Higher prices aren't because costs are higher, they're because they can charge more

Small stores, conveniently located, open all hours, charge more than vast sheds operating at peak efficiency. This shouldn’t be a surprise to anyone, that this happens. We do all, after all, do the bulk shopping in the sheds and top up with what we’ve forgotten at the corner shop. We know it well enough that our habits accord to it.

However, we do need to be clear about why this happens:

Express supermarkets are charging customers up to three times more for their groceries than superstores from the same chain, an investigation has found.

Some fruit and vegetables have a mark up of up to 177 per cent as smaller shops charge more for the same product.

Branded items do not have consistent prices across stores from the same chain either, according to the investigation by the BBC.

The analysis found that a Tesco Express store sold a banana for 25p, while the local superstore sold it at a fraction of the price for 9p.

Similarly at Marks and Spencer, a banana costs 40p in the convenience store and 18p in the big shop.

Only the complete dullards among us don’t know that this is true. But why?

The shops all said the mark-ups were due to smaller shops facing higher operating costs, including higher rents and increased rates for longer opening hours.

No, that’s not it. Costs don’t determine prices - they only determine whether you stay in business given the prices you can charge. Higher prices are charged because people can charge higher prices. Which is a function of competition, nothing else.

Yes, this is an important distinction. It is markets which solve our problems.

East & West, North & South — Real world test labs

Some want us to compare the practical experience of capitalism, warts and all, with some abstract theory of what socialism might be like “if it were done properly.”

It is difficult to compare the two, given that experiments with each have been done at different times, in different places, in different countries, in different cultures. We cannot usually do a “ceteris paribus” because other things are not usually equal, and therefore different outcomes can be attributed to outside variables.

There are, however, two obvious cases where we can see countries of similar background, history and assets over enough time, to give us an approximate laboratory comparison of the outcomes achieved by each system. They are postwar Germany, divided between East and West; and postwar Korea, divided between North and South.

The two parts of Germany and Korea shared broadly similar backgrounds and peoples, but in each case one part of the country followed the path to socialism, while the other allowed its economy to follow the route to free markets and capitalism.

If anything, the North Koreans had the advantage of most of the peninsula’s natural resources, while the East Germans had most remaining postwar industrial infrastructure. The Marshall plan did benefit West Germany a little, but Italy and West Germany received only 10% of it each, while the UK had 25% and France 20%. Economic estimates put the benefit to West Germany of perhaps only 0.5% growth in GDP between 1948 and 1951.

The two split countries showed a striking disparity in economic performance. After Ludwig Erhard abolished price controls and made “a bonfire of restrictions” in a single weekend, West Germany embarked upon the “economic miracle” that soon led it to be Europe’s top economy. Meanwhile the East had to endure endless shortages, poor quality goods, low growth rates and wages.

In Korea, the South embraced markets and capitalism and roared to success as one of the booming “tiger” economies. The North saw starvation and economic stagnation as living standards declined. It was a reasonable like-for-like test of the two systems. In each, one part of the split countries capitalism delivered the goods (literally), while in the other part, socialism simply did not work.

This comparison does not take into account the misery and stunted lives brought about by the totalitarian dictatorships in East Germany and North Korea that accompanied socialist controls. On economic performance alone, capitalism came out as the overwhelming winner in delivering better lives to its people. It affords a salutary lesson.

Once again, to miss the point about health care treatment costs

We seem to have something of a break through in the treatment of peanut allergies:

The first medical treatment for children with peanut allergies is likely to be approved next year but there are concerns about its affordability, even though it consists essentially of peanut flour.

That the treatment exists is just lovely. It’s essentially Mithridates all over again - minor and increasing doses to build tolerance. The idea’s not new - indeed one of us knows a child having this treatment right now.

The complaints about cost have surface validity. It’s just peanut flour so why does it cost £17,000 a year? The answer being because someone had to test this old idea. Lots of people in white coats had to spend years of their lives working on whether it worked, how it worked and whether they could prove it worked.

