Steve Baker’s latest article for Centre Right is one of his best:
I listened to Comrade Milliband’s tedious historical revisionism with interest: apparently New Old Labour are to become the party of enterprise and small business in order that wealth can be created and redistributed. With Comrade Milliband’s remarks following so closely after Comrade Cable’s denunciation of capitalism, I am reminded of Churchill:
Some people regard private enterprise as a predatory tiger to be shot. Others look on it as a cow they can milk. Not enough people see it as a healthy horse, pulling a sturdy wagon.
Steve covers Edwin Riegel’s concept of right wing socialists, and explains how the apparatus of the state is responsible for problems in banking.
It is good that bankers are intelligent, driven and innovative: they are merely operating a flawed system to their own advantage, which is to be expected. As I wrote in the Wall Street Journal, explaining the present crony capitalism, it is the power of the state which has corrupted banking and consequently the entire economy. Persecuting bankers for the crisis is no more sensible than criticising farmers for the CAP.
In our latest 26-minute Cobden Centre Radio show, I interview Steve Baker MP about his Austrian path into the world of politics and how he thinks we can inject financial sanity into the economically diseased global body of Keynesian orthodoxy. Touching upon the Douglas Carswell bill, due for its second reading in November, we also discussed how the British state can be rolled back, and where he thinks the British economy is heading, and how he thinks we can turn everything around to create an honest monetary system and a reduced government.
At the end of the interview, Steve also mentions a new TV documentary by Wag TV, due to be broadcast on Channel4 on the 21st of October, immediately following the coalition government’s comprehensive spending review, as a commentary upon the state of Britain’s finances. As Wag TV have produced some of my favourite documentaries in recent years, and as Steve may be playing a significant role in this new documentary about the British economy, Cobden Centre subscribers may want to book this date in their diaries for a rare night in with the TV. In the meantime, here is our fourth home-grown radio show:
Two defences of the penalization of prudence, as a response to the current economic circumstances, have been published in the last couple of days. First, Martin Wolf lampooned the “austerian” argument that “you can’t cut debt by borrowing”. No surprise there. Then Charles Bean, Deputy Governor of the Bank of England, told savers to “stop moaning and start spending“, as the Daily Telegraph paraphrased his comments. Low rates, he argued, were part of the essential strategy to “return the economy to a reasonable level of activity as quickly as possible”.
“Austerians” can deal with these arguments easily within their own circles by reference to Austrian theories of the business cycle, capital, interest, etc. But The Cobden Centre does not exist merely to preach to the converted. We ought to recognise the attraction to many (probably the indebted majority) of the apparently easy escape offered by people like Wolf and Bean, and the comparative repugnance to those people of an argument that the “good times” were an illusion, and the “bad times” are a necessary correction.
I have been struggling to find an explanation that might be comprehensible to people of the opposite view, why exceptionally-low interest rates created by manipulation of monetary policy by governments and central banks are neither natural nor beneficial. I don’t suppose the following will convince many, as so many people’s attitudes are conditioned by their perception of the interests of those they care about (particularly themselves) and less by a rational assessment. But perhaps it might swing one or two.
Forget money. Money isn’t the key to wealth or welfare. Harnessing our resources as efficiently as possible to maximise our quality of life is the key to wealth and welfare. (Let’s put aside the welfare arguments about interpersonal comparisons and aggregation of utility for one second, and accept that the previous sentence is intuitively reasonable as a broad rule for most people, and defensible to a limited extent on the basis of Pareto optimality in the way that Rothbard suggested)
Increases in wealth and welfare are not independent of our human choices, but fundamentally dependent on them. We can easily destroy wealth and reduce our welfare through our choices. If I burn down your house and you burn down mine in response, there has been an absolute net loss of wealth and welfare. War is a wealth- and welfare-destroyer on a grand scale, and no amount of economic activity from the production of the tools used to kill and destroy can ever tip the welfare scales against the weight of death and destruction. It may be defensible as a necessary evil, but never as an economic benefit.
