Economic Nonsense: 38. The market cannot produce art, music, literature & museums

The market actually does produce such things in some other countries.  What the market does best is to allow people to create the wealth that will fund cultural activities.  The United States has a strong tradition in which people who have done well in business support the arts.  Names such as the Guggenheim Museum or the Getty Centre remind us of the generosity of rich patrons.  Andrew Carnegie, who found fame and fortune in the United States, funded the provision of organs in many churches in his native Scotland, as well as numerous libraries.

In fact the arts have been funded by rich patrons through the ages.  It was often regarded as a sign of good character and culture that a wealthy person would support art, architecture and sculpture.  The emergence of modern economies since the Industrial Revolution has enabled wealth to be created on an unprecedented scale.  This, in turn, has allowed some people to become rich through business and become patrons, where previously it was mostly aristocrats and rich merchants who could afford to do so.

When Kingsley Amis wrote for the Adam Smith Institute opposing arts subsidies, his central case was that if government through its arts committees funded the arts, their output would be skewed towards the desires and tastes of the paymasters, rather than from the passion and inspiration of the artist.

It must remain a suspicion that the committees responsible for handing out public funds as grants to the arts will give effect to their own tastes, rather than those which the public might freely choose to support otherwise.

Some arts can be self-supporting through ticket or admission prices, but government can help through its tax laws, remitting all or part of the tax that would have been due on money donated to artistic institutions.  It does not itself need to dole out taxpayer-funded largesse,  The UK's National Lottery has multiplied financial support for the arts without needing taxpayer funds.  The view that the market cannot finance the arts and that government grants are needed to sustain them is simply not correct.

It's not entirely obvious that inequality is increasing

It's a standard trope of our times that inequality is increasing beyond all reasonable levels. And it's also true that this isn't really quite true. Inequality within the rich countries has been increasing in recent decades, this is true. But global inequality has been falling. And now from Branko Milanovic (one of the major scholars on this subject) we get that chart above, and this:

...the noted convergence of countries’ inequality levels (see the graph, indicating that countries with higher inequality before 1980 had smaller increases or even declines in inequality since)?

He's actually arguing about something else which is why the quote is so truncated. But this is interesting, don't you think? While there has been rising inequality in some to many countries in recent decades those with the highest original inequality have seen, in some cases at least, falls. And that convergence does mean that the world is, at the country level, becoming equally unequal.

The standard trope of that increasing inequality has more than a few problems with it therefore: not just that decreasing global inequality but also this convergence of inequality. and that's before we even get into things like trying to measure inequality of consumption, adjusted for price levels, at which point we'd be very hard pressed indeed to claim that there's been any rise in inequality in the UK at all.

Economic Nonsense: 37. Government must act to redress trade deficits

No, not really.  People used to think so.  To some extent this is a hangover from mercantilist attitudes when people thought you needed a surplus of exports over imports so you could accumulate wealth.  In its primitive form of bullionism, people thought you had to sell more than you bought in order to build up piles of precious metals.  

When the UK had fixed exchange rates the balance of trade was regarded as vitally important.  Each month when the Department of Trade (as was) published the figures, people would fret about rising imports or reduced exports.  The "trade gap" would sometimes feature as the lead item on the evening news bulletins.  The significance was that if the imbalance were sustained over a period of time, the pressures on the currency would rise to the point where the pound might have to be devalued to a new fixed rate.  This was regarded as a humiliation, and made imports more expensive, increasing the cost of living.

Once the pound was allowed to float against other currencies, however, the issue lost significance.  If imports exceed exports over a period, the pound drifts down in value, making exports cheaper to sell and imports cheaper to buy, thus closing the gap.  Trade deficits are only a problem for countries with fixed rates of exchange.  And even here, while devaluation can redress them, other countries might also devalue, leading to "currency wars" as each tries to give itself a trade advantage.

