"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
Yesterday saw our inaugural Liberty Lectures event at Cass Business School. The speakers were as follows:
Videos of all the speeches will be uploaded onto our YouTube channel soon.
Online Schools and Awarding the Web have nominated us as one of the 2010 Top Economics Blog. We come in at number 35.
You can see more details here.
Before it's too late, here are my Top Fives for 2011:
Top 5 - Cinema (released in the UK in 2011)
Top 5 - TV (aired on UK TV in 2011)
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In this think piece Ruth Lea, Economic Advisor to the Arbuthnot Banking Group and Senior Fellow of the Adam Smith Institute, discusses what 2011 holds for the British and global economies. There is some room for optimism, she says, but overall the near future isn't bright.
As we enter 2011 there is little doubt that the UK economy is slowing from the heady grow rates recorded in the middle of last year. But this is only to be expected as those growth rates reflected special factors that are highly unlikely to be repeated. However, this should not be a reason for complete gloom. The economy probably grew by a better-than-expected 1¾% last year and it can be expected to grow by a similar magnitude this year. Such is the momentum of recovery a double dip seems most unlikely. But there will be many risks and there are many reasons to be cautious.
Our panel discussion of what the next year has in store for us was surprisingly philosophical: Jamie Whyte discussed the redistributionism built in to democracy and Brendan O'Neill gave a rallying cry against "middle class miserablism". More concretely, Alex Massie discussed the US presidential election (it'll get bad, and then worse) and Douglas Carswell gave a short-term pessimistic, long-term optimistic vision of things to come in British politics. His economic outlook was remarkably Austrian too — reason enough to be optimistic, if you ask me.
During the halcyon days of late August, October 20th seems some months distant. But Public Expenditure (PE) Day, when the Comprehensive Spending Review outcome is announced, will have momentous consequences for the economy.
Indeed, PE Day on 20th October may well be compared with two other infamous days in UK financial history – 13th October 2008, when the £37 billion bank bail-out was announced as Royal Bank of Scotland (RBS), unbelievably, came close to total collapse; and Black Wednesday on 16th September 1993 when the UK was humiliatingly ejected from the Exchange Rate Mechanism (ERM).
Yet, there seems to be little general understanding about the forthcoming budgetary cuts, which will be wide-ranging, controversial - and probably vicious.
Encouragingly, since the last Budget, gilt yields have fallen – both bringing down borrowing costs and reassuring foreign lenders. When the Coalition was established, the benchmark 10-year gilt yield was 3.9%; it is now just over 3%.
Although widespread spending cuts are inevitable, their impact is less clear. As outlined in the recent ASI publication, The Party is Over, most of the savings should be demanded from the big five spending departments.
Currently, social security cuts are being widely debated. A shrinkage policy, as outlined in last week’s blog, is the best option.
Although the Coalition has ring-fenced the NHS from cuts, much-needed administrative savings are already underway.
In terms of education, capital expenditure savings have recently been confirmed – and generated controversy following the shambolic nature of their announcement.
Proposed defence cuts are generating savage service in-fighting: it seems probable that the RAF will suffer badly. New aircraft orders will be cancelled and bases closed: the Navy will also have to cut back sharply.
Local Authorities, too, are under real pressure to cut back on their many excesses.
But will the Coalition survive the political fall-out from PE Day?
Ha-Joon Chang tells us, in his book "23 Things They Don't Tell You About Capitalism" a number of things: 23 in fact. Over the next few weeks I'll be examining the core of each of these things and showing, where necessary, why the wrong end of the stick is being waved around so excitedly.
Our first shocker is that there is no such thing as a free market. Given that this is so we should therefore succumb to whatever limitations on our actions All Right Thinking People wish to impose upon them. Without complaint at all of course.
No, that's not a satire of Chang's views here, that's the distilled essence of it.
It is of course true that there is no such thing as a truly free market. Even in anarcho-capitalism (in fact especially there, as there would be no other limits) there are restrictions on what happens in a market. At the most simple, there is societal expectation: if we agree to swap apples for pears than I am indeed expecting you to hand over the apples as I deliver the pears. That in this sense no market is ever truly free does not therefore mean that we should accept any and every restriction upon them. One example of how Chang leaps from the first to the second positions is that he tells it is "obvious" that such things as trade in narcotics or transplant organs should be banned: two things that I most certainly, if not the ASI itself, have long argued should have legal trade in them.
