Rothbard Summer University is coming

The Murray Rothbard Institute and Institute for Economic Studies Europe are this summer holding the Rothbard Summer University, a 5-day seminar in (beautiful) Ghent, Belgium.

The seminar features such prominent lecturers such as Tom Palmer (Atlas Network), Tim Evans (Adam Smith Institute), Adam Martin (King's College London), Lawrence Reed (President of Foundation for Economic Education) and Stephen Davies (Institute for Economic Affairs).

The event is held from 17th to 21st September, scholarships are available and free books distribution will also be organized.

More information can be found on www.rothbard.be/rsu, and any remaining questions should be directed to lode@rothbard.be.

Milton Friedman's objection to immigration

Free market supporters of immigration controls often quote Milton Friedman in support of their position:

There is no doubt that free and open immigration is the right policy in a libertarian state, but in a welfare state it is a different story: the supply of immigrants will become infinite.

On the face of it, this is a powerful argument for restriction. As I’ve noted in the past, whether we like it or not people are dependent on state institutions like the NHS and it would be a bad thing for those things to crumble without the reforms that make market-based alternatives viable.

But are things as clear as they seem? Elsewhere, Friedman also said:

Look, for example, at the obvious, immediate, practical example of illegal Mexican immigration. Now, that Mexican immigration, over the border, is a good thing. It’s a good thing for the illegal immigrants. It’s a good thing for the United States. It’s a good thing for the citizens of the country. But, it’s only good so long as it’s illegal.

I think Friedman vastly overstates his case in his final line (it’s only good if it’s illegal?), and empirically he seems to be mistaken (the fiscal contribution of immigrants is usually positive in general, and has been positive in the UK in particular) but still, let’s take his point as given. Does that make immigration controls the best option?

No. There are ‘keyhole solutions’ we can implement instead – that is, solutions that are specifically designed to address the supposed problems that go with open borders.

We could require that immigrants post bonds priced according to the average cost to the state of someone of their age. We could require immigrants to provide for their own health insurance, unemployment insurance, education, etc. We could restrict the use of the NHS and other state services to immigrants who are working. And so on. The point is that most of the problems associated with immigration are not best solved by restrictions on immigration. Don't use a sledgehammer to crack a nut.

Well, OK, but we are where we are. Those solutions are nice in a think tank fantasy-land, but they’re never going to happen, you might say. (Well, not with that attitude, they're not!) For the sake of argument, what if these keyhole solutions were irrelevant and Friedman was empirically correct?

In that case, his point about illegal immigration being the best kind of immigration – and indeed, a net positive overall – might really be worth thinking about. As Will Wilkinson has argued, people who follow Friedman on immigration should then argue not for restrictive immigration controls, but restrictive immigration laws paired with a toothless Border Agency, or one simply told in practice to ignore these laws. (Much as most decent police officers ignored anti-sodomy laws for some time before those laws were repealed.)

So maybe that’s a Friedmanite ‘keyhole solution’ for people concerned about immigrants sucking the welfare state dry: keep immigration laws the way they are, but shut down the UK Border Agency and treat the laws as the silly anachronisms they are.

Chart of the week: Eurozone inflation not likely to pick up

Summary: EA inflation remains subdued and below target

What the chart shows: The chart shows euro area (EA) inflation, headline, core (excluding food and energy) and trimmed mean (excludes the fastest and slowest changing items) as twelve-month changes.

Why is the chart important: Ultra-low interest rates and loose central bank policies – including ‘money printing’ in a number of countries – have raised concerns that inflation could take off in the near future. While there almost always is an upward pressure on inflation in modern societies, recent inflation developments and broad money trends (which is a key indicator of future inflation) show that there is little or no risk of a near-term surge in inflation. In the year to June, EA inflation remained below the ECB’s target of ‘below but close to 2%’ for a fifth consecutive month. Moreover, excluding the impact of food and energy, inflation has been below target for five years. As long as EA domestic demand remains weak and even for some time after it has picked up (given the slack in the EA economy), inflation will also remain quiescent.

Why Gove is right to back for-profit schools

A report in the Independent based on alleged leaks by Department for Education civil servants suggests that Michael Gove is preparing plans to allow academies and free schools to be run as profit-making institutions, bringing cash into education from hedge funds and venture capitalists. Although many on the left are hostile to the idea of profit-making schools, as they are to profit-making in general, the evidence suggests that Gove is right, and that this could result in the rapid expansion of free schools delivering a high quality education.

