The Pin Factory Blog

All those who participated in this little piece of political grandstanding by some MEP or other. They ran a competition to see what would be nominated as the most dangerous financial product so that the MEP could then work to have it banned. Of course, the competition was entirely rigged: my own nomination of the euro was rejected, as was a further nomination of a financial transactions tax. On the grounds that they rather like them so of course no one should be allowed to make fun of them.

But worse than that is the pureblind idiocy shown by those who voted for the winners:

"Products based on food speculation are dangerous because they cause price increases of basic food stuff."

Which I hope you'll agree is the most gargantuan pile of steaming dingoes' kidneys since the Labour Party election manifestoes of the 1980s. For of course speculation doesn't necessarily increase food prices: even if we want to use physical speculation as our example, those speculating short will be reducing food prices as they do so.

But worse than this is as Adam Smith himself pointed out (start at para 40 here). Assuming that we do start talking about physical speculation, about hoarding and storage, the successful speculator increases food prices in the short term and lowers them in the long. To cut Smith's explanation short.

A wheat merchant purchases wheat just after harvest and stores it. He is speculating that there's not going to be enough wheat to last all the way through to the next harvest. If he's wrong, well, boo hoo, he loses money. Weep for him why not. But if he's correct then something very desirable happens. By his action he has moved some of that wheat from when it was plentiful and cheap to when it is in short supply and expensive. That's how he makes his profit of course. But he's also done something else. He's made wheat a little more expenwsive than it was just after harvest: his buying (depends upon quantity of course) will have moved the price up. This will curb consumption at that point. Similarly, when he sells in that "hungry time" just before the next harvest, he will be lowering the price below what it would have been without his sales. This will enable higher consumption at that time. Note though that total consumption is likely to fall: just what we want if there really is a shortage of wheat before that next harvest. In fact, if there is to be a shortage of wheat then we absolutely want everyone to be more economical in their consumption of it before that next harvest. Better that there's a little more substitution to barley or potatoes all year round (as a result of those higher prices) then that there is no wheat at all for 6 weeks before harvest.

Speculation thus smooths food prices through time: not raises them particularly, even if people are hoarding. But smooths them.

Aren't we lucky to share an economic and political system with elected politicians who are incapable of grasping these basic points. Who would actually ban the very thing that ameliorates food shortages. The trade and speculation in food?

George Kirby is the winner of this year's Young Writer on Liberty Prize, beating out dozens of applicants. We are delighted to post his excellent winning pieces to the blog over the next few days, and look forward to seeing much more of him in the years to come.

Article 3 of the Universal Declaration of Human Rights holds that “Everyone has the right to life, liberty and security of person.” Through this right to power over one's own body, it is legal to donate a kidney, whether to a friend or relative (Human Organ Transplants Act 1989), or to a general waiting list as a 'stranger' donation (legalised in the Human Tissue Act 2004).

Yet these Acts stipulate that “making payments for the supply of organs for transplantation or advertising a request for, or offer of, such organs for payment” is an offence. Concerns about the possible exploitation of the healthy poor by the nephropathic wealthy have led to more state control of the free market. Meanwhile, “three people a day die on the UK kidney transplant list”, according to the BBC.

This should change. A surprising example of a legal kidney market is that of Iran. Two state-surveyed charities match those who need a kidney with those who are compatible and prepared to sell. The vendor “is compensated by both the government and the recipient”. This system means that “there is no shortage of the organs”. A similar system in the UK would save thousands of lives and help alleviate the financial strain on the NHS, which spends more than £1.4 billion each year treating chronic kidney disease.

Furthermore, selling a kidney helps the vendor. Sue Rabbitt Roff, a researcher at Dundee University, suggests students could use the money to pay off university debt.

Those who oppose such a proposal argue that the state is the best judge of the individual's interests. Dr Tony Calland, chairman of the British Medical Association's medical ethics committee, said,

"Introducing payment could lead to donors feeling compelled to take these risks [of donation], contrary to their better judgement, because of their financial situation."

As it is, the dangers are greater for those selling organs via the illegal market, where advice, safe surgery and support are lacking. The government's policy against the trade of kidneys makes it more dangerous for who will sell anyway, needlessly costs patients' lives and, most fundamentally, infringes on individual liberty on the grounds that it is for our own good.

