The importance of careful analysis

From the obituary of Freddy Johnston:

Even as he uttered those words, the company’s card was being marked. Four months earlier a small American business called Google had started AdWords, an online system allowing businesses to advertise alongside keyword searches. Oblivious to the threat, Johnston Press marched on and in 2006 bought The Scotsman from the Barclay brothers for £160 million.

Soon came the financial crisis and a seismic shift in consumer behaviour. Classified advertising revenues of £177 million in 2008 dwindled to £22 million a decade later, while newspaper sales sank from £101 million to £55 million over the same period.

We are regularly told that Google and Facebook must give more back. They must support local journalism because they have caused it’s near demise through their monopolisation of the online advertising market.

Something which is not, in fact, true. These numbers are American but given the monopoly nature of the local press in both countries applies here too. Roughly one third of a local paper’s revenue was subscription or cover price. One third display advertising and the other one third classified. The classifieds market being subject to network effects - people advertise in the local paper because that’s where people look, people look because that’s where people advertise.

It’s that classifieds market that the internet stole. The jobs are on Monster.com, the property on Rightmove, prams on e-Bay and so on. It’s the pulling of the rug on that one third - and by far the most profitable one third - of the revenue that has done the damage.

What do the political classes incessantly call for? That Google and Facebook, who have taken some portion of the display advertising budget must compensate.

The solution demanded doesn’t solve the problem because that solution is based upon incomplete - or even incorrect - analysis of the original problem. What, politically, everyone knows turns out to be based upon a fable.

Which is why politics isn’t a good way of dealing with the real world - politics doesn’t know or understand the real world.

Which is something that Hayek said better and earlier than we just have done but it’s true all the same.

Making taxes transparent

It is a good thing for both democracy and liberty if government tells people openly and honestly how much it is taking from them in taxation. Most people accept that government must finance essential services and the public services that enjoy popular support, and are prepared to pay taxes to finance them. But this should be above board, not something done in an underhand and deceptive manner.

Stealth taxes are wrong in principle because they are based on concealment and deception. The aim of them is to levy taxation that people are not aware of, and people cannot consent to something if they are not aware of it. They thus break the principle of consent that underlies honest taxation.

Gordon Brown was the master of underhand, stealthy taxes, but it looks as though Rishi Sunak will take his title. One of the most common stealth taxes is achieved by fiscal drag, by failing to increase thresholds in line with inflation, so that people not earning any more in real terms are sucked into a higher tax bracket that makes them pay more.

Another stealth tax is achieved in National Insurance by labelling part of it the ‘employer contribution’ so that the employees are unaware that they are actually paying it themselves. To the employer it is part of the wage pool that would be available to the employee if the government did not take it.

The government, and the Treasury in particular, like stealth taxes because they do not want people to know how much tax they are paying, fearing public resistance if they knew how much the government was taking from them.

Many motorists do not realize that the pump price contains the fuel duty, currently 56.95p per litre for petrol and diesel, and that the VAT of 20 percent is then added on top, charging the customer VAT on the fuel duty as well as on their fuel. Many whisky drinkers are probably unaware that a similar principle is applied to their tipple, and that VAT is charged on the total cost including the duty, making a tax upon a tax, and that £3 in every £4 spent on it goes to the Chancellor. The same applies to tobacco products.

Taxes on airline tickets, insurance policies, and many other products, are contained in the price, such that most customers are scarcely aware of how much of what they are paying is taken by the government.

All of this means that instead of knowing and consenting to the amount taken from them in taxation, most of the electorate does not even know how much that is. They are tricked by deceit and concealment into paying sums they are unaware of.

A partial solution to this would be achieved if the price before taxation were listed alongside the final price paid. Customers would see at a glance how much of what they were paying was going to the government. This should be done at petrol and diesel pumps, on alcohol products, on tobacco products, on airline tickets and insurance policies, on purchases subject to VAT, and everywhere it could be applied. Furthermore, the “price before tax” should not be buried somewhere in the small print, but should feature prominently alongside the final price that includes the tax.

Companies selling fuel, or alcohol and tobacco products, could start the ball rolling by voluntarily doing this, but ultimately it would be up to Parliament to make this mandatory. It would be a major stride towards honest and open government by those who profess to favour that.

