ASI on shortlist for €100,000 "Brexit" plan

A team representing the ASI has been shortlisted for the €100,000 “Brexit” prize for blueprints on what steps the UK must take to secure its economic future if the electorate vote to leave the EU in the coming referendum. The prize has been put up by the Institute of Economic Affairs and attracted over a hundred submissions.

The Adam Smith Institute plan, drawn up by award-winning City analyst Miles Saltiel and senior lawyer Charles Proctor, covers how Britain should handle the negotiations and set out the future of regulation, trade, and relations with Europe.

They outline the difficult political, economic and trade environment situation in which the new EU-UK relationship will be negotiated, and how these affect each side. It sets out the areas where agreement is possible and proposes a framework for agreement that makes sense for the EU as well as our other trading partners, and cultivates the UK's standing in the international economic community. As well as economic stability and access to markets, the deal would have to cover issues such as residency, immigration and  asylum.

“We believe our entry is well-placed to win,” said Miles Saltiel, “because it embraces the timeless principles of Adam Smith, the father of modern free trade policies. And it is free trade that people in Britain most want out of their relationship with the EU.”

The organisers of the Brexit Prize have told finalists that they lay weight upon “costed and quantitative estimates and arguments”. If this is up your street, you are a third-year undergraduate or post-graduate economics student with an interest in trade ecomomics, and you would like a share of the prize and the glory of contributing to the winning entry, we invite you to send in your CV, to arrive no later than 15 November 2013, to Miles Saltiel, 23 Great Smith Street, London SW1P 3DJ.

Maybe Marx was right, just a little bit

One of the (many) things that Marx was insistent about was that the technology in use by a society determines the social relations in it. Of course, what he meant here was that in a capitalist system the capitalists would screw everyone else while in a system where the workers controlled everything all would be sweetness and light. But there's an interesting paper discussed by Alex Tabarrok here which seems to be saying that there might be at least a smidgeon of a point to what Marx was saying:

The paper appears on the surface to be affirming the importance of cultural differences and to be agreeing with the kind of literature that stresses the idea of self-interest and individualism as western and contingent. Yet, in fact, the paper is suggesting that at a deeper level so-called cultural differences may not be transmitted down through the generations but instead are learned responses to very particular production techniques. Note that such learned responses may change rapidly as production techniques change and that the sea and lake villages are both unusual in the modern world in relying on just one dominant production technique with few other options for learning.

The basic point being highlighted is that lake fishing is more individualistic than sea fishing and lake fishermen are more willing to compete rather than cooperate than sea fishermen. And as Tabarrok points out that seems to be learnt behaviour. But that does mean that, to some extent at least, that Marx was right in that the technology in use does, at least to some extent, determine the social relations, the degree of competition or cooperation, in a society.

So, if the old philandering sponger off Engels was correct on this then should we listen to the modern leftists who insist that we should all be doing much more cooperating socially and a lot less competing in markets (and we'll leave aside my continual contention that markets are how people cooperate)? No, absolutely not: for what is being stated is that that level of cooperation or competition is emergent from the technologies in use.

That is, we can't directly effect the competition/cooperation model, we can only watch it be influenced by the level of technology that we have available. And if anyone wants to start thinking that we can control the technology there are several million inventors with bright ideas that the patent office would like to introduce you to. So what we end up with is that even if the old boy was correct on this point the wailings of his successors are still wrong. That technology determines the social structure does not mean at all that we can impose a social structure and thus create a technology to support it. Rather, it just means that we're stuck with the social structure enabled by our technology.

Err, yes, this is how capitalism works

I find myself distinctly confused to read this in the newspaper:

He claimed the Big Six only offered competitive prices to customers once they called to say they were switching to another supplier. He warned that the companies responsible go “unchallenged” by Ofgem, the energy regulator. “A significant number of the Big Six are charging the maximum price they feel they can get away with to the customers that they feel will not switch under any circumstances and then maintaining the illusion of competitive pricing with tariffs targeted towards a very small number of relatively well-engaged customers,” Mr Fitzpatrick told MPs.

I'm not confused by what is being said, of course not. I'm just wondering why anyone thought it worthwhile to put into a newspaper. Seems to fail the dog bites man test to me.

