Happy New Year!

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A hopeful message

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In response to a blog a wrote a few weeks ago, I was asked, "Does this mean that the competitive free market economy of Adam Smith does not exist in the real world? That it is today a government managed economy through supply side and monetary policies?" It's an interesting question, and it is very easy to get depressed about the state of the world at the moment – but I still don’t know that I'd go that far.

On the one hand, it is probably true that no country in the world has a pure free market economy. In unstable or extremely undeveloped countries, you don't get proper free markets (even in the absence of government intervention) because the institutions needed to support them, like secure property rights and the rule of law, are absent. And when countries do become stable and developed, they almost always end up with governments committed to managing the economy and micromanaging citizens.

So yes, pure free markets (in the theoretical sense) probably do not exist in the real world. What we have instead is varying degrees of state capitalism – the most successful versions being those that maximize individual freedom and allow the greatest degree of competition.

But on the other hand, I don't think we should despair. Maybe there's no free market utopia, and maybe there never will be. But ultimately individual freedom (and, by extension, the free market) will always be more powerful than statism, because it goes with the grain of human nature – people are inherently entrepreneurial, dynamic and individualistic. So while governments will probably never stop trying to manage everything, they're never going to succeed in managing everything either. Indeed, the more complex, diverse and advanced economies become, the harder it will get. There will never be a perfect world, sure, but in the long run liberty has the upper hand.

On the eighth day of Christmas...

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My true love sent to me: eight maids a-milking. In the Christmas song, A Partridge in a Pear Tree, these may signify the eight beatitudes or blessings in the Sermon on the mount: blessings to the poor, the meek, those who mourn, the just, the merciful, the clean of heart, the peacemakers, and those who suffer persecution.

But what of the milkmaids? Well, they and the cheesemakers are hardly blessed, thanks to a Catch-22 conspiracy of politics and interest groups. Britain's Office of Fair Trading has claimed that the big four supermarkets colluded to keep the prices of milk and dairy products artificially high, pocketing an estimated £270m in the process.

The supermarkets look like being forced to stump up huge fines, though they regard it all as a bit rich. After years of everyone complaining that they screwed down farm gate prices from their suppliers so low that it was threatening the future of the dairy industry, the supermarkets decided it was time to get together and be a bit more generous to the farmers. Prices were duly put up and...then the whistles started blowing. In business, you just can't win.

Blog Review 826

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Some of us were saying that the Detroit Three really did need to go into Chapter 11 bankruptcy in order to get themselves sorted out (if that was even possible). Here's a story of what happens when you don't have that legal stucture around such a complex process. Those in the know get preferential treatment.

An excellent point made. All large companies are now software companies.

Wouldn't you like to know where all the tax money goes? Well, here's at least some of it.

Could it be that Krugman's greatest fault as an economist is that he simply doesn't believe public choice theory?

Using barkingly bad statistics to back up an even more barkingly crazed policy prescription.

An 'orrible and foolish idea. Plus someone who doesn't believe in it but doesn't think it's that crazed.

And finally, squeeze 'em and squash 'em good.

On the seventh day of Christmas...

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My true love sent to me: seven swans a-swimming. In the song, this could refer to the seven sacraments, or the seven gifts of the Holy Spirit, which include things like teaching, service, and leadership.

Teaching, of course, is another of those things where there is far too much government, and far too little service and leadership. As in health, it is not that the staff are bad - but they are just badly managed, and the sector is too centrally run. The top-down Stalinist way of running things didn't deliver in the Soviet Union, and it doesn't deliver in health, education, and other public services. So we end up with sink schools from which parents and kids - usually those in the most deprived areas - have no escape.

Now, though, the world is building up experience that decentralization actually works. Instead of the state running every school, give parents and teachers money to run their own. That has led to a flowering of new schools in poor, often black areas of America where the state schools had been overwhelmed with drugs and violence and underwhelmed with learning and achievement. Now Sweden has a similar system - the money follows the choices of parents, not bureaucrats, so it tends to be spent better: and all sorts of new education providers are springing up as a result. A model for the UK? Well, we certainly think so.

The Media's Top 10 Economic Myths of 2008 (No.1)

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1. America needs a new, New Deal.

Media myth: Time magazine and other media outlets pushed the idea that Obama must be the next FDR, but they are misrepresenting the impact of the New Deal.

Originally published by the Business & Media Institute

Imagine the classic image of FDR sitting in his car grinning, with a cigarette perched from his mouth. Now imagine it had the face and hands of president-elect Barack Obama instead of FDR.

No, it wasn't a dream – it was the cover of Time magazine on Nov. 24 which made it clear the media had crowned Obama the new FDR and wanted him to institute a new New Deal.

The photo illustration of Obama and FDR came with a headline that declared: "The New New Deal: What Barack Obama can learn from F.D.R. – and what the Democrats need to do."

But even before Obama was elected, journalists were looking for FDR. CNN's Wolf Blitzer asked before the election, "who's gonna be FDR as opposed to Herbert Hoover?"

