The Pin Factory Blog

The 21 st thing is that a larger government actually makes economies more flexible: thus we should have larger governments in order to increase the necessary flexibility of the economy. And if the first part were true then the second part might indeed follow: only it isn't, at least not in the sense that Chang means it.

As part of his argument there's one thing that Chang does which is really very naughty indeed. He compares the growth rates of various European countries to that of the US. And he divides the growth rates into two periods: early 1950s to late 70s, late 70s to now (or what was now when he wrote a couple of years ago). He's right that the European economies, with their larger state sectors, grew more quickly than the US did in the earlier period. Hence the claim that larger government can mean more economic growth. Except, well, there's just one thing missing from this calculation: the Wermacht. As the perceptive will have noticed the German Army did have something of a European tour in the years immediately preceeding the early 50s. And the destruction of getting them to go home again was considerable: something which did not happen to the US at the time.

Just as we expect a developing country to have a higher growth rate than a developed one, given that copying is easier than being at the technological cutting edge, so we also expect an economy recovering from a total war being fought on its territory to grow faster than one which is not. So while the growth rates are true we cannot use them as proof that larger governments will create more economic growth.

The real problem with Chang's position though is that he confuses two entirely different things. He talks about employment inflexibility: the way in which it's difficult to get fired and thus the workers all feel secure. He also talks about the existence of a decent welfare state: unemployment pay, health care, retraining opportunities and so on. The problem is that he sees these as being equal: both increase the security felt by the workers and thus increase their flexibility. Which is untrue: they work in very different ways indeed.

It is true that a decent welfare state does lead to greater flexibility in the economy. The workers (and everyone else in fact) will be less stuck in their ways if they know that a change in the economy does not mean destitution. But job security works entirely the other way around: those who are too secure in their jobs won't accept any change at all. Thus reducing the necessary flexibility of the economy.

The reason that this becomes important is because Chang points to the Nordics as evidence of his assertion that you can still have decent economic growth with a large government sector: indeed that it increases growth to have a large such sector. But the very success of the Nordics argues against all of the other strictures about free markets and capitalism that he wants us to understand and adopt. For it is true that they do have large and generous welfare benefits: the unemployment pay, the retraining and so on. They also have decent economic growth. But what they don't have is the sort of regulation, planning and government intervention into the economy that Chang proposes. Look behind the tax numbers (necessary to pay for those benefits) in the economic freedom index and look instead at everything else. They have less regulation of markets than we do, greater economic freedom than even the US, less intervention into capitalism than just about anyone other than Hong Kong. Which is what makes the places work of course: as Scott Sumner is fond of pointing out, Denmark might well be the most classically liberal economy on the planet underneath that welfare state.

All of which I admit I find rather amusing. It is true that the Nordics are nice places to live, despite those crippling tax rates (almost all of which are tumbling down). It is indeed true that they've had very decent economic growth over the years and decades. It's entirely true that they have a lavish social insurance system. But those economies work precisely because they ignore, do absolutely the opposite of, everything else that Chang proposes a government should do to an economy. They're more free market and capitalist than even the US: which is why they work. Indeed, it's probably true to say that the only way in which you can have a social safety net like they have is if you allow capitalism and markets to let rip: how else can you possibly afford to pay for it all?

In Thing 17 Chang tells us that the current preoccupation with extending access to higher education is grossly wrong. It might well be true that more people should enjoy three years at the gleaming spires (and in the modern world, the booze, babes or boys to choice) and we are indeed in a richer world so why not? We do expect to take some portion of our ever increasing wealth in more leisure and there's no reason at all why this shouldn't be three years at the start of working life rather than more days off during it or more years of senescence after it. But if we think that more of this higher education is going to make us all richer then we're simply wrong. In this argument Chang is absolutely and completely correct.

Even the blind Haplorrhini gets a banana sometimes.

