Blog RSS

The Pin Factory Blog

"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

More on the ultimatum game

Written by Tim Worstall | Saturday 18 May 2013

A few days back I mused, almost as an afterthought, on whether the ultimatum game would be played the same way in all human societies. This is the game where player 1 gets to split $100, player 2 decidding whether or not to accept the split. If the division, 50/50, 60/40, 99/1, whatever, is accepted then both players get their money. If it's rejected, then neither gets any.

The importance of this game is that it shows that we'll actually harm ourselves in order to punish someone we think is acting unfairly. Humans thus have a deep and innate sense of fairness: or do they? For Luis Rooney (a reader here) has pointed me to this article which explains that the results of the ultimatum game are very much not consistent over human societies. There are those where people do act as that entirely rational consumer beloved of certain economists: they'll take a 99/1 split for who wants to leave a dollar on the table? There are even those where the offer starts out at 40/60 and player 2 will still reject it. These are the so called "gift" societies (historicaly, some Amerindian ones, today some Papua New Guinea for example), where acceptance of something leads to larger and more onerous burdens and obligations in the future.

This has really rather large implications for market economics. For it is that punishment of the transgressor, the unfair person trying to take advantage, which is one of the things that makes said market economies work. It's one of the things that regulates said markets: and do recall, regulation is often by social factors, not by legislation.

These differences, they believed, were not genetic. The distinct ways Americans and Machiguengans played the ultimatum game, for instance, wasn’t because they had differently evolved brains. Rather, Americans, without fully realizing it, were manifesting a psychological tendency shared with people in other industrialized countries that had been refined and handed down through thousands of generations in ever more complex market economies. When people are constantly doing business with strangers, it helps when they have the desire to go out of their way (with a lawsuit, a call to the Better Business Bureau, or a bad Yelp review) when they feel cheated. Because Machiguengan culture had a different history, their gut feeling about what was fair was distinctly their own. In the small-scale societies with a strong culture of gift-giving, yet another conception of fairness prevailed. There, generous financial offers were turned down because people’s minds had been shaped by a cultural norm that taught them that the acceptance of generous gifts brought burdensome obligations. Our economies hadn’t been shaped by our sense of fairness; it was the other way around.

Assume they're right about that causation (the piece doesn't explain how they reach that conclusion, instead of the idea that such markets thrive where the behaviour is already prevalent) and we actually find a good reason for why economic development is so hard. Why it's really very damn difficult to reach that first lift off stage. Because we're not just trying to get people to act in a particular manner, trade with people, divide labour and so on. We need to have, or the system needs to have, got into peoples' heads and changed the way they actually think before it can all happen. It's only with that change that the self-reinforcing feedbacks come into play and the economy as a whole takes off.

Which does rather put a different gloss on why some parts of the world are developed and some aren't, doesn't it? It's not because of what we've been doing to them but because, at least in part, of what is going on in both our and their heads.

We might even muse that this just reinforces the necessity of starting with markets, not with central direction, as a means of development. For it's only as the influence of the markets changes those thoughts that that lift off occurs.....

View comments

Ten reasons why the Left should like the ASI, 8: Immigration

Written by Dr. Madsen Pirie | Saturday 18 May 2013

The Left, traditionally supportive of immigration, should admire the ASI's stance in consistently arguing that the UK benefits by welcoming immigrants to our shores.

ASI writers have consistently pointed to the benefits that immigrants bring to the UK.  Their skills help generate economic activity and augment output and wealth-creation.  This is more obviously true of those with qualifications and a degree of expertise in some professional field such as medicine or finance, but it is also true of those with more modest skills.  As long as immigrants have a command of English, some education, a willingness to work and a readiness to respect our culture and values, they can make a positive contribution.  Their willingness to take on demanding jobs at relatively low wages benefits the population by enabling UK goods and services to be more widely available and to be produced more cheaply.

But migrants make more than an economic contribution.  Over the centuries successive waves of immigrants have been absorbed into British culture and have enriched it by their contribution.  From Flemish weavers and Huguenot glass-makers to Italian ice-cream manufacturers and more recently the celebrated Polish plumbers, they have made a cultural as well as an economic contribution.

Obviously any would-be immigrants not prepared to work and to integrate into our culture come into a different category, but the majority of our immigrants, and certainly most of those from other European countries, are not like that.  They want to work and get ahead, and can make a contribution to our society.  The degree of immigration matters, as does its concentration in certain areas, in that it should be within our ability to cope with the extra demands resulting from their arrival.  But these are problems that can be solved, and in no wise affect the principle that immigrants should be welcomed.

