Tim Worstall

Richard Murphy (and I quote in full, so that you get the full flavour):

I thought I’d finished with Tim Worstall. But not quite as it turns out, for he left a comment on this blog yesterday which really does blow his whole position apart.

I’d said:

It is impossible to suppose that a man who can argue (as you did in the Guardian, very recently) that “Things in markets are worth what the markets say they are worth” is a true heir of [Adam] Smith

His response? This:

As I’ve said before, no one thinks that all markets all the time produces the optimal allocation of resources.

The argument is not over whether markets *always* produce either “just and moral” prices, as opposed to simply market prices, or whether they *always* produce an optimal allocation of resources. It’s over when and where do they and when and where do they not.

That’s fine Tim. I agree. But let’s be clear what you have conceded here. What you’re saying is:

1) Markets don’t necessarily produce the optimal allocation of resources;

2) We don’t know when they do, and when they don’t;

3) In that case the economics you espouse provides us with no useful information - we’re left making our own choices;

4) In that case you either can’t sustain your claim that economics is a rational science, or alternatively you can say it is, but the results it produces are of no use to anyone;

5) As a result economic decisions are always subjective;

6) The economic theory you espouse can never be used to justify intervention in the economy because it is clear that it cannot predict optimal outcomes, and we could not tell is those had been achieved in any event.

Put bluntly, this means you’re about as far away from objectivity as it is possible to get: you pretend you’re objective when you know you’re not. That’s not just a failure of objectivity and a lapse into subjectivity, it’s rank hypocrisy.

And it’s rank hypocrisy that you use for a particular purpose, which is always to favour markets when they suit the well off and to oppose regulation when it suits the least well off. This is readily apparent from your argument against the minimum wage recently where you said there was a moral argument for abolition because this interfered with market outcomes: market outcomes you now admit you cannot predict. The only morality on offer therefore was your own, designed in this case to harm the well-being of those on the lowest pay in our society.

At some points over the last couple of weeks I seriously wondered why I bothered to engage with you. Now I know two things: one you definitely do not know what you’re arguing, and second that all the arguments you and your ASI colleagues put forward for the supremacy of the market are pure bunkum: they’re simply a subjective argument for the endowment of favour on those you choose.

It was worth getting to this point. The argument with you has been won. I’m satisfied with that outcome. So please don’t bother me again: it’s now abundantly clear it’s not worth my time dealing with you or your like.

I’m not really sure what to do here other than snigger.

1), yes, of course, we all agree that markets and markets alone do not necessarily produce the optimal allocation of resources. I’ve already in this (long) series pointed to any number of such examples.

2) We don’t know when they do and when they don’t? Blimey! So what is this economics thing then? It is, at least in part, a study of when they do and when they don’t. As above, I have given a number of examples about when economics (no, not "neo-liberal" economics, not "right wing", not anything other than simply the standard economic toolkit) tells us that pure and unadorned markets do not give us the optimal allocation of resources. Externalities for example, pollution is a good one. Ronald Coase pointed out that a pure market solution may or may not work: it depends upon transaction costs. Alan Walters (from his Times obituary: " In 1968 he published the Economics of Road User Charges,"….the paper that led directly to the London Congestion Charge. Again, a study iof how we deal with an externality and in this case, one where the transaction costs make a pure market solution impossible). Or the entire system of copyrights and patents: we think that creation is a public good, public goods are undersupplied in a pure market because the creator cannot appropriate the value that is being created. Thus we rig said markets to get to a better, if not entirely optimal, outcome.

3) No, economics informs those choices.

4) As points 2 and 3 are false, then so is the conclusion, 4, drawn from them.

5) Now there is indeed subjectivity in the system. Of course there is. But it’s not in the economics.  The statement that "a very high minimum wage will cause unemployment" is not subjective. It’s a statement of the blindingly obvious. Similarly, the statement " a very low minimum wage will make no damn difference" is not subjective, it’s similarly a truth. "The current minimum wage has some good effects and some bad effects" is yet again, simply a truth. The subjectivity somes when someone says, "I think the good effects are worth the bad", or, the opposite "I think the bad outweighs the good".

Economics can be and is used to tell us what those effects are: whether we prefer one set to the other is subjective, not the analysis of what they are.

6) The economics I espouse is indeed used to justify interventions in the economy. It’s used to do that each and every hour of each and every day. See, say, carbon taxes, cap and trade, congestion charges, copyrights, patents, anti-monopoly laws, and so on nearly ad infinitum.

This plays onto the morality thing mentioned. Morality is of course personal and is thus subjective.  But that’s how we make the choices between the various options that economics reveals are available to us. That we might differ  here is unsurprising: but to reject economics itself  because it reveals those choices is absurd.

