Friday, May 28, 2010

Is state sovereignty relevant to resource rent taxation?

The Henry tax review into Australia’s future tax system recommends:

‘Subject to transitional arrangements, the new rent-based tax should apply to existing projects, replacing existing charging arrangements. The allocation of revenue and risks from the new tax should be negotiated between the Australian and State governments’.

The federal government seems to be attempting to ignore this advice in imposing the new tax. It is proposing to reimburse mining companies for existing royalty payments rather than to replace existing charging arrangements. It has decided unilaterally how it proposes to use the additional revenue from the new tax. In selling the tax to the Australian public it is asserting that mineral resources are owned by all Australians, contrary to the legal position of ownership by the Crown, with state governments having constitutional authority for resource management.

The government of Western Australia is threatening a constitutional challenge to the new tax, but the federal government doesn’t seem to be particularly concerned about this. I’m no lawyer, but I imagine the federal government think they are on safe ground in calling the tax a profits tax rather than a resource rent tax.

However, even if the new tax is legal, I think the federal government should be concerned about the viability of their proposal not to reimburse mining companies for any new or additional royalties that might be charged by state governments. Whatever the High Court might decide about the validity of the new federal tax, it is not likely to rule that the imposition of a new tax by the federal government has extinguished the rights of state governments to raise royalty rates.

Are state governments likely to impose additional royalties? Some proposals for higher royalties were already in the pipeline in Western Australia prior to announcement of the new federal tax and it is possible that these charges will be accommodated in transitional arrangements. The state governments review their royalty charges from time to time and I imagine that they will continue to do so. It is quite possible that having read and digested the Henry report a state government could decide to change the basis of their charging arrangements to a resource rent tax and to increase revenues from the resources sector. In considering such a change the state government might note that there is nothing particularly magical about the 40 percent tax rate proposed by the federal government. They might even read in the Henry report that Norway imposes a total tax rate on petroleum rents of 78 percent.

The point I am leading to is that the new federal tax has not extinguished the potential for state governments to raise royalty rates. This remains a potential source of sovereign risk for mining investment in Australia. This consideration is additional to the argument in my earlier post (Does a resource rent tax solve the problem of sovereign risk?) that the proposed application of the new tax to existing mines would lead investors to perceive that they have under-estimated sovereign risks in Australia. Even if the federal government comes up with satisfactory transitional arrangements for the new tax, miners will still need to factor into their calculations an allowance for possible future increases in state government royalties.

In my view the federal government should take another look at the recommendations of the Henry report and seek negotiations with state governments about the allocation of revenue and risks from their proposed resources rent tax.

Tuesday, May 25, 2010

What metaphors help us to understand the functions of reason and emotion?

Plato argued that we can only be masters of ourselves if reason, the ‘human charioteer’ is able to control the dumb beasts of passion:
‘Now the winged horses and the charioteers of the gods are all of them noble and of noble descent, but those of other races are mixed; the human charioteer drives his in a pair; and one of them is noble and of noble breed, and the other is ignoble and of ignoble breed; and the driving of them of necessity gives a great deal of trouble to him. ... The right-hand horse is upright and cleanly made; he has a lofty neck and an aquiline nose; his colour is white, and his eyes dark; he is a lover of honour and modesty and temperance, and the follower of true glory; he needs no touch of the whip, but is guided by word and admonition only. The other is a crooked lumbering animal, put together anyhow; he has a short thick neck; he is flat-faced and of a dark colour, with grey eyes and blood-red complexion; the mate of insolence and pride, shag-eared and deaf, hardly yielding to whip and spur’ (‘Phaedrus’).

How We DecidePlato’s metaphor seems to have provided the basis for an influential model of human flourishing which puts reason (or rationality) on a pedestal and views the emotions as crude and primitive. In his book, ‘How We Decide’(2010), Jonah Lehrer links Plato’s metaphor to Cartesian philosophy and notes that Freud used a similar metaphor in which the horse (id) provides the locomotive energy and the rider (ego) determines the goal and guides his powerful mount towards it (p.10-12).

