Adam Smith Institute

45. "Speculators are parasites who produce nothing."

Speculators have had a bad press. Along with landlords, corn merchants, and tax gatherers, they have been the whipping boys of demagogues. They are often thought of as drones who "buy in the cheapest market and sell in the dearest," adding nothing of value in the process. Typically the speculator buys up something they think will be in short supply later, and can therefore sell for more than they paid.

Yet the speculator helps to smooth out uncertainty. The farmer who plants in the spring does not know what prices might be like when the harvest is in. He might prefer a guaranteed price than face that uncertainty. Someone who buys the crop now offers a sure price; the crop might sell for more than that, but it could also be less. The speculator can carry that risk instead of the farmer, and profit from it if he is right.

This is what speculators do; they handle risk. They live and trade by being able to call the future more accurately than others. They give people certainty and security now, in return for a higher return for themselves in the future if they are correct. Speculators can lose. The goods they buy now at a guaranteed price might plunge in value later. Unlike many farmers and merchants, the speculator can carry those losses.

Speculation in currencies is similar. A manufacturer planning to sell in another currency might prefer the certainty of a fixed value, rather than take chances on the future exchange rate. The speculator will sell him that currency now, at a price he thinks it will exceed in the future.

As long as speculators are right more often than wrong, they can prosper, and they smooth market volatility in the process. So far from being unproductive drones, speculators actually offer a valuable and skilled service: they manage risk.

John Kampfner has recently been thrown out resigned as the editor of the New Statesman. My assumption is that even the highly partisan readership of that magazine got  bored of being offered inaccuracies of the following sort:

It is strange to remember that a Labour government has presided over the phenomenal transfer of wealth and assets into the hands of the very rich.

I could understand if he said a transfer of resources from the productive, private, sector to the less productive State one, for taxation and government spending have indeed risen over the New Labour years. But a transfer of wealth from the poor to the rich? How does that work then?

Leaving aside the sarcastic point that the poor, by definition, don't have any wealth worth taking because, by definition, they're poor?

A requirement for this to be true would be that the poor now have less wealth (and we should distinguish between wealth, a stock, and income, a flow) than they did ten years ago.  There's no evidence that this is in fact true: quite the contrary, every level of society is now wealthier than they were ten years ago. So there has been none of the transfer that he complains about.

What is true is that of the growth in wealth in the past decade more of it has gone to the top of the distribution than was formerly the case. But this is a function of the way in which the benefits of growth are distributed, not a transfer from one group to another. And even there it's hardly phenomenal: in 1999 the top 1% had 34 % of the wealth in 2003 they had, err, 34% (adjusted for housing, and yes, I'm cherry picking).

I've no objection to someone complaining about the distribution of newly created wealth (I might disagree but it's a legitimate concern) but I do have an objection to someone insisting that if some have become richer then others must have become poorer: that simply isn't true, the economy and the wealth it can create are not zero sum games. All can benefit, as they have been, rather than more for some having to mean a transfer to them from others of a set amount. 

Now we've put him straight all we need to work out is why this guff is appearing in The Telegraph rather than tucked away in a magazine no one reads. 

44. "Business should be forced to be socially responsible."

People in business have moral obligations to others, just as teachers and lift operators and everyone else does. Nothing about the activity excuses them from these, which include behaving in a responsible way to others, and respecting their rights, too.

Business people have the additional burden which trust imposes. They engage in transactions and contracts, and have a moral duty to keep their side of the bargain. Of course they have a legal duty as well, but that is not why they behave honourably.

They already perform services to society by making goods and services available, by creating employment, and by contributing to society's maintenance by paying the taxes and levies it imposes. Some suggest that they have the additional obligation of contributing to charities and the arts, to funding neighbourhood community schemes, and to supporting causes they deem worthwhile.

Some businesses engage in such activity to boost their public relations and their reputation. If being seen to do such things makes them sell more of their product, these are legitimate business actions, calculated to improve the financial position of the company. It can be good business practice to maintain excellent employee and community relationships.

