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.

239 years of The Wealth of Nations

Today is the 239th anniversary of the publication of The Wealth of Nations by Adam Smith. For nearly a quarter of a millennium, we have actually known the principles by which wealth is created and maximised. The trouble is, that for a fair chunk of the same time, we have been trying to resist that information, thinking that we can somehow do better than the market.

The Wealth of Nations is a great book: most objective commentators would probably put it among the top five books ever written, in terms of its influence on humankind and the way we live.

Yes, it’s very eighteenth-century stuff, sprawling and wordy, with enormous digressions on things that do not seem very interesting to us today. Luckily, you do not have to read it, because you can download my Condensed Wealth of Nations instead.

And yet, Adam Smith’s original is the book which took economics out of its primitive phase and made it distinctly modern. With a bit of time and effort, any of us can understand what Smith says because what he is describing is all around us today.

The very first sentence of the book dismisses the old idea that the wealth of a nation was the amount of gold and silver that it had hoarded up in its vaults. Rather, says Smith, the measure of a country’s wealth is what it produces. In that first sentence, he had invented the idea of gross domestic product. In the second, he notes the wealth of individual citizens of that country depends on how many citizens are sharing this GDP. (So there,he had invented the idea of GDP per capita.) In the third, he talks about how many people are actually working to produce this wealth. (The concepts of the participation rate, and productivity.) Before we are past the first page, we can see that this is sensational stuff.

But surely his greatest breakthrough was the realisation that we do not have to conquer people or make things in order to increase our wealth. We can also increase it by simply exchanging things. If you have something I want and I have something you want, we are both better off by swapping it. And that is the foundation of market exchange and trade, and of the specialisation that makes our production and exchange system so spectacularly efficient, creating and spreading benefit throughout the world.

More evidence that all schools should be free schools

Free schools raise standards – not just in the schools themselves, but in the traditional state schools in their neighbourhood.

That is according to a new report from the think tank Policy Exchange. And it should come as no surprise. That is exactly what happened in Sweden, after it reformed its education system in 1991 and allowed charities, faiths, voluntary groups and private companies to open schools rather like the UK’s free schools.

Schools that are independently run but still supported by taxpayers – and paid by results, basically in proportion to the number of pupils they attract – are better motivated to think more deeply about the education they provide and how they provide it. Despite the fact that free schools are still highly regulated – much more so than their counterparts in Sweden – that is exactly what they do. So they stimulate other, unreformed, schools in two ways. First, they provide a model for what is achievable. Second, local state schools realise that they have to improve if they are to continue to attract pupils and justify their own existence. Simple really.

People make two arguments against free schools. First, they say that they are more selective than other schools and so it is not surprising that they get better results because they get more able pupils from generally better-off, better-educated parents. But look at another country, the United States, with its so-called charter schools. Often, these have been set up in the least promising areas, inner-city areas rife with drugs and violence, where all or nearly all pupils are from generally poor, minority families. The uplift in performance, though, is startling. Many of these schools are set up by parents, or parents and teachers, precisely because the existing government-run schools are do depressingly and young-life-ruiningly dismal. but those concerned local people make their schools secure places to learn, ban drugs and tolerate ‘no excuses’. And you know what? The children shine.

The other objection is that free schools in the UK are wasteful because they are often set up in places where there are already spare places in traditional state schools. Indeed: rather like the case in those American cities I have just mentioned. Setting up a new, different, better-motivated school in an area where there are only ‘sink’ schools is no waste: it is one of the most cost-effective things you could do. Preventing better schools from setting up is rather like preventing better restaurants from opening up when there are still spare tables in the local greasy-spoon.

The government says it will create another 500 free schools. Frankly, we should turn every school in the country into a free school.

Ed Miliband’s TV debates law

Following the TV debate row in the UK, Labour Party leader Ed Miliband says a future Labour government would pass a law to ensure that live television debates become permanent features of general election campaigns. The law would establish a trust to establish the dates, format, volume and participants.

