Do we even have sectors of the economy any more?

I find myself rather scratching my head over this latest bright idea from a lefty think tank:

Sectoral bargaining should determine pay and conditions: The legislation relating to sectoral bargaining should make provision for the determination of pay and other working conditions, provide procedures for the resolution of disputes, and deal with skills, training and productivity;

Part of this is of course that old idea that if only the Great and the Good were to sit down around the table and really discuss things then they'd be able to put the world to rights in no time at all. An idea that Hayek rightfully exploded when he pointed out that the centre cannot have enough information to be able to plan anything in such a manner and further, even if they could gather the information they couldn't process it in time to be able to decide anything useful. We have to use markets and prices to do that calculating because that's the only calculating engine we've got that is capable of doing the, umm, calculating.

But there's something else that worries me about this. Do we really even have "sectors" in the economy any more, to any meaningful definition that is? Even defining what is a service and what a manufacture is extraordinarily difficult. Rolls Royce is defined as a manufacturer because jet engines. But most of their revenue comes from and most of their people work on a service: keeping the engines that they've sold running and serviced. And we're often told that restaurants are part of the service industry: but they manufacture meals and I've certainly been in one or two where dropping that manufacture on your feet would hurt.

If we try to become more detailed then of course we'll enter an entire nightmare. Those myriads of small racing car manufacturers and testers. Manufacturing? Well, they don't roll that many products out the doors. Research and development might make more sense: but then we might equally logically regard them as part of the entertainment industry along with F1 etc itself.

So it's not just the Hayek point that worries me over these sorts of plans. I don't really see that we can, in an economy as complex as ours, really define sectors sufficiently well so as to be able to manage them as these people seem to think we should.

Oh, and, of course, setting the prices for the same input, labour, differently for different sectors of the economy would, even if we could define it all satisfactorarily, rather destroy the abiolity of that market to do our calculating for us of the price of and demand for labour across those industry sectors. You know, that market which is the only calculating engine we've got that even has a theoretical hope of working?

Quote of the day: On anarchist calisthenics

One day you will be called on to break a big law in the name of justice and rationality. Everything will depend on it. You have to be ready. How are you going to prepare for that day when it really matters? You have to stay “in shape” so that when the big day comes you will be ready. What you need is “anarchist calisthenics.” Every day or so break some trivial law that makes no sense, even if it’s only jaywalking. Use your own head to judge whether a law is just or reasonable. That way, you’ll keep trim; and when the big day comes, you’ll be ready.

— James C. Scott, Two Cheers for Anarchism, quoted in Jason Kuznicki's Cato Journal review.

Why the Green New Deal won't work

I'm sure you've all heard about the Green New Deal. It's the idea that we'll just print a load more new money then spend it on lovely things like building green houses, lagging and insulating those that already exist and by doing so we'll create lots of high paid jobs and boost the economy. Plus, of course, reduce CO2 emissions.

I'm afraid it's not going to work though:

At the beginning of the year, Ian Hodgkinson's main aim was to keep his business alive. But in the last four months he has gone from ticking over to overwhelmed. His bricklaying firm has been inundated with demands as Britain's building industry has begun to boom, boosted by the government's Help to Buy scheme for first-time house buyers. The scheme, announced in April, has started a chain reaction that has seen the construction industry facing labour and materials shortages that have pushed up prices and lengthened supply delays. Bricklayers can now earn more than £40,000 a year and brick deliveries that were being fulfilled in two days can now take 10 weeks.

The reason it won't work is that we don't have the skilled labour nor the production infrastructure to make it work. Boost housebuilding/repairing beyond what it is now and all we'll end up doing is sucking in more immigrants and more imports. Not that there's anything wrong with more of either but pumping yet more stimulus into a sector already overstretched is not one of the wisest ideas around. Indeed, good Keynesian demand management would indicate that a sector so stretched should probably have a bit of fiscal austerity applied, not stimulus.

The empathy that John Donne and Adam Smith had in common

Both John Donne and Adam Smith expressed the view that we empathize with our fellow men and women.  Donne said that "any mans death diminishes me, because I am involved in Mankinde."  A century and a half later in his Theory of Moral Sentiments Smith wrote, "How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it."

Smith referred to this as a 'sympathy' for others, though in modern parlance we might call it an 'empathy' with our fellow human beings.  I share that feeling that Donne and Smith expressed.  I am not saying it is how people do feel, or how they should feel, although it may be either or both of those.  I am simply saying that it is how I feel.  I identify with other people in some respect simply because they are human.  I feel a kinship with them and an awareness that they are in some degree like myself.  It is not an empathy felt equally with all of them because its force declines with distance.  It is experienced most strongly with friends and family, then with those in my community, and it diminishes like the slope of a hill as it recedes from the summit towards those farther away.  But it never reaches zero, and I am with Donne and Smith in recognizing it for every human being.

