Economists Know More Than You Think

I was telling my colleague Danny Finkelstein about my new theory that the free market doesn\’t work properly when the real customers are those who commission a product rather than those who use it. It is, for example, businesses, not the householder, that choose the courier service that makes you stay in all day in case it calls; it is insurance companies, not patients, that are are private medicine\’s real customers. “Ah,” said Danny, “this conundrum is well known to economists. They call it the Principal-Agent Problem. There are whole chapters in textbooks about it.”

I felt as proud as Molière\’s Bourgeois Gentleman, enchanted to discover from an expert that quite spontaneously he had been speaking something called “prose” all his life.

Not all that unusual. You see someone struggling to a conclusion, working from first principles, and they then come up with the answer. And it\’s already there in the textbooks, they just didn\’t know that it was.

One example I like currently is all those greens, telling us that markets don\’t take account of externalities, that we have to make the cost equal the "real cost". Indeed, and economists did indeed note this a long time ago. Vast amounts of modern economic research is in trying to work out "how" to do this: it\’s already accepted that "whether" to do this is either useful or necessary (dependent upon circumstances).

EvoPsych and Markets

Very slightly confused here:

Market economic theory and simple models of evolution suggest individuals (or their genes) act to maximise their own benefit. But altruism is common, as apparently witnessed by festive gift-giving. The standard evolutionary explanation is "reciprocal altruism" (give me a gift and I\’ll give you one just as nice). One of the most widely used experimental setups to investigate the origins of altruism is the "ultimatum game". Two subjects are asked to share a cash sum of say £100. One of them (the proposer) decides the cut – who gets what. The other (the responder) can either accept the share offered or toss the money back in the proposer\’s face, in which case, neither of them takes any of it away.

They play the game only once, so there\’s no opportunity to develop reciprocal altruism. If the responder behaves entirely and rationally selfishly, he or she should accept whatever the proposer is prepared to give. But if the proposer offers less than £25, the other player tends to refuse the share and both leave empty handed. Most people are prepared to forsake personal benefit to punish selfishness. In the language of evolutionary psychologists, we are spiteful.

Now that\’s a reasonable description of the ultimatum game and yes it is true that humans seem to play it a different way from other animals. We are indeed spiteful when we don\’t get a fair deal. But there\’s an error there in the idea that market economic theory is based on the maximisation of our own benefit.

In one sense, it\’s true. In another not. It\’s commonly believed that each individual acts to maximise their own immediate self-interest: that is, that the economy depends upon a series of one time ultimatum games. Thus that one or oher party gets screwed in every transaction.

But actually, market economic theory is based, at least in part, upon Adam Smith\’s "enlightened" self interest. I take that "enlightened" to be a synonym for a recognition that it\’s actually a series of the ultimatum game: not a one off in each transaction, but a series of them with the same (or nearly the same) players over time. Thus the existence of behaviour such as spite, the idea of a "fair deal" which we will accept and an unfair one which we won\’t. No, Smith didn\’t couch it in the same language, of game theory and so on, but I do take the two explanations to be the same.

I thus end up with this piece of evopsych telling me not that there\’s something wrong with market economics, rather, that it\’s confirming one of the things that make such work. Precisely because we do have spite, precisely because we do look to enlightened self interest, not purely to short term self interest, that\’s why the whole structure works.

Worth a Giggle


These are South Africa\’s dispossessed, representatives of the millions of poor blacks who feel they have been left behind by President Thabo Mbeki\’s free-market economic policies.

What free market economic policies? A minimum wage that is vastly above productivity levels, meaning that 40% of the population is unemployed? The continuation of apartheid, in that race determines who is allowed to own assets? If only there were in fact a few more free market policies in South Africa.

Economics Bleg

Anyone with access to JSTOR want to send me a copy of this paper?

The Economic Theory of a Common-Property Resource: The Fishery;2-L

Update: OK, got a copy, thanks Noel!


Clive Crook on Oil

Once nearly everyone is convinced that the rise in prices has some real economic foundation after all, and not before, the whole thing goes pop. The pattern repeats over and over. A parallel suggests itself. When even the people who were worried about $40 oil have stopped worrying about $100 oil, it may be time to panic.

