IEA Blog

Environmental scares have a long history. At the end of the 18th century, Thomas Malthus predicted that rapid population growth would lead to war, pestilence and famine. Almost 200 years later, the 1972 Club of Rome report, The Limits to Growth, pointed to similar consequences due to rising populations, pollution and the exploitation of finite natural resources.

 
But the disasters failed to materialise. In flexible market economies the price mechanism incentivised consumers to use scarce resources more efficiently. Entrepreneurs found lower-cost substitutes and developed new technologies to improve productivity, for example through the new crop varieties that facilitated the green revolution. Nevertheless, the ideological climate created by The Limits to Growth contributed to the implementation of some unpleasant sterilisation programmes in developing countries in an attempt to reduce birth rates.

 
These consequences were relatively minor compared with the effects of Rachel Carson’s 1962 book Silent Spring. The resulting assault on pesticides lead to the banning of DDT in the USA and the steering of foreign aid to prevent its use in tropical countries. As revealed in Malaria and the DDT Story, this green crusade contributed to the death of up to 100 million people, as efforts to eradicate the disease were hampered by controls on spraying.

 
The world is now gripped by another environmental issue: climate change. The latest IEA monograph, Climate Change Policy: Challenging the Activists, describes how the policy agenda has been captured by quasi-religious ‘global salvationists’. Even more than in previous green campaigns, dissent has been ruthlessly suppressed. Organisations like the Intergovernmental Panel on Climate Change (IPCC) are dominated by ‘true believers’ and the political process is noticeably biased towards socialist-style initiatives based around central planning and detailed regulation.

 
In the worst case scenario, global warming will provide a rationale for state officials to increase dramatically their control over households and businesses, in terms of their freedom of movement, housing choices and energy consumption. Entrepreneurship and innovation will suffer and economic growth rates will fall. Intrusive bureaucracy will thrive. This will cause discomfort in the West, but it will be disastrous for developing countries. Even a small cut in their growth rates will condemn millions more to poverty and disease.

 
As the authors of the book explain, climate change can be addressed by relatively low cost policies that reduce emissions without significantly reducing the dynamism and flexibility of market economies. The ability of individuals, businesses, communities to innovate and adapt can be retained. Accordingly, calls for central planning and heavy regulation should be strongly resisted.

The market economy is a profit and loss system. Imprudent decisions do require correction – if not by the individuals themselves, then by others who enter into the market in the hope of realising the profit opportunities others are mistakenly leaving on the table. This is how markets work; this is how markets self-correct.

The self-correction properties of the market economy are perhaps the most important lesson of economic science (not an issue of faith) that must be communicated to the general public. Unfortunately, this fundamental truth of economic theory is one of the first casualties of crises.

Firms enter and exit all the time in a vibrant market economy. During my days as an economist/Sovietologist one of the factoids I peppered my public talks with was the number of bankruptcies in New York City in one month in 1995 versus the number of bankruptcies in the whole of Russia from 1991 to 1995. The number in NYC swamped the number in Russia. Firms get driven from the market, executives who made poor decisions lose their jobs, and industries that no longer meet consumer demands become obsolete. Was it a crisis for water-carriers to be driven from the market by the innovation of indoor plumbing, or for the whaling industry in New England to be displaced when electric lighting became widespread?

Resources do not disappear, they get reallocated. The market process is a mechanism for the continual re-evaluation and re-shuffling of scarce resources among alternative uses. This is what is meant when we refer to the market as a dynamic process of entrepreneurial discovery and learning.

The most important “wisdom” of market process theory is to get out of the way of the process of adjustment. The poor decisions in one period must be penalised, the malinvestments made by businesses must be cleaned out and the opportunities for hitherto unrecognised profit opportunities must be allowed to be exploited. Bailouts, regulations, taxes, redistribution and inflation only hinder the ability of the market to self-correct.

Besides the economics, there are also constitutional and ethical issues that should be considered when such sweeping legislation is proposed. Consider the classic essay Not Yours to Give by Davey Crockett. There is also a consequentialist issue at stake. A free society works best when the need for the policemen (read in this case regulator) is least. Individuals must be equipped to embrace the troubles of thinking and the cares of living if they are to live freely as a self-governing citizenry.

The consequences of our current policy path are dire in terms of economics, politics and freedom.

Also posted on The Austrian Economists

Until last week, it seemed that one only needed a couple of PhDs in monetary economics and finance to make head or tail of what was going on in financial markets. It now seems that a PhD in political science would come in useful, too.

But, firstly, should the US government be talking about committing $700bn of taxpayer funds to bail out the US banking system? The Archbishop of York, in a speech devoid of serious analysis, suggested yesterday that if this money could be found for the bankers, then money should be found to reduce poverty in Africa.

In fact, while the US government is making a commitment of $700bn, over time considerable value will be realised from the assets they buy and any losses will be much less than the headline figure.

