Blog RSS

The Pin Factory Blog

"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

Just why are we ruled by these people?

Written by Tim Worstall | Tuesday 04 February 2014

The 2020 Conservatives group used Laura Sandys MP to write a report on how we should all reuse stuff much more so that we're a much richer nation. And my question to that group is why?

Why did you have written and then release a report that shows your misunderstandings of how the economy works? Wouldn't it have been better to write one on a subject you do understand?

I managed to get hold of a copy (it's not on the 'net as far as I can see) and it's somewhat painful to read. There's the pretty much standard now view that we're all about to run out of minerals, an obvious fallacy if there ever was one. This leads to the insistence that we must all recycle more and this will make us richer:

The UK spends £1 billion a year in landfill costs just to dispose of plastics, wood, textiles and food - and in the process destroys these valuable commodities41. If a landfill ban was introduced just on these products and materials, £1 billion worth of costs would be avoided and a further “£2.5 billion [of] value” would be recovered42

Those two references, 41 and 42, are to something from the Green Alliance....where Mariana Mazzucato is a trustee which isn't all that comforting. But the obvious point here isn't tackled: if all this value is currently being dumped into holes in the ground why isn't anyone trying to make money out of it? We've been running scrap and rag and bone operations for many centuries in this country already and if there really was £3.5 billion of free money available then someone would be doing it and providing themselves with hot and cold running Bentleys.

That they're not shows that there's something wrong with this basic calculation: sure, landfill might cost £1 billion (much of that being the Landfill Tax) and OK, I'm willing to believe that the materials, when processed, could be worth £2.5 billion. But the reason it's not being done is obviously that the process of not landfilling the materials and processing them instead costs more than £3.5 billion. There's also an estimate that such recycling would lead to 300,000 new jobs. Given that the pay cannot be greater than the value being created that would imply wages of £12,000 for each of them even if we believe their number for said value created. We're really going to make the country richer by creating jobs at about half of median wage? It seems unlikely, doesn't it?

But there's a part that provides me with little hope:

For those of us who come from a business background, it is always surprising that government rarely considers the profitability of the UK economy. Currently the vast majority of political discourse and macroeconomic analysis centres on GDP, but a business would never focus on the top line and ignore the bottom line – businesses focus on profit rather than turnover for good reason. In the commercial world and across the economy ‘margin’ and ‘profitability’ are given equal consideration to ‘sales’, yet this is not reflected in public policy discourse.

As UK policymakers do not currently focus on profitability, there are few policies in place that truly support margin enhancement. This is illustrated by the fact that there is no mention of the words ‘profit’ or ‘profitability’ in BIS’ Business Plan4.

I had hoped that this was simply clumsy phrasing but the same point is made in interviews about this plan:

The modernisers also call for a rethink away from what Sandys calls the "British Leyland" mentality, which says that the strength of an economy is measured solely by Gross Domestic Product (GDP) – the size of an economy. "We are going to have to look at what we are really achieving and not what I call British Leyland metrics," Sandys said. "British Leyland produced a lot of cars. It had a lot of GDP. Nobody wanted the cars but nobody seemed to care.

Oh dear. Ms. Sandys seems to believe that GDP measures the turnover in the economy. Erm, no: it measures the value added in the economy. The clearest expression of this is when we look at it from the income approach: what everybody earns, wages, salaries and profits, equals (with a couple of minor adjustments) GDP. It simply is not true to say that GDP is composed of, nor measured by, the turnover of companies. BL's contribution to GDP was the wages it paid to its workers minus the losses that it made: something which could conceivably have meant that BL actually reduced GDP given the scale of its losses at times.

Now I'm perfectly happy for people to come up with proposals to make things work a little better. But I would hope that those doing so demonstrate that they understand how things currently do work. And equating turnover to GDP is a signal that they very much don't here.

And then there's the part that near kills all hope:

Why do we only think of labour productivity?

For the obvious reason that labour productivity is what determines what it is possible to pay labour. And our aim in this whole economy thing is to maximise the living standards of the people which is why we concentrate on raising labour productivity so that people can earn more and thus have more nice things.

Please note that this isn't an ideological or political assault here. It's a commentary on the point that the people presuming to tell us how the country should be run don't have a firm grasp on that real world they want to direct. Which isn't likely to lead to a decent outcome really.

