This On Rock Or Sand book will be a bit of a disappointment

I'll not argue theology with the Archbishop of York, coming originally as I do from the tran- not con-substantiation side of the argument. But when said Archbish strays over into Adam Smith and economics I'm afraid that it really is incumbent upon both I and us to point out to him the errors of his ways. There's to be a new book out, On Rock Or Sand, telling us all what's wrong with our country. And as far as theology goes well, theologians sound like the right sort of people to be telling us all about it. However, it would be helpful if, when those same theologians decide to tell us about economics, they have some clue as to the basics of the subject. This illustrates the problem nicely:

The book characterises the welfare state as the embodiment of the Christian command to “love thy neighbour” and warns that people should not rely on what the founding father of free-market capitalism Adam Smith called the “invisible hand” of the market to create a fair society.

Smith never said anything so drivellingly stupid. The one reference in Wealth of Nations to "invisible hand" is during a discussion of the general propensity to invest capital at home rather than abroad. The modern day usefulness of this being that, even in a world of perfect theoretical capital mobility, some incidence of a corporate profits tax will always fall on shareholders. This is something that is useful to know but it's going to be a very minor footnote in the recipe for a just society.

Which is why, of course, Wealth of Nations and Theory of Moral Sentiments are such agonisingly long books. For they're largely an exploration of when markets cannot be left safely to handle the creation of a just and or efficient society. Which is something we would hope someone desiring to comment upon them would know.

For example:

Dr Sentamu adds that a post-war vision through which the welfare state and NHS developed has “given way to an individualist and consumerist vision, with public goods such as health … and education … increasingly becoming privatised, where society has become a market society, with everything going to the highest bidder and the poor being left behind in the unceasing drive to increase the nation’s Gross Domestic Product.”

Smith discusses the very point of non-market access to education. And backs it, at least at the basic level. On the grounds (not that the phrase existed then) that being part of a generally literate and numerate society was indeed a public good. And we can go on, using the same logical structure, and argue that much of traditional public health is similarly a public good. Sewage, drains, the control of infectious diseases, the effects of vaccination, yes, these are indeed public goods. But the treatment of your or my cancer might well be good for the public, good public policy, publicly good even, but it's not a public good. As your or my university degrees are not a public good.

What really annoys is that Christian churchmen will be the first to agree that thousands of very bright people have chewed over the intricacies of theological debate for millennia. Even, that as a result some truths have been uncovered. And yet when it comes to economics they're unwilling to similarly agree that some thousands of very bright people have chewed over the subject for some centuries now and have uncovered some truths. Or if they are willing to accept that in theory they've apparently not bothered to find out what those truths are.

I've no idea as to whether tran- or con-substantiation is actually correct. And I'm also not all that interested to be frank about it. But I would make the effort to understand it all before pronouncing upon the matter. We'd all rather wish the Archbishop would make the same effort when he steps outside his own specialist knowledge base, eh?

A rousing defence of private property in The Guardian of all places

This is all rather Dr. Johnson in a way, as with seeing a woman preacher. It's that thing with a dog walking on its hind legs: not to see the thing being done so well but to see it being done at all. So it is with Aditya Chakrabortty and his tale of how some council house tenants in East London are being railroaded.

What is powerlessness? Try this for a definition: you stand to lose the home where you’ve lived for more than 20 years and raised two boys. And all your neighbours stand to lose theirs. None of you have any say in the matter. Play whatever card you like – loud protest, sound reason, an artillery of facts – you can’t change what will happen to your own lives.

Imagine that, and you have some idea of what Sonia Mckenzie is going through. In one of the most powerful societies in human history – armed to the teeth and richer than ever before – she apparently counts for nothing. No one will listen to her, or the 230-odd neighbouring households who face being wrenched from their families and friends. All their arguments are swallowed up by silence. And the only reason I can come up with for why that might be is that they’ve committed the cardinal sin of being poor in a rich city.

It's as if the assembled plutocrats of the planet are descending to feast upon the bones of good honest working class Brits, isn't it? So, who are the villains here?

Sonia lives in one of the most famous landmarks in east London. The Fred Wigg and John Walsh towers are the first things you see getting off the train at Leytonstone High Road station; they hulk over every conversation on the surrounding streets and the football matches on Wanstead Flats. Since completion in the 1960s, they’ve provided affordable council homes with secure tenancies to thousands of families. Named after two local councillors, they are a testament in bricks and mortar to a time when the public sector felt more of a responsibility to the people it was meant to protect, and exercised it too.

And so they must go. Last month, Waltham Forest council agreed on a plan to strip back the two high-rises to their concrete shells, rebuild the flats, and in effect flog off one of the towers to the private sector. In between Fred and John, it will put up a third block.

