All economics is either footnotes to Adam Smith or wrong

We’d not want to have to defend, wholly and precisely, that headline but we do think it a useful starting point. The truly interesting parts of the subject are those few findings which are neither. Say, Coase on the private production of public goods.

So, we’re not hugely surprised when empirical research shows that Smith was right:

We carry out two policy experiments based on our calibration. First, an industrial policy (e.g. a tax/subsidy) that induces all firms to specialise would have increased real income, so the equilibrium is inefficient (firms don’t internalise the externality of their adoption decision on others). That income increase is significant if the policy was implemented in 1987 but negligible in 2007 since, by the latter period, trade and technical change had induced sufficient specialisation. Second, we compute the impact of an increase in trade costs of 16 log points, similar to the recent trade war, and show it increases the labour share but reduces market size and real income substantially – almost half way to the predicted effect of the US shutting all trade.

The background to this is that trade allows the division and specialisation of labour - the very thing which raises productivity and therefore living standards. Allow trade with more people in more places and more division and specialisation happens thereby raising real incomes. Real incomes being the same thing as living standards.

The resulting economy of scale at the firm level captures one aspect of Smith's (1776) specialisation argument: when markets are larger firms have an incentive to specialise their labour into a subset of tasks where they are most productive.

Quite so, one of those footnotes to Smith and also, not by chance, correct.

An alternative explanation for Mr. Piketty's latest

The essential question being asked here is quite simple:

Given the steep rise in economic inequality in many parts of the world since the 1980s, one might have expected to see increasing political demands for the redistribution of wealth and the return of class-based politics. This didn’t quite happen – or at least not straightforwardly.

To make sense of the big picture, we studied the long-term evolution of political divides in 50 western and non-western democracies, using a new database on the vote that covers more than 300 elections held between 1948 and 2020.

Why aren’t the sans culottes storming the barricades? Where are the descamisados demanding what’s theirs by right?

A third related mechanism involves the ascendancy of a global ideology that puts private property interests above all else, abandoning any sense that capitalism can be radically transformed. The moderation of traditional leftwing parties’ platforms since the 1980s (think of New Labour), as well as in some cases their shift to promoting neoliberal policies, directly contributed to the decline of class divisions being perceived as politically salient, the subsequent demise of these parties, and the rise of identity-based conflicts.

Quite, why?

As Branko Milanovic has pointed out there is a useful answer available. Which is that this neoliberal capitalism actually works. By far the greater predictor of your income - and thus consumption possibility - is the country you are born into, not the position or class you are born into within one. Back when that work was being done, a decade ago, one result was that the average income of the bottom 10% of the United States was higher than that of the top 10% of either India or China.

Meaning that if we were to view the world through that veil of ignorance, as with the injunction from Rawls, the proto-you would be insisting upon the possibly unequal society dedicated to private property interests above all else rather than the radically transformed one. For we’ve not got an example, anywhere, of a society that did the radical transformation bit and improved the living standards of the average omnibus rider, nor of one that created such improvement in the first place without the capitalism and private property bits.

It is, that is, in the enlightened self interest of the demos to go for that unradically transformed capitalist - even neoliberal - system which actually produces the goods. The goods and services which improve life.

We did conduct the experiment too. We call it the 20th century - with able assists from Venezuela and Zimbabwe in this one. It is not, of course, the end of history and there are flavours within the basic structure as well. But we do know the answer to an interesting question - how do we make the average person richer, significantly, sustainably? We use capitalism and markets. Not doing so fails at that task.

So, how much are MPs intending to pay for these golden shares?

Certain MPs are suggesting that golden shares should be acquired in British defence companies:

Britain must take 'golden share' in defence firms like Meggitt, say MPs

Chairman of defence select committee says the FTSE 250 firm should be protected from foreign takeovers in same way as BAE and Rolls-Royce

So mateys, how much are you going to pay for those golden shares?

The Government should take "golden shares" in defence companies critical to UK national security such as Meggitt to stop them falling to foreign predators, MPs on the Defence select committee have said.

The call comes as concern mounts about the £6.5bn takeover of the FTSE 250 company by US rival Parker Hannifin.

