The Pin Factory Blog

Over on the Guerrilla Economist blog, Ust Oldfield discusses the economic consequences of the dragon Smaug on Tolkien's fictional universe, Middle Earth. He argues that the net effect on Middle Earth's economy may well have been positive. Both Dwarves and dragons hoarded the gold, so there would have been no monetary shock from the rapid withdrawal of so much precious metal from the economy. The Dwarves were then forced to offer their labour and skills to the outside world as refugees, contributing to the economy at large.

Perhaps. But there is something wrong with this picture. Ust neglects to mention that much of the Dwarven kingdom of Erebor and nearby Dale were utterly destroyed. Thousands of years' worth of accumulated physical, human (or should that be Dwarven?) and social capital incinerated. In order to have a net positive effect on the economy of Middle Earth, the Dwarves' integration with the wider economy must outweigh this massive destruction of wealth. This is unlikely, to say the least. For a start, the human city of Dale existed because of its trade with Erebor. Therefore the Dwarves were already engaging in peaceful and mutually beneficial exchange with the rest of Middle Earth. The Dwarves' actions as refugees can only have created less value if their highest-value, voluntary choices were forcibly eliminated.

The second problem is an epistemological and moral one. Sure, this is fiction, but Ust should not be so quick to defend forcible actions to create the most value for the most people. In his analysis, the values of a minority are subjugated to that of the population at large in a zero-sum manner. Creating a Dwarven diaspora constitutes the loss of the economic, social and cultural institutions that best satisfy their demands. Dwarves lose, Middle Earth supposedly gains. And yet, in a peaceful world without the destructive interventions of Smaug, both parties gain through voluntary exchange according to what they themselves value most.

Ust, like many other Keynesians, loses sight of what actually matters in economics: economic growth and production are only important because they satisfy peoples' demands and values. Forcibly removing their best avenues for peacefully satisfying demands can only be a net loss to all.

George Orwell died on January 21st 1950, only 47 years old.  Short though his life was, his achievements earned him a place in history.  His Homage to Catalonia, describing his experiences as a volunteer in the Spanish Civil War, brought him fame, but with it the enmity of the hard, pro-Soviet left because of his indictment of the duplicity of the Communist forces in Spain.

Orwell's passionate concern for the underdog and the poor shines through his writings, as does his fervent opposition to the lies and distortions used by some to advance political ideologies.  Some of his essays on the use and abuse of the English language earned the status of enduring classics.

Although on the left himself, two of his works, Animal Farm and Nineteen Eighty-Four constitute the most effective exposures of the fraudulent brutality that underlay Soviet Communism.  Indeed, the latter work, completed just before his death, bequeathed us the vocabulary that describes totalitarianism, with phrases such as "Big Brother," "thought police" and "doublethink."

Orwell genuinely loved liberty and had a deep affection for the British people and their way of life.  His ability to project his honesty into his writing has earned him a place among the top British authors of his century.  In the fight for freedom he played a significant role, and is rightly remembered and appreciated.

When David Cameron became leader of the Conservative Party, it is unlikely that many Conservative members expected him to preside over the nationalisation of an airport. But, with the £1.5bn sale of Stansted to Manchester Airports Group (MAG), that is, in an odd way, what has happened. For although MAG (which already owns and operates Manchester, East Midlands and Bournemouth airports) is privately managed, its principal shareholders are a group of ten local authorities. Manchester City Council owns 55%, and Bolton, Bury, Oldham, Rochdale, Salford, Stockport, Tameside, Trafford and Wigan own 5% each.

True, MAG is doing the deal with the Australian investment group Industry Funds Management, which will take a 35.5% stake in the newly-enlarged enterprise. But that still leaves the local authorities as the main owners.

The privatisation of the UK's airports was not done well. The 1984 Adam Smith Institute paper Airports for Sale, by the distinguished Dublin transport economist (and now Irish Senator) Sean D Barrett, raised the idea of privatising the then British Airports Authority (BAA), but insisted that its airports – three in Scotland (Aberdeen, Glasgow and Edinburgh) and three around London (Stansted, Gatwick and Heathrow) should be sold individually or in packages in order to promote competition. Sadly, Margaret Thatcher's government, while taking on the wisdom of privatising the badly-run BAA airports, chose to take the easy option (and perhaps the most lucrative one) of selling all six together. We knew this was a mistake, but consoled ourselves in the thought that such a monopoly could not last for ever and (like that other privatised monopoly, British Gas) it would be broken up one day, once it had acquired a more commercial way of working.

