UK Chancellor Gordon Brown has done many things the Adam Smith Institute does not support. He has greatly increased taxes, leaving less money for investment and demand in the private sector. He has introduced stealth taxes and made taxes so complicated that people do not know how much they are paying. He has pushed huge sums at the public services, sums which will be 80 percent soaked up in pay increases without extra output. He has heavily taxed pension funds, causing a crisis to what was easily Europe's best pensions industry, and impoverishing many who thought they were saving enough. The list goes on.

He has perhaps earned two cheers, though. His first act was to give the Bank of England the independence to take interest rate decisions based on the need for sound money, and distancing it from the political needs of the government of the day. This has worked well so far.

A second early action was to introduce the rule that borrowing must not exceed investment over the course of a cycle. It looks highly unlikely that he will keep that pledge, but it may have been a good one to make, in that it allows for longer term thinking than has been customary.

He has not by these two actions managed to balance his books with the Adam Smith Institute, but the plus pan is not completely empty.

Our lecture last night with Bjorn Lomborg, author of the Skeptical Environmentalist, gets write-ups on BBC News and Samizdata.

Attempts were once made to link the business cycle with sunspot activity, which has roughly the same span and can be linked with weather and harvests. The modern business cycle is irregular and has a large psychological component.

Traditionalists say that the down part is necessary to clear away the dead wood of inefficient businesses and reallocate capital to the dynamic, growing ones. They say the recent economic dip has not been deep enough or long enough to achieve that, and that it must come before another boom.

The revisionists say that we have finally learned to smooth the cycle. By making credit easier through interest rates, we can keep consumer spending strong. Low interest rates boost house purchase and prices, enabling more borrowing. The sustained demand carries the economy through the dip. In the UK the recent one was not even a recession at all.

If the traditionalists are right, the apparent recovery will be temporary, with the bears waiting to pounce. If the revisionists are right, we could be three months deep into a seven or eight year boom, maybe even longer than the last one. They point to events like the Asian downturn (or ‘flu,’) and the Russian collapse, either of which could have triggered a slide into recession. Neither did, perhaps because of the steady hand of Alan Greenspan at the Federal Reserve Bank. Which view is right?

No doubt the traditionalists will sell and the revisionists will buy. And those who can’t stand the doubt should get out of the market.

Matthew Parris points out in the Times that the green revolution, pioneered by Nobel laureate Dr Norman Borlaug, has saved hundreds of millions of lives and improved the environment, and that GM crops might do likewise. He argues:

First, world population is not - contrary to widespread belief - spiralling out of control. Though still our planet's biggest worry, the rate of growth shows signs of reducing. Most projections see a gradual flattening of the increase until a point after the middle of this century when the world population may stabilise at about double its present level.

Second, starvation is not an effective form of birth control. In fact, the more secure and well fed people become, the fewer children they have. The harsh but seemingly plausible argument that producing more food is pointless because extra food will be met by more hungry mouths to feed is wrong.

Third, better crop yields do not add to the pressure on rainforests or on wild or marginal land: they reduce it. To hack into hillsides, swamps and woodland is often the resort of agriculturalists who are desperate.

Richard Littlejohn writes in The Sun that Britain today is like Britain in the 1970s, adding that: "Nothing much works in Britain 2004, if it's anything to do with the state."

Today's Guardian says that: "Genetically modified crops will not help the developing world." It argues that the move from inefficient, subsistence farming, to more efficient, science-improved farming, would mean that lots of people would lose their jobs.

Let's look frankly at subsistence farming. Has any population, anywhere in the world, become rich as a result of subsistence farming? The answer is no. Subsistence farming, backed by laws that prevent a population from moving up into other industries, ensures that a population stays poor. Some might well like us to subsidise this by transfer payments from the West, or by buying "fair trade". But this has a limited effect, and is hardly sustainable development. Why not instead let people develop into producing products that bring a better return?

The problem with the Guardian's analysis is that it is static. It only looks at one stage. But real life is not static: it is dynamic. Yes, the numbers of people doing farming will decrease. But, as long as countries allow a free-market, the people will move into better paid jobs. They have done wherever the market has been allowed to exist.

Imagine a socialist country where there is a single, state-owned producer of cola. It would be claimed that this market is better than the capitalist system of cola production. Instead of consumers being exploited by brands, they would receive cola sold at the cost of production. The poor would benefit. The product being produced would be superior to that produced by the capitalist economy as the ingredients would not be decided purely according to financial gain, but by a council of nutritional experts who would work in the best interests of consumers to produce a healthy product.

