In a society of saints

On Sunday, Eamonn reviewed Tom Palmer's new book, The Morality of Capitalism. Summarising one chapter, Dr. Butler explained that

The Chinese economist Mao Yushi [presents] an interesting paradox. If we were all completely benevolent – looking out for the interests of other people rather than ourselves – we would have just as much conflict as capitalism is said to give us. We would be fighting shopkeepers to charge us more and reduce their quality. The arguments would be just as red in tooth and claw, but the incentives would all be to reduce value rather than to create and increase it, as capitalism does.

Perhaps. But managing conflicting priorities is not the only reason that we need a capitalist system; nor does the existence of a conflict in a community motivated by other-interest suffice to justify capitalism. A deeper understanding of the role of markets is required. As Samuel Brittan noted 13 years ago,

An economic system has at least five functions

1. co-ordinate the activity of millions of individuals, households and firms;
2. obtain information about people’s desires, tastes and preferences;
3. decide which productive techniques to use;
4. promote new ideas, tastes and activities which people would not have thought of without entrepreneurial initiative;
5. create incentives for people to act on such information.

Only the fifth, incentive, function of markets could be abandoned in a community of saints. The others would still be required for the saints to know how best to serve their fellows.

And as Friedrich Hayek taught us, the role of markets is to co-ordinate the vast and diffuse knowledge that is scattered in the minds of multitudes of economic actors. In Dr. Mark Pennington's synopsis:

Even in a world of perfect altruism, therefore, public-spirited planners could not obtain the information to engage in a process of conscious social planning owing to the cognitive limits of the human mind. In the market economy, by contrast, each entrepreneurial decision actively creates new knowledge... As the behaviour of the successful is emulated, more knowledge is produced and spreads throughout the market in a snowballing process, the results of which could never have been given to a group of minds attempting to simulate this process [deliberately]...

Rather than focussing on people’s motives for economic action, those who look to make the world a better place would be better placed focussing on results. What market-based systems offer us is not a more, or less, moral world but one that enables us to maximise the wellbeing of participants, both through providing the right incentives to economic actors and through maximising the efficient allocation of productive resources. To put it in the vernacular of philosophers, it may not be deontologically more moral, but it is more moral teleologically.

To close with a thought from Adam Smith:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.


A tax on death

Madsen has a piece in City AM today, on the benefits of getting rid of inheritance tax:

Perversely, inheritance tax rewards spending rather than saving. The spender enjoys 100 per cent of value, whereas the saver is allowed only 60 per cent. The incentive is to dissipate the pool of capital rather than preserve it. Some unincorporated businesses that could continue as going concerns under family stewardship are sold and dissipated. Other businesses guard against this by ceasing to be entrepreneurial and growing, diverting energies instead into ways of minimising their exposure to inheritance tax rather than into expanding their activity and their markets.

The tax’s adverse effects on entrepreneurship go much further than discouraging parents from building up and passing on businesses. Several studies have shown that ordinary bequests boost self-employment. They provide capital sums to children at just the time when some contemplate branching out from paid employment into their own business. The bequest makes it possible, and by taxing bequests we are inhibiting future self-employment and the new businesses it would bring.

Read the whole thing.


Seven billion cheers for humanity!


According to the UN, some time next week the world's population will reach seven billion. Many will see this as a bad thing. But I think we should be cheering for joy. Seven billion mouths to feed also means seven billion brains – and it's brainpower that is the key to human flourishing.

The worriers take the Malthusian view of population. Thomas Malthus famously predicted that population growth would create a relentlessly poorer world, as population growth was geometric (2, 4, 8, 16, 32...) whereas technological advancement is only arithmetic (2, 3, 4, 5, 6...). Population would grow faster than farming technology could support it. What Malthus didn't realize was that technology and wealth are linked to population: the more people there are, the more brains there are. The more brains, the more ideas. And ideas are infinitely reproducable. Unlike economic goods, my posession of an idea doesn't deprive anybody else of possessing that idea as well. 

Thus, one brilliant idea can improve an infinite number of lives. The most important of the last fifty years from a Malthusian point of view was Norman Borlaug, father of the "green revolution" that brought high-yield, disease-resistant strains of wheat to the poorest countries in the world. But there are plenty of others – two recently deceased ideas-generators are Steve Jobs and Dennis Ritchie (inventor of the C programming language). The ideas they came up with would be just as useful in a population of seven million as seven billion. The same goes for artists: a piece of music is just as beautiful listened to by seven people as seven billion.

