One of those plans that gang aft agley*

I think we'd all probably consider it desirable that children get to go to school and to go out and play rather than have to labour for their bread from an early age. However, quite how we achieve that wondrous state is something that is more contentious. For there's good evidence from India that simply making child labour illegal increases the amount of it that happens.

There are many policy options to readdress this. Bans and regulations against child labour are among the most popular worldwide. When perfectly enforced, bans force employers to forgo the use of child labour. However, it is not clear that such laws will always lead to reductions in child labour. In reality, governments in countries where child labour is prevalent, rarely have the capacity and resources to perfectly enforce regulations on child employment, as documented in a recent study by economists Eric Edmonds and Maheshwor Shresthra (2012). According to a simple model by Kaushik Basu (2005), when bans are imperfectly enforced, they raise the cost of hiring children, as employers anticipate facing stiff fines or other penalties when caught using child labour. Thus, when imperfectly enforced, bans may simply lower the wages that children are paid. If families send their children to work out of necessity, this can have perverse effects, as it lowers the income for families relying on child labour. Therefore, a drop in child wages may compel families to supply more child labour, rather than less.

If the entire brood is starving then you might send one or two out to work and try to educate the others. But if that ban on those first two leads to their wages dropping you might need to take all of them out of school. And it is very much this sort of effect that they've found.

We might say that this could be solved just by perfect implementation of the law: well, good luck with that among India's 1.2 billion people.

My own opinion on this is that many of the things that we consider desirable aspects of society, no child labour, the economic emancipation of women, education, shorter working hours and so on, they're the results of an increase in economic wealth, not a cause of it. Sure, there's something of a feedback going on but it's being rich enough to not need the child's paltry wages that leads to their being educated. That child mortality rates fall (an excellent example of people very definitely getting richer that doesn't necessarily show up in monetary of GDP figures) so that women can do something else with their lives rather than just pump them out. That there is that surplus available to invest in education, that again there is that surplus available to even have the concept of leisure, it is this that drives the improvements we wish to see. Not the passing of laws that insist we must have these things, or stop doing them, but that as wealth increases we can afford not to do the undesirable things and also afford to do the desirable.

It's growth first in other words.






*Whatever it is that this phrase actually means.

How do politicians manage to believe such things?

I'm slightly boggled by this statement:

Tim Farron, South Lakes MP and chair of the all-party parliamentary hill farming group, said: "We need to do all we can to support our farming industry, particularly in the uplands where life can be a real struggle. This support and funding could make a massive difference to upland farmers throughout Cumbria and help show the next generation that there is a real future in a career in farming."

It appears to me to be an example of cognitive dissonance. For we're also being told this about that same occupation:

An upland farmer earns, on average, only £6,000 a year, which has led to a number of people leaving the industry.

That you can only earn £6,000 a year as an upland farmer is proof perfect that there is not a real future in a career in this type of farming. It is true that not everyone is paid their marginal product but for self-employed people like these hill farmers it is indeed so. Their earnings are exactly the measure of the value that their labours are adding. And given that we're in a country where the GDP per capita is some £25,000  (recall, this includes all of those who do not contribute to the money economy at all) they are producing remarkably little value as compared to the rest of us.

This is telling us that hill farming is something we should stop doing therefore, not something we should be devising ways to prop up. We would all be richer if these farmers simply stopped and went off to do something else.

Introducing you to the word emporiophobia

Via Don Boudreaux we get this wonderful economics paper, Emporiophobia:

There is widespread emporiophobia (fear of markets) and this has important policy implications as it leads voters to demand anti-market policies. There are many reasons for this anti-market attitude. However, economists could reduce emporiophobia if we stressed cooperation rather than competition in our writings and policy discussions. In a sample of introductory textbooks, competition is mentioned on average 8 times as often as cooperation. The fundamental economic unit is the transaction and transactions are cooperative. The benefit of a market economy, increased consumer surplus, comes from cooperation through transactions, not from competition. Competition in a market economy is competition for the right to cooperate. Competition is important because it guarantees that the best cooperators will win and because it establishes the efficient terms for cooperation, but cooperation is fundamental. For most people, competition has negative connotations as it focuses on losers, while cooperation implies a win-win situation. As an example, if we say “Wal-Mart outcompeted its rivals” we think of losing firms being bankrupted. If we say “Wal-Mart did a better job of cooperating with its customers” we think of the benefits created by Wal-Mart. Economists in our policy and textbook writing should strive to use the second sort of locution, not the first. Other implications involve the morality of the market, “giving back,” and characteristics of market failures.

