Coming out as neoliberals

You may have spotted that we’ve recently decided to start calling ourselves free market ‘neoliberals’, instead of libertarians. Nothing has changed about what we believe about the world, or the approach we take to making it better. But after thinking about it and discussing it among ourselves we decided that this was a clearer label for what we already believe and do.

Madsen's "Looking at the world through neo-liberal eyes" is an excellent primer on what we mean by this. I've had a stab at something similar, too. For us, the word neoliberal means that we’re:

  1. Pro-markets
  2. Pro-property rights
  3. Pro-growth
  4. Individualistic
  5. Empirical and open-minded
  6. Globalist in outlook
  7. Optimistic about the future
  8. Focused on changing the world for the better

These are, of course, what we’ve always been. We promote low, simple taxes because we want economic growth and to give people more power over their money, so it is individuals and not the state that choose where their income goes. We promote competition in healthcare, education, utilities and other public services because we want those things to be better through a process of experimentation and individual choice. We promote globalisation and a liberal immigration system because we want to raise the living standards of people around the world through trade and investment. 

Adopting the word ‘neoliberal’, then, is not a change of policy but a recognition that other labels do not describe what we’ve always been quite as well. We're not closing the door on libertarians, Objectivists, anarcho-capitalists, Whigs, free marketeers, conservatives, voluntarists, agorists or liberals - these are our friends and allies, and we welcome all to speak at our events, but these are not the words that most accurately describe us.

Why not ‘libertarian’, which we've used before? In the UK the word libertarian has a rather rigid meaning - someone who is opposed to all but the tiniest night watchman state in every case. In the US this isn’t the case. There, the word is more of an umbrella term for small state liberals who nonetheless might favour things like school vouchers or a Negative Income Tax as an end goal for policy, not just a stepping-stone to eventually abolishing all government altogether. But in the UK, I think it's confusing to many people to describe anything short of almost total abolition of the state as 'libertarian'.

Rightly or wrongly, many people in the UK are confused or annoyed when self-described libertarians such as us favour some measure of government, built on market-based lines. But we don’t care about ideological purity, we care about making the world better using experimentation and evidence. ‘Neoliberal’, like classical liberal but unlike libertarian, implies that we’re not all-or-nothing absolutists.

So why not ‘classical liberal’? We think that the world is better now than it ever has been, and that markets and property rights are to thank for that. The ‘Washington Consensus’ policies that advise developing world governments to get their spending and taxes under control and focus on opening markets up to competition and investment are in large part to thank for this. The massive reductions in poverty across the developing world and rise in wealth in places like China and India are thanks to the neoliberal order of sound government and free trade, and we want to defend that.

The classical liberal heroes we admire - Adam Smith, of course, but also people like John Stuart Mill and David Hume - are the progenitors of this order, but our policy programme is updated for the modern world. You might say that neoliberals are classical liberals with smartphones, internet access and frequent flier miles.

And then, of course, is the fact that ‘neoliberal’ is already in use today, but almost exclusively as a slur. For a large number of people (mostly on the left), neoliberalism describes the modern world order and the fact that nobody self-describes as a neoliberal is proof that nobody is willing to defend that order. Well, not any more. 

The words Tory, suffragette and Whig all began as insults but were adopted and reappropriated by the people they were used against. We intend to do the same with neoliberalism. The modern world is where it is thanks to markets and property rights, and we’re thankful for that. But with sensible policies it could be even better. And that’s where we neoliberals come in.

We really don't think this is a good idea

It's obviously wildly desirable that Members of Parliament get a good kicking. Not for any particular reason, just on general principles. However, this particular suggestion being made is not a good one in our view.

The idea is that they're all waltzing off and earning cash doing something else other than serving their constituents. Thus some limitations should be placed on the cash earning to ensure the serving. Superficially attractive but we're agin it:

MPs will be forced to drop lucrative outside jobs if they "conflict" with their jobs serving their constituents, according to a proposed new code of conduct.

