The Pin Factory Blog

Ed Miliband seems to have appropriated Disraeli's famous slogan about 'one nation' government. Whether this is merely a meaningless catchphrase,  an attempt to out-manoeuvre Cameron or has any real policy implications remains to be seen. Having raised the issue, it is interesting and instructive to reflect on nineteenth century government as well as what the phrase might imply for modern politics.

It is notable that Disraeli coined the phrase in 1844 as the 1840s were a decade which represents the high-water mark of Classical Liberal values in Britain and perhaps throughout the world - contemporary American and French had similar Classical Liberal features. That decade saw the repeal of the Corn Laws and Navigation Acts and the apparent defeat of mercantilism and economic nationalism in the UK. It saw the triumph of the Manchester school led by Richard Cobden and John Bright. It is worth remembering that these great strides for liberty were inspired by, amongst others, Adam Smith in the late eighteenth century.

Similar movements towards freedom were being made in the social sphere with, for instance, the abolition of slavery and Catholic emancipation. Fiscal retrenchment was the hallmark of mid-nineteenth century government, with great strides being made to pay down the national debt. How striking a contrast to today's politicians who fail to eliminate the public deficit and . Although Peel re-introduced the income tax in 1842, he and many other politicians were opposed to its use and aimed at its elimination. Peel's government also introduced the Bank Charter Act (1844) - a high-minded but ultimately misguided attempt to create stable, gold-backed currency. It is notable that both parties - Whigs and moderate Tories - were broadly sympathetic to these policies.

The most famous political slogan of that era is 'peace, retrenchment (cuts in government spending) and reform' - something which our modern politicians would do well to emulate. We cannot characterise the mid-nineteenth century as a period of true laissez faire as there was still a great deal of government intervention and whilst government spending was low, it is important to recognise that government was still very activist. There was much government intervention in social life via the Poor Laws and the education system. Nevertheless, the tone of times was towards liberty and equalitarianism (i.e. equality under the laws and the absence of discrimination by government) in general.

The 'one nation' position is one of paternalism and limited egalitarianism. Disraeli used the phrase as a political slogan in a bid to win the support of the new voters enfranchised in the 1867 Reform Act - an Act which created far more voters than its more famous predecessor. In this he was doubtless successful; instead of being destroyed by Reform the Tories successfully adapted. The Whig Party, in Britain (unlike the US) the party of small government and free trade was, by contrast, was consumed by the Liberals. The Tories shifted their position to appeal to the new voters and sought to portray Whiggism as heartless individualism.

The following era saw a gradual shift in political positions of which Disraeli's slogan is a signifier. Whilst Disraeli himself was a showman and a populist, his 'philosophy' such as it is represents an opposition to Manchester values, much as does Bismarck's. Gladstone's Liberals represented a more fiscally conservative, Whiggish position. The 1860s-1880s period should be recognised as witnessing the 'Strange Death of Whig England', the causes of which are contentious but bear a good deal of historical study.

Again, both parties in this period turned to a more interventionist style of government, albeit in a limited fashion. In the sphere of political thought, the 'New Liberals' emerged led by Green and Hobhouse. Herbert Spencer in The Man Versus the State (1884) categorised this shift as the 'New Toryism', a return of paternalist values blended to varying degrees with the contemporary collectivist ideas of socialism, imperialism and nationalism. By 1894 it was possible for the Chancellor WV Harcourt to announce that 'we are all socialists now' as he introduced death duties.

With Gladstone's death the Liberals emerged more strongly as the party of social democracy although the Conservatives, as they became, gradually adopted a more moderate version of this position. This point should not be too greatly over-stated, however; prior to 1914 government spending remained small by contemporary standards, there was little deficit spending and the currency was stable.

This gallop through history leaves much detail out, of course, but it should remind us of one or two very salient points. Ed Miliband is quite within his rights to adopt Disraeli's concept as his own as they both represent paternalism and interventionism. It is worrying, however, that both Miliband and Cameron laud Disraeli whereas very few politicians would adopt a Gladstonian much less a Cobdenite position (including the mis-named Liberal Democrats). It is interesting to observe how political parties tend to adopt slightly moderated versions of essentially the same position and actual ideological divides are rare.

In reality, all three major parties are offering greater or lesser degrees of managerialism. On a more hopeful note, it is also clear that ideas take a long time to become embodied as the prevailing doctrine. The ideas of Smith's generation took 40-50 years or more to become reality. It is our duty, therefore, to generate the ideas and methods to free ourselves from the welfare and regulatory state so that our grandchildren may benefit.  

My fourth very good thing is imports, one of the most misunderstood.

