Why greed is good


FSA chief Lord Turner, interviewed recently in Prospect magazine, calls much of the banking industry “socially useless", attacking its “excessive activity and profits." The City’s response to these criticisms has been sensible, but bankers have been afraid to make explicit the crucial counterargument: that making money is, in itself, socially useful.

The argument is so simple as to be trivial: firms, provided they are subject to laws preventing theft and violence, can only gain revenue by selling things that people want; they can only make a profit if they sell these things for more than they cost to produce; and in the process of production they employ people who prefer that job to any other they could find. That is, profit-making firms create wealth (in the broadest sense of the word) for their customers, owners, and employees. They take wealth from no-one.

Turner talks vaguely of the banks failing to be ‘socially useful’. The truth is this: any industry that makes money is ‘socially useful’, in the very concrete sense that it makes all those involved better off. Banks made enormous amounts of money over the last decade because they promised something extremely useful: the efficient distribution of capital and risk. The wealth they created was found in the share prices and dividends of banks, the welfare of their customers, the pockets of their employees, and the coffers of the exchequer.

This is not to say that the usefulness of an activity should be judged solely by the profit it makes, nor that people never behave recklessly and make costly mistakes. It’s true that bankers’ remuneration packages were ill-designed, some financial instruments were poorly understood, and the financial sector grew larger than proved to be viable. But the problem with the banks was not that they sought income, nor that they made profits, but that they made poor decisions, and eventually suffered huge losses. In regulating the banks, the government will make a huge mistake if it sees profits as the enemy rather than the goal. The government should ignore Turner’s suggestion to “reduce the size of [the banking] sector or apply special taxes to its pre-remuneration profit," and instead allow it to seek profit, through intelligent regulation, disposal of nationalised firms, and minimal taxation.

The desire to generate profit has long driven men and women to find mutually beneficial trades, to innovate, to compete, to generate wealth and to better the lot of society. We must harness this desire, not constrain it. “The point is," in the memorable words of Gordon Gekko, “that greed -- for lack of a better word -- is good." This fact lies at the heart of capitalist society, its truth is evidenced by our prosperity, and we must not shy away from defending it in these difficult times.

Regulating pay: A step backwards


With the recent economic recession many governments have taken it upon themselves to rescue private businesses, pumping them full of taxpayer money. Governments around the world have decided that it would be best to save companies that could not survive in a free market system and in so doing they have intensified the economic uncertainty in the market. Almost immediately, the government starting capping CEO pay, and regulating bonuses, to protect taxpayer’s money that should not have been there to begin with.

The problem is that without incentives to perform, a high-quality CEO will leave to a company that can afford to pay him more. If a failing business is not able to attract superior management to itself by paying more then it will most certainly continue on its path towards complete failure. The government should mind a lesson practiced regularly in the world of sports.

According to Sports Business Daily the average annual salary for a football coach in the National Football League in America was just under $3 million with only 13 coaches making less than the average. The interesting point is that of the 13 coaches that make less than the average only 1 has ever made it to the Superbowl. In college sports the story is not much different; according to the NCAA the average salary for football coaches has increased to over $1 a year and bonuses for winning a single game can reach as high as $450,000. No one would argue the fact that coaches indeed make a difference on how well a team performs, and clearly the best coaches are paid the most. The government doesn’t attempt to cap coaches’ salaries in publicly funded universities because they understand that a coach that can win will fill the stadiums and gain a profit for the University. The same is true in the world of business.

According to an article published in the Journal of Managerial Finance titled CEO Pay and Company Performance authors Kevin J. Sigler and Joseph P. Haley found, “a positive and significant connection between the pay of CEOs and the performance of their respective firms."  They further stated, “From our results it appears that CEO pay is used to align the interests of shareholders with company CEOs, reducing agency costs within the firm." Those in charge of determining CEO pay are those that have the most to lose, the shareholders. Deciding how much to pay a CEO is a simple matter of economic trade-off between compensation and expected performance.

Just as I assume the lowest paid coach will likely not have a good season, I also assume a low paid CEO will not bring in a large profit margin. Incentives to perform need not be tampered with if the government would keep out of private business. Let any company pay its CEO however much they desire, and if it doesn’t work out then let the company go under. The best way to regulate CEO pay is to allow the free market to punish and reward decisions by shareholders on the matter.

Spencer Aland joins the ASI


I am delighted to become a part of an institution as prestigious as the Adam Smith Institute. As a student of both Economics and Political Science at Brigham Young University I have gained great respect for the man whose name this great institution bears and also for the timeless principles he introduced to us so long ago. Adam Smith left us with more than a new way of looking at the world; he left us the key to understanding the remarkable order of things in what was previously seen as chaos.

The problem that many politicians and institutions find themselves in today is that they feel as if they have progressed ahead of classical economic theory. They act as if the laws that have governed economic principles since the dawn of man no longer apply to them. Is this a result of arrogance or of simply ignorance? I would argue for the later. The laws of economics are being ignored in this generation and we can see the punishment that the invisible hand can deal to us if disregarded or coerced. The economic future of the world depends on the ability of our leaders to back off the free markets, and yet they insistently continue to attempt to micromanage in a loosing battle. The market has indeed turned to chaos, but we are the cause and not traditional economic thought.

I a big fan of American Football and enjoy a good round of golf when the weather is right. I enjoy travelling and being around friends and family as often as possible.

Credit crunch reality


America will beat this crisis and emerge as an economic powerhouse once more. Politicians and policy-makers will rush to claim credit. But the US recovery, when it comes, will be driven by the grit, talent and hard work of ordinary American people. It will happen in spite of, not because of, the actions of Bernanke and his ilk.

