Economic Nonsense: 25. With free markets the poor are left behind
No. It is the poor who benefit most from free markets. The expensive new products that initially only the rich can afford become cheaper as time passes until they fall within what most people can afford. Colour televisions were initially a luxury product for rich people, but there was money to be made so more producers entered the market. The competition spurred firms to develop cheaper methods of production and improvements in quality. Colour TVs are now something that even poor people in rich countries are expected to own. Many consumer goods follow the same trajectory; most recently smartphones have done so. Far from being left behind, the poor are pulled along by the progress that initially caters for the rich.
Free markets offer a great variety, a variety that includes high fashion items for wealthy buyers, but also serviceable and affordable versions for those not so well off. A Bentley is a very fashionable, high quality car with four wheels that enables its owner to get around. A Vauxhall is less fashionable and less high quality, but it has four wheels and enables its owner to get around. The rich eat caviar, while the poor eat the equally nutritious but less fashionable cod roe. The princess and the movie star can wear the latest couturier designed Paris dress; others can await the High Street department store version inspired by it a few weeks later.
On a global scale, the world's poor have made huge gains because of free markets. Hundreds of millions have been lifted from subsistence and starvation because global free markets have enabled them to produce goods or services that sell to people in richer countries. They have not been left behind because globalization has admitted them into markets and allowed them to advance their living standards.
No, Robots aren't taking our jobs
The impact of mechanization on human employment has been a long-held concern. Long before robodoctors, drones and self-service checkouts the Luddites waged war with technology, smashing and burning the labour-saving machines they considered a threat to their livelihoods. Today, people like Tyler Cowen predict that the rise of intelligent machines will result in a society where the top 15% are fantastically successful and wealthy, but much of the traditional work of the lower and middle-classes is performed by robots and automation. Indeed, a much-cited 2013 study by the Oxford Martin Programme on the Impacts of Future Technology found that 47% of total US employment is at ‘high risk’ of computerization and could be automated within the next few decades. ‘Threatened’ sectors include transport, logistics and office administration, but surprisingly also the service sector, which is currently responsible for many of the new jobs created in developed economies.
Technological progress tends to have two differing effects on employment. At first there is displacement, as workers are substituted for new technology. However, efficiencies gained from automation often reduce prices, increasing real income and the demand for other goods. Companies will move into industries where productivity and demand is high and create new jobs, or use new technology to create new industries. Automation also frees up displaced workers to utilize their skills in other, potentially more fulfilling and creative ways.
Setting aside something like the singularity the economic impact of robots depends on whether they destroy more jobs than they create, and which section of society gains most from the opportunities they bring. At the moment, nobody really has a clue what future economic impact robots will have. Even a survey of nearly 2,000 experts in robotics and AI found that they were split down the middle in terms of techno-optimism (believing that robots will create more jobs than they replace) and techno-pessimism (that the rise of robots will inevitably adversely effect a significant number of blue and white collar workers).
Until now, there’s actually been very little empirical work done on the economic impact of the use of robots. However, a new paper — ‘Robots at Work' —from the Centre of Economic Performance at the LSE makes a welcome contribution to the field.
Using data from industries in 17 developed countries between 1993-2007, the report finds that ‘robot densification’ has no statistically significant effect on total hours worked over the period. This suggests that the use of robots has not (on net) resulted in less work opportunities for humans.
It has, however, had significant, and positive, effects elsewhere. The study found that the contribution robots make to economic growth is substantial, at 0.37 of GDP growth, and accounted for one-tenth of aggregate growth over the period. They also raised annual labour productivity by 0.36 points, comparable to steam technology’s boost to British labour productivity between 1850-1910. They also found that robot densification increased both total factor productivity and wages.
Industrial robots were used in under a third of the economy during the study period, and accounted for only around 2.25 percent of capital stock even within robot-using industries. The authors suggest that the likely contribution of robots to future growth is substantial, particularly when considering their potential impact in developing countries.
There is one note of warning, though — whilst the study found no overall impact of robot densification on hours worked, the use of robots did have a negative and close to significant impact on the hours worked by low-skilled workers, and, to a very small extent, those of middle-skilled workers. Presumably time will tell whether this is trend truly worthy of concern, and whether displaced workers are able to find alternative jobs elsewhere. For now, though, this study suggests that robots are tools which assist with and complement our jobs, as opposed to threaten them.
George Monbiot does rather misunderstand things
The latest bright idea from George Monbiot is that we must, in order to beat climate change, force people to leave fossil fuels in the ground. On the basis that it is necessary to attack supply as well as demand:
Imagine trying to bring slavery to an end not by stopping the transatlantic trade, but by seeking only to discourage people from buying slaves once they had arrived in the Americas.
