Adam Darwin

Matt Ridley, author of "Genome" and more recently "The Rational Optimist," gave Tuesday's annual Adam Smith Lecture before a packed audience at St Stephen's Club.  His title, "Adam Darwin," explored similarities between the insights and observations of Charles Darwin with those of Adam Smith who had written a century earlier.

One similarity is that evolution works in nature by a selective death rate.  It is not a random process which leads some to survive and others not.  The ones that make it are those with some mutation which increases their survival chances, even by a small amount.  Nature can build up incredibly complex mechanisms through a series of minute changes which do this.

Those who succeed in the market are often those with an innovation that brings them an advantage.  It might be new technology of new methods of achieving better productivity.  The firms that fail are again, not the result of a random process, but those which lack the crucial advantage that innovation has brought to others.

In the world of nature sex plays an important role in mixing up combinations of genes so that innovations occur more frequently than would otherwise be the case.  In the world of human activity there is an equivalent in which ideas can intermingle and interact, producing new combinations and innovations.  The more trade, exchange, and contact there is, the more there are likely to be new ideas to be tried out.  As in nature, the ones that bring advantages survive at the expense of those which do not.

Ridley stressed the co-operative nature of trade and exchange.  Human beings exchange things to the advantage of both, and do so uniquely among groups which have no kin or tribe relationship.  We co-operate with strangers to mutual advantage, and this has led to the extraordinary achievements that humanity has made.

Ridley's speech was an intellectual tour de force, elegantly delivered, and a superb contribution to the Institute's lecture series. The lecture will be uploaded to Youtube and posted on the blog shortly.

Yes, MPs really are trying to give us lessons in morality

Executives of Starbucks, Amazon and Google have been hauled in front of the Public Accounts Committee to face questions about their alleged UK tax avoidance practices.  Margaret Hodge, Labour MP and the chair of the committee made her feelings clear by telling the executives: “We are not accusing of you being illegal, we are accusing you of being immoral.”  Given the MPs recent track record, I am not at all sure how wise it is for any politician to give lectures about morality.  Nevertheless, it does make good political theatre if the recipient of a lecture on morality is a multinational corporation, especially an American one.

I can’t comment what would constitute a just, or a morally acceptable, rate of tax. Thomas Sowell, a respected economist and social theorist also had problems with this same issue: "Since this is an era when many people are concerned about 'fairness' and 'social justice,' what is your 'fair share' of what someone else has worked for?"  I don’t know if Sowell was ever able to find a definitive answer to his question. 

Similarly, I too will have to leave this problem for our politically elected representatives to ponder about.

However, what I have to take issue with is the accusation levied against Amazon at the Committee hearing that the firm was somehow responsible for putting high street booksellers out of business by “playing the system.”  Starbucks has similarly been accused for being responsible for the demise of independent coffee shops up and down the country.  This is absolute poppycock. These firms’ global success can’t be explained by the amount of corporate tax they do or don’t pay in the UK.  These firms are successful because they produce an offer that is perceived valuable by consumers.  Starbucks has a unique “experience” that consumers prefer over other coffee shops’ offer, and Amazon’s strategy of providing unparalleled choice at a lower price resonates with those who “love a good deal.”  It is the consumer whose preferences, combined with the inability by other firms to provide competing value that determine the winners and losers in a competitive marketplace.

Furthermore, the accusation of immoral behaviour leveled against these companies is not only inflammatory, but it also makes a presumption of intentionality.  The directors of these firms, as agents of the shareholders, have a fiduciary duty to maximize shareholder wealth on a sustainable basis.  The sustainability of wealth-creation is an important concept in this context.  Any profit-seeking firm must balance the often-conflicting interests of the various stakeholder groups that, in addition to the shareholders, include employees, suppliers, customers, and the communities that they operate in.  It is this balancing act, often captured under the umbrella term, corporate social responsibility that allows the firm to turn a profit on a sustainable basis, thus creating shared value for all key stakeholder groups.

