Yes, let's abolish the census

Danny Dorling is bemoaning the decision to abandon the census:

It is only because the census is our most accurate count of the population that we can tell, using it, whether mortality rates, university admission rates, employment rates or almost any other rates are rising or falling for particular groups in particular parts of the country over time. In calculating rates the numerators tend to be more reliably measured: deaths registered, students enrolled, or paying jobs in these three cases. Errors tend to be greater in the denominators, the population estimates. The census counts, corrected for estimates of under-enumeration, are the best denominators we have. An ID card system that relied on people being compelled to register their place of residence would be more accurate, but also far more intrusive. The most important task of the decennial census is in updating annual population estimates for small areas to remove systematic bias so that a huge number of studies and also funding calculations can be enacted.

We would expect Dorling to bemoan this for of course he's a social geographer. This is the very meat and drink of life to him.

However, Dorling is also something of a lefty (no, really, no kidding, he is) and like most of the English such he cannot abide knowing that something is going on somewhere without there being some government plan to make everyone do that thing in the approved manner. Which is why he insists that we should continue to do the census so that he and his mates can have the detail they desire to run our lives for us.

At which point we should remember the wisdom of Sir John Cowperthwaite out in Hong Kong. He refused to allow the compilation of GDP statistics on the grounds that some damn fool would only try to do something with them.

We also know that, as Hayek pointed out, the centre can never have sufficient information to be able to plan our lives for us. That census does give them the illusion that they do though. So, a very good reason for abandoning the census is so that no one does have, or even thinks they have, sufficient information to plan both the national and personal lives of us all. Another way to put this is that if they can't see any problems then they won't have any damn fool problems to try and solve them.

The life and legacy of Ronald Coase

The great economist Ronald Coase has died at the age of 103. Vuk Vukovic explains what made Coase such an influential and profound thinker.

Yesterday, at the age of 103, one of the greatest minds of our time, Nobel prize winner and emeritus professor at University of Chicago Law School Ronald Coase passed away.

His contributions to and influence on economic science are of monumental importance. His groundbreaking research has set the stage for a joint field of law and economics, and has also influenced the new institutional revolution in addition to a number of other fields and areas of research in economic theory.

It would be unfair to say he only made two major contributions since both of these (written 23 years apart from one another) not only won him the Nobel prize, but have continued to influence the economic science ever since. The first was his 1937 paper The Nature of the Firm where he introduced the concept of transaction costs in microeconomic analysis. He believed that firms exist because they economize on transaction costs - costs like market entry, acquiring information, managing a company, bargaining, etc. If these individual transactions can be reduced into fewer transactions by organizing a hierarchical body, then entrepreneurs will form firms. With microeconomic theory at the time focusing only on production and transportation costs, Coase's inclusion of transaction costs was a breath of fresh air into economics. However, in 2009 Coase said he was surprised how much The Nature of the Firm was being cited since it was "little more than an undergraduate essay".

The second was his 1960 paper The Problem of Social Cost, widely considered to be the seminal contribution to the joint field of law and economics. It is from this paper that the Coase theorem was later developed (it was Stigler who actually coined the phrase "Coase theorem"). In The Problem of Social Cost, Coase examines how a cost imposed on society by an individual firm (an externality such as pollution) can be solved by mutual negotiation and consent if transaction costs are zero and if property rights are well-defined. This idea was subject to vast misinterpretation, which Coase tried to clear up in his subsequent interviews and texts. Regarding the theorem, he later stated: “All it says is that the people will use resources in the way that produces the most value, that’s all ... I still think it’s an obvious point. You wouldn't think there was a need for a Coase Theorem, really.”

The path to greatness

Born in a London suburb, he received his BA from the London School of Economics in 1932 and was a member of staff at LSE from 1935 until 1951 (the same time Hayek was there). During his student times he spent a year in the US as a travelling scholar, where he studied the American automobile industry. It was from this experience that he formed ideas for The Nature of the Firm. For Coase, becoming an economist was pure luck, as he himself admitted, since he wasn't interested in economics until he met Sir Arnold Plant on his final year who introduced him to Adam Smith's invisible hand and explained the coordination mechanism of the price system to him.

