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Economics

EEC/CERT/CESP/Warm Front – Picking Losers…

Via EEC/CERT/CESP/Warm Front – Picking Losers…, an argument that government intervention in the energy markets is counterproductive:

These programmes¹ are examples, like the EU-ETS, where government intervention hands commercial advantage to the VILE (Vertically-Integrated Large Energy) companies, to little beneficial effect.

The VILE companies point to the fact that demand for domestic energy has fallen in the last couple of years, as evidence for their success. I have argued this was largely a response to price increases, increasing disparities between costs-of-living and disposable income, and warmer winters (until last year), and not the effect of their energy-efficiency programs. In my opinion, the timing demonstrates the point. EEC was introduced in 2002, and Warm Front in 2000, but domestic energy demand carried on rising until 2005², which coincidentally was when global wholesale gas prices spiked (consumers did not feel the full effect until Winter 06/07, but there was already concern and initial increases in 2005).

Economics

The Micropolitics of Free Market Money: a Proposal

This paper originally appeared as Economic Notes No. 39, published by the Libertarian Alliance in 1992. The Paper is available in full here.

This paper is not primarily intended as a contribution to economic theory. It is instead intended to steer the debate on free banking away from statements of loyalty to the “line”: that orthodoxy of political views which is often incoherent and always an affront to individual reason. This is accomplished by concentrating upon the process of argument.

In “A Credibility Problem” (Part I), there is a critical evaluation of the depth of understanding by free banking’s supporters of their own position, and a hard evaluation of the likely effectiveness of these arguments. Then in “How To Do It” (Part II) micropolitics are applied to the free banking issue.

PART I: A CREDIBILITY PROBLEM

To expect the introduction of legal private currency – that is to say not state owned, not state regulated, and the use of which will not result in prosecutions on the grounds of issuing counterfeit notes, fraud nor ‘economic sabotage’ – is to dream.

Most people divorce their dreams from reality. In the Conservative Party’s youth wings, home to many who “dream with their eyes open”, a majority does not as yet support the privatisation of money. Given the tendency in these sections of the Tory Party to “vote the slate” and “walk the line”, heedless of the anguished bleatings for moderation from Conservative Central Office, the fact that the “comrades” are not four-square behind the extirpation of state dirigisme is perhaps an indication of how unpractical currency liberation appears to be. Perhaps it is also a problem of definition: how many people could explain the benefits of currency demonopolisation? Of these how many would the enlightened comrade entrust with his savings? I leave the reader to make up his or her mind, but for my part I know no one personally who can simultaneously convince me of the urgent need for privatization, assure me that its introduction is remotely likely, persuade me that it won’t involve considerable disruption when introduced, and sell to me the proposition that I am better off using this currency without qualms about ‘funny money’ or ‘junk bonds’. I haven’t even begun to consider the technical operation of such a currency, which is where I consider that Hayek has left a host of questions unanswered. In short there is a credibility problem.

This is a matter that I have tested before writing this paper, by asking acquaintances of mine who are not intimately familiar with the works of people who write for the Institute of Economic Affairs, the Adam Smith Institute or the Libertarian Alliance. The test was carried out by asking the respondent what he or she thinks of the privatisation of money. The response that comes to mind most readily but is not always articulated (we do live in a civil society) is: “It’s insane!”

After a period of time devoted to demonstrating the possibility that currency denationalisation is not necessarily insane, the immediate reply is: “It couldn’t work.”

This is an understandable objection because it reflects a distinction between what Ayn Rand called “an error of knowledge” and “moral failure”. Some technical arguments exist, and I propose to evaluate some of them in the course of this paper, but it would be a gross overstatement of the public’s awareness of market economics to assume that these arguments are widely disseminated, assimilated, or even that they are conclusive. At this stage, after some explanation that the topic has been researched by Nobel prizewinners and that some historical studies have offered grounds for accepting the principle that private money could exist, in possibly atypical circumstances, the victim of my experiment may recoil at the notion of one of his or her standards for gauging reality being shattered. The response may then become: “It’s unnatural!”

By now emotional objections will have come into play; privatisation of the Bank of England is at least credible but the abolition of legal tender restrictions is – in appearance at any rate – the end of civilisation as we know it.

Having reassured the listener of the seriousness of my case and having suggested that civilisation might not end because the monarch’s head is not on every bank note the problem turns to the consequences of such radical reform: “It isn’t safe!”

