Issue 8 £3.75

FAT TAXES: A WAIST OF TIME? From the Institute of Economic Affairs

PAYDAY MOANS: PROBING THE GENDER PAY GAP

BAD BEHAVIOUR? ...BEHAVIOURAL ECONOMICS IN THE DOCK

INTRO WELCOME New faces. New subjects. New challenges. A sense of excitement, a sense of possibility… and a nagging sense of apprehension. I could, of course, be talking about the start of a new college year. But I could just as easily be talking about the task now facing our politicians, our bureaucrats – and our society – as we move into the post- Brexit universe. In this issue of EA, Razeen Sally assesses the implications of the Brexit vote. Can the UK look forward to a future of free trade and much-reduced regulation? Or will the decision to leave the EU be disastrous? Discover his thoughts on page 56. Also in this edition, we explore capitalism and the environment. Some say the two can never go hand in hand. But on page 25 Christopher and Rachel Coyne contend that capitalism has created enormous environmental benefits right around the world. Our cover story takes a controversial stance on Behavioural Economics. Writer Daniel Ben-Ami says it’s the result of flawed thinking – with dangerous implications for individual freedom. Find out more on page 4. And on page 22, we have a tale of two Smiths and a tale of two economics giants – as Nobel Prize winner Vernon L. Smith pays tribute to the works of the legendary Adam Smith. As ever, this edition of EA features some of the world’s finest writers on economic freedom and I trust it’ll make very relevant and stimulating reading. Don’t forget, all the articles – from this and previous editions – are available for free download at www.iea.org.uk/ea-magazine EA is our most downloaded publication – so don’t hesitate to join in!•

Professor Philip Booth Academic and Research Director Institute of Economic Affairs [email protected] September 2016 facebook.com/pages/ Institute-of-Economic-Affairs @iealondon

01 18 INSIGHT BENJAMIN POWELL on how economic freedom and the protection of property rights helped the Asian tiger roar...

8 PERSPECTIVE 25 FADS & 36 CAMPUS Booms, busts and stagnation FALLACIES Why we’re going to Hull Assessing the long-term Can capitalism be green? and back – plus all the latest impact of the boom that Are capitalism and student news from the IEA preceded the Great environmental concerns Financial Crisis really mutually exclusive, 38 CITY VIEW ask CHRISTOPHER and How the Treasury got in 12 PRÉCIS RACHEL COYNE a stew Expired licence? …over the EU – and what Our new book on the BBC 29 REBUTTAL dumplings can tell us examines the future of the Bad Break…if you live in the UK about trade! corporation – and questions What`s the link between TV the continued justification of blockbuster Breaking Bad and 42 IDEALOG the TV licence fee the NHS? KRISTIAN NIEMIETZ Touting opinion on ticket explains... sales, tax havens and more in 22 INTERVIEW the best of the IEA blog Smith on Smith 32 VIEWPOINT Nobel prize winner VERNON A new kind of journalist? 46 REVIEWED L. SMITH on the lasting legacy The demise of investigative & REVISITED of economics giant – and journalism – and how Essential and recommended namesake – Adam Smith academics could fill the gap reading – both old and new

02 CONTENTS

ON THE COVER 4 BAD BEHAVIOUR Commentator, journalist and author DANIEL BEN-AMI puts Behavioural Economics in the dock

43 PAYDAY MOANS LEN SHACKLETON on the gender pay gap, sexism and supply and demand

52 WAIST OF TIME 48 BRIEFING The IEA’s Bite size summaries of CHRISTOPHER essential reading from around the globe SNOWDON weighs in on the fat tax debate 50 SOUNDBITE Short and snappy views on the Brexit debate, wildlife conservation – and much more

Editor Philip Booth Creative Director Glynn Brailsford This edition of EA magazine was made Design Marian Hutchinson possible, in part, through the support of a grant from the John Templeton Review Editor Andre Alves Foundation. Editorial Adviser Richard Wellings The opinions expressed in EA are those of the authors and do not necessarily IEA reflect the views of the John Templeton 2 Lord North Street Westminster SW1P 3LB Foundation. 020 7799 8900 www.iea.org.uk

Although the IEA has made every effort to ensure the accuracy of this publication, neither it nor any contributor can accept any legal responsibility whatsoever for consequences that may arise from errors or omissions or any opinions or advice given. Institute of Economic Affairs 03 BAD BEHAVIOUR? Behavioural economics is one of the latest fashions. But is it subject to “irrational exuberance”, asks DANIEL BEN-AMI FOUNDATIONS

nyone who has what might be called an view consumers as primarily driven by rational instinct for freedom is likely to baulk at considerations. From this premise it is a short being dictated to by experts. step to explain financial crises and economic A A fundamental liberal principle is downturns as essentially bouts of irrationality. The that individuals should have the autonomy to conclusion normally drawn is that experts should make their own decisions about how to run their play a central role in directing economic activity. own lives. It is important to recognise that such claims This insight goes back at least to the eighteenth should not be rejected simply because they lead century. Immanuel Kant, one of the greatest to objectionable conclusions. If the assumption German philosophers, spelt it out in 1784 in of irrationality is true then, whether we like it an essay entitled Was ist Aufklärung? (What is or not, it should be accepted. The key question Enlightenment?): “If I have a book that thinks is whether it is indeed correct. There are at least for me, a pastor who acts as my conscience, a three reasons to question it. physician who prescribes my diet, and so on - First, the claim of irrationality is often based then I have no need to exert myself. I have no on a caricature of orthodox economics. Even need to think, if only I can pay; others will take the most ardent mainstream economists do not care of that disagreeable business for me.” generally claim that humans always act as perfect Overall the passage sounds strikingly robotic calculators. People do not systematically contemporary. In the early twenty-first century we are plagued with self-proclaimed ONE WAY THIS ARGUMENT experts telling us how to do everything from eating IS SOMETIMES EXPRESSED healthily to parenting. The main IS THE CLAIM THAT difference with Kant’s day is that we do not have to pay for HUMANS ARE MORE LIKE guidance from above, or at least not directly. We are bombarded HOMER SIMPSON THAN with unsolicited advice. MR SPOCK However, there is a key clause in Kant’s comment that it is easy to miss. His argument hinges on the assumption weigh up the costs and benefits of every minute that individuals are capable of thinking for decision they ever make. themselves. In reality, the mainstream claim is that an But what if that premise is false? What if assumption of a broad rationality should be the ordinary people, those who are not experts, are starting point for building a model of how the incapable of thinking rationally? economy works. It does not preclude people That is the starting point for the edifice of the from ever feeling emotions, making mistakes burgeoning field of behavioural economics. or miscalculating on the spur of the moment. Many of its proponents, such as Dan Ariely Moreover, outside the economic sphere, say of Duke University, state bluntly that they view in relation to love or family life, people often humans as irrational. The more sophisticated make decisions on grounds other than economic ones, such as Daniel Kahneman, a Nobel laureate rationality. at Princeton, talk more guardedly of ‘bounded It is also common for behaviouralists to assert rationality’. Either way the assumption is that the irrationality rather than to prove it. human thinking process is fundamentally flawed. For example, in a BBC Horizon documentary One way this argument is sometimes expressed Daniel Kahneman, the Nobel laureate, gave the is the claim that humans are more like Homer working habits of New York taxi drivers as an Simpson than Mr Spock. Most people, in this example of irrational behaviour. view, are essentially idiotic and ignorant rather His claim was that everyone wants taxis on than logical calculating machines as epitomised rainy days but on sunny days fares are hard to by the Star Trek character. find. So, he argued, taxi drivers should logically Whatever metaphor is used it should be spend lots of time driving on rainy days when it is clear that if the claim of irrationality is true easy to find passengers. Sunny days, when there it undermines one of the foundations of are fewer passengers around, are the best time mainstream economics. for drivers to take time off. From a behavioural perspective it is wrong to But in reality many drivers do the opposite.

05 FOUNDATIONS

They work long hours on slow sunny days In addition, it is wrong to see economies while knocking off early when it is rainy and as mere collections of individual consumers. busy. Rather than thinking about how best to Modern economies are complex entities with maximise their income they simply aim to earn a large numbers of producers as well as consumers. set amount every day. Once they hit their target Understanding weaknesses on the productive they go home. side of the economy involves examining such Anyone who takes the trouble to talk to taxi factors as low levels of business investment drivers or even to think about the question will and profitability. The difficulties economies realise things are not so simple. face demand careful examination rather than Some drivers say that, contrary to Kahneman’s assertions that they are manifestations of claim, there can be fewer people around when it market madness. is raining. For example, a potential passenger who Indeed it is a rich irony that it is often experts, who in many cases are sympathetic to behavioural THE CLAIM OF economics, who have exacerbated economic problems. IRRATIONALITY IS OFTEN For instance, there is a BASED ON A CARICATURE reasonable case that some central banks contributed to the 2008-9 OF ORTHODOX financial crisis by pursuing an ECONOMICS overly loose monetary policy beforehand. Low interest rates contributed to the creation of is thinking of going out for a meal might decide the financial bubble before the market crash. to eat at home instead if the weather is wet. And, this leads to a fundamental issue. Other drivers claim that passengers tend to want Those who use behaviourial economics to go on less lucrative shorter journeys, rather often suggest that it implies a greater role for than long trips, when it is raining. regulators or the state to “nudge” us in the It is also likely that many drivers have set right direction. But, are not regulators subject expenses to pay, whether it is for food or to behaviourial biases too? Perhaps, for housing, every week. To be sure of meeting example, they systematically over-estimate their their commitments they may need to drive ability to perfect markets. whatever the weather. On a sunny day they may Behavioural economics should be seen as part decide they cannot afford to risk waiting for more lucrative rainy days to come along. The MODERN ECONOMIES weather itself is uncertain. In such cases there is probably ARE COMPLEX ENTITIES no perfect solution which is WITH LARGE NUMBERS right in all circumstances. It is likely the correct answer will OF PRODUCERS AS WELL vary according to particular local AS CONSUMERS conditions and individual needs. The key point is that it is wrong to simply assume that taxi drivers who work long of a broader assault on reason that goes back to hours in sunny weather are behaving irrationally. at least the nineteenth century. They may have rational reasons for driving when It attacks the primary liberal value of individual they do. Indeed they are likely to know a great freedom on the spurious grounds that people deal more about how they run their own lives are incapable of thinking clearly for themselves. than even the most eminent professor. On this basis it opens the way for both illiberal Finally, the claim that economic downturns policy conclusions and flawed economics• can simply be explained as bouts of irrational behaviour is crass. Such arguments tend to be based on simplistic assumptions. Often financial Daniel Ben-Ami turmoil is treated as more-or-less synonymous Economics commentator, with trouble in the real economy when the journalist and author relationship between the two is complex. [email protected]

06 Study Economics at Buckingham with a Ronald Coase Scholarship £10,000

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Find out more: Melissa Wyley T: +44 (0)1280 820324 E: [email protected] W: www.buckingham.ac.uk BOOMS, BUSTS & STAGNATION Some analysts claim a phenomenon called ‘secular stagnation’ is responsible for the disappointing post-crisis economic performance. In other words, there are long-run forces to do with trends in saving and investment that will keep growth low. This article argues that the economy is still struggling as a result of the boom that preceded the financial crisis CLAUDIO BORIO, ENISSE KHARROUBI, CHRISTIAN UPPER and FABRIZIO ZAMPOLLI

08 PERSPECTIVE

roductivity has been Figure 1 Fall in productivity caused by a financial boom and crisis puzzlingly weak in the wake of the Great Financial Crisis. ThisP is especially so in the UK, 0.5 where productivity growth 0.4 since the financial crisis has been close to zero. 0.3 This has heightened concerns about secular 0.2 stagnation – the view that 0.1 a structural deficiency of demand has been haunting 0.0 the world and crippling Annual cost during ...and over a five-year its productive capacity as credit boom... window post-crisis persistent unemployment Resource misallocation Other erodes workers’ skills and investment slumps Notes: Estimates calculated over the period 1969–2013 for 21 advanced (Summers 2014, Teulings economies. Source: Based on Borio et al. (2015) and Baldwin 2014). Those who hold this sustainable in the long term. Figure 1 summarises our view typically also argue This distorted the key findings. It shows the loss that the financial booms – structure of the economy. of productivity per year of unsustainable increases in The protracted post-crisis an assumed five-year credit credit and property prices – weakness therefore may boom followed by a financial that preceded the crisis were reflect in no small measure crisis and then in the five the price to pay for keeping the difficulties of correcting years following the crisis. resources fully employed. the resource misallocations There are a number of In other words, the trends that accumulated during the causes of the productivity in saving and investment previous financial boom and slump. Slightly more than were such that, without the which became apparent once two thirds of the fall reflects credit boom, the economy a financial crisis subsequently the shift of labour to would have under-performed broke out. lower productivity growth earlier. However, once the This is indeed what we sectors. Shifts of labour boom turned to bust, the conclude by examining the into a temporarily bloated hidden demand deficiency experience of 21 advanced construction sector play re-emerged with a vengeance. economies over the last 40 a key role. We are still suffering from years (Borio et al. 2015). For example, a credit boom the pre-crisis boom. The hitherto unsuspected is typically associated with This narrative has some villain in this story is the low interest rates and a merit and has gained misallocation of resources boom in construction and the currency. And it is of course during the credit boom which building of houses, offices, well known that the financial had long-lasting effects. retail outlets and so on that busts that follow booms The findings support the are not viable in the long weaken demand for quite view that the disappointing term – the precise effects are some time. However, there is developments we have been different in different boom also another explanation. witnessing may be the result and bust episodes. The boom of the early of a major financial boom and The subsequent impact of 2000s might have distorted bust that has left long-lasting this labour misallocation is demand and had an impact scars on the economic tissue much larger if a financial crisis on the allocation of resources (e.g. Bank for International follows the boom. Thus, if in the economy. Settlements 2014, Borio 2014, there is a boom followed by a In other words, because of Borio and Disyatat 2014, crisis, it casts a long shadow. the boom, and the associated Rogoff 2015) rather than Think, for instance, of the credit expansion, firms made the reflection of a structural, painful rebalancing in the investments and took other deep-seated weakness in structure of production that decisions that would not be aggregate demand. Spain had to go through

