The joy of Paul Mason's economics

We've pointed to the glee with which we welcome Paul Mason's contributions to economic understanding before. Not, as you know, considering him as a guide to reality, but rather as if he were the poster child in one of those "before and after" ads. Mason's views forming the before picture, before any study of any real actual economics has taken place.

A glorious example is this piece of his. Where he's wondering whether the current events are a re-run of the 1930s. Well, where people use the bad policies of the 1930s, say Venezuela, then yes, perhaps it is. Where people use policies that worked from the 1930's then again, it's a replay, but not in a bad manner.

We are, for example, reminded by the consistent cries for more infrastructure spending of Hitler's reaction to the problems of the early 1930s. Which was to splash out on that infrastructure like the autobahns. Which most certainly boosted employment and so on, but it's also true that the Nazi state would have been bankrupt by 1941 (Goetz Aly's "Hitler's Beneficiarie" is very clear on this) and thus war and plunder as a solution.

But that is only an example of 30s policy, Mason mentions another one:

On the face of it, the similarities are real. Britain’s vote to leave the EU parallels its panicked decision to quit the gold standard in September 1931 – the first major country to quit the global economic system.

The joy there is that quitting the gold standard worked. Worked very well in fact. For it led to a 25% decline in the exchange rate, a very large stimulus to the domestic economy. This was combined with a cut in government spending - that is, with fiscal contraction. The combination of the two (the exchange rate stimulus being larger than the fiscal contraction for those keeping Keynesian score at home) was overall expansionary and Britain's Depression troubles were largely over in 18 months. To be followed by rather a boom as an unconstrained housing industry, untrammeled by limitations on planning permissions, went onto produce 300,000 houses a year in places that people actually wanted to live - and which they could also afford.

We're really not sure about everyone else but we think that's a pretty good outcome. Why, we might even recommend it today. The pounds was indeed allowed to crop by that 25%, we've had loose monetary policy and Osborne was promising fiscal austerity. That is, Britain's 1930s experience was that fiscally expansionary austerity was not only possible it actually worked. And if we blow up the Town and Country Planning Act 1947 and successors would work even better.

But that's rather more about out ideas than Mason's. The point we want to make about his ideas is that he seems unaware that the actions he is worrying about actually worked. And it would be useful if, as an economic prognosticator, one knew which ideas did actually work and which didn't. Expansionary fiscal austerity does, socialism does not perhaps? 

Matt Ridley is wrong: progress is all about predicting the future

I’m a huge fan of Matt Ridley’s work, but his most recent column on experts struck me as being a little off-base. 

You’re better off ignoring ‘expert’ predictions about the future, he says, pointing to so-called experts’ failed predictions about the FTSE dropping after the Brexit vote, and bad (sometimes terrible) forecasts by the Met Office.

In contrast, there are the plumbers, doctors and mechanics we rely on regularly:

There are no experts on the future. Explaining the present and the past requires expertise: ‘it’s your carburettor/prostate’. In forecasting the future, experts are generally no better than everybody else. They might be worse.

But a plumber or a doctor is an expert on the future. I don’t hire plumbers to tell me why I got a leak, I hire the ones who can correctly predict which pipe they need to replace to stop it from leaking in the future. 

Doctors who blamed miasma for plagues were explaining the present and past. The ones who figured out how to stop plagues in the future were the ones we actually needed. 

You can fit any number of theories on past experiences. The useful theory is the one that can predict new experiences.

Consider Feynman on the scientific method:

First we guess a new law. (“Don’t laugh, that’s really true!”) Then we compute the consequences of the guess to see what that guess would imply. Then we compare those results to nature, experiments or experience. If it disagrees with our experiments, it’s wrong. If it cannot predict what we observe, it’s false.

Without predictions, in other words, we’re not doing science at all. 

In Trial & Error, Madsen points out that theories that successfully predict events in this way cannot be said to be true, but they are useful. They allow us to shape the universe in a way that is more to our liking. 

Matt is a little unfair to the Met Office. It’s not confusing to say that weather forecasts are “based on probabilities”, nor is it untestable. If they predict an 80% chance of rain and four times out of five it rains, that looks like a useful method. If it only rains two times out of five, it looks like a useless method – one that is systematically wrong. 

If I say that you have a five-in-six chance of rolling between 1 and 5 on a single roll of a die, rolling a six does not make me a bad forecaster. The examples he gives of bad forecasts are a little like that. Overall, the Met Office does well at short-term forecasts. Our inability to rigorously test its climate models are cause to be sceptical about those models, as Rupert Darwall points out. They don’t mean we should throw our hands up and accept that all predictions, everywhere, are worthless.