It is obviously a good thing when parents, teachers and local businesses work together to establish a free school, and there have already been several examples that point to an extension of educational opportunity as a result. But they only have the motive to do this once and in their own area. Any lessons they learn stay relatively local, and the numbers of such schools set up depends on the availability of capital. The advantage of for-profit schools is that they bring investment. The cash needed to set up a new school is a major hurdle to be climbed, and outside investments helps it to be climbed. Secondly, the lessons learned can be applied to other schools set up in other areas by the same investors. Once there are chains of schools, the successes achieved by each can be extended to the others and built upon. When for-profit investment is allowed, the numbers of new schools will increase dramatically. 

In Sweden, which pioneered free schools and permitted for-profit ones to be established, the free schools are now one in five of the total, and 65% of the independent ones are for-profit schools. Since the mid-90s free school numbers have gone from 122 to 1,091, and parental satisfaction with the for-profit schools there is far higher than it is for the government schools.

The argument that for-profit schools "divert money out of the classroom," as opposition spokesman Stephen Twigg has alleged, is absurd. This is akin to saying that for-profit food stores divert money from the table. In fact our food is supplied both plentifully and cheaply and of high quality by suppliers doing it for profit. That is why it has attracted the investment to make it widely available. We do not need to imagine what food would be like if it were provided at state outlets on a non-profit basis. We do not need to imagine it because we saw the example in the Soviet Union: low quality, short supplies and interminable queues. If the leaks are correct, Gove should be applauded for doing the one thing that will give millions of children an alternative to the low quality education that still pervades parts of the state system.

Despite its problems, QE might be right

John Butler has a great piece in yesterday's City A.M. making the case against central bank interest rate interference. He uses the devastating insights of Ludwig von Mises and Friedrich Hayek to show why central planning cannot work rationally for basic epistemic reasons. His example is of the Soviet shoe industry, constantly providing surfeits of boots in summer and sandals during winter.

Absent a pricing mechanism to match supply and demand, there was invariably either a glut or a shortage. And even when there was a glut, there were plenty of summer shoes, but a shortage of winter boots. By contrast, the largely capitalist West, responding to real price signals in real markets, did a pretty good job at producing, in sufficient quantities, a range of shoes that customers wanted, that fit, that they could afford.

Butler argues that in the significantly more important financial markets, which coordinate plans about saving and investment, together determining the future's capital structure, the same rules apply. We need real prices to convey information and organise society into a rational economic order. He claims the monetary policies of many countries—cutting headline interest rates and buying hundreds of millions of bonds—distort market interest rates (the most important prices in the economy) and thereby drive capital to be used in suboptimal ways.

I think there's a problem with his approach. Going with the title of this post—isn't it possible that the free market interest rate is below zero? German bund yields have fallen below zero several times during the Euro crisis, despite no central bank engaging in any major programme to buy them up. In times with few good investment opportunities, lots of funds (saving rates have boomed during the bust), and lots of worrying risky areas, it makes sense that some safe assets would see crashing rates. Bond yields can fall below zero even in a zero inflation or deflationary environment, but that's not true for many of the myriad interest rates in a modern economy. There is a zero lower bound on most rates, that is, no one would accept a nominal rate less than zero, as they could usually change the money into cash and put it under their mattress. But quantitative easing raises inflation expectations (and inflation), allowing real rates to go below zero, potentially clearing some otherwise stuck markets.

Now this isn't necessarily telling on Butler's argument. It might be that sometimes rates need to fall below zero, potentially justifying inflation above zero, but the QE needed to achieve this inflation distorts markets in general more than it benefits in these cases. Other things being equal, the extra demand from bond purchases means higher prices and lower yields on those bonds, and this would be expected to hit all substitute assets. This seems to hold even if the other effects of extra QE (higher inflation and demand growth (NGDP growth) expectations) work in the other direction, or even exactly balance out the demand effect of QE. Compared to the hypothetical situation where the central bank boosts growth expectations without buying up bonds, assets will be more expensive, or yield less.

