Chart of the week: Italian banking system balance sheet

Summary: The Italian banking system’s balance sheet is expanding – this could be good news

What the chart shows: The chart shows the change in the size of the consolidated balance sheet of Italian and German MFIs, set to an index of September 20081=100

Why is the chart important: The bulk of banks’ assets are loans to the public, corporate or household sectors. The bulk of their assets are deposits held by the non-bank private sector. These make up most of what we refer to as ‘money’ (cash is actually quite irrelevant). If banks’ balance sheets are shrinking, the amount of money (and credit) in the economy are probably also shrinking. This is bad news for economic growth. Expanding bank balance sheets usually mean the stock of money is growing and there is scope for more lending. Although the Italian economy is currently very weak, the expanding bank balance sheets therefore hold out at least the hope of a possible improvement.

Chart and comments provided by Stein Brothers (UK) www.steinbrothers.co.uk

23 Things We're Telling You About Capitalism XVII

In Thing 17 Chang tells us that the current preoccupation with extending access to higher education is grossly wrong. It might well be true that more people should enjoy three years at the gleaming spires (and in the modern world, the booze, babes or boys to choice) and we are indeed in a richer world so why not? We do expect to take some portion of our ever increasing wealth in more leisure and there's no reason at all why this shouldn't be three years at the start of working life rather than more days off during it or more years of senescence after it. But if we think that more of this higher education is going to make us all richer then we're simply wrong. In this argument Chang is absolutely and completely correct.

Even the blind Haplorrhini gets a banana sometimes.

As Chang points out, Tony Blair might have caught the zeitgeist with his mantra of "education, education, education", but there's absolutely no evidence at all to show that he was right. Countries with higher further education rates do not have richer economies, ones growing more strongly, ones with higher technologies. There just isn't, in the actual data, any correlation at all with wealth and university education. Indeed, there's the suggestion that going above the 10-15% of da youf going off to uni is wasteful: we just end up in a signalling game rather than actually teaching anyone anything that's useful in terms of working life.That 10-15% that Switzerland had until recently and we had historically.

Given that so very little of what we're ever actually taught at university is ever used in a job (other than teaching the next cohort through uni) this shouldn't come as all that much of a surprise.

We might also muse on the fact that Chang's book has been very popular among the Guardianista classes. Haven't seen any of them mentioning this point though. Funny that.

I would take issue with only one of his points.

"What really matters in the determination of national prosperity is not the educational levels of individuals but the nation's ability to organise individuals into enterprises with high productivity".

I would replace national and nation there with economics and economy. For the nation state isn't actually the determinant of that ability to organise into such enterprises with high productivity. Indeed, one of the major points we can make about the UK is that absolutely it isn't.

London, The City at least, is organised into a global economy that connects Hong Kong, Singapore, New York and a number of other lesser international legal, financial and banking centres. London is also the richest of the EU statistical units (ie, not nation states, next level down). Cornwall, parts of the North, the bin ends of Wales and Scotland, are some of the poorest such regions in the EU. It is the ability of an economy to organise high productivity, not the ability of a nation to do so, which is important.

Perhaps you might think this a trivial distinction. But if we keep on getting all national about these things then we'll become both nationalist and statist. Which is very much the point we shouldn't be taking from this. If such high productivity can be organised across national boundaries, without national governments doing the planning or the regulating, then we know that the creation of those high productivity enterprises is not dependent upon the nation or the State, don't we? Nor even that "helping hand" of government.

Tax Freedom Day has finally arrived

Tax Freedom Day—the day when the average UK resident finishes paying George Osborne and begins putting money in her own pocket—is finally upon us.

After 150 days of sending all our money to the Treasury, we can earn for ourselves over the rest of the year.

The ASI's Director, Dr Eamonn Butler, says “Tax Freedom Day, which the Adam Smith Institute has been calculating for 25 years, is the plainest way to show what the tax burden really is. That is why the Treasury hates it. They of course want to conceal how much tax we pay, which is why they are so keen on stealth taxes.”

“But we put in every tax, including stealth taxes – income tax, national insurance, council tax, excise duties, air passenger taxes, fuel and vehicle taxes and all the rest – and show just how long the average person has to work to pay their share of them all. The stark truth is that this burden costs us all 150 days of hard labour every year. That's not how long a rich person has to work – it is the time the average person must labour for the tax collectors.”

“In the Middle Ages a serf only had to work four months of the year for the feudal landlord, whereas in modern Britain people have to toil five months for Osborne’s tax gatherers.”

