Sunday, 26 March 2017

Fantasy Stories About Tax


Here we have another characteristically dodgy article from Duncan Weldon in The Guardian, who foolishly believes that the way to sort out the public sector crises of unaffordability is to throw more and more money at them (I argued here that that is the precise opposite of what we need). Like giving more chips and ice cream to a morbidly obese child, pouring more money into crisis-ridden services is only going to conceal the deeper rooted problems, and will consequently make things worse in the end. This is a point that has been made on here repeatedly in recent times.

What I haven't mentioned quite so recently is the other big problem seen throughout articles like the one above - a misunderstanding of who tax actually affects and in what way. Take, for example, the call for higher corporation tax on the basis that by taxing big corporations more there will be more to redistribute to struggling families. It's a simple idea, but like many simple ideas, it is simply wrong.

The main problem is that the definition is factually inaccurate, because corporations don't actually pay tax - only individuals pay tax. The cost of corporation tax is primarily borne by customers (with increased prices of goods or services) or employees (with decreased wages) to avoid being borne by shareholders (through lower dividends). Corporations pay tax only in the sense that the cheque or debit is written in the name of the company. If the cost of taxes ultimately falls on individuals in the form of higher prices of consumption and lower wages (or in some cases increased unemployment) then a tax policy that tries to hurt corporations is simply a tax policy that harms the people the lefties are trying to help.

Abolishing corporation tax and taxing at the level of shareholder dividends and high-end consumption at an increased rate, coupled with a reduction in the top rate of income tax, would do more to boost the UK economy than any of the flimsy policies most MPs proffer. But because the abolition of corporation tax and top rate reductions are about as attractive as a fart in a space suit to most of the electorate, no political party is brave enough to implement them.

Another thing not often realised is that the cost of tax to an individual is greater than the sum of money paid to the IRS in 1s and 0s. To see why, suppose that the demand for highly skilled workers like doctors, surgeons, IT directors and financial advisers is very inelastic. If taxes on high skilled jobs are high, it will reduce numbers of doctors, surgeons, IT directors and financial advisers, which will mean that consumers pay the price through higher fees for those services.

Where the demand is inelastic, high taxes on such workers reduce the number of suitable people willing to train for those jobs, with the result being that customers in need of their services bid up their wages at a cost to their own pocket. In other words, the cost of the tax is a transfer from those that pay the tax to those that consume the services of those in the high skilled industry.

A similar issue arises with the minimum wage, where the state-enforced increased cost to employers is a cost that is passed on to consumers with higher prices or fewer jobs. Further, PAYE taxes (that's income tax and national insurance) are a tax on labour, which of course means that you get less than the optimum amount of it. Whether PAYE taxes are paid by the employer (before he pays wages) or by the employee (when he receives wages) doesn't matter much - they are essentially the same tax on labour.

The place where the ultimate burden of tax falls is largely contingent on supply and demand's elasticity. If the supply of labour is elastic then that means prospective employees won't be particularly sensitive to wage levels, thereby placing the burden on employees. If on the other hand employers have to increase wages to hire good workers then the tax burden falls on the consumers of what those workers produce.

Income taxes interfere in the market of trade by diminishing value in society too. This happens because income tax means there are fewer transactions, as exchanges that would otherwise benefit both parties now do not take place. Suppose I am willing to pay no more than £11 per hour to have some work done, and I have some workmen who are willing to do the work for £10 per hour. That being the case the transaction should take place and both buyer and seller will be happy with a £10 an hour hourly rate.

But once the government imposes 20% income tax, things change, because now the most the workmen can earn from me in net pay is £8 per hour, which means they'd be unwilling to do the job for me. In order to satisfy the workmen's earning needs, the 20% income tax means that the workmen have to charge me £12.50 an hour to clear £10 an hour. What then transpires is that either the work doesn't get done because I'd rather not spend that much money, or else I end up doing it myself and making a much less good job of it.

The upshot of all this is that tax is not some kind of magic money tree that can be obtained without negative consequences. People who wish to tax us out of crises usually miss three vitally important things:

1) Tax something and you usually get less of that thing, which in many cases means the nation is worse off by the reduction.

2) Tax something to bestow benefits to one group of people and you usually find that what you give to them in one hand you take it out of their other hand a short time after.

3) Tax something and you also end up hurting other groups you have usually totally forgotten about.

Thursday, 23 March 2017

Don't Campaign Against Tax Havens: They Are Good For Us


My favourite blog posts are the ones where I take a common viewpoint held by the majority of people and explain why it is a myth. Today it is the turn of tax havens. Thanks to faulty headline-grabbing propaganda, like the latest offering from The Guardian's Richard Murphy (he's the guy behind Corbynomics), most people think tax havens are outrageous places in which tens of billions of pounds are being stored offshore, denying UK citizens valuable tax revenue that could be used on public services like schools, health care and roads. Nice idea. But like many nice ideas, it veers far from the truth.

First off, so what of the complaint that if the money stays in the private sector in tax havens then UK citizens are being robbed of vital tax revenue? To answer this, consider if the money stays in the private sector in a tax haven, who else benefits from that apart from the person with the money? In the first place, the money is invested, which generates plenty of jobs and lots of economic growth. And in the second place, what is less obviously true is that if a UK Billionaire keeps £500 million in a tax haven then all the time he's not spending it he makes everyone else in the UK better off in terms of more resources and lower prices. This is because money earned but not spent is like conferring a gift to the UK taxpayers.