09 PERSPECTIVE

following the pre-crisis boom. deserve deeper scrutiny. Furthermore, especially in If we take a ten-year This analysis also raises the context of the current episode made up of a pre- broader questions. debate, it is worth noting crisis boom, a financial crisis When considering the that monetary policy may not and then five years following macroeconomic implications be particularly effective in the crisis, the cumulative of financial booms and busts, addressing financial busts. impact amounts to a loss it is important to go beyond This is not just because its of productivity of some 4 the well-known and very real force is dampened by debt percentage points. aggregate demand effects overhangs and a broken and to examine also what banking system. It may also What can policymakers happens to the supply side of be because loose monetary do in the bust? the economy. policy is a blunt tool to correct The work that we have done The booms and busts the resource misallocations on this problem attempts to damage the supply side of the that developed during the measure the magnitude of economy by encouraging the previous expansion, as it was the productivity loss following misallocation of resources. a factor contributing to them a crisis. We do not test a Furthermore, ‘supply side’ in the first place. formal model that explains policies are important to We therefore cannot the mechanism by which enable the misallocation of expect low interest rates and the productivity loss takes resources to be reversed. quantitative easing alone to place. However, possible The analysis also helps our solve the problems caused by mechanisms come to mind. understanding of the effect of the financial crisis• During credit booms, the monetary policy. Sometimes, expansion of credit affects monetary policy is thought of different sectors differently. as being ‘neutral’ as far as the Claudio Borio During busts, especially if economy is concerned over Head of Monetary and there is a financial crisis, there the long run. Economic Department, tends to be a scarcity of credit In other words, a lax Bank for International and there is a need to reverse monetary policy may create Settlements the misallocation of resources inflation but, in the long run, [email protected] that happened in the boom. it will not affect aggregate Some sectors find it difficult supply and output. However, Enisse Kharroubi to get credit to expand this work shows that, if loose Senior Economist in the while others may get too monetary policy contributes Monetary Policy Division much of the smaller pie, to credit booms, then these in the Monetary and so that there is further booms have long-lasting, if Economic Department, misallocation of resources. not permanent, effects on Bank for International However, the mechanisms output and productivity. Settlements [email protected]

References Christian Upper Bank for International Settlements (2014), 84th Annual Report, June. Head of Emerging Markets, Borio, C (2014), “The financial cycle and macroeconomics: what have we learnt?”, Journal of Banking & Finance, 45, August, pp 182–98. Also available as BIS Working Monetary and Economic Papers, no 395, December 2012. Department, Bank for Borio, C and P Disyatat (2014), “Low interest rates and secular stagnation: is debt a International Settlements missing link?“, VoxEU.org, 25 June. [email protected] Borio, C, E Kharroubi, C Upper and F Zampolli (2015), “Labour reallocation and productivity dynamics: financial causes, real consequences”, BIS Working Papers, no Fabrizio Zampolli 534, December. Acting Head of Rogoff, K (2015): “Debt supercycle, not secular stagnation”, VoxEU.org, 22 April. Macroeconomic Analysis, Summers, L (2014), “Reflections on the ‘New Secular Stagnation Hypothesis’”, in C Teulings and R Baldwin: Secular stagnation: facts, causes and cures, VoxEU.org Bank for International eBook, CEPR Press. Settlements [email protected]

This article is adapted from a longer article published on Voxeu, available at: http://www.voxeu.org/article/financial-cycles-labour-misallocation-and-economic-stagnation The views expressed are those of the authors and do not necessarily represent those of the Bank for International Settlements.

10

E X P I R E D L I C E N C E ? PROFESSOR LEN SHACKLETON examines a new book from the IEA which looks at the future of the BBC and calls into question the continued justification for the TV licence fee

n May the government published a White the BBC, a collection of essays covering Paper setting out its vision for the BBC. such topics as the licence fee, new ways of While some changes were suggested, most viewing television, the nature of public service commentators have seen the proposals broadcasting, issues of bias in news reporting, Ias very limited. Technology, market innovative sources of competition and possible competition and social change are making privatisation. old assumptions about broadcasting difficult to justify. The BBC and the licence fee Just before the White Paper appeared, the As Philip Booth and Stephen Davies point out IEA published In Focus: The Case for Privatising in the opening chapter, when radio was born 12 PRÉCIS in the early part of the twentieth century available – although even back in the 1940s the Post Office was tasked with issuing and cable-based transmission was possible and charging for licences. could have allowed some competition for the As yet there were no regular broadcasts. In BBC. 1922 radio manufacturers, working with the As usually happens with monopolies, Post Office, formed the British Broadcasting however, the incumbents can offer all sorts Company to provide news and entertainment of reasons why their position should be programmes. maintained. At first this was funded by the sale of The BBC for many years, particularly under its receivers, but as users of existing sets came first Director-General Lord Reith, saw itself as greatly to outnumber new purchasers there having an overriding moral purpose to ‘inform, was a need for continuing funding. In 1927 educate and entertain’ rather than compete in the company was nationalised, awarded a a marketplace. Royal Charter as the British Broadcasting Gradually this position was undermined. In Corporation, and given most of the revenue 1955 ITV was launched, funded by advertising, from the annual licence fee. For many years the BBC was effectively a monopoly FOR MANY YEARS broadcaster. It offered what THE BBC WAS can be described as a ‘club good’, one provided for a fee to EFFECTIVELY ‘members’. A MONOPOLY The same principle was maintained when television BROADCASTER came along. It took its current form in 1946 when TV was re-established after followed in 1982 by Channel 4 and in 1997 by World War II: a joint licence allowed people to Channel 5. Meanwhile the BBC had gained watch TV and listen to radio. a second channel (BBC2) in 1964. From the The government maintained a broadcasting late 1980s cable and satellite TV expanded monopoly for decades. In effect it ‘owned’ the competition further, while the switch to digital relevant part of the electromagnetic spectrum, transmission greatly increased the potential for which it allocated to various uses such as police new channels. and military communications as well as radio. Most UK households now have access Given the technology of the day, only a to around 100 free-to-air channels, with limited number of potential channels were hundreds more available on subscription. And

Figure 1: Viewer shares by channel, 1988-2014

13 increasingly popular Internet streaming services and only be available to subscribers. The such as Netflix and Amazon allow viewers to licence fee could then be scrapped and the watch what they want, when they want it, BBC funded in the same way as Sky or other undermining the twentieth-century idea of a subscription services. channel carrying daily timetabled content. Figure 1 shows how this increased Public service broadcasting competition has reduced the BBC’s share of The idea of turning the BBC into just another television viewers over recent years. subscription channel is opposed by the BBC’s Yet despite this, everyone in the UK aged defenders, who point to the organisation’s under 75 (the very elderly are exempted) who mission, which differs from the commercial watches or records any live television at all has imperatives of ITV or Channel 5, let alone those to pay £145.50 to the government – even if of Sky or Netflix. They emphasise that the BBC they never watch the BBC. is, above all, a public service broadcaster. Competitors regard this as anachronistic Public service broadcasting, as Cento and unfair. While they have to raise revenue Veljanovski argues in his chapter in the book, is through advertising or subscription, the BBC is held to be necessary because of some form of in effect financed out of taxation. It is also able market failure in television and related sectors. to undercut commercial producers elsewhere This argument goes back many years, although by selling its subsidised output in overseas the type of alleged market failure has been markets. disputed. This unfairness is increased with the rapid At one time, shortage of broadcasting uptake of new technology. You can now watch spectrum was the justification for the BBC’s TV on a computer, a laptop, a tablet or a status as a regulated monopoly. As we mobile phone without paying for a licence. have seen, that argument is undermined by Young ‘millenials’ in the UK seem to be technological change. following those in the USA, where traditional It used to be argued that television had viewing via a fixed television set is heading the two key characteristics of a public good for minority status. This is facilitated by time- – which A-level students know to be ‘non- rivalness’ and ‘non-excludability’. Public goods may THE LICENCE FEE SHOULD be underprovided BE SCRAPPED AND THE in a free market and state provision BBC SHOULD BECOME A could be justified. SUBSCRIPTION SERVICE A television broadcast is clearly non-rival, in the switching facilities offered by the BBC iPlayer sense that everybody with a TV can watch and similar services. simultaneously. It used to be the case that It means that many who benefit from BBC nobody could be excluded, but now digital services, including a large and increasing transmission means that exclusion is technically number of people in other countries, do not possible and the public good argument falls. pay. Another claim was that economies of scale There are ways to make more people pay for in broadcasting justified the support of a services from which they benefit. One might be monopoly provider. This argument doesn’t a household levy, as in Germany. This could be seem too convincing today. collected via the council tax system. But those Digital and robot cameras, plus reduced watching no television at all would be treated staffing agreements as union power has unfairly. waned, have reduced studio production costs. The idea that the BBC could finance itself Larger international markets for English- through advertising, once popular, is now language content mean that many commercial no longer credible given that more channels competitors are able to produce high-quality are competing for declining spending on TV drama and documentaries themselves or in advertising. collaboration with other producers. More radically, as Booth and Davies argue, There was also an argument about the BBC’s output could nowadays be encrypted externalities. For instance, having a national

14 PRÉCIS public sector broadcaster brought the nation For many years commercial channels such together and was seen as an important part as ITV or Channel 5 have had public service of a common citizenship. This argument still obligations relating to their content (for has some salience at times of crisis or great example, the provision of news, children’s national events, when many older viewers and religious programming). Channel 4 is instinctively look to the BBC. a publicly-owned business supported by But in a diverse multicultural society viewing advertising, and it too has a public service habits change and the BBC’s audience has remit. fragmented. Even successful programmes In principle, as Veljanovski argues, the may only be watched by 4 or 5 million people government could set up a public service fund, rather than the 11 or 12 million (in a smaller rather like the Arts Council, where broadcasters population) who watched popular shows in could submit bids for financing clearly-defined the 1970s. public service programmes. With this proposal, Probably the most powerful rationalisation first mooted thirty years ago, there would be for the BBC’s current status is the one which is IN A DIVERSE nowadays difficult MULTICULTURAL SOCIETY to make publicly. Economists call it VIEWING HABITS CHANGE the ‘merit good’ argument. AND THE BBC’S AUDIENCE Left to HAS FRAGMENTED themselves, it is said, most viewers would gorge themselves no need for a separate licence-funded BBC. on the televisual equivalent of junk food – endless soaps, ‘reality’ shows, sport, cheap News and current affairs – market dominance chat programmes and so on. They should and bias? instead have a balanced diet, including arts In his chapter, Ryan Bourne draws attention programmes, innovative drama, current affairs, to the BBC’s dominant share in the news and religious programmes, regional productions current affairs market. and content which reflects the diversity of the Approximately 75 per cent of television news UK population. watched in the UK is provided by the BBC, and But while Lord Reith in the 1920s could it has a similar share of radio news. unashamedly make the claim that people A commercial organisation with a similar didn’t know what was good for them, in our market share would be subject to investigation more democratic and less deferential age such by the Competition and Markets Authority. elitism is a difficult sell. Particularly worrying is the dominance of the A slightly more appealing way of making publicly-funded BBC in local and regional news this case is to argue that in a diverse society reporting, at a time when local newspapers are people’s preferences will differ between age in great difficulty with falling readership and groups, between regions, between ethnicities advertising revenue. and so on. Another related concern is the BBC’s online The danger is that minorities with a presence: its website covers a vast range of strong interest in, say, classical music, ballet, topics including many non-news areas where it unusual sports, challenging plays or specialist competes directly with commercial providers. documentaries will be under-supplied when For Bourne, this market dominance raises companies compete for large audiences. concerns about potential bias and its effect on Against this, many of today’s most political debate within the UK. exciting and innovative documentaries, arts Politicians are very quick to accuse the BBC programmes and drama can be found on of bias, particularly when a member of their commercial channels and streaming services party performs badly in an interview or a policy which find such niches profitable, possibly is reported on unfavourably. The Conservatives because they appeal to more affluent viewers. accuse the Corporation of bias in favour of To the extent that there is a definable Labour, while the Labour Party detects a pro- need for subsidised public sector broadcasting, Conservative bias. The BBC often argues that should the BBC continue to play the major role? this proves its neutrality.

