23 Things We're Telling You About Capitalism V

Our fifth thing is this insistence that free market economists claim that everyone is greedy, therefore untrustworthy. But a market economy wouldn't actually work if this were true. Chang then goes on to point out that there are many more motivations to human action than simple greed: in which statement he is obviously correct. Risking your life to save that of a stranger is clearly not motivated by economic greed.

However, he's rather misrepresenting that free marketeer's insistence upon greed being a motivating force. We do indeed insist that most people are greedy and most people are also lazy. They'd like to have as much as they can (or wish) of whatever it is with the least effort required in getting it. This does not rule out there being other motivating forces of course. But more than that, we're insisting that it is "enlightened self interest". That is, looking at rather more than the immediate future, thinking about reputation in general and so on. All of which is pretty much the standard argument. We'd also try to limit pure self interest to being an economic motivation, perhaps not a general one for the entirety of life.

However, there's something that Chang has entirely missed here and that's the implications of the ultimatum game.

Going back to our examples above, if you, as a taxi driver, want to chase and beat up a runaway customer, you may have to risk getting fined for illegal parking or even having your taxi broken into. But what is the chance of you benefiting from an improved standard of behaviour by that passenger, who you may not meet ever again? It would cost you time and energy to spread the good word about that Turkish garage, but why would you do that if you will probably never visit that part of the world again? So, as a self-seeking individual, you wait for someone foolish enough to spend his time and energy in adminstering private justice to wayward taxi-passengers or honest out-of-the-way garages, rather than paying the costs yourself. However, if everyone were a self-interested individual like you, everyone would do as you do. As a result, no one would reward and punish others for their good and bad behaviour. In other words, those invisible reward/sanction mechanisms that free-market economists say create the optical illusion of morality can exist only because we are not the selfish, amoral agents that these economists say we are.

Which brings us to the ultimatum game. In this, player one is given $100. Told to split it between herself and player two, she can choose any split she likes. $99 for her, $1 for the poor second. Or $50/$50, whatever. Player two gets to decide whether the split stands. If it does then the money is divided as was decided upon by player one. If the second player rejects the split then the money is confiscated and no one gets anything.

The results of this rather astonished the people who first performed it. Once the split starts to look "unfair" (roughly, when it passes through $60/$40 or so) then player two starts to reject it more often. Being entirely rational one should accept any split at all: better to have $1 from an unfair split than no dollars from confiscated money. But that's just not what people do. People will harm their own immediate economic interests in order to punish those they see as acting unfairly.

And it is this very ultimatum game that gives us the answer to whether we're all greedy or not. The answer being, yes, we are: for almost no one at all ever offers a $40/$60 split or better than that. The player one offers always start at 50/50 and get worse. That is, we're greedy in our own motivations and actions if we can get away with it. However, in observing (or having influence over) the actions of others we seem to turn on that fairness switch.

That is, human interaction seems to have within it, as the very basis of how we interact, a mechanism to curb and revise the inherent greediness of others. That willingness to punish our own economic interest to punish those we think are taking a liberty. Now why would have such a mechanism have arisen if it were not true that people are indeed greedy in their own actions? We don't protect the virginity of our daughters because we think it's unnecessary to do so: we protect the virginity of our daughters precisely because we know there's great interest in relieving them of it. The existence of a powerful social force to punish greed insists that greed is prevalent.

You could indeed say that player two's reaction is altruism. But even if you do want to say that it's still altruism from the second actor, not the first. The reaction clearly exists in the first place in order to curb that greed we all expect from player one,. And that's what brings us back to enlightened self interest. Such social interactions are not one time games. Indeed, the way to play the closely related prisoners' dilemma game is tit for tat. That is, if the game is to be played through many iterations. As most social life actually is. We have in our most basic reactions something that curbs that innate greed. Which is a pretty good indication that that greed really does exist in the first place.

An interesting little aside. The ultimatum game has really only been played with rich world students. There are those who wonder (and I'm one of them) whether the results would be the same in every society. I'm willing to agree with Chang that an entirely selfish society would not work well as a market economy. He is saying that because market economies do work therefore we cannot all be selfish. I'm claiming that we know that there's a very powerful force that curbs that selfishness. But the results of the ultimatum game from other societies would be incredibly interesting.

For there's the possibility that in societies that are not functional market ones then that willingness to punish, at one's own economic cost, might not be there. Which would, of course, be further proof that my contention is correct. It isn't that we're not all greedy: it's that in some societies there is a countervailing force. A countervailing force that must be there for markets to work. Or at least, one that we consistently find is not there where markets do not work very well at present.

