Dinner with Sir John Major

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Sir John Major was guest of honour at an Adam Smith Institute dinner at St Stephen's Club in Westminster. Sir John has done a great deal of travelling since he left the Commons, and has seen the tremendous advances made by India and China, and by some Middle East countries. His remarks on the world's probable future development and Britain's place in it were thus extremely well-informed.

He stressed in particular the importance which the rapidly-developing countries are giving to education, and the urgency of ensuring that in the UK, too, education is accorded the importance it needs to secure Britain a place in the forefront of research, development, and economic expansion.

Sir John's speech was a tour de force, showing complete mastery of his subject, and he contributed both eloquence and insight to the lively question and answer session that followed his remarks.

Tobin Tax or bankrupcy

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During the G20 finance ministers meeting in St. Andrews, the British Prime Minister addressed the G20 countries to implement a worldwide tax on financial transactions. Gordon Brown's argued for the imposition of a multi-billion pound tax on international transactions is to get "a better economic and social contract to reflect the global responsibilities of financial institutions to society''. In short to make banks socially responsible, and urge them not to take unnecessary risks.

Wouldn’t it be better if risk calculations in banks were based on the risk of going bankrupt instead of those imposed by government intervention and regulation? Unfortunately, Gordon Brown himself has played an active role in removing this part of the risk calculation by using taxpayer money to bail out the banks.

Gordon Brown has said that the UK would not act on its own and implement the Tobin tax without a global agreement. This is no brainer for most of them. US Treasury Secretary Timothy Geithner has turned down the Prime Minister's irresistible offer. No surprises there.

Line in the Sand

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There has been much discussion of David Cameron's proposal to enact a law requiring a UK referendum before any new European treaties can take effect. Obviously there must be also be some repatriation of powers from Brussels in areas where we feel our sovereignty is unnecessarily and unacceptably compromised, and the proposed law will do nothing to achieve that. But there are three vital areas which the Cameron law will protect from future encroachment.

There will be no unified European foreign policy without a new, post-Lisbon treaty. There will be no unified European army under European command. And there will be no Europe-wide system of taxation decided in Brussels and levied equally across the EU. Any of these would require a new treaty, and such a treaty would require UK citizens to assent to it in a referendum.

The point is that there are European politicians with such ambitions, people who want to turn the EU into a unified super-state to match the continental scale of the US and Russia. This is one reason behind the almost hysterical abuse heaped on the proposal by some European ministers. They have spotted, correctly, that it will put a permanent limit on their centralizing ambitions.

Much of Europe's progress towards "ever closer union" has been achieved, often by stealth, by the political class of Europe over and against the wishes of ordinary citizens of European countries. That will change once the new bill is passed, enfranchising British voters by giving them a direct say in any future moves. While the proposed law will not solve the problem of present and previous European intrusion into affairs that can and should be decided in Britain, it will draw a line in the sand, making it difficult for more UK sovereignty to be lost without the direct consent of its citizens.

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

Big Brother is in your home

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All telecoms companies and internet service providers will shortly be required by law to keep a record of every customer's personal communications. This all inclusive ‘Big Brother’ system will record phone calls, emails, text messages, and even the links clicked on the internet, all stored for at least a year under government control. According to government officials this type of surveillance is absolutely critical in combating terrorism and hardened crimes.

This is the same kind of rhetoric that was given when CCTV was installed up and sown the country. However, according to the London Police Chiefs less than 3% of crimes were solved with the assistance of CCTV in 2008, even though the number of CCTV cameras in England had reached 4,200,000 in the year 2002. The most fitting use for CCTV has proved to be in discovering which parents lied about where they lived in order to enroll their children in better schools and who is not disposing of their rubbish properly. CCTV is conceivably the best example of a tool implemented to fight crime that quickly turned into a mechanism for domestic control, even going as far as attempting to install them in school toilets.

This new program, no matter how good the intentions, will only add to the already out of control invasions of privacy in this country. Chris Grayling, shadow home secretary has said he has fears about the abuse of the data:

The big danger in all of this is 'mission creep'. This Government keeps on introducing new powers to tackle terrorism and organised crime which end up being used for completely different purposes. We have to stop that from happening.

