One of the reasons we shouldn't have a planned economy is

That perhaps the planners don't know what they're talking about. We spied this little piece in the Times:

Australia’s richest woman has backed the £3 billion plan to build Europe’s biggest potash mine beneath the North York Moors.

Hancock Prospecting, controlled by Gina Rinehart, the iron ore magnate, is paying $300 million towards constructing Sirius Mienrals’ mine on the national park in return for a share of the revenue and, eventually, a stake in the company.

The deal is the first chunk of financing secured for construction of the $3.6 billion (£2.9 billion) mine which was approved by planners last year. The mine will initially produce 10 million tonnes of polyhalite, a fertiliser, every year.

That Hancock family fortune hasn't been built by just stumbling over some deposit that could be made into a mine. It's been done by very clever work over the decades concerning what is financed and with whom.

This company's addition to this project is a very big feather in the cap of said project. To change industry sector it's a little like inventing some tech good enough that Apple wants to buy into it.

Polyhalide is a bit of an oddity. It's slightly different than the more normal run of the mill raw materials for fertilisers but adaptations can be made without too much difficulty.

Which is where the planners come in. As we can see one of the top end mining companies likes this project enough to plonk down $300 million for a bit of it. The planners, at one point, refused the development licence on the grounds that no one would buy the production from the mine if it were built.

We tend to think that decisions made by those who know what they are doing are preferable to decisions made by those who do not. Of course, this project is not a slam dunk success quite yet but we do know which way we lean on who is right here.

And it ain't the planners. Thus we find our prejudices reinforced - why would we let economic decisions be made by those with no skin in the game and possibly even less knowledge than that?

The ASI and Brexit

The Adam Smith Institute has no official line on Brexit. Its staff have different opinions on the issue, just like those in other policy bodies. The ASI’s Executive Director, Sam Bowman, favoured Remain in the referendum, and now advocates an EEA-style solution. Its President, Dr Madsen Pirie and its Director, Dr Eamonn Butler, voted to leave the EU and now believe that a clean (and quick) Brexit is desirable.  

Both founding directors take the view that the referendum result must mean that UK laws are in future made in the UK, that the European Court of Justice has no further jurisdiction in the UK, that the UK no longer contributes to the EU budget, and that the UK has control of its borders.  All these were crucial elements in the Leave vote.

We both take the view that the UK now has the chance to trade freely with the rest of the world, since it will no longer be locked inside a protectionist bloc of diminishing economic and political significance. We think our economy will grow faster than those of our EU neighbours now that the UK – always an advocate of liberal commerce and free trade – can negotiate with its own interests at heart, instead of having them swallowed up in the interests of 27 other EU members.

We expect to enjoy very good relations with our former fellow members.  We do not expect the agreement we reach with them to be like any they have with other non-members.  Ours will be different because we have been members and have worked with them.  We do not come to them as mere outsiders who have to start from scratch; the saga of the proposed EU trade deal with Canada shows how difficult that can be.  For us it will be a case of modifying previous ways of working together to take account of the new relationship. 

Like most economists and everyone at ASI, we hope that protectionism will not prevail, and that free trade with those beyond our borders will be the norm. We hope, too, that once in control of our borders, we can be relaxed about immigration, choosing whom we wish to take into our economy, our culture and our society, and taking significant numbers of those who can contribute positively to all of those.

We therefore look to the future with optimism that, outside of the EU, the UK can move forward to a bright future that will enrich the lives of its citizens and provide a positive example to the world. And the quicker we embark on that future, the better for everyone.

Book review - Adam Smith by Jonathan Conlin (Reaktion Books, 2016)

One of the unintended consequences of the 2008 financial crisis has been to bring what until then had been a backwater of academic research, financial history, into a mainstream topic of the reading public. So it will pique readers’ interest that Jonathan Conlin in Adam Smith (Reaktion Books, 2016, £11.99) covers an intriguing episode from the life of the great economist when he was working on The Wealth of Nations. In 1772, Smith witnessed the collapse of a major Scottish financial institution, Ayr Bank, and since one of the bank’s principal shareholders was Smith’s principal patron, the Duke of Buccleuch, its demise affected him in more ways than one.