Moreover, it's important to remember that the primary contribution high earners make to society is not in the taxes they pay, it is in the goods and services they produce. Most of these big corporations make small profit margins on each unit sold - they just sell lots of units, which means they are creating an awful lot of value to consumers.

When it comes to tax havens, what is also being missed by a lot of people is that tax havens actually make us better off in another way, in that they provide vital competition to tax rates in the UK. A popular view from the left is that because of tax havens governments have to increase our taxes to make up for all the tax they are not getting from money stored in places like the Cayman Islands. In actual fact, the opposite is true - tax havens keep our UK taxes lower not higher.

To see why, suppose there is just one quite expensive Bakery in town (call it Bakery A). Along comes another Bakery in competition (Bakery B), offering townsfolk lower prices for bread. The very worst thing that Bakery A could do in response would be to raise its prices even more. Their best response would be to try to out-compete Bakery B for custom. This is the nature of competition, and how it lowers prices and improves efficiency.

Similarly, tax havens are like Bakery B - their more competitive tax rates place competitive pressures on governments that might be tempted to tax us highly. Competition for prices occurs with tax just as it does with bread, laptops and cars. Governments must be competitive with their tax rates, otherwise more and more money will be stored in places with lower tax rates. Tax competition is a key driver of economic growth in the world, as this incentivises politicians to keep taxes on savings and investments low. When tax rates are excessive, there is less economic growth. Tax havens provide the necessary competition to militate against this happening - they are not the bogey that many will have you believe.

Instead of calling for politicians to tackle the grave injustices of tax havens, campaigners should be calling for a more fruitful tax systems here, based on lower rates, reduced complexity and bureaucracy and increased market freedom.


Wednesday, 15 March 2017

When Jack Thinks He Knows Jill Better Than Jill


In 1998, inspired by watching a baseball game, the economist Don Boudreaux wrote a short essay entitled Much More Than Meets the Eye. It's a neat essay and well worth sharing (I've reprinted the whole thing below) for the way Boudreaux uses a sporting analogy to illustrate the widespread presumption of over-simplicity in the economy.

That is, just as the skill and dexterity combined with lots of practice goes into the prowess of playing baseball, similarly society and the economy appear to be a lot simpler and easier to organise than they really are. Because of this, third party politicians operate under the delusion that they know people's wants and needs better than the individuals themselves, and can govern their lives better than they can.

I have to admit, ever since being a young lad and first getting into those academic subjects like economics that would titillate and enhance the mind ever since, our sluggishness in evolving beyond this state of stultifying dependency has struck me as strange. While I understand the human need to help others, I remain perturbed by how, in a Jack and Jill scenario, we let so many Jacks dictate to us Jills what our preferences are and how much we should value things.

It remains utterly peculiar to me how almost everyone loves the idea that Jack knows enough to forcibly prohibit Jill from selling her labour for lower than the rate that Jack (with only a tiny fraction of all the facts) establishes is best for Jill. It remains utterly peculiar to me how almost everyone loves the idea that Jack knows Jill's perceived trade off in the pleasure of eating chocolate versus the prospect of being a few grams heavier as a result.

The same applies to Jill's wine, beer, cigarettes, number of hours she can work, whether she is allowed to charge the market rate for renting out her apartment in London, and the extent to which supply, demand and consumer choice ought to be factored in to getting a train, obtaining a university degree, and so forth (there are still many people who support nationalisation of railways and the scrapping of tuition fees).

I do sense that market-friendly thinking is on the rise, and with the mass-sharing of ideas thanks to the global online connectivity, and with hopefully enough people wanting to reap the benefits of critical thinking, it would be nice to see this trend continuing. For now though, there's still quite a way to go. 

Here's the short essay…

Much More Than Meets the Eye
Last October I watched a few telecasts of the Major League baseball playoffs. I noticed the Atlanta Braves’s all-star pitcher Greg Maddux and asked myself: “What makes this guy so special?”

I studied his pitching motion. “It looks like something I could do with a bit of practice. Why am I not making millions of dollars pitching in the Major Leagues?”

Of course, I know that I could never hurl a ball with Maddux’s combination of speed and accuracy—even if I could mimic very accurately the outward manifestations of his expert pitching style. Every single pitch delivered by Maddux is the result of countless precise muscle movements, only a tiny fraction of which are visible. In short, it is impossible really to observe how Greg Maddux pitches. All we can observe are a few rough external movements—how high he raises his leg, how far back he cocks his throwing arm, and so on. If skilled pitching indeed involved mastery of nothing more than the external movements every fan sees, then the world would be so awash with skilled pitchers that Greg Maddux would have to work two jobs to earn enough money to feed his family.

Maddux’s unusual expertise is invisible. This expertise is his rare knowledge of how to coordinate the tens of thousands of sequential minute muscle movements necessary to get the ball over the plate at lightning speed. Not only can no observer ever see the complex coordination of indescribably exact muscle movements in Maddux’s feet, legs, back, shoulders, arms, hands, and fingers, but Maddux himself could never hope to articulate to even the most perceptive listener just what he does.

In fact, we can never really see, or learn by words, how any pitcher pitches. We see only the surface phenomena—the tip of the iceberg. To watch a big-league pitcher pitch is to risk being misled into thinking that we see how to pitch. The actual pitching process is vastly more complicated than anything that can be observed, measured, recorded, communicated, or mimicked.

