Authors

Economics

On Money And Society: An Exclusive Interview With Steve Baker MP

A former RAF aviation engineer and software engineer in the financial sector, Steve Baker has been the Conservative MP for Wycombe, Buckinghamshire since 2010. Recently he was elected by his colleagues to the Treasury Select Committee, where he has put questions to Bank of England Governor Mark Carney, and he has also sponsored a Parliamentary debate on ‘Money Creation and Society’. He is an outspoken follower of the Austrian Economic School, and is an advocate of ‘free banking’ and the de-nationalisation of money. In this interview, Steve shares his views on money, banking and economics generally; why he chose to enter into politics; his plans for the next Parliament; and the prospects for sound money and banking in the UK and around the world.

BY WAY OF BACKGROUND…

Steve Baker has been fascinated by machines since his youth growing up in Cornwall. He studied Aerospace Engineering at Southampton University through a University Cadetship programme, entering the RAF on graduation, and served his country in multiple international locations for 10 years.

Also fascinated by information technology, on leaving the RAF in 1999 he studied towards a degree in Computer Science at St Cross College, Oxford. He then worked in a number of IT roles, including at Lehman Brothers in 2006-08, leading into the global financial crisis. His personal website (here) makes plain that, “My work at Lehman Brothers particularly informs my present work on reforming the financial system.” He decided to enter politics in 2007 and was elected to Parliament on his first attempt in 2010.

Steve is hardly the only sitting MP to focus on financial and banking issues. But he is the only Conservative MP to openly advocate for fundamental reform of not just banking, but of money itself. This is due to his outspoken belief in the key tenets of the Austrian Economic School, which teaches that activist monetary and fiscal policies undermine long-term economic health. To begin our discussion, we explore how Steve experienced the 2008 financial crisis and the impression it made.

JB: Steve, you had been working at Lehman Brothers for about two years when the financial crisis hit in 2008. Did you ever have a sense that the firm was dangerously exposed to a potential crisis? That the firm’s high leverage and a reliance on short-term financing could bring it down? That the financial system in general was as fragile as it demonstrably was?

SB: Back when Lehman was posting record quarter after record quarter, I was focussed on delivering value through software and I still believed our masters understood the institutional superstructure of the economy. It was only when the bust came that I realised the Austrian School had crucial insights to offer which were missing from the mainstream.

JB: How exactly did you come to believe that the Austrian Economic School provided the best explanation for the 2008 financial crisis and also for understanding economics more generally? Was this a gradual process or rather something more like a sudden epiphany?

SB: It was a long process. I first read Mises’ The Causes of the Economic Crisis and Hayek’s Monetary Theory and the Trade Cycle in 2000 during my MSc in Computer Science. I was planning to make my fortune in software, but then the dot-com bust happened. I wanted an explanation and found it in these books. However, my priority was business and I didn’t have the confidence to start telling economists where they were going wrong. It was only after working for banks and their regulators that I realised key insights about epistemology and method were absent from mainstream economics in important ways. That caused me to read more deeply, co-found The Cobden Centre with Toby Baxendale and then use my Parliamentary position to promote better economic policies.

JB: Please describe what it is you mean by free banking and money. Most people just take national fiat money and heavily-regulated banking for granted. Of course this was not always the case. But then have free banking and money really ever been the norm? Why is this topic of such importance to you?

SB: By ‘free-banking’ I mean money and a banking system produced by the spontaneous co-operation of free individuals in markets. It is what Hayek proposed in his Denationalisation of Money and HM Treasury briefly worked in that direction as an alternative to the euro. Usually, free banking means gold (or silver) as the base money and banking conducted under the ordinary commercial law, usually with unlimited strict liability. Canada and Scotland historically came closest to free banking. In a future free-banking system, cryptocurrencies or blockchain technologies of some sort are likely to have a role. Sound money is crucial to the justice of social processes.

JB: When and how did it occur to you that, by entering politics, you could contribute to changing the terms of debate around money and banking, when neither major UK party seemed to have any interest in doing so?

SB: Originally, it was the scandal of the Lisbon Treaty – the mangled EU Constitution – which prompted me to seek election to deliver an in/out referendum. It seems I may have played my part in reaching that objective but that decision was reached in 2007, before the crash. Once the crash came, when I had no realistic expectation of being elected, I decided to establish an Austrian School think tank. My surprise selection for a Conservative-held seat and election to Parliament changed everything.

JB: Please describe your experience in Parliament to date. What is it like to be something of a ‘maverick’ MP on the issues of money and banking? Is it encouraging? Discouraging?

SB: It’s hugely encouraging but hard work and I always appreciate support. As far as I am aware, I have no original ideas in this field and, being wary of the fringes of debate, I keep close to established literature. As a result, I seem to be attracting colleagues to at least consider the possibility that the Austrian School has a better answer to the question—famously asked by HM the Queen—of how the financial crisis could have happened. People know I am unorthodox but they also know I am grounded in credible literature. They also recognise the call for lower taxes, balanced budgets and sound money as distinctively Conservative. I suppose the difference is I really mean it; I don’t just say such things in hope of being elected.

JB: You recently sponsored a Parliamentary debate on ‘Money Creation and Society’? What was the purpose of the debate and do you believe that it achieved your objectives?

SB: Prominent Constitutional fiat money advocates Positive Money were agitating for a debate and they have strong national support. Despite disagreeing on many things, I am one of their best contacts in Parliament. The timing of the debate corresponded with their campaigning activity. However, of course I have spoken many times in the same vein, beginning with my maiden speech. Positive Money had created sufficient support for a debate in the main chamber to be possible and I was glad to lead it. We meant to move the debate forward and we did: I have received messages of support from around the world.

JB: Having recently achieved selection to the Treasury Select Committee, you have now had the opportunity to engage with Bank of England governor Mark Carney on multiple occasions. While he is obliged to answer your questions, do you find his answers satisfactory? Or evasive? Does it seem to you that the Bank of England is properly accountable to Parliament? Or is it able more or less to set policy on its own? If you could change anything about the existing governance of the Bank of England—other than abolishing it—what would that be?

SB: It is always a huge pleasure and privilege to ask questions of the Governor, who also chairs the G20 Financial Stability Board. Mark Carney is undoubtedly the central banker of his generation, full of talent and statesmanship. He knows where I stand. Perhaps our good-natured jousting can sometimes be seen in the sessions. His answers are mainstream and remember he has a dreadful power to shift markets with every word. He is sometimes breathtakingly honest—for example in relation to the shortcomings of mathematical models—but it is right that he has regard to the potential for his words to reverberate through markets. This factor has no place in a free society, of course, but we are where we are. The Bank is accountable to Parliament and the officials evidently take this seriously. The Bank operates within its mandate and that means it reaches policy decisions independently of politicians.

Given that, like Walter Bagehot [ed. note- Bagehot was Editor-in-Chief of The Economist from 1860 to 1877 and wrote extensively on fundamental economic and financial issues], I think the ideal system would not include central banks, your last question is hard to answer. I would have the Bank produce research that questions their groupthink and they are doing so. It will be a long time yet before we win the argument but having the Bank itself challenge orthodoxy may be an important breakthrough.

JB: Assuming that you and the Conservatives are re-elected in the coming months, what plans do you have for the next Parliament? What goals are realistic? And if you’re optimistic, what might be achieved over the next five years?

SB: Nationally, we must balance the budget. In all the circumstances, this will remain a tough problem. Personally, I would like to be re-elected by my colleagues to the Treasury Committee so I can continue to work on changing the terms of debate.

JB: How do you feel about the growing UK independence movement? Do you believe that the UK is more likely to fundamentally reform money and banking inside or outside the EU?