View comments

Apparently the UK is in the grip of a house price fairy

Written by Tim Worstall | Monday 03 February 2014

I'm afraid that I rather spluttered into my fry up this morning reading this piece of absurdity in The Guardian:

Cable calls for a new house-building programme, but in truth this is a nonsense when the market dictates prices, and always will. You can build 300,000 new homes a year, as the Lib Dems want, but you can't stop those homes putting on value to a point where the people for whom they were built can't afford them.

I'm sorry, what? Does Melissa Kite think that the market is some sort of pricing fairy that decides that house prices are always going to be high?

As opposed to "the market" being the balance of supply and demand for goods and services? So that if we increase the supply while demand stays static then we expect prices to fall?

Good grief: housing completions are running at around 120,000 a year at present. If we were to have 300,000 a year then prices may or may not be lower or higher than they are now: that depends upon a host of other factors like interest rates, real wages, immigration levels and so on. But if 300,000 houses were indeed being completed each year then they would most certainly lower than if only 120,000 were a year.

The real absurdity here is that Kite is, as many lefties do, reifying "the market" in a manner that we free marketeers know we shouldn't. It's not something separate from the interactions of the rest of us: it is the interactions of us all. And that means that if supply rises then prices will, ceteris paribus, fall. And thus, if you want to lower house prices one should try to build more houses.

Or, as I've pointed out passim ad nauseam, given that the most expensive part of a house anywhere anyone wants to live is the chitty granting permission to build a house there one should issue more such chitties.

View comments

And here's another problem with the climate change debate

Written by Tim Worstall | Sunday 02 February 2014

This article by Michael Mann is an interesting example of something that has gone wrong with the climate change debate. For what we're getting is people who claim expertise in one part of the problem insisting that said expertise gives them power to determine what should be the answers to other parts of said problem.

As ever, let's not get into the shouting match about the science being all wrong. Let us just, for the moment, accept what the IPCC tells us. Yes, even including Mann's hockey stick:

I have made my position on the Keystone XL pipeline quite clear. Approving this hotly debated pipeline would send America down the wrong path. The science tells us now is the time that we should be throwing everything we have into creating a clean 21st century energy economy, not doubling down on the dirty energy that is imperiling our planet. Now that the State Department has just released a final environmental impact report on Keystone XL, which appears to downplay the threat, and greatly increases the odds that the Obama administration will approve the project, I feel I must weigh in once again.

Erm, why must you weigh in again? You're a climate scientist. You work on temperature reconstructions. What on earth do you know about the economics of the oil industry?

And that's what our problem is here. Again, leave aside whether you believe Mann's science or not. Let us just, for the sake of argument, accept it for the moment. Excellent: so he's identified a problem, one that we should think carefully about. The same could be true of all sorts of people who have contributed to the IPCC reports. But the climate scientists are not the people we should be listening to on what we do next. For they've no expertise, not even any knowledge, of the subject that is crucial to what we do actually do next.

Economists know a great deal about what we should do next: Stern, Nordhaus, Greg Mankiw, in fact a goodly portion of the entire profession, would say that you whack on a carbon tax and you're done. Things like pipelines will then be controlled by whether they can carry the cost of that tax or not. As it should be: we've stuck our oar into the price system over an externality and can leave the market to sort out the impications. Even James Hansen has got this message.

OK, you might not like that answer either: but it is at least coming from people with qualifications in the relevant field. Asking Mann what we should do about climate change is as odd as asking an economist to do paleobiology: not just a waste of time but something highly likely to come up with the wrong answer.

And I do insist that this is a particular example of a larger problem. Being able to decipher what cloud cover does to temperature does not make one an expert in how to change the behaviour of human beings. That how cloud cover changes temperature is a building block of our knowledge of whether climate change is a serious problem or not is entirely true. But that simply doesn't mean that being able to pronounce with confidence on the one subject offers any insight at all into the second.

As you all know I'm perfectly happy to leave science to the scientists (and yes, I know many of you disagree). But I do insist that whether there is a problem is a different question than what we do about it if it is. And it requires entirely different skill sets to answer that second.

