Wednesday, 30 September 2015

Contracting Birth Rates Mean The Gradual Fading Out Of The State


Numerous people in history have uttered the maxim that the measure of a civilised society is how it treats its weakest and most vulnerable members. The elderly are perhaps the best case in point, because children with all their life ahead of them are seen to have plenty of future value, whereas a society that maltreats elderly people may do so on the basis that they have little perceived societal worth.

We used to treat the elderly in ways that would make your blood boil. When we were in hunter-gatherer groups the elderly soon became a burden on the party, taking up resources, slowing them down, and being unable to contribute much by way of hunting or gathering. Consequently, it wasn't uncommon for older folk in the tribe to be starved to death, killed with a sharp or heavy object, left behind to die, or even eaten by some of the tribes with cannibalistic proclivities.

Nowadays we're doing better - we have a social services system that ensures there is adequate treatment for the elderly, and in places like Spain and Italy you'll often find the elderly living with the rest of the family, being cared for until they die. One day we might even allow people the dignity of assisted suicide - a present solecism for which future generations will surely look upon us with horror.

Yet in spite of best intentions, and all the progress we make ethically, there is still something that will cause us big problems in the future, and is starting to already. The problem in question is a financial discontinuity between the tax that can be gathered and the money needed to be gathered to sustain State-funded institutions like the NHS and pensions. When state pensions were first introduced there was an 8 to 1 worker to pensioner ratio. Currently there is a 3 to 1 ratio, but at some point that will be reduced, perhaps even to the point where there is just 1 worker for every pensioner. For this reason alone the NHS is only going to survive if it is fully privatised, which it pretty much will be in a few decades.

But the problem deepens because most developed countries have systems of welfare that depend on a growing population to sustain their workforce. Apparently, though, we're told that after a steady growth since 2001, the past three years have seen birth rates fall quite sharply (that's not to say this trend will continue). If birth rates continue to fall and life expectation continues to rise (both of which seem quite likely) then there will be relatively fewer workers paying taxes towards the NHS and pensions.

Because of this, taxes have been way too high, which negatively affects total revenue from earnings. Also the tax threshold for low earners is far too low, which means people in the lowest quintile are often not keeping enough of their wages, and some finding it is not worth their while being in work at all. There is no question about it: things cannot go on as they are - the State is going to have gradually unload its most costly institutions - institutions that were once affordable, but due to a very different ratio of workers to pensioners, no longer is.

Monday, 28 September 2015

Conflict Of Interest


One of the most important things anyone can master about economics is that prices are not just numbers, they are vital information carrying signals too. Prices are the result of billions of transactions all over the world, and while they are always in states of fluctuations, they are the only reliable mechanism for exhibiting economic value in society.

If the supply of oranges rises or falls relative to the demand for oranges, then the price of oranges will fall or rise accordingly. That falling or rising orange price is a signal to suppliers that they might be wise switching their business to something else or perhaps that they should augment their business. Governments are not very good in the supply and demand market, because any price fixing they do is bound to be either too low or too high (it is almost always too high).

Interest rates, like oranges, are subject to these fluctuations too. If savings are in scarce supply but there is a high demand for borrowing, then interest rates will rise. This will reduce demand for borrowing (because with compound interest borrowing is expensive) but it will also increase the incentive for savers (because people who save will get a better return on their money). As more money is saved, more capital becomes available to be loaned out, and the price (that is, the interest rate) will fall, making borrowing more enticing, and increasing demand for loans. Just like with oranges, the price of borrowing fluctuates in order that as closely as possible it matches savings supply with the credit demand.

Consequently, interest rates provide signals regarding the extent to which people are willing to forgo something in the present for something more desired in the future. So interest is basically a tax on borrowing, but you should know too that interest rates do not mean the 'price' of money as most people seem to think. They think in those terms because interest rates are mostly attached to borrowed sums of money (for a mortgage, a car, a university degree, and so on).

Remember though that although a bank loan appears in the form of money, it is usually spent within a few hours or days - and whoosh, it is back in the banking system in somebody else's account. Interest rates, then, are not to do with the price of money - they are to do with the price of consumption - what you buy with the money. The rate you pay in interest is the price of consumption now against future consumption. As an example, suppose you have £25,000 in your account and you buy a new kitchen tomorrow for £5000. You're left with £20,000, and you haven't had to borrow anything, so you've paid no surcharge on your consumption. But suppose instead that you have no savings but you want a new kitchen right away. You can borrow the £5000 with a 5% yearly interest rate and pay back £5250. The £250 surcharge is the price you've paid for consumption in the here and now.

Most people don't realise this - they see that the Bank of England sets interest rates and they assume it's to do with the price of money not the price of consumption. Interest rates are determined by banks, but they are based on the supply and demand related to consumption. Banks don't control people's supplies and demands, so ultimately they don't control interest rates, only at a proximal level. A ship's captain is in control of the ship, but he's not in control of the weather that controls the state of the ocean.

When interest rates are lowered a lot of keen borrowers come along to capitalise. To satisfy this demand the Bank of England must increase the money supply, which drives up prices. As people are borrowing to consume goods, not to store money, they will need more money, which the Bank of England must respond to with a further increase in the money supply, which further drives up prices, and round and round we go. To avoid hyperinflation the Bank of England raises interest rates again.

Suppose the government wastes £50 billion on a building a whole new railway project that never comes to fruition. The key of the cost is not the £50 billion in monetary terms - money is just an abstract concept - it is the cost of the materials and the labour that went with the project. The materials and the labour amount to a £50 billion deficit that could have been used elsewhere; building aircraft or improving sea defences, for example - so with fewer materials and labour available the British public has a deficit in what can be consumed - a £50 billion deficit to be precise. With 63 million people in the UK, the £50 billion costs each person just over £790.

Imagine you have some money you want to invest - in what should you invest: in consumable goods or services? Say it's in consumable goods, then ok, what kind? After all, car investment is a different investment to a sweet shop. In countries where governments mess around with interest rates, they distort the allocation of capital – investment doesn't consistently go to the optimal stages of production, which means we don't get ideal production of goods. That, in a nutshell, is why we shouldn't desire that governments set interest rates. For all his faults, Gordon Brown granted the Bank of England operational independence over monetary policy, which meant that politicians were no longer setting interest rates.

A lot of people hailed this move, but the trouble is it was only a step in the right direction, it didn't go far enough. It's better that banks set interest rates than politicians, but it's even better if interest rates are determined by the market rather than by the Bank of England.

The problem with governments or de facto government agencies like the Bank of England setting interest rates is that they don’t have the information signals they need to set the price correctly, any more than they would with oranges or kitchens. Because interest rates are prices for borrowing, they should be determined by the supply and demand market in exactly the same way that oranges and fridges are. It's only because most people don't see the 'price' factor of interest rates in the same way they see the 'price' factor of oranges and kitchens that see them differently. But the same principle still applies as in my opening paragraph: artificially setting prices, even interest rates, means things like consumer preferences, quantity of resources and risk levels are distorted.

