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"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

Minimum alcohol pricing is an irredeemably stupid idea

Written by Tim Worstall | Friday 10 January 2014

Much fun and games as we here at the ASI are attacked in the pages of the British Medical Journal:

The opening public salvo of a concentrated lobbying offensive with the sole objective of killing off minimum unit pricing was a report published by the Adam Smith Institute on 26 November, two days before the consultation opened. The institute is a self appointed opponent of “big government . . . regulating businesses [and] interfering with lifestyle choices,” and has a long record of resisting regulation on behalf of the tobacco industry.16 17 For the institute, opposition to minimum pricing was a perfect fit, and its report, Minimal Evidence for Minimum Pricing, declared that predictions based on the Sheffield alcohol policy model were “entirely speculative and do not deserve the exalted status they have been afforded in the policy debate.”18

It is of course joyous that we here are able to get so far up the noses of these appalling little health fascists that they start to lash out in such a fashion. The authoer of that report, Chris Snowden, responds quite magnificently here. And Chris has shown that the original statistics used to justify the idea were wrong, that the plan won't actually do much if anything about the perceived problem being addressed and all in all it's simply a loss of freedom to no benefit whatsoever. It's also, as both Chris and I have pointed out over the years, illegal under EU law.

But I would go that one step further. It's also an irredeemably stupid idea. Even if we accept the evidence being proffered by the enthusiasts it is still entirely barking mad. For the effect of the plan, this minimum alcohol pricing, will be to increase the profits of those who make, market and sell cheaply made alcohol. Which is, as I hope all those with an IQ above their shoe size can see, not really the very bestest manner of reducing the incentives to make, market and sell cheaply made alcohol.

Let's just take as read everything those enthusiasts are telling us. That cheap booze kills, that we can reduce the number dying by making alcohol more expensive. OK. So, we have two ways of making booze cost more: we can have regulated (and high, as they demand) prices. Or we could raise the tax on booze.

The effects of high regulated prices are that the profit margins of those who make cheap booze rise. Because there is now no price competition in the retailing of the booze of course. Thus the makers of cider, the retailers of it, don't have to indulge in price cutting to compete their way into the shopping baskets of boozers. Thus we get high, and fixed, profit margins in the grotty booze business. Sure, volumes sold might fall but the margins on what is sold will be attractively eyewatering. This isn't notably a desirable outcome: recall, we're liberals so we're on the side of the consumers, not the producers.

Or we could raise taxes. We end up with the same prices as in option one. We end up with the same reduction in boozing, whatever that amount is. But we've not just fattened profit martgins for the producers. We've also raised cash money for the Treasury and can thus cut taxes elsewhere to compensate. Or, if you must, we can increase public spending or cut the national debt.

Option two is clearly and obviously the better one: and that is already assuming that we agree with everything else that the campaigners are suggesting. When we relax that assumption of course their case falls apart entirely but that's not what I'm trying to point out here.

What I am pointing out is that even by their own (paltry) standards of evidence and logic their plan for minimum alcohol pricing is still irredeemably stupid. And we're really not supposed to be basing public policy on such idiotic suggestions now, are we?

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The most appalling drivel from the New York Times

Written by Tim Worstall | Thursday 09 January 2014

This drivel from the New York Times is so bad that it's actually painful to read. It's following on from the paper's hit job on your friend and mine, Craig Pirrong. The argument is about how does, or how doesn't, speculation alter prices. And as I say this is so bad that it really is painful. I quote at length so you don't think I'm cheating or anything:

The academic debate about what role, if any, the surge of financial speculation played in the run-up of commodity prices during the past decade remains unresolved. It is generally accepted that the price increases were in large part caused by market fundamentals – increasing demand in China and other developing countries, currency fluctuations, the diversion of grains to biofuels. Numerous studies by economists find little evidence that speculation played a major role. Studies by other economists find that price increases and volatility were fueled, to a significant degree, by the vast amount of speculative money that has entered the market since the rise of investment funds — particularly index funds — that track commodities.

The task of definitively answering the question is complicated by the murkiness of the data. Most trading data is considered proprietary and is therefore not released to the public or researchers. The information released by federal regulators and the exchanges is often difficult to work with because it is aggregated in ways that make it tricky to separate investors speculating on where prices will go from those simply trying to hedge their risks. When the Commodity Futures Trading Commission gave researchers from Princeton and the University of Michigan access to actual trade data, the resulting study found evidence suggesting that financial speculation had played a role in price swings during certain time periods.

