So government isn't very good at running research programs then?

The standard argument in favour of government running research programs is that the product, knowledge, is a public good. That is, it's non-rivalrous and non-excludable and thus the private sector will underproduce it. Simply on the grounds that non-rivalrous and non-excludable goods are difficult to profit from and thus a profit seeking private sector won't do very much of that activity. Thus government should step in to produce the socially optimal amount of whatever it is.

There are most certainly areas where we agree with the argument. It is exactly the logic which produces the patent and copyright system for example. However, the wider logic of government intervention in the provision of public goods is not the same as concluding that government must provide that item. We think, for example, of the herd immunity provided by a vaccination campaign. The US does it largely by insisting the children cannot enter public education without having been vaccinated - the UK by the NHS directly providing the vaccinations. We think that second system works a little better. But that is not necessarily true of all public goods.

Which brings us to biomedical research. The Zuckerbergs are funding $3 billion of such. This is welcomed as the field currently rather suffers: 

Success rates for NIH grant applications are at the lowest they’ve been going as far back as the 1970s. When the money for science is this tight, researchers don’t take big risks. Instead of making innovative leaps in science, researchers early in their careers are typically among the most risk averse, taking on bits of studies designed by their senior mentors. Writing a successful grant application often requires preliminary data – in other words, you need to have already done a chunk of the research you’re proposing to do. Even then, about 20-25% of academic biomedical researchers’ time (in my experience) is spent applying for grants to support their projects. Much of their mental effort goes into grantsmanship, which is not at all the same thing as creativity.

Academic researchers are promoted on the basis of “achievement” – grants won and papers published. Volume is what matters here, not necessarily impact. According to Adam Grant, a professor of organizational psychology at the Wharton School of Business, “The greatest originals are the ones who fail the most, because they’re the ones who try the most.” But biomedical researchers can’t afford to have failed experiments because they’re not publishable. Furthermore, they need to take as much of the credit as possible for that “productivity” to count towards their advancement, so there’s an incentive against working with too many other people. Biomedical research is highly siloed in parallel with the grants funding it. An added challenge is that the gold standard for medical research – the randomized clinical trial, ideally conducted in multiple sites and settings – is very expensive.

The NIH spends 10 times as much per year as that entire Zuckerberg gift. And yet we're told that government does this job of funding research rather badly.

Or as we might put it more widely. That we've identified a possible market failure does not mean that government is the solution - for there is such a thing as government failure too.

Questions in the Guardian we can answer

The Guardian asks us:

Do we really want post-Brexit Britain to be the world’s biggest tax haven?

Yes.

Next question?

Or in more detail, yes we do want tax competition. For it is that very competition, as it is in so many other areas of life, which limits the amount that we the people can get shafted. 

We all know very well that a monopoly supplier of beer would be watering that of the workers even as they raised the price. We prosecute people who build cartels for the very same reason - such cooperation between producers means that it is the consumer that is going to get screwed.

Tax competition is exactly the same logic. It's entirely true that there does need to be government - no, we are not anarcho-capitalists around here - and that means there must be tax revenue to pay for it. It is also true that a government is going to be sovereign over its own territory. Which means that the only form of competition we can have here, to protect us against that monopolist problem, is between tax jurisdictions rather than within them.

And thus the joy with which we welcome tax competition and yes, even tax havens. Simply because their existence limits the depredations the governors may make upon the pockets of the populace.

And why shouldn't it be us that leads the world in such matters? We did, after all, rather pioneer these very ideas. Our own Adam Smith leading the way in much of it of course. Starting with that point that it is economic freedom which leads to the enrichment of said populace, competition being the thing which ensures that economic freedom.  

We insist that the bakers and then butchers compete for our custom. Why should that not be true of those who would claim to rule us, those who claim to know how our money should be spent? We might even find that leaving it to fructify in the pockets of the populace provides that optimal solution.

Which is exactly why those who would rule us don't desire the system of competition - and thus exactly why we must have it.

George has missed the point again

It will not come as a great surprise that George Monbiot has managed to miss the point again. Here he is on transport and cars:

The primary aim has become snarled up with other, implicit objectives: the sense of autonomy, the desire for self-expression through the configuration of metal and plastic you drive, and the demand for profit by car manufacturers and fossil fuel producers whose lobbying keeps us on the road rather than moving along it.

