So, does competition work in health care or not?

We can all refer to theory about whether competition, markets, works in health care or not. There are still those who insist that competition and markets never work at all (yes, sadly, still some antediluvians out there) and even I will agree that there are areas of life where markets, pure and unadorned, are not the optimal solution. The question is though, well, do markets improve heatlh care provision or not?

Fortunately, we've an answer. This is the final version of a paper that looks at what happened in NHS England a few years back, at a time when NHS Wales and Scotland did not take the same market opening path. We can thus compare and contrast what happened in England against the other two, further we can look at those areas where there was more competition in England and see what happened. Interesting results:

The effect of competition on the quality of health care remains a contested issue. Most empirical estimates rely on inference from nonexperimental data. In contrast, this paper exploits a procompetitive policy reform to provide estimates of the impact of competition on hospital outcomes. The English government introduced a policy in 2006 to promote competition between hospitals. Using this policy to implement a difference-in-differences research design, we estimate the impact of the introduction of competition on not only clinical outcomes but also productivity and expenditure. We find that the effect of competition is to save lives without raising costs.

That seems pretty clear, doesn't it? Lives saved with no more money expended simply by bringing in a bit of market discipline?

We'd probably better have some more of that market discipline, hadn't we?

No, no, I'm afraid this isn't quite how it works

A very badly aimed piece of snark in the Telegraph's city gossip column:

Here's a tale of how public money for good works can end up in private offshore hands that is troubling conscientious corners of the City. It involves the Emerging Africa Infrastructure Fund (EAIF), an enterprise set up by a fund co-founded by the UK Department for International Development, which decided to invest $25m (£16m) into a start-up satellite services provider called O3B Networks. If the EAIF really wanted to make “a real and lasting difference on the development of sub-Saharan Africa’s infrastructure”, as it states on its website, wouldn’t it have done better to invest in an African-owned satellite company? Channel Islands-based O3B prefers not to break down its exact ownership structure, says a spokesman. But, given its largest shareholder is the Luxembourg-based satellite group, SES, accompanied by the similarly tax-conscious Google, it has a distinctly first-world flavour.

No, no, I'm afraid this isn't how it works. As Adam Smith reminded us all, 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. As he didn't go on to point out, not only must we not attend to the interests of the producer over and above those of the consumer we should also ignore who is the producer when attempting to gain that consumption opportunity.

A satellite firm, one that knows what it is doing, backed by the likes of Google among others, seems like an excellent choice to provide satellite internet links (this is what the company does) to those sort of places in Africa that currently do not have decent internet links. Further, we know very well that the provision of simple mobile telephone increases GDP growth. One researcher says that growth increases by 0.5% of GDP for every 10% of the population that has a working mobile. And there is similar research showing that simple broadband, up to 2 Mbits/s (we don't know about higher speeds, no one has had widespread coverage for long enough for us to check) similarly increases GDP growth. And finally we also know that those countries which do not currently have a landline network are never going to get one: it's so much hugely cheaper to wire everyone up using mobile technologies.

So, what we'd actually like to do for the poor of the world is whack some satellites up there and let them get access to that mobile telephony and internet. Which is what the company does, its name standing for "The Other 3 Billion".

Who owns it, whether they pay their taxes, whether they pay any taxes at all, are entirely irrelevant compared to the benefits that will come from the consumption of the company's products. After all, as I repeatedly say, the benefits to us of Google are not the number of people the company employs, not the taxes it does or does not pay, but the fact that we get to Google. So it is here: who gives a damn who is building the thing, it's who gets to use it that is important.

The government's new doomsmonger case for HS2

John Burton shows how the government's new case for HS2 is even less convincing than the last.

The Government -- or rather the Department for Transport (DfT), and its offspring, HS2 Ltd -- have  (once again) today published "new, updated" reworkings¹ of their strategic, business and economic cases for the High Speed 2 (HS2) rail mega-project; which is forecast for full completion (if eventually approved by Parliament) in 2037.

These are largely reworkings of their earlier argumentation; but they do, now, accept (grudgingly) that the Benefit-Cost Ratio (BCR) of their (Giant!) "pet" project is lower than earlier claimed; and the daft assumption that businessfolk do no work on intercity trains (eg, via ICT) remains, discreetly, embedded in the "new" analysis

What I also think is new about this "new, updated" case for HS2 is that it involves a  histrionic resort to (what can only be described as) blatant scare tactics to try to "sell" the HS2 case to an increasingly sceptical public audience. A day before the publication of these new reports, a "Government source said":² 'The alternative to HS2 is a patch and mend job that causes 14 years of gridlock, hellish journeys, and rail replacement buses. 'The main routes to the north would be crippled and the economy would be damaged'.

