Spending a bit of time in Alice Springs has got me thinking about economics and unemployment. The unemployment rate amongst indigenous people is probably not as high as it feels, but it's still pretty high (19% for NT in 2006). There's an overwhelming sense of needing to shift the culture to make people more employable. Education needs to increase. English skills need to improve. People's work ethic needs to improve. We need to "skill people up" to cope with the challenges of a modern economy. There are some efforts to instead change the labour market, to reduce the burden of change placed on the community, but these efforts appear pretty minor. CDEP was probably the most ambitious (and successful?) example and that's being rolled back in favour of a conventional labour market. There is the idea that CDEP wasn't real employment, because it was subsidised and the wages weren't market wages.

So while no one really wants to label the indigenous communities as "failing" it feels like that's what everyone is thinking. That's sort of what the Intervention is about. The communities are supposedly so screwed up that the government needs to roll in and fix things up.

But it seems to me that the real failure in the Northern Territory is the labour market. We have backed it 100% but it hasn't delivered. The idea is that the labour market allocates work and incomes to the majority, and all those who benefit from it look after the people who get shafted by it. It's most fundamental promise is that it will find people jobs that are a better alternative than poverty. But here that hasn't really happened. For a lot of people in the Northern Territory, poverty is still a more appealing option than any of the available jobs. There are obviously different levels of poverty and if you removed welfare the incentives would change slightly, but not dramatically. I wonder if white onlookers are exaggerating the burden of income poverty and/or the appeal of the jobs there are. After all, for Quite a Long Period, indigenous people lived pretty merrily on consumption far lower than they do today and only worked a few hours each day.

So I don't perceive there is a problem with the work ethic of local communities or with indigenous people at all. I don't think work ethic is even a factor here. I really think it is more about the options available to people. And that is a failure not of the people but of the economy. It's a failure that I suspect is mostly the fault of relying on a market to distribute work. I think that most indigenous people value the resources and services that Europeans have introduced. But I don't think they value them as much as Europeans and I don't think they always value them enough to sign up for one of the jobs on offer.

People are already talking a lot about this sort of stuff, which is great. But I don't feel like they have stopped being exasperated with indigenous people, which is possiblly just as important. We still offer welfare begrudgingly, even though I think it's a necessary component of our preference for market solutions.

I reckon we need better jobs and a more deliberate effort to find jobs that people want. We need jobs that are a better option then welfare and/or income poverty. That definitely isn't easy. If it was then the market would probably have done it already. And it's probably a harder solution than just brainwashing kids through the schools. But I think it's a better solution.

I've written about Coase Theorem before. But I had another thought about it. The idea of the theorem is that it doesn't matter who gets the right to decide what happens to things (or who gets the property rights), the outcome should be the same. Theoretically, the two (or more parties) will negotiate and the optimal use of the resource will be figured out. The benefits of using the resource as well as it can be used mean that everyone can have a bit more stuff. There are plenty of issues with it - unequal incomes, difficulty monetising the "vibe" of things that people enjoy, and the fact that people don't really negotiate with each other that much. But even so it does have some sense to it and it is used a lot by governments to justify their decisions.

The government will use it to say that it doesn't matter if they give land rights to indigenous people or mining companies. If indigenous people get it the mining company will just pay them to leave. If the mining company gets it they will make people leave without paying them. The second option might not seem "fair", but of course, in economics there is No Such Thing as fair. And even though it isn't fair the economists are happy because the land really should be used for mining because that is clearly its most productive use. Or at least that is the reasoning.

I think that is all quite silly, however even if you think it's reasonable I don't think you can be indifferent between who gets the property rights in the first place. The government largely assigns property rights arbitrarily. There is really no way around this, which I suppose is one of the dumb things about property in the first place. When the government assigns rights to one party, it is effectively imposing costs on the other party. They're either going to have to forgo a whole lot of benefit or buy that benefit from the other party. Often those costs are enormous, as in the case of communities moving to make way for big developers.

I'd suggest that those costs (which should of the same magnitude for whichever party doesn't get the property rights) are more difficult to absorb for the less organised party. Even if you think they can both negotiate equally, the more organised party will be better able to insure themselves against large, uncertain costs. Mining companies do it by distributing shares amongst a large number of people. Indigenous communities have to just get up and move.

It's hard to imagine an aboriginal community insuring itself against the possibility of losing a court case which forces them to move to another town. It's very easy to imagine a mining company insuring itself against the possibility of losing a court case which prevents them from mining somewhere they hoped to mine.

