Behavioural Economics in Public Choice
I have been writing on the different schools of economic thought through the ages. One interesting take-away from the last half-century is how much economists’ attention has been drawn away from mechanical, macroeconomic explanations and towards how people actually make their economic decisions. There is, for example, a revival of the Austrian School, which stresses the subjective nature of values and economic choices; the Public Choice School, which looks at how collective decisions are made, and the consequences of that for economics; and Behavioural Economics, which attempts to bring human psychology into the study of personal choices.
At the heart of the Public Choice School approach is the idea that every stage of the democratic decision process — from elections, through the legislature, to the bureaucracy that implements the laws and the judiciary that interprets them — is riddled with self-interest, leading to decisions that are irrational and often factional. And for its part, Behavioural Economics hinges around the idea that natural biases in the way human beings see and respond to events also creates some shocking irrationalities.
Behavioural Economics has applied this psychological approach largely to the ways that individuals make choices. But I wondered what might be revealed if we took it into the making of collective decisions. Is there more than mere self-interest at work? Is the democratic process not riddled with other psychological biases too.
To start with, one of the strongest natural biases identified by Behavioural Economic is risk aversion. It is why bad news sells newspapers; we are much more alert to and concerned about bad things than good ones, partly because bad things can be fatal to us. But this shows up in the public choice environment too. I saw an example of this in the Thatcher era, when a UK-wide private hospital company decided to bid to build and run a new NHS hospital. Department of Health bureaucrats were so keen to cover their own backs that the tender documents with all their provisos formed a metre-high stack, requiring the company’s response to be even higher. And how did the bureaucrats respond to this bid to run NHS provision in a completely new way? After two months of silence, the first question they asked was what kind of cutlery would be used in the staff canteen.
Can’t be too careful, they say. But yes, that was too careful, and indeed the political system abounds in being too careful. We pass laws and regulations that attempt to keep people completely safe from harm. It is irrational, because the extra cost of guaranteeing that extra featherbedding is huge; and overprescriptive regulations thwart people from trying new ways of doing things that might just prove more productive, and even safer.
As we make our way through the other cognitive biases identified by Behavioural Economics, we see the democratic — i.e. political — system falling for every one of them. Bounded rationality, for example: rather than consider very possible implication of every possible option, we tend to follow ‘rules of thumb’. And if those work reasonably well, we tend to stick with them (what these economists call ‘satisficing’) even though other rules of thumb might actually work better. In Public Choice terms, Bryan Caplan showed the bounded rationality of electors: they tend to favour government solutions, for instance, over market solutions. As do politicians, of course. And for their part, bureaucrats, especially regulators, tend to assume the superiority of regulation over competition.
How decisions are presented. the choice architecture, also affects personal choices. That is the whole theory behind ‘nudge’ — tell people the downsides of smoking, for instance, and they will probably do less of it. But it works in political decision-making too. Should we have more free trade, which could deliver better choice and lower costs? Well, international competition might also create job losses too, and you can be sure that the media focus will be on the unemployment (risk aversion). No wonder that electors and politicians opt for protectionist policies.
Confirmation bias is another human quirk, where we see and judge things in terms of our own beliefs, rather than against any objective standard. Politicians are particularly prone to this error. Rent controls, for example, make it less worthwhile for property owners to rent out rooms and homes; so they evict their tenants and quit the market. That leads to calls for more tenant security. And if owners can’t evict people anyone but can’t make any money out of them because of the rent controls, they just let their properties fall into disrepair. Which is taken to be proof of how greedy ‘landlords’ are and leads to yet further controls… and so on, until the whole rented sector dries up. Rationally, we should scrap the controls and let the market allocate things. But rationalism is little use in politics.
Politics abounds with another bias, the sunk costs fallacy. The high speed rail link (HS2) between London and Birmingham is costing hundreds of billions of pounds for very little difference in journey time, but so much construction has been done that politicians are embarrassed to pull the plug on the project. The same happened with Edinburgh’s (three times over budget and five years late) new tram system and Scotland’s (also three times over budget and five years late) replacement ferries.