In 1769, when Ayr Bank opened doors, Scotland was booming. Investing in Edinburgh’s New Town seemed a one-way bet and substantial sums were raised for property there and for infrastructure in the region. When the managers Ayr Bank came to grief they did much as have bankers before and since, namely by kidding themselves that loans could not sour and even if they did, savers were unlikely to care enough to pull their deposits., David Hume wrote to his economist friend after Ayr Bank collapsed, “we are here in a very melancholy situation … Do these Events any-wise affect your Theory?”

Smith in Wealth of Nations had two points to make.

The first was banks ought to lend to create real value in an economy and help build highways rather than highways through the air.  Such common sense advice was in keeping with conventional thinking. But there was another comment Smith offered, regarding the imprudence of depositors, that evinces Smith had an intuitive understanding of the psychology of risk where he was well ahead of his time.

This is what Adam Smith had to say about depositors whose mind-set conduced to financial crashes:  “The house is crazy, says a weary traveller to himself, and will not stand very long; but it is a chance if it falls to-night, and I will venture, therefore, to sleep in it to-night.” Depositors, in other words, share some of the blame for a collapse in market confidence because they are not as vigilant as they ought to be.

Just how perspicuous is this insight we can see from debates over the benefits of deposit insurance, today unquestioned as an indispensable prop of financial market stability. But less thought is given that once monitoring bank solvency becomes a regulator’s job, this not only adds to cost of regulation but also tempts reckless depositors to act as free-riders to the system.  

In Jonathan Conlin’s biography, Smith’s reaction to Ayr Bank’s default is only one of many incidents in the life of Adam Smith that are sets against his works. As Conlin shows, it is often Smith’s asides and throwaway observations with which his Theory of Moral Sentiments and Wealth of Nations abound that illustrate his almost limitless capacity to prod readers into looking at things from an unexpected angle; for more of this see my full review of Adam Smith.

Well, why not slash corporation tax to 10%?

Given that we are all economically literate around here we know that corporations do not bear the economic burden of corporation tax. It's just a convenient fiction that they do, the reality is that the tax hits the wallets of investors in the company being taxed and all the workers in the economy which has the tax. Similarly, given that we are all economically literate, we know that capital income should be taxed rather more lightly than labour income, if it should be taxed at all.

So, this seems like a very good idea:

Britain could slash corporation tax to 10 percent if the European Union refuses to agree a post-Brexit free trade deal or blocks UK-based banks from accessing its market, the Sunday Times reported, citing an unidentified source.

The newspaper said the idea of halving the headline rate from 20 percent had been put forward by Prime Minister Theresa May's advisers amid growing fears other EU member states will take a hard line in Brexit negotiations.

The tax cut would be used to try and persuade the EU to grant "passporting" rights for financial services firms to continue operating across the EU, the newspaper said, in a sign of the likely animosity of the upcoming divorce talks.

But why is this being kept in reserve just in case we want to be dastardly to the French? Or the threat of not doing is being used as a persuasion for the Germans to maintain their own access to our fine banking services? 

This is simply a good idea in and of itself and one we should implement right away.

Could we make all politicians personally liable?

Could we, should we, think about importing a political practice from Thailand? We have the long reigning monarch after all, even if their practice of military coups is something we gave up centuries ago. For they've decided that a Prime Minister who oversaw a piece of monumental stupidity should be personally liable for some of the damages.

Yes, obviously, there's more than just a tad of political score settling here but the idea still has merits:

Former Thai Prime Minister Yingluck Shinawatra on Friday said the junta that overthrew her government had ordered her to pay nearly $1 billion in civil damages over a botched rice-subsidy program.

Botched is not quite the concise description we want here - insane folly is perhaps closer. The plan was to pay Thai farmers 50% above the world price for their rice, store it, then make a profit by selling as exports the now more expensive rice. This did not work as a quick glance at the EU's history of wine lakes and butter mountains would have shown.