This is of course a political, propagandistic even, argument. But a correct and strong one for all that. Even more so over here in the UK of course. You see the misunderstanding slathered all over the arguments about markets in the NHS. Polly and all bewailing the way in which competition is going to reduce cooperation. And it doesn't matter how many times you tell them, they just cannot and do not get the point that a market transaction is a form of cooperation.

And a further little observation about the UK and this emporiophobia. I wouldn't want to have to prove this but I am still certain that I'm right. One of the reasons the country is not reliably more free market is exactly that the upper middle classes rather model their attitudes upon those of the aristocracy of old, rather than the more ruggedly bourgeois virtues of some other countries (the US comes to mind here). And of course those old aristocratic attitudes were that there was something extremely demeaning about mere trade. One did not do it, one did not associate with those who did and one most certainly did not admire it. But trade too is simply a transaction in which people are cooperating. But I do think that this is one of the reasons why markets are (by Polly and her ilk for example) still regarded as not quite a polite manner of solving a problem, even if efficient.

In what crazed universe are used cars more valuable than new?

No, I don't mean where is an 80 year old Jaguar worth more than a new Lada, rather, how badly do you have to have screwed up an economy so that the average, normal, used car is more valuable than one on the lot, never been used?

However much it is Venezuela has managed that rare achievement:

The premise may leave car enthusiasts in other parts of the world scratching their heads, but vehicles actually gain in value in Venezuela – as soon as they're driven off the new or used lot. Shortages and government-mandated currency controls have led to higher preowned car prices, as many consumers are desperate to find a vehicle.

I had thought that Chavismo was just the usual Latin American buffoonery of the Caudillo doing a bit of badly misunderstood socialism. But this sort of result makes me think that the place is far more badly run than that. So, my apologies for not paying enough attention I suppose. And this isn't something new either: I can see references to this going back to 2009 at least.

But in a move to protect consumers, Venezuela's National Assembly has sought to throw the brakes on soaring car costs. Last month, a bill was passed that, if signed into a law by President Nicolás Maduro, would attempt to regulate both new and used car prices, levying hefty fines and even jail time on venders who don't comply with government-approved prices.

That's really not going to help now, is it?

I am left just to boggle at the idea that cars rise in price as they drive off the dealer's lot. The only other time I've seen this was in the Soviet Union where you knew that if a car had been running for a couple of months then it was likely better built than the ones still on the lot.

Bastiat and green policy

Nineteenth century French economist Frederic Bastiat described the government as “that great fictitious entity by which everyone seeks to live at the expense of everyone else''. This quote may give some insight into the present state of the debate about energy policy in the UK.

The pollsters tell us that the public are in favour of green subsidies and green technology. Reducing our greenhouse gas emissions is seen to be important and worthwhile. But there still seems a large section of the population who think that somehow the big 6 energy companies could or would subsume any additional costs from green energy rather than passing them back to consumers, or that the government would make up the difference.

Evidence seems to suggest that the energy market is reasonably competitive, with margins no higher than other comparable industries, meaning the firms wouldn't absorb the cost—if they did, the public would suffer anyway through their pension funds. And the hope that government could make up the cost ignores the central truth that the government has no money of its own, not due to the economic crisis not but because the state can only ever spend and distribute our money. A case in point is the government recently "lowering" our bills by putting the costs of the social levies into general taxation and away from power. This may or may not be a fairer way of spreading the cost of a greener future, but it doesn't magically make the cost of greener energy any lower.

Bastiat has more to add to our appreciation of UK energy policy. He said that good economic decisions can be made only by taking into account the full picture, by examining the full costs and benefits of the short- and long-term consequences.

Employing increasing amounts of green energy has costs. The debate is complex. But in the absence of dramatically increasing our energy efficiency and therefore cutting our energy use together with a reduction in the cost of green power production, employing low carbon technology will lead to energy prices to continue to rise. This rise may eventually be less than using more fossil fuels in our energy mix, if the costs of fossil fuels increase as many including the Department of Energy and Climate Change maintain. Nevertheless, green energy is currently expensive. Defining the benefits of employing low carbon technologies is even harder to evaluate. The UK emits a small proportion of the world's total CO2 output, and emissions are growing in the developing world. The UK's contribution may be important, but alone it cannot make a huge difference.