In the banking sector, saving is simply the supply of new capital, and investment is the demand for new capital. They need to be equalised by market price mechanisms just as much as oranges or kitchens. What equalises the supply and demand for savings and investments is interest rates - it is simply the name for the price of borrowed capital. So when we read articles like this one in The Telegraph about how the Bank of England may need to push its interest rates into negative territory to fight off the next recession, we get a glimpse of one of the many problems that occurs when governments or government agencies mess around with the price system.

If interest rates are kept artificially low, this will increase the demand for government supplied capital and reduce supply of actual capital, which will increase levels of borrowing and discourage saving. Similarly, if interest rates are artificially high it distorts the levels of borrowing and savings the other way. Moreover, the injection of more money into the economy through quantitative easing creates the illusion of more capital only in the same way a bartender could create the illusion of more Jack Daniels by pouring some water in the half empty bottle.

 

Friday, 25 September 2015

The Philosophy Of Vegetarianism


Oh golly gosh, if it's true - that Jeremy Corbyn has put a vegan, Kerry McCarthy, in charge of farming and agriculture policy - you just can't write this kind of material. Well, you can, but you expect it to appear in TV comedies like The Thick Of It or Veep, not in mainstream politics.

There is a lot to like about Corbyn, but if he did appoint Kerry McCarthy to this role then either he was terribly sloppy in not knowing enough about who he is appointing, or he thinks a woman who recently asserted that "meat should be treated in exactly the same way as tobacco with public campaigns to stop people eating it" is a good choice for being in charge of a multi-million pound industry driven by mass consumption of meat. Such an appointment is rather like putting Anjem Choudary in charge of policy for social cohesion.

Anyway, this news story gives me the chance to say something off the wall about the philosophy of vegetarianism. Some people don't eat meat because they don't like the taste of it. This part of the blog isn't addressed to them. It's addressed to those vegetarians who don't eat meat on the grounds that animals bred for mass consumption are often in conditions that appear undesirable and immoral.

I only want to play around with ideas here because I'm perfectly willing to accept that some of those mass production conditions are pretty rotten environments, and that many animals would be much better off if they were looked after better.

But there is still a philosophical question attached to this issue which is never really addressed - and that is, what is it like to be an animal bred for consumption, like, say, a chicken or a pig? The first thing to say is that no human actually knows the answer to this, and never will.

It's interesting isn't it - trying to empathise with animals - it leads to mixed results, or at the very least questionable logic. Here's an example. My wife is a vegetarian, and when I eat pork chops or bacon, she occasionally tries to justify why it is bad ethicality (always very lovingly, I should add) by saying something like "Think how awful it must be for pigs bred in large quantities in confined space for the purposes of human consumption".

I pointed out to her that the 'pathetic fallacy' (ascribing human emotions to non-human things) is sometimes likely to mislead us in the case of animal ethicality. In imagining the bad experiences of pigs in confined spaces we can't help but do so from a human perspective, knowing that we'd hate to be crammed up in fences with a lot of other pigs. But I’m not sure that says as much as some people think – after all, it’s obvious from a human perspective that being locked in a pig’s body with a human brain under even the nicest pig conditions is going to be hell for us. In other words, even if we were given the best living conditions for a pig, it would still be dreadfully unpleasant for us to be walking around all day every day in a dirty old sty eating nothing but corn, barley, oats and wheat.

So the argument for vegetarianism based on animal living conditions seems to be tenuous, as for a human the negativity of being a pig in either good pig conditions or bad pig conditions seems largely indistinguishable when juxtaposed with the pleasures of being a human mind in a human body. This really amounts to saying that being a pig or chicken or cow with a human brain would be terrible, so I refuse to eat meat.

That doesn’t mean vegetarians aren't onto something with their ethics, or that many don't have other good reasons – I’m just offering a word of caution about the pathetic fallacy, and suggesting that, actually, our interpretations of different animal environments are immensely speculative.

I think, in the end, my wife and I decided to agree on the most obvious candidate for being true - that pigs, chickens and cattle are bound to less happy crammed in confined spaces than not. After that agreement I carried on eating meat and my wife carried on being a vegetarian.

Thursday, 24 September 2015

What's The Optimum Income Tax Rate? It Probably Will Surprise You To Know That It Is Zero


In a period of time in which Corbynomics has gained much electoral sway, and the man behind it, Richard Murphy, is talking about raising top rates of tax to the disastrously high levels we saw in the 1970s, it would be good to bring things back to reality by reminding everyone that the idea of taxing ourselves to prosperity is a ridiculous one that's been discredited at every turn in history. To give you an idea, this is a chart that shows some differing tax incomes in the UK based on differing top rates of tax.


This is often brought up because of Chancellor Nigel Lawson's great reforming tax budget in 1988 where he famously cut top rates of tax from 60% down to 40% and saw increased economic growth and generated more tax revenue in the process. As you can see, in 1986-87 when the top rate was 60p, the richest 1% contributed just 14% of all income tax, whereas once the top rate was reduced from 60p to 40p, the proportion paid by the richest 1% soared to 21% where it stayed.

This is all about what's known as the Laffer curve, which shows the relationship between tax rates and the amount of tax the government collects. Obviously with the current system of fairly large government, 0% and 100% would bring in no income at all, with the optimum amount being somewhere in between. So if you start to increase it from 0% upwards you see an increase in tax revenue, but after a certain point the line will flatten and it will reach a point of declension when too high a tax rate discourages work and innovation, and encourages avoidance and evasion, makes some people leave the country, stops others from investing, and increases black market transactions too.

In this blog post I explained why the government tends to behave a bit like the mafia running a protection racket - they try to extract out of their victims as much as they can without extracting so much that they ruin their business and can no longer collect any money. Incidentally, the last time I checked, the Centre for Economics and Business Research (CEBR) calculated an optimal top tax rate of 36% - even lower than Lawson's great reforming tax.

No one knows, under the present system, exactly what the optimum top tax rate is, but all the evidence shows that high rates in the region of 60%-80% are ridiculously off the mark. We know that fairly recently when the top tax rate was reduced from 50p to 45p the Treasury received an extra £1.3 billion in income tax from the top earners. The ratio saw the top 1% contributing over 29% of the nation's income tax. Not only was it less when the rate was 50p, we can contrast it with the ratio in the 60p mid-eighties top rate when we had the top 1% contributing only 14% of the nation's income tax. You may also be interested to know that as things stand with the 45p tax rate, the tax gained from the top 1% is apparently at a record high. They earn 13% of the income but now pay 30% cent of income tax collected.  Even the top 0.1% (stress that's nought point one percent, not one percent) pay a comparably astronomical 14% of the total income tax paid, which is an increase by a factor of 140.

