The Pin Factory Blog

The seminars hosted by Ludwig von Mises, first in Vienna and later in New York, have a key place in the history and development of Austrian economics. Such figures as Hayek, Rothbard, and Hazlitt all attended.

Inspired by this the London Mises Circle is holding a seminar at the Institute of Economic Affairs at 6:30pm on November 1st.

The resurgence in popularity of Austrian Business Cycle Theory in recent years has prompted renewed criticism of ABCT. In a recent article, A Reformulation of Austrian Business Cycle Theory in Light of the Financial Crisis, one of the leading Austrians, Joseph Salerno of Pace University, responds to some of these criticisms and makes some additions and refinements to ABCT. We will be aiming to discuss these at November’s meeting.

All are welcome. If you have any questions please email londonmisescircle@gmail.com. 

In the US Presidential election of 1992, candidate Ross Perot talked of the "giant sucking sound" of US jobs draining South of the border if the US signed into the North American Free Trade Area.  It did; there wasn't; it won't.

4.  Employment

The pessimists seem to think that the advanced economies have had their day as far as jobs are concerned.  They say we can't compete against low-cost labour in the developing world, and they urge protective tariffs against imported goods to protect jobs at home.

No.  What happens if government follows that course is firstly that they make their own citizens poorer by making them pay more than they need for their goods.  Secondly they make their own manufactures uncompetitive by cocooning them in a protective domestic market, but unable to sell elsewhere in the world.

When we buy cheaper foreign goods we have money left over to buy other things with.  It is true that some jobs go abroad and help people in poorer countries to step onto the road that leads to wealth.  But it is also true that as people in those countries become richer, we can sell them more of what we produce.  We no longer compete on cheap textiles, but many jobs have been created in added value areas of textiles.  Developed countries face growing demand for fashion labels and designer goods from countries such as China.

It is true that electronic goods can be out-sourced to countries with low-cost labour, but those goods generate thousands of jobs in developed countries, including ones in design, in advertising and promotion, in marketing and retailing, and it is also true that those products bring convenience and utility into the lives of those who use them.

People might want to do the same job producing the same goods for the whole of their lives, but there is no civil right to do that, and the real economy embodies constant change.  People become wealthier and their aspirations change.  New product and processes emerge to tap those new demands.  Successful economies are ones which keep moving.  As goods from poorer countries undercut their cheap goods on price, people in developed economies move into areas where higher value is added, or into service jobs less susceptible to foreign competition.

As we become richer on a global scale, there will be more demand for goods and services, and therein lie the opportunities that will create tomorrow's employment.

There’s no doubt that today’s GDP figures are good news, but we should be wary about depending too much on GDP as a measure of prosperity. Prof Anthony Evans, a Senior Fellow of the Adam Smith Institute, wrote this superb piece about GDP way back in 2009, but his point still stands:

The "health" of the economy is too complex to be summarised in a single number. It would be like reviewing a novel based on the average words per page.

GDP doesn't tell us how economic activity affects living standards. It fails to distinguish between a bubble and sustainable growth. It doesn't forewarn about inflation. And perhaps most importantly – it doesn't help the average person on the street know whether they're more likely to become unemployed. After all, declining incomes actually increase the demand for many types of goods and services, which is why plenty of workers are prospering in the downturn.

I don’t want to be too grim, but we came ‘out of recession’ back in 2010 as well and we all know how well that turned out.

The fundamentals of the economy are still weak. Our levels of debt – private and public sector – are rivalled only by Japan. As a new paper released by the excellent Save Our Savers (in cooperation with the Cobden Centre and the Adam Smith Institute) argues, the massive levels of private and public debt that have accrued over the past decade mean that no strong recovery is possible. And the monetary system is a de facto government subsidy for banks:

As well as outright support, the UK’s banks are being helped by Quantitative Easing, by the Funding for Lending Scheme and by the record low Bank of England base rate. Above all, they are assisted by the knowledge that they are considered so important to the economy that they will be bailed out if they mess up again.