Difficult to think of a more rousing argument in favour of private property and against council housing really, isn't it? If you owned the home you lived in, or if the tenants collectively owned the building (as is common enough in buildings of flats) then they, the people who lived in that housing, would be able to control what happened to that housing.

Given that they don't, that it is owned by the local council, they have no such rights. They are subject to the whims of whatever turnips in red rosettes the local Labour Party put up for election. This isn't an argument in favour of "democratic control" of housing or anything else, is it? It is however a very strong argument in favour of private ownership, that private ownership which protects property from such "democratic control".

Chakrabortty doesn't quite manage to spot that logical conclusion to his argument, so we cannot say that he's done it well. But it is still interesting to see this argument in The Guardian, as with the dog on two legs.

Two cheers for Paul Krugman

Paul Krugman says that this (from this Branco Milanovic paper) gives you recent history in one chart, and it's hard to disagree:

Everyone got richer in real terms, although some a lot more than others – and this doesn't fully include technological developments that make pocket supercomputers cheap enough that even people on quite low incomes (for rich countries) can afford them. Like Scott I am more interested in the bottom 80 percent than the top 20 percent, so this is broadly good news. The bottom 10 percent do seem to be left behind to some extent, but African poverty has still fallen by 38% during this period, and most health-related metrics have improved. Maybe issuing more unskilled work visas to poor Africans and Indians would help to boost the incomes of the bottom 10 percent even more.

In another post, Krugman points out that the left's "econoheroes" tend to be of a pretty good academic calibre (he cites himself and Joe Stiglitz, both Nobel Prize winners), whereas the most popular economists on the right tend to be slightly less impressive supply-siders. I think that's fair, and it's a pity. When's the last time you heard a right-wing pundit citing Nobel Prize winner (and not-so-secret free marketeer) Eugene Fama's work on the efficiency of financial markets? Or, indeed, Milton Friedman's monetary prescription for stagnant economies like Japan or, now, the Eurozone?

Well, we try to here at the Adam Smith Institute, and a very honourable mention goes to the excellent James Pethokoukis at the American Enterprise Institute. There are others, but in general I think Krugman's point is pretty fair. For example, I often meet right-wingers who think using monetary policy to generate extra inflation during demand-side recessions is somehow a left-wing idea. This would come as a surprise to Milton Friedman!

I have a theory about why: the post-Cold War consensus has been so good for us – that is, the "Overton Window" of debate has shifted so far rightwards — that the best ideas have been absorbed by the 'centre' and the less compelling ones are all that's left over. That seems unsatisfactory to me, but it does leave me wondering what it means to be a free marketeer, if not a strong preoccupation with the supply side. Maybe Hayek has an answer.

Fiscal austerity might not have hurt growth in the Great Recession

I say 'might', but of course I don't think there's any evidence it did. Anyway, a new NBER paper (gated up to date version, full working paper pdf) from Alberto Alesina, Omar Barbiero, Carlo Favero, Francesco Giavazzi and Matteo Paradisi finds that it did not.

The conventional wisdom is (i) that fiscal austerity was the main culprit for the recessions experienced by many countries, especially in Europe, since 2010 and (ii) that this round of fiscal consolidation was much more costly than past ones.

The contribution of this paper is a clarification of the first point and, if not a clear rejection, at least it raises doubts on the second. In order to obtain these results we construct a new detailed "narrative" data set which documents the actual size and composition of the fiscal plans implemented by several countries in the period 2009-2013. Out of sample simulations, that project output growth conditional only upon the fiscal plans implemented since 2009 do reasonably well in predicting the total output fluctuations of the countries in our sample over the years 2010-13 and are also capable of explaining some of the cross-country heterogeneity in this variable.

Fiscal adjustments based upon cuts in spending appear to have been much less costly, in terms of output losses, than those based upon tax increases. The difference between the two types of adjustment is very large. Our results, however, are mute on the question whether the countries we have studied did the right thing implementing fiscal austerity at the time they did, that is 2009-13.

Finally we examine whether this round of fiscal adjustments, which occurred after a financial and banking crisis, has had different effects on the economy compared to earlier fiscal consolidations carried out in "normal" times. When we test this hypothesis we do not reject the null, although in some cases failure to reject is marginal. In other words, we don't find sufficient evidence to claim that the recent rounds of fiscal adjustment, when compared with those occurred before the crisis, have been especially costly for the economy.

The paper comes with a whole load of interesting charts, showing how much newspapers started talking about austerity in 2010, the evolution of Eurozone fiscal policy, the correspondence between different measures of governments' fiscal policy stances, and how much better cutting spending is as a means of belt tightening than raising taxes (contrary to what Keynesian intermediate macro textbooks tell you).

