Piketty is an economic illiterate

I have finally put my hands on a copy of Thomas Piketty’s Capital in the Twenty-First Century. And what do I find, that this world famous book, this book that is going to set our economic world on its head, in its introductory chapter makes a fundamental error in basic economic theory I would fail any first year student for making. Forget about fraudulent data. He has confused a shift in demand (ie a movement of the demand curve) with a change in quantity demanded (the effect on the number of units bought caused by a change in the price). For an economist, you cannot be more wrong than that. Here is the passage in which, of all things, he is discussing Ricardian land rents in a section he titles, “Ricardo: the principle of scarcity”:

“To be sure, there exists in principle a quite simple economic mechanism that should restore equilibrium to the process: the mechanism of supply and demand. If the supply of any good is insufficient, and its price is too high, then demand for that good should decrease, which should lead to a decline in its price.” (p.6 – my bolding)

He has here basically stated that insufficient supply (a shortage) will lead to a fall in price which you can see from the bits in bolding. An economist should immediately see the flaw, but for those not trained in the dark arts, let me explain.

1) The phrase, “if the supply of any good is insufficient” means, suppose there is more being demanded at the price than is being supplied. That is, suppose the price is below its equilibrium level so that there is upwards pressure on the price. He doesn’t say it quite that way, but only that “its price is too high” which, in theory terms, is a nonsense statement. But since he is talking about the pressure of demand on supply, he can only mean that the increase in demand is pushing the price up which is driving some people out of the market. As economists like to put it, the demand curve has moved to the right and prices have therefore gone up.

2) But because “its price is too high,” he writes, “then demand for that good should decrease.” Big, big mistake. He has shifted his meaning of “demand” from representing a movement of the entire demand curve to a movement along the demand curve. Higher prices, he is saying, cause the quantity demanded to fall. The demand curve stays put but with a higher price some people are leaving the market. That is why demand curves are downward sloping.

3) Then he writes that “demand for that good should decrease, which should lead to a decline in its price”. He has now mistaken a fall in quantity demanded, a movement along the curve, for a fall in demand, a movement of the entire curve to the left. He has confused a fall in the quantity demanded caused by a rising price with a fall in the level of demand, which is a shift of the entire curve.

This is one of the things I harangue my students about to stop them from making such elementary mistakes. Compare what Piketty wrote with the text of my Free Market Economics where I warn my students against making this absurd but common enough error, at least common enough amongst economic illiterates. From page 100:

Demand versus Quantity Demanded

People often do talk about demand as if it is a specific amount and it is therefore important to make sure that when someone is talking about “demand”, that one is aware of which meaning they have in mind.

Compare these two statements:

(1) if the price goes up demand goes down (and who would deny this is so?)

(2) if demand goes down the price goes down (and similarly, who would deny this?)

This becomes the following conclusion if the two statements are run together:

(3) if the price goes up [demand goes down; if demand goes down] the price goes down.

That is, if the price goes up the price goes down. A higher price is the cause of a lower price. Obvious nonsense, but it comes from using the word “demand” in its two different meanings.

In (1), this is using the word demand to mean a movement along the demand curve when the price happens to rise. In (2), this is using the word demand to mean a shift of the entire demand curve when one of the underlying factors has changed.

It is therefore essential to always make sure which meaning of demand is intended. You can usually tell from the context of what is being said, but the words here are slippery and can lead you into trouble.

This is trouble, all right. I find it absurd that Piketty cannot tell the difference between a shift of the demand curve and a movement along the demand curve.

To trust anyone’s economic judgment on serious economic matters who makes such a fundamental error would be ridiculous. He has 650 pages of stats and data but almost literally doesn’t know the first thing about economic theory?

The sentiment of a large majority of the active business community

Reading classical economics for me is to be in the company of economists who understood how economies worked. I have of late been reading Simon Newcomb’s “The Problem of Economic Education” which was published in The Quarterly Journal of Economics in July 1893. And what he does is go through the kinds of economic illiteracy that was all too common in the general population of his time, with a decidedly pessimistic view of whether these ideas can ever be eradicated amongst the population in general. And this was even though there was then universal understanding amongst economists about how fallacious these fallacious ideas were. An example:

From the economic point of view, the value of an industry is measured by the utility and cheapness of its products. From the popular point of view, utility is nearly lost sight of. . . . The benefit is supposed to be measured by the number of laborers and the sum total of wages which can be gained by pursuing the industry. . . . Here legislation only reflects the sentiment of a large majority of the active business community. A man’s economic usefulness to society is supposed to be measured by his expenditure of money and consumption of goods. He who spends freely is pointed out as a benefactor; while the miser, who invests his income, is looked upon as a selfish being, mindful only of his own aggrandizement. (p. 7)

Well, that was in 1893 for goodness sake. Who today would think spending is good and saving bad? From The Australian today:

CLIVE Palmer wants the age at which Australians can access their superannuation lowered, saying it will boost domestic demand for goods and services and increase economic growth. . . .