The bottom line is that we cannot go around claiming that humans aren't, in their own motivations and actions, inherently greedy when we can observe such a powerful social force to curb the greed in the motivations and actions of others. The results of the ultimatum game prove that force exists: therefore people must be inherently greedy.

Why is Adam Smith the greatest economist of all time?

George Mason University economists Tyler Cowen and Alex Tabarrok, who run Marginalrevolution, one of the most popular and—in my opinion—best blogs on the internet, have recently made forays into online education. Their latest is on the history of economic thought, looking at great economists from Galileo up until the marginal revolution of the 1870s, tackling questions including "Why is Adam Smith the greatest economist of all time?"

Here is the introduction to their course:

Vaclav Klaus on privatisation and monetary union

I was lucky enough to be at the 3rd Pembroke College (Cambridge) Annual Adam Smith Lecture. This year we were graced by the presence of Vaclav Klaus, 2nd President of the Czech Republic.  He combined a rich understanding of Classical Liberal theory with decades of practical experience completing reforms at the height of Czech politics. His full speech can be read here, but there were four highlights I particularly enjoyed.

Firstly his 5 point plan for reform:

• open-up the country after half a century of life in a semi-autarkic society
• liberalize prices and foreign trade
• radically deregulate the markets
• privatize the whole economy, not just a particular small segment of it as in the UK;
• de-subsidize the heavily distorted economy and to return it to economic principles.

Secondly his account of the sheer scale of reform:

"We had no private economy at all. I remember repeatedly saying that my hero Margaret Thatcher had to privatize 3 – 4 firms per year, whereas we were forced to privatize 3 – 4 firms per hour…The inefficient visible hand of the bureaucratic communist government was replaced by Adam Smith’s invisible hand of the market."

Thirdly, in response to questions about the Eurozone crisis he drew upon his experience as the last leader to break up a major currency union. He highlighted the relative insignificance of Greece to the Eurozone. It represents roughly just 2% of total GDP. When he broke up the Czechoslovakian currency union as Finance Minister, Slovakia represented around a third of GDP. For Klaus, this was easy. It was an event that passed without crisis, an event he claims few would even remember.

Also on the Eurozone he highlighted the Latin Monetary Union, established in 1865 by France, Belgium and Italy. They were later joined by Spain, Greece, Romania, Bulgaria, Venezuela, Serbia and San Marino. This currency zone collapsed as the governments took on excess debt and debased the currency. There was one particular culprit, Greece, who were temporarily expelled in 1908. Greece decreased the amount of gold in their coins in breach of the currency zone’s rules. Economic turbulence in 20s finished off the flawed Union.

Finally when asked about the correct rate of tax, he gave an answer sure to please many a free-marketeer. He declared that he was no philosopher king who could impose an ideal tax level. Instead, he simply pleaded to see them cut as low as possible. For Klaus, taxes in the UK and Czech Republic are far too high across the board. We should get cutting.

Tax Freedom Day is on the 30th of May

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

I can't wait. Tax Freedom Day is just three weeks away. Add up all the taxes paid by people in the UK – income tax, national insurance, VAT, fuel duty, taxes on alcohol and tobacco, council tax and all the rest. Then work out how long it takes us to earn enough to pay for all these taxes. Then you find that in 2013 the average UK citizen will be forced to hand over to the government everything they earn between New Year's Day and 30th May!

That's five months of the year working for the government, and only seven months of the year working for ourselves. Things don't seem to have moved on much from the feudal system, where the oppressed vassals were expected to work three days a week for the benefit of their lord. We have to work about the same for the benefit of the Chancellor.

The Adam Smith Institute has calculated Tax Freedom Day going back to the mid-1960s, and has published the figures annually since 1992. When England won the World Cup back in 1996, Tax Freedom Day fell on 2 May. That is a whole four weeks earlier than it will be this year. Another four weeks of indentured service to the state.

If you think that's bad, it gets worse. Governments spend everything they raise in taxes from us – and then borrow as much more as they can get away with. The trouble is that is it we taxpayers, or our children, who will have to pay back that debt. When you work out the total – what we call Cost of Government Day – we don't start enjoying the fruits ofour own labour until 13 July!

When people joke that they spend as much time working for the tax collector as they do working for themselves, they are spot on. They work slightly less than half their time to pay taxes, but slightly more in order to bail out the government's over-spending as well.