Politicians also make decisions on the basis of salience. What is playing in the media today — prison escapes, dangerous dogs, school truancy — is likely to shape policy far more (and more urgently) than longer term issues — like disincentives in the tax and welfare systems — that might be far more significant in their effects.
The Behavioural Economics bias list goes on. Optimism bias — plenty of evidence for that in public procurement, and projects like the postwar replacement of ‘slums’ with ‘modern’ blocks that people hated even more. Or mental accounting — sticking with 1001 budgets for separate projects, rather than re-thinking spending as a whole (as Canada did in the 1990s). Or the endowment effect of over-valuing what we already have (like ‘our’ ‘precious’ NHS). I have decided to explore all this psychology of public choice in more detail. If we know exactly what foibles are producing such daft public policy, after all, we might be able to do something about it.
What if it’s actually the international bureaucracy to blame?
So, Monkeypox has broken out again and this time around the solution is not just to ask the promiscuous to be less so for a bit. OK. There is a vaccine, why isn’t it available to these who need it?
African nations hit by mpox still waiting for vaccines – despite promises by the west
Last week’s planned rollout of doses faces further delays as campaigners complain of greed and inequality
Ah, yes, we know that one, don’t we? We must overturn capitalism in order to make the world a better place.
“The continuously unfolding injustice of mpox owes to long indifference and inequity, stigma, slowness, anaemic use of public power and yes, greed,” said Peter Maybarduk, access-to-medicines director at US-based campaign group Public Citizen, which signed the letter.
Quite so, quite so.
But we actually have a system to deal with this problem. Sure, maybe capitalism does need to be overthrown but what is going wrong with the system we’ve already got to ameliorate this particular and specific problem?
Unfortunately, a new Mpox variant is now spreading in the Democratic Republic of the Congo and nearby countries. Here’s the crazy part: despite declaring Mpox a public health emergency on August 14, the WHO has not approved any Mpox vaccines. You might think, “Who cares what the WHO authorizes?” After all, the FDA, EMA, and the UK have all granted emergency approval. But here’s the catch: the WHO’s approval is crucial for GAVI, the vaccine alliance that donates vaccines to developing countries. Without WHO approval, GAVI is reluctant to provide vaccines to the Congo. To add insult to injury, the Congo itself has approved the Jynneos and LC16 vaccines. Yet, the WHO refuses to authorize and GAVI to donate these vaccines, citing vague concerns about safety and efficacy.
Oh. The problem is in the international bureaucracy we’ve put in place to ameliorate the problems caused by capitalism. So, obviously, the solution is to abolish capitalism and have more of life determined by international bureaucracies.
Right?
No, come on, it’s obvious. Can’t be any other solution at all. Clearly the world is made better by giving more power to the incompetent, how can anyone think otherwise?
Tim Worstall
Observation of reality is always useful
Yea, even in economics that reference to the actual universe has its merits. Which brings us to the latest idea from Danny Blanchflower and Richard Murphy. Calling themselves the Mile End Economists they are to:
We are not. We believe that what is being done by Rachel Reeves since she became Chancellor in July is deeply dangerous for the people of this country.
It looks as if she is heading to deliver Austerity 2.0, the first version having been delivered 2010. That will be her prescription when she goes to the dispatch box in October to deliver her first budget. And we think she's making a fundamental mistake.
There is this little difficulty. A difficultette perhaps. As one wag has put it about current politics:
It’s bleakly entertaining watching people who’ve spent the last 15 years complaining about austerity now in government and having to face up to the fact that there actually wasn’t any.
Or as one of us put it elsewhere:
Yet the current meaning that has real value among the electorate is that the Tories, the b*stards, just stopped spending government money. Those are the ‘cuts’ they are expecting a new government to simply reverse and let the milk and honey flow again.