SB: People across the political spectrum are awakening to the reality that state power has escaped democratic control and that awakening is a good thing. The challenge is to hold politics together while a coalition for democracy and liberty is built, especially bearing in mind that it is the classical liberal and conservative family that is awakening first. A further fragmentation of the centre-right would be bad news for democrats and advocates of liberty.

Realistically, monetary reform is likely to come from either spontaneous market action or global reform of the post Bretton-Woods system. I don’t think the UK is likely to reform sterling unilaterally but this could happen provided we retain our own currency. I imagine Switzerland is culturally better-placed to reform independently, especially now they have decoupled from the euro. Maybe Russia will dramatically disrupt geopolitics with the reform you describe in your book. [Ed. note- I have suggested that Russia might respond to escalating international tensions by backing the rouble with gold. See here.]

JB: Do you regard the government’s ‘austerity’ policies to have been a success? How would you define ‘success’?

SB: Success would be a balanced budget. More work is required and the longer I spend in politics, the clearer it becomes that turning around a democracy is not like turning around a private company. The Chancellor has been more successful than most other finance ministers. I will continue to support him in so far as I can.

JB: To expand on the above, you are more aware than most about the deteriorating state of UK public finances and of the large imbalances in the economy more generally, such as the excessive reliance on property and financial services, and the chronic trade deficit with the rest of the world. Is it hard to be optimistic for the future when history suggests that the UK economy is going to remain weak for many years even in a relatively benign, non-crisis scenario in which these imbalances and excesses are worked off?

SB: In truth, it is often hard to be optimistic when you have “taken the red pill” of Austrian School economics. On the one hand, I am glad so many more people are now in private sector employment but on the other, as I have explained many times, the trajectory of debt and the continuing abuse of currencies is of grave concern. The future of our civilisation may be at stake.

JB: You co-founded the Cobden Centre, the leading sound money and banking think-tank in the UK. What do you see as the CC’s core mission? How exactly do you see the CC making a difference in future? Through education? Practical policy recommendations?

SB: The Cobden Centre’s core mission is to promote classical liberalism and specifically the Austrian School, that is, social progress through honest money, free trade and peace. It does not do politics but ideas and education. There is much more to do. Those interested in learning more can visit the website at www.cobdencentre.org and potential donors are welcome to send an email to staff@cobdencentre.org!

JB: Thanks so much for your time Steve. Before we conclude, are there any other thoughts you would like to share with our readers, many of whom work in the financial industry and would be profoundly affected by the sort of money and banking policies you advocate. What sort of impression would you hope they would take away from our discussion today?

SB: I hope readers will read your reports and your book, The Golden Revolution, and Detlev Schlichter’s complimentary work Paper Money Collapse. I hope they will read Mises and Hayek. If financial professionals cease opposing honest money and banking will we achieve the greatest institutional reform of our age: money and banking subject to competition and free of ruinous state control.

JB: Thank you so much Steve for your time.

POST-SCRIPT: REAL REFORMS REQUIRE

REAL LEADERSHIP

The value of Steve’s prominent role in promoting sound money and banking cannot be overstated. His leadership is an inspiration to all who would seek a better economic future. The best hope for real reform is to pressure the system both from within and from without. I encourage all readers to support Steve in his efforts in Parliament; through the educational resources of the Cobden Centre; and through their own private initiatives, whatever they might be.

Care to comment on this Report? Please contact me at john.butler@amphora-alpha.com.

Follow me on twitter! @butlergoldrevo

Politics

Lessons For Winning Liberty In a World Of Statism

Friends of freedom often become despondent when it seems that every day brings another growth and intrusion of government over people’s lives. But there is no reason to be disheartened, because there are lessons for winning liberty – from the opponents of freedom.

Beginning in the last decades of the nineteenth century, through most of the twentieth century and into our own time, all ideological, political and economic trends have been in the direction of various forms of collectivism. How did this come about, and what might friends of freedom learn from it?

Let’s take the case of socialism. On March 14, 1883, a German philosopher living in exile in London passed away. When he was buried three days later in a modest grave where his wife had been laid to rest two years earlier, fewer than ten people were present, half of them family members.

His closest friend spoke at the gravesite and said, “Soon the world will feel the void left by the passing of this Titan.” But there was, in fact, little reason to think that the deceased man or his long, turgid, and often obscure writings would leave any lasting impression on the world of ideas or on the course of human events.

That man was Karl Marx.

Socialism Did Not Always Seem “Inevitable”

Advocates of liberty often suffer bouts of despair. How can the cause of freedom ever triumph in a world so dominated by interventionist and welfare-statist ideas? Governments often give lip service to the benefits of free markets and the sanctity of personal and civil liberties. In practice, however, those same governments continue to encroach on individual freedom, restrict and regulate the world of commerce and industry, and redistribute the wealth of society to those with political power and influence. The cause of freedom seems to be a lost cause, with merely temporary rear-guard successes against the continuing growth of government.

What friends of freedom need to remember is that trends can change, that they have in the past and will again in the future. If this seems far-fetched, place yourself in the position of a socialist at the time that Karl Marx died in 1883, and imagine that you are an honest and sincere – if naïve – advocate of socialism.

As a socialist, you live in a world that is still predominately classical liberal and free market, with governments in general only intervening in relatively minimal ways in commercial affairs. Most people – including those in the “working class” – believe that it is not really the responsibility of the state to redistribute wealth or nationalize industry and agriculture, and are suspicious of most forms of government paternalism.

How could socialism ever be victorious in such a world so fully dominated by the “capitalist” mindset? Even “the workers” don’t understand the evils of capitalism and the benefits of a socialist future! Such a sincere socialist could only hope that Marx was right and that socialism would have to come – someday – due to inescapable “laws of history.”

Yet within 30 years the socialist idea came to dominate the world. By the time of the First World War the notion of paternalistic government had captured the minds of intellectuals and was gaining increasing support among the general population. Welfare-statist interventionism was replacing the earlier relatively free-market environment.

The socialist ideal of government planning was put into effect as part of the wartime policies of the belligerent powers beginning in 1914, and also lead to the communist revolution in Russia in 1917, the rise to power of fascism in Italy in 1922, the triumph of National Socialism (Nazism) in Germany in 1933, and the implementation of FDR’s New Deal policies in 1933, as well.

Collectivists Triumphed Based on Individualist Methods

Socialism triumphed during that earlier period of the last decades of the nineteenth and early decades of the twentieth centuries because while socialists advocated an ideology of collectivism, they practiced a politics of individualism. They understood that “history” would not move in their direction unless they changed popular opinion. And implicitly they understood that this meant changing the minds of millions of individual people.

So they went out and spoke and debated with their friends and neighbors. They contributed to public lectures and the publishing of pamphlets and books. They founded newspapers and magazines, and distributed them to anyone who would be willing to read them. They understood that the world ultimately changes one mind at a time – in spite of their emphasis on “social classes,” group interests, and national conflicts

They overcame the prevailing public opinion, defeated powerful special interests, and never lost sight of their long-term goal of the socialist society to come, which was the motivation and the compass for all their actions.

Uncle Sam and Lady Liberty Searched cartoon

Lesson One: Confidence in the Moral Rightness of Liberty

What do friends of freedom have to learn from the successes of our socialist opponents? First, we must fully believe in the moral and practical superiority of freedom and the free market over all forms of collectivism. We must be neither embarrassed nor intimidated by the arguments of the collectivists, interventionists, and welfare statists. Once any compromise is made in the case for freedom, the opponents of liberty will have attained the high ground and will set the terms of the debate.