And it is no joke. High tax and government borrowing drains resources from productive uses, chokes off people's entrepreneurial spirit and reduces UK competitiveness. It really is time, Chancellor, to move Tax Freedom Day a lot earlier.

Why provide your own answers if you're then going to ignore them?

I'm afraid that this little piece from The Independent did make me smile:

It leads to two broad questions. Why is it happening? And what might be done about it? On the first, we can see some obvious points. A globalising world economy needs an English-speaking hub in this time zone. So London has become a magnet for wealth and talent, reinforcing its hub status. More people fly into its airports than into any other place on earth. There are more non-national professionals living in the commuter region than any other, more international phone calls, more cross-border money managed – the litany goes on.

Recently its status, or at least its property, has been bolstered by the UK’s role as a “safe haven” for eurozone money seeking a home, and its young people seeking a job. But to say all that is more to observe what is happening than to explain why. You can say that success breeds success, that we are in a winner-take-all world, and London currently has critical mass in that amorphous mix of money, style, creativity, intellect, whatever.

But things did not look like that 40 years ago when its population was falling and it seemed locked into inexorable, if gradual, decline. If it is hard to identify the reasons behind the success, it becomes impossible to replicate them elsewhere.

Eh? If you've already correctly identified the reason for what is happening then why ignore your own answer later?

Yes, London is indeed booming as one of the Great Cities of the current round of globalisation. Very much as it did from 1880 to 1914 in fact in the last round. And in very much the same industries too: banking, finance, law, shipping.

As to why it was different 40 years ago, well, 40 years ago we didn't have the current round of globalisation. There was most certainly no free movement of capital, currencies were restricted, international trade was a great deal lower than it is. Which is why London wasn't booming 40 years ago: because the great strengths of the economy of the place, that international finance, banking, law and shipping, just weren't being used as they are now.

This really is just straight David Ricardo: the employment of comparative advantage. One way of thinking about globalisation is that it is simply the international division and specialisation of labour. As Adam Smith pointed out, such division and specialisation being something that creates wealth. For all who take part in it please note. As it happens, what we in London seem to do well (and do again note that we've specialised in these things twice, both times there have been bursts of globalisation, just as Germany has done heavy industry and machine tools both times) is that banking, finance and law stuff.

Quite why is something that people can and will continue to argue about. I'm sure language has something to do with it. There could well be some vestigial hangover of Empire. My own feeling is that it depends, at root, upon the Common Law. With many fewer restrictions than in other places you can write a contract in English law that states pretty much whatever you want. Sure, there are limitations, but many fewer than in many to most other jurisdictions. England (or more formally, England and Wales) thus offers the flexibility of agreements that the fast moving world of business desires and requires. Thus everyone doing their business in a place that offers exactly these attributes.

Now, I might well be wrong about the why here but that's OK. Wouldn't be the first time (and certainly won't be the last) that I am wrong. But the basic observation about London still is just too obvious for words. So obvious indeed that the Independent entirely misses it. London has boomed over the past 40 years because of globalisation. It's part of that global economy in a manner which the rest of England (or Britain) simply isn't. Before globalisation London was shrinking and failing: with it it's booming.

Council housing causes unemployment

This will surprise some but council housing causes unemployment. No, really, it does.

Dartmouth College’s David Blanchflower (best known for being the Bank of England member who first pressed for interest rate cuts after the onset of the financial crisis) and Andrew Oswald of the University of Warwick find that a doubling of the rate of home ownership in any U.S. state is followed in the longer run by more than a doubling of the unemployment rate. The authors stress that they are not arguing that the owners themselves are disproportionately unemployed. They suggest that lower levels of labor mobility, greater commuting times and fewer new businesses all combine to hurt the labor market.

Yes that's for the US and no, it's not a new finding in general. Several studies here in the UK have shown the same thing. Higher (or perhaps "too high" where the "too" is somewhat subjective) rates of home ownership do indeed lead to higher levels of unemployment. The reason is that owning a home makes one less geographically mobile than renting one. If you lose a job you're more likely to stay in the area where you own a home than you are to pack up and move to where the jobs are if you rent. Given the large regional differences in the economy in the UK this does indeed mean that high levels of home ownership will lead to higher unemployment than if more rented.

To which we will hear the cry: build more council houses then!

But this does not work as an answer. Moving a secure and subsidised tenancy (housing association or council) is vastly harder and takes much longer than selling a house and buying anew. Moving across local council boundaries is near impossible: although there is a system that supposedly enables it. Once councillor (and director of a housing charity) that I asked about this a few years ago said that it might take as long as 5 years to be able to move from one subsidised tenancy to another in another council area.

