The Pin Factory Blog

Michael Gove’s proposal to abolish competing exam boards for his new O-levels has sparked an important debate within the free-market movement. On the one hand, Liz Truss MP leads the approving side, while Dale Bassett of Reform, James Croft of the Centre for Market Reform of Education, and I, have all cautioned against the dangers of establishing subject-by-subject exam board monopolies.

Liz Truss’ main response to our criticism has been that competitive exam boards represent a “pseudo market” where government determines content, and that we have misunderstood the proposed structure: it is to be a franchise system rather than a monopoly. Similarly, she cites successful genuine free market qualifications like that of the Chartered Institute of Management Accountants (CIMA), who don’t have competing exam boards within their structure.

However, a franchising system is nothing more than a temporary monopoly. There may well be fierce competition for each contract, but it can only serve to restrict the hitherto limited number of competitors even further, as some fail to land contracts and go out of business. This sort of limited competition is also even more conducive to succumbing to the pressures of lobbyists and thus grade inflation as the ‘buying’ is done by a single body rather than by each individual school. As James Croft has pointed out, centralisation also concentrates risk, making it less likely for qualifications to gain and sustain confidence in their standards. Overall, the points made against monopolies still stand.

Nevertheless, the real problem is the persistence of a state-run and state-designed qualification. Comparing CIMA and O-levels is to compare apples to oranges: one is private, and one is not. Where politicians have control, centralisation must be avoided at all costs. The proposed abolition of the National Curriculum suggests that schools will no longer be bound to use O-levels, and will have more freedom to choose from an abundance of existing and potential alternative qualifications. But O-levels’ very existence as a state-run and state-sponsored qualification will necessarily crowd out the competition, leaving it in a dominant position.

Instead, perhaps both sides of the debate could agree to abolish O-levels (and A-levels) altogether. Superior private alternatives already exist, and would welcome the prospect of a more level playing field without government distortions. Even better, existing institutions’ experience of setting exams and designing syllabuses should be used, perhaps by encouraging the currently competing exam board companies to set up their own, entirely separate qualifications. This increased competition could also produce a variety of qualifications that meet employers’ and universities’ demands by including them in syllabus-setting processes. Rather than debating the design of a government qualification, we must be truly radical and propose its abolition.

The ongoing debate in the United States over Obamacare recalls the value of religion in the debate on liberty.  Key to the religious perspective on the debate are efforts by the US Department of Health and Human Services (HHS) to require Catholic organisations to provide contraceptive, abortifacient and sterilisation services to their employees as part of their health insurance programmes; an attempt which the Catholic Church has staunchly resisted as infringing on matters of conscience.

The opposition from the Catholic Church of course hinges on religious freedoms guaranteed under the First Amendment, but galvanises awareness among religious groups of the broader personal freedoms at stake under the other Obamacare mandate, requiring all Americans to purchase health insurance on pain of a fine.  Indeed, a Gallup poll now shows that a majority of Americans regardless of political persuasion view the mandate central to the health reform package as unconstitutional.

In some ways, the circumstances resemble the manner in which the first New Deal was brought down by provisions which violated the kosher practices of Jewish butchers, as recounted in an article in The Freeman this month.  In that case, the butchers’ challenge did not rest on First Amendment grounds, but it was motivated by religion and ultimately resulted in the economic regulation being struck down by the Supreme Court.

As the religiously-minded classical liberals of the 19th-century wrote, religion was valuable in a free society because it reminded the people that their sole duty was not to the state, and could thus serve as a means of protecting civil liberties from encroaching government.  As historian Ralph Raico says of Alexis de Tocqueville, who penned Democracy in America in 1835, the Frenchman believed that religious sentiment:

“...sets up barriers to the heedless trampling on individual rights. It is ultimately because of these influences, he holds, that ‘no one in the United States has dared to advance the maxim that everything is permissible for the interests of society, an impious adage which seems to have been invented in an age of freedom to shelter all future tyrants.’ ” (p. 99)

Whatever the Supreme Court may decide this week – whether it overturns or upholds the individual mandate which affects all citizens, or the HHS contraceptive mandate which affects employers – the religious dimension of this debate will hopefully sharpen awareness of individual liberties in future political discourse.  Many secular libertarians today, like their 19th-century forerunners, suspect authority including religious authority.  Rather, it is coercive authority which is to be suspect.  Ultimately, the first protection in upholding the rule of law in a free society is not the court or legislature, but the sentiment of the people, wherein religious sentiment can perform a valuable role.