“An increasing number of economists believe that Britain's taxes are too high and are choking off recovery. Some politicians say they need to keep taxes high in order to balance the government's books. But the trouble with governments is that they always spend everything they raise in tax – and then as much more as they can get away with through borrowing. Just as the rest of us have had to cut back, so should the government. The UK economy would be a lot healthier for it.”

Steve Baker, Conservative MP and member of the executive of the 1922 committee, adds: “Many congratulations to the Adam Smith Institute for once again revealing the shocking truth about taxes and overspending. This doomsday machine of deficit spending, debt and currency debasement will eventually blow up and there is no kindness in pretending otherwise. Politicians who are serious about the prosperity of our country and the wellbeing of the poorest within it should take note.”

For more information see our press release or our Tax Freedom Day page.

Time to privatise the courts

Britain's Ministry of Justice is considering "wholesale privatization" of the courts and tribunal service. Quite right too. Anyone who has seen the country's courts in action knows how inefficient they are, to the frustration of all who use them. That is because they are a monopoly, and monopolies do not have to please their customers – in this case, not just the public who use them but the taxpayers who fund them.

The Adam Smith Institute advocated privatization of the court system decades ago in its Omega Report and the replacement of civil courts with a system of arbitration. Some of this has been started, falteringly. It is time to bring a new, privatised vision to the sector.

The legal profession more generally needs reform too. Its trade union and its standards bodies are pretty much the same thing. Again, it is a closed shop. While the ability to represent people in court has been opened up somewhat, the monopoly remains, just as it does in medicine. Let us hope that the Ministry of Justice's proposals have a clear vision of how we can deliver justice in a more modern way, more competitively, more cheaply and at a higher standard. That is what privatisation usually does.

23 Things We're Telling You About Capitalism XVI

Our sixtetenth thing is that we're all just too damn stupid to be allowed out without the government nanny holding our hands. Chang doesn't put it in quite these words but but it is his general meaning. He runs through the usual arguments: we free marketeers think that people are rational so allow them to get on with it. Chang says (rightly) that people aren't always rational so they need guidance. When that runs into the problem that the people doing the governing are going to be just as irrational as everyone else Chang then says well, OK, government should simply ban things until we understand them. For example, and it's his example, new financial products should be banned until we understand them.

One major problem with this approach is that the argument for market activity doesn't depend upon rationality. One is, over and above that, that I know my desires better than you know mine. And however much I want to be Prime Minister I don't know yours better than you do. There's thus an extremely strong assumption that I shouldn't be (even if I do become PM) trying to restrict your actions unless there is some over riding reason to do so. What I think best for you ain't good enough. That over rising reason can be found in Mill for example: the proximity of an about to be broken nose to your swinging fist. Chang's argument in favour of regulation doesn't overcome this reason for non-regulation at all.

It's also rather irritating to be told, again, "that as Adam Smith said about the invisible hand". No, he didn't: he used the phrase once in WoN, about the propensity for domestic investment even in the face of the free movement of capital. It was absolutely nothing at all about the glories of market coordination. Grr.

The real heart of Chang's argument is Herbert Simon's point that we humans have bounded rationality. We cannot consider everything so we don't: we're not bright enough to consider the ins and outs of every possible action so we have rules of thumb which we act by. This is undoubtedly true: it's rather the flip side of the idea that we don't particularly maximise utility but we do satisfact (although a purist would argue that by not bothering to think too much, because thinking is hard, we are maximising utility). And there is indeed a great deal of truth in this. Company routines, our own sleep patterns and breakfasts (to use Chang's examples) are based not on rigorous contemplation of all the avaliable options. Rather, on the very limited number of choices that we allow ourselves through our routines or company structures.

Thus, says Chang, the government should impose such regulation on all: and that's the leap that is too far. Yes, even in the face of the uncertainty (no, not risk, uncertainty) about the impact of that new financial instrument.

Think a moment of evolution. We all generally think of it as leading to a certain harmony. Which isn't, as deeper down we know, how it actually is. We've this random mixture going on through mutation, we've a further mixture of genes through mating (in sexual animals at least) and it's the ever changing environment which does the selecting about who and which will survive. That's the only way that life can in fact deal with the inherent uncertainty about future conditions.

You can see where I'm going with this: market processes are an endless repetition of experimentation, much like those gene mutations and mixtures. Which of these experiments will survive depends upon the environment they are tried in. Writing great smartphone apps in 1955 would not have been a path to success: in 2015 it's highly likely to be. And this is exactly why we don't want government building regulation to stop the experimentation. Precisely and exactly because we don't know what the future environment will be and thus don't know what will succeed in it. And because it's uncertainty, not risk, we cannot know: therefore we must not stop the experimentation.

