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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

Article: If elections have consequences, then so does economics

Written by Stephen MacLean | Thursday 03 January 2013

Speaking on Fox News Sunday following the U.S. presidential election, Bill Kristol, editor of The Weekly Standard, said that Republicans, having lost to the Democrats, could no longer hold out free market principles with respect to taxation.  ‘I think there is a very good chance that [President Obama will] pass major consequential legislation in the second term, and people like me won’t like it that much.  I think Republicans will have to give in much more than they think,’ he said.

Kristol elaborated on the GOP fallout:  ‘The Democrats picked up seats in the House and Senate, and the President is in good shape ... the Republicans in the House will be able to get some concessions and some compromises, but I think there will be a deep budget deal next year, it will be an Obama-type budget deal, much more than a Paul Ryan budget deal, type budget deal.  And elections have consequences.’

Read this article.

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America’s Chief Magistrate and the Spirit of ’76

Written by Stephen MacLean | Thursday 08 November 2012

The year 1776 was a revolutionary milestone for individual liberty, with the publication of Adam Smith’s The Wealth of Nations setting forth the path of economic freedom and a Declaration proclaimed by thirteen American colonies ringing the tocsin for political independence.

But a solemn spectre of ’76 hung over the United States this November as Americans voted for representatives and senators in Congress and a Chief Magistrate to occupy the White House — for the promise of economic and political liberty has turned dark.

The spirit of ’76 was animated by the desire for personal freedom, both in our relations with others and in our transactions with them.  Adam Smith wrote against the mercantilist system which thwarted innovation and entrepreneurship, while the Declaration of Independence affirmed that ‘all men are created equal’ and ‘endowed ... with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness’; that we establish governments to protect these rights, said governments ‘deriving their just powers from the consent of the governed’.

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Tax freedom for the poor!

Written by Stephen MacLean | Tuesday 02 October 2012

Establishing a higher threshold for personal income tax was under much discussion last month — a precursor for conference season debate.  Under the banner of ‘Fairer Tax in Tough Times’, the Liberal Democrats presented plans to increase the scheduled threshold of £9,205 to a suggested rise of £10,000.

Not slow to capitalise on this ‘leak’, the Spectator’s blog drew attention to a Centre for Policy Studies report published by Lord Maurice Saatchi and Peter Warburton in 2001, Poor People! Stop Paying Tax!, that itself recommended £10,000 at which the low-paid began to pay.  For the think tank that Margaret Thatcher and Keith Joseph built, it is absurd that the State ‘even taxes people who can’t afford to pay tax at all.’  But insult is added to injury:

Governments put up tax, which reduces individual incomes and creates more dependence on the state.  And citizens claim more state benefits to compensate.  And so it goes on until the government is claiming billions of pounds a year in taxes from citizens who also claim billions of pounds a year in benefits from the government.

This political duel over who is truly the friend of the poor should set off a policy debate on taxes in general; namely, is it better for taxes to be wide and shallow — that is, paid by everyone, allowing for overall rates to be low — or narrow and deep — again, paid by the wealthy few who are considered able to pay them and, necessarily, rather high?

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The organic roots of oaks and free markets

Written by Stephen MacLean | Friday 07 September 2012

‘David Cameron will announce tomorrow that the oak tree has been dropped and the torch of freedom will once again be the Conservative party logo.’  So wrote Benedict Brogan for a tongue-in-cheek Telegraph blog.  Brogan’s mirthful explanation for this ‘back to the future’ change?

The move is being promoted by Downing Street as a “decisive” switch that demonstrates the urgency with which the Prime Minister is advancing the cause of free enterprise and a more robust grip on the economy.

Hold on, Mr Cameron, good news!  The cause of free enterprise can still be championed by the Tory party’s venerable cultural symbol.  As a traditionalist, for example, you will appreciate these inspiring lyrics from ‘Heart of Oak’ to rouse your industrious compatriots:

’Tis to honour we call you, as freemen not slaves, / For who are so free as the sons of the waves?

Fortunately, too, free market economics is synonymous with the organic principles of generation and growth which should be at the heart of conservatism, modernised or otherwise.  For in The Wealth of Nations, Adam Smith praised the ability of entrepreneurs to struggle and triumph against adversity:

The uniform, constant, and uninterrupted effort of every man to better his condition, the principle from which publick and national, as well as private opulence is originally derived, is frequently powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of government, and of the greatest errors of administration.  Like the unknown principle of animal life, it frequently restores health and vigour to the constitution, in spite, not only of the disease, but of the absurd prescriptions of the doctor (II.iii.31).

