The Pin Factory Blog

The people in charge of economic policy in the EU appear to believe that they can create economic reality by passing laws and reaching decisions through negotiation.  Their knowledge of human psychology seems to be even more flawed than their understanding of how markets actually work in practice.  The decision they forced upon the Cyprus government is flawed on many levels.  The bank levy punishes savers but leaves the bond-holders untouched, violating the principle that small savers should be protected, while the bond-holders who knew they were taking a punt should take a hit.

It is also a wealth tax, violating one of the principles of fair taxation that it is OK to tax transactions such as making money or buying goods, but not OK to take money from someone simply because they have it.  A state might claim to justify a transaction tax by saying that it provides and maintains the infrastructure that makes it possible for people to deal with each other to mutual advantage, but not a wealth tax.

If the Eurocrats had studied game theory or psychology they could have anticipated the anger and outrage that their move has provoked.  People mind losses more than they value gains.  They mind precipitous losses more than they mind gradual ones.  They mind visible losses more than invisible ones.  People do not like it if their €200 in the bank will, through inflation and currency fluctuations, only buy them €180 worth of goods in the future.  But they dislike it almost infinitely more if government removes €20 from their savings account.  Indeed, 'dislike' is too mild a word.  They are outraged because their government has stolen their money, even though they were not responsible for the crisis.

The signals this move sends out are that it is foolish to save, and foolish to keep money in banks.  These signals are spreading to countries other than Cyprus.  A precedent set in one place could be followed in another.  It is entirely possible that this action will set in motion runs on several banks as savers seek to place their funds beyond the reach of predatory governments.  The reaction of outsiders to this move can only be one of shocked incredulity.

If asked which groups posed the greatest threat to individual liberty in modern Britain, I would unhesitatingly cite two groups. These groups are, broadly, the medical profession and those who are generally called 'celebrities' - pop stars, film stars and so on. You may think that I am being somewhat tongue-in-cheek (and in some ways I am), yet there is a serious set of issues at stake here.

Firstly, the medical profession. Hardly a day goes by without some group of doctors or medical scientists calling for a ban on this or some sort of government intervention in that. The latest example seems to be the attempt to set a minimum price of alcohol sales, a terrible idea which, hopefully, has failed. Consumption of tobacco, salt, sugar, fat plus associated advertising are all deemed dangerous and suitable subjects for medics to attempt to ban or circumscribe via price increases . Medics also see fit to spend public money to instruct us how to live our lives and what choices we ought to make.

Some of the rationale for this comes from the doctor's protective monopoly, the NHS. As the health costs of unhealthy lifestyles are born by the state, it seems quite justified for doctors to call for bans and price hikes. Naturally, this simply demonstrates the lunatic incentive structure that state-provision of healthcare creates, especially free-at-the-point-of-delivery healthcare which externalises the costs of unhealthy behaviour. However, the chief threat from doctors lobbying stems from their apparently impartial and expert position as guardians of health and security. Unfortunately, most of their calls ignore the Public Choice and Knowledge Problem implications of the state interventions which result.

Celebrities have an even less programmatic threat to liberty, unsurprisingly for such a diverse group. They usually adopt a single-issue approach. For a long time we have had Bob Geldof and Bono calling for state spending on international aid. The greatest current threat stems from Hacked Off's campaign against a free press. Celebrities will often lead opposition to reductions in public spending or state activity such as Arts Funding. They have a powerful ability to rally strong public opinion for or against a cause, no matter how strong the case against - whilst Joanna Lumley's campaign to allow Gurkha's to settle in the UK hardly represents a major threat to liberty, although it has had some unintended consequences for Aldershot, it serves to demonstrate the power without responsibility that celebrities wield.

In distinction to the recent past, where ideological opponents of liberty tended to possess a coherent ideological programme of state intervention and control, these groups are far more pragmatic and opportunistic. Thus, in many ways, they are far more dangerous because they cannot be so easily shown to be a threat. It must be said that both groups 'mean well' - they cannot really be accused of a malign plot to oppress people. However, both represent a serious threat to liberty.

Regulations and public spending, once in place, are rarely repealed and tend to expand as they crowd out private responses. Innovation is prevented and alternative solutions are foregone. Bans and prohibitions create black markets and often serve to create other problems without solving the first (viz. recreational drugs). Whilst everyone has a right to free speech, those lobbying for state intervention need to be aware of the consequences and problems created by their support for the insidious expansion of the state into yet more aspects of our lives.

One of the things that is so difficult to get over to the "Arrrgh! We're running out of everything!" crowd is that we humans actually create resources by inventing the technology that does that creation. I've blathered about this with respect to minerals here often enough. Today's example is fresh water. Of course, we all know that there's a water cycle, that we don't destroy water by using it, we just dirty it. But it is true that there are areas of the world that are becoming short of potable water. We would obviously like there to be a solution for this and it looks like there is:

The process, officials and engineers at Lockheed Martin Corp say, would enable filter manufacturers to produce thin carbon membranes with regular holes about a nanometer in size that are large enough to allow water to pass through but small enough to block the molecules of salt in seawater. A nanometer is a billionth of a meter. Because the sheets of pure carbon known as graphene are so thin - just one atom in thickness - it takes much less energy to push the seawater through the filter with the force required to separate the salt from the water, they said.

This is reverse osmosis which is nothing very new. But here's what the new part is:

"The energy that's required and the pressure that's required to filter salt is approximately 100 times less."

100 x less?

"If you can design a membrane that's completely different than what we use today, then there's a chance for more than two orders of magnitude (100 times) increase in the permeability of the membrane," Grossman said.

Well, yes, because the cost in reverse osmosis is indeed the cost of maintaining the pressure differential on either side of the membrane.

Just to put this into actual numbers. The average UK household uses some 100 cubic metres of water a year. (100,000 litres). At current desalination costs this is $50 a year for a rough guide is 50 cents per cubic metre. Reduce that cost by 100 and we're talking about a cost per household of 50 cents, or 25 pence. At which price it really doesn't matter whether we're putting rainwater, rivers, reservoirs or desalinated water into the pipes now, does it?

This also applies everywhere else too of course. Lagos, Lima, LA...potable water simply becomes a non-problem. Agreed, you'd probably still not use it to irrigate wheat but at these sorts of prices water for industrial or human consumption simply becomes something that isn't a problem.

This is entirely apart from the fact that such a water filter fine enough to seive out the sodium and chlorine ions is obviously going to be fine enough to dispose of all microbes and viri, all heavy metals and so on, any oestrogen or other molecule, thus making cleaning up polluted water vastly cheaper. Factory run off, heck, if you really wanted to, fertiliser run off from farming.

There is good news for the worrying crowd though. You can still worry about the fact that we're running out of scarce resources to worry about running out of.

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.