Adam Smith Institute

Says Barack Obama:

I believe that America's free market has been the engine of America's great progress. It's created a prosperity that is the envy of the world. It's led to a standard of living unmatched in history. And it has provided great rewards to the innovators and risk-takers who have made America a beacon for science, and technology, and discovery.

Very well said. But if well done is better that well said, why did he:

• 1) Vote against the Central American Free Trade Agreement?
• 2) Advocate raising minimum wage?
• 3) Attack Hillary for her support of NAFTA in the 1990s?
• 4) Vote for, and attack Bush and McCain for opposing, the recent farm bill, which would increase subsidies by $20bn, make the government buy sugar at twice the world price, and give subsidies to farmers with incomes of up to $1.5 million per year? (See here and here).
• 5) Propose raising the capital gains tax?
• 6) Advocate fair, not free trade, which will halt the rapid economic growth in poor and industrialising nations?

If the free market is the engine of economic prosperity, why hit the brakes and turn off the vehicle? The enlarging free-trade block in Europe, British economic reforms in the 1980s and 1990s, economists across the world, and the end of the cold war, all show what Adam Smith said in the first place — that the invisible hand, not central government, should guide our economies.

Simon Heffer is usually a little bit too angry at the modern world for my tastes, but every once in a while his anger is justified. Last week the government was finally forced to do the sensible thing: make up for its abolition of the 10p tax rate by raising the personal allowance. Which is great, apart from the fact that even this minor tax cut will be financed by yet more borrowing (and will apparently only last for one year). In his column in Saturday's Telegraph, Heffer hit the nail on the head:

The £2.7 billion loan, at a time when we are grotesquely over-borrowed, is the final sign not merely that this man has no idea about sound economics, but that he [Gordon Brown] is unfit to see the country through hard times. Total public spending is around £617 billion a year. It would not even have constituted what accountants call a rounding error to make a saving of £2.7 billion in a total of that magnitude, yet Mr Brown could not bring himself to sack a few thousand from his overmanned client state, or trim spending elsewhere, like the private sector is being forced to do thanks to his mistakes.

Exactly. Any sensible organistion would seek to reduce costs and make efficiency savings in the midst of a downturn, but that never seems to occur to governments. A new report from the Taxpayers' Alliance has found that there are now 1,162 QUANGOs in the UK, running at an annual cost to the taxpayer of £64 billion. Couldn't Brown start by doing a little pruning there?  

And everything old shall become new again: more echoes of history in the modern world.

There might be something worse than the operation of orthodox economic policies in Latin America: the operation of heterodox economic policies in Latin America.

Might it be that America's much vaunted higher education system is not quite as it seems? With certain effects for our own?

A report from the by-election frontlines. Just who is the toff in Crewe and Nantwich?

If this is correct, that car emissions targets are being set by manufacturers' fleet averages, then it looks like a direct attack on the small luxury car makers.

Praise from this particular source might not be worth having.

And finally, a very personal delivery service. (Netsmith wants to know though, how did they get Eliott Spitzer to star in the ad?)

...Especially about the future. Tim Harford points this out in his column in the FT:

There is a simple reason why most economic forecasts are useless, which is that forecasting is hard. We don’t fully understand the underlying economic processes that produce the results we wish to forecast (growth, inflation, house prices), nor can we measure all the variables accurately, nor anticipate the sudden shifts caused by politics or technological change.

Now that is fairly obvious, and it's why economists have predicted successfully nine of the last three recessions. It might also be why I pay so little attention to macroeconomics (no, it's not solely because I can't get my head around the mathematical models) and prefer to assume that if we get the microeconomics of the incentives that people face at least roughly right then theings will pretty much work out OK.

There's a larger point there though: one that Hayek made repeatedly. We simply don't know enough about the economy to be able to plan it: if we can't even forecast growth or inflation, then how can we forecast sufficiently well to be able to plan anything else? The number of houses needed? The technological changes that are going to happen? The demand for sugar? It's simply not possible to do so thus we shouldn't even be trying.

Harford does point out that at least baby steps are being taken though. One major problem with the forecasts is that not only don't they anticipate changes called "structural breaks", a change in technology say which changes the necessary assumptions of the models. Not only do they not anticipate them (and thus make them useless) they fail to even recognise them when they have happened.

But even if structural breaks cannot be predicted, that is no excuse for nihilism. Hendry’s methodology has already produced something worth having: the ability to spot structural breaks as they are happening. Even if Hendry cannot predict when the world will change, his computer-automated techniques can quickly spot the change after the fact.

This is an advance: at least we can now say why our model has failed to mimic the real world, even if only after the fact. No doubt in another century or two we'll be able to predict such structural breaks and at that point perhaps planning, perhaps even socialist calculation, might be possible.

So, until 2208 we seem to be stuck with the only useful calculation and planning method we've so far discovered, markets and their interactions. It's good to get these things sorted out for a few lifetimes at a time, isn't it?

