Heseltine's lessons from the jungle won't help the regions

This week the UK former deputy prime minister Lord Heseltine will present a report on boosting economic growth in Britain's regions. The fact that the report is 80 pages long and has taken six months to compile is surely evidence that its analysis and conclusions are far too complicated. It is actually pretty obvious what is holding back growth, not just in Britain's regions, but all over.

Lord Heseltine, who as a business minister promised to 'intervene before breakfast, dinner and tea' is expected to propose the following.

1) Tax credit changes to encourage businesses to spend more money on research and development, and on developing skills.

Here we go again. Experienced business people make perfectly rational decisions on how much to invest in their future products, based on the cost of that investments and their predictions of its likely effectiveness in winning new business – but politicians tell them they are wrong and that they ought to spend more. It seems so obvious: how can anyone be against spending more on research and skills development? But the fact is that these things have certain costs and uncertain benefits, and business people have to make their own judgement about whether the risk justifies the cost. And the fact is that companies right now are sitting on cash and not investing it for perfectly sound reasons – they cannot see where the new business is likely to come from. Economic growth in Europe is flatlining. Consumers are doing what governments ought to do and are paying down their debt rather than spending like they did before. It is wrong to use the tax system in an attempt to suspend reality.

2) A big boost to the £1bn Regional Growth Fund, set up by the present government to help regional businesses.

And funded by whom? From the taxes, of course, paid by individuals and lots of other businesses in those same regions and elsewhere in the country. And as those taxes rise, business people find their budgets being squeezed as demands come in for VAT, national insurance, PAYE, the rates and all the rest. At best they decide not to hire any new people: at worse they have to lay workers off; at worst they cannot make the books balance and the business closes. But of course everyone sees the grants and loans made by the public bodies, while nobody notices the hundreds and thousands of small businesses crippled by over-high taxes. The policy is like quietly drawing water out of one side of lake, taking it round to the other side (spilling some on the say), and throwing it in with great fanfare, crowing about how much you are raising the level.

3) A wider role and more funding to Local Enterprise Partnerships, bodies comprised of business people and local authority officials.

You do not need vast funds to make local authority officers get up from their desks and find out what local businesses actually need. Nor to get business people to represent their concerns to local authorities. All top-down, enforced 'partnerships' are the same: they become a talking-shop between people who have the time and patience to talk. Most business people, however, are far too busy for such bureaucracy. The old Regional Development Authorities were a case in point. Everyone engaged in them thought they were wonderful, and enjoyed spending the taxpayers' money. Most others thought them a complete waste of time and energy. This policy will do no good at all.

4) Scrapping dozens of district councils in order to simplify local government.

An odd policy, given the government's aim of getting decisions made more locally than they are at the moment. It is a return to (or perhaps an extension of) the existing centralism and giantism that exists in local government – a trend consolidated by the creation of super-authorities in the early 1970s. But larger local government bodies do not mean greater efficiency. Rather, they mean more distant decision making by people who inevitably, because of the size of the organisation, think more bureaucratically and less locally. There is a case for shedding a tier of local government, certainly: the present structure is confusing and allows many a buck to be passed. But with today's technologies the case is to have smaller authorities, not larger ones. Small organisations can still do big things, if they do them together. The trouble with big organisations is that they are very bad at doing small things or dealing with individual cases.

So what, then, do we really need to pull Britain's regions out of the doldrums?

We could start by lowering taxes on businesses – things like national insurance, company and capital taxes –and lowering them for good. Some people say that this would be folly because the government is already spending more than it rakes in through taxes. But you do not lower a deficit by raising taxes: that just smothers trade and economic growth. As the Nobel economist Milton Friedman pointed out, governments spend everything they collect in taxes, then as much as they can get away with. Higher taxes just mean bigger government and less careful spending – as well as more grandstanding politicians and more interventionist reports.

