The debt and deficit cost of political policies

UK Conservative Party Co-Chairman Grant Shapps MP has started "deficit alerts" on his Twitter account whenever a Labour politician appears on television to demand more spending on this or that. Here is a sample:

@grantshapps: "Deficit Alert! Ed Balls calls for £16.5bn more borrowing "this year" on #Murnaghan - same old Labour answer would mean soaring interest rates."

I am glad that politicians should be so focused on the debt and deficit implications of public policy. But we need to make it systematic.

As ASI Fellow Miles Saltiel has pointed out in the past, the UK's official national debt – about £1trn but who's counting? (precious few in Westminster, that's for sure) – is about one-sixth of the government's total liabilities. Most of those commitments are 'below the line', unseen. They include the cost of nuclear decommissioning, of Network Rail's debts, of future pension obligations, plus future commitments on healthcare, education and (more recently) social care and childcare.

The trouble is that politicians propose measures without any review of their cost, other than the cost in the current year. The full financial impact – next year, the year after and the year after that in perpetuity (since government spending programmes are almost never abandoned) – is never expressed.

I propose that whenever any measure is introduced into Parliament, the Office for Budget Responsibility should audit its future financial burden. New health treatments? Fine, but the Bill has to include the price tag of what it will cost in the decades ahead and an analysis of what that will do to the national debt and interest rates. Better social care? School leaving age raised to 18? Green technology subsidies? All fine if we choose them, but we must be told the long-term price.

Of course, knowing the future cost of their measures would not stop politicians from introducing things that look small but have a big future impact on the budget. But it would at least provoke a healthy national debt about what is and is not affordable. 

Chart of the week: US personal income and expenditure

Summary: US household spending is holding up

What the chart shows: The chart shows the % change in US personal income and expenditure in nominal terms in the most recent three months (January-March 2013) compared with the previous three months (October-December 2012)

Why is the chart important: In 2011 the US temporarily cut the employee payroll tax rate from 6.6% to 4.6%. In January 2013, this cut was reversed as part of the fiscal tightening.  There were fears that this tax increase, equivalent to 1% of household disposable income, would lead to a sharp cut in consumption, potentially throwing the US economy back into recession. These fears were always exaggerated. The payroll tax cut did not lead to a spending boom, as households used the extra money to pay down debt faster. The increase could be – and was – met by drawing down savings somewhat. Although monthly income fluctuated over the year-end, this was due to pay-outs in December to avoid the tax hike. Averaging the past four months shows income remaining steady. This confirms the continued US recovery.

Monetary rules vs. central bank discretion

On Monday I attended a conference in Copenhagen on monetary policy regime change with Lars Christensen of Danske Bank, Sam Bowman, research director here, Anthony J Evans, economics professor at ESCP Europe Business School, and Martin Ågerup, president of Danish liberal think-tank CEPOS, among others. The discussions raised a huge number of interesting ideas, among which was the question of rules vs. discretion in monetary policy. We all agreed that a rule-based system would be a major improvement on the existing system.

The current monetary regime in the UK, and many other major economies, is known as flexible inflation targeting. Under flexible inflation targets, a panel of appointed “wise men” is tasked with keeping inflation close to a target rate—in the UK 2% measured by the consumer prices index. They set interest rates (and in exceptional times, asset purchases, known as quantitative easing) to control aggregate demand and through that the price level, and achieve their target. The flexible element of the policy is that they have leeway to decide when achieving the target straight away would cause more harm to the economy than the resultant above target inflation. It is this provision that explains the Bank of England’s monetary policy committee’s decisions not to tighten policy despite 40 successive months of above target consumer price inflation in the UK.

There are many problems with this framework—including looking narrowly at consumer prices, rather than all prices in the economy; targeting a rate instead of a level; and judging performance by actually achieved inflation instead of expected future inflation—but here I wish to focus in on the problems with allowing the MPC to decide when and how much to miss their target.

One obvious problem with discretion, as opposed to rules, is that it can be unclear exactly what rate-setters will do in response to shocks. Firms have to worry not only about unexpected changes in market conditions but also unexpected macroeconomic response to these changes. Hence the feverish market interest in a press conference from Mario Draghi or Ben Bernanke, with intense focus on minute changes in tone or wording of statements. Hence the massive market shifts on central bank policy decisions. Measures of economic policy uncertainty have risen to volatile highs, and such uncertainty is widely believed to stymie investment, arguably the most important constituent of national income for staging an economic recovery.

