Capitalism after Covid: The Case Against Disaster Corporatism

The Adam Smith Institute’s latest paper, by Matthew Lesh, ASI Fellow and Head of Public Policy at the Institute of Economic Affairs, argues that businesses and governments must return to their proper roles in order to kickstart the post-pandemic recovery.

• Free markets, limited government, democracy and individual rights have delivered immense human prosperity. They have raised our standard of living, provided social mobility and protected human freedom. But some are now, particularly in response to the Covid-19 crisis, calling for a new settlement. They claim the crisis has shown the need for a bigger state as well as a new mission for business that downgrades the importance of profit.

• These claims are nothing new. Many were suggesting the same prior to the crisis. Nevertheless, this crisis – combined with the public’s declining faith in both governments and corporations – could be hijacked in a form of Disaster Corporatism to reshape society in an unconstructive manner. 

• If this is to be avoided, we must learn the right lessons about state capacity and the role of business from Covid-19. These lessons are the opposite to what has been often suggested. If governments and businesses are to regain public confidence and improve their effectiveness, there must be a reassertion of their purpose and a return to their traditional competencies.

• Many governments struggled to provide an effective pandemic response: they failed to respond in a timely manner and restricted tools, like testing, that could have prevented the virus from spreading. Meanwhile, businesses, albeit with challenges and state-support, have largely responded successfully to immense challenges and delivered life-saving vaccines and therapeutics. 

• The crisis is revealing and should help refocus attention. The state failure evident in response to Covid-19 undermines the case for a greater government role in the direction of the economy. It is bizarre that many are calling for more power and more responsibility for the very same bureaucracies that have shown catastrophic failures. The state must, to regain public trust, focus on effectively delivering traditional demands for essential public services and safety.

• The extent to which the state was effective during the crisis—such as in providing financial support to keep businesses afloat or in procuring and partly funding vaccines—does not necessarily set a model for how the state should act during a non-emergency. 

• If the economy is going to flourish after the crisis, the state will need to allow the private sector to adapt to its new circumstances. It must avoid continuing to crowd out private sector activity, propping up unproductive ‘zombie companies’, and encouraging subsidy entrepreneurs.

• Not only do some want the state to be more involved in the affairs of business, many also want business to be more involved in the affairs of the state. This applies across social and environmental issues under the guise of ‘stakeholder capitalism’, replacing traditional profit-driven ‘shareholder capitalism’. Businesses, it is claimed, should accept lower profits in order to contribute towards social and environmental goals.

• The perpetrators of this false dichotomy are harming support for a liberal economy. Profit is socially responsible. A business that returns a profit to its shareholders can provide quality and value-for-money products for their customers, pay wages to their workers, procure from their suppliers, and pay taxes to fund public services. 

• Businesses that adopt a social justice agenda risk being perceived as incompetent – since they cannot live up to lofty goals that often require political collective action – and often face  accusations of being cynical and hypocritical.

• The failings of the alternative, corporatist model of capitalism provide a warning to those who now want to reshape liberal market economies. The Wirecard scandal reveals the dangers of downplaying market forces in favour of broader social goals leading to the cover-up of unlawful corruption. 

• Both the state and businesses must relearn their place if the successful liberal free market system is to survive, and flourish, after the crisis.

Splice of Life: The case for GMOs and gene editing

The Adam Smith Institute’s latest paper, by Cameron English, Director of Bio-Sciences at the American Council on Science and Health (ACSH), outlines how the UK can benefit from embracing gene editing and GMOs:

• Genetic engineering allows farmers to produce larger and more nutritious yields that are resistant to pests and disease. This results in more profitable farms and lower cost to consumers, along with environmental benefits like less chemical pesticide, water and land use, protecting biodiversity and reducing carbon emissions.

  • GMOs save global consumers up to $24 billion per year, while the UK farming industry has lost £1.7 billion due to GMO ban since 1996.