A second growth strategy is to slash the regulation on businesses – particularly regulation on small businesses and particularly all the workplace regulation that has been imposed in the last fifteen years. Perhaps the easiest strategy would simply be to exempt small businesses from it all entirely. The trouble is that workplace regulation like the Social Chapter provisions, the working hours rules, and maternity and paternity conditions have been imposed largely as the result of EU directives and regulations. So those who want to reduce workplace regulations in the UK find themselves hitting the brick wall of the UK's EU membership. And there are, of course, many positive benefits to EU membership. Yet the weight of this regulation has, in recent years, arguably turned the balance negative. It is another good reason (along with the banking and budgetary integration that is the only way to hold the euro together) to renegotiate the UK's relationship within the EU – something that Lord Heseltine would hate. But there are signs that such a renegotiation may not be far off.

Ten reasons to be cheerful, part 7: Ideas

Some people, including Tyler Cowen in The Great Stagnation, think we are running out of big ideas that can improve things.  I disagree.

7.  Ideas

The pessimist's thesis is that we are wringing smaller and smaller gains from our past breakthroughs in science and technology.  Tyler Cowan says we picked the low-hanging fruit of things like education, putting into universities those who previously might have been out in fields.  There are no similar future gains to be had, he suggests.

I think we are actually just at the beginning of what the communications revolution will bring us.  The fact that we can communicate rapidly on a global basis multiplies the number of interactions we can have.  If we look at the Enlightenments and Renaissances of previous ages we finds a pattern in which relatively isolated societies were thrown into sudden contact with many others.  It was the silver empire of Athens, the merchant princes of Italy, or the Scottish traders given access to the British Empire by the Treaty of Union.

That relatively sudden extensive contact brought comparison and contrast with other cultures, which proved fertile ground for creativity, and an explosion of talent followed.  The communications revolution brings that on a wider scale than previously, and it is happening quickly.

For creatures who evolved to run and throw things and occasionally to shout at each other, we have done some pretty cool stuff like sending machines down through the clouds of Titan or landing roving laboratories on Mars.  Our brains have moved further to understanding how the universe works than nature might have intended us to.

We do not know what insights and ideas we might have in future.  They are among Donald Rumsfeld's "unknown unknowns."  I doubt if anyone before Newton realized that they didn't know about gravity.  Nor do we know what conceptual breakthroughs and insights might come.  What we do know is that the conditions in which they flourish are advancing.

We can also be reasonably confident, for example, that biotechnology and nanotechnology will bring great advances in our ability to target and fine-tune our abilities in such areas as medicine and materials.  We know, too, that advances in artificial intelligence will enable us to attempt tasks hitherto thought impossible.  It took decades to apply the fruits of our previous industrial revolutions, and we are only at the beginning of this one.

I am optimistic that the planet's greatest resource, human creativity, will not fail or fall short.

Long past time for employee ownership of firms

Nominal coalition partners Tories and LibDems disagree on a lot of things, like many married couples, but manage to stay together because the alternatives seem too awful to contemplate. But now it turns out they have found something to agree on, since George Osborne's innovative plan to allow employees to swap some employment rights for shares in their employer is being echoed by Nick Clegg, who is going to announce the creation of an Institute of Employee Ownership this week.

The ASI has been banging the drum for employee share ownership for decades: in 1989 I wrote a report for the Institute called Incentive Through Ownership which set out the incontrovertible evidence in favour of it. And just recently I found out that my great-great-great-uncle, Christopher Furness, who built ships in West Hartlepool, had offered his workers shares in the 1880s. But the unions turned him down, just as they have attacked Osborne's scheme.

Strangely enough, they may have been right in 1889: it does seem that owning shares in a very capital-intensive business may not be ideal for employees, because they can't affect outcomes quite so much. Furness couldn't offer tax breaks, not being Chancellor, and anyway there was hardly any tax to break.

Nowadays such schemes usually come with attached tax douceurs: but current thinking says that too may not be ideal. Tax-favoured schemes encouraging widespread share ownership have often led to rapid disposal of the shares in rising markets. Privatizations in the UK in the 1980s and Russia in the 1990s are both good examples. Workers are just as rational as economists, and sometimes more so.