Freedom advocate, Leonard E. Read, once warned of sinking in a sea of “buts.” I believe in freedom and self-responsibility, “but” we need some minimum government social “safety net.” I believe in the free market, “but” we need some limited regulation for the “public good.” I believe in free trade, “but” we should have some form of protectionism for “essential” industries and jobs. Before you know it, Read warned, the case for freedom has been submerged in an ocean of exceptions.

Each of us, given the constraints on his time, must try to become as informed as possible about the case for freedom. Here, again, Leonard Read pointed out the importance of self-education and self-improvement. The more knowledgeable and articulate we each become in explaining the benefits of the free society and the harm from all forms of collectivism, the more we will have the ability to attract people who may want to hear what we have to say.

Lesson Two: Focusing on the Long Run, Not Short Run Turns

Another lesson to be learned from the earlier generation of socialists is not to be disheartened by the apparent continuing political climate that surrounds us. We must have confidence in the truth of what we say, to know in our minds and hearts that freedom can and will win in the battle of ideas.

We must focus on that point on the horizon that represents the ideal of individual liberty and the free society, regardless of how many twists and turns everyday political currents seem to be following. National, state, and local elections merely reflect prevailing political attitudes and beliefs. Our task is to influence the future and not allow ourselves to be distracted or discouraged by who gets elected today and on what policy platform.

As Austrian economist, F.A. Hayek, emphasized, current policy directions are the product of ideological and political trends from thirty or forty years ago. In other words government policies today are the lagged effect of political-philosophical and ideological trends of earlier decades. To change tomorrow’s policies, our focus today must be on influencing the “climate of opinion” reflected in people’s minds that, then, will determine how people in the future view issues such as the role of government in society based on their notion of the nature and rights of individuals.

Lesson Three: Knowing that Only Freedom Works

Let us remember that over the last hundred years virtually every form of collectivism has been tried—socialism, communism, fascism, Nazism, interventionism, welfare statism—and each has failed. There are very few today who wax with sincere enthusiasm that government is some great secular god that can solve all of mankind’s problems – at least not many outside of those currently employed in the White House!

Obama and the Declaration of Independence

Statist policies and attitudes continue to prevail because of institutional and special interest inertia; they no longer possess the political, philosophical, and ideological fervor that brought them to power in earlier times.

Political collectivism resulted in terrible and brutal tyrannies around the world. Government central planning created economic stagnation and chaos wherever tried. Interventionist-welfare statist policies have generated spider’s webs of special interest politics, intergenerational redistributive dependency, and perverse incentives and barriers to opportunity and prosperity.

There is, in fact, only one “ism” left to fill this vacuum in the face of collectivism’s failures in all its forms. It is classical liberalism, with its conception of the free man in the free society and the free market, soundly grounded in the ideas of each individual’s right to his life, liberty, and honestly acquired property in a social setting of peaceful association and voluntary cooperation and trade.

If we keep the classical liberal ideal of individual rights and laissez-faire capitalism before us, we can and will win liberty in our time – for our children and ourselves.

Free Trade

Before Adam Smith There Was Chydenius

[Editor’s note: this article first appeared at mises.org]

On my first day back in the classroom this fall, I was reminded that entrepreneurial alertness applies to ideas and insights as well as profits.

Since the opening chapter of the course’s economics principles text calls Adam Smith the father of economic science, I told my class that he actually had multiple precursors in the study of economics. I mentioned the Spanish scholastics as an example. And having his precursors in mind primed me to discover another one I had been completely unaware of.

After my class, I stopped by to visit a colleague I hadn’t seen all summer. Outside his office were copies of a pre-Euro 1,000 Finnish mark note and a pre-Euro 100 Austrian schilling note that I hadn’t noticed before. When I asked him about them, he said they were examples of countries that put important economist’s likenesses on their currency. I looked at the bills more closely. I recognized Eugen Böhm-Bawerk on the 100 Austrian schilling note. But on the 1,000 Finnish mark note was Anders Chydenius. I said, “Who is that? I never heard of him.”

My colleague told me just enough about Chydenius (1729–1803) to make me curious, particularly in mentioning that he wrote some very Smithian things before Smith. So I took a moment to check him out. What did I find? One article described him as “Scandinavia’s Adam Smith.” A review of his 1765The National Gain (originally written in Swedish) stated that “Chydenius published this system of economic thought about ten years previous to the publication of Adam Smith’s epoch-making work. It is peculiar to note how well the ideas of this simple Finnish country parson coincide with those of the great Scottish economist.” Another article I found said “One of the most remarkable aspects of Chydenius’ analysis is how relevant many of his conclusions are to today’s political and economic debates.” My curiosity aroused, I had to look further.

Chydenius was a country churchman in an outlying area of Finland (then part of Sweden). He did not read English or French (and the vast majority of his work was not translated into English until recently), and so he was unaware of the enlightenment discussions taking place in those tongues. He did not found a school, nor did he attract a group of followers. He was self-taught in economic matters and had no systematic methodological approach beyond common sense. He did not seek involvement in politics or look for power, but as Carl Uhr wrote, “when, on three separate occasions, he was a member of the Swedish-Finnish Parliament, it was the demands of his conscience which drove him to publish his opposition to a number of legislative proposals which seemed to him harmful and/or inequitable.” Briefly stated, it was his response to the inequities and waste of mercantilism that motivated his interest in economics.

In Bruno Suviranta’s review of Chydenius’s best-known work, The National Gain, he described what tied together Chydenius’s writings on political economy as “all founded on the same constant idea of freedom.” Charles Evans wrote that “he expressed a classical liberalism as radical as any penned by familiar [contemporary] liberals.” Chydenius “pointed out repeatedly that individuals engaged in voluntary exchange would be rewarded for doing only those things that their neighbors wanted them to do. If each individual is doing only what his or her neighbors want, then the commonweal is served.” In other words, “peasants left to their own devices could run the economic activity of the nation better than the nation’s best and brightest in positions of authority.”

So what did Chydenius write that Eli Heckscher could describe as reflecting a “simple exposition of the fundamental tenets of economic liberalism,” which “might readily have achieved international fame if at that time it had been published in one of the world languages”?

For example, we see in The National Gain (1765) some of Chydenius’s insight in his critique of government efforts to “improve” the national economy by favoring some industries over others. Of course, it is impossible for the government planners to know which industries provide the greatest good for society:

[I]t is quite unnecessary for the Government to draw workmen from one trade to another by means of laws. Nevertheless, how many Statesmen are there that have busied themselves with this … either by force or by granting them privileges. … No statesman is yet found capable of stating positively which trade will give us the greatest National Gain. … [Economic freedom] relieves the Government from thousands of uneasy worries, Statutes and supervisions, when private and National gain merge into one interest, and the harmful selfishness, which always tries to cloak itself beneath the Statutes, can then most surely be controlled by mutual competition.

In examining the issue of emigration from Sweden, in What Are The Reasons for Emigration from Sweden? (1765) Chydenius observed that economic freedom is at the heart of the matter:

[Workers] yearn for freedom. … They would rather settle among people whose speech they do not understand but among whom they may move and act freely … and in their decision one reads this motto: “a homeland without freedom and the chance for improvement is a great word with little meaning.”

In Rural Trade (1777), Chydenius examines the problems of government-favors bestowed on certain industries, and the resulting distortions:

Why, then, do rulers take unto themselves a power which is not theirs?… petty princes busy themselves with dabbling in matters they do not understand in order to satisfy their own or someone else’s prejudices, or in blindly following some minister’s advice.

They gather together a great many of their subjects in separate flocks and bestow favors on them at the cost of the others, and these favors they elevate into fixed privileges.

