Yes of course Thomas Piketty is wrong, why do you ask?

It was obvious from the moment of publication that Thomas Piketty was wrong. Simply because the world just does not resemble his dystopia of a capitalist plutocracy. The much more interesting work has been picking apart his assumptions and arguments to work out why he is wrong. Our own opinion is that it's an entirely political work. Standard optimal taxation theory states that we shouldn't be taxing capital or capital incomes (rents are another matter). This is unacceptable to certain political types therefore an argument, any argument, for taxing capital and capital incomes must be constructed. The End, Finis.

However, that detailed work of why he's wrong continues. As with this reported by Branko Milanovic:

But then suppose that capitalists decide to spend some of their r on fancy cars and yachts. There would be a split between the rate of return on capital (which is still r), and the rate at which capital grows (which will be now equal to r*=sr where s is the average saving rate out of capital income). It is then very clear that if capital does not increase as fast as output, the share of capital income in total net output (Piketty’s alpha) may not increase. It is at its most obvious if we assume that s=0. Then capitalists spend their entire income, the capital stock does not grow at all, and if the growth rate of output (g) is positive, the capital/output ratio will go down, and Piketty’s alpha will decline. Notice that all of this happens while r>g still holds in the background (on the production side).

If capitalists spend some of their income from capital then while the return to capital can be more than the growth of the economy, it does not necessarily follow that capital will ever increase sa a portion of that economy. Simply because some of that return is consumed, not spent. And it seems a reasonably logical idea that people would consume some of the income from their capital. No point in being rich if you don't have hot and cold running redheads Ferrari Testarossas after all.

As it happens the empirical evidence is that said capitalists do in fact spend some part of their income, do not save it all. And they spend a sufficient amount of it that capital is not becoming an ever greater part of the economy. Piketty is wrong, it ain't happening.

All of which accords with the general advice given to people with savings in fact. Sure, you want to reinvest some of your returns because there's this thing called inflation. Meaning that some part of your current returns are in fact illusory, and you need to reinvest some part of those returns to make sure that your income in the future is the same, in real terms, as you've got now. But once you're managing that, sure, go buy that redhe sportscar.

That is, capital maintenance and the best living standard possible compatible with that is how the rich, just like everyone else, seem to act. Thus capital doesn't ever concentrate.

Ten initiatives to help young people: 1. Housing

Young people find it difficult to obtain housing because it is so expensive.  This is because demand is rising much faster than supply.  People live longer and occupy housing for longer.  An increasing proportion of people choose to live singly, and immigrants add to the population.  All these factors increase demand, but planning regulations prevent a corresponding increase in supply.  More homes are needed, and it should be made easier to build them, and to build ones suitable for young people. Parts of the green belt are by no means green.  Agricultural land around cities is often given over to monoculture with quantities of fertilzers and pesticides poured into it to grow huge fields of a single crop, resulting in poor habitat for birds or small mammals.

One solution would be for government to buy chunks of agricultural land around cities.  They would do so at the market prices for agricultural land, or slightly above, and from farmers willing to sell.  Government would then re-zone the land as suitable for building, and sell it, again at market prices, to developers.  Since land that can be built upon sells for many multiples of the price of farmland, government will make huge change-of-use gains.  

The sale of large blocks of such land will lower the price of building land.  The hundreds of thousands of extra houses built upon it will lower the price of housing as the supply more than keeps pace with demand.  Government could designate a proportion of the new homes specifically for young people.

The result would be extra housing where people wanted it to be, on the edges of cities instead of beyond the green belt.  Much of it would be more affordable to young people, who would then be able to live closer to where they work, without having to pay exorbitant housing costs.  With more young people finding it easier to buy homes, the pressure on rental properties would decrease, lowering the living costs of those who choose to remain and rent properties within the cities.

The programme of building such housing would boost employment, creating tens of thousands of extra jobs, including jobs for young people.  It would give the economy a significant boost.  More to the point, it would solve one of the most serious problems faced by young people today.