Tobais Ellwood, the committee chairman, called for an expansion of the system in which the Government holds a controlling share that can be used to block takeovers.

What’s the price?

This is clearly what the Americans call a “taking”, something that their constitution says is illegal without market value compensation. The entire point of the exercise is to be such a taking:

On Monday US-based Parker revealed an 800p a share offer for Meggitt, which supplies parts for both military and civil aircraft.

Its board recommended the all-cash offer, which is at 71pc premium. The chairman, Sir Nigel Rudd, said he was confident Parker would be a “responsible steward of Meggitt”.

It is to stop that sort of thing. Johnny Foreigner giving lots of money to the current owners of the business. The aim of the golden share is to stop those owners receiving that lots of money. The taking is the lots of money they will not receive.

Now, yes, strange things can righteously be done in the name of national security. And while we don’t have that constitutional ban on uncompensated takings we do indeed have laws that insist that nationalisations and the like be compensated at market price.

So, what’s the price that is going to be paid for these golden shares? Not to have one is simply the confiscation of some part of the wealth of those current owners.

The Government only has golden shares in BAE Systems and Rolls-Royce,

Those golden shares existed at the time of privatisation. The price at which they were sold included the effects of the golden share that is. This new demand is to impose the restrictions on already private companies. Which is a confiscation of some of the value - so, how much will be paid for that confiscation?

By the way, we do have a word for uncompensated takings - theft.

Whether or not there should be golden shares isn’t the issue here. As above, strange things can righteously be done in the name of national security. But ownership of something does, in its very definition, mean being able to dispose of it as one wishes. That right, that valuable right, is to be taken away. Foreigners bearing baskets of money may not buy these companies - the reduction in the value of those companies is the excess cash those foreigners would be willing to pay but now cannot. This is, obviously enough, the reduction in value of the company to the current owners.

The suggestion, nay insistence, is that government should confiscate some measure of private property. Well, OK, national security and all that. But how much is to be paid for that private property being confiscated?

If they take your house to build a railway they can do that, but they must pay you market value for the house when they do so. Compulsory purchase does exist and it’s right that it does. But it always, but always, involves market value compensation.

Perhaps we should put this to Mr. Ellwood in a slightly different manner. Have you cleared this with Rishi yet, asked him for the money?

Time limits on landbanking aren't going to work

Making some move against the idea of landbanking may or may not be good politics. A fairly damning criticism is that it’s not going to work. For a producer of something is going to want to have a stock of whatever it is to last however long it takes to gain new stock of that something.

If it takes 6 months to get steel to make cars from then a car manufacturer is going to want to have a 6 month stock of steel. Or, at the very least, a continual and reliable series of orders at least 6 months long. The more variability - risk - there is to an order not arriving then the closer to the 6 month’s stock, rather than just the order stream, they will decide upon. We’re seeing this calculation right now as car manufacturers do find out more about the time lags and variability of chip supplies. And yes, they are saying that they’ll probably have to hold higher stocks given the increased unreliability of supply.

How long does it take to gain planning permission to build a new development? Yes, sure, the time count from the final and completed application to pass through the system is measured in weeks. But the actual time from the decision to try to build here to gaining that permission to build here is on average some years - 5 years by several estimations.

Therefore builders seek to have a 5 year stock of planning permissions. Given the unreliability of the system in definitely delivering any specific application.

The way to reduce the number of approved but as yet unbuilt houses is to increase the certainty of the system delivering on any specific application and to reduce the total time taken to do so. Builders will then, entirely naturally, reduce the stock they desire to hold.

Another way of putting this is that builders are not trying to manipulate the market by landbanking, they are manipulated into landbanking by the planning bureaucracy. The solution thus lies in the bureaucracy, not the builders.

To reform the world it aids to know the world

Anyone planning to alter how the world works runs into that Hayekian problem of understanding how it does work before those reforms. This being, as his Nobel Lecture points out, something that is difficult for that world is a complex place.

Which brings us to this exhortation in The Guardian from an American professor of design:

….and cobalt will be processed from broken flatscreen TVs, not acid-rinsed from a million tons of rubble.