As Chang points out, Tony Blair might have caught the zeitgeist with his mantra of "education, education, education", but there's absolutely no evidence at all to show that he was right. Countries with higher further education rates do not have richer economies, ones growing more strongly, ones with higher technologies. There just isn't, in the actual data, any correlation at all with wealth and university education. Indeed, there's the suggestion that going above the 10-15% of da youf going off to uni is wasteful: we just end up in a signalling game rather than actually teaching anyone anything that's useful in terms of working life.That 10-15% that Switzerland had until recently and we had historically.

Given that so very little of what we're ever actually taught at university is ever used in a job (other than teaching the next cohort through uni) this shouldn't come as all that much of a surprise.

We might also muse on the fact that Chang's book has been very popular among the Guardianista classes. Haven't seen any of them mentioning this point though. Funny that.

I would take issue with only one of his points.

"What really matters in the determination of national prosperity is not the educational levels of individuals but the nation's ability to organise individuals into enterprises with high productivity".

I would replace national and nation there with economics and economy. For the nation state isn't actually the determinant of that ability to organise into such enterprises with high productivity. Indeed, one of the major points we can make about the UK is that absolutely it isn't.

London, The City at least, is organised into a global economy that connects Hong Kong, Singapore, New York and a number of other lesser international legal, financial and banking centres. London is also the richest of the EU statistical units (ie, not nation states, next level down). Cornwall, parts of the North, the bin ends of Wales and Scotland, are some of the poorest such regions in the EU. It is the ability of an economy to organise high productivity, not the ability of a nation to do so, which is important.

Perhaps you might think this a trivial distinction. But if we keep on getting all national about these things then we'll become both nationalist and statist. Which is very much the point we shouldn't be taking from this. If such high productivity can be organised across national boundaries, without national governments doing the planning or the regulating, then we know that the creation of those high productivity enterprises is not dependent upon the nation or the State, don't we? Nor even that "helping hand" of government.

Our fourteenth thing is simply that American executives get paid far too much money and that this is wrong. In itself this is proof that a market manner of doing things is ineffective: just the simple fact that the average US CEO gets 300 times the wage of one of his workers proves this.

And we should admit that Chang has some useful points to make here. It's entirely possible that there is rent seeking in the way that CEO pay is determined. Interlocking boards, where you scratch my back with a pay rise and I'll approve your's next month could be partly to blame. The agent/principal problem may well be in play as well. While the shareholders are the legal owners of the company we can all find examples of organisations being run for the benefit of the managers, not the owners. So there is some truth to the processes which Chang points to as raising US CEO incomes.

However, not enough truth for his contention that these pay rates are in some manner wrong or unjustified.

For example, the comparison between the 30 or 40 times average wages that CEOs used to be paid and the 300 they are now. Back when the average US CEO was running a US domestic market company. This simply isn't the case now: the large corporations there (as with the large corporations everywhere in fact) are now global companies. They're massively larger than they used to be so it's not entirely surprising that pay for those running them has gone up.

The two major mistakes made though are not quite so simple.

The first is that Chang wants to claim that people are paid according to their marginal productivity: only if a CEO is worth 300 times the average worker should he be paid that. But that's really not quite how labour markets work. Yes, average wages in a country are going to be determined by average productivity, this is true. But the wages of individuals are going to be determined by supply and demand of those particular skills. Given the mess certain CEOs make of running large corporations we can also see that the supply of the necessary skills is fairly small. We'd thus expect a high price to be paid for them.

But even this is still understating the point. The job of a CEO is not just to make profits for the shareholders: it's to avoid making losses for them. The value therefore of a CEO is not just the profit booked at the end of the year: it's the losses avoided. And those losses can, of course, amount to the entire value of the firm itself as Chrysler and GM shareholders found out.

