Economic Nonsense: 43. Private enterprise cannot generate public goods such as lighthouses

In fact private enterprise supplies many public goods, although few commentators think they should provide all public goods.  Lighthouses are often cited as an example of essential services that only the state can provide, but the Nobel laureate Ronald Coase showed that many lighthouses were indeed built and operated by private enterprise.

They had their origin in the hilltop fires that were lit near ports to guide incoming ships.  These eventually evolved through wooden or stone towers into their modern form with steady improvement in their illumination.  They were financed by contributions from nearby ports, which incorporated the costs into landing fees charged on boats entering the harbour.  The state's role was to allow operators to levy such charges, in order to counter free riders who might seek to benefit from the lighthouse without contributing to its upkeep.  When the state took over their maintenance and operation, it was not because they were failing, but to standardize the charges which were then subject to wide local variations. 

Britain's Royal National Lifeboat Institution (RNLI) is an example of an independent public service supported by voluntary contributions rather than out of taxation.  For a few years in the 19th century the RNLI did take government money, but found its private contributions dropped off by more than it received in tax support, so it reverted to voluntary finance, which it maintains to this day.  Because contributions are voluntary, there are undoubtedly freeloaders who benefit without contributing, but there are enough public-spirited people to sustain it through their support.

The usual way of providing public goods privately is by a charge levied on users, as the early lighthouses did.  Modern technology makes it easier to identify users and to charge those who wish to benefit from the service.  The BBC was originally financed by a licence fee to provide and broadcast its programmes, but later media providers have used first advertising, as with ITV, and then subscription services, as with Sky.  Many would say that it is fairer and more appropriate for public services such as these to be paid for by those who benefit from them, rather than use taxpayer funds.

Women like dyads - men like groups

According to social psychology, stereotypes about groups tend to be accurate. This makes sense, because you'd expect an inverse Gresham's Law to operate: accurate stereotypes make you better at life; inaccurate stereotypes make you worse. It's like how markets drive out taste-based discrimination (racism, sexism) by making people pay for their unjustified prejudices. One such accurate stereotype is that women prefer one-to-one dyadic relationships, and men prefer membership in larger groups, particularly hierarchical coalitions.

New evidence for this comes in a recent study: "Women Favour Dyadic Relationships, but Men Prefer Clubs: Cross-Cultural Evidence from Social Networking" (full html paper) by Tamas David-Barrett, Anna Rotkirch, James Carney, Isabel Behncke Izquierdo, Jaimie A. Krems, Dylan Townley, Elinor McDaniell, Anna Byrne-Smith, and Robin I. M. Dunbar.

They added to the literature supporting this result in a rather interesting way:

The ability to create lasting, trust-based friendships makes it possible for humans to form large and coherent groups. The recent literature on the evolution of sociality and on the network dynamics of human societies suggests that large human groups have a layered structure generated by emotionally supported social relationships. There are also gender differences in adult social style which may involve different trade-offs between the quantity and quality of friendships. Although many have suggested that females tend to focus on intimate relations with a few other females, while males build larger, more hierarchical coalitions, the existence of such gender differences is disputed and data from adults is scarce.

Here, we present cross-cultural evidence for gender differences in the preference for close friendships. We use a sample of ~112,000 profile pictures from nine world regions posted on a popular social networking site to show that, in self-selected displays of social relationships, women favour dyadic relations, whereas men favour larger, all-male cliques. These apparently different solutions to quality-quantity trade-offs suggest a universal and fundamental difference in the function of close friendships for the two sexes.

This plays into Roy Baumeister's & Kathleen Vohs's work (see e.g.) on some of the sex differences (again, these may be biological or socially/culturally constructed) that may be working to underly differences in labour market activity and in turn the gender wage gap.

There is no inherent reason why men and women must have on average similar lives in order to have equally good lives; or in order for them both to have as good lives as possible (even if not equally good). It's OK for there to be differences between men and women.

Miliband's zero hours contracts catastrophe

Ed Miliband's latest attempt to screw up a part of the economy is his proposal to legislate on zero hour contracts:

"If you work regular hours for three months, Labour will give you a legal right to a regular contract, not a zero-hours contract."