View comments

An end to zombie politics 6: Broadcasting

Written by Miles Saltiel | Friday 17 May 2013

The government needs revenues and holds too many assets on its books. In future blogs, I will return to its holdings in finance and healthcare. For the time being, let’s look at its involvement in media, specifically broadcasting.

Is it so very wrong to confess that the BBC has been getting on my nerves since the era of the “Boat that Rocked”? Indeed, contrary to Richard Curtis’ fairy-tale, it was no bewhiskered Tory, but the sainted Beeb which connived with the Musician’s Union and that old crook Harold Wilson to suppress the pirate radio stations, replacing them with the anodyne Radio 1.

The rationale for the BBC arose when spectrum was scarce—or more accurately monopolised by the military. But this hasn’t been the case for a generation. The public service obligation is unnecessary now that bandwidth is de facto unlimited – after all, the UK doesn’t have it for the press (despite the impact of Leveson). So why carry on with a poll tax on every household for a frankly undistinguished broadcasting service? Admittedly it keeps the chattering classes quiet-ish but at the price of giving them a platform and exposing the rest of us to decades of second-rate programming. Meanwhile its news values distort national debate, though to be fair the tendency of a profession to look at things from its own perspective means journalists are bound to (and should) be inclined to have at the powers-that-be, which today could engender a left-ish perspective.

Regardless, the BBC can readily be broken up into its constituent parts: entertainment, catalogue and commercial, content generation, news, radio, minorities, regional and so on. My figures show it would raise some £5.4bn, if sold in the market, or (where there is no market value) disposed of to other bodies like charities, universities and other NGOs, as well as local authorities. I estimate that Channel Four is worth another £1.6bn for a total of £7bn. Better than a kick in the teeth, and letting the public off the cost of the TV licence, so liberating the estimated 4,500 civil servants concerned for more gainful employment.

View comments

23 Things We're Telling You About Capitalism IX

Written by Tim Worstall | Friday 17 May 2013

The ninth thing we're told is that even though manufacturing is becoming a smaller part of our economy, of all economies, it's still very important oh yes indeed it is! There's a certain sadness in watching the argument develop in this chapter in fact.

Chang is quite right on his facts: it isn't that manufacturing output has shrunk at all. In the UK that was rising until 2007 (and we don't know how much of the subsequent fall is recession related or structural) and it's still rising in the US. It's just been rising less than the growth of the rest of the economy: thus falling as a proportion but not absolutely. Manufacturing employment has been falling substantially: a small part of this is simple reclassifcation. The graphic designers who used to work at the factory were counted as manufacturing workers: now they take their cocaine in Soho lofts they're service workers. The majority of that workforce fall is because of rising productivity: we simply need fewer people to make ever more stuff as we become more efficient at using labour to make things.

Chang gets all of this right: then he makes something of an intellectual leap and it's sad to see the tumble into the chasm of illogicality.

Given all of the above he says that manufacturing is still important and we should work to increase the portion of the economy that is such. The argument being that as productivity is easier to increase in manufacturing than it is in services, as manufacturing becomes an ever smaller part of the economy then total productivity growth will fall. Well, yes, it will, undoubtedly (and there's rather a clue as to why productivity growth has been falling in rich societies in recent decades: because that manufacturing where productivity growth is faster has been becoming an ever smaller part of the economy).

But to then insist that we must have more manufacturing in order to improve productivity growth is most odd. For we don't desire productivity growth per se. It's nice to have, for sure, it means we can make more stuff with fewer inputs. But even with that we only actually want to make more stuff, become more efficient at making stuff, that we actually want. There's no point in becoming more efficient at making Simon Cowell for example, as we've all got a surfeit already. And so it is with things that are manufactured. We don't want to simply become more productive: we want to have more of the things that we want with the resources we've got available, not more things that are manufactured just because it improves average productivity.

It's also true that manufacturing (yes, output is rising, but as a portion) of the global economy is falling. So the advice that every country whould focus more on manufacturing is ridiculous. Manufacturing what for whom? If manufacturing is carriages and services are cars (bear with me) Chang's insistence here is like saying we should all be making more buggy whips. Sure, no one particularly wants them but we're getting ever so much better at making them that average productivity would rise as a result of doing so.

