An independent Scotland should use the pound without permission from rUK, says new ASI report

Today the Adam Smith Institute has released a new paper: “Quids In: How sterlingization and free banking could help Scotland flourish”, written by Research Director of the Adam Smith Institute, Sam Bowman. Below is a condensed version of the press release; a full version of the press release can be found here.

An independent Scotland could flourish by using the pound without permission from the rest of the UK, a new report released today by the Adam Smith Institute argues.

The report, “Quids In: How sterlingization and free banking could help Scotland flourish”, draws on Scottish history and contemporary international examples to argue for the adoption of what it calls ‘adaptive sterlingization,’ which combines unilateral use of the pound sterling with financial reforms that remove protections for established banks while allowing competitive banks to issue their own promissory notes without restriction. This, the report argues, would give Scotland a more stable financial system and economy than the rest of the UK.

According to the report, adaptive sterlingization would allow competitive, private banks to issue their own promissory notes backed by reserves of GBP (or anything else – including USD, gold, index fund shares or even cryptocurrencies like Bitcoin). With each bank given powers to expand and contract its balance sheet relative to demand, this system would be highly adaptive to changes in money demand, preventing demand-side recessions in modern economies such as the ones that led to the 2008 Great Recession.

The report’s author, Sam Bowman, details Scotland’s successful history of ‘free banking’ in the 18th and 19th centuries and the period of remarkable financial and economic stability which accompanied it. Historical ‘hangovers’ from this period, like Scotland’s continued practice of individual bank issuance of banknotes, are still in place today, making Scotland uniquely placed for a simple transition to the system outlined in the report.

The report highlights evidence from ‘dollarized’ economies in Latin America, such as Panama, Ecuador and El Salvador, which demonstrate that the informal use of another country’s currency can foster a healthy financial system and economy.

Under sterlingization, Scotland would lack the ability to print money and establish a central bank to act as a lender of last resort. Evidence from dollarized Latin American countries suggests that far from being problematic, this constraint reduces moral hazard within the financial system and forces banks to be prudent, significantly improving the overall quality of the country’s financial institutions. Panama, for example, has the seventh soundest banks in the world.

The report concludes that Britain’s obstinacy could be Scotland’s opportunity to return to a freer, more stable banking system. Sterilization, combined with reform of Scottish financial regulation that:

  • removed government liquidity provisions to illiquid banks,

  • established mechanisms to ‘bail-in’ insolvent banks by extending liability to shareholders, and

  • shifted deposit insurance costs onto banks and depositors rather than taxpayers,

would improve standards and competitiveness in banking, while significantly reducing the prospect of large-scale bank panics and financial crises.

Commenting on his report, the Research Director of the Adam Smith Institute, Sam Bowman, said:

The Scottish independence debate has repeatedly foundered on the question of currency, but if Scots look to their own history they will find that their country is a shining example of how competition in currency and banking can ensure a stable and effective banking system. Scotland’s free banking era was an economic and intellectual Golden Age, and its system of competitive note-issuance was recognised by such thinkers as Adam Smith as one of the root causes of the country’s prosperity during this time.

The examples of Panama and other dollarized Latin American economies are proof that countries can thrive when they unilaterally adopt another country’s currency. Combined with a flexible, adaptive banking system, the unilateral use of another country’s currency can instill a discipline in a country’s financial sector that neither a national currency nor a currency union can provide. Scotland’s banking system is almost uniquely primed for such a system of ‘adaptive sterlingization’. The path outlined in this paper would go almost unnoticed by the average Scot – until the next big economic shock, when they might just wonder why their system was so much more stable than that of the country they’d left behind.

This train fare question isn’t difficult you know

The Guardian rather jumps the shark here:

The Guardian view on rail fares: unfair
Travelling by train produces benefits for everyone – less air pollution, lower greenhouse gas emissions, fewer traffic jams. Passengers should not have to pay two-thirds of the cost

Actually, a small engined car with four people in it has lower emissions, lower pollution, than four people traveling by train. So it simply isn’t true that everyone benefits from more train travel.

There are indeed some truths there though. It simply would not be possible to fill and empty London each day purely by private transport: some amount of commuting public transport is going to be necessary. And there’s no reason why those who benefit from that should not pay for it: as they largely do through the subsidy of London Transport paid for by Londoners.

But on the larger question of who should pay for the railways of course it should be those who use the railways that pay for it. Some City fund manager who commutes in from 50 miles outside London should not have his lifestyle choice subsidised by the rest of us. We should not be taxing the man who cycles to work at minimum wage in order to pay for wealthier people top travel longer distances.

The Guardian is, once again, forgetting that there is no magic money tree. If rail users do not pay for the railways then there is no unowned cash that can be diverted to doing so. Either the rest of us put our hands in our pockets or we don’t. And why should the poor pay taxes so the middles classes can live in the greenbelt?

A simple point on railway nationalisation

One point people bring up when they advocate renationalising railways (or renationalising stuff in general) is that when private companies run something they take a chunk of the total surplus in profit, but if the government were in control, that could go to them. But there’s a very basic reason why this isn’t the case: opportunity cost.

