Tuesday, 14 November 2017

Power Law Inequalities & Geniuses

In response to my recent Blog post on inequality, a friend brought up power laws and asked about their relationship with inequality. This is very apt at a time when we've just been subjected to a sub-standard piece of propaganda from the BBC called The Super Rich & Us - a recent programme presented by someone who doesn't understand much about economics, interviewing other people (some of whom were economists) who also don't understand much about economics. With a better understanding of the subject, they wouldn't have spent the best part of two hours utterly confused about most of the matters regarding inequality, power laws, living standards, supply and demand and consumption.

The relationship between power laws and inequality is largely built on society's revealed preferences, but there's a little more to it than that. Power laws do lead to concentrations of wealth falling in a small proportion of the population's hands. But they are nothing much to worry about: they are to be expected because in a free market where goods and services are freely exchanged for money, the rate of consumption always exceeds the rate of service for an individual.

In other words, there are more ways for Jack to procure goods and services from other providers than there are ways for Jack to provide goods and services to others. Whether you're a lawyer, a taxi driver or a circus clown, you earn money providing a particular skill to your customers.

But the money you spend (at Tesco, on Amazon, at the hairdresser’s, at the garage, etc) goes in multiple directions. Lots of people want food, books, a haircut, fuel, etc, so concentrations of wealth fall in the hands of large-scale providers, who are a small proportion of society, relative to the number of consumers.

(By the way, point of technicality, even consumers are providers in that their consumption provides producer surplus for other providers, but that’s not central to the point being made).

So you can hopefully see why power laws exist, and also how wealth can be concentrated in a few hands very quickly. To give you a much simpler illustration than something as complex as UK society; suppose 20 people are put on an otherwise uninhabited island with treacherous weather conditions. They have to stay on the island for one year, and each inhabitant is given 15 tokens a day with which to buy food from a delivery helicopter that lands every day at noon. What they don’t spend on food, they keep, and at the end of the year whatever tokens they have saved can be exchanged for £3 per token.

During their stay it emerges that there is an expert in building safe, warm tent sheltering from the natural plants. For a fee of 350 tokens per person, payable over the next 50 weeks, all 19 of the other inhabitants can have a tent built for them, thereby enjoying warm, dry and safe nights of sleep for their island duration. At the end of the year our tent building expert will have seen a significant concentration of wealth in his hands, at the expense of the other 19 islanders, but they will have enjoyed a year’s worth of tent-related benefits.

That’s a very simple illustration of a much wider phenomenon that is going on across society, where innovators, writers, musicians and hugely successful business owners are the beneficiaries of these power law transfers. Nobody would have any difficulty seeing a just power law inequality in my island scenario - but yet when the situations apply to real business goings on in society, preferences, they don't seem to get it. To the extent that most inequality is the result of an aggregation of society's revealed preferences - inequality is one of the most democratic of all human phenomena.  

But if you take society as a collection of individuals, you’ll find another important trend that plays out in power laws: there should be a continual natural trend towards progression and improvement. Here's what I mean.

Humans are generally working (either together cooperatively or independently) to make their own lives better, and despite exceptions, this engenders an inclination towards making the world a better place, whether it’s through all the benefits of trade, innovations with which we are continually seeking to improve products, technology and new designs, or lest we forget, the numerous formal institutions that (with mixed results, but generally more pros than cons) make laws and implement regulations that are thought to make society a better place to live.

Because the nature of trade and work constantly involves tweaks, improvements and innovations here and there, and further multiplied both across society and in a fairly linear fashion across time, we have a situation where (despite obvious peaks and troughs and chaotic anomalies and degrees of randomness in the system – world wars, financial crashes, tsunamis, etc) there is a fairly inevitable (or at least high probability) and stable trend of human progression built into the system.

And it's this trend that's another catalyst for generating inequality - the fact that nature is not very democratic (looks, size, shape, talents, intelligence, sensory apparatus, opportunity and background), and therefore it is expected that there won't be equal outcomes. There is a notable difference in all of these human qualities in each of us, as their attainment depends on undemocratic things like fortune and pursuit, as well as hard work, skill and application.

Consequently, then, inequality has a lot do with the fact that humans are tenaciously trying to improve themselves, and the fact that progression is in our blood - it is not just an inevitable part of our journey, it is an exhibition of how influential and advancing our species can be - particularly when you factor that into this observation about human beings.

Wednesday, 8 November 2017

Here's Someone Who Should Know Better!

Having once read Daniel Kahneman's very good book "Thinking, Fast and Slow", and being no stranger to Thomas Nagel (you know Thomas Nagel, the writer of the hugely famous "What Is It Like To Be a Bat?" essay), I was interested to stumble on Nagel's review of the book here.

