The Pin Factory Blog

Ayn Rand’s Howard Roark succinctly summarises the only real obstacle to individual achievement in a single line: “the question isn’t who is going to let me; it’s who is going to stop me.”

Fans of Rand (and private sector workers) know that few forces in the world have more stopping power than a government. With its monopoly on violence and its ability to rewrite the rules, government possesses the power to interfere with the private lives of those who live under it even when these persons are willing to abide with the multitude of other laws, regulations and taxes, not all of them fair, to which they are subject. And in the exercise of this power it can be unfair and arbitrary; democracies and tyrannies alike have the power to reduce the efforts of a single person to nothing, to crush him utterly for any reason such a government might choose. Last month brought the news that, as has happened many times in many nations, our government has done exactly that.

By revoking the “very highly trusted” status of London Metropolitan university without providing for any transitional arrangements, the Home Office gives that institution’s current and future students a mere 60 days to either find an alternative sponsor or to self-deport. These are not very good options.

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A nice little chart here at Cato showing how spending on food stamps has risen over the past decade.

We can see that expenditure on this anti-poverty programme has risen considerably over 12 years. In fact, if we assume away inflation and GDP growth (not quite right but close enough in this past 12 years, especially with respect to food prices) then expenditure on this programme has risen from 0.12% of US GDP to 0.56% of GDP. Call it, allowing for the uncertainty over the GDP and inflation numbers, a fourfold increase in real terms.

Now, I think it should be obvious to everyone that giving poor people a means to purchase food means that poor people are less poor. We would also assume that some who were poor before this distribution are not poor after it.

But here's the interesting question. Fully 0.5% of GDP is being given to the poor in just this one redistribution programme. What difference does this make to the number of poor in the US?

The answer is, distressingly, absolutely not one iota. By the official statistics this redistribution does not lift one solitary person up out of poverty: in fact, does not even alleviate poverty in any way recorded by the official statistics. Further, this is true of all of the major US poverty alleviation programmes. Their Section 8 housing vouchers (roughly, housing benefit), Medicaid (health care for the poor), the EITC (working tax credits). Adding these together the US spends a good 4% or more of GDP on poverty alleviation. Yet apparently it alleviates no poverty at all.

The reason being that the US, uniquely, does not count benefits in kind, nor benefits through the tax system, when calculating who is poor. They could double spending on the poor and there would be exactly the same number of poor people as when they started. In fact, in recent decades they have doubled spending on the poor. And they've still got the same number of poor people.

Just a little warning should anyone ever brandish US poverty figures at you. They're very strange indeed and absolutely cannot be taken at face value.

Alex and Tyler have announced their new Marginal Revolution University. And I'm afraid that I have to say that I don't think it will work.

I should be careful to distinguish what I mean by "work" of course. They're very good teachers and I'm sure that those who take the courses will learn a great deal. This is one definition of a deliberate act of education working and by that definition of course it will work.

However, when we think of a new method of doing something entering the market we mean more than it just being the marginal (sorry) addition to that market. What we're really interested in is whether this new method can sweep away the old. Can restructure that part of the economy completely to all our benefit. And by that standard I think it's doomed to failure.

Not because it might not educate people better. Current universities are built still upon the limitations of medieval book production technologies. The whole idea of a lecture, one person shouting at a crowd, comes from the idea that books were simply, pre-Gutenberg, too expensive for all to have a copy. Thus they must be read out to the students. This is clearly no longer true but 600 years later we're still working within those past technological constraints. I think it's therefore fair to say that within higher education there's some resistance to change.

What we really want to know is whether online courses can replace, not just augment, the current university system. And I don't think any set of online courses is ever going to get the chance. They won't be accredited, it won't matter how many you have you'll never be awarded the piece of paper which is a degree. For those who have the power to award such degrees now know very well that they will be swept away if that does happen. Thus we'll have a great deal of institutional reluctance to allowing that to happen.