Step back from this mess and ask yourself this. If you controlled the billions that are spent every year – privately and publicly – on the transport system, and your aim was to smooth the passage of those who use it, is this what you would do? Only if your imagination had been surgically excised.

The point being that a free society does not have some rational planner determining what everyone should be doing. Rather, we allow the system to be emergent from what the people actually want to be doing. And as it turns out absolutely every society where people have been able to afford cars has had people flooding to have cars. Simply because that appears to be what people want.

Whatever the purported rational planner says about it.

There is this though:

Let’s reopen old rail lines closed in the mistaken belief that train travel was on the way out (it has grown 74% since 1995) and build new lines to bridge the gaps. Let’s bring train services under public control and use the money now spent on road-building to make tickets affordable for everyone.

Privatisation has led to a 74% increase in rail use. Therefore let's reverse privatisation in order to increase rail use.

That is better than just missing the point, isn't it? 

A good month for neoliberalism

It hasn’t been a great year for neoliberalism, which is a word that I am determined to appropriate (like a modern suffragette, without the violence). Donald Trump and Brexit (at least, if it was down to anti-immigrant sentiment, which I'm not sure about) both make it look as if the pendulum is swinging away from pro-market globalism. But September has been quite a good month for neoliberalism.

1. The Resolution Foundation’s examination of the famous “elephant curve”, which was thought to show that global growth had mostly passed the West’s working- and middle-classes by between 1988 and 2008. It turns out that the seeming lack of growth is an artefact of population shrinkage in Japan and post-Soviet states. If you remove them from the data, income for all groups has risen very healthily across the Western world, especially for the bottom 10% in Britain. Nice one.
2. Japanese PM Shinzo Abe’s full-throated defence of free trade and the Trans-Pacific Partnership, a massive trade deal that would bring more countries into the global liberal trading order, and be a huge boon to the poor in places like Vietnam. TPP has taken flak from both Clinton and Trump during the campaign (though Gary Johnson supports it) but it may end up being passed in the lame-duck Congressional session between the election and the inauguration – a way of passing it that won't be electorally catastrophic for those involved.
3. The news that US household income grew by 5.2 percent in 2015, after years of post-crisis sluggishness. That was the largest single-year rise since records began in the 1960s, and though we can't read too much into single year rises (or falls), many people do – and this is a sign that the Western neoliberal model of relatively low regulation, low market interventions and low taxes might not be quite as useless as some of those people think. 
4. Lots and lots of banks and other forecasters are revising their UK growth estimates upwards, as the UK economy looks more resilient than we thought. Brexit hasn’t happened yet, and we don’t know what exactly it will look like, but all the hard data we’ve seen so far has been fairly positive. If a big shock was expected we should have been seeing investment and consumption both begin drop straight after the referendum. Maybe becoming a North Sea Singapore really is on the cards for Britain.
5. Italy’s populist, anti-trade Five Star movement may be facing decline after a long period of rising support. Its candidate was elected mayor of Rome earlier this year, and she has been a disaster – garbage is piling up in the streets and she has “faced the resignations of four top officials, an ongoing scandal about the sanitation chief she chose to clean up the city, and accusations of being a hapless tool of party leaders”. Darn it – looks like electing incompetent populists has its price!

I’m not trying to be panglossian. I’ll be depressed if Donald Trump wins the US election, and only slightly less depressed if Hillary does. Much of the above could evaporate quite quickly. But it does seem as if there’s some fight left in neoliberalism yet.

Brexit: By-passing Sir Humphrey

Only one radical plan for Brexit has been made since the referendum: John Redwood, and like-minded MPs, propose the UK repeals the 1972 legislation under which we entered the Common Market in the first place.
 
There are attractions to this. For example, it would allow us to take back control of our fisheries, decide our own agriculture policies, and stop sending cheques to Brussels.
 
It also involves no negotiation, the UK would unilaterally decide what continues, leaving the other 26 member states to propose an alternative – if they could ever agree one.
 
This would be a real benefit since the UK has lost all its trade negotiators and the Foreign and Commonwealth Office are notoriously underwhelming as is. It could spare us years of uncertainty.
 