People about to be legislated against lobby do they? Our word, that is a surprise

So our question here is, well, what do you expect people to do?

Some of Britain’s betting giants are revealed to have quietly lobbied Treasury officials against a proposed industry crackdown, claiming it will cost millions of pounds in lost tax receipts.

Executives representing Bet365, Paddy Power and Ladbrokes met officials from the Treasury and Revenue and Customs, warning a radical overhaul of the industry could drive gamblers to the black market. The meeting was with tax officials rather than ministers and was therefore not required to be automatically disclosed.

Our point here is not about the rights and or wrongs of betting, betting regulation or anything so specific. Rather, the much more general point of what do you expect people to do?

Here’s an activity which is currently lawful. The government is thinking of changing which parts of it are indeed lawful. What does anyone expect people engaged in said lawful behaviour to do? Have a chat about why making their currently lawful activities unlawful might actually mean in practice? You know, possibly?

Explore whether Ministers are fully cognisant of all of the implications, the trade offs involved? Even, ask whether they really want to steal the crust from their mouths?

Perhaps we could suggest a little irruption of reality here. The only way there will not be lobbying from industry is if government doesn’t determine how industry works.

Even if you think that this activity is indeed corruption - the implication the Observer is suggesting - it’s still true that the only solution to it is laissez faire.

The Enduring Value of Hayek

The Nobel economist and social theorist Friedrich Hayek — whom Robert Skidelsky called “the dominant intellectual influence of the last quarter of the twentieth century” — was born on this day in 1899. 

Almost single-handedly, Hayek kept alive the spirit of personal and economic freedom that had been crushed by the Second World War and the Keynesian economic interventionism that followed it. Such interventionism, Hayek argued, was based on the ‘fatal conceit’ that we knew far more about society’s workings than we really did. Government planners simply could not collect and process all the information needed to run a functioning economy, because that information is dispersed, diffuse, incomplete and essentially personal. The socialist dream would always be frustrated by reality; and as socialists struggled to control things, we would be drawn down a road to serfdom.

Hayek showed how unplanned societies were highly rational and collaborative, their customs containing a ‘wisdom’ that we cannot even understand, never mind control. The price system, for example, allocated resources to their most urgent uses, with a speed and efficiency that defied central planners. Such ‘spontaneous orders’ (including not just markets but language, justice and much else) were, said Hayek, products of social evolution, not rational thought. Replacing them with some planned ‘rational’ alternative would inevitably end in disaster. 

Hayek influenced a generation of economists, including many others who would win the Nobel Prize, such as Milton Friedman, George Stigler, Maurice Allais, James Buchanan, Vernon Smith, Gary Becker, Ronald Coase and Elinor Ostrom. His ideas also enthused intellectuals 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 of the Adam Smith Institute.

This gave his ideas a real political effect – something unimaginable in the post-war years. Margaret Thatcher and Ronald Reagan owed much to his thinking, as did Mart Laar and Vaclav Klaus, who became political leaders in Eastern Europe after the fall of the Soviet system. “No person,” concluded Milton Friedman, “had more of an influence on the intellectuals behind the Iron Curtain than Friedrich Hayek.”

Hayek remains an inspiration to lovers of individual freedom all over the world. Think tanks promote his view; student groups name themselves after him; college programmes take his name; economists and journalists cite 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).

The explosive importance of that free part of free markets

It’s possible to argue that no market has ever been truly free as there have always been rules. Which is true. But the important meaning of free in free markets is that the ability to enter the market is free - people are free to try their hand at producing what people might desire to have.

Technology advances, human tastes and desires change. So there’s a constantly changing universe of things that can be done, also of what it is desired be done. Free entry into that market - anyone and everyone gets to try whatever - is what sorts through, in the most efficient manner possible, to that meeting point of the Venn Diagram. What people want to have done out of what can be done.

The entrepreneur in all of this is, in the strict definition, the person who takes extant economic assets and combines them in some new manner.

The weapons are thought to be Soviet-era RKG-3 anti-tank grenades with 3D-printed tail fins attached to stabilise their fall.

First introduced in 1950, the grenade is designed to be thrown by hand against tanks and armoured vehicles.

….