The second is that Chang hasn't recognised that CEO compensation is like that of traders or footballers. We're in a tournament here. There's no static benchmark by which we measure the performance: that performance is only ever relative to everybody else in the same field. You can be a very fine footballer indeed and never make it to the Premiership simply because there are a couple of huindred players who are better than you are. You could make a perfectly adequate CEO: but you'll not get there if there's a few hundred to a few thousand who are better at it than you are. So CEO pay isn't being based upon some critical appraisal of some abstract standard: it's all about whether you're actually better than the other candidates or not.

And we do very much know one thing about what happens to pay in such tournament markets. It soars: because being 5% better than the other guy means that the employer wants to have you, not the other guy.

And that's really what is behind high executive pay. Yes, there's undoubtedly rent seeking, there's certainly some aspect of larger companies paying larger amounts and so on. But the real point is that it is indeed a tournament and as I say, the one thing we know very well about tournament markets is that they pay massively to those who win the tournaments.

Thing 13 is simply that trickle down economics doesn't work. Making the rich richer doesn't make everyone richer therefore we shouldn't be planning to make the rich richer. The whole thing is based upon the marginal propensity to invest: investment is good for the future of the economy, the rich invest more of their incomes than the poor do thus if the rich get more of the money then there will be more investment and that's good for the future. Chang insists that this idea is wrong, based as it is upon the classical economists. The rich don't necessarily invest more therefore allowing them to have more of the pie won't increase investment and so no glorious future.

There's a very serious problem with this argument of Chang's. For the flip side of this marginal propensity to invest is the marginal propensity to consume. And it's an absolutely standard part of Keynesian economics (most definitely not classical economics then!) that the poor have a greater marginal propensity to consume than the rich do. Indeed, we do get people telling us that in economic hard times we should be taking money of the rich to give to the poor. Precisely because the rich will just save and invest it while the poor will spend it thus boosting aggregate demand.

Here is such an argument in fact:

“For example, in an economic downturn like today's, the best way to boost the economy is to redistribute wealth downward, as poorer people tend to spend a higher proportion of their incomes.”

The greater marginal propensity to consume is exactly the same thing as the lower marginal propensity to save and invest: if the poor are more likely to spend then this is the same statement as the rich are more likely to save. The really unfortunate thing for Chang's rejection of the idea that the rich invest more is that this sentence comes from Chang. In this very same chapter where he urges us a to reject the greater marginal propensity to invest of the rich. Oh dear, eh?

It's also probably true that Chang should be deprived of his economists' secret decoder ring or confusing wealth and income as he does in that sentence. Wealth is a stock, income a flow, and never should the two be confused.

There's a common rhetorical flourish throughout the chapter that should have been avoided as well. He veers between talking about a redistribution of income upwards in recent decades and the way in which the growth in incomes has gone disproportionately to the already rich. The two are very much not the same statement: the first is that extant incomes have been snatched, like a humble crust from a Dickensian waif's lips, to be awarded to the rich. The second is that of the new incomes that are being created the upper part of the income distribution is getting most of that new income: the crusts are still safe in the waif's hands. The truth is that there has not been a redistribution of incomes upwards: the last few decades have seen average (both mean and median) incomes rise therefore nothing has been taken away from anyone. It is true that a large portion of the new income created has gone preferentially to those already gaining high incomes.

You may be happy about that or not but that is what has been happening, not the first but the second.

And now we should look at the proof that Chang uses to show that allowing the rich those higher incomes doesn't improve the growth of the economy. It is, fairly simply, that in more equal times like the 50s and 60s then economic growth was higher than it has been since the 80s, when inequality started to rise. What more proof could we require that the rich getting more of the pie doesn't grow said pie?

At which point we'd probably recommend that Chang read his own chapter 9. In which he tells us, entirely correctly, that as economies mature growth will become more difficult and thus, presumably, slower. Chang's (and, interestingly, the correct, which is an amusing coincidence) argument is that in the long term economic growth comes from improvements in total factor productivity (tfp). This tfp is easier to increase in manufacturing than it is in services. Chang uses this to argue that therefore economies should have lots of manufacturing so that tfp can be improved: an argument we rejected as there's only so much manufacturing that we actually want.