In this way, the market is like adroit pitching: everyone observes the surface phenomena but no one ever sees the underlying mechanism—invisible in its entirety—that gets the job done. Not even the most astute economist, entrepreneur, or financial analyst ever sees more than a sliver of the vast and intricate invisible workings of the market process that daily transforms raw materials and human creativity into billions of consumer goods and services.

Leonard Read explained what he called the “white magic” of the market process in his justly praised article “I, Pencil.” No one knows how to make an ordinary pencil; no one can ever know how to make a pencil. And yet pencils are produced in such huge quantities that they are virtually free for the taking. We have pencils not because some one person planned from the beginning the cutting of cedar trees, the mining of graphite, alumina, and bauxite, the extraction of petroleum and clay, or the organization of transportation to get supplies to pencil factories and pencils to retailers. When you contemplate the enormousness of all the tasks that are required to make a single pencil, you understand that no one can know how to do more than a tiny fraction of these tasks.

We have pencils (along with indoor plumbing, electric lighting, microprocessors, disposable diapers, camcorders, concert halls, . . . ) only because for each of the countless tasks required for the production and distribution of each good there are a few people who specialize in knowing how to perform these tasks. But no one knows—or can know—how to perform all of the tasks required to produce even the most commonplace of goods. The free market works as well as it does because, when property rights are respected and fully transferrable, the resulting prices tell each of the producers at the innumerable different production “sites” just what (and how much) to produce and with what particular combination of resources.

For example, if the supply of crude oil falls, the resulting higher price will prompt manufacturers of paint to produce less petroleum-based paints and more linseed-oil or water-based paint. The resulting higher price of petroleum-based paints will prompt pencil manufacturers to paint fewer of their pencils with petroleum-based paints and more of their pencils with paints made of substances other than petroleum. As F. A. Hayek taught, the pencil manufacturer need never know why the price of petroleum-based paint rose; all that is required for this manufacturer to act appropriately is for him to conserve on his use of petroleum-based paint. The higher price of such paint achieves this goal.

Every hour of every day millions upon millions of specialists around the world adjust their plans based upon prevailing prices in light of their own unique knowledge of their specialties. Each of these adjustments, in turn, spawns further price changes that cause yet others to adjust their plans. This great web of mutual and continual adjustments allows the free market to deliver the goods (both literally and figuratively).

But this web, though we know it exists, is invisible. We see only its surface phenomena—goods on supermarket shelves, physicians’ offices filled with magnificent diagnostic equipment, beer trucks making their daily rounds. No one ever sees the immense expanse of human cooperation across space and time—or the vision and gumption of entrepreneurs, or the highly specialized skills of workers—all of which are necessary if we are to enjoy even the most mundane of modern goods and services.

People who would plan an economy, or even regulate an industry, commit the cardinal sin against sound economics: believing that they can consciously improve that which they cannot hope to know. Just as it is utterly ridiculous for me to imagine that I can learn to pitch merely by studying videotapes of Greg Maddux, it is equally ridiculous for politicians or bureaucrats to imagine that they can improve upon the free market with knowledge only of the tiny part they are able to observe. Such conceit is toxic for a free society.

Donald J. Boudreaux

Monday, 13 March 2017

Brexit Ought To Mean Leaving The Customs Union


In case you’ve forgotten, I wrote an article back in December explaining why Brexit must involve leaving the customs union. More recently Ryan Bourne at CapX adds weight to this by alluding to the shocking 12,651 different taxes associated with Common External Tariff (CET), and how the EU is internally trade liberating but outwardly protectionist, as UK businesses outside the EU could face two-way tariffs if they import and export simultaneously.

As we all know, after leaving the EU, the UK will be able to set its own trade deals in keeping with WTO rules. Given that the pain of tariffs is entirely self-inflicted – rather like ramming a broom handle through the spokes of your bike as you’re riding it – the sensible post-Brexit policy for Philip Hammond and Theresa May will be to abolish tariffs altogether and allow manufacturing industries to import more cheaply from anywhere in the world. For as Ryan Bourne points out in the article – a fact that is utterly pain-inducing:

“The CET, coupled with non-tariff barriers imposed by the EU, has resulted in agricultural and manufactured goods prices being around 20 per cent above world prices.”
This should tell you two things. Firstly, as I’ve often remarked on here - that people in the agricultural industry in the developing world are being screwed over here, unable to compete with the EU’s protectionist racket. And secondly, we consumers are being screwed over too because we are paying more than the market value for our goods. Because in case you’ve forgotten, consumption is the primary benefit of trade.

Remember, it’s not Steve’s Steel that pays the tariffs to export, it’s the customers of Steve’s Steel that pay when it is imported. Apparently the EU buys 44% of our exports, whereas we buy just 7% of theirs, which means they tax themselves a lot more than we tax ourselves. The alternatives to exporting to the EU are exporting to non-EU countries or not exporting at all and increasing our home-grown consumption – both of which are more sensible than taxing ourselves - and the EU countries would be wise to adopt the same approach. The outcome – tariff-free trade for both parties, and mutual benefits for both importers and exporters. It’s a no-brainer really. 

Friday, 10 March 2017

How Numbers Can Easily Mislead


I see a lot of headline-grabbing warnings in the media about how activity x, y or z is a huge danger to a, b or c. They bandy figures around like if you do x you'll be 80% more likely to get this type of cancer, or y increases the risk of a heart attack in men by 70%, or z makes a more than 5 degree temperature more likely by 75%.