Consequently, the way the system is set up at present, my best guess for the optimal top tax rate would be somewhere between the CEBR's 36% and the current 45% rate - although in actual fact, I suspect that as the government continues to get smaller and smaller in the coming decades even 36% will seem unthinkably high - particularly if a little known and abstruse mathematical proof called the Chamley-Judd Redistribution Impossibility Theorem ever becomes more well known, as it demonstrates a proof that the optimum capital tax rate is zero, because it’s actually impossible to make the workers in an economy better off by taxing capital.

Finally, Arthur Laffer, on whose wisdom the aforementioned Laffer curve is based, looked thoroughly at specific US state tax policies against economic growth. It's no surprise that the USA saw the same kind of results that we saw in the UK:

"Laffer compared the nine states with no income tax with the nine states with the highest income tax rates over the last 10 years. The nine with no income tax have experienced higher revenue growth rates, higher productivity growth and lower unemployment growth. Similarly, he looked at the 11 states that have introduced a progressive income tax in the last 50 years. Each of those states has experienced a decline in gross state product as a share of the total U.S. product and a decrease in revenue as a share of the total state tax receipts. Laffer concluded that a tax structure that includes a progressive income tax “not only causes a state economy to grow more slowly, but leads to a lower standard of living, lower productivity growth, and thwarts expectations of revenues.”

Laffer, like most people who understand economics, advocates a low flat tax with no deductions as the best tax structure for economic growth. If only our politicians had the courage to put growth ahead of votes.

Tuesday, 22 September 2015

These Paroxysms Of Lust Over The Public Sector Are Truly Baffling


It constantly amazes me that there are still so many people in the UK who live under the long-refuted misapprehension that public services are better than the more competitive, efficiency-inducing private sector. Currently making the headlines at the minute is the news that if he got the chance Jeremy Corbyn will commit to bringing all rail franchises back into public ownership. I saw two articles out yesterday that give well-argued reasons why railway nationalisation is a bad idea – one from the Adam Smith Institute’s Eamonn Butler (see here), and one from the IEA’s Philip Booth (see here). I’ve also written a couple myself a while back, which you can see if you access my ‘Transport’ link on the side.

Despite many compelling arguments, one area that neither Mr Butler nor Mr Booth considered is the area of opportunity cost, which is what we consider when we factor in what isn’t done as well as what is. I'll explain. There's a well known comment by economist Milton Friedman who wanted to rebut the idea that if soldiers enlisted in the army for money rather than duty they would be mercenaries, because to join the forces for money casts an aspersion over their commitment and patriotism. Friedman refuted the idea that a paid volunteer in the army would be worse than a conscripted member by pointing out that compulsory conscription isn't impassioned patriotism either, as forced servitude also does not contain the volitional incentives for serving one's country with impassioned patriotism. Friedman said the following:

“In the course of his [General Westmoreland’s] testimony, he made the statement that he did not want to command an army of mercenaries. I [Milton Friedman] stopped him and said, ‘General, would you rather command an army of slaves?’ He drew himself up and said, ‘I don’t like to hear our patriotic draftees referred to as slaves.’ I replied, ‘I don’t like to hear our patriotic volunteers referred to as mercenaries.’ But I went on to say, ‘If they are mercenaries, then I, sir, am a mercenary professor, and you, sir, are a mercenary general; we are served by mercenary physicians, we use a mercenary lawyer, and we get our meat from a mercenary butcher.’ That was the last that we heard from the general about mercenaries.”

This kind of wisdom is the kind needed to show why proponents of government-run services overestimate the benefits and underestimate the costs. To show where they've gone wrong we need to see why the question of whether voluntarily paid soldiers or conscripted soldiers cost the nation more. Friedman showed that conscripted soldiers cost more by showing that costs are not the same as expenditure.

The expenditure of an army soldier is what he is paid in salary, whereas the cost of an army soldier is how much his being in the army robs society of the skills and abilities he could otherwise put in. Those who've chosen the armed forces are those who are getting paid for their chosen vocation; those who are conscripted are those who are now not free to do what they'd otherwise be doing.

When Elvis Presley was conscripted in the army, the cost of that conscription was whatever he didn't record or film whilst in there. If he'd been denied the reported $200,000 he was paid for shooting the film GI Blues then his conscription cost would have been $200,000, and the expenditure would have been whatever his military salary was (Muhammad Ali on the other hand refused to be conscripted on grounds of religious beliefs, which cost him personally his boxing title).

Alas, the politicians like Corbyn who are calling for re-nationalisation of the railways would do well to become mindful of the difference between costs and expenditure regarding government-run services. Not only do we see greater inefficiency and waste in government-run services due to the credit-guarantee that comes in the form of taxpayers, we see that government expenditure can't be considered without also considering cost too. The expenditure for nationalised railways is evident - although the extra costs, like pension contributions, sick pay, holiday pay, human resources costs, and so forth are usually overlooked, as are labour costs by being treated as beneficial jobs rather than expenditure (which is what they actually are). It's the costs that really bring about the inefficiency.

The cost of having 'conscripted' private sector employees in the railway is the cost of what they would be doing if they weren't being paid by the taxpayers. It's true some might be working in the rail industry, but they would be being paid by private company expenditure not taxpayers expenditure. So to put the analogy to effect in a more general sense, the cost of being nationalised is the cost borne by what those workers would otherwise be doing were they not funded by the taxpayer.

The other reality check pro-nationalisers need is over the issue of why the railways system is as it is. Train tickets are not priced as they are because there are private operators - they are priced as they are because the subsidies that used to keep the prices lower have been reduced. Whether the subsidy is increased or not, it is not an argument for re-nationalisation, which means running at a loss for the taxpayer, and more inefficiency too.

It's true that rail fares have crept up, and it's true that trains are delayed, they break down, tracks get damaged, and carriages get overcrowded, but to think that these problems are caused by not having the government in charge of the railways is really quite ludicrous. Consider prices – everyone’s favourite complaint. The complaint the rail fares are hugely overpriced, and that a government-run service would bring this back in check is overinflated, because the current profit margin for train operating companies is only between 3% and 5%. Ignore the fact that if the government makes no margin it becomes a very precariously run (and costly) enterprise – at 5% profit margins, a reduction of up to 4% on your train ticket is hardly going to amount to the kind of huge saving many imagine.

As for the issue of over-crowding (another favourite from people who think the trains run inefficiently), they may have missed the fact that the railway network is, actually, nationalised, it is only the train services operations that are tendered out privately. Given the limit on how many trains can viably enter a station at any one time, it is foolish to blame the private franchises for over-crowding. If anything, the sensible pricing that offers cheaper off-peak fares for people who are less price-sensitive or able to travel more leisurely under fewer time constrictions is exactly the kind of competition customers ought to value.

