Blog Review 958


One of the oddities of those oh so socially democratic Nordic countries is that in many ways they're not what would be called social democratic in UK terms. School vouchers, no inheritance tax, postcode lotteries for medical care....

Speaking of school vouchers, Obama's children don't attend the public school system but they're shutting down the voucher scheme that would enable others to make that same choice. Obama signed off on that restriction of other peoples' choices too.

Paul Krugman is indeed Paul Krugman, but he's still right on trade.

The libel law just got a whole lot more difficult for journalists and bloggers.

The ID cards mess just had yet another twist of spin added to it.

Why the American banking system won't go the way of the Japanese one.

And finally, physicists prove that vampires cannot exist.

Pondering on Mises


I'm feeling a bit wet – intellectually – and I need some robust Austrian School economists to dry me out.

I've been boning up on the great Austrian economist, Ludwig von Mises, for a short book on him I'm writing for the excellent Institute of Economic Affairs. Mises got notoriously irritated with people who questioned the need for a gold standard or thought that fractional reserve banking was a good thing. me.

On gold, i can see the point that once you let politicians print money, you're asking for trouble. And we've certainly got it. But do we really want the world's money to depend on the production of some metal – particularly one that Russia controls so much of? Russia bullies other countries over oil for political reasons: would we really expect it to act as an honest banker to a world dependent on its gold?

Friedman tried to solve this by suggesting a monetary rule – that the money supply should expand at an even pace, roughly in line with production – or by a commodity currency, backed not by a single metal but by a basket of goods. But such rules are only practical if the politicians do indeed stick to them. So that's not promising. But it seems to me that if we can work out a way to get such rules to work, it's better than having the entire world monetary system rooted in a single commodity that just a few countries control. Shouldn't we focus our intellectual energy on that, rather than on restoring gold?

Fractional reserve banking is the system whereby banks don't keep all of your savings in their vaults – they lend the money out to people who need it to build businesses and the like, keeping enough on hand to assure savers that they can withdraw what they want, when they want it. It doesn't work, of course, if all savers all want their money out at the same time: and the fear that the bank might not be able to immediately pay back savers in full leads to a 'run on the bank' that produces exactly that effect.

One solution to this is free banking, where banks issue their own notes. If people are concerned about the probity of a particular bank, they will agree to take its notes only at a discount – accepting its dollars only for 95 cents, say. It may not prevent bank failures entirely, but it sends early warning signals to the bank that it needs to mend its ways.

Personally, I'd prefer that my money was being lent out to create new businesses, and earning interest for me, rather than sitting in a vault with the bank charging me to look after it. So two cheers for fractional reserve banking. You don't need 100% of your cash sitting in the vault. What you do need is some insurance for when lots of savers all want their money out on the same day. Your house doesn't burn down every day: you simply want insurance for when such bad things happen. The same is true with your savings in the bank.

Again, this isn't easy. When the financial sector goes into spasm as it did last year, then the traditional insurers are in spasm too because the two markets are so closely interdependent. The old idea was that the central bank should be the 'lender of last resort' in these circumstances. If, like Mises, you don't like central banks much either, the same question persists. Shouldn't we be applying our brains to creating some insurance system to back up the fractional reserve banking system, rather than demanding that the banks lock their savers' cash in unproductive vaults?



Writing in the Telegraph, Angela Monaghan and Edmund Conway give us ten reasons to be optimistic about the economy. Considering there was so much Armageddon-speak only a few months ago, this itself is good news. They list the weaker pound helping exports at number one, with markets correcting as they do the imbalances between currencies (except in the Euro zone where one exchange rate fits all).

They point to rising equities, increased business confidence, and US banks coming off better than feared in their stress tests. Low interest and mortgage rates are another plus, creating the conditions for recovery. They are impressed by the Chinese economy's unexpected resilience, and by the fact the both UK and US housing markets may be bottoming out. The point to the benefits of falling utility bills, and finally list the coming summer with its feel-good warm weather lifting people's spirits.

Even if you don't agree with all of their pointers, it's an impressive list. The last one is important and they are right to list it. Optimism points to recovery as people begin to make plans to invest, to expand, and to plan purchases. This is one reason why Obama's message of hope is probably more important than anything he actually does.

On the whole the authors are probably right. This was not the end of market economics, but a cyclical downturn made worse by the smoothing of previous downturns with massive credit expansion. Downturns pass, unless unwise governments turn them into depressions.