Matt mentions the fascinating “superforecasters” project, made up of people who consistently beat the odds in predicting geopolitical events. They are more foxes than hedgehogs, willing to adapt their models to new information rather than sticking to the same one come what may. But their existence rather blows a hole in his basic claim, which is that complexity renders predictions useless. People seem to just need to change their methods.

Similarly, if consistently accurate predictions are impossible, then stock markets and bookies should be easy to consistently beat. Since it is actually very difficult to beat the market or the betting odds repeatedly, it seems as if these are quite good at predicting things.

And while it’s true that there’s an awful lot we can never know in economics, we can and do make accurate predictions about it quite a lot too. Impose a tax on something and with some exceptions you’ll usually get less of it. Put price floors on something and you’ll get too much of it; put price ceilings in and you’ll get too little. 

It’s impossible to make a policy argument without a prediction like this. If we didn’t have good, reliable predictions that communism ruins everything, the case against communism would be weaker. How could we possibly say that one policy or another is bad without implicitly predicting that, if implemented, it would be likely to go badly?

I think what Matt is really against is bad predictions based on false ideas. And there is no shortage of these, nor of experts willing to peddle them to an unsuspecting public. But they are often easy to spot precisely because their predictions are so bad. Put Seumas Milne in charge of the Treasury and I wager that I can make a good prediction about the state of the economy in a few years’ time.

Identifying these bad predictions and their advocates is what we should be doing, not denying that anyone can make predictions at all. That’s why we should ask people to write clearly, to be precise about their claims, and to admit it when they’re wrong. (They’ll definitely tell us when they’re right.)

I’m biased, of course. We at the ASI love to make predictions: we think the world is getting better, that technology is advancing (we even have a few ideas about how), and that making people freer makes their lives better. We’re just as frustrated as Matt is about phoney “experts” and their predictions. But without useful predictions, tested against reality, we wouldn’t have a leg to stand on.

How free trade helps the UK's poorest

Much has been made of a trend of low income voters, the so-called "left behind", turning their backs on free trade, and instead supporting anti-trade politicians like Trump and Le Pen. 

One solution, typically advocated by the left (but also by those with more centrist tendencies) is to simply redistribute some of the gains of trade to those who've lost out (i.e. workers in Port Talbot). But the problem is that the gains of trade already go to those least well-off. 

A paper in the most recent Quarterly Journal of Economics by Fajgelbaum and Khandelwal shows why. The least-well off typically spend a much greater share of their income in traded sectors than rich folk. Think cheaper imported food in ASDA and cheaper imported clothes in Primark. The rich on the other hand, will typically spend more on services that are much more difficult to trade internationally. 

So what is causing the backlash against free trade? Everyone's favourite textbook writer Greg Mankiw has a piece in the New York Times arguing that it's not economic self-interest but culture that's driving opposition to globalisation.

Referring to a study by Mansfield and Mutz, he writes:

For an economist, one natural hypothesis to entertain is that people’s attitudes toward globalization are based on their self-interest. That is because textbook economic theory says that openness to international trade increases a nation’s overall prosperity, but it also says that some people gain and others lose. Even if the gains exceed the losses over all, those who get the short end of the stick may still object.

Yet Mr. Mansfield and Ms. Mutz reject this theory of voter attitude. If people were just looking out for themselves, their view of globalization would be determined by the industry in which they worked. Those in industries with a high concentration of exports should be favorable to an open economy, while those in industries that have to compete with imports should be opposed. In actuality, however, people’s attitudes about free trade and offshore outsourcing are unrelated to the characteristics of the industry in which they are employed.

Mankiw lists three belief that Mansfield and Mutz suggest are more predictive of opposition to free trade; isolationism, nationalism and ethnocentrism. It's not increased redistribution, but addressing these cultural concerns that'll ultimately matter, if sense is to prevail on free trade.


The trouble with diversity

Some years back an American academic, Walter Benn Michaels, wrote a book called The TroubleWith Diversity. From the standard lefty campus viewpoint he pointed out the problem with the current fad for diversity. Sure, it's great, people from all different groups and backgrounds mixing together, we'll be better off for it. But that simple thought has morphed into the diversity industry we see today. And there's a problem with that:

Where's the diversity of thought?

