The museum to markets – The Museum of Failures

As regular readers will note around here we tend to like markets. On the grounds that they generally - except where they don't - work. But it's important to understand what it is that markets generally work at and that's not success, not at all. Markets work well because they work well at failure.

Which is why we're rather tickled by this new Museum of Failure.


That's their tagline and we'd quibble a bit with it even though we agree with the general idea. Rather, as we'd put it, you can only succeed if you work out what's failing. Some of the ideas, like that Coke Blak, could have, might have, succeeded. They didn't. Others it's a bit more mysterious why they didn't succeed:

Bic For Her pens are also on display. The supposedly female-friendly pink and purple pens launched to widespread derision and mockery in 2012. "I mean, you know that women can't use regular pens. You need special pens for their delicate hands," West said. "And they're double the price of regular pens because they're specially for women." 

Quite why that didn't work is unknown, pink razors do cost more than blue as we're so often told they do. The important part of it though is this:

West told The Local.: 'You can fail at any point during the process. It's better to have a lot of cheap mistakes early in the process, than to do so on a large scale. Then it costs billions.'

That's why market systems work better than planned ones. What it is possible to do, what people want to have done, is an ever moving feast. The technology with which we can do things is always changing and so are personal tastes. We want thus some method of sorting through what can be done and what people want to have done. And the finest way yet discovered of doing this is for every lunatic to try. We, the rest of us, will then sort through what is available and decide upon which of these possible things that can be done add utility to our lives.

Imagine wandering into GOSPLAN one day to explain that we need an overlay to the telecoms network so that people can swap cat pictures with each other. Mr. Zuckerberg would have been laughed out of the room and yet 2 billion people later that experiment he cooked up in a dorm room seems to add utility to some number of lives.

And thus the glory of that Museum of Failure, it's a museum to why markets work. Precisely and exactly because so many innovations get absolutely nowhere - that's how we find out which ones we want.

Haven't these people ever heard of the price system?

Well, yes, they have, but they've not absorbed the point of it:

Big-name stores including Selfridges and Harrods are being lined up to sell the range in the UK, but WWF wants to make this a global project. It is determined to prove to the fashion industry that it is possible to design and produce clothes with zero impact on the environment.

“It’s hugely challenging,” says Alfredo Orobio, founder of the online community AwaytoMars that is working with WWF. “Everything from the buttons, zippers, labels, tags and packaging to the fabric and production process itself – all of it has to be sustainable.”

Ah, yes, sustainable. Let's use fewer resources so that we walk more lightly upon this Earth. 

Sure, why not? That's just another name for economic efficiency after all. If we use fewer resources to make one thing then we've resources left over to make another one. Or one of something different. Sure we want to be sparing in our use of resources.

We've even a method to work this out in a market economy. A higher production price will mean that we're calling on more resources to make whatever it is, a lower one fewer.

We do of course think this is amusing about fashion. Clothing is a little different, yes, because why not wear the same clothes for decades? Possibly even wash them occasionally. But the entire point of fashion is that it is a signalling exercise, that one is hip, with it and moving with the seasons and styles. Making something which is fashionable and also lasts for decades seems to us to be violating the basic social purpose of fashion itself.

But the real problem is here:

One of the key barriers to consumer take-up is that the expense involved in turning every part of the life cycle of a garment green means the cost of sustainable clothing is out of the reach of most. Current prices at AwayToMars, for example, range from £50 for a T-shirt to £390 for a wool jacket. Cridland’s signature 30-year jacket costs £190 while a T-shirt is £35.

They're missing that lesson of the price system, aren't they? If it is vastly more expensive to do this in a "sustainable" manner then by definition they must be calling upon more resources to make these "sustainable" clothes. 

As anyone who has ever met any of us knows we're not really up with this fashion thing anyway but we do wonder about the idea of using more resources in order to claim to be using fewer.