It's the small, entrepreneurial start-up that is the perfect forum for employee shareholding with a free get-out-of-CGT card. And that's just the corner of the economy in which growth would be possible if we could only get the juggernaut of government out of the way. I'm rather against institutionalizing things, although The Adam Smith Institute seems to have made a good fist of it. But if George Osborne and Nick Clegg can stay married for long enough to institutionalize employee share ownership, I'll be the first in line at their anniversary party.

Ten reasons to be cheerful, part 6: The economy

Popular among the "we are all doomed" series is the notion that the good times are behind us.  I disagree.  For both the UK and the world I am optimistic that the economy will be better in the future, not worse.

6.  The Economy

For over 125 years US growth has averaged about 2% per year.  In the UK it has been slightly less than that, over a longer period.  The long-term trend has been growth since the first industrial revolution (steam, railways) and through the years of the second (electricity, internal combustion engine, aeroplanes).  We are currently in the early years of a third industrial revolution (computers, internet, biotech), with the expectation that these factors will similarly increase productivity.

I have already dealt with the notion that there are insufficient resources to support economic expansion.  New extraction technology clicks in before the old sources run dry.  Advanced production achieves more from each unit of resources than it did, and inventiveness supplies substitutes.

The current economic difficulties faced by Europe and the US did not arise from any inherent failure in the economy, but from mismanagement and political interference.  No features suggest they need permanently impair the ability to invest in increased production, or to produce increased quantities of the goods and services people will wish to buy.

It took a few decades after the invention of previous technologies before their impact began to take effect, and the same will probably be true of recent breakthroughs.  It takes time to apply the technology and to develop the infrastructure to take advantage of it. 

An added advantage this time is that we are now dealing with a global economy.  In recent years we have seen over a billion people brought into the world market and able to interact and trade with their fellow humans across the planet.  This gives yet more cause for optimism.  The rising middle classes in India and China present a promising future market, and as the lower income people behind them are lifted from subsistence and poverty, they, too, will need goods and services.

Some pessimists point to Europe's aging population, but this will be less problematic if people remain economically productive for a greater proportion of their lives.  Others suggest we have reached the limits of the planet's capacity to cope with economic activity, but there are indications already that our creative technology can provide ways of progressing that leave smaller footprints.

My conclusion is that provided we opt for a competitive, largely private, economy, we can look forward to seeing it achieve far more than it has already.

Will the BBC die from opportunity costs?

It sounds rather odd really for no one really notes that anything does die from opportunity costs. But I think that it might well be possible that that's what does in the BBC in the end. I'm prompted in these thoughts by Bill Quango. He notes that it's becoming less unusual for people not to have a TV. And that even those who have them seem to use them less than in the past:

I have been monitoring my own recent TV use and its dismal. I'm struggling to watch programs I actually like. TV seems to have become old hat. I now watch less than 10 hours a week. I listen to far more radio than Tv.  At least twice as much, maybe 3 times as much. Mostly because its easy to combine with other activities. I listen to music as much as I watch TV. In fact I pay video games more than I watch TV. I certainly use the internet far far more than TV use.

 

And that is the root of the TVs demise. There are other things to do. And they are now easy to do. Read a book direct on download. Multiplayer mayhem {wars of the roses- a current fav} All night shopping. News. current affairs. Gossip. Politics. Youtube. Facebook. Twitter. And general mooching around.

 

As there are more ways for us to pass our time then the cost of doing any one of them rises: for we're giving up more things to do that one. As the costs of something rise we're not all that surprised that people do less of it. You might not believe it but this has been used as an, in part, explanation for the falling birth rate. There's so much more to do in life than only have kids these days.

 

Of course, I think it will be a long time before the TV really goes the way of the pianola. But the BBC itself is in a precarious position long before TV itself dies. As TV becomes less central to the leisure life of the nation then a tax specifically to pay for it will become much less politically tenable. I wouldn't be at all surprised to see in a decade or so that support for it just simply dies out.

 

Killed by opportunity cost: there's simply so many other interesting things to do these days.

