Adam Smith (1723-1790)

On this day in 1790 died the great Scottish economist Adam Smith. To us he is best known for his pioneering 1776 book An Inquiry Into The Nature And Causes Of The Wealth Of Nations – which he called simply his Inquiry, but which today is known as The Wealth of Nations. It was arguably the first systematic presentation of modern economics: on the very first page, it introduces the notions of Gross National Product (GNP), GNP per capita, and productivity – all of which are essential tools for economists today. But it was more than a mere textbook. It was a polemic against government controls over economic life: of trade barriers and protectionism (designed to favour domestic industries and keep out other countries’ imports, but which merely impoverished both sides); and of government regulatory power that could be used cynically by businesses keep out their competitors.

But it was his earlier 1759 book on moral philosophy, The Theory Of Moral Sentiments, that propelled him to fame. Philosophers at the time struggled to work out how we could know what was moral and what was not. Many appealed to religion as the answer. Others thought that we might have a sixth sense, a ‘moral sense’ that could detect good and evil. Smith explained it in terms of our natural feeling for the welfare of others and the praise or blame that others heap on us for our good and bad actions. This, by some sort of providence, prompted us to act morally and curb our selfishness, thereby promoting the general good of society and survival of humanity. Smith tried, but could not explain this happy providence by which positive moral sentiments are visited on one generation after another. It would be exactly a century later before Charles Darwin’s 1859 The Origin Of Species identified the mechanism.

The Theory Of Moral Sentiments so impressed the prominent statesman Charles Townsend, who was stepfather to the 12-year-old Duke of Buccleuch, that he promptly hired Smith, on a lifetime salary of £300 a year, to tutor the young nobleman. On their travels in Europe, Smith met many of the leading Continental thinkers and was exposed to the very different economies of Europe. He began to write notes for a book – the book that would become The Wealth Of Nations.

It took him a decade and a half. But Smith’s second book proved even more sensational than the first. It quickly went through several editions and translations. It changed the direction of public policy on trade, regulation and tax. The nation gave him a sinecure – Commissioner of Customs – on an even grander salary of £600 a year. Smith being Smith, he did not treat the post as a sinecure but was meticulous at actually doing the job. And he offered to give up his £300 a year from the Duke of Buccleuch, though the Duke would hear none of it: with Smith as his teenage tutor and adult friend, he thought it amazing value.

In 1774 Smith bought an elegant town house off the Canongate, in the Old Town of Edinburgh. Here he would entertain leading thinkers from Edinburgh and visitors from further afield. The story – almost true – is that, at one such meeting, he felt unwell and rose, saying: “Gentlemen, I fear we must continue this conversation in another place.” He died shortly after.

In reality, Smith died, aged 67, in the north wing of Panmure House, after a painful illness. He left instructions that his unpublished papers should be burnt, apart from his Essays On Philosophical Subjects and a breathtakingly original work on the philosophy of science, called History Of Astronomy. He was buried just a few yards from his home, in an elegant neoclassical tomb in the Canongate Kirkyard. 

On his deathbed, he regretted that he had not done more. He had planned a work on politics, and perhaps another on justice. But with The Wealth Of Nations, he achieved an impact on our lives that lasts even today.

We'd like to announce, once again, that we told you so

What we've said over these years is that some damn fool is going to insist upon doing something damn foolish about this climate change thing. the political and social head of steam is such that this just is going to happen. Thus we should all be insisting that what is done is the only sensible response to the problem if it exists, a carbon tax. As the Stern Review and every other economist studying the problem insist. For if we don't so insist then damn fool things like this will happen.

True, this is from the colonial cousins where things are always more extreme but still:

Following the prolonged cold snap, PJM, the entity that oversees utilities in the Mid-Atlantic and parts of Appalachia and the Midwest, put a plan into action: It would help the local utilities ensure that power was more reliable. To do this, PJM fast-tracked new rules for capacity resources — an industry phrase for guaranteed electricity supply. The Federal Energy Regulatory Commission (FERC) approved the new rules last May.

Renewables tend not to supply on demand. Thus a renewables based system needs to make sure that there is sufficient power available on demand and may well have to make payments just to make sure that such capacity is built and is ready to roll. Then the twist:

Under the new rules, renewable energy providers, such as solar and wind companies, will have a hard time participating in PJM’s capacity market, where utilities pay to make sure that they have a certain amount of electricity guaranteed in future years. The new rules require the providers in the market to be able to provide consistent production year-round, whereas wind and solar perform better during different parts of the year.