  • GMOs have led to a 8.6 percent decrease in global pesticide use, representing roughly 800 million fewer kilograms of insecticides and herbicides — a 19 percent reduction in the environmental impact of pesticide use since 1996.

  • Between 1996 to 2018, GMOs are responsible for 34.2 million kilograms less of carbon dioxide.

• Genetically engineered (GE) organisms can refer to both genetically modified organism (GMO) varieties, that means moving genetic material between different species, and new breeding techniques (NBTs) including CRISPR-Cas9 gene editing, that generally aims to change an organism’s existing DNA.

  • GMOs are safe for human consumption and help promote sustainable agriculture. More than 2,000 studies have confirmed that approved GMO crops pose no greater threat to human health or the environment than plants produced through other breeding methods. 

  • New breeding techniques, like CRISPR gene editing, are also very safe. They pose no greater risk to human health or the environment than non-GE counterparts. Unlike GMOs, organisms developed through NBTs (like CRISPR) generally do not contain genetic material from other species. In fact, traditional breeding methods induce far more mutations than any new breeding technique. 

• There is a near-universal prohibition of genetic engineering across the European Union based on the ‘precautionary principle’. Hypocritically, the EU still imports around 30 million metric tons of soybean and soybean meal annually, 90-95% of which is GMO. The UK adopted these policies as a member of the bloc, yet now has the opportunity to diverge.

• The UK Government is intending to reform regulations. Boris Johnson, in his first speech as prime minister in 2019, promised to “liberate the U.K.’s extraordinary bioscience sector from anti–genetic modification rules.”

  • In September 2021, the Department for Environment, Food & Rural Affairs (DEFRA) announced plans to “ease burdens for research and development involving plants, using technologies such as gene editing”.

  • However, this would only apply to agriculture, and not gene editing in animals or change the approach to GMO varieties. The different treatment is inconsistent with the scientific evidence.

• If the UK Government wants to follow the scientific evidence and ‘liberate’ the UK’s bioscience sector, they must GMO regulatory framework and gene editing in animals:

  • The ideal biotech regulatory framework is a case-by-case risk assessment that evaluates each novel organism based on the harms they may pose to humans and the environment, regardless of how they were developed. The organism’s characteristics and intended use would determine the degree of scrutiny applied by regulators. 

Singapore-on-Thames: What the UK can learn from the Lion City

The Adam Smith Institute’s latest paper, by Dr Bryan Cheang, an academic at King’s College London, outlines what the UK can learn from Singapore:

• Singapore has had one of the most rapidly growing economies in the world in recent decades, making it one of the ‘four Asian tigers’. The ‘Lion City’ presents important lessons for policymakers in the United Kingdom.

• Singapore has prospered with minimal state intervention in the economy. Singapore spends and taxes far less as a percentage of national income compared to the United Kingdom and other major Western economies.

• Singapore spends £3,500 less per person per year on social spending compared to the United Kingdom yet achieves better outcomes.

• Singapore’s public services are carefully designed to emphasise individual responsibility and use market principles — while providing extremely high quality outcomes and equitable access.

• The central plank of Singapore’s welfare and health systems is the Central Provident Fund (CPF) accounts, which is a mandatory social security savings scheme funded by contributions from employers and employees. CPF can be used for ​​retirement, healthcare and housing. The Singaporian government supplements the savings of lower wage workers through Workfare and top-ups to MediSave.

• By encouraging saving with appropriate taxpayer-funded top-ups, Singapore’s welfare system promotes personal responsibility and local community organising that is both well-targeted to those in need and limited in cost.

• Singapore’s “workfare” welfare approach focuses on getting people back into work and providing them with the necessary skills. It is designed to encourage self-reliance and responsibility. 

• Singapore abandoned the NHS-style healthcare (and welfare) model left behind by the British when they gained independence in 1965. Instead, Singapore redesigned the health care system to emphasise market competition and choice while maintaining universal healthcare access. Singapore’s healthcare system is more efficient and has much better health outcomes than Britain thanks to market reforms. 

