The Pin Factory Blog

Halfway through an MSc Economics at a well-respected department, I have found myself learning no new economics, but only struggling unpleasantly with a level of maths that seems relevant only for pure scientists.

The students, for their part, wish only to master the equations in order to pass the qualification and get good jobs. Broader economic ideas are seen as an optional module, rather than the core that they are. Microeconomics seems exclusively to rely on comparative statics (holding one variable constant whilst you assess another, in a state of equilibrium, using differential calculus).

But since we are not rational beings, the irrationality of this seems profound. The recent trend in "Behavioural Economics" is a step in the right direction (intertwining psychology into statistical assessments of activities), but again, one isn't certain if the exercise is just a ruse to further complicate the statistics.

I remain a fan of Schumpeter, and though for a time, he was head of the Econometric Society, he was also concerned to integrate more sociological understanding into his economic theories. The profession would not do too badly by trying to revitalise this (more integrationist) approach, utilising more of the core social scientific developments, and perhaps fewer of the natural science attempts at mapping certainty.

In order to be useful, the computationalists argue, we have to quantify our actions and be able to replicate them - anything else is simply hokum, and lacks both scientific rigour and logic. These, the theorists demand, is the key to everything. Maybe. But with increasing numbers of economists stemming from maths and engineering, what they are bringing with them is not economic understanding. Well-equipped critical thinkers are being discouraged from entering a discipline that is obsessed with the false certainty of mathematical analysis.

In a lifetime of work, study, family interactions and educational exposure, I have known very few people who are logical and rigorous, consistent and replicable. And the financial markets? Again, comes the argument, if we had cracked the phenomena of financial dynamics, software programmes that have automated actions following trends' analysis, we would not have brought august institutions to the ground in hours and there would probably be no business cycle.

And yet after decades of mathematical economics, we haven’t cracked these things. Institutions still fail, cycles persist and the human nature underlying it all remains just as unquantifiable. Perhaps by embracing the lack of clarity, the human “fuzziness” we can promote the contemplative again and start teaching and learning some real economics.

Damian Merciar is a Business Economist and Strategist, with 20 yrs experience of public and private sectors. He is also currently studying part time for an MSc Economics.

Speaking on Fox News Sunday following the U.S. presidential election, Bill Kristol, editor of The Weekly Standard, said that Republicans, having lost to the Democrats, could no longer hold out free market principles with respect to taxation.  ‘I think there is a very good chance that [President Obama will] pass major consequential legislation in the second term, and people like me won’t like it that much.  I think Republicans will have to give in much more than they think,’ he said.

Kristol elaborated on the GOP fallout:  ‘The Democrats picked up seats in the House and Senate, and the President is in good shape ... the Republicans in the House will be able to get some concessions and some compromises, but I think there will be a deep budget deal next year, it will be an Obama-type budget deal, much more than a Paul Ryan budget deal, type budget deal.  And elections have consequences.’

Read this article.

In between the turkey, spiced beef and mugs of hot port, I spent some of Christmas thinking about the state. Specifically, how to make it smaller.

Milton Friedman used to say that cutting taxes would force governments to cut spending to make ends meet. The last ten years has basically proved him wrong. Why cut spending when you can spend more, tax less and let the next lot pay the bill?

The old ‘tax cuts first’ strategy is dead. For a smaller state, we need to cut spending as we cut taxes, and avoid government borrowing as much as possible.

But it’s not quite that simple. The problem is that there aren’t many places you can cut without also changing quite a few other things as well. “Cut spending” sounds good, but, without much more fundamental reforms, almost any big spending cut would leave a lot of people high and dry.

The five biggest areas of government spending are health, welfare, pensions, education, and defence. To really shrink state spending, we need to cut all of these things. But without a complete overhaul of policy in general, no real cuts can be made.

The NHS is a socialist bureaucracy, but until we liberalize the healthcare market and make health insurance a viable alternative for NHS users, cutting the NHS might very well make patients’ lives a lot worse. A simple cut to the NHS would be bad because, thanks to the state, a lot of people depend on it for their healthcare.

The same goes for all the other big areas of spending. Want to cut education spending? Fine, but without something like school vouchers or private education tax credits, things will probably get worse. Some bits of welfare can and should be cut, but without planning reform to reduce the cost of rents and employment deregulation to increase the number of jobs going, people who genuinely cannot find work will suffer. And a tax system that takes £1,500 from a minimum wage worker is utterly morally bankrupt.

Try explaining to granny why her pension is being cut after spending her life paying National Insurance (under the impression that it was something other than a tax in disguise). And defence cuts – great, but not until we’re out of Afghanistan and servicemen’s lives won’t be threatened by a shortage of bullet-proof vests.

