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"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

Politics makes us 'stupid' because the world is complex

Written by Sam Bowman | Wednesday 16 April 2014

Ezra Klein has launched his new site, Vox.com, with an essay on ‘how politics makes us stupid’.

The piece is provocative, and Klein uses some interesting examples. Most striking is the study that shows that people’s maths skills get worse when the problem they’re dealing with has a political element and goes against their political instincts. (Klein seems to have slightly misunderstood the study he’s written about, but his basic point stands.)

The basic claim is that people engage in ‘motivated reasoning’ when they think about politics – in other words, they think in order to justify what they already believe, not in order to discover the truth. This, he suggests, is because the politically-engaged people get more loyalty to their ‘tribe’ than they lose by being wrong.

This ‘identity-protective cognition’, as he calls it, makes sense – a pundit who decides that the other side is right about some particular political issue (Klein uses global warming as an example) has a lot to lose in terms of status within the group they’re part of, and little to gain by being right.

Klein says that this has become worse as political parties have become more ideologically uniform and ideological ecosystems, like think tanks, blogs, media, more expansive. Not only is there the external cost of being wrong, but admitting to yourself that you’ve been wrong for a long time is quite difficult too, especially if you’re politically engaged and some of your sense of self is tied up with your beliefs. You could call this ‘rational ignorance’.

Even though that might seem plausible, I think he is assuming too much and is wrong about some of the phenomena he identifies. I’d like to suggest an alternative understanding of political ignorance that, I think, explains more and assumes less.

I think Klein’s fundamental error is to assume that the truth – or, at least, his mode of truth-seeking – is obvious. Basically, he starts off from the position that most people could reasonably see the light if they wanted to. If that’s right, then it could follow that incentive to disbelieve the truth. And “identity-protective cognition” is an interesting way of understanding that.

But suppose truth is not obvious – that we’re ignorant not because we want to be but because, in Keynes’s words, “we simply do not know!”. In contrast to the rational ignorance Klein is discussing, this kind of ignorance comes about because life is complex. The existence of this kind of ignorance is what allows people to disagree without either being willfully ‘dumb’.

To demonstrate his case, Klein uses examples of ideological dogmatism that are based on rejection of the hard sciences. Here he is assuming that a reasonable default position must be to believe in the usefulness of science, so anyone who deviates from that by disbelieving some scientific point must have an incentive to do so. But if they are simply unaware of the fact that science is usually a good way of learning things, them ignoring scientific consensus is simply a mistake.

Klein may see it as being obvious that science is great. But he has probably spent a lot more time thinking about it than most people – for many, rightly or wrongly, the jury is still out on science, as a great man once said. Error, not group loyalty, may be a simpler explanation for people’s refusal to accept what seems to be a well-established truth.

If the truth is difficult to determine, people who have an interest in politics need some way of sorting the truth from the information they can access. Since there is a huge amount of conflicting data and theory in nearly every area of policy (whether garbage or not), people need some way of sorting the wheat from the chaff.

That’s where an ideology comes in. An ideology, I suggest, is a type of ‘web of belief’ that allows people to use what they already believe to be true to sort relevant and true new information from irrelevant and untrue information. As Jeffrey Friedman puts it, ideology “provides pegs on which to hang the political facts of which non-ideologues tend to be so shockingly ignorant”.

This fits with the fact that ideologues are usually a lot more informed than non-ideologues, an important fact that, so far as I can tell, Klein ignores.

Klein’s view is that political ideology ‘makes us stupid’, but ‘closed-minded’ is probably a more accurate term. The vast majority of the public is shockingly ignorant of basic political facts, with the informational 'elite' also happening to be the more closed-minded. The alternative to closed-mindedness may simply be to be extremely uninformed.

This matters because the things Klein blames for politics making us stupid – ‘gerrymandering, big money, and congressional dysfunction’ – are mostly irrelevant if the view I’ve outlined here is correct. In a complex world where the truth is hard to discover, even the purest politics would make us stupid.

This implies a much more fundamental problem with the democratic process than Klein suggests. The trade-off between ignorance and dogmatism may be unavoidable in politics, making a well-functioning deliberative democracy virtually impossible to achieve. This may imply that less cognitively-demanding ways of making decisions, like markets, may be even more valuable than we realise.

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It's not capitalism that Cuba should be worrying about but markets

Written by Tim Worstall | Wednesday 16 April 2014

Cuba is, however gradually, reforming its economy which is great. However, they do seem to be concentrating on the wrong bits still:

Less well known and less common are the cooperatives but they are part of a political balancing act for the government, which needs to move hundreds of thousands of workers off the state payroll but also wants to slow the rise of capitalism. In many ways it prefers cooperatives, where each worker has a stake in the business, to private businesses where owners make profits based on the work of their employees.

