HMV must adapt or die

6571

hmv-must-adapt-or-die

What was the most dangerous evil to come out of Pandora’s box? Classical texts point to greed, envy, and the relentless pursuit of power. Modern tabloids would suggest lust. I am convinced that of all the evils, Nostalgia exerts the most corrosive influence on human happiness. Nostalgia, or the false romanticization of the past, breeds an aversion to change. Of course, change may not always be good, but an unwillingness to at least be open to change is always bad.

Consider HMV. The high-street retailer, which offers CDs, DVDs and other entertainment products, has faced steeply declining profits as a result of competition from internet shopping and supermarkets. A couple of days ago, HMV secured a £220 million loan from lenders that included state-backed institutions such as RBS and Lloyds banking group. The loan in itself is not bad; the company can use this opportunity to dramatically reconfigure its business model and emerge in a more competitive form. If HMV once again becomes profitable, the shareholders, the lenders, and everyone else involved in the deal benefits. The dialogue surrounding the circumstances of the loan issuance, however, was worrying.

Romaticization began with puff pieces like one in the Guardian entitled ‘Would you miss HMV?’ which included maudlin reminisces such as ‘there is nothing like owning a record’ and ‘its been really sad seeing stores close down one by one—I don’t want HMV to be next'. There are some things worth preserving, but the sort of sentimentality that portrays HMV as a British national treasure is silly at best and destructive at worst.

Consumers clearly do not value HMV that highly. HMV is not going out of business because of a sinister-investment banker-driven-plot-to-destroy-all-that-is-good-and-wholesome-in-the-world. HMV is going out of business because the majority of consumers prefer to purchase their CDs/DVDs online at lower prices (or illegally download them) rather than travel to a store and pay more. Some people might prefer the latter experience, but not enough to support the current massively expensive operating model. Either HMV will have to downsize, streamline, and reinvent in order to serve this niche consumer base, or it must exit the market entirely.

The demise of HMV as we know it does not mean the end of entertainment, but rather a transition towards new forms of entertainment distribution and consumption, as demanded by the consumers. For the true CD lover out there, you will still be able to buy CDs, just as you can still buy a gramophone. Given the limited demand for gramophones, you have to shop online or in a specialty shop rather than in a massive gramophone complex on Oxford Street, but the option is still there. So it is with CDs. If consumers demand a good or service, the market will provide it – even if it’s obscure. But if they don’t, no one should be forced to subsidize its provision for the sake of nostalgia.

Yes it was Maggie

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yes-it-was-maggie

Many stories are told about the post war British economy. There are those who still claim that 1976 was the peak year, the gloriousness of all gloriousnesses because that was when we had the least inequality. Those who lived through it as adults are, to put it politely, less than sure that was the case.

Here's another idea though. The problems actually started in the 1930s nd it was only the 1980s that got us out of them.

The retreat from competition in the British economy was triggered by the 1930s crisis but was not fully reversed until the 1980s. Early postwar Britain was notable for cartelisation, nationalisation, weak competition policy, and protectionism.

One Nation Tories and socialists were in power thoughout that time period.

The results of the “Thatcher Experiment” in the 1980s make the case and paved the way for reversing relative economic decline. Competition was much strengthened by ongoing trade liberalisation, deregulation, and discontinuing 1970s’ industrial policy. As competition strengthened, there were major changes in industrial relations which were associated with organisational change, together with divestment and restructuring in large firms.

Despite Maggie being in the Conservative Party the best description of her economics views is "liberal". And these were liberal reforms she brought in and which had the desired effect: increased productivity.

So yes, it is Maggie wot done it.

Thankfully.

So what is it that makes people happy?

6564

so-what-is-it-that-makes-people-happy

Much consternation over the pond on what it is that makes people happy. For the OECD has released the "Your Better Life" report and the US isn't top. Surely this cannot be, that there are 16 countries happier than the US?

So I thought I'd have a look through the numbers and see what I could find. The most obvious point is that higher taxes and a larger welfare state don't provide the answer. For other than Hong Kong, just about everyone has those and some of them are less happy than the US. They are not the definitive factor (s) therefore.

