The Sutton Trust proves Hayek right once again

Hayek’s narrow point was that the economy is large enough, complex enough and even chaotic to the point that it simply is not possible for the centre to gain the information necessary to plan it in any detail. The Sutton Trust neatly widens the application of this thought for us:

Universities’ positive discrimination measures risk descending into a farce as new research reveals that almost half of students flagged as “disadvantaged” are in fact well-off.

Russell Group institutions could be handing out lower A-level offers to the wrong students because one of the main measures of deprivation is “conceptually flawed”, according to a new report.

Conceptually flawed seems a bit strong to us. The report itself agrees that some proxy is going to be used to measure disadvantage. They just differ over which one it should be. However the (Pearson) correlations for their preferred measures are only 0.69, 0.56 and 0.47. These being measures that are not widely and freely available. The information that is correlates only to 0.22 and 0.17 levels.

Mathematics doesn’t, quite and exactly, work this way but to translate into useful colloquial, the statement is that “Our preferred measure is only entirely wrong between half and one third of the time and the one used is mostly useless.”

We might think that the planning of society should be based upon something more accurate than this. Or, given that Hayek was and is correct, reality is a complicated place, we shouldn’t be planning given the impossibility of acquiring the information to do so.

We’re reminded of Sir John Cowperthwaite’s refusal to collect GDP statistics for Hong Kong on the basis that some damn fool will only try to do something with them.

Some other method of admission thus seems sensible. How about one or more academics from the institution meets the would be student and then asks themselves “Would I like to teach this person?”

After all, those trying to answer that question are the presumed to be intelligent and clever of our society. What could go wrong?

Or even, if the presumed to be intelligent and clever of our society have been using a measure which is so flawed then what value this idea of technocracy, that the clever and intelligent should be planning our lives for us?

We are unconvinced that the WHO is the solution

Of the varied organisations that have burnished their reputations in the recent pandemic unpleasantness we’d not include the WHO in our list. That capitalism and markets hodgepodge that is the pharmaceutical industry, yes, the development of multiple vaccines in record time does impress. Certain governments have done well at certain parts of their tasks - financing Big Pharma to get on with it being among them. But the WHO, no, not so much.

Yet certain of the international Great and the Good have a suggestion for us:

Helen Clark, former prime minister of New Zealand, and Ellen Johnson Sirleaf, former President of Liberia, are co-chairs of the Independent Panel for Pandemic Preparedness and Response

Their suggestion is that more of our resources should be put under the control of the international Great and the Good:

The WHO must be strengthened and given more financial independence based on fully unearmarked resources and increased member state fees. Among other WHO reforms, the position of the director general should be restricted to a single seven-year term.

More funding is required. A new international pandemic financing facility would mobilise up to $10bn (£7bn) each year for preparedness, with the ability to disburse $50–$100bn at short notice in the event of a pandemic declaration.

Many will offer as a solution - regardless of the problem - that more cash should be sent to people like us. Given recent performance at the WHO this doesn’t sound like all that good an idea. We remain to be convinced that posting more money to incompetence is the way to improve the world.

This is not a mistake, this is the point

We have long been in favour of radical change in the British planning system. To the point of repeatedly calling for its entire destruction. Not wholly and entirely as mere rhetorical exaggeration either. Still, the current changes proposed are a significant step in the right direction. One way we can prove this is by looking at who is complaining:

The moves were described as an “utter disaster” by the Lancashire, Liverpool city region and Greater Manchester branch of the CPRE charity, which lobbies to protect the countryside.

“We will see a lot more houses on greenfield land and in areas of outstanding natural beauty,” said Debra McConnell, the chair of the branch. “The people in the north of England need these green spaces for their wellbeing.”

People actually living where it’s beautiful doesn’t sound like all that much of a problem to us.

The CPRE also warned the bill, which will largely apply only in England, ran counter to the proposed environmental bill and would “take us back to a deregulated dark age of development”.

That deregulated dark age of the 1930s was the last time Britain actually built housing at the same speed as household formation rates. Sounds like a good idea to us. The housing often being built in those ribbon developments in the South that people now fight to buy into. Housing that people want to live in, where they want to live. We tend to think this is the point rather than a mistake.

