Economic Nonsense: 42. A planned economy is more rational than an unplanned one

Very few people advocate an unplanned economy.  At a simple level people might suppose that having intelligent and informed people direct the economy is better than having it proceed by blind chance.  But this is not the choice.  The choice is between an economy in which millions of individual decisions made daily interact with each other to produce an overall order, and an economy whose overall order is sought by a few people gathered around a table trying to direct it.  In other words the choice is not between planning and chaos, but between an order produced by the few and an order produced by the many.  It is between planning done by a few at the centre, and planning done by many at the periphery.

When a person makes an economic choice, to buy or not buy, to stay in a job or to change employment, it is not necessary for the information about that choice to be collected and relayed to a directing authority.  The choice itself impacts upon the economy sending information through it that causes it to change and respond.  In a centrally planed economy the information has to be relayed to the centre so that those in charge can add it to other inputs and decide how to respond to it.  That process takes time, and much of the information is outdated or submerged into a fog of other data before it can reach the centre and be acted upon.  In a spontaneous, interactive economy, its effect is immediate.

Much as the directing authority might try to ascertain the circumstances of individual economic participants, they cannot hope to have more knowledge of them than the individual concerned.  The market economy thus has more information at its disposal, and it can act more rapidly, responding to imbalances and redressing them.  This means that the centrally planned economy is by no means more rational than the spontaneous one.  It is true that the billions of transactions that have input into a market economy might be too large for an individual mind to encompass, but that makes it complex rather than irrational.  

Observe the naked cash grab by the tobacco control people

It's a general rule of UK taxation that we don't do hypothecation. On the very sensible grounds that how much we can raise by taxing on activity has absolutely no relationship whatsoever to how much we desire to spend on some other activity. Fuel tax is not all spent on the roads, national insurance does not pay for the NHS and so on. But we now have a proposal that we should have an explicity hypothecated tax: Pressure is growing for the introduction of an additional levy on cigarette sales in the UK, a move that campaigners say could help eradicate tobacco consumption within decades.

To tax tobacco more or less: an interesting question. Our supposition is that it's already taxed over the top of the Laffer Curve, given the percentage of the market currently supplied by smuggled and informal imports. But certainly, whether to tax more or not is something that can and should be discussed. But more tax in itself won't bring about that no smoking world simply because we do live in a free society with open borders. However, the idea is worse than that:

“The industry is one of the most profitable on Earth,” Burstow explained. “The two largest tobacco firms in the UK, Imperial and Japan Tobacco International, hold around four fifths of the UK market and achieve joint profits of about £1bn a year. Charging those firms to help clean up the damage their products cause is a rational and justified extension of the ‘polluter pays’ principle to public health policy.”

Stuff and nonsense, the polluters are those who smoke. Just as it is people driving cars who produce fossil fuel emissions, not the petrol companies. But it gets worse again:

Health campaigners say the introduction of a levy equivalent to 25p a pack could raise £500m a year, money that they say should be used to fund measures to help people quit and prevent the uptake of smoking. Health campaigners believe devoting greater resources to tobacco control will bring major benefits.

This is simply a naked cash grab. The various bureaucrats and prodnoses in the "public health" sector want to have an untouchable £500 million a year to spend upon themselves. Whatever happens at the election in a few weeks time this is an idea that must be rejected.

More tax on tobacco? Meh. A dedicated revenue stream for these people? Absolutely no way at all.

Economic Nonsense: 41. Immigration is bad for the economy

Many argue that immigration harms the economy.  Some suppose that immigrants are attracted by welfare, and come to live off benefits at the taxpayers' expense.  Others assert the contradictory claim that "they come here to take our jobs."  Schrödinger's immigrant, like his cat, seems to manage two states simultaneously.  Some point to the pressure on services and resources, with immigrant children filling classrooms and their sick taking up hospital beds and lengthening waiting times to see doctors.

The reality is that most immigrants are young and ambitious, coming to better their lives.  They are overwhelmingly fit and looking for work.  Many of the jobs they take up are ones whose low pay and long hours do not appeal to the native population.  Most do not draw benefits or take up hospital space.  In some sectors they help fill skill shortages, and many UK businesses clamour for more educated and talented foreigners to be allowed in.

