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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

Why I think voting matters

Written by Dr Madsen Pirie | Thursday 03 May 2012

I disagree with Sam's view on voting.  I think I might be more Popperian than Sam, in that I never expect to find a candidate whose views correspond with mine.  We're all different, and the best I can hope for is some agreement.  That's not why I vote.  I vote to turf out, or keep out, the bad guys, the ones I don't want to see holding office.  This follows Popper's view that democracy helps us to prevent bad or incompetent rulers from doing too much damage.

I could take the position that even if I don't vote, other people will do that job for me, so I can save myself the inconvenience and free-ride on their efforts.  I know that many critics of free-marketeers accuse us of acting only in self-interest, but many experiments in game theory situations show that the default position is not selfishness but co-operation and goodwill if others reciprocate.

I'm happy to go along and co-operate with my fellow electors in trying to turf out, or keep out, the bad guys.  In the election for London Mayor I regard one of the front runners as well worth keeping out, and will vote accordingly, hoping that enough of my fellow electors do likewise.

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The Bennites strike back

Written by Chris Snowdon | Friday 04 May 2012

Tim Worstall made himself (more) unpopular with Compass last week by pointing out that their idea of creating a form of national socialism rather resembled the sort of economy favoured by National Socialists. In a think piece entitled ‘Progressive Protectionism’, Colin Hines espouses a system in which countries “rebuild and re-diversify their economies by limiting what goods they let in and what finance they choose to enter or leave the country.” This happens to be much the same policy favoured by the British National Party. Hines has responded by calling this a “libellous smokescreen” and I have no wish to poke this particular hornet’s nest, other than to say that while ‘Progressive Protectionism’ is certainly unoriginal, it borrows less from Herr Hitler than from Mr Benn.

In 1976, Tony Benn came up with his ‘Alternative Economic Strategy’, of which Hines’ scheme is a virtual carbon copy. As described by Dominic Sandbrook in the latest volume of his monumental history of post-Churchillian Britain, Benn believed he could save the British economy by cutting the country off from foreign competition.

“The premise of the so-called Alternative Economic Strategy was that, in a globalized world, Britain could only reboot its stalled economy by temporarily cutting itself off from external pressures. Under this strategy, the government would introduce stringent controls on foreign imports and the flow of capital, effectively throwing up a protectionist barrier to stop too many foreign goods getting in. Behind this trade wall, they could adopt a properly socialist policy, with full employment, steadily rising wages, booming demand and hence a resurgent manufacturing sector, all under the direction of a souped-up National Enterprise Board.”

This was justifiably viewed as economic lunacy by the rest of Jim Callaghan’s Cabinet (who were hardly a band of Randian objectivists). They understood that such an anachronistic policy would lead to international retaliation on a grand scale which would further cripple British industry. In addition to violating various free trade agreements, including EEC membership, Benn’s “siege economy” was almost certain to lead to mass unemployment, severe deflation and shortages of essential imports. In the long term, it would stifle innovation and savagely curtail economic growth.

The only significant difference between Benn’s ruse and that of Hines is that the latter believes in turning the whole EU, not just the UK, into one large protectionist bloc. It is a matter of debate whether that would make the policy more or less disastrous, but disastrous it would surely be. “Benn’s alternative strategy would probably have been a catastrophe,” Sandbrook writes. “For one thing, he consistently refused to accept that a siege economy would probably annihilate what was left of British manufacturing. What was more, he seemed completely indifferent to the importance of financial discipline and international confidence, as if he could just wish away the new world of global competition and fluctuating exchange rates... in Benn’s imagination the rest of the world appeared as a sinister conspiracy of American bankers, European moneylenders and multinational corporations, plotting to undermine British socialism.” Benn, he concludes, “remained a little Englander to the last.”

After politely listening to Benn’s protectionist fantasies, Callaghan rejected the Alternative Economic Strategy in its entirety, but the scheme remained popular with many on the left of the Labour party and it was eventually incorporated into the 1983 election manifesto, famously described by Gerald Kaufman as the “longest suicide note in history”. Michael Foot’s crushing defeat in that election forced the party to abandon many of its most reactionary and economically illiterate ideas, of which the Alternative Economic Strategy was surely one. It seems that there are some who think it is time for a revival, but if resurrecting policies from Labour’s most dismal period of opposition qualifies as “progressive” then this much abused word no longer has any meaning.

