Two-thirds of a pint, anyone?

2331

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An announcement that the National Weights and Measurements Laboratory (NWML) is considering introducing a ‘two-thirds of a pint’ measurement into pubs across Britain raises questions as to why publicans and drinkers cannot deal in any quantity they want.

Left to the free-market, consumers would be free to demand whatever quantities of drink they wanted and firms would satisfy those demands in order to make greater profits. Even if the government did not choose to regulate the size of drinks we consume a system of standardisation would no doubt emerge, but one which was more responsive the needs of drinkers rather than being dictated to them.

The arguments for state intervention in the quantity of our drinks seem somewhat restricted from the outset. Perhaps the government thinks that it can tackle the over consumption of alcohol as people will no longer be forced to have a whole pint. This would be a narrow and ineffective goal for the government to aim for.

Why does the state decide what size glasses our alcohol must come in but they do not apply the same logic across the board? For example, when ordering soft drinks, some pubs fill the glass with ice before serving, others do not. The government has not felt inclined to interfere here, so why elsewhere?

Essentially, we should be able to say how much we drink and in what size glass. At the very least, this would lead to a much better allocation of resources when purchasing drinks!

Those hedge funds

2335

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There seems to be a certain amount of glee behind this statement:

Emmanuel Roman, of GLG Partners, said 25pc-30pc of the world's 8,000 hedge funds would disappear "in a Darwinian process", either going bust or deciding meagre profits are not worth their efforts.

"This will go down in the history books as one of the greatest fiascos of banking in 100 years,"

But I'm not really sure why. Hedge funds haven't caused any of the current problems, indeed, many of them, by going short, have reduced the size of the bubble and thus the subsequent crash.

"There need to be some scapegoats, and the regulators are going to go hunt people.

Now that is certainly true, and hedge funds most certainly are going to be one of the prime suspects to be those scapegoats. But there's no good reason why they should be.

Hedge funds are simply investment vehicles, ones that by restricting themselves to only taking investments from sohpisticated investors are able to do things that mutual funds and unit trusts cannot because of regulation. They can go short, invest in different classes, commodities, bonds, shares, as they wish.

It's also true that they have grown massively in recent years (even decades) as new opportunities tend to. One or more people find a way to make excess returns, above the usual risk adjusted level, and then others spot that. So they move their own capital into that very field. This is exactly what we want to happen, capital moving towards its most productive use, just as we want the same to happen with any other resource. Now certainly markets often overshoot, so it's entirely possible that there's too much capital now chasing those excess returns....to the point that there are no excess returns, even that returns in the field as a whole are below the normal risk adjusted rate. OK, "shrug", some people will continue to make profits, others perhaps losses , some will leave the market and the risk adjusted return will level out at around and about that which is normal in the rest of the economy.

But via innovation (in this case financial) we've seen that high profits attract capital until there's enough capital there so that profits aren't high. Which, as I say, is exactly what we want to happen, just as we do with bananas, electricty and lawyers.

Why should the people in such a process become scapegoats...other than the thought that our rulers might not understand such simple points about how markets allocate resources?

Blog Review 758

2327

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There really are some things that we don't need a debate upon. A swift and firm rejection of the very concept often suffices.

Interesting charts for the monetarists amongst us.

Just how many blogs are illegal under German and or Austrian law?

More Austrians: although this time talking about the appropriate form of bank regulation.

Turns out that those booming sales of Das Kapital aren't going to do people much good. Well, doorstops are all very well, but don't bother reading it.

Recessions aren't all that big a deal you know.

And finally, yes, school inspectors are indeed insane.

Credit crunch basics

2326

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• Forget all about Keynes. Anybody who believes that “If you save five shillings you put a man out of work for a day" is economically illiterate. Saving is spending – on capital goods not consumer goods. A switch of consumer preference from drinking beer to drinking wine has employment effects identical to those from a switch from drinking beer to building a brewery.
• Liquidity and credit and market interest rates are all a matter of supply and demand. There is no credit “seizure"; there is simply a shortage of savings due to artificially low interest rates.
• Market interest rates represent consumer preferences for saving versus consumption. Artificial rates throw a spanner in the whole structure of production; an artificially low rate signals that consumers are prepared to save for little reward, so entrepreneurs start to build breweries rather than provide more immediate beer. Once this error becomes clear, all projects dependent on artificially low interest rates must be cancelled as unviable. Hence the unavoidable recession.
• Government can only make matters worse and more prolonged by ignoring this. Furthermore since paper money has no intrinsic worth government cannot create wealth; it can only redistribute it – take and give with a hefty cut for itself.
• Banks cannot borrow short and lend long without risking defaulting. But if they borrow short and do not lend long, they can pay no interest. Only free market banking, as practised in Scotland for the first half of the 19th century, can resolve this dilemma. (No, Walter Bagehot was not against free market banking; he advocated a Lender of Last Resort because the Bank of England had an absolute monopoly of note issue.)  The bank of England must be abolished or sold.
• Borrowing and lending does not require the preservation of bankrupt banks. The banking industry is the greatest example of corporatism, in which government and banks form unholy alliances for their mutual gain, with government holding the ring. It is difficult to imagine anything more remote from “laissez faire".
  

Terry Arthur is the author of Crap: A Guide to Politics. Buy it here.