I have no doubt Ed Miliband isn't ignorant of the fact that such a policy will harm lots of people and help only a tiny few, yet he doesn't seem to care two hoots - he supports the policy because he knows most people will endorse it based on the help for the tiny few while at the same time being wholly oblivious to the wider harm it will do. If you happen to be one of those few to whom that applies, you'll be happy. But for the vast majority, the labour market of supply and demand involves an allocation of resources (work and wages) far beyond the scope of any top-down management, and with far more efficiency than state meddling can achieve. Telling employers they must offer a regular contact after three months (a figure seemingly plucked out of the air) can only harm the efficiency of mutually allocated resources. This isn't anything more than standard first year economics - something politicians seem to be happy to ignore to buy votes.

What Ed Miliband is missing is the most important point. Yes, some people struggle on zero hours - the part of the labour market that contains much of this kind of work is often insecure, unstable and volatile anyway - but the notion that this law will make things better is moonshine. Here's the key point. The labour market of supply and demand is dictated by numerous price signals that generate all kinds of information about the value of labour, the supply of services, length of contracts, and so forth. A dentist can work in the same place for 15 years doing a similar number of hours each day. A sub-contracted painter and decorator can work at dozens of places in that time, with varying lengths of contract. Selling labour is heterogeneous - and you're just not going to be able enforce better pay or more stability without damaging a whole sub-section of people in that labour market.

So it's not that I'm repudiating Ed Miliband's proposal because I've suddenly developed amnesia about the struggles of people's ability to live or the volatility of the market - I'm repudiating it because its implementation will simply alter the behaviour of employees and employers in the market because the vital price signals of information on which the economy runs will be distorted.

It's easy to think of zero hour contracts only in terms of employees, and to imagine most employers to be cold, uncaring exploiters. But it distorts the true reality. Economic policies affect employers as well as employees - and employers are the essential providers in this equation. Make a law that helps low earners and you hinder another group (usually low-skilled employers but also other low earners). Make a law that helps tenants and you hurt another group (usually landlords). Make a law that helps Brits and you hurt another group (usually anyone who isn't a Brit). Nothing comes without a cost.

Employers have lots to consider when they take on people. They have to make forecasts about the future; they have to consider market fluctuations; they have to consider what they should invest; and they have to consider which future state-interference will hamstring them. Zero hour contracts are sometimes opportunities to exploit, but they are mostly opportunities to reduce risk in a frequently unstable market, and create lots of short-term employment.

Think who the beneficiaries might be - students, single parents, those looking for additional employment to top up their main job, and those with multiple part time jobs. The ability to work flexibly as and when they want is a very beneficial thing for them. Ed Miliband's proposal to ruin theirs and their employers' flexibility is narrow and short-sighted.

What Ed Miliband also doesn't understand is that the economic growth is the main vehicle to reduce zero hour contracts for those not happy with them. The reason being job growth increases the necessity for employee stability, which will only diminish the allure of zero hour contracts for both employers and employees, because employers are going to want stability in their personnel. Moreover, as unemployment rates fall and job creation continues to take place, greater power is transferred to jobseekers, which places selection pressure on firmsoffering less desirable contracts. Ironically, Ed Miliband's proposal will uproot some of the stability in the market, which will more than likely go on to have a cobra effect type scenario whereby he contributes to an increase in zero hour contracts - the very opposite of what he's trying to do.

The state's role is to reduce the tax burden for people on low incomes or in volatile parts of the market, and give them the financial help they require, leaving those vital price signals untouched.

