The Pin Factory Blog

On 3rd October David Cameron told the Sunday Telegraph that a Conservative government will "smash open the state education monopoly so that any qualified organisation can set up a new state schoo".

What sort of organisations will be able to qualify? Well, according to the Conservatives' two years old policy document, "The country which provides the closest model for what we wish to do is Sweden".

A major feature of the Swedish system is that profit-seeking enterprises, including PLCs, qualify. Indeed three-quarters of the new schools in the Swedish model are profit-seeking. Furthermore, an impeccable source wrote, in a recent article for the Spectator and the Daily Telegraph that "the Swedish model would not exist without the acceptance of profit-making organisations". Yet it has long been clear that Cameroons have no intention whatsoever of permitting such enterprises to "qualify". After all, that would be private enterprise; strictly passé for the Cameroons.

Or would it? During the conference week, part of the pro-Tory press was willing itself to believe otherwise. Thus on 8th October the Spectator editorial said “Crucially, it now looks likely that the new schools will be able to be run for profit" while in its Coffee House, Fraser Nelson wrote “Michael Gove’s new Swedish schools will, it seems, be allowed to make a profit".

This blog is some 3 weeks late while I have searched vainly for support of these notions.

I could be wrong, but if I am right, the Cameroons are guilty of serious misrepresentation of the "Swedish model". The same goes for another of their favourites – "the post-bureaucratic age" (largely via the internet and the information revolution). But the word "bureaucratic" refers to management in government and the public sector. The post-bureaucratic age is not a result of the internet as Dave the Vague likes to claim. It is the result of Adam Smith’s "invisible hand" – the most powerful information system the world has ever seen – bar none, whilst the internet is a mere side-show which enhances whatever market signals are allowed by the bureaucrats.

To reduce bureaucracy the Cameroons must slash taxes and allow private enterprise to flourish, rather than continue to tax us all and dish the funds out again to a few favoured voluntary groups. A good start would be to allow any entity, especially a profit-seeking institution, to create a school and charge fees directly, with a full tax rebate to those who thus reduce the cost of state education by moving their children out of it altogether. Don’t hold your breath.

• Forget all about Keynes. Anybody who believes that “If you save five shillings you put a man out of work for a day" is economically illiterate. Saving is spending – on capital goods not consumer goods. A switch of consumer preference from drinking beer to drinking wine has employment effects identical to those from a switch from drinking beer to building a brewery.
• Liquidity and credit and market interest rates are all a matter of supply and demand. There is no credit “seizure"; there is simply a shortage of savings due to artificially low interest rates.
• Market interest rates represent consumer preferences for saving versus consumption. Artificial rates throw a spanner in the whole structure of production; an artificially low rate signals that consumers are prepared to save for little reward, so entrepreneurs start to build breweries rather than provide more immediate beer. Once this error becomes clear, all projects dependent on artificially low interest rates must be cancelled as unviable. Hence the unavoidable recession.
• Government can only make matters worse and more prolonged by ignoring this. Furthermore since paper money has no intrinsic worth government cannot create wealth; it can only redistribute it – take and give with a hefty cut for itself.
• Banks cannot borrow short and lend long without risking defaulting. But if they borrow short and do not lend long, they can pay no interest. Only free market banking, as practised in Scotland for the first half of the 19th century, can resolve this dilemma. (No, Walter Bagehot was not against free market banking; he advocated a Lender of Last Resort because the Bank of England had an absolute monopoly of note issue.)  The bank of England must be abolished or sold.
• Borrowing and lending does not require the preservation of bankrupt banks. The banking industry is the greatest example of corporatism, in which government and banks form unholy alliances for their mutual gain, with government holding the ring. It is difficult to imagine anything more remote from “laissez faire".
  
  

Terry Arthur is the author of Crap: A Guide to Politics. Buy it here.

“If it were possible to substitute credit expansion (cheap money) for the accumulation of capital goods by saving, there would not be poverty in the world". (Ludwig von Mises, Planning for Freedom)

At The Times, there are columnists and there are columnists with chutzpah, such as Anatole Kaletsky and David Aaronovitch, both of whom feature quite prominently in my book.