It's generally a good review, but what struck me from Nagel's review is the bit where he gets on to economics, and in that section makes the audacious claim that a 10% chance of $1,000 is better than a 50% chance of $150. This is a basic GCSE-type error Nagel is making, because one of the quintessential tenets of economics is that we don't get to say what other people value, we let their own decisions provide the signals.

Mathematically it's certainly true that the value of such choices is possible outcomes x probabilities, and economics doesn't disagree with that. But there are no grounds in economics for claiming that a 10% chance of $1,000 is better than a 50% chance of $150, because 'better' depends entirely on the individual's trade off of expected value when measured against the risk.

If Betty is pretty well off and has no disposable income issues she might well prefer a 10% chance of $1,000, in the knowledge that she can treat herself to something nice if she wins, but not worry at all if she doesn't. On the other hand, Joan, who is struggling to pay her food bill this month would be well advised to go for the 50% chance of $150 rather than just 10% chance of $1,000, as the higher probability of $150 is of much more immediate value to her. This is basic stuff, and Nagel should know better.

What Nagel is missing, so it would appear, is that in economics rational expectations theory is not the same as expected utility theory - even though he is talking about them in the same breath. Expected utility deals with already extant probabilities, whereas rational expectations are about decisions and outcomes where interaction generates probabilities and explains why they are so.

The above decision regarding the money is not about expected utility, it is about a forecast of value measured against risk. For that reason, it would not be at all unnatural for two different people to be faced with the same probabilistic circumstances, yet perfectly rationally opt for different risks, based on the immediacy of their need.

Sunday, 5 November 2017

Extending The Corbynomics Sham To 16 Year Old Voters Will Harm Them, Not Help Them

Talk about being subtle: the left wing parties, led by Labour, treated 16 years olds as electoral chattel by pushing for them to have a vote in order to improve the number of seats their party has in the House of Commons (people of that age tend to vote for more left wing parties).

Unsurprisingly, as it would disadvantage their own political standing, the Tories filibustered the debate, meaning that there was no time for a Parliament vote on whether to lower the voting age to 16.

It was a squalidly transparent claim of Labour to want to 'empower' young people - no one was falling for it. But this does bring to bear another important factor in how young people embracing left wing economics and the promise of free sweets are going to one day pick up the bill for all the fiscal irresponsibility they demanded in their youth - nicely illustrated in one of the most iconic (and multifariously applicable) images of our generation:
The young people who are trusting Jeremy Corbyn's ludicrous magic money forest economic policies do not seem to realise that the government must raise taxes in the future on the very people they are trying to help now. It's a bit like buying your son a games console on his 14th birthday but then telling him he only gets to play on it if he pays for it on his 21st birthday. At no point along the way can this boy think of the games console as a free gift.
At the moment Corbyn wants to defer increases in taxation (for anyone earning up to £80,000 pa) by borrowing. The economics behind what I'm now going to tell you is more complex than my simple illustration, but not in any way that alters the efficacy of the generalised arithmetic. Suppose Corbyn wants to tax you £100 to help wipe out student debt. Here are some possible scenarios (figures rounded for simplicity):
Scenario 1: Corbyn taxes you a £100, which you remove from your £1000 savings account, leaving £900. A year from now, your bank account has grown (at 10% interest - again for simplicity) to £990.
Scenario 2: Instead of taxing you, Corbyn borrows the £100. This leaves £1000 in your savings account, which grows to £1100 a year from now. At that point, Corbyn taxes you £110, leaving £990 in your bank account.
Scenario 3: Corbyn taxes you £100, reducing your bank account to £990. Then he lends you the £100 back at 10% interest, raising your bank balance to £1000, which grows to £1100 a year from now. At that point Corbyn demands repayment of his loan, so you fork over £110, leaving £990 in your bank account.
Note that despite some complex tweaking of the knobs to adjust for real values over a lenthier execution time, all three scenarios bear out on the taxpayer no differently - the only major factor at play is the time that it is recouped. In other words, Helen the student who wants all her free sweets now is going to pay for them later in life anyway in ways that will esacape her naked eye.
The government is merely a representative agent of the taxpayers, and politicians are a bit like magpies - they steal from the shiny objects of enterprise to line their nests (magpies don't really do that - but it's part of popular mythology) - in that any good things that politicians can do for citizens are done as the result of extrapolating from the fruits of other people's labour.
Raising taxes depletes our present day assets, and increasing borrowing to pay for Corbyn's short-sighted policies depletes our future assets and only defers its main damage to a few decades' time when Jezza is a distant memory. No wonder Corbyn loves these policies - he'll be long gone when the voters that love them most end up feeling the costs.

Friday, 3 November 2017

Everything You Should Know About The Housing Crisis

The housing situation in the UK would be laughable if it were not so saddening. Put simply, the housing crisis is almost entirely caused by the politicians that govern us - but what makes it even worse is that these politicians are trying to fix the problems they've caused with policies that add harm to the crisis that is already the result of their interference.

