The crisis of government

Since the 2007-2009 financial crisis, many calls have been made (often in right-wing newspapers) that capitalism has failed; capitalism has died or that capitalism is in crisis. These claims are weaked by the government’s impact on society and markets,  given the massive growth in government’s size and power. Public spending is estimated at 44.13% of GDP for FY 2012 (Actual FY2011 45.65% of GDP). This chart shows the growth over the last 110 years.

Government has become too big and like a bull in the proverbial china shop its weight and strength end up trampling everything and everyone. Society is a complex mechanism whose nuance is lost on goofy footed government. Bureaucracies don't manage anything well nor do they have an eye for economics. Indeed government cannot manage itself or the society it governs. As a result, government sets up unintended consequences because of its size, influence and power. It is not, as many would claim, a crisis of capitalism but rather a ‘crisis of government’. Society can no longer afford the bull. It is causing too much damage.  


At every level of society, the state through its agency, government, subverts responsibility. For the individual, the group, the corporation; government intercedes at the behest of lobbyists, voters or the unseen dictates of bureaucrats. Bureaucrats and politicians are weighed down by the responsibility of having to be seen to do something - anything so long as they can fulfil their perverse self interest in maintaining perks, position and privilege. Indeed the term public servant has become an oxymoron. 

Heavy hoof prints come in many forms. One big hoof print is the high level of taxation borne by you that brings low satisfaction for your taken money. Another large hoof print is the unintended consequences that occur when actions of government have effects that are unanticipated or unintended. Often cited but rarely defined, the law of unintended consequences illuminate the perverse unanticipated effects of legislation and regulation. In attempting to mend the unintended consequence of one policy, the result brings further consequence. 

At the heart of all the bull lies the problem of economic ignorance by politicians. Our political class never realize the unintended consequences of their legislation and policymaking until it is too late. And having dug themselves and the nation into a giant dung heap, politicians lack the insight that they are the cause of the problem and lack the political will to find a way out. Hubris clouds judgment. 

JS Mill on Europe

What has made the European family of nations an improving, instead of a stationary portion of mankind? …Europe is, in my judgment, wholly indebted to this plurality of paths [of character and culture] for its progressive and many-sided development. But it already begins to possess this benefit in a considerably less degree. It is decidedly advancing towards the Chinese ideal of making all people alike.

John Stuart Mill, On Liberty, Chapter 3

Privatize marriage

I've written for PoliticsHome today about why the whole debate over same-sex marriage misses the point. Why are we even having a discussion about which groups of people should be allowed to 'marry' others, I ask, when marriage has historically been a private institution that had nothing to do with the state? 

Removing the need to get a state licence for 'marriage' would allow consenting adults to sign whatever contract they want and call it marriage. People would be free to draw up contracts tailor-made for them, or to take one of the one-size-fits-all 'marriage contracts' that would inevitably be offered by private firms.

This rather simple step would make the whole marriage debate redundant. Any pair of consenting adults – gay, bisexual, straight, transsexual, or anything else – could agree to a contract that suits them and hold a marriage ceremony wherever would have them. (I say a pair, but there is no reason that three or four or more consenting adults should not be allowed to share their lives with each other in a private marriage, if they want.)

Of course, they would be free to hold whatever ceremony they wanted to around the contract signing. Marrying couples could hold unique weddings that reflected their own values and passions, instead of having to sign their contracts in a state registry office. It would be up to individual churches to decide for themselves whether or not they want to be involved – some probably would, and some probably would not.

So long as marriage is a state institution, it should be available to people in as many different kinds of relationships as possible. But there is something deeply unpleasant about a world where every kind of private relationship has to be approved in the court of public opinion before it is granted the same legal status as 'acceptable' relationships. We are fortunate to live in a fairly tolerant era where things like gay marriage are becoming accepted by the majority, but this is an insufficient safeguard.

Taking marriage out of the hands of the state would end the tyranny of the majority over people's private relationships. It's vital that we push politics out of our private lives. As I say in my post, love is too important to leave up to the state.