This is what I think is one of our major economic problems at present. There's all sorts of shouting about how we all have to be innovative: even the EU parrots the catchphrases. But that's only half of the story. We also need the destruction of the old ways to make way for the new and all too much of our economic and political life is in the preservation of those comfy sinecures  the old ways present.

Another way to put this is that almost all innovation and productivity gains come from entry into and exit from markets. We've all the cheeleaders for the entry part but no one seems to be making the exit happen: far from it, huge amounts of energy seem to be being spent on preventing exit.

I hope of course that Alex and Tyler do succeed. As they point out, their first course takes half the time for all of the same material as that traditional university technology. Think how much we would all save if a first degree took 18 months not three years (for the English that is). Think how much more if it were not done on campus. But the great problem is going to be those who currently make a living from a slow campus degree: and unfortunately they're also the same people who determine what a degree is.

A post on ConservativeHome this morning wrote about the differences between individualism and conservatism:

While the concept of personhood is central to philosophical conservatism, so is the connectedness of each person to other people within the organic institutions of family, community and nation, each of which of which stretch out beyond ourselves not only in space, but also in time through the traditions that sustain a living culture.

The post sparked an interesting discussion on Twitter about the differences between conservatism and libertarianism. I think the writer's main point is that small-c conservatism places a lot of emphasis on tradition and community cohesion in a way that libertarianism does not. I think the writer is talking about a sort of atomism ('men are islands') that is rare in most libertarian thought. [Note: I had thought this was a Tim Montgomerie piece, but in fact it's a group blog that's written anonymously. I've changed this post to reflect that — Sam]

Adam Smith may not have been a libertarian by modern standards, but he was one of the first great liberal individualists, and he was certainly not a conservative. Yet his work was all about the power of cooperation and compassion to better the human condition. The great achievement of The Wealth of Nations was to show the productive powers of individuals working in peaceful cooperation with one another, specializing and trading with one another to both people’s benefit. The Theory of Moral Sentiments, similarly, emphasised the social nature of morality and decency. We are good because we see ourselves in others, and empathise with their plight.

Modern libertarian writers carried on this emphasis on cooperation, most notably Ludwig von Mises and FA Hayek. In Human Action, Mises is clear that all the achievements of man that we call civilization have been the result of peaceful cooperation between human beings. The ‘feelings of sympathy and friendship and a sense of belonging together … are the source of man's most delightful and most sublime experiences.They are the most precious adornment of life; they lift the animal species man to the heights of a really human existence.’

Mises’s (and my) individualism lies in his view of individual people as being the most basic unit of analysis in human affairs – only the individual acts:

The individual lives and acts within society. But society is nothing but the combination of individuals for cooperative effort. It exists nowhere else than in the actions of individual men. It is a delusion to search for it outside the actions of individuals. To speak of a society's autonomous and independent existence, of its life, its soul, and its actions is a metaphor which can easily lead to crass errors.

The questions whether society or the individual is to be considered as the ultimate end, and whether the interests of society should be subordinated to those of the individuals or the interests of the individuals to those of society are fruitless. Action is always action of individual men.

This does not mean that the fabric woven by individuals acting together is not valuable, but simply that we cannot understand society except as the product of many individuals acting together to achieve their own ends. Those ends might be selfish or they might be altruistic.

FA Hayek is even stronger about the importance of tradition and social cooperation in understanding society and individuals. The latter period of his life – in works such as The Constitution of Liberty, Law, Legislation and Liberty and The Fatal Conceit – was devoted to studying the importance of tradition in society, and the pitfalls of a rationalism that tries to fix or improve on tradition that ain’t broke.

Hayek, again, was an individualist and favoured libertarian or classical liberal institutions. He understood the power and importance of tradition as phenomena that emerged as the result of human action, not of human design – in other words, as ‘organic institutions’ that hold people together and establish very bonds of trust and empathy that allow market institutions to flourish. Hayek was an arch-skeptic of grand plans to improve the human race.

Ayn Rand’s celebration of selfishness is the aberration in the libertarian tradition, not the rule. (Indeed, she didn’t consider herself a libertarian and didn’t like people who did.)

