Economics is not just money and shopping

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Economic choice is about time, effort, loyalty, guilt, same – not just money.

Too often, when I appear on the radio or TV and talk about the perverse incentives of some new government policy, I'm accused of being an 'unfeeling economist' who 'reduces everything to money'. Well I ain't. And that view misunderstands what is actually about. Economics is the science of choice. True, many of the choices we make involve giving up money to get something we want. But many more choices hinge on giving up other, non-monetary things – like our time and effort.

Should I go out with friends, or stay at home reading my book? I cannot do both. Should I mow the lawn, or offer to help out at the school fete? No money is involved in these decisions, and yet they are properly 'economic' decisions. How do I juggle scarce resources, like my time and effort, to yield the biggest benefit for me? And I don't just think of my private benefit. I might figure that my friends would like to see me, or that the teachers would welcome my help at the fete. Sure, it makes me feel good that I have helped others, and to that extent I derive some benefit. But it is a psychological, not a monetary, benefit.

Some studies suggest that when you pay people to give blood, fewer donors come forward. That is because people give blood to help others, not for financial gain. Offering payment suggests that you think they are doing it for their own benefit, without thought to the benefit of others, whereupon the delicate psychology of the activity is broken. Likewise, I find that I go to the doctor a lot more now that I have moved from a free NHS doctor to a private one. The reason is that I always felt guilty going to a free doctor, because I imagined that there were others who needed medical help more than I did (well, that and the long waits). Now I'm financially poorer, but I don't feel any guilt. Similar effects have been discovered when nursery schools fine parents for picking their kids up late – more of them arrive late, because they regard the fine as compensating the teachers for the inconvenience of having to stay on, whereas before they would have felt shame in being late.

Yes, there is a lot more to economic choices than mere money. People do things for reasons of love, honour, self-respect, or loyalty – and don't do things out of guilt, shame, idleness, or criticism. Indeed, most, by far, of our 'economic' decisions don't involve money at all.

Dr Butler's book The Rotten State of Britain is now in paperback.

Politicians turn nanny state into bully state

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The nanny state has given way to a bully state in which politicians coerce the public into submission.

A new book by controversial former MSP Brian Monteith argues that the nanny state is dead but has been replaced by a much more malevolent bully state where we are not just preached at, but forced to do what the politicians think we should.

The Bully State: The End of Tolerance charts the movement from nannying health warnings about smoking, through compulsory motor cycle helmets and seat belts, to the bully times of today, when we can be fined for smoking in our own cars and Marmite is banned in schools.

Monteith warns: “We won't lose the freedoms that we cherish by a military coup or some great cataclysmic war engulfing us, but through the gradual invasion of our private lives by the very politicians we elect to protect us – and all in the cause of looking after our health.

“Today’s politicians think us mature enough to elect them, but too immature to decide what we should eat, smoke, drink or drive. So they give officials powers to snoop on us, enter our homes, fine householders without trial for using the wrong rubbish bins, and make shopkeepers hide the cigarettes under the counter.

“This is not just some left-wing campaign. It started when New Labour and Conservative politicians decided that information and choice weren’t enough in their brave new target-setting world. Now politicians of all colours simply bully us into submission if we do things they don’t approve of."

The book traces our evolution from nanny to the bully state, with its growing intervention into the realms of smoking, eating and drinking – including some truly bizarre and absurd examples of politicians’ latest bullying. An edifying and shocking read.

The Bully State: The End of Tolerance is published by The Free Society, price £5.99, is launched on Wednesday in Westminster.

Privatisation is no way to sustain Britain’s runaway spending

In this article originally published in The Telegraph, Dr Madsen Pirie argues that the Government’s asset sales will provide a year of bounty but fail to address the British state’s excessive spending.

First there was “borrowing our way out of debt” which raised the eyebrows of sober-minded accountants. Then there was “printing our way out of debt,” as quantitative easing magically created money out of nowhere. Now the latest round is “selling our way out of debt,” as the Prime Minister announces the sale of £16bn worth of state-owned assets.