People invest in companies, lending them money in order to generate a yield from it. It is a company's duty to use that money with due diligence for the purposes for which it was lent to them. If they misapply it to themselves, we rightly castigate and even prosecute them. If they apply that money to causes they approve of, perhaps because it makes them feel good, this can be a misuse of funds lent to them in good faith. It was not lent to them to support good causes, however noble. The lenders could have done that themselves. If it aids the business it is a valid use, otherwise it is not.

Lloyds TSB has just announced its results: 

The group, Britain's fifth-biggest bank, has taken a £280m hit on risky sub-prime loans, but that is only a fraction of the figure suffered by rivals such as Barclays, which earlier this week revealed a £1.6bn write-down. Chairman Sir Victor Blank said the bank had benefited from its cautious approach.

But that's how the system works: we've not found any method better than people doing as they wish wth their own money: hiring those stewards for it that they trust. Those who turn out to be worthy of that trust prosper as do the businesses they run and those who invest in them, waxing fat off the judgement of their servants and hirelings.

Those who are careless or foolish in where they invest stand to lose their money: exactly the tonic needed for people to be careful about where they do so. Harsh it may sound, but there's nothing unfair about capitalism in this manner. 

41. "Privatization has given to a few hands industries and services which should belong to all of us."

The term 'public ownership' is a misnomer. The state sector may have the name of the public filled in on the dotted line, but the public do not own it in any meaningful sense of the word. All of the attributes of ownership, such as control, the right to determine what use is made of it and under what conditions, is determined by the bureaucracy in command of it. Far from being owned by the public, it is owned in effect by the people who administer it. The public actually has more influence, via its choices and purchasing decisions, on private sector businesses than it can ever have over state industries and services. In those cases its influence is diffuse and diluted through the political process.

Because the public has no choice over whether to pay for state services, or to choose what quality of service is appropriate for them, they have no power over them. In their absence it is the managers and workforce who increasingly direct the services to meet their needs and convenience instead of those of the public. The phenomenon, called 'producer capture' by economists, results in services which score low in customer satisfaction, and in the output achieved for the funds they receive.

When parts of the state sector are privatized, they are moved into that part of the economy over which people do have some control, and influence. It is the public sector which is in the hands of the few, and the private economy which is subject to the will of the many. And where state industries are privatized by widespread share issue, large numbers of the public do achieve some genuine measure of ownership, as opposed to the total myth which is what public ownership has always been.

At last, after four months of dithering, the UK government has finally decided to nationalize the failed bank, Northern Rock. To their credit, and as if to show how far they have grown from their Old Labour roots, they declare that this nationalization will be "temporary". But as the economist Milton Friedman once noted, "Nothing is more permanent than a temporary government programme".

This particular temporary measure may indeed last a lot longer than the government intends. It's going to be very difficult for the government to extract itself from this business. The new boss that they have put in charge – Ron Sandler, who has appeared at Adam Smith Institute seminars on financial-services regulation – is, it seems, not being paid £1m a ayear to stabilize the bank and quietly return it to the private sector. On the contrary, he says he intends the Rock to "compete vigorously" with the other banks and mortgage lenders.

Right: so the government is going to be running an enterprise which aims to take on, and take business from, the private sector. Until recently the Rock had a fifth of the mortgage business, so it remains a potentially big player that the government's got hold of. And that's not good: London's reputation as a financial market has rested on the fact that governments have let the market get on with it and do not interfere in the running of particular firms.

The government says that nationaization is good for the taxpayer (though estimates suggest that the process could cost us each £3,500). But it's not good for the existing shareholders, who threaten the government with court action over their 'theft' of the bank. The government will brush off these gadflies – but they will be buzzing around, irritating ministers, for years.

There will be even less joy for ministers when they see a bank that they control evicting people and repossessing their homes because (thanks to the credit crunch) they can't pay their mortages. The press will have a field day with that.