A certain nuance in his argument becomes apparent when he claims that what is the proper limit to market activity is inevitably a political question. For what should or should not be traded is an ambiguous thing. Thus there can be no hard and fast rules and it will depend upon opinion at any one time: thus it is politics. Which, if you believe that there are no hard and fast rules would be true. Whether people can choose their own pint or working hours or narcotic of choice does become just an opinion to be settled by political means. If, and only if, you do already believe that politics, not logic, or rights, or civil liberty, should settle such matters.
We free marketeers do though have a set of hard and fast rules. They're at the heart of what classical liberalism is all about. Best summed up in Mill's freedom to swing the fist ending where the nose of another begins. This does give is hard rules. Subject to one exception, markets are the default: except where the exercise of a market right interferes with the rights of another. I cannot claim a free market in someone else's boots but I most certainly can in my own. I cannot insist that someone else work a certain set of hours: but I can indeed insist that he be free to determine his own.
This gives us our framework to decide upon the regulations he sees as just being political. That "obvious" ban on trade in narcotics not only causes deaths through the violence of the illegal trade, deaths through the impurity of the drugs themselves, gross corruption by the illegal money: it's actually a restiction of my own civil rights to do what the hell I want with my own body. Which may or may not include ingesting things Chang assumes should be banned.
The exception of course is externalities but these are a form of indirect harm and so come under our general rubric. Markets in everything except where the civil liberties of another are being harmed.
Chang further makes the mistake that said regulation of markets needs to be done by the authorities. Laws must be passed to govern behaviour: whereas we all see around us, all the time, markets that are governed by convention, accepted behaviour and just general expectations of how people are going to behave. There is no law that says that one should stand their round: yet social pressure is pretty good at ensuring that people who do not know about the displeasure at their actions. To the point of vehement corrections of said behaviour.
So it is with much of the regulation of markets. To show that norms are required, behaviours expected, is insufficient to make the leap to the insistence that the law must define all of these.
And finally, for this chapter, there is the laughable use of working hour and child labour laws to show that markets and thus capitalism, need to be regulated. For of course it is capitalism and markets, that strange duo, that made restrictions on child labour and working hours even possible.
When we all lived in the abject penury of peasant agriculture there were no possible limits on such working hours. All hands on deck all the time was the minimum needed to keep the family fed. This included children of course: indeed, the way in which small children rapidly become earners in peasant agriculture is used as a reason to explain the high fertility of such families. It's only with increasing urbanisation (capitalism there, with the factories) that fertility rates drop as young children are no longer economic assets but costs. It is only after we start to see the first rising in living standards from that combination of markets and capitalism that we can indeed labour only 10 or 12 hours a day, that we can leave children to have a childhood rather than their grubbing for the pennies that aid in keeping their families alive.
You'd think that a Korean would know this. For of course, the time when Britain was rich enough to be able to do this was some century, century and a half, before Korea was. We don't have to be rich as Croesus to be able to limit, say, child labour. But we do have to have at least started the climb out of abject destitution: you know, that climb that only markets and capitalism has ever managed for anyone?
In his second chapter Chang tells us that companies really shouldn't be run in the interests of their shareholders. All this guff about shareholder value is just that, guff. Precisely because shareholders can just cut and run by selling their stock they are in fact the most short term thinkers in the entire system.
An argument for which a case can be made and Chang tried to make it. Unfortunately this doesn't really accord with that real world out there: who actually does, no not in theory, but who actually does have a longer term view than the shareholders? Certainly not politicians as they never look beyond the task of winning the next election. And it would be difficult to accuse British unions of thinking much beyond the next pay negotiation. I might even be true that shareholders don't think enough about the longer term: but there ain't nobody else out there with a longer time horizon than the shareholders have. After all, the current value of the shares is the net discounted value of all future income from them. Any company that really isn't thinking about the long term is therefore going to have a low share price.
But there's a much larger underlying confusion in Chang's thinking here. He talks about other ways of organising matters so that extant companies do indeed exist long into the future: deliberately having strategic stockholders for example, the way that the Japanese keiretsu do perhaps. The problem with this is that there's no particular reason why a specific company should exist for the long term. Indeed, it's often entirely desirable that they do not, that they go bust and the assets then distributed in bankruptcy to those who can make better use of them.
Most growth in the economy, and almost all employment growth, comes from new entrants into the market. It is small firms starting and growing, old firms failing and leaving, which changes the marketplace. Yes, of course, we can all think of examples of the opposite: I can never remember whether it is Ericsson or Nokia that started out making gumboots and switched to mobile phones. But this is very much the exception. It is the start ups that revolutionise the economy to all of our great benefit.
