Magna Carta – and EU law today?

Lord Sumption has been telling the papers that we owe our freedoms more to the French Revolution and its Declaration of Rights than to Magna Carta, the 800th anniversary of which we celebrate this month. He is wrong. But each passing day makes him more right, and that is the whole problem. A real problem for freedom, not some merely smug debating point.

Sumption may be a distinguished mediaeval historian, but he is a poor political economist, or legal scholar for that matter. He calls the Charter a ‘turgid’ document of its time, and says it has ‘nothing to do’ with our libertarian tradition.

He is right that it reads like something rather turgid and technical. It was indeed mainly a list of demands, and was never meant as a constitution. But what it demands is critical to the development of limited government and representative democracy in the centuries that followed.

Magna Carta is the re-assertion of property rights that Anglo-Saxon England enjoyed before the Norman Conquest. The limits it imposes on authority – preventing the King’s arbitrary confiscation of people’s property and freedom – occupy only three or four of its 63 clauses and are therefore easily dismissed by those who think the Charter was just a hotchpotch of ‘trade union’ demands by the aristocracy.

But those who drew up the Charter knew that these few clauses are absolutely crucial. They are there precisely to guarantee those property rights that are spelled out in the rest of the document. What good is it to have rights if they are unenforceable because the authorities can act without restraint.

From that assertion of property rights, grows parliamentary democracy. Sure, as Sumption sneers, the Charter is by no means a democratic constitution, and concerns itself only with the rights of a rich few. But it reasserted the pre-Norman tradition that the rules of taxation and justice should be based on agreement, not on the whim of monarchs. To reach agreement, you need debate. And to debate, you need some kind of representative parliament.

It also explains England’s later history as a great trading nation, and the entrepreneurial flair that abides in the Anglophone nations. The Charter guaranteed property rights, and that principle was quickly expanded from just the nobility to everyone. So people could build up capital without fear of being expropriated by kings, ministers and officials.

And the common law that was reasserted by the Charter allows people to do what they want, provided only that others are not harmed by it. Top-down Continental law, by contrast, requires you to seek official permission first. It is obvious which one is likely to encourage more innovation.

Sumption also tries to show the Charter’s irrelevance by dismissing its insistence that justice should be based on the ‘law of the land’. The assertion as worthless, he says, because the King decided what the law actually was. But the whole point was that the Charter reasserted the commonly agreed fact that the ‘law of the land’ was much older and more fundamental than King-made law. It was the common law of the Anglo-Saxons, built up, by the common people over centuries. This law had evolved and endured, despite the efforts of feudal authorities to supplant it, because it worked and because it was made by the people as they went about their everyday business. This common law was a matter for everybody, not just for the king to decide and hand down to everyone else.

We have the same issues today, with Britain’s common law tradition being swamped by top-down law in the shape of EU regulation. Here again, the Continental tradition that you need detailed regulation that says what you can do is at odds with Britain’s common law approach that you are free to act as you choose unless there is some proven and agreed reason not to.

The difference is crucial, and that is why Sumption is so horribly wrong to suggest that our libertarian tradition owes more to France than to Runnymede. Perhaps our rights and freedoms are indeed being subjected more and more to this Continental legal tradition. But this legal harmonisation is something to be mourned and feared, not celebrated.

UK loss on RBS sale: so what

Bygones are bygones. Or as economists call them, ‘sunk costs’. If you invest in something that doesn’t pay off, you can kiss your sunk costs goodbye. Just sell for what you can get.

Today we are being told that UK taxpayers are going to take a £7bn loss when the government sells its stake in the the mega-bank RBS. Add fees and costs, and it might be £14bn. So what?

When the UK’s Labour Chancellor Alastair Darling spent £45bn of our money bailing out RBS – and another £63bn on Lloyd’s, Bradford & Bingley, Northern Rock and the rest – he wasn’t going through the Financial Times with a highlighter to pick good investments to enrich taxpayers. He was trying to rescue Britain’s financial services sector during the financial crash.