Unfortunately, the Vienna Convention on the law of treaties (1969),  does not allow us to scrap a treaty just by passing or repealing a law. But it does allow a unilateral termination if there has been a "fundamental change" in circumstances since the treaty was agreed.
 
The Common Market the UK joined in 1972 is a far cry from today's centralised Federal State with its own currency, diplomatic service and (emerging) army. And the UK population was not consulted on the 2009 Lisbon Treaty, which made truly fundamental changes.
 
Another “fundamental change” is the non-delivery of the “subsidiarity” promised by Article 5 of the Lisbon treaty, under which the great majority of new regulation would be left to member states. Brussels has successfully challenged every attempt to do that and subsidiarity never happened. When the UK signed the Lisbon treaty it could not have known the EU would behave in this way.
 
Lisbon is a multilateral treaty between 27 independent countries, not the EU, which is not yet an actual state. If the UK followed Redwood's idea it could refuse to deal with the EU, since it has not signed a treaty with the EU.
 
Probably the dispute would be kicked upstairs to the United Nations. That should provide employment for diplomats into the foreseeable future, but meanwhile, the UK would be free to act as it chooses. The agenda for discussion would be interesting, but:
 
• On contributions to the EU budget, Norway only pays because its EU exports are 50% higher than its imports. On this logic the EU should be paying the UK.
• The UK would not be bound by EU regulations domestically nor when exporting to other parts of the world.
• The free movement of people has no logical link with common market access and is purely a political bargaining chip. The UK population has already demonstrated its views on the issue.
• Post-Brexit, the UK would not be bound by the Common Fisheries Policy – and indeed, it should adopt fishing rules similar to Iceland’s, as the ASI has recommended.
 
This leaves only tariffs for discussion and civil servants would not be required for that. The UK has plenty of business people well qualified in international price negotiation. Battles are won by the unexpected.

The Finnish education system is not quite what people think it is

The Finnish education system is a pretty good one. Does the job of getting almost all to the jumping off point for further study. However, rather too many people then start to project their own prejudices onto it - and the thing is it just isn't as some would have it. This is important as we discuss that subject of grammar schools ourselves.

For example, this in The Guardian:

The success of Finland’s comprehensive school system is a story now well-told. At the turn of the century, much to the surprise of the Finns, let alone the rest of the world, it emerged as a global leader in education. Pisa tests revealed Finnish pupils produced some of the world’s highest scores in maths, science and reading. In the three subsequent reports, the last in 2012, the country’s performance dropped slightly but it remains the highest-ranked in Europe.

Its success came under a system built resolutely against the grain of prevailing education fashions adopted by developed countries, including the UK, in the 1980s and 90s. In Finland, children do not start formal academic learning until seven. Driven by a commitment to equality (on both moral and economic grounds), it outlaws school selection, formal examinations (until the age of 18) and streaming by ability. Competition, choice, privatisation and league tables do not exist. “Teaching to the test” is an alien concept. Grammar schools, the UK government’s current obsession, were abolished decades ago. Free school meals, tentatively endorsed for younger pupils only in the UK, are universally provided.

The error in there is that it's not actually a comprehensive system. Here's the actual structure of the system. Or a written description.

Upper secondary education begins at 16 or 17 and lasts three to four years (roughly corresponding to the last two years of American high school plus what in the USA would be a two-year Community or Junior College). It is not compulsory. Finnish upper secondary students may choose whether to undergo occupational training to develop vocational competence and/or to prepare them for a polytechnic institute or to enter an academic upper school focusing on preparation for university studies and post-graduate professional degrees in fields such as law, medicine, science, education, and the humanities. Admissions to academic upper schools are based on GPA, and in some cases academic tests and interviews. For example, during the year 2007, 51% of the age group were enrolled in the academic upper school.

It is comprehensive up to the age of 16, just as our primary schools are comprehensive, and then there's a very rigid division into the academic and vocational streams. To the extent that the two only meet again, and this is very much a might meet again, at the PhD level.

It's entirely possible to argue that perhaps 11 isn't the right age at which to decide upon the split. Or that 16 is or any other combination of such ages. But we can't go around pointing to what is said to be the world's best system and argue that it proves that we should not split - not when that "world's best system" does indeed split.