The sort of atomism that ConHome's writer is rejecting is, I think, quite different to the sort of individualism that I and many other libertarians adhere to, and is very rare. Even the most grisly caricature of a selfish libertarian would have to admit that she could only get rich by trading with others.

The core of libertarianism is the belief that people can only prosper by cooperating peacefully with each other, socially, economically and spiritually. Individualism, yes – the interests of individual humans should always be our ultimate concern. But atomism, the idea that men are islands? No.

‘David Cameron will announce tomorrow that the oak tree has been dropped and the torch of freedom will once again be the Conservative party logo.’  So wrote Benedict Brogan for a tongue-in-cheek Telegraph blog.  Brogan’s mirthful explanation for this ‘back to the future’ change?

The move is being promoted by Downing Street as a “decisive” switch that demonstrates the urgency with which the Prime Minister is advancing the cause of free enterprise and a more robust grip on the economy.

Hold on, Mr Cameron, good news!  The cause of free enterprise can still be championed by the Tory party’s venerable cultural symbol.  As a traditionalist, for example, you will appreciate these inspiring lyrics from ‘Heart of Oak’ to rouse your industrious compatriots:

’Tis to honour we call you, as freemen not slaves, / For who are so free as the sons of the waves?

Fortunately, too, free market economics is synonymous with the organic principles of generation and growth which should be at the heart of conservatism, modernised or otherwise.  For in The Wealth of Nations, Adam Smith praised the ability of entrepreneurs to struggle and triumph against adversity:

The uniform, constant, and uninterrupted effort of every man to better his condition, the principle from which publick and national, as well as private opulence is originally derived, is frequently powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of government, and of the greatest errors of administration.  Like the unknown principle of animal life, it frequently restores health and vigour to the constitution, in spite, not only of the disease, but of the absurd prescriptions of the doctor (II.iii.31).

In his 1974 Nobel Prize lecture, Friedrich von Hayek denoted this undirected, up-from-below phenomenon as ‘spontaneous order’:

...in the social field the erroneous belief that the exercise of some power would have beneficial consequences is likely to lead to a new power to coerce other men being conferred on some authority.  Even if such power is not in itself bad, its exercise is likely to impede the functioning of those spontaneous ordering forces by which, without understanding them, man is in fact so largely assisted in the pursuit of his aims.  We are only beginning to understand on how subtle a communication system the functioning of an advanced industrial society is based—a communications system which we call the market and which turns out to be a more efficient mechanism for digesting dispersed information than any that man has deliberately designed. [emphasis added].

Hayek’s discomfort with the ‘power to coerce other men’—whether for good or ill—and what Smith called ‘the extravagance of government’ and ‘the greatest errors of administration’, is another reason why a return to the Tory torch (factual or otherwise) may be a bad omen, especially if it were meant to signal, in Brogan’s mirthful rendition, ‘a more robust grip on the economy.’

As Smith cautioned, ‘What is the species of domestick industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him.’  If a decision must be made in favour of either the individual or the State, the presumption must always be made for the wisdom of individual entrepreneurs.

The stateman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it (IV.ii.10).

So, oak or torch, modernised or traditional, the Conservative party must always stand for individual initiative in economic endeavours, cognisant of the government’s circumscribed role in supporting such entrepreneurship.  And that’s no laughing matter.

The French government seems determined to drive out its wealthiest and most productive citizens. President Hollande is striving forward with his anti-rich campaign, setting a target of raising €7.2 billion through taxes and levies on high earners, wealthy households and big corporations. Steadfastly ignoring evidence that suggests imposing high taxes on the most productive and those who are most able to move abroad will be at best inefficient, at worst ruinous, he proudly boasts of the huge revenues he expects to bring in.