We are ruled by idiots

A crucial economic distinction is between a complement (no, not a compliment) and a substitute. For example, it is often asserted that more pornography leads to more sex crime: we are indeed primates and thus potentially subject to the "monkey see, monkey do" cause of action. That would mean that pornography is a complement to sex crimes: one aids in causing the other. However, as it happens, the rate of sex crimes has slumped in these past couple of decades as pornography, of ever greater detail and possibly vileness, has become ever more available. We must therefore conclude that the two are, generally and upon average, substitutes. Urges are expended upon the one meaning that less of the other happens. It is, of course, absolutely vital that public policy manages to make this distinction. For the problem is the sex crimes, not the pornography. Thus we should not ban the one in order to reduce the incidence of the other, the real problem. This has been violated by our rulers as this reduction in the real problem also applies to child pornography, as we've noted here before. Yet child pornography is highly illegal in order to reduce the number of sexual crimes committed against children.

Yes, we agree, it will be very difficult for any politician to get that across to people. However, we've another example of just this sort of mistake. We've just had a change in the law:

On 1 October 2015 it became illegal:

for retailers to sell electronic cigarettes (e-cigarettes) or e-liquids to someone under 18 for adults to buy (or try to buy) tobacco products or e-cigarettes for someone under 18

Are e-cigarettes a complement or a substitute to teenagers smoking cigarettes, the things which are actually the problem?

More than 40 states have banned the sale of electronic cigarettes to minors, but a new study out of the Yale School of Public Health indicates that these measures have an unintended and dangerous consequence: increasing adolescents’ use of conventional cigarettes.

Using data from the National Survey on Drug Use and Health, the research finds that state bans on e-cigarette sales to minors yield a 0.9 percentage point increase in rates of recent conventional cigarette use by 12 to 17 year olds, relative to states without these bans.

A substitute not a complement, therefore e-cigarettes should not be banned for teenagers it might even be sensible to encourage their use.

And we must then conclude that we are ruled by idiots.

Those of us who do or have worked in and around Westminster have known this for a long time. It's why we expend so much effort in trying to bring the rest of the country up to speed on the matter.

To understand why economic growth is slow look at Keystone XL

The saga over Keystone XL is an excellent example of why rich world economies are in general slow growing at present.

President Barack Obama rejected the Keystone XL oil pipeline on Friday, in a move that infuriated conservatives but will bolster his legacy on environmental issues ahead of next month's climate change summit in Paris.

No, not because the pipeline will now not be built, not because of those climate negotiations and no, not because conservatives are unhappy about this.

The pipeline was to bring Canadian tar sands oil down to the refineries on the Gulf Coast. Very simply, refineries further north just aren't set up to process such heavy crude. The ones on the Gulf are. So, instead of changing all the refineries, build the pipeline to get the oil to where it can be efficiently processed. And that's really it.

Given current crude prices those tar sands are shutting down some production and the whole plan is just less important than it was. And while the plan did indeed have a positive current net present value (and thus was something that made us all generally richer) it wasn't either as earth shattering as the proposers suggested nor as earth shattering as the environmental protestors insisted. And in something the size of the US economy something like an oil pipeline or not is always going to be a marginal decision.

The decision whether to build it or not is obviously highly interesting for those directly involved and for the rest of us very much a "Meh" question. Except for this:

Mr Obama's announcement follows a seven-year review process

It's worth noting that it is only phase IV of the project that has been cancelled. The other three phases are up and running. And they each took between one and two years to build.

That is, we now have a system whereby it can take 7 years to get a decision on whether one can build something which takes two years maximum to build. And that is why modern economies have a slower growth rate than they perhaps should have. Not because people aren't allowed to do things like build oil pipelines, but because the entire economy is being strangled by red tape.