Floating currencies solve the problem.  If a country is uncompetitive, buying more than it sells, its currency will go down, enabling it to sell more and buy less.  One of the problems with countries such as Greece has been that within the eurozone, they were not able to devalue or to drift down.  The value of the euro was not within Greece's control.  Had they left the single currency and restored the drachma, a steep devaluation would have addressed their debts and their competitiveness.  

Economic Nonsense: 36. It is important to ensure that the finest minds are directing the economy

This commits the Platonist fallacy of supposing that the problem is to find the wisest, noblest rulers.  The assumption behind it is that we will come out best if only the right people end up in charge.  In "The Open Society and its Enemies," Karl Popper exposes the fallacy.  The problem is that that whatever method we choose to select our rulers, those rulers can easily be corrupted in office.  The temptations of power are all too obvious.

If we did manage to have the finest minds in charge of the economy, the odds are high that they would direct it to serve ends they approved of, rather than the ends that ordinary people would freely choose if they had the opportunity.  

But there is a deeper fallacy.  It is that any minds, no matter how fine, can have sufficient information and act quickly enough to direct the economy.  The economy is changing from micro-second to micro-second as choices are made, decisions reached and actions taken.  These all input into the flow of information conveyed by prices and deals.  The economy is not like a vehicle that can be controlled by accelerators, brakes and steering wheel.  It is more like a living organism in its complexity and its ability to adapt to changing circumstances.  The odds are that if the finest minds were to direct the economy, they would direct it badly. 

Popper's answer was not to ask, "How can we choose or train the best rulers," but to ask instead, "How can we so organize political institutions that bad or incompetent rulers can be prevented from doing too much damage?”  His answer was that you need a means of rejecting the bad, rather than selecting the good.  In the economic sphere this happens without the direction of the finest minds.  Products that do not cut it with consumers are counted out, along with the firms that market them.  Capital is redeployed to the newer, smarter people who can satisfy customers.  It is a continuous process by which the less competent is weeded out in favour of the more competent.

If we did have the finest minds trying to direct the economy, the chances are that they would contrive to stop this happening, or at the very least, interfere with it in ways that made it less effective.

The Observer seems remarkably confused about Chinatown this morning

Apparently rents are going up in Soho's Chinatown enclave. The Observer seems very confused indeed about this:

The doubling and more of rents and the pressure to convert restaurant space into residential property are causing long-established family businesses to close, social networks to break up and generic catering businesses with more financial muscle to move in. A famous and attractive manifestation of London’s celebrated diversity will dilute and fade. Big trouble in little Chinatown as rent rises force restaurant owners out Read more

Other examples include threats to markets and industrial space in other parts of the city, to the music shops of Tin Pan Alley, much-loved clubs or independent-spirited restaurants. There are the squeezing out of small but useful shops and other businesses, the city’s inability to house its poor, the exclusion by house price of the people who provide its services, from cleaners and carers to the designers and creatives who are said to add so much to London’s international lustre.

It is confused to both complain about the shortage of residential space and also about the conversion of commercial space to residential space in the same city, isn't it? But the real problem of course is the headline:

The Observer view on the threat to London’s Chinatown: its loss will be no one’s gain

Well, let's see. The landlords will gain, they will be getting more money for their property. But that's not all: all of the users of the properties will gain as well. If the value in use of some part of Soho was greater as a chop suey house than as a house then the chop suey place would produce a higher valuation for the property. We thus don't need an agonised "conversation" about what provides the greater value. We only have to go and look at the prices. If the price is higher as a not chop suey house, which is what The Observer is complaining about, then quite obviously all of the users of that joint value the joint at a lower value than the alternative use.

After all, this is the very definition of societal wealth creation: moving an asset from a lower to a higher valued use.

It may well be that some looking for a cheap chow mein will be disappointed at not being able to get one from that now residential building. But if the customers in aggregate were in fact willing to pay the amount needed to keep the restaurant in place then it would still be in place, wouldn't it?