They are thought to be "Too Big Too Fail". If the banks make money they’ll continue to pay enormous bonuses. If they take stupid risks and blow up the financial system once more, the government will step in with taxpayers’ cash and the banks will still pay enormous bonuses. This is known as “moral hazard”.

The Bank of England believes this implicit subsidy has benefitted British banks to the tune of £100 billion a year, leading to greater profits and salaries yet doing nothing to diminish their appetite for stupid risks.

So, without wanting to pour too much cold water on good news, I don’t think we should party just yet. As Prof Evans says, “statistics are like bikinis – what they reveal is interesting, but what they conceal is critical.”

The mantra is "The world is running out of scarce resources; we are leaving none for our children."  It is not true, and resources are my fourth reason for optimism.

4.  Resources

In a famous 1980 scientific wager, Julian Simon invited Paul Erlich, author of "The Population Bomb," to choose 5 resources he thought were being depleted, and bet they would fall in price over the decade.  Erlich chose copper, chromium, nickel, tin and tungsten, and duly paid up when their price fell over a decade, indicating relative abundance rather than scarcity.

We are indeed using resources, but our ability to extract new sources is advancing faster than our rate of use, meaning that they are becoming relatively more plentiful, and therefore falling in price over the decades.  Two things happen as we use resources.  If they become more scarce the price rises, motivating us to find new sources of supply and to use less.  We also develop cheaper substitutes. 

Famously in the case of copper we developed fibre optic cables to convey our signals as copper rose in price.  We use plastic pipes instead of copper ones to convey liquids because they are cheaper.  The falling demand for copper means that world reserves are now estimated at between 25 and 60 years (depending on assumptions about growth rates), whereas at the time Erlich wrote, it was much less.

This is not to suggest copper will suddenly run out in 25 or 60 years.  If it becomes scarce it will become more expensive, and people will use other things in its place.  The reason the world is not running out of scarce resources is that the technology to locate and extract them is advancing year by year, and market prices motivate us to use it. 

The Earth is nearly 4,000 miles from surface to centre, and we have barely scratched its surface.  There are plenty of resources; all it takes is technology to tap them, and an incentive to do so.  It also takes technology to develop substitutes, and carbon fibre, laminates and plastics are less resource-intensive than their predecessors.

It is not only our ability to tap new sources that advances: or skill at reclaiming and recycling previously used resources is also advancing.  And crucially, our technical advances now enable us to stretch our resources further, using less of them to achieve the same effect.  It all means that resources are not running out.

We've been told the world is running out of sources of energy, and we've been preached to about renewables and made to spend vast sums on them.  In fact energy is the third of my sources of optimism.

3. Energy

The oil, we are told, is running out, and they talk of 'peak oil.'  There are vast reserves of coal, but it pollutes more than we want, so the talk turns to renewables.  Biofuel from food grains lacks all sense or reason.  The farmers loved it, of course, and so probably did the politicians who collected their votes.  Poorer people who had to compete with Chelsea tractors for cheap food were less pleased.

Wind farms have blighted our areas of natural beauty, are very expensive, and may not even contribute to environmental quality when their whole life pollution, including construction, is factored in.  Moreover there has to be back-up power for when winds prove unreliable.

Renewables are jacking up the fuel bills that customers complain of, despite their tiny contribution to total energy supply.  The big change to the equation has been the natural gas revolution, with hydraulic fracturing technology giving us access to reserves we knew about but could not previously tap.  We now have many decades, maybe hundreds of years, of reserve supplies.  And those reserves are not in politically sensitive or unstable areas.

Gas does emit carbon, but half that of the coal-fired power stations it can replace.  It is what will fuel our power stations.  It can even substitute for oil in transport if we move to electric vehicles using gas-generated electricity.  It is a fossil fuel, of course, but not in short supply.

