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By Steven Baker MP, on 29 December 09
 Razeen Sally’s Trade Policy, New Century (PDF) succeeds magnificently in explaining the 21st-century case for free trade and, specifically, unilateral trade liberalisation to the interested, non-specialist reader.
From the IEA home page of the book:
The World Trade Organization (WTO) is failing to deliver the trade liberalisation desperately needed to bring prosperity to developing countries, according to a new study released today by the Institute of Economic Affairs. The WTO is hamstrung by a cumbersome negotiating model and the influence of vocal protectionist lobbies who oppose free markets. At the same time, increasingly popular regional ‘free-trade agreements’ often create as many barriers as they remove by erecting new obstacles to trade with countries outside the blocs concerned.
In the context of policy paralysis at the WTO, the author, LSE trade expert Dr Razeen Sally, argues that governments must take back the initiative from supranational institutions. The priority must be unilateral liberalisation – removing trade barriers to benefit domestic consumers rather than waiting for tortuous international negotiations to be resolved. Governments can also help maximise the benefits of free trade by liberalising their economies and strengthening key institutions.
But what is the imperative for the UK? Surely, European Union citizens enjoy free trade?
The EU is a customs union: we trade ostensibly freely within it, but, as can be seen from the EU’s TARIC database, we find ourselves behind a complex system of tariffs on, for example, wheat, notwithstanding the battle long since won by our inspiration, Richard Cobden, to repeal England’s Corn Laws in the general interest.
And this is the key point: free trade is in the general interest. We may make the political and economic arguments in detail, but the public good is our ultimate aim, and not just at home. Razeen Sally explains (pp179-180, emphasis mine):
Adam Smith fortified his presumption in favour of free trade with an explicit political argument. Protectionism is driven by ‘the clamorous importunity of partial interests’ who capture government and prevent it from having ‘an extensive view of the general good’. Free trade, in contrast, tilts the balance away from rent-seeking producer interests and towards the mass of consumers. It is part of a wider constitutional package to keep government limited, transparent and clean, enabling it to concentrate better on the public good.
As important to Smith and Hume was the moral case for free trade, centred on individual freedom. Individual choice is the engine of free trade, and of progressive commercial society more generally. It sparks what Hume called a ‘spirit of industry’; it results in much better life-chances, not just for the select few but for individuals in the broad mass of society who are able to lead more varied and interesting lives.
To sum up: free trade is of course associated with standard economic efficiency arguments. But the classical-liberal case for free trade is more rounded, taking in the moral imperative of individual freedom and linking it to prosperity. Finally, free trade contributes to, though it does not guarantee, peaceful international relations. Freedom, prosperity, security: this trinity lies at the heart of the case for free trade.
In a short article, I can scarcely do justice to this monograph’s insight in relation to the case for classic liberalism nor to its observations on emerging geopolitics: I heartily recommend the book.
Further reading
By Steven Baker MP, on 24 December 09
Via Thrifty families accused of prolonging the recession – Times Online, yet more crass Keynesianism:
Anxious families are repaying debts instead of spending in the shops, amid concern over the uncertain economic outlook. The share of income saved in banks and building societies has risen to its highest level in more than a decade, heightening fears that faltering consumer demand could prolong the recession.
But see also Correction, Mr. Bernanke:
It is real savings that fund economic activity. The increase in the pool of real savings is the key behind sustained real economic growth.
These two authors make fundamentally different diagnoses and policy prescriptions because economics is not a positive applied science comparable to, say, physics. There are at least four schools of economic thinking, as Jeffey Tucker explains, but only one school predicted the bust.
This conflict over whether saving promotes recovery really matters: if the wrong side win and policy makers take heed, the recession will be deeper and longer than necessary.