Well, cobalt tends to be acid rinsed from material already being processed for nickel or copper so we’re not entirely sure what the complaint is. It’s already in the vat, why not extract the second material? But of rather more interest we fear that trying to extract from flatscreen TVs would be an isometric exercise. A great deal of effort to get nowhere.

We don’t claim to know everything about mineral usage, just a great deal. We’re entirely unaware of the use of cobalt in flatscreens and we can’t even think of what it might be used for in them. In batteries, yes, but flatscreens? We’ve even tried checking this and the detailed breakdowns we can find don’t mention it. There is something called Cobalt TV but that’s something entirely different and cannot, possibly, be the mistake being made. It could be us making the mistake of course an if so we welcome any correction - the world is that complex place after all.

If you’re going to plan the world then these sorts of details do matter.

This before we get to the larger errors in the plan. The insistence is that we must have repairable tech and also that we must have a circular economy. No more new mining, recycle everything. But if we are to recycle everything - turn old electronics into the ore from which we make the new - then having repairable tech makes no difference. So, the old part can be extracted and replaced, or the whole machine extracted and replaced. Those broken bits are still going to go into the same crushing, grinding and creation of ore process whether they’re parts or the whole thing. It’s entirely unnecessary to do both in order to reduce that mining of virgin material. Whether to repair or recycle becomes simply a fiscal decision, either and both gain the desired end. Which we use should be decided by which is cheaper for this part or that machine.

The biggest of those larger errors being, of course, that we already have a vast global industry which does exactly this - recycles old equipment for their metals values. One of us even made their living in this field for a number of years. If the value of recycling some old kit is higher than the cost of doing so then it gets recycled. If it isn’t profitable - if value isn’t being added by the process - then it doesn’t. And how else would anyone want such a system to work? Doing what is worth doing and not doing what is not?

After all, none of us are likely to think that scrap metal merchants are going to leave $100 bills on the ground, are we? Or even, even if we agree that the problems detailed exist we still already have our solution - a capitalist and market driven economy already recycles what is worth recycling and doesn’t what isn’t. Most especially in the metals world, the industry with the highest recycling rate of any other, anywhen. Other than that which weathers off the occasional onion dome all the gold ever mined is still being recycled……

Declaring class war

An extraordinary document has appeared from a group at the London School of Economics calling itself “LSE Class War.” It puts forward a series of “demands” which reveal a totally misguided view of what the world is actually like.

Number one on their list is the installation of a David Graeber lecture series to honour the memory of a left-wing and anarchist activist who died last September aged 59. He seems to have been more of a political activist than an academic, helping to establish the “Occupy Wall Street” movement, and enthusiastically supporting Jeremy Corbyn in the 2019 election, despite being a US, rather than a UK citizen.

This gesture to honour him is coupled with a demand to cease honouring the ex-LSE Nobel Laureate economist and philosopher, Friedrich Hayek. They want the LSE Hayek Society dissolved “because it promotes free market fundamentalist views which outwardly call for the oppression of working class people.” This is, of course, a total travesty. Hayek’s views have done more to elevate the condition of working classes throughout the world than virtually anyone else’s. Global free markets have lifted billions of people out of poverty, subsistence and starvation.

Oblivious to this, LSE Class Wars wants discussion of his ideas silenced, together with the dissolution of other societies that promote similar views. Presumably this would include the Economics Society and the Conservative Association amongst others. It does not want their ideas simply opposed; it wants them silenced, together with any discussion of them.

They also want the LSE “decolonized,” calling for BAME quotas for the hiring of academics. Lecturers and professors are not to be appointed on academic merit or scholarship, but on skin colour and ethnic background. It’s doubtful whether their idol, David Graeber, would have been appointed under this policy, since it’s unlikely that they include Jews as an oppressed minority.

Their other “demands” include banning people who attended private schools from studying at the LSE. This would certainly alter the ethnic balance there, since most foreign, non-white students were privately educated. It would also alter the LSE’s finance sheet, since without their fees it would probably go bankrupt in short order.