Bryan Caplan lists a few reasons to be sceptical about the Card & Krueger study that purportedly shows no unemployment effect from minimum wages. His overall point is that, beyond traditional labour economics, there is quite a lot of empirical evidence to show that minimum wages create unemployment. My favourite point:

4. The literature on Keynesian macroeconomics.  If you're even mildly Keynesian, you know that downward nominal wage rigidity occasionally leads to lots of involuntary unemployment.  If, like most Keynesians, you think that your view is backed by overwhelming empirical evidence, I have a challenge for you: Explain why market-driven downward nominal wage rigidity leads to unemployment without implying that a government-imposed minimum wage leads to unemployment.  The challenge is tough because the whole point of the minimum wage is to intensify what Keynesians correctly see as the fundamental cause of unemployment: The failure of nominal wages to fall until the market clears.

I wrote about the labour economics research into minimum wages in a paper on the Living Wage last year. Even if you think minimum wages are a good thing, the levelof ambiguity around the consequences of raising the minimum wage should give you pause for thought. There are no straightforward solutions to low pay, but if there are ways of increasing the net income of the poor that don't risk putting people on the margin out of work, aren't these the ones that we should focus on?

On a gap year and looking for something interesting?

If you are already on a gap year and looking for something stimulating, rewarding and worthwhile that can also enhance your CV and your experience, you might consider spending some time with the Adam Smith Institute.  We have space for someone currently on a gap year who might join us to help on some exciting new projects. 

You know what we do and where we stand.  If you feel this is compatible with your own position, get in touch with us at TNG@adamsmith.org with a copy of your CV and a few paragraphs about yourself. We will cover expenses and compensate you for your time.

The government's push to repeal the Human Rights Act 1998 is ill-advised, says the ASI's legal writer Preston Byrne, who argues that the civil liberties protections offered to the British people by the Human Rights Act 1998 must be buttressed, not erased. If there is a problem with the Human Rights Act, it's not that it goes too far – it's that it doesn't go nearly far enough.

The other day I stumbled upon Justified, a newish series about a thirtysomething, cowboy-hat-wearing, gun-toting U.S. Marshal named Raylan Givens. Raylan, the story goes, has been reassigned from sunny Florida to sleepy Kentucky – “punishment” for carrying out what amounts to a daylight assassination of a Miami mobster – following which he promptly misbehaves, sleeping with material witnesses, failing to recuse himself where conflicts of interest arise, and killing a number of human beings per episode. These are problems that the characters, treading the fourth wall, openly acknowledge but do little to fix.

It’s not The Wire. But then, it’s not 2002, and Raylan is a better fit for the conscience of today's United States. Pining for John Wayne, America reminsices as Raylan, self-loathing, naïve and eager to wield raw, unbridled power, apes him; we admire him for falling short. He is a John Wayne for the Drone Age, angry, uncertain, broke and extra-judicial.

It is impossible to suspend disbelief and enjoy the show. in real life, the only thing this cowboy could ride is a desk. Killing is an unfortunate and traumatic possibility in the life of an armed policeman. When it occurs, it is very contentious. Administrative concerns kick in, a lawsuit or public inquiry is often involved and it is often cause for mandatory suspension or early retirement, on account of which “it would be hard to ‘imagine a set of facts’ that would lead a cop to be involved in the deaths of six people,” especially in the first season alone.

Read this article.

The Parliamentary Commission on Banking Standards, headed by Andrew Tyrie, wants to electrify the proposed ring fence between retail and investment banking. Regulators should be able to force a complete split of retail and investment banking operations if a bank tries to resist the ring-fencing rules, it says.

We need smaller banks and more competition in banking, yes. But this proposal is a bad idea.

In the first place, the Vickers Commission ring-fencing proposals are the answer to the wrong question. The idea is to separate the 'risky' investment banking (or as the Business Secretary Vince Cable calls it, 'casino banking') from the supposedly less risky retail element (the 'Captain Mainwairing' business). However, it was not the investment banks that crashed back in 2007-08. As our report by Miles Saltiel explains, it was the mortgage banks and former building societies like Northern Rock that came to grief. Ring-fencing could actually increase risk. And it will certainly raise costs for retail bank customers, as their banks will not be able to pass on the savings from the savvy management of pooled funds by their investment arms.