But before more studies could be done to test their findings, the C.F.T.C. research program was shut down because the Chicago Mercantile Exchange complained that a subsequent study, which was critical of high frequency trading, had improperly released confidential details about its clients. Outside of academia, many commodities traders, financial institutions and oil industry executives have asserted in recent years that speculation is a major factor behind rising prices and market volatility.

The public policy debate has also been moving toward more regulation to prevent any possible price impact of increased speculation in the future. In the United States, restrictions on speculation were included in the Dodd-Frank package of financial reforms in 2010. While those rules were blocked by a court challenge funded by the financial-services giants, the C.F.T.C. in November approved a new set of position limits that would curtail Wall Street speculation. — David Kocieniewski

This is just nonsense: the writer of a front page New York Times piece appears entirely ignorant of what he discusses.

Absolutely everyone agrees that speculation changes prices. No doubt about it whatsoever.

We're entirely certain that speculation in the market for physical goods changes the prices for physical goods. We're equally sure that speculation in futures and options changes the prices of futures and options. These aren't things up for discussion: they just are.

The actual subject under discussion is whether speculation in futures and options changes the underlying physicals prices. And the answer to that is, in the absence of changes in physical stocks, no. Even Paul Krugman of the New York Times agrees with that.

But this is the way that the public debate seems to be conducted these days. Read the extract again: at no point at all does the distinction between speculations in futures and options or speculations in physicals get mentioned. And it's precisely that this distinction is not made that allows the horrible mistakes. Including, obviously, the entirely untrue implication that futures speculation changes physicals prices and therefore we must regulate futures trading more.

If I thought these reporters were bright enough to recognise a bribe I'd assume they've taken one: given that I don't it must simply be that they do not understand the subject they are attempting to explain.

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Old Economy Steven would have been better off now

Written by Ben Southwood | Wednesday 08 January 2014

An interesting essay from Chris Maisano over at Jacobin Magazine drifts over many topics—full employment, growth since the 1970s and neoliberalism, worker activism and the 40-hour week. Its essential case is that full employment is important, because it makes workers better off in lots of ways, including giving them more leisure time. There are some interesting points in the piece, and I agree that full-ish employment is an important goal, but overall I think it rests on a huge number of misconceptions—indeed data is used in very weird ways, with what I see as obvious questions left entirely uninterrogated.

Maisano points to the "Old Economy Steven" meme, which looks back to an idealised post-war era:

Steven pays his yearly tuition at a state college—with his savings from his summer job! He graduates with a liberal arts degree—and actually finds suitable entry-level employment! ... But Steven doesn't just enjoy the material comforts of Old Economy abundance. He possesses a degree of everyday power scarcely imaginable by working people today. Steven can tell his boss to shove it, walk out and get hired at the factory across the street.

The contrast with popular views about today's economy, at least since the recession, is obvious. But full employment policies have been demoted—indeed since the late 1970s and especially since central bank independence most developed countries have centred their macroeconomic policies around stable inflation, not high employment. In fact, central banks now see a Non-Accelerating-Inflation Rate of Unemployment (NAIRU) as the optimal situation. But is this an "ideological response" as Maisano suggests?

There will always be some unemployment, from the numerous supply side restrictions on labour, and from job switching, especially with sectoral shifts. Inducing unexpected inflation can temporarily take unemployment below this "natural" level, for example through money illusion—where workers think nominal pay is actually real pay—but it is unsustainable. Once unions and individual workers compute this level of demand growth into their calculations the natural rate will return and the monetary authorities will need to push inflation yet higher to subvert this equilibrium.

Many economists, including Milton Friedman, argue that something like this caused the rampant, out of control inflation of the 1970s, something that was only reigned in by harsh recessions in both the UK and USA (attempting to control wages and prices was an abject failure everywhere). Acknowledging this means acknowledging that aiming for unemployment as close as possible to zero is a bad idea; it is better to aim for the lowest level of unemployment achievable without acceleration inflation. It's certainly possible to argue that monetary policymakers have failed to do this—but it hardly seems like a specifically ideological development, more like progress in economics.

