No, prefabs aren't the answer

Another attempt at a solution to Britain's housing crisis. One that once again manages to entirely miss the cause of the crisis. And as such one that won't solve it. This time around it's prefabs:

Britain is to get a new wave of prefabs as ministers plan to offer help to build 100,000 ready-made homes to try to solve the housing crisis, the Telegraph has learnt.

In a major strategy shift, the Government has decided to meet its ambitious housing targets by embracing the first new generation of pre-packed homes since the great reconstruction drive that followed the Second World War. 

Many of the modern prefabs, now known as “modular homes”, will be aimed at younger Britons to help them on to the housing ladder. 

There's absolutely nothing wrong with prefabs and why shouldn't we embrace modern housebuilding methods?

But this isn't the solution to the problem we face. British housing costs, as it has done for generations, around and about what it costs to build a house. Lowering that cost through more efficient housebuilding is to be welcomed, of course. But that's not the problem we face.

The problem we do face is that the cost of a piece of land, with the associated chitty to allow a house to be put on that land, is extortionate. And the reason for that is that we've an immensely restrictive planning system that horribly limits which piece of land you can put a house on.

Land itself is cheap, houses cost pretty much what houses always have done and the price of the chitty has gone through the roof (sorry). The solution is therefore to reduce the price of the permission by issuing more permissions.

Or, as we tend to say around here, the solution to the housing problem is to blow up the Town and Country Planning Act and successors.

Cheaper building costs through prefabs? Sure, why not? But how much are those 100,000 plots to put them on going to cost? And isn't that the actual problem we face anyway?

Yes, Mariana Mazzucato is still missing the point. Why do you ask?

Mariana Mazzucato is still making her pitch for government to gain more of the revenues from innovation. Not hugely and massively surprising of course, she was funded by the EU and developed the plan by which the EU is going to take a chunk of the revenue from the innovation they fund. But it's still true that she's missing the point.

Breakthrough technologies, such as the internet and biotech, did not emerge from governments worried about “commercialization”; they emerged from the spillovers of investments that were focused on long-run public missions. Missions of the past, such as getting a man to the moon, translated into multiple homework problems that needed different actors to work together in dynamic partnerships, spurring innovation. Today’s societal challenges, from aging to climate change, can provide a similar focus and animating force. They can stimulate innovation and give direction for new private investment and entrepreneurial activity as profit-making opportunities come into sight. Mission-oriented thinking could also be used to develop technology roadmaps for the 17 sustainable development goals.

We are talking there of public goods of course. The reason that the private sector doesn't do this basic work is because the results are non-excludable and non-rivalrous. Therefore it's almost impossible for a private actor to appropriate the revenues from the work done to offset the expenses. This is the entire argument for there being any form of public expenditure in this area.

Tax payers should cough up because otherwise these things won't get done. Yes, sure, we are a little wary of stating that this argument is true but let us just, arguendo, assume that it is.

The solution therefore is as follows, according to Mazzucato:

Fourth, risks and rewards. The wrong narrative about who the risk takers are has led to a distribution of rewards that does not reflect the true distribution of risk. If taxpayers are taking the biggest risks during the uncertain early stages of the innovation process, they should share in the rewards. The question is how best to do this. There are many options, including agreements on the reinvestment of profits (exactly the kind of deal that led to the creation of Bell Labs); capping prices of publicly funded products (e.g., drugs); retaining a golden share of the intellectual property rights; retention of equity or royalties when feasible; and income-contingent loans. There is no one solution, but consideration of different ways through which rewards from innovation can be better shared is central to a strategy that targets not only smart growth but also inclusive growth.

But we've just said that the reason for public sector involvement is because we cannot appropriate the rewards. Thus stating that the public sector should appropriate some share of the rewards that cannot be appropriated isn't going to work, is it? 

Mazzucato's argument doesn't even work on its own terms, let alone any other.


