The Pin Factory Blog

Smoking, drinking.... what next? This?

Hello - I’m Yohan Sanmugam and I am starting my two-week internship here at the Adam Smith Institute.

At 18 years old, I have just finished at Westminster School where I studied Maths, Further Maths, Economics, History and Spanish. Fingers crossed for results day, the 14th. In October, I will be starting my degree in Economics at Christ’s College, Cambridge. And after that I don’t know - many have warned me not to sell my soul to the City. But I am torn between that, politics and some sort of civil service job (diplomat, economist).

Outside of my core education, I would say my greatest interest is Politics, which explains why I wanted to work here and understand more about public policy. And after that, The Sopranos.

The philosopher Jamie Whyte has made an excellent documentary for Radio 4 on the current revival of the Austrian school, embedded below. There's no doubt that the Austrians have made a huge comeback since the financial crisis, and prime time exposure on Radio 4 is an big step towards success.

This past week’s UK employment statistics underscored the fundamental economic issue facing the nation: a bloated and still expanding public sector that is smothering and shrinking the private sector. Not only is a thriving private sector essential to curing the medium term problem of the government’s budget deficit but it’s even more critical to the longer term pension funding problem.

The political and chattering classes are now mired in pre-election shuffling of the proverbial deckchairs without credibly fixing the hole below the waterline. It’s a depressing wrangle over yesterday’s problem, even as tomorrow’s are about to overtake events.

Friends of the ASI know what needs to be done and nowhere are the details better collected than in Eamonn Butler’s “The Alternative Manifesto.” Aggressive cuts in income and corporate tax rates, simplification of the tax code, a reversal of mindless regulation, an economically-biased immigration policy and ruthless zero-based government budgeting are what’s needed to grow the private sector.

Failure to get on with it now exposes the UK to the shock of the unexpected and risks missing opportunities of the future.

From booming Asia comes the beginnings of rising inflation. Australia, Malaysia and Vietnam have already raised interest rates while China and India have boosted reserve requirements. Economists expect more dramatic tightening in response to accelerating inflation throughout the region by yearend and weak sterling makes the UK especially vulnerable to imported inflation.

Meanwhile, the eurozone is grappling with its own demons, most immediately the problem of Greek, Spanish, Italian and Portuguese government finances. Fortunately, the UK is out of the euro but it’s still exposed to collateral damage. Already, the usual suspects are eyeing London’s financial centre as the whipping boy for their self-inflicted woes but Gordon Brown’s ultimately inept stewardship of the British economy has left the UK with little credibility to stave off regulatory threats from the continent.

Beyond looming problems, though, the shackled private sector may miss out on some terrific opportunities.

Britain’s well-established petroleum industry should be leading the exciting development of shale gas but the industry’s experience could easily go abroad to friendlier tax and regulatory regimes. Similarly, the government’s disastrous management of public-private partnerships (PPPs) could drive Britain’s otherwise excellent infrastructure engineering firms to where PPPs are better run like Canada, Australia or even France. Elsewhere, Britain could better exploit its potential in arts, media & entertainment, tourism, software development, biotechnology, agriculture and aerospace to name just some if only the private sector could see a just reward for the required investment of time and money.

Sadly, old-fashioned fixations on higher taxes and “tough choices” on spending to cure yesterday’s problem don’t bode well for coping with new problems and opportunities in the future.

Yes, it really is possible to have too much education. Not just in the sense of the absent minded professor either (as the saying goes, the more educated you become you know more and more about less and less until as a senior professor you know everything about nothing).

It is entirely possible for both an individual to have too much education and for a society to be educating too many people too highly:

The oversupply of college graduates started in 1999 when Chinese leaders decided to counter some of the effects of the Asian financial crisis by boosting university enrollments. They had hoped that a generation of well-heeled educated urbanites would boost domestic consumption and help reduce China's dependence on exports. Enrollment rose quickly, from 3% of college-age students in the 1980s to 20% today......Some 6.1 million graduates entered the job market this summer, 540,000 more than last year. In 2008 the employment rate for graduates was less than 70%. This year nearly two million of graduates, many of them postgraduate diploma holders, are expected to be left without job placements......An explosive report released by the Chinese Academy of Social Sciences (CASS) in September said earnings of graduates were now at par and even lower than those of migrant laborers.