Riddle us this if you would, riddle us this

Rather like those rains on the plains in Spain, the floods in Australia have led to certain crops being destroyed. Thus there will be a little gap in the variety of diet there for a time. At which point serious thinkers turn their minds to what might be done to lessen this problem at times or points in the future. All well and good but what worries us is how anyone can then make the following two insistences:

Key features of a resilient food system are likely to include:

geographic diversity in production, which spreads the risk of crop damage from extreme weather events across a number of different production areas;

more local food production, to reduce transportation and storage costs and avoid over-reliance on particular regions;


How can we both concentrate food production right by where we are ourselves and also insist upon supply from widely dispersed geographic areas? That second we do agree is the crux of the matter. If, say, the world contains 50 (just an invented number) weather zones, we get 1/50th of our food from each one, then extreme weather in any one zone can only threaten 1/50th of our food supply. That's great.

But that's also entirely inconsistent that we should be growing more of our food within walking distance of wherever our boots happen to be.

And no, it's no good saying eat local except when the crops fail at which point we'll buy in. If we're not regularly buying in then that production system further away won't have the capacity, will it? That security of the system depends upon us sending some of our local food off to them, they sending some of their local grown to us, all the time.

This burble was the product of no less than four academics. At which point we've got to wonder what's happening in academia. The answer being akin to religion. Everyone knows that local food production is a good idea. Therefore, even when the very point being made is that reliance upon it is a bad idea the incantation still has to be made. It's akin to the medieval philosopher proving with unadorned logic that God does not exist and ending with an All Praise the Lord comment. Local food must be good so even though we've just proven that reliance upon local food kills when the floods come we must still praise local food.

Jon Platt should sue the state for kidnapping

The Daily Mail’s campaign to ‘end rip-off holiday charges’ is another example of the lunacy you get into when you allow government to do things that it has no business doing. 

The fuss stems from the Supreme Court’s finding against a parent, Jon Platt, who took his daughter on a family holiday to Disney World during term time. The Platt family argued that holiday packages became unaffordably expensive to them during school holiday periods. The state argued that removing a child during term time damaged their education, and that the law required children to be in school. The Supreme Court, which rules on points of law, agreed and found against Mr Platt.

School leaders hailed this as a victory, arguing that 20,000 parents do much the same each year, which is disrupting children’s education.

The point remains, however, that holidays taken in the Easter, Christmas and Summer breaks are very much more expensive than those taken in term time. And of course, transport links and tourist centres are much more crowded at these times. The populist Daily Mail criticises this as ‘ripping off’ parents who (now) have no choice about when to take their children on holiday, and are calling for stern regulations on ‘exploitation’ by travel agencies.

They can’t really believe this nonsense, though, can they? Holiday are much more expensive during school breaks because the demand then is much higher. As Adam Smith pointed out as long ago as 1776 (and he wasn’t the first). By now it should be, well, kind of obvious.

Interestingly, private schools help their parents get round the problem by having different holiday periods—typically starting a week before the state schools. So all those rich parents that Labour Leader Jeremy Corbyn wants to slap a 20% tax on can jet off to the Canaries a little cheaper than the rest of us. So what is it about the state system?

Ah, that’s just it. The words ‘state system’ speak silent volumes. State systems are notoriously uniform (which is why the nation’s school holidays all start and finish within days of each other). And they are notoriously run in the interests of the producers rather than their customers (which is why those education leaders are so delighted that parents have now been put in their place).

Educators in a wholly private school system would be taking parents’ wishes into consideration, rather than taking parents to court. Exactly how is a matter for the market rather than me. They might stagger their holidays at different times, or arrange for catch-up teaching for children who’ve been off for a week or two, or provide videos or an app to allow children (and parents) to keep up with what they’re missing, or any of 101 other methods. But then in a wholly private system, the way schools teach would probably have been revolutionised anyway. (Today’s private schools just have to be a bit better than the state’s. Faced with real competition, they’d have to be a lot better.)

