A Capitalist Carol, Stave 5

The story so far: After meeting the first of Adam Smith’s heralded three messengers, the high-spending enthusiast for statism, Splurge, prepares for the second…  

Awakening in the middle of a loud snore, Splurge felt that he was restored to consciousness for the especial purpose of conferring with the second messenger dispatched to him through Adam Smith’s intervention.

Consequently, when the bell struck One, he was not surprised to find himself enveloped in an eerie light, the source of which seemed to be in the adjoining room. He rose softly and shuffled to the door.

The moment Splurge’s hand was on the lock, a strange voice bade him enter. “Come in! And know me better, man!”

The spirit that introduced itself gave every appearance of one who had known better days. It had a weak, sickly pallor. “I am the Ghost of Freedom Present,” it explained. “Touch my robe!”

As Splurge did so, the room vanished instantly, and he found himself standing, in his night-gown, in the city streets. As before, there were people about, all wishing each other good-day. But many of the shops and ale-houses seemed to be closed and shuttered.

“It must be Christmas morning,” ventured Splurge, as he sought to explain the evident lack of commerce.

“It is,” said the spirit, “but that is not why all these enterprises are closed. He pointed: “This ale-house, for example, shut two months ago, unable to bear the cost of all the regulations – on planning, on its product, and the terms on which it employs its staff. Like thousands of others, it was driven out of business.”

“The young people you see,” it continued, “a million of them, are not in the street for exercise and enjoyment,” – Splurge wondered why anyone should think they might, given the coldness of the air and the light snow that was falling – “but because they have been driven out of work by the minimum wages that employers cannot afford to pay them.”

“Oh, no, spirit!” exclaimed Splurge. “These laws were meant to protect workers! To guarantee a fair deal to the poorest, to the young, to women, to minorities and the vulnerable.

“…The very groups who employers stop hiring,” said the ghost, “when times are most difficult. As they are now. Thanks to you.

“That was the bankers!” Splurge insisted.

“No!” replied the ghost. “It was the easy credit and loose money you created, in the attempt to create an economic boom. But it was a fake boom, which inevitably turned into a bust – a bust deep and damaging, for these wretched individuals and the businesses that, in a more liberal age, once sustained them.

“Spirit! I cannot endure these Austrian visions!” cried Splurge. “Do not torment me with the unintended consequences of my policies! Take me away from this place!”

“Touch my robe!” answered the ghost; and in an instant, the scene dissolved again.

The doctors are on the rampage again

We've a letter in the BMJ signed by some thousands of doctors over plain packaging of cigarettes:

The government is heading for an explosive new year showdown with doctors who fear it is in danger of giving cigarette companies a late Christmas present by pulling out of a major anti-tobacco initiative.

Nearly 4,000 health professionals, including the presidents of many of the leading royal colleges, have signed an open letter to the prime minister and the health secretary, published on Sunday on the British Medical Journal website, expressing alarm that plans to force cigarette manufacturers to sell their products in plain packs may not be introduced before the general election, as had been expected.

The number of doctors signing the letter – 3,728 – is five times greater than the number who recently signed an open letter supporting a ban on smoking in cars, a health initiative the government has confirmed it will introduce. The thousands of signatories underscore the strength of feeling about the issue within the medical community.

We've indicated here before our suspicion of the emergency with which this particular question is being addressed. The government says that it must follow EU rules about consultation, the doctors are saying damn that and do it now. But why now? Our suspicion is that they want it enacted into law before the evidence that it doesn't actually work becomes more widely appreciated:

Australian Bureau of Statistics' data show that there has been a secular decline in the chain volume of tobacco sales since the 1970s, but this began to go into reverse in the first year of plain packaging (see graph below). In three out four quarters in 2013, sales were higher than they had been in the last quarter before plain packaging was implemented. This unusual rise in tobacco sales only came to end in December 2013 when a large tax rise on tobacco (of 12.5 per cent) was implemented, thereby leading to a fall in the following quarter.

Screaming that we've a major problem that requires action is sometimes valid. Whether you think that plain packaging is such is up to you. But it does boggle the mind that so much effort is being given to the implementation of a policy that doesn't actually achieve its predicted result. It's rather like the similar public health campaign for minimum alcohol prices. They seem to have got the bit between their teeth and thus be completely incapable of seeing that they're proposing something that is just a terribly stupid way to try and achieve that stated goal.