Whether or not the cost of reducing CO2 is worth it, we must note that it does have a cost, and it must eventually come from the public, either through taxes, higher energy bills, or lower returns to firms also owned by UK citizens. People cannot all live at the expense of one another.

The minimum wage's ugly allies

Ron Unz, an American conservative, has launched a new campaign to raise the US federal minimum wage to $12/hour, up from $7.25/hour. Today he makes his case on the New York Times website:

A $12 minimum wage would increase the incomes of America’s lower-wage work force by a total of over $150 billion each year, shifting those huge sums from the pockets of the sort of people who don’t shop at Walmart to those who do. A minimum wage of $12 per hour would be very good for Walmart’s business.

Usually, advocates of minimum wage increases either deny that minimum wages cause unemployment, or say that the unemployment effect would be very minor.

Unz is different. A fierce opponent of Hispanic immigration, he realises that minimum wages cost unskilled workers their jobs and that (Hispanic) immigrants are mostly unskilled. As Bryan Caplan says, “For Unz, the disemployment effect of a high minimum wage is a feature, not a bug.”

This brought to mind Walter Williams’s work on the origins of South Africa’s minimum wage. White labour unions supported the minimum wage’s introduction for similar reasons to Unz: to exclude unskilled black workers from the workforce and stop them from undercutting white workers.

Williams quotes G. V. Doxey’s The Industrial Colour Bar in South Africa as saying that white unionists “argued that in absence of statutory minimum wages, employers found it profitable to supplant highly trained (and usually highly paid) Europeans by less efficient but cheaper non-whites”, and the South African Economic and Wage Commission of 1925:

While definite exclusion of the Natives from the more remunerative fields of employment by law has not been urged upon us, the same result would follow a certain use of the powers of the Wage Board under the Wage Act of 1925, or of other wage-fixing legislation. The method would be to fix a minimum rate for an occupation or craft so high that no Native would be likely to be employed.

Williams also quotes a South African government minister’s complaint in the 1930s that white workers were losing jobs to Indians due to “unfair competition”, and his recommendation that they be legally prevented from undercutting white workers.

The economics seems to support this view of minimum wages. Neumark and Wascher’s seminal 2006 review of economic studies of the impact of minimum wages found that “the studies that focus on the least-skilled groups provide relatively overwhelming evidence of stronger disemployment effects for these groups”.

Obviously, most supporters of the minimum wage do not share these intentions. But no matter how well-intentioned they are, quite a lot of economic evidence seems to suggest that Unz and the South Africans are correct: the minimum wage can hurt immigrants and other vulnerable groups enormously. People concerned with the living standards of the poor may find that direct income redistribution is a safer and more effective way to help than minimum wage laws.

Err, yes, that's why we use markets

Via Left Outside we get this from the Brad Delong:

7) There is a valid “great stagnation” worry, but it is overwhelmingly one of institution design rather than of innovation exhaustion.And here we reach what I regard as the big issue. In the future we are going to want to spend a greater share of our incomes and attention in areas where the market system works less well: information goods, public goods, increasing-returns goods, pensions, health care, education. The market works less well in these areas. But our alternative modes of collective organization, product take some bureaucracy, not exactly cover themselves with glory in these areas either. Thus I suspect that not innovation exhaustion but rather institution design will be our big problem in keeping the pace of true economic growth going into the long-run future.

Leave aside whether this is actually true or not, that markets work less well in these other areas. I tend to think that this is incorrect, what we actually have is some areas where we don't allow markets to work because certain prejudices lead to people thinking they won't work. But as I say, leave that aside and think about what we should be doing if the second part is true. That our real problem is going to be institution design. What do we do then?

We use markets of course.

For we don't know what will be the best institutional form to solve a particular one or a set of problems. Therefore we need to experiment with different designs. Which means that we want to set up thoise expoerimental designs, alloow them to compete with each other and then see which solves the problem better. That is, a market in institutional forms.