It's an interesting example of his faulty logic. Because of course the transatlantic trade was at first banned in 1803 and then gradually extended to non-British ships and so on. But slavery lasted in the US until 1865 and into the late 1880s in Brazil, long after that supply was both legally and effectively banned. The solutions were variously more and less bloody but they were actually that people were dissuaded from purchasing slaves rather than that people were dissuaded from supplying them anew from Africa.
So it is, we're sorry to have to say, with fossil fuels and their associated emissions. We are not all victims of the evil capitalists (and, given that governments actually own the vast majority of fossil fuel reserves and resources, it's definitely not the capitalists to blame) who are forcing us to use such fuels. Rather, we the people rather like what we can do with such fuels: travel, heat our homes, heat our food and so on. It is the demand that needs to be changed (assuming that you want to consider climate change to be a problem), not the supply.
After all, banning the production of psychedelic drugs has proved so successful hasn't it? So too the supply of prostitution services where such is illegal. It really is worth recalling that while Say's Law (that supply creates its own demand) might not be entirely true the opposite, that demand calls forth supply is.
The answer to climate change, as above assuming that you think it is a problem and one that needs a solution (we do, even if not as immediate and cataclysmic as Monbiot does), is as it always has been. Either cap and trade or a carbon tax, plus research into non-CO2 emitting forms of energy production, in order to curb demand. Just as Bjorn Lomborg, the Stern Review, William Nordhaus, Richard Tol and everyone else who has actually looked at the economics of the problem has concluded.
Logical Fallacies: 17. The dilemma
https://www.youtube.com/watch?v=3Yy7dDHDlCs
Watch 'the dilemma', the latest in Madsen Pirie's series on logical fallacies.
You can pre-order the new edition of Dr. Madsen Pirie's How to Win Every Argument here
Economic Nonsense: 24. Strong laws are needed to curb the activity of speculators
The villains of the piece change as the economy changes. At one time it was money-lenders, then corn merchants. In modern times speculators are up there with bankers in popular dislike. Speculators are commonly perceived as people who add nothing to a product, and often as people who profit from the hardships endured by others. They are seen to buy cheap in the hope that the price will rise, then sell at a profit without having added to or improved whatever it was they speculated on. In fact speculators often provide a useful service. They can take the burden of risk that others might find difficult to deal with. The speculator who buys a farmer's crop in advance gives the farmer the certainty of a price. Farming is an unpredictable activity, and the market price when the crop I harvested might be higher or lower than that agreed price. The speculator hopes it will be higher and takes the chance, but the farmer prefers the certainty of a known price that enables him to plan his affairs.
When speculators buy or sell commodities hoping to profit from price changes, they dampen some of the fluctuations. If they bet on a future shortage, they will buy now in the hope of selling for a higher price. If enough of them do it, the effect of buying now is to raise the price now, signalling to users to curtail their use, and to producers to bring out more supply. The same happens in reverse if they bet on a future glut by selling.
Businesses that sell to other countries face the uncertainty of not knowing what their goods might fetch in foreign currencies at the time of their delivery. They can smooth this by buying or selling currencies in advance from speculators prepared to take a punt on future changes in exchange rates.
The invisible service that speculation adds to goods is risk management. It is a valuable service, but because people cannot see it, they see it as money for nothing. Always there will be populist politicians prepared to trade on their resentment and propose tough laws to curb an essential service that helps markets to work more efficiently.
Believe it or not, people actually like smoking and eating fatty food
Public information campaigns and nutritional labelling are good at informing people about what’s healthy and what isn’t, but don’t seem to have much impact on what they actually eat. That’s what a comprehensive review of 121 'healthy eating' policies found, and I think it should make us rethink more heavy-handed policies to do with unhealthy food, tobacco and alcohol. There are benefits as well as costs to every activity that public health groups want to discourage. We know there are benefits because people do them freely. But we know there are costs as well, like living a shorter and less healthy life.
The liberal view is that each person’s cost-benefit calculation is different, because they enjoy and dislike things differently. In this view there’s no case for stopping people from doing things unless they don’t actually have the information they need to make a judgement. We should want to make people’s lives better as they themselves understand ‘better’, not according to a single measure we’ve decided on, like lifespan.
So telling people that sugar makes them fatter may be a good policy, if they didn't already know that. And policies that do that do seem to make people more informed. But what’s interesting is the impact they have on people’s diets – usually not much, and sometimes an unexpected one.