That doesn't sound ideal.

No, it's rather like if a bad driver knocks a cyclist off her bike and then tries to administer very inexpert first aid, but in doing so gets in the way of the ambulance crew trying to get to the scene of the accident.

I see, tell me more. What exactly is the housing crisis in the UK?

The housing crisis is largely made up of one twofold problem: there is a shortage of affordable housing. That is to say, there are not enough houses to match demand, and because of this the available housing is too expensive for many young people to afford.

And why is this the fault of politicians?

The shortage occurs because the government specifies rigid building standards, restricts the use of land that can be built on, and subsidises mortgage borrowing (all these policies push up the cost of housing and create a scarcity of suppliers). Due to inflation and planning restrictions, politicians continue to cause the huge rise in property prices, as they ensure that supply cannot meet demand.

So, then, what can be done to rectify the situation?

If demand is high and supply scarce enough to cause a drastic shortage, the obvious solution is to deregulate some of the brown/green land prohibitions and allow the natural forces of the market to bring supplies closer to demand. One of the ineluctable laws of economics is that if demand increases and supply decreases or remains unchanged there will be a higher equilibrium price to account for the scarcity of supply. So for example, younger prospective house buyers find it harder to obtain an affordable purchase, and people renting property or even just a room find that a larger proportion of their income is going on rent. Also, when claimants of housing benefits constitute a greater part of the market, rents are hiked up. As a corollary, higher rents engender a surge in buy-to-let investments, which forces up house prices, which comes full circle in justifying high rent.

So it's a kind of negative spiral?

Yes, but with an obvious solution. If renting out property is hugely profitable, and housing restrictions are relaxed or in some cases lifted, then investors will look to build more property in order to generate more profits. If lots of investors do this then housing supplies will increase, demand will lessen, and prices will be brought down.

Yes, it makes sense - I can see why it is important not to artificially restrict supply.

Indeed, but restricting supply is only one part of the problem our politicians have caused - the other is much more subtle, but arguably even more damaging to the housing market.

Oh, what's that? I'm intrigued.

I thought you would be. I am talking about the government's injection of extra money into the economy and how that negatively impacts people's purchasing power through money devaluation. A look at the housing market and the difference between old and young people will show this. For young people the cost of getting on the housing ladder has risen to reflect all the additional money that has been put in circulation.

You mean that older people got to buy their houses prior to this, so they benefit from higher house prices that are now disproportionately higher than they originally paid?

Yes, spot on. All the ways the economy is devalued, through printing money, through excessive borrowing, and through deficit spending, society is being turned into part Ponzi scheme part credit-pumping pyramid scheme where those nearest the new currency gain the most and those furthest away from it lose out, because by the time all this extra money reaches them it comes in the form of higher prices, which are reflected in higher house prices, where in places like London, where demand far outweighs supply, housing is unaffordable for most people in the UK.

Thanks for the explanation.

You're welcome. A fact from Dominic Frisby's article in The Guardian might interest you:

"Between 1997 and 2007 the housing stock grew by 10%, but the population only grew by 5%, and house prices rose by more than 300%."

Golly gosh!

Quite!! This shows quite clearly that supply and demand are out of whack here, and much of it is to do with the whopping increase in the supply of money that’s in circulation, coupled with frivolous lending. House price inflation has gone out of control as more and more mortgages are issued and more capital is created in the form of 1s and 0s on a bank computer. Cheaply created money ensures that there are bubbles, and societies built on easy debt are going to burst, as was the case in 2008. Once you add in all the loose lending from abroad and include those vast sums of money that flood into our housing market, you see that even though there is lots of new housing being built in our major cities, house prices are still unaffordable for the majority of young people. Couple all that cheap money with the very restrictive planning laws we mentioned and it’s a recipe for inflated prices, making a heavily regulated building sector the preserve of a small group of wealthy suppliers.  

You also mentioned that politicians are trying to fix the problems they've caused with policies that add harm to the crisis. What did you mean?

Oh yes, so I did. Having seen how the state has caused the housing crisis by the toxic combination of starving supply and devaluing currency, making houses both in short supply and more expensive, let me mention two government policies that have been tried as a method of easing the housing crisis, but for what ought to be fairly obvious reasons, have worsened it.

Let me guess - something to do with affecting supply and demand?

You're learning fast. Yes, the first is their help to buy scheme, which comes in the shape of government equity loan and mortgage guarantee schemes. The problem is, while regulations are not relaxed, perpetuating the supply-side problem, the help to buy scheme simply increases house prices and while raising affordability for the signatories, makes house buying even harder for everyone else.

What else?

Another terrible idea is rent controls, which although thankfully have not happened in the UK in recent years are an issue in other countries, and are a favoured policy of some of the opposition parties, not least the aspiring Prime Minister Jeremy Corbyn.