And it is right that the airport monopoly inherited by BAA plc should be opened up to competition. Glasgow and Edinburgh are what economists would call 'near substitutes', as are the three London airpots (or they would be, had BAA and British Airways not striven to segment them). And though  both groups face competitors (Prestwick, Luton, Cit), these are small. It is just a shame that the competition has to come from a publicly-owned body. Rather like Britain's electricity sector, a large chunk of which is now owned by nationalised French firms. If we really believe in competition, should we really be handing companies back to state enterprises here or abroad?

The Daily Telegraph reported (16th January) that UK taxpayers would likely be called to contribute up to another £30bn. to further bail out RBS and Lloyds TSB.  Their source was the Bank of England’s Financial Policy Committee’s (FPC) evidence to the Treasury Select Committee.  The problem is largely artificial: banking fogeys see the crash as having arisen from inadequate capital to withstand shocks.  They are wrong: more capital may have averted the need for the bailouts but capital shortage did not cause the crash.

The new international regulations-to-be (Basel III) focus on complex increases in tiered capital requirements.  The fogeys, in pressing for higher capital ratios, are pressing for shareholders, including us, to bail out the banks once again. This new money, if the EU allowed the Treasury to do that, would sit on bank’s balance sheets waiting to withstand another 2008-like crash.

In the middle of a recession that is not going to happen. You may as well treat a patient dying of hypothermia with a liberal application of ice packs.

Requiring higher capital ratios will also cause banks to lend less and especially less to SMEs, the very businesses which could lead us out of recession if they had the cash to do so.

The FPC has a built in problem with trying to balance growth, which always involves risk, and stability, i.e. the absence of change.  The problem is partly cyclical: just now we need growth but if and when growth again becomes unhealthy, we will need the ice packs.

Select Committees involve a lot of MPs showing and witnesses avoiding the questions.  The best example of this time wasting during this particular session (yes, I watched two hours of it) was when Andrew Bailey was asked why UK borrowers paid higher interest rates, and UK lenders to banks lower, than their continental counterparts, i.e. why are UK bank margins wider at both ends? The British Bankers’ Association must have been proud of Bailey’s evasion but why did the Chairman, Andrew Tyrie, let him get away with it? The reality is that banking debates are full of technical confusions. 

The high point of the session was the discussion between Brooks Newmark MP and Michael Cohrs, an independent, and independent minded, member of the FPC.  It was this exchange that gave the Daily Telegraph its headline but it was a lot smarter than that.  Rather than cut back on lending or increasing shareholder equity, banks could, and should, sell off their other assets.

I'm afraid that I really don't understand this latest idea from Oxfam. I can only conclude that it comes from some unfortunate brain spasm or something. They seem to be calling for a rise in global inequality. Here's their actual paper, here's The G and the TUC both praising it. And here's their central demand:

An end to extreme wealth by 2025. Reversing increasing extreme inequality and aim to return inequality to 1990 levels.

I've long had my little problems with Oxfam: they seem to be suckers for every right on initiative going. But I hadn't thought that they'd been taken over by complete loons. Not up to now that is. For the problem with this demand is that 1990 levels of inequality were higher than they are now.

There's a logical point that need to be made:

Free public services are crucial to levelling the playing field. In countries like Sweden, knowing that if you get sick or that you will receive good treatment regardless of your income, is one of the greatest achievements and the greatest equalisers of the modern world. Knowing that if you lose your job, or fall on hard times, there is a safety net to help you and your family, is also key to tackling inequality. Similarly, access to good quality education for all is a huge weapon against inequality.

I agree entirely that free public services reduce inequality. Indeed, the TUC itself has calculated that income inequality in the UK is some 30x: the top 10% get 30 times the bottom 10% in market incomes. By the time you add in all the effects of taxes, benefits, those free public services like health care and education, that true income disparity falls to 6x. Given that all rich world countries do indeed have free health care, state pensions, free at the point of use education and so on, it's thus very difficult indeed to see that inequality is anywhere near as bad as is being stated. For we do indeed all have those public sectors which reduce inequality. We cannot thus go around measuring inequality purely by market incomes. Thus the very measure that Oxfam is using is, by its own lights, incorrect. For you just cannot go around recommending state services as a method of reducing inequality without taking note of how state services already reduce inequality.

