Gary Becker, 1930–2014

Gary Becker, made a Nobel Laureate in Economics in 1992, has died aged 83.  He was one of the great economic minds of the second half of the 20th Century, and was described by his mentor and friend, Milton Friedman, as "the best student he ever had."  At the Adam Smith Institute we knew him through the Mont Pelerin Society, whose meetings he attended.

He was a leading liberal thinker (using the word in its European sense), whose original contribution was to introduce economic thinking into other areas of human behaviour such as the family, marriage, discrimination, crime and addiction.  In a key insight he showed, for example, that the entry of women into the workplace had raised the value of their time and thereby reduced their demand for children.  He incorporated into economic thinking ideas that had hitherto been thought to belong to sociology and other areas of behavioural study.

His insight on crime was the observation that criminals are not necessarily mentally ill or socially oppressed, but capable of calculating quite rationally if the likely proceeds of a criminal act would outweigh any penalty, taking into account the probability of being caught.

He was a key figure in the Chicago School, and was Professor of Economics and Sociology at the University of Chicago.  He was regarded as an inspirational teacher and a valued colleague, and will be sadly missed.  He wrote:

My teachers taught me that economics was not a game played by clever academics, but a serious subject that helped us understand the real world we lived in.

In aiding that understanding Gary Becker played a major role.

There's an awful lot that is accepted wisdom that really isn't true you know

There's an awful lot of things out there that are the accepted wisdom and yet are still wrong. Take, for example, the reason the Mongols came swarming out over the Steppes:

The traditional view has been that the Mongols were desperately fleeing harsh conditions in their craggy, mountainous homeland. The Lamont-Doherty team, however, found just the opposite: Between 1211 and 1225—a period that neatly coincides with the rise of Genghis Khan and the Mongol empire—central Mongolia enjoyed a spell of sustained benign weather unlike anything the region has experienced during at least the past 1,100 years and probably much longer.

Pretty logical really: you're not going to get huge population movements without there being population gorwth and thus pressure for population movement.

But that's just an interesting historical curiosity. What interest us rather more is that we can look around us and see that a new "conventional wisdom" is being created right now. The conclusion is goin to be the same as the old one, that there must be vast and punishing taxes on anyone who actually has anything. It's only the reasoning that is changing. Last time around it was that socialism would be more efficient than capitalism and markets, therrefore we must confiscate all the capital so that the State can deploy it in that more efficient manner.

No, really, don't laugh, socialists right up into the 1950s and 60s really did believe this. Now, the one under construction, appears to us to be the one about inequality. The Spirit Level told us that inequality was bad for a society, bad for everyone in it.  Diamond and Saez told us that the peak of the Laffer curve is 80% for the taxation of income (actually, they said 54%, but it gets read as 80% as people forget the caveats in their model) and Thomas Piketty now says that inequality will only get worse unless there's an 80% income tax plus a whacking wealth tax.

We're back where we started in policy terms, take all the money off anyone who has the temerity to have any. It's only that reasoning that has changed.

That reasoning itself being highly suspect: the Spirit Level was amusingly taken apart by Chris Snowdon. The 80% income tax result was brought down by many who read the paper. And Piketty's arguments are being sifted through and thoroughly taken apart as well. Won't stop many people searching for yet another reason why taxes must be much, much, higher. We just have to remember that the validity of the policy position depends on the arguments and logic that are used to get to it. And they're not right yet, at least.

Ms. Moore misses her own argument

Suzanne Moore gets up on that traditional high horse at The Guardian to decry the Help to Work programme. This may or may not, it is true, be quite as spiffing as those proposing it wish to claim. But the point for us to look at here is that Ms. Moore, and many like her, know the reason it is being deployed yet choose to ignore that very reason.

This is called Help to Work. Doublespeak. For it doesn't help and it won't work. Jobcentres are not geared up to cope with such numbers, and many leading charities such as Oxfam are boycotting mandatory work placements because they think the key word in voluntary work is, er, voluntary. If it isn't, we are basically talking about community service, which you would get for being found guilty of an offence

The government's own research indicates that unpaid work placements are not increasing the chances of claimants finding work. But, yet again, this policy is not about finance (it will actually cost money if travel fares to jobcentres are paid); it is an ideological assault that seeks to undermine the very idea of unemployment benefit.

