The morality of capitalism

What your professors won't tell you is the subtitle to Tom Palmer's new book The Morality of Capitalism (Jameson Books 2011). Tom – who travels the world beating the drum for liberty – has assembled a powerful team of contributors, including two Nobel laureates and the founder of Whole Foods Market. Though the authors obviously don't have a consistent style – some very academic, some didactic, others very personal in their approach – you can still strain out a huge number of interesting arguments and points about the morality of markets that you won't see in common circulation and certainly won't hear from your professors.

Cato's David Boaz, for example, points out that human beings are social creatures and the like to associate and collaborate. Sure, they are self-interested, but they wold be self-interested under any system, not just capitalism. The virtue of free-market capitalism is that people can only make themselves better off by helping others.

The Chinese economist Mao Yushi takes that further with an interesting paradox. If we were all completely benevolent – looking out for the interests of other people rather than ourselves – we would have just as much conflict as capitalism is said to give us. We would be fighting shopkeepers to charge us more and reduce their quality. The arguments would be just as red in tooth and claw, but the incentives would all be to reduce value rather than to create and increase it, as capitalism does.

Tom Palmer himself provides a heartfelt story of when he was in severe pain, but was treated with huge courtesy, kindness, and human decency in a private hospital. That contrasted mightily with his subsequent treatment in a public hospital, where he was bossed about and treated like a lump of meat. You can't raise or lower people's natural feelings of humanity by force, he concludes, but you can certainly prompt them to show their humanity – or inhumanity – by your choice of incentives. In one setting, Tom was a valued customer; in the other, a necessary inconvenience.

Palmer also has a chapter on Adam Smith, pointing out that the Sage of Kirkcaldy is too often caricatured as saying that 'greed is good'. It is plain from his writings, though, that he believed no such thing. Self-interest has its place, but there are limits to this as there must be to every human characteristics. Seeking wealth by helping other people, which is the essence of the market, is just fine, though. The desire to accumulate money is entirely benign if you want it to feed, and clothe your family or to spend for the public benefit. The more money that philanthropists have, the more philanthropy they can deliver: why do people think then, that the pursuit of money is immoral?

There are 101 more insights like this in the book. Congratulations to and for doing it.


Europe's crisis is the UK's opportunity

cowThe profound financial crisis at the heart of the EU provides an ideal opportunity to address the issue of the Common Agricultural Policy (CAP) which was set up in the 1950s mainly at the instigation of Germany and France. Currently, it accounts for annual expenditure of over €50 billion and represents a colossal percentage – some 40% - of total EU costs. Central to its operation are many concepts – subsidies, quotas, levies and intervention prices – that are anathema to most free market economists. 

Not surprisingly, the CAP has also given rise to such Pythonesque features as butter mountains and wine lakes. Whilst some progress has been made in reforming the CAP in recent years, the reality is that it remains a highly expensive anachronism of post-war recovery – and very unsuited to today’s competitive economy.

Inevitably, in the short term, the EU’s focus will be on saving the euro as the markets continue to home in on the dreadful public finances of both Italy and Spain – whilst accepting that Greece’s case is virtually beyond recall. Amongst the more sensible proposals for resolving the euro crisis is a currency split between two EU blocs – the northern and southern countries, with France’s membership underpinning the latter.

In any event, the euro crisis is giving rise to fundamental thinking about the future of the EU. Indeed, within the UK, eurosceptics are becoming far more vocal, with continuing calls for a referendum on the UK’s future EU participation. Furthermore, at some juncture, the UK may need to make further financial contributions to saving the euro – whether directly, through the IMF or bilaterally as with the Ireland.

In return, the UK should demand concessions of its own, including major cuts in CAP payments and, in the long term, its abolition. Its replacement should be based on individual national agricultural policies. Remember, the PR executive mantra - every crisis provides an opportunity.


Yes, let's have real localism

Tom mentions that he'd be in favour of more local taxation. That's "more local" rather than "more" local of course. And I agree but we don't in fact need to try and devise such a system. We can just copy one that works very well elsewhere.

Let's have a national income tax rate of 3.76%. OK, if you really insist we'll have a top national income tax rate of 15% as well. That's plenty to pay for the things that the national government really does have to do, defence, the higher courts systems and so on. Everything else we'll raise the money for and pay for at the lowest political level possible. In the UK this is the council ward which is some 5,000 to 30,000 people, depending upon urban, rural and so on. This maps well over the 10,000 and up number in the communes of the country we're going to nick our tax system from.