The people we ought to be listening to about what we do are the economists: assuming we believe what the climate scientists are telling us in the first place.

By the way, the economists and the engineers have spoken on Keystone XL now. It's not going to make any noticeable difference to emissions because those Canadian sands are going to be developed anyway.

View comments

It is the strange task of economics

Written by Tim Worstall | Saturday 01 February 2014

The usual second part of that phrase is that economics shows us what we don't know. But in this case it is in fact to tell us what we do know:

An infant school has launched a new crackdown on parents who pick up their children late from school - by fining them £6 if they turn up more than 15 minutes late. Germander Park School in Milton Keynes wants to discourage parents from treating it as a 'childcare provider' by charging whenever it has to look after pupils outside school hours.

Ah, no, that won't work. On the basis that humans are contrary beings:

In an example made famous by Freakonomics, when parents at an Israeli kindergarten were fined a small amount for showing up late to collect their children, their punctuality actually declined.

Because if we're paying for baby sitting anyway then why not take advantage of the babysitting?

Or, an alternative explanation was that the social pressures of not imposing upon the staff were stronger than the monetary fine. Once the fine was introduced those social pressures lost much of their force.

However you want to explain the finding is one thing: that the result is there is another. Charging parents for being late is likely to make more parents late: and also to make those parents who are late later. For once you've incurred the fine why hurry?

Then again perhaps we shouldn't be all that surprised by this. No one has ever found evidence that the British school system is over burdened with those who understand economics.

View comments

We free marketeers have a problem here

Written by Tim Worstall | Friday 31 January 2014

This is something of a facepalm moment:

When he vented his frustration about holiday prices shooting up during the school half-term break, Paul Cookson struck a chord with other parents. His rant to 250 Facebook friends quickly went viral as outraged parents shared his post about rip-off prices 143,000 times. Now the issue may even be debated in Parliament after more than 100,000 signed an online petition calling for the Government to curb prices.

Err, yes, access to the fixed supply of something may well be more expensive when more people want to gain access. It's that supply and demand thing in action. There are alternatives of course: it could be that the favoured children of party apparatchiki gain access. There have certainly been times and places where that was the allocation method. There could be queueing, there have been times and places where that has been used too. But of all the different methods that have been tried rationaing of something like this by price has ended up being the best one.

That isn't to say that rationing by price is always the best method: I'd not be happy with justice being so allocated for one. But the chance to sit in the chlorinated water someone else's baby has just passed through? Sure, ration by price.

But as we can see there appear to be at least 100,000 of our fellow citizens who don't agree. I am reminded of Bertoldt Brecht's point about the first East German elections: perhaps we should try to elect another people who do get this market economy idea.

It also reminds me of something I saw the first year after food price rationing ended in Russia. Eggs are painted for Easter, there as here, and one old grandmother couldn't understand why they became more expensive just before Easter. "Why are they more expensive just when everyone wants them?" If you don't get the basic answer to that one then the operations of a market economy are always going to mystify you. She had an excuse: she'd lived her entire life under a system that was not a market economy. Quite what the excuse of those 100,00 Brits is I'm not sure. They'd all understand instincitively why pay goes up on Christmas Day. Because that's the day that absolutely everyone wants to have off. That they can't make the leap to why holidays might be more expensive in holiday time mystifies me.

View comments

Yes, really, Women's Lib caused inequality

Written by Tim Worstall | Thursday 30 January 2014

Now here's a thing: the liberation of half the country from their economic and social shackles I regard as an unalloyed good thing. That this liberation of women largely came from technological causes, the "washing machine" or domestic household technology as Ha Joon Chang calls it, plus the decline in the economic importance of male musculature, doesn't matter at all. That it happened was great.

However, as recent research is showing, it has also led to an increase in the inequality of household incomes.

The argument is very simple indeed. We have moved from a society in which women tended not to work into one in which they tend to do so. And obviously, women tend to do the sort of work they are educated to achieve. Add in that people tend to meet their partners through university or work these days and it's quite clear that professionals will tend to marry professionals, blue collar blue collar and so on. We thus end up with a world in which there is a strata of society enjoying two professional incomes per household and others enjoying two white collar incomes, two two blue collar and so on. Although it does rather break down at that last: stay at home housewives are more likely to be in the working classes.