But look at what that does to Chang's subsequent argument about economic growth. We know very well that manufacturing has fallen as a portion of western world economies in recent decades. Indeed Chang tells us that manufacturing as a percentage of total production fell, in Britain, from 37% in 1950 to 13% today. That's the manufacturing where tfp growth is easier than in the services which have grown faster (for yes, manufacturing output has still grown, just not as fast as services) which has shrunk as a portion of the economy. And it's Chang himself who tells us that this makes future economic growth more difficult as a result of that difficulty in increasing tfp in services.

Yet when it comes to comparing growth rates in manufacturing heavy and services heavy economies the lack of growth is all about how the rich have all the money. Go figure. Consistency isn't just the hobgoblin of little minds you know.

One final point about why we don't want to be taxing those high incomes too much. It isn't, as Chang purports, because only the rich can make everyone else rich by investing. Rather, it's because the process of people getting rich is what makes us all richer. Assuming no rent seeking (which we free marketeers do indeed abhor) and the lucky sperm club then the only way you can get rich, become rich, is by satisfying the desires of others. You need to be producing something that others are willing to purchase. That they are willing to purchase it shows that they value it more than it costs them: by definition this makes them richer. As the influx of cash makes you richer.

It's not the static state of being rich that makes everyone better off: it's the activity of producing what others value that makes both the producer and consumer richer. And that's why we don't want to take huge bites out of the incomes of people who are doing this: because we'd like them to be seen to be well rewarded so that others are willing to take the risks of similarly producing value that all can enjoy. After all, we know that taxing something produces less of it: thus taxing the creation of wealth will produce less wealth.

The eleventh thing we've not been told about capitalism is so bizarre as to make me wonder whether Chang was proofread before publication. The layout of the free market position is that Africa is irredeemably doomed to low or no economic growth because of structural factors: ethnic diversity, disease, geography and so on. And the reason that we free marketeers say this is because we're embarrassed about the fact that Africa instituted free market reforms in the 80s and hasn't grown since then. Thus we've invented reasons as to why it hasn't rather than rethinking our committment to free market development.

Chang also tells us that post colonial Africa grew rather well (hmm, well, even he admits not well but better than nothing) in the 60s and 70s. So therefore we free marketeers are doubly wrong. We not only killed off what was working we also prescribed what does not and are now lying about it.

There is one teeny little problem with this. Chang has shifted his decades a bit. There was indeed a change in the 80s but this wasn't the widespread adoption of free market policies. That was the debt fuelled autarkic development that was abandoned. Actual free market policies didn't take root until the 1990s in sub-Saharan Africa (the place Chang and we are talking about) and since the mid-1990s there has indeed been a take off in growth in those countries.

In fact, if we look at the work of people like Xavier Sala-i-Martin (do look him up, his web page is a hoot but he's also one of the most cited economists around) we find that Africa is growing so well that they've actually got rising Sen Welfare. That is, not only are incomes going up but inequality is falling at the same time.

What drove the much slower growth of the 60s and 70s was exactly the set of policies that Chang usually proposes. Infant industry protection, government direction of the economy, planning. And most crucially, borrowing to fund that economic development. And, as is usually the problem when people play socialism at some point you run out of other peoples' money. The actual investments that were made (just about every country decided they needed an integrated steel mill for example. Almost none of which ever worked at anything like capacity as the continent could really support perhaps two, not the dozens planned) simply never did pay back the borrowings made to construct them. So the policy of state directed development not only didn't work it came crashing down in a ghastly and impoverishing heap.

What happened to African development is an argument against Chang's policies, not one in favour of them. And I've already mentioned that I'm not sure that you can do Chang's form of directed development in a democracy. Even if (which I'll not admit anyway, but just for the sake of argument) you can do it in an authoritarian or repressive society, the political dynamic is such that you can't wher the people get to vote.