For example, a 2008 study found that people who used nutrition labels had big increases in fiber and iron intake, but no change to their total fat, saturated fat or cholesterol intake. The UK’s ‘five a day’ campaign about fruit and veg was very successful at getting people to think about eating more fruit and veg, but increased people’s intake by an average of 0.3 portions a day (which was not viewed as being a very good improvement). 44 studies of similar campaigns in the US and EU have shown about the same size effect.
To some people that might make it look like we need to do more. To me it looks as if people view the costs of changing their diet to something less enjoyable or convenient as being quite important, and are willing to forgo some level of health to avoid that.
Maybe this tells us something about cigarette regulation too – there is some evidence that smokers actually overestimate the risk of smoking and some that they underestimate it. If they do overestimate the risks, we’re ‘informing’ people so much that it’s become misleading.
It would be fair to respond to this that people have no real way of doing a proper cost-benefit analysis about eating sugary foods or smoking, but because the state can’t measure the benefits – that is, the pleasure – it is just as limited.
The fact that people do change their habits about iron and fibre, but not fats, suggests that they aren’t ignorant, they just don’t want to eat less fat! If that’s the case and we’re working to improve people’s lives on their terms, there is no case at all for more heavy-handed policies like taxes, ingredients restrictions and advertising bans.
The Spending Plan, courage, and politicians
A ring-fenced National Health Service, a bill poised to commit future governments to spend 0.7% of GNI on international aid, a triple lock on pensions, senior military figures pushing for commitments to higher defence spending: these are inauspicious times in which to contemplate cutting the UK’s £77 billion structural budget deficit, but contemplate we must. Aside from the velleities and equivocations of the political parties when it comes to their respective deficit reduction plans (and most other things besides), the Taxpayers’ Alliance has today released their Spending Plan, which comes as a substantial contribution to the debate. The Spending Plan’s first goal is modest: to lay out a menu of cuts which would take public spending to 35.2% of GDP by 2019-20 – the level forecast by the Office for Budget Responsibility – its second more radical, to outline further measures which would cut spending to 31.7% of GDP, a level at which a single income tax of 30% could be implemented.
Despite the reasonableness of its first end point, or perhaps because of it, the Plan makes for sobering reading. An implementation of the first, less stringent, programme would, among other things, see the abolition of no less than three government departments (the Department for Business, Innovation and Skills; for Culture, Media and Sport; and of Energy and Climate Change), an end to national pay bargaining in the public sector, and a sizeable cut to Scotland’s grant from the UK government.
While the numbers add up, the issue is likely to arise in finding a politician willing to implement the proposals. As the TPA’s Chief Executive, Jonathan Isaby, puts it:
Our Spending Plan honestly sets out the savings that need to be made by whichever party or parties take power after the election. Today we challenge our political leaders to accept our plan or to produce a similarly rigorous set of proposals of their own which explain where it is that they would reduce spending instead.
The report recognises that reduced spending and deregulation are of no importance if they don't lead to people being better off in the long run, and makes the welcome case that making the state leaner is desirable for reasons other than deficit reduction. David B. Smith sets out the case that market economies grow faster, while the ASI's Director, Dr. Eamonn Butler, makes the ethical argument for lower taxes.
Despite the size of the challenge that future governments face, that markets have confidence in the UK’s ability to get its debt under control might serve as good evidence that all is, in fact, not lost. However, politicians would do well to come to the realisation that, whether those set out in The Spending Plan or not, radical decisions about the role of the state must be made; we can only hope this research helps them do that.
Electric cars won't save drivers anything, not one single red penny
We have the glorious news today that if only everyone drove electric cars then everyone driving an electric car would save loadsamoney. It isn't actually true though, electric cars won't save drivers anything at all, not one single red penny:
Electric cars could cut the UK’s oil imports by 40% and reduce drivers’ fuel bills by £13bn if deployed on a large scale, according to a new study.An electric vehicle surge would deliver an average £1,000 of fuel savings a year per driver, and spark a 47% drop in carbon emissions by 2030, said the Cambridge Econometrics study.
The paper, commissioned by the European Climate Foundation, said that air pollutants such as nitrogen oxide and particulates would be all but eliminated by mid-century, with knock-on health benefits from reduced respiratory diseases valued at over £1bn.
But enjoying the fruits of a clean vehicle boom will require an infrastructure roll-out soon, as the analysis assumes a deployment of over 6m electric vehicles by 2030 – growing to 23m by 2050 – powered by ambitious amounts of renewable energy.