A firm, in doing business, puts capital to use. It uses a mix of physical and human capital and devotes it toward achieving tasks in order, usually, to turn a profit. The best way to measure the amount of capital tied up in a project is the market’s assessment thereof—the firm’s market capitalisation—although of course we know that market prices are never perfectly accurate, since they are only on their way to an ever-changing equilibrium, and they may not have got there yet. And what’s more, not all the relevant information will always be in the public domain.

For rail franchises—or TOCs (Train Operating Companies), as they seem to call themselves—it is relatively hard to pinpoint the exact amount of capital they are using, as they are usually subdivisions of a larger structure. But suffice to say, running trains involves tying up money on the order of billions, whoever does it (i.e. it includes Directly Operated Railways, the state body that is currently running the East Coast Mainline pretty well). You have to rent the rolling stock (trains), pay the staff, buy the fuel, pay to use the track and so on.

From this capital you get a return. TOC margins average about 4% over the last ten years. The average company got more like 10%. FTSE100 companies seem to enjoy higher returns. Of course, operating profits are not share returns, but they tell more or less the same story. The extra couple dozen billion the government would need to spend on trains could equally be spent on equities or anywhere else for more or less the same risk-adjusted return. The return they got here could be put into trains.

But even doing this makes no sense. If the government returns that couple dozen billion to the population at large, the government can tax the income that the private citizens make on the wealth, at a glance dealing with the problems of governments holding wealth—principally: they are not very good at picking winners. Or they could pay off debt and reduce their repayment costs—since the risk-adjusted return of gilts is priced in just the same way as other assets.

Either way, and whether or not rail re-nationalisation makes sense from any other perspective, it is simply not the case that government, by nationalising rail, could get a bit of extra cash to put into our network.

Looking at the world through neo-liberal eyes

Adam Smith Institute President, Dr. Madsen Pirie, explains why he is willing to own the usually-derogatory term neo-liberal, and explains why the world actually shows us the success of the much-maligned perspective.

I spoke at Brighton University as part of their seminar series on neo-liberalism.  The term ‘neo-liberal’ is usually used in a derogatory sense, though I chose not to use it that way.  I was the only speaker in the series to speak in favour of neo-liberal ideas, and my title was “Looking At the World Through Neo-Liberal Eyes.”  I began by quoting an old Chinese proverb: “Never criticize a man until you have walked a mile in his shoes.  That way you are a mile away when you voice your criticism; and you have his shoes.”  I invited the audience to see the world briefly as it looks through neo-liberal eyes.  These were the points I made.

1.  Value is in the mind, not within objects.

Value is not a property of objects or a quality they possess.  Although we talk of objects “having value,” we mean that we value them.  Value is in the mind of the person contemplating the object, not in the object itself.  If value resided in things, it could theoretically be measured objectively and we would all agree on what it was.  There would then be no trade, for exchange takes place when each person values what the other person has more than they value what they are offering in exchange.  A trade gives each of them something they value more, and thus wealth is created by the exchange.  When people make the mistake of supposing that value resides in objects, they ask how it arrived there, and come up with fallacious ideas such as Marx’s labour theory of value.  An object can take masses of labour to produce, but if no-one values it, it will be worthless.

Read the whole thing.

What glories this capitalist free market thing hath wrought

There’s nothing worse than being exploited by some running lackey pig dog of a capitalist, as Deirdre McCloskey reminds us:

The aim of the true Liberal should not be equality but “lifting up those below him.” It is to be achieved not by redistribution but by free trade and compulsory education and women’s rights.

And it came to pass. In the UK since 1800, or Italy since 1900, or Hong Kong since 1950, real income per head has increased by a factor of anywhere from 15 to 100, depending on how one allows for the improved quality of steel girders and plate glass, medicine and economics.

In relative terms, the poorest people in the developed economies and billions in the poor countries have been the biggest beneficiaries. The rich became richer, true. But the poor have gas heating, cars, smallpox vaccinations, indoor plumbing, cheap travel, rights for women, low child mortality, adequate nutrition, taller bodies, doubled life expectancy, schooling for their kids, newspapers, a vote, a shot at university and respect.

Never had anything similar happened, not in the glory of Greece or the grandeur of Rome, not in ancient Egypt or medieval China. What I call The Great Enrichment is the main fact and finding of economic history.

It’s that penultimate sentence which is so important. There have most certainly been many attempts at designing economic systems: there have been even more that just sorta happened out of voluntary interactions. But there’s only one of them that has actually managed what we are all the lucky, lucky, beneficiaries of. That is, one economic method of organisation that has led to a substantial, sustained, increase in the standard of living of the average woman on the Clapham Omnibus.

Nothing else, nothing planned nor nothing unplanned, has managed this. And that really is the main fact and finding of economic history. It’s the one unique even in it too. McCloskey, you and I, we might differ on the details of how it all happened but we shouldn’t allow minor disagreements over precedence between the flea and the louse to obscure the manner in which we’re all feeding off that larger truth. That nothing else does work as well as those largely bourgeois virtues plus economic and social liberty.