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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

So how's this Bolivarian Chavismo working out then?

Written by Tim Worstall | Sunday 16 February 2014

It has to be said that this Bolivarian Chavismo, socialism with a Venezuelan face, really isn't working out all that well. A few months back we had the absolutely absurd story that people were using high tech gadetry like smartphone apps just to work out which shop had toilet paper in stock. Things are going downhill from there:

At least three airlines have grounded flights to and from Venezuela so far this year, in part because the nation's government owed the carriers $3.3 billion in foreign exchange they need to pay operating costs. ........Carmakers are also in trouble. Toyota Motor Corp. is halting production in Venezuela, while Ford Motor Co. is reducing output. A mere 722 vehicles were sold in a country of almost 29 million people last month. Trade group Cavenez reckons this amounts to an 87 percent drop in sales in one year. Ford’s chief financial officer, Robert Shanks, understated the problem when he told Bloomberg last week that “price controls and a very limited and uneven supply of foreign currency to support production, have affected output adversely.” So adversely that Chrysler, Ford and General Motors produced no vehicles in Venezuela last month. Business isn't much better for newspapers. In the last six months 12 papers have shut and more than a dozen might cease publication if the government doesn’t sell the newspapers enough foreign exchange to pay for imported paper. .......A greenback in the black market now goes for 84.2 bolivars, or 13 times the official rate. ......With the highest inflation on earth, rampant violence, declining oil output and a hobbled private sector, Venezuela seems instead to be on a sustainable path to economic ruin.

I'm not sure that anyone would have the chutzpah to claim that that is all a mark of success.

The basic problem was an old one that confronts socialists. Desiring to reduce inequality might be something that I'm not very concerned with but it's a legitimate view to hold. Desiring to improve the position of the poor is one that I do agree with. But either of these things cannot be done by screwing with the market. For doing that is going to, inevitably, lead to the results above.

As I mentioned a couple of days back if you institute price controls then if you set them high, over the market clearing price, then you'll get a surfeit of whatever it is that you've just controlled the price of. If you set it below that market clearing price then you'll suffer a dearth. And if you set it at the market clearing price then why on earth are you bothering to control prices?

There is just no way out of this problem.

Unless, of course, you don't screw with the market as your method of increasing the incomes of the poor or of reducing inequality. And the most obvious method of doing that is to tax and then redistribute that money to said poor. Obviously this can be overdone but it is indeed what every country currently does do and they all manage to keep airlines flying, toilet paper on the shelves and the exchange rate within sight of the official numbers.

That, according to what they said at least, they wanted to move Venezuela a little in the direction of Sweden's icy social democracy isn't something we should condemn them for. For being complete fools about how they went about doing so perhaps is.

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The annuities market

Written by Tim Ambler | Saturday 15 February 2014

The Financial Confusion Authority (FCA) has just spent a year, and a massive amount of our money, discovering that some annuities are better value for money than others. Fancy that!  Some brands of corn flakes are better value than others too.  Some brands of corn flakes are more trustworthy than others and the same applies to annuity providers.  Consumers consider it good use of their money to pay a premium for security.  And who is the FCA to tell them that they shouldn’t?  According to the FCA, differing annuity payments means the market is “disorderly”.

They now intend to spend a further year considering what to do about it, i.e. interfere further in the market and thereby raise the total costs for all buyers of annuities.  Yes, of course financial markets need regulation, as do all markets, but the excessively detailed interventions we have witnessed since Gordon Brown gave us the Financial Standards Authority have eroded the very value for money these regulators were set up to achieve.

Regulators were created to bring about fair, competitive markets and then step away leaving choice to consumers.  Of course this means that the necessary information should be provided, be it the weight of a packet of potatoes or the amount of the annual annuity. The consumer is not helped by information being excessive or over-complex.  The regulator should be able to specify the key facts to be provided by annuity sellers in two days, not 12 months.

The primary mission of any organisation is to survive and, better, to grow.  The FCA is no exception.  The reality, as has been shown before (“I dreamed a dream of the FCA” 29 April 2013 and other ASI blogs and publications) is that the FCA is unnecessary.  The little it achieves could be handled by the Financial Ombudsman Service and Office of Fair Trading.