We were rather taken with this argument and at least one of us said so at the time. We would also take it further. The original argument is that people of all genders, melanin contents, backgrounds,. have different life experiences and thus could well have a unique perspective to offer on the troubles and problems of life. We should thus at the very least listen to all these voices as we ponder how to navigate through those rapids and shoals.

But if all those voices have only one intellectual viewpoint, that of whatever the current fashion is, then both where is and what's the point of the diversity? It being diverse experience and thus views that we were applauding in the first place.

Which brings us to Saatchi and Saatchi:

The chairman of Saatchi and Saatchi has been put on immediate leave of absence after suggesting that the debate about gender bias in the advertising industry is “all over”.

Kevin Roberts, who is head coach at the advertising agency’s parent company Publicis Groupe, said he did not think the lack of women in leadership roles “is a problem”.

Whether he's right or wrong matters not a whit. He's in a competitive industry and as Gary Becker pointed out, getting it wrong on either taste discrimination or rational discrimination (and most especially, thinking you are doing the latter but really the former),  just leaves an opportunity for someone to outcompete you. Dinosaurs do die out....

However, we did laugh like a drain when we saw this, which seems to bear out Michael's point beautifully:

Publicis Groupe swiftly issued a statement saying that due to the “gravity of Mr Roberts’ comments he “has been asked to take leave of absence…effective immediately”.

The group said that its board would decide on his future at the company.  


Publicis chief executive Maurice Levy sent a memo to employees re-iterating that “diversity and inclusion are business imperatives on which Publicis Groupe will not negotiate”.

Except, apparently, diversity of views, but isn't that where we just came in, starting by insisting that diversity of views was what we were after?





Just how mindgarglingly stupid are these people?

There's plenty floated as political or economic policies which we disagree with. There's more put up for consideration which we think simply wrong or even counter-productive. But it does have to be said that there's not all that much which we actively consider to be mindgarglingly stupid. But take this from Owen Smith's platform to topple Jeremy Corbyn:

Increase spending on health and social care by at least 4% in real-terms in every year of the next parliament.
Commit to bringing NHS funding up to the European average within the first term of a Labour Government.

No, we don't think real term increases in such programs are needed but that's a matter of opinion and a vision of the good society. Ours is not one where ever more of the population is shackled to the State's teat.

But that second one falls off the edge we're afraid. for consider the argument that is used to defend the NHS. All that centralisation and planning is more efficient than the chaos and competition of markets. No, of course we don't believe that but the important point is that they do.

The NHS must be state run, only state run and state paid for because it is more efficient that way. That is the defence of it which is trotted out every time we suggest a bit more competition in it. 

Now note what they're saying. We must be spending the same as other European nations all of which use a less efficient method of running a health service.

Err, why? If we've got the more efficient system then we can get the same or more health care for less money. They're either that mindgarglingly stupid, don't believe their own propaganda about efficiency or are simply saying anything they can in the pursuit of votes.

Given that this is politics we think it likely that it's a combination of all three. But we're giving very serious consideration to the idea that they really are too stupid to have noted the contradiction in their separate statements.

Young Owen meets the democratic problem

All rather amusing from Owen Jones here. He notes that the Labour Party isn't in fact the working classes en masse it is in fact drippingly right on middle classes deciding what would be good for the hoi polloi. The membership among the AB classes is higher than their representation in the population - and lower among the working classes. Not that anyone who both reads The Guardian and has also talked to an actual working class person would be unaware of this difference.

More interestingly, he comes up against the basic problem of expressed and revealed preferences:

Why is this an obstacle to becoming a social movement? The idea of leftwing middle-class professionals descending en masse on working-class communities to campaign at election time is fraught with issues, mostly arising from contrasting experiences and different priorities and outlooks. But this is merely a hypothetical problem because it simply isn’t happening. Political rallies may brim with enthusiasm, as do many local party meetings when it comes to debates about the party leadership. But some constituency Labour parties have grown three-fold yet experienced little or no increase in door-knocking; some even report a decline. When it comes to campaigning, Labour has a very large paper membership. There is a clear danger of it being reduced to voting fodder and a source of funds.

If Labour is to have a future, that has to change. A mass membership offers immense potential that, as of yet, is untapped. Labour needs to adopt a strategy – led by trade unions – to recruit and give leadership positions to underrepresented working-class people, particularly in the north, whether they work in supermarkets or call centres. There needs to be a concerted effort by long-standing experienced members to get new members to knock on doors.