However, these reports do not demonstrate this "doom-without -HS2" scenario! There would be some disruption arising from the implementation of alternative, rail capacity-enhancing projects; but not the "14 years of chaos" claimed by the Government. Moreover, the HS2 project would also involve much disruption (eg, around Euston, and in Middle England in particular)... but this is ignored by the  Government in this pre-publication marketing ploy.

What should be done is to compare the alternatives side-by-side, dispassionately...which the new bevy of HS2 reports fails signally to do. In a seperate media attempt to market HS2 by doomsmongering, on the day before publication, the (London) Evening Standard³ was told: 'Tens of thousands more rail passengers will have to stand during their journeys if  the HS2 rail link is cancelled, a new study warns. 'It says that there would be 17 passengers for every 10 seats on trains into London by 2026 if the current growth in rail travel continues...'. Obviously, this specific "marketing" ploy for HS2 was aimed at the (long-suffering) London commuter hordes, trying to read their Standard, whilst packed  like cattle on some commuter line!

However, there are some very basic problems with this scare-tactic argument. First, Phase I of the HS2 project is not planned to open until 2027...one year after the 2026 "crisis scenario" fed to the Standard! So, HS2 could not head off this proclaimed capacity  crisis! Second, HS2 is not aimed at all at relieving London (or other-city) commuting congestion at all...it is, by very design, a high-speed inter-city proposition (with a £50bn.+ price tag).

There are genuine capacity problems looming in the British Rail system; but these mainly relate to the very crowded commuter services in/around Britain's large cities -- notably London, Birmingham, Manchester and Leeds -- plus the Paddington-West Country/S.Wales lines . There are, moreover, plenty of potential ways of incrementally improving North-South rail capacity in the  UK, without recourse to HS2  (should that demand arise).

I have elsewhere⁴ compared the doomsmongering  that now accompanies proclamations of the case for HS2 to the Great Horse Manure Crisis of 1894; in which a (London) Times analyst forecast that London was doomed to be (literally) overwhelmed by horse manure -- to a depth of 9' -- by 1944 at the very latest... This Doom Scenario did not come about because alternatives to/substitutes for horse-drawn conveyance -- eg, cars, buses, rail, tubes, phones -- were developed. Likewise, if sensible alternative investments are made in infrastructure, we need not fear the "Doom-without-HS2" prospect that HS2's proponents now  espouse to bolster their teetering case.

Sources referred to:

1:DfT, The Strategic Case for HS2, (29/10/13); HS2 Ltd, Economic Case and Other Supporting Documents, (29/10/13).

2: J.Groves, 'Passengers face "14 years of chaos" if HS2 is Derailed', Daily Mail, 28/10/13, p20.

3:Joe Murphy, 'Standing Room Only "Could Become Norm Without HS2"', Evening Standard, 28/10/13, p.8

4: John Burton, 'Conometricks and the new NAFF 'case' for HS2', Institute of Economic Affairs Blog, 24 October, 2013.

ASI on shortlist for €100,000 "Brexit" plan

A team representing the ASI has been shortlisted for the €100,000 “Brexit” prize for blueprints on what steps the UK must take to secure its economic future if the electorate vote to leave the EU in the coming referendum. The prize has been put up by the Institute of Economic Affairs and attracted over a hundred submissions.

The Adam Smith Institute plan, drawn up by award-winning City analyst Miles Saltiel and senior lawyer Charles Proctor, covers how Britain should handle the negotiations and set out the future of regulation, trade, and relations with Europe.

They outline the difficult political, economic and trade environment situation in which the new EU-UK relationship will be negotiated, and how these affect each side. It sets out the areas where agreement is possible and proposes a framework for agreement that makes sense for the EU as well as our other trading partners, and cultivates the UK's standing in the international economic community. As well as economic stability and access to markets, the deal would have to cover issues such as residency, immigration and  asylum.

“We believe our entry is well-placed to win,” said Miles Saltiel, “because it embraces the timeless principles of Adam Smith, the father of modern free trade policies. And it is free trade that people in Britain most want out of their relationship with the EU.”

The organisers of the Brexit Prize have told finalists that they lay weight upon “costed and quantitative estimates and arguments”. If this is up your street, you are a third-year undergraduate or post-graduate economics student with an interest in trade ecomomics, and you would like a share of the prize and the glory of contributing to the winning entry, we invite you to send in your CV, to arrive no later than 15 November 2013, to Miles Saltiel, 23 Great Smith Street, London SW1P 3DJ.