Worth remembering what I was actually arguing for as a moral precept there as well. That if we, societally, wish to change the outcomes of the market pricing mechanism then we, collectively and societally, have to be willing to pay to do so. Rather than dumping the costs onto some subset of society.

I find it very hard to see that as an immoral position but do agree that it’s not an economic point, it’s a subjective one.

And as I also argued, we should stop taxing the working poor. how this harms the well-bing of those on the lowest pay in our society I’m really not sure.

As to who has "won" this argument I’ll let others decide that. I certainly don’t think that Richard Murphy has, but then that’s probably me just being subjective.

This is laughable, coming from Polly.

Cameron’s plan for retrenchment is economically illiterate, and would be frighteningly dangerous if he were in power.

Economic illiteracy accustaions from Our Pol? However:

Take his plan for a loan guarantee to let banks lend again with the state as guarantor. It sounds good - indeed, the government has already said it will do the same, responding to the Crosby report. Cameron’s deceit, in his eagerness to cut borrowing, is to pretend he can do it cost-free by raising interest rates enough to cover any losses from failed loans. Nonsense, say those working on the scheme. To make it self-financing, he would have to raise the loan interest rates to many times their present rate, and no one would want them. Guaranteeing loans, some of which would fail, costs some £2bn - but in Cameron’s fantasy economics he pretends he can both fix this crisis and cut spending.

What’s rather more sobering is that in this case she’s actually correct. If the interest charged on loan guarantees is to cover the potential losses, then they would indeed have to be at market interest rates (market interest rates already encompassing those default risks). And the point is that no one’s all that keen at borrowing at market interest rates, the deficiency this plan is designed to cure.

Whether it’s a good plan to guarantee such debts is another thing entirely. But as she’s described the plan, Dave really is being economically illiterate. Which doesn’t really bode well, when Polly is more clued up than the Leader of the Opposition.

Must, be, Richard Murphy tells me so.

Our latest comment call and response:

“. It is impossible to suppose that a man who can argue (as you did in the Guardian, very recently) that “Things in markets are worth what the markets say they are worth” is a true heir of Smith,”

I fear that you have failed to note the next but one sentence. “It’s also true that we often don’t like the values that markets come up with so we intervene to change them.”

As I’ve said before, and as just about everyone both acts and believes (and indeed I’ve made this very point here on this very blog), no one thinks that all markets all the time produces the optimal allocation of resources. “Things are worth in markets what markets say things are worth” is a tautology. The value of a freely copyable book (or MP3 in this digital age) is damn near nothing in a market system. So we intervene with copyright to create some value: for we do not like, either for efficiency (ie, if creators earn nothing from creation we’ll get too litte creation, the public goods argument) reasons or for more moral reasons (it is right that creators earn from their creations).

The argument is not over whether markets *always* produce either “just and moral” prices, as opposed to simply market prices, or whether they *always* produce an optimal allocation of resources. It’s over when and where do they and when and where do they not.

As I’ve said here before. And as you seem to be ignoring.

That’s me. This is Ritchie:

Oscillating again, aren’t we? Have you ever given a straight answer?

The simple reality is this: you’re recognising that markets produce imperfect outcomes except when it suits you to say otherwise - which seems to be when it’s a matter of abolishing the minimum age, for example.

In fact it’s always a matter of markets work when it suits you and your privileged ilk and not when they don’t. And you like to say economics is objective and a science?

Come on Tim, your true colours are now clear. You’re just a bigoted hypocrite hiding behind a market theory as a witch doctor does behind a cauldron, and with both as bogus in their claims to competence.

If markets don’[t work - and that’s what you’re saying - your arguments fall apart at the seams.

Game over Tim. Don’t bother to post again. You’ve been rumbled.

Now I thought I was being very reasonable. Markets work except when they don’t, at which point we both can and should intervene. As, for example, the late Sir Alan Walters, with the full support of the Adam Smith Institute, used to argue for congestion charges.

This makes me a bigoted hypocrite apparently.

If I could just add that while I seem to have been banned from Richard Murphy’s comments section, as is his right….it being his private property….Richard is not banned from mine. Up to you Dickie.

At the ASI.

About geoengineering.

Pupils in every secondary school should be taught the statistical skills they need to make sensible life decisions, one of Britain’s leading mathematicians says.

A basic grasp of statistics and probability — “risk literacy” – is critical to making choices about health, money and even education, yet it is largely ignored by the national curriculum, according to the UK’s only Professor of the Public Understanding of Risk.

Why not start by educating journalists? They certainly need it…..

. He’s approved higher taxes for top earners and promised further help to pensioners and the poorest. In all this, we see the return of Labour values, which seemed at times over the last 10 years to have vanished into history. Nobody wants a state-run economy or 97% marginal taxes, but the notion of a slightly fairer, less materialistic and longer-term polity is not an ugly one, and is now sellable.

