Can prediction markets replace politics?

Marc Andreessen, the Silicon Valley entrepreneur who co-founded Netscape, points out that markets don’t seem to be adjusting prices to reflect future costs from climate change.

Premium coastal vacation real estate prices are skyrocketing, he says. It's an interesting point that suggests that markets may think the dangers of climate change are overblown, although it’s important to try to compare this to the counterfactual. Maybe they’d be even more expensive if climate change wasn’t happening – or maybe there’s a scramble of demand for them now, so people can enjoy them before they're underwater!

But markets can be good ways of predicting the future. To the extent that they are a form of betting on the future, they can be a ‘tax on bullshit’:

I am for betting because I am against bullshit. Bullshit is polluting our discourse and drowning the facts. A bet costs the bullshitter more than the non-bullshitter so the willingness to bet signals honest belief. A bet is a tax on bullshit; and it is a just tax, tribute paid by the bullshitters to those with genuine knowledge.

As this paper outlines, markets generate good predictions for three reasons: 

First, the market mechanism is essentially an algorithm for aggregating information. Second, as superior information will produce monetary rewards, there is a financial incentive for truthful revelation. Third, and finally, the existence of a market provides longer-term incentives for specialization in discovering novel information and trading on it.

The empirical evidence (outlined in that paper) is that markets generate good predictions for these reasons, and are difficult to manipulate – even if someone is willing to spend a lot of money to bet on a particular outcome, other participants’ judgment about the outcome will not change, and there is a significant profit opportunity for them to bring the price back to the equilibrium level. Of course they’re not infallible – good incentives cannot always overcome sheer ignorance – but at least when people are wrong there, they lose out.

Futures markets are essentially large-scale betting exchanges for predictions about the future, aggregating all the individual bets people are willing to make. So to scrape out the confounding factors in the example Andreessen gives, why not set up a pure futures market on climate? What will the average global temperature be by 2030, 2040, 2050 and so on?

Here there may be a role for government. It would be very socially useful to know what the aggregated best guess about global temperatures in 2050 is, but there isn’t any demand for this so far. There are not enough 'noise traders', who subsidise other futures markets by betting stupidly, for our fantasy climate markets to exist.

So, in order to generate enough volume for the market to be worthwhile, we need to subsidise it: the government pays a premium on top of the standard, market-driven pay-off for winning contracts when the time comes. This may cost several million pounds or even more – a small fraction of the current climate change budget.

We could use this for other purposes as well. Scott Sumner has long advocated an NGDP futures market so that central banks can target the monetary policy variable that really matters, for instance. And we could set up ‘conditional’ markets on policy questions too: “if the government cuts disability benefits this year, how many more people registered as disabled will be below the poverty line next year?” If the government doesn’t do the cuts in the end, all bets are cancelled, so we have a reliable 'what if?' window into the future.

Heck, if we could agree on some end-goal everybody wants, like average wealth levels weighted by the wealth of the bottom decile with red-line rules about freedom of speech and so on, we could replace the legislature with conditional markets. (We could hold regular referendums on what this 'end-goal' should be.) Robin Hanson calls it futarchy. Anyone could propose a policy, and if conditional markets implied that it would raise long-term wealth levels (or whatever we said the end goal was), it would become law.

It’s far-fetched, perhaps, but if it meant we could abolish politics I wouldn’t bet against it. I guess that makes me a noise trader.

How to solve the obesity crisis: turn the central heating down

We have long been, well, how to say this, umm, somewhat unconvinced, of the standard explanations for rising obesity. As we've mentioned just recently, that more people seem likely to die in some decades from popped fat pustules is less of a problem than our older now solved problem of people dying next week from lack of food. But it is still true that rampant obesity, if for no other than aesthetic reasons, isn't to be greatly welcomed.

Yet we just cannot bring ourselves to believe the standard explanations. That it's all to do with increased sugar consumption is obviously nonsense given that sugar consumption per capita has been falling. That it's about increased calorie consumption is also obviously wrong: the average diet today is lower in calories (and significantly so) than the standard WWII ration at which weight would be lost. So, it must be some other cause here, something else is going on.

We have leapt from there to the idea that the major use of energy in mammals is maintaining body temperature. Something of a leap to be sure but that epidemic of obesity is at least correlated with the widespread adoption of central heating across time and countries.