Power lunch with Liam Fox MP

2320

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Shadow Defence Minister Liam Fox MP was our guest at a Power Lunch in Westminster this week. It's not a job that anyone envies him. If the Conservatives win the next election they will inherit not only a wrecked economy, but a defence apparatus that's outdated and starved of funds.

We've not had a strategic defence review since 1998, despite the fact that the world has changed a lot since then, and the threats are both larger and very different. To some extent, we're still fighting the cold war. But now we have to contend with energy supply, a bullying Russia, an Iran that wants to be first in a regional nuclear arms race, a divided nuclear Pakistan... It's clear that we need frequent and regular defence reviews if we are to keep on top of a changing and complex defence problem.

Gordon Brown never financed Tony Blair's military excursions adequately – which is why we had troops being killed because they couldn't find any body armour to borrow, or spare parts for their tanks and their few helicopters. Meanwhile, other NATO countries are happy for us to provide their insurance, without paying an adequate premium. So we're overstretched and under-supplied, and when Russia re- arms and starts parking troops next to the Georgian oil pipelines, or stakes a claim in the Arctic, or surrounds Norwegian oil rigs, or when Iran starts playing with nuclear fission, we have neither the forces nor the stamina to stand up to them. But our own security demands that we should.

Sorting that lot out is not going to be an enviable job at all.

No support for South African MP

2325

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Economic crisis got you down? Trust Junksmith, this video will cheer you up...

Blog Review 757

2323

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Tales from the schoolroom....how Paul Krugman's classmates predicted his Nobel.

Britain through the eyes of an expat. Surely it should be better than this?

It's quite amazing the way this Osborne/Mandelson story has been spun.

It's possibl;e (in at least one way) that the bank bailout has made things worse.

The falling oil price could lead to some terrible problems in the oil producers.

Yet another incredibly bad argument for ID cards.

And finally, apparently it's all Adam Smith's fault. No, really.

The mood passes

2319

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Has Gordon Brown dithered himself out of office again? Last week there was a mood: SuperBrown had saved British finance, and shown the world how to do it. The public were beginning to think that he was the right person to have in charge in a crisis. And we're in a crisis. So a few people in Westminster were talking up the chance of an early election - mandate for a new world order sort of stuff.

This week the mood has gone. True, stock markets are recovering, and it's been a long time since we had a clear week without some government having to bail out some bank. But winter's coming, and a snap election at the end of November doesn't look so thrilling.

Unfortunately for Gordo, it won't get much better. The stock markets might be showing their relief that the whole world economy hasn't just collapsed into mush. But there's more bad news to come. House prices continue to fall, mortgages continue to be expensive (despite the government's guarantees on interbank lending). And with falling house prices comes falling consumer spending. People just don't feel as wealthy as they did six months ago and a year ago. Retailers are bracing themselves for a tough time, and unemployment is rising quickly. We're in for a winter of closures and generally bad news.

And of course, it's the economy, stupid. People think that Brown has had a good crisis, but they are now even less inclined to vote for him. And by the time of the next election window in May, the recession will have bitten and people will feel even poorer. October 2009, maybe? Well, things still won't be great. No, Brown will just hope that the green shoots of economic recovery will be popping through by May 2010. But by then he'll be down to the wire, and people don't like governments that hang on to the last possible moment.

What next for the Republicans (Part 2)?

2318

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As I wrote last week, the forthcoming election season promises little in the way of good news for the US Republican Party. Chances are, once the dust has settled, they will be looking for a new direction to resurrect their tarnished brand. They could go populist, backing greater government intervention in the economy and focussing even more on ' traditional values' and social issues. They might go centrist, adopting something like David Cameron's liberal conservatism. Or they could go back to their roots, re-embracing the principles of liberty and small government.

Obvious personal preferences aside, there is a good electoral case for them pursuing the third strategy. According to Cato's polling research, the 'libertarian vote' represents between 10 and 20 percent of American voters – a group that is both large enough to swing elections and which has shifted away from Republicans and towards Democrats in recent years. Indeed, when you use the loosest definition, this 'libertarian vote' is even larger: some 44% of voters would describe themselves as "fiscally conservative and socially liberal".

Given the federal nature of US politics, any new movement in the Republican Party is likely to start in the states – which is why another Cato report, published this week, is so interesting. The Fiscal Policy Report Card on America's Governors ranks state governors on their tax, spending and borrowing records, giving them grades ranging from A to F. Two Republican governors got A grades: Charlie Crist of Florida, and Mark Sanford of South Carolina (who once brought live pigs into the state legislature in protest at pork-barrel spending). Both men were mentioned as potential vice-presidential candidates in 2008, and both may be ones to watch for 2012.

Blog Review 756

2322

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This financial market stuff: yes, we have been here before, if not quite at this level of panic.

This is of course a great time to become a regulator: the value of being someone who has put up barriers to market entry will be quite high.

The regulators and would be such are insisting that the CDS market must be regulated. Odd really, when it's the one credit market that has continued working, continued to be liquid.

Making the moral case for tax havens: Dan Mitchell rides again.

Thankfully, the credit crunch hasn't hit the real economy (at least, not yet).

Something lighter for the middle of the week. A clerihew contest.

And finally, The Orwell Prize is now open to bloggers.