What really worries here is that we're really quite sure that you've got to be reasonably bright to train as a doctor. So why is it that when it comes to these public health campaigns they all seem to have left their brains at home?

A Capitalist Carol, Stave 4

The story so far: The high-spending, big-government enthusiast Ed Splurge has been visited by the Ghost of Freedom Past…  

Although they had but that moment left Splurge’s apartment behind them, they were now in the busy thoroughfares of a city. The noise was tumultuous, for there were adults, and more children there than Splurge in his agitated state of mind could count, all talking, singing, dancing, and generally enjoying what was obviously Christmas Day.

They continued, the ghost and Splurge, to a large house. They went across the hall, to a door at the back. In a melancholy room, lined with books sat an old man with a long white beard, quill in hand, writing earnestly, obviously unaware or unmoved by the joy and bustle going on outside.

“Why, it’s Charles Dickens!” cried Splurge. “I did my dissertation on him, and how he exposed the evils of the factory system!”

“Your eyes, and his,” said the spirit, “were clouded by bile and ignorance. “Before the Industrial Revolution, most people were condemned to life in abject poverty, destitute and starving, toiling outdoors in all weathers for an uncertain harvest. They thronged, willingly, to the factories exactly because of the security, income and opportunity that the towns afforded.”

“But the work was still harsh,” objected Splurge, “and the upper classes lived far, far better.”

“Bah!” replied the spirit. “The upper classes prospered by extracting favours and monopolies from the political authorities. Have you not heard that power corrupts?"

“The hours for those without political cronies,” it continued, “were long because this was yet a poor country – until production, exchange and investment made ordinary people rich.”

“Oh, spirit!” cried Splurge. “You mean the capitalist system I decried was the very salvation of these poor wretches?”

“Yes; and what gave them opportunity for self-improvement. Come!”

Suddenly they were at the door of a grand building, proudly declaiming itself “Institute of Education”. People – ordinary mill workers, Splurge surmised – crowded past them, each heading for rooms in which different activities were going on. In this, it was a concert in which they played string or brass instruments. In that, a lecture on Mr Darwin’s new theories. In another, a class teaching reading and writing to adults and children alike.

“Factory owners were fully aware of the benefits of a fulfilled and educated workforce,” explained the ghost, “and made these facilities available. And the workers themselves combined into friendly societies, to make provision for their own welfare needs, without needing the powerful – and corrupt – state that you deem so essential.”

“But you,” it scowled, “would have denied them that every opportunity, and condemned them to starvation on the land.”

“Oh spirit!” begged Splurge. “Take me from here. I can no longer bear these memories!”

He was conscious of being exhausted, and of being back in his own bedroom; and had barely time to reel into bed, before he sank into a heavy sleep.

Someone's got a very dark sense of humour concerning Cuba

Much chuntering about the fact that Broadway musicals have returned to Cuba for the first time in 50 years. And whoever it was that put this package together they've a very, very, dark sense of humour:

In the play, the setting is New York: the East Village, in the early 1990s, with a bohemian, artistic crowd trying to make ends meet over Christmas.

In real life, the setting is Havana – with a disparate group of actors, trying to put on a musical, to show over the festive period.

Because for the first time in 50 years, a Broadway musical is transferring to the Communist island, and – in a case of life imitating art – a play whose first scene opens on Christmas Eve will raise its curtain on December 24. Rent will then open to entertain crowds of curious Cubans, most of whom will never in their lives have seen a musical on that scale.

"Getting permission to bring the show here was extremely challenging," said Robert Nederlander Jr – producer of the show, and the third generation of a Broadway dynasty. "It took us well over a year to negotiate."

Our best guess is that we should congratulate Mr. Nederlander on that sense of humour.

Rent is a story (loosely a story, a collection of songs loosely nailed to a story might be a better description) detailing the travails of various people of interesting sexuality, their struggles with being HIV positive, the threats of becoming so, and how they cannot find secure and decent housing.

To take this to an island that, until recently, would lock up in isolation camps those who were HIV positive, distinctly demonise those of interesting sexuality and where there hasn't been decent or secure housing since the socialist revolution is, well, it is humorous, isn't it?

Well done Mr. Nederlander, well done, our caps are raised in admiration. We are left wondering though who, other than you and ourselves, is going to get the joke.

A Capitalist Carol, Stave 3

The story so far: Haunted by the ghost of Adam Smith, high-spending, big-government enthusiast Ed Splurge is expecting the first of three more visitations…   

When Splurge awoke, it was dark. Smith’s ghost bothered him exceedingly. It had warned him of a visitation when the bell tolled One – which it now did, with a deep, dull, hollow, melancholy ONE.