This response is often considered awkward because anyone with the faintest understanding of economics, and banking especially, will feel inclined to agree …

This problem is therefore of crucial importance: are private currencies less secure than ‘junk bonds’ as well as non-inflationary? Those who answer glibly “No” to the former and “Yes” to the latter are probably not the sort of people that I will take private scrip from.

Scepticism about privatising currency is not merely understandable, in keeping with the view that the ‘masses don’t know where their true interests lie’, but is rather a healthy indication that people are wary of panaceae, immiment miracles and ‘leave it all to the market: everyone’s a winner’. Those who propounded the decimal calendar, lunar colonies before 1985 and the revival of British Lawn Tennis due imminently – since 1936 – are today on a par with those who promise the abolition of inflation and monetary stability.

The credibility problem is compounded by the additional correlation of forces supporting or opposing change. The basic list of opponents to change is more powerful than for any privatisation to date. The list of supporters of currency privatisation is the flimsiest for any privatisation to date.The opponents come in four categories: interest groups in favour of less choice in currency exchanges than exists at present (i.e. Socialists, certain sections of bureaucracy); interest groups in favour of the status quo (i.e. the Bank of England, H.M. Treasury); some financial institutions that would benefit in a marketplace, issuing currency, but with more to lose (in terms of market share to new operators and in faster clearing of credit) than seems prudent to stake on change (i.e. some banks and building societies, particularly the larger ones); those potential users of private currencies who would prefer to keep ‘safe’ state currency because it’s the known quantity and because it is ‘guaranteed’ (i.e. the entire population of the United Kingdom).

THE ANTI-PROGRESSIVE FORCES

Those whose interests lie with greater state control are of little concern to this study: its purpose is not to convert Socialists, nor bureaucrats. This study is more interested in the reasons why money privatisation is not in prospect in the UK, what the weaknesses are in the argument for free currencies, and whether or how the enterprise might succeed.

To read on: download the paper.

Economics

Can Government Create Wealth?

In this article, I argued that a useful measure of GDP needs to extract the government sector, as all it represents is a movement of wealth from the productive private sector to the productive and not so productive government sector. The private sector is the well spring of wealth creation and the government sector can in itself create no wealth, it can only redistribute it to achieve outcomes that it determines to be more desirable.

One of our regular readers commented as follows:

I have trouble with the suggestion that government spending cannot — at least in theory — result in wealth creation.

The commentator goes on to give an example of taxes creating a useful service, that of a national railyway that creates wealth and an example of printing money that, given to the right projects, will create wealth. They are as follows;

Suppose FooCorp sends their packages by carrier pigeon. This is slow and expensive (pigeons need to be trained and fed, and packages go missing when they fly past hunting grounds). FooCorp realises that they can increase efficiency by investing in a private rail network. The cost savings delivered by the network are greater than the cost of the investment, and FooCorp reaps the rewards. This, presumably, is wealth creation. If so, why is wealth not created if a taxpayer-funded rail network benefits the taxpayers more than it costs them?

And:

Suppose that rather than confiscating our wealth directly through taxes, the government confiscates it indirectly by printing money. The government spends its new money not on bank bailouts or welfare programs, but instead on the fusion researchers, who eventually deliver cheap power for all UK citizens. Again, it would seem that though the original funds were ill-gotten, the result has been genuine wealth creation.

I do not deny the possibility that in these specific individual, stylised examples a government can create wealth. However, in the round, they can never create more wealth than a freely functioning economy.

Economic Calculation in the Socialist Commonwealth

This is the title of a very famous essay – for the full downloadable PDF, see here.

Ludwig von Mises masterfully shows us how rational economic calculation in a socialist system is impossible. Only a half-baked system of production is possible under socialism. Empirically, we saw this in Eastern Europe and the Soviet system. The message is very simple;

  • In the free market, people transact for goods and services via voluntary exchange, facilitated by the use of money.
  • Money is the price you pay for the goods.
  • The price mechanism tells us all sorts of information as to the scarcity of those goods and services (higher prices) or their abundance (lower prices). They also indicate the need or wants of consumers as they will pay more for more wanted goods and services and less for less wanted goods and services.
  • Entrepreneurs look out for these price signals so they can direct the factors of production in better ways and combinations to satisfy those most urgent needs of the consumer.
  • If government owns the means of production, there is no price for capital goods.
  • The central planner has to make up a price to get a capital input.
  • How is this done?
  • It can only be done at best by educated guesswork.

