The Pin Factory Blog

As some readers will already know, I am moving on from the Adam Smith Institute. Friday was my final day as Executive Director here, and in June I will be moving to the United States. I'm heading for Washington, DC, where I am going to be Managing Editor at the Reason Foundation, a libertarian think tank which also publishes Reason Magazine and produces Reason TV.

I'm very excited about this new opportunity, but, needless to say, I am also very sad to be leaving the Adam Smith Institute. It has been a great five years, and I have so many wonderful memories to look back on. I will miss all the people I have worked with enormously.

We have done so much since I started in 2007, that it is hard to pick favourites. But here are few personal highlights: unveiling the Adam Smith statue back in 2008; running Freedom Week in 2011; filling the LSE with libertarians for last year's Hayek v Keynes debate. I have also hugely enjoyed establishing a top-notch ASI lecture series over the last few years. Tour de force talks by Tara Smith and Kevin Dowd stand out as particularly memorable moments.

More broadly, there are a handful of overarching themes that have characterized my time here: the resurgence of Austrian school economics in response to the financial crisis; the emergence of unabashed libertarianism as a distinct voice in the political debate; and the creation of a fast-growing libertarian youth movement in the form of the UK Liberty League and European Students for Liberty. I will always be very proud of the role we have played in these developments.

My final words, though, must go to Madsen and Eamonn – who gave me an opportunity few people fresh out of university could dream of – and to the Adam Smith Institute's friends, supporters, and donors, who make everything we do here possible. Thank you, and farewell.

The Chief Economist of Deutsche Bank Group, Thomas Mayer, has announced that he is “an Austrian in economics”. In a new paper released today by Deutsche Bank Research, based on a speech he gave this week, Mayer says that the Austrian theory of the business cycle describes what we are living through pretty well:

– Failure of the liquidationists to overcome the Great Depression of the early 1930s prepared the ground for an era of interventionist economic policies. Modern macroeconomics and finance nourished the belief that we can successfully plan for the future. But the present crisis teaches us that we live in a world of Knightian uncertainty, where the ―unknown unknowns dominate and our plans for the future are regularly thwarted by unforeseen and unforeseeable events. . . .

— …First and foremost, firms should have the incentives to follow sound business practices. The best incentive is to make failure possible. Hence, we need resolution regimes for financial firms.

— In a world where people have imperfect foresight and do not always behave rationally, and markets are not always efficient, we need to accept that economic policy cannot fine-tune the cycle.

— For us economists, the lesson from recent events should be to rely less on the development of theories by ―deduction (like in natural sciences) and to apply more induction(like in social and historical sciences). Failure to study history makes us repeat the mistakes of the past.

Mayer goes on to outline and argue for the mainstream Hayekian narrative of the last decade. Low interest rates inflated a bubble and knocked the whole economy out of kilter. Where non-Austrians misconstrue Hayek is in thinking that he is only focused on the bubble itself – they rightly point out that the housing sector itself wasn’t big enough to create our current stagnation. But Hayek’s genius was in recognising that the entire economy is interconnected, and credit distortions in one sector can disjoint the rest. If you imagine a tower of blocks, taking one block away (or changing its shape) can knock all the others down if it’s in the wrong place, even if it’s relatively small. Similarly, credit distortions affect the whole economy because everything is so interlinked.

Anyway, read the whole Mayer piece. We can add him to the Hayek Club.

There may well come a time in the future when parents who choose to have children become stigmatised. Imagine the scene at an "Islington" dinner party some years from now when someone around the table mentions that their partner is pregnant. Cutlery is dropped onto plates heaving under the weight of the locally grown organic vegetables and the person is admonished for being "selfish beyond comprehension". How dare they not think of the global impact of that child. Some though are already thinking along these lines and are sterilising themselves against the possibility of lumping the world with what could be a climate tipping pile of carbon emissions, otherwise known as a child.

The right over one's womb is of course beyond question, and I do not, in any way, suggest that it should be taken from them. It is the fact that the rest of the rational population will ultimately need protecting against possible demands for legislation to be passed. We are probably not far from a world where we have to undertake "carbon awareness training" if we wish to reproduce and how to offset the carbon of the child we bring into the world. Currently many of us would laugh at such a suggestion, but I suspect if you raised that idea in environmentalist circles they would all think it brilliant and seek to implement it.

Caring for the planet through this course of action (self-sterlisation) raises a valid question though: How to reduce the carbon footprint further so as to alleviate the level of one's guilt to zero? There is a course of action that I could suggest that these people take, but I don’t think they’d like the consequences.