Second, regulators are the last people you want telling the banks how to run their businesses. if they were empowered forcibly to split up banks, they would undoubtedly make a hog's ear of it. They would, in the process, damage UK banking and drive yet more banking business out of the UK. If you want to break up the banks, use the market: simply have more onerous capital ratios on the larger banks. That reflects the fact that the larger a bank is, the more damage its failure would do: small bank failures are manageable. It is the huge cost of regulation that has actually caused the elephantiasis of our banks: with smaller banks we would have more competition and we would need less regulation.

Third, the proposal is typical of politicians' belief that they can manage markets. In fact they are hopeless at it. A decade ago they were telling us how well they were managing the banking sector, and the Financial Services Authority had more than two thousand people on the job. They failed, miserably. Politicians and regulators don't know what is happening in markets. They wouldn't know whether a bank was getting round the ring-fencing rules or not. And they certainly wouldn't know what to do about it.

Fourth, our banking system is broken, but the politicians and regulators have done nothing to expose its problems. Nor would this proposal. The banks are still loaded with toxic obligations, but nobody outside the banks themselves knows how much. Banking depends on trust, but how can you trust them, if you don't know how many skeletons are in their cupboards?

A better solution would be to make the banks fess up and reveal their toxic 'assets'. Then put those assets into an isolation ward and let the healthy parts of their business get on with life. Then encourage more competition in banking by making market entry easier, reducing the regulations on smaller banks and raising the capital (and – see our forthcoming report by Robert Miller on this – their cash requirements). In other words, return banking to the real world of market competition. Job done.

At least, much of what we're told about inequality is wrong if we go off and have a look at revealed preferences that is. Here's what is now, on the left side of the political aisle, what is generally accepted as a truism about inequality:

Inequality matters because people evaluate their economic well-being relative to others, not in absolute terms.

And it's true that if you go look at some of the experiments done on this point then there's evidence to support the idea. Ask college undergraduates (they are used because they are extremely cheap and in high supply in the sort of environments that economists inhabit) whether they would prefer $50k a year while everyone else gets $25k, or $100k while everyone else gets $200k, then the preponderance is for the lower absolute but higher relative amount. We can also think of reasons why this might be so: higher status for a male does get more babes.

However, this is also based on what people say. And it's one of those truisms of economics, known as "revealed preferences", that you shouldn't take at face value what people say. Instead, look at what they actually do.

And with this relative and absolute stuff about income we've got a very large data set: immigrants. And we see the big immigration flows as being people from poor countries coming to rich ones. So that's certainly people being concerned about aboslute incomes. But there's more than that. The immigrants from those poor countries tend not to be the poorest of those countries. It's not the landless Bangladeshi day labourer that turns up in Bradford. They simply haven't the basic economic resources to manage the move for a start. Rather, it's people some way up off the bottom of those poor societies that become the immigrants into the rich countries. Where they, at least to begin with, start off right at the bottom of the income and even social stratifications.

So what we do actually see, out in the real world, is tens of millions of people a year willing to reduce their relative wealth, their wealth or income with respect to the societies they live in, in return for a higher absolute standard of wealth and or income. 

All of which is rather at odds with those experiments about the stated preferences of American college students. And as revealed preferences tells us, when we're considering evidence about what people say they would like and the actions we can see that they actually take, then it's the evidence about people do, not what they say, which should be given the greater weight.

All of which makes the importance given to relative wealth or income very much less important than some currently claim it is. Not that I think it has no importance: but that plain and simple fact that people do, voluntarily, move to lower relative incomes but higher absolute ones means that we cannot, just cannot, insist that only relative incomes are what we use to make decisions or measurements. The claim fails because it simply isn't true.

One of the standard tropes of British politics is that we are continually told that we should be more like Germany. It's pretty much a centre left idea, running that gamut from the Heseltines to the Huttons. Big government, big corporations and big unions will work together to plan and manage the economy. With a great deal of necessary guidance from the Heseltines and Huttons of course. It's a form of corporatism and perhaps the closest we actually came to it in the UK was under Wilson and Heath. But let us put that aside and consider what Germany actually did under that very system back over the past decade or so.

Around 2000 it was clear that Germany was becoming the "sick man of Europe". Labour costs were far too high for the productivity of that labour force. So what did this consensual management of the economy prescribe? That labour costs should fall. That's a pretty good answer to the problem of high labour costs of course. So, over the next decade pay rises for German labour were deliberately limited. By all sides: unions and companies and government. And the system worked. German labour costs fell with respect to productivity and German industry was saved. It didn't hurt that half the eurozone had rising labour costs at the same time but there was indeed this particular, and successful, plan to reduce the wages the workers were getting. Just hold on to that thought: this consensual and corporatist management of the economy decreed that labour costs must fall and then implemented the plan to produce that outcome.

