A market solution to the third runway

You have to have some sympathy for Zac Goldsmith, whatever you think of his politics. He clearly has principles and grit. Resigning over the Government’s plans for a third runway at Heathrow was his promise. Now he has delivered. Other politicians have a lot to learn.

Expanding airport capacity is long overdue. London is a growing and global city. As Sam argued yesterday, the government might also want to approve a new runway at Gatwick. Why not the Boris island too?

I have spent most of my life in Richmond, so I am also very sympathetic for residents. This is where Sam and I disagree. But, I think there is a simple solution. Markets.

Welfare economics 101 tells us that many activities have externalities. Costs that affect a party who did not choose to incur them. This means the air travel market does not reflect its full social costs. For example, Pearce & Pearce estimated that noise nuisance at Heathrow results in £37-66 million p.a. in uncompensated losses.

Governments often respond to these challenges by trying to ‘internalise’ the externality. Pigou’s solution is most common - applying a tax that is 'equal' to the cost of the externality.  (Yes - there are many flaws to this approach, covered well elsewhere!).  

Flights in the UK are taxed already. These include air passenger duty, passenger service charges, and sometimes value added taxes. The air passenger duty is supposedly intended to offset environmental costs. The airlines, airports and their employees also face a range of taxes. Perhaps more taxes isn’t the best answer.

A simple solution would be take a cut of the revenues raised by air passenger duty and give it directly to those affected as compensation. An independent not-for-profit institution could make yearly evaluations of the harm caused.

The more sophisticated solution would be to create an actual market. Residents would be granted a right to silence, and a share of tradeable noise permits. The marketplace would be neutral and managed automatically by software.

This solution does not require regular evaluations. It is not expensive to manage. It isn't biased towards businesses nor does it give them too much power. It avoids drawn out legal disputes. It could even be set up without political direction.

A tradeable pollution market moves the real world much closer to the Coase theorem. With clear property rights (for air corridor residents), and low transaction costs (with a simple trading platform), both sides can bargain to a balanced outcome.

This market would allow the third runway to proceed, with extra flights, and provide compensation to those harmed. All without too much hassle for May’s government and further delays for travellers.

Why we're against gender parity

The World Economic Forum tells us that true gender parity is going to be some century and a half away. Something we think we're rather grateful for to be honest. For we strongly disagree with the definitions of parity being used here. The WEF is using definitions which depend upon equality of outcome - and we insist that it is equality of opportunity that matters.

No, this is not just some trivial or even philosophic difference, it goes right to the heart of what we want our socio-economic system to offer.  We can have parity of the WEF's type if everyone wears boiler suits, that anyone may or may not, can or cannot according to their desires, wear a boiler suit is the equality we desire.  

Take their set of comparators for economic participation:

Economic Participation and Opportunity Ratio:

Female labour force participation over male value

Wage equality between women and men for similar work

 Ratio: female estimated earned income over male value

 Ratio: female legislators, senior officials and managers over male value

 Ratio: female professional and technical workers over male value 

We don't support any of those. No, not even equal wages for similar work - equal wages for the same work we insist upon, just as the law does now, but not for similar because similarity is always in the eye of the beholder, isn't it? 

All of the rest of them are insisting that male and female outcomes must be the same. That there must be the same number of male coders as female ("technical workers"). That as many women work in the market economy as men.

We are adamant that women and men should have exactly the same opportunities to deploy their skills and desires as they wish. That's what freedom and liberty mean. But we're well aware that there seems to be, when looking at the world around us, there's something of a difference in who wants to do what. No, not at that individual level, where the freedom must apply, but at the average or societal level there's most certainly a difference in numbers who wish to be primary child carer for example. 

House husbands exist and are becoming more common. That's fabulous, an expansion of those individual freedoms - we ourselves were behind that expansion of paternity leave for example. But the WEF assumption is that parity is only achieved in labour force participation when equal numbers of men and women are primary child carers.

That does rather seem to run against what we know in general about mammalian and thus viviparous species. 

The desirable world is one in which we all get to live our lives as we wish. This does not mean equality of outcome simply because we all have different desires. That the individual man or woman should and must have the same opportunities does not mean that the entire population of either - nor of any other grouping we might like to consider - will choose the same mixture from life's rich list and thus the population outcome isn't going to be the same. 


