Blog RSS

The Pin Factory Blog

"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

An accountable monarchy?

Written by Chris Harlow | Friday 28 September 2012

It will be interesting to see how the decision to order government to publish confidential letters between Prince Charles and seven Whitehall departments under freedom of information law pans out. A blanket ban on all royal correspondence being disclosed in this way was imposed last year following pressure from the royal family meaning that this will be the last time such information will be publicly available. The monarchy and the Cabinet Office are also fighting the demand by the courts for Whitehall to publish guidance on when to consult the Queen or Prince on changes to the law that may affect their private interests. The secrecy surrounding royal involvement in political affairs does nothing to help a commonly held public perception that they are undeserving of their tax-funded benefits and power.

Let me start by saying that I have nothing against having a monarchy in this country. The burden on the taxpayer is minimal compared with the US Department of State and in return they placate a widespread desire for traditionalism and serve to promote relations both at home and abroad in a way that short-term, partisan politicians could not hope to replicate. Similarly, I have nothing against royal involvement in politics, which is in general a very passive role, but only on the condition that whatever involvement they do have is made public. The monarchy is heralded as being an essential part of limited government, holding back the self-interest of politicians from a non-partisan and impartial perspective. This does beg the question as to why their opinions are such closely guarded secrets. The protective veil over communication regarding policy rightly serves to generate a mistrust of the royal family and fuels the fires of anti-royalists who claim that they are an outdated relic, extravagantly funded by the taxpayer with no right to meddle in public affairs. This will only be ignited further if it is revealed that the Prince has been a significant influence within Whitehall. In order for the monarchy to be legitimised in the eyes of the people, they cannot conceal their influence on issues that are in the public interest.

One could counter by saying that being only two individuals representing the monarchy, the Queen’s and the Prince’s views will necessarily be constricted to a few areas of interest, making it impossible for them to be impartial. To protect limited government therefore, their views would have to kept secret. Yet, a democratic government must be accountable for its actions and this includes the head of state. If they are truly above politics, they should only get involved in order to protect the public from political corruption and damaging, election-seeking policies.

At the other end of the spectrum, it can be argued that the royals are not qualified to get involved in politics at all. The Queen has a wealth of experience, being the longest serving Head of State in the world, but there are some who would argue that she is nonetheless in a position of inherited power. Frank Gardner’s comments on the BBC that the Queen had told him she ‘couldn’t understand why [there was no way to arrest Abu Hamza]- surely there was some law that he had broken’ reveals an emotional reaction as opposed to logical neutrality. Similarly, Prince Charles’ dislike of certain forms of architecture has lead him to intervene in a number of planning developments he has found distasteful, and has lobbied on issues such as the ‘perceived evils of genetically modified crops’ and foxhunting. This is fine and the royals have just as much right to voice their opinion as everyone else, but in return for their inflated influence above the rest of us, they must also be held accountable for their views.

The unique nature of an unelected head of state within a democratic system means that the royal family cannot hope to maintain their legitimacy without disclosing their political correspondence or details of their veto power within the legal process. They are in a privileged position of having the capacity to influence policy in a much more direct way than the electorate and in return should accept that their impartiality must remain accountable.

View comments

No more truckin'

Written by Chris Harlow | Tuesday 18 September 2012

The Department for Transport has announced plans to implement a new charge of up to £10 a day on foreign lorry operators using British roads, a move it is claimed will increase UK competitiveness, boost growth and create a ‘level playing field’ for British lorry drivers. Hurrah! No more Johnny Foreigners coming over here congesting our roads and stealing British jobs!

But I think I may have noticed a flaw: how does making it more expensive for overseas businesses to trade here increase UK competitiveness and boost growth? The last I checked, protectionist policies don’t work. It is not only the foreign lorry companies that will suffer, but the businesses that use them to transport their goods to the UK, who will just move their trade elsewhere. At the very least, the bulk of the losses will be transferred on to the imported products and services. As a result, competitiveness between UK and foreign businesses and haulage companies will decrease and the price of goods and lorry services will rise.

