Mariana Mazzucato's interesting economic argument

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Alberto Mingardi, one of those we around here think to be a top bloke, has an excellent analysis of the rather, umm, interesting economic ideas of Mariana Mazzucato over at Cato. Mazzucato it the one who insists that because all of the components of the Apple iPhone had their start in some government research grant or other then the government should be owning a piece of Apple. To really cover the issues with this line of thinking please do read the whole of Mingardi's piece. For a flavour though, he notes an interesting thought. Which is that this obviously didn't happen with the original Industrial Revolution because government didn't fund anything other than the military and the debt back in those days. So it's clearly not necessary that government fund research, despite Mazzucato's insistence that it must. And we can then go one step further: not that government has its mitts all over 40% of everything in the economy it would really be rather surprising if something as complex as a smartphone didn't have some fort of series of connections to said state. Because it's got connections to rather large parts of that economy that the state has its mitts all over, of course.

Again, well worth reading.

And we must also turn to a more speculative reading of this situation. Do understand that this is entirely opinion. And it is our opinion that it's a very interesting fact that the first governmental R&D funding organisation to adopt Mazzucato's prescriptions is that of the European Union. The latest round of EU funding for R&D will indeed insist that the EU should take part in any financial rewards that develop out of any research or even D that it has funded.

And the original research by Mazzucato that led to the conclusion that this should be done was funded by the EU. An EU which we very well know would love to have its "own resources", that is funding that it doesn't get by going cap in hand to the national governments.

Again, let us be very clear indeed that this is opinion and opinion only, but we are of the opinion that there's a very definite whiff of policy driven evidence making in the air.

Welcome Holly and Hunter!

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Holly Mackay and Hunter Georgeson have joined the ASI as gap-year employees. We asked them to write this post to introduce themselves to our readers. Holly:

Having said in my interview that my favourite book was Harry Potter, I was both extremely surprised and delighted to find out that I’d landed one of the coveted gap year internship positions at the Adam Smith Institute. After finishing my A-Levels in Politics, Economics and Maths, I desperately wanted to fill my year with something that would hopefully allow me to build on my interest in those subjects, and working at the ASI is the perfect opportunity to do so.  Three weeks in, I’ve already had a fantastic time; I can’t wait for the rest of the coming year here.

I am an enthusiastic advocate of the ASI’s forward-thinking libertarian stance, and as Margaret Thatcher’s no. 1 fan, it’s a dream for me to have the opportunity to work with the masterminds behind some of her policies. As well as championing greater economic freedom, I also subscribe to the belief that individual liberties on social issues should be maximised too. I have already written my first blog post from this perspective, arguing in support of the Assisted Dying Bill, and I look forward to exploring so many more topics that are currently pressing British politics. Some of my personal interests include education, particularly in the wake of high levels of immigration and how we should cope with expanding demand, and how a freer market can actually be fairer for everyone- the Bleeding Heart Libertarian within me fully supports ASI campaigns to lower taxes for the poorest, get rid of the National ‘Living' Wage, and reduce regulations on businesses to allow entrepreneurs to flourish and create higher earnings for everyday workers.

I’m so excited to learn more from my colleagues here at the ASI; their energy and hard work is hugely inspiring, encouraging me to look at economic problems from angles I’ve never considered before. I greatly admire the work the ASI does, especially its outreach to students and young people, and I look forward to being able to contribute myself.

Hunter:

Very aware that an entire year without a definite plan would become a sort of spiritual black hole, I leapt at the opportunity to apply for the ASI's internship programme. After my first week here, I find it difficult to imagine that my time could be any better spent.

I did A-levels in subjects (English Literature, History, and Maths) that limited my ability to ask big questions – there's only a certain extent to which you can explore the deeper political philosophy behind Thatcher's privatisation reforms when you're studying the history of modern Britain. Although the ASI's work is on policy reform, there is behind the scenes a rich discourse on the ground-up basis for the free-market, libertarian perspective. It's very exciting to be around people who feel just as strongly about explaining their own ideas and hearing new ones as I do.