According to yesterday's London Evening Standard, Margaret Hodge has backed a call for direct action to “punish” these firms after they had failed to convince the Public Accounts Committee about their tax affairs.  "I think one should boycott these companies. I do actually think that is the right thing to do," she said after the Committee hearing.

In a free country, Mrs. Hodge has every right to call for a boycott and we all are free, at least for the time being, to choose and decide our patronage.  In turn, the firms have to take into account the public sentiment, its impact on revenue generation, and balance these with the interests of other stakeholder groups.  However, ultimately the choice has to remain with us, as consumers, to decide whether we value the choice given to us by these firms at a given price, and whether we perceive them as good corporate citizens.  It is not for the politicians to make moral judgments on our behalf about companies that have not broken any laws.

Risky business

Those who think that responsibility for the financial crisis lies mainly at the door of governments and central banks might like to consider the following.  The policy of easy money and cheap credit, designed at the behest of politicians to smooth the down side of the business cycle, had one unexpected result.  by depressing interest rates it was made difficult for fund managers to gain decent returns on relatively low-risk investments such as bonds.

In search of decent returns in this low interest rate climate, they were forced to climb the risk ladder, investing in things that carried higher risk than they would otherwise have taken.  So while it is true that some investment groups were undertaking riskier investments, it was not because they had suddenly become greedy and reckless, but because government policies had denied them adequate returns on the safer things they would normally have gone in for.

What does the BBC need?

Over at his personal website, Madsen discusses why people like the BBC, and says that it has radically departed from the impartiality that once made many people value it:

In fact traditional support for the BBC is more likely to have arisen from its role as an unbiased reporter of events, rather than as a campaigning organization doing investigative work.  People valued the BBC’s level take on national and world events, and trusted it to be accurate.

That reputation was undermined not by the incompetence of its investigative teams, but by the way it allowed what some call the left-wing mindset of its culture to bias its reporting.  Its enthusiastic endorsement of all things pro-EU, its hostility to business and enterprise, its refusal to use the word ‘terrorist’ to describe those who murder civilians in causes it approves of, and its selection of news to highlight on the basis of a pro-state intervention agenda, have systematically alienated those who used to trust it and support it as the embodiment of all things British.

Read the whole thing.

Denmark admits its fat tax failure

The world’s first fat tax will soon also be the first to be abolished. Denmark has taxed saturated fats since October 2011, and the experiment has been a failure. Danes are worried that the tax has increased food bills (which was the point of the tax) and that it could be threatening the food industry. One poll found that 70% of Danes felt the tax was ‘bad’ or ‘very bad’ and 80% said it had not changed what they ate.

At the same time, fat prohibitionists tell us that what Denmark really needed was a much higher tax to have the desired effect. Multiple studies find that a tax as high as 10% (much higher than the Danish tax) would reduce population bodyweight by less than 1%. Most of us tend not to change what we eat based on a change in price — foods like butter and bacon are relatively price inelastic. To get people to change their behaviour you have to set punitively high rates.

It is a good idea to question why the health-obsessives are going after saturated fats to begin with. Many believe that a good diet includes saturated fats, as they have been linked to increased testosterone, boost the effects of omega-3 fatty acids, and improved immune system function.

Simple economics tell us that when you tax something, like saturated fats, enough to cause a change in behaviour then their consumption will fall in favour of a substitute. In most cases, that substitute will be carbohydrates. The nutritional science is far from settled on whether carbohydrates are worse for us than other macronutrients (protein and fat). Politicians are unlikely to know better. The tax on fat could be making the 20% of Danes that changed their diets less healthy. That the impact of the tax is largely unknown is a good enough reason not to mess with the food on our plates.

Of course, there is a more fundamental liberal point. Why should we be coerced to be healthy? If someone decides that they prefer Danish bacon once a week to the last (probably quite uncomfortable) five years of their life, that certainly isn’t a ‘wrong’ choice. It is hard to coerce ‘healthy’ behaviour, and government should not try to. Sadly, politicians know that they can appear to attack the scapegoat of the unhealthy citizen, while taking more money from our pockets.

