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"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

Schumpeter on socialism

Written by Mariam Melikadze | Saturday 10 July 2010

I recently came across the following quote by Schumpeter: “I for one cannot visualize, in the conditions of modern society, a socialist organization in any form other than that of a huge and all-embracing bureaucratic apparatus. Every other possibility I can conceive would spell failure and breakdown”.

The idea of an “all-embracing bureaucratic apparatus” is disturbing. Ardent socialists place faith in the power of men to handle the gigantic amount of planning necessitated by a centralized economy, but there is obvious potential for failure when we assign such great responsibility to subjective decision-makers. Determining the prices of inputs and outputs, making sure demand is met by supply and markets clear smoothly, while taking into consideration changing consumer preferences is too complex a task to be carried out by individuals. And, in line with the utilitarians, how are we to be sure the resulting allocation is “fair”? How will we determine what exactly is “fair”?

Then there is the problem of enforcing “the rules of the game”. Schumpeter foresaw the necessity of authoritarian discipline for the success of socialism. He described the efficiency of the disciplinary mechanisms employed by the Russian Communists while attributing the cruelties of the system to “the unripeness of the situation”. However, power tends to corrupt, and absolute power corrupts absolutely. Some believe the failed Soviet experiment was a one-time blunder, but what of Mao, Chavez, Castro and Ceausescu? Can any authoritarian regime stop short of infringing on basic human liberties? And even if people were to unanimously elect this kind of social order, would the fact be sufficient to label it as democratic?

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On university endowments

Written by Mariam Melikadze | Friday 09 July 2010

The UK universities are some of the best in the world. Yet, compared to their American counterparts (even the state universities), they have tiny endowments. Only Oxford and Cambridge operate budgets of a similar size. But larger endowments enable these institutions to expand and diversify their services, because, as non-profits, they need to make complete use of their income.

In the UK, higher education institutions are supported by government grants. This results in a system with skewed incentives: those who immediately benefit (students, professors, alums) share only a tiny fraction of the costs (for example through capped student fees), while the state bears the bulk of the burden. But there is no such thing as a free lunch, and what this scheme actually requires is an annual expenditure of 7.8 billion pounds, funded by – you guessed it – tax revenue.

Is there anything wrong with such a system? Well, such spending mostly benefits the rich (or the soon-to-be-better-off university grads) at the expense of the whole population (a great portion of which doesn’t directly benefit from the higher education sector). A much fairer mechanism would fund university operations through endowments. By gradually decreasing grants to universities, we can create a motive for these institutions to actively seek out donors, something they don’t prioritize given the status quo. They can achieve this through tried and tested methods – such as setting up designated fundraising positions within the administration and regularly sending out donation requests to alumni – that are a standard by US universities.

This would save the state a couple of billion pounds, which could be put to better use elsewhere, perhaps directly supporting needy students, or even in cutting taxes.

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Capping payouts

Written by Mariam Melikadze | Thursday 08 July 2010

The Unions are threatening strike action following Francis Maude's announcement that the cap on redundancy payouts to civil servants will be decreased to 15 months instead of the current 6-year maximum. Civil servants are not too happy.

But there is no getting around the fact that the current rate is ridiculously high. True, only a small portion of all public officials are eligible for the maximum amount allotted. But it’s also true that the average rate is three years’ worth of salary, far greater than the benefits offered in the private sector (the average being two weeks’ pay for every year worked). And it costs the taxpayers 1.8 billion pounds annually. With record levels of deficit, this luxury is no longer affordable.

Obviously there is bound to be some sort of remuneration to cushion the transitory between-job period, yet the scale has to be sensible. Apart from increasing the budget deficit, such a high rate disincentivizes workers to find a new workplace. Large benefits perpetuate unemployment by removing the element of urgency. Why find work when you can enjoy leisure and compensation at the same time?

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The horror unleashed

Written by Mariam Melikadze | Thursday 01 July 2010

The Guardian piece on unemployment has received much attention (ahem… causing much panic) over the last day. The article describes a “hidden cost” of over one million lost jobs as a result of the cuts and brings into question Osborne’s claims about the transparency of his briefing. Although I’m far from convinced by the forecast quoted in the article, especially as the exact source and methodology of the study are unknown (how exactly did they come up with these numbers?), let us assume them to be accurate for the time being.

Then here’s a thought:

The source clearly states that despite the 1.3 million jobs lost in the public sector, the private sector will create an additional 2.5 million, therefore we actually end up with a net increase in employment. While the Guardian never questions the figures on the lost jobs, the second piece of data is brushed away. Note that both numbers are from the same source, thus if one is treated as accurate, I believe the second one, at the very least, should be addressed more fully. The article argues that there is “not a hope in hell's chance” the private sector can generate so much growth, yet doesn’t mention any substantial evidence proving this point.