• Singapore’s education system gives schools and teachers autonomy. It is largely decentralised and has a flourishing private sector which promotes competition and efficiency.

• The UK could improve the quality of public services, such as welfare, healthcare and education, by adopting a more market-centric, decentralised and personal responsibility model exemplified by Singapore:

  • Reduce state-spending and taxation to similar levels of Singapore, abolishing tariffs and quotas along with other restrictions on trade; 

  • Incentivise greater personal saving or insurance for unemployment, education, retirement, healthcare, and social care; by developing a UK-equivalent of Central Provident Fund (CPF) accounts.

  • Decentralise the curriculum and encourage further academisation.

  • Incorporate market incentives into the delivery of welfare, health and education.

Against The Man of System: Innovative Dynamism after Covid-19

The Adam Smith Institute’s latest paper, by economics professor Dr Arthur M. Diamond, Jr, makes the case that the state lacks the entrepreneurialism and innovation provided by the private sector — and both struggled to respond to the Covid-19 pandemic and should not get more involved in issues such as climate change, semiconductors, infrastructure, and jobs:

• As the pandemic grinds to an end, there is significant clamor for a bigger government to solve alleged crises in healthcare, climate change, semiconductors, infrastructure, and jobs. 

• Many believe that China’s state-centric policies are better suited than the West’s to solve these crises. But central planning consistently fails and Chinese Communist Party (CCP) efforts to increase the role of the state will hold back their economy. 

• Life has improved as a result of innovation, which occurs through the efforts of inventors and innovative entrepreneurs. Workers, on balance, benefit from a system of innovative dynamism. Policies can be crafted to encourage further entrepreneurship and innovation. 

• Innovative entrepreneurs use serendipity, slow hunches, and trial and error experiments to end crises and create a flourishing economy. The path toward innovative solutions cannot be known in advance by central planners and regulators, and only can be created by the improvisation of entrepreneurs. 

• The track record of centrally planned projects, whether the explosion of the R101 government-built dirigible in Britain, or the bankruptcy of the government-subsidized Solyndra in the US, does not suggest that government central planning is better than entrepreneurial innovative dynamism. 

• In the recent Covid-19 pandemic, central planners in China covered up the emergence of the virus and were slow to warn their own citizens, and the citizens of the world, of its virulence and fast spread. They may also be responsible for accidently leaking the virus from a laboratory.

• The World Health Organization (WHO), the Centers for Disease Control (CDC) in the US, and Public Health England in the UK, for months ignored evidence that the virus could spread asymptomatically and through aerosols and that it only very rarely could spread through infected surfaces. As a result, those who acted on the information from these authorities took measures that were of limited use (temperature checks and frequent surface disinfection) and failed to take measures that could have mattered more (earlier, quicker, targeted testing and better ventilation). Perhaps even worse, central planning organizations discouraged or banned the kind of nimble trial and error experiments that could have provided more useful therapies until vaccines could be developed.

• In respect to climate change, semiconductors, infrastructure, and jobs, a system of entrepreneurial innovative dynamism has resulted, and will continue to result, in faster and greater progress. 

To sustain the innovative dynamism that allows us to flourish, we must make sure that:

• We do not interfere with the process that allows entrepreneurs to innovate; 

• We do not tax would-be entrepreneurs so much that they do not have the funds to pursue their hunches and conduct their nimble trial and error experiments; 

• We do not regulate or centrally plan the path forward.
  
  

Submission: Reforming the framework for better regulation consultation

The Adam Smith Institute has responded to the Department for Business, Energy & Industrial Strategy (BEIS)’s Reforming the framework for better regulation consultation. The submission was written by the ASI’s Head of Research, Matthew Lesh, and lawyer and consultant Robin Ellison.

The submission focuses on three key areas:

1. using the RegData approach to reduce regulation;

   • RegData is an innovative approach to measuring and reducing regulations developed by George Mason University’s Mercatus Centre. The method has been used in the United States, Canada and Australia, at both a national and provincial level.

