The lighthouse never justified state intervention

Lighthouses are the textbook example of a “public good”: goods that are socially beneficial but that free markets under-provide.

The narrative goes that because everyone can see the light that they emanate but the producer of the light cannot see who consumes the light it is impossible to charge for the service. This leads to the free-rider problem: it is possible to benefit from the provision of lighthouses but avoid paying, leading to under provision. Therefore, the state must step in to build lighthouses. which is socially beneficial because they reduce the number of shipwrecks.

This is a nice theoretical story told by many introductory economics lecturers. But the historical experience shows that lighthouses are not in fact a public good.

Beginning with Ronald Coase, economists have objected to the lighthouse example. Coase pointed out that in pre-19th century Britain most lighthouses were provided privately. Other economists more recently pointed out that most lighthouses in Tokugawa Japan were privately constructed and operated. During the 18th century, many of the lighthouses of colonial America were privately built. These works suggested that, even if they were public goods, lighthouses could be privately provided.

However, these works never considered the possibility that lighthouses are not public goods. There are many historical examples of rudimentary lighthouses organised by shepherds or farmers during the off-season or by local taverns close to the seaside. These lighthouses, some of which are mentioned in sources such as Homer’s Iliad, have been lost to history because they were simple. They were unlike the towering edifices constructed by kings which have been left to weather the passage of time. History has only left us the state-constructed ones to observe physically. Mentions in old books are all that we have for the more rudimentary ones.

Yet, these more rudimentary lighthouses were economically relevant. Many sources concerned with the history of navigation point out that those who operated these lighthouses were using them to signal their offering of services as pilots to ship captains unfamiliar with local waters. For these local individuals who were familiar with the surrounding waters, these lighthouses operated as directional pilotage stations from which they could wait for clients rather than sail around in the hope of finding a client. The lighthouse was a complement to the services of pilots. More importantly, it made them more efficient as pilots because they could also use the lighthouse to better guide ships to port. In fact, even after lighthouses were fully nationalised by governments, they continued to frequently act as pilotage stations suggesting that even government-entities were aware of the possibility of bundling the two.

So why was there so little private provision of lighthouses in history? The reason is that pilots were one of the first trades in medieval Europe to organise and push for the formation of guilds that restricted access to the piloting trade. The first guilds faced important pushbacks from the providers of the rudimentary lighthouses who acted as pilots. However, they were gradually able to restrict entry in pilotage which, while increasing income for pilots, increased prices for shipowners (through a reduction in competition). In essence, the creation of a pilotage cartel reduced the supply of pilots which meant that the supply of lighthouses (which was jointly supplied) was also reduced. Had governments not conferred legal rights to restrict competition, there would have been more pilots and more lighthouses.

As such, the question is not why there were so few private lighthouses but why do we find so many. The best entrepreneurial option, the bundling of two services, recognised as the most efficient manner to provide lighthouse services, was legally restricted. This left entrepreneurs with “second best” options such as using subscriptions before provision (or lotteries which served the same end) or social ostracism of free riders. The fact that there was considerable private provision of lighthouses in this context of being constrained to use second-best solutions is an astounding one.

It is ahistorical to claim that lighthouse are an example of a public good that markets would fail to provide. The free market was perfectly capable of providing lighthouses and was only prevented by excessive government regulation.

Vincent Geloso is assistant professor of economics at King’s University College (London, Ontario)

The Observer Is more than usually confused on the subject of climate change

The costs of doing something about climate change versus the costs of not is a subject that has been well hashed over in the Stern Review and the work of William Nordhaus. No point in revisiting all of that here. However, The Observer manages to get itself more than usually confused over the subject in the business editorial.

The idea is that we should strive ahead to be a zero carbon society and economy because we’ll create vast profits from having done so:

But the spin-off economic benefits of being in the vanguard of decarbonisation are potentially enormous. The countries that move first to develop green technologies will reap monopoly profits until such time as their rivals catch up.

That’s not quite how it’s working out already. Britain installs a large number of solar panels - too many for a country so far north perhaps - but not one single solar cell is made in Britain. It’s difficult to have world leadership in the manufacturing of a technology when you don’t actually do the manufacture. To be world leader in solar panel installation might be a nice green badge to wear on the Scout’s uniform but being able to nail things to the roof is not what international monopolies are built of. We seem to import our windmills from Denmark and such places. And so on.