Consider that the government runs a comprehensive school monopoly and there is a shortage of teachers, but that shortage hasn't hiked up teachers' pay. Doctors, surgeons, lawyers and accountants all work in a prolonged qualification-based arena in which it is hard for competing forces to challenge, and that is not due to privatisation, it is due to scarcity. Also, scarcity power (which is what makes prices high) is not absent in government monopolies any more than private monopolies.

The paradox of competitive private industry is that it often starts as a nationalised company (as all the providers in the UK did - electricity, gas, telephones, water, etc), because otherwise there are few providers able to build the initial infrastructure to get their business off the ground. Generally, without governments' anti-monopoly policies one firm would rule because it costs so much to start a business that competition ends up costing too much to compete. For example, suppose no one was providing any large-scale water supplies around the UK. Thinking of economies of scale - to produce tap water, an aspiring water company had to invest in a huge network of water pipes stretching throughout the country. The fixed cost of this investment is very high. However, once in place any company that can distribute water to tens of millions of households brings the average cost down. Yet it often would not be worth another water company building another network of water pipes to compete with the existing company, because if they only got a small share of the market, the average cost would be very high and they would go out of business This is an example of a natural monopoly – but these largely occur when the goods or services provided are not fungible (see below).

That's why it's not always bad when the government first owns the means of production and then gets to the stage where it can sell off the rights of provision to competing companies, whilst stipulating a rule that they must compete for shares in the existing infrastructure.

What conditions this process is whether or not the good or service is a fungible one – by which we mean whether or not that good or service is easily replaceable in competition. The trouble with rail is that it is not a fungible good in the same way that food, clothes or cars are. If you need to take the train to London to Norwich you can't suddenly decide to purchase a vacuum cleaner instead and still get to Norwich, whereas if you're hungry and on arrival you find that sausage rolls at the station are too expensive you can buy some fruit from the nearby supermarket. Similarly, if the price of BMWs or leather jackets become undesirable, there are plenty of other alternatives you can seek, like Fords, Vauxhalls, wool or denim.

With trains things are not quite the same. The only competition for your train fare is other transport alternatives – driving, getting the bus, or occasionally cycling. But the competition in the railway services is not fungible: if you’re at Norwich station looking to get the 7:20am to London, you will not have a choice of trains like you will a choice of snacks and drinks in the nearby shops. A private monopoly or cartel that provides a service (like trains to 25 million people) is very hard to break, as competition for such a service is hard to generate. It's very costly to start up a rival firm to provide 25 million rail customers, and any small firm can be swallowed by being bought out by offering shareholders bigger shares in the larger company, as SKY TV did. Moreover, the fact that profit margins are under 5% shows that rail travellers are not getting ripped off - it is just simply the case that railway services are very expensive to run, they require lots of investment, and are large scale operations - and as such, they need to be run with the kind of efficiency that only the private sector is going to deliver.

Sunday, 20 September 2015

My Favourite Metaphor For Evolution


Scientists have just published an incredible 'Tree of life' for 2.3 million species - a grand achievement in itself (see link at the bottom of the page). The tree of life is one of the very apt metaphors for evolution of life on this planet over several billion years - the other one is the web of life. Both are good in their own way of metaphorically illustrating patterns of evolution from the origin of life right through to the rich variety of life seen today - all of which share the same common ancestry.

My favourite metaphor, though - one which I don't think anyone else has used in relation to biological evolution - is what I call the 'cloud metaphor' for evolution. Scientifically the water cycle is an easily conceivable pattern. Our sun heats the earth’s water; water evaporates into vapour into the air; clouds are formed after the air currents that take the vapour up into the cooler atmosphere condense; those clouds precipitate after growth and collisions in the higher atmosphere, producing a water cycle for the earth. The cloud metaphor based on that cycle is already a very popular one in common parlance. We have distilled terms like ‘casting a cloud’ over a situation, to mean a negative occurrence, or ‘clouded’ to become troubled, or ‘cloudy’ blurred, or ‘clouded’ in suspicion. Nowadays we even have cloud-computing and web data stored in the 'clouds'. How can we apply that to biological evolution?

In the material realm of physics, chemistry and biology, metaphors are there to provide illustration and visualisation to mathematical models. In evolution we are used to the tree of life or web of life metaphors, because the phylogenetic 'tree of life' is good for studies of taxa and the many ancestral lineages (although in some cases, with cladistic ‘hierarchies’ it may be difficult to practically place species in their correct topological relations, even though the theoretics are robust).  But as for evolution as a whole, in what they call 'morphospaces' - a term coined by Matt Ridley - one can zoom in further on the mathematical details, whereupon we find my cloud metaphor comes into its own. I find it to be a beautiful metaphor, and I suspect the only reason we don’t use it much is because its complexity is difficult to conceive. 

Trees of life provide easy branching effects, whereas clouds of probability are much more like the studies of equilibrium and disequilibrium in thermodynamics, where small pockets of order cause slowly populated genetic algorithms that facilitate evolution. This is like a ‘cloud’ of probability searching the space and finding the states of survival systems.  Clouds, of course, are dynamic objects - they do not have a singular position or formation, they have no single coordinate or single velocity - they have a smeared formation over a complex volume of activity and internal movement, and they are continually in states of probability, which makes the metaphor for evolution at a mathematical level particularly compelling because it aptly describes how the laws of physics direct the evolutionary process, as random walk statistics are factored into the dynamics of the probability cloud. Because the laws of physics are driving evolution in morphospace, it means that the particular mathematical weighting on the construction paths is providing those stable pathways, due to the search space being severely skewed by the constraints placed on the system by the laws of physics.

So where in the tree of life metaphor, addition, subtraction and division would be modelled on natural selection, mutations and the consequent genetic variation – in the cloud metaphor it is more closely related to computations that program genetic algorithms, and the laws of physics acting as the programmer.  With this one mass of vapour that we observe in nature’s water system we can constructed a very rich and diverse range of metaphorical ideas from what we observe in nature.

  * Here is the full 'Tree of life' article

Friday, 18 September 2015

Let's Finally End This Myth About Thatcher


When myths are widespread, it's good and necessary to prick the balloon of illusion. Perfect cases in point are these anti-Thatcher memes that used to pervade through the jungle of left wing social commentary. Given that all of the world's most successful economies got the way they did by adopting the things Thatcher espoused*, one would think it should be rare to meet people who are still aboard the anti-Thatcher bandwagon. However, to my surprise I met someone last week who believes Thatcher ruined our economy and made people generally worse off through her industrial policies. When I shared this on Facebook it emerged from the resulting thread that this anti-Thatcher rhetoric is still alive and kicking.

