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"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

Technology: the limitless resource

Written by George Layton | Monday 12 August 2013

Environmentalists say we must change our behaviour to save the planet and pass on something to our children.  They often pick symbolic targets designed to raise our awareness, even where they make an insignificant impact on the problem.  The behaviour they favour is less materialistic, in that we are supposed to moderate our wants and live simpler, slower lives.  Although many environmentalists ally with the Left against 'materialistic capitalism,' their prescription is profoundly conservative, disdaining the pace and complexity of the modern world.

In fact it is technology rather than behavioural change which will bring more certain results because there are, or can be, technological solutions to modern problems.  With CO2, for example, a variety of sequestration methods can isolate it from the atmosphere.  It can be captured and compressed for use in enhanced oil recovery. This has been very successful at the Salah Project in Algeria.  The compressed CO2, transmitted through pipelines, is injected deep below the Earth’s surface in saline formations or in depleted gas or oil fields.  This prevents it polluting the atmosphere.

Since some 85% of the world's energy is wasted, there is considerable scope for technological means of conserving it.  Engineering advances have made cars far more fuel-efficient than they were even a decade ago.  Much energy will be saved with the gradual switch to electric cars, and driverless ones promise further efficiency gains. These changes will help curb the emission of pollutants such as sulphur oxides, nitrogen oxides and carbon monoxide.  Technology gives us choices as to how our electricity is produced, with shale gas having less than half the pollution of coal, and pollution-free photovoltaic electricity on a steeply falling price curve.

Environmentalists tell us to produce less, but it will be more effective to produce more cleanly, with huge advances made in air scrubbers and pollution extractors already making production far cleaner than it was.  Cleaner production costs more, but as we become wealthier we become more able to afford the worthwhile gains it brings.  The behavioural changes proposed are not without cost.  Living more simply often means living with fewer choices.  Walking or cycling to work might seem more virtuous, but it uses time that might have been better spent.

What technology offers, in effect, is a morning after pill, a way of achieving all that we wish to achieve without having to pick up the consequences; the party without the hangover.  It is unlikely that humans across the globe will change their behaviour sufficiently to make measurable differences fast enough, but it is highly likely that creative imagination will make technological advances that solve our problems in other ways.

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Where Keynes went wrong in Economic Possibilities For Our Grandchildren

Written by Tim Worstall | Monday 12 August 2013

Or if it's too much for you to believe that Keynes could have been wrong at all, where current interpreters of Keynes go wrong in thinking about that essay. For of course, Keynes did indeed say that by around and about now we'd all be so damn rich we'd not need to be working hardly at all. At which point we might wonder why so many of today's Keynesians are worried about part time jobs but that would be just snide and sarcastic. There are indeed people who are wondering where that reduction in work and concommittant increase in leisure has gone. What went wrong with capitalism along the way?

To which the answer is nothing at all. It's just that Keynes didn't explicitly spell out the difference between household and market work. The difference is there, with his story of the charlady and of the upper middle class woman bored to distraction because she has servants to do all that for her. The great reduction in working time has come in the unpaid, household, part of production:

Whenever there is a new study on housework, domesticated creature that I am, I like to put on my pinny and go around – just to check that the premise isn't all dusty. This time, a report says that, while chores used to take 63 hours a week 60 years ago, they now only take about two.

That's where the great change has come in, in domestic technology. It's the one thing that Ha-Joon Chang was actually correct about. We've mechanised a huge amount of human drudge work and thus freed up the distaff side of humanity to do something more interesting with their lives. This has included entry into the world of paid work, of course. But it's also meant an increase in leisure for both men and women over these decades.

Keynes wasn't wrong, it's his current interpreters who have rather missed the point. Working hours are getting shorter, have been so ever since Keynes wrote. It's just that it's household production hours that have become shorter. And we are all indeed gaining greater leisure, just as Keynes predicted we would.

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Let's make fracking easier by increasing bureaucratic delay!