However, Lehrer points out that this classical theory is ‘founded on a crucial mistake’: ‘What we have discovered when we look at the brain is that the horses and the charioteer depend on each other’ (p. 13). ‘When we are cut off from our feelings, the most banal decisions become impossible. A brain that can’t feel can’t make up its mind’ (p.15). We might like to think that reason plays a large role in our decisions, but if our feelings didn’t tell us what we like and dislike we would not be able to make decisions.

The Happiness HypothesisJonathan Haidt has argued similarly that Plato’s metaphor ‘may overstate not only the wisdom but also the power of the charioteer. ... Reason and emotion must work together to create intelligent behavior, but emotion ... does most of the work’ (‘The Happiness Hypothesis’, 2006, p.13).

Haidt has his own metaphor, an elephant and its rider, to explain the relationship between the controlled and automatic systems that determine human behaviour:
‘The controlled system ... is better seen as an advisor. It’s a rider placed on the elephant’s back to help the elephant make better choices. The rider can see further into the future, and the rider can learn valuable information by talking to other riders or by reading maps, but the rider cannot order the elephant around against its will. ... The elephant and the rider each have their own intelligence, and when they work together well they enable the unique brilliance of human beings’ (p.17).

Jonah Lehrer uses a modern aeroplane in his metaphor to explain the functions of the emotional brain and the pre-frontal cortex:
‘To sit in a modern airplane cockpit is to be surrounded by computers. ... These computers are like the emotional brain of the plane. They process a vast amount of information and translate that information into a form that can be quickly grasped by the pilot. ... These computers are so reliable that they perform many of their tasks without any pilot input. ... Pilots are like the plane’s prefrontal cortex. Their job is to monitor these onboard computers, to pay close attention to the data on the cockpit screens. If something goes wrong, or if there’s a disagreement among the various computers, then it’s the responsibility of the flight crew to resolve the problem. ... When the onboard computers and pilot properly interact, it’s an ideal model for decision-making. The rational brain (the pilot) and the emotional brain (the cockpit computers) exist in perfect equilibrium, each system focusing on those areas in which it has a comparative advantage’ (p.256-8).

Which metaphor is best? I doubt whether one metaphor is the best aid to understanding of all aspects of human behaviour, but I think the elephant metaphor is better than the plane metaphor from a personal development perspective. It is possible to think of the rider and elephant as being responsible for their future performance as well as for their current performance. As Jonathan Haidt puts it, ‘virtue resides in a well-trained elephant’ (p.160). I don’t pretend know much about training elephants or their riders but it seems reasonable to suppose that they would have a stronger incentive to learn to work together and to improve their performance if they were held jointly responsible for their behaviour.

Thursday, May 20, 2010

How can we ensure that parliaments are representative and governments are accountable?

An update of my views on the topic has now been published by "On Line Opinion":

‘In a really equal democracy, every or any section would be represented, not disproportionately, but proportionately. A majority of the electors would always have a majority of the representatives; but a minority of the electors would always have a minority of the representatives. Man for man they would be as fully represented as the majority. Unless they are, there is not equal government, but a government of inequality and privilege: one part of the people rule over the rest: there is a part whose fair and equal share of influence in the representation is withheld from them; contrary to all just government, but, above all, contrary to the principle of democracy, which professes equality as its very root and foundation’ (J S Mill, Representative Government, Chapter 7, 1861).

Some famous person has probably written in support of strong executive government which dominates parliament and is held in check only by periodical elections (as well as an independent judiciary etc) but I don’t know where to find an appropriate quote. Those who have commented on such a system have tended to refer to it disparagingly as an elective dictatorship. However, I think it is possible to defend a system that tends to deliver the governing party a substantial majority of seats on the grounds that it results in more accountable government than a proportional system in which no party has a clear majority. A government that dominates parliament cannot claim that it has not implemented its promises to the electorate because of obstruction by other parties. It has to wear the electoral consequences of its own actions.