It turns out that it's not ice cream and burgers making us all fat

We have the public health crowd telling us all that it's "bad" food which is making us all obese lardbuckets. This is, of course, when they're not telling us that it's sugary drinks that are. As we've pointed out a number of times there is a problem with this. We're not eating more than our forefathers did, quite the contrary. So it cannot be the calories in which are causing the problem.

But, perhaps, there's a little sneak room for the argument that it's the types of calorie in which are causing the problem, not the volume? It would appear not:

Methods: Using 2007–2008 Centers for Disease Control's National Health and Nutrition Examination Survey, the consumption incidence of targeted foods on two non-continuous days was examined across discrete ranges of BMI. Data were analysed in 2011. Results: After excluding the clinically underweight and morbidly obese, consumption incidence of fast food, soft drinks or candy was not positively correlated with measures of BMI. This was true for sweet snacks (r = 0.005, p  l.t.e. 0.001) and salty snacks (r = 0.001, p = 0.040). No significant variation was found between BMI subcategories in weekly consumption frequency of fast food meals.

Conclusions: For 95% of this study's sample, the association between the intake frequency of fast food, soft drinks and candy and BMI was negative. This result suggests that a strategy that focuses solely on these problem foods may be ineffective in reducing weight. Reducing the total calories of food eaten at home and the frequency of snacking may be more successful dieting advice for the majority of individuals.  

The full paper is here.

We would rather disagree with that last line though. If we're ingesting fewer calories, and it's also not the type of calories we're ingesting which is the problem, then the problem is not in our ingestion of calories. It's in our expenditure of calories.

Which brings us back to our long running default position here. We're mammals, the major calorie expenditure for mammals is in the regulation of body temperature. The obesity explosion closely tracks the introduction of affordable and reliable central heating across societies. At least until someone manages to disprove that thesis that will remain our explanation of what's been happening.

That JCB laddie might have something here

Anyone who has the wit to create a dance troupe of JCBs has something going for them, an inquisitive mind at least. So it is with Lord Bamford's views on Brexit.

Here at the ASI of course we contain multitudes so views on Brexit itself differ. Our ultimate aim is always the same, an increase in liberty and freedom, but whether clean, hard, soft or no-Brexit leads us to that nirvana is something to discuss. However, it is at least possible that this is true:

The cost of European Union regulations for companies means that Britain is better off leaving the single market, one of the country’s most senior business leaders has said.

Lord Bamford, the chairman of JCB and a Conservative peer, said that trade tariffs imposed after Brexit would be a “price worth paying” and that UK businesses will take it “in their stride”.

Whether it becomes true is dependent upon what we actually do post that Brexit which has already been decided upon.

By analogy we could look at the Nordic economies. They are famously high tax and high redistribution. A lesser known fact is that they are rather more red in capitalist tooth and claw, free market zealotry, than either the US or UK. The usual lists of economic freedom have them at the top and Scott Sumner has persuasively argued that if look past the tax rates then Denmark is the freest economy on the planet.

One way to explain this is that if you are going to have that topweight of heavy redistribution then you need to have the vibrantly free economy underneath in order to be able to afford it and also have any hope of economic growth.

Back to Brexit - yes, EU membership gives us Single Market access and membership. It also gives us  a heavy ballast of regulation. If we're outside the market, facing tariff barriers, then we need to ditch that weight of regulation to compensate. Whether we do or not is up to us of course. But it is at least possible that Bamford is correct here. 

We might even find, and certainly some of us here insist we will, that the regulation has always cost us more than the market access gains us so we will be better off out.

Oh dear, John Sauven doesn't understand how a carbon tax works

John Sauven is the Director of Greenpeace. As such we would rather hope that he understands how a carbon tax works. For, you know, his organisation is rather vocal on the idea that we need to do something about climate change and the carbon tax is the thing that all the economists say we should be doing. It would behove such a campaigner to understand the subject, no? 

