It's the absence of markets that causes poverty

There's an excellent discussion of a recent finding in development economics over here.

If markets are missing completely, or so unreliable as to effectively be missing, then household separation fails. The extreme case is easiest to think of. If a household is completely autarkic, and can trade with no one else, then it can only consume what it produces. The two decisions are inseparable. If they want a new TV, then they’d better have a source of rare earth elements in their back yard and a passion for soldering.

The importance of knowing if household separation holds or not is that it tells us something fundamentally important about why a developing area is poor.

What's being looked at is that horrible, $1 a day, poverty that far too many of our fellow humans are stuck in. The big question being, well, are they stuck there because of the way that markets operate? Perhaps "the market" means they can't get enough fertiliser for example. Or is it that markets simply do not exist and thus they cannot reap the benefits of the division and specialisation of labour and the subsequent trade in the increased production?

The answer appears to be the absence of markets rather than any failure in them. Which leads to an interesting thought about what should be the right way to aid them.

Instead of sending money with which to buy them stuff we should be trying to work out how to create markets. And the most important part of that is in fact information. Not from us to them, but within such communities. And that ties in neatly with something that is becoming apparent from another part of the literature. It may well be that the mobile telephone is the greatest poverty reducing technology of our times. Simply because it does do exactly that, allow the spread of the information that enables markets to do their wealth creation thing. As this excellent paper makes clear.

It's not quite as simple as "make sure there's a phone network everywhere and the poor will get rich" but we're increasingly coming to the view that that's a damn good start to solving the problem.

UPenn Global Go-To Think Tank Rankings 2014 – how we did

This year's Global Go-To Think Tank Rankings, which are compiled annually by the University of Pennsylvania, have been released, and the ASI did pretty well. Our global rankings were:

• 69th in Top Think Tanks Worldwide (Non-US)
• 16th in think tanks in Western Europe
• 3rd in Top Domestic Economic Policy Think Tanks
• 5th in Top International Economic Policy Think Tanks
• 17th in the Best Use of Social Networks
• 40th in Think Tanks with the Best External Relations
• 24th in Think Tanks with the Most Significant Impact on Public Policy
• 12th in Think Tanks with Outstanding Policy Orientated Public Programmes

The full rankings are here, and congratulations to our friends at other think tanks who also did well, particularly the Cato Institute which came 8th in the total US think tank rankings. We rose in most rankings, and by our own internal measures of impact, media coverage, research quality, events attendance and fundraising, 2014/15 is shaping up to be a very good year indeed.

Reading the report reminded me of the challenge that think tanks (and non-profits in general) all have. As Jeffrey Friedman has observed, when you run a for-profit firm, you have a single measure of success – profit. If you do X and profits go up, keep doing X. If you do X and profits go down, stop doing X. In a complex world having just one thing that matters cuts through quite a lot of confusion.

But, obviously, non-profits don't have that measure or any single thing we can focus on. For us, it's a constant struggle. Focus on fundraising too much as a think tank and you end up being good at talking to donors but not good at using their money to make the world better. The tail wags the dog. Focus on media coverage and you become a rent-a-quote. And so on.

The thing you really care about is changing the world. But if that's done by, say, changing the minds of young people, it takes decades to measure success. If it's done by focusing on policies implemented, you're tempted to go for the easy, insignificant win over the difficult long-term change. There's no single thing you can look at, so it's tough to cut through the complexity. Rankings like this don't do that entirely, but every little helps.

With property rights, there are plenty more fish in the sea

We at the Adam Smith Institute need little further evidence that property rights are the best way to an efficient allocation of resources. Even so, more literature on how property rights can work in different industries and regulatory environments is always welcome. A new National Bureau of Economic Research paper looks at how the strength of property rights can affect regulators' willingness to allow the exploitation of natural resources. They focus on the most common system of regulation, which sees a limited number of firms given the right to extract to the level of a cap set by a regulator. They attribute this, at least partly, to a benign form of regulatory capture.

Commonly, it is seen as an unwelcome anticompetitive force, leading to the overexploitation of resources by monopolistic producers in industries with clearly defined property rights. However, because of the temporary, weak, and ill-defined nature of rights in the natural resources sector, the authors suggest that this analysis is not applicable. Instead, they find that

when property rights to the resource are strong, the regulator’s choice (which is the product of resource harvesters’ influence) coincides with the public interest. However, when property rights to the resource are weak, the regulator’s choice leads to overexploitation. This suggests that the resulting extraction level is closer to the socially-optimal extraction level when rights to the resource are strong.