They key lesson from these two years of FCA self-promotion is that it is struggling to justify its existence.

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In which I fully support Natalie Bennett of the Green Party of England and Wales

Written by Tim Worstall | Saturday 15 February 2014

I should, I suppose, support Natalie Bennett of the Green Party of England and Wales, given that I publicly supported her at the time of her election. But I do have a feeling that this support she's about to get from me will not be quite so welcome.

She's come out in an official party document demanding that everyone who rejects the science of climate change be fired from government: apparently elected or unelected.

Ms Bennett said: "We need the whole government behind this. This is an emergency situation we're facing now. We need to take action. We need everyone signed up behind that." Pressed on the issue, she agreed that even the chief veterinary officer should be removed if he didn't sign up to the view on climate change also taken by the Green Party. A policy document released by the party said: "Get rid of any cabinet ministers or senior governmental advisors who refuse to accept the scientific consensus on climate change or who won't take the risks to the UK seriously." Ms Bennett added: "It's an insult to flood victims that we have an Environment Secretary (Owen Paterson) who is a denier of the reality of climate change and we also can't have anyone in the cabinet who is denying the realities that we're facing with climate change." She said her party took the consensus view shared by many other organisation including the Intergovernmental Panel on Climate Change.

This is, of course, a betrayal of all that is holy about democracy and so we'll not be having with that. However, let us just put that to one side for a moment and think through, properly, what is the accepted science of climate change.

We can start with the SRES: these are the economic assumptions that go in at the beginning of the process. How many people will there be, at what level of wealth, using what technologies: these estimates produce the emissions numbers that then do into the climate models from which everything else is derived. We have four families of such scenarios and they run A1, A2, B1, B2. A largely stands for a capitalist economy red in tooth and claw, B for something more akin to a caring sharing social democracy. 1 means a more globalised economy than the one we have now, 2 means a more balkanised one, one more autarkic than at present.

In terms of human flourishing, the wealth of people in the future (and do recall that wealth is not simply more things or more consumerism, it is an expansion of the possibilities available to people),  then as we would expect the capitalist bit produces better results. But what's even more interesting is that a more globalised result produces better results than a more autarkic one. In fact, even in terms of emissions the globalised (whether capitalist or social democratic) families produce fewer emissions than the autarkic ones. Thus we can see that the science of climate change insists that we must increase, not decrease, globalisation.

This is not, to put it mildly, something that Ms. Bennett believes nor the Green Party of England and Wales. But under this stricture proposed by those very people we will simply have to fire from government everyone who opposes greater globalisation. Sad but there it is, we do have a planet to save after all.

We can go further as well. As My Lord Stern has pointed out (and as have eminences like Richard Tol, William Nordhaus, Greg Mankiw and, in fact, just about every economist who has bothered to look at the issue) the correct solution to the results that come from the IPCC is a carbon tax. Of some $80 per tonne CO2-e in fact according to Stern. And it's well known that UK emissions are around 500 million tonnes. And also that we already pay some swingeing amount of such Pigou Taxes: the fuel duty escalator alone now makes petrol a good 15p per litre more expensive than it should be under such a tax regime. And there are other such taxes that we pay, so much so that we are already, we lucky people here in the UK, paying a carbon tax sufficient to meet Lord Stern's target (which is, it should be noted, rather higher than what all the other economists recommend: we're not stinting ourselves in our approach to climate change).

We don't quite pay it on all the right things as yet, this is true, but the total amount being paid is about right. We just need to shift some of the taxation off some products and on to others. Less on petrol and more on cowshit for example.

That is, according to the standard and accepted science of climate change we here in the UK have already done damn near everything we need to do to beat it.

This, in turn, means that we now have to fire everyone who disagrees with this application of that accepted science. Which means we get to fire Ed Davey for suggesting more windmills for example. We don't need any other schemes, plans, subsidies, technological boosts nor regulations. As Stern and all the others state once we've got that appropriate carbon tax in place then we're done, problem solved. We just then sit back and allow the market to churn through the various options now that we've corrected the price system for externalities.

