Moral and responsible capitalism

Let's face it: capitalism is a lot more moral and responsible than politics. Many people think capitalism can never be moral because it's rooted in self-interest. But that confuses self-interest with greed. Self-interest is natural and indeed essential: none of us would survive long if we neglected our own needs. Equally, nobody survives long in business if they get a reputation for being greedy.

Politicians pursue their party interests by doing down others, but capitalists can serve their own interests only by serving other people's. If they deliver excellent products, services and value to customers, they will prosper. If they deliver bad value, they will fall to the competition.

Where politics creates conflict, capitalism creates peaceful cooperation on an international scale. Creating the simplest product involves thousands of people. A cotton T-shirt, for example, requires the work and collaboration of farmers, truckers, designers, machine-makers, weavers, dyers, packagers, exporters, retailers and many others from all over the world. Each contributes their effort willingly, for the reward it bring them; and their efforts are coordinated by the market to produce benefits for us all.

Some people imagine that capitalism creates conflict, citing the tension between buyers and sellers. But when things are decided politically, the conflict is far greater. Capitalism produces a wide variety of goods, serving the diverse needs and tastes of the public; political decisions are all or nothing, delivering only what the majority choose.

Capitalism reduces conflict, but is it fair? People often complain that nurses are paid just a fraction of what a premier league footballer earns. But this is simply the result of voluntary choices. Very few people have the talent to play in the premier league, and millions of people are willing to pay handsomely to watch them do so. Many people could become nurses, but they can care for only a few people at a time. Those factors create a disparity in pay; but nobody has acted unjustly.

And even with such obvious difference, capitalist societies are actually more equal, more prosperous, and happier than others. Inequalities are greatest where power, not money, is what counts. And there is more social mobility and opportunity in capitalist societies. In politically dominated society, your success depends on you being a member of the right party, or race, or family.

People in businesses, large or small, are no different from anyone else. Some are upright, virtuous characters, and some are not. But capitalism pushes them in the direction of virtue. If markets are open and competitive, producers can survive only by producing good value for others; anything less and they will quickly lose customers to other producers. And what is it that reduces market competition and openness? Things like government regulations that raise barriers to entry or dictate how people should run their business, or taxes that distort investment decisions or whittle away the incentive to profit by serving others. Capitalism is perfectly moral and responsible, if only politicians let it be.

Eamonn Butler is author of The Best Book on the Market.


Why I hate being a libertarian

For as long as I can remember I have believed that decisions should be made at the lowest level possible. When I was younger, I used this thinking to justify the existence of supranational organisations such as the EU and a whole host of government regulations that to my older, but still young, eyes now seem to be ridiculous. Many of my conclusions have changed over the last fifteen years but my core ideology remains the same. It's just that now I see that the lowest level possible is often the individual.

Voltaire is often misquoted as having said, “I disapprove of what you say, but I will defend to the death your right to say it.” I often find it odd the way this quotation is used. Should it not be followed with “and if you're a sexist, racist or homophobic I will use the same right to follow you around and ridicule you at every opportunity”? I have come to take a broadly similar attitude to actions, at least those which do not involve the use of either force or deception, though I probably would not go quite
a far as Voltaire in defending them to the death. Unfortunately one of the logical conclusions of my ideology is that when one sees injustice which involves neither force nor deception, I can't utter phrases such as “someone should put them away” or “there should be a law against that.” This is why I hate being a libertarian.

Yesterday there was quite a twitter storm over a user who goes by the alias @badlydrawnroy. His twitter feed describes how he has been feeling depressed of late and after taking some advice from the twittersphere decided to tell his employers about his predicament. Unfortunately it transpires that his employer is about as unenlightened as the mouldy cheese inside my fridge when the door is closed, and her response appears to have been to summarily dismiss him for being ill.

There is no denying that if, as I would prefer, employers did not pay your sick leave, maternity leave and holidays to you when they became due but instead put money into an account which was entirely under the employees control for the expected cost, this would be much less of an issue. Particularly since this would lead to a situation where employers would be paying all employees for their actual work done and insurance companies and private providers would be the ones taking all the risks. However, the fact remains that an employer has decided to sack a man for having depression. While in an ideal world I wouldn't want the government to intervene, I do disapprove.