Wealth can also be destroyed and welfare reduced by more subtle means than overt destruction. If we consume goods that are important to our quality of life, without making provision for their continued availability in the future (or the availability of some equivalent), we have destroyed wealth and reduced our welfare in the long-term; for instance, if we consume our seed corn in anything other than the most desperate circumstances. Or, as Mises put it in Human Action,
It may sometimes be expedient for a man to heat the stove with his furniture. But if he does, he should know what the remoter effects will be. He should not delude himself by believing that he has discovered a wonderful new method of heating his premises.
Conversely, human choices can create wealth and increase welfare. If I am a painter and my neighbour is a plumber, and instead of burning down each other’s houses, we decide to employ each other for our specialisms rather than doing the work badly ourselves, we achieve a better outcome more efficiently than through self-sufficiency, and thereby have more time and resources for things we enjoy. We have chosen to increase rather than reduce wealth and welfare.
But it is unlikely that all my plumbing needs will coincide (in timing and value) with my neighbour’s painting needs. We need a store and measure of value that enables us to purchase each other’s services when needed, and in more granular and comparable units than bartered goods or services. Hence money.
And although I know that sooner or later I will need some plumbing services, and my neighbour knows he will need some painting services, neither of us knows when, so we have to make sure we are putting enough away to be able to purchase necessities when required, preferably with reference to the ageing of our pipes and decor and the increasing likelihood that purchases will be required, plus some allowance for risk. Hence capital.
Everyone benefits from having a little money and capital, and from having a fundamental understanding of the concepts (sadly rare nowadays). But it is no more necessary or likely that everyone has an equal understanding and skill at handling money and managing capital than that they have equal understanding and skill at painting or plumbing. Allocation and growth of capital is as much a specialist skill as any other, and society benefits as much, under the division of labour, from specialists focusing on that skill as on any other.
But how do we know who the best-equipped specialists are, and ensure that they take the lead in their field? Good painters and plumbers get more jobs at higher rates, and are thereby encouraged to stay in the business and expand their activities. Bad painters and plumbers eventually run out of work that pays enough to bother, and have to switch to something they are better at.
It is the same for capital-allocators, or entrepreneurs. Profit (built up into investment capital) is the evidence that they are good at it, the reward/incentive to focus on capital-allocation, and the means to do so. Losses (and accumulated debt) are the evidence that someone is not good at marshalling resources to make more than the sum of their parts.
We do not say that we should redistribute the means to paint and the available painting work from those who are good at painting to those who are bad at it. In fact, we don’t say that for any skill, except the skill that is most important to the increase of our welfare: the allocation of capital to achieve the most efficient improvement in our quality of life.
It is no disparagement or deprivation to recognise that some people are not good at allocating capital. If they have other skills, they can charge for those, and probably earn more by focusing on what they are good at than if they were distracted half the time, trying to cope with something they are not good at. They can take payment from an entrepreneur who knows how to maximise their value and minimise their costs better than they do themselves. That is a symbiotic arrangement to be proud of, not ashamed. It is a voluntary and equal arrangement of mutual interest. The entrepreneur is probably a lousy painter, but it isn’t considered demeaning to him that his colleagues will try to keep the paintbrush out of his hand as much as possible and keep him focused on the thing he is good at. But for some reason, the reverse is considered a power imbalance and a social injustice.
That is why it is so important that investment be based on real profits and savings. It ensures that the people making the investments are the people best-equipped to judge which investments are the most effective deployment of capital.
And that is why using monetary policy to discourage saving and encourage consumption is so harmful. It ensures that choices on spending are being made too much by those whose judgement has proved poor, and too little by those whose judgement has proved good. And it distorts the relative values of the different things on which they could spend their money. Consequently, we get more ill-judged spending and less well-judged spending than we would without the policy distortion. More ill-judged spending and less well-judged spending results in destruction of capital and a reduction in the wealth and welfare of society as a whole, to everyone’s detriment in the long-run.
Besides giving debtors an unhealthy ongoing responsibility for spending decisions, soft monetary policy relies on two other groups to substitute for savers and entrepreneurs on spending decisions: politicians and bankers. That, of course, suits politicians and bankers very well. But it is less good for society at large.