Of course, the idea that cola would be better produced in this sort of an economy is nonsense. For a start, I like the taste of Dr Pepper and find Diet Coke watery. The market provides different types of product for different consumers. A single state producer of cola would not have to compete in a marketplace and therefore there would be no incentive to provide exactly what consumers want. Instead, as happens time and time again in the state sector, the forces of political correctness would capture it, producing what government thinks consumers should be drinking. Cola would be of the 'diet' variety and without caffeine. University lecturers would appear on Newsnight supporting the government's virtuous work in reducing obesity. Unfortunately, the drink would be disgusting.

As for the claim that without brands cola would be cheaper, this is an absurd fallacy. Brands have to compete against one another in a marketplace. If a can of Dr Pepper doubled in price, I would move to Pepsi. But, moreover, in the world of brands, there are economy brands. Safeway and Tesco produce their own colas, each cheaper than the main brands - and, I would contend, cheaper than the state could produce.

A state cola manufacturer would be inefficient, shielded from the rigours of marketplace. Costs of production are not fixed: the profit motive encourages investment in new techniques to bring costs down. Brands in the marketplace have a duty to shareholders to keep costs down and are forced by market forces to keep their prices down. In the market, consumers snub products they do not like, as has happened with Virgin Cola. Brands also help guide those who do not normally buy in a certain market to know what is a safe bet: when buying trainers, a person can learn that while brand X are fashionable they also fall to bits - without conducting major market research. In other words, they provide cheap information.

One of the most unhelpful theories taught in basic economics courses is the notion of perfect competition, which has been captured by anti-capitalists to attack capitalism. They argue that brands are anti-market because they prevent perfect competition, a state where products are identical and where companies can only make 'normal' profits. However, there is no such thing really as perfect competition, nor would it be desirable. And profits are never "normal". In markets, different firms compete not only on price, but also on image and quality. In the car industry, the cars from Peugeot, Ford and Jaguar compete, but the products are not homogeneous. Consumers are made better off by this lack of sameness: manufacturers add new features and better designs in an attempt to lure custom, leading to ever improving products. In short, the perfect competition model is wrong because it oversimplifies how the market works. Ludwig von Mises, founder of the neo-Austrian school of economics, would no doubt describe the model as "two hypothetical curves."

Add to this the fact that brands help consumers make choices about which products to buy. I know that if I buy sandwiches from Pret a Manager, they will be of a high quality. I may end up spending more than buying from Mrs Globbin's shop, but I am paying for the peace of mind. When I see a can of Dr Pepper for sale, I know it is a product I enjoy and can trust. What the "no logo" lobby fails to understand is that brands have to maintain high standards otherwise their image suffers. If a customer found glass in a can of cola, that brand would suffer massive negative publicity, lots of column inches, and a decrease in custom.

The profit motive means that producers have to provide what customers want; otherwise their brands will not get repeat custom. As Adam Smith pointed out in 1776, self-interest on the part of the producer makes producers "as if by an invisible hand" produce good products. State-owned producers and anonymous, unbranded products do not have to be as responsive to consumers. If I buy an unbranded pair of trainers and do not like them, I might avoid the shop, but I will not know which manufacturer to avoid next time. That is why I am Pro Logo.

Spiked Online isn't too impressed with Government-commissioned thinking on school exams:

'The time for reform has come', said Mike Tomlinson, leader of the government-commissioned working party on the future of England's schools examinations system, as he produced his interim report on 14-19 education.

What, again? Over the past few years England's exams have undergone more reform than the pupils sitting them have had hot dinners. Each one has had the effect of diminishing the standard of work expected from young people, as a challenging curriculum and demanding tests have given way to content and assessment designed to put children under less pressure. It's not yet more exam reform that is needed, but higher educational standards - and an end to the obsession with qualifications altogether.

The singer Billy Bragg's idea for House of Lords reform - party lists reflecting the percentage vote in general elections - is better than the mass quango we are heading for, but it's a highly 'political' system that still gives too much power to party bosses.

