Yes, we're afraid we are this cynical

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That the major concerns in economics - or perhaps we should say that major concerns in political economy - have changed in recent years is true to us. But we're afraid that we are really rather cynical about why they have changed:

I hear frequently that economics needs to change, and it has, at least in the questions we ask. Twenty years go, the dominant conversation in economics was about the wonder of markets. We needed to free the banking system from regulations so it could do its important job of turning saving into productive investment unfettered by government interference. Trade barriers needed to come down to make everyone better off. There was little need to worry about monopoly power, markets are contestable and the problem will take care of itself. Unions simply get in the way of our innovative, dynamic economy and needed to be broken so the market could do its thing and make everyone better off. Inequality was a good thing, it created the right incentives for people to work hard and try to get ahead, and the markets would ensure that everyone, from CEOs on down, would be paid according to their contribution to society. The problem wasn't that the markets somehow distributed goods unfairly, or at least in a way that is at odds with marginal productivity theory, it was that some workers lacked the training to reap higher rewards. We simply needed to prepare people better to compete in modern, global markets, there was nothing fundamentally wrong with markets themselves. The move toward market fundamentalism wasn't limited to Republicans, Democrats joined in too.

That view is changing. Inequality has burst onto the economics research scene.

If we are to talk about that political economy then yes, we agree that the change has happened. We do not project this cynicism onto Professor Thoma's views, of course, but we do think we know why the change has occurred.

Because the answers to that first set of questions were correct. Things like the Washington Consensus (essentially, a list of stupid things you shouldn't do to an economy) were correct. Don't do these things, don't mess with markets where they do work and economic growth will happen. The adoption of those simple rules: let markets alone in those areas where they do work, has led to the greatest reduction in absolute poverty in the history of our entire species.

The questions were asked and answered and the answers to those questions were correct.

But of course that's not enough for some people. We too are entirely happy to agree that pure unadorned markets do not work in all circumstances. There are interventions, things that only government can do and which also must be done, that must and should be made. However, it's a very human desire to want to be able to plan the world in one's favoured image and a societal instruction set which says "intervene in these small and limited areas, otherwise leave well alone" just isn't going to be emotionally or professionally satisfying for all too many in the field.

And thus inequality. An excuse to do all sorts of societal management, management and fiddling that the answers to the previous set of questions ("How do we make the poor rich?" "How do we make all richer?") largely preclude, as people who would wish to manage society for emotional reasons would prefer.

As an example we think of the work of Piketty, Saez and Zucman. It's entirely clear in the economics of taxation that transactions taxes, wealth taxes and capital taxes are to be abjured. They make everyone poorer to no good reason. Yet if we start shouting about inequality then we can impose those things which we know to be deleterious. That is, the concentration upon inequality is simply a result of people desiring to do those things that the previous set of answers say not to do. So, obviously, change the subject and quickly.

Yes, this is cynical: but then we are about the motivations of our fellow humans. Oxfam has spent decades arguing that the only solution for abject poverty is that the rich world transfer more to the poor. Recent decades have shown that the cure for abject poverty is for rich people to buy things made by the abjectly poor in abjectly poor places. But there is still that very strong desire to tax the heck out of the rich: so the same original policy is now proposed it's just using inequality, not poverty, as the excuse. We are being less cynical about Oxfam there than we are about economics in general.

As it happens inequality is a problem which is going to go away of its own accord. Global inequality, as a result of that fall in absolute poverty, is falling. And in country inequality is going to start falling as a result of the change in demographics. The last few decades, as we added those poor to the global economy, have seen a relative rise in the amount of labour compared to he amount of capital. The returns to, the price of, capital have thus risen. The working age population, globally, started falling relative to the supply of capital last year. Thus inequality will decrease for the opposite reason that it increased. It's a self-solving problem: but that won't stop the calls to soak the rich for of course the soaking is the point, the answer whatever the question is.

All we've got to keep an eye out for in the future is the next reason they'll give for the policies they so desire. Who knows, they might even come up with a valid one one day.

We wholly approve of voluntary migration

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No, we're not quite thinking of the wave of migration entering Europe just at present although obviously open borders do have their attractions. Rather, we're thinking of migrations in which people sort themselves into the sort of State that they desire. Like, for example, American "liberals" moving to Canada to find a society that they desire rather more:

“If Americans want to live in a country where there is an investment in public education, where people aren’t afraid of going bankrupt because they get sick, and where democracy is taken seriously, they should move, because an alternative exists,” said Tom Kertes, 43, who moved from Seattle to Canada with his now husband Ron Braun in 2007. ... For Laura Kaminker, however, that’s completely out of the question. In the 20 years before she and her partner Allan Wood finally moved to Canada from New York City in 2005, she had “lost hope” in the country she saw plagued by “civil liberties crackdowns” and “endless wars”. Although she still has her American citizenship, she doesn’t vote any more in US elections, and whenever she comes back to Canada after visiting family or friends in the States, she breathes a sigh of relief.

