I spoke last night in the general debate on the economy, saying*:
As I rise to speak I am reminded of a quotation from an economist who was a fierce critic of Keynes, a chap called Henry Hazlitt, who said:
“Today is already the tomorrow which the bad economist yesterday urged us to ignore.”
We have heard today some moving accounts of individual and collective suffering in different regions of the country and among different sections of the public. We should be asking ourselves why, oh why, have we been delivered into this misery, which looks as if it will extend over years. Much of the conversation we have heard has been along the lines of aggregates, coarse economic aggregates, and has tended to stray away from individual choices and consequences. We have talked about markets in the abstract, and it is a pity that we seem to have forgotten that markets are a social phenomenon, and that they are about people co-operating. When we talk about markets, we tend to imagine overpaid people, high-frequency trading and those who add nothing to society.
I am reminded of something a constituent said to me recently after hearing a Minister’s speech. He asked, “Why is it that everything always seems to get harder for the working man, whoever is in power?” Indeed, in my constituency unemployment is up by 6.3% among the over-50s, up by 9.5% among those aged 25 to 49 and, scandalously, up by 23% among the young. We have heard that child poverty increased by 200,000 under the previous Government and that it is likely to increase by up to 100,000 under this Government. In the 21st century, that should not be our economic position.
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?
Unfortunately, the idea that money takes some time to move around the economy is lost on most economists, which I very much regret. Why did most economists not see the crisis coming? I put it to the House that it is because their theories of credit are mistaken. They make fundamental errors. Unfortunately I do not have time to go into that, but the fundamental point is that credit is a choice to consume more now and less later. It is about the exchange of present goods for future goods, and co-ordinating the economy through time, and I am afraid that the current intellectual mainstream in economics has dropped us into this desperate mess.
Opposition Members criticise the Thatcher and Reagan years. I think that there was much to applaud in those years, but unfortunately their intellectual underpinning was monetarism, which, like Keynesianism, is infected with those dreadful mistakes. People in the Occupy movement, and our constituents, are right to question the justice of our economic processes. The hon. Member for Penistone and Stocksbridge (Angela Smith) said earlier that the system cannot endure, and I am inclined to agree. I agree that the current debt-based and—I am afraid to say—statist system cannot endure. However, if this system is not to endure, which way should it fall? [Humanity] tried the statist direction in the past and it led to misery and murder. I stand for free markets and free co-operation, but I say this to the House: if this is capitalism, I am not a capitalist.
* (I have made a small correction to the quote and a clarification in [], both of which I have requested from Hansard)
Related reading can be found here:
Hazlitt, Economics in One Lesson (buy, PDF), chapters 1, 6 and 23 in particular.
Mises, Human Action (buy, online), especially chapter 20 “Interest, Credit Expansion, and the Trade Cycle”
Hulsmann, The Ethics of Money Production (buy, PDF).
The Bank of England’s money supply measure M4, which I referred to, may be found here. I used M4 in this context because it is the conventional mainstream measure, but I prefer Kaleidic Economics’ MA for reasons explained on that site (Notes and Coins is too narrow and M4 too broad). MA tells a clear story of where jobs and growth came from and where they went – money supply growth created the illusion of prosperity, broke the banking system and collapsed, taking the illusion with it:
Year on year change in Kaleidic Economics' MA - click for source
In today’s Daily Telegraph, there is a good letter on inflation, ‘quantitative easing’ and the Bank of England.
Commenting on institutional processes in which the centrally planning blind lead the politically blind, the author – one Quentin Pain – concludes:
The Osborne bubble may seem attractive to a government that is having to make significant cuts to the public payroll and which is desperate to reduce debt. But like all bubbles it will eventually burst – and with a general election likely in 2015 it may, for the Coalition, come at just the wrong time.
Indeed. But such is life for those who endlessly love to fondle and play with the loaded gun of economic socialism. Every now and then, you are liable to shoot yourself in the foot!
Last week, I spoke on behalf of The Cobden Centre at a very spectacular Leadership Institute event organised at Wellington College – just outside London.
The Leadership Institute is the leading activist training centre for free marketeers in the United States of America. And on this occasion, my audience was some 120 people from around the world, including so it seemed to me, many people from Spanish speaking countries.
Now, while I very much enjoyed my hour on the podium – and from all the feedback so it seems did my audience – I am constantly amazed by the achievements of this sort of enterprise. In particular, I was blown away to learn from the LI’s founder and director, Morton Blackwell, how over the years the Institute has now formally trained more than 92,000 students. That, it strikes me, is quite some record and an amazing achievement!