We were all born in the same way.  We all cried, soiled our nappies and took warm comfort in our mother's milk.  We all learned by example and experiment how to make sense of the world, and to make our way in it.  We all seek to better our lot and to care for those who command a special place in our affections.  These experiences and impulses are common to humanity. 

These feelings of a common lot with others of our kind can be erased and overcome, alas with ease, by the fanaticism of a religion or an ideology, and we can be conditioned to regard others as less than human and unworthy of our respect and consideration.  But I think the default condition, expressed by both Donne and Smith, is that of a sense of fellow-feeling with others of our species, and a recognition that they share much in common with ourselves.

News of a distant tragedy moves us, not because we know or will ever meet those involved and affected by it, but because we feel a common sense of identity with them, an identity that derives only from our common humanity.  Donne spoke for himself, as I do, whereas Smith expressed the view that this general ability to project ourselves into the experiences of others "is a matter of fact too obvious to require any instances to prove it."  I believe, like Smith, that this feeling is the basis for the decent treatment of other people and lies at the bedrock of our relationships with others.

Will Hutton's very strange thoughts on climate change

Apparently we free marketeers are almost entirely responsible for the fact that Flipper is going to boil in the coming end of times. It's all our fault that not enough is being done about climate change.

However, it will be met by a barrage of criticism from the new "sceptical" environmental movement – almost entirely on the political right – which, while conceding that global temperatures are rising, insists that there is still insufficient scientific proof to make alarmist predictions. There is certainly no need for governments to tax and regulate the burning of fossil fuels, or subsidise renewables, or come to "freedom-denying" international agreements. Economic growth, technology and the magic of human adaptation through tried and tested market mechanisms will see civilisation through what is already an over-hyped crisis.

With one slight proviso that is indeed what we argue. It's happening but it's unlkiely to be catastrophic. Economic growth and technology will indeed be the way out of it. And market mechanisms are going to be vitally important in ensuring this happens.

But this does not put us out on some extremist wing of the argumentation: the reason we support such things is because they are the scientific consensus on what to do about climate change.

The markets, economic growth and technology thing comes from the Special Report on Emissions Scenarios, the foundational economics study upon which the entirety of the IPCC process is built. It's very clear indeed that the globalised scenarios are better than the not globalised (lower population, a richer population and lower emissions). Further, it's equally obvious that a free market/capitalist society produces a better outcome (lower population, a richer population and lower emissions).

The one proviso is that we (or at least I) do agree with taxation of carbon emissions. They are an externality, externalities should have Pigou taxes applied to htem. We even have a very large report called the Stern Review that is supposed to guide our actions in this matter. And that Stern Review says apply a carbon tax of $80 per tonne CO2-e. Which is largely what we already do here in the UK.

Free market globalised capitalism with a carbon tax. That's what this "political rightist" thinks should happen. And the amazing thing is that this particular solution is boringly mainstream, it's actually the considered scientific consensus.

Perhaps government regulation isn't the way to go then

That something must be done is sometimes true: that that thing must be done by government regulation might also be true at times. But I have a very strong feeling that the majority of times when something must be done doing it by any method other than government regulation would be a good idea. Just three examples from around the place just recently.

Auto-enrollment in the new compulsory pension schemes that the UK government is just introducing. Reports are that this is going to cost firms £15 billion just to fill out the paperwork. Money that, call me misguided if you wish, would probably have been better spent on being put into pension funds for those workers.

The Dodd Frank regulations on conflict minerals. Stopping slave labour at mines in The Congo is a good idea: we were originally told by the Enough Project that the checking system, to make sure no minerals from those mines entered the supply chain, would cost some $10 million a year. The SEC now estimates the cost of doing the paperwork at $4 billion.

The FATCA regulations to stop Americans hiding money abroad, away from the prying eyes of the Internal Revenue Service. This is expected to bring in a few billions a year in additional tax revenues. One estimate I've seen of the cost of compliance with these rules is $1 trillion.

The one thing that is common to all of these cases is that the bureaucracy set up to adminster each scheme has not had to consider the costs to other people of said schemes. That cost of bureaucratic regulation is, if you like, an externality to the legislative system. And as we all know from our studies of climate change externalities must be controlled. The polluter must pay i the most common catchphrase here.

So, to repeat a suggestion I've made before. We need to change the system so that those externalities are internalised, are made part of the legislative and decision making process. The most obvious method of doing so is that we get to charge the government for the time they make us spend on paperwork. They want us to fill out a complicated form? Great, that'll be £75 an hour (a reasonable semi-professional rate that) for the time it takes me to fill out said form.

That'll stop the little buggers in their tracks.....

Why are insurers willing to make permanent losses on insuring people?

