The nature of morality

On this day, in 1759, the Scottish philosopher Adam Smith published The Theory Of Moral Sentiments. He may be less well known for this book than for his pathbreaking 1776 economics text, The Wealth Of Nations—but it was Moral Sentiments that made his fame and fortune. 

Thinkers at the time were struggling to discover how we can separate right and wrong. Some thought that religious texts were the authority on how we should act, and that religious leaders could authoritatively interpret those texts in cases of doubt. Others of a more practical bent suggested that we had a ‘moral sense’ by which we could detect right and wrong, much as we could sense light and dark or rough and smooth. Some argued that we could reason out which actions were moral or immoral. But no explanation was found entirely convincing.

Smith’s Moral Sentiments was a real scientific breakthrough. It showed that our moral ideas and actions are a product of our nature as social creatures. Social psychology was a better guide to moral action than books, authorities or reason. We applaud actions that help our society to survive, and rules (like prudence and justice) which it could not survive without.

Though we are mainly interested in our own welfare, we have an empathy (Smith called it sympathy) for others. We we feel their emotions of joy or grief, and we want them to empathise with us too, by acting in ways that help and please them. We are struck by conscience when we distress someone. So we curb our own emotions and self-interest in order to live more harmoniously with others. 

Morality is not something we have to calculate, it is something we feel. Those feelings are part of our very nature, and exist because they benefit both us and others. Writing exactly a hundred years before Darwin’s 1859 Origin Of Species, Smith had no theory of evolution by which to explain this fortunate situation. He could put it down only to providence—it was almost as if we were guided by an invisible hand.

But Smith knew that, for society to survive, there must be rules of justice to prevent individuals harming each other. It was also important to reward beneficial actions and punish harmful ones. And in the process of making judgements on countless numbers of actions, we gradually formulate rules of conduct. Then we do not even have to think about what to do: we have inbuilt moral standards to guide us.

Though we are free to act as we please, our natural empathy for others, and others’ opinions on our actions, serve to moderate our behaviour. But we still need a certain strength of character to restrain ourselves in the ways that an impartial spectator would approve of. 

The truly virtuous person, therefore, embodies the qualities of prudence, justice, beneficence and self-command. Prudence moderates the individual’s excesses and so is important for society. Justice limits the harm we do to others and is essential for the continuation of social life. Beneficence improves social life by prompting us to promote the happiness of others: beneficent action cannot be demanded from anyone, but it is appreciated and praised when given. Self-command moderates our passions and reins in our destructive actions.

Freedom and human nature, Smith concludes, are therefore a surer guide to the creation and preservation of a harmonious, functioning society than the supposed authority of ancient books, the imagination of visionaries, or the over-vaunted reason of philosophers.

Frank Field seems to want a National Lunch Service

This all sounds rather Maoist to us. The children of the nation should be fed in communal canteens on the basis that their parents just can't get this right: 

Up to 3 million children risk going hungry during the school holidays, leaving them vulnerable to malnutrition and undermining their education and life chances, a cross-party group of MPs and peers has warned.

Its report cited evidence of children existing on holiday diets of crisps, hungry youngsters unable to take part in a football tournament because “their bodies simply gave up”, and others surviving on stodgy, unhealthy diets “bought to fill hungry stomachs”.

The report said those at risk of hunger over the summer include more than 1 million children who receive free school meals during term time, and 2 million more with working parents who are still in poverty.

There's more background here. And the evidence presented is shockingly thin. It is, quite literally, that 1 million get free school lunches so clearly they're at risk of hunger when there are no free school lunches.

The call is thus for some replacement system of getting a free lunch to such children. Which is to violate one of the basics of subsidy, we don't and should not subsidise things, we should subsidise people. As, in fact, we do with the free school lunches. The kids are going to be there, they need to eat, so there is provision for lunch. That's paid for, of course. But then some are too poor to pay, so they get free provision. We're not subsidising the existence of lunch, we're subsidising some people to gain access to what is produced.

This is an excellent general rule about subsidy. The answer therefore being that if children, or their families, are too poor to have lunch is for them to have more money so they can buy lunch. Not to have a system trying to provide them with lunch.

However, the report also manages to wildly miss the import of their own evidence. They tell us that the potion of household income spent on food dropped over the decades: 

The proportion of household income spent on food and non-alcoholic drink decreased from 33.3% in 1953 to 16% in 2003. 

