Economics, Philosophy, Politics & Government Ben Southwood Economics, Philosophy, Politics & Government Ben Southwood

Does the existence of intangible goods mean we shouldn't maximise wealth?

The proposal I made last week—that we abolish parliamentary democracy and turn over decision-making to a a set of betting/prediction markets—faces a number of serious objections. In this post I will deal with the objection that national wealth in principle misses out several important contributions to welfare like liberty, love or other intangibles. I have four further serious objections, which I will attempt to tackle in a third and final piece.

What makes us happy, and helps or allows us to satisfy our desires and preferences, may not be wealth alone. A millionaire who desires only a dishwasher is no better off for all her wealth if she is unable to buy one. A world in which dishwashers are harder to get hold of—perhaps due to a ban—is worse than one in which they are widely available, for a given amount of wealth.

But introducing "for a given amount of wealth" might be begging the question. Our measure of wealth, to be a good one,  will include some correction for changes in prices (like the official measure). Even under our current system of drug prohibition there are measures of illegal substance prices. Similarly, if we banned dishwashers, perhaps in some bizarre return of the lump of labour fallacy, they might still exist, albeit underground and more costly. In this way the measure would show an expected dip in real wealth in the prediction market for the national wealth effects of dishwasher banning.

And many other restrictions on liberty that we'd have independent reasons against would also depress our wealth, e.g. racist employment regulations, restrictions on travel. Even something like the ability to marry could be factored in—if people want to have marriages, they will have a higher demand for housing in areas where marriages are allowed. However this faces a lot of difficulties in a world where so many goods are unpriced and thus we cannot measure all of these effects. And it's unclear whether all of the cost to an individual of, for example, restrictions on marriage would be fully capitalised into house prices. So there might be some reason to expect a wealth maximising state to be less liberal than the ideal happiness-maximising state would be.

Further, typically unmeasured goods like love—which many people see as one of the most important—may not be measured by any element of the wealth markets. While current parliamentary systems don't necessarily directly consider what effect policies will have on aggregate love in the country, were it to be significantly effected by a (proposed) policy they would be able to factor it in. But a pure national wealth-driven system would not.

This is certainly a difficult objection for the model of government, but it isn't necessarily fatal. After all we know there are devastating problems with the current system, including distorted incentive structures, but even more than that public ignorance. We'd want evidence that not only would maximising expected wealth tend to cut the amount of aggregate love in society—it would do so to an extent that outweighed the improvements in policymaking down to an unbiased, properly incentivised and dispassionately rational decision-making system.

We'd need particularly robust evidence to overturn the strong established empirical connections between wealth and happiness (which presumably takes into account the effect of love on happiness). This means the love objection is not telling on our account without much further exploration. As suggested above, there remains the objection that some liberty contributes to happiness without contributing to wealth, or being fully accounted for in wealth measures, and this stands, and should be weighed against the other benefits gained from the wealth-maximising state. And the wealth-maximising state may well be more liberal than current parliamentary arrangements, given what we know about free markets and long-term growth.

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Dr. Eamonn Butler Dr. Eamonn Butler

Privatisation, nationalisation and jobs

Just as the UK government sells the bulk of Royal Mail, the Scottish government prepares to nationalise Prestwick Airport. The current owners, the New Zealand company Infratil, have done their best in marketing the place, but cannot make it pay. An hour out of Glasgow, it has been losing custom to Glasgow Airport, which is minutes from the centre and has benefited from recent road improvements. Prestwick is also very dependent on one customer, Ryanair, which has cut its flights and is famously keen on forcing down airport charges. So it seems that the Airport will be sold to Holyrood for £1. That's a very bad deal. Firstly, Prestwick loses money, secondly there is no obvious way of making it pay, and thirdly, an expert private operator will make a better fist of it than politicians.

The reason for the nationalisation is to protect jobs. There are various high-tech and aviation businesses that need a runway, and they and the airport employ a large number of the local population. Debating this on Radio Scotland, I was faced with the usual argument: 'the private sector makes profits, then when things don't pay any more they walk away and leave the public with the bill for sorting out the mess'.

