The Pin Factory Blog

What do you think of when picturing an ‘innovator’? I would hazard a guess that the skinny, t-shirted frame of a computer developer forces his way into mind. He is likely in the middle of developing a new app or website, and is keen to end his summons before your mind’s eye to get on with typing inscrutable code and eating pop tarts.

This is a shame. Not the interruption of our computer nerd - who we’ll leave alone now - but the fact that innovation has become such an internet and computer centred phenomenon. It is also, however, no coincidence. The ‘techy’ sectors have enjoyed huge advances in recent years in no small part because of the relative lack of regulation and red tape they’ve faced.

This has kept start-up costs low, compliance with legislation cheap, and product development swift. The economic benefits of this business freedom have been extraordinary. In 2010 the UK internet economy contributed £121bn to GDP, in 2016 this is set to be £225bn. This is a remarkable 86% growth in 6 years. According to McKinsey in 2011 2.6 jobs were created for every (mainly high-street) job lost. It is no surprise that London’s ‘Silicon Roundabout’ has grown in notoriety in recent years. We would do well to follow the advice of Dominique Lazanski’s recent ASI paper to keep the stellar growth going.

Other sectors have not been so lucky – over the decades industries like pharmaceuticals and food production, which once saw equally impressive innovation, have been overwhelmed by creeping legislative burdens. The rise of the grisly ‘ealf and safety brigade, backed by big business eager to block new entrants, has gradually put a stop to the leaping advances. The regulatory obstacles are so great now that aspirin would not be passed by the FDA (it would be red flagged because it risks causing gastrointenstinal bleeding). Similarly, rising levels of regulation contributed to the end of so-called ‘green revolution’ in food production between the 1940s and 70s, which hugely increased yields and lowered prices.

The risk of failing to comply with standards discourages businesses from engaging in the kind of innovation that can lead to radical break-throughs. It is safer to opt for more mundane improvements safe in the knowledge that they will be allowed to make it to the market-place.

I can hear the hard-hatted inspectors and boardrooms bursting to object. ‘This regulation is designed specifically for the benefit of consumers, they clamour; in its absence people would be exposed to improperly tested, and therefore potentially lethal medicines and foods. ‘Are you in favour of sacrificing human lives at the altar of innovation?’ they ask.

I can think of two replies to this. First, in the developing world millions die of starvation and disease; if more rapid advances were allowed many more lives would be saved than lost. Second, as our President Dr. Madsen Pirie argued so persuasively on the Daily Politics, the expectation of progress and improvement is an important component of a society’s well-being. Increased optimism about the development of new life-saving medicines and lower food prices would be a welcome addition to looking forward to the new iPad.

A bonfire of regulation would attract the best innovative minds from around the world and reignite economic growth and job creation in Britain. Exit double dip recession, enter double digit levels of growth. Who knows, we might even discover another drug as effective as aspirin. 

The daffodils are out and the annual uproar at bankers' bonuses is upon us. The EU’s bonus cap is a well-timed, predictably silly play to the gallery, but we shouldn't assume that our own banking rules are much more sensible.

Any rules about what private firms pay their employees are, of course, absurd. Aside from the base illiberalism of interfering in people’s privacy, there is the practical problem that a cap on pay would drive bankers abroad. Imagine if there was a cap on footballers’ pay – within a year, the Swiss Premier League would be world class.

A cap on bonuses will also make financial firms more sensitive to downturns in business. The purpose of bonuses is to give firms flexibility in how much they pay, so that they can pay employees much less in bad years than they would in good years without having to sack people.

In a free market, the problem of bonuses encouraging short-term profit maximisation at the cost of long-term sustainability would not be an issue – the firms that pursued that strategy would go out of business soon enough. The problem is that any large firm that acts badly like this is protected from its mistakes by things like deposit insurance and bailouts.

The other problem is that the government has already bailed out quite a few banks, and those banks also want to pay bonuses to their employees. On the one hand, this is perfectly sensible – it’s crucial that we have competent executives in government-owned banks to minimise the loss of value to taxpayers.

On the other hand, aren’t we against extravagant public sector pay? The big problem with the public sector is that, internally, it lacks the price signals that make markets work relatively efficiently. It’s true that the public sector can mimic market prices to an extent, but only very crudely. RBS can borrow money at a significant discount because of the implied promise of government backing. (All banks operate under the promise of an implied government bailout, and explicit deposit insurance.) Without a functioning price system, there’s no way of telling how much RBS’s CEO deserves.

The reality is that nobody really knows how much to pay RBS’s executives. Mimicking the private sector isn’t enough – without private shareholders to answer to and a genuine threat of loss, RBS’s bonuses are no more wiser spent than Bury council’s iPads for its binmen.