Interestingly, they don't make much mention of monetary policy whether conventional or unconventional. Of course, I believe that fiscal austerity would hurt growth if monetary policymakers weren't willing and able to steady aggregate demand. But so would a particular large firm, for example, reducing investment if this was also coupled with the central bank deciding to cut its nominal target for some reason.

It's terribly difficult to argue that markets are too short term

There's lovely little essay talking about how difficult it is to believe that financial markets are too short term in their outlook. To do so demands that said markets are entirely inefficient in their processing of information. And as this is something that no one but would be commissars still believes then it isn't really possible to insist that markets are short term in their outlook. Here's a part of said essay:

Basically, if capital markets price things well (with few ex ante errors, or put differently, the market is close to “efficient”) then maximizing shareholder value is a very good idea. Believing that markets make common and giant predictable errors is the only legitimate beef one can have with maximizing shareholder value, and it’s absolutely fair to debate this tenet.

But instead of confining the debate to this central point, or even realizing that this is the central point, critics attack shareholder value for many ancillary reasons. For instance, they laugh off the concept as vacuous, the absence of a strategy. They attack share‑based and particularly options‑based compensation. They attack markets and managers for being too “short-term."

The obvious point is that if markets are anywhere near efficient (and just about everybody agrees with the weak version and some more with the semi-strong) in the processing of information then the current market valuation is the value of that company from now into the indefinite future. And, given that we are measuring that flow of funds from that company off into that indefinite future then how on earth can this be short term thinking?

Sure, if you are a would be commissar then you can argue that markets aren't efficient at processing information. At which point you're going to have to explain the difference in food supply in London in 1990 and in Moscow in 1990. When that famous question got asked, "Who is in charge of the bread supply for London?".

Quite, markets are, observably, somewhat efficient at processing information. Thus they are forward looking and as such cannot possibly be short term. QED.

So how does this work then?

It would appear that someone, somewhere, is confused. It could be us that is confused but we're a bit, umm, confused about that. For the claim is that if retailers are providing a subsidy to the consumption of milk then this could devastate the milk producing industry. Which is confusing:

The price of milk has fallen to just 22p a pint thanks to a fierce war between supermarkets. Farmers have warned the UK dairy industry faces extinction if retailers continue to drive down the price – now at its lowest level in seven years. Asda, Aldi, Lidl and Iceland are selling four pints of milk for just 89p, while Tesco, Sainsbury’s and Waitrose are not far behind at £1. Pint for pint, milk is now cheaper than mineral water in most supermarkets. Retailers insist they are funding the cost of the price reduction from their own profits, rather than paying farmers less. Many supermarkets have guaranteed the price farms receive will stay above the cost of production. But farmers say the price war is also devaluing milk as a product at a time when they are under unprecedented pressure.

It doesn't get any less confusing on consideration, does it? The retail price of milk is lower, given the supermarket subsidy to it, leading to higher consumption, while the producer price is "guaranteed" to be above production costs. And this is going to devastate the industry? We don't think it is us getting confused here. Of course, the real background to this is that, as has been happening for the past couple of centuries as farming techniques improve, milk has been getting cheaper and cheaper to produce. And as has been happening over that time the higher cost producers have been pushed out of the market by the lower cost ones. This is, after all, the universe's way of telling you to go do something else, when the price of what you produce is lower than the cost of producing it. That's what is devastating farming, we're in general becoming more efficient at it. And the supermarkets are, through their subsidy, restricting this process which is the very opposite of devastation, isn't it?

Interrogating the evidence: women in academia

Lots of women have experienced individual instances of discrimination in academic settings. Women are underrepresented, relative to their half of the population, in some academic fields. Most people naturally conclude that one reason women are underrepresented is either (a) direct discrimination or (b) women being dissuaded from entering due to perceptions of an unwelcoming 'culture of discrimination'. A new paper argues that neither is a plausible explanation in philosophy, one of the fields most heavily criticised for its relative dearth of women. Authors Neven Sesardic and Rafael de Clercq, in the paper "Women in Philosophy: Problems with the Discrimination Hypothesis" present a strong case that there may well be bias in favour of women in the academic philosophy hiring process, with institutions going out of their way to try and find qualified women for positions if they can.