When stated like that, activities x, y and z can quite easily cause alarm - and they often do, whether it's how many cups of tea you drink a day, how often you have a fried breakfast, how many cars are on the road or whether you smoke in a house with children - someone has got something to say about it and some stats to throw at it.

But those figures mean very little unless you know the base probabilities to begin with. For example, suppose drinking an extra two cups of tea a day (from, say, 4 to 6 cups) increases the probability of your getting prostate cancer by 40%. On first inspection it may sound advisable to stick to the 4 cups of tea a day.

But suppose drinking 4 cups of tea a day only makes your chance of getting prostate cancer 15% - a 40% increase in probability from 4 cups a day to 6 cups a day only adds another 6% to your chance, which is still only a 21% chance. You may well feel that all those extra cups of tea over your lifetime is worth a 6% increase in probability. However, if you just saw the headline "2 extra cups of tea increases the chance of prostate cancer by a whopping 40%" then taken at face value it may put you off tea for life.

We routinely hear claims of the kind that eating two rashers of bacon a day raises the risk of bowel cancer by 18%. But without a base rate (how common is bowel cancer?) this information is not very useful. As it happens, in the UK, bowel cancer affects six out of 100 people; so a bacon-rich diet would cause one additional case of bowel cancer per 100 people.

Here's another example. Suppose 40 million of the UK population ticks a yes or no box to say whether they trust the media, and then the media tries to clean up its act. Next year there is a repeat poll and the results show an 18% increase in people who now trust the media. At first glance that sounds like it could be quite a lot of people changing their mind - after all, 18% of 40 million is 7.2 million people.

But, of course, that's totally the wrong way to think about it, because we need to know the base rate - that is, the number of people who trusted the media in the first year. Apparently the actual figure is that only 6 out of every 100 people say they trust the media, so an 18% increase the year after is only an extra 1 person in every 100 now trusting the media.

Numbers are misleading - they can shock in large quantities, but that often skews the real picture. When a few years ago Vince Cable projected that our joining the Euro would increase our GDP by a few billion pounds, lots of Liberal Democrats got excited, and many pressed for us to join.

What should have been obvious is that that GDP figure is spread over the entire population of Britain, and doesn't add up to much at an individual level (for example, 4 billion divided by 63 million works out at just over £60 each). Would you want to lose the pound sterling for an extra sixty quid in your pocket? (that was then, of course - now almost every Brit is glad we didn't touch the Euro with a barge pole).

Yet another example. Imagine that there is a new illness discovered, colloquially called 'MXDA', the symptoms of which are swollen hands and occasionally swollen feet (with neither causing the other, and either can occur independently of the other). With MXDA swollen hands occur in 99/100 people diagnosed with it. Swollen feet occur in only 1/100 people diagnosed with it. Consider this question: which of the two following statements is most probable:

A) George contracted MXDA and had swollen feet

B) George contracted MXDA and had swollen feet and swollen hands

The vast majority of people answer B, even though the answer is obviously A. It's fairly evident that even though George has swollen feet, there is still a 1 in 100 chance that he does not have swollen hands, and given that the two probabilities are independent, it is impossible that B is more probable than A. Belief to the contrary is known in philosophy as the 'conjunction fallacy'.

Understanding base rates, probabilities and logical thinking can help us in everyday life decisions too. Take insuring your household products (a subject I once blogged about here) Using similar logic to the above thinking, then in terms of probability when it comes to insurance of household products the cards are stacked in the favour of the insurer not the insured. It should be fairly evident why: insurers must cover the cost of pay outs and the administration costs to sell insurance, so insurance must be a winning hand for the insurer overall (ditto casino owners, bookmakers, amusement arcade owners, and so on - the fact that they are in business at their customers' expense tells us all we need to know).

Should someone who has spent £20,000 on a conservatory spend an additional £30 to insure against it being damaged by the weather? The obvious answer seems like yes, but it depends on the 'base rate' - the odds of the conservatory being damaged by the weather. If the odds of it being damaged are 1000/1 he'll be £10 down on the deal. Maybe it's still worth it, but what about £3,000 insurance against a 1000/1 chance that a £2 million conservatory will be damaged? It's the same as before in terms of odds and ratio, but our man may think an extra £3000 could be better spent elsewhere.

One final point, when it comes to perceived rationality things aren't always as they seem - sometimes it's important to think a bit further outside the box. For example, generally it is thought that people who understand probability won't buy a lottery ticket* because they know the vanishingly small chance of winning the jackpot pretty much makes any lottery ticket purchase tantamount to a waste of money.

That might be true if those gambling odds were all there is to the purchase, but there are other factors that might make a ticket purchase worthwhile, just as there are other reasons why going for a night out at the casino is not necessarily irrational despite the probability being in the casino owner's favour. In buying a lottery ticket you might also be buying the dream and the excitement, which may well be worth the value, particularly if you enjoy the whole TV show that goes with the lottery experience. And in case you're wondering, I don't buy a lottery ticket, I'm not an idiot! Haha! Just kidding!  

* I remember reading about the high number of lottery winners who squander their fortune, some of whom even go bankrupt within a few years. It could be that the paradox of lottery players is that if they are willing to spend a few pounds each week on lottery tickets in the first place they are not likely to be the kind of person who optimises their spending commensurate with their budget. Therefore, one would expect that a high number of lottery winners had proclivities for profligacy. "Proclivities for profligacy" - That's one hell of a statement.