Grayling is simply pointing out the obvious. The government has repeatedly used programs such as this against its own citizenry without regard for personal privacy, claiming that only tguilty have anything to fear. The crusial question though is at what point do law abiding citizens need to start fearing their own government? If monitoring your private phone calls and emails without a warrant, and without permission from a judge, isn’t enough then what is? I doubt that people would tolerate CCTV in their own homes, but the difference between allowing cameras in our homes and this new program seems to be minuscule at best.

Spencer Aland blogs regularly here.

Climate change hijack

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On the day that the world remembered and celebrated the fall of the Berlin wall, Mikhail Gorbachev wrote in The Times reflecting on the magnitude of the event. Dwelling on the historical crossroads we faced before the fall of the wall, he claimed in the that “climate change is the new wall that divides us from our future", insisting that a paradigm shift is needed to deal with it.

Gorbachev’s enthusiasm for targeted worldwide action isn’t based purely on his fear of melting icecaps. He claims that “world citizens are demanding that action is taken to tackle climate change and redress the deep injustices that surround it", and that a “breakthrough in our values and priorities is needed". Once more, the concept of global warming has been hijacked by those with an ulterior motive. For Gorbachev, addressing climate change is a convenient vehicle for the politics of social equality and communitarian values. It is sad to see Gorbachev using the fall of the wall – a symbol of economic and political freedom – to encourage increased government regulation and restriction.

Those with a particular political outlook have long used climate change as an excuse to peddle their own interests, using apocalyptic visions of a charred earth caused by our own selfishness and greed, in order to radically change our way of life and forfeit economic progress. Politicians of all stripes also use the global warming hype to bolster their standing amongst the public, and more damagingly, increase government control of the economy through regulations, taxes and subsidies.

Climate change, if a problem, will require scientific solutions. As such, it will need to be dealt with through schemes such as large-scale geo-engineering projects. It has no political or moral solution. In his article, Gorbachev states that “There is the wall between those who heed the scientific evidence, and those who pander to vested interests." It is ironic that it is often those proclaiming the severity of climate change that possess the most ulterior motives.

Goodbye rational expectations

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Roman Frydman and Michael D. Goldberg, the authors of "Imperfect Knowledge Economics: Exchange Rates and Risk," have a well-argued piece in the Times that amounts to a full-frontal attack on the Rational Expectations Hypothesis (REH) that underlies much of mathematical economics. Their claim is that flawed theories of market 'efficiency' and 'rationality' have led economics and policy astray with recent disastrous results.

Although 'rationality' in common parlance is a synonym for 'reasonableness,' many economists take a rational individual to be "someone who behaves in accordance with a mathematical model of individual decision-making that economists have agreed to call rational."

The centrepiece of this standard of rationality, the so-called Rational Expectations Hypothesis (REH), presumes that economists can model exactly how rational individuals comprehend the future.

In effect, REH-based models make markets unnecessary because they use equations rather than adaptive learning to predict outcomes. Yet Hayek has shown how markets can contain in dispersed form more information than is accessible to anyone, and Popper has illustrated the impossibility of predicting future knowledge. REH models gloss over these objections as they use their assumptions to 'price' new derivative products and 'predict' outcomes.

Real markets are uncertain. It is not that people are irrational, just that their rationality does not lend itself to mathematical modelling.

Thus, the behavioral view suggests that swings in asset prices serve no useful social function. If the State could somehow eliminate them through massive intervention, or ban irrational players by imposing strong regulatory measures, the “rational" players could reassert their control and markets would return to their normal state of setting prices at their true values.

In fact, say Frydman and Goldberg, asset prices are subject to swings because "participants must cope with ever-imperfect knowledge about the fundamentals that drive prices in the first place."