And on the matter of the relationship between labor and private property, Chydenius notes inThoughts about the Natural Rights of Masters and Servants (1778) that “[T]he property of the poor is hardly anything else than … freedom to labor and earn their daily bread. If this right be denied a person or be curtailed … by force … then it is clear that his freedom voluntarily to seek work and thus earn his living has been impaired, and then his constitutional guarantee of freedom loses its meaning and value …”

When it comes to the price of labor, Chydenius understands that wages should be left up to agreement between employer and employee “since the various regulations … do not adequately preserve that civil liberty that belongs to all … and since they do not serve the proper aim which is the strengthening and improvement of the nation … it should be left to each citizen’s discretion and liberty … to come to an agreement with one another as best they may … and at whatever price they may mutually agree on.”

If I hadn’t been thinking about Adam Smith and his precursors, I would probably never have followed up on Anders Chydenius from seeing his name on an old Finnish banknote. But I profited from the effort. And I think many others could, as well.

I especially resonated with Carl Uhr’s description of Chydenius as “imbued … by the vision that man, in seeking his own gain by specialization of labor and by exchange under an impersonal discipline of competition, would realize … the welfare and progress of society as a whole.” As a result, he was a “predecessor [of Adam Smith] who arrived independently at a conception of the essential nature and the virtues of an economic order based on freely functioning markets.” I only wish that, a quarter millennia later, more people shared Chydenius’s insight that, in Eli Heckscher’s words, “the only path to social harmony … was by free competition … all governmental intervention in the production and distribution of goods and services redounded sooner or later to the disadvantage of the great majority of the people.”

Politics

The Unpredictable Future And Winning Liberty

As a new year begins, it is easy to consider that the prospects for freedom in America and in many other parts of the world to seem dim. After all, government continues to grow bigger and more intrusive, along with tax burdens that siphon off vast amounts of private wealth.

Extrapolating these trends out for the foreseeable future, it would seem that the chances for winning liberty are highly unlikely. There is only one problem with this pessimistic forecast: the future is unpredictable and apparent trends do change.

Many years ago the famous philosopher of science Karl Popper pointed out, “If there is such a thing as growing human knowledge, then we cannot anticipate today what we shall only know tomorrow.” What does this mean?

When I was in high school in the 1960s, I came across an issue ofPopular Science magazine published in the early 1950s that was devoted to predicting what life would be like for the average American family in the 1970s. It had a picture of a wife and child standing on an apartment building roof waving good-bye to dad as he went off to work—in his one-seat mini-helicopter!

Dad Going Off to Work in Future

As best as I can recall, the authors talked about such things as color televisions, various new household appliances, robots that would do much of our household work, and the use of jet planes for commercial travel. What was not mentioned, however, was the personal computer or the revolution in communication, knowledge, and work that it has brought about. When that issue of Popular Science was published, one essential element of the computer revolution had not yet been invented: the microchip.

We Cannot Predict Tomorrow’s Knowledge Today

Those authors could not imagine a worldwide technological revolution before the component that made it all possible was created by man. Our inescapably imperfect knowledge means we can never predict our own future. If we could predict tomorrow’s knowledge and its potentials, then we would already know everything today—and we would know we knew it!

This applies to social, political, and economic trends as well. Most people in 1900 expected the twentieth century to be an epoch of growing international peace and harmony. In 1911, the British free trader and peace advocate, Norman Angell (who won the Nobel Peace Prize in 1933), argued in The Great Illusion that war had become so costly in terms of financial expense and wasteful destruction that it would be irrational for the “Great Powers” of Europe or America to be drawn down that path any longer.

But, instead, in 1914, there began the First World War, that went on for four years, took the lives of at least 20 million soldiers, and cost (in 2014 dollars) over $3 trillion. And the relatively classical liberal and free market world that prevailed before the “Great War,” was shattered.

The twentieth century, as a whole, was the bloodiest and most destructive in modern history due to the rise of political and economic collectivism, in the forms of socialism, communism, fascism, Nazism and the interventionist-welfare state. The conflicts that collectivism brought in its wake have cost possibly 250 million lives over the last one hundred years. No one anticipated this turn of events in 1900.

The Unpredictability of Future Political-Economic Trends

When I was an undergraduate in the late 1960s the book assigned in my first economics class was the seventh edition of Paul Samuelson’s Economics (1967), the leading Keynesian-oriented textbook at the time.

There was a graph that tracked U.S. and Soviet Gross National Product (GNP) from 1945 to 1965. Samuelson then projected American and Soviet GNP through the rest of the century. He anticipated that possibly by the early 1980s, but certainly by 2000, Soviet GNP would be equal to or even greater than that of the United States. Notice his implicit prediction that there would be a Soviet Union in 2000, which in fact disappeared from the map of the world in December 1991.

Which of us really expected to see the end of the U.S.S.R. in our lifetimes, without either a nuclear cataclysm or a devastating and bloody civil war? In the mid-1980s the often perceptive French social critic Jean-François Revel published How Democracies Perish, in which he expressed his fear that the loss of moral and ideological commitment to freedom by intellectuals and many other people in the West meant that the global triumph of communism under Soviet leadership was a strong possibility. Instead it was Soviet communism that disappeared from the map of the globe.

Who in January 1990 anticipated that Saddam Hussein would invade Kuwait in August of that year, setting in motion a chain of events that resulted in two American invasions and a ten-year occupation of Iraq?

Who in 2000 would have anticipated that Bill Clinton’s eight years in office would seem, in retrospect, an era of restrained government compared to the explosion in government spending and intervention during the George W. Bush and Barack Obama administrations?

no_future_in_economic_forecasts_251805

Historical Chronology Does Not Mean Future Causality

And who today knows what the whole twenty-first century holds for us? Let me suggest that the answer is: nobody.

As the late Robert Nisbet, one of America’s great social thinkers, once pointed out, “How easy it is, as we look back over the past – that is, of course, the ‘past’ that has been selected for us by historians and social scientists – to see in it trends and tendencies that appear to possess the iron necessity and clear directionality of growth in a plant or organism . . . But the relation between the past, present, and future is chronological, not causal.”

The decades of relative global peace and market-based prosperity that preceded 1914 did not mean that war and destruction were impossible for the rest of the twentieth century. The ascendancy of Soviet communism, Italian fascism, and German Nazism in 1920s, 1930s and 1940s did not mean that freedom and democracy had reached their end, though the books and articles of some of the most insightful advocates of individual liberty and limited government in the years between the two World Wars carried the despair and fear that totalitarianism was the inescapable wave of the future.

The persistent and current growth in government intervention and the welfare state does not mean that a return to the classical-liberal ideas of individual liberty, free markets, and limited government is a pipe dream of the past.

Human Events are the Result of Human Action

Human events are the result of human action. Our actions are an outgrowth of our ideas and our will and willingness to try to implement them. The stranglehold of Big Government will persist only for as long as we allow it, for as long as we accept the arguments of our ideological opponents that the interventionist welfare state is “inevitable” and “irreversible.”

That is, the present trend will continue only for as long as we accept that the chronologically observed increase in government power over the last decades is somehow causally determined and inescapable in the stream of human affairs.

This could have been equally said about human slavery. Few institutions were so imbedded in the human circumstance throughout recorded history as the ownership of some men by others. Surely it was a pipe dream to suggest that all men should be free and equal before the law.

Yet in the eighteenth and nineteenth centuries a new political ideal was born – that declared that all men are created equal and endowed with certain unalienable individual rights to life, liberty and honestly acquired property, which no other mortals could take away. So slavery, which Aristotle considered to be the natural condition of some men, was brought to an end before the close of the nineteenth century through the power of ideas and human purpose.

In the 1700s, mercantilism – the eighteenth-century version of central planning – was considered both necessary and desirable for national prosperity. Even Adam Smith, in the Wealth of Nations(1776), believed that its hold over men’s minds and actions was too powerful to ever permit the triumph of free trade. Yet in one lifetime following Adam Smith’s death in 1790, freedom of trade and enterprise was established in Great Britain and the United States, and then slowly but surely through much of the rest of the world.