Geoff Dunning of the Road Haulage Association has celebrated the move, which he says ‘will lessen the financial advantage currently enjoyed by our European neighbours.’ Reducing the competition both for haulier companies and the goods brought over by them will probably help the UK haulage industry by reducing transport options for businesses and allowing them to charge more for their services, but it certainly won’t do anything good for the rest of us. The ‘advantage’ referred to is that foreign lorry companies can operate cheaply here, while UK companies have to pay road charges and tolls when abroad. However, making it more expensive for foreign drivers to operate here does not make it cheaper for domestic drivers to operate abroad. Indeed, it risks sparking reactionary policies discriminately charging British lorry companies working overseas.

Of course, we always have that nice little figure of £20m in expected tax revenues to look forward to each year from the move. Except for the fact that foreign lorry companies will move their services out of the country due to the combination of the new charge and the vehicle excise duty, which is much higher than its equivalent in most EU countries. Even if we were to raise something close to that amount, it is unlikely to be spent efficiently on things such as road maintenance.

Instead of this, why not significantly reduce the vehicle excise duty and allow private investors the freedom to build more tolled roads, similar to many systems in continental Europe? This would boost economic growth, maintain UK competitiveness, keep prices down and improve road conditions. This is not a new idea, but one that is failing to attract serious attention from policymakers. It is certainly better than driving away foreign business and increasing prices because British hauliers aren’t efficient enough to compete.

View comments

No, Brendan Barber, the economy is not a sporting event

Written by Chris Harlow | Wednesday 12 September 2012

TUC leader Brendan Barber has jumped on the back of Olympic glory to make a strange analogy about the Games and how we should run the economy. He criticises the notion that private is better than public spending and that the market will deliver better than government by pointing at the success of the publicly funded and organised Olympic and Paralympic games, just ahead of the TUC’s annual Congress.

Of course, the function of the Olympic Games was to provide entertainment. Some may argue that it will boost tourism and (temporary) employment but, essentially, it is a sporting event. If we were to run the country like the Olympics, we would produce a society in which wage values would be polarised between very high achievers (the Usain Bolts and Jessica Ennises) and the very low earners (the many, many amateur athletes that do not manage to make it to the Olympics). This is precisely the wage differentiation that the TUC campaign against.

Barber ridicules the fact that government claim they "can’t pick winners" when helping companies adding, ‘Tell that to Bradley [Wiggins], Jessica [Ennis] and Mo [Farah], all supported by targeted funding.’ What he is missing in this comparison is the essential difference between athletes and companies, which is one of function. An athlete can certainly be targeted by funding, as they have only one function, easily and objectively measured. For example, the target of funding for a 100 metre runner would be whoever can run 100 metres in the fastest time, while the target of funding for a high jumper would be whoever can jump the highest and so on. Simple.

When governments target spending towards companies however, they are essentially saying: the products and services this company provides are what people will want and all alternative products and services are inferior. By ‘picking winners’, companies compete for government investment as opposed to consumer spending. The great thing about letting the markets decide is that it is, in a sense, democratic; it lets people vote with their money, creating a fluid and representative selection of what the entirety of society actually want and allowing those areas to develop and become more accessible.

Barber goes on: ‘Markets always trump planning, they say. Well look at the Olympic Park, the result of years of careful planning and public investment.’ He says look at the Olympic Park, well I say look at Concorde, British Leyland, the Millennium Dome, the Channel Tunnel, and so on. All government investments that overshot costs and timescales and were grossly inefficient. The taxpayer underwrites the risk of government investment and it is they that have to foot the bill when things go wrong.

Economic activity and investment in certain industries in London and the surrounding areas have been boosted (at least temporarily) by the Games, but to the detriment of those living everywhere else whose income was diverted through taxation to fund it. This may be regarded as an acceptable loss by many because of the entertainment value provided, but is it right that even those who have no interest in the events should be made to pay? Central planning means that your income is diverted towards things that may not be in your best interest and often in a way that is too inefficient to justify the collective good rationale.

Finally: ‘Private is always better than public, they argue. Not true, as we saw all too clearly when it came to Olympic security.’ G4S remember was the choice of government with the backing of the public purse; it should have been up to them as investors to ensure that the security company was up to the task, something a well run private organisation would have been sure to do. Even if we disregard this fact, the Olympic games took place over a matter of weeks, while the market has been in existence for thousands of years.

