What neoliberalism hath wrought

As we all know it's a fairly common trope over on the left to say that the mid 70s were when everything was best. The UK was more equal at that time than at any other point before or since, the labour share of the economy was at its highest ever and, well, in general, everything has been downhill since then. Internationally, the rise of "neoliberalism" with Maggie in 1979, Ronnie in 1981 and that appalling system of ideas, the Washington Consensus (essentially a list of things not to do because we know they will screw up an ecoonomy) has right royally messed things up internationally.

I beg to differ:

Despite the recent hiccup caused by global recession, between 1970 and 2010, average incomes in the UK more than doubled, according to data from the World Bank. And wealth has been spreading worldwide, so that poverty measured as the proportion of the population living on less than $1.25 a day has more than halved since 1990, thanks not least to rapid growth in China and India.......The average Briton born in 1960 could expect to live to 71. Today, the average Brit will live 10 years longer. Indeed, fewer people are dying at every stage of life. Nearly 3% of infants born in Britain died before their fifth birthday in 1960. Today that figure is one half of 1%......In 1990, nearly 12 million children worldwide died before they had reached their fifth birthday; today, that figure is below 8 million......There were 24 wars worldwide in 1984, but by 2008 that figure had dropped to five. The worldwide annual death toll from war, already very low by the previous century's standards in 2000, fell by a further 40% between then and 2008.......The Polity database, maintained by George Mason University in the US, rates the world's countries on their status between absolute autocracy and perfect democracy. The average global Polity score across countries has never been as high as it is today. Recent events in the Middle East are just the latest manifestation of a heartwarming fact: democracy is now the default for political systems worldwide.....Vaccines reduced measles mortality in Africa from 400,000 deaths a year to below 40,000 between 2000 and 2006 alone.

That listing is, would you believe it, from the Observer.

Now I wouldn't make the mistake of trying to say that the world's perfect, or that there haven't been elements of two steps forward, one back. But there's very definitely an element of the future's so bright I've gotta wear shades there, we the British are getting richer and living longer lives, fewer of our children are dying cruelly young. The same applies right across the world in fact, except for those ever fewer places plunged into war, civil or otherwise.

Not perfect, but the world's becoming an ever better place and if the prevailing political ideology is going to be blamed, as it is, for the state of the world then that prevailing political and economic ideology also gets to take the plaudits, where such are due. And they are due.

Greater economic and political freedom, which is all "neoliberalism" is after all, has made the world a better, richer place. Long may it continue.

No, we're not going to build a large model of the financial markets

No, we're really not, whatever BIS says about it being a wonderful way to spray taxpayers' money at favoured parties.

Felix Salmon tells us all about why the banks and the financiers won't pay for it. Largely because if it finds anything then they'll be more regulated. And you can read what BIS thinks about it here in 40 or more pages.

We conclude with an argument that, in the specific case of the global financial markets, there is an urgent need to develop major national strategic modelling and predictive simulation capabilities, comparable to national-scale meteorological monitoring and modelling capabilities. The intent here is not to predict the price-movements of particular financial instruments or asset classes, but rather to provide test-rigs for principled evaluation of systemic risk, estimating probability density functions over spaces of possible outcomes, and thereby identifying potential “black swan” failure modes in the simulations, before they occur in real life, by which time it is typically too late.

No, no and thrice no. Even, scream "Noooooo!" while fleeing the country that would do such a thing.

Allow me to introduce our two computing experts to an economist. A certain Mr. Hayek who taught for a number of years in our fair and pleasant land.

You cannot model the market because the only method we have of modelling the market is the market itself.

Too much knowledge is local, there is too much knowledge to attempt to capture it, it is simply not possible to model something as complex as the financial markets using anything other than the financial markets themselves as the model. If you like, you cannot map the territory it is only possible to use the territory itself as the map.