This was all made possible because of the rise and partial triumph of a political philosophy of individual rights that argued for the banishment of violence and oppression in the relationships among men.

Future-Past Picture

Liberty’s Winning Ideas are Out There

We cannot imagine, today, how freedom will successfully prevail over our current paternalistic governments, any more than many people could imagine in 1940 a world without German Nazism and Soviet communism, or FDR’s New Deal. But that does not mean it’s impossible.

Precisely because the future is unknown, we may be confident that trends can and will change, just as they have in the past. We cannot fully know today what arguments friends of freedom will imagine and successfully articulate tomorrow to end government control of our lives. But those arguments are out there, waiting to be better formulated and presented, just as earlier friends of freedom succeeded in making the cases against slavery and mercantilism.

In 1951, Austrian economist Ludwig von Mises pointed out, “Now trends of [social] evolution can change, and hitherto they almost always have changed. But they changed only because they met firm opposition. The prevailing trend toward what Hilaire Belloc called the servile state will certainly not be reversed if nobody has the courage to attack its underlying dogmas.”

There is one thing, therefore, that we can predict: patience, persistence, and belief in the power of ideas and a well articulated defense of individual rights and free markets will provide the best chance we have to achieve the free society many of us so much desire.

[This first appeared at http://www.epictimes.com/richardebeling/2014/12/forecasting-the-future-and-winning-liberty/3/]

Politics

Yes, Virginia, There Is No Political Santa Claus

At a time of the year when gift giving and charitable good spirit fills the air, please allow me to be the one who rains on the parade: “Yes, Virginia, there is no Santa Claus!”

I don’t mean the Santa who comes down the chimney with toys for every girl and boy. This is the Santa who really is Mom or Dad, Grandparent or other family members or close friends who out of their own earned income choose to purchase, wrap and give gifts to those little ones on Christmas morning.

The small child may have been told the fairy story about an jolly, fat man in a red suit who lives in the far north, working with his elves all year long so the toys and other presents are ready to be miraculously delivered to every “good boy and girl” around the world in one night.

But we “adults” all know that is all just a story for the children at an early and gullible age when the fantasy of it all seems possibly real. And many of us cherish those early years of wonder and make-believe, before the reality breaks through that it just does not and cannot happen that way.

The Redistributing and Regulating Political Santa

I mean the Uncle Sam “Santa” that, not just at Christmas time, but year-round, is believed by many people to have the ability to bring them many of the good things they want from a mythical North Pole called Washington, D.C., or any governmental capital around the world.

This is the political Santa who delivers subsidies of various sorts to farmers or “alternative energy” manufacturers. The Santa who redistributes vast sums of money for educational expenditures, or public housing, welfare and food stamps, or government defense contracts, and even “bridges to nowhere.”

This is also the political Santa who can magically fill the global skies with unmanned drones for surveillance and death, or fund decade-long trillion-dollar wars in far-off lands, or bankroll “friendly” governments in other places around the world while punishing “bad” countries for what Uncle Sam defines as “misbehavior.”

This is the Santa who claims the power and ability remake human nature, control human thought, and redesign some or even all of human society into various preferred shapes and forms.

This political Santa works hard to create the illusion that prosperity and improvement in the human condition cannot happen if not for the guiding, regulating, and manipulating hand of “benevolent” government.

The Political Myth of Something for Nothing

But while almost all children grow out of their belief in a Santa Claus with his home at the North Pole who “somehow” succeeds in manufacturing all those “goodies” that he carries on his sleigh on Christmas Eve, many people go through their entire life convinced of the Santa-like abilities of a paternalistic government that can “somehow” assure many, if not all, of the desired good things of life.

However, just as “Santa” is really Mom and Dad who buy the presents, and wrap them to put under the Christmas tree, governmental “Santa” are those in political office who have no ability to bestow desired benefits on “all” without, in fact, first taking from some to give to others.

Mom and Dad work. They assist in producing goods or in performing services for others in the marketplace, which earns them a salary or nets them a profit. They have had to first produce to, then, through the income they earned, have the ability to consume, including on the goods that their children find on Christmas morning.

The governmental Santa must, first, tax away the income and wealth of some to, then, redistribute it in one form or another to others in the country over which those in political power assert fiscal and regulatory authority.

For the mythical Santa at the North Pole there are no costs for anything he does. The resources, raw materials and tools with which his Christmas goodies are made just appear. The elves work, apparently, for nothing and their food and clothes do not need to be produced, either.

For our political Santa Claus to rain redistributive “gifts” on those he considers deserving and “nice,” he must take from those found to be “naughty” and not nice.

Santa vs. Government Giveaway cartoon

Political Santa’s “Gifts” Carry High Costs

Our political Santa Claus imposes real and meaningful costs on many in society to do his magical “social work.” First, he must appropriate part of the material wealth produced by those productive members of society. People who, in a free market, only earn what they have by peacefully offering to others things those others desire and value enough to pay an agreed-upon price to acquire.

A portion of the intellectual and material effort of real men and women are seized from them through compulsory taxation. The government classifies these net taxpayers in society as having more than they “really” need, and usually don’t ethically “deserve.”

They get “sack of coal” for being “bad” in the form of being left with less than the full value of their creative and hardworking effort. They are denied the opportunity and the right to enjoy the complete fruits of their mental and physical labors. Their choices to spend what they have honestly earned are narrowed to what the political Santa decides they should have available to spend.

The “good” little political citizens who are given the redistributive benefits, therefore, are the net recipients of what others have produced, and which they have received due the ideological and pressure group power they can bring to bear in collaboration with the political Santa in the municipal, state, and national halls of governmental control.

But the costs of political Santa’s generosity do not come just in the form of direct redistributions. They also come in the form of regulations, restrictions, and licensing requirements that determine who may allowed to compete, work, and earn a living in a particular line of enterprise, production, and trade.

This “sack of coal” for the “bad” citizens also comes in the form in the inability to start a business or expand and successfully run an enterprise as the result of the regulatory hand of political Santa. The costs also take the form of closed opportunities for those with little or no skills to find work or be hired at a starting wage that would give them a chance at improving their own lives through honest employment in the free marketplace.

It also costs the consumers who find their choices and options are more limited or nonexistent than the free market would have provided, if only the government had not imposed these barriers, walls, and hurtles in the way of those who merely wish to be left alone to go about their private and personal affairs of life by offering new, better, and less expense goods and services to their fellow men through honest, peaceful, and mutually agreed terms of trade.

The “good little citizens” in this case are those on the supply-side of the market who are sheltered from the competition of real or potentially more efficient and productive rivals. Their larger market shares, greater profit margins, and costly inefficiencies are protected by the political Santa’s regulatory power; he, in turn, receives the campaign contributions and implicitly bought votes on election days that keep him in office.

The Myth of Needing a Political Santa for Life

For political Santa to pursue his mythical game in governmental plunderland, he must do all in his power to persuade and convince his citizen “children” that they do not have a right to their own life and to live it in their own chosen way. They must be indoctrinated to either passively accept the role of life-long dependent upon the political Santa, or to serve as the self-sacrificing elves who must do the work to produce all the goods and services in the world that will be redistributed out of the political Santa’s sack of taxed and regulated benefits.

Santa will educate you; he will see that you have a job and that you receive a “fair” wage. He will make sure that you are safe and satisfied by controlling what is produced, how it produced, and the terms under which the “bad” business children under his regulatory supervision market and sell many of those “goodies” to you.

When sick or disabled, political Santa will give you medical care; and he will guarantee you a retirement free from the need for planning for these things yourself.

