Reading

I’ve been reading Dierdre McCloskey, and Indur Goklany.

You should too.

Auctions, Voting and Strategy: why AV may not matter.

As it stands, the current FPTP voting system allows both the illiterate and innumerate to vote; changing the voting system to one that requires a grasp of numbers and letter will unfairly disenfranchise these vulnerable groups. It is profoundly undemocratic, unfair and un-egalitarian.

You may think this is an absurd objection to voting reform, but I think the proponents are confused. To see why we need to think about auctions.

You bid for an item in a special auction: the bids are sealed and you are not allowed to confer with the other bidders. The highest bidder wins, but pays the second highest price. What do you bid? Simple: you bid what you think the item is worth (in the parlance of game theory this is a dominant strategy). To see this imagine you bid £60 for a silver candelabra in this auction, why not bid £50 (or £70) instead? If any other bids more than £60, then  both £60 and £50 are losing bids. Similarly if the second highest bid is £40, then both £60 and £50 are winning bids, and there is no difference between them. If the competitive bid is say £55, then only by bidding your true value (£60) will you win, and since you would prefer to win rather than lose you should bid what you think the candelabra is worth (a similar argument holds for bidding above your true value).

One of the more interesting game theory results is that this auction should generate similar revenue to English and Dutch auctions. In an English auction, the price is bid up until there is only one bidder left (the one who values the item most), but they pay the second highest valuation for the item (the bid at which the second highest bidder drops out of the auction – the second highest valuation). In a Dutch auction, the bidding starts high and then goes down. The first person to enter a bid, wins the item and pays the bid. The danger with this auction is that the longer you wait, the higher the chance that someone will jump in before  you and win the bid. What do you do? If you bid, you win and therefore had the highest valuation:  your best strategy is to bid what you think the next highest person’s value is, given that you have the highest valuation. Thus all three auction types will generate the same revenue for the seller.

The moral of the story is that if you change the rules, the participants of your game will change their strategy and there’s no reason to believe the outcome will be different. This is important for understanding AV: like a Vickery auction, AV gives voters a chance to register their true preferences (via ranking candidates). But since it will select MP’s (and the largest party subsequently forming government) it’s difficult to see what would be different.

To see why you need only note that any candidate who does not gain 50% of the vote is eliminated under AV, and that under FPTP voters do not vote in vacuo: they vote tactically. That is under FPTP voters will vote for their second or third preferences (as expressed under AV), because they think these parties stand a better chance of winning (or that these candidates would be a better representative for the constituency). Under AV voters may put one or two parties first, but unless the voting preferences in your constituency change, these options will be eliminated anyway  (a Marxist in Knightsbridge will fail to get the SWP elected, because most other voters will vote Tory regardless of the voting system). Thus only your second or third preference counts (or if none of your candidates gets elected, then none of your preferences counted).

Thus under AV  it’s as if you still only have one vote, and that vote would be for the candidate you would have voted for under FPTP. The superior fairness of AV is irrelevant: as long as voting preferences don’t change, parties that were never going to be elected never will.

Economic Thinking and its Discontents.

Economics has taken a beating recently, despite having the answers (expansionary fiscal or monetary policy, with differed taxation as the liabilities on borrowing). It seems no one will take economists seriously. Why?

The subject is overtly mathematical

Well, so what? If you want to think with precision about quantitive phenomena (or in the case of Social and Public Choice theories, qualitative phenomena) then you’ll need to use mathematics. Maths is a convenient language that ties you to being logical, and fully understanding what you are talking about.

Some parts of economics that are highly mathematical do involve real world applications: auction theory or finance for instance.

The models don’t fully describe reality

I’ll let you in on a secret here: the models of physics don’t fully describe physical reality. They are an abstraction. Cows aren’t spherical, particles aren’t isolated from the rest of the universe etc. These models help physicists come to the real world and answer questions like: why does coffee go cold?