“I think we should be allowing people to access their super at 50 if they want to.

“It’s up to them, it’s their savings … we want to get that money released from the super funds.”

On this, Newcomb wasn’t even close to being pessimistic enough. Now, and since 1936, even economists think saving is a bad thing and spending is good.

Media report media bias

So if you read in the media that media bias is seen by 48% of the population as a worse problem than political donations, what would the outcome have been if the media had not been as biased as it is?

More Americans believe that biased media coverage is a bigger problem in politics than donations from fat cats, according to a new poll.

Rasmussen Reports found that when given a choice, 48 percent of voters believe media bias is the No. 1 villain while 44 blamed big campaign contributions.

And among Tea Party members, 77 percent said media bias and reports against the movement are the top problem in politics.

The poll found that voters clearly despise the money from special interests pouring into politics, but their opinion of the media is even harsher, fed by a general perception that the press goes out of its way to help Democrats, including President Obama, not Republicans.

It is a problem without a solution.

Democratic principles and the people be damned

Let us begin with Peter Hitchens’ reflections on the democratic principle as seen by the people the people elect:

Democracy is very well-defended against public opinion. Political parties, especially, are immune to almost everything that the majority actually desires, and are much less interested in mass tastes than shopkeepers, broadcasters, or industrial corporations. Modern politicians employ battalions of professional deceivers and manipulators, whose main job is to persuade the electorate to want what they are already being given, or what they are going to get. Our democratic leaders much prefer this to giving the people what they actually want.

So it is quite funny to watch men and women who are publicly dedicated to government for, by, and of the people, getting angry and exasperated when the people actually speak.

Events in Britain over the last few days have reminded me strongly of Berthold Brecht’s embittered sneer at his East German Communist comrades who, faced with a revolt by the workers they claimed to represent, ordered those workers to do penance for this outrage.

As Brecht sarcastically enquired, “Wouldn’t it be simpler if the Government just dissolved the people and elected another?”

And what has brought on these reflections on politicians and democratic principles?

Here, the very large vote for the United Kingdom Independence Party (UKIP), a fourth party which incoherently but emphatically defies the consensus, has been treated by politicians and their media toadies as a problem with the voters which has somehow to be contained.

The idea that all these voters have broken the loyalties of a lifetime for good reason, and that leaving the European Union and restoring control of the national borders are good ideas (which they are), is never considered for a second. Instead, having been dismissed as ignorant bigots for the past six weeks, the insurgent voters are now the object of a campaign to bamboozle them with fake sympathy, combined with an utter refusal to do what they want.

Quite unaware of how this sounds, my country’s political and media elite simply cannot stop themselves treating legitimate discontent as some sort of pathology. They, the governing class, cannot possibly be the problem. It must the voters who are mistaken, misguided, or in some way mentally ill.

Our elites wish for world government while people like myself wish to preserve those tiny enclaves of sanity in the midst of a quite mad world. It won’t happen and so 2114 will be as unimaginably different from 2014 as this year is from the world a century ago. But a one-world horror with an international elite is the aim right now amongst our progressives irrespective of what anyone might wish for and desire. I remember border crossings and national money and much else about which I wish we could turn back the clock. So I am with Peter Hitchens on this and much else besides.

The case for capitalism

I have just received through the post a first edition copy of Hartley Withers, The Case for Capitalism. The preface is found below but comes with this one warning which to modern sensibilities can set them off in every direction but towards trying to understand what the author was saying. This was written when the most wealthy countries in the world were the capitalist economies of the British Isles, northern Europe, North America along with Australia and New Zealand. His reference to the Anglo-Saxon nations only refers to their social and economic organisations which anyone else is free to adopt, as some have since the 1920s, with exactly the results he describes. But the effect is moral rather than just economic since, as he makes clear, people who are challenged to do their best become better people. This is a moral statement even more than an economic. Written in 1920 just after the Russian Revolution, the book has not lost a beat in its ability to articulate why free enterprise is beyond all doubt the only system capable of providing prosperity and human freedom, not just together but you cannot have either without a free market economy in place.