Politicians have rarely, in their path to power, demonstrated much skill in the allocation of capital. Indeed, for many of them, politics is a way of getting to play with other people’s money on a scale that they could never have earned by their own efforts, by demonstrating very different (almost diametrically opposite) skills to those required for the allocation of capital. Not surprisingly, managed by people like that, government almost always runs at a loss. The more government runs, the more significant are those losses to the welfare of society as a whole. The projects that politicians choose to encourage are usually those that are operating least successfully – almost by definition, as most cries for political help come from failing businesses, and politicians get more political reward for helping organisations that “need” help than those that don’t.
Modern bankers have demonstrated repeatedly how few of them are heirs to the traditional banker, whose role was precisely the judicious allocation of the capital of his savers, through a deep understanding of the claims of entrepreneurs, who would vie to invest those savings and grow the capital for everyone’s benefit. That sort of banker has been eliminated from the institutional structure of most modern banks. He has been replaced by (a) a large majority of modestly-paid employees who are hidebound by rules, unauthorised to apply judgement, and free to lend only against those sorts of unproductive assets (e.g. property) whose assessment requires little understanding and experience, and (b) a small minority of excessively-remunerated gamblers. If only by their attitude to remuneration, these gamblers show themselves unfit to allocate capital, as they are so keen to consume rather than invest such a large part of their bank’s resources. They expect returns so quick and persistently accelerating that they could rarely be the product of genuine investment that creates genuine wealth. Their rewards stem mostly from their privileged positions as partners and agents of governments’ soft-money policies. And, despite their privilege, they prove remarkably adept (with their political friends) at destroying capital by blowing bubbles and failing to predict the inevitable bust. Hardly the best evidence of good judgement in the allocation of capital.
These are the only two options. Either, through soft-money policy, you penalize the prudent and reward the profligate, and put the responsibility for the growth of our wealth and welfare in the hands of debtors, gamblers, politicians and their clients in failing organisations. Or, through hard-money policy, you ensure that the people who get to make the decisions on capital allocation are the people who have proved themselves best at allocating that capital in the past. Despite the harsh consequences for over-extended debtors, the choice should not be difficult. Yet, probably because of a misunderstanding of the nature of wealth and capital that fosters an irrational jealousy, too many people continue to cling to the wealth-consuming option.
News flash from the Commissariat of Monetary, Mystical and Magical Affairs: A glorious bountiful future is upon us! Science has conclusively proven that savings are anti-progressive. Science has prevailed. You may now enjoy the bounty of our success and consume at will!
Comrades, it is now thirteen years since the liberation of banking from the evil yoke of the hated Westminster Illetrati, and stupefying progress has been made. Right from the outset the new owners of the banking system, the MPC (Magical Pronouncements Committee) has steered the glorious (bank) workers towards an unstoppable era of perpetual prosperity.
Our perpetual energy anti-graviton money flotation device (known as the economic model) has once and for all ended the inefficient distribution of money, and apart from the odd hiccup, a never ending prosperity has been achieved. This fact has been scientifically proven by use of the officially approved scientific papers produced by our colleagues in the (un)free banking world (known as annual profit and loss statements).
It is with this wonderful news pulsating through our veins and the joy in our hearts, that we must now announce some final tweaks to the scientific formula that will save us all from hard work, irresponsibly ‘saving’ (ha!) for a so called ‘rainy day’ (see pronouncement 737845, circa May 2007, where rainy days were banished forever).
My fellow consumers, we have secured the very latest Bernankopters, loaded with magic money token sprays, but you too must do your bit to further expand our success.
In order to assure our glorious future, we must now spend it! Fear not dear travellers, this is the era of black-is-white. Night has been turned into day.
It has come to the attention of Commissar Charles Bean that anti-dirigiste elements are spreading a heresy that we have somehow ‘over consumed’, that the glittering successes were a sham and that the lack of savings should be compensated by the voodoo of ‘thrift’.
Comrade Bean urges you to ignore these siren calls.