Furthermore, the Guardian writes “… the private sector will be affected both through the loss of government contracts and from the knock-on impact of lower public spending”. What they forget are the additional benefits to businesses included in the new budget: in conjunction with the spending cuts, we will also see decreases in corporate tax rates that will most definitely boost employment.

Historical cases support this claim. For example, the Ireland corporate tax cut in the 80’s improved the economic environment and increased income (from 30% below the EU average to 40% above the average today). Benefits to businesses attract investment, increase employment and boost per capita income. For some reason the Guardian fails to note the beneficial effects of the emergency budget that will make up for the lost jobs – were they to occur.

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Budgeting for Higher Education

Written by Mariam Melikadze | Friday 25 June 2010

Budget cuts are top news these past few days, and no wonder: they provide a once-in-a-generation opportunity to tackle the fundamental problems that plague the public sector. The current circumstances call for drastic measures and clear visions, and not the “slicing” effect that many fear to be unavoidable.

Obviously, the education sector is not immune from said cuts. Well, so far so good: the coalition government seems to have a set plan of action to reform schools, one that incentivizes private initiative and ensures greater equality, and one that I welcome with open arms. Sadly, this doesn’t hold true for higher education.

Quite bizarrely, different governmental departments are responsible for the administration of universities and schools, the former under the authority of the Department for Business, Innovation and Skills. Yes, the one department facing the highest cuts in absolute value within the immediate future, at 836 million pounds. What is worrisome is the rather haphazard way these cuts are administered: 10,000 university places and several government programs abolished, university funding slashed, tuition fees (currently capped at £3,225) expected to increase. But this all sounds awfully like “trimming back” spending rather than fundamentally rethinking the way of providing higher education. The ever-decreasing state funding, unable to meet rising costs and growing demand, leaves the world-class UK universities vulnerable. Next year’s scramble to secure spots will leave many students empty-handed. And there is a lot more pruning to be done with the £1.4 billion cuts projected over the next three years.

Instead, we need a clear-cut policy that eliminates wasteful spending, encourages competition and targets the limited resources available at the most disadvantaged students. We might as well take advantage of the rare opportunity we have and reform in such a way as to ensure both efficiency and fairness in our higher education system.

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A starving country with a surplus of food

Written by Mariam Melikadze | Friday 18 June 2010

More evidence that Chávez’ 21st century socialism seems to be failing spectacularly: as this Economist article describes, thousands of government-imported food containers were discovered rotting away in Puerto Cabello. Officials admit to 30,000 tons, while the opposition claims the number to be somewhat higher – around 75,000. This is quite uncomfortable news for the regime amid growing food shortages and rising prices ravaging the country.

Throughout his 11-year presidency (now extended for an indefinite period thanks to last year’s referendum), Chávez has nationalized many corporations, while private firms face constant threat from the state. In the meantime, the government-run industries such as telecommunication, agriculture and supermarkets are deteriorating day-by-day. Authoritarian regime aside, it is not really in the president’s best interests to let the country starve. Rather, the fault lies with the inherent inability of a regime to succeed under a planned economy.

Despite all outrage caused by this scandal, there is nothing really new here. How many times have we witnessed a similar scenario, replayed over and over again? The Soviet Union (both before and after the perestroika) and Cuba are just a few examples. Aside all ethical and theoretical discussions, the system has proven to be unsuccessful and impracticable many times over. We knew this during Adam Smith’s day and we know it now: free markets are the most efficient means of allocating resources. Government meddling, no matter how benevolent its intentions are, will always lead to miscalculations – simply due to the staggering amount of planning involved. Decomposing containers of food in the port of a starving country is testament to this very fact.

By the way, another feature of such ineffective regimes is that people eventually get tired of them. It’s only a matter of time before Chávez’ indefinite presidency term comes to an end.

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A warning of things to come?

Written by Mariam Melikadze | Friday 11 June 2010

I woke up this morning to find Hayek’s Road to Serfdom topping the bestseller list on Amazon. And while it’s quite disturbing that it took Glenn Beck’s promotions (the guy who called President O a racist and regularly preaches doomsday on Fox) to get it there, I’m quite happy for the result.

The Road to Serfdom outlines the dangers of falling prey to socialist principles, however honorable they may seem from afar. Due to the complexities of the economic system, a centralized, planned economy is only feasible in practice under a tyrannical regime. This, in turn, breeds economic inequality, the very opposite of what the structure strives to achieve.

Road to Serfdom was first published in the 1940s to a world that had just emerged from the cruelty of the Nazi regime and was facing the looming threat of Communism. It’s bewildering that almost seventy years later we are still debating the merits of such a system.

With the onset of the recession, more and more people are turning to socialism, interpreting the recent events as a failure of capitalism. Cries can be heard from left and right for increased regulation and government control. Yet we are conveniently forgetting the unavoidable dangers that all such admirable ideals entail (The Communist Manifesto was veiled as a call to arms for the cause of equality). The choices we make in the pretense of the greater good may result in unintended consequences. In the words of Hayek:

To the great apostles of political freedom the word “freedom” meant freedom from coercion, freedom from the arbitrary power of other men, release from the ties which left the individual no choice but obedience to the order of a superior to whom he was attached. The new freedom promised, however, was to freedom from necessity, release from the compulsion of the circumstances, which inevitably limit the range of choice of all of us. Freedom in this sense is, of course merely another name for power or wealth.