The point here being that "productivity" isn't some thing that we should reify. It is indeed the secret to rising living standards: as Paul Krugman has said productivity isn't everything but in the long run it's almost everything. What Chang's missed though is that the output is measured at market prices: if we overproduce manufactures simply because this will raise the productivity number then their market price will fall: and productivity won't in fact increase at that point, will it?

So even though his basic facts are right here his prescription still fails. For while we would like rising productivity and it's easier to raise productivity in manufacturing than servicves this does not then mean that we want to throw resources at manufacturing.

Another way of clarifying this point is that, as we said yesterday, the purpose of all production is consumption. Sure, it would be nice to be more efficient at production: but only of things that people want to consume. And as it happens, it appears that further units of services produce greater consumer surplus than further units of manufactures.

Chang also goes on to point out that developing countries must concentrate on manufactures as this is the only way to raise their general productivity, that productivity increase that by definition leads to becoming a developed country. And I'd agree that it's highly likely that the developing countries will go through their own industrial revolutions. But not for this particular reason:

"If you base your development largely upon services from early on, your long term productivity rate is going to be much slower than when you base it on manufacturing."

The confusion here is that yes, when you're at the technological frontier then improving manufacturing productivity is easier than service productivity. For when you're at that frontier there's an awful lot of head scratching and pondering about what to do next. When you're well behind that frontier then there's no particular reason to think that this is so: indeed, we might think that services are easier. Take, just as an example, retailing in India and the computer hardware industry in India. In which do we think it would be easier to improve productivity?

I'd argue in retailing, the service, rather than computing, the manufacture. To improve the productivity of retailing all we've got to allow (or, err, the Government of India has to allow) is WalMart and Tesco in to start building the standard retailing logistics chain. That's going to be far easier (and cheaper!) than trying to build silicon fab plants (and all the rest) in a country without reliable electricity supplies. Or we might argue that we could improve the various state bureaucracies by computerising them away from the current quill pen and parchment systems.

That it is more difficult for us rich world people to improve services productivity than manufacturing such is entirely true. That the same is true of those places mired in seventeenth century services productivity is not. And what's really interesting about this argument is that if services are 70% of the economy (as they are, UK and US alike) and current poor world services became as productive and efficient as ours, then we'd see those poor countries become vastly richer whatever they do about their manufacturing. Simply because they'll be getting more services for the same as the current input: that's what increasing productivity means you see?

View comments

Chart of the week: US personal income and expenditure

Written by Blog Editor | Friday 17 May 2013

Summary: US household spending is holding up

What the chart shows: The chart shows the % change in US personal income and expenditure in nominal terms in the most recent three months (January-March 2013) compared with the previous three months (October-December 2012)

Why is the chart important: In 2011 the US temporarily cut the employee payroll tax rate from 6.6% to 4.6%. In January 2013, this cut was reversed as part of the fiscal tightening.  There were fears that this tax increase, equivalent to 1% of household disposable income, would lead to a sharp cut in consumption, potentially throwing the US economy back into recession. These fears were always exaggerated. The payroll tax cut did not lead to a spending boom, as households used the extra money to pay down debt faster. The increase could be – and was – met by drawing down savings somewhat. Although monthly income fluctuated over the year-end, this was due to pay-outs in December to avoid the tax hike. Averaging the past four months shows income remaining steady. This confirms the continued US recovery.

View comments

The debt and deficit cost of political policies

Written by Dr. Eamonn Butler | Friday 17 May 2013

UK Conservative Party Co-Chairman Grant Shapps MP has started "deficit alerts" on his Twitter account whenever a Labour politician appears on television to demand more spending on this or that. Here is a sample:

@grantshapps: "Deficit Alert! Ed Balls calls for £16.5bn more borrowing "this year" on #Murnaghan - same old Labour answer would mean soaring interest rates."

I am glad that politicians should be so focused on the debt and deficit implications of public policy. But we need to make it systematic.

As ASI Fellow Miles Saltiel has pointed out in the past, the UK's official national debt – about £1trn but who's counting? (precious few in Westminster, that's for sure) – is about one-sixth of the government's total liabilities. Most of those commitments are 'below the line', unseen. They include the cost of nuclear decommissioning, of Network Rail's debts, of future pension obligations, plus future commitments on healthcare, education and (more recently) social care and childcare.

The trouble is that politicians propose measures without any review of their cost, other than the cost in the current year. The full financial impact – next year, the year after and the year after that in perpetuity (since government spending programmes are almost never abandoned) – is never expressed.