But won't these extra people, born disproportionately to the world's poorest families, just hold others back? Another potential Steve Jobs is fine in California, you might say, but not Calcutta. Alas, more babies really are a burden to poor families. But, crucially, this isn't the cause of their poverty – there are plenty of poor countries that have very low birth rates, like Russia. The cause of poverty in the developing world isn't lots of babies, but bad government. The most famous example of famine in the last few decades was the Ethiopian catastrophe during the 1980s; a direct consequence of a war against the people by Ethiopia's communist government. Other, even more dreadful famines of the 20th Century – such as the Ukrainian Holodomor of the 1930s and the Great Chinese Famine of 1958–61 – were caused by incompetent or wicked states, not a natural lack of food.

Poverty today has similar roots: it's very hard to find a poor country with a good government. Where there is poverty and famine today, it's a consequence of bad government, not a Malthusian food shortage. And this also presents an opportunity for tremendous improvements in the lives of all humans: if, somehow, those bad governments can be improved, a billion brains are waiting to be unlocked. Having lots of people isn't an obstacle to more human flourishing. On the contrary: it's the best way we can achieve it.


What to renegotiate with the EU

The present turmoil in the EU and the eurozone gives an opportunity for Britain to renegotiate its involvement in the EU. There is a strong chance that the eurozone countries might move towards much closer fiscal union with EU-imposed common taxation and a European Economics Ministry to harmonize and oversee EU budgets. Obviously Britain cannot be part of this, and should therefore consider just what are the key elements to seek in its future relationship. Four priorities suggest themselves – especially if the government is serious about renegotiation as it opposes today's Commons vote on an EU referendum.

Firstly the UK must no longer participate in the Common Agricultural Policy. It raises food prices in Europe and limits the ability of poorer countries to sell their produce. It cost €42.8bn last year, consuming 31% of the EU budget. Britain should neither participate in it nor pay for it. This would save a significant part of the £14.6bn which the UK pays out annually to the EU.

The UK should no longer be part of the Common Fisheries Policy. This cost the UK some £3.3bn in lost catches and threatens our fish stocks by massive over-fishing in our waters.

Thirdly, the Acquis Communautaire should no longer apply in the UK. This is the body of past European regulations, now some 80,000 pages long, by which European bureaucrats seek to control the minutiae of life and business in the UK.

Our fourth requirement is that under our renegotiated relationship, the European Court of Justice should have no jurisdiction within the UK, leaving our own courts to interpret EU regulations according to the findings of English Common Law in England and Scottish Law in Scotland.

Much more might emerge in the actual process of renegotiation, but these four basic changes would be a good base to build upon in seeking a more rewarding relationship with our EU partners.


Generations on war footing

Last week, we wrote about the assault on UK pension savings that is just one way to claw back some of the benefits the baby boom generation has enjoyed. Well, a wider campaign against the boomers is getting itself organised with the formal launch this past week of The Intergenerational Foundation which claims to “promote fairness between generations.”

The IF says it believes “each generation should pay its own way, which is not happening at present. British policy-makers have given undue advantage to the older generation at the expense of younger and future generations.” It’s hard to argue with the basic premise that politicians with a short-term view to the next election have been catering to the largest demographic group with scant regard for long-term costs.

Going through the IF’s detailed projects like education, employment, health, housing and taxation, its analyses of the issues sound reasonable but it’s short of practical solutions. Of course, it’s early days and the IF is mostly warning that it will be “monitoring” or “studying” policies for now.

So far, so good and we look forward to seeing the IF’s big ideas. However, a disquieting theme running through the IF’s material is a repeated call to “fairness.” This is a noble concept in theory but has generally been a disaster in practice as it leads our short-termist politicians to enact special privileges and convoluted schemes with unintended consequences.

Hopefully, the IF will come up with ideas that do away with existing privileges rather than proposing new off-setting privileges. It all comes down to money and we look forward to any proposals that simplify the tax regime, eliminate special-interest spending and just generally let people get on with their lives as they see best.

Unfortunately, early indications aren’t encouraging. On the matter of housing, the IF wants to deal with the “hoarding of living space” (ie. “under-occupation”) by chasing older people out of big houses into smaller ones. Its proposed policies include abolishing stamp duty for those downsizing, changes to planning rules to increase the supply of suitable housing for people downsizing, ‘nudge’ policies such as the withdrawal of some ‘universal’ benefits for those living in houses worth over £500,000, a property value tax and abolition of council tax concessions for single occupation.

If future ideas from the IF call for yet more taxes and more tax-code fiddling, it’ll be just another special interest group grasping at the public purse. This could be a very expensive intergenerational war. Maybe we can save a lot money by proposing pistols at dawn between IF co-founder Angus Hanton and Saga’s Director General Ros Altmann.