For a sector that brings in £66bn a year in taxation, that was a pretty good deal. Yes, you can argue that if he had done nothing, the market would have sorted it out. Or that the government should have simply lent the banks more money. But at the time it was all pretty hair-raising. Banks exist on trust, because if all their customers pull out at the same time the banks don’t (usually) have enough cash on hand to repay their deposits. They have lent out that cash to help grow businesses, jobs and prosperity. So when 20,000 queued up to take their savings out of Northern Rock, and the RBS said its cash machines were going to run out of cash in 48 hours, it wasn’t unreasonable to do something.

Actually, when you look at that £108bn went, taxpayers are already in pocket. Slices of Lloyd’s have already been sold off, and Northern Rock is looking like a really good business again. It depends on your predictions of what the remaining bits are worth, but taxpayers could already be £14bn up on the deal. That’s no surprise: the same happened in Sweden when its banking sector was bailed out years ago.

So what of RBS? Bygones are bygones. The bank grew bloated in the boom years, and has had to spend hundreds of millions restructuring. And being involved in just about sort of financial business known to humanity, it has picked up more regulatory penalties than most. So it is trading well below the 502p share price that Alastair Darling bought it at.

But that money was spent, not on buying a bank as an investment, but on buying a bank to save it from utter collapse. Money spent, job done. Bygones are bygones, let’s move on.

Should we wait until things improve, so that taxpayers get all their money back? No. After all, as they keep telling us, shares can go down as well as up.

George Osborne’s political economy

We should stop teaching economics in universities and instead teach only political economy. Because every economic policy – every economic law, regulation and rule – has a political origin and a political consequence. (And not always anintended consequence.)
Take, for example, the UK Chancellor George Osborne’s proposal for a UK balanced budget law, under which Chancellors would have to seek the permission of Parliament to run a deficit. Pure economists have of course dismissed this as economic illiteracy. When times are bad, they say, government has to spend more, and run deficit budgets, in order to sustain welfare payments and pump-prime the economy.
I’m not even sure this is good economics, since most people can probably spend their own money far more productively than the government can, so leaving people to make their own investments is probably better than having the state invest it for them. And debt is not free – you have to pay interest on it, and that then curbs your freedom of action and makes you poorer.
What I am sure of is that deficit budgets are lousy politics. No, not in the sense that they don’t win votes – often, they do – but in the sense that they corrupt and damage the political system. If there is no restraint on how much governments can borrow, then their every incentive is to borrow more and more. Then they can spend more and more (and buy more and more votes) without having to raise taxes. They simply pass the bill on to the next generation.
This is a one-way choice that no human being should be asked to make. The high-spending, high-borrowing route is just too beguiling. You would need to be an angel to resist it, and our politicians are not angels.
This is of the main reasons why political economists from Adam Smith onwards have been worried about the very existence of a national debt. Once you admit the principle, there will be no stopping things. Forget the idea of asking Parliament – yes, it might embarrass them, but they will always support the majority party’s spending. Far better to have an inflexible rule that all budgets must balance … or if you want flexibility, that all budgets must balance over the five-year term of a government. And if not, there are consequences.
Terrible economics, some might complain. But very sound political economy.

It’s a wonderful life

The name of Nigel Vinson may not be one bandied across the breakfast tables of Britain, but he has done more, for longer, to promote the cause of personal and economic freedom than most. And, raised to the peerage (as Lord Vinson of Roddam Dene) for that and for his work in re-shaping and promoting British business, his impact continues.

So it is good to see a new biography, Making Things Happen, written by Gerald Frost and published by Biteback, which provides fascinating insights into Vinson’s quite remarkable life, ideas and approaches. He had a good start in life, but built up his own business – and fortune – from scratch.

In the 1950s, Vinson was one of the first to see the huge potential of plastics, particularly as an anti-corrosion covering for metal. Starting from a Nissen hut in Guildford, he overcame the technical difficulties to coat all sorts of metal objects, from refrigerator shelves to aircraft parts. He would later win the Queen’s Award for Industry in recognition of the company’s technological innovation.