Further reading
By Steven Baker MP, on 22 December 09
Via The Adam Smith Institute, A Beginner’s Guide to Liberty is now available, edited by Cobden Centre Senior Fellow Dr. Richard Wellings with contributions from our Founding Fellow Dr. Anthony J. Evans and Advisory Board member Prof. Peter J. Boettke. Introducing the book, Adam Smith Institute Executive Director and Cobden Centre Senior Fellow Tom Clougherty writes:
Our latest publication – A Beginner’s Guide to Liberty, edited by Richard Wellings – is now available to buy and download from the publications section. This is a project I’m very proud of. It’s a short book, only about 100 paperback pages in total, but it provides an extremely good introduction to some of the most important ideas in political and economic theory. The guide consists of the following ten chapters, all of which are jargon-free and written in clear, simple language: …
Chapter 9, Banking, Inflation and Recessions is by Anthony Evans: it is an excellent short introduction to the Austrian-School perspective on this subject.
Read more here; download or buy here.
By Toby Baxendale, on 21 December 09
Sean Corrigan of Diapason Commodities Management packs more sound applied economics into this report than ever: Toby Baxendale provides a commentary. This is a great Christmas read for us all: download the report here.
 Bastiat's Iceberg On the Errors of GDP Accounting
- For the USA economy, Corrigan shows the utter futility of using the conventional GDP measure. The same applies for any of the OECD countries who use the same measure.
- Business spending in 2006 in the USA was $31 trillion vs a GDP of $13.4 trillion.
- Businesses were spending $4.30 for every $1 spend on personal consumption.
- Policy makers from around the world, if any of you are reading this article, please take note of the significance of this fact!
- This focuses on something that all Austrian economists know: the desire by the mainstream economists is not to double-count. In the end, they do not count much at all!
- As a catering fish monger myself, I buy fish off farms, boats and auctions around the world. I cut and prepare the fish and send it to my customers, the hotels and restaurants of the UK. Yet none of my spending exists in the GDP figures! My wealth and that of my suppliers does not exist as far as the authorities are concerned. I only wish that I could get the tax man to take this view like his economist colleagues in the Revenue Department!
- I had this discussion with a member of the MPC some months ago: how if my salmon was bought at the fish farm for £1 per kg and we put a £1 mark-up on after cutting it up and the end user put a £1 mark up on, it is double counting as far as he was concerned. He reasoned that to count all of the stages of production when it only finally gets sold for £3 would be an overstatement as the price of the inputs is in the final price of £3. They miss out the significance that I and my supplier have our profit to the spend in the wider economy after we have spent our companies’ resources on continuing investment and consumption. This is all real activity! This is the danger of having statisticians running the economy.
- All that matters, we are told, is that GDP is composed of 70% of final consumption expenditure. In reality, the final consumption element is more like a quarter of real GDP, once the production sector is included.
- As I have always said, the health of the production sector is driven by its ability to invest in replacement capital to make more efficient production techniques, to supply more goods and services to people at better prices and with better service levels. This is the essence of entrepreneurship, the essence of wealth creation and the essence of the recovery: magic tricks perpetrated by the economic witch doctors, who wish to pursue a policy of QE or similar, will only consume capital and not replace it with some better means of production.
Continue reading “Bastiat’s Iceberg: A Sean Corrigan Masterpiece for Christmas”
By Steven Baker MP, on 18 December 09
Via Don’t Blame the Federal Reserve – Stephen Mauzy – Mises Institute:
Banks operate under a fractional-reserve system that allows them to create liabilities and money virtually at will. This system expands money beyond what it would otherwise be and guarantees inflation by pushing the broad money supply far beyond the base money. Money, in essence, is debt, with supply dictated by loan demand.
A full-reserve scheme would prevent banks from lending phantom money. Banks’ primary functions would be bifurcated into money warehousing and deposit lending. As warehouses, banks would collect fees for storing deposits, with the deposited funds always available to the depositor. As deposit lenders, banks would accept time deposits to lend. The depositor would earn interest for the use of his money, while the bank would earn the spread between the rate it paid to depositors and the rate it charged its borrowers.
Insufficient credit is the first and most voluble objection to a full-reserve banking system. This shortage may or may not occur. If it did, no problem — private finance companies would arise to fill the credit void. They wouldn’t accept deposits, instead they would raise funds by issuing equity and debt. These companies would be free to specialize and lend to what their charters dictate.
By Steven Baker MP, on 18 December 09
Via Cheques are to be abolished – Telegraph:
The Payments Council Board has agreed to set a target date of 31st October 2018 to close the central cheque clearing system.