Perhaps we should have environmental regulation of the type that stops such building. Perhaps we shouldn't: the existence or not of such regulation isn't the problem at hand. What is the problem is that whatever the decision is it needs to be made quickly. So that either the project can be built or, if rejected, then everyone can stop their efforts at filling out paperwork and go off and do something more interesting.

We obviously do have our view of which way this decision should have gone. But that isn't our point today. Rather, if we're going to have a system of regulation over who may do what then it has to be an efficient system of deciding who may do what, how and when. Even to whom. Otherwise the entire economy will descend into a welter of form filling that would make C. Northcote Parkinson proud and the rest of us poorer than we need be.

There really is no gender pay gap

As we've been saying for some time now, there really is no gender pay gap. At least, not one of any size that anyone should be bothering to do anything about. It's a motherhood pay gap, most certainly, but then that's just not the same as gender is it? This latest empirical report comes from the US:

A new report from PayScale, a jobs website, takes a stab at this very problem by looking at the gender gap in various occupations controlling for factors including experience, education, company size, and crucially, job title. According to their data, female doctors make 29.2% less than their male counterparts, but that gap shrinks to just 4.6% after introducing the controls. This in part because women are more likely to work in paediatrics, while men are more likely to work in the better-paid field of surgery. A similar pattern exists for lawyers: women make 14.8% less than men, but just 4.1% less on an adjusted basis. Again, there are differences in the types of jobs taken by men and women: 8.7% of female lawyers work for non-profit outfits, compared to just 4.5% for male ones. The pay gap for all workers is 25.6% before such differences are controlled for, and 2.7% afterwards.

We think 2.7% is pretty much the end of the story. And certainly we cannot think of any government work that's ever managed to be any more accurate than that.

In effect, much of the gender pay gap can be thought of as the cost of having children.

Quite: fathers make more than non-fathers among men, mothers make less than non-mothers among women. Whether that's a cultural or an innate feature is another matter: but that's where whatever remaining problem is. And it's not entirely obvious that it's something that's amenable to anything other than the slow change of cultural practices, whichever of those two causes are responsible.

Rescuing the NHS

The media would have us believe that, due to cost cutting, the NHS is in terminal decline when, in reality, it is thriving and has never had more resources.  Political spin aside, the real problems are that it is too big, too diverse, and over-managed. Suggesting that the NHS most needs the removal of political interference is hardly new.  The Bank of England has improved since Gordon Brown gave it independence.  It has not been privatised.  It remains a non-profit making public corporation acting, so far as it can, in the best interests of the country.  It would be inconceivable to make the BBC, also a public corporation, part of the Department for Culture Media and Sport.

Of course politicians should set the goals and priorities for the NHS and allocate the resources but continual interference in the way it is managed has demoralised staff and created patient dissatisfaction.  What qualifications do MPs have which can usefully applied to the NHS before other equally unqualified politicians reverse any changes as soon as they can?  The UK’s biggest organisation, by numbers employed, blows in the wind.

The NHS should have a long-term, not less than five years, charter setting out what it is aiming to achieve and the funds government will allocate.  Parliament should agree the mission but not how it should be achieved.  And NHS top management should certainly be held to account at the end of each charter.

The debates about “privatisation” exemplify why politicians should leave the NHS stage.  Left-leaning MPs claim that allowing anyone to make a profit, however small, in the supply chain raises the cost for the taxpayer.  This school of economics was once popular in Leningrad.  Now Russia, like everywhere else, recognises that even a public corporation cannot itself make everything it uses.  The Norfolk and Norwich Hospital does not take deliveries of iron ore to make their own scalpels.  The NHS should do for itself what it does cheaper and better.  When buying in services is cheaper and better, the taxpayer gains by so doing.  Whether someone has made a profit along the way is irrelevant.

Only local managers can do these calculations: they should be free (transparently) to buy in what makes better use of their resources and to do the rest themselves.