It is also interesting that, at the time, Coase was more of a socialist, wondering why people thought Lenin was wrong to posit that a government can be centrally run in the same manner a big firms like Ford or General Motors (Lenin used the Deutsche Post to make his point). In answering this question, he developed a crucial insight about why firms are formed. Even though firms are like centrally planned economies, they are dissimilar to governments in that they are formed by people's voluntary choices, and are governed by the price mechanism. The cost of using the market induces people to make the choice of forming a firm to lower this cost, which leads to the most efficient production processes taking place within a firm: not a government.

During WWII, he worked for the Central Statistical Office of the War Cabinet in London, an experience he cherished as he saw how large organizations tend to operate. He left LSE in 1951 first to join the University of Buffalo, and then the University of Virginia in 1958 (James Buchanan and Gordon Tullock were there at the time). While working in Virginia, he studied the Federal Communication Commission's allocation of radio frequencies.

In his 1959 article, he suggested that the Commission should sell the frequencies to the highest bidders in order to solve the externality problem. It is here where he first suggested that with well-defined property rights, radio frequencies could be allocated in the market just like any other good. It wasn't until 1994 that his suggestions were actually implemented. What is interesting about this article is that he presented it to a group of economists from the University of Chicago (including Nobel prize winners George Stigler and Milton Friedman) trying to persuade them that if property rights were properly defined market actors would yield an efficient solution. George Stigler recollects on that night:

“We strongly objected to this heresy. Milton Friedman did most of the talking, as usual. He also did much of the thinking, as usual. In the course of two hours of argument, the vote went from 21 against and one for Coase to 21 for Coase. What an exhilarating event! I lamented afterward that we had not had the clairvoyance to tape it.”

It was from this anecdote that The Problem of Social Cost was written. Coase was hired by the University of Chicago in 1964. In 1965 he became the editor of the Journal of Law and Economics, a position he occupied until 1982. It is believed that his leadership was partly responsible for the journal achieving its influential status. Coase himself said that he used the journal to create a new subject, which he was successful at: not to mention that in this process he influenced the creation of many others.

Oliver Williamson and Douglas North (both Nobel prize winners) on several occasions single out Coase as their major influence behind the new institutional revolution. In 1991, Coase received a Nobel prize in economics "for his discovery and clarification of the significance of transaction costs and property rights for the institutional structure and functioning of the economy."

As with many great economists, Coase was active and fully engaged in his work until the very last day. (Elinor Ostrom graded PhD papers on her deathbed, and Paul Samuelson wrote op-eds just a few weeks before he passed away.) In his last years, he shifted his attention to China, which culminated in a co-authored book in 2011 (at the age of 101) entitled How China Became Capitalist (with Nina Wang). In the book, the authors claim that the Chinese transition wasn't because of deliberate actions of the communist party, but small, marginal changes in society. They dubbed China the product of human action, but not human design, as "China became capitalist while it was trying to modernize socialism". Not since Milton Friedman was there a more respected Western economist in China.

Perhaps the best description of Coase as a person, as well as of the essence of his work, was summarized by Gary Becker: "Coase didn't say a lot, but I began to realize that every time he did say something, it was really profound."

Misinterpreting the Coase theorem

The simplest interpretation of the Coase theorem is that individuals can resolve their disputes in their best interests without the need for government intervention, assuming no transaction or bargaining costs are involved. However, since transaction costs do indeed exist, there is a need for government to lower these costs via an efficient institutional design and properly defined property rights. In other words, courts and efficient institutions are necessary to solve disputes: but not laws that for example prevent smoking, or Pigouvian taxation of externalities like pollution. The right to create social costs like pollution or smoking would simply end up in the hands of those who value it the most.

Consider the following example that Coase himself has noted. A confectioner has machines that shake the office of a nearby doctor when operating, thus preventing him from performing delicate examinations. The answer, Coase would say, is not to enforce a government regulation to put the confectioner out of business. If the value of the machines to the confectioner is higher than the harm imposed on the doctor then there is scope for a mutually beneficial agreement of a payment (compensation) from the confectioner to the doctor for using the machine. It works the other way around as well - if the doctor's work is valued more than the confectioner's, he can make payments to the confectioner to stop production during his work. Another example is a factory whose pollution imposes costs on a dry cleaning business, but whose profits are much higher than that of the dry cleaner. If the factory owner values his production more than what the dry cleaner values his, he can simply pay him the cost he's imposing onto him.