Then that:

The proportion of household income spent on food and non-alcoholic drink also in 2003 increased from 16% to 17% in 2011 (this includes a decrease by 1 percentage point to 15% in 2005 before increasing again in 2006).

We're twice as food rich as our grandparents were and this is evidence that we need a National Lunch Service? That the government must build a new system to feed the kiddies?

We think we'll file this under "politicians desperately thrashing around to appear relevant to some issue in the headlines."

Capping energy prices? Still a bad idea

Freezing energy prices was a very bad idea when Ed Miliband proposed it. Yet two years after the electorate rejected it Theresa May is putting forward the same idea and rebranding it a 'cap'. The facts on the ground haven't changed, yet just like workers on boards and the living wage, Red Ed's Zombie Policies are on the march. 

In a complex market with low rates of switching and an apparent oligopoly in the Big Six, capping the expensive Standard Variable Tariffs that the vast majority of bill payers are on might seem like common sense. But it's a bad idea for two main reasons.

First, the Prime Minister is justifying her intervention into the energy market on the grounds that the market isn't functioning properly and that her cap would save bill payers around £100 a year. Britain used an incredibly competitive energy market with the highest rates of active customer switching in Europe, but since 2009 well-intentioned regulators have implemented rules that have lead to a nearly 50% fall in switching rates. Keep in mind that this happened in the era of CompareTheMarket.com and GoCompare spending massive money on advertising the benefits of switching. Suppliers used to have a great deal of freedom to offer better deals to customers with different suppliers creating an incentive for customers to frequently switch providers. OfGem's regulations impeded them from doing this, reducing flexibility and innovation.

In a scathing op-ed for The Telegraph (paywalled), five ex-regulators set out the OfGem regulations that undermined competition in the market:

Ofgem’s 2008 probe found “unfair price differentials” totalling £500m. Ofgem introduced a non-discrimination condition. The price differentials disappeared – but by increases in the lower prices, not reductions in the higher ones.

Ofgem also imposed strict constraints on direct marketing, including doorstep selling. Because of both policies, customers engaged less in the market – particularly poorer customers. The customer switching rate halved.

Suppliers competed by introducing new tariffs. Ofgem argued that these baffled customers. In 2012 Ofgem introduced a “simple tariffs” policy that limited the number and variety of tariffs. This did not assuage public concern, or restore the previous customer switching rate.

When the Competitions and Markets Authority (CMA) looked at the problem in 2016 they proposed lifting many of the restrictions imposed by OfGem. 

Theresa May's plan is to cap the Standard Variable Tariff (SVT) that most bill payers are on. It's true that the gaps between the best deals and the SVT can be as much as £200.

Theresa May might believe that price discrimination is unfair. Why should ordinary 'loyal' (lazy) customers pay more? But capping the Standard Variable Tariffs will only reduce competition. With a price cap customers will have little incentive to switch between suppliers. Suppliers may then see little point in offering better deals for switching, so while passive consumers may see their bills fall, the consumers who keep the Big Six honest will see their bills rise.

Regulation often begets regulation. By reducing competition between energy suppliers, we should expect even greater opportunities for suppliers to collect monopoly rents. This paradoxically pushes prices up and leads to further calls for price controls to curb supplier profits.

That brings us to the second problem with the PM's proposal. Profits incentivise investment; if you cap prices to curb profits you discourage new investment. There's an added cost for suppliers too - uncertainty. Firms lack perfect foresight. They make investments knowing that there might be big downsides if energy prices collapsed for instance but also bigger profits if energy costs increase. If you cap the upside but don't cap the downside, otherwise viable investments will be cut. 

Governments won't stand by while power stations go unbuilt – if a politician can't keep the lights on they'll soon be kicked out of office. That's why I think that warnings of a future of power cuts are overblown. What we'll end up getting instead might be just as bad though; an increasingly centrally planned energy sector where politicians not businesses decide which energy sources and projects are worth investing in.

In many ways this is already the case. As leading energy expert Dieter Helm puts it:

The direction of policy has been increasingly to replace markets and competition with state-backed contracts. Onshore and offshore wind, solar panels, and biomass are all based on government-determined subsidies passed through to electricity customers. The grid charges reflect grid investment partly to support the intermittent renewables on the fringes of the existing systems. Extra capacity is needed to manage the intermittency too. Then there are energy efficiency subsidies, many with a social element. Customers are paying for the roll out of smart metering.