Thus, whatever problems are caused by labour immobility through house ownership are worse with those council and housing association tenancies. Because people with such tenancies are even more immobile than those who own their own homes.

So, yes, it's true: council houses cause unemployment.

23 Things We're Telling You About Capitalism IV

In our fourth chapter we get told that the washing machine has changed the world more than the internet. Something which we can all actually agree upon as long as we accept the conceit that the washing machine is standing in for domestic labour saving technology in general. We might quibble with the example of email not being much of an advance upon the telegraph: email allows you to broadcast to 5,000 or more which the telegraph certainly didn't. And I've run a software business that simply couldn't have happened without being able to send files and graphics. But Chang is correct that the development of domestic labour saving technology has, so far at least, had more effect. 

It has, for example, liberated half the rich world human race and allowed them to join the paid, market, economy. It really wasn't all that long ago that women simply could not do this, given the pressures of domestic labour: and it's still true that many women in many poorer countries cannot do so yet.

However, yes, again, we find Chang being extremely partial in his discussion of how all this happened. As someone who once owned a Soviet washing machine (no, really) I'm sure that this capitalism and free markets thing had a hand in it all. Firstly, in the invention, production and distribution of those devices: the route from carpet beaters through Spangler to Hoover was indeed the usual market style chaos of no one at all understanding what they were doing (certain early models blew dust around rather than sucked for example). Similarly the route from washing stone through washtub to mangle and finally washing machine was not a planned excursion. It was driven by incremental steps the users of which could see the advantages on offer. Capitalism meeting the market and then further innovation taking place.

What annoys to some extent is that Chang actually mentions a point about servants:

The main reason why there are so much fewer (of course, in proportional terms) domestic servants in the rich countries- (...) - is the higher price of labour. With economic development, people (or rather the labour services they offer) become more expensive in relative terms than "things".

Which is entirely true and this is known as Baumol's Cost Disease. The annoyance is that the other half of William Baumol's work is about how invention and innovation happens. What socio-economic system leads to all these wondrous things like a machine that washes clothes without effort or much time expenditure? And the answer to that is that innovation works vastly better in a free market socio-economic system. As Baumol points out, the planned Soviet system invented some pretty cool stuff: but I as the past owner (user would not be the correct word) of a Soviet washing machine that planned economy most certainly did not come up with successful labour saving domestic devices.

Which leaves the final line of his "what they tell you part" looking a little strange:

We- as individuals, firms or nations- will have to become ever more flexible, which requires greater liberalisation of the markets.

Err, yes, yes this is true, despite Chang using the rest of the chapter to argue against the idea. The reason why we do want that greater liberalisation of markets is precisely because it is this, this very thing as Baumol tells us, that produces those innovations like domestic labour saving technology. This is the very point: we want to encourage, continue, the replacement of grunt human labour with machines. Which does indeed require those free markets - or at the very least benefits hugely from them.

I do agree that so far the washing machine has changed the world more than the internet. Which is really rather why we want to be promoting that socio-economic system that came up with that very washing machine, no?

Is nationalism a force for good? Yes

The nation state is—in its fundamental nature—a free and tolerant political system. National loyalty requires only fondness for a geographical location (and its history) which can be acquired by anyone who moves to a nation, as well as those born and brought up there. In principle national loyalty requires no significant revision of values, nor does it exclude people on the basis of their family, colour or any other unsavoury criteria. It is, taken on its own, a remarkably benign form of attachment. 

Loyalty is necessary for political institutions to uphold their laws. Laws protecting private property, free speech and so on do not hold sway because they have been written down by a legislator but because those subject to them believe they are authoritative. This requires general acceptance of their content and the body charged with enforcing them, which in turn requires a loyalty and trust for that body and for other citizens. In non-nationalistic countries such as Kazakhstan trade can't rely on its participants' having particular reason to trust one another. Nationalism avoids such pitfalls by enabling a trust of a pool of strangers – something which characterises flourishing societies.

The strongest ties among humans have proved to be religious, tribal-ethnic and national. They are typified by attachment to that which is familiar. The first two of these however, when elevated into political form, are intolerant of differing values and of differing bloodlines. The conflict between family love and religious obedience has characterised some of the worse strands of the Middle-East's history. In Africa tribal loyalties have underpinned devastating atrocities – in the 1994 Rwandan genocide for instance the Hutu people massacred the Tutsi (a group seen to have different physical characteristics). Twenty-two years earlier the Burundi Genocide had seen a reversed tragedy. Similarly fascism is not an extreme form of nationalism but an extreme form of tribalism—members of Hitler’s Aryan race were identified by their appearance and bloodline, not their attachment to a particular nation. We would do well to celebrate our often mocked pride for the rolling hills. Other attachments have proved much less tolerant of our differences and freedoms.