They are still in stonking form. Thus Kaletsky seems to dare you to look back at his previous columns, presumably in the hope that you won’t. On 15th December he tells us that a year ago he wrote repeatedly for a government-led Plan B which “was duly implemented in January and February". Hence in January Kaletsky wrote “I believe that the global credit crisis, far from taking a turn for the worse, is now almost over". His current excuse (15th December) is that the Bush Administration sabotaged Plan B in September. (Surely it should have been all over by then, though.) Three days later he tells us that “bankers and borrowers need cosseting in the soft eiderdown of zero interest rates". Yet only savers (who abstain from consumption for the sake of capital formation) can shorten the recession, caused as always by guess what – cosseting borrowers. Instead Kaletsky accuses savers of refusing to invest in “productive assets". The trouble here is not only that any savers left are dying from years of cosseting borrowers. Productive capital is similarly scarce and will remain so until boom-time malinvestment is cleared and saving is allowed to flourish... [Click 'read more' to continue]

In their 1974 election manifesto, the Tories made their attitude to free markets very clear. Arguing against outright nationalisation, the manifesto said “the desired results can be achieved just as effectively and far more cheaply through taxation and regulation”. Since then it has been made plain that if you want genuinely free markets you can forget the Tories.

Today, the march to corporatism, in which government is the senior partner in any major industry, is rife. In this partnership, big business often promotes state regulations to keep pesky little competitors out and thus enjoy a cosy monopoly. The current bare-faced collusion between government and the banking industry is a case in point, with bankers agreeing to several ridiculous conditions including committing £1billion for “regional growth”, £200 million for a “Big Society Bank” and the same for gross new lending to business – at a currently laughable interest rate. Another case in point is trade, with Britain’s biggest companies now having to work with individual ministers to “manage trade”.

The railway industry is a perfect example of the 1974 manifesto at work, with government granting licenses, owning all the track, dictating consumer prices, and now spending a fortune on a very dodgy new railway between London and Birmingham.

Reverting to banking, the rot began with the Bank of England. [Continue reading]

In 1930 a Labour MP gave his wife and daughter two rail travel vouchers from a pack issued to him (only) for travelling between his constituency and Westminster. The ticket inspector pressed charges and that was the end of the MP’s career.

Over a single century, serious corruption in Westminster has moved from virtually unheard of to routine; “the virtually unheard of" bit now refers to disciplinary action. The same goes for abuse of power – recent examples include Jack Straw’s refusal to release records of how the Iraq war came about (it would “damage democracy") and Harriet Harman’s reaction to Fred the Shred’s pension (“it might be enforceable in a court of law but it’s not enforceable in the court of public opinion and that is where the Government steps in"). It’s not that many years since our Harriet was a NCCL activist!  (Shades of her colleague Patricia Hewitt, who actually wrote a book called Abuse of Power, more recently stooping to calling for “heat maps" linking potential hospital closures to non-Labour constituencies.)

This decline coincides (but not coincidentally) with the rise of total taxation over the last century or so from about 5% of GDP to about 50%.

The motivations for a Parliamentary career have changed radically, from a strong wish to do good to exercising power for its own sake and the corruption of the system for personal gain. This fits precisely Hayek’s explanation of “why the worst get on top" .*

But we ain’t seen nothing yet. My knowledge of history isn’t exhaustive, but I suggest we’d be hard-put to find a democracy that lasted as much as 500 years. Of course there is room for doubt about what a democracy actually is, which is one reason why Churchill’s famous remark “Democracy is the worst form of government except for all those others that have been tried" is little more than a sound bite.

An unlimited democracy in which all decisions can be settled by a majority vote is essentially the same as two wolves and a lamb voting on what to have for lunch. A “representative" democracy is potentially even worse, with government itself taking all decisions in an elective dictatorship, such as those of Hitler and Mussolini. Modern Britain is getting ever closer to this position.

