The Pin Factory Blog

Stephen Littlechild, Professor emeritus at the University of Birmingham, fellow of Judge Business School at the University of Cambridge and a top regulator from 1983 to 1998, explains how politicians and regulators have, by misunderstanding how markets work, regulated to boost energy firms' profits at the expense of higher bills for consumers.

Britain’s competitive retail energy market was the first in the world, and for many years the most competitive. It had the most active suppliers, and the most active customer switching. This competition and choice brought better offers for customers. It may not seem like it because of recent energy price increases. But these reflect increases in fuel costs like gas, higher costs of renewable energy and other obligations on suppliers, not a lack of retail competition.

In fact, retail competition was sometimes too fierce, witness the problem with doorstep mis-selling. But Ofgem took action to fix that problem.
Retail profits in the domestic sector used to be minimal; Ofgem calculated that many were negative. New entrants came into the market, but until recently most found it tough to survive.

Retail competition has been enhanced by a dozen switching sites. Each seeks the best way to attract users, to offer the simplest calculations, to include the most relevant information and the clearest comparisons, to facilitate subsequent switching. No other country can boast as lively, innovative and effective market for information and assistance to energy customers as Britain.

Continue reading.

The Adam Smith Institute is looking for a bright, enthusiastic student on their gap year between school and university to come and work for us. The role would be a mixture of administrative work around the office and helping the ASI team with their research and policy work on an ad hoc basis.

It’s a great opportunity if you want to gain some experience in an exciting think tank. We are nice, fun people to work with, so candidates should enjoy working with others as part of a team. You should be interested in our work and willing to roll up your sleeves to do some of the less glamorous work around the office too.

This position pays £6.31/hour, and depending on the candidate is either a six-month or year-long position.

If you’d like to apply, send the following to tng@adamsmith.org:

1. an up-to-date CV;
2. two hundred words about yourself and why you think you’d be good for the job;
3. a four hundred word blogpost in the style of the ASI blog about why liberty is the best policy in an area of your choosing.

Applications close on June 22nd.

The eleventh thing we've not been told about capitalism is so bizarre as to make me wonder whether Chang was proofread before publication. The layout of the free market position is that Africa is irredeemably doomed to low or no economic growth because of structural factors: ethnic diversity, disease, geography and so on. And the reason that we free marketeers say this is because we're embarrassed about the fact that Africa instituted free market reforms in the 80s and hasn't grown since then. Thus we've invented reasons as to why it hasn't rather than rethinking our committment to free market development.

Chang also tells us that post colonial Africa grew rather well (hmm, well, even he admits not well but better than nothing) in the 60s and 70s. So therefore we free marketeers are doubly wrong. We not only killed off what was working we also prescribed what does not and are now lying about it.

There is one teeny little problem with this. Chang has shifted his decades a bit. There was indeed a change in the 80s but this wasn't the widespread adoption of free market policies. That was the debt fuelled autarkic development that was abandoned. Actual free market policies didn't take root until the 1990s in sub-Saharan Africa (the place Chang and we are talking about) and since the mid-1990s there has indeed been a take off in growth in those countries.

In fact, if we look at the work of people like Xavier Sala-i-Martin (do look him up, his web page is a hoot but he's also one of the most cited economists around) we find that Africa is growing so well that they've actually got rising Sen Welfare. That is, not only are incomes going up but inequality is falling at the same time.

What drove the much slower growth of the 60s and 70s was exactly the set of policies that Chang usually proposes. Infant industry protection, government direction of the economy, planning. And most crucially, borrowing to fund that economic development. And, as is usually the problem when people play socialism at some point you run out of other peoples' money. The actual investments that were made (just about every country decided they needed an integrated steel mill for example. Almost none of which ever worked at anything like capacity as the continent could really support perhaps two, not the dozens planned) simply never did pay back the borrowings made to construct them. So the policy of state directed development not only didn't work it came crashing down in a ghastly and impoverishing heap.

What happened to African development is an argument against Chang's policies, not one in favour of them. And I've already mentioned that I'm not sure that you can do Chang's form of directed development in a democracy. Even if (which I'll not admit anyway, but just for the sake of argument) you can do it in an authoritarian or repressive society, the political dynamic is such that you can't wher the people get to vote.

