Madsen's talking middlemen today — those wicked people who buy things for one price and then sell it to someone else for a higher price. But, it turns out, this is actually quite a useful function, both for the seller and the buyer. I remember back in school being taught about how middlemen were exploiting the poor, and if you didn't buy things directly from the seller you were exploiting them too. Even back then it didn't sound right, and I wish I'd had a video like this to explain why.

There are thirteen more videos to come in this series, and the whole lot can be viewed as they're posted in this playlist we've made. You can also subscribe to the Adam Smith Institute's Youtube account here to get notifications about this and other ASI videos as we post them.

This week sees the launch from Biteback Publications of Madsen's book, "Think Tank – the Story of the Adam Smith Institute."  Madsen, with Eamonn and Stuart Butler, founded the Adam Smith Institute "to make a difference."  They wanted a new type of think tank, one that would deal in policy innovation rather than trying to change economic thought.

Taking a lead from Public Choice Theory as well as from Free Market and Austrian Economics, they sought to develop creative policies that would address the various interest groups, allying them where possible to proposals that would introduce choice and incentives into an economy heavily dependent on state ownership, planning and controls.

"Think Tank" is the story of what they did.  It is a very revealing, almost blow by blow account, of the hurdles they faced and how they sought to surmount them.  Without major backers, the ASI operated on a shoestring.  It used resourcefulness to turn its chronic under-funding to advantage, developing ingenious and innovative ways of ensuring that its message was heard. 

Skills and techniques that Madsen and Eamonn developed at St Andrews were used to good effect in giving the ASI a footprint out of all proportion to its actual size.  The book is a very engaging story, lighthearted in tone, unpretentious, and with none of the pomposity or self-importance that sometimes characterize political memoirs.  It is actually quite a thrilling read, written in an almost chatty style that takes the reader along with it.

Martin Hutchinson's Bear's Lair newsletter is always worth a read, but last week's was particularly good. Just as the housing bubble of the 2000s brought down the world economy, a government bubble is now growing and approaching bursting point. Artificially cheap credit, which led to massive malinvestment in the housing sector, is allowing profligate governments to spend far beyond their means:

In the government bubble, central banks have played the exacerbating role that Fannie Mae and Freddie Mac played in the mortgage bubble. The Bernanke Fed’s repeated purchases of government bonds, a practice believed devoutly to be thoroughly unsound before 2008, mirrors Fannie and Freddie’s massive portfolio of mortgage bonds and their determination not to be left behind in market share however “subprime” the mortgage market became. Similarly the European Central Bank’s $600 billion 3-year 1% bank funding in December 2011, and its promise to repeat the operation in February, have provided a massive subsidy to the government bubble in the same way as Fannie and Freddie’s recklessly awarded guarantees, their dumbing down of approval criteria and their bloating of maximum mortgage limits subsidized the subprime mortgage bubble.

We printed our way into the "boom" of the 2000s; now we're trying to print our way into a recovery. What's the likely outcome?

The solution in both cases is a recession that writes down the malinvestment and begins the redeployment of resources to more economically viable areas. In the case of housing, that process is nearly finished – there are strong signs that house prices are nearing a bottom, having returned in most areas to below-average multiples of incomes. The next few years will see two further downdrafts, however, one caused by the inevitable (if artificially delayed) foreclosures and the other caused by a rise in real interest rates to historically appropriate levels. It may thus be 2018-2020 before the housing market is truly restored to health, in terms of new home building, etc.

In the government case, the first solution attempted will inevitably be a burst of inflation, with interest rates being kept artificially below the inflation rate, inflation statistics being falsified, and the Fed attempting to depress the real value of the government’s obligations. This will not work, but the temptations to the Fed and the authorities are likely to be such that no Paul Volcker will appear as in 1979 while inflation is at the relatively benign 10-12% level. Instead, sloppy money will be perpetuated until hyperinflation of 100% per year or more has entered the American experience for the first time.

It's a chilling thought. Quantitative easing was once described by the now-Chancellor George Osborne as "the last resort of desperate governments". He was right. QE is becoming an increasingly normalized tool of government policy throughout the world. It may be endless; carried again and again to keep the government bubble inflated until Hutchinson's nightmare scenario is realized.

As the government bubble bursts, Hutchinson himself predicts that after some political turmoil governments will be forced into acting responsibly, with a return to the gold standard and constitutional amendments requiring balanced budgets. History tells a different story about the aftermath of hyperinflations. Let's hope Hutchinson is right.