Once we accept that then the very idea of trying to insist upon the long term viability of a specific company becomes a nonsense. We want to be able to increase and grow the economy into the future, yes we most certainly do. But there's no particular reason why the corporate entity called Rover, or Rolls Royce, or Glencore, should survive log term. Indeed, there's good reason why we'd be quite happy for firms to die out at some point. That point being when their particular skills and advantages are no long appropriate to the demands of the rest of us in the economy.
Schumpeter made this point, that capitalism is all about creative destruction. Those small companies do provide the creativity and it is the end of large companies, at the end of their business or technological tether, that get destroyed. Stakeholder interests make that destruction a great deal more difficult. Two recent examples:
Uber is a method of hailing a yellow cab over a smartphone rather than waving your arms on a street corner. This isn't rocket science. But it has taken a year so far to fight through the bureaucracy to get this simple system licensed. And once that had been achieved the "stakeholders", the limo drivers of New York City, sued to over turn that. On the grounds, incredibly, that it would be age discrimination as older people were less likely to have a smartphone. Or, as we might put it, the incumbent stakeholders were resisting their creative destruction.
The blast furnaces at Florange in France are another example. The unions, and then the government acting on the behalf of such stakeholders, are insisting that these blast furnaces must remain open. Except no one at all wants the iron made in these furnaces. Technology has moved on, we now recycle a lot of our iron and steel here in Europe. To the point that we just don't need as many blast furnaces as we did: they've been replaced by electric arc furnaces. So who is doing better for the economy as a whole here? The stakeholders fighting to save the past or the shareholders liquidating that past? I would certinaly argue that the shareholders here have the longer term interests right.
And that's what becomes problematic about that stakeholder, as opposed to shareholder, economy. It becomes static. If the stakeholders, as they will, demand that their interests be protected then the interests of stakeholders will indeed be protected. Which means that we cannot have enough of that capitalist destruction to make room for the new capitalist creation. I'd be willing to accept the stakeholder argument if we did in fact desire a stagnant economy. As we don't, I don't.
Another way of putting this is that by running companies for the benefit of the wider community, rather than purely for the profit of the shareholders, we entrench the power over what that company does, whether it survives, whether it gains entry to government subsidy schemes perhaps, in that wider community of stakeholders. Who will, as Adam Smith didn't quite say, then conspire against the wider public to ensure the continuation of their benefits from their stakeholding interest. Which isn't what we want at all. We want companies to continue as long as they continue to make a profit: for profit is that signal that the output is worth more than the inputs, that value is being added. Once that is no longer true we want the companies to fold and make way for new market entrants. Given that profit is the marker of this success or not then we want these decisions made by those who benefit from the profits: the shareholders. Not by those who benefit from the jobs, or patronage, or political power: so not by the workers, not by the unions and not by the politicians.
If stakeholders get to run the system then we'll still have blast furnaces 50 years after they're technologically obsolete and we'll all still have to stand in the rain to get a cab. For stakeholder interests gum up that creative destruction that is the very essence of capitalism.
In the third chapter of the report from the Cambridge Economics Department Chang tells us that people are not in fact paid according to their individual productivity. He uses the examples of Sven and Ram, Swedish and Indian bus drivers respectively, the first getting some 50 times the annual wage of the second.
Of course Chang is correct in that the individual does not get paid the value of their own productivity. No, even if we consider the time value of the people on the bus, which will indeed be much higher for Sven than Ram, that isn't the reason for the higher income. Nor, actually, is it the barriers to immigration which explain it all: that being what Chang blames it all upon.
The average wages in any economy will be determined by the average productivity in that economy. Another way of putting very much the same point is that wages are determined by not the job that is actually being done by the worker, but by the next one that could possibly be done by that worker. Ram may indeed drive just as well as Sven. But if Ram's alternative employment is peasant destitution then he'll be paid like a destitute peasant for driving. If Sven can go to Ericsson (or Nokia) and make gumboots (or phones) then he'll be paid to drive a bus very much like a phone maker.
And I'm afraid that it's this very point that Chang gets so horrendously wrong. He does in fact say this:
"It is not simply, or even mainly, because they are cleverer and better educated that some people in rich countries are hundreds of times more productive than their counterparties in poor countries. They achieve this because they live in economies that have better technologies, better organised firms, better institutions and better physical infrastructure - all things that are in large part products of collective action taken over generations."