Maybe Marx was right, just a little bit

One of the (many) things that Marx was insistent about was that the technology in use by a society determines the social relations in it. Of course, what he meant here was that in a capitalist system the capitalists would screw everyone else while in a system where the workers controlled everything all would be sweetness and light. But there's an interesting paper discussed by Alex Tabarrok here which seems to be saying that there might be at least a smidgeon of a point to what Marx was saying:

The paper appears on the surface to be affirming the importance of cultural differences and to be agreeing with the kind of literature that stresses the idea of self-interest and individualism as western and contingent. Yet, in fact, the paper is suggesting that at a deeper level so-called cultural differences may not be transmitted down through the generations but instead are learned responses to very particular production techniques. Note that such learned responses may change rapidly as production techniques change and that the sea and lake villages are both unusual in the modern world in relying on just one dominant production technique with few other options for learning.

The basic point being highlighted is that lake fishing is more individualistic than sea fishing and lake fishermen are more willing to compete rather than cooperate than sea fishermen. And as Tabarrok points out that seems to be learnt behaviour. But that does mean that, to some extent at least, that Marx was right in that the technology in use does, at least to some extent, determine the social relations, the degree of competition or cooperation, in a society.

So, if the old philandering sponger off Engels was correct on this then should we listen to the modern leftists who insist that we should all be doing much more cooperating socially and a lot less competing in markets (and we'll leave aside my continual contention that markets are how people cooperate)? No, absolutely not: for what is being stated is that that level of cooperation or competition is emergent from the technologies in use.

That is, we can't directly effect the competition/cooperation model, we can only watch it be influenced by the level of technology that we have available. And if anyone wants to start thinking that we can control the technology there are several million inventors with bright ideas that the patent office would like to introduce you to. So what we end up with is that even if the old boy was correct on this point the wailings of his successors are still wrong. That technology determines the social structure does not mean at all that we can impose a social structure and thus create a technology to support it. Rather, it just means that we're stuck with the social structure enabled by our technology.

Err, yes, this is how capitalism works

I find myself distinctly confused to read this in the newspaper:

He claimed the Big Six only offered competitive prices to customers once they called to say they were switching to another supplier. He warned that the companies responsible go “unchallenged” by Ofgem, the energy regulator. “A significant number of the Big Six are charging the maximum price they feel they can get away with to the customers that they feel will not switch under any circumstances and then maintaining the illusion of competitive pricing with tariffs targeted towards a very small number of relatively well-engaged customers,” Mr Fitzpatrick told MPs.

I'm not confused by what is being said, of course not. I'm just wondering why anyone thought it worthwhile to put into a newspaper. Seems to fail the dog bites man test to me.

For yes, of course, any and every suppiler will charge their customers the maximum they think they can get away with. It's rather the lifeblood of this production thing, trying to gain as much as possible for one's production.

It's also true that the ability of any one supplier to gouge their customers in this manner is limited by the fact that the gougee has an option to switch to another supplier of whatever it is. This is the competition part brought in by having a market structure.

Which leads us to the point that surely everyone has got by now. That it is the freedom of markets that limits and curbs the ability of the capitalist to rook the consumer. Which also leads us to our corollary that markets are a much more important point than is the capitalism or capitalist thing. Imagine that we had a socialist economy, producers were owned by cooperatives or the State. We'd still want, indeed need, those markets to curb the power of the producer to rook the consumer.

As, actually, we found out when the State did own the electricity and water companies and did have us all over a barrel on pricing and we had no market competition to moderate their demands upon us.

If you start from the wrong place then you're never going to get to your desired destination

I do tend to like making fun of the economics leader writer of The Guardian, the history graduate Aditya Chakrabortty. For his knowledge of the subject he covers is, how to put this, less than complete. For example, here he is on finance:

In one of the world's elite institutions, the elites were taking a pasting – from accountants, entrepreneurs and academics. They knew what they were on about, too. Given his turn on the mic, one biologist said: "I'll believe economists have reformed when the men behind Black and Scholes [the theory that helps traders value financial derivatives] have been stripped of their Nobel prizes."

No, that's not Chakrabortty speaking there but the second sentence does show that he thinks that biologist had got it right. Which, sadly, he hadn't, as I've explained elsewhere before:

Now if the crash had been caused by options, derivatives, high frequency trading (HFT), foreign exchange and so on then I’d be one of the first musing on something like the financial transactions tax as a way to curb these markets and thus make another crash less likely. But the thing is that the crash wasn’t caused by any of these things. It was a straight old housing bubble helped along by an expansion of securitisation. And as we all know, if you misidentify the problem then you’re most unlikely to be able to fix it. Which is why this is important.