And this is of course what we have been doing for some centuries now. We seem to have found out that a capitalist heirarchy is the best (best we have at least) method of producing whippet flanges, a rather socialist form of partnership is the best method of coralling the lawyers who deal with the legal complexities of whippet flanges and so on. For one way of looking at a market is that it is a space for experimentation, along with a method of divining which is the most successful of those experiments. Thus, if we're not sure of the best way to do something we should want to use a market to aid us.

We who call ourselves free marketeers are really only arguing one thing on top of this. Yes, we know, no market is ever truly free and we'd be entirely happy to say that we don't want to explore all possible organisational methods again. I would certainly not want to see chattel slavery on our list of experimental forms and institutions again. What we do mean by free though is freer: we simply want the experimental space to be as large as possible so that as many as possible alternatives are tested.

Our reaction to the Autumn Statement

Here were my comments on what I thought were the key points of the Autumn Statement:

  1. Raising the pension age sooner than previously planned will be unpopular, but it is the right thing to do. With an ageing population we will experience a fiscal crisis unless we raise the pensions age and, ultimately, move to a system of private pensions savings accounts so the system is robust to any demographic shifts.
  2. Borrowing has been £111bn in 2013/14, which is equivalent to £304m/day or £12.6m/hour. It’s great that the deficit is falling faster than previously (though not originally) projected, but the numbers are still staggering.
  3. The economy is recovering, but compared to this point in previous recoveries, growth is still sluggish. The Bank of England’s mandate is muddled and should be replaced with a single target to stabilise aggregate demand and return nominal GDP to the level it was growing towards before the financial crisis. This would also offset the effects of government cuts, stopping the cuts from having any negative macroeconomic impact. (Ben Southwood, Head of Macro Policy, comments further below.)
  4. The cap on total welfare spending seems like a PR stunt. It will be modified every year and doesn’t make much sense in any case: what happens if/when negative economic shocks create lots of unexpected unemployment?
  5. The development budget was heralded, but the best tool for development is letting in more immigrants from poor countries, because immigrants send money home – indeed, they sent 3 times as much money to poor countries as was sent in total official aid last year. And this is good for our economy too.
  6. It’s bizarre to give LIBOR fines to charities. It simply makes no sense. What's the connection between LIBOR and military charities?
  7. The pensions triple lock is about buying votes. Many pensioners don’t need more money and there is no real reason to redistribute wealth to them over other groups in society.
  8. Help to Buy and other expanded mortgage subsidies completely miss the cause of expensive housing. If more houses are built (increasing supply) then prices will fall. This will happen if we liberalise the planning system. Throwing money at the housing market will drive prices up and do little to increase supply. Rolling the Green Belt back by one mile would free up enough land to build one million new homes.
  9. Corporation tax is a terrible tax and, though the government’s cuts are welcome, it should be abolished altogether. Corporation tax largely falls on workers’ wages and as such it is an invisible and regressive tax on earnings.
  10. The Chancellor’s confirmation that the personal allowance will rise to £10,000 is good news, but the government should go further and peg it to the minimum wage rate to reduce the tax burden on the working poor and help to make work pay.
  11. Cutting employers’ National Insurance contributions for workers under 21 is a good move and highlights the cost of employer NICs to jobs. Employer NICs are a jobs tax and the government should be aiming to abolish them altogether.
  12. Ultimately, there was no mention of reform to planning, immigration or monetary policy – the three things most important to Britain’s economic prospects. The Chancellor has done a good job at balancing the books but he should look to making significant structural reforms that would really get the country booming: liberalising planning to allow hundreds of thousands of extra homes to be built; scrapping the net migration cap to allow talented immigrants to work here and fee-paying foreign students to study here; and giving the Bank of England a new mandate to target Nominal GDP to ensure a stable macroeconomic environment.

Ben Southwood, Head of Macro Policy at the Institute, also commented:

"It's understandable, now that the economy looks finally to be recovering, that the chancellor has moved his focus away from monetary policy, but it's also worrying.

"Economies can absorb financial crises but they cannot absorb inconsistent monetary policy and massive drops in demand. We need George Osborne to change the Bank of England's remit, requiring it to stabilise demand according to strict rules.

"A rule-based monetary policy will stop the economy from overheating into unsustainable booms, and dive-bombing into harsh recessions."