Economists similarly creat idealised worlds, with simplified assumptions about human behaviour, to fully understand what is going on. What happens when we print money? How much do people care about the future? How much regulation is too much regulation? How much is too little? Does free trade produce tangible benefits? If so, How? What are the effects of technological change? Whys does technological change occur? How do you aggregate individual behaviour into collective behaviour without prices (voting systems for example)?

These questions would be difficult to answer without sophisticated mathematical tools – mostly because the precise statements of those questions requires a logically tight language. Maths provides it.

Human Behaviour cannot be reduced to rational utility maximizing

True. I bet you know someone in your extended family who isn’t rational. Despite the insistence of Jeremy Bentham, not everything in human psychology can be reduced to utility. The assumption, however, is deliberate. The point of science is to understand the world, and that process requires reductive assumptions.

Besides, “the market” is the interaction of huge numbers of people. It’s not just a few – 10 say - but literally billions of people. Size does matter – the character of a million people interacting can be radically different from two people, and naively assuming it won’t is an error.

mathematical reasoning delegitimizes the opinions of people who don’t understand maths

They do: often because these opinions are wrong.

Take for instance the opposition to globalisation Pual Krugman notes:

“The typical story – as found, for example, in the 1994 World Competitiveness Report (World Economic Forum 1994) or in Greider (1997a) – goes like this: Multinational corporations and other investors are massively relocating capital to low-wage countries, undermining traditional employment in the advanced countries. Meanwhile, hopes that these newly industrializing economies will provide export opportunities and thus alternative jobs for the displaced workers are a mirage: wages and hence purchasing power in these countries will remain low, both because of the sheer size of their labor forces and because they need to keep wages low to attract a continuing inflow of capital. Thus workers in the Third World will see no benefit from the process – their economies will achieve high productivity while continuing to pay low wages – while those in advanced countries will find their position undermined both by trade deficits and by capital outflows.

What is wrong with this story? Economists quickly notice that it violates the equation that says that current account plus capital account equals zero. It cannot be true that newly industrializing economies are or will be the recipients of large capital inflows and at the same time export much more than they are importing. And once one tries to fix this aspect of the story, the whole thing falls apart. In particular, suppose that one decides that newly industrializing economies will, in fact, attract large capital inflows. Then one must conclude that they will run current account and probably trade deficits rather than surpluses. But how can they run trade deficits when their productivity rises but their wages remain low? Doesn’t this cost advantage ensure a trade surplus? Well, something must be wrong with the premise; perhaps wages will not remain low after all.”

It’s perfectly acceptable to delegitimize incorrect opinions, especially when people act on them politically and the consequences will be continued poverty for billions. In fact that equation is just an accounting identity – yet people with primary school level of numeracy refuse to belive the consequences of it. They wonder why they aren’t taken seriously.

Well, human behaviour still isn’t that simple.

True, which is why economists have many models of it. They assume rationality, bounded rationality, rational irrationality and then incorporate psychological insights into these (George Ackerloff - Nobel 2001 – has written a paper on the economics of cognitive dissonance). They study rational altruists and imperfect altruists as well. There’s plenty of variety.

Economists deify the Market

Well no actually; most of the interesting work in economics is about when markets fail. Which is all the time really: whenever there are external costs to a decision, the provision of public goods (see: infrastructure in 19th century London), whenever there is a asymmetric information, the mis-aligning of incentives a la the principal agent problem.

They study the auctions, voting systems, collective management of resources, markets for “goods” such as murder and gun control, legal and institutional systems, explicit market failures, history, tournaments. Economics is a broad church, and many economists feel no trouble in government correcting market failures – but they stress, not all market failures need to be corrected.

It’s true some have the attitude “Markets are good. Markets fail. Use Markets.” As I’ve said not all market failures need to be corrected, and can be profit opportunities for entrepeneurs - spurring them on to the improvement of human life.

Economics isn’t science, it gives credibility to greed

You’ll find, that often the consequences of your actions are open to little debate. Economics is just a thoughtful working out of those consequences.

As for giving credence to greed: most economic activity is simply people responding to real demand from other people. Acting as an intermediary between parties. For example: property developers and speculators. Both just respond to the demand for homes, one by supplying them the other speculating on prices and generating the signal for demand (this is simplified, much speculation does create zero social benefits). Both are only greedy if you accept that the buyers are greedy, or that developers are.