If I could just, very gently, correct Madsen here

In his series of reasons to be cheerful (yes, he is indeed a Blockheads fan, why do you think he lets me hang around the place?) Madsen tells us this about copper and other mineral resources:

Famously in the case of copper we developed fibre optic cables to convey our signals as copper rose in price.  We use plastic pipes instead of copper ones to convey liquids because they are cheaper.  The falling demand for copper means that world reserves are now estimated at between 25 and 60 years (depending on assumptions about growth rates), whereas at the time Erlich wrote, it was much less.

This is not to suggest copper will suddenly run out in 25 or 60 years.  If it becomes scarce it will become more expensive, and people will use other things in its place.  The reason the world is not running out of scarce resources is that the technology to locate and extract them is advancing year by year, and market prices motivate us to use it.

This is true, yes. But it's also not the whole story and I think that whole story is rather interesting. For the truth is we create resources, not discover them. And it is most certainly true that we create reserves of these minerals. We create them through the invention of new technologies.

On the specific point about copper, the great change in that metallurgical world was the early 80's introduction of SX EW technology. For the full gory details try here. The important point is that before this new technology we got our Cu from copper sulfates and sulphides. When we found a mountain of copper oxides it was just a mountain of useless dirt. We didn't know what to do with it. Then we adapted the SX EW technique and all those mountains of dirt became mountains of copper ore. Hurrah!

And we can expand this point into a much larger lesson. To a useful level of accuracy the mining world divides the world up into dirt and ore. Your allotment patch contains gold, rare earths, uranium and all sorts of other lovely metals*. However, your allotment patch is dirt. For while we do know how to extract all of those metals the cost of doing so would be higher than any value that could be recovered.

Ore is simply dirt where we know how to extract the metals: and also the value of the metals is higher than the cost of extraction. Ore is an economic concept, not a natural world one. And as with so many other economic concepts what is dirt and what is ore is a constantly changing spectrum. For technology, including the technology of extraction, changes over time. As an example I'm about to embark on the extraction of tungsten from some left over rock. A century ago, when it was dug up, it was rock. Now it's ore. The extraction technology has changed over time.

We should also go one stage even further and talk about Donald Rumsfeld's known unknowns.

When you see an environmentalist complaining that we're going to run out of a mineral in a generation he'll actually be correct. That's also the number Madsen uses for copper, 40-60 years or so. For every generation runs out of mineral reserves, this has been true since we started mining. For what everyone is talking about is "reserves". These are the known knowns. These are the ore, we know where it is, we know we can extract it at current prices, with current techniques, and make a profit doing so. Further, we have also tested and proven all of this to the satisfaction of the stock market listing rules where mining companies go to get traded.

You'll not be surprised to learn that drilling and sampling and sending odd hairy geologists over the hill with little hammers is expensive. So we only do this with the stuff we're likely to dig up in the next few decades. Thus, reserves of ore are, at any one time, good for only a few decades of use. Because they are a both legal and economic concept and as such we only define as reserves what we're likely to use in the next few decades. Or rather, only bother to do enough work to declare as reserves what we're likely to use in the next few decades. Thus every generation does indeed use up the available reserves of minerals.

But that isn't all there is of course: there's also the known unknowns. We've only bothered to stake out this side of the hill and in a couple of decades we'll do the same to the other side. We know it's there, we've just not bothered to prove it yet. These are more generally known as resources. They're there, we know that, we've just not gone through the expense of converting them to reserves yet.

Then there's our unknown knowns. We do know roughly what the geology of many places is. But we've sent very few hairy odd men with hammers over it. For example, we know that the geology of Madagascar is quite similar to that of the German/Czech border. Lots of lovely tungsten, tantalum, niobium, scandium up in them thar hills. Same sort of volcanic structure that's been folded in a similar manner and weathered much the same way. But why bother with the lemurs when you can go digging within reach of the Pilsener Urquel brewery? Well, quite. We're sure there's lots out there. Not sure quite where, in what quantities, quite how we'd get it out: an unknown known.

