Nobel economic prize for Elinor Ostrom and Oliver Williamson

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Nobel economists' work on common ownership shows that markets, not distant governments, manage things better.

For the first time, the Nobel economics prize has gone to a woman, Elinor Ostrom of Indiana University. She shares it with colleague Oliver Williamson.

Much more significant, however, is what the pair have to say about the management of resources, particularly resources that are owned in common, like forests, parks and fisheries. The bottom line is that they show these things are much better managed by the people who use them, than by some distant owner – particularly distant government owners.

One of the things the pair studied, for example, was the case of the Maine lobster fishing families, who brought in their own system of tradeable quotas. It meant that market principles were brought to bear on the exploitation – and protection – of this natural resource. Iceland's trawler industry also derived great benefit from the system of individual transferable quotas designed by my free-market friend Hannes Gissuarson.

Of course, the BBC and friends will stress that the new laureates also say that commons resources don't need to be privatized to be well managed. That is true. But at the moment, many commons resources are squarely in the hands of governments – meaning bureaucrats – who are very far removed from the actual concerns of the users and local residents, and wouldn't know a market principle if it bit them. If privatization merely hands the resource to some new absentee landlord, it will do not good at all. But privatization can be a good way to get the resources out of these bureaucratic hands, and into the hands of those who care about them and – if the right incentives are put in place – will protect and manage them. I have no doubt that we should sell the Forestry Commission's plantations in Scotland and Wales, for example, to local people. There may be implications in this for all sorts of other areas – such as whether we can simply let people who own historic houses get on and care for them in their own way, or whether every new window pane has to be approved by English Heritage or some other quango. As with so many things, perhaps it's time to clear out the quangos and trust the people again.

Dr Butler's book The Rotten State of Britain is now in paperback.

Agriculture’s new electronic bandwagon

I agree that it would be good for rural communities to have access to broadband internet and it could be a useful commercial tool for them – not least to generate more competition in the rural supply chain. But there are two important issues here, one economic, and one technical. The economic one is that a group of rent-seekers has found a pork barrel they believe can feed off at the expense of other taxpayers. They are seeking a subsidy. They shouldn’t, they will end up beholden to other parties for a key tool of their business, losing some more of their commercial freedom in the process. They need to pay for this service themselves, perhaps at a premium, but it will be theirs to make gains from and it will also upgrade itself to their advantage through time through their sovereignty as consumers.

The technical issue is that broadband, as presently delivered, is a “cludge". ADSL uses copper wire technology, raising the voltage and data frequency/capacity of existing wires that are in most places very old. That’s why broadband is faster when you are nearer to your local telephone exchange. If you live in a distant place you need to wait until a locally situated sub-exchange exists with an optical fibre connection. That puts you near to your exchange like everyone else with broadband.

But think about it, putting this technology into rural areas is a civil engineering issue, digging trenches, running cables, building small huts with optical amplifiers in remote valleys. There is almost nothing that government is slower or less efficient at as agreeing where to place infrastructure. Planning, agreeing a plan, funding a plan, clearing a plan through Local Authority Planning takes for ever. That’s why some rural communities have actually taken to digging their own trenches to bring optical fibre nearer (privatization has allowed you to hook third party fibre into BT’s networks thank goodness).

During “for ever" there are other technologies that will be ready with a far faster installation track; broadband wireless, broadband satellite, broadband via the power grid to name three. Rural communities would be far better asking the government to get out of the way, lobbying private entities (or creating their own Rural Broadband Corporations) to get a price, a contract and a timescale for their own broadband. They’d pay a bit more, but they would get an early service, with proper upgrades and wouldn’t be beholden to others because of an unjust begging bowl.

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A new bandwagon is being loaded up by a familiar cohort of rent-seekers – this time on behalf of the rural communities without access to broadband internet. Climbing aboard after an initial rousing by the Prince of Wales are the Commission on Rural Communities, the Telegraph newspaper and other worthies from the shires.

