Will the BBC die from opportunity costs?

It sounds rather odd really for no one really notes that anything does die from opportunity costs. But I think that it might well be possible that that's what does in the BBC in the end. I'm prompted in these thoughts by Bill Quango. He notes that it's becoming less unusual for people not to have a TV. And that even those who have them seem to use them less than in the past:

I have been monitoring my own recent TV use and its dismal. I'm struggling to watch programs I actually like. TV seems to have become old hat. I now watch less than 10 hours a week. I listen to far more radio than Tv.  At least twice as much, maybe 3 times as much. Mostly because its easy to combine with other activities. I listen to music as much as I watch TV. In fact I pay video games more than I watch TV. I certainly use the internet far far more than TV use.

 

And that is the root of the TVs demise. There are other things to do. And they are now easy to do. Read a book direct on download. Multiplayer mayhem {wars of the roses- a current fav} All night shopping. News. current affairs. Gossip. Politics. Youtube. Facebook. Twitter. And general mooching around.

 

As there are more ways for us to pass our time then the cost of doing any one of them rises: for we're giving up more things to do that one. As the costs of something rise we're not all that surprised that people do less of it. You might not believe it but this has been used as an, in part, explanation for the falling birth rate. There's so much more to do in life than only have kids these days.

 

Of course, I think it will be a long time before the TV really goes the way of the pianola. But the BBC itself is in a precarious position long before TV itself dies. As TV becomes less central to the leisure life of the nation then a tax specifically to pay for it will become much less politically tenable. I wouldn't be at all surprised to see in a decade or so that support for it just simply dies out.

 

Killed by opportunity cost: there's simply so many other interesting things to do these days.

If I could just, very gently, correct Madsen here

In his series of reasons to be cheerful (yes, he is indeed a Blockheads fan, why do you think he lets me hang around the place?) Madsen tells us this about copper and other mineral resources:

Famously in the case of copper we developed fibre optic cables to convey our signals as copper rose in price.  We use plastic pipes instead of copper ones to convey liquids because they are cheaper.  The falling demand for copper means that world reserves are now estimated at between 25 and 60 years (depending on assumptions about growth rates), whereas at the time Erlich wrote, it was much less.

This is not to suggest copper will suddenly run out in 25 or 60 years.  If it becomes scarce it will become more expensive, and people will use other things in its place.  The reason the world is not running out of scarce resources is that the technology to locate and extract them is advancing year by year, and market prices motivate us to use it.

This is true, yes. But it's also not the whole story and I think that whole story is rather interesting. For the truth is we create resources, not discover them. And it is most certainly true that we create reserves of these minerals. We create them through the invention of new technologies.

On the specific point about copper, the great change in that metallurgical world was the early 80's introduction of SX EW technology. For the full gory details try here. The important point is that before this new technology we got our Cu from copper sulfates and sulphides. When we found a mountain of copper oxides it was just a mountain of useless dirt. We didn't know what to do with it. Then we adapted the SX EW technique and all those mountains of dirt became mountains of copper ore. Hurrah!

And we can expand this point into a much larger lesson. To a useful level of accuracy the mining world divides the world up into dirt and ore. Your allotment patch contains gold, rare earths, uranium and all sorts of other lovely metals*. However, your allotment patch is dirt. For while we do know how to extract all of those metals the cost of doing so would be higher than any value that could be recovered.

Ore is simply dirt where we know how to extract the metals: and also the value of the metals is higher than the cost of extraction. Ore is an economic concept, not a natural world one. And as with so many other economic concepts what is dirt and what is ore is a constantly changing spectrum. For technology, including the technology of extraction, changes over time. As an example I'm about to embark on the extraction of tungsten from some left over rock. A century ago, when it was dug up, it was rock. Now it's ore. The extraction technology has changed over time.

We should also go one stage even further and talk about Donald Rumsfeld's known unknowns.

When you see an environmentalist complaining that we're going to run out of a mineral in a generation he'll actually be correct. That's also the number Madsen uses for copper, 40-60 years or so. For every generation runs out of mineral reserves, this has been true since we started mining. For what everyone is talking about is "reserves". These are the known knowns. These are the ore, we know where it is, we know we can extract it at current prices, with current techniques, and make a profit doing so. Further, we have also tested and proven all of this to the satisfaction of the stock market listing rules where mining companies go to get traded.