The trouble with a list system is that the party whips who draw up the lists would want to choose only party hacks. So the House of Lords would lose all those able but independent-minded people from the worlds of art, literature, broadcasting, sport or public administration. People like Lord Winston, or Melvyn Bragg, or Lord MacLaurin -- even Lord Archer. People who have got real experience outside the closed world of politics, and who can make a really useful (did I mention Lloyd-Webber?) contribution to the decision-making of the nation.

So instead of dividing the Lords according to the share of votes cast, let's give the politicos a shock. Divide it on the number of people actually voting -- with the 'stay at home' vote represented by true independents of experience and calibre. Given the rising public disdain for politicians and how fed up people are with elections, who knows - the free minds might soon end up in the majority!

The UK government has decided not to enforce a complete ban on smoking in bars and restaurants. The reason? Nothing to do with public health. It's just that the government thinks a ban would be deeply unpopular and doesn't want to be blamed.

But it's goodbye nanny state, hello nanny in jackboots. Instead, the government is going to allow local authorities to introduce bans. Local government are the folk who ban window-boxes and nativity plays, so imposing a smoking ban should be just a Saturday-afternoon job as far as they are concerned.

Pubs and restaurants are private property. Why should local bureaucrats decide how the owners run them? Some people might prefer smoke-free pubs, others not: why can't we have some of each, as decided by what customers choose? People know the risks from smoking, and probably think the risks from passive smoking are greater than they are: so they don't have to go into a smoky pub if they don't want to. And if people do want to go to a smoky pub, they are fully aware of the risks.

But these bans will soon become universal, unfortunately. Local councillors will want to avoid lawsuits from staff and customers who say they've been 'passive smoked'. And council bureaucrats will take delight in making our lives as miserable as theirs. I don't smoke, but I regret that others are going to lose the right to do so.

Oliver Letwin MP announced today the new "Medium Term Expenditure Strategy" for the Conservatives. Broadly, public spending will rise at 1% below GDP growth so that there will (he hopes) be room for tax cuts, which he argues fairly persuasively should be made. The mechanism he sets out for achieving this is to monitor expenditure in five broad categories - the Cost of Government, Health and Education (as one category), Pensions, Social Security, and Other Government Departments.

More importantly, the Tories have finally mentioned the prospect of tax cuts in the early years of their next administration, even if they haven't come up with any specific proposals. The combined effective marginal rate of benefit withdrawal and tax is higher than 70% for certain people. Taking effective action to combat this is essential.

London's Congestion Charge approaches its first anniversary. It raises less money than expected, but traffic jams are much reduced and journey times are shorter. On the other hand businesses report takings down. John Lewis says their Oxford Street store is 9 percent behind their others since the charge came in, while Politico's Bookshop is to close in March, becoming internet-only, citing a 12 percent drop in business since the charge was introduced. This article gives an update.

Does this count as success?

Our favourite blog this week is Marginal Revolution, written by the brilliant Tyler Cowen and others. Although American, it talks about British issues too. Of particular interest this week are blogules on how much of the organic food in Britain is genetically modified, and on how the British government intervenes to keep foreign paintings in the UK. Take a look.

In 1990 an American office supplies company entered the British market. It won business away from many British-owned firms. Many of the losers were small, local businesses. It helped Dudley, an established, national firm go into receivership.

Isn't it terrible, some say, how American multinationals are allowed to put British firms out of business?

The company in question, Viking Direct, wasn't always a big firm. It got its market share - in America, Britain and elsewhere - by being the best. By "best", I mean it offered what buyers themselves found valuable. I do not mean it offered what leftists say buyers should care about.

In Britain, it offered next day delivery. Most of its competitors took several days to deliver because they didn't keep much stock, or didn't keep the right things in stock. When competitors caught up, Viking introduced same day delivery in London, Manchester and the Midlands. It offered a free trial for 30 days on everything bought. All the staff answering calls were empowered to do everything, because customers hate being shifted between departments. And Viking introduced very good online ordering, whereas those established firms that bothered with the internet, on the whole introduced cluncky and frustrating systems.

Yes, Viking has been bad news for the established British stationary firms. But good news for consumers. The old office suppliers were lethargic. Those wanting to stay in business have had to improve. New firms, like the internet-based Euroffice, have entered the market, with considerable success - by understanding Viking's success.)

Oppose multinationals if you like, but it won't do any good for our economy. Without globalization we'd only gain from the work of British entrepreneurs. But having overseas entrepreneurs also coming up with ideas to improve our lives is better. If it's good having Yorkshire entrepreneurs selling in London, surely it's also good having American entrepreneurs selling in Britain.