I recently spoke at a fabulous event in Birmingham organised by the Liberty League. Called the Liberty League Forum and hosted for 100 young people and students, my brief was to provide a rousing conclusion to what had clearly been a very successful three days of lectures and leadership training.
There were many things I enjoyed about this event and three are worthy of comment. First, I thought the audience was terrific. Lots of new faces, lots of people from different backgrounds and not too many young-Tory-fogey types! Second, I liked the way the audience enjoyed radical ideas and the spirit of pushing at boundaries. Academia is often too conservative and narrow these days. Too often, university reading lists fail to provide students with the rounded and challenging exposure to ideas that so many of them love. Finally, I thought the organisation was excellent. Supported by key players at the Institute of Economic Affairs, The Freedom Association and the Adam Smith Institute, I thought the range of speakers, the subjects chosen and all the underpinning logistics were excellent.
This is important because as a member of the Liberty League’s Advisory Board, my understanding is that they want to unite the young free market movement in a way that has never been achieved before. Using social media platforms, holding seminars and major conferences, they want to take the ideas of classical liberalism and liberty to a new generation. Wonderful.
It was brought to my attention that a film version of a book was about to be released on 15 April. The book is of course Ayn Rand’s classic Atlas Shrugged, a book that should be brought to the attention of every serious student of life. Sadly, I only came across the book 3 years ago but I found its insights on the way the world works today simply stunning. You can find my introduction to the book here.
A film of this classic deserves an airing and is most timely with current world events unfolding as they are. The film makers are appealing to everyone who wishes to see the film in the cinema to join their online petition. Could I encourage every reader to sign up for a local viewing?
One can imagine that a film of a book that exposes so many home truths about the way Western society and culture are headed will meet stiff opposition. It is time to stand firm and demand a hearing of all views, especially the ones that describe the mess we are in and give a pointer to the remedy.
I look forward to seeing this film and posting a review. The makers have a hard job to approach the standard of the original, but they should be encouraged and supported in their efforts.
The book Atlas Shrugged by Ayn Rand details the decay and collapse of a society from real wealth-creating activities to a society that uses policy and laws to appropriate that wealth from others. This leads to a strike by the true wealth creators, leading to a slow motion collapse of society.
The book is based on a society in the US and it tells the story of a family owned railroad business. At the time the book was written, the jet-setting and interstate car age was only just in its infancy.
A parallel seen today will be with the off-shoring of production and jobs with nothing to replace it. We also see in the West a rise of regulation and other enforcements that strangle new enterprises at birth. You may have heard the phrase ‘Too Big to Fail’ with reference to the banks but we now have ‘Too Small to Succeed’! The sums involved with all this regulation and enforcement are staggering. Ayn Rand comments on this state of affairs in the book:-
“Then you will see the rise of the men of the double standard- the men who live by force, yet count on those who live by trade to create the value of their looted money- the men who are the hitchhikers of virtue. In a moral society, these are the criminals, and the statutes are written to protect you against them. But when a society establishes criminals-by-right and looters-by-law- men who use force to seize the wealth of disarmed victims- then money becomes its creators’ avenger. Such looters believe it safe to rob defenseless men, once they’ve passed a law to disarm them. But their loot becomes the magnet for other looters, who get it from them as they got it. Then the race goes, not to the ablest at production, but to those most ruthless at brutality. When force is the standard, the murderer wins over the pickpocket. And then that society vanishes, in a spread of ruins and slaughter.
Do you wish to know whether that day is coming? Watch money. Money is the barometer of a society’s virtue. When you see that trading is done, not by consent, but by compulsion- when you see that in order to produce, you need to obtain permission from men who produce nothing – when you see that money is flowing to those who deal, not in goods, but in favors – when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you- when you see corruption being rewarded and honesty becoming a self-sacrifice- you may know that your society is doomed.“
We see today the outworking of this in the case of the ongoing financial scandals in the US and elsewhere (Iceland, Greece, Ireland…), where large private investment bets are paid out in full, backstopped by the taxpayer.
We see moral hazard: risk has been offloaded to those least able to afford it. People who took the risk are not willing to realise, or are sheltered from realising, the consequences of that risk. There is so much wrong here it would take many essays, books even, to document.
The people of Iceland have said no to paying the debts of private banks with public money and the world has not ended. Are the people of Ireland also about to say no? Austerity seems to now mean the taxpayer pays so that those that took the risk do not have to.
On the subject of Money
“Whenever destroyers appear among men, they start by destroying money , for money is men’s protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist…Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims.”