Their claim is odd. The internet has become so important to doing business in rural areas, especially for farmers, they say, that not having it is seriously disadvantaging them. The first oddity is that if any service really is of critical importance, businesses usually pay over the odds for it to make sure they get it delivered. The second oddity is that farming is a controlled, essentially nationalised, industry in which the need for the internet is being imposed by government regulations. The disadvantage is not a competitive one, it’s a bureaucratic one. Having created more regulating bureaucrats to monitor farming practices than there are farmers, an unanticipated consequence is that these clerks need to communicate with their clients. On-line methods are cheaper than driving a post van with mail to them, so government is enforcing on-line methods of servicing the industry. It’s their very own version of “any colour as long as it’s black". (Note to HMG – Ford’s now come in all shapes and colours.)

Mission creep for the bandwagon is already happening; “rural traders" are also affected, and rurally based specialist on-line food businesses. Well, just a minute, if you are a specialist on-line food business shouldn’t you have thought about your on-line access before you started? And isn’t there a way around the problem, Britain is not a big country; a decent internet connection can’t be more than twenty miles away almost everywhere. These businesses are not sending their cheeses through the wires of the web, they’re taking orders that way and I doubt next day delivery is absolutely essential. Putting your administration where there is a connection and your production in the hills can’t be that complicated. Get real, you’re deep in the country, you’re in business, adapt.

[CLICK HERE TO READ ON]

Britain's financial crisis was 100% home grown

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One year on from the part-nationalizations of Lloyds-HBOS and RBS, a new ASI report by John Redwood MP has pinned the blame for the financial crisis squarely on the government and the Bank of England.
 
In Credit Crunch: The Anatomy of a Crisis, published this week, Redwood attacks the notion that the UK economy was well run, and that its problems were imported from the US. He blames bad monetary policy from the Bank of England, bad regulation from the Financial Services Authority, and bad fiscal policy and crisis management by the British government for the severity of the crash. Britain's crisis may have had much in common with America's, Redwood says, but it was very much home grown.

Britain's fake boom
The report traces the roots of the banking crisis to the "false boom" of 2001-2007. A boom fuelled by ultra low interest rates, lax credit controls, and an explosion of lending, rather than real, sustainable growth. These economic conditions encouraged banks, like Northern Rock, to pursue an aggressive growth strategy based on selling securitized mortgages and borrowing short-term from the money markets to finance new lending. As well as driving a house price bubble, this approach sowed the seeds of later disaster.
 
Blame the Bank of England
The Monetary Policy Committee of the Bank of England must take a major share of the blame for the crash. Redwood explains that having first kept interest rates too low for too long, it then raised them too far and too fast in 2007. They starved the money markets of cash and triggered the first phase of the financial crisis, as Bradford & Bingley, Alliance & Leicester and HBOS had to be bailed out, and Northern Rock, ultimately, nationalized. Incredibly, Redwood points out, in the year that followed the run on Northern Rock, the Bank of England acted as though nothing serious had happened, keeping interest rates relatively high when they should have been cutting them.

The government got it wrong
The report argues that the worst policy mistake of the crisis was the government's. In autumn 2008, just as world markets were showing serious signs of strain, they suddenly decided to insist that the banks hold more cash and capital than they had required during the boom years. As Redwood points out:

"That was the worst possible moment to make such a request, and the worst possible thing to do when markets needed reassurance from the authorities that the banks would survive. As soon as the regulators' demands became public, confidence in the major financial institutions was undermined, and RBS and Lloyds-HBOS were forced into semi-nationalization, at huge taxpayer risk."

Reforming Britain's banks
The result of this disastrous intervention, Redwood says, is that Britain has been left with a banking sector with too few competitors and too many weak balance sheets. He argues that the prime task facing the next government will be to remodel the state owned banks, splitting them up into smaller institutions to encourage domestic competition, and return them to the private sector as soon as possible. The report also suggests that banking regulation should be returned to the Bank of England, who would in future focus on the 'big picture' and set counter-cyclical cash and capital reserve requirements for the banks.

Click here to read the report.

David Wiletts and student fees

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Tory David Willetts could raise student fees to £7000. It's not enough.

The Conservative Shadow Minister for universities, David Wiletts, said that he would consider demands to raise the annual fees charged by universities fo £7,000, roughly twice the current levels. That's a step in the right direction. People complain about students leaving university with debts of £20,000 and suchlike – but the fact is that a university education can raise their future earning potential by much more than that, so it's still a really great deal.