15 Bourne, however, takes a more objective subject, and may be opposed to the views of view. He recognises that the BBC is highly many sections of the population. trusted by its viewers and listeners. Drawing The sort of person who chooses to work at on data from News-watch (a monitoring the BBC is signed up to this world view, which organisation) he argues that bias is not a means that other views are marginalised and simple party-political issue, but more subtle. either misrepresented or ignored. He argues that there are three elements of potential bias in any news organisation – The future of the BBC omission (of an appropriate range of views on The government’s White Paper (A BBC for a topic), selection (of what is newsworthy, and the future: a broadcaster of distinction), who should be asked to comment on it) and while recognising some of these issues, has presentation (the context of news stories and disappointed many people, including the how spokespeople are introduced). authors of the IEA book. These factors are not necessarily apparent In setting out a plan for the next eleven years to the viewing and listening public. No news before the next Charter review, the White organisation can ever escape these subtler Paper recommends keeping the licence fee, biases, but greater competition could mitigate and raising it in line with inflation. their effects. It intends to charge people who use In a separate chapter, Stephen Davies also iPlayer: whether this succeeds in increasing discusses the issue of bias, drawing attention revenue significantly is debatable. It will almost certainly inconvenience A PRIVATISED BBC COULD existing licence- BE A WORLD PLAYER payers who will probably have WITH HUNDREDS OF to fiddle about entering their MILLIONS OF VIEWERS IN licence fee number MANY COUNTRIES before accessing this service. to the internal culture of the BBC, and There will be a very limited experiment with arguing that the processes of commissioning, commissioning public service broadcasting, production, delivery and presentation tend though there will be wider opportunities for to produce programmes based on independent producers to get work at the BBC. ‘conventional wisdom’. The Corporation is to be encouraged to form This involves ideas that people amongst the partnerships with local news outlets. There is political and media elite rarely challenge, but renewed commitment to diversity, a greater which do not represent the last word on the openness about the pay of top BBC talent, and the involvement of the National Audit Office in scrutinising BBC spending. There are also internal governance changes, QUESTIONS FOR DISCUSSION with a new unitary board instead of the current structure with an executive board and • Is the licence fee a fair and efficient the BBC Trust which sets strategy. In addition way to fund the BBC? What are the the BBC is now to be regulated by Ofcom. alternatives? Despite these changes, the BBC’s status is to remain essentially unaltered. The IEA authors • Is there a ‘market failure’ in would have preferred fundamental reform. In broadcasting? If so, what is it? their view, the licence fee should be scrapped • What is the difference between a ‘club and the BBC should become a subscription good’ and a ‘public good’? service. It should withdraw from some areas where it competes unnecessarily with the • How might ‘bias’ in news broadcasting private sector. It should no longer be a public arise, and can it be eliminated? body, but what form privatisation should take • If the BBC were to be privatised, what is open to further debate. forms of privatisation are possible? One view is that the BBC should be reconstituted as a members’ organisation

16 PRÉCIS like the National Trust, with the members up, and greater freedom to form commercial – subscribers – being represented on its partnerships. governing body. Some claim that the government really Another possibility would be to set it up wanted to adopt some of these ideas, but was with a large trust fund and operate with a constrained by wishing to avoid controversy governance structure resembling that of the at a time when the EU referendum was at the Guardian newspaper. Under both of these forefront of its thinking. models some of the good features of the ethos If this is the case, it suggests that the of the existing BBC could be maintained. proposals set out in the IEA’s publication will A more radical approach is advocated by Tim return to prominence well before the end of Congdon in the final chapter of the book. He the BBC’s new extended Charter. suggests a straightforward privatisation of the BBC on commercial terms. Professor Len Shackleton He sees huge potential for a privatised BBC University of Buckingham as a world player with hundreds of millions [email protected] of viewers in many countries, rather than a business largely focused on the UK. The Corporation is at present a relatively small player worldwide: indeed its share of world markets is falling. FOR MORE… The UK has a comparative advantage in Read In Focus: The case for television and related media services, as a privatising the BBC in full. result of its history, reputation for quality and Download it for free at: I N the English language, but the BBC cannot fully www.iea.org.uk/ exploit this in the current framework. F O C U S publications/research/ In order to change this it needs access to The case for PRIVATISING the BBC in-focus-the-case-for- large amounts of capital which will never be Edited by privatising-the-bbc obtainable under the existing and planned set- PHILIP BOOTH

“A MAJOR CONTRIBUTION to better understanding of one of the FORMATIVE PHILOSOPHIES of the MODERN AGE” Dr Stephen Davies

The IEA’s primer on this misunderstood, misrepresented but most important way of thinking is available now for FREE DOWNLOAD at:

www.iea.org.uk/publications/ research/classical-liberalism-a-primer

The growth of Asia was based on an increase in economic freedom, relative openness and the protection of property rights – not protectionism and state planning, says BENJAMIN POWELL

he rapid economic growth of East Asian Japan’s industrial base had been decimated in economies after World War II led many the war and it had a similar per capita income. to mistakenly believe that government In the span of a single generation all these T industrial planning policies were the economies grew to achieve first-world living key to their success. Nothing could be further standards. from the truth. Some have attributed the growth in these Although some industrial planning existed, countries to national economic planning. Ha- it was a relatively large measure of economic Joon Chang goes so far as to claim that “there freedom that is most responsible for their long- is now a broad consensus that the spectacular term development and prosperity. growth of these countries, with the exception The post war growth record of the East Asian of Hong Kong, is fundamentally due to activist “Tiger” economies is staggering. Hong Kong, industrial, trade and technology (ITT) policies by Singapore, Taiwan, and South Korea all had the state.”i pre-industrial standards of living with incomes That “consensus” exists largely among a small significantly below $500 per capita in 1950. group of scholars who have been repeating, in 18 INSIGHT varied forms, the same claims since the early is necessary to discover how resources are best 1980s. But their argument is unconvincing on allocated. No central planning body can replicate both theoretical and empirical grounds. this process. By bidding against other would-be The industrial planning problem entrepreneurs, those successful in securing capital State industrial planning involves a government and labour are forced to take into account the agency selecting what industries should value that others thought that they could create be promoted to best achieve economic with those very same resources. development. Then, they funnel labour and The market’s competitive process is not perfect. capital to those industries through, direct cash or Entrepreneurial mistakes are revealed through technology subsidies, trade policy that protects the profit and loss system. Some enterprises will those industries from international competition, go bust; others will thrive. It is only through this and controls on foreign investment and other process that the knowledge of which capital regulations. goods should be created, and to which industries Ha-Joon Chang contrasts the industrial capital and labour should flow, is revealed. planning model with the standard textbook case State industrial planning interferes with this for free trade. That textbook case, he claims, process of discovery. Through trade protection assumes that “productive resources can move and subsidies the state biases the competitive freely across economic activities” but in reality, bidding process in favour of particular industries “this is not the case: factors of production cannot – often selected because of the lobbying of take any form as it becomes necessary. They are interest groups. usually fixed in their physical qualities and there Planners stifle the very process that discovers are few ‘general use’ machines.”ii the knowledge needed to ensure that capital and But this very fact, that capital is not homogenous labour is allocated to the right industries. Rather or equally suited to all uses, creates an than rationally planning the economy, state insurmountable problem for industrial planners. planners’ attempts to steer the economy amount If industrial planning were going to promote THE POST WAR GROWTH economic growth, the RECORD OF THE EAST ASIAN planners would “TIGER” ECONOMIES IS need to have knowledge STAGGERING. IN THE SPAN OF A of what is the SINGLE GENERATION ALL THESE right capital to create and in ECONOMIES GREW TO ACHIEVE which industries FIRST-WORLD LIVING STANDARDS it should be created. But this very knowledge is only revealed through the to what Don Lavoie called, “the blind leading the market’s competitive process. sighted.”iii In a free market, entrepreneurs bid against Some advocates of industrial planning attempt each other for labour and capital. They bid based to deny a need to “pick winners”. Robert Wade on their expectations of the profits that their claims that: “‘Picking Winners’ implies that the envisaged entrepreneurial venture will create. potentially competitive industries are out there In turn, these expectations reflect the expected waiting to be discovered, as though the problem costs of production of and the value that world is to find those that most closely correspond with consumers will put on different goods and services. the economy’s given comparative advantage. The Free trade and freedom for entrepreneurs to governments of Taiwan, Korea, and Japan have move resources from one industry to another not so much picked winners as made them.”iv i Chang, Ha-Joon. (2002) Kicking Away the Ladder. London: Anthem Press. P. 49. ii Chang, Ha-Joon. (2008) Bad Samaritans. New York: Bloomsbury Press. P. 71. iii Lavoie, Don. (1985) National Economic Planning, What is Left? Cambridge, MA: Ballinger Publishing Company. P. 4. iv Wade, Robert (1990) Governing the Market. Princeton, NJ: Princeton University Press. P. 334.

19 INSIGHT

Scarcity is a fact of economic life. Any industrial As the exception that, perhaps, proves the rule, policy that favours one industry necessarily draws Chile is the one South American country that, in scarce resources away from other industries. the last 20 years has embraced a market-based So, planning in favour of one industry implies approach to development and, not only does it planning against others. rank in the top decile for economic freedom, it The state may make a “winner” out of what also has the best outcomes in the region in terms would have otherwise been a “loser” but it can of almost any measure of human development. only be done at the cost of harming another The connection between economic freedom industry that would have been more efficient and growth, unlike the supposed connection and created greater growth. between protectionism and growth, fits with the But, even when an industry that was favoured larger empirical literature. by industrial policy remains profitable when its Hundreds of papers have found that levels of subsidies are taken away, it is not an unambiguous economic freedom are positively associated with sign of success. Given that the market was rigged, higher long-run living standards. there is no way to evaluate the cost in terms of the There is also a strong theoretical connection value forgone in some other industry that would between economic freedom and prosperity. An have been created absent industrial policy.

How the ‘Asian Tigers’ THE CONNECTION BETWEEN roared ECONOMIC FREEDOM AND The fact that Taiwan, South Korea, Japan, GROWTH, UNLIKE THE and Singapore all had SUPPOSED CONNECTION some amount of state industrial planning BETWEEN PROTECTIONISM AND and all grew rapidly GROWTH, FITS WITH THE LARGER does nothing to show that the industrial EMPIRICAL LITERATURE planning caused the growth. Hong Kong, which had no industrial planning, environment of economic freedom allows for the grew equally rapidly. More pertinently, countless co-ordination of the decentralised knowledge African and South American countries practised that is spread across all the minds in an economy. industrial planning with disastrous consequences. It allows prices to best reflect the real scarcity The real story of East Asian development is of resources and everyone’s assessment of how a story of economic freedom. Although some those scarce resources can best be put to use. state planning existed in these countries, they Competition within this environment will were, on balance, mostly free market economies tend to encourage the right capital in the right – much more so than the countries that they left industries to best promote long-run prosperity behind. And the more they liberalised, the more because the system of profit and loss is able to they developed. discover the very information that industrial The Economic Freedom of the World Annual planners would need in order to be effective. Report is the most comprehensive measure of The rise of the East Asian economies occurred how market orientated a country is. in spite of the presence of some state industrial In 1970, the first year data is available, Hong planning. Their growth, like the growth of Kong was the freest economy in the world. Japan virtually all wealthy countries today, was made and Singapore were tied at 7th, Taiwan 16th, and possible by adopting institutions that protect South Korea at 31st ranked in the top 20 per cent private property rights, respect the rule of law, of the index. This set the background for their and grant a large measure of economic freedom• development in the 1970s and 1980s. It is interesting to see that, Japan has moved Benjamin Powell down the index as its economic performance Director of the Free Market Institute has deteriorated and countries that embraced Texas Tech University the central planning model, such as Argentina, Professor of Economics languished near the bottom back in 1970 just as Rawls College of Business they do today. [email protected]

20

SMITH

ON SMITH

In the latest of our interview series, Nobel laureate VERNON L. SMITH reflects on the lasting importance – and relevance – of his hero and namesake ADAM SMITH

Why should young economists study It was a spectacular success largely because it Adam Smith? caught the attention of British and American Young students in economics and the humanities intellectuals and politicians, particularly after desiring to better understand the world in the American Revolutionary war ended. which we live and how it came about need to The book importantly influenced William Pitt, study the two great works of Adam Smith. Prime Minister of Britain for 17 years. Countering In 1759 Smith published his first book, The the popular views of the time, Smith opposed Theory of Moral Sentiments (Hereafter TMS). He slavery, empire, colonialism, mercantilism, and considered it his most important work, although taxation without representation. posterity would not judge it so. You would be The book argued for free trade in direct wrong to assume that the best wisdom of the opposition to the mercantilist policies of taxing past is always integrated into modern sources the goods that Britain allowed to be imported of learning. into the American colonies. His second book was published in an eventful His position was based on his penetrating year for America, 1776. This was An Enquiry into mastery of the causes of national wealth the Nature and Causes of the Wealth of Nations. creation, not on the political controversies of (Hereafter WN) his time.

22 INTERVIEW

Mercantilism represented the heavy hand of each become socialised and learn self-control in undue influence by special interests – we call it following the cultural rules of propriety. “rent seeking” today. This is because of our unique human capacity For Smith this sort of crony influence was not for “mutual fellow-feeling”. We naturally desire merely unfair, it was an impediment to wealth to reward others in response to their properly creation. Smith was remarkably forward in motivated actions of a beneficent tendency interpreting current conditions, and speaking towards us. frankly – calling the shots as he saw them. The book’s centrality to the issues of the day is According to Smith, what was the origin indicated by the fact that the American colonies of property rights, and why was this erupted on July 4th of the same year, a few important? months after the publication of WN, in protest Just as we may empathise with those who at the tea tax – the last of a series of abusive behave well towards us, sometimes, we policies as seen by the Americans. naturally feel resentment and a strong urge to Smith understood and sympathised with that punish those who intentionally choose actions cause, but did so as a loyal British citizen. The that are hurtful to us. British were badly and unexpectedly beaten, For Smith, this is a more powerful sentiment and this together with the wise economic than those arising from our feelings of analysis of Smith enabled the start of an beneficence. Feelings easily escalate becoming agonising re-evaluation in his country and in more than an eye-for-an-eye, and society the colonial world. cannot subsist. This is why, after long practice, viable Adam Smith wrote about how the communities come to have “property rights”, pursuit of self-interest promoted general once called “propriety rights”, which allow economic welfare. Was he suggesting for the proportionate punishment of specific that people ought always to behave hurtful acts of injustice. selfishly? This is also why in the civil order of law the Smith was the intellectual SMITH architect of a system of natural liberty which called for the removal of all imposed privileges of preference or of restraint: “Every man, as long AFTER LONG PRACTICE, as he does not violate the laws of justice is left perfectly free VIABLE COMMUNITIES to pursue his own interest in COME TO HAVE his own way…” (WN, Vol 2, p 184). “PROPERTY RIGHTS” But to understand what he meant by “the laws of justice” and “own interest in his own way” it is essential to read TMS. Because of the enormous success of WN, people greatest punishment is reserved for murder, the to this day do not read TMS. Consequently his most hurtful of all acts. Next, and calling for essential message is easily distorted as people less punishment, are theft and robbery which, fail to grasp the pre-conditions that gave it because they take from us what we possess, context in Europe. are greater crimes than violations of promises – In TMS (pp 78-91; 109-120) we learn that, breach of contract – which only disappoint us of although every mature person is strictly self- what we expected. interested, and fitter than others to take Where a person has learned to be social and care of himself, none can look mankind in the follow rules that discourage hurtful actions, she face and suggest that this principle governs all still follows her self-interest, but does so in the his actions. service of harmony with you. You follow the Rather, in the process of growing up in same rules and you both co-operate to your society, he learns to “humble the arrogance” mutual benefit. of his self-interest in the light of what “others Those societies that achieve a high level of will go along with”. Only in this way do we harmony, where most people are law abiding,