Michael Gove's proposals for education are certainly an upheaval, but scrapping competing exam boards for the new O-levels may be a big mistake. The reasoning behind the proposal, espoused by supporters like Liz Truss MP, is that competition causes a 'race to the bottom', with teachers and schools self-interestedly choosing the easiest qualifications for any given subject in order to boost their rankings in the league tables. The argument goes that this has been one of the chief causes of 'dumbing down' in school qualifications.

Irrespective of whether this is true or not, it doesn't necessarily mean that we should throw the competition baby out with the bathwater. As Dale Bassett of Reform points out, competition has generated some excellent curricula in response to the demand for higher quality, like International GCSEs, the International Baccalaureate (vested interest: I took it), and the Cambridge Pre-U. It is not clear how far the new proposals will limit the ability of schools to deviate from the GCSE/O-Level path in order to choose these alternatives, though the scrapping of the National Curriculum suggests that school freedom will be extended rather than curtailed.

But beyond competing curricula, a plethora of different and competing exam boards within a particular qualification gives us the opportunity to discriminate more effectively when figuring out individual kids' ability and knowledge. For example, English from Exam Board X may be superior to English from Exam Board Y, but despite the fact the 'buyers' of exam boards are schools and teachers, they have had to conform to government-sanctioned rankings and league tables that treat competing qualifications as equivalent. Employers and universities have suffered from the illusion that this lack of distinction makes too.

The proposals to limit exam board competition to monopolies for every subject (or duopolies between O-levels and CSEs) would therefore exacerbate the problem by limiting healthy academic discrimination even further. With only one exam board to be lobbied for each subject, we would face a system where every self-interested education minister could easily ‘dumb down’ the system even further, no matter how much an overhaul could raise standards in the immediate short term.

Free-marketeer MPs like Liz Truss should be more wary of the dangers of this proposed exam board monopoly. Rather than abolishing competition, the real solution to grade inflation may lie in more accurate and discriminating government league tables, or even their replacement with a competing system of tables by universities, employers, and other private groups. The abolition of the National Curriculum may well free schools from the shackles of clumsy government league tables too, but we will have to wait and see for more detailed proposals.

It is encouraging to see that the Coalition is looking into welfare and changes to improve how the state treats the poor. After all, a lower welfare bill means the stress on the poor through taxation can be reduced. Proposed measures to scrap housing benefit for under-25s however, are poorly thought out.

Many claimants of housing benefit do so in order to subsidise low wages. Some 93% of households who made claims in the last year included at least one employed adult. Rather than seeking to subsidise the low wages of the employed, we should be seeking to reduce the taxes they pay.

Lifting those on minimum wages out of tax altogether would be a good way of achieving this, effectively securing a ‘living wage’ for all who are employed. Having a greater post-tax income is preferable to an equivalent in-kind benefit for housing, most clearly because it gives the poor more choices in alleviating their own poverty. Present arrangements give offspring financial incentives to live apart from their parents. In reality the young poor may be better served with money for transport than by an in-kind benefit for housing. These people are better placed to determine what they need than government.

The reasons for needing housing benefit in the first place are largely driven by state failure. Prime among these are examples of urban planning, which so often fail to actually meet the needs of the poor. Instead these projects serve to generate political capital as governments can be seen to care about regeneration. Similarly, the middle classes are often able to use planning law to protect the value of their own property. This in turn limits the ability of property developers to generate new stock, bringing about high prices in this sector. Steps to liberalise planning law and to reduce the size of the green belt would reduce property prices and help to reduce rents.

Many have already pointed to alarmingly high youth unemployment figures for reasons as to why it is wrong to specifically target under-25s. They are right to note this, but it is not through benefits that these problems can be solved. Rather, legislation such as minimum wage and employment law serves to reduce the number of employment opportunities open to young people. Government’s fetishisation of Higher Education has served to further distort employment markets.

This policy would create new problems by further complicating an overly complex system of benefits, while not properly addressing the real issues with welfare and housing that currently harm not just the taxpayer, but most importantly the young poor themselves. A sincere attempt to reform would have the state get out of the way of young people and allow them to help themselves.

