The socialist calculation problem

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The standard leftist/socialist argument about the economy is that it would all work vastly better if only it were planned. Omniscient and benevolent bureaucrats (or possibly politicians although few believe in the benevolence or omniscience of that tribe any more) will decide what should be produced where and how at what price and children will therefore gambol happily in the streets. The delusion isn't new of course, it's been around at least since Diocletian, but despie repeated failures still it persists.

Post 1945 Labour saw it as the way to build the New Jerusalem, the 70s was infested with the idea, even nominal Conservatives like Michael Heseltine have embraced it. But as various people have tried pointing out over the centuries, economies are complex things and it's going to be difficult to even measure everything, let alone make decisions in time to have an effect. Even the manifest failures of GOSPLAN in running a relatively simple society doesn't seem to cool the ardour.

The latest meme to ride to the rescue is that all encompassing cry of "computers!" As they get better, faster, more complex, we can model more complex things upon them. We will, at some point, reach that happy place where we can model the entire economy properly and thus plan it. Hurrah!

I'm afraid I have bad news for this secular but most pious hope:

Then there is the sheer number of products: Eric Beinhocker, author of The Origin of Wealth, reckons there are probably 10 billion distinct products and services available in a modern economic environment such as London, Tokyo or New York.

No, you're simply not, ever, going to be able to collate the information and then run the program on 10 billion discrete variables. It just isn't going to happen whatever happens to computers in the future.

For those who do suffer from the planning delusion might I suggest dusting off some Hayek?

Why interventionism works

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Short Term Serial Correlation and Long Term Mean Reversion sound rather heavy. And so they should. They were conceptualised by statisticians, after all; people who make economists sound normal. Yet an understanding of these two phenomena helps explain why the myth that politicians can and do solve real problems continues.

Short Term Serial Correlation emerges because people like to see patterns. Random events are never evenly distributed; some areas will manifest more incidents than others. Geographically, there may be a larger concentration of accidents, or geniuses, or Stephens in one locality; chronologically, there will be more crimes, or jackpots, or bankruptcies in one month than another. For some of these there may be real causes (a criminal has moved into the area, thus triggering a local crime wave) but very often apparent rises or falls in frequency are just the results of random coincidence.

Long Term Mean Reversion is the inevitable “return to form". If there is no cause for these clusters, in the long run they will even out. The average reasserts itself. Because there was no reason for the cluster of incidents, it is not sustained and everything returns to normal. All very dry stuff, you might think, and blindingly obvious. Except that this duel-phenomenon may explain why interventionism is so popular. Take two examples:

• A number of traffic accidents in a short space of time lead to a public outcry and a demand that something be done to improve safety in what is, apparently, a dangerous stretch of road. Local people focus not on the 10 year average but the tragedies of the past 12 months. Action is called for and local councillors step in. Money is spent changing the road layout, building speed humps or erecting a camera. The following year the number of accidents falls (returns to the long-term average) and both councillors and residents claim it is a success.
• The economy goes into a bit of a slide. Shares fall and unemployment rises. Worried citizens demand that something be done to prop up asset values and protect jobs. The government – ever eager to please – steps in with a lot of expensive and headline-grabbing measures. After a period, economic activity recovers its upward momentum. Government officials are quick to point out that the recovery results from their own policies. Put like this, the significance of these phenomena should be obvious.

The natural instinct of people to cry that “Something must be done" very often leads to policies that appear to have the desired result. This perpetuates the belief that politicians can make a difference and that without them the world would rapidly go to hell in a hand basket.

The future of grammar schools

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The Head of the Grammar Schools Heads’ Association has announced that he thinks children from poor backgrounds should be given priority over the middle-classes in admission to grammar schools. He has also said that the 11+ should be scraped in favour of an exam that benefits the lower classes.
 
This is a clear example of positive discrimination and a ‘dumbing-down’ of education. I agree with the view that the 11+ needs modernizing, at 11 children are too young to take high pressure exams which can have a huge outcome on their futures. There is no doubting the Middle-class education machine where parents are willing and able to spend on private tutoring and coaching. I have invigilated 11+ exams where children are distraught that they cannot answer any questions whilst their parents have imposed so much pressure upon them. But parents are not to blame for wanting the best for their children.
 
The blame lies with the poor standards of education that state schools currently provide. Parents and children are often faced with the choice of a grammar school or a comprehensive with little variation or scope for individual needs. If the education system was opened up and individual schools were given greater autonomy, pupils would be able to choose a school that could cater to their needs and offer a more tailored education.
 
Clearly the solution to the poor education standards is not to positively discriminate against middle class students. Instead we need to be offering pupils greater choice and opportunity and provide schools with greater incentives to raise standards across the board, not just for one section of society.

Charles Moore asks an interesting question

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And rather blows it, for the answer is in his question.

But I should like to concentrate on the non-economic elements of all this. What is the attitude of mind that has turned the most educated and prosperous part of the human race against reproducing itself?