Coase wasn't trying to describe a perfect world without transaction costs (he actually resented such inapplicable economic analysis), but rather make it clear what the role of transaction costs is in designing the institutions of an economic system. The theorem is actually a great showcase of the real world - a world full of transactions, bargaining and choices that are not only constrained by budgets, but by the design of an institutional system within which these choices are made. It is the real world where the Coase theorem has found many of its applications. An example I always think of is the hunting of elephants in Kenya and Botswana. While poaching was banned in Kenya to save elephants from extinction, in Botswana local farmers were given property rights to elephant herds. The ownership of elephant herds would incentivise the farmers to preserve their long term value. As a result in Kenya, which applied the ban on hunting, since the 1970s the amount of elephants has dropped from 140,000 to only 16,000 today, while in Botswana their number has grown from 20,000 to 68,000.

Apart from the externalities problem, Coase also had a few things to say about public goods. In his 1974 paper "The Lighthouse in Economics" he challenged the classical a priori view that a lighthouse is a typical example of a public good that cannot be provided by the private sector at a profit. He showed that in 19th century Britain, all lighthouses were privately provided and charged ships for their use as they entered a port.

The legacy

Finally, from the Institute bearing his name (), a closing point:

"Coase was critical of economics for being static and preoccupied with formalizing concepts that date back to Adam Smith. He believed that the goal of economists should be to change fundamentally the way we look at a problem. This goal was part of the inspiration behind the Ronald Coase Institute, which a group of scholars formed with Ronald Coase in 2000 to assist young scholars whose research has the potential to help transform their economies. Coase’s support for these young scholars was an act of generosity illustrative of a lifetime of scholarly generosity and confidence in the power of ideas. Ronald Coase himself was an outstanding example of an economist who changed fundamentally the way we think about problems, and the impact of his ideas continues strong today."

Here is a list of some of his most notable writings (a full list of publications can be found here):

  • 1937: "The Nature of the Firm." Economica 4 (November): 386–405.
  • 1938: "Business Organization and the Accountant." Reprinted in James M. Buchanan and G. F. Thirlby, eds., L.S.E. Essays on Cost. London: Weidenfeld and Nicolson, 1973.
  • 1959: "The Federal Communications Commission." Journal of Law and Economics 2 (October): 1–40.
  • 1960: "The Problem of Social Cost." Journal of Law and Economics 3 (October): 1–44.
  • 1972: "Durability and Monopoly."  Journal of Law and Economics 15 (1) : 143-149.
  • 1974: "The Lighthouse in Economics." Journal of Law and Economics 17 (2): 357–376.
  • 1992: "The Institutional Structure of Production." American Economic Review 82(4): 713-719. (Nobel Prize lecture)

And these two books that reprint some of his most important work:

  • 1988: The Firm, the Market, and the Law. University of Chicago Press, Chicago.
  • 1994: Essays on Economics and Economists. University of Chicago Press, Chicago.

Why Ronald Coase matters

The great economist Ronald Coase has died at the age of 103. Vuk Vukovic explains what made Coase such an influential and profound thinker.

Yesterday, at the age of 103, one of the greatest minds of our time, Nobel prize winner and emeritus professor at University of Chicago Law School Ronald Coase passed away.

His contributions to and influence on economic science are of monumental importance. His groundbreaking research has set the stage for a joint field of law and economics, and has also influenced the new institutional revolution in addition to a number of other fields and areas of research in economic theory.

It would be unfair to say he only made two major contributions since both of these (written 23 years apart from one another) not only won him the Nobel prize, but have continued to influence the economic science ever since. The first was his 1937 paper The Nature of the Firm where he introduced the concept of transaction costs in microeconomic analysis. He believed that firms exist because they economize on transaction costs - costs like market entry, acquiring information, managing a company, bargaining, etc. If these individual transactions can be reduced into fewer transactions by organizing a hierarchical body, then entrepreneurs will form firms.