Whatever the earlier level of household income inequality we had before it's obviously going to be larger now. That a polemicist for the trade union movement is married to a GP, or that the Harman/Dromey household enjoys two, not just the one, MP salaries and allowances, makes the gap between those professional classes and the average working joe greater.

Short of the State telling people who they may shack up with there's no real way out of this either.

But what's really interesting is that that linked paper is claiming that all of the rise in US household income inequality can be put down to this one factor. And if that's so then I cannot for the life of me see that that rise in inequality is a problem. People are now much freer in their love and working lives than they used to be. That's good, in fact that's great. The side effects be damned.

View comments

There's nothing neoliberal about work for the dole

Written by Tim Worstall | Wednesday 29 January 2014

OK, so this story comes from Australia where they might be far enough away not to be quite up to speed with things. But the idea that people should work for the dole is not in fact some appalling apparition leaping from the fevered imaginations of neoloberals. It's not, in fact, even a liberal idea. It's an entirely social democratic one: you know, soft left sorta thing?

A favourite policy of talkback callers everywhere, work for the dole is also an idolised measure for the right side of politics where old-fashioned conservative selfishness dovetails nicely with the extremist economic demands of economic neoliberalism. The idea is that to receive the sub-poverty-level subsistence Centrelink payment of $250 week, dole recipients will be mandated into forced labour or deprived of subsistence completely. Currently mooted are plans for the unemployed to be mandated to pick up rubbish in the not-for-profit sector or work in aged care homes as maintenance workers.

Ah, no. Here is the impeccably social democratic and soft left M'Lord Layard on the subject from 15 years ago or so:

This long-term unemployment is a huge economic waste. For people who have been out of work for a long time become very unattractive to employers and easily get excluded from the world of work. So it often happens that employers feel a shortage of labour even when there are many people long-term unemployed, with the result that inflation rises even in the presence of mass unemployment. Thus a major objective must be to reduce or eliminate the long-term unemployment caused by welfare dependency. There are two possible approaches – “stick” and “carrot”. The evidence suggests that much the best approach is a combination of the two. This combined approach is now being used increasingly in Britain, Denmark, the Netherlands and of course in the U.S. for single mothers on welfare. In consequence in these countries there have been dramatic falls in unemployment consistent with a given level of vacancies – which in most other countries continues to rise.

The argument is extremely simple. People who are long term unemployed drop out of the labour force entirely. This is both a waste of their lives and also of the things that they could be producing for the rest of us. We therefore want policies which keep the long term unemployed in that labour force: even up to and including make work programs while they collect their unemployment pay. For this does indeed keep them connected with the world of work and aids in preventing that dual waste of their lives and out money.

This is absolutely nothing at all to do with being right wing, conservative, neoliberal or even liberal. It's an entirely social democratic analysis of the problem and an entirely social democratic solution.

It may also be a good one, might also be a bad one but that's an entirely different matter. The blame or the plaudits, whichever way around it should be, should indeed go to those who proposed it. Similarly, if it's a good idea than praise its introduction whoever does it and if a bad one condemn it.

Peronally I'm convinced by the argument and the evidence and in the absence of my preferred solution (a return of capitalism red in tooth and claw that would raise the growth level and thus reduce unemployment) support the idea that work for welfare is a good idea. Even if it did come from my old economics professor....

View comments

Technology, Privacy and Innovation in 2014

Written by Charlotte Bowyer | Tuesday 28 January 2014

Prediction lists for the coming year are always revealing, though perhaps more of the current public mood than the future. A write-up of the tech trends for 2014 by Fast Company's design blog is hardly controversial, but what is interesting is how the areas they’ve chosen highlight the existence of two wider and seemingly divergent technological trends. This apparent conflict in the way technology is heading is far from problematic. On the contrary, it shows our success in adapting and experimenting with new ideas and in response to shifts in the social and political context, without the need for any central guidance.

One thing clear from Fast Company's list is that 2014 will bring a continued increase in the volume and depth of the personal data we create. Things like Google Glass, the ‘quantified self’, hyperpersonalised online experiences and the interconnectivity of theInternet of Things all create new reasons and mechanisms for data capture. This in turn increases the value of our data to ourselves, the companies with access to it and, in some situations, the state.

