Protectionism: The infant industries argument

One of the most common justifications for trade barriers is to enable developing countries to diversify and grow new industries to a size where they can benefit from large-scale production and compete against established competitors abroad. 

That is important to countries that need to diversify, such as those who are largely dependent on a single mineral or crop. And people fear that, since it is hard for individual governments to regulate multinationals, they can accumulate and use monopoly power to squeeze out competitors.

But there are problems with the infant industry argument. For example, which new ‘infant’ industries should be grown? The choice may be made for political purposes more than any real prospect of economic success. 

And unfortunately, the infant industries never grow up. Precisely because they are protected from competition, they become inefficient and slow to mature. And you can be sure that the industries themselves will campaign hard to keep their protections.

Like all protectionism, this policy benefits a few producers while leaving consumers facing higher prices, poorer quality and less choice. There may be plausible arguments for trade barriers, but the infant industry argument is not one of them.

Johan Norberg and open societies

Johan Norberg’s latest book is entitled “Open - The Story of Human Progress” (Atlantic Books, London). It’s a very apt title because it makes the case that it is open societies that have led progress in history. This uses “open” in the Popperian sense to mean open to the movement of goods, ideas, and people.

The book is an instant classic, a complex and wide-ranging series of insights into what has led some societies to succeed and some to fail. “Succeed” here means giving their citizens the chance to lead decent and improving lives. Trade, Norberg shows, has been a key factor. Merchants take back and forth not only goods but ideas and innovations that can be copied. Open, trading societies learn from each other, whereas societies that close their borders to foreign goods in order to protect their own producers are denying their citizens access not only to goods from outside, but also to ideas that can improve their lives.

Open societies that allowed movement of goods, people and ideas have prospered. Their openness has bred tolerance and welcomed diversity. Ancient open cultures have progressed in arts and science, in manufactures, agriculture and in ideas, as well as in wealth. People copy successful innovation.

Open societies are ones that do not require adherence to one set of beliefs and practices, but which allow different groups within them to follow differing values. They tolerate nonconformity, and are prepare to see new ideas develop and spread. All previous open societies have reverted to authority and imposed conformity. Some, Norberg points out, have succumbed to external shock such as conquest or plague. Others have seen innovation and tolerance repressed as traditional ruling élites and those benefitting from established powers have fought back to restore their advantage.

There has been one exception - the one that fostered the Industrial Revolution in Britain and which has provided an economic template as the source of the modern world. It survived, Norberg suggests, because no-one had the power to shut it down as they had done elsewhere. Power in Britain was dispersed and multi-faceted, and neither crown, aristocracy, church or guilds had enough power to impose their will to silence the ideas or to stop the innovations. Norberg lists the Glorious Revolution of 1689 as a pivotal event in this, channeling monarchical power into constitutional government.

Norberg is particularly good on explaining how the tribal instincts developed by hunter gatherers, can reassert themselves in modern, open societies when people feel threatened by developments and events. Prospering societies tend to toleration and openness; it is in economic shocks and downturns that some are inclined to close borders, put up shutters, and blame outsiders and dissidents for their misfortunes. In place of the liberal and democratic institutions and practices they think have failed them, they are tempted, says Norberg, to turn to strong leaders who can assert authority to restore what they see as former glories. Traditionalism fosters protectionism, and when societies close borders for self-sufficiency, they become poorer materially and intellectually.

Norberg remains an optimist despite the alarming threats to openness posed by attempts to shut down debate and free speech, and by the rise of populism as a response to perceived exclusion from power and prosperity. There is nothing, he says, that ensures our still fairly open society will survive. But it could if we wanted it to. This is an excellent book, and I cannot recommend it more highly.