Do you have any more questions, internet?

Branding and Politics

Starbucks brand’s itself as a Third Space; a place of warmth and community away from the office and home. Apple styles itself as the last word in cool, on the crossroads of technology and liberal arts. UmbrellaCorp don’t need to advertise: when the zombie apocalypse comes, you’ll know who they are.

In reality the Third Space is somewhere between the Second Coming and the Fourth Dimension, and Apple isn’t really that cool (being cool is). Brands (and the corporations that go along with them) aren’t going to take over the world, for the simple reason that the existence of branded products implies how weak corporations are, and how little influence over us they actually have. Only a monopoly gives us no choice but to buy a product. competitive firms  need to persuade us to buy their products, and that their product is superior to a competitors; it is because we are fickle and have choice that that branding is necessary.

Rather, branding conveys something – scarce information about a product. Here’s one way to think about it: suppose I put my capital in bank that will only pay interest after 5 years, and then 20% of the principal each year for 5 years after that. You’d expect me to think that I’ll be business for a while. That’s what branding is – it conveys the fiduciary nature of a transaction, when the two parties may never meet (as is the case of branded products). Historically branding was a response by companies during the advent of the industrial revolution to convey the quality of products, as production and consumption became divorced geographically. It’s not some attempt by corporations to “take over”.

Of course, many critics (Naomi Klein qua Naomi Klein for instance) of this claim that it relies on psychological manipulation of some sort. The corporation incites us to trust it through this manipulation, inducing us to buy their product. Using classic Marxian dialectic discourse (read: illogical nonsense) they deconstruct the Capitalist narrative of exploitation (whatever that means). One crucial mistake is made: it’s assumed that psychological manipulation is a bad thing.

(It’s worth noting they – the critics - never stop to think that a set of legal, market and technological institutions arising with little planning of any sort can allow us to buy products from the other side of the globe, and we expect them to appear on our doorstep. That this is nothing short of amazing escapes them).

Actually it’s not. Some things need no manipulation; for instance, most people think that sex with someone you love (or even with someone you don’t love) can be a very pleasant experience indeed. If I convinced you that standing one one leg, naked, and clucking like a chicken to be more pleasant experience; then, I’ve improved standing on one leg, naked and clucking like a chicken. Similarly, if Apple make their consumers think they are cool then Apple have improved Apple products. There is no chicanery here.

So, the phenomenon of political party branding is a good thing – as opposed to those who think politics should be all heady debate. It means that political parties (along with the ideas and policies they peddle) have less power over us. This is mainly because they have zeroed on a set policies (neoclassical synthesis in the economic sphere – lets hope they go further in future - and increased civil liberties in the civic one) that are the correct ones. We have little need of further debate except on on matters of judicious de-legislation and defining the power of the executive and courts to set and repeal laws (in my view less is  more regarding the executive branch).

It also means that parties are responding to the consumer (us), by trying, however imperfectly, to give us what we want. This is a good thing.

In Praise of Krugman

Despite my political differences with the man – his strongly social-democratic (read: democratic socialist) bent – he is an astoundingly good economist, and a good writer too. A list of his popular articles can be found here.

In particular the note “Why I am an economist” is brilliant.

Monbiot on Law

George Monbiot sometimes is a good writer; especially on things he knows and understands, such as ecology and maybe radiative transfer in the atmosphere (but I’m guessing not so much on the latter). Sometimes he does go off on one, like he does this morning.

I will give him kudos for the basic premise: that the law should judge all equally, irrespective of wealth or status. This is an important point, as the law draws the boundaries of our freedom – and what the limits of ourselves over other people, and their limits over us, are. These limits aren’t drawn approximately, they are exact. We are punished for breach of the law, and not by the arbitrary power of those in Government. Rule of law means

“equality before the law, or the equal subjugation of all classes to the ordinary law of the land administered by the ordinary Law Courts.” A. V. Dicey – The Law of the Constitution

It’s heartening to hear George support this. The pope should not be granted immunity for any crimes he committed, nor should priests be given immunity for theirs.