What's wrong with rent controls? They are looked upon by some as an answer to the affordability problem for tenants.

Alas, as with help to buy schemes, they have the opposite effect though. Rent controls artificially lower the price of renting an apartment to below the market rate. That’s a terribly bad idea. The consequence of this economic short-sightedness is a housing shortage. When the government makes rent artificially cheaper it means landlords want to rent out fewer units than they otherwise would.

So the long term vision of having more affordable housing for people will also be compromised with artificial rent controls?

Yes, think about it this way. Suppose you’re a property developer looking to spend millions of pounds building a huge apartment complex in a major city – and let’s say you’re thinking of either London or Auckland. Suppose London has a rent control policy and Auckland doesn’t, and all other factors are equal – you’d head straight off to Auckland to avoid developing apartments in a place that makes you charge below the market rate to rent them out.

Yes, I can see that.

This also knocks-on to affect economic growth too, as entrepreneurs will be reluctant to locate to a country that artificially induces goods and services to be priced below the market level.

Got it.

And here’s another way rent controls create shortages – they disincentivise already available rooms from being rented out. Suppose you live in Lambeth or Pimlico and you have a room to rent. If the state-induced rent control places the room at 70% of the value you place on it, you may well decide to leave the room unoccupied and use it for storage or an office instead. Every time a decision like that is made the government effectively eliminates hundreds of units from the rental market.

I guess rent controls would also lower living standards too?

That's right. If landlords have to artificially lower their profits they will be tempted to lower their own standards in order to cut costs and make up for their losses. They will be disincentivised to maintain properties in the way that they would if they were being paid what their rooms are worth. The consequent effect is that re-wiring isn’t done as frequently; general repairs are scarcer; utilities don’t get replaced when they begin to show faults, and the neighbourhoods (from gardens to graffiti) are cared for less. You may think that cutting corners to engender shoddier living standards won’t be tolerated by clients, but that won’t be a problem for landlords. With artificially low prices they will be able to fill their shoddy rooms twenty times over.

So help to buy and rent controls are bad ideas, what then can be done to help?

Relaxing regulations and loosening the brown and green belt zoning are key things that would be a big help. To understand why this is so important, let me give you an idea of how the land lies (pun intended) at the moment. The UK is 60 million acres in size, and the population is 65 million people, which equates to just under 1 acre per person. However, the land is not divided up to equate to 1 acre per person. Less than 1% of people own 70% of all the UK land (mostly comprising Aristocrats, Baronets and the Landed Gentry). Yet the average Brit lives on 340 square yards which totals about 8% of the entire land, which would translate as 12.5 people per acre instead of 1 person per acre.

Yep, it's obvious to anyone who has ever flown over the UK in a plane that there is plenty of land available to be built on.


And most of it non-green belt land too.

Yes again. To those who assert that Britain has reached its capacity on how many more people it can fit in - it's just not true! Last I heard the UK National Ecosystem Assessment (NEA) worked out that the proportion of England's landscape that is built on is a mere 6% (in fact, once you include parks, allotments, and domestic gardens into that equation, the actual figure is more like 2.27%). Or to put it in an even more compelling way, excluding parks and gardens, if we were to quadruple the size of every city, town and village in the UK, it would still be the case that just over 90% of UK land is not urbanised.

Now obviously I'm not saying that every bit of non-urban land can be built on - there are important areas of natural beauty, there are mountains, rivers, canals, lakes and reservoirs; and there is important land for farming, horticulture and silage, but the mere suggestion that the UK is overcrowded, and that we are full, is frankly ludicrous, and ought to be put to bed right away!.

Some cities are cleary overcrowded though, aren't they?

Don't make such an assumption - you have to understand why cities have so many people in them. Rural areas are quieter because fewer people like to live in them - and house prices are very expensive in bust cities because more people want to live there. It's simple logic - the reason London has 8.6 million people and rural towns have only a few thousand is because more people prefer to live in London than they do rural towns. The reason being, not only is there is a greater abundance of the aforementioned benefits in more populous areas, there are also better career prospects, higher salaries, better nightlife, greater choices of restaurants, a richer choice of entertainment, more tourist attractions, better public transport, greater diversity of people – the list goes on. 

But yet in terms of probability, the highest number of complainers of over-crowdedness will most likely come from a highly populated area, which probably explains why to them the UK feels overcrowded.

Most people who pontificate on overcrowding are likely to be pontificating from a vantage point of high population density. The people with the highest probability of feeling an intense population density are those who live in the densely populated areas. For example, if city x has 7 million people and a village y has 1000 people, and only x and y exist, there is only a 1 in 7000 probability that you don't live in city x.

What, so this means the UK is not overcrowded? I don't get it.  