The debate over tax avoidance never dies because most people tend to act in their own self-interest. We always search for the most common-sense approach to organising our own finances: We tend to buy things with lower VAT because they cost us less, and we tend to put our savings into a tax-free ISA when the opportunity presents itself. Likewise, with the financial resources to do so, you would tend to seize the chance to avoid tax on a much grander scale à la Carr.

The political classes, from David Cameron to Owen Jones, present tax avoidance as immoral. But then taking advantage of ISAs and VAT distinctions is immoral too, just as stealing a pound rather than stealing a million remains stealing nonetheless, the difference in scale is more to do with opportunities and abilities than intent. If moral equivalence amounts to anything at all, then we would have to demonise the entire population for tax avoidance.

But the real root of the complaint about immorality is that it deprives the government of revenue to do worthy things, like fund hospitals and schools. So dodging £1m is given the moral equivalence of taking it from the sick, children, and particularly sick children. Libertarians can even set aside the retort that these functions may be better served by the private sector. But it’s really the system that allows massive tax avoidance that should shoulder the moral blame, something that both libertarians and socialists could actually agree on.

The extraordinary 12,000 pages of the Tolley's Tax Guide represent decades and decades of heavy-handed discrimination and intervention by government. It ranges from petty differences like X VAT on pasties, and Y on their warm variety, to Labour millionaires acting like corporations. This discrimination is, obviously unequal treatment before the law, and will tend to discriminate against those least able to lobby: against the average family, and the smaller businesses. If ‘fair’ means anything it all, coercive discrimination to either manipulate society or give sops to lobbyists probably isn’t it.

But morality is a slippery thing. Even setting morality to one side, and accepting that tax avoidance does harm, what are the proposed solutions? Every government informs us that they are 'cracking down' on avoidance, with ever-greater resources and powers for Her Majesty's Revenue and Customs. But this solution tends do even more harm than good. Unsurprisingly, the bureaucratic sledgehammer falls heaviest on the easiest, and thus poorest targets. These small businesses without armies of accountants are woefully unprepared to deal with the thousands upon thousands of pages of tax legislation.

The solution is ruthlessly simple, and should satisfy socialists and libertarians alike: Taxes ought to be simplified. That means radically fewer exceptions, fewer loopholes, and fewer distortions. If possible, eradicate them completely. Let’s stop blaming individuals for being human, acting in their own self-interest. Instead, maybe we can agree for once, and end large-scale tax avoidance by ripping up our crony-corporatist tax system.

Are the days numbered for Europe’s last big bastion of sound money and public finances? The omens from its real estate market aren’t good.

Germany’s Chancellor Angela Merkel faces unrelenting pressure from virtually all other world leaders to set the printing presses free and to hand over her citizens’ dosh to feckless foreigners. Oh, it’s all dressed up in grand macro-economic excuses about matching surpluses and deficits, harmonizing fiscal regimes and stabilizing markets but the assault strikes at the foundation of Germany’s recent success – hard work, prudent saving and thoughtful investment. Like Britain’s own St Margaret in her final days, Frau Merkel is increasingly cornered by the baying hounds.

It looks like the rot, though, has already crept into the home front – literally. This week’s Sunday Times Home section has an article on the booming property market in Germany. Could it be that even those industrious Germans are succumbing to the siren call of easy money to be made in real estate – the same temptation that skewered the economies of Ireland, Spain and, yes, the UK?

German house prices had been relatively steady for two decades but have started to move up significantly in the past couple of years.

Nationally, house prices were up 5.5% last year while flats in the biggest cities rose by 10%. The Sunday Times article is replete with the kind of anecdotes so familiar to British home and property supplements over the years: Berlin properties now fetching three times their price four years ago, opportunities in buy-to-let, exploitation of tax breaks. One developer is quoted as saying: “We’re seeing Greek millionaires pile in out of fear and because they think it’s trendy…”

All these are worrisome signs of a bubble in the making. Even The Sunday Times article itself poses the question “So where are the best places to invest?” – surely a leading indicator of trouble ahead. If German airwaves become saturated with reality make-over TV shows and dinner parties with arguments about the best source for marble counter tops, then we’ll know that even Germany is lost.

We’ve argued before that speculative investment in real estate is a poor substitute for truly productive investment, something that Germany has clearly avoided in the past, much to its benefit. The more Frau Merkel is forced to give away to foreigners, the more the folks back home will ask “Oy! Wo ist meine?” That would be a far cry from the Germany we’ve come to respect and, secretly, admire.