It was political genius, that's true, given that it secured the votes of the 40% of Thais who are rice farmers, but an economic hallucination consistent with the very finest psychotic drugs. Production increased both inside and outside Thailand, the export markets substituted over to other producers, smuggling into Thailand took place and by the end the plan was reportedly swallowing 4% of GDP.

That's cheap votes if it's other peoples' money, expensive if its your own. And thus the idea of making all politicians so personally liable. £400 million here on a troubled families programme, £20 billion there on a nuclear power station and £169 a MWatt for tidal power and pretty soon you're talking about real money.

Some would say that this would mean politicians never did anything, paralysed as they would be by the fear that it might go wrong. This is not a bug in the plan, King Log was a rather better ruler than King Stork,  it's rather the point of it....

Voluntary economic transactions between consenting adults to be made illegal

Not that it's actually that unusual for people to try to usurp the law to ban voluntary economic transactions. There're all too many people out there who believe that others should not be allowed to do as they wish and who will use the might of the State to prevent them doing so. This does not make prison time for being an efficient ticket distributor the correct answer:

Touts who use computer software to buy concert tickets for resale at inflated prices could face a prison term, under proposals to be considered by the government.

The proposal was made as Theresa May, the prime minister, said she was looking at ways to address the use of ticket-resale websites by professional touts at the expense of fans.

This simply is not the correct answer.

The market clearing price is the market clearing price and it always will be. Those supply and demand curves really do intersect. And trying to put a price cap on the supply only makes whatever it is more expensive for the consumer. Either there is the intervention of resellers, in a relatively inefficient market, or the cost of gaining access to the tickets becomes something else, time spent in queues for example, also less efficient. As we know, the best method of rationing anything is by price.

If it is true that the current supply leads to a price being "too high" according to whatever metric you want to use then there are only two potential answers. One is to reduce demand - by, perhaps, doing worse gigs. This might not be an entirely desirable answer of course. The other is to increase supply so that prices do come down - because again those supply and demand curves do intersect. Play larger gigs, play gigs more often.

That prices will vary according to those two, supply and demand, is not some optional extra it's one of the laws of our universe, at least a universe which has humans like us in it. Up to 51 weeks in prison doesn't change that fundamental fact of our existence.

This is a terrible idea, a bad suggestion for the law.

In defence of Mark Carney

In the last few weeks a number of politicians and right-wing commentators have attacked Mark Carney, Governor of the Bank of England, either for his conduct during the referendum campaign or for the policies he has overseen while at the Bank. 

These attacks are misguided. There is an important debate to be had about the nature of central bank policy in Britain and elsewhere – indeed, a debate about the very existence of central banks – but, with some notable exceptions, few of Carney’s critics seem to be aware of it.

There are two main criticisms of Mr Carney: one, that the Bank of England’s policy of quantitative easing has done more harm than good by driving up asset prices; and two, that the Bank of England’s forecasts before the EU referendum were inappropriate. I will only discuss the first of these here – the second is a political complaint, not an economic one.

The first of these criticisms has been made on ConservativeHome by Alex Morton, formerly of the No 10 Policy Unit; by the Spectator’s James Bartholomew and Fraser Nelson; by William Hague in the Telegraph; by Michael Gove MP in today’s Times (£); and by the Prime Minister herself during her party conference speech. 

Morton says that:

There are disagreements among liberals about how fast and far to raise interest rates, but there is broad agreement that the current low rates are a distortion of the market and need to go. There is no way that zero and negative interest rates are a ‘market’ creation. In addition, it was the excess of debt caused by too low interest rates (again set by government via Central Banks) that many liberals (rightly) blame for the financial crisis in the first place.

The first of these points is simply false, as far as economics goes. Among Austrian-school economists (who Morton seems to favour, given his second point) as well as many others there is concept called the “natural rate of interest”, which is the rate that we would expect to emerge if the market was left alone and the cost borrowing and lending was determined entirely by the supply of loanable funds (like bank deposits) and demand for loans. 

At this rate we expect the monetary framework for the economy to be neutral – neither too inflationary nor too deflationary. If interest rates were set in a free market, this is what the rate would be.