“Every time I say, ‘God, I’m so glad to be out of that crazy country,’” she said.

That's not a view of the United States that we share but then we are liberals not "liberals". Chacun a son gout and good luck to all who sail in her is our motto. And if you don't like the society you're in but can see a better one, by your lights, just over the horizon then great, move to it.

It certainly strikes us as a great deal more honest, more adult even, to go and live in a society that operates as you wish one did rather than try to insist that your 320 million fellow countrymen must follow your own plans. It's not so much that we would say good riddance to those who with to be more statist, it's that we do indeed understand that different people have different ideas about what the good society entails. and we're just fine with people going off to one they find more congenial. As, of course, is the foundational myth of the United States itself.

It's just that we'd really rather hope that the tolerance would be mutual, that we might move, or if they do we might remain, in a society more attuned to our own tastes and prejudices but that never really does seem to happen, does it?

The Pink Tax is a myth

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Or, rather, it is in much the same way that the gender wage gap is a myth. I’ll provide some context: this article by Anne Perkins is the latest in a wave of pieces expressing latent support for a study released by NYC Consumer Affairs in December. Amongst its findings were that 42% of products available to consumers were targeted at women and more expensive than an equivalent alternative. As a consequence of women deciding to buy these pink products, they are on average $1,351 a year worse off.

Perkins argues that companies price their gender-targeted products differently ‘because they can’ – they are taking advantage of the ‘soft underbelly of exploitation’.

The logic underpinning the campaign seems to involve services and products possessing a sort of objective value – a ‘fair’ price. That companies discriminate between consumer groups in their pricing is evidence that they charge above this price, and therefore exploit their customer base.

Of course, there is no such objective value. The value of a product or service is only what it brings to the consumer, its emotional payout. In this vein, we would expect having a shirt dry cleaned to afford a greater emotional payout to women than to men - this is explained by their willingness to pay for the higher price in the first place. Although in material terms, they are offered identical (or at least very similar) services, the emotional experiences of the groups are different. Madsen provides an excellent account of this theory of value in this Youtube video.

Perkins also neglects to recognise that in return for higher prices on their bottles of shampoo or perfumes, women enjoy a greater range of products to choose from. Supply does tend to equal demand, folks!

The campaign may have some genuinely positive aims: informing consumers that just down the aisle is a near-identical product in different coloured packaging for 30p less can only be a good thing. I myself had no idea that products were priced in this way. Perkins does say that the power to redress the imbalance, should we abhor it as she does, lies in the hands of each and every one of us. I endorse this sentiment.

However, to go a step further than this and use the information as ammunition in the ideological assault on free-markets and to support a demand for government intervention is undoubtedly misled. If we do as Perkins suggests, and outlaw gender price discrimination, then in some cases we will rectify a wrong that could have been solved by easier access to market information. In other cases, we will end up either giving women an especially sweet deal or raising the price to such a level that very few men are willing to pay.

The New Aristocrats: A cultural and economic analysis of the new status signalling

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A new report, released today by the Adam Smith Institute, argues virtue signalling has made widely-held ideas like ‘keeping up with the Joneses' and conspicuous consumption completely outdated. Rather than trying to one-up one another by buying Bentleys, Rolexes and fur coats, the modern social climber is more likely to try and show their ‘authenticity’ with virtue signalling by having the correct opinions on music and politics and making sure their coffee is sourced ethically, the research says. The paper, The New Aristocrats: A cultural and economic analysis of the new status signalling by Prof. Ryan Murphy of Southern Methodist University in Texas, lays out how trends in status signalling—showing one’s self to be worthy of respect and privilege in the eyes of one’s group—have changed over recent decades.

While the conventional understanding holds that families are apt to buy ever-bigger cars and ever-bigger homes in the pursuit of higher social rank—a fruitless zero-sum competition that might well be tackled by luxury taxes—the new race for prestige is quite different.

A modern aspirant elitist would be better off getting an arts degree than buying a gas-guzzling four-by-four, Prof. Murphy points out, if they want to raise their profile in the eyes of their peers. This trend of ‘virtue signalling’ has been widely noted, but policy has not shifted with society.

