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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

Common Error No. 20

Written by Dr Madsen Pirie | Tuesday 29 January 2008

20. "It is wrong that so few people should own so much of the nation's wealth."

wealth.jpgThe wealth in no sense belongs to the nation, since we are talking about wealth which belongs to individuals. The statement comes down to saying that it is wrong for some people to own vastly more than others. This is not self-evidently true, and there are many advantages to people in society if concentrations of wealth are possible.

Firstly, estimates of the distribution of wealth in society are often wrong. They conveniently count shares and landed property, while often neglecting the entitlements which constitute the main source of wealth for ordinary people. Pension rights are often treated as if they did not exist or had no value to them, while other estimates deliberately omit wealth vested in housing, which is most people's main item of value.

That said, there is nothing wrong with an uneven ownership of wealth. Some people are more prudent, some more successful than others. Some show enterprise and initiative, and the accumulation of wealth represents the reward for their activities. In a free society, even if people started with an equal amount of wealth, there would soon be wide variation.

Possible accumulation of wealth not only stimulates entrepreneurs into socially useful activity; it often provides the means. Wealth can be put to work by investment in creative enterprises. It can create employment, and can lead to the creation of more wealth. Pools of capital are necessary to most economic enterprises; they are a vital tool by which societies become richer.

Of course we want decent living standards for those who cannot make it on their own, but we also want opportunities for those who wish to advance themselves and who can benefit society in doing so. Inequalities of wealth are not important; what counts are the opportunities for people to create the wealth that enables society to improve its services.

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Bill Gates wrong again

Written by Dr Madsen Pirie | Tuesday 29 January 2008

bill_gates.jpg Bill Gates is good at making money and supporting charitable work, but weak on his understanding of how capitalism works. He called at Davos for a kinder, gentler, "creative" capitalism. As our own Tim Worstall points out on the Globalisation Institute site, that's what capitalism already is. It harnesses desire for self improvement into social good. All right then, how much good does capitalism's creative side do socially? Tim quotes William Nordhaus calculating how much of the benefit of technological change between 1948 and 2001 went to its producers.

The actual number he came to is that only 2.2 percent of the total value created by innovation remained with those who did the innovating. The other 97.8 percent went to the society at large: they got new, or cheaper, or more, gew gaws like edible food, clean water or even mobile phones as a result of the entrepreneurs' attempts to enrich themselves.

That's the point. It already benefits others. Bill Gates seems to have taken on board some comic book BBC view of a greedy, reckless capitalism which tramples the poor. Phooey. It's the best thing in history that has ever happened to the poor.


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And another thing...

Written by Junksmith | Tuesday 29 January 2008

Since it came to power, the Labour government has introduced 2,685 pieces of legislation every year. And each has been either ill-conceived, draconian, bonkers, bitter, dangerous, counter-productive, childish, wrong, thoughtless, selfish, or designed primarily to make life a bit more miserable for everyone except six people in the BBC, 14 on The Guardian and Al Gore.

– Jeremy Clarkson tells it like it is in The Sunday Times

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Blog Review 490

Written by Netsmith | Monday 28 January 2008

The stupidity of mercantilism was known before Ricardo, before Adam Smith. Why is it that some politicians still don't get it?

Unfortunately, there are all too many who think this way. 

Explaining how the "stimulus bill" is being crafted in the American political system. Bismark and sausages comes to mind. 

And how such bills are passed after crafting. Sausages probably get more scrutiny. 

Where your tax money goes after such lackadaisical scrutiny. 

Surely stupidity, no, evil, like this will wake people up to the insane nature of the war on drugs? No? 

And finally, a fabulous time waster. The awful thing is that Netsmith is convinced that he's seen far worse, certainly listened to far worse.

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That crisis in manufacturing

Written by Tim Worstall | Monday 28 January 2008

One of the statements that engenders general bewilderment is the insistence that there is no crisis in manufacturing in the UK. It's certainly true that manufacturing employment has fallen a lot, but (with a few years of flatlining just recently) manufacturing output has continued to rise. This is a result of increasing productivity and is generally a good thing: we make the things we can drop on our feet using less labour, meaning that we can both break feet and have other things produced by that newly freed labour. It's also true that the workshop of the world (copyright, 19th century Britain) now has an economy which is only some 16 percent (or so) manufacturing, but this is a result of the service side of it growing more swiftly in recent decades.

Even the car industry is doing well:

Britain exported a record number of cars last year, marking a renaissance in the motor industry, according to the Society of Motor Manufacturers and Traders.

However, I have this horrible feeling that exactly the wrong lesson is being taken from this renaissance:

(SMMT CEO) Everitt said there was a renaissance in the car making industry that should lead to a re-evaluation of the role of manufacturing in the UK economy. "Looking at areas [of the economy] where there is now concern, these are the areas we have been told were the future. We were told that this future was with service industries and we did not need to worry about manufacturing. I think it's time we looked once again at the value of manufacturing."

No, I don't think this is the time to look at the value of manufacturing at all. These good figures have come after a couple of decades where we, as a society, didn't investigate, promote, worry about nor subsidise manufacturing in any manner. We seem to have empirical proof that leaving the business of business to those who actually do business works just fine: the last thing we want to do now, when we've got it running on all cylinders is to open up the bonnet and start fooling around with things again. 

If "we" start to look at the role of manufacturing again that'll only encourage the politicians to take an interest: as British Leyland should remind us, that's a great way to destroy an industry. 