“The new rules will funnel billions of dollars from electricity consumers to fossil and nuclear power plants while severely limiting clean energy participation in PJM’s capacity market,” writes Jennifer Chen, an attorney with NRDC’s Sustainable FERC project.

The capacity market exists because renewables cannot be relied upon over time. But to not allow renewables to compete for the capacity payments is discrimination against renewables and thus something that must be fought in court.

We admit that we wouldn't have and didn't predict this particular damn foolishness. But we would and did something like it. Any system of ever more bureaucratic control is going to be subject to interventions like this.

Thus, assume that we really do have a problem here, or any other problem of a similar nature. We need to put a crowbar into market forces to account for an externality for example. Fine, but we should also make just the one intervention, insert just the one crowbar, and then allow market forces to work out the details. In this case, the Pigou Tax of a carbon charge is far better than endless wrangling in the courts over whether windmills should get capacity payments. The entire capacity payment system dependent upon the fact that we cannot rely upon windmills when the wind doesn't blow.

We really did tell you so. If we're going to do something then let's do the carbon tax.


We don't think we would blame Boris for the creation of the Euromyth

Something of a stretch here, a claim that Boris Johnson invented the very genre of Euromyth and the enthusiastic pursuit of that by others is what has led to Brexit:

Even worse, Johnson created a school of EU reporting: the entire British press, to varying degrees, began peddling Euromyths, fuelling the kind of Europhobia that no UK politician dared to stand up to, and which ultimately has now led to Brexit.

No, we don't think that can be allowed to stand really. For two reasons, the first being that it wasn't those making the anti-EU stories such fun which started the game. Rather, it was the absurd claims of the federasts which set things off. 

The European Union has created peace in Europe? a regular claim, as we know, that an organisation which came into being in 1992 created peace since 1945... and rather missing the influence of NATO there. The euro would produce a burst of economic growth? Err, yes, let's brush that one under the carpet shall we? The more current insistence upon an FTT to raise revenue when the Commission's own report into it insists that tax revenue will fall as a result of the FTT causing a smaller economy? 

The second reason would be that the Euromyths all too often turn out not to have just a grain of truth to them but are actually the truth. It really is illegal, a criminal offence punishable by 6 months inside and or a £5,000 fine, to sell bananas of excessive curvature for direct human consumption. Or to market apricot marmalade. These are not myths they are truths. And there really is a law, the jams, jellies, extra jellies and marmalades regulations which insist that it is legal to make jam (or extra jam) from tomatoes or carrots but not from  marrows or turnips. At the pain of that 6 months and or five large again.

Who needs myths when you've bureaucrats trying to rule 500 million people in that manner?

No, Johnson did not invent the Euromyth nor did myths of any kind lead to Brexit. The system itself created the stories and the system itself led to our leaving. it, to borrow a phrase, tumbled from its own internal contradictions. 

What joy, we're to have an industrial strategy again are we?

Much singing and dancing in the streets no doubt:

Business leaders welcomed the creation of the new Department for Business, Energy and Industrial Strategy, expressing hope that the Whitehall department will formulate an industrial policy.

Some things in such a strategy are welcome of course. Low taxes, the rule of law, a reasonable regulatory environment, these are vital parts of any strategy for the economy, industrial or not.

Then there's the things which are not reasonable:

 Gareth Stace, director of UK Steel, who has spent the past year jousting with Mr Javid over his handling of the steel crisis, said that the department must help industry to “invest, thrive and play a significant part in building a stronger UK economy”. He called for ministers “to remove unilateral costs, including energy, business rates and increasing the proportion of British steel used in British construction projects”.

"Buy more of what my people make" is not a welcome addition to an industrial strategy Gareth.

Angus Brendan MacNeil, who could find himself out of a job as chairman of the Commons energy and climate change select committee, said: “DECC’s disappearance raises urgent questions: which department will take responsibility for the energy and climate aspects of negotiations to leave the EU? Who will champion decarbonisation in Cabinet? Who will drive innovation in the energy sector?”