If we have a central bank that sets the base rate for the cost of borrowing, we want it to try to set its rate as close to the “natural rate” as possible. If it sets it lower, too much borrowing will occur and inflation will rise; if it sets it too high, money will be too tight and a deflationary recession will occur.

So Morton’s point seems to rest on the assumption that the natural rate of interest could not be zero or negative. There is “no way” this is the case, he says, though he does not provide any evidence for this claim. As far as I know he never has, despite frequently claiming that monetary policy is too loose.

As David Beckworth, a free market economist in the Milton Friedman mould, says, the question of what level the natural rate of interest is at is the crux of the whole debate:

The answer to this question would go a long ways in ending much confusion. If the answer is yes, then it would not be true that Fed has been 'artificially' suppressing interesting rates as many have claimed. Nor would it be true that the Fed has been enabling the large budget deficits with low financing costs for the treasury department. Finally, it would reveal that U.S. monetary policy has not been that loose despite the Fed's various QE programs.

Beckworth argues that the gap between potential and actual economic output in the US since the 2008 crisis, which is to a large extent mirrored in the UK (which has seen better employment growth but worse economic growth than the US), is indicative of a negative short-run natural interest rate. “Given the large amount of slack during the crisis,” he says, “it seems reasonable that the market-clearing nominal interest rate could have turned negative during this time.”

Has it stayed negative? Seemingly, yes. Using two (admittedly crude) proxies for the natural rate, Beckworth shows that both suggest that the natural rate seems to have turned sharply negative in 2008 and stayed there for many years, only beginning to recover recently. Similar estimates do not exist for the UK but for Morton to claim that there is “no way” that the same is true for the UK as the US is baseless.

James Bartholomew’s broadside against Carney (in which he demands that Carney resign!) similarly makes heroic assumptions about what the stance of policy should be with little more than hand-waving to justify his claims. 

Fraser Nelson, Michael Gove and Theresa May all object that quantitative easing in particular has driven up asset prices, thus worsening inequality. But they misunderstand why asset prices can rise dramatically after new QE is announced, but GDP only rises slowly. 

It is not because QE money is like treacle, that slowly drips down from banks through financial assets to ‘real people’. QE buys bonds from banks, giving them a newfound cash injection and pushing up the prices of bonds marginally, which causes them to rebalance their portfolios to other assets. But this is not what drives up asset prices.

In fact, it is the fact that the monetary base has been expanded that is doing most of the work: buying bonds from banks is just a way of getting that base expansion into the economy, and the process would work just as well (probably better) if bonds were purchased on the open market rather than from banks in particular.

Expanding the money supply, if the natural interest rate is below zero, is the best way of avoiding a deflationary recession if the Bank’s own rate is stuck at zero. This is, at least, the Milton Friedman and FA Hayek view. Over-loose monetary policy cannot create growth, but over-tight policy can destroy growth.

So if we do a round of QE and it helps us to stay on the growth path, what should we expect? GDP to grow better than previously expected for a few years, for one. And that is what all serious estimates of the impact of QE in Britain since the crisis have found – that QE prevented between at least 0.75% and 1.5% of GDP from being destroyed needlessly by over-tight policy. Some studies put the estimate even higher.  

And what would we expect to happen to asset prices in the event of a 1% boost to GDP? We would expect them to rise by a lot more than 1%, because (eg) share prices reflect the value of firms for many years into the future. Google’s share price reflects expectations that it will be profitable for many years; if something happened that made investors think that it would be (say) 1% more profitable every year for many decades, it would become vastly more valuable.

In this reading, does it make sense to blame QE for exacerbating inequality? No. Because QE simply avoids over-tight policy, it is about avoiding needless destruction of wealth rather than ‘propping up’ share prices as many people claim. If it makes us all richer, by avoiding a needless recession, it doesn’t matter that it makes some richer than others. Objecting to it is like objecting that the fire brigade exacerbates inequality, because rich people’s burning homes are more valuable than poor people’s burning homes.

Where Gove does have a point is in saying that central bankers are fallible, and often guilty of groupthink. This is a serious problem, and it is this rather than low interest rates that I suspect was one major cause of the financial crisis.