Alas, anyone with even the sketchiest understanding of economics would know why this myth should have long been put to bed. The reality is, the reason Thatcher's economy was a terrific success was largely down to her government’s understanding of the relevance of the works of the likes of Smith, Ricardo, Bastiat, Hayak and Friedman - which, to put in a nutshell, state that global trade, competition, private industry, low taxes, a small State and hard work are the key tenets to a successful economy. It was because of the Conservatives' embracing of these qualities that, despite popular myths to the contrary, Britain actually manufactured more under the Thatcher years than in the decades that bookended her time in office, and increased its public spending in that time period too.

Since the Second World War, and the foundations laid down by the Clement Atlee socialist government, Britain had been awash with economic hardship and putrid nationalisation projects that were being choked by overly-powerful unions. This went on until the 1979 Thatcher years, when she and her party upset a lot of people by transforming an economically impotent Britain into one of the world's economic superpowers again**. It's true that a lot of this comes from, and remains in, London and the South East - but power law distributions make this unsurprising - the whole point is that Britain is an economic powerhouse once again, and it's largely thanks to Thatcher's terms in office in allowing the free market to bear the fruits it couldn't under a stultified socialistic system.

What needs to be grasped is that although the industries most constantly talked about (like coal and steel) declined as a proportion of the aggregate economy, other sectors (like service industries) expanded. To capture the point, next time you’re in London – the country’s economic epicentre – have a walk around and see how many sectors are providing steel, coal and timber compared with service-based goods.

You might also like to note that this isn't a pro-Thatcher bias - the exact same thing happened in all the other prosperous economies too - it's just the way the world was changing. When steel and coal industries declined across Europe and America, that declension was offset by huge expansion in service industries, in every case making the countries in which this was happening richer. The Thatcher government had a strategy to discontinue unprofitable industries - as all governments should with their responsibility to its taxpayers - because despite emotional attachments up north, this unprofitability couldn't carry on under the pretext of it being British unprofitability (replace 'British' with 'white men' and see how it sounds a lot like racism)

The reality is that due to the changing landscape, Britain's coal industry had been declining long before Thatcher. In fact, it's quite famously known that more coal pits were closed under Wilson's Labour governments than under the Tory Thatcher's ones. The reason is obvious - but also widespread across other advanced economies - we saw not only the rise of cheaper coal abroad, but also the rise of first oil and then gas and later nuclear as less ecologically unfriendly sources of power. With that comes a decline in industries that relied on coal, in favour of industries that relied on oil and gas.

A few crazy trade unionists would have preferred to have kept subsidising inefficient and less profitable coal mines (and have the taxpayer pay to prop them up), all in name of Britishness, but as well as sounding a lot like racism to me, it is certainly illogical and economically short-sighted.

I don't dispute that much of what happened to the UK under Thatcher was a hard pill for many to swallow, as jobs were lost, families broken up, communities' clubs shattered, and so forth - but equally what holds us together is going to have to be much more than industrial nationalism. In global economies, climates change all the time - and we humans have to adapt to those changes. Coal mines were shut down because coal could be bought cheaper from abroad. Cheaper coal is better than expensive coal for the one buying it, irrespective of the country from which it happens to come. Trade should have no national preferences, and generally coal mining in the UK is expensive compared to open cast mines in countries such as China, Russia, India, Australia, and Indonesia. It’s the old Adam Smith wisdom again - you can try to produce wine in Scotland, but much better to produce it in vineyards in sunnier countries like France and Italy.

What’s usually the case, as is with Thatcher’s critics, is that they have missed most of the costs and mistaken the benefits for costs, by having too narrow a vision in supporting the parts of the economy that are not healthy (which not-coincidentally, often seem to be the particular industries in which they find themselves). It's no use being emotionally affiliated to an industrial factory that's costing us money just because it happens to be one’s own, or because it happens to be based in one's own country

The argument that supports why enhancing the global connectivity is good for all economies is the same argument that supports why market economics on a global scale is more efficient than the Darwinian natural selection model for economics, and why Thatcher's critics have got it wrong - it is the efficiency of the relationship between prices, supply and demand. It is foolish and impractical to favour bailing out and propping up industries in Britain, when Britain (and the rest of the world) can benefit more greatly (and has benefited more greatly) from the efficiency of the relationship between prices, supply and demand on a global scale. Making good use of the efficiency of the relationship between prices, supply and demand on a global scale is the more or less the same as making good use of the efficiency of finding improved technology. Whenever a government departs from this mandate by trying to artificially improve industries on the basis that they happen to be 'our national industries' (as the Labour Government of the 1970's tried to do) it only succeeds in diminishing the extent to which opportunities to improve everyone's welfare exists.

Competitive markets is what brings about the allocation of resources with maximum efficiency.  Adam Smith showed in his seminal Wealth Of Nations that the different ways to allocate resources is only maximised to the best effect when competitive markets function freely (for further reading, this has also been proven mathematically by Debreu and McKenzie). 

There may be plenty of reasons to criticise Mrs Thatcher – but claiming she ruined our industry is not one of them – because, in fact, the opposite is true; she helped enhance our economy in ways that seemed unlikely in 1979.  To criticise her for that is as foolish as criticising all the people driving safely in China and India because you happen to prefer car crashes in Britain.

There is one simple reason why British manufacturing of consumable goods has gone downhill, and if you don't get this point you're not getting the whole picture; manufactured goods acquired from other countries makes Britain richer as well as making the exporting countries richer too. In the vast majority of cases the price system in the competitive marketplace couldn’t have favoured the companies that are no longer manufacturing in Britain – quite simply because consumers started to buy from cheaper manufacturers abroad.

Let me offer a schoolboy example that shows the logic is correct. Pretend that instead of two countries we have two schools – School A and School B, neither of which is permitted to trade with the other. Johnny at School A has a monopoly on pencil cases. Johnny can sell Billy a pencil case for £5. Now because of a new policy which enables School A to trade with School B, Billy can now buy a pencil case from Charlie in School B for £3. Johnny has two choices, he can match Charlie’s £3 selling price or he can find something else to trade in. If he chooses the latter he will ensure he is no worse off than a £2 loss, otherwise he might as well choose to match Charlie’s £3. So the worst case scenario is that Johnny carries on trading, losing £2 per unit. Billy’s £2 gain matches Johnny’s £2 loss, so there is no net gain or loss. But now consider Freddy at School A.  Freddy, who was never willing to pay £5 for a pencil case, buys one for £3 from Charlie in School B, and goes home happy (as does Charlie with another sale). 