So there you have it. The Establishment feeds the very populism that it decries. Populists want the state to intervene in the holiday market because parents are forced by law to commit their children to penal servitude in monolithic school system dictated by the opinions of ‘experts’, not the needs of customers.

If I were Jon Platt (assuming he has any money left after going through the other state monopoly that is the legal system), frankly I’d now be suing the government for kidnapping. It’s time to set our children, and their parents, free.

The curse of the cross subsidy

John Cochrane's wrote an interesting piece on what he calls "the second original sin of healthcare regulation" (the first being the tax deductibility of employer provided group insurance of course). His post describes what's fundamentally broken about the US healthcare system, but his observation applies to far more than just healthcare.

Our political system is allergic to the word "tax." Instead of straightforwardly raising taxes in a non-distortionary way (a VAT, say), and providing charity care or subsidies -- on budget, please, where we can see it -- our political system prefers to fund things by forcing cross subsidies.

Medicare and medicaid don't pay what the service costs, because we don't want to admit just how expensive that service is. So, large hospitals make up the difference by overcharging you and me instead. The poster child (though not really a cost driver) is emergency room care. The government passed a law saying hospitals must provide emergency room care for free. But money does not grow on trees, so again you and me (via private insurance) must get overcharged to cross-subsidize. The ACA tried to force young healthy wealthy (not getting subsidies) to vastly overpay for insurance, to cross subsidize the poorer and sicker.

Cochrane argues that this is much more harmful than simply raising the money through taxes and doling it out through the state.

Low prices, efficiency, and innovation in the provision of services like health care come centrally from competition, and especially disruptive competition.  With no competition -- especially no entry by new doctors, hospitals, clinics, insurance companies -- costs spiral up. As  costs spiral up, the cost of the charity care spirals up. As that spirals up, the size of the cross-subsidies spirals up. As that spirals up, the need to restrict competition spirals up.

In a sensible world, government assistance lives beside a free market, where innovation and price discovery happen. That keeps the cost of government assistance somewhat in check. But when we choose assistance by cross-subsidy, then kill off competition and force us all in the regulated system, that check disappears.

The UK obviously doesn't have this problem with healthcare, but the problem of cross-subsidy still creeps up in a number of markets. 

"Affordable Housing" mandates are a classic example. In the absence of real planning reform there'll be a shortage of housing within the price range of ordinary Britons. Policymakers looking for a second best solution have a choice. Either leave the market alone and offer cash subsidies to those who struggle to afford a home, or require house builders to not only build what the market is demanding, but also to sell a percentage of the houses they build at "affordable" (below market value) rates. The latter option is clearly sub-optimal, it's essentially a specific tax on new construction and makes construction much riskier for developers raising barriers to entry. Affordable housing requirements are meant to make housing more affordable but by penalising new development they make the shortage worse for all.

Another example is the energy market. Prof. Stephen Littlechild (who served as a top energy regulator in the 80s) has set out in great detail how over the past 10 years Ofgem undermined competition in the energy market. Energy companies used to offer low prices online and in competitors' areas to encourage consumers to switch supplier. Ofgem decided that firms should instead offer the same price to everyone. The price sensitive consumers who frequently switch were to subsidise the lazier consumers. But just like in the case of healthcare, the results were much worse than simply taxing one group and giving it to another. Not only did prices rise for price sensitive consumers, but prices didn't fall for the rest. The number of people switching suppliers fell and the market became much less competitive. 

Rather than a lesson being learned, this was followed by calls for even greater cross-subsidisation. The consumer affairs magazine Which? then called for energy companies to provide a simple, uniform price. That would have required massive geographic cross-subsidisation but thankfully Ofgem rejected the proposal. The coast isn't clear however with Theresa May seriously considering capping the difference between the 'cheapest and 'most expensive' tariff.

Taxes do affect behaviour and discourage productive activities, but the solution isn't to cook the books and shift taxes off the balance sheet. Doing so only makes things worse. It distorts prices and damages competition. Worse of all, it leads to even deeper calls for regulation when the existing rules fail to deliver. Subsidies are bad, but cross-subsidies are worse.