That concentration on who owns what is the wrong thing to be concentrating upon. Sure, capitalism is useful, it's also a great bugbear of those over on the left. But it's also not the important point in an economy. What is important is markets: competitive markets at that, with entry and exit. This is vastly more important than whether those entrants (and those being forced to exit) are cooperatives, owned by the government or top hatted pot bellied capitalists like myself.

The reason for this is that there is no possible method of planning a modern national economy. We could use Alchian's (and Hayek's) point that only a market economy produces enough experimentation for us to be able to work out what to do, or that Socialist Calculation problem that means we've still got another century of Moore's Law to go before we could possibly calculate what to do. There is simply no alternative to using the prices and incentives that a market provides for us and so therefore that's where Cuba should be concentrating their efforts. Simply scrap the rules about who may do what, those licencing regimes. Worrying about who owns it is trivial by contrast.

As an aside, to those who will insist that Cuba provides wonderful free health care and so the system mustn't change. Amazingly, I think you'll note that this country, the UK, also manages to provide free health care to all citizens. And we manage to do this without being a communist dictatorship, without being in Stone Age poverty and without shooting anyone who wants to leave. So quite why those three things are considered necessary to provide tax paid for healthcare I'm really not quite sure.

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The importance of Tiebout effects

Written by Tim Worstall | Tuesday 15 April 2014

An excellent little piece of cheering news about what this coming century holds for us:

When I was done with In 100 Years, one prediction stuck in my mind more than any other. It was the mathematical economists Mas-Colell who, almost in passing, wrote, “I believe that Tiebout effects will be increasingly felt on a global scale.” He should know, having long been involved in government, in Brussels and his native Catalonia Spain. As the Wiki says, Charles Tiebout is the economist fundamentally associated with the concept of voting with one’s feet. His Tiebout model was designed to show how people choose their communities, within limits, simply by relocating and choosing to pay higher or lower taxes and prices (or immigrating, or simply fleeing, and choosing to bear greater risks). It’s the way suburbs emerge around cities – some with good schools and fancy houses, others with very low rents, and the rest at every stage in between. It covers refugee camps, too. That this ineluctable force of human nature will continue is the prediction I most confidently expect to pan out, in a century of global change.

For what this means is that free and liberal society will continue.

Think about what Tiebout really means: that people differ in their desires, differ in the trade offs they're willing to make. We all thus potter about looking for that set of circumstances that best suit us. It can be the trivial of making sure when young and dating that we live near the good booze and a decent supply of potentially willing sexual partners, moving out to calmer climes when we have chosen (or been chosen to) settle down, through to the ability of the self-appointed righteous to cluster together to congratulate themselves on their righteousness. Camden Council for example. This works on hte larger scale as well: we can and should be allowed to leave a political entity where those trade offs don't suit us. 

As opposed to those (Camden again) who say that we all have to live by the same rules, make the same trade offs. And that's the cheering part of the above prediction. That if Tiebout is going to hold for this century then that means that we'll continue to have a free and liberal society this century.

Maybe.

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Oh how we laughed all those years ago

Written by Tim Worstall | Monday 14 April 2014

Many years ago, just after Boris Yeltsin had abolished rationing and freed up food prices, I was in Russia when a little old granny was interviewed just before Easter. She wanted to know why egg prices were going up just before everyone wanted them to dye for the Easter festivities. Oh how we laughed about that, for of course the miracle of supply and demand means that when more people want something prices will rise. Not that we could expect someone subjected to 70 years of communism to quite get that.

This isn't something that's going to happen in our much more sophisticated age and place of course. Everyopne's far too well informed about how the world works these days:

Majority of parents back holiday price caps - new ITV poll More than half of parents say inflated holiday prices should be capped so they are not forced to take their children out of school for cheaper getaways, a new survey for ITV reveals.

Well, I guess that explains the Labour Party then if more than half of those old enough to breed are quite so clueless about the most basic concept in all economics, the price system.

So how do we go about remedial education for half the population?