The authors distinguish between 'weak' and 'strong' property rights using the probability that such rights will be revoked – the more likely, the weaker the rights. They propose that, when rights are strong, firms influence regulators (either formally by voting in regulatory councils, or by informal means) to choose a lower extraction rate than they would in a situation with less secure property rights, because they are less concerned about those rights being revoked in the future. In addition, regulators discount utility from future harvests less when there is less risk of rights being revoked, causing them to favour less current extraction.

The paper tests this thesis empirically against novel panel data from 178 of the largest commercial fisheries, and finds that regulators are "significantly more conservative" in their management of resources when property rights are most secure. In those cases where poorly managed fisheries switch to a 'Catch Share' system, with more secure property rights, there is a significant fall in exploitation, supporting their thesis (the fall prior to the switch is attributed to a gradual policy change in the face of overexploitation):

If in practice the Coasean idea that the assignation and enforcement of property rights – through their effects on the decisions of regulators – lead to more efficient outcomes, this has important implications for policy. It gives us an even greater incentive (as if we need it) to promote the institution of secure property rights, especially in those resource-rich low-income countries which could be subject to a swift depletion of natural resources due not only to tragedies of the commons, but also to the insecurity of extractive firms property rights.

Nationalising the railways might be popular but perhaps not for the reason people think

Owen Jones tells us that Labour should, to beat the Greens, announce some really popular policy like re-nationalising the railways. And this might well be popular but perhaps not for the reason that people are assuming:

But there are three clear commitments Labour could offer to win over Green defectors. First, renationalise the railways. It would cut through like few other policies, and probably prompt some voters to break out in spontaneous applause. Polling demonstrates a publicly owned railway has near-universal appeal, winning over well-heeled Tory commuters and Ukip voters alike. But it also has a totemic quality about it: a clear demonstration that Labour has taken a decisive stance against the untrammelled market in the era of market failure.

The real complaint, we feel, about the railways is not over who owns and or runs them. It's over the price of them.

It's common enough to see people complaining that UK ticket prices are among the highest in Europe. And they are, as a result of a deliberate political decision. More of the revenue to keep them running comes from ticket prices and less from direct subsidy than in most other countries. And that's the correct decision too. There's Britons who don't use a train from one decade to another: difficult to see why they should be taxed to provide cheaper transport for others.

And that's why nationalisation won't make much difference. Because doing so isn't going to reverse that decision that, by and large, people who use trains are the people who should pay to keep trains running. The only way ticket prices will come down is if the taxpayer gets dunned for it. And why should we?

Logical Fallacies: 3. Definitional Retreat

https://www.youtube.com/watch?v=bvTS9Jw2JDM  

The third in Madsen Pirie's 'Logical Fallacies', this video is on the 'definitional retreat'.

You can pre-order the new edition of Dr. Madsen Pirie's How to Win Every Argument here

Uber: helping drivers, helping customers

The first comprehensive analysis of Uber 'partners' (i.e. drivers) has come out, written by Dr. Jonathan Hall, head of policy research at Uber, and Prof. Alan Krueger, of Princeton, and formerly Barack Obama's top economist. The results in short: Uber provides flexible employment at higher per-hour wages than traditional taxi driving, while building up reputational capital that traditional taxi systems cannot offer. It does not undermine traditional employment more general, or enhance inequality, but we all know how cheap the fares can be, and how useful the service is (this previously led me to believe that its stratospheric valuation might be justified).

This paper provides the first comprehensive analysis of Uber’s driver-partners, based on both survey data and anonymized, aggregated administrative data. Uber has grown at an exponential rate over the last few years, and drivers who partner with Uber appear to be attracted to the platform in large part because of the flexibility it offers, the level of compensation, and the fact that earnings per hour do not vary much with hours worked, which facilitates part-time and variable hours. Uber’s driver-partners are more similar in terms of their age and education to the general workforce than to taxi drivers and chauffeurs.

Uber may serve as a bridge for many seeking other employment opportunities, and it may attract well-qualified individuals because, with Uber’s star rating system, driver-partners’ reputations are explicitly shared with potential customers. Most of Uber’s driver-partners had full- or part-time employment prior to joining Uber, and many continued in those positions after starting to drive with the Uber platform, which makes the flexibility to set their own hours all the more valuable. Uber’s driver-partners also often cited the desire to smooth fluctuations in their income as a reason for partnering with Uber.