Adam Smith Songs!

 By the end of 2017, my band will release an album inspired entirely by the works of Adam Smith. Spanning eight songs and covering both Theory of Moral Sentiments and The Wealth of Nations, the album will highlight the beautiful prose and infinite wisdom found in Smith’s writing.

The eight songs are not meant to be a comprehensive summary of Smith’s two books, but rather a mosaic of Smith’s wisdom. I see them as eight of the most illustrative concepts he uses to explain human nature and political economy.

The inspiration came about when I attended a gathering of singer-songwriters in New York. As an economics graduate student, I stood out amongst the crowd that otherwise featured people doing creative work as their day jobs. I was in an Adam Smith reading group at the time, loving his writing style and description of the world around him, and realized there was a niche to be filled by writing music based on the works of the classical economist.

Early on in the process of writing the songs, I came to see how biographical and relatable the themes were. Within Smith’s concept of the Impartial Spectator, we can all relate to the desire to “not only be loved, but to be lovely.” Smith describes a poor man’s son yearning for the luxury and ease of having riches, only to regret his efforts on his death bed: Every one of us has at one time or another overestimated what accomplishments and riches will do for our happiness.

Overall, I hope the album will inspire people to learn more about Smith and his rich, nuanced, and wise view of human nature and economics. Too often, he is depicted as an extreme free-marketeer that sees human beings as being governed purely by a cold self-interest. This caricature overlooks his significant descriptions of market failures and the central role of sympathy in his view of human nature, among other things. If “Hamilton” could inspire everyday people to learn more about a centuries-old American thinker, so can these eight songs.

Our first single featured here is called “Silent Revolution,” inspired by Book 3, chapters 2-4 of Wealth of Nations. Smith describes how the introduction of commerce, through no intention or foresight of any parties involved, allowed for the gradual liberation of the masses away from feudalism. Interdependence replaced dependence, prosperity ensued, and power became more decentralized.

You can listen to the song here.


Nicky Morgan in Brexit fake news shocker

We are warned these days that we must be most careful about fake news. Indeed, that we must vigilantly fight back against the purveyors of it. What is meant is that anyone who states that Donald Trump might have a point must be mercilessly mocked and banished from public life, but the actual effect of taking the injunction seriously is that we will all end up exposing the usual political falsehoods.

Yea, even from former Cabinet Ministers. Such as this from Nicky Morgan:

Its consequences would be very dangerous: this would be an extremely perilous economic path. Leaving the EU with no deal means Britain would default to World Trade Organisation rules with our biggest trading partner. The resulting tariffs on imports and exports would raise prices for British consumers buying imported goods,

The problem with this is that reversion to WTO rules doesn't mean that Britain must impose import tariffs. That's fake news. If Ms Morgan knows that it is untrue then she's being economical with the actualite. If she doesn't know then she's remarkably ill informed on the subject she wishes to pontificate about.

This isn't unusual, Nick Clegg has been wandering around spreading the same fake news.

WTO terms means that there is a maximum tariff schedule that other people can charge against our exports. There's also a maximum that we're allowed to impose upon imports into the UK. But it is a maximum. We are entirely at liberty to impose any rate we like below those various maximums as long as the same product from different sources is equally treated. That includes imposing rates of 0%.

We did in fact go and check this at the source, the WTO itself in Geneva. We can move, as Patrick Minford has been saying we should, to unilateral free trade under WTO rules. There is absolutely no insistence whatsoever that we should or must impost import tariffs.

To claim that Britain must impose import tariffs is incorrect, it is not true, it is fake news. Yea even though we're told we must by an ex-Cabinet Minister who should know better.

A little offer to Ms. Morgan. If she'd care to tell us whether she's being economical or merely ill informed we will publish the answer she gives us.