Which brings us to the UK economy today:

The TUC said that between 2007 and 2011 real wages fell by 4.5pc in the UK, higher than in countries such as Italy and Japan, while in Australia and Canada there were increases of 6.9pc and 5.4pc respectively. Most of the decline was in 2011 - the coalition Government's first full year in office, the research found. The TUC said the Government's austerity programme had made the squeeze on living standards even tighter by cutting tax credits and welfare support for low and middle-income families. TUC general secretary Frances O'Grady said: "While most countries have suffered periods of negative wage growth, no-one has witnessed such a marked decline as the UK. "This Government's blind obedience to self-defeating austerity has ensured that we are leading the way when it comes to the squeeze on living standards.

The British problem was indeed that wages were too high as compared with productivity. Real wages thus needed to fall: or at least, wages as compared to the value of output did. This has been achieved: it's one of the reasons the unemployment numbers are not vastly higher. As in Germany, instead of higher wages for those who remain in employment, we've seen real wages stutter or fall while unemployment has not skyrocketed as many predicted it would.

Which brings us to the point about how we cannot be like Germany. We've achieved the same result, lowering labour costs, but we've had to do it by a different method. For as you can see, the TUC, that voice of Big Labour, is complaining bitterly about that very outcome. The German unions agreed that wages should be limited: it is not possible to conceive of a polity in which the British unions would similarly agree. Thus that sort of corporatism, that sort of managerialist approach, to the UK economy simply will not work in the UK. For one of the necessary components just won't support the necessary actions.

Please do note: this is not to support the German style. Nor is it to support the Heseltine/Hutton axis that insists we'd all be better off if the Heseltine/Hutton axis determined things. It's simply to point out that even if it were desirable that we be ruled that way, it simply wouldn't work here. We simply cannot be more like Germany because we don't have German unions.

With Mervyn King saying yesterday that we ought to get on with re-privatising RBS, the issue becomes how to do it.

As we discovered in the 1980s privatisations, you have to take out all the bad and unsaleable bits of a business before people will buy it. For example, the highly-risky nuclear element had to be taken out of the electricity sale. Likewise we need to pull out ABN-Amro. And to set up a 'bad bank' and put into it all the toxic business of RBS, and for that matter, Lloyds TSB too. That would free up lending and crystallize or segregate the banks' zombie obligations. It takes a bit of time to root everything out, but there is plenty of international expertise around to help.

Should RBS and Lloyds RSB be split into retail and investment arms? After the Vickers Report this idea is wearing the yellow jersey, but retail banks are not inherently safer than mixed ones, as Northern Rock and others showed. It is also hard to define the retail/investment boundaries. A split like this would just slow the process down.

While we are setting up the bad bank, it seems sensible to split the banks so as to promote competition and reduce systemic risk. Lloyds TSB could be split into Lloyds, Halifax and BoS. RBS could be split into NatWest and RBS, or into smaller pieces. That again would take time, and would mean re-engineering some back-office systems (most of which, in RBS's case, are hopelessly outdated anyway), but it gets rid of the 'too big to fail' problem.

How then to privatise? We could just give out shares to taxpayers, since they were the ones who stumped up for the bailout. But nearly everyone is a taxpayer, paying VAT and other indirect taxes, and it would be controversial to give out more shares to people earning enough to pay more tax than others. So what about giving out shares to everyone? Well, the mess of Russia's 'voucher privatisation' suggests that is a bad idea. People just sell their shares on right away, probably for too little money, and conventional owners step in.

But share giveaways raise no money on what should be a valuable asset. So a better route is to sell the banks and then distribute the proceeds to everyone. A staged sale would help to maximise the returns, and people would get several cheques, not just one. Perhaps some of the proceeds could be returned to the public and some could be put to paying off the national debt.

A broad privatisation is preferable, as selling to another bank just re-concentrates risk. Of course, it might be possible to sell to a completely different outside player – an Asian bank, for example – but people are nervous about foreign ownership.

And a popular privatisation bonanza just before the 2015 election could give Osborne and Cameron quite a boost – which I am sure enters their calculations.