That's without mentioning white elephants like Hinckley Point C where the Government has guaranteed a strike price far beyond what the market would normally bear.  As Sam Bowman has pointed out before "High energy prices are mostly caused by high wholesale prices, and energy firms are not generally more profitable than other large firms". Pushing the energy market on the path towards greater state control will push up wholesale costs as otherwise uneconomic projects will be favoured by bureaucrats who lack the incentives and the knowledge to pick the best projects.

Theresa May should tread carefully. An energy price cap might poll well now, but its consequences will be felt long beyond the electoral cycle. 

We thought this was an interesting little gambit from the Soil Association

The Soil Association undertakes a survey which finds out that some cosmetics which claim they've got organic bits in them aren't, by the standards of the Soil Association, entirely organic. The respondents then say they're not happy about this and possibly there should be some rigor in what is described as organic:

Beauty brands including Boots have been accused of misleading customers by falsely labelling products as organic.

Ingredients not certified as organic – and even linked to health problems – were found in a range of cosmetics apparently claiming to be all-natural.

The research for the Soil Association revealed High Street brands including The Organic Pharmacy, Dr Organic and Faith in Nature, were using the word on packaging for shampoos and sunscreens containing potentially harmful ingredients

...

Unlike organic food, which must adhere to strict EU standards, it is not illegal to label a beauty product organic when it is not. But items can be certified as organic by organisations such as the Soil Association.

Yet 69 per cent of people surveyed by the group said they felt misleading labelling should be against the law.

Possibly this is some outrage which should be banned by the law. Or perhaps it is something else. You see, the Soil Association sells those organic certifications. Indeed, they're expanding their operation in doing so.

Isn't that just what every young commercial operation needs, a law insisting that people must use it? 

Of course, we've no objection whatever to anyone applying whatever sort of woo they wish to their lives. But we really do object to it being the law that someone must be paid to certify the delusions.

An interesting gambit by the Soil Association but one which deserves to fail.

National investment bank barminess

It seems almost everyone thinks that the Tories have this election in the bag. With the latest ComRes poll giving the Tories 50% of all votes, it’s not hard to see why.

But there is good reason for this. Labour leader Jeremy Corbyn is not just a friend to controversy, he also seems to flirt with very silly ideas. One of many is the idea of a national investment bank, which he says would enable £500 billion worth of investment in infrastructure and industry. This would allegedly create one million new jobs, which might seem like a nice thing until you remember that unemployment in the UK is now hovering around 5% — the best it has been in a long while. Corbyn’s idea seems even more preposterous when you also consider the current national debt of 1.6 trillion.

But the idea of a National investment bank is not just unnecessary, it is foolish. The track record of the idea is really rather shocking. Tony Benn’s similar National Enterprise board in the 70s threw money at all kinds of wacky things. From British Leyland motors, to British leather, money was spent where it would create no wealth. Meanwhile private industries in the tertiary and quaternary sectors grew and those industries that Benn’s National Enterprise Board tried to protect simply fizzled out. There is no reason that a rebranded version of Benn’s failed project would do any better. It would just lavish taxpayer’s money on projects run by those with political connections, creating arbitrary jobs in Labour seats.

And even if you concede that the National Investment Bank’s job creation is a good thing, the kind of jobs that it aims to create are not going to help the kind of people who need helping. Gone are the days when building roads required hard unskilled labour. The kind of people who are likely to be employed to build infrastructure nowadays are engineers, operators of technical machinery, and other skilled and educated individuals who are unlikely to be unemployed.

A national investment bank has the potential to really hurt private investment too. The enormous amount of borrowed money required to pull it off would mean issuing extra bonds, which in normal times means competing with private firms for investment funds. Private firms would have to pay more to borrow, or re-consider their own investments — meaning less private capital spending on factories, machine tools, training, R&D, and housing. So when the government borrows to fund its own investment, private investment has to fall. Occasionally government investments are worth it, but boondoggles like the Millennium Dome are de rigeur.

When even the most switched on venture capitalists find it difficult to pick sound investments, technocrats with no commercial experience are likely to find it impossible. Because of this, the national investment bank is not just unnecessary, but completely unworkable.

Corbyn's bank holiday madness

With an election campaign underway, Labour leader Jeremy Corbyn has promised four new bank holidays. This is bad news. We, and not the state, should decide when we take holidays. And election auction-bidding over bank holidays says something dismal about our democracy.

Start with the argument about holidays themselves. Bank holidays were instituted so that workers would get at least some time off, principally around religious festivals. When business was all done in cash, forcing the banks to close meant forcing businesses to close, which meant that workers had to be sent home.