Markets learn and adapt to needs and preferences, removing underperforming businesses and rewarding those that provide the desired service at the cheapest cost (unless of course there is government interference). Unlike the targets of government spending, companies within a free market system that do not provide the products and services desired of it better than their competitors can are allowed to fail, while better and more efficient ones take the lead. Competition induces progress, forced monopoly results in stagnation.

Perhaps Brendan Barber realises the fallacies of the arguments he is making, but think they can win him favour simply by allying him to the ‘Olympic spirit’, implicitly setting his opponents against it. However, the economy is not a sporting event, it cannot be run like the Olympic Games and nor should it.

View comments

France provides a lesson in how not to cut a deficit

Written by Chris Harlow | Friday 07 September 2012

The French government seems determined to drive out its wealthiest and most productive citizens. President Hollande is striving forward with his anti-rich campaign, setting a target of raising €7.2 billion through taxes and levies on high earners, wealthy households and big corporations. Steadfastly ignoring evidence that suggests imposing high taxes on the most productive and those who are most able to move abroad will be at best inefficient, at worst ruinous, he proudly boasts of the huge revenues he expects to bring in.

One big idea is to raise the top rate of income tax for those earning above €1m p.a. to 75%. European Affairs Minister Bernard Cazeneuve defended against the notion that high earners and spenders will simply move out of the country by stating that there are ‘French bosses who are patriots’ and ‘there is a range of measures we will take in favour of business, measures that will support investment and encourage business to stay in France.’ Leaving out the odd notion that businessmen and wealth creators put patriotism above financial security, why not encourage businesses to stay by not taxing them and the people that run them? This would have the double benefit of not trying to redistribute the collected taxes into businesses that the government think are best for the people rather than those that the people think are best for the people. Cameron gleefully offered to roll out the red carpet for French ‘tax refugees’ (to which French Labour Minister Michel Spain rather weakly reposted that rolling out a red carpet over the channel would ‘risk taking on some water’).

This August, France became the first EU country to impose a financial transactions tax for publicly traded businesses with a market value above €1bn, deciding that the originally proposed 0.1% wasn’t high enough and doubling it to 0.2%. FTTs are supposed to reduce incentives to destabilise the market through speculation, but in reality increase volatility and reduce price discovery and liquidity on the market. Further, unilaterally implemented FTTs will not raise the revenues expected due to tax avoidance strategies by traders and businesses. A prime example is Sweden in the 1980s, which imposed a 0.5% (later 1%) FTT on all purchases and sales of equity. This resulted in a mass exodus of between 90-99% of Swedish traders to London and the tax was eventually abandoned as it did not raise the revenues expected.

Not only is Hollande driving out domestic productive individuals and businesses, it seems he would also like to discourage wealthy tourists from contributing to the national economy. The French Constitutional Council has approved a tax on foreigners with second homes in the country, raising capital gains tax on the sale of second homes from 19% to 34.5% and raising the rate rented home owners have to pay from 20% to 35.5%. The extra capital gains tax mirrors the tax on French residents that they pay in exchange for the social benefits they receive from the state; note that foreign homeowners will not receive these benefits, which is believed by some to make the tax discriminatory and therefore against EU law. Because of the ‘social’ nature of the tax, those affected may not be covered by the UK-France double tax treaty, which prevents individuals from paying income and capital gains taxes twice. Again, revenues collected from this move won’t be nearly as high as the predicted €50m, as foreign homeowners will just relocate elsewhere.

Other easy sources of revenue come from a €2.3bn levy on wealthy households and €1.1bn in one-off taxes on large banks and energy firms. All of this comes amid bizarre schemes such as temporarily cutting fuel taxes for three months and hypocritical policies such as bailing out ailing bank Dexia and guaranteeing the debts of non-systemic mortgage lender Credit Immobilier de France. Scapegoat policies against the wealthy might win Hollande votes from the disenchanted poor, but they won’t help them get back on their feet in the long run.

View comments

Would a third runway be 'good value' for the taxpayer?

Written by Chris Harlow | Tuesday 04 September 2012

The Department for Transport has stated that without new runways, London’s airports will be at capacity by 2030. This could put Britain at a disadvantage from not being able to deal internationally at its full potential, especially with fast-growing markets in the Far East. Heathrow, as Britain’s only hub airport, is almost at capacity already and there has been pressure on the PM from businesses, media and backbenchers supporting the building of a third runway there. It is important that government does not prevent international businesses from operating in Britain, yet it is equally important that it allows investment decisions and funding to come from private interests and that it does not encroach on the rights it is designated to protect.