That has to be a blow, the highly educated scions of the urban middle classes are valued at less (for their labour at least) than the peasants just in from the fields. Yes, education itself is valuable and life enhancing, but this idea that we should push as many as possible through the universities simply does not make economic sense. Our own experience in the UK is that trying to get 50% of all to have a degree is, well, it's already been reported that an Arts degree for a man is not cost effective, it detracts from lifetime income. It's one thing to say that education is good (as I've said it is, as part of personal development) but this mania that it will be the economic salvation of us is nonsense.

For us to take people out of the workforce for three years, at great expense to both themselves and the taxpayer, simply doesn't work as part of economic development. We are actually destroying value, not building it, by doing so.

As is so often true the American vernacular seems to have recognised this long before the policy makers (how about that for the wisdom of the crowds?). One discussion on the correct form for the plural of Starbuck's barista (baristae? baristas? baristi?) ended with the sage observation that it was in fact "liberal arts graduates".

As an economist Billy Bragg's a great singer. Commenting on the 25th anniversary of the miners' strike he asks:

Is there anybody out there willing to stand up – on this, of all days – and raise a toast to the wilful destruction of our manufacturing industry and its replacement by the financial services sector?

The first question has to be whether there has been a destruction of our manufacturing industry, whether wilful or not. Looking at the index of production, we see that it stood at 75.9 in 1984 and at 97.9 in 2008. A rise in output of some 29 % really doesn't sound like "destruction" to me. In fact, claiming that manufacturing has been destroyed would lead me to accusing you of being ignorant of the facts.

What has actually been happening is that the production process in manufacturing has been getting ever more efficient, productive, in its use of labour. Thus production can rise but the labour used to create it falls: what is really being complained about is the loss of manufacturing jobs, not the despoilation of the manufacturing sector itself.

And this is where I might accuse people of being ignorant of theory. For in reality we're absolutely delighted that we need to use less labour to get the physical goods we desire. That labour, newly freed up, can go off and do other things. Yes, work in financial services, or perhaps care for the rising number of elderly or even go and build more darn windmills.

As Paul Krugman has pointed out, productivity isn't everything but in the long run it's almost everything. Me, rather than drinking to the destruction of it, I'll raise a toast to the increasing productivity of manufacturing. It's one of the things making us all ever richer.

I'm always slightly shocked by how those in favour of a big state are shocked by how a big state operates. Take the Marxist (or perhaps Marxian is more accurate) Professor Wolff, writing in The Guardian:

The so-called economic "recovery" since mid-2009 was chiefly hype, a veneer of good news to disguise and minimise the awful underlying economic realities. The few (large corporations and the rich) who bear much of the responsibility for the crisis made sure that the government they finance used massive amounts of public money to support a recovery for them. The mass of the population was excluded from the government-financed recovery for the few.

But why would anyone expect anything else? Large government has a large ability to determine who does and who does not make money. Large government will therefore be infested by those trying to use large government to make money. We've various names and phrases for this, Smith's "businessmen seldom gather together" is part of it, we might talk of regulatory capture and the interaction with public choice economics or we might just quote PJ O'Rourke: when legislators decide what can be bought and sold the first thing to be bought and sold will be legislators.

There really is no great mystery to this. When fortunes can be lost and made by the twitch of a legislators' or regulators' pen then fortunes will be spent on influencing the twitching. And there's no way out of this either: except that one true path, the classically liberal one.

A government large enough to do the things which absolutely must be done by government but one that's not large enough to do any of the things that don't have to be done by government. If no one's going to make any money out of changing the rules no one's going to spend money to do so.

We might of course hope for rule by sea-green incorruptibles but after the drugs have worn off we all really know what the only possible solution is. A government that's small enough that it's not worth bothering trying to buy.

Stolen Borrowed from Brad DeLong:

As the professor points out, the countries are matched as to rough starting point before the communist armies marched, matched roughly as to culture and so on, and yet after that series of communist experiments we see the same result everywhere. The reason?