Another reason is philosophical. Where we happen to have been born and brought up is certainly arbitrary from a moral point of view – but this is no good reason to rule it out as mattering. Which mother we happen to have been born to is arbitrary, and yet no one claims we should shun her on that basis. Similarly we come across our friends arbitrarily, even if they have been chosen carefully from those we’ve met. My point is not that we should consider important all aspects of our lives that aren’t up to us, but rather that their being arbitrary shouldn’t be a reason not to think them important. In other words, arbitrariness should give us no reason to feel uneasy about the benefits that national attachment brings.

Is nationalism a force for good? No

My colleague Geoffrey Taunton-Collins argues that nationalism is a force for good, as the loyalty and fellow-feeling it generates are necessary to create high trust law-abiding societies. He says that examples of atrocities committed partially in the name of nationalism—the Rwandan genocide, the second world war and Holocaust, strife in the middle east—are all better explained by ethnic tribalism or religion. I disagree. Firstly I'm sceptical that successful modern societies are driven by nationalism, secondly I think it's impossible to disentangle the nationalist element in many of the terrible occurrences he lists, and thirdly I think that nationalism underlies some very bad policies adopted by many modern societies.

Why does an individual obey the law? One obvious reason is that the penalties for disobedience, weighted by the likeliness of their being incurred, often outweigh the benefits from breaking the law. A second reason, is that individuals believe there is some sort of justice in the laws. This is why people give "because it is against the law" as a reason independent of any further explanation for why a course of action ought not to be followed. Anecdotally, the arguments people give for the duty to obey the law—if these can be taken as also being the reasons they actually do obey the law—seem to go against Geoff's claim, centring on reciprocity, universality and fairness. And the cases where people disobey the law appear to go with my analysis. Consider illegal downloading: some estimates say PC games are illegally downloaded as many as 20 times as they are bought legally. People seem unswayed by the laws—brought about by the authority of the nation state they are supposedly loyal to—requiring them to buy games (or films, television programmes, music) legally. Because others are not following the law, and because the likelihood of punishment is low, they don't themselves.

Can nationalism and ethnic strife be disentangled? Certainly Hitler's regime looked no more favourably on the many proudly German Jews who had served the Kaiser honourably in the first world war than they did on any with Jewish ancestry. And certainly Nazism was centred on the idea of a Volk—a people—united despite the borders of Weimar Germany. But the purest form of an ideology is rarely what gets through and propagates throughout society, and the Dolchstosslegende—the idea that Germany didn't really lose the first world war, but was stabbed in the back by a Jewish-Bolshevik conspiracy—was a vital part of the Nazis' appeal. I think the general bleeding of racialist, ethnic and religious ideas into nationalism and national identity is inevitably tied into Middle Eastern conflicts and the two major central African genocides.

And finally, look at the policies nationalism produces. True, as Geoff points out, there is no necessary reason why nationalism should exclude anyone born outside the country, if they are willing to switch their loyalty to their destination nation, but in practice we know that's what happens. Taking the UK as an example, the tide of anti-immigration feeling has been rising and rising since Gordon Brown's 2007 pledge to provide "British jobs for British workers", culminating in the rise of UKIP and Tory policies like the 99,999 or less net inward migration pledge. Surely it can't be denied that a sense of nationalism, that the UK is collectively owned by only its current inhabitants, a sense of insider and outsider, is intimately connected to this ethically indefensible and economically incompetent trend?

As far as I can tell, actually-existing nationalism is not responsible for our generally law-abiding society, cannot be disentangled from many gross moral horrors, and is responsible for bad policy. Therefore I conclude that nationalism is a force for bad.

Happy 114th Birthday, Hayek

Here's a video of Friedrich Hayek talking about his key contribution, on the economics of knowledge. For his work in this field, centring around his 1945 paper "The Use of Knowledge in Society", cited 9391 times according to google scholar, he shared the 1973 Nobel (Memorial) Prize. Here, the specific (closely-linked) issue here is the economic calculation problem that Hayek and Ludwig von Mises argued hit socialist societies due to their lack of prices. This culminated in the socialist calculation debate, part of the way Hayek made his name, and a debate that such luminaries as G.A. Cohen later agreed Hayek and von Mises had won.