Innovation is driven by people innovating, not government telling them to innovate. Thus the answer to innovation in energy is to get the prices right (yes, we've an externality here that needs to be priced in) and once we've done that let the markets rip. We've even got a whole great big report, the Stern Review, which says exactly that.

That is, the correct industrial strategy is for government to set the basic ground rules, make sure of the existence of the necessary institutions, then get out of the way.

We are aware though of one more possible use of an industrial strategy: 

David Palmer-Jones, chief executive of the UK division of Suez, the French energy and waste recycling group, said: “Any rationalisation of government departments to ensure the creation of more joined-up, long-term strategic policy planning at a national level to help us to build the power stations, produce the resources and create opportunities for a skilled labour force [is welcome]. Businesses like ours need clear long-term policy guidance from Whitehall.” 


If we can get all of the people who think and speak like that off discussing industrial strategy somewhere then the rest of us will be safe from anything the might do in the real economy. To the great benefit of is all. That is, the benefit of discussing industrial strategy is that we don't have one and all who would are still discussing it.

The wrong type of subsidy

We've pointed out a number of times here that the basic policy about climate change is simply wrong. Given that everyone has got so excited about the subject that something is going to be done we have been pointing out that what should be done is the least damaging and most effective thing. A simple carbon tax, revenue neutral by preference. Instead, as a result of Ed Miliband's misunderstandings of how the universe works, we've ended up with a ludicrous subsidy system. Which continues to get worse:

In October 2013 the Government agreed a deal with the French state-owned energy giant to guarantee it a price of £92.50, index-linked to inflation, for every megawatt-hour of electricity the £18bn nuclear plant would produce over a 35 year period.

The difference between the wholesale price of power and the guaranteed price would be "topped up" through subsidies, paid for through a levy on UK energy bills. 

At the time the deal was signed, power price projections had implied a lifetime cost to consumers of £6.1bn for the subsidies, the NAO said.

As of March this year, that had more than quadrupled to £29.7bn due to significant cuts to official power price forecasts.

We should tax the bad thing, not subsidise a possibly good thing. But if we are to have subsidies then it should be just the one subsidy rate.

Instead of different subsidy rates for nuclear, solar, tidal, offshore and onshore wind and so on and on we want to have just the one single rate. Any and every technology which meets that rate without emissions gets it, any that doesn't thus doesn't get built. It's only in that manner that we end up getting the most efficient method of dealing with the problem built.

Instead Ministers have, over the years, fallen prey to the idea that they can plan this instead of admitting that the actual solution is to harness market forces and technological advance to deal with it.

Become an ASI gap-year student this year (and get paid!)

Backpacking around South-East Asia is great, but do you know what's more fun? 

That's right, spending 4 - 9 months in the ASI office with all of your favourite libertarians!

It's that time of year again: the ASI is looking for two new employees, to start in September 2016.

As last year, the crucial requirements are that you:

  • Are on a gap year; you must be 18-20
  • Are open-minded, inquisitive, friendly, intellectually curious, eager to learn and interested in policy
  • Know and have an opinion on the ASI's perspective and what it does
  • Have a broadly liberal perspective on the world

Does that sound like you? If it does, you've passed the first hurdle. Congratulations! You're one step closer to potentially becoming the latest ASI intern. 

Your duties will include:

  • Organising lunches and dinners
  • Keeping the database up-to-date
  • Managing the blog
  • Reviewing and editing ASI publications
  • Selling ASI merchandise
  • Doing secretarial work for the directors
  • Logging RSVPs for events
  • Meeting a wide range of interesting & important people
  • Learning about social & political science
  • Socialising with the staff
  • Carrying out self-directed research
  • Writing blog posts
  • Setting up and cleaning up after events
  • Mailing out publications to subscribers

And, of course, having fun! 

Previous interns have gone on to work with the Adam Smith Institute, including the ASI’s current Deputy Director, Sam Bowman, and Head of Digital Policy, Charlotte Bowyer, who was a Gap Year intern in 2009-10.

The role pays the National Minimum Wage. All applicants will interview with President Madsen Pirie and Deputy Director Sam Bowman at the Adam Smith Institute offices in Westminster during the summer.

Please send a CV and cover letter of around 500 words to by Wednesday 20th July 2016. 

Is there some method by which this could have been predicted?

We don'rt think that this was a desired outcome:

Elderly people are quietly being denied support by councils struggling to cope with funding cuts and rising carer bills fuelled by the National Living Wage, new analysis shows.