And there's a factual one too. The go to guy on inequality is Branco Milanovic. A slide show is here, a paper here. Global inequality, the only form of inequality that a good little liberal should be concerned about at all, has fallen over the years. Substantially. As I've pointed out here, it's also true that the past few decades have seen the biggest reduction in actual poverty in the entire history of our species. And as here, the poorest of the poor, sub-Saharan Africa, has seen both rising incomes and falling inequality over that time period.

We've just managed, amazingly, to concoct the right economic policies to do exactly what Oxfam wants. We've let globalised capitalism rip and the poor are getting rich even as global inequality falls. So now they want us to stop doing what so obviously works.

I can really only think of three explanations for their desire to reverse all of these achievements. The first is that they're simply ignorant. Ignorant of the most basic facts about inequality and poverty. The second is that they've suffered some sort of brain spasm and need to go and have a little lie down. The third is that the organisation has been hijacked by loons. I'm afraid I just cannot think of any other reason why they would propose that we increase global inequality back to 1990 levels.

The Guardian has another of those worthy snoozefests discussing how the concerned and enlightened can solve whatever problem it is that is this week the topic of discussion over the mung beans. This one is all about how we can "save" the Great British High Street. You can imagine the level of analysis, can't you?

so many high streets reflect a landscape created by extreme capitalism

Sigh. Actual suggestions are that perhaps people should do something else with those buildings:

a new genuinely productive economy based on making, caring and exchanging goods and services could create thriving high streets again. Youth services, libraries, creches and the like, .....with more niche stores and "click and collect" shops. But high streets must also become vibrant and welcoming places for people to visit. A modern high street should provide ample facilities for childcare and good social facilities such as restaurants and coffee shops

Seriously, more coffee shops?

making high streets more truly mixed in use. They should house elder-care centres and medical clinics, government bureaus helping the public and pop-up music or art venues. .......In the longer term, we need a proper industrial strategy for retail to promote multichannel retailing, combining online trade with vibrant high streets at the heart our communities.

Don't bother trying to match opinion to speaker: it doesn't matter. None of them grasp the basics so all are floundering. The basics being that we've already got a tried and tested system for dealing with problems like this.

At heart here we've a problem of technological change. Some 11 or 12% of shop space in the UK is empty. Some 11-12% of UK retail spending is online these days. The two facts are not unconnected. We simply need less retail space than we used to. Or to get this completely correct, we need less retail space at current prices than we used to.

For don't forget, there is no such thing as "supply" or "demand". There is only either at a particular price. Currently UK retail space is priced for when we desired to have more of it than we currently use. The solution to this is clear and obvious too. Do absolutely nothing. Given the oversupply at current prices those prices will fall. Which will increase demand and thus that 12% of empty shops will become property used for something or other again.

Exactly what they are used for, well, we've no idea actually. Might be coffee shops, could be OAP drop ins, creches: could be fabric shops, places to jailbreak an iPhone too. And we've got a method of discovering what will indeed work when we're all entirely clueless too. Called that market again. As shops get cheaper different people will try different things. Some will work and get copied, others won't and won't. And so we experiment our way to a solution of empty shop windows.

Which leaves us again with our solution: do nothing for the market will take care of it. Prices, if left alone, will adjust to balance supply and demand. And what that demand will be will is something that is emergent from the very process of considering the new prices.

For markets are both a pricing system and also a system of discovery. Change the prices and we'll discover what works at the new ones. Which, given that no one, not even the luminaries willing to chat to The Guardian for a few minutes, has the slightest clue what should actually replace the shops busted by the internet, seems quite useful really.

Not that there's anything new in this observation of course: King Log being the appropriate method of governance dates back to the Ancient Greeks at least.

Professor Dani Rodrik at Harvard University has offered up a challenge for free market liberals. He is openly, and unashamedly mercantilist: the very ideology that Adam Smith originally set out to defeat back in 1776. While rejecting the historical obsession with amassing precious metals, Rodrik proposes a mercantilist alliance of government with corporations towards common objectives like economic growth.