The MPs' second jobs will be scrutinised by the Parliamentary standards watchdog for the first time in a major crackdown on politicians’ lucrative work away from the House of Commons.

A new code of conduct will require MPs to ensure that any outside work “does not conflict” with their day jobs representing constituents in Parliament.

The change in the rules – which are still to be approved by MPs– will radically cut back the amount of time MPs will be allowed to spend away from their constituents.

It could also make it easier for the Standards Commissioner Kathryn Hudson to stop MPs using their positions to win paid consultancy work outside the House of Commons.

It's not that we're against the idea of some method of stopping MPs from troughing it. It's that we're massively against anyone having the power to tell MPs what they may or may not do.

Having control over the secondary finances of MPs means having control over MPs. We simply don't think that anyone should have such control.

Share buybacks are a good thing

A wide range of commentators, experts, and laymen have recently denounced share buybacks: where firms buy their own equity on the stock market, effectively deleting shares and raising the size of those that remain. These critics claim that share buybacks are a symptom of corporate short-termism: these firms, instead of investing in factories, skilled labour, information, research, premises and so on to raise their long term success, are merely boosting short-term returns. Thus, it is said, the managers of these firms are actually contributing to "secular stagnation"—slow growth around the world, not due to the business cycle—and the "productivity puzzle"—the surprisingly slow improvement in British and European output per worker and per hour.

But this is all wrong, and these critics are fundamentally mistaken. Buybacks improve stock market efficiency by pricing in inside information without harming outsiders, when firms know things their shareholders don't. They also free up funds to be invested in other firms: if firms repurchase shares they are effectively saying: at the current price it would be better to put our cash into other projects (perhaps in other firms); we have already funded all the investments with a cost:benefit ratio that passes muster at the current interest rate.

Start with a simple model of investment. You try and hold a portfolio of securities—bank deposits, bonds/gilts, and equities—based on how much risk you are willing to hold, and what your opinions are on the prospects of various firms, sectors, and countries, relative to the market. If you think Apple stock is worth more than the market price you hold more of it than the average investor; if you think China will grow faster than the average investor, you hold more Chinese assets; if you're investing for retirement in 50 years you hold more equities; if you're investing for a few years in the future you hold more bank deposits and gilts.

When a firm decides to buy its stock back, it will have to bid marginally above the market price to induce stockholders to sell, as well as accounting the mechanical price increase due to concentrating remaining holdings. Those stockholders who value the firm at exactly its current share price will sell first, and then those who value it marginally above the current price, and so on. But there is no reason to expect that the overall appetite for saving and investment has decreased: we should expect these investors to redirect this cash into whatever marginal investment they almost did instead of the firm in question. When Apple was £12/share they may have fancied it, but when it's £15/share Google might be more attractive.

Thus, overall investment is not affected by buybacks. It is merely redirected to better uses. The counterfactual is either overinvestment in upopular sectors and obsolete technologies, or conglomerate-isation. Should the rise of digital cameras prompt Kodak to (a) start up a digital camera division; (b) invest more in its existing business; (c) or focus on its profitable activities and let its investors go for Canon and Nikon. There is a case for (a), but history suggests (c) was the best strategy—companies suffer diseconomies of scope.

A new paper by Pascal Busch and Stefan Obernberger in the Review of Financial Studies (abstract, ungated earlier version) confirms the predictions of the simple intuitive model. They study data on US stock prices and find that repurchases enhance several measures of price efficiency, primarily by intervening when outsiders underrate firms' prospects in ways that insiders are sure are false. What's more, they can't find evidence that managers use buybacks to manipulate their own pay packets.

The message is clear: financial markets work well, and meddling with them can be costly!

No, don't let MPs have a vote on Brexit

An interesting little political manouevre here, insisting that MPs should be able to vote on the trade arrangements post Brexit. Specifically, the claim is that membership or not of the Single Market is not the same as Brexit and thus MPs should vote on that single market membership or not.

