In which we refute Piketty - thusly

All too few of us really understand the scientific method. Certainly, whenever it comes to the social sciences the truth of the technique rather goes by the wayside. So, to repeat, we come up with an idea, this becomes the hypothesis. We then look around for facts which will refute this idea. For as long as we find no facts that do disprove our idea then it stands as a possibly useful description of our world.

But note the truly important part. When we find a fact which cannot be true if the hypothesis also is then it is the hypothesis, that idea about how the world works, which is rejected, not the fact.

That's the bit the social sciences have such difficulty with, the rejection by fact-finding. Clearly, if this were not so then we'd not have as many as we do insisting that socialism and planning will make us richer given our evidence of 1989.

Thomas Piketty made waves with his insistence that inheritance of wealth is leading to a division in society., one where place in that society is solely determined by membership of the lucky sperm club. We also have certain facts about wealth and who has it and why:

The number of people who inherited their wealth has gone down, with 94 per cent of the rich list being comprised of self-made entrepreneurs. 

Yes, that's a strong enough fact to refute the hypothesis. The idea is wrong and we not just should but must discard it.

Those concentrations of wealth are not being inherited, they're being newly created. Which is great of course, we like new wealth being created, given that we know how much of - some 97% or so in fact - entreprenurial wealth flows to us, the consumers, only that fraction sticking with the entrepreneur.

An elegant proof of why planned economies don't work, the efficient markets hypothesis

The efficient markets hypothesis tells us that it's not possible to regularly beat the market. For information about what prices should be is already incorporated into those prices. Sure, some beat it for some period of time because that's just the way statistical variability works. Some, like Warren Buffett, beat it for a long time but then his cost of funds is lower than the market's.

We also have all sorts of people out there who insist that the use or markets to allocate economic resources is the wrong way to be doing it. That the wise people in government should be doing this for us instead perhaps. 

At which point, an interesting comparison:

The message is clear: the beat-the-market efforts of professionals are impressively and overwhelmingly negative. In any asset class, the only consistently superior performer is the market itself. It is well to consider, briefly, the connection between the socialists and the active managers. I believe they are cut from the same cloth. What links them is a disbelief or skepticism about the efficacy of market prices in gathering and conveying information.

Odd to equate socialists and money managers, true. But the underlying point does stand. If we had evidence from our unfettered (no, don't titter at the back there) financial markets that they could consistently be beaten by good planners, then it's possible that good planners with adequate powers could improve upon a market economy.

We don't see that market outperformance - thus the planning part isn't going to work either, is it? For all the evidence we have is insisting that we cannot beat the market.

Why shouldn't the people who benefit pay for infrastructure?

There's a certain amount of shock, horror, being expressed at the idea that property owners near Crossrail 2 stations might chip in some of their value gains to pay for Crossrail 2. It being a reasonably obvious observation that being close to a station running in and out of London increases property values.

Home owners living within a certain radius of Crossrail 2 stations could be forced to stump up millions to pay for the project.

Transport for London is considering introducing a levy to fund the £30 billion scheme, which will run from Broxbourne in Hertfordshire to Epsom in Surrey, through central London.

It would create three zones stretching a kilometre around each station. Each zone, mapped out in concentric circles, would have a scaled charge, known as the Transport Property Charge, descending with the distance from the station, according to Estates Gazette.

This is of course close to, a variant of perhaps, land value taxation. The society around you has increased the value of your land. Why not a tax to pay for the process of increasing your land value? 

We might also note that this is not uncommon in transport circles. Hong Kong's metro is largely paid for in this manner, the Jubilee Line to Canary Wharf, the more recent Northern Line to Battersea. Property owners benefit from this, why not property owners pay for it at least in part? 

There most certainly can be specifics wrong with such charges - come on, this is government, of course there will be errors. But the basic idea, that those who profit from infrastructure pay for it seems fair enough.

Is Eurovision worth the cost?

This morning I jumped onto BBC Radio Wales to discuss the costs and benefits of the Eurovision song contest to the UK. 

Back in 2013 Dr Eamonn Butler wrote a great blog piece on the cost of the contest to the UK. In it he detailed the payments that the BBC makes to the European Broadcasting Union that hosts the contest: £279,805 in 2009, and £283,190 in 2010, £310,000 in 2012. What does this buy us? Well it buys the BBC the right to show the programme and it buys us a guaranteed place in the final. 