All you need to do is accept your status as a lifetime adolescent needing supervision, care, and oversight in everything and in all things that you do. The spirit and psychology of being political Santa’s dependent was captured in that government website cartoon during the first Obama Administration called “The Life of Julia.”

“Julia” needed government to supply the hospital in which she was born; to provide the pre-school education with which her political indoctrination began; too see that Julia was given not only a government high school diploma, but got taxpayer subsidies and special quotas to make it into a preferred college or university; to see that gender affirmative action laws guaranteed a “fair chance” to a good paying job and career that she otherwise could never get on her own; and to see that in later years Julia has the safety-net of government Social Security, without having to bear the responsibility of carrying for this herself.

President Santa Claus cartoon

Self-Sacrificing “Elves” to Serve Political Santa

The other side of political Santa’s plunderland is the indoctrination of the productive and producer “elves” who are needed to do the work that supplies all that government can give away. This requires convincing everyone that “society” comes before the individual; that anything that the individual has is not due to his own effort and his peaceful and voluntary associations with others, or as President Obama asserted, “You did not built it.”

Instead, what you have is due to the collective efforts of all, so that you cannot claim a right to anything or any more than what the collective deems you to deserve. And it is political Santa who represents and acts for the social collective in determining what shall be expected from you and in what form, and what you shall be allowed to have from “society” (or that you are allowed to keep) as bestowed by the government’s redistributive and regulatory activities.

But just as there is no Santa at the North Pole, there is no political Santa in society. Political Santa is really those who run for political office to gain and retain governmental control and power over other people’s lives. Political Santa is really all the special interest groups who wish to use the halls of governmental power to obtain through regulation and taxation what they cannot honestly earn in the open competition of the free marketplace.

Ethical Benevolence vs. Political Immorality

Benevolence and voluntary charity, and a properly understood spirit of “giving” to those you value and love at Christmas time are right and virtuous sentiments of free people in the open society.

But belief in and actions based upon the idea of a “political Santa” only succeeds in weakening and finally destroying the spirit and ethical health of a free and prosperous society.

So, yes, Virginia, there is no Santa Claus. Neither a North Pole Santa who comes down the chimney in a red suit, nor a political Santa who can give people “something for nothing” in a world in which all that people want and desire must be creatively produced by someone before it may used to satisfy those wants and desires.

What makes the mythical belief in a political Santa far worse than the short-lived childhood belief in the North Pole Santa, is that the idea of a political Santa challenges and destroys the spirit of individualism upon which the good, free and prosperous society ultimately rests.

Ethics

Silly Conspiracy Theory: The Rothschilds control the world

“Give me control of a Nation’s money supply, and I care not who makes its laws.”

This quote frequently is attributed by conspiracy theorists to Mayer Amschel Rothschild, founder of the Rothschild banking dynasty.

A comparable quote is attributed to his son, Nathan:

I care not what puppet is placed upon the throne of England to rule the Empire on which the sun never sets. The man who controls Britain’s money supply controls the British Empire, and I control the British money supply.

Mayer_Amschel_Rothschild_grave
 Grave of Mayer Amschel Rothschild

 

There are some really big problems with these claims.

First, thorough research has uncovered no evidence whatsoever that either Rothschild ever said such a thing.

Skeptoid: Critical Analysis of Pop Phenomena — an award-winning weekly science podcast — searched for a primary source and reported:

In fact, that famous quote from Nathan Rothschild about “controlling the British money supply” turns out to be a fabrication. I found no original source for the quote at all, though it’s repeated in dozens of conspiracy books and on tens of thousands of conspiracy websites. I did a thorough search of all available newspaper archives from Nathan’s lifetime, and had some friends check various university library systems. No such quote appears in the academic literature. After such a thorough search, I feel confident stating that he never made such a statement.

But the quote doesn’t appear to be completely made up by the conspiracy theorists. It’s most likely a revised and restyled version of this quote attributed to Nathan’s father, the original Mayer Rothschild:

“Give me control of a Nation’s money supply, and I care not who makes its laws.”

But like the longer, more specific quote from Nathan, even this one turns out to be apocryphal.  Author G. Edward Griffin did manage to track it down, though. He found that this saying was:

Quoted by Senator Robert L. Owen, former Chairman of the Senate Committee on Banking and Currency and one of the sponsors of the Federal Reserve Act, National Economy and the Banking System, (Washington, D.C.: U.S. Government Printing Office, 1939), p. 99. This quotation could not be verified in a primary reference work. However, when one considers the life and accomplishments of the elder Rothschild, there can be little doubt that this sentiment was, in fact, his outlook and guiding principle

And this is certainly true. In Rothschild’s day, before banking regulation and antitrust laws existed, it was indeed possible for small groups to gain controlling interests in enough financial institutions that it could be argued that they “controlled” a nation’s money supply. Evidently the Senator made up the quote to support whatever speech he was making, and attributed it to a famous name to give it some clout.

Second, reckless falsehoods play into the hands of the most sinister elements of society.  In the case of the Rothschild family itself, Skeptoid reminds its readers that a “1940 German movie called Die Rothschilds Aktien auf Waterloo(was) described as ‘the Third Reich’s first anti-Semitic manifesto on film.'”   “Nazi Germany devastated the Austrian Rothschilds and seized all of their assets. The family members escaped to the United States, but lost their entire fortunes to the Nazis, including a number of palaces and a huge amount of artwork.”

The tenor of both apocryphal quotes echoes an authentic, lyrical and deeply discerning observation by Scottish writer, politician, and patriot Andrew Fletcher of Saltoun who wrote, in a letter to the Marquis of Montrose in 1703:

I said I knew a very wise man so much of Sir Christopher’s sentiment, that he believed if a man were permitted to make all the ballads he need not care who should make the laws of a nation, and we find that most of the ancient legislators thought that they could not well reform the manners of any city without the help of a lyric, and sometimes of a dramatic poet.

This sentiment has become well known in paraphrased form, “Let me make the ballads of a nation, and I care not who makes its laws.”  This writer infers that Fletcher’s words may have been the inspiration for the malevolently confabulated sinister sentiments attributed to the Rothschilds.

Skeptoid’s conclusion?

By my analysis, the Rothschilds are best thought of not as an evil shadow conspiracy, but as a great success story of rags to riches, Jewish slum to financing the defeat of Napoleon. The price of gold is fixed twice a day by five members of the London Bullion Association: Barclays Capital, Deutsche Bank, Scotiabank, HSBC, and Societe Generale, and they conduct their twice-daily meeting over the telephone. Today this is mere financial necessity, but until 2004, it was also a century-old tradition as great as the ringing of the bell at the New York Stock Exchange. The five distinguished representatives included a Rothschild, and they met in person in a paneled room at the London office of N M Rothschild & Sons. That ritual is now a thing of the past, as is the power of the world’s greatest financial dynasty.

 

This piece originated at http://thegoldstandardnow.org/key-blogs-6/1645-silly-conspiracy-theory-1

Economics

Should economics emulate natural sciences?

Economists have always been envious of the practitioners of the natural and exact sciences. They have thought that introducing the methods of natural sciences such as laboratory where experiments could be conducted could lead to a major break-through in our understanding of the world of economics.
But while a laboratory is a valid way of doing things in the natural sciences, it is not so in economics. Why is that so?
A laboratory is a must in physics, for there a scientist can isolate various factors relating to the object of inquiry.
Although the scientist can isolate various factors he doesn’t, however, know the laws that govern these factors.
All that he can do is hypothesize regarding the “true law” that governs the behaviour of the various particles identified.
He can never be certain regarding the “true” laws of nature. On this Murray Rothbard wrote,
The laws may only be hypothecated. Their validity can only be determined by logically deducing consequents from them, which can be verified by appeal to the laboratory facts. Even if the laws explain the facts, however, and their inferences are consistent with them, the laws of physics can never be absolutely established. For some other law may prove more elegant or capable of explaining a wider range of facts. In physics, therefore, postulated explanations have to be hypothecated in such a way that they or their consequents can be empirically tested. Even then, the laws are only tentatively rather than absolutely valid.1
Contrary to the natural sciences, the factors pertaining to human action cannot be isolated and broken into their simple elements.