One of the few good things to come out of the financial crisis is a re-examination of the fundamentals of Austrian Economics. One of them is that value is entirely subjective, residing in the mind of the individual, not in the object contemplated, and that it changes over time and is different between individuals. This is light years away from the REH-based models that have dominated academic economics, and treated it as practically a subset of mathematics. For some years now most academic economists have talked only to each other, describing in ever more detail a fantasy world that never touches reality. If the crisis undermines the heresy of Rational Expectations, at least some good will have come from it.

Dr Madsen Pirie has recently published "101 Great Philosophers."

The powers of the EU superstate

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What exactly are the powers of the European Union, whose Lisbon Treaty has now been fully ratified and will come into force in December? What policy areas is Brussels responsible for, and which are reserved to the Member States?

This is an important question for the UK and its next government, which claims it will repatriate certain powers to Westminster. And yet it is not altogether easy to find the answer.

The reason is that the powers of the EU have expanded far beyond those which most people – viewing the EU as primarily a trade bloc, which also co-ordinates its members’ actions on some necessarily international issues – would expect it to have.

Indeed, if you look at the original Constitutional Treaty (really just the Lisbon Treaty presented in slightly less tortuous and impenetrable language), you will see that the real scope of the EU’s powers is really quite extraordinary.

Brussels has ‘exclusive competence’ on five issues: the customs union, competition rules, monetary policy in the eurozone, conservation of marine biological resources, and commercial policy. Only the EU may legislate in these areas.

Then there are ‘shared competences’, where member states can act, but only if the EU has chosen not to. These include: the internal market, social policy, economic social and territorial cohesion, agriculture and fisheries, the environment, consumer protection, transport, energy, health and safety, and the ‘area of freedom, security and justice’. International aid, research and development and ‘space’ are also shared competences, but in these cases EU action does not exclude member state action.

There are also areas where the EU has competence to carry out ‘supporting, co-ordinating or complementary action’: the protection and improvement of human health, industry, culture, tourism, education, sport, vocational training, civil protection, etc.

Finally, the EU is also meant to make ‘arrangements’ for the co-ordination of member states’ economic and employment policies, and to carry out ‘initiatives’ to ensure the co-ordination of social policies. It is also meant to define and implement a common foreign and security policy, including the ‘progressive framing’ of a common defense policy.

To put it another way: almost nothing is reserved for member states, and the EU may take action in more or less wherever and whenever it pleases. And I'm pretty sure that's not what we signed up for...

It's new business, not business, which is important

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We see various politicians running around and firehosing our money at extant businesses as a way of stopping the recession and there are those who praise such actions. They are those, of course, who have not really quite grapsed what a recession is. It isn't a time when 100% of the people lose 10% of their income: it's when 10% lose 100%. And it isn't particularly a time when more people lose their jobs than normal. It's when fewer of those who do fail to find new ones. For the gales of creative destruction are always roaring through the economy: it's the creating of new businesses and thus new jobs which fails at these times.

According to the Census Bureau, nearly all net job creation in the U.S. since 1980 occurred in firms less than five years old. A Kauffman Foundation report released yesterday shows that as recently as 2007, two-thirds of the jobs created were in such firms. Put more starkly, without new businesses, job creation in the American economy would have been negative for many years.

The US economy is little different from the UK in this regard. The importance of this is that a rising unemployment rate (which is of course simply the balance between those jobs lost and new created rather than an absolute measure of either) is not particularly caused by firms dying, thus our solution is to prop such up. That is always happening and does not always lead to a rising unemployment rate. It is the lack of new companies and organisation providing those new jobs which leads to the rising unemployment rate. Thus, in order to lower it, we should turn our attention not to the old and large companies, but to the small and new.

And there is a simple, no cost, solution to the problems of the small and new. No, not subsidised loans, not government provided capital, rather, an absence of government in crucial parts of the system. The absence of the dead hand of the bureaucracy that stifles their creation. The thousands upon thousands of regulations and laws that state that you may do this, you must fill out that form, you may not do that, do not proceed without authorisation.

Get rid of that and we'll have more small firms created, more expanding, and thus a lower rate of unemployment. All at no cost: you see, sometimes, there really are free lunches.