Take, as an example, Ghana. Nkrumah very definitely believed in the socialist and state directed development model. Vast sums were borrowed in order to construct the industry it was thought the place needed (and there were many a western socialist writing these plans in Accra at the time). But while Nkrumah did become increasingly repressive himself he did still face democratic pressures. So the economic policies favoured the urban population, those who tended to vote (or even riot where they could be seen) rather than the larger rural one. The exchange rate was fixed high for example: to the great detriment of the cocoa farmers trying to export, to the great benefit of the urbanites who wished to import goods. There was indeed an attempt to have that planned economy, to build and protect those infant industries. It's just that they were all bad plans: and as I say, I'm convinced that at least part of the reason the bad ones were followed was precisely because it was a democracy.

No, this does not mean that I think that we should have authoritarian government in order to attain economic development through planning. Quite the opposite: that given that we've got democracy we cannot have that planning because the democratic pressures will lead to bad planning.

So, Ghana, and everyone else who tried to follow the same development path (pretty much everyone) ended up going bust. Which is what gives us the slump of the 80s. Finally the recommendations of the Washington Consensus manage to trickle through the intellectual barriers (and let us recall that the Consensus is really just a list of stupid thing you shouldn't do) and to be applied in the 90s. Since then we've had good and decent growth in sub-Saharan Africa. Hurrah etc: but that is a very different story indeed than the one Chang is telling. Which is what rather makes me wonder whether the book was proofed before publication.

There is one little aside as well. Chang does correctly point out that many to most African countries have bad external transport links. For reasons both historic and geographic. What puzzles me is this. Given that Chang says that a country should not leap into the global marketplace, but should develop at least to begin with behind its own borders, well, given that Africa's had no choice in this, why isn't it developed? If few imports lead to economic development as this encourages domestic production then why haven't African countries developed as they've had few imports?

That is just an aside though. The real problem with our eleventh thing is that Chang just isn't describing things as they really did happen. Sub-Saharan Africa did do the planned and tariff bound infant industry protection thing in the 60s and 70s. And growth was there but feeble: and then the entire system went bust. Once the mess was cleared up and free market policies adopted in the 90s we've seen good and decent growth across the region. And no, it's not the free marketeers who have been ascribing Africa's problems to anything other than economic policy. Quite the contrary: we've been using the benighted continent as absolute proof of our contentions. Managed development was tried and failed: free market development is working.

Do you realise how much we pay for the thrill of watching dancing meatballs?

A couple of years back, Ewan Spence had the same question, and put in a Freedom of Information request to the BBC, Eurovision's sponsoring partner in the UK. They refused to disclose all their production costs for broadcasting the competition on BB1, BB3 and Radio 2. But they revealed that the payment the BBC makes to the European Broadcasting Union was £279,805 in 2009, and £283,190 in 2010.

Since then, journalists have been watching the Eurovision bill grow. Last year, the BBC spent £310,000 – the eqivalent of 2,130 licence fees – on broadcasting Britain's disastrous entry by 76-year-old singer Engelbert Humperdinck (which only four countries gave any points at all—not that we have had many points since the Eastern Europeans turned up and formed a pact to vote for each up).

BBC officials say that their EBU membership also buys it other things, like membership of a news exchange, rights to concert broadcasts and activities around the Olympics. But broadcasting the Song Contest also imposes other costs on the BBC, including travel, hotels and incidentals for its broadcast staff.

Last year, the contest cost €48m to stage in Baku, Azerbaijan. This year's, in Malmö, Sweden, the aim was to do it for much less. Anyone with a television (i.e. virtually everyone) is forced to pay for this embarrassing, political show, whether they watch it (and the BBC) or not. Can that be right?

The tenth thing we have to understand is that actually Americans aren't as rich as all that. This is very important because if that sort of free market capitalist society did lead to the richest society on Earth then of course all the other strictures about how awful free market capitalism is would be rather wasted. We'd start to believe our own lyin' eyes rather than the Reader in Economics at Camdridge and that would just never do.