But here he is:

Davies’ “solution” exists as fragments scattered through his 600-page multi-volume report in an as obscure and obfuscatory manner as he could manage. It’s designed, very effectively, not to be understood. It consists primarily of demand-control measures, primarily carbon taxes. Davies is saying (or rather whispering in pig Latin with a paper bag on his head) that we can build a new runway that has the specific purpose of increasing flights so long as we increase the price of those flights so much that demand drops to a level that reduces the number of flights overall. There are two ways to interpret this “solution”.

No, the purpose of a carbon tax is not to get emissions down to any particular nominal level. Not at all.

At the Stern Review exhaustively pointed out we have a problem here with externalities. And our aim is to maximise human utility over time. We thus wish to add those externalities into the price system for this is the manner by which the costs of emissions are compared to the benefits from having made those emissions.

The utility maximisation means that we want (yes, really, want and desire) those emissions which increase utility more than their costs to continue. And that those where the costs in the future are greater than the benefits now do not. That's the whole point of intervening in the price system. The carbon tax should thus be at the future cost of those emissions to incorporate the damage into the price system.

The net result of this is, as Lord Stern showed, that if we value the holiday creating half a tonne of CO2 more than the $30 of damages that will produce in the future then we *should* take that holiday by this metric.

The carbon tax is not a method of getting to any particular nominal level of emissions. It's a method of getting to a real value level of emissions. Where emissions that add value to human existence, on net, take place and where emissions that do not do not.

This is all entirely explained in the literature, yea even in that near biblical report of Sir Nicholas. Thus all in the debate should grasp the point - but it appears that John Sauven does not. Which doesn't say much about the quality of either his research nor the general level of debate on the subject, does it? 

A market solution to the third runway

You have to have some sympathy for Zac Goldsmith, whatever you think of his politics. He clearly has principles and grit. Resigning over the Government’s plans for a third runway at Heathrow was his promise. Now he has delivered. Other politicians have a lot to learn.

Expanding airport capacity is long overdue. London is a growing and global city. As Sam argued yesterday, the government might also want to approve a new runway at Gatwick. Why not the Boris island too?

I have spent most of my life in Richmond, so I am also very sympathetic for residents. This is where Sam and I disagree. But, I think there is a simple solution. Markets.

Welfare economics 101 tells us that many activities have externalities. Costs that affect a party who did not choose to incur them. This means the air travel market does not reflect its full social costs. For example, Pearce & Pearce estimated that noise nuisance at Heathrow results in £37-66 million p.a. in uncompensated losses.

Governments often respond to these challenges by trying to ‘internalise’ the externality. Pigou’s solution is most common - applying a tax that is 'equal' to the cost of the externality.  (Yes - there are many flaws to this approach, covered well elsewhere!).  

Flights in the UK are taxed already. These include air passenger duty, passenger service charges, and sometimes value added taxes. The air passenger duty is supposedly intended to offset environmental costs. The airlines, airports and their employees also face a range of taxes. Perhaps more taxes isn’t the best answer.

A simple solution would be take a cut of the revenues raised by air passenger duty and give it directly to those affected as compensation. An independent not-for-profit institution could make yearly evaluations of the harm caused.

The more sophisticated solution would be to create an actual market. Residents would be granted a right to silence, and a share of tradeable noise permits. The marketplace would be neutral and managed automatically by software.

This solution does not require regular evaluations. It is not expensive to manage. It isn't biased towards businesses nor does it give them too much power. It avoids drawn out legal disputes. It could even be set up without political direction.

A tradeable pollution market moves the real world much closer to the Coase theorem. With clear property rights (for air corridor residents), and low transaction costs (with a simple trading platform), both sides can bargain to a balanced outcome.

This market would allow the third runway to proceed, with extra flights, and provide compensation to those harmed. All without too much hassle for May’s government and further delays for travellers.

Why we're against gender parity

The World Economic Forum tells us that true gender parity is going to be some century and a half away. Something we think we're rather grateful for to be honest. For we strongly disagree with the definitions of parity being used here. The WEF is using definitions which depend upon equality of outcome - and we insist that it is equality of opportunity that matters.