If I were a minister now, I think I'd be stepping down and planning my career in the City.

40. "The free market does not work in practice because there is no such thing as perfect competition or perfect information."

The free market needs neither perfect competition nor perfect information. It works on the basis of what there is. Textbooks might talk of such things, and they might be used to make pretty equations and graphs, but they have nothing to do with the real world.

In the market place there is competition all the time. Sellers are competing to sell products at different prices, and buyers are bidding to buy them. When supply is abundant, sellers might have to undercut each other to get their goods sold. When goods are in short supply, customers might find themselves bidding against each other to obtain them. This goes on constantly, changing from day to day and even from moment to moment as new information emerges. None of this has anything to do with perfection. It is a continual process in which available information is acted upon. It does not have to be perfect; all it has to be is better.

Textbook economists might talk of 'equilibrium prices' at which supply matches demand, but no-one has ever seen such a thing in the real world. On the contrary, prices are changing constantly and vary at different times between different types of seller and between different locations.

Some people take the 'imperfection' of markets as a signal to advocate central planning and state direction. They want intelligent minds to supersede the confusing jumble of market interactions and impose a rational order on things. But there is no such thing as perfect planning either, and attempts to plan economies have proved laughably inferior. They have less information, less motivation, and are less responsive. Comparing the record of free markets, imperfect as they are, with planned economies and their imperfections, one sees the market economies winning hand over fist.

Anatole Kaletsky's take on the Northern Rock nationalization in yesterday's Times was spot-on:

Nationalisation... made sense only as a necessary legal stepping-stone to the orderly liquidation that Northern Rock required as soon as it ran out of money in September... To use nationalisation to keep the bank in business and its staff in state-subsidised employment would be a travesty of all the economic principles that “new” Labour has claimed to believe in.

His final paragraph is particularly telling:

All in all, what Mr Darling announced yesterday was a financial and political disaster of almost unimaginable proportions. The Northern Rock saga did not end yesterday; the fiasco has only just started, with the Government now officially in charge.

39. "Even though people are richer on average, they are no happier, so we should stop pursuing economic growth."

Surveys show roughly the same proportion of happy people as there were 20 years ago when standards of living were lower. From this Lord Layard and others conclude that economic growth does not bring happiness and that we should aim for a simpler, more equal society rather than for a wealthier one.

There are things that can be said about wealth brought by economic growth. It makes more opportunities available. At some levels it can remove unnecessary sources of unhappiness such as disease and starvation. It can make it easier to achieve goals, or to lead a more varied and fulfilling life.

Surveys about happiness also show that people say they are happier when they feel their circumstances are improving. They are less likely to profess happiness in a wealthy society that is static than in a less rich society which is advancing. It is the improvement which counts, not the actual level. Jefferson rightly pointed to "the pursuit of happiness" rather than to any given level of it.

Humans are not the sort to enjoy static contentment. They seek challenges and the thrill of achievement. The peaceful calm of the Lotos Eaters is not for them, and neither are the sheep-pen and the secure pasture. Those who think of happiness as needs satisfied fail to spot that those needs include challenge and change. Humans are aspirational, seeking much more than the provision of necessities. Better a human dissatisfied than a pig satisfied.

It is not up to economic commentators to say what levels of wealth and achievement people are to be allowed to make them happy enough. People themselves will determine the limits, if any. To achieve a society in which more people are happy, far from curbing economic growth, we will aim at one which affords its citizens opportunities for advancement.

32. "The fact that capitalism is in crisis is shown by the constant shifts from boom to bust."

Critics point to stock market and financial volatility as evidence of a "crisis of capitalism." In fact capitalism is always adjusting to new trends and reacting to new events, sometimes sharply, sometimes gradually.

Capitalism goes through business cycles. When confidence is high the market booms, but sometimes business contracts and consolidates. Despite the fluctuations of these periodic swings, there has been a steady growth rate, averaging about 2 percent per annum for over a century. Even the Great Depression of the 1930s failed to deflect the trend of that long-term average.