Now we learn that our leap is not simply fanciful:

Elderly adults are bigger around the middle when they turn up the heat inside their homes during the cold season and have smaller waistlines when their homes stay cool, new research finds. Investigators from Japan presented their study results Friday at the Endocrine Society's 98th annual meeting in Boston.

"Although cold exposure may be a trigger of cardiovascular disease, our data suggest that safe and appropriate cold exposure may be an effective preventive measure against obesity," said the study's lead investigator, Keigo Saeki, MD, PhD, of Nara Medical University School of Medicine Department of Community Health and Epidemiology, Nara, Japan.

Cold exposure activates thermogenesis, to generate body heat, in brown fat. This type of fat is the good calorie-burning fat that prior research found most humans have. However, Saeki said the association between the amount of cold exposure and obesity in real life remains unclear.

We can thus junk all the currently fashionable nostrums. It's not killer sugar, not the food industry ramming doughnuts into our gobs, all that is required it to turn the central heating down. Sure, there's no plaudits to be won in fighting against The Man here, no tax revenue to be collected, no social justice warriors to be employed in 5 degrees today outreach. But it does have the advantage of being consistent with the empirical evidence we have. 

We're eating less, consuming less sugar, keep our homes much warmer than ever before and are getting fat. Given the increase in weight it's likely to be the thing that we've increased, not that we've reduced, to blame.

Logical, evidentially supported, it'll never catch on as public policy, will it? 

The question is not how to save Port Talbot but whether to

There's an excessive amount of thrashing around being done over the question of Port Talbot and the Tata steelworks there. And there's very few managing to ask the right starting question. Which is not "How will we save Port Talbot" but rather "Should we save Port Talbot?"

As many are pointing out, there are indeed times when government can and should step in to "save" something: an industry, a system, perhaps even a company. As many are again pointing out a few years ago much was done to stop the financial system collapsing into a heap of smoking rubble. If that and then, why not this and now? Do though note that not all of that financial system was saved, rescued nor did we even try to do so. Lehman, Northern Rock, the Dunfermline, Chelsea and other building societies, Alliance and Leicester slightly differently, all were allowed to go their own way into distress sales or outright bankruptcy. Even in such extremis we did indeed select between those who needed to be saved and those who did not (our own opinion being that rather fewer of those who were saved should have been so but that's another matter).

Which brings us to that Port Talbot plant. Various people are muttering various things about which bits of the business they might like to take over. But all are saying the same thing about the major plant at the heart of it all, the blast furnaces on the site. No one wants them. And the truth of it is, as one of us has been saying for near five years now, that the world simply needs fewer such plants for we all recycle much more steel now than we used to. Recycling happening in an entirely different technology, arc furnaces. Well over 50% of Europe's steel comes from this process now. And there's not really any good argument as to why blast furnaces should be in the UK either. Sure, there are some times when entirely new, virgin, steel is necessary but we import the coking coal, the iron ore, to make that at present. There is no good reason why we should import the raw materials and lose £1 million a day processing them instead of just importing the virgin steel itself.

Which brings us to a good example of that thrashing about:

The scale of the challenge, though, means that no private investor is likely to be willing to take on the entirety of the risk. We need other investors to bridge that gap, but this investment could come from a range of sources and take a multiplicity of forms. Tata’s environmental liability – which could run to as much as £1bn at Port Talbot alone – converted into an “exit dowry” could be reinvested by the Welsh government as an equity stake in a new joint venture company. The workforce could do the same, perhaps via Tata’s contribution to the pension fund deficit, trading accrued rights for employee shares. Local authorities could invest through the City Deal in a research and development centre for new hi-tech steels or the kind of process and business model innovation that Liberty Steel’s Gupta has promoted as a possible medium-term solution.

The UK government could also become a stakeholder, perhaps holding the heavy-end blast furnaces as a strategic asset – or, if its ideological aversion was too strong, simply providing very large, very long-term and very soft loans.

What is strategic about holding something that no one wants to use? What is asset-like about something which has a negative value? And look at the financial prestidigitation being suggested there! The debts for the environmental clean up are to be declared an asset, pensions are to be converted into equity in an asset that has a negative value and the taxpayer invited to spray cash all over the result as a beneficience.

This is not sensible. We must ask the correct question in the first place. Is there any good reason to "save" a blast furnace in the UK today? We would say no, others might differ in their views on that. We do have the advantage that we actually understand the technology of the steel industry but we would not claim omniscience on this specific point.