No, this is not just some trivial or even philosophic difference, it goes right to the heart of what we want our socio-economic system to offer.  We can have parity of the WEF's type if everyone wears boiler suits, that anyone may or may not, can or cannot according to their desires, wear a boiler suit is the equality we desire.  

Take their set of comparators for economic participation:

Economic Participation and Opportunity Ratio:

Female labour force participation over male value

Wage equality between women and men for similar work

 Ratio: female estimated earned income over male value

 Ratio: female legislators, senior officials and managers over male value

 Ratio: female professional and technical workers over male value 

We don't support any of those. No, not even equal wages for similar work - equal wages for the same work we insist upon, just as the law does now, but not for similar because similarity is always in the eye of the beholder, isn't it? 

All of the rest of them are insisting that male and female outcomes must be the same. That there must be the same number of male coders as female ("technical workers"). That as many women work in the market economy as men.

We are adamant that women and men should have exactly the same opportunities to deploy their skills and desires as they wish. That's what freedom and liberty mean. But we're well aware that there seems to be, when looking at the world around us, there's something of a difference in who wants to do what. No, not at that individual level, where the freedom must apply, but at the average or societal level there's most certainly a difference in numbers who wish to be primary child carer for example. 

House husbands exist and are becoming more common. That's fabulous, an expansion of those individual freedoms - we ourselves were behind that expansion of paternity leave for example. But the WEF assumption is that parity is only achieved in labour force participation when equal numbers of men and women are primary child carers.

That does rather seem to run against what we know in general about mammalian and thus viviparous species. 

The desirable world is one in which we all get to live our lives as we wish. This does not mean equality of outcome simply because we all have different desires. That the individual man or woman should and must have the same opportunities does not mean that the entire population of either - nor of any other grouping we might like to consider - will choose the same mixture from life's rich list and thus the population outcome isn't going to be the same. 


One of the reasons we shouldn't have a planned economy is

That perhaps the planners don't know what they're talking about. We spied this little piece in the Times:

Australia’s richest woman has backed the £3 billion plan to build Europe’s biggest potash mine beneath the North York Moors.

Hancock Prospecting, controlled by Gina Rinehart, the iron ore magnate, is paying $300 million towards constructing Sirius Mienrals’ mine on the national park in return for a share of the revenue and, eventually, a stake in the company.

The deal is the first chunk of financing secured for construction of the $3.6 billion (£2.9 billion) mine which was approved by planners last year. The mine will initially produce 10 million tonnes of polyhalite, a fertiliser, every year.

That Hancock family fortune hasn't been built by just stumbling over some deposit that could be made into a mine. It's been done by very clever work over the decades concerning what is financed and with whom.

This company's addition to this project is a very big feather in the cap of said project. To change industry sector it's a little like inventing some tech good enough that Apple wants to buy into it.

Polyhalide is a bit of an oddity. It's slightly different than the more normal run of the mill raw materials for fertilisers but adaptations can be made without too much difficulty.

Which is where the planners come in. As we can see one of the top end mining companies likes this project enough to plonk down $300 million for a bit of it. The planners, at one point, refused the development licence on the grounds that no one would buy the production from the mine if it were built.

We tend to think that decisions made by those who know what they are doing are preferable to decisions made by those who do not. Of course, this project is not a slam dunk success quite yet but we do know which way we lean on who is right here.

And it ain't the planners. Thus we find our prejudices reinforced - why would we let economic decisions be made by those with no skin in the game and possibly even less knowledge than that?

The ASI and Brexit

The Adam Smith Institute has no official line on Brexit. Its staff have different opinions on the issue, just like those in other policy bodies. The ASI’s Executive Director, Sam Bowman, favoured Remain in the referendum, and now advocates an EEA-style solution. Its President, Dr Madsen Pirie and its Director, Dr Eamonn Butler, voted to leave the EU and now believe that a clean (and quick) Brexit is desirable.  