23 INTERVIEW and people generally engage in mutually increased relative to a world with no trade. beneficial rule-following behaviour, also tend to The basic theorem in Smith is that specialisation be the wealthiest. is limited by the extent of the market: the bigger the market the greater the possibilities What was Adam Smith’s most important for specialisation and beneficial trade. observation about the ‘nature and causes Property rights, wherein each person has a of the wealth of nations’, and how can natural right to the income produced by his the pursuit of self-interest promote the own labour, and to the investment return on general welfare? saving out of income, are a pre-condition for Now that we have seen what Smith meant by this wealth creation process to occur: natural liberty we can appreciate the causes of Smith’s account, together with the innovation wealth creation. it encourages, defines a forward looking system Smith used the operations of a pin factory to based on merit, not a backward looking system dramatise the great wealth gains from the co- of privilege. operative “division of labour” among tasks: or This attitude change explains the enormous specialisation as we call it today. growth in per capita economic betterment Specialisation in the economy, however, beginning in Northern Europe in the 1700s, occurs not by top-down orders, but is discovered spreading westward to North America, to the naturally in people-to-people interactions, rest of Europe, to Australia, New Zealand, Hong because of the human propensity “to truck, Kong, Singapore, and most recently to China, barter and exchange one thing for another”. India and Asia generally. That growth, however, With this key axiom, Smith shows that this is hampered to the extent that people are not propensity leads to prices; and prices facilitate free in their economic and political choices. comparison calculations. The farmer can discover The overarching themes in Adam Smith are that he can benefit (profit) by producing more firstly the sources of human social betterment in pigs and less maize, buying his maize and selling The Theory of Moral Sentiments, and secondly, his pigs in market exchange with others. the origins of human economic benefit in the Through markets people form a vast co- Wealth of Nations• operative network with each specialising in those activities for which they learn to be most Vernon L. Smith productive, and each thereby profiting. As a result Chapman University of each being more productive, the wealth of all is 2002 Nobel Laureate in Economics

ADAM SMITH: THE WEALTH OF NATIONS “[T]he certainty of being able to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he may have occasion for, encourages every man to apply himself to a particular occupation, and to cultivate and bring to perfection whatever talent or genius he may possess for that particular species of business.” (Wealth of Nations, Vol 1, p 17)

24 FADS & FALLACIES Can CAPITALISM

be GREEN? Many believe capitalism and the environment are at odds with one another. But CHRISTOPHER J. COYNE and RACHEL L. COYNE say this view neglects the numerous environmental benefits generated by property rights

“Capitalism v environment: can greed ever environmental harms. be green?” This headline from The Guardian Based on this reasoning, many argue for the captures the standard view of the relationship socialisation of property so that government can between capitalism and the environment1. protect the environment from the harms done by According to this view, capitalism and the capitalism. This common view is a fallacy. environment are necessarily at odds with one The relationship between capitalism and the another. The only way for people to earn a environment is positive sum, as private ownership profit, the logic goes, is to exploit the and mutually beneficial exchange generate environment and, in the process, cause irreparable significate environmental benefits.

25 The beneficial aspects of property right care for what they own and to consider the long- Private property refers to the right to use, control, term consequences of their actions. and obtain benefits from a resource, good, or This reality is at odds with how many people service. This includes the right to exclusive use, view capitalism which is often characterised as the right to transfer property to others, and legal the drive for immediate profits with no regard enforcement against invaders. for the long-term consequences. Property in this context can refer to buildings, The example of fishing grounds has already but more usually will refer to land in agricultural been mentioned, about which there is ample use, forestry and fishing grounds. Property rights evidence. There are other examples of natural yield three key benefits. experiments which allow for a test of the two Property rights incentivise private owners competing views of property rights and the to use resources in ways that benefit others. In environment. markets, a profit indicates that property owners There has long been a concern about the have used their resources in a manner which is declining elephant population in Africa due to pleasing to consumers. the poaching of ivory. In Africa, there is variation Secondly, private owners have an incentive in ownership rights over the elephant population. to care for and manage their property. This is In some areas elephants can be privately owned because property rights internalise the benefits while in others they are communal property. and costs of the behaviour of owners. An empirical study looking at the factors influencing the elephant population in Africa found that “countries with property rights IF NOBODY OWNS systems or community wildlife programmes THE FISHING GROUND, [which create residual claims over the well-being of the elephants] have more rapid elephant TRAWLER OWNERS WILL population growth rates than do those countries TEND TO OVER-FISH that do not.”2 These findings make perfect sense when If property owners exercise care in the upkeep considered in light of the incentives created by of their property, they benefit in terms of the property rights. increased value of the resource. Likewise, if Clearly defined property rights incentivise owners choose to allow their property to fall owners to care for their property, which is into disrepair, they incur the cost through the reflected in faster growth of the elephant decreased value of the property. population in areas which allow for private Finally, property owners have an incentive ownership. to consider the long-term consequences of The lack of private ownership, in contrast, their actions. Owners have the right to future leads to the tragedy of the commons whereby cash-flows associated with their property. This a communal-resource system leads to overuse, incentivises owners to ensure that their resources as each individual considers their own costs are sustainable. and benefits while neglecting the broader For example, the owner of a fishing ground implications of their actions. will wish to keep stocks buoyant because that Indeed, where there are no ownership rights in will ensure the profitability of the resource in the elephants, they are just regarded as a pest (they long term is maximised. This, in turn, is reflected only bring costs to farmers) and therefore they in the value of the resource at any given time. If are shot. nobody owns the fishing ground, trawler owners Property rights also allow non-profit will tend to over-fish. organisations to engage in environmental conservation. For example, among other Property rights and the environment programmes, the Sierra Club often raises funds Once the benefits of property rights are to purchase tracts of land which it then maintains appreciated, it becomes clear that well-defined or turns over to other entities that conserve the property rights are crucial to maintaining and land. This illustrates the range of opportunities improving the environment. that private ownership offers for environmental Consider the incentives for property owners to conservation and improvement.

1 www.theguardian.com/sustainable-business/2014/nov/26/capitalism-environment-green-greed-slow-life-symposium-tony-juniper 2 Michael A. McPherson and Michael L. Nieswiadomy. 2000. “African elephants: The effect of property rights and political stability,” Contemporary Economic Policy 18(1): 14-26. 3 http://www.econlib.org/library/Enc/EnvironmentalQuality.html#lfHendersonCEE2-052_figure_018 26 FADS & FALLACIES

More generally, the innovation that arises in a General economic progress and growth are free economy yields numerous benefits. positively correlated with better environmental It leads to less waste because there is an quality. As the environmental economist Terry incentive to economise on resource use to cut the Anderson writes, “[t]he correlation between cost of production. environmental quality and economic growth is Consider, for example, the traditional drinks incontrovertible. Comparing the World Bank’s can which is made from aluminum. The first environmental sustainability index with gross generation of cans, introduced over a half- domestic product per capita in 117 nations shows century ago, weighed three ounces each; current that richer countries sustain environmental cans weigh approximately one ounce. quality better than poorer countries do. Indeed, This change was due every systematic study of to innovations in the environmental indicators production techniques shows that the environment which allowed producers improves as incomes rise.”3 to use less aluminum while There are theoretical producing a stronger can. reasons to believe that the There are also significant direction of causation runs long-term benefits to from economic growth to innovation. Over time, improved environmental there have been advances quality. in sanitation and medicine Moreover, greater which have reduced, and wealth affords citizens the often outright eliminated, opportunity to care more many of the pollutants about the environment. which plagued people in It is precisely because the past. citizens in wealthy countries These long-term benefits do not have to worry about are typically neglected the diseases and other in discussions of the pollutants that existed not environment even though long ago that they can, the improvements in instead, worry about current standards of living due to environmental concerns. innovation and increases in People who are worried wealth are truly staggering. about where their next meal is coming from, or The implications for the environment about dying from malaria, are not in a position Appreciating the benefits of property rights to be concerned about endangered species or is crucial for understanding the relationship potentially rising sea levels. between capitalism and the environment. Contrary to popular belief, the best Contrary to popular opinion, markets and the environmental outcomes can only be secured environment are not at odds with one another. through well-defined and well-enforced In stark contrast, well-defined property rights private property rights. Just as individuals have are important not just for maintaining the much to gain from capitalism, so too does the environment, but also for improving it. environment• One key implication is that, when discussing Christopher J. Coyne environmental issues, it is crucial to start by F.A. Harper Professor of Economics thinking about the current property rights George Mason University arrangements, or lack thereof. [email protected] The absence of property rights leads to environmental harms, since private actors lack Rachel L. Coyne the incentive to take into account the full cost of Senior Research Fellow their behaviours. Many environmental problems F.A. Hayek Program for the can be addressed by defining or clarifying Advanced Study of Philosophy, Politics, and property rights. Economics It is also important to remember that Mercatus Center improvements in the environment do not occur George Mason University. in a vacuum. [email protected]

27 Pay is one of the most contentious issues of our time.

But does government regulation of wages really work?

And what threat does this pose to UK employment?

Find out in this fascinating new report from the IEA.

FREE to DOWNLOAD at: www.iea.org.uk/publications/research/and-how-much-do-you-earn-public-pressure-for-govern- ment-regulation-of-pay

PAY is one of the most contentious issues of our time. But does government regulation of wages really work? And what threat does this pose to UK employment?

Find out in this fascinating new report from the IEA. FREE to DOWNLOAD at: www.iea.org.uk/publications/research/and-how-much-do-you- earn-public-pressure-for-government-regulation-of-pay REBUTTAL 35 Bad 56 Br eak …if you live in the UK KRISTIAN NIEMIETZ on the bleak prospects for British lung cancer victims

he US TV series decides to continue teaching. forget Japan and Israel, ‘Breaking Bad’ is Thus the story ends, or rather, which do exceptionally well about a middle-aged never begins. on this particular measure, high school teacher, The cartoon can be seen as well. Survival rates in Italy, T Walter White, as a powerful defence of the Netherlands, Norway, who is diagnosed with lung the National Health Service, Australia, Iceland, Sweden, cancer, and who is unable with its universal coverage Germany, Switzerland, to afford the treatment his and free access to healthcare, Belgium, Canada, Austria and doctor recommends. Out of based on need rather than South Korea are also at least desperation, he embarks on ability to pay.2 five percentage points higher a criminal career in order to In fact, in a British version than in Britain. raise the money. of ‘Breaking Bad’, Mr White Given how common lung Since the streaming of the would have probably died cancer is – with about 45,000 final series, a cartoon with soon after diagnosis. British new cases diagnosed each the (attributed) caption ‘If lung cancer patients only year (Cancer Research UK, “Breaking Bad” had been set have a one-in-ten chance of 2012) – a difference in survival in the UK’ has been making surviving the next five years3, rates of a few percentage the rounds on social media.1 which is the lowest survival points translates into large In the cartoon version, Mr rate in the developed world numbers of lives that could White’s doctor simply informs (see Allemani et al, 2015). The have been saved through him that he is entitled to free US rate is almost twice as high. better and/or timelier medical care, and Mr White But forget the US, and treatment.

1 To be fair to the cartoonist, Christopher Keelty, the cartoon itself does not mention the UK, it just says “anywhere but America edition”. But in the British healthcare debate, there is an implicit consensus to pretend that there are only two healthcare systems in the world, which are the NHS and the US system. Therefore, on social media, the cartoon was quickly reinterpreted to be about Britain. 2 The notion was given some additional credence by the actor who had played Mr White, who said in an interview with the Rolling Stone magazine (10 June 2011): “if we did have universal health care […] the show might not have worked”. 3 This is a so-called relative survival rate, which, roughly speaking, means it strips out those who die with lung cancer, but not because of lung cancer. 29 Had all the UK’s lung cancer Table 1: Number of lives that could be saved per year if British lung cancer patients patients sought treatment in experienced outcomes as good as those in other countries France rather than through If the UK’s lung cancer patients had …this number of lives could the NHS, there would have been treated in… have been saved: been 1,780 additional survivors. Had they been Denmark 760 treated in the Netherlands, Finland 1,200 another 2,300 people could New Zealand 1,250 have survived; had they been treated in Australia, it could Spain 1,330 have been 2,400, and had they Portugal 1,420 been treated in Switzerland or Ireland 1,470 Germany, it would have been around 3,000. France 1,780 So in short, yes of course Italy 2,270 there could be a British Netherlands 2,310 version of ‘Breaking Bad’. The main difference from the Norway 2,400 US version would be that a Australia 2,400 British Mr White would try to Iceland 2,400 raise money in order to seek treatment abroad. Sweden 2,670 But, if the aim were to Germany 2,940 shoot a ‘boring’ version Switzerland 3,070 of ‘Breaking Bad’ (i.e. one with an easy happy ending), Belgium 3,110 one could have set it in, for Canada 3,430 example, Austria. Austria 3,690 Unlike the American Mr White, an Austrian Herr Weiß South Korea 3,960 would be protected against USA 4,040 the risk of medical bankruptcy Israel 6,320 (although he may be asked for a moderate co-payment), Japan 9,120 and unlike a British Mr White, author’s calculation based on figures from Cancer Research UK (2012) and Allemani et al (2015)

Figure 1: Lung cancer 5-year survival rates for patients diagnosed 2005 – 2009

35

30

25

20

15

10

5

0

NZ UK Israel USA Italy Japan Austria Iceland FranceIreland Spain CanadaBelgium GermanySweden AustraliaNorway Portugal FinlandDenmark South Korea Switzerland Netherlands based on figures from Allemani et al (2015)