The rest of the chapter is just hemming and hawing about how we should change the figures to show that actually Americans are not the richest society on the planet. Well, OK, even I'm not going to claim that there aren't certain microstates that beat the US: Luxembourg for example. But comparing a few hundred thousand people to 300 million seems rather like cheating. It would be like comparing Manhattan to Texas for example, just not quite fair. Or, again about the same distortion of scale, comparing the residents of Eaton Square to the entirety of Luxembourg.

Chang has two basic methods in use here to show that the American Dream is just that, a wraith. After we go through all the various ways that we can measure income he agrees that Purchasing Power Parity is the right one. Which is good, for it is. We don't measure just incomes, but incomes as compared to prices in the places the people are living. This gives us a much better idea of living standards. And by PPP measurements, absent those microstates, the US is indeed the winner. To which Chang says but hang about a bit.

Firstly, we know that the US is a more unequal society than many others. Thus the average doesn't give us a true view of how people really live. In an unequal society there will be more people below that (mean) average and thus the real average (ie median) living standard is lower than in a more equal society. Which could even be true but it's not all that large an influence. After we account for all of the taxes and benefits then everyone from Sweden to the US is in a gini (the way we measure inequalty) range of 0.25 to 0.38 or so. And the scale does run from 0.01 to 1.00.

More importantly perhaps we do have some evidence of what actual living standards are at the bottom of the pile in a number of different societies. This chart:

These are the incomes at PPP (so adjusting for price differences) after taxes and benefits. And the comparison is to US median income: so, the bottom 10% in Sweden get 38% of US median income. The bottom 10% in Finland get 38% of US median income. And the bottom 10% in the US get 39% of median income.

Hmm, I think our contention that the US higher average income isn't really valid because the poor get less than the average....thus the greater inequality means that the lives of the poor in the US are worse off than the poor in other countries....doesn't really stand, does it?

The US is definitely a more unequal country. But the poor seem to be about as well (or badly) off as the poor elsewhere.

The other trump that Chang plays is to point out that Americans have longer working hours than people in most other countries. Given that slaving away over a hot desk isn't what life is all about then perhaps we shouldn't all attempt to emulate this US lifestyle then? And while it's true that money isn't everything and that very few of us go into that long dark night bemoaning the paucity of hours we spent working for The Man, Chang has committed a terrible error here. He has assumed that the only form of work we do is paid working hours.

The actual division made is between personal time (we cannot get someone else to sleep for us, take our shower for us), paid working time, household production time and the balance left over is leisure time. The important point to note here is that there is that unpaid working time: that time spent in household production. We might think of digging the allotment to feed the family, childcare time, cooking time, washing and cleaning, repairing the car. It is this time plus paid working time for The Man which produces total working time. And when we look at this total working hours it isn't obviously true that Americans do work more hours than, say, Europeans. It is also possible to substitute household production for paid working time and vice versa. Once can slave over the hot desk to buy a takeaway, or slave over a hot stove to make up for the lack of income from the time not spent at the desk.

In fact, when people actually study exaclty this question (ie, here) they find that the opposite is true, Americans don't work longer hours. For example, the average German woman is working an hour and a half a week more than her US equivalent. And for the men the working hours are almost exactly the same. The German woman might be making sauerkraut at home (I know, terribly culturalist of me) while her American sister goes out to work, earns the money and they buys it: in the process the American sister gaining more leisure time than the German.

It is indeed true, as Chang states, that Americans do more paid working hours per year than Europeans. It is also true that the US is a more unequal society than most of Europe (Italy is actually more so than the US). However, the American poor have incomes around and about the same as the European poor. Americans work fewer unpaid, household production, hours leading to equal or greater leisure time. And as Chang has already admitted, the Americans do indeed, on average have both higher incomes and greater command over consumption opportunities as a result of those higher incomes.

The poor get about the same: the regular guy is both richer and has equal or greater leisure time? Perhaps there is something to say for this free market capitalism stuff they have in the US then?

Footnote. For those who think we shouldn't be talking about household production, please read the Stiglitz Report. The entire issue is well explained there.

The welfare debate has roused emotions on both the left and right, and has led to some outlandish claims. Myth needs to be separated from reality. Here is my take on what we should and shouldn’t believe.