PREFACE

To make a better world we want better men and women. No reform of laws and institutions and economic systems will bring it unless it produces them. Institutions and systems that turn men and women into machines working under the control of officials or of monopolies will not make them better even if, as is very far from likely, they make them better off. It is only through facing life’s problems for ourselves, making our own mistakes and scoring our own hits, that we can train and hammer ourselves into something better. Individual freedom, initiative and enterprise, have been the life-blood of the Anglo-Saxon nations and have made it what it is, pre-eminent among the nations of the world because its men and women can think and act for themselves. If we throwaway this heritage because we think that regulation and regimentation will serve us better, we shall do a bad day’s work for ourselves and for human progress. And yet this seems to be the object to which many earnest and sincere reformers are now trying to lead us, when they ask us to accept nationalization of industry or its organization under Guild monopolies, as a remedy for the evils which are evident in our economic system. If they succeed life will cease to be an adventure and become a drill; the tendency to variation which, as science teaches us, is the secret of development, will be killed or checked, and we shall be standardized, like Government boots.

This book is written to show that the greater output of goods and services on which material progress depends cannot be expected with certainty under any form of Socialism that has yet been proposed; that Capitalism, though a certain amount of robbery goes on in its backyard, does not itself rob anybody, but has wrought great benefits for all classes; and that, if improved and expanded as it may be without any sudden change in human nature such as other systems demand, it may earn for us the great material advance that is needed to provide us with a better, nobler, and more beautiful world.

HARTLEY WITHERS.

London, January 1920.

Climate change alarmism is a belief system

I thought the role of a monarch was to stay above the fray. This is the kind of stupidity you would have thought his more politically tuned-in minders would have saved him from. Apparently not.

Prince Charles has called for an end to capitalism as we know it in order to save the planet from global warming.

In a speech to business leaders in London, the Prince said that a “fundamental transformation of global capitalism” was necessary in order to halt “dangerously accelerating climate change” that would “bring us to our own destruction”.

He called for companies to focus on “approaches that achieve lasting and meaningful returns” by protecting the environment, improving their employment practices and helping the vulnerable to develop a new “inclusive capitalism”.

But with a different perspective, and in this case from someone who understands politics in a way HRH never will, there is this, by Nigel Lawson, former Chancellor of the Exchequer, in a presentation with the title, “The Trouble With Climate Change“. And the trouble for him is that many of those who have a different view are beyond any rational discussion of this issue, something he knows from first hand experience. Here is the text:

There is something odd about the global warming debate — or the climate change debate, as we are now expected to call it, since global warming has for the time being come to a halt.

I have never shied away from controversy, nor — for example, as Chancellor — worried about being unpopular if I believed that what I was saying and doing was in the public interest.

But I have never in my life experienced the extremes of personal hostility, vituperation and vilification which I — along with other dissenters, of course — have received for my views on global warming and global warming policies.

For example, according to the Climate Change Secretary, Ed Davey, the global warming dissenters are, without exception, “wilfully ignorant” and in the view of the Prince of Wales we are “headless chickens”. Not that “dissenter” is a term they use. We are regularly referred to as “climate change deniers”, a phrase deliberately designed to echo “Holocaust denier” — as if questioning present policies and forecasts of the future is equivalent to casting malign doubt about a historical fact.

The heir to the throne and the minister are senior public figures, who watch their language. The abuse I received after appearing on the BBC’s Today programme last February was far less restrained. Both the BBC and I received an orchestrated barrage of complaints to the effect that it was an outrage that I was allowed to discuss the issue on the programme at all. And even the Science and Technology Committee of the House of Commons shamefully joined the chorus of those who seek to suppress debate.

In fact, despite having written a thoroughly documented book about global warming more than five years ago, which happily became something of a bestseller, and having founded a think tank on the subject — the Global Warming Policy Foundation — the following year, and despite frequently being invited on Today to discuss economic issues, this was the first time I had ever been asked to discuss climate change. I strongly suspect it will also be the last time.

The BBC received a well-organised deluge of complaints — some of them, inevitably, from those with a vested interest in renewable energy — accusing me, among other things, of being a geriatric retired politician and not a climate scientist, and so wholly unqualified to discuss the issue.

Perhaps, in passing, I should address the frequent accusation from those who violently object to any challenge to any aspect of the prevailing climate change doctrine, that the Global Warming Policy Foundation’s non-disclosure of the names of our donors is proof that we are a thoroughly sinister organisation and a front for the fossil fuel industry.

