Tweet of the day

The Nobel prize is sufficient to fund the EU agricultural policy's destruction of food markets and third world countries for 14 minutes.

— Johan Norberg (@johanknorberg) October 12, 2012

Ten very good things 9: Globalization

There is talk of food miles, of buying locally, and of self-sufficiency, as if these were virtues.  The good thing (my number nine) is globalization which gives us all access to each other's special skills and products.

9.  Globalization

Over the course of decades globalization is turning the world into an integrated economy instead of what it has been for most of its history, a series of relatively isolated economies.  The more trading that takes place, the more wealth is created, and global trade across international frontiers has created more wealth than ever before in human history, and had helped lift more people out of mere subsistence than ever before.

To poorer countries globalization brings the chance to sell their relatively low cost labour onto world markets.  It brings the investment that creates jobs, and although those jobs pay less than their counterparts in rich economies, they represent a step up for people in recipient countries because they usually pay more than do the more traditional jobs available there.

To people in richer countries globalization brings lower cost goods from abroad, which leaves them with spending power to spare and a higher standard of living.  It also brings opportunities for productive investment in high growth industries in developing countries.

Those adversely affected by the global exchanges are the people in rich countries whose output is now undercut by the cheaper alternatives from abroad.  They often need to find new jobs or to be retrained to do work that adds higher value.  The extra wealth generated by globalization has brought an increase in service sector employment, which provides many of the new jobs needed.

Competition from abroad forces firms to become more efficient and to use resources more efficiently.  Often they choose to go upmarket, seeking higher added value products that face less competition from relatively unskilled labour.  Thus firms which once sold cheap textiles move into fashion and design, and find customers among the rising middle classes in developing countries.

The integration of the world economy has brought with it an interdependence.  As countries co-operate in trade with each other, they get to know each other and grow into the habit of resolving disputes by negotiation and agreement instead of by armed conflict.  The 19th Century French economist Frederic Bastiat expressed this pithily: "Where goods do not cross frontiers, armies will."

Ten very good things 8: Growth

Although some people look out from their centrally heated balconies, with their bathroom cabinets full of modern medications, and their refrigerators full of well- preserved nourishing foods, and affect to despise growth, growth fills life with more opportunities, not just material ones. It is good thing number eight.

8. Growth

There is a certain temperament which dislikes progress because it is emblematic of change and struggle. They share the Elysian dream of Tennyson's Lotos Eaters for peace and contentment: "Is there any peace in ever climbing up the climbing wave?"

Such people disdain economic growth and advocate instead a contented life which does not seek to improve its lot. In fact some important studies on happiness suggest that it comes with the prospect of improvement rather than with a comfortable standard of living.

Adam Smith spoke of "The uniform, constant, and uninterrupted effort of every man to better his condition," and it applies equally to women. People are motivated to better their lot, and it is partly from this drive that large numbers of us do not now live near starvation and at the mercy of bad harvests and crop failures. We have learned how to generate surpluses that can tide us through bad times, and which can offer us greater opportunities than previous generations could conceive of.

We use wealth to invest in creating more wealth in the future. This is what economic growth is. It has enabled us to afford an improved diet, sanitation, clean water, education, healthcare, better transport, and has given us the means and the leisure to cultivate the arts.

There are those who say that enough is enough, without making clear why it is today's standard which is enough, rather than that of 50 years ago or of 50 years hence. Some suggest we are using up the Earth's resources, even though our ability to access new sources seems to increase faster than our use of them, which is why the price of most of them has fallen in real terms. Others suggest that we cannot produce sufficient energy to fuel more growth,even though recent technological innovation in gas extraction has increased the available reserves by decades, if not a century or more.

Growth means a higher standard of living. It means better and smarter goods and services. It means one generation having access to the choices that only the very rich of the previous generation could afford. Growth offers the chances of more leisure, of self-improvement, of raising the standards of education. It is what brings to millions the chance of a better life.

Why Hayek matters

I was away when Eamonn gave the lecture above on the continuing importance of FA Hayek, but having had a chance to watch the speech I can understand why the room was packed out. It's a fabulous, concise explanation of why people like us at the Adam Smith Institute still revere the old economist born in Vienna a hundred years ago. Eamonn's new primer on Hayek is available from Amazon now in paperback and Kindle editions.

Ten very good things 7: Risk

There is a modern idea that risk is equated with danger and should be eliminated if possible.  In fact risk is my good thing number 7, and makes progress possible when innovators embrace it.

7.  Risk

There is a modern idea that risk is a bad thing to be avoided, whereas the reverse is true.  Some people do indeed feel comfortable in a safe and stable environment, but this is not where progress and advances are made.  Risk is essential to the learning process.  We make experiments and we try things out.  We learn from both the ones that work and the ones that do not.

Health and safety officers post recommendations to reduce risks, especially those faced by children.  The approach seems to derive from a zero risk mentality that makes no attempts to weigh the benefits of an action against any adverse consequences it might bring.  It is true that when children play conkers, a few might sustain injuries if not wearing helmets and goggles.  But playing conkers is part of the fun of childhood, and will not be done at all if made inaccessible by unrealistic safety demands. 

