Economic Nonsense: 39. Only strong government regulation can hold big business in check

It isn't strong government that causes concern for big business.  They are more worried about the smaller, newer businesses that might take away their trade.  It is competition, not government that they worry about.  Big business often cozies up to big government.  It employs lobbyists to negotiate with civil servants and ministers, and hammers out agreements on what types of regulations should be introduced, and how they should be implemented.

Big business can cope with regulation.  It can afford the staff to deal with compliance.  Small businesses, especially start-ups, find it more difficult to afford the money or the staff time that regulatory compliance takes up.  Big business knows this, and often strikes deals with lawmakers to impose regulation that will deter newcomers from entering the market.  Far from it being used to control big business, regulation often helps big business by imposing unacceptable costs on its real or would-be competitors.  People speak of "regulatory capture" when the industry works with government to secure helpful regulation.

Some regulation is needed to reassure the public that it will not fall victim to sharp practice or shady dealing, but five words should be engraved above the door of every legislator: "Competition is the best regulator."  It is competition that keeps firms striving to deliver high quality and keen prices.  The fear of losing trade is more powerful than the fear of incurring the displeasure of government.

Regulation is commonly used to protect those in the market from competition by those who might enter it.  If no-one can trim hair without training and a certificate, the prices charged by existing hairdressers will not be undercut.  If no one can enter the taxi trade without a medallion or a two-year training course, the fares charged by existing cabbies will be protected.  All rules like these are done in the name of protecting the public, but in reality it is the established operators that they most commonly protect.

To control big business government should pursue a policy of promoting competition.  It should make it easier, not harder, to enter established markets.  This, more than regulation, will keep firms attentive to their customers.

Blithering stupidity about electronic cigarettes

Sometimes we just despair for the human species. Perhaps it might be time for us to resign and make way for intelligent life. Such is our reaction to this latest report about electronic cigarettes:

E-cigarettes need to be more strictly controlled to stop teenagers using them, health professionals have argued.

The call was prompted by new research showing that 19% of 14-17 year olds have tried the products despite them only becoming available in recent years.

An analysis by researchers at Liverpool John Moores University found that the e-cigarettes were used by 5% of teenagers who had never smoked, 50% of former smokers and 67% of light smokers.

Or as the BBC reported:

Many teenagers, even those who have never smoked, are experimenting with e-cigarettes, researchers in north-west England say.

Questionnaires completed by 16,193 14 to 17-year-olds, published in BMC Public Health, showed one in five had tried or bought e-cigarettes.

The researchers said e-cigarettes were the "alcopops of the nicotine world" and needed tougher controls.

The truth is, of course, that these results show that electronic cigarettes are an entirely marvelous product that are likely to save many lives in the future. Yes, lots of teenagers are using them. But what is the effect of their using them? As one of us has pointed out elsewhere:

That halving of teen smoking rates coincides with the invention and introduction of vaping (overlaps at least, the first devices really came in 2007). And other studies show very much the same thing. People use vaping equipment instead of smoking, not as a gateway to it nor does vaping increase smoking prevalence. It is thus a substitute, not a complement. As such of course it is to be greatly welcomed.

Electronic cigarettes lead to less smoking of cigarettes. Thus, far from our wondering about whether we ought to regulate them more the actual discussion should be about whether they are quite so wonderful that we ought to be subsidising them.

Young Writer on Liberty Competition 2015

  The Adam Smith Institute invites the under-21s to enter our annual 'Young Writer on Liberty' competition.

This year’s theme is: The road not yet travelled: Three paths the next government should take towards a freer United Kingdom

This is not a typical essay contest. Instead, entrants should submit three, ASI blog-style articles, each highlighting a different policy the incoming government (whoever they may be!) should adopt to make the UK freer, richer and happier.

You may argue to get rid of certain regulations, or a repeal a specific law. You might suggest reform of the banking system, the right to sell organs for money, or a move to direct democracy. You might even call to abolish politicians completely! No idea–however radical–is out of the question.

We are looking for entrants who can think creatively and express themselves clearly and succinctly. As such, winning entries will be thought-provoking, well-argued, and suitably researched.

Prizes: There are categories for the Under-18s and the 18-21s, with a winner and a runner-up in each.

The winner of the Under-18 category will receive £150 prize money and a box of liberty-themed books. They will also have their articles published on the Adam Smith Institute blog.