And then there's the unknown unknowns. The best way to approach this is from the other side. We think we know what the crustal abundance of all (OK, most) metals is. At the extreme we can imagine mining your allotment for them. Whether or when we'll get the technology to do so at economic cost we don't know. We do know that we can do it right now but only at exorbitant cost. Take, say, Tellurium, that we use to make a certain type of solar cell. Crustal abundance is, well, I can't remember how many zeroes there are after the decimal point to be honest. 0.1 parts per million? 0.0001 ppm? Somewhere in that range meaning that in the crust of the earth there's some 120 million tonnes of the stuff (I do recall that number from having done the calculation).

We use 125 tonnes of tellurium globally each year. Our known known is that we get it from copper slimes (no, real mining word, one of the wastes of making copper). We make enough to cover current demand from our known known. We're pretty sure about the known unknown as well: there's mountains just full of copper out there which contain that Te. Our unknown known is that there are other minerals that contain it in some quantity but we've just never bothered to check. And our unknown unknown is that, if it ever became expensive enough, I'd be around rootling through your veg patch to get it.

Do we, in the end, face resource constraints? Sure we do: absent asteroid mining we cannot use any more tellurium atoms than there are on the planet. Are these resource constraints meaningful in any manner at our current scale of activity? Nope.

For we continually create new reserves through the invention of new technologies. And we continually turn the various known/unknown combinations into those known known reserves by bothering to spend the time and money to do so. Or, as I say, we turn dirt into ore all the time. And so far at least no one has posited a shortage of dirt.

*I have a hankering to do a mad scientist TV show. In which we really do take a field, a pile of rock, and we break it down into its component elements. Here's the uranium, here's the iron, the aluminium and so on all the way down the periodic table. Just to, once and for all, get across the point that reserve or resource scarcity is an economic, a cost, concept. Not some immutable law of our environment. Sadly I fear there are no TV producers quite as mad as me.

London Mises Circle

The seminars hosted by Ludwig von Mises, first in Vienna and later in New York, have a key place in the history and development of Austrian economics. Such figures as Hayek, Rothbard, and Hazlitt all attended.

Inspired by this the London Mises Circle is holding a seminar at the Institute of Economic Affairs at 6:30pm on November 1st.

The resurgence in popularity of Austrian Business Cycle Theory in recent years has prompted renewed criticism of ABCT. In a recent article, A Reformulation of Austrian Business Cycle Theory in Light of the Financial Crisis, one of the leading Austrians, Joseph Salerno of Pace University, responds to some of these criticisms and makes some additions and refinements to ABCT. We will be aiming to discuss these at November’s meeting.

All are welcome. If you have any questions please email londonmisescircle@gmail.com. 

Ten reasons to be cheerful, part 5: Employment

In the US Presidential election of 1992, candidate Ross Perot talked of the "giant sucking sound" of US jobs draining South of the border if the US signed into the North American Free Trade Area.  It did; there wasn't; it won't.

4.  Employment

The pessimists seem to think that the advanced economies have had their day as far as jobs are concerned.  They say we can't compete against low-cost labour in the developing world, and they urge protective tariffs against imported goods to protect jobs at home.

No.  What happens if government follows that course is firstly that they make their own citizens poorer by making them pay more than they need for their goods.  Secondly they make their own manufactures uncompetitive by cocooning them in a protective domestic market, but unable to sell elsewhere in the world.

When we buy cheaper foreign goods we have money left over to buy other things with.  It is true that some jobs go abroad and help people in poorer countries to step onto the road that leads to wealth.  But it is also true that as people in those countries become richer, we can sell them more of what we produce.  We no longer compete on cheap textiles, but many jobs have been created in added value areas of textiles.  Developed countries face growing demand for fashion labels and designer goods from countries such as China.

It is true that electronic goods can be out-sourced to countries with low-cost labour, but those goods generate thousands of jobs in developed countries, including ones in design, in advertising and promotion, in marketing and retailing, and it is also true that those products bring convenience and utility into the lives of those who use them.

People might want to do the same job producing the same goods for the whole of their lives, but there is no civil right to do that, and the real economy embodies constant change.  People become wealthier and their aspirations change.  New product and processes emerge to tap those new demands.  Successful economies are ones which keep moving.  As goods from poorer countries undercut their cheap goods on price, people in developed economies move into areas where higher value is added, or into service jobs less susceptible to foreign competition.

