The Pin Factory Blog

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The former Mr. Katy Perry took to Newsnight this week to display to all of us his ignorance of economics.

And after a few textbook political dodging of the question, Brand, 38, finally laid down his revolutionary manifesto which would create: 'a socialist egalitarian system based on the massive redistribution of wealth, heavy taxation of corporations and massive responsibilities for energy companies exploiting the environment.'

Hmm. I wonder whether we can manage it without starving 8 million Ukrainians this time. The fallacy at the heart of his prejudices though is this:

'David Cameron says profit isn't a dirty word, well I say profit is a filthy word,' the comedian passionately declared. 'I think the very concept of profit should be very much reduced because wherever there is profit there is also deficit. This system currently doesn't address these ideas.'

Ah, no. Entirely misunderstanding what is going on here.

Profit is simply the proof that value is being created. Leave aside for a moment who is getting that profit and consider what it actually is. We have the costs of our doing something: whatever those costs might be in labour, wages (no, not the same thing), raw materials, other inputs and for purists, the opportunity costs of doing something else with all of these things. We also have the income from having done this thing, whatever it is. All profit is is the acknowledgement that the income is higher than hte costs of having done it. Thus value has been created.

And we like people creating value: it's really rather the point of having an economy at all, creating value. For if no value was being created then there wouldn't be any value for us human beings to consume.

Indeed, we can go further. The opposite of profits is losses: they being an acknowledgement that  value is being destroyed. What is being produced from our process is less valuable than the things we are using to do the production. There is therefore less wealth to share around: people are all poorer therefore.

Losses are the destruction of economic wealth, profits the creation of that wealth.

Now, we can indeed mumble to ourselves over who gets these profits. We can even note that the consumer surplus (which is the profit accruing to consumers from that production with profit normally being defined as the value created flowing to the producers) is usually vastly higher than those "profits".  But even as we shout about the distribution of profits we must all recall the most important point here. Which is that we very much desire that profits be made. For they are, by definition, the proof that economic value is being created, that the value of output is higher than the value of inputs.

And that really is what we want in an economy, an increase in value creation.

A second day for the ASI to celebrate. It may have taken HMG four years to catch up with our policy on a bad bank, but it took just six months for our arguments on green taxes to win through. In April’s blog, “An end to Zombie politics”, we called for the government to “suspend surcharges on energy bills [and] subsidies to energy suppliers or technologies”. Yesterday Cameron told the House of Commons that he is doing just that. There has been a certain amount of backing and filling since, with today’s Times suggesting that the Government may pick up costs no longer funded from energy bills. This sort of robbing Peter to pay Paul misses the point. The most recent IPCC report altogether rejects the alarmism formerly propelling green policy. In addition, reviews of the climate change literature point to the benign effect for the next fifty years of such warming as may occur. To use the slogan of climate change campaigners, “the science is settled”, that is settled against the expensive green policies which the government seems set to abandon.

And while in self-congratulatory mood, let’s note that our call for an acceleration of shale exploration was endorsed overnight by the National Trust, also reinforced by the agony of the Grangemouth complex, unable to compete with cheap American feedstock.

Whatever next? Let’s set up our scorecard on the policies we were calling for earlier in the year.

There should be no Nobel Prize in Economic Science, says economist Liam Halligan, because economics is not a science. It was, of course, only added (by the Swedish central bank) some 75 years after Alfred Nobel's death; but recipients get the same grand medal and scroll, get to shake hands with the King, and give a lecture.

Halligan cites this year's award to Eugene Fama and Lars Hansen of Chicago University, and Robert Shiller of Yale, jointly honoured for "laying the foundations for the current understanding of asset prices". Understanding? As Halligan says, "You may be forgiven for thinking that no one truly understands asset prices. The global stock market turmoil of recent years is surely testament to that."

The sad thing is that economists are so keen that their subject should be thought of as a science that they have infused it with many of the tools and approaches of the physical sciences – making it look more like applied mathematics than the study of (decidedly non-mathematical) human beings that it really is. I often say that, through their intense application of mathematics, the mainstream economists of today pride themselves on a more and more precise understanding of things that the rest of us know are complete tosh.