– Liam Halligan, 'Four more years of Bernanke is a problem, not a solution' Telegraph.co.uk

At last, a truly sensible idea for legislative reform!


Now this idea is originally aimed at those who have banned incandescent light bulbs but I think it could usefully be deployed further:

Here's my modest proposal to determine whether the legislation actually serves people. Satisfy the proposed power limits in all public buildings, from museums, houses of worship and hospitals to the White House and the homes of all elected officials. Of course, this will include replacing all incandescents with CFLs. At the end of 18 months, we would check to be certain that the former lighting had not been reinstalled, and survey all users to determine satisfaction with the resulting lighting. Based on the data collected, the Energy Independence and Security Act and energy legislation still in Congress would be amended to conform to the results of the test.

Yes, I like it, I like it a lot. Let legislators pay higher taxes for 18 months before the rest of us have our money taken from us. Insist that the SNP does without sealskin sporrans for a year and half before we have to. If fuel duty is to rise then let them pay it before we do: perhaps using some complicated voucher scheme at each and every petrol station so we can identify the scoundrels and thus pelt them.

If children are to be randomly assigned to schools by lottery, then all the children of the educational bureaucracy will be so assigned in the test period: that's every civil servant at the centre, of every councillor enacting it, every child of even a cleaner for a Local Education Authority and most definitely the young Cooper/Balls.

If climate change requires less use of cars and more of public transport then Ministers should be the first: abolish their cars and drivers perk.

Finally, if everything is to be powered by windmills then insist that the entire governmental apparatus do so first for 18 months. What with their chilblains, incipient pneumonia and the sputtering candles they'll have to work by that'll be a year and a half when we are entirely free from their bright ideas and ministrations.

Yes, an excellent idea and I thoroughly recommend it to the House.

Reform the ONS


Having spent the last week trying to come up with accurate statistics on the public sector, I can confidently state that the online information available from the Office for National Statistics (ONS) is a mess.

Information is hidden in tables that cannot be easily found and when it is finally dug up it is not in a logical format and incomplete without explanation of why this is so. It should not take hours to get access to the number of people employed in the public sector. Upon my inability to find some bssic statistics on public sector pay I sent them an email; despite the prompt reply it was to a page that did not work. I have put in another request and have yet to hear back from them; even if they do get back to me, I don’t expect much help from them.

This failure to provide information in a digestible form is a long way from the model of open government that politicians are so keen to promote. The lack of maneuverability on the website is indicative of all government despite its obsession and waste on new technology. We do not need the policy analysis present in the ONS publications, just the statistics with background information on their collection. Outsiders can do the policy analysis.

Apart from the core functions – measuring the National Accounts, the census, Consumer Prices index (CPI) and the Retail Prices Index (RPI) – most of the statistics are not useful. The ONS needs fundamental reform in order to meet the informational demands of the 21st century. We deserve value for the £1.2 billion we are spending from 2007 to 2012.

The statistics need to be available in easily searchable and comparable formats. The US are doing slightly better with www.usaspending.gov, but it is perversely obsessed with graphics and performance metrics and is remarkably costly. Instead we just need clear and consistent facts.

Perhaps though this is all too much to ask. After all, an understanding of public choice theory suggests that it is not in the government’s interest: “crafty governments use artful marketing to create fiscal illusion--a false picture--to hide from taxpayers how much they pay, where the money goes and what the true long-term costs will be."

Incentives matter


Famine stalks Ethiopia once again:

The spectre of famine has returned to the Horn of Africa nearly a quarter of a century after the world's pop stars gathered to banish it at Live Aid, raising £150m for relief efforts in 1985. Millions of impoverished Ethiopians face the threat of malnutrition and possibly starvation this winter in what is shaping up to be the country's worst food crisis for decades.

Yes, of course we should buy food and feed it to the starving. It's difficult to think of any system of morals worthy of being called such that would deny them that or us that duty. However, while we go looking down the back of the couch for that spare change which will keep our fellow human beings alive, it's still worth pondering why this keeps on happening.

Land ownership is another important election issue. The opposition believes the best way to fight poverty is ending the state's ownership of all land, and argues farmers must be free to buy and sell property and develop wealth. The government insists the state must own land, arguing it gives more security to farmers.

Yes, all land is State owned. There is no incentive for a farmer to invest in improving the productivity of his land for it simply ain't his land. In more detail, Meles Zenawi, the Ethiopian Prime Minister:

Now we have, as I am sure all of you know, rejected the concept of changing land into a commodity in Ethiopia. We feel that this choice in our context is not economically rational. That is why we don’t accept it. Why do we think it is not economically rational? By fully privatizing land ownership, one starts the process of differentiation. The creative, vigorous peasant farmer gets to own larger pieces of land and the less effective get to be left to live in doubt.

He then goes on to reject this and insist that as they have lots of peasants thus they should have lots of peasant farms. Oh, and, while the land is held by the peasant "in perpetuity" the government still reserves the right to reallocate at any time. So it's not actually in perpetuity and of course as it cannot be owned privately it cannot be used as security for a loan to improve its productivity.

Until those incentives are sorted out Ethiopia is condemned to have repetetive famines, sadly.

Just for a little further illumination, Zenawi, after a couple of years medical studies, joined the "Marxist Leninist League of Tigray" where he presumably got his education in economics. The MLLT were Hoxaist. That is, the people who thought that Joe Stalin had actually got it right on agriculture.

Which, if you want to starve the peasantry, is probably correct.