My own introduction to the liberal-right perspective came with reading, firstly, Hayek's The Road to Serfdom, and later, Mill's On Liberty. I found the simplicity of the principles underlined by the authors refreshing, whilst the few nuances and inconsistencies only drove me onto further reading. My particular interests include the problem of whether we can, or should, regulate against monopoly in a market economy, and the idea of more localised government systems, specifically with regard to the fostering of competitive forces between regional health-systems - like in Sweden.

Outside of academia, I'm the drummer in a band called Topknot (it's ironic, I promise!), and spend a lot of time working towards my ultimate goal of becoming an ascetic.

So how much should the world's fifth largest economy pay toward drug development?

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Depending upon exactly how you want to measure it the UK has around the fifth largest economy in the world. The creation of a new anti-cancer drug is of course a global (or at least rich world) public good. So, how much should that fifth richest society be asked to pay toward the creation of such a public good? Too much apparently:

The health secretary, Jeremy Hunt, has been challenged by a coalition of cancer patients, clinicians and campaigners to effectively tear up the patent on a breast cancer drug that has been dropped from the NHS because of its cost and allow the import or manufacture of a cheap generic copy.

The radical demand is reminiscent of what happened with Aids drugs in the early 2000s. The cocktail of antiretroviral medicines that now keeps millions of people with HIV alive was unaffordable in the developing world until a legal loophole was found enabling generics companies in India to make cheap copies.

The drug, Kadcyla, known generically as T-DM1, will not be available to new patients with advanced breast cancer from November on the NHS, although those already on it will be able to continue getting it.

It has been turned down for NHS use by the National Institute for Health and Care Excellence (Nice). Recently NHS England dropped it from the list that the Cancer Drugs Fund – set up to pay for drugs Nice rejected – is willing to reimburse.

The drug offers some 6 extra months of life to those with a particular form of breast cancer resistant to other treatments.

But here's the really important numbers. It costs some £70,000 for a course of it. It benefits perhaps 1,500 people a year. And the cost of development of a new anti-cancer drug is around and about $1 billion. That is, please do note, the cost of development. That doesn't cover manufacturing costs, marketing, training and the rest. Further, the few drugs that make it out of the development process have to also pay for all the ones that fail within it. Finally, note that this isn't about the profit driven nature of the industry. We can imagine alternative methods: say, governments pay for all drug development and testing. That wouldn't change those numbers: someone, somewhere, still has to pay for those costs.

So, that fifth largest economy in the world is being asked to pay some £100 million a year (recall, that's including all of the training, production, and marketing costs, not just the R&D) towards something that had an R&D cost of $1 billion.

Is that too much? Could be: but it doesn't seem wildly out of order either. The effective life of a patent is really only around 10 years (because of the time it takes to get approval) so it certainly wouldn't be appropriate for that fifth largest global economy to be paying £10 million a year for that global public good. Nor, obviously, £1 billion a year. So while there might be room to argue about this price it really doesn't look wildly disproportionate.

What we've really got here, with this call for the patent to be broken and then we can have puppies for all, is the economic equivalent of baying at the Moon. Because drugs cost a great deal to develop. Therefore, if the drug only benefits a small number of people it will be expensive to administer to each of that small number. It's simply a truism that a $1 billion cost amortised over few people has a high per capita cost. And that doesn't change whatever the financing method used in that development.

Simon Jenkins is quite wrong about the housing crisis

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Simon Jenkins says that there is no housing crisis, and lists 11 ‘myths’ that have misled people into thinking there is. I usually really like Jenkins's pieces, but I think almost all of his rebuttals of these ‘myths’ are wrong:

1. That there is a housing “crisis”. There is none. Too many people cannot find the house they want in London and the south-east, which is where most politicians and commentators live. …Average prices in London may be £500,000, but in the north-west and north-east of England they are £150,000.