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ASI Annual Lecture with Irwin Stelzer

Written by Mariam Melikadze | Friday 04 June 2010

ASI and friends gathered yesterday to commemorate the birthday of Adam Smith, our favourite classical economist. The reception was held at St. Steven’s Club, followed by a lecture by Irwin Stelzer, business economist, columnist for the Guardian and the Sunday Times (among others) and the co-founder of The National Economic Research Associates. The topic of the speech was the relevance of Adam Smith’s teachings on modern economic policy.

Mr. Stelzer took an unorthodox approach in his lecture: assuming everyone on the audience was a free marketeer, he argued in favour of some government intervention, and attempted to define the proper role of government within the economy. He highlighted six key areas in which some intervention would be desirable:

  • Fostering competition
  • Regulating when necessary
  • Internalizing externalities
  • Offsetting market failures
  • Preserving Free trade
  • Ensuring fairness of distribution

Mr. Stelzer labelled his approach “neo-orthodoxy”: a free economy with minimal, but well thought-out regulation to counterbalance market imperfections. Referencing Smith, he asserted that if the incentives are chosen well enough, “much good will follow”.

Well, maybe. But I wasn't wholly convinced. As the ASI's Dr. Eamonn Butler pointed out during the question and answer session, many – if not all – of the market failures Mr Stelzer drew attention to have their roots in previous government failure or intervention. He argued that if we got the first point right, and ensured that markets were genuinely free and competitive, government wouldn't really need to concern itself with the five that followed.

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28 days later

Written by Mariam Melikadze | Thursday 03 June 2010

And so, much like of the opening scenes of an apocalyptic movie, science has reached a great milestone: on May 20th, Doctor Craig Venter and Doctor Hamilton Smith announced the creation of a bacterium with an artificial genome, the first living organism with a synthetic DNA able to reproduce. The era of bioengineered creatures has officially begun, bringing with it the end of disease, hunger and maybe even poverty.

But in all apocalyptic movies the great invention inevitably goes wrong. The environmentalists seem to have picked up on this: only a few days have passed since the discovery was revealed and they are already demanding a ban on synthetic biology. Enter regulation, the obvious answer to all of mankind’s problems.

Yes, bioengineering has negative externalities and poses a threat if misused. However, prohibitions are rarely effective and instead induce markets to go underground. Bans require reinforcement, which some countries do better than others. If someone were planning to use the technology for evil ends, they could very well do so and easily get away with it. Bioterror knows no barriers: viruses can spread in the blink of an eye.

The fact is that the technology is already out there: we would only make ourselves vulnerable by closing our eyes to it. As this Economist article argues, “knowledge cannot be unlearned, so the best way to oppose the villains is to have lots of heroes on your side”. Some regulation and monitoring maybe necessary to discourage the occasional hooligan or two, but further research is crucial so that we can better understand the benefits as well as the dangers of this technology.

Also, quite selfishly, I’m looking forward to a stroll around Jurassic Park.

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Regulating oil

Written by Mariam Melikadze | Sunday 30 May 2010

Following the BP oil spill, the Obama administration announced on Thursday that it will suspend Shell’s Arctic program that was to commence this coming month. In fact, all exploratory offshore drilling will be stopped, and a moratorium placed on new deepwater wells until 2011.

It has been a recurrent theme these past few years to increase control over any industry that experiences problems: the financial sector, healthcare, and now, the latest gem of the collection, oil. At the rate the events are unfolding, we’ll soon have a Randian nightmarish dystopia on our hands. For there’s nothing that could possibly go wrong with a few politicians in Washington with no expertise in the oil industry deciding what the appropriate safety standards are…right? Ironically, the ones who will suffer most from such tighter regulations are going to be the consumers who will see a hike in oil and gas costs.

On the other hand, it is in BP’s interest to (literally) clean up the mess as fast as possible. The reason the problem still hasn’t been solved, a month after the incident, is because it presents a tough technological challenge. It’s doubtful that the government would have been more efficient had it taken over earlier. And while critics claim that BP has weak incentives to ensure safety, since the losses to the company are minuscule compared to its profits, the dangers to its reputation are much more hazardous.

The bottom line is that we will never be 100% ensured against spills, no matter how much we regulate the market, unless we stop consuming oil altogether. If anyone is to blame, first and foremost are the consumers of oil that regularly expect their demands to be met by the market. Regulation will not protect us from environmental disaster, but shifting to newer and cleaner forms of energy will.

Meanwhile, we’re left to wonder which industry will suffer the next regulation-craze. Toyota anyone?

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