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Economics

Mr. Ridley: oh dear

Now we know that Matt Ridley reads this at least sometimes. And we\’ve found out that he has a new book out.

In this book I have tried to build on both Adam Smith and Charles Darwin: to interpret human society as the product of a long history of what the philosopher Dan Dennett calls \”bubble-up\” evolution through natural selection among cultural rather than genetic variations, and as an emergent order generated by an invisible hand of individual transactions, not the product of a top-down determinism.  I have tried to show that, just as sex made biological evolution cumulative, so exchange made cultural evolution cumulative and intelligence collective, and that there is therefore an inexorable tide in the affairs of men discernible beneath the chaos of their actions.  A flood tide, not an ebb tide.

That basic idea being entirely reasonable,

However, naughty, naughty Mr. Ridley.

The conjunction of Adam Smith with \”an invisible hand\”.

Sigh….invisible hand appears three times in Smith\’s writing. Once about astronomy, the second I cannot remember and the third in the way that merchants prefer to invest at home rather than abroad. None of which are actually about that \”invisible hand\” that is currently used as a shorthand for the market.

You\’ll have Gavin Kennedy shouting at you soon enough you know.

The real problem with the euro

No, the real story behind the euromess lies not in the profligacy of politicians but in the arrogance of elites — specifically, the policy elites who pushed Europe into adopting a single currency well before the continent was ready for such an experiment.

Paul Krugman.

Do recall, the man has actually won a Nobel for Economics.

Update: about the idea that Europe wasn\’t ready but might be in the future: there are well respected economists who think that the US only became an optimal currency area in the 1980s….about a century after it started having one currency.

Book Tip

This looks fascinating.

Especially since you don\’t have to buy the book, you can just read the original papers.

The question being asked is of course the most important one in economics: and quite possibly in all of the social sciences.

Why are some places shitholes and some places not, given that we all started with roughly the same people, abilities and attributes?*

*Well, given enough time we all started out in pretty much the same place, Olduvai Gorge or some such.

What?

Supermarket giants Tesco and Asda dramatically increased prices on key items in the runup to Christmas in what an independent expert has called \”a systematic, cynical and aggressive attempt to exploit demand\”, a Guardian investigation can reveal. Batteries, lightbulbs, medicines, Christmas drinks and must-have children\’s toys were among essentials whose prices were increased.

No, tell me ain\’t so!

Prices respond to supply and demand? Jeepers, someone better write that up. Could be a Nobel in it for anyone who manages to work out the implications of this stunning fact. Might even be the opening of an entire new area of scientific investigation!

Professor John Bridgeman, the former director general of the Office of Fair Trading who conducted official inquiries into the supermarket sector, said that in his view the data showed \”a cynical attempt to exploit demand in the week before Christmas and force prices up\” and \”extract maximum profit\” from shoppers who were too busy to go elsewhere.

My, oh my. Isn\’t that just the most remarkable thing ever? Businesses attempt to maximise profits. Who would have thought? We\’re going to have to rewrite whole chapters of the textbooks there. No one has ever thought this could possibly be true before. Business operates purely out of love for their customers, doesn\’t it?

The two retailers did not challenge the accuracy of the figures we put to them, but rejected Bridgeman\’s interpretation. They said the majority of the increases we have identified were on products that were coming off promotion. Bridgeman described ending advertised promotional discounts in the busiest week of the year as \”cynical\”.

Ahahaha. Now, seriously, we did employ this bloke as the D-G of the OFT did we? He\’s not been replaced in retirement by someone from Pandora has he? Or the nef?

Jesus F. Christ. Are you sure we\’ve got to continue paying this knob\’s pension?

OK, OK, We\’ll be lenient. He can have it back again after he\’s read and understood this. It\’s from 1776 mind, wouldn\’t want him to have to deal with modernity in any manner.

Leggett again

They warn of an oil crunch: an unexpected crash in global production such that supply can no longer meet demand, even if China and India throttle back.

Dimbulb.

This isn\’t possible.

There is only the balance of supply and demand \”at a price\”. Supply of oil cannot meet the demand for it at $5 a barrel. That\’s why oil is whatever it is today….$80 a barrel? Something like that.