Some activities are risky, and some bring benefits that outweigh any adverse consequences.  People wrapped in cotton wool develop no resilience or resistance to what life throws their way.  They are also denied the gains in terms of the personal achievements and advances which those activities can bring if successful.

Entrepreneurs take risks.  Investors do, too.  Trying to estimate what the future may bring is risky, especially if one has money riding on the outcome.  But those who undertake those risks successfully bring benefits to others than themselves.  Innovators and inventors bring new products onto the market that improve the lives of others, in addition to the rewards they might gain themselves.

Risk is a part of everyday life.  Farmers take risks in deciding what crops to plant and when to treat them.  Students take risks in choosing courses that may or may not lead the way to a fulfilling career.  Businesses take risks in deciding what products to produce and to market.  People take risks when they buy products that might or might not bring the satisfaction sought.  Risk is all around us and it helps us to learn and to advance.  As with evolution, some things work and some things do not.  In nature the organism usually dies with its unsuccessful innovation, but in human affairs we learn from the unsuccessful and gain the wisdom of experience.

Keynes in action

David Boaz recently mentioned a pretty extraordinary anecdote about Lord Keynes, mentioned in the Wall Street Journal in 2009:

Drama was a Keynes tool. During a 1934 dinner in the U.S., after one economist carefully removed a towel from a stack to dry his hands, Mr. Keynes swept the whole pile of towels on the floor and crumpled them up, explaining that his way of using towels did more to stimulate employment among restaurant workers.

David Boaz says that the Keynes story highlights the absurdity of 'make-work' theories of economics, but if it's true (and it may not be, so take it with a pinch of salt), it makes you wonder why today's Keynesians aren't taking matters into their own hands in the same way. Since the government is, supposedly, unwilling to stimulate aggregate demand, altruistic Keynesians could take it upon themselves to boost demand. Keynesian do-gooders could slash car tyres, knock down walls, dig up roads, smash ATMs, and break some windows, all in the name of stimulating the economy. Your country needs you!

Ten very good things 6: Capitalism

Although capitalism is attacked for embodying greed, with some saying it has failed, it is in fact the most benign thing people have created, having brought about more good than any of the others.  It is my good thing number six.

6.  Capitalism

Capitalism was not invented.  It developed out of the ways in which people deal with each other, and is one of the most benign things that people have done.  Wealth can be spent on present consumption, or consumption can be deferred, and wealth used to generate more wealth in the future.  When this is done the wealth is called capital, and the process of using it to create future wealth is called capitalism.

When merchants invested capital to kit out ships for trade, hoping for returns from cargoes such as spices, they would each take a share of the profits.  If they invested equal sums, they would receive equal shares, but if they invested different sums, their share of the profits would correspond to the proportion they had put in.  This is in essence how companies raise investment capital.  They sell shares in their future profits, and people receive a proportion of those returns corresponding to the shares they bought.

This kind of investment has made possible specialization, mass production and mechanization, vastly increasing the output a person can produce, and making lower prices possible.  It takes time, labour and usually machinery to embark on this process, and it is capitalism that has supplied the investment to make those things possible. 

Only in the past few hundred years has capitalism created the wealth to lift huge numbers out of poverty, starvation and grinding toil.  Capitalism has generated the wealth that has enabled diseases to be conquered, clean water and sanitation to become widespread, and has given people more opportunities and choices in their lives than any previous generation has enjoyed.

Some people and businesses use the political process to prevent the outcomes that free market capitalism would achieve.  Through rent-seeking and cronyism, they secure favours from politicians that limit the free choices people would have made.  Such behaviour is a corruption of capitalism and acts to limit what capitalism itself could have achieved without such burdens.

The achievements of capitalism in the advanced industrial economies have spread across the world as capitalism itself has spread.  More people have been lifted from starvation in the past two decades than ever before in human history, and the economic rise of countries such as China and India is bringing improved standards of living to millions.  Capitalism has achieved more for humanity than any other institution people have developed.

Ten very good things 5: Population

Many people still suppose the world will wallow and drown in over-population, unable, Malthus-style, to keep pace with the footprint they will leave upon it.  Population is my fifth good thing.

5.  Population

Some people in environmental lobbies seem to treat people as a kind of pollution.  Although happy to see plants and other animals proliferate, they seem to regard humans as a kind of blot on an otherwise 'natural' landscape.  Human beings affect the planet, and always have done.  Our hominid ancestors undoubtedly caused mass extinctions with their efficient hunting techniques, and our predecessors changed the appearance of the planet as agriculture developed.  More recently our industry and transport systems have changed it.

We are told by some that the Earth cannot support its projected population, having neither the food, the water, the energy or the space to sustain it.  None of this is likely to be true.  Just as the Green Revolution transformed agricultural output in the 20th Century, so can genetically modified crops transform food production in the 21st Century.  New techniques for water purification are developed almost annually, and the Earth is not short of water to treat.  Gas will supply abundant energy for decades, and following close behind it is the steady reduction in the cost of photovoltaic power.  And human beings, though they are found in every habitat on the surface of the Earth, occupy only a tiny fraction of its area.