However, George also distinguishes between crimes committed by individuals and crimes committed by the state – and that we should hold states responsible in some way. I’m not so sure of that argument: a state is a collection of individuals with power over other individuals, if it’s anything. The Law should only apply to individuals, so presumably we should hold those who committed the crimes accountable. However, it’s good to have an international court of arbitrage; this helps to avoid any systematic corruption within the political structure of a country, if any exists.  A good example of an alternative are the Gacaca trials currently being held in Rwanda. That is, everyone involved should be punished, not just the head of state (or in the real world everyone it’s possible to punish, given the costs).

He also argues:

“The laws of most nations protect property fiercely, the individual capriciously, and society scarcely at all”

which is absurd, if individuals (and their property) are protected, then where is a need to protect wider society? He then goes on to introduce the idea of “ecocide” as part of

“a wider understanding of legal equality: why should private property be protected while the common wealth of humanity is not?”

The definition of ecocide (straight from the horses mouth) is:

“Ecocide is the extensive destruction, damage to or loss of ecosystem(s) of a given territory, whether by human agency or by other causes, to such an extent that peaceful enjoyment by the inhabitants of that territory has been severely diminished. “

That sounds plausible enough, except the “by other causes” part (how else would ecocide happen – ecosystems change all the time without human interference). I don’t think it merits itself as a law with the same moral force of  genocide though, as we can undo environmental damage. Resurrecting the dead is a little harder.

Regarding Monbiot’s wider understanding – perhaps the common wealth of humanity should all be private property? The idea has presumably never occurred to Monbiot. A graphic illustration of the common wealth of humanity can be found here. Wealth is a slippery term, it includes walks in beautiful parks as well as iPad’s - no one would surely argue that an iPad is a common resource. Similarly, many parks are private (for instance our National Parks are mostly private property with footpaths). Further, 20th century broadcast media (as well as newspapers) are public goods, yet they were provided privately in many cases. Presumably such common wealth can be managed privately.

I guess the ability to craft good rhetoric makes a journalist, but presumably logical thinking would also help.

Efficiency and Externalities

Today I’ll talk about market efficiency, externalities (with an aside on the economics of deletable resources) and transaction costs in this post.

To start, a few definitions: a perfect market is efficient in the sense that it generates improvements in welfare such that the total benefit to the gainers, measured as the sum of money that the gainers would pay for the benefit, is larger than the total loss to the losers, similarly measured. That is, a perfect free market approximates a utilitarian optimum for society – it tends to make the people living in that society as happy as they can be. Normally (as in textbooks) these improvements are made by a god-like figure called the social planner, but the miracle of the competitive price system is that these improvements are generated by the market and need no social planner. This is a strong requirement for the outcome of any real world system of institutions, since the outcome is only efficient if it could not be improved by a dictator god. surprisingly though, it is possible to prove a market is efficient given the following assumptions (and a lot of maths) (again courtesy of David Friedman – “Should Medicine be a Commodity?” page 7):

1. People are rational utility maximisers: that is, a cross between Spock and the CEO of Enron (sometime named Max U).
2. Producers and consumers have perfect knowledge: Producers the marginal cost of all alternative ways of producing and the marginal market price for what they will produce; consumers know the price and value to them of all the goods they consume.
3. Private property: Property rights are defined and can be costlessly enforced and transferred for all scare goods.
4. No transaction costs: Any opportunity for arbitrage mutually advantageous to the parties involved can be arranged at no cost.
5. Perfect competition: Every producer and consumer is so small a part of the market that the quantity he produces or consumes does not affect the market.
6. Private goods: Every producer can control the use of the goods he produces.

These assumptions are chosen to eliminate market failures traditionally associated with public goods, externalities, imperfect competition, and imperfect and asymmetric information. Assumption 4 substitutes for assumptions 5&6 because in a world with zero transaction costs all of the inefficiencies associated with imperfect competition, externalities and public goods can be eliminated with appropriate bargains among the affected parties.