If lots more people want to use more oil then the price will rise further. If supply is more constrained in the future then the price will rise. Supply and demand will always, when prices are allowed their play in a market system, balance. For prices adjust to make it so.

Will Hutton really is a stain on society, isn\’t he?

Which is why David Cameron and George Osborne\’s attempt to revive a better Conservative tradition – liberal conservatism or red Toryism – is such a difficult and perilous project. They have to persuade their comrades that fairness matters; there is such a thing as society; market fundamentalism has screwed up; and there is no option but to use the state cleverly and purposefully to reform the broken structures of British capitalism.

It is a tough challenge because, apart from the odd tract, there is no canon of red Tory ideas from which to borrow. Liberal Conservatives don\’t have a John Rawls, Maynard Keynes, Joe Stiglitz, Amartya Sen or Michael Sandel to inform their thinking.

Liberal conservatism has no canon? There are none who might inform the thinking?

Wot? Adam Smith, JS Mill, David Ricardo, Friedrich Hayek, Alfred Marshall,  Schumpeter, Mises, Friedman, aren\’t enough to be getting on with?

Coase, Buchanan to give just a couple more Nobel Laureates?

What a miserable dribble of a weak effusion Hutton is.

New York Times economics fail

In a sidebar about the GDP figures:

\”The fact is, companies clearing out their warehouses boosts G.D.P., but doesn’t do much for those out of a job.\”

Something of a pity that the article itself is actually about how the restocking of warehouses boosts GDP…..and about how previous company clearing out their warehouses contributed to the decline in GDP.

Remember this when you next read an NYT editorial on how the economy should be run. At least some of the people at the newspaper really have no idea what they\’re talking about.

Environment Agency\’s inflation prediction

Interesting:

More than half a million homes are at \”significant\” risk of flooding and the cost of protecting them will double to £1bn a year by 2035, according to the latest data from the Environment Agency (EA).

Current spending is about £570 million a year. If costs remained static in real terms then that cost, at 2.5% inflation, would be a £1 billion in 2035.

Therefore the EA is predicting 2.5% inflation over the next 25 years.

Jeremy Warner: logic fail

Inequality between economies, and within advanced economies, has never been greater – witness this week\’s statistics on the widening wealth gap in the UK.

Fact fail first: inequality between economies has been falling as inequality within them rises. Fact fail second: the report mentioned says that the wealth gap is as high as it has been since WWII. That\’s not, as you might recognise \”ever\”.

But here\’s the logic failure:

So self-evidently desirable and beneficial are these pillars of the market economy that even China, after years of fighting them, is embracing them as quickly as it dares. But China wants the benefits, not the excesses, and so far, in this giant experiment in market liberalisation, it seems to be getting them.

Inequality in China is higher than it is here or than it is in any other major economy. So either China hasn\’t dodged this excess or inequality isn\’t such an excess to be dodged. Either of which make the contentions a little strange.

Osborne: he\’s going to be Chancellor in a few months and it\’s not going to be pretty

Osborne teams up with Richard Thaler: latest exponent of the drear conviction that we\’re all little idiot baa lambs and have to be driven into behaving properly. You know, managed, prodded, but all for our own good of course.

But perhaps most significantly, the crisis has finally put to rest the assumption, which underpinned Labour\’s entire system of financial regulation, that individual behaviour is always entirely rational…

Who has ever said that individual behaviour is entirely rational? That we attempt to be so, that we attempt to reach our desired goals in the best manners available to us given the information about the world that we have plus the inevitable imperfect information about the future, sure….but the leap to perfect rationality from that is something of a straw man.

and that market prices always reflect intrinsic values.

What? What in buggery are \”intrinsic values\”? If we\’re all the way back to Thomas Aquinas and \”true value\” then we\’re about to march off a very steep cliff. For there isn\’t and aren\’t any such things. The value of something depends upon the value of everything else: we cannot say that 1 kg of gold is worth $12,000, or x tonnes of wheat, or y tonnes of fresh water or z numbers of smiling babies, without having some idea of the relative values of fresh water and smiling babies. Which in turn depend upon the state of knowledge (medical knowledge tells us what our forefathers did not know, that unfresh water leads to definitely not smiling and in fact dead babies) and the state of technology (how much effort do we have to put into freshening water to get smiling babies?) and indeed where we are at any one time (less effort if we\’re by a clear mountain stream, more if we\’re on a boat out in the ocean).