Secondly, prevention (health promotion), cure and care are three very different problems that need three solutions, not one. The NHS should focus on curing people and returning them, as soon as their health permits, to their normal lives or to state care if they and their families cannot cope.  Using curing resources for care is not just wasteful but ineffective, and even inhumane, as recent complaints about nursing and mental health institutions testify.

Moves are now afoot to bring care and the NHS closer together which is good in the sense of combining the two caring functions but bad in the sense that the managerially challenged NHS will not be able to cope with both roles. We should stop trying to cure the uncurable: the senile, and those suffering from dementia and many forms of mental health.

The National Care Service should be an independent organisation developing its own pride and professional standards.  The Hospice movement is a shining example.  It is noteworthy that general practice aside, the great curing institutions tend to shrink in number but grow individually as more specialities have to be accommodated whereas in care, the tendency is to move from large institutions to a multiplicity of small units closer to their communities.  Different problems need different solutions.

Finally, preventive health is in practice national publicity intended to reduce the net national cost by persuading us to adopt healthier life-styles.  Their effectiveness can be measured, and funded, by the reduction in the costs of cure and/or the benefit to the economy from our working productively for longer.  This role could be managed directly from the Department of Health or a separate quango but in either case, the performance measurement of the campaigns should be transparent.

Dear Politicians.  Please stop bickering over the NHS: separate its three functions and then leave it to the professionals.

Power Up: The framework for a new era of UK energy distribution

The UK's energy market is unfit for the modern age, a new report from the Adam Smith Institute argues. The report, Power Up: The framework for a new era of UK energy distribution, argues that new technologies such as smart grids and distributed energy production can revolutionise old models of energy distribution and pricing, in the same way that apps like Uber are disrupting traditional models of transport.

In a world of expensive of energy prices, the report suggests regulators should encourage experimentation with new technologies, rather than cutting them off at inception. Regulating the market too heavily - often justified by claims that consumers are being 'ripped off' or overwhelmed by the number of tariffs available - closes down consumer experimentation and prevents technological and economic progress, which keeps energy prices high.

The paper envisions a world of choices in the energy market; where smart meters that relay real-time price changes to encourage better energy use are just the beginning. The author, Dr Lynne Kiesling, imagines consumers being able to see where their energy is coming from, and to choose what kind of green-grey energy mix they want.

Most important, Dr Kiesling argues, is for OFGEM to adopt a structure of 'permissionless innovation' - which allows companies to experiment freely without being granted permission from regulators. In the early days of the internet, no-one envisioned a world of Amazon, iPhones and Uber; but these inventions were able to thrive, as there were not limited by regulatory barriers. OFGEM, Kiesling argues, needs to adopt a more relaxed regulatory structure that dismantles the barriers that have been created.

Read the full press release here.

For further comments or to arrange an interview, contact Head of Communications Kate Andrews: kate@old.adamsmith.org | 07476 915072

To introduce you to an extended whingefest

We wish that this was satire, or perhaps even the ravings of some poor deluded soul well outside the mainstream. Unfortunately it is neither: this whinge that Bill Gates really shouldn't be spending his own money how he wishes is meant to be a serious contribution to the debate:

Is the most effective philanthropist a dead one? It’s a morbid question, but also a pertinent one. Are large philanthropic organisations such as the Ford, Rockefeller or Gates Foundation able to achieve the most good with a living benefactor who is in the picture on a regular basis, providing expertise and political leverage? Or are they better off once a benefactor is long gone, permitting staff to operate free of the constraints of donors who, however well intentioned, may hinder effective decision-making?

To recast that question, which is the better organisational style? One of the most intelligent men of our generation (yes, Gates is, fearsomely intelligent) directing an organisation attempting to do good or the usual bureaucrats that fill up any organisation after a generation or two having meetings about whether there's sufficient diversity in the snacks offered at meetings to discuss which snacks should be served at meetings?