Of course deep spending cuts are needed. But, unless you’re happy to mess over people who rely on state services through no fault of their own, they can only work in conjunction with big changes in how we do things.

Spending cuts are a little bit like Brussels sprouts: quite good for you, but not very appealing on their own. But as part of a bigger meal, they can be wonderful. Deeper cuts are only possible with fundamental libertarian reforms of the state. That will be a bigger task than many would like.

We're all familiar with the screams of woe from the environmental movement. Peak oil, peak fertiliser, peak water, there's even a peak copper scare out there. The idea, if it can be flattered enough to be described as one, is that we're all using too much of whatever it is, there ain't no more and we're all going to die. Aieee!

And now we've got peak farmland approaching:

"We believe that humanity has reached Peak Farmland," said Jesse Ausubel, director of the Program for the Human Environment at the Rockefeller University in New York.

So there's no more land to grow more food on and we're all going to die Aieee! etc?

No, this is sensible people, not the usual envorinmental wailers. What they're actually saying is that given the increasing efficiency with which we use farmland we're not actually going to need any more. The true quote is:

"We believe that humanity has reached Peak Farmland, and that a large net global restoration of land to nature is ready to begin," said Jesse Ausubel, director of the Program for the Human Environment at the Rockefeller University in New York.

The one caveat is that we have to make sure we don't mess it up by growing biofuels: but even FoE and Greenpeace agree this is a bad idea now so we've only the politicians left to convince.

And it's entirely possible that this report is actually not optimistic enough. OK, this is the Mail but still: plantscrapers anyone?

Crops could soon be grown in greenhouses the size of skyscrapers in city centres across the country, it has been claimed. Birds Eye and other food producers are investigating building ‘plantscrapers’, which could accommodate hundreds of storeys worth of crops, in a bid to make farming more economical, sustainable and meet increasing demand.

Or another development, hydroponics using seawater as both the growing medium and the cooling necessary in a desert.

The old mantra was that we should buy land because they're not making it anymore. But the truth is, by making what land we do use more productive through the application of technology we are indeed making more of it. We're making more farmland, even if not more actual land.

One joy of this is that some good part of the land that is currently being farmed can be allowed to revert to nature. Which should of course please all those environmentalists: but it won't, they'll still be complaining. You see, hydroponics isn't organic. Ho hum.

We around here are pretty much in with the idea of free immigration. Even the scary statistics coming out of places like MigrationWatch show that there's a very small (about £4 a year I recall) benefit to the indigenous population. And of course the value to the immigrant is vast making it a definite pareto improvement. And as Bryan Caplan likes to point out, the immigration of low skilled immigrants still enables a more fine grained division of labour within the country to everyone's benefit.

But OK, let's be a tad political and realise that not everyone agrees with these obvious truths. That immigration must be limited in some manner. So, err, how have we ended up with a set of immigration restrictions that are so stupid?

The Royal Society says a separate government scheme introduced in 2011 to attract 1,000 top academics and artists had allowed only 50 people in.

That a government policy fails is hardly a surprise. But OK, they're trying to get top academics in. So why would the new rules have meant that one of our recent Nobel Laureates couldn't have got in?

Russian-born physicist Professor Sir Andre Geim said new restrictions on non-European Union immigrants, including minimum salary requirements of at least £31,000 and tighter student visa rules, are blocking the brightest academics from working at British institutions.

Well, you see, the thing is that British academics aren't all that well paid:

Sir Andre, 54, first arrived in the UK in the early 1990s as a Russian citizen with a permit to work as a post-doctoral fellow at Nottingham University. His salary would have been around £27,000 in today's money, meaning that he would have been barred from entry under the minimum salary requirement.

So the government wants to get all these top academics coming in, to the point where they've got a scheme to aid them in coming in. At the same time its own salaries that it pays to top academics (and yes, post-doctoral students are indeed that, they're all the people having the bright ideas. Professors are those who are old enough to have stopped having new ideas) mean that they cannot immigrate into this country under the requirements for immigrants to have a high salary.

Something of a facepalm moment that.

Which brings us to an important point. Government just isn't capable of doing these complicated things. Is incapable of the finesse necessary to achieve solutions to tricky problems. So we might well be better off if they didn't even try. You know, cut government back to the basics of defending the country and maintaining at least a semblance of law and order. Once they've shown they can manage that we might allow them to at least trying more difficult things. But not until they've shown they can master the basics.

David Cameron tells us that:

“The argument of the heart is even when things are difficult at home we should fulfil our moral obligations to the poorest of the world. There are still more than a billion people living on a dollar a day,” Mr Cameron said.

That's fair enough.