You'll not be surprised to learn that drilling and sampling and sending odd hairy geologists over the hill with little hammers is expensive. So we only do this with the stuff we're likely to dig up in the next few decades. Thus, reserves of ore are, at any one time, good for only a few decades of use. Because they are a both legal and economic concept and as such we only define as reserves what we're likely to use in the next few decades. Or rather, only bother to do enough work to declare as reserves what we're likely to use in the next few decades. Thus every generation does indeed use up the available reserves of minerals.

But that isn't all there is of course: there's also the known unknowns. We've only bothered to stake out this side of the hill and in a couple of decades we'll do the same to the other side. We know it's there, we've just not bothered to prove it yet. These are more generally known as resources. They're there, we know that, we've just not gone through the expense of converting them to reserves yet.

Then there's our unknown knowns. We do know roughly what the geology of many places is. But we've sent very few hairy odd men with hammers over it. For example, we know that the geology of Madagascar is quite similar to that of the German/Czech border. Lots of lovely tungsten, tantalum, niobium, scandium up in them thar hills. Same sort of volcanic structure that's been folded in a similar manner and weathered much the same way. But why bother with the lemurs when you can go digging within reach of the Pilsener Urquel brewery? Well, quite. We're sure there's lots out there. Not sure quite where, in what quantities, quite how we'd get it out: an unknown known.

And then there's the unknown unknowns. The best way to approach this is from the other side. We think we know what the crustal abundance of all (OK, most) metals is. At the extreme we can imagine mining your allotment for them. Whether or when we'll get the technology to do so at economic cost we don't know. We do know that we can do it right now but only at exorbitant cost. Take, say, Tellurium, that we use to make a certain type of solar cell. Crustal abundance is, well, I can't remember how many zeroes there are after the decimal point to be honest. 0.1 parts per million? 0.0001 ppm? Somewhere in that range meaning that in the crust of the earth there's some 120 million tonnes of the stuff (I do recall that number from having done the calculation).

We use 125 tonnes of tellurium globally each year. Our known known is that we get it from copper slimes (no, real mining word, one of the wastes of making copper). We make enough to cover current demand from our known known. We're pretty sure about the known unknown as well: there's mountains just full of copper out there which contain that Te. Our unknown known is that there are other minerals that contain it in some quantity but we've just never bothered to check. And our unknown unknown is that, if it ever became expensive enough, I'd be around rootling through your veg patch to get it.

Do we, in the end, face resource constraints? Sure we do: absent asteroid mining we cannot use any more tellurium atoms than there are on the planet. Are these resource constraints meaningful in any manner at our current scale of activity? Nope.

For we continually create new reserves through the invention of new technologies. And we continually turn the various known/unknown combinations into those known known reserves by bothering to spend the time and money to do so. Or, as I say, we turn dirt into ore all the time. And so far at least no one has posited a shortage of dirt.

*I have a hankering to do a mad scientist TV show. In which we really do take a field, a pile of rock, and we break it down into its component elements. Here's the uranium, here's the iron, the aluminium and so on all the way down the periodic table. Just to, once and for all, get across the point that reserve or resource scarcity is an economic, a cost, concept. Not some immutable law of our environment. Sadly I fear there are no TV producers quite as mad as me.

London Mises Circle

The seminars hosted by Ludwig von Mises, first in Vienna and later in New York, have a key place in the history and development of Austrian economics. Such figures as Hayek, Rothbard, and Hazlitt all attended.

Inspired by this the London Mises Circle is holding a seminar at the Institute of Economic Affairs at 6:30pm on November 1st.

The resurgence in popularity of Austrian Business Cycle Theory in recent years has prompted renewed criticism of ABCT. In a recent article, A Reformulation of Austrian Business Cycle Theory in Light of the Financial Crisis, one of the leading Austrians, Joseph Salerno of Pace University, responds to some of these criticisms and makes some additions and refinements to ABCT. We will be aiming to discuss these at November’s meeting.

All are welcome. If you have any questions please email londonmisescircle@gmail.com. 

Ten reasons to be cheerful, part 5: Employment

In the US Presidential election of 1992, candidate Ross Perot talked of the "giant sucking sound" of US jobs draining South of the border if the US signed into the North American Free Trade Area.  It did; there wasn't; it won't.