The winner of the 18-21 category will receive 2 weeks work experience at the Adam Smith Institute, £150 prize money, a box of liberty-themed books, and have their work published on the ASI blog.

Runners-up in each category will also receive a box of books, and have an article of their choice featured on the website.

How to enter: You should submit your three articles using our Young Writer on Liberty submission form.

The deadline for entries is 11.59pm on Friday, May 15th. Applicants must be under 21 on this date.

If you have any questions or queries, please contact schools@old.adamsmith.org

We look forward to reading your entries!

Economic Nonsense: 38. The market cannot produce art, music, literature & museums

The market actually does produce such things in some other countries.  What the market does best is to allow people to create the wealth that will fund cultural activities.  The United States has a strong tradition in which people who have done well in business support the arts.  Names such as the Guggenheim Museum or the Getty Centre remind us of the generosity of rich patrons.  Andrew Carnegie, who found fame and fortune in the United States, funded the provision of organs in many churches in his native Scotland, as well as numerous libraries.

In fact the arts have been funded by rich patrons through the ages.  It was often regarded as a sign of good character and culture that a wealthy person would support art, architecture and sculpture.  The emergence of modern economies since the Industrial Revolution has enabled wealth to be created on an unprecedented scale.  This, in turn, has allowed some people to become rich through business and become patrons, where previously it was mostly aristocrats and rich merchants who could afford to do so.

When Kingsley Amis wrote for the Adam Smith Institute opposing arts subsidies, his central case was that if government through its arts committees funded the arts, their output would be skewed towards the desires and tastes of the paymasters, rather than from the passion and inspiration of the artist.

It must remain a suspicion that the committees responsible for handing out public funds as grants to the arts will give effect to their own tastes, rather than those which the public might freely choose to support otherwise.

Some arts can be self-supporting through ticket or admission prices, but government can help through its tax laws, remitting all or part of the tax that would have been due on money donated to artistic institutions.  It does not itself need to dole out taxpayer-funded largesse,  The UK's National Lottery has multiplied financial support for the arts without needing taxpayer funds.  The view that the market cannot finance the arts and that government grants are needed to sustain them is simply not correct.

Immigrants and institutions

It's becoming increasingly difficult to be opposed to significant immigration for economic reasons. One of the more sophisticated arguments for restricting migration–proponents include Paul Collier, in Exodus: Immigration and Multiculturalism in the 21st Century, and George J. Borjas in Immigration Economics–concerns the socio-political baggage that immigrants bring with them; institutions, characteristics, and social norms which might even have had some bearing on the poverty of their countries of origin. There’s a substantial literature to support the claim that institutions like secure property rights and the rule of law are by far the most important guarantors of long term prosperity and growth. If it were true that high levels of immigration could serve to undermine these institutions, (as Borjas hypothesises) significantly mitigating the vast welfare gains some predict immigration will bring, those who support very high levels of immigration might well reevaluate their position.

The newly updated version of a Cato Institute working paper, soon to be published in Public Choice, goes some way to looking at these claims empirically. They use data from the Economic Freedom of the World Annual Report to examine the effects of migration on the institutions such as property rights. The main finding of their analysis is that countries with a larger percentage of immigrants in their population in 1990 had a higher level of economic freedom in 2011.

Indeed, Clark et al. conclude:

Regardless of the immigration measure used or the precise regression specification, we have not found a single instance in which immigration is associated with less economic freedom. It does not appear that immigrants are bringing the poor economic freedom records of their home countries abroad with them.

and

Overall, we find some evidence that larger immigrant population shares (or inflows) yield positive impacts on institutional quality. At a minimum, our results indicate that no negative impact on economic freedom is associated with more immigration.

As the evidence around the economic case against immigration is weakened (I could have also blogged today about a recent CReAM discussion paper which concludes that low-skilled immigration to Denmark pushed up native wages, employment, and occupational mobility), we might wonder whether people have other reasons for opposing it.

It's not entirely obvious that inequality is increasing

It's a standard trope of our times that inequality is increasing beyond all reasonable levels. And it's also true that this isn't really quite true. Inequality within the rich countries has been increasing in recent decades, this is true. But global inequality has been falling. And now from Branko Milanovic (one of the major scholars on this subject) we get that chart above, and this:

...the noted convergence of countries’ inequality levels (see the graph, indicating that countries with higher inequality before 1980 had smaller increases or even declines in inequality since)?