The flagship Government policy, which came into effect in April and guarantees £7.20 an hour for those aged 25 and over, has left English councils searching for an extra £600 million, according to the Association of Directors of Adult Social Services (ADASS).

Overall, local authorities need an extra £1.1bn just to maintain the level of care they provided last year, the ADASS report reveals.

Actually, we think there is a method that could have been used to predict this. That basic part of economics on the introductory page of every book everywhere - supply and demand.

Except in the very strange circumstances that something is a Giffen Good, and labour is not one, when the price of something rises people will attempt to economise on their purchases of that thing.

Raise the wages being paid to carers and the people who are paying for carers will hire fewer of them.

Yes, yes, we know that George Osborne said this wouldn't happen and we all know that we can trust George. Except reality has different ideas it seems. 

We're all fatty lardbuckets because we're eating less

That the population is generally getting fatter is true. That we might be facing an obesity epidemic is at least possible. But what we'd like to know is why is this happening? And the answer is that we're all becoming fatty lardbuckets because we are eating less. Unfortunately, we're not eating less than our decline in calories expended would suggest

Surprisingly, we find that total calories purchased have declined substantially over the last three decades. We distinguish two periods: 1980-2007, when food prices were falling; and after the Great Recession (2008-2013), when food prices increased worldwide and real incomes fell for many people. Table 1 shows the continuous decline in mean calorie levels regardless of food price changes. In the paper we show that this decline is not just occurring at the mean, but also across the distribution.

As Chris Snowdon over at the IEA has been manfully pointing out for a couple of years now it just isn't true that we are all eating more. We're simply not. As Snowdon has also pointed out the average UK diet now contains fewer calories than the WWII rationing one considered sparse leading to dangerous weight loss.

Thus public policy about why obesity is rising is simply based upon the wrong premise. It's not Big Sugar, nor Big Food, nor fats nor whatevers. Quite simply we expend fewer calories than our forefathers did and yet our calorie consumption has not fallen to meet that. Thus we are getting fatter.

And it is a simple truth about this world that if you want to try and solve some problem then you do have to analyse correctly why there is a problem in the first place. Which just ain't being done at present. Thus all the proposed solutions are wrong.

The sad, sorry state of the Conservative Party

Leadership elections, much like Presidential primaries, are usually a great opportunity to showcase the ideological variety hidden beneath the veneer of party unity. Asides from entertainment, this is valuable as it allows differences to be expressed, battles to be fought, and new consensuses to be developed. 

The Parliamentary Conservative Party decided to buck this trend, even before the contest ground to an unceremonious halt when Andrea Leadsom, the last obstacle to Theresa May’s coronation, pulled out. Superficially, there was a significant divide between the candidates: May (and Stephen Crabb) supported remaining in the EU, Leadsom supported leaving (as did Michael Gove and Liam Fox). Likewise, May seems to support retaining a greater level of access to the EU’s Single Market than Leadsom, who prioritised curtailing migration to a greater degree.

However, along with the other candidates, May views ending free movement of labour into the UK as enough of a priority to compromise access to the Single Market. In the best-case scenario, this would amount to the EU conceding the loss of freedom of movement in exchange for the UK losing certain benefits. Most worrying is the risk this poses for financial services. In particular there is a significant threat to passporting rights, which allow global financial institutions based in the UK to ‘passport’ into the rest of the EU. 

This is terrible policy. Immigration is beneficial to the UK economy: it increases output, does not increase unemployment, offsets an ageing population, and does not create a burden on the welfare state. And, even if it were detrimental, reducing it would not be a price worth paying for compromising finance.

Admittedly, you would be forgiven (though not necessarily correct) for thinking that maintaining freedom of movement was politically impossible in post-Brexit Britain. The problem is that this stance reflects a more general perspective and outlook that looks set to dominate and define the Conservatives: nationalism, authoritarianism, and populism are trumping economics, markets, and trade. 

May, the purported establishment-continuity candidate and ‘safe pair of hands’, exemplifies this by taking the most hard-line and wrongheaded attitude towards EU citizens currently residing in the UK. She also has a particularly ugly record of vindictive anti-migrant policies as Home Secretary. 