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The Hayek Club goes to the Financial Times

Written by Sam Bowman | Friday 04 May 2012

Congressman Ron Paul had an op-ed in the Financial Times yesterday (£). As part of their series on the future of central banking, Paul wrote about the 'intellectual bankruptcy' of the world's central bankers. It's quite a coup for the Hayek Club, our informal list of people who see central bank credit expansion as the root cause of the financial crisis and post-2008 recession. Paul wrote:

Economists understand that having wages or commodity prices established by government fiat would cause shortages, misallocations of capital and hardship. Yet they accept at face value the notion that central banks must determine not only the supply of one particular commodity – money – but also the cost of that commodity via the setting of interest rates.

Printing unlimited amounts of money does not lead to unlimited prosperity. This is readily apparent from observing the Fed’s monetary policy over the past two decades. It has pumped trillions of dollars into the economy, providing money to banks with the hope that this new money will spur lending and, in turn, consumption. These interventions are intended to raise stock prices, lower borrowing costs for companies and individuals, and maintain high housing prices.

But like their predecessors in the 1930s, today’s Fed governors behave as if the height of the credit bubble is the status quo to which we need to return. This confuses money with wealth, and reflects the idea that prosperity stems from high asset prices and large amounts of money and credit.

The push for easy money is not new. Central banking was supposed to have ended the types of periodic financial crises the US experienced throughout the 19th century. Yet US financial panics have only got worse since the centralisation of monetary policy via the creation of the Fed in 1913. The Depression in the 1930s; the haemorrhaging of gold reserves during the 1960s; the stagflation of the 1970s; the dotcom bubble of the early 2000s; and the current recession all have their root in the Fed’s loose monetary policy.

Each of these crises began with an inflationary monetary policy that led to bubbles, and the solution to the busts that inevitably followed has always been to reflate the bubble.

This only sows the seeds for the next crisis. Lowering interest rates in an attempt to forestall a recession in the aftermath of the dotcom bubble required massive credit creation that led to the housing bubble, the collapse of which we still have not recovered from today. Failing to learn the lesson of the bursting of both the dotcom bubble and the housing bubble, the Fed has pumped trillions of dollars into the economy and has promised to leave interest rates at zero through to at least 2014. This will only ensure that the next crisis will be even more destructive than the current one.

The article is behind a registration wall, but it can be read in full here if you don't have an FT account. 

My one regret is that the FT chose to ask Ron Paul to represent the Austrian perspective. Paul has had a profoundly positive impact on the world by promoting this point of view, but he a politician, not an economist like those writing in the rest of the FT's series. Like Bloomberg TV pitting Ron Paul against Paul Krugman, it's a lop-sided debate. There are some superb Austrian school monetary economists around, like George Selgin, Larry White, Steve Horwitz and our own Kevin Dowd, who are more qualified to make the case against central banking than Paul in a relatively technical newspaper like the FT.

Still, it's remarkable that any Austrian was asked to give this point of view. As I've written here before, it all adds to my feeling that the Austrians are on the rise.

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But of course regulation doesn't hamstring the economy!

Written by Tim Worstall | Saturday 05 May 2012

We've been told, by a man with impeccable economic credentials no less, that red tape and regulation just isn't important to the economy at all:

The truth is that, if there is money to be made, businessmen will invest regardless of the level of regulations. This is why the 299 permits that were needed to open a factory in South Korea in the early 1990s did not prevent the country from investing 35% of its income and growing at 10% per year at the time.

As I've said elsewhere already this is the statement:"Look, a factory exists! Red tape isn't a problem!". When of course M. Bastiat would have us ask how many factories would there have been in the absence of the red tape? As I've also mentioned on this point, that Ha Joon Chang teaches economics at Cambridge tells us that we might have the occasional problem in our education system.