Values are thus relative, always, all the time, not intrinsic.

We can just about side step this and go for a much weaker meaning of \”intrinsic\” which is \”what people think these values are\” but then by definition market prices are the average of what everyone does think these values are.

So we\’re not off to a good start here.

A classic example is the way that Gordon Brown\’s tax credits system was initially designed. Obviously, we are in favour of tax credits, but when the system was first introduced it was assumed that people would promptly inform HM Revenue and Customs of any change in their income. That must have seemed so plausible on a spreadsheet on the then chancellor of the exchequer\’s desk. But of course, as it turned out, people don\’t quite behave like figures on a Treasury spreadsheet, and as a result billions of pounds were lost on overpayments.

So if we recognise that people do not always act rationally, what does this mean for public policy?

Eh? What is irrational about keeping overpayments to you? At least once (and I think more than that) they\’ve been written off. So this behaviour is in fact entirely rational. You might have to pay the money back, you might not. So hang on to it and wait and see. You can\’t be worse off by doing so and you might be better off by doing so. This is rational action, not irrational.

That Osborne and Thaler (and of course Brown himself) cannot see that this is rational behaviour really rather bites at the arse of the idea that politicians are going to be more rational than we are now doesn\’t it?

They then maunder off into behavioural economics which is a very different thing.

So if we recognise that people do not always act rationally, what does this mean for public policy? This is where behavioural economics and social psychology – an academic field that has already garnered Nobel prizes for the likes of Daniel Kahneman – comes in. These disciplines are enabling us to develop a new approach to policymaking, based on empirical evidence about how people really behave.

Here is one example. Over the past decade, the UK government has spent billions of pounds trying to encourage households to become more energy efficient. These efforts have largely failed, but it doesn\’t have to be like this. In Sacramento, an energy company has harnessed the insights of behavioural science, and prints information on energy bills that allows households to compare their energy use with similar homes. This simple change led to a fall in overall energy consumption as homes using more energy than their neighbours quickly adjusted their behaviour to fit in with the norm.

In what way does this undermine the thought that people at least attmept to behave rationally? What you\’ve just done there is increase the information available to people, OK, great. But you\’re then still depending upon them acting upon that information in a rational manner, aren\’t you? You\’ve again undermined your assumption of irrational behaviour: indeed, the very success of this scheme obliterates that assumption as with new information people are acting upon it rationally.

Jebus, if this is how the Shadow Cabinet thinks then we\’re fucked, aren\’t we?

Behavioural economics is all very well (\”Hey, wow, you mean that\’s the way people actually behave?\”) but none of it leads on to the idea that people aren\’t rational within the bubble of their own desires and the information available to them. Nor to anything quite so medieval  as \”intrinsic values\”.

And most certainly not to the idea that the bloke who\’s good at kissing babies in Tatton is more rational than we are when faced with our choices about our lives.

That inequality report

Ooooh, there\’s lot\’s of fun stuff in here.

Figure 2.6 (a) for example.

After we\’ve adjusted for inflation (ie, set everything in 2008 pounds) we find that from 1968 to 2008, for men working full time wages for the have (arrived at by eyeballing the graph):

a) Tenth percentile risen by some 50%, from £200 a week to £300 a week.

b) For the median, risen by over 50% from £300 to £550 ish.

c) Top 10%, risen by over 100%.

So, for men working full time we have definitive proof: the poor have not been getting poorer. The poor have simply been getting rich more slowly.

From women\’s wages the results for the tenth percentile seem even better: around and about a doubling.

Figure 2.7 shows us something very similar to the Piketty and Saetz work on US incomes over similar periods. The huge growth at the top has been concentrated in the top 1%, even more so in the top 0.5% (and P&S shows even futher, the top 0.1% and even 0.01%.). This is presumably globalisation in action. (They have several interesting pages about this actually, although fail to note the globalisation issue.)

Oh, and, yes, as with the earlier posts, they do indeed deliberately fail to include State pensions in determining wealth at retirement age.

More on the inequality report

One technical point and a surmise.

The technical point:

Researchers analysed the total wealth accrued by households over a lifetime. The top 10%, led by higher professionals, had amassed wealth of £2.2m, including property and pension assets, by the time they drew close to retirement (aged 55-64), while the bottom 10% of households, led by routine manual workers, had amassed less than £8,000.

