Knowing and Making

I have just remembered to link to Turbulence Ahead , the blog of Gerard O'Neill, who spoke on a panel with me last year at the Geary Institute. His latest post has a nice quote from Sean Corrigan: "...prosperity cannot be forced, but must be built one exchange at a time as individuals further their own self-interest by catering to the interests of others..." Corrigan intends this as an argument for his Austrian, laissez-faire philosophy. And it does support that case. But when we think about it a little more deeply, it also illuminates a different view. The quote hints at, but perhaps underplays, the role of the entrepreneur. Presumably each consumer knows about a certain range of available goods, and they are already choosing whichever subset is best for them (I'd usually insert a critique about economic rationality here, but this time I'll leave that alone and make a different point). Given this starting point, in order to get economic growth we need one o...

While I would love it if this idea came true, doesn't it sound a little like special pleading? Tax breaks on market research, proposed by...three companies which spend money on market research. Oh but wait - they also have the support of "accountancy groups near Henley-on-Thames". Hmm. Don't accountancy groups also make money right now from the existing tax breaks on technological research and development? Why yes. Is market research a good thing? Yes, just like jobs and apple pie - not famously the subject of a lot of tax breaks. There is one good argument though, not clearly made by the article: research has a positive externality. Research allows us to test more innovations, and innovations by one party - whether successful or not - tell the rest of us something about what to try in the future. That's a good thing - but only if (like the patent system) people have to disclose the results of their research. Maybe we should offer tax breaks on disclosure  of...

Two years later, we're still hearing about narrow banking as the solution to the problem of risky behaviour by financial institutions. In fact, most of the problems that led to the 2008 bailouts were barely related to investment banking. The primary cause of the financial crisis was a collapse in the value of mortgages extended by deposit-taking institutions. The sheer volume of mortgage lending was indeed partly enabled by investment banks, helping commercial banks to securitise the loans. But separating those from the deposit-taking banks would not have stopped this. So is there a way to stop this from happening again? What was it that led banks to take these risks, and why did they pose a problem for the whole financial system? Why did we need to bail them out? The size  of banks is a potential risk factor. And the Volcker plan to impose a tax on wholesale borrowing and a cap on the size of individual banks would help with this. But if, instead of ten huge institut...

One of the problems we face in economics is that our theoretical solutions do not always work in the real world, because the key assumptions of liquid markets, no transaction costs etc often do not hold. In these cases, we have to spend time working out second-best solutions. But even the second-best may still hold surprises. Here's an example. Does it make sense for Bill Gates go to the trouble of disposing of his own litter? Let's say Bill drinks a can of Coke. As Andy Warhol said (h/t Russell Howard ): ...the President drinks Coke, Liz Taylor drinks Coke, and just think, you can drink Coke too. A Coke is a Coke and no amount of money can get you a better Coke than the one the bum on the corner is drinking. So Bill drinks Coke just like the rest of us. He finishes it and needs to get rid of the can somehow. But, as it happens, he's spending the afternoon in Sixty Acre Park near Redmond, and the nearest trashcan is half a mile away (amusingly, the description starts with...

HBOS today announces losses of about 6% on its total corporate loan book, according to Robert Peston (ignore the 47% figure that he also gives - that is only generated by cherrypicking the scope of the statistic to get the most serious-looking number). Can a bank charge a sufficient additional premium on its interest rates to cover this size of loss? It's unlikely. Small businesses regularly pay a spread of 6-10% over base (I've heard from some bank managers that they are charging up to 15% to some) but most loans are to much larger companies which have been able to get much better terms in the past. So, if a bank can't charge enough money to cover its costs, should it stop providing the service? Strict microeconomic logic says yes: the service is not viable in the marketplace at the current price, so its price should go up and the volume of loans provided should be much lower. But this is a classic example of market failure due to uncompensated externalities. Most discuss...