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

Blog Review 501

Written by Netsmith | Friday 08 February 2008

The real cause of the sub-prime mess. Yes, it was government action that caused it.

The entirety of world history in one graph and one table.

And on the subject of poverty, what is it that causes civil wars ? Could it be our old friend, an absence of property rights? 

And why do people complain so much when they are the best off of all, ever in human history? 

A review of the Black Swan. Not a notably approving one either, but with a great insight: if we even suspect black swans exist, then they don't.  

One for the "how surprising" section. Those where globalisation is providing the most growth are those most in favour of globalisation.

And finally, how fast does a backhoe have to be travelling in order to slice a bridge in half? 

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Quote of the day

Written by Wordsmith | Saturday 09 February 2008

Alcohol didn't cause the high crime rates of the '20s and '30s, Prohibition did. And drugs do not cause today's alarming crime rates, but drug prohibition does.

– US District Judge James C. Paine, addressing the Federal Bar Association in Miami, November, 1991

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And another thing...

Written by Junksmith | Saturday 09 February 2008

plane_crash.jpgIn light of the possible compensation claims with regard to the recent emergency landing at Heathrow, Francis Charig reports that, "The landing was a little heavy but I've been on numerous other journeys where it has been almost as bad."; and, "... the landing was so unsurprising that it was insufficient to stop me working on my Sudoku puzzle." As well as, "I doubt if you've had to go down a chute before but it was damn fun; I would have loved to have had another go but we were being taken well away from the plane to safety."

She has seen what was so painfully obvious to most of us, that this was nothing more than a slightly bumpy landing. And the natural reaction is not to seek out someone to blame, but to dust oneself down and get on with life. There is no better therapy than that.

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Common Error No. 29

Written by Dr Madsen Pirie | Saturday 09 February 2008

29. "We should ban cheap imports made possible by low wages and poor working conditions."

The opportunity to sell us goods gives some people in poorer countries their start on the road to economic growth. The wages which might look like "subsistence" to us, might look like survival to them.

If other countries can make goods more cheaply than us, we should be buying those goods, and diverting our production to what we can do best. Everyone benefits from this. It is called the Law of Comparative Advantage, and has countries committing their economy to what they do best, each buying the goods they need at the price of the most efficient producer.

In a healthy economy, capital is continually being turned over from industries which are no longer competitive to the new ones which are. The world economy grows, and the poorer countries get richer by doing some of the things we used to do. We, in turn, do new things. To ban cheap imports is to leave us paying more than we need for goods which we cannot sell in the rest of the world.

Some industries in developing nations pay much less than our workers would accept, and have conditions well below those we would tolerate. The question is how those wages and conditions compare with what else is available in their countries. In most cases they represent a step up from peasant agriculture and malnutrition. It was the same when Britain industrialized.

It is those low wages which give them entry to our markets, and which set their feet on the first rungs of the economic ladder. We are better off because we buy cheaper goods; they are better off because they get our money. As economies become richer they can afford better working conditions; we should be helping them do that as fast as possible. Far from banning their goods, we should be buying more.

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The value of tax competition

Written by Tim Worstall | Saturday 09 February 2008

One of the more annoying things we hear from the likes of the European Union is that tax competition is harmful. If one country or another decides to loot the wallets of their populace a little less than the place next door, the harm is seen as being a constraint on the ability of that second country to do more such looting. The EU is having a large spat with Switzerland on this very point at the moment.

We here of course regard tax competition as beneficial for exactly that reason, that it places a limit of sorts on the ability to loot. Sir Gus O'Donnell, the head of the civil service, takes this point a little further.  Talking about the way in which people are going to be demanding more in public services (an ageing population etc.):

But increasing taxes to pay for the increased demand was not the answer, he said. He
said: "We are going to have real problems, because of the competitive
nature of globalisation, it is going to be hard to put tax rates up.
The increasing demand for spending more which falls on the state ...
means that we are going to have to do more with less.

Now Sir Gus might not think of it this way but I do. Tax competition constrains greater looting of the populace while it doesn't constrain the desire for more services. The result is that the public sector will have to provide more output with the same (or even lessened....hey, we can hope can't we?) input in the form of tax money.