OK, accept the logic there. But the implication of it might be a little different. Instead of it meaning that $100 oil will in fact be a problem, doesn\’t it mean that, given that everyone does now say that there are real economic foundations to the high price of oil, that said price is about to collapse?

We are, after all, rumoured to be about to enter a global recession…..

Boosting Growth

I do have to wonder:

Gordon Brown plans to harness at least 20 of the world\’s biggest multinational companies, including Google and Vodafone, to tackle a "development emergency" in the world\’s poorest countries and put the international community back on course to achieve seven UN development goals by 2015.

As a UN report released today shows limited progress in hitting goals intended to tackle poverty, education, health and sanitation, the prime minister has been holding talks with the internet and telecoms giants as well as other international companies including Goldman Sachs and Wal-Mart in an attempt to find ways of increasing growth in poor countries

Yes, of course such companies can play a role in increasing growth in poor countries. WalMart, for example, by entering a market and revolutionising the distribution system (as it has done over the decades in the US), could greatly increase growth. It\’s actually tried to do so in India (I think I\’m remembering this correctly) but has been stopped from doing so by the Indian Government.

But trivia like that aside, what these companies can do to aid growth is to go there, invest, build things, sell their services, try to make money. Act, in fact, as they do at home: creating a product that people want to buy and thereby making a profit.

Although the prominence given to multinationals is likely to be controversial with parts of the development community,

Indeed, there\’s a very vocal part of the "development community" that insists that such companies should be prevented from doing exactly that. Why isn\’t all that certain: my own assumption is that they\’re either cretins or socialists: but I repeat myself.

Also worth noting Vodaphone there. There\’s actually a direct link between the number of mobile phones in a country and the growth rate. Looking at countries without a decent landline network it\’s (again, from memory) something like a rise of 10 per 100 of the population having handsets leads to a 0.5% increase in growth. Further, there\’s a direct relationship between how many competing providers of services there are and the penetration per head. So we can see a pretty simple idea forming here. Governments should issue multiple competing licences for mobile telecoms. Some still have single monopolies (Ethiopia, Angola, again, from memory).

The problem isn\’t with Vodaphone, it\’s with the host governments not allowing them to enter the market.

But this is the part of the press release that I love the most. It shows Brown\’s thinking so clearly:

Brown told the Guardian: "We are half way to the target date of 2015, but a long way off track to our goals and face a development emergency. 2008 should be a development year and mark a call to action from everyone – not just rich and poor governments but civil society, faith groups, trade unions and even the private sector."

We\’re talking about growth here, the creation of wealth. The moving of resources from low value uses to higher value ones (which is, after all, the very definition of growth). And we get "even the private sector"?

The truth is of course that the best method of getting that desired growth is to let the private sector rip. Remove the current barriers to capitalism red in tooth and claw. We could aid that ourselves by removing the limits placed upon imports into the UK. You know, allow people to buy goods made by poor people in poor countres, we know that boosts wealth.

It might even be something useful that the UK Government themselves could do: if we hadn\’t given the right to determine our trade policies to the European Union that is.

Most Odd

Dan Roberts does a column on confidence in the economy, the importance of it in fact.

But he doesn\’t mention the most famous economist to have commented upon the matter, Keynes, with his comments about "animal spirits".

Not important, just odd not to do so.

Calling Mr. Freedland!

Sorry Jonathan, but you\’re talking bollocks:

One could go further, arguing that it is not just excessive consumerism but capitalism\’s very nature that makes it incompatible with the survival of our planet. For capitalism requires constant economic growth, yet the Earth\’s resources are finite. Capitalist logic says we must buy, sell and consume more and more each year. Nature\’s logic says we can\’t.

There\’s nothing inherent in capitalism which requires constant growth. Nothing at all. If you start from here then you\’re going to get the rest of your argument tragically wrong.

Paul Krugman and Population Density.

Well, yes Paul:

Whenever I write about America’s lag in telecommunications — how we’re falling behind other countries both in wired and wireless networks — some people point out that we have much lower population density than Europe or Japan.

This is true in a literal sense, but largely irrelevant. Yes, there are vast open spaces in America. But hardly any of us live there.