Yes, a cap on bonuses is a dumb idea. But so is any state involvement in the banking sector. If the government’s going to fight against the latest example of EU overreach, it would do well to get its own house in order as well.

Long term readers will recall that for some years now I've been saying that we've not really got a gender pay gap. We've a motherhood pay gap, that we do, but not a gender one. In this I am supported by all sorts of interesting evidence. Like this from the Telegraph, this from this here blog, and even this quite delightful piece. Where the Statistics Authority chief rapped Harriet Harman over the knuckles for misleading people with bad statistics. You know, the crime of being a politician.

Now, the proof that we do not have a gender pay gap comes in the details of the (correct) statistics. Single no children women in their 40s earn more than their male age cohort. Women in their 20s on average make more than men in their 20s. There is indeed a pay gap though: one that opens up in the average pay for women as they enter their prime child rearing years. And we can even see that it really is child bearing years as well. A generation ago average age at first birth was in the low 20s. And that's where the pay gap started. Today it's around 30 years old and that's where the pay gap starts now.

And between all of us we've managed to get this basic fact across to the political classes. Shared parental leave might not be everyone's cup of tea but it is indeed an admission that since it is childcare that causes the pay gap then perhaps parents might want to share that pain? All of which is lovely. Then enters Viviane Reding:

16.2%: that’s the size of the gender pay gap, or the average difference between women and men’s hourly earnings across the EU, according to the latest figures released today by the European Commission. The news comes ahead of the 2013 European Equal Pay Day on 28 February. The EU-wide event marks the extra number of days that women would need to work to match the amount earned by men: currently 59 days, meaning this year the day falls on 28 February.

Sigh. As we know domestically in Britain the pay gap is not a gender pay gap. It's a motherhood/child rearing one. Which, even assuming that you wanted to solve it means rather different policies to do so, no?

To make matters worse they also peg the UK pay gap as being at 19.6%. Which as we know from the Statistics Authority chief isn't actually the correct number at all.

This is the problem with multiple levels of government. You beat back ignorance and idiocy at one level and it just reappears at another.

Is to look at peoples' reactions to what you're doing. If, for example, you decided that you wanted to clean up the MPs' expenses system and every MP then started howling about how we mere ignorant citizenry aren't supposed to control them then we'd know that we were on the right track. Similarly, if every criminal in the country (to the extent that this is a different group from MPs) starts to complain about the length of sentences after just and righteous trials then you would at least begin to suspect that you might have created sentences which have a deterrent effect.

And when you're doing supply side reforms to the economy if you start to hear loud wailing from those suppliers being reformed then you've got a pretty good indication that you are achieving your goal. As with this letter to the Telegraph: 

As doctors and health-care workers, we are concerned about the Government’s proposed secondary legislation (under Section 75 of the Health and Social Care Act) to force virtually every part of the English NHS to be opened up to the private sector to bid for its contracts. These regulations were proposed on February 13 and will become law on April 1 unless MPs first insist on a debate and then vote them down. Parliament does not normally debate or vote on this type of regulation, but it is possible. We urge parliamentarians to force a debate and vote on this issue to prevent another nail in the coffin of a publicly provided NHS free from the motive of corporate profit.

There then follows 1,000 or so signatures. Which is, as I say, a signal that something is going right. The aim and point of the NHS reforms is indeed to introduce a market. Competition among suppliers that is. The reason for doing this is that in the absence of competition the producer interest will dominate, not that of the consumer. This is why we insist upon more than one electricity supplier in the economy, welcome that there are many sources of food (whether trivially in shops or more importantly from many different farmers and producers), sell off four licenses for mobile telephony at a time, not just one.

We desire to have this competition because it stops that producer interest from ossifying and then taking over the entire system. Very much to the detriment of the consumer who is the person we're actually concerned with.

As a result we've got those producers howling about how just ghastly it is that people will be able to compete with them. Screaming about how undignified it is that such august personages might have to consider what consumers want rather than what producers might deign to provide.

Great eh? It's working!

Channel 4's follow-up to the "Bank of Dave" made for highly enjoyable viewing. The programme was subtitled 'Fighting the Fat Cats', but it was bureaucrats rather than Fat Cats that caused the problems.

The show followed the experience of Dave Fishwick's Burnley Savings and Loans community bank. The bank offers 5% AER to savers and small loans to local businesses, with profits given to local charities. In many ways, the concept has much in common with the old Credit Unions, Mutuals and Co-ops as well as the German Sparkasse (which, as the programme showed, have had similar struggles with regulation). Without knowing the full details of the business, it seems that Fishwick had a very successful model and a very low rate of non-performing loans.