Today we have throughout the world paper fiat currencies backed by nothing. Debt is now paid simply by ‘printing’ more out of thin air – the Quantative Easing programmes of central banks around the world. ‘Printing’ was put in quotes as today printing is done simply with a computer keyboard, adding the appropriate number of zeros to an entry somewhere in a computer database.
The account these ‘looters’ draw on is the debasement of the currency, by that insidious process of inflation.
Inflation is a stealth tax on savers and pensioners applied by creating currency in ever-increasing amounts through government deficit spending – the unearned income of ever increasing debt. Inflation is not rising prices but the falling in the value of money.
Guilt – the weapon used against you.
Ayn Rand identifies the weapon used against you to great effect. It is an insidious tool of manipulation. That weapon is your decency and sense of fair play, it is your guilt. By making you feel guilty about any topic, it disarms you from an effective response. You are made to feel a bad person – the games used here are very cynical. Political Correctness is such a tool, one word accusations which instantly apportion guilt, making you defenceless, innocence denied. You know those words, they enable the manipulator to win the argument without having one. By making you guilty up front you have lost position, do not allow these contemptible frauds to win. Ayn Rand warns of this in the book:
“We are on strike, we, the men of the mind.
We are on strike against self-immolation. We are on strike against the creed of unearned rewards and unrewarded duties. We are on strike against the dogma that the pursuit of one’s happiness is evil. We are on strike against the doctrine that life is guilt.“
Moreover:
“Guilt is a rope that wears thin.”
“The worst guilt is to accept an unearned guilt”
“To hold him guilty in a matter where no innocence exists is a mockery of reason.”
This book should be mandatory in all schools for study. It teaches you how to think, not that I agree with everything, as I did note a certain self-centred sterility which would not work in a family setting. The book exposes well the cynical manipulation by others who try to exploit one’s good nature against yourself.
A comment on the Justice system
“When one acts on pity against justice, it is the good whom one punishes for the sake of the evil; when one saves the guilty from suffering, it is the innocent whom one forces to suffer. There is no escape from justice, nothing can be unearned and unpaid for in the universe, neither in matter nor in spirit—and if the guilty do not pay, then the innocent have to pay it.”
In Conclusion
Finally, what we see today can be summed up with this following quote which preceded Atlas Shrugged and was written during the Great depression by Adrian Rogers (1931):
“You cannot legislate the poor into prosperity by legislating the wealthy out of prosperity. What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half get the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is the beginning of the end of any nation. You cannot multiply wealth by dividing it.”
One question may be, “Will the film be true to the book?” However the question may be, “Will Ayn Rand’s insights come over in the film or will it just be an excuse to defame capitalism with a straw-man cartoon of crony capitalism?”
What should be portrayed in the film is the ultimate bankruptcy of Marxism/socialism and the Robin Hood class of a self enriching elite, always claiming to act for the benefit and in the name of the people they ultimately oppress. In the book the society decays and collapses because those in control do not create any wealth but conspire to appropriate and consume the wealth created by others, wrapping it up of course in the obligatory self-justifying but bankrupt cause.
George Orwell’s sage words are ever more applicable today: “In the time of universal deceit, telling the truth is a revolutionary act!”
Peter Joyce and Geoffrey Sell describe an Eton and Oxford educated Party Leader thus:
A long-term opponent of statism, the view that social advance could only be brought about through the action of the state. His opposition to state action was partly based on the belief that this enhanced the power of bureaucracies, transforming those who received state services into the passive recipients of handouts, devaluing their humanity by depriving them of the ability to take decisions which affected their everyday lives. His firm belief in the importance of participation and the need for individuals to possess freedom of choice resulted in him viewing communities as the key social unit in which individuals could intellectually develop their full potential by sharing in the pursuit of common goals…
He found in small self-sufficient communities paradigms against which he measured the lunacies of central government and the welfare state…
He deserves credit for placing on the political agenda issues such as how Britain should handle her relative decline in the world and how government should be brought closer to the people…
I was struck by the similarity of the Big Society not Big Government message from David Cameron and these quotes from the excellent Joyce/Sell Biography of the late Liberal leader Lord Jo Grimond found here.
I believe it highlights the flawed tribal nature of our politics. I feel truly sorry that the Liberals have abandoned such a rich political heritage for the politics of envy entrenched in their 2010 Manifesto. They now espouse a misguided socialist agenda of taxing the rich and disincentivising enterprise with policies like Mansion tax and more than doubling capital gains tax. Surely we have all learned the lesson from Labour’s mistakes of the 60’s and 70’s that to “tax the rich until the pips squeak” does not work. This is even more relevant now that we recognise the potency of global competition which even Gordon Brown acknowledges now that his claims to have ended “boom and bust” have been trashed by “global events”. Wealth creators can simply up sticks and locate in tax and regulatory friendly jurisdictions. We need to encourage enterprise as well as foster philanthropy and promote sound stewardship.