With microeconomic theory at the time focusing only on production and transportation costs, Coase's inclusion of transaction costs was a breath of fresh air into economics. However, in 2009 Coase said he was surprised how much The Nature of the Firm was being cited since it was "little more than an undergraduate essay". Continue reading...


On the appalling inequality in the United States

It is true that when we look at the Gini index and other measurements of that type then the United States is highly unequal by the standards of the advanced countries. It's also true that if we look with a fresh pair of eyes then it's not that unequal in fact:

Almost every single person in America has access to basic food, clothing, water and sanitation. I haven't been to states like Louisiana and cities like Detroit, but from what I can tell, nobody is scrambling for the basic necessities required for sustenance.

The US may indeed be unequal but it's only in the last 40 to 50 years that any society at all has been able to make such a claim. Something is being done right.

An almost-classless society: I've noticed that most Americans roughly have the same standard of living. Everybody has access to ample food, everybody shops at the same supermarkets, malls, stores, etc. I've seen plumbers, construction workers and janitors driving their own sedans, which was quite difficult for me to digest at first since I came from a country where construction workers and plumbers lived hand to mouth. Also, (almost) all sections of society are roughly equal. You'll see service professionals owning iPhones, etc. as well. This may be wrong but part of it has to do with the fact that obtaining credit in this country is extremely easy. Anybody can buy anything, for the most part, except for something like a Maserati, obviously. As a result, most monetary possessions aren't really status symbols. I believe that the only status symbol in America is your job, and possibly your educational qualifications.

It may well be that an Indian student isn't seeing everything in this society so new to him. But it is indeed true that while monetary inequality in the US is back up at the levels of the 1920s it simply isn't true that life as it is actually lived is as unequal as it was. That country, like others in the advanced capitalist world, has largely conquered the problem of providing the first set of Maslow's heirarchy of needs for all. After that the inequality in positional goods just isn't all that important.

An open letter to the government on the Lobbying Bill

The government's Lobbying Bill is a serious threat to free speech and will curb the activities of think tanks, charities and other groups whose participation in political debate is vital for the political system to work openly. That's why we've co-signed the letter from other think tanks, below, urging the government to drop this bill.

We wish to highlight our grave concern about the Government’s Lobbying Bill, a piece of legislation that poses a significant threat to legitimate campaigning freedom of speech, political activism and informed public debate.

Part II of the bill threatens the ability of charities, research and campaigning organisations to inform the public debate, fulfil their missions and raise awareness of important issues. The current drafting would capture a huge number of organisations who would not presently be considered as relevant to electoral law and who do not receive any state funding. It also threatens to dramatically expand the range of activity regulated far beyond any common sense understanding of commercial lobbying.

We do not regard the Cabinet Office’s assurances as sufficient given the widespread legal doubts expressed from across the political spectrum. It cannot be a prudent approach to legislate on the basis of assurances that enforcement will not be to the full extent of the law. The exceptions offered are unclear and unconvincing.

The lack of clarity in the legislation further exacerbates its complexity, while granting a remarkably broad discretion to the Electoral Commission. The potential tidal wave of bureaucracy could cripple even well-established organisations, while forcing groups to reconsider activity if there is a perceived risk of falling foul of the law. This self-censorship is an inevitable consequence of the bill as it stands.

We urge the Government to reconsider its approach and to urgently address the fundamental failings in this legislation.

Yours Sincerely,

Mark Littlewood, Director General, Institute for Economic Affairs Simon Richards, Director, The Freedom Association Tim Knox, Director, Centre for Policy Studies Matthew Sinclair, Chief Executive, Taxpayers’ Alliance Jo Glanville, Director, English PEN Emma Carr, Deputy Director, Big Brother Watch Eamonn Butler, Director, Adam Smith Institute

Rest in Peace Ronald Coase

Ronald H Coase, the Chicago-based British Nobel economist, has died at the age of 102. I first met him in 1976 at the Mont Pelerin Society meeting in St Andrews, where he delivered a paper on 'Adam Smith's View Of Man'. But he was best known for his work on transaction costs and social costs.