A friend showed me this fantastic group last night: Wirral First, an organization (with at least one member) dedicated to the Wirral seceding from the rest of the UK:

Firstly, local citizens will stand for election to Wirral Borough Council as independent candidates, but on a Wirral First platform. That platform is a proposal to massively reduce the size of the present Council and outsource almost all of its current functions.

By following this policy, unnecessary spending would be greatly reduced, as would Council Tax. This is in line with other recent local government proposals around the country.

In the future, if we can achieve a majority of councillors in Wirral, we would then propose to petition central government to hold a referendum on whether Wirral should have autonomy from the UK. The principle has already been conceded that, if the majority of Scots want to run their own affairs, they can do so and we would expect the UK government to allow the same rights of self- determination to the citizens of Wirral.

Their economic policy is based around abolishing income and corporation taxes. They would hold to English Common Law and abolish at least some of Westminster's statutory laws. If you ask me, the common law is the only law we should have, but I suppose this is a good start. Best of all, drugs and prostitution would both be completely legal.

Alright, I'm not sure that the Wirral will ever manage to achieve any of this. But why shouldn't it? Douglas Carswell MP was profiled in yesterday's Evening Standard as "the politician who wants to bring down the SW1 set". Well, good. More importantly, though, Carswell wants to reform local government so that most decisions take place on a local basis. The advantage of this is that the costs of statism are more immediately felt the closer power is to them, and leaving a lousy government is easier when it means moving to the next-door county than the next-door country.

Milton Friedman used to make the point that there were four ways of spending money, and spending someone else's money on other people was the worst way possible. The more local this sort of decision is and the fewer other voters there are, the greater the incentive to vote for sensible, free market policies. And even if it's still unlikely that voters would elect a liberal administration, the more local administrations there are, the greater the chances of getting at least one.

I'm all for charter cities, seasteads and free zones. Honduras's experiment with a charter city shows a lot of promise. I'm convinced that new technology is rendering the nation-state obsolete, and this will be the century of the city-state. But we should be thinking globally while acting locally: let's not forget the Wirral.

If you want to try to judge the shape of a proposed censorship regime, there are few better methods than observing the sort of people who are cheer-leading the scheme. Although of course all forms of censorship are anathema to libertarians, the exact nature of the threat is always worth divining.

The inspiration for this post was last week's Question Time, the panel of which consisted of Philip Hammond, Alastair Campbell, Shirley Williams, Steve Coogan and Ann Leslie. One of the sections was whether or not the post-Leveson press needed statutory regulation. The two champions of censorship on the panel were Coogan and Campbell, who took the view that some form of independent regulation of the press was necessary in order to restrain the worst criminal practises.

The two most vocal opponents were Shirley Williams and Ann Leslie. Ms Leslie in particular drew on her extensive experience as a foreign correspondent to warn that wherever she want, the Minister of Information is always in favour of a ‘responsible’ free press, and that a truly free press is fundamental to democracy. Her views were not really permitted to count, however, because she committed the egregious career-sin of writing for the Daily Mail. This brings me to my main point.

Both Campbell and Coogan spent a good portion of the show playing for cheap applause by lambasting the Daily Mail and that other great liberal-left Satan, News International. Scarcely a question could go by without some cheap joke at the Mail’s expense. Defending censorship, Coogan querulously queried whether or not we could have a ‘free press’ when Rupert Murdoch owned so large a share of it (the answer is yes).

As I’ve argued in the past, the Mail and especially the Murdoch papers have such a large readership not because of any great corporate conspiracy but because their papers are very popular. Murdoch only owns three national papers, no more than the Mirror Group. It is just that more people like – and buy, of their own free will – his output. This infuriates a certain species of Guardian reader (although not all of them) who genuinely believe that their tastes and preferences should carry more weight than that of the ordinary public. The fact that their newspaper of choice has to be propped up by Auto Trader and has the lowest circulation of any quality daily baffles and infuriates them.

Like fast food and cigarettes, they view right-wing journalism as a morally debilitating opiate upon which the masses have become cruelly hooked. So what’s needed is statutory regulation that will afford a narrow band of elitists the opportunity to ‘correct’ the market tendency towards journalism they dislike. It is inevitable that any censorship regime, however well-meaning, will be informed by the prejudices of its enforcers. We must not allow the political class to make the same mess of the press that they make of so much else.