A second sticking point is how growth has declined since neo-liberalism replaced the post-war consensus as the dominant political framework in at least the US and UK. This is true. But it's also true that every developed country saw a growth slowdown in the 80s and 90s relative to the post-war era. Economic historians are divided on the causes but since the most neo-liberal countries grew much faster than the more left-leaning states, one'd be hard placed to see that as a key cause. But even though growth has slowed down it has not stopped—and despite a few bumps we are much much richer today than in the 1970s. Just think, if had the opportunity to be whizzed to the 1970s to have the same standard of living as someone in your income percentile did then, would you?

My third disagreement is on hours worked. Maisano heavily implies that the consistently looser labour markets since the 1960s and 1970s have resulted in workers forced to work longer hours. He's clearly looked at the numbers, since he compares the US's average 1,778 in 2010 (1,742 on the FRED numbers I've seen) worked unfavourably to "continental European and the Scandinavian social democracies". But is that a germane comparison? To me it seems like the best way to compare the wellbeing of workers now, following decades of neo-liberalism and below-full-employment, and workers then, is to directly compare them. On average, during the 1970s, an employed person worked 1,859 hours (in 1970 it was 1,912 hours), in the ten years up to and including 2011 the average was 1,772.9. Maybe Maisano believes that with a greater focus on full employment incomes would have grown even more and hours would have fallen even faster—but if he thought that maybe he should say it.

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A sensible Tobin Tax

Written by Tim Worstall | Wednesday 08 January 2014

This might come as something of a surprise but there is, out there in the real world, a proposal to have a sensible Tobin Tax. As opposed to the deeply not sensible Tobin Tax as supported by the Robin Hood Tax campaign. That's a financial transactions tax which would be a completely appalling idea. The sensible one is in fact from China:

Britain’s bid to become a global hub for trading in Chinese assets has run into a major snag after a top Chinese official suggested a ‘Tobin Tax’, a levy on financial transactions to curb capital flows. Yi Gang, director of the State Administration of Foreign Exchange, called for an “in-depth study” of a Tobin tax, particularly on foreign exchange trades and flows of speculative hot money. SAFE is the world’s biggest fund, commanding the central bank’s $3.7 trillion in foreign reserves. ..... Mr Li, who is also deputy chief of China’s central bank, wrote in the Communist Party journal Qiushi that curbs may be needed to ensure an “orderly” transition as the country opens up its internal capital markets and moves towards a free float for the yuan.

It's worth recalling what Tobin himself actually advocated. Back at the end of the fixed exchange rate system known as Bretton Woods he wanted to increase the power of governments over markets. To do so he advocated a small tax on all foreign currency transactions. This would slow down, or reduce, the amount of money washing through the echanges and thus make it easier for central banks to manipulate the exchange rates. He saw this as a good thing, we now do not, therefore we're not in favour of such taxation.

However, there is still a place for such taxation: no, not such a tax to be imposed on our now free markets in currency (or anything else) but as a stage to be gone through when moving from a near entirely non-market system to a free market one. And it's in that context that China is suggesting one on their currency, the yuan. The liberalisation of such a market is a good idea, obviously. But there's very definitely an element of not quite wanting to go to complete and total liberalisation in one fell swoop. There's a good 70 years of economic mismanagement there to overcome and the shockwaves of an immediate and pure free market would be considerable. Not a bad idea at all to take it step by step.

The real problem with this of course will be that those Robin Hood, the FTT, people will say that if it's OK for China to have a Tobin Tax then why wouldn't it be a good idea for us to have one? The answer being that China having one is part of the transition from a rigged market to a free one: our having one would be an entirely unwelcome move back in the other direction.

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The effects of abolishing corporation tax

Written by Tim Worstall | Tuesday 07 January 2014

As you all know I'm a great believer in pushing that corporation tax rate right down to zero. In simply abolishing the tax in all its forms. One of the arguments against this is that, well, whadda about the revenue to pay for schoolsnospitalsncouncilouses? And the thing is, I'm not entirely sure that there's actually all that much revenue in corporation tax. Here's a prediction about dividends for this coming year:

Stock market investors are in line for windfalls after research showed that Britain’s biggest companies are expected to pay out a combined £72.4bn in ordinary dividends this year. Businesses listed in London’s benchmark FTSE 100 and mid-cap FTSE 250 will lift their dividends for the current financial year by 4.5pc, according to financial data firm Markit. The total payout is expected to rise to £89.3bn once special dividends, including Vodafone’s $23.9bn (£14.6bn) shareholder reward, are taken into account.