I propose that whenever any measure is introduced into Parliament, the Office for Budget Responsibility should audit its future financial burden. New health treatments? Fine, but the Bill has to include the price tag of what it will cost in the decades ahead and an analysis of what that will do to the national debt and interest rates. Better social care? School leaving age raised to 18? Green technology subsidies? All fine if we choose them, but we must be told the long-term price.

Of course, knowing the future cost of their measures would not stop politicians from introducing things that look small but have a big future impact on the budget. But it would at least provoke a healthy national debt about what is and is not affordable. 

 

View comments

Monetary rules vs. central bank discretion

Written by Ben Southwood | Thursday 16 May 2013

On Monday I attended a conference in Copenhagen on monetary policy regime change with Lars Christensen of Danske Bank, Sam Bowman, research director here, Anthony J Evans, economics professor at ESCP Europe Business School, and Martin Ågerup, president of Danish liberal think-tank CEPOS, among others. The discussions raised a huge number of interesting ideas, among which was the question of rules vs. discretion in monetary policy. We all agreed that a rule-based system would be a major improvement on the existing system.

The current monetary regime in the UK, and many other major economies, is known as flexible inflation targeting. Under flexible inflation targets, a panel of appointed “wise men” is tasked with keeping inflation close to a target rate—in the UK 2% measured by the consumer prices index. They set interest rates (and in exceptional times, asset purchases, known as quantitative easing) to control aggregate demand and through that the price level, and achieve their target. The flexible element of the policy is that they have leeway to decide when achieving the target straight away would cause more harm to the economy than the resultant above target inflation. It is this provision that explains the Bank of England’s monetary policy committee’s decisions not to tighten policy despite 40 successive months of above target consumer price inflation in the UK.

There are many problems with this framework—including looking narrowly at consumer prices, rather than all prices in the economy; targeting a rate instead of a level; and judging performance by actually achieved inflation instead of expected future inflation—but here I wish to focus in on the problems with allowing the MPC to decide when and how much to miss their target.

One obvious problem with discretion, as opposed to rules, is that it can be unclear exactly what rate-setters will do in response to shocks. Firms have to worry not only about unexpected changes in market conditions but also unexpected macroeconomic response to these changes. Hence the feverish market interest in a press conference from Mario Draghi or Ben Bernanke, with intense focus on minute changes in tone or wording of statements. Hence the massive market shifts on central bank policy decisions. Measures of economic policy uncertainty have risen to volatile highs, and such uncertainty is widely believed to stymie investment, arguably the most important constituent of national income for staging an economic recovery.

A perhaps more fundamental problem with discretion as against rules is the huge amount of knowledge it assumes the nine-member MPC can amass and act upon. The optimal response to a supply shock, as Bill Woolsey explains in detail will depend on the demand and supply elasticities in that and other markets, not to mention guessing when and in which markets the shocks will hit. So even if an omniscient and perfectly benevolent despot could set the optimal policy with discretion, a rule-based system could be the best—or least bad—actually possible policy.

Allowing central bankers to decide when to hit their target is just allowing central bankers to decide whatever they think is best, and as Woolsey says, it’s completely unsurprising that they come out generally in favour of the system. 

View comments

23 Things We're Telling You About Capitalism VIII

Written by Tim Worstall | Thursday 16 May 2013

In our eighth chapter Chang tells us that as capital is, despite Marxist insistences, national in some manner therefore we should be nationalist about capital. Whether or not we allow Johnny Foreigner to come and invest in our pristine and national economy thus become a political question: the politicians should stroke their beards and ponder upon whether this specific capital is going to do the right thing in our specific economy.

One major problem with this is that, unlike Chang, we do not think that politicians, however long and grey their beards, have the ability to note whether a particular investment is good for the economy or not. The average political researcher turned Cabinet Minister could not invest their way out of a wet paper bag. But let's not talk about British politics specifically.

In one part of his analysis Chang is obviously and clearly correct: that captial and companies do still have a national character however multi- or trans-national they may seem. This is not, of course, a new idea:

By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

Yes indeed, that's Adam Smith. Wealth of Nations Book IV Chapter 2 para 9. And it's also the only mention of "invisible hand" in the entire tome. No, invisible hand is not a shorthand for the market and all its wondrousness: it's a comment upon the way in which even if capital were entirely free, foreign profits were higher than domestic, there's still something about security and familiarity that leads to capital being invested in that domestic trade. Very much the same reasons Chang gives for why corporates do indeed still have something of a home nation bias.