They oppose social mobility, and want the words deleted from the title of the student union’s “working class and social mobility officer.” They say that social mobility means that “only a few of the working class can transcend their class position,” and instead want “all working-class people to rise together.” It seems to have escaped their notice that by attending universities such as the LSE, most people from working-class backgrounds can gain access to middle-class employment. In the real world they would concentrate on removing barriers to social mobility so that more could rise, but in their fantasy class-struggle world they want to prevent that until, in the words of Lewis Carroll’s dodo, “Everybody has won, and all must have prizes.”

It would be easy to dismiss them as a tiny, deranged group of fanatics. But the Bolsheviks and the Nazis started as similar groups and went on to stamp out freedom and slaughter millions. The LSE Class War group deserve attention because the price of liberty is eternal vigilance. Their document is well worth reading. It is a fascinating study in psychopathology.

Our Health in Safe Hands

39 Victoria Street 

“Humphrey.” 

“Yes, Minister?” 

“I want to develop a reputation for having a safe pair of hands.” 

“That would indeed be a welcome change.  Appointing Amanda Pritchard to succeed Sir Simon as Chief Executive of NHS England is an excellent start.” 

“Thank you.  I believe Lady Harding is now in the running to take charge of all our gas and electricity supplies in the run up to Zero Carbon 2050. Goodbye National Grid.” 

“I understand that there will be the politically appointed overall controller, but I could not possibly speculate as to who that might be, who will ‘help steer the country towards its climate targets, at the lowest cost to energy bill payers, by providing impartial data and advice after an overhaul of the rules governing the energy system to make it “fit for the future”.’ What could possibly go wrong?” 

“Quite right, Humphrey.  Nothing at all. Saving our NHS is far more important than protecting our energy supply.” 

“Indeed, Minister. Amanda Pritchard has worked in the NHS since she left Oxford nearly 25 years ago and her father was the Bishop of Oxford.  Thus our two national religions entwine as one.” 

“And you tell me that, apart from doling out the money once a year, she doesn’t really have anything to do.” 

“Correct. We have taken all the requisite steps to ensure that the Chief Executive is not over-burdened.  The hospitals are now mostly independent foundation trusts with their own governance, GPs have always been independent contractors and we are turning over the rest of the front line to Integrated Care Systems (ICSs) which, as you know Minister, are the 40 something independent partnerships linked to local authorities and dealing also with social care.” 

“Yes, that’s all in my predecessor’s Health and Care Bill which I seem to have been lumbered with.  A right old dog’s breakfast. Amanda has always been a manager in the NHS so excluding any responsibility for medical and care practices is not so daft.  Presumably she has charge of all the administration?” 

“We have been over this before, Minister, but legal, IT and business services are all outsourced to arm’s length bodies and we ourselves make the decisions on pay and staffing.” 

“That is also daft, Humphrey.  Now we are going to have all these local ICSs, why don’t they just pay the market rates in their own areas to get the staff they need?” 

“We have a National Health Service, Minister, and the unions would not like that at all. It would be a pay code lottery. We deal with the nation’s health, not with individuals.” 

“I expect you will tell me that our management of adult social care is not so much ‘safe hands’ as ‘hands off’.” 

“Yes, indeed, Minister.  We have a strict policy of non-interference.  We have been under pressure for some years to come up with a policy for adult social care, or a green paper, or something like that but, as Macbeth put it so neatly. ‘anticipation is better than realisation.’”  

“Yes, Macbeth was good on social care and I gather my predecessor had similar views. When the Treasury insisted, at the outset of the pandemic, that he reduced the pressure on hospital beds and the cost of social care, he solved both at a stroke by shipping all the bed-blockers, infected by Covid in the hospitals, out to care homes which speedily freed up beds there too.  Brilliant.” 

“Possibly, Minister, but it did incur a degree of odium.  Our policy of non-interference is far safer.  The local authorities have to deal with social care and receive financial support from the Ministry of Housing. The more affluent citizens pay for themselves.  We are not even contaminated by a single arm’s length body though we do provide a junior minister to express concern and sympathy on the Today programme when called upon to do so.” 