The worst thing, in my opinion, is that this is exactly the reason why our country is so completely drowned in red tape. It's because when many people hear stories like this they get angry and demand that 'something must be done'. Politicians who like to be seen to be doing something then cobble together some atrociously-worded legislation which increases the burden on small businesses making themless inclined to be flexible and continuing the drowning spiral.

Therefore I find myself wanting to cry out that 'something must be done' and hating that, as I am a libertarian, it would make me a hypocrite. Then I recall that there is an option open to me. I can choose to boycott this company and use my free speech to encourage others to do so also. Therefore, if you agree with me that sacking a person for being ill, without having first tried to make the situation work either by offering them the option to go part time, with a proportionate cut in pay, or at the very least statutory sick pay (which would cost an employer little), is totally unacceptable, then I encourage you to boycott this company until either it reinstate Roy or goes bust. Of course, if you don't agree with me you're free to continue purchasing their goods and services. That's the voluntary way.


What Queen Elizabeth I's silk stockings tell us about inequality

Inequality drives civilisation.  Unequal distribution of income indicates which behaviour needs to be copied to prosper, and which doesn’t.  If you stay in bed you earn nothing; if you get on your bike to work you do: the unequal income incentivises behaviour which will create growth and prosperity from which ultimately the whole of society benefits. 

Inequality does not only benefit everybody with regards to income – but also in spending patterns.  Wealthy individuals will typically buy luxury goods while they are still exclusive.  Spurred on by the high income, manufacturers will produce more – and this leads to those previously exclusive goods becoming cheaply available to all.  Silk stockings once were a luxury which only Queen Elizabeth I and the richest in the land could afford – now everybody can buy them for £28.95.

What is important is that everyone should have enough food to eat, clothes, and a roof above one’s head – not whether or not your neighbour drives a Rolls Royce or just a bicycle.  It is perfectly possible to  have a reduction in inequality through high taxes for the rich, while seeing an increase in absolute poverty at the same time.

Inequality as indicated by the Gini Coefficient therefore misses the point completely.  Poverty is absolute, not relative.  Read more in our report, Does Inequality Matter.

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The fiasco of state financial regulation

In August 2010, the Institute of Economic Affairs published a monograph “Does Britain need a Financial Regulator?” .Written by Professor Philip Booth and myself, with a particular focus on Stock Exchanges around the world, our conclusion was no, it does not. 

Within days of publication we were vilified by several commentators, including a barrage from readers of my blog article on the website of Conservative Home.

Given the subsequent performance of the Financial Services Authority in several areas perhaps we can now hope for a little more support.  Take, for example, the fiasco of the FSA report on the demise of the Royal Bank of Scotland (the latest trick being the appointment of the insider Sir David Walker), or the FSA veto (yes, veto) of a proposal to put all RBS directors up for re-election, thus ensuring that Sir Fred Goodwin stayed for another six months and a doubling of his pension.  Or take the FSA’s own almost unbelievable empire building, supported by the government and heavily driven by levying unlimited fines of its own choosing. Or its clampdown on communications between journalists and their city contacts.  And, of course, its complete failure to foresee the financial crisis because of its total lack of nous. (I have kept an interesting e-mail exchange between myself and Hector Sants on this but that had better stay private.)

Financial entities and in particular Stock Exchanges, would be far better left to their own devices – as they once were, making their own rules which had to attract both corporate listings on the one hand and buyers and sellers on the other, thus leading to a race to the top; emphatically not a race to the bottom which State regulators everywhere would have us believe.

As an example of possible rules for a private Stock Exchange, take the contentious case of insider trading.  There is no reason why such a feature should be a criminal offence. As the US lawyer Richard Epstein wrote, “for a company to legitimize insider trading all it needs is a provision in its charter saying “if you want to deal in shares with this company, please understand that every employee and every director is entitled to trade on insider information to their heart’s content.  If you do not want to trade with us you are free to buy shares in our competitor which does not allow that option”2.

