The Pin Factory Blog

Let us take a small fishing community as an example of how recessions work. They have a money in the form of tokens (easily manufactured and branded by their Government at negligible cost). We all know what happens if the number of these tokens is suddenly doubled. Prices double. If the doubling took place individually so that everyone got double overnight, then the prices – all prices – would double pretty quickly and, apart from the dreadful inconvenience, it would not matter too much (as long as repeats were not expected). But if the doubling occurred unevenly and if the process took a few months, say, then the path to universal price doubling would be very rough and fortunes and disasters would be commonplace.

If, for example, the under 30s got all the new tokens they would gain; but the spread of the corresponding loss would not be clear. If the under 30s bought fish then the fishermen would eventually react and some of the smart ones might even do a bit of stockpiling until prices rose. The boatbuilders would be even further down the queue. The original price relativities might never return, but eventually things would settle down much as before except for the one-off gains and losses caused by the uneven distributions of the new tokens.

But what would happen if the new tokens were not dropped down people’s chimneys, but made available for lending – at a knock down interest rate? 

Read this article.

As the encroachment of government grows larger and larger, so does corruption, greed, and dictatorial behaviour grow likewise. The dumbing down of state education ensures that “we the people” will become less and less knowledgeable about what is a proper role for government.

A case in point is the issue of Long Term Care (LTC) – a crisis which has been building up for decades, at the same time as we the people have come to expect a growing NHS and, in many cases, would now expect the NHS to expand as necessary to cover long term care of the elderly. Nor have governments done anything to abuse us of that impossible notion any more than has the NHS which, on the contrary, has encouraged it and advertised “NHS continuing health care” as “a package of continuing care provided outside hospital, arranged and funded solely by the NHS, for people with on-going healthcare needs”.

Governments don’t do long term. Few readers may recall that way back in 1997 LTC funding was made a priority by the Labour government, with a Royal Commission reporting in 1999 – at which point it was thrown into the long grass. Pension schemes (similar in many respects to LTC) have been peppered with reams of rules and regulations throughout my long career in that industry and get worse by the day. The 1997 raid on occupational schemes by Gordon Brown via changing the ACT tax rules virtually killed off final salary-related schemes in the private sector. This raid was upon existing assets, which were backing promises in respect of years of service already accrued, so naturally it plunged many thousands of schemes, large and small, into insolvency. (1, see references below) This is a crucial matter because pensions and LTC have many similar features. It is all too easy to see that another “Brownian raid” may hit LTC providers retrospectively. [Continue reading]

Amidst all the hoo-hah about the forthcoming referendum on the Alternative Vote, it is worth recalling the drawbacks of any kind of voting. Yes, Churchill famously said that democracy is the worst form of government except for all the others. To be fair to Churchill, my understanding is that he was quoting somebody else, but it was hardly a propitious remark at the time (1947) bearing in mind that some of the main enemies of the UK in World War II were democracies when their leaders came to power; Hitler and Mussolini come to mind, whilst one of the major allies of the UK was the dictator Stalin. More generally there is plenty of evidence that democracies are no better, indeed usually worse, in avoiding wars than are many other creeds.

Clearly, voting as a way of making group decisions can have advantages over the alternatives, but who decides what decisions come under the heading of group decisions? Few would argue that many entities like business corporations and other voluntary groups function better under votes (at AGM’s for example) but these groups are voluntary; those who have no interest can forget all about the governance of Tesco, say, even if they shop there every week. Furthermore the items in their trolley will be very different from other shoppers. Action beats voice every time; that way, everybody gets to choose what they want.

Any single vote has only a minuscule chance of making a difference. This means that, unlike personal decisions, be they the contents of a shopping trolley or a new motor car, there is no incentive to spend any time at all on a proper investigation into what the parties and candidates offer, even if you believed them. Thus the quality of decision-making is extremely poor. [Continue reading]

In their 1974 election manifesto, the Tories made their attitude to free markets very clear. Arguing against outright nationalisation, the manifesto said “the desired results can be achieved just as effectively and far more cheaply through taxation and regulation”. Since then it has been made plain that if you want genuinely free markets you can forget the Tories.

Today, the march to corporatism, in which government is the senior partner in any major industry, is rife. In this partnership, big business often promotes state regulations to keep pesky little competitors out and thus enjoy a cosy monopoly. The current bare-faced collusion between government and the banking industry is a case in point, with bankers agreeing to several ridiculous conditions including committing £1billion for “regional growth”, £200 million for a “Big Society Bank” and the same for gross new lending to business – at a currently laughable interest rate. Another case in point is trade, with Britain’s biggest companies now having to work with individual ministers to “manage trade”.