   • RegData quantifies and categorises laws and regulations using machine learning and textual analysis. It analyses the restrictions of the text by counting the number of phrases such as ‘shall,’ ‘must,’ ‘should,’ and ‘prohibited’. This creates a count of “regulatory restrictiveness clauses”.

   • This method allows for a high quality measurement of regulations over time, between jurisdictions and across industries. It is superior to counting the number of regulations, the number of pages of regulations or the number of words in a regulation.

   • The RegData approach is particularly appropriate for tracking regulatory reduction efforts, by counting and setting targets to reduce regulatory restrictiveness clauses.

   • British Columbia used the method to reduce regulatory requirements by 41%.

2. better cataloging of the regulatory burden; and

   • The United Kingdom lacks a depository of all laws and regulations. We are all expected to follow the law, yet there does not exist a proper list of the legislation and regulations that citizens must abide by.

   • The lack of single regulatory source undermines the rule of law, severely burdens business and leads to the creation of more red tape.

   • Businesses spend thousands of hours attempting to find and interpret the law, employing costly external regulatory consultants and professional legal advice.

   • In addition to clearly cataloguing laws, regulations, and departmental guidance, there is a need to reduce and simplify the burdens on citizens to a point at which the legal responsibilities of citizens is comprehensible and clear.

   • There is a need to ensure the publication of rules in accessible website, data feed (XML, JSON) and PDF formats, amendments to be dated and time travelled, penalties for breach not to be applicable without proper publication and obligation to provide user friendly websites.

3. changing the culture of regulation by educating lawmakers.

   • Previous efforts to reduce regulation have failed because of an absence of training for lawmakers and regulators in how to produce good law and regulation and an inappropriate mindset, treating law and regulation as the first rather than a last solution.

   • In order to redress this issue, lawmakers and regulators could be better trained on the principles of regulation.

I Owe You: A Churchillian Solution for the Covid Debt

The Adam Smith Institute’s latest paper, written by Dr. Eamonn Butler and Gabriel Stein, argues that the Government could finance debt accrued from Covid-related spending in the same way as Britain has done for past wars: using ‘consols’:

• The Government has borrowed hundreds of billions in response to the Covid pandemic. This has led to a record peacetime debt totaling £2.2 trillion, representing 97% of GDP.

• The use of regular bonds, with repayments in 10 or 30 years’ time, create a substantial future financial burden that could be rolled over even further into the future.

• The Covid debt could be separated from day-to-day lending using ‘consols’ or ‘consolidated annuities’.

  • Consols are like normal bonds, with a fixed interest rate paid to the bearer, however, they have no fixed repayment date. They continue to exist until the Government decides to buy them back.

  • Consols were first used in Britain in 1751 to pay for the War of Austrian Succession, and were used again to finance the Napoleonic Wars, and by  Winston Churchill, when Chancellor, in 1927 to refinance World War I debt.

• Consols would lock in ultra-low interest rates and not have to be paid back at any specific date — Napoleonic War consols were only fully repaid in 2014. They provide greater flexibility, with the government able to repay them when ready rather than on an arbitrary date in the future, with limited annual cost.

• The Government could specifically legislate to convert existing Covid debt into ‘Covid Emergency Bonds’ based on consols, with a commitment to repay when the economy recovers.

• Consols should not be used for routine big-spending projects, but rather, rare and unexpected emergencies like wars and pandemics that create an immediate large need for borrowing.

Blind man’s buff? The UK Net Zero Strategy

The Adam Smith Institute’s latest discussion paper, written by Tim Ambler, Peter Edwards and Michael Kelly, outlines the uncertainties and challenges facing the UK’s Net Zero by 2050 strategy whilst proposing a potential solution.

• The UK's Carbon Net Zero by 2050 target is an excellent aspiration but there is currently no coherent, quantified strategy for its achievement.

