Thursday, November 19, 2015

More unpopular economic opinions

My last post on unpopular economic opinions was actually quite popular.

Here are some more.

1. There is no such thing as freedom. Every right has an equal and opposite obligation on the rest of society to accept that right. I want to walk around naked through the city. What type of idiotic freedom-crushing society doesn’t let me do that. Well, pretty much all of them. Because my right to waltz naked comes with the equal and opposite obligation on others to accept naked people wherever they look.

Since this "freedom=obligation identity" is always true, there are limitless examples to draw from.

My right to peaceful enjoyed of my house and property is an obligation on the rest of society not to interrupt me, to sleep in my bed uninvited, to use my kitchen, to camp on my lawn. 

2. Capitalism is successful not because it is efficient or productive. The amount of duplication of basic services, 25 types of toilet paper, the fact that over 30% of food grown is never eaten, and the massive costs invested in advertising and sales suggest that there is a fair bit of fat that could be trimmed in our economic system.

But capitalism is successful because it is inefficient. It has built in redundancy that creates enormous flexibility. A society with one large mechanised bakery that makes the daily bread for everyone might get points for productivity, but it is risky. A mechanical breakdown, natural disaster, or disease outbreak would all bring the total bread supply to a halt. In a society with multiple competing smaller, but less efficient bread-makers, these risks are greatly reduced.

As Rory Sutherland says:
Competition itself is highly inefficient. In my home town, I can buy food from about eight different places; I’m sure this system could be much more ‘efficient’ if Waitrose, M&S and Lidl were forcibly merged into one huge ‘Great Grocery Hall of The People No. 1306’. I am equally confident that after a few initial years of success, the shop would be terrible. 
So when we teach comparative advantage and specialisation as a great insight from economics, we aren't actually talking about markets and the foundation of competition in a capitalist economy, but a central planner's view of efficiency that is highly risky. One of the puzzle of the USSR was that for all it's economy troubles, it often seemed quite economically efficient in terms of the static allocation of resources.

3. Net foreign investment is an idiotic and misleading term for a capital account surplus. It should be called balance of trading assets for goods and services. 

4. Queuing is often a really good allocation mechanism. Congestion is a type of queuing. The study suggesting that serving the last person in a queue first increases efficiency is stupid. 

5. The amount of human organisation that is determined directly by prices and markets can be rounded to zero. When you consider the vast amount of services and goods that could be priced that aren’t, you realise just how small the effect of the price mechanism is on society.

Don’t believe me? Why don’t we have private property rights and markets for:

Roads. Public spaces. Air space. Oceans in all dimensions. Outer space. Mars. Antarctica. Within family production. Crime and criminal organisations. Government departments including within the military. Firm internal trade and services. All sex outside prostitution. All possible genes and animal species. Sunlight. Wind. 

Add in options contracts for all future rights for all these activities as well and we get the feeling that the story that economics of markets and prices plays a tiny role in human organisation and production. I reckon the scope of possible property rights must be thousands (millions?) of times larger than the actual property rights that facilitate priced exchanges that we have in place. 

Not only that, but prices are way too sticky to be performing the function they are suggested to do in economic theory. Coca-cola was 5c a bottle for 70yrs.

As you might have guessed, Ronald Coase is my favourite economic pioneer.

6. Writing off the $1.2 trillion of US student debt would be costless and probably a good way to stimulate the American economy. It would have the same effect of writing off any debt. 

I say it is costless because it is just a transfer from the owner of the debt to the borrower. So although the students in debt are probably above average in terms of their wealth, those who own the debt are probably even wealthier. Hence it would be a redistribution from the super wealthy to moderately wealthy as well as being an economic stimulant as those student whose debts are written off increase spending on goods and services more, relative the owners of the debt. 

The discussion of this topic on a Slate Money podcast earlier this week totally missed this point about this being an asset transfer. 


  1. Hey Cameron,

    Just on US student debt, to fully understand the distributional consequences of a full debt write off, you need to acknowledge that most of the debt is guaranteed by the US gov't. So the transfer would be from taxpayers (who are on average more affluent than average) to indebted former students (who are probably roughly average in terms of the overall income distribution, given the positive relationship between age, work experience, and income). Since the holders of the student debt would be made whole (or nearly so) they would not be transferring any resources anywhere.

    1. Yes, this must be considered. My understanding was that banks own a fair chuck of the debt, which would skew the distribution of debt owners way upwards. And yes, then are major distributional effects via the government budget.

      "Commercial banks hold about 20 percent of government-guaranteed student loans and about 40 percent of private student loans"

    2. I wrote a paper on the subject of student loan policy in the United States listed on SSRN under the title: "How Honest But Unfortunate Student Borrowers Became Scapegoats in Bankruptcy." SSRN-id = 2508974.

      Figure 5 on page 17 shows a simplified model for SLABS (Student Loan Asset Backed Seccurities) Financial Security System business model. The key to understanding write-offs is to group capital with insurance reserves in an economic loss cusion. This loss cushion plays the same role as Loan Loss Reserves + Equity + Insurance Reserves held against any banking system pool of assets, liabilities, equity, and insurance reserves (set-aside of equity to absorb a statistical loss).

      When the Department of Education (ED) makes a direct loan, or pays funds on a defaulted loan, it must obtain funds from Treasury to cover outlays. If ED were to write-off defaulted loans it would accumulate a perpetual debt inside the government. This is a political problem in Congress which expects government agencies to break-even or turn a profit. In reality if student loans are not sound on an actuarial basis then a net loss should occur on the loan portfolio which explains why private investors won't generate student loans without favorable creditor laws (no discharge in bankruptcy) or government subsidized cash flows. Investors want equity to grow persistently which means making loan pools only to borrowers with pricing power to force cash flow to repay debt. Students in aggregate appear to be price takers not price makers.

  2. Gee, I remember when the price of a 6 oz. bottle of Coke went up to 5¢ from 3¢.