4.  Imports

A common fallacy supposes that nations become rich by exporting more than they import.  Many governments make the effort to augment exports and diminish imports.  This usually involves subsidizing exports by means of grants and lower taxes, and discouraging imports by means of tariffs.  Both of these are more difficult to do under the rules of the World Trade Organization, but countries sometimes find covert ways of achieving these ends.

It used to be thought that a country's wealth was augmented by a positive 'balance of trade,' under which the surplus of exports over imports would bring in more gold and silver than went out, leaving the nation richer.  Adam Smith exposed this fallacy, pointing out that the wealth of nations consisted in the productive labour of its peoples rather than in bars of precious metals stored in its treasury.

In fact it is imports that make a nation richer.  By importing goods that are cheaper than those they can produce themselves, nations have cash to spare as well as the goods.  This makes them wealthier than if they were self-dependent.  Adam Smith said that Scotland could grow grapes and produce wine "by means of hot-walls and glass houses" on the slopes of Ben Nevis, but it would cost them 30 times the price of equivalent French wine.  By buying the French wine, they saved twenty-nine thirtieths of the cost and could spend it on other things.

Of course these imports have to be paid for, and exports make that possible.  We export to gain the wherewithal to enrich ourselves through imports.  It need not be manufactured goods we export.  It can be services such as insurance, skills such as design, or the returns on our own overseas investments.

The US humorist, P J O'Rourke put it succinctly: "..imports are Christmas morning; exports are January's MasterCard bill."  Imports make us richer, and exports make it possible.  The self-sufficiency which is advocated as a virtue is the road to poverty.  It denies us the specialized and skilful services of far-flung producers anxious to provide us with goods at lower prices than we can make for ourselves.

...here is one of my favourite poems by Ogden Nash, which is as appropriate now as it was when he wrote it in the midst of the US government's measures to prevent 'overproduction' during the Great Depression.

One From One Leaves Two

Higgledy piggledy, my black hen,
She lays eggs for gentlemen.
Gentlemen come every day
To count what my black hen doth lay.
If perchance she lays too many,
They fine my hen a pretty penny;
If perchance she fails to lay,
The gentlemen a bonus pay.

Mumbledy pumbledy, my red cow,
She’s cooperating now.
At first she didn’t understand
That milk production must be planned;
She didn’t understand at first
She either had to plan or burst,
But now the government reports
She’s giving pints instead of quarts.

Fiddle de dee, my next-door neighbors,
They are giggling at their labors.
First they plant the tiny seed,
Then they water, then they weed,
Then they hoe and prune and lop,
They they raise a record crop,
Then they laugh their sides asunder,
And plow the whole caboodle under.

Abracadabra, thus we learn
The more you create, the less you earn.
The less you earn, the more you’re given,
The less you lead, the more you’re driven,
The more destroyed, the more they feed,
The more you pay, the more they need,
The more you earn, the less you keep,
And now I lay me down to sleep.
I pray the Lord my soul to take
If the tax-collector hasn’t got it before I wake.

— Ogden Nash

The third in my series is profits, much-maligned but essential for progress.

3.  Profits

The role of profit is much misunderstood.  Some denounce profits as if they represent money that rightfully belongs to others, but profits are the reason for the wealth-creation that has so benefited the world.  We postpone consumption so that we can enjoy more of it later.  There would be no reason to do so otherwise.  By using wealth to create more wealth in the future we can have access to more choices and opportunities.  The prospect of making a profit leads us to invest, and the investment creates new products and processes and new efficiencies.  Profit is the difference between the cost of the inputs that go to create something and the price that others will freely pay for it.

Sometimes people are envious of high profits and think them somehow unfair.  In fact the high profits encourage others to enter and start up in competition, which in turn benefits the consumer by increasing choice.  Moreover high profits motivate others to start up new ventures in the hope of doing likewise.  Thus profit is the incentive for increased economic output, as well as for the introduction of new products onto the market. 

Profits do not represent wealth taken from others, but wealth created by added value and exchange.  Without profits there would be no reason to forego present consumption by investing.  Profits thus make us look to the future and what we might achieve in it, and lift our eyes above the present gratification that would prevail otherwise.  Profits are the incentive which sets people on the road to economic expansion and the self-betterment which it makes possible.

Marxists erroneously suppose that profit represents exploitation, a price higher than the labour cost of producing goods.  They err in supposing that value derives from labour costs.  In fact it derives from demand, and is in the mind of the person contemplating the object, not in the object itself.  It is because we value things differently that we trade.  The investor hopes that people will value the goods produced more than the price that will be asked for them, and that this will be more than it costs to produce them.  Profit benefits people rather than exploiting them, and it does so by making available new goods that they value and are willing to buy.

For the second of the very good things that tend to receive a bad press, I highlight bankruptcy.