Following on from my blog post of yesterday I've been emailed with an interesting question. I asserted that the very evidence that banks are making losses on current accounts (before we consider the value of the float that is) is evidence that the banking market for current accounts was competitive. I was then asked this follow up question:

"Tim, you say that banks consistently lose money and/or fail to make a decent return, thus perfectly competive. I’ve no reason to doubt you. A query for those who understand these things. Why do some markets consistently lose money for those trying but failing to be ruthless capitalists? Motor insurance is a consistent loser overall, even though there is a captive market. But no one drops out. Professional indemnity insurance for solicitors is another consistent loser, despite a captive market. Whenever someone drops out, some obscure Latvian/Irish insurer comes in, keeping the rates down. Newspapers are another, but they are fun/prestigious/influential. Motor insurance is not. What is it about certain markets that makes capitalists tolerate endless losses?"

The newspaper point is fun: there are those willing to take financial losses for the proximity to power and sheer self importance of being a media magnate. Which leads to the thought that those who tell us of the financial sacrifices they make to be in "public service" might have similar motivations.

The answer to the insurance question though is simple: premiums are not the only revenue stream in an insurance company.

We pay our premiums in and the insurance company only has to pay them out at some point in the future. They thus get to play with that vast pile of cash for some amount of time. What they actually do with it is invest it. What they invest in will depend a little on what type of insurance they're writing, what the likely time scale is before any potential payout. Someone writing car insurance will probably have a more liquid investment (ie, shorter term) portfolio than someone writing earthquake reinsurance (ie, insurance to insurance companies about earthquakes). The reinsurance companies have some of the longest term investment portfolios around, often longer even than pension providers.

These investments of course make a return (well, hopefully they do!). And that's the second source of insurance company income. The returns they get on the money they get to play with inbetween receiving the premiums and having to pay out the losses.

The end result of this in a competitive market is that said insurance companies are going to compete among themselves over the price they will set those premiums at. Given that second income stream it actually makes sense for them to lose money on the underwriting, a loss which is more than compensated for by the investment returns. Indeed, we can take this one step further. Given that income stream from investment returns we have a very simple test for whether an insurance market is in fact competitive or not. If the companies are all making a profit on the simple underwriting then probably not. By this measure the UK car insurance market probably is competitive, the US one not.

There are other points we can make as well. When investment returns fall then we might expect to see insurance prices rise. I don't know whether that has happened recently and if anyone knows do please tell me. Other businesses work in much the same manner. Futures broking say. The actual business of doing the buying and selling is a loss leader for gaining access to the deposits that the customers must leave with the firm (the "margin"). This is invested for the benefit of the firm, not the customer. It was indeed falling returns on bonds and bills (the allowable investments for these firms) that led MF Global to stretch itself into the Euro Sovereign market in search of higher yield. An adventure that ended horribly of course.

Another observation is that the part of Obamacare that insists that medical insurance companies pay out 80% of premiums on actual medical care doesn't matter very much. For no one's bothered to take account of the investment returns from having all that cash while they wait for people to get cancer.

And finally, this is the secret of Warren Buffett's wealth. Yes, he is indeed a very astute investor. But as soon as he'd scraped together enough money to do so the first thing he bought was an insurance company. So his excellence in investing has not been applied to his own money (nor those of his partners) over the decades, but to the multiples of their capital that owning that cash float and investment pool inside an insurance company offers him. He's been using leverage: not by borrowing but by owning the returns from the insurance company premium pile. Oh, and Geico, which Berkshire Hathaway owns, generally does make a profit on car insurance underwriting. But then I've already said that the US car insurance market might not be all that competitive.

Rolling down a slippery slope

Warnings about ‘slippery slopes’ are often overused by defenders of individual liberty. That’s probably inevitable, since we often end up defending a principle against a seemingly-pragmatic policy that, by itself, is not very objectionable.

For instance, I find it hard to muster any specific argument against energy efficiency labelling of washing machines, but the principle of letting people do what they want with their own stuff means that I’m still pretty suspicious of them. It’s hard to convince someone else who doesn’t already share my belief in that principle without resorting to things like slippery slope arguments .(First they label the washing machines – next it’ll be health warnings on cans of Coca-Cola!)

But, overused as they can be, slippery slopes really do exist. Tobacco regulation is an interesting example, because it's often used as the thin end of the wedge for other kinds of paternalism. After plain packaging of tobacco was passed in Australia (will the new, nominally Liberal government repeal this legislation?), its advocates moved straight on to calls for plain packaging of alcohol. To quote our 2012 paper:

Australian Senator Cory Bernadi recalls: “[O]n the very first day [after the plain packaging legislation was passed] they moved onto drinking. People who were advocating plain packaging were saying “We should have this for alcohol. We should have it in fast food”. Where does it end? The nanny state will never end because there is always another cause to advocate for.”