Nick Clegg says this in his foreword to the Liberal Democrats Manifesto “We’ve had 65 years of Labour and the Conservatives: the same parties taking turns and making the same mistakes, letting you down. It is time for something different. It is time for something better.”
If he truly wanted to do “something different” he would have stuck to core Liberal ideas and not filched old Labour policies. With luminaries such as Richard Cobden and Jo Grimond in their past they have a rich vein of truly innovative and now timely ideas on which to draw. Sadly, enticed by the prospect of power they have ditched ideas of gravitas and integrity for a more populist polemic.
If I were to summarise the 2010 manifesto’s for my 83 year old father and ask him to identify the Party he would probably identify the Conservative manifesto as old Liberal, the Liberal manifesto old Labour and the Labour manifesto as – well at best it is a poor attempt to cobble together enough populist ideas to cling on to power
Through it all is an electorate so disenchanted with politics and politicians that if they bother to vote at all they will either vote tribally or be influenced by the televised debates where image not policy is King. Political selection now has more in common with TV shows like X Factor, Britain’s Got Talent and in Lord Mandelson’s case Strictly Come Dancing.
On the plus side this is just the right time for efficacious change. Our Nation has been shaken for sure, we have seen the imperfections of the banking system and Politics has been thrown into disarray by the expenses scandal. Yet a wind of change is blowing life into the embers and fresh ideas are being debated. The Cobden Centre is dedicated to promote “Honest Money and Social Progress” – let the discourse continue!
Could the endgame of this “Greek tragedy” be a eurozone break-up? The single currency’s supporters maintain such an outcome is mere mythology. Greece accounts for only 3pc of the 16 member states’ combined GDP, they say, and has lower debts than some of the banks bailed-out during “sub-prime”. A loan of €20bn (£17.5bn) would do the trick, we’re told. That’s less than the British government injected into either Lloyds or the Royal Bank of Scotland.
Such analysis sounds vaguely plausible. But its naïve and politically dishonest. Then again, the single currency was built on political dishonesty. That’s because, at the heart of the eurozone project there was always a fundamental contradiction – one the architects of monetary union never dared to address. Now its being highlighted for them, whether they like it or not.
While the European Central Bank controls eurozone interest rates and the money supply, the size of each country’s fiscal deficit results from the spending and taxation decisions of its own sovereign government. How can you enforce collective fiscal discipline in a currency union of individual sovereign states, each answerable to their own electorate? The truthful answer is you can’t – not unless you subjugate the autonomy of democratically-elected politicians and, by proxy, their voters.
Voters don’t like that. Neither, do politicians. Faced with a choice between seriously annoying their own voters and seriously annoying the ECB, the most ardently “pro-European” lawmakers, even those with years of Brussels trough-nuzzling under their belt, will always side with their own. That’s why the eurozone will ultimately break-up – whether Greece is bailed-out or not.
The eurocrats blame “speculators” for the single currency’s woes. That’s a bit like sailors blaming the sea. The eurozone is ultimately doomed because, in the end, economic logic wins and the will of each country’s electorate bursts through. This current Greek saga won’t end the eurozone – but future historians will identify it, perhaps, as the beginning of the end.
Many have said it’s hardly surprising that Greece – with its history of financial profligacy and capital flight – has emerged as the eurozone’s Achilles heel. A more germane observation is that, while fiscally wayward, Greece is also the birthplace of democracy. If the Greek population wants to get upset, throw out its elected politicians and reject austerity, it must be allowed to do so. I think they’d be mad, but it must be their choice.
If Berlin and Brussels try to impose their own view on Greece and the “cuts” come from outside, the situation will become incendiary. Protests will turn into fully-blown riots. Greece will endure very serious social unrest. Deep-seated rivalries and suspicions between countries will be re-ignited. And for what?
Greece is running a budget deficit of 12.7pc of GDP. The real number could be 15pc or more as Greek politicians have lied for years about the extent of their country’s liabilities. They’re not the first European leaders to do so and they won’t be the last. But Greece was, almost uniquely, assisted in its fiscal cover-up by Brussels – with the usual “convergence criteria” being bent to allow Greek euro entry.