So Chang's right here but only because he's not original. And it's really most odd to insist that no one tells us this about capitalism when the very point is made in the Ur-foundation document of capitalist economics.

However, there's a very large mistake that is being made in the rest of the argumentation here. In short, it's in this sentence:

"This means that the home country appropriates the bulk of the benefits from a transnational corporation."

If the high end R&D is done at home, if the profits flow home, then the home country gets the major gains because these are the major benefits of a transnational corporation. Which is absurd poppycock. It's an entirely ludicrous thing for an economist to try and claim.

The major benefit of any productive organisation is what is produced: the benefit that people get from what the company (or co-op or individual) pumps out. This is known as the consumer surplus and this really ought to be known even at Cambridge. The benefit of Google is not cushy jobs for engineers, nor the lack of tax revenue in the UK, the benefit of Google's existence is that we all get to use Google. Whether VW's R&D is in Wolfsburg or not matters very much less than that we all have the chance to drive VWs.

Indeed, we can make an attempt at showing how vast is the difference between these two concepts of the value that a corporation provides. It's not quite exact, because this paper talks about Schumpeterian profits (ie, what the entrepreneurs get, not finance capital) but the stunning fact is that the entrepreneurs only get 3% of the value created.

The present study examines the importance of Schumpeterian profits in the United States economy. Schumpeterian profits are defined as those profits that arise when firms are able to appropriate the returns from innovative activity. We first show the underlying equations for Schumpeterian profits. We then estimate the value of these profits for the non-farm business economy. We conclude that only a minuscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.

As I say, it's not quite exactly the same but it is indeed indicative. The vast majority of the value that is created by any productive enterprise is not in who gets the jobs nor the profits nor the tax from that enterprise. It flows to the consumers who get to use the produce of that enterprise.

That is, after all, why the consumers buy it: they value it at more than it costs them to purchase it.

At heart this chapter shows one of Chang's basic problems. He views the economy as being about the benefits to producers and the benefits of production. He's entirely lost sight of the fact that the whole game, the economy and economics as well, is about consumption and opportunities for consumption. Whether or not foreign owners of companies do their R&D locally, pay their taxes or employ locals in the higher echelons of management is such a tiny part of the whole that it's an irrelevance. That foreign capital is still pumping out things that the local gets to use and that's where all the value is, in that consumer surplus.

After all, Smith did also say:

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident that it would be absurd to attempt to prove it. But in the mercantile system the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.

That was back in 1776: isn't it about time that it sunk in?

View comments

Oil price fixing – who the European Commission should question

Written by Dr. Eamonn Butler | Wednesday 15 May 2013

The European Commission has launched an investigation into oil prices. They suspect that prices may have been artificially inflated in order to swindle motorists out of their cash.

They are right. And they should start their investigation at the grand offices located at 1 Horse Guards Road, London SW1A 2HQ. That's not the headquarters of Shell or BP, but the home of the UK government's Treasury. After all, more than half the price that motorists pay at the pump is in fact tax. The product itself costs about 48p a litre to produce and get to the pump. The retailer gets about 5p. But on top of that, there is fuel duty of 58p for a litre. And 20% VAT on top of all that. Indeed, because VAT is added to the whole price, including the fuel duty, motorists are actually paying a tax on a tax!

VAT, of course, was raised recently in order to help balance the government's books in the wake of its bail-out of the banks. So that explains part of the increase in prices. More comes from the 'fuel escalator' – the principle that fuel duty should rise by more than inflation, in an attempt to induce us to leave the car at home and save the planet. (Politicians are remarkably adept at picking our pockets while telling us it's for our own good.) The escalator forced up UK fuel prices from below the EU average, to make them now among the very highest in Europe. And the tax on fuel is now several times what any economist can justify as a fair charge for the carbon that vehicles emit.

The bottom line is that more than tax on motor fuel is more than 80p a litre. Which makes George Osborne's offer to 'stabilise' petrol prices by shaving 1p off the tax look rather feeble. If the European Commission wants to get to the heart of the great petrol price rip-off, they should immediately call the Chancellor in for questioning.

View comments

23 Things We're Telling You About Capitalism VII

Written by Tim Worstall | Wednesday 15 May 2013

What Chang wants us to understand is that because we used to have protectionism and we still had economic growth and development then therefore we should have protectionism in those places where we want to have economic growth. In other words the poor countries should throw up trade barriers so that all the rich world megacorps cannot supply the people of those countries. Thus will industry develop and in the long term, wealth will be created.