All of which I think is rather wonderful. Given that the Green Party is very much against globalisation then their demand is that no member of the party can ever be employed in a senior political or civil service role. For globalisation is a cure as the settled science of climate change insists. Indeed, it's one of the basic assumptions that go into the original models. And we also get to fire everyone who comes up with any scheme for regulation or subsidy, given that these are all contra-indicated by the accepted solution of the carbon tax. And finally, do note that we're already paying enough in green taxes, we've only got to tweak, in a minor manner, what we're paying them on in order to have completely solved the problem. And, as Ms. Bennett states, we now have to go and fire absolutely everyone who disagrees.

Which, given that I seem to be the only person who has actually read all of this guff, understood the implications of it and managed to piece it together makes me Prime Minister, doesn't it? Or Grand High Panjandrum or something? I seem to have convinced Matt Ridley of this over the years so perhaps he could handle the Lords for my new government.

So when do I get to meet the Queen?

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How Scotland could flourish by unilaterally keeping the pound

Written by Sam Bowman | Friday 14 February 2014

Between 1716 and 1844, Scotland had one of the world’s most stable and robust banking systems. It had no central bank, no lender of last resort, and no bank bailouts. When banks did fail, it was shareholders who were liable for paying back depositors, not taxpayers. Scottish GDP per capita was less than half of England’s in 1750; by the end of the era in 1845 it was nearly the same. Now that George Osborne has ruled out a currency union if Scotland votes for independence, the Scots have an opportunity to return to this system more seamlessly than any other place in the world could.

As I said to the press this week, there’s nothing really stopping Scotland from continuing to use the pound unilaterally. (Unless the remaining UK introduced strict foreign exchange controls, which would be absolutely crazy.)

What the Chancellor's announcement actually means is that the Bank of England (BoE) would no longer consider Scottish interests when it determines monetary policy and that illiquid Scottish banks would no longer be able to use the BoE as a Lender of Last Resort.

I’m not sure that the first point really matters at all. Scotland’s five million people can’t have much of an influence over the BoE’s policy for the UK’s 63 million people as it is. And, frankly, I’m not sure the BoE knows what it’s doing well enough for it to matter whether it cares about you or not.

The second point is the interesting bit. George Selgin has pointed to research by the Federal Reserve Bank of Atlanta about the Latin American countries that unilaterally use the dollar. Because these countries – Panama, Ecuador and El Salvador – lack a Lender of Last Resort, their banking systems have had to be far more prudent and cautious than most of their neighbours.

Panama, which has used the US Dollar for one hundred years, is the most useful example because it is a relatively rich and stable country. A recent IMF report said that:

“By not having a central bank, Panama lacks both a traditional lender of last resort and a mechanism to mitigate systemic liquidity shortages. The authorities emphasized that these features had contributed to the strength and resilience of the system, which relies on banks holding high levels of liquidity beyond the prudential requirement of 30 percent of short-term deposits.”

Panama also lacks any bank reserve requirement rules or deposit insurance. Despite or, more likely, because of these factors, the World Economic Forum’s Global Competitiveness Report ranks Panama seventh in the world for the soundness of its banks.

I suspect that there would also be another upside. Following Walter Bagehot, central banks are only supposed to lend to illiquid banks, not insolvent ones. Yet since the start of the Eurozone crisis the ECB has clearly made significant bond purchases to prop up both insolvent banks and insolvent governments. This may have been a lesser evil than letting them collapse altogether, but it’s hard to say that this kind of moral hazard is not present.

So, given that some countries do survive and even flourish without a central bank, how would Scotland do it?

The basic mechanics, I think, would be this: in a hangover from the old free banking period, Scottish banks currently issue their own banknotes. After independence, they could continue issuing their own notes that entitle the bearer to GBP on demand. BoE pounds, in other words, would be the 'base money' that Scottish banks use to back their own private currencies, in the same way gold was used during the last Scottish free banking era.

A banknote from a Scottish bank would be, in effect, a promissory note redeemable on demand in BoE-issued pound sterling. (Scottish notes are already promissory notes, but issuance is closely regulated by the BoE.) Of course, there should be nothing stopping banks from issuing notes redeemable in something else, like US Dollars, gold, Bitcoins, or Tesco Clubcard points. Scottish banks would have to arrange private clearing houses, as they did in the last free banking era, to provide loans to illiquid banks, or they could follow Panama in simply maintaining very high reserves.