Take, as an example, Ghana. Nkrumah very definitely believed in the socialist and state directed development model. Vast sums were borrowed in order to construct the industry it was thought the place needed (and there were many a western socialist writing these plans in Accra at the time). But while Nkrumah did become increasingly repressive himself he did still face democratic pressures. So the economic policies favoured the urban population, those who tended to vote (or even riot where they could be seen) rather than the larger rural one. The exchange rate was fixed high for example: to the great detriment of the cocoa farmers trying to export, to the great benefit of the urbanites who wished to import goods. There was indeed an attempt to have that planned economy, to build and protect those infant industries. It's just that they were all bad plans: and as I say, I'm convinced that at least part of the reason the bad ones were followed was precisely because it was a democracy.

No, this does not mean that I think that we should have authoritarian government in order to attain economic development through planning. Quite the opposite: that given that we've got democracy we cannot have that planning because the democratic pressures will lead to bad planning.

So, Ghana, and everyone else who tried to follow the same development path (pretty much everyone) ended up going bust. Which is what gives us the slump of the 80s. Finally the recommendations of the Washington Consensus manage to trickle through the intellectual barriers (and let us recall that the Consensus is really just a list of stupid thing you shouldn't do) and to be applied in the 90s. Since then we've had good and decent growth in sub-Saharan Africa. Hurrah etc: but that is a very different story indeed than the one Chang is telling. Which is what rather makes me wonder whether the book was proofed before publication.

There is one little aside as well. Chang does correctly point out that many to most African countries have bad external transport links. For reasons both historic and geographic. What puzzles me is this. Given that Chang says that a country should not leap into the global marketplace, but should develop at least to begin with behind its own borders, well, given that Africa's had no choice in this, why isn't it developed? If few imports lead to economic development as this encourages domestic production then why haven't African countries developed as they've had few imports?

That is just an aside though. The real problem with our eleventh thing is that Chang just isn't describing things as they really did happen. Sub-Saharan Africa did do the planned and tariff bound infant industry protection thing in the 60s and 70s. And growth was there but feeble: and then the entire system went bust. Once the mess was cleared up and free market policies adopted in the 90s we've seen good and decent growth across the region. And no, it's not the free marketeers who have been ascribing Africa's problems to anything other than economic policy. Quite the contrary: we've been using the benighted continent as absolute proof of our contentions. Managed development was tried and failed: free market development is working.

In our eighth chapter Chang tells us that as capital is, despite Marxist insistences, national in some manner therefore we should be nationalist about capital. Whether or not we allow Johnny Foreigner to come and invest in our pristine and national economy thus become a political question: the politicians should stroke their beards and ponder upon whether this specific capital is going to do the right thing in our specific economy.

One major problem with this is that, unlike Chang, we do not think that politicians, however long and grey their beards, have the ability to note whether a particular investment is good for the economy or not. The average political researcher turned Cabinet Minister could not invest their way out of a wet paper bag. But let's not talk about British politics specifically.

In one part of his analysis Chang is obviously and clearly correct: that captial and companies do still have a national character however multi- or trans-national they may seem. This is not, of course, a new idea:

By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

Yes indeed, that's Adam Smith. Wealth of Nations Book IV Chapter 2 para 9. And it's also the only mention of "invisible hand" in the entire tome. No, invisible hand is not a shorthand for the market and all its wondrousness: it's a comment upon the way in which even if capital were entirely free, foreign profits were higher than domestic, there's still something about security and familiarity that leads to capital being invested in that domestic trade. Very much the same reasons Chang gives for why corporates do indeed still have something of a home nation bias.

So Chang's right here but only because he's not original. And it's really most odd to insist that no one tells us this about capitalism when the very point is made in the Ur-foundation document of capitalist economics.

However, there's a very large mistake that is being made in the rest of the argumentation here. In short, it's in this sentence:

"This means that the home country appropriates the bulk of the benefits from a transnational corporation."