The Pretence of Knowledge

This is the tile of a very famous speech by Hayek: see here

Also see Hayek FA 1937 Economics and Knowledge, Economica V4 N13 33-54 and 1945 The Use of Knowledge in Society, The American Economic Review .

Hayek built on the work of his teacher Mises by adding the following;

  • Planning the production process in the free market economy is done by billions of people exchanging goods and services, facilitated by the medium of money.
  • Prices to entrepreneurs are indispensible communication points in their planning process, showing the entrepreneur what factors of production and being demanded to produce what goods and services.
  • This knowledge is dispersed and comes from a multiplicity of sources.
  • Central planners cannot possible have brains big enough to take over the role and plans of all the entrepreneurs in society and all the spending individuals, thus they have a “knowledge problem.”

Although this was all debated well before the advent of super calculating computers, no program can ever take into account the changing needs and preferences of individuals. Also getting into the computer all of the combined information all the time in all circumstances for all times and places to replicate the market place cannot as of yet be done and I suspect never will be done.

Conclusions

So in answer to our commentator, I would advise a quick reading of the above mentioned classics as I think they are unbeatable in their logic. A government may get lucky with a plan and subsequent taxation of wealth to spend on that plan but, overwhelmingly more so than not, they will fail for the given reasons.

In the mixed economy we exist in today, Lord Andrew Adonis, the current Secretary of State for Transport, is doing just as our commentator suggests and is planning to build a high speed rail network that will undoubtedly bring benefits by moving the great cities of our nations closer together. More trade will take place than before, that is for sure. This I hope will be one of those lucky central planning projects.

The reported £34 billion is a lot of money to spend. Would the private sector have undertaken this? We do not know the answer to the latter for sure, but I would note the following pre big government;

  • All the great roads until the 40’s, but now only toll roads as the road system has been nationalised, were built by the private sector;
  • This is the same for all the railways, the canals and other infrastructure systems;
  • And all the bridges;
  • All the health care provision;
  • All the education provision;
  • Power supply;
  • The tunnels;
  • And the sewers.

I could go on and on…

If we consider food retail, we find Tesco created with £34 billion of private money invested in its capital. Do we really think that the government could provide for this in a better way?

When governments issue debt, it crowds out private sector bond issuance and fewer big capital projects are provided for by the market system.  To create a better functioning market place, governments should be forbidden from raising bonds, then the needs of the market could be met as people will still want to save and they would look more favourably on corporate issuance.

Indeed, we should look once again at how bonds could be the basis of all welfare provision, as I discussedhere, from “How do we fund a Deficit” onwards.

Our commentator gives the second example of using QE or creating money out of nothing to give to some scientists who develop a superior technology that drives masses of benefit. Again, I would say this is possible and more down to luck than having the many millions, if not billions, of economic actors, working through the price mechanism solving problems and allocating resources in the most efficient way, as only entrepreneurs can.

I would back the market, comprising all of us cooperating, over any central planning agent any day of the week!

Government can create the climate for lasting wealth generation by:

  • Upholding the rule of law;
  • Upholding the sanctity of contract;
  • Avoiding war unless attacked;
  • Removing legislation that obstructs the market.

There is much more but these are some key areas. I would like to refocus our commentator on thinking of ways the government can create the climate of wealth creation, rather than attempting to be the wealth creator itself.

Further reading

Economics

Protectionism, Regulations and Globalization — ECIPE

Via Protectionism, Regulations and Globalization — ECIPE:

Economic history tells us many lessons. One particular lesson of contemporary relevance is that the internationalization of economies should not be taken for granted. It should not be viewed as a perpetuum mobile; a force that is impossible stop. The current crisis – and the responses to it – has triggered fears of a replay of the 1930s when tit-for-tat protectionism and economic nationalism followed hard on the heels of a financial crash. The world economy then experienced a giant process of deglobalisation that took almost 40 years to unwind.