2.  Bankruptcy

When an individual or firm goes bankrupt, a legal process is instigated to discharge debts that cannot be repaid.  In former times such debtors might have been put into a debtors' prison and languished there for years.  The process weighs assets against liabilities and allows the debts to be discharged at some fraction of their nominal value, leaving the debtor free of the burden, albeit subject to rules of financial behaviour and with a blemish on their credit record which can last for years.

While bankruptcy undoubtedly involves some social stigma that most people would seek to avoid, it does have advantages to society as well as to the individuals it releases from debt.  A discharged bankrupt is no longer burdened by the debt, and is free to work again and to earn money without it all being consumed in repayments.  If he or she went bankrupt as a result of a failed business enterprise, they become free, after the passage of time, to try again.  Some highly successful business people have failed to get it right the first time, and have experienced bankruptcy on the road to eventual success.

Most lenders who extend loans to business know that risks are higher among 'subprime' candidates, and set their repayment terms sufficiently high to cover the losses from those who go bankrupt.  While failure might be devastating and distressing for the individual, however, it has economic and social benefits.  Failure enables capital and assets to be redeployed from businesses that have not worked towards new ventures that show more promise.  It is the financial equivalent of clearing out the less hardy plants and animals and leaving their ecosphere available for the hardier strains.

The economist Joseph Schumpeter spoke of the "creative destruction" wrought by innovative ideas and businesses that led to the demise of established ones.  Bankruptcy is part of the process by which failing firms close down and are replaced by newer and more successful ones.  Although governments might try to reduce bankruptcies and failures by propping up firms in trouble, they do the economy and the prospects for future growth no favours by doing so.  The failure of some is an important ingredient in the success of others.

Establishing a higher threshold for personal income tax was under much discussion last month — a precursor for conference season debate.  Under the banner of ‘Fairer Tax in Tough Times’, the Liberal Democrats presented plans to increase the scheduled threshold of £9,205 to a suggested rise of £10,000.

Not slow to capitalise on this ‘leak’, the Spectator’s blog drew attention to a Centre for Policy Studies report published by Lord Maurice Saatchi and Peter Warburton in 2001, Poor People! Stop Paying Tax!, that itself recommended £10,000 at which the low-paid began to pay.  For the think tank that Margaret Thatcher and Keith Joseph built, it is absurd that the State ‘even taxes people who can’t afford to pay tax at all.’  But insult is added to injury:

Governments put up tax, which reduces individual incomes and creates more dependence on the state.  And citizens claim more state benefits to compensate.  And so it goes on until the government is claiming billions of pounds a year in taxes from citizens who also claim billions of pounds a year in benefits from the government.

This political duel over who is truly the friend of the poor should set off a policy debate on taxes in general; namely, is it better for taxes to be wide and shallow — that is, paid by everyone, allowing for overall rates to be low — or narrow and deep — again, paid by the wealthy few who are considered able to pay them and, necessarily, rather high?

Read this article.

Some things that are good and beneficial are frequently disparaged because they are misunderstood.  I have selected a few such things to put the case in favour, pointing out the good that they do.  These points will be familiar to many of our readers, of course, but they might equip other people with arguments that can defend these ideas against critics.

1.  Advertising

Some suggest that advertising is wasteful, diverting resources into promoting goods that might otherwise be used to lower the price.  It has even been claimed that advertising is coercive, tricking a gullible public into buying goods and services by bombarding them with positive images instead of trying to sell on the basis of quality.

In fact advertising is informative.  It tells the public what goods are available, in what varieties and at what prices.  It is a very competitive industry, with creative minds vying with each other to find new and attractive ways of appealing to what the public is looking for, and of emphasizing the merits that people seek in the goods they buy.

Advertising is often used to promote new or improved products by announcing the edge they have over their rivals.  It is self-regulated, not permitting ads that try to sell goods by making people feel inadequate or inferior without them.  Instead they have to stress the positive aspects of their products.

Some intangible associations add value to products by creating an image for the product that enhances the enjoyment of it.  Malt whisky in India is promoted as an aspirational product, so the young Indians who sip it enjoy not only the whisky, but the feeling that they are headed for success.  And long after the whisky has gone, the memory of that feeling might endure.  When some products are bought, the purchaser buys into a lifestyle linked to them by advertising, and enjoys the intangible associations they bring.

Sports companies are sometimes criticized for promoting expensive brands that young people are encouraged to buy into.  But the fact is that many teenagers are still discovering who they are, and the brands help them to assert an identity linked to their associations.

Far from being wasteful, advertising promotes competition, and that keeps prices keen and quality high; and the images created for products enhance the value of those goods to the purchaser.