Haven’t you noticed, we do have 97% marginal taxes? It’s just that we charge them on the poor, where the tax and benefit systems meet.

Much has been written in recent weeks about Franklin Roosevelt’s New Deal, the storm of activity with which, following his inauguration in March 1933, he sought to resurrect the US economy from the Great Depression. Among his less-noticed measures was a cut in public sector pay.

Today, is it credible that hundreds of millions of employees in the world’s manufacturing, service and financial services industries should suffer, as they are going to, while public sector pay and benefits remain inviolate?

Hmm, there’s an idea.

Let’s say that public sector pay is around 50% of total government spending. No idea whether it is but imagine. So £300 billion of £600 billion.

If you look at the ONS ASHE survey (the same one we get the gender pay gap numbers from) then public sector pay is, on average, 8 % or so higher than private. Plus there’s those pensions. So call it 10%.

A 10% haircut all round on public sector pay. Sounds fair doesn’t it?

Of course, we don’t want to upset the fiscal boostiness the economy needs at present so we need to make this neutral, so we can pass this along as tax cuts. Say, increase the personal allowance to £11,000. That would cost £30 billion.

Hmm. We equate public and private sector pay in this time of pain and we take the working poor entirely out of the tax net.

Or of course you could look at this the other way around. The reason we tax the working poor is so that government employees can get higher pay than private sector workers.

So, anyone know what the total wage bill actually is? Is 50% about right?

Another one of those Guardian pieces about Cuba (not all that bad a one actually) and I spot this in the comments.

No Rory, for its achievements against the odds the revolution is respected. A better life expectancy than the vastly richer US is no mean feat, not to mention the educational methods which are now stamping out illiteracy across Latin America.

This is one of those things that always slightly puzzles me. Why such empahsis placed upon literacy in a place where the Government decides what you might be allowed to read or write?

Wasn’t this, well, a bit of a worry? I asked (in the Bank of England understatement is the modus operandi – or at least it was then). The faces that stared back looked drawn, fearful and rather weary. They pointed me towards another set of figures, even more worrying. They implied that if there was an unexpected shock that made it difficult to fill that gap by borrowing short term from other investors, home and abroad, the consequences would be disastrous: we were talking about a year’s worth of profits – £40 billion – being wiped out; about house prices falling by a quarter and the economy shrinking by 1.5 per cent.

The boom went on for another year and a bit, and the eventual slump looks like being even worse, but the fact remains: there was a distinct bat-squeak of worry in the Bank of England in 2006 – and it was more or less ignored. Granted, the Bank had not identified all of the details, nor precisely how this crisis would become the worst since the Great Depression, but it did enough; it identified the root cause of the credit crunch.

So what went wrong?

One candidate for what went wrong. The Bank was no longer in charge. Supervision of the banking system lay with the FSA, not the Bank as had been the case before 1997.

In earlier days this sort of worry would have had the chief execs called into hte back room by the Governor, given a stern talking to and told to sort things out. Under the new, more legalistic and rule based system, no one actually had the power to do that.

Thanks Gordon.

As Mr Obama and his young family moved into a luxury hotel opposite the White House, it was announced that Bill Richardson, his nominee for commerce secretary, was stepping down amid allegations of wrongdoing.

A federal grand jury in New Mexico is investigating accusations that Mr Richardson, the state’s governor, gave lucrative contracts to a California financier because he contributed more than $100,000 (£62,000) to the governor’s political funds.

In a statement, Mr Richardson protested his innocence but "concluded that the ongoing investigation also would have forced an untenable delay in the confirmation process".

Not even had the inauguration yet and already we have the first scandal.

It could be interesting over the next few years. Was Bush uniquely "corrupt"? The Republicans? Or are we simply going to see the same from the other half of America’s political class?

So I write about the campaign against prostitution. In the comments is this.

Anyone who’s ever seen Julie Burchill’s likeness, or Jacqui Smith’s or Harriet Harman’s for that matter, know that it comes down to sheer jealously. All three know that if they went on the game they’d starve.

Well, no, I didn’t say it, but there are indeed times of the night, levels of sobriety, when I might.

And other times of the day, other levels of sobriety, when I wish I had.

Here.

At The Register.

About prostitution. Not quite sure why I’m writing for geeks about prostitution really: Linux has made that entirely unnecessary*.

* Such a bad joke that Microsoft actually used it in an advertisement in New Zealand.

Michael Lewis has a great piece on sub prime. This leaps out at me.