Funds will look cheaper to firms than they "actually are" in the sense of their social cost as approximated by the information that would have been contained in the relevant market interest rates. Firms will tie up slightly more productive capital in improving capacity when society as a whole would seem to prefer slightly more devoted to consumption. This mispricing of loanable funds seems like it would have distortionary effects, with the size of the efficiency loss depending on the responsiveness of the supply of deposits and the demand for investment to their prices.

Before this starts to sounds one-sided against QE, there is one (big) consideration to take into account—the extra inflation and demand growth expectations that asset purchases create don't just help some interest rates adjust, but also create the space for a vast number of relative price moves. Labour markets tend not to clear after demand shocks because wages take a long time to adjust downwards. The price of avoiding any interference could be deep, ongoing recessions. So a prudent central banker may need to risk some misallocation of resources into investment if they wish to avoid the probably worse cost of punishing unemployment and slashed living standards.

Allister Heath lays out his Mark Carney wishlist

In a video out this morning, City A.M. editor Allister Heath calls on Mark Carney to bring the Bank of England into the twentieth century by reforming regulation to emphasise greater interaction with the financial sector, opening up its culture to something less dictatorial, and monetary policy to something more like Nominal GDP Targeting or a Productivity Norm.

A lunchtime reminder of the golden rule of liberty

During lunchtime last week, I was queuing for a popular street-stall which sells kebabs to the hungry workers of Westminster. I thought the queue had managed to double back on itself enough to avoid blocking too much of the busy street. Apparently, I was wrong. A middle-aged woman (let’s call her “Mary”), who seemed to be otherwise uninterested in the kebab-stall, decided the queue needed to change shape so that it was more compact. We, in the queue, grumbled but obeyed her directions and shuffled around into the new formation. Whether this had any effect on the flow of pedestrians was unclear, but Mary seemed happy and wandered off, leaving us to discuss her sanity and lust for power.

This got me thinking: to what extent are we private citizens justified in ordering each other about? Mary had no authority over us: she wasn’t a government official, company boss or even an employee of the kebab-stall. We were equals in every respect. For deciding how to act, I was glad to see everyone more or less obey the golden rule of liberty: no interference is justified except to prevent harm.

How does that apply to this situation? Mary’s belief that the queue was blocking the street (and thus causing “harm”) provided justification for her intervention. Furthermore, I believe everyone has the right to freedom of speech, so whatever the circumstances, Mary would have had the right to open her mouth. But what if we, the people in the queue, had ignored her directions? Could Mary have been justified in gently tugging sleeves to form a less disruptive queue? While this would hardly be assault, it would go beyond the right to free speech. It could be argued that people who spend their time trying to help society run more smoothly, as Mary did, should be hailed as heroes of “the Big Society”. I certainly think that, in general, people are too passive about minor intrusions in their lives (for example, those selfish individuals who feel it necessary to share their music tastes with the rest of the bus).

But this is what happens in the ideal society: the citizens sorting themselves out, willing to listen to the advice of a stranger without feeling their autonomy is being violated. More important, in my opinion, are the laws that we need for society to operate to a basic level of satisfaction. In this case, Mary’s right to exercise free speech, but not go beyond that into physical involvement. After all, the actions taken to correct an error should be in proportion to the error itself. Physical coercion seems fine when used against criminals, but over-the-top for rearranging a kebab queue. (This isn’t totally accurate: the police may have the authority to physically control crowds at public events, for example.)

Still, the main point is that Mary had the right to suggest that we re-form the queue, but nothing more. If we had ignored her (and assuming that the queue shape was indeed causing a problem) that would have left a small imperfection affecting the flow of the street. This can be applied in a wider sense to government in general. A control-freak large state might iron out inefficiencies in some areas, like Mary reducing the blockage of the street by physically rearranging the kebab queue. But it is not worth giving up individual rights (and the long-term benefits of a limited state) for these small savings.

Welcome Mark Carney, now here's what you need to do

Today Mark Carney becomes the new governor of the Bank of England, gaining oversight not only of UK monetary policy, but also financial regulation, as part of the Bank's newly-expanded responsibilites. When George Osborne revealed he had managed to persuade Carney to take on the role there was great fanfare and excitement. This was firstly because the Canadian economy has performed relatively well through the recession and secondly because Carney has shown himself open to innovations in central banking, though he has not implemented any in his time at the helm of the Bank of Canada.