After this one the real fight starts over what lessons can be learned. France and Germany are leading the EU charge to learn the wrong ones by introducing more restrictive regulations that would leave politicians driving business decisions. The right lesson might be for governments to stop doing the things which led businesses into making wrong decisions in the first place.

Nothing to fear, oh really?


altHave you signed a petition on the Number 10 website? Did you sign this one: We the undersigned petition the Prime Minister to…resign? (As of Friday lunchtime there were currently 54,672 signatures). You could be in for a surprise in the future.

In an article on Marginal Revolution, Alex Tabarrok brings attention to a recent report from Venezuela that examined the wages of the millions of signatories to a petition calling for Hugo Chavez to be removed from office. Unfortunately for them in the proceeding election, Chavez triumphed and their names were added to a database that was distributed across government agencies. The report finds that those who signed the petition and: “...were identified as Chavez opponents experienced a 5 percent drop in earnings and a 1.5 percentage point drop in employment rates after the voter list was released. A back-of-the-envelope calculation suggests that the loss aggregate TFP (Total Factor Productivity) from the misallocation of workers across jobs was substantial, on the order of 3 percent of GDP."

Whilst this specific instance may have taken place overseas it highlights that governments can’t be trusted, especially with private data. Whilst it is hard for people to imagine something similar taking place in this country, we are singularly blind to human nature, it is entirely possible. Should Gordon Brown win the next election (hypothetically speaking) there is little to stop him implementing a subtle tweak to tax credits, or the tax system that would leave the majority of the signatories to the online petition worse off. The database state is not your friend, at some point you are very likely to become a victim of a politician disposed with a weaker human nature.

Thankfully though on this occasion, it looks likely that signatories of this petition are in the majority!

Obituary: Professor Norman Gash


We are sad to report the death of Professor Norman Gash, former Professor of Modern History in the University of St.Andrews, at the age of 97.

Norman Gash was known to the world as a fine historian of the Nineteenth Century, and in particular the leading expert on the life and times of Sir Robert Peel – on whom he wrote a definitive two-volume biography. His thoroughly researched books on Peel, the Duke of Wellington, Lord Liverpool, and the politics of their age continue to command respect within the academic community.

Gash was also a leading Conservative intellectual, and at St.Andrews did much to encourage the thriving group of student activists whose members would go on to become MPs – such as Michael Fallon, Michael Forsyth, Robert B Jones – or active in the world of policy formation – such as Madsen Pirie and Eamonn Butler of the Adam Smith Institute and Stuart Butler of the Heritage Foundation.

EU wants to run the internet


Daniel Hannan MEP, has informed us all that the EU seems rather upset that the US "runs" the internet and is keen to do something about it. They want ICANN to be taken over by the G12 so that they can run it "for everyone". The internet was invented (by a British man) because of the American effort to protect itself in case of a nuclear attack. The EU expects the US to hand over the keys to a strategic asset merely because it offends their anti-American sensibilities. "If it ain't broke don't fix it" does not resonate with them much either it seems.

Hannan quotes this gem: "In the long run, it is not defendable that the government department of only one country has oversight of an internet function which is used by hundreds of millions of people in countries all over the world."

Obama might be keen to suck up to the Europeans, but even he would not be stupid enough to grant this request. I doubt most in the UK would be too keen on this idea eithe.

Blog Review 957


So will the newspapers be able to charge for online content? Doubtful, but then many have bet against Rupert Murdoch before as well.

Nobody goes into politics to get rich, of course, but it's amazing the number who get rich from having gone into politics.....

The latest victim of the elfnsafety culture. One culture that may be even more pernicious than even those of banking or even politics.

There are (at least) two problems with torture. one is that it immoral, the other that it doesn't actually work.

Just as confiscating private property via government pressure doesn't work in creating future prosperity.

Yet another piece of the gender pay gap. If male jobs are more likely to disappear in a recession then they're more likely to pay more outside recessionary times.

And finally, another page from the modern dictionary.

Yaron Brook speech now online


Earlier this year, Dr Yaron Brook, the president of the Ayn Rand Institute, spoke at the Adam Smith Institute (write-up here). His excellent speech, on Capitalism without Guilt - the Moral Case for Freedom, is now available to watch online. If you weren't able to join us back in February, these videos are well worth watching:

You can also watch the Q & A session in parts five, six, seven and eight. And as if that wasn't enough, you can also see Andrew Medworth (of the Ayn Rand Forum) interviewing Dr Brook before his speech: part one, part two, part three and part four.