And the true natural rate of interest is hard to determine. (One reason it is so silly when people insist that it is obvious that rates should rise.) But the solution is not to give politicians the job of setting monetary policy instead – their incentives and understanding of economics are even worse than those of central bankers.

In fact, I would prefer if Mark Carney’s job and the Bank of England itself did not exist at all. State-backed central banks are not an essential feature of modern capitalism, and are associated with less competitive banking systems and more banking crises overall than so called ‘free banking’ systems. 

Under ‘free banking’, banks must restrain themselves because there is no taxpayer-backed bailout of their bondholders or depositors to save them if things go wrong. Banks are free to issue their own money, backed by whatever their customers want – maybe gold, maybe a basket of commodities, maybe nothing but the confidence that someone will accept it as money in the future (like Bitcoin). 

The evidence seems to be that these systems are more stable than central bank-backed systems, and the Scottish experience with free banking in the 18th and 19th Centuries was a remarkable success, with Adam Smith himself (WoN, II.2.41) attributing the country’s rapid catch-up with industrialising England to, in part, its free banking system. 

But it would be a mistake to equate the ‘liberal’ or free market position on monetary policy with one that is always fixated on raising interest rates or stopping QE. Under free banking in Scotland, banks expanded their balance sheets (that is, they did their own version of QE) and cut rates during times of recession, precisely because the natural rate of interest was low or perhaps even zero or less.  

This is the system I would like most. Failing that, I would like a central bank that mimics this as much as possible – one based on rules about when and how policy should be loosened and tightened, rules that made policy close to what a free banking system would do. 

Having someone like Mark Carney in the job, and a Monetary Policy Committee of wise men and women, is a third- or fourth-best solution, if that. If we must have a central bank, it should be predictable and automatic. The role for ‘wise men’ is in designing the rules, so that inflation is predictable and avoids distorting policy by making it too tight or too loose.

But most of Carney’s critics have missed this whole debate, and their own proposals to drastically tighten monetary policy – uninformed by economic thought or history – would be ruinous. Though they claim to criticise ‘wise men’ they are really just offering their own wisdom instead, which in light of the evidence is even worse than Carney’s. Instead of trying to offer themselves up as better players, they should be trying to change the game.

It is always true that small companies produce the employment growth

The House of Commons library has compiled figures to show that it is small, not large, companies that produce employment growth in the economy. This should not be news to anyone although sadly it is. For it is small companies which provide almost all of the forward impetus of the economy. This is true everywhere and always:

Small firms have created ten times more jobs than the big businesses who are lobbying to keep Britain inside the EU's single market, an MP revealed last night.

Tory backbencher Charlie Elphicke said the figures – compiled by the independent House of Commons library - nailed the CBI's 'single market lies'.

The pro-EU business group argues it is vital for the economy that the UK stays inside the tariff-free single market.

...

The figures show small and medium-sized enterprises (SMEs) have created 3.4 million new jobs in the private sector in the past 15 years.

Big businesses have created 323,000 over the same period, according to a new analysis of the Government's Business Population Estimates 2015.

This is true not just of employment. It is also true of innovation - as in the old joke that science proceeds one funeral at a time. The economy advances, productivity increases, one bankruptcy at a time.

New technologies are created, new technologies are adopted, largely through firm exit from the market and firm entry to it. Thus the entire system itself advances not through those large companies continuing to exist, but by their death from the competition bubbling up underneath them.

This is not a point specific to Brexit or the EU argument of course, but it is relevant to it. It's the entire and whole reason why we want a lightly regulated economy. Regulation aids incumbents as they are the people with the size and heft to be able to deal with the overhead of said regulation. It is only via a low regulation environment that we leave the room for the small companies to pop up into and so drive that economy forward to the ever greater enrichment of us all.

The relevance of the EU or Brexit to this being that we do all believe that we can transform the EU into a low regulation economy, right?

Right?

Christmas reading list 2025

Christmas seems to start early these days, so here's our contribution.  We sometimes publish a list of books we suggest people might lay in stock to read over Christmas, or to give to friends.  Here's our list for Christmas 2025.

"Why I Became a Conservative" by Owen Jones.