The point I am trying to make is that while proportional representation might be a desirable characteristic of a parliament, it is undesirable to have a system of government in which parties go to the polls to seek endorsement of their policies and then, after the election, enter into negotiations to decide what policies the temporary coalition of parties forming the government will actually seek to implement. Parties forming such temporary coalitions tend to blame each other for poor outcomes and electors find it hard to tell who is responsible for what.

Various compromises between proportional representation and elective dictatorship are possible. One possibility is the reinforced proportional representation system used in Greece under which the party which wins the largest number of seats in parliament is allocated additional seats so that it more likely to be able to form a majority in its own right. Leaving aside the obvious point that it is difficult to envisage that Greece’s recent economic performance could have been much worse without this reinforcement of proportional representation, an arbitrary adjustment to numbers of seats seems somewhat inelegant (if not undemocratic).

Another possibility is to have a bi-cameral system with the government being formed in the lower house, elected on the basis of a system that usually produces workable majorities for a governing party or stable coalition (e.g. single member electorates) and an upper house, acting as a house of review, elected using proportional representation. As recent events in the UK show, single member electorates cannot always ensure that the party winning the largest number of votes is able to govern by itself (or even to form part of the government for that matter). But single member electorates have a reasonable track record in producing stable and accountable governments. This system has the added advantage of allowing voters to vote for a person to represent their locality rather than for a party (or party list).

Luke Malpass and Oliver Marc Hartwich have recently advocated a bi-cameral system, such as I have just described, to replace the single chamber proportional representation system in New Zealand (CIS Policy Monograph 109). This is also the system that we have in Australia.

So, does the Australian system provide the best possible compromise between a representative parliament and an accountable government? I don’t think so, because it gives too much power to the upper house. The Australian Constitution contains a sensible procedure to resolve a deadlock between the upper and lower houses of parliament – a joint meeting of both houses – but joint sittings can occur only after a double-dissolution election.

I think the requirement for an election to resolve deadlocks between the two houses of parliament tends to work against accountable government because it enables governments to blame obstruction in the Senate for failure to implement policies. Before going down the double-dissolution path governments have to consider the possibility that they will lose such elections or be returned to power with more obstructive upper houses than they had before. Although there are half a dozen occasions in Australian history when governments have brought on double-dissolution elections, they have been defeated on about half those occasions. A joint sitting of both houses of parliament has occurred on only one occasion.

Given the difficulty of amending the Australian Constitution it seems that we will have to continue to live with the adverse consequences for government accountability of the requirement for elections to resolve deadlocks. We can, however, take some solace from the fact that the election requirement has the virtue of providing a test of the extent to which governments have the courage of their convictions. The value of such a test has recently been highlighted by the current government’s decision not to trigger a double-dissolution election on the bill to establish a carbon emissions trading system in Australia.

Postscript 1:
After reading a post by Tim Harford I have been reminded of Kenneth Arrow's impossibility theorem. Rather than wondering where to find a quote from some famous person supporting elective dictatorship I could have quoted Kenneth Arrow to the effect that whatever electoral system you use you will always end up with some form of dictatorship (although some forms of dictatorship are worse than others). The inference that I think should be drawn from Arrow's impossibility theorem is that markets are usually better than politics in producing outcomes that are beneficial for everyone.

Postscript 2:
Joseph Schumpeter qualifies as a famous person who emphasized the value of strong executive government. In Capitalism, Socialism and Democracy (1942) he wrote: 
"It is in fact obvious not only that proportional representation will offer opportunities for all sorts of idiosyncrasies to assert themselves but also that it may prevent democracy from producing efficient governments and thus prove a danger in times of stress. But before concluding that democracy becomes unworkable if its principle is carried out consistently, it is just as well to ask ourselves whether this principle really implies proportional representation. As a matter of fact it does not. If acceptance of leadership is the true function of the electorate's vote, the case for proportional representation collapses because its premises are no longer binding. The principle of democracy then merely means that the reins of government should be handed to those who command more support than do any of the competing individuals or teams".

I wrote more about Schumpeter's views of democracy here.

Saturday, May 15, 2010

Which books should I recommend?

I am in the process of becoming an Amazon associate. This is unlikely to make me rich, but it is still worth doing to highlight some books relating to freedom and flourishing that I would like to recommend to readers.