However, the article also predicts that 2014 will see increasing concerns over cyber-privacy and a movement towards greater digital anonymity. Users will increasingly chose to control their own data and how this is profited from, whilst we will begin to discover the joy of ‘disconnecting’ from the digital world and see the creation of intentional blackspots.

The fact that we seem to be embracing deeper technological integration yet simultaneously finding ways to mitigate and avoid its consequences is certainly interesting. Does this show that we’ve raced forward too fast and are trying to claw back a space we’re realising we’ve lost? It’s perhaps possible that this is the case, but far from giving us cause for concern the two-track path we’re seeing shows the ability of consumers and the tech sector to adapt over time, and in turn gives some hints on the optimal tech policy.

Continue Reading...

View comments

An alternative ‘Agenda for Hope’

Written by Sam Bowman | Tuesday 28 January 2014

Owen Jones has written a nine-point ‘Agenda for Hope’ that he argues would create a fairer society. Well, maybe. I’m not convinced by many of them. Then again, it would be quite surprising if I was.

But it got me thinking about what my nine-point agenda would be — not quite my 'perfect world' policies, but some fairly bold steps that I could just about imagine happening in the next couple of decades. Unlike Owen’s policies, few of these are likely to win much public support. On the other hand, most of the political elite would think these are just as wacky as Owen's too. 

Nine policies to make people richer and freer (and hopefully happier):

1) The removal of political barriers to who can work and reside in the UK. Removing all barriers to trade would increase global GDP by between 0.3% and 4.1%. Completely removing barriers to migration, though, could increase global GDP by between 67% and 147.3%. Those GDP benefits would mostly accrue to the poorest people in the world. We can’t remove these barriers everywhere but we can show the rest of the world how it’s done. Any step towards this would be good – I suggest we start by dropping the net migration cap and allowing any accredited educational institution to award an unlimited number of student visas.

2) A strict rule for the Bank of England to target nominal GDP instead of inflation, replacing the discretion of the Monetary Policy Committee. Even more harmful than the primary bust in recessions is what Hayek called the ‘secondary deflation’ that comes about as people, fearing a drop in their future nominal earnings, hold on to more of their money. That reduces the total level of nominal spending in the economy which, since prices and wages are sticky in the short run, leads to unemployment and a fall in economic output. NGDP targeting prevents those ‘secondary deflations’ and would make economic busts much less common and harmful. In the long run, we should scrap the central bank altogether and replace it with competition in currencies (see point 9, below).

3) Significant planning reform that abolished the Town and Country Planning Act (which includes the legislation ‘protecting’ the Green Belt from most development) and decentralised planning decisions to individuals through tradable development rights (TDRs). This would give locals an incentive to allow new developments because they would be compensated by the developers directly, allowing for a reasonably efficient price system to emerge and making new development much, much easier. The extra economic activity from the new home building alone would probably add a couple of points to GDP growth. 

4) Legalisation of most recreational drugs and the medicalisation of the most harmful ones. I think Transform’s outline is pretty good: let cannabis be sold like alcohol and tobacco to adults by licensed commercial retailers; MDMA, cocaine and amphetamines sold by pharmacies in limited quantities; and extremely dangerous drugs like heroin sold with prescriptions for use in supervised consumption areas. The sooner this happens, the sooner producers will be answerable to the law and deaths from ‘bad batches’ of drugs like ecstasy will be a thing of the past. Better yet, this would bring an end to drug wars like Mexico's, which has killed around 100,000 people in the past ten years.

5) Reform of the welfare system along the lines of a Negative Income Tax or Basic Income Guarantee. As it is, the welfare system disincentivises work and creates dependency without doing much for the working poor. A Negative Income Tax would only look at people’s incomes (not whether they were in work or not in work), reducing perverse incentives and topping up the wages of the poorest earners. This would strengthen the bargaining position of low-skilled workers and would remove much of the risks to workers associated with employment deregulation. Of course, the first thing we should do is raise the personal allowance and National Insurance threshold to the minimum wage rate to give poor workers a de facto 'Living Wage'.