He's actually arguing about something else which is why the quote is so truncated. But this is interesting, don't you think? While there has been rising inequality in some to many countries in recent decades those with the highest original inequality have seen, in some cases at least, falls. And that convergence does mean that the world is, at the country level, becoming equally unequal.

The standard trope of that increasing inequality has more than a few problems with it therefore: not just that decreasing global inequality but also this convergence of inequality. and that's before we even get into things like trying to measure inequality of consumption, adjusted for price levels, at which point we'd be very hard pressed indeed to claim that there's been any rise in inequality in the UK at all.

Economic Nonsense: 37. Government must act to redress trade deficits

No, not really.  People used to think so.  To some extent this is a hangover from mercantilist attitudes when people thought you needed a surplus of exports over imports so you could accumulate wealth.  In its primitive form of bullionism, people thought you had to sell more than you bought in order to build up piles of precious metals.  

When the UK had fixed exchange rates the balance of trade was regarded as vitally important.  Each month when the Department of Trade (as was) published the figures, people would fret about rising imports or reduced exports.  The "trade gap" would sometimes feature as the lead item on the evening news bulletins.  The significance was that if the imbalance were sustained over a period of time, the pressures on the currency would rise to the point where the pound might have to be devalued to a new fixed rate.  This was regarded as a humiliation, and made imports more expensive, increasing the cost of living.

Once the pound was allowed to float against other currencies, however, the issue lost significance.  If imports exceed exports over a period, the pound drifts down in value, making exports cheaper to sell and imports cheaper to buy, thus closing the gap.  Trade deficits are only a problem for countries with fixed rates of exchange.  And even here, while devaluation can redress them, other countries might also devalue, leading to "currency wars" as each tries to give itself a trade advantage.

Floating currencies solve the problem.  If a country is uncompetitive, buying more than it sells, its currency will go down, enabling it to sell more and buy less.  One of the problems with countries such as Greece has been that within the eurozone, they were not able to devalue or to drift down.  The value of the euro was not within Greece's control.  Had they left the single currency and restored the drachma, a steep devaluation would have addressed their debts and their competitiveness.  

Erm, this one is interesting

So Prof. Tim Besley of the London School of Economics, former All Souls Prize Fellow, ex-member of the Bank of England's Monetary Policy Committee, the UK's third most respected economist, and all-round impressive smart guy, has a new paper with Marta Reynal-Querol at the Universtat Pompeu Fabra in Barcelona. I mention these credentials to emphasise how respected and mainstream these guys are before I mention the finding of their paper, entitled "The Logic of Hereditary Rule: Theory and Evidence" (pdf, seems to be quite an early working paper), which is that hereditary rule/monarchy outperforms democracy but only when the hereditary ruler is subject to few constraints on their power.

Hereditary leadership has been an important feature of the political landscape throughout history. This paper argues that it can play a role in improving economic performance when it improves intertemporal incentives. We use a sample of leaders between 1848 and 2004 to show that economic growth is higher in polities with hereditary leaders but only when executive constraints are weak.

This finding is mirrored in policy outcomes which affect growth. There is also evidence that dynasties end when the economic performance of leaders is poor suggesting that hereditary rule is tolerated only where there are policy benefits. Finally, we focus on the case of monarchy where we find, using the gender of first-born children as instrument for monarchic succession, that monarchs increase growth.

That is: hereditary monarchs with lots of legal power choose better policy than other systems do, including democracies, non-hereditary dictators, and weak hereditary monarchs, and this is reflected in higher growth.

The size of the coefficient suggests that, in a country with weak executive constraints, going from a non-hereditary leader to an hereditary leader, increases the annual average economic growth of the country by 1.03 percentage points per year.

That's a really really big difference.

Of course, they're not saying they actually favour hereditary monarchy!

Although we have tried to understand the logic of hereditary rule, we do not regard the findings of the paper as supporting the institutions of hereditary rule. There are many arguments against, going back at least to Paine (1776), about the inherent injustice in such systems. Moreover, the fact that many polities around the world have put an end to hereditary rule and establish strong executive constraints is no accident since this is arguably a much more robust way to control leaders than relying on the chance that succession incentives will safe-guard the public interest.