Which brings me to this little snippett of information from Bloomberg:

France has about 1,500 companies with 48 employees and about 1,600 companies with 49 employees, but only 660 with 50 and 500 with 51, according to a December 2011 report from state statistical unit Insee.

The full lunacy of French employment law kicks in when a company has 50 workers. That's when you have to set up three workers' councils, apply to a court to make redundancies and so on. Which is rather glaring evidence, don't you think, that at least in the minds of employers red tape does have an effect? People are deliberately not growing their payroll through that 50 person barrier in order to avoid the costs of that red tape. And, as ever, it's not actually what the Reader in Economics at Cambridge thinks ought to be happening that is important: it's what people are actually doing out there in the real world that is.

It's also worth taking issue with another point: even if red tape were only a minor factor this is still not an argument in favour of red tape. Even a minor disincentive to growth and investment is still a disincentive, one that we probably would prefer not to have. As an analagous argument, as a middle aged, fat, bespectacled and balding (and married!) male I'm not going to be a great success with the young ladies. But that doesn't mean I should put spinach between my teeth just to make sure of it, does it?

I must admit though, I'd love to know how many of those French firms that are under 50 employees have grown to that size: and the number that are over 50 have been shrunk to that size by the effects of the red tape.

 

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The idiocy of the protectionist growth argument

Written by Tim Worstall | Sunday 06 May 2012

You don't have to go far into NGO land to find people arguing that poor countries need to protect their baby industries from the big bad wolves of international capitalism. That trade barriers are a good idea, that infant industries need to be nurtured and, as is the way of these things, the Washington Consensus is the imposition of the poverty that the poor suffer from.

That this is entire nonsense does not stop those idiots wearing ideological blinkers from repeating it. Which is something of a pity as it really is trade, openness to it, which drives economic growth:

In recent years, sub-Saharan African countries have grown remarkably. According to data from the Penn World Table 7.0 (Heston et al. 2011), average annual real GDP per capita growth from 2005-9 has been over 2.5% (3.5% when excluding 2008 and 2009). This recent growth performance is remarkable given that, for over four decades since 1960, real GDP per capita growth in sub-Saharan Africa was dismal, averaging less than 0.5% per annum.

We are, as we know, talking about the poorest of the poor and any uptick in their fortunes has been both extremely difficult to find and extremely welcome when it is.

One thing that might be remembered is that, post-colonialism, most sub-Saharan countries did in fact follow the policies of infant industry protection behind tariff and licencing barriers. It was the falling apart of this in the 80s and then the gradual adoption of good old neoliberalism in the mid to late 90s which has turned the numbers around.

By casual empiricism, it is interesting to note that the average sub-Saharan African country is today over 30% more open to international trade than in1960 (as measured by the ratio of exports plus imports over GDP). The big question is, of course, whether this increase in trade openness is a cause or a consequence of the increase in economic growth.

So, we have a correlation: what is the causation?

We find that openness to international trade increases economic growth in sub-Saharan Africa. The instrumental-variable estimates suggest that, on average, a one percentage point increase in trade openness is associated with a short-run increase in GDP per capita growth of about 0.5% per year. The long-run effect is larger, reaching about 0.8% after ten years.

It is that trade openness precedes the growth.

Thuys we have an interesting piece of objectivity in economics. It is certainly possible to make subjective arguments either way about trade and growth. That everyone else had protectionism when they grew so therefore this is a necessary part of growth, just to give one currently fashionable argument.

However, such theorising does need to be calibrated against reality which is what this paper has done. And the answer is, no, protectionism is a complete crock at reducing poverty through economic growth. It is that trade that does it: we neoliberals are right again!

 

 

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Ditching, at least for the moment, macroeconomics

Written by Tim Worstall | Monday 07 May 2012

I've said before here that I'm deeply unimpressed with macroeconomics, stating that as the man didn't say in the long run it's all microeconomics. However, I'm coming around to the idea that the situation is worse than that. We just don't know enough about macroeconomics to know what to do. This from Noahpinion sums it up for me:

Macroeconomics is not a science that has, as of May 2012, proven itself in the way that chemistry, biology, or various branches of microeconomics have proven themselves.