To pose the question that way is to answer it of course:

We need to challenge this silence. We need loudly to ask an uncomfortable question: do foundations narrow wealth inequalities or simply preserve them? Are foundations at their most radical when they exist to serve a benefactor’s hopes and whims – or when they’re emancipated from such an obligation?

After their founders had died, the “big three” foundations in the US – Ford, Rockefeller and Carnegie – started to sympathise with labour and civil rights movements. Detractors frequently criticised them for being too anti-capitalist; Ford’s grandson Henry resigned from the foundation in protest in 1977, stating in a revealing letter that “a system that makes the foundation possible very probably is worth preserving”. At least Henry Ford had the honesty to state which side he was on. We should challenge his modern successors to be as upfront.

The answer being that such organisations should serve the interests of the bureaucrats that run them not the wishes of the founder. The argument against Gates is that he doesn't allow that long march through the institutions its head, he insists that the organisation do what it was set up to do: alleviate disease and poverty in the most effective manner possible. That this doesn't suit the bureaucrats is why they hate him and it.

Just to illustrate how far the decline reaches the thoroughly sensible, originally, Joseph Rowntree bequests now fund Richard Murphy to think big thoughts in his shed.

It is for this reason that Warren Buffett has insisted that his, very generous, donations to the Gates Foundation must be spent immediately, before such institutional degradation into a home for the socially just happens. And why the Gates Foundation itself talks about specific tasks now that it wishes to achieve, rather than gabfests that will produce a "legacy". That is, let's get rid of all the money before the funds become "emancipated from such an obligation" to actually achieve anything, or even any oversight. As with the Oxford Committee for Famine Relief campaigning in the UK, where there is no famine, Barnardo's, a system of childrens' homes campaigning in a country without such private childrens' homes, Stonewall campaigning for equal rights long after equal rights have actually happened.

C. Northcote Parkinson really did have a point, the prime purpose of any bureaucracy is to make sure that the bureaucracy itself survives. All else is subservient to that. At which point we might suggest Worstall's Corollary to the Peter Principle: all useful philanthropic work is done before the socially just or the bureaucrats take over the charity.

Break the monopoly on liquor in Virginia

Our Deputy Director, Sam Bowman, is currently out in Virginia taking part in the Atlas Network's Think Tanks MBA, where he has started campaigning for the state of Virginia to release their monopoly hold on the sale of liquor. Watch the video below to find out more.  

The campaign tweets from @PrivatiseVABC and can also be contacted through their website here.

Shocker as Guardian letter writer doesn't quite get it

We find this extract of a letter to The Guardian as being a very fun example of people not quite getting it:

The decision to remove availability of tax reliefs for community energy projects (Government to cut tax relief for community green energy schemes, theguardian.com, 28 October), coming at the same time as it is clearing the way (contrary to pre-election pledges) for privately owned, profit-driven fracking businesses to operate wherever they choose, makes explicit the governent’s preference to allow private equity, venture capital and hedge funds to profit rather than allow individuals and families to invest in their own communities.

The not quite getting it bit is of course that those community energy projects were driven by exactly the same profit calculations as those for profit fracking companies are using. After all, all a company is is a group of people banding together to achieve a task: just as a community project is a group of people banding together to achieve a task.

Well, at least we assume that the community projects were motivated by that same calculus: we don't think the British people are stupid enough to do things which don't make them better off.

And the fact that tax reliefs are considered important shows that money is indeed considered to be important. If people were doing these community projects purely for the love of Gaia, with no regard to gelt and pilf, then they would not be concerned about the tax position, would they?

Further, the removal of those special tax reliefs leaves such community projects free to compete with profit driven groups upon entirely equal terms. And, if as could be possible, people are more motivated by stupidity Gaia than by profit, then they'll even have an advantage in the financing of their fracking rigs.

And we are really sorry to have to point this out but creating a level playing field does not prevent anyone from joining in the game.