Steve Hemingway

The Financial Services Industry in the UK is in a sorry state. Retail investors are sold stuff which is in the vast majority of cases unsuitable. A solid diversified portfolio of stocks and bonds would suit the vast majority of investors, but of course none of them ever are recommended this kind of investment. Instead they are steered into managed funds of various sorts that have large fees part of which go to pay the salesman.

This is how it is, how it has been and, as far as I can see, how it always will be. As long as people are told that investing is a dangerous business and they can do it only through the agency of a qualified and approved 'advisor' they will simply never make good decisions.

The one thing the industry loves is more regulation. This justifies high fees and, most importantly, creates large barriers to entry. It makes spivvy insurance salesmen like doctors or lawyers. So, it's not surprising that the government is proposing more regulation. They have consulted extensively with interested parties, overwhelmingly the banks and existing industry, and they have concluded that, although regulation has given terrible outcomes in the past (think of just about anyone you know who has been sold any financial product over the last decade), the solution to the problem is ... drum roll ... more regulation!

Of course you need a highly experienced professional, expensive regulator to manage this, so let's welcome Martin Wheatley who has arrived from HK to run the newly-created Financial Conduct Authority. Apparantly the problem is that we didn't understand enough about behavioural economics, not that greedy salesmen routed savers into rip-off products because that was what maximised their commissions.

Of course, as usual real estate, carbon credits, bamboo plantations, land banks, wine, diamonds, precious metals, art and the rest remain outside the scope of this regulation. So valuable do ordinary savers feel the regulation is that they put much more of their money into unregulated buy-to-let properties than equities, even though for the large majority a few REITs, directly held, would offer a far better exposure to UK property than even a quite large portfolio.


References

http://www.ft.com/cms/s/0/7a681cc2-4674-11e1-85e2-00144feabdc0.html

Related articles

• Julian Knight: New watchdog must rebuild consumers' trust (independent.co.uk)
• Failing Finance Companies - does it impact life insurers? (pinnaclelife.co.nz)
• The Market's Hottest Dividend Sector Is Still the Place to Be (dailyfinance.com)

Via: OnlineEducation.net

It's generally considered that good institutions, like body of law, courts, constitution, make for a wealthy society. This is supposedly why the USA, UK, Denmark, Australia, Japan, France are wealthy countries. Although they have different laws and constitutions, they have functioning institutions.

This suggests that it should be easy to make a south american country prosperous. In fact as someone once said, if you ever need to check something in the US Constitution and don't have one to hand, you can go to practically any Latam country and borrow theirs, since it will be virtually a xerox copy of the US one, just as the Japanese one is.

But Japan is wealthy and Ecuador is poor. It is argued that the missing ingredient is trust. As a guy from Africa once said to me "you guys are incredible: you actually pay your taxes and expect the government not to steal them all, but to use them to build hospitals and run schools to teach your children - do you realise how implausible that outcome seems to a typical African?"

Large organisations are really important to get productivity improvements, and as I've blogged before, great productivity is the only thing that matters when it comes to enjoying a wealthy society. With large organisations, and great division of labour, productivity becomes enormously greater. Not just a bit, but unbelievably. In the past, Kings with wealth beyond the dreams of avarice would not have enough to pay for the production of a car which is remotely comparable with the most basic runabout as churned out by Korean factories today. 

But large corporations, and other institutions in society, can exist only with a large element of trust. To an extent once the institutions have 'got going' it's easier to keep them going than to start them from scratch. But still, individuals have to risk a lot, and trust a lot, to keep the show on the road.

This is similar to the problem with the firm - why, in practice, most of us work for large corporations, rather than entering into contracts with others for the supply of our labour. The legal contract lacks a lot when it comes to the selling and buying of labour. The 'old fashioned' feudal system, which requires a lot of trust, is alive and kicking and embodied in the modern corporation and is currently surviving even the extremes of inequality of income that we're seeing and the progressive erosion of the position of the employee, particularly in terms of what are usually called 'pension rights' but which many long-standing employees are discovering are not really rights at all when the profitability of the firm is at stake.

The problem with trust, in the context of Economics, is that it's very hard to model quantitatively, and therefore it's not really part of mainstream theory.  Somehow I think it needs to be incorporated, because Economics is failing, both to explain how the economy will evolve, and what poor countries need to do to get richer.

Related articles

• David Rose on the moral foundations of economic behavior (cafehayek.com)
• Income Inequality (26): And Social Mobility (filipspagnoli.wordpress.com)
• Does Mitt Romney Have a Wealth Problem? (wallstreetpit.com)
• Crisis of the middle class rampant, says Noda (thehindu.com)

What children learn at school is terribly imporant. Politicians tell us this, so it must be so. A great deal of taxpayers money is spent on schools, and when parents pay for private education the sums they are prepared to spend are extremely high.