30 REBUTTAL an Austrian Herr Weiß would also have a fighting chance of • A cartoon has been making the rounds on social media, survival. claiming that the TV series ‘Breaking Bad’ could not have Lung cancer is not a happened in the UK. The story is about a man driven to special case: the pattern we extremes by desperation, because he is unable to afford see in the above graph is medical treatment for his lung cancer. In the UK, this would also, broadly, repeated for not have made sense, because he would have had access to many other health outcome free NHS care. measures. • Outcomes, however, tell a different story. The UK has the It is generally true that lowest lung cancer survival rate in the developed world. The countries with competitive, US rate is almost twice as high. In most of the developed world, survival rates are at least five percentage points higher pluralistic healthcare than in the UK. systems such as Australia, • Were the UK’s lung cancer patients all treated in the France, Japan, South Korea, Netherlands, there would be about 2,300 additional survivors Germany, Switzerland and the every year. Were they treated in Switzerland or Germany, the Netherlands do well across number of additional survivors would be around 3,000. a wide range of measures • Patients in other developed countries would not have to (Niemietz, 2015). worry about the risk of medical bankruptcy either. Universal It is also true that countries access to healthcare is the norm, not the exception. The US, which have similarly not the UK, is the outlier in this respect. uncompetitive systems, such • But ‘access to healthcare’ is not binary, it is not something as Ireland, Finland and New that people either ‘have’ or ‘don’t have’. Rather, we all have Zealand, often have problems access to some healthcare, but most of us do not have access that are similar to those of to anything that is medically possible. All health systems the NHS. ration access in some way. The smugness of NHS cheerleaders is therefore unwarranted. ‘Access to This is often the case where We should judge healthcare healthcare’ is not a binary the state rations access to systems (and many other variable; it is not something publicly provided goods and policy areas) by their that you either ‘have’ or services through non-price outcomes, as measured, for ‘don’t have’. mechanisms. We all have example, by survival rates, We all have access to some a right to access municipal and not by vague intentions healthcare, but, apart from parks, and they are free at the or ‘founding ideals’. Bill Gates, none of us have point of use. But if you live in Judged in this way, the access to everything that is an area where there are no performance of the NHS medically possible. parks nearby, or where the is simply not especially A British Mr White would park is rundown, or blighted impressive• have access to healthcare, but by crime and anti-social Kristian Niemietz not to the kind of healthcare behaviour, that theoretical Head of Health and Welfare that would give him a right of ‘access’ is not worth Institute of Economic Affairs reasonable chance to survive. very much. [email protected]

References Allemani, C., H. Weir, H. Carreira, R. Harewood, D. Spika, X. Wang, F. Bannon, J. Ahn, C. Johnson, A. Bonaventure, R. Marcos-Gragera, C. Stiller, G. Azevedo e Silva, W. Chen, O. Ogunbiyi, B. Rachet, M. Soeberg, H. You, T. Matsuda, M. Bielska-Lasota, H. Storm, T. Tucker, M. Coleman, CONCORD Working Group (2015) ‘Global surveillance of cancer survival 1995–2009: Analysis of individual data for 25676887 patients from 279 population-based registries in 67 countries (CONCORD-2)’, Lancet 2015; 385: 977–1010. Cancer Research UK (2012) ‘Cancer incidence for common cancers’, Cancer incidence statistics, dataset, available at http://www.cancerresearchuk.org/sites/default/files/ cstream-node/inc_20common_mf_1.xls Niemietz, K. (2015) ‘A patient approach. Putting the consumer at the heart of UK healthcare’, IEA Discussion Paper No. 64, London: Institute of Economic Affairs.

31 A NEW JOURNALIST?TYPE OF

In some senses, journalism has become a public good because of changes in technology. This means there may be less investigative journalism than is desired. But, asks LUIGI ZINGALES, could academics fill the gap?

he year before last, mission is to increase produced by a California- a series of emails demand for eggs – into a bit based company. came to light that of hot water. The emails came to the T got the American The emails appeared to attention of a US senator, Egg Board – an industry show the board producing a and the US Department of group whose members are strategy for attacking a new Agriculture launched an appointed by the US secretary kind of vegan (and therefore investigation. In the midst of agriculture, and whose eggless) mayonnaise being of the controversy, the CEO

32 VIEWPOINT

of the egg board took early subscribers, they write for a retirement. wide audience, making The saga of the egg board more people interested, was brought to public and as a result, promoting attention by the Guardian. It public welfare. may be an obscure example of the “watchdog” role of the press, but its very obscurity shows how effective the press can be at policing people and institutions that the general public does not itself have time or access to monitor. As traditional media, particularly print media, Information as a public good continue to adapt to changing For journalists, there are clear technology and its disruptive rewards in investing time A NEW effects, it is worth remembering and energy in investigative that everyone has an interest in work: there is recognition, the TYPE OF the press maintaining that prestige of getting a scoop, JOURNALIST? watchdog role. Educating decision makers and accolades such as the And it is not just to keep The general public is not the Pulitzer Prize or the an eye on egg boards: a only target for newspapers. Wincott Awards. strong press is, amongst I have been on the board of But investigative work other things, an important two large companies in the isn’t always as rewarding for defence against anti- past, and I learned well the newspapers in the same way. competitive behaviour. importance of newspapers to The reason is that information Normally, the only people corporate boards. has many of the characteristics who pay attention to a given Companies are complex, and of what economists call a regulatory topic have a big, board members obtain only ‘public good’. compelling interest in that a small set of information, Information is non-rivalrous topic and are trying to push which is generally precooked in consumption - my reading the agenda in the direction by the corporate apparatus a piece of news does not of their own interests, not that brings information to reduce the relevance of the necessarily in the direction of the board. news, and it does not reduce the common good. When newspapers your ability to read the same One of the problems is write about a company, it piece of news. so-called rational ignorance: gives board members an However, when it comes it is rational for people not opportunity to go in front to the second element of a to become informed about of the board and say: “Look, public good (the ability to issues because it is costly to there was this stuff; I read it exclude those who do not pay become informed. As such, in the newspaper. Can you for the good or service) that those who campaign about please explain that to me?” is very much a function of issues tend to have strong This is a rare opportunity in technology. interests to protect – for which you actually get to ask In the 21st century is has example, incumbents in a them informed questions, become much easier to market who want to prevent and they find it a bit more transmit information quickly deregulation that would difficult to precook all around the world: access to promote competition. the material. information is much easier. Hence, if we are to have The important role that It is now much more difficult good public policy, it is the media play is as relevant to exclude non-payers from important to reduce this cost to civic governance as it is accessing the information. of information, and to corporate governance. By In the old days, when a that is ultimately what informing the public, the press newspaper landed a scoop, newspapers do. creates a political demand everybody was rushing to The media summarise and for action that politicians can the street to buy a copy explain issues and, because try to exploit by running a and figure out what this they try to maximise their campaign on the issues. marvellous information was.

33 Today, when you hear Valentino dress in a store. can get into your business. there is news, you Google it. Why? Because the first dress You build barriers to entry by Somebody has replicated most represents an aspiration. building prestige. of the content in a perfectly The second reason is that If you are the main business legal way so you don’t need haute couture functions paper in a large city – the to go to the original source. to attract talent. You want Financial Times, for example The institution that did the to have the most creative – and you are very profitable, hard work doesn’t even get a designers, so you let these it makes sense to spend some boost in revenue as a result of designers go wild at the of those profits in creating their effort. fashion shows, and then they credibility so that it is harder As information becomes also produce some more for competitors to enter the more easily distributed, the mundane lines of clothes that field. Plus, you attract the best incentives to collect it go normal human beings can talent, who will also write down, and the quality goes actually wear. It would be more mundane articles, exactly down as well. difficult for Valentino or Gucci like the haute couture model. to retain the most talented people if they could not do the most extravagant things. But one fundamental condition of all this is that the fashion house has to be profitable as a whole. You can afford to do haute couture if you have a lot of cash flow. If you are struggling to survive, the first thing that goes is the haute couture line. After all, there is no point in investing in long-term prestige if you’re Investigative journalism as not sure you’ll make it to the The impact of haute couture end of the month. journalism’s decline If the information age has Investigative journalism The difficult time newspapers made this problem more follows a similar model. have had turning in a severe, the problem has McClure’s did not make money profit, combined with nonetheless always existed. with investigative journalism. the diminishing returns Information has always had But, McClure’s was the most to uncovering important the first characteristic of a profitable and prestigious information due to the ease public good, and investigative publication in the US during with which that information is journalists have always been Theodore Roosevelt’s time and, shared, has made things hard a sort of add-on within because of this, they could for investigative journalism. newspapers that was not afford to use investigative And maybe I wouldn’t particularly profitable. journalists. And that added particularly care, if it were An analogy can be made to the magazine’s prestige. not for the fact that it has here with haute couture for It added to its mystique and serious consequences for the fashion houses, which, if attracted the best talent, but it political economy. A lot of you look at that segment of the was not the bread-and-butter the distortions we have seen fashion business, is incredibly business model. in capitalism in the last 20 unprofitable. Very few people Now, you might say, “Wait years are directly associated buy the extravagant dresses on a minute. Shouldn’t a well- with this decline of the role display during fashion shows. run company be run in the of newspapers, and media in They’re too extravagant and interest of shareholders, who general, in keeping capitalism too expensive. don’t really care about all in check. Let me mention a few. But fashion houses pursue these extravagances?” The The first one is an extreme haute couture for two answer is yes, but if you are in consolidation of industry. In reasons. One is prestige: an oligopolistic business and the US there is much evidence you see this new beautiful you earn some rents, it makes of a massive consolidation in Valentino dress, and then you sense to spend some of those many industries. The banking go and buy a more mundane rents to make sure nobody industry is probably among

34 VIEWPOINT the worst offenders, but the trend is broader than that. IN THE OLD DAYS, WHEN This consolidation comes A NEWSPAPER LANDED A with higher prices and little resistance from anti-trust SCOOP, EVERYBODY WAS authorities or public opinion. Why? Because there is not RUSHING TO THE STREET enough sensitivity to it TO BUY A COPY AND FIGURE among the press. The second issue is OUT WHAT THIS MARVELLOUS widespread financial fraud. INFORMATION WAS In a paper, some colleagues to take on; being part of the kind of subsidising of the and I estimate that one cheering crowd is a more press: academia. out of seven large financial profitable role. You can Academia today looks companies in the US is afford to be more vocally much like the newspaper involved in financial fraud. sceptical only if you have a trade of 20 or 30 years ago: Every financial fraud tends solid financial base. it is a business where there to cost roughly one-fifth the are a lot of rents because value of the company. So if there is not a great deal of you add up the annual cost competition at the top, and of financial fraud in the US, where people consume those you get $380 billion. But how rents in research. Some of many executives in the US this research is completely went to jail as a result of the irrelevant, or some of it is financial crisis? Zero. likely to be relevant only 200 Last but not least, we have years from now. had two major bubbles in less Maybe academics don’t than 10 years in the US, and need to spend time doing I argue that it is the result of investigative journalism exactly, a less investigative press. In but they should be using big 2000, Robert J. Shiller wrote data to expose what does not his famous book Irrational How to support journalism work in the capitalist system Exuberance, in which he What can we do? Some – or where corporations are makes an acute observation: people will look at this protected from the capitalist “It cannot be a coincidence analysis and say: “Information system by regulation reinforced that bubbles and newspapers is a public good. We should by rent seeking. were born at the same time”. support it with taxation and It is time for academia to The first financial bubble, financial subsidisation.” pick up some of the slack as we know, was the tulip But I have seen what left by the falling fortunes of bubble, and it occurred at the subsidisation of newspapers many newspapers time when the first financial • creates, and it is not pretty. Luigi Zingales leaflets were being created. After all, in Italy they subsidise Robert C. McCormack It is only logical, since the newspapers, and if there is a Distinguished Service Professor fundamental characteristic bad press, it is Italy’s. of Entrepreneurship of a bubble is that there is a But you can subsidise and Finance collective state of euphoria. journalism in a variety of Charles M. Harper Faculty And how do you create a indirect ways. As many Fellow collective state of euphoria scholars have suggested, a lot Chicago Booth if you don’t have a means of of news is already subsidised influencing people? www.chicagobooth.edu/ by virtue of the fact that Newspapers can be the faculty/directory/z/luigi-zingales journalists read material cheering crowd encouraging produced by the government, This essay is an edited version the inflation of financial by companies, and by NGOs, of remarks delivered as part bubbles, or they can be in the and produce news from it. of the Wincott Foundation’s difficult position of trying to This is an indirect form of warn that a Trojan horse is 2015 Harold Wincott subsidisation. And there is a actually a Trojan horse. Memorial Lecture, which segment of society that can The latter is a tough task took place October 29th, and should do more of this 2015, in London. 35

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37 How THE TREASURY got in a STEW… (and what dumplings can tell us about trade)

Even countries that are not efficient gain from opening their borders to trade. On this and other points, the recent Treasury White Paper on the EU was flawed and confused, says TIM CONGDON

38 CITY VIEW

ow does participation in international a particular product, a nation has fewer trade and finance affect economies? resources available for another product. For Does a nation benefit from opening society as a whole, the issue is how best to H up its borders so that goods, services, allocate resources between different branches capital and ideas can flow to of production. and from other nations? Is free trade or When a country is closed to foreign protectionism trade, the balance between the resource the best policy? commitments to two or more products is These are some of the most familiar and determined by consumers’ preferences and basic questions in economics. A valuable relative prices within the one nation. When by-product of the debate ahead of the 23rd it opens up to international commerce, the June referendum on EU membership was relative prices of different products are likely that it stimulated new interest in theories of to change, perhaps radically. international trade and integration. For example, an oil producing country will However, a fair comment is that non- get a much better price for its oil if the country economists were largely bemused by the sells the oil on international markets than if exchanges, with far too much fuss made about it is all consumed domestically. It makes sense the technical differences between the EU’s for nations to specialise according to their customs union, the European Economic Area, “comparative advantage”. the so-called “Swiss option” and Specifically, they ought to commit resources the like. to those activities where the loss of other kinds This article identifies two types of benefit from international EVEN IF A COUNTRY IS openness and PRODIGIOUSLY EFFICIENT, IT STILL shows how they are both important to MAKES SENSE FOR THAT NATION the debate on EU TO SPECIALISE AND SELL TO membership. The government’s OTHER COUNTRIES TO BUY THE April White Paper THINGS IT DOES NOT PRODUCE on the long-term economic impact of EU membership and its alternatives claimed of production is least (or, technically, to those that the damage from leaving the EU would activities “with least opportunity cost”). be enormous, perhaps as much as 10 per cent The ideas at work here are not intuitive, of national output, but was widely viewed as despite being fundamental to economic unconvincing and unsatisfactory. thinking. It focused on only one of the two types of A common mis-understanding is that, when benefit, attributed this benefit to the wrong one nation is more efficient (say, in terms of economist and did not set out a clear chain the labour input per unit of output) in every of argument connecting its premises to its form of production, it will dominate its trade conclusions. partners, sell things to other countries and never buy anything in return. Specialisation leads to gains from trade In other words, nations with an “absolute The first type of benefit from trade can be advantage” in every industry will destroy all shown if we assume that the ability of nations the industries of competitor nations, which to produce output (or their “production ought to impose tariffs and other controls to possibilities”, for short) is not affected by their survive the onslaught of their super-efficient participation in international trade. rivals. In this sense the situation is “static”. It For example, it is often argued by NGOs may seem odd that any gains could come in that, if Africa opened its borders to trade, its such circumstances, but the key is to notice farming would be wiped out by, say, Brazilian that every nation – with its resources and or US farmers who may be more efficient (in an technology given – could make absolute sense) at producing everything. several products. That is all wrong. The people and By concentrating its finite resources on companies who constitute a nation sell