A perhaps more fundamental problem with discretion as against rules is the huge amount of knowledge it assumes the nine-member MPC can amass and act upon. The optimal response to a supply shock, as Bill Woolsey explains in detail will depend on the demand and supply elasticities in that and other markets, not to mention guessing when and in which markets the shocks will hit. So even if an omniscient and perfectly benevolent despot could set the optimal policy with discretion, a rule-based system could be the best—or least bad—actually possible policy.

Allowing central bankers to decide when to hit their target is just allowing central bankers to decide whatever they think is best, and as Woolsey says, it’s completely unsurprising that they come out generally in favour of the system.

23 Things We're Telling You About Capitalism VIII

In our eighth chapter Chang tells us that as capital is, despite Marxist insistences, national in some manner therefore we should be nationalist about capital. Whether or not we allow Johnny Foreigner to come and invest in our pristine and national economy thus become a political question: the politicians should stroke their beards and ponder upon whether this specific capital is going to do the right thing in our specific economy.

One major problem with this is that, unlike Chang, we do not think that politicians, however long and grey their beards, have the ability to note whether a particular investment is good for the economy or not. The average political researcher turned Cabinet Minister could not invest their way out of a wet paper bag. But let's not talk about British politics specifically.

In one part of his analysis Chang is obviously and clearly correct: that captial and companies do still have a national character however multi- or trans-national they may seem. This is not, of course, a new idea:

By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

Yes indeed, that's Adam Smith. Wealth of Nations Book IV Chapter 2 para 9. And it's also the only mention of "invisible hand" in the entire tome. No, invisible hand is not a shorthand for the market and all its wondrousness: it's a comment upon the way in which even if capital were entirely free, foreign profits were higher than domestic, there's still something about security and familiarity that leads to capital being invested in that domestic trade. Very much the same reasons Chang gives for why corporates do indeed still have something of a home nation bias.

So Chang's right here but only because he's not original. And it's really most odd to insist that no one tells us this about capitalism when the very point is made in the Ur-foundation document of capitalist economics.

However, there's a very large mistake that is being made in the rest of the argumentation here. In short, it's in this sentence:

"This means that the home country appropriates the bulk of the benefits from a transnational corporation."

If the high end R&D is done at home, if the profits flow home, then the home country gets the major gains because these are the major benefits of a transnational corporation. Which is absurd poppycock. It's an entirely ludicrous thing for an economist to try and claim.

The major benefit of any productive organisation is what is produced: the benefit that people get from what the company (or co-op or individual) pumps out. This is known as the consumer surplus and this really ought to be known even at Cambridge. The benefit of Google is not cushy jobs for engineers, nor the lack of tax revenue in the UK, the benefit of Google's existence is that we all get to use Google. Whether VW's R&D is in Wolfsburg or not matters very much less than that we all have the chance to drive VWs.

Indeed, we can make an attempt at showing how vast is the difference between these two concepts of the value that a corporation provides. It's not quite exact, because this paper talks about Schumpeterian profits (ie, what the entrepreneurs get, not finance capital) but the stunning fact is that the entrepreneurs only get 3% of the value created.

The present study examines the importance of Schumpeterian profits in the United States economy. Schumpeterian profits are defined as those profits that arise when firms are able to appropriate the returns from innovative activity. We first show the underlying equations for Schumpeterian profits. We then estimate the value of these profits for the non-farm business economy. We conclude that only a minuscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.

As I say, it's not quite exactly the same but it is indeed indicative. The vast majority of the value that is created by any productive enterprise is not in who gets the jobs nor the profits nor the tax from that enterprise. It flows to the consumers who get to use the produce of that enterprise.

That is, after all, why the consumers buy it: they value it at more than it costs them to purchase it.

At heart this chapter shows one of Chang's basic problems. He views the economy as being about the benefits to producers and the benefits of production. He's entirely lost sight of the fact that the whole game, the economy and economics as well, is about consumption and opportunities for consumption. Whether or not foreign owners of companies do their R&D locally, pay their taxes or employ locals in the higher echelons of management is such a tiny part of the whole that it's an irrelevance. That foreign capital is still pumping out things that the local gets to use and that's where all the value is, in that consumer surplus.

After all, Smith did also say:

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident that it would be absurd to attempt to prove it. But in the mercantile system the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.