Billy’s gain and Johnny’s loss cancel each other out, but Charlie’s gain amounts to a net gain.  The logic is compelling and simple – in net terms both School A and School B benefit from being able to trade with each other. Instead of two schools, relate that model to every country in the world, multiply that simple pencil case model by factors of billions to allow for an open and competitive market, and different countries’ resources, strengths and geographical positions, and it is obvious that each country benefits from unconstrained trade potential. 

But that’s not the whole story; I have only said why free international trade is good for economies. There is another important factor in this picture – impeding the process of free international trade actually harms the people the government wants to protect – its own industry (and thus, its own citizens). Here’s how it happens. Let’s use a simple and extreme illustration to explain what is a more complex but no less valid truth about why government interference is bad.

Let’s suppose there is a car factory in Newcastle that isn’t doing as well as the Executives or the Government would like, due to consumers’ preference for cars in Japan. The Government introduces a policy that favours car production in Newcastle over car imports from Japan.  How on Earth could that not be good for the British economy – Britain’s gain is Japan’s loss, right? Wrong. Quite simply, what you put into the pockets of the car factory in Newcastle you take out of someone else’s pockets elsewhere in Britain (as well as having people probably paying more for their cars). Consider Slough’s boiler factory; what you don’t see is an almost invisible chain of events; the boilers made in Slough are shipped off to Japan and sold to a company that makes its money producing nuclear reactors, the buyers of which are companies who trade in mineral oils, and those companies deal with companies who make cars in Japan and ship them to Britain. 

In other words, there is a complex economic process that is going on outside of your peripheral vision, whereby both the car factory in Newcastle and the boiler factory in Slough are both bringing cars into Britain. That is to say, if you protect the car factory in Newcastle from competition you must damage Slough’s boiler factory because somewhere down the line they are the competition. So the next time you hear a politician announcing how much he or she wants to do to protect British producers in one industry from foreign competition, be aware that he or she is unknowingly proposing an action that hurts other industries in Britain, and amounts to a net loss in economic efficiency. 

Finally, I'll leave you with a passage I wrote in this blog about the benefits of global trade and how it is similar to the innovations of new technology:

"Finding someone who will do the job for less is a good thing for the economy in a similar way to how improving technology is good for the economy (and in most cases it’s a good thing for the person doing the work too – because having accepted the lower wage job, one presumes he did so because the terms offered were an improvement on his situation prior to accepting it).  In fact, not only is finding someone who will do the job for less a good thing for the economy in a similar way to how improving technology is a good thing for the economy - they are more or less the same thing.  Here’s why. 

Suppose you have a car factory in Manchester, and on the staff team you have 3 innovative engineers; Tom, who designs a machine that assembles the engine valves 25% quicker than the current machine; Dick, who synthesises two compounds that vastly improves the engine oil’s ability to clean the engine; and Harry, whose newly constructed equipment can make seatbelt holders at £2.60 per item cheaper than the current equipment.  I think you’ll agree that those three advances have improved the car factory in Manchester.  And having agreed, it stands to reason that if you want to be consistent you are compelled to agree that finding cheaper ways to employ people is also good for the economy, because it’s the same thing.

When we outsource the work attached to call centres, medical data analysis, computer software design, electrical engineering, and so forth, we are doing something very similar to Tom, Dick and Harry’s improvements in the car factory in Manchester.  That’s the wisdom that it seems too many people miss; new business and trading links across the world are good for the world as a whole, just as new technological innovations are good for the world as a whole.  Hopefully in our lifetime we will get to live in a world in which we see the end of discrimination against total strangers because they happen to live in another humanly constructed geographical border.  Economics favours it, and so does human kindness and decency."

* This is about the empirical nature of economics and the results seen globally when governments learn how to engender freer trade, less state interference, lower tax thresholds, fewer barriers to trade, removal of cronyism and other vested interests and the encouragement of competition. Off the top of my head the two countries that are not embroiled in major instability or civil war but that have departed furthest from those qualities are countries like Cuba and Venezuela - and one can see clearly how undesirable it would be to live in either of those places (you might add North Korea to that too).

** Then Labour, particularly under the Brown era, tried to repeat the mistakes of the 1970s, with irresponsible spending and unmindful borrowing concealed by stealth taxes and misjudged accounting, injecting copious amounts of credit into the system which gave false signals about the cheapness of money and prudent borrowing.

Thursday, 17 September 2015

Science Is The Missing Currency

As has often been said on here, the key drivers in the increase in prosperity and the mass reduction in poverty throughout the decades are the free market, increased trade opportunities, increased scientific and technology advancements and increased population. That is to say, you’ll find a causal relationship between each of these things and to what extent a country is able to prosper from them.

Increased population is hugely beneficial in being conducive to progress, except for in countries that don't have an abundance of the other qualities (I explained that in great detail in this blog post). And the nations that enjoy a healthy, competitive free market and abundant trade opportunities have a long history of being the ones that advanced first, and continue to prosper. However, much of that is commensurate with their scientific and technological advancements too – and this is not often considered as much as it needs to be, as a healthy market requires a healthy scientific development to propel its growth.

The key point here is that in a world in which a global market is pretty well established for most countries, the developing countries' progression race is likely to be decided in no small part by how scientific the country is - particularly in terms of money put into research, and the extent to which that research can bring them into closer competition with the bigger players in the global market.

The primary European nations (England, Scotland, Germany, France and the Netherlands) that dominated the market for trade in the late 19th century were also all the biggest players in terms of scientific endeavours too (joined by America shortly after). They remained the nations that lead the way in the global market, and were later joined by the likes of Norway, Switzerland, New Zealand, Canada, Sweden, Australia, Denmark, Belgium and Finland. Excluding China, which is an exception all of its own, the other recently developed countries that have the biggest edge on the developing world nations are the smaller countries like Japan, South Korea, Hong Kong, Israel and Singapore, which, unlike India, Brazil and Russia (prior to its own internal problems) are able to advance scientifically with a great degree of rapidity, and become big players in the global market without having a large proportion of the population still at the subsistence level.

The upshot is, we know full well that the free market, open trade, a stable government, rule of law and property rights are all key drivers in the increased prosperity and well-being of a nation’s citizens – and history has repeatedly shown that a lack of these things retards progression. It’s quite understandable why: a nation with internal civil conflict, threats of crime and social instability and a corrupt government (as well as geographical disadvantages like being landlocked) is going to find that trade is hindered by these things. You’re less likely to have a country of innovators if there is widespread fear that there is little protection from the state, or strife and unrest among your fellow citizens, or difficulty in imports and exports due to conflict.

But what’s not considered anything like enough is that a key vehicle for a nation's progression is a healthy scientific apparatus, including prodigious scientific investment in training and infrastructure. Having a growing scientific program doesn't guarantee a nation's progression, but not having one pretty much guarantees that the nation in question won't grow very fast until it acquires one.

