Original Appropriation

Over the past few days, I’ve been reading some of the work of Peter Vallentyne [1], a Professor of Philosophy at University of Missouri-Columbia. One particularly interesting piece is On Original Appropriation [2], in which he analyses the basis of property rights. He concludes that self-ownership doesn’t imply any system of property rights, beyond the requirement that one person doesn’t violate the self-ownership of others by forcibly taking from them items which they have in their physical possession.

Of course, that isn’t to say that systems of absentee ownership of items, concepts, etc. are not morally justifiable; many of them are promoted on the grounds of utilitarianism, contractarianism (the approach I tend to take) or a belief that it is morally right to give people exclusive rights over the fruits of their labour. What Peter Vallentyne’s work shows is that any attempt to derive other property rights from the right of self-ownership is bound to fail, as they are two independent concepts.

1. http://klinechair.missouri.edu/Vita_Revised.htm
2. http://klinechair.missouri.edu/on-line%20papers/Original%20Appropriation.doc

The Elitist Core of State Socialism

Over at the Tax Research Blog, having pretty much argued that the only way to make the world better is to increase government debt in order to increase the size of the state and been unable to effectively refute the opposing arguments, Richard Murphy has resorted to accusing people who don't want a massive state of being “socially violent” [1].

It’s an interesting piece, because it highlights what a nasty, arrogant and pessimistic creed state socialism is, particularly the version promoted by Richard Murphy. There is an unspoken belief that people are inherently evil and without the state controlling our behaviour, we’d have no consideration for each other. The unlegislated convention of queuing must be incomprehensible to the big state mentality and the existence of an institution such as the RNLI, entirely voluntarily funded, must be absolutely inconceivable.

Another aspect of state socialism, which seems to be particularly prevalent in the British approach, is the paternalism which assumes that, if the state is redistributing wealth, it must spend it too, rather than giving the recipient a choice. Contrast the approach with the education system in Sweden, a country often held up as a model social democracy. Education is state funded, but the system allows parents, if they wish, to obtain a voucher equal to the amount spent on a state school place and use it to pay for a place at a privately operated school. The desire to ensure a certain level of provision isn’t used as an excuse to centralise decision making in the same way it is in the UK; the public are treated, at least in this area, as intelligent individuals who are capable of making their own decisions.

The state socialist approach is built on a foundation of elitism. It assumes that, as an ordinary person, you are so selfish and callous that the only circumstance in which you will help your fellow human being is if you are forced to by those more caring than you. It also assumes that you are too stupid to make your own lifestyle choices and need the state to buy a whole range of goods and services on your behalf to protect you from the effects of the stupid purchases you would make if left to your own devices.

The implicit assumption is that the state socialists who will be doing the forcing and choosing don't suffer from the same flaws as us mere mortals. They have declared themselves morally and intellectually superior and therefore fit to rule over the rest of us with a rod of iron. Quite frankly, anybody with that level of arrogance is the kind of person I least want in a position of power.

1. http://www.taxresearch.org.uk/Blog/2009/07/13/naming-libertarians-for-what-they-are/

The National Express Issue

As far as I can see, the problems surrounding National Express’s operation of the East Coast rail franchise stem from two basic issues:

1. The bidding process will necessarily result in the most optimistic bidder obtaining the franchise, so there is always a possibility that the franchisee will have overstretched itself in making the bid and may be unable to fulfil the contract. That in itself isn't a major problem; the potential for failure is part of what makes markets more responsive than state monopoly control, but it does mean that, if the government wants a continual service in all circumstances, it needs to consider the possibility of failure at the outset and allow for it.

2. Perhaps more importantly, the contracts are static whereas the economy is dynamic. If the contracts don't allow for the possibility of a recession occurring during the term of the contract, there is always the possibility that a bid which seemed reasonable at the outset will turn out to be non-viable in a downturn.

One possible way around point 2 and possibly point 1 as well, would be to apply the same methodology I’ve outlined in the past as a potential system for self-assessed land value tax. In simple terms, the potential franchisees would bid at the outset for the right to run the service, knowing that while they hold the franchise, they will be required to pay an annual fee equal to a percentage of their own estimate of the resale value of the franchise (say 15%), knowing that, if another operator agreed to meet that valuation, the franchisee would be obliged to sell to them.
That way, in a downturn, the operator would be able to reduce the valuation, rather than going through the upheaval of giving up the franchise only for it to be re-auctioned at a value likely to be far lower than the original.