One of the reasons we shouldn't have a planned economy is

That perhaps the planners don't know what they're talking about. We spied this little piece in the Times:

Australia’s richest woman has backed the £3 billion plan to build Europe’s biggest potash mine beneath the North York Moors.

Hancock Prospecting, controlled by Gina Rinehart, the iron ore magnate, is paying $300 million towards constructing Sirius Mienrals’ mine on the national park in return for a share of the revenue and, eventually, a stake in the company.

The deal is the first chunk of financing secured for construction of the $3.6 billion (£2.9 billion) mine which was approved by planners last year. The mine will initially produce 10 million tonnes of polyhalite, a fertiliser, every year.

That Hancock family fortune hasn't been built by just stumbling over some deposit that could be made into a mine. It's been done by very clever work over the decades concerning what is financed and with whom.

This company's addition to this project is a very big feather in the cap of said project. To change industry sector it's a little like inventing some tech good enough that Apple wants to buy into it.

Polyhalide is a bit of an oddity. It's slightly different than the more normal run of the mill raw materials for fertilisers but adaptations can be made without too much difficulty.

Which is where the planners come in. As we can see one of the top end mining companies likes this project enough to plonk down $300 million for a bit of it. The planners, at one point, refused the development licence on the grounds that no one would buy the production from the mine if it were built.

We tend to think that decisions made by those who know what they are doing are preferable to decisions made by those who do not. Of course, this project is not a slam dunk success quite yet but we do know which way we lean on who is right here.

And it ain't the planners. Thus we find our prejudices reinforced - why would we let economic decisions be made by those with no skin in the game and possibly even less knowledge than that?

The ASI and Brexit

The Adam Smith Institute has no official line on Brexit. Its staff have different opinions on the issue, just like those in other policy bodies. The ASI’s Executive Director, Sam Bowman, favoured Remain in the referendum, and now advocates an EEA-style solution. Its President, Dr Madsen Pirie and its Director, Dr Eamonn Butler, voted to leave the EU and now believe that a clean (and quick) Brexit is desirable.  

Both founding directors take the view that the referendum result must mean that UK laws are in future made in the UK, that the European Court of Justice has no further jurisdiction in the UK, that the UK no longer contributes to the EU budget, and that the UK has control of its borders.  All these were crucial elements in the Leave vote.

We both take the view that the UK now has the chance to trade freely with the rest of the world, since it will no longer be locked inside a protectionist bloc of diminishing economic and political significance. We think our economy will grow faster than those of our EU neighbours now that the UK – always an advocate of liberal commerce and free trade – can negotiate with its own interests at heart, instead of having them swallowed up in the interests of 27 other EU members.

We expect to enjoy very good relations with our former fellow members.  We do not expect the agreement we reach with them to be like any they have with other non-members.  Ours will be different because we have been members and have worked with them.  We do not come to them as mere outsiders who have to start from scratch; the saga of the proposed EU trade deal with Canada shows how difficult that can be.  For us it will be a case of modifying previous ways of working together to take account of the new relationship. 

Like most economists and everyone at ASI, we hope that protectionism will not prevail, and that free trade with those beyond our borders will be the norm. We hope, too, that once in control of our borders, we can be relaxed about immigration, choosing whom we wish to take into our economy, our culture and our society, and taking significant numbers of those who can contribute positively to all of those.

We therefore look to the future with optimism that, outside of the EU, the UK can move forward to a bright future that will enrich the lives of its citizens and provide a positive example to the world. And the quicker we embark on that future, the better for everyone.

Book review - Adam Smith by Jonathan Conlin (Reaktion Books, 2016)

One of the unintended consequences of the 2008 financial crisis has been to bring what until then had been a backwater of academic research, financial history, into a mainstream topic of the reading public. So it will pique readers’ interest that Jonathan Conlin in Adam Smith (Reaktion Books, 2016, £11.99) covers an intriguing episode from the life of the great economist when he was working on The Wealth of Nations. In 1772, Smith witnessed the collapse of a major Scottish financial institution, Ayr Bank, and since one of the bank’s principal shareholders was Smith’s principal patron, the Duke of Buccleuch, its demise affected him in more ways than one.

