Why provide your own answers if you're then going to ignore them?

I'm afraid that this little piece from The Independent did make me smile:

It leads to two broad questions. Why is it happening? And what might be done about it? On the first, we can see some obvious points. A globalising world economy needs an English-speaking hub in this time zone. So London has become a magnet for wealth and talent, reinforcing its hub status. More people fly into its airports than into any other place on earth. There are more non-national professionals living in the commuter region than any other, more international phone calls, more cross-border money managed – the litany goes on.

Recently its status, or at least its property, has been bolstered by the UK’s role as a “safe haven” for eurozone money seeking a home, and its young people seeking a job. But to say all that is more to observe what is happening than to explain why. You can say that success breeds success, that we are in a winner-take-all world, and London currently has critical mass in that amorphous mix of money, style, creativity, intellect, whatever.

But things did not look like that 40 years ago when its population was falling and it seemed locked into inexorable, if gradual, decline. If it is hard to identify the reasons behind the success, it becomes impossible to replicate them elsewhere.

Eh? If you've already correctly identified the reason for what is happening then why ignore your own answer later?

Yes, London is indeed booming as one of the Great Cities of the current round of globalisation. Very much as it did from 1880 to 1914 in fact in the last round. And in very much the same industries too: banking, finance, law, shipping.

As to why it was different 40 years ago, well, 40 years ago we didn't have the current round of globalisation. There was most certainly no free movement of capital, currencies were restricted, international trade was a great deal lower than it is. Which is why London wasn't booming 40 years ago: because the great strengths of the economy of the place, that international finance, banking, law and shipping, just weren't being used as they are now.

This really is just straight David Ricardo: the employment of comparative advantage. One way of thinking about globalisation is that it is simply the international division and specialisation of labour. As Adam Smith pointed out, such division and specialisation being something that creates wealth. For all who take part in it please note. As it happens, what we in London seem to do well (and do again note that we've specialised in these things twice, both times there have been bursts of globalisation, just as Germany has done heavy industry and machine tools both times) is that banking, finance and law stuff.

Quite why is something that people can and will continue to argue about. I'm sure language has something to do with it. There could well be some vestigial hangover of Empire. My own feeling is that it depends, at root, upon the Common Law. With many fewer restrictions than in other places you can write a contract in English law that states pretty much whatever you want. Sure, there are limitations, but many fewer than in many to most other jurisdictions. England (or more formally, England and Wales) thus offers the flexibility of agreements that the fast moving world of business desires and requires. Thus everyone doing their business in a place that offers exactly these attributes.

Now, I might well be wrong about the why here but that's OK. Wouldn't be the first time (and certainly won't be the last) that I am wrong. But the basic observation about London still is just too obvious for words. So obvious indeed that the Independent entirely misses it. London has boomed over the past 40 years because of globalisation. It's part of that global economy in a manner which the rest of England (or Britain) simply isn't. Before globalisation London was shrinking and failing: with it it's booming.

Council housing causes unemployment

This will surprise some but council housing causes unemployment. No, really, it does.

Dartmouth College’s David Blanchflower (best known for being the Bank of England member who first pressed for interest rate cuts after the onset of the financial crisis) and Andrew Oswald of the University of Warwick find that a doubling of the rate of home ownership in any U.S. state is followed in the longer run by more than a doubling of the unemployment rate. The authors stress that they are not arguing that the owners themselves are disproportionately unemployed. They suggest that lower levels of labor mobility, greater commuting times and fewer new businesses all combine to hurt the labor market.

Yes that's for the US and no, it's not a new finding in general. Several studies here in the UK have shown the same thing. Higher (or perhaps "too high" where the "too" is somewhat subjective) rates of home ownership do indeed lead to higher levels of unemployment. The reason is that owning a home makes one less geographically mobile than renting one. If you lose a job you're more likely to stay in the area where you own a home than you are to pack up and move to where the jobs are if you rent. Given the large regional differences in the economy in the UK this does indeed mean that high levels of home ownership will lead to higher unemployment than if more rented.

To which we will hear the cry: build more council houses then!

