We might not like the answers but prices are information

Today’s harsh proof of the truth - we may well not like what prices tell us but they are still information.

Florencia is being forced to make a maddening choice between working and staying afloat. She and her husband employ a nanny to look after their two-year-old daughter, who has special needs, while they both work. “With the spike in costs, we can no longer afford [the nanny] so I have decided to take time off,” she tells me.

The labour of one woman is being used to look after the child, whichever way around this is done. Quite why there’s a societal interest in whether it’s Florencia doing the childcare or the nanny is something we don’t quite grasp. Or even, we’ve a way of working out what the societal interest is here. If Florencia’s non-childcare income is high enough to pay the costs of the childcare then that’s a net plus for society as a whole. If it isn’t then it isn’t. For, again, the starting set up is that the child requires the full time labour of one adult to care for it. The only question is whose - what is the societal interest in whose, that is?

“People still do not grasp this notion that if you invest in the childcare sector, you’re investing in the economy, because it enables people to work,” says Brearley. “What they think is: ‘My taxes are paying for your children.’ And that’s not fair.”

But run that through the Florencia Filter again. You are taking people away from other work to care for these children. In order for people to go out doing other work than caring for children. Only if the work being done not-caring for children is of higher value than the work being done caring for children is this a net plus for society. How do we work out what is higher value work? The income gained from doing the work. If that income supports the childcare then we have our proof that it is societally value add. And, in that cruelty of prices, if it doesn’t then we’ve our proof that it is not.

I know I’m not the only one who compares my wages each month with the cost of childcare, and wonders if the stress of juggling both, only to be barely breaking even, is worth it.

Those prices might well be saying that it isn’t.

But ask any expectant parent about the state of British childcare and you will settle upon a seemingly universal understanding: the system is woefully unfit for purpose.

After a Brexit exodus decimated staffing levels in nurseries, the pandemic quietly pushed the early years sector past the point of no return, and this winter promises even more hardship. Deliberate underfunding means providers have little choice but to charge astronomical fees, which have increased at a rate that far outstrips wages, to cover their own sizeable outgoings. And as energy prices rise, so too will costs.

That’s getting dangerously close to a claim that Brexit must be reversed in order to solve the servant problem. Which has, we agree, been something people have been complaining about for well over a century - the servant problem we mean, Brexit’s a little more recent.

We do entirely agree that there is a childcare “problem”. Children require care, so the problem is who should provide that? We also entirely agree that there’s no reason at all why it should necessarily be the mother that does so. But we do need a structure, a reasoning method, inside or with which to make the decision.

Where the work being done outside the nuclear family covers the cost of importing the childcare into the nuclear family then perhaps this should be done. Where it doesn’t it shouldn’t. As with absolutely any other discussion about home as opposed to market production of anything at all - cooking, laundry, floor sweeping, button sewing, lawn mowing, gutter clearing and all of the rest.

One added little extra piquancy here. It does seem to be those who demand more household production of all sorts of things - sew, make and mend rather than buying fast fashion, grow our own veggies on the allotment, slow cook at home rather than use the supermarket chiller shelf and on and on - who also demand that childcare should not be part of the household sector of production but must be moved over into the market sector. Which does strike us as odd, as the very reason for the household’s existence being the human economic unit is children and their long, long, raising periods.

But leave that grumpiness aside. We may well not like what prices tell us but they are information all the same. For some parents caring for their own children is higher value work than whatever it is they do in the office. Society as a whole is therefore richer - as it always is - if they do that higher value work.

We’ve our decision making structure that is - prices. We should use it.

How to solve climate change

Ms. Thunberg has invited some friends to tell us all how to deal with climate change. As we’d expect there’s very little actual thought here, more the repetition of previous positions. Very much a set of calls to do what the individual wants whether climate change exists or not, whether it’s a problem or not and whether that action would solve climate change or not.

Ms. Klein tells us to beat transnational capital (now, there’s a surprise, right?), Mr. McKibben to stop using fire. The health care guy says health care should be green, Mr. Piketty says tax the rich, a couple of climate justice folk say equity and justice is the solution and Mike Berners-Lee (no, not Tim, but Mike) says honesty in politics would be a good idea. We agree with that last one, obviously, even as we think it’s the least achievable of those desires.