Written by Tim Worstall | Sunday 11 August 2013

The Telegraph tells us that there will be more consultation on fracking permits:

In a development that will be welcomed by opponents of fracking, the Environment Agency (EA) said the “current level of public interest” meant that the permitting process was likely to be extended to allow for more consultation.

The Purple Scorpion points to the actual document and then comments:

"The high public interest status could mean an extremely lengthy process", says a lawyer, "taking into account a number of rounds of community consultation". "Given the current level of public interest in unconventional gas and oil exploration, it's likely that we will treat such sites as being of high public interest," the Agency said in the document on its website.

But here's what is actually meant. The Government has decided that fracking would be a good idea and wants to make it simpler and faster to gain a permit to do so. This unelected quango has decided to scupper that desire. Instead of it being "You've like a fracking licence? Here you go" they're going to insist upon lengthy public discussion periods for each and every licence. Effectively, every nutter in hte land will be encouraged to shout out the same old stale, and wrong, arguments for each and every licence.

I've said before that I'm not surprised that economic growth has slowed down in recent decades. We're issuing ever more red tape that stops people from actually being able to do anything: why be surprised when less is done?

And it doesn't bode well when a government cannot contain or control its own bureaucracy, does it?

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The horrors of zero hour contracts

Written by Tim Worstall | Saturday 10 August 2013

You'll have noticed the calls for the banning of zero hours contracts. What we used to call temping in fact. My problem with this call for the banning of said contracts can be summed up with this comment from Natalie Bennett (Leader of the Green Party).

Imagine you get a phone call at 6am each morning, to tell you if you’ll get any work – or pay – each day. You’re awake, dressed, waiting, then it’s “stand down”. That can happen five days in a row, and you’ll get to the end of the week without a penny coming in to your pocket.

No, I don't think I would like to get up at 6 am every day. However, let's just change this a tiny bit:

Imagine you get a phone call at 11am each morning, to tell you if you’ll get any work – or pay – each day. You’re awake, dressed, waiting, then it’s “stand down”. That can happen five days in a row, and you’ll get to the end of the week without a penny coming in to your pocket.

There doesn't seem all that much difference there really. But that second type of work offer has people lining around the block, shouting, screaming even that they'd just love to be employed on such terms. For that's how the opinion and comment pages of the national newspapers are written.

You get up at whatever time, look around for the stories that an editor might be interested in. Then phone them up and pitch them in that small gap between their arriving at work (10 am) and the editorial meeting (11 am). Then you wait for your phone call at noonish which will tell you whether you have been chosen as one of the lucky ones to scribble something for the paper's readers. Note that the actual writing is the smallest part of the work routine: finding something to be written about is what takes the time and effort. Yet you'll only ever be paid if you do the easy part, the writing, and never for the research.

It's a job I've done and was happy to do too. As, obviously, everyone else who write freelance comment pieces is.

There are therefore two things that grate about this shouting that zero hours contracts must be abolished. The first being that it does seem odd that everyone else be denied the joys of the sort of contract that we metropolitan media luvvies think quite normal, desirable even. The second is that Natalie Bennett, the Leader of the Green Party, used to employ people in such a manner when she was an Assistant Editor at The Guardian. It just grates, that's all.

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Enterprise, rather than aid, will boost the development of poorer countries

Written by George Layton | Friday 09 August 2013

The Adam Smith Institute featured on Bono's website when he discovered that the ASI had advocated canceling poor countries' debts before churches and charities promoted the idea. Now Bono features on our site for his speech at Georgetown.  He said: "In dealing with poverty here and around the world, welfare and foreign aid are a Band-Aid. Free enterprise is a cure."

This is correct. Simply giving developing countries money often does not benefit them in the long term.  Even in the short term the aid often fails to reach the people who need it; some of it might diverted to a corrupt government.  And sometimes it might be a used to prop up dictatorial regimes.