As nations become richer, their people no longer need large families to supplement the family budget and to support them in old age.  Population levels off as the world becomes wealthier, and is unlikely even to approach the levels touted by alarmists.

In fact human beings are as asset, not a burden.  Their creative intelligence has created opportunities for many people to live more rewarding lives well above the subsistence level that was the lot of their predecessors.  Human ingenuity and technical skill have given us wonderful cities in which to interact and co-operate with our fellow humans.  Their intellect and creativity have given us buildings that lift the spirit, literature that inspires, music that elevates the soul, and paintings that convey insights into the human condition.

Humankind has faced problems and has used its ingenuity to solve them.  It finds ways to make resources go further, fields to produce more crops, engines that are cleaner, and advances in transport and communication that shrink the world and enable us to interact with more of our species.  Julian Simon described the human imagination coupled to the human spirit as "The Ultimate Resource."

And now it's the nef being very silly indeed

To return to one of the great questions of our times. Why is it that people are paying any attention at all to people who seem not to know the first thing about the subject of their pontifications? Our example today comes from Lindsay Mackie who is something or other at the new economics foundation. You know, the place a current Lib Dem SpAd once christened "not economics frankly".

The circling and landing of carrion birds on waste tips is common enough. These days, it is being mirrored by what you could describe as the circling of human vultures over the waste disposal industry. Biffa, the waste disposal company that carries out much local authority work, is profitable,...

Well, if it's profitable then it's got nothing to worry about then, does it. But that's not quite true:

Rather, the financial crisis intervened and the company can no longer service this crippling debt.

Oh, so it's not profitable then is it? It cannot pay the costs of doing business from its revenues. Costs are higher than revenues in fact and thus it is not profitable. For yes, the cost of capital really is a cost of doing business. So, we have a deep ignorance of the specific subject under discussion then.

This situation is an object lesson in faulty economics,

Well, yes it is, and I'm glad that you said it not me.

The rest of the piece is about how we should have all sorts of regulation to stop this ever happening again. But what happening again? Someone making a mistake in business? That, sadly, is always going to be with us. And what exactly is it that everyone is afraid of?

In August, a consortium of Chinook Urban Mining, a London recycling specialist, the private equity investor Clearbrook Capital and the American bank JP Morgan bid just £520m for the group. But so far no decisions have been made either to sell, or how exactly to re-structure the debt so that the company is less burdened.

Eh? So one bunch of capitalists have lost a fortune by making a mistake. Another bunch of capitalists are willing to risk their money picking it up and trying to make it better. The firm still exists, the firm will continue to exist, rubbish will still be collected, recycling done and the environment preserved. Err, this is what capitalists are for: screw up and you lose your shirt.

What, actually, is the problem with this system?

These social democrats are very strange you know

A very puzzling call contained in the latest little pamphlet from Compass. You know the sort of thing, the call to arms about what we must do to make this a more caring, sharing and wondrous society. And yes, I read these things so you don't have to. They insist that there should be a European minimum wage:

Europe should therefore move towards a continent wide minimum wage, based on the respective average income.

There's an awful lot of weight that rests upon that word "respective". There are two possibilities. One is that there should indeed be a European minimum wage. One single rate that applies to all jobs in the EU. Which would be either irrelevant or entirely crazed. If it's based on some sort of average of European wages then just about every job in the poorer countries would disappear overnight. Insisting on, say, 50% of German wages in Romania when that's some multiple of average wages in Romania would indeed be crazed. Insisting that Germany meet the Romanian minimum wage would simply be irrelevant.

The other meaning possible is that they think that there should be a minimum wage in each country, based on the relevant wages for that country. The problem with this is the following:

Germany, Cyprus and the Former Yugoslav Republic of Macedonia have statutory minimum wages that do not apply to all or the large majority of employees but are restricted to specific groups which are defined e.g. by sectors or by professions. These are excluded from the data collection. Also excluded are countries where there are no statutory national minimum wages: Denmark, Italy, Austria, Finland, Sweden, Iceland, Norway and Switzerland. In these countries, wages are either determined by negotiations between the social partners, at company level or at the level of each individual contract. Typically, sectoral level agreements are widely applied and have erga omnes applicability, thus constituting de facto minimum wages.

Insisting on a statutory minimum wage in Denmark, Sweden, Germany, Finland.....what effect does anyone think this will have in any manner at all?

Which leaves me really rather puzzled. I'm not sure which box to put Neal Lawson and his band of merry social democrats in. It could be that they're simply ignorant, in that they don't know that there are already minimum wages in most EU countries. It could be that they're stupid in that they don't realise that having them where they do not already exist isn't going to make a damn bit of difference as the same end is achieved in other ways. Or it could be that they really are crazed loons and that they want to impose a minimum wage based on some average of European wages. Which would immediately close down large parts of the economies of the poorer countries.

Which leaves me even more puzzled. Given that these are the only three boxes that they can be put in as a result of this call then why is it that anyone pays any attention to them at all?