Thanks to the deep concern of Britain’s overbearing government racism is now being targeted in nursery schools, not with a focus on teachers, no, no that’s already been done, but on those narrow-minded little 3 to 4 year olds.
 
According to the Telegraph, the National Children’s Bureau, which receives most of its yearly £12 million pounds from the government, has started a new program designed to detect racist attitudes in children as young 3.  The program highlights several ‘potentially racist’ characteristics that teachers and caretakers should watch out for, my favourite being a dislike for spicy foods.

Good thing this policy wasn’t encouraged during my childhood. My revulsion of marinara sauce and garlic in nursery school would’ve alerted my parents to my intense anti-Italianism as a 4-year old. But I applaud the Government for issuing tax money to identify future Nazi’s by their food preferences. It just goes to show that some of the most ludicrous ideas can be the greatest. Or in this case, just downright silly.

We have all heard the old adage, ‘It takes a village to raise a child’, but the government has taken the village to mean the state. Unfortunately we live in a world where there are people who seek out children to exploit children, but does it take the government raising our children in order to prevent it from ever happening? The government has now taken steps to ban parents from entering play areas, and in some cases even banned parents watching their own children play, unless they have been vetted.

It feels as if we elected nannies instead of public officials. First parents were banned from ferrying their children to sports activities and then two police women almost lost their jobs over sharing child minding duties. Now parents can’t even watch their own children play without submitting to criminal background checks. How long will it be before you have to submit to a background check before you allowed to have a child? I know it sounds outlandish now, but if you told my parents 15 years ago that they couldn’t watch me while I played in a playground they would have thought you were crazy.

We have already given up so many of our natural rights to government that we almost don’t notice when we lose another. The real danger is that we are allowing our children to grow up under government control. Children will grow up thinking that ‘government knows best’ if they continually see their own parents undermined by government regulation and intervention. The government is practically teaching children that they need to be protected from their parents. If public-run institutions are any indication of how well things turn out under government control, then I’m afraid families don’t stand a chance.

Spencer Aland blogs regularly here.

While Chile was being welcomed with open arms into the OECD, Chavez was busy devaluing Venezuela's bolívar fuerte. The lesson is unambiguous: free markets work, while planned economies fail. The Chicago Boys – protégés of the late and great Milton Friedman – deserve a great deal of the credit. Theirs were the policies that broke through under Pinochet’s dictatorship and have been continued and extended under Socialist governments since.

Chile is ranked 10th in the 2010 Index of Economic Freedom, ahead of the UK. By these measurements, this makes it the most economically free country the South and Central America/Caribbean region. Following the recent elections, Chile is now lead by the right-wing Sebastian Piñera. He was elected on a pledge to introduce more business friendly policies – an area in which there is certainly room for improvement.

Things have been looking good for Chile for a while, as Nick Reynolds points out for an article in The Globe and Mail:

From 1914 through 1980, Chile's economy grew at an average annual rate of 0.7 per cent. Since 1981, it has grown at an average annual rate of 4.2 per cent. Before the reforms of the Chicago boys, it took Chile 70 years to double its living standard; after these reforms, it took only 17 years.

Nestled in between Libya and Burma, Venezuela is judged to be the 174th most economically free country in the world, thus 28th out of the 29 countries in the South America/Caribbean region. And with that Constitutional Referendum passing last year, as low as Venezuela currently stands, Chavez is likely to only continue drive the country further into the ground in the coming year (or decades).

I'm at the Mont Pelerin Society meeting in Buenos Aires, where I have been learning about the issues facing the future of freedom in South America. One interesting case is that of Chile, whose military government of the 1980s, perhaps surprisingly, introduced a series of free-market liberal reforms. One of these was to change Chile's hopeless chain-letter pension system – that is, one like ours – into a system based on personal savings accounts.

Overall, the system has been a fantastic success. It gave people choice in how they saved, and incentives to do so. Personal savings in Chile are up from just a few hundred million dollars to tens of trillions of dollars today.

But no system is perfect. Self-employed people were not required to join the system, so many such people saved nothing or little. Young workers often did not bother to contribute, reckoning that retirement was a long way off. Low-paid, temporary workers had patchy saving records. The government guaranteed a minimum pension for those who contributed long-term – which, like the pension credit in the UK, gave many workers no incentive to save much at all. Some retired people drew down their pension benefits too rapidly, and ran out of money.

In 2008, Chile introduced a number of reforms to try to get round these problems. There were new supplements for people with little or nothing saved in their accounts. Wealthier people, and some self-employed persons, are now obliged to participate. Younger workers were given subsidy incentives to join. New rules were introduced to make sure that pensioners did not exhaust their accounts before they died. And there were new requirements on people to buy survivors' and disability insurance.