The railway industry is a perfect example of the 1974 manifesto at work, with government granting licenses, owning all the track, dictating consumer prices, and now spending a fortune on a very dodgy new railway between London and Birmingham.

Reverting to banking, the rot began with the Bank of England. [Continue reading]

Most market sympathisers know that lower are overall taxes, the smaller is government and the higher are living standards, but for support they concentrate on statistical evidence such as the adverse relationship between economic growth and the level of overall taxes. This evidence is very strong, but an underlying theory showing WHY this is the case would make it far stronger.

Naturally such a theory exists, but it is little known nowadays outside Adam Smith aficionados and the Austrian School of Economics to which both Ludwig von Mises and F. A. Hayek belonged. Even then, I have yet to see a simple and arresting explanation. In The Constitution of Liberty, Hayek refers to the effects of taxation, including “the frequent restriction or reduction of the division of labour”. The Institute of Directors’ Graeme Leach refers to the “deadweight loss” as the loss of output that would have occurred in the absence of the tax – a loss of economic welfare above and beyond the tax revenues collected.

These observations are absolutely correct, but it is probably fair to say that they do not describe in layman’s terms the simple mechanism at work. We must remember what we are up against in the shape of government and the public sector in general (including many schoolteachers and lecturers); the last thing they want is to have their cover blown.

It is nothing short of a scandal that generally respected commentators can still promote government spending as a major plank in getting out of the current recession when (in addition to the fact that such spending was a major plank in creating the recession) it will inevitably reduce output even further. Such a level of ignorance could not possibly exist were it not for the state’s iron grip on the education system via a nationalised school system including a national curriculum. And you certainly won’t find a mention of the topic on the website of the “National School of Government”, the Civil Service training college.

Read the whole article.

I didn’t know whether to laugh or cry last week after reading two mutually exclusive, incorrect views of economics in the papers. They were both on time preference, one of the most important factors in economic growth, and both showed a profound ignorance of their topic.

The first, by Tom Stevenson, a professional fund manager, said that: “The trouble is that humans are seemingly hard-wired for short-termism. Ask someone if they prefer £10 in a year or £11 in a year and they will, rightly, opt for the £11. But ask them if they would prefer £10 today or £11 tomorrow and they will invariably put out their hand for the money straightaway.”

I don’t know who Mr Stevenson asked, but the latter claim is a fairytale. Quoting Adam Smith, Stevenson exhorted us to learn “self-command, by which we are enabled to abstain from present pleasure in order to obtain a greater pleasure in some future time”. How much time is apparently not an issue, although £10 today versus £11 tomorrow implies an interest rate (i.e., a time preference) of 10 per cent per day. Plenty of people would accept this bargain rate on a £10 windfall. [Cont'd...]

The eighteenth century Scottish judge Alexander Fraser Tytler, said “A democracy cannot exist as a permanent form of government. It can only exist until a majority of voters discover that they can vote themselves largess out of the public Treasury”. In other words, democracy evolves into kleptocracy.

If Tytler were alive today, surely he would have added that the rot begins with a state education system and a national syllabus which themselves eulogise the State. What else can cause highly intelligent and educated people to plead for funding of their personal interests, even as Rome is burning?

Thus can eminent scientists seek more taxpayer funding for science, while sportsmen write in the Telegraph that, “A party that prioritises sport might get my vote”. More generally those making good livings from “the arts” (actors, musicians, and so on) seem to bleat almost perpetually in the broadsheet newspapers.

Did all these worthies not learn that science and inventions, sport, and “high-brow” entertainment were thriving features of the UK throughout the 19th century (and earlier), when state funding wasn’t on anybody’s agenda. Indeed, government involvement would have been pooh-poohed on the basis that not only would it come with strings attached; it would also become contaminated. Indeed this has happened in spades to science and statistics in the last 75 years.

The end of democracy is nigh, unless it is severely constrained via a constitution which puts most current government functions firmly off limits. Fat chance.

Terry Arthur is a keen sportsman and played rugby for England in 1966.

On 3rd October David Cameron told the Sunday Telegraph that a Conservative government will "smash open the state education monopoly so that any qualified organisation can set up a new state schoo".

What sort of organisations will be able to qualify? Well, according to the Conservatives' two years old policy document, "The country which provides the closest model for what we wish to do is Sweden".

A major feature of the Swedish system is that profit-seeking enterprises, including PLCs, qualify. Indeed three-quarters of the new schools in the Swedish model are profit-seeking. Furthermore, an impeccable source wrote, in a recent article for the Spectator and the Daily Telegraph that "the Swedish model would not exist without the acceptance of profit-making organisations". Yet it has long been clear that Cameroons have no intention whatsoever of permitting such enterprises to "qualify". After all, that would be private enterprise; strictly passé for the Cameroons.