Now, if were just a few programmers playing with a box or two, well, leave them to it perhaps. But quite apart from that not being what will happen (they are already calling for a programme the size of the weather prediction business, supercomputers and all) and thus much more money than that will be wasted, the programme itself will introduce horrible uncertainty into the system. For, you see, the regulators, the lawmakers, will think that having spent tens, hundreds, of millions to map the territory, model the markets, will think that they actually understand them. That there are no little grey areas, no bottomless pits of ignorance into which they can fall, no relationships or linkages unknown.

And yet we know that this is impossible. They simply cannot manage to create a model which does not have these lacunae: and there's nothing on the planet more dangerous than a politician who thinks that they really do understand something.

Well, there you go, hundreds of millions saved and financial calamity averted. Yes, I'll wait until the next Honours List for my MBE, that's fine. And could I just add a little routine that I'd hope that the Government Office of Science might like to follow in future?

When you've got non-economists making suggestions about matters economic, would you like to just run their ideas past an economist before paying anyone anything? Would save both time and money you know.

2011 Top Fives

Before it's too late, here are my Top Fives for 2011:

Top 5 - Cinema (released in the UK in 2011)

1. The Skin I Live In
2. Midnight in Paris
3. Black Swan
4. Tinker Tailor Soldier Spy
5. The Kings Speech

Top 5 - TV (aired on UK TV in 2011)

1. Mad Men, Season 4
2. Boardwalk Empire, Seasons 1 & 2
3. Game of Thrones, Season 1
4. Bored to Death, Seasons 1 & 2
5. Fringe, Season 3

Abolish Driving Licences Now!

Those of us who are econ geeks will know about the Pelzman Effect. Regulations that supposedly make us safer (say, seatbelts or cycling helmets) don't actually make us safer as behaviour changes to take account of the new safety. Almost as if there's what we consider to be an acceptable risk to take and reducing it in one manner just allows us to be silly in another so as to maintain that risk we're comfortable with. What I didn't know (but better econ geeks than I might have done already) is that there is a Reverse Pelzman Effect.

Exploiting an interesting natural experiment, the authors of that paper are able to show that we should abolish driving licences. The various States of Mexico found that bribery was impossible to avoid when attempting to gain a licence. So, to varying degrees, they changed their issuance system, some deciding simply not to have them any more. So, of course, death rates from car accidents went up, didn't they?

Erm, actually, no, they didn't. Those places that didn't bother with licences any more, allowing absolutely anyone at all to get in and drive, saw no change in such death rates any different from those that had now (well, hopefully) incorruptible issuance systems.

Yes, the death rate on Mexican roads is indeed appalling: but it's no worse in those areas that demand licences than it is in those that don't nor vice versa. Thus drivers' licences are not needed and we can abolish them.

I would have known this if I'd ever bothered to listen to Pater. I only remember it now because he's reminded me. The basic lesson of driving is always to drive as if every other driver is drunk, mad or incompetent. Or all three. And as it turns out, when we really do recall this because no one has to take a test then we do adjust our driving habits to take account of their madness or incompetence.

I look forward to the UK being the 22 nd largest economy in the world

Oh dear, oh dear, looks like we've got a nasty outbreak of league tables on our hands again.

CEBR chief executive Douglas McWilliams said: "Brazil has beaten the European countries at soccer for a long time, but beating them at economics is a new phenomenon. Our world economic league table shows how the economic map is changing, with Asian countries and commodity-producing economies climbing up the league while we in Europe fall back."

However over the next 10 years, Britain is expected to fare better than France, which is currently the fifth-largest economy behind the US at number one, China, Japan and Germany.

The CEBR forecasts that the UK will be the eighth largest economy by 2020, with France in ninth spot, Germany in seventh spot and Russia and India in fourth and fifth place.

It simply doesn't matter which country has the largest economy. For an economy is not a country nor is a country an economy. What we actually want to measure is how well the economy of any place (whether village or continent and anything in between) adds to the gaiety of life in that place, how it aids in increasing the happiness of those who live there. Possibly even their freedom and liberty, sdmiles on children's faces and the choices that people are able to make.