Roast Salmond

My colleague, Dr Eamonn Butler, was quite right to castigate Alex Salmond, Scottish First Minister, for his disparaging remarks about Adam Smith and the Institute that proudly bears his name.  Every few years some left-winger, usually a politician, tries the claim that Smith was really a sort of proto-socialist.  It is never convincing because he was nothing like that.

At the ASI we always stress Smith's "Theory of Moral Sentiments" as a companion and precursor to his "Wealth of Nations."  The left seem to think we treat Smith as someone who promoted selfishness, whereas the opposite is the truth.  He said that our most salient characteristic is our ability to empathize  (he said feel sympathy) with others.

The act of wealth creation, which requires trade, puts our co-operation with our fellow men and women right at the start of market economics.  They trade so that each gains greater value than they had.  Without that co-operation there would be no exchange and no wealth-creation.

Eamonn's very apt put-down of Alex Salmond was this:

“I shall be pleased to send him copies of Adam Smith – A Primer, my dummie’s guide to all of Adam Smith’s work. It includes not just the Theory of Moral Sentiments but his lectures on jurisprudence and on literature, which Alex may not be familiar with.”

Inequality in the UK just ain't what people say it is

I've said this before and no doubt I'll say it again. But inequality in the UK just isn't quite what people generally say it is. We're in an unusual situation: we've in London one of the great commercial cities on the planet. The rest of the UK is pretty standard high income European stylee. A goodly part of the recorded inequality in the UK is between these two economies. We can see this in this report on the latest ONS figures:

The least inequality was in Wales, where the highest earners had wages seven times higher than the lowest. The top 10 per cent of earners in Britain earned at least £26.75 an hour last year. Of these, 36 per cent worked in London, indicating that more than a third of the highest-paid jobs were in the capital.

London is, of course, significantly less than 36% of the total population (more  like 12% or so). Which does indeed lead us to two important points about nationwide inequality.

The first is that we all know that London is vastly more expensive to live in than other areas of the country. So measuring inequality by inequality of incomes is going to hugely overstate the consumption inequality we have. Consumption inequality being the only one we should even theoretically worry about given that it's what people get to do with their lives which could conceivably important, not the numbers on their paycheque.

The second is that a good piece of even the income inequality being recorded across the nationwide figures isn't, in fact, a nationwide difference between the oppressing capitalists and the ground down workers. It's that we have, in one city, a part of the great global high end economy. In a manner that no other European country really does. Given that there is indeed a difference in wages between that high end global economy and the usual standard European economy we therefore have higher recorded inequality.

And if I'm honest I really can't see a problem with this. That we've got one part of our economy that really is world class, world beating, seems rather cheering actually, not a cause for woe and despondency.

There seems to be something to this trade idea

I can't say that I've ever really understood this idea that we must all eat only the things that have been grown in our own region. "Region" of course is a variable thing. It seems to depend on how deep the green of the fool recommending it is. Something from "the nation" to "your back yard" is the spectrum. But as I say, I've never really understood the point.

For we know what happens when food supplies are indeed restricted to just the region one is actually in. We've been there before, back before we had decent roads. And what used to happen is that when the local crops failed then everyone died of starvation: even if 30 miles away there was a bumper crop. Quite why anyone wants to recreate the bad parts of the Middle Ages I'm really not quite sure.

As a modern example, think what would be happening in the near future given the near failure* of the American corn crop this year. We would currently be awaiting the news that Mid-Westerners were keeling over from the shortage of corn dogs no doubt. Then have a look at this other piece of news from this past week:

Chinese farmers are reaping a third record corn harvest even after a typhoon wiped out some of the crop, easing demand for imports at a time when the U.S. drought is driving sales from the biggest exporter to a four-decade low. The harvest rose 3.6 percent to 199.74 million metric tons, according to a survey of farmers in China’s seven biggest producing provinces by Geneva-based SGS SA (SGSN) for Bloomberg. The country’s stockpiles last month were at a nine-year high, and the U.S. Department of Agriculture expects a 64 percent drop in imports. The agency will raise its estimate for U.S. reserves by 2.4 percent when it reports Nov. 9, the average of 29 analyst estimates compiled by Bloomberg shows.