To which the correct answer is no, go away:

Theresa May is under massive cross-party pressure to grant MPs a vote on any decision to leave or limit UK involvement in the European single market, amid growing outrage at the prospect that parliament could be bypassed over the biggest economic decision in decades.

Tory MPs joined forces with former leaders of Labour and the Liberal Democrats, the SNP and Greens to insist that parliament have a say and a vote, pointing out that, while the British people had backed leaving the EU, they had not chosen to leave the biggest trading market in the western world.

They're right it's a large decision and one can indeed make a case that that's what they're for, making decisions for us. But in this case the answer really is no, go away.

Because it's being made very clear to us that the Single Market is Brexit. We are being told that if we want membership of that trading area then we've got to accept free movement of people (not in itself a bad idea but not really what people voted for), all of the regulation of the economy which the EU imposes, must pay into the EU budget and so on and on. Essentially, it is being made very clear that membership of the Single Market comes with all of the costs and responsibilities of full EU membership.

That is, single market membership is a denial of Brexit itself.

We do all know that a majority of MPs are against the very idea of leaving. Which is exactly why they shouldn't have a vote on the matter. For accepting single market membership is tantamount to not leaving, it would be a reversal of the referendum by the back door.

Doesn't market competition just cure so many different things?

That Brexit is just going to cause food prices to soar of course. For Britain imports 40% of its food, the pound has tumbled and we're all doomed:

Prices in British shops dropped by another 1.8pc in the 12 months to September, as fierce competition between supermarkets outweighed the impact of the fall in the pound to drag down groceries prices, according to the British Retail Consortium (BRC).

Food price deflation accelerated with prices down 1.3pc on the year, a faster fall than the 1.1pc dip recorded in August.

“We are now in the fourth year of falling shop prices, so the record-setting run of shop price deflation continues, which is great news for consumers,” said the BRC’s chief executive Helen Dickinson.

It is indeed great news for consumers which makes this headline a little off:

UK food prices suffer biggest ever drop in September
Food prices fall 1.3% year-on-year despite a recent uptick in global commodity prices.

Suffer? Who? The cause of all of this is:

In a startling development, almost unheard of outside a recession, food prices have fallen for nine straight months in the U.S. It’s the longest streak of food deflation since 1960 -- with the exception of 2009, when the financial crisis was winding down. Analysts credit low oil and grain prices, as well as cutthroat competition from discounters. Consumers are winning out; grocery chains, not so much. Their margins and, in some cases, their stock prices, are taking a hit.

Yes, in both the US and the UK the fall in food prices is being driven by that market competition. Or as we can also put it, that lust for pilf and gelt of the few German billionaire families that own and run Aldi and Lidl. 

All of which tells us what one of the major jobs of government is. That major job being to allow that lust for gilt and pelf to run rampant throughout the economy - but with care. We must not let market incumbents prevent market entry in order to protect their gains. But we must allow market entry for the entrants to pursue their own dreams of mountains of cash. Precisely and exactly because it is the competition in search of those piles of wonga that so enriches consumers.

We do not want government to prevent, limit or even manage competition - we just want them to make sure there is room for it to happen. Once that is true we can leave human greed to deal with the rest of it.

This isn't a surprise in about absolute poverty - fortunately we know what to do

Unicef has released a report about that 10% of humanity that is still stuck in that horror of absolute poverty. One of the things they say about it is obvious after a moment's thought:

Children are disproportionately affected by extreme poverty – they make up just a third of the population studied, but comprise half of the extreme poor. They are twice as likely as adults to be living on less than $1.90 a day, the report claims, with 19.5% of children in developing countries living in extremely poor households, compared to just 9.2% of adults.

There is nothing odd or surprising about this. That moment's thought will tell us that it's going to be this way. Absolute poverty includes those horrific child mortality rates that so afflicted everywhere until recently. Thus children are going to be a majority of that absolutely poor society - just as they were when all were that poor.