I can just imagine Lord Turner shouting the odds here; “Make insider trading a matter for contracts between the company and its investors? You must be joking. You’ll be suggesting that companies have control over their Memorandum and Articles next!”

In fact the criminality lies with the regulator. There are clear reasons why insider trading would often be helpful; under free markets, there is a raft of devices which would enable shareholders to control insiders. Not the least of these is a thriving takeover market. It is all of a piece that the FSA looks upon such a market as necessarily hostile. In the majority of cases any hostility is directed at incompetent management, where a takeover would enable shareholders to dismiss the incumbents in favour of a new and better management. In other words the FSA protects incompetence at the expense of shareholders.

Another incontrovertible point is that an insider not trading may be just as important a signal as trading, but naturally it can’t be spotted!

The activities of successful speculators in short-selling have many similarities to insider trading. In both cases the essential point is that such activities get market prices nearer to where they should be faster, so that those profiting, far from making a quick buck at the expense of others, are effectively sharing their knowledge with the rest of the world. It is the unsuccessful speculators and insiders that we should worry about, but fortunately they don’t last long!

It is true that for the present the FSA has nothing on the USA’s Securities and Exchange Commission. Formed in the early 1930s, it is even more scary, and the IEA monograph referred to herein highlights some dreadful abuses of power. For example, our research suggests strongly that at least two of the most notorious jailed insider-dealers (Martha Stewart and Kenneth Lay) were not guilty even as charged. But that’s cold comfort at best for those of us on this side of the pond.


Why Wikipedia is doing the right thing on SOPA and PIPA

Today, with the closure of one of the internet's richest resources. the English-speaking world stands greatly impoverished. In protest against two proposed bills in the U.S. House of Representatives and Senate (the 'Stop Online Piracy Act' (SOPA) and the 'Protect IP Act' (PIPA) respectively), the English-language version of Wikipedia has taken itself offline for 24 hours. [That includes the Wikipedia links in this post, lest ye take the open internet for granted — ed.]

The provisions put forward in SOPA and PIPA enable the closing down and harassment of websites (not even necessarily located in the US) on the flimsiest of pretences: government censorship masquerading as copyright protection. But what exactly makes the laws so odious? There are four key, objectionable provisions, all of which are ripe for manipulation by rent-seeking parties (summarised from this link):

1. The Anti-Circumvention Provision, allowing the US government to close sites who offer advise on merely circumventing censorship mechanisms;
2. The “Vigilante” Provision, which would grant immunity from prosecution to internet service providers who pre-emptively block potentially offending sites, leaving them inherently vulnerable to pressures from a host of interested parties;
3. The Corporate Right of Action, enabling copyright holders to obtain an unopposed court order which would cut off foreign websites from payment processors and advertisers;
4. Expanded Attorney General Powers: therein giving the Attorney General the power to block any domain name and have their results barred from search engines: they would effectively cease to exist.

You don't need to be a rabid libertarian to realise both SOPA and PIPA are anathema to a society which readily proclaims its commitment to spreading liberal democracy; an integral part of which is the freedom of expression. After all, western nations have waged war purportedly in support of 'freedom' and regularly (this time rightly) criticise those nations which continually suppress freedom of expression online.

On their own turf however, governments seem evermore reluctant to allow the internet to remain the vital bastion of freedom that it is. Away from the stifling proclamations of state broadcasters and the mass media, the internet has revolutionised Joe Bloggs's ability to think independently: little wonder it is increasingly browbeaten from governments worldwide.

Economic consequences must considered too. If a website is to avoid being picked-off by the keen-eyed legal-sharpshooters that would undoubtedly thrive with the passing of these laws, they would have to employ an army of workers to constantly micromanage their site's content: one slip-up and it's potentially 'Game Over'. Who would want to invest in company stifled in a quagmire of draconian legislation, able to be shut down with the hit of 'Enter'? The internet's position as a motor of modern innovation would be seriously jeopardised.

Despite the promising words coming from the White House that freedom of speech and expression will be upheld, scepticism about Obama's commitment to liberty is well grounded: less than three weeks ago the 'National Defense Authorization Act' was passed, enabling the indefinite detention of almost anybody the US government sees fit – an unsettling omen.