Wednesday, 8 March 2017

On The Philosophy Of Art & Morality


In this paper, I will consider supposedly subjective things like taste and opinion and look to challenge long-standing views about their subjectivity - instead attempting to show why they can be thought of as being inextricably related to objectivity.
 
To read the full paper, click on this link.
 
Hope it's informative and in some way enjoyable too!

Monday, 6 March 2017

Free Movement Of People Does Not Equal A Level Playing Field


In the air at the moment are grave concerns about EU citizens in the UK and UK citizens in the EU, and whether both groups will get to securely live where they want to. To me, the problem smacks of politicians having too much interference in people's liberties. With increased liberty comes a reduction in problems concerning free movement of people.

A policy that enforces compulsory free movement of people also mandates an open borders policy, which most certainly does not necessarily mean freedom if the policy impinges on the freedoms of the indigenous population, particularly if it affects their economic infrastructure.

As with everything, a market approach to border control and movement of people has to factor in all the costs as well as benefits, and to all groups too. I'm going to assume that readers will have already worked out the various permutations of who benefits and who has costs imposed upon them.

For that reason, I'll assume you can see the obvious corollary, which is that there would be far fewer problems attached to freedom of movement if so much of a nation's infrastructure was not tied up in politics and taxpayer-funded state spending. A nation that has schools, hospitals, social care and welfare paid for by taxpayers cannot very easily endorse a politically-mandated complete free movement of people, because of the burden it can place on those taxpayer funded services (not to mention problems surrounding social and cultural integration).

That is to say, even a market approach to movement of people has to, for the time being, be consistent with a level of border control, and the protection of its citizens against those that damage cultures by not contributing to its economy, or make the society more divisive, fractionated and vulnerable (with immigration from Islamic countries being the obvious case in point).

The best way to protect the liberties of the people contributing to a nation's economy while also protecting the liberties of people wishing to work wherever they wish is to have free movement of labour but not have complete free movement of people (note: I am not talking here about situations involving refugees and asylum seekers - that is a subject beyond the scope of my intention here).

As long as people are free to work (and retire, of course) in any country they wish, nations avoid almost all of the costs of migration and enjoy almost all of the benefits. They have less chance of suffering from labour shortages, and wage inflation, and inflexible labour markets - and they enjoy the numerous additional benefits, which I documented quite comprehensively here.

The problem with having complete free movement of people disconnected from their ability to work is that in a bloc like the EU with severe wage differentials there is a strong pressure for labour migration that has a knock-on negative effect of the citizens of the wealthiest countries. If all countries in the EU were of a similar economic standard in terms of wealth and jobs there wouldn't be so much of a problem.

But a quick Google search tells me that a Hungarian worker migrating to the UK could earn in one year here what would take him about four years in Hungary. For perfectly understandable reasons, the economic incentives for people in Eastern Europe to seek employment in countries such as the UK, Germany and France is far greater than the other way around. Consequently, then, unless everyone who migrates is guaranteed a job, there will be a disproportionate migration strain on countries like the UK, Germany and France.

Because of this, a more prudent solution would be to tie labour to free movement rights. Rather than having border controls based on a woolly perception of what the nations possibly wants, it would be better if they were based on what the nation definitely needs. I was reading in Forbes that in late 2013, an estimated 13.5% of points-tested immigrants who had arrived in Australia earlier that year were unemployed, whereas just 1% of immigrants who arrived by being sponsored by a company were unemployed.
 
Clearly, businesses could be much better than politicians at overseeing a successful migration policy. And as for the matter of the security of EU citizens already working here, the government would be absolutely mad to jeopardise their status, and they jolly well know it.

Wednesday, 1 March 2017

We Seem To Be Confused About This One...


There is nobody more confused in mainstream media at the moment than Paul Mason - a man so bad at economic social commentary that he doesn't even attempt the verbal adroitness required to conceal it. The latest target of his peculiar anti-growth agenda (and there are plenty) was the complaint about the so-called 'absurd' amounts of money millionaire chief executives make running their companies compared with the people that buy their products and use their services. He also gave his usual rant about how the economy is benefiting a few at the top at the expense of the rest of the population. The image above is designed for confused people like Paul Mason.


Alas, the sentiment the wine glasses image evokes is ubiquitously believed to be true - in particular it's a popular complaint from the left, but it rather skews the reality of what's going on. I will illustrate the point by talking about supermarkets. The next time you're feeling disgruntled at the profits of the average supermarket compared with the real income of the average person, I want you to consider just how much better off we consumers are because of supermarkets - so much so, in fact, that we do better out of this than any of the supermarket fat cats.

I was reading in Forbes recently that families are around £400 a year better off because of the supermarket price war triggered by the rise of the discount supermarkets like Aldi and Lidl, thanks to which the competition has driven down food prices at places like Tesco, Sainsbury's and Morrisons. So it's not simply that shoppers get more for their money in discount supermarkets, they benefit right across the board from competition full stop.

I'm asking you to consider that the supermarket fat cats get a few million quid for their roles, but families get £400 each! Hang on, I hear you say, £400 is nothing compared with a few million quid. True, but given that there are around 27 million families/households in the country, that's £400 x 27 million benefits (which is £10.8 billion pounds of gain cross-nationally). Moreover, £10.8 billion is an annual benefit (give or take a few pounds) for consumers, in addition to - and this is also important - the consumer surplus they receive from all the goods consumed.