However, in economics we have certain knowledge about certain things, which in turn could help us to understand the world of economics.
For instance, we know that an increase in money supply results in an exchange of nothing for something. It leads to a diversion of wealth from wealth generators to non wealth generating activities. This is certain knowledge and doesn’t need to be verified.
We also know that for a given amount of goods an increase in money supply all other things being equal must lead to more money paid for a unit of a good –an increase in the prices of goods. (Remember a price is the amount of money per unit of a good).
We also know that if in the country A money supply grows at a faster pace than money supply in the country B then over time, all other things being equal, the currency of A must depreciate versus the currency of B. This knowledge emanates from the law of scarcity.
Hence for something that is certain knowledge, there is no requirement for any empirical testing.
How this certain knowledge can be applied?
For instance, if we observe an increase in money supply – we can conclude that this resulted in a diversion of real wealth from wealth generators to non-wealth generating activities. It has resulted in the weakening of the wealth generating process.
This knowledge however, cannot tell us about the state of the pool of real wealth and when the so-called economy is going to crumble.
Whilst we can derive certain conclusions from some factors, however, the complex interaction of various factors means that there is no way for us to know the importance of each factor at any given point in time.
Some factors such as money supply – because it operates with a time lag, could provide us with useful information about the future events – such as boom-bust cycles and price inflation.
(Note that a change in money supply doesn’t affect all the markets instantly. It goes from one individual to another individual – from one market to another market. It is this that causes the time lag from changes in money and its effect on various markets).
Contrary to the natural sciences, in economics, by means of the knowledge that every effect must have a cause and by means of the law of scarcity (the more we have of something the less valuable it becomes), we can derive the entire body of economics knowledge.
This knowledge, once derived, is certain and doesn’t need to be verified by some kind of laboratory.

 

1. Murray N. Rothbard, “Towards a Reconstruction of Utility and Welfare Economics”, On Freedom and Free Enterprise: The Economics of Free Enterprise, May Sennholz, ed. (Princeton, N.J.: D.Van Nostrand, 1956), p3.

Economics

Brave new world

“Sir, Adair Turner suggests some version of monetary financing is the only way to break Japan’s deflation and deal with the debt overhang (“Print money to fund the deficit – that is the fastest way to raise rates”, Comment, November 11). This was precisely how Korekiyo Takahashi, Japanese finance minister from 1931 to 1936, broke the deflation of the 1930s. The policy was discredited because of the hyperinflation that followed.”

–       Letter to the Financial Times, 11th November 2014. Emphasis ours. Name withheld to protect the innocent.

 

 

“Don’t need to read the book – here is the premise. Business dreams are nothing more than greed. And you greedy business people should pay for those who are not cut out to take risk. You did not build your business – you owe everyone for your opportunity – you may have worked harder, taken more risk and even failed and picked yourself up at great personal risk and injury     (yes we often lose relationships and loved ones fall out along the way). However, none the less you are not entitled to what you make. Forget the fact that the real reason we have massive wealth today is we can now reach the global consumers – not just local – so the numbers are larger. Nonetheless the fact is that is not fair – and fair is something life now guarantees – social engineers demand that you suspend the laws of nature and reward all things equally. 2 plus 2 = 5 so does 3 plus 3 = 5; everything is now levelled by social engineers.  We need to be responsible for those who choose not to take risk, want a 9 to 5 job and health benefits and vacation. The world is entitled to that – it is only right – so you must be taxed to make up for those who are too lazy to compete, simply don’t try, or fail. In short the rich must mop up the gap for the also ran’s. Everyone gets a ribbon. There are exceptions – if you are Google, BAIDU, Apple or someone so cool or cute or a liberal who will tell people they should pay more taxes – you aren’t to be held to the same standard as everyone else.”

–       ‘cg12348’ responds to the FT’s announcement that Thomas Piketty’s ‘Capital’ has won the FT / McKinsey Business Book of the Year Award, 11th November 2014.
“@cg12348, I think you succeeded in discrediting yourself comprehensively. You didn’t read the book. You do not in fact know what is in it. But you just “know” what is in it. One can only hope that you do a little more work in your business ventures.”

–       Martin Wolf responds to ‘cg12348’.

“Socialism in general has a record of failure so blatant that only an intellectual could ignore or evade it..”

 

“Since this is an era when many people are concerned about ‘fairness’ and ‘social justice,’ what is your ‘fair share’ of what someone else has worked for?”

 

–       Thomas Sowell.

 

 

Forbes recently published an article suggesting that Google might be poised to enter the fund management sector. The article in question linked to an earlier FT piece by Madison Marriage (‘Google study heightens fund industry fears’, 28.9.2014) reporting that the company had, two years ago, commissioned a specialist research firm for advice about initiating an asset management offering. An unnamed US fund house reportedly told FTfm that Google entering the market was its “biggest fear”. An executive from Schroders was reported to be “concerned” and senior executives at Barclays Wealth & Investment Management were reported to perceive the arrival of the likes of Google and Facebook on their turf as a “real threat”. Campbell Fleming of Threadneedle was quoted in the FT piece as saying,

“Google would find the fund management market more difficult than it thinks. There are significant barriers to entry and it’s not something you could get into overnight.”

Bluntly, faced with backing Google or a large fund management incumbent, we’d be inclined to back Google. Perhaps most surprising, though, were the remarks by Catherine Tillotson of Scorpio Partnership, who said,

“There probably is a subsection of investors who would have confidence in Google, but I think the vast majority of investors want a relationship with an entity which can supply them with high quality information, market knowledge and a view on that market. I think it is unlikely they would turn to Google for those qualities.”

We happen to think that many investors would turn precisely to Google for those qualities – assuming they found those qualities remotely relevant to their objective in the first place. So what, precisely, do we think investors really want from their fund manager ? All things equal, it’s quite likely that investment performance consistent with an agreed mandate is likely to be high on the list; “high quality information, market knowledge and a view on that market” are, to our way of thinking, almost entirely subjective attributes and largely irrelevant compared to the fundamental premise of delivering decent investment returns.

After roughly 20 years of the Internet slowly achieving almost complete penetration of the investor market across the developed world, fund management feels destined to get ‘Internetted’ (or disintermediated) in the same way that the music and journalism industries have been. The time is ripe, in other words, for a fresh approach; the pickings for incumbents have been easy for far too long, and investors are surely open to the prospect of dealing with new entrants with a fundamentally different approach.

Another thing prospective digital entrants into the fund management marketplace have going for them is that they haven’t spent the last several years routinely cheating their clients, be it in the form of the subprime mortgage debacle, payment protection insurance mis-selling, Libor rigging, foreign exchange rigging, precious metals rigging.. Virtually no subsidiary of a full service banking organisation can say the same.

Sean Park, founder of Anthemis, suggests (quite fairly, in our view) that the demand for a fresh approach to financial services has never been stronger. In part, this is because

“..the global wealth management and asset allocation paradigm is fundamentally broken.  Or rather it’s a model that is past its sell-by date and is increasingly failing its ultimate customers. The “conventional wisdom” has disconnected from its “source code” meaning that the industry has forgotten the original reasons why things were initially done in a certain way and these practices have simply taken on quasi-mystical status, above questioning.. which means that the system is unable and unwilling to adapt to fundamentally changed conditions (technological, economic, financial, cultural, demographic..)