Yeah, yeah, Tories grinding the faces of the poor into the dust again. But what's this?

Employers aren't fantastically keen on someone has not worked for a while.

Umm, yes, that's the point of these sorts of schemes. It comes from the work of Richard Layard, who has been pointing this out since the 1970s (it was in textbooks in the 80s at least). Employers don't want people, for some reason, who have been long term unemployed. So, if we have long term unemployed then we've got to get them a job of some kind, doing damn near anything, so that they're not long term unemployed, but perhaps partially employed, employed, short term unemployed even, where they have a chance of attracting an employer.

This is the very point of it all, the aim and intention. Which is why, whole the name has changed over the decades, each and every government has been trying to implement some similar sort of scheme since those 80s. On the grounds that Layard is actually correct in his analysis. Welfare to Work was just one other name for exatly this same plan and for the same darn reasons.

It's not so much that people are ignorant of all this it's that commentators on the point seem to have all of the necessary information to hand but still willfully ignore some of it.

Why would we cut taxes for those who will cost the NHS more?

There are strange ideas, weird ideas and then there are those that just don't make any sense whatsoever. Take, as our example for today, this one, the idea that we should cut taxes on those who will cost the NHS more to treat:

Britons should be rewarded with tax rebates for giving up smoking, staying slim or drinking less as a way of relieving the "mind-boggling" increase in demand for NHS care, a thinktank urged on Thursday. 20/20 Health says incentive schemes that reward healthy lifestyles would encourage people to be more responsible about looking after themselves and avoiding damaging habits.

This simply does not make any sense at all. And it's also very easy indeed to work out why 20/20 Health has got itself into such a tangle: they're simply ignorant of the economics of healthcare. Something that should makes us a tad wary of taking their advice on such things.

Smoking, boozing, being a lardbucket, these are all things that have substantial costs, this is entirely true. However, most of the costs are private costs, costs carried by the people who do or are these things. Most notably, the costs of having a shorter lifespan.

There are also public costs from these things: the healthcare treatment that people who do these things will require. But there are also savings in public costs as a result of people doing these things: most notably in the health care that people who do these things will not receive because of those shortened lifespans. Yes, it's true, treating lung cancer is expensive but on average someone who dies of that at 67 isn't going to be needing a hip replacement at 75 nor round the clock care during a decade of complete senescence.

And the truth is that, and it has been studied many times, these behaviours which shorten lifespans reduce, not increase, the costs to publicly funded health care systems. And when you add in the pensions not claimed (and of course the extra taxes paid on boozing and tabs) then the economic model is overwhelming.

There are substantial private costs to these three behaviours, smoking, drinking and being obese (we are, of course, assuming that all are being done to excess here, not that couple of glasses of wine a day that is positively beneficial to health) but there are substantial public savings from them.

It is this that 20/20 Health are ignorant of and thus why they've come up with such a strange suggestion. That those who will cost the public health care system more should be taxed less for the behaviours that will cost the public health care system more.

Madness through ignorance we might call it.

Why Labour's rent controls will do more harm than good

Now that we have more detail, Labour’s new ‘rent control’ policy is not quite as bad as I'd initially feared. Instead of the old school price ceilings that destroyed parts of New York City, Labour are proposing ‘second-generation rent controls’, which limit the ability of landlords to renegotiate rents during tenancies, and ‘make three-year tenancies the norm’.

The real-world effects of this are likely to be that expected rent increases over the three-year lease will be priced in to the starting rent, so it’s unlikely to actually make anyone better off unless there’s an unexpected increase in rents. If rents fall below expectations, this would hurt tenants.

Since landlords are bound within tenancy agreements, rises in rents are likely to be sharper than they currently are for new tenants. This means that housing mobility is likely to be reduced – tenants locked in to a relatively low rent will find it more costly than they otherwise would to move. This is very important: it looks as if lowered housing mobility causes higher unemployment, because people are less able to move to find new jobs.