Free enterprise is the cure because it can enable poor countries to generate wealth instead of depending on tiny transfers of it from richer countries.  Developing nations become wealthy by enterprise and trade, not by aid, and inward investment is a potent way of assisting this with a range of spillover benefits.  It boosts the business environment by assisting capital investment; around the world it accounts for about 15% of domestic capital formation.

The OECD points to its role in triggering technological advance. Technology is transferred from the developed country in four ways  - migration of skilled labour; the internationalization of research and development; horizontal linkages with competing companies in the same industry and vertical linkages with suppliers or customers in the developed country.  Inward investment also leads to human capital growth (or formation) and contributes to international trade integration.  The OECD concluded that inward investment benefits income and factor productivity growth more than domestic investment.

Critics point to repatriation of profits and low taxes paid by multinational investors, but they miss the point.  It is the profits and the low taxes that attract them to developing countries, and their economic activity creates jobs and infrastructure there and efficiently channels the countries' natural resources onto international markets.

Developing countries can play their part.  They can privatize the nationalized corporations often corruptly run by political cronies.  They can set up special economic zones as Deng Xiaoping did so successfully in China.  They can boost education as Singapore did early in its development.  They can create a tax-friendly environment to encourage more investment, and they can have low local income tax rates to increase domestic consumption to help fuel their growth.

The developed countries also have their role.  In addition to investment they can set examples of responsible corporate policies that respect property rights, treat their workers correctly, and keep clear of corrupt officialdom.  Most of all, they can open their markets to the goods produced in poorer countries and enable them to create wealth by trade, just as they did themselves when their own economies advanced.

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Coming around to the Austrian view of investment and recessions

Written by Tim Worstall | Friday 09 August 2013

I don't think it's any surprise to anyone that Madsen and Eamonn, here at the ASI, are rather more Austrian in their view of the world than I am. This is partly just because they are but also because I'm not really sure that I believe in any school of macroeconomics at all. I can see that there are useful things pointed out by all of the different schools: quite happy to accept that the New Keynesians have a point about sticky prices and menu costs, the Marxists aren't entirely wrong to think that class can sometimes matter (which Englishman could reject that basic point?) and so on and on. But I'm also extremely doubtful that any of the various schools manages to capture the full complexity of the economy in the way that, say, the microeconomics of prices and incentives captures activity at that level.

However, this story certainly supports one prime contention of the Austrian story:

Spain's €1bn white elephant airport could be yours for just €100m The first private international airport in Spain that turned into one of the country's biggest white elephants is being sold off for just €100m.

A vast airport built where very few live, fewer go and apparently almost none wish to fly to. This is very much he Austrian story about recessions: the boom times allow monstrosties of this type to be financed and built. A misallocation of capital in fact. And once the system gets sufficiently clogged with such misallocations then recession is going to happen. Further, we'll not return to growth until these misallocations are liquidated and we're back to allocating our capital sensibly, not on these white elephants.

What turns people off this Austrian view is that it almost seems to glory in the bankruptcies which are a necessary part of cleaning up the messes of the previous misallocations. Which isn't quite what is being said: rather that this is a sad necessity which we've got to go through so we might as well recognise that. And as I say, this particular case shows that there's at least one solid truth in that Austrian view.

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Demand Matters

Written by Ben Southwood | Thursday 08 August 2013

Markets are about supply and demand. Scarcely a more banal thing could be said in economics, and yet some of the time it seems like free-market economists look only at supply. Glance over policy recommendations from a free-marketeer and you'll often see only tools for freeing up supply—labour market deregulation, planning reform, a bonfire of the quangos, an end to unbalancing subsidies or tax breaks, liberalisation of trade barriers. These are all fantastic things, which we definitely need. And even through the visor of the AS/AD model, even in a slump, these can make things better both by cutting prices and by raising wealth. But either deliberately or unconsciously, these economists are completely avoiding the demand side.

Is this because there are no doctrinaire libertarian things that can be done on the demand side? I've certainly heard many policies like quantitative easing called "socialism" by fellow travellers, but I'd like to think that my libertarian-leaning friends were more thoughtful than instinctively dismissing ideas they see as ideologically impure out of hand. 