Give me strength. Who do you suppose provides all the taxes that the government uses to 'sort out the mess' in the first place? Answer: the private companies that make profits and pay taxes on them, the companies that supply them and do the same, and all the people who work for all those commercial enterprises and pay tax on their wages and still more taxes when they save or spend those wages. Business should stick to making money and government should stick to civics. Neither of them is much good at doing the other's job.

And is it a 'mess' anyway, or simply the workings of a changing world? Jobs should go where the demand is, rather than outdated industries and infrastructure being preserved in the aspic of taxpayer funding. If the Scottish government were not so keen to intervene – with an eye to elections, politicians always like to look 'pro-active' – what would happen to Prestwick? Maybe the companies that depend on its runway would find cheaper ways of keeping it working. Maybe the jobs would simply move to somewhere better connected. Maybe the land would be sold for some far more productive purpose that would produce even more, genuine, industry and employment.

Once Holyrood has nationalised Prestwick, it is going to be faced with calls to do the same for the much larger, failing oil facility, Grangemouth. And whatever superannuated loss-maker follows that. It is beginning to sound like the 1940s. Maybe it can preserve jobs though: after Independence, Scotland could always market itself as a Museum of Socialism.

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Education Tim Worstall Education Tim Worstall

It's amazing how Will Hutton misses the point again

It's entirely astonishing to find that Will Hutton has missed the point again. Here he's talking about education, the costs and returns to it. And he manages to use as examples the very facts that prove his argument wrong.

Although the proposition was that there would be a range of fees, few universities charge less than £9,000 a year. Indeed, average fees are about £8,400. Accommodation and living costs have to be paid for on top, so that almost whatever university a student attends or whatever the degree taken, he or she will end up with about £45,000 of debt.

OK, £45k of debt. It's a lot I agree. But is it worth it?

There are insufficient jobs that pay enough to allow even a fraction of each year's 340,000 students to escape the trap. The average salary is £26,500. Only about 10% of the population earn more than £41,000. Even allowing for the fact that wages usually rise faster than prices (though they have not since 2006), it follows that many, perhaps even the majority of, students will struggle to fully pay back their debt.

Will doesn't think that the extra earnings of those graduates, for most of them at least, make up for the debt costs they've got to pay back.

OK, let's agree so far. What is therefore the solution?

For Hutton it is that everyone should be taxed more so as to pay those fees on behalf of the students rather than making them borrow to pay them themselves.

Unfortunately, those facts that he's using lead us to entirely the opposite conclusion. If we've got a cost that is higher than the benefit then this is a signal that we should stop doing this thing. Hutton is indeed arguing that the cost of a university education is higher, for many to most people, than the benefit that comes from having one. This is true whoever is paying the bills. Therefore we would rather like to have fewer people going to university.

But that leaves us with another problem. For some people university is definitely worth it. For others not. So how do we select those for whom it is and those for whom it is not?

Well, actually, that's one of the things that a price structure does for us. We make clear the costs of something and people will decide themselves whether they're willing to pay that price. That is, whether it is worth it for them. Whether Media Studies from an ex-technical college is worth £45,000 isn't something that you, I or Hutton should be deciding. It's something that people considering doing Media Studies at an ex-tech should be deciding. So too with English at Cambridge or physics at King's.

Do also note that once we have prices clear we don't have to assume that people will then decide purely on the financial return: Everyone will ascribe some value to the 3 years of uni, some might even ascribe value to the intellectual stimulation, whatever the degree.

But the important point here is the basic one. Hutton is arguing that university does not make sense in terms of value added for most students. He therefore proposes subsidy for those students. Which is ridiculous. If the activity is not value adding we don't want more of it, we want less of it.

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Tax & Spending Tim Worstall Tax & Spending Tim Worstall

Blatherings and facts about the tax gap

HMRC's just released their estimates of the tax gap. What should be paid under the law of the land against what is actually paid. And as a result we've got Richard Murphy shouting that HMRC's estimations are all wet for he's the guy with the real facts.