But this does not work as an answer. Moving a secure and subsidised tenancy (housing association or council) is vastly harder and takes much longer than selling a house and buying anew. Moving across local council boundaries is near impossible: although there is a system that supposedly enables it. Once councillor (and director of a housing charity) that I asked about this a few years ago said that it might take as long as 5 years to be able to move from one subsidised tenancy to another in another council area.

Thus, whatever problems are caused by labour immobility through house ownership are worse with those council and housing association tenancies. Because people with such tenancies are even more immobile than those who own their own homes.

So, yes, it's true: council houses cause unemployment.

23 Things We're Telling You About Capitalism IV

In our fourth chapter we get told that the washing machine has changed the world more than the internet. Something which we can all actually agree upon as long as we accept the conceit that the washing machine is standing in for domestic labour saving technology in general. We might quibble with the example of email not being much of an advance upon the telegraph: email allows you to broadcast to 5,000 or more which the telegraph certainly didn't. And I've run a software business that simply couldn't have happened without being able to send files and graphics. But Chang is correct that the development of domestic labour saving technology has, so far at least, had more effect. 

It has, for example, liberated half the rich world human race and allowed them to join the paid, market, economy. It really wasn't all that long ago that women simply could not do this, given the pressures of domestic labour: and it's still true that many women in many poorer countries cannot do so yet.

However, yes, again, we find Chang being extremely partial in his discussion of how all this happened. As someone who once owned a Soviet washing machine (no, really) I'm sure that this capitalism and free markets thing had a hand in it all. Firstly, in the invention, production and distribution of those devices: the route from carpet beaters through Spangler to Hoover was indeed the usual market style chaos of no one at all understanding what they were doing (certain early models blew dust around rather than sucked for example). Similarly the route from washing stone through washtub to mangle and finally washing machine was not a planned excursion. It was driven by incremental steps the users of which could see the advantages on offer. Capitalism meeting the market and then further innovation taking place.

What annoys to some extent is that Chang actually mentions a point about servants:

The main reason why there are so much fewer (of course, in proportional terms) domestic servants in the rich countries- (...) - is the higher price of labour. With economic development, people (or rather the labour services they offer) become more expensive in relative terms than "things".

Which is entirely true and this is known as Baumol's Cost Disease. The annoyance is that the other half of William Baumol's work is about how invention and innovation happens. What socio-economic system leads to all these wondrous things like a machine that washes clothes without effort or much time expenditure? And the answer to that is that innovation works vastly better in a free market socio-economic system. As Baumol points out, the planned Soviet system invented some pretty cool stuff: but I as the past owner (user would not be the correct word) of a Soviet washing machine that planned economy most certainly did not come up with successful labour saving domestic devices.

Which leaves the final line of his "what they tell you part" looking a little strange:

We- as individuals, firms or nations- will have to become ever more flexible, which requires greater liberalisation of the markets.

Err, yes, yes this is true, despite Chang using the rest of the chapter to argue against the idea. The reason why we do want that greater liberalisation of markets is precisely because it is this, this very thing as Baumol tells us, that produces those innovations like domestic labour saving technology. This is the very point: we want to encourage, continue, the replacement of grunt human labour with machines. Which does indeed require those free markets - or at the very least benefits hugely from them.

I do agree that so far the washing machine has changed the world more than the internet. Which is really rather why we want to be promoting that socio-economic system that came up with that very washing machine, no?

Is nationalism a force for good? Yes

The nation state is—in its fundamental nature—a free and tolerant political system. National loyalty requires only fondness for a geographical location (and its history) which can be acquired by anyone who moves to a nation, as well as those born and brought up there. In principle national loyalty requires no significant revision of values, nor does it exclude people on the basis of their family, colour or any other unsavoury criteria. It is, taken on its own, a remarkably benign form of attachment. 

Loyalty is necessary for political institutions to uphold their laws. Laws protecting private property, free speech and so on do not hold sway because they have been written down by a legislator but because those subject to them believe they are authoritative. This requires general acceptance of their content and the body charged with enforcing them, which in turn requires a loyalty and trust for that body and for other citizens. In non-nationalistic countries such as Kazakhstan trade can't rely on its participants' having particular reason to trust one another. Nationalism avoids such pitfalls by enabling a trust of a pool of strangers – something which characterises flourishing societies.