None of these are specific to climate change. Mr. Piketty says tax the rich as the solution to the Sun rising in the East each day. Ms. Klein has become a transnational brand by railing against the brands created by transnational capitalism. And so on.

Our real ire, rather than just snide observation, is reserved for this from Greenpeace:

In our throwaway society, it feels as if we’re facing an avalanche of disposable plastic. One simple idea holds the key to turning this around: reuse. The practice was embedded for generations in so many cultures across the globe, yet the corporate world has made us forget those traditions and the value we place in objects that have taken natural resources and energy to produce. We need to shift to reusable packaging that stays in circulation – used, washed, reused and, crucially, out of the environment. The status quo simply isn’t working: we need to embrace the innovations that will allow reuse to flourish in the modern world.

This is not just the repetition of what Greenpeace would be saying anyway - recycle more! - whatever the subject under discussion it’s also, with climate change, often counterproductive. Assume, as they do, that we need to reduce resource use. OK, therefore we should recycle where that reduces resource use and not recycle where recycling increases resource use.

For example, we recycle must of the world’s usage of aluminium metal. Not because the ore, bauxite is particularly scarce, nor because alumina is difficult to source. But because that process of transforming alumina (Al203, or aluminium oxide) into aluminium metal uses some $1,000 per tonne or so of electricity. Remelting already extant aluminium uses perhaps $50 of electricity. So, what is actually recycled is that $950 per tonne of electricity.

Also, we calculate this by seeing that secondary aluminium - what the recycled stuff is called - is cheaper than primary. That it is cheaper shows us that fewer resources are being used. This is also why people like scrap merchants will pay for aluminium to be recycled. That is, our price system already tells us what to do here.

Just as we do not recycle the neodymium from hard drive magnets. Each hard drive might contain a few grammes of that rare earth metal, each magnet might therefore be worth - as pure metal value - twenty or thirty cents. The costs of a) pulling the magnet out of the hard drive and b) collecting enough of them in the same place to recycle them (we’d want perhaps one such plant per continent, continents are large places) are higher than that metal value. This is also - prices work, d’ye see, they’re information - proof that recycling hard drive magnets uses more resources more than digging up a bit more of Gaia to make primary neodymium.

So, recycle aluminium, don’t recycle hard drive magnets. We’ve already got that selection method of how to organise the world so as to minimise resource use.

Recycling those things that use more resources than starting afresh would do is known as being more wasteful of resources. But Greenpeace urges us to be more wasteful of resources in order to solve climate change. Not because it will solve climate change, but because Greenpeace always says we should recycle more - as with Mr. Piketty that’s their reaction to the Sun rising in the East each morning.

As to Mr. Piketty, of course he’s wrong here. The solution to climate change is innovation. Just everyone is saying that we need to change the way we do things. Great, that’s what innovation is. People who successfully innovate get very rich. This logic works the other way too - in order to encourage innovation we want to allow people to get very rich by successfully innovating.

It might even be true that taxing the extant rich is a useful place to go get money. But that inevitably damages the incentives to try to get rich by innovating. So, higher taxes on those getting rich by that desired green innovation is counterproductive, it militates against solving climate change.

But then we did pretty much insist, up at the top there, that everyone is talking their own book, promoting the bees buzzing in their own bonnets rather than actually trying to solve climate change, didn’t we?

Maybe Ms. Thunberg should have stayed in school so that she was informationally equipped to evaluate the ideas of her friends a little more?

In the end the bacon sandwich always wins

Ed Miliband clearly sees himself as the Rev Audrey’s Fat Controller. The working parts of the economy are to be moved around at his insistence and desire:

Last month, Labour’s shadow climate change secretary, Ed Miliband, called for such a cap in the Commons, citing the figures from the Tony Blair Institute and Onward. “Why would we leave this money in their pockets when it could help pay for the action on energy?” he said.

This is with reference to the profits currently being made by the renewable energy companies. One possible reason for not being all Fat Controllerish over these profits is that “their” there. It’s their money, not some giftie to be allocated as Mr. Miliband desires.