That was back in 1776: isn't it about time that it sunk in?

Oil price fixing – who the European Commission should question

The European Commission has launched an investigation into oil prices. They suspect that prices may have been artificially inflated in order to swindle motorists out of their cash.

They are right. And they should start their investigation at the grand offices located at 1 Horse Guards Road, London SW1A 2HQ. That's not the headquarters of Shell or BP, but the home of the UK government's Treasury. After all, more than half the price that motorists pay at the pump is in fact tax. The product itself costs about 48p a litre to produce and get to the pump. The retailer gets about 5p. But on top of that, there is fuel duty of 58p for a litre. And 20% VAT on top of all that. Indeed, because VAT is added to the whole price, including the fuel duty, motorists are actually paying a tax on a tax!

VAT, of course, was raised recently in order to help balance the government's books in the wake of its bail-out of the banks. So that explains part of the increase in prices. More comes from the 'fuel escalator' – the principle that fuel duty should rise by more than inflation, in an attempt to induce us to leave the car at home and save the planet. (Politicians are remarkably adept at picking our pockets while telling us it's for our own good.) The escalator forced up UK fuel prices from below the EU average, to make them now among the very highest in Europe. And the tax on fuel is now several times what any economist can justify as a fair charge for the carbon that vehicles emit.

The bottom line is that more than tax on motor fuel is more than 80p a litre. Which makes George Osborne's offer to 'stabilise' petrol prices by shaving 1p off the tax look rather feeble. If the European Commission wants to get to the heart of the great petrol price rip-off, they should immediately call the Chancellor in for questioning.

23 Things We're Telling You About Capitalism VII

What Chang wants us to understand is that because we used to have protectionism and we still had economic growth and development then therefore we should have protectionism in those places where we want to have economic growth. In other words the poor countries should throw up trade barriers so that all the rich world megacorps cannot supply the people of those countries. Thus will industry develop and in the long term, wealth will be created.

There are a few problems with this argument. One of the most glaring is that he takes historical levels of tariffs as evidence of levels of historical protectionism. Which is an absurdity: until well into the 20th century transport costs were more important than whatever tariff levels were as a barrier to trade. Just as an example, it is true that US tariffs near doubled post Civil War. But actual trade barriers fell as transport prices (essentially, the ocean going steam ship) fell by more than that doubling of the tariffs. His historical evidence of tariff barriers is thus highly suspect. The reason that most countries developed their own industries is precisely because non tariff barriers, those high transport costs, were more important.

Another problem is that, as he actually points out but doesn't make the connection with, all of his examples who developed behind such tariff barriers and with infant industry protection etc simply were not democracies in any modern sense. Even the countries that developed behind them in the 20th century like Taiwan (or his native Korea) were not. Semi-fascist military dictatorships would be a more useful description of the political systems actually. And don't forget what the sort of planning that he's advocating means: not just that government should encourage certain industries but also that local people must be actively prevented from wasting their energies in things which are not part of the plan. It's extraordinarily difficult to think of a way in which a free and liberal democracy could do such things. Force some companies to enter ship building, yes, perhaps that could be done with carrots and not with sticks, but how would one, in any semblance of a liberal society, prevent someone from setting up to build ships if that's how they desired to waste their money? This is the sort of thing that did actually happen in those planned economies too.

Even if we grant him his thesis, that such planned and directed industry, protected by trade barriers, did lead to industrial development, I can't actually see how anything like it could be done in anything close to a free society. Indeed, I'd even be willing to consider the idea that the reason this "worked" in certain societies (like parts of East Asia) and did not work at all in others (parts of Latin American and Africa) was precisely that those two latter sets of societies were not authoritarian enough to allow it to work. People had enough freedom to be able to ignore the plan.

One further very important point from Chang's own argument. He does insist that only those countries that have got to the technological leading edge benefit from free trade. His argument is absolutely not that the rich countries of today, those on that leading edge, would benefit from restrictions on trade: quite the contrary. His argument, such as it is, applies only to developing, not developed, nations. So don't allow anyone to start using his arguments, faulty even as they are, to propose that the UK or the US, EU, should retreat behind tariff barriers. That's not what even he is saying.