And further than that, there are things we can do to make the demand side more libertarian, at least if we don't make the perfect the enemy of the good. School voucher systems are not decried for their "socialism" by libertarians despite the fact that under these systems schools are still paid for and run by the state. Monetary policies that are more free market (and more sensible) than our current one should be looked upon in the same way. It's not the case that anything short of abolishing the central bank is "socialism"—unless we want to completely devalue the word. And even if an intermediate policy were a form of "socialism" or "central planning", the realistic alternative is not a free market in money, but an abysmal central plan!

What are these intermediate policies that free-marketeers seem to be ignoring? Firstly there is nominal income targeting, which relies on markets both to stabilise demand and to allocate that demand among competing industries according to consumer preferences; and secondly counter-cyclical taxes, which rise automatically in good times and fall in bad times. Those are both thoroughly libertarian and entirely focused on demand.

In fact, the two most important libertarian economists of the 20th century—Friedrich A. Hayek and Milton Friedman—both endorsed demand-side policy, in the right circumstances. Friedman blamed the US Great Depression on the Federal Reserve, allowing a massive collapse in the money supply and aggregate demand. Hayek said that after the inevitable collapse of a misallocated capital structure there could also be "secondary deflations", where aggregate demand collapses and there is a costly adjustment period. Both would support monetary policy to deal with this issue—stabilising demand, so as to avoid painful adjustments from big inflationary or deflationary shocks. If money is non-neutral in the boom, why would it be neutral in the downturn?

One response libertarians might make is that Say's Law shows there is nothing we can do about demand. But Say's Law clearly doesn't hold in the short-run, and Austrian economists who rightly critique the assumptions economists often make about equilibria should be absolutely clear of this. In the short-run, a dip in aggregate demand—absent any response from the government, central bank, or hypothetical free banks working together—necessitates a period of deflation. But we know that (at least nominal) wages are sticky-downwards, meaning that calling for an adjustment to the new equilibrium means calling for years of the grave evil of unemployment foisted on millions. Say's Law reasserts itself in the medium- to long-run, and by then the misery and destruction of potential wealth has all already happened.

What libertarians are missing is that the relentless focus on supply is leaving them almost completely out of the conversation, and thus leading to worse policy than necessary. If free marketeers were talking about the best things to do on the demand side, as well as on the supply side, then there would be less of the all-eggs-in-one-basket big project spending stimulus, and more diverse market-oriented ways of countering the demand shortfall.

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Kick the 'wise men' out of the Bank of England

Written by Sam Bowman | Thursday 08 August 2013

In today's City AM, newly-minted ASI fellow Lars Christensen (aka The Market Monetarist) writes on the 'Carney rule'. The Carney announcement is a tiny step in the right direction, he says, but as long as the 'wise men' of the Monetary Policy Committee are running monetary policy, policy will be erratic and unpredictable, preventing adequate planning by firms and adding to market panic in economic downturns. Instead, we should have a strict rules-based system of nominal GDP targeting:

A much better rule would have been to commit to stabilising the level of nominal GDP (NGDP), a measure of aggregate demand, keeping market expectations of NGDP growth on a 4 or 5 per cent growth path. This should be combined with an open-ended commitment to expanding the money base to hit this target. This would avoid the nitty-gritty of the Carney Rule and be clearer and easier to communicate to markets.

Monetary policy based on the discretion of “wise men” leads to market uncertainty and panicky jolts as investors react to tiny changes in central bankers’ pronouncements. Replacing the MPC with rules-based policy would bring discipline and predictability to the Bank of England far beyond what was outlined yesterday.

I would prefer to have no Bank of England at all, with money emerging from the market as outlined by Hayek in 1976. Having said that, perfect is not the enemy of good — replacing the discretion of 'experts' with predictable, market-led rules would be a huge step in the right direction. If Carney's new rule fails, it may come on to the agenda sooner than we think.