As we become richer on a global scale, there will be more demand for goods and services, and therein lie the opportunities that will create tomorrow's employment.

Hold the GDP party for now

There’s no doubt that today’s GDP figures are good news, but we should be wary about depending too much on GDP as a measure of prosperity. Prof Anthony Evans, a Senior Fellow of the Adam Smith Institute, wrote this superb piece about GDP way back in 2009, but his point still stands:

The "health" of the economy is too complex to be summarised in a single number. It would be like reviewing a novel based on the average words per page.

GDP doesn't tell us how economic activity affects living standards. It fails to distinguish between a bubble and sustainable growth. It doesn't forewarn about inflation. And perhaps most importantly – it doesn't help the average person on the street know whether they're more likely to become unemployed. After all, declining incomes actually increase the demand for many types of goods and services, which is why plenty of workers are prospering in the downturn.

I don’t want to be too grim, but we came ‘out of recession’ back in 2010 as well and we all know how well that turned out.

The fundamentals of the economy are still weak. Our levels of debt – private and public sector – are rivalled only by Japan. As a new paper released by the excellent Save Our Savers (in cooperation with the Cobden Centre and the Adam Smith Institute) argues, the massive levels of private and public debt that have accrued over the past decade mean that no strong recovery is possible. And the monetary system is a de facto government subsidy for banks:

As well as outright support, the UK’s banks are being helped by Quantitative Easing, by the Funding for Lending Scheme and by the record low Bank of England base rate. Above all, they are assisted by the knowledge that they are considered so important to the economy that they will be bailed out if they mess up again.

They are thought to be "Too Big Too Fail". If the banks make money they’ll continue to pay enormous bonuses. If they take stupid risks and blow up the financial system once more, the government will step in with taxpayers’ cash and the banks will still pay enormous bonuses. This is known as “moral hazard”.

The Bank of England believes this implicit subsidy has benefitted British banks to the tune of £100 billion a year, leading to greater profits and salaries yet doing nothing to diminish their appetite for stupid risks.

So, without wanting to pour too much cold water on good news, I don’t think we should party just yet. As Prof Evans says, “statistics are like bikinis – what they reveal is interesting, but what they conceal is critical.”

Ten reasons to be cheerful, part 4: Resources

The mantra is "The world is running out of scarce resources; we are leaving none for our children."  It is not true, and resources are my fourth reason for optimism.

4.  Resources

In a famous 1980 scientific wager, Julian Simon invited Paul Erlich, author of "The Population Bomb," to choose 5 resources he thought were being depleted, and bet they would fall in price over the decade.  Erlich chose copper, chromium, nickel, tin and tungsten, and duly paid up when their price fell over a decade, indicating relative abundance rather than scarcity.

We are indeed using resources, but our ability to extract new sources is advancing faster than our rate of use, meaning that they are becoming relatively more plentiful, and therefore falling in price over the decades.  Two things happen as we use resources.  If they become more scarce the price rises, motivating us to find new sources of supply and to use less.  We also develop cheaper substitutes. 

Famously in the case of copper we developed fibre optic cables to convey our signals as copper rose in price.  We use plastic pipes instead of copper ones to convey liquids because they are cheaper.  The falling demand for copper means that world reserves are now estimated at between 25 and 60 years (depending on assumptions about growth rates), whereas at the time Erlich wrote, it was much less.

This is not to suggest copper will suddenly run out in 25 or 60 years.  If it becomes scarce it will become more expensive, and people will use other things in its place.  The reason the world is not running out of scarce resources is that the technology to locate and extract them is advancing year by year, and market prices motivate us to use it. 

The Earth is nearly 4,000 miles from surface to centre, and we have barely scratched its surface.  There are plenty of resources; all it takes is technology to tap them, and an incentive to do so.  It also takes technology to develop substitutes, and carbon fibre, laminates and plastics are less resource-intensive than their predecessors.

It is not only our ability to tap new sources that advances: or skill at reclaiming and recycling previously used resources is also advancing.  And crucially, our technical advances now enable us to stretch our resources further, using less of them to achieve the same effect.  It all means that resources are not running out.