The building of a third runway is all very well if BAA Ltd (or a consortium of businesses and airlines) can afford to do so itself, but it is quite another if the £10bn funding required is going to come from the taxpayer. Against the official line of his party, George Osborne said on Sunday on the Andrew Marr show that a third runway at Heathrow is an option for government funding through the Infrastructure (Financial Assistance) Bill. This Bill will come into effect in October and promises £40-50bn of state finance to go to private schemes approved by the government, can start within 12 months and, supposedly, offer good value for the taxpayer (in other words, more government welfare for private companies that offer ‘good value for the taxpayer’).

If it is decided that a third runway is to go ahead, even if it is privately funded by BAA, additional costs may hit the taxpayer. The Free Enterprise Group, made up of Conservative MPs, has supported a move to give up to £40,000 compensation to those who would be affected by noise created by the new runway. This presumably would come out of government pockets rather than being enforced on BAA.

The best solution would be to grant a private company permission to build an airport around existing transport links and infrastructure located in an area where no or minimal noise compensation would be needed. The Mayor of London has stated his support for a new hub built in the Thames Estuary. One such proposal by Foster and Partners is to build a £20bn four runway airport on an artificial island near the Isle of Grain. It would be entirely privately funded, allocating £4bn towards improving existing infrastructure. Arguably, however, demand in the area isn’t high enough and the government would end up diverting much more infrastructural spending to this to increase demand, by creating transport links and provide public services for new workers. For the same reason, building a hub airport in the north when demand is predominantly centred around London may be good politics, but would be a great risk economically. The ‘build it and they will come’ strategy is a risk that should not be taken on something as crucial as international transport links, especially if the public purse is involved.

Another possibility arises from the currently anonymous ‘world-leading infrastructure firm’ made up of a consortium of British businesses, who are currently scouting sites for a new four runway airport that they hope could rival and perhaps even replace Heathrow as Britain’s key link between domestic regions and international airports, especially in the Far East. The firm has been looking at sites to the west and north-west of London and is now in talks with Chinese sovereign wealth funds over raising the necessary capital.

With a self-appointed monopoly on the decision of where something as crucial as an airport can be built, the government has a responsibility to make a decision that will involve minimal public expenditure, follow demand and protect the citizens who elected it from having their property devalued without compensation, whichever option that may be.

View comments

Why Funding for Lending will not work in the long run

Written by Chris Harlow | Tuesday 21 August 2012

The Funding for Lending Scheme (FLS), introduced by the Treasury and the Bank of England at the start of this month, aims to encourage banks and building societies to lend to UK households and businesses by allowing them to borrow from the Bank of England for up to 4 years at lower rates. These rates would be based on the amount that the banks lend out. In theory, this would allow many entrepreneurs to start new businesses that would be unviable without these lowered rates, as well as getting first time buyers on the property ladder.

The scheme has been coolly received by lenders, largely because of the track record for bureaucracy involved in previous government schemes of this nature. There have also been criticisms from the media, namely, that there have been no stipulations as to whom banks can lend to in order to receive their reduced fees, meaning some banks are aiming the savings towards trusted borrowers rather than new investors. To the libertarian, this seems more of a cushion to further market distortion, as the government backing banks to lend to anyone regardless of their ability to repay is what got us into this mess in the first place.

History and the Austrian school of economics tell us that when interest rates are artificially lowered below the market rate, people will simultaneously save less and invest more, but do so with false information about the market, as price signals become relatively distorted. Business schemes that would have been unviable with the higher borrowing rates now seem attractive, and so time preferences (i.e. whether one should spend now or save now) change to favour increased spending. This has a knock on effect on those whom the increased capital in the economy is spent on, usually those who work in the capital goods industries, who also start spending and stop saving. Sooner or later it becomes clear that bad investments have been made based on artificially altered interest rates and nobody has any savings to fall back on.