On the other hand, the supermarket gains are part of a whole range of capital gains that resulted from years of investment (purchasing the land, building the store, paying solicitors fees, government fees, etc), and the concomitant capital sums required to keep the business going to the level it is now, and apply economic duress to competing firms' prices as they do their bit in society to displace less efficient businesses.

Not only is there no injustice in the pay of the executives, what we're seeing quite clearly is that their influence in the world of retail competition is benefiting consumers in the UK to the tune of billions of pounds. The above image has got it all wrong; what really happens is that as the top glass gets larger it doesn't just fill the top glass - it fills all the other glasses too. And if you're unsure quite who is possibly overpaid and who isn't, check out this Blog post here.

Sunday, 26 February 2017

Which Brilliant Ideas Are Far Less Widely Known Than They Ought To Be?


It's a great question which a friend and I were discussing over a group dinner Friday night. I can offer plenty of suggestions to whet your appetite; there are numerous ideas that would enrich people's understanding of everyday societal matters that are not currently captured with enough depth to do so. Examples would be things like comparative advantage, that which is seen and unseen, deadweight costs, Coase's theorem, Chesterton's fence and the concept of the invisible hand. Then there are absolutely life-changing ideas such as Aumann's Agreement Theorem and Harsanyi's Amnesia Principle that bear repeating regularly to get them as widely disseminated as possible. All of those ideas make an appearance in this blog from time to time.

However, the idea I'll pick as the idea of choice in response to this blog post's title will be Arrow's Theorem, as a tribute to Kenneth Arrow who died this week. He was, up until a few days ago, one of the greatest living economists. Arrow's Theorem is not the easiest to describe simplistically because it is mathematically dense, and is quite counterintuitive too (I had a go once before using voting as the illustrative template). In fact, past reading of economics has given me the impression that several economist social commentators have described Arrow's Theorem as the hardest complex idea to simplify for a layperson. I'll have a try with a version I typed up yesterday in the hope that you find it both understandable and intriguing.

To do so, let's discuss my favourite dessert - cheesecake. What I'm going to illustrate is that no democratic system, however fair it appears in terms of participants and number of choices, can satisfy all the axioms associated with the preferences. So for example, if there are three, then: if two are satisfied the third must be violated, whether those two are 1 and 2, 2 and 3, or 1 and 3.

Let's illustrate this. Every day, Julie, Frank and Timothy split a cheesecake with one flavour - Chocolate, Strawberries or Lemon. Their preference orderings change from day to day - some days Julie is in the mood for Strawberries, other days the very thought of Strawberries makes her wish she was eating another flavoured cheesecake. Every evening at dinner time they have to call in their first, second and third choice cheesecake orders (let's say the cheesecake patisserie insists that you specify your second and third choices in case they run out of something.) So Julie, Frank and Timothy need a method for translating their individual preferences to a cheesecake order. Now as it happens, on the 22nd on February, their preferences ran as follows:
 

 
Julie
Frank
Timothy
First Choice
Chocolate
Strawberries
Lemon
Second Choice
Strawberries
Lemon
Chocolate
Third Choice
Lemon
Chocolate
Strawberries


I’m not going to divulge what system these three were using to determine their order, but I will tell you that on the 22nd they phoned the patisserie and expressed Chocolate as their first choice. On the 23rd, Julie ranked Chocolate over Lemon again (and let's suppose we don’t know anything about Frank’s or Timothy’s rankings). On the 22nd, only Julie ranked Chocolate over Lemon, whereas on the 23rd, Julie plus possibly one or both of the others ranked Chocolate over Lemon. So if the cheesecake order ranked Chocolate above Lemon on the 22nd, then it should certainly have ranked Chocolate over Lemon on the 23rd, no?

In principle, yes (disallowing for a change of mind for variety - not something that's as likely to happen in political voting). Any other result would have seemed unreasonable to Julie, Frank and Timothy, so when they designed their system, they designed it with the following feature. If we list Chocolate over Lemon on our order on one day, and if none of the people who prefer Chocolate over Lemon change their minds about that the next day, then we should list Chocolate over Lemon the next day as well.

Because this was implicit in their system (and because they’d listed Chocolate over Lemon on the 22nd when only Julie had that preference), they always listed Chocolate over Lemon on any day when Julie preferred Chocolate to Lemon. That is to say, Julie was the principal figure on the Chocolate/Lemon consideration - the 'authoritarian', if you like.

Now on the 24th, Julie was in a Chocolate/Lemon/Strawberries frame of mind. Suppose again we don't know much about Frank’s or Timothy’s moods except that they both favoured Lemon over Strawberries. Since everyone preferred Lemon to Strawberries, Lemon was, of course, listed higher than Strawberries in the cheesecake hierarchy. Once again, any other result would have appeared unreasonable to Julie, Frank and Timothy, so they’d built their system along the following lines:

Whenever we unanimously prefer option X to option Y, option X should rank higher than option Y on our order.

First, Julie preferred Chocolate to Lemon, so of course Chocolate ranked higher than Lemon. Second, everyone preferred Lemon to Strawberries, so Lemon ranked higher than Strawberries. Logic says that Chocolate must have ranked higher than Strawberries. Logic also says that when Julie prefers Chocolate/Lemon/Strawberries in that order, and everyone else prefers Lemon to Strawberries, Chocolate must be more preferable than Strawberries.