The mistake people are making is that they are trying to average population density of people instead of averaging over square miles. You can't get a proper picture of the UK's people to area ratio by counting how densely populated a populated area is - the only way is to assess how densely populated the average square mile would be when considering each square mile as a weighted average of total population and total area. A tube station in the rush hour can be overcrowded; so can a concert venue without proper door control - but as you suggested, take a trip around the UK by plane and look down, and for the most part you won't see crowds of people, you'll see fields and woodlands.

Ah right, so the measuring method is dodgy?

It's far from ideal because it's quite misleading. The rate of urban areas in relation to square miles is vanishingly small - there is potential for literally millions more people living in the UK. Of course, just like all sensible immigration policies, a nation must ensure it has the schools, hospitals, roads, etc to support more people, but given the myriad qualities and benefits one distils from living in places like London, that ought to be something that's greatly encouraged.

Yeah, it certainly is the case that in some areas of the UK the infrastructure hasn't quite kept up with population demand.

True, but once you accept the general maxim that more people means more cultural and social benefits, it's easy to see that inadequate facilities does not mean the nation is overcrowded, it simply means that the UK infrastructure has not progressed conterminously to facilitate the social and cultural benefits that come with an increased diversity of people."

While we are here, I'd like to talk about something else please - London house prices. 

Oh yes.

Hardly a day goes by without hearing someone complaining about London house prices.

I think London is a fantastic city - far and away the best in the UK. A lot of other people agree, and because of that they want to live there. Such demand means London house prices are high, but that's not bad for society.

It sounds like a bad thing if you want to live in London.

Yes, but we are talking about society as a whole, not just people who want to live in one city. The negatives of high house prices for buyers are offset by the positives of high house prices for sellers. There is no net loss for society.

But lower prices benefit society, right?

They benefit buyers but those benefits are offset by costs to sellers. Low prices are a benefit to consumers in one principal way - when they cause consumers to buy more of what they want. Consider a large Domino's pizza costing £12. If you buy a Domino's pizza for £12 you are signalling that you value it more than the £12, otherwise you'd buy something else.

Yes, no disagreement so far.

Right, now suppose you value a £12 large Domino's pizza at £15, the £3 difference is what is known in economics as your consumer surplus. If Domino's makes £7 on the pizza (their producer surplus) then society has a net value gain of £10. That applies to anything – cinema tickets, washing machines, clothes, DVDs, and so on.

Now suppose the price of a Domino's pizza falls to £11 and Domino's producer surplus drops to £6. Nothing has changed in net terms because Domino's loss is the customer's gain. But something else does change. What then happens is that more people are willing to buy Domino's pizzas. All the people who were willing to pay £11.50 for a pizza didn't buy one when they were £12, but will now. All these extra purchases create more consumer surplus, which creates more societal value. Remember Domino's gains too because they sell more pizzas (the very reason businesses cut prices).

Why doesn’t the same thing happen with housing?

The key difference between Domino's and housing is that Domino's don't have a fixed supply of pizzas - they can make as many as the demand necessitates. Housing supply increases are severely restricted by regulations, bureaucracy and influential lobbying groups (as we've already discussed), which means even a theoretical drop in property prices couldn't benefit consumers in the same way lower pizza prices could.

The upshot is that by and large the properties go to people who most value owning property in London. People with alternatives to living in highly priced London will take those options, leaving in most cases the people in London who most value living there. Moreover, as demand to live in London drives up prices, much more prudent use is made of the limited space available. Not only do prices that rise with demand ensure the best allocation of residents to the fixed number of properties, it also ensures that the best use is made of the land.

It's our old friends supply and demand again.

It sure is. The primary cause of London's housing problem is overly-stringent regulations that starve supply in an inelastic market (the inelasticity being the limited supply of land). London is the main place where the demand to live there is hugely greater than the supply-side availability, not least because the supply is limited to a 1500 km2 area, whereas the buyer-side demand comes from anywhere in the world, and not always from people who want to buy those properties to live in.

Perhaps the government should try to alleviate the problem by restricting London house buying to UK folk?

Definitely not, because stated another way, it is tantamount to banning foreigners from buying property in our country, which would be a wholly oppressive and foolish thing to do.

But there are too many properties sitting empty in London because foreigners are simply buying them as assets, not as places to live.

Do you know how many empty properties there are that are owned by foreign investors?

No, not off hand.

Then how can you say there are too many if you don't know how many there are? Look, I know all those buyers who purchase properties in London as an investment but have no intention of living in them make many of you mad. But the reality is, there are not thousands of London homes sitting empty while at the same time there are thousands of people looking for housing in London - it's simply not true.

But there are quite a few - shouldn't the government do something?