It doesn’t buy us the cost of the BBC’s production though. So I thought I’d update that a bit with some more figures, to give a better picture of what we spend and for you to decide if we’re getting bang for our buck. 

The benefits are obvious of course, so I’m going to focus on the costs. 

While the beeb isn’t keen to be open on how much it spends on Eurovision coverage, we can get an idea based on the spends the BBC is open about elsewhere. 

In their commissioned tariffs structure the BBC says the Premium Entertainment (including ‘one-off specials’ broadcast on flagship national TV networks like BBC 1) price per hour the BBC expects a show to cost is between £400,000-£750,000. 

Eurovision isn’t just a one-off on one day. As any die-hard fan will let you know it’s many months in the making and the actual contest is a week-long phenomenon, with two semi-finals broadcast live and then the Saturday final. The semis last around 2-3 hours and the final has been known to go beyond 4. In the UK we also have the BBC’s ‘You Decide’, run live on BBC 1 and BBC Radio 2. So we’re looking at a potential spend of between £4m and £7.5m on top of the payments made to the EBU (if any rogue BBC journalist wants to drop me the true figure, my DMs are open). 

And of course there’s the salary of our superstar presenters. One who earns £900,000 per annum direct from the BBC (not to mention his fees for his regular show on the beeb), another who earns £250,000-£300,000 and two that earn through producing companies for this one-off so don’t show up in the superstar earnings breakdowns. 

This year’s first semi final saw UK just half a million watching the first semi-final, just over that amount last night for the second semi. Tomorrow is the final and based on audience figures being up for the semis we might expect it to beat last year’s 6.73m who turned in (which was about 36.6% of the Saturday night audience). This year’s contestant picking show had fewer than 1m viewers. The final in particular is a pretty substantial number – comparable regular annual events are the Voice (5.7m) or the X Factor Final (4.4m) with the FA Cup getting over 9m. This is of course nothing compared to the audience share for the final in Sweden (70%) or Iceland (98%). 

Eurovision costs are borne by Licence Fee payers and the EBU has been pretty vocal about its support for the system. We are, as you might expect, slightly less keen on a fee that makes up 10% of our criminal cases and which crowds out private competitors. 

The good thing is we’re not likely to win the contest any time soon. When Azerbaijan hosted the contest in 2012 they spent £48m on it and got just £7m back in tourism revenues, Copenhagen in 2014 spent £36m and got £13m back. It’s better if you do it on the cheap, Malmo spent £17m and got an estimated £16m back. Last year’s hosts Kiev ended up spending around £30m, it destroyed plans to reform the state broadcaster into a private one and took up nearly a quarter of its annual budget. 

I’m not going to say whether Eurovision is worth it (I have spent a lot of this week listening to the songs on repeat via my private subscription to Spotify, or watching videos supported by adverts on YouTube) but we should know how much our publicly funded broadcasters spend on events in our name and perhaps we should be more open to private broadcasters taking up the reins. 
 

Not that we expect anyone to thank us but housing policy is working

We have, for a number of years now, been pointing out that what ails the British housing market is really very simple. We have a shortage of permits that allow one to build on specific pieces of land.

We do not have a shortage of land - housing is 3% of so of our land area. We don't have a shortage of land where people wish to live either - given the inevitability of positional goods like a mansion in Mayfair at least - nor even, over time, of the ability to build more housing.

We've just a legal structure and a bureaucracy dedicated to not allowing people to build housing without those permits in artificial shortage.

Recent policy has been, not as fast as we'd like, not as big a change as we'd like but in the right direction at least, to issue more of such permits. The result being, as even The Guardian notices: 

At last, a reason to celebrate: house prices are falling.

We're not the sort who would boast of having told you so, heaven forfend that we should be so self-regarding.

But, you know, we did tell you so.

These markets things, the interaction of supply and demand changing prices, they really do work, are a useful description of that reality out there.

The history of property rights in Judeo-Christianity

Yesterday evening, we hosted the author and historian Benedikt Koehler who presented a whistle-stop tour through 2,500 years of thinking on property rights in Judeo-Christianity. John Locke’s contention that everyone has a right to own property now seems so obvious it is hard to imagine how it could ever have been contentious.