This might be betraying my own lack of knowledge of the subject, even my uninterest in it, but I'm not aware of a macroeconomic model, one that actually provides policy responses, that you could get more than perhaps 50% of economists to sign up to. Whereas there are swathes of areas in microeconomics that most would indeed agree are true, disagreements being haggling around the details or even the subjective valuations of the goals, not the objective truths of the insights.

This does come as something of a surprise to me as, like most non-economists*, from outside the profession you get the idea that all agree on what should be done to the wider economy. It's the validity of things like minimum wages, rent controls, tariffs, trade itself, incentives, the working of the price mechanism, incidence of taxes, that are still widely disputed among economists. Which is, at least as far as can see it is, entirely the wrong way around.

In macro we've still got entirely respectable economists, Nobel Laureates on every side, arguing over whether monetary policy is a sufficient cure for recession at the zero interest rate limit, helpful but not enough or near entirely irrelevant, only fiscal policy can help. The same people are similarly arguing over whether, with national debts at 80-100% of GDP, borrowing more to spend more as a fiscal policy is the only way out of recession, helpful but be careful or merely bringing the day of reckoning even closer as nations spiral into bankruptcy, counter-productive even.

I don't mean to support or argue against any of these positions here: just to note that the senior practitioners of the craft are arguing as if medicine were still based upon the four humours, chemistry upon the four elements and biology without genetics or inheritance.

Which leads me to a suggestion. We really should be concentrating on those parts of economics where we know that we're at least roughly right. Those microeconomic matters: get the incentives right, get the price system right, and leave that attempted manipulation of the wider economy until there's actually an agreement on how to do so. Or even why to do so.

 

*Yes, I'm self taught, no advanced degree, not a professional economist, even if well informed in a couple of specific areas of the subject.

 

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Europe's nightmare has just begun

Written by Sam Bowman | Tuesday 08 May 2012

The chart above comes from Veronique de Rugy of the Mercatus Centre. It tells a different story to the popular narrative that European voters have tried and rejected austerity. In fact, they have hardly tried it at all, returning generally to 2008 levels of government spending. France has not cut at all, yet it has just elected the patron saint of mediocrity, Francois Hollande. Not that Sarkozy was much better. De Rugy comments:

First, I wish we would stop being surprised by what’s happening in Europe right now. Second, I wish anti-austerity critics would start acknowledging that taxes have gone up too–in most cases more than the spending has been cut. third, I wish that we would stop assuming that gigantic “savage” cuts are the source of the EU’s problems. Some spending cuts have been implemented in a few countries. Also, if this data were adjusted for inflation (which I would prefer but the data isn’t available) it would possibly show a slight decrease and certainly a flatter line for all countries. However, the overwhelming take away from the European experience is that a majority of governments haven’t really implemented spending cuts, large or small, and some have even continued to grow.

What European voters have rejected is the idea of austerity. The very suggestion that their governments should live within their means is, apparently, unacceptable to the majority of voters in France, Greece and, as seems likely, the Netherlands. Hollande may be a nonentity, but the National Front candidate, Marine Le Pen, polled 18%, and the far-left Jean-Luc Melenchon 11%. Both seem likely to do well in next month's parliamentary elections. Golden Dawn, Greece's Nazi Party, has just polled 7%, the Communists 8.5%.

This is worrying stuff. No doubt an element of this is anti-bailout sentiment which, shamefully, has not been given a legitimate political voice in most European countries. But much of it must be down to the threat of austerity, as we're told. If these voters had been through years of hard cuts and belt-tightening, a backlash would be understandable. But these voters haven't lived through that yet. The worst economic misery is yet to come, sooner or (as people like Hollande would have it) later. If this is what things have come to before the austerity, what's coming after?

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Happy birthday, FA Hayek

Written by Sam Bowman | Tuesday 08 May 2012

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A Queen's Speech we'd like to see

Written by Blog Editor | Wednesday 09 May 2012

While there might well be some good things in the Queen's Speech laid before Parliament, there are some things which could be added to it.