Effectively that world's best system splits at O Levels when we measure it against the English system. And after that split there's a vocational route up and through technical colleges and something very like City and Guilds, an academic route through A Levels and universities.

You know, that system we've spent the last few decades abolishing in the name of better education?  

The incredible efficiency of government

This rather strikes home to us:

The Department of Homeland Security granted citizenship to hundreds of people who had previously been ordered deported or removed under different names because of flaws in keeping fingerprint records, according to a report released Monday.

The report from the department’s Office of Inspector General found that nearly 900 individuals were granted citizenship because neither the agency nor the F.B.I. databases contained all of the fingerprint records of people who had previously been ordered to be deported.

Nearly 150,000 older fingerprint records were not digitized or simply were not included in the Department of Homeland Security’s databases when they were being developed, the report said. In other cases, fingerprints that were taken by immigration officials during the deportation process were not forwarded to the F.B.I.

The reason for our specific interest is that one of us, in an earlier working life, delivered the source code of the KGB's fingerprint system to the people developing that FBI one. Entirely legally we hasten to add.

But the more general point is that yes, there are things that markets don't solve. What some call market failures although they are more often simply the absence of markets. 

However, don't ever get to thinking that there's no such thing as government failure.

Hard Brexit or Soft Brexit?

A few thoughts on the current debate between hard and soft Brexit, and why I prefer soft Brexit:

1. “Hard” and “soft” Brexit are not clearly-defined positions. They are usually thought of as being the UK getting no deal with the EU at all, and relying on WTO rules to trade with the EU (“hard Brexit”) and the UK staying as a member of the Single Market, like Norway (“soft Brexit”). But the eventual outcome may be somewhere in the middle, and a “hard” Brexit could mean the UK getting a rather limited trade deal with Europe, such as one that abolishes tariffs for goods but does not safeguard services firms, while a “soft” Brexit could mean Single Market-like rules governing certain sectors (such as finance) but not others. It’s probably best to think of them as referring to how extensive the free trade deal we have with Europe is.
2. A lot of what’s going on right now is posturing. This can’t be emphasised enough. It’s tempting to try to read a lot into what different ministers say about the relative attractiveness of membership of, or access to, the Single Market, or the ease with which we could adopt WTO rules and go it alone ourselves. On the other side are European politicians like Francois Hollande who have been quite gung-ho about how quickly the UK should leave the EU, or like the European Parliament’s chief negotiator Guy Verhofstadt who has been quite hardline about the supposed all-or-nothing nature of the Single Market. In my opinion, all of these people are playing to their respective galleries and posturing before negotiations begin, and their statements are best taken with a pinch of salt.
3. Hard vs Soft are not simple proxies for Leave vs Remain. A lot of Remainers prefer the hard Brexit option – Nick Boles MP, for example, kindly cited our case for the EEA Option (a soft option) in a recent post but decided that he preferred a hard Brexit option – while a lot of Leavers are leaning towards a softer exit option, as with long-time Brexiteer Roland Smith’s case for the EEA Option or Daniel Hannan MEP, who has emphasised the need for a close economic relationship with the EU (but is opposed to full Single Market membership). 
4. Free trade is not just about tariffs. It’s easy to assume that tariff-free access to an economic bloc is all you need for firms to be able to trade freely, but regulations matter a lot too. Countries can obstruct trade with regulations intentionally – one example is France’s requirement that services like Netflix carry at least 40% French-made content – or unintentionally – different safety standards, for example, might mean that a medical device made in the UK to British safety standards cannot be sold in the US without going through a very costly testing process in the US as well. Since tariffs are already very low between developed nations, modern free trade agreements are about mutually accepting other countries’ regulations (if it’s made in Britain and passes British rules, you can sell it in America too – and vice-versa) or agreeing on a shared set of rules for firms in both countries to adhere to.
5. The Single Market is not all-or-nothing. It’s a mistake to believe EU rhetoric about the Single Market being a single, monolithic thing. We are very far from having a true Single Market in services – according to a 2013 government report “the Services Directive only covers half of the services sector, and is only partially implemented”, and other regulations overlap causing inadvertent barriers to services trade. With this in mind we can begin to see the bluster behind the EU’s supposed ‘red line’ on Freedom of Movement. I think it’s quite possible that we may end up with a deal that gets us free movement of workers (people employed by or with a job offer from a UK firm) but not free movement of all people, as well as things like an emergency brake.

