IEA Blog

While I never met him personally, I want to express my sadness at the recent death of a former Publishing Director of the IEA, Walter Allan.

Walter was a great man and by all accounts was one of the funniest people ever to work in this organisation. With endless stories of his roguish and outrageous humour, his boundless energy and his exuberant love of life, I know that loved ones and friends alike will be greatly saddened at this tragic and early loss.

Still only in his 50s, he was a larger than life character with an infectious wit. Always the life and soul of any party, he was also a formidably hard working and talented writer, editor and teacher. At this time of sorrow and reflection, my heart goes out to all his family and friends.

Memories of Walter may be added in the comments box.

With the advent of cheap, ubiquitous broadband, I am beginning to wonder why we pay so much more for voice calls than we do for Internet access.

By my calculation, the cost of a voice call is typically thousands of times higher than the cost of browsing the Internet, when measured in terms of the amount of data transferred. Yet there is no significant difference between voice and data on digital exchanges, and almost all exchanges in Britain are now digital.

A similar argument can be made about mobile phone charges. With the new technologies of GPRS / UMTS / 3G, we can put through at least 10 times the necessary bandwidth for voice data all the time over a mobile almost anywhere in Europe. However, a very large discrepancy between voice and internet charges remains.

Then there is the international dimension. If you were browsing the Internet, would you expect to pay more money to download a page from Brazil than you would one from Bognor Regis? Of course not. You pay a flat rate and you can surf anywhere in the world anytime. So why do firms persist in charging different rates for calling different countries when they are all actually equally easy to get to?

Why? Habit. We are stuck in our ways and we apply an erroneous rationale to information costs by equating it with sending something physically. Imagine if a radio charged its users more money the further they got away from each other!

 
So how have the phone companies got away with this for so long? I would argue that it can only be because of artificial restrictions on access to the networks. The government needs to open up all areas of our telephony network to real competition. 

In this extract of an interview with John O’Sullivan, F. A. Hayek discusses the Great Depression and the influence of John Maynard Keynes. Professor Hayek explains that he spent a year analysing Treatise on Money (1930) and Keynes’ earlier books, only for Keynes to admit soon afterwards that the ideas he had expounded were wrong. When The General Theory was released in 1936, Hayek assumed Keynes would quickly change his mind again, and decided not to devote time to writing a systematic critique – a decision he regretted for the rest of his life. The General Theory has had immense influence on government economic policies, as we see today in the misguided response to the current crisis.

(Hayek’s writings on Keynes are collected in A Tiger by the Tail: The Keynesian Legacy of Inflation.)

I have various reservations about the Nudge philosophy that has been embraced by David Cameron. It is clearly attractive to the Conservatives because it seems novel without appearing to smack of market fundamentalism – and the Conservatives seem unable or unwilling to make the case for liberating the market economy directly.

One reservation that I have about “Nudge” is not about the basic underlying idea, but about the likely flaws in implementation. The authors of “Nudge” clearly intend that their proposals should be an alternative to state regulation, but it is difficult to see them being implemented that way in practice. For example, in the pensions field, auto-enrolment into personal accounts is going to be used in addition to all the current government interference in the provision of pensions: we will still have a government-provided state pension, a “second state pension”, continued regulation and tax relief. In addition to all this, people will be auto-enrolled into saving through personal accounts.

A second problem is that of who decides the direction in which to nudge people. The political elite, for example, wish to nudge the young to take out pensions but this risks making pension mis-selling compulsory. Young people will be saving in a pension whilst paying off a mortgage or even paying off credit card bills: saving and borrowing with two different financial institutions at the same time is an expensive business. Of course, the people who will lose out most are those who are not sufficiently sophisticated to shoulder barge the nudger and do their own thing.

The best way is to allow paternalism to evolve naturally in society without the interference of government. That is genuine “libertarian-paternalism” to use the phrase that Nudge’s authors use. People generally know when they are not the best judges of their own interests and they often choose to devolve decisions to others.