Another way of putting this is that we don't want to regulate market experimentation out of existence because such market actions are precisely the way we find out what is either good or bad. Further, if we don't allow the ideas out into the markets we can never get enough information to know whether they are good or bad: so, in Chang's universe nothing would ever happen because we've lost the very mechanism by which government can decide whether to regulate or allow something.

The final killer for Chang's extreme interpretation of the precautionary principle (for that is what it is) can be explained by anyone who has ever tried to explain something to a politican. You know, the people Chang wants to make all these decisions for the rest of us. They're no brighter than you or me and almost inevitably less well informed. They also have rather different motivations: one becomes a politician with power by spending inordinate amounts of time working out how to gain and hold on to power. Bad incentives, less information and no greater (at best) mental faculty than the rest of us: their rationality is more bounded than our own. This is not a good argument in favour of their being responsible for protecting us from our own bounded rationality.

Censorship is not the answer to the Woolwich attack

Tyranny does not come as a thief in the night, but openly. The killing, by two radicalised islamic extremists, of a British soldier on a London street has brought the usual calls to suspend the rule of law. A BBC interview with one radical preacher prompted Home Secretary Theresa May to ask what the state broadcaster thought it was doing by broadcasting such a thing, and Baroness Warsi, formerly a prominent Muslim minister, joined the chorus. The newspapers reported that a ban on radical clerics being covered on the airwaves is being actively discussed.

If so, it won't work. Those with long memories will remember how the UK government tried to prevent the broadcast media carrying interviews with radical politicians from Northern Ireland. That came about after a particularly sickening interview with Sinn Fein leader Gerry Adams on the back of yet another Irish Republican Army murder. The law was duly passed, but the media simply used actors to dub the words of their interviewees, or put the text on screen and had the newsreader read it out.

Frankly, I don't want to hear extremists justifying murder on UK radio and television. It can be pretty revolting, not to mention deeply upsetting for bereaved relatives. But we have – or had – a rule that people should be free to express their opinions, no matter what the rest of us think about them. We have that rule because we believe that, although it may be abused on occasion, and although it may give air to views that might prove damaging, in the long run it is better to have ideas openly expressed and debated. If ideas are good, they will win that debate. If they are bad, they will not.

There is a limit, though, as the libertarian philosopher John Stuart Mill pointed out over a century ago. We do not allow people to say or do things that could cause real damage to others. We do not allow people to shout 'Fire!' in a crowded theatre, and we do not allow them to incite violence. The line between condoning a murder and inciting violence might be a thin one for the broadcasters to tread. But we owe it to the rule of law to try to maintain that line.

23 Things We're Telling You About Capitalism XV

In our fifteenth thing that we didn't know about capitalism (because the capitalists have been so misinforming us) we get rather flipped over into the absurd. Chang's claim is that we all get browbeaten into believing that poor countries are poor because the people there are not entrepreneurial. He does on to point out, quite rightly, that this is an absurd thing to believe. The poor everywhere are vastly more entrepreneurial than us bourgeois middle class types: they have to be in order to survive. This is as true of poor people in rich countries as it is in poor too. The ducking and diving that goes on to make a life on benefits more pleasant is entrepreneurialism in a raw form. All of which is why no one at all does go around claiming that the poverty of some countries is based upon a lack of that raw entrepreneurialism making that claim something of a strawman.

Chang is also quite right in pointing out that the reason why this greater extent of entrepreneurialism amongst the poverty stricken doesn't then go on to create great wealth is not because of some deficiency in the people themselves. Nor in their ability to do that ducking and diving. The lack is in the institutions in that society that allow the microbusiness to flower into the larger one. This is indeed quite true.

We also know quite a lot about what it is that is lacking in those institutions. Chang mentions things like crooked bureaucrats: the short hand for not having them and their ever changing interpretations of the regulations (and the subsequent opportunities for personal enrichment to turn a blind eye) is the rule of law. There are other things too: Hernando de Soto has pointed out that many of the poor in these poor nations do indeed own property. But they don't own it legally: they hold it informally, by common recognition that they do rather than government recognition of their ownership. This means they cannot borrow against it, mortgage it, leverage their wealth. This can also be known as the absence of property rights. Or at least the absence of the formal recognition, de jure, of de facto property rights. De Soto has gone on to show that when such rights are formally acknowledged then matters improve.