The Prime Minister acknowledged that the Coalition’s commitment to spending 0.7 per cent of GDP on overseas aid

That's not. It does make me wonder what, if anything at all, they teach in the philosophy part of PPE at Oxford. Only a moral actor can have a moral obligation: a country ain't such so it can't. We as individuals are indeed moral actors and we might well have a moral obligation to do something. Which, amazingly, many of us so with our donations to various international charitable causes. And well done us: but this does not extend to it being moral to confiscate our money to assuage the egos of politicians in alleviating foreign poverty.

Quite apart from which there's a more important point:

Huge bureaucracies are financed (with the aid money), corruption and complacency are promoted, Africans are taught to be beggars and not to be independent. In addition, development aid weakens the local markets everywhere and dampens the spirit of entrepreneurship that we so desperately need. As absurd as it may sound: Development aid is one of the reasons for Africa's problems. If the West were to cancel these payments, normal Africans wouldn't even notice. Only the functionaries would be hard hit. Which is why they maintain that the world would stop turning without this development aid.

Governmental aid is simply the wrong way to discharge that moral duty even if it existed. I'm sure I recall the British Council spending some of that much vaunted 0.7% on a female dance troupe (most feminist you see?) to interpret the dangers of climate change just as a weird example.

The correct way to alleviate poverty is as Madsen has been saying for decades now. Buy things made by poor people in poor countries. And the government's aid to our doing so could and should be the breaching of all the trade barriers that prevent us from doing so.

As an example, abolishing the Common Agricultural Policy would do more for poor peasant farmers elsewhere than anythinhg else we could possibly conceive.

I have to admit that what confuses me is that all of the above is entirely clear and obvious. And if we really did elect the just, righteous and intelligent to rule us then all of the above would already be happening. It isn't so what is it that this tells us about those elected?

There's a joint report out from the Resolution Foundation and the IPPR about the "Living Wage". It's here. And having actually read it, so you don't have to, I can confirm that the two groups should go boil their collective head. For they've missed the most obvious point of the matter they're whining about.

Their argument is that paying everyone a Living Wage would be better. It most certainly would be, no argument there at all. It would be even better if everyone earned more than that too. As we all do earn more than the living wage of, say, 1900. That we all get richer is known as progress and I'm all for progress. They then try to work through what it would cost to pay everyone that living wage. The answer being that, in companies that pay very few people below it not a lot. And in companies that pay many people below it a lot. Something I think we could have worked out without the aid of our proto-Labour MPs in the making.

However, the real reason they can go boil that part that they don't think with is that they manage to write their entire report without even mentioning that the Living Wage is a pre-tax number. They completely ignore that anyone earning minimum, living, or somewhere in between wages gets a couple of grand a year nicked off them to pay for duck houses and diversity advisers. Further, they completely ignore the point I've been screaming about here for several years now. If you didn't tax the minimum wage then it would be, to within pennies an hour, that very post-tax living wage that they're arguing for. In turn meaning that creating that living wage is well within the power of the political class, the Chancellor in particular. Simply raise the personal allowance for income tax and NI and there we are, job done, everyone in employment is not on the Living Wage.

And I['m afraid that anyone at all who wants to discuss this project and who is not willing to make this point will indeed be told to go boil their heads. Because, if you want to improve the incomes of the working poor then stop bloody taxing them so much. End of.

I will admit to being amused by one part of the report though. They point out that if instead of insisting on the full living wage we insisted upon payment of 90 % of it then....wait for it....it would cost companies less to do so. No **** Sherlock.

I suppose we should have realised this: if money doesn't make you happy then poverty isn't, necessarily, going to make you unhappy. Fortunately we now have confirmation of this point from our trusted news source on all things poverty related, The Guaridan.

Deprived areas of the country do not contain the unhappiest citizens, research by the government revealed as official statistics showed that one in eight people were struggling to manage financially during the economic slowdown. Speaking at the launch of the the latest release of data from the Office for National Statistics, David Halpern from the Cabinet Office pointed out that reported life satisfaction in Hartlepool was higher than in Blackburn despite similar levels of deprivation. "Look at Rutland, which is similarly wealthy to Wokingham. Yet levels of life satisfaction are much higher. Rutland is built near lakes. So we think environment does make a difference to happiness. It seems that if you can see a tree you are happier," said Halpern, who leads the government's Behavioural Insights Team.

That is, of course, fascinating. Most especially when we mix it with the new happiness economics which suggests, nay demands, that government policy should be about increasing the happiness of the citizenry, not the wealth.

For what it means is that instead of taxing the rich to give more money to the poor we should instead just organise things so that those poor can see a tree. I can't say I'm entirely convinced by this but it is the logic of these oh so currently fashionable ideas. And we here at the ASI have already worked out how to do this: Land Economy.

Land Economy proposes the most radical change in land use in decades, putting the case for redeveloping agricultural land into a combination of woodland, housing and infrastructure. By converting just 3 percent of the farms in England and Wales over a ten year period, covering 90 percent of the land with trees and the other 10 percent with houses, we would create 950,000 new homes and almost 130,000 hectares of new woodland.