• There are several key areas of uncertainty, including:

  • Energy generation requirements and likely shortfalls:

    • On current plans, the UK will have insufficient nuclear generation capacity to meet conservative estimates of expected baseload requirements. Under reasonable assumptions, renewables' contribution to overall energy needs would need to increase by approximately nine times the current amount;

  • The cost to users of moving to Net Zero by 2050:

    • Different estimates of the cost of Net Zero arrive at wildly divergent conclusions whilst often making questionable assumptions;

  • The likely contribution from anticipated new technologies:

    • Some future technologies are given undue attention despite lack of feasibility or likely cost effectiveness, whilst working estimates of 'technological readiness' for advanced modular reactors require greater scrutiny.

• Just as the government set up a panel of scientists (SAGE) to provide advice on an area with a high degree of uncertainty, a similar approach could be taken towards the Net Zero by 2050 goal. If the Government wants to deliver Net Zero by 2050 while maintaining a low-cost and reliable energy supply, they could do so by establishing E:SEAG—the Energy: Science and Engineering Advisory Group.

  • This could bring together top science, engineering, industry and business skills to help identify the best energy strategy for meeting Net Zero 2050 in the most effective manner;

  • It must learn from the failures of SAGE by, for example, increasing external scrutiny and ensuring experts are specifically regarded as such in their relevant fields.

Draining Our Pockets: How the global tax cartel could cost Britons billions

The Adam Smith Institute’s latest paper, written by Julian Morris, outlines how the global minimum tax proposal would endanger Britain’s national interest:

• One-hundred and thirty six jurisdictions, including the United Kingdom, have agreed to negotiate two new treaties that would, if implemented, change how many large companies are taxed in the name of ‘tax fairness’.

• Pillar One would implement a special tax on profits above 10% for companies with an annual revenue of over €20 billion, thus changing the recipient country for some of the taxes on profits of the world’s largest multinational companies. 

  • Pillar One was originally targeted at digital companies, however in the final design it will apply to all companies except regulated financial service companies.

• Pillar Two would introduce a global minimum tax of 15% on multinational companies with annual revenues of over €750 million.

  • The main purpose is to prevent jurisdictions from competing with one another by offering lower taxes in order to attract companies.

  • The measure is designed to require companies to pay a minimum level of corporate income tax where they domicile, to be achieved through companies paying “top up” amounts. This is contradictory with Pillar One which aims to require companies to pay tax where they operate.

• The minimum tax has been justified by claims that there is a ‘race to the bottom’ in tax rates.  But, in fact, corporate tax revenues, as a proportion of GDP, have risen in recent decades along with lower rates. This includes in the UK where corporate tax revenues rose from about 2% of GDP in 2000 to over 2.5% in 2019, at the same time as the topline rate was reduced from 30% to 19%.

• Corporate taxes are the most harmful of major taxes to economic growth because they significantly reduce investment and entrepreneurial activity. The minimum tax would lock in a corporate tax rate, which economic theory suggests should be lower if not closer to zero.

• There is no guarantee that every country will implement a global minimum tax, including the United States if President Biden is unable to get Pillar Two through Congress. This would create advantages for some countries.

• The minimum global tax could be seriously detrimental to the United Kingdom because it would:

  • be incompatible with key UK Government policies, including the super-deduction, free ports and the patent box; 

  • undermine national sovereignty by locking the UK into a model of corporate taxes and reduce future policy flexibility; and 

  • result in some UK companies relocating to jurisdictions that do not implement the minimum tax, leading to the loss of as much as £7 billion in annual tax revenues to HM Treasury.

• If the UK Government and OECD do not abandon the process but want to reduce the negative impact of the treaties, the following changes could be implemented:

  • 1. Set the global minimum effective tax rate in proportion to the current global average effective tax rate, and at a lower rate, such as 10% rather than 15%;

  • 2. Permit full expensing of capital in the global minimum tax rate to enable ‘super-deduction’ and freeports;

  • 3. Calculate the minimum tax at an entity level (‘global blending’ in OECD-speak) rather than at each jurisdiction; and

  • 4. Expand the definition of an excluded fund to cover all regulated entities such as private equity funds, insurance company funds, and unregulated (private) funds.