"I have decided to tackle youth unemployment by scrapping the Minimum Wage for those under 25 years of age."

"Firms with fewer than 100 employees will be allowed to register their employees as self-employed.  Such firms create two-thirds of new jobs in the United Kingdom, and this will dramatically increase the number of them, taking hundreds of thousands of those currently employed into work and off benefits."

"My government has decided to reduce the burden of regulation by imposing a five-year moratorium on new regulations while existing ones are scrutinized for possible abolition.  This will include regulations and directives that emanate from the European Union, and the only exceptions will be for any that relate to national security."

"My government will abolish mandatory retirement laws."

"Towns and cities across my kingdom will be invited to apply to become Charter Cities, and six will be selected on a four-year trial basis.  These cities will be administered by private management teams with private equity involved, and will operate under a much lighter tax, planning and regulatory climate in order to boost business and growth."

"My ministers have decided to bring forward the raising of the income tax threshold, and will be increasing it to £12,500 by the end of the current Parliament."

"In view of recent discoveries of low cost reserves of relatively non-polluting natural gas, my government has decided to phase out subsidies to wind energy sources, and to reverse the increase to energy bills which this entails."

"To encourage the setting up of new businesses, my ministers commit themselves to lower the rate of Capital Gains Tax to 15% within 2 years, confident that this will raise more revenue than is yielded by the current rate."

"To accelerate the building of many new homes affordable to first time buyers, my ministers will introduce legislation to allow farmland in the UK to be converted to other uses in the ratio of 80% woodland, 10% housing and 10% infrastructure."

"My government will abolish Inheritance Tax by the end of the current Parliament."

"My government is confident that these measures will boost growth and employment by such amounts as will more than compensate for any temporary diminution in revenues they might entail."

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Our reaction to the Queen's Speech

Written by Blog Editor | Wednesday 09 May 2012

In response to the Queen’s Speech, the Adam Smith Institute gives its reactions to some of the key areas:

“The government seems determined to tinker around the edges of business and employment regulation. The tepid piecemeal modifications the government is proposing will do virtually nothing to make doing business easier in Britain, and that's the only hope we have of generating a strong recovery. Our export markets are weak and domestic demand is stagnant – without a supply-side revolution that slashes business taxes and employment regulation, we will not see growth.

“The Communications Bill is particularly concerning. One of Britain's best comparative advantages internationally is its dynamic and fast-growing tech sector. So far, the government has talked the talk about protecting this sector, but not walked the walk. The Communications Bill should establish the exceptionalism of the internet and protect it from the stifling regulation that is holding back the rest of the economy.

“Instead of more regulation like the immigration cap and the Communications Bill, the government should be throwing out the regulation book and starting from the ground up. It should determine which regulations are absolutely necessary and ditch the rest. In the meantime, companies with 100 employees or fewer should be encouraged to register their employees as self-employed under contract, to side-step much of the existing employment regulation. Growth won't come from anywhere else, so we can't afford not to unleash British business. Unless we tackle the regulatory blockages, competition and enterprise policy will bear little fruit.” — Sam Bowman, Head of Research

On the Groceries Code Adjudicator – what will they think to regulate on next?!

“So now we are going to have an OfGrocer. What will they think of to regulate next? At this rate, almost the entire country will be employed in regulatory quangos, with hardly anyone left to produce things at all.” Dr Eamonn Butler, Director

On public sector pension reforms – long overdue, and must be in line with private sector:

“The bill to reform public service pensions is long overdue, though it will be hugely controversial. But the pensions for public sector workers have to be in line with what people in the private sector can aspire to. Right now, the perceived superiority of public pensions – larger, inflation-proofed, with more generous sickness provisions and available at an earlier age than most private pensions – causes enormous resentment.” Dr Eamonn Butler, Director

On Freedom of Speech – welcome news but they won’t go far enough:

“I am pleased to see measures to protect freedom of speech and reform the law of defamation. No doubt the government will not go far enough, but freedom of speech is essential for a healthy public debate on the important issues of the day. Right now people are unable to speak their mind for fear of being prosecuted or sued.” — Dr Eamonn Butler, Director

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