The RKG-3 grenade has been renamed the RKG-1600 when the 3D-printed fins have been added. The new weapon weighs about 1kg.

Tests have shown the stabilised grenade can hit a 1m target from a height of 300m (900 feet).

Videos released by Aerorozvidka show Ukrainian-made octocopter drones with two RKG-1600 bomblets mounted beneath them.

The tank is around a century old. That grenade, some 70. Those drones are two or three years old as cheap and reliable machines. The combination of two of them solves that third problem.

This is entrepreneurialism in everything. Extant economic assets have been combined in a new manner to solve a problem.

The free part of free markets really is important. It’s free entry that really matters.

Exports don't have to be manufactures

There’s a line of thought in developmental economics that a country must do manufacturing, must export manufactures, in order to be come rich. That there aren’t sectors in which a currently poor country can do so means that poor countries never can become rich.

Yes, that’s a rather extreme characterisation of the argument but it really is one that’s out there.

We insist that this is not true. It’s might well be helpful, probably will work - industrialisation and manufactures exports that is - but it’s the insistence that it’s necessary we disagree with:

Freshii is coming under fire for outsourcing virtual cashier jobs to Nicaraguans paying $3.75 per hour.

The restaurant chain replaced some of its in-store cashiers in Ontario with workers in Central America who run the cash through a video link, as reported by The Toronto Star. Some of these workers are reportedly being paid less than the price of the food chain's dishes.

Manufactures might be a good way to bundle up the embedded labour so as to export it. But anything that adds value to labour, over and above that in the domestic economy, and is able to export it does exactly the same job. It adds value to domestic labour and exports that value.

That is, manufacturing isn’t a necessary part of the development process at all. We’d even put down a claim, a marker - soon enough there will be entire economies that develop purely by producing and exporting services.

Adding value is development, whatever adds value is development.

Do you know the Knowledge?

Our new research paper has been generating some forthright conversation this week. Of particular controversy is our proposal that the ‘Knowledge’ topographical test should be scrapped as a requirement for taxi cab drivers in London.

Before you join the ranks of taxi unions in berating us, might we invite you to first undertake the following quick quiz (answers below). 

When was the knowledge introduced as a requirement for taxi drivers? 

a) 1902

b) 1865

c) 1950

How many people fail the first stage?

a) 99%

b) 65%

c) 30%

Taking the test can cost up to…

a) £10,000

b) £5,000

c) £1,000

How long on average does it take to pass the test? 

a) 5-6 months

b) 3-4 years

c) 6 months-1 year

If you answered most of the questions correctly, congratulations—you are clearly aware of the ridiculous demands placed on aspiring cabbies. If you did not, then welcome to the reality of applying for a taxi licence in 21st century Britain. 

Channel 4’s documentary on this subject, The Knowledge: The World’s Toughest Taxi Test Test highlights the difficulty of taking the test. One young man explains that he has been studying for many hours a week for 18 months—and that’s just to pass the first stage. The man in question deserves to be commended for his dedication and desire to improve his life: the regulatory system which requires him to do so does not. 

This requirement is outdated. So outdated in fact that it was established a full 21 years before the first motor car, let alone the satnav, was invented. This is perhaps unsurprising, considering that British regulations have historically held back innovation in the automobile industry. Prior to the 1896 repeal of the Locomotives on Highways Act, legislation dictated that engine-driven vehicles be restricted to driving at walking speeds and that two people had to accompany the engine. This may have been logical for steam driven traction engines moving between fields and encountering horses, but it was a serious impediment to petrol-engined cars, which were much faster. In contrast, the French benefitted from fewer restrictions and dominated car development in the years leading up to 1900 as a result. 

Abolishing the knowledge is not about unduly attacking a particular trade; on the contrary, it makes applying for a taxi licence a far less exclusionary process. This is something that needs serious consideration—the average age of taxi drivers is getting ever higher, whilst the rate of new licenses is slowing down. Making the profession more accessible benefits both aspiring drivers and the consumer. 

Answers:

1 (b)
2 (a)
3 (a)
4 (b)

We're entirely in favour of this fake - sorry, microbial - meat

The Guardian tells us that if more people ate microbial protein then the forests would be saved. Well, that’s nice, we’re generally in favour of forests, the climate, the environment and all that:

Replacing 20% of the world’s beef consumption with microbial protein, such as Quorn, could halve the destruction of the planet’s forests over the next three decades, according to the latest analysis.