The business cycle's troughs and peaks are not a crisis of capitalism. Capitalism has shown itself well able to survive these cycles. Despite them, society gets steadily richer, and living standards rise as wealth diffuses through all classes.

Governments have distorted these cycles by manipulating the economy for electoral advantage. They have flooded money and credit into the economy ahead of an election to stimulate a short-term boom and gain support from the feeling of prosperity this induces. This has produced economic dislocation and inflation which had to be squeezed out later with attendant unemployment.

In recent years independent central banks have tried to smooth the business cycle's severities by combining the pursuit of sound money with making credit easier when an economic downturn loomed. It has been a precarious act which cannot necessarily be sustained, but this is not a crisis of capitalism either. It might just be problems arising from one type of financial management.

Capitalism itself is resilient. It adjusts, it survives. Its dynamism contrasts sharply with the rigidity of the planed economies, their consistent failure to deliver the goods, and their ultimate collapse. If people are free to invest in new production, to innovate and seek new markets, the resultant economy shows remarkable ability to survive the periodic shocks it encounters. 

28. "A small rise in inflation is a legitimate price to pay for reducing or eliminating unemployment."

There is no trade-off between the two. A "small" rise in inflation means that the government is creating false demand, and sending false signals about the real cost of investment. Making more money available pushes down the cost of borrowing. It also steals from people by making money worth less than it was, reducing the real value of their savings, and it therefore discourages thrift.

There is over-investment in producer goods as a result of the false demand. This does indeed create temporary jobs, jobs which will be lost as soon as the money which sustains them stops being pumped in. Furthermore, the loss in everyone's purchasing power which results from the inflation means that jobs are lost in the wider private sector because people can afford fewer of its goods and services.

Governments tried in the past to sustain the job expansion by increasing the rate of inflation. All this did was to postpone the day of reckoning for a little while. The "small" inflation does not lead to a reduction in unemployment on any permanent basis. What it does lead to is a larger and larger rate of inflation as government struggles to ride the tiger.

When hyper-inflation comes and the squeeze is applied, all of the "new" jobs are lost, together with many more as the economy plunges into recession. It actually happened in Britain, as in other countries.

The point is that inflation, even at modest rates, distorts the economic process with false signals, and leads to investment in areas where there is not the genuine demand to justify it. The real way to reduce unemployment is to achieve honest money that holds it value and the right conditions for enterprise. Then genuine economic growth will create the new jobs.

27. "Free market capitalism simply cannot meet society's welfare needs."

Strictly speaking, it is not supposed to. It is a method of social and financial organization that allies itself to the individual motivations which help determine human action. It does do two very important things, however.

In the first place it creates the wealth that allows for welfare provision. Under a free economy people in society can become rich enough to afford higher levels of care for those in need. They may do this through charitable organizations, or they may do it collectively through government. Non-capitalist economies tend to achieve poorer results, and cannot usually afford so high a level of provision.

Secondly, the free economy itself reduces the need for welfare by a variety of market provisions. Recognizing the demand, people respond with insurance policies, health plans and pension schemes, all of which reduce the need for welfare. By encouraging people to make their own provision wherever possible, the free economy reduces the need for state welfare. Self-provided welfare can usually be tailored more closely to each individual's circumstances, whereas collective provision is often provided on standardized levels based on what are perceived as average needs.

Paradoxically, it can be the state welfare system which makes people dependent upon it. It takes the funds to support its provision which people might otherwise have used to pay for their own. In other words, high taxes make people no longer capable of providing for their own welfare. Two-thirds of those receiving benefits in Britain actually pay more in direct and indirect taxation than they receive back from the state.

Furthermore, state services crowd out private choices for many people. Private education, healthcare and pensions compete with state options which are 'free' at the point of consumption. Private alternatives charge fees, but compete with state services which do not (because they have been paid for through taxation). This severely restricts their availability and accessibility for most people.

24. "A market economy offers people no more than a crass, materialistic life."

