The Pin Factory Blog

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.

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.

Four years on, Mervyn King has finally admitted to some of his culpability for the banking crisis.  At the same time, he rpoints to the Treasury, FSA and Bank of England “Tripartite” for its combined responsibility.  He is right about that. Incredibly, during the ten years leading up to the crisis, i.e. as it was slowly developing, the Tripartite met only once.  King notes the mea culpa from the FSA, again only partial, but also notes the absence of penitence from Gordon Brown and Ed Balls.

He also failed to mention Sir John “Teflon” Gieve.  As a senior Treasury official he helped draw up the Tripartite agreement that almost guaranteed its failure.  He was then Permanent Secretary of the Home Office during the years the auditors refused to sign off the accounts.  His financial sagacity was further confirmed when, as link man between the FSA and the Bank of England during the lead up to the crisis, he effectively neutered them both.

King has had some hard words for the banks who, notably Barclays, have failed to admit responsibility, pay mega-bonuses based on profits from mis-selling and resolutely obstruct attempts to increase capital ratios to prevent a recurrence.  I have some sympathy with the banks on that last point.  Regulation was not, and is not, the solution.  We are unlikely to have another such crisis until the memory of this one is fully expunged, i.e. half a century.  We can already see the effects of higher capital ratios damaging our ability to escape recession.  To increase capital ratios, banks have to lend less to SMEs and increase their margins to everyone.  Look at LIBOR and mortgage interest rates increasing while the Bank of England rate has been stable at 0.5%.

At this particular time we need less capital ratios and more lending at keener prices.  When recovery comes, then by all means think again.

We are still in the doldrums of the banking crisis and are likely to continue to be for some time.  Yes, Sir Mervyn, we do need a proper independent enquiry and we need it now that the pressure is off but memories are, or could be, clear.

It is extraordinary, when you think of it, that we are mesmerised by the peccadillos of the Murdochs which have had a marginal, if any, effect on our way of living but ignore the far more grievous failures of the banks and the Tripartite which have brought the country to its knees.  We have a years long judicial review of the former and no review at all of the latter.

I addressed a meeting of Cambridge University's Marshall Society in King's College last night.  It was in Keynes Hall, with a bronze bust of Keynes looking in from the side of the stage.  My theme was "The Influence of Economic Ideas on Politics," and I began with Adam Smith, the Scottish economist who overturned the prevailing view that nations became rich by exporting more than they imported.

Influenced by Smith's ideas, successive British governments liberalized duties, taxes and regulations, culminating in the repeal of the Corn Laws in 1846.  It unleashed a period of unparalleled prosperity in Britain.

Next I cited John Maynard Keynes, who taught that governments could regulate the business cycle to some extent by "priming the pump" with public spending at times of insufficient private spending to boost employment levels.  The Keynesian approach dominated the post-war consensus, with government playing an active and leading role in economic management.  Politicians liked to be seen to be doing things and in control instead of simply reacting to events.

Although Milton Friedman was famous for monetarism, I suggested he probably played a larger role in discrediting government intervention and boosting the case for private enterprise and opportunity in its place.  He certainly played a leading part in emboldening governments to undertake privatization and the reassertion of market economics in the final quarter of the last century.

Following the financial crisis of 2008, I suggested that the Austrian School was now winning the argument about its causes, pinning responsibility firmly on the cheap borrowing instigated by governments and central banks that lay behind the credit bubble and the careless risk-taking that accompanied it.

My final note was that despite what economics teaches, politicians would probably continue to advocate silly things such as a financial transactions tax, or punitive tax rates on high achievers, and would continue to damage and limit wealth creation by an excessive preoccupation with its redistribution.

Today, Londoners will vote for the next Mayor. I won't be among them. I don't think that voting is any more one's "duty" than supporting a football team. Indeed, in large-scale elections (like the Mayoral election) it is probably a lot less important than cheering on your favourite team. If your aim is to affect policy, voting is irrational. If you want to act ethically, voting is irrelevant.

Mathematically, the chances of a single vote actually determining the outcome of an election in a meaningful way (that will affect policy outcomes) is infinitesimally small. The closest general election result ever in the UK was in 1997, when Lib Dem Mark Oaten was elected by two votes. Not only would one vote still not have made a difference here, the result was annulled and a new election held in which Oaten won by a landslide. Even if one vote did make a difference, the result would (apparently) be annulled. 