This is quite mindgargling: subsidy junkies arguing against subsidies

It's really rather difficult to know whether to laugh or cry at this latest story. The subsidy junkies are now arguing against subsidies.

Chinese solar companies could soon find themselves bereft of some of their biggest foreign markets as Western manufacturers intensify a solar trade war and seek stiff anti-dumping duties on low-cost Chinese products. German group SolarWorld said on Thursday it was working on steps to curb alleged price dumping by Chinese rivals in Europe. This comes less than a day after its U.S. unit led a group of seven U.S. solar companies in urging the U.S. government to slap anti-dumping duties on Chinese-made solar energy products.

The various European and US solar power companies have been gargling subsidies since the very first day they were a gleam in a rent seeker's pocketbook. They're so voracious in their eating of such subsidies that solar produced electricity in the UK is four times the price of conventionally so. In Germany it costs $1,070 per tonne CO2 not emitted: some $990 more than the $80 cost of such emissions. The entire industry exists only because of the great gobbets of taxpayers' money that has been thrown their way.

And now they are complaining about other people offering subsidies?That there should be trade and tariff barriers to make sure that we the poor bloody consumers cannot get a piece of the action? Cheap solar panels subsidised by someone else?

I suppose I should laugh or cry at this rather than what I'm very tempted to do: shoot them all for Gaia will know her own.


The morality of capitalism

What your professors won't tell you is the subtitle to Tom Palmer's new book The Morality of Capitalism (Jameson Books 2011). Tom – who travels the world beating the drum for liberty – has assembled a powerful team of contributors, including two Nobel laureates and the founder of Whole Foods Market. Though the authors obviously don't have a consistent style – some very academic, some didactic, others very personal in their approach – you can still strain out a huge number of interesting arguments and points about the morality of markets that you won't see in common circulation and certainly won't hear from your professors.

Cato's David Boaz, for example, points out that human beings are social creatures and the like to associate and collaborate. Sure, they are self-interested, but they wold be self-interested under any system, not just capitalism. The virtue of free-market capitalism is that people can only make themselves better off by helping others.

The Chinese economist Mao Yushi takes that further with an interesting paradox. If we were all completely benevolent – looking out for the interests of other people rather than ourselves – we would have just as much conflict as capitalism is said to give us. We would be fighting shopkeepers to charge us more and reduce their quality. The arguments would be just as red in tooth and claw, but the incentives would all be to reduce value rather than to create and increase it, as capitalism does.

Tom Palmer himself provides a heartfelt story of when he was in severe pain, but was treated with huge courtesy, kindness, and human decency in a private hospital. That contrasted mightily with his subsequent treatment in a public hospital, where he was bossed about and treated like a lump of meat. You can't raise or lower people's natural feelings of humanity by force, he concludes, but you can certainly prompt them to show their humanity – or inhumanity – by your choice of incentives. In one setting, Tom was a valued customer; in the other, a necessary inconvenience.

Palmer also has a chapter on Adam Smith, pointing out that the Sage of Kirkcaldy is too often caricatured as saying that 'greed is good'. It is plain from his writings, though, that he believed no such thing. Self-interest has its place, but there are limits to this as there must be to every human characteristics. Seeking wealth by helping other people, which is the essence of the market, is just fine, though. The desire to accumulate money is entirely benign if you want it to feed, and clothe your family or to spend for the public benefit. The more money that philanthropists have, the more philanthropy they can deliver: why do people think then, that the pursuit of money is immoral?

There are 101 more insights like this in the book. Congratulations to and for doing it.


Europe's crisis is the UK's opportunity

cowThe profound financial crisis at the heart of the EU provides an ideal opportunity to address the issue of the Common Agricultural Policy (CAP) which was set up in the 1950s mainly at the instigation of Germany and France. Currently, it accounts for annual expenditure of over €50 billion and represents a colossal percentage – some 40% - of total EU costs. Central to its operation are many concepts – subsidies, quotas, levies and intervention prices – that are anathema to most free market economists. 

Not surprisingly, the CAP has also given rise to such Pythonesque features as butter mountains and wine lakes. Whilst some progress has been made in reforming the CAP in recent years, the reality is that it remains a highly expensive anachronism of post-war recovery – and very unsuited to today’s competitive economy.

Inevitably, in the short term, the EU’s focus will be on saving the euro as the markets continue to home in on the dreadful public finances of both Italy and Spain – whilst accepting that Greece’s case is virtually beyond recall. Amongst the more sensible proposals for resolving the euro crisis is a currency split between two EU blocs – the northern and southern countries, with France’s membership underpinning the latter.