It fears most of the new homes are unlikely to be low-cost or affordable.

Issuing lots more planning permissions will make planning permissions cost less. Given that the planning permission is between lots of and the majority of the price of a house this is a good way to provide low cost and affordable housing.

The Nimbys are protesting - something is being done right.

And then there’s this:

The councils body the Local Government Information Unit said the changes would “leave local government with the political liability on planning whilst depriving them … of the powers to manage it effectively”.

Well, yes, our collective problem is rather that local government hasn’t been managing this effectively for around and about an entire lifetime. Ever since the management powers were first granted in fact. About time we change a system that hasn’t worked for 70 years, isn’t it?

Making bonsai cabinets

Cabinetry is not what it was.  Today’s cabinets turn up in flat packs, and too many pieces do not fit together. The Prime Minister du jour hopes the veneer will mask the cracks and the poor quality of the timber. The current Cabinet numbers 26 and the new Shadow Cabinet 33. Jesus Christ in AD 29 and David Cameron in AD 2012 may not have had much in common but both their Cabinets numbered 12. Research indicates that the most effective size of a public corporation board is just under 10 and, surprisingly, the average actual size is 9.2. 

The size of Cabinet really depends on how the Prime Minister wants to use it. If its purpose is to debate and, through that, decide policy and what the government wants to achieve, then 12 is as good a number as any.  If, however, these matters are decided elsewhere, then they may be tested in cabinet but its role is really to be the audience. To applaud, the more the merrier.  The extent to which Margaret Thatcher welcomed debate in cabinet is itself debatable but the fact is that her second cabinet numbered 22, the same as her first.

Tony Blair, renowned for sofa decision-making, got through 48 cabinet ministers during his 10 years in office, but many of those were the same people in different roles and others just had short stays. The total cabinet at any one time numbered about 25 – perhaps more of an audience than a debating group. 

Running a government may or may not compare with running a large corporation.  Some corporations are larger than some governments and employ more people. The key governance distinction in business is between executive and non-executive directors, the latter being there, in essence, to keep the former honest. In democracies, that role falls to parliament; Cabinet is essentially executive. On that basis, one has to question whether the non-executive members of the current Cabinet should be members at all. 

Current Cabinet numbers exclude Larry, “Chief Mouser to the Cabinet Office of the United Kingdom of Great Britain and Northern Ireland”. Appointed in 2011, he must now be nearing retirement.  The office predates any others in cabinet: the first was appointed by Cardinal Wolsey c. 1515. Larry may be the longest serving member of the Cabinet Office but he does not attend Cabinet meetings, or usefully if he does.  His role is specific: catching and eliminating rats. The Chief Whip has much the same role; valuable as it is he should not need, normally, to attend Cabinet. Likewise, the Attorney General, Leaders of the Lords and Commons and the Chairman of the governing party. At present, this seat is taken by Amanda Milling. It is not clear why she gets the seat rather than her Co-Chair (Ben Elliot) who has held that appointment longer. Those changes would reduce the current Cabinet from 26 to 21. 

Then we have two specialist ministers: Alok Sharma, President of COP26 and Lord Frost, minister for annoying the EU.  In the same way as the Financial Secretary, Steve Barclay, and indeed anyone else whose specialist expertise is needed, they should be summoned when their particular expertise is needed. We are now at 18. 

The final cull should be the number of departments represented.  It is a matter of political philosophy whether the UK government tries to do too much.  If it attempted less, would it do better?  The pandemic has distorted this picture. Some departments do little beyond divvying up the money HM Treasury provides between those who will actually do something. The Department of Housing, Communities and Local Government is a case in point.  The work and the spending are almost entirely undertaken by local authorities.  Yes, some policy is needed but that does not need thousands of civil servants and a Planning Inspectorate devoted to overturning local democracy.  Merge it with the Department for Transport to which similar comments apply. 

Much the same also applies to the Department for Culture, Media and Sport. Yes, we need some regulations in this area but we have plenty of Regulators, supposedly independent of government, for that. Merge it with the Department believed to be for Education which has similar Regulators and disbursement activity. 