This was with a turnout of 62,000 – the larger the turnout, the less likely it is that the vote will be tied or won by a single vote. In the last London Mayoral election, turnout topped two million. The chances of a single vote determining this election are extremely slim – less slim than they'll be at the next general election, to be sure, but still very slim. (Incidentally, some people will always reply to this, "If everyone thought that way, nobody would vote!". This is silly. We act marginally as individuals. If everyone went to the cinema tonight, there would be no room for me. This is a bad reason not to go to the cinema.)

Voting isn't instrumental, aimed at affecting policy, it's expressive. Like supporting a football team from home, you do it because it makes you feel good, not because you think it'll make the team win. But there isn't really much reason to care who wins the Mayoral election. The Mayor's powers are extremely limited, and the differences between Boris and Ken (the only two people who have a hope of winning) are more about personality and style than policy. Sure, Ken gives me the creeps, but Boris has disappointed me by resorting quickly to spending pledges whenever he's challenged about things like transport or policing. Maybe that's what it takes to win, but don't expect me to care enough about you to go out and vote for you if it is.

Some people like to say that voting is everyone's duty as citizens in a democratic country. This is nonsense. States establish and enrich themselves by violence. Don't believe me? See what happens when you choose not to pay all your taxes because, say, you don't want to use the NHS. You have no more of a duty to vote than you have a duty to go down to your local Mafia's consultation meeting about how to make protection money collection as pain-free as possible.

Voting is a remarkably poor tool in determining socially-optimal outcomes. When I go to the bookstore, I can pick from thousands of different books and even pay more to buy obscurer titles. Even if I'm in a minority wanting to learn Polynesian nose flute-playing, I can pay extra to express the intense wish I have to learn, which will allow my minority wishes to go fulfilled.

Voting can't measure intensity of feeling like markets can. It's blunt, uniform and heavily weighted towards the wishes of a majority that often chooses poorly. Democracy is a bookstore where you can have any novel you want, as long as it's Twilight.

To be fair, things might be different in your local elections, where one vote sometimes can make a difference. That's a good argument for more localism, so democracy can be a little less tyrannical and local government a little more attractive to talented people. But in this large Mayoral election where the candidates are offering, more or less, the same thing, there's no point. Instead of trudging down to the polling booth today, I'll be going home and reading a good book. I suggest you do too.

Last week we held our first sixth form conference of 2012 in Westminster. ISOS, the Independent Seminar on the Open Society, has been running for many years and is extremely popular with sixth formers and teachers.

One teacher I met at our conference told me how her pupils were much more free market than her and were keen to come to all our student events. A number of pupils attended independently and a couple of students travelled all the way from Yorkshire to take part. Hundreds of the free books we provided were snapped up within minutes and we were inundated with requests for work experience and for more events for sixth formers.  The enthusiasm of those attending and the quality of the questions asked were truly inspiring - encouraging me that there may be many more libertarians amongst the next generation.

As always, the speeches at ISOS were excellent and can be viewed on our YouTube page [We didn't get the debate at the end of the day between Jamie Whyte and the nef's Nic Marks, but I'm going to embed rest of the videos on the blog later today - ed.]. Dr Tim Evans’s talk on ‘The Morality of Markets’ was the highlight of the day for me and sparked challenging discussions on the myth of ‘market failure’ and controversial topics such as whether the banks should have been bailed out.

I wasn’t alone in my enjoyment of the day. In our feedback forms, 100% of the attendees rated the day as ‘excellent’ or ‘good’ (with the majority voting excellent!). The comments on the forms were all very encouraging with pupils writing “Absolutely great, outstanding and highly intellectual seminar. Thank you!” and “Excellent conference. Really widened the way I thought about the topics discussed.” And that’s just a glimpse. The feedback was overwhelmingly positive and served as a great reminder to us of why we choose to focus so much of our energy on student work.

Plans are already underway for our next ISOS conference in November 2012 and details will be out soon. If you are a sixth-former who is interested in attending, please do get in contact. And if you are a teacher or know of a teacher who would benefit from hearing more about our student conferences, please do drop me an email at sally@adamsmith.org.