Note that this is only listed companies, this does not include any private companies paying dividends: something which a lot of them do of course. That £80 billion odd has already paid corporation tax at what, 25% say? Do note that most of the dodges about corporation tax fail when it comes to money available to pay dividends: all that offshore stuff just doesn't work. So, given that the £80 billion is a net figure, add in a bit for private companies and we could guess that perhaps £30 billion, £35 billion has been paid in corporation tax upon these dividends. The recipients of those dividends then get a tax credit on what has been paid already (higher rate taxpayers have to cough up more).

Over here we've got the total recepits for corporation tax:

Comparing the last two years available, total CT liabilities were broadly equal, rising by one percent to £43.8 billion in 2011-12, from £43.2 billion in 2010-11.

And some £9 billion of that was the offshore oil and gas sector. Which isn't, really, corporation tax that's a tax on the Ricardian Rent of the oil being found under British waters. Something that should most certainly continue.

£44 billion minus £9 billion in Ricardian taxation gives us pretty close to that £30 - £35 billion which is simply the advance taxation paid upon those dividends. And it really makes no difference at all whether we tax that at the level of the dividend recipient or the company.

All of which means that if we were to abolish corporation tax and then tax dividends simply as the income they are then there wouldn't actually be much difference in revenues to pay for the schoolsnospitalsncouncilouses.

Agreed, this is very much back of the fag paper stuff and I'm sure that other people have more accurate information on this. But wouldn't it be wonderful to be able to simply abolish a tax without any great effect upon the public revnues? Oh, and with the effect of no company ever again being able to do any tax dodging at all as there would be no tax for them to dodge? Plus all those accountants and lawyers have to go off and do something productive.

I like it as a plan. So where and why am I wrong here?

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The twelve days of state bureaucracy: 8-12

Written by Dr Eamonn Butler | Monday 06 January 2014

Day 8

Dearest Grandmama, eight noise abatement officers arrived saying that the noise of my neighbours' protest and the various inspectors' cars coming and going was in clear breach of official guidelines. They served me a compliance notice. I will write more tomorrow.

Day 9

Dearest Grandmama, the au pair and I made the mistake of bringing out tea and cakes in an attempt to make peace with the neighbours, it is the season of good will, after all. Now nine food safety inspectors are here, saying that out kitchen does not comply with hygiene regulations for the provision of food to the public. I will write more tomorrow.

Day 10

Dearest Grandmama, ten Home Office people broke down the door today, saying they suspected that the au pair might have been working here illegally. I've spoken to a lawyer and we hope we can get her out of the detention centre soon. We had the workmen come back to repair and repaint the front door. I will write more tomorrow.

Day 11

Dearest Grandmama, eleven EU inspectors arrived today. We convinced them the au pair was Bulgarian and therefore had a perfect right to be working here, but one of them noticed the name of the house and told us that we had to change it from Green Acres to Green Hectares. They also quizzed us on what colour the front door had been painted. I will write more tomorrow.

Day 12

Dearest Grandmama, today twelve court officers turned up to serve me with a European Arrest Warrant. We had been reported for painting the front door in a colour called Burgundy Red, Unfortunately this name breaches of EU local origin protection regulations. Anyway, I'm in prison myself now in Burgundy, and will have to sell the house, including the partridge and the pear tree, to pay my legal bills.

Still, it was a very kind gift, and at least it has taught me a lot about regulation these days. Please address any future correspondence to my lawyer.

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Bitcoin is a win-win for liberty

Written by Preston Byrne | Monday 06 January 2014

Depending on who you ask, cryptocurrency is either: (1) the future or (2) stupidity.

Some early adopters claim that 1 BTC could reach $40,000; others ask whether BTC will become “Gold 2.0”.

The ASI's own Tim Worstall (among others) disagrees, pointing to the fact that a cryptocurrency can effectively be created out of thin air—“with no scarcity comes no value”—and likens BTC, whose rivals (wow) multiply, as akin to that of “the Golgafrinchan B Ark using leaves as money. They...have to burn down the forest to stop inflation.”