First will come the Tote, the Thames Dartford Crossing, the Channel Tunnel rail link, and student loans. The sale of the state’s 33 percent stake in Urenco, the uranium enrichment company, will follow. There are good and bad features of the sale. The good point is that most, if not all, of these will sit happily in private ownership. It has never been clear why the state should be involved in race-course gambling, while transport crossings and loan agencies are often handled elsewhere by private firms.

The disappointing feature is that these are all to be done by private sales. The sale to a single private buyer is the easiest and quickest to implement, but does least to secure public support or to secure improvements to the industry or service.

Many of the 1980s privatisations (now called by the mellower name of “asset sales”) featured public offerings with discounted shares available to workers so they could become part-owners of the new enterprise. Significantly, the Government has already tried a private sale of the Tote, but was rebuffed by the European Court as representing poor value for the public. It would have been bolder (and better) to involve employees and the public in the new round of sales.

Secondly, it is by no means clear that the proposed sales will actually be used to reduce the Britain’s huge debt burden. It is quite legitimate to use capital sales to reduce capital debt, and the sales would deserve support if that were the case. But this looks like the Government’s way of postponing reality until after the election.

Britain has to cut its spending, and that will involve some hard and unpleasant decisions. Asset sales are a one-off. They might be used to fund spending programmes but only for one year. Crucially, that one year will see a general election, and the suspicion arises that the sales revenue will be used to continue with spending that really should be cut until after the election.

The Government has not come up with realistic proposals to cut spending to what can be afforded. Nor has anyone else, to be fair. The budget deficit (£220 billion this year) means that debt is increasing. Asset sales are not, and should not be, a way to sustain high spending; they should be a means of reducing debt.

Published on Telegraph.co.uk here.

The value of innovation

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Innovation is of course a good thing: so too is the science that leads to lovely new things to innovate with. We're all also well aware of the public goods arguments about science: because it's very difficult to profit from it directly we'll not have enough of it. Thus we need taxpayer support for science, so that we've got lots of lovely new things to innovate with and thus we all get richer. An example of the argument from Colin Blakemore:

PricewaterhouseCoopers estimates that every pound spent on research by the UK Arts and Humanities Research Council sees a rapid return of £10, and £15 to 20 in longer-term benefits........But it’s not just a love of intellectual pursuits that justifies the nearly £3 billion per annum the Government spends through the research councils and the additional £2 billion that is dispensed through the higher education funding councils. It’s the expectation that it will deliver benefits for UK plc — “outcomes" in Treasury-speak.

However, we do also have to add what we know from what I think is one of the great research papers of all time: Schumpeterian profits in the American Economy.

We conclude that only a minuscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.

In more detail, only 3% or so of the value created by new technologies goes to the entrepreneurs, 97% goes to the rest of us lucky people who get to use the new technology. In one way this bolsters the argument that science should be heavily funded: look what we all get from it!

In another, the picture is not so clear. For the science is a public good, as we've agreed, which is why it needs funding in the first place. But as the science is a public good (non-rivalrous and non-excludable) we don't actually care where it is done nor who funds it: only that someone does. Further, if all but some tiny amount of the value of the technologies created by the science comes from the use, not the making or manufacturing of them, then we don't really care where that making or manufacturing is done either. All we care about, rationally, is that we get to use the new gear. And the end result of that chain of reasoning is that there's no real reason why we should be insistent upon funding "British" science, or "British innovation" nor even "British manufacturing". As long as someone funds it, somewhere, why should we care?

If the Americans decide to tax themselves to fund such activities, why shouldn't we just be free riders on their efforts?

The priorities

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Tony Blair listed his three priorities as "education, education, education," and achieved none of them. There will be a great deal of pressure on the incoming Cameron government and many claims on its urgent attention. Given the limits of parliamentary time and attention, the four which should count are "education, liberty, education, liberty" (in no particular order). If they do nothing else, they should reverse the erosion of our liberties by setting up a one-year judicial commission to review the state of our liberties and make recommendations accordingly. I set out in the Telegraphhow this can be done.

