Inside the Adam Smith Institute

Now that the new Adam Smith website is up, with an exciting plethora of activities and reports scheduled, new readers might like to take stock of what the ASI does, and what motivates us.

If labels are used, they might be “free market” and “libertarian,” but these are big tents under which disparate people are grouped. The crucial thing is that our free market libertarianism is both consequentialist and empiricist, combining an essentially Hayekian economic outlook with a deep optimism about the world.

In our view actions that enable individuals to advance their happiness by pursuing their own goals are worthy of support, and those that restrict their ability to do that should be opposed. We are more concerned with what results from actions than with the intentions or attitudes of those who initiate those actions. And we are more concerned with changing the world for the better than with promoting theories about it.

As empiricists we make conjectures about the world and its future, and we test their value against experience of real world outcomes. Where the two conflict, it is the conjecture that has to be rejected or modified. We take the view that “an ounce of practice is worth a pound of theory.”

While economics and public policy are complex fields that make experiment and testing difficult to perform, we do attempt to test proposals by their results. Several times we have proposed small-scale trials of larger ideas in order to validate the ideas and ascertain any unforeseen drawbacks before they are rolled out more widely.

We recognize, of course, that poor people do not have access to the choices and chances accessible to the rich, and this is why many of our policy initiatives are directed to improving the lot of poorer people in society. We have advocated for many years that the income tax and national insurance thresholds should be set at the level of the minimum wage and indexed to it, so we would not be taxing people on the bottom income level.

Some of our research studies and policy suggestions derive from our recognition that poor people are hurt most by things such as restrictions on international trade and migration, planning controls that prevent cheap housing from being built, education policies that condemn poor children to bad schools and regulatory policies that protect established market players from new entrants.

We propose and back policies that give all parents choice over where their children go to school and which introduce competition into the school system, whether these be by education vouchers, or by allowing the allocation of state funds to schools be determined by the choices parents make. We tend to back the view that welfare is not just about providing the services the state thinks poor people should have, but about equipping people with the means to make their own choices about the mix of services they prefer. Ideas such as a negative income tax could remove the perverse incentives present in the current welfare system.

We recognize that states can cause a great deal of harm when they attempt to direct and micromanage the economy. Many regulations have damaging effects that were not anticipated, and this includes financial regulations that can make financial systems more unstable than they would be without them.

More broadly, we think that the ‘unknown unknowns’ of regulation should lead society to prefer decentralized trial and error to the risk of one big mistake that affects everyone in the same way.

We have argued that the central bank should follow the ‘Hayek rule’ – the stabilization of the level of nominal spending in times of booms and busts along a predictable path. Scott Sumner recently delivered our annual Adam Smith Lecture and explained how the failure of the world’s central banks to do this led to the Great Recession.

In the Adam Smith Institute we have always been very optimistic about technology and society. We see the world becoming increasingly open and tolerant in most (though not all) areas, with technology and entrepreneurship helping to drive that. To us, companies like Uber, Google and Airbnb deserve to be celebrated when they break down barriers to competition and disrupt the existing way of doing things in ways that give consumers a better product for a lower cost. It is this kind of innovative entrepreneurship that moves the world forward and allows today’s luxuries of the very rich to be tomorrow’s household commonplaces.

There is a dark side when new technologies are used by governments to spy on their citizens and control them. If technologies like Bitcoin and other blockchain-based innovations represent a long-term way of evading the worst excesses of government intrusion, they should be defended from government now while they are still in their infancy.

Of course the Institute is not a monolith. It consists of people who sometimes differ, but all of whom are brought together by a desire to give more power and liberty to individuals, so that their regard to their own interest can make them and us richer, freer and happier.