Greed is usually a good guide as to how high prices can go

We’ve been observing this shouting match over streaming royalties with some interest for there seems to be a deep misunderstanding of how prices are set buried in there:

The DCMS committee inquiry has heard testimony from an array of musicians, from Elbow frontman Guy Garvey to Mercury-nominated singer-songwriter Nadine Shah, which have highlighted the difficulties artists have making money from the small royalties artists receive from digital music services. Garvey, who told the committee that the next generation of bands are being lost because they cannot sustain their careers, has also said services such as Spotify and Apple Music are not charging customers enough. It can take more than 1 million streams for an artist to make £1,000.

£1,000 from a million people listening to a song doesn’t seem like much we agree. We would note that this appears to be about 5 times what a million people listening to the same song on the radio generates for the musicians. Sure, this is inaccurate but it’s close, songwriters and performers together make perhaps £200 from a Radio 1 play - to we’ll assume a million listeners - of a 3 minute song.

It is not obviously true that the streaming price is lower than the radio one. It is entirely possible to argue that the on demand nature of streaming, possibly the absence of the DJ, makes that a more valuable experience for the listener than the radio play. But this is where we come to price setting.

Spotify is at least attempting to be a profit maximising company. We’ll not have to work very hard to convince people that capitalists are greedy for other peoples’ money. Therefore the obvious assumption is that the streaming giant is charging listeners as much as they think they can possibly get away with. That’s the function of greed in setting prices, that greed meets the consumer willingness to pay and that’s where supply meets demand.

The other way of putting this being that Spotify cannot raise prices - we assume, of course - without reducing gross revenue. They’re extracting as much as is possible from the pockets of the listeners. This assumption could be wrong, of course it could. The answer to which is to launch a higher priced streaming service and see how it does. We believe people have done this too which is that markets testing the limits of greed thing again.

Understanding these basics leads to what might be an uncomfortable finding for Mr. Garvey and Ms. Shah. The people have spoken, their output is worth what is being paid for it simply because that is what people are willing to pay - that’s the only valuation that has any merit in a society containing humans.

Being in a popular beat combo doesn’t pay very much because consumers don’t value popular beat combos very much. Ah well.

Reasons for optimism - desalination

Technological advances make it highly likely that the world will soon have no shortage of water of potable quality in the places where it is needed. Although there have been disputes between countries over available supplies, the likelihood is that there will be enough for everyone. On the small scale much is being done to dig new wells and to adopt local water purification techniques that diminish the spread of water-borne diseases. The big advances, however, are being made in desalination.

The world is not short of water; it covers seven-tenths of its surface. The problem is one of removing the salts from it to render is usable for drinking and for agriculture. The most promising developing technology uses seawater reverse osmosis (SWRO desalination) to push seawater through membranes that admit pure H20 molecules, but prove impervious to the salt and other molecules dissolved in it.

It has had problems associated with it, notably the high energy inputs needed, and the high costs this brings, together with the environmental impact on the localized marine ecology, but these are being solved. It has been shown that the local impact can be mitigated by creating or restoring suitable habitats or by restocking with affected species. And the high costs associated with abundant energy use is being resolved as the costs of renewable energy sources decline. The current cost curve for solar and wind energy suggests that energy will become cheaper as time progresses, making osmotic desalination ever more attractive economically.

As energy does become cheaper, it will be possible to move the desalinated water to the places where it is needed by pumping it long-distance though pipelines, much as oil is currently piped across thousands of miles. Lower energy costs will render this viable. The rapid development of desalination technology indicates that water shortage problems can be resolved. This will make it possible to cultivate in currently inhospitable areas. It will enable hydroponic farming to take place in areas lacking fertile soil, further reducing pressure on the land needed to produce food.

Far from facing shortages and possible conflict situations, the likelihood is that fresh, clean water will be both abundant and cheap in the future

Why should landlords have lower tax bills?

If the underlying truth to a matter is misunderstood then we’re going to end up with bad to terrible policy on that matter. Thus it is important that all understand who really pays, who carries the economic burden, of business rates:

Business rates, a tax levied on commercial property occupiers, have created an uneven playing field between bricks-and-mortar chains and their online competitors, helping to drive a slew of high street chains to the wall. Since the onset of the pandemic, Laura Ashley, Cath Kidston, Monsoon Accessorize, Paperchase and Edinburgh Woollen Mill empire have all fallen into administration. The collapse of Debenhams, often an anchor tenant in shopping centres, will damage the prospects of other businesses around it.