So I went and looked at the various measures of economic freedom instead. We can look at things like business freedom, trade freedom, monetary such, investment, financial, the protection of property rights and the lack of corruption. The other measures clearly are to do with that tax and spend stuff that we've already rejected as our explanation. I looked only at those 16 countries which are happier than the US. There are a couple of wobbles, France is an outlier on these figures just as it is for the use of soap or the sale of ladies' razors.

But all of those countries are, with the occasional already admitted wobble, freer economically than the US. Higher business freedom, investment, financial and trade. These we could and should lump together as free trade really: free trade internally and externally.

Freedom from corruption is really the rule of law: a corrupt place doesn't have that because the corruption is in itself being paid to undermine the rule of law. Low corruption means the law (whatever it actually is) isn't being subverted. And property rights are, well, they're property rights.

So, now we have it, now we know what it is that makes countries happy, happier than the United States. Free trade, property rights and the rule of law.

Who knew?

The government's immigration cap is economic illiteracy

6563

the-governments-immigration-cap-is-economic-illiteracy

There’s an old joke: How do you know when a politician is lying? His lips are moving. So it is with this government’s supposed commitment to economic growth, and the ludicrous immigration cap that it intends to implement. The idea is so economically illiterate, so wilfully illogical, that it makes me wonder if the people proposing it understand that their policies will actually have an effect on people’s lives, or if they simply don’t care. As policies go, it’s less a case of cutting off your nose to spite your face, and more like cutting off your left arm so your right arm doesn’t have to compete with it.

On top of the immigration cap that the government has already proposed, the immigration minister Damian Green has said that only a “tightly controlled minority” of the 100,000 allowed in will be able to stay for longer than five years. So, the immigration cap keeps numbers down, and the “no settling down” rule reduces the quality of the people who can come in by putting off anybody who wants to integrate or settle down.

Immigration is good for the economy. Increasing the complexity and size of the workforce allows greater specialization and efficiency, and living in a relatively stable and free society can unlock the potential of innovative immigrants who would otherwise be wasted at home. To deny this is to deny the benefits of free trade – an example of faith-based economics that has no basis in fact or theory, and should have no place in contemporary politics. Some worry about the burden on the welfare state – a worry that ignores the fact that immigrants are net contributors to the state – but this could be addressed by limiting the welfare services available to new immigrants. The social arguments against of immigration amount to a form of coercive social engineering: you may own your property but you cannot rent or sell it to this person, because he's from a different country.

Capping immigration will hurt the economy no less than putting up protectionist barriers to trade or banning firms from hiring more than a certain number of staff would. Today’s idea is similar – not just anti-growth, but anti-economics. It is a rejection of the use of reason in policymaking in favour of kneejerk populism. I’ve always suspected the government’s commitment to economic growth to be empty. If this excuse for a policy makes it into law, I’ll be certain of it.

Economists? What economists?

Only 15 of the 52 are actually practising mainstream economists:

Howard Reed, Landman Economics; – Tax specialist
Prof Geoffrey M Hodgson, University of Hertfordshire – Business Studies
Professor Mariana Mazzucato, Open University – Economics of Innovation
Professor Marcus Miller, University of Warwick – Macroeconomics
Professor Dennis Leech, University of Warwick – Economics
Prof. Giuseppe Fontana, Leeds University – Monetary Economics
Professor Susan Himmelweit, Open University – Economics
Prof Malcolm Sawyer, University of Leeds – Economics
Dr Paul Segal, University of Sussex – Economics
Dr Jonathan Perraton, University of Sheffield – Economics
Ismail Erturk, University of Manchester – Banking
Professor Matthew Watson, University of Warwick – Political Economy
Professor Sir Tony Atkinson, Nuffield College, Oxford – Public Economics
Professor Andy Danford, Bristol Business School (Research Director)
Professor Gregor Gall, University of Hertfordshire – Industrial Relations

Quite a few are active campaigners:

Andrew Watt, Senior Researcher, European Trade Union Institute
Michael Burke, Economic Consultant (frequent Guardian columnist)
Pat Devine, University of Manchester – Industrial Economics (Google says he's a 'Radical economist')
Richard Murphy, Director, Tax Research LLP – Anti-Poverty Campaigner

Including several from the left-wing new economics foundation:

