Adam Smith Institute

With speculation about Tony Blair becoming EU President intensifying, it's time to take another look at William Hague MP's wonderful take on the subject. Junksmith is almost beginning to feel sorry for Gordon Brown...

Much is being said about the Granite securitisation and Northern Rock. Here's something actually sensible on the subject. And here's the FT taking that something sensible and expanding upon it.

Something else deeply unsensible: how can you write an entire chapter of a book on inflation without mentioning the two words "money supply"? 

Yet more: moves afoot to harmonise EU taxation: the apparent logic is that having tax competition will, umm, allow people to compete. 

Answering George Monbiot's accusations. If only George understood the subjects he was writing about... 

The Precautionary Principle is often likened to Pascal's Wager: here's why it isn't. 

Ever wondered why the amount ripped from you untimely in taxation only ever goes upwards? Because you're usually paying through the tax system for people who lobby for higher taxation. 

And finally, where all the education tax goes. 

Ferrovial's misfortunes may be London travellers' gain. The Spanish infrastructure group, which controls Heathrow, Gatwick, and Stansted (plus four Scottish airports) through its ADI (Airport Development and Investment) consortium, is under pressure from all sides.

The airport regulator (and recent ASI Power Lunch guest) Harry Bush seems likely to cut the return on the consortium's capital. The Competition Commission is also looking at the London airports monopoly, and may force the consortium to sell Gatwick. The economic slowdown has alarmed aviation executives, since holidays and business travel are some of the first things that people cut down on when times are tough.

All of which means that Ferrovial's shares have halved since last year, and its debts have soared. It needs to restructure fast. But the credit crunch has made that pretty difficult. Some commentators are speculating that Ferrovial will have to sell Gatwick, even if it isn't forced to by the regulator, just in order to make ends meet.

That would be good for travellers. When the Adam Smith Institute proposed the privatization of Britain's airports in the Airports for Sale back in the 1980s, we did not even contemplate the idea of the London and Scottish airports being packaged as a single unit. We were sure that a competitive structue with different owners would serve customers better. Now, more than two decades later, the regulators seem to be coming to the conclusion that we were right. It's a conclusion that air passengers - especially those who have to face the hell of Heathrow - came to a long time ago.

Fidel Castro’s retirement seems to offer a “once in a dictator’s lifetime” opportunity for Cuba to escape the injustices of Communism. However, with reports that brother Raul is of equal mind to Fidel, freedom could be as far away as ever. With the internal strangleholds over internal revolution, this may be a good time for the US government to change their policy towards Cuba, undermining the new leadership through trade and engagement.

If life is to improve for the people of Cuba, the US should consider ending its long-term trade embargo. It could be the necessary catalyst to move the country from the dead-end limitations of Venezuelan oil money to the limitless wonders of free and varied trade. However, President Bush (like those before him) is in a tight corner. The Cuban-American lobby puts strong pressure on the US to continue its embargo, a valid position in view of the many freedoms taken for granted in the US but routinely trampled upon by the Cuban government.

However, efforts like the Condozeela Rice led United States Commission for Assistance to a Free Cuba (CAFC) have failed. The best way to put pressure on the inadequacies of the Cuban system is to trade with them. Such a position was argued convincingly in the Financial Times last month. Cuba’s future may not come from the withered seeds of its home grown kleptocracy, the passing of power from dictator to dictator. Instead it could come with the inauguration of a new President and a change of US policy: from the energised democracy, ninety miles across the Straights of Florida.

41. "Privatization has given to a few hands industries and services which should belong to all of us."

The term 'public ownership' is a misnomer. The state sector may have the name of the public filled in on the dotted line, but the public do not own it in any meaningful sense of the word. All of the attributes of ownership, such as control, the right to determine what use is made of it and under what conditions, is determined by the bureaucracy in command of it. Far from being owned by the public, it is owned in effect by the people who administer it. The public actually has more influence, via its choices and purchasing decisions, on private sector businesses than it can ever have over state industries and services. In those cases its influence is diffuse and diluted through the political process.

Because the public has no choice over whether to pay for state services, or to choose what quality of service is appropriate for them, they have no power over them. In their absence it is the managers and workforce who increasingly direct the services to meet their needs and convenience instead of those of the public. The phenomenon, called 'producer capture' by economists, results in services which score low in customer satisfaction, and in the output achieved for the funds they receive.

When parts of the state sector are privatized, they are moved into that part of the economy over which people do have some control, and influence. It is the public sector which is in the hands of the few, and the private economy which is subject to the will of the many. And where state industries are privatized by widespread share issue, large numbers of the public do achieve some genuine measure of ownership, as opposed to the total myth which is what public ownership has always been.

UK Chancellor Alistair Darling, announcing the nationalization of failed bank Northern Rock:

"This is a temporary measure. The long-term ownership of this bank must lie in the private sector."

US economist Milton Friedman, reflecting on politicians' plans:

"Nothing is so permanent as a temporary government programme."

Castro resigns and Brad Delong has to man the barricades against the mouth breathers. This is both most droll and quite possibly true on the end of the embargo.