There are even cheaper houses in the Scottish Highlands, Spain and Bulgaria. The point is that London and the south east are not just where ‘most politicians and commentators’ live, they're where most of the best jobs are being created, and hence where people want to live — from 2007 to 2011, "London’s economy (GVA) grew by a nominal 12.4% compared to between 2.3% and 6.8% across other UK regions." There’s a good case for trying to rebalance but for now it’s easier to build houses where the jobs are than move the jobs to where the houses are.

2. That an average is a minimum. It is not. Housing hysteria is based on averages. When someone asks “How can I possibly afford £500,000?”, the answer is: you cannot, but somebody presumably can. But go on Zoopla and there are houses in parts of London for £180,000. Even the poorest newcomers seem to find somewhere (usually private) to rent.

The problem here is that the average house is not affordable for the average earner. So the cheapest houses Jenkins can find in London go for £180,000 (actually, I'm not sure this is true because I can't find any on Zoopla) – where does that leave people on the lowest salaries? So ‘the poorest newcomers seem to find somewhere (usually private) to rent’ – never mind if those places are squalid, far from work and cost half those people’s incomes, eh?

3. That there is a national “need” for 250,000 new houses a year. ... Housing need implies homelessness. It should refer to the 60,000 people currently in temporary accommodation, who ought to be the chief focus of policy attention. All else is “demand”.

The 250,000 new houses a year figure is based on the number of new houses needed to stabilise affordability. True enough, people’s wish to have more in their lives than food and shelter – a bit of disposable income for themselves or their kids – is ‘demand’, not ‘need’. They won’t die if they don’t have it, they’ll just have worse lives.

4. That the solution to house prices lies in building more new houses. …The chief determinant of house prices is the state of the market in existing property and the cost of finance. During the sub-prime period, prices soared in America and Australia despite unrestricted new building. It was cheap money that did the damage. The house-builders lobby equates housing to “new build” because that is where their interest lies.

No doubt interest rates have an impact on the price of houses, as with any investment good. Simon Wren-Lewis explains why here. But think of interest rates and housing supply as two blades of a scissors: the only reason houses are an investment good rather than a simple consumer good is because the supply is so inelastic. There is no investment market in TVs or cars because the supply of these things responds to changes in demand for them.

The story Jenkins gives of the US housing bubble is a popular one but isn’t well supported by the evidence. Jenkins is extraordinarily ignorant if he thinks that building was or is ‘unrestricted’ in the US – planning controls mean that US GDP may be 13.5% lower than it would otherwise be. Houston, Texas, which (in)famously is the only major US city with no zoning code, actually escaped the subprime collapse virtually unscathed, and Texas issues so many building permits annually that median home prices in Texan cities are a fraction of that of tightly-controlled California.

5. That the solution lies in the green belt. This is an anti-ruralist’s version of myth four. Even were the green belt obsolete, which few accept, or partly so (which I accept), it will not dent the pressure of overall demand. Nor is sprawl remotely “sustainable” development. It requires new infrastructure and puts more pressure on roads and commuting. It is bad planning.

Jenkins does not explain why he thinks building more houses in places people want to live ‘will not dent the pressure of overall demand’ so it’s hard to rebut this. There is plenty of land around existing train stations into London that could be built on. Certainly new infrastructure would be required. I’ve discussed some ways to capture planning gain and use impact fees to fund other new infrastructure here.

6. That high buildings are the answer. They are inefficient as the higher you build the more is spent on servicing. London’s most popular and economic housing is “high density/low rise”. Towers have supplied mostly empty pads for the rich, housing no one.

I mostly agree with Jenkins here. “High density/low rise” housing is popular because it is relatively cheap, as he suggests. There is a clear price premium for lower density terraced and semi-detached housing – compare similarly units in the same areas in almost any part of London. This is the sort of thing people seem to want to live in, if we built enough for them to afford it. The reason we can't do this is – you guessed it, and Jenkins later acknowledges it – planning laws.