The work they do adds to our GDP and boosts growth.  The taxes they pay boost our public finances.  Most immigrants have shown some drive in being prepared to move to a new country to improve their lot.  Some have scraped up cash to finance their trip.  Some have taken risks on their journey.  They constitute a huge net plus to the economy, not a minus.  

It is true that in some areas, particularly if they concentrate, they can put pressure on local facilities.  A minority seeks to retain a culture that sits ill alongside the tolerance and liberalism that Britain has developed over its history.  These are indeed problems, but they are ones that can be addressed and dealt with, and some are temporary rather than long-term. 

Immigrants do one more positive thing for the economy.  Most countries in Europe face declining and ageing populations, and will encounter difficulties if there are not enough young people in work and paying taxes to support the elderly with appropriate services.  The UK population is not declining, and it is immigration that is making the difference.  Far from constituting a problem, it is in this case a solution.  

Only government can screw up markets this badly

A quite lovely piece in The Observer awailin' an' a moanin' about how cocoa is rising in price, which will make chocolate a luxury good, yet also complaining that the cocoa farmers aren't making enough to continue farming. We usually suspect that a rising price will feed through into a better income for producers so that's that problem solved then. Indeed, it's difficult to work out how it could be otherwise:

“In the next five years the price of chocolate will skyrocket, and we should think about it as very much a luxury,” said Alejandro Litovsky, founder of consultancy Earth Security Group. In a recent report, Earth Security forecast a cocoa shortfall of a million tonnes by 2020.

Scary, eh?

The chocolate industry is reaping the harvest of poor working conditions and rock-bottom prices in the cocoa heartlands of west Africa, a situation that is driving potential farmers out of the industry in droves.

But it's horribly difficult to understand how we can end up with both happening over time. Rising prices for the beans, and thus the chocolate made from them, will mean that farming those beans will produce a higher income and thus keep farmers in the process or attract more to it.

Unless, unless, of course, there's something screwing up that market mechanism. Ah:

Local investment is hampered by high taxes on farmers, with around 40% of the money paid by commodity buyers going to the government.

Ah, the government is taking a whacking great tax wedge out of the cocoa trade. Meaning that the transmission process of consumer prices to producer prices is prevented in part. And thus we have our problem, the market not working becuase of that governmental intervention.

This isn't all that much of a surprise either. Cocoa farmers in West Africa tend to be poor rural peasants. Political power in such countries comes from the rather richer urban voters. Thus the incentive is for government to sting the farmers and spend the money in the urban areas. This has in fact been going on since Ghana became independent under Nkrumah. There the mechanism was to set the exchange rate very higher. This benefited the urbanites, from whom political power flows, who were able to import at reasonable prices, and hit those rural farmers exporting the cocoa cash crop.

So it appears that there really is something wrong in the cocoa market. That is, there's too much government and not enough market going on. We do, of course, support the campaigners who are bringing such abuses to our attention. But we'd be a great deal happier about it if they could manage to divine accurately what the problem actually is:

But campaigners argue that manufacturers and retailers should do much more. “If the five biggest chocolate companies spent 1% of the $86m they spend on marketing on the Ivory Coast, they could train and support half of the farmers there,” Mechielsen says. “Where are the priorities of those companies?”

Why not suggest that the government lower that taxation rate so the market can have the room to breathe and work?

Introducing the climate deniers at the Renewable Energy Foundation

John Constable of the Renewable Energy Foundation finds that he gets attacked for being something he is not:

Work like this has caused a flurry of unease in certain circles. REF has been falsely accused of hiding its donors, while our new Energy Institute – established with the University of Buckingham – has been branded a “front” for climate sceptics. The Independent quoted one academic who called me a “doubt-monger”.

We feel the pain, we've been accused of similar things ourselves. So, what is it that Constable suggests?

But it also means that there has to be a clear economic signal, which I think is best provided by putting a consistent, economy-wide price on carbon, probably through a carbon tax with corresponding offsets in other taxation. This would be flexible, so economic harm could be kept under control, and it would be technology-neutral, allowing the economy to gravitate towards the cheapest ways of reducing emissions that human ingenuity can discover.

That is also what we have been suggesting this past decade. And it's extremely surprising to be told that we're climate deniers for doing so. For this was, of course, the major recommendation of the Stern Review itself. That source document that everyone is using to tell us that something must be done. Stick on a carbon tax at the social cost of carbon emissions, reduce other taxes to compensate and she'll be right. Perhaps sprinkle a bit of R&D fairy dust tax money around the place as well.