As recently as September 2008, the euro seemed to be going well, despite the massive variation between member states. The five-year Greek credit default swap spread was less than 50 basis points. In other words, buying insurance against Greece reneging on its sovereign debt cost only slightly more than insuring German government bonds. Those, such as this columnist, who continued to warn that the eurozone was “dangerous and inherently unstable” were dismissed as cranks, xenophobes or worse.
Then sub-prime hit in earnest. Insuring against Greek default suddenly became a lot more expensive, the CDS spread rising six-fold in eight weeks. The same risk measure is now around 400 basis points, the cost of insuring against Greek default no less than 20 times higher than it was in January 2008. Default risks are growing in Portugal and Spain too, the eurozone’s fourth biggest economy.
The problem is that default dangers in Greece – where €20bn of debt falls due in April and May – are making creditors think twice about lending to other cash-strapped governments. Even if Greece avoids default, this latest crisis means governments everywhere will have to pay more for their finance, which in turn will push up borrowing costs for everyone – right across the eurozone and beyond, including in the UK. This is so-called “contagion”.
The Greek government has been desperately trying to convince the rest of the world – the Germans in particular – that it will keep its promise to reduce the deficit in its still-shrinking economy to 8.7pc of GDP next year and less than 3pc by 2012. Yet this would amount to the most severe fiscal contraction in the history of modern Europe. It simply won’t happen.
The reality is that Greece has two choices – both disastrous for the eurozone. One is to default, leave the euro and re-establish the drachma at a rate low enough to stimulate exports and growth. To write this is heresy. But with general strikes now in the offing, and the Greek public-sector unions resurgent, such a scenario is possible.
For years, the ECB has set rates low to suit France and Germany. This has made life difficult, causing dangerous debt bubbles, in smaller and more inflation-prone eurozone members. Were Greece to take the exit route, the governments of several other single currency members would come under intense pressure to do the same. The eurozone’s vital cohesion would be seriously undermined. Its ultimate break-up – or, at least shrinkage to a Franco-German rump – would only be a matter of time.
The other, more likely, option is that Greece accepts a German-led bail-out and “muddles through”. But even that would spark an eventual eurozone split. On extending assistance, Berlin and Brussels would talk tough and Greece would promise to behave. Anything less wouldn’t be tolerated by German voters. After the horrors of inter-war hyperinflation, Germany has spent more than 50 years building policy credibility. Backing a Greek bail-out would be a massive step – the first time in decades Germany has departed from its fiscal and monetary hard line.
Yet the German government will do it. Refusing to bail-out Greece would risk being labelled “bad Europeans” – something anathema to Germany’s post-war elite. Berlin also has a massive financial stake in the euro’s status as the world’s second most-used reserve currency.
Although Greece will be presented as a one-off, a “very exceptional” case, once that line has been crossed there is no going back. Other eurozone countries will want a bail-out. Why should Portuguese, Estonian or Spanish workers endure austerity and unemployment, while those in Greece were spared? Why them and not us? If big banks can compete for bail-outs, walking the line of “moral hazard”, political leaders will do so too. A Greek rescue by the Germans would spark repeated bail-outs.
In the end, voters in the big eurozone economies, faced with their own fiscal problems will say enough is enough. Europe’s monetary union will collapse, just like every other currency union in the history of man. The exception is America – yet the US, as the eurocrats hate to acknowledge, had been through a century and a half of political union before the Federal Reserve was founded in 1913.
That’s the key difference. America is a political union, with a system of explicit inter-regional fiscal transfers, and the eurozone isn’t. That’s why the single currency will ultimately split and be exposed as what it is – a triumph of European hubris and political vanity over unavoidable economic logic.
In an exciting development, the Conservatives have announced employee-owned cooperatives for the public sector:
A Conservative government will give public sector workers a powerful new right to form employee owned co-operatives to take over the services they deliver. This will empower millions of public sector workers to become their own boss and help them to deliver better services.
This is the most significant shift in power from the state to working people since the sale of council houses in the 1980s, which gave millions of people across Britain greater freedom, security and control over their lives.
The new right to form employee owned co-operatives will apply throughout the vast majority of the public sector – including JobCentre Plus offices, community nursing teams and primary schools. Employee owned co-operatives will continue to be funded by the state so long as they meet national standards, but will be freed from centralised bureaucracy and political micromanagement. They will be not-for-profit organisations – any financial surpluses will be reinvested into the service and the staff who work there, rather than distributed to external shareholders.
Over the years, our Chief Executive, Dr Tim Evans, has written a great deal on mutual, co-operative and worker ownership. See for example This Stockholm Network Paper. We are delighted that the policy debate is moving in this direction.