Yet the Conservative Party didn’t, in fact, spend the last 14 years reducing government spending: quite the opposite. Large parts of the Labour electorate have however convinced themselves – egged on by a large part of the press – that government spending has fallen and that it will be easy to reverse. But they have been taken in. There is no switch on spending waiting to be flipped.
Or as we’ve said here:
It’s also possible to wonder about something else. If government spending has risen by 6% of GDP - which is a lot, even a lorra lots - then what is this story about austerity? Seriously, what austerity?
The Mile End Economists are to campaign against an austerity that never happened. Ho Hum. Still we suppose it beats their usual shouting at clouds.
Don’t forget, it’s actually a Labour Party advertisement currently claiming that the Tories overspent. What austerity?
Tim Worstall
The war over so-called Price Gouging
Readers will excuse me for prompting them to delve into their pandemic memory hole, but isn’t it glad to be able to enjoy big events again? Taylor Swift bringing in £1bn to London’s nightlife economy is no surprise, with so much pent-up demand following almost two years (even if some time ago) of being locked indoors. Today, we saw the outcome of a similar flurry of interest - Oasis tickets go on sale. Brace for the coming debate over price gouging, laying in the background of previous Parliamentary debates and in the US with Kamala Harris’ proposed reforms.
Oasis’ return will see a new era in BritPop, a mix of nostalgia paired with new innovations in the performing arts. Safe to say, social media has been going wild in excitement - but something piqued my interest. The jokes about ‘who is going to remortgage their house’ to afford tickets are a meme shared by die-hard fans who have learned the hard way that resales are common.
For those unfamiliar with the reselling market - high-intensity ticket buying (often automated) is common amongst the most popular artists’ fan bases. Within the first few minutes, lines of code and hyper-organised punters will have purchased all of the available tickets, only to turn to a secondary market worth up to $2.82bn a year according to Statis Research. Tickets would return to organic fans at multiples of the price. However, this should be welcomed, rather than banned.
‘Price gouging’ is a necessity - it reflects the true price (and thus, demand) for a very limited product. 90,000 seats at Wembley may sound like a lot, but for a band like Oasis who have sold 75 million records worldwide, it is not nearly enough to facilitate equitable demand. In order to correct for this, selling (or re-selling) at higher prices will ensure that future concert holders will be able correct pricing and maintain the financial viability of their performances, and incentivise even more shows. It also discourages hoarding by some punters, who may seek to get early, cheaper tickets in order to fork them out at lower rates to friends and family - they are free to do so, but it’s fairer if everyone has a good shot.
There will be calls for price controls and regulations on ticket pricing after Saturday. Kamala Harris’ government has already touted price controls to counter “corporate greed”, and given the political osmosis between the UK and US, we can expect such battles to be touted here. But, as my colleague Dr Eamonn Butler has pointed out, evidence from 40 centuries of history shows that price controls never work. They limit supply further, create dangerous black markets, and significantly harm consumers just looking to spend their money as they please. From rent controls to energy price caps to tickets, the Invisible Hand of the market is immutable.
Policy makers have a duty towards consumers to act in a free market, where, yes prices may be uncomfortable, but at least they are right. They should avoid imposing additional regulations and controls on prices, and deafen themselves to grumpy concert-goers about parting with their money to enjoy a concert they wish to pay exorbitantly for. Price controls are straight from the economics black-book. Pure Blunderwall.
Arguing over planning gain is to miss the point
The current plans about building housing fail because the arguments are about entirely the wrong thing:
Strict affordable housing rules proposed by Angela Rayner will make construction projects unaffordable and derail her goal of building 1.5m homes by 2029, an executive at the UK’s biggest housebuilder has said.
The planned target, for 50pc of properties on green belt developments to be affordable, is “baffling” and risks ruining the Housing Secretary’s broader ambitions, according to Philip Barnes, land and planning director at Barratt Developments.
Don’t forget, affordable here doesn’t mean cheap - something achieved by just building more - it means below market price.