Education is one policy where Murphy’s analysis is readily applicable. Though pursuing practical education, a STEM degree, or even building up work experience may be better for an individual’s earnings and society’s productivity, individuals may pick extended study of essentially useless degrees in pursuit of status.

This is enabled by an extensive system of subsidies, which actually, since the last reforms, made the terms for those expecting to earn very little—i.e. those pursuing degrees that barely enhanced their career potential—much more generous. Murphy’s analysis suggests these subsidies should be scaled back—we are only encouraging an endless arms race.

Screen Shot 2016-02-03 at 10.51.24To read the full press release, click here.

To download the paper for free, click here.

Perhaps James Daley could be encouraged to learn some economics?

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This rather surprises us even if, perhaps, it shouldn't. That a man can reach a senior management position, reach middle age in fact, without having the first clue about how products are priced by those who sell them. James Daley, used to be of Which?, is railing about credit cards fees being charged.

But the likes of Ryanair and Easyjet are still charging 2pc. While British Airways charges a fixed fee of £5 a ticket – which can amount to a double digit percentage on cheaper shorthaul flights. The reason that companies have been getting away with this is that no one is enforcing it. Strictly speaking, it falls to the under-resourced Trading Standards. But consumers are also in their rights to challenge companies in the courts. I’m seriously considering doing just that. I’ve spent several thousand pounds on flights over the past few years – and I’d like to challenge the airlines to justify the excessive credit card charges that they’re passing onto their customers.

This is all about credit card fees that airlines and others are charging us to purchase things over their websites. And Daley has entirely missed the underlying point here. Companies do not charge us on a cost plus basis. Nor should they: we would not like a world in which they did. Suppliers of whatever it is charge us the maximum they think they can get away with: the greatest price consistent with profit maximisation. And that's how it should be too.

If we had a static economy this would not be true: but thankfully we do not and we would not want one either. The point being one that Adam Smith noted, we actually want people to make excessive profits. For, as he noted, capitalists are both greedy and observant. They'd like to be making more than the average level of profit: and they will note when someone comes up with a plan to do so. They will then invest in that area producing that excess profit and the resultant competition will bring that profit down to average again.

And yes, we want this to happen in a non-static economy: because that's the thing that advances it by stopping it from being static. Some new technology comes along, and a new technology can be anything from a smartphone to the idea of unbundling the package that used to be air travel into the seat, the meal, the drink, the luggage and yes, even the paying by credit card and then charging for each separately, and if it works then people will copy it. Ryanair started, Easyjet followed and we're at the point now where almost all short haul carriage uses this model. Because profits are higher through using it and given the amount more we all fly so is consumer surplus. We're all better off as a result of this new technology.

This system is dependent not upon regulation of prices, not upon set margins for certain actions, but upon being able to gouge the customer for as much as said customer thinks whatever it is is worth. For it is the excess profits from doing exactly that which foster the competition that makes this new idea, new technology, near universal.

When people have alternatives, whining about the fee for one method or another of doing something is simply economically illiterate.

And yet these people are able to influence the legislation we all live under? Sheesh.

Applications for Freedom Week 2016 are now OPEN!

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Freedom Week is an annual, one-week seminar at Sidney Sussex College, Cambridge which teaches students about classical liberalism and free market economics. It is open to over-18s who are currently attending or about to start university. The event is jointly run by us and the IEA and will be held July 4th - 9th.

The week is entirely free to attend: there is no charge whatsoever for accommodation, food, tuition or materials.

If you are lucky enough to be successful in your application, you will spend the week immersed in talks from some of Britain's leading thinkers. Seminars will cover the foundations, history and underlying economic principles of classical liberalism, as well as discuss cutting-edge research and contemporary debate from within the movement.

As if that wasn't enough, there'll be as many evening activities as you can handle, including a BBQ, a drinks reception, several dinners in the College, trips to local pubs and a seriously fun pub quiz. Attendees will also be able to try their hand at ‘punting’ on the River Cam, and will have ample free time to explore Cambridge.

Still not convinced? Let our website cinch it for you: all this information and lots more can be found here.

Competition for the few highly coveted places is intense, so get your applications in ASAP before someone else does!