In the absence of such property rights it's extraordinarily difficult to have a smoothly functioning financial system. The reason microcredit ever worked at all (and Chang is again perfectly correct in pointing out that it's not been quite the success sometimes advertised) was because it replaced that security of the lender being able to call on property for repayment with the security of the social pressure of the guarantors of the loan. Borrowers were in groups: the others in the group could not borrow until the first loan had been paid off. It was the finding of a different form of security, in a society without those formal property rights, that allowed any success at all. But clearly, if we want a financial system that can be used for the financing of the aquisition of property (whether it be a bullock for ploughing, a building to trade from or live in or a factory) then there has to be a system of recognising and transferring the ownership of that property. Backed up by a functioning court system and so on.

So far it looks like I'm agreeing with Chang in this chapter. And I'm not disputing his facts, this is true. But let us recall what the book is about as a whole. The way in which we have been mislead into believing that capitalism and free markets have created the wealth that we enjoy. The application of capitalism and markets to the currently poor being what would make them rich: this is the thesis that Chang wishes to refute. But his facts in this chapter simply show us quite how important and true that thesis is.

For what Chang's actually complaining about, what he's stating is keeping the poor poor, despite their admirable entrepreneurialism, is the absence of capitalism and free markets. For that's what capitalism is: a method of describing who owns productive assets. Markets are a method of exchanging things one with another, under the rule of law. It is the very absence of these things that Chang is identifying as keeping them poor: which is exactly the same as the capitalist and market case for why people are poor. They've not got the institutions that allow entrepreneurialism to flourish. They have, in short, too litle of that law, capitalism and market freedom necessary to get rich.

All of which is why this chapter leads into such absurdity. Chang tells us that the poor don't have this, that and t'other which is what keeps them poor. Yes indeed: but this, that and t'other are what capitalism and free markets are. At its most basic too: the rights to own, transfer and trade legally.

In a sense I am agreeing with Chang. I agree entirely that what blunts the success of that admirable effort and nous shown by the poor is the absence of the institutions that allow it to flourish. But Chang seems to think that this shows that capitalism and markets are not the way forward: when the very definition of the institutions that allows such effort to flourish is capitalism and markets. So how the analysis, that the poor are kept poor by the absence of capitalist institutions, can be used as an example of why capitalist institutions are undesirable for the poor I'm not quite sure. But that is the absurdity that Chang is putting forward.

If markets are this simple and obvious then why the opposition to them?

The Daily Mail has a report looking at the plight of the hardworking prostitutes of the country. Economic times are so hard that they're finding it difficult to make a steady living at the oldest trade.

Yet, just like many other businesses up and down the UK, even prostitution is now struggling with Britain's struggling economy. Many sex workers are now saying its almost impossible to make a full time living out of prostitution with rising rents and energy costs and a reduced demand for services. They also complain of a saturated market in which students and those recently sacked turn to prostitution to make money. Like many other workers across Britain, sex workers even complain that immigrants are providing tough competition.

Just for a moment put aside any moral or religious (or even lascivious) thoughts you might have about this sort of trade. Forget even the dubious legality of much of it (prostitution itself is legal in England, must of the activity surrounding it is not, such as brothels, soliciting, pimping and so on).

Look at what is actually happening instead. We have an absolutely textbook example of a market operating. There is a rise in supply of the service thus prices are falling. There's a reduction in demand at the same time, so prices are falling again. The marginal provider is being described as being pushed out of business and being forced into some other trade. Just as those leaving other trades are thinking of entering this one.

My point is that if markets work as advertised in something as simple and basic as sex then why is it that we've vast reams of people insisting that markets simply don't work? Why is it that all can see that markets work for those who want to get laid but not for those who desire to be educated, healed or housed?

Perhaps I should change that a little bit: for as any adult human being knows there's actually nothing very simple about human sexuality at all. It's a horribly complicated area of life even if it is one that endlessly fascinates our shaved ape brains. But that just strenghtens my point: if markets do indeed work as described on the tin even here then why are so many people, including naturally those in PJ O'Rourke's Parliament of Whores, insist that markets do not work, cannot, and must be replaced with something else?

I agree that it's not a particularly deep thought for a bank holiday morning but I do find it interesting. Supply and or demand change, prices change to compensate and bring them into balance. Why is it so difficult for people to get this?