Which books? When I started making a list I quickly noted around 30 titles, but the carousal widget that I had decided to use has room for only 10 books. So I have focussed on the books I would recommend to a person somewhat like myself – a person with a background in economic policy or business who is becoming increasingly interested in broad issues relating to human flourishing, including the role of liberty, the nature of happiness and the ethics of well-being.

My recommendations are not listed in any particular order. See the carousal (at right) for links to Amazon.

1. ‘Happiness: A History’, by Darrin McMahon.
This book traces the way ideas about happiness have changed through history. I particularly enjoyed his discussion of the inclusion of ‘pursuit of happiness’ in the US Declaration of Independence. There is a quote from the book in my post: Does the evolution of ideas about happiness intersect with the evolution of ideas about markets?

2. ‘Norms of Liberty’, by Douglas Rasmussen and Douglas Den Uyl.
Is liberty compatible with human flourishing? This book argues that not only is liberty compatible with human flourishing, it is also necessary because individual flourishing is an inherently self-directed activity. The book is not an easy read, but well worth the effort for anyone with any interest in political philosophy. The book is discussed briefly in my posts: Is freedom a necessary condition for human flourishing? and Why should we view individual rights as metanormative principles?

3. ‘Happiness: The science behind your smile’, by Daniel Nettle.
This little book provides an excellent introduction to the science of happiness. I particularly like Nettle’s discussion of different kinds of happiness and of the distinction between wanting and liking. Some comments relating to the book are included in posts here, here and here.

4. ‘The Logic of Life’, by Tim Harford.
This is my favourite among the spate of books that have been written over the last few years about the economics of everything. The basic idea is that if you want to understand how the world works keep in mind that people tend to respond to incentives. I have discussed the book here.

5. ‘Predictably Irrational’, by Dan Ariely.
This book is a good introduction to behavioural economics. Ariely describes experiments which show that we are often not as rational as we might think we are. I have discussed the book here.

6. ‘Well-being for Public Policy’, by Ed Diener, Richard Lucas, Ulrich Schimmack and John Helliwell.
This book probably has the best account currently available about the relevance of subjective well-being measures to consideration of public policy issues. I have some comments on the book here and here and in a review essay for ‘Policy’, Summer 2009-10.

7. ‘In Pursuit of Happiness and Good Government’, by Charles Murray.
This book was first published in 1988, but the views it presents are still highly relevant today. Anyone considering the potential relevance of happiness research to public policy should read this book. I have commented on the book here and here.

8. ‘The Pursuit of Unhappiness’, by Daniel Haybron.
This book is a philosophical exercise in clear thinking about the nature of happiness. It is fairly difficult to read, but provides plenty of food for thought about the directions of well-being research. It also provides some grounds for concern about the direction in which western society may be heading. I discussed the book here, here, here and here.

9. ‘The Happiness Hypothesis’, by Jonathan Haidt.
Martin Seligman, author of ‘Authentic Happiness’ is quoted on the cover of the book as saying: ‘For the reader who seeks to understand happiness, my advice is: Begin with Haidt’. That is high praise from the author of another very good book. I particularly like Haidt’s view that some of the conditions for happiness come from within us and others require relationships with other people, our work and 'something larger' than ourselves. There are some references to Haidt’s book in my posts here and here.

10. ‘What is Good and Why, by Richard Kraut.
This is a highly readable book about ethics. The main purpose of the book is to establish that we should specify ‘for whom’ or ‘for what’ when we talk about what is good. Kraut presents a developmental view of human well-being. I discussed the book in posts here , here and here.

Thursday, May 13, 2010

Should we ever play the man rather than the ball?

I don’t think there is any situation on the sporting field where players are justified in playing the man rather than the ball. Immediately after writing that I have begun to think of exceptions. An exception should obviously be made for technical infringements of the rules that that have become an accepted part of the way some games are played. Should an exception also be made for giving a particularly dirty player in the other team an elbow in the ribs? It might be possible to convince an impartial observer that this could not have happened to a nicer person, but that doesn’t mean that the behaviour should be condoned. If we allow that violations of the code of behaviour can justify retaliation we are likely to end up with an all-in brawl rather than a ball game.