Read the full article on ConservativeHome.

I am now on a 40,000 kilometre round trip to present a paper that will last but a single hour. The nature of this trip can be understood in the context of the invitation I received:

“On behalf of the Mises Institute, I am pleased to invite you to present the Ludwig von Mises Lecture at the Austrian Scholars’ Conference to be held at the Mises Institute. The topic would be of your own choosing and could cover any aspect of your research that is in the spirit of Mises’ efforts to refine and advance economic theory. Your work on Say’s Law in modern macroeconomics is a fine example of this and is also very timely.”

I have now put together a presentation titled, “Why Your Grandfather’s Economics was Better than Yours: On the Catastrophic Disappearance of Say’s Law.” It rounds up the origins of modern macroeconomics in Keynes’ discovery of Malthus, his taking up Malthus’s theme of demand deficiency as the cause of recessions, and his consequent rejection of what we now call Say’s Law, a rejection which has been accepted to this day across virtually the entire world of economics.

I, however, think Say’s Law is true. And to show how very far off the beaten track this is, for those unfamiliar with economics I will put it this way. To accept Say’s Law as valid is equivalent amongst economists to the denial of global warming amongst those who believe climate change is taking place.

What Say’s Law argues, to put it briefly, is that you can never give an economy momentum from the demand side. You can never spend your way to recovery. All expenditure must be backed by value-adding production.

Mises was himself one of the greatest economists in history. I have read much of what he wrote which is accessible to anyone who will make the effort. And while he wrote on Say’s Law, he did so on only a single occasion. Here is part of what he wrote:

“The Keynesians tell us that his immortal achievement consists in the entire refutation of what has come to be known as Say’s Law of Markets. The rejection of this law, they declare, is the gist of all Keynes’s teachings; all other propositions of his doctrine follow with logical necessity from this fundamental insight and must collapse if the futility of his attack on Say’s Law can be demonstrated.” 

To which Mises added:

“The exuberant epithets which these admirers have bestowed upon his work cannot obscure the fact that Keynes did not refute Say’s Law. He rejected it emotionally, but he did not advance a single tenable argument to invalidate its rationale.”

The rot Keynes commenced continues. Public spending and deficit finance in times of recession are now automatically taken. For all that we live in an exchange economy. The only thing that will create demand is the production of goods and services people not only want but are willing and able to pay for in full. It is these sorts of things I will be talking to the Mises Institute about.

In the 1960s, thousands of industrious Greek gastarbeiter came to work in West Germany. Immigration from Greece has been a success story of rapid integration and mutual economic benefit. With little capital, many of the incoming guest workers started their own businesses such as Greek restaurants and delicatessen stores, bringing Gyros, Souvlaki and Ouzo to the remotest village. Today, there is no such thing as a “Greek-German”. The child or grandchild of a Greek gastarbeiter is simply a German with black hair and an unusual surname.

One wonders what these people are making of the ridiculous mud fight currently taking place between Greek and German tabloids over the possibility of a Greek bailout. For parts of the Greek media, the debated austerity measures represent an imposition by foreign countries, motivated by sheer sadism. For them, export-intensive European countries owe them a bailout, because Greece has supported their economies for years by running up a huge trade deficit. For parts of the German media, this represents a brazen lack of gratitude from people who have received substantial EU-subsidies.

Taking the logic of the Greek media serious, one could argue that every regular consumer of Kalamata olives is entitled to a personal bailout by the Greek taxpayer, for supporting Greek exports. The flaw is, obviously, that these consumers have already received their due consideration from the transaction: the olives.

There is also a serious flaw in the reasoning of the German media. They are projecting a logic which would make perfect sense in relationships between individuals into the political sphere. They are confusing a forced transfer of taxpayers’ money with “solidarity”. The differences could not be greater.

In the personal sphere, when we receive help from somebody, we feel gratitude, and a desire to give something back. In the political sphere, when we receive an “entitlement”, we quickly get used to it and take it for granted. When it is threatened, we feel robbed.

