So why are the Chinese saving so much?

I think we all know that China, or perhaps the Chinese, havs/have a mindbogglingly high savings rate. Something around 50% of GP as compared to our own few paltry percent. Don Boudreaux does a wonderful little piece of intellectual judo in explaining the implication of this:

If Haltom’s claim is correct, the high household savings in China today is evidence that government provision of welfare substitutes to some extent not only for private provision generally, but also for provision at the level of the household. People are neither as personally irresponsible nor as incapable of planning for and providing individually for their own needs as many today – “Progressives” and some conservatives alike – presume them to be.

Just to lay this out again in all its elegant simplicity.

We currently have a welfare system that provides unemployment pay, health care, pensions and so on. We also have a very low savings rate. That's fine, it just is that way. But when the cold hearted and callous like myself suggest that perhaps we might want to reduce some aspects of that welfare state the cry goes up, but bit, what will people do? There will be no pensions, the old will starve in the streets, there will be no health care, there will be a disaster!

And the answer is that we can actually see what happens when there is not that welfare state. It will be as it is in China. People will, in the absence of a decent welfare system, save their own money in order to provide those highly desirable services to themselves. As, actually, the British working classes did in great numbers through the friendly and provident societies before there was a welfare state.

This is not to say that private savings to provide these things is better than taxation provision of them. Nor that it is worse. And it's entirely possible to argue for a blended system (I certainly would argue for tax financing of catastrophic medical care for example). My point here is simply to show that there really are viable alternative systems: the proof being that such alternative systems do in fact exist.

Yes, the minimum wage really does reduce the number of jobs

We're back to Bastiat and what is seen and unseen I'm afraid in this latest research into the effects of the minimum wage. It isn't that a rise in the minimum wage is going to immediately cause the mass unemployment of millions. Rather, that over time the rise in the minimum wage is going to lead to fewer jobs being created:

The findings are unequivocal: higher minimum wages lead to lower rates of job growth. Indeed, a ten percent increase in the minimum wage causes roughly half a percentage point reduction in the rate of job growth, a very large effect. The effect of this hypothetical increase is not permanent, though, since it is eroded by inflation and increases in the state’s comparison group. Our calculations show that this ten percent increase in a state’s real minimum wage, relative to its regional neighbours, causes a 1.2% reduction in total employment relative to what it would have been.

Now of course that's in the US, with their easy ability to relocate either production or labour across state lines.

But there's another point to this as well. If the major effect of a minimum wage is to reduce the creation of entry level jobs then the major group of people who will suffer from a minimum wage are those looking for entry level jobs. The young, the untrained and the unskilled: all of those who are already the poorest in our society. And it's also true that we can track the rising minimum wages, in both the UK and US, against rising teen and youth unemployment: they've been moving in near lockstep.

The takeaway point from that being to wonderwhy on earth there's so much political support for a minimum wage. Why do people support something whose major effect is to screw over their own children when it comes for the time for them to enter the labour market?

We did something right in the 20 th century then

An interesting point being made by the economic historian, Brad Delong:

To put it another way: In 1870 the daily wages of an unskilled worker in London would have bought him (not her: women were paid less) about 5,000 calories worth of human, not horse food: not oats (although Scotsmen would disagree) but bread--5,000 wheat calories, about 2½ times what you need to live (if you are willing to have your teeth fall out and your nutritionist glower at you). In 1800 the daily wages would have bought him about 3,500 calories, and in 1600 2,500 calories. Karl Marx in 1850 was dumbfounded at the pace of the economic transition he saw around him. That was the transition that carried wages from 3500 calories per day-equivalent in 1800 to 5000 in 1870. Continue that for another two seventy-year periods, and we would today be at 10,000 calories per unskilled worker in the North Atlantic today per day. Today the daily wages of an unskilled worker in London would buy him or her 2,400,000 wheat human-food--potato--calories. Not 10,000. 2,400,000. That is the most important fact to grasp about the world economy of 1870. The economy then belonged, even for the richest countries, much more to its past of the Middle Ages than to its future of--well, of you reading this.

It's also worth noting that from Angus Maddison's figures GDP per capita in England in 1870 was about $3,200 (yes, of course, in inflation adjusted dollars). The living standard of roughly India or Nicaragua today.

It's a reminder of quite how poor our forefathers were: or how rich we are if you prefer. And also of quite how poor some other places still are. Along with, of course, the point that to get those other places rich, as we all should want to happen, is going to mean those other places following the same sort of economic path as we did. That strange mixture of capitalism and markets that propelled that North Atlantic world into unprecedented prosperity.

Chart of the week: Japanese inflation rises to five-year high

Summary: Japanese consumer prices are accelerating

What the chart shows: The chart shows the 12-month per cent change in the headline Japanese consumer price index

Why is the chart important: The Japanese government and the Bank of Japan are currently engaged in a major effort to break Japan’s two-decade long deflationary spiral. They aim to do this through three ‘arrows’ – a fiscal stimulus, a major monetary stimulus and – as yet not clearly spelled out – structural reform. A key goal is to reach 2% inflation by 2015. In the year to July, consumer prices rose by 0.7%. But, more importantly, in July itself, the CPI rose by a seasonally adjusted 0.4%, the highest rate in five years. Even if consumer prices were to remain unchanged from now on (which is highly unlikely), this would still take the twelve-month rate to 1% by early 2014. Prime Minister Abe’s government may not achieve all its targets. But it should successfully get inflation to 2% in 2015, if not before.