That is, no real world economy satisfies all of these assumptions. The question is why, and the answer was provided by Ronald Coase in his paper on the social cost.

The most obvious example of a market failure is an externality of some sort; where the producer of some good (say pollution, or smiles) doesn’t feel all the costs and benefits of their actions and so under, or over, produce their good. For example, the steel mill emits pollution but doesn’t feel the cost to people who breathe air when deciding how much pollution to emit, so it produces to much pollution (the socially optimal amount of pollution isn’t zero however).  Externalities undermine the social benefits of individual actions. If self-interested consumers don’t have to pay producers they won’t pay; and if self-interested producers don’t get paid they won’t produce. A valuable product doesn’t get made (or conversely, in invaluable product gets made).

In reality it’s not quite as bad as this – people aren’t perfectly rational, and usually there is some way of providing some of the good desired by the market. But the under production (or overproduction) of some good is still a problem, people most likely going without something they need. What then are the solutions?

The first is a subsidy (in the case of under production), or a tax (in the case of overproduction) commensurate with the costs and benefits required. That is: if laissez-faire causes education to be unproduced by $50 per person with an income under $15,000, then subsidise education for poor people by $50. The market will correct the externality – there would be no need to, say, take over the education system. Simillilarly if a factory causes $50 damage to the environment per unit of pollutant, then tax that pollutant by $50 per unit.

Of course, it’s one thing to say that the market outcome could be improved by Government and another thing to say that it would be improved by Government. Fortunately there is a theory which deals with collective decision making: public choice theory, an accessible account of which can be found here, and here. It treats the political market exactly like the economic one – just with more esoteric property rights. As James Buchannan says it’s “politics without romance.” Cutting a long story short, because it’s not what the post is about and because my grasp of it isn’t as firm as the rest of economics, the political market suffers from market failures as severe as the economic ones. The lesson for those who wish to correct externalities through Government is: be careful what you wish for, you just might get it (or compound a market failure with a political market failure).

But, going deeper, what causes a market failure? Why do the two parties in a transaction fail to account for anyone else? The answer comes from Ronald Coase – in two articles spanning his career. The first – the theory of the firm - introduced the idea of transaction costs (the cost of interacting with the market, e.g. writing enforceable contracts), which a firm will minimise on the road to maximizing profit. Coase then took this idea further – the problem of social cost - in thinking about externalities – that in fact market failures (when social costs and private costs are unequal) are due to the high transaction costs involved in including all affected parties.  It takes a lot of organising to create a contract for a market in clean air with 6.8 billion signatories. That is, we cannot assume that simply equalising social and private costs trough a tax or subsidy would in fact maximise welfare. There is is no costless way of getting to a perfect world, in fact a perfect world may not exist. This article is quite good at explaining the details.

The cororally of this is that when transaction costs are low (or zero) then affected parties will bargain appropriately to reach an efficient outcome. That is, as long as property rights can be defined, respected, priced and transferred efficiently. A better solution for the state then, may be to concentrate on that effort rather than ex post actions of taxation. There is no reason to suspect that taxation will lead to an efficient outcome (say people who value clean air breathing clean air), except by happy accident; that is because the problem of transaction costs will still exist, and will scupper any reforming taxes.

A particularly good example of this is the economics of deletable resources, especially oil. The owner of an oilfield can choose when to pump oil: if the price of oil in the ground is higher than in a barrel he (or she!) will slow pumping. This reduces current supply, driving the current price upwards; it also increases future supply, driving the future price downwards. This process will continue – in world of enforced property rights – until the present price rises at the market interest rate (ignoring fixed and pumping costs). Of course, property rights underground aren’t enforced (as someone else could well drill into your oilfield), so the price will rise faster than this simple model – and we’ll have more oil now, and less in future.

That is, insecure property rights are at the heart of any inefficiencies in oil production (or say forestry). Taxing oil would do little to change this (as money in a Swiss bank account is still a safer asset than oil in the ground).