This is more generally known as increasing efficiency. It's something that private sector businesses try to do all the time, so as to maximise their profits. Unfortunately, as we know, the public sector is not subject to those incentives. But if tax competition can, by reducing the ability to tax us, force a similar process on the public sector then I'm all for it.

Less tax paid and it spent more efficiently? Who couldn't like that?

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Blog Review 502

Written by Netsmith | Saturday 09 February 2008

This might not be true in every and each particular: a slight suspicion of over-emphasis for dramatic or comic effect perhaps. But Alfie visits Westminster to discuss the West Lothian Question.

This might indeed be a world first: a blog post from the Oval Office. 

Discussing the economics of obesity: yes, that recent paper showing that fatties save the NHS money is discussed. 

What is wrong with the benefits system in three short sentences. 

What might be wrong about the US welfare system: marginal tax rates of 130% anyone? 

Don't let anyone ever tell you that economists define wealth by how much money people have. 

And finally, an online jukebox for your delectation.

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Quote of the day

Written by Wordsmith | Sunday 10 February 2008

The Ten Commandments contain 297 words. The Bill of Rights is stated in 463 words. Lincoln's Gettysburg Address contains 266 words. A recent federal directive to regulate the price of cabbage contains 26,911 words.

– The Atlanta Journal

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And another thing...

Written by Junksmith | Sunday 10 February 2008

I was so happy when I married Miss Right. Until I discovered that her first name was 'Always'.


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Common Error No. 30

Written by Dr Madsen Pirie | Sunday 10 February 2008

30. "Private equity firms do nothing but make excess profits at the expense of jobs."

Private equity firms specialize in making more efficient use of resources than is currently being made. They look for opportunities where a firm is under-performing. Typically they might consider that not enough use is being made of the firm's resources, and that better management and organization might get more out of them. These are in no sense "excess profits," though they are higher profits; that is the point of the exercise.

Very often the private equity bidders will put their own money into a venture as well as borrowed money. They calculate that the return they can get a company to yield will be sufficiently greater than the interest on the loan to make it worthwhile, and that their own funds will see a significant return in the process.

It is not true to say that private equity takeovers result in job losses. They can in the short term, but most often their effect is to improve the company's performance, to secure its market position, and to expand the areas in which it succeeds. The net result is more jobs, not less, and more secure long-term jobs at that.

The shareholders benefit, too, from the higher than market price the private equity group pays for their shares. In cases where some shareholders opt to retain minority holdings in the restructured firm, they gain, too, from the enhanced performance achieved by the new owners.

The economy as a whole gains by having its resources used more efficiently and contribute more to the economic growth of the nation. The firms taken over by private equity nearly always become more competitive as well as more successful, able to bring business to the country that might otherwise have gone to foreign competitors.

The rise of private equity groups has brought benefits throughout the economy, turning under-performing firms into success stories.

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Mobile Phones and Prices

Written by Tim Worstall | Sunday 10 February 2008

No, not about the prices of mobile phones, but what mobile phones do to prices. We already know that better communications technology is correlated with a rise in the growth rate of GDP. A new paper helps to explain quite why:

In this paper we provide some estimates of the nature, magnitude and distribution of the effects of cell phones on grain market performance, traders’ behavior and consumer and trader welfare in Niger. The introduction of cell phones reduced price dispersion across grain markets, with a larger increase for those markets that were farther apart and over time.

"Price dispersion" meaning different prices at different markets, whether markets in different places or on different days. The actual results are that those disparities in prices are reduced by some 6.4 % across markets and 10% across time. The reason why should be fairly obvious: grain traders, instead of having to travel to a market to find out what the prices are can simply phone somone and ask them. This means that they can monitor more markets and thus work out where best to buy and sell. That many such traders are doing so makes the whole process more efficient.

As the researchers conclude, mobile phones are therefore probably Pareto-improving: some have been made better off and none worse off, a highly desirable state of affairs.

In the larger scheme of things this does suggest some options for how we might aid growth in such poor countries. Yes, some, as with the authors of this paper, suggest subsidising mobile phone systems. Given that private companies are entirely happy to build such networks as long as they are allowed a licence, this would seem unneccessary (as with the Niger system itself). Encouragement to governments to issue such licences might seem to be all that is required. But more important than that even is the lesson that improving the ability of markets to function benefits all, so we should be encouraging those things which improve said functioning.

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