A little detail about the Simon Ehrlich bet

Tyler Cowen is recommending a new book about the Simon Ehrlich bet on prices of natural resources in the 1980s. Given my background in the weird metals business thought I'd add the trivial details of why Simon won. No, not the general economic principles of substitution, greater efficient of extraction and so on, but the real reasons, in detail, for the win. The bet was about these metals:

Copper, chromium, nickel, tin, and tungsten

Simon won because copper, tin and tungsten went down by more than the other two went up. But why did those three fall in price? You can track the prices here.

Copper dropped in price in that decade because we worked out a new method of extracting copper. Before the 80s all copper was extracted from copper sulphides. Then someone worked out that a technique used on some other metals, solvent extraction and electrowinning (SX-EW), could be used on copper oxide deposits. Now we always knew that there were mountains (and quite literally mountains) of copper oxide lying around but we didn't know how to get the copper out of them. Now we did and the first plant entered service in 1982. It's not too much of a stretch to think that given a new method of processing entire mountains that the copper price was going to fall. Which it did indeed do.

Tin was a more interesting case. Under the usual UN agreements that we must try to plan everything there was something called the International Tin Council. This tried to manage the world tin price so as to be "fair" to everyone. Not surprisingly, given the cocentration of interest, the producers dominated and so the tin price was kept very high. This increased demand and the tin price started to fall at the end of the 70s. The ITC kept buying in tin to support the price and thus went bust in 1985. Yes, we had the collapse of a producer cartel.

Tungsten, that was a combination of China opening up and the collapse of the Soviet Union. Both led to floods of material out of both countries depressing the price.

This is not to say that Simon just got lucky in this particular decade (as many supporters of Ehrlich try to make out). Rather, that Simon's bet was really that these sorts of things do happen. New technologies are found, market inefficiencies are removed, new entrants do come into markets. And they do so consistently enough that long term prices for commodities like minerals do indeed fall. Simon's ultimate point was correct: I'm just providing the proximate reasons for why that is so.

Cooperation works for humans, not competition

This isn't as much of a breakthrough as the Mail thinks I'm afraid:

ls 'survival of the fittest' finished? Scientists 'prove' that generosity - not selfishness - is the only way modern civilisation can survive

We've known for some years now that the correct solution to the prisoners' dilemma is tit for tat: as long as the game is running in repeated iterations. And given that life is a repeating series of interactions with very much the same people this is thus the winning strategy in life. If someone cooperates with you then cooperate back: if they do you over then do them over back. We also know from the ultimatum game that people will damage their own interests in order to enforce their vision of fairness. So there's no real surprise about the idea that cooperation works for human beings: we've seen both that in the way that life is actually lived it brings rewards and also that humans seem hard wired to punish those who do not.

Although this isn't really entirely true. For these games and studies have been done pretty much entirely with US students. That's the walking meat that most economists have unfettered accerss to after all. And we do find that when the same games are played with people from very different economies then the results are very different. Whether it is living in a cooperative society that changes the results or that the innate cooperation leads to the different society hasn't been worked out as yet.

However, as sure as eggs is eggs we're going to get someone writing a screed for The Guardian insisting that this finding shows that markets are all icky. You know the sort of thing, if humans naturally cooperate then we don't need all this competition stuff and so should have socialism under the guidance of the wise and all knowing. That group of wise and all knowing always, but always, including the writer and their friends. The problem with this argument being that markets are a form of cooperation.

Indeed, we can go further than that: it's this cooperation in repeated transactions plus the willingness to punish defaulters that actually makes markets work. Those replays of the two games in very different societies show that in generally non-market societies the results are different from those in market ones. And it is those very differences which make the whole idea of cooperating through markets work.

Thus, far from having found that we don't need markets because we naturally cooperate what we've actually found is that we have markets because we all naturally cooperate. Or rather, that those of us who live in market economies do, which is why our market economies work.

Yes, let's abolish the census

Danny Dorling is bemoaning the decision to abandon the census:

It is only because the census is our most accurate count of the population that we can tell, using it, whether mortality rates, university admission rates, employment rates or almost any other rates are rising or falling for particular groups in particular parts of the country over time. In calculating rates the numerators tend to be more reliably measured: deaths registered, students enrolled, or paying jobs in these three cases. Errors tend to be greater in the denominators, the population estimates. The census counts, corrected for estimates of under-enumeration, are the best denominators we have. An ID card system that relied on people being compelled to register their place of residence would be more accurate, but also far more intrusive. The most important task of the decennial census is in updating annual population estimates for small areas to remove systematic bias so that a huge number of studies and also funding calculations can be enacted.

We would expect Dorling to bemoan this for of course he's a social geographer. This is the very meat and drink of life to him.