One big idea is to raise the top rate of income tax for those earning above €1m p.a. to 75%. European Affairs Minister Bernard Cazeneuve defended against the notion that high earners and spenders will simply move out of the country by stating that there are ‘French bosses who are patriots’ and ‘there is a range of measures we will take in favour of business, measures that will support investment and encourage business to stay in France.’ Leaving out the odd notion that businessmen and wealth creators put patriotism above financial security, why not encourage businesses to stay by not taxing them and the people that run them? This would have the double benefit of not trying to redistribute the collected taxes into businesses that the government think are best for the people rather than those that the people think are best for the people. Cameron gleefully offered to roll out the red carpet for French ‘tax refugees’ (to which French Labour Minister Michel Spain rather weakly reposted that rolling out a red carpet over the channel would ‘risk taking on some water’).

This August, France became the first EU country to impose a financial transactions tax for publicly traded businesses with a market value above €1bn, deciding that the originally proposed 0.1% wasn’t high enough and doubling it to 0.2%. FTTs are supposed to reduce incentives to destabilise the market through speculation, but in reality increase volatility and reduce price discovery and liquidity on the market. Further, unilaterally implemented FTTs will not raise the revenues expected due to tax avoidance strategies by traders and businesses. A prime example is Sweden in the 1980s, which imposed a 0.5% (later 1%) FTT on all purchases and sales of equity. This resulted in a mass exodus of between 90-99% of Swedish traders to London and the tax was eventually abandoned as it did not raise the revenues expected.

Not only is Hollande driving out domestic productive individuals and businesses, it seems he would also like to discourage wealthy tourists from contributing to the national economy. The French Constitutional Council has approved a tax on foreigners with second homes in the country, raising capital gains tax on the sale of second homes from 19% to 34.5% and raising the rate rented home owners have to pay from 20% to 35.5%. The extra capital gains tax mirrors the tax on French residents that they pay in exchange for the social benefits they receive from the state; note that foreign homeowners will not receive these benefits, which is believed by some to make the tax discriminatory and therefore against EU law. Because of the ‘social’ nature of the tax, those affected may not be covered by the UK-France double tax treaty, which prevents individuals from paying income and capital gains taxes twice. Again, revenues collected from this move won’t be nearly as high as the predicted €50m, as foreign homeowners will just relocate elsewhere.

Other easy sources of revenue come from a €2.3bn levy on wealthy households and €1.1bn in one-off taxes on large banks and energy firms. All of this comes amid bizarre schemes such as temporarily cutting fuel taxes for three months and hypocritical policies such as bailing out ailing bank Dexia and guaranteeing the debts of non-systemic mortgage lender Credit Immobilier de France. Scapegoat policies against the wealthy might win Hollande votes from the disenchanted poor, but they won’t help them get back on their feet in the long run.

Last night I debated at the first Sp!ked Drinks event about 'nudge' policy. Here is what I prepared for my opening statement against 'nudging'. It's worth bearing in mind that this is an attack on nudge policy as it has been promoted and implemented by governments, not necessarily on the book by Sunstein and Thaler. 

Nudging is a new way of talking about an old idea: that people do not act in ways that are best for them, and should be helped along by their betters.

Understandably, this is a popular idea – most of us think that other people are very stupid, and people drawn to politics often think they have the right ideas for other people.

Many people like the idea of nudging because it isn’t as extreme as old-fashioned paternalism – they don’t want to force you not to eat so much, they just want to move chocolate oranges away from the checkout counter.

But seemingly-small nudges can have big implications about how we view the individual’s relationship with the world. Making organ donation the default means that your body by default belongs to the state or to society, not to yourself. Making military service something we have to opt out of would do the same thing.

Nudging food companies into cutting salt or sugar input is not benign at all. Companies who comply with government do so because if they don’t, a much less voluntary approach will come sooner or later. Government may nudge softly but it always carries a big stick.

Much of the argument for Nudging comes from a misunderstanding of why people are libertarians.

If you have built your models of the world around a wealth-maximising homo economicus, nudging is a godsend. The model of economics that is based on all-seeing wealth-maximisers is a very silly one.

If you thought that that was the best or indeed only argument for leaving people be, you would indeed be quite excited by Nudging after you had discovered how silly your views of human beings were. Here we can use the wisdom of government to correct the folly of man.