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But firms don't try to maximise short term profits

Written by Tim Worstall | Sunday 13 April 2014

It's a standard enough trope, that modern capitalism fails because companies only ever try to maximise short term profits. Not enough is done to think of the long term. Yet there's a simple enough point that can be made about this. Any firm at all that invests in anything cannot be said to be maximising short term profits, as David Henderson points out:

He said matter-of-factly, as if there were no doubt, that profit-maximing companies maximize short-run profits at the expense of the long run. "If that were true," I replied, "then drug companies should end all R&D today. Their R&D expenses would fall and their profits would rise. And yet we don't see them doing that. They invest hundreds of millions of dollars in drugs that, in many cases, will not bring good earnings to them for a few years and maybe for 10 or more years."

Any investment in anything more long run than refilling the ink jet printers is evidence that a company is not trying to maximise short term profits.

Now, it's possible to think that perhaps companies should pay more attention to the very long term, this is true, but then we come to a rather different problem. Which is that companies are already the most long term looking organisations around. Governments, famously, never look beyond the next election day, we as individuals are known (indeed, it's often used as the proof needed that governments should nudge our behaviour) to suffer from hyperbolic discounting, paying insufficient attention to the far future. Which really rather leaves only companies as the organisations that do try to look out beyong 5 or 10 years. The major oil companies, for example, are famed for having 30 and 40 year horizons. And there's just no one else in our society that is looking that far ahead.

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Raising the minimum wage means lowering the workers' perks and conditions

Written by Tim Worstall | Saturday 12 April 2014

As Adam Smith himself pointed out all jobs pay the same really. When you take account of what's needed to do them, the terms, the conditions, the "disagreeableness" of them, add in the wages and they're all paying much the same amount. Which has an interesting implication for those who would raise the minimum wage:

There are many other forms of compensation, including fringe benefits, relaxed work demands, workplace ambiance, respect, schedule flexibility, job security, hours of work and so forth. Even a limited accounting indicates that these nonmonetary benefits amount to a substantial percentage of the total compensation employees receive, nearly 30 percent over and above wages of all workers and 20 percent over and above wages for restaurant workers, on the average.

Employers compete with one another to reduce their labor costs, and that competition is expressed in a variety of ways in labor markets — certainly in money wages, but also in terms of fringe benefits, work demands and all other forms of nonmoney compensation. Workers also compete for the available unskilled jobs. The competition among employers and workers will not disappear with a wage increase but will merely be redirected into the components of compensation packages not covered by the wage mandate. Wage floors, therefore, restrain competitive pressures in only one of the many ways in which businesses compete. With a minimum-wage increase, employers will move to cut labor costs in other areas. As such, employers are likely to reduce fringe benefits and/or increase work demands.

We can indeed raise that minimum wage and there will of course be job losses from doing so. It's even possible to insist that the benefits to those who have their wages raised outdo the disbenefit to those who lose their jobs although that's not something I'd be keen to try to prove to the newly unemployed. But we do also have to insist that raising the minimum wage is going to reduce those other terms and conditions under which people work. Might be as something as simple as insiting that the staff buy their own darn teabags, could be more stricness about breaks, or trady arrival, a bit more slavedriving to pressure mor work out of that newly more expensive labour.

But there will be that something that will compensate for those newly higher wages.

Another way of putting this is that a higher minimum wage might move wages but it's not going to change the total compensation on offer. And it's that insight that allows us to suggest something rather more interesting. As we know, employers' national insurance is some 13.8% of wages above the threshold these days. And yet it's clearly part of total compensation. So, what we could do is stop charging that tax upon incomes for those below, say, the full year full time minimum wage of £12,500 a year or so and we would expect that to feed through into wages. For we'd not, again, have changed total compnesation but we would have changed the non-wages part of it.

Another way of making the same point is to say that we don't have minimum wage poverty we have tax poverty. The government is simply taking too large a part of the wages of the working poor.

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Is government helping exports?

Written by Tim Ambler | Friday 11 April 2014

Is the UK Trade and Investment (UKTI), is a net hindrance or help to exporters?  UKTI can surely point to successes but could its expenditure of over £400M p.a. (up 70% since this government took office) be better spent? 

The 2013 research into UKTI commissioned by Daniel Kawczynski MP is important, valuable and deserves more attention. It provides insights into the strengths and weaknesses of UKTI as it now is. UKTI can point to successes but overall the emerging picture is one of excessive bureaucracy and ineffective communications. The reports recommendations are sensible but they are not radical enough. 

UKTI should become a separate stand-alone agency, integrated with Chambers of Commerce, and its HQ should be cut from 500 to 50.

The UK [potential] exporters and receivers of inward investment should be put in charge.  They should be asked what help, and especially contacts, they want, as distinct from being told how to do their business.  These should be communicated directly to overseas posts.

