Well doesn't that just kill the Peak Oil idea then?
Peak Oil is the idea that one day there just won't be any oil left and civilisation will fall over. Or for the more discriminating but no less wrong, that one day we'll be producing less oil than the oil that is demanded and thus civilisation will fall over. The major problem with these and other flavours of the same prediction is that they ignore price. If demand for oil is greater than supply of it then the price will rise. Thus there never actually is a possible position where there is no oil and civilisation falls over. The newspaper home of this idea here in the UK has always been The Guardian. So it's something of a surprise to see that same paper saying this:
But the truly global implications of the International Energy Agency's flagship report for 2012 lie elsewhere, in the quietly devastating statement that no more than one-third of already proven reserves of fossil fuels can be burned by 2050 if the world is to prevent global warming exceeding the danger point of 2C. This means nothing less than leaving most of the world's coal, oil and gas in the ground or facing a destabilised climate, with its supercharged heatwaves, floods and storms. What follows from this is that the idea of peak oil has gone up in flames. We do not have too little fossil fuel, we have far too much. It also follows directly that the world's stock markets are sitting on toxic levels of subprime coal and gas, a giant carbon bubble ready to explode.
Still nutty of course. For it's still ignoring the role of price: in this case, the relative prices of using oil and having climate change or not using oil and not having climate change. Our whole and entire problem with the whole subject is that, as best we can guess, the no oil no climate change option would be more expensive than the oil and change one. Certainly it would be vastly more expensive if we tried to implement it today. Perhaps it won't be in 50 or 100 years. But that is actually our problem today: no oil today means billions die. This is indeed more expensive than having some climate change.
But there's something else much more interesting here. This idea that we must not, indeed cannot, use all of the fossil fuels we already know about. Fossil fuels that are embedded into the stock market values of a number of companies. If we all believed that these fuels would never be used then they would be valued at nothing (or perhaps a small option value). They're obviously not so we don't so believe.
However, there are those campaigning that we should leave them alone. And one would assume that they expect to be successful at saving the world. Which is something we can test of course, their own beliefs about how effective they are going to be. If they do believe that they'll keep those fuels in the ground then obviously all those energy companies will, in the future, be worth a lot less than they are now. Which is an arbitrage opportunity: they should be short those stocks. If they're not, they don't think they will be successful: if they are they do. So, Greenies, where are your pension funds?
Speaking to the IREF in Paris
In Paris on Thursday I addressed a meeting of IREF, the Institute for Research into Economic and Fiscal Issues, which is a French free market and broadly libertarian outfit whose scholarly research and press briefings try to nudge France in the general direction of soundness. Given Francois Hollande, they face a tough task.
I was asked to speak about how think tanks might hope to influence events, and I put forward the view that it is not just sound policies that are needed, but ones that are realistic, practical, and likely to bring success and popularity to the political leaders who implement them. To some extent this involves careful examination of the interest groups which stand to gain or to lose, and an innovative slant to the policies that takes those groups into account.
I delivered the speech in French, having prepared it in advance, and after the discussion there was a most civilized session in which a sommelier introduced some French wines which we then sampled along with charcuterie, cheeses and French breads. I found myself wondering if it’s a format the Adam Smith Institute might try out to see how popular it might be in the UK.
I, Pencil: The Movie
A wonderful video of Leonard E. Read's classic I, Pencil. I, Pencil was one of the first things I ever read about economics and it completely changed the way I looked at the world. This video does a nice job of expressing its message in the YouTube age.
The unintended consequences of banning price discrimination
British car insurance advertisements are going to change. Right now they are populated by annoying Welsh opera singers, stick cartoon figures, and meerkats. But all of these are likely soon to be made redundant, replaced perhaps by white kittens with pink bows, giggling babies and sophisticated-looking models with designer handbags. So I predict.
Why? Because of the latest daft 'equality' regulation from the European Union. From December 21, insurers will be banned from offering cheaper insurance premiums to women, following a ruling by the European Court of Justice (ECJ). According to motoring groups, it means that women will face a 25% increase in their premiums, despite the fact that they are statistically much safer drivers. On average, women take shorter journeys, obey the speed limits more faithfully and brake less hard. But they could be facing premium bills of £400 on an average family car.