People will say they want all sorts of things. But when you ask them to actually do those things they become less keen. And thus a rather basic concept in economics - don't look at what people say, look at what they do. If people aren't prepared to spend a few evenings door knocking in pursuit of greater equality then they don't think that greater equality is very important. On the simple grounds that if working for greater equality is worth less than watching reruns of the Royle Family then greater equality is, when it comes down to it, less important to people than reruns of the Royle Family.

Oh well, shrug, that's just what people think important. And we are supposed to be running this whole show so as to maximise what people actually do think is important, not what the urban intelligentsia think they should find important. Something which is even true of a party that claims to represent the working classes.....whether it's dominated by that urban intelligentsia or not. 

What the Hell did anyone think was going to happen?

Something of a facepalm moment here:

When George Osborne announced the introduction of the national living wage, my colleagues and I, who clean the Merseyside offices of HM Revenue and Customs, were pleased. We’re not naive – we knew we wouldn’t be in line for huge pay rises. But we did think it meant the government was taking low pay a bit more seriously – and when you’re on as little money as we are, any increase is welcome. We definitely didn’t bank on the firm we work for cutting our hours to pay for it.

In one sense this is fair enough, we don't expect people cleaning offices to grasp the intricacies of the minimum wage. But we should ask those who advocate such to grasp them and quite clearly, given the furore around this, they don't. And that includes the last Chancellor who is apparently quite as gormless on this as those further to the left of him.

If you raise wages by legislative fiat then employers will purchase less of that now more expensive labour. Yes, even if it's the taxpayers coughing up for that labour - as innumerable home care contracts are finding out. There're no great profit margins here that can be raided.

There really are only two options. Either less labour is purchased or the labour that is purchased must do more:

This isn’t the first time ISS has cut our hours, or the number of staff. In one of the offices in Bootle there are 19 floors and there used to be two cleaners to each floor. Now there aren’t even enough cleaners to take a floor each. This is only going to get worse. We can’t work any harder than we already do, but that’s what is expected of us. When any of us is on holiday, the rest are now expected to cover their work for no extra money.

Both techniques appear to be being used. And do note that this insistence that labour must do more is the same as, definitionally the same as, that "raising productivity" which is said to be how adaptation will happen.

There simply is no surprise here. Grab a passing Martian with no knowledge of economics or humans, explain supply and demand to them, and they would be able to predict exactly this outcome.

Raise the price of something and people will either purchase less of it of sweat that thing harder.

Our only question left is why our own government (and, of course, the Opposition) appears to have less knowledge of labour economics than some random passing Martian?

Why conscription means higher taxes

Thanks in large part to the work of free market economists Milton Friedman and Alan Greenspan working for Richard Nixon, in 1973 the United States abolished the draft and switched to an all-volunteer army. The pro-draft Generals debating against Friedman argued that paying patriotic volunteers would be substantially more costly than conscription.

Friedman, of course was able to point out the gap in their logic.

The argument that a volunteer army would cost more simply involves a confusion of apparent with real cost. By this argument, the construction of the Great Pyramid with slave labor was a cheap project. The real cost of conscripting a soldier who would not voluntarily serve on present terms is not his pay and the cost of his keep: it is the amount for which he would be willing to serve. He is paying the difference. This is the extra cost to him and must be added to the cost borne by the rest of us.

Yet sadly many otherwise liberal nations (Norway, Denmark, Finland and Switzerland) remain unpersuaded and continue to compel young men to serve.

A new paper in the journal Public Choice might hopefully persuade them otherwise. It shows that even if you ignore Friedman's point about the cost to the draftee, compulsion is still the wasteful option. Authors Javier Birchenall and Thomas Koch find:

that voluntary enlistments leave more high-income earners in the civilian sector, leading to a larger tax base. When income taxes are set optimally, voluntary enlistments lead to less distortionary taxation than a draft. 

Even though you can pay conscripts substantially less than volunteers, conscription still means higher taxes. This is because voluntary armies tend not to draw in those who have high-paying productive work available. Under conscription, these people will no longer be in the civilian sector paying the taxes that fund the military. That means that shortfall will be made up with higher taxes across the board for civilians.

There's nothing quite as conservative as a Progressive Radical

A common observation of ours here is that there's really nothing quite as conservative as the British left. The more they proclaim themselves to be progressive, radical even, the more they retreat into the world of yesterday. Owen Smith is a case in point. Here the self-proclaimed radical gives us his vision of the Forward to the 1970s movement:

He will propose:

Reintroducing Wages Councils, abolished by former Conservative PM Margaret Thatcher, across different sectors of industry - to boost pay above the minimum wage in sectors such as retail and care
Minimum guaranteed working hours and the abolition of zero hours contracts
Scrapping trade union reforms that curb the ability of unions to call strikes
To establish a Ministry of Labour
Same rights for agency workers as full time workers
Workers to be placed on company remuneration committees
A ban on companies being allowed to recruit only foreign workers

Mr Smith is also expected to call for an end to private provision in the NHS, more spending on public services and higher taxes on the wealthy.