No. Even if we ignore the fact that such an intervention would be xenophobic, wanting the state to intervene to prohibit transactions just because they think the wrong kind of people are buying these properties is problematical. You may argue that people who want to live in London but couldn't afford the properties, and people without homes at all, would value those more than foreign investors, but the knowledge that those properties are far out of their price range shows evidentially that those properties are not being bought at the expense of either of those groups of people. It's a tragedy that there are so many people who are homeless in the UK, but people buying expensive properties in London are not the cause of their plight, and nor are any actions that prohibit those purchases going to be the solution.

Secondly, and following on from the first point, even just a basic understanding of economics would inform people that Britain is actually better off when those properties are sold, irrespective of whether the buyer is an English person or a foreigner.

Really, how can that be so?

To see why foreign buyers make Britain better off, and why banning them would be counterproductive (not to mention xenophobic), consider who benefits when an Englishmen (Jack) buys a house from a second Englishman (Tom). Suppose Jack buys a house from Tom for £300,000. Jack must value the house at more than £300,000 otherwise he would be unwilling to buy it, and Tom must value the money more otherwise he would be unwilling to sell it. Suppose the maximum Jack would pay is £310,000 - his consumer surplus (the difference between the most he'd pay and what he actually pays) is £10,000. Suppose that Tom would have sold his house for no less than £295,000, then his surplus is £5,000, which means the transaction generates a net societal surplus of £15,000

Now suppose that up steps Johnny foreigner, out-bidding Jack by £7,000, offering him £307,000. Jack gets no benefit from the sale of Tom's house to Johnny foreigner, but Tom's surplus has risen to £12,000, meaning that if Johnny's consumer surplus is the same as Jack's then society now has a net gain of £22,000, which is £7,000 more than when the transaction was between Jack and Tom (there are complex reasons why, in terms of a weighted average, we’d expect the consumer surplus to be roughly the same – but we won’t deviate into that now). Of course if you ban Johnny foreigner then Jack gains, but his gain is less than the loss incurred by Tom - plus on top of that you also have to count Johnny's lost consumer surplus. 

The desire to ban foreigners from buying homes in the UK (by which we really mean London) is perfectly coterminous with the definition of xenophobia you’d find in any dictionary – it is a desire to impose an unfair discriminatory procedure on a bunch of people solely on the grounds they do not share the same nationality as you.

The test for you, dear reader, not just on this, but in life in general, is to keep a check on how often in the free market you find yourselves favouring people who just happen to share your nationality – in terms of jobs, goods and services – over people who happen to be of a different nationality. For I hope I don’t need to remind you too often that the more globalised we become the more we should erode away these old misconceived notions of jobs, goods and services being available only to people who share your place of birth.

Finally, a more general point about all this is that I think it's more the case that in the modern age lots of people have become quite furtive about telling the truth. The truth used to be valued so much more highly, but since socially we became more emotionally linked (which, don't get me wrong, has been excellent in so many ways) there is a widespread fear of telling the truth about things like wealth, value, wages, inequality, discrimination and so forth for fear of sounding blunt or uncaring.

When Jack tells us about the problem of homelessness in London, his default position is to frame it relatively in relation to rich property owners (inequality) instead of as an intrinsic issue of how homeless people are struggling on their own terms and need some help in life. The properties that rich tycoons have the luxury of being able to buy are usually homes in the region of £1-5 million pounds - they are unaffordable to the vast majority of people in the UK, and have almost nothing to do with the reason the homeless people are on the streets.

But there is another politicised aspect to the housing crisis that no politician wants you to think about. Politicians don’t want house prices to be lower, because lower house prices are seen as a sign of a failing economy, and a big turn off for home owners (home owners are fairly influential as they tend to vote in greater numbers than renters). The housing debacle in the UK has created a vicious circle - more people’s wealth has become dependent on the value of their home, so there is more and more for politicians to lose if they loosen the restrictions on housing. As most politicians are home owners (often multiple home owners) and many also have rental income from second and third properties, you can be quite sure that things aren’t going to get better anytime soon.

Wednesday, 1 November 2017

No, No, No! A Top Economist Would Never Say This!!

A top economist would never say that inequality is the biggest danger to global growth, because it is flatly untrue. In fact, quite the opposite, global growth and the great enrichment of humanity in the past 200 years has been so astounding that it has rendered 'equality' a largely insignificant goal. In other words, humanity is doing so well compared to any other time in the last 200,000 years that the only reason people talk so much about inequality is because humans have so much prosperity in terms of consumption and standard of living.

For a long time I have challenged anyone to come forward and give a reason why inequality is actually a problem, and nobody has ever been able to provide anything substantive. When they posit a problem with inequality they never actually mean inequality, they mean poverty - which, of course, we all agree is a problem wherever it occurs - but that is to do with absolute well-being, not inequality - which remains one of the most bizarre human obsessions in the world.