But even though all that is true, the picture of the changing world in terms of free market progress and scientific global development is pretty astonishing, as this chart shows:
 
 
Here's what it shows. In the 19th century, extreme poverty — defined here as living on less than $1.25 a day — was the pretty much the norm (and yes, this is adjusted for different purchasing power in different countries). In 1820, 94.4% of humans were below that line. Only a small fraction of the world enjoyed standards of living that were not terribly hard. So progress was initially a snail's pace, and by 1910 the share had only been reduced down to 82.4% — a 12 point drop over 90 years. But things picked up after the Second World War, and 89 years after 1910, only 28.9% of people were in extreme poverty. That is to say, from 1820 to 1910 there was just a 12 point drop, whereas from 1910 to 1999 there was more than a 53 point drop. In 2011, the most recent year represented in the chart, the extreme poverty rate had been cut to half its 1999 level: 14.4%

Regular readers will know that I've written before about the extent to which the free market and competition has been one of the primary drivers of the progression-explosion humans have seen in the past 200 years (see for example here, here, here, here, and here). This is the first time I have conveyed so much of an emphasis on nations' scientific progress as an accompaniment to the free market. They are natural bedfellows.

Wednesday, 16 September 2015

Why Parents Probably Don't Influence Their Children As Much As They Think

 
When I was a young boy I grew up in a home that was almost completely absent of books and learning potential, with two parents whose background had little academic pedigree. They were amazing parents though, and what they lacked in scholasticism they more than made up for with love, kindness, support, reliability, generosity and encouragement.

When I started school, and began to meet parents and children from more academically illustrious backgrounds I soon saw what was missing from my home, so I set out to change that, acquiring as many books as I could beg, buy or borrow, and passionately tried to learn as much as I could. By early teens I would have five or six books on the go at once, and I'd regularly write critiques and theses as I built my own young man's worldview.
 
Now, being a writer aged 39, I can see through the lens of retrospection that those early discoveries were the biggest catalysts for shaping who I am today. In those nascent days of discovery I began to suspect that the personality of my parents probably would have only a partial effect on how I would be shaped - and from what I went on to learn from psychologists it seems I was onto something.

I've read numerous studies throughout the years - Robert Trivers, Thomas Schelling, and Konrad Lorenz are three good cases in point - that look at the relationship between nature and nurture. The findings are interesting - much more intriguing than you might expect, particularly regarding the issue of how little parents actually shape their children's lives. When it comes to traits and characteristics, there is a good way to test which of those traits are more to do with nature and which are more to do with nurture. Genotypes are perfect for real life social experiments. With nature, identical twins should share all genetic traits, irrespective of whether they grow up in the same home or whether they are separated at birth. Siblings should share lots of genetic traits too.

But if traits are part of socialisation (nurture) then children brought up in the same household should share many of those traits, even if they are not biologically related. While this kind of quantification is pretty sketchy, it is currently thought fairly consensually that approximately 50% of our personality is genetic. Studies show that identical twins separated at birth are still generally pretty similar in terms of personality, but those studies also show that non-related people who grew up in the same home usually turn out to be very different.

So the indicators are it's not correct to say that the other 50% of variability must come from how children are brought up in the home, as was the standard belief in the days of Freud and Skinner. The variation in the home in which you are brought up is now thought to account for only about 5% of the differences in children. Adoptive siblings in the same home turn out to be as different as two children picked out randomly from the population. In other words, after conception and all the genetic formations, parents only account for a tiny fraction of their children's personalities (see studies by David Cohen for more on this, and most prominently Judith Harris's seminal work The Nurture Assumption: Why Children Turn Out The Way They Do, which blows out of the water a lot of psychological and cultural myths about the parental role).

This will surprise a lot of people - instinctively it still surprises me - and there is bound to be contention from parents who want to insist that they have a major impact on their children's personality. But all the evidence shows that they do not. Point of note, that's not to say that the basic qualities like love, care, protection, guidance, tutelage and kindness are unimportant - they are essential. But what the evidence shows is that if you had say 50 children in 30 homes each with parents employing all those positive traits, you could switch all the parents around in any of the homes and as long as the children stayed in their own homes they would grow into pretty much the same adults under any set of those parents that they were going to anyway (save for the small variability in parents' actual influence, of course).

I understand this is counterintuitive - in fact, it almost beggars belief - but it is true, and Judith Harris as well as Trivers, Cohen (and later on in his career Lorenz), and countless others have amassed lots of evidence for it - children are shaped predominantly by genetic factors and by peer groups, not by parents once a certain quality of parental threshold is reached. Children's cultural heritage, their schooling, their friends, social groups, clubs, coteries and hierarchies are the main determiners of their adult personalities.

So all the evidence shows that if you want the best for your children in life, not only are you at the mercy of genetic factors, you are wise to concentrate a lot of effort ensuring as best you can that they are surrounded by positive influences in their schooling, peer groups, friendships and other social groups. Other than that, perhaps the biggest challenge a parent has is working out how they can have a continually positive impact in their children's well-being, and enrich their emotional and intellectual development when evidence that they are able to do this to any great extent is stacked against them.

 
* Photo courtesy of science:howstuffowrks.com

Thursday, 10 September 2015

Let's Talk About Tax: Forget The Myth That The Rich Are Under-Taxed


Let's get a few facts straight when it comes to how much tax people pay. Last time I looked the top 20% of earners in the UK already pay a whopping 74% of all tax paid. But perhaps an even more compelling figure is that the bottom 50% of earners pay just 5% of all tax paid. I have to laugh when I hear people say that the rich aren’t paying enough tax. When a millionaire gets paid he gets taxed a whopping 50% on the majority of his earnings. If he acquires capital with the remains he gets taxed on that; he gets taxed on the money he saves; and he gets taxed on the goods he buys, the car he drives, the people who live in his house, the holidays he has, and so on, and so on. On one sum of money he can be taxed four or five times, and then if he dies and leaves it to his kids they pay tax on it yet again in the form of inheritance tax.

If he works in a corporation he gets hit with a double tax - on earnings and then on dividends - and on future income in the form of capital gains tax. This is a heavy bias against successful high earners, but it would never be tolerated in lower earners. To do so would be like fining someone for being drunk behind the wheel and then imposing a second fine for having too much alcohol in his bloodstream.

People who like Karl Marx tend to argue that this is quite fair because taxing corporation bosses is like recouping something back for the labour that earned those rewards. What these people don't realise is that such taxes are only a disguised tax on labour, rather like how minimum wage proponents don't realise that enforced labour rates are a price hike on goods and services. When companies pay high amounts of tax, those taxes are largely paid for by workers' wages and increased prices for customers.