In his 1974 Nobel Prize lecture, Friedrich von Hayek denoted this undirected, up-from-below phenomenon as ‘spontaneous order’:

...in the social field the erroneous belief that the exercise of some power would have beneficial consequences is likely to lead to a new power to coerce other men being conferred on some authority.  Even if such power is not in itself bad, its exercise is likely to impede the functioning of those spontaneous ordering forces by which, without understanding them, man is in fact so largely assisted in the pursuit of his aims.  We are only beginning to understand on how subtle a communication system the functioning of an advanced industrial society is based—a communications system which we call the market and which turns out to be a more efficient mechanism for digesting dispersed information than any that man has deliberately designed. [emphasis added].

Hayek’s discomfort with the ‘power to coerce other men’—whether for good or ill—and what Smith called ‘the extravagance of government’ and ‘the greatest errors of administration’, is another reason why a return to the Tory torch (factual or otherwise) may be a bad omen, especially if it were meant to signal, in Brogan’s mirthful rendition, ‘a more robust grip on the economy.’

As Smith cautioned, ‘What is the species of domestick industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him.’  If a decision must be made in favour of either the individual or the State, the presumption must always be made for the wisdom of individual entrepreneurs.

The stateman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it (IV.ii.10).

So, oak or torch, modernised or traditional, the Conservative party must always stand for individual initiative in economic endeavours, cognisant of the government’s circumscribed role in supporting such entrepreneurship.  And that’s no laughing matter.

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New at AdamSmith.org: 'We built it together, Mr President, through the division of labour.’

Written by Stephen MacLean | Wednesday 01 August 2012

Is Barack Obama right that entrepreneurs 'didn't build it' when they look at their own achievements? No, says Stephen MacLean - he should re-read his Adam Smith.

Friday the thirteenth wasn’t kind to Barack Obama.  In a speech in Roanoke, Virginia earlier this month, it was the American president’s bad luck to proclaim a howler heard round the world:  ‘If you’ve got a business — you didn’t build that. Somebody else made that happen.’ — An affront to sound economics and Adam Smith, for whom Malthus’s ‘dismal science’ was instead a path to personal freedom and prosperity for all.

Obama privileges ‘corporate’ co-operation at the expense of individual achievement.  It’s not that he emphasises the benefits of civil society where we come together voluntarily for mutual benefit, which is a good thing.  No, when he says ‘we succeed because of our individual initiative, but also because we do things together’, the subtle message is that we are a means to a communal end greater than ourselves, for ‘if you were successful, somebody along the line gave you some help.’

Government is at the apex of this ‘you’re not on your own, we’re in this together’ pyramid, as evidenced by the President’s redistributive tax policy.  By no means was Adam Smith a private property anarchist, for in The Wealth of Nations he acknowledged ‘the duty of erecting and maintaining certain publick works and certain publick institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain (IV.ix.51).’  Such is the theme of Book V of this great work, ‘Of the Revenue of the Sovereign or Commonwealth’ (which occasions opprobrium from contemporary libertarians).  Rather, it was the State’s coercive tax policies in aid of social justice to which Smith objected.

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A cheer for constitutional monarchy's restraint on government

Written by Stephen MacLean | Wednesday 06 June 2012

As the Queen’s Diamond Jubilee celebrations wind down, it may be well to reflect on an aspect of public choice theory which supports constitutional monarchy — principally its rôle as a brake upon self-aggrandising politicians.

Public choice argues that, contrary to the myths propagated about the selfless motives of public servants, politicians and bureaucrats can be as self-interested in their public personas as they are as private citizens.

This is not the time to examine the unitive functions of the Crown, nor the acts of public service performed by the Royal Family — and how monarchy either refutes or conforms to the political landscape sketched out by public choice  theory (though I personally believe the opportunities for gain are very few, while the burdens are many).

Neither is this an argument for constitutional monarchy as against republican forms of government; indeed, this may be one of the few areas where both forms, when modelled on justice, are equally serviceable according to the respective country’s traditions and national character — quite in variance, by the way, with respect to economics, where all the arguments are in favour of classical liberal/Austrian theories and quite contrary to Keynesian prescriptions.

Moreover, let it be admitted that constitutional monarchy is rarely an active force in limiting the power of politicians (minority parliaments being one exception, where the Crown has legitimate avenues of intervention), but serves rather more as a passive agent in limiting the State.