Running the Economy: I

In what may become a running commentary on the Guardian’s coverage of the election, I can’t resist commenting on this article.

Beginning with the tagline: Gordon Brown must “remind them of who runs the economy” – the economy runs itself, regardless of what Messrs Brown or Cameron think. The increased NI will have several effects, mainly on employees in one form or another – either in a lower wage, a lower rate of increase in wages, or by hiring fewer employees on the margin. Also, the employer NI contribution simply falls on the employee in reduced wages. It is in every sense a ‘tax on jobs’.

Population, immigration and house prices.

Environmentalists regularly point out that at current agricultural output Britain could sustain about 20 million people. Thus (in some incredible leap of logic) our current models of food provision are completely unsustainable - given some cataclysm, the other 40 million people in Britain are going to starve. Which of course would be horrible. In fact, even without this cataclysm were on such an unsustainable path that starvation is just around the corner. Each new person who is let into Britain further impoverishes the rest – there’s less food to go around with more people. Ergo, they say, we should restrict immigration to forgo the possibility of such horrors. To put it as bluntly as UKIP does : we’re full, go home.

Quite how this vision – bleak and Malthusian – is squared against the reality of rising rates of obesity in the population is beyond me. I suspect environmentalists are trying to answer the wrong question. They simultaneously underestimate the benefits of increased population growth, and overestimate the costs. They particularly overestimate spillover costs, or externalities. I can’t be the only person to note that the whole population of the world would fit into the Grand Canyon if you stack ‘em right. David D Friedman – son of Milton – estimates that the area of the US covered by housing is 1/1000th of the continent. That is, there’s plenty of space left over to grow food. And plenty of reason to suspect that there’ll be enough.

The wrong sort of question is usually: how many people can the Earth support? Then, from some scientific principles, a number is calculated. It then appears that the actual population is some, positive, multiple of what’s calculated. Then, extreme alarm sets in. The spillover costs of each new child brought into the world are extreme: it sets us onto a path that leads to starvation, war, poverty and doom. But that’s asking the entirely wrong question. The earth doesn’t get to decide how many people it supports; but we all get to decide how many people our share of the earth supports, and decide how big our families accordingly.

In his book, More Sex is Safer Sex, Steven Landsburg asks us to think of Robinson Crusoe on his island with a fixed amount of oil. He may wish he had more, but given what he has he’ll make decisions regarding the best use of that oil. If he has children he’ll factor that into his consumption decisions. Similarly, all the families in the world either own oil or have assets they’ll trade for oil. They’ll all make different decisions, but no one family’s (or person’s) choices impinge upon the others.

If it still bothers you here is Ray Kurzweil on the future of solar energy (it’s useful remembering that we have 10,000 times as much sunlight as we need to meet 100% of our energy needs):

“We also see an exponential progression in the use of solar energy,” he said. “It is doubling now every two years. Doubling every two years means multiplying by 1,000 in 20 years. At that rate we’ll meet 100 percent of our energy needs in 20 years.”

Similarly, resource competition from population growth cannot be a spillover cost. Each family can adjust its own growth rate to their needs. Some will prefer wealthy descendants; others, lots. These hypothetical children will go through life they will claim their share of land, food and energy. But they don’t impoverish anyone: they will produce some (say music videos, or chocolate cake), and trade for other things they value more (like tango it takes two to trade, and both parties get something they value more than what they offered for trade). Some things these children will inherit, but that only impoverishes some specific people: their siblings, not people in general. That’s why these ideas are wrong – if I hadn’t been born my brother would have a bigger share of the pie. Everyone else would have the same amount of stuff that they have now.

Similarly overcrowding cannot be a cost of population growth, as like the amount of children someone has, where someone lives is a choice. You can enjoy the cultural benefits of central London, or the tranquility of mid-Wales. Efforts to eliminate crowding will only eliminate a choice. House prices are so high in London because people value living near others. Rather, people who live in cities gain opportunities to network and learn from others (often in the same profession). This increases the rate at which their wages increase, compared to people living in less developed areas. That is, people put a premium on becoming richer quicker.