The local tax rate is set and raised locally (although of course you can have a national organisation collecting it if you wish) and much more importantly, it is spent locally. Each such ward will indeed need some police cover, fire cover and so on and there's no problem with banding together as larger units to pay for these. Similarly with health care, some such is decidedly local but not every ward needs a transplant ward, so money can be sent upwards to pay for a share of one of those if desired. But the massively important point is that money is only sent upwards, local things are locally funded, regionally can be regionally but only with the direct consent of that lowest level.

Such a system will also be subject to what I've called Bjorn's Beer Effect here before. If Bjorn is the bloke who sets your tax rate and Bjorn is the guy who decides where the money is spent, then in a community of 6,000 to 30,000 people you're going to know, or at least be able to find out, where Bjorn has his Friday night snifter. Which is going to put the fear of God into Bjorn as he spends your money: but also means that there's one human individual to explain to you, forcefully if need be, why you can't have what you're not willing to pay the taxes for.

The country we're taking this from is of course Denmark. Which means we can all join in a rousing chorus of, along with Polly Toynbee and all points left, "We must all be more like the Nordics!"


The case for recalculation

Skeptics of the Austrian narrative of the Great Recession – that inflation caused malinvestment bubbles, particularly in the housing sector, which eventually burst – often point to the lack of empirical evidence for this thesis. David Andolfatto seems to offer some of this vital empirical evidence (hat tip to Arnold Kling):

The collapse of the construction sector accounts for 46.4% of the decline in U.S. GDP and 51.9% of the decline in total employment (roughly 3.4 million jobs).

That's important, because – if it's true – it really would suggest, empirically, that the Austrian story about the crisis is the right one. You probably know the narrative by now – easy money distorted relative prices, making construction appear to be more in demand than it really was, causing a lot of people to invest too much money and time building things that nobody ended up wanting. Once prices started to stabilize and reflect real demand, a lot of the people who'd made bad investments need to cut their losses and get rid of them. The same goes for people who've trained in skills that aren't really needed – they've got to retrain now that reality has bitten.

Andolfatto's analysis is interesting, because it attempts to model the shockwaves that a change in a large single sector can have on the rest of the economy. If you've set up a business selling coffee to workers at a now-defunct construction site, you're out of business. If some of your customers were construction workers, whatever your business, you'll be making less money now, and so will the people who you bought money from. And so on. The interconnectedness of the economy is sometimes difficult to grasp, but it's really important to understanding why one sector going *pop* can affect so many other sectors so badly. 

The policy implications of this perspective are quite signficant. Forget trying to "stimulate" your way out of a recession through spending or printing money – all you'll be doing is creating another type of false, unsustainable demand. You'll do the most damage if the stimulus is aimed at the unemployed, the people who need to retrain to cope with the real economy the most: reskilling takes time, and will be put off if there's some public works project nearby that will hire you instead. Even taking up unemployed people's time has an opportunity cost; justification for "stimulus" programmes ignore this.

Stimulus and government spending aren't just bad because they cost money; they're bad because the people they employ could be doing something else with their time that people actually want. That's the crucial thing that many economists ignore – time. A recession takes time for people to resolve their difficulties. Impatient governments can't do anything to speed that along, except get out of the way.


Do we own our bodies?

Yesterday morning the Human Fertilisation and Embryology Authority announced that it would increase the ‘fees’ it offers for women to donate eggs from £250 to £750. (At the taxpayer’s expense, of course.) There is a serious shortage of eggs so HFEA wishes to encourage more women to come forward. HEFA argued that the increase is to cover costs and not act as an ‘inducement’ which is prohibited under EU rules.

We should consider the unfortunate consequences of the prevention of financial inducements for the sale of eggs. Firstly, there is a shortage of eggs so potential parents are being denied the ability to have children – surely that is also unethical, or at least unfair? Demand exceeds supply – in economic terms we need to allow the market to set a price which would increase supply (of course, this may make infertility treatment via the NHS more expensive, but that is merely an argument against nationalising such services). Secondly, as with all prohibitions, are the unintended consequences which lie in the creation ‘fertility tourism’ and probably an illegal egg trade. Naturally, such a trade endangers the health of both donors and recipients. If the sale of eggs were legal, the egg trade would be both cheaper and far more subject to oversight and safety.