Now I am actually under a promise to Madsen not to mention Murphy too much here but he's given us a perfect example of why the numbers differ: because the definitions do. Here's Murphy on corporation tax revenues:

Instead let me just highlight some of the absurd anomalies in this year’s report that I have noted so far. Let’s take corporate tax avoidance for a start. According to HMRC in 2011-12, they year to which this report relates UK tax avoidance in that year was just £4 billion and was split down as follows: (chart excluded-Ed)Now this report in the Mail on Sunday in April 2012 – covering the same year as a result – gave an estimate (and in my opinion a fair one) of the tax avoidance of just a few giant tech companies: (chart excluded) That’s, as they note, £685 million lost to five companies. Microsoft and Yahoo are not in there. And there are, we know, plenty more playing such tricks. But apparently the total lost is just £1.5 billion. Actually, that’s because none of these losses to tech companies is in HMRC’s figures. They may have been in David Cameron’s sight lines when attacking tax avoidance but HMRC refuses top recognise they do anything wrong. And that’s ludicrous.

Now what he's talking about is of course the way in which various tech companies sell into the UK from Ireland or Luxembourg, paying their corporation tax there. Murphy is claiming that the tax on this money that is paid (or not paid) in Ireland is thus tax avoidance from the UK tax system. What he's missing is that it isn't. Here's HMRC on the subject:

In broad terms, companies are required to pay corporation tax in the country where they carry on the economic activity that generates their profits, not where their customers are located.

Hmm, so where the customers are is not the determinant of where the tax liability is. Not even in theory: in fact theory, that spirit of the law, operates exactly the other way around. That people are selling to UK based firms or consumers does not, in any manner, create a tax liability in the UK. It is entirely other and very different criteria that decide that question. And as HMRC goes on to state:

Non-resident trading companies which do not have a branch in the UK, but have UK customers, will therefore pay tax on the profits arising from those customers in the country where the company is resident, according to the tax law in that country. The profits will not be taxed in the UK. This is not tax avoidance: it is simply the way that corporation tax works.

So, the reason that HMRC does not include such numbers in its estimates of tax avoidance is that under the basic system of corporation tax, under both the spirit and letter of the law of this and most other nations, there's not any tax avoidance going on. This is the way that Parliament, the OECD and before them, the League of Nations (where the basic structure of international tax treaties come from) set the whole system up.

Murphy's numbers try to include such sums which is most odd for someone prclaimed as one of the nation's leading tax experts.

What is actually happening here is that Murphy thinks that settled law should not be as it is. Which is fine, of course, there's plenty of areas of life where I think settled law should not be as it is. I wouldn't be allied with a radical think tank if I didn't. But there is something important to therefore note about these tax gap estimates.

Murphy's numbers and thus, for they all run with them, those of the TUC, PCS, Unite, Polly, nef, Margaret, Lady Hodge and the rest of the rag tag groups that is the British left, estimate what the tax gap would be if the law were changed to conform to their prejudices and misconceptions about what settled tax law should be.

HMRC's numbers are based on what settled tax law actually is.

All of which does lead to a small amusement: those campaigning for tax law to be changed to reflect their prejudices are of course campaigning to increase the tax gap. For if the law were changed in the manner they desire then that tax gap would be closer to their figures: figures note which are larger than those under current tax law.

And it's very odd indeed to see lefties arguing that there should be even more uncollected tax around the place.

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International Miles Saltiel International Miles Saltiel

America's shutdown to a Briton's eyes

What to make of the Yanks and their budget? As Newt Gingrich pointed out in last Saturday’s FT, we might start by dialling down the hysteria: shutdowns are no novelty.

“Democratic Speaker, Tip O’Neill presided over twelve…government shutdowns…with presidents Jimmy Carter and Ronald Reagan, and even while Democrats controlled both Houses of Congress….No one in the O’Neill era saw shutdowns as catastrophic. They were irritating, complicated and frustrating but also part of the legislative process.”

The GOP is fussed about Obamacare, which no-one in the UK gets. Its main point is not to provide hospital care for indigents (something already provided under Medicaid and common-carrier obligations), but to oblige healthy youngsters to sign up so as to reduce costs by bringing them into the insurance pool. This makes some sense – it more or less happens elsewhere - but putting it like this explains why Americans see it as intrusive and the scheme is so unpopular.