Albeit not alone, the world's most powerful nation is walking down an increasingly questionable path. The internet is one of history's most momentous inventions: its fate is far, far too important to be left for politicians to decide.

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Campus smoking bans are naked authoritarianism

When a Guardian journalist attended an Adam Smith Institute event in October, he came away convinced that libertarians are “obsessed” with smoking. This, of course, is an outrageous slur (everybody knows libertarians are obsessed with guns and drugs), but how can freedom-minded individuals not take an interest in the naked authoritarianism of the anti-smoking lobby in 2012? Take events on US college campuses, for example:

Looking for the designated smoking area at Florida International University? There is none.

Want to light a cigarette inside your car at the University of Florida? Don’t let let the cops see you.

Hoping to smoke during your break at Nova Southeastern University? You have six months left until NSU becomes the latest college to go tobacco-free. Come July 1, the covered smoking benches will come down and smoke-free-campus signs will go up.

This is part of a growing trend towards ‘smokefree’ campuses, of which there are more than 600 in the Land of the Free. And by smokefree they mean no smoking anywhere inside or outside: not in the grounds, not on the pavement, not in the fields, not even in your own car.

But isn’t a car, y’know, private property? Nova Southeastern University’s ‘director of campus recreation’ has an answer for that:

"We don't want your car to be a safe haven, where you do any activity you want as long as you're in your car."

Heaven forbid there should a safe haven, especially for legal activities...

Meanwhile, Californians have done what Californians always do and taken the lunacy a step further. The University of California, San Francisco has not only banned smoking across its entire grounds and student digs, but also banned students and staff from carrying any form of tobacco. Taking the paternalism to absurd lengths, it has also banned people from using and carrying e-cigarettes—a battery-powered, tobacco-free nicotine delivery system with no known health risks. The only nicotine products permitted on site are those made by the pharmaceutical industry, which just so happens to give lavish donations to anti-smoking groups around the world, including our very own Action on Smoking and Health.

The other nine University of California campuses have promised to follow San Francisco’s lead by 2014 and, if history is any guide, it is only a matter of time before the UK does likewise. What is remarkable about this new phase of the anti-smoking crusade is how effortlessly it has shifted from a position of “we must protect nonsmokers” to “this is for your own good”. Say what you like about smoking ban in Britain, but at least campaigners made an attempt to appeal to John Stuart Mill’s harm principle. No longer. None of the universities have pretended that smoking outdoors is a threat to passers-by, just as the British Medical Association does not pretend that smoking alone in one’s own car has implications for nonsmokers, but all they demanded a ban all the same.

Velvet glove, meet iron fist. Trampling on property rights; paternalism run riot; the tyranny of the majority—why would libertarians not be interested in this?

(Hat tip to Dr Michael Siegel, who wages a lonely war against cant and junk science from within the the anti-smoking movement)


Five books on Austrian economics

At The Browser's excellent FiveBooks page, Austrian school economist Peter Boettke recommends five books to read to understand the Austrian school of economics:

1) Human Action — Ludwig von Mises

2) Individualism and Economic Order — FA Hayek

3) Calculation and Coordination — Peter Boettke

4) The Invisible Hook — Peter Leeson

5) After War — Chris Coyne

It's a good list, mixing the pillars of twentieth century Austrianism, Mises and Hayek, with works that reflect contemporary scholarship being done in the Austrian tradition. The last two books are especially interesting — Leeson's work on informal legal systems led him to studying pirates and the mechanisms they used to keep some semblance of order in a stateless environment. Coyne's work looks at the political economy of "exporting democracy" — that is, trying to build liberal democratic institutions where they do not exist in countries like Iraq and Afghanistan. I think it's fascinating how academics like Coyne and Leeson are using the Austrian framework to branch into different areas of the humanities, and a nice countertrend to the silly overspecialization that is taking place in many other parts of academia. Little needs to be said about the first two, although it's interesting to note the vastly different approaches taken by the system-building, hedgehog-like Mises and the eclectic, fox-like Hayek.