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Self-sufficiency appeals to some, but the world gains by going global

Written by George Layton | Thursday 08 August 2013

Calls ask us to "buy local," supporting domestic industry and cutting back on "food miles."  The reasons advanced include saving fuel used in transportation, and not "exploiting cheap labour" in developing countries.  Self-sufficiency is, however, an expensive delusion.

This morning few of us draw our own well water to wash in.  Nor did we grow our own cotton and weave it into shirts.  We did not grow even our own wheat and combine it with “oaty goodness” to produce Cheerios. This is because we stick to what we can do, which is none of these things.

Specialization preceded globalization and is a major source of the world's wealth.  It involves producers doing what they do well, and producing more goods more cheaply that people could manage themselves.  Globalization extends it on a larger scale and to more peoples.  It gives domestic firms access to increased demand across the world, and it enables them to obtain lower cost raw materials and thus become more competitive and create extra jobs.  Consumers benefit, too, from lower prices that leave them more money to spend on other things.

Globalization means that firms can invest in overseas production, gaining the benefits of local skills for worldwide markets.  The Nissan factory in Sunderland, for example, represents inward investment of over £3.5 billion.  Meanwhile UK firms invest in production in developing countries, creating jobs there that raise the local standard of living.

Some blame globalization for the collapse of domestic industries, whereas what it did was to expose industries that were not viable without subsidies and protective tariffs.  Uncompetitive industries have indeed closed, and been replaced by ones that can hold their own on a world stage and sustain jobs that did not exist before.

Other critics bemoan the 'over-standardization' of global products, with the majority using Microsoft PCs or Apple computers.  It is true that globalization makes many standardized products widely available, but with economies of scale that keep them falling in price, and with access to improved communication achieved by using standard systems.

Nowhere are globalization's benefits more widespread than with food.  Our supermarket shelves are stacked with choices because the world is able to sell us their produce.  Many developing countries depend on food exports to improve the living standards of their people. And world hunger?  In the UK we import 50% of our food, and we produce more and cheaper food with 3% working on the land than we did when it employed 90%.  As modern farming methods spread and use land more efficiently, the world is producing more food and feeding more people.  Globalization helps poorer countries most of all, and it provides a viable way to close the development gap.   Self-sufficiency does not.

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Could people please stop trying to plan losers for us all?

Written by Tim Worstall | Thursday 08 August 2013

An oft expressed contention is that if only we allowed those wise people in Whitehall to plan more of our lives then the future would be made so very much better that we won't mind paying the costs of having those wise people in Whitehall. One problem, among many, with this idea is that it does require the people we're paying for to be wise. Not something that I'm really willing to bet on, that. The Very British Dude makes an excellent point here:

.....the biggest change to transport technology on the horizon, the driverless car. Instead, the Lib-Dems are wibbling about High-Speed Rail which will be almost completely obsolete by 2050 as everyone will be snoozing in their own autonomous vehicles. Such vehicles will run door-to-door on a vastly greater network of tracks (let's call them "roads" shall we?) than any train network will ever be able to compete with.

This is exactly right I think. The planning that we're being offered is that we should have more of a 19th century technology in the 21 st century. And it's entirely ignoring the coming impact of a 21 st century technology.

The arguments in favour of HST and other fast trains etc are capacity and speed. We want or desire a rise in the capacity of people to move around the country simultaneously. And we also want to increase the speed at which they do so because time spent travelling is "dead time". That latter isn't really true what with mobiles and notebooks: and it most certainly won't be true when we're all sitting in the back seats of our Wi Fi enabled cars. Such cars will also solve some to all of the capacity problems: the current road networks can carry a great deal more traffic if it isn't all being directed by that all too fallible few pounds of meat called the human brain.

I will admit to being a little unsure about how quickly computer controlled cars are going to be rolled out. But it wouldn't surprise me at all if they were actually commonplace before anyone even starts breaking ground on HST. Which would be an interesting example of spending £40 billion on a project that was outdated before it was even begun, wouldn't it?

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