The final departmental shrinkages should be applied to those for Scotland, Wales and Northern Ireland. Since devolution, they have been little more than liaison offices doing, in the cases of Scotland and Northern Ireland, more harm than good. Michael Gove will in future be operating from Glasgow for half his time and, as Minister for Everything Else, he is a busy man. The Westminster government failed to involve Ulster politicians in resolving the border problem, and now the revision of the Protocol. Surprise, surprise, we now have trouble. My great-grandfather when he was deputy head of the Royal Irish Constabulary used to say he had more troubles with London than with the Irish warring factions back in 1900.  Some things don’t change.  We do have a Minister for the Union, one Boris Johnson, but he cannot show his face in Scotland.  We need to replace the three current Secretaries of State with a separate Minister for the Union who understands that the role is to provide glue, not quasi-colonial supervision. 

We are now down to 14 and that seems as good a number as any. It would be wearisome and unnecessary to review the composition of the 33 member Shadow Cabinet in like manner because the operative word is “shadow”. The whole point of the concept is that the number and roles of its members should match those of the actual Cabinet, i.e. 14 in this analysis. Each should monitor and challenge his or her opposite number. 

Any trained craftsperson knows that cabinets should be made from hard, well matured timber. The Chinese Cabinet (the “Politburo Standing Committee”) has only between five and eleven, currently seven, members. Their average age is over 60. By contrast, the average age of Johnson’s 2019 Cabinet was 48. Governing a country where no opposition is allowed may be easier, but one has to be impressed by the quality, steadiness and effectiveness of Chinese government, something that is by no means true of all non-democratic countries. 

Ultimately the quality of a Cabinet depends on the skill of its maker. Margaret Thatcher is regarded by many as a great Prime Minister who revivified the UK, unblocked the economy and hand-bagged the EU.  Her record with her Cabinets, however, was more mixed. John Major was not exactly supported by the “bastards”.  His long and hard negotiation with the other EU leaders in Maastricht to extract the UK from the “Social Chapter” was a personal triumph. At the end they gave him a round of applause but his Cabinet gave him no credit for it. 

Coming to the present day, most people would consider Johnson’s cabinet-making skills, ignoring their policies and peccadillos, superior to Starmer’s. His success as London mayor, without any qualification for the job, must be down to that.  Sir Keir Starmer is clearly a fine lawyer but was not so clearly a great CEO for the Crown Prosecution Service (CPS) from 2008 to 2013. 

For example, he claimed to have sorted it: “The prosecution service is strong; focused and capable of excellent standards of delivery. It is time now to build on that secure platform and to embed the public prosecution service at the heart of delivering criminal justice in the 21st century.“ This was not quite the conclusion of the Commons Home Affairs Select Committee in October 2018: “While recorded crimes have risen by 32% in the last three years, the number of charges or summons has decreased by 26% and the number of arrests is also down.” In fairness we should also note that amongst his successor’s claims was “A new Poor Performance Policy was introduced” [sic, p.11].

In short, whatever skills the Cabinet-maker brings to the task, the Cabinet should be small, about half the present size, made of well-seasoned timber, do what it is supposed to do and not rely on veneer.

Back when we were talking about payday loans we said this would happen

There was a time when activism highlighted the disaster of high interest payday loans and doorstep lending. As we and others pointed out this is simply an inherently expensive thing to do:

Competition seems to limit payday lenders’ profits as well as their prices. This study and this study found that risk-adjusted returns at publicly traded payday loan companies were comparable to other financial firms. An FDIC study using payday store-level data concluded “that fixed operating costs and loan loss rates do justify a large part of the high APRs charged.”

Is a 36 Percent Interest Cap in Order?

Even though payday loan fees seem competitive, many reformers have advocated price caps. The Center for Responsible Lending (CRL), a nonprofit created by a credit union and a staunch foe of payday lending, has recommended capping annual rates at 36 percent “to spring the (debt) trap.” The CRL is technically correct, but only because a 36 percent cap eliminates payday loans altogether. If payday lenders earn normal profits when they charge $15 per $100 per two weeks, as the evidence suggests, they must surely lose money at $1.38 per $100 (equivalent to a 36 percent APR.) In fact, Pew Charitable Trusts (p. 20) notes that storefront payday lenders “are not found” in states with a 36 percent cap, and researchers treat a 36 percent cap as an outright ban.