Ending Extreme Poverty: A Focus on Children – a briefing note from the World Bank Group and UNICEF – finds that children in developing countries are more than twice as likely as adults to live in extreme poverty. 

There is also the point that someone earning $10 a day will not have his family in extreme poverty if there are four of them in total and will if there are eight. And yes, the report points to sub-Saharan Africa as the great concentration of this sort of poverty. And Sub-Saharan Africa is perhaps the last major area of the world where fertility rates have not dropped towards replacement rate. No, this isn't about contraception not being available. Desired fertility also hasn't fallen to replacement rate.

Fortunately, while this is all obvious we know what we nee to do to wipe this stain from the planet. Continue to do what we've been doing this past 40 years. That neoliberal globalisation which has driven the greatest reduction in absolute poverty in the history of our entire species.

As Madsen of this parish points out, we should buy goods made by poor people in poor countries. Extend that concept to preferentially doing to with goods from sub-Saharan Africa and we'll get there faster than any other method.

Fentanyl - just another reason to legalise drugs

Reports from the US of the chaos, and deaths, that the fentanyl epidemic is causing.

Small-scale drug labs are cropping up around the country, as budding home-brew traffickers discover how easy it is to manufacture pills using synthetic opioids to meet a skyrocketing demand. Law enforcement says the phenomenon threatens to atomize the illicit narcotics trade, adding a troubling new dimension for authorities already strained trying to halt larger-scale drug gangs.

Abuse of opioids, including prescription drugs, heroin and synthetic narcotics like fentanyl, has reached crisis proportions. The Centers for Disease Control and Prevention said more than 28,000 people died from opioid-related overdoses in 2014, the last year of nationwide data, more than double the total from a decade earlier.

Opioids mimic opiates but do not rely upon anything to do with the poppy as a precursor. You'd need to be a good chemist to produce fentanyl entirely from non-controlled substances but it is indeed possible. Thus all that malarkey about controlling borders doesn't work with this.

Further, the gap between a good high and a dose that kills is remarkably narrow. And finally of course, people are using it to produce what look like Oxycontin and other opiates, hugely less powerful and dangerous drugs.

Thus it's easy enough to make illegally, doesn't have to be smuggled across borders and almost never arrives in carefully controlled doses. Oh, and, as above, it's poisonous very quickly in ever so slightly too large a dose.

We could, of course, say that we should just jail everyone and check everything. Which is what we try to to do today and it obviously doesn't work. The other solution is to legalise all of this and thus have a market in clean, portion controlled, drugs.

Whether that's acceptable to you will of course depend upon what it is about all of this that bothers you. People getting high or people getting dead? We're worried about and against the second and quite frankly couldn't give two hoots about the first. Except for that basic civil liberty of people being allowed to toot whatever it is they want to.

Thus we are for the legalisation in order to curb the dropping dead problem. Sadly all too many other people seem to be worried about the other people enjoying themselves problem.

How Governments harm trade

The following paper, entitled "How Governments Harm Trade" (see link at the bottom), is a paper in which I explain the principle behind why in most cases the free market works best when governments do not interfere in the prices society engenders by the laws of supply and demand. Those prices, I will argue, reflect human choices played out on a day to day basis, and are the soundest bottom-up basis on which economies are organised, not the top-down organisations that politicians impose on us.

The free market is the aggregation of billions of choices, wants, needs and desires going on in the world at any one time, all in the form of mutually beneficial transactions. Naturally, as you'd expect, such a system is far too complex and dynamical to be mapped to a set of simple ordinances and decrees, and that is the basis on which so many regulations are frequently problematical to the agents involved in trade.

I will show how value is created in every societal transaction for both agents by the combination of consumer surplus and producer surplus. Consumer surplus is the difference between what the consumer pays and what he would have been willing to pay, and producer surplus is the difference between what producers are willing and able to supply a good for and the price they actually receive. I also explain how the mutual value attained by both agents in those free exchanges is much closer to an optimal outcome than when politicians impose their will on the transactions.