The UK Government announced details of its Pension Protection Fund, and it
is to charge a flat fee on funds instead of working like a traditional insurance scheme and charging a premium based on the risk posed; and all pension benefits will be insured by the same monopoly provider, a statutory body. We already require companies to have Public Liability Insurance. Instead of creating the Pension Protection Fund, the Government should extend this principle to require pension schemes to insure some of the benefits they provide using the private market.

The UK government has announced plans to create its own version of the FBI, the Serious Organized Crime Agency (which will no doubt be known to this football-mad administration as SOCA). Fair enough, you might think: how can disparate local police forces fight the mafias?

But I still find it unnerving. It's not just that it's going to employ 5000 people (and where are they going to come from - yet more new public job-creation, or taken from existing hard-stretched police forces?). Nor that it will cost zillions. What really worried me is the Prime Minister saying that perhaps the burden of proof in organized crime cases would be lowered to, in order to make them easier to prosecute.

Let's face it, earlier generations fought and died to create the rule of law in what became the UK. Now we're just tearing up those rights. Already we've suspended the right of silence in fraud cases. If you call someone a terrorist you can hold them for weeks without trial. And now, if the state accuses you of drug-running or pimping, forget your ancient civil rights.

These diversions from the rule of law are too easy for the authorities to exploit. The RICO racketeering laws in the US are now routinely used against any businessperson accused of any fraud - since the penalties are so draconian, people gladly plea-bargain and admit to some lesser charge, even if they are not guilty of it. That's not justice, not the rule of law.

You'd have much less organized crime if you made fewer things criminal. The Chief Constable of North Wales has said that even heroin should be decriminalized because that would be better than what we have now. He's probably right. Same with prostitution. We don't need this new agency and this new opportunity to violate our rights. We need freedom.

The US Federal Aviation Authority confirms that Scaled Composites has applied for a licence to send a manned vehicle over 60 miles high on the first private enterprise space flight. Should this even need a licence? It's not exactly rocket science, is it?

Over a hundred years ago Sir Arthur Conan Doyle had Sherlock Holmes send letters inviting people to tea and receiving all the replies on the same day. Since then the mail service has rather deteriorated, with one facility after another being withdrawn. No more Saturday delivery; no second delivery; no Sunday collection; no timed collections.

The Royal Mail has been prone to all that you expect of a state monopoly, but a story in today's Times indicates that change may be on the way.

While flicking through Hayek: a Commemorative Album, I came across this real gem of a letter, sent by F. A. Hayek and published in the Daily Telegraph in 1975:

I find it difficult to trust "the first comprehensive, on-the-record Press interview... since his February 1974 election" which Time magazine claims to have been granted by the Prime Minister.

Is it really conceivable that a British Prime Minister is such a fool as seriously to maintain that "Germany, of course, had the advantage of the total destruction of their industrial equipment, while we were struggling with old looms, old machine tools and the rest"? If that is so, why not proceed at once to the total destruction of most of Great Britain's industrial equipment?"

There's been a lot of worry about programming jobs being transferred from Britain and American to India. Brian Micklethwait says that we shouldn't worry, and that we should avoid falling for the Fixed Quantity of Programming Fallacy.

It's not Ryanair that's at fault in the Charleroi airport-discounts controversy. It's state intervention in the aviation industry.

Airports should be free to charge whatever they want. Why not offer a discount to a big customer - just as suppliers of food or clothing offer big discounts to their biggest retail clients? That's just good business.

The problem in aviation is that European airports are mostly owned by the state. And we're right to be concerned about how state money is used: we've had enough of governments messing up markets by subsidizing things in order to buy votes. So we need strict rules against subsidies.

A commercial airport owner might well decide to reduce prices in order to attract in a higher volume of business. When the state does it, though, you can't tell whether it's a sound commercial decision or just more of the usual political interference.

The solution is not to stop European airports offering discounts. It is to privatize them. Then they can set their own prices and nobody will be at all bothered. Indeed, the state-owned airports themselves should lead this campaign. They have nothing to lose but their chains; they have world travellers to gain.