“It’s a double crime because we are letting online businesses like Asos and Boohoo out-compete rivals by not paying as much tax — and when they kill their competitors, the creditors, which includes HM Revenue & Customs, pick up the tab for that too,” said former Sainsbury’s chief executive Justin King, who now sits on the board of Marks & Spencer. “It would be funny if it wasn’t so serious.”

It is true that the occupier hands over the cheque for the rates. But the person who carries the economic burden is the landlord, they can charge a lower rent because of the existence of the tax. This is as close as our current tax system gets to a land value tax and is, in fact, a good tax. Good here meaning both efficient and equitable, rather than it being good to have to tax, that’s a cost given that we’ve got to pay for government somehow.

So, the current argument, the one being made against business rates, is that landlords should pay less tax and the shareholders, workers and possibly customers of online retailers should pay more.

It’s possible that that is true, not that we think so, but that is the argument that is being made and is the case that has to be proved.

So, before anyone signs up to this change in taxation methods there’s the big question that needs to be answered.

Why should landlords pay less tax?

GameStop and short selling

As ever, when there’s something interesting happening in the stock markets there are the claims that something must be banned. The GameStop story has certainly been interesting and it’s leading to the call that short selling be banned.

Ourselves, well, one calculation is that short sellers have just lost $20 billion. If short selling should be reduced then we’d consider that a pretty good incentive for short selling to reduce.

However, we are these days told that we must “follow the science”. On this particular point the science being Robert Shiller and his Nobel. His point is that the efficient markets hypothesis works only within certain caveats, one of which is that markets must be complete. If people can buy something then we get the views of those who think it will rise. If people can not buy something then we get the view of those who, perhaps, have no view. Only if people can go short can we gain the views of those who think the thing should or will fall in price.

Thus a market which does that market job of price discovery does so better in the presence of the ability to short sell. This is why his solution to the US housing frenzy of 2003 to 2006 being the creation of futures markets where more speculation can take place. That speculation on lower prices is possible tempers and reduces such frenzies.

The implication there - baldly stated by Shiller at times - is that having to short housing finance (those CDS and CDO things) rather than housing more directly delayed the pricking of that bubble.

A proper and decent financial market is one that deliberately creates the structures in which is it is possible to speculate upon falling prices, to sell short. At which point we’d probably not ban the very thing which creates that proper and decent financial market.

We can take a step further back too, to Galton’s Ox, that foundation of the idea of the wisdom of the crowds. The random mass is asked the weight of the dressed carcass and no individual gets it right. The average of the random mass does with startling accuracy. But, and here’s the essential caveat, it only does so when all views, however objectively silly they are, are included.

This is rather redoubled in a financial market where things are worth exactly and precisely what people think they are worth. Banning short selling excludes views from that price setting therefore the price that is set will be wrong in the absence of short selling. Not because there is some objective price that is correct, but because we’re excluding some of the views as to what that price should be.

Of course we can value the environment, the ecosystem services

Whether the current calculations of the environment, of ecosystem services, are quite right and accurate is one thing. But the idea that we cannot or even should not do so is false:

Some environmentalists wince at the financial characterisation of the natural world, disputing an anthropocentric understanding of ecosystems and organisms as capital that derive value from how well they “serve” humanity. Guardian writer George Monbiot calls the approach “morally wrong, intellectually vacuous, emotionally alienating and self-defeating”. Others dislike the seductive logic of including the environmental damage of eating a beef burger or driving a petrol car in their “true” costs, deforestation and melting glaciers included.

We’re the only valuers around to apply a value to anything. Further, the valuations that are calculated are the valuations to human beings.

Of course, to claim that there is some pure and just value, independent of that applied by humans, is to make the same error that Aristotle and Aquinas did. This is not then to go on and say that all values are captured by market prices. We’d argue that a lot of them are but never that extreme that all are. It is though to insist that, among humans the value of something is the value humans ascribe to it.