That’s the American experience but limitations were placed on what could be charged here and Wonga and others left the business. Provident Financial is now also leaving. From those who demanded this change we now get a new insistence:

I continue to have little regard for the business model of financiers like Provident Financial. But there is a problem now they and Wonga have left the market, and that is in some people accessing credit at all.

It is vital that those on low income with low or no savings have access to credit.

Small sum and short term credit is simply an expensive thing to provide. Parts of Goodwill in the US tried to do it on an entirely non-profit basis and had to charge 200% APR just to balance those books.

But this is how the activist gravy train works. Demand the abolition of short term small sum credit then once achieved, demand the creation of a small sum short term credit industry.

A little advice on what we think would make a better world. Why not come up with the solution first? Create the better system then compete the old out of business instead of using the law to ban. On the basis that people might really need the goods or services on offer. Depriving people of what they need is not quite the way to do things now, is it?

Labour's salvation will be Burkean conservatism

There is a certain amusement in watching the British left thrash about in trying to reinvent the reason for their gaining power. John Harris here is perceptive about which parts of activism are making a difference:

Whenever we are on the road for the Guardian’s video series Anywhere but Westminster, we now make a point of focusing on the sources of hope we have found in places as diverse as Grimsby, Walsall, Stoke-on-Trent and inner-city Edinburgh: the kind of local initiatives and projects that sit apart from the state, and are often run by energised, inspirational women. As romantic as it may sound, these things look to me like the modern equivalents of the miners’ institutes, friendly societies and working-class self-help organisations that were the wellspring of the early labour movement and the party it eventually spawned.

They are also the modern equivalents of Burke’s little platoons, the people who make society work. The lesson perhaps being that what was spawned, that national party, wasn’t quite the point. Rather, the little platoons having the freedom to do their thing is.

To attempt to bring them anywhere near formal politics would be a difficult business, made even harder by the fact that many of the people involved, understandably, have little interest in such things.

Well, quite. The task of a national party, if it is the little platoons that do the good work, is to ensure that the national system leaves the room for the little platoons to do their good work. That is, a free and liberal - classically liberal - society that doesn’t just leave people to get on with it but allows the room for people to get on with things. The national party’s job becoming to insist that the nation has to get out of the way and let the people do their thing.

All of which is a most conservative political philosophy and one we’d be most interested to see revive in the Britain of today. After all, given the Conservative Party of the current era there does seem to be a gap available there. We think it’s unlikely that this idea will catch on but if the free and liberal society comes with “Labour Party” splashed on the masthead well, so be it. It’s the result that matters, not who claims credit for it.

An excellent natural economic experiment

We welcome this:

South Carolina and Montana residents will be cut off from federal pandemic unemployment benefits next month, with Republican governors in each state claiming the payments have led to a workforce shortage. Economists say that's not the case.

"Employers are just angry that they are unable to find workers at relatively low wages," Heidi Shierholz, a senior economist and director of policy at the Economic Policy Institute, said in an interview. "The jobs being posted are more stressful, more risky, harder jobs than they were pre-COVID. ... When the job is more stressful, then it should command a higher wage."

These two states will be the first to end participation in the unemployment enhancement programs, as both states are attempting to transition back to pre-pandemic unemployment insurance eligibility and benefits by the end of June.

We disagree with Heidi. The current system whereby normal state unemployment benefits are paid, with few questions, plus the $300 a week Federal upgrade means that somewhere between 25% and 50% of the American labour force earns more by not going to work than by labouring. This clearly and obviously raises the reservation wage - the amount that must be paid in order to get a worker to come to work.

We’re entirely agreed that supporting people during a pandemic inspired lockdown of the economy is a good idea. But we’re also convinced that the political incentive is to continue handing out the cash long after it’s sensible to continue doing so.

However, it’s not so much the ending that we think is such a good thing. It’s that it will end in some places and not in others. The national economy will be subject to much the same influences in every part of it. We’ll have this one policy difference in just these two areas. We’ll thus have the natural experiment to be able to see what the effect of the extended and expanded unemployment benefits actually is.