Greg Mankiw, Larry Summers and William Polley all agree: you should read Capitalism and Freedom.

An entirely wondrous and excellent find at The Guardian. Still there as Netsmith goes to press... 

The last bank nationalised for borrowing short and lending long was Continental Illinois. We might not like the results at Northern Rock to judge by that experience. But it is just like Bargain Hunt, isn't it?

Sausages and laws: you might actually prefer the tour of the abbatoir to this description of the legislature. 

A possible step on the way to a hydrogen economy. 

And finally, waiters everywhere are cheering wildly.

The Adam Smith Institute and its supporters think that a range of policies covering every area of government is needed to improve life and prospects in Britain. We think that a flat tax would improve the economy and the range of choices open to people if they could spend more of their own money. We think that universities would do better if they secured their independence from government and were free to pursue their own admissions and tuition practices. We'd like health services that responded to the needs and priorities of patients, rather than to the targets which government and its managers preferred to deliver. We think that much of the regulatory burden could be replaced by industry wide codes of practice and a legal regimen that specified general objectives whose details could be filled in by accumulated case law of test cases and tribunal decisions.

The list of these desirable and necessary changes is a long one, but if we had to pick one out for fast-track priority action, it would probably be the schools. Long an ideological battleground, a social laboratory, and a factory for inculcating fashionable attitudes, many of the state schools have failed to bring out the full potential of their students. Indeed, all too many have even failed to equip them with the basic educational skills needed for a decent life.

It is not that state-produced education needs to be changed; it needs to be ended. Schools should be independent, setting their objectives according to the wishes of parents, headteachers and governors. It should not be a decision of government to replace A-level examinations by a certificate, or to abolish oral tests from language qualifications. It should be up to the school to decide which exams are appropriate for its students, and for various exam boards to offer different alternatives.

City academies are not the answer, and neither are grammar schools. Both are part of the answer because the desired outcome is of a variety of different types of school so that parents can choose one they find suitable. Government's role should not be that of running schools and employing teachers, but of ensuring that everyone has access to a decent and appropriate education. If they were allowed to spend the state funding in schools they choose, like the Swedish model, all parents would be able to choose quality education for their children.

This should be coupled with moves to make it very easy for new schools to be set up, whether by parents and teachers getting together, or by educational organizations taking the initiative. The key factors are free choice for parents and a wide range of choices for them. Yes, we need all the policy changes in other areas, but we need this one most of all, and we need it soon.

At last, after four months of dithering, the UK government has finally decided to nationalize the failed bank, Northern Rock. To their credit, and as if to show how far they have grown from their Old Labour roots, they declare that this nationalization will be "temporary". But as the economist Milton Friedman once noted, "Nothing is more permanent than a temporary government programme".

This particular temporary measure may indeed last a lot longer than the government intends. It's going to be very difficult for the government to extract itself from this business. The new boss that they have put in charge – Ron Sandler, who has appeared at Adam Smith Institute seminars on financial-services regulation – is, it seems, not being paid £1m a ayear to stabilize the bank and quietly return it to the private sector. On the contrary, he says he intends the Rock to "compete vigorously" with the other banks and mortgage lenders.

Right: so the government is going to be running an enterprise which aims to take on, and take business from, the private sector. Until recently the Rock had a fifth of the mortgage business, so it remains a potentially big player that the government's got hold of. And that's not good: London's reputation as a financial market has rested on the fact that governments have let the market get on with it and do not interfere in the running of particular firms.

The government says that nationaization is good for the taxpayer (though estimates suggest that the process could cost us each £3,500). But it's not good for the existing shareholders, who threaten the government with court action over their 'theft' of the bank. The government will brush off these gadflies – but they will be buzzing around, irritating ministers, for years.

There will be even less joy for ministers when they see a bank that they control evicting people and repossessing their homes because (thanks to the credit crunch) they can't pay their mortages. The press will have a field day with that.

If I were a minister now, I think I'd be stepping down and planning my career in the City.

40. "The free market does not work in practice because there is no such thing as perfect competition or perfect information."

The free market needs neither perfect competition nor perfect information. It works on the basis of what there is. Textbooks might talk of such things, and they might be used to make pretty equations and graphs, but they have nothing to do with the real world.

In the market place there is competition all the time. Sellers are competing to sell products at different prices, and buyers are bidding to buy them. When supply is abundant, sellers might have to undercut each other to get their goods sold. When goods are in short supply, customers might find themselves bidding against each other to obtain them. This goes on constantly, changing from day to day and even from moment to moment as new information emerges. None of this has anything to do with perfection. It is a continual process in which available information is acted upon. It does not have to be perfect; all it has to be is better.

Textbook economists might talk of 'equilibrium prices' at which supply matches demand, but no-one has ever seen such a thing in the real world. On the contrary, prices are changing constantly and vary at different times between different types of seller and between different locations.