Rent controls of any kind are likely to decrease the supply and quality of available housing. ‘Second-generation’ controls are less tight and so less harmful than classical rent controls, but as Hopi Sen has pointed out, the German experience does not seem encouraging. There, rents have risen far more quickly over the past decade than they have in Britain, as new construction has slowed.

There is also evidence to suggest that second-generation rent controls have a similarly negative impact on housing quality as classical rent controls. A 1985 study by the Richmond Fed found that controlled housing units were 7.1% lower in quality in 1974, and 13.5% lower in 1977, pointing to a cumulative negative effect. If classical rent controls are only worse than bombing, second-generation controls may be close to petty vandalism.

One interesting aspect of this announcement is that it may affect supply now, as would-be investors in new housing are discouraged by the prospect of stricter controls on their investment. If the measures are actually brought in – crossing the rent control Rubicon – an expectation of tighter controls may reduce supply even more.

It’s not clear what mechanism Labour is proposing to make three-year tenancies ‘the norm’, but it’s hard to imagine any effective measure that would not end up hurting tenants who want shorter leases. This probably means young people.

As we say virtually every day, the best way to reduce the cost of housing is to build more. Labour’s proposals seem counter-productive, but they’re nothing compared to the harm caused by the planning system.

We recently learned that more of Surrey is covered by golf courses than by houses. Rolling the green belt out even a bit – by, say, a mile outside London – would create space for hundreds of thousands of new homes, relieving pressure on existing housing stock, reducing rents and – a nice bonus – creating lots of jobs and adding a few percentage points on to GDP growth. We can dream.

Why we support this globalisation thing

Being grossly bourgeois, as we are, there are several reasons why we might support this whole globalisation thing that's been going on over the past few decades. As bourgeois liberals we applaud the manner in which freedom of trade, ofcapital movement, allows people to do as they wish with their own money. Invest where and when, purchase from whomever, they might wish. An addition to human freedom.

But also as those grossly bourgeois types that we are we are able to welcome hundreds of millions, nay billions, into those petit bourgeois pleasures of regular meals and a roof over the head. As Branco Milanovic, who is one of the experts on these things, points out:

When we look at the global population rather than at countries, however, there is a positive side. The unprecedented growth of China and, from the early 1990s, of India, as well as much of the rest of Asia has lifted millions out of poverty. For the first time since the industrial revolution, income inequality among world citizens has fallen.

We have regularly pointed out this result from Milanovic here. But there's more:

It is also a fragile middle class because it is still relatively poor. Even when we include among the global middle the groups whose real incomes increased (in percentage terms) the most between 1988 and 2008 – that is people with incomes from $3 to $16 per day – it is only those at the upper end of the range who overlap with what is considered the lower middle class in rich countries.

The major beneficiaries of this globalisation thing have not been us rich world people, most certainly not the plutocrats in the gilded castles. It's been those just struggling up out of that $1, $2 a day poverty who have been, propotionately, benefitting the most.

It all sounds like rather a good system really. A bit more freedom for people to do as they wish and we find that the poor get richer, inequality declines and that bourgeois section of the population just grows and grows. Milanovic does sound one note of caution: it's possible to slide back from that $4 and $6 a day sort of income back into real poverty. It's only when incomes rise about $10 a day that that backsliding seems not to happen. So we'd probably better keep going in what we're doing then, eh?

Unfare Competition

It’s not really a huge surprise that Brussels, the home of EU bureaucracy, has recently banned ‘cab app’ service Uber from the city. The Brussels court unashamedly declared the company “unfair market competition” to the town’s two (yes, two...) taxi companies, and drivers face a €100,000 fine if they use the app to pick up customers. This isn’t a one-off, either; Uber’s had a bumpy ride from the start. Across the USA and Canada they’ve endured cease-and-desist letters, impounded cars, sting operations and suspended trading. Taxi drivers in Chicago are suing the city itself over them,  Berlin’s slapped on an injunction, and in France enraged taxi drivers are getting physical.