What is needed above all else is a constitution, listing all the areas which are off limits for either government or majorities to settle (such limits, both personal and economic, being based in particular on the bulwark of private property in its widest sense).

Not one of the original constitutional documents of the USA (Declaration of Independence, Constitution, Bill of Rights) mentioned the word democracy.  These documents are themselves bulwarks, but over a period of time “representative" government dismantles them or disobeys them without fear of retribution.

The politicos are always referring to “democracy" alongside others “good" phrases, like “peace" and “economic growth", whereas in fact neither is available under untrammelled democracy.

If history is anything to go by, the picture is bleak indeed.

* See Chapter 20 of The Constitution of Liberty, Routledge,1960

Let us take a small fishing community as an example of how recessions work. They have a money in the form of tokens (easily manufactured and branded by their Government at negligible cost). We all know what happens if the number of these tokens is suddenly doubled. Prices double. If the doubling took place individually so that everyone got double overnight, then the prices – all prices – would double pretty quickly and, apart from the dreadful inconvenience, it would not matter too much (as long as repeats were not expected). But if the doubling occurred unevenly and if the process took a few months, say, then the path to universal price doubling would be very rough and fortunes and disasters would be commonplace.

If, for example, the under 30s got all the new tokens they would gain; but the spread of the corresponding loss would not be clear. If the under 30s bought fish then the fishermen would eventually react and some of the smart ones might even do a bit of stockpiling until prices rose. The boatbuilders would be even further down the queue. The original price relativities might never return, but eventually things would settle down much as before except for the one-off gains and losses caused by the uneven distributions of the new tokens.

But what would happen if the new tokens were not dropped down people’s chimneys, but made available for lending – at a knock down interest rate? 

Read this article.

The first chapter of my book covers Newspeak Crap and contains a glossary of words abused by the politicos, together with their correct meanings.  For example, “friendly fire" means “killing colleagues", “legal tender" means “a compulsory medium of exchange", “social justice" means “theft", and so on.

Also in the glossary is “price war" meaning “competition to serve customers". Ever-present, "pricewar" has recently been used by The Guardian to describe Ryanair price cuts. You can’t win of course; price increases are “exploitation" or “rip-offs"; even “pickpocket" was used recently by Ed Mays, chief of the National Consumer Council.

Meanwhile poor old Ryanair is in the wars on another front, having been accused of “waging war" against consumers by its decision to exclude price-comparison websites from purchasing tickets through third party websites rather than Ryanair’s own site.  “Pawns" is the word used to describe consumers by Which? Magazine (not always a true friend of the consumer). Similarly, (directly alongside news of the price war mentioned above) The Guardian reported that “Ryanair to cancel thousands of  ‘illegal’ tickets" and surreptitiously hinted that the word ‘illegal’ (in Ryanair’s claim that the practice is against its terms and conditions) was dubious if not ridiculous – even though Ryanair has already succeeded in recent legal actions on this very point.

Although it seems to me that Ryanair’s spokesman made several telling points in support of its action, it is quite possible that Ryanair has made an error.  But if so, it will correct it, quickly, just like British Airways did over its crucifix ban.

That’s the way that markets work – the consumer is king.  The word “pawns" is best left to describe consumers who are not served by markets.  The NHS is a good example, and let us not forget that it too can and does turn away patients which don’t fit its templates or whims. And outside the directly nationalised organisations, the UK is riddled with state regulation and state corporatism. The airline industry is a case in point, but somehow I don’t think this was what Which? Magazine had in mind.

Click here to learn about Terry's latest book, Crap: A Guide to Politics.

Don’t get me wrong; I love Adam Smith.  In particular I love and support his description of the “negligence and profusion resulting from the separation of ownership and control in a business enterprise".

However it pains me no end to see this concept brought up to support a prior argument (policy-based evidence rather than evidence-based policy, as some wag put it recently) – especially when there is a far more likely explanation to hand.

Chris Dillow, an experienced writer on economics at the Investors Chronicle wrote this in an article in The Times on 18th September:

"There’s a pattern here. The biggest shocks to the financial system have all come from stockmarket companies. By contrast, hedge funds, which many expected to cause trouble, have been innocent bystanders. These are, generally, owned as private partnerships.  So one form of ownership has caused a crisis, and another hasn’t".