Earlier this week I heard Derek Scott, formerly Tony Blair's Economic Adviser, speak at the Economic Research Council (whose events are well worth a look).  His subject was "Reform: Past, Present and Future" and his insights were very interesting.

He said that the Thatcher reforms were huge, albeit incomplete. Two things helped her: (1) she came to power at a real turning point in British history, when everyone knew things needed to change; and (2) her election manifesto had been very clear on what she wanted to do, which gave her real authority.

That second point was particularly important. Although Tony Blair had a much larger majority than Thatcher, his manifesto had been very vague and so his authority was diminished. But despite this, and the Labour Party's left-wing 'intellectual baggage', Blair was determined to carry forward the Thatcher reforms, particularly in public services.

The problem was, said Scott, that Labour tried to drive reform from the top down, making services more accountable to the government, rather than to users. There was lots of change but not much reform. Now, he said, the government needed to really focus on putting patients in charge of education, patients in charge of healthcare, and local communities in charge of policing.

Labour's centralization was accompanied by a huge spending splurge, with success increasingly measured by inputs, not outcomes. Scott criticized Gordon Brown for taking the UK from a healthy surplus to a large and growing deficit. We need a good atmosphere for entrepreneurs, Scott said, and Brown's tax, borrow and spend approach has undermined it. He suggested that the government establish a new fiscal rule: public spending as a proportion of GDP must fall from 43% to 35% in the next ten years.

All of which was music to my ears. On this evidence, it's a shame Derek Scott wasn't running the Blair government's economic policy, rather than just advising on it.

Your important Saturday roundup of this week's beer stories.

On other comestibles: yes, really, attempting self-sufficiency in foodstuffs raises their price.

How to translate a formal business letter into collquial English (even if of the American variant).

Yes, regulation really does impose a burden upon business.

As of course governance itself imposes a burden upon everyone.

And my oh my, unintended consequences of government and regulation. Who would have thought it possible?

And finally, this week's stunningly good invention.

So we're to have an extension of the right to ask for flexible working hours are we? Quite why anyone thinks this is a great step forward somewhat confuses me: everyone already has the right to ask "Hey, Boss, may I?" and while many might not like the answer given these new "rights" don't change anything. For specifically all that is happening is that you now have the same right to ask that you've always had when negotiating your terms of employment.

That aside, some seem to think that it's a great idea:

A "win-win" in which families are happier at home and work, says research by Cranfield School of Management.

Perhaps, but they do really seem to have missed the most important part about part time working (for this is what is meant by "flexible").

The fact is that 14 million people, far more than the 10.5 million covered by Walsh, already do flexible working, part-time and reduced hours, voluntarily agreed.

Almost half are men, but those who work flexi-time for childcare reasons are overwhelmingly women.

Quite, and there's the explanation of part of the gender pay gap for us as well. Part time workers get paid less per hour than full time ones do, so they cost the employer more in overhead.

Another description of "win-win" in economics is the search for that all too elusive free lunch. In this case maybe it doesn't exist. Perhaps people would be happier if they could work fewer hours, but perhaps not when they find out that they'll get less pay for each of those shorter hours as well?

Given that there is in fact no new right being offered here, might we assume that people have already looked at this trade off and made their own decision?

Essentially then, we've just had a political announcement which means nothing much at all. Honestly, I can't remember the last time that happened, can you?

Friday's Times featured an op ed. article questioning the abuse that politicians are receiving from the press and the public at large. Focusing on the recent turn against Prime Minister Gordon Brown, the piece suggests that the current abuse is now more vitriolic than in the past and is indicative of the bad character of the people making such judgements.

On the first point, the criticism of Gordon Brown is nothing new. Public figures have always come under intense criticism deep into the annals of history as well as in more recent history. For welfare loving socialists, Margaret Thatcher was, for instance, the devil incarnate. John Major was mocked mercilessly. Now it is Gordon Brown's turn.

The press and public work symbiotically in developing a personal dislike of for a leader. After all, those in the press are members of the public too. Criticism for Brown is near unanimous across the press only because it is so across the public at large. That's why there is a good chance that the traditional Labour supporters of Crewe and Nantwich will likely vote against their Party.

The vitriolic attacks would certainly not be so harsh if the public felt at ease with Brown at the helm of the country. Regardless, the freedom to criticise those that control our lives is a vital part of living in a free society. As Winston Churchill rightly pronounced:

Criticism may not be agreeable, but it is necessary. It fulfils the same function as pain in the human body. It calls attention to an unhealthy state of things.

I was in my tuxedo under the blazing sun of Brighton for the annual Booksellers' Association dinner and awards (called the 'Nibbys' in the trade). I was there as a guest of Wiley's, whose imprint Capstone is publishing my book on markets, modestly entitled The Best Book on the Market, along with TV presenter Anne Diamond and other worthies. (Clarissa Dickson-Wright was on the next table – she and I are like that, you know).