Uber hit London in Summer 2012. Given the range of ventures on the scene- Black cabs, mini cabs and fleets of Addison Lee, as well as apps like Kabee and Hailo – Uber’s operation should be uncontroversial. Not so. Instead, the Licensed Private Hire Car Association (LPCHA) has called upon TfL to ban cab app services for failing to conform to relevant legislation, citing , uninventively, public safety concerns.

Reading all of this Uber come across as renegade cowboys, tearing through cities kidnapping passengers. Reality is far more boring.

Uber’s critics deem them an unlicensed taxi company (or as per the Chicago lawsuit, an ‘unlawful transportation provider’), who blatantly violate regulations. In actual fact, Uber are a new kind of entity: an app-based, ‘logistical’ intermediary. They use GPS to connect passengers with self-employed (and in the UK, licensed) drivers, and handle payment through a registered card. Their trick is that in only ‘matching up’ independent drivers with riders, they don’t count as a taxi operator.

Additionally, in the UK private hire vehicles can’t ply for trade like registered taxis and must be booked in advance. It seems that a rider requesting a pickup through Uber counts as a booking, allowing a nearby driver to accept a request and be there in minutes. In these ways it does seem that Uber and other like it have thrown away the rulebook, but only because they’ve been ingenious enough to innovate around it. Uber’s model also brings other innovations too, such as price discrimination through ‘surge’ pricing, truly flexible work for drivers, and a highly responsive rating system of both drivers and passengers.

There’s no wonder that incumbent players are worried. But it’s sad, if not surprising, that anti-Uber sentiment comes not from governments angry at rulebreaking but businesses threatened by fresh thinking.

State intervention imposes huge costs and barriers to entry on the taxi industry (think of London cabbie’s ‘The Knowledge’, fixed taxi fares, and America, where taxi medallions have sold for over $1m) - scuppering competition and innovation. Reform of the industry with its often cozy cartels is long overdue.

Companies like Uber show other firms how they can improve their game. In fairness there is an argument for ‘leveling the playing field’; it’s not one actors want to use. When Uber works around (or even flouts) a jurisdiction’s regulation, other players can use Uber’s success as evidence that restrictions are superfluous to providing a good service, and therefore unfair on them.

Instead of demanding more relaxed regulation, however, incumbent actors have decided which side their bread is buttered, and would rather keep the status quo than improve their service. Instead of competing, they cling to the regulatory chains binding them and wail for others to be shackled by them too. They might cry the cry of public safety, but it’s the safety of their market share which they’re really concerned about.

Sadly, vested interests have had far too much success in this area. Where Uber hasn’t been banned completely, lawmakers have often caved in and introduced new restrictions. Frequently, this doesn’t stop protestors. And it isn’t just Uber who has such woes. Companies with similarly innovative models such as AirBnb and Aereo have also faced an uphill struggle of acceptance.

TfL should disregard LPCHA’s demands. It certainly isn’t up to the government to protect old industries and vested interests, but sadly so many other cities clamping down on Uber adds false weight to their claims. It’s beyond obvious that consumers, not regulators, and certainly not business rivals should be the judge of an effective (and safe) service. That said, the fact that cab app services are making so many competitors uncomfortable is a pretty good indicator that they’re doing something right.

We've said this before and no doubt we'll have to say it again

In the short term, if you want to alleviate hunger then the obvious thing to do is give the starving food to eat. If you want to stop people getting wet then give them that kagoule we've just mugged off the trainspotter at the end of the platform. And if people are poor, poverty being not having money, given them some money.

This is, obviously, not the long term solution to any of these problems: that good ol' mixture of capitalism and free markets is what has alleviated our own poverty, is what is alleviating it for billions more currently and will, estimated by the end of this century, abolish absolute poverty once and for all for our species. But as we know, the long and the short term are rather different: telling people to farm better does work but doesn't alleviate the immediate suffering of famine.