Nevertheless, Bush’s plan is not the way to go about solving the current crisis. After all, this chapter opened when Freddie Mac and Fannie Mae – two institutions that were far too close to the government for their own good – went under. The US government will be creating another vehicle, which will be with us for the long term and under government control, full of poorly constructed financial instruments.

The President himself has said that we have to do whatever it takes to deal with the current crisis and then look at the underlying problems at a later date. As Ronald Reagan once said, the problem is that “government programmes, once launched, never disappear… a government bureau is the nearest thing to eternal life we will ever see on this earth”. Sixty-five years on, we are still suffering from President Roosevelt’s misguided response to the 1929 crash – part of which was the creation of Fannie Mae…

 
To see the full version of this Yorkshire Post article click here. 

It is always disappointing when Bishops follow the mob rather than trying to lead their flock. The Archbishop of York joined in the name calling yesterday. Today, in the Spectator, the Archbishop of Canterbury suggested that the financial sector cannot continue to escape scrutiny and regulation to the degree it has got used to. He ought to read the FSA’s Prudential Sourcebook and other regulatory guides.
 
Of course, it is so easy to say these things. Everybody is saying them. But should we not expect our Archbishops to stand back, reflect and comment on those areas where they can really bring their expertise to bear? It would be reasonable, for example, for the Archbishops to call for morality and honesty in financial dealings. They could also call for self restraint on behalf of those who wish to consume beyond their means – indeed the Archbishop of York did say this to be fair. But they should also recognise that identifying immorality and high-handed dealing in the financial system gets us nowhere in terms of deciding whether we should regulate more. And their blanket condemnation of short selling is bizarre. Why do the Archbishops assume that man is imperfectible when acting within financial markets but not examine the implications of that assumption when proposing to give more power to regulators? Whether this omission is a failure of logic, theology or economics is a moot point – probably it is a failure of all three. But, the Archbishops only need to look at some of the developments in the current crisis to see the importance of this point. The current crisis almost certainly has its underlying cause in the loose monetary policy followed by government-owned institutions. Furthermore, we have the most heavily regulated financial system in our history and many of the paper instruments that are created are designed specifically to avoid the over-regulation of particular parts of that system. And the regulators have hardly covered themselves with glory when they have intervened. The FSA, despite literally thousands of pages of regulations, seemed to ignore illiquidity risks in a major bank. Indeed, one of its regulations specifically appeared to prevent the Bank of England from extending lender of last resort facilities to a bank with liquidity difficulties without the Bank informing the whole market and thus causing a run!
 
The Archbishops should call for moral restraint, prudence and reflection but the only way that their statements can be justified is if we assume away the problem of the imperfectibility of man – in which case we would never have had a problem in the first place. Their statements might have been expected from an atheist rationalist in the French Revolution but they are not appropriate from twenty-first century Christian leaders.
 
Philip Booth is the editor of Catholic Social Teaching and the Market Economy

The Guardian’s environment editor, John Vidal, cannot resist a swipe at the IEA’s latest publication, Climate Change Policy: Challenging the Activists. Vidal doesn’t address any of the arguments in the book, but rather dismisses it as ‘tosh’ written by authors ‘most of whom must be over 70’.

 
To describe the book as ‘tosh’ is par for the course, even though it is not a very well informed comment given that like all IEA publications the book has undergone a rigorous process of academic peer-review, unlike the writings of Guardian journalists it might be said. But to dismiss the authors’ views on the basis of their age is astonishing.
 

This is a classic example of the argumentative strategy in which the personal characteristics of one’s opponent are attacked rather than their arguments. It is used by those who are not confident in the strength of their own arguments.
 

It is remarkable that a politically correct newspaper like the Guardian has published such explicit ageism. I’d be curious to know at what age John Vidal believes people’s views no longer count? Perhaps if the IEA had published a weaker book with younger authors the Guardian would be willing to engage with its arguments, but for those who are interested in serious analysis of these most important issues, rather than personal abuse, I highly recommend reading this new publication.

The Liberal Democrats recently became the first major political party to endorse fully the right of patients to top-up their National Health Service care privately. Labour and the Conservatives favour some relaxations to the existing top-up ban, but nothing close to its complete abolition.

The debate over so-called “top-ups” started in late 2007, after a couple of cancer patients decided to upgrade their NHS-provided chemotherapy with a privately purchased drug which was not offered on the NHS. Subsequently, the Department of Health (DH) issued guidance which outlawed such combinations of NHS and private care. To prevent what the DH called a “two-tier NHS”, it ruled that patients who purchased a health product that went beyond a standard NHS therapy should lose their entitlement to that therapy altogether. For the cancer patients affected, this meant that they would have to pay the costs of chemotherapy, consultations, laboratory tests etc.