They point to a raft of previous work:

[At the University of Western Ontario 1991-1999] On average: 5.4% of female applicants were appointed compared to 2.9% of male applicants; 21.7% of female applicants were interviewed compared to 15% of male applicants; and 24.9% of female applicants who were interviewed were hired whereas 19.2% of men who were interviewed were appointed. Again, the results in each of the years are remarkably consistent. Women had almost twice the chance of being hired as did men.[9]

Similar results were obtained in a recent comprehensive study commissioned by the U.S. Congress to assess gender differences in the careers of science, engineering, and mathematics faculty—the area with the highest underrepresentation of women.[10] Conducted under the auspices of the National Research Council, Gender Differences at Critical Transitions in the Careers of Science, Engineering, and Mathematics Faculty included two surveys of major research universities, focusing on almost five hundred departments and more than eighteen hundred faculty members.

The authors reported that among those interviewed for tenure-track or tenured positions, the percentage of women interviewed was higher than the percentage of women who applied for those positions, and that tenure-track women in all disciplines received a percentage of first offers that was greater than their overall percentage in the interview pool.[11] The situation was the same with tenured positions in all disciplines except biology.

They attack the anecdotal evidence of discrimination presented in popular debate around the issue, and suggest that rather than discrimination either at the university level or perceptions of discrimination, biology and culture are to blame. Women end up, for whatever reason, with skill sets and preferences that don't favour the hard sciences and philosophy.

They document that existing studies showing bias have been overturned:

After re-examining the analyses, Nature has concluded that "[a study finding gender bias in journal acceptance of article submissions] can no longer be said to offer compelling evidence of a role for gender bias in single-blind peer review. In addition, upon closer examination of the papers listed in PubMed on gender bias and peer review, we cannot findother strong studies that support this claim. Thus, we no longer stand by the statement in the fourth paragraph of the Editorial, that double-blind peer review reduces bias against authors with female first names."[32]

It looks at evidence on research grant applications in the UK:

The authors looked at 1,741 grant applications to the Wellcome Trust and 1,126 grant applications to the Medical Research Council (in the UK). They concluded that “this study has shown no evidence of discrimination against women.”[35]

And across the developed world:

More recently, Ulf Sandström and Martin Hällsten investigated 280 grant applications submitted to the Swedish Medical Research Council in 2004.[36] Their conclusion is that “female principal investigators receive a 10% bonus on scores.”[37] More generally, Ceci and Williams report that “the weight of the evidence overwhelmingly points to a gender-fair review process” in grant funding.[38] Their conclusion is based on a number of smaller studies from different countries (including the abovementioned study by Grant et al.) as well as on six large-scale studies, including one by Herbert W. Marsh et al. that “found no significant gender differences in peer reviews of grant applications.”[39]

There is a huge amount more by way of evidence for their conclusion that neither (a) nor (b) is substantially true. Men and women sometimes want different things, and that's OK.

Paul Mason wants to be an economist

This is ever so slightly strange. Paul Mason has decided that he'd like to be an economist, figure out how the economy works in detail.

If I could rub an empty lager can, and get a genie to appear and grant me one wish for 2015, it would be for something apparently banal but revolutionary: an accurate simulation of the economy.

It would be multilayered: it would model the microeconomics of my home area, allowing me to test the lurid worries of my neighbours about the opening of a second tattoo shop. It would model the real Britain – including the sex work, the cybercrime and the drug deals. And at a macro-level it would model the whole world – from the effects of a factory collapsing on its workers in Bangladesh to those of fast fashion on the consumption habits of teenage girls here.

The reason we need such models is that the ones provided by economics are pretty useless – particularly when modelling instability, complexity and change. Mainstream economic models rely on the 150-year-old assumption that capitalism’s tendency is towards equilibrium, and that everybody acts rationally; they struggle to accommodate sudden shocks. About 20 years ago economists decided to abandon data and go for an ever more abstract series of models that are logically consistent but not tested against facts, and unable to predict real crises.

There's really only one slight problem with that idea. Hayek showed that, in theory, such detailed planning of an economy simply isn't possible. Knowledge is local, the centre cannot possible gather enough of it in apposite time scales to be able to produce such models. We end up with the end result that we can only use the economy itself as the model of the economy.

It's entirely true that not everyone actually believes Hayek on this point. There's always those who think that just a little more computing power, just a little more scientific socialism, will enable us to overcome this wastefulness of capitalism and markets.

But as the socialists themselves found out, this just isn't true. Or, sa this great essay points out, In Soviet Union Optimisation Problem Solves You.

I said before that increasing the number of variables by a factor of 1000 increases the time needed by a factor of about 30 billion. To cancel this out would need a computer about 30 billion times faster, which would need about 35 doublings of computing speed, taking, if Moore's rule-of-thumb continues to hold, another half century. But my factor of 1000 for prices was quite arbitrary; if it's really more like a million, then we're talking about increasing the computation by a factor of 1021 (a more-than-astronomical, rather a chemical, increase), which is just under 70 doublings, or just over a century of Moore's Law.