This is not a conflict between two nations. Nothing of this kind has ever played a role in the relationship between native Germans and Greek immigrants. Meanwhile, the foreign minister’s mere mentioning of the fact that the money on which domestic welfare recipients live has to be paid by somebody has caused a political earthquake. It is politically fuelled tug-of-wars, domestically and internationally, which cause conflicts between people who would otherwise get along.

Yesterday, the Catholic Bishops issued a document Choosing the Common Good which is intended to guide Catholics in the run up to the general election and beyond. Unlike its predecessors such as Taxation for the Common Good and The Common Good and the Catholic Church’s Social Teaching it has not hit the headlines. This is because, in contrast to the other documents, it is sober, well written, does not take the Bishops beyond their competences on technical economic matters and does not misrepresent aspects of the tradition of Catholic social teaching through a partial and selective analysis. There is nothing like the ghastly suggestion that tax is like the string that binds society together that appeared in Taxation for the Common Good (perhaps that document should have been followed by one on regulation that could have stated that “regulation is like the red tape that binds society together”).

Instead, the basic message of the new document is that if you want a good society then people need to behave virtuously – in their business lives, social lives, when they participate in civil society and in their public lives. These virtues, the document argues, need to be practised at all times and the paper does a good job of outlining what the traditional virtues are and why they are important.

In my view the Church should be sceptical of a state that spends over 50% of national income and which completely dominates the welfare scene. But it is better for the Bishops to put such warnings in nuanced terms or to leave it to the laity and other intellectuals to fight these battles than go beyond their competences in suggesting economic reform. I would not particularly want the Bishops to produce “The Free Market for the Common Good” written in the same terms as Taxation for the Common Good. Nevertheless, there were warnings about the ability of the state to solve our problems which were welcome (and inoffensive even to the left). For example:

“Have we allowed ourselves to be seduced by the myth that social problems are for the government to deal with? Politics are important but there are always limits to what any government can achieve. No government can solve every problem, nor make us more generous or responsive to need. The growth of regulations, targets and league tables, which are tools designed to make public services accountable, are no substitute for actions done as a free gift because the needs of a neighbour have to be met.”

“In place of virtue we have seen an expansion of regulation. A society that is held together just by compliance to rules is inherently fragile, open to further abuses which will be met by a further expansion of regulation. This cannot be enough.” And,

“Families have a right to a life of their own, and governments do well when they interfere as little as possible while supporting parents in the exercise of their responsibilities.”

Are there any criticisms one would make? Possibly, but these would be constructive criticisms rather than the tearing apart that some authors of Catholic Social Teaching and the Market Economy thought was necessary of previous documents. Perhaps the following could have been considered:

1. In the section on the environment, people were reminded of their responsibilities. It might have been useful to mention that, in terms of public policy, these responsibilities can be met in a number of ways (for example, direct regulation or the better definition of property rights and the use of the price mechanism) and we should not just vote for a party that says it is going to address environmental problems directly by regulation because we think that is the Christian thing to do. I say this not because the likely author of the document (Archbishop Vincent Nichols) is likely to think in such a way but because Catholic agencies in the West – who have a very high profile amongst the laity – do think like that whilst passing off their old, tired, subjective political views as objective moral thinking (more on this next week).

2. It could have been made clearer that individuals, families and the community through voluntary activity have the primary responsibility for looking after the poor rather than the state.

3. Possibly the only thing which missed the mark altogether was at the end where the document talked about the benefits of the state/Church partnership in education. This is really not where Catholic social teaching leads us. The primary responsibility for education lies with the parent and the family. The state should aid the family (for example, with finance if necessary) to educate their children – as should the institutions of the Church. It is not for the state and Church in partnership to build the schools, design the curriculum, determine the terms and conditions of employment of almost every teacher in the land and tell parents where to send their children to school. There has been interesting movement on this issue, in fact, in the Catholic hierarchy in the last few weeks – perhaps since yesterday’s document went to print!