In this week's episode of Economics Is Fun, Madsen explains the role of money in the economy. Watch out for the Zimbabwean trillion-dollar note — I carry one in my wallet in case anyone ever claims that governments can learn from history.

Madsen's new book, Economics Made Simple, is available to buy in paperback and Kindle now.

Following on from Madsen's commetary on trade and comparative advantage, a little proof that clever people instinctively get it.

"What leads one little Einstein to choose electrical engineering and the other law? A 10-year study of 320 profoundly gifted individuals (top one in 10,000) found that those whose mathematical skills were stronger than their verbal ones (even though they had very high verbal ability) said math and science courses were their favorites and were very likely to pursue degrees in those areas. On the other hand, those kids whose verbal skills were even higher than their math skills said humanities courses were their favorites and most often pursued educational credentials in the humanities and law. It appears then that highly gifted kids ask themselves, 'What am I better at?' rather than 'Am I smart enough to succeed in a particular career?'"

That last, am I good enough, would be absolute advantage. That is, am I better than the other people who will be in this same career?

And that's where so many go wrong about this comparative advantage thing. It's normally expressed as we should all do what we're best at. But this leads to confusion with many thinking that "best" means in comparison to others. No, it isn't meant to mean that at all which is why I much prefer the reverse formulation. We should all do what we're least bad at. Which is what, quite instinctively, those clever students are doing. At that sort of level, the 1 in 10,000, pretty much any career choice is going to lead to worldly success. These are the (and yes, I find such gifted people profoundly irritating as well) people who near whatever they do are going to be the cream on the top of their chosen career. Yet they are saying that they should be following specific career paths based on their own internal differences in competence.

Which is what we should all be doing: whether we are talking about ourselves as individuals, or the more normal formulation of what countries should specialise in as a matter of trade. Do what you're least bad at and trade the resultant production for everything else that you need. This will leave you the best off that you can be.

I would add though: I don't think it's only the very bright who internalise this point. I think we all actually think this way. Do what we're least bad at. It is only when we come to this trade point, when we dress it up as Ricardo's comparative advantage, that people start to get confused. Which is, as I say, why I prefer the reverse formulation: everyone instinctively gets it when it's put that way.

You know that a politician is losing it when he comes aross as an East End schmutter salesman: you know the line, never mind the quality sir, feel the width! Which is exactly what Algirdas Semeta does here as he tries to defend the absurd financial transactions tax.

All taxes, when looked at in isolation, carry an economic cost. But there is an urgent need to raise revenue and the cost of the FTT is small compared to the trillions of euros and pounds of support that the financial sector has received in recent years.

Moreover, the positive effects of using revenues from the FTT must be taken into account. If the projected €57bn (£47.7bn) per year is put towards consolidating national budgets, reducing other taxes or investing in public services and infrastructure, the direct economic effect of the FTT should be positive for growth and employment in Europe.

That first part is indeed true: all taxes have costs as they are raised. Which is why we have to look at the costs imposed by each tax and the way the tax is raised. Not wander off into a salesman's patter about how gloriously we're going to spend the money.

Ways of spending funds can have good effects, yes. And we should consider those effects when deciding how to spend money. But different ways of taxing things have different effects. So we should not, cannot, justify a specific tax by the glory of how we're to spend the revenues. We should, must, justify a particular tax by the effects of just that tax, comparing it to the effects of the other ways in which we could raise the same revenue: for of course, the glories of the spending will be the same even if we reduce the impacts of the raising.

There is an urgent need to balance budgets. How could this small tax on the financial sector be worse for growth and competitiveness than further hikes in income taxes, or deeper cuts in public spending?

Well, I don't know about you matey but I, when confronted with a thorny question like this, tend to go and seek the opinions of the experts in the point at hand. Perhaps Mirrlees and Diamond, you know, the blokes who got their Nobels for exploring this very point, the various forms of taxation and the elements that make up an optimal taxation system? The blokes who were writing papers on this while you were having Soviet economics drummed into you in Vilnius? The blokes who point out that transaction taxes are entirely contra-indicated for the way that they cascade through the economy makes them vastly more expensive in effects as against revenues than taxing capital, corporations, income or consumption?

You know, the experts who say that an FTT is a very bad idea indeed?

But then I'm not a politician having to defend a near insane idea for which I'm extraordinarily grateful. For I'm allowed to look at facts, not compose rhetoric.