The wider industry backed Mr Barnes’ views on Linkedin. Patrick Murray, executive director of policy and public affairs at Northern Housing Consortium, wrote: “The reality is subsidised housing needs subsidy and it can’t all come from landowners.”
Well, yes. But what’s happening here is that the planners are looking at the effect of the grant of planning permission. This - massively - increases the value of that land that now may be built upon. So, the demand that landowners subsidise that affordable housing. Plus the associated Section 106 demands that they build schools, GP surgeries and all the rest to go along with the new housing. There’s a chunk of profit there at the stroke of the bureaucrat’s pen so, well why not?, a chunk of that profit should pay for local goods.
They why not is that there shouldn’t be planning uplift. There is no good reason at all that that stroke of the pen should increase the value of the land. Why would we limit building permissions? The only effect of that is to make the houses finally built more expensive after all. The aim of a rational planning system is to reduce the value of planning uplift to nothing.
At which point, of course, we don’t require specially labelled “affordable” housing for all housing will then be cheap. Which sounds like a plan really. Just issue so many planning permissions that none of them are of any value. Or, obviously, just abolish the Town and Country Planning Act 1947 and successors - blow up, proper like, kablooie - and be done with the idiocy itself.
Tim Worstall
British fashion is being correct, not fashionable
The Guardian complains:
‘Profit is being prioritised over climate action’ – British fashion is falling behind on sustainability
How excellent say we. One useful definition of the word “profit” is the value added in whatever it is that is being done. We like value added. All of us do. Value added is what we consume of course - in the GDP definition all consumption equals all production amd production is measured as value added. The existence of profit, in this sense, is exactly what makes us all richer.
True, we can also define profit as the amount of that earlier profit meaning that the producer manages to retain. We’re only worried about that in the sense of there being enough to incentivise the production of profit in that wider meaning. We want capitalists (or workers’ coops, whatever) to retain enough of the value add to make sure they keep adding value, that’s all.
If sustainability is something that all of us out here desire enough that we’ll pay for it then a profit maximising firm will bow obeisance to that sustainability. If we out here give sustainability the same respect we give to the average catwalk fashion - interesting perhaps but no one’s actually going to wear that, are they? - then a profit maximising firm won’t. Therefore profit maximisation is perfectly aligned with the revealed preferences of the population of consumers.
Thus, despite the Guardian’s shock at this finding, fashion firms are perfectly aligned with the consumer. We out here apparently don’t give the proverbial monkey’s about sustainability so nor do they. How perfect is that profit driven world, eh?
Tim Worstall
Theories that explain everything
Two ways of explaining things are by Intension (with an ‘s’) and Extension.
The Intension is the list of properties that the thing you are explaining has. Thus for ‘journalist’ you might list dealing in news, writing in newspapers or magazines, communicating on current affairs by radio, television or social media.
The Extension is made up of the members of the class. Thus for ‘journalist’ you might list Owen Jones, Polly Toynbee, Charles Moore, Adam Boulton or Nick Robinson. These names convey to the listener or reader the idea of ‘journalist.’
The more properties listed in the Intension, the fewer the number in the class being talked about. ‘Animals’ has a great many members, but ‘human animals’ are in much smaller numbers, and ‘living human animals’ are in even smaller numbers. ‘Living human male animals’ cuts the numbers further, and ‘living human male animals living in Milton Keynes’ cuts them even more.
The more properties that are listed in the Intension, the fewer the number there will be in the Extension, and vice versa. The Intension is inversely proportional to the Extension.
I = 1/E
If there is an infinite number in the class, then E = ∞ and I = 1/∞ which is zero.
This means that if everything is in the class, the Intension is zero. A theory into which everything fits thus has no information content. Another way of putting this is to say that a theory that explains everything tells us nothing. Perhaps it tells us about its holder’s determination to apply a preconceived interpretation to everything in the observed world, but it tells us nothing about that world.