The most accident-prone drivers, of course, are young men. They are less experienced, enjoy speeding and barking, and drive more at night – often in the company of inebriated friends who egg them on to take risks. Which is why young men aged 17-22 pay average premiums of £1,604 compared to the £1,127 paid by females of the same age, according to the Automobile Association. A survey by the comparison website uSwitch.com reports that just over one in eight (13%) female drivers think they will not be able to afford to keep motoring. Apart from the inconvenience, that may also reduce the employment prospects of women who depend on their own transport to get to work safely.
The ECJ ruling is motivated by noble intentions – to remove discrimination between the sexes. But it is economically illiterate. And the trouble with economically illiterate legal or political decisions is that they produce widespread unintended and indeed unwelcome consequences.
The illiteracy here is the belief – and how often we hear it – that insurance is about 'pooling risk'. That instead of bearing the whole risk of certain events individually – ill health, car accidents, household disasters – we each chip in a little and compensate those who suffer when the risk becomes reality.
In fact, insurance is nothing of the sort. It is about putting a price on a risk. The insurer calculates your risk, and charges you a premium that reflects the likelihood of the misfortune actually happening to you, the amount that they would have to pay out to compensate, and a little bit of profit for the service they give you – which is peace of mind. And as information technology advances, such risks can be calculated more and more precisely. Houses in certain postcodes, for example, are more likely to be burgled than those in others. But more than that: whether you live in the middle of a street or on the corner, in a house or an apartment block, on the ground floor or the first floor, behind a door with secure locks or not – all these are relevant factors, and insurers price them accordingly. The same is true of motor insurance. If you are young, male, or you drive a flash red car, you are more likely to cost the insurers money than if you are older, female, in a modest runabout. You pay more to reflect those risks.
It may sound unfair, but in fact this price system does a useful job, encouraging people to minimise the risks they expose themselves to. For example, one reason why young men have high accident rates is because they drive at night with those tipsy pals of theirs. But insurers are now trialling in-car technology that reports motorists' driving habits back to them. And a young person who agrees not to drive late at night can, as a result, get cheaper premiums, reflecting the lower risks.
Of course, people cannot change their sex – or at least, it is not easy and hardly worth doing solely to get cheaper insurance. So the insurance price difference between men and women is not something that can be moderated by an easy behavioural change. Hence the notion that women are being discriminated against. Someone in an area with high burglary risk can install locks and alarms. Men are pretty well stuck with being men, with all their faults.
But trying to make equality legislation take the strain is mixing up markets and civics, and trying to make markets do things they are quite unqualified to do. Once governments start manipulating prices, perverse incentives and disruptive effects ripple out through the entire economy, and nobody knows that ultimate damage they will wreak. It is better to let the price system do its job, then deal with any unwelcome results through the welfare system. We do not ensure that everyone has access to food by putting price caps on supermarket prices. We know that if we did, pretty soon the shelves would be empty. Instead, we give cash to needy people. Likewise, if we want to keep down the insurance premiums of men so they equalise those of women, we should subsidise men through the tax system, not force the insurance providers to do it. Either way we will get perverse incentives and will see more, dangerous, male drivers on the road, so either way it is a daft policy. But when you mess with the price system, that is what happens.
Insurers, of course, certainly do not want customers who they cannot charge the proper price for, and who are more likely to cause them to pay out. More than ever, they will be pursuing female customers, rather than male. The enterprising ones will be advertising insurance in ways and through media that are so girly that no self-respecting red-blooded male would go near them. If you like kittens and babies, you are in for a treat.
Yes, MPs really are trying to give us lessons in morality
Executives of Starbucks, Amazon and Google have been hauled in front of the Public Accounts Committee to face questions about their alleged UK tax avoidance practices. Margaret Hodge, Labour MP and the chair of the committee made her feelings clear by telling the executives: “We are not accusing of you being illegal, we are accusing you of being immoral.” Given the MPs recent track record, I am not at all sure how wise it is for any politician to give lectures about morality. Nevertheless, it does make good political theatre if the recipient of a lecture on morality is a multinational corporation, especially an American one.