New ASI briefing paper: The Ties that Bind

The ASI has a new short briefing paper, The Ties that Bind: Analysing the relationship between social cohesion, diversity, and immigration by James Dobson. Its key findings:

• Social cohesion is the strength of interactions between members of society. These interactions are characterised by a number of norms that include trust, a sense of belonging, and a willingness to participate.
• Measures of social cohesion include generalised trust, interpersonal trust, civic participation and volunteering.
• Evidence from the US suggests a strong relationship between rising diversity and lower levels of generalised trust. There is much less evidence for a relationship between diversity and other measures of social cohesion in the US.
• There are some cultural reasons to suspect that American evidence might not fully apply to Europe and the UK.
• European evidence at a national level does not suggest a negative relationship between diversity and trust or other social cohesion indicators.
• Evidence from the UK is mixed. There is some evidence to suggest an association between higher diversity and lower generalised trust – yet there is also conflicting evidence which finds no such association.
• There is little evidence to suggest a negative relationship between diversity and other measures of social cohesion such as: civic participation, trust in authority, or voluntary work in the UK.

Read the whole paper here.

Economic history isn't what a lot of economists think it is

That's something of a problem, that economic history is not actually as a lot of economists think it is. Here, for example, is Paul Krugman on the current UK recovery:

Britain’s economic performance since the financial crisis struck has been startlingly bad. A tentative recovery began in 2009, but it stalled in 2010. Although growth resumed in 2013, real income per capita is only now reaching its level on the eve of the crisis — which means that Britain has had a much worse track record since 2007 than it had during the Great Depression.

The rest of the column is about austerity, wrong economic policy, Keynes, you get the general picture. However, Britain's economic history in the 1930s is really not what is being assumed there. In fact, it's Britain's economic history in the 1930s which gave us the whole idea of expansionary austerity....which actually showed it could work.

What Neville Chamberlain did was to take Britain off the gold standard and allow the corrency to devalue (about 25%). At the same time he cut government spending significantly and brought the budget back into some kind of balance. This actually worked: By 1934 Britain was back above 1931 levels of output and it all became just a nasty blip unlike that Depression that the US suffered (the 1920s in te UK were a different matter). That is, fiscal austerity combined with monetary laxness worked and worked very well.

Krugman wants to tell us that it hasn't worked this time: OK, that's fine, it hasn't worked in hte same manner. Krugman also wants to tell us that fiscal expansion would have: but that's to miss the lesson of the 30s. Osborne devalued the pound and had that loose monetary policy through QE. This should have worked as before: but it didn't. What was the one thing that Osborne didn't have? Fsical austerity. So, expansionary austerity worked once, didn't work a second time. And what wsa different was that the second time we didn't actually have the austerity. This isn't an argument that therefore expansion would have worked: it's simply a note that we didn't actually do what worked last time.

Please note, we're not actually arguing that repeating Chamberlain's actions would have worked this time. Rather, we're remarking upon the misunderstanding of what he did, that misunderstanding of what history was. The UK's 1930's recovery is proof that that basic idea, of expansionary austerity, can in certain circumstances work. We cannot therefore go around using it as an example of it not working. and if we do want to apply that lesson to today then the answer would be that it's not worked as well this time around because there hasn't actually been any austerity, even if the monetary policy has been spot on.

Economic Nonsense: 42. A planned economy is more rational than an unplanned one

Very few people advocate an unplanned economy.  At a simple level people might suppose that having intelligent and informed people direct the economy is better than having it proceed by blind chance.  But this is not the choice.  The choice is between an economy in which millions of individual decisions made daily interact with each other to produce an overall order, and an economy whose overall order is sought by a few people gathered around a table trying to direct it.  In other words the choice is not between planning and chaos, but between an order produced by the few and an order produced by the many.  It is between planning done by a few at the centre, and planning done by many at the periphery.

When a person makes an economic choice, to buy or not buy, to stay in a job or to change employment, it is not necessary for the information about that choice to be collected and relayed to a directing authority.  The choice itself impacts upon the economy sending information through it that causes it to change and respond.  In a centrally planed economy the information has to be relayed to the centre so that those in charge can add it to other inputs and decide how to respond to it.  That process takes time, and much of the information is outdated or submerged into a fog of other data before it can reach the centre and be acted upon.  In a spontaneous, interactive economy, its effect is immediate.