More generally, the Tea Party is up in arms because the new obligations of Obamacare come at a time when the US (as pretty much universally) is testing the limits of what a government of free citizens can afford to take on. Hysteria is now extending to lefty commentators, who are calling apocalypse if the debt ceiling is not raised on 17 October, fearing without quite admitting it that the markets will bear down on the President. They have been joined by some big bondholders who ought to know. Now we hear that “constructive talks” are under way - on the ceiling at least. But recall that great changes in national direction only come with grubbiness and mess: think of Lloyd George threatening to pack the Lords after they turned down the Peoples’ Budget, Roosevelt menacing the Supreme Court over the New Deal, or Bevan getting the NHS past hold-out doctors by “stopping their mouths with gold”. That’s politics.

But is Obamacare a good thing? Hard for a Brit to say. US healthcare is costly by our standards, yielding outcomes which at their best are world-beating but not universal. Maybe they need more private “managed care” systems to reduce costs, but that is not the same as Federal intervention.

Back to the limits of government. King Charles I - the one who lost his head - had a legitimate gripe about the irresponsibility of his parliaments. They were bloody-minded, sent mixed signals (singe Papist beards; raise no new taxes) and generally messed him about something rotten (not to mention that losing the head thing). But they and their successors established the principle that the executive shall be controlled by the power of the purse, exercised by representatives of the taxpayers. The Tea Party is also bloody-minded and given to mixed signals. But it is fully seized of that most essential component of American DNA, snappily put by the Culpeper Minutemen, “Don’t tread on me!”

No doubt, the immediate outcome of this month’s stand-off will be the customary fudge. That’s politics too. But make no mistake: the Republicans in their confusion, the Tea Party zealots in their flyover-state gaucherie are onto something: where shall government find its limit? It’s not a trivial question and it won’t be answered in just one go.

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Education Tim Worstall Education Tim Worstall

If you've not got the skills then maybe it's the institutions?

There's been much fussing about education and skills these past few days as a result of another information release showing that various countries have higher educational skills than others. And also that various countries have higher incomes than others. An example here:

The good news for Americans in a new international study of adult skills is that the U.S. ranks near the top in gross domestic product per capita, behind only Norway. The bad news is that Americans are so far behind in their skills that it’s hard to see how they can stay at the top for long. The figures are contained in a report by the Organization for Economic Cooperation & Development called OECD Skills Outlook 2013.

That's not quite the way that I would read it myself.

Think through this for a moment. Wealth, GDP, income, call it what you will, it's a function of two things, the endowment and the efficiency with which that endowment is used to produce the wealth, income, gilt and pelf. So, if we're got one nation full of dumb lardbutts which is still one of the richest in the world while we've others heaving with the highly educated and knowledgeable which are poorer then we've got to assume that the efficiency with which that endowment is exploited must be higher over there with the lardbutts. We could go to the PJ O'Rourke extreme at the other end of course and note Russia where chess is a spectator sport yet they're boiling stones for soup.

This is important: that education, that human capital, yes, it is indeed an addition to the endowment off which that GDP is created. But then so also are the various institutions through which it is exploited. So these figures do not quite show what everyone has been saying: that everyone had better get their education act together. Desirable though that is of course. For we are also able to note people with lots of that human capital which do not exploit it efficiently. To these countries we should be saying that you too need to get your act together: change those institutions.

And here's the thing. Just casting an eye along those whose income position is markedly higher than their human capital one, they do seem to be the places running some variant of that Anglo Saxon capitalism and free market racket. Perhaps those places do need to sort out their education: but the greater efficiency also shows that everyone else needs to sort out their institutions.

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Charlotte Bowyer

Charlotte is a Research Associate at the Adam Smith Institute, having perviously worked here on her Gap Year. Her key interest is Digital Policy, particularly freedom of expression and innovation online. She holds a degree in Politics, Economics and Economics from the University of Manchester, and is an Executive Board member of Liberty league, a network which seeks to promote and advance libertarian ideas amongst students and young professionals.

In her spare time Charlotte likes to collect taxidermy and is about to turn her hand to it. She also enjoys going to loud electronic music nights and creating extravagant, oversized meals. 

She tweets as @EileenSpalding.