This is not an odd view, is not some denial, it's the straight up mainstream view. We could get everyone from Bjorn Lomborg through Nick Stern, Bill Nordhaus, Richard Tol all the way out to James Hansen to sign on to this. Yes, there's technical arguments about what the social cost is but the basic structure of what needs to be done is evident to everyone who has spent more than 30 seconds thinking about the economics of this.

But then, of course, it's when the economics profession is most united in their view of a matter that no one else takes a blind bit of notice, isn't it?

A most interesting argument about the housing market

We might also term this an interesting installment in our "How to lie with statistics" course. From the Green MEP for the South East:

Perhaps as a result, the south-east has seen the biggest rise in rough sleeping levels with a shocking 96% overall rise since 2010. And in 2013/14, no new social housing was built at all by the region’s local authorities.

This represents a massive political failure to serve the interests of our communities.

Well, no, not really. Here are the numbers for housing completions in Britain. What you will note is that council building of houses is, as is stated, pretty much non-existent. That's because we changed the way we did this, moving over to social housing being constructed by social housing associations, rather than councils directly. We can still argue, of course, that more of these should be built. But the way that number has been quoted leaves the impression that no social housing is being built: when some 25,000 units were last year, at least some of which will be in the South East.

Then there's this which is a most ugly idea:

This should be implemented alongside a “right to rent” policy. Homeowners who are unable to meet their mortgage payments and are under threat of repossession would have a right to transfer ownership to the council, at less than market value, in exchange for the right to remain in the home and pay rent as council tenants. This would stop people living under threat of eviction and in fear of not being able to make next months rent.

This is equivalent to compulsory purchase of the property by the council. And given that it's at less than market value it is a confiscation from the holders of the mortgage. It's flat out theft in fact.

That then has an interesting knock on effect: if the security of a mortgage is to be called into question in this manner then all mortgages will cost everyone more. Further, quite apart from this, negative equity is not eradicated upon the sale of a property. The total amount is still owed to the mortgage holder. so this solution doesn't even solve that problem of people being in negative equity.

Yes, this is election season and all sorts of barkingly mad things are proposed at such times. But really, this could do with a bit more thought.

Economic Nonsense: 40. Too much wealth is owned by too few people

Underlying the claim is an assumed egalitarianism.  How much is "too much" and how few is "too few?"  Obviously those making the criticism have some concept in their minds of how they would like to see wealth distributed in society, and it seems they would prefer a more equal distribution than is currently the case.  The obvious question is "Why?"  The answer often given is that this would be 'fairer', but since they seem to define 'fairer' as 'more equal', this is not very helpful.

It does not help, either, that many of these measures of inequality only count certain forms of wealth.  Many people in the UK see equity in housing as their main source of wealth.  For some it is pensions.  Many assessments of wealth distribution, on the other hand, only count assets and investments, and thus miss much of the wealth owned by ordinary people.  Few if any seem to count entitlements to such things as health and education as part of measured wealth, even though they undoubtedly improve the living standards of the average citizen.

It could be argued that societies with an unequal distribution of wealth are able to increase wealth faster, and that poorer people in those societies become richer more rapidly than those living in more equal societies.  To poorer people it matters that they are able to command more resources.  It matters less to them that software multi-billionaires have widened the gap between them and made society less equal.  

Part of the reason this criticism persists is envy, the resentment that some have more, yet aspiration is often motivated by the observation that some have it better.  The success of others can inspire the desire to emulate instead of simply envying.

The false zero sum game probably plays a role in this criticism, the notion that because some own so much, the rest must make do with less.  In fact wealth in constantly being created, and creating wealth is a far surer route out of poverty than redistribution.  Instead of envying those richer than themselves, people would be better advised to try to copy them.

Come and work for the ASI in your gap year!

It's that time of year again: the ASI is looking for two new employees, to start in September 2015, and stay for 4-9 months. Our current crop—Sophie and Nick—are not quite finished (they are staying for the Summer before they go to Edinburgh and Cambridge respectively). But we are opening applications nice and early to make it easy for everyone to plan their gap years.