And who, might we ask, has to pay for that infrastructure? Ah, yes, of course, that's us, the general taxpayer, isn't it? So, we're asked to dig into our pockets to make driving cheaper for other people. And given that it's not the poor who are going to be buying expensive electric vehicles that's us, the general taxpayer, subsidising the better off, isn't it? Not quite the way this is meant to work.
However, there's another problem with this. Which is that electric cars aren't going to save drivers any money at all, not in the long term. For petrol driven cars, if petrol were untaxed, are still very much cheaper than electric cars. Sure, for environmental reasons that might mean that a bit of subsidy to get the new technology rolling might be worth it (not that we agree but we're willing to accept the possibility at least). And that tax on petrol does raise some £27 billion for the Treasury, at least it did last time we looked.
Politicians are not simply going to acquiesce at having £27 billion less of our money a year to play with and dispose of as they wish. Thus, as electric cars become a larger portion of the fleet so taxation of electic cars will rise in order to replace that revenue lost from taxing petrol. That £27 billion is still going to be extracted from drivers whatever else happens.
So given that the savings from electric vehicles are entirely tax driven, and the tax system will not, as soon as the revenue loss becomes noticeable, stay static then we cannot say that the widespread adoption of electic cars will save drivers money.
In fact, given that the electric car untaxed is still more expensive than the petrol car untaxed, yet the political imperative will be to make sure that tax revenues do not fall, we will find out that electric cars cost drivers more than petrol driven. Because, once electric cars become popular, they will have to carry the costs of their inefficiency and also that same tax burden.
This idea that drivers will, in the long term, save money by having electric cars is thus a con. It simply won't happen: not when politicians so enjoy spending the money they raise through the taxation of driving.
Economic Nonsense: 23. Too much economic effort is wasted on branding and advertising
People tend to say this because they cannot see any value added by branding and advertising, assuming therefore that the resources put into them must add to the costs of items without adding to their value. It is true that branding and advertising cost money, but not true that they have no value. Both convey information that is important to consumers. Advertising is used to make customers aware that the product or service is available, and to indicate how it differs from similar products or services available from rival producers. It is an essential part of competition, and it is competition which keeps producers anxious to keep quality high and prices low. Advertising can tell potential customers details of both price and quality making them able to choose between rival offerings. It can serve to remind customers that the product is out there and available.
Branding serves to reassure people about quality. Companies take good care to protect the reputation of their brands because they know that their ability to sell goods depends on how people perceive them. When analysts calculate the value or a company, they include a price they estimate to be the worth of its brands.
Brands do more that that. Companies use them to convey an image that people might want to be part of. The boy who buys Nike trainers acquires more than the shoes. He acquires the knowledge of their quality, and the feeling he gets by being seen to be one of the circle of Nike wearers. He might gain the thrill of being seen to be cool and stylish, a person of discrimination and taste. Scotch malt whisky is branded in India as an aspirational drink, so young Indians determined to make good can drink it and feel they are part of a group that is on the way up. Long after the whisky has gone, they might remember and savour that feeling. These intangibles are among the most durable of consumer goods, and it is branding and advertising that attach them to the product.
Protectionism Takes on a Dangerous New Legal Identity: A New Threat Posed by State Sponsored Patent Trolls
This think piece sees Adam Smith Institute Senior Fellow Keith Boyfield explore a worrying aspect of the alarming growth of patent assertion authorities – often referred to across the pond as patent trolls. He highlights a particular brand of patent 'trolling' sponsored by foreign governments, and contemplates its implications for world trade and competitive markets. Major corporations, some past their sell by date, have lost none of their appetite for continuing to launch unjustified demands for patent royalties through patent assertion entities (PAEs) or patent trolls as they are more familiarly termed across the Atlantic. PAEs hold patents with a view to extracting a substantial sum from companies utilising the patents. (see Privateers and the sinister plot posed by ‘patent trolls’). Typically, patent trolls have little in the way of assets and no manufacturing operation: they exist simply to ‘milk’ patents on behalf of a parent organisation. The patent itself is the primary asset and the only with any real revenue-earning potential. Tellingly, a PAE’s payroll is dominated by a platoon of lawyers.
Their efforts aimed at exploiting weaknesses in the patents system have proved so damaging to commerce that they have now provoked action by Congress. Indeed, US legislators have redoubled their concern as the threat of patent trolls sponsored by foreign governments, notably the Chinese, looms on the horizon. Even countries in Europe, most obviously France, have already taken worryingly protectionist steps in this area, with their own state-sponsored patent trolls.
Patent trolls are growing in popularity – and are, in many cases spreading their wings. Troll-like behaviour is being exhibited by others, too, such as the ‘patent privateers’, of which more later.