The trouble with political initiatives, of course, is that, like Topsy, they just grow. Over the years, the number of bank holidays was increased, often after a promise in an election campaign. The most recent was the May Day bank holiday, instituted by a Labour government to suggest a weak sort of solidarity with the workers of the world.

But today’s most hard-pressed workers are not the people who benefit from bank holidays. In those early days, when large numbers of us worked in factories, and some in offices, a day off work meant a day at home. Now, a Monday off work means a weekend at the seaside, or touring, of going out to shops, cinemas and restaurants. In the decades since bank holidays were first thought of, like these, services have become the UK’s most important sector.

So a bank holiday for well-paid professionals and politicians means a busy time for people in retail, restaurants and other trade where rates of pay are often quite low. Promoting bank holidays is a pretty strange way of showing your solidarity for workers and their rights and leisure.

We have eight in most of the UK, and nine in Scotland because St Andrew’s Day is also a holiday. There are, in addition, local holidays, particularly in Scotland (including, in many places, Queen Victoria’s Birthday. The May and August holidays, in particular, are notorious for ‘bank holiday madness’ in which, like Lemmings, we rush to the coast and into the sea. (Actually, Lemmings don’t: they are far too sensible.) Public transport—the state showing its support for workers’ rights again—is often operating reduced schedules, so much our holiday time is spent stuck in the car, in the collective traffic jam. Madness indeed.

Why do we need the state to ordain our holidays? Holidays should be a matter of agreement between employers and employees. It’s the same problem we have with schools—because the government runs them and they all take holidays at the same time, the cost of flight and hotel packages soars. Why can’t we pick our own work holidays and so spread the congestion and benefit from non-peak pricing?

Which brings me to the point about democracy. Democracy is a great way of deciding things you can’t decide in any other way. If there is another way, it’s usually better. Do our holidays really need to be a collective decision? Should banks and businesses be forced to close, under threat of imprisonment? Should people in different trades, and of different religious and other backgrounds, all be forced to take the same holidays as everyone else?

Politicians like to think that democracy is so wonderful, it should be extended to more and more decisions. But that means extending politics to more and more decisions. And it’s already feeling like the decline of Rome. We’re being promised more and more things (ever-rising pensions, free healthcare for everything, free schools and universities) that are, in the long term, undeliverable.

It’s time for some brave politician to say that, without changing anyone’s leisure entitlements, bank holidays should be abolished and we should choose our own days off. They won’t, of course. Bread and circuses will win every time.

No, really, don't cap electricity tariffs

It's obviously election season as people are promising actions of the most blithering stupidity. The latest idea being that electricity tariffs should be capped. No, if you cap prices then that thing the price of is capped disappears from the marketplace:

Theresa May will attempt to capture the political centre ground by slashing £100 from the energy bills of 17m families and granting new rights for workers.

The prime minister will use the Conservative manifesto, to be published on May 8, to cap the gas and electricity bills for the seven out of 10 households that pay standard variable tariffs — dubbed a rip-off by watchdogs.

The policy is a centrepiece of a manifesto that will set out a bold social vision for Britain that parks Tory tanks on terrain usually occupied by Labour.

There's not a huge amount of point in beating Labour if one does so by repeating their idiocies. And this is a foolishness at best. If prices are capped below the cost of production of something then that something disappears from the market. Nicolas Maduro and his stunning success with the Venezuelan food supply is all we need to see to prove that.

Now, we might just possibly think that it is profit margins which are excessive here but that's not actually the case:

GB Energy Supply, which only months ago boasted the cheapest fixed-rate deal on the market, has ceased trading.

The low-cost energy supplier, which is believed to have had around 160,000 customers, moved to reassure customers that they will not be cut-off following the announcement.

A low price, an under the market price, strategy doesn't work in the current industry. We would thus very much assume that the market price is indeed that market price, not one inflated by excessive profit margins.

Capping prices just isn't a sensible thing to do. So, don't do it.

If only Will Hutton knew what he was talking about, eh?

Will Hutton is indulging in his usual blizzard of assertions to insist that really, we should all just get on with doing what he says and tug that forelock as we do so. As is also usual the assertions don't seem to have much behind them - they're rather wrong in fact.

We most certainly agree that the UK tax system isn't perfect and we make a number of suggestions about how it could or should be better. But we do at least know the basics about the current system. Unlike Willy:

The ideological right’s propositions – that tax in principle is immoral, coercive, anti-enterprise, anti-aspiration and always economically destructive – now set the terms of discussion, policed by our rightwing media. The consequence is that the tax system is now so gravely distorted that it threatens the social fabric.