Most things people value highly are subject to rapid innovation. Mobile phones, movies, cars, holidays, food. The quality of these goods and services benefit from the strong competition with the result that strong gains are obtained. But it's not the case with school. The same subjects are taught, in much the same way, perhaps now with an 'interactive' whiteboard taking the place of a blackboard. Teachers may be more smartly dressed, but they teach the same things in much the same way, with pupils failing to reach any higher standard, certainly if university tutors are to be believed.

The other thing is that there is very little global convergence. British children continue to study geography and French long after the point when it's clear that they have any great relevance to modern society. They no doubt study the Born-Haber process and electrolytic production of aluminium in Chemistry. The only conclusion I can come to is that whoever consumes what it is that teachers produce are not really very bothered about the ostensible product.

What then explains the high value placed on education? The only conclusion I can come to is that it is largely a positional good. Knowledge in itself is valueless, whereas an Oxbridge degree is of great value. This certainly is consistent with the fact that there is very little variation of graduate pay by subject studied.

The conclusion of all this: focus on passing exams and study what interests you!

Today the English language Wikipedia will be blocked out for twenty four hours to protest against the SOPA and PIPA acts that are currently going through the US congress. The background to the blackout, and some information on the acts themselves can be read on the anti-SOPA blackout page.

I must admit that I haven't read the details of these acts. Probably 99% of congressmen haven't either. But we all know that they will read as though they were dictated to Congress by the US media industry, particularly the Hollywood studios, and as a kind of last stand defence, the recorded music business which stands as an ever-present reminder to Hollywood of what might happen to them if these bills are not passed.

What will be conspicuous by its absence is the case that this IP will actually deliver economic rents to the studios resulting from their control of an artificially scare resource: the distribution network that they control, that is now being challenged by alternative channels available through fast internet connections.

The economic and political case is not entirely one-sided. People like to watch Hollywood films, because they have high production values which are partly the consequence of the high profits the studios can gain from their control of content and its distribution.  In effect they can obtain monopoly profits, because if you want to see Pirates of the Carribean 5 the only place you can get it from is Walt Disney Pictures. Of course a large part of these monopoly profits is diverted into the pocket of Johnny Depp, because he controls the supply of that essential ingredient of the franchise, namely Jack Sparrow.

Anyway, these acts will create new offences and give additional powers to the holders of this IP to support their position relative to what it would be without them. This takes power away from consumers and gives it to producers. In a democracy it seems odd that the democratic will of the consumers who would presumably overwhelmingly prefer these measures not to go ahead, is overriden. The resolution to this paradox was given by Mancur Olson in his book The Logic of Collective Action (the link is to Wikipedia which, of course, will be unavailable if you are reading this on the 18th, ironically).

Olson realised that because the return per capita on lobbying by small groups of vested interest was so great, and that organising large groups was so difficult, the small groups would progressively hijack the democratic process. Basically in large groups everyone assumes that someone else will make the effort - the famous 'free rider problem'.

Since I came across Olson's ideas I have realised that they have terrific explanatory power. When I see any proposal for a new piece of legislation I now ask myself: 'which industry/professional body will benefit from this?'. Invariably  the industry/profession will be heavily represented in the body of experts called upon to draft the legislation. Of course one group benefits from almost all new legislation: they lawyers themselves. Is it surprising that so many politicians are lawyers?

Related articles

• Wikipedia SOPA/PIPA Blackout Pages (webpronews.com)
• Let's bury SOPA and PIPA (piedtype.com)
• Wikipedia to black out all 3.8 million English-language pages to protest PIPA (digitaltrends.com)
• Wikipedia to shut down for 24 hours (ausocial.com.au)
• Wikipedia goes nuclear against SOPA: founder confirms site blackout (venturebeat.com)

PC's are expensive. They are amazingly powerful and complex pieces of equipment, and they are worth the money, but they do represent the consumption of a lot of resources.

These are the rules I follow when buying a PC. Others may work for you, not least because you may be reluctant about installing a new operating system, upgrading the memory of your laptop, or replacing the hard disk. If you are willing to have a go at doing these things you can save a lot of money:

1. Think about buying a second-hand machine. There are a lot on the market, and some have been well maintained,
2. don't disregard processors made by AMD or designed by ARM,
3. don't be worried if the hard disk has failed - this is usually easy to replace, and quite cheap,
4. don't be worried if the computer has no operating system. If the PC has a COA then you are entitled to install a fresh Microsoft operating system. In any case you can install Fedora or Ubuntu, which will probably serve you just as well,
5. eBay is a great source of ex-lease laptops. Sellers will usually have very high feedback.
   