No bank would have monopoly privileges: any ‘bank’ could issue notes and it would be up to the market to decide whether to accept them as money or not. As Selgin explains here, banks free to issue their own notes will set their reserve ratios according to people's demand for money, stabilising nominal spending.

With respect to other regulations, I quote Selgin again:

"It is, in any event, desirable that there be no Scottish public authority capable of bailing out insolvent banks and of thereby introducing a moral hazard. Deposit insurance should be resisted for the same reason. Foreign banks should be admitted, by way of branches rather than subsidiaries, and should enjoy the same rights as Scottish banks. (Of course the major "Scottish" banks are themselves no longer really Scottish anyway.) Finally, re-establishing some form of extended liability (though not necessarily unlimited liability) wouldn't be a bad idea."

We take no position on Scottish independence — it is up to Scottish voters to decide. And while a return to free banking in Scotland may seem fanciful, this week’s announcement makes it much more likely. Keeping the pound and treating it as the ‘specie’ on which banks can base their notes would make the transition virtually seamless for the average Scot, while giving them a banking system that is unrivalled anywhere in the world for being stable, open, and free.

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Price fixing doesn't work Part XVII

Written by Tim Worstall | Friday 14 February 2014

Thailand is finding out, in a most painful manner, what happens to those who try to fix prices:

Thailand, once the world’s biggest exporter, is short of funds to help growers under Prime Minister Yingluck Shinawatra’s 2011 program to buy the crop at above-market rates. After the government built record stockpiles big enough to meet about a third of global import demand, exports and prices have dropped, farmers aren’t being paid, and the program is the target of anti-corruption probes. Political unrest may contribute to slower growth in Southeast Asia’s second-largest economy.

In order to curry favour with the rice farmers who compose a substantial part of the electorate prices were fixed and fixed high. The inevitable thus happens, magically more is produced than anyone wants to consume and here at least it is looking like the government will go bust over it. "Produced" is of course a flexible word: there are long running reports of rice being smuggled over the Burmese border to take advantage of those high Thai prices.

This really should not be a surprise to anyone. For prices are information, they're information about how many people want to consume how much of what and similarly about who is willing to produce. Changing the prices will change those desires and thus kick the system out of sync.

And it really is always the same: Thai rice, the world's supply of tin back in the 70s, the EU food mountains and wine lakes, Red Ed's idea to subsidise wind and solar power prices. If you set the price high then there will be a glut on the market that someone, somewhere, is going to have to buy at those high prices in order to maintain those high prices. That is, as we all know, the poor bloody taxpayer. If you set the price too low as with Venezuelan toilet paper or Red Ed's idea to freeze power prices then the good in question becomes in dearth. More people want to consume it than there is supply for them to consume.

And if, of course, you manage to set prices where supply does indeed meet demand then why the heck are you wasting your time setting prices? The market will achieve that for you without your lifting a finger.

The error really does come from failing to realise that prices are not something for us to manipulate, they're information that we need to process.

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On the rise of the robots

Written by Tim Worstall | Thursday 13 February 2014

I'm astonished to find yet another person getting this wrong. Martin Wolf:

Fourth, we will need to redistribute income and wealth. Such redistribution could take the form of a basic income for every adult, together with funding of education and training at any stage in a person’s life. In this way, the potential for a more enjoyable life might become a reality. The revenue could come from taxes on bads (pollution, for example) or on rents (including land and, above all, intellectual property). Property rights are a social creation. The idea that a small minority should overwhelming benefit from new technologies should be reconsidered. It would be possible, for example, for the state to obtain an automatic share in the income from the intellectual property it protects.

This is all about what happens when the robots steal all our jobs. And everyone, just everyone, is arguing that when they do then the capitalists will have all the money. For they, of course, own the robots. Thus we should tax the snot out of capital and the capitalists and the world will be a better place. It all sounds a bit Marxist to me to be honest, this idea that there is some class of capitalists that we must tax.

There are several reasons why I don't think this is going to happen:

1) My favourite economics paper. Looking at who benefits from Schumpeterian innovation, that's the same thing as the technological change we're considering here. The answer is that we the consumers get 97% of it and the entrepreneurs get 3%. Now why should we, getting 97% of the increased living standard from technological change, then want to tax the snot out of those people bringing it to us and only getting 3% of that new value created?