To give an example, the cost benefit analysis for the varied alternatives to the Swansea Barrage, the Severn tidal dam and so on. In there is an amount for the value of mud flats for wading birds. Given the birds’ lack of money, so too the clams, the mud itself and so on, it’s obviously not a straight market calculation of how much they’d pay to keep that environment rather than having a lagoon generating electricity.

What that mudflats value actually is is that some people like the idea that there are mudflats for wading birds. That’s humans applying a value to some part and or form of the world. Working out exactly what that value is is a bit of an art (how much do people show, by their actions, that they value this at?) but the logical concept is sound. It’s exactly the same logical method we use to work out the statistical value of a life - how much, by their actions, do people show they value a representative life?

It’s also true that not only can we do this but we should. The aim of this economic game is to maximise the utility of us folks in aggregate. Therefore we need to know the calculations being applied to the varied things that are valued and produce that utility.

Gawping at mudflats, even knowing they exist, produces utility for some human beings. Thus it’s a part of the maximisation of utility. As are, of course, the alternative uses of that same chunk of the environment which is why we want to know the values in varied uses.

It’s common enough to declare that certain values are not commensurable. That value of the curlew getting its dinner as against the electricity with which a human can cook theirs. But all commensurable means is capable of comparison and given that both are the values ascribed by humans to those things then of course we can compare them. For they are the same thing - values ascribed by humans.

The Left and the Zero Sum

When I published my logic book, “How to Win Every Argument,” I said that if fallacies were assigned to nations, the English would have the Argumentum ad Temperantiam, which falsely attributes superiority to a middle way in the absence of supporting argument or evidence. I remarked that if one group in a pub was arguing that two plus two equals four, while another group argued that it made six, an Englishman might conclude that the answer was probably about five. Moderation in all things, even accuracy.

If fallacies were instead assigned across the political spectrum, the Left would have the Zero Sum Game fallacy. This is the fallacy that falsely supposes something to be limited in supply when in fact it is not. Some have dubbed it the Pizza Pie fallacy, because a pizza pie is limited in size, and if some take a larger share, there is less left for others. The fallacy lies in extending this reasoning to things that are not limited in size.

Many on the Left apply this to wealth, supposing that some people are poor because others are rich. They suppose that a small number of very rich people are somehow making the rest of the world poorer by taking too large a share of a fixed supply. The reality is that the world’s wealth is not limited, and that wealth is created every day. When people trade and exchange both sides give what they value less in return for what they value more, and both have greater value than they had. The trade takes place because both people gain; this is how wealth is created.

Some on the Left suppose that rich nations became rich by taking wealth from others, whereas the reality is that they became rich by creating wealth through trade and exchange. Some also claim that poorer countries can only become richer if the world’s wealth, supposedly in fixed supply, is “shared out more equally.” Poverty is neither man-made, nor is it caused by wealth. It was the default condition for most of humankind for hundreds of millennia. It was only when we discovered how to manufacture productively and to trade and exchange with others that we climbed out of it, as more are doing every year.

The presence of a few billionaires does not make the rest of the world poorer. Indeed, they probably makes it richer by heading up corporations that add value to people lives by giving them new opportunities. Oxfam, which once was the Oxford Committee for Famine Relief, dedicated to the worthy cause of providing food to those hit by famine, has fallen head over heels into the Zero Sum trap. Their new report, “The Inequality Virus,” blames the rich for the poverty of the poor worldwide.

 “This inequality is the product of a flawed and exploitative economic system, which has its roots in neoliberal economics and the capture of politics by elites. It has exploited and exacerbated entrenched systems of inequality and oppression, namely patriarchy and structural racism, ingrained in white supremacy. These systems are the root causes of injustice and poverty.”