The problem goes beyond migration. May is perhaps best known for her devotion to the surveillance state, and was instrumental in perhaps the worst piece of drugs legislation to have ever been written. Crabb, the other ‘moderate’ candidate, is associated with a church that claims it can ‘cure’ homosexuality and has a very poor voting record on social issues.

Libertarian support for Leadsom was misguided. She supported much of the current government’s most authoritarian agendas, and consistently opposed more liberal legislation. Furthermore, pro-business rhetoric aside, her enthusiastic championing of curbing migration suggests her consideration of business and financial issues is limited. The same is true of May, who has also started spouting vapid anti-business populism.

Simply put, free market libertarianism and internationally inclined liberal-conservatism have been marginalised and neutered. The worrying implication is that this is no longer a party of either Thatcherite Whigs or of anti-utopian Tories, but increasingly one of populist, nativist anti-intellectuals. 

It may seem odd to find anything positive in the Labour Party’s recent bout of self-destruction. However, given the increasingly apparent political realignment (away from ‘left-right’ and towards ‘open-closed’) it is probably healthy that Labour is likely to split into an internationalist left-liberal party and an anti-globalisation neo-socialist movement. 

What is missing from all these perspectives is uncompromised support for free markets, free trade, and economic globalisation: in other words, the right’s contribution to ‘open’ politics. This is supposed to be at least one of the functions of the Conservative Party. And without this, the chances of pursuing an intelligent post-Brexit option, whether that is EEA membership or something more radical, look increasingly diminished.

Designing economic solutions is fine but we want the chaotic serendipity of undirected markets too

A piece in the New York Times from a designer. Bemoaning the manner in which all those little start ups aren't using design in their process of trying to solve economic problems. Par for the course from a designer, that more people should use design. As with hydraulic engineers wanting to see the economy as a hydraulic project and so on - we all view things through our own professional competences. 

She is also correct in part - we would like to use conscious design at times in order to work out what to do about certain economic problems. No, this isn't the same as the idiot idea of trying to plan the whole economy. But say we've a problem - pollution or emissions, possibly the existence of real destitution in our country. Yes, we should think about this and design solutions. In order there, Pigou Taxes and a bit of income redistribution perhaps. 

However, even given that it is wrong to decry the seemingly silliness of the undirected, undesigned, innovation going on:

Perhaps the main reason these frivolous products and services frustrate me is because of their creators’ insistence that changing lives for the better is their reason for being. To wit, the venture capitalist Marc Andreessen, who has invested in companies like Airbnb and Twitter but also in services such as LikeALittle (which started out as a flirting tool among college students) and Soylent (a sort of SlimFast concoction for tech geeks), tweeted last week: “The perpetually missing headline: ‘Capitalism worked okay again today and most people in the world got a little better off.’ ”

This is to completely miss what is going on here. To miss the value of what those undirected efforts gain us.

We start with the basic assumption that human desires and wants are unlimited. Further, that we have scarce resources available to sate them. Technology is, in one way of thinking about it all, the method by which we transform resources into sating those desires and wants. So, when technology changes we can sate more of them.

However, we don't know which. We don't know which in two senses. We don't know which on the list of unsolved desires humans would like to have solved next - we don't know utility functions. We also don't know which desires the technology can be used to solve. We must therefore experiment - and that is what that entirely undirected market activity is really doing.

Exploring the newly available technological space in order to see which desire or want can be sated and which people want to have sated.

A service that delivers a new toothbrush head to your mailbox every three months.

A service that delivers your beer right to your door.

An app that analyzes the quality of your French kissing.

A “smart” button and zipper that alerts you if your fly is down.

An app with speaker that plays music from within a mother’s vaginal walls to her unborn baby.

A sensor placed in your child’s diaper that sends you an alert when the diaper needs changing.

None of those look civilisation changing we'll agree although some do at least look fun. The derivative innovation of a new way to deliver a porno sound track could work.....

Someone has obviously already done Uber for Plumbers but what about Teenagers 'R' Us? The instant dispatch of a spotty youth to any young couple feeling frisky - to berate them as to why they don't understand anything and why all hate them. Should increase contraceptive usage, that one. 

Or to be serious - we face uncertainty here. Not just risk but proper uncertainty, we just don't know and cannot know. What can newly be done and what would people like to have done? Thus we need that chaos of the undirected market efforts to explore this new technological space. Design is just fine when we know what we want to do and are just figuring out how to do it. But design isn't enough.