Remembering Rand

Ayn Rand (1905-1982) was born 111 years ago today, in St Petersburg, Russia. Through, in particular, her hugely influential novels such as The Fountainhead and Atlas Shrugged, she was (and still is) responsible for more young people becoming interested in the ideas of individual and economic freedom than any other author. One can see why. Rand offers young people a philosophy which reminds them of their own worth, gives them heroic models to aspire to, and provides a coherent world view that seems to answer all their questions. In the novels, the key protagonists are ambitious, purposive, independent and strong – ruthlessly self-interested and yet deeply moral. The morality of self-interest conquers all, she insists. The altruism that philosophers and clerics teach us is destructive and contrary to reason. It has consigned us into obedience to mystics and bullies who claim to know what is good for us. It is evil because it destroys and diminishes human life, instead of promoting it. Human life is the standard of morality, and your own life is the purpose of morality. You should not consent to be a sacrificial animal for others, but be confident in standing up for your own interests, and acting on them.

But that does not mean doing whatever you like. Though you should strive for your own happiness rather than serving other people’s, you need to be clear what happiness is, of what things are really important to you. Rather than indulge every passing whim, you need to take a long-term view of what is actually in your rational self-interest.

To Rand, what marks out human beings is their reason: their ability to understand the world by forming and organising logically consistent concepts based on their perception of reality. We betray our species and our selves if we do not use this powerful tool of knowledge.

Capitalism is usually regarded as immoral because it is not altruistic. But Rand believes that its basis in self-interest makes it the only moral system in history. There is no need for force to make people conform to some altruistic ideal. Indeed, the one rule of capitalist morality is that nobody may initiate the use of force. Instead, rational self-interested individuals get along by freely trading with each other, without any need for compulsion – benefiting not just themselves, but their trading partners in the process. The basis of capitalism is not conflict, but collaboration, between self-interested people. That is precisely why reason and freedom from compulsion have been associated with happy and prosperous times; while attempts to create some altruistic paradise have instead produced misery and squalour.

Gosh, what a wonderful idea legislation about mandatory technology is

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Some may recall the fuss that surrounded the banning of incandescent light bulbs here in the European Union. Our view, driven by the detailed industry knowledge of one of us*, is that this was something that could be taken care of by the market unadorned. If these compact fluorescent bulbs were all they were cracked up to be then people would adopt them voluntarily. And if they weren't then why should they be forced to? That was not the general view and the ban came into effect variously between 2009 and 2012, dependent upon the power rating of the bulb. Sadly, it was not in fact possible to simply swap bulbs: in order to get reasonable lighting effects many had to upgrade or alter, at some capital cost, their lighting systems as a whole. But still, no matter eh, because in this dim and flickering future of the CFL we'd all be saving so much money on electricity that we'd be happy anyway.

It's even possible that that could have been true. Except the CFL is now a redundant technology and everyone who did adapt their systems is going to have to do so all over again:

By the end of the year, GE will cease production and sales of compact fluorescent lights (CFLs), the manufacturer announced this morning. Moving forward, the company's focus will fall entirely on halogen incandescents and on high-efficiency LEDs.

"CFL's kind of been the light bulb that everybody loves to hate," explained John Strainic, chief operating officer of GE Lighting, citing the history of complaints about CFL dimmer compatibility, brightness delay, and quality of light. Strainic says that the industry has come a long way, but admits that the perception of inferior performance lingers. "Ultimately, LED offers a better solution at a comparable price."

Amazing, eh? The technology becomes redundant a mere four years after we're all forced to use it. The current replacement one, LEDs, was simply not ready for prime time those short few years ago. So aren't we lucky that we all got to be forced into this technological dead end for those years. Just what would we do without those Wise Solons telling us all how to light our own homes?

Other than, you know, being richer, freer and able to make the useful and important technological leap from incandescent to LED without having to mess around with CFLs in the interim?

The lesson from this being that when politicians try to mandate the technology we must use they should be met with a volley of that Anglo Saxon invective which so enriches the English language. And we do, so much that it hurts, look forward to the studies on how much this lunacy has cost us all, that forced investment in a technology to be superseded in less than the claimed lifetime of one of those CFL bulbs.

*No, no direct impact here, the interest is in halogens, the fourth technology not affected by any of this.

Corporation tax vs. sales tax

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I was on the Today programme this morning, at the ungodly hour of 6.15am, making the case for scrapping corporation tax and replacing it with a sales tax. This has come onto the agenda because Lord Lawson, chancellor under Margaret Thatcher, and great shifter of tax from incomes to consumption, suggested the idea. I also made a similar argument in City A.M. last week. Why might we want to scrap corporation tax? Corporations are legal fictions; the burden of the taxes they pay must come out of the pockets of their stakeholders. In fact, it comes out of their employees' wages and their shareholders' returns. In itself this is not a huge problem, but we have a huge weight of economics research telling us that we must not tax capital.