Why golf is a rubbish sport

The LSE’s Paul Cheshire has a good post up on the Spatial Economics Research Centre blog today on green- and brown-field development. Among other things, he explains why there are so many golf courses on the green belt:

Nothing wrong with golf or horsey culture but what we have to understand is that Greenbelt designation gives those land uses a massive subsidy. House building cannot compete for agricultural land but golf and horses can. I recently discovered another reason why we have so many golf courses around our cities: they are substitutes for landfill sites. It costs £80 a ton to dispose of ‘inert material’ in registered landfill sites but nothing if it goes into building bunkers! To quote Paul Robinson, Derby Council’s Strategic Director for Neighbourhoods, in defending the potential to capitalise on the value of the sites of the Councils two golf courses: “Effectively you go out to the waste industry and you say we will allow you to put your inert waste in our golf course…So you create mounds and bunker areas using the waste and at the core of those is inert waste.” .

This is one factor which underlies the proliferation of golf courses close to sources of builders’ waste and on land where there is no competition from houses. As noted in The Economist there is a serious oversupply of them. So the combination of Greenbelt designation and landfill costs means we can build as many golf courses as the market demands at their subsidised price but we cannot build houses. It is time to start turning some of our excess supply of golf courses into gardens; with houses on them!

The whole thing is a good read, particular the estimate of how much greenfield land is currently available to build on within a ten minute walk of a train station. (Quite a lot.)

My word, you mean competition actually works?

Well, would you look at that! Apparently competition works to the benefit of consumers! Who could have possibly predicted that outcome?

Shop prices fell at the steepest rate for at least eight years last month as the popularity of discount stores among the middle classes helped to drive down the cost of clothing and consumer goods.

The overall price of items at the till fell by 1.8 per cent compared with June last year, with the price of clothes down by 13.7 per cent year-on-year.

The figures, compiled by the British Retail Consortium/Nielsen shop price index, show the fastest drop in prices since the trade association began compiling data in 2006.

It was also the 14th month in a row in which shop prices fell, easing the pressure on households where wage-earners have suffered pay freezes.

Yes, of course, the capitalists are straining every sinew to increase the profits that they make from our need for basic necessities such as food and drink. But in doing so they find themselves competing with other capitalists who would also like to like that pelf from our pockets. That competition then limiting the amount any one shop can charge and finally leading to falling prices for consumers.

Of course, a number of people have pointed this out before, starting with Adam Smith, Bastiat had things to say on the point and even Karl Marx got it. Monopoly capitalism is to be avoided for it is without that competition, for it is that market choice that makes such a system work to the benefit of consumers.

This is all obvious to us, the initiates, of course. But we need to continue to make a song and dance about it. Yes, there really are things that governments must do that cannot be done by other actors. Yes, there really are times that said government must intervene in the economy. But for the most part that intervention necessary is simply to ensure that competition is possible.

It’s not necessary to ensure that competition is happening, only that it can. For a monopolist in possession of a contestable monopoly is unable to exploit that monopoly for fear of competition arising to contest it. It’s not even necessary to have a level or even playing field, only to have an open one.

Worth noting the next time someone starts to complain about the monopoly of the supermarkets (as they do every few years, prompting yet another enquiry). Precisely because competition is forcing prices down we’ve obviously not got an exploitable monopoly here.

So just what is slow economic growth then?

This is slightly worrying:

Just how difficult this has become was shown last week when the OECD released its predictions for the world economy until 2060. These are that growth will slow to around two-thirds its current rate; that inequality will increase massively; and that there is a big risk that climate change will make things worse. Despite all this, says the OECD, the world will be four times richer, more productive, more globalised and more highly educated. If you are struggling to rationalise the two halves of that prediction then don’t worry – so are some of the best-qualified economists on earth.

World growth will slow to 2.7%, says the Paris-based thinktank, because the catch-up effects boosting growth in the developing world – population growth, education, urbanisation – will peter out. Even before that happens, near-stagnation in advanced economies means a long-term global average over the next 50 years of just 3% growth, which is low. The growth of high-skilled jobs and the automation of medium-skilled jobs means, on the central projection, that inequality will rise by 30%.

Not the predictions themselves, which come from this OECD report, but the interpretation that is put upon them. For it appears that Paul Mason, supposedly one of those employed to explain the world to us, is incapable of actually reading a report.