But even to think along such lines is to be making a category error. For while it might be true that government policy encourages the development and deployment of such technologies it’s not actually government, nor the country, that does or will own them. They do belong and will belong to the private sector economic actors who develop them.

Perhaps Drax will solve the thorny problem of carbon capture without expending so much energy doing the capturing as to make the process economic. Unlikely but still - that process will belong to Drax, not GB PLC.

That’s not the only error of course. For British companies to be able to extract monopoly profits from foreigners means that they must have actual monopolies. Which means that they’ll have a monopoly over their technologies here in the UK too, extracting monopoly profits from our hides. Which isn’t the point nor the policy at all, is it?

There’re unlikely to be monopoly profits from going green, they wouldn’t belong to the nation that suffered the costs and even if there were we’d be working as hard as we could to break the monopoly for fear of the costs such would extract from us. Meaning that the promise of global monopoly profits from going green isn’t all that alluring a prospect, doesn’t it?

Sorry John, it is socialism and it has failed

John McDonnell recently stated that Chavista Venezuela and communist Cuba, were “never socialism.” In this denial he is contradicting himself, having declared as recently as 2014 that Chavista Venezuela was “socialism in action.”  McDonnell has long praised Chavez, saying that he “lit a spark that really started a firebrand…Venezuela and the Bolivarian Revolution became an item on the agenda for all socialists…here you had the contrast between capitalism in crisis and socialism in action”.

As a Venezuelan who has lived the bulk of his life in Venezuela before coming to Britain, the nature of the system in Venezuela and whether it is worthy of support from foreign politicians like Mr McDonnell are important questions.  International support from sympathetic politicians and the states some of them control is one of the reasons that the regime has been able to survive for as long as it has.

Have we in Venezuela experienced socialism and has it worked? Let’s look at some of the individual policies we have experienced.  Firstly, nationalisation.  It seems clear that nationalisation is a socialist policy.  It was defined as the “common ownership of the means of production, distribution and exchange” in the original clause four of the Labour Party constitution and further defined as ‘public ownership’ in Labour’s 1945 election manifesto. Nationalisation was one of Chavez’s most significant economic policies, and he proceeded to nationalise not only the ‘commanding heights’ of the Venezuelan economy, but many other assets too, often refusing to compensate the owners of the property that he confiscated.

Let me provide a few examples:

The steel industry was nationalised. The biggest steel company, Sidor, produced 4.3 million tonnes of steel a year before it was expropriated by Chavez in 2008 and handed over to an allied member of the military. By 2014 its production was less than 700,000 tonnes per annum. In March 2019 Sidor closed its doors for the last time and ceased production permanently.  13,000 employees lost their jobs.

The Venezuelan assets of the four major private cement companies were expropriated by Chavez, and the assets were integrated into one state company, the Socialist Cement Corporation, which controlled 90% of cement production.  By 2015 production had fallen by 42% and today cement is barely available in Venezuela, with resulting mass unemployment in the construction sector. Utilities have also been nationalised and now there are constant power cuts (of over 10 hours a day in my home city), a lack of running water to most dwellings and extraordinarily poor telecommunications service.

Agricultural land was also expropriated under a Land Law introduced by Chavez in 2001. Seized estates were turned over to co-operatives and regime supporters without the technical know-how, management skills and capital necessary to run them. By 2010, the government had seized 20% of all agricultural land.  Consequently the remaining private farmers do not invest in their farms for fear of expropriation and food production has collapsed.

Secondly, price controls, a common feature of socialist economies. Any products made by the remaining private companies are subject to price controls, which usually means they operate at a loss. The 2014 ‘Law on Organic Prices’ created the National Superintendency for the Defence of Socioeconomic Rights (Sundde), responsible for the “consolidation of the Socialist economic order.” With inflation at around 1.3 million%, prices have to change constantly if a business wants to survive. But under the law an inspector can immediately occupy or shutdown an establishment if he accuses it of non-compliance. In 2017 alone, there were 9,341 inspections which resulted in 3 outright expropriations, 12 shutdowns, 10 occupations, 186 confiscations, and 1,189 cases of state-encouraged looting.