We’d really like to increase the frequency of these events, but that is only possible with the support of people who share our vision of educating the next generation on the importance of free markets and a free society. If you would like to donate towards our work in this area, we would of course be delighted to hear from you!

Long queues are a clear indication of supply failing to meet demand. In the Soviet Union, you queued for bread and butter. In the UK not too long ago, you queued for the GPO to install a telephone. The mismatch was usually due to some government agency mucking things up.

So it is now with Britain’s airports where arriving passengers have faced queues of up to two hours due to an inefficient UK Border Force. The solution is obvious – privatise the UK Border Force. Let the airports, airlines and passengers sort out amongst themselves how to deliver an efficient immigration service. Let them decide how much to spend and how much to charge and when and where to staff.

In the government’s defence, they’ve been forced to slim staff numbers as part of its overall priority to get a grip on the nation’s finances, but that’s why more imaginative thinking is required. That process may have started amid reports of talks to increase charges on airlines to hire more Border staff. That makes eminent sense – users and beneficiaries should pay.

Willie Walsh, head of the company that owns British Airways, has said that airlines would be prepared to pay for the right service but then hit the nail right on the head with his comment that this willingness disappears if the government was wasting money. Indeed, as Labour proved with health and education, you can’t just pour endless cash into a government agency without accompanying structural reforms.

Unsurprisingly, Ryanair’s Michael O’Leary weighd in with his claim that “The big problem with the queues at Heathrow and at Stansted is they are treating EU citizens like potential bloddy terrorists and they are not.” He claimed it wasn’t short-staffing as a result of budget cuts but rather a work-to-rule mentality.

So don’t offer the government more money to carry on as is; privatise the whole process.

In the spirit of airline pricing, there could be first, business and economy immigration lanes or the equivalents of easyJet’s Speedy Boarding and Ryanair’s Priority Queues. A really clever company would roll out trolleys with refreshments when queues do build up or maybe offer up work experience students to hold your place in any queue while you take a toilet break. How about immigration hall buskers?

Private companies have a much better record in chopping and changing to altered circumstances and in adopting and adapting modern technology. Let them get on with it.

Oh, the vested interests will squawk that national security is too important to be left to the private sector, just like teachers claim that children cannot be entrusted to anyone but their own guarded priesthood. However, assorted government agencies over the years don’t have a spotless record when it comes to keeping out undesireables.

One important free market argument against government regulation of the economy is that regulators tend to become captured by corporate interests. When faced with a brief they know little about, politicians turn to the experts to devise policy and advise them on the ins-and-outs of the different industries they’re expected to regulate.

Who are those experts? Business leaders who’ve made their money by mastering their industry. The very people who stand to gain the most from some insider political power to protect themselves from competition. Firms are constantly looking for a way to exclude new entrants from the marketplace –  when governments have a lot of power over the market, the incentive for firms to try to bend that power to their will is overwhelming.

This is an unavoidable aspect of the fact that government officials – politicians, civil servants, and even “independent experts” the government loves to put in charge of its policy commissions – are human. They are no more or less greedy or easily swayed than anybody else.

This concept of “regulatory capture” is one reason I tend to prefer rules to individual discretion when thinking about regulation. There’s no way to ensure that only the angels get into power, and I’d prefer to avoid much discretionary power being invested in the hands of individuals, in case they misuse it.

All of this is important in understanding where we are and where we’re going. One of the most remarkable phenomena of recent years has been the revolving-door relationship between Goldman Sachs and the US government. Goldman Sachs is not a morally bad company, but its success has led to its executives being tapped up for senior roles in the Clinton, Bush and Obama administrations – notably Hank Paulson, a former Goldman CEO who presided over the Troubled Asset Relief Program (TARP), the first major bailout for US banks during the financial crisis.

There is no need for conspiracy theories here. It is sufficient to presume that Paulson’s ties to the financial world made him sympathetic to calls for bailouts and to the idea that established firms in the financial sector could not be allowed to go bust in an orderly fashion.

Paulson is not, personally, the one to blame: the system that gave anybody the power to pervert the market with bailouts is. If Paulson had not been in that position, someone else had – and if not someone tied up with Goldman Sachs, then with JP Morgan, CitiBank, or one of the other large banks. The mindset that these established firms have to be protected at any cost would be there, wherever the Treasury Secretary had come from.