For yes, of course, any and every suppiler will charge their customers the maximum they think they can get away with. It's rather the lifeblood of this production thing, trying to gain as much as possible for one's production.

It's also true that the ability of any one supplier to gouge their customers in this manner is limited by the fact that the gougee has an option to switch to another supplier of whatever it is. This is the competition part brought in by having a market structure.

Which leads us to the point that surely everyone has got by now. That it is the freedom of markets that limits and curbs the ability of the capitalist to rook the consumer. Which also leads us to our corollary that markets are a much more important point than is the capitalism or capitalist thing. Imagine that we had a socialist economy, producers were owned by cooperatives or the State. We'd still want, indeed need, those markets to curb the power of the producer to rook the consumer.

As, actually, we found out when the State did own the electricity and water companies and did have us all over a barrel on pricing and we had no market competition to moderate their demands upon us.

If you start from the wrong place then you're never going to get to your desired destination

I do tend to like making fun of the economics leader writer of The Guardian, the history graduate Aditya Chakrabortty. For his knowledge of the subject he covers is, how to put this, less than complete. For example, here he is on finance:

In one of the world's elite institutions, the elites were taking a pasting – from accountants, entrepreneurs and academics. They knew what they were on about, too. Given his turn on the mic, one biologist said: "I'll believe economists have reformed when the men behind Black and Scholes [the theory that helps traders value financial derivatives] have been stripped of their Nobel prizes."

No, that's not Chakrabortty speaking there but the second sentence does show that he thinks that biologist had got it right. Which, sadly, he hadn't, as I've explained elsewhere before:

Now if the crash had been caused by options, derivatives, high frequency trading (HFT), foreign exchange and so on then I’d be one of the first musing on something like the financial transactions tax as a way to curb these markets and thus make another crash less likely. But the thing is that the crash wasn’t caused by any of these things. It was a straight old housing bubble helped along by an expansion of securitisation. And as we all know, if you misidentify the problem then you’re most unlikely to be able to fix it. Which is why this is important.

Our professor has gone off on the popular narrative: all those people trading too much and too quickly were the underlying problem. But mortgages, the bonds made up of securitised mortgages (those CDOs), were very rarely traded. They were more normally created, sold once and then stuck in the basement vaults of those who bought them. This wasn’t a highly traded market. Further, there was a mathematical error in this market but it wasn’t Black-Scholes. It was that “Gaussian cupola”: the measurement of how prices were or were not correlated. Turns out they were a lot more correlated than anyone thought but that’s a result of a mistake in a different equation.

And even where there was something akin to a derivative, in the CDS market, it wasn’t that people were using Black-Scholes, or even using it wrongly, that caused the problems. For the people who got into trouble were AIG Financial Products and the problem at AIGFP is that they were not treating their CDS contracts as derivatives whose value changed with underlying prices. Instead, they were treating them as insurance contracts they’d never have to pay out on. They were not marking to market, were not evaluating potential losses on a rolling basis and therefore were not using Black-Scholes. If they had been they’d have realised their error rather earlier and quite possibly would not have had to run to the Feds for help.

Black Scholes is a method of valuing derivatives and the derivatives markets where they were using Black Scholes didn't cause the crisis. The one derivatives market where they were not using Black Scholes is one that did contribute to the crash. It seems most unkind to threaten to strip two Laureates of their Nobel for something that when people do use it doesn't cause crashes and when they don't can contribute to them.

There's a Richard Feynman line which seems appropriate here:

I believe that a scientist looking at nonscientific problems is just as dumb as the next guy

I have to admit that I tend to translate that slightly. An expert looking at issues outside his area of expertise is just as dumb as the next guy.

Whether they be historians or biologists.

Meanwhile, over here in reality Sweden shows how laissez faire capitalism makes people rich

As we all know Sweden is burdened with an extraordinary tax burden, one so heavy as to crush all things of beauty within that country. But that's the price that has to be paid for the glories of an icy social democracy of course.