In terms of human consumption, the world has never been so equal. It is equal in ways that people of a few hundred years ago wouldn't have thought possible. Those preoccupied with the Hegelian dialectic and the materialist conception of history will be keen to bang on about how much capital is in the hands of those that control the means of production, and that there is too much of a wage gap between the rich and the poor. But that interpretation misunderstands what wages are and why this isn't a problem that needs artificially fixing.

Wages are determined by the skill level of the job in terms of how easy it would be for the next person in line to come in and do the job, and they are also determined by the other job opportunities the worker has. This is why if you went to your boss and asked her to add 20% to your salary you wouldn't find yourself beaten down by her egregious attitudes to your needs, you'd be beaten down by the information signals of supply and demand. And don't forget, bound up in the cost of labour for employers are all the start-up costs, future forecasting and other concomitant risks that require business owners to be prudent.

It is not capitalism conspiring against the poor - it is the operation of markets tending towards parsimony in ensuring resources (goods, services and labour) are allocated most efficiently for the mutual benefit of buyer and seller. That's why in a more globalised economy Britain and America have lost the firm grip on some industries they used to hold pretty tightly.

Information signals tell us that it is no longer so efficient to manufacture those resources in this part of world (this is a natural selection-type filter that in economics is called Schumpeter's gale of creative destruction, after the economist Joseph Schumpeter) - to use the proper economic terms, we no longer have the absolute advantage or the comparative advantage.

If the poor are becoming better off by capitalism to the extent that inequality of capital actually drives progression rather than stifles it, it's alarmingly obvious that the attack on inequality is a case of choosing the wrong battle. Top economists would know better.

The Needless Battle Of The Sexes: How Identity Politics & Faux Victimhood Hinders Women

John Lewis made the headlines the other week by announcing they are going to make all their children’s clothes ‘gender neutral’. Many reacted with dissonance, probably fearful that John Lewis is pandering to the rising snowflakery in our society.

Sadly, these days it is quite easy to encounter a tantrum from a social justice warrior who thinks that racial associations are so rigid that you can't even host a continental fancy dress party without written permission from the local Lord Mayor, but gender is so fluid that some hairy-chested, bearded bloke called Kevin can put on a padded bra and high heels and shout "Call me Kathy' and suddenly she's a woman.

But many have reacted to John Lewis's move in a fairly phlegmatic way, stating that it doesn't really matter much, as people are still free to shop as they wish, and are quite capable of making their own decisions on the colour and style of the clothes they buy for their children.

Whichever side you're on, one thing is clear - our society did for a long time relentlessly reinforce the stereotype that young boys like wearing blue and playing with action men and tanks and little girls like wearing pink and playing with dolls and make-up kits. The common view has been that this is less to do with biological hard-wiring and more to do with the ways in which boys and girls are socialised at an early age, particularly as for a long time our past society has perpetuated the female-as-caregiver paradigm, and that this manifests itself very early through (among other things) the toys children are given.

It turns out, however, that in all likelihood the toy preferences of boys and girls are not primarily driven by socialisation, but by genes. This study shows that non-human primates show preferences for gender-typed toys similar to those seen in human children. That is to say, sex differences in toy preferences exhibited in non-human primates give strong indication that these are independent of the socio-cultural mechanisms first thought by many to be the primary influences on toy preferences.

That said, it still is the case that socialisation plays a significant part in human development, and that there are traits imposed upon children and young adults that are negatively brought to bear on them as adults. A good example is how girls are frequently discouraged from being direct for fear of being thought of negatively, whereas values such as assertiveness and competitiveness (which one often needs to get to high-powered positions in business) tend to be associated with masculinity, and are explicitly encouraged in young males (and may well have political ramifications in terms of women and men on the left-right spectrum).

Identity politics has always been a precarious thing, because the merits and demerits of intellectual and ideological propositions do not stand or fall on the sex, ethnicity or skin colour of the person making them. Currently the personal and the political regularly become entangled to the extent that many tend to conflate criticisms of their views with an attack on their personal identity - their biological, ethnic, sexual, religious self.

Intellectual challenges are (or should be) blind to things like sex and ethnicity, and as such, the responses should be too. We've seen too many people whose arguments have been challenged cry foul that the motive for the challenge has been their sex, skin colour or religion. Alas, the contemporary mindset for a significant proportion of the population is that political disagreement is taken as an assault on the entirety of their character and sometimes on their sex or ethnicity too.

This engenders a kind of paradoxical figure that becomes utterly supine when facing challenges to their worldview, but at the same time hostile and intolerant towards those that disagree with them, even going so far as wanting to censor or sometimes even decimate contra opinions and viewpoints.