The strongest ties among humans have proved to be religious, tribal-ethnic and national. They are typified by attachment to that which is familiar. The first two of these however, when elevated into political form, are intolerant of differing values and of differing bloodlines. The conflict between family love and religious obedience has characterised some of the worse strands of the Middle-East's history. In Africa tribal loyalties have underpinned devastating atrocities – in the 1994 Rwandan genocide for instance the Hutu people massacred the Tutsi (a group seen to have different physical characteristics). Twenty-two years earlier the Burundi Genocide had seen a reversed tragedy. Similarly fascism is not an extreme form of nationalism but an extreme form of tribalism—members of Hitler’s Aryan race were identified by their appearance and bloodline, not their attachment to a particular nation. We would do well to celebrate our often mocked pride for the rolling hills. Other attachments have proved much less tolerant of our differences and freedoms.

Another reason is philosophical. Where we happen to have been born and brought up is certainly arbitrary from a moral point of view – but this is no good reason to rule it out as mattering. Which mother we happen to have been born to is arbitrary, and yet no one claims we should shun her on that basis. Similarly we come across our friends arbitrarily, even if they have been chosen carefully from those we’ve met. My point is not that we should consider important all aspects of our lives that aren’t up to us, but rather that their being arbitrary shouldn’t be a reason not to think them important. In other words, arbitrariness should give us no reason to feel uneasy about the benefits that national attachment brings.

Is nationalism a force for good? No

My colleague Geoffrey Taunton-Collins argues that nationalism is a force for good, as the loyalty and fellow-feeling it generates are necessary to create high trust law-abiding societies. He says that examples of atrocities committed partially in the name of nationalism—the Rwandan genocide, the second world war and Holocaust, strife in the middle east—are all better explained by ethnic tribalism or religion. I disagree. Firstly I'm sceptical that successful modern societies are driven by nationalism, secondly I think it's impossible to disentangle the nationalist element in many of the terrible occurrences he lists, and thirdly I think that nationalism underlies some very bad policies adopted by many modern societies.

Why does an individual obey the law? One obvious reason is that the penalties for disobedience, weighted by the likeliness of their being incurred, often outweigh the benefits from breaking the law. A second reason, is that individuals believe there is some sort of justice in the laws. This is why people give "because it is against the law" as a reason independent of any further explanation for why a course of action ought not to be followed. Anecdotally, the arguments people give for the duty to obey the law—if these can be taken as also being the reasons they actually do obey the law—seem to go against Geoff's claim, centring on reciprocity, universality and fairness. And the cases where people disobey the law appear to go with my analysis. Consider illegal downloading: some estimates say PC games are illegally downloaded as many as 20 times as they are bought legally. People seem unswayed by the laws—brought about by the authority of the nation state they are supposedly loyal to—requiring them to buy games (or films, television programmes, music) legally. Because others are not following the law, and because the likelihood of punishment is low, they don't themselves.

Can nationalism and ethnic strife be disentangled? Certainly Hitler's regime looked no more favourably on the many proudly German Jews who had served the Kaiser honourably in the first world war than they did on any with Jewish ancestry. And certainly Nazism was centred on the idea of a Volk—a people—united despite the borders of Weimar Germany. But the purest form of an ideology is rarely what gets through and propagates throughout society, and the Dolchstosslegende—the idea that Germany didn't really lose the first world war, but was stabbed in the back by a Jewish-Bolshevik conspiracy—was a vital part of the Nazis' appeal. I think the general bleeding of racialist, ethnic and religious ideas into nationalism and national identity is inevitably tied into Middle Eastern conflicts and the two major central African genocides.

And finally, look at the policies nationalism produces. True, as Geoff points out, there is no necessary reason why nationalism should exclude anyone born outside the country, if they are willing to switch their loyalty to their destination nation, but in practice we know that's what happens. Taking the UK as an example, the tide of anti-immigration feeling has been rising and rising since Gordon Brown's 2007 pledge to provide "British jobs for British workers", culminating in the rise of UKIP and Tory policies like the 99,999 or less net inward migration pledge. Surely it can't be denied that a sense of nationalism, that the UK is collectively owned by only its current inhabitants, a sense of insider and outsider, is intimately connected to this ethically indefensible and economically incompetent trend?