James Meadway, Senior economist, new economics foundation
Ruth Potts, Campaign Manager, the Great Transition (at the new economics foundation)
Andrew Simms, nef fellow and Green New Deal Group Member
James Meadway, Senior economist, new economics foundation

A good many of those signing the letter are no longer active in academe:

Sheila Dow, University of Stirling – Economics (retired)
Barbara MacLennan, Universities of York and Manchester – Economics (retired)
Professor Derek Braddon, University of the West of England – Economics (retired)
Ian Gough, Emeritus Professor, University of Bath – Social and Policy Studies (retired)
David Purdy, University of Manchester (retired)
lan O'Shea, UEL – Cultural Studies (retired)

Several more seem to have more overseas than UK experience:

Henning Meyer, LSE – Global Governance;
Robin Murray, Senior Visiting Fellow, Global Governance, LSE
Prof George Irvin, Univ of London, SOAS – Development Studies
Professor Diane Elson, University of Essex – Development Studies
Professor David Bailey, Coventry University – International Business Strategy
Jonathan Glennie, Overseas Development Institute (former Christian Aid manager)

A large number are do not teach economics but 'organizational studies' and similar subjects:

Dr Gregory Schwartz, University of Bath – Organizational Studies
Professor Alison Pullen, Swansea University – Organization Studies
Dr Damian O'Doherty, University of Manchester – People, Management and Organizations
Professor Simon Lilley, University of Leicester – Information and Organization
Colin Crouch, University of Warwick – Governance and Public Management
Nick Isles, Managing Director of Corporate Agenda – Organizational Performance
Professor Stephen Haseler, Global Policy Institute – Constitution and International Relations
Prof Peter Case, Bristol Business School – Leadership and Organizational Ethics

While several more are social policy theory:

Professor Adrian Sinfield, University of Edinburgh – Social Policy
Professor Stephen Linstead, University of York – Organizational Theory Research
David Donald, Glasgow Caledonian University – Political Science
Professor David Marquand, Oxford University – Politics (former Labour MP)
Stuart White, Jesus College, Oxford University – Politics
Valerie Bryson, Emerita Professor of Politics, University of Huddersfield – Politics (retired)
Alan Finlayson, Reader, Dept. of Political and Cultural Studies , Swansea – Political Theory

Some are historians, others involved in culture, and even media studies:

Prof Richard Grayson, Goldsmiths, University of London – History
Professor Jonathan Rutherford, Middlesex University – Cultural Studies
Professor Stefano Harney, Queen Mary, University of London – Strategy, Culture and Society
Professor David Knights, Bristol Business School – Ethics, Gender Studies, Financialization
Professor Natalie Fenton, Goldsmiths, University of London – Media and Communications
Dr. Douglas Chalmers, Glasgow Caledonian University – Media and Journalism

A few hardly register on Google at all:

Mark Fisher, University of London
Stewart Lansley, Research Fellow, Bristol University
Dr. Olivier Ratle, University of the West of England, Bristol

So: a devastating broadside that will blow a hole in the government's economic strategy? Hardly.

6544

economists-what-economists

I was slightly astonished when I read that "52 economists" had written to the Observer to say that the government's book-balancing, welfare-reforming strategy was all wrong. First, as unkind people say, there are three kinds of economist – those who can count, and those who can't. When 364 economists wrote to the Times to beat up Mrs Thatcher's economic strategy many years ago, they obviously got the number of days in the year wrong. At least this lot know how many weeks there are in a year.

But what really puzzled me is how any economists, never mind 52 of them, should say anything so daft. Plainly, we've been spending and borrowing far too long, and now it's chicken-roosting time. That's pretty obvious.

So I spent an hour doing a very quick Google check on the 52 that had signed the letter. [Continue reading] 

The unintended consequences of price controls and the minimum wage

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the-unintended-consequences-of-price-controls-and-the-minimum-wage

Interest rates and the price system

6537

interest-rates-and-the-price-system

The key thing to realize about market economics is that prices function as signals. They emerge spontaneously, and co-ordinate the actions of millions of people, all over the world, who may not know each other and may have nothing in common.