On the Austrian school itself, Boettke has a lot interesting to say. His closing comment is interesting:

Most standard economics assumes that the relationships we are trying to understand can be captured by a continuous function that’s smooth and twice differentiable. What the Austrian analytics suggests is that life is not actually a continuous and smooth function that’s twice differentiable, but instead a lumpy function, a discrete function, in which there are all kinds of difficulties in the ability for us to model them the way our standard approach does. So, instead, what we engage in is discursive reasoning. You use the logic of economic action, the logic of choice, you worry about opportunity cost and presume individuals are doing the best that they can, given their situation. But notice, even in that phrase, you have to spend a lot of time specifying what that situation is. That situation is full of historical context and institutional details. A lot of your story is made up of the specification of the context in which economics decisions are made.

I'm annoyed by the superficial empiricism that people often apply to economics in policy. The world isn't a laboratory where things can be controlled to isolate a single variable, and it's telling that the biggest data point we have for deep recessions (America's Great Depression) has inspired a handful of contradictory "remedies" for recession. A dose of Austrian economics, with its realism about the limits of human knowledge and wariness of scientism, would be a nice change from the silly inductive reasoning that dominates policy discussions today.

The cost of the War on Drugs

Marking Martin Luther King day in the US yesterday, Russell Simmons and Dylan Ratigan have an article on the Huffington Post on the new government persecution of blacks – the War on Drugs. I’m not entirely convinced by the article’s thesis about business support for the Drug War, but the statistics it gives are startling:

• Since 1971, there have been more than 40 million arrests for drug-related offenses. Even though blacks and whites have similar levels of drug use, blacks are ten times as likely to be incarcerated for drug crimes.
• There are more blacks under correctional control today -- in prison or jail, on probation or parole -- than were enslaved in 1850, a decade before the Civil War began.
• As of 2004, more African American men were disenfranchised (due to felon disenfranchisement laws) than in 1870, the year the Fifteenth Amendment was ratified prohibiting laws that explicitly deny the right to vote on the basis of race.
• In 2005, 4 out of 5 drug arrests were for possession not trafficking, and 80% of the increase in drug arrests in the 1990s was for marijuana.
• There are 50,000 arrests for low-level pot possession a year in New York City, representing one out of every seven cases that turn up in criminal courts. Most of these arrested are black and hispanic men.

Fifty years after the end of segregation, black Americans have the highest rates of poverty and, by far, the highest rates of incarceration for drug-related crimes. America’s prisons are violent, gang-infested hell-holes. It isn’t surprising that many young men imprisoned for the “crime” of getting high become sucked into much worse. That these young men are usually black helps to explain why poverty, family breakdown and crime are so endemic in black communities there, and why their situation is so desperate and stagnant compared to other racial minorities. And by making conventional narcotics more expensive, drug prohibitions are also probably to blame for the rise of highly potent new drugs like crack and crystal meth, a depressing example of unintended consequences of government legislation.

Tom has written about the horrendous impact of the Drug War on Latin America, but statistics like those above show how bad it is for the US as well. Just as many people once turned a blind eye to the evils of slavery and segregation, today many otherwise-decent people are ignoring the consequences of drug prohibition. That has to change.


The virtues of John Lewis-style businesses

UK Deputy Prime Minister Nick Clegg has argued that firms should get tax breaks to encourage them to structure like Britain's successful John Lewis department store chain. Basically, the staff in John Lewis stores are not employees so much as partners – they all have a stake in the success of the business. And this is what Nick Clegg wants to encourage.

Up to a point, I agree. Back in 1989, the Adam Smith Institute did a report, Incentive Through Ownership by the entrepreneur Michael G Bell, arguing the case for just such arrangements in business. They make sense particularly in 'people' businesses, where making profits hinges wholly or mainly on the talents of the staff. Where people are a business's main asset, it makes sense not just to reward them with bonuses for exceptional effort, but to cut them in for a share of the business themselves. That gives them an asset they can trade and use, a stake in the business and in the country.