This is one of those Reverse Chesterton's Fence moments. The original is that one cannot decide to remove something until one works out why it was at first inserted. The reverse is that we cannot go about reinstating mythologies from the past until we work out why we abandoned them.

And the truth is that for the British economy the 1970s didn't really work. Which is why we undid many of these 1970s style policies.

But as we say, nothing quite as conservative as the British left these days. Maybe they hope to disprove Einstein by it all working out differently this time?

Why public health initiatives have nothing on Pokémon GO

Pokémon Go is getting people outside and exercising more effectively than any public health initiative in history.

The app has been downloaded 75 million times since it launched two weeks ago and public parks, previously full of wind swept quavers packets and urban tumbleweed, have been overrun by enthusiastic trainers trying to catch ‘em all.

Some number crunching on the Independent revealed the estimated weight loss for Pokémon players, with those catching in the area of 100 Pokémon/24 hours losing a pound every three to four days – the equivalent to five hours of jogging.

Reportedly Pokémon Go is even beneficial to our mental health, with many recounting how it has helped people with depression, anxiety and agoraphobia to venture outside for the first time.

But with all these great health benefits (bar the odd person wandering off a cliff) one point keeps getting repeated. As Larry O’Connor put it: “Pokémon GO got more American kids off the sofa in four days than Michelle Obama’s seven years of haranguing.” So why do million-pound public health initiatives fail to achieve in years what some imaginary animals can do in a week?

An article in The Libertarian Republic last week quoted Adam Smith to highlight how Pokémon GO is the perfect example of why and how the market is better in enacting social change than any government initiative:

“Pokémon Go is not going to solve childhood obesity. It might not even make a significant dent. But it does illustrate how the market is far superior in enacting social change than any government could be. The key is not that the game developer cares so much about the children’s well-being, but that it wants to provide a product for which there would be a demand.
“To quote from economist Adam Smith, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” Many do not understand that as society’s desires and values change (healthy living, environmentalism, etc.) the market must find solutions to meet the demand of those values.
“Pokémon Go is an interesting combination of satisfying a demand (that of a new video game), while providing a perceived social good of physical activity. I would bet a good deal of money that most children would take an afternoon outside with this game over Mrs. Obama’s program any day of the week.
“The market creates goods like this all the time, but people often fail to notice. Take for example the USB drive, or even more recently, cloud servers. Environmentalists and the EPA have been fighting for government protection of the planet for decades – and have made little difference. Yet, these free market innovations have done more for their “cause” than government ever has.”

The UK’s biggest public health initiative of recent times, Change4Life, may have beaten its modest launch targets but that translated as just 400,000 people signing up to the site in its debut year, with only 44,833 still engaging with it six months on. When an action is based on ‘ought to’ rather than ‘want to’ it’s never going to be as sustainable.

Pokémon GO has already released information about new upgrades, including Pokémon GO Pro, coming down the line to keep interest fresh. Big government (tax payer) funded campaigns just can’t move that quickly to keep peoples interest and maintain demand.

It’s also worth noting that these public health initiatives are pretty expensive in terms of return on investment. Although originally budgeted in for a whopping £75m over three years, the Change4Life campaign actually only racked up £11m or so a year due to government cuts. But that’s nearly £250 per user at the end of six months, an absurd figure.

If you were going to directly incentivise every overweight and obese adult in the UK (64% of us, scream!) at a rate of £250 then it would cost £10,400,000,000, rather more than the £4.2 billion that obesity is claimed to cost the NHS each year, although of course it doesn’t.

In contrast Pokémon GO makes $1.6 million a day from in app purchases. People are paying to have fun and getting fitter in the process, not paying to have a nurse give them a six-page leaflet on the bleeding obvious.

Of course interest in Pokémon GO will eventually drop off and the furore will die down, but people won’t stop playing mobile games that bring them outside. The technology to bring the virtual into the real world on your mobile is out there, and people will simply move on to newer, shiner and more engaging apps which meet demand.

So while the NHS can tell you to walk 10,000 steps a day, let’s leave it to the market to make you want to.