Much as the directing authority might try to ascertain the circumstances of individual economic participants, they cannot hope to have more knowledge of them than the individual concerned.  The market economy thus has more information at its disposal, and it can act more rapidly, responding to imbalances and redressing them.  This means that the centrally planned economy is by no means more rational than the spontaneous one.  It is true that the billions of transactions that have input into a market economy might be too large for an individual mind to encompass, but that makes it complex rather than irrational.  

Observe the naked cash grab by the tobacco control people

It's a general rule of UK taxation that we don't do hypothecation. On the very sensible grounds that how much we can raise by taxing on activity has absolutely no relationship whatsoever to how much we desire to spend on some other activity. Fuel tax is not all spent on the roads, national insurance does not pay for the NHS and so on. But we now have a proposal that we should have an explicity hypothecated tax: Pressure is growing for the introduction of an additional levy on cigarette sales in the UK, a move that campaigners say could help eradicate tobacco consumption within decades.

To tax tobacco more or less: an interesting question. Our supposition is that it's already taxed over the top of the Laffer Curve, given the percentage of the market currently supplied by smuggled and informal imports. But certainly, whether to tax more or not is something that can and should be discussed. But more tax in itself won't bring about that no smoking world simply because we do live in a free society with open borders. However, the idea is worse than that:

“The industry is one of the most profitable on Earth,” Burstow explained. “The two largest tobacco firms in the UK, Imperial and Japan Tobacco International, hold around four fifths of the UK market and achieve joint profits of about £1bn a year. Charging those firms to help clean up the damage their products cause is a rational and justified extension of the ‘polluter pays’ principle to public health policy.”

Stuff and nonsense, the polluters are those who smoke. Just as it is people driving cars who produce fossil fuel emissions, not the petrol companies. But it gets worse again:

Health campaigners say the introduction of a levy equivalent to 25p a pack could raise £500m a year, money that they say should be used to fund measures to help people quit and prevent the uptake of smoking. Health campaigners believe devoting greater resources to tobacco control will bring major benefits.

This is simply a naked cash grab. The various bureaucrats and prodnoses in the "public health" sector want to have an untouchable £500 million a year to spend upon themselves. Whatever happens at the election in a few weeks time this is an idea that must be rejected.

More tax on tobacco? Meh. A dedicated revenue stream for these people? Absolutely no way at all.

Economic Nonsense: 41. Immigration is bad for the economy

Many argue that immigration harms the economy.  Some suppose that immigrants are attracted by welfare, and come to live off benefits at the taxpayers' expense.  Others assert the contradictory claim that "they come here to take our jobs."  Schrödinger's immigrant, like his cat, seems to manage two states simultaneously.  Some point to the pressure on services and resources, with immigrant children filling classrooms and their sick taking up hospital beds and lengthening waiting times to see doctors.

The reality is that most immigrants are young and ambitious, coming to better their lives.  They are overwhelmingly fit and looking for work.  Many of the jobs they take up are ones whose low pay and long hours do not appeal to the native population.  Most do not draw benefits or take up hospital space.  In some sectors they help fill skill shortages, and many UK businesses clamour for more educated and talented foreigners to be allowed in.

The work they do adds to our GDP and boosts growth.  The taxes they pay boost our public finances.  Most immigrants have shown some drive in being prepared to move to a new country to improve their lot.  Some have scraped up cash to finance their trip.  Some have taken risks on their journey.  They constitute a huge net plus to the economy, not a minus.  

It is true that in some areas, particularly if they concentrate, they can put pressure on local facilities.  A minority seeks to retain a culture that sits ill alongside the tolerance and liberalism that Britain has developed over its history.  These are indeed problems, but they are ones that can be addressed and dealt with, and some are temporary rather than long-term. 

Immigrants do one more positive thing for the economy.  Most countries in Europe face declining and ageing populations, and will encounter difficulties if there are not enough young people in work and paying taxes to support the elderly with appropriate services.  The UK population is not declining, and it is immigration that is making the difference.  Far from constituting a problem, it is in this case a solution.  