4.  Employment

The pessimists seem to think that the advanced economies have had their day as far as jobs are concerned.  They say we can't compete against low-cost labour in the developing world, and they urge protective tariffs against imported goods to protect jobs at home.

No.  What happens if government follows that course is firstly that they make their own citizens poorer by making them pay more than they need for their goods.  Secondly they make their own manufactures uncompetitive by cocooning them in a protective domestic market, but unable to sell elsewhere in the world.

When we buy cheaper foreign goods we have money left over to buy other things with.  It is true that some jobs go abroad and help people in poorer countries to step onto the road that leads to wealth.  But it is also true that as people in those countries become richer, we can sell them more of what we produce.  We no longer compete on cheap textiles, but many jobs have been created in added value areas of textiles.  Developed countries face growing demand for fashion labels and designer goods from countries such as China.

It is true that electronic goods can be out-sourced to countries with low-cost labour, but those goods generate thousands of jobs in developed countries, including ones in design, in advertising and promotion, in marketing and retailing, and it is also true that those products bring convenience and utility into the lives of those who use them.

People might want to do the same job producing the same goods for the whole of their lives, but there is no civil right to do that, and the real economy embodies constant change.  People become wealthier and their aspirations change.  New product and processes emerge to tap those new demands.  Successful economies are ones which keep moving.  As goods from poorer countries undercut their cheap goods on price, people in developed economies move into areas where higher value is added, or into service jobs less susceptible to foreign competition.

As we become richer on a global scale, there will be more demand for goods and services, and therein lie the opportunities that will create tomorrow's employment.

Hold the GDP party for now

There’s no doubt that today’s GDP figures are good news, but we should be wary about depending too much on GDP as a measure of prosperity. Prof Anthony Evans, a Senior Fellow of the Adam Smith Institute, wrote this superb piece about GDP way back in 2009, but his point still stands:

The "health" of the economy is too complex to be summarised in a single number. It would be like reviewing a novel based on the average words per page.

GDP doesn't tell us how economic activity affects living standards. It fails to distinguish between a bubble and sustainable growth. It doesn't forewarn about inflation. And perhaps most importantly – it doesn't help the average person on the street know whether they're more likely to become unemployed. After all, declining incomes actually increase the demand for many types of goods and services, which is why plenty of workers are prospering in the downturn.

I don’t want to be too grim, but we came ‘out of recession’ back in 2010 as well and we all know how well that turned out.

The fundamentals of the economy are still weak. Our levels of debt – private and public sector – are rivalled only by Japan. As a new paper released by the excellent Save Our Savers (in cooperation with the Cobden Centre and the Adam Smith Institute) argues, the massive levels of private and public debt that have accrued over the past decade mean that no strong recovery is possible. And the monetary system is a de facto government subsidy for banks:

As well as outright support, the UK’s banks are being helped by Quantitative Easing, by the Funding for Lending Scheme and by the record low Bank of England base rate. Above all, they are assisted by the knowledge that they are considered so important to the economy that they will be bailed out if they mess up again.

They are thought to be "Too Big Too Fail". If the banks make money they’ll continue to pay enormous bonuses. If they take stupid risks and blow up the financial system once more, the government will step in with taxpayers’ cash and the banks will still pay enormous bonuses. This is known as “moral hazard”.

The Bank of England believes this implicit subsidy has benefitted British banks to the tune of £100 billion a year, leading to greater profits and salaries yet doing nothing to diminish their appetite for stupid risks.

So, without wanting to pour too much cold water on good news, I don’t think we should party just yet. As Prof Evans says, “statistics are like bikinis – what they reveal is interesting, but what they conceal is critical.”

Ten reasons to be cheerful, part 4: Resources

The mantra is "The world is running out of scarce resources; we are leaving none for our children."  It is not true, and resources are my fourth reason for optimism.

4.  Resources

In a famous 1980 scientific wager, Julian Simon invited Paul Erlich, author of "The Population Bomb," to choose 5 resources he thought were being depleted, and bet they would fall in price over the decade.  Erlich chose copper, chromium, nickel, tin and tungsten, and duly paid up when their price fell over a decade, indicating relative abundance rather than scarcity.