Our professor has gone off on the popular narrative: all those people trading too much and too quickly were the underlying problem. But mortgages, the bonds made up of securitised mortgages (those CDOs), were very rarely traded. They were more normally created, sold once and then stuck in the basement vaults of those who bought them. This wasn’t a highly traded market. Further, there was a mathematical error in this market but it wasn’t Black-Scholes. It was that “Gaussian cupola”: the measurement of how prices were or were not correlated. Turns out they were a lot more correlated than anyone thought but that’s a result of a mistake in a different equation.

And even where there was something akin to a derivative, in the CDS market, it wasn’t that people were using Black-Scholes, or even using it wrongly, that caused the problems. For the people who got into trouble were AIG Financial Products and the problem at AIGFP is that they were not treating their CDS contracts as derivatives whose value changed with underlying prices. Instead, they were treating them as insurance contracts they’d never have to pay out on. They were not marking to market, were not evaluating potential losses on a rolling basis and therefore were not using Black-Scholes. If they had been they’d have realised their error rather earlier and quite possibly would not have had to run to the Feds for help.

Black Scholes is a method of valuing derivatives and the derivatives markets where they were using Black Scholes didn't cause the crisis. The one derivatives market where they were not using Black Scholes is one that did contribute to the crash. It seems most unkind to threaten to strip two Laureates of their Nobel for something that when people do use it doesn't cause crashes and when they don't can contribute to them.

There's a Richard Feynman line which seems appropriate here:

I believe that a scientist looking at nonscientific problems is just as dumb as the next guy

I have to admit that I tend to translate that slightly. An expert looking at issues outside his area of expertise is just as dumb as the next guy.

Whether they be historians or biologists.

Meanwhile, over here in reality Sweden shows how laissez faire capitalism makes people rich

As we all know Sweden is burdened with an extraordinary tax burden, one so heavy as to crush all things of beauty within that country. But that's the price that has to be paid for the glories of an icy social democracy of course.

As many fewer know Sweden (along with Denmark) is, underneath that tax burden, actually a rather more economically liberal place than either the UK or the US. That's how they can manage to cope with that staggering tax burden and still have economic growth. But there are still those who think that Sweden gained its current wealth as a result of that tax burden that finances that social democracy. And Johan Norberg has an excellent essay out showing that this last part of the story simply isn't true. Sweden grew to wealth under something very much like laissez-faire. It's only once wealth was achieved that the tax burden rose:

Sweden had the fastest economic and social development that its people had ever experienced, and one of the fastest the world had ever seen. Between 1850 and 1950 the average Swedish income multiplied eightfold, while population doubled. Infant mortality fell from 15 to 2 per cent, and average life expectancy rose an incredible 28 years. A poor peasant nation had become one of the world’s richest countries. Many people abroad think that this was the triumph of the Swedish Social Democratic Party, which somehow found the perfect middle way, managing to tax, spend, and regulate Sweden into a more equitable distribution of wealth—without hurting its productive capacity. And so Sweden—a small country of nine million inhabitants in the north of Europe—became a source of inspiration for people around the world who believe in government-led development and distribution.

But there is something wrong with this interpretation. In 1950, when Sweden was known worldwide as the great success story, taxes in Sweden were lower and the public sector smaller than in the rest of Europe and the United States. It was not until then that Swedish politicians started levying taxes and disbursing handouts on a large scale, that is, redistributing the wealth that businesses and workers had already created. Sweden’s biggest social and economic successes took place when Sweden had a laissez-faire economy, and widely distributed wealth preceded the welfare state.

This is the story about how that happened. It is a story that must be learned by countries that want to be where Sweden is today, because if they are to accomplish that feat, they must do what Sweden did back then, not what an already-rich Sweden does now.

I thoroughly recommend the entire piece. And do note the most important point: wealth first, then worry (if you so wish) about the equity and the fairness. Get this the wrong way around and you'll never have the wealth to worry about the distribution of.

Bank bail-ins: needed, or misguided?

Like other businesses, banks get money from shareholders. When a business fails, the shareholders are first to take the hit. And banks also raise money from bondholders – investors who give them cash in return for an IOU.  But in the recent financial crash, innocent taxpayers bailed out the banks – the bondholders were largely unscathed. So now there are moves towards a ‘bail-in’ system – where bondholders forfeit before taxpayers do.

It’s good politics, but is it good finance? I’m really not sure. If bondholders face higher risk, they will demand higher interest. Banks will have to pay more to raise money, and will pass on the higher interest charges to customers. Right now, that could tip a number of businesses and families over the edge.