Myth: Welfare spending that goes on pensions is unreformable.

Reality: The state pension eligibility age has risen too slowly.

Opponents of cuts to welfare often cite the proportion of welfare that goes on pensions (48% or a total of £80bn) as proof that the colossal budget is justified. This is lazy reasoning. The problem is not that pensioners necessarily receive too much money per year, it is that they receive it too soon. Life expectancy is rising fast and people are able to contribute to the economy for longer than they used to. If the government were to raise the state pension age over the next two decades to 70 taxpayers would save hundreds of billions and all would benefit from the contribution of older workers. If this change were made by 2030 pensions would still provide for 15 years of retirement, based on experts' guesses of life expectancy then. Historically this change is long overdue – since 1948 life expectancy has risen by 16% but the accompanying rise in the State Pension age has been a meagre 1% for men and 3% for women.

Continue reading.

The Left should back the ASI's proposals to increase the numbers of jobs available, especially for those of relatively modest skills.

The ASI takes the view that the best welfare measure of all is paid employment.  Someone in a job that pays wages or a salary can meet their needs and advance their status far better than anyone dependent only on state support.  The ASI supports measures than can boost job-creation by making it easier and cheaper to employ people.  It is made easier by reducing the paperwork and regulatory compliance required of would-be employers, and it is made cheaper by reducing the tax burden that falls on them.

Since about two-thirds of new jobs are created by small employers, the ASI has concentrated on the small business sector, proposing a lighter regulatory environment for them than for business in general.  The large firm can afford the costs of compliance more readily than can the small or start-up business.  One of the ASI proposals is that small firms should be allowed to treat their workers as self-employed, removing the need for employers to calculate and handle PAYE and NI payments, as well as reducing the non-wage provision they are obliged to provide for employees.  This would greatly boost the number of jobs, and be particularly effective at encouraging the one-person business to overcome the barriers that discourage it from taking on its first employee.

Although part of the Left wants to concentrate on securing more rights for those already in jobs, the rest of them should support ASI proposals that could greatly increase the jobs available and therefore the employment opportunities for those seeking jobs, especially young people.  They should also note that it is today's start-ups that will secure jobs in Britain's future, and support the ASI's commitment to an expanding future for employment.

On Friday the AA hit the newspapers with the allegation that there are shadowy companies in the petrol market. Speculators even: they buy up petrol, sit on it until the price rises and then, horrors, make a profit!

Few of the traders’ names – including Glencore, Cargill, Gunvor and Trafigura – are known to consumers outside the oil industry, but their effect on Britain’s 33million motorists and the wider economy is profound. They buy huge quantities of petroleum on the open market and store it until the price goes high enough to make them a handsome profit, at which point they sell.

It's an interesting contention, isn't it? That future prices are well enough known that you can make sure and certain profits just by storing something for a little bit. I'm particularly suspicious of the allegation in that at least some of those companies are wholesalers of petrol: the people who buy the tanker loads that the oil majors like to sell and split it up into the truck loads that petrol stations like to buy. And yes, there are more such companies these days as the oil majors pull back from their downstream activities.

The allegation then goes on that consumers are losing out as a result of the actions of these companies. Something which is by no means certain as, yes, it's Adam Smith time at the ASI once again, points out in WoN, Book IV, Chapter 5 para 40 and following. Smith is talking about wheat but the same basic concept applies to petrol.

The speculator at least attempts to purchase in a time of plenty, when prices are low, then sell in a time of dearth when prices are high. By doing so he raises prices when they were cheap: yes, indeed he does. But he also lowers them in time of dearth by releasing produce onto the market when it is expensive. So the net effect on hte consumer might well be nothing at all: the price has been moved through time but total expenditure on wheat (or petrol) remains the same.

Our speculators have made their profit: and if the consumers are paying the same total amount that profit cannot be coming from them. No, instead, it's coming from the original sellers: in this petrol case that's the oil majors and their refineries.

Which really rather changes this story, doesn't it? Even if the AA is right here, "Speculators rip off motorists" and "Speculators rip off oil companies" will play rather differently in the public press. And it's very likely indeed that the story is actually the second one.