Under all the equations and algorithms, Fama's 'rational markets' idea is quite simple: markets quickly price in all new information. And since information itself can change quickly, the short-term movement of markets can be hard to predict.

That is plainly true: people in markets would soon find themselves losing money if they did not take account of the facts. However, there is more to human life (and therefore to markets) than mere facts – as both Hayek and Keynes knew. Halligan sums up this point with a phrase that should be engraved onto the computer screen of every supposed economist:

"...it obviously makes sense that share prices reflect all available information.... But they also clearly reflect rumours, supposition, herd-instinct, prejudice, hubris, pessimism and a myriad of other immeasurable qualitative factors, including occasional madness...." That's humanity for you. Good luck trying to model that.

It is appropriate that David Simpson should preface his new book The Rediscovery of Classical Economics with the famous 'road less traveled by' poem by Robert Frost. For his purpose is to put forward an alternative to the equilibrium economics that has dominated the subject for nearly a century. His alternative is classical economics, in the tradition of Adam Smith, Marshall and the Austrians. In their view, economic growth is the thing to study; they see markets as a dynamic process rather than as static; and they focus very much on human nature rather than seeing economics as a series of detached, static, mechanical models.

The reliance on equilibrium economics leads to some systematically bad policy mistakes. The mainstream economists tend to assume knowledge, such as the lowest-cost mix for production, that the classical economists point out must be, sometimes painfully, discovered. Knowledge, and how dispersed pieces of partial information are used and co-ordinated by market players, is critical, but the mainstream economists and their policymaker counterparts again assume that they can do better themselves, from the centre – a fatal conceit. And the mainstream economists again assume that people are rational in their economic behaviour – which, says Simpson, does not reflect the reality of the world that we are trying to understand.

The book shows how classical approaches provide a much better understanding of how market economies work than does equilibrium theory. All economics is about human behaviour – something often forgotten by the mathematical modellers – so Simpson starts with looking at human being, the limited information they have and their hopes and expectations, and adaptive nature. Adaptation of course means constant change, and the book looks at how markets adapt to change in an incremental, voluntary and self-organising way, another useful lesson for policymakers.

Simpson sees the process of policy formulation as another evolutionary, adaptive process, though of course the motivating factors are different. And they are much more complicated than the simple business objective of turning a profit, which is why government policy is so often confused and contradictory. Simpson concludes by extracting some key principles from the Austrian economics including some insights on the severe limitations of mathematical analysis in economics.

Readers who have that uncomfortable feeling that economic policymakers and the economists who advise them have a less than complete understanding of what they are doing will find out, from this book, why they are right to think like that. I hope both economics and policymakers read the book, as it will make them far more aware of their own limitations when it comes to managing the economy – which is not a sort of machine you can easily tinker with, but a complex, dynamic network of economic processes that is quite good at organising itself.

I never heard back from the BBC. They called me to ask if I might go on the radio to talk on Sunday trading. But there was a twist: Celestina Mba, a devout Christian, lost her job at Merton Council because she refused to work on a Sunday. So she is arguing before the Appeal Court that employers have a legal duty to "reasonably accommodate" such religious views. If successful, people of other faiths could win the same rights. And not just councils but all employers could find themselves obliged to make special provision for devout workers.

So what did the BBC want me to say? "We thought you would be on the side of business," they asserted confidently. That is, employers could set whatever working conditions they wanted.

Well, I am on the side of business, a much-oppressed minority these days. And I do want this case thrown out – but not for the reasons the BBC imputes to me as a "business supporter". My view is that working conditions are a matter for negotiation between employers and employees. If they cannot reach agreement, then it's no deal: the employer has to look elsewhere for staff and the employee has to look elsewhere for a job. If the labour market is properly competitive, there are lots of other employers and employees out there.

This argument is consonant with my libertarian prejudices. Yet the world is not as tidy as this. Employers and employees are not necessarily equal when it comes to negotiations. The loss of an employee is of minor consequence to a large employer; but the loss of a job can be devastating for a worker, particularly in times like these when other jobs may be hard to find. In this, as in other parts of life, the common law has always sought to ascertain and uphold what is "reasonable": we have discovered that if we all act "reasonably", we have fewer disputes and less violence.