Light flashed up in the room upon the instant, and the curtains of his bed were drawn – drawn aside by a hand. Splurge found himself face to face with the unearthly visitor who drew them: as close to it as I am to you now.

It was a strange figure – like a child: yet more like an old man viewed through some supernatural medium, which diminished it to a child’s proportions.

“Are you the spirit, whose coming was retold to me? Asked Splurge.

“I am the Ghost of Freedom Past”

“Long past?” inquired Splurge: observant of its dwarfish stature.

“Your past. Your ideology’s past.”

But the strangest thing about this apparition was, that from the crown of its head there sprung a bright clear jet of light, by which all was visible; and which was doubtless the occasion of its using a great extinguisher of a cap, which it now held under its arm.

Perhaps, Splurge could not have told anybody why, if anybody could have asked him, but he had a special desire to see the spirit in his cap; and begged him to be covered.

“What!” exclaimed the ghost, “would you so soon put out, with worldly hands, the lamp of liberty? For that is the light I give!”

Splurge reverently disclaimed all intention of doing that. He made bold to inquire what business brought him there.

“Your reclamation!” replied the apparition, in a voice soft and gentle. It clasped him by the arm. “Rise! Walk with me!” And it made toward the window.

“I am mortal,” Splurge remonstrated, “and liable to fall.”

“Bear a touch of freedom,” said the spirit, laying his hand upon its heart, “and you shall be upheld in more than this!”

As the words were spoken, they passed through the wall. The city had entirely vanished. It was a clear, cold, winter day, with snow upon the ground.

“Good Heaven!” said Splurge. “I know this place!”

We can show that conscription is economically inefficient

Quite apart from the fact that conscription is vile in and of itself, it's the creation of slavery to the state, we've good evidence that it's economically irrational as well. This little snippet from Iran illustrates the point:

Iran has been hit so hard that its government, looking for ways to fill a widening hole in its budget, is offering young men the option of buying their way out of an obligatory two years of military service. “We are on the eve of a major crisis,” an Iranian economist, Hossein Raghfar, told the Etemaad newspaper on Sunday. “The government needs money badly.”

The amount people will pay to avoid conscription is higher than the value the government places on having conscripts. Thus the loss to the individual must be higher than the gain to the government. This makes the idea economically irrational: it's a destruction of wealth.

Now of course we're most unlikely to have military conscription in the UK anytime soon,. But it's worth keeping that lesson in mind. And yes, this economic reality does also apply to all of the various plans floating around for compulsory "voluntary" service and all the rest. Enslaving people to the state is simply wrong in the first place. But the value that people put on avoiding it is greater than the value the government places upon their doing it. Therefore this is a destruction of wealth: really not what we want a government to be doing, is it?

Democratic discrimination: Minors’ voting rights, poorer households and inequality

Usually, across countries, relatively low-income households tend to have more children than higher-income households; this difference also holds between countries that have relatively high incomes versus low incomes. It’s also the case that the voting age in most countries coincides with the age at which one is no longer considered a minor but a fully-grown adult (16, 18 or 21, usually). Since it’s not just the individuals who vote but also the entire household that is affected by the government’s economic policies – the moral principle of affected interests, would seem to imply that children should be granted the vote. Poorer households have, on average, more children than wealthier households, by denying minors the right to vote, the law is essentially discriminating against poorer households and communities on the whole. Even though both wealthy and poor households are affected by the elected government’s policies, if we presume that both households have an equal number of adults (say, for example, 2), the average wealthier household would actually have a disproportionately higher voting power relative to its own size and the size of the average poorer household. So, if the poorer household had 2 adults and 3 minors (a total of 5) and the wealthier household had 2 adults and 2 minors (a total of 4), though the poorer household is larger and, therefore, more people are impacted by the government’s policies, their voting power is equal to the wealthier household’s since only the adults can vote. In this way, by denying ‘minors’ the right to vote, the wealthier household is favoured and the poorer household is discriminated against.

In many developing countries, there is a high fertility rate amongst both urban and agricultural communities when compared to their developed counterparts and, furthermore, within these poorer countries, the difference in the fertility rate between a wealthier and a poorer household is even larger than in a supposedly free, developed country. Therefore, denying minors the right to vote discriminates against poorer households even more so in developing countries than poorer households in developed ones and, by that same logic, favours the wealthy elite in the developing nations even more so than the wealthy in developed countries!