I can’t comment what would constitute a just, or a morally acceptable, rate of tax. Thomas Sowell, a respected economist and social theorist also had problems with this same issue: "Since this is an era when many people are concerned about 'fairness' and 'social justice,' what is your 'fair share' of what someone else has worked for?" I don’t know if Sowell was ever able to find a definitive answer to his question.
Similarly, I too will have to leave this problem for our politically elected representatives to ponder about.
However, what I have to take issue with is the accusation levied against Amazon at the Committee hearing that the firm was somehow responsible for putting high street booksellers out of business by “playing the system.” Starbucks has similarly been accused for being responsible for the demise of independent coffee shops up and down the country. This is absolute poppycock. These firms’ global success can’t be explained by the amount of corporate tax they do or don’t pay in the UK. These firms are successful because they produce an offer that is perceived valuable by consumers. Starbucks has a unique “experience” that consumers prefer over other coffee shops’ offer, and Amazon’s strategy of providing unparalleled choice at a lower price resonates with those who “love a good deal.” It is the consumer whose preferences, combined with the inability by other firms to provide competing value that determine the winners and losers in a competitive marketplace.
Furthermore, the accusation of immoral behaviour leveled against these companies is not only inflammatory, but it also makes a presumption of intentionality. The directors of these firms, as agents of the shareholders, have a fiduciary duty to maximize shareholder wealth on a sustainable basis. The sustainability of wealth-creation is an important concept in this context. Any profit-seeking firm must balance the often-conflicting interests of the various stakeholder groups that, in addition to the shareholders, include employees, suppliers, customers, and the communities that they operate in. It is this balancing act, often captured under the umbrella term, corporate social responsibility that allows the firm to turn a profit on a sustainable basis, thus creating shared value for all key stakeholder groups.
According to yesterday's London Evening Standard, Margaret Hodge has backed a call for direct action to “punish” these firms after they had failed to convince the Public Accounts Committee about their tax affairs. "I think one should boycott these companies. I do actually think that is the right thing to do," she said after the Committee hearing.
In a free country, Mrs. Hodge has every right to call for a boycott and we all are free, at least for the time being, to choose and decide our patronage. In turn, the firms have to take into account the public sentiment, its impact on revenue generation, and balance these with the interests of other stakeholder groups. However, ultimately the choice has to remain with us, as consumers, to decide whether we value the choice given to us by these firms at a given price, and whether we perceive them as good corporate citizens. It is not for the politicians to make moral judgments on our behalf about companies that have not broken any laws.
Adam Darwin
Matt Ridley, author of "Genome" and more recently "The Rational Optimist," gave Tuesday's annual Adam Smith Lecture before a packed audience at St Stephen's Club. His title, "Adam Darwin," explored similarities between the insights and observations of Charles Darwin with those of Adam Smith who had written a century earlier.
One similarity is that evolution works in nature by a selective death rate. It is not a random process which leads some to survive and others not. The ones that make it are those with some mutation which increases their survival chances, even by a small amount. Nature can build up incredibly complex mechanisms through a series of minute changes which do this.
Those who succeed in the market are often those with an innovation that brings them an advantage. It might be new technology of new methods of achieving better productivity. The firms that fail are again, not the result of a random process, but those which lack the crucial advantage that innovation has brought to others.
In the world of nature sex plays an important role in mixing up combinations of genes so that innovations occur more frequently than would otherwise be the case. In the world of human activity there is an equivalent in which ideas can intermingle and interact, producing new combinations and innovations. The more trade, exchange, and contact there is, the more there are likely to be new ideas to be tried out. As in nature, the ones that bring advantages survive at the expense of those which do not.
Ridley stressed the co-operative nature of trade and exchange. Human beings exchange things to the advantage of both, and do so uniquely among groups which have no kin or tribe relationship. We co-operate with strangers to mutual advantage, and this has led to the extraordinary achievements that humanity has made.
Ridley's speech was an intellectual tour de force, elegantly delivered, and a superb contribution to the Institute's lecture series. The lecture will be uploaded to Youtube and posted on the blog shortly.
Risky business
Those who think that responsibility for the financial crisis lies mainly at the door of governments and central banks might like to consider the following. The policy of easy money and cheap credit, designed at the behest of politicians to smooth the down side of the business cycle, had one unexpected result. by depressing interest rates it was made difficult for fund managers to gain decent returns on relatively low-risk investments such as bonds.