The broken Withywindle fallacy

Over on the Guerrilla Economist blog, Ust Oldfield discusses the economic consequences of the dragon Smaug on Tolkien's fictional universe, Middle Earth. He argues that the net effect on Middle Earth's economy may well have been positive. Both Dwarves and dragons hoarded the gold, so there would have been no monetary shock from the rapid withdrawal of so much precious metal from the economy. The Dwarves were then forced to offer their labour and skills to the outside world as refugees, contributing to the economy at large.

Perhaps. But there is something wrong with this picture. Ust neglects to mention that much of the Dwarven kingdom of Erebor and nearby Dale were utterly destroyed. Thousands of years' worth of accumulated physical, human (or should that be Dwarven?) and social capital incinerated. In order to have a net positive effect on the economy of Middle Earth, the Dwarves' integration with the wider economy must outweigh this massive destruction of wealth. This is unlikely, to say the least. For a start, the human city of Dale existed because of its trade with Erebor. Therefore the Dwarves were already engaging in peaceful and mutually beneficial exchange with the rest of Middle Earth. The Dwarves' actions as refugees can only have created less value if their highest-value, voluntary choices were forcibly eliminated.

The second problem is an epistemological and moral one. Sure, this is fiction, but Ust should not be so quick to defend forcible actions to create the most value for the most people. In his analysis, the values of a minority are subjugated to that of the population at large in a zero-sum manner. Creating a Dwarven diaspora constitutes the loss of the economic, social and cultural institutions that best satisfy their demands. Dwarves lose, Middle Earth supposedly gains. And yet, in a peaceful world without the destructive interventions of Smaug, both parties gain through voluntary exchange according to what they themselves value most.

Ust, like many other Keynesians, loses sight of what actually matters in economics: economic growth and production are only important because they satisfy peoples' demands and values. Forcibly removing their best avenues for peacefully satisfying demands can only be a net loss to all.

A simple guide to America's borrowing

The quiet nationalization of Stansted Airport

When David Cameron became leader of the Conservative Party, it is unlikely that many Conservative members expected him to preside over the nationalisation of an airport. But, with the £1.5bn sale of Stansted to Manchester Airports Group (MAG), that is, in an odd way, what has happened. For although MAG (which already owns and operates Manchester, East Midlands and Bournemouth airports) is privately managed, its principal shareholders are a group of ten local authorities. Manchester City Council owns 55%, and Bolton, Bury, Oldham, Rochdale, Salford, Stockport, Tameside, Trafford and Wigan own 5% each.

True, MAG is doing the deal with the Australian investment group Industry Funds Management, which will take a 35.5% stake in the newly-enlarged enterprise. But that still leaves the local authorities as the main owners.

The privatisation of the UK's airports was not done well. The 1984 Adam Smith Institute paper Airports for Sale, by the distinguished Dublin transport economist (and now Irish Senator) Sean D Barrett, raised the idea of privatising the then British Airports Authority (BAA), but insisted that its airports – three in Scotland (Aberdeen, Glasgow and Edinburgh) and three around London (Stansted, Gatwick and Heathrow) should be sold individually or in packages in order to promote competition. Sadly, Margaret Thatcher's government, while taking on the wisdom of privatising the badly-run BAA airports, chose to take the easy option (and perhaps the most lucrative one) of selling all six together. We knew this was a mistake, but consoled ourselves in the thought that such a monopoly could not last for ever and (like that other privatised monopoly, British Gas) it would be broken up one day, once it had acquired a more commercial way of working.

And it is right that the airport monopoly inherited by BAA plc should be opened up to competition. Glasgow and Edinburgh are what economists would call 'near substitutes', as are the three London airpots (or they would be, had BAA and British Airways not striven to segment them). And though  both groups face competitors (Prestwick, Luton, Cit), these are small. It is just a shame that the competition has to come from a publicly-owned body. Rather like Britain's electricity sector, a large chunk of which is now owned by nationalised French firms. If we really believe in competition, should we really be handing companies back to state enterprises here or abroad?

Bank bailouts fix the wrong problems

The Daily Telegraph reported (16th January) that UK taxpayers would likely be called to contribute up to another £30bn. to further bail out RBS and Lloyds TSB.  Their source was the Bank of England’s Financial Policy Committee’s (FPC) evidence to the Treasury Select Committee.  The problem is largely artificial: banking fogeys see the crash as having arisen from inadequate capital to withstand shocks.  They are wrong: more capital may have averted the need for the bailouts but capital shortage did not cause the crash.