Is it "reasonable" that businesses should respect the rights of religious workers? Plainly. But what exactly is "reasonable" depends upon the specific circumstances. In the case of religious days, a large firm may be able to accommodate everyone's preferences; a small firm may not; and the common-law courts are fully aware of that and would not expect anything different. Sadly, there is a growing tendency for politicians to intervene at this stage, taking one court ruling and applying it as general policy for everyone and across everything – a single rule, law or regulation that takes no account of the particular circumstances of each case. Which means that in many cases, the law is not at all "reasonable" but is repressive.

As we all well know one analysis of the Great Crash is that it all happened because financial markets werte too concentrated. There were banks that were "too big to fail" and which we couldn't just let go bust therefore we had to bail them out. I certainly ascribe to part of that analysis, or to it in part perhaps. And a useful solution would therefore be to break up large banks so that none are in fact to big to fail. Seems a logical answer.

However, what is actually happening is that we're getting ever greater regulation of those financial markets. And that's a problem, for being able to deal with regulation is a fixed cost: and increasing those reduces the number of smaller players. As Craig Pirrong puts it:

The hedge fund article also points out something I’ve been hammering on for years now: perversely, since compliance costs have a huge fixed cost element, the regulatory onslaught creates scale economies that favor concentration and consolidation, and which can potentially reduce competition. You are seeing it in hedge funds. You are seeing it in banking. You are seeing it in FCMs. And I do mean perverse, because among the ostensible purposes of these regulations were mitigating the too big to fail problem, and promoting competition. The dramatic increase in regulatory overhead that favors the big over the small is completely at odds with these purposes.

I think we do all agree that sometimes there are things that must be done and also that some of these things that must be done can only be done by government. However, the list of things that can successfully be done by regulation is rather shorter than that list of things that must be done and which can only be done by government. For as here, sometimes the effect of the regulations is diametrically opposed to the solution of the problem we're trying to deal with. More paperwork will lead to an increased concentration in an indsutry.

A rather worrying document crosses my desk. This one, in which we are told the following:

The Task Force’s human rights analysis begins by making a link between human rights and extreme poverty. For instance, the UN Human Rights Council has recently adopted Guiding Principles on Extreme Poverty and Human Rights that describe how poverty is connected as a cause or consequence of violations of 14 different human rights and all the key human rights principles − ranging from the right to food, the right to health, the right to education and the right to social security, to the principle of transparency.

Considering the negative impact that tax abuses have on poverty and human rights, the state has a number of obligations to counter tax abuses. These flow from states’ obligation to use the maximum available resources to progressively realise human rights − including the obligation to confront tax abuses as part of an overall plan to strengthen financial and tax governance.

This is the International Bar Association talking here: and it's an interesting perversion of human rights that has led us to this pretty pass.

That perversion is of course the idea that positive rights are human rights. It's pretty simple with negative rights: freedoms of speech, or association and so on. These cost nothing to provide, you just don't do things that would stop people having such rights. Positive rights, those rights to food, education, health care, they do indeed cost money to provide. In the UK at present something like 30 t0 40% of everything the entire country produces in a year in fact. We must therefore violate someone's right to property to be able to provide those things to all. We thus have a conflict of rights and one or other of them has to give.

Now I'm not an advocate of our not having a state financed welfare, health care, education or social security system. Even the most minarchist state that I can imagine happening is going to have some role for government in those fields. Which inevitably leads to taxation of course. But I am arguing that we cannot include these positive rights in our definitions of human rights. For they directly conflict with others, with negative rights that we have already decided are indeed human rights.

Clearly and obviously the UN and the International Bar Association disagree with me on this point but I wave a very English two fingers in their general direction. We're going to have government come what may and that inevitably means taxation to pay for it. But it's taking matters much too far to claim that my paying Johnny No VAT cash for cleaning my windows is a violation of Jimmy's human rights as he doesn't get a plaster for his cut finger.