If the high end R&D is done at home, if the profits flow home, then the home country gets the major gains because these are the major benefits of a transnational corporation. Which is absurd poppycock. It's an entirely ludicrous thing for an economist to try and claim.

The major benefit of any productive organisation is what is produced: the benefit that people get from what the company (or co-op or individual) pumps out. This is known as the consumer surplus and this really ought to be known even at Cambridge. The benefit of Google is not cushy jobs for engineers, nor the lack of tax revenue in the UK, the benefit of Google's existence is that we all get to use Google. Whether VW's R&D is in Wolfsburg or not matters very much less than that we all have the chance to drive VWs.

Indeed, we can make an attempt at showing how vast is the difference between these two concepts of the value that a corporation provides. It's not quite exact, because this paper talks about Schumpeterian profits (ie, what the entrepreneurs get, not finance capital) but the stunning fact is that the entrepreneurs only get 3% of the value created.

The present study examines the importance of Schumpeterian profits in the United States economy. Schumpeterian profits are defined as those profits that arise when firms are able to appropriate the returns from innovative activity. We first show the underlying equations for Schumpeterian profits. We then estimate the value of these profits for the non-farm business economy. We conclude that only a minuscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.

As I say, it's not quite exactly the same but it is indeed indicative. The vast majority of the value that is created by any productive enterprise is not in who gets the jobs nor the profits nor the tax from that enterprise. It flows to the consumers who get to use the produce of that enterprise.

That is, after all, why the consumers buy it: they value it at more than it costs them to purchase it.

At heart this chapter shows one of Chang's basic problems. He views the economy as being about the benefits to producers and the benefits of production. He's entirely lost sight of the fact that the whole game, the economy and economics as well, is about consumption and opportunities for consumption. Whether or not foreign owners of companies do their R&D locally, pay their taxes or employ locals in the higher echelons of management is such a tiny part of the whole that it's an irrelevance. That foreign capital is still pumping out things that the local gets to use and that's where all the value is, in that consumer surplus.

After all, Smith did also say:

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident that it would be absurd to attempt to prove it. But in the mercantile system the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.

That was back in 1776: isn't it about time that it sunk in?

The sixth thing about capitalism we're told is that inflation just isn't so bad. Further, that the attempts to reduce inflation have led to greater economic instability elsewhere. We should thus chillax about inflation and concentrate on other things.

Chang is indeed correct about low rates of inflation. The 1-3% sort of levels that central banks currently aim for aren't so bad: indeed they often aid other changes in the economy. Take, for example, Keynes' point about the rigidity of nominal wages. If inflation is 3% and wage rises 1% then real wages will be falling (as, sadly, they sometimes need to do, see Germany early this century) and this will cause a great deal less fuss and social unrest than if inflation is zero and nominal wages fall 2%.

It's also true that the aim is for low inflation because, in a debt financed society, we really don't want to get into a deflationary period. If nominal incomes and production values fall while nominal debt levels stay static it's entirely possible to enter a sort of death spiral. So erring on the side of caution, a couple of percent, is sensible enough.

Chang goes on to make the leap to the idea that moderate (which, apparently, means 20-40% a year) is also not so bad. He agress that hyperinflation is bad for:

" Hyperinflation undermines the very basis of capitalism, by turning market prices into meaningless noise".

This is an example of how Chang continually conflates capitalism and markets. They're really just not the same thing. They might work well together but capitalism is a description of who gets to own the productive asserts: the capitalists. Markets describe a method of exchange. These simply are not the same thing at all. Indeed, we can have capitalism without markets (the Soviet system was state captialism without markets) and we can have various forms of socialism with markets (Tito's Yugoslavia was an attempt at this and we can certainly have socialist entities within markets: Mondragon, the Co Op and John Lewis come to mind), but it is vital to keep in mind that the two are descriptions of different things, not just interchangeable names for the same socio-economic system.