As we see above, Uber drivers really like their jobs, and that's probably why so many of them are still there a year later. I actually feel quite sympathetic towards existing taxi drivers both in the UK and US. They were forced by existing rules to invest heavily in getting their privileged spot in the market place, and Uber is effectively circumventing this process altogether.

This suggests we should compensate taxi drivers so that in the future people are not so worried that tech changes will force transformational rule changes that will ruin them. But this progress promises improvements on practically every margin of taxi driving; I can imagine a future where no traditional taxi driving exists—indeed with self-driving cars I can imagine a future where only an Uber-style rental-taxi system exists. So, compensation aside, it must go on.

Trade restrictions and dehumanisation

Tariffs are simply taxes but one can see why subsidies are, in the eyes of some, somewhat justifiable (though they still remain morally reproachable). However, a closer examination of both reveals the problematic, degrading moral assumptions that their imposition necessarily presupposes (along with all protectionist policy). Protectionist policies are, more often than not, designed to protect domestic industry. The argument is usually phrased along the lines of “protecting our farmers’ jobs”, “our workers’ jobs”, “our manufacturing industry”. It all boils down to protecting the jobs of domestic citizens; this is essentially nationalism in benevolent garb.

‘Protecting’ farmers, for example, from the competition of comparatively cheaper foreign imports imposes costs upon domestic consumers (whose range of choice is restricted and who are forced to pay higher prices). However, protecting domestic farmers over foreign farmers via tariffs, subsidies and other trade restrictions presupposes a key value judgment by elevating domestic farmers’ jobs’ intrinsic worth over foreign farmers’ jobs’ intrinsic worth. There is no real economic reason for this since this is one topic that all economists agree on (except, perhaps, for some agricultural economists based in rural and/or semi-rural communities); that is, that there should be free trade between countries – rather, this is a question of politics.

Systemically, it is an issue of agricultural land usage rights; after all, if farmers could diversify the use of their land, then they would no longer need subsidies (since their income stream would no longer be limited solely to farming) – hence, they are also tools of perpetuating political dependence. There is also the issue of food security but this is reflective of the prevailing war-ready/war-preparing psyche and artificially reduces the costs of going to war in the first place (an obvious cause for concern in the long-run). In this case, the criteria for elevating the political worth of a person boils down to voting rights, nationality, culture, ethnicity etc. rather than the simple fact of the personhood they are naturally endowed with.

Those who lobby government to redistribute wealth argue that it is unfair that people can be so privileged or downtrodden merely through birth. However, tariffs and subsidies are essentially income redistributions in at least three ways; firstly, from taxpayers (taxes fund subsidies), secondly, from consumers (tariffs make products more expensive and reduce a range of choice) and thirdly, from foreign producers (by making it infeasible for them to export and thereby make a living). Through capitalising on the shaky, divisive social construct of nationality and citizenship, protectionists have successfully increased tax revenue and subtly assaulted the intrinsic worth of human life. Is this redistribution of income really worth moral retrogression?

A plain pack of lies

BBC News tells us that: “A law introducing plain cigarette packaging in England and Wales could come into force in 2016 after ministers said MPs would be asked to vote on the plan before May's general election.” We really are seeing the thin end of the wedge here as yet another misjudged interference in the free market looks set to take place. The confusion that people like Public Health Minister Jane Ellison harbour is that they only seem to think of smoking in terms of bodily damage. Yes, if you only want to think about smoking in terms of the effects of physical degeneration on body parts, then cigarettes are a terrible thing, and plain packaging can be argued for on those (albeit flimsy) grounds. But only a fool would do that. Jane Ellison is presumably aware that many people still smoke even though they have full knowledge of how bad cigarettes are for them. With this knowledge she ought to have a clue that there is a reason people smoke in spite of knowledge of its degenerative effects – they enjoy doing it. Clearly people who voluntarily hand over money to buy and smoke cigarettes have accounted for cigarettes being bad for your health, but have still concluded that the positive effects of smoking outweigh those negatives. Ben Southwood's blog on smoking is particularly appropriate here.

