Friday, 2 August 2013

Jane Austen's ring and valuing the future

A ring that once belonged to Jane Austen came up for auction recently and was bought by US singer Kelly Clarkson for £150,000. The UK government has, however, subsequently put a ban on the singer taking the ring out of the country. The Culture Minister said 'I hope that a UK buyer comes forward so this simple but elegant ring can be saved for the nation.'
      This is clearly the kind of policy that will split opinion. Some are going to think its important to save our heritage, and some will think it stupid to stop the sale of a ring worn by an author who died nearly 200 years ago. What does amuse me, however, is that just about every spokesperson I have heard criticising the policy appeals to economic theory to back up their case. Listening to them talk you could easily get the impression that hard-headed economic logic leads to only one conclusion - sell the ring. This is wrong!
      The basic argument I heard more than once goes something like this. Kelly Clarkson paid £150,000 for the ring. If the UK populous really value the ring at more than £150,000 then they would do something to buy the ring, e.g. every member of the Jane Austen fan club could contribute £50 each. The fact that this has not happened shows the populous of the UK does not value the ring at £150,000. So it should be sold. This logic is flawed on at least three counts.
       First, keeping the ring in the UK is, in large part, a public good. Which means that individuals will try to free-ride on paying for it. Or equivalently individuals will wait and hope that someone else pays the money. The collective willingness to pay could easily exceed £150,000 and yet the money not be forthcoming because  everyone is waiting for everyone else. Indeed, measuring the willingness to pay for a public good is incredibly difficult - something called the preference revelation problem. Because of this, government intervention is justified in providing public goods.
       Second, there are large transaction costs in organizing lots of people to contribute towards the ring. That means raising the £150,000 needed to buy the ring is going to cost a lot more than £150,000. This will exasperate the public good problems. Again, government intervention is justified when transaction costs are high.
        Both the reasons above justify intervention on behalf of the current population of the UK. The ring, however, is to be saved for the nation. That presumably means future generations should count too. But we have a problem: future generations are not born yet and so cannot contribute towards keeping the ring! When valuing the ring we should estimate the value that future generations will put on it. This amount should be discounted a little, because, for instance, an asteroid might kill us all in 50 years time. But, the discount rate should be relatively small, because it is unlikely an asteroid will kill us all in 50 years time. Yet again, government intervention is justified to protect the interests of future generations.
       I'm not saying that the UK should keep the ring. But, I am saying that economic theory can go either way on this one. Hard-headed economic theory does not inevitably mean selling the ring. This is an important point to understand because the principle is very general. Many things are analogous to Jane Austen's ring. The natural environment probably being top of the list. For the same reasons economic theory may back saving Jane Austen's ring it also backs saving the environment (despite what many would have you believe).     
     

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