However, we are entirely adamant that that is the first and important question to be asked and only an answer to that then leads to what should be done next. And sadly, as far as we can see, we're the only people actually asking that question before some billions of your and our money is sprayed around to quite possibly no good purpose.

We'll chalk this up as a victory for free markets, capitalism and globalisation then

The Lancet tells us, in shocked and disapproving tones, that there are now more fatty lardbuckets on the planet than there are undernourished people. We simply cannot bring ourselves to think of this as being a bad thing. Rather, we consider it to be a massive victory for the economic policies of the last few decades. A victory for capitalism, free markets and globalisation.

There are now more adults in the world classified as obese than underweight, a major study has suggested.

The research, led by scientists from Imperial College London and published in The Lancet, compared body mass index (BMI) among almost 20 million adult men and women from 1975 to 2014.

It found obesity in men has tripled and more than doubled in women.

Lead author Prof Majid Ezzat said it was an "epidemic of severe obesity" and urged governments to act.

It's possible that action is required or even desired. But first we should have a little pause for celebration, a few turns of that victory dance. As the paper itself says:

Implications of all the available evidence

The world has transitioned from an era when underweight prevalence was more than double that of obesity, to one in which more people are obese than underweight.

So what, actually, has happened? Well, the essential heart of it is that we all started buying stuff made by poor people in poor countries. This made them richer and led to the solution to what PJ O'Rourke has called the species-long human problem: what's for lunch? Closely followed by that other rather already solved one, how do I not be lunch? 

That history of our species has been the struggle to try and work out how to gain enough calories to see the next day: as it actually is for all other species. We're the one that has worked out farming, economy, trade, to solve it. And we're here in this happy day when it is actually all coming to fruition.

Consider what is the complaint. Instead of people dropping dead of starvation next week we're now facing the idea that people might drop dead in a few decades or more from an excess of food availability. That second, in and of itself, may not be all that desirable an outcome. But compared to what went before we do indeed insist that this is a vast, joyous, victory.

So, happy dance! With, of course, lashings of ginger beer, burgers, milkshakes, fries, donuts, ice creams and syrup covered waffles to sate the appetites so created.

A ridiculously silly complaint about the national living wage

We should emphasise here that we are not in favour of Osborne's new national living wage. The correct answer to some people being perceived as having too low an income is not to start price fixing, messing with the market. Instead it is for those who insist that those incomes are too low to put their hands into their own pockets and top up those incomes they perceive as being too low. Yes, it is simply moral that those doing the insisting do the paying.

However, it is also possible for there to be very bad arguments against this national living wage. And wonder of wonders The Guardian manages to find someone willing to make such a ridiculous argument:

The introduction of the national living wage has done two things; it has symbolically detached workers aged 21-24 from the entitlements afforded their older colleagues, and it has added another rung to the ladder that must be scaled in order to achieve financial security and independence. While today the work of a 22-year-old is recognised as adult labour, with commensurate minimum earnings, tomorrow the national living wage will reduce its relative value and the workers’ comparative income.

This is made more desperate by the terrible position young British workers are already in. Despite low levels of overall unemployment, running at 5.1% for the three months to January 2016, the unemployment rate for 16- to 24-year-olds was two and a half times higher, at 13.7%.

That higher unemployment rate for young people is exactly and precisely why the national living wage only kicks in at age 25.

A minimum wage, whatever it is, will bite most upon those who have the least value in the employment market. That is, the young and untrained. That the youth unemployment rate is so high is exactly the evidence we need to show that the current minimum wage is already too high. For a "too high" minimum wage will show up as unemployment, that unemployment will appear among those with the least workplace value, those young and untrained, a higher unemployment rate among the young and untrained being proof that the minimum wage is too high.

But that is not why this complaint is ridiculous, that is just why this complaint is ignorant. What makes it ridiculous is the following. If we now have a higher minimum wage for those over 25 and a lower one for those under, what does this do for the relative demand of workers over 25 and under? Quite, there will be a shift in demand toward those now cheaper younger workers. That is, the very thing that is being complained about, that higher youth unemployment rate, will in part be cured by the very thing that is being complained about, the age limit on the national living wage.

As we've noted before the Daily Mash really does have something with their statement about The Guardian, wrong about everything. All the time.