If a Marxist tells us that everything that happens can be explained by the theory, then Marxism can tell us nothing about what happens. Theories have to live dangerously, as Popper put it. There have to be circumstances that would lead us to discard or at least modify the theory if they were to happen.
Einstein, whose theory predicted that two stars observed during an eclipse would be out of their expected positions because their light would have been bent by gravity, could have seen his theory contradicted if this had not happened; but it did happen.
There appear to be no circumstances in which the theories of Freud or Marx could be contradicted if everything that occurs can be explained in terms of the theories. Their adherents use them to explain everything in terms of the theory, and theories that explain everything tell us nothing.
If everything that happens is confirmation of the theory, it has zero content.
Why, yes, markets work even in housing
There’s a long string of people out there who insist that housing just isn’t like any other market. Financialisation, or assets, or everyone needs a home, or summat. Near always the introduction to reasoning which insists that actually, therefore, politics and the State must be the provider of said housing.
This is not, in fact, true:
Over-optimistic house sellers who end up having to reduce their asking price typically see the property take more than twice as long to sell as those more competitively priced from the outset.
The finding comes in analysis from Zoopla, the property website, which said that while all key measures of activity in the housing market are higher than they were at this point last year, it remains a buyers’ market.
If you try to sell a house at higher than market price then you can’t. You have to then lower the price - which takes the time - and then you can indeed sell the house. That is, house buyers are rational - they’ll not pay more than market price - and that forces sellers to be so too.
We have simple and obvious market effects going on here that is. Which does indeed mean that housing is a market like any other. Supply, demand, prices, we’re in that Econ 101 world.
Which is fortunate because we know how to deal with an Econ 101 world. It’s not exactly a startling proposition that near all of us - other than those currently trying to sell a house - think that the market price of houses is too high. In the Econ 101 world we therefore only need to build more houses, increase the supply of them, and we’ll lower house prices.
So, as we’ve been known to say. Blow up the Town and Country Planning Act 1947 and successors, proper blow up - kablooie. Job done. For if we simply allow people to build more houses then more houses will be built - the price is high, right?
Tim Worstall
Reforming Capital Gains Tax won’t increase tax revenues
Obviously an amusement at the nominative determinism here:
Rachel Reeves is about to hoodwink Britain with a disastrous tax raid
How Thatcher’s chancellor could be the unlikely inspiration for Labour’s capital gains tax
Adam Smith
However, in all this talk of how capital gains tax is to be reformed the one thing we’ve not seen mentioned. It’s not going to increase tax revenues very much if at all.
The Resolution Foundation describes the current CGT regime as a “source of unfairness in our tax system” and Dan Neidle of Tax Policy Associates wrote that “it’s inequitable that a type of income received mainly by the wealthy is taxed less than other types of income”.
These arguments are persuasive on the left of centre and frankly quite compelling to the general public. A number of high profile, new Labour MPs such as Torsten Bell, previously head of the Resolution Foundation, have been making them for years and I assume would continue to do so.
So, fairness, equity and all that. Fair enough.
To try to counter those groups Rachel Reeves could turn to an unlikely source of inspiration for a Labour Chancellor: Nigel Lawson. When he equalised capital gains with income tax in his 1988 Budget he argued that “taxing them [capital gains and income] at different rates distorts investment decisions”.
Also fair enough. But it’s still not going to increase tax revenues very much if at all.
For back when Lawson did it he included an inflation adjustment. Indexation that is - and that has to be a part of the calculation of what the capital gains tax rate should be.
Think on it. As the BoE calculator tells us inflation over the past 5 years has been 24% (or, more accurately, that what cost £10 then costs £12.40 now and we’re not going to bother with adjusting that to a proper inflation rate because our maths is not up to that, not up to even working out whether that is the correct inflation rate). Or 15 years 54% and 25 years 85%. So, obviously there needs to be indexation because why would we tax people on gains made purely from inflation?