We're definitely part of that group being sneered at there. But the proposition that tax is a bad thing is clearly and obviously true. It's the price we pay for government and like all prices are it's a cost. Sure, why not aspire to government of Aston Martin levels of luxury? Why not aspire to an Aston in fact? The point being that the price is that cost and we'd all very much prefer to be getting the Aston at the Ford Fiesta price. Because that price is the cost, the bad thing. And that's also why the Fiesta outsold the Aston by some considerable margin.

But crucial in this story is that property is effectively only taxed when it is bought and sold. There has not been a revaluation of residential property prices, on which the ineffective council tax is based, since 1991. As a result, the property market is, because of generous inheritance tax thresholds, tax exemption of capital gains on homes and trivial council tax receipts, the world’s biggest onshore tax haven creating the world’s highest real house prices. 

But Britain does not tax property lightly. As the OECD points out, the portion of GDP that is taken in property taxes is both the highest among OECD members and over twice the average at 4% or so. Vastly more tax than anyone else is an odd description of a tax haven.

Britain must create a tax system that raises revenue across a broad base as fairly and with as little economic distortion as possible and it must accept that if it wants health and education to remain public goods financed by general taxation,

Education and health care are not public goods. They are both rivalrous and excludable - as NICE shows every time it refuses to pay for a certain treatment or an Oxbridge college refuses to enroll a student. At least that second Willy should understand given that he runs a college.

It's entirely true that Adam Smith suggested that being part of a generally literate and numerate society was a public good and thus primary schooling might be encouraged usefully by the government. But it's that which is the public good, not the education itself.

then taxation will have at the very least to remain around 35% of GDP and may even have to rise a little.

It is around 35% of GDP. And if we keep the current tax rates then as GDP rises then the percentage of GDP in tax will rise. Because the tax system is leveraged to growth. Because there are tax free allowances on all sorts of things, incomes and so on, then the government's take of a marginal 1% of GDP is very much higher than their average take across all GDP.

As we say, the assertions which Willy brings into play turn out not to be correct. Thus the conclusion he reaches must be suspect too, no?

Alarmingly, we find we agree with John McDonnell

McDonnell tells us that above some £70,000 a year people should be defined as rich - or more accurately, as high income. There are problems with this, that sum in Central London isn't a fortune while in Middlesbrough it will finance a very much grander lifestyle. But then that problem is always going to happen in a national tax system. But McDonnell's point was that we should be expecting those more fortunate to be contributing more as a percentage of their income to the public coffers. And we've not got a problem with the idea that the top 5% should be identified as those who should be contributing more.

Adam Smith did after all talk about more than in proportion to income. Our own desired taxation system is rather different of course, with a substantial tax free allowance and then a flat rate but that still allows progressivity. But that essential underlying logic McDonnell is using seems fine to us.

But there is a problem here. As the Diamond and Saez paper points out the peak of the Laffer Curve in a tax system with allowances - and yes, being able to leave the country and thus the tax system is an allowance - is 54%. And this is taxes upon income, not the income tax alone. So, employers' NI must be included. Meaning that we are above the peak of the curve already. There is therefore no room for another higher rate on those over £70,000.

Yet that moral intuition that the richer should pay more still exists and is still correct. The only possible answer therefore is tax cuts for those on less than £70k. Which is entirely fine with us we shouldn't need to have to point out.

This is known as begging the question

To argue that we must decide who to tax more assumes first that we must in fact be taxing more. And that's the question that is being begged here:

The paradox is that raising taxes may scream “politics of yesterday” to voters Labour needs to win over, when in many ways the idea has never been so contemporary. Crumbling public services, a mountain of debt to repay, and an ageing nation of pensioners with a post-Brexit aversion to letting young, taxpaying foreigners move here all adds up to one logical conclusion: tax rises loom almost regardless of who wins in June.

For the aim, the current plan, is to deal with all of this by shrinking the size of the state itself. The declared targets - yes, stop sniggering at the back there - are that public spending should decline to some 35% of GDP, back where it was in the late 90s and also where it was for some goodly part of the post-war era. 

The current tax system can finance that without tax rises.

We do indeed agree that if you insist that tax revenues must rise then it is necessary to work out who should pay those higher taxes. But that first question must be answered first, do we actually need more tax revenue?

The answer to that being, currently at least, no, so therefore we've not got to fret over whose wallet to plunder, do we?