What market economies offer are choices and opportunities. They allow people to acquire the wealth that brings new things within reach. In some cases these will indeed be material things. If a person can become sufficiently well off to afford decent housing, enough to eat, adequate clothing and shoes, these are all better than their absence.

But a market economy brings more. It allows people to buy the things that make life more rewarding. They can enjoy music, communicate more readily with each other, travel to places previously out of reach. These, too, are the result of material things. They do not represent a crass materialism, however, because they give the chance to improve life's social interactions and its mind-broadening opportunities. It might take material objects to enjoy music and to visit exotic places, but a person with access to them does not lead a crass life in consequence.

Even beyond the personal possessions that can add to life's experiences, the wealth created by a market economy enables people to afford better services such as health an education. It enables them to enrich their surroundings with fine architecture. Better education opens doors to life's opportunities, and good health brings the possibility of activities such as sports and hobbies. They require material goods to become possible, but the opportunities they offer are far from materialistic.

Wealth is a tool. It enables the holder to trade it for the things they value. Some might indeed use it to acquire more possessions; it is their choice. For others it might be for enjoyment of the arts, the theatre and the concert hall. Some might seek satisfaction in beautiful objects such as antiques of works of art. The wealth created by economic growth gives access to all of these, and it allows us to express our personality by the choices we make.

22. "The free market is unfair because we do not all have equal votes as we do in a democracy."

The argument is that people with more resources unfairly have more market power than others, whereas in a democracy everyone counts equally. We would think it absurd if everyone voted on what kind of MP3 player people should have, and everyone received the one which gained the majority vote; yet this is how democracies work.

In a market we can all choose what type of MP3 player we want, and receive the one we choose, even if it is not the one preferred by a majority. This makes the market a source of greater freedom than a democracy. In a democracy we have to settle for the majority choice on a large package of issue taken together. In a market we can pick and choose to satisfy our preferences on individual items. We can take Apple for some products and Sony for others. We cannot in our government choose different parties for different policy areas.

People do not have the same buying power. Some people can offer goods and services worth more than those of other people. Older people might have more savings or command higher salaries than younger people. Those with more education and skills might become wealthier than others as a result, and the same applies to those with special talents, such as footballers, musicians, or entrepreneurs.

It means that some people can afford more or better goods and services in their market choices. This is because they offer more valuable service to others, and it is what spurs others to try and do likewise. If the rewards were allocated by equal votes, a majority could vote themselves a large share of the total, and make entrepreneurial activity no longer worthwhile. The economy would stagnate and no-one would benefit. This is not the kind of "fairness" that is worth having.

Dan Lewis of the Economic Research Council makes some good points about recession worries in the Yorkshire Post. The last time we were in this pickle, he says, was 2001 - but the then Chancellor of the Exchequer, Gordon Brown, had a full Treasury thanks to a long period of growth initiated by the Conservatives, and he used it to ride out the trough.

Fast forward to 2008, however, and we find ourselves in exactly the reverse position. Brown simply failed to turn off the public expenditure taps, so we have a budget deficit of 3.1 per cent of GDP – inexcusable after 15 years of growth. What this means is that there's just no money for a Keynesian expansion this time to stave off recession. Just a few days ago, we found out from the Office for National Statistics, that net borrowing in the financial year to December was running at £43.6bn – a staggering £11bn increase on the year before. 

It's worse than even that, Dan. By 2001, the UK's postwar economy - centralized, state controlled, bureaucratic, high-tax inflation-ridden - had been largely opened up to market forces by Mrs Thatcher's reforms. Lower taxes and greater growth enabled the national debt to be reduced. But now, after ten years of Gordon Brown, there's even more top-down centralization, business is strangled and controlled by a spaghetti of regulation, civil-servants intervene everywhere, taxes have risen hugely and inflation is on the way up.

Lewis might well be right that the UK can avoid a recession - two quarters of negative growth - and I hope he is. But I wouldn't start from here.