It is pronounced that we must all suppress our fears and consume for the future!
On Thursday the 28th of October, Cobden Centre Senior Fellow Jesús Huerta de Soto will be giving this year’s Hayek Lecture at the LSE.
Date: Thursday 28 October 2010 Time: 6.30-8pm Venue: Sheikh Zayed Theatre, New Academic Building Speaker: Professor Jesús Huerta de Soto
The current financial and economic situation of the world should be analysed from the point of view of the Austrian Business Cycle Theory as developed by Mises and Hayek. Professor Huerta De Soto will present innovative solutions to the banking crisis and credit crunch working within the tradition of the Austrian School masters, Mises and Hayek. He will also unveil his proposal for similar legislative change that the “Peel Act” or Bank Charter Act of 1844 achieved with regards to the over issue of promissory notes to gold, but with respect to the over issue of credit. The consequences of doing this should create a climate of financial stability and an opportunity to totally restructure the national debt (potentially pay it off).
Jesús Huerta de Soto is professor of political economy at King Juan Carlos University.
This event is free and open to all with no ticket required. Entry is on a first come, first served basis. For any queries email events@lse.ac.uk or call 020 7955 6043.
There’s another great article from Liam Halligan in The Telegraph, recapping how we got to our current situation, and considering the impact of further quantitative easing being proposed in the US.
Central bankers lowered rates in the aftermath of 9.11 and the dot-com crash, then kept them low far too long – so pumping-up the biggest credit bubble in history.
Now, the Western world’s policy response amounts to printing money and heaping debts upon debts, while shoving the banking sector’s losses on to the general public – and particularly, their children and grandchildren. This is perhaps the most systematic act of inter-generational theft the world has ever seen. But that’s not the point – at least for now. The point for now is that QE and the related fiscal boosts simply aren’t working.
Halligan highlights the challenge we face,
In the early 1980s, Western governments bit the bullet and tackled the vested interests that had caused recessions – not least recalcitrant trade unions – so allowing enterprise to flourish and fuelling the recovery. This time around, the lobby group blocking sustainable growth is even more powerful – namely the banking sector itself.
As Simon Johnson has written: “The finance industry has effectively captured our government – and recovery will fail unless we break the financial oligarchy that is blocking essential reform”. Strong words from a Former Chief Economist of the International Monetary Fund – but no less true for that.
As regular viewers of Peter Schiff’s video blog channel will already know, there are ups and downs in his output. However, last Friday’s show (September 24th) was one of his best in recent months and a fairly decent contender for Schiff-of-the-Season. Without seemingly pausing for breath or erring once, Mr Schiff laid into the popular urban myth of a gold bubble and then the resignation of President Obama’s financial adviser, Larry Summers — who Schiff thinks could be replaced by an inexpensive parrot squawking “Print More Money” — before directing his forensic attention towards Bernanke, Obama, and finally a hedge fund billionaire called David Tepper, who Schiff accuses of being yet another believer in the omnipresence, omnipotence, omniscience and omnibenevolence of government-appointed central planning bureaucrats.
The 2006 article Peter Schiff refers to in the video above, can be found here:
This week, after the Japanese yen had surged to a fifteen-year high against the US dollar, the Japanese government decided to intervene in the foreign exchange market. To great fanfare, the Bank of Japan initiated a vigorous campaign to buy US dollars, thereby stemming the rise of the yen and pulling up the greenback. The effects were immediate, with the yen falling an astonishing 3% on the day of the announcement. At a time when American politicians are growing increasingly vocal about China’s currency manipulations, Washington was strangely silent on the Japanese move. This was completely overlooked by the hawkeyed media.
While missing this blatant irony, the media spin doctors cast the Japanese decision as an attempt by the island state to prop up its own fragile economy. More accurately, the intervention was done to help American consumers buy more cars and electronics from Japan. In truth, although more American purchases would nominally benefit some Japanese exporters, a weaker currency is a detriment to the overall Japanese economy.
