In which we sympathise with a letter in the Telegraph

We find ourselves nodding in agreement at this letter:

Mr Walters said there are some benefits to being a member, but that the level of bureaucracy is a heavy burden on the state.
“If we get ourselves out of the bureaucratic nightmare Europe creates, that would be beneficial. And the amount of money spent propping up that bureaucracy. There would be no worries about an exit.”

Because of course “Europe” is a political union with people who do this:

Four French bakers have been found guilty of working too much and hit with fines after sparking national debate over their desire to stay open seven days a week.
A court in Dax, south-western France, handed €500 (£368) fines to the four from the town and nearby Saint-Paul-les-Dax saying they had flouted a 1999 prefectural order obliging any bakery to remain closed for at least one day per week.

Note that this is not about giving the staff (nor even the boss) a day off or two. This is an insistence that the actual premises must close for one day a week. Supposedly so:

Jean-Pierre Crouzet, head of the national baker’s and confectioner’s confederation backed the status quo, saying it encouraged competition by obliging people to buy bread elsewhere at least once a week.

That is, in the view of the French Bakers’ union, the French people are too stupid to understand the concept of shopping around. A problem which can only be solved by having one seventh of the country’s bread, confectionery and patisseries plant and capital inoperative on any single day.

We really are of the opinion that this is something that the market unaided can solve. And, further, should be left to solve.

Yes of course Donald Trump is wrong about Nafta

More interesting is why Trump is wrong about Nafta:

Recently, Donald Trump made a strong claim about the North American Free Trade Agreement (NAFTA) in an interview on CBS 60 Minutes:

“It’s a disaster. … We will either renegotiate it, or we will break it. Because, you know, every agreement has an end. … Every agreement has to be fair. Every agreement has a defraud clause. We’re being defrauded by all these countries.”

And we have an, admittedly incomplete as yet, theory for why we think businessmen are often quite as bad as they are at economics. We would expect them, given that they are usually playing in the private sector, to be rather better than they are at how private markets work. And certainly someone in Trump’s industry should understand public choice arguments.

But our theory is that so much of what a business actually does is trying to beat economics that the knowledge of the underlying theory rather gets missed. Just as one example, every business is trying to gain market power, the ability to set prices. From the economic theory point of view this is a very bad idea: and it’s the competition that markets provide that stops every business from gaining that market power.

And something similar happens with trade: when running a business you are obviously going to try to reduce your inputs. Of anything: one of the ways to succeed is to minimise inputs. And yet when we talk about the whole economy, about trade, the aim and point of the entire exercise is to maximise those imports, those inputs. That’s why we’re doing it, to gain the maximal amount possible of the resources and labour of foreigners that our people get to consume.

So, much of the time, running a business is trying to beat economics. Thus a businessman can often have a distorted idea of what desirable economic policy is.

There are those who will make the leap from this claim to the one that therefore we must regulate businesses because they are “anti-economic”. To which we would respond yes, of course , we must do so. And we do do so, we insist on competitive markets which is exactly the correct antidote to such attempted behaviour.

On the consistency of Willy Hutton

Of the varied commentators that parade and prance across the national life we have a certain weakness for Will Hutton. As a wonderful example of the, umm, consistency which is required to remain as an authoritative national voice over the decades.

For example, it’s a very good idea, in fact we should remake British business in this image, that companies are largely family owned, with a secure shareholding structure, so that management can get on with looking to the long term of the business and not be distracted by the flightiness of the here today gone in milliseconds nature of the stock market:

The proposed new Companies Act would set out a new legal framework that will privilege long-term, engaged investment. Mutuals should be created to aggregate proxy votes, and cast them on behalf of shareholders. The basic voting share will continue as now, but it will attract more votes the longer it is held; if shares are lent, voting rights will be forgone. This will strike many in London as going too far – a dagger at the heart of British capitalism. But when Google floated, its founders Sergey Brin and Larry Page issued two classes of shares, with class A shares having 10 times more votes than class B – so Brin and Page ended up with 37.6% of the votes for 3.7% of the shares. As they said in the letter accompanying the initial public offering, “we have set up a corporate structure that will make it much harder for outside parties to take over or influence Google. This structure will also make it easier for our management team to follow the long-term, innovative approach.” Ten years on from the flotation, who can say they were wrong?

LinkedIn offered its original long-term shareholders 10 times the votes when it floated in 2011, and the Glazers floated Manchester United in New York rather than London because American rules allowed the family shares to have 10 times as many votes. Owners in mainland Europe – from the Wallenbergs in Sweden, who have holdings in most of Sweden’s top companies, to the Piëch family, part-owners of Porsche – use similar devices. Where there is business success and innovation, look for non-British corporate structures.

This trinity – business purpose, trusteeship and a range of committed shareholders – will be the foundation for the creation of purposeful companies, freed to behave like long‑term trusts rather than dance to the tune of peripatetic day traders. They will be value creators rather than rent extractors. It would be stakeholder capitalism in practice.

These proposals must be supported by a new takeover regime. The argument in hostile takeovers should not just be over price: it should be whether business purpose is being protected – with both sides being required to ask their shareholders’ view – and long-term shareholders’ votes privileged over those who have bought for a quick buck. The government should refer bids that create public-interest concerns and use the Competition and Markets Authority more aggressively. In short, takeovers, especially hostile takeovers, should be the exception rather than the rule of British business life.

We quote at length to show that this is not some throw away line, but central to Willy’s vision of how business life should operate.