The ease with which a mining company can adapt to change makes the cost of that uncertainty or the arbitrariness of the government's/court's decision far more manageable. It is also a purely monetary cost which is easier to distribute over time or amongst others.

So I would suggest that in a disagreement between two parties, the property rights should always be given to the party least able to protect itself from the costs of not having those rights. According to Coase, this shouldn't affect ease of development at all. The mining companies can still buy the right to mine from the little guy if it's really the most productive use of the land. But by biasing your decisions towards the weaker party society can benefit from better risk distribution which comes entirely for free.

Lately, when people ask me for money, I've been trying to give them more than they've asked for. Usually twice as much. People rarely ask for a lot, so giving twice as much is usually pretty easy out of an average pocket-worth of change.

I think maybe I'll try do that more deliberately. I'm looking for some signal to people that the change isn't begrudged. You could just smile at someone and say "You're welcome". But as I come from an economic tradition I have a bias towards signals that are costly to fake. This signal certainly isn't in the costliness order of Les Miserables, but I suppose that's where the thought comes from.

I wonder if anyone has considered setting up derivatives markets for famine. You could have a futures product (or many) linked to some aspect of the calorie intake for a particular country or area. It could be the mean (although probably not) calorie intake, although including the variance would be better. It could be the proportion of the country consuming less than some figure or just the fifth percentile of the distribution.

You probably wouldn't have starving people going into the stock exchange buying futures in their own calorie intake variation, but insurance companies could use the markets to fund some sort of insurance product. If the price of the insurance wasn't extremely cheap, that would be a sign that the government or the UNDP or whatever needed to grow some food quick smart.

Of course, an insurance company could just offer insurance the conventional way but given that famines tend to affect large numbers of people at once it might not work that well.

Using a futures market might make it easier to reduce moral hazard and adverse selection problems. If one person in a village was starving and made an insurance claim while everyone else was doing fine, the person making the claim would have to show how they were affected by something that no one else was.

Collecting data on calorie intake would be tricky, because there'd be money at stake based on the measurements. People might bribe doctors or whoever to change the data. But if it was collected by some UN agency (which I guess they already do), then it would probably be OK.

There's also the problem that people in positions of power (bureaucrats etc.) might be able to profit by causing famines. But selfishness probably already causes quite a few famines, so perhaps having one more avenue wouldn't be such significant thing. There are already plenty of examples of functional derivatives markets where people could do deliberate damage to governments or companies in order to make money. Perhaps that is even implicit to derivatives markets. As soon as people were able to profit from things going wrong in the world - which is largely what makes derivatives special - there was a greater incentive for sabotage. I'm not sure if famines are sufficiently different that this would be a real problem where it hasn't been to date.

Probably a lot of people will think this idea is pretty sick...

...which I've just realised adds another interesting aspect. There's the potential for the sickness factor to "distort" the market. If speculators are irrationally biased against selling short famine futures they'll prefer to bet on food intake going up. Meaning, if they don't want to make a whole lot of money out of people starving to death then the market will be biased in favour of the starving, who are effectively selling short their own nutrition levels. Which is a slightly strange concept.

I reckon there's a parallel between men with dogs and countries that make good films. For men, owning a dog says something about their character. Perhaps depending on what sort of dog, I'm more likely to trust a man who owns a dog. I suspect that owning a dog is only satisfying if you're willing to put in a certain level and type of energy. And not everyone is willing to do that. I don't think you even have to like dogs for it to affect your judgement of them. I find myself having the same response to countries that make good films. If I read somewhere that a country has a reputation for making good ones, or I see a few good ones myself, I'm much more likely to think that the country must be a reasonably good place. It tells you something about the culture that has been able to develop, and what the government has permitted to happen. And for me, the culture and the government of a country are probably the two most important things. They are the things that would most influence my decision to live somewhere, although you could argue the government is a product of the culture.

Sometimes I wonder if art is a good waying of spending our money. I've even wondered if having all these pets is a good thing given how many people there are that need food. But even if I can't put a precise finger on exactly what it is that is valuable about art and dogs, I think they both tell us about ourselves. Maybe they don't actually change us, or change our society for the better. But despite their absence might be a troubling thing.

I was reading The Economist yesterday and looking at some of their graphs in the growth of private equity investment. As I understand it, private equity investment is like stock market investment except less transparent. And presumably you can only be a private equity investor if you have a large enough chunk of money. I can't really think of any legitimate reason for there to be a large shift to private equity funding, but apparently it has happened anyway. The graph of it (from The Economist looks a little like a logistical growth line.