When the CGT rate was dropped, as it was, to lower than income tax rates the indexation allowance went as well. And the calculation was that, over all collections and over time, the revenue yield was going to be about the same. A lower rate, but charged upon purely inflationary gains as well as real, would collect about the same amount of tax as a CGT = IT rate with indexation. Well, OK. But that then means that if we change the system back, CGT rates are now to equal IT rates but we bring back indexation then the revenue collected is also going to be about the same. So, sure, maybe the change makes sense in some political meaning of “fair” but it’s not going to do much for revenue collection.
Shrug.
Obviously indexation will come back as well. For the current analysis is that Britain’s economy lacks that patient and long term capital necessary for truly useful investment and economic development. So of course no one’s going to bring in a capital gains tax where the rate increases the longer you hold the asset now, are they? That would just be ridiculous, insane even. Hold an investment for 25 years, there’s an 85% gain that you’ll be taxed 45% upon but that gain is purely inflation and so you’re paying tax to not even be able to stand still?
No, obviously, indexation will come back as well as the equalisation of rates and there will be no more money for anyone to spend. At which point really, why bother? Other than the political optics of course.
Hmm? What’s that? You think they’ll equalise rates but not bring back indexation? Ahahahahaha, gurgle, snort, aha, aha, aha. No, really, there’s no one in Britain that damn’d insane. Not even in politics.
Tim Worstall
The trouble with inflation is that eventually the money’s worth nothing
We all know of the grand experiment in the Magic Money Tree of recent years of course.
According to the lore the last print run wasn’t worth enough to buy the ink for the next print run.
But there are other examples. We’ve always been very taken by De La Rue’s problems over printing money for Venezuela:
The British banknote printer De La Rue reported an £18.1 million ($22.8 million) “exceptional charge” on its annual results due to unpaid bills from the Central Bank of Venezuela, as its chief executive resigned.
The obvious solution, simply sell the banknotes to pay the bill for printing the banknotes couldn’t be used. For no one other than the Central Bank of Venezuela was willing to pay for “strong” bolivars and the CB of V wasn’t able to.
But Modern Monetary Theory insists that those aren’t fair cases. A proper government (“proper” here having definite colonialist, even eurocentric, overtones) can’t end up producing so much money that it becomes worthless. Why, they can insist you must pay taxes in that currency and that will always support the value.
The Royal Mint has left millions of unwanted 1p and 2p coins abandoned in warehouses across Britain as speculation over the future of copper coins grows.
Roughly 260m surplus copper coins worth around £4m are piling up after being stored indefinitely in cash centres across the country, industry data shows.
This includes roughly 150m – or two thirds – of all the 225m 2p coins in the UK as well as 110m of the 200m 1p coins that have been minted.
The amount of surplus cash is now so large that the total volume is the equivalent of more than 2,000 washing machine-sized cages – each weighing a tonne – filled with coins.
No one wants them as coins (tho’, to be fair, we’d happily take delivery ourselves, shipper pays of course) so they’re worthless? Well, melt them down for the copper then!
The Royal Mint, the official maker of British coins, has not recycled or melted down surplus coins since it closed its smelting facility more than a decade ago.
Tsk, Tory austerity, eh? Except, no, not so. Traditionally we made coppers from a copper, tin, zinc alloy (a “bronze”) but copper and tin - especially tin - are far too valuable to be used in mere money these days. They’re now steel with a copper coating. That is, they used to be worth melting down and now they’re not. So close that furnace then - to say nothing of the required tech being entirely different anyway.
But, but, steel has a scrap value, right? And indeed it does. But in steel scrap the thing to look out for is “tramp elements”. Things that wander through the system when you don’t want them to do so. Copper being the big bugbear in steel recycling. Therefore copper tainted steel doesn’t, in fact, have that much value. Possibly even a negative value given the cost of transport.
So, yes, even a “proper” money issuer like the UK has managed to make the money of the country - even though you can pay your taxes with it! - valueless. Magic Money Trees have their problems, see? The difference is only the speed at which it happens.
Tim Worstall