We are indeed using resources, but our ability to extract new sources is advancing faster than our rate of use, meaning that they are becoming relatively more plentiful, and therefore falling in price over the decades.  Two things happen as we use resources.  If they become more scarce the price rises, motivating us to find new sources of supply and to use less.  We also develop cheaper substitutes. 

Famously in the case of copper we developed fibre optic cables to convey our signals as copper rose in price.  We use plastic pipes instead of copper ones to convey liquids because they are cheaper.  The falling demand for copper means that world reserves are now estimated at between 25 and 60 years (depending on assumptions about growth rates), whereas at the time Erlich wrote, it was much less.

This is not to suggest copper will suddenly run out in 25 or 60 years.  If it becomes scarce it will become more expensive, and people will use other things in its place.  The reason the world is not running out of scarce resources is that the technology to locate and extract them is advancing year by year, and market prices motivate us to use it. 

The Earth is nearly 4,000 miles from surface to centre, and we have barely scratched its surface.  There are plenty of resources; all it takes is technology to tap them, and an incentive to do so.  It also takes technology to develop substitutes, and carbon fibre, laminates and plastics are less resource-intensive than their predecessors.

It is not only our ability to tap new sources that advances: or skill at reclaiming and recycling previously used resources is also advancing.  And crucially, our technical advances now enable us to stretch our resources further, using less of them to achieve the same effect.  It all means that resources are not running out.

Ten reasons to be cheerful, part 3: Energy

We've been told the world is running out of sources of energy, and we've been preached to about renewables and made to spend vast sums on them.  In fact energy is the third of my sources of optimism.

3. Energy

The oil, we are told, is running out, and they talk of 'peak oil.'  There are vast reserves of coal, but it pollutes more than we want, so the talk turns to renewables.  Biofuel from food grains lacks all sense or reason.  The farmers loved it, of course, and so probably did the politicians who collected their votes.  Poorer people who had to compete with Chelsea tractors for cheap food were less pleased.

Wind farms have blighted our areas of natural beauty, are very expensive, and may not even contribute to environmental quality when their whole life pollution, including construction, is factored in.  Moreover there has to be back-up power for when winds prove unreliable.

Renewables are jacking up the fuel bills that customers complain of, despite their tiny contribution to total energy supply.  The big change to the equation has been the natural gas revolution, with hydraulic fracturing technology giving us access to reserves we knew about but could not previously tap.  We now have many decades, maybe hundreds of years, of reserve supplies.  And those reserves are not in politically sensitive or unstable areas.

Gas does emit carbon, but half that of the coal-fired power stations it can replace.  It is what will fuel our power stations.  It can even substitute for oil in transport if we move to electric vehicles using gas-generated electricity.  It is a fossil fuel, of course, but not in short supply.

Coming close on its heels is photo-voltaic power, with the price of the cells subject to a kind of Moore's Law that sees the prices tumbling steadily over the years.  Technology has thus already shown us the solution to the energy shortage.  Environmentalists oppose this solution, of course, because it does not necessitate the behavioural changes that they seek.

Note that a US coal-fired plant converts only about 33% of the potential energy to power.  An incandescent light-bulb is only about 3% efficient.  This makes coal to incandescent light only 1% efficient.  By contrast an LED powered by gas-generated electricity is 20% efficient – twenty times as much.  Technology like this is solving the problem.

In praise of sprawl

Since the formation of the Coalition Government in 2010, the British populace has been given the unusual, if often dubious, privilege of hearing significant public discourse on the subject of land use planning policy. Even more unusually, the planning system has been subject to changes that may well prove to be more than semantic; the Localism Act 2011 and the revised National Planning Policy Framework (NPPF) of April 2012 have both resulted in material changes, albeit with the caveat that the full effects, especially of the former, will probably take some time to become apparent.

In the meantime, the Government’s interest in planning policy has clearly not waned. The Treasury and the Department for Communities and Local Government (DCLG) have both issued a stream of announcements and comments on the subject, with a particular emphasis on the effects of planning policy on economic performance. In addition, it is worth noting that the Prime Minister commented on the subject in his speech at the 2012 Conservative Party conference, referring to the need to construct additional homes, and to ameliorate the planning impediments encountered by businesses.