39 goods and services only in order to buy Plausible production Production other goods and services which they can with no trade with trade consume. To produce for the sake of production would be crazy. Bread Dumplings Bread Dumplings Even if a country is prodigiously efficient in every field of economic activity, it still makes sense for that Britannia 50 30 100 0 nation to specialise according to comparative advantage and sell to other Europa 50 50 0 100 countries to buy the things it does not produce. Consider two nations, one (Europa) Total 100 80 100 100 with 100 million workers and the other (Britannia) with 50 million workers, able to make two things, bread and dumplings. If they decide to trade, both nations do what they are relatively best at. Europa could make If both made only bread, let’s assume that 100 dumplings and no bread, and Britannia they could make the same quantity of bread, could make 100 loaves of bread and no say, 100 million loaves. Evidently, Britannia dumplings. with fewer workers is more efficient than Although Britannia is more efficient at Europa, while – without trade – the two producing both bread and dumplings, it is countries can enjoy 100 million loaves of relatively more efficient at producing bread. It bread and no dumplings. therefore makes sense to produce bread and If, on the other hand, they commit all their trade to obtain dumplings. workers to cooking dumplings and none The two countries then exchange. Britannia to baking bread, assume that Europa could sells some of its bread to Europa and Europa sells some of its dumplings to Britannia. With both more bread TRADE CAN MAKE and more dumplings being BOTH PARTIES produced (see table), clearly, there is a position whereby both sides can BETTER OFF FOR ANY be better off. COMBINATION OF Indeed, trade can make both parties better off for any BREAD AND DUMPLINGS combination of bread and dumplings that could be produced THAT COULD BE unless Europa only wants to PRODUCED consume dumplings and Britannia only wants to produce bread. produce 100 million dumplings and Britannia Britannia is “better” than Europa in both only 60 million. branches of production, in the sense of having Again, obviously, Britannia is more higher labour productivity and an “absolute productive than Europa, because each of its advantage”. workers produces (60 million/50 million) Nevertheless, despite being good at or 1.2 dumplings compared with (100 everything, it is sensible for Britannia to million/100 million) one dumpling in Europa. specialise in baking bread and to sell some of Before trade, Europa can make 100 its bread production to Europa, while Europa dumplings or 100 loaves of bread or some mix limits itself to the manufacture of dumplings of smaller numbers of both. Also before trade, and sells some of them to Britannia. Britannia can make 100 loaves of bread or 60 Amazingly, almost by magic, trade improves dumplings or some mix of smaller numbers of consumption patterns even while both nations’ both. production possibilities – including labour Let us compare plausible positions with productivity – are the same as before. and without trade. Europa could produce 50 dumplings and 50 loaves of bread and The Treasury should have known better Britannia could produce 30 dumplings and 50 The insight that, with productivity given, trade loaves of bread. could improve consumption was one of the 40 CITY VIEW great achievements of David Ricardo in an Unhappily, it attributed the dynamic 1817 treatise on Principles of Political Economy benefits to Ricardo. As we have seen, this and Taxation. was not Ricardo’s point at all. If the Treasury’s Given that production possibilities are economists had a better understanding of the unchanged, here are the static gains from history of thought, they would have known opening an economy to international market that Adam Smith was the right authority to forces. mention. Although Ricardo’s idea is basic to the case Much else was wrong with the White Paper, for international openness, it was not noticed which seems likely to be heavily criticised for at all in the government’s White Paper. years to come as an example of the misuse of The heart of the White Paper’s defence of economic analysis for public policy purposes. liberal trade relationships was quite different, Now the British people have decided to leave that increased participation in international the EU, a practical test will be made of the trade (for example, through membership of White Paper’s conclusion that their country will the European Union) boosted productivity and be 10 per cent worse off by 2030 than if it had living standards. remained in the EU. The truth is that outside the EU the UK can resume THE WHITE PAPER SEEMS its seat on the World Trade Organization and LIKELY TO BE HEAVILY press more forcefully CRITICISED FOR YEARS TO than before for renewed international trade COME AS AN EXAMPLE OF liberalisation. THE MISUSE OF ECONOMIC At any rate, both Adam Smith and David Ricardo ANALYSIS FOR PUBLIC would surely enthuse POLICY PURPOSES about the possibilities for increased international The White Paper’ thesis is sensible and has openness that an independent Britain can ample empirical support. Compare Singapore embrace. Of course, in a democratic society the and Hong King, with their commitment over choice between free trade and protectionism decades to absolute free trade, with North will be determined by politics• Korea and Cuba, which are largely shut off from the world economy. Tim Congdon But the White Paper thesis – of a dynamic Institute for International Monetary Research link between openness and growth – has a University of Buckingham quite distinct theoretical foundation from the [email protected] principle of comparative advantage. The seminal thinker was Adam Smith and the key book was his 1776 Wealth of Nations. Smith made two propositions, that productivity benefited from specialisation or, in his terminology, “the division of labour”, and that the division of labour was limited by the size of the market. By implication, the larger was the market because of openness to trade, the greater was the scope for specialisation and hence for productivity improvement. The government’s White Paper on the benefits on EU membership would have been more convincing if it had recognised that there are static as well as dynamic benefits from moves to free trade, and if it had attributed the dynamic benefits to the correct economist.

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42 IDEALOG

PAYDAY MOANS… The gender pay gap continues formerly male-dominated an occupational area, whether to attract passionate attention occupation, earnings fall. as a result of an expansion of on both sides of the Atlantic. Why does this happen? Paula graduates with particular skills, It has been known for England, a Sociology Professor or as a result of migration, many years that the size of at Cornell University, is in no you surely expect a decline in this gap is associated with the doubt that employers place a relative pay. So an influx of relative proportion of men and lower value on work done women into a field is likely to women employed in particular by women. lead to more competition and occupations. Her view has been echoed lower pay. Male-dominated fields by Sam Smethers, the chief The issue here is that an typically pay more than female- executive of the UK’s Fawcett influx of women (unless dominated ones. There are Society, who asserts “This accompanied by an exit of several possible explanations shows that it’s not women’s men of the same magnitude) for this. One is the existence of work that is undervalued, it’s represents an increase in labour compensating differentials. If women”, while Jayne-Anne supply. The relative decline working conditions differ, pay Gadhia, head of Virgin Money, in pay occurs not because will reflect this. says there is an “unconscious the newcomers are women, For one thing, men are bias” against women. but simply because there are more likely to be in dangerous Employers don’t think in that newcomers. jobs with long hours. There is way. Many of them are women You may not like how these abundant evidence that such job characteristics carry a wage premium, other things such AS WOMEN ENTER AN as education and experience being held constant. OCCUPATION, AVERAGE PAY Also if preferences over FALLS. SEXISM? NO. JUST types of work differ, so will pay: women typically report a SUPPLY AND DEMAND, preference for working in jobs with intrinsic satisfactions – SAYS LEN SHACKLETON such as helping other people – while men are more money-oriented. themselves, of course. They changes play out, but to blame Of course many women do want to get the best staff they them on employer attitudes is dangerous jobs, while many can, male or female, and will unhelpful and just adds to the men work in caring roles. pay what they have to do to anti-business rhetoric of our But pay gaps are based get them. What they have to chattering classes• on averages. pay, though, is not necessarily Len Shackleton In recent years some going to remain the same Professor of Economics interesting evidence has over time. Buckingham University emerged that, when increasing When you get a big influx len.shackleton numbers of women enter a of potential employees into @buckingham.ac.uk

Full version at: www.iea.org.uk/blog/ as-women-enter-an-occupation-average-pay-falls-sexism-no-just-supply-and-demand

43 Pop stars and promoters are entitled to price their tickets as they wish and distribute them how they wish: it is a private event. If Simon Jenkins invited 100 people to a party at his home, he would not expect one of the invitees to sell his free invitation to a rich person – the invitation would be non-transferable. If pop stars wish to make tickets non- transferable, that is their right. There may be all sorts of reasons why an institution JUST such as a football club or a pop star want to have a diverse audience rather than the the highest-paying audience. A free economy does not just lead to a “value maximising” position as TICKET defined by the greatest amount of revenue raised, The government has recently An original purchaser of the it provides an institutional been considering responses tickets might then sell them framework within which to a submission on whether to somebody who is willing people can pursue their aims it should take action on to pay a higher price and, in and objectives whatever ticket touts. doing so, make a huge profit. they may be. Being loyal What exactly is the issue This might be on ebay, hand- to a fan base might be one here? To take an example, a to-hand or through some such objective. pop star (or agent, or concert other method. However, if you are a rich pop star or well-endowed football club putting on an event, what you cannot do is PHILIP BOOTH SAYS NON- expect the government to do your work for you by making TRANSFERABLE CONCERT TICKETS the act of selling on a ticket a ARE PERFECTLY LEGITIMATE criminal offence. There are perfectly reasonable forms of producer) may take a decision In some situations, it might enforcement that the that they wish tickets to go be possible for businesses promoters can use not just to those who can or motivated individuals to themselves. For example, ID pay the most but to the acquire a lot of cheap tickets checks or credit card checks widest possible fan base or and sell them on in this way. can be made on entry. It is to fans who have particular Simon Jenkins has argued the organisers’ event; it is characteristics (for example, that allowing a secondary their problem; the technology those who have joined a market ensures that tickets exists to solve it; they should fan club). will go to those who value deal with it• In other words, the star, them most and that the pop Philip Booth through their promoter, is stars who are complaining Academic and Research willing to sacrifice immediate should give free concerts to Director income in order to perform to the most avid fans. But, this Institute of Economic Affairs a particular audience. misses the point. [email protected]

Full version at: www.iea.org.uk/blog/simon-jenkins-is-wrong-non-transferable-concert-tickets-are-perfectly-legitimate

44 IDEALOG

HAVEN-SENT

In an Oxfam-coordinated give a neutral, stable platform in British companies, looking letter, 355 economists claim where this international to attract British investors, will that tax havens “serve no investment can take place. often be located in London, useful economic purpose” Often the investors that but if the fund is collecting and do “not add to overall use offshore centres are not investments from a range of global wealth or well-being”. even taxable (for example, countries to invest in a group This is nonsense. they may be pension funds, of (say) Central American National tax systems are charities and international companies, then locating the often badly designed, and the organisations). They are just investment vehicle offshore interactions between them avoiding the complexities of simplifies things considerably. are even worse. Try to set up paying tax that they would an international business and then have to try to reclaim or you will soon become bogged paying tax from which they RICHARD down in the international tax really should be exempt. system. For anyone attempting Offshore finance centres also TEATHER cross-border business or bring stability and a secure, LEAPS TO THE investment, the main worry familiar, well-understood legal is the risk of double or even system. Sadly a lot of countries DEFENCE OF triple taxation. do not have that and investors TAX HAVENS Profits are legitimately can use offshore financial taxed in the hands of the centres as a reliable and secure business that earns them and place for investment. The huge growth of in the hands of the investors These two points – the need international trade and who ultimately receive them, for a neutral platform to investment over the last but should not be taxed as collect and pool investment, 25 years has lifted a billion they merely flow through and the need for a stable people out of poverty – intermediary investment legal and political framework the biggest anti-poverty managers. – are part of the service that campaign in world history. If the investors and the offshore finance centres If the governments of the businesses in which they invest provide to the world. wealthy and powerful nations are all in one country, that But these services are most “end the era of tax havens”, double taxation is usually important for investment they will cut off the best removed by the tax system. into developing countries and conduit of this investment and But, if an investment fund is emerging markets, because that great poverty reduction trying to attract money from collecting capital for a niche process will stall• sources in different countries, market requires investments to Richard Teather the system often cannot – or be pulled together and pooled Senior Lecturer in Taxation does not – cope. The role of from various sources. Bournemouth University offshore finance centres is to An investment fund investing [email protected]

Full version at: www.iea.org.uk/blog/three-cheers-for-tax-havens

45 REVIEWED THE GREAT ESCAPE Health, wealth, and the origins of inequality ANGUS DEATON PRINCETON UNIVERSITY PRESS 2013

In 2013, two major books on economist Peter Bauer who inequality were published: maintained that if all the Angus Deaton’s The Great conditions necessary for Escape. Health, wealth, and development other than the origins of inequality and capital are present, capital Thomas Piketty’s Capital in the will soon be generated 21st Century. locally or become available Though Deaton’s book on commercial terms. So, was ultimately vindicated governments do not need to by its author being awarded provide capital in the form of the 2015 Nobel Prize in aid and doing so, in fact, can Economics, it got a fraction of undermine other necessary the international recognition conditions for development by gained by Piketty’s. strengthening local elites. By and large, the very 3. Since the fabric of economic different fortunes of the two progress is so delicate, be books can be explained by careful when you play with their respective messages. social engineering. The Piketty and Deaton share bravest of Deaton’s pages are a similar vantage point. those devoted to the “much They both care deeply about takeaways: mischief” that was done “in inequalities and they both 1. If you deal with inequalities, the name of the international belong to the political left. think about wellbeing, not population control”, which Piketty’s study came only income or wealth. was taken to the extreme of together with a slew of news Deaton writes at length so-called voluntary sterilisation on the widening of the gap about health, pointing out that wasn’t voluntary at all. between the rich and the that increases in years of life The population explosion, poor in Western countries. are associated with economic for one thing, didn’t plunge Deaton’s work, on the growth. Life expectancy the world into doom and contrary, presented a cautious roughly doubled in the last desperation. But, even if that and yet positive case for two centuries, in non-OECD danger was real, how do we increased well-being all over countries. This happened dare to impose our choices on the world. The “great escape” thanks to a dramatic decrease people, particularly when it is the great escape from in child mortality, rooted in comes to so intimate a choice poverty and death. economic and social progress, as the decision to have babies? Piketty’s unit of analysis particularly in better nutrition Coercion in this realm, no is the nation state, Deaton and living conditions. matter how humanitarian was looks into global dynamics. He 2. Better living conditions the claimed motives, were in reasons that, if we care about come with economic progress, fact a most serious intellectual people rather than countries, but economic progress is not and ethical error. we should be optimisic as something that can easily be The care with which Deaton living standards across the parachuted in countries still researches problems has led globe have been converging. oblivious to it. Historians have to some brilliant work that Deaton clarifies that inequality long been asking themselves deserves wide attention, is often a consequence of why the Industrial Revolution especially among students• progress as not everyone gets happened in Europe, and in rich at the same time. Britain in particular. In the “The Great Escape” is dense past century, richer countries Alberto Mingardi and carefully argued. I can tried to foster investment in Director General only point out what I regard the poorer by sending them Istituto Bruno Leoni as its three most relevant money. But, Deaton quotes [email protected] 46 REVISITED