6. think about buying the sort of boring computer corporations typically lease - i.e. not Alienware or Mac,
   

   Image via Wikipedia

7. don't be put off buying from abroad - you can escape the VAT (possibly) and it's easy to get used to a US keyboard (I prefer them) or if you don't like that you can still use a UK-style keyboard, you just have to remember where the £ key is,
8. get as much memory as you can afford. I think that a 4GB PC is just much nicer to use, even if the processor speed is a bit slow. It's fairly cheap to buy extra memory from a specialist supplier like Crucial  but it's probably going to be cheaper to buy the PC with the extra memory already installed,
9. always google for reviews of the particular PC before you bid. Amazon is good, but sometimes ordinary buyers will give a low rating because the item was delivered damaged, or doesn't do something it was never designed to do,
10. think about what you need the PC for. If you are going to connect it to a modern PC or monitor, then an HDMI connector is very important (DVI or display port may be an cheaper alternative if you're prepared to buy a slightly more expensive adaptor cable).

These are my top-ten tips. I am sure there are other things to look out for. Send them to me on Twitter and don't forget to tell me how you get on! My latest purchase was a Dell Latitude E6400 with 4GB RAM which I managed to pick up for under one hundred and sixty pounds from PC Efficient in Shefford (driveable from me, so I save the delivery cost!).

 

Property rights are pretty important. They are probably the reason that capitalism won the cold war. They solve that most important of problems: the tragedy of the commons.

The classical economists identified certain goods that should be outside the control of single owners. Public goods, which are non-rivalrous and non-excludable, are such goods. Such goods should not be subject to property rights for fairly obvious reasons: imagine someone being able to charge for the air that we breath. However, it seems fairly clear that someone who has legitimately acquired land, and built a dwelling on it, should have fairly exclusive use of it. The exact rights are perhaps more subtle: what about the column of air above the plot, or the minerals below it. But the general concept that the house should be for the exclusive use of the owner seems reasonable.

We get into trouble when we extend property rights to what has been called intellectual property. If I invent a new way of solving a problem, should I be able to charge you for using it? The patent lawyers say 'patently, yes!'. I am not so sure. By giving exclusive use of land to a single owner, he can ensure that it is farmed just enough to maximise the yield. When it comes to an idea, then there is no point in restricting the amount of exploitation because the greatest yield is obtained by not restricting its use.

I think the law accepts that when it comes to techniques of solving equations (for example), but does not do it when it comes to finding cures for a disease. The argument is that drug companies will never invest enough in research and development if they cannot get the rent from exploiting their monopoly supplier status granted by the patent system for the term of the patent.

So the issue boils down to how to fund research into these techniques, drugs, software algorithms and the like. I don't really care about trade marks because consumers always have the option of buying a non-branded but otherwise equivalent product.

Alex Tabarrok has argued the case more eloquently than I can, and has argued that the weight of IP law in the USA has hampered innovation. Certainly it was argued that the patents taken out by Boulton and Watt delayed innovation in steam engine design because it prevented other engineers from incorporating condensers to their engines, as this was covered by the Watt patents, although Watt's own engines did not make full use of them.

An argument that I had not come across before, which I learned from Tabarrok, is that although each patent holder will expect a 'small' royalty for the use of their IP, many high-tech inventions rely on many patents. If a new phone requires the use of 20 patents, then the weight of paying a royalty cost of a few percent of the retail price for each of them will probably make the invention uneconomic. Google and Nokia can afford to purchase portfolios of patents (by buying Motorola in the case of Google) but new entrants into the sector will be forever kept out, resulting in a gradually ossifying oligopoly.

Related articles

• Tabarrok on innovation (cafehayek.com)
• Copywrong and the Long, Overreaching Arm of the Law (thenewprint.com)
• Copyright, Copywrong, Copyrighteous? (imaginarius13.wordpress.com)
• Copyright or Copywrong? (gameofroles.wordpress.com)

As always I am indebted to, and influenced by, the good folks at Cafe Hayek.

Alan Greenspan was celebrated during his time as Fed Chairman as he seemed to have managed to slay the dragon of inflation without sacrificing the virgin of economic growth. For a decade or two we had the 'Goldilocks economy' which was neither too hot (heading into a boom) or too cold (heading into recession). His success led central bankers around the world to emulate him and his policies, becoming as close to pop stars as bankers or academics are ever likely to come.