This is just sooo embarrassing

There's many things that we don't know much about and they tend to be the things that we don't opine upon. There's a (rather smaller) set of things we do know something about and we do tend to opine upon them. We would put this forward as useful general advice in fact. So it's just too, too, embarrassing to see one of our national legislators revealing that he's got an opinion on a subject where he is obviously entirely clueless:

USC collapsed into administration in January but was rescued days later by another Sports Direct subsidiary, Republic, as part of a controversial pre-pack deal that saw staff given just 15 minutes notice of their redundancy.

In a testy three hour exchange, Ian Davidson, the Labour MP who chairs the committee, said that while Sports Direct was legally shielded from the losses incurred by USC's collapse, it had a "moral" duty to foot the bill for USC's oustanding debts and redundancy payments.

"You have managed to retain all the good bits remove bad bits. You’ve done over the taxpayer as well. We have ended up carrying the debt and you’ve strolled off into sunset with the money. It’s good business if you can get away with it. It may be legal but it’s not moral," he said.

A market economy is, in one sense, an experimental economy. People continually try new combinations of whatevers, within the technological envelope of what is possible, and see what happens. Most of these experiments fail but enough succeed that the general living standard rises over the years and decades. We like this. An extremely important part of such an experimental economy being, well, what do we do with the failed experiments?

The complaint here is that the debts have been put over into one pot while the potentially productive assets have been detached from the debts and sold on (for whatever sum) to someone who might be able to make better use of them. This is the complaint note: but this is not a bug in bankruptcy, it's actually the entire damn point.

If we leave those potentially profitable assets attached to that debt then the value of the combination is less than zero. That's actually what "being bankrupt" means. Those assets cannot therefore be used to do something more useful as no one will take them on. Who would take on something with a negative value, if you lose money just by walking in the door? Thus what the process of bankruptcy actually is. Separating the debts, into one pot, from the assets into another. So that those assets might, at least potentially, be used in a manner that adds value rather than decreases it. If we don't do this then every experimental failure leaves assets that cannot be used by anyone: and the entire society will thus become poorer over time.

"You have managed to retain all the good bits remove bad bits."

Yes, that's the point of having a bankruptcy process.

It might be a bit much to hope for our being ruled by wise Solons but might we at least expect that our Solons do in fact have a clue?

Economic Nonsense: 35. Big companies cut safety & build in obsolescence to boost profits

If big companies actually did this they would be very silly indeed, and would not remain big companies for long.  What companies want is satisfied customers, preferably repeat customers.  They want customers to value what they are buying, and to come back for more.  They want customers who will spread the word and encourage others to become buyers as well.

One thing companies do understand is that reputation matters.  If they made unsafe products that became unusable, they would soon gain a reputation bad enough to deter buyers.  Buyers are not captive; they can turn to other firms.  It is because of this that firms compete against each other, trying to outdo each other in the value they provide.  That value includes both safety and quality.

Some products do become obsolete, of course.  In areas characterized by innovation and rapid progress, this year's wonder product can be out of date in a few year's time, or even sooner.  Most buyers would not want a computer or a phone that would last 50 years.  There would be no point.  But this is not obsolescence that is deliberately built in; it is obsolescence brought about by improvement.

Because firms compete against each other, they can attempt to occupy different market niches.  Some people would prefer to buy things that are cheap and cheerful and not as long-lasting, rather than things that are more durable, but cost significantly more.  Competition allows both types of people to be satisfied.

The claim that companies cut safety and build in obsolescence is often made by people who are simply anti-business, and these are usually people who do not understand what business is all about.  They think business is some kind of conspiracy against the public and that firms make profits by swindling people.  It is in fact about supplying value for money that will leave both buyer and seller feeling they have gained by the transaction.  This is far more likely to be achieved by selling safe products that are long-lasting enough to satisfy customers than it is by cheating them.