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Philip Salter

Philip Salter is Director of The Entrepreneurs Network. He started his career as Programmes Director at the Adam Smith Institute, running the Institute’s events, student activities and researching and representing the Institute on education policy in the media. After three years with the Adam Smith Institute he moved into journalism, becoming Business Features Editor of City A.M., after which he was Editor across EMEA for one of world’s largest insurance brokers. While at City A.M. Philip wrote a weekly column on entrepreneurship and interviewed some of Britain’s leading entrepreneurs. He now writes a regular column for Forbes.

He tweets as @Philip_Salter and @TenThinkTank.

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Media & Culture Charlotte Bowyer Media & Culture Charlotte Bowyer

Tor, Bitcoin and the Silk Road: three forces for good

Since the arrest of Ross Ulbricht aka 'Dread Pirate Roberts' — the alleged mastermind behind the Silk Road — media attention has in part focused on the role of legal technologies Tor and Bitcoin in its operation. Silk Road was an online black market where all kinds of restricted and illicit goods (from illegal drugs to forged passports) were sold in an eBay-style setting. Because of the nature of its wares it made up part of the 'deep web' - accessible only by using software such as Tor, which enables user anonymity by obscuring their location and usage, making surveillance incredibly difficult. Its illegality also prevented customers from paying via card companies or PayPal, so business was done using the crypto-currency Bitcoin.

Whilst talk of Bitcoin and Tor is old hat amongst technophiles, reporting of Silk Road's takedown is probably one of the first times that many people would have heard about such technologies. And, understandably, when their raised profile comes in association with a giant underground marketplace in drugs and a man charged with charged with ordering an assassination, people may be swift to discount them as 'hacker tools', or look upon them unkindly. (The Guardian's leak of GCHQ's presentation 'Tor Stinks', which depicts an apparently typical terrorist Tor user masked and toting an assault rifle (and sat in front of a giant onion) is in this respect both amusing and depressing.)

However, Tor and Bitcoin aren't used just for shady dealings. Both can be used to great benefit — Tor in providing freedom and safety online, and Bitcoin in encouraging financial and monetary innovation.

There are huge numbers of people who aren't terrorists, sex offenders or drug barons who benefit from anonymising software such as Tor, and those whose lives may depend on it. Tor allows people across the globe to communicate freely when doing so is risk and the internet is monitored or subject to blocks. It circumvents national firewalls, empowering and educating citizens who would otherwise be restricted. It allows whistleblowers to divulge their information anonymously, journalists to share news, and activists and citizens to criticise, dissent and organise in protest. Millions around the world benefit from Tor.

And it isn't just citizens in oppressive regimes who benefit — Tor is used by the military in operations to protect their location whilst communicating securely. It could also be argued that concerned parents can help protect their child online by using Tor to mask their location. Whatever else Tor may be used for, its capacity to liberate and protect is great.

Similarly, the development of crypto-currencies such as Bitcoin carry with them great potential. Bitcoin is an open-source, peer-to-peer electronic currency. It has no central issuing authority; the money supply is increased as users's computing power crunches numbers to verify pervious transactions. This has made crypto-currencies very interesting to those who wish to abolish central banks and establish new forms of currency. But Bitcoin also has a growing number of practical uses.

Increasing numbers of vendors are accepting payment in Bitcoins and it can be used to pay for things from Wordpress services to pizza. It doesn't require any third-party intermediary such as credit card companies or PayPal to process payments, making transactions cheaper and easier. This can lower transaction costs for businesses, which, were Bitcoin to become widely adopted could also be passed onto the consumer. The Mercatus Center's primer on the currency suggests that this aspect of Bitcoin could also revolutionise the global redistribution of wealth. In 2012 immigrants to developed countries sent $401 billion back home to developing countries. The average fee doing so at places like Western Union is close to 10%, whilst fees for similar services using Bitcoin are less than 1% of the transaction. Wiring companies are looking at integrating Bitcoin services into their own, and if they were to do so this would be a tremendous boon for the poorer people of the world.