As this paper will also show, the main regulations one ought to be opposed to are ones that artificially interfere with prices and the information-carrying signals they exhibit. Two examples are price floors and price ceilings. A price ceiling is a form of legislation by the government that says the price of x must not go above their ceiling price. A price floor is a form of legislation by the government that says the price of x must not go below their floor price. I will show how both these legislations negatively interfere in the market process, and how frequently both parties (buyers and sellers, employers and employees, landlords and tenants) are made worse off by these price controls.

On the issue of when it is good or bad for the state to be involved in the free market, I use quite a simple and obvious formula. It is this: the state should only involve itself in our transactions when there is a net benefit to society from this involvement. That is, when the benefits of doing so outweigh the costs.

When stated like that, I would think it is hard to find a sane person who disagrees with that proposition. The odd thing about society, however, is that it is full of people who would find little trouble agreeing with the idea in its above propositional form, but who quite comfortably hold numerous beliefs that depart from the above logic. It is this societal anomaly that will be unpacked.

To read the full paper click here.

China’s Incipient LFTR

You wouldn’t know it from reading most papers, but the last five years have accommodated noteworthy developments in the chronically underreported world of next generation nuclear research. It is unfortunate that nuclear tends only to get airtime when journalists deign to dispense dismissive, undergraduate analysis, obligatorily set in the ‘wake’ of Fukushima and aimed at a caricature of the industry. The impression one gets from the nuclear landscape is actually one of careful optimism, an optimism built upon the sight of many bright lights on the next-gen horizon. The Liquid Fluoride Thorium Reactor (pronounced ‘lifter’ in acronymic form) is one of those bright lights, one that China is chasing, and one that Britain would do well to pay more attention to.

The LFTR is a type of Molten Salt Reactor: Molten Salt Reactors are Generation IV nuclear fission reactors that use molten salt as either the primary reactor coolant or as the fuel itself; they trace their origin to a series of experiments directed by Alvin Weinberg at Oak Ridge National Laboratory in the ‘50s and ‘60s. The LFTR is differentiated from other variants of the MSR by the fact that it runs on thorium rather than uranium, thorium being an element that is fertile rather than fissile, and which will transmute to fissile uranium-233 upon exposure to neutrons. Weinberg’s research was fruitful and instructive, and illuminated many solutions to the complex mechanical problems that are raised by the use of a liquid fuel, but Nixon nonetheless terminated research in ’69 (some say because of the unsuitability of thorium to the manufacture of nuclear weapons, though this claim is questionable). After enduring a long purgatory, MSR technology has experienced something of a renaissance in recent years: dust-cloaked Oak Ridge dossiers, long dormant in office drawers, are being re-examined by pioneering start-ups. The MSR movement gained considerable momentum in 2011 when the Chinese Academy of Sciences publicised its intention to commercialise a thorium-based MSR in 20 years (it is also developing non-thorium MSRs and solid fuel thorium reactors). The Shanghai Institute of Applied Physics has since employed 700 nuclear engineers in this service: a 10MW pilot LFTR is expected to be operationalised in 2025, with a 100MW version set to follow in 2035. Given that China theoretically has enough thorium to satisfy its energy needs for the next 20,000 years, this seems a sage application of resources.

Of course China still has much to do, there are obstacles to overcome and commercialisation will not be viable until the late 2020s, but it has nonetheless taken the plunge, undoubtedly motivated by considerable hypothetical advantages over conventional Pressure Water Reactors. According to Flibe Energy, headed by nuclear scientist Kirk Sorensen, thorium is so energy dense that 6600 tonnes of it could replace the ‘combined 5.3 billion tonnes of coal, 31.1 billion barrels of oil, 2.92 trillion cubic meters of natural gas, and 65,000 tonnes of uranium that the world consumes annually’. It is approximately 3X more abundant in the Earth’s crust than uranium, and significant quantities have already been extracted as the by-products of existing mining operations. Most compellingly, the energy output of a LFTR, per metric ton of thorium ore, is estimated to be 200X greater than the output of a Light Water Reactor (a type of PWR).