Contrary to the 'plain packaging' lobby's misapprehension, it is trivially obvious, that smoking is only entirely bad for you if you forget all the reasons that it is good for you. The trouble with going down this road is that if you consider only the costs, then just about everything is bad for you. Take drinking water. By only counting the costs you'd find drinking water is a pretty disagreeable action - it brings about increased urination, it causes time lost in the toilet, it engenders increased chlorine levels in your stomach, and it causes gradual damage to your detrusor muscle in the bladder. Drinking water - one of the most innocuous activities we can undertake - has risks and it has costs, but no one thinks it's bad for you in net terms. Quite the contrary, in places where water is scarce we do all we can to make it plentiful.

Governments interfere too much by focusing only on costs and ignoring benefits. It’s unsurprising that people like Jane Ellison want to trespass into other people’s free choices so much – she’s only aspiring to do what the state does on a frequent basis.  This is the simple and straightforward reason why I'm a libertarian, and why I hold the view that a small government is best. People know how to run their lives better than any government. That's not a blanket truism, but it's true for the vast majority of people, and it's true in the majority of ways that relate to how we live our lives by making cost-benefit analyses and exercise our freedom of choice. Politicians are quick to interfere or ban things that have costs, which often involves failing to appreciate that humans can decide for themselves whether those costs are worth paying.

Because it is impossible for the state to know how much every individual values health, exercise, weight training, smoking, alcohol, and so forth, it is impossible for the government to know better than its citizens what is good for them. A good government would understand this, and seek to minimise its involvement in our lives to enhance our welfare and liberty, as the quality of welfare and the benefits of liberty are synchronised to enable people to voluntarily undertake the activities they prefer.

Another strange idea to reform the housing market

It does continue to amuse us, watching the contortions that people twist themselves into in their attempts to reform the housing market. As opposed to, you know, just getting on with issuing more planning permissions so as to bring down the price of housing. The latest one is that self-builders should be treated as special little snowflakes with their own, special snowflake, planning permissions system:

But we also need to reform the land market, to make it dramatically easier for those without much capital to buy a plot of land and commission their own homes – either individually or as a group. All political parties pledge theoretical support for custom and self-build, and the government’s “Right to Build”, which allows people to buy council land on which to build their own houses, is a first step. But systemic change is needed to create a market providing land specifically for custom and self-build housing.

Let’s create a new land use class in the planning system “C5 Custom build”. In effect, that would create a parallel land market that differentiates between a house built as a speculative asset, and a house built as a place to live. Let’s create space for both, and see which works.

There's only one problem with this suggestion. Which is that we don't in fact want a special class of planning permission for self builders. What we actually want is simply the issuance of more planning permits. For as is entirely obvious to everyone the price of housing in the UK is determined by a shortage of said planning permissions. So, therefore, we don't want the creation of a special system for special snowflakes, we simply want the loosening of the planning permission system as a whole. And then indeed self builders can run alongside more commercially minded organisations and may the best man win.

Oxfam, capitalism, and poverty

After Thomas Piketty's Capital in the 21st Century told us about rising inequality, it's perhaps unsurprising that a new report from Oxfam tells us the global 1% will soon own half of all the world's wealth. But things are not quite as they seem. Oxfam's figures look at net wealth, implying that Societe Generale rogue investment banker Jerome Kerviel is the world's poorest person, and Michael Jackson was afflicted by the direst poverty before he died.

Ivy League graduates about to start a job as an investment banker at Goldman Sachs are judged far poorer than rural Indian farmers with the tiniest amount of capital.

Seven point five per cent of the poorest tenth of the world live in the USA, the figures say, almost as many as live in India.

And the claim that 85 own as much as 3.5bn is even more misleading, since the bottom 2bn don't have nothing, but negative wealth—something like $500bn of it.

What's more the global 1% probably contains more Times readers than CEOs or oil sheikhs—you need own a house worth around £530,000 to enter it.

All these facts skew Oxfam’s figures to make them astonishingly misleading.

Better figures tell a completely different and far more optimistic story.

Global poverty has actually fallen enormously with the rise of global capitalism. The fraction of the world's population living on less than $2 a day (measured in constant dollars) has crashed from 69.6 per cent in 1981 to 43 per cent today.

Even if you take out India and China, where the most spectacular improvements have been made, and look only at Sub-Saharan Africa, the worst-off region, there have been improvements. From 1981-2006 8.6 percentage points fewer were living on under $1 a day and 4.9 percentage points fewer were living on under $2 a day.

In virtually every respect global poverty is falling and poor people are living longer, better lives. That is less sexy than Oxfam’s claims, but at least it is true.