In retrospect, pretty much all of the riskiest subprime-backed bonds were worth betting against; they would all one day be worth zero. But at the time Eisman began to do it, in the fall of 2006, that wasn’t clear. He and his team set out to find the smelliest pile of loans they could so that they could make side bets against them with Goldman Sachs or Deutsche Bank. What they were doing, oddly enough, was the analysis of subprime lending that should have been done before the loans were made: Which poor Americans were likely to jump which way with their finances? How much did home prices need to fall for these loans to blow up? (It turned out they didn’t have to fall; they merely needed to stay flat.)

If someone, or many people, screw up, then in a market there will be someone who uncovers that error. And in doing so, make a very large amount of money. Providing that incentive to uncover the screw up.

THE Home Office has quietly adopted a new plan to allow police across Britain routinely to hack into people’s personal computers without a warrant.

The move, which follows a decision by the European Union’s council of ministers in Brussels, has angered civil liberties groups and opposition MPs. They described it as a sinister extension of the surveillance state which drives “a coach and horses” through privacy laws.

The hacking is known as “remote searching”. It allows police or MI5 officers who may be hundreds of miles away to examine covertly the hard drive of someone’s PC at his home, office or hotel room.

Material gathered in this way includes the content of all e-mails, web-browsing habits and instant messaging.

Under the Brussels edict, police across the EU have been given the green light to expand the implementation of a rarely used power involving warrantless intrusive surveillance of private property. The strategy will allow French, German and other EU forces to ask British officers to hack into someone’s UK computer and pass over any material gleaned.

Can we leave yet?

And into the Labour Party.

A CHARITY that has had more than £840,000 of loans quietly written off by a government fund has made two unlawful donations to the Labour party.

Catz Club, which runs after-school clubs for children, paid £30,000 to attend two Labour fundraising events at Wembley stadium. Charity law bans the use of charitable funds to bank-roll political parties.

To be honest, while I know nothing of this specific charity, I can’t say that I’m surprised at the basic activity. They have form.

Like, umm, giving millions to the unions for "modernisation" and then getting millions in donations from the unions.

We start from the observation that politicians do what benefits politicians, not necessarily what benefits the populace. It’s hardly a shocking assumption: we’re quite happy in all other areas of life to think that self-interest rules. We’re also quite happy, or at least some of us are, to note that this pursuit of enlightened self-interest does indeed benefit the populace. Think of the butcher and the baker.

So this assumption that politicians do what benefits politicians, how strongly is this held? Here’s The Observer, probably the most liberal paper in the country. There’s something of a holdover of the classical liberalism of its past and certainly a healthy dose of "modern liberalsim" although it tends not to be quite as forward in this sense as its sister paper, The Guardian.

You never want a serious crisis to go to waste." The words of Rahm Emanuel, President-elect Obama’s chief of staff, have clearly caught Gordon Brown’s attention. As today’s interview reveals, the prime minister is determined to use the economic crisis to re-establish his credentials as the man best able to lead Britain through troubled times. His certainty of purpose is welcome, but success depends less on rhetoric and more on hard policy.The criticism of Gordon Brown has always been his focus on tactics, not strategy: an obsessive desire to corner the opposition and establish party political dividing lines. It was these characteristics that produced the mess of the 10p tax band abolition and the needless fight over 90 days’ detention. But now Brown has the chance to shed his partisan image

That certainly reads to me like the essence of public choice economics, that politicians juggle policy so as to cement their own position rather than to actually do anything beneficial, is believed there. Indeed, the very essence of their message there is that Brown should stop doing what he has been doing for the past 12 years and start to think about policy in policy terms, not political.

So, yes, I think we can take it that even the liberals agree.

Named after the two Democrat senators who sponsored it, Glass-Steagall prevented commercial banks – which take deposits from ordinary households and firms – from engaging in the high-risk speculative activities undertaken by investment banks.

Legislation in the US is not usually named after "two senators". Rather, after one Representative and one Senator: the names of those who sponsor the legislation in each House. Glass was a senator, Steagall athe representative.

Pendantry I know, but this is in a national newspaper after all.

The definition of lunacy is continuing the same actions over again and expecting a different outcome.

Gordon Brown was reported to be preparing to pump billions more pounds into the banking system amid mounting evidence that his £37 billion part-nationalisation has failed to get credit flowing to home-owners and businesses.

As banks continue to restrict lending, Alistair Darling, the Chancellor, has been considering a range of options including cash injections and offering banks state guarantees to raise money privately.

There’s a school of thought that says we were due a credit crunch and a credit crunch we’re going to have. Preserve the banking system, yes, so that when the great deleveraging has finished we still have a system able to intermediate between savers and borrowers. But that there’s pretty much nothing that anyone can do to stop the actual deleveraging itself.

Not sure how true that actually is: this level of economics is well above my pay grade. But I have a feeling that we’re about to find out how true it is.

At the ASI.

Why the NHS spends so much on agency staff, why it’s so dangerous and what we can do about it.