It’s most appealing to look at the cost of sales of some new thing and demand that some reasonable margin above that is enough. But to do so is to ignore those development costs. Yes, obviously, development costs of something that exists are sunk costs but this is our public goods problem. Non-recovery of sunk costs won’t change, one iota, the value of this peanut allergy cure. But they’ll hugely affect any future intention to invest in solving another of man’s ailments.

The argument that all of this should be publicly funded also doesn’t change the basic calculation. It’ll not even change who pays. If the NHS buys privately developed drugs then the taxpayer pays. If government paid scientists develop the drug then the taxpayer pays. The argument necessarily devolves down to efficiency, a state run bureaucracy does rug development better or worse than a profit driven private sector?

Someone, somewhere, has to pay those development costs. If we use the private sector to do the development then the private sector must be paid those costs - or we’ll not have future private development.

There is no way out of this, no cute trick. Costs of development are costs and they’ve got to be paid somehow.

An Enquiry Concerning Human Urban Planning

Headlines such as ‘The Curse of Urban Sprawl’ are too often presented as virtuous platitudes. It is almost commonplace to look down upon the notion of urban sprawl, but is this the most sound position on an idea which has very practical implications?

One of the reasons why the Viking community was able to expand over three continents with some of the most socially and economically advanced societies of their time, was due to not merely urbanisation but urban sprawl. From ancient cities in Mesopotamia, to London today; expansion of the urban lifestyles has allowed for increased productivity and wealth. It has meant the spread of employment, infrastructure and transport.

Hostility toward urban sprawl is popular amongst academic and political circles. Some colder souls than I might find some hypocrisy in MPs with luxurious country homes and 3 acre back gardens resisting any building around existing train stations in the green belt.

Opposition materialises not only in spurious comments about shanty towns and slums but contemporary policy too. Green belts and zoning are detrimental toward choices people make about where to live in both the negative and positive sense of liberty.  

Let us consider the green belt. Established by the Town and Country Planning Act in 1947, it was intended to hold back urban sprawl and restrict certain development on some land. This meant a restriction of the supply of housing, prices have rocketed and people are left unable to afford their own home.

There are two issues. First, the seemingly ideological resistance to accept urbanisation as an instrument of prosperity, perhaps bolstered by the trade off between politicians’ aforementioned 3 acre back gardens and the freedom and prosperity of those who are not living in urban areas. The second, is the lack of political will to be in favour of allowing high density urban populations to expand out into the fringes. It is this paternalistic attitude which results in others being effectively made to subsidise residential areas outside of the green belt through the construction and maintenance of unnecessarily long winded infrastructure and travel routes.

Urban sprawl may be both qualitative (through the diffusion of the urban lifestyle) and quantitative (through new residential zones) and may appear to be a wooly notion at first. However it is crucial to increasing the wealth of the members of society it affects as people have the choice to move to areas where they, for example, get a promotion. But it has also become fashionable among some on the right to blame sprawl on immigration - that is an entirely separate mammoth of a blog post for a future date.

Some in the anti-sprawl movement do however appear to be well intentioned. Urban sprawl is associated with increased traffic congestion, closely linked to air pollution and the increasing use of cars instead of public transport. However, higher levels of air pollution are associated with higher densities and urban sprawl by definition is the dispersal of the population, thereby reducing the concentration of air pollution and traffic congestion is worse, not better where population densities are higher. Furthermore, travel times have generally decreased overtime (largely due to the use of cars) and increase when urban spaces are restricted from expanding due to unnecessary congestion. The most efficient way of overcoming the issues of an expanding urban centre is not through top down planning but by permitting the market to let people choose where to live.

For some, sprawl is ugly and commutes are tiresome, but that is a trade-off individuals ought to be able to make and not the government. We may love the bucolic rolling hills of the countryside but unnecessarily high property prices have more adverse socioeconomic effects than the cookie cutter uniformity which pleases the eye and benefits the rent-seeking few.