Despite their hitherto limited nature, the Government's planning reforms, both actual and mooted, have been the subject of significant attention and controversy. Readers will doubtless recall the turbulence caused by the NPPF reforms, with opponents, including the normally quiet National Trust, prophesying the eradication of any and every patch of green space; a Los Angeles for the Home Counties, no less. More recently, the DCLG's proposal temporarily to relax the requirement to seek consent for certain property alterations has generated its own, if rather more modest, controversy; certain individuals and organisations appear to envisage the destruction of every garden in the land, complete with attendant social strife as previously civilised neighbours wage war over conservatory designs.

Such controversy is a useful reminder of the difficulties that any Government can expect if it is deemed to be liberalising planning policy. Quite aside from the fact that state bodies have a tendency to overestimate their own interventionist wisdom, it is worth bearing in mind that they, or more precisely, their political masters, are always under significant pressure to restrain the freedom to develop land. Therefore, even the limited liberalisation that has been implemented to date is to be welcomed, for no one should underestimate the political difficulties that such liberalisation can entail.

However, there are, of course, some very good reasons as to why the Government should not only persist in its planning policy endeavours, but should go much further, and seek fundamentally to curtail the operation of the planning system.

We will now turn to consider, in outline, some of the reasons for doing so.

Planning control is founded on two primary assumptions. Firstly, that the owner of a parcel of land is not entitled to use that land as he or she would necessarily wish. Secondly, that the state is in a better position to determine how a given parcel of land should be used than is the case for the owner of the land in question.

By reference to the normal standards that underpin a liberal, capitalist democracy, those assumptions are clearly eccentric. They are also clearly unwise, given our knowledge and experience of the effects of intrusive state intervention upon personal liberty and economic prosperity. At best, state control of the supply, development and use of land is a misguided anachronism. At worst, it is an economically illiterate obscenity.

The consequences of state control of land use have been rather predictable, especially with regard to the housing market. Firstly, the supply of new housing has failed to keep pace with demand. Secondly, the type of housing that has been built has often failed to match consumers' expectations and requirements. This has led to scarcity, high cost, limited choice and overcrowding, with all the deleterious problems that follow. In short, the housing market is not functioning in the way in which an efficient market should. The principal reason for this is the operation of the planning system, which places greater faith in the state's, rather than the free market's, ability to determine the optimal extent, pattern and nature of land development.

To many involved in the (attempted) development of land, the British planning system has the feel and appearance of a timeless monolith. However, it is worth bearing in mind that it is, in fact, a relatively recent intrusion. The legislation that underpins the system has, of course, changed over time, but the conceptual framework was largely the creation of the Town and Country Planning Act 1947. It is therefore worth giving some consideration to the Act in question.

The main rationale for the 1947 Act can be summarised in three points. Firstly, it was conceived at a time when confidence in state control and direction of economic activity was very strong. Secondly, it was intended to assist the Government of the day in resolving some long-standing housing problems, especially in urban areas. Thirdly, it was a response to some strident criticism of some of the development seen during the inter-war period.

How do those three points fare when considered under today’s conditions?

On the first point, confidence in state control and direction of economic activity is much less pronounced. Of course, there is, regrettably, a rather stubborn residue of confidence, and the current economic climate appears to be strengthening it. However, it can, at least, be said with some certainty that public and official attitudes have changed markedly since the 1940s.

On the second point, the housing problems that afflict modern Britain are largely the result of Government action and intervention. As such, Government inaction would be infinitely preferable, albeit on the condition that the inaction in question is not used as an excuse for not repealing certain items of legislation!

What, therefore, of the third point?

The criticism in question was largely a response to the acreage of suburban housing that developed around major towns and cities between 1919 and 1939; the archetypal semi-detached sprawl. Such development was, and indeed still is, regarded by many as a blight, and an example of the risks posed by a liberal planning regime. Inevitably, such views are most prevalent among those who are enthusiastic supporters of the notion that the state should decide what type of development is ‘right’.

However, one man's architectural blight is another's economic triumph; the opponents of the inter-war suburban development have clearly forgotten, or have chosen to ignore, the fact that the development in question brought some remarkable benefits. Around four million new homes were built during those years, of which some 75% were provided on a commercial basis. This was a veritable building boom, one that not only provided millions of people with new homes, but also provided extensive employment opportunities during a period that is rather better remembered for grinding stagnation and chronic unemployment.