The aggressive bullying exhibited by trolls in pursuit of patent rights has led to product development being stifled and the shackling of competition in the marketplace, particularly as it relates to consumer products and telecommunications. To give one striking example, recent research by economists at the Massachusetts Institute of Technology (MIT) has shown that sales of imaging software has declined by one third relative to other medical imaging products due to the threat posed by patent litigation. The demand for such medical services is buoyant, yet patients suffer[i].
Nokia, which once bestrode the planet as the leading manufacturer of mobile phones, has now sold its handset manufacturing operation to Microsoft yet, significantly, it has retained the bulk of its patent portfolio. Whereas it no longer focuses on producing phones, Rajeev Suri, the CEO, has made only modest attempts to disguise the company’s strategy of asserting its patents through aggressive licensing demands pursued by privateer subsidiaries with no assets and no manufacturing capability[ii]. His colleague, Nokia’s chief intellectual property officer, Paul Melin, acknowledges ominously that, “Divestment of patents has become a very important channel for us to monetise and realise the value of our research and development[iii]”.
As pointed out in an earlier blog by the author on the dangers associated with this behaviour (Privateers and the sinister plot posed by ‘patent trolls’, August 29th 2014), the cost of litigation and the awards given by US courts, notably in West Texas, can be staggering. PriceWaterhouse Coopers (PWC) report that 6,500 patent suits were filed in the US in 2013 of which PAEs – patent trolls – accounted for two thirds of them. PWC note that the median damages awarded in 2013 was a lucrative $4.3 million. America’s accounting journal – the CPA Practice Advisor – reckons “frivolous patent litigation costs US businesses $29 million a year in direct costs and $80 million in indirect costs”.
Patent privateers take the patent troll model a step further. Privateers focus on what are termed ‘better’ patents, associated with leading parent companies as opposed to obscure, antiquated patents. In practice, privateers tend to restructure the originating company’s portfolio into a series of sub-portfolios, thereby increasing the potential to generate lucrative royalties. They also aggregate patents into those they are already asserting with a view to increasing their negotiating leverage. Privateers are used by some of the larger market players as a form of rent-seeking through the courts – to undermine or attack their competitors by launching time-consuming and expensive lawsuits or other aggressive actions against successful market players.
In the last month the US Congress has made fresh moves to combat this menace to competitive, free markets. In February, Bob Goodlatte, the chairman of the House Judiciary Committee, reintroduced an Innovation Bill with the signatures of no less than 18 Democratic and Republican legislators – and potentially the support of a majority of House members. The House passed an earlier version of the Bill in December but it did not win support in the Senate prior to the closing of the session. Crucially, this revised Bill aims to raise the pleading requirements of a patent owner intent on making an infringement claim. If passed this could help to curb the activities of PAEs, whether based in the US or established by foreign governments.
The threat to competitive markets, both in the US and here in Britain, has significantly increased with the establishment of government sponsored PAEs, a move which carves out a dangerous new form of protectionism. The People’s Republic of China, for instance, has pumped huge sums[iv] into China’s Ruichan IPR Funds in order to acquire a portfolio of patents which it can they use to extract substantial royalty sums from licensees across the globe. This alarming new trend is dubbed ‘patent stockpiling’. Japan, South Korea, Taiwan and even France are adopting a similar strategy by way of rent-seeking activity. In the case of Korea, the state owned PAE, the misnamed Intellectual Discovery, has bought more than 200 patents, including one for retinal eye scan technology, with a view to maximising royalty income through aggressive threats to litigation. France Brevets – the French Government’s patent pool – has been open about the litigious protectionism inherent in such a model.
Britain needs to be aware of these growing dangers to world trade and brief its representatives in the EU (which handles all trade negotiations on behalf of the UK and other member states) to support initiatives aimed at addressing the threats posed by patent trolls in World Trade Organisation (WTO) talks, along with the ongoing negotiations taking place under the auspices of the Transatlantic Trade and Investment Partnership (TTIP). Furthermore, our courts and legislators need to be wary of any rent-seeking in the form of frivolous patent suits aimed at extorting money from companies keen to innovate products and services.
If we do nothing about this menace we face a downturn in world trade, higher prices and a poorer deal for customers.
It’s time to act now.
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[i] See ‘Patent trolls: Congress gets down to business - A bipartisan consensus to address the issue is building in Washington’ by Steven Titch, Computerworld, 10 February 2015.
[ii] ‘Why Patent Reforms Are Needed: Intellectual Property Abuses Threaten Innovation and Cost Consumers Billions’ by Steven Titch, Heartland Institute, Chicago, February 2015 Briefing Paper.
[iii] Op cit endnote (i).