In case anyone is wondering why I am writing about sport, I am just using an analogy to introduce a discussion of the ethics of ‘playing the man’ in discussions of public policy. The post has been prompted by the comment of another blogger, Jim Belshaw, that I made a ‘cruel’ remark about Australia’s prime minister, Kevin Rudd, in a recent post on my blog. I implied that Mr Rudd's argument that the proposed resource rent tax will be paid mainly by foreign investors is similar to the nationalistic rhetoric that Hugo Chavez, president of Venezuela, has used to justify nationalization policies. To add insult to injury I suggested that Hugo, who is famed for long-winded speeches, was less verbose than Kevin.

I regret that comment because my intention on this blog is to raise the tone of policy discussion rather than to lower it. I don’t feel apologetic towards Mr Rudd, however, because I acted in retaliation for his past behaviour. I think Mr Rudd has done more than most other contemporary Australian politicians to lower the tone of public policy discussion in this country.

In trying to explain myself I have made an assertion that I now have to justify. The way politics is played in Australia it is fairly common for politicians to mis-represent the views of other politicians and to attempt to demonize them. But most politicians tend to treat academics with some respect unless they involve themselves directly in politics. Apart from Mr Rudd I don’t think many other politicians in this country who have sought to mis-represent the views of a Nobel-prize winning economist or to demonize him or her. I am referring in particular to Mr Rudd’s misrepresentation of the views of Friedrich Hayek, which I have discussed in an earlier post: Why does Rudd persist in misrepresenting Hayek? (On reflection, I also regret the sarcasm in the last sentence of that post.) In my view the real reason Rudd misrepresents Hayek is so that he can falsely claim that political opponents who respect Hayek’s views are adopting an extreme position.

As I noted in the introduction, I don’t think violations of codes of behaviour justify retaliation in kind. This applies just as much to policy discussions as to sport. The most appropriate response to bad behaviour by political leaders is to make other people aware of it.

Wednesday, May 12, 2010

Will history judge Marx to have been right about the effects of technological progress on income distribution?

‘The instrument of labour, when it takes the form of a machine, immediately becomes a competitor of the workman himself. ... That portion of the working-class, thus by machinery rendered superfluous, i.e., no longer immediately necessary for the self-expansion of capital, either goes to the wall in the unequal contest of the old handicrafts and manufactures with machinery, or else floods all the more easily accessible branches of industry, swamps the labour-market, and sinks the price of labour-power below its value’ Karl Marx, Capital, 1887 (first English edition).

Since Marx wrote that, real wages have increased by massive amounts in industrialized countries. Authors of some books I have read recently suggest, however, that Marx’s predictions could end up being right in the end. Gregg Easterbrook warns that we should not take too much comfort from the fact that Marx’s predictions of gloom have not yet come true (‘Sonic Boom’, p 153; discussed here) and Jacques Attali suggests that tomorrows West will resemble today’s Africa (‘A brief history of the future’, discussed here).

In attempting to think our way around this question an obvious place to start is with the effects of technological progress on the demand for labour. This approach makes sense if labour can be assumed to be more or less homogeneous, that aggregate capital stock can be measured appropriately, that most income from capital tends to accrue to people with high incomes and that technological change is the only factor influencing income distribution. I’m actually not sure that any of those assumptions stand up to scrutiny, but let us keep the discussion as simple as possible to begin with.

As Marx observed, new technology often involves capital-intensive processes displacing labour-intensive processes, e.g. the use of power looms to replace hand looms in the textile industry at the beginning of the industrial revolution and, more recently, increased use of robot technology in car manufacture replacing labour-intensive assembly lines. This kind of technological change tends to increase the ratio of capital to labour. However, introduction of new technology often occurs through the introduction of superior capital equipment that replaces existing capital (or more efficient sources of energy, financing innovations, business practices etc) without necessarily increasing the ratio of capital to labour. Most importantly, new technology makes possible an increase in national product, or real national income, and with increased demand for factors of production, including labour.