The new international regulations-to-be (Basel III) focus on complex increases in tiered capital requirements.  The fogeys, in pressing for higher capital ratios, are pressing for shareholders, including us, to bail out the banks once again. This new money, if the EU allowed the Treasury to do that, would sit on bank’s balance sheets waiting to withstand another 2008-like crash.

In the middle of a recession that is not going to happen. You may as well treat a patient dying of hypothermia with a liberal application of ice packs.

Requiring higher capital ratios will also cause banks to lend less and especially less to SMEs, the very businesses which could lead us out of recession if they had the cash to do so.

The FPC has a built in problem with trying to balance growth, which always involves risk, and stability, i.e. the absence of change.  The problem is partly cyclical: just now we need growth but if and when growth again becomes unhealthy, we will need the ice packs.

Select Committees involve a lot of MPs showing and witnesses avoiding the questions.  The best example of this time wasting during this particular session (yes, I watched two hours of it) was when Andrew Bailey was asked why UK borrowers paid higher interest rates, and UK lenders to banks lower, than their continental counterparts, i.e. why are UK bank margins wider at both ends? The British Bankers’ Association must have been proud of Bailey’s evasion but why did the Chairman, Andrew Tyrie, let him get away with it? The reality is that banking debates are full of technical confusions. 

The high point of the session was the discussion between Brooks Newmark MP and Michael Cohrs, an independent, and independent minded, member of the FPC.  It was this exchange that gave the Daily Telegraph its headline but it was a lot smarter than that.  Rather than cut back on lending or increasing shareholder equity, banks could, and should, sell off their other assets.

Remembering George Orwell

George Orwell died on January 21st 1950, only 47 years old.  Short though his life was, his achievements earned him a place in history.  His Homage to Catalonia, describing his experiences as a volunteer in the Spanish Civil War, brought him fame, but with it the enmity of the hard, pro-Soviet left because of his indictment of the duplicity of the Communist forces in Spain.

Orwell's passionate concern for the underdog and the poor shines through his writings, as does his fervent opposition to the lies and distortions used by some to advance political ideologies.  Some of his essays on the use and abuse of the English language earned the status of enduring classics.

Although on the left himself, two of his works, Animal Farm and Nineteen Eighty-Four constitute the most effective exposures of the fraudulent brutality that underlay Soviet Communism.  Indeed, the latter work, completed just before his death, bequeathed us the vocabulary that describes totalitarianism, with phrases such as "Big Brother," "thought police" and "doublethink."

Orwell genuinely loved liberty and had a deep affection for the British people and their way of life.  His ability to project his honesty into his writing has earned him a place among the top British authors of his century.  In the fight for freedom he played a significant role, and is rightly remembered and appreciated.

Oxfam's latest gambit: let's raise global inequality

I'm afraid that I really don't understand this latest idea from Oxfam. I can only conclude that it comes from some unfortunate brain spasm or something. They seem to be calling for a rise in global inequality. Here's their actual paper, here's The G and the TUC both praising it. And here's their central demand:

An end to extreme wealth by 2025. Reversing increasing extreme inequality and aim to return inequality to 1990 levels.

I've long had my little problems with Oxfam: they seem to be suckers for every right on initiative going. But I hadn't thought that they'd been taken over by complete loons. Not up to now that is. For the problem with this demand is that 1990 levels of inequality were higher than they are now.

There's a logical point that need to be made:

Free public services are crucial to levelling the playing field. In countries like Sweden, knowing that if you get sick or that you will receive good treatment regardless of your income, is one of the greatest achievements and the greatest equalisers of the modern world. Knowing that if you lose your job, or fall on hard times, there is a safety net to help you and your family, is also key to tackling inequality. Similarly, access to good quality education for all is a huge weapon against inequality.