Coming close on its heels is photo-voltaic power, with the price of the cells subject to a kind of Moore's Law that sees the prices tumbling steadily over the years.  Technology has thus already shown us the solution to the energy shortage.  Environmentalists oppose this solution, of course, because it does not necessitate the behavioural changes that they seek.

Note that a US coal-fired plant converts only about 33% of the potential energy to power.  An incandescent light-bulb is only about 3% efficient.  This makes coal to incandescent light only 1% efficient.  By contrast an LED powered by gas-generated electricity is 20% efficient – twenty times as much.  Technology like this is solving the problem.

Since the formation of the Coalition Government in 2010, the British populace has been given the unusual, if often dubious, privilege of hearing significant public discourse on the subject of land use planning policy. Even more unusually, the planning system has been subject to changes that may well prove to be more than semantic; the Localism Act 2011 and the revised National Planning Policy Framework (NPPF) of April 2012 have both resulted in material changes, albeit with the caveat that the full effects, especially of the former, will probably take some time to become apparent.

In the meantime, the Government’s interest in planning policy has clearly not waned. The Treasury and the Department for Communities and Local Government (DCLG) have both issued a stream of announcements and comments on the subject, with a particular emphasis on the effects of planning policy on economic performance. In addition, it is worth noting that the Prime Minister commented on the subject in his speech at the 2012 Conservative Party conference, referring to the need to construct additional homes, and to ameliorate the planning impediments encountered by businesses.

Continue reading.

Some people tell us that water scarcity might well be the cause of future wars as the world struggles to cope with shortages.  In fact water is my second cause for optimism.

2.  Water

The shortage pointed to is of usable water, not of water itself.  Although four-fifths of the Earth's surface is covered by water, some 97 percent of the Earth's water is too salty for people to drink or to use for irrigation, and much of the water that is accessible is not safe to drink.  The question is whether we can develop the technology required to purify water to render it of drinkable quality at a price that can be afforded.

Great advances are being made in fairly low technology solutions to water purification in less developed countries.  A range of ingenious solutions has been developed from simple filtration systems that use coal ash, to solar-powered ones using plastic bottles.  Great efforts are under way from a number of foundations to finance the construction of deep wells to bring clean water to villages whose nearest other source is miles away.

A combination of such developments will contribute much to ensuring adequate supplies, but ultimately it could well be desalination technology that provides an inexhaustible supply.  The main desalination technique hitherto has depended on boiling seawater and condensing the steam.  This works well and is in widespread use, but it is very energy-intensive.

The alternative approach that is rapidly gaining ground uses osmosis (technically reverse osmosis) to separate out the salts using membranes.  This also uses quite large amounts of energy, but advances in engineering are making it more efficient as time passes.  Such plants could be solar powered as those costs come down, and can be located in areas that both need water and have many hours of sunlight.

Ultimately the question of the future supply of clean water comes down to whether we can develop the technology to purify water efficiently, and the answer seems to be that we can.  Of course the water will have to be where it is needed, but its transmission is again a problem susceptible to technological solutions.  Both of these depend on access to cheap and abundant sources of energy if they are to be affordable, and it seems likely that the gas revolution has made the breakthrough which makes that outcome likely.

We are told there won't be enough food for our increasing numbers, and that millions in poorer countries will starve.  In fact this will almost certainly not happen, and the world's future food supply is a source of optimism.

1.  Food

It was Thomas Malthus (1766-1834) who popularized this view in "An Essay on the Principle of Population." He stated that agricultural output increases in a linear (arithmetic) way, but that population does so in an exponential (geometric) way.  This means that large numbers must starve.

The Malthus view has not been borne out by events.  Our ability to use technology to increase food production has enabled food output to keep pace with population, even with the explosive growth of the 20th Century.  The use of fertilizers, pesticides and herbicides has boosted production per acre in ways he could not imagine.

The Green Revolution between the late 1940s and the 1970s, led by Norman Borlaug, saw the development of high-yield crop varieties, plus changes in agricultural infrastructure, and is reckoned to have saved more than a billion people from starvation.