The net effect of those factors on future demand for labour will depend partly on whether, on balance, the new technology is a closer substitute for labour than for existing capital equipment (and other factors of production). Further development of electronics and robotics, in particular, can be expected to displace a lot more manual and mental labour, but my guess is that before too long new technology will largely involve superior robots replacing inferior robots, leaving demand for human labour relatively unaffected. There are some parts of the economy where new technology is unlikely to have much effect at all on the ratio of capital to labour, e.g. symphony orchestras. (William Baumol made the point in the 1960s that a symphony orchestra does not become more productive by playing faster.)

Another important influence on the future demand for labour will be whether average incomes are likely to result in a changing pattern of consumer spending toward more on labour-intensive or more capital-intensive goods and services. My guess is that ‘real’ experience (of foreign travel etc.) will trump ‘virtual’ experience and that people will prefer to interact with other humans rather than robots to obtain services such as restaurant meals.

So, I think there are limits to the extent that technological progress will result in substitution of capital for labour. When we take into account the fact that labour is not homogeneous, that investment in human capital and investment in physical capital can be substitutes or complements, and that people embody new technology in the skills they acquire it is not even obvious that it is particularly helpful to think in terms of aggregate categories such as labour and capital.

It is probably more meaningful to consider demand for particular categories of labour e.g. unskilled labour. Perhaps it is reasonable to predict that demand for unskilled labour will continue to shrink, but even that is problematic if we define ‘unskilled’ in terms of lack of formal qualifications and overlook the possibility that inter-personal skills - often acquired without formal training - will become increasingly important.

The idea that there is a class of people who obtain their income from selling their labour (workers) and another class of people who obtain their income from ownership of capital (the idle rich) seems likely to become increasingly irrelevant. As working people invest for their retirement they will be increasingly buying shares in the robots that will earn the income they previously earned for themselves.

Technological progress is not the only factor influencing income distribution. Factors affecting the supply of labour, e.g. immigration, could have effects on wage rates in some countries that are as important as the effect of technological progress. Then there are the effects of globalization both in providing international competition for labour-intensive industries and, increasingly, new sources of innovation and competition for technology-intensive sectors of industrialized countries.

Finally, the taxing and spending policies of governments modify the effects of technological progress on income redistribution. If Marx turns out to have been right about technological progress, it seems likely that governments in democratic countries will come under increasing pressure to intervene further in income distribution to ensure that all groups have an opportunity to benefit from the fruits of technological progress.

However, my personal view is that history will probably continue to judge Marx to have been largely wrong about the effects of technological progress on income distribution.
Winton Bates

Sunday, May 9, 2010

Does a resource rent tax solve the problem of sovereign risk?

I have been a supporter of resource rent taxes for as long as I can remember. More precisely, my view has been that taxes on rents are better than most other taxes because they extract funds with minimal distortion to production and investment decisions.

I think the best way to think your way around the question of resource rent taxes is to imagine initially that you are the sovereign of a territory in which there has been no previous mining or exploration. You want to obtain revenue from the minerals in your territory by the inducing mining firms to use their expertise to explore and to mine.

One way of obtaining revenue from minerals is to auction off mining rights and promise mining companies that there will be no further taxes on the minerals they find. A major problem with such a ‘finders keepers’ policy is that on the basis of past experience mining firms have good reason to be skeptical that sovereigns will keep their promises to let them keep what they find. When valuable resources are found sovereigns (and democratic governments) have a habit of changing their minds and wanting more revenue. As a consequence of this ‘sovereign risk’, mining companies are not likely to be willing to pay anything like what an exploration lease would be worth to them if they could believe the sovereign’s promise of finder’s keepers.

Another way that governments can obtain revenue from minerals is through a system of royalty payments based on the volume or value of minerals extracted. This is like imposing an additional cost on mining activities and can deter mining that would otherwise be commercially viable.

By contrast, under a well-designed resource rent tax the sovereign is, in effect, a silent partner in the venture. The sovereign shares in the rents and risks of the project without distorting investment and production decisions in the process.