At the basic level, it's a question of supply and demand. If the supply of X rises relative to the demand for X, then the price of X will fall. That falling price is a signal to entrepreneurs that they should probably switch their investment somewhere else, which in turn leads to lower production. On the other hand, if the supply of X falls relative to the demand for X, then prices will rise. And rising price is a signal to entrepreneurs that they should invest in X, in order to increase production and satisfy market demand. To put it very simply, it is the system of market prices that co-ordinates supply and demand, avoiding big shortages or surpluses.

The problem when government tries to control the price of anything is that prices no longer reflect supply and demand, and no longer serve as a useful guide to entrepreneurial activity and investment. No one has any reliable way of knowing, in the absence of market prices, whether we need more of X or less of it. Inevitably, we end up with a shortage or a surplus. Consider, for example, what has happened when governments have interfered with food prices. In Europe, we've had lakes of milk and mountains of butter. In Africa, they've at times ended up with nothing much at all. Such outcomes are unavoidable when you don't have market prices to guide activity.

Crucially, of course, governments can never 'set' prices correctly – the information they would need to do that is so dispersed, so complex, and so constantly changing, that real market prices can only ever arise spontaneously.

Let’s apply this to interest rates. As I pointed out yesterday, interest rates are prices – in this case, the price of loaned capital. And again, this price is essential for the co-ordination of economic activity. The supply/demand point made above holds true. If savings are in short supply, but demand for borrowing is high, then interest rates will rise. That reduces demand for borrowing (because borrowing is expensive) but also increases the incentive for people to save (because they'll get a better return on their money). As more is saved, more loanable funds become available, and the price of loaned capital (that is, the interest rate) falls. That makes borrowing more attractive, so demand for loans rises. If it starts to outstrip the supply of loanable funds then the whole process starts again. It is like a constant balancing act – the price fluctuates spontaneously in an unplanned effort to match the supply of savings with the demand for credit.

Now, that is a bit of a simplification, because there's actually a more sophisticated point to be made about interest rates, which is that they also express the extent to which people are willing to forgo something now for the prospect of a greater reward in future. In economic jargon, it's called time preference, and it tells entrepreneurs whether they should be investing in capital goods (that is, in things which are used to produce other goods), in ‘durable consumer goods’ (things like cars, fridges, even houses), or in goods for immediate consumption. Again, when governments mess around with interest rates, they distort the allocation of capital – investment goes to the wrong stages of production, and the wrong goods are produced. Supply and demand, once again, does not meet up.

And that’s the fundamental problem with governments, or government agencies setting interest rates. Inevitably, they don’t have the information they need to set the ‘price’ correctly, and so the proper functioning of the market is disrupted. That’s when you get misallocated capital, bubbles, and an exaggerated boom and bust cycle.

The relationship between saving and borrowing

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the-relationship-between-saving-and-borrowing

I wouldn’t normally quote at such length, but I was re-reading Henry Hazlitt’s Economics in One Lesson and came across a very elegant explanation of the relationship between saving and borrowing, and its importance in a market economy. I can’t better it myself, so here it is:

[W]e may define "savings" and "investment" as constituting respectively the supply of and demand for new capital. And just as the supply of and demand for any other commodity are equalized by price, so the supply of and demand for capital are equalized by interest rates. The interest rate is merely the special name for the price of loaned capital. It is a price like any other.

This whole subject has been so appallingly confused in recent years by complicated sophistries and disastrous governmental policies based upon them that one almost despairs of getting back to common sense and sanity about it. There is a psychopathic fear of "excessive" interest rates. It is argued that if interest rates are too high it will not be profitable for industry to borrow and invest in new plants and machines. This argument has been so effective that governments everywhere in recent decades have pursued artificial "cheap money" policies. But the argument, in its concern with increasing the demand for capital, overlooks the effect of these policies on the supply of capital. It is one more example of the fallacy of looking at the effects of a policy only on one group and forgetting the effects on another…

The effect of keeping interest rates artificially low, in fact, is eventually the same as that of keeping any other price below the natural market. It increases demand and reduces supply. It increases the demand for capital and reduces the supply of real capital. It brings about a scarcity. It creates economic distortions. It is true, no doubt, that an artificial reduction in the interest rate encourages increased borrowing. It tends, in fact, to encourage highly speculative ventures that cannot continue except under the artificial conditions that gave them birth. On the supply side, the artificial reduction of interest rates discourages normal thrift and saving. It brings about a comparative shortage of real capital.