Here is an example of the kind of thing the economic left never tell you when talking about inequality in the UK. Before the government has taken any tax from the highest earners and given any benefits to the lowest earners, earners in the top 20% have fifteen times the income of earners in the bottom 20%. However, after the government has taken tax from the highest earners and given benefits to the lowest earners, the income disparity drops to the much the lower figure of 4 to 1. So, those who are forever unhappy that politicians aren't doing more to tackle inequality should be made aware that State-intervening is already really really really going on with extreme measure.

Tuesday, 8 September 2015

Let's Talk About Tax: How Taxing The Rich Can Be Good For The Rich


One reason it is good not to over-tax people is because tax is part of competition, just like goods, services and labour - and competition is the main driver of economic growth. Our tax in the UK is relatively low because we are a nation that's relatively competitive in the global market. That's why our economy (particularly London-Oxford-Cambridge and other parts of the south east) is thriving more than anywhere else in Europe, and why lots of foreign investment is generating lots more economic growth here than in the rest of Europe. Contrary to popular opinion, when we earn money it is not the case that the money belongs to the government and the government lets us keep some of it. The money belongs to us, and although many of us willingly pay tax, the system ensures it is taken off us with the threat of imprisonment for non-compliance.

Despite empirical evidence that low top rate taxes are best for growth, we hear a lot of people on the left asserting that reducing the top rate of tax is tantamount to "Giving hand-outs to the rich while neglecting the poor". That is silly. Such people have forgotten the above maxim - that getting to keep more of what you earn is not a hand-out. If a mugger forces you to hand over your wallet and mobile phone but lets you keep your watch, you're not going to take kindly to a policeman who tells you that in not taking your watch too the mugger was giving you a hand-out.

In terms of what they get out of the deal, the richest people in the UK have every right to argue that they pay too much tax, particularly when considering how relatively little they get for those taxes in return. The richest 5% may own 40% of the wealth but they pay a whopping 48% of total tax. That means by definition they are paying for a lot of public service units that they don't use. Those units confer a State-guaranteed wealth on every citizen that nearly half of which is paid for by the rich. In contrast the bottom 50% of taxpayers pay just 5% of total tax.

I argued in this blog post that there should be no automatic assumption that the rich should pay more tax, but by the end of the blog post I conceded that it's a good thing that they do, largely because rich households have a lot more of their income that is not spent on basic necessities, and thus have more to spare in a way that the poor do not. As well as it being a good thing for those that have plenty to give a helping hand to those that have little, there are also other obvious benefits too - namely that big taxes for the rich enable the government to spend some of the money on things that benefit the citizens of that country - more government spending on scientific research, better roads, better defense, better food standard research, better foreign policy, and so forth.

But there is another less obvious reason why taxing the rich can be good for the rich - one that you may not have considered before. Rich people spend money on luxuries and on status-mongering - and these things are not ultimately helpful to them. At the high end of spending, the law of diminishing marginal utility kicks in, in a big way. The law of diminishing marginal utility basically means that satisfaction from something declines with every additional unit. So for example, if you ate five of your favourite chocolate bars on the trot the fifth would be less pleasurable than the fourth, which would be less pleasurable than the third.

Translating that to rich people: the pleasure gained from getting your first £50,000 Nissan Skyline is greater than the pleasure of upgrading from a £50,000 Nissan Skyline to a £60,000 Nissan Skyline. The general point being that the gains when one goes from very high spending to very very high spending give diminishing returns. On the other hand, if all those £10,000s went towards building a play area in the local park, or towards better roads, or towards supporting a charity that works in global development, or towards more police officers on the beat, then these are benefits that would be more strongly felt in society. In other words, for society the net gain of having a few more police officers in your area is likely to trump the net gain of a few people upgrading from a £50,000 Nissan Skyline to a £60,000 Nissan Skyline.

While we should respect people's desire to spend their money how they want (within reason, and within the law), taxing the rich does them a favour in that it often spends the money on their behalf better than they would, where better equals better for society. Rich people have been known to spend anywhere between £50,000 to £10 million on things like a bottle of champagne; a child's birthday party, a handbag, a wristwatch, a dressing gown, and so on. All this type of spending is done primarily for the purpose of vanity and status mongering - trying to stand out from or emulate their peers. The term for this is often referred to as "Keeping up with the Joneses". The trouble is, when Rich Tom's peers spend more, so does he, which ends up conferring the same social distinction on him for a lot more money. In other words, a man who stands out from his peers by buying a £5000 watch compared with his peers' £1000 watches stands out to exactly the same magnitude as a man who buys a £500,000 watch compared with his peers' £100,000 watch. Status mongering is one of the big causes of obscene prices, and given that insecurity is the primary driving force behind status mongering, it really is quite futile in the long run.

You’re probably familiar with the well known stadium metaphor, in which one-by-one people stand up to get a better view, culminating in all standing up, with no one having any advantage over when they were all seated. That’s what happens in status mongering. Rich people buy more luxurious things in order to attain status, but once others follow suit the comparative advantage dwindles, causing them to increase their luxurious spending further in a rinse and repeat cycle. A poor husband shows he loves his wife with a box of Milk Tray and a £10 bunch of flowers. A multi-millionaire shows he loves his wife with a Prada handbag and a necklace from Hatton Garden**. But it doesn't mean the love shown by the rich person is greater just because the consumption costs are higher.

A tax we really should desire
Personally I don't much care for the kind of people who are so detached from ordinary people's reality, and so focused on status, that they would pay hundreds of thousands of pounds for items like clothes, ornaments and fireplaces. I'm all for the government taxing the heck out of a billionaire's purchase of a fleet of yachts. I would like to see luxury spending taxed highly under progressive income-consumption tax system.

Under a properly progressive income-consumption tax system, taxpayers could pay according to earnings, savings and consumption (maybe high price consumption). Consumption tax could be correlated with savings and earnings, and start low and rise according to expenditure. So for example, everyone pays the same tax on a bar of chocolate but not on a Nissan Skyline or a fleet of yachts.

I would like to see consumption tax according to ostentation (an ostentation tax), where the purchase of a Gucci handbag comes with a high rate of tax. So if you're the sort of smug individual who wants to pay, and can afford to pay, £1000 for a bottle of champagne, or £5000 for a handbag, or £40,000 for a set of 10 dinner plates, you are the sort of person who should be giving a lot back to society (for your own good as well as for the good of society). This is the best redistributive system of tax I can think of - ostentation tax - taxing luxury spending. It would be the closest thing to creating money for the poor out of thin air (although it's not quite thin air), while not punishing the consumption habits of people lower down the economic ladder. If heavy savings are taxed, and luxury spending is taxed, then spending patterns should change to bring more income to lower earners in smaller businesses too.



** This sentiment was beautifully summarised by the economist Richard Layard like this: “In a poor country, a man proves to his wife that he loves her by giving her a rose, but in a rich country, he must give a dozen roses."



  
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