Our state financial institutions continue to prolong this depression because they refuse to see that it is their continued inteference that is keeping us here. The FLS scheme is the latest in a long line of projects, seceding the National Loan Guarantee Scheme (NGLS), that hope to realign their fundamentally flawed Keynesian cross to boost output. The policymakers pat themselves on the back as economic activity increases, not realising that it is leading those members of society that could bring us out of recession into ruin based on the false information that they send out. As such, regardless of their good intentions, policymakers need to realise that these schemes are not the solution to our problems.

View comments

Making society friendly again

Written by Chris Harlow | Wednesday 15 August 2012

Imagine a society in which welfare was provided not by the state, but by competing private organisations performing services such as insurance, savings, pensions, primary medical care and unemployment aid, and whose success and continuing function depended on how well they provide these services.

Welfare would be provided at a much more intimate level and would be results-orientated as consumers demanded better services with their wallets. Levels of social capital and community action would be higher, as current taxpayers would no longer feel as if they had already ‘played their part’ by paying taxes — which, in our state-centric system, are distributed ineffectively and often to rent-seekers. Participation in these societies could create a stronger feeling of ‘belonging’ among their members.

This kind of system was a reality before the birth of the welfare state, which began with Lloyd George’s provision of National Insurance in 1911 and set firmly on its path by William Beveridge’s social policy report in 1942. The ‘friendly societies’ that preceded the welfare state provided specialised welfare benefits that directed capital where its members’ values lay, in a pluralistic way that was starkly different to the monolithic approach of the modern state.

The competitive nature of these private welfare societies meant that they aimed to provide top quality service in a capital efficient way. This competitiveness also meant that there was a very large profit incentive to find cheats and strip them of their benefits, which in turn would mean more help could be diverted to the truly needy. In turn, unemployment was dealt with faster and more personally, aided by the inter-member sense of community. Further, members could choose where their money was going and join those societies that were most in line with their values.

Friendly societies still exist today, providing financial services and thriving on an ethos of mutuality, economy and community. However, they are held back from their vast potential by the nanny state that pervades our society under the guise of ‘wealth redistribution’, in reality providing an inferior service than could be achieved privately, increasing our reliance on the state and discouraging charity and community values. Many in the UK and elsewhere see state welfare provision as the backbone of our country and fervently expound its virtues, because they have never known anything else. But a look back into history shows that privately owned welfare societies worked in the past, and could work for us once again.

View comments

Social capital and the free market

Written by Chris Harlow | Tuesday 14 August 2012

The concept of the positive form of social capital, as championed by Robert Putnam in books such as Bowling Alone, is the notion that economic and collective benefit can be derived from networks of relationships, reciprocity and trust within and between communities.

The creation of social capital is often associated with government intervention and even the enforcement of a certain set of moral principles based on the whim of the current government. The government's Big Society program has been scorned from its very initiation because of its disconnection from reality and lack of government backing. However, the Big Society program failed not because, as often argued, that social capital cannot be created without private wealth and public investment, but because it intended to redistribute wealth rather than promote healthy competition. The creation of social capital does have its place in capitalism, but it is not something that can be forced.

Let me explain. By promoting free market competition, big businesses are given no safety net; they must depend totally on Darwinian capitalist principles. This encourages cooperation to strive forward for that mutually beneficial prize and increases the amount of wealth and innovation in the system. At the individual level, libertarianism creates a similar pattern, giving people an incentive to volunteer their services and to create social networks. The creation of social capital should be at the forefront of the mind of anyone who wishes to create a libertarian system as it is only with a healthy dose of social capital that we can avoid the concentration of wealth that is feared by many Marxist theorists.

Conversely, by funding a selective welfare state through obligatory public funding, voluntary commitments seem unnecessary and makes the ‘norms of reciprocity and networks of civil engagement’ that Putnam states are crucial to the creation of social capital much harder to form and we may actually see the destruction of social capital. Staffan Kumlin and Bo Rothstein have noted that ‘people with experience with selective welfare... will to a greater extent perceive themselves as having been mistreated’ and this in turn affects levels of interpersonal trust.

The creation of a free market system and the abolishment of a selective welfare state can and will create the social capital that will further reinforce libertarian principles. Governments must not be tempted to intervene in an attempt to create social capital as by doing so they will undermine the delicate balance of reciprocity. Social capital is not something that can be enforced, but can grow organically through the perception of universal benefit and fairness.

View comments

Current search

About the Institute

The Adam Smith Institute is the UK’s leading libertarian think tank...

Read more