Come on, Chris.  You’re not a politician – a species which uses statistics like a drunken man clinging to a lamppost – for support rather than illumination.

Surely the explanation that sticks out a mile is that hedge funds are fund managers and not banks.  The shocks to the financial system have come from banks – who are heavily controlled by the Bank of England and the government in one of the clearest examples of corporatism you are ever likely to see.  In contrast, hedge funds (whose activities are extremely diverse and include funds offering deliberate reduction of risk as well as the opposite) are plain vanilla fund managers.  It is true that many other plain vanilla fund managers are also privately owned and are surviving but the point is they are not banks.

The credit crunch is now spreading outside the financial sector and it will be interesting to see further analysis by Mr Dillow.  In the meantime his perfectly valid concern about the “cost of separating ownership from control" should be applied to voters and government – now there’s a real gulf to consider.  It’s funny, and it may be a coincidence, but I don’t recall Chris Dillow praising the virtues of small government.

Mark Kleinman, City Editor of the Sunday Telegraph, is worried about the remuneration (including bonuses) of company bosses. Many shareholders are incandescent, but largely powerless to influence the chairmen of remuneration committees – a group whom Kleinman describes correctly as a new category of City pariahs. So what can be done? One suggestion, says Kleinman, would be to make investor votes on remuneration legally binding, but suspects that this may be unworkable; he prefers the idea of making remuneration committee chairmen stand for re-election each year.

I have a far simpler idea; abolish the Companies Act, now almost 1,000 pages long. Radical? Yes, and rightly so. Unlike politicians, companies (or would-be companies) are perfectly capable of drafting sane constitutional documents and shareholders (or potential shareholders) as well as Stock Exchanges are perfectly capable of deciding whether or not to supply funds or approval on the basis of such documents. All we need is contract law; there is no need for Companies Acts at all – indeed it is they that prohibit certain investor votes from being legally binding. Government controls over PLCs include not only their constitutional documents, but also the relationships between directors and shareholders (hugely biased to the former - so much so that the famous Higgs report suggested that one director should have special responsibilities to shareholders. Gee thanks!) Government rules also control the hostile takeover market (again favouring incumbent directors), and what issues can be raised and validated at an AGM. They even influence capital structure; the tax system favours high gearing and risk.

But what about insider trading? Simple – deal with it in the company constitution. To allow such trading, says Richard Epstein ,the constitution can provide that “if you want to deal in the shares of this company please understand that every employee and director is entitled to trade on inside information to their heart’s content. If you do not want to trade with us you are free to buy shares in our competitor which does not allow the option".

Click Read More

The eighteenth century Scottish judge Alexander Fraser Tytler, said “A democracy cannot exist as a permanent form of government. It can only exist until a majority of voters discover that they can vote themselves largess out of the public Treasury”. In other words, democracy evolves into kleptocracy.

If Tytler were alive today, surely he would have added that the rot begins with a state education system and a national syllabus which themselves eulogise the State. What else can cause highly intelligent and educated people to plead for funding of their personal interests, even as Rome is burning?

Thus can eminent scientists seek more taxpayer funding for science, while sportsmen write in the Telegraph that, “A party that prioritises sport might get my vote”. More generally those making good livings from “the arts” (actors, musicians, and so on) seem to bleat almost perpetually in the broadsheet newspapers.

Did all these worthies not learn that science and inventions, sport, and “high-brow” entertainment were thriving features of the UK throughout the 19th century (and earlier), when state funding wasn’t on anybody’s agenda. Indeed, government involvement would have been pooh-poohed on the basis that not only would it come with strings attached; it would also become contaminated. Indeed this has happened in spades to science and statistics in the last 75 years.

The end of democracy is nigh, unless it is severely constrained via a constitution which puts most current government functions firmly off limits. Fat chance.

Terry Arthur is a keen sportsman and played rugby for England in 1966.