This view is wrong. Cryptocurrency is not presently scarce: there are perhaps hundreds of cryptocurrencies with active userbases, many of which are actively traded. Yet despite being functionally identical to BTC some are near-worthless (1 DOGE = $0.00035) while others are prized (1 LTC = $24.00). Why, then, is 1 BTC worth $760?

The answer, of course, is that cryptocurrencies aren't money, but rather “more of a payment system like Visa than a currency like the dollar,” and ones with some unique characteristics at that: low transaction costs, increased anonymity, and a distributed network architecture. This alone has value.

BTC also benefits from its “first-mover status (which) grants it some advantage over its competitors in the form of network effects,” with its value deriving, “at least in part, on the number of other users willing to transact.” (Luther, 2013).

In this respect its lead is commanding. As for its closest analogue, credit cards, network effects in respect of these have resulted in there being “only three major credit card companies in the world… (and as such) cryptocurrency network externalities are likely to be high.” Though cryptocoins are obscenely easy to mint, the dominance of a few large players will mean joke currencies become increasingly difficult to trade.

As yet, cryptocommerce has only been adopted by small, distinct groups of individuals (libertarians, internet denizens, and black marketeers (Luther, op. cit.)). For each of the above, crypto serves a distinct purpose and success or failure has a distinct meaning. For those who see crypto as a creature of politics (as I do), at this early stage, it should not matter what a particular cryptocurrency is worth from time-to-time. It matters only that a few are (1) capable of holding value and (2) are actually used.

The value of the eventual frontrunners will undoubtedly bear a relationship to black market demand – as put by one commentator, “if Bitcoin succeeds, it will be because of the War on Drugs and other policies that increase demand for a quasi-anonymous, internet-transportable currency,” exactly the kind of disruptive function the crypto-anarchist manifesto predicted in 1988.

Crypto therefore presents states with a dilemma: repress it, or compete against it. Choose the former, and cryptocurrency will serve as a check on state power. Choose the latter, and it will have been a powerful catalyst for reform.

Either way, liberty wins.

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Apparently I'm a hyper-neoliberal

Written by Tim Worstall | Monday 06 January 2014

It rather surprised me, last week, that I was described by an American magazine editor as a "hyper-neoliberal". I'm really not quite sure what that means but I assume it's because I agree with points like this:

PLAN A The government subsidizes the incomes of low-wage workers. These subsidies are financed by increasing taxes on middle- and upper-income Americans.

PLAN B The government again subsidizes the incomes of low-wage workers. But under this plan, the subsidies are financed by taxing those companies that hire low-wage workers.

This is Greg Mankiw discussing the difference between raising the incomes of the working poor through some form of public payment (ie, tax credits, the EITC, whatever) and a rise in the minimum wage.

To be sure, the minimum wage isn’t exactly a system of taxes and subsidies. But its effects are much the same as those of Plan B. Unskilled workers earn more, and the businesses that hire them pay more. The main difference between the minimum wage and Plan B is that, under a minimum wage, the extra compensation is paid directly from the business to the worker, rather than indirectly via the government.

And for me this is the clinching point:

First, fairness: If we decide as a nation that we want to augment the income of low-wage workers, it seems only right that we all share that responsibility. Plan A does that. By contrast, Plan B concentrates the cost of the wage subsidy on a small subset of businesses and their customers. There is no good reason this group has a special obligation to help those in need.

I've said this a number of times before and it still remains true. There is indeed the market price of whatever it is, in this case low skilled labour. And it's entirely possible that we, as a society, communally, decide that we don't like that price. Say we think that the price of cigarettes is "too low" (leave aside how we determine too low or too high here). We tax them and that tax benefits us all in that all of us share in the public goods financed by that tax.

We might also decide that the price of low skilled labour is too low. We desire it to be higher. Precisely because it is all of us making that decision (again, leave aside concerns about majoritarian tyranny here) therefore it should and must be all of us dipping into our pockets to pay for it. We should no more insist that investors in the sort of business that employs low wage workers pays that extra wage that we desire than we should insist that smokers, or tobacco companies, get that extra tax raised as we fix that too low price of ciggies.

They're societal interventions thus it must be society that pays or collects on them.