A second Green Revolution is coming about based on genetic modification.  Desirable traits can be crossed between species, enabling plants to be bred that can overcome many of the limits of traditional agriculture.  Plants have already been developed to resist herbicides so that weeds can be killed without affecting food crops.  Even more exciting is the research under way to develop crop strains that will resist pests themselves without needing chemical assistance.

Researchers are developing crops that will thrive on marginal land, that can resist drought and temperature extremes, and that are saline tolerant.  This will open up to agriculture huge areas of land not presently suitable for crops.  Varieties are being produced that can fix atmospheric nitrogen and fertilize themselves in the way that legumes do.  Others are under way that incorporate vitamins to supplement unbalanced diets and reduce the health risks caused.

Yet more research is being done to create varieties that yield more food and less waste, enabling greater output per acre.  We will not need to cut down rainforests.  Our future food production should easily outpace the population increase, overturning the Malthusian pessimism.

Environmentalists whose agenda is behaviour change have raised scare campaigns over GM foods, yet GM crops have been in widespread use now for many years without adverse effects.  Far from posing a hazard to our future well-being, they stand to make a huge and positive contribution to it.

Regulatory confinements very often result in wrong policy perceptions and adverse policy conclusions. In an attempt to create a safer environment they impose a number of rules, procedures, and amendments to these rules that eventually end up stifling companies and diverting their resources away from productive activities. This is particularly endangering for small and medium-sized businesses (SMEs), considered to be the drivers of growth in an economy.

Small and medium-sized businesses make up an integral part of the private sector. The recovery depends on them to create jobs and replace public sector spending. But we cannot expect them to flourish under current regulatory and tax conditions. The focus of the ASI’s new report Unburdening Enterprise was to identify the most cumbersome and harmful regulations, taxes, and other barriers to growth and to offer possible solutions to relieve the businesses of these burdens. Having undergone a range of surveys among businesses, several constraints were recognized, including employer’s national insurance contributions being too high, problems with access to finance, regulatory compliance costs, hiring obstacles, fear of employment tribunal, and a lack of confidence due to the uncertainty regarding the unfolding of the recession.

With the UK experiencing deteriorating productivity, keeping on inefficient workers subject to employment law protection is a policy that will keep productivity low for quite some time. Low productivity is a sign of an economy stuck in a structural shock (bad equilibrium). Domestic competitiveness is deteriorating, making domestic businesses inflexible in adapting to market conditions. This will only make them more prone to failure.

It these times of uncertainty and lack of confidence, government subsidies to businesses in favoured industries won’t create an incentive to invest or hire more. Just like the banks, the businesses choose to hoard cash since they are uncertain on the future returns on their investments. On the other hand, the private sector is currently engaged in a massive deleveraging process. Introducing subsidies and stimuli will only shift the resources from making profits on their regular markets onto making favours on the political market in order to attract the subsidies. Cutting costs creates a completely different incentive – it gives the business an incentive to use its resources more efficiently and to transfer them into more production or more hiring. 

This report aimed to show how decreasing costs for businesses is a much wiser, cheaper and efficient policy than a subsidy or a fiscal stimulus, as it creates economically better incentives for businesses. It is particularly important to create a healthy, competitive, market environment where firms compete for customers rather than political or bureaucratic favours. Otherwise, we are dangerously close to a system of crony capitalism where political signals rather than consumer demand drive the incentives of the private sector.

The plea for less regulation doesn’t imply removing all regulation since SMEs need a sense of reliability and guarantee in order to be considered a credible borrower. Deregulation is a call for reducing and removing all those regulative, administrative, and legal burdens that exemplify adverse use of resources and constrain a business in its growth and development.