THE RISE AND DECLINE OF NATIONS: Economic Growth, Stagflation, and Social Rigidities MANCUR OLSON YALE UNIVERSITY PRESS 1982

Mancur Olson (1932-1998) perceive as harmful to their is regarded as one of the special interests and therefore founding fathers of public slow down their adoption choice theory or ‘the (with negative impacts on economics of politics’ – a economic development). discipline that tries to apply 6. As distributional coalitions economic ideas to explain successfully accumulate political decision making. over time, they increase the In The Logic of Collective regulatory burden, the role Action (1965) he provided of government and have a many groundbreaking general negative impact on insights on how incentives economic and social evolution. affect individuals acting as Drawing from these members of groups and so implications, Olson links the improving our understanding growth, stagnation and the of the results of collective and decline of nations with the political action. dynamics of “distributional However, his 1982 work The coalitions” their cumulative Rise and Decline of Nations negative effects will – if deserves even closer attention unchecked – ultimately lead from those interested in chapter 3: to societal collapse, paving the institutional political economy 1. Interest groups will have way for drastic institutional and development studies. asymmetric bargaining power change. It can be argued It provides several insights and optimal outcomes cannot that some of these affects into our understanding of be achieved via comprehensive are being seen today in the institutional dynamics of bargaining (for example, Mediterranean countries. economic development and public sector unions may have There are, of course, multiple how it relates to the political more bargaining power than other variables that affect process and the action of hospital patients). outcomes, but Olson’s theory organised interest groups. 2. In stable societies organised is a useful tool with which to The book’s structure interest groups tend to analyse both historical and comprises a first part which accumulate and flourish over contemporary cases. is mostly theoretical and a time. Above all, The Rise and second part that applies the 3. Smaller groups will tend Decline of Nations provides theoretical framework to to be better organised for a solid case concerning the analyse several historical and collective action to influence social harm caused by special contemporary issues and cases government to promote their interest groups acting through in political economy. interests. the political process and The theoretical framework 4. Organised special interest simultaneously reminds us of starts with a summary of the groups have, on balance, an the importance of markets main ideas developed in The adverse effect on economic and competition in promoting Logic of Collective Action growth and increase political sustained prosperity• and then draws implications divisiveness (for example, for the action of organised by promoting strikes or André Azevedo Alves interest groups in societies obtaining special privileges for Institute for Political Studies that enjoy some degree of businesses). at The Catholic University of stability over time. 5. Distributional coalitions Portugal & Given their centrality to (which try to affect policy Benedict XVI Centre for Olson’s analysis, it is worth to increase the incomes to Religion and Society very briefly summarising some their members) react against St. Mary’s University of the key findings laid out in new technologies that they [email protected] 47 BRIEFING

BRIEFING: Summarising and signposting essential reading we’ve seen elsewhere...

The IMPACT of SUPPLY RIDE-SHARING, FATAL CONSTRAINTS CRASHES and CRIME on HOUSE In recent years, ride-sharing applications enabled by smartphones have increasingly challenged the heavily regulated taxi sector in cities worldwide. PRICES While proponents of these new business models highlight the convenience, in ENGLAND attractive fares and good customer service of transport apps, sceptics have raised concerns about the safety of firms which are much less regulated by In the last 40 years, real house government than traditional taxicabs. In particular, it is alleged that the prices have grown faster in Britain presence of transport apps could lead to higher accident and assault rates. than in any other OECD country, This paper examines the statistical evidence by comparing relevant significantly outstripping real variables – traffic fatality rates; arrests for driving under the influence (DUI), income growth. assault and disorderly conduct – across US counties. The gap between the UK and The authors found statistically significant evidence of a reduction in traffic comparable countries becomes all fatality rates. Specifically, they find that the arrival of Uber was, on average, the more striking when house size associated with a 6 per cent drop in fatal crashes and an 18 per cent fall in is taken into account. The average fatal night-time accidents. new-build house is close to 40 per Each month that Uber operates in a county is associated with a 2.1 per cent cent smaller in the UK than in either drop in fatality rates. DUI arrests decline by between 9 and 18 per cent with Germany or the Netherlands, even entry into the market by Uber. Both of these are statistically significant. though the latter is more densely The arrival of Uber is likely to have led some young drivers to ride-share populated. rather than drive themselves, reducing accident rates. Similarly, the relative Economists have long posited affordability and convenience of ride-sharing apps seems to have resulted in that Britain’s outlier status in real substantial numbers of people using apps rather than drink-driving. estate prices is driven by tight supply constraints, i.e. the lack of ANGELA K DILLS and SEAN E. MULHOLLAND available land for development in Working paper, Spring 2016: Available on the Social Science Research Network places where people want to live. The paper’s authors test this hypothesis empirically and investigate how much of recent CAPACITY TO WORK AT OLDER AGES: house price growth is attributable to planning restrictions. They use EVIDENCE FROM THE US data on house prices and earnings As life expectancy increases and populations age in many Western countries, from 353 local planning authorities the financial burden on pensions and healthcare systems will grow. over 35 years from 1974 to 2008. Raising the retirement age, and encouraging more people to extend their They find that, in the absence working life, are two common policy proposals to partly address this issue. of planning constraints, real house The authors of this paper explore whether older individuals – specifically, prices would have risen from older Americans – enjoy good enough health to work in old age. £79,000 to £147,000 instead of to The paper asks two questions. Firstly, if people with a given mortality rate £229,000, for the average dwelling, were able to work as much as people with similar mortality rates worked in between 1974 and 2008. the past, how much could they work? In other words, house prices Secondly, if older people with a given level of health were able to work would be 35 per cent lower without as much as younger people with the same level of health, how much longer regulatory restrictions on building. could they work? The findings suggest that older Americans have the health But the authors find that, even capacity to work significantly longer than they currently do. if the South East had relaxed its Concretely, the authors find that, if the same relationship between regulations to a level similar to employment and mortality rates prevailed as in 1977, American men would standards in the North East, house work an additional 4.2 years between ages 55 and 69. prices in 2008 would have been 25 Using estimates of self-reported health and comparing employment rates per cent lower. with those younger Americans who report similar health status, the authors This paper provides robust find that older Americans are able to work 4.9 years longer than they empirical backing for the hypothesis currently do. that high house prices in England The paper suggests that there is considerable scope to increase labour are primarily caused by planning force participation at older ages in the United States. restrictions. A similar exercise would have to be conducted for the UK to establish whether its conclusions apply to the British labour force. CHRISTIAN A.L. HILBERT and WOUTER VERMEULEN COURTNEY COILE, KEVIN S. MILLIGAN, and DAVID A. WISE The Economic Journal Vol. 126 NBER Working Paper 21940. Cambridge, Issue 591: 358-405. 2016 MA: National Bureau of Economic Research, 2016

48 Faculty of Social Science & Public Policy

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For more information visit www.kcl.ac.uk/prospectus and search for ‘economics’ SoundbiteSoundbiteSoundbiteSoundbi teSoundbiteSoundbiteSoundbite Sound nbiteSoundbiteSoundbiteSoundbiteSo SoundbiteSoundbiteSoundbiteSoundbi teSoundbiteSoundbiteSoundbite Sound biteSoundbiteSoundbiteSoundbiteSoun SoundbiteSoundbiteSoundbiteSoundbi teSoundbiteSoundbiteSoundbite Sound biteSoundbiteSoundbiteSoundbiteSoun SoundbiteSoundbiteSoundbiteSoundbi teSoundbiteSoundbiteSoundbite Sound biteSoundbiteSoundbiteSoundbiteSoun SoundbiteSoundbiteSoundbiteSoundbi teSoundbiteSoundbiteSoundbite Sound biteSoundbiteSoundbiteSoundbiteSoun SoundbiteSoundbiteSoundbiteSoundbi teSoundbiteSoundbiteSoundbite Sound biteSoundbiteSoundbiteSoundbiteSoun

54 SoundbiteSoundbiteSoundbiteSoundbi SOUNDBITE teSoundbiteSoundbiteSoundbite Sound nbiteSoundbiteSoundbiteSoundbiteSo An ILLIBERAL VIEW SoundbiteSoundbiteSoundbiteSoundbi of NEOLIBERALISM An article from the International Monetary neoliberalism teSoundbiteSoundbiteSoundbite Sound Fund’s magazine, entitled ne.o.lib.er.al.ism ‘Neoliberalism: Oversold?’, noun has been making the rounds a modern politico-economic theory favouring free trade, privatization, biteSoundbiteSoundbiteSoundbiteSoun on social media. minimal government intervention in business, reduced public expenditure on This is not surprising: social services, etc bemoan ‘neoliberalism’ in one Derived Forms SoundbiteSoundbiteSoundbiteSoundbi way or another, and you are neoliberal, adjective, noun virtually guaranteed roaring applause on social media. free capital flows magnify the macroeconomic headwind. teSoundbiteSoundbiteSoundbite Sound Nor is it surprising that likelihood and impact of crises. Furthermore, the recent IMF authors are taking such Rather, an examination of experience of Ireland and a stance, unless you ever fell the countries involved shows Spain show that austerity for the urban legend that the that events were mainly driven can be expansionary when biteSoundbiteSoundbiteSoundbiteSoun IMF is a ‘neoliberal’ institution. by a lack of robust institutions accompanied by a programme But what is surprising is how – independent central banks, of liberalising reforms. narrowly the article defines the fiscally prudent governments, As far as developing SoundbiteSoundbiteSoundbiteSoundbi alleged ‘neoliberal agenda’. the rule of law – which both countries are concerned, the Free-market reforms include spurred public and private main problem is that the openness to foreign trade, borrowing in the boom years state was not just large, but teSoundbiteSoundbiteSoundbite Sound deregulation of labour and and led foreign investors to also astonishingly inefficient product markets, and the call in their loans as soon as before liberal reforms were liberalisation of areas of things turned sour. Argentina, implemented. India’s growth- biteSoundbiteSoundbiteSoundbiteSoun the economy which were Mexico and Thailand are all choking ‘permit raj’ pre-1991 previously subject to extensive comes to mind. state intervention. Thus a market-driven SoundbiteSoundbiteSoundbiteSoundbi Such an agenda has been DIEGO agenda has provided oxygen pursued, with varying degrees for the private sector to of commitment, throughout ZULUAGA flourish, with very beneficial the world since the late 1970s. TAKES THE IMF effects on growth and real teSoundbiteSoundbiteSoundbite Sound Where it has been pursued, wealth at all income levels. and where it has not been TO TASK International bodies such undermined or offset by as the IMF may worry about biteSoundbiteSoundbiteSoundbiteSoun statist measures, the results salient examples of this cycle. rising inequality as economic have been overwhelmingly By contrast, countries growth rewards some positive: a dramatic reduction such as Chile with a better more than others within an SoundbiteSoundbiteSoundbiteSoundbi in poverty, with 700 million institutional framework have economy. people lifted from deprivation thrived under the free flow of But even a superficial look in China alone; greater capital. So has the UK, which at the evidence from the past teSoundbiteSoundbiteSoundbite Sound access to water, electricity until 1979 had strict capital 35 years shows the amazing and consumer goods and a controls in place. progress made – especially promotion of social mobility There is no historical by poorer countries – under biteSoundbiteSoundbiteSoundbiteSoun as entrepreneurship and credit precedent in peacetime for the so-called ‘neoliberal were unleashed. the level of debt that many agenda.’ This progress is sadly The article points out that developed countries have overlooked in the article• recent balance of payments reached in recent years. crises in Latin America and However, it is unlikely that Diego Zuluaga Asia occurred in the context economies with public debt-to- Financial Services of free capital flows. But this GDP ratios close to or exceeding Research Fellow does not necessarily mean 100 per cent are in a strong Institute of Economic Affairs that, as the article implies, position to weather the next [email protected]

51 IS WA T OF T I M E

THE GOVERNMENT PLANS TO TACKLE OBESITY BY IMPOSING PUNITIVE TAXES ON A HUGE RANGE OF PRODUCTS THAT LEAD TO WEIGHT GAIN. BUT CHRISTOPHER SNOWDON ARGUES THAT IT HASN’T DONE ITS ECONOMICS HOMEWORK… SOUNDBITE