First, the very hereditary nature of British constitutional monarchy — i.e., non-elective — disinclines government to aggrandise the Head of State.  Governments are reluctant to invoke public criticism for expenditures which do not in some way flatter the ‘heirs’ of democracy (especially when the House of Windsor is itself exceptionally well-endowed financially):  Witness the absence of a royal yacht when H.M.Y. Britannia was decommissioned.

Second, the constitutional role of the monarch in the Westminster parliamentary system means that the prime minister is a servant of the Crown and cannot therefore with impunity rise above his station.  It is at best to be guilty of lèse-majesté, and at worse an affront to the parliamentary party which can always be relied upon to remember that the inhabitant of No. 10 is simply primus inter pares.

The theoretical ground of this public choice defence is laid out by Austrian economist Hans-Hermann Hoppe who, while he may not necessarily be a monarchist, sees the unrestrained growth of elective governments as far more destructive of personal liberty and economic freedom.  When absolute monarchy reigned, Hoppe argues, the State and its appurtenances were held as private property, and husbanded wisely as a future inheritance; subjects were jealous of their rights and defended them tenaciously (arising from an awareness of ‘class consciousness’), leaving the Crown on guard not to exceed its authority.  Democracies, to the contrary, do not arouse a corresponding scepticism — Why, one day I too may be leader of the country! — but nor do they engender similar feelings of safeguarding wealth:  Without the responsibility of bequeathing royal estates to one’s children, politicians become mere ‘caretakers’, and the spoils of State become transitory gifts that must be enjoyed and shared with one’s cronies while the democratic gods shine (a form of present-orientedness that is reflected in citizens’ consumption rather than investment).

Arthur Seldon called this ‘the dilemma of democracy’, noting four weaknesses in popular government:  short-sighted with material resources; over-expansive with a tendency to ‘grow’; liable to conspiratorial patronage; and uncritical of majoritarian electoral decisions.

All of which leads me to wonder why classical liberals are so often enamoured of the republican ideal.  As Hoppe observes:

From the viewpoint of those who prefer less exploitation over more and who value farsightedness and individual responsibility above shortsightedness and irresponsibility, the historic transition from monarchy to democracy represents not progress but civilizational decline.

One can understand their inability to appreciate a Tory reverence for tradition and continuity, yet why do they so cavalierly dismiss the public choice arguments that demonstrate that limited government in the age of the Welfare State is held hostage to democratic fortune?

‘It is the highest impertinence and presumption, therefore, in kings and ministers, to pretend to watch over the œconomy of private people, and to restrain their expence,’ wrote Adam Smith in The Wealth of Nations.  ‘They are themselves always, and without any exception, the greatest spendthrifts in the society.  Let them look well after their own expence, and they may safely trust private people with theirs.  If their own extravagance does not ruin the state, that of their subjects never will (II.iii.36).’

Let not the irony be lost:  Britain has gone from the time when a burgeoning representative democracy set in motion the end of the divine right of kings, transformed thus into constitutional monarchy — which itself has become the most visible restraint on elected politicians who behave as if themselves graced with divine sanction.  We may no longer fear kings, but their ministers remain a threat to our rights and freedoms.  Elizabeth II embodies the limits we must impose upon the political classes; her Diamond Jubilee an occasion to remember the State is the servant of the people.  God Save the Queen!

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New at AdamSmith.org: The global economics of corporate tax cuts

Written by Stephen MacLean | Wednesday 29 February 2012

Jim Flaherty, Canada’s minister of finance, may well be exasperated.  Speaking of the federal government’s plan for a national corporate tax of 25 per cent, the Minister affirmed that ‘we believe lower taxes create investment and jobs.  I continue to encourage our provincial partners to follow our lead.’  Unfortunately, his counterparts remain to be convinced, with British Columbia and Ontario signalling their intentions to halt the downward trend.

How times have changed!  ‘On New Year’s Day,’ reported Neil Reynolds, ‘Canada’s corporate tax rate — federal and provincial rates combined — fell to 25 per cent, giving Canada the lowest rate in the Group of Seven countries, and a more competitive economy on a global basis.’  (According to the 2012 Index of Economic Freedom, Canada’s federal rate of 15 per cent compares favourably with the United Kingdom’s 26 per cent.)

Flaherty could remind officials in the provincial treasuries of the global consequences of their actions, citing an economic truism published in The Wealth of Nations two-centuries-and-a-half ago.

Read this article.

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Can the GOP defend capitalism?