As riots accompany new austerity measures in Greece and Spain, the euro is plunged into uncertainty again.  Sanguine observers might predict that there will be three such crises in the next year, and that there will be three emergency summits held, and three announcements of new measures to deal with the problem.  On each occasion markets will respond favourably for a very short time, then gloom and uncertainty will return.  Those same observers might predict a further three such sequences in the following year, and three more in the year after that.  And so on.

Oliver Smith in the Telegraph reports informed opinion suggesting that a Greek exit from the euro is now inevitable.  Greece would become a very cheap tourist destination with a devalued drachma, and the tourist industry would experience a boom.  Investment would come in to build hotels and restaurants, and employment would rise.  This process could and should have started two years ago.  If it had, recovery would by now be visible.

It is also true of Spain.  The only solution for them is to quit the euro so that the peseta can find a level that reflects Spain's true position and enables exports to rise and economic growth to take hold.

The economic case for exit might be overwhelming, but it is entirely subordinated to the political case that the European juggernaut must not falter for an instant in its drive to 'ever closer union.'  This gives a strong likelihood that the crises, the summits and the responses will continue for years, along with the civil unrest and misery that accompanies them.  This is where we came in.

The current government has announced that no family will get more than median income in benefits each year. I'm afraid that they're still being hopelessly over-generous here. And I would call into evidence the Baron Skidelsky to prove it to them as well. No one should ever be able to garner benefits of more than £10,000 a year. For as the Noble Lord tells us:

The case against making increased GDP per capita the overriding policy objective is that it doesn’t deliver the increased happiness or welfare if promises. In 1974, the economist Richard Easterlin published a famous paper, “Does Economic Growth Improve the Human Lot?”. The answer, he concluded, after correlating per capita incomes and self-reported happiness levels across a number of countries is probably “no”. In a refinement dating from 1995, Easterlin found no relationship between income and happiness above an average per capita income level of between $15,000 and $20,000. Other findings confirm Easterlin.

Well, there we have it. Over $15,000 a year you just don't get any happier. This is usually applied to the idea that people who do make more than that £10,000 a year can have chunks of cash nicked from them to be given to those with less with no loss of human happiness. And let us do our ideological enemies the honour of exploring their own argument. Which is, as we can see, that more than £10,000 a year doesn't make you any happier.

Thus, while those with more than this might have room to lose some income in order to make others happier, those who already have £10,000 a year won't be made any happier by gaining more. Nor will anyone receiving benefits of £10,001 be made happier, indeed, someone currently earning £9,990 currently will be made maximally happy by being provided with only another £10.

That is, that our argument that money doesn't make you happy provides an absolute cap on how much it is that the welfare state should try to supply to the poor. We have in fact reached Nirvana: we know how much money to move around, the maximum amount of money that can possibly be usefully applied to making people happier. And that amount isn't £10,000 per person per year. It is only the amount by which each person receives less than £10,000 through their market activities. Or, compared to what is currently spent, virtually nothing.

All we have to do is rejig the system so that everyone's income is topped up to that £10,000 a year level (and why yes, this would include housing benefit, it would even include services in kind like education and the NHS) and we are all as happy as can possibly be.

The only reason this could not possibly be true is if that you don't get happier having more money isn't true. So which idea do the redistributionists want to give up? For it is either more than £10k doesn't make you happier therefore no one needs more welfare than to provide them with £10k or, if more than £10k does make you happier then, well, more than £10k does make you happier.

Robert Skidelsky has another of his pieces about how being richer just doesn't make people happier. In it he quotes Adair Truner on a point which really should put to rest the idea that either of them are economists. For it really is a dreadful mistake:

More radical is Turner’s attack on our way of measuring wealth. GDP measures the volume of marketed output, not its quality. But it is the improvement in quality which is chiefly important for satisfaction.

GDP is not the volume of marketed output at all. It is the value of total output at market prices. That valuation at market prices means that we're linking that output to the satisfaction that consumers get from it. No, it's not the total value they do derive from it for there is such a thing as the consumer surplus (people purchase things at market prices because they value them more than the market price).

It's actually the other people, the Soviets, who measured economic output by volume. So many tonnes of cement, so many kilos of copper, so many kilometres of transport provided. We measure economic output by the value of it. Which does, as I say, link economic output to the satisfaction derived from it in a way that purely measuring by volume does not. For the value ascribed to production by market prices does bear some relationship to the satisfaction derived by consumers.

As a critique of announcing the tractor production statistics Turner and Skidelsky have a valid point. Given that we don't do that, have never done that and in fact as the 20th century proves we were right not to do that as a criticism of our current economy it's entirely incorrect. Fatuous even: so can we put to bed the idea that, given their seeming ignorance of the most basic points about our current economic system, either Turner or Skidelsky have anything very much interesting to say to us about how we should alter our current economic system?