As well as his insight and initiative, much of Vinson’s success was cutting through the class barriers that dogged British business in the postwar decades. Vinson saw his workforce as a team, the only distinctions being the different tasks they each did. Even as the business grew, he insisted on personally meeting every new employee and on ‘walking the ship’. He kept production units small, so that people felt part of a human enterprise, not cogs in a faceless machine. When he eventually sold the business, he shared a large part of his gain with those workers, even though he did not have to: they were not just his employees but his friends and colleagues.

Vinson’s abilities as a successful entrepreneur and enthusiast of the potential of better-managed British business, put him in demand elsewhere. He joined the Council of the CBI and became President of the Industrial Participation Association and Chair of the Wider Ownership Group – again promoting his idea that employees of a business should be participants in that business. Many other businesses sought him for their boards.

Never slow to back the things he believes in, Vinson was an early supporter of the Institute of Economic Affairs and the Centre for Policy Studies. In the early 1980s he also supported IOUS, an annual freedom conference for students: the new Culture Secretary, John Whittingdale, was one of its first participants. IUOS eventually grew into ISOS, a series of sixth-form conferences run by the Adam Smith Institute, and the Freedom Week student training course, run jointly by ASI and the IEA.

Making Things Happen is an uplifting story of how much one person with a vision can achieve – though it makes you yearn to have just a quarter of Vinson’s drive and energy.

Peru: an argument for competition in currencies

If only we had introduced the Hard Euro, as the UK Prime Minister at the time, John Major, had suggested! Sadly his proposal came just too late, as the EU Euro enthusiasts were already pressing ahead with their own plans to create a single, Euro, currency that would replace domestic currencies such as the Frank, Mark, Lire and of course Drachma.

John Major’s idea can be seen working perfectly well here in Peru, which I have been visiting for the Mont Pelerin Society conference in Lima. Being close to the US in terms of trade, and reasonably close – well, in the same hemisphere – in terms of geography, and having a border with Ecuador, which uses the US Dollar as its currency, US dollars circulate quite freely here, alongside the domestic currency, Soles.

Dollars are most obvious in the capital and in tourist areas, and indeed the ATM cash machines at the banks will dispense them in everyday quantities. They are commonly accepted, particularly for larger transactions.

The result is that there is a competition between currencies, Dollars and Soles – just as Hayek proposed in the 1970s and as Robert Miller outlined, in a recent Adam Smith Institute paper ‘What Hayek Would Do’.

The effects are interesting. Because of the prevalence of Dollar usage, there are limits to the extent that the monetary authorities in Peru can overextend and devalue Soles. They know that if their currency loses its value, more and more transactions will be done in Dollars. We used to think that there would need to be a difference of perhaps 5% or more (and perhaps a widespread feeling that the gap would widen) between the value of competing currencies in order for people to shift from one to the other: which made a lot of people say that competition in currency would not work, because it would lead to big wrenches from one currency to another.

But the opposite seems to be the case. As one currency loses a bit of value, more and more people make their transactions in the other. The marginal differences in people’s currency use is enough to keep up the pressure on the domestic authorities. And the authorities know that they have no influence on the value of the Dollar – the value of which might, at any point, become inappropriate to local economic conditions – so the last thing they want is people rushing to take out Dollar loans and relying too heavily on Dollars, since then the authorities would lose all control over monetary conditions.

Equally, the public are pretty savvy about their finances. Announcements from the Federal Reserve in Washington lead to radio chat shows in which people debate whether they should be taking out mortgages in Dollars rather than Soles. Just the sort of competition that Hayek might have hoped for – no big wrenches, just lots of individual decisions made at the margin.

Wouldn’t that be nice in Europe? A currency that had to prove its worth to people by being at least as good, and maybe slightly more solid, than their own, and which people could choose (or not) if they desired. Indeed, even in non-Euro countries like the UK, it would be rather refreshing for people to have the choice over which currency they used. It might have moderated the reckless expansions of the early 2000s and made the post-2008 adjustment very much quicker and less painful.