This includes housing and pensions as they say. And that latter figure is simply wrong.

For routine manual workers will have accrued a right to a State pension (as does everyone of course). Yes, the right to a State pension is an asset just as much as a private pension plan is. That pension is worth around £5,000 a year or so (ignoring the minimum pension guarantee etc) and life expectancy at age 65 is something like 15 years or so, isn\’t it? Ignoring discounting (simply because I cannot be bothered to work it out) that gives us a capital value of that pension of £75,000 (obviously less if I\’ve over estimated lifespan there).

So, anyone who has reached retirement age after even the most menial of working lives has an asset worth £75,000.

(If we include the minimum guarantee, even after not working all their lives too).

Now I\’m a little hazy on how housing benefit works for pensioners but I asssume that pensioners are eligible. And of course, of that bottom 10% a number will be living in subsidised social housing. Which again means that we\’re not comparing like with like. That £8,000 figure is simply wrong.

We\’re comparing the fully visible cost of housing (as in, it\’s bought and paid for) without looking at the value of housing subsidy on offer for those who have not bought and paid for it.

That latter value is of course the net present value of either the rent subsidy they receive through housing benefit or the housing subsidy they receive through social housing. That they can\’t sell these income flows and go and whoop it up down the pub as those with their own house can doesn\’t mean that they\’re not assets.

So technically the numbers used here are wrong. For they are not including the assets that the poor have.

Now the surmise: council housing produces wealth inequality.

For, as above, a goodly chunk of the wealth inequality as measured is ownership of property. If you cannot purchase housing, which if you live in a council place you cannot, this is going to lead to wealth inequality at the end of life. The one policy which would reduce this inequality most effectively would be….umm, well, to do what Maggie did, sell council housing to tenants.

So, who is up for that? Come on, all you peeps who will no doubt be using this report to bemoan wealth inequality, which of you is willing to argue for the simplest and most obvious policy which will reduce it?

Bueller?

Oh dear….

Maybe inequality and poverty in modern Britain are important and maybe they\’re not. It\’s entirely possible to argue it either way and to a large extent depends upon your Bayesian priors.

However, what is essential is that when arguing you understand what it is that youre actually talking about. Which some seem not to.

The gulf between the richest and poorest in society is at its widest since the Second World War, an official report has found.

We can start with the entirely contentious: properly understood that claim is nonsense. It\’s looking purely at the amount of money that people have (yes, wealth, not income, this is talking abouit stock, not flow). That isn\’t, over long periods of time, an entirely valid manner of looking at this question.

For over the past 70 odd years we\’ve had massive changes in the costs of things. Way back when, the difference between poverty and wealth would mean the the difference between having a refrigerator and not having one, having a car and not having one. Between having enough calories and not having enough. Sure, we have differences in wealth now as measured by money but those differences lead to having a cheapie fridge or a stainless steel Smeg, a Bentley or a crappy Ford Fiesta, and there\’s no one without mental health or addiction issues who cannot afford sufficient calories any more.

So while the money gap might be as large as it was again, the standard of living gap (which is probably a better measure of wealth) simply isn\’t.

There\’s also this:

  • Britain has one of the most unequal societies in the world, with income inequality ahead of Ireland, Japan, Spain, Canada, Germany and France. Inequality is worse in England than Wales and Scotland;
  • Poverty rates are among the worst in Europe, with only Italy, Spain and Greece faring worse.

Given the way we measure these things (and now we\’re talking about income, not wealth) that is actually the same thing being said twice. For here we define poverty as less than 60% of median income adjusted for household size. So a more unequal society will have a higher poverty level (not quite necessarily, but in practice, yes). But if you look at the actual standard of living of those defined as \”poor\” in, say, Spain, we find that Britain, as a richer society overall, does in fact provide a better standard of living than Spain.

Interestingly, the reason that inequality (and if we measured poverty in Wales, England and Scotland against individual national standards rather than the aggregate for the UK, which we normally don\’t) is higher in England is London. There\’s a huge disparity in incomes between London (and surroundings) and the rest of the country. This pushes up the median for the country as a whole. One interesting number is that average white collar female earnings in the NE are 60% lower than the same in London. But we don\’t adjust for the differences in the cost of living. So we get the quite absurd comparison of the average female office worker in the NE being defined as poor (as regards London, not the national average). And yes, this is worse in the UK than in most other countries foir London and environs is a much larger chunk, and a much more different chunk, of the economy than most other countries have as a concentration within their economies.