Somewhere, Edmund Burke is doing the Happy Dance

As a conservative sorta guy Edmund Burke wouldn't really be in tune with today's millennial snowflakes. Yet there are things they're doing which he would thoroughly approve of:

Millennials have nevertheless dealt with the breakdown in the social safety net through community support, connectivity and responsibility. We’ve used social media to create a new kind of economy, one where decisions and directions have the potential to be mitigated, controlled and owned by those formerly most vulnerable. In an era of welfare cutbacks, young people have responded by crowdfunding the needs of their peers.

Burke, of course, thinking that that war against the collapse of society best being fought by the little platoons:

This form of selfless community organisation flies in the face of what older generations would have us believe about selfish, lazy millennials, but nobody should be surprised – a recent YouGov study in Australia showed that respondents under 30 were those most supportive of socialism and wealth redistribution over capitalism in comparison to other ages. It many ways, we see social capital as more of a viable resource than money.

That the young and untried like ideas that don't work in greater numbers than those tempered by experience is not a great surprise. But none of us oldsters are against social capital, nor against the rallying around. As with Burke, it's who does that rallying and under what level of compulsion.

The best level being those very little platoons in action here, just people getting on with it themselves, under no compulsion at all other than that they wish to do this.

But when I had the misfortune of having three cameras break on me consecutively, as a freelance photojournalist, I was thrown into panic. My livelihood was directly compromised by a series of unlucky mishaps. It was hard to pretend that I wasn’t on the verge of a breakdown as I catastrophised about what I would have to do in order to get back on my feet.

After a day of appeals on Twitter, I earned a few hundred dollars to buy a new camera; the donations were all from young people who had experienced similar things, or from people who liked or supported my work.

We might or might not have chipped in ourselves. But that the problem was solved without the compulsion of state socialism shows that it's not in fact needed to solve such problems, does it not? That, perhaps, art can be done without taxation and arts grants? 

Burke did say that left to themselves, allowed the room to do so, that people on their own will solve many to most such problems. How wondrous of the millennial snowflakes to prove this for us all over again.


Maybe arguing about immigration isn't totally hopeless after all

Here’s a cool new paper. It tests whether people are willing to substantially shift their opinions about immigration policy when they’re given more information about it. The results suggest that people may be doing less ‘motivated reasoning’ about immigration policy than many think, and that there’s real value in trying to highlight the facts to the public.

I’ve written before about why people oppose immigration – whether it’s because they believe that immigrants threaten their incomes, safety, or way of life, or because they just don’t like immigrants and want less of them for more emotional reasons. Simply asking them is unlikely to give us the truth, because people who simply dislike immigrants will tend to give a more reasonable-sounding reason (they may not even be aware that they are doing this). This paper tests this by looking at whether people’s responses change when they have new information that might make them less hostile to immigrants.

First, it looks at the Transatlantic Trends Survey, which polled 19,000 people in 13 different countries and, among other things, asked whether they thought there were too many immigrants in their country. People almost always overestimate the proportion of their country’s population that are immigrants, in the UK by a factor of two. But, here, half of the respondents were told the true proportion. The prediction is that if people are motivated reasoners, learning that there are far fewer immigrants than they may have believed should not change their view. If they are hostile because they believe that immigrants threaten their jobs or way of life, then information that contradicts that should result in less hostile answers.

In most countries surveyed, especially in the UK, the ‘treatment’ group that was given the correct figure gave substantially less anti-immigrant responses than the ‘control’ group that was not given any figure. In the UK there was an 18 percentage point gap, which was the difference between a majority saying there were too many immigrants among the group that wasn’t given the correct numbers and a minority in the group that was.

Interestingly, the gap seems related to the total size of the opposition to immigration – countries with smaller proportions of people saying there were too many immigrants also saw smaller percentage drops when the correct figures were provided, which is consistent with opposition being made up of two groups – one ‘hardcore’ group opposed no matter what the facts are, one group whose views are up for grabs. Further research needed!