We might also mention that historical evidence of restricted trade areas is interesting in an historical sense: but it's not really of any relevance today. This is becasue of the sheer scale of modern industry. Perhaps, maybe, it made sense for the US to build a steel industry behind barriers. There were a number of companies in it and between them they created a market, however protected it was. These days, even the EU isn't a large enough market, all 500 million of us, to produce, say, a viable computer industry. The idea that Tanzania (just as an example)  should have tariff barriers in order to encourage an indigenous computer industry is therefore ridiculous. Or a car industry: it costs $1 billion just to plan out a major new car platform these days, let alone tool up to manufacture it.

The scale of modern industry is simply such that anyone trying to recreate any substantial part of it behind tariff barriers is just going to be making shoddy goods, very expensively, for no very good reason. You might, just about, get away with a little bit of restriction with the billion and more in China and or India. But the idea that Somalia will, with the appropriate planning and protection, ever have a viable steel, car, chemicals or comuter industry is simply nonsense. It might well end up producing firms in an interesting niche or other: but the creation of an entire industry for such a small number of people just isn't ever going to happen.

And there's one final overarching reason why this autarkic route to development is undesirable: it's immoral. Building up infant industries behind tariff barriers is very much a case of jam tomorrow, not jam today. The idea is to deliberately remove from the inhabitants of the country concerned the ability to consume the delights of the current world. So as to enrich those who own the industry within those tariff barriers. That populace is subjected to decades of worse consumption goods than they could have had. Even if this does, in the end, lead to development we've still impoverished the people in favour of the capitalists of that society. Not that I think it does lead to such development: but even if it did that's what is being urged.

Which rather brings us back to why I don't think this will work in a democracy, or in anything even vaguely approaching a free and liberal society. Yes, sure, economic growth is important but not at the cost of deliberately impoverishing this generation. And that's what infant industry protection does and not only do the voters appear not to be willing to sit still for that (and thus it only, if at all, succeeding under authoritarian regimes) I very seriously doubt that it's moral for us to go around insisting that they should.

23 Things We're Telling You About Capitalism VI

The sixth thing about capitalism we're told is that inflation just isn't so bad. Further, that the attempts to reduce inflation have led to greater economic instability elsewhere. We should thus chillax about inflation and concentrate on other things.

Chang is indeed correct about low rates of inflation. The 1-3% sort of levels that central banks currently aim for aren't so bad: indeed they often aid other changes in the economy. Take, for example, Keynes' point about the rigidity of nominal wages. If inflation is 3% and wage rises 1% then real wages will be falling (as, sadly, they sometimes need to do, see Germany early this century) and this will cause a great deal less fuss and social unrest than if inflation is zero and nominal wages fall 2%.

It's also true that the aim is for low inflation because, in a debt financed society, we really don't want to get into a deflationary period. If nominal incomes and production values fall while nominal debt levels stay static it's entirely possible to enter a sort of death spiral. So erring on the side of caution, a couple of percent, is sensible enough.

Chang goes on to make the leap to the idea that moderate (which, apparently, means 20-40% a year) is also not so bad. He agress that hyperinflation is bad for:

" Hyperinflation undermines the very basis of capitalism, by turning market prices into meaningless noise".

This is an example of how Chang continually conflates capitalism and markets. They're really just not the same thing. They might work well together but capitalism is a description of who gets to own the productive asserts: the capitalists. Markets describe a method of exchange. These simply are not the same thing at all. Indeed, we can have capitalism without markets (the Soviet system was state captialism without markets) and we can have various forms of socialism with markets (Tito's Yugoslavia was an attempt at this and we can certainly have socialist entities within markets: Mondragon, the Co Op and John Lewis come to mind), but it is vital to keep in mind that the two are descriptions of different things, not just interchangeable names for the same socio-economic system.

But Chang's real complaint isn't about inflation: it's about the economic instability of the other parts of the "neoliberal" package. By concentrating on killing inflation we've raised such things as job instability and other forms of non-price instability. Chang thinks this is a bad idea: I think it's entirely excellent. No, not because I'm a rabid neoliberal (although I am) nor because I want to grind the faces of the workers into the dust as they cower in fear of losing their jobs.

No, the entire point and aim of this game of an economic system is that we want to move productive assets from lower value uses to higher value ones. That's what we're trying to do for this movement is the very definition of wealth creation. And, given that we've still got near a billion people living on $1 a day and the like, more wealth creation is still an urgent task.