Obama is wrong about the difference between capitalism and communism

President Obama recently told Cuban kids not to worry about the philosophy of communism or capitalism, but just go with what works. I have little problem with that because most people are indeed not bothered with matters of philosophy, and we know what works – and it isn’t communism. So if they do what works they will end up as capitalists.

But I do get angry when it is suggested that there is ‘little difference’ to choose between these two philosophy. The trouble is, that there is very little difference between communism and what’s called capitalism these days, largely because our politicians do not understand the philosophy themselves.

Maybe it’s just my recent speed-dating of Ayn Rand rubbing off on me, but I think we need to promote a much deeper understanding of the principles underpinning our system, in particular their ethical roots, nature and results.

Obama, for example, is at pains to point out that capitalism is just fine, provided that we make sure it has a proper ethical dimension. Which shows that he thinks that, by itself, it doesn’t, and that it somehow needs to have morality regulated into it.

Yeah, well what about the ‘moral' basis of communism? It’s not capitalism that murdered 3,000 people a day when it was going strong (add them up: Stalin, Mao, Pol Pot’s purges just for starters). And capitalism at least treats people like human beings rather than as tools in someone else’s thinking, and respects their lives, families and property. In Cuba, you have a cow and because your family is starving you kill it to eat. Then you go to jail because it’s not ‘your’ cow, it’s the state’s cow. How moral is that? 

Sure, you have to be nice to communist leaders if you want them to talk to you and maybe then have an impact on them; but there must be ways of letting them know that as a matter of plain fact, it’s communism that stinks, not capitalism, both in theory and practice. The general mass of their own population, of course, already know that.

The TUC has a complaint with reality

The Trades Union Congress has a complaint it would like to make to someone about the reality of our universe. We're not sure they're going to get very far there being no central ruler but they want to complain nonetheless:

In 2014 the UK was home to 2,926 €-millionaire bankers, according to new report published by the European Banking Authority.

This is more than ten times as many as Germany, who come in second with 242.

If we could just draw attention to some of that reality?

London has more than 40 percent of the global market for currency trading. Almost half of the world's interest-rate swaps business takes place in the City, as does a third of European equity trading.

It is, of course, wholesale finance that pays the big money. And it wouldn't be all that much of an exaggeration to state that London's part of the global wholesale financial industry is some 10 times that of Germany. Nor that London is home to the majority of the EU's wholesale financial industry.

Wholesale financial services is just something that Britain does rather well, thus the number of people here who are highly paid to do it. The complaint is akin to shouting about how the UK and France have almost all of Europe's highly paid rugby players. When, to a significant level of accuracy, they are the only two countries with paid rugby players.

That international playing out of comparative advantage has just left us doing the high finance and Germany doping the dumpling making. The bulk of highly paid dumpling makers being in Germany, the bulk of highly paid bankers being in Britain. To complain about this is to rail against the universe. And to no very great end either.

The liberal case for 'Leave'

The EU referendum campaign is presenting us two competing choices. On the one hand a vision of Britain as part of a steadily-integrating EU (at whatever speed) or a vision of Britain completely outside it.

For the Remain side, we are required to anticipate what may happen over the next generation which, if the last 40 years are anything to go by, will mean a gradual growth of EU power into more and more areas of competence - the ratchet towards “a country called Europe”.

The vision of Britain outside generally uses a number of arguments employed over a long period: of the need to regain our sovereignty and become a self-governing democracy again; to have the flexibility to deregulate; to spend the UK’s EU contributions on something better inside the UK; to drive forward better trade deals with countries beyond the EU; and to constrain immigration.

However let’s take this from a different angle and set out a third vision - a Leave proposition that rejects some of the arguments outlined above. In short, a liberal case for Leave.

Read more.

There's more to the minimum wage than 1998

One of the difficulties in economics is isolating the effects of particular actions in a very complex world. If we cut income tax this year and next year tax revenues are a little higher, it’s tempting to attribute that to the tax cut. But maybe it’s actually because oil prices fell, or because growth was picking up anyway.

To get around this, economists try to aggregate large numbers of data points – that is, look at lots of different times when we cut income tax and see what the effect on revenues were, ideally adjusting for things we know might affect growth, like the price of oil. Using lots of different data points helps us to cancel out ‘noise’ and focus in on the effects we really care about.