Only government can screw up markets this badly

A quite lovely piece in The Observer awailin' an' a moanin' about how cocoa is rising in price, which will make chocolate a luxury good, yet also complaining that the cocoa farmers aren't making enough to continue farming. We usually suspect that a rising price will feed through into a better income for producers so that's that problem solved then. Indeed, it's difficult to work out how it could be otherwise:

“In the next five years the price of chocolate will skyrocket, and we should think about it as very much a luxury,” said Alejandro Litovsky, founder of consultancy Earth Security Group. In a recent report, Earth Security forecast a cocoa shortfall of a million tonnes by 2020.

Scary, eh?

The chocolate industry is reaping the harvest of poor working conditions and rock-bottom prices in the cocoa heartlands of west Africa, a situation that is driving potential farmers out of the industry in droves.

But it's horribly difficult to understand how we can end up with both happening over time. Rising prices for the beans, and thus the chocolate made from them, will mean that farming those beans will produce a higher income and thus keep farmers in the process or attract more to it.

Unless, unless, of course, there's something screwing up that market mechanism. Ah:

Local investment is hampered by high taxes on farmers, with around 40% of the money paid by commodity buyers going to the government.

Ah, the government is taking a whacking great tax wedge out of the cocoa trade. Meaning that the transmission process of consumer prices to producer prices is prevented in part. And thus we have our problem, the market not working becuase of that governmental intervention.

This isn't all that much of a surprise either. Cocoa farmers in West Africa tend to be poor rural peasants. Political power in such countries comes from the rather richer urban voters. Thus the incentive is for government to sting the farmers and spend the money in the urban areas. This has in fact been going on since Ghana became independent under Nkrumah. There the mechanism was to set the exchange rate very higher. This benefited the urbanites, from whom political power flows, who were able to import at reasonable prices, and hit those rural farmers exporting the cocoa cash crop.

So it appears that there really is something wrong in the cocoa market. That is, there's too much government and not enough market going on. We do, of course, support the campaigners who are bringing such abuses to our attention. But we'd be a great deal happier about it if they could manage to divine accurately what the problem actually is:

But campaigners argue that manufacturers and retailers should do much more. “If the five biggest chocolate companies spent 1% of the $86m they spend on marketing on the Ivory Coast, they could train and support half of the farmers there,” Mechielsen says. “Where are the priorities of those companies?”

Why not suggest that the government lower that taxation rate so the market can have the room to breathe and work?

Introducing the climate deniers at the Renewable Energy Foundation

John Constable of the Renewable Energy Foundation finds that he gets attacked for being something he is not:

Work like this has caused a flurry of unease in certain circles. REF has been falsely accused of hiding its donors, while our new Energy Institute – established with the University of Buckingham – has been branded a “front” for climate sceptics. The Independent quoted one academic who called me a “doubt-monger”.

We feel the pain, we've been accused of similar things ourselves. So, what is it that Constable suggests?

But it also means that there has to be a clear economic signal, which I think is best provided by putting a consistent, economy-wide price on carbon, probably through a carbon tax with corresponding offsets in other taxation. This would be flexible, so economic harm could be kept under control, and it would be technology-neutral, allowing the economy to gravitate towards the cheapest ways of reducing emissions that human ingenuity can discover.

That is also what we have been suggesting this past decade. And it's extremely surprising to be told that we're climate deniers for doing so. For this was, of course, the major recommendation of the Stern Review itself. That source document that everyone is using to tell us that something must be done. Stick on a carbon tax at the social cost of carbon emissions, reduce other taxes to compensate and she'll be right. Perhaps sprinkle a bit of R&D fairy dust tax money around the place as well.

This is not an odd view, is not some denial, it's the straight up mainstream view. We could get everyone from Bjorn Lomborg through Nick Stern, Bill Nordhaus, Richard Tol all the way out to James Hansen to sign on to this. Yes, there's technical arguments about what the social cost is but the basic structure of what needs to be done is evident to everyone who has spent more than 30 seconds thinking about the economics of this.

But then, of course, it's when the economics profession is most united in their view of a matter that no one else takes a blind bit of notice, isn't it?