If we have this need to be continually moving productive assets to higher valued uses then yes, labour will be more insecure in its current employment. As will capital and land of course: and most especally so will human capital. Very few indeed expect to leave university these days and not have to learn new skills by the time they retire. Price insecurity, that inflation, does aid us in these reallocations: but not once we've got past that 1-3% level. Byt the time we get to 20% and up, the price insecurity is raising that signal to noise ratio in that information that prices are giving us. Thus we find that the allocations of assets that we're making is becoming less efficient as a result of the rise in that noise.

Even what Chang calls "moderate" inflation will, in an economy anywhere near the technological boundary, lead to us simply not having accurate enough information to know what we should be doing next: and that hampers wealth creation. It's worth noting that the economies he uses to show that inflation isn't so bad are those which were, at the time, decidedly not at that technological boundary.

As an analogy let us compare inflation to oil or grease. Chang and I are agreeing that drowning in a vat of hyperinflation is a bad idea, most unpleasant. We're also both agreeing that a little bit of oil greases the operation of the economy. The difference is that he sees the lake of oil on a skidpan as being an exciting experience, one that doesn't limit our speed, I as one where the feedback from the system leaves us all entirely out of control and with no idea where we're going or how to change where we are.

As to increasing economic instability in this neoliberal age: yes, quite. We've got the instability we need and require: the flexibility to deploy productive assets from lower to higher value uses. You know, to aid in making the poor rich.

23 Things We're Telling You About Capitalism V

Our fifth thing is this insistence that free market economists claim that everyone is greedy, therefore untrustworthy. But a market economy wouldn't actually work if this were true. Chang then goes on to point out that there are many more motivations to human action than simple greed: in which statement he is obviously correct. Risking your life to save that of a stranger is clearly not motivated by economic greed.

However, he's rather misrepresenting that free marketeer's insistence upon greed being a motivating force. We do indeed insist that most people are greedy and most people are also lazy. They'd like to have as much as they can (or wish) of whatever it is with the least effort required in getting it. This does not rule out there being other motivating forces of course. But more than that, we're insisting that it is "enlightened self interest". That is, looking at rather more than the immediate future, thinking about reputation in general and so on. All of which is pretty much the standard argument. We'd also try to limit pure self interest to being an economic motivation, perhaps not a general one for the entirety of life.

However, there's something that Chang has entirely missed here and that's the implications of the ultimatum game.

Going back to our examples above, if you, as a taxi driver, want to chase and beat up a runaway customer, you may have to risk getting fined for illegal parking or even having your taxi broken into. But what is the chance of you benefiting from an improved standard of behaviour by that passenger, who you may not meet ever again? It would cost you time and energy to spread the good word about that Turkish garage, but why would you do that if you will probably never visit that part of the world again? So, as a self-seeking individual, you wait for someone foolish enough to spend his time and energy in adminstering private justice to wayward taxi-passengers or honest out-of-the-way garages, rather than paying the costs yourself. However, if everyone were a self-interested individual like you, everyone would do as you do. As a result, no one would reward and punish others for their good and bad behaviour. In other words, those invisible reward/sanction mechanisms that free-market economists say create the optical illusion of morality can exist only because we are not the selfish, amoral agents that these economists say we are.

Which brings us to the ultimatum game. In this, player one is given $100. Told to split it between herself and player two, she can choose any split she likes. $99 for her, $1 for the poor second. Or $50/$50, whatever. Player two gets to decide whether the split stands. If it does then the money is divided as was decided upon by player one. If the second player rejects the split then the money is confiscated and no one gets anything.

The results of this rather astonished the people who first performed it. Once the split starts to look "unfair" (roughly, when it passes through $60/$40 or so) then player two starts to reject it more often. Being entirely rational one should accept any split at all: better to have $1 from an unfair split than no dollars from confiscated money. But that's just not what people do. People will harm their own immediate economic interests in order to punish those they see as acting unfairly.

And it is this very ultimatum game that gives us the answer to whether we're all greedy or not. The answer being, yes, we are: for almost no one at all ever offers a $40/$60 split or better than that. The player one offers always start at 50/50 and get worse. That is, we're greedy in our own motivations and actions if we can get away with it. However, in observing (or having influence over) the actions of others we seem to turn on that fairness switch.

That is, human interaction seems to have within it, as the very basis of how we interact, a mechanism to curb and revise the inherent greediness of others. That willingness to punish our own economic interest to punish those we think are taking a liberty. Now why would have such a mechanism have arisen if it were not true that people are indeed greedy in their own actions? We don't protect the virginity of our daughters because we think it's unnecessary to do so: we protect the virginity of our daughters precisely because we know there's great interest in relieving them of it. The existence of a powerful social force to punish greed insists that greed is prevalent.