But then we agree that private property is such an antiquated, even archaic, notion these days. So we’ll need to go one step further in our explanation. The truth here being that someone famously outwitted by a bacon sandwich might not have quite enough - we emphasise the quite, for it is only a falling short, not an absence of - intellectual capacity to organise, manage and design something as complex as the economy of an entire nation. We would also emphasise, as with Hayek, that no one has that sufficient intellectual capacity. The best that can be done is to set up the system, not direct the details. Or, in the end, the bacon sandwich always wins.

So, the system. As Caroline Lucas has told us renewables are now nine times cheaper than fossil fuels. As we emphasied only yesterday, capitalists are both greedy and lazy. They’ll go for the easy profits every time. So much so that when large profits are available they’ll over-invest in an activity or sector, thereby destroying the profits and moving the value add over into the consumer surplus.

What is it that we actually desire to be happening here? In fact, what is it that Mr. Miliband desires to be happening? That folk move away from fossil fuels, that much, much, more capital be invested in renewables.

This being why we use marginal pricing of course. It is true that the costs of producing renewable energy have not gone up in tandem with the costs of producing fossil derived. Yet the sales prices have followed, leading to those massive profits. Which is exactly as we desire it to be of course.

To set up a little model - as with all models it’s illustrative, not correct. We have two ways of doing something, System A and System B. At one set of prices they’re about equally profitable to the capitalists. Now the production costs of System B rise, considerably, output prices from both System B and System A rise. Because we’re using that marginal pricing - all output is priced at the level sufficient to produce that last unit, here from that now much more expensive System B.

What happens now? Producers using System A gain vast, humongous, profits. Which, given the greed and laziness of the capitalists leads to a surge of investment in new System A production. So much so that eventually we gain all of what we desire from System A, everyone using System B goes bust and leaves the marketplace. The marginal producer is now a System A one and prices, determined by that marginal pricing system, collapse.

This is what all desire - or all putting heads above the parapet at least. More renewables, more investment in renewables and consumer pricing to reflect that reduction in cost. Great, leaving those - admittedly humongous - profits with the renewables producers achieves exactly that. In fact, our experience of human nature over time tells us that this is the most efficient method of gaining that desired outcome. Allow the capitalists to gorge on profit and watch as it gets competed away.

The only reason this won’t work is if renewables are not nine times cheaper than fossil fuels. But that can’t be true because Ms. Lucas has told us. Or, perhaps, one other get out, that given irregularity of output some portion of the system must always be fossil fuels - but then both Ms Lucas and Mr. Miliband assure us that that’s not true either.

So, we’re left with that intellectual outwitting. We’ve already set up the system - one with profits and market prices - to deliver the desired outcome. We’ve also harnessed human nature to gaining it. The only possible reasons for this not to work are because the would be Fat Controllers are wrong in their assertions.

Which does, of course, mean that we should ignore the Fat Controllers and depend upon the system that works.

Chief People Person

70 Whitehall

“Good morning, Humphrey. I see we have a new Chief People Person.” [1]

“I believe her title is Chief People Officer, Minister, and an excellent appointment it is too, if I may say so.”

“Have you met her?”

“Ms Ryland has a long line of people clamouring for her availability.”

“Her predecessor, Rupert McNeil, had the job for six years so I expect you know him well?”

“Well, I am sorry to admit to this but I have never met him either. The joke at the Oxford and Cambridge Club was that he never existed. Not, Minister, a very good joke.”

“Well, you are not really a people person, Humphrey.”

“Very droll Minister. Heading up HR for the whole of the civil service is critical for the whole future of our country. We have, as I am sure you acknowledge, the finest civil service in the world.”

“Of course, of course. Will our new Ms Ryland have charge of quangos too?”

“I take it you are referring to Non-Departmental Public Bodies? They are independent and employ public, not civil servants, so we have no responsibility for them. That would contaminate our core values which are, as you well know and admire, Minister, are ‘integrity, honesty, objectivity and impartiality.’ One way we achieve that is to get the incoming minister to reverse the decisions of his predecessor. That preserves the balance for which we are famed.”

“I’ve been looking through the Centrica annual report, Humphrey, and there are two whole pages reporting their Chief People Officer’s achievements. The 282 pages of ours do not even mention that we have a Chief People Officer.”

“Discretion, Minister, is the better part of valour. Senior civil servants do not appreciate self-aggrandisement.”