Which means that looking at this 192 million people over here (Brazil) and comparing it to this 62 million over here (the UK) is simply nonsense. For once we've adjusted for population size we find that the UK manages three times the living standards of Brazil: sunshine, capirinhas and football be damned.

I myself look forward to the time that the UK has the 22 nd largest economy in the world. For as the 22 nd largest nation by population that would mean that the billion odd Chinese have overcome decades of Maoist lunacy, the more than a billion Indians have got through decades of Nehru's foolishness, that 230 million Indonesians have overcome Suharto's (and Sukharno's) greed corruption and avarice and joined us in that sunny upland of being just about as rich as it is possible to be at our current level of technology along with everyone else as well.

For the economy really isn't a zero sum game and their getting rich will make us richer too. And who really wouldn't want that to happen?

The ASI's best of 2011: Sam Bowman

Sam Bowman, Head of Research:

It was a pretty good year for films, both because of some excellent rereleases (Apocalypse Now, Jurassic Park, The Lion King – thankfully shown in 2D as well as 3D) and terrific independent films. The Guard was the funniest film I saw this year, about an rural Irish policeman teaming up with a black FBI agent to bust up a gang of drug smugglers, although some of the humour may be lost on a non-Irish audience. (I usually side with the drug smugglers in films like these, but they were suitably nasty in this one.)

Drive was extremely slick, and had a great soundtrack — it wasn't the most profound film ever, but it was a good watch. We Need To Talk About Kevin was well-made but deeply unpleasant to watch, and its polar opposite My Week With Marilyn wins the Most Enjoyably Frothy award from me. I should also give special mention to Attack the Block, which I haven’t seen yet but may be in one scene as a background extra. (I'm a big fan of its director, Joe Cornish, from his TV shows and radio programmes with Adam Buxton.) The most outstanding film of the year, for me, was Tinker Tailor Soldier Spy. Mark Kermode insists that it's a film about the tense relationships between men (and not, as you might think, about spying), so the fact that every man at the ASI has chosen it as one of our films of the year might say something about us!

Most books I read this year were released before 2011. Of the 2011 crop, Detlev Schlichter’s Paper Money Collapse was one of the best. Schlichter reframed the Misesian theory of the business cycle for modern times, giving a stark prediction about a Weimar-like future for the world’s fiat currencies. Of the fiction I read, the most enjoyable were the fantasy A Song of Ice and Fire books (on which the Game of Thrones TV series is based). I'm working my way through Tony Judt's history of Europe since 1945, Postwar, but it is so vast that I tend to dip in and out.

It wasn’t as good a year for music as some previous years, but there were still a few notable releases. Kate Bush’s 50 Words for Snow (sample song) was a languid, dreamy snowscape, and a return to form after the disappointing Director’s Cut. From Britain, the only outstanding album for me was Metronomy’s The English Riviera (sample song). St Vincent’s Strange Mercy (sample song), Lykke Li’s Wounded Rhymes and Bon Iver’s Bon Iver were all pretty good, but I wasn’t grabbed by many albums this year overall.

Most of my favourite TV at the moment comes from the US. Game of Thrones proved that HBO could do fantasy, fusing the epic setting of the Lord of the Rings with the characterization of The Wire or The Sopranos. I finally saw Band of Brothers, which was brilliant. But the best show I saw this year was Parks & Recreation, a hilarious successor to the US Office set in a small town local government department which also included possibly the first openly libertarian character on TV. (If you decide to try P&R, skip the weak first season.)

My favourite YouTube video was Nicholas Cage Losing His Sh*t (video may be NSFW). That's pretty much how I feel whenever I read the newspaper nowadays and see stories like this. I don't have a favourite politician of the year, but I like Gary Johnson and hope he does well on the Libertarian Party ticket in 2012. Ron Paul has an ugly past, but I like him and hope he does well in the GOP primaries.