Which is great, isn’t it? Next time around we’re not going to have to try and pick and choose between two sets of - possibly - ideologically motivated think tankers, we’ll have real world evidence and proof. We’ll be using the evidence to illuminate the issue the next time around but the other lot…..

Some advice for Sir Iain Duncan Smith

We think it would be helpful if, when talking about the details of policy about metals, the details about metals were known.

Sir Iain Duncan Smith, the former Conservative party leader said: “The Government should now call this in and block it.

“China already has three-quarters of the world’s rare earth minerals and an even larger share of their processing.

“Rare earth minerals like lithium are to the 21st century what oil was to the 20th century and deals like this are all about taking control of strategic materials to make the West go to China for them.”

Lithium is not a rare earth mineral. They are the 15 lanthanides plus yttrium and scandium. This might sound like some terrible pedantry but we’re afraid it isn’t. China does indeed mine some three quarters of the world’s rare earths, process even more of them. It does not have anything like the same stranglehold over lithium which is, in most classifications, a minor metal and in all is definitely not a rare earth.

Even then the Chinese position in lithium is for a particular method of extraction. When mining spodumene it is necessary to have a processor of the concentrate produced at the mine. China does dominate that process. Other extraction routes - from brines, clay deposits as this one under discussion, from micas - do not require that processor for the material is processed up to industrial quality at the mine itself.

This is not, therefore, pedantry for the misidentification as a rare earth leads to this belief of Chinese dominance as with the rare earths. Australia is the dominant producer of lithium - that spodumene that is then often processed in China - followed by Chile which processes directly.

We also think there is a distinct whiff of overreach here.

Ministers have been urged to block a planned Chinese takeover of a British lithium miner as fears mount over Beijing’s grip on materials critical for electric cars.

Bacanora Lithium, which is listed in London, said it has received a £190m bid from its largest shareholder, China’s Ganfeng Lithium, which is already one of the world’s largest producers of the material.

Bacanora is listed in London. But the deposit anywhere near to actual exploitation is in Sonora in Mexico. It sounds a little colonial almost for the British government to be determining who might own minerals in Mexico. The next idea in the company pipeline is at Zinnwald in Germany. Again - and this is a deposit that one of us actually knows rather well having done work in the area on associated minerals - the British government insisting upon who may own minerals in Germany seems to us a bit of a reach.

This is, of course, Hayek all over again. Gaining the actual knowledge to run the world in any detail is somewhere between extremely difficult and impossible for any government to achieve.

More than that we do rather worry about that property rights thing. Bacanora Lithium is currently the property of the shareholders of Bacanora Lithium. Property rights, if they are to have any meaning at all, meaning that one can dispose of one’s own property as one wishes. Rather than, say, being limited by the technical misunderstandings of a politician.

(Just for the avoidance of doubt none of us here have any relationship with any of the companies. We do know Sir Iain and like him, this is a critique more in sorrow than anger)

The old idiocies do keep coming back, don't they?

Bad economic ideas do seem to repeat just like that dodgy kebab persuaded into late one night.

Still, for all the sabre-rattling, some good can come from the dispute if it serves as a firm wake-up call for our over-reliance on foreign partners.

The solution to this skirmish isn’t to simply reroute giant subsea power cable projects away from France towards the Netherlands or another country deemed to be a more reliable ally. That misses the point and simply shifts the problem elsewhere. The answer should be a comprehensive rethink of the energy system so that we can become self-sufficient.

But don’t let it stop there. Post-Brexit, post-Covid Britain has a massive opportunity to reinvent itself. The pandemic has exposed the downsides of globalisation and the danger of being overly reliant on the impulses of suppliers thousands of miles away.

Self-sufficiency is also known as making ourselves grossly poorer. The entire point of trade is to gain access to those things that Johnny Foreigner does better, cheaper, faster, than we do. To become self-sufficient is to miss out on better, cheaper, faster.

Think, just for a moment, about those vaccines that we’ve just done so well at. We in Britain did the bit that we’re good at. Design and testing, financing, the high value parts of the process. We’ve even done some of the manufacturing. And yet the supply chain can be seen here, or here. One vital ingredient is, apparently, Chilean tree bark. Whether that’s bark from a tree from Chile or bark from a tree called Chilean we don’t know but we’re pretty sure we’re not about to plant a forest of them in Britain.