That\’s, umm, sorta the definition of low population density, isn\’t it? Lots of space and not many people?

And the truth is that New Jersey is more typical of modern America than Crawford. In 2000, a sizable majority of Americans — 58% — lived in metropolitan areas with populations of more than a million people. Two thirds of us live in metro areas with more than half a million people.

The density issue isn’t entirely irrelevant. South Korea surged ahead in broadband partly because so many South Koreans live in easily-wired large apartment buildings. But there’s no excuse for poor network coverage in the fairly dense sprawl in which most Americans live.

Dense sprawl? Bit of a mix and match phrase there. But still, what about that urban density then? The Europeans are packed in two and a half times more densely, the Brits nearly four times.

Given that telecoms, whether mobile or land, have a very close relationship to population density, I still don\’t think you\’ve managed to blow off that concern, not yet.

D2 on Milton Friedman

They\’re always hacks, Brad. Always. Yes even Milton Friedman. The more independent-minded ones will occasionally come up with a liberalish or fair-minded idea or two, but this is purely for display, not for ever doing anything about if to do so would run the risk of a higher rate of capital gains tax. The ideological core of Chicago-style libertarianism has two planks.

1. Vote Republican.
2. That\’s it.


In Oliver Cromwell\’s eloquent words, "I beseech you, in the bowels of Christ, think it possible you may be mistaken" about the course you and President Bush urge us to adopt to fight drugs. The path you propose of more police, more jails, use of the military in foreign countries, harsh penalties for drug users, and a whole panoply of repressive measures can only make a bad situation worse. The drug war cannot be won by those tactics without undermining the human liberty and individual freedom that you and I cherish.

You are not mistaken in believing that drugs are a scourge that is devastating our society. You are not mistaken in believing that drugs are tearing asunder our social fabric, ruining the lives of many young people, and imposing heavy costs on some of the most disadvantaged among us. You are not mistaken in believing that the majority of the public share your concerns. In short, you are not mistaken in the end you seek to achieve.

Your mistake is failing to recognize that the very measures you favor are a major source of the evils you deplore. Of course the problem is demand, but it is not only demand, it is demand that must operate through repressed and illegal channels. Illegality creates obscene profits that finance the murderous tactics of the drug lords; illegality leads to the corruption of law enforcement officials; illegality monopolizes the efforts of honest law forces so that they are starved for resources to fight the simpler crimes of robbery, theft and assault.

Alcohol and tobacco cause many more deaths in users than do drugs. Decriminalization would not prevent us from treating drugs as we now treat alcohol and tobacco: prohibiting sales of drugs to minors, outlawing the advertising of drugs and similar measures. Such measures could be enforced, while outright prohibition cannot be. Moreover, if even a small fraction of the money we now spend on trying to enforce drug prohibition were devoted to treatment and rehabilitation, in an atmosphere of compassion not punishment, the reduction in drug usage and in the harm done to the users could be dramatic.

This plea comes from the bottom of my heart. Every friend of freedom, and I know you are one, must be as revolted as I am by the prospect of turning the United States into an armed camp, by the vision of jails filled with casual drug users and of an army of enforcers empowered to invade the liberty of citizens on slight evidence. A country in which shooting down unidentified planes "on suspicion" can be seriously considered as a drug-war tactic is not the kind of United States that either you or I want to hand on to future generations.

Some hack, eh?

Richard Gott on Venezuela

Good Lord, has the man learnt nothing in his life?

It sells a limited range of basic foodstuffs but would hardly justify the title of supermarket. Today, as everywhere throughout Caracas, powdered milk is in short supply, although no one knows for certain if this is the result of opposition manoeuvre and malice, or of government incompetence.

It\’s the result of fixing the price below the costs of production you dolt! If you force people to sell something for less than it costs them to produce it then they won\’t produce it. It\’s not a result of manoeuvre, malice nor even government incompetence. It\’s simply an iron rule of the universe.

Caracas has never been a "safe" city in recent decades, and some claim that the situation has got worse during the nine years that President Hugo Chávez has been in power.

Chávez believes that poverty is the root cause of crime, and that tackling poverty will solve the problem. Yet, while poverty rates have undoubtedly fallen, crime continues at a high level and some extra action will eventually be needed.