So far so good, but Australia is not a country in which there has been no previous mining or exploration. There is currently a great deal of mining being undertaken in this country under long-established systems in which state governments obtain revenue from royalties. In that situation it becomes important to consider how to make the transition from royalty payments systems to a resource rent tax without disturbing the reasonable expectations of miners of rewards that they are entitled to receive for the risks that they have taken. If the transition to a new tax is used by the government to grab a larger slice of rents from successful mines, the miners are likely to perceive that they have under-estimated sovereign risk in this country. They will also perceive that there is a chance that the rate of resource rent tax could be increased in future, particularly if there are further increases in mineral prices. If they factor that into their calculations of expected returns they will reduce their investment in further exploration and new mines – even if the structure of the new tax minimizes disincentives to investment.

As is well known, the Australian Government has recently announced the introduction of a resource rent tax and its intention to grab a substantial additional slice of mining profits on top of revenue raised from existing mining royalties. The main source of this sovereign risk, Kevin Rudd, has defended the tax grab on the grounds that ‘what we are doing is to recover national sovereignty over our own resources’. Actually, I must confess that I don’t think Mr Rudd has used those precise words. Those words were used by Hugo Chavez, president of Venezuela. As far as I can see, however, the main difference is that Hugo is less verbose than Kevin.
Here is what Kevin Rudd has been saying:
‘Over the last decade the mining companies generated $80 billion in higher profits. At the same time governments, on behalf of the Australian people, received only an additional $9 billion over that period of time. What we're saying is that the mining companies deserve a fair return on their investment - that's important - but we also believe the Australian people deserve a fair return on the resources which they themselves own, and remember, these companies- you mention in your introduction BHP and Rio. BHP's 40 percent foreign owned. Rio Tinto's more than 70 percent foreign owned. That means these massively increased profits, the $80 billion that I referred to before, built on Australian resources, are mostly in fact going overseas’ (Interview on AM, ABC radio, 3 May, 2010).

Why is the percentage of foreign ownership of BHP and Rio relevant to the issue of resource rent taxation? The unmistakeable message is that Kevin Rudd views foreign investors as fair game. Tax reform has become a cover for expropriation of rents from assets owned by foreigners. All we can hope is that the more sensible members of the Australian government will encourage second thoughts about the rate of resource rent tax that should be imposed - and urge Kevin to restrain his rhetoric - before too much harm is done to Australia’s reputation as a safe location for investment.
Winton Bates

Postscript notes:
1. As I explained in a subsequent post I regret comparing Kevin Rudd to Hugo Chavez.
2. The additional $9 billion dollars that the prime minister refers to as the amount the Australian people have recieved from mining companies over the last decade does not include company tax.
3. Mining companies would be wise to factor into their considerations of new projects the possibility that the tax rules will be changed in future if substantial new investment projects are not profitable. Under the proposed tax mining companies are supposed to get a subsidy equal to 40% of losses. A government that is prepared to change the rules opportunistically to grab additional tax revenue could also be tempted to change the rules opportunistically to avoid substantial revenue losses at some time in the future.
4. In a subsequent post I have discussed the risk that state governments could still increase royalty rates.

Monday, May 3, 2010

Would an hedonimeter help us to choose between push-pin and poetry?

There seems to be enduring interest in the post, ‘Is push-pin as good as poetry’, that I wrote a few years ago. That post was about John Stuart Mill’s rejection of Jeremy Bentham’s assertion that if the game of push-pin gives more pleasure than poetry then it is more valuable than poetry. Mill argued that some pleasures are superior to others and that it is possible for people to become addicted to inferior pleasures. I followed up on the question of whether push-pin might be addictive in a subsequent post.

A logical place to begin this post would be to define an hedonimeter. Before I do that, however, I want to make the point that Mill’s thoughts about higher and lower pleasures seem to have been a side-track that did not lead anywhere in the subsequent development of economics. A few years after publication of Mill’s essay on utilitarianism, the famous economist, William Stanley Jevons, came down strongly in favour of Bentham’s view of utility. According to Jevons:

Whatever can produce pleasure or prevent pain may possess utility. ... The food which prevents the pangs of hunger, the clothes which fend off the cold of winter, possess incontestable utility; but we must beware of restricting the meaning of the word by any moral considerations. Anything which an individual is found to desire and to labour for must be assumed to possess for him utility. In the science of Economics we treat men not as they ought to be, but as they are’ (‘The Theory of Political Economy’, 1871, III.2).