The report’s main proposals include:

• Abolish employers’ National Insurance contributions. This proposal has a potential of creating a minimum of 500,000 jobs by relaxing the tax burden on employment.
• Reverse the 5.6% increase in business rates from April 2012 to free up funds for businesses.
• Substantially reduce costs for the SMEs by removing all unnecessary administrational burdens. The government should continue with its deregulatory agenda demanding higher efficiency from all departments.
• Simplify the regulatory system for SMEs in order to remove the necessity of hiring lawyers and accountants to help them comply with regulatory standards. Simplification should benefit all UK SMEs.
• Put a stop to all new regulation coming in from EU that targets SMEs. This will save them a total of £100bn per year (£23,000 per business) – enough to hire an additional employee or invest into new capital creation and production.
• Make it easier for employers to fire employees for misconduct. This will make it more attractive for employers to hire, and will increase labour market flexibility.
• Encourage businesses to take more temporary, zero-hour and fixed term employees. Introduce the option of self-employment for SMEs. It saves money, increases job creation and channels resources into profit-making opportunities.
• Remove the minimum wage to create youth jobs.
• Encourage private sector solutions to help businesses chase late payments and increase their availability to credit.

Download the whole report here.

Today's example comes from Canada but I get hugely and vastly irritated by very much the same thing over here. Quite simply the blind refusal of many in the environmentalist movement to understand what it is that economists are trying to tell them. Mike Moffatt (both an economist and a Green, so something of an unusual mixture) tells of his experience here. Taking David Suzuki to task for his illiteracy here.

“But if you ask the economists, in that equation where do you put the ozone layer? Where do you put the deep underground aquifers of fossil water? Where do you put topsoil or biodiversity? Their answer is ‘oh, those are externalities’. Well then you might as well be on Mars, that economy is not based in anything like the real world,” Dr. Suzuki goes on to say. Dr. Suzuki’s remarks on externalities were clarified in an interview given to the magazine Common Ground: “I won’t go into a long critique, but currently nature and nature’s services – cleansing, filtering water, creating the atmosphere, taking carbon out of the air, putting oxygen back in, preventing erosion, pollinating flowering plants – perform dozens of services to keep the planet happening. But economists call this an ‘externality.’ What that means is “We don’t give a shit.” It’s not economic. Because they’re so impressed with humans, human productivity and human creativity is at the heart of this economic system. Well, you can’t have an economy if you don’t have nature and nature’s services, but economics ignores that. And that’s an unbelievably egregious error.”

As Moffatt goes on to point out the idea that economists ignore externalities is a nonsense given how much attention is paid to them. Moffatt is also a lot politer with Suzuki's view than I would be or am. For Suzuki has got the point entirely bass ackwards. Economists do not say that externalities are not important because they're not included in the price system. Quite the opposite: the statement is that we've a serious problem because externalities are important things which are not included in the price system. And it's a serious problem because we do use the price system to calculate what to do and leaving important things out of such calculations is a serious problem.

Which is why all the discussion about externalities revolves around how do we get externalities included in our decision making process? We could use regulation, yes, and at times that is indeed the appropriate way to do it. See Coase's Nobel winning work for when this is so. With other such problems it might be that tweaking the price system is the appropriate solution: see Coase again, or Pigou (come on, that's from the 1920s, you'd sorta expect people to have picked up on it by now) or even M'Lord Stern and his review on climate change. Assuming it's all happening then the solution is to tweak the pricve system by imposing a carbon tax. And then we're done, dusted and problem solved.

That other people place different values upon the environment than I do worries me not in the slightest. It is precisely such differences of opinions about value that make a market. What does annoy me intensely is that almost all of the environmental problems that are currently being complained about have indeed been studied by economists. And they've found solutions to them as well. Just about any and every environmental problem is either about externalities or common access to a resource. In many ways these are just the flip side of exactly the same problem. But we do indeed know how to solve each of them and both of them. Hardin on ownership or regulation, Pigou on tax or regulation, both mediated through Coase on transactions costs (with a decent assit from Ostrom on communal ownership). There, that's it: far from economics ignoring matters environmental economics has solved the damn problems.

So why won't the environmentalists listen?