The move would also halve emissions from the global food system, by reducing the razing of trees and the methane emissions from livestock. Previous studies have found meat alternatives have lower environmental footprints but this latest analysis is the first to assess what impact that could have in the world.

Go make it, put it on the shelves and see who eats it. Some will enjoy that flavour and difference. Others will preferentially partake to do their bit for those forests and the environment. Some other group will still insist upon bovine provenance.

The end result will be that mixture of what people desire to do. All of which is entirely as it should be. Our aim, task, in having an economy is that more people get to do more of what those people desire to do - this is also known as them getting richer.

Making proteins from yeasts and making them available is, by that very increase in choice and matching to desires, making people richer. Good, we approve.

The only insistence we have is that the consuming, or not consuming of, must be voluntary. It is the choice itself which is that increase in wealth. But then of course that doesn’t really need to be said, does it, for no one at all is stupid enough to try and make this sort of change mandatory, are they?

Freeing up ride-hailing and paratransit

The new ASI paper, “A Fair Shake,” by ASI researcher Maxwell Marlow, has called for a complete overhaul of the UK approach to ride-hailing. Specifically, the new paper calls for the abolition of outdated regulations that now serve to limit entry into the activity, to restrict access to new technology and new practices, and to impose costs that increase the prices that passengers have to pay. The famous ‘knowledge,’ for example, that costs would-be black cab drivers thousands of pounds and years to complete, restricts the numbers going into the profession and acts to restrict competition thereby. In the days of satnavs, it seems there are viable and less costly alternatives. Competition, says the ASI paper, is the key. It can allow innovative technologies to make inroads into established and expensive practices, and to bring greater flexibility and lower costs into the activity.

Reform of the licensing and the regulations which currently restrict ride-hailing could open up the activity, generate many thousands of jobs and give a shot in the arm to areas that need a boost economically. For example, it notes that the current system takes fulltime investment and employment to provide transport that typically peaks during the morning and evening rush hours, and is underused for the rest of the day.

Reviving a proposal that the ASI first put forward in 1980, the new study calls for the introduction of a new tier of passenger vehicles in the shape of the paratransit light vehicle. Used in many other countries around the world, these are typically 8-15 seater vehicles that offer shared rides to passengers who hail them from the street or catch them at designated pickup points, rather than from fixed stops. Instead of working to fixed timetables, these vehicles use numbers instead to provide a frequent service that picks up passengers from the curbsides, and drops them off at places they request. Fares are cheap because of low operating costs and multiple passenger numbers.

The new paper will undoubtedly ruffle feathers among established operators, just as the automobile shook up the coaching industry. Indeed, the requirement for motor cars to be preceded by a man carrying a red flag was inserted at the behest of the coaching lobby. However, the attractions of the new offerings were sufficiently strong that the public successfully clamoured for the industry to be freed up. The ASI is confident that the same will be true of the proposals it makes today.

We are very amused by calls for a windfall tax

BP reports a $20.4 billion loss for the quarter and this is taken to show the excessive profits of the oil companies which must therefore be taxed away. At which point someone is very confused here and it’s not us.

BP’s profits more than doubled to $6.2bn (£5bn) in the first three months of the year, adding to pressure on ministers to impose a windfall tax to aid households struggling with soaring energy and fuel bills.

For that is operating profit and also that’s at replacement cost. Which isn’t how corporations are taxed.

BP wrote down the value of its business in Russia, and including the resulting $24bn charge, reported a quarterly headline loss of $20.4bn, its biggest ever.

That’s actually the relevant figure. A useful proof of that being that in the actual announcement the company carefully makes the difference between the pre-tax writedown and the post-tax effects of it.

We strongly suspect that the tax take - even a windfall tax - on a $20 billion loss is going to be not very much.

This is before we even begin to discuss the abject stupidity of the base idea. In a time of dearth taxing supply and subsidising demand is, we’re sorry to have to point out, abject stupidity.

A windfall tax - wrong in principle and wrong in detail. But then this is politics, isn’t it, it’s not supposed to make sense.