Overseas UKTI staff are bogged down in paperwork. OMIS and other statistical reports and surveys should be scrapped. Successful exporting and inward investment are a matter of personal contacts, not sitting at computers especially as, in this www age, [potential] exporters have access to the same on-line data.

Measuring UKTI performance by the number of contacts allegedly made, and/or number of exporters, should also be scrapped. The quality of the contacts, i.e. the additional exports arising, matters; the quantity of contacts, which may be no more than unreturned phone calls, does not.  The ineffectiveness of communications within UKTI and with [potential] exporters and overseas FCO posts is probably the biggest complaint by the private sector and within the lowere echelons of UKTI.  The only metric that matters is how much trade has been added, whether directly or indirectly.

UKTI is not delivering the exports we need.  The UK’s share of exports is declining whilst the cost of UKTI soars. It requires drastic overhaul.  The Kawczynski report is important and valuable. It provides insights into the strengths and weaknesses of UKTI as it now is and suggests useful improvements but more drastic change is needed.

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The new economics foundation has been speaking to the newspapers again

Written by Tim Worstall | Friday 11 April 2014

Image from xkcd.

Those masters of economic logic, the new economics foundation, have been talking to the newspapers again. Gothenburg, a city in Sweden, has decided to experiment with shorter working days for the city employees. At which point nef says:

Anna Coote, Head of Social Policy at the New Economics Foundation, a UK-based think tank, welcomed the proposals. “Shorter working hours create a more committed and stable workforce,” Ms Coote told The Telegraph. “There are indications you can make savings by reducing working hours,” she added, citing an experiment in Utah where public sector workers were given a three-day weekend.

According to OECD data, there is a correlation between shorter working hours and greater productivity. The Greeks are the hardest working members of the OECD, putting in more than 2,000 hours a year compared with the Germans’ 1,400, but their workers are 70 per cent less productive than their Teutonic counterparts.

Yes, this is absolutely true, there is a correlation between higher productivity and shorter working hours. However, it is not that working shorter hours makes you more productive, although that could happen, sure. Your last hour of an 18 hour working day is unlikely to be as productive as your first of a one hour working day.

The causation is really working the other way around and for a well understood economic reason too. The average wages in any society will be determined by the average productivity of labour in that society. Thus a higher average productivity means a higher average wage. And we're well aware that most human beings are, most of the time, both greedy and lazy. Meaning that we'd all like to get as much of whatever with as little effort as we can manage. And that laziness also means that as we become increasingly rich we take more of that wealth as increased leisure, that being the point and purpose of going to work in the first place, to be able to afford the things that we want.

Thus more productive labour, in that richer society, works shorter hours. Not at all the other way around, working shorter hours makes you more productive.

There is actually a reason why Giles Wilkes named the nef "not economics frankly".

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The progressive approach to immigration looks a lot like the conservative one

Written by Sam Bowman | Thursday 10 April 2014

In a way, it’s refreshing that Yvette Cooper’s speech on immigration today has identified ‘free market liberals’ as the main advocates of freer immigration policies. There aren’t many of us, though, so we usually have to rely on immigration liberals on the left to win the argument over there for decent reforms to take place. Unfortunately, it looks as if they're losing too.

Cooper’s main claims are that immigration reduces native wages and job opportunities, puts public services under pressure, and low-skilled immigrants are exploited by British firms.

The first two of these claims are basically wrong and the third is a little dubious, as I’ll try to show, but even if they were true they would only justify restricting low-skilled immigration. There is basically no decent economic argument against skilled immigration, and I’m doubtful whether even the most wild-eyed worrier about the cultural ‘Islamicization’ of Britain has Pakistani doctors in mind. But, without any explanation, Cooper says that Labour will keep the cap on skilled immigration (despite her admission that “top businesses are worried they can’t get the high skills they need”). Oh well.

On low-skilled immigration, the main focus of the speech, Cooper suggests that liberals support immigration “as cheap labour to keep wages and inflation low”. Ignoring that this is a straw man worthy of the Wizard of Oz, it’s also untrue. According to the impact assessment published by the Home Office last month, low-skilled immigration has, at most, a minor impact on native wages, which in a flexible labour market like Britain’s is temporary anyway. And on the ludicrous idea that anyone supports immigration to keep inflation low, see Lars Christensen – under inflation targeting, a positive supply shock like immigration will lead to more inflation.