They also agreed the following:

Our preferences regarding Lemon should not affect the relative positions of Chocolate and Strawberries in the ranking. Therefore, the above should hold if we drop all the Lemon-related assumptions. That is to say, on any day when Julie prefers Chocolate to Strawberries, Chocolate must rank higher than Strawberries.

The next day, the 25th, Julie’s preferences ran Strawberries/Chocolate/Lemon, while the other two both preferred Strawberries to Chocolate. Since they all preferred Strawberries to Chocolate, Strawberries came out higher than Chocolate on the cheesecake order. Since Julie was a Chocolate/Lemon authoritarian, Chocolate came out higher than Lemon. Logic tells us also that Strawberries came out higher than Lemon. And the same would be true on any day when Julie preferred Strawberries/Chocolate/Lemon and everyone else preferred Strawberries to Chocolate.

But the ranking of Strawberries vs. Lemon was designed to be unaffected by how anyone cared about Chocolate, so the Chocolate-related information cannot be relevant. This tells us that on any day when Julie prefers Strawberries to Lemon, Strawberries rank higher than Lemon. She’s not just a Chocolate/Lemon authoritarian and a Chocolate/Strawberries authoritarian; she’s a Strawberries/Lemon authoritarian too.

What we’ve uncovered is that any Chocolate/Lemon authoritarian is also a Chocolate/Strawberries authoritarian and a Strawberries/Lemon authoritarian. Interchanging the flavours, we could have just as easily discovered that any Chocolate/Strawberries authoritarian (e.g. Julie) is also a Chocolate/Lemon and a Lemon/Strawberries authoritarian - and so on as every pair of flavours appear. In other words, despite the table of preferences above, Julie is an absolute cheesecake authoritarian as all of her preferences are entirely reflected in the cheesecake order on any given day.

Now here's the upshot of it all. We started by declaring that Chocolate came out on top on the 22nd. But if Strawberries had come out on top, then using Arrow's model I could have given evidence to show that Frank is an absolute authoritarian, and if Lemon had come out on top, then using Arrow's model I could have given evidence to show that Timothy is an absolute authoritarian. Regardless of what happened on the 22nd, someone must be an absolute authoritarian - counterintuitive as that may have first appeared.

Extending that further, if there had been more people than just Julie, Frank and Timothy, and more flavours than Chocolate, Strawberries and Lemon, then although the argument becomes more mathematically intractable, it is not at heart any further from the nub of the wisdom just covered - that is, if you have a scenario that translates a series of individual preference choices into a single group preference of choice, that scenario will throw up an authoritarian.

Crucially here, we're seeing the distinction between what are very coherent individual preferences (called transitivity), and how at a group level it becomes incoherent (intransitivity). Transitivity is formally expressed as: if A > B, and B > C, then A > C - so in other words, with cheesecake choices, if Julie likes Chocolate more than Strawberries and Strawberries more than Lemon, she should like Chocolate more than Lemon.

Groups, however, don't necessarily have a transitive preference order - they have intransitive 'cycling' of preferences, which means Chocolate beats Strawberries, which beats Lemon, which beats Chocolate, which beats Strawberries, which beats Lemon, which beats Chocolate - meaning for group scenarios you might just as well put the flavours of cheesecake in a hat.
 
 

Saturday, 18 February 2017

When You State It Like This, The Minimum Wage Doesn't Seem Quite So Lovely, Does It?


My local newspaper has a feature that looks to name and shame businesses that are finding ways to get around paying the full minimum wage to employees. The people that should actually be named and shamed are the short-sighted politicians that impose this law on people trying their best to run a business and people doing their best to find work.

I wonder if anyone has ever thought of the minimum wage the other way round, from the perspective of a law against the employee rather than the employer. That is, not of it being illegal to pay someone less than £7.20 an hour, but for it to be illegal to sell your labour for any less than £7.20 per hour. When it’s stated that way round it emphasises the point a bit more of how much of an infringement on our liberties the minimum wage law is.

When you think of Tom, Dick and Harry getting out of bed, eating their breakfast, all ready and willing to go out to their £6.50 an hour jobs - jobs they enjoy - but suddenly being disallowed to go to work because the government decides to slap an extra 70p on their legally mandated price floor, it doesn't sound anywhere near as positive, does it? To compound the point, have a look at this typical supply and demand graph.
 
 
An illustration much like the one above ought to make it clear. The equilibrium point is the point at which the supply and demand curves cross - which basically means that it's the one price where the quantity supplied and the quantity demanded are equal. Suppose the graph represents a 25kg sack of potatoes, and the equilibrium price is £6 per sack. That means that if the market price is not at the equilibrium - say at £8 per sack - then the quantity demanded and the quantity supplied would not be equal.
 
The same is true of wages. Suppose the equilibrium price for a gardener is £6.50 an hour. If a government sets the minimum wage at £7.20 an hour then as you can work out from the demand curve, demanders (that is employers) would want fewer gardeners, while suppliers (gardeners) would want more of their labour sold, thus creating disequilibrium. Thanks to this government price floor the suppliers are now not able to sell all the labour they want to. Not only that, but of course, demanders are not happy either because they cannot buy the quantity they would like to, as they prefer a price of £6.50 an hour to hire a gardener, not £7.20.
 