It is a frustrating paradox whereby complaining about urban density is commonplace but calls to take action to increase this urbanisation is fraught with politically impossible propositions. Affordable, comfortable dwellings which people choose ought to be the goal.  Restrictions under the guise of saving us from urban sprawl are at most, mistaken and at worst, virtue signalling and ought to be abolished.

To explain the UN Rapporteur on UK Extreme Poverty

An excellent spot by Rod Liddle here. Philip Alston, the UN’s Special Rapporteur on extreme poverty, has just had a whirlwind tour of the UK where he’s listened to people complaining. He then applied his understanding of the meaning of poverty to these and wrote his report - the UK is very bad at dealing with poverty.

The problem is the definition of poverty being used. We might think of poverty as the World Bank does - less than $1.90 a day. Alston doesn’t, he thinks of it as less than 60% of median household income in that society. The two methods provide entirely different results:

Mauritania is the obvious answer. Its government has been commended by the UN special rapporteur on poverty, Philip Alston, an Australian human rights lawyer. Alston praised President Mohamed Ould Abdel Aziz for having made “significant progress” in tackling poverty, although he added much work was still to be done. So, well done Mo. Some 42% of this hellhole’s population live in absolute poverty, the average yearly wage being less than £1,000. Life expectancy is 20 years below our own and Mo, when not alleviating poverty, presides over a state that murders its political opponents or subjects them to torture. But hell, if it’s a beacon of light for Alston, that’s good enough for me.

Alston’s measure is not one of poverty, it’s one of inequality. So, if you’ve a society without that much inequality, where all are desperately poor, living under a shared burnoose and eating sand, then that’s a place with little poverty. If you have society with more inequality, but the standard of living of the poorest in it is far above the average in that poor place*, then you’ve more poverty.

Well, quite, go figure, but our real problem is that it’s that relative poverty which is our own official definition of poverty. It’s, to put this delicately, an idiot manner of defining things.

*Just a few years back, about a decade, it was true that the average living standard of the bottom 10% of Americans was higher than the average living standard of the top 10% of Indians. Inequality within a society might not matter all that much compared to that statistic. A decade of India’s high GDP growth has made it untrue now but it’s still a fascinating number.

Venezuela Campaign: building crisis cements Maduro's failed legacy

Cement is a vital building material that is largely unavailable in Venezuela due to the collapse of the state-owned cement industry. Venezuela’s massive cement scarcity has resulted in the ruin of the construction industry.

Hugo Chavez nationalised the cement industry to increase production in the ‘strategic’ sector. The Venezuelan assets of the four major private cement companies were expropriated in 2007-8, and construction of a new state-owned cement plant was started in co-operation with Iran. Ten years later this new plant is not yet complete. Chavez merged existing enterprises into the state-owned Socialist Cement Corporation, which controlled 90% of cement production in Venezuela. This move has been disastrous for the industry. Cement production plummeted by 42% from 10.2 million tons in 2007 to 5.9 million tons in 2015. The current economic crisis has reduced production further—many cement plants barely operate.

This has had a deep impact on the construction industry. Octavios Campos, director of the National Federation of Construction Workers, lamented in 2016 that “the unemployment rate is between 70% and 74%” in the industry. Two years later the situation is much worse. According to four Venezuelan unions the construction industry is operating at no more than 5% of its capacity, causing unemployment, economic slowdown and mass migration.

This breakdown can be largely attributed to corruption and mismanagement. Once the cement industry was taken over by the state, military officers and party bureaucrats replaced professional experienced management. They were interested in political control and personal enrichment rather than the long-term health of the industry. Party bureaucrats were also given administrative roles throughout the industry, bloating the companies and eating into margins. 75% of Cemento Cerro Azul’s employees are administrative staff.

Machinery regularly breaks down because of inadequate maintenance and lack of funds to import spare parts; while currency controls and shortage of foreign currency exacerbate every problem in Venezuela. There aren’t enough trucks to transport limestone from the quarries because of the failure of a new state-owned trucking monopoly (Entipisal). At one plant the union reported that of the 30 trucks previously serving the operation, only two or three were working.