There are a few problems with this argument. One of the most glaring is that he takes historical levels of tariffs as evidence of levels of historical protectionism. Which is an absurdity: until well into the 20th century transport costs were more important than whatever tariff levels were as a barrier to trade. Just as an example, it is true that US tariffs near doubled post Civil War. But actual trade barriers fell as transport prices (essentially, the ocean going steam ship) fell by more than that doubling of the tariffs. His historical evidence of tariff barriers is thus highly suspect. The reason that most countries developed their own industries is precisely because non tariff barriers, those high transport costs, were more important.

Another problem is that, as he actually points out but doesn't make the connection with, all of his examples who developed behind such tariff barriers and with infant industry protection etc simply were not democracies in any modern sense. Even the countries that developed behind them in the 20th century like Taiwan (or his native Korea) were not. Semi-fascist military dictatorships would be a more useful description of the political systems actually. And don't forget what the sort of planning that he's advocating means: not just that government should encourage certain industries but also that local people must be actively prevented from wasting their energies in things which are not part of the plan. It's extraordinarily difficult to think of a way in which a free and liberal democracy could do such things. Force some companies to enter ship building, yes, perhaps that could be done with carrots and not with sticks, but how would one, in any semblance of a liberal society, prevent someone from setting up to build ships if that's how they desired to waste their money? This is the sort of thing that did actually happen in those planned economies too.

Even if we grant him his thesis, that such planned and directed industry, protected by trade barriers, did lead to industrial development, I can't actually see how anything like it could be done in anything close to a free society. Indeed, I'd even be willing to consider the idea that the reason this "worked" in certain societies (like parts of East Asia) and did not work at all in others (parts of Latin American and Africa) was precisely that those two latter sets of societies were not authoritarian enough to allow it to work. People had enough freedom to be able to ignore the plan.

One further very important point from Chang's own argument. He does insist that only those countries that have got to the technological leading edge benefit from free trade. His argument is absolutely not that the rich countries of today, those on that leading edge, would benefit from restrictions on trade: quite the contrary. His argument, such as it is, applies only to developing, not developed, nations. So don't allow anyone to start using his arguments, faulty even as they are, to propose that the UK or the US, EU, should retreat behind tariff barriers. That's not what even he is saying.

We might also mention that historical evidence of restricted trade areas is interesting in an historical sense: but it's not really of any relevance today. This is becasue of the sheer scale of modern industry. Perhaps, maybe, it made sense for the US to build a steel industry behind barriers. There were a number of companies in it and between them they created a market, however protected it was. These days, even the EU isn't a large enough market, all 500 million of us, to produce, say, a viable computer industry. The idea that Tanzania (just as an example)  should have tariff barriers in order to encourage an indigenous computer industry is therefore ridiculous. Or a car industry: it costs $1 billion just to plan out a major new car platform these days, let alone tool up to manufacture it.

The scale of modern industry is simply such that anyone trying to recreate any substantial part of it behind tariff barriers is just going to be making shoddy goods, very expensively, for no very good reason. You might, just about, get away with a little bit of restriction with the billion and more in China and or India. But the idea that Somalia will, with the appropriate planning and protection, ever have a viable steel, car, chemicals or comuter industry is simply nonsense. It might well end up producing firms in an interesting niche or other: but the creation of an entire industry for such a small number of people just isn't ever going to happen.

And there's one final overarching reason why this autarkic route to development is undesirable: it's immoral. Building up infant industries behind tariff barriers is very much a case of jam tomorrow, not jam today. The idea is to deliberately remove from the inhabitants of the country concerned the ability to consume the delights of the current world. So as to enrich those who own the industry within those tariff barriers. That populace is subjected to decades of worse consumption goods than they could have had. Even if this does, in the end, lead to development we've still impoverished the people in favour of the capitalists of that society. Not that I think it does lead to such development: but even if it did that's what is being urged.

Which rather brings us back to why I don't think this will work in a democracy, or in anything even vaguely approaching a free and liberal society. Yes, sure, economic growth is important but not at the cost of deliberately impoverishing this generation. And that's what infant industry protection does and not only do the voters appear not to be willing to sit still for that (and thus it only, if at all, succeeding under authoritarian regimes) I very seriously doubt that it's moral for us to go around insisting that they should.

View comments

Pages

About the Institute

The Adam Smith Institute is the UK’s leading libertarian think tank...

Read more