Sorry? You mean that Hugo isn\’t even providing order?

It is easy to denounce the levels of crime and corruption, and the incompetence of a government presiding over a revolutionary upheaval, just as it is easy to suggest that catastrophe may lie ahead.

Suggest? It\’s a certainty: you can tell because people are stupid enough to try and fix the prices of things below their cost of prduction.

The Chávez revolution remains the most original and democratic experiment in Latin America, and is clearly here to stay.

To stay you say? Let the oil price dip and Chavez is toast. If it stays high then he\’ll survive for a time, but idiot economics is idiot economics, however it\’s subsidised.

Not Sure About This

Here\’s the claim:

From the student ghettos of cities such as Birmingham to the new flats strewn along the quays of our Victorian docklands, a record share of UK housing stock is now owned by small private landlords indulging in the middle-class pastime of "buying to let".

Here\’s some numbers:

Table 6: Historical Owner Occupation Rates  
  1953 1981 1991 2001
All households 32% 43% 66% 70%
Over 65\’s n.a. 51% 58% 73%
      Source: ONS

It would appear that the rental market is still a great deal smaller than it was, historically. Now, it\’s possible that that 1953 number ( ie, 100% minus 32% owner occupied: 68%) was entirely State or council housing, but I\’m pretty sure it wasn\’t. While there was council housing from the turn of the century or so, and more after WWI, the great boom in it came after WWII I think. I\’m almost certain that the vast majority of that rental housing was in fact private landlords.

What killed that market was the imposition of rental control (not just pricing and "fair rents" but the whole tenancy arrangement ws grossly weighted in favour of the tenant). That was really only lifted in the early 80s, under Maggie: before that as a private landlord you really didn\’t have all that many rights over your property.

I agree that the numbers of private landlords are higher than they have been for many decades but this is not historically unprecedented, we\’re actually moving back to a world we\’ve seen before. One with a thriving (well, I agree there\’s a blip or two at present) private rental market, alongside social housing and owner occupation.  An older model, one that was killed off by an ideological hatred of the private landlord in the post war years.

Ragging on Richie

Here is Richard Murphy\’s comment on that Johann Hari book review concerning the Laffer Curve:

The New Statesman includes a brilliant article by Johann Hari called Cooking the Books. What it amounts to is a complete destruction of the Laffer curve principle, so beloved by the Right and invented by, as Hari says :

a group of men who were untrained in economics – and, as it happens, borderline-insane.

As he notes, the universally discredited Dick Cheney was one of those involved. He saw it:

presented in a simple, easily digestible form the messianic power of tax cuts.

There was just one problem. It was, of course, a complete work of fiction. Read the article. It’s well worth it.

As far as I recall it, Murphy claims t have a degree in economics. He must have missed that bit where they point out that the Laffer Curve is both obvious and trivial (for a given value of the word trivial).

A more balanced appreciation of Hari\’s piece is here, written by some godawful horrible classical liberal. One who seems to have stayed awake for that 5 minutes of an economics degre.

Fisheries Again

These people are insane.

"Why did we introduce discards in the first place? The reason that we did that is that we knew that stocks were going down.

"We have seen a recovery in cod in the North Sea in particular. That is good news and that\’s why we will pushing the commissioner in December for an increase."

He added: "We are confident we have a position that is backed up by science – that\’s the crucial thing."

But environmentalists say increasing the quotas is exactly the wrong thing to do.

Oliver Knowles, a Greenpeace campaigner, said: "We think it would be madness to increase the cod quotas to try to remedy this problem.

"The solution to over-fishing lies in a much more wholesale review of the fishing industry.

"If stocks of cod in the North Sea are returning then it is at its very earliest stage and one way to destroy that recovery is to send the fishing fleet back."

UK vessels landed 614,000 tonnes of sea fish, including shellfish, in 2006, worth £610m, a 13 per cent reduction in quantity on 2005 but seven per cent up in value.

The number of young cod in the North Sea has risen for a second year in a row, but the International Council for the Exploration of the Seas has called for a 50-per-cent cut on 2006 catch levels to sustain it.