If the universities had to balance their own books and pay for themselves instead of taxpayers handing them cash, their fees would have to be a lot higher than that, though. ASI Fellow Terence Kealey, himself the head of Buckingham University, reckons that £15,000-£20,000 would be nearer the mark – comparable to the fees in top US universities.

The public interest argument is that we don't want bright but poor students to be discouraged from going into higher education. Quite right. But the US universities solve that by accepting students only on the basis of merit, then having endowment funds to pay the fees for those who can't afford them. It's a very sensible sort of arrangement, and we should strive to have it in the UK. But I'm skeptical of the argument that the taxpayer should subsidize the universities because the country needs lots of graduates. The main benefit of a university education goes to the students themselves, and not to the general public. So the students should pay most of the cost – the real cost. A loan system is a good way to make that manageable for them. But it is right that people should look at the costs and benefits of higher education and decide on the basis of the realities – not on the basis of subsidized prices. That would be a more rational allocation of taxpayer funds, and better for the students themselves.

Dr Butler's book The Rotten State of Britain is now in paperback.

Police use child abuse tapes for PR

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Police have released interview tapes of child abuser Vanessa George. That should worry us all.

Justice is flouted so routinely these days that you may feel they can't do anything more to shock us. And then this happens. Nursery worker Vanessa George,39, has been found guilty of abusing young children at the nursery where she worked. Given that anyone who comes within 100 yards of a child these days has to go through Criminal Records Bureau checks, you might wonder how that can happen. Well, the system seems to be wrecking scout groups, schools and after-hours clubs, who have seen a bit drop in parents volunteering to help out – innocent parents who simply can't bear the intrusion of a CRB investigation – though it doesn't seem to stop the real abusers.

Maybe, as with the Soham murders, it was just police incompetence. But even that is not the real shocker. Really shocking is that the police interview tapes with Vanessa George have been released to the BBC and are now all over the internet.

Police interview tapes came in for one reason alone. There were so many cases of defendants pleading that they had been bullied into confessions by police questioning that, to protect the public against any possibility of police abuse, it was ruled that all police interviews should be taped. It would also ensure that what appeared as evidence in court was properly extracted and did actually correspond to what a defendant said.

Now interviews are conducted on video, not just audio. A relief to innocent people who are accused of things they didn't do, you might think. Until you find that the police are releasing your tapes to the BBC, as they did in this case – complete, of course, with their own commentary: "She clearly knows what she did was wrong..." and "She was still trying to manipulate the situation..." etc etc. Yes, she's guilty, yes, she's going to jail, and good thing too. But the duty of the police is to prosecute cases, not to put their own spin on them. Something brought in to protect the public is now being used for police PR.

It's truly amazing. How are the police going to get anyone to confess to anything if they imagine that edited snippets of their tapes are going to be splattered all over the BBC and the internet? I've often said that if you are arrested by the police, the best thing to do is to say absolutely nothing. Yes, they will hold you as long as they can out of spite, but at least you won't be set up, and the BBC won't be playing tapes of you saying something unfortunate for the next twenty years. Just because Vanessa George has been found guilty doesn't make it any better. Today it's tapes of guilty people. Soon it will be tapes of anyone they pull in, plus commentary, if they figure that a bit of public outrage might help the case against them. You might think the rules of natural justice mean that could not possibly happen. But seeing how far our liberties have been eroded, it's surely only a matter of time.

Dr Butler's book The Rotten State of Britain is now in paperback.

Charisma or control?

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A very insightful Times piece by Roger Mavity of Conran holdings observes that a successful business needs two types of person. There is the charismatic CEO, and the number-crunching Finance Officer. They have different roles, and are different personality types. The guy (or gal) with the imagination and drive that can fire people up is what drives creativity and innovation, whereas the more sober accounting type is there to cut the cloth and control costs.

"One of the classic mistakes in business," says Mavity, "is to promote the finance director to chief executive — leadership by charisma is exchanged for leadership by control." This is, he thinks, what has happened to the Labour government. The imaginative inspiring CEO (Tony Bair) has been replaced by the control-obsessed Finance Director (Gordon Brown), and the result is stagnation and lack of leadership.