I'm not sure that I've seen this extremely interesting form of argumentation before. Quantas, the Australian airline, is in dire financial straits. Their international routes are losing bucketloads and are being subsidised by their very juicy profits on their domestic routes. Etihad, the parent company of Emirates, is looking to raise its stake in Virgin Australia. Quantas is arguing that this must not be allowed to happen:

“Etihad will cross-subsidise Virgin’s domestic business with the specific aim of weakening Qantas,” claims an internal Qantas briefing paper, reported in the Sydney Morning Herald. “Virgin/Etihad will be able to flood the market with capacity until its competition is forced to significantly reduce its own operations or worse.”

That is, they must not be allowed to cross subsidise because it will damage our own cross subsidies.

I've always had this impression of Australia, of Australians, of being a pretty straightforward sort of place and people. Willing to give everyone a fair go, no side or pompousness to them.

Ah well, I suppose even the Lucky Country has to have its share of brazen hypocrites.

The great thinkers at the nef have insisted that we must reform the UK banking system in the following manner:

We need new institutions such as a Post Bank, Social Investment Bank, Green Investment Bank and new mutual, local and regional banks to provide a diverse, competitive and resilient banking system fit for the 21st century.

They and Compass organised the Good Banking Campaign which said:

The creation of a genuinely mixed and plural banking sector with far more choice for people than the present one-size-fits-all model with its few 'too big to fail' banks. Such a sector would for example include flourishing building societies, local and regional banks, green banks, a post bank run through the post office network, co-operatives and mutuals so that all sections and needs of society and business are properly catered for.

Lovely. Co-ops and mutuals, just get rid of that capitalist part, the shareholders, and everything will be well sweet. From the New York Times:

Spain’s three largest banks — Santander, BBVA and La Caixa — are not expected to request rescue financing.

Ah, something of a problem with the basic thesis then. For two of those three are the capitalist shareholding type banks. All the ones going bust and threatening to bankrupt the entire country are the local, regional, mutual or co-op type banks.

I'm all in favour of having a varied ownership structure for I really do believe in markets. Markets in forms of organisation just as much as in products or services. But to think that cuddly local organisations cannot cause problems is an error. Especially when, as in Spain, so many of them were subject to the "democratic control" of the local political classes.

We generally hear the term ‘Consumerism’ used as a term of abuse, usually by religious movements, pro-state economists, environmentalists and so on. I would argue that, properly constituted, a ‘consumerist’ society is exactly the type of society that we should be striving for.

However, part of the pejorative use of the term comes from a particular meaning attached to it. As the brief but surprisingly illuminating Wikipedia article observes, there are at least four possible meanings of the term:

i) The common use of the term giving an "emphasis on or preoccupation with the acquisition of consumer goods" (Oxford English Dictionary) – which is exactly the meaning which attracts much opprobrium

ii) The original coinage (1915) which referred to the "advocacy of the rights and interests of consumers" (Oxford English Dictionary)

iii) The economic use of the term referring to “economic policies placing emphasis on consumption”

iv) And finally “In an abstract sense, it is the belief that the free choice of consumers should dictate the economic structure of a society”.

Clearly, as Classical Liberals or Libertarians, we will see that (iv) is exactly the kind of economic order that we would like to prevail. This is the argument of von Mises in Liberalism that:

The social order created by the philosophy of the Enlightenment assigned supremacy to the common man. In his capacity as a consumer, the “regular fellow” was called upon to determine ultimately what should be produced, in what quantity and of what quality, by whom, how, and where... The much decried “mechanism” of the free market leaves only one way open to the acquisition of wealth, viz., to succeed in serving the consumers in the best possible and cheapest way.

This must be contrasted to an economic order in which producers are able to dictate to consumers what quantity of quality and of goods they should receive and at what prices, rather than having that determined by, in the long-run, the subjective desires of consumers. In a free market*, producers will be unable to dictate to consumers except in a very few cases, as Hayek and von Mises pointed out. However, armed with the power of governmental intervention, producers will be able to create cartels and monopolies and exploit consumers. This is what Deirdre McCloskey recently pointed out as have many others.

Read this article.

Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.

— Judge Learned Hand, U. S. Court of Appeals, 1935.