But Chang's real complaint isn't about inflation: it's about the economic instability of the other parts of the "neoliberal" package. By concentrating on killing inflation we've raised such things as job instability and other forms of non-price instability. Chang thinks this is a bad idea: I think it's entirely excellent. No, not because I'm a rabid neoliberal (although I am) nor because I want to grind the faces of the workers into the dust as they cower in fear of losing their jobs.

No, the entire point and aim of this game of an economic system is that we want to move productive assets from lower value uses to higher value ones. That's what we're trying to do for this movement is the very definition of wealth creation. And, given that we've still got near a billion people living on $1 a day and the like, more wealth creation is still an urgent task.

If we have this need to be continually moving productive assets to higher valued uses then yes, labour will be more insecure in its current employment. As will capital and land of course: and most especally so will human capital. Very few indeed expect to leave university these days and not have to learn new skills by the time they retire. Price insecurity, that inflation, does aid us in these reallocations: but not once we've got past that 1-3% level. Byt the time we get to 20% and up, the price insecurity is raising that signal to noise ratio in that information that prices are giving us. Thus we find that the allocations of assets that we're making is becoming less efficient as a result of the rise in that noise.

Even what Chang calls "moderate" inflation will, in an economy anywhere near the technological boundary, lead to us simply not having accurate enough information to know what we should be doing next: and that hampers wealth creation. It's worth noting that the economies he uses to show that inflation isn't so bad are those which were, at the time, decidedly not at that technological boundary.

As an analogy let us compare inflation to oil or grease. Chang and I are agreeing that drowning in a vat of hyperinflation is a bad idea, most unpleasant. We're also both agreeing that a little bit of oil greases the operation of the economy. The difference is that he sees the lake of oil on a skidpan as being an exciting experience, one that doesn't limit our speed, I as one where the feedback from the system leaves us all entirely out of control and with no idea where we're going or how to change where we are.

As to increasing economic instability in this neoliberal age: yes, quite. We've got the instability we need and require: the flexibility to deploy productive assets from lower to higher value uses. You know, to aid in making the poor rich.

The Wall Street Journal picks up on the quite fascinatingly stupid imposition by the current government of a minimum price on carbon permits. This could only have been done by people entirely ignorant of how a cap and trade system works: not a wholly desirable attribute in those supposedly running a cap and trade system.

The European Parliament's rejection this week of the Commision's proposed carbon-permit price-fixing scheme is good news for economies across Europe—except for the U.K.'s, which is likely to suffer from the lower carbon-emissions prices that result...........The carbon price floor, which came into effect April 1, was supposed to increase investment in "green" energy projects in the U.K. by ensuring that carbon-permit prices could not fall below a certain level—starting at £16 per ton of carbon this year and rising to £30 per ton in 2020............The European Commission's idea for shoring up the price of carbon permits—withholding the supply of permits from the market—was voted down this week by the Parliament, and the permit price only fell farther. As of Thursday is stood at €2.80 (£2.40) a ton—just 15% of the Cameron government's floor.

I know, I know, many of you are more sensible than I am when it comes to this climate change thing. I'm still under the delusion that it's a problem we should do something about. But at least I do understand the role of price in a cap and trade system. In a carbon tax system, the other viable alternative action, it is the tax, the price of carbon emissions, that reduces them. In a cap and trade system it is instead the number of permits issued which reduces emissions. The price for such a permit is simply telling you how tough it is to meet that cap. Thus, the lower the price of the permit the better for all. It shows that reducing emissions is actually quite simple and quite cheap.

In this case, we're seeing that eliminating the marginal emissions necessary to stay under the cap costs less than £2.40 a tonne. Quite why the British government insists that everyone should pay £16 a tonne for it is known only to the more frenzied minds within it. In a cap and trade system a low price for permits is a good idea, a welcome sign that it's all less of a problem than we had thought.

As I say I do indeed think that carbon emissions are a problem that we ought to do something about. But I do also think that we should not use this as an excuse to do fascinatingly stupid things: like artificially raising a price that we are gloriously grateful about being low. The cost of reducing emissions that is.