“You could have fooled me, Humphrey. Antonia Romeo seems to win promotion by flaunting her credentials. Anyway, I don’t understand why a Chief People Officer isn’t chief of the people; the Cabinet Secretary is.”

“Well yes and no, Minister. He or she may be but ‘the Civil Service Board (CSB) is responsible for the strategic leadership of the Civil Service’ and that is chaired by the Chief Operating Officer for the Civil Service.”

“OK but the Chief People Officer must be on that Board and driving things from there.”

“Well actually, under the civil service grade system, he’s not senior enough to be on the CSB but he does get a seat on some junior board reporting to it. He did read PPE at Oxford albeit at St Catherine’s. Good enough for the Club though.”

“And Fiona Ryland?”

“UCL, I fear, Minister. Nothing we can do about that but she has a challenge on her hands. Our press release said ‘Fiona will be leading our HR function at a time of huge change, as we work in partnership with Ministers to equip our people to deliver Civil Service reform.”

“Well, there are two things wrong with that. If the Civil Service is all you crack it up to be, why does it need reform? Secondly, as you so frequently remind me, civil servants do not report to ministers; the buck stops with permanent secretaries. And that’s you Humphrey.”

“Well, the last Chief People Officer never bothered me and I do not suppose this one will. As we say at the Club, ‘plus ça change, plus the same shows.’”

Hedge funds and Adam Smith

From Julian Robertson’s obituary:

In later years, Robertson said if he were beginning afresh he would probably avoid hedge funds. “People wonder why they aren’t doing better,” he said. “I think it is from increasing competition from other hedge funds.”

There is a time and a tide etc.

Or, as we can construct from Adam Smith, although in most un-Smithian language. Capitalists are both greedy and also lazy. Finding the Big New Thing is difficult.

Well, OK, there’s a parade of Big New Things past the door every morning. Finding the one that works is difficult. The one that works is the one that produces economic profit - a return over and above the normal and standard return to capital within that current economy.

Some capitalists, through work or sheer good luck, do find these new things. They then gain economic profit. The other capitalists, being both lazy and greedy, note then copy. Invest into that same sector, along very much the same lines. The competition is what drives the economic profit down - and sometimes below - that normal return in that economy at that time.

Economic profit is also known as “adding value”. The output is worth more than the costs of the inputs. Those inputs being valued at the prices of their alternative uses. This is exactly what we desire to be happening in the economy of course. We might not be so happy at the capitalists harvesting all of that economic profit but we’re still delighted that it is being created. For that’s what we all eat, drink and play with - value added.

The competition being the very thing which switches that economic profit rom the capitalists’ pocketbooks - in time - into the consumer surplus, the value add that we enjoy out here.

The maths of all this is in the Nordhaus paper, Schumpeterian Profits. But the simple truth of it is in that Robertson point. Hedge funds were wildly profitable in the 1980s and 90s. Now they’re not. The reason being that the capitalists saw those economic profits, saw that they were good, then competed them away.

All of which gives an insight into the value of this free market capitalism thing. We harness the greed and laziness of the capitalists to transform economic profit into consumer surplus. There’s a transition period, oh yes indeed there is, one where hedgies vomit money around London’s flashier quarters. But the end result is the same as with all other technological advances - we out here get richer.

More wetlands means more mosquitoes, doesn't it?

We have a tendency around here to point out that planning the economy, planning the world, is a difficult thing to do. They’re both complex systems with many moving parts, it’s near impossible to account for all of them in that one plan.

Which brings us to this particular problem:

Mosquitoes plague Provence in ‘unprecedented’ home-grown dengue outbreak

As warmer temperatures boost mosquito populations across France, experts believe it’s only a matter of time before it reaches the UK

Let’s work with the assumptions being made. A warmer world will mean mosquito populations move north (and south). Mosquitos can carry diseases like dengue, yellow fever and malaria. Yes, it requires that those exist within the human population to be picked up and then spread.

So, climate change is going to expand the areas where those diseases are a significant risk. We cannot, of course, use chemicals like DDT to fix this. Tsk, no, absolutely not.

So, so goes the mantra, climate change will kill many.

Except that’s not quite all of it. As varied investigations put it malaria was endemic in Britain for at least many centuries. The Fens, the Somerset Levels and so on, entirely infested with the agues which result from those diseases. The solution to which was, long before DDT, quinine or any actual chemistry, to drain those swamps and wetlands.