But the chief problem with government intervention in our lives – whether it is Nudging or direct paternalism – is not that it interferes with homo economicus, but that government is usually a lot worse than we are at knowing what is good for us.

This is true on two levels.

The first is that government can be very ignorant of the consequences of its actions, and what makes government different from private action is that it is a collective approach.

A government nudge to do something will necessarily affect everybody, so if it makes a mistake, the problem will be compounded across society.

There are countless examples of seemingly-good government nudges that have turned out to have very bad unintended consequences:

Bicycle helmet laws and ‘nudging’ public information initiatives that seemed like a no-brainer have resulted in more deaths, possibly because drivers act more recklessly and fewer cyclists take to the roads.

The food pyramid that was used to ‘nudge’ people into eating right advised people to eat between six and eleven servings of bread, pasta, cereal and rice a day, things we now think may make us fatter and less healthy.

After the Potters Bar train crash, trains were slowed down to a crawl in some areas to avoid more crashes. The unintended consequence was that more people took to the roads to get to work on time – and driving is significantly more fatal than train-riding. By trying to make trains safer the government almost certainly caused more people to be maimed in car accidents.

Bank regulation in the 1990s and 2000s that was intended to make banks act prudently drove them to take on much of what was then thought of as the safest debt – mortgages, government bonds, and triple-A rated securities.

The list goes on.

Government and the experts it listens to are no less at risk of making errors than ordinary people. When government makes certain ‘good things’ a matter of policy, one mistake can have society-wide consequences. Governments are blind to individual circumstances.

The second meaning of the idea that the government doesn’t know what’s good for us is that there is no objective standard of what is good for us.

Some of us choose to act in ways that other people regard as being very silly. Some of us like to smoke, because we judge the pleasure we take from smoking to outweigh the costs of doing so. Some of us may not care about the down-sides as much as others do – hence, some people smoke, and others do not.

Many fat people do not care that they’re fat, especially when it comes as a consequence of being able to enjoy their favourite foods whenever they want. Like beauty, what I find pleasurable may be repugnant to you. What’s fun is subjective.

It hardly needs to be said that ‘living longer’ is just one criterion of many that people value. When we try to nudge people into behaving in certain ways, we necessarily try to define other people’s idea of a good time.

So we are pushed into drinking less, eating better, cycling everywhere and giving up smoking altogether. Wholesome activities are promoted. Healthy sports are encouraged, promiscuous sex and watching pornography are discouraged.

Why? What is the objective standard by which these things are deemed good and bad? There isn’t one. Or, rather, the standard is the policy-makers' own preferences. Any nudge will end up being a promotion of policy-makers' preferences onto other people. In a word: paternalism.

Nobody other than ourselves can know exactly how much pleasure we take from doing something. This is, fundamentally, the problem with all paternalism, including nudging.

Nudging is just a new term for the old idea that our rulers know what’s good for us. The chief argument for libertarianism is not that people are wealth-maximising machines. It is that nobody knows better than I do what makes me happy.

Tucked away in the twenty-third page of the Liberal Democrat party conference agenda is a proposal to look into “fiscal measures such as the taxation of heavily sugared drinks”. This follows a recent post by two advocates of such a policy at LSE Politics and Policy which is also fairly alarming. Once again, the political classes have found an issue where they feel other people just don’t know best, and need the government to fix it. The ‘solution’ is to make us pay more for things we enjoy. They tell us that this is certainly not prohibition — even the most hardened opponents of fizzy drinks are wary of the word. But they do seem to realise that what they are calling for is starkly illiberal.

Bizarrely, this is not a call for a tax on sugar in all forms, but only sugary drinks. It is a very strange kind of paternalism that does not mind what you consume, if only you consume it in a state-approved fashion. Proponents of the measure suggest that there is something different about these products — that people do not realise that what they are doing is bad for them. It is hard to imagine that this is true. We are already bombarded with warnings that fizzy drinks are bad for us, and fat-shaming is alarmingly prevalent in modern society. Labels stating the sugar content of these products are already clear and obvious to those concerned. The simple fact is that some people just like fizzy drinks, even if they make them fat.