7. That the answer lies in new social housing. Security of tenure and low turnover – not to mention right to buy – renders the fixed stock of public housing inflexible and immobile. Increasingly it has become a generous donation by the taxpayer to a fortunate few, for life.

Yes. Very few people actually want to live in social housing – 80-84% say they’d like to own their own home, if they could. But Jenkins seems to want neither social housing nor much private housing to be built.

8. That people have a “right” to live where they or their parents lived before. Localities benefit from stable populations, but conferring and bequeathing such a right to discriminatory subsidy is in no book of rights.

and

9. That there is also a “right” to home ownership. The state has a housing obligation for those who need help. Home ownership is capital accumulation, developed out of the Tories’ mortgage tax relief as a form of saving for old age and to endow offspring. It promotes inequality and cannot be termed a right.

No, there isn’t and shouldn’t be a ‘right’ to home ownership or to live where your parents lived, but nor should home ownership be seen as capital accumulation only. As per above, houses are part consumer good (because people use them), part investment good (because they are scarce and valuable and their supply is inelastic). People want to own their own homes – we don’t need to use the empty language of rights to think it’s worth trying to give them that.

10. That renting is stupid. Renting is buying a service. About 60% of Germans rent. They do not think of buying until their 40s. Booming Berlin has 90% of its population renting. Renting aids labour mobility and channels savings into productive investment. As a result, Germany has little house price inflation and no “ladder” advantage to owning not renting.

Renting is great – Jenkins is entirely correct here. But a dysfunctional housing market also means a dysfunctional rental market. Rents seem to be less elastic than house prices, though they are rising, but quality and choice are dropping. A minor anecdote in evidence of this: flats that lettings agents used to show to people individually are now being shown to large batches of people, and there is a mad rush to be the first person to secure any half-decent flat that comes onto the market.

A second point: when people like Jenkins and Robert Shiller warn against owning a home, I tend to agree, but I have to wonder whether they are renters themselves. If not, why not?

11. That buy to let is evil. The poorest people rent from the private sector. The more houses are available to rent, the more flexible is the housing stock and the lower are rents for those who do not buy. Whether buyers-to-let should enjoy tax breaks and whether rents should be regulated are quite different matters.

This seems right to me. Buy to let has been demonized unfairly, although there are bad tax loopholes that distort the market in favour of it. But if you accept the logic that renting is desirable for at least some people you must accept that some people will need to act as landlords. They effectively bear the risk involved with investing in housing that renters do not want.

Jenkins's 'realities' are worth reading but are all fairly lacklustre. The goal should not just be to put roofs over people's heads: it should be houses people want to live in, in places people want to live, at prices they can afford.

Proof that it's the permits that matter

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Am interesting little statistic from over the Pond:

....in every year since 2007, the combined number of building permits issued for single-family homes in the Dallas and Houston MSAs has outnumbered all of the permits issued for single-family homes in the entire state of California.

The population of Dallas and Houston together is some 12 million. That of California some 39 million. The population density in Dallas and Houston is very much higher than that in California.

The median home price in Dallas is $150,000, in California $400,000.

It would seem that the solution to the problem of creating affordable housing is to issue more permits allowing people to build affordable housing.

It's all so complicated, isn't it? When there's more of something it seems to become cheaper. We'll have to see if we can find someone to codify this idea for us.....far too difficult to just be true in and of itself, surely?

TfL and the cabbies are conspiring against the public

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James and Charlotte have already written about why Transport for London's (TfL) proposed regulations of private hire taxis like Uber are a bad idea. I have not yet seen any defence that the regulations will improve standards for Londoners – they appear to be wholly designed to protect black cab drivers. And that seems to be exactly what's going on.