There are established legal rules about who loses what when a firm gets into trouble; but the ‘bail-in’ proposals would see regulators deciding who pays what. That’s a recipe for injustice: one can easily envisage regulators discriminating in favour of domestic bondholders, for example, and against foreign ones – after all, the foreigners have no votes. And among domestic investors too, those with political clout are likely to be favoured over others.

When things are booming, of course, bail-in bonds will look safe as houses, and their value will rise. But the slightest doubts about the security of a bank will see them plummet. Like the Basel II capital rules, people will find themselves selling off other assets to raise cash – depressing the price of what they are trying to sell and forcing them to sell even more in a market spiralling downwards. Bail-in bonds might well worsen the panic and losses that go with financial crises.

When banks run out of credit and investors run out of cash, the only agency left standing is the central bank. And traditionally, central banks have been the lender of last resort to a struggling banking system. Which means taxpayers’ cash is called on. Some people argue that this is in fact far less messy than forcing bondholders and others to try to raise cash fast on a falling market – which inevitably brings real losses.

Equally, I do not see why taxpayers should be called on to save any business that has got itself into a mess. Is banking any different? Perhaps it is. But only because of the fractional reserve system, the government guarantee of depositors’ funds, and the fact that the huge burden of bank regulation stifles competition in the sector. A better solution is, like Switzerland, to have much higher capital requirements on larger banks – so encouraging the banks to split themselves up, and encouraging new banks to start up. Competition is the best regulator.

The chocolate covered pickle version of why politicians get it so wrong

Don Boudreaux is of course correct here. Well, of course he is, he's Don Boudreaux:

Asymmetric information of the sort that many professional economists get worked up over might in principle be discovered and spread more widely by government regulators. But information about people’s subjective preferences can never, not even in principle, be known by government regulators. And yet much government regulation is proudly justified by politicians, regulators, and intellectuals on the grounds that people allegedly will value X by amount $Y once they actually encounter X. In private markets such guesses are harmless.

A private, unsubsidized firm that guesses that enough consumers will value, say, its new-fangled jar of chocolate-covered pickles by at least $4.00 per jar will actually find out if its guess is accurate or not because each individual has the choice of actually forking over $4.00 per jar (and getting a jar) or not forking over that sum (and not getting a jar). When government acts, in contrast, no such discovery procedure is available to test politicians’ guesses about people’s subjective preferences. People must pay for what government foists on them. And no process of knowledge discovery or information revelation is available to cure politicians’ and regulators’ inevitable ignorance of the subjective preferences of the very people that they pretend they are seeking to help.

I not only agree in theory I can tell you, as someone who has actually had a chocolate covered pickle (Don means here a gerkhin, of the type served with a hamburger) that that combination of vinegar, salt and chocolate is indeed, to a certain palate, delicious.

But, as ever, I would take this point much further. I have, in my working life, had some interaction with politicians. And bureaucrats as well. I have even sat across the table from a trio of North Korean generals trying to explain why, well, no, we didn't trust the North Korean state and yes, we really would like a letter of credit from them (one which their bank then refused to issue on the grounds that they didn't have any money).

That further point I would take it to being that the asymmetry of information is not in favour of those Godlike beings who pretend to rule us. It is in fact in favour of us, the people who know what we're doing, not in their favour. Just as with journalism (everyone who ever reads a newspaper piece on their speciality finds things wrong with it) so with politicians and bureaucrats. In my particular world of real expertise I've seen the US Congress stampeded into action by the insistience that China has 30% of the world's reserves of rare earths.

Indeed, it does, but all then thought that that meant that China had 30% of the world's potential supplies of these vital metals: not so. It means only that China has 30% of what anyone has bothered to map out, drill, test, check and prove that it could be mined at current prices and with current technology. Everyone in the world of rare earths ended up sniggering at the politicians. Couldn't they understand this very basic point about what the phrase "mineral reserves" means? Well, no, they couldn't: and so it is with anyone else with real world expertise who examines what our leaders seem to believe about things.

I accept entirely The Boudreaux's point about no one except the consumer understanding the consumer's desire or utility. But as I say, I take it further and insist that politicians and bureaucrats do not understand reality, the nuance and specialist knowledge of anything at all.

Sadly, we do need to have them as there really are things that need to be done that can only be done with the coercive force that government can bring to bear. But it is precisely that asymmetric information, that ignorance of our rulers, that means that we should and must limit their influence to only those things that both must be done and can only be done by government. For the rest of it we know more than they do so we should be left to get on with it.