Coase introduced the idea of transactions costs in 1937. Before then, most (mainstream) economists simply assumed that trade and commerce were costless. In fact, he noted, the costs of simply making the deal might be higher than the price of the good or service itself. People need to gather information about what they are buying and whether they can trust the supplier, they have to put time and effort into striking a bargain, they might have to draw up contracts and monitor the service they get.

This idea spills over into how we deal with social costs. The fact that transactions are not costless means it makes a big difference who is blamed for externalities. To take his example, a fence could prevent a rancher's cattle from destroying a farmer's crops. But how can they agree who should pay for it? If the farmer has to bear that cost, the farmer will build a fence to keep them out. If the rancher has to compensate the farmer, the rancher will build the fence.

This in turn had important consequences in terms of the public choice economics of James Buchanan and and Gordon Tullock and others. Welfare economists had looked at 'market failure' and concluded that government must intervene to correct it. But they assumed away the transaction costs of making political decisions. And when you look at those, the corruption, the rent-seeking, the interest group politics and all the rest, you find that the outcome might be even less desirable than what the market can do.

Banning adverts for unpaid internships will only hurt young people

During the closing weeks of 2012, Labour MP Hazel Blears claimed to have attracted cross-party support for a private bill that would have effectively made advertising for unpaid internship positions illegal. Thankfully for those that are eager for valuable work experience regardless of short-term financial rewards, her calls to effectively exclude tens of thousands of would-be interns from pursuing their preferred vocation fell upon deaf ears. The bill has since faded into obscurity.

Monday saw Nick Clegg criticise the movement to protect interns from themselves, with his spokesman citing potential “unintended consequences” - such as the creation of a “black market” for unpaid internships - as grounds for opposing the ban. Speaking to Graduate Fog, the Deputy Prime Minister’s spokesman explained:

“We want to bring an end to the ‘who you know not what you know’ culture. But there are possible unintended consequences of legislating on this issue – it could actually be entirely counterproductive and force these valuable opportunities back on to a kind of ‘black market’ where the vacancies are filled by people with the best connections.”

I don’t think that Hazel Blears and co. harbour a desire to deny all but the well-connected a chance to hone skills that will help them to secure preferential employment. Nonetheless, in the words of Milton Friedman, “one of the great mistakes is to judge policies and programs by their intentions rather than their results”. The result of prohibiting advertising for unpaid internships would be the substitution of meritocracy for nepotism.

The rhetoric surrounding unpaid internships has, for the most part, been overwhelmingly negative in tone: skewing the debate towards the emotive rather than the factual. Whilst more reasonable detractors cite cases of interns being treated poorly by employers (and there are a number of such cases), oft-repeated comparisons to “slavery” are hyperbole at best, and callously trivialise the plight of millions of actual slaves living in the world today.

An individual choosing to be paid in experience rather than money should be allowed to do so, free from a coercive state severing access to the former option through banning certain job advertisements. The appropriate response of those who rue interns lack of access to paid employment should be deregulating the labour market, rather than denying young people the opportunity to improve their future job prospects by acquiring indispensable knowledge and skills.

Extrapolating general ‘anti-internship’ sentiments from a few extreme cases masks the true story: one of a practice that provides saleable skills, easier access into highly competitive professions, networking opportunities, and a plethora of other benefits. At present, I am lucky enough to be completing an unpaid placement at the ASI; hopefully, the constructive nature of such a placement is evidenced by the very existence of this blog post. I don’t claim that every intern will be as lucky as me in his or her remit, but I do know that I am definitely not alone in gaining substantial benefits from an unpaid internship.

Medieval peasants really did not work only 150 days a year

One of the things that irks my choler, yanks my goat if you like, is this idea that the medieval peasant led a life of incredible leisure, had to work vastly less than we poor saps ground down under capitalism have to. It's entirely nonsense of course:

Plowing and harvesting were backbreaking toil, but the peasant enjoyed anywhere from eight weeks to half the year off. The Church, mindful of how to keep a population from rebelling, enforced frequent mandatory holidays. Weddings, wakes and births might mean a week off quaffing ale to celebrate, and when wandering jugglers or sporting events came to town, the peasant expected time off for entertainment. There were labor-free Sundays, and when the plowing and harvesting seasons were over, the peasant got time to rest, too. In fact, economist Juliet Shor found that during periods of particularly high wages, such as 14th-century England, peasants might put in no more than 150 days a year.