That was in February. This month we are told that it’s a very good idea, in fact we should remake British business in this image, that companies are largely not family owned, with a secure shareholding structure, so that management can get on with looking to the long term of the business and not be distracted by the flightiness of the here today gone in milliseconds nature of the stock market:

Former CEO Martin Winterkorn, who resigned last week over the scandal, claims he knew nothing of what was going on, blaming a few unnamed executives for making a catastrophic error of judgment. Winterkorn was the consummate German engineer, knowing every dimension of engine performance; if he did not know how the dirty diesel engines of some popular VW brands were successfully passing US emission tests it was only because he chose not to ask. He did not need to. He had the backing of the Porsche family, who own just over 50% per cent of VW’s shares and who agree to vote as a block; the support too of the state of Saxony with a further 20% per cent –and of union members on the supervisory board. Winterkorn could run a company of 600,000, as Süddeutsche Zeitung remarked, as if it were North Korea.

VW is about production and jobs which trumps concerns about environmental sustainability – a culture than unites unions as much as the Porsche family.

And that’s even in the same newspaper. So, umm, yes, the consistency of Willy Hutton. We wonder if he’s heard of consistency?

Six points about the Trade Union Bill

  1. Making striking more difficult might be a good thing. The most controversial part of the bill is the part requiring at least 50% turnout in strikes overall (so 25% of members must vote in favour), and for public sector strikes the backing of at least 40% of those eligible to vote. This certainly does make striking less easy, but it hardly makes it impossible. If workers really feel that they need to strike, they can still do so, provided they get 25% or 40% of total members (for private and public sector workers respectively) to agree with them. This does make it harder for people like Len McCluskey and Mark Serwotka to call strikes that most union members don’t want, though.
  2. Most workers aren’t in a union. Only 14% of private sector workers and 54% of public sector workers – 25% overall – are in a union. That means that strikes, even if they are good for union workers, only benefit a small number of workers. And everyone else is inconvenienced by them: strikes can be costly and time-consuming for people who use the services that the striking workers provide.
  3. People who are in a union are generally middle-income workers. According to the ONS, “Middle-income earners were more likely to be trade union members than either high or low paid employees. About 38 per cent of employees who earned between £500 and £999 were members of a trade union, compared with 21 per cent of employees earning £1,000 or more. The proportion of employees earning less than £250 who were trade union members was 15 per cent.” Also, “Employees in professional occupations are more likely to be trade union members” (this includes jobs like nurses).
  4. Why shouldn’t firms be allowed to hire agency workers to fill in for striking workers? Workers who take part in official strikes (as defined here) are protected from being fired, except after 12 weeks of striking if the employer has tried to settle the dispute. This privilege is popular but if the only reason to stop firms from hiring replacement workers is that it makes strikes less powerful it’s not clear why this is a bad thing.
  5. Some parts of the bill do seem draconian. Making strikers wear armbands may be justifiable if there is a problem with identifying workers who are actually working and who are taking part in the strike – I don’t know if this is the case. Requiring picketers to give their names to the police seems entirely overboard, though, and David Davis is probably right that it’s unnecessary.
  6. Strikes do cost money, though some might have a surprising upside too. Between 2011 and 2014 (inclusive) about 3 million days worth of labour were lost directly because of strikes. That’s costly and does not include the time lost from people working from home, leaving work early, coming in late, etc. (Giles Wilkes points out that over the same period 520 million days were lost to illness. With that context, 3 million doesn’t sound very high.) But there may be surprising upside too – a Cambridge paper released today says that the February 2014 tube strike was a net positives in efficiency terms, because 1 in 20 people who found a new route to work stuck with it after that, and the long-term savings to them from that outweigh the daily losses to the other 19 in 20 workers. I’m not sure if that scales to other strikes, but it’s quite a nifty finding either way. (NB: I haven’t read the full paper yet, so I can’t vouch for it.)

So, voluntary cooperation works again then

There really is, as Garret Hardin pointed out, a problem called the Tragedy of the Commons. When a resource is exploited on an open access basis (ie, a Marxian one) and if demand on that resource is greater than the regeneration capacity then some form of management is required or the resource will be exhausted. In the modern era this means that the bureaucrats get to write lots of regulations. However, as Elinor Ostrom went on to get the Nobel for pointing out, it doesn’t have to be this way:

The local Vezo people subsist, on average, on $1.72 a day, well below the $2 a day official poverty line, and depend on fishing. After detailed discussions with the charity .and in village meetings, they decided to institute a series of two to three month closures of just a fifth of their octopus fishing areas, to give stocks time to recover. Just a single, experimental such closure, in 2004, has so far been followed by more than 100 others along the southwest coast.
The results, the study shows, have been dramatic. Octopus catches in the month after the closures – carried out under traditional laws, and enforced by the local communities themselves – are seven times as great, on average, as in the month immediately before them. Partly this is down to a big influx of fishers to the newly reopened areas, but – even so – individual catches almost doubled. Average incomes shot up by over 130 per cent, and did not fall significantly during the closure periods because the people then directed their efforts to the 80 per cent of their areas that remained open.

An octopus fishery is hugely well suited to such a system. Relatively short lived creatures (perhaps 6 months in the wild) and they usually die shortly after their one mating extravaganza. But Ostrom’s point was much more than that, it was that voluntary cooperation, in a group small enough to be able to cooperate properly (up to some few thousand people perhaps), can indeed solve these sorts of problems. Perhaps, as here, people might need to be told how to do it but that’s fine, none of us know everything.

Of course, as all three of Hardin, Ostrom and Coase have pointed out, not all problems of this type can be so solved. Which means that our necessary trick is to work out which ones can be and to leave those to voluntary cooperation to solve. Those that absolutely do require government intervention (which would need the cooperation of tens of millions perhaps, thus requiring that element of compulsion that only government does have) would, well, they’d need government action.

That is, we should be cutting government back to only those things which must be done and which can only be done by government. The rest of it, the stuff we can do for ourselves, we’ll get on with ourselves.