As many fewer know Sweden (along with Denmark) is, underneath that tax burden, actually a rather more economically liberal place than either the UK or the US. That's how they can manage to cope with that staggering tax burden and still have economic growth. But there are still those who think that Sweden gained its current wealth as a result of that tax burden that finances that social democracy. And Johan Norberg has an excellent essay out showing that this last part of the story simply isn't true. Sweden grew to wealth under something very much like laissez-faire. It's only once wealth was achieved that the tax burden rose:

Sweden had the fastest economic and social development that its people had ever experienced, and one of the fastest the world had ever seen. Between 1850 and 1950 the average Swedish income multiplied eightfold, while population doubled. Infant mortality fell from 15 to 2 per cent, and average life expectancy rose an incredible 28 years. A poor peasant nation had become one of the world’s richest countries. Many people abroad think that this was the triumph of the Swedish Social Democratic Party, which somehow found the perfect middle way, managing to tax, spend, and regulate Sweden into a more equitable distribution of wealth—without hurting its productive capacity. And so Sweden—a small country of nine million inhabitants in the north of Europe—became a source of inspiration for people around the world who believe in government-led development and distribution.

But there is something wrong with this interpretation. In 1950, when Sweden was known worldwide as the great success story, taxes in Sweden were lower and the public sector smaller than in the rest of Europe and the United States. It was not until then that Swedish politicians started levying taxes and disbursing handouts on a large scale, that is, redistributing the wealth that businesses and workers had already created. Sweden’s biggest social and economic successes took place when Sweden had a laissez-faire economy, and widely distributed wealth preceded the welfare state.

This is the story about how that happened. It is a story that must be learned by countries that want to be where Sweden is today, because if they are to accomplish that feat, they must do what Sweden did back then, not what an already-rich Sweden does now.

I thoroughly recommend the entire piece. And do note the most important point: wealth first, then worry (if you so wish) about the equity and the fairness. Get this the wrong way around and you'll never have the wealth to worry about the distribution of.

Why Britain should embrace entrepreneurship

Guy Myles, managing director at Octopus Investments, welcomes The Entrepreneurs Network, a new think tank set up by the Adam Smith Institute.

It’s hard being an entrepreneur. You work every hour God sends. You have people depending on you for their livelihoods. And you’re taking levels of risk most people couldn’t even contemplate.

On top of all that, you probably feel you’re on your own. Within your company, it may be you’re the only one shouldering real responsibility, while the wider world can feel like hostile territory, where you go into battle all by yourself – fighting for finance, for customers, for less red tape, and most of all for recognition.

It’s crazy that we as a country should let entrepreneurs feel unloved or isolated in this way. After all, we’re relying on them to create the jobs and sales that are helping to get the UK economy back on its feet. And they deserve to have their voice heard.

Making a difference in communities

Part of the problem is that smaller businesses don’t attract the attention that commercial giants get, even though their contribution to the economy may be just as important. If one of the big supermarkets unveils plans for a new distribution centre, or a car manufacturer decides to build its latest model in the UK, you’re bound to see it in the news. But if a local furniture factory gradually doubles its staff from, say, 20 to 40, few people will find out. Yet the impact of those extra jobs on shops, tradesmen and support services in the area could be enormous.

That’s why Octopus Investments is so pleased to be sponsoring The Entrepreneurs Network (TEN).  We work with entrepreneurs all the time. They’re great fun, but we see at first hand exactly how much support they need. The ones we back tend to have businesses that are already established. They’re looking to take things up to the next level, and they’re invariably hungry, not just for money, but for ideas, contacts and encouragement.

Why continued support is so vital

We make a point of helping out in any we can. Completing an investment is just the start of the story. Whenever we invest in an unquoted company, someone from Octopus will sit on the board. One CEO has told us this helped him keep his eye on the big picture, without micro-managing. Another said the Octopus director offered a strategy for breaking into the US market.

We came up with the idea of hosting regular forums, such as breakfast seminars, for CEOs from our portfolio companies. These events give them a chance to swap stories and hear how other businesses are coping with challenges and capitalising on opportunities. We may focus a session on a specific sector – such as media, technology or telecoms – but it’s great if we can also create cross-fertilisation of ideas between businesses in completely different fields.

Keeping up the pressure for change

So, we’re hoping The Entrepreneurs Network will provide a bigger arena where entrepreneurs can support each other. But it’s in the area of public policy that I hope TEN can make a real difference. We desperately need a body that can lobby government and policy-makers on the many issues that affect smaller businesses. To take just one example, a major area of complaint in recent years has been the length of time it can take to get work visas for staff coming in from abroad. This is the sort of problem where we need to keep pressuring the government to take action.