The combination of nationalisation and price controls have led to a collapse in domestic production, which the regime sought to compensate for by increasing imports, which more than doubled in per capita terms between 2000 and 2012. It financed this with over a decade of unsustainable borrowing. Between 2002 and 2016 Venezuela increased its debt burden by a factor of 6. Venezuela’s foreign debt now equals more than 5 years’ worth of exports, the worst ratio of any country. Now the regime can no longer finance imports, which explains the widespread hunger and malnutrition. Excessive borrowing is not an inherent feature of socialism, but it does seem to follow from the phantom of abundant resources and to be a by-product when socialist economies are no longer able to sustain themselves.

Fourthly, state-directed investment. Chavez established large state investment banks and funds, notably BANDES and FONDEN, through which he channelled huge resources.  Such organisations are commonly put in place by socialist governments, for example the National Enterprise Board set up by the Labour government in 1975 to extend state ownership of industry. By 2012 FONDEN accounted for a third of all investment in Venezuela and half of public investment, having taken in some $100 billion of Venezuela’s oil revenue over the previous seven years. What happened to all the money is unclear.  Many FONDEN projects never started or were half-completed.

Fifthly, centralisation of power in the hands of the ruling socialist party, a feature of many but not all socialist countries.  Chavez put the media and judiciary under state control, getting rid of media outlets and judges that he did not like and packing the supreme court with his cronies. He took control of the once independent electoral commission and financed his party’s election campaigns from public funds.

Mr. McDonnell’s line has been that Chavez was a great socialist, but Venezuela “took a wrong turn when Chávez went and I think unfortunately since then, I don’t think they have been following the socialist policies that Chávez developed. And as a result of that they’re experiencing problems.”

The socialist policies were indeed introduced by Chavez and these caused Venezuela’s economic collapse.  His hand-picked successor Maduro has not changed any of these policies but faithfully continued them.

Finally, and turning to a qualifiedly political aspect, socialist ideology has played a fundamental role in setting political goals and interpreting concrete historical events. Most importantly, to justify the actions of the regime and its costs.

Today, when the revolution results in repression, misery, oppression and crime, socialist ideology is used to justify the outrages of the regime: The people responsible for the political and humanitarian catastrophe – began by Chavez and completed by his followers – turn to socialist ideology to justify the chaos and entrench themselves in the decision to pay any cost to maintain their power.

Venezuelans today immensely regret the mistake they made believing Chavez’s promises of a perfect future under socialism – consider all those people who fall under the spell of an advertisement promising magical results; they end up regretting it.

Chavista policies and socialist ideology have been an unmitigated disaster for my country and I would strongly advise against any attempt to introduce them here.

The launch of the USS George Washington

June 9th, 1959, was a significant date in the history of the Cold War, because it was on that day that the USS George Washington was launched. The Soviet Union had acquired an early lead in long range missiles, largely because they gave it huge priority and spent a large proportion of the budget on their military. The US response was to develop a new technology, the submarine launched ballistic missile. The Polaris nuclear-armed missile would pop to the surface before its rocket motor ignited to send it to its target.

Rather than wait until new submarines designed to carry it could be built, the US Navy basically inserted a new 130ft missile section into the hull of an attack submarine under construction. Admiral Hyman Rickover played a key part in this move, which saw the Polaris system combat ready at least two years before it would otherwise have been. The submarine was renamed the George Washington, and seven months later lest-fired two Polaris missiles while submerged. Despite all their effort and financial sacrifice, the Soviet advantage was nullified because no first strike by them could now eliminate the West’s retaliatory response.

The US did this again when the Soviet’s deployed their SS20 medium range missiles. Launched from trucks hidden in forests, they again threatened a strategic advantage, but again the US responded with a technological leap in the shape of the Ground Launched Cruise Missile and the Pershing II. The BGM-109 GLCM (called “glickum” after its initials) was a small, pilotless flying machine, powered by a turbofan engine. The point was that, while subsonic, it flew so low that it was undetectable, and had a sophisticated guidance system that allowed it to veer around obstacles and fly to within metres of its target with its single nuclear warhead. Both weapons were deployed in Europe, and led the Soviets to sign the agreement limiting medium range missiles. Again, new technology had nullified their advantage.