The DH’s standpoint is gravely misleading. People are “topping up” public services all the time, inside and outside the health sector. A lot of people pay privately for MRI scans, hearing aids and elements of dental care without losing NHS coverage as a result.

Carrying the logic deployed by the DH one step further, parents who pay for private lessons to enhance their children’s school performance should be charged the full costs of schooling, because they are “topping up” state education. And people who install a burglar alarm in their homes should be billed with their share of policing costs, because they are “topping up” state-provided security services.

But the real irony is that the DH’s policy brings about exactly what it attempts to prevent: much more unequal access to healthcare. In the test case which triggered the guidance, the top-up drug would have cost £4,000 a month. The affected patients found it hard, but not impossible to fund it; they put their houses up for sale and used their savings. However, the cost of the full package, at £10,000, would have been completely out of their reach. The top-up ban therefore prevents low and middle-income earners in particular from purchasing additional medical services.

In the longer run, if top-up payments were legalised, incurring them would become an insurable risk. A whole new market of top-up insurance policies could emerge. Access to the latest treatments would become much more affordable. A private pillar of healthcare funding would develop, enabling people to avert the risks associated with ongoing government rationing. 

I once heard Sudha Shenoy described as the original pin-up model of the “Austrian” school of thought in economics. Whatever the merits of that description, she was certainly a knowledgeable, vivacious and enthusiastic proponent of classical liberal ideas.

Born in 1943, she was educated at Mount Carmel School and St Xavier’s College, Ahmedabad, India. She later attended LSE, UVA and SOAS (London) and it was at the first of these circa 1964 that she founded the Whig Society on the advice of F. A. Hayek and with the help of fellow student Ed Feulner.

However her interest in classical liberal ideas predates that as she learnt much from her father, the famous Indian economist B. R. Shenoy, who endured a form of house arrest and was severely persecuted for his open dissent on central economic plans.

B. R. Shenoy was also thoroughly questioned by Milton Friedman and others when he applied for membership of the Mont Pelerin Society (MPS) in the 1950s as they could scarcely believe their ears or eyes.

In 1966 Sudha placed 3rd in the Evan Durbin Competition run by the Institute of Economic Affairs for her paper ‘Pricing for Refuse Removal’. She won 50 guineas and her paper appeared in the IEA’s Readings in Political Economy No. 3, Essays in the Theory and Practice of Pricing (1967).

In 1971 Sudha’s India: Progress or Poverty was published as Research Monograph No. 27, again by the IEA. People joked that the book should have been called “India: Poverty and No Progress”. She was two decades ahead of her fellow countrymen in advocating market reforms.

This was soon followed by membership of the MPS to which she was elected at the Montreux, Switzerland meeting in 1972 aged just under 30. Her LSE friend Ed Feulner was also elected at that meeting aged just over 30.

 A great talking point at that 1972 meeting was a recent Hobart Paperback publication A Tiger by the Tail – The Keynesian Legacy of Inflation by F. A. Hayek but compiled and introduced by Sudha. This publication had great influence in intellectual and scholarly circles at the time and proved to be very timely and very useful.

Sudha taught in the UK, most notably at the Cranfield School of Management, a part of Cranfield University. She then re-emigrated and later taught in Australia at the University of Sydney and the University of Newcastle, New South Wales (NSW). She continued to work on inflation and was published by the Centre for Independent Studies (CIS).

Sudha spent the last three decades married to Dennis, a leading archivist in Newcastle, NSW. When your spouse is an archivist for a particular area you do not have much choice regarding your location and she made Newcastle her home. Off-hand I cannot recall Sudha’s married name – her husband was always called Dennis Shenoy in my home!

In fact Dennis had been a mature student of Sudha’s as he was doing an evening course in economics. They met when he complained that he could not understand a single word of her lectures! This necessitated his taking her to dinner after every lecture to review the material covered.

When we think of Sudha we recall not only her scholarship, her learning and her enthusiasm at transmitting ideas but also:

• her quirky, perky, toothy big smile and her lovely chuckle,
• her great love of discussion and debate and, above all,
• her passion for liberty

Based on a speech delivered to the Mont Pelerin Society in Tokyo, Japan, on Friday 12th September 2008.

Yesterday marked the UK release of the 2008 Economic Freedom of the World Report, produced by the Fraser Institute in Canada in association with the IEA. Fraser’s motto is “if it matters, measure it”. Some of the IEA’s Austrian-economics followers might be sceptical of that motto but, nevertheless, the report has some important messages. Here, I focus on one.

 
African nations occupy most of the bottom spots in the index. With the exception of Venezuela, the ten nations with the lowest levels of economic freedom are extremely poor countries: Zimbabwe, Angola, Myanmar, the Republic of Congo, Niger, Guinea-Bissau, Central Africa Republic, Chad, Rwanda, and Burundi. As James Gwartney, the lead author and professor of economics at Florida State University said “Weakness in the rule of law and property rights is particularly pronounced in sub-Saharan Africa, among Islamic nations, and for many nations that were part of the former Soviet bloc.”