That is, even if we did say that we were going to have our own, local for locals, vaccine supply chain we still aren’t going to have one. Because at some point down the line, at some iteration of suppliers to suppliers, the supply chain for any product at all is the entire global economy.

Another way to make much the same point we can think of two countries that are, largely enough, self-sufficient in the sense that they import very little. The result being a distinct lack of sufficiency of anything at all in both DR Congo and North Korea.

No, there is no clever way of identifying what government should insist we are self-sufficient in and what we might allow to be traded. That calculation is already being done by all the millions upon millions of people engaging in making economic decisions - some few hundred in Westminster don’t have the knowledge to second guess all of that. The chutzpah to think they do but not the competence.

Seriously, we’ve spent tens of millennia expanding the geographic coverage of our trading networks. For good reason, the larger the network the richer we are. There is no good reason to slam that process into reverse whatever current political fashion may be.

Happy Birthday Friedrich Hayek!

On 8 May 1899, in Vienna, Friedrich Hayek was born. He would become, in Robert Skidelsky’s words, “the dominant intellectual influence of the last quarter of the twentieth century” and he remains influential among liberals and libertarians today.

From the 1940s to the 1970s, Hayek had — almost alone — kept alive the spirit of personal and economic freedom that had been crushed by the chaos of the Second World War and the Keynesian government interventionism that followed it. Such interventionism, he argued, was based on a fatal conceit, the conceit that we knew far more than we in fact did. Governments and their planners simply could not collect and process all the information needed to run an efficient economy, because that information is dispersed, diffuse, incomplete and essentially personal. The socialist dream, therefore, would always be frustrated by reality; and as socialists struggled to control that reality, individuals would increasingly find their freedoms being stripped away. It was a road to serfdom.

More than anyone, Hayek showed how unplanned societies could be highly rational and collaborative, their conventional practices containing a ‘wisdom’ that we may not even understand, never mind be able to manipulate.  The price system, for example, allocated resources to their most urgent uses, with a speed and efficiency that conscious government planning could never achieve.

Hayek explained how such spontaneous orders (which include not just markets but language, justice and much else) were the product of social evolution rather than of rational thought. Indeed, trying to replace them with some planned ‘rational’ alternative was likely to end in disaster. His thought influenced a whole generation of economists, including many who, like he, would win the Nobel Prize, such as Milton Friedman, George Stigler, Maurice Allais, James Buchanan, Vernon Smith, Gary Becker and Ronald Coase. A 2009 study by David Skarbek showed that only Kenneth Arrow was cited more often in the work of other Nobel economists – an indicator of his influence on the profession.

Hayek’s ideas also enthused a whole generation of intellectuals, writers and think-tankers who in turn disseminated his ideas even more widely. Among them were Henry Hazlitt, journalist and co-founder of the Foundation for Economic Education; Ralph (later Lord) Harris and Arthur Seldon who ran the Institute of Economic Affairs; F A (“Baldy”) Harper who founded the Institute for Humane Studies, Eamonn Butler and Madsen Pirie who set up the Adam Smith Institute; and many others.

Through this process, Hayek’s ideas came to have a real political effect too – something unimaginable for much of the half-century following the Second World War. Politicians such as Margaret Thatcher and Ronald Reagan owed much to his thinking. So did those, like Mart Laar and Vaclav Klaus, who became the political leaders of Eastern Europe after the fall of the Soviet system — which Hayek’s thought did much to undermine. “No person,” concluded Milton Friedman, “had more of an influence on the intellectuals behind the Iron Curtain than Friedrich Hayek.”

Hayek’s ideas remain a guide and inspiration to lovers of individual freedom all over the world. Think tanks promote his view; student groups name themselves after him; college programmes spring up in his name; journalists cite him; academics admit their intellectual debt to him; his views are analysed in books, papers and blogs. Millions of ordinary people owe to Hayek their enjoyment of the fruits of economic and personal freedom, even though they may not realise it; but then as Hayek pointed out, knowledge is not always obvious.

Eamonn Butler is author of Friedrich Hayek: The Ideas and Influence of the Libertarian Economist (Harriman Economics Essentials).