Both founding directors take the view that the referendum result must mean that UK laws are in future made in the UK, that the European Court of Justice has no further jurisdiction in the UK, that the UK no longer contributes to the EU budget, and that the UK has control of its borders.  All these were crucial elements in the Leave vote.

We both take the view that the UK now has the chance to trade freely with the rest of the world, since it will no longer be locked inside a protectionist bloc of diminishing economic and political significance. We think our economy will grow faster than those of our EU neighbours now that the UK – always an advocate of liberal commerce and free trade – can negotiate with its own interests at heart, instead of having them swallowed up in the interests of 27 other EU members.

We expect to enjoy very good relations with our former fellow members.  We do not expect the agreement we reach with them to be like any they have with other non-members.  Ours will be different because we have been members and have worked with them.  We do not come to them as mere outsiders who have to start from scratch; the saga of the proposed EU trade deal with Canada shows how difficult that can be.  For us it will be a case of modifying previous ways of working together to take account of the new relationship. 

Like most economists and everyone at ASI, we hope that protectionism will not prevail, and that free trade with those beyond our borders will be the norm. We hope, too, that once in control of our borders, we can be relaxed about immigration, choosing whom we wish to take into our economy, our culture and our society, and taking significant numbers of those who can contribute positively to all of those.

We therefore look to the future with optimism that, outside of the EU, the UK can move forward to a bright future that will enrich the lives of its citizens and provide a positive example to the world. And the quicker we embark on that future, the better for everyone.

Book review - Adam Smith by Jonathan Conlin (Reaktion Books, 2016)

One of the unintended consequences of the 2008 financial crisis has been to bring what until then had been a backwater of academic research, financial history, into a mainstream topic of the reading public. So it will pique readers’ interest that Jonathan Conlin in Adam Smith (Reaktion Books, 2016, £11.99) covers an intriguing episode from the life of the great economist when he was working on The Wealth of Nations. In 1772, Smith witnessed the collapse of a major Scottish financial institution, Ayr Bank, and since one of the bank’s principal shareholders was Smith’s principal patron, the Duke of Buccleuch, its demise affected him in more ways than one.

In 1769, when Ayr Bank opened doors, Scotland was booming. Investing in Edinburgh’s New Town seemed a one-way bet and substantial sums were raised for property there and for infrastructure in the region. When the managers Ayr Bank came to grief they did much as have bankers before and since, namely by kidding themselves that loans could not sour and even if they did, savers were unlikely to care enough to pull their deposits., David Hume wrote to his economist friend after Ayr Bank collapsed, “we are here in a very melancholy situation … Do these Events any-wise affect your Theory?”

Smith in Wealth of Nations had two points to make.

The first was banks ought to lend to create real value in an economy and help build highways rather than highways through the air.  Such common sense advice was in keeping with conventional thinking. But there was another comment Smith offered, regarding the imprudence of depositors, that evinces Smith had an intuitive understanding of the psychology of risk where he was well ahead of his time.

This is what Adam Smith had to say about depositors whose mind-set conduced to financial crashes:  “The house is crazy, says a weary traveller to himself, and will not stand very long; but it is a chance if it falls to-night, and I will venture, therefore, to sleep in it to-night.” Depositors, in other words, share some of the blame for a collapse in market confidence because they are not as vigilant as they ought to be.

Just how perspicuous is this insight we can see from debates over the benefits of deposit insurance, today unquestioned as an indispensable prop of financial market stability. But less thought is given that once monitoring bank solvency becomes a regulator’s job, this not only adds to cost of regulation but also tempts reckless depositors to act as free-riders to the system.  

In Jonathan Conlin’s biography, Smith’s reaction to Ayr Bank’s default is only one of many incidents in the life of Adam Smith that are sets against his works. As Conlin shows, it is often Smith’s asides and throwaway observations with which his Theory of Moral Sentiments and Wealth of Nations abound that illustrate his almost limitless capacity to prod readers into looking at things from an unexpected angle; for more of this see my full review of Adam Smith.