As the programme portrayed it, however, Fishwick was lucky to survive a heavy-handed assault by the FSA. The regulator appeared to object to the simple business model and tried to impose a greater level of complexity of the savings accounts. This is typical - regulators want all banking institutions to conform to a chosen model, which may well be inappropriate. How is a regulator to know what customers want and which is the best means for suppliers to provide that? Fortunately, Fishwick is a charismatic character and was able to motivate public support and win some influential backing, particularly the support of the excellent Steve Baker MP.

This serves to demonstrate exactly why there is so little competition in the UK retail banking sector and why there have been so many financial scandals (PPI, Libor). In banking, as in any other market, regulation creates barriers to entry to small businesses. Not every small bank is lucky enough to have a crusading Dave Fishwick, but they should not need to. The regulatory barriers to entry drive consolidation and prevent small businesses entering and outcompeting established players. It is this which allows uncompetitive practices and harms the consumer. Big businesses have a symbiotic relationship with regulators and there is frequently a revolving door between the two. This is why we have ended up with banks that are too big to fail, but yet we still have the cry of 'more regulation'.

We should remember that, with the possible exception of energy, banking is the most heavily regulated sector of the UK economy. Moreover, it is one of the few sectors where the prices are controlled by the state - the nominally independent Bank of England in this case. It is ironic that populist demagogues such as Vince Cable and Ed Balls jumped on the Fishwick bandwagon, as it is they who advocate heavier regulation of the banking sector.

Competition in banking, as in any area of the economy, can only come from deregulation. Lowering barriers to entry, allowing small banks to enter and allowing caveat emptor by both savers and lenders (together with the re-introduction of sound money and privatisation of the Bank of England) is the only way to fix the broken banking sector. 

It's that time of year again. After the roaring success of last year's inaugural conference, the Liberty League Freedom Forum 2013 is only weeks away.

For just £35 per ticket, they've booked out the UCL School of Pharmacy in central London, and will be providing your accommodation, meals, drink and books for the entire weekend, as well as giving you the chance to meet other young pro-liberty activists from all over the UK. If you're based in London, it's £25 without accommodation.

You'll have the chance to meet and debate some of the liberty movement's best speakers, and take part in seminars and lectures with topics such as Bleeding Heart Libertarianism, free-banking and currency reform, the feasibility and desirability of anarcho-capitalism, why healthcare costs seem to always rise, whether the private sector can really build the roads, how innovation undermines Leviathan, libertarian conceptions of the law, free market environmentalism, out-innovating dictatorships, and a whole lot more too.

This will be alongside activism and training sessions exploring and improving skills in journalism, public relations, public speaking, and how to set up and run pro-liberty student societies on campus.

With even more speakers to be announced over the next few days, the list already includes Sam Bowman, Research Director of the Adam Smith Institute, along with Mark Littlewood, Dr Richard Wellings, Brendan O'Neill, Steve Baker MP, Douglas Carswell MP, Abebe Gellaw, Dr Anders Sandberg, Dr Terence Kealey, Dr Kevin Dowd, Professor Mark Pennington, Chris Snowdon, Dr Steve Davies, Linda Whetstone, JP Floru, Wolf von Laer, Professor Randy Barnett, Mark Wallace, Alex Singleton, and Jamie Whyte.

Date: 5th-7th April

Venue: UCL School of Pharmacy, and Generator Hostel, London.

Check out full details all of the sessions and speakers, and book your ticket right away by clicking here: http://uklibertyleague.org/2013/01/14/llff13/

Imagine a world where possession and use of fire extinguishers was banned. Let us suppose that a terrible tragedy — a child accidentally asphyxiated while playing with one — caused widespread media fuelled outrage. In a grand parliamentary review it was decided that there would be a blanket ban on all future possession of fire extinguishers except by trained health and safety professionals.

“But you need fire extinguishers to put out fires!” protested the few curmudgeons opposed to this new law. “Fire extinguishers are the first line of defense against fires. Without fire extinguishers there will be more house burnings.”

“So you support child asphyxiations then, do you?” chimed a newly popular strawman in response. “Besides, that's what firefighters are for.”

Within a year house burnings have more than doubled. Instead of questioning the law (now firmly embedded in general approval), a new lobby group is on the streets shouting that the recent outbreak of house burnings was caused by dilapidated fire stations and government austerity.

The moral of this story alludes to a very real problem. 80,000 women are raped every year in the UK. That's not even to mention the 400,000 who are sexually assaulted, every year, according to the government's Action Plan on Violence Against Women and Girls (2010-2011). And one of the most proven and minimally violent methods of deterring sexual crimes is completely banned in the UK.