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Common Error No. 19

Written by Dr Madsen Pirie | Monday 28 January 2008

19. "Big business does not really produce what people want. It uses coercive advertising to make people buy what it wants to produce."

strand.jpgThe Ford Edsell was produced by Ford of America and backed by a massive advertising campaign. It flopped utterly. The adverts for Strand cigarettes in Britain won many awards and were very popular. Alas, nobody bought the product, which is why Strand cigarettes have disappeared.

The notion of coercive advertising is pure theory. In fact most advertising is used to break into markets, or to open up new ones. Advertising informs the public of new products and processes, and can thus attack established products. Furthermore, it is very competitive. Skilled creative power pits product against product, company against company. It is self-regulated, too, refusing to allow ads which try to sell products by making people feel inadequate or exposed to ridicule without them.

Far from deciding what is convenient to produce and then trying to make the public want it, companies spend millions on market research trying to anticipate the tastes and needs of the public, and into designing and producing products to satisfy them. Despite this, they often get it wrong. Fortunately the market system directs resources to those who are good at this type of activity. Investors are more likely to back them, and stores are more likely to stock their goods.

Any business which did produce for its own convenience and then tried to make the public accept its goods would soon find its market taken from it by competitors who produced what the public really wanted. In practice, the only firms who can hope to get away with this sort of activity are state-controlled ones protected by monopoly. In these cases the public has no alternative but to accept what is produced, because no competitor is allowed to offer them the things they really want.

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Making myself unpopular

Written by Tom Clougherty | Monday 28 January 2008

I was a guest on BBC 1 West's Politics Show yesterday, discussing post office closures and housing development - both emotive issues in the West Country, I imagine.

Post office closures were first up. I argued that we needed to put aside emotional attachments to the post office and put things in context. Firstly, 95 percent of people will still be within one mile of a post office after the closures. Secondly, the only reason the post offices are being closed is because not enough people use them - despite taxpayer subsidies to the tune of £150m a year, the post office network still loses more than £100m per annum. If people want to save their post office they should spend more money there, not expect the taxpayer to keep an uneconomic business going. In any case, the services provided by post office counters can easily be offered in more cost-effective ways. The mail functions could provided by other shops - just as you can buy a lottery ticket anywhere, why shouldn't you be able to pay for postage? Bills can be paid over the phone or online, and pensions and benefits can almost always be paid directly into people's bank accounts. Where they cannot, it would be much cheaper to send 'mobile post offices' out to rural areas on a regular basis, rather than keep the post offices open.

In the second half of the show we talked about the planning system. I was asked whether I agreed with the government's new target for house building. My reply was that the very fact the government has a housing target is the problem. Development should be led by demand, and not government dictat. Certainly, areas of outstanding natural beauty can be protected, but that still leaves plenty of space for development in the UK. More than 90 percent of the population currently lives on just 8 percent of the land. The only reason it feels cramped is that the government artificially restricts the supply of land, and then imposes density requirements on the land that is available. This also explains much of the objection to new development - government regulations often prevent developers from building houses in a way that 'fits in' (precisely the opposite of what the planning system was meant to achieve). The truth is that government cannot plan land-use any better than it can plan the rest of the economy, and the sooner it gives up trying the better. That wouldn't mean a free-for-all, as most people assume: Bath and Edinburgh were both privately planned cities, and they are much more attractive than anything the government has ever managed. 

You can watch the show here via the BBC website.

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And another thing...

Written by Junksmith | Monday 28 January 2008

"A Nevada brothel is encouraging its customers to give their tips to the Ron Paul campaign. How did this endorsement deal slip by Bill Clinton? He must be getting old."

– Jay Leno

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Blog Review 489

Written by Netsmith | Sunday 27 January 2008

Economists and politicians: sadly, while the economists might have some pretty good ideas, the politicians, well, no one actually knows.

Then again, some politicians seem to have sensible ideas, it's the rest of their party that holds them back. 

Just what is the optimal size for a firm or organisation? Sadly, no one knows except ex-post: which is why having politicians trying to determine it won't work. 

So this saving the planet stuff: how's it going to work when one EU insistence on energy meets another on the environment? 

Was the rise in tax revenues in the 1920s a Laffer Curve event? 

A shout out to one of our blogging friends : cancer is treatable but pimples where? Ouch! Get well soon! 

And finally, perhaps not the best part of the world to be getting advice from on these two problems. 


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Jerome Kerviel and Societe General

Written by Tim Worstall | Sunday 27 January 2008

By now everyone and their dog has heard about Jerome and the €4.9 billion he lost his employers by playing around with equity derivatives. A decent explanation of the machinations is here. The Daily Mash is (as ever) slightly over the top in ascribing it all to his working (quelle horreur) more than 30 hours a week but even The Guardian notes that he didn't take a single day's holiday in eight months!

But there's one very important point that I haven't seen mentioned anywhere else, a by product of the fact that he lost the money in equity derivatives. That point is that over the system as a whole, there has been no net loss at all. To understand this Willem Buiter's concept of "inside instruments " is very useful. 

Another way of putting this is that derivatives trading is a zero sum game. Risk gets shuffled around (a good thing) but at the system level, rather than that of the individual company or trader, no money is made or lost.

For with each and every one of the contracts that Kerviel made there was a counter-party. If we ignore the trivial sums paid to the marketplaces and clearing houses, each and every euro that he lost on said contracts was made by said counter-party.

This obviously isn't going to be of much comfort to Societe Generale and its shareholders, just as much as it will be a comfort to those who now have that €4.9 billion. But no wealth or money was "lost" in this case: rather, it was transferred.


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