2) Does anyone at all really believe that the robots are all going to end up being owned by one class of people? In this age of open source stuff? Is this what's happening with 3D printing? Of course it damn well isn't: people are pottering about in sheds with these technologies. As soon as we do have robots that make robots (the necessary stage for them to take all our jobs) there will be designs for such robots that you can make at home. We'll all be robot owners and why would we want to tax the snot out of ourselves?

3) The assumption is that capital will become more productive in a robot world. That's why we'll have to tax the snot out of capital. And capital will indeed become more productive: which is why its value will fall. Yes, you read that right. When something becomes more productive this is equivalent to stating that we've made more of it. Thus more productive capital means we have more capital and the price of something that becomes in greater supply falls, not rises.

4) The last time we mechanised a significant area of life was probably farming back in the 1920s and 30s. Agriculture become significantly more productive. What happened to the price of land? Yup, it sank like a stone and the farmers have been on the public teat ever since.

Vast numbers of cheap robots would lead to our lives improving immeasurably: so why is everyone running around insisting that it will then be necessary to tax the snot out of the capitalists?

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Markets do set rates: A reply to Julien Noizet

Written by Ben Southwood | Wednesday 12 February 2014

Financial analyst and blogger Julien Noizet has replied to my article on mortgage rates on his blog. It is a good piece, worth reading, but I still think I am right. It is perhaps true that Noizet is right too, because my claim was really very modest: in total, mortgage interest rates do not mechanically vary with the Bank of England's base rate; we can show this because the spread between them and the base rate varies extremely widely; and since we have very strong independent reasons to expect that market forces largely drive rate moves, that should be our back-up explanation. The implication of this I was interested in was that this meant a hike in Bank Rate wouldn't necessarily drive effective rates up to a point that would substantially increase the cost of servicing a mortgage and hence compress the demand for (London) housing.

Even if the first graph in Noizet's blog post did appear to support his narrative that effective market rates follow Bank Rate moves, I'm not sure why these disaggregated numbers matter given that the spread between overall effective rates on both new and existing mortgages varied so widely. If it turns out that specific mortgage types varied closely with Bank Rate but the overall picture did not, then markets still control effective rates, they just do it via a changing composition of mortgages, not by changing the rates on particular products. The effect is the same—and it is the effect we see in the Bank's main series for effective rates secured on dwellings. But the graph, to me, looks a lot like mine, despite the effect of new reporting standards: mortgage rates are about a percentage point from the base rate until 2008, then they don't fall nearly as far as the base rate in 2008 and they stay that way until today. If other Bank schemes, like Funding for Lending or quantitative easing were overwhelming the market then we'd expect the spread to be lower than usual, not much higher.

His second big point, that the spread between the Bank Rate and the rates banks charged on markets couldn't narrow any further 2009 onwards perplexes me. On the one hand, it is effectively an illustration of my general principle that markets set rates—rates are being determined by banks' considerations about their bottom line, not Bank Rate moves. On the other hand, it seems internally inconsistent. If banks make money (i.e. the money they need to cover the fixed costs Julien mentions) on the spread between Bank Rate and mortgage rates (i.e. if Bank Rate is important in determining rates, rather than market moves) then the absolute levels of the numbers is irrelevant. It's the spread that counts. But the whole point of my post is demonstrating that the spread changes very widely, and none of Julien's evidence seems to me to contradict that claim. Indeed, Noizet's very very good posts on MMT, which stress how deposit rates are much more important as a funding cost than discount rates for private banks, seem at odds with what he's written in this post. And supporting this story is the fact that the spread between rates on deposits (both time and sight) and mortgages changes much less widely. If we roughly and readily average time and sight on the one side and average existing and new mortgages on the other, the spread goes no higher than 2.3 percentage points and no lower than 1.48.