6) A Singaporean-style healthcare system to replace the NHS. In Singapore, people have both a health savings account and optional catastrophic health insurance. They pay a portion of their earnings into the savings account (poor people receive money from the state for this), which pays for day-to-day trips to the doctor, prescriptions, and so on. The government co-pays for many expenses but the personal cost disincentivises frivolous visits to the doctor. For very expensive treatments, optional catastrophic health insurance kicks in. This is far from being a pure free market system but it is miles better (cheaper and with better health outcomes) than the NHS. (By the way, if you really like the NHS we could still call this an ‘NHS’ and still get the superior system.)

7) A school voucher system and significant reform of the state education and free schools sectors. This would include the abolition of catchement areas and proximity-based admission, simplification of the free schools application process, and expansion of the free schools programme to allow profit making firms to operate free schools. These reforms, outlined in more detail in two ASI reports, would increase the number of places available to children and increase competition among schools to drive up standards.

8) Intellectual property reform. As both Alex Tabarrok and Matt Ridley have pointed out, our IP (patent and copyright) law is too restrictive and seems to be stifling new innovation. Firms use patents as barriers to entry, suing new rivals whose products are too similar to their own. In industries where development costs are high but imitation costs are low, like pharmaceuticals, patents may be necessary to incentivise innovation, but in industries like software development where development can be cheaper than imitation, patents can be a terrible drag on progress. Tabarrok recommends that we try to tailor patent length in accordance with these differences; as a sceptic about our ability to know, well, anything, I’d prefer to leave it to private contracts and common law courts to discover.

9) Last but not least, the removal of the thicket of financial regulation and the promise of bailouts for insolvent banks. Known as ‘free banking’, this system of laissez-faire finance has an extremely strong record of stability – though bank panics still occurred in free banking systems, they were much less severe and rarely systemic. Only once the government started to intervene in the financial system to provide complete stability did things really begin to go wrong: deposit insurance, branch-banking restrictions, and other prudent-seeming regulations led to extremely bad unforeseen consequences. The financial crisis of 2008 probably owes more to asset requirements like the Basel accords, which heavily incentivised banks to hold ‘safe’ mortgage debt over ‘risky’ business debt, than anything else. Incidentally, the idea that having a large number of local banks is somehow better than having a few large banks is totally wrong: during the Great Depression, 9,000 of America's small, local banks failed; at the same time not one of Canada’s large banks failed. The small banks were more vulnerable because, unlike the big banks, they were undiversified.

Now, if only there was a think tank to try and make these dreams a reality.

View comments

Bill Easterly on Bill Gates and aid and development

Written by Tim Worstall | Tuesday 28 January 2014

Bill and Melinda Gates have released their annual letter on what's going on with their Foundation, global poverty and aid. And they quite rightly point out that things are indeed getting better.

However, this is not the same thing as stating that it is aid that is making things better. As Bill Easterly points out:

The obsession with international aid is a rich-world vanity that exaggerates the importance of western elites. It is comforting to imagine that benevolent leaders advised by wise experts could make the poor world rich. But this is a condescending fantasy. The progress that Mr Gates celebrates is the work of entrepreneurs, inventors, traders, investors, activists – not to mention ordinary people of commitment and ingenuity striving for a better life. Davos Man may not be ready to acknowledge that he does not hold the fate of humanity in his gilded hands. But that need not stop the rest of us.

There are undoubted successes stemming from aid budgets: vaccination programs or the spread of oral rehydration therapy for example. These have certainly been funded by aid: but we should also note that our own societies managed very much the same things without aid from abroad to pay for them. So while aid may indeed have paid for them that's not the same as stating that aid is necessary for them to have happened.

But Easterly's larger point is that aid flows are of such tiny amounts in comparison with the global economy that they cannot in fact explain that marvellous reduction in poverty. Over the decades there's been very little aid to places such as China, Taiwan, S. Korea, the places where the battle against poverty is being so conclusively won for example. What has actually worked is that these places have become part of the global economy rather than languishing in purist localism.

Or, as we like to say here at the ASI, I contribute to making poor people richer by buying things made by poor people in poor countries.

Aid's all very well but trade is the name of the game.

View comments


About the Institute

The Adam Smith Institute is the UK’s leading libertarian think tank...

Read more