On a wider scale, Mavity identifies a more general problem for Britain. We have become obsessed with numbers. Teachers waste their time filling in forms about targets, instead of inspiring children with a love of learning. Everywhere from hospitals to business offices we are driven by targets and numbers, the stuff of control. All too lacking, he says, are the imagination and flair which can lead to innovation and achievement.

"But all too often," he says, "our ingenuity and our sense of adventure gets slowed down by the box tickers, the people who can’t have an opinion until a focus group has had it for them, the people who won’t ever take a risk they don’t have to." He cites Charles Saatchi, James Dyson, Terence Conran and iPod designer Jonathan Ive as people who broke the mould and dared to take risks and let their imagination run. There are all too few of them, he says, and as the box-tickers take over, our world is the poorer for it.

Check out Dr Madsen Pirie's new book, "101 Great Philosophers."

Europe is lagging behind

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Europe is on the right track to becoming the largest re-agriculturialized region in the world. Whilst all other regions tend to use more and more resources on research and development (R&D), the European Union continues to subsidize wine production and agricultural export instead of making it profitable to invest in future wealth.

The OECD has recently publicized a report expressing concern about the investments made in the EU in the field of R&D. Likewise, the European Commission has also expressed concern that the EU region will not reach the goal of using 3 % of GDP on R&D in 2010. Both the US, China and Japan are currently investing more money in future development than the European countries, even though the EU countries make up the world’s largest economy.

The combined investments made in the EU region equals 1.8 % of total GDP, in comparison the expenses used on subsidizing wine and butter, adds up to 0.6 % of EU GDP. Right now every European Citizen is using about £90 a year to enable European farmers to sell goods in developing countries at prices that cannot be matched by local farmers, forcing them to rely on aid from European countries... The safe way of ensuring jobs for bureaucrats.

What could then be done to increase the wealth of EU citizens in the long as well as the short run? In the first place, the EU countries could choose to use the agriculture subsidies on corporate tax reliefs encouraging investments in R&D. This would leave the EU region using 2.4 % of total GDP on actual improvement. An increase like this would mean that the EU region would spend $298 billion on R&D compared to the US’s $344 billion. Secondly the EU could stop taxing agricultural import from developing countries, leaving these economies with a fair chance of self-propelled economic development as well as securing cheap agricultural goods to EU citizens. Last but not least we would save the costs of unnecessary bureaucracy, since we wouldn’t need to send nearly as much development aid to developing countries in view of the fact that they would be better off as a result of free markets.

What has Obama done for peace?

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Plenty has already been written on why Barack Obama didn't really deserve to win the Nobel peace prize, and in general I agree with it. But one thing that bothers me – and I'll confess here that my views on foreign policy are strongly non-interventionist – is that people seem to be labouring under the delusion that Obama is some kind of pacifist. He isn't. Sure, he rose to fame and political fortune as an opponent of the Iraq war. And yes, he did initially promise to withdraw American troops from Iraq and close Guantanamo Bay as soon as he became president. But he hasn't done those things.

As Cato's Jason Kuznicki points out, the withdrawal from Iraq has been delayed and partial, and is now described by the White House as "complicated". Meanwhile, the Bush administration's policies on detention and rendition have remained largely intact. Obama might have railed against the executive powers the Bush administration invented for itself when he was a presidential candidate, but now he's in the Oval Office he seems to like them. It is also worth noting that Obama is considering sending 60,000 additional troops to Afghanistan, to fight a war with unclear objectives and little real prospect of success. Again, that hardly strikes me as a peaceful act.

Of course, you can't really blame the Nobel prize committee for not realizing Obama wouldn't stick to his promises, can you? After all, he had only been president for 12 days when nominations closed.

The weakest link

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Britain’s political establishment is indeed its weakest link, with insufficient collective self-control to take decisions that are truly in the public interest. No wonder we are in such a mess. We should never forget that while capitalists and free markets are far from perfect, politicians and regulators tend to be much worse. Our self-interested and all too human political class is as far from the ideal of the Platonic Guardian as it is possible to imagine.

Allister Heath 'Expenses scandal latest blow for sterling' City AM.