No less important is the permanent change that can be made to our schooling by empowering parents with a choice of school backed by the funding their taxes have paid for. Provided this is backed by measures which enable a proliferation of new schools, public and private, there is no single measure which can alter the political landscape so much, or with such lasting effect.

No doubt we will be told that times are hard, money is tight, and time is short. Maybe this will be true to some extent. We do not expect miracles. But we do expect the tide which has flowed against our liberties to be turned back, and lost ground regained. And we do expect that education will finally be reformed so that every child, regardless of their background, will gain the chance to succeed.

This is not an ambition or a distant hope, it is a minimum. Without these two, any new government will go down as a failure which turned its back on the untrodden heights and lost the goodwill that might have sustained it.

Check out Dr Madsen Pirie's new book, "101 Great Philosophers."

Tories hire Nudge author Thaler

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Will Nudge author Richard Thaler cut regulation or build a new Tory Nanny State?

University of Chicago economist Richard Thaler has reportedly joined the Conservative party as an adviser on regulatory issues. This may be good news for the cleanliness of British urinals, but not much else.

Professor Thaler is the doyen of the school of ‘behavioural economics’, which is based on such non-astonishing insights as the fact that human beings are not wealth-maximizing automata; they procrastinate, lack self-control and occasionally act like headless chickens. He recently wrote an article in The New York Times in which he compared the average punter to Homer Simpson! Behavioural economics thus represents yet another attack on the straw man notion that the validity of free markets depends on rational humans and perfect markets. Adam Smith certainly never made any such claims. He noted that it was all about higgling, bargaining and propensities to ‘truck, barter, and exchange’. Behavioural economics is yet another excuse for intervention, as if the return of Keynesianism wasn’t bad enough!

The Bible of the ‘new’ economics is Professor Thaler’s Nudge: Improving Decisions about Health, Wealth, and Happiness, which he co-authored with Cass Sunstein, President Obama’s regulatory czar. The book is aimed at promoting an oxymoronic ‘paternal libertarianism,’ a ‘real Third Way’. Thaler and co-author Sunstein make the claim – much beloved of Communist rhetoricians – that there is no ‘real’ freedom. Since all choices are made within particular ‘contexts’, policymakers are obliged to become ‘choice architects’, subtly rigging our environment to stop us making the ‘wrong’ decisions. For support, the authors quote – with an example whose bizarre triviality you could not make up if you were deliberately trying to discredit them -- how Dutch airport authorities reduced urinal spillage by 80% by etching target flies into the porcelain!

It seems that people can’t even piss straight without someone in authority telling them how.

Monopoly empowers unions

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One of the merits of competition is that it limits the power of producers. Most people focus on how firms have to compete with each other if consumers have a choice, but competition also limits the power of organized labour. The degree to which it can impose uneconomic terms on employers is severely limited if customers can move elsewhere and cause their employer to go under. Where competition is introduced into a state monopoly, it also limits the power of the unions to put political pressure on government by interrupting the service.

When the UK featured many state-owned monopolies, strikes were a common feature as unions exploited the power which monopoly gave them. But it was not only privatization and the competition which usually accompanied it which undermined their power; technology played an important role. The Post Office provides a classic example.

The fax machine (if anyone remembers it!) spread rapidly because the monopoly post service could not be relied upon. Motor and pedal cycle couriers spread through our cities to exploit a loophole that allowed expensive alternatives to the Royal Mail. What unions do not seem to grasp is that it is their exploitation and abuse of monopoly power that speeds the adoption of alternative technologies. If the service were reliable and good value, many of these technologies would develop more slowly or not at all.

It is easy to predict the consequences of yet another impending postal strike. People will rapidly get into the habit of using technological alternatives to the Royal Mail, and will not return when the service resumes. They will use such alternative methods of conveyance as are allowed, and many will not return from those, either. The Royal Mail itself will find its business diminished and will need to cut its cost further… At the bottom of that vortex is a plug-hole.

Meanwhile, Lord Mandelson could earn a load of brownie points by empowering the Boy Scouts to deliver Christmas mail, and allowing charitable organizations to oversee its collection, transport and distribution…

Check out Dr Madsen Pirie's new book, "101 Great Philosophers."