Wales and Scotland of course don\’t have such a concentration and thus their inequality and poverty levels, when measured more locally, are lower.

But here\’s where not making these distinctions starts to matter:

Brendan Barber, the TUC’s general secretary, said that while inequality “took hold” in the 1980s “even in recent years the best that can be said is that it hasn\’t got any worse”.

He added: “We have now tested to destruction the theory that wealth trickles down – it doesn\’t.

Well, actually Brendan, we\’ve not even looked at that in this analysis, let alone tested anything to destruction. The entire analysis is about relative positions. No one (except my first point above) has looked at all at absolute positions. The question we need to ask about wealth trickle down is not whether the poor have grown richer more slowly than the rich, that their relative positions have worsened (or not changed even). Rather, we need to ask, are the poor wealthier than they were in an absolute sense?

And of course they are indeed so. Absolutely no one at all would want to return to even the average living standard of 1945, let alone the living standard of the poor in 1945. In which case of course trickle down does indeed work.

It\’s certainly possible to argue that other systems work better, that that\’s not the point, that relative positions are very important. And some might disagree with such arguments. But what this analysis absolutely does not prove is that wealth does not trickle down…..for no one is even looking at absolute levels of wealth.

Jesu bleedin\’ Christe on a crutch

Raedwald has an interesting little catch.

Save the Children says that the minimum income necessary to not be in poverty for a couple with two children is £626.43 a week.

No, really, £626.43 a week post tax. £32,574.36 a friggin\’ year.

Now this isn\’t entirely accurate but it is indicative*. Average household income is below £30,000 post tax. In fact, only the top quintile has an income higher than this poverty figure.

That is, 80% of households in the UK are poor.

Well, at least we\’ve worked one thing out I guess from this stupidity. Redistribution isn\’t going to be able to solve this problem. We\’d need at least £200 billion (calculated by eyeballing, so sue me….yes, this does include already the taxes already paid and benefits already received) a year to bring all of the households in the bottom three quintiles up to this standard. That\’s more than the total post tax incomes of the top quintile.

There just isn\’t enough money out there to do it.

* It\’s not accurate because of course not all households are made up of a couple with two children.  But in the absence of my finding other figures it is indeed indicative.

On corruption in Italy

\”For as long as I can recall, sociologists and economists have made a connection between levels of corruption and prosperity. For a long time this seemed to be borne out by the rankings. Squeaky-clean societies such as Sweden, say, had high per-capita GDPs.\”

Erm, might be worth finding out what economists actually say about corruption really.

1) Yes, corruption is bad, it reduces economic efficiency and thus makes a place poorer than it would otherwise be (all that rent seeking etc).

2) However, over prescriptive regulation and a throttling bureaucracy are also bad for growth because they reduce economic efficiency (all that rent seeking etc.).

Which leads to the conclusion that *if* the bureaucracy and the State are too prescriptive then corruption, by by passing that logjam, increases economic efficiency even given the costs that corruption itself imposes.

For example, a general conclusion often reached is that corruption was the only reason the Soviet state of the 70s and 80s worked at all: it added to living standards. At the other end a place like Sweden is a very liberal and open economy (no, really, it is, whatever the tax levels) and thus corruption would be a diminution of economic efficiency because there isn\’t that bureaucracy stifling activity.

Where you put Italy on that scale is of course up to you…..but a number of the studies of the subject have said that at least mused that the Mafia style corruption of Southern Italy is an increase in efficiency, not a decrease.

Oh dearie me Mr. Stiglitz

Sad to see a Nobel Laureate mangling the numbers so:

With median household income already down some 4pc from 2000,

Now on the headline number of course he\’s correct. That is the published number. But we rather expect the giants of the economic world to tell us the truth, not simply repeat the government number.

There are three problems with this number.

1) Starting and finishing dates. 99/00 was the peak of the previous boom. 09 is of course the depths of the Great Recession. This is what is known in technical circles as \”being naughty\”. Peak to peak of trough to trough is fair enough but not peak to trough.