As last year, the crucial requirements are that you:

• Are on a gap year; you must be 18-20
• Are open-minded, inquisitive, friendly, intellectually curious, eager to learn and interested in policy
• Know and have an opinion on the ASI's perspective and what it does
• Have a broadly liberal perspective on the world

Your duties will include:

• Organising lunches and dinners
• Keeping the database up-to-date
• Managing the blog
• Reviewing and editing ASI publications
• Selling ASI merchandise
• Doing secretarial work for the directors
• Logging RSVPs for events
• Meeting a wide range of interesting & important people
• Learning about social & political science
• Socialising with the staff
• Carrying out self-directed research
• Writing blog posts
• Setting up and cleaning up after events
• Mailing out publications to subscribers

Previous interns have gone on to work with the Adam Smith Institute, including the ASI’s current Deputy Director, Sam Bowman, and Head of Digital Policy, Charlotte Bowyer, who was a Gap Year intern in 2009-10.

The role pays the National Minimum Wage. All applicants will interview with President Madsen Pirie and Deputy Director Sam Bowman at the Adam Smith Institute offices in Westminster during the summer.

Please send a CV and cover letter of around 500 words to gapyear@old.adamsmith.org by May 1st 2015.

Iceland's new money and banking proposal. Yes, why not?

Iceland is considering a new report which would rather radically change the banking system of that country:

Iceland's government is considering a revolutionary monetary proposal - removing the power of commercial banks to create money and handing it to the central bank.

The proposal, which would be a turnaround in the history of modern finance, was part of a report written by a lawmaker from the ruling centrist Progress Party, Frosti Sigurjonsson, entitled "A better monetary system for Iceland".

"The findings will be an important contribution to the upcoming discussion, here and elsewhere, on money creation and monetary policy," Prime Minister Sigmundur David Gunnlaugsson said.

The report, commissioned by the premier, is aimed at putting an end to a monetary system in place through a slew of financial crises, including the latest one in 2008.

To be honest, the report (which can be read at that link) is little more than a rehash of the proposals of Positive Money. And worth about as much as such a rehash is going to be. It's worth pointing out that Julian Simon was actually correct, human ingenuity, and the knowledge it produces, is the ultimate resource. And given that Iceland's population is some 300,000 people there's not a great deal of it natively. We have noted around here more than once the problems that stem from trying to extract decent economic ideas from the rather larger population of Norfolk as an example.

The basic idea is that as banks create credit, credit creation is behind boom and bust, put credit creation into the hands of the government and abolish boom and bust. We don't think that that's how it will work out. Rather more likely is that politicians will follow the incentives of being able to spend this newly created money without having to tax to gain it and the result will be high and persistent inflation.

However, we're absolutely delighted that someone undertakes the experiment. Actually, we're delighted that someone else undertakes this experiment. Good luck to them say we. And we'll come back in 20 years, see whether there's been that abolition of boom and bust, been that persistent inflation or not, and then we can make a decision about whether to follow or not.

Economic Nonsense: 39. Only strong government regulation can hold big business in check

It isn't strong government that causes concern for big business.  They are more worried about the smaller, newer businesses that might take away their trade.  It is competition, not government that they worry about.  Big business often cozies up to big government.  It employs lobbyists to negotiate with civil servants and ministers, and hammers out agreements on what types of regulations should be introduced, and how they should be implemented.

Big business can cope with regulation.  It can afford the staff to deal with compliance.  Small businesses, especially start-ups, find it more difficult to afford the money or the staff time that regulatory compliance takes up.  Big business knows this, and often strikes deals with lawmakers to impose regulation that will deter newcomers from entering the market.  Far from it being used to control big business, regulation often helps big business by imposing unacceptable costs on its real or would-be competitors.  People speak of "regulatory capture" when the industry works with government to secure helpful regulation.

Some regulation is needed to reassure the public that it will not fall victim to sharp practice or shady dealing, but five words should be engraved above the door of every legislator: "Competition is the best regulator."  It is competition that keeps firms striving to deliver high quality and keen prices.  The fear of losing trade is more powerful than the fear of incurring the displeasure of government.

Regulation is commonly used to protect those in the market from competition by those who might enter it.  If no-one can trim hair without training and a certificate, the prices charged by existing hairdressers will not be undercut.  If no one can enter the taxi trade without a medallion or a two-year training course, the fares charged by existing cabbies will be protected.  All rules like these are done in the name of protecting the public, but in reality it is the established operators that they most commonly protect.

To control big business government should pursue a policy of promoting competition.  It should make it easier, not harder, to enter established markets.  This, more than regulation, will keep firms attentive to their customers.