On the inequality point he’s missed the crucial qualifier: “in-country” inequality. The report is actually telling us that the currently poor countries are going to catch up with the currently rich ones and that when they do, when they join us at the technological frontier, then their growth will be lower than it is during the current catch up phase.

That is, the prediction is that the vast gulfs of inequality between those living on a $1 a day and ourselves will be closed: yet Mason is concerning himself with that trivial 30% rise in inequality amongst ourselves, the already rich. It’s absurd to be worrying that in-country gini will rise from, say, 0.30 to 0.39 while not celebrating the collapse of the global gini from 0.80 to 0.40 (made up numbers just for illustration). At least it’s absurd if inequality is one of those things that you want to worry about.

There’s another misunderstanding there, one which anyone who has actually read Piketty should understand for he explains it very well. Gross GDP growth, the size of the entire economy, is driven by two different things. One is the expansion of the population that is producing that GDP. The other is the efficiency with which each person is contributing to that GDP. The report is stating that the entire globe is just about to finish going through the demographic transition, as the UN and everyone else assumes it is. Thus population growth will not be contributing to growth after some few decades of the future.

3% (or 2.7%) growth without the demographic effect is not low or slow growth: this is fast growth. The economy doubles every 25 years or so but over the same number of people meaning that per capita GDP doubles every 25 years. This is not an historically slow level of per capita GDP growth. This is actually rather fast.

It’s not the specific predictions that worry at all: it’s that someone supposedly employed to explain such matters to us doesn’t seem to understand the points being made. How did we end up in this situation?

One of the upsides of having a global elite is that at least they know what’s going on. We, the deluded masses, may have to wait for decades to find out who the paedophiles in high places are; and which banks are criminal, or bust. But the elite are supposed to know in real time – and on that basis to make accurate predictions.

Well, yes, quite.

Voxplainer on Scott Sumner & market monetarism

I have to admit that I usually dislike Vox. The twitter parody account Vaux News gets it kinda right in my opinion—they manage to turn anything into a centre-left talking point—and from the very beginning traded on their supposedly neutral image to write unbelievably loaded “explainer” articles in many areas. They have also written complete nonsense.

But they have some really smart and talented authors, and one of those is Timothy B. Lee, who has just written an explainer of all things market monetarism, Prof. Scott Sumner, and nominal GDP targeting. Blog readers may remember that only a few weeks ago Scott gave a barnstorming Adam Smith Lecture (see it on youtube here). Readers may also know that I am rather obsessed with this particular issue myself.*

So I’m extremely happy to say that the article is great. Some excerpts:

Market monetarism builds on monetarism, a school of thought that emerged in the 20th century. Its most famous advocate was Nobel prize winner Milton Friedman. Market monetarists and classic monetarists agree that monetary policy is extremely powerful. Friedman famously argued that excessively tight monetary policy caused the Great Depression. Sumner makes the same argument about the Great Recession. Market monetarists have borrowed many monetarist ideas and see themselves as heirs to the monetarist tradition.

But Sumner placed a much greater emphasis than Friedman on the importance of market expectations — the “market” part of market monetarism. Friedman thought central banks should expand the money supply at a pre-determined rate and do little else. In contrast, Sumner and other market monetarists argue that the Fed should set a target for long-term growth of national output and commit to do whatever it takes to keep the economy on that trajectory. In Sumner’s view, what a central bank says about its future actions is just as important as what it does.

And:

In 2011, the concept of nominal GDP targeting attracted a wave of influential endorsements:

Michael Woodford, a widely respected monetary economist who wrote a leading monetary economics textbook, endorsed NGDP targeting at a monetary policy conference in September.

The next month, Christina Romer wrote a New York Times op-ed calling for the Fed to “begin targeting the path of nominal gross domestic product.” Romer is widely respected in the economics profession and chaired President Obama’s Council of Economic Advisors during the first two years of his administration.

Also in October, Jan Hatzius, the chief economist of Goldman Sachs, endorsed NGDP targeting. He wrote that the effectiveness of the policy “depends critically on the credibility of the Fed’s commitment” — a key part of Sumner’s argument.

But read the whole thing, as they say.

*[1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14] [15] [16]