In addition to the advantages conferred by the use of thorium as a fuel, the design of the LFTR also delivers a host of benefits: the core, blanket, and primary cooling salt loops are all engineered to function at near atmospheric pressure and absent of water or steam, thus precluding the possibility of a Fukushima-style pressurised release. For this reason, the containment vessel also needn’t be much larger than the reactor itself, thereby alleviating construction costs and times. Crucially, liquid fuel is self-regulating: in the event of an increase in operating temperature the ‘thermal expansion of the liquid fuel and the moderator vessel containing it reduces the reactivity of the core’ (i.e. the more reactive the core becomes, the more the liquid fuel acts to reduce reactivity). Even some chaotic event, like an interruption in the supply of electricity to the plant, could be safely negotiated: a freeze plug, cooled by an electric fan, is installed in the base of the core vessel; if the supply of electricity to the plant is disturbed, the fan ceases to rotate and ‘the plug melts’, thus allowing the liquid fuel in the core to be safely evacuated into a ‘subcritical geometry’ inside of a catch basin (a subcritical geometry is an environment in which neutron losses exceed neutron production and the liquid fuel departs from a state of criticality, or self-sustaining fission).

China has been trailblazing in the world of next-gen nuclear for five years now: the fact that they are so aggressively chasing LFTR technology should excite our curiosity. The combination of ‘simpler fuel handling, smaller components, markedly lower fuel costs and significantly higher energy efficiency’ raise the prospects of attracting capital, and with the price of LFTR-generated electricity estimated to be 25% lower than the price of electricity generated by conventional nuclear power plants, the public would likely also be receptive. The government should engage Moltex Energy, a London-based company that has been a pioneer of Generation IV MSR technology, in an intellectual partnership to explore the mechanics, advantages, and disadvantages of a home-grown LFTR project. Given how mutually beneficial the collaboration between Oak Ridge National Laboratory and the Shanghai Institute of Applied Physics has been, the potential for a Sino-British partnership is real. Circumstances are auspicious: a little enterprise is now required. 

We said that this women in sport things was just a Gizza' Job matter

Back a couple of weeks we puzzled over a report about women in sport and the gender pay gap there. The report was written by the sort of women who might end up as sports administrators if there were to be more women sports adminstrators. The recommendation was that there should be more women sports adminstrators. We did not think this exactly surprising, all too many of these reports are really "Gizza' Job" applications.

But we are surprised at the speed with which matters are moving:

The governing bodies of half of the UK’s most successful sports were on Monday night facing millions of pounds in cuts unless they move to ensure women make up at least 30 per cent of their boards by the end of the financial year.

Note that the insistence is not that womens' sport is treated equally, nor that similar amounts of money must be spent across the gender divide.

The demand is simply that more of the sort of women who sit on boards should be paid to sit on sports boards.

Sport England, the Government-appointed funding body which has invested almost half a billion pounds in grass-roots sport since London 2012, told The Telegraph it was ready to take punitive action if necessary.

Chief executive Jennie Price said: “I’m very confident that the relationship to funding is a real one, and that if people don’t comply with the code, that is going to be a very real risk.

“We need a real willingness and a really credible plan of action to do this. So, we accept that it can’t all be done in five minutes but it needs to be done as fast as we can do it and it needs to be properly and actively pursued and accepted as the right thing to do.”

Most remunerative for that certain type of woman no doubt.

We would rather wish that the sort of people who infest bureaucracies spend more time serving the consumers rather than attempting to get a well paid job infesting a bureaucracy. But then that they never do is why we want to reduce bureaucracy, isn't it?