By taking on obesity as a vastly higher than anything companies, he portrayed it as political challenge the that could be realistically a nudge to get manufacturers government is on course to levied on food (cigarette to reformulate their products spend many years and taxes currently stand at with less sugar. countless pounds trying to around 700 per cent whereas This is a strange demand to control the waist circumference the proposed sugar tax is 10 make of an industry that has of its citizens. It is a project per cent), but tobacco taxes been producing low-sugar doomed to failure. are aimed at all products that and zero-sugar varieties for A literal ‘fat tax’ in which cause the problem. decades. people are taxed on each A tax on cigarettes, pipe Consumers are aware kilogram of excess body tobacco and cigars effectively that artificially sweetened weight might work but that, taxes all smoking whereas drinks contain no calories. If too, would be politically a tax on certain soft drinks they tasted as good as the unacceptable. does not tax obesity, rather it sugary originals, they would Instead, the government is taxes one small component of dominate the market. proposing a tax here and an advertising ban there. These policies seem to have been chosen because they have EVEN THOSE WHO been used on smokers in the past rather than because they CAMPAIGNED FOR THE are likely to work in relation SOFT DRINK TAX NOW to the far more complex issue of obesity. ADMIT IT WILL HAVE In an affluent country in which even the poorest fifth LITTLE OR NO EFFECT of the population spends ON OBESITY only sixteen per cent of their income on food, taxes are unlikely to make any real difference to what people put energy intake which is neither Alas, most people prefer in their grocery basket. a sufficient nor necessary the taste of sugar and so the Food prices change all the cause of obesity. health-conscious consumer time without significantly Moreover, whereas a tax has to decide if he is prepared changing people’s diet. on cigarettes only affects to sacrifice flavour for fewer Evidence from Denmark, smokers, a tax on soft drinks calories. which briefly implemented affects obese and non-obese This is the key trade-off a fat tax a few years ago, people alike. with food in general. For suggests that higher prices In technical terms, the good evolutionary reasons, make people buy cheaper government is choosing to people find low calorie food brands and shop in cheaper tax one out of a range of less flavoursome than high stores while continuing to eat close potential substitutes – calorie food. much the same food. so people will substitute an The government can tell In other words, the demand untaxed sugary product for manufacturers to use less for food in general is price a taxed one. In other words, sugar in their products but inelastic, though people do there are other products that they cannot force people to substitute to cheaper brands have a significant “positive buy them. because of the income effect cross-price elasticity of So long as people have of higher taxes. demand”. money in their pockets and Proponents of sugary-drink Even those who freedom to choose, the taxes draw comparisons with campaigned for the soft chances of the state dictating tobacco taxes. The latter drink tax now admit that it what we eat are vanishingly have undoubtedly had some will have little or no effect small• effect on reducing smoking on obesity. Instead they rates over the years and yet argue that it is a ‘symbolic’ Christopher Snowdon the comparison does not act, and perhaps it is. When Head of Lifestyle Economics stand up. George Osborne announced Institute of Economic Affairs Not only are tobacco taxes his ‘sugar levy’ on soft drink [email protected] 53 LION’S SHARE

For wildlife to thrive, it must be valuable. This means allowing economic activity related to wildlife – including the right to hunt, says ecologist MIKE NORTON-GRIFFITHS

he international furore enabling rather than failed conservation policy but following the killing purely regulatory and also of the abject failure and of Cecil the lion in enforcement roles. ineptitude of “professional T Zimbabwe in 2015 conservationists”, inflamed the debate on It is when these policy issues government and NGOs, who the contribution to wildlife have been dramatically sat by idly while Kenya’s conservation of sport hunting. changed that we see their wildlife vanished under their The evidence is strong importance. For example in very noses despite the millions that, outside protected Kenya, in 1977, all consumptive of dollars invested by them in areas, wildlife prospers and use of wildlife, including sport wildlife conservation. more living space is made hunting, was banned. More recently Kenya’s available under the following Following the ban, grass-roots “conservancy conditions: opportunities for economic movement” in which exploitation were restricted individual or groups of • There are wider, rather to photo-tourism and the landowners and landusers than narrower, state monopolised all wildlife have pooled their access opportunities for economic ownership and user rights. As rights has significantly exploitation a result, benefit streams from improved matters. wildlife abruptly ceased. Tourist operators must • Ownership and user rights Revenues from wildlife now pay an agreed monthly to wildlife are more shrank by about 90 per cent. rental for access to their land devolved to the owners As a result wildlife production independently of the number and users of land rather became uncompetitive of visiting tourists. In the areas than less devolved compared with livestock and covered by these agreements, • Benefits flow transparently agricultural production and, wildlife populations are and fairly to both by the year 2000, Kenya had showing clear signs of producers and consumers lost some 60 per cent of her recovery. of wildlife goods and wildlife (Figure 1). [insert services figure one about here] Success in the South This loss is a telling While Kenya was pursuing its • Wildlife authorities adopt indictment not only of a restrictive policy, extensive

54 SOUNDBITE

wildlife industries developed throughout southern Africa, Figure 1 KENYA – loss of wildlife following the 1977 hunting ban especially in South Africa. Wildlife became, like livestock, fully tradable. New legislation was passed to devolve ownership and user rights to landowners and landusers who could now capture the great majority of wildlife generated revenues. In addition, close working relationships were forged between the state and private sectors. While Kenya hemorrhaged 60 per cent of her wildlife, South Africa’s wildlife numbers increased by more than 20 times. The difference between them in terms of the added value to wildlife is particularly striking. Recently a cape buffalo sold for breeding at auction in South Africa for game farms, ranches and protected areas throughout US$5,000,000; in contrast the hunting areas. Africa are large enough to meat from a poached buffalo The conservation of lions support significant numbers in Kenya would fetch, after demonstrates the importance of lions, the majority of paying off the police and of both kinds of protected which live on land currently the Kenya Wildlife Service, areas. Lions require space protected by economic around US$500. because of their social system: incentives. We now see there are young males leave the pride In southern Africa the wide range of economic opportunities open to landowners and landusers ALLOWING HUNTING AND makes the economic ALLOWING WILDLIFE TO landscape much more extensive and more BE HARNESSED IN OTHER favourable to lions than in WAYS... IS THE BEST WAY countries such as Kenya. In other words, allowing TO ENSURE THAT ALL hunting and also allowing HAVE AN INTEREST IN wildlife to be harnessed in other ways to extract PROTECTING WILDLIFE economic value is the best way to ensure that all have an two quite different kinds of and wander far afield until interest in protecting wildlife• protected areas for wildlife they are strong enough to conservation: those formally take over a pride by killing the Dr. Mike Norton-Griffiths demarcated and protected resident male and his cubs. is Visiting Research Fellow by the state as National This is how Cecil took over with the World Agroforestry Parks, Reserves and Forests his pride, as did his father and Centre (ICRAF). He previously and those protected by grandfather before him, and worked as senior ecologist landowners and landusers is how Cecil himself would in the Serengeti in response to economic have been finally deposed. National Park, Tanzania incentives as conservancies, But, few of the state- [email protected]

55 SHELL SHOCK Averting Brexit Disaster

DEREGULATED MARKETS AND FREE TRADE AREN’T THE MOST LIKELY OUTCOME OF THE EU ‘DIVORCE’ PROCESS, SAYS RAZEEN SALLY

The British (or rather the non- will be costly in the short- get worse, not better, with a London English and Welsh) term, given uncertainty over fragmented EU, especially with have decided to leave the future arrangements with the UK outside it. EU. I think this is a very bad, the EU, with probable long- In my view, much of the and potentially disastrous, term damage. The evidence Leave campaign behaved decision. is overwhelming, from a with wanton recklessness. I was appalled by the Leave tsunami of official and non- The official campaign never campaign. But the deed official studies in the UK and fleshed out a credible post- is done. Now the UK must elsewhere. Brexit plan. And many of its contain the damage and turn Second, Brexit risks the arguments came from the gut, it into opportunity. break-up of the Union, without regard to evidence, My starting point is that of starting with Scotland. And logic, intellectual examination, a “sceptical European” (Ralf third, Europe faces existential or indeed basic facts. Dahrendorf’s term, not mine). challenges: perhaps from a First came the demonisation For all the EU’s faults, I still flood of refugees from the of evidence from “experts”. thought it prudent to stay Middle East and North Africa; Then followed the economics inside. but more so, externally, of fantasy. The problems of First, the UK has gained from Vladimir Putin’s Russia, negotiating new terms with enormously from the Single and, internally, from a toxic the EU were minimised, with Market, far outweighing the cocktail of left-wing and totally unrealistic assumptions budgetary and regulatory right-wing populism. of UK bargaining power with costs of membership. Brexit These problems will probably a much larger (and newly

56 SOUNDBITE jilted) partner. So were the Englanders. integration” agreements with challenges of negotiating Dark, illiberal forces have the USA, Japan, and other new free-trade agreements been unleashed. I fear the capable and willing trading with non-EU trading partners. UK will take an illiberal turn partners. In general, serious trade outside the EU, starting It could apply to join the economists do not believe with more controls on North American Free Trade that more intensive trade immigration. How can this Agreement, which brings with far-flung emerging be averted? How can the UK together the USA, Canada markets will compensate become more liberal outside and Mexico, and the Trans- for trade losses with the EU as some in the Leave Pacific Partnership, which neighbouring large, campaign genuinely do want? brings together the USA, prosperous markets in the First, it is vital the UK Japan and nine other Asia- EU. The contention that preserves full access to the Pacific countries. Other FTA trading better with the Single Market, including candidates are the Pacific Commonwealth and a cultural the freedom of movement Alliance in Latin America, Anglosphere will trump trade of people (though this will China, the ASEAN countries, with the EU is fanciful – as now be very difficult to sell India and Brazil. I can testify sitting here in domestically). This is the optimistic Singapore. Second, the UK should start scenario that many of Worst of all was many in unilaterally deregulating the classical liberal and the Leave campaign’s stance areas not under EU control, libertarians who voted for on immigration. The UK, like such as taxation, expenditure, Brexit would, no doubt, like other prosperous, ageing labour markets and land use to see. However, the tone of societies, needs more migrant planning (which it could have the Brexit campaign overall workers. The freedom to done in any case as an EU was such that it is not the move and work within the EU member). most likely outcome. is one of its biggest successes Third, it should draw If the UK veers in a – also for the UK. up plans for unilateral more illiberal direction, Restricting or removing the liberalisation where EU then classical liberals and right of people in other EU constraints apply, especially libertarians who campaigned member-states to live and work in non-EU trade, agriculture, for Brexit must take their in the UK would be the single energy and the environment. share of the blame• most illiberal act since Mrs On external trade, the Thatcher took office in 1979. UK should aim to continue Razeen Sally Most shamefully, by as a member of existing EU Director whipping up the false demon free-trade agreements (FTAs) European Centre for of immigration, many in through “grandfathering” International the Leave campaign made provisions. And, separately, Political Economy a Faustian Pact with little it should go for new “deep [email protected] FOR MORE… For a range of different viewpoints on Brexit, see these recent IEA publications: Breaking Up is Hard to Do: Britain and Europe’s Dysfunctional Relationship, edited by Patrick Minford and J. R. Shackleton www.iea.org.uk/publications/research/breaking-is-hard-to-do-0 Why Britain Should Leave the EU, by Patrick Minford www.iea.org.uk/sites/default/files/EA%20Spring%202015_VIEWPOINT.pdf Free-marketeers should support Britain’s membership of the EU, by Diego Zuluaga www.iea.org.uk/blog/free-marketeers-should-support-britains-membership-of-the-eu Free-marketeers should oppose Britain’s membership of the EU, by Ryan Bourne www.iea.org.uk/blog/free-marketeers-should-oppose-britain%E2%80%99s- membership-of-the-eu

57 Don’t lean on this tower of PISA

Over recent decades, the Take the issue of leading to quite significant idea of evidence-based competition from efficiency gains. policy has gained ground independent schools. The According to this research, in many areas. In education PISA report tells us that the a 10-percentage point many commentators look share of children attending increase in independent- at the OECD’s Programme independent schools is school enrolment shares raises for International Student unrelated to countries’ achievement by about 10 PISA Assessment (PISA) survey, performance. points and decreases costs by which produces scores Andreas Schleicher, the about 5.6 per cent. measuring educational OECD’s education director, Using methods designed to performance in dozens of often refers to this non- unveil causal relationships, different countries. They existing correlation as the study blows the OECD’s assume this organisation evidence that competition methods out of the water. knows what it takes to does not raise standards. Another example concerns perform well. So do representatives of school autonomy – which This is not the the left-of-centre think- measures the extent to which case, however. OECD tank IPPR, who argue that schools are free to make their own decisions. The OECD concludes that autonomy GABRIEL HELLER SAHLGREN in combination with state accountability has a positive SCRUTINISES THE OECD’S impact on PISA scores, while STUDENT ASSESSMENT autonomy by itself has negative effects. However, academic research recommendations are based this conclusion demands shows that the impact of on cross-country comparisons an answer by advocates of autonomy by itself is positive and the characteristics of independent providers. in developed countries, high-performing nations. Well, here’s the answer: although accountability But just because certain proper academic research increases this positive effect. policies have been adopted by does in fact find positive These are just two countries with good results, effects of independent- examples. The OECD’s analysis it does not mean that those school competition on PISA of effective practices fails policies caused those good performance – and also to provide us with answers results. that pupils in state schools and so does the supposed In fact there may be many benefit just as much as pupils best-practice approach more other explanations. Looking attending independent schools. generally. to the OECD’s analysis for The study that uses the Searching for characteristics answers on what produces most robust methods finds shared by high-performing effective education systems is that competition both raises countries’ education therefore a leap in the dark. PISA scores and lowers costs, systems isn’t a recipe for 58 SOUNDBITE understanding what makes them perform well. Why? Because ‘best practice’ approaches always derive from often engaging, but ultimately pointless, stories: if you’re only looking at successful education systems, it’s impossible to know whether the policies highlighted have caused, been irrelevant for, or even Issue 8 £3.75 impeded their performance. From the Institute of Economic Affairs Indeed, the approach typically leads to cherry FAT picking, an exercise in which TAXES: A WAIST pundits emphasise the policies OF TIME? they happen to like and ignore the rest. As Jay Greene, professor of education reform BREAKING BAD at the University of Arkansas, AND THE NHS has argued, best practices are therefore in fact the worst. But if this is the case, why do politicians continue to refer to the OECD report regarding what constitute effective policies? Well, analysing research BEHAVIOURAL ECONOMICS IN THE DOCK... requires an understanding BAD of what makes it good and BEHAVIOUR? what makes it bad. And unfortunately, unlike the PISA report, economic studies aren’t very accessible to non- economists. And it’s easier for politicians to highlight ideas that are popular in the teaching profession, such as collaboration, rather than ideas that are unpopular, such as competition – even though TO GO! the latter receives more support in the literature than the former. It’s also understandable that policymakers look for DOWNLOAD every edition an easily interpretable guide on how to reform their of EA magazine education systems to produce – in full or in part – better results. But the OECD report isn’t that guide. FOR FREE The sooner they realise this the better. at: Gabriel Heller Sahlgren Research Director Centre for the Study of www.iea.org.uk/ea-magazine Market Reform of Education [email protected]

59 “INSPIRATIONAL”

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“INCISIVE”

“THOUGHT-PROVOKING”

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