When the US announced the Strategic Defence Initiative, dubbed “Star Wars,” it again threatened a technological leap that would render the Soviet missile arsenal obsolete. Oleg Gordievsky, the KGB station head who was an undercover Western agent, reported that the Soviets could not compete technologically or financially with such a project, and were determined to reach an agreement with the US that specifically prevented it. When President Reagan refused to abandon the project, the Soviets folded, and the Iron Curtain came down. But it was the launch of the USS George Washington 60 years ago that started the process that led there.

The truth about British poverty and economic mobility

It’s a general refrain, that Britain has more poverty than other European countries, that we’ve less social mobility enabling people to get out of it. As it happens that’s not what the actual numbers show. From the Office for National Statistics:

Out of the 28 EU member states, the UK had the 12th highest poverty rate in 2017, but only the 20th highest persistent poverty rate; this reflects that in the UK, for those experiencing relative low income, it is more likely to be for a shorter period of time.

Or, another way of saying the same thing, income mobility in the UK is greater than it is in the majority of other EU states. For fewer people are stuck in that low relative income for long periods of time here.

We should also take issue with this definition of “poverty” here, this is relative poverty. Or, as it’s more accurately known, inequality. That Britain has more inequality than a lot of Europe we know and we here are also fine about.

However, turning to actual material poverty, something we should we think really be worried about:

Persistent material deprivation – which provides an estimate of the proportion of people whose living conditions are severely affected by a lack of resources – fell to 2.1% in 2017, continuing the decline over the past four years.

We tend to think that getting a problem down to only 2 percentage points is a startling victory for government given the general inefficiency of the system. Do note though that this definition of material poverty is also a relative measure. It’s still compared to the average British standard of living, not that of Romania or Bulgaria.

But what’s most interesting is how different that is from the usual bombardment. Actual poverty, not having very much, is low and falling. Having less than others sees Britain pretty much in the middle of the pack. The persistence of that less than being lower than in our peer comparators by virtue of income mobility being greater here.

The most frequent reason for leaving in-work poverty was for employees to keep the same job and number of hours, but to increase their hourly pay, accounting for 44% of those who exited.

Oh, and the best way out of poverty? Get and keep a job until you’ve proved yourself and earned a pay rise. Now isn’t that different from what we’re more commonly told?

Nineteen Eighty-Four taught us about dictatorship

On June 8th, 1949, a full 70 years ago, George Orwell’s 1984 was published by Secker and Warburg. Orwell had parted with his original publisher, Victor Gollancz, when they’d refused to publish his 1945 “Animal Farm” because it was too anti-Communist. Nineteen Eighty-Four is even more anti-Communist. Although ostensibly set in a dystopian future, the novel is in fact a recreation of Stalinist Russia in the 1930s. Big Brother, with his moustache, is uncannily like Stalin, who was also the subject of an over-the-top personality cult.

In Orwell’s world the people are subject to incessant surveillance and propaganda. Euphemisms abound, in that the Ministry of Love specializes in torture, the Ministry of Plenty oversees shortages and rationing, the Ministry of Peace runs the war, and the Ministry of Truth specializes in what we would today call “fake news.”

Members of the Outer Party, including Orwell’s protagonist, Winston Smith, have to make do with synthetic foodstuffs and poor-quality “Victory” gin, oily and unpleasant, and loosely-packed “Victory” cigarettes. The ruling Inner Party live in clean and comfortable flats, with pantries full of luxury goods such as wine, coffee and sugar, all unavailable elsewhere. The unmistakable reference is to the special shops stocked with Western goods that only the Nomenklatura of the Soviet Communist hierarchy had access to.

Orwell gave us the language with which to speak of totalitarianism, with terms such as Big Brother, newspeak, doublethink, thoughtcrime, and memory hole. The book was so powerful that the term “Orwellian” is now used to describe the total control of a dictatorship.

The “book within a book” is the illicit copy Winston obtains of “The Theory and Practice of Oligarchical Collectivism by Emmanuel Goldstein,” (Leon Trotsky), a masterly insight into the theory of totalitarian domination. Goldstein is the main subject of the daily “Two-minutes hate” in which party members have to participate. It resembles the interminable party rallies of Communist regimes.