The money rate can, indeed, be kept artificially low only by continuous new injections of currency or bank credit in place of real savings. This can create the illusion of more capital just as the addition of water can create the illusion of more milk. But it is a policy of continuous inflation. It is obviously a process involving cumulative danger. The money rate will rise and a crisis will develop if the inflation is reversed, or merely brought to a halt, or even continued at a diminished rate. Cheap money policies, in short, eventually bring about far more violent oscillations in business than those they are designed to remedy or prevent.

Hazlitt wrote this in 1946, but he could just as well be talking about the economic situation today – for this is precisely what has happened in Britain, and elsewhere over the past decade.

The Foundation for Economic Education has Economics in One Lesson available online, for free, in both PDF and HTML.

Asking questions about minimum wage

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asking-questions-about-minimum-wage

Bryan Caplan asks two questions to minimum wage supporters:

1. If the minimum wage is a good idea, shouldn't unpaid internships be illegal as well? If not, why not?

2. Name the main arguments in favor of the legality of unpaid internships. Aren't all of them equally good arguments for allowing people to work for wages greater than zero and less than the minimum wage?

I suspect that quite a few minimum wage supporters actually do oppose unpaid internships. The nonmonetary returns from work – experience – are intangible, leading many to assume that one party is being exploited. This is incorrect. Wages are a product of skills, so if an unpaid intern gains valuable skills they may be increasing their future earnings. Consider how competitive unpaid internships with financial companies are – getting one almost guarantees high earnings in the future.

To Bryan's questions, I would add two more:

– An excess of supply in labour is usually called unemployment; minimum wage supporters deny that minimum wage laws create unemployment. What other goods can have a price floor set above the market price without creating an excess of supply?

– Why don't you want minimum wage to be £20/hr, or £100/hr, or £1,000/hr? If wages can be set by government without any ill effects, why not solve poverty simply by raising the minimum wage?

Tax Freedom Day 2011

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tax-freedom-day-2011

As of June 2024, this is out of date. Please refer to Tax Freedom Day 2024 for the updated statistics.

Today is Tax Freedom Day – the first day of the calendar year that Britons stop working for the state and start working for themselves. This year, we've worked for a full 5 months this year to pay their taxes, with every penny earned in the UK between January 1 and May 29 taken by the taxman to support government expenditure.

· Britons have worked 149 days to pay their taxes in 2011 – three days longer than in 2010.

· Regional figures reveal that Londoners have to work the longest to pay off their income tax burden (51days) whilst the Welsh spend the least time paying their income tax (35days)

· UK income taxpayers would have to work for almost a year and a half with all their money going to the government to pay off our national debt.

This means that Tax Freedom Day, the day when people stop working for the government and start making cash for themselves, will come on May 30 in 2011 – 3 days later than in 2010. The main reason for this is that the government has raised VAT, in order to help reduce the UK’s record budget deficit.

New calculations by the ASI also reveal the worrying extent of the UK’s debt. Our burden of debt is so great that UK income taxpayers would need to work for nearly a year and a half (525 days) - with their entire wage packet going to the government, and not a penny being spent on public services – to pay off the national debt.

Dr Madsen Pirie, President of the Adam Smith Institute, identified the linkage between the lateness of Tax Freedom Day and the government’s attempt to tackle the deficit and UK debt: “The last government left an appalling legacy. Its reckless spending has driven Britain into record levels of debt that threaten the lives and happiness of future generations. Bringing down that debt has to be an absolutely urgent priority. However it isn’t enough to merely cut spending. We need targeted tax cuts to encourage economic growth.”

Sam Bowman, Head of Research, added: “Tax Freedom Day underlines the huge burden of government on working people’s lives. For five months of the year, we are slaves to the state. No wonder growth is so slow – we need robust tax reform now, bringing lower, simpler, flatter taxes. The government should resolve to make Tax Freedom Day something we can celebrate earlier and earlier each year.”

Note: Using the Treasury's most recent revised figures, Tax Freedom Day was revised back to May 28th in 2011. These revisions are unavoidable and we always strive to use the most recent official data available.