Pensions and Adam Smith’s invisible hand

Adam Smith only mentions “invisible hand” the once in Wealth of Nations and it’s not about the joyousness of free markets or even capitalism. Rather, it comes at the end of a long - this is 18th century prose after all - discussion of the profits of the foreign trade as opposed to the domestic. The foreign profits are higher but some to many will just invest domestically all the same, because, and so by “some invisible hand” they benefit their fellows in that domestic economy. Investment being good, d’ye see?

These days we use the same logic but invert it. Some to many do invest domestically just because but they shouldn’t - there’s far too much home bias in investing. Therefore people should invest more abroad in their pensions and other savings. So:

The overhaul means Scottish Widows’ £72bn default workplace pensions fund will take a “market weight” approach, meaning the amount of money allocated to each country will depend on the size of their stock market.

In practice, this will mean less investment in Britain. At the moment, Scottish Widows has more of its assets invested in the UK than other markets relative to the size and value of Britain’s economy. Of its £72bn workplace pension pot, it invests £5.5bn, or 7.6pc, in Britain.

The decision to cut back comes after an extended slump for the London Stock Exchange. The relative value of the UK’s stock market has fallen sharply over the past two decades, from around 11pc of the MSCI World Index in 2000 to 4pc today.

Scottish Widows is doing the correct thing. There is far too much domestic bias, this reduces the income of those savers in the future. So, don’t, etc.

But what of that invisible hand?

Lloyds Bank is to pull billions of pounds from Britain’s stock market in a major blow to Rachel Reeves’s efforts to boost the UK economy.

Scottish Widows, the bank’s pensions division, plans to cut its exposure to the UK and move more money into better-performing markets such as the US.

It is a blow to the Chancellor, who has been encouraging pension funds to invest more in British stocks to boost both the market and the economy.

Well, yes. We could then go on about how pensions and other savers should take the hit in order to benefit that domestic economy. This is also known as financial repression. It’s also a tax - lower pensions to benefit that domestic economy. It’s even a violation of fiduciary duty.

Bit of a bind there really. A clash of interests there even. The general health of the domestic economy - that some invisible hand - as against the more direct interests of savers. What to do, eh, what to do?

The cut for this Gordian Knot is to make the profits of domestic investment at least equal to foreign. Then there is no problem, is there? As to how we do that the Carthaginian Solution applied to the regulatory state would help. Might even solve the problem entirely. If it doesn’t we could always go back two decades and reverse one of Brown, G’s, big mistakes - abolishing the pensions tax credit on corporation tax. That is, after all, just about when the UK stock market started to decline as a portion of the globe’s, about when pensions funds really started not investing in it and….

Killing parts of government and also killing past mistakes of government. We think that has viability as a plan more generally. The joy here being that it would also solve the specific problem under discussion. Which is nice, no?

Tim Worstall

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