The politics of currency intervention are actually quite simple. Japan’s economy is dominated by large manufacturers that export lots of goods to Americans. The problem is that Americans can’t really afford to buy in the quantities that they did just a few years ago. So, instead of looking for new customers with more money to spend, either in their own country or in other productive economies, Japanese manufacturers use their political clout to lobby their government to bailout their traditional U.S. customers. The bailout takes the form of a direct transfer of purchasing power from Japanese savers to American consumers, so that Americans can continue buying products they couldn’t otherwise afford. In short, pushing up the dollar allows Japanese exporters to postpone a necessary, but costly, restructuring.
The tendency for governments to sacrifice the needs of the general population in favor of entrenched corporate interests is not unique to Japan. In the United States, we have taken similar measures on behalf of our dominant industries. However, instead of manufacturers and exporters, whose political clout has waned along with their economic prospects, Washington has moved to protect the profits of the financial, retail, and real estate industries– the true heavyweights of the American corporate world. These industries profit when Americans borrow money to buy things they can’t afford. To keep this behavior going, the government must make it possible for consumers to take on more debt; but, in so doing, these policies have left us with an ailing economy in need of deep and drastic restructuring.
In a way, what the Japanese government is doing for American consumers is very similar to what our government is doing for American homebuyers. Rather than let home prices fall, the US government subsidizes homebuyers so they can continue overpaying for houses they cannot actually afford. The beneficiaries of these moves are those selling, building, and financing overpriced homes. Unfortunately, the last thing we need as a nation is to build, buy, or finance more homes. Our economy would improve if the resources devoted to the real estate market could be devoted to other, more needed industries.
Japan should allow the dollar to fall, which would force their manufacturers to adapt to a changing global market where Americans consume less, and those in emerging markets consume more. Instead, it is vainly trying to preserve the status quo and appease entrenched political factions.
Just like here in the US, Japanese politicians take cover by falsely claiming that the intervention “saves jobs.” However, the jobs that are saved come at the expense of more productive jobs that are either lost or not created. If Americans cannot afford to buy Japanese products, it makes no sense for the Japanese to continue selling them to us. Rather they should devote their time, effort, savings and resources to selling products to customers who can actually afford to pay.
Japan’s bailout of American consumers is nothing more than international vendor financing. This is the same technique used by telecom companies during the Internet boom of the late ‘90s. In order to pump up short-term profits, manufacturers of communications gear loaned money to cash-strapped Internet startups so they could buy switches and routers. Of course, when the dot-coms went bankrupt, all those phony sales were written off; then, the stocks of those companies doing the financing, like Cisco, Lucent, and Nortel, collapsed as well (though they did not collapse to zero like the dot-com companies). Although their performance would have lagged during the boom, the equipment manufactures would have been in far better shape fundamentally if the phony sales had never been made.
The same fate awaits the US and Japan. In this analogy, Japan is Cisco and the United States is Pets.com. Sooner rather than later, both Japan and China will realize that they have been hoodwinked by a fast-talking sock puppet without a credible plan to pay them back. When that happens, they will take the write down and let us fend for ourselves.
It’s the injustice of the current system that feels so appallingly wrong. If you do not work in the financial services industry or for the government, then you should feel angry at the political shenanigans of last few years, for it is you who have paid for their mismanagement and extravagance and both you and your children who will continue to pay for years to come. Not content with the shameful plunder of these last 30 years, the vested interests seek to maintain the same structures in place to allow it to persist, enriching themselves at the expense of the rest.
The common man has an inkling of who is to blame. A straw poll of grievances of the bloke down the pub will often finger ‘bankers’ and ‘politicians’ as the rogues in our society, but he is unable to identify just how they pulled off this trick of empoverishing him. He doubts himself as he does when he looks in his wallet leaving the pub after one beer too many thinking “I’m sure I had another tenner here somewhere”.
The free market is a fair system through which an entrepreneur can only become rich through serving the needs of his customers better than any other provider. This should therefore result in beneficial systemic effects that all can enjoy. As Von Mises wrote
‘A “chocolate king” has no power over the consumers, his patrons. He provides them with chocolate of the best possible quality and at the cheapest price. He does not rule the consumers, he serves them. The consumers are not tied to him. They are free to stop patronizing his shops. He loses his “kingdom” if the consumers prefer to spend their pennies elsewhere’.