Everything I’ve discussed about population growth of the world through childbirth applies to the population growth of the UK through immigration. The costs – resource competition, overcrowding, – are illusory. But what are the benefits? A large population brings prosperity (world population has increased sixfold since 1800, yet world income per capita has increased by a factor of five). With more people we have a greater choice of friends, neighbours and lovers; not to mention the potential trading partners. That is, our personal lives are more fulfilled. With more people we have more diversity: we have Wagnerian Opera and sushi because there is a large enough population to support them.

So population growth is like pollution in reverse: parents count all of  the costs (to them of a child) against some of the benefits (their love, which should be enough), and overproduced children. A polluter counts all the benefits (more money), against some costs (they neglect the third parties) and we have too much pollution. Immigration is similar (but whatever we gain, the country they came from loses out by exactly the same amount). We get all the benefits (in friendship, love or commerce) of that new person (child or immigrant), but someone else did all the work raising them. In other words: this is exactly the kind of world we should be living in.

So, to environmentalists worried about the impending mass starvation about to occur in Britain: there is a place you can choose to go to with the same population as Britain, but with four times the land (and presumably agricultural output). Going there should alleviate your worries. It’s called France.

Education

As I’ve posted before, I think that it’s Government spending which is the main mechanism by which a society can impoverish itself (I need also add, Government spending is also a powerful way in which a society can enrich itself – for instance railroads, dams and highways all have created massive economic gains). At the minute in the UK all three major parties are boasting about “efficiency savings” (including Labour, which I suppose is a tacit acceptance that their previous models were wasteful), without any real plans of how to achieve them (apart from pulling them from the ether). I’ve already suggested one efficiency saving – that is create a market in healthcare. I’ll do the same for education and welfare in this post.

Most people consider education a public good – that is a good whose consumption is non-rivalrous and non-exclusive. That is, goods which everyone I can consume and will not be affected by you. Further, they assert that education has net benefits for society – namely that more educated people will become more informed voters.

Naturally, I disagree. Education may be a public good, but it’s also a normal good (that is the demand for the good will increase with income). Or, citizens will automatically buy education – of whatever form they feel is necessary for their lives. Also, the main beneficiary of education is the educated; in that the skills they learn may enable them to educate themselves later in life, and, pragmatically, earn them a higher wage relative to less educated people. As far as creating a better class of voter, that point is highly debatable. Need I mention that Al Gore was almost elected president – a man whose family fortune was made on growing tobacco, yet who told voters he supported banning cigarettes? I shouldn’t be too unfair, given the choice (and state of knowledge in 2000) Bush would’ve gotten my vote.

So, should the Government pay for education? Well, my answer will be yes and no. That is, some forms of payment for education can be made on egalitarian and self-interested grounds. However, others fail these litmus tests. I will discuss some further objections to educational markets – further externalities, information and capital cost arguments, and then some policy alternatives that bridge the gap.

As discussed above, the main argument for Government producing education is a belief that there exist significant  positive externalities: by educating children we increase productivity and thus the wealth of the whole society, or that we increase the virtue of the educated in that they will become more responsible people (say, teaching ecological awareness makes the planet better), and that it reduces crime. I’ve discussed the ecological version eleswhere, and I doubt the reality of the increased productivity (as I’ve noted, roads increase productivity; as do pencils on your desk) or virtue. The reduction in crime is real: James Heckman estimates that for every $15,000 invested in early (pre-school) education can reduce crime by $80,000 later on – i.e a $65,000 benefit to society. However, these studies are for current expenditure in the US, and we cannot conclude from his research that further investments in the present system would do as much good.

The other market is failure is one of capital – whereas I could finance an industrial venture by offering the machines and factory as collateral, I can’t fund my education by offering myself as collateral (short of indentured labour). I could however go bankrupt once I have acquired my education, making me an extremely risky venture. However my family can pay for my education out of current income – and they do, in the form of taxes to support state schools. It isn’t clear whether this form of payment is value for money, and that a private school charging a similar price may offer a higher return on education.