However, the opposite notion - that land was beyond the reach of private ownership - had been axiomatic from the beginnings of Judeo-Christianity and throughout most of the Middle Ages.

You can view the slides from Benedikt's lecture by clicking here, and listen to our Facebook Live recording here.

Cat & Dog Economics

Books, poems, films and theatre productions have been written and produced over many decades celebrating the unconditional devotion and affection that exists between dogs, cats and their owners: A Streetcat named Bob; Clare Balding’s delightful book My Animals and Other Family about her maternal bulldog Candy; and the incredible story from Australia of Sophie Tucker the castaway dog, to name but a few.

However far less has been recorded of the parallels to Human Health from owning a companion animal, in what is an effectively largely overlooked adjunct to Social Welfare.

Dr Leigh Plummer, A Sydney Clinical Psychologist has drawn on his experience working with people suffering from mental health issues to demonstrate how owning a cat or a dog can improve owners’ sense of self, from walking the dog, communicating with other dog owners in the park which can help those suffering depression and sense of isolation. 

Owning a cat can provide companionship in the home and alleviate loneliness especially for the elderly or infirm and the daily routine provided by feeding, cuddles, and stroking can make for a more rewarding life for many who live alone.

Remember the touching story of Billy the stray cat who brought the autistic 4 year old Fraser Booth out of his shell? An air of peace, happiness and calm returned to the Booth family home.

A compelling British published pamphlet “Companion Animal Economics: The Economic Impact of Companion Animals in the UK” says that readily available data collection for companion pets is poor in the UK as, up until now, there has been little requirement for statistical collating of pet ownership by Government. In contrast, Germany and Australia have already published studies on this fascinating Human-Animal bond.

A common theme in animal companionship literature is the anxiety- reducing effect that cats & dogs have (Lang et al., 2010, Berger & Grepperud 2011, Dietz at al, 2012). 

In 2007, 2.28 million people in the UK were diagnosed with an anxiety disorder which costs the economy £8.9 billion. By 2026 it is projected that 2.56 million anxiety related diagnoses will be made which will further cost approximately £14.2 billion (McCrone et al 2008).

Just half the people living with an anxiety disorder do not receive treatment which is associated with lost employment costs. The ability of companion animals to prevent and remediate symptoms of anxiety, independent of medical services, is exciting and worthy of further controlled investigations.

The study goes onto say how Australian companion animal owners from various demographics, made fewer visits to their doctors for minor ailments than non-owners (Headey 1995), furthermore, the same owners were reportedly less likely to be taking medication for heart problems, high blood pressure, high cholesterol and sleeping difficulties. 

One of the pioneering studies in the estimation of economic savings associated with companion animal ownership, Headey & Anderson (1995) attempted a preliminary estimate of possible government expenditure savings using data obtained from 1994 Australian National People & Pets Survey. 

The study arrived at a saving of AUS $1,183 million, equivalent to 5% of the total Australian health expenditure.

In 2013, the United Kingdom’s healthcare expenditure totalled £124 billion which then equalled 8% of GDP. 

In the same year, 63.5 million people lived in the UK in 26.4 million households, with 46% owning a cat or a dog (Murray et al 2015). The implication is around that 12.14 million main companion animal owners or 19.1% of UK population could be in better health than those without pets (80.9% of the population).

In 2008, Dog & Cat owners made on average 5.04 visits to the GP each year which equals 61.19 million (17.5%) visits vs 288.13 million visits (82.5%) by non-owners. Total average visits to the GP in 2008 was 5.5 p.a. (Hippisley-Cox & Vinogradova 2009). The suggestion is then, that should companion animals not exist, total UK healthcare could have been significantly higher at £126.45 billion. Government healthcare savings due to the presence of companion animals was estimated to be £2.45 billion.

Giving the ageing national population, the significance on this effect may be of increasing importance to governments and healthcare providers. Perhaps it's an area of worthy study – our dogs and cats are leaving us healthier and the country wealthier.
 

Madsen Moment – Innovation

Once a week Dr Pirie takes to the camera to explain a concept to our social media channels. This week it's innovation and Madsen is explaining why we at the ASI have put it at the heart of our policies for the year. 

Of all the silly ideas about climate change

There's a good reason why all the economists looking at climate change insist that there should not be detailed plans for this and that to do with the subject. Assuming that something must be done stick the one crowbar into the price system and allow those markets, that calculating machine of the economy, to do the detailed work.