It is also an entirely economic answer. The reason that the most educated and prosperous do not have great tribes of children is because they are educated and prosperous. We can see this in any indicator we like: whether it's average income in a country, the wealthier within a society, the richer people are the fewer children they have. The effect is even more striking for education of women: more years in school leads to fewer changing nappies. This much is simple.

But of course we want to know why this is as well. Why should anything from learning to read and write to a PhD in electrical engineering lead to women wanting fewer children? Why does having the physical wherewithal to provide a child with an entrancing life lead to having fewer? And it isn't just that children are a cost now as they weren't in peasant societies, as Moore mentions.

It is, I'm afraid, our old economists' friend, opportunity costs. The price of anything is not what we pay for it, it is what we give up to get it. The richer you are and the more educated you are the more glorious opportunities this modern world of ours gives you. You can travel the world, climb mountains, have a long and fulfilling career, run a major corporation, write novels, this globe of ours really is the mollusc of your choice. You can also spend some 30 years or so pumping out and raising (clearly, for men, only the latter) a series of five or eight children as our forbears did. But what you cannot do is all of them, choices have to be made.

The result of such is that given the multitude of choices available to the educated and prosperous fewer such are deciding to have children. That's pretty much it.

Smaller banks, more competition

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An editorial in the FT this week stated that:

The UK needs to set out a plan for selling off publicly owned shares, rolling back guarantees and reintroducing a competition regime under which banks get cut back if they are overdominant, and can be allowed to fail. During the panic, stability was the key aim of policy. For a time, banks had to be cosseted. But, as calm returns, so too must competition.

The need for more competition in the UK banking sector is one of the dominant themes which has emerged from my talking and listening to financial experts over the last few months. The primary motivation behind it is that banks should not be allowed to become 'too big to fail' in future, with all the moral hazard and systemic risk that carries with it. A more competitive market might also improve deals for consumers and encourage higher industry standards.

Of course, it might strike some people as not being very free-market to suggest that government policy should try to prevent businesses from growing too large. In many sectors, that might be the true: as long as it is possible for new competitors to enter the market, monopolies or oligopolies will not be able to get away with abusing their market position and offering consumers a bad deal. As such, government intervention would be unnecessary.

This argument may not apply to the banking sector, however. For starters, the regulatory barriers to market entry are extremely high, and make it hard for competitive forces to operate. It's also worth making the point that many big businesses would probably never emerge with a very basic legislative intervention in the market – limited liability incorporation laws. This means that supporters of the free market should not dismiss measures to promote competition out of hand.

The question remains though, how best to encourage smaller banks? This merits a more in-depth study, but the obvious place to start would be with the banks now majority-owned by the government. They should be broken up before being returned to the private sector. In the rest of the financial system, it might make sense to impose higher capital requirements and lower leverage ratios the larger a bank gets.

Public space reclamation

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The list of what we can't do in public spaces is outpacing what we can do. In light of this the collaboration between Blueprint magazine and the Manifesto Club is welcome as it attempts to answer Mayor Johnson's 'Great Spaces' initiative.  Blueprint Magazine would like to see all the 'rules and regulations' removed and the Manifesto Club would like a removal of bans on alcohol (part of their ongoing 'Booze Campaign').

The New Statesman article covering the above's 48 hour test of public spaces shows why there needs to be a thorough review of how public space is regulated. The example of the police officers, happily accepting lager drunk from a tea cup rather than a can – otherwise they would confiscate it – makes a mockery of the inane regulations. It also points to a policy of self-regulation being the correct way that the public should govern the public spaces they enter. The control of the public realm needs to be wrested back from the politicians who are using it as a vote-winning policy fairground, appeasing this or that section of society to gain popularity.

Common sense, both from the public and the police, is the attitude that used to be pervasive in society. Unfortunately the politicians have sought to absolve us of relying on our own intelligence. For many this now means we are treated like children, assumed to be likely to act in a fashion similar to the very transgressors that regulations and rules are promoted to deal with. It's time to fight back, emancipating public space and ourselves at the same time.

The New Minister

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Much is being said about how we need to revise our constitution: we should change the voting system, actually have one for the second house, perhaps have primary elections, state funding of parties, maybe even give the whole liberty and freedom thing up and fall sobbing upon the shoulders of the European Commission. However, I've a simpler idea, one that has two benefits. Firstly, it would provide me with a well paid sinecure shouting at and making fun of politicians and secondly, it would actually be useful whatever else we did to the political or governance system.

I want to revive the post of Jester: in it's proper, medieval sense that is. Not just a funny looking man in odd clothes (I've got that part of the job description right at least) who told unfunny jokes (ditto) but one who was licenced, authorised, to shout out when someone was talking b?**?!cks. If the Minister for Equality started to say again that the gender pay gap is 24% or more then that stick with bells on gets waved. Repeat in Cabinet that ID cards will help to prevent identity theft and the bells on the silly hat are also tinkled.

Someone proposing that wind power can meet all our electricty needs would be greeted with the report showing that it is indeed possible for peak demand to coincide with not a breath of useable wind in the entire country and something unfunny from Shakespeare. The full capering and preening upon the table, boncing with the blown up pig bladder and provision of a whoopee cushion would be reserved for those who say something extraordinarily stupid: like stating that a 50% tax rate will increase revenues, or that the economy is well placed to weather the storm. Of course, no one would be silly enough to say such things, would they, so the full production would indeed be a rarity.