Whether we should have a wages top up, or taxes on ciggies, is entirely another argument. This logic, assuming that we're going to have them, still stands. Societal decisions need to be paid for by society, not by some subset who can be stuck with the costs of our desires.

In this analysis I am joined, as above, by Greg Manikiw, ex-head of the Council of Economic Advisors, economic advisor to Mitt Romney (about as wet a Republican candidate as we've seen in many a decade) and also by the UK's only thinking Marxist, Chris Dillow.

And for thinking this way I am called a "hyper-neoliberal" by an American magazine editor. I still don't quite know what that phrase means but I think it's more a commentary on the political inclinations of the US journalistic caste than it is about me or the real world.

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A little note for our Robin Hood Tax friends and the World Development Movement

Written by Tim Worstall | Sunday 05 January 2014

You will recall one of the arguments put forward by the Robin Hood Tax crowd: that lots of speculators in futures and options markets drives up prices. This has also been put forward by the World Development Movement, another group of teenage trots only lately out of their mothers' basements. The problem with this idea, as has been endlessly pointed out, is that future prices can only affect current, spot ones, if there is a rise in inventories. And that's not something we've seen in recent price booms.

And here is Craig Pirrong, fresh from the mendacious hit job the NYT did on him, to explain why in more detail:

Back in the 1990s and early 00s, gold prices were low. Very low. $300 and below. Back then, the hue and cry was that prices were artificially low because . . . wait for it . . . producers were massively short because of hedging programs.

Well, if producers were massively short that means that speculators were massively long. So if speculators drive prices, why weren’t gold prices stratospherically high in the late-90s early-00s? After all, supposedly in 2008, and the last couple of years, the massive long speculative positions were inflating prices. Why didn’t the massive long speculative gold positions a decade ago inflate gold prices?

Flipping things: If short commercial positions were depressing gold prices a decade ago, why didn’t they depress oil prices in 2007-2008, and over the last couple of years? Hence the danger of superficially examining net positions and claiming that one side of the market is inflating (or depressing) prices: an equally legitimate argument is that the other side of the argument is depressing (or inflating) prices.

But the point is that neither argument is legitimate: both are equally illegitimate. Derivatives positions net out to zero. Derivatives are in zero net supply. Looking at one side of the market, and ignoring the other, makes no sense.

In the absence of changes in physical stocks driven by those future prices, futures speculation simply will not change current, spot, prices.

Worth adding I think my favourite mistake by the WDM on this point. They looked at grain prices in 2008. Wheat and corn (maize) moved a bit. Rice moved massively. OK: but they used this as proof that futures and options speculation really does change spot prices. Failing to note that the futures market for rice is very thin and small while those for wheat and corn are vast and deep. Thus the grains with more speculation in them had lower price rises: not exactly a confirmation of their thesis.

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The effect of rising consumerism

Written by Tim Worstall | Saturday 04 January 2014

We're all aware of the standard critique of consumerism: that we shouldn't in fact want more at all. We should be happy with our lot, accept that there are limits and, you know, just sorta vegetate with what we can currently do and make. However, as Virginia Postrel points out, that's not really how the human race works:

Rising expectations aren’t a sign of immature “entitlement.” They’re a sign of progress -- and the wellspring of future advances. The same ridiculous discontent that says Starbucks ought to offer vegan pumpkin lattes created Starbucks in the first place. Two centuries of refusing to be satisfied produced the long series of innovations that turned hunger from a near-universal human condition into a “third world problem.” Complaining about small annoyances can be demoralizing and obnoxious, but demanding complacency is worse. The trick is to simultaneously remember how much life has improved while acknowledging how it could be better. In the new year, then, may all your worries be first world problems.

We only ever moved out of the caves because someone thought that house sharing with a hungry bear was unsatisfactory, only ever invented the car because of the rising tide of horse dung, it's the very things that we find unsatisfactory currently that drives the vast wave of innovation that has been sweeping us along these past few centuries.

And the real strangeness of this is that while we might indeed be desiring more transport, or food, or communication ability, whatever it is, that innovation manages to bring us that more at the expense of using fewer resources. Smartphones are, obviously, using fewer resources than trying to run Facebook on semaphore flags. So contrary to the standard story it is our very consumerism that reduces resource use via the mechanism of innovation.

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