Or would it? During the conference week, part of the pro-Tory press was willing itself to believe otherwise. Thus on 8th October the Spectator editorial said “Crucially, it now looks likely that the new schools will be able to be run for profit" while in its Coffee House, Fraser Nelson wrote “Michael Gove’s new Swedish schools will, it seems, be allowed to make a profit".

This blog is some 3 weeks late while I have searched vainly for support of these notions.

I could be wrong, but if I am right, the Cameroons are guilty of serious misrepresentation of the "Swedish model". The same goes for another of their favourites – "the post-bureaucratic age" (largely via the internet and the information revolution). But the word "bureaucratic" refers to management in government and the public sector. The post-bureaucratic age is not a result of the internet as Dave the Vague likes to claim. It is the result of Adam Smith’s "invisible hand" – the most powerful information system the world has ever seen – bar none, whilst the internet is a mere side-show which enhances whatever market signals are allowed by the bureaucrats.

To reduce bureaucracy the Cameroons must slash taxes and allow private enterprise to flourish, rather than continue to tax us all and dish the funds out again to a few favoured voluntary groups. A good start would be to allow any entity, especially a profit-seeking institution, to create a school and charge fees directly, with a full tax rebate to those who thus reduce the cost of state education by moving their children out of it altogether. Don’t hold your breath.

Mark Kleinman, City Editor of the Sunday Telegraph, is worried about the remuneration (including bonuses) of company bosses. Many shareholders are incandescent, but largely powerless to influence the chairmen of remuneration committees – a group whom Kleinman describes correctly as a new category of City pariahs. So what can be done? One suggestion, says Kleinman, would be to make investor votes on remuneration legally binding, but suspects that this may be unworkable; he prefers the idea of making remuneration committee chairmen stand for re-election each year.

I have a far simpler idea; abolish the Companies Act, now almost 1,000 pages long. Radical? Yes, and rightly so. Unlike politicians, companies (or would-be companies) are perfectly capable of drafting sane constitutional documents and shareholders (or potential shareholders) as well as Stock Exchanges are perfectly capable of deciding whether or not to supply funds or approval on the basis of such documents. All we need is contract law; there is no need for Companies Acts at all – indeed it is they that prohibit certain investor votes from being legally binding. Government controls over PLCs include not only their constitutional documents, but also the relationships between directors and shareholders (hugely biased to the former - so much so that the famous Higgs report suggested that one director should have special responsibilities to shareholders. Gee thanks!) Government rules also control the hostile takeover market (again favouring incumbent directors), and what issues can be raised and validated at an AGM. They even influence capital structure; the tax system favours high gearing and risk.

But what about insider trading? Simple – deal with it in the company constitution. To allow such trading, says Richard Epstein ,the constitution can provide that “if you want to deal in the shares of this company please understand that every employee and director is entitled to trade on inside information to their heart’s content. If you do not want to trade with us you are free to buy shares in our competitor which does not allow the option".

Click Read More

In The Times of March 31st we have an extraordinary attempt from Noreena Hertz (a Fellow of the Judge Business School at Cambridge University) to bring free trade down to size (“Let’s shake off the shackles of free trade.") Her main prongs are that our politicos at the G20 summit this week are “in uncharted waters" (they are not), that they “acknowledge that the credit crunch was man-made" (indeed it was, but not by “a complacent blindness to the to the downside of untrammelled free-market economics") and that “all the absolutism of the key tenets of neoliberalism (privatisation, deregulation, balanced budgets, have been rejected by all but the most dogmatic. Apart from one – the primacy of free trade").

How wrong can one be? What planet is she on? Politicos will always blame anyone but themselves, of course, but where exactly are these untrammelled free-market economics, when government spending alone is almost certainly at an all time high and state regulation is still rising having reached it long ago? Put the two together and you’re miles over half the national income.

It gets worse. Like Gordon Brown, she doesn’t even understand free trade.

In my book I quoted Gordo thus: “In the 19th century Britain led the world in equating free trade with liberty only when business and politicians came together for that shared purpose. In this new century the same kind of joint effort is required from government and business before the last window closes to restart the talks." (Gordon Brown, reported in The Times, 6 November 2006).

Just a little word left out, Gordo. In the 19th century the defining feature of Britain’s free trade was its unilateral nature. Trade treaties didn’t come into it. We knew then that the practice of free trade in just one country, (to the extent that it was allowed any trade elsewhere), brought gains. Treaties are just an excuse for stalling.

With or without treaties the “Gospel of free trade" which Noreena describes as “What an extraordinary thing to say" is actually unassailable by logic; a simple economic truth. Don’t truths count any more? If so, why don’t we practice a little protectionism between London and Birmingham, say?