As you can see, no one is predicting that China is going to start exporting corn to the US. My point is, rather, that bad weather doesn't affect every part of the world at the same time. Thus harvests that are bad in one place can be offset by good ones in others.

Or if we are to put it in the terms usually reserved for this argument, the term "food security". We can only have a secure food supply if we grow all our own food. Which is nonsense of course, for our food growing is at the mercy of our weather. True food security comes from having a multitude of suppliers in many different parts of the word so that we can play that game of averages with that weather.

You know, this trade idea. The one that our greens seems to be so strongly against?

*Yes, I know, it wasn't anything like a failure but you wouldn't know that from the news stories.

The wrong agenda

There is a damaging focus on taxation instead of growth.  Media and politicians, egged on by ideological enemies of business and markets, are talking about ways of making corporations and 'rich' individuals pay more in taxation.  Tax avoidance and use of the legitimate means people use to reduce their tax liability are being denounced as wicked, and ways are being sought to curb this activity.

The emphasis is totally wrong.  Those who think the economy would be in better shape if more of its resources went to government are simply wrong.  Government does not use those resources as wisely as private citizens do.  It neither spends nor invests as effectively.  It is prone to vast wastage and to the direction of expenditure to serve the ends of politicians rather than those of private citizens.

The agenda is misguided.  Instead of concentrating on ways that would give government more of our resources, it should be focused on ways to allow us to generate more resources.  Investment and job-creation should be made more attractive by a policy of lower taxation and lighter regulation.  If it is easier and more rewarding to engage in economic activity, people will do more of it.  The aim should be to have fewer resources directed to government, and more of them to growth.

Broken windows: still not good for the economy

The weather might not be predictable, but one thing is almost certain; when natural disasters strike, you can be sure that someone will claim this is a good thing. Sure enough, journalists have made the case here, here and here. It is claimed that Sandy will provide a stimulus for the US construction sector as damage estimates approach $50 billion. It is argued that in turn this growth in the construction sector will move through into other areas of the economy, this new activity driving growth.

Those who make this case could do worse than to read Frédéric Bastiat’s “What Is Seen and What Is Not Seen”. Rather than simply generating new economic activity, destruction is not costless. The cost of rebuilding devastated areas will be a cost at the cost of other alternatives. People who might have spent money on improving their homes may now have to rebuild them entirely. They have not gained wealth; they have lost the improvements to their homes that they would have otherwise enjoyed.

If it were true that destroying homes was good for growth, we should be smashing buildings as they spring up. By this logic we would be richer as a result. These arguments are seen not just in the case of natural disasters, but also when war occurs. World War II famously saw huge production numbers as nations clawed for scarce resources to build bullets and tanks. This was not production that improved the quality of people’s lives. Railings from parks and schoolyards were melted down to build bombs.

Similarly, while many breakthroughs were made in the form of new inventions during wartime, this came at the cost of other alternatives. It is impossible to compare with what might have been, but that does not mean that it is not important. Had World War II not happened then we would have been free to pursue research and development directed at improving the quality of lives, not at winning wars.

This story betrays an alarming obsession with GDP. GDP does not usefully describe the health of an economy. What is important is that people have more of the things that they want and natural disasters destroy this prosperity. Bastiat’s classic essay dispelled this myth in 1848, yet it is clearly still rampant.

There is a good news story here, but it's not one of false stimulus. It is one of the continual process of development and production. The damage in the US has been much lower than in less developed countries also struck by Sandy. Development has helped to save lives. As we lift more people out of poverty, we can expect natural disasters to be less lethal.