As I have pointed out on a number of occasions, the Foundation’s Board of Trustees decided, from the outset, that it would neither solicit nor accept any money from the energy industry or from anyone with a significant interest in the energy industry. And to those who are not-regrettably-prepared to accept my word, I would point out that among our trustees are a bishop of the Church of England, a former private secretary to the Queen, and a former head of the Civil Service. Anyone who imagines that we are all engaged in a conspiracy to lie is clearly in an advanced stage of paranoia.

The reason why we do not reveal the names of our donors, who are private citizens of a philanthropic disposition, is in fact pretty obvious. Were we to do so, they, too, would be likely to be subject to the vilification and abuse I mentioned earlier. And that is something which, understandably, they can do without.

That said, I must admit I am strongly tempted to agree that, since I am not a climate scientist, I should from now on remain silent on the subject — on the clear understanding, of course, that everyone else plays by the same rules. No more statements by Ed Davey, or indeed any other politician, including Ed Milliband, Lord Deben and Al Gore. Nothing more from the Prince of Wales, or from Lord Stern. What bliss!

But of course this is not going to happen. Nor should it; for at bottom this is not a scientific issue. That is to say, the issue is not climate change but climate change alarmism, and the hugely damaging policies that are advocated, and in some cases put in place, in its name. And alarmism is a feature not of the physical world, which is what climate scientists study, but of human behaviour; the province, in other words, of economists, historians, sociologists, psychologists and — dare I say it — politicians.

And en passant, the problem for dissenting politicians, and indeed for dissenting climate scientists for that matter, who certainly exist, is that dissent can be career-threatening. The advantage of being geriatric is that my career is behind me: there is nothing left to threaten.

But to return: the climate changes all the time, in different and unpredictable (certainly unpredicted) ways, and indeed often in different ways in different parts of the world. It always has done and no doubt it always will. The issue is whether that is a cause for alarm — and not just moderate alarm. According to the alarmists it is the greatest threat facing humankind today: far worse than any of the manifold evils we see around the globe which stem from what Pope called “man’s inhumanity to man”.

Climate change alarmism is a belief system, and needs to be evaluated as such.

It is beyond rational argument and into the realm of good and evil. We must reform capitalism, ruin our economies, devastate living standards in the name of a forecast change in global temperatures for which evidence has evaporated over the past fifteen years.

The Obama constituency

Victor Davis Hanson looks at the incredible staying power of a president who is ruining his own country and yet finds its critics at the other end of the garden. They don’t even describe him as a Teflon President since, to his supporters, Obama has hardly put a foot wrong. Nothings sticks because, in their view, there is nothing to stick. Here are three of the factors that keep Obama’s numbers in the acceptable zone.

1) His record support among minorities will not change since 70-90% of various hyphenated groups see the Obama tenure as long-overdue representation of their own interests — economic, ethnic, and symbolic. . . .

2) The media is not just overwhelmingly hard left, but hard left with a chip on its shoulder that its own views are neither accepted by the majority nor usually implemented by government.

All the above scandals and embarrassments would have ruined a Bush, given that such mishaps would have been headlined daily in the New York Times (e.g., “VA, Benghazi, AP, NSA, IRS overwhelm sinking Bush administration”) or Washington Post (“Bush Cabinet Paralyzed by Scandal”). . . .

3) The well-off are indifferent to the Obama record, interested only in its symbolic resonance. Doctrinaire liberalism resonates mostly with the very wealthy. We see that by the voting patterns of our bluest counties, or the contributions of the very affluent. In contrast, Republicanism is mostly embedded within the middle class and upper middle class, while liberalism is a coalition of the affluent and the poor.

But while these are important according to Hanson, the area he specially identifies is this:

For the liberal grandee . . . Obama represents their utopian dreams where an anointed technocracy, exempt from the messy ramifications of its own ideology, directs from on high a socially just society — diverse, green, non-judgmental, neutral abroad, tribal at home — in which an equality of result is ensured, albeit with proper exemptions for the better educated and more sophisticated, whose perks are necessary to give them proper downtime for their exhausting work on our behalf.

He may throw like a girl, screw everything up he touches, make America a worse place to live, leave the world far more dangerous than it was, but at least he’s not one of those rubes like Sarah Palin. And for this, and this alone, all is forgiven assuming it is even noticed there is anything he has to ask forgiveness for.