In search of decent returns in this low interest rate climate, they were forced to climb the risk ladder, investing in things that carried higher risk than they would otherwise have taken. So while it is true that some investment groups were undertaking riskier investments, it was not because they had suddenly become greedy and reckless, but because government policies had denied them adequate returns on the safer things they would normally have gone in for.
What does the BBC need?
Over at his personal website, Madsen discusses why people like the BBC, and says that it has radically departed from the impartiality that once made many people value it:
In fact traditional support for the BBC is more likely to have arisen from its role as an unbiased reporter of events, rather than as a campaigning organization doing investigative work. People valued the BBC’s level take on national and world events, and trusted it to be accurate.
That reputation was undermined not by the incompetence of its investigative teams, but by the way it allowed what some call the left-wing mindset of its culture to bias its reporting. Its enthusiastic endorsement of all things pro-EU, its hostility to business and enterprise, its refusal to use the word ‘terrorist’ to describe those who murder civilians in causes it approves of, and its selection of news to highlight on the basis of a pro-state intervention agenda, have systematically alienated those who used to trust it and support it as the embodiment of all things British.
Denmark admits its fat tax failure
The world’s first fat tax will soon also be the first to be abolished. Denmark has taxed saturated fats since October 2011, and the experiment has been a failure. Danes are worried that the tax has increased food bills (which was the point of the tax) and that it could be threatening the food industry. One poll found that 70% of Danes felt the tax was ‘bad’ or ‘very bad’ and 80% said it had not changed what they ate.
At the same time, fat prohibitionists tell us that what Denmark really needed was a much higher tax to have the desired effect. Multiple studies find that a tax as high as 10% (much higher than the Danish tax) would reduce population bodyweight by less than 1%. Most of us tend not to change what we eat based on a change in price — foods like butter and bacon are relatively price inelastic. To get people to change their behaviour you have to set punitively high rates.
It is a good idea to question why the health-obsessives are going after saturated fats to begin with. Many believe that a good diet includes saturated fats, as they have been linked to increased testosterone, boost the effects of omega-3 fatty acids, and improved immune system function.
Simple economics tell us that when you tax something, like saturated fats, enough to cause a change in behaviour then their consumption will fall in favour of a substitute. In most cases, that substitute will be carbohydrates. The nutritional science is far from settled on whether carbohydrates are worse for us than other macronutrients (protein and fat). Politicians are unlikely to know better. The tax on fat could be making the 20% of Danes that changed their diets less healthy. That the impact of the tax is largely unknown is a good enough reason not to mess with the food on our plates.
Of course, there is a more fundamental liberal point. Why should we be coerced to be healthy? If someone decides that they prefer Danish bacon once a week to the last (probably quite uncomfortable) five years of their life, that certainly isn’t a ‘wrong’ choice. It is hard to coerce ‘healthy’ behaviour, and government should not try to. Sadly, politicians know that they can appear to attack the scapegoat of the unhealthy citizen, while taking more money from our pockets.
Roast Salmond
My colleague, Dr Eamonn Butler, was quite right to castigate Alex Salmond, Scottish First Minister, for his disparaging remarks about Adam Smith and the Institute that proudly bears his name. Every few years some left-winger, usually a politician, tries the claim that Smith was really a sort of proto-socialist. It is never convincing because he was nothing like that.
At the ASI we always stress Smith's "Theory of Moral Sentiments" as a companion and precursor to his "Wealth of Nations." The left seem to think we treat Smith as someone who promoted selfishness, whereas the opposite is the truth. He said that our most salient characteristic is our ability to empathize (he said feel sympathy) with others.
The act of wealth creation, which requires trade, puts our co-operation with our fellow men and women right at the start of market economics. They trade so that each gains greater value than they had. Without that co-operation there would be no exchange and no wealth-creation.
Eamonn's very apt put-down of Alex Salmond was this:
“I shall be pleased to send him copies of Adam Smith – A Primer, my dummie’s guide to all of Adam Smith’s work. It includes not just the Theory of Moral Sentiments but his lectures on jurisprudence and on literature, which Alex may not be familiar with.”