And why I support a “soft Brexit” (though some at the ASI disagree):

1. Something like a Swiss-style bespoke deal might be the best option for the UK in the long run. But it took Switzerland decades to negotiate that, and we have two years. Something like the EEA Option, with modifications that kept control over things like labour laws, would be a good halfway house. 
2. The banks are in a more precarious position than most people realise, and if the economy and/or the financial sector did take a hit from a hard Brexit it may be difficult to control the damage.
3. Recession is not the only danger here. A hit to Britain’s economy via the strength of the pound is a hit to people’s real disposable income, and a few years of sub-par growth is just as bad as a short recession. Brexit has never had to mean economic harm, but a hard Brexit probably would. Nobody wants Brexit to make us poorer, and there's no reason that it should – but disrupting existing trade links and making trade harder overall might do it.
4. Europe shouldn’t dominate the next decade of politics. It’s tempting to see hard Brexit as drawing a line under the question of what our relationship is with Europe. I suspect the opposite is the case – the greater the change, the more the next ten years of British politics is polarised between triumphant Outers and bitter Inners. I’m with Dan Hannan in thinking that a compromise can avoid that.
5. Similarly, for Scotland’s sake, we should try to avoid a conclusion that pushes undecided Scottish voters towards independence. The SNP is fanatically supported and governs like the ruling party of a banana republic – an independent Scotland dominated by it could be a truly dire place to live.
6. I’d quite like to see the government's experts proved wrong. As I said at the time, it was misleading of the Treasury to exclude an EEA-style option in its forecasts. I don’t think that “gravity”-based trade modelling is bogus (indeed it’s one of the most empirically well-supported models in economics), but a model is only as good as the assumptions that go into it, and it’s very bad to only model the scenario with the worst-case assumptions – which, in the Treasury’s case, was a hard Brexit.

Paul Mason discovers Hayek was right - but fails to realise it

Watching Paul Mason grapple with a new economic idea is always going to be an amusing prospect. Perhaps a little like resistance training, vast effort being expended to get nowhere. Here his concern is the new Paul Romer paper insisting that, if we're honest about it, most macroeconomic models are a bit pants.

Well, yes, they are. Mason's solution is:

Romer’s huge mea culpa on behalf of mainstream economics is a sign that, after a decade-long hunt for trolls and gremlins as the cause of crisis, academia now has to begin the search for the cause of instablity inside the system, not outside it. My hunch is that the answer lies in large, agent-based simulations, in which millions of virtual people take random decisions driven by irrational urges – such as sex and altruism – not just the pursuit of wealth.

What the left can bring to the design of these models are the insights that still draw lines of emnity through elite campuses: that class, gender and race exist as economic facts; that the 1% always acts with more information than the 99%; that crises are unavoidable but can be mitigated by accepting they might happen.

Which is rather to miss the point that Hayek made. Which is that we simply cannot do this. The centre cannot collect enough information in anything approaching real time to be able to model something as complex as an economy. Which leaves us with the economy, that market and price system, as the only thing capable of calculating the economy.

Sure, there are some thing we can vaguely plan. The central bank determines the short term price of money (as Romer insists) and influences the longer term price so a decision must be made as to what that price will be. But at any level of detail greater than that we just don't have a system.

And there's no point in invoking "computers" to replace the phlogiston of the current models. As Cosma Shalzi pointed out in "In Soviet Union Optimisation Problem Solves You." We are at minimum a century away from having the necessary sort of computing power even if we knew what we were trying to compute. But since we don't, and cannot, know what the utility function we're trying to optimise is 100 years hence doesn't get us any closer to the goal.

Oh, and whatever modelling process we do use we've still got to start with market prices meaning that we've still got to have that market and prices in the first place.

That is, the lesson that Mason has missed is that Romer's dismissal of the current models does not mean that some others are therefore going to be correct. The failure of the current best we have models means that no such models work.

As Hayek pointed out. Nothing can model an economy to the sort of level Mason desires, so that it can be controlled.