Introduce school vouchers and liberalise free school creation to improve UK education

As Britain faces dire PISA education rankings, the government should liberalise the free schools application process and give parents a voucher for a place in any approved school, state or private, says a new research report from the Adam Smith Institute and the Centre for Market Reform of Education. (School Vouchers for England: Harnessing choice and competition for greater quality and equality in education. Executive summary here.)

The move would abolish the restrictions that prevent poorer parents from accessing England’s best schools. Proximity-based admissions should be scrapped, being replaced by lotteries and subsidised transport in cases of oversubscribed schools.

At a time when many areas will face a 20% shortfall in places by 2015, urgent and cost-efficient action is required, the report says. Parents may be left without schools to choose from unless the government accelerates the development of new free schools.

The government therefore must simplify the school creation process, says the report, cutting through red tape and introducing a voucher system so that parents can signify where and how they require schools to be built.

Gabriel Heller Sahlgren, co-author of the report and Director of Research for the Centre for Market Reform of Education, said:

“Parents are currently restricted to choosing schools they can afford or the schools they can afford to buy a house near. Giving parents a voucher, redeemable to all state schools and participating private schools, would usher in a new era of social mobility and reverse the decline in the quality of English education.

“A voucher programme would expand the number of schools that parents could choose. Parents could choose participating private schools, which would be incentivised by the prospect of a more steady income. The resulting increased competition between schools to attract pupils would cause significant improvement in education.

“Good schools in sparsely populated areas would be incentivised to expand by receiving more pupils and money. Similarly, bad schools would be incentivised to improve by the threat of losing pupils, and therefore funding. A voucher programme would avoid the need to build more costly free schools, as well as the huge costs and regulations surrounding which have hampered the government’s education reforms."


A copy of the paper is downloadable here: An executive summary of the paper is downloadable here:

Please contact Alexander Blackburn to arrange an interview with the paper’s authors by calling 020 7799 8903 or 07400 902 290, or emailing

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There really is a Laffer Curve you know

That there really is a Laffer Curve is obvious: tax rates of 0 and 100% raise no revenue, revenue is raised at points in between. The precise shape of the curve is of course a matter for more debate. But as the Spectator has just pointed out, and as should be general knowledge but sadly isn't, the people who face the highest tax rates in this country are the working poor. Which is, of course, entirely ludicrous.

So the same low-paid job will be worth far, far more to a Romanian than a Brit on benefits. That explains why so many foreign workers are happier, keener, more likely to apply – they actually get to keep all of the extra money they earn, while Brits have to sacrifice up to 84 per cent of it. Again, who’d be all zip-a-dee-doo-dah turning up at work when you keep just 16p in every pound you earn? Certainly not me. So there is nothing lazy about Brits. The problem lies not with our people, but an still-unreformed welfare system. Iain Duncan Smith’s revolutionary Universal Credit would lower the top rate of effective tax to 65 per cent – still too high, but a vast improvement. When it’s up an running, the Chancellor should say in every budget what this top rate would be, and aim to lower it to 40 per cent. The top rates of tax in this country are not paid by millionaires. They’re paid by the millions who are caught in a welfare trap. That’s why the Romanians spot such an opportunity here. And that’s why IDS’s Universal Credit cannot come fast enough.

Universal benefit will be better, yes, but not sufficient to take us down to more sensible levels of the discouragement of work.

The first part is that we've got to, as we here at the ASI have been saying for years now, take those working poor entirely out of the income and NI tax systems. I prefer a tax allowance (which would include both types of NI) pegged to the minimum wage. Madsen has proposed a higher, £15,000 a year allowance. My proposal is based on the political resonance of tying those two numbers together of course, not on the economics.

That is, as far as I can see, the only thing that will get that combined tax and benefit rate down to something more reasonable, like that 40%. And if we want to drive it down again we'd have to become very radical indeed, move to a citizens' basic income. Here's £7,000 a year or so for each and every adult, untaxed, and that's it. That's the welfare state in its entirety. That would drive that tax and benefit rate down to zero and I think people would be very surprised indeed at the sort of change in behaviour that sort of supply side change would create. Rather than an increase in leisure I would expect a huge increase in hours worked actually.

But the real point is that if we do want to free the working poor from tax rates that we consider entirely unacceptable for the richer among us then those are the sorts of changes we're going to have to start making.