Blog RSS

The Pin Factory Blog

"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

Why is everyone shouting that the nuclear deal is so expensive?

Written by Tim Worstall | Wednesday 23 October 2013

I have to admit that I'm not really getting all this screaming about how expensive the nuclear deal is. Just not getting it at all:

Seven years ago, I collected all the available cost estimates for nuclear power. The US Nuclear Energy Institute suggested a penny a kilowatt hour. The Royal Academy of Engineering confidently predicted 2.3p. The British government announced that in 2020 the price would be between 3 and 4p. The New Economics Foundation guessed that it could be anywhere between 3.4 and 8.3p; 8.3 pence was so far beyond what anyone else forecast that I treated it as scarcely credible. It falls a penny short of the price now agreed by the British government.

And there's any number of people out there shouting that at £92 per MWhr Ed Davey has agreed to pay twice the current price for the electricity that will be generated. Or, as George Monbiot points out above, that 9.2 p or so per kWhr.

Sure, this is indeed more expensive than the current costs of electricity but here's the bit that I'm not getting. These complaints, they're over something that is vastly cheaper than all of the other things that are being done with the full agreement of those currently complaining.

This strike price, it's the same as a feed in tariff in its effects. And here's the list of the feed in tarifs on other technologies. Solar at 14.9 p, Hydro at 21.65 p, wind at 21.65 p again. This nuclear scheme, the one that people are complaining so hard about, is under half the cost of wind power. So, either nuclear is amazingly cheap or it's grossly expensive and wind power is twice as bad either way around.

So, as I say, I don't really get it. How can people complain about the costs of this nuclear deal and then go on to support alternative technoligies which are twice as expensive?

View comments

Equality in death if not the time of it

Written by Tim Worstall | Saturday 19 October 2013

New figures out from ONS means that the newspapers have an opportunity to point to the inequality of lifespan in Britain:

A baby born in the North West of England will live on average two years less than a child born in the South East, new Government figures have revealed. The figures give a snapshot of life in Britain today and reveal the divisions between life-expectancy rates for people living in different areas of Britain.

The figures themselves are correct, average life expectancy does vary around the country and across socio-economic classes. But the interpretation put on them is not correct. For no one is measuring the life expectancy of someone born in a particular place. They are measuring the age of death of people in that specific place. The error can be seen in this second story inspired by the same ONS numbers:

Eastbourne has become the first place in the country to boast a population with an average age of more than 70. The Meads district of the famously genteel East Sussex town was identified by the Office for National Statistics as having the oldest residents in England and Wales. Named by officials as Eastbourne 012B, the well-heeled area has a population with an average age of 71.1, compared with the national average of 39.7.

We do not believe that all people born in Eastbourne have exceptionally long lives. Quite the contrary, we believe that people who live long enough to move when they retire go to Eastbourne. Which of course means that people who live long enough to move when they retire must move away from some other part of the country, lowering the observed age at death in those places.

A goodly part of the inequality of lifespans is simply that people move around. And we have parts of the country where older people preferentially move to. Thus, inevitably, we end up with concentrations of the long lived in some paces and a relative paucity of them in others.

Try this for an extreme example of the same phenomenon. Measure the average age of death in a children's hospice against that in a home for those with senile dementia. We will see a very great difference in average life span, a vast inequality. One that will tell us absolutely nothing at all about the average life expectancy of those people when they were born nor of the people who were born in the same area.

Geographic measurement of lifespan inequality reflects where people die and at what age, not the potential lifespans of those born in those places: for people do move around.

 

View comments

Yes, let's abolish the census

Written by Tim Worstall | Thursday 05 September 2013

Danny Dorling is bemoaning the decision to abandon the census:

It is only because the census is our most accurate count of the population that we can tell, using it, whether mortality rates, university admission rates, employment rates or almost any other rates are rising or falling for particular groups in particular parts of the country over time. In calculating rates the numerators tend to be more reliably measured: deaths registered, students enrolled, or paying jobs in these three cases. Errors tend to be greater in the denominators, the population estimates. The census counts, corrected for estimates of under-enumeration, are the best denominators we have. An ID card system that relied on people being compelled to register their place of residence would be more accurate, but also far more intrusive. The most important task of the decennial census is in updating annual population estimates for small areas to remove systematic bias so that a huge number of studies and also funding calculations can be enacted.

We would expect Dorling to bemoan this for of course he's a social geographer. This is the very meat and drink of life to him.

However, Dorling is also something of a lefty (no, really, no kidding, he is) and like most of the English such he cannot abide knowing that something is going on somewhere without there being some government plan to make everyone do that thing in the approved manner. Which is why he insists that we should continue to do the census so that he and his mates can have the detail they desire to run our lives for us.

At which point we should remember the wisdom of Sir John Cowperthwaite out in Hong Kong. He refused to allow the compilation of GDP statistics on the grounds that some damn fool would only try to do something with them.

We also know that, as Hayek pointed out, the centre can never have sufficient information to be able to plan our lives for us. That census does give them the illusion that they do though. So, a very good reason for abandoning the census is so that no one does have, or even thinks they have, sufficient information to plan both the national and personal lives of us all. Another way to put this is that if they can't see any problems then they won't have any damn fool problems to try and solve them.

View comments

Stupid, stupid, people

Written by Tim Worstall | Monday 26 August 2013

The question for today: are we actually ruled by fools?

Half a million households in flood-prone neighbourhoods will see annual insurance bills rise by up to one third, even after they have been subsidised by policyholders across the country. Ministers have reached a new deal with insurance firms they claim will protect hundreds of thousands of people whose homes are at risk of severe water damage, and who struggle to afford insurance on the open market. When the new scheme was first announced in June, householders were promised that there would be no increase in bills in general. But an analysis of the new plan, conducted by government officials and independent experts, has found that every home insurance policy holder in Britain faces increased bills.

Yes, it appears that we are ruled by fools.

There is no sensible argument that supports the idea that I, living one hundred metres above the flood plain, should subsidise the flood insurance of someone dim enough to live actually on the flood plain. Their tootsies are going to get wet every few years, mine are not. This is because they have decided to live where there is a risk of flooding and I have decided to live where there is not.

We want insurance costs to act as an incentive. Young drivers pay more in insurance that those mature in years like myself: those young drivers are more likely to have an accident and cost the insurers money. Convicted arsonists are quite likely charged more for their fire insurance: we want people at higher risk of flooding to pay higher premiums for flood insurance. Mainly to stop people being so damn stupid as to build houses where there is a high risk of flooding.

What is it about this extremely simple idea that seems to have beeen missed by those who claim the right to dispose of 50% of everything that the country collectively produces? And perhaps more to hte point why do we allow them to take 50% of everything when they're quite clearly off their collective rocker?

View comments

23 Things We're Telling You About Capitalism XXI

Written by Tim Worstall | Wednesday 05 June 2013

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?

 

View comments

23 Things We're Telling You About Capitalism XVII

Written by Tim Worstall | Thursday 30 May 2013

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.

 

View comments

23 Things We're Telling You About Capitalism XIV

Written by Tim Worstall | Friday 24 May 2013

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.

View comments

23 Things We're Telling You About Capitalism XIII

Written by Tim Worstall | Thursday 23 May 2013

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.

View comments

23 Things We're Telling You About Capitalism XI

Written by Tim Worstall | Tuesday 21 May 2013

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.

View comments

23 Things We're Telling You About Capitalism VIII

Written by Tim Worstall | Thursday 16 May 2013

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?

View comments

Pages

Current search

About the Institute

The Adam Smith Institute is the UK’s leading libertarian think tank...

Read more