Why might we want to switch to a sales tax instead? Well, unsurprisingly given where I work, I'd probably prefer no tax hikes at all. But, presuming we have to raise revenue somewhere, then the goal is to minimise the distortions in the system. Taxing corporate profits discourages profits—the most reliable guide a firm is doing its joband discourages corporatesthe backbone of modern capitalism.

Sales taxes shift the burden away from successful, desirable economic activity and towards less successful or unsuccessful firms. And note that if firms have a future, investors will plough more and more money into them despite making tiny profits or even losses. This does not change that.

They also go some way to resolving public discord over the corporate tax burden. Since it seems impossible to get over the point that it's pension funds and Google staff who lose out if Google is squeezed (Google might be a bad example because it seems that in this case it's paying the amount required by both the letter and the spirit of the law), maybe this more transparent levy would satisfy popular demands.

Certainly taxing firms on their profit but based on their sales in a territory (rather than where they create value, as in the current system) would create horrendous disincentives—driving many firm subsidiaries out of the UK.

The main objection is the same objection as people give to VAT: sometimes it's unclear whether a sale is made in the UK or not; smaller firms find it costly to keep up with. These are legitimate but dwarfed by the costs of distorting investment under the current system.

The real problem is if a 'sales tax' becomes a revenue tax, and falls on intermediate transactions as well as final sales—this would discourage any subcontracting and push firms to become giant vertically-integrated behemoths. But I am optimistic: with a bit of pushing, sometimes reforming civil servants and politicians will do the right thing.

Why taxes and snooker rules are not that different

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Pretty much anyone with even the sketchiest understanding of economics knows that a competitive market is the mother of all driving forces for efficiency. In fact, Kenneth Arrow and Gérard Debreu have a mathematical proof called the Arrow–Debreu model which shows that if the conditions are propitious in terms of a competitive free market there will be a general equilibrium between total supplies and total demands reflected in a set of prices. Obviously there are all sorts of reasons why the reality isn't the case, and that's largely due to all the ways in which politicians interfere with the natural mechanisms of prices (taxes and price controls are two prime examples). Like others at the ASI, I am not unfriendly to some form of government - but one of the primary rules of thumb is that in most cases an interference in the market that upsets the natural price mechanisms created by supply and demand is an inefficient interference.

For a more generalised indicator about when it is likely to be bad to interfere in the market in terms of negatively affecting people's behaviour, consider the game of snooker as an analogy. I used to play in two types of snooker league: the open league and the handicap league. In the open league both players would start the game on zero, and the best players had the best chance of winning. However, in the handicap league, based on a points system conditioned by past results, better players would give inferior players a head start in an attempt to narrow the gulf in ability and make the frames more evenly contested.

The handicap league works because even though the points are differentiated at the start of play, both players are still incentivised to try their hardest and play to the best of their ability. A handicap snooker league in which poorer players were given more of a chance by the better players being compelled to deliberately play below par would be no fun for either player.

The snooker handicap league can provide a pretty good illustration for when governmental interference in the market is good and when it is not. Policies that cause the participants in the market (snooker players) to waste opportunities (play below par) are likely to be bad policies, whereas any policies that cause as few wasted opportunities as possible (in a way that's similar to handicap scoring) are less likely to be bad policies (note: pretty much all taxes and price controls cause some loss of efficiency, so that's why I said 'cause as few wasted opportunities as possible' rather than 'cause no wasted opportunities').

To translate that in market terms, taxes or price controls that change behaviour in a way that diminish efficiency are undesirable. A price control on renting apartments is going to negatively affect property development and create a shortage (which ironically makes renting apartments more expensive). This is the snooker equivalent of making players play below their best ability. On the other hand, taxes like inheritance tax or savings tax or consumption taxes on goods to which consumers are relatively price insensitive, while not without some behaviour-changing costs, are more like the snooker equivalent of handicapping - they don't greatly diminishing anybody's drive to perform well. And let’s not forget, some taxes, such as taxes on negative externalities like pollution and congestion are taxes that can change our behaviour for the better.

The upshot is, whenever you consider a tax, a price control, a subsidy, or any other kind of government involvement in the market, it is good to consider whether it is a solution akin to adjusting the starting scores in a handicap snooker match, or whether it is akin to asking some snooker players to perform below the best of their ability. The closer that government involvement is to the latter, and the farther away it is to the former, the less good for society it probably is.