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"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

Chart of the week: Deflation risk as Eurozone inflation falls to 4-year low

Written by Gabriel Stein | Monday 04 November 2013

Summary: Euro area inflation is at a 4-year low; a bout of falling prices in 2014 is possible

What the chart shows: The chart shows the twelve-month per cent euro area inflation, headline and core,

Why the chart is important: Deflation, like rapid inflation, is bad for countries. This is even more the case when there is a debt overhang, as there currently is in many euro area countries. A number of factors highlight the risk of falling prices in the EA in 2014. Broad money growth is once again slowing. There are large and persistent negative output gaps in all EA countries, showing substantial slack in the economy. The euro is now more likely to rise than to fall. And, finally, the scope for further increases in taxes and administered prices is limited. In theory, the ECB could easily avert deflation by boosting broad money growth. But technical problems and a disinflationary bias mean that this is unlikely to happen. The most we are likely to see are, in order of likelihood, a cut in the policy interest rate; the introduction of negative interest rates for bank reserves held with central banks; and attempts to talk down the euro. The first and the third will have little effect, the second may prove somewhat useful. 

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Libertarian film screening of V for Vendetta

Written by Blog Editor | Monday 04 November 2013

Tom Stringer has arranged a really fun Monday evening outing on Monday November 4th.  It's a showing of the movie "V for Vendetta" at the Bowler Bar and Pub in Clarkenwell. The screening starts at 7, but people can arrive from 6pm onwards and there'll be plenty of time to chat with fellow libertarians. There's an amply stocked bar and what's more there is a free drink for every attendee courtesy of EzyOrder when you arrive (all you need to do is download their app onto your smartphones).

You can purchase your tickets here.

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Welcome To Tax Poverty Week

Written by Tim Worstall | Monday 04 November 2013


Someone or other has decided that this is Living Wage Week. A far better name, one that properly describes the reality, is Tax Poverty Week.

I've a long piece here laying out the basic argument. Cutting to the chase the core arguiment is very simple. The sugggested Living Wage of 7.20 an hour is a pre-tax wage. Once you've taken off the tax and NI due on that sum the resulting post-tax income is only 50 pounds a year different from what the minimum wage untaxed would be. Therefore the minimum wage is indeed the living wage except for the depredations that government makes into the pocketbooks of the poor.

That is, the poor are being taxed into poverty, it isn't that employers are paying too little. So let's start calling it what it is: tax poverty.

So my suggestion for this coming week is that every time someone mentions the living wage we should just replace that mention with the phrase "tax poverty".

And then we've got a truly ludicrous suggestion:

Miliband will pledge that in the first year of a Labour government firms which sign up to the living wage will receive a tax rebate of up to £1,000 for every low-paid worker who gets a pay rise, funded by tax and national insurance revenue from the higher wages.

You what? Someone is suggesting that we make sure the working poor have more money by taking more off them in tax?


It's really terribly, terribly simple. The UK tax system dips into incomes too far down the scale. Thus if you want the working poor to have more money please, just stop taxing them so damn much.

Intending to tax them more is an insanity worthy of a lunatic asylum.

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So, does competition work in health care or not?

Written by Tim Worstall | Sunday 03 November 2013

We can all refer to theory about whether competition, markets, works in health care or not. There are still those who insist that competition and markets never work at all (yes, sadly, still some antediluvians out there) and even I will agree that there are areas of life where markets, pure and unadorned, are not the optimal solution. The question is though, well, do markets improve heatlh care provision or not?

Fortunately, we've an answer. This is the final version of a paper that looks at what happened in NHS England a few years back, at a time when NHS Wales and Scotland did not take the same market opening path. We can thus compare and contrast what happened in England against the other two, further we can look at those areas where there was more competition in England and see what happened. Interesting results:

The effect of competition on the quality of health care remains a contested issue. Most empirical estimates rely on inference from nonexperimental data. In contrast, this paper exploits a procompetitive policy reform to provide estimates of the impact of competition on hospital outcomes. The English government introduced a policy in 2006 to promote competition between hospitals. Using this policy to implement a difference-in-differences research design, we estimate the impact of the introduction of competition on not only clinical outcomes but also productivity and expenditure. We find that the effect of competition is to save lives without raising costs.

That seems pretty clear, doesn't it? Lives saved with no more money expended simply by bringing in a bit of market discipline?

We'd probably better have some more of that market discipline, hadn't we?

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No, no, I'm afraid this isn't quite how it works

Written by Tim Worstall | Saturday 02 November 2013

A very badly aimed piece of snark in the Telegraph's city gossip column:


Here's a tale of how public money for good works can end up in private offshore hands that is troubling conscientious corners of the City. It involves the Emerging Africa Infrastructure Fund (EAIF), an enterprise set up by a fund co-founded by the UK Department for International Development, which decided to invest $25m (£16m) into a start-up satellite services provider called O3B Networks. If the EAIF really wanted to make “a real and lasting difference on the development of sub-Saharan Africa’s infrastructure”, as it states on its website, wouldn’t it have done better to invest in an African-owned satellite company? Channel Islands-based O3B prefers not to break down its exact ownership structure, says a spokesman. But, given its largest shareholder is the Luxembourg-based satellite group, SES, accompanied by the similarly tax-conscious Google, it has a distinctly first-world flavour.

No, no, I'm afraid this isn't how it works. As Adam Smith reminded us all, consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. As he didn't go on to point out, not only must we not attend to the interests of the producer over and above those of the consumer we should also ignore who is the producer when attempting to gain that consumption opportunity.

A satellite firm, one that knows what it is doing, backed by the likes of Google among others, seems like an excellent choice to provide satellite internet links (this is what the company does) to those sort of places in Africa that currently do not have decent internet links. Further, we know very well that the provision of simple mobile telephone increases GDP growth. One researcher says that growth increases by 0.5% of GDP for every 10% of the population that has a working mobile. And there is similar research showing that simple broadband, up to 2 Mbits/s (we don't know about higher speeds, no one has had widespread coverage for long enough for us to check) similarly increases GDP growth. And finally we also know that those countries which do not currently have a landline network are never going to get one: it's so much hugely cheaper to wire everyone up using mobile technologies.

So, what we'd actually like to do for the poor of the world is whack some satellites up there and let them get access to that mobile telephony and internet. Which is what the company does, its name standing for "The Other 3 Billion".

Who owns it, whether they pay their taxes, whether they pay any taxes at all, are entirely irrelevant compared to the benefits that will come from the consumption of the company's products. After all, as I repeatedly say, the benefits to us of Google are not the number of people the company employs, not the taxes it does or does not pay, but the fact that we get to Google. So it is here: who gives a damn who is building the thing, it's who gets to use it that is important.

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

Written by Blog Editor | Friday 01 November 2013

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.

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Maybe Marx was right, just a little bit

Written by Tim Worstall | Friday 01 November 2013

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.

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Err, yes, this is how capitalism works

Written by Tim Worstall | Thursday 31 October 2013

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.

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

Written by Tim Worstall | Wednesday 30 October 2013

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.

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

Written by Tim Worstall | Tuesday 29 October 2013

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.

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