Another example: If oil prices rise, and consumption of oil doesn’t fall, we don’t throw out our model that says people use less oil when prices rise—we acknowledge that oil’s price isn’t the only factor. Perhaps it was particularly cold just after oil prices rose, so people needed more for heating; perhaps there was a big national holiday and everyone used their car more. Similarly when the price of labour jumps and employment doesn’t fall, this doesn’t mean that employers don’t take wages into account, it might mean there are countervailing factors: employers can pass some costs on; employers can reduce other benefits; or employers are going to reduce hiring to take account.

This is why it can be foolish to point to a single example of a tax cut appearing to raise revenues or to point to a single example of raising or introducing a minimum wage not causing unemployment. The latter has been very common recently. We didn’t see unemployment rise in 1998 when we introduced the National Minimum Wage, so people saying the new National Living Wage will hit jobs are on thin ice.

The LSE’s Prof Alan Manning, who is an expert on minimum wages, does this in the FT today, being quoted as saying that “prophecies of doom … turned out to be wildly inaccurate then; I suspect they will be this time as well.” I guess Prof Manning is being glib – he knows all the literature and that a single event isn’t indicative of very much, but it’s misleading to most people reading who do not.

The graph above, via Menzie Chinn, shows a meta-analysis of the impact of minimum wage rises on employment from 1,424 data points – an elasticity of -0.5 means that a 1% rise in the minimum wage is associated with a 0.5% fall in employment for the affected group. The red line is the mid-point of a range (-0.1 to -0.3) suggested by David Neumark. The graph above seems to suggest that the effect is negative but small; Neumark argues that the international evidence points to a clear disemployment effect.

Other research, which is again based on data from large numbers of events, not a single event, suggests that minimum wage rises tend to slow down job creation rates over time. The effect here seems to be that employers are reluctant to actually fire workers (perhaps for the same reasons they are reluctant to do so during recessions) but become less willing or able to hire new ones. Another paper suggests that job losses are avoided by passing the costs on to consumers.

The right is guilty of the kind of error I'm criticising, too – the OBR disputes the claim that cutting the 50p tax rate really raised revenues, suggesting that the increased revenue came from people deferring income until the rate was cut. I don’t hear many supporters of the 50p cut acknowledging that.

It also needs to be pointed out that the level, not just the rate, of the rise in the minimum wage matters too. In 1998 the NMW was introduced at £3.60 per hour, or £5.71 in today’s prices; the new National Living Wage will be £7.20 per hour. A comparably small rise may still raise the level to a high enough point that it does cause serious problems in terms of job losses.

It may be that the NLW does cause job losses, which are masked by other positive effects. It may be that it doesn’t, but the economy dips anyway and it looks as if it does. It will be impossible to say either way if we just look at this one event. The trick is to look at many events and test our hypotheses against the aggregate, not to cherry pick single events to make a point.

The difference between France and a liberal nation

We would not say, ourselves, that we are greatly in favour of the burkini and other such manifestations of Islamic prurience. Yet we would, as with people saying things we might not agree with, insist that the populace should be allowed to dress themselves in any such manner that doesn't actually frighten the animals. This is rather the point of a liberal polity in fact: although that seems not to be a view shared by parts of the French state:

Learning of the quintessentially British brand’s decision to release the burkini, Laurence Rossignol, France’s women’s rights minister, slammed the move as kowtowing to misogynists and religious conservatives, adding that women in favour were like "negroes who supported slavery".

Speaking to RMC radio, Ms Rossignol said: “What’s at stake is social control over women’s bodies. When brands invest in this Islamic garment market, they are shirking their responsibilities and are promoting women’s bodies being locked up.”

“You cannot pass off as trivial and harmless the fact that big brands are investing in a market that puts Muslim women in a situation of having to wear that.”

We can and would pass off as entirely trivial that such garments are being produced, even for the purpose of making money. For it is not, except with that animals exception, for the State to detail how the population may dress. Nor even for said authorities to determine how modest women may or must be.

A liberal society lets people decide for themselves. Sure, people might get some very odd looks, a bit of social pushback, wearing a burkini, same as a thong and some dental floss at the beach might garner excessive attention. But it is for those who dress this way and those around them to sort out, not for those who collect the tax and control the men with guns.

After all, it is entirely legal for a woman to uncover her breasts on a French beach but no one has ever said that it's mandatory. So too with unveiling or covering up any other part of the body.

The clothing ode of the populace is for said populace to determine and no, not through the tyranny of the majority either. In, that is, a liberal polity.