Back in August, Steve McNamara, General Secretary of the Licensed Taxi Drivers' Association, wrote in Taxi Magazine (p. 3 at that link) that "all of the proposed regulatory changes were proposed by the trade in our response", which were said to be:

  • A five minute period between booking and pick up
  • Operators must not show vehicles available for immediate hire – either visibly or virtually, via an app
  • The fare must be specified at the time of booking
  • Drivers to only work for one operator at a time
  • No ride sharing
  • Operators must offer a pre-booking facility – up to seven days
  • Operators will have to record destinations at time of booking
  • Operators to have a landline
  • PH operators will be required to have Hire and Reward insurance policy for their fleet
  • Satellite or temporary event licenses will be scrapped

These – published a month ago – are almost word-for-word what TfL is now proposing. And the Licensed Taxi Drivers' Association has a seat on TfL's board. This is regulatory capture, pure and simple.

That the LTDA have been able to dictate TfL's policy so precisely seems like virtually 'smoking gun' evidence that TfL – with London Mayor Boris Johnson as its Chairman – is regulating against the public interest to protect black cab drivers from competition from Uber and similar firms.

Nobody thinks these regulations will help consumers. This isn't misguided regulation, it's a conspiracy against the public. We're being stitched up here.

Mr Corbyn and the deaf philosopher

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Jeremy Corbyn captivated the Labour Conference with his calls for a kinder politics and a caring society.  His audience enthusiastically applauded the idea of seeking fairness and compassion.  This is not surprising, since these are all aims that would be shared and expressed by many, if not most, people across the political spectrum.  David Cameron would have received rapturous applause for the same words, as would Tim Farron.

It is not the aims that mark the political divide, but the methods that might be deployed to achieve them.  It is not the intentions that matter, but the policies pursued to bring them about.  Mr Corbyn's speech was long on ambition but short on policy, though there were some policies, together with others in the pre-conference days, that enable us to picture the approach he would take, if not the detail.

I have at times advocated being a 'deaf philosopher,' not listening to what politicians say, but watching what they do, judging them by their actions and not their words.  It is all very well talking about caring and compassion, but not much use if the policies pursued bring about drabber and more restricted lives for the people they claim to serve.

The Communist governments of the Twentieth Century uttered high-vaulting words of fairness and 'rule by the people,' but the reality they delivered was of squalid poverty and stunted lives.  More than that, their rule was marked by a huge gulf in living standards between the party elite allowed to buy Western goods in special shops and the mass of ordinary people consigned to the endless queues for the shoddy products of a socialist economy.

Mr Corbyn talks of rent control, a policy no serious economist endorses.  This is because it fails in practice.  For a few it fixes their rents, but given non-market returns, landlords withdraw properties from the market, so availability diminishes.  Moreover, with inadequate returns landlords do not spend to maintain properties as well, so they decline in quality.  Fewer and poorer properties is not the intent, but it is the result.

Renationalizing railways and utilities is advocated to 'put the people in charge,' but in reality it means bringing them under political control.  When they were under state control they were characterized by under-capitalization, producer capture, vulnerability to frequent industrial unrest, and services that paid scant attention to consumers.  The talk was of one thing, the reality of another.

It will be very important during the coming months to make the case that real-world results matter more than high-falutin intent.  We need to see what happened before in the UK, and what happens elsewhere when politicians attempt to impose ideas without regard to their actual results.

Transport for London's taxi conspiracy against Uber

Adam Smith wrote in his Wealth of Nations that, “people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” He goes on to conclude that proposals for new regulations “ought always to be listened to with great precaution”. His words from 1776 remain as true as ever in London today. Transport for London’s latest regulatory proposals are a sop to the Unions. They will hammer innovative businesses like Uber, reduce competition, raise prices and worsen the quality of transport Londoners receive.

Proposed rule changes include a ban on showing available cars for hire “either visibly or virtually on an app”, and a mandatory wait time of 5 minutes from booking a journey to getting a car, even if a car is available immediately. These two rules alone would undermine the core of Uber’s business model – you won’t be able to see cars on the app and you’ll be left needlessly waiting on the street.

The rule changes would harm many drivers too, particularly those who work part time, with a ban on working for more than one operator at a time. “Controls on ridesharing” would halt plans to introduce UberPool and other upcoming digitally enabled transport services. TfL are also looking at new tests, advertising controls, payment rules and a requirement that companies “seek TfL approval before changing their Operating Model”.