Karl Marx, you see, completely missed the utility of markets as devices for providing decision makers with proper incentives and for achieving allocative efficiency. (Why he missed this is, I think, a result of his crazy metaphysics of value, but I won't go there today.) He saw markets only as surplus extraction devices--ways to quickly and fully separate the powerless from the value that they had created and that ought to have been theirs.

So when the Communists took over, they followed Marx and said: "we don't want no stinking markets in our economies." This naturally raised the question of how they were then to coordinate economic activity. And they hit on the clever plan of attempting to reproduce the Rathenau-Ludendorff Imperial German war economy of World War I. And they did so.

We really do want markets in everything. We might want to compensate, after the fact, for some of their effects, we might insist upon care being provided to those who cannot cope with them but we really would like markets to be the basis of resource allocation. Yes, even in education and medicine.

Please note, this is absolutely nothing at all to do with capitalism, with what should be the level of redistribution in the society, what top tax rates should be nor even patriarchy, the oppression of women or the Rape of Gaia.

Use markets first foremost and always, then clean up the bits of the results we don't like afterwards: absolutely not the other way around, not using markets because we fear we won't like some of the results.

From Mikhail Gorbachov's memoirs:

The costs of labour, fuel, and raw material per unit of production were two to two and a half times higher than the developed countries, while in agriculture they were ten times higher. We produced more coal, oil, metals, cement and other materials (except for synthetics) than the Unmited States, but our end product was less than half that of the USA.

And that is, note, valuing Soviet production the way the Soviets did: way, waaay, too highly.

This is what the absence of markets does to you over 70 years of compounding. Or of not compounding if you prefer, talking about the small but continual improvements in efficiency markets bring us each and every year.

We can get all theoretical about this, invoke Hayek and insist that knowledge is local and that the centre can never plan in sufficient detail to make those little incremental steps which so contribute to that increased efficiency. We can get all empirical and simply note what did in fact happen in those economies without markets. We can even get all bolshie and simply insist that we'll do things our way, as free people, rather than being automatons programmed by the Man in Whitehall.

But the takeaway argument is that we really do want markets in everything. Yes, in education, higher education and even in health care. We might well want to have "markets light", with State financing, we might well desire (I certainly do) a welfare safety net underneath it all, but we really do want those markets so that we get, as we did over the last century, that ever increasing efficiency of production.

You know, efficiency, that essential and basic desire of lazy and greedy human beings everwhere: the most we can get out of what's available.

No, I've not read Tony's maunderings and no, I'm not going to. However, there is one interesting little story that's emerged:

The former Prime Minister describes how he supported pension reforms proposed by Adair Turner but these were opposed by the Chancellor of the Exchequer at that time. Lord Turner recommended raising the State pension age and restoring some linkage with earnings – both changes now planned by the Coalition Government – but Mr Brown was thought to be against these reforms. Now we know just how much so.

Mr Blair’s book ‘A Journey’ says: “We had been having a huge set-to about Adair Turner’s pension proposals. John Hutton (the pensions secretary) and I both thought them right but Gordon disagreed.

“He was in a venomous mood and I can truthfully say it was the ugliest meeting we had ever had…the temperature which was already below freezing point went Arctic.”

Mr Blair goes on to relate how Mr Brown threatened to call for an inquiry into allegations that wealthy friends of the Prime Minister had gained seats in the House of Lords after making donations to the Labour Party. Mr Blair claims Mr Brown said he would expose what became known as the ‘cash for honours’ scandal unless Lord Turner’s proposals were dropped.

Government is needed because there really are some collective action problems that cannot be solved without the existence of government (sorry anarchists!). But that does not mean that all of the problems of the world are amenable to government action and that we thus require a government so large as to try and solve all such problems.

For, as we can see, those who actually make up government do not in fact attempt to solve those problems. They're far too much like the rest of us fallible human beings, willing to snit and scrabble for short term advantage for themselves while ignoring the large scale and long term problems.

No, I don't say this was unique to Brown: James Buchanan received the Nobel for pointing out that all politicians, all bureaucrats, are susceptible to exactly the same urges. They are, after all, just people and people everywhere react to incentives.

All of which leads us to he conclusion that while we do require government to solve those problems that only government can solve we really don't want them doing anything at all other than what only government can do.

For the rest of it we'll make our own mistakes thanks very much.