I have a theory about this. I've made previous predictions that superannuation schemes all over the world would reduce the returns to capital. I was happy about it, because I was hoping that maybe poor people would start getting rich at the same rate as the wealthy. Since they all have to throw their investment money in the same pot, and superannuation funds provide some nifty economics of scale, no one can tell the difference between the poor money from the rich money. I didn't really think the rich would let that happen. The rich have mostly been happy about the idea of trillions of dollars flooding into their precious markets, and you wouldn't be happy about that unless you had a scheme.

I wonder if maybe that scheme is something like this. Let the poor put all their money into stocks. The stock prices get inflated so they think they're getting a good deal for a while, even though no wealth has actually been generated. A lot of that spare money ends up as CEO salaries and consulting fees for investment banks and management fees for the super funds. The rich take their money out of the inflated stock markets and start investing in private equity markets, where the returns are higher.

I'm guessing that when the pendulum swings back from capital to labour (as it should), and wages grab back some of those profits, the stock market is suddenly going to look like a pretty poor deal. Since the mid-1990s only 28% of productivity growth has gone to workers, so profits have gone through the roof. However, the average P/E ratio has stayed constant. I've previously tried to figure out how the P/E ratio had stayed the same despite buckets of superannuation money and fairly constant productivity growth. It seems like it can mostly be explained by the increase of profits relative to wages.

So telling workers that slow wage growth doesn't matter because they're getting great returns on their stock portfolio isn't very honest if their dividends are coming straight out of the wage increases they aren't getting. It's particularly unencouraging for the very large number of workers who haven't ever had enough money to get themselves a stock portfolio.

I'm not very happy with my theory, because I'd expect that there's going to be money to be made in smuggling poor people's money into the rich people's private equity markets. The fabulous thing about rich people is they're usually happy to stab each other in the back for a quick buck.

One of the problems with life annuities is they are trying to provide insurance, and to smooth out income. And providing that sort of insurance is super hard. I'd tell annuities to go suck an egg, but if you want private superannuation you kind of need them. I want to know if there's a role for annuities that aren't insurance, but provide a neat way of smoothing income. At the moment annuities are inequitable because rich people end up getting a lot of the money that the poor throw in, and unappealing because no-one wants to give their retirement money to other people if they can help it.

The other problem is that insurance companies need to give us much less than they really should just in case we accidentily all end up living until 90. Insuring a whole nation against the possibility of everybody living an extra 10 years is, and always will be impossible to insure against. Insurance works using the law of large numbers and spreading out risk across large numbers of people. But it only works if there is a reasonable sort of average that the insurance company can figure out ahead of time. If everyone is dying later and later, then the average is a moving target, and the law of large numbers is not so useful. So if this is happening our only options are to ask our kids for more money or reduce our expenditure. Neither of these options are related to annuities at all. The age pension provides the first option, and takes money from the young and gives it to the old if they need it for some reason.

So I've blathered on about what that was. But my idea is to let insurance companies update their expectations as time goes on. Insurance companies should be able to use additional information about the population and individuals as it becomes available. So if you have cancer so they give you a great deal on your annuity, but then you are cured, they should be able to reduce your yearly payment.

I did some fiddling in Openoffice, and made this. The expectations are initially that the person will live for 15 more years but they end up living for 25 years. The jitters in the tapered income line represent points where the insurance company readjusts their expectations of how long the fellow is going to live for. With the flat annuity, either the poor old chum runs out of money at 79, or the insurance company has to pay out. I haven't done a very good job of accounting for growth in the capital base. I've assumed 3% real growth, but that isn't really what's important.

Does anyone have any ideas about how to stop insurance companies from abusing this system? You'd probably need some sort of transferability between companies to ensure competition. Or perhaps they sell you an income formula instead of an income quantity when you first buy the annuity. There could be some independent institution responsible for working out average and individual life expectancies and the insurance companies could be forced to use those estimates perhaps.

Wouldn't it be interesting to pick out students from high school at random and give them nifty university scholarships. The ones that got scholarships would be more likely to go to university, regardless of how clever or motivated they were. Then after 10 years you could go and see if they were making more money or being more productive or something. Then you'd know if university was useful or not. No one really knows if university is helpful. Economists kind of sort of think it's useful, but it's possible that university has no impact at all. Although even if university did earn you better money, it still might just be because you seem like a better proposition. Not because you actually are. So you wouldn't have all the answers. But at least you could say that university has more of an impact than just stealing the brightest kids from high school and then taking the credit for their brightness. Although now I think about it, you couldn't even do that. Those scholarship kids might simply get higher incomes because they went to the same institution that others smart kids went to. You'd need to use a university with no name brand recognition. Gee whiz. Practical economics sure is tricky. It's not wonder most economists focus on the impractical sort.