Carney talked up the benefits of targeting the level of demand in the economy—though only for exceptional times—in a recent speech. And one would expect that the chancellor, for the £870,000 he has agreed to pay Carney, is open to significant change, notwithstanding the insignificance of the minuscule changes he himself made to the BoE's remit in the budget. Put together, these facts give cause for some optimism for someone like me, who supports targeting the level of demand.

So instead of speculating on what the superstar economist actually will do, I will outline the basics of what Mark Carney should—and could do:

I.  Target levels instead of rates—this means bygones are not expected to be treated as bygones, and market actors do not worry about worse-than-expected outcomes because the central bank has committed to sorting them out

II. Target NGDP (demand) instead of inflation—this means supply moves don’t lead to the wrong sorts of tightening or loosening of monetary policy, also means demand is stabilised directly, instead of an arbitrary part of the outcome of demand; stable demand means no recessions caused by nominal factors and no unsustainable booms

III. Target the forecast instead of the outcome—this is what matters for expectations, which are basically all that matters for employment contracts, loan/debt contracts, investment etc. etc. Expectations are the key, so it’s insane to ignore them

IV. Target market, not internal forecasts—set up an NGDP-linked bond, like the RPI-linked bond, and target the spread between the vanilla bond and the linked bond to get an objective idea of where to aim. Guesses where people have skin in the game are systematically better than the relatively costless estimates produced by private consultancies and the Bank’s internal team. But even if they’re wrong it doesn’t matter because expectations are all that count, and the spread between the bonds IS the market expectation. Driving that to a particular point is success, regardless of what happens.

In general the road ahead must be one of rules and discipline, not the translucent discretion of nine unelected barons.They must keep demand steady so we can focus on improving the supply capacity of the economy, and so there is no excuse for fiscal stimulus, with all its flaws. If you still need convincing, read Scott Sumner's 2011 Adam Smith Institute monograph "The Case for NGDP Targeting".

Professor Kenneth Minogue

Sadly Prof Kenneth Monogue has died. Born in New Zealand and educated in Australia, he taught at the LSE since 1959, eventually being appointed Emeritus Professor of Political Theory. He fought tirelessly and bravely for freedom at a time when it mattered most, and has a huge range of scholarly works to his credit, including "The Liberal Mind," "Nationalism," and "Alien Powers - The Pure Theory of Ideology." He made an important contribution to the understanding of ideologies, and took apart some once-popular ones with forensic skill.

He was a good friend and supporter of the Adam Smith Institute, along with other right-thinking think tanks. We knew him personally for over 35 years and enjoyed his wit and charm as well as his insight. He often attended ASI functions and was widely liked and admired by our members.

He was 82 when he died, having just attended and delivered a paper at a successful conference of the Mont Pelerin Society in the Galapagos Islands, which both Eamonn and I attended. He was a former President of the Society. He remained lively and alert to the end of his life and died quickly and among friends. His shrewd observations and mischievous sense of humour will be much missed.

Mongolia chooses right in plans for the future

Last Sunday saw Mongolia’s 6th Presidential election. I was glad to see the incumbent President, Tsakhia Elbegdorj, win with just over 50% of the vote. Mr Elbegdori, the candidate for the centre-right Democratic party, was heavily involved in the movement to end 70 years of Communist rule, which was finally successful in 1990. He has a good track record of loosening the grip of government on the country’s businesses, and he is passionately anti-corruption. Another of his achievements (in my opinion) is his work to abolish the death penalty.

It’s great to see an emerging democracy choosing to shrink the state. It may be unsurprising that the people want to get away from the Communist ideology of the past, but the false promises of socialism are always tempting. Mongolia has great mineral wealth, and everyone will want a slice of the pie, but the best way to get rich is through laissez-faire economics. The focus of the presidential race was on Oyu Tolgoi, a huge copper and gold mine: both of Mr Elbegdorj’s rivals advocated a renegotiation of the government’s contract with Australian mining giant Rio Tinto. But Rio Tinto has put a lot of investment into Oyu Tolgoi, and too much government involvement may cause problems. Mr Elbegdorj is more friendly to foreign investors, which bodes well for Monglia’s future.

The country has been doing well recently: this year it is the world’s fourth fastest-growing economy. Poverty has been decreasing, from 39.2% in 2010 to 29.8% in 2011. Of course, there are still obstacles to be overcome, but at the moment it looks as though Mongolia is in capable hands.