Stephen Moore writes in National Review Online pointing out the reality President Bush's budget, which is being given today:

The president will predictably boast that this is a lean budget that spends money judiciously on top national priorities like homeland security and not a penny more. He will try to assure conservatives that this budget limits the growth of federal non-defense, non-security spending (social programs) to less than 2 percent. His Democratic rivals will complain that this is a penny-pinching budget that under-funds education, health care, the environment, and on down the line.

They are both wrong. A federal budget that will spend more money in a single year than the entire GDP of France and three times what it cost to fight World War II can hardly be disparaged as inadequate or celebrated as tight-fisted. Uncle Sam, Inc., will spend more money in just this year than it spent combined between 1787 and 1900 — even after adjusting for inflation. Ironically enough, we are now celebrating the ten-year anniversary of Newt Gingrich's bold declaration that "we Republicans will make government smaller and smarter." It didn't exactly turn out that way, given that the budget is now nearly $1 trillion larger than it was when the Republican revolution was launched.

Bush has achieved a great deal. But he has failed thus far in spending. Far from being a conservative, he has been so far rather socialist. Is he by any chance trying to buy a second term?

I got an editorial in my inbox today from the New Economics Foundation. It says that:

we are turning ourselves into slaves - and creating a world where less and less is possible for all but the giant biggest corporations. What can we do about it? We can find new ways of creating a range of new kinds of money that are locally controlled, and persuade the government to start issuing its own interest-free money, without borrowing it from the banks. We can also limit the ownership rights of investors.

The editorial starts from a false premise. The world is moving from people doing back-breaking subsistance farming to leading easier, wealthier lives. The world is also becoming more equal. We in Britain lead longer, more diverse lives than ever before. We travel more, eat better food, and have access to more intellectual content. It is simply not true that "less and less is possible".

The problem with the "new economics" is that, despite its utopian intentions, it has three major logical and inevitable consequences: poverty, the death of science, and the return of the Middle Ages.

I'll deal with the first consequence (leaving the second and third for the comments). "New economics" causes poverty by preventing the invisible hand of the market from working. Elsewhere in the editorial, we are asked: "Why can't people afford to set up quirky, colourful and interesting shops?" What the author means is that shops should receive payment regardless of whether there is any demand. From whom will they get the money to fund those shops? If they take away ownership rights from investors, they will soon see negative economic growth. There will be no wealth created to pay for the subsidy.

Considering that every society which has taken away ownership rights has experienced poverty and hunger, what makes supporters of "new economics" think they can get it to work?

They may claim to support sustainable development. Unfortunately, what they propose is neither sustainable nor enabling of any development. I'm not even sure that it is very new.

First they came for the tiller's job. I didn't object because I liked using the plough. Then it was the sowers who went as that seed drill came in. Pretty soon the spinners' jobs were taken by Hargreaves' spinning jenny and Arkwright's water frame. It all meant cheaper goods for me.

Then it was the weavers. Then others. Now they're after my job, with a machine to pull the cart along. There's no-one left now to help me. I should have joined a union at the start of it and campaigned to save ALL jobs.

They tell me it's part of some economic revolution and there'll be new jobs coming along to make us all richer. I say 'prove it.'

Mark Skousen's The Making of Modern Economics is an engaging account of the lives and theories of economists since the Adam Smith. The author, a free-marketeer, justifiably covers the Austrian and Chicago schools of economics with some considerable depth. Skousen's book acts as a counterbalance to plethora of leftist accounts of economic theory, and his book is not sympathetic to Karl Marx. At the same time, Skousen is fair in his assessments, and is quite prepared to be negative about those economists with whom he would naturally agree.

The central character of the book is Adam Smith. 'Our hero,' says Skousen, 'has gone through untold triumphs and tragedies in the unfolding of over 200 years of economic history. Sometimes he appears lifeless following the blows of his opponents. But he seems to have nine lives and always makes a recovery.'

The book is the winding account of how economic theory has moved away from the system of individual liberty put forward by Smith, and how it has meandered back again. It is clear that the Austrian and Chicago schools are responsible for rescuing us time and time again from the forces of big government. The explanations of theory are succinct and clearly written in the main, but the real beauty of this book is how it weaves in stories about each character. The history of the individuals is fascinating and insightful.

The book is clearly designed to look like a textbook rather than a history book, presumably because the author wishes it to be used by university economics departments. The result is that the text is broken up with lots of subheadings and boxes, helping to make it a very easy read.

I found The Making of Modern Economics impossible to put down and would recommend it to anyone interested in economic thought.