What would happen if, instead of looking at your UAI when you apply for university, they looked at your marks relative to the average mark in your postcode? I reckon that a lot of success at university is determined by personal characteristics and ability (which should be fairly independent of postcode) and not that much by absolute UAI (which is very dependent on postcode).

It would be good to have a way of removing the bias of high school quality and parenting resources from entry into university. If you were compared to the people in your postcode, rather than the people in your state, a lot of those extraneous-ish factors would be disregarded. I also suspect our universities will get higher quality students. I am certain that someone who gets a UAI of 80 where the average is 40 will generally do better at university that someone who gets 90 where the average is 90. University is all about effort, and a UAI isn't the best indicator of effort.

The other nice effect is that it would encourage all those North Shore parents who want their mediocre children to study medicine to move to Cabramatta. They'll be probably be horrified by the resources at the Cabramatta school they go to and so they might get together with the other North Shore refugees on the P&C to raise some extra money. Which would probably be an OK outcome. If you end up with educational equity instead of a "leg up" for capable kids in poor postcodes, that isn't the end of the world. You might even get the situation where North Shore parents are bribing Mt Druitt principals to let their kids in after their HSC trial results arrive. Which would be absolutely hilarious, and would totally make the whole system worthwhile by itself.

I've had another thought about how an ethical super fund could be used to save the world. It goes a little like this.

Ageing hippies and other good sorts put all their super money into this ethical super fund. It's an international fund and it gets a few billion dollars (or something) from peace-loving retirees. Its charter is to make money for its investors and use its resources to improve the world. Perhaps it guarantees to return at least the rate of inflation, or perhaps it offers a little more than that. But it's free to pursue strategies that don't maximise financial return.

This company invests a chunk of its money in normal ethical investments. The rest it uses as a cycling takeover fund. It takes over large companies and then reforms them. The "company" declares that it will behave ethically from then on. It signs contracts with various organisations vouching that it will fulfill various criteria. The company improves. The share price probably drops. The hippy fund sells for a loss, and goes off to do the same thing for some other company. Maybe the company will revert, but I imagine it could be quite difficult. You'll have other ethical investing companies who'll buy shares in it when they drop, and they'll have some influence and probably make loud noises when the company changes tack. It's also embarassing to suddenly change your mind, and might make shareholders even more flighty. People like the idea of acting ethically, even if they don't put their money where their rhetoric is. So I'm betting that if some of these companies were given a nudge, they might realise it's not as bad as they think.

But the fun bit comes in after the hippy fund has demonstrated that it's willing to lose money pursuing its hippy ends. After a while of that, merely the threat of being taken over, will make both the management and the shareholders at unethical companies freak out. The management doesn't want to be replaced and the shareholders don't want their share price to go down. So they'll reform themselves until they're no longer the least ethical company in an industry. Then the company that becomes the least ethical will freak out, and start reforming themselves. And so on, until all our nasty selfish unethical companies frighten themselves into creating a hippy utopia.

Even if the management wants to hold on and refuses to change, the threat of takeover (and the drop in the share price that would follow) will cause the share price to drop anyway. The hippy fund will get a bargain, and the share price won't drop any more once they take over, so they won't even lose any money.

The whole lovely scam makes me all happy with hope. I'm trying to think of the holes in it. The main one is that you need a whole lot of hippies who are willing to make less money than they could, at least in the short-term. But ethical companies have already found those sorts of people, so they definitely exist. The other risk is that nice ethical manager actually can't run a company to save themselves, so it's possible that the hippy fund will bring in some hippy managers to manage their company and they'll run it into the ground. The one thing you can say for the selfish, unethical arsemunchers, is that they are good at not running companies into the ground.

I just had an extra thought. While it's in charge, the hippy fund could issue a whole lot of options to itself, that it can only exercise if the company starts being naughty again. That will reduce the resale price a little, because potential shareholders will know they can't play up once they've rid themselves of the hippies, but I don't think it will by that much. And how cool would it be to have all these options floating around, that give hippies control of the unethical companies as soon as they become too unethical. Way cool. You could have an index of ethicalness, and companies who underperform the index just get taken over by hippies.