Some health groups in Australia have also called for plain packaging of ‘junk food’, whatever that is.

So it’s worrying when tobacco is treated as a special case in international trade agreements, as is happening in Trans-Pacific Partnership negotiations between a number of major Pacific Rim countries, including Australia, the US, New Zealand and Japan.

The US and Malaysia have proposed exemptions for domestic tobacco control measures from the provisions of the Partnership. Not many people will object to that on its own, but here’s where the slippery slope problem comes in. Most free trade agreements are riddled with special exceptions, but using them to reinforce domestic paternalism is particularly ugly.

A free trade agreement that institutionalises tobacco as being ‘non-normal’ is a hop, skip and a jump from one that does the same for all sorts of other things that people probably would have a problem with being told are abnormal, like booze. And the infantilization of adults – much harder to pinpoint than the number of lives supposedly ‘saved’ by tobacco control measures – rolls on.

What an interesting example from Zoe Williams

If this were true it would most certainly be undesirable:

We spend so much time talking about this titanic clash between the free market and the social state – yet ignore the fact that most of our major "markets" no longer operate as such. This is an oligarchy whose only governing authority is the administrator of wrist-slaps, and whose principles begin and end with the preservation of its jointly and severally managed profit. Which is to say that they're not competing against each other; they collaborate brilliantly – which would be sweet to watch were it not for the fact that they are working together the better to screw us.

Monopolies and oiligopolies are indeed undesirable things. And we here at the ASI spend much of our time pointing this out and arguing for the one known solution to the problem, more markets, more free markets. But what really surprises is the example that Ms. Williams uses to bolster her case:

Looking specifically at PPI, we could also see the counter-intuitive but obvious point that banks aren't charging enough for their services: current accounts cost money to administer. But rather than admit this, they would prefer to outwardly compete with one another, vie to see who can be the most free, while recouping the money by sleight of hand (swingeing overdraft charges), irresponsible lending or outright cheating (mis-sold PPI). This is what a market with only four or five big players looks like: amazing value in the top line, all the profit draining from somewhere you can't see.

In a truly competitive market we expect profits to decline to something around zero. In the long term perhaps to the level that just covers the cost of capital: something the UK commercial banks do not manage. In the proper economic sense they are therefore losing money: just the result we expect from that truly competitive market.

So, in the provision of current accounts we have evidence that we do indeed have that desired competitive market. Yet this is being taken as evidence of oligopoly? What is it they're putting in the water over there in York Way?

The new economics foundation hasn't bothered to understand Adam Smith

You would think that 237 years after publication that those who wish to pronounce on matters economic would have, by now, grasped the simple and basic points that were made by Adam Smith in Wealth of Nations. But apparently not, at least not over at the nef, which is why Giles Wilkes explanation of the acronym, not economics, frankly, is so apposite.

They've a new book out telling us how lovely it would be if we all just worked less and had more leisure. In this they are correct: it would indeed be wondrous if we were able to take more of our increasing wealth as leisure. Which is, of course, what we have been doing for some centuries now as our wealth has increased. We all have a great deal more leisure time than our forefathers (and most especially foremothers), as I've pointed out here and elsewhere many a time.

However, where the wheels come off the organic yurt is that they think that we will increase leisure hours by doing less work in the market and more for ourselves in domestic production. This is, quite frankly, an insane suggestion.

Take two of Adam's points. The first that the sole purpose of all production is consumption. The corollary of this is that we would like production to be efficient: this will maximise potential consumption for any given set of inputs. The second that the division and specialisation of labour increases the efficiency of production. Thus, if we wish to increase the amount that can be consumed for the inputs available then therefore we want to take advantage of the specialisation and division of labour.

The specialisation and division of labour takes place through the market: sadly it's not true that all 7 billion extant human beings are part of this yet (this is why some of them are so darn poor) but a good three to four billion are. That's the number that we can divide and specialise with. This is going to, does lead to, vastly greater efficiency of production than the available split between the two people in my household. Thus by doing more market work and less household production I will maximise the amount of leisure I have for any particular standard of living. Or, if I wish to run it the other way (as we all do at times, some of us do all the time) maximise the standard of living for the number of hours I am prepared to labour and not be at leisure.

The entire thrust of the nef's new little book is that we should, in complete contradiction to the above description of reality, do less market work where we are efficient and more household work where we are less so. So that we must labour more hours for any particular standard of living or, alternatively, have a lower standard of living for any particular amount of leisure we might decide to have.

In one chapter we have a full blown professor no less arguing the following:

Tim Jackson challenges the argument that more labour productivity inevitably leads to more growth and more jobs.

No one has ever said it does: rather, that greater labour productivity allows more leisure for that labour that is being more productive: or, alternatively, a higher standard of living for said labour.

These people a loons.