Transferring traditional currency into Bitcoins can also allow people to overcome domestic economic problems and the consequences of corruption. With tight capital controls and an inflation rate of 25%, it is no surprise that Argentinians are some of the most enthusiastic users of Bitcoin. Other great uses of Bitcoin, such as in conjunction with SMS banking in developing countries, are developing all of the time. Bitcoin definitely has the potential to be more than a plaything for nerds and a way of buying hash.

Cathy Reisenwitz is right: the world is less safe now that Silk Road is gone. The violence associated with drug dealing is not a consequence of the products, but of their illegality. As a stable, trusted and effective platform Silk Road removed that need for violence. Drug laws need a serious overhaul, and the user rating and delayed payment system of Silk Road offer a great model for a legal marketplace for drugs. I therefore think that it is great that technologies such as Tor and Bitcoin are being put to such use.

However, many will disagree. This is why it is important to point out the great potential and liberating capabilities of these technologies before people discount them, or worse turn against them. No technology in itself is 'good' or bad' - what matters is how it is put to use, and while we worry about the potential dangers of new technology, we should remember its use in positive ways too.

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Economics Dr. Eamonn Butler Economics Dr. Eamonn Butler

Regulation, big government, public debt: not so benign

What is it about Cambridge University economists? They've always been bad, but they seem to be waging some kind of orchestrated campaign right now. Every time one speaks (like Michael Kitson at this week's Economic Research Council Hayek-Keynes debate), they seem to produce the same sound-bites, designed to assure us that regulation, big government and public debt aren't so bad.

The first petition in the litany is: There is no such thing as a free market. All markets have rules, and couldn't work without them. So there's nothing wrong with government intervention in markets. That's crazy. All police forces have corrupt officers, but that doesn't mean we should have more corruption. It's true that markets only work if people respect certain rules – the basic rules of property, honesty and contract, which are happily agreed on by market participants. Government intervention beyond that is usually counter-productive (like the vote-seeking price controls now being canvassed in energy: remember the California blackouts, and invest in candles).

The second is: The British government debt was much higher, as a percentage of GDP, after the Second World War. And we paid that off. So don't worry about adding to the debt either. Hmmm. It took us 50 years to pay off all that debt. And at least it bought us victory over Nazism. All we have to show for today's borrowing is a bigger government and a few dud banks. And Britain's GDP was pretty shot after the War, making the debt a much higher percentage of it. Today's £1.16 trillion is no mean debt – and even that is just the official figure. Add in pension liabilities and all the rest and it is six times that. Affordable? Not if we keep adding to it as we're doing, and less so if and when interest rates rise. It's a dangerous risk.

The third is: Big-government countries like France grow just as fast as small-government countries like Britain. So we shouldn't worry about growing government either. Oh yes we should. There won't be much business done without defence, justice, so countries with some government spending on these things grow faster. But too much, and growth is damaged. It's called the Rahn Curve. A 2009 study of 15 EU countries put the sweet spot at about 30% of GDP. A 2008 study of 21 OECD countries found that higher taxes reduced growth. A 2011 report on 145 countries over half a century found that a 1% of GDP tax rise cut private investment and consumption by twice that amount. Andrew Sentance of PwC found that a cut in taxes produced growth and inward investment. And so on. Keynes himself thought the sweet spot was government spending no higher than 25% of GDP. Ours today is twice that. Cambridge economists please note.

And another thing

Oh, and one last thing that Michael Kitson told us the other day, and which Cambridge economists go on about. It runs roughly: Adam Smith only mentioned the 'invisible hand' once in The Wealth of Nations'. That means it obviously wasn't a big thing for him. So stop going on about it as if it explains everything. This again is utterly wrong. And not just because Smith mentioned it earlier, in The Theory of Moral Sentiments – or that it appears slap in the middle of both, which some folk think is significant.

No: in neither case does it really mean quite what we use it to mean today. But read The Wealth of Nations. Even if Smith never mentioned the 'invisible hand' even once, there is no escaping the fact that this is what the whole book is about. It is about people pursuing their own self-interest and as a result – without specifically intending to – benefiting others too. After all, nobody would voluntarily enter into an exchange unless they thought they would benefit from it. Market exchange benefits both sides in the deal. Government regulation, price-fixing or outright bans on trading eat into that benefit. Such intervention comes at a cost.

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