2) \”Income\”. The US definition is the cash income of the household. It does not account for benefits in kind. In most countries this isn\’t all that much of a problem. However, in the US, the vast majority of households get their health insurance as part of the compensation for their work. Thus \”household compensation\” is a better measure than \”household income\” in that country. And as you may have noted there\’s a certain sense over there that health care insurance costs have been rising faster than general inflation, faster than even income.Some figures I\’ve seen indicate that these costs have been rising by as much as 8% a year. And if health insurance comes to you as part of the compensation for your job then your compensation for your job has, in that part of it at least, has been growing at 8% a year (please note, this has nothing at all to do with whether other health care systems might be better or cheaper).

We can go a little further as well. Average health insurance costs in a high cost state can be around $20,000 for a family of four. Median household income is $52 k for the country (those high cost states tend to be those with higher incomes but it\’s also true that median household size is less than 4 people. So this is entirely indicative of the idea, not an actual calculation of compensation rises). So health insurance is some 40% of total household compensation but not of income, the way the Americans measure it.

8% growth over a decade doubles the sum. So that rise in compensation is really rather large (I would say that I\’ll leave this as an exercise for the reader as to how much but the truth is that this Sunday morning I can\’t quite bend my mind to working it out correctly).

3) Household size. The median household size has been falling since the creation of the Republic. It\’s gone from 5.9 to 2.4 (those are from memory, sorry) over the couple of centuries. Yes, there\’s a bit of it that has happened in hte last decade and, again from memory, it\’s not been a straight line decline, it\’s been accelerating in recent decades.

The point of all of this being that yes, it is true that median household income has fallen over the past nine years. But median compensation per head (the number we\’re truly interested in) has not. Which is why it\’s terribly misleading to use the median household income number as a measure of how well things are going.

Tsk Mr. Stiglitz, Tsk.

A small note on Haiti

Folks, no one \”made Haiti poor\”.

Certainly there have been actions by all sorts of people of right and left, thugs and even the well meaning, which have made Haiti poorer than it should be or could be. Everything from supporting grossly incompetent dictators to demanding reparations and stupidity about trade.

But the sort of poverty that Haiti is enmired in is not something that is made. This is the natural state, this $1 or $2 a day disgusting, foul, entirely a blemish upon us all, level of destitution is something which is the result of something not being made.

It is the result of wealth not being made. That may well have been the result of actions by all sorts of people of right and left, thugs and even the well meaning. Everything from supporting grossly incompetent dictators to demanding reparations and stupidity about trade.

But the basic point remains. They\’re in the Malthusian trap. GDP per capita is (at PPP) around $1,300. That\’s not notably different from England in 1600. Indeed, it\’s not notably different from England in 900 AD, from the GDP per capita in the Roman Empire.

Haiti\’s poverty is not something that man hath wrought. It\’s the result of what man hath not wrought.

In the longer term what they need is just what everyone else needs and has needed. Economic development. More factories, more trade, more, dare I say it, of that liberal capitalism stuff that dragged our own forefathers up out of the horrors of that $2 a day destitution.

Good old Guardian

Politicians want us to believe that it is possible to make better-off people richer without making poor people poorer.

Stunning that politicians actually are accused of holding a belief which is true.

Similarly stunning that The Guardian assumes that this is obviously not true.

The Guardian is stuck in that idea that the size of the pie is fixed. Which, of course, it isn\’t. It is possible to grow the pie.

Just as one example. Way back when, around the time of the start of the Industrial Revolution, the gini (a measure of the inequality of the society) was about 0.50 for the UK.

The unchanged gini (ie, before we consider the effects of the tax and benefits system) for the UK now is about 0.50.

Are the rich better off now than they were in 1750? I think the answer to that is obviously yes. Are the poor better off now than they were in 1750? I think the answer to that is similarly and equally obviously yes.

So, we\’ve got unchanged inequality of market incomes over the 259 years, the better-off are better-off (umm, obviously, making adjustments for the fact that no one at all is 259 years old) and the poor are not poorer.

It is therefore possible to make the better-off better-off without making the poor people poorer.

The mechanism is called economic growth.

Such a pity that the leading left wing newspaper in the country seems entirely ignorant of this fact.