Obviously, there would be a lot of detail to work out, but I think the idea has potential.

The Economics of Illegal Activity

I find that the general understanding of economics is disappointingly low, but when it comes to the economic impact of illegal activity, it seems to be almost non-existent. Take the following claim from the trial of a man who was prosecuted for selling set-top boxes which allowed people to access scrambled cable TV without paying [1]:

Ari Alibhai, prosecuting told Liverpool Crown Court that the fraud deprived the industry of millions of pounds and caused customers to pay higher monthly charges.

That kind of claim is likely to go unchallenged and gradually become received wisdom, but I think the higher monthly charge claim can quite easily be shown to be the opposite of the reality of the situation.

The claim relies on an unspoken assumption that when a business operates, it sets out to make a fixed amount of profit and if it doesn't make it from one customer, it will make it from another. That is, of course, complete nonsense; almost every profit making business will seek to maximise its return, not just hit a target and go no further. The reality, as anybody with the most basic knowledge of economics will tell you, is that prices are set by supply and demand.

A cable TV supplier will generally set the price at a level which, in the long run, will maximise profit, which will be determined, in simple terms, by the number of customers multiplied by profit per customer.

So, how does the availability of illegal set-top boxes impact on the price? It suppresses demand, by providing cheaper competition. The box will be cheaper, but it will also bring with it the risk of prosecution, so, each customer who is prepared to use one of the boxes is faced with a simple decision - is the saving worth the risk of being prosecuted? As the difference between the price of a legal box and the price of an illegal box becomes greater, more people will say yes and opt for the illegal choice. What the illegal box does is introduce a reduction in demand for the legal product, which should, in theory, result in a reduction in the price charged.

To some that may sound counter-intuitive or even nonsensical, but there are examples of the effect in practice; for years the music industry claimed that copying music pushed up prices, but when file-sharing emerged as a technology which allowed people to easily share perfect copies, the cost of CDs fell.

Of course, none of that impacts on the guilt or innocence of the accused in a court case, but in the interests of economic accuracy, it would have been nice to hear the defence responding to the prosecution by saying "This kind of fraud deprives the industry of millions of pounds, but it keeps prices down for everyone else!"

1. http://www.theboltonnews.co.uk/news/4277942.Illegal_set_top_box_fraudster_is_jailed/

Mervyn King Seems to Get It

The more I listen Mervyn King, the more I get the impression that, as Governor of the Bank of England, he's had a reasonable understanding of the situation he's been faced with, but little real influence. One of his recent speeches has a lot of value in it[1]. Early on in the speech he highlights an effect of the current climate which, although it may have some negative elements, I generally think is quite positive.

Investors continue to demand high returns to finance banks. Put bluntly, market data on credit spreads imply that some banks are viewed as a worse credit risk than some of their customers. As a result, companies that can bypass the banks to access capital markets directly are doing so. Indeed, in the first four months of this year, more finance was raised in debt and equity markets than is normally the case in an entire year.

In this context, banks are risk externalisers; when somebody with money invests it directly in a business, they do so with an understanding that, if the business fails, they stand to lose some or all of their investment. When a bank acts as a middleman in that transaction, the person lending the money will often have an expectation that a proportion of their money is guaranteed to be safe, so the risks will be the same, but rather than the lender shouldering all the risk, it is shared by the lender and the taxpayer, who has to underwrite the guarantee. In that context, a shift towards direct investment is a positive thing as it internalises the risk, rather than socialising it.

King seems prepared to cut to the chase when it comes to national debt.

But five years from now national debt, as a proportion of national income, is expected to be more than double its level before the crisis. So it is also necessary to produce a clear plan to show how prospective deficits will be reduced during the next Parliament, so returning to a gradually declining path for the ratio of national debt to national income.

It's on the issue of banking regulation that he really hits his stride.

If some banks are thought to be too big to fail, then, in the words of a distinguished American economist, they are too big. It is not sensible to allow large banks to combine high street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee against failure. Something must give.