It depends what you want government to do. If it's just there to guarantee a basic framework for society then as long as it worked, some sort of non-democratic system might be OK. Our having a stake in the electoral process hardly guarantees good governance (perhaps the opposite).

But lots of people value democracy not just because they think it gives us good policy: being part of a community; as an expression of human equality; an important type of positive freedom. These pragmatic arguments for and against different governance systems are not going to fully convince those types (and that's fair enough).

Of course the bigger issue is that the paper could easily be proved wrong in the review process, that's the point of interesting conjectures in working papers. And there's a whole lot of other literature out there, some of which goes against Besley and Reyna-Querol's work. But I tend to think that monarchy vs democracy is an empirical question. Whatever makes us freer, happier, richer is best.

We're rather confused about these anti-discrimination laws

No, not about the idea that people shouldn't discriminate except where it is rational to do so. If that's the way that people want to be then so be it. Rather, we're confused about the fact that people keep calling for laws on this basis. Note that this nothing at all to do with things like Jim Crow: that was a series of laws to force people to discriminate. Or, if you prefer, it's everything to do with Jim Crow: for as Gary Becker pointed out the reason for those laws was the thought that in the absence of them then people would not discriminate in the manner that the racists thought everyone should. Showing that left alone people might well be able to rub along quite happily, even if not perfectly.

But we go a bit further than that in these cases of gay wedding cake refuseniks and the like. There's at least two possible reactions to that sort of discrimination. The first is obviously the law. But we're rather large believers in the idea that markets (and yes, social pressure and reaction is a market in this sense) are rather more powerful. To refuse to serve a potential customer because of race, gender, sexuality or any other such irrelevance is of course to be displaying a socially (in this society, the one we're in, in general) undesirable prejudice. And the question then becomes, well, what should be done about it?

Well, if it actually is a socially not desired prejudice being declared then we'd expect there to be some social and or economic consequences of it being expressed. People not using that supplier for example even if without any direct boycott being organised. That supplier going bankrupt as a result of not gaining custom perhaps.

Let us be serious for a moment: any pub which displayed the notorious no dogs...(insert prejudices of choice here) sign would be out of business within weeks. It's therefore not obvious that we actually need a law stopping people from posting such signs.

Another way of looking at the same point is that a society where it's possible to gain majority support for laws banning such signs is fairly obviously a society in which social and business pressures would stop people from displaying that sort of prejudice anyway. So we're left really rather wondering what is the point of the laws in the first place.

Economic Nonsense: 36. It is important to ensure that the finest minds are directing the economy

This commits the Platonist fallacy of supposing that the problem is to find the wisest, noblest rulers.  The assumption behind it is that we will come out best if only the right people end up in charge.  In "The Open Society and its Enemies," Karl Popper exposes the fallacy.  The problem is that that whatever method we choose to select our rulers, those rulers can easily be corrupted in office.  The temptations of power are all too obvious.

If we did manage to have the finest minds in charge of the economy, the odds are high that they would direct it to serve ends they approved of, rather than the ends that ordinary people would freely choose if they had the opportunity.  

But there is a deeper fallacy.  It is that any minds, no matter how fine, can have sufficient information and act quickly enough to direct the economy.  The economy is changing from micro-second to micro-second as choices are made, decisions reached and actions taken.  These all input into the flow of information conveyed by prices and deals.  The economy is not like a vehicle that can be controlled by accelerators, brakes and steering wheel.  It is more like a living organism in its complexity and its ability to adapt to changing circumstances.  The odds are that if the finest minds were to direct the economy, they would direct it badly. 

Popper's answer was not to ask, "How can we choose or train the best rulers," but to ask instead, "How can we so organize political institutions that bad or incompetent rulers can be prevented from doing too much damage?”  His answer was that you need a means of rejecting the bad, rather than selecting the good.  In the economic sphere this happens without the direction of the finest minds.  Products that do not cut it with consumers are counted out, along with the firms that market them.  Capital is redeployed to the newer, smarter people who can satisfy customers.  It is a continuous process by which the less competent is weeded out in favour of the more competent.

If we did have the finest minds trying to direct the economy, the chances are that they would contrive to stop this happening, or at the very least, interfere with it in ways that made it less effective.