Pepper spray, or oloresin capiscum, was prohibted under section 5 of the Firearms Act of 1965, which classifies pepper spray in league with automatic firearms and rocket launchers. Pepper spray is also banned under similar grounds across most European countries, except, typically, Switzerland where it is classified as a self defence device- not a weapon- and can be carried by all.

In Switzerland there are on average about 150 incidents of rape per year. Adjusted for population, Switzerland has proportionally 84 times fewer rape victims every year than the UK. This really is a staggering figure.

Oloresin capiscum is an inflammatory agent that causes temporary blindness. It can temporarily incapacitate an aggressor in a relatively safe and non-violent manner. The compound used in pepper spray is almost identical to tear gas, used by riot police to control mobs.

This raises interesting though rarely considered questions about the inequality of power between the state and its citizens. Why always must the state be the sole exception to its own laws?

But putting aside such abstract considerations, what if tomorrow parliament completely legalized this relatively tame form of self defence? What if every pocket and handbag in the nation was equipped with pepper spray? I believe the evidence indicates that cases of rape and violent crime would plummet considerably.

As always, there are the unintended consequences of state prohibitions. The only self defence devices available on the market are mini alarms and so called “criminal identification spray” which brands the aggressor and makes them easily identifiable to the police (for what purpose seems to be unclear, given the truly shameful rates of rape convictions). But since these products don't actually deter the criminal or give any window of escape, using them would most likely only aggravate the situation even further.

There is no such thing as a miracle cure, but putting the power of self defence back into the hands of citizens is not only right in theory, it is highly effective in practise. Better to extinguish the fire at the source, then to wait half an hour for the state to deal with the smouldering rubble and ruined lives left behind. 

The Coalition's welfare reforms are too timid, says economist Peter Hill. Welfare-to-work schemes have failed, and adding more state intervention will only compound the problems. What is needed is a reform package that time limits out of work benefits, turns benefits into a genuine unemployment insurance scheme, and more.

Given all the bold statements of Iain Duncan-Smith about restoring fairness and making work pay one could easily be swept away by the hype.  The reforms set out by the coalition include the introduction of the ‘Universal Credit’ in an effort to streamline the cacophony of benefits and tax credits inherited from Labour, the introduction of a benefit cap of £26,000 for families on benefits, and a tightening of conditionality surrounding disability to ensure that all those capable of work do seek it.

With this swathe of seemingly radical reform taking place one would expect spending by the Department for Work and Pensions to soon reverse from the relentless upward trends seen under Labour.  Sadly, this will not be the case with spending set to increase by an average of £4.29 billion per annum over the course of this Parliament comparing on marginally better than £4.43 billion per annum increase during Labour’s time in office.  According to ONS data unemployment has also only fallen from 2.51 million to 2.49 million since the coalition came to power and growth remains stagnant.

Read this article.

The political crisis in Italy will just deepen the eurozone's resolve to move faster and deeper into real economic and banking union. With no clear winner emerging, a large vote against austerity measures, and the prospect of another election in weeks, markets already have the jitters. The European Central Bank (ECB) will find itself, inevitably, being drawn in to try to calm them.

Italy is a big country, the third largest European economy. It is not going to be rescued by a few Greek-style bail-outs that are annoying and irritating, but bearable for the other eurozone countries (and for non-euro countries like the UK, which have got sucked into some of the bailouts). Italy really is too big to be allowed to fail. If it did, there would be monetary chaos throughout the eurozone, and beyond. And although a considerable number of Italians gave pro-euro politicians the thumbs down last weekend, the country seems to have no real intention of pulling out of the euro and getting the lira back. Indeed, it went to very strenuous efforts to get into the euro when it was created, and the other eurozone countries were keen to bend the rules and get Italy in (as they did with Greece, so they only have themselves to blame).

Over to you Mario Draghi. He has already indicated that he will do whatever is necessary to keep the euro show on the road. With Italy looking shaky, that can only mean one thing: creating new money and flooding the markets with liquidity until (hopefully) the problem goes away. Quantitative easing, euro-style. It is something that Germany and others have long resisted, some fearing the inflation it could cause and others fearing the enormous power that the ECB would be acquiring. But what is the (politically realistic) alternative?

But such money-creation will probably do little more than it has done in the UK. The new money will go to the commercial banks of the eurozone, who will buy 'safe' assets (like government bonds) with them in order to strengthen their balance sheets in advance of the next Basel deadline. Financial asset prices will rise, but little of the stimulus will get into the real economy and make a real difference to growth.

Which is bad news for the UK too. Continued uncertainty and low growth among our nearest customers is not the way to grow ourselves out of the recession. George Osborne's overview of economic conditions in his budget in three week's time will be... interesting.