School’s Out: How microschools boost educational choice and quality

The Adam Smith Institute’s latest paper, written by education policy analyst Sophie Sandor, outlines how microschools could boost educational outcomes:

• The UK Government’s response to COVID-19 kept children out of school for the best part of a year, during which time children were offered lessons provided by teachers online and were homeschooled by parents. 

• The school closures of March 2020 have led to great learning losses for children, a significant number of whom completed only between zero and one hour of school work per day whilst locked down at home. Pupil performance in both reading and mathematics amongst Year 2 pupils, for example, progressed by two months less on average. 

• The level of education at home during school closures varied greatly across regions and social groups. Private school students and those not on free school meals undertook more education than state school pupils and those on free school meals. 

• Some educators and parents responded by forming ‘microschools’ or ‘pandemic pods’. These are very small schools conducted from the home of one of the pupils. They typically involve between 3 and 12 students.

• Microschools could continue to play a valuable role in education post-COVID-19. They can cater to parents’ diverse preferences better than state schools. They also provide competition that drives up educational standards across the board. This would particularly help students from disadvantaged backgrounds, the people who suffer most from the shortcomings of the state school system.

• Microschools are severely hampered in the United Kingdom as a result of cumbersome school regulations. Additionally, in the absence of tax-funded education vouchers, they would financially struggle to compete with state schools for pupils from low to middle income households.

• Homeschooling is gaining in popularity, primarily because of improvements in communication technology which enable remote lessons from educators and access to a wide array of materials. Many parents who homeschool their children out of dissatisfaction with the state offering would prefer microschooling, if only it were affordable. Similarly, the demand for private tutoring is increased by the absence of affordable alternatives to state schools. 

• The regulatory liberalisation, signalled by the introduction of free schools in 2010, has not continued. Ofsted are finding a new zeal for regulating and supervising independent schools and, in certain cases, for shutting them down against the wishes of parents.

• The homeschooling experience forced on millions of parents and children offers a glimmer of hope. The experience of an alternative to inadequate state education creates political demand for more options.

• If the Government wants to increase educational choice and improve standards for disadvantaged students, they should liberalise school regulation to enable the proliferation of microschools:

  • Develop a new light-touch regulatory approach for microschools separate to current approach that limits microschools to a family home and four or fewer pupils; 

  • Create a schools sandbox, modelled on the Financial Conduct Authority’s regulatory sandbox, to allow entrepreneurs to experiment with a diverse array of new arrangements for schooling in a light-touch regulatory environment;   

  • Introduce a ‘schools voucher’ scheme to ensure that parents who choose to micro-school their children are not financially worse off with respect to state-support for their children’s education.

Submission: Competition and Markets Authority's Facebook, Inc / Giphy, Inc merger inquiry

The Adam Smith Institute has joined with the Competitive Enterprise Institute in a submission to the Competition and Markets Authority’s (CMA) investigation into the completed acquisition by Facebook, Inc of Giphy, Inc. The submission was jointly submitted by the ASI’s Head of Research, Matthew Lesh, and the CEI Vice President and senior fellow Iain Murray.

The submission contends that the CMA’s provisional findings:

• dramatically lowers the bar for the CMA policing mergers and acquisitions by overseas parties and thereby constitutes an inappropriate “power grab”.

• make the “relevant market fallacy” by drawing the market under consideration excessively narrowly. Specifically, determining that GIPHY has significant market power as a “searchable GIF library” despite most GIF searches being undertaken on a generic search engine such as Google.

• fails to demonstrate consumer harm, compared to the consumer benefits of better integration of GIPHY’s services into widely used social media platforms.

• makes implausible assertions about the counterfactuals, with respect to GIPHY’s profitability, for a currently loss-making exercise, and limited advertising business, that does not currently operate in the UK and is unlikely to be a competitor to Facebook.

The ASI and CEI conclude that the provisional findings should not become final.