The result: supply and demand for gardeners is at a disequilibrium, and the country has fewer gardeners. What I didn't tell you is that Tom, Dick and Harry are gardeners - or, at least, they were until the former chancellor hiked up the minimum wage an extra 70p an hour, and sent Tom, Dick and Harry, and lots more like them, to the job centre - where there'll join the thousands of other people who are already there, and have been for a very long time having never had a job, because said chancellor has made it illegal for them to sell their labour at the supply and demand equilibrium point.

Thursday, 16 February 2017

Brilliant Pavement Art....


When it comes to art, I inhabit a funny, possibly solitary, odd-duck world - a world in which the works of Escher are among the finest of the 20th century, and a world in which, in true Emperor's New Clothes fashion, nobody ever got to tell the likes of Mark Rothko and Willem de Kooning how overrated they were. For the record, it's also a world in which I have quite a lot of time for Salvador Dali, but not much time for Pablo Picasso.

Anyway, personal tastes aside, the reason for this rather unconventional Philosophical Muser Blog post is simply to enjoy these awesome pavement art creatons, which I think are wonderful, and I hope you do too!


 

































Tuesday, 14 February 2017

It Would Be More Surprising If Employers Are *Not* Discriminating Against Muslims


A couple of days ago I saw a feature on the BBC News channel on discrimination against Muslims in the job market - Is it easier to get a job if you're Adam or Mohamed?:

"A job seeker with an English-sounding name was offered three times the number of interviews than an applicant with a Muslim name, a BBC test found. Inside Out London sent CVs from two candidates, "Adam" and "Mohamed", who had identical skills and experience, in response to 100 job opportunities. Adam was offered 12 interviews, while Mohamed was offered four."

The reports conclude that there is 'Significant discrimination' going on in the job market against Muslims. The BBC feature also showed that Muslims are the minority group that find it hardest to obtain employment - a fact that is creating all kinds of social problems in areas with high concentrations of Muslims.

With my economist hat on, I don't find it in the least bit strange that Muslims are being discriminated against in the labour market. Quite the contrary, it would be stranger to me if they weren't being discriminated against, because if there is one thing we ought to be discriminating against it is people's views and beliefs.

I have shown before on this blog how the market weeds out unfair discrimination and how it is foolish for an employer to discriminate on factors that don't affect someone's ability to do a job. But that's just another way of  saying that it is wise to discriminate on factors that do affect someone's ability to do a job. That's why we don't see blind lifeguards and people in wheelchairs working on the top of cranes.

Ah, but hang on, being a Muslim doesn't preclude someone from doing a job, does it?

No it doesn't, not usually, but hang on yourself - we are talking about a more subtle kind of discrimination here - one that I can fully sympathise with. Imagine you're an employer and you're shortlisting for five candidates for an interview based on application forms and CVs. You have 4 shortlisted already and the fifth is between an applicant called Adam and an applicant called Mohamed. All other things being equal, it is perfectly understandable why a prospective employer would pick Adam over Mohamed.

That's not to say that Mohamed would always be worse than Adam - in fact, there may be instances where, in not picking Mohamed, the employer has omitted the strongest candidate of all. But you must understand that picking job candidates is not an exact science, it is a probability estimate that occurs in a fast-paced world with lots of asymmetry of information.

Knowing that Adam the non-Muslim and Mohamed the Muslim are equally qualified, the prospective employer knows that as a broad cross-national probability estimate, Adam provides less of a risk of being a worse employee than Mohamed. Like I said, not always, but all the employer is interested in at this stage is picking the people who he or she thinks constitute the best candidates to be good work colleagues with as few barriers as possible to doing the job.

Unfortunately for Mohamed, he lives in a world in which people's views and beliefs ought to be scrutinised, and judgements ought to be placed on that scrutiny. One should feel no differently about a scientologist, an astrologer, a member of the BNP, a young earth creationist, and so on - not that these views and beliefs always maketh a bad candidate, but simply that they increase the probability of doing so.

They do so on the basis that if you're sort of person to believe things that are obvious to everyone on the outside as being nonsense, or have views that are obvious to everyone on the outside as being socially toxic, you are likely to be the sort of person susceptible to all manner of bad thinking and dodgy beliefs (I've elaborated on how Islam falls into that category numerous time before on this blog).

So while Mohamed may sometimes be the best candidate for the job, he has an increased probability of missing out on an interview due to the socio-cultural stigma of being a Muslim in a place like the UK. And that's because, even if the probability is low, as long as all other things are equal, a prospective employer ought to factor in Islam into the consideration of who to shortlist for the interview. For example, Mohamed may be less preferable than Adam because being a Muslim, he might have a religious needs that disrupt his work more than Adam (going out to pray during the day for example), he might have a troublesome attitude towards female colleagues, he might be disruptive by being overly preachy, he might be more susceptible to other extreme beliefs, he might be politically toxic to the work atmosphere, and although hopefully unlikely, there is perhaps a slim chance that he might be a radicalised Muslim or go on to become one in the future.

The point is not that all Muslims are like this (obviously!!) or even that the things I described are highly representative of Muslims in the UK (they are probably not!!) - it is that in the landscape of employers choosing prospective employees they are going to pick candidates for an interview that have the lowest probability of being bad workers and bad colleagues. And in a straight shoot out between an unknown candidate called Adam and an unknown candidate called Mohamed, it is easy to see why prospective employers would opt for the former over the latter, thereby making the BBC's discriminating statistics unsurprising.
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