I agree entirely that free public services reduce inequality. Indeed, the TUC itself has calculated that income inequality in the UK is some 30x: the top 10% get 30 times the bottom 10% in market incomes. By the time you add in all the effects of taxes, benefits, those free public services like health care and education, that true income disparity falls to 6x. Given that all rich world countries do indeed have free health care, state pensions, free at the point of use education and so on, it's thus very difficult indeed to see that inequality is anywhere near as bad as is being stated. For we do indeed all have those public sectors which reduce inequality. We cannot thus go around measuring inequality purely by market incomes. Thus the very measure that Oxfam is using is, by its own lights, incorrect. For you just cannot go around recommending state services as a method of reducing inequality without taking note of how state services already reduce inequality.

And there's a factual one too. The go to guy on inequality is Branco Milanovic. A slide show is here, a paper here. Global inequality, the only form of inequality that a good little liberal should be concerned about at all, has fallen over the years. Substantially. As I've pointed out here, it's also true that the past few decades have seen the biggest reduction in actual poverty in the entire history of our species. And as here, the poorest of the poor, sub-Saharan Africa, has seen both rising incomes and falling inequality over that time period.

We've just managed, amazingly, to concoct the right economic policies to do exactly what Oxfam wants. We've let globalised capitalism rip and the poor are getting rich even as global inequality falls. So now they want us to stop doing what so obviously works.

I can really only think of three explanations for their desire to reverse all of these achievements. The first is that they're simply ignorant. Ignorant of the most basic facts about inequality and poverty. The second is that they've suffered some sort of brain spasm and need to go and have a little lie down. The third is that the organisation has been hijacked by loons. I'm afraid I just cannot think of any other reason why they would propose that we increase global inequality back to 1990 levels.

How to save the High Street: Do nothing

The Guardian has another of those worthy snoozefests discussing how the concerned and enlightened can solve whatever problem it is that is this week the topic of discussion over the mung beans. This one is all about how we can "save" the Great British High Street. You can imagine the level of analysis, can't you?

so many high streets reflect a landscape created by extreme capitalism

Sigh. Actual suggestions are that perhaps people should do something else with those buildings:

a new genuinely productive economy based on making, caring and exchanging goods and services could create thriving high streets again. Youth services, libraries, creches and the like, .....with more niche stores and "click and collect" shops. But high streets must also become vibrant and welcoming places for people to visit. A modern high street should provide ample facilities for childcare and good social facilities such as restaurants and coffee shops

Seriously, more coffee shops?

making high streets more truly mixed in use. They should house elder-care centres and medical clinics, government bureaus helping the public and pop-up music or art venues. .......In the longer term, we need a proper industrial strategy for retail to promote multichannel retailing, combining online trade with vibrant high streets at the heart our communities.

Don't bother trying to match opinion to speaker: it doesn't matter. None of them grasp the basics so all are floundering. The basics being that we've already got a tried and tested system for dealing with problems like this.

At heart here we've a problem of technological change. Some 11 or 12% of shop space in the UK is empty. Some 11-12% of UK retail spending is online these days. The two facts are not unconnected. We simply need less retail space than we used to. Or to get this completely correct, we need less retail space at current prices than we used to.

For don't forget, there is no such thing as "supply" or "demand". There is only either at a particular price. Currently UK retail space is priced for when we desired to have more of it than we currently use. The solution to this is clear and obvious too. Do absolutely nothing. Given the oversupply at current prices those prices will fall. Which will increase demand and thus that 12% of empty shops will become property used for something or other again.

Exactly what they are used for, well, we've no idea actually. Might be coffee shops, could be OAP drop ins, creches: could be fabric shops, places to jailbreak an iPhone too. And we've got a method of discovering what will indeed work when we're all entirely clueless too. Called that market again. As shops get cheaper different people will try different things. Some will work and get copied, others won't and won't. And so we experiment our way to a solution of empty shop windows.

Which leaves us again with our solution: do nothing for the market will take care of it. Prices, if left alone, will adjust to balance supply and demand. And what that demand will be will is something that is emergent from the very process of considering the new prices.

For markets are both a pricing system and also a system of discovery. Change the prices and we'll discover what works at the new ones. Which, given that no one, not even the luminaries willing to chat to The Guardian for a few minutes, has the slightest clue what should actually replace the shops busted by the internet, seems quite useful really.

Not that there's anything new in this observation of course: King Log being the appropriate method of governance dates back to the Ancient Greeks at least.