In 1769, when Ayr Bank opened doors, Scotland was booming. Investing in Edinburgh’s New Town seemed a one-way bet and substantial sums were raised for property there and for infrastructure in the region. When the managers Ayr Bank came to grief they did much as have bankers before and since, namely by kidding themselves that loans could not sour and even if they did, savers were unlikely to care enough to pull their deposits., David Hume wrote to his economist friend after Ayr Bank collapsed, “we are here in a very melancholy situation … Do these Events any-wise affect your Theory?”

Smith in Wealth of Nations had two points to make.

The first was banks ought to lend to create real value in an economy and help build highways rather than highways through the air.  Such common sense advice was in keeping with conventional thinking. But there was another comment Smith offered, regarding the imprudence of depositors, that evinces Smith had an intuitive understanding of the psychology of risk where he was well ahead of his time.

This is what Adam Smith had to say about depositors whose mind-set conduced to financial crashes:  “The house is crazy, says a weary traveller to himself, and will not stand very long; but it is a chance if it falls to-night, and I will venture, therefore, to sleep in it to-night.” Depositors, in other words, share some of the blame for a collapse in market confidence because they are not as vigilant as they ought to be.

Just how perspicuous is this insight we can see from debates over the benefits of deposit insurance, today unquestioned as an indispensable prop of financial market stability. But less thought is given that once monitoring bank solvency becomes a regulator’s job, this not only adds to cost of regulation but also tempts reckless depositors to act as free-riders to the system.  

In Jonathan Conlin’s biography, Smith’s reaction to Ayr Bank’s default is only one of many incidents in the life of Adam Smith that are sets against his works. As Conlin shows, it is often Smith’s asides and throwaway observations with which his Theory of Moral Sentiments and Wealth of Nations abound that illustrate his almost limitless capacity to prod readers into looking at things from an unexpected angle; for more of this see my full review of Adam Smith.

Well, why not slash corporation tax to 10%?

Given that we are all economically literate around here we know that corporations do not bear the economic burden of corporation tax. It's just a convenient fiction that they do, the reality is that the tax hits the wallets of investors in the company being taxed and all the workers in the economy which has the tax. Similarly, given that we are all economically literate, we know that capital income should be taxed rather more lightly than labour income, if it should be taxed at all.

So, this seems like a very good idea:

Britain could slash corporation tax to 10 percent if the European Union refuses to agree a post-Brexit free trade deal or blocks UK-based banks from accessing its market, the Sunday Times reported, citing an unidentified source.

The newspaper said the idea of halving the headline rate from 20 percent had been put forward by Prime Minister Theresa May's advisers amid growing fears other EU member states will take a hard line in Brexit negotiations.

The tax cut would be used to try and persuade the EU to grant "passporting" rights for financial services firms to continue operating across the EU, the newspaper said, in a sign of the likely animosity of the upcoming divorce talks.

But why is this being kept in reserve just in case we want to be dastardly to the French? Or the threat of not doing is being used as a persuasion for the Germans to maintain their own access to our fine banking services? 

This is simply a good idea in and of itself and one we should implement right away.

Could we make all politicians personally liable?

Could we, should we, think about importing a political practice from Thailand? We have the long reigning monarch after all, even if their practice of military coups is something we gave up centuries ago. For they've decided that a Prime Minister who oversaw a piece of monumental stupidity should be personally liable for some of the damages.

Yes, obviously, there's more than just a tad of political score settling here but the idea still has merits:

Former Thai Prime Minister Yingluck Shinawatra on Friday said the junta that overthrew her government had ordered her to pay nearly $1 billion in civil damages over a botched rice-subsidy program.

Botched is not quite the concise description we want here - insane folly is perhaps closer. The plan was to pay Thai farmers 50% above the world price for their rice, store it, then make a profit by selling as exports the now more expensive rice. This did not work as a quick glance at the EU's history of wine lakes and butter mountains would have shown.

It was political genius, that's true, given that it secured the votes of the 40% of Thais who are rice farmers, but an economic hallucination consistent with the very finest psychotic drugs. Production increased both inside and outside Thailand, the export markets substituted over to other producers, smuggling into Thailand took place and by the end the plan was reportedly swallowing 4% of GDP.