In essence, we have a situation where people are being denied the potential of having children whilst at the same time donors are being exploited and inducements are being offered, which is exactly what the ban and its advocates seek to avoid. This situation is clearly the worst of all possible worlds.

What startled me most in reading about this were the views of those opposed to allowing women to sell their own eggs. For instance, this comment by Dr David King, Director of Human Genetics Alert that; "Ethically, it's wrong to make part of the human body a commodity... The body should not be part of commerce."

I fundamentally disagree with such a position – and I think the same applies to blood and organs as much as eggs or sperm. If individuals wish to sell their eggs freely, that should be their choice. I would argue that it is fundamentally unethical to deny individuals the freedom to do so. It is also worth observing that even if a market in eggs were created, there is no reason to suppose that some women would not choose to donate eggs charitably.

There are many other activities which, by prohibiting free markets, governments deny us the rights to use our bodies as we see fit - narcotics, smoking, prostitution and others. Such prohibitions not only invariably fail but they also create opportunities for criminals and harm the most vulnerable, thereby necessitating more government intervention in the form of law enforcement as John Meadowcroft’s excellent book Prohibitions shows (On this topic there is a chapter by Mark Cherry addressing the specific issue of organs).

But there is an even more fundamental issue at stake. By denying the ability to use our bodies in the way in which we see fit the state is denying us property rights over our bodies and staking a claim to ownership. A person who does not have ownership over their own body is usually referred to as a slave.


Property rights and the 'Occupy' protest


The 'Occupy' protest around St Paul's Cathedral in London raises interesting questions about the nature of property rights. When a few anti-capitalist activists started pitching their tents on the forecourt of the Cathedral, the first thought of the police was to step in and tell them to move on. But then the Dean of St Pauls, the Rev Dr Giles Fraser, told the police that it was the Cathedral's private property, that the Dean and Chapter approved of the right of people to protest, and that the police should clear off. Which they did.

Since then, however, with 180-odd tents pitched round it and more arriving by the day, the Cathedral has had to close some of its facilities and restrict access to visitors. A bit unfortunate if you happen to be on a once-in-a-lifetime trip to London and you cannot actually experience the magnificent interior of Wren's Masterpiece. And unfortunate if you live or, more probably, work around St Paul's and are inconvenienced with noise and congestion as a result of the protest.

There's also a public health consideration. There is no water or sanitation in the encampment, of course, and St Paul's is not known for its lavish shower and toilet facilities. Plus the fact that, like the years-long encampment on Parliament Square outside the House of Commons, the protest is, well, a bit of an eyesore.

It's a point noted by Milton Friedman nearly 50 years ago in his Capitalism and Freedom that, for all we liberals or libertarians believe in property rights, the ownership of property does not necessarily allow people to do anything they like with it. He asks, for example:

Does my having title to land, for example, and my freedom to use my property as I wish, permit me to deny to someone else the right to fly over my land in his airplane? Or does his right to use his airplane take precedence? Or does this depend on how high he flies? Or how much noise he makes? Does voluntary exchange require that he pay me for the privilege of flying over my land? Or that I must pay him to refrain from flying over it? Does my having title to land, for example, and my freedom to use my property as I wish, permit me to deny to someone else the right to fly over it?

Friedman's point is that property rights are not indisputable, but are a matter of convention, settled over long periods by public debate, court decisions, and laws. Dr Fraser and the protesters should no more expect to be able to do anything they like on the Cathedral's land than travellers can expect to be permitted to form a settlement at Dale Farm without the same planning permission that everyone else must apply for. The forecourt of St Paul's Cathedral is, in an important sense, as much public property as it is private.

I'm all in favour of people being allowed to protest – the last government's blanket ban on demonstrations within a kilometre of the House of Commons was an absolute outrage – but I'm not in favour of allowing people permanently to occupy public space, or even private space if it has adverse effects on the public. If we were looking for a new convention, the easiest might be a 24-hour rule: demonstrations on public land, or on private land that might impact the public, are OK as long as they pack up the next day. Then at least we, the public, might be able to reclaim what is supposed to be ours, instead of having to endure permanent eyesores around our main tourist attractions.