In general with the post I don't feel I understand the mechanisms Noizet is relying on, perhaps I'm misunderstanding him, but the implications of his claims regularly seem to contradict our basic models of markets. For example, he says that a rate rise would lead banks to try and rebuild their margins and profitability. But I can't see any reason why banks wouldn't always be doing that. The mortgage market is fairly competitive, at least measured by the numbers of packages on offer and the relatively small differences between their prices. I don't think Julien has presented any mechanism to suggest why banks would suddenly want to maximise profit after a rate rise but wouldn't beforehand—or why they'd suddenly be able to ignore their competitors but couldn't beforehand. It's possible there is one, but I can't see that he's explained it. Overall I suspect I've missed something crucial, so I welcome any more comments Julien has on the issue.

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Why we can't plan the economy part DXVI

Written by Tim Worstall | Wednesday 12 February 2014

This is a lovely little tale from Paul Ormerod in City AM:

Igal Hendel and Yossi Spiegel document the evolution of productivity over a 12 year period in a steel mini-mill, producing an unchanged product, working 24/7. The steel melt shop is almost the Platonic ideal from a national accounts perspective of output measurement. The product – steel billets – is simple, homogenous, and internationally-traded. There was virtually no turnover in the labour force, very little new investment, and the mill worked every hour of the year. Yet despite production conditions which were almost unchanged, output doubled over the 12 year period. As the authors note, rather drily, “the findings suggest that capacity is not well defined, even in batch-oriented manufacturing”.

This is a product of the point that Hayek made, that all knowledge is local. This increase in production from the same assets and workforce came not because anyone outside the plant had anything at all to do with it. There was no governmental either mandate, nor advice on how to do it. There was no technological breakthrough, no scientist involved, no research. Simply people getting better at doing something simply by doing that thing. And note that production doubled in 12 years just from this factor.

This isn't something you can do by plan nor is it something that can be accomodated in a plan: for obviously it's not true of all processes all the time. Another blow struck against the idea that the centre can possibly detail how an economy should work.

Yes, we do indeed still need the centre, there are some things that can only be done there. But as I've remarked before we should be using central government only for those things that both must be done and can only be done by central government.

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A lie can be half way around the world before the truth has got its boots on

Written by Tim Worstall | Tuesday 11 February 2014

This is a little story close to my heart in the day job:

"I think there is a great commercial potential on the moon," he added, citing significant reservers of helium 3, which is rare on Earth and which could be developed into a clean energy fuel ideal for nuclear fusion. The lunar soil is also rich in coveted rare earth elements: 17 chemicals in the periodic table that are in an increased demand because they are heavily used in everyday electronics. "There are a vast amount of opportunities for a wide variety of companies not only in America but across the globe," Gold insisted, emphasizing Europe and Japan, as well as the US Congress, are enthusiastic about a return to the moon.

The lunar soil may indeed be rich in rare earths: I have no idea myself but it could be. However, absolutely no one, ever, is going to try and mine rare earths on hte Moon and then return them to Earth. It simply isn't going to happen.

What I think has happened here is that people have absorbed the stories of the past few years about impending shortages of the rare earths. All that stuff about China reducing exports of these metals so vital to modern electronics. And thus there's a feeling that any deposit of them, even somewhere as inaccessible as the surface of the Moon, must be something that people would want to exploit.

The problem is in the initial story: yes, China did limit exports but that does not mean that there's any shortage of these minerals here on out little planet. Several of them, individually, are as common as copper down here. And we produce millions upon millions of tonne of that each year while we use only 140,000 tonnes of all 17 rare earths together. There's simply no long term shortage.

And there's absolutely no way therefore that anyone's going to try and mine the Moon for things that can be had down here for $10 a lb.

My major point here being that these people are apparently basing their plans about lunar mining on something that simply never will be mined up there: at least not for returning down here. And it's inevitable that if you start basing your plans on untruths then your plans are going to fail at some point.

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Quote of the week

Written by Dr. Eamonn Butler | Monday 10 February 2014

"The miracles of the past three and a half centuries – the unprecedented improvements in democracy, in longevity, in freedom, in literacy, in calorie intake, in infant survival rates, in height, in equality of opportunity – came about largely because of the individualist market system developed in the Anglosphere. All these miracles followed from the recognition of people as free individuals, equal before the law, and able to make agreements one with another for mutual benefit."

– Daniel Hannan
How We Invented Freedom & Why It Matters

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