That's cheap votes if it's other peoples' money, expensive if its your own. And thus the idea of making all politicians so personally liable. £400 million here on a troubled families programme, £20 billion there on a nuclear power station and £169 a MWatt for tidal power and pretty soon you're talking about real money.

Some would say that this would mean politicians never did anything, paralysed as they would be by the fear that it might go wrong. This is not a bug in the plan, King Log was a rather better ruler than King Stork,  it's rather the point of it....

Voluntary economic transactions between consenting adults to be made illegal

Not that it's actually that unusual for people to try to usurp the law to ban voluntary economic transactions. There're all too many people out there who believe that others should not be allowed to do as they wish and who will use the might of the State to prevent them doing so. This does not make prison time for being an efficient ticket distributor the correct answer:

Touts who use computer software to buy concert tickets for resale at inflated prices could face a prison term, under proposals to be considered by the government.

The proposal was made as Theresa May, the prime minister, said she was looking at ways to address the use of ticket-resale websites by professional touts at the expense of fans.

This simply is not the correct answer.

The market clearing price is the market clearing price and it always will be. Those supply and demand curves really do intersect. And trying to put a price cap on the supply only makes whatever it is more expensive for the consumer. Either there is the intervention of resellers, in a relatively inefficient market, or the cost of gaining access to the tickets becomes something else, time spent in queues for example, also less efficient. As we know, the best method of rationing anything is by price.

If it is true that the current supply leads to a price being "too high" according to whatever metric you want to use then there are only two potential answers. One is to reduce demand - by, perhaps, doing worse gigs. This might not be an entirely desirable answer of course. The other is to increase supply so that prices do come down - because again those supply and demand curves do intersect. Play larger gigs, play gigs more often.

That prices will vary according to those two, supply and demand, is not some optional extra it's one of the laws of our universe, at least a universe which has humans like us in it. Up to 51 weeks in prison doesn't change that fundamental fact of our existence.

This is a terrible idea, a bad suggestion for the law.

In defence of Mark Carney

In defence of Mark Carney

In the last few weeks a number of politicians and right-wing commentators have attacked Mark Carney, Governor of the Bank of England, either for his conduct during the referendum campaign or for the policies he has overseen while at the Bank. 

These attacks are misguided. There is an important debate to be had about the nature of central bank policy in Britain and elsewhere – indeed, a debate about the very existence of central banks – but, with some notable exceptions, few of Carney’s critics seem to be aware of it.

It is always true that small companies produce the employment growth

The House of Commons library has compiled figures to show that it is small, not large, companies that produce employment growth in the economy. This should not be news to anyone although sadly it is. For it is small companies which provide almost all of the forward impetus of the economy. This is true everywhere and always:

Small firms have created ten times more jobs than the big businesses who are lobbying to keep Britain inside the EU's single market, an MP revealed last night.

Tory backbencher Charlie Elphicke said the figures – compiled by the independent House of Commons library - nailed the CBI's 'single market lies'.

The pro-EU business group argues it is vital for the economy that the UK stays inside the tariff-free single market.


The figures show small and medium-sized enterprises (SMEs) have created 3.4 million new jobs in the private sector in the past 15 years.

Big businesses have created 323,000 over the same period, according to a new analysis of the Government's Business Population Estimates 2015.

This is true not just of employment. It is also true of innovation - as in the old joke that science proceeds one funeral at a time. The economy advances, productivity increases, one bankruptcy at a time.

New technologies are created, new technologies are adopted, largely through firm exit from the market and firm entry to it. Thus the entire system itself advances not through those large companies continuing to exist, but by their death from the competition bubbling up underneath them.

This is not a point specific to Brexit or the EU argument of course, but it is relevant to it. It's the entire and whole reason why we want a lightly regulated economy. Regulation aids incumbents as they are the people with the size and heft to be able to deal with the overhead of said regulation. It is only via a low regulation environment that we leave the room for the small companies to pop up into and so drive that economy forward to the ever greater enrichment of us all.

The relevance of the EU or Brexit to this being that we do all believe that we can transform the EU into a low regulation economy, right?