What Shor (and others, for there are others who make the same claim) has done is looked at the labour service expected of the villein and then claimed that this was the amount of work they had to do. Nonsense: this work on the lord's demesne was the rent payable for the peasant's own land to farm. Something which rather added to his workload of course, that farming his own land.

We might also point to the amount of household labour that had to be performed. Yarn had to be spun, cloth to be weaved. Cooking was over open fires: and that firewood had to be collected. Bread baked and so on and on. There was a recent report (rather exagerrated but still) which claimed that in the 1930s it took 65 hours of human labour a week to run a household. Today it takes 3. Things were worse back in medieval days.

And finally there's the obvious point that these villeins and churls were animal owning peasant farmers. And people who own animals just don't get 70 days off a year, you don't manage to go off and get pissed for a week and then expect to have live animals when you come back.

What has been done here is to mistake work in the market economy for all the work being done. As a vast amount of a peasant's work is not in that market economy (that's why they're peasants and why they're poor) then they've decided not to include that back breaking labour done inside the household as labour.

As to why this is all being trotted out:

As for the modern American worker? After a year on the job, she gets an average of eight vacation days annually.

The US is the only leading nation that does not have legislation as to how much paid vacation time an employee must get. There is thus a move to make such a law. Thus these rather tired misunderstandings of medieval lafe being trotted out, to aid in making that case.

But there's one more surprise here. If you look again at their argument it is that everyone does indeed get paid vacation in the US even though there isn't a law insisting that they must. Therefore, because everyone gets it already we must have a law. Why not, you know, just leave everyone to get on with it themselves?

German retail sales trundle along

Summary: German retail sales moving sideways

What the chart shows: The chart shows German retail sales in real (inflation-adjusted) terms, with an index where 2010=100

Why is the chart important: The euro area economy has recently surprised on the upside. Absent any new political or fiscal crises, activity should now expand, meaning the EA is out of its long recession. But future developments depend very much on demand in Germany. German retail sales are a very volatile series, which is prone to substantial revisions. Nevertheless, it is disconcerting that – in essence – the volume of German retail sales has moved sideways in a very narrow range over the past two years. Germany is also in recovery., But domestic demand remains sub-par and may not be enough to act as a growth engine for the rest of the euro area.

Bale and the market

Is Spurs striker Gareth Bale really worth €100m? Plus whatever eye-watering salary his new employers, Real Madrid, will pay him? Isn't it immoral to pay footballers such enormous amounts for what is basically entertainment, when nurses (say), who do such an essential job, are so badly paid?

You can certainly discuss the morality of such questions, but pay is the outcome of a market process, not a moral question. If millions of people admire the skill of a footballer – or for that matter a singer, a guitar player, an artist, an actor, an architect—and are prepared to pay well to see that person in action, who has acted immorally? You might say that "society" should value nurses more than footballers, but value, like beauty, is in the eye of the beholder. It is a personal reaction to something. "Society" is not a person with values of its own: only individuals can value things. So if we are criticising the price that is put on a footballer, it is individuals that we are really criticising, those that voluntarily pay to see him. But none of those individual customers has acted unjustly or dishonestly or wrongly or immorally in any way.

When people start criticising how much different people are paid for different jobs, they are making a moral judgement about the distribution of rewards. The implication is that rewards should be distributed in some other manner. But who is to judge. But as the Nobel economist F.A. Hayek noted in The Road to Serfdom, how could we ever decide what would be the "fair" pay of a nurse, a butcher, a coal miner, a judge, a deep sea diver, a tax inspector, the inventor of a life-saving drug or a professor of mathematics? Appealing to ideas such as "'social justice" or "value to society" or "merit" does not give us the slightest help, because we all disagree on these things.

In free markets, people pay us for the goods and services we produce because they value those products. So market rewards do depend, very directly, on the value that we deliver to other members of our society. They reflect the scarcity and skill of the producers, the numbers of customers who want the service and the urgency and importance that buyers attach to it. That is a pretty good way of rewarding people's contribution to human life. If earnings are to be decided by right-thinking politicians and officials, the main gainers will instead be those groups with the best lobbying operations. Which won't be nurses.