Above all, price controls force companies to sell cement at ludicrously low prices, which has enabled the administrators to cash in by selling such cement that is still produced on the black market. National Assembly Deputy Joaquin Aguilar observed: “for every truck of cement that leaves the plant, Cemento Andino receives a little less than 90,000 bolivars while the Mafioso who sells it on the black market gets 1,350,000. That’s why Cemento Andino is a bankrupt company with rich administrators.”

It is thus today nearly impossible for consumers to acquire cement. Chavez destroyed the cement industry by nationalising it and packing it with cronies. The impact on the construction sector and the wider Venezuelan economy has been devastating. The literal building blocks of this once great country destroyed.

More information on the Venezuela Campaign can be found on their website. 

Health care is a luxury so of course Americans spend more upon it

Health care is a luxury - a luxury good that is. No, not something only the rich can have, rather just something that we appear to spend larger portions of our incomes on as we become richer. So, a richer country like the US should be spending a higher portion of income on health care. Just as it does on other luxury goods.

Now, the claim here is a little rich even for us, that this is the entire and only explanation necessary for US health care spending levels. But we certainly agree with the underlying idea, it’s going to be part of it. And the way to work it out is too see how much of a luxury good health care is, how much would we expect a richer nation to be spending and see if that’s what the US is.

And the U.S., as the country which converts our GDP per capita most efficiently into higher household expenditures is the 4 points on the right of the graph. Do note that U.S. healthcare is there, but it’s under the gray explanatory label.

Here’s the thing: all the models show that U.S. households spend a little more than predicted on everything. Further, we’re probably a bit worse on entertainment than we are on healthcare (both luxuries).

Except the models fit really well, so we’re not talking about big discrepancies here: individual spending on healthcare appears to be too high by about … wait for it … $400 per year.

We’d not say we’re entirely and wholly convinced as yet. Even if we agree the underlying method of analysis is correct. Richer people spend more on luxury goods, health care is a luxury good, the US is richer.

Upon how true this is rather a lot depends. For example, if it’s just this explanation alone then no reform of the system is needed, is it?

What is the correct number of bank branches?

Lawyers are advised never to ask a question they don’t already know the answer to. We’re not lawyers so we can break this stricture with impunity and admit that we’ve absolutely no idea at all how many bank branches there should be across this green and pleasant land. We are certain how we find out, but the number is unknown to us.

Britain’s leading consumer group has called on banks to justify nearly 13,000 bank branch closures that have left millions of people struggling to access vital financial services across the UK.

Figures compiled by the consumer charity Which? show that the UK has lost nearly two-thirds of its bank and building society branches over the past 30 years, from 20,583 in 1988 to 7,586 today.

The loss of those sites has left 19% of the population more than nearly two miles away from their nearest branch, while 8% now have to travel more than three miles, with Scottish communities hardest hit by closures.

Which? obviously has in mind some level of service, or geographic distinction perhaps, which should determine that number. Our method is somewhat different.

How many bank branches are people willing to pay for? For quite obviously it is the people who use banks who pay for there to be banks to use. We’re not into the idea that we out here should be paying for other, perhaps richer, people to have somewhere safe to keep their money.

Once we’ve got that settled then the answer emerges. It costs money to keep a branch open, there’re rents, wages, rates to pay. If insufficient people use the branch to cover those costs then the branch should not be there. Expending more resources to produce something which is worth less than those resources used is a great way to make the society in general poorer.

So, how may bank branches should there be? Whatever number it is profitable to provide. Something that will change as technology does, as the society around the banking system does.

Seriously, how else could we possibly work this out?

Wider applications of the Kuznets Curve

Simon Kuznets, 1971 Nobel prizewinner in Economics, observed that as a nation develops, inequality usually increases until a certain level of prosperity is reached, then it declines. This is the so-called ‘Kuznets Curve,’ an inverted U-shape. It was not proposed as a universal law, just an empirical observation.