As it happens, the UK isn’t such a bad place to set up a business. A report from the World Bank’s Doing Business project put us seventh out of 185 countries on the ‘ease of doing business index’ for 2013. The survey looks at everything from getting building permits and electricity connections to enforcing contracts and trading across borders.

The worrying point is that the UK has slipped a couple of places down the rankings in the past few years. And there are countries like South Korea, Georgia and Malaysia coming up fast behind us. We have to keep working to make the regulatory environment as supportive as possible for small businesses, and that’s the challenge we’re all hoping TEN can rise to.

Guy is co-founder and Managing Director at Octopus Investments.

Bank bail-ins: needed, or misguided?

Like other businesses, banks get money from shareholders. When a business fails, the shareholders are first to take the hit. And banks also raise money from bondholders – investors who give them cash in return for an IOU.  But in the recent financial crash, innocent taxpayers bailed out the banks – the bondholders were largely unscathed. So now there are moves towards a ‘bail-in’ system – where bondholders forfeit before taxpayers do.

It’s good politics, but is it good finance? I’m really not sure. If bondholders face higher risk, they will demand higher interest. Banks will have to pay more to raise money, and will pass on the higher interest charges to customers. Right now, that could tip a number of businesses and families over the edge.

There are established legal rules about who loses what when a firm gets into trouble; but the ‘bail-in’ proposals would see regulators deciding who pays what. That’s a recipe for injustice: one can easily envisage regulators discriminating in favour of domestic bondholders, for example, and against foreign ones – after all, the foreigners have no votes. And among domestic investors too, those with political clout are likely to be favoured over others.

When things are booming, of course, bail-in bonds will look safe as houses, and their value will rise. But the slightest doubts about the security of a bank will see them plummet. Like the Basel II capital rules, people will find themselves selling off other assets to raise cash – depressing the price of what they are trying to sell and forcing them to sell even more in a market spiralling downwards. Bail-in bonds might well worsen the panic and losses that go with financial crises.

When banks run out of credit and investors run out of cash, the only agency left standing is the central bank. And traditionally, central banks have been the lender of last resort to a struggling banking system. Which means taxpayers’ cash is called on. Some people argue that this is in fact far less messy than forcing bondholders and others to try to raise cash fast on a falling market – which inevitably brings real losses.

Equally, I do not see why taxpayers should be called on to save any business that has got itself into a mess. Is banking any different? Perhaps it is. But only because of the fractional reserve system, the government guarantee of depositors’ funds, and the fact that the huge burden of bank regulation stifles competition in the sector. A better solution is, like Switzerland, to have much higher capital requirements on larger banks – so encouraging the banks to split themselves up, and encouraging new banks to start up. Competition is the best regulator.

The chocolate covered pickle version of why politicians get it so wrong

Don Boudreaux is of course correct here. Well, of course he is, he's Don Boudreaux:

Asymmetric information of the sort that many professional economists get worked up over might in principle be discovered and spread more widely by government regulators. But information about people’s subjective preferences can never, not even in principle, be known by government regulators. And yet much government regulation is proudly justified by politicians, regulators, and intellectuals on the grounds that people allegedly will value X by amount $Y once they actually encounter X. In private markets such guesses are harmless.

A private, unsubsidized firm that guesses that enough consumers will value, say, its new-fangled jar of chocolate-covered pickles by at least $4.00 per jar will actually find out if its guess is accurate or not because each individual has the choice of actually forking over $4.00 per jar (and getting a jar) or not forking over that sum (and not getting a jar). When government acts, in contrast, no such discovery procedure is available to test politicians’ guesses about people’s subjective preferences. People must pay for what government foists on them. And no process of knowledge discovery or information revelation is available to cure politicians’ and regulators’ inevitable ignorance of the subjective preferences of the very people that they pretend they are seeking to help.

I not only agree in theory I can tell you, as someone who has actually had a chocolate covered pickle (Don means here a gerkhin, of the type served with a hamburger) that that combination of vinegar, salt and chocolate is indeed, to a certain palate, delicious.

But, as ever, I would take this point much further. I have, in my working life, had some interaction with politicians. And bureaucrats as well. I have even sat across the table from a trio of North Korean generals trying to explain why, well, no, we didn't trust the North Korean state and yes, we really would like a letter of credit from them (one which their bank then refused to issue on the grounds that they didn't have any money).