That sounds perfectly sound to me. I'm not keen on the idea of state guarantees generally, but if they exist, it seems especially unwise to offer them to the riskiest institutions. The frustrating thing is that the actions of the government have often run in the opposite direction to King's comments, encouraging the merger of Lloyds and HBOS being the prime example. Facilitating consolidation at the same time as bailing out banks because of their size displays ridiculously short term thinking, especially in an industry where the barriers to entry are so high.

Either those guarantees to retail depositors should be limited to banks that make a narrower range of investments

That sounds reasonable enough; if you want an extensive guarantee, then in return, you have to show that you're restraining your risk. That's what I'd expect from any other insurance policy.

or banks which pose greater risks to taxpayers and the economy in the event of failure should face higher capital requirements

Again, that's reasonable enough, although the caveat is that rapidly increasing capital requirements can increase the immediate demands on banks and damage their stability.

or we must develop resolution powers such that large and complex financial institutions can be wound down in an orderly manner.

This is where I think he really hits the nail on the head and it's something he expands on later in the speech.

One important practical step would be to require any regulated bank itself to produce a plan for an orderly wind down of its activities. That would provide the information to the authorities the absence of which made past decisions about the future of institutions difficult. Making a will should be as much a part of good housekeeping for banks as it is for the rest of us.

Attempting to completely prevent the failure of banks will always prove futile, so as a strategy it can never be more than a damage limitation exercise. The real need isn't to prevent failure, but to ensure any failure is orderly. Banks can happily be left to fail, so long as they don't end up externalising costs in the process. "Too big to fail" seems too sweeping a statement to explain the situation. "Too big to collapse" would probably be more accurate.

The one point at which King seems to understate the situation is:

Privately owned and managed institutions that are too big to fail sit oddly with a market economy.

I wouldn't say they sit oddly with a market economy, but that they are completely incompatible with a market economy. The strength of true market economies is that they evolve. The businesses which satisfy the demands of customers most effectively tend to succeed and those which don't fail. In that way, bad practices get forced out and good practices thrive. Like biological evolution, it may not be a completely smooth process, but it is effective. Guaranteeing the survival of a bank, no matter how unfit for purpose it is, stifles that process of evolution and begins to introduce some of the characteristics which make command economies so unresponsive.

1. http://www.bankofengland.co.uk/publications/speeches/2009/speech394.pdf

Copyright in Digital Britain

As is often the case with government documents, the tone of the copyright section in the Digital Britain report reveals more than the substance. Given the collapse of the attempt to introduce a "three-strikes" law in France [1], it was unlikely that a similar approach would be suggested. What has been proposed amounts to carrying on with the law pretty much as it is and doing something else, unspecified at this point, if copyright infringement doesn't reduce within a year. In contrast to the relatively bland proposals, the language is in places emotive and weighted, such as:

The Government considers online piracy to be a serious offence. [2]

Aside from the fact that the use of the word "piracy" to describe copyright infringement comes across as puerile in a government publication, the sentiment appears to be at odds with the public mood. Copyright provokes a range of opinions; some view it as an illegitimate state granted privilege, some view it as an expedient state mediated bargain and some view it as a legitimate property right. However, outside of a relatively narrow set of lobbying groups, I know of few people who would consider copyright infringement to be a serious offence. In fact, I think you'd struggle to find many people who would consider it to be anything more than a relatively minor misdemeanour.

By pushing so heavily against the general mood, the government threatens to achieve the opposite of what it is aiming for. On a party political front, the success of the Pirate Party in Sweden shows what can happen when a government enacts draconian laws, even when the issue is one which is rarely at the forefront when it comes to election time. Outside electoral politics, the effect can be even more profound. It might be an unpleasant thought for authoritarian politicians, but it is customs and social norms which tend to define what is socially acceptable, rather than the force of law. In the long run, it tends to be custom which over-rides law, rather than the other way around. Legal brute force is a highly inefficient means of changing behaviour; it might be effective at guiding people in a slightly different direction to the one they're moving in, but if it's used to push the mass of people in a direction they don't wish to go, it will tend to break down.