Some people take the 'imperfection' of markets as a signal to advocate central planning and state direction. They want intelligent minds to supersede the confusing jumble of market interactions and impose a rational order on things. But there is no such thing as perfect planning either, and attempts to plan economies have proved laughably inferior. They have less information, less motivation, and are less responsive. Comparing the record of free markets, imperfect as they are, with planned economies and their imperfections, one sees the market economies winning hand over fist.

Many people leaving comments on our 'Common Errors' series have suggested that we produce a compilation of the errors. Well, they will be happy to learn that just such a compilation is nearing completion.

On March 4th the ASI will be launching a new book, Freedom 101 by Dr Madsen Pirie, which collects all 101 common errors into a paperback single volume (PDFs will also be available from the website). Since the series was always intended to help students and young people to confront conventional wisdom and persuade their friends of the case for liberty, we are happy to announce that Jean-Paul Floru (left) – the driving force behind Freedom Week – will be speaking at the launch.

As Guido points out, the nationalisation of Northern Rock means that the government will be making someone homeless by repossession on a defaulting mortgage at the same time that the government has a duty to house said people. And this might be the first such person.

On sub-prime, an opportunity for some experiments. Given that each of the 50 States have different rules abour foreclosures etc, we can study over the coming months which set of said rules work best. 

Education vouchers: they benefit not just the children that leave failing schoiols, but those that stay in such failing schools as well. 

Some of those global warming numbers are starting to look decidedly iffy.

The comparisons economists make: leaving your wife is just like having a colonoscopy. 

Discussing MEPs' expenses. All done behind closed doors, of course. 

And finally, harsh but fair. 

Anatole Kaletsky's take on the Northern Rock nationalization in yesterday's Times was spot-on:

Nationalisation... made sense only as a necessary legal stepping-stone to the orderly liquidation that Northern Rock required as soon as it ran out of money in September... To use nationalisation to keep the bank in business and its staff in state-subsidised employment would be a travesty of all the economic principles that “new” Labour has claimed to believe in.

His final paragraph is particularly telling:

All in all, what Mr Darling announced yesterday was a financial and political disaster of almost unimaginable proportions. The Northern Rock saga did not end yesterday; the fiasco has only just started, with the Government now officially in charge.

39. "Even though people are richer on average, they are no happier, so we should stop pursuing economic growth."

Surveys show roughly the same proportion of happy people as there were 20 years ago when standards of living were lower. From this Lord Layard and others conclude that economic growth does not bring happiness and that we should aim for a simpler, more equal society rather than for a wealthier one.

There are things that can be said about wealth brought by economic growth. It makes more opportunities available. At some levels it can remove unnecessary sources of unhappiness such as disease and starvation. It can make it easier to achieve goals, or to lead a more varied and fulfilling life.

Surveys about happiness also show that people say they are happier when they feel their circumstances are improving. They are less likely to profess happiness in a wealthy society that is static than in a less rich society which is advancing. It is the improvement which counts, not the actual level. Jefferson rightly pointed to "the pursuit of happiness" rather than to any given level of it.

Humans are not the sort to enjoy static contentment. They seek challenges and the thrill of achievement. The peaceful calm of the Lotos Eaters is not for them, and neither are the sheep-pen and the secure pasture. Those who think of happiness as needs satisfied fail to spot that those needs include challenge and change. Humans are aspirational, seeking much more than the provision of necessities. Better a human dissatisfied than a pig satisfied.

It is not up to economic commentators to say what levels of wealth and achievement people are to be allowed to make them happy enough. People themselves will determine the limits, if any. To achieve a society in which more people are happy, far from curbing economic growth, we will aim at one which affords its citizens opportunities for advancement.

The Adam Smith Institute is saddened by the news of the death of the former MP for North Norfolk, Sir Ralph Howell.

A resolute free-marketeer, Ralph was the author of the ASI reports Why Work? and Why Unemployment? In the first, he pointed out how the unemployment and welfare benefit system – alongside high taxation – created a poverty trap. When people received generous benefits when they did not work, and were taxed when they did, is it any wonder, he asked, that we had high unemployment rates? All the more so when moving to work meant losing benefits – leaving some families facing an effective rate of tax of 70% when they tried to move off benefits and into employment.

Ralph's second ASI report suggested a solution. Ralph was one of the first people in the UK to mention the W word – workfare. He made the point that people who are fit for work should either be working, looking for work, or training for work – and not just living off the taxpayer while doing nothing. After all, even Lord Beveridge, the intellectual architect of the welfare state, imagined unemployment benefit as no more than a temporary form of assistance. Various US states, observed Howell, had a policy of making people do at least something in return for their benefits, something that would hopefully get them back into the active workforce. After all, a job is the best welfare benefit there is. The existing policy trapped people in poverty and unemployment and, over the years, made them less and less likely to get back into work.

That was, of course, almost twenty years ago. And now, it seems, the government is racing ahead to try to prove itself more radical than the Tories and introduce exactly what Ralph Howell proposed – ending the poverty trap and prompting people on unemployment benefit to take active measures to get themselves back into work. It's taken a long time, but then Gordon Brown is a very cautious man. But good ideas do come through in the end.