It is however by no means certain that the science on sugar is settled. The debate in the world of nutritionists is very much alive. The reality is that we can not be sure why people are getting heavier. Some research states that “Numerous clinical studies have shown that sugar-containing liquids, when consumed in place of usual meals, can lead to a significant and sustained weight loss”. When scientists are not sure that fizzy drinks are ‘the problem’, how can politicians be so certain?

If someone is overweight, that is an issue for them, and not for the Liberal Democrats. We should of course welcome research that shows those who want to lose weight how to do so effectively, but it is unlikely that this will come from government. Diversity in approaches to diet and exercise is far more likely to result in the development of effective strategies than by government constraining us all down a set path.

Steve Horwitz gave this excellent talk on Monday at the Adam Smith Institute, and with the government's new plan to underwrite up to £50bn in private sector spending, it's more timely than ever. Horwitz argues that the Krugmanite conception of the recession is misguided, and has already shown its weakness in the failure of the Obama administration's stimulus package. Instead of stimulating, Horwitz says, we should be restoring profit opportunities and allowing insolvent firms (including banks) to fail, so that the painful recession process can be dealt with as quickly as possible.

The Department for Transport has stated that without new runways, London’s airports will be at capacity by 2030. This could put Britain at a disadvantage from not being able to deal internationally at its full potential, especially with fast-growing markets in the Far East. Heathrow, as Britain’s only hub airport, is almost at capacity already and there has been pressure on the PM from businesses, media and backbenchers supporting the building of a third runway there. It is important that government does not prevent international businesses from operating in Britain, yet it is equally important that it allows investment decisions and funding to come from private interests and that it does not encroach on the rights it is designated to protect.

The building of a third runway is all very well if BAA Ltd (or a consortium of businesses and airlines) can afford to do so itself, but it is quite another if the £10bn funding required is going to come from the taxpayer. Against the official line of his party, George Osborne said on Sunday on the Andrew Marr show that a third runway at Heathrow is an option for government funding through the Infrastructure (Financial Assistance) Bill. This Bill will come into effect in October and promises £40-50bn of state finance to go to private schemes approved by the government, can start within 12 months and, supposedly, offer good value for the taxpayer (in other words, more government welfare for private companies that offer ‘good value for the taxpayer’).

If it is decided that a third runway is to go ahead, even if it is privately funded by BAA, additional costs may hit the taxpayer. The Free Enterprise Group, made up of Conservative MPs, has supported a move to give up to £40,000 compensation to those who would be affected by noise created by the new runway. This presumably would come out of government pockets rather than being enforced on BAA.

The best solution would be to grant a private company permission to build an airport around existing transport links and infrastructure located in an area where no or minimal noise compensation would be needed. The Mayor of London has stated his support for a new hub built in the Thames Estuary. One such proposal by Foster and Partners is to build a £20bn four runway airport on an artificial island near the Isle of Grain. It would be entirely privately funded, allocating £4bn towards improving existing infrastructure. Arguably, however, demand in the area isn’t high enough and the government would end up diverting much more infrastructural spending to this to increase demand, by creating transport links and provide public services for new workers. For the same reason, building a hub airport in the north when demand is predominantly centred around London may be good politics, but would be a great risk economically. The ‘build it and they will come’ strategy is a risk that should not be taken on something as crucial as international transport links, especially if the public purse is involved.

Another possibility arises from the currently anonymous ‘world-leading infrastructure firm’ made up of a consortium of British businesses, who are currently scouting sites for a new four runway airport that they hope could rival and perhaps even replace Heathrow as Britain’s key link between domestic regions and international airports, especially in the Far East. The firm has been looking at sites to the west and north-west of London and is now in talks with Chinese sovereign wealth funds over raising the necessary capital.

With a self-appointed monopoly on the decision of where something as crucial as an airport can be built, the government has a responsibility to make a decision that will involve minimal public expenditure, follow demand and protect the citizens who elected it from having their property devalued without compensation, whichever option that may be.