This is simply wrongheaded on all counts. “These systems” are not the root causes of injustice and poverty. It is lack of economic opportunity that perpetuates such poverty as remains worldwide, for a diminishing proportion of humanity. Globalization has enabled billions in poorer countries to enter the world market and to trade their produce and their labour with people in richer ones. It is by buying their produce and employing their labour that richer people have helped them up the ladder, not by transferring to them more of a fixed supply of wealth. Wealth is infinite, and there is no limit to the amount that can be created. The important thing is not to share it out on a more equal basis, but to enable more people every year to gain more of it by creating more of it. It is not a zero sum game.

Economics 101 has its merits

It’s a common denigration of simple economics that it is simplistic. The world’s much more complex than that description of it in the Economics 101 course. This is why - the argument inevitably goes on to point out - we must do these things which violate those precepts of Economics 101. You know the sort of thing. Sure, higher prices mean people buy less but this doesn’t apply to a minimum wage because reasons. We’ve even seen the argument that higher corporate taxes would increase investment because complexity.

So it’s nice to see agreement that this base and basic view of the world does still have some power:

Low EU purchase prices per vaccine might have further slowed down deliveries.

That’s directly from the chart on the first page or two of every Econ 101 book, the supply and demand curves. The lower the price on offer the less excited people are to supply the item. A useful confirmation of the textbook from that reality outside the window.

We also have confirmation of a finding from Politics 101:

But the EU must now learn lessons. It needs institutions comparable with those of the US to deal with such situations. The commission’s initiative to boost the European Health Emergency Response Authority is to be supported. EU citizens should decide how much risk they are willing to take when it comes to vaccine authorisation and liability, and leaders should provide more financing for vaccine development and procurement. For now, the EU’s priority must be to mobilise all financial and political resources to increase vaccine supplies.

The current political structure hasn’t worked very well. Therefore we must give more power to the current political structure. This is indeed basic politics, removing power from failure is something that only happens out in markets - you know, that part of life that works?

The wrong way to deal with climate change

A suggestion here for what should be done about climate change:

Ministers should consider launching tax breaks for companies investing in green technology, according to EY’s former UK boss Steve Varley.

The UK will host COP26, the UK’s climate change conference, in November and has pledged to support green and sustainable investment as part of its economic strategy.

The Bank of England plans to launch its first green bond this year while the Government has made a legally binding commitment to end the UK’s contribution to global warming by 2050.

Mr Varley said taxation could play a role in the Government’s efforts to achieve that aim.

He said: “In the past the UK... had incentives for research and development innovation. I think exploring those and reintroducing those at a greater scale to spur on green investments and green technology would be a really smart avenue for the Treasury.”

No, that’s the wrong way. This however:

A carbon tax could play a role in the UK’s fiscal policy over the next three to five years,

That’s also wrong. It should read “A carbon tax will play the role”.

As to the reason why Donald Rumsfeld’s known unknowns idea aids in explanation. There are things we know, known knowns. Things we know we don’t, known unknowns. Things we don’t know we know, unknown knowns and things we don’t know, unknown unknowns.

Assume, just for the moment, that those future terrors of climate change are in fact true. We thus want to mobilise all the things we can in order to solve that problem. That requires all of those things, all four of them, known and unknown.

By definition a tax break can only deal with things we know about. Because we must be able to identify that thing in order to craft the tax break itself. But we want to mobilise all those things we don’t know we know as well as all those things we don’t know as yet.

Therefore our incentive structure has to be the other way around. Instead of a break for anything that we know about we want to make the ill-activity more expensive for everyone so as to uncover all of those things we don’t. That is, instead of lower prices based upon current knowledge we want higher prices to encourage those unknowns.

Yes, obviously, this does depend upon accepting the existence of the terrors in the first place.

It also insists that politicians don’t get to do any picking and choosing. One simple rule, set once, then leave it alone, allow prices and the economy in general to chew through the problem. Given the propensity of politicians to fiddle this is exactly why the one, pure, solution to climate change, that carbon tax, never has been instituted anywhere properly. After all, where’s the fun of power if a problem actually gets solved?