However, Dorling is also something of a lefty (no, really, no kidding, he is) and like most of the English such he cannot abide knowing that something is going on somewhere without there being some government plan to make everyone do that thing in the approved manner. Which is why he insists that we should continue to do the census so that he and his mates can have the detail they desire to run our lives for us.

At which point we should remember the wisdom of Sir John Cowperthwaite out in Hong Kong. He refused to allow the compilation of GDP statistics on the grounds that some damn fool would only try to do something with them.

We also know that, as Hayek pointed out, the centre can never have sufficient information to be able to plan our lives for us. That census does give them the illusion that they do though. So, a very good reason for abandoning the census is so that no one does have, or even thinks they have, sufficient information to plan both the national and personal lives of us all. Another way to put this is that if they can't see any problems then they won't have any damn fool problems to try and solve them.

Why Ronald Coase matters

The great economist Ronald Coase has died at the age of 103. Vuk Vukovic explains what made Coase such an influential and profound thinker.

Yesterday, at the age of 103, one of the greatest minds of our time, Nobel prize winner and emeritus professor at University of Chicago Law School Ronald Coase passed away.

His contributions to and influence on economic science are of monumental importance. His groundbreaking research has set the stage for a joint field of law and economics, and has also influenced the new institutional revolution in addition to a number of other fields and areas of research in economic theory.

It would be unfair to say he only made two major contributions since both of these (written 23 years apart from one another) not only won him the Nobel prize, but have continued to influence the economic science ever since. The first was his 1937 paper The Nature of the Firm where he introduced the concept of transaction costs in microeconomic analysis. He believed that firms exist because they economize on transaction costs - costs like market entry, acquiring information, managing a company, bargaining, etc. If these individual transactions can be reduced into fewer transactions by organizing a hierarchical body, then entrepreneurs will form firms.

With microeconomic theory at the time focusing only on production and transportation costs, Coase's inclusion of transaction costs was a breath of fresh air into economics. However, in 2009 Coase said he was surprised how much The Nature of the Firm was being cited since it was "little more than an undergraduate essay". Continue reading...

On the appalling inequality in the United States

It is true that when we look at the Gini index and other measurements of that type then the United States is highly unequal by the standards of the advanced countries. It's also true that if we look with a fresh pair of eyes then it's not that unequal in fact:

Almost every single person in America has access to basic food, clothing, water and sanitation. I haven't been to states like Louisiana and cities like Detroit, but from what I can tell, nobody is scrambling for the basic necessities required for sustenance.

The US may indeed be unequal but it's only in the last 40 to 50 years that any society at all has been able to make such a claim. Something is being done right.

An almost-classless society: I've noticed that most Americans roughly have the same standard of living. Everybody has access to ample food, everybody shops at the same supermarkets, malls, stores, etc. I've seen plumbers, construction workers and janitors driving their own sedans, which was quite difficult for me to digest at first since I came from a country where construction workers and plumbers lived hand to mouth. Also, (almost) all sections of society are roughly equal. You'll see service professionals owning iPhones, etc. as well. This may be wrong but part of it has to do with the fact that obtaining credit in this country is extremely easy. Anybody can buy anything, for the most part, except for something like a Maserati, obviously. As a result, most monetary possessions aren't really status symbols. I believe that the only status symbol in America is your job, and possibly your educational qualifications.

It may well be that an Indian student isn't seeing everything in this society so new to him. But it is indeed true that while monetary inequality in the US is back up at the levels of the 1920s it simply isn't true that life as it is actually lived is as unequal as it was. That country, like others in the advanced capitalist world, has largely conquered the problem of providing the first set of Maslow's heirarchy of needs for all. After that the inequality in positional goods just isn't all that important.

Rest in Peace Ronald Coase

Ronald H Coase, the Chicago-based British Nobel economist, has died at the age of 102. I first met him in 1976 at the Mont Pelerin Society meeting in St Andrews, where he delivered a paper on 'Adam Smith's View Of Man'. But he was best known for his work on transaction costs and social costs.

Coase introduced the idea of transactions costs in 1937. Before then, most (mainstream) economists simply assumed that trade and commerce were costless. In fact, he noted, the costs of simply making the deal might be higher than the price of the good or service itself. People need to gather information about what they are buying and whether they can trust the supplier, they have to put time and effort into striking a bargain, they might have to draw up contracts and monitor the service they get.

This idea spills over into how we deal with social costs. The fact that transactions are not costless means it makes a big difference who is blamed for externalities. To take his example, a fence could prevent a rancher's cattle from destroying a farmer's crops. But how can they agree who should pay for it? If the farmer has to bear that cost, the farmer will build a fence to keep them out. If the rancher has to compensate the farmer, the rancher will build the fence.

This in turn had important consequences in terms of the public choice economics of James Buchanan and and Gordon Tullock and others. Welfare economists had looked at 'market failure' and concluded that government must intervene to correct it. But they assumed away the transaction costs of making political decisions. And when you look at those, the corruption, the rent-seeking, the interest group politics and all the rest, you find that the outcome might be even less desirable than what the market can do.