The shortages and general low quality of life, like the canteen with its peeling and grease-stained tables lead Winston to wonder if it had always been like this. At the back of his mind is the notion that it was not, but the incessant propaganda about constant improvement prevents an accurate recollection. It has been claimed that Orwell’s description derives from his wartime experience in the BBC canteen. If so, it would be fitting, in that the Corporation is practically a temple to doublethink, the art of holding conflicting views simultaneously. And of incessant fake news.

The book is still a gripping read, even 70 years later. Its power is such that some members of the current Opposition regard it with hostility for daring to tell the truth about what Soviet Russia was actually like.

If only the Resolution Foundation could make up their minds

As is obvious we care rather less about inequality of outcome around here than do many others in our current society. But it would still be useful if those doing such worrying could actually make up their minds. For example, here we’ve the Resolution Foundation insisting that regional inequality isn’t much of a thing:

More young people are getting stuck where they grew up or went to university because they cannot afford rents in places where they can earn more money, according to the Resolution Foundation thinktank. It found the number of people aged 25 to 34 starting a new job and moving home in the last year has fallen 40% over the last two decades.

Whereas previous generations were able to move to big cities such as London and Manchester or regional hubs like Leeds and Bristol to develop their careers, the current millennial generation is enduring a slump in mobility caused by rising rents, which can wipe out all of the financial gains of a move.

Even moves over short distances are barely worth making, the data shows. A person on average earnings in Scarborough paying average rent would have been 29% better off if they had moved to Leeds in 1997 and paid average rent and earned average money. In 2018, rising rents and stagnant wages means the benefit after taking into account rent was just 4%.

Some places do indeed have higher wages. They also have higher costs of living, the two rather neatly near exactly cancelling each other out. We’ve thus not got regional inequality of the only type that can even conceivably matter, inequality of consumption.

Thus most of the statistics about inequality in Britain are wrong, based as they are upon income, not consumption. This is, of course, something we have been saying for a long time. Britain has regional differences in pay, yes, but also regional differences in the cost of living. Britain has more of both of those than most other countries, it’s this which makes British inequality figures look so different. It’s also this that makes British inequality figures largely an irrelevance.

We do wish though that the Resolution Foundation could actually make up its mind. For only a year ago they were whining bitterly about regional inequality in Britain. That very thing they’ve just shown doesn’t exist in any manner that is important, in consumption.

Yes, obviously, we’re being picky and all that but is consistency - in saying something other than the modern world’s bad, M’Kay? - really all that much to ask for?

And anyway, isn’t the young moving back home after their education a welcome symptom of local community anyway? Instead of all the brains and human capital draining out of the provinces into the Great Wen?

Two dates for liberty

June 7th was a significant date for liberty on two occasions. The first was the royal assent to the Petition of Right by Charles I in 1628, and the second was the royal assent to the Great Reform Act of 1832 by William IV.

Charles I, anxious to support his foreign wars, had taken to collecting “forced loans” in the absence of Parliamentary subsidies, and imprisoning those refusing to pay. In addition he had soldiers billeted in private homes, and imposed martial law in several places. The Petition, signed on June 7th, imposed prohibitions on the monarch. It limited non-Parliamentary taxation, forced billeting, martial law and unjustified imprisonment.

It ranks alongside Magna Carta and the 1689 Bill of Rights as one of the landmark documents that embed liberties into the Constitution. Its influence can be seen in the Third, Fifth, Sixth and Seventh amendments to the US Constitution, and it remains in force today, not only in the UK, but in many Commonwealth countries.

It was also on June 7th, in 1832, that the Great Reform Act was signed into law. Many historians mark that as the beginning of the UK’s modern democracy. The Act was designed to do away with many of the abuses that had crept into the old system, and to recognize that Britain had become different following the Industrial Revolution. It abolished the rotten boroughs, which in some cases had ceased to exist, and got rid of most of the pocket boroughs that were under the control of the local landowner.

In place of the 143 borough seats it abolished, it created 130 new ones, including many of the new towns and cities in the North. In county seats it effectively enfranchised the new merchant class of property owners, though it did not extend the franchise to the working class or to women. It increased the electorate by over 60 percent, and turned a ramshackle system into a fairly smooth and logical one. It paved the way for future reforms that would lead eventually o universal adult suffrage.