It appears that all of these nefarious high speed traders are not, as all had thought, making vast profits. Rather, they've come up against a limitation to the system which is seriously reducing their profits. Meaning that regulation and action to stop HFT is really rather moot:

Now it appears the advantages of speed are starting to dissipate, and being the fastest trader isn’t worth what it once was. High-frequency trading profits are expected to fall 35 percent this year, 74 percent below their peak in 2009. In an ironic twist, high-frequency traders have gotten so fast, they seem to have outrun their own profitability.

The specific problem they face is that their systems are now faster than those of the exchanges. Thus throwing money at getting faster doesn't do you much good. Rather like building a motor car that tops out at 250 mph when the speed limit is 70. Possible as a rich man's toy but not necessarily a profitable method of business. The car maker might make money but it's only the bragging rights for the user.

But the thing is Smith, Ol' Adam, did point out that this was the sort of thing that would happen. Someone might spot a new method of making excess profits: they go off and do so. Others note those excess profits and follow. In time, those excess profits get competed away and, with many a wobble, profits decline to normal levels again. In this very manner new profit opportunities are supplied with the capital necessary to exploit them and when they're exploited our adventurous capital goes off to look for further excess opportunities. In which manner the economy becomes ever more efficient and we all collectively get richer. Hurrah!

In an example of that search for further excess profit possibilities those HFT methods appear to be moving from the stock market over to the commodities markets. At which point Hurrah! again as they will become more efficient and we'll all get collectively richer again.

How about that, eh? Free markets lead to capital being optimally allocated. Who would have thought it? The chase for excess profit leads to it being competed away and in the process we all get richer.

A very puzzling call contained in the latest little pamphlet from Compass. You know the sort of thing, the call to arms about what we must do to make this a more caring, sharing and wondrous society. And yes, I read these things so you don't have to. They insist that there should be a European minimum wage:

Europe should therefore move towards a continent wide minimum wage, based on the respective average income.

There's an awful lot of weight that rests upon that word "respective". There are two possibilities. One is that there should indeed be a European minimum wage. One single rate that applies to all jobs in the EU. Which would be either irrelevant or entirely crazed. If it's based on some sort of average of European wages then just about every job in the poorer countries would disappear overnight. Insisting on, say, 50% of German wages in Romania when that's some multiple of average wages in Romania would indeed be crazed. Insisting that Germany meet the Romanian minimum wage would simply be irrelevant.

The other meaning possible is that they think that there should be a minimum wage in each country, based on the relevant wages for that country. The problem with this is the following:

Germany, Cyprus and the Former Yugoslav Republic of Macedonia have statutory minimum wages that do not apply to all or the large majority of employees but are restricted to specific groups which are defined e.g. by sectors or by professions. These are excluded from the data collection. Also excluded are countries where there are no statutory national minimum wages: Denmark, Italy, Austria, Finland, Sweden, Iceland, Norway and Switzerland. In these countries, wages are either determined by negotiations between the social partners, at company level or at the level of each individual contract. Typically, sectoral level agreements are widely applied and have erga omnes applicability, thus constituting de facto minimum wages.

Insisting on a statutory minimum wage in Denmark, Sweden, Germany, Finland.....what effect does anyone think this will have in any manner at all?

Which leaves me really rather puzzled. I'm not sure which box to put Neal Lawson and his band of merry social democrats in. It could be that they're simply ignorant, in that they don't know that there are already minimum wages in most EU countries. It could be that they're stupid in that they don't realise that having them where they do not already exist isn't going to make a damn bit of difference as the same end is achieved in other ways. Or it could be that they really are crazed loons and that they want to impose a minimum wage based on some average of European wages. Which would immediately close down large parts of the economies of the poorer countries.

Which leaves me even more puzzled. Given that these are the only three boxes that they can be put in as a result of this call then why is it that anyone pays any attention to them at all?