What to hope for in 2012? I think the silent film The Artist will be great and loved the trailer. If I'm lucky, Joanna Newsom might do another album, and musicians I love like Of Montreal, Janelle Monae and Dirty Projectors are all expected to as well. And I'm hugely enjoying my advance copy of Daniel Klein’s book Knowledge and Coordination, in which he makes the case for a liberalism based on a synthesis of Adam Smith and FA Hayek, and which I will review on the blog when it is released. 

The ASI's best of 2011: Madsen & Eamonn

Madsen Pirie, President:

Movies

The best movies I saw were

The Eagle

A great tale of adventure, loyalty and friendship in Roman Britain

Tinker Tailor Soldier Spy

It holds up splendidly against the Alex Guinness TV version, with more than a nod in its direction.

Hugo

A brilliant, atmospheric and absorbing tribute to the early pioneers of cinema. Beautifully shot with effective use of 3D.
____

Books

The best books I read were

Dictators' Houses (by Peter York)

How fascinating to see how dictators live, unrestrained by taste. 

The Churchill Memorandum (by Sean Gabb)

A fast-paced romp through an alternative post-war history in which all of the political opponents I have despised are cast as traitors or mass murderers!

What Am I Still Doing Here (by Roger Lewis)

Roger Lewis looks with dispassionate eyes at the sometimes squalid lives of people and places he has known, but never without humour.
____

Events

Among the events I enjoyed were:

The Royal Wedding

I celebrated it with friends, decorating a balcony in Nice and with a union jack cake and champagne to toast the happy couple.

Reagan Statue unveiling

I joined the crowds in Grosvenor Square unveiling the great man's statue, and in Guildhall to hear Condoleeza Rice and William Hague celebrate his achievement.

Mont Pelerin Society meeting

I had the chance to mingle with great intellects in Istanbul, and to cruise the Bosphorus in style.

~

Eamonn Butler, Director:

Best film:

Tinker Tailor, Soldier Spy - different from but just as gripping as the TV series with Alec Guiness.

Best book:

Nicholas Phillipson's Adam Smith - An Enlightened Life.

The ASI's best of 2011: JP Floru

JP Floru, Director of Programmes:

As a contrarian I’m reluctant to prove that I am human after all - what’s wrong with being a Martian?  But our Sam has asked us to do this – so here we go.

Talking of Martians, the most interesting event I attended this year was a talk organised by the Economic Research Council about Space Travel and Space Exploitation – some people there couldn’t wait to move to another planet.  My second most favourite event was attending mass at Westminster Abbey with the Pope.  He is even smaller than I am, and has a very high-pitched voice with a strong German accent.  Lots of incense and pump and circumstance, and red mitres and golden clothes.   Yes!

As for films, for me only those where everybody is rich will do.  This started when my communist teacher in school discouraged us from watching Dallas “because it glamourised the rich in America”.  Not for me, serfs crawling in the mud, fighting over a potato: films are to escape.  I switched the DVD three minutes into Black Death last week.  This film featured Eddie Redmayne, who I saw in the fantastic play Richard II at the Donmar last week.  Favourite play of the year, though I don’t really do plays.  Richard II would be the favourite play always, because of the “Sceptered Isle” bit (tears), which also talks about “That England that was wont to conquer others, hath made a shameful conquest of itself”.  This second bit, presumably, talks about the European Union.  All very topical.

Back to films.  Melancholia by Lars von Trier ticks all the boxes: everybody is rich; they live in castles; there is some SF in it (without ghosts and Martians, all perfectly possible); it is sufficiently weird and hasn’t bee done before.  Another potential contender, Almodovar’s The Skin I Live In I disliked profoundly because too gory. The King’s Speech had glorious decors but no story and I never got Mr. Darcy’s allure anyway.  Downtown Abbey (of course), though the second season was not as good as the first (of course).  Had Lord Fellowes been told by the BBC to write more about downstairs than last year?

Music: I listen to XFM at high volume while driving through Central London and making tourists jump.  I like most of it, especially when upbeat.  Surprise then that this year’s winners for me are two melancholic tunes: Video Games by Lana Del Ray; and On Melancholy Hill by Gorillaz.  But I am more a classical music person: the grander and the more pompous the better: Handel, Vivaldi, Lully. Versailles rocks.