The Laffer Curve has a similar shape. Obviously with income tax at 0%, no revenue will be raised. Similarly, no revenue will be raised with income tax at 100%, because there will be no point to work. Between the two is a curve, which might have a point at which a tax rate will yield the greatest revenue. Many statists find this obvious fact unpleasant, preferring to believe that when income tax rates are raised, more revenue will be yielded. Practice suggest otherwise, that the inverted U-shaped curve has a maximum point, after which higher taxes yield less revenue.

Empirical observation suggests that pollution in countries increases as they develop economically. In the earlier stages they find it more important to avoid starvation than to have clean air and water. As they develop, however, they become wealthy enough to afford to produce more cleanly, and to look after their environment. Again, it is the inverted U-shaped curve. China polluted massively as it developed, and is now about at the point where if feels wealthy enough to redress that problem. On the whole it seems to be the rich countries that pollute less than the developing ones, because they can afford to do so.

Poor countries have had high fertility rates because many of those born do not survive infancy, and because children are needed to contribute economically, and later to support aged parents. Medical advances lower child mortality and enable people to live longer, increasing populations. As countries become richer, however, they can afford to put children into education instead of work, and can afford to care for retired people. Fertility rates decline in consequence. Many rich countries have birth rates too low to sustain population levels without immigration. Increases in world population are levelling off, and look set to decline after they reach 10bn, a far cry from the alarmist figures of 50bn suggested by some. Again, it is the familiar U-shaped curve identified by Kuznets.

Popper’s ‘conjecture and refutation’ in scientific discovery is mirrored in the market as some businesses are counted out when they cannot compete. Even the mutation and section of evolution follows a similar methodology, albeit without the inspired human brain behind it. The methodology of innovation and selective death rate seems to function in most aspects of human progress. This formed the basis of my doctorate in philosophy.

Observation suggests that the inverted U-shaped curve features far more widely than in the income inequality observed by Kuznets. It seems that in many cases of human development, the adverse consequences of it rise as it takes place, then level off and decrease when a certain stage of prosperity has been reached.

It provides an empirical counter to those who urge humanity to stop economic development, growth and technological advance. In many cases it seems that the adverse consequences can be overcome not by doing less of these things, but by doing more of them. In that way we acquire the wealth and expertise to solve our problems.

It's the decision making process itself which is wrong here

A reasonably fundamental question, set of questions, underlies this story. Who gets to decide and how to they reach that decision?

Coffee shop fatigue in a coastal town has resulted in a council blocking a new cafe from opening in a store left empty for a year.

Christchurch in Dorset had 14 coffee shops within a 500-metre stretch on its High Street - an average of one every 35 metres - before an application was submitted by chain company Coffee#1 to turn a former a shoe shop into an outlet.

Christchurch Borough Council voted to refuse permission for the plans, which would have created eight jobs, following objections from rival cafe owners and local residents, who complained there were too many coffee shops.

Among the establishments already on the High Street are chains like Caffe Nero and Costa, as well as independent businesses the Coffee Pot, Cuckoos coffee bar, Fleur-de-Lis tearooms, Arcado Lounge, Soho, The Boardroom, Wild and Free Coffee, Coast Coffee Co, Kelly's Kitchen, Baggies, Clay Studio and Indulge Yourself.

How do we determine “too many”?

Well, obviously enough, more than people want. So, having moved back an iteration, how do we decide how many people want? Our answer having to be leave it to the market. If 15 coffee shops can all attract enough custom to make a profit then the number of coffee shops that the people want is at least 15. If only 10 can make a profit then the number wanted is, by that measure of where people will spend enough of their own money, 10.

We do not - and cannot - know a priori how many there should be. Simply because the correct number is the interaction of supply and demand, something emergent from observed behaviour. No, we cannot predict with market research and all the rest, New Coke shows us the flaws in that system.

There’s also nothing at all to suggest that the local council is better informed about what the citizenry wants than the citizenry.

And finally of course, not using the council to make the decision means that the current suppliers can’t stick their oar in to limit competition for their own profits.

It’s not which way the decision went here that’s the issue, it’s that the entire decision making structure is incorrect in the first place.