“And so opportunities (to take a step back and do things differently) abound..

“Coming back to the.. “broken asset allocation paradigm” – the constraints (real, i.e. regulatory and imagined, i.e. convention) and processes around traditional asset management and allocation (across the spectrum of asset classes) now mean that it is almost impossible to do anything but offer mediocre products and returns if operating from within the mainstream framework. (Indeed the rise and rise of low cost ETF / passive products is testimony to this – if you can’t do anything clever, at least minimise the costs as much as possible..)  The real opportunities arise when you have an unconstrained approach – when the only thing driving investment decisions is, well, analysis of investment opportunities – irrespective of what they may be, how they may be structured, and how many boxes in some cover-my-ass due diligence list they may tick (or not)..”

As we have written extensively of late, one of those practices that have taken on “quasi-mystical status” is benchmarking, especially with reference to the bond market. This is an accident waiting to happen given that we coexist with the world’s biggest bond market bubble.

Another problem is that low cost tracking products are fine provided that they’re not flying off the shelf with various asset markets at their all-time highs. But they are, and they are.

We have a great deal of sympathy with the view that the fundamental nature of business became transformed with the widespread adoption of the worldwide web. There is no reason why fund management should be exempt from this trend. What was previously an almost entirely adversarial competition between a limited number of gigantic firms has now become a more collaborational competition between a much more diverse array of boutique managers who also happen to be fighting gigantic incumbents. Here is just one example. Last week we came across a tweet from @FritzValue (blog:http://fritzinvestments.wordpress.com/) that touched on the theme of ‘discipline in an investment process’. With his approval we republish it here:

“Daily checklist:

8am – 10am: Read trade journals and regional newspapers for ideas on companies with 1) new products, 2) new regulation, 3) restructurings, 4) expansions, 5) context for investment ideas

10am – 6pm: Find new ideas. Read 1) company announcements.. 2) annual reports from A-Z or 3) annual reports of companies screened for buybacks / insider buying / dividend omission, etc.

7pm – 10pm: Read books to understand the world / improve forecasts / fine tune investment process

Before each investment:

1)    What do you think will happen to the company and by consequence the stock price ?

2)    Go through a personal investment checklist

3)    Use someone else or yourself as a devil’s advocate to disprove your own investment theses

4)    Have we reached “peak negativity” / has narrative played out ?

5)    Are fundamentals improving ?

6)    Why is it cheap ? Especially if it screens well in the eyes of other investors – i.e. exciting story, other investors, low P/E, etc.

7)    Decide what will be needed for you to admit defeat / sell the position

If you lose focus, sell all the positions, take a break and start again.

Only expose yourself to serious and intelligent people on Twitter / investor letters / media and avoid the noise that other investors expose themselves to.”

Fabulous advice, that has the additional advantage of being completely free. While we spend quite a bit of time agonising over the State’s ever more desperate attempts to keep a debt-fuelled Ponzi scheme on the road, we take heart from the fact that – through social media – an alternative community exists that doesn’t just know what’s going on but is perfectly happy to share its informed opinions with that community at no cost to users whatsoever. O brave new world, that has such people in it !

Money

Understanding the Money Creation and Society Debate

Together with colleagues spanning four parties – Michael Meacher (Lab), Caroline Lucas (Green), Douglas Carswell (UKIP) and David Davis (Con) – I have secured a debate on Money Creation and Society for Thursday 20 November. Here’s a quick guide to understanding the debate.

First, we have a system of paper or “fiat” money: it exists due to legal mandate as opposed to being a physical commodity like gold. Reserves, notes and coins are created by the state but claims on money are created by the banks when they lend. Most of the money we have was created by banks lending.

This excellent video from Dominic Frisby is a great place to begin:

There was once a time when the literature about money creation was sufficiently off the mainstream to be dismissed. The Bank of England now explains:

I published a short paper on what is wrong with the current system and what to do about it, first inBanking 2020 and then Jesús Huerta de Soto kindly republished it in his journal Procesos De Mercado Vol.X nº2 2013. A further monetary economist privately reviewed the paper but errors and omissions remain my own. You can download it here:

Recent emergency monetary policy has been dominated by Quantitative Easing: the Bank of England has provided a report on The distributional effects of asset purchases (PDF). However, the financial system has been chronically inflationary throughout my lifetime, ever since the Bretton Woods currency system ended.

If QE has distributional effects, why not all money creation?

Here is a historic price index from the Office for National Statistics and House of Commons Library: Consumer Price Inflation since 1750 (PDF).

Price Index 1750-2003

And here is the growth of broad money from 1982 to date via the Bank of England (series LPMAUYM). Note that the money supply stopped accelerating in the course of the crisis, during the period of QE:

M4: 1982-2014

No one can argue prosperity has not increased over the period but if distributional effects matter at all, one must ask “Who benefits?” Via Positive Money, here’s where the new money went:

Sectoral lending

As I said in debate on 6 Dec 2011:

Why are we in this debt crisis? I have just checked the M4 money supply figures—I am sorry to return to aggregates, but needs must. When Labour came to power the money supply was about £700 billion and it is now about £2.1 trillion, so it has tripled over the past 14 years. Unfortunately, most economists talk about money flowing into the economy as if it were water poured into a tank that found its own level immediately, but what if it is like treacle or honey? What if it builds up in piles when poured into the economy and takes a while to spread out? What if that money was loaned into existence in response to individual choices led by the excessively low interest rates pushed by the central bank? What if it was loaned into existence in particular sectors, such as the housing sector, where prices have more than doubled over the same period, and what if it was the financial sector that received the benefit of that new money first? Would that not explain why financiers and bankers are so much wealthier than everyone else, and why economic activity and wealth has been reorientated towards the south-east?

This debate will explore the effects on society of long-term money creation by private banks’ lending in the context of the present financial system.

Further reading:

Ethics

Means-ends and consumer choices

A major problem with the mainstream framework of thinking is that people are presented as if a scale of preferences were hard-wired in their heads.
Regardless of anything else this scale remains the same all the time.
Valuations however, do not exist by themselves regardless of the things to be valued. On this Rothbard wrote,

There can be no valuation without things to be valued.1

Valuation is the outcome of the mind valuing things. It is a relation between the mind and things.
Purposeful action implies that people assess or evaluate various means at their disposal against their ends.

An individual’s ends set the standard for human valuations and thus choices. By choosing a particular end an individual also sets a standard of evaluating various means.
For instance, if my end is to provide a good education for my child, then I will explore various educational institutions and will grade them in accordance with my information regarding the quality of education that these institutions are providing.

Observe that the standard of grading these institutions is my end, which is to provide my child with a good education.
Or, for instance, if my intention is to buy a car then there is all sorts of cars available in the market, so I have to specify to myself the specific ends that the car will help me achieve.
I need to establish whether I plan to drive long distances or just a short distance from my home to the train station and then catch the train.

My final end will dictate how I will evaluate various cars. Perhaps I will conclude that for a short distance a second hand car will do the trick.
Since an individual’s ends determine the valuations of means and thus his choices, it follows that the same good will be valued differently by an individual as a result of changes in his ends.
At any point in time, people have an abundance of ends that they would like to achieve. What limits the attainment of various ends is the scarcity of means.
Hence, once more means become available, a greater number of ends, or goals, can be accommodated—i.e., people’s living standards will increase.

Another limitation on attaining various goals is the availability of suitable means.
Thus to quell my thirst in the desert, I require water. Any diamonds in my possession will be of no help in this regard.

1. Murray N. Rothbard, Towards a Reconstruction of Utility and Welfare Economics.