All this came to mind yesterday when reading that Goldman Sachs’ Jim O’Neill is rumoured to be in the running to succeed Mervyn King as Director of the Bank of England. No doubt O’Neill has a lot of valuable experience – although I find his much-celebrated categorization of the “BRICs” (Brazil, Russia, India and China) as must-invest powerhouses slightly underwhelming. But, like all ex-financiers who enter the political-regulatory nexus, he would be beholden to the established firms that made him who he is today.

For different reasons, an academic may be little better, unless he was a truly radical visionary. But, if O’Neill or someone like him gets the job, I know what response my money will be on when the next financial crisis rolls around.

As some readers will already know, I am moving on from the Adam Smith Institute. Friday was my final day as Executive Director here, and in June I will be moving to the United States. I'm heading for Washington, DC, where I am going to be Managing Editor at the Reason Foundation, a libertarian think tank which also publishes Reason Magazine and produces Reason TV.

I'm very excited about this new opportunity, but, needless to say, I am also very sad to be leaving the Adam Smith Institute. It has been a great five years, and I have so many wonderful memories to look back on. I will miss all the people I have worked with enormously.

We have done so much since I started in 2007, that it is hard to pick favourites. But here are few personal highlights: unveiling the Adam Smith statue back in 2008; running Freedom Week in 2011; filling the LSE with libertarians for last year's Hayek v Keynes debate. I have also hugely enjoyed establishing a top-notch ASI lecture series over the last few years. Tour de force talks by Tara Smith and Kevin Dowd stand out as particularly memorable moments.

More broadly, there are a handful of overarching themes that have characterized my time here: the resurgence of Austrian school economics in response to the financial crisis; the emergence of unabashed libertarianism as a distinct voice in the political debate; and the creation of a fast-growing libertarian youth movement in the form of the UK Liberty League and European Students for Liberty. I will always be very proud of the role we have played in these developments.

My final words, though, must go to Madsen and Eamonn – who gave me an opportunity few people fresh out of university could dream of – and to the Adam Smith Institute's friends, supporters, and donors, who make everything we do here possible. Thank you, and farewell.

Cardinal Keith O’Brien, the head of the Catholic Church in Scotland, has called for the government to introduce a “Robin Hood Tax”. This is hardly a surprise. O'Brien's expertise is in the field of faith and the supernatural, which is just where support for the “Robin Hood Tax” comes from. (Incidentally, this isn't the only dumb political statement the Cardinal has made in recent weeks.)

It hardly needs to be said that the “Robin Hood Tax” (or financial transaction tax, to give it its correct, non-adolescent name) is a sham. No, it would not raise £20bn in revenue, as its supporters claim – that number is based on a static analysis that supposes, wrongly, that the tax wouldn’t affect behaviour.

In fact, it would affect behaviour a great deal, by crippling financial traders’ ability to engage in high-volume, low-margin trades that give volume to markets and help it to adjust quickly to new real-world information. A “small” 0.05% tax adds up to be quite substantial as you make several trades a day, as these traders do.

Most likely, a financial transaction tax would drive many traders overseas – to Zurich, Wall Street, Singapore, or somewhere else. That’s what happened in Sweden when that country tried the tax: within less than a decade of the tax’s implementation, trading for over 50% of Swedish equities had moved to London. Futures and options trading virtually ceased in Sweden altogether.

Advocates of the tax in Sweden claimed it would raise 1.5bn kroner per year (approximately £330m in current figures). In reality, it raised just 50m kroner (£11m in current figures), or one thirtieth of what was promised. The advocates of the “Robin Hood Tax” today are spinning the same fraud, and their numbers are worthless.

The “Robin Hood Tax” is, basically, a case of charities misusing their organizations for political purposes. It has nothing to do with charity, and everything to do with the left-wing agenda those charity employees want to advance. It’s a huge shame to see organizations like Oxfam and others misappropriated by the hard left to give PR heft to this silly idea.

The "Robin Hood Tax" is faith-based economics at its worst. But if Cardinal O’Brien really wants to help the poor, there’s plenty he could do himself. The Catholic Church is one of the richest organizations in Britain. They say charity begins at home. If O’Brien wants the government to get richer, waiving his church’s tax-exempt status would seem like a good place to start.