Of course now we know that actually the whole time we were building up to a financial crisis which is possibly the most severe the world has ever known. The funny thing is that nobody seemed to question whether or not he really had managed to hit his inflation targets without any future trouble being stored up. A few questioned the bailing out of LTCM, even more the famous 'Greenspan Put' which saved the equity markets repeatedly, but none seemed to say 'hold on a minute, are we sure this is not going to end in tears?'.

This is in contrast to the long-term attitude of the Chinese. When asked about what he thought of the success of the French Revolution, Zhou Enlai famously replied that it was too soon to say. It is natural that elected politicians are impatient for fixes. They have their eyes firmly fixed on the next election, usually five or fewer years ahead. This means that good policies that take a long time to work will never get a chance.

The private sector has this kind of problem, in that corporations that produce products that take too long to become popular or successful will go out of business. But the difference is that these products remain available for others to develop and exploit. If someone can see a point in the future when profits will come, they will be developed. Lots of important technologies take a very long time to make money. The initial investors in the railways all lost their shirts. It took sixty years for electricity to become very widely adopted. The whole history of civil aviation has been a disaster for investors, but consumers have benefited enormously. It's hard to see how these technologies would have been developed by democratically elected governments.

Of course it can take a long time for the flaws in a new technology to become apparent. We may be seeing this with fossil fuels now, and also with the separation of ownership from control that followed the invention of the limited liability corporation. Over time this has resulted in managers helping themselves to the slice of the cake that would, in the absence of this separation, go to providers of capital. By controlling the capital the managers can extract rents from passive shareholders in a way that's all to familiar to the members of pension schemes that have seen their savings collapse.

Just for the record, I think central banks are a very bad idea. Banks existed quite happily for centuries without them, and I think that at best they convert frequent little crises (runs on undercapitalised banks) into rare but catastrophic global financial crises.

A lot of people think that capitalism is great for making mobile phones, and cars, and computers, and wide-bodied jets, and even pharmaceuticals and replacement hips, and even for building your house, or representing one in court on a murder charge. But they don't really trust it for important things, like educating our children, or providing a general practitioner (physician).

The solution seems obvious: have a mixed economy. Let the private sector make the goods and services that it is good at providing, and leave the state to provide the rest. This seems so obvious that it hardly needs stating. But there is a problem, because some identical resources are used by both the private and public sector, not least land. Currently, even though there has been a major downturn in the price of houses, they are still more profitable per acre than other types of development.

In a real example where I live, there is a proposal to sell off some public buildings, for housing development. The buildings could be used for a public sector use, but almost certainly this use would not maximise the price to the seller. Politicians will become involved and make some decision, as they must when the market mechanism is prevented from operating. Unfortunately, politicians don't have the aggregating power of the market mechanism. They may 'take soundings' - ask around their associates, or even formally consult the electorate. But any kind of democrating aggregation is a very poor substitute for the powerful incentives of using prices.

It's not easy to estimate the cost of this effect, but I strongly suspect that it's quite a lot bigger than is generally recognised. Even perfect politicians who did not yield to the sort of incentives that Public Choice advocates will identify will struggle to see through to what voters really want, partly because they don't know themselves until they have to make choices on how to allocate their own resource. As someone said some time 'talk is cheap'.

Unfortunately it will be a long time before Ron Paul's remark is literally true, but at least he's doing a fabulous job of making people aware of what Mises and Hayek were saying all those years ago. 

There is an increasing concern about the inequality of income in our society. David Cameron talks about increasing the powers of shareholders to control executive pay. The Occupy movement is camped out in various financial centres.

It's not quite clear the top 1% is getting detached from the rest of us. It seems clear that it's more a sociological problem than a strictly economic one. The groups that are paid very highly are increasingly isolated from the rest of the community, certainly not sharing any schools, shops, and probably having gone only to the most elite and exclusive universities. They undoubtedly conclude that it's very hard to jump all the hurdles that have lead to themselves finding themselves in these positions, and it's only reasonable to conclude that such hard work must be recognised, not least financially.

In theory investors, shareholders of listed firms, and investors in private equity funds, ultimately the ordinary workers in the other 99%, employ the 1%. A naive analysis might conclude that this overwhelming majority might collectively exploit the minority. This is supposed to be the danger of democracy. In fact the opposite happens. The benefits for the 1% are far more clear and attractive than the costs to the 99% are. This is the insight for which Mancur Olsen got the nobel prize for economics in the 60's.

This analysis shows that no amount of exhortation or encouragement from the political class is likely to have any effect, but this is exactly what the politicians are attempting. This allows them to gain a few votes, without really having any danger of receiving the funding from the lobbyists, who like things just the way they are, thanks.

I recommend that you read John Plender in today's FT. He gets it.