The Government should keep such analysis of the 1947 Act in mind when it is contemplating planning policy. We should certainly hope that it does so; after all, even if it chooses not to adopt a stance informed by a principled commitment to personal and commercial freedom, it could still decide to curtail planning control out of a desire to repeat the economic success of the inter-war development.

In addition, the Government could use the experience of the inter-war development as a reference point for consumer opinion on the subject of planning control. Given what was said above regarding public and political controversy, this may seem counter-intuitive. However, in this case, there is arguably a crucial difference between ‘public opinion’ and ‘consumer opinion’. Of the two, it is the latter that is most persuasive, as it reflects economic actions and decisions, rather than stated opinions of the type that are far too easy to manipulate. Fortunately, it appears that consumer opinion is, in fact, supportive of loose planning controls, or at least of the results of loose controls. By way of an illustration of this, we will turn once more to the inter-war housing referred to above.

It should be borne in mind that millions still live in the housing of the inter-war period. Furthermore, those millions are probably perfectly content with the housing in question, especially when it is compared with some of the alternatives. After all, given a free choice between the free-wheeling sprawl of a 1930s housing estate, the Soviet dystopia of a 1960s social housing tower block, and the Lilliputian scale model that passes for many a modern housing development, most people would be happy to choose the first option. This is hardly surprising, for the housing in question is reasonably close to the ‘ideal’ housing that most consumers want; a reasonably spacious house, three or more bedrooms, a garden that is larger than a dining table, and an adjacent space in which to park a car.

Put another way, the consumer has spoken, and not in favour of the status quo. The Government should take note, for a Government that provides consumers with what they want, rather than what is thought to be good for them, is likely to be rewarded accordingly.

In praise of sprawl

Since the formation of the Coalition Government in 2010, the British populace has been given the unusual, if often dubious, privilege of hearing significant public discourse on the subject of land use planning policy. Even more unusually, the planning system has been subject to changes that may well prove to be more than semantic; the Localism Act 2011 and the revised National Planning Policy Framework (NPPF) of April 2012 have both resulted in material changes, albeit with the caveat that the full effects, especially of the former, will probably take some time to become apparent.

In the meantime, the Government’s interest in planning policy has clearly not waned. The Treasury and the Department for Communities and Local Government (DCLG) have both issued a stream of announcements and comments on the subject, with a particular emphasis on the effects of planning policy on economic performance. In addition, it is worth noting that the Prime Minister commented on the subject in his speech at the 2012 Conservative Party conference, referring to the need to construct additional homes, and to ameliorate the planning impediments encountered by businesses.

Continue reading.

Ten reasons to be cheerful, part 2: Water

Some people tell us that water scarcity might well be the cause of future wars as the world struggles to cope with shortages.  In fact water is my second cause for optimism.

2.  Water

The shortage pointed to is of usable water, not of water itself.  Although four-fifths of the Earth's surface is covered by water, some 97 percent of the Earth's water is too salty for people to drink or to use for irrigation, and much of the water that is accessible is not safe to drink.  The question is whether we can develop the technology required to purify water to render it of drinkable quality at a price that can be afforded.

Great advances are being made in fairly low technology solutions to water purification in less developed countries.  A range of ingenious solutions has been developed from simple filtration systems that use coal ash, to solar-powered ones using plastic bottles.  Great efforts are under way from a number of foundations to finance the construction of deep wells to bring clean water to villages whose nearest other source is miles away.

A combination of such developments will contribute much to ensuring adequate supplies, but ultimately it could well be desalination technology that provides an inexhaustible supply.  The main desalination technique hitherto has depended on boiling seawater and condensing the steam.  This works well and is in widespread use, but it is very energy-intensive.

The alternative approach that is rapidly gaining ground uses osmosis (technically reverse osmosis) to separate out the salts using membranes.  This also uses quite large amounts of energy, but advances in engineering are making it more efficient as time passes.  Such plants could be solar powered as those costs come down, and can be located in areas that both need water and have many hours of sunlight.

Ultimately the question of the future supply of clean water comes down to whether we can develop the technology to purify water efficiently, and the answer seems to be that we can.  Of course the water will have to be where it is needed, but its transmission is again a problem susceptible to technological solutions.  Both of these depend on access to cheap and abundant sources of energy if they are to be affordable, and it seems likely that the gas revolution has made the breakthrough which makes that outcome likely.