There is an important lesson here for the Make Poverty History Campaign and the so-called Trade Justice Campaign. The former has campaigned for more government aid for poor countries. Both groups have campaigned to try to stop the forces that lead to the liberalisation of trade in poor countries. There are many unfortunate direct economic effects of aid (it can raise real exchange rates and damage export sectors for example). But an important indirect effect is that it can give greater financial power to governments and enable government officials to benefit from financial preferment. In other words, aid has effects that lead to bad governance and can undermine the rule of law and property rights. Similarly, trade regulation, quite apart from the damaging direct economic impact it has, is well known to be a major source of corruption in under-developed countries.

 
Neither of these observations proves that aid or trade regulation are a bad thing (though, in my view the latter is, without doubt). However, these campaigners should just pause for thought – as should the Bishops who recently marched on Parliament to support them. They should realise that, if they are wrong, the consequences could be serious. Clergy in particular have a responsibility to think carefully about all angles of political and economic subjects before they make public comments – one wonders if they always do so.
 

This morning the UK government announced that in the last quarter unemployment rose by more than 80,000 to a total of 1.7 million. We should never forget the countless personal tragedies that these figures represent: unemployment not only imposes financial hardship on individuals and families but also causes immense psychological suffering.

 
Today government ministers have been doing the rounds of the TV and radio studios explaining away these figures as an unfortunate by-product of the credit crunch and therefore beyond their control or responsibility. There is some truth in that, but is it really the case that the government bears no responsibility for the increase in unemployment or that there is nothing it can do to improve this situation?

 
To answer that question, we need to look at the minimum wage. The minimum wage was introduced by the UK government in 1999. Prior to its introduction, the IEA published a special edition of its journal Economic Affairs in which economists examined the evidence for and against a minimum wage. Their overall conclusion was clear: in a period of sustained economic growth, a minimum wage has negligible positive or negative effect; but in a period of recession a minimum wage is likely to deepen that recession by preventing labour markets from clearing. Firms will be unable to take on new employees willing to work for relatively low wages in order to escape unemployment; if firms cannot take on new employees and people cannot exit from unemployment, then the route out of recession becomes much slower and more arduous.

 
Sadly, rather than reducing or abolishing the minimum wage, in March this year the government announced that next month it will increase to £5.73 per hour. In the present economic climate this is, frankly, lunacy.

 
The UK unemployment rate is still markedly lower than the continental European norms of around 10%, but there is a real danger that a lasting legacy of the present recession will be increased structural unemployment – that is, unemployment that is long-term and seemingly built into the economy – at continental European levels. The government simply cannot blame this on the global economic climate alone. It is a consequence of the policies introduced when the present Prime Minister was Chancellor of the Exchequer despite the evidence and warnings that the long-term consequence of a minimum wage would be much higher unemployment when the business cycle inevitably entered its downward phase.

 
The government should abolish the minimum wage immediately. If that is politically impossible, then it should be reduced back to its original rate of £3.60 per hour. It would be interesting to see what sort of positive boost such a decision would give to the economy and the financial markets.

Dr DeAnne Julius’s recent review of the UK Public Services Industry (PSI) tells us that the outsourcing of government services is an industry which has grown to £80 billion of annual revenues and employs 1.2 million people. It concludes with “8 recommendations to tap the full potential of the PSI in its drive to provide world class public services for all.”

The launch of eight new school “academies” in London, sponsored by various institutions and entrepreneurs, including Lord Harris, makes this an appropriate time to consider the economic implications of such outsourcing.

 
We can accept for the sake of argument that outsourcing any given “public service” to private firms under a competitive process (unlikely for academies) should bring improvements. The primary reason is that such private firms are subject to the rigour of profit-loss accounting and its resulting disciplines. The problem, though, is the services themselves, which are not subject to such disciplines. The essence of private enterprise is that from conception through funding to delivery, all participants are acting voluntarily, and a net profit therefore means a net gain.  “Public services” do not have this feature; consumers may have preferred another “service” entirely.  What we need is not the outsourcing of given services, but exposing the services themselves to competition.

Without this, there are downsides to expanding PSI. The review calls for “clear and consistent objectives” and “long term commitments” which in effect mean tying down a new government to a predecessor’s “services” (e.g. identity cards). Any improvements achieved will encourage governments to expand the range of “public services” under the mantra that outsourcing gives greater efficiency. 

Most important of all, the taxation to fund any public services will always cause a serious net loss of output – a subject to which I hope to return. The goal must be to remove government from the scene rather than to scale back the losses. Think of the military-industrial complex; yes, the weapons companies make the conduct of war more efficient, but they also make it more feasible in the first place.