In a discussion of economic stimulus packages, ABC's George Stephanopoulos said on Oct. 19 that he thought Obama "would want to do something like what FDR did in 1932."

Guests and experts also sounded the call. On CNN, Jeffrey Sachs of the Earth Institute at Columbia University called for a revamped New Deal more than once. Sachs was a favorite expert of CNN in October appearing on 10 of the first 23 days of the month.

But what news reporters, anchors and guest didn't tell viewers is that according to several economists FDR's New Deal actually prolonged and deepened the Great Depression.

In a 2004 study, two University of California, Los Angeles (UCLA) economists found that FDR's policies lengthened the suffering of the Depression by seven years. The two economists specifically blamed anti-free market measures including the National Industrial Recover Act (NIRA) and later the National Relations Act.

Another free-market economist who has written about FDR's negative impact on the economy is Robert Higgs. Higgs told the Business & Media Institute that a new, New Deal would be disastrous. "I cannot imagine a worse course of action, short of outright socialization of the entire economy. The measures comprised in a new New Deal will not hasten general economic recovery, but will only bulk up the power of government and transfer income to privileged interest groups at the expense of taxpayers and consumers," Higgs said."

Film of the Year No. 1

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1. Cloverfield

Given my previous two picks – Gomorrah and Lust, Caution – my choice for the best film of 2008 may seem like an odd one. Cloverfield is, after all, an Americanized take on the Godzilla genre, filmed entirely on handheld camera and aimed squarely at a Hollywood blockbuster audience. But I don’t think that necessarily disqualifies it from movie-greatness: Cloverfield is, in its own way a truly brilliant film.

As the film opens we are told we are watching a camcorder video, recovered by the US military from an 'incident' site known as “Cloverfield". First we see a happy couple spending the day together; then we cut to the preparations for a going-away party. During the party, something attacks New York and the city is plunged into chaos. The party-goers flee the apartment, but the camcorder is kept on, capturing the terrifying events that follow...

Cloverfield succeeds completely as a genre film, keeping you on the edge of your seat from beginning to end. It also wins points for its innovative style, telling the story of a disaster entirely from the camcorder-point of view of a small group, and lasting the exact same time as a real DV tape. The feeling of panic that envelopes the whole film is almost overwhelming, such is the skill with which it is put together. But while Cloverfield’s only real intention is to scare you, it is also more than simply a monster movie: the implicit parallels with 9-11, though entirely unforced, give the film a powerful and unexpected resonance.

Watch the trailer here

Quote of the Year

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It is true that we had ten years of record growth when I was prime minister. I have, unfortunately, come to the conclusion that it was luck.

Tony Blair, in a lecture to Yale University

Blog Review 825

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Well, if you start off with faulty statistics and then ignore the real world, of course you can prove whatever it is that you want to.

Guess who might end up carrying the financial can for the Madoff losses? Yup, the taxpayer. Still, at least it's a $50 billion fiscal boost, eh?

No, food miles are not a good way of measuring environmental impact. Total resource use would be rather better.

So those people approving all those no money down, no income checks, negative amortisation mortgages, what were they, on crack? Umm, no, methamphetamine actually.

Competition time! Who would you nominate as your, err, umm, "coprolites" of the year?

The Angry Economist has obviusly spent too much of the season with young children. The latest Nobel Laureate in economics* is, apparently, a "doody head".

And finally, shades of Roderick Spode and those black footy bags. Can any British politician survive being the butt of the Panto jokes?

*Yes, we know, it's the Swedish Central Bank's prize in honour of etc. And no, we don't care.

On the sixth day of Christmas...

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My true love sent to me: six geese a-laying. In the song, this seems to refer to the six days of creation.

The goose that laid golden eggs in Britain was our occupational pension system. Businesses would open a pension scheme run by independent trustees, encouraging workers to join it and putting in some money themselves. By 1997, Britain’s workplace pensions savings were larger than the rest of Europe’s put together.

The 97,900 work-based pension schemes that existed in 1997 have now shrunk to just 53,801 – and falling. Of those, 18,990 no longer accept new members, 4,354 are frozen, and 1,779 are being wound up. Less than a third of the 1997 figure are still active and open to new employee members. By the end of 2007 there were about a million less active members of occupational pension schemes than there were just three years earlier. Less than half of those who work in the private sector are now paying into a pension. At the current rate of decline, there will be no contributors at all by 2020. The demise of this once-thriving savings sector is one reason why more and more people now face hard times when they retire.

The sole person responsible for this is Gordon Brown. It goes back to the ending of dividend credits on advance corporation tax, which Brown slipped into his first Budget speech in 1997. It was a typical Brown stealth tax – one that few people understood, and which fewer would even notice until they came to retire many years later. And it has taken about £175 billion out of the pockets of pension savers and put it into the Treasury’s. That is equivalent to a tax of £16,600 on every private pension saver.