Now that is talking about planning the economy. But the same is true of modeling it. For if we can model an economy then, as Mason desires, we would be able to plan it. And the reason that we can't plan it is because we can't model it. It is just one of these things that we cannot do.

Anyway, full marks to Mason for wanting to understand more about the economy, limited points for wanting to know more about the effects of policy but really, shouldn't he have known that his desires are impossible before he became an economics editor?

Isn't the Venezuelan economy doing well?

The Venezuelan economy is at the top of the world. For something, at least:

The South American oil giant's economy shrank 2.3pc in the third quarter, after contracting 4.8pc in the first quarter and 4.9pc in the second, the central bank said.

The inflation rate, a figure the government had not released since August, came in at 4.7pc for November and 63.6pc for the year - among the highest in the world.

As we've mentioned around here before there's nothing wrong at all with the idea that you'd like to change an uneven income distribution. It may or may not be desirable, may or may not be practicable, but the basic desire for a little less extremity in the gap between rich and poor is not a dishonourable goal. It's just that there are sensible and non-sensible ways of going about this.

President Nicolas Maduro's leftist government has introduced mandatory price cuts and rent controls in a bid to rein in the increases but has not managed to get the inflationary spiral under control.

Inflation has been aggravated by severe shortages of basic goods.

Well, yes, it would be. Because price fixing is the wrong way to go about doing it. The problem that all too many of the simpler sorts of socialists have is that prices are not just what people must pay for something, they're also information to those producing things. So, if we price fix because we want the poor to have, say, toilet paper, we then find that the information going to those producing toilet paper is corrupted.

If we set prices above the market clearing price then forests will be razed to provide enough paper to overwhelm the very nation. If prices are set below that market clearing price, as they have been, then there will be shortages of this most basic accoutrement of a civilised bathroom experience. As there have been. And if we set prices at the market clearing price (ignoring that we can't actually calculate that without using the market itself to do so) then what the heck are we doing anyway?

Further, deliberately lowering prices by fiat will reduce production. Thus increasing the price of what is produced on that black market that will inevitably develop and this increasing inflation.

Price fixing just isn't the way to do it.

This is a lesson that our own socialists here in the rich world have learnt to some extent. They still get a bit confused over things like electricity, housing and health care, but at least for general consumables and comestibles they've got it. The way to enable the poor to enjoy more of these things is not to try to fix the price low but to simply give the poor some more money so they can buy at that market price. Which is what we do with tax credits and the like.

Whether we should be reducing inequality is a different matter: but if we are to then we should be doing it in a sensible manner. As Venezuela so obviously isn't.

Adam Curtis and the shapeshifting lizards

It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance ~ Murray Rothbard

Adam Curtis's segment in Charlie Brooker's look back on 2014 tells us that news is confusing, and hard to paint into black and white. We've withdrawn from Afghanistan, but did we win or lose? Bashar al-Assad is bad, but is ISIS even worse? But nothing, he says, is more confusing than the economy.

The economy is growing, but wages are falling; the deficit is falling, but the national debt is rising. This, he says, keeps the population (whether intentionally or not) in a state of confusion and apathy.

But at the 'dark heart of this shapeshifting world' he says, is quantitative easing (QE), which pumps hundreds of billions of pounds into the economy at the same time as the government is 'taking it out' via its austerity programme.

According to Curtis, the Bank of England has 'admitted' that his has accrued to the richest 5%, a failure of the programme. He calls it 'a ruthless elite, siphoning off billions of pounds of public money'. He even suggests it's roughly analogous to the situation in Russia, comparing British wealthy to oligarchs.

But I wonder if he's looked at any of the research into the programme, asked any economists, or even, perhaps, interviewed some people at the Bank of England?

The reason why some Bank of England research says that the wealth benefited disproportionately in wealth terms is that without the QE programme there would have been a depression, and asset prices would have collapsed. The rich hold assets, the poor don't. But does anyone think the poor would have done better had there been a depression and mass unemployment?

Curtis might find a comparison between what Ambrose Evans-Pritchard calls the 'QE bloc' of the US and UK (and now Japan) and the Eurozone germane. Where have we seen deflation? Where have we seen mass unemployment?

They might look at some of the peer reviewed and robust research telling us whether and how QE has worked.

Much of it is from the Bank of England and Federal Reserve, although I suspect that the credence Brooker & Curtis give to the Bank only extends to stuff that says things they want to hear. Anything else may be dismissed as being exactly what you'd expect the shapeshifting lizards to say.