Do not, just do not, try to make those little plans for each nook and cranny. Like, for example, do not try to have industry or sector specific carbon allowances: 

A radical way to cut emissions – ration everyone’s flights

Sonia Sodha

No, really, just no.

Instead we should look to carbon trading schemes for inspiration. In schemes running in the EU and some areas of the US, international organisations or governments sign up to a total limit on carbon emissions. They then issue companies with permits that allow them to emit a certain amount of carbon. It’s then up to the companies to trade the permits. Companies that want to emit more can buy permits from those that manage to reduce their carbon emissions.

We could develop a similar system for flights. Everyone could be given an air mile allowance – say enough for one long-haul return flight a year, or three short-haul flights, so people with families on the other side of the world could see them once a year. If you don’t want to use your allowance, you could sell it off in a government-regulated online marketplace. If you’re keen to do a holiday a month, you’ll have to buy your allowance from someone else.

The reason being that there's nothing specific about emissions from airplanes - or any other source. They're all the same gas, it all has the same effect - whatever that is. Thus we want to be as rich as we can within whatever the limit we allow ourselves.

Which means using that that economists' favourite, substitution. We don't want to limit emissions from farming, from aviation, from land transport, shipping, per se. Whatever the limitation is we want to limit all such - meaning that we're not just happy but overjoyed if emissions in one sector go up as those in another go down. Say, just imagine, that a fully loaded car has fewer emissions on a journey than a train - true for small cars properly full of people. Our desired output is that people get there with the fewest emissions - we'd thus be happy with rising car emissions and falling train ones to get that task done.

Or to adapt Adam Smith, the transport emissions from taking Bourdeaux to Scotland are lower than the local emissions of trying to grow the wine north of the Tay. We would be happy with such substitution as we'd still gain the booze and also lower emissions.

Thus we don't want industry or sector specific schemes - we want substitution across sectors as well as within them.

Whatever views on climate change itself it's still important that we stamp on delusions like this one proffered. We're looking for the greatest human utility within whatever the limits are. That means we cannot impose strictures just on the one activity, whatever it is that is done must allow for substitution across sectors and activities. 

Reforming their Lordships and Ladyships

Many commentators think it inevitable that the House of Lords will be reformed. The present mix–part hereditary and elected by their peers, and part appointed and chosen by the government–is difficult to justify in principle, and has failings that are all too evident in practice.

Some of the activities and powers of the Lords have been restrained by convention rather than by law. The famous Salisbury Convention, by which the Lords will not impede laws that were in the manifesto on which the government was elected, is not legally binding; it is only a convention. Recent years have shown that convention is a poor restraint on political expediency.

Convention decreed that the Parliament Act that could shorten the delaying power of the Upper House to one year rather than three, was limited to matters of vital national security. That was what was promised in the chamber when it was enacted. Yet it was used by the Blair government to push through the ban on fox-hunting–hardly the most vital of national security issues.

The unelected Lords have voted for measures designed to thwart Brexit or to render it meaningless, despite the clear majority it enjoyed in the largest vote ever seen in the UK, and the government’s manifesto promise to deliver it.

Opinions differ over the type of reform needed. Many oppose an elected Second Chamber because it would divide along party lines. It would have an electoral mandate to challenge the Lower House, and would make it nigh on impossible for talented achievers in different fields to sit there, depriving the country of the vital role they play in scrutinizing forthcoming legislation.

Instead of the total overhaul that such a step would demand, it might be preferable to tweak the present arrangement to reduce or remove its failings. Some have proposed either a compulsory retirement age, or a limit to the number of years for which a member might sit.  

It would make sense to separate the legislative power from the honour bestowed, by separating life peers into those who sat to legislate, and those who received the title as a personal honour for achievement but did not sit in the chamber.

Perhaps the most sensible reform would be to change the legislative powers into advisory ones, so that instead of passing amendments to bills, the Lords would pass recommendations for the Lower House to consider. The expertise of its talented achievers would not thus be lost, while the problem of unelected authority which could overrule elected authority would be resolved.

By their recent actions the Lords have brought forward the need to redress some of the anomalies that presently characterize it. The aim of the reforms should be to preserve the good presently done by the Upper House, while removing some of the abuses it currently allows.