Swatting aside accusations of cronyism, he offers two reasons to be mercantilist. Firstly, he claims that it works: the recent Asian experience of modern economic growth suggests so, along with the fact that classical liberalism only became dominant in Britain around the 1840s, after it had already started to industrialise. But both of these claims are dubious at best. Regarding the Asian economies, most of them are experiencing catch-up growth, skipping stages of invention. For example, they needed only to import smartphone technology, rather than going through the painstaking process of inventing every single model of mobile phone from the clunky ancient ones to the iPhone. The adoption of capitalism they experienced was not the alliance of the state with business, but the openness to adopting ideas. Indeed, countries like Japan who have recently caught up now experience stagnation. The mercantilist structure does not seem to be quite so conducive to sustained, original innovation, and hence modern economic growth.

As for the British experience of the Industrial Revolution, the original technical innovators, Rodrik's claim does not imply that mercantilism is the better system. Just because the British state did not adopt a liberal attitude to innovation until the 1840s does not necessarily mean that pro-innovation liberalism was not already in action before the Establishment adopted it. If anything, the liberal view is the anti-Establishment view. It wasn't in state-subsidised or state-monopolised industries or businesses that the unprecedented innovation took place. If anything, the much-admired cotton industry of the time had to operate despite protectionist laws like the Calico Acts. Similarly, the invention and increasingly sophisticated application of steam power had almost nothing to do with the government whatsoever. We also have a useful comparison, as post-Revolutionary France was desperately intent on copying the British industrial experience. Yet despite massive subsidies, early attempts consistently failed.

Secondly, Rodrik says that under mercantilism, it is producers rather than consumers who are king. He claims that mercantilists subsidise liberals' vaunted consumption. The obvious question is "Why?" What is the purpose of production if not to satisfy someone's wants or needs? Even people who value work for work's sake are "demanding" the production of something that meets those values. What is the point of having an economy, of interacting and exchanging with others, if not to acquire value for yourself? This does not necessarily mean that you are some selfish miser, obsessed with money, but includes the whole panoply of values you can hold, from equality, to community, to family and to love. If Rodrik's mercantilist challenge is to have weight, he needs to explain what the point of production is, if not to satisfy demand.

On March 8th-10th, European Students For Liberty (ESFL) will present the second ESFL Conference, hosted by the Classical Liberal Students Association at the Catholic University of Leuven (15 minutes away from Brussels) in Belgium. Inviting students, graduates, and guests across the continent, ESFLC will feature lectures from scholars and activists in the liberty movement, free meals, books, pamphlets and campus swag for student groups to take back to their universities. Students will be able to connect with top liberty organizations to find information on internships, jobs, seminars and conferences at the liberty fair. Evening socials with speakers and students will top off Friday and Saturday nights in the Leuven area for lively discussions and good cheer for liberty.

Confirmed speakers include James Turk of the GoldMoney Foundation, Tom Palmer of the Atlas Network, David and Emily Skarbek of King’s College, entrepreneurs like John Chisholm and Daniel Model, and more. A lively student debate on rival concepts of liberty will give students an exciting and thought-provoking opportunity to engage with their peers. ESFL invites all students to participate and join the largest pro-liberty network among young people across Europe. With registrations currently spanning over twenty five countries, this will be a prime opportunity to forge new friendships, share ideas and further advance key debates and conversations about the philosophy of liberty. All conference details and registration information are located on ESFL’s conference webpage.

Seats are going fast, so those interested should reserve their spots sooner rather than later! We expect more than 300 friends of liberty to come to the ESFLC. The ESFL team is looking forward to seeing you and your friends in March!  Gathering the brightest young minds interested in liberty helps bring us one step closer to a free academy and a free society.

Check out last year's conference video.

When: 8th-10th of March 2013

Where: Leuven, Belgium. Located 15 minutes outside of Brussels

Conference fee: 30 Euros students / 45 Euros non-students (until 31st of January). Late registration: 40€/55€

Your registration fee includes: all meals provided, three days of speakers, Liberty Fair, networking, and awesome socials

Expected number of participants: more than 300

Conference website and registration link: ESFL’s conference webpage

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