A point with which I would most certainly agree. But don't forget, Chang is writing a book about how capitalism and the free market just aren't all they're cracked up to be: if so, then how did we end up with the better technologies, better institutions, better firms and infrastucture? Could it, possibly, have anything to do with the fact that we've been largely capitalist and free market for a couple of centuries?
We should be rather harsher than that too. Everywhere, anywhere, that has been roughly free market, roughly capitalist, for the past century is so stinking rich that the bus driver does get paid 50 times what a better one in India gets paid. That's actually the point of the entire socio-economic structure: it makes even bus drivers rich by any global or historical standard.
This isn't confined to any one group or set of countries either. Just since WWII, Hong Kong, Japan, Taiwan, S. Korea have all joined the nations that enjoy that distinction. China is catching up fast. Those countries that haven't haven't: like, for example, the bureaucratic and planned Licence Raj in India which still impoverishes Ram.
This is why the lucky people like us at the ASI, born into a rich country and gloriously happy that this did happen to us, argue so strongly that everywhere else should embrace the joys of free market capitalism. Precisely and exactly because it's the only way anyone has as yet found to make bus drivers gloriously rich.
Perhaps Cambridge just doesn't do irony: or they push all those capable of it off into Footlights or something. For here's what Chang's actual argument in this chapter is. The average person in rich countries is rich because of the institutions, infrastructure and better organised firms in rich countries. This shows that capitalism and free markets don't work because those institutions have been formed by capitalism and free markets. We'll be proving that black equals white next and get ourselves killed on the next zebra crossing.
In our fourth chapter we get told that the washing machine has changed the world more than the internet. Something which we can all actually agree upon as long as we accept the conceit that the washing machine is standing in for domestic labour saving technology in general. We might quibble with the example of email not being much of an advance upon the telegraph: email allows you to broadcast to 5,000 or more which the telegraph certainly didn't. And I've run a software business that simply couldn't have happened without being able to send files and graphics. But Chang is correct that the development of domestic labour saving technology has, so far at least, had more effect.
It has, for example, liberated half the rich world human race and allowed them to join the paid, market, economy. It really wasn't all that long ago that women simply could not do this, given the pressures of domestic labour: and it's still true that many women in many poorer countries cannot do so yet.
However, yes, again, we find Chang being extremely partial in his discussion of how all this happened. As someone who once owned a Soviet washing machine (no, really) I'm sure that this capitalism and free markets thing had a hand in it all. Firstly, in the invention, production and distribution of those devices: the route from carpet beaters through Spangler to Hoover was indeed the usual market style chaos of no one at all understanding what they were doing (certain early models blew dust around rather than sucked for example). Similarly the route from washing stone through washtub to mangle and finally washing machine was not a planned excursion. It was driven by incremental steps the users of which could see the advantages on offer. Capitalism meeting the market and then further innovation taking place.
What annoys to some extent is that Chang actually mentions a point about servants:
The main reason why there are so much fewer (of course, in proportional terms) domestic servants in the rich countries- (...) - is the higher price of labour. With economic development, people (or rather the labour services they offer) become more expensive in relative terms than "things".
Which is entirely true and this is known as Baumol's Cost Disease. The annoyance is that the other half of William Baumol's work is about how invention and innovation happens. What socio-economic system leads to all these wondrous things like a machine that washes clothes without effort or much time expenditure? And the answer to that is that innovation works vastly better in a free market socio-economic system. As Baumol points out, the planned Soviet system invented some pretty cool stuff: but I as the past owner (user would not be the correct word) of a Soviet washing machine that planned economy most certainly did not come up with successful labour saving domestic devices.
Which leaves the final line of his "what they tell you part" looking a little strange:
We- as individuals, firms or nations- will have to become ever more flexible, which requires greater liberalisation of the markets.
Err, yes, yes this is true, despite Chang using the rest of the chapter to argue against the idea. The reason why we do want that greater liberalisation of markets is precisely because it is this, this very thing as Baumol tells us, that produces those innovations like domestic labour saving technology. This is the very point: we want to encourage, continue, the replacement of grunt human labour with machines. Which does indeed require those free markets - or at the very least benefits hugely from them.
I do agree that so far the washing machine has changed the world more than the internet. Which is really rather why we want to be promoting that socio-economic system that came up with that very washing machine, no?
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