At usual sort of occupancy rates that would mean 3 million people able to see a tree and mademuch happier by being able to do so. And even better, it doesn't actually cost anything to do: not from public funds at least. We just issue theplanning permissions and the market will happily take care of the rest. Indeed, the public purse will find the burdens upon it lessening as an increase in the housing stock of that size will lowerprices and thus the housing benefit bill.

All round it just sounds like the most lovely idea really. And so with it and hip, don't you think? Truly making people happier without doing anything so consumerist as having to spend a bean.

In the course of destroying Sandel's wibbling about whether market transactions are fair or not Deirdre McCloskey explains what actually is this liberal bourgeois deal on offer:

Suppose that behind a veil of ignorance of where you or I would end up in some future system of markets and creative destruction, or their communitarian opposites, we are asked to decide what constitution we would agree to. Go ahead, choose: neo-liberal markets or communitarian interventions. Suppose, as in fact happened in Holland and then Britain in the seventeenth and eighteenth centuries, we pretty much agree to the Bourgeois Deal—you let me, a bourgeoise, make a fortune inventing the coffee trade or very cheap steel or a computer operating system, and in the third act of the economic drama I'll make you (all) rich by historical and international standards: $129 a day per person in the United States in 2010 as against $6 a day in the same prices in 1800 and $1.40 a day now in Zimbabwe and less in North Korea.

The Deal is not in the first act egalitarian, which is as far as Sandel's economic and philosophical analysis reaches. Yet by the third act it has been powerfully enriching for the poor, satisfying a Buchananite-Rawlsian standard of improving the lot of the worst off. The daily incomes per person in the average country that has agreed to the Bourgeois Deal has risen, in real, inflation-corrected terms, from an appalling $3 a day in 1800 (and likewise since the caves) to $100 a day now (thus the UK)—and much higher if one properly allows for the much higher quality since 1800 of travel and medicine and economic analysis.

And that is pretty much it. If we don't allow the creative destruction and the markets then the poor don't get rich. If we do they do. So if our aim is to allow the poor to get rich then we have to allow the markets and the creative destruction.

Which is of course where modern politics goes so howlingly wrong. We're told that we must be more communitarian precisely because not to be so is unfair to the poor. But how is keeping them poor fair? Which leads to the conclusion that if you are indeed of the left and wish to make the poor rich then you should be supporting markets and that creative destruction.

This is certainly where I come from: it's also where the left of the 18th and 19th centuries came from as well. It's the inspiration for the whole classical liberal economic viewpoint. Would I like those in Zimbabwe and N Korea to enjoy the same economics possibilities, even luxuries, as you and I do? I sure would, which is why I keep shouting that we want to have more markets and more creative destruction.

By the way, it's also possible to argue that inequality itself diminishes as we all do get richer. Sure, you can point to money incomes and note that the Gini has risen. But the old inequality was between those who could not afford to eat and those who ate 5,000  calories a day. Between those dressed in silks and those in rags, between mud hovels and mansions, 16 hour workdays and lives of ineffable luxury. Barring that tiny fraction with drug and mental health problems, all today eat, are clothed and housed and the only people slaving all God's Hours are the rich. It's very difficult to say that inequality has actually increased in any meaningful manner, money incomes be damned.

As I've mentioned, this is the time of year to be talking about taxation. It was Caesar Augustus who started this whole Bethlehem thing after all. And here we have Steve Landsburg telling us that the real lesson of A Christmas Carol is, well, it's this:

Great artists are sometimes unaware of the deepest meanings in their own creations. Though Dickens might not have recognized it, the primary moral of A Christmas Carol is that there should be no limit on IRA contributions.

Well quite. And this is the lesson of the Mirrlees Review as well.

As Landsburg points out. if you save then you're doing someone else a favour. If you save what you've earned and stick it in the bank then that lowers interest rates (however infinitesimally) for someone who wants to borrow, allowing them to consume. And if you save just under the bed then you have produced something in order to earn but you're not consuming. Thus leaving more goods and services to be consumed by others.

The lesson of which actually extends long beyond IRA (or pension) contributions. All savings and all earnings from savings should be tax free. It is consumption, not income or capital, that should be taxed. As indeed the Mirrlees Review goes on to point out.

What we'd really like to have is a proper consumption tax. At the end of the year your income is measured. What you have added to savings is deducted from that. What you have withdrawn from savings and spent is added to it. It is this net sum, income plus or minus changes in savings, which then pays tax. Earnings on savings which are reinvested are not taxed.

Essentially, all savings are inside a giant ISA in our system. At which point Tiny Tim would indeed be able to say, "God Bless us all. Everyone."