As far as I can tell, actually-existing nationalism is not responsible for our generally law-abiding society, cannot be disentangled from many gross moral horrors, and is responsible for bad policy. Therefore I conclude that nationalism is a force for bad.

Happy 114th Birthday, Hayek

Here's a video of Friedrich Hayek talking about his key contribution, on the economics of knowledge. For his work in this field, centring around his 1945 paper "The Use of Knowledge in Society", cited 9391 times according to google scholar, he shared the 1973 Nobel (Memorial) Prize. Here, the specific (closely-linked) issue here is the economic calculation problem that Hayek and Ludwig von Mises argued hit socialist societies due to their lack of prices. This culminated in the socialist calculation debate, part of the way Hayek made his name, and a debate that such luminaries as G.A. Cohen later agreed Hayek and von Mises had won.

23 Things We're Telling You About Capitalism III

In the third chapter of the report from the Cambridge Economics Department Chang tells us that people are not in fact paid according to their individual productivity. He uses the examples of Sven and Ram, Swedish and Indian bus drivers respectively, the first getting some 50 times the annual wage of the second.

Of course Chang is correct in that the individual does not get paid the value of their own productivity. No, even if we consider the time value of the people on the bus, which will indeed be much higher for Sven than Ram, that isn't the reason for the higher income. Nor, actually, is it the barriers to immigration which explain it all: that being what Chang blames it all upon. 

The average wages in any economy will be determined by the average productivity in that economy. Another way of putting very much the same point is that wages are determined by not the job that is actually being done by the worker, but by the next one that could possibly be done by that worker. Ram may indeed drive just as well as Sven. But if Ram's alternative employment is peasant destitution then he'll be paid like a destitute peasant for driving. If Sven can go to Ericsson (or Nokia) and make gumboots (or phones) then he'll be paid to drive a bus very much like a phone maker.

And I'm afraid that it's this very point that Chang gets so horrendously wrong. He does in fact say this:

"It is not simply, or even mainly, because they are cleverer and better educated that some people in rich countries are hundreds of times more productive than their counterparties in poor countries. They achieve this because they live in economies that have better technologies, better organised firms, better institutions and better physical infrastructure - all things that are in large part products of collective action taken over generations."

A point with which I would most certainly agree. But don't forget, Chang is writing a book about how capitalism and the free market just aren't all they're cracked up to be: if so, then how did we end up with the better technologies, better institutions, better firms and infrastucture? Could it, possibly, have anything to do with the fact that we've been largely capitalist and free market for a couple of centuries?

We should be rather harsher than that too. Everywhere, anywhere, that has been roughly free market, roughly capitalist, for the past century is so stinking rich that the bus driver does get paid 50 times what a better one in India gets paid. That's actually the point of the entire socio-economic structure: it makes even bus drivers rich by any global or historical standard.

This isn't confined to any one group or set of countries either. Just since WWII, Hong Kong, Japan, Taiwan, S. Korea have all joined the nations that enjoy that distinction. China is catching up fast. Those countries that haven't haven't: like, for example, the bureaucratic and planned Licence Raj in India which still impoverishes Ram.

This is why the lucky people like us at the ASI, born into a rich country and gloriously happy that this did happen to us, argue so strongly that everywhere else should embrace the joys of free market capitalism. Precisely and exactly because it's the only way anyone has as yet found to make bus drivers gloriously rich.

Perhaps Cambridge just doesn't do irony: or they push all those capable of it off into Footlights or something. For here's what Chang's actual argument in this chapter is. The average person in rich countries is rich because of the institutions, infrastructure and better organised firms in rich countries. This shows that capitalism and free markets don't work because those institutions have been formed by capitalism and free markets. We'll be proving that black equals white next and get ourselves killed on the next zebra crossing.

An end to zombie politics 5: Europe

How readily the Zombie metaphor applies to the politics of Europe: eighteen years of unapproved accounts, eternal squabbles between federalists and anti-federalists; the Euro project itself - intended to unify but achieving the opposite. But none of this matters for this piece, confined to the Zombie character of British responses to the European dream and the nightmare it has become. Instead, I will explain why the government must not ruin its negotiating stance by essentially promising to put its weight behind staying in the EU regardless of the success of negotiations, as I laid out in greater detail in a recent report.