Dealing with the other side on the gender wage gap

Though there is a very large literature suggesting that the gender wage gap is not down to discrimination, this is not a universal finding, even in new papers. Three recent studies, for example, allege that their evidence supports the gender discrimination model of the labour market. However, their methodologies cannot well account for alternate hypotheses (e.g. gender difference) and we would do well to look primarily at the work which does try and factor these possibilities in. The first, "Estimating gender differences in access to jobs" (2012 pdf, 2015 gated), from authors Laurent Gobillon, Dominique Meurs, and Sébastien Roux, finds that:

females have a lower access to jobs at all ranks in the wage distribution of job positions and that the access function is decreasing with the rank. At the lowest ranks, the probability of females getting a given job is 9% lower than the probability of males. The difference between these probabilities is far larger at the highest ranks and climbs to 50%.

But wait! Their data allows for three explanations!

First, females may apply less often for high-paid jobs because working hours are less compatible with family constraints. Second, there can be taste discrimination against females which increases with the rank. Third, there can be statistical discrimination such that the skill distribution is the same for males and females, but skills are observed with more uncertainty for females than for males by managers.

Turns out there are lots of existing papers suggesting statistical discrimination (i.e. not sexism/racism) explains a big fraction of differential labour market outcomes between groups. And we have lots of evidence that men and women have different preferences about work hours. Let's not point to taste-based (i.e. sexist) discrimination before we've considered more well-supported alternative hypotheses.

"Gender and Dynamic Agency: Theory and Evidence on the Compensation of Top Executives" (2015 pdf) by Stefania Albanesi, Claudia Olivetti and María José Prados is even stranger. They:

document three new facts about gender differences in executive compensation. First, female executives receive lower share of incentive pay in total compensation relative to males. This difference accounts for 93% of the gender gap in total pay. Second, the compensation of female executives displays lower pay-performance sensitivity. A $1 million dollar increase in firm value generates a $17,150 increase in firm specific wealth for male executives and a $1,670 increase for females. Third, female executives are more exposed to bad firm performance and less exposed to good firm performance relative to male executives.

But their data shows that this is more or less entirely explained by male executives being older and more experienced. They don't have the data to control for age and experience so they just don't!

Sure, this isn't quite how they tell it in their abstract and conclusion but what else does this mean?

The managerial power/skimming view of executive compensation can rationalize these differences based on the notion that female top executives are less entrenched than male top executives, due to their younger age and their relative difficulties in accessing informal networks.

Whereas we know that for otherwise similar male and female execs, women get promoted more aggressively and earn more.

"The gender wage gap among PhDs in the UK" (2015 pdf) by Ute Schulze finds a similar sort of thing. There is a gender wage gap among even highly talented and motivated people—those who manage to earn a PhD. But is this down to discrimination? Schulze thinks it is: even within fields and within academia the gap ranges from an average of £559 to £10,902.

But does Schulze control for the positions these people end up reaching—no. She is right that men get higher returns on their observable characteristics, but she hasn't observed enough characteristics to justify her conclusion. There is quite a lot of good evidence that academia isn't significantly discriminatory towards women, and this simple regression based study is not enough to turn that over.

It seems more plausible that the large differences in preferences observed even between highly talented men and women explain the gap here—with men taking on more competitive, harder and just more work and hence ending up with dissimilar labour market outcomes.

It's true that this could come from social/cultural pressure, but at the same time it could be primarily biological. What's more, it doesn't seem to lead to women rating their lives as worse, in fact quite the opposite. Raising children and doing work in the home tends to be related to women reporting higher happiness, well-being and life satisfaction.

So it's not clear to me that this new hat-trick of papers adds anything to what we already know about sex/gender discrimination in the workplace—it still seems like there just isn't that much of it.

Economic Nonsense: 34. Governments have a duty to extend equality in wealth and income

Governments in democratic societies are elected to serve their citizens, not to impose some ideological view of what they would prefer society to look like.  If they do try to pursue equality in wealth and income they will almost certainly reduce both.  While there are some who would prefer a society that was more equal rather than one in which everyone became wealthier, this is unlikely to become a popular view.  Becoming richer is something that matters much more to poor people than to rich people.