That further point I would take it to being that the asymmetry of information is not in favour of those Godlike beings who pretend to rule us. It is in fact in favour of us, the people who know what we're doing, not in their favour. Just as with journalism (everyone who ever reads a newspaper piece on their speciality finds things wrong with it) so with politicians and bureaucrats. In my particular world of real expertise I've seen the US Congress stampeded into action by the insistience that China has 30% of the world's reserves of rare earths.

Indeed, it does, but all then thought that that meant that China had 30% of the world's potential supplies of these vital metals: not so. It means only that China has 30% of what anyone has bothered to map out, drill, test, check and prove that it could be mined at current prices and with current technology. Everyone in the world of rare earths ended up sniggering at the politicians. Couldn't they understand this very basic point about what the phrase "mineral reserves" means? Well, no, they couldn't: and so it is with anyone else with real world expertise who examines what our leaders seem to believe about things.

I accept entirely The Boudreaux's point about no one except the consumer understanding the consumer's desire or utility. But as I say, I take it further and insist that politicians and bureaucrats do not understand reality, the nuance and specialist knowledge of anything at all.

Sadly, we do need to have them as there really are things that need to be done that can only be done with the coercive force that government can bring to bear. But it is precisely that asymmetric information, that ignorance of our rulers, that means that we should and must limit their influence to only those things that both must be done and can only be done by government. For the rest of it we know more than they do so we should be left to get on with it.

Fortunately there's really not that much slavery in the UK

Having even one person in slavery here in the UK would be one person too many of course. Having anyone anywhere in slavery would be entirely terrible but we are rich enough and liberal enough that we should have none at all. Fortunately, there's a new report out that shows us that while the problem is real it's small.

United Kingdom Estimated number enslaved 4,200 – 4,600

That puts us as rank 160: no, the higher the number the better the rank and we scrape into the top 10 of the nations they've studied here.

But this of course creates a problem. For who can forget Dennis MacShane telling the House of Commons that there are 25,000 slaves just in the sex industry? Or Harperson alleging much the same thing? Julie Bindel and her friends at the Poppy Project insisting that there are vast tribes of women held as sex slaves, there only to be repeatedly raped for the benefit of others?

Well, the solution to this problem is that this report is actually defining slavery properly:

1 Recruitment, transportation, transfer, harboring or receipt of persons. 2 By means of threat or use of force or other forms of coercion, of abduction, of fraud, of deception, of the abuse of power or of a position of vulnerability or of the giving or receiving of payments or benefits to achieve the consent of a person having control over another person (these means are not required in the case of children). 3 With the intent of exploiting that person through: Prostitution of others; Sexual exploitation; Forced labour; Slavery (or similar practices); Servitude; and Removal of organs. (UN Trafficking Protocol, 2000).

Note that trafficking requires all three. For example, transportation, with their consent, of people into the sex industry does not count as trafficking nor as slavery. And odd as it may sound there are indeed people entirely willing to offer up a short term rental of their bodies for the sexual gratification of others. And, unsurprisingly, they'd rather like to do this in a high wage country like the UK than in the perhaps low wage countries of their origin. Thus they migrate for the work.

There is indeed a small problem with slavery in the modern UK. One that we should indeed be doing out best to combat. But the larger numbers bandied about are the result of either hysteria or political manipulation. As Operation Pentameter showed us there's no perceivable instances of sex slavery going on: why on earth would there be given the willingness of some to do the work anyway?


The ideological drift of Nobel laureates in economics

The new issue of Econ Journal Watch is online. It is a bit different from most issues, being devoted to a survey of the ideological stances of 71 Nobel economists – with profile of all of them.The aim is to assess how their opinion changes, and whether Nobel economists tend to become more or less classical liberal throughout their lives.

George Mason economist Daniel Klein led the project, a very substantial piece of work. Twelve of the laureates replied to a questionnaire seeking to identify their ideological outlooks at different times in their lives. Klein discusses the results in an audio podcast. The bottom line? Most of the Nobel economists (51 of them) did not noticeably change their views. Of those that did, a larger number grew more classical liberal over their lives than grew less classical liberal.