For the presence of the mosquito as the bug carrying and spreading the diseases depends not just upon temperature, the presence of the diseases in the human population, but upon those swamps and wetlands for the bugs to breed in.

So, now we can restate the current mantra. Climate change is going to increase malaria, dengue, yellow fever risk. To which our response is to increase the number of wetlands in which the mosquitos can breed in order to…..well, in order to what? We stop pumping the Somerset Levels so that Bridgewater and Glastonbury become fever ridden? Ely and Norwich should - once again - become the loci of agues?

If the construction about climate change and the range of mostquitos is correct then our response should be to drain the remaining wetlands. But public policy is to increase them.

It’s also possible to recall that malaria was endemic before climate change - therefore even if we solve that but still expand the wetlands it will come back anyway. So solving climate change isn’t the solution, draining the wetlands is.

It actually is public policy to expand those mosquito breeding wetlands too. As we say, planning that whole economy, the world, is a difficult thing to do. For public policy is currently hell bent on killing more of us. Quite why we’re not sure - not unless the Optimum Population Trust has more power than we think it does - but the fact is still there. Given the existence of mostquitos and dengue, malaria and so on, expanding British wetlands will kill people. So, why are we doing it?

If only the people at The Guardian could actually read

We’re told that:

More than 330,000 excess deaths in Great Britain in recent years can be attributed to spending cuts to public services and benefits introduced by a UK government pursuing austerity policies, according to an academic study.

No, this study did not find that. This study assumed that:

There is clear evidence of adverse changes to mortality rates in the UK from the early 2010s onwards: a slow-down in the rate of improvement overall, alongside increasing death rates among more socioeconomically deprived populations; inequalities have widened considerably as a consequence of the latter.1–9 These changes predate the COVID-19 pandemic and are important context for understanding the scale of pandemic-related inequalities.10 11

Although a number of different contributory factors were initially proposed, a considerable body of evidence now demonstrates that UK Government’s ‘austerity’ policies are the main cause of these pre-pandemic changes.12–17 This includes a recently published, large-scale, critical assessment of all the relevant evidence.18 Such policies—introduced from 2010 onwards, and following ‘the great recession’ of 2008—have removed billions of pounds from both social security and vital services, and have thus particularly impacted on poorer, more vulnerable, populations.10 15 18 Similar adverse effects of austerity measures on population health have been seen in other high-income countries.

This specific paper assumes that changes in mortality stem from “austerity”. The actual thing the paper is trying to look at is whether there is a gender aspect to this - the answer there being “dunno”.

A little memo to Guardian journalists. There’s a difference between finding that and assuming that. Quite a large one in fact.

It’s also possible to wonder about the assumption of course. For here’s the base idea:

Trends in age-standardised mortality rates were calculated, and segmented regression analyses used to identify break points between 1981 and 2019. Excess deaths were calculated for 2012–2019 based on comparison of observed deaths with numbers predicted by the linear trend for 1981–2011.

The claim is a link between government spending and mortality - or age of mortality perhaps. So, as this shows, govt spending as a percentage of GDP fell during the 80s, was low during the 90s, rose in the 00s and that much vaunted “austerity” didn’t lower it back down to the levels of the 90s and early 00s.

A link between government spending and mortality should therefore show the same sort of shape. It doesn’t. Thus the assumption that any change in mortality more recently is linked to the same changes in govt spending as a percentage of GDP is, umm, somewhat suspect, no?

But then asking journalists to understand the numbers behind politically convenient journal papers is asking too much, isn’t it?

To remind of O'Rourke's Principle of Circumcision

We are told the following in The Guardian:

Liz Truss wants to inflict more austerity on Britain – but there’s nothing left to cut

Rosie Collington

This is not, in fact, true. For look at the definition of what there isn’t to cut:

Britain now faces a real risk that its welfare state will become a “dual system”, where a sizeable chunk of care is provided by private companies in parallel with a public healthcare system. Some may ask why this matters – if we still have a public health service, what’s the issue with the rich paying for private healthcare? The problem is that dual systems of welfare exacerbate inequality and frequently undermine the quality of public services. Moreover, once the principle of universal free public services is eroded, it becomes more difficult to make the argument for their existence in general. The case for a welfare state begins to fray.