Why we really do want to abolish corporation tax reason 672

You'll have noted that there's a certain amount of shouting going on at present about the corporation tax. And while there is much of that shouting going on very little of it seems to be well informed. For the truth is that we should solve this "problem" just by abolishing corporation tax itself. Around here we've been through the arguments many a time and I've been known to bore people to tears on the point. But it is still true that we want to get rid of it. The most basic reason being that companies simply don't pay it anyway: all taxes mean the wallet of some live human being gets lighter. As a company isn't a live human being (no, legal personality is not the same as being a natural person) therefore it's not the company bearing the burden of the tax. We've rehearsed this part of the argument a number of times.

There's another supporting argument mentioned here though. Corporation tax is a dreadfully inefficient tax. For that reason alone we'd rather like to get rid of it and have something more efficient.

All taxes have deadweight costs (sorry, almost all of them do which we'll come to). The simple existence of the tax sticks an oar into market pricing and thus causes some people not to do what they would have done in the absence of the tax. Sometimes we desire this, of course: taxes on pollution say are meant to reduce the amount of pollution. But on making profits and incomes and things like that we don't want to reduce the activity. In this sense corporation tax, to put it politely, sucks. How much though?

"The domestic distortions that the corporate income tax induces are large compared with the revenues that the tax generates," the Congressional Budget Office wrote in a 2005 report. It found that for every dollar raised by corporate taxation, the cost due to distortions was between 24 and 65 cents.

An entirely horrendous number I hope you'll agree. And if we look over here we can see that the OECD agrees. Corporation tax is very much more distorting than other forms of taxation. We thus should get rid of corporate taxation and replace it with something less damaging, something less distortionary and with lower deadweight costs. Like, for example, repetitive taxes on immovable property (or Land Value Taxation perhaps) which is one of the very few taxes which has negative deadweight costs. For you can't avoid it thus there's no distortions and the weight of the tax is likely to lead to more efficient use of the available land.

It's true that this issue of corporate taxation has been brought into public view as a result of various lefty agitrots and NGOs. Which is fine: free speech for all n'all that. But now that the issue is being talked about we, the sensible few, should coopt that public mood.

Now that everyone is talking about corporation tax let's do something sensible about corporation tax. Let's abolish corporation tax.

Why Ireland and developing countries should have a low corporate tax rate

As you know there's much ventilating going on about corporate tax rates about the place. Special venom is reserved for Ireland's low rate and various development charities are turning the air blue with complaints about taxes in the developing countries. The thing is though, a small and open economy like Ireland should have a low corporation tax rate: and developing countries should probably have one of zero.

The reason is that thing called tax incidence. Companies don't pay corporation tax: it's some combination of the shareholders and the workers who do. This is not a point in argument: the only argument is about what the portions are, not the fact that the burden falls upon these two groups. We also know what it is that influences which group: it's how large the economy is in relation to the world economy and how open it is to capital movement. The smaller and more mobile, the more the workers get it in the neck.

The mechanism is simple enough. It's pretty much straight from Adam Smith in fact. There's an average rate of return to capital: a jurisdiction that taxes that return to capital will have a return lower than that global average. So, some domestic capital will flow out seeking the higher foreign returns, some foreign capital will not flow in for the lower domestic ones. There's thus less capital employed in the economy. Adding capital to labour is what drives up the productivity of labour: the average wages in a country are determined by the average productivity in that economy. So, tax companies, get less capital employed, wages are lower than they otherwise would be. The workers are bearing part of the burden.

As I say, the smaller the economy and the more open it is then the more of that burden is upon the workers. And in a wonderful result back in 1980 Joe Stiglitz showed that the burden upon the workers can actually be more than 100%. That is, the workers lose more in wages than the government gets in tax.

Ireland's a small economy, 3.5 million people or so and as it's in the EU has about as close to perfect capital mobility as it is possible to get. Thus it ought to have a lower corporation tax rate than larger economies. And it does, so that's just fine then. Attempts to push it up (as various EU types are currently muttering) would simply lower wages in that country.

And the effect is even greater in developing economies. By definition they're small economies: that's why we call them developing because they haven't developed a large economy yet. And the current rows about tax rates in them are all about foreign investment: so obviously we're talking about mobile capital here. And it's entirely possible that for some (actually, for the smallest, it's certain) that the burden on the workers' wages is more than 100% of the tax being raised. All of which makes Christian Aid's wafflings about tax avoidance and evasion very interesting indeed. Given that it is the workers, those poorest of the poor, who are bearing the burden of corporation tax in such places then a charity committed to improving the condition of the poorest of the poor would be arguing for zero coroporation tax rates in such places.

Unless, of course, they were simply ignorant of the basics about tax incidence. But that couldn't be possible, could it? No one who is ignorant of a subject would be campaigning on it, would they?