Although cheque use has been in decline since 1990, and has fallen by 40pc over the last five years, there are still plenty of situations where cheques are used extensively.
By Steven Baker MP, on 18 December 09
Via Edmund Conway at The Telegraph we learn that the debt today cannot be inflated away:
In fact, around four fifths of the state’s debt bill is inflation-proof. The only way ministers and mandarins could inflate their way out of the crisis would be to rip up all the contracts that tie these debts to inflation: possible in the case of the state pension (which is one reason why Gordon Brown’s pledge to link it to earnings is probably doomed), difficult for all the rest.
Thankfully, James Tyler has explained How to deal with the Banksters, a proposal in the tradition of Fisher, de Soto and others which just happens to deal with the debt too.
By James Tyler, on 18 December 09
James Tyler explains how to fix banking. This article originally appeared on hedgehedge.com.
Open your wallet. Take out that £10 note. It’s yours. Your property, to spend as you wish. Put it in a bank, and you enter Alice’s Wonderland.
Most people in this country believe that when your money is placed in a bank account, it remains their property. Nothing could be further from the truth. Once you hand it over, it becomes the bank’s property: what you get in return is a promise that they will repay you if you ask for it. Why does this matter? Because the bank will then lend it to somebody else – and not on the same terms.
Think about what this means for a while.
If the money has been lent to somebody else… surely it’s not there. Yet you have been promised instant access. Surely the person who has borrowed the money has the right to it? The fact is both you and the borrower can use the money – at the same time. How can this possibly work?
Well, the banks say “not everyone will want to take their money out at the same time. We carefully plan and monitor withdrawals, and we don’t lend the whole lot out – we keep some in reserve to cover withdrawals”. True, for every £100 you put in, they keep a hefty reserve.
A truly massive £3.
Worried yet? It’s only the start.
Continue reading “How to deal with the Banksters”
By Steven Baker MP, on 17 December 09
Via FT.com / US / Economy & Fed – Fed signals pullback in liquidity supports, we learn:
The Federal Reserve on Wednesday upgraded its assessment of the US economy and highlighted its intention to shut down most of its crisis-fighting liquidity facilities in early 2010.
And consequently:
Stocks eased slightly after the Fed statement, while the yield curve in the bond market steepened.
Which brings us on to Roger Koppl’s Big Players and the Economic Theory of Expectations.
I am indebted to Cobden Centre supporter Bruno Prior for introducing me to Koppl’s work which extends the tradition of Ludwig von Mises, Friedrich Hayek and others, unusually, applying empirical methods to demonstrate the application of the theory.
Koppl demonstrates, with extensive reference to other scholars, that investment and all other economic actions depend on “subjective” expectations. He then presents a theory of expectations which assumes people interpret their situations in unpredictable ways. This theory includes a theory of “Big Players”:
Big Players are privileged actors who disrupt markets. A Big Player has three defining characteristics. He is big in the sense that his actions influence the market under study. He is insensitive to the discipline of profit and loss. He is arbitrary in the sense that his actions depend on discretion rather than any set of rules. Big Players have power and use it.
We learn that Big Players reduce the reliability of expectations, thereby disrupting markets. They encourage herding and produce perverse effects on entrepreneurship: traders must pay attention to the Big Player and not the fundamentals.
And so we find today, for example, the markets moving in response to the Fed not the realities of the economy…
By Toby Baxendale, on 15 December 09
Here’s a sobering thought. If you are due to pay 50% income-tax in the new tax year, do not be fooled: it will come closer to 80% when you add on a few mandatory extras such as the full 17.5% VAT on most of your spending coupled with the 12.8% National Insurance paid by your employer on your behalf. (I have ignored a few allowances – but also the ‘stealth taxes’ pulling back on the other side such as Stamp Duty, Airport Tax, Car Tax, Tax on fuel … it just goes on and on.)
Think about this number for a moment. It means that for 80% of the year you will be working hard for the state and 20% for you and your family plus any philanthropic causes you contribute to. This means you will be working from the 1st of January to the end of September for the State. It won’t be until towards the end of September in to October, November and December that you will truly be working for yourself in any sense.
This is a subtle and pernicious form of modern day slavery, for sure.