Written by Stephen MacLean | Thursday 16 February 2012

Of America’s two political parties, Republicans are viewed as the better friend of the market-place.  But these capitalist credentials have taken a beaten in the race to choose a candidate to challenge the Democrats for the White House.  Two recent events on the campaign trail epitomise GOP troubles.

The first sign of danger came in January when former Massachusetts governor Mitt Romney’s business career came under scrutiny, with former Speaker of the House Newt Gingrich (and Texas governor Rick Perry) calling into question Romney’s tenure at Bain Capital, a private equity and venture capital firm — which Perry characterised as ‘vulture capitalism’.  An independent Gingrich Super PAC exacerbated the issue with an incendiary video from which even the candidate distanced himself.

Facing outrage from the business community, Gingrich soon abandoned this avenue of attack to focus on Romney’s personal tax records in a South Carolina exchange.  A few days later in Tampa, Florida, Romney complicated matters with a populist appeal against Gingrich’s own zero capital gains tax policy, quipping that ‘under that plan, I’d have paid no taxes in the last two years.’

Romney mounted a belated counter-offensive in a CNBC interview with Lawrence Kudlow, but his on-the-stump sop on taxes deserves reproof:  For whereas the supply-demand, profit-loss principles of capitalism are easy to grasp, the obfuscation that underpins disingenuous ‘the rich should pay their fair share’ class warfare arguments need vigorous refutation.

Double taxation lies at the heart of the subterfuge, when a capital gains tax (15% maximum) is heaped upon wage incomes that already have been taxed (35% maximum) — an ant-grasshopper taxation policy where capital investors pay while capital consumers play.

Michael Tanner, a senior fellow at the Cato Institute, deconstructs President Obama’s so-called ‘Buffet rule’ (a 30% minimum tax on high earners):

Buffett makes most of his money from investment income (capital gains and interest), and he pays a capital-gains tax rate on that money. [...] However, the president’s narrative ignores the fact that Buffett’s income had already been taxed at the corporate level.  When the effect of both taxes is combined, the real effective tax rate is closer to 45 percent.  That is quite a high rate on an inherently risky activity — investing — that our tax code should encourage.

Dan Mitchell, another Cato senior fellow, further unravels the capital gains tax canard with an explanatory video and chart.

Romney committed a second own goal during a February interview on CNN, saying ‘I’m not concerned about the very poor; we have a safety net there.  If it needs repair, I’ll fix it’.  Again, Gingrich took the putative front runner to task, arguing that ‘I think what he said and the underlying part of that is very revealing.  I think we want to replace the safety net with a trampoline.  We want to have policies ... to help the poor become middle class, to help people get out of poverty.’

It was Texas Rep. Ron Paul, libertarian extraordinaire but long-shot nominee, who came to Romney’s defence in both instances.  With respect to Bain Capital, Paul said of Romney’s Republican critics:  ‘I think they’re wrong.  I think they’re totally misunderstanding the way the market works.  They are either just demagoguing or they don’t have the vaguest idea how the market works.’

And in relation to the poor, Paul defended Romney, saying that he didn’t believe that the governor was unconcerned about the poor, but that ‘I think the problem is he’s a victim of his own economic theories, rather than him being cold and heartless.’

What is shocking about these misguided economic smears is how the supposed defenders of free markets shape their vision according to the language of ‘social democracy’.  As Friedrich Hayek opined in The Intellectuals and Socialism, ‘That a particular measure tends to bring about greater equality has come to be regarded as so strong a recommendation that little else will be considered.’

But for Republicans, the issue is even more invidious, for in trying to counter the Democrats’ strongest electoral message — ‘social justice’ — they have ceded the field of first principles to their opponents:  ‘Since on each particular issue it is this one aspect on which those who guide opinion have a definite conviction, equality has determined social change even more strongly than its advocates intended,’ wrote Hayek. 

The overall picture is ominous:

...today in most parts of the Western world even the most determined opponents of socialism derive from socialist sources their knowledge on most subjects on which they have no first-hand information.  With many of the more general preconceptions of socialist thought, the connection of their more practical proposals is by no means at once obvious; in consequence, many men who believe themselves to be determined opponents of that system of thought become in face effective spreaders of its ideas.

With the GOP’s championship of capitalist tenets not above reproach and with Democrats preparing to run on a platform of redistributionist measures, wealth creators are put on notice.

Though the true path to eradicating poverty lies in innovation, entrepreneurship, and capital accumulation, rich and poor alike will be sacrificed in the 2012 race for the White House to easy rhetorical platitudes and political opportunism.  Between the safety net or the trampoline, will voters be given a real choice?

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