On "compassionate" taxation

It's amazing to me how many people think that voting to have the government give poor people money is compassion. Helping poor and suffering people is compassion. Voting for our government to use guns to give money to help poor and suffering people is immoral self-righteous bullying laziness. People need to be fed, medicated, educated, clothed, and sheltered, and if we're compassionate we'll help them, but you get no moral credit for forcing other people to do what you think is right. There is great joy in helping people, but no joy in doing it at gunpoint.

Penn Jillette


Quote of the day, 20th Oct 2011

It's amazing to me how many people think that voting to have the government give poor people money is compassion. Helping poor and suffering people is compassion. Voting for our government to use guns to give money to help poor and suffering people is immoral self-righteous bullying laziness. People need to be fed, medicated, educated, clothed, and sheltered, and if we're compassionate we'll help them, but you get no moral credit for forcing other people to do what you think is right. There is great joy in helping people, but no joy in doing it at gunpoint.

Penn Jillette


Paying for Localism

Charles Moore makes a good point in The Spectator:

The government is very proud of its commitment to localism, and has fought hard to get its controversial Localism Bill despite numerous objections in the House of Lords. Yet at the same time, it orders another annual freeze of council tax and everyone applauds. If localism is not locally paid for, it is only a game. It reminds one of people who love the ‘self-sufficiency’ of living in tents and foraging for food, but retreat to their comfortable homes whenever it rains.

I agree – the general principle ought to be that each level of government should itself raise the money it spends. When local authorities are just spending bodies, reliant for the most part of the largesse of the central government, they lack accountability. They also face skewed incentives – why should they economize when money is being handed to them by Whitehall? If anything, they’ll want to be as profligate as possible in attempt to justify a bigger grant the following year.

Financial autonomy, or at least something closer to it, would encourage greater fiscal responsibility and more rational policymaking. It ought to be a central part of any localism agenda worth the name. How exactly you do it is open to debate. Some favour greater reliance of property taxes, while others advocate a local sales tax. Personally, I think the best approach would be to cut every national income tax rate by six or seven percent, and then let councils set their own flat rate income tax.

The beauty of that approach is that it would introduce domestic tax competition where it is needed most. Councils who set lower taxes rates might attract more residents and see revenues rise, which would encourage other councils to follow their example or else risk losing out. At last, then, there might then be some countervailing pressure on income tax rates – which would be a very good thing indeed.


The unintended consequences of socialist architecture

An article in Planning in London makes a fascinating point about this summer’s London riots:

It has been suggested by others that there is a link between riot locations and the nearby presence of social housing. We think this can be more accurately defined.

Hillier’s earlier work suggests that the proximity of riot activity to large post-war housing estates may not be the result of social housing in itself but the type of social housing: most post-war estates have been designed in such a way that they create over-complex, and as a result, under-used spaces. These spaces are populated by large groups of unsupervised children and teenagers, where peer socialisation can occur between them without the influence of adults. This pattern of activity, and the segregation of user groups, is not found in non-estate street networks.

The trouble with so much architecture from the post-war period is that the state was the client – architects designed housing projects with little or no concern for the people who would actually live in them. The design of housing estates did not reflect the way people lived, worked and played. Rather, it reflected a utopian socialist ideology which central planners wished to impose upon them. Of course, that attempt failed miserably.

Opposition to post-war architecture tends to focus on aesthetic concerns. And, certainly, much of it is appalling ugly, almost to the point that merely looking at it fills you with despair. But its mostly deeply pernicious effect is surely the way in which it has affected people’s behaviour, by forcing them to live in an environment which is cold, desolate and practically inhuman. Naturally, I am not suggesting that post-war architecture caused the riots. But the idea that it was a contributory factor certainly has the ring of truth about it.

Incidentally, the picture I’ve used here is not actually from a post-war London housing estate. It is a photo of the Vele di Scampia estate near Naples, which was the setting for the stunning, shocking film Gomorrah. If you’re sceptical about the social consequences of bad architecture, I’d challenge you to watch that film and, bearing in mind that it is based on real events, ask yourself whether many of the things depicted would be possible in a traditional street layout. For me, it’s a shining example of brutalist by name, brutal by nature.