This has repercussions for subsequent policymaking and the government’s calculations for re-election next term. If those who are less fortunate have proportionally less self-determining power in elections than others, less attention will be paid to them in proportion to those biased proportions.

Furthermore, people are generally much younger in developing countries and when we consider that various diseases, poor employment opportunities, food shortages etc. might lead to a large number of children in many developing countries dying before they even reach the legislated voting age, it is imperative that they be given the chance for self-determination as soon as possible.

One could easily argue that although there are many minors who might be able to walk, talk and vote independently, there are still those who might be unable to do so in an adequate manner (such as newly born babies and toddlers). My suggestion would be to allow children to claim their right to vote whenever they feel ready rather than at some arbitrary, legally imposed age that results in biased representation of socioeconomic groups in elections.

A Capitalist Carol, Stave 2

…It was the living face of Adam Smith. He knew it from that irritating Institute that bore the name. It seemed to emerge, ethereally, from his wallet, and hover before him, a ghostly wig upon its ghostly forehead. But then, as Splurge looked fixedly at this phenomenon, it was a banknote again. To say that he was not startled, or that his blood was not conscious of a terrible self-doubt to which it had been a stranger from infancy, would be untrue. And though he never took out his own wallet much, it seemed perfectly restored to normality. So he said “Bah! Humbug!” and closed the door with a bang that echoed through the whole lavish apartment.

Lounge, billiards room, private cinema, ensuite bedroom and dressing room. All as they should be. Nobody under the Chippendale sofa or behind the Picassos. An indulgent blaze in the grate. Yet the image of Adam Smith preyed on his mind.

“Humbug!” said Splurge, mentally attributing the apparition to the surfeit of over-ripe Stilton and over-rich port that he had enjoyed at lunch in Claridges. His colour changed, though, when without a pause, the apparition came through the heavy door, and passed into the room before his eyes.

Its body was transparent; so that Splurge, observing him, and looking through his waistcoat, could see the two buttons on his coat behind.

Though he looked the phantom through and through, and saw it standing before him; though he felt the chilling influence of its death-cold economic logic; he was still incredulous. “What do you want from me?”

“Less,” said the spectre. “Much less. Less spending and less bureaucracy. For I created the wealth that you are now squandering.” It raised a cry and rattled the heavy chain that it was carrying.

“You don’t believe in me,” observed the Ghost.

“I don’t,” said Splurge. “Your stony old economics was completely dispelled by the Keynesian revolution.”

“You must,” replied the spirit. “These heavy chains are not mine, but yours. Every politician is doomed to limp through history, loaded down by the weight of the national debt and the burden of regulation that he forged in life. And your chains will be heavier than anyone’s.” It shook the chains and wrung its shadowy hands.

Splurge fell upon his knees, and clasped his hands before his face. “Adam,” said Splurge imploringly. “Speak comfort to me.”

“You will be haunted,” resumed the ghost, “by three spirits.” Expect the first tonight, as the bell tolls One.”

The spirit beckoned Splurge to the window. The air was filled with phantoms – many of them, he could see, former ministers from his own party – wailing under the weight of their own spending promises.

But being, from the emotion he had undergone, or the high-spending fatigues of the day, in much need of repose, he fell asleep upon the instant.

Mariana Mazzucato, is there no beginning to her knowledge of economics?

It is, of course, becoming increasingly irritating to see Mariana Mazzucato being lauded for her stunning finding that the only reason we have nice things is because of government. Especially when one considers that this finding came from a research program funded by government. Biting the hand that feeds is really very terrible economics after all. The latest irritant is this, in her acceptance speech for an award:

The point is not to belittle the work of Jobs and his team, which was both essential and transformational. But we must be more balanced in the historiography of Apple and its founders, where not a word is mentioned of the collective effort behind Silicon Valley. The question is this: who benefits from such a narrow description of the wealth-creation process in the hi-tech sector today?

...

If policymakers want to get serious about tackling inequality, they need to rethink not only areas such as the wealth tax that Thomas Piketty is calling for but the received wisdom on how to generate value and wealth creation in the first place. When we have a narrow theory of who creates value and wealth, we allow a greater share of that value to be captured by a small group of actors who call themselves wealth creators. This is our current predicament and the reason why progressive parties on both sides of the Atlantic are struggling to provide a clear story of what has gone wrong in recent decades and what to do about it.