In terms of copyright, a general disregard for the law is already in evidence. Under UK law, ripping a CD and putting it onto an MP3 player is prohibited, but I know of no-one who has any respect for that law. Of course, many will be unaware that the law exists, but even when people become aware of it, I've seen no evidence that their behaviour changes one iota. It's a clear example that even people who would ordinarily consider themselves "law-abiding" are prepared to ignore laws if they view them as outdated, pointless or stupid.

By describing online copyright infringement as a serious offence and retaining copyright laws that the general public clearly has no respect for, the government risks pushing copyright into the same category as the requirement that London Hackney Carriages must carry a bale of hay and a sack of oats or the requirement that all men in England must carry out longbow practice - laws which still sit on the statue books, but are regarded as amusing historical anomalies which don't need to be observed.

1. http://news.bbc.co.uk/1/hi/technology/8093920.stm
2. http://www.culture.gov.uk/images/publications/chpt4_digitalbritain-finalreport-jun09.pdf section 18.

It Wasn't Me Guv

From the BBC:

Chancellor Alistair Darling does not plan fundamental reform of the way UK financial institutions are regulated.

Mr Darling has said that the current regulatory system is not to blame for the credit crunch, blaming instead the bosses of financial institutions." [1]

I find that utterly pathetic. Setting up a regulatory regime to prevent a set of events and then claiming that the regulatory regime is not at fault when one of the most severe of those events occurs is responsibility dodging of the highest order.

Regulation creates deadweight losses and distortions. Regulation will tend to make people believe that an activity is less risky and therefore encourage participants to take more risks. If the regulation is ineffective at controlling risk, which seems to be the admission in this case, then it can end up being seriously counter-productive and in that case, if you aren't prepared to amend it, you should seriously consider getting rid of it.

1. http://news.bbc.co.uk/1/hi/business/8104340.stm

Electoral Vagaries

Looking at the press coverage of the BNP’s success in getting an MEP elected in the North West region, you’d think that they’d managed to attract a huge number of new supporters. The numbers tell a different story. Rather than being the beneficiaries of a wave of support, the BNP actually got fewer votes in 2009 than they did in 2004 (132,094 compared to 134,959 [1],[2]). The only parties to increase their total number of votes in the region were UKIP, the Greens and the English Democrats. So, how did fewer votes result in a seat being won? There are a few contributory factors:

By far the biggest factor appears to be the collapse of the Labour vote, plummeting from 576,388 to 336,831. The seat that the BNP gained was matched by a seat that Labour lost, so it seems that rather than the BNP actively winning the seat, it was lost by Labour and trickled down to the fifth place party.

Another change is the absence of the Liberal Party, which gained 96,325 votes in 2004. The party was formed by members of the original Liberal Party who objected to the merger with the SDP. The party has traditionally had strong core support in Liverpool and is moderately Eurosceptic. Given that the Lib Dems’ vote numbers dropped, it’s not clear where the Liberal Party votes went.

A further factor is the emergence of new parties which spread much of the vote. Had the Socialist Labour Party not stood, I suspect that enough of its vote would have gone to the Green Party to enable them to finish ahead of the BNP.

All in all, I don't think that the result should be viewed as a sign of progress for the BNP. The reality is that the traditional big three and the BNP got fewer votes than last time, while everybody else got more; the BNP gained a seat purely because they are losing support at a slower rate than the big three. I suspect the damage to the big three is a combination of the expenses scandal and an increasing familiarity with the list system used in European Elections, which is giving people more of a sense that a vote outside the big three is not a wasted vote. The fact that the BNP couldn't increase their vote when there is a recession and disenchantment with the political mainstream is so high tends to make me conclude that this isn't a watershed moment for the BNP. In fact, I feel it’s the opposite, as it’s shown that the BNP have no appeal outside their core vote.

This election provides clear evidence that, when voters become unhappy with their usual mainstream choice, they might not bother voting, or they might decide to vote for a smaller party, but what they won’t do is vote BNP.

1. http://news.bbc.co.uk/1/shared/bsp/hi/elections/euro/09/html/ukregion_34.stm
2. http://news.bbc.co.uk/1/shared/bsp/hi/vote2004/euro_uk/html/34.stm