The Bill had a fraught passage, and for a time civil disorder was threatened. Eventually Prime Minister Wellington persuaded the Lords to let it through, rather than have hundreds of new peers created to ensure its passage.

Both Acts played a role in asserting the liberties of the people. The first represented a block on monarchical power, and the second severely diluted that of the aristocracy. Both of them were mileposts on the road to modern Britain.

Here we have proof that solar power is not economic yet

There is much shouting to and fro about the economics of renewables and solar power. Those who insist that it really is economic and all we need to do is roll it out, those who are equally vehement in their insistence that it’s simply not ready for prime time - if it ever will be. Each side presenting their own calculations to make their point.

What we’d like of course is some neutral totting up of the costs and benefits. Fortunately we have just such a system - the market.

Home solar panel installations fall by 94% as subsidies cut

Home solar power is not yet economic.

The Labour party has accused the government of “actively dismantling” the UK’s solar power industry after new installations by households collapsed by 94% last month.

Rebecca Long-Bailey, the shadow business secretary, used prime minister’s questions to challenge the government’s record on climate action after scrapping subsidies for domestic solar panels from April.

Without subsidy people won’t install. The level of subsidy required to get them to install is exactly the measure by which they are uneconomic. QED.

We don’t want people to do uneconomic things so their not installing solar panels is just fine - why would we want people to make themselves and us poorer?

That’s not the end of the argument though. For there is that climate change argument. Perhaps solar panels will become part of the solution? And at some - lower than today - price they could well become so. The answer being that we should wait until those prices are lower and then install. How do we reach that lower price?

Well, no one does actually make solar cells in this country. Our installation or not has near zero effect upon their price, that’s something driven by global technological change, not anything we do here. The answer therefore is obvious enough. As and when global technological change drives down prices so that domestic solar PV is economic then we should be installing it. And there’s no need for us to be doing anything at all to be encouraging anything either. When solar PV is economic people will naturally install it. The price change - the technological advance - that leads to it being economic is entirely unaffected by anything we do so there’s no argument for even encouragement, let alone subsidy, there. And as we don’t, and won’t, take part in the manufacturing anyway there’s no argument for “creating a national industry to compete” and all that malarkey.

King Log is the correct ruling ethos here. When installing solar power is logically sensible then people will o it unprompted and unaided. There’s absolutely no point in subsidising them into doing so when it’s not logically sensible.

The day that brave men changed the world

Seventy-five years ago, on June 6th, 1944, the largest seaborne invasion in history took place on the beaches of Normandy. The logistics are staggering. There were 6,939 assorted ships, including the 1,213 warships that began the invasion with a dawn bombardment. During the night parachute troops had made glider assaults to capture and hold key bridges.

The allies had engaged in major deception plans, including a fictitious US Army Group, led by General Patton and stationed in Kent, to persuade the Germans that the landing would be made at the Pas de Calais. The Germans had assumed that if the Allies did choose Normandy or Brittany, they would have to attack a port such as Cherbourg to disembark safely and land supplies, including fuel. Instead the Allies took their own floating harbour called Mulberry with them, and kept the invasion force refuelled as it moved inland with PLUTO, a pipeline under the ocean, pumping oil across the Channel from England.

Brave men stormed ashore in landing craft that had to run the gauntlet of underwater obstacles and mines, and under enemy fire. On D-Day itself nearly 160,000 troops landed in Normandy, a figure that had swelled to 875,000 by the end of June. The supply operation was on a barely imaginable scale. Vehicles, guns, tanks and ammunition had to be transported in vast quantities, as did food and fuel.

Estimates put the Allied cost at 4,414 confirmed dead, nearly half of those at the heavily defended Omaha beach, but the Allies took all 5 beaches on the first day, and later linked them into a perimeter that eventually paved the way to the Allied victory on the Western front. With the Russians advancing from the East, it secured the liberation of Europe from the scourge of Nazism.

Had there been no Churchill, derided as “a criminal” by some on the Left today, there would have been no Britain still in the war to serve as a base for the build-up of men and materials, and D-Day could not have happened. There was no ambiguity about that war. The men who put their lives on the line that day were prepared to accept sacrifice, if necessary, to protect their countries and their peoples from a monstrous and evil tyranny. We owe our peace and freedom today to that readiness on their part, and on the 75th anniversary of their bravery, we salute them. They changed the world.