So these arrangements can be valuable, but are not for everyone. Businesses where the individual workers are less important than the land or capital that is employed have little scope to use such schemes, and might well not benefit much from installing them. And the other point I would make is that the tax system ought to be neutral It should not be used to promote one kind of business arrangement that particular politicians happen to favour, over any other. Sure, there may be other factors – such as other parts of the tax code or other regulations – that skew the way businesses are put together, and then there might be a case for using the tax system to restore the balance. But generally it's better to restore the balance by not having the distorting taxes and regulations in the first place.

Having said all that, our report Incentive Through Ownership made a strong case for the virtues of employee share ownership, and the evidence it produced in support was overwhelming, as it continues to be. In politics, good ideas usually come out in the end, though it can take a lot of time. In this case, over twenty years, which is about average in fact.

I wonder whether firms based on partnerships may benefit, not just from the incentive effect of share ownership, but from a possible reduction in employment regulation. Hire a single employee and you are immediately drenched in a mountain of tax law and employment regulation. That's why many people don't. Take on a self- employed colleague and things are different. So it is quite possible that, if such partnerships took off, so would growth.

Just don't tell Her Majesty's Revenue and Customs, which has campaigned for years to stamp out self-employment. Nothing irritates it more than people who don't fit its standard tick boxes, and whom it can't simply capture money from every month through their firm's finance department. If it came to a contest between Clegg and HMRC, that would be messy indeed.


The anachronism of public service broadcasting

In last week’s Spectator, Charles Moore bemoaned the dumbing down of BBC Radio 3. In this week’s issue, several letters to the editor make the same point. Now, you may dismiss this as the snobbery of classical music afficionados. Or you might agree that Radio 3 presenters are indeed ruining the listening experience by telling you how you should feel about particular pieces of music (e.g. “blown away”) and entreating you to to email, text or tweet about what you are hearing. Frankly, I’m too much of a musical moron to have an opinion on the subject.

What this story really highlights is the futility of compulsorily funded “public service broadcasting”. The point of public service broadcasting is, one would assume, to address some failure in the broadcast market – to produce and air content which benefits the public, and which would not otherwise be produced or aired by commercial players. But if you buy this market failure argument, you have to concede that ‘public service broadcasting’ is likely to be a fairly elitist project. The intention may be to bring high culture to the masses, but in reality you will probably end up subsidising the tastes of the relatively wealthy and well educated with a tax paid largely by those who have no interest in such things. This is clearly a rather perverse outcome.

On the other hand, if you “dumb-down”, if you chase market share with populist programming, then the rationale for compulsorily funded public service broadcasting disappears.  By way of illustration, let’s look at tonight’s broadcast schedule for the BBC 3 TV channel.

At 7pm, we get Pop’s Greatest Dance Crazes, “a top 50 countdown of the hippest, sexiest, quirkiest and campest dance crazes of the last 40 years.” At 8pm, it’s Don’t Tell the Bride, a reality TV show in which a man gets £12,000 to arrange his wedding, but isn’t allowed any contact with his wife-to-be while he does it: “Four weeks apart will push their relationship to the limit.” At 9pm, it’s How Sex Works, which is a documentary about twenty-somethings who get around a bit. At 10pm, it is time for Eastenders (a miserable soap opera), followed by documentary Bizarre Crimes (self-explanatory), and a series of cartoons imported from the US. If you are lucky enough to still be awake at 4.25am, you get to watch Cherry Healey look for “essential truths amongst the tales of sex and debauchery to see if losing your virginity is about more than just having sex for the first time.”

Can anyone really argue that programming like that justifies forcing television-owners, on pain of imprisonment, to pay £145.50 a year to a government agency? It’s a rhetorical question.

Public service broadcasting is caught between a rock and a hard place. If it sticks to its ‘market failure’ remit it will appear elitist and lose public support. If it chases a larger market, it will undermine any reasonable case for public funding. Ultimately, public service broadcasting and the licence fee that sustains it are an anachronism – something which might (just) have been appropriate when we had two TV channels and limited broadcasting spectrum, but no longer make sense in a world of thousand-channel satellite television and high-speed internet streaming. With almost limitless choice available at the click of a button, we don’t need government to entertain us, inform us, or filter our cultural diets for us. Curiously enough, the way that technology has democratized the media means that democracy itself no longer has any valuable role in broadcasting. It’s time the BBC and the government realized that.