Will this work? My worry is that two-thirds of all pensioners will now receive some government pension support – which must reduce the incentive to save. Public benefits will comprise half the retirement income of the poorest households. The new survivors' and disability insurance will impose a new financial burden on families, which will eat into their savings. The public benefits will cost a noticeable fraction of the government budget – and paying for them will impose an effective tax, and quite a hefty one, on private pensions.

Chile's pension system was a commonsense breakthrough that many other countries have copied. As a pioneering system, it is not surprising that it threw up some problems to solve. But the solutions, I believe, should have been more in the direction of extending market principles rather than extending government interventions. It will be interesting to see what happens – and it will provide a lesson for us all.

The visit of the Chinese premier Wen Jiabao to the UK this week naturally makes one ponder the role of China in the world economy. After years of China selling us cheap clothing and electronics, British and American consumers are getting used to paying a lot more for their imports as their currencies slide gracefully towards oblivion, thanks to quantitative easing. In China, meanwhile, the expansion of the cities and the movement of people off the land is turning the economy more middle class – more interested to supply its own needs rather than be cheap producers for the rest of the world.

British and, particularly, American influence in world affairs has been given a knock by the financial crisis. China was already catching up fast, in terms of overall GDP at least, if not per-capita. The crisis is just hastening the eclipse of the West. The old G8 hardly matters these days, it is the G20 that pushes the world economic agenda. Indeed, the emerging economies of Brazil, Russia, India, China, Mexico, Indonesia and Turkey are becoming a power in themselves. And Europe is of course embroiled in its own crisis, thanks not so much to the banking crisis as to the inconsistencies of the single currency.

On the other hand, the West's self-inflicted hurt is not really good news for China. It has its own problems. Its decades-long manipulation of the exchange rate has produced a lot of them. Inflation is alarmingly high. Growth has slowed as China's customers, like America, have been spending less. Commodity prices are rising again as other parts of the world recover. It has a terrible demographic problems, with its ageing population and one-child policy. And when you go to China and see millions of them jabbering into their mobile phones, you wonder how the central administrators in Beijing think they can resist the rise of democracy. Sure, China is growing, more of its population are being taken out of poverty, its muscle in world affairs is getting stronger. But it would be a lot stronger still if it maintained more sensible economic policies, rather than its politicians thinking that they can defy economic laws of gravity. If China really goes capitalist, we had better all watch out.

It’s been hard times in Beijing for those who feel the cold, as it emerged this week that the nation’s heating is only switched on centrally by the government today. It's interesting that just as many in this country are arguing for greater state control over such electrical consumption as domestic heating, the highest polluting nation shows the inability of central state-driven controls to cope with the real world.

Isn't socialism stupid?

I’m always a little surprised to hear free market economists waxing lyrical about China. True, China has taken some extraordinary steps forward since they began to liberalize their economy, and many people have been lifted out of poverty as a result. But we should not lose sight of the fact that China is still dominated by the state and run by central planners, and that all of the failings of socialism remain present and correct. Indeed, there is a strong case for arguing that much of what we are witnessing in China now is not real growth at all, but rather a bubble driven by easy credit, with resources being misallocated on a grand scale.

Johan Norberg made this point in a recent Spectator article:

Absurdly, China’s money supply is now larger than America’s, even though its economy is a third of the size. We can see the results of this stimulus in stock market prices and in new roads, bridges and housing complexes all over the country.

Not that anyone wants to travel on those roads or live in those buildings. In August, China’s largest energy company reported that an extraordinary 65.4 million residences have not consumed any electricity in the last six months — a fairly big clue that they lie empty. There are now entire ghost towns, like new Ordos in northern China, where tens of thousands of buildings erected from scratch stand empty. And yet property prices in Ordos have doubled over three years. It’s not popular demand, it’s pure speculation. In some quarters, China is being spoken of as the last, best hope for the world economy. But it might be the next bubble to pop.

Moneyweek’s Bill Bonner is a skeptic too:

Property prices are still spiking up. People are still speculating. Ships with dirt and rocks still head for Chinese ports. The capital spending boom goes on. It looks like growth. But it is zombie growth. People build bridges to nowhere rather than working for profit-making enterprises. Concrete is used to put up cities where no one lives. Savings that might have been used to start a new bank instead prop up an old one. Japan has been doing it for years. Encouraged by government miscues in the 1980s, private industry created Japan's zombies. Then, after the bubble burst, the government kept them alive. They've been sucking blood from the living ever since.

I’m no China expert. I don’t know how big the bubble is, and I don’t know when it will burst. But I do know socialism doesn’t work, and that you can’t buck the market forever. Somewhere down the line, central planning always ends in tears.