Francis Edgeworth, who came with the idea of an hedonimeter, was a strong supporter of Jevons’ view that utility has two relevant dimensions: intensity and time. Edgeworth suggested that we:
‘...imagine an ideally perfect instrument, a psychophysical machine, continually registering the height of pleasure experienced by an individual ... From moment to moment the hedonimeter varies; the delicate index now flickering with the flutter of the passions, now steadied by intellectual activity, low sunk whole hours in the neighbourhood of zero, or momentarily springing up towards infinity’ (‘Mathematical Physics’, 1881).

I think that description tells us, in today’s language, that an hedonimeter might be a sexy idea. It will probably be a long time before you can buy an hedonimeter at your local supermarket but research indicates that levels of various chemicals (e.g. cortisol) in the body and activity in various parts of the brain are related to pleasant and unpleasant experiences. It seems likely that if we were able to conduct surveys using hedonimeters – perhaps one day it might be possible to carry one around like a pedometer – they would give similar results to those obtained by Daniel Kahneman and Alan Krueger using evaluated time use (ETU) techniques. In surveys using ETU techniques respondents are asked to account for time spent on various activities on the preceding day and to rate their feelings for each activity in terms of a range of affective categories e.g. happy, worried/ anxious or angry/hostile. The ETU data suggests that people tend to get most pleasure from sex and socializing and least pleasure from working and commuting.

If anyone was really interested in comparing the pleasures people obtain from push-pin and poetry it is possible to imagine conducting an experiment in which participants played push-pin and attended poetry readings and rated their experiences. If you were concerned that such information might not be relevant to you personally, you might be able to get someone to design an appropriate experiment to enable you to rate and record your emotions during the two experiences.

How would you feel about using the results of an ETU exercise (or an hedonimeter) to decide something that may actually be important to you – for example, whether to play sport A or B or have a holiday at location X or Y - on the basis of the balance of emotions that you have experienced in those activities in the past? I don’t know about you, but I would want to see whether the hedonimeter results are consistent with my memories of the different experiences before I decided whether to use them.

A recent presentation by Daniel Kahneman (on TED) suggests that what my reflective self might feel about my memories of the experiences that I want to choose between could differ substantially from the emotions that my experiencing self has actually felt (or what an accurate hedonimeter might record).

Would you ignore the evidence of an hedonimeter if it conflicted with your memories of the experience? Would you ignore suggestions from your spouse or a friend that your memories of a holiday might be biased by the way you felt about something that happened at the end? If you had a reliable hedonimeter to record your memory of past pleasures would you give less weight to consideration of what experiences it is good to have (or issues such as those raised by J S Mill about the superiority and inferiority of different pleasures) in making your choices? Why do humans have selective memories? Do our selective memories serve a useful function from an evolutionary perspective?
Winton Bates

Postscript 1:
In retrospect I would like to add some further questions: Do the reasons why human have selective memories make any difference to the way you and I should live our lives? If I am told that there are good evolutionary reasons why I should remember how an experience ended (e.g. because it was important to the survival of my ancestors to remember which of their hunting expeditions were successful and unsuccessful) is this relevant to the decisions I should make today?
I am beginning to think that while the evolutionary reasons for cognitive bias may be interesting they may not be particularly relevant to our current decision-making.

Postscript 2:
I obviously became sidetracked while attempting to answer this question. My answer is that whether the hedonimeter would help us to make the choice depends on the criterion we think is most appropriate. If the criterion is pleasure, the hedonimeter might help. If the criterion is what is good for us, then pleasure is only factor that we would take into account and an accurate measure of pleasure might not be particularly useful. We might consider that it is better for us to spend Thursday evenings reading poetry rather than playing pushpin even though we might get more pleasure from playing pushpin.