Finally, there is another class of arguments for government education, based less on the technicalities of market performance but on ethics: that parents (especially uneducated ones) are incompetent judges of what is good education, and that private education perpetuates inequality. Further, the sort of vigorous competition of the marketplace would interfere with the wholesome virtues of educating young people. I’ll discuss the first objection later, along with some evidence for my belief; suffice to say I am unpersuaded that poor people are so stupid as to be incapable of judging the quality of their child’s education.

As for perpetuating economic inequality: the goal of education should be education not equality. If education is improved across the board, albeit unequally, then everyone is better off. Most people imagine private schooling as a situation where we have educational Asda’s and Wholefood Market’s – that is one of poor quality, with concentrated orange juice and produce grown with pesticides; the other expensive and highly exclusive, with organic produce and Tropicana smoothies as the staple. But even the reality of this analogy is very different to the perception; these stores are aimed at entirely different markets – people who have different ideas about what the basics are. Asda sells Tropicana smoothies, but its own brand orange juice is far more likely to be prominent. Wholefoods sells non-organic produce, but never like next to like (i.e. organic bananas are not placed next to non-organic bananas) as the price difference may be too sobering.

Similarly, different schools will cater to different parents ideas of what good education is – be it Latin, cello and discipline; or, sports, science and interacting with a diverse set of classmates. Learning how to get along with people who are different to yourself, sometimes in very noticable ways, is as important as what goes on in the classroom; the best schools will strike the right balance between the two, whilst setting a price the parents are willing to pay.

Finally, the issue of competition. Many people emphasise how corrosive this can be to community spirit, atomising and alienating individuals leaving only Enron executive types who succeed. This needn’t be the case, because for almost as long as competitive political economy has been around Elinor Ostrom has been developing a political economy based on co-operation. Her main insights (based on how communities manage communal resources) are summarised:

Clearly defined boundaries (effective exclusion of external unentitled parties);

Rules regarding the appropriation and provision of common resources are adapted to local conditions;

Collective-choice arrangements allow most resource appropriators to participate in the decision-making process;

Effective monitoring by monitors who are part of or accountable to the appropriators;

There is a scale of graduated sanctions for resource appropriators who violate community rules;

Mechanisms of conflict resolution are cheap and of easy access;

The self-determination of the community is recognized by higher-level authorities;

In the case of larger common-pool resources: organization in the form of multiple layers of nested enterprises, with small local CPRs at the base level.

Education (and for that matter provision of medical care) can be provided in a perfectly humane way without the intervention of Government. Further, we can reap the benefits of of both political economies: competition between schools to bring down costs, but co-operation within them between parents, teachers and pupils.

Luckily for me I have some evidence to back my theorising up: namely, that parents in third world countries do send their children to private schools, and that the educational outcomes of these school are superior to the outcomes of public schools in those countries.

Performance of variously funded schools in Africa

Professor of Education at Newcastle university James Tooley has written a thoughtful book on the subject – The Beautiful Tree - and his research can be found here. Despite the availability of public schooling in these countries, parents sent their children (for a cost of $1.50 – $7 per month) to private schools, even when an alternative provided by the state was available. The reason given by the parents was simple: the success of the school, as an enterprise, depended upon how happy the parents were with their child’s education.

More than that, the parents were often poorly educated themselves; yet, they were capable of making positive decisions for their children’s education – which confirms my skepticism regarding the ability of poor people to know what’s best for them. I’d encourage you to read the book and/or the papers, they are fascinating.

So, what do we do? We can’t let people become uneducated, yet we don’t need the state to pay – we can do that already with money saved in tax. Naturally, not everyone can – we are correct in intelligent discontent with a philosophy that doesn’t provide for the poor. Clearly there are a lot of people who wouldn’t be able to pay for adequate education (where adequate means the education they want). The answer is simple: just give them the money. Or a voucher redeemable for said amount of money.

That is we can have our cake and eat it too: less tax, but everyone can go to school. We’ll only need to pay a small transfer to people below the poverty line – and something like a negative income tax will do that just fine. Think of all the money we’d save if we redefined the department of education out of existence.