The Left ought to support our campaigns to put power over these services into the hands of the people who use them.

Some elements on the Left want the state services used to mould an egalitarian society, but others should side with the ASI in wanting to concentrate instead on improving those services in line with the needs and wishes of their users.  The ASI views the centrally-planned top-down model as unsatisfactory and unresponsive, in that it delivers what its administrators think should be provided.  The ASI instead has advocated and backed reforms that have state services responding instead to the choices made by recipients.  Patients should have choices over where they are treated and, in consultation with their doctors, over which treatments they prefer.  Parents should be able to choose which school their child attends.  In both cases the state funding should follow from those choices and be directed to the institutions favoured by patients and parents.

Not everyone is equally equipped to make such choices, of course, but the ASI thinks that the choices made by those who are informed will lead the way in improving standards generally as others follow their lead.  Much the same effect happens in the production of private goods and services; it is the informed customers who improve the goods and services for everyone else as suppliers try to attract them.

This introduction of choice to allocate state funding is not only a superior model in theory.  It works in practice in some of the Scandinavian countries in both health and education, and succeeds there in raising standards as well as consistently attracting high levels of popular satisfaction.

A few days back I mused, almost as an afterthought, on whether the ultimatum game would be played the same way in all human societies. This is the game where player 1 gets to split $100, player 2 decidding whether or not to accept the split. If the division, 50/50, 60/40, 99/1, whatever, is accepted then both players get their money. If it's rejected, then neither gets any.

The importance of this game is that it shows that we'll actually harm ourselves in order to punish someone we think is acting unfairly. Humans thus have a deep and innate sense of fairness: or do they? For Luis Rooney (a reader here) has pointed me to this article which explains that the results of the ultimatum game are very much not consistent over human societies. There are those where people do act as that entirely rational consumer beloved of certain economists: they'll take a 99/1 split for who wants to leave a dollar on the table? There are even those where the offer starts out at 40/60 and player 2 will still reject it. These are the so called "gift" societies (historicaly, some Amerindian ones, today some Papua New Guinea for example), where acceptance of something leads to larger and more onerous burdens and obligations in the future.

This has really rather large implications for market economics. For it is that punishment of the transgressor, the unfair person trying to take advantage, which is one of the things that makes said market economies work. It's one of the things that regulates said markets: and do recall, regulation is often by social factors, not by legislation.

These differences, they believed, were not genetic. The distinct ways Americans and Machiguengans played the ultimatum game, for instance, wasn’t because they had differently evolved brains. Rather, Americans, without fully realizing it, were manifesting a psychological tendency shared with people in other industrialized countries that had been refined and handed down through thousands of generations in ever more complex market economies. When people are constantly doing business with strangers, it helps when they have the desire to go out of their way (with a lawsuit, a call to the Better Business Bureau, or a bad Yelp review) when they feel cheated. Because Machiguengan culture had a different history, their gut feeling about what was fair was distinctly their own. In the small-scale societies with a strong culture of gift-giving, yet another conception of fairness prevailed. There, generous financial offers were turned down because people’s minds had been shaped by a cultural norm that taught them that the acceptance of generous gifts brought burdensome obligations. Our economies hadn’t been shaped by our sense of fairness; it was the other way around.

Assume they're right about that causation (the piece doesn't explain how they reach that conclusion, instead of the idea that such markets thrive where the behaviour is already prevalent) and we actually find a good reason for why economic development is so hard. Why it's really very damn difficult to reach that first lift off stage. Because we're not just trying to get people to act in a particular manner, trade with people, divide labour and so on. We need to have, or the system needs to have, got into peoples' heads and changed the way they actually think before it can all happen. It's only with that change that the self-reinforcing feedbacks come into play and the economy as a whole takes off.

Which does rather put a different gloss on why some parts of the world are developed and some aren't, doesn't it? It's not because of what we've been doing to them but because, at least in part, of what is going on in both our and their heads.

We might even muse that this just reinforces the necessity of starting with markets, not with central direction, as a means of development. For it's only as the influence of the markets changes those thoughts that that lift off occurs.....