UKIP’s success last Thursday (2 May) and Lord Lawson’s piece in Tuesday's Times (7 May) blow the cobwebs off an issue kicked into touch for three months by January’s  referendum promise. Lawson's article points out that referenda can sometimes be red herrings. Sometimes, as in 1975, they are a device to shut down discussion. On this occasion they could be more of the same. Alternatively they can act as a way for the political class to reconcile themselves to giving up on a favourite project. I’m getting that the current government warms more to the former approach: thus the bonkers ideas floated over the past week.

On the one hand they've considered doing absolutely nothing. This would look magisterial, if an administration bumping along the bottom of the electoral cycle could pull the stunt off; however in the event it will look weak.

On the other hand policymakers have mulled publishing a bill setting out the referendum terms. This scheme would also be as weak as water, vulnerable to disabling amendment when eventually put to Parliament. Similarly, the wheeze of a 'mandate' or 'backing' referendum coinciding with the EU elections next year adds nothing to January’s promise. Both of these are transparent tactics, most likely to irritate voters who deserve to be taken more seriously.

Worst of all is their inherently zombie nature in flinching from the contradictions inherent in the so-called in-out referendum. These stem from the convention that Her Majesty's Government commits itself ex ante to campaign for the renegotiated outcome. It may be that anything less would court accusations of unsportsmanlike behaviour from the other side - our negotiating counterparties in Europe. Such a commitment, however, greatly weakens the UK’s bargaining hand, particularly if following the current plan of linking to a timetable. The other side can simply wait out our negotiators, offer meaningless concessions, or prevail upon the UK to offer further referenda till the electorate sees sense and votes in the EU's preferred direction, as seen previously in France, Ireland and elsewhere – if it is a given that the government will put its weight behind an in vote regardless of the result.

If the government wishes to offer a referendum in good faith, let it put forward a proposal which actually makes sense. It may not get through Parliament, but it will show willing and serve as a clear line in the sand. This would be a bill to bind UK to one and only one referendum regardless of the state of negotiations at the time of a stated deadline. Setting aside party politics, if such a bill were passed it would be more likely than not to strengthen UK negotiators’ hands; it could pave the way for early negotiations if wanted; and it would relieve the post-2015 election government of the nutty ex ante obligation to campaign in favour of the outcome.

The arguments against are trifling: of course it might not get through parliament (and if it did would not bind a future Parliament), but the very attempt sets the agenda both domestically and overseas, going some way to throwing holy water on the zombie hordes of EU politics.

Three ideas that will not be in the Queen's Speech

I was on the Today programme on BBC Radio4 alongside Tom Papworth of Centre Forum.  John Humphrys asked each of us to nominate three pieces of legislation we'd like to have seen in the Queen's Speech setting out the government's priorities for the year.

My first was a bill to allow all employees of small businesses to be registered as self-employed.  This would create huge numbers of new jobs by lowering the non-wage costs borne by employers.  It would also reduce the paperwork they have to cope with, freeing up time to drum up more business, and keeping prices down by lowering their costs.

Secondly I proposed a bill to set the income tax threshold at the minimum wage level for an average working week, making it so that no-one earning less than that would have to pay income tax.  This would give the low-paid the so-called 'living wage' without it costing jobs by raising the costs to employers.  It would indeed involve lost revenue, but there would also be supply side effects as work became more attractive and significant numbers moved off welfare and into work.

For my third point I called for hard drugs to be medicalized, meaning available to addicts at clinics run by doctors and nurses, and for recreational drugs to be legalized.  I pointed out that the so-called 'war on drugs' was being lost, as it has been for half a century.  The new proposal would take the crime out of drug use.  I said I thought politicians would carry on doing more of what they knew did not work, but that more and more were admitting that a new approach was needed.

None of my proposals is in the actual Queen's Speech, but I am confident that at some stage in the future all of them will.

23 Things We're Telling You About Capitalism II

In his second chapter Chang tells us that companies really shouldn't be run in the interests of their shareholders. All this guff about shareholder value is just that, guff. Precisely because shareholders can just cut and run by selling their stock they are in fact the most short term thinkers in the entire system.