The very real danger is that genuine threats of violence get lost in a wave of noise against people who've offended them on Twitter or who've held a public opinion they want to shut down. But it is very unwise to act this way: as I wrote a few years ago, affording people the liberty to speak freely is also of huge benefit to the individuals trying to rob people of that liberty:

"Whenever we hear a voice or read an opinion which is vastly different from our own, or the common opinion, not only should we give that person the right to express themselves, we actually deny ourselves the right to hear or read the expression if we choose to seek refuge in the false security of consensual opinion. Not only does the person in front of you wishing to speak have a right to be heard, it is also the right of everyone to listen; and every attempt to silence somebody makes the silencer a prisoner of their own actions because they deny themselves the right to hear something.  In other words, your own right to hear is as involved as the other person's is to have his or her view. The freedom of speech is incomplete unless it means freedom of speech for the person who thinks differently.  We may not agree with everything we hear, but we do ourselves an injustice if we fail to hear the dissenting voices." 

Similarly, with the emergent (and awfully named) Westminster sex dossier that's gathering pace at the moment (and ditto wider allegations in society), there is a pressing need for genuine cases of rape or sexual assault to not get lost in a barrage of witch-hunting from women who've merely been on the receiving end of inappropriate jokes, improper suggestions and tasteless banter and labelled it 'sexual harassment'.
Let's all work together in whatever way we can to expose sexual assault, bullying and tawdry abuses of power, and see that justice abounds. But let's also frame this in its proper context and speak out against blanket condemnations from extremist groups who want to believe that the whole of society is one gigantic, overwhelming, dangerous patriarchy where all women are subjugated under the thrall of male-dominated hegemony. Because if you're running with this narrative, you're not helping anyone, especially women.

People who present themselves lewdly and unsuitably can easily face the charge of being sad, immature, pathetic and of lacking urbanity if it helps - but unless there are better demarcation lines between serious sexual offences and ill-suited words, it is women who will suffer most by being categorised as feeble and overly-delicate by a small minority of feminist women who don't have their backs at all, but pretend they are speaking on their behalf. There was no better response to this than Julia Hartley-Brewer's response reprinted below:

Tuesday, 31 October 2017

Left Wing Intellectuals: Really?

On Newsnight last night, the Daily Mail's Stephen Glover and a philosophy professor called Barry Smith were discussing Labour MP Barry Sheerman's statement that most of those who voted Remain in June's EU referendum "were the better educated people in our country".

They discussed the fact that a high proportion of Remainers were university educated students, and that among the 'intellectual' demographic a high proportion of them are left wing - by which I assume they mean economically left wing (they never said).

Both contributors spent their time analysing why so many students are left wing, whether they are being coerced or compelled by university lecturers, whether those lecturers suffered heavily from confirmation bias, and why young people begin as lefties but end up much further to the right when they have grown up, had some more life experience, become smarter and more worldly lived a few more years.

Yet both failed to arrive at the primary and most obvious reason why young people start as lefties and undergo a gradual metamorphosis into capitalists - it's because when they are young they have no capital, and do not feel the costs of the policies they support (they might feel differently if they understood why it is their older selves that will end up paying for socialist policies anyway, but we've covered that before).

Young people are generally more fancifully idealistic too, with less life experience; are more easily driven by social conformity than older people; and still at the stage when their economic awareness aptly comes under the maxim "a little knowledge is a dangerous thing".

Consequently, whether on average the young people in London and Bristol who voted Remain are better academically educated than the older people in Lincoln and Hull who voted Leave is neither here nor there - because both groups had obvious personal incentives for voting as they did, and turkeys are never going to have a very balanced view on the topic of Christmas.

Because both groups had numerous personal incentives for how they voted, it is fairly obvious that there will be good and bad reasons why young people voted Remain, and good and bad reasons why older people voted Leave. That's one good reason why on this occasion it doesn't really matter all that much whether Remainers "were the better educated people in our country" - because what makes them better educated academically is not primarily what is behind their reasons to vote to Remain.

If there were a statistic released today that said half of the doctors in the NHS never studied medicine, then it would matter, because studying medicine is a necessary requirement of being a doctor. Studying chemistry, biology and English literature (while all excellent subjects) has no real bearing on a person's understanding of the merits and demerits of being in the EU, so it's a largely unimportant statistic to bandy around.

The only really important consideration regarding how people voted in the EU referendum is the number of voters whose main personal interests in the result are to do with what's best for the UK as a whole, whether the EU is a net force for good or not, and more long term, what's best for the other nations of Europe and the rest of the world too.

Even if that proportion of the demographic that rigorously understands all this is in the tiny minority, it hardly matters at all. Good and reliable opinion is contingent on expertise not on consensus. In a room of 500 people where only 1% of them are particle physicists, if you're looking for advice on Fermi–Dirac statistics you will very likely learn more from the minority 5 than you will the other 495 people combined - and I fancy that something similar can be said about Brexit.

For further reading, my own contributions to the EU referendum debate can be found on the right hand side bar, most comprehensive is The EU Referendum: Remain or Leave? You Might Like To Ask The Question In Another Way

I also explained why I think One Day Remainers Will Be Relieved Brexiteers