Conspiracy theorists like their threats to be fundamentally phantom. After all, if you stake your pride and credibility on something that can be empirically tested, you risk being proved wrong and having to adjust your world view. This was certainly the case with the more committed species of campus feminist I encountered at university. Patriarchy to them was not something with any demonstrable limit – it was a vast, secret conspiracy on the part of the male sex covering all aspects of live and explaining everything.

Every instance of disproportionate male involvement was a result of this evanescent injustice. Even the student council – elections to which were riddled with enough ‘positive’ discriminatory measures to make a meritocrat’s eyes bleed – had a fairly narrow male majority, which was taken as proof positive that more work was needed. The idea that the playing field might actually be fairly level, and the disparities the result of other factors and individual preferences, was anathema.

The same thinking lies behind Harriet Harman’s obsession with boardroom representation, which has recently taken hold of the mind of the Prime Minister. The argument runs that lots of hard-working, economically productive women are being passed over purely on the grounds of their sex, and this is costing the British economy £40bn a year. Now, the Telegraph’s James Delingpole has handily skewered the laughable notion that politicians are simply foisting unwanted profit on short-sighted businesses. But it’s worth considering how ridiculously extensive this patriarchal conspiracy Harman and others subscribe to must be.

Let’s imagine we have ten businesses competing for the same market. If we are spectacularly ungenerous to the male sex (as to get into Harriet Harman’s brain we must surely be) let’s assume that nine of those businesses are run by real, conviction sexists who consciously exclude capable women on the grounds that they’re women. This leaves a vast talent pool available to the tenth business, which presumably can lap up these highly capable workers. If sexism was depressing their wages as well, then this business would have a significant competitive advantage over the competition.

How long would rival businesses really keep deliberately hiring inferior labour at inflated prices out of allegiance to the principle of sexism? It would only take one company in a competitive market to break the ranks of chauvinist solidarity for such arbitrary and costly employment practises to be rendered totally unaffordable.

There are all kinds of reasons for differing employment patterns between men and women, including different priorities, working hours, child-rearing and so forth that have firm bases in business sense.
To ascribe these differences to an omnipresent, more-important-that-profit sexist conspiracy, one must believe the entire spectrum of business subscribes to the exclusion of women at the expense of their own industrial and economic interests. That they literally looked at the ‘profits’ David Cameron is waving in front of them and decided that, if the cost was employing women, £40bn wasn’t for them. Let’s hope nobody ever shows Cameron ‘Loose Change’.

In December 2011, the Adam Smith Institute asked one of its Senior Fellows, Miles Saltiel, to form a team to compete for the £250,000 Wolfson Prize for an essay on the best course for the Eurozone if members decide to drop out. He assembled a crew of City professionals and economists. They pored through the law-books, worked up the sums and took the counsel of an international group of seasoned veterans. They concluded that the legal situation is so ambiguous that drop-outs will have strong negotiating hands. The sums are plain scary:

• Bank contagion of €740bn , swamping even German bank capital;
• Policy cost of €1tn, including reform, monetary and fiscal easing; and
• Haircuts for selected creditor classes of 100%, if the ECB sticks to its guns by insisting on its status as an “official creditor”.

Most alarming is the institutional mismatch: the ECB should be taking the lead but is hampered by its own statutes; not even Germany is in a position to ride to the rescue. And the need to minimise turmoil means that any secession will come as a surprise.

• This is no excuse to for policy-makers to bury their heads in the sand. They need to brace themselves and be ready to tweak the international mechanisms to meet the specifics of dropping out from the Eurozone.
• The occasion of secession should be handled calmly all round, with the seceding state making provisional agreements with its neighbours and others to minimise spill-over.
• Restructuring needs the skills of the IMF, who in turn need local leadership. If the ECB can’t step up, European states and others should create “Resolution Funds”, possibly one for each seceding country, to finance reform and supervise restructuring.
• The EU needs to take an adult approach to restructuring. Fines make no sense and treaties have no force. Once realistic plans are agreed, the EU should co-operate with drop-outs while they stick to their promises, but hold out the threat of reduced decision-making rights if they stray. So too must the regulators act with maturity, restraining pro-cyclical burdens on financial organisations including central banks.
• The eventual settlement should be embodied as a treaty, to iron out the complexities and regularise the dislocation of secession.

Click here to see the essay, setting out the analysis and proposals in full. It is offered as a contribution to the debate between contestants for the Wolfson Prize, which we see as playing a positive part in adding to public understanding and the formation of professional opinion.