TfL innocently claim the consultation seeks to "raise standards across the industry" following an "exponential" growth in the private hire industry and technology.  Yet according to City-AM the taxi unions are boasting about their influence over the consultation, and Addison Lee is happy they are putting the “genie back in the bottle”.

Regardless, these proposals would protect incumbents at the expense of innovators and flexible jobs. This is hardly consistent with the Government’s ambitions to cut regulations, promote the Tech City, and make services ‘Digital by Default’. Londoners looking for instant, cheap and quality transport are the ultimate victims.

This all reminds me of Bastiat’s satirical parable from 1845 in which the candle makers petition the French government to block out the sun, lest their business be harmed by unfair competition. Fortunately, Uber has established a counter petition, which you can sign here.

Quick, someone tell Jeremy Corbyn about national insurance

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In economics, as in medicine, we usually find out that things are connected. The shin bone is indeed connected to the knee bone and insurance benefits are closely connected to having paid insurance premiums. Sadly, in politics this essential interconnectedness of things is often missed. It could, of course, be some aspect of the political mindset that causes this but we think that it's essentially the ignorance of the political classes about the world they would rule. An example is this idea from Corbyn:

“I want our policy review to tackle this in a really serious way and consider opening up statutory maternity and paternity pay to the self-employed, so all newborn children can get the same level of care from their parents.

“Labour created the welfare state as an expression of a caring society but all too often that safety net is not there for self-employed people. It must be.”

The self-employed pay a radically different rate of national insurance than the employed. And they thus get rather different benefits from the social insurance schemes that we have. Thus such an "opening up" should lead to NI charges to the self-employed rising: a policy we think will be rather less popular than Corbyn might think.

We do however wonder what's going to happen when someone breaks it to Jezza that the self-employed don't get unemployment benefit either....

We have something of a problem here

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There are those about who would change the world. OK, we might not agree about how they would do so but that's all part of the joy of arguing about it of course. But it is really incumbent upon people who would change this oblate spheroid to understand how it does currently operate before floating plans to change it. And that understanding seems to be rather lacking. Here's one example:

In a speech that may be the most critical of the week to the credibility of the Corbyn project, McDonnell will insist he understands the need to bring the current account deficit under control.

Now, who doesn't understand this, McDonnell or Patrick Wintour who wrote the article, is unknown to us. But the current account deficit isn't something that particularly needs to be dealt with and it's also not something under anything but the vaguest influence of government and politics. What is meant is the budget deficit not the current account one. It it would be useful if people telling us how to make the nation a better place understood the difference.

But, sadly, it gets worse:

McDonnell has promised he will review the role of the Treasury so that it focuses on fiscal policy and revenue collection. He will promise a drive to end corporate tax evasion and, like the party leader, will point to specific firms deemed to be involved in tax evasion.

There is no corporate tax evasion. Evasion is, recall, the illegal kind: and there's no one at all, not even the Dread Murphy, who thinks that there's anything other than the most trivial amount of illegal tax dodging activity in Britain's corporations. There's an awful lot of allegations of tax avoidance, structuring things so that tax is not legally due. There's even more allegations of taxes that aren't even theoretically due not being paid on the grounds that those making the allegations think that the tax system should be changed to make them practically due.

But as far as there is tax evasion it's simply not in the corporate world. It's you and I paying the window cleaner in cash that is the evasion. And again it would help if those who want to change the world understood this difference.

The country being run by people who don't understand these sorts of differences is unlikely to work out well.

McDonnell has now given his conference speech:

Our balance of payments deficit, which is the gap between what we earn from the rest of the world and what we pay to the rest of the world, is at the highest levels it’s been since modern records began.

You can't have a balance of payments deficit. It's a balance, it balances by definition. You can have a trade deficit, which means most likely a capital surplus, and vice versa, but you can't have a balance deficit.

No, not going to work out well.