Politician of the year would be Boris (as all years for the previous five). David Cameron was a surprise second (late entrant after the Veto in Brussels).  Ed Millibore: Zero Point. Other losers include: Rowan Williams, for being so predictably socialist (and therefore boring).  Most dangerous politician of the future: Yvette Cooper.

Favourite places of 2011: Sweden (very civilised) and St. Jean-Cap-Ferrat (France) where I will move to when I win the lottery.

Most impressive video clip: Zach Wahls Speaks About Family.

What I look forward to in 2012: More vetoes on Europe; The Iron Lady; and writing a second book.

Which is the most generous country in the world?

Which is the most generous, the most charitable, country in the world is rather a difficult question really. We know what the official answer is, a neck and neck tie between Norway and Sweden for those are the countries that give the highest portion of their economy as official overseas aid each year. You know, well over that 0.7% of GDP that is supposed to be gioven away as Official Development Aid (ODA) and the number which the current Coalition has insisted that we will maintain even as everything else is up for grabs in budget negotiations.

You can see a country listing here. The figures are a little old which is why the UK is so far down the list. But look, for example at the US: the meanies!

However, that's not really measuring which country is the most charitable. It's in fact measuring which governments are most charitable with the citizenry's money. Which politicians are most willing to use the power of taxation at gunpoint to feed money to foreign potentates.

There's another way entirely of measuring who is most charitable and that's to actually go out and count those who are charitable. Who gives money voluntarily, who helps strangers, who volunteers at charities and projects. Which is what the Charities Aid Foundation has done. The results are really very different: The US is the world's most charitable country, Ireland second, Australia, New Zeland then the UK fifth. Norway's down at 32 and Sweden languishes 40 th.

There's a number of ways you can look at this information: that what governments do purportedly on our behalf is not the same as what we do ourselves. Or even that government's priorities are not the same as ours. That the most charitable nations seem to be the relatively low tax Anglo-Saxon ones will come as a surprise to many: but then again, perhaps it's the low tax which leads to the charity. We find our desire to do good not being crowded out by government: or even we find we've a small enough tax bill that we can afford to do good directly. Possibly, even , that in certain countries they know that government is handling it so why bother to do anything oneself?

I think the biggest point that I would pluck from this though is that it's easy enough for politicians to take our money and spend it they way they wish: but charity requires rather more than that and it does seem to be those countries where the exactions of the revenue are lower that have room for that rather more.

It wasn't the Efficient Markets Hypothesis wot did it

It's been a common enough trope, that it was the Efficient Markets Hypothesis (EMH) that led to the crash. Usually put forward by those who don't understand what is being claimed, true. What it actually says is that markets are efficient at processing information about what prices should be in markets. What some seem to think it says is that "markets are efficient". Which may even be true but that's not what is being claimed by the EMH. However, there are those slightly more clued up who do know what EMH means and blame it for the finanacial woes. Because everyone thought that markets were efficiently processing information no one was doing their own processing to see if they were right.

Thus dodgy mortgage bonds got rated AAA, everyone bought too many of them and thus we had collapse. However, via Tyler Cowen, we've a new paper which makes a very interesting point.

The first statement (ie, that the EMH is to blame-Tim)is at odds with the fact that prior to 2007,collateralized debt obligations (CDOs),3 the mortgage-related bonds at the
center of the financial crisis, were offering much higher yields than straight corporate bonds with identical ratings, apparently for good reason.4 Disciples of efficient markets were less
likely to have been misled than those investors who flocked to these instruments because they thought they had identified an undervalued security.

Those bonds were more risky, those bonds were lower priced (had higher yields) to reflect that risk. Those who actually believed the EMH would therefore not have been mislead as to the calculating value of the EMH. It was those who did not believe the EMH who got biffed then.

There are a couple of other excellent insights like this in the paper and I recommend reading it all. For over and above those specific points, it really is an excellent over view of the various explanations that are being bandied about.