In this story of his journey, Owen tells how he came to see Marxism as an ideology imposed by intellectuals on the working class, and against their interests and aspirations.  By contrast, he came to realize that Conservatism, working with the grain of human nature, gives working people the chance to improve their lives.

"On My Ownio - the last of Labour" by Ben Bradshaw.

This rather sad autobiography chronicles how it feels to be the last Labour MP.  Ben sketches the history of the once great party from its origins in working men's associations, to its final demise in the streets of Islington.  As Westminster's solitary Labour MP, Ben tells how it feels to have no-one to second his motions, and to have to sit on the cross benches after a distinguished career in opposition.

"The Body Count" published by HM Statistical Office.

This shocking book catalogues the death toll brought about by NGOs through their campaigns against genetic modification, nuclear power, fracking, global free trade, and by their campaign for biofuels. The authors count up the millions of children who could have been saved from starvation by GMO crops and cheap food and energy, plus those whose sight could have been saved by GMO golden rice.  It is a shocking catalogue of the havoc the NGOs wreaked until their funding began to dry up four years ago as people withdrew their support.

"Bought and Sold for English Gold" by Elaine McLintock.

Here at last is the gripping story of how Scotland's fifth referendum on independence since 2014 went down by an even bigger margin than the fourth.  It's a blow by blow account of the increasingly bitter campaign that saw the Scots decide to remain within the developed world's fastest growing economy rather than heed the siren calls to a proud and romantic, if impoverished, independence. 

"We Kept the Peace" by Herman von Rompuy.

Five years after the dissolution of the European Union, one of its stalwart old time enthusiasts asks for it to be remembered fondly for the good it did.  Herman claims it prevented a third war between France and Germany, and that although it finally expired in a quagmire of bureaucracy and mutual recrimination, it should be remembered for its earlier achievement as Europe's Nobel prize-winning peacekeeper.

Unconventional thinking does not mean we should stop thinking

It's entirely true that at times we need to be a little unconventional in our thinking. Possibly even prioritise some out of the box conceptualisations as an urgency to set the ball rolling. But unconventional thinking is not the same as asking us to stop thinking.

At which point gurning from stage left is Andrew Simms, he formerly of the not economics frankly groupuscule:

Conventional thinking will not solve the climate crisis

Andrew Simms

Choosing the best possible future means considering radical scenarios that align energy use and industry with climate action

OK, many of us don't share his obsession with the amount of plant food in the atmosphere. But it is always worth examining someone's logic within the structure of their own beliefs. So, what is it that we are urged to do?

Rarely considered but important variables come from new economics, including the shorter working week, the share economy, shifts in corporate ownership and governance, and intelligent but deliberate measures for economic localisation. Compare these to the “stumble on”, or business as usual scenario, in which we give up control of our future to a permanently destabilised climate change, but also assess seriously the consequences of the argument for planned so-called “de-growth” of the economy.

That is not thinking rather than unconventional thinking. For all of these were examined, in detail, a quarter century back. It was considered in the Special Report on Emissions Scenarios, the economic models upon which the entire IPCC process is built. Absolutely every meeting, treaty, gabfest and report since then has been working on the basic logic of that examination.

The results of that examination being most interesting. The most obvious of which is that, even within that obsession with plant food, if we reduce carbon emissions then we're done. There is no other problem in this area. The other seriously interesting result being that economic localisation makes the problem, such as it is, worse, not better. 

Approximately speaking we have four models, families of models. A, in which we're capitalist free marketeers and B in which we do the Swedish socially democratic cha cha cha. 1 in which we're doing the globalisation waltz and 2 in which we revert to economic localisation. A1 and B1 are markedly better in terms of living standards and also the size of the climate problem than A2 and B2. Better as in the problem is smaller.

The reason is obvious - more trade will produce a higher living standard with the same resource use, or the same living standard with lower resource use, than less trade will. Because the process of trade is producing where resource use is least.

Which leaves us where we came in. Unconventional thinking is undoubtedly necessary at times. But this is not a synonym for not thinking. As with Simms and his idea here that the solution to climate change is economic localisation, the very thing we've known for 25 years which makes the climate change problem worse.