The sad thing is we shouldn't actually need a Jester, someone to perform this office. If we had emotionally and intellectually continent adults (or even ones who were intellectually coherent) in office then of course they would be able to manage things themselves. But while we've got the politicians we do there is indeed a need for someone to leap up and shout "B?**?!ks" at them when they're being, as they are all too often, stupid.

If I don't get the job then I nominate Roy "Chubby" Brown.

Railway franchises – the need for reform

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The effective re-nationalisation of the East Coast Main Line (ECML) is yet another setback for the railways privatisation policy of the mid-1990s.

National Express submitted a heroically optimistic bid for the ECML franchise, which was based on a £1.4 billion payment to the Government between 2007 and 2014.

This figure assumed annual revenue growth of over 9% - in the first half of 2009, growth was a meagre 1%.

Not surprisingly, National Express has now thrown in the towel. It remains unclear whether it will be allowed to retain its two other railway franchises.

Given the previous railway franchise setbacks, including the removal of Connex from the South Eastern network in 2003 and the enforced departure of GNER from the ECML, it is clear that reform is needed.

Assuming that the next Government retains the railways franchise system, two obvious improvements could be made.

First, some of the uncertainty relating to future revenues – the key financial driver – could be removed. Imposing a guaranteed minimum and maximum revenue figure within each franchise repayment contract could deter over-optimistic bids.

Secondly, correlating more closely franchise lengths with rolling-stock contracts would be beneficial. In particular, those franchises that compete directly with air services, such as the ECML, should be of much longer duration,

Whilst some argue that shorter franchises promote efficiency, the water sector operates with near-permanent licensees – and without undue problems.     

In time, and once the large Network Rail capital expenditure programme begins to wind down, the Government should allow some vertical integration - initially in rural areas or where the network operation is reasonably straightforward.

Eventually, there is no reason why integrated regional railway operators cannot be treated like regional water companies. With a substantial ongoing capital expenditure programme and decent operating revenues, they could also be price-regulated according to their Regulated Asset Valuation (RAV).

Hot, hot, hot

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Well, it's warm. The UK is apparently suffering from a prolonged bout of 'hot' weather and as per normal there are many who apparently aren't coping very well with it. Why as a populace have we become so useless at dealing with simple things? In cold weather the country grinds to a halt. In warm weather we continue about our business dripping with sweat and bemoaning our lack of air conditioning! Why are we so unable to adapt to our surroundings when extremes of weather occur? Or more to the point, why have we become so overly reliant on the government to aid us in slightly 'harder' times?

It's only a matter of time before the hot and bothered amongst us accuse the government of not tackling global warming and reason that that is why the weather is seemingly getting warmer and we have these mini-'heatwaves'. This will obviously lead the government to act, no doubt at the taxpayers' considerable expense. A better course of action is to do nothing. People who find this weather a little on the warm side for themselves can purchase air-conditioning, buy a fan, maybe a bottle of water, or a convertible car or one with a/c. And when it's cold a jumper, coat or matching hat and gloves.

The way things are going it's only a matter of time before Gordon Brown promises to tackle the sun and cool the population. After all, he is a man who listens to the people. He might even seek to introduce a bill establishing a government-controlled dish that has the ability to block those warming rays, if only so that he can borrow yet more money. But then there'll be people complaining it's too cold and he'll have to introduce legislation to purchase everyone jumpers. Such is life in Brown's barmy Britain.

More on public spending

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Further to my post below on public spending, there are of course many good reasons why ever-higher public spending is a bad thing. Chief among these is the deleterious effect it has on economic growth.

The obvious point here is that public spending requires either taxation or government borrowing (which is really just deferred taxation). Both of these take money away from the private sector, where it can be put to productive, wealth-creating use, and spends it in the public sector, where it isn't. Moreover, these taxes also affect behaviour – they blunt people's incentives to work and produce, to start businesses and create jobs. Put simply, the high taxes that the doctrine of 'ever-higher public spending' requires make as poorer as a nation than we otherwise would have been.

It isn't just about the taxes though. The under-appreciated flip-side of that coin is that public spending itself – regardless of the taxes needed to fund it – damages economic growth. The reason is crowding out. When the state spends money in a particular sector, it crowds out private businesses that would otherwise have been performing the same function, or providing the same services.

If we didn't have a nationalized healthcare system, for example, we could have a much more profitable, wealth-creating private healthcare sector. Rather than being a drain on the resources of the productive private sector economy, as it currently is, the provision of healthcare could itself contribute to the wealth of the nation. The same could be said of the universities – higher education being something in which Britain can and should have a commercial comparative advantage. And perhaps most obviously, this is true in Britain's creative and media industries – if it wasn't for the anachronistic dominance of the state broadcaster, the BBC, this industry would be very much vibrant and dynamic.

Politicians should be glad to cut public spending, and ought to be brave enough to make the arguments for it.