Foyles cleaned up on the awards for the best bookseller – something that took even them by surprise. When I was at school this Charing Cross Road shop was revered among my teachers as 'the biggest bookshop in the world', capable of getting any book on any subject from any location. When I got to London in the late 1970s, though, it was starting to look very shabbly. Cluttered and confused, with a funny system where you chose your book, then went to another desk to pay for it, then came back again to pick it up. Christina Foyle, who lived in a penthouse on the top floor, was still holding her celebrated literary lunches, but the place was obviously dying.

In the 1980s, the rise of Waterstones and the like left it completely stranded, and the rational thing might have been to knock it down and sell the site for some big glass office block. But about eight years ago the family had a crisis meeting and brought in new management. They certainly seem to have turned it around.

Another winner was, inevitably Amazon.co.uk. But most of my bookie friends at the table told me that they never used the site, preferring bookdepository or play.com. For a believer in markets, like me, this was heartening news. Competition is a wonderful thing.

In my young day, we could go into a shop and come out with a bar of chocolate, a bottle of pop, a packet of crisps, and a comic all for less than six pence.

You can't do that any more.

Not with all these security cameras around.

Today's lesson in public choice economics: politicians do what benefits politicians, not what benefits the wider public (nor even, in this case, what accords with the rules of logic).

Netsmith for one cannot wait for this particular political announcement.

There's amusement here, to be sure, but very much a damned if they do, damned if they don't sort of situation.

So just what was the most significant wealth creating film of all time?

This might be blasphemy in certain quarters: Ben Bernanke has been doing the right things and averted the crisis?

From an unexpected quarter: the value of private schooling is that it attempts to educate.

And finally, proof that reincarnation really does happen.

Britain's Prime Minister Gordon Brown seems very smug that his government has 'taken a million people out of poverty'. But has he any right to be so? The truth, as always, is more complex and less rosy than Mr Brown presents it.

The government's poverty target is 60% of median income: below that, you are in poverty, above that, you are not. And yes, by giving people just the wrong side of the line a little extra cash, you can move them to just the right side of the line. A great deal of politicians' time and effort (and our money) has been expended on achieving just such a change. Look at a graph of income distribution and you see a slight shift from one side of the line to the other. This does of course represent millions of people. But it doesn't mean that previously they were in abject poverty and now they are enjoying la dolce vita. A few extra pounds might be very welcome, but all this political effort hasn't exactly changed people's lives.

And what has happened to those who really are in abject poverty – say, those who have incomes below 40% of the median? Well, that depth of poverty is the highest in thirty years, both in terms of numbers (over five million) and as a proportion of the population. Two-fifths of those who the government defines as being in poverty are in fact in this, severe poverty.

Then, of course, you have to remember that many people would fall below the government's poverty target were it not for in-work benefits. And the number of us receiving those has rocketed – from around 4% of working-age households in 1997 to around 15% today. We've taken people out of 'poverty' by making them more dependent on the state.

There's something rotten with this. Our over-regulated, state-dominated economy with its perverse tax and benefits system – which taxes people who are below the minimum wage – is not encouraging self-help, hard work and enterprise. So we distort it even more in order to cover up the fact. It's time to restore incentives and trust the market.

The Institute of Economic Affairs held a book launch this week for Eamonn's new book, modestly entitled The Best Book on the Market (subtitle: How to stop worrying and love the free economy). Eamonn told the gathered audience that he learnt the reality of markets in his father's garage, watching him deal with customers as his mother did the books. As a result, when he studied economics at university he quickly realized that the profs had it all wrong. By treating people like robots and trying to make economics a science, they stripped out everything human that actually makes markets work. Unfortunately, lots of bad public policy was (and is) based on these bad ideas.

And that's why Eamonn has written his book – to explain why markets work, why they are a good thing, and why politicians who try to 'perfect' them are evil. He's kept it short and accessible – and full of illuminating examples – so if you liked Freakonomics or The Undercover Economist but thought they were too long, this is the book for you.

Click here to buy your copy now.
 

Councillors in Edinburgh have approved the sale of Panmure House – the former home of the great Scottish economist Adam Smith – to Heriot-Watt University. They chose the £800,000 bid over a higher offer, on the grounds that the University would make the building more accessible to the public. The University plans to restore the house to promote the study of economics.

The sale has to be scrutinized by the Scottish Government in nearby Holyrood, but the Heriot-Watt bid is probably the best possible outcome for admirers of Smith. The house will – once again – become an international centre for scholarly work on economics, and members of the public will be able to visit the house where Smith spent the last decade of his life.

The sale coincides with the unveiling of the Adam Smith Institute's statue of Adam Smith not far away, in Edinburgh's Royal Mile, which will take place on the morning of Friday 4 July.