“Well, I’ll tell you where it does not cut the mustard, Humphrey, and that’s jabs, the pingdemic and travel quarantine. None of those make any sense to me.” 

“It is possible that our briefing has been inadequate, Minister. If something is self-evidently stupid, like insisting on self-isolation when the person pinged has had both jabs, we either say we are following the science, or provide an utterly irrelevant response, such giving our world-leading vaccination programme time to complete or proof that the test and trace system finally works or mentioning the ladies BMX gold medal.” 

“I took a lot of incoming last week, Humphrey, about making the French quarantine because of a few, and declining, Covid cases in La Réunion. At least, that’s what Dominic Raab said on the Today programme.  I’m all for sticking it to the Frogs but that does seem to be taking it too far.” 

“We are only following the science, Minister. The UK Biocentre advised it because France has a higher level than us of the Beta variant. They need time to study it and its resistance to vaccines.” 

“That’s piffle, Humphrey.  They’ve been studying the Beta variant since it emerged in South Africa last October so they must know all they need to know by now.  Furthermore, its prevalence in Metropolitan France is very low and a lot lower than Spain.” 

“I fear you are correct, Minister.  The truth is that we were put under pressure to do this by the Home Office.” 

“The Home Office?  What on earth does it have to do with them?”  

“It’s the migrants.  The Home Office is very embarrassed by all these migrants crossing the Channel in rubber boats.  They’d like to sink the boats and make them swim for it but they have to show compassion, pick them up and take care of them until some time in the next decade when they can be arsed, sorry Minister, find the resources to consider their asylum applications.” 

“I know all that but I don’t see the connection with Covid testing.” 

“The Home Office gave the French £114M to curb these crossings in the five years to 2020 and we’ve now promised them another £55M.  All that’s happened is that the numbers crossing have escalated and the French rubber boat business is soaring. I believe the manufacture of rubber boats, with our help, is the only growth sector in the French economy. No doubt the French coastguards have to push them off the beaches to make room for more.” 

“That’s a shocking thing to say, Minister, I am sure the French government is fully cooperating in their usual manner.” 

“The whole thing is a nonsense because asylum seekers are supposed to remain in the first safe country they reach and France is certainly safe.  Come to think of it, the whole population of La Réunion is under 900,000 and as that’s part of France they could send them there.” 

“Yes, I suggested that but my opposite number at the Home Office said it would be considered divisive.  We need another means of annoying them and especially drawing attention to their vaccination incompetence.  It would be safer, legally speaking, to play the health card.” 

“I take it that’s the joker?  Very droll, Humphrey, and the French are unlikely to see the humour.” 

“Indeed, indeed.  A safe pair of hands never drops the ball and the safest way of doing that is never trying to catch it in the first place.” 

In praise of price gouging

Of course there should be a look at what is happening in the shipping sector.

Shipping costs from Asia have surged in recent months, with the price of a 40-foot container from Shanghai to Rotterdam rising to over $13,000 from about $2,000 last November. There have been ever larger rises in the cost of getting goods into the UK, eroding businesses’ margins on imported products and leading to price rises.

The surge has been driven in part by pandemic-related bottlenecks at ports, but several businesses told The Telegraph they believe some shipping companies are effectively price gouging.

Price gouging is desirable.

“The shipping companies are profiteering from the Covid pandemic,” he added. “The UK government along with the other larger global economies must act together to insist these costs are controlled to a manageable level.”

So is profiteering desirable.

The Competition and Markets Authority is considering the complaints heard by The Telegraph ahead of a decision on whether to launch a full investigation. A spokesman said: “We are aware of increases in the cost of international shipping and have received reports of market issues and allegations of collusion and price fixing – all of which we are taking seriously. As such, we welcome additional information and evidence of any alleged breach of competition law.

Collusion and price fixing - or to be accurate, collusion in price fixing - is not desirable.

The investigation, the look at, should therefore be attempting to distinguish between the two.

This applies to the price system in general, not just shipping but let us use this current example. The general economic shutdown and subsequent boom during reopening has led to shipping costing a different amount than it did before. Prices of shipping should thus change. This is how a market system allocates that scarce resource - here, shipping capacity - across the alternative possible uses of that scarce resource.