She seems entirely unaware of the basic paper on this subject. Those "wealth creators", those "entrepreneurs", how much do they get from their innovations?

The present study examines the importance of Schumpeterian profits in the United States economy. Schumpeterian profits are defined as those profits that arise when firms are able to appropriate the returns from innovative activity. We first show the underlying equations for Schumpeterian profits. We then estimate the value of these profits for the non-farm business economy. We conclude that only a minuscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.

The answer is a little under 3% of the total value created by the innovations. Almost all of the rest ends up as consumer surplus being enjoyed by the great unwashed citizenry out there. Which is great, as it should be perhaps, the aim and point of this whole having an economy game is to make the average Smith and Jones as rich as they can possibly be without bursting with the pleasure of it all.

The complaint is that Professor Mazzucato seems to be entirely ignorant of all of this. Sure, Steve Jobs ended up with a pile of money that Scrooge McDuck would blush to surf down. But we don't actually care because Jobs ended up with a trivial amount of the value created. It is quite seriously being said that another 10% of the people in a developing country with a smartphone adds 0.5% to GDP growth (and no, not 0.5% of extant growth, an entire 0.5% of GDP more) in said developing economy. Whether Jobs ended up with $5 or $50 billion for sparking that amount of value creation is an entire irrelevance compared to that value creation.

And no, we don't insist that Jobs "earned it", nor "deserved it". It's a purely utilitarian calculation. If someone who innovates (for Mazzucato would insist Apple and Jobs did not "invent") something that adds entire percentage points of growth to the developing economies of the world then gets to have hot and cold running private jets for the rest of his life, well, that's just fine. Because we think that would be a pretty good incentive for the next person who is going to make the poor of the world richer to buckle down and get on with it.

The first point of economics is that incentives matter. So it would appear that there is no beginning to Professor Mazzucato's understanding of the subject.

Challenging Shapiro on involuntary unemployment

A particularly famous efficiency-wages model was the one devised by Shapiro & Stiglitz (1984) - a ‘shirking’ model. The main assumption is that there is imperfect, asymmetric information and that workers have a choice to work or ‘shirk’ (exert little or no effort) and that there is a probability that employers catch them and that they don’t catch them. From this simple assumption, Shapiro & Stiglitz conclude that the wage-rate paid in the market will be an efficiency-wage that is higher than the market-clearing wage. The model predicts that there will necessarily be involuntary unemployment in equilibrium which supposedly acts as a ‘worker discipline device’ since it discourages workers from shirking because their being fired would mean that there is a possibility that they may not find another job. For those who are interested in a graphical representation, the graph below depicts the Aggregate Labour Demand (ALD) curve, the Aggregate Labour Supply curve (ALS – which also presumes a competitive labour supply), the Non-Shirking Condition (NSC) and the Efficiency Wage (EW) at equilibrium. Several of the underlying assumptions can be challenged, however. For example, since the state of technology enters the Aggregate Labour Demand relation and the state of technology is not static but it actually improves over time, when we take a dynamic view of the Shapiro-Stiglitz model, we find that the positive technology shocks consistently shift the ALD curve outward.

Furthermore, Shapiro & Stiglitz make a simplifying assumption that the worker believes the likelihood of finding another job (if fired) is equivalent to the proportion of unemployed people – this simplification means that, at the limit of full employment, the Non-Shirking Condition (NSC) cannot intersect with the Aggregate Labour Supply (ALS) – this means that full employment is a theoretical impossibility. In reality, however, people have individualised estimates with respect to how likely they are to get another job if they are fired (based, for example, on their estimation of their own ability, how well their skills match to vacancies and other variables) – this more realistic assumption makes full employment possible.

Remember, how the Aggregate Labour Demand curve experienced constant positive technology shocks over time? Well, this subsequently means that there would be full employment since the NSC and the ALD would intersect at or beyond the ALS curve as time progressed. However, the outcome of full employment here presumes static population growth. In reality, the population changes over time (generally, the ALS might shift right over time to signify an increase in the population over time) and, because of this, the conclusion of the model becomes ambiguous.

Simplified models yield nice conclusions whilst more complex models yield ambiguous results. With Shapiro & Stiglitz’s initially realistic assumption, one may have thought that involuntary unemployment was going to be an inevitable labour market outcome even in a competitive labour market. However, when relaxing the accompanying unrealistic assumptions, it’s not so straightforward.