The current crisis has been far from as severe as the crisis in the 1930s. Nor have crisis measures been ostensibly protectionist. Many protectionist measures have been introduced (still counting), but they have been far from as drastic as the spiraling tariffs of the 1930s. This is comforting knowledge, and it testifies to the disciplining effects on protectionist sentiments offered by WTO agreements. However, it might be less comforting than we are led to believe by most modern accounts of the crisis and globalization. To understand what is currently happening in the global economy we might have to release ourselves from traditional concepts of the integration of markets. In the past centuries, markets have been integrated through trade and cross-border movement of production factors. For most of the time, it has been a process of internationalization: one country after another have linked up with the global economy as it has become a destination for production and the origin of inputs and products for final consumption at home. In such an internationalized economy, trade barriers have damaged flows across borders and imposed costs on producers and consumers.

Read more: Protectionism, Regulations and Globalization — ECIPE

Economics

IEA Blog » Qualitative easing

Via IEA Blog » Blog Archive » Qualitative easing:

While quantitative easing has received much press, qualitative easing has been neglected. Qualitative easing consists of policies that deteriorate the average quality of the assets that a central bank holds. This can occur both with and without quantitative easing.

By selling high quality assets (i.e., foreign exchange, government bonds, or gold) to buy low quality assets (i.e., asset backed securities, or granting loans to a tumbling banking system), there may be qualitative easing without an increase of the central bank´s balance sheet (i.e., without quantitative easing). This was the strategy of the Fed before Lehman Brothers collapsed in September 2008. When the purchase of low quality assets is not sterilised, there is quantitative and qualitative easing at the same time. This has been the strategy of the ECB during the financial crisis and the Fed after Lehman.

Why is the average quality of the assets of a central bank important? There are four main reasons.

Economics

How and why China will flood the gold market

Via How and why China will flood the gold market:

As you read this, the Chinese government is doing an extraordinary thing… something nearly unheard of in the modern world.

It is encouraging citizens to put at least 5% of their savings into precious metals.

The Chinese government is telling people gold and silver are good investments that will safeguard their wealth. After last year’s meltdown in the stock market, people believe it. After all, Chinese citizens don’t receive government retirement money… and they don’t have company pension plans like people in many other countries do.

This is why folks in China are lining up outside of banks, post offices, and the new official mint stores to buy gold and silver (they especially like silver because it’s cheaper per ounce).

Economics

The ESCP Europe/Cobden Centre Colloquium on Sound Money

ESCP EuropeThrough tomorrow and Saturday, ESCP Europe and The Cobden Centre are hosting a Colloquium on Sound Money. The Colloquium is to be directed by Founding Fellow Dr Anthony J Evans and chaired by Corporate Affairs Director, Steve Baker.

A team of academics, banking professionals, entrepreneurs and politicians will meet to discuss:

  1. What is Money?
  2. The Interest Rate and Intertemporal Coordination
  3. The Gold Standard and the Great Depression
  4. Deflation and Prosperity
  5. Free Banking vs 100% Reserves
  6. Central Banking
  7. Proposals for Reform

The authors whose work will be under consideration are Carl Menger, Joseph Salerno, Frank Shostak, Ludwig von Mises, Friedrich A Hayek, Joan and Richard James Sweeney, Murray Rothbard, Lawrence Reed, Lawrence H White, George Selgin, Vera Smith, Tim Congdon, Richard Salsman and Jesús Huerta de Soto.

Economics

China’s empty city

Is an Austrian style boom followed by a bust just about to happen in China? See this video sent to us by Catlin Long, MD of Morgan Stanley and make up your mind yourself!

Economics

Dr. Anthony J. Evans: Banking, Honest Money and the Free Market

A conference presentation by Founding Fellow Dr Anthony J. Evans.

laconf09, Anthony Evans: “banking, Honest Money and the Free Market” from Sean Gabb on Vimeo.

Economics

This financial mess isn’t even the end of the beginning for UK wealth – Telegraph

Via This financial mess isn’t even the end of the beginning for UK wealth – Telegraph:

Today’s financial crisis – and the resulting damage to the UK’s broader economy – is of monumental historic importance. The future of the free world may not be at stake as it was in Churchill’s day. What is in jeopardy, though, is the prosperity of the British people for at least the next 15 to 20 years. In the balance, is nothing less than this country’s place among the world’s top-ranking nations.

The fall-out from “sub-prime” clearly can’t be compared to the horrors of the Second World War. But readers should be in no doubt that current events and our leaders’ reaction to them will affect Britain’s future path more than any episode since then.

Read more.