The second part of the study was based on a poll of Americans who were given information not just about the proportion of the country that are immigrants, but their characteristics – their propensity to commit crimes or be imprisoned compared to natives, their English-speaking rate, their unemployment rates and how many of them were illegal versus legal. Again, this had a pretty big effect (0.25 of a standard deviation) in changing people’s attitudes and beliefs about immigrants for the better, though they were much less likely to shift policy positions.

Maybe this was just a temporary effect? Four weeks later, there was very little change in either group’s responses. The new information actually stuck!

Now, here’s the really encouraging bit, for me: right-wingers moved most strongly towards more pro-immigrant positions when given this new information, in terms of their attitudes and their policy preferences.

The paper isn't perfect, for example because giving new information might prompt people to give more 'politically correct' pro-immigration answers. But it's a start. 

This all suggests two things to me that are very encouraging. One is that ideas, debate and new information really can change people’s mind. Obviously that’s not exactly easy, because why should Joe Bloggs believe your ‘facts’ and not the other guy’s? But it does mean there’s hope and we might not all be motivated reasoners – indeed my suspicion is that it’s elites who are the most dogmatic, and normal people are far more open-minded, though less well informed. It’s a vindication of that handful of people (like KCL’s Jonathan Portes and the Cato Institute’s Alex Nowrasteh) who stick to the facts in the public immigration debate and challenge those who don’t. I tried doing this last week as well.

The other is that the lowest-hanging fruit in arguing for a more liberal stance on immigration could be in talking to the right more. Say there are people who are right-wing in general, but not necessarily hardcore anti-immigrationists, they get their information from right-wing news sources, which also make anti-immigration factual claims and arguments, and the opposite is true on the left. If that's the case, we would expect that there are more ‘mistaken’ right-wingers than left-wingers, and so more people on the right who might be persuaded to take a different view.

That’s consistent with the results of this paper, and it is an encouragement of immigration-liberal right-wingers to make that case to their friends and allies who disagree. It might not be as hopeless as you think.

Was F. A. Hayek a Neoliberal?

F A Hayek published his “Constitution of Liberty” in 1960, and added as an appendix a very famous essay, “Why I Am Not a Conservative.” When the ASI in 1987 published a volume of tribute essays by famous scholars, entitled “Hayek – on the fabric of human society,” I wrote the final essay, somewhat cheekily entitled “Why F. A. Hayek is a Conservative.” You can see it here.

Debate has taken place since, and I think most commentators have tended to agree with me that he was. His view morphed over his lifetime, becoming distinctly more conservative than the more straightforward libertarian outlook of his younger days. His basic case originally was that Conservatives wanted to conserve the status quo. If that status quo was socialism, he did not want to conserve it. When he wrote, there was a postwar consensus of mixed economy socialism with its nationalized industries, welfare state and National Health Service. He did not wish to conserve it.

I argued that this was an aberration, and that what Conservatives wished to conserve was not any given status quo, but the spontaneity of society. I added the magic words “or to restore” to the wish of Conservatives to conserve that spontaneity. If it were lost they would bring it back. This added a justification to the Thatcher revolution, which was well named, and of which Hayek most decidedly approved.

On the day my book “The Neoliberal Mind” is published, I ask whether Hayek was himself a neoliberal. He was certainly pro free-market and for a large measure of personal freedom, and applauded their spread. Had he lived longer, he would have undoubtedly applauded their progress since. He also shared with today’s neoliberals an outlook that seeks to prevent people from taking society in a preconceived direction, but instead to allow it to emerge from the interaction of peoples making independent decisions.

But there are aspects of neoliberalism which are as much about character as they are about political outlook. Most neoliberals are optimists, most embrace new technology for the opportunities it brings. I don’t think Hayek quite shared that enthusiasm for the new, or the readiness of neoliberals to embrace change and to ride with it.

Hayek sought for a name for people who shared his viewpoint, and toyed with the idea of “Old Whig.” I think on balance, and it is close, I would stand by my original judgement and say that he was more of a conservative than a neoliberal. But I think he would have approved of neoliberals even if his disposition prevented him from actually being one himself.