4. Something could have been said about structural budget deficits. These have not been widely discussed (as far as I am aware) in Catholic social teaching since the sixteenth century. However, without getting into the technical issues about deficit reduction in a recession, the Bishops could have mentioned that lasting structural budget deficits can be a reflection of selfishness on behalf of the electorate that is trying to transfer resources from a future generation who have no representation. This is clear in the Greek case but becoming more pertinent in the UK.

This document should have been big news. “Bishops fail to put their foot in it” should be regarded by editors as genuinely newsworthy when it comes to statements on economic and political matters – both in the case of the Catholic Church (since the 1970s) and the Anglican Church. But this document goes further. It does not just avoid past mistakes but provides excellent food for thought.

Interview on Bloomberg TV about the pound, the fiscal crisis and the prospect of a hung parliament:

Who would have thought that protectionism could be entertaining? Professor Ha-Joon Chang’s lecture at the LSE last Thursday, part of the university’s “Series on the Future of Global Capitalism”, proved that it can be. Whatever one makes of his views, as a speaker, Prof. Chang is an exceptionally witty and engaging.

In the main, Prof. Chang’s speech was a plea for a new “Developmentalism”, an economic policy strategy in which the state takes on the role of a development catalyst. Using tools like selective tariffs, subsidies and procurement laws favouring the domestic economy, governments in poor countries should nurture their own industries, and break out of dependency on foreign capital and foreign technology. They should create their own versions of Boeing and Volkswagen.

Judging from the chuckling responses and the remarks during the Q&A session, the audience seemed to interpret these proposals as highly unorthodox, bold critical thinking – a protectionist David challenging a neoliberal goliath. This is surprising. State-led development is old hat. It has been tried in a lot of places, creating highly politicised economies with stagnant productivity. Prof. Chang referred briefly to the Latin American experience and pointed out that when this model was at its height, the region experienced high growth rates. What he omits is that these rates were built on sand. They were based on an increase in the utilisation of labour and physical capital, while total factor productivity stagnated. They also depended on ever-increasing foreign debt, which led to the debt crises and economic meltdowns of the 1980s – ‘la decada perdida’ in local jargon.

So what’s new about Prof. Chang’s new developmentalism, which will enable it to avoid these past failures? Nothing much, really. He wants developmentalism to take environmentalism on board, and give more thought to political and institutional considerations. Old developmentalists, Prof. Chang argued, had simply assumed that governments were always competent and benevolent. New developmentalism should not take this for granted.

True: if you placed your hand on a hot cooktop, assuming it was cold, you would burn yourself badly. But the problem is, if you placed your hand on a hot cooktop without assuming that it was cold, you would get burnt just the same.

On Friday the Office for National Statistics (ONS) released revised GDP figures for the last quarter of 2009. The BBC and other media outlets reported this as good news as Q4 growth was revised upwards from 0.1 to 0.3%. In this context, it is worth reading Edmund Conway’s article, “Don’t be fooled: GDP figures were actually revised down.”  

He points out “The size of the British economy … was actually £133m smaller in the fourth quarter than the ONS previously thought,” and goes on to quote Andrew Lilico: “The faster growth … was entirely the result of a downwards revision to 2009 Q3.” Conway also notes with concern that the ONS press release on the revisions is entitled “Services growth in December pushes up GDP estimate.”

In other words, GDP is smaller today than people thought before the revision. The only reason why growth is higher is because three months ago the over-estimate was even greater. One of the authors once read a spoof on Conservative employment figures in 1981 that read: “Though unemployment has risen again, the government is delighted that there has been a slowdown in the rate at which the increase is rising. It is also delighted that, for the fourth month running, the number of unemployed is less than the population of Norway.” But the ONS and the BBC are not the government. The government can spin the figures how they like. However, it is not the job of supposedly independent organisations to (in the case of the ONS) create the spin and (in the case of the BBC) reflect the spin. The headlines should have been “National income revised down” with a possible sub-headline: “Stronger rebound from lower level.”