So how did the bankers manage to pickpocket our pub-goer without him realising? How did he cheat the free market system?
At its most basic, banking should be a management function whereby transactions are facilitated and savings passed efficiently to investment opportunities with the best prospects. It is the success of these projects that provides the goods for all to consume in the future, and they are only successful if – like the chocolate king’s chocolate – consumers are willing to buy them. Financial services are an indispensable part of the economy, created for and ultimately demanded by consumers.
But, we ask ourselves, how did there get to be so many of these financial managers, and why are they paid so much money? Ordinarily the right number in any industry and remuneration will also be decided by market processes. Too many financial managers will mean that any profits from the financial firm are eaten away, such that the industry is forced to shrink. Surely it cannot be an efficient allocation of resources to see their numbers growing faster each year relative to the size of the economy. And yet this is what we have.
OECD world factbook 2009
In the chart above the term “value added” does not seem apposite. However, it is be indicative of the size of the industry relative to the overall national economies.
As banks create new credit, all these new loans earn interest, making the banks more profitable, allowing the hiring of new people so that their businesses can expand. Banks have been able to expand their loan books without fear of these loans being called in, only because of they have a direct credit line from the central bank, which was has the ability to print new money.
The creation of new credit has pushed down the interest rate available below its sustainable long-term rate, and has allowed consumers pay more for assets, and so bid up their prices. All those therefore working in areas of the economy who charge a fee on assets have also therefore benefited (fund managers, estate agents etc.). This is captured in the numbers above.
Is it reasonable that more than 30% of the UK economy is now engaged in providing financial paper shuffling of one kind or another? This is not just due to the UK selling financial products overseas. The trend of financial services becoming a greater proportion of overall economies is global, ubiquitous and is entirely down to over-cheap money.
Credit created today has the effect of driving up asset prices as mentioned. It causes inflation down the line but this does not hit wages for the non-banks’ employees until much later. The credit created tends to be deployed in the loans market first (the central banks’s favourite way to inject money into the system is to buy government debt). This in turn has forced up the value of other financial assets, equities and houses. However, the price inflation does not hit the average wage earner’s pocket until all the other prices have gone up beforehand. Although his wages do not decline in pounds sterling, his purchasing power is taken from him, just the same, expropriated by the banks.
The other group that has ‘benefited’ from the policies pursued over the past 20 years is government. Increases in asset prices caused by the credit expansion allowed the government to take ever increasing amounts of tax. In addition, the low interest rates set by the central bank allowed the government also to borrow to unacceptable levels to fund its continued spending. The central bank funds the government directly through buying its newly issued debt.
OECD world factbook 2009
This situation is only possible as a result of the existence of the central bank. Without it, the commercial banks would be checked in their efforts to create more credit and the government would have no funding instrument and would have to reduce its spending. Back in the days before central banks, governments themselves went bust. Alas no longer.
So where does this leave our bloke down the pub? He should be livid! He is squeezed between a hungry bank and a bloated government. He can do little about it other than attempt to join these two favoured groups, which of course explains their expansion.
Annual survey of hours and earnings (ASHE) 2009
Note that the chart above tracks nominal wages. When adjusted for inflation, we see that the median man has made little progress at all, if any, over the last 10 years.
The average man works hard in order that he might share in the gains that result from our society becoming more productive, is robbed every single day that he picks up his wage packet, the gains that would normally be seen as a result of falling prices spirited away out of his wallet without his knowledge.
It would be easy to blame individual bankers, or even the whole industry for this sordid con-trick. However, each of the participants within the banking industry is only acting in his best interests. The individual banker that did not take advantage of the subsidy granted to the entire industry in the form of central bank printing would be at a severe disadvantage relative to his competitors and may go out of business as a result.
As Austrian economists know, the only way to prevent this behaviour, and re-align the interests of the banks with the interests of their customers, is the abolition of the central bank.