Let's just say you're someone who loves equitable land redistribution, but I doesn't like wars and death squads. Having read a little history you assume the situation is hopeless. You conclude that you can't have it both ways. You don't really like the fact that only rich people are educated, but you probably believe that educated people are sort of useful, even if they're rich. So even if you could you probably wouldn't choose to send them off to seek refugee status in Tuscany or even just to kill them all. This makes you sad and despondent and you feel almost ready to give up on any sort of social justice altogether and become one of those people who laughs loudly whenever anyone else mentions peace, or justice or happiness.

But then suddenly one day it hits you. Tax credits! American economists use them all the time, so why can't poor revolutionary governments who've just overthrown their oligarchic oppressors after centuries of torment and misery. You can tax businesses, which is entirely reasonable. You can appropriate land from large estate-holders, which is entirely reasonable assuming you pay them a fair price for it. And if you can buy this land surely you can pay for it with tax credits, since you're a stable government and they are (of course) fine upstanding, tax-paying business-owners who aren't going to flee the country as soon as you eliminate all the corruption and government subsidisation of inefficient businesses.

To make it all even more reasonable you'll only buy the least efficient and profitable estates, and you'll know which estates these are because they are the ones paying the least tax. Any wealthy person who is making no profit on their estate would surely leap at the opportunity to sell their unprofitable land at fair prices. In most of the cases where very wealthy people are stuck holding large estates of land they make no money on, they probably couldn't sell their land even if they wanted to, so you're really doing them a huge favour.

At the end of it all you'll have a whole lot of very happy wealthy people looking forward to using their tax credits in their future businesses. You'll have a very happy bunch of poor people who now mysteriously have a lot of land to grow stuff to eat. You'll have a very happy government who is happy because its only debt is in the form of tax credits and is stable since everyone wants to keep their freshly minted tax credits and not have them forgotten by the next military dictatorship. And to boot, you'll even have a whole lot of very happy American bomber pilots and CIA agents who are over the moon about your perfectly reasonable capitalist new system. After all, what could be more American and capitalist than tax credits.

Economists (namely my business and govt lecturers) continue to blithely propagate the idea that market allocate resources efficiently. Of course, on a good day, they'll remind you that this assumes "you've got an optimal distribution of income", and promptly forget about it altogether. They'll start using phrases like "and this is why we must cut funding for social services." The argument is purely one of efficient allocation of goods.

I think that the major problem with all this is that economists believe that in an ideal world income is only influenced by how much someone wants that income. If it were true then incomes would be "optimally distributed" and we could leap to all the counterintuitive conclusions to which economists regularly leap. But any economist will happily tell you that incomes are influenced by all sorts of things. In fact, one of the core components of wage theory is that wages are influenced by both the willingness of people to work and the need employers have for their work. The willingness to work can be equated with how much someone wants income relative to how much they want spare time.

To make matters more ridiculous this is only looking at the combined willingness of all workers and the combined need for work of all employers. The need that employers have for each individual worker is very different. This half the explanation for why people incomes are different. The outcome of all this is that a person's income has very little at all to do with how much they want income.

I think that income serves too many purposes for it to be useful in telling us how much stuff people want to have. You can argue that if someone wants more stuff they'll simply go out and earn more income. So that when they go out and buy something we can safely say that the transaction is "optimal". Which merely means they wanted that thing more than anyone else did. But because income is also a way of motivating people to work it loses it's meaning as a measurement of desire for things.

To put it simply, income is only a useful proxy for utility when income is a function of and individual's demand for income. To the extent that it is a function of demand for income, then market's are "efficient". Since economists themselves show that income is a function of many other things, it seems unlikely that our free markets are going to be particularly efficient at all. And the old "efficient by not equitable" argument doesn't cut it. Economists mix up equity of income and equity of market outcome. It's true that given some distribution of income, a market will find the optimal-ish outcome. But who decided that markets should only be measured on their efficiency once the distribution is known. You can totally ignore inequity and still say that markets will not achieve an efficient outcome. Because the income distribution you're given not purely a function of utility. Given we don't really know what the utility distribution looks like - the income distribution is just a very lazy approximation - who's to say that the government doesn't have as good an idea of the optimal distribution as anyone.

The interesting thing about this is that you'd probably get a much more efficient distribution of resources if income was earned by queuing in a line for dollars. Everyone has the same number of hours in a day. The one small problem is that there wouldn't be anything to buy once you left the queue. Which leads you to the conclusion that communist-style rationing is probably far more efficient than capitalism. Capitalism actually trades efficiency for higher production.