What Ms. Collington actually means to say is that there’s nothing left to cut if the country is to be run the way that Ms. Collington wishes the country to be run. Which is a less forceful assertion than that headline, that there is nothing to cut.

Of course there are things that can be cut. Things the state does badly, things the state shouldn’t be doing at all, even the costs of those things the state must do but currently doesn’t do efficiently.

To give just the one example. Cancelling HS2 would, if we were to allocate all the savings to the year of cancellation, take some 10% of govt spending, 5% of GDP, off the government portion of GDP. So, that’s our first year of 10% cuts dealt with easily enough.

To repeat PJ O’Rourke’s Principle of Circumcision - you can take 10 ten percent off the top of absolutely anything.

It's called expectations management

Just to point out to Polly Toynbee - and all too many others - the point of central bank intervention is not how much is spent. It’s the insistence that so much will be spent if necessary.

That is, what matters is what the markets think the central bank is willing to do - expectations management.

Markets are, after all, forward looking. Therefore if someone - someone believable - says so and so then that event becomes incorporated into market prices. This is why share prices move so much on management forecasts of likely future sales or profits - it’s not the immediate past that determines share prices, it’s expectations about the future.

which crashed the economy and sent sterling spiralling down and gilts soaring, costing the Bank of England £65bn to prop up pension funds.

The Bank hasn’t spent £65 billion. What actually happened was that the Bank stated that it is willing to spend up to £65 billion to gain a certain result. That willingness to do the spending to gain the result is what has, in large part, caused the desired thing to happen. Rather than the actual spend itself:

The Bank said yesterday it bought £22.1 million of long-dated gilts, bringing the total purchased to £3.66 billion in the first four trading days of the stabilising operation.

The £65 billion is made up of up to £5 billion a day over 13 trading days. The actual spend, after 4 days, is not £20 billion but that £3.66 billion. And if we take that £22.1 million (with an m) figure as being accurate then it does seem to be, well, rather tailing off, no?

This isn’t to say that everything is hunky dory, nor to prance with glee at the joyousness of monetary policy. It is though to point out that central banks work by expectations management. If they’re independent and the markets trust them to remain so of course. Failure to understand that means that monetary policy will remain a complete mystery - as, unfortunately, it seems to be for many people.

How naughty we are to disagree with Lord Deben

To be as polite as we possibly can be about this, it’s nonsense:

“The problem at the moment is that people just see this as an unending situation of increasing bills, and then you get some people who are foolish enough to say that because gas is so expensive, we ought to have more gas. As if the gas we produce ourselves is going to be any different from the world price of gas. It doesn’t change any of the arguments about fracking, or anything else, actually.”

It’s nonsense because it’s irrelevant.

That there is no world price of gas is one thing. That US price is considerably different from the German, for example. For gas costs money to transport therefore the price is - as Ricardo pointed out more than two centuries ago - equal across geography only after taking transport costs into account. Plus there’s an entire absence of the ability to transport enough gas to equalise the varied local prices across the globe. Which is why gas prices differ by geography by more than merely transport costs.

But leave all of that aside. What actually matters is that the British government would like to have more money. The British public would also like the government to have more money as long as it doesn’t come from their wallets. Producing gas domestically is exactly the way to square that circle.

Gas in Britain belongs to the Crown. Therefore domestic production leads to lovely resource rent payments to the Treasury. As we also derive from Ricardo resource rents should be taxed until the pips squeak.

The gas Britain currently imports produces such resource rent taxation to the Treasuries of Holland, Norway, possibly Russia and so on. If we produce domestically then those payments accrue to the Treasury on Horse Guards Road and then get spent on us. Or reduce the amount of some other tax that we have to pay to get whatever it is that we already do get. Britons, us, get richer through domestic production of natural gas.

And that’s why these insistences that fracking won’t change the price of gas are so much nonsense. Because it’s not even the point. What’s really relevant isn’t the amount of money but who gets that cash? If it ends up being us then we’re richer, right?

Even, to the extent that a lower tax bill for a given amount of government is a substitute for a lower heating bill, the domestic production of natural gas reduces the price of natural gas in Britain.