All of which leads to this interesting paper at Vox. Making a poiint that we've made here a number of times: whatever it is that you're trying to do do please make sure that you're doing it efficiently. That is, achieve your goal at the least possible cost. They're rather more worried about inequality than we are (we reserving our ammo for dealing with what we see as the real problem, absolute poverty, the solution to which see above) but they're making absolutely the same point about efficiency:

Other countries also have similar programmes that are sold as pro-equality but are inefficient or even harmful for that goal (IMF 2014a). In developing countries, measures that tax, subsidise, or price-regulate food and energy tend to be highly inefficient tools for improving the income distribution, and frequently even have the opposite effect. A disproportionately small share of social spending goes to the poorest 40% of the population (IMF 2014b). Of the $400-plus billion that countries spend on fossil fuel subsidies each year, far less than 20% of the benefits go to the poorest 20% of the population (International Energy Agency 2011). Conditional Cash Transfers, on the other hand, have proven highly effective – they reach the poor and promote education and health.

Don't try to rig markets, don't try to freeze or subsidise prices. If you want the poor to be able to consume more just give them money so that they can buy more.

This has domestic lessons for us in the UK as well. The much talked about idea of "predistribution" is exactly this. Attempting to cock up markets so as to gain a more pleasing distribution of consumption. It won't work for it's, by definition, cocking up markets. Redistribution is a more efficient method of achieving that consumption levelling goal. And if the nation has run out of appetite for more redistribution then, well, that's just tough, isn't it? As it does appear to have done...

Subsidy is not the way to export success

UK Chancellor of the Exchequer, George Osborne, says he wants to see more 'Made in Britain' stickers appearing around the world. So would I. But we have to create the right conditions for that to happen.

We certainly don't want 'Made in Britain' stickers to appear round the world only because we are subsidising our production. We tried that in the 1970s with shipbuilding, steelmaking and volume car manufacturing. It just loaded cost on taxpayers and created vast monopolies that grew inefficient because they faced no effective competition. But in fact, other emerging economies such as Korea could do all these things better and cheaper than we did.

Adam Smith pointed out 250 years ago that by means of glasshouses and hotbeds you can grow good grapes in Scotland, and make wine out of them – but at around 30 times what it costs to make wine in France. So we should stick with what we are better at than others – design, fashion, finance, tourism, education and luxury goods such as Scotch Whisky.

What we certainly should not be doing is subsidising industries such as renewable energy. If these are potentially money-making industries for the future (as the government say, to justify the subsidies), then private investors would be well ahead of any government investment bureaucracy, that is for sure.

Perhaps Mr Osborne is riled by the fact that Germany, even though its economy is flatlining, has expanded its exports to China, while the UK, even with its devalued pound, hasn't. But the solution to that is a proper growth agenda. Roll back the acres of regulation on employment and manufacturing, making it easier for people to hire workers and less risky to invest. Then stand back and watch the 'Made in Britain' stickers streaming out.

Once more we find Adam Smith was right

This should come as no surprise to us all for, as we all know, almost all of economics is either footnotes to Adam Smith or wrong. But we've nice evidence that once again he was right. That evidence comes from a study of entrepreneurs and what is necessary to allow, possibly encourage, them to succeed:

Indeed, entrepreneurialism is strongest in countries that share the English common law tradition – five times higher than those with a French legal origin. There is also a strong correlation between high rates of entrepreneurship in a country and low taxes. Equally, a low regulatory burden correlates strongly with high rates of entrepreneurship. On the other hand, those government and supranational programmes that politicians love to announce to encourage entrepreneurship – such as the EU’s Lisbon Strategy – tend to fail. The lesson is clear: to encourage innovation and entrepreneurialism, governments should do as little as possible, beyond cutting taxes and regulations.

It's always interesting to see people pointing to the Common Law as we're quite certain that it's one of the major beneficial attributes of our society. But leaving that aside this is remarkably similar to Smith's comment:

Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.

One other point that the study makes: there's a very large difference between self-employment and entrepreneurialism. I, for example, when writing am self-employed but I am not an entprepreneur. When I am fossicking around for scandium I am both and when I find a nice large pile of it I will be employed by a company but still be an entrepreneur. and as the study notes the rates of the two things can often move in opposite directions. The rate of self-employment in Silicon Valley, the most entrepreneurial spot on hte planet, is actually half the self-employment rate for California as a whole.