In any event, the euro crisis is giving rise to fundamental thinking about the future of the EU. Indeed, within the UK, eurosceptics are becoming far more vocal, with continuing calls for a referendum on the UK’s future EU participation. Furthermore, at some juncture, the UK may need to make further financial contributions to saving the euro – whether directly, through the IMF or bilaterally as with the Ireland.

In return, the UK should demand concessions of its own, including major cuts in CAP payments and, in the long term, its abolition. Its replacement should be based on individual national agricultural policies. Remember, the PR executive mantra - every crisis provides an opportunity.


Yes, let's have real localism

Tom mentions that he'd be in favour of more local taxation. That's "more local" rather than "more" local of course. And I agree but we don't in fact need to try and devise such a system. We can just copy one that works very well elsewhere.

Let's have a national income tax rate of 3.76%. OK, if you really insist we'll have a top national income tax rate of 15% as well. That's plenty to pay for the things that the national government really does have to do, defence, the higher courts systems and so on. Everything else we'll raise the money for and pay for at the lowest political level possible. In the UK this is the council ward which is some 5,000 to 30,000 people, depending upon urban, rural and so on. This maps well over the 10,000 and up number in the communes of the country we're going to nick our tax system from.

The local tax rate is set and raised locally (although of course you can have a national organisation collecting it if you wish) and much more importantly, it is spent locally. Each such ward will indeed need some police cover, fire cover and so on and there's no problem with banding together as larger units to pay for these. Similarly with health care, some such is decidedly local but not every ward needs a transplant ward, so money can be sent upwards to pay for a share of one of those if desired. But the massively important point is that money is only sent upwards, local things are locally funded, regionally can be regionally but only with the direct consent of that lowest level.

Such a system will also be subject to what I've called Bjorn's Beer Effect here before. If Bjorn is the bloke who sets your tax rate and Bjorn is the guy who decides where the money is spent, then in a community of 6,000 to 30,000 people you're going to know, or at least be able to find out, where Bjorn has his Friday night snifter. Which is going to put the fear of God into Bjorn as he spends your money: but also means that there's one human individual to explain to you, forcefully if need be, why you can't have what you're not willing to pay the taxes for.

The country we're taking this from is of course Denmark. Which means we can all join in a rousing chorus of, along with Polly Toynbee and all points left, "We must all be more like the Nordics!"


The case for recalculation

Skeptics of the Austrian narrative of the Great Recession – that inflation caused malinvestment bubbles, particularly in the housing sector, which eventually burst – often point to the lack of empirical evidence for this thesis. David Andolfatto seems to offer some of this vital empirical evidence (hat tip to Arnold Kling):

The collapse of the construction sector accounts for 46.4% of the decline in U.S. GDP and 51.9% of the decline in total employment (roughly 3.4 million jobs).

That's important, because – if it's true – it really would suggest, empirically, that the Austrian story about the crisis is the right one. You probably know the narrative by now – easy money distorted relative prices, making construction appear to be more in demand than it really was, causing a lot of people to invest too much money and time building things that nobody ended up wanting. Once prices started to stabilize and reflect real demand, a lot of the people who'd made bad investments need to cut their losses and get rid of them. The same goes for people who've trained in skills that aren't really needed – they've got to retrain now that reality has bitten.

Andolfatto's analysis is interesting, because it attempts to model the shockwaves that a change in a large single sector can have on the rest of the economy. If you've set up a business selling coffee to workers at a now-defunct construction site, you're out of business. If some of your customers were construction workers, whatever your business, you'll be making less money now, and so will the people who you bought money from. And so on. The interconnectedness of the economy is sometimes difficult to grasp, but it's really important to understanding why one sector going *pop* can affect so many other sectors so badly. 

The policy implications of this perspective are quite signficant. Forget trying to "stimulate" your way out of a recession through spending or printing money – all you'll be doing is creating another type of false, unsustainable demand. You'll do the most damage if the stimulus is aimed at the unemployed, the people who need to retrain to cope with the real economy the most: reskilling takes time, and will be put off if there's some public works project nearby that will hire you instead. Even taking up unemployed people's time has an opportunity cost; justification for "stimulus" programmes ignore this.

Stimulus and government spending aren't just bad because they cost money; they're bad because the people they employ could be doing something else with their time that people actually want. That's the crucial thing that many economists ignore – time. A recession takes time for people to resolve their difficulties. Impatient governments can't do anything to speed that along, except get out of the way.