Euan Dunn, fisheries expert with the Royal Society for the Protection of Birds, said: "The idea of calling for an increase in catches to reduce discards is so counter-productive.

"Massive efforts now have to be made to help the fragile 2005 year class survive to breed and fuel real recovery in the cod stock.

"The EU ministers\’ focus now needs to be totally on how to prevent these discardable fish being caught in the first place, rather than giving the industry a licence to catch more. Responsible fishermen know this, but you can\’t wake a man who\’s pretending to be asleep."

All of them, entirely crazed.

Fisheries are not the most complex of problems. They\’re a simple application of the Commons Problem. One which is, as we know, solved by apportioning property rights. Are they, in the face of this problem, suggesting the apportioning of property rights? No, they\’re not, ergo they are crazed loons, all of them, the Commissioner, the Government, Greenpeace and the fishermen themselves.

Err, No.

This isn\’t in fact, a sensible idea.

How do we weaken the link between socioeconomic status and health? One option, according to sociologists, is to build social housing in affluent areas.

Because we have other sociologists insisting that it is relative socioeconomic status that matters. And it\’s relative, not to some global or even national standard, but to one\’s peer group. Now, it does depend upon which effect is greater, but there\’s the possibility that by building the social housing where such relative differences are in fact highlighted, we\’ll be increasing the gap in health outcomes.

Jackie Ashley and Economics

Slightly sad that one of the country\’s leading commentators misses such an obvious point:

Sport and culture shouldn\’t be vying for funds.

Sigh. We have unlimited desires and we have limited resources. Thus, whether we are talking about tax money or private spending, different things are, have been and always will be, vying for funds.


Maddy, Maddy:

There are three big concerns on EPAs. First, every developed country has used tariff protection in its history to develop industry, but EPAs restrict that capability and could unleash a surge in European imports that could wipe out fledgling industries such as Kenya\’s dairy sector, as well as undercut prices of agricultural products. Second, governments themselves stand to lose a major chunk of their revenue that comes from tariffs; for instance, Zambia would lose $15.8m – the equivalent of its annual HIV/Aids budget. EU assurances that there would be aid to compensate only underline how this would increase dependency on aid. Third, the most complex and most important issue of all is how EPAs will affect regional trade. If you can get cheap widgets from the EU, why bother importing from your neighbour in Africa or the Pacific? UN studies have indicated that EPAs could lead to contraction in exactly those low and medium technology industries that are the basis for successful industrialisation.

I won\’t waste my energy trying to overturn your near insane belief that tariffs lead to economic development. But please, just try this. Joe Stiglitz (yes, the Nobel Laureate, the fellow Guardian writer, the go to guy on this sort of trade policy for the interventionists) pointed out in one of his papers on the subject that even if infant industry protection, import substitution and so on did in fact work, it would only do so if the rulers, the politicians and the bureaucrats, were wise, omniscient, incorruptibles.

This clearly isn\’t the case in Africa now, is it? So, as his paper then goes on to state, it rather makes all of these plans about developing behind such barriers rather moot, doesn\’t it?

As Dani Rodrik likes to say, we may often have to go with the second best solutions: as Africa is run by theiving hyenas, even if what you say about tariffs is correct, we still don\’t want industry being developed by such politicians, so free trade is still the way to go.

Frank Steinmeier

Frank Steinmeier is the German Foreign Minister. We have a certain problem on our hands if this is the level of his understanding of matters economic:

Nevertheless, Germany stands to lose more than any other country from any protectionist-minded retreat from globalisation. In the first six months of 2007 alone, the value of German exports nearly passed €500bn.

Look, exports are a cost to an economy, not a benefit. The benefit from trade comes from the imports, not the exports. If we approach all of this globalisation stuff from the wrong end then of course we\’re going to mess it all up.

Imports are what we want, they\’re the things that make us richer. Exports are simply the costs that we bear in order to gain the imports.

The US Economy

Only a thought here:

There is not enough demand in this economy, and there was a time when progressives called on the government to help supply it.

Err, increasing demand in the economy. As far as I remember there\’s really only one way the Govt can do this. Defecit spending. Is that really what progressives in the US should be calling for? More defecits?