This is not just how the system does work it is also how it should work. It now costs more to get something from China. That then changes the calculation of what should be got from China. As opposed to somewhere else, or produced domestically, or done without altogether. This is not an error, it’s the very point of the price system itself.

Price gouging is thus to be welcomed as it’s that vital part of the fine tuning of our world. Who produces what, where? That some accustomed to the current set up don;t like these changes is unfortunate but also the point. Those changes in prices are the message that they should be doing something else. Reality has changed so, therefore, so too should their actions.

If some use these fluctuations to collude and therefore by cartel force up prices and their profits this is not desired. Those found to be doing so should be both uncovered and punished. If any are of course.

Which brings us back to the original point. Yes, fine, investigate. If there is evidence of price gouging then this is evidence of how the system is supposed to work and nothing need be done. Nothing should be done either as this is how said system is supposed to work. That balance of supply and demand has changed therefore prices should. If there is evidence of collusion then punishment should righteously be meted out.

The purpose of the investigation is therefore to ascertain which is happening - not, not at all, to return prices to their previous levels.

Meddling in our lives

There is a mindset within the Department of Health and Social Care that should not be there. A group of people there, perhaps most of them, seem to think that it is their job to make people live as the Department’s personnel think they should live, rather than as people might choose to live. They use both punishments and incentives to bring this about.

The punishments they advocate, and sometimes secure, are things such as taxes on sugar and fizzy drinks and minimum pricing on alcohol. They want people made to feel bad about exercising their own eating and drinking preferences by requiring calorie counts on foods and in restaurants and pubs. The idea is to make people sufficiently guilty that they will no longer enjoy themselves when they do what they want to do instead of doing what the Department wants.

They seek bans on the advertising of what they call “junk” foods, ones that contain more fats and sugars than they would have people eat. In particular, they seek to stop advertising that might be seen by young people, so they try to secure laws that limit the times at which it can be shown. They sought, and still seek a blanket ban on the promotion of what they regard as unhealthy foods, and used a definition that would ban advertising the traditional foods that counties and localities take pride in, food such as Cumberland and Lincolnshire sausages, Cornish pasties, or Melton Mowbray pork pies.

There is scant evidence that advertising bans would be effective in changing behaviour. Estimates suggest that the ban on advertising the so-called “junk” foods to children might make a caloric difference equivalent to about one doughnut every three months.

The incentives, as opposed to punishments, they propose include discounts on clothes for those who can show they meet healthy eating targets, though it remains unclear how such records could be kept without intrusive surveillance into people’s lives. It is also unclear whether ten percent off T-shirts would lead people to avoid putting on weight more than the known drawbacks of obesity already do.

Obesity is indeed a problem, but these are not the ways to address it. The claim that curbs on freedom are justified because of the costs that would otherwise fall on the taxpayer is specious. If the aim were to save taxpayer funds, shorter lifespans would achieve far more savings on state pension payouts. It is not and never has been about money; it is about power. It is about using the power of the law to control what other people do and how they might live.

It is not an attitude that belongs in government, and it should be removed. Government may well advise us and publish information that enables us to make our choices with greater knowledge, but when it makes those choices for us, it steps over a line that should not be crossed in a free society.

Perhaps we should do this, yes

A demand so shameless in its self interest:

Eurostar chief demands airline tax to help save rail link to France

Sorry, what?

Damas does not support the idea of a similar ban on airlines flying to destinations served by Eurostar. “If you do not want to ban, but give an incentive, it is very easy,” he says “If you just work with the taxation system. If you take just £1. Take £1 more in taxing fuel for aircraft, and take that £1 as a reduction in access charges on the railway.”

That is, you must tax my competition in order to subsidise me.

It is not because this is a French company that the correct answer is that Anglo Saxon Wave. It’s because this is a demand that is entirely shameless in the effrontery of its naked self interest.

Sadly international business relationships rarely do use that two word phrase that so commonly follows the “Yer what?” question.

At which point perhaps we should in fact give in. That £1 tax on all flights between Folkestone and Calais. And much good may it do them.