Alistair Darling, our hapless Chancellor, tells us that those with the biggest and broadest shoulders should share the largest burden of funding the deficit that his Government – and only his Government – have created over the last ten years.
I am reminded of Ayn Rand’s great novel published in ……. Atlas Shrugged, Part 3, Chapter 7. Here is John Galt speaking:
If you saw Atlas, the giant who holds the world on his shoulders, if you saw that he stood, blood running down his chest, his knees buckling, his arms trembling but still trying to hold the world aloft with the last of his strength, and the greater his effort the heavier the world bore down on his shoulders — what would you tell him to do? To Shrug.
Ayn Rand’s prophetic warning – that it is the businessmen of the world who create the wealth in the first place, which allows what a ‘statist’ like Darling wishes to do to advance his Party’s vision of social progress – will, one day, if pushed far enough, cause this country’s wealth creators to just shrug their shoulders and move on and away. At worst, what will be left is a society bereft of those who actually make money – or such a diminishing pool that the state will implode, consuming itself to death with no new wealth to replenish it.
In Capitalism: The Unknown Ideal, Rand reminds us:
Businessmen are the one group that distinguishes capitalism and the American way of life from the totalitarian statism that is swallowing the rest of the world. All the other social groups – workers, farmers, professional men, scientists, soldiers – exist under dictatorships, even though they exist in chains, in terror, in misery, and in progressive self-destruction. But there is no such group as businessmen under a dictatorship. Their place is taken by armed thugs: by bureaucrats and commissars. Businessmen are the symbol of a free society – the symbol of America.
Well, the UK State has run out of money. It will borrow £200 billion next year to pay its ever-ballooning payroll. Meanwhile we, here in the UK, are relying on the good will of our lenders to bankroll our state workers on a week-by-week basis. Yes, the UK is existing on a hand to mouth basis only. This is what it means to have a £200 billion deficit to fund. The government takes £4 in tax and spend £5 on its programs. It does not have the political courage to take immediate efforts to make this £4 in and £4 out, as any prudent family must budget.
When human beings began to peacefully exchange goods and services, civilised society was created. Money is the medium that facilitates this exchange to our satisfaction. Society, and its closely associated derivative, money, which facilitates peaceful exchange, is arguably the greatest invention of mankind. All other things flow from the basic functions of exchange being enabled to be fulfilled: it is, quite simply, this that has lifted us up from primitive existence. We should be glorifying those, like Ayn Rand’s fictional John Galt, who – far from being labelled fat cats – are a shining beacon of hope in desperate times. Rand goes further:
“So you think that money is the root of all evil?” [leaving it aside that this is a common misquote: St Paul suggests that the love of money is the root of evil, a distinction lost to those who damn the rich out of hand.] “Have you ever asked what is the root of money?” continues Rand. “Money is a tool of exchange, which can’t exist unless there are goods produced and men able to produce them. Money is the material shape of the principle that men who wish to deal with one another must deal by trade and give value for value. Money is not the tool of the moochers, who claim your product by tears or of the looters, who take it from you by force. Money is made possible only by the men who produce. Is this what you consider evil?
“Until and unless you discover that money is the root of all good, you ask for your own destruction. When money ceases to become the means by which men deal with one another, then men become the tools of other men. Blood, whips and guns–or dollars. Take your choice–there is no other.”
A modern day John Galt is none other than Michael Spencer, who I have the good fortune of knowing. He is the billionaire founder of ICAP, the largest inter deal broker on the planet. He employs 4,500 people, transacts £1.4 trillion of trades per day, has 50 offices world wide. His charity day at the office raises half of he total amount that the whole BBC Children in Need raises. Glory to the forces of free market capitalism, that most potent wealth creating force known to mankind.
Michael Spencer was interviewed by the Daily Telegraph on the 5th of December and said: “If the Conservatives are not elected and if Labour continue to increase taxes as they probably will then, regrettably, we would presumably have to reconsider moving domicile.”
The prospect of working 80% of the year for the State, like the Titan Atlas holding up the world is becoming too much for the likes of Spencer. We are approaching the tipping point. We need our Spencers and the whole army of entrepreneurs more so now then ever to create the wealth to get us out of the Labour Party induced mess we are in today.
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