You could indeed say that player two's reaction is altruism. But even if you do want to say that it's still altruism from the second actor, not the first. The reaction clearly exists in the first place in order to curb that greed we all expect from player one,. And that's what brings us back to enlightened self interest. Such social interactions are not one time games. Indeed, the way to play the closely related prisoners' dilemma game is tit for tat. That is, if the game is to be played through many iterations. As most social life actually is. We have in our most basic reactions something that curbs that innate greed. Which is a pretty good indication that that greed really does exist in the first place.

An interesting little aside. The ultimatum game has really only been played with rich world students. There are those who wonder (and I'm one of them) whether the results would be the same in every society. I'm willing to agree with Chang that an entirely selfish society would not work well as a market economy. He is saying that because market economies do work therefore we cannot all be selfish. I'm claiming that we know that there's a very powerful force that curbs that selfishness. But the results of the ultimatum game from other societies would be incredibly interesting.

For there's the possibility that in societies that are not functional market ones then that willingness to punish, at one's own economic cost, might not be there. Which would, of course, be further proof that my contention is correct. It isn't that we're not all greedy: it's that in some societies there is a countervailing force. A countervailing force that must be there for markets to work. Or at least, one that we consistently find is not there where markets do not work very well at present.

The bottom line is that we cannot go around claiming that humans aren't, in their own motivations and actions, inherently greedy when we can observe such a powerful social force to curb the greed in the motivations and actions of others. The results of the ultimatum game prove that force exists: therefore people must be inherently greedy.

Vaclav Klaus on privatisation and monetary union

I was lucky enough to be at the 3rd Pembroke College (Cambridge) Annual Adam Smith Lecture. This year we were graced by the presence of Vaclav Klaus, 2nd President of the Czech Republic.  He combined a rich understanding of Classical Liberal theory with decades of practical experience completing reforms at the height of Czech politics. His full speech can be read here, but there were four highlights I particularly enjoyed.

Firstly his 5 point plan for reform:

• open-up the country after half a century of life in a semi-autarkic society
• liberalize prices and foreign trade
• radically deregulate the markets
• privatize the whole economy, not just a particular small segment of it as in the UK;
• de-subsidize the heavily distorted economy and to return it to economic principles.

Secondly his account of the sheer scale of reform:

"We had no private economy at all. I remember repeatedly saying that my hero Margaret Thatcher had to privatize 3 – 4 firms per year, whereas we were forced to privatize 3 – 4 firms per hour…The inefficient visible hand of the bureaucratic communist government was replaced by Adam Smith’s invisible hand of the market."

Thirdly, in response to questions about the Eurozone crisis he drew upon his experience as the last leader to break up a major currency union. He highlighted the relative insignificance of Greece to the Eurozone. It represents roughly just 2% of total GDP. When he broke up the Czechoslovakian currency union as Finance Minister, Slovakia represented around a third of GDP. For Klaus, this was easy. It was an event that passed without crisis, an event he claims few would even remember.

Also on the Eurozone he highlighted the Latin Monetary Union, established in 1865 by France, Belgium and Italy. They were later joined by Spain, Greece, Romania, Bulgaria, Venezuela, Serbia and San Marino. This currency zone collapsed as the governments took on excess debt and debased the currency. There was one particular culprit, Greece, who were temporarily expelled in 1908. Greece decreased the amount of gold in their coins in breach of the currency zone’s rules. Economic turbulence in 20s finished off the flawed Union.

Finally when asked about the correct rate of tax, he gave an answer sure to please many a free-marketeer. He declared that he was no philosopher king who could impose an ideal tax level. Instead, he simply pleaded to see them cut as low as possible. For Klaus, taxes in the UK and Czech Republic are far too high across the board. We should get cutting.

Why is Adam Smith the greatest economist of all time?

George Mason University economists Tyler Cowen and Alex Tabarrok, who run Marginalrevolution, one of the most popular and—in my opinion—best blogs on the internet, have recently made forays into online education. Their latest is on the history of economic thought, looking at great economists from Galileo up until the marginal revolution of the 1870s, tackling questions including "Why is Adam Smith the greatest economist of all time?"

Here is the introduction to their course: