An interesting little story about path dependence

There’s no particular theoretical reason why the Burnley Miner’s Social Club should be the world’s largest consumer of the Benedictine liquer. There’s also no theoretical reason why it shouldn’t be: which is good for the fact is that it is. It’s a useful reminder of two things, the first being path dependence:

A working men’s club in the north of England is the world’s biggest consumer of French Benedictine liqueur, downing 1,000 bottles a year of the alcoholic beverage.

The golden tipple has been a favourite at the Burnley miners’ working men’s social club for more than a century after being popular among soldiers who developed a taste for it during the First World War and drank it to keep warm.

Since then the drink has become a best seller at the 600-member club – which has even introduced a ‘Bene Bomb’ in a bid to keep it popular among the younger members.

There really isn’t going to be any other 600 member club that gets through a 1,000 bottles a year of the stuff. The fist of our wider points being to point once again to the idea of path dependence. Things that happen today are often as they are because of some other thing that happened in the past. Perhaps the Dvorjak keyboard is better than he qwerty, perhaps it isn’t, but the reason we don’t use it today is because it definitely wasn’t better with mechanical typewriters. Qwerty was deliberately designed, for purely mechanical reasons, to stop people typing too quickly. How we do things today is dependent upon things long irrelevant but important at the time we started the activity.

The second of course being that sometimes things just happen. You can see how the Benedictine story started: someone in one of those regiments got ahold of a bottle and told his mates how good it was. A century later it’s still going on. The habit survives just because of that original happenstance and the social reinforcement of it over time. As with driving on the left or the right. Unlike Dvorjak there’s no particular merit to either system, no basic reason to choose one or the other: and different places have chosen differently over the years (Sweden changed over from one to the other in, umm, the 1950s. Sadly, the story about the buses changing sides a week before the cars isn’t true).

The world can make a lot more sense if we keep in mind that stuff really does just happen sometimes and the effects can be with us centuries later.

Isn’t Will Hutton’s logic here just so lovely?

We’d probably have to invent Will Hutton if he didn’t already exist for his logical twists and turns are something of a national wonder to behold. On the subject of FIFA he’s noticed that it’s not the purest of organisations, not as white as the driven snow:

This is a disgrace. Based in Zurich, Fifa is the governing council of world football, with 209 national member football associations. Yet even though it has global reach, power and income, earning $4.5bn this year from the World Cup alone, it is run with less transparency than a car boot sale. Football, and the world, needs better.

The president is elected by a simple majority of the 209 members. There are no checks and balances; no accountability to a governing board; no transparency over key issues such as pay; no protocols for the publication of reports like those of the former New York district attorney, Michael Garcia. Once elected, the president of Fifa can run the organisation like a tribal chieftain, dispensing favours to seek ongoing support from the tribe’s varying factions and brushing off criticism. His position is unassailable.

Well, yes, OK, perhaps being part of an organisation where not everyone accords with the British notions of fair play and honesty might not be all that wise a decision. Possibly we migfht leave then, or refuse to deal with it until it starts to live up to those values we deem important.

It underlines the larger point: we have to live up to our values and make common cause with those who share them. Yet the Conservative party is gearing up to fight the election on a nativist programme of leaving the European Convention on Human rights (ECHR) and moving ever closer to exiting the European Union.

But we mustn’t leave an organisation that doesn’t accord with British notions of fair play and honesty. Actually, doesn’t even agree with the basic and fundamental underpinning of our system of law (as Lord Woolf so notably pointed out). If Hutton didn’t exist we would have to invent him, wouldn’t we? Otherwise where would we find our logical equivalent of the Red Queen, where an argument means whatever he says it does rather than that plain and honest meaning.

Getting it entirely wrong on fatcat CEO pay

An interesting little piece of research over at the Harvard Business Review. What do people think the difference between worker and CEO pay is and what do they think it should be? The research is interesting it’s just that the conclusions people are likely to draw from it are entirely mistaken. The result won’t surprise many:

We’re currently far past the late Peter Drucker’s warning that any CEO-to-worker ratio larger than 20:1 would “increase employee resentment and decrease morale.” Twenty years ago it had already hit 40 to 1, and it was around 400 to 1 at the time of his death in 2005. But this new research makes clear that, one, it’s mindbogglingly difficult for ordinary people to even guess at the actual differences between the top and the bottom; and, two, most are in agreement on what that difference should be.

“The lack of awareness of the gap in CEO to unskilled worker pay — which in the U.S. people estimate to be 30 to 1 but is in fact 350 to 1 — likely reduces citizens’ desire to take action to decrease that gap,” says Norton.

It really shouldn’t surprise that an awful lot of people are remarkably ignorant about the world that they inhabit.

The error though is in what is then assumed should be done about it. For of course you can already hear the screams (from people like the High Pay Commission) insisting that as the average voter doesn’t want there to be this income disparity therefore there should not be this income disparity. The error being that what the CEO of a large company gets paid is none of the damn business of the average voter.

It’s the business of those doing the paying: and if the shareholders in a company wish to pay the person managing their business handsomely then that’s entirely up to them. Nothing to do with the jealousy of the mob at all.

There is a small coda: some argue that it’s the same old interlocking boards that keep raising the CEO’s pay, knowing that their own will get raised in turn. The theory that the managerial class is ripping off the owners, the shareholders. It’s true that this could happen, principal/agent theory is true. However, if this were true then private equity would be paying their managers considerably less than public companies do as they would not be subject to this rip off. Given that in reality, out here in the world, private equity pays very much better than public companies do then this isn’t true either.

On Unite’s demand for a £1.50 rise in the minimum wage

Howard Reed has done this particular piece of pencil sucking research for Unite to back up their demand for a rise in the minimum wage of £1.50 an hour. They’re very proud of the fact that this would increase the amount of tax paid. Which doesn’t really strike us as being all that good an idea really. Hoovering more money out of the wallets of the lowly paid never does sound like a good idea to us but we assume that things are seen differently over in unionland.

But in the report they also say this about the macroeconomic effects:

A £1.50 per hour increase in the National Minimum Wage has three potential multiplier impacts
on UK GDP:
• The wages impact: the increase in net incomes arising from the increase in gross wages
should lead to increased consumer demand which has a positive multiplier impact on GDP.
• The profits impact: the reduction in net incomes arising from a decrease in profits may lead to
reduced consumer demand which would have a negative multiplier impact on GDP.
• The public finances impact: the increase in income tax, expenditure tax and NICs receipts and
the reduction in benefit and tax credit spending leads to an improvement in the public
finances even after taking into account increases in the public sector wage bill and reductions
in corporation tax revenue. This means that government spending does not need to be cut as
badly as current plans suggest. If the improvement in the public finances is matched by an
increase in government departmental and investment spending – so that the overall
government fiscal position is unchanged – then there should be a positive multiplier impact
on GDP.

Reed also looks at the number of jobs that will be lost from that rise in the minimum wage and, hey presto, finds that more will be created than lost. He manages this by taking the lowest estimate of unemployment to be created he can find and the highest one for the number of jobs to be created available.

Hmm. Think we’ll file this report in the policy based evidence making file, that round one under the desk, shall we?

Colin Hines and the Magic Money Tree

It had to happen of course: once people started talking about unconventional monetary policy then there was always going to be someone who espied the Magic Money Tree. And it’s Colin Hines who has:

It was heartening to hear Ed Miliband say in his speech that tackling climate change is a passion of his and that solving it could be a massive job-generating opportunity (Report, 24 September). The inevitable question of how to pay for this can be tackled by writing to Mark Carney, the governor of the Bank of England. He is on record as saying that if the government requested it, then the next round of QE could be used to buy assets other than government debt. Miliband said that the Green Investment Bank would be used to fund green economic activity and so Labour should allow it to issue bonds that could then be bought by the Bank using “Green QE”. Similarly, local authorities could issue bonds to build new energy-efficient public homes funded by “Housing QE”.

The Bank has already pumped £375bn of QE into the economy, but with little tangible benefit to the majority. Imagine the galvanising effect on the real economy of every city and town if a £50bn programme of infrastructural QE became the next government’s priority. This could make every building in the UK energy-tight and build enough highly insulated new homes to tackle the housing crisis. It would provide a secure career structure for those involved for the next 10 years and beyond, massive numbers of adequately paid apprenticeships and jobs for the self employed, a market for local small businesses, and reduced energy bills for all. Such a nationwide programme would generate tax revenue to help tackle the deficit, but in an economically and socially constructive way. Best of all it would not be categorised as increased public funding, since QE spending has not and would not be counted as government expenditure.
Colin Hines
Convener, Green New Deal Group

Wonderful, eh? We can have everything we want, and a pony, without ever having to pay for it!

Hurrah!

The problem being that Hines (and there are others of that ilk out there too) hasn’t grasped the difference between the creation of credit to reduce interest rates (what QE does) and the creation of base money to spend into the real economy. That second has rather different effects: as the Germans found out post WW I, the Hungarians post WW II and the Zimbabweans more recently. It creates hyperinflation, those last having it to such a bad extent that they kept printing until they’d run out of the real money necessary to buy the ink to print the play money.

I do not, note, claim that £1 billion or £50 billion or even £500 billion of this “Green QE” will inevitably produce inflation of 1000 % a day. I do however claim that use of this Magic Money Tree will, given the way that politics works (which politician doesn’t like spending money she’s not had to find through taxation?) will inevitably lead to hyperinflation. For the thing is we’ve tried this experiment before, many a time, and that is always what does happen.

Simply not a good idea.