People are different and they have different goals in life.  Some are born more talented, and some put in the effort and the time it takes for them to become so.  Some people have more economic value than others, though this is not to say they have more moral worth.  People will pay money to see a talented celebrity or sportsman perform, and those individuals can become richer in consequence.  To equalize incomes is to prevent this happening.  Since higher earnings make possible higher savings and greater wealth, to equalize wealth is to prevent people from accumulating the proceeds of their talents.

Most people would prefer society to make provision for the unfortunate or destitute, but this means ensuring they have a decent standard of living, not making them equal in wealth and income with richer people.  Governments that strive for equality can only do so at the expense of liberty, by preventing the free choices and exchanges that people would otherwise make.

Egalitarians have tried to redefine poverty as a percentage of average income, but this is not what it is.  Poverty does not mean inequality, it means not having enough resources to get by and to live a decent life.  Many would rate opportunity above equality, thinking it more important that people should have the chance to develop their talents and abilities and to raise their standard of living.  Many would prefer governments to help make this possible, rather than attempting to equalize wealth and income.

Peru: an argument for competition in currencies

If only we had introduced the Hard Euro, as the UK Prime Minister at the time, John Major, had suggested! Sadly his proposal came just too late, as the EU Euro enthusiasts were already pressing ahead with their own plans to create a single, Euro, currency that would replace domestic currencies such as the Frank, Mark, Lire and of course Drachma. John Major’s idea can be seen working perfectly well here in Peru, which I have been visiting for the Mont Pelerin Society conference in Lima. Being close to the US in terms of trade, and reasonably close – well, in the same hemisphere – in terms of geography, and having a border with Ecuador, which uses the US Dollar as its currency, US dollars circulate quite freely here, alongside the domestic currency, Soles.

Dollars are most obvious in the capital and in tourist areas, and indeed the ATM cash machines at the banks will dispense them in everyday quantities. They are commonly accepted, particularly for larger transactions.

The result is that there is a competition between currencies, Dollars and Soles – just as Hayek proposed in the 1970s and as Robert Miller outlined, in a recent Adam Smith Institute paper ‘What Hayek Would Do’.

The effects are interesting. Because of the prevalence of Dollar usage, there are limits to the extent that the monetary authorities in Peru can overextend and devalue Soles. They know that if their currency loses its value, more and more transactions will be done in Dollars. We used to think that there would need to be a difference of perhaps 5% or more (and perhaps a widespread feeling that the gap would widen) between the value of competing currencies in order for people to shift from one to the other: which made a lot of people say that competition in currency would not work, because it would lead to big wrenches from one currency to another.

But the opposite seems to be the case. As one currency loses a bit of value, more and more people make their transactions in the other. The marginal differences in people’s currency use is enough to keep up the pressure on the domestic authorities. And the authorities know that they have no influence on the value of the Dollar – the value of which might, at any point, become inappropriate to local economic conditions – so the last thing they want is people rushing to take out Dollar loans and relying too heavily on Dollars, since then the authorities would lose all control over monetary conditions.

Equally, the public are pretty savvy about their finances. Announcements from the Federal Reserve in Washington lead to radio chat shows in which people debate whether they should be taking out mortgages in Dollars rather than Soles. Just the sort of competition that Hayek might have hoped for – no big wrenches, just lots of individual decisions made at the margin.

Wouldn’t that be nice in Europe? A currency that had to prove its worth to people by being at least as good, and maybe slightly more solid, than their own, and which people could choose (or not) if they desired. Indeed, even in non-Euro countries like the UK, it would be rather refreshing for people to have the choice over which currency they used. It might have moderated the reckless expansions of the early 2000s and made the post-2008 adjustment very much quicker and less painful.