I was once shocked by the alacrity with which politicians proposed new laws as the answer to any problem. Then I came to see it more as an interesting fact of anthropology. Now I see it more as an art form. The invention that goes into making new, pointless or counterproductive laws is truly a pinnacle of human achievement.

It is sublime that a politician who cannot get other people to debate with him should propose a law to force them. Exquisite that this new law should be backed up and overseen by a new quango. Uplifting that the law’s proponents should think that the process would be fair, democratic, and easy.

It won’t, of course. As I have mentioned here before, it is by no means clear that TV debates have any place in the constitution of the UK. After all, we do not live under a presidential system, and we do not elect presidents at general elections. Rather, we elect individual Members of Parliament in our local constituencies, and it is those MPs, or at least their parties, who decide who goes into 10 Downing Street. TV debates, by contrast, suggest that we are in fact electing a head of government. They suggest that individual MPs are of no account, mere members of that person’s Establishment. They suggest that we are electing an executive, not a legislature that can hold the executive to account. Already, the executive in the UK has far too much power over Parliament, and Parliament has too little control over the executive. TV debates can only make that imbalance more profound.

As for timing, who knows if the five-year fixed election cycle, introduced in 2010, will last? If parties split on key issues, for example, the country might find itself without a coherent government. The calls for a fresh election would be overwhelming. And how to decide who should debate anyway? Is it decided on the basis of current representation in Parliament (in which case UKIP, though polling 15%, would be nowhere)? Or on the basis of the polls (in which case the Lib Dems, currently part of the government, would be nowhere)? Should parties that stand in only part of the UK (the Scot Nats or the Ulster Unionists, for example) be represented in the national debate? If so, how deeply?

The only people who would win every time are the lawyers. I sometimes wonder if, like the mice in Hitchhiker’s Guide to the Galaxy, it is actually for their benefit that the world is currently configured.

RIP Matthew Young

MJYoung June 2012


We are very sad to report the death of our friend Matthew Young, who died suddenly at the weekend following an undiagnosed illness. He worked on major projects for the Adam Smith Institute, but also had a significant career in government, under both Labour and Conservative administrations.

Matthew rose quickly through Whitehall to become Private Secretary to Lord Armstrong, head of the civil service under the Conservative Prime Minister Edward Heath, in 1971. He went on to be Press Secretary to the Labour Prime Ministers Harold Wilson and James Callaghan, conducting twice daily Lobby briefings in Downing Street and preparing instant responses to the numerous political issues that arose.

From 1976 he became responsible for policies to control and reduce costs in the civil service, with direct responsibility for controlling expenditure limits on government departments. During this time he exposed some of the profligate spending in ministries – such as the Ministry of Defence, which he found was still issuing detailed specifications on headlight seals for their trucks, long after this technology had been replaced by cheaper, more reliable one-piece headlight manufacture.

In the Thatcher years, Matthew worked on privatisation, drafting plans to privatise HMSO, the Laboratory of the Government Chemist, the Building Research Establishment and the Agricultural Development Advisory Service. He also pushed forward the contracting-out of Defence functions such as Navy Air Training, Radio Communications, and Met Office observation functions. He estimated that these activities amounted to more than £300m of savings for the taxpayer.

In the 1990s he directed major projects for the Adam Smith Institute, involving key players from industry, government and the civil service. One of these, the Trafficflow Project, identified the potential for road congestion pricing in the UK, and convinced the then Mayor of London, Ken Livingstone, to adopt it. Another, involving national pension and finance experts, laid out plans for a simplified pension system, which was the foundation for the Stakeholder Pension introduced soon after.

From 1996, Matthew created his own think-tank, Public Policy Projects, concentrating mainly on health policy. Hundreds of key players from private and public sectors would attend his events and Parliamentary Breakfasts, to hear an impressive array of ministers and experts talking about current concerns.

The Adam Smith Institute has lost a good and loyal friend, and someone who not only thought deeply about the structure of government, but actually made change happen.