An argument for which a case can be made and Chang tried to make it. Unfortunately this doesn't really accord with that real world out there: who actually does, no not in theory, but who actually does have a longer term view than the shareholders? Certainly not politicians as they never look beyond the task of winning the next election. And it would be difficult to accuse British unions of thinking much beyond the next pay negotiation. I might even be true that shareholders don't think enough about the longer term: but there ain't nobody else out there with a longer time horizon than the shareholders have. After all, the current value of the shares is the net discounted value of all future income from them. Any company that really isn't thinking about the long term is therefore going to have a low share price.

But there's a much larger underlying confusion in Chang's thinking here. He talks about other ways of organising matters so that extant companies do indeed exist long into the future: deliberately having strategic stockholders for example, the way that the Japanese keiretsu do perhaps. The problem with this is that there's no particular reason why a specific company should exist for the long term. Indeed, it's often entirely desirable that they do not, that they go bust and the assets then distributed in bankruptcy to those who can make better use of them.

Most growth in the economy, and almost all employment growth, comes from new entrants into the market. It is small firms starting and growing, old firms failing and leaving, which changes the marketplace. Yes, of course, we can all think of examples of the opposite: I can never remember whether it is Ericsson or Nokia that started out making gumboots and switched to mobile phones. But this is very much the exception. It is the start ups that revolutionise the economy to all of our great benefit.

Once we accept that then the very idea of trying to insist upon the long term viability of a specific company becomes a nonsense. We want to be able to increase and grow the economy into the future, yes we most certainly do. But there's no particular reason why the corporate entity called Rover, or Rolls Royce, or Glencore, should survive log term. Indeed, there's good reason why we'd be quite happy for firms to die out at some point. That point being when their particular skills and advantages are no long appropriate to the demands of the rest of us in the economy.

Schumpeter made this point, that capitalism is all about creative destruction. Those small companies do provide the creativity and it is the end of large companies, at the end of their business or technological tether, that get destroyed. Stakeholder interests make that destruction a great deal more difficult. Two recent examples:

Uber is a method of hailing a yellow cab over a smartphone rather than waving your arms on a street corner. This isn't rocket science. But it has taken a year so far to fight through the bureaucracy to get this simple system licensed. And once that had been achieved the "stakeholders", the limo drivers of New York City, sued to over turn that. On the grounds, incredibly, that it would be age discrimination as older people were less likely to have a smartphone. Or, as we might put it, the incumbent stakeholders were resisting their creative destruction.

The blast furnaces at Florange in France are another example. The unions, and then the government acting on the behalf of such stakeholders, are insisting that these blast furnaces must remain open. Except no one at all wants the iron made in these furnaces. Technology has moved on, we now recycle a lot of our iron and steel here in Europe. To the point that we just don't need as many blast furnaces as we did: they've been replaced by electric arc furnaces. So who is doing better for the economy as a whole here? The stakeholders fighting to save the past or the shareholders liquidating that past? I would certinaly argue that the shareholders here have the longer term interests right.

And that's what becomes problematic about that stakeholder, as opposed to shareholder, economy. It becomes static. If the stakeholders, as they will, demand that their interests be protected then the interests of stakeholders will indeed be protected. Which means that we cannot have enough of that capitalist destruction to make room for the new capitalist creation. I'd be willing to accept the stakeholder argument if we did in fact desire a stagnant economy. As we don't, I don't.

Another way of putting this is that by running companies for the benefit of the wider community, rather than purely for the profit of the shareholders, we entrench the power over what that company does, whether it survives, whether it gains entry to government subsidy schemes perhaps, in that wider community of stakeholders. Who will, as Adam Smith didn't quite say, then conspire against the wider public to ensure the continuation of their benefits from their stakeholding interest. Which isn't what we want at all. We want companies to continue as long as they continue to make a profit: for profit is that signal that the output is worth more than the inputs, that value is being added. Once that is no longer true we want the companies to fold and make way for new market entrants. Given that profit is the marker of this success or not then we want these decisions made by those who benefit from the profits: the shareholders. Not by those who benefit from the jobs, or patronage, or political power: so not by the workers, not by the unions and not by the politicians.

If stakeholders get to run the system then we'll still have blast furnaces 50 years after they're technologically obsolete and we'll all still have to stand in the rain to get a cab. For stakeholder interests gum up that creative destruction that is the very essence of capitalism.