The public services point is old and well-worn, and it hardly needs repeating here that immigrants pay more in tax than they cost in services – a phenomenon which over the next few decades will mean the difference between a national debt of over 180% of GDP (in a zero net migration scenario) and just over 50% (in a >260k/year net migration scenario). Presumably nobody really thinks that more high-skilled immigration would have a negative fiscal effect, but I suppose it’s possible that liberalizing low-skilled immigration a lot could change this. In that case, charge immigrants a fee to reside in the UK or restrict access to public services. There is no problem with immigration to which strict immigration controls are the best solution.

The final point is the one that Cooper focuses on the most, maybe so that the dreary conservative orthodoxy of her policies is less obvious. Undoubtedly, some genuine exploitation does take place – Cooper gives the example of agencies advertising in Poland for jobs that turn out not to exist, virtually forcing the victims into grim jobs that they did not sign up for. It may be that the law needs to be strengthened to punish people who defraud immigrants in this way. But there will be negative consequences too – by raising the risk for legitimate employers of employing immigrants, this kind of law will make it harder for immigrants to get legitimate work. The danger is that, as in the case of the Modern Slavery Bill, laws designed to prevent truly terrible crimes will end up curbing whatever legitimate work the government decides it wants to stop as well.

To be fair, there are two positives in Cooper’s speech: taking students out of the net migration figures would be good for the education sector, and taking refugees out is humane. But the fact is that Labour has accepted the “logic” of the net migration cap, is making no reforms to high-skilled immigration, and is basing low-skilled immigration policy on anecdotes instead of evidence. Liberals beware: the ‘progressive’ approach to immigration is starting to look an awful lot like the conservative one. 

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I feel all dirty somehow, seeing who it is that I'm in bed with

Written by Tim Worstall | Thursday 10 April 2014

There are times when who supports an idea that you support means that you've got to reconsider your support for that idea. At the risk of Godwinning, that Adolf liked dogs is not a reason to either like or beat up dogs. But his support for anti-smoking is a reason to look askance at certain of the anti-smoking zealots. For his views on this were that smoking deprived the State of that valuable resource of men fit to fight and there's very definitely more than a whiff among today's zealots of people not being allowed to do things they wish to do because of the cost to the State of their doing so.

Which is what makes me cringe slightly over my support for the idea of a basic citizens' income. It's the sort of thing that The Guardian seems to be supporting:

The society our politicians are shaping is defined by the idea of "something for something". What would happen if, instead, we were given something for nothing? A new campaign for a "citizen's income" asks exactly that. Replacing the costly, complex benefits system, a citizen's income is an unconditional payment granted to every individual as a right of citizenship. It's not a high figure – barely enough to survive on alone, and below the minimum wage – but it is designed to prevent all of us from falling into poverty traps. Compellingly, it removes the stigma from state support. There is no difference between a student, a person managing life with a disability, a pensioner and someone struggling to find stable employment if we all share the same basic starting point.

Further supporters can be found here and here. That I support an idea supported by the Leader of the Green Party, by a professor from SAOS, by the usual list of concerned Europeans, yes, this does give me pause for thought. Given that all are usually staggeringly wrong about everything am I wrong to be supporting this idea?

And, having re-examined the idea I come to the conclusion that I'm not wrong in supporting it after all. For one very simple reason.

Their support is all about justice, equity, redefining the relationship between work and leisure and yadda yadda down the list of progressively desirable goals. My support is grounded in that good old idea of economic efficiency, you know, that thing that progressives never actually bother to consider.

My starting point is that whatever else happens in this world there is going to continue to be some version of the welfare state. People are going to continue to be taxed in order to provide handouts to that mixture of the incompetent, unlucky and lazy that make up the current list of recipients. There simply isn't going to be a Randian revolution where the entire idea gets chucked onto the ideological scrapheap. Given this I'd prefer to have a welfare state that was economically efficient. And the greatest inefficiency (quite apart from the incompetence with which the money is actually doled out) is the way in which benefit withdrawal rates and the taxes charged to the lowly paid lead to vast marginal tax rates on those lowly paid earning a little more money.

There are millions who face marginal rates of 60% and up, still hundreds of thousands looking at 80% and even some unfortunates with marginal rates over 100%. And yes, I do indeed believe in the Laffer Curve argument, it's just that I believe that it applies to all of us, not just the highly paid. Who in heck would bother to work another 10 hours a week if their disposable income would fall (something seriously possible in our current system)?

So, it's for this reason that I support the cbi. Simply because it would be staggeringly better than the current monstrosity of a welfare state that we have.

Which means that I'll just have to hold my nose and put up with those who also support the idea I suppose. I mean, seriously, me agreeing with a prof from SAOS? Did anyone think that a universe with such a distortion in it could continue to exist?

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