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By James, on 26 January 10
Mr Smith works hard, plans carefully, and saves what he can, putting his money into a building society. He pays his credit card bills off each month, and tries to overpay his mortgage when he can.
Mr Smith got a 3% pay rise last year – inflation was only 2% – so he felt good about that. But… he doesn’t feel any wealthier.
Year after year, the government had said that the economy was growing strongly, but still, things seemed harder for his family and him. Train ticket prices up again. Heating bills rocketed when the price of oil went up, but never seemed to come down. He swears a loaf of bread and a pint of milk were much cheaper in years gone by.
When he changes his cash for Euros, he realises that his holiday in France is now unbearably expensive. His tax rates didn’t go up, but still, after all his bills were paid, he seemed to have less and less spare cash than he remembers a few years ago.
There are Mr Smiths everywhere. Careful folk, who plan, save for a rainy day and have a sense of personal responsibility.
Smith is the target.
It is Mr Smith who is going to pay for the banking crisis.
His saved wealth will pay the national debt.
His prudence will bail out Gordon Brown’s profligacy.
His forgone holiday will pay the banker’s bonuses.
His careful spending will pay for the vast number of quangos.
His financial planning will bail out the failed NHS computer project, over-budget military programs and ID cards.
His sense of responsibility will end up funding the destruction meted out in Iraq and Afghanistan.
It won’t be the politicians or the bankers who pay for global warming – he will.
He knows he pays tax… but what is hard for him to comprehend is that there is another pernicious process draining his wealth and subverting his hard work towards paying for the misjudgement of others. Whether he likes it or not, he naively pays for the decisions made by the political class.
He has no choice. No option. He was never asked to vote for it. And for the most part, the act of theft is so subtle he doesn’t even know it is happening.
Why does he feel poorer?
Why is it that Mr Smith seemed to miss the ‘boom’, yet is hurting more in the bust? Why doesn’t life get easier for him? What is going on?
Inflation.
As technology produces things more cheaply, Mr Smith should have been able to reap the rewards – except that things don’t get cheaper for him. Society cheats him when the government opens the spigot of new money, washing this value away as the torrent of new money chases prices higher beyond his reach.
The winners are always those close to the gusher – the banks, financiers and politicians. These are the ones who get to spend the new money first, thus chase prices up before Mr Smith gets any sniff of what is happening.
To save or to invest?
Think about your personal circumstances. Every time your payslip comes in, you have a choice of how much to spend and how much to save. Every rational person knows that there is a balance to be struck between current enjoyment (consumption) and future enjoyment (savings – or deferred consumption).
This choice is exactly the same for society as a whole. As a country, we must decide how much to consume, and how much to defer consumption in order to allow our children and us to enjoy things in the future.
The choice for us all is simple. Defer consumption and invest for the future, or consume and enjoy now.
What is the process by which we save for the future? There are two ways.
- Voluntary saving. If society needs to invest for the future, but people prefer to consume, then the savings rate – the profits paid on investments and/or the interest rate paid on deposits, rises until people choose to defer consumption and invest.
- Forced saving. Government policy forces a decrease of the purchasing power of money via inflation of the money supply. The net effect is a transference of wealth from savers and fixed income groups towards net borrowers (itself included). It also creates an artificial pool of liquidity into which the government can sell its IOUs.
The evil of Forced Saving
The natural state of affairs in a free market, with a more consistent supply of money, is that general prices fall as technology advances. The prudent are rewarded, and borrowers have to carefully evaluate and moderate their flights of fancy, only investing borrowed funds carefully in sound projects.
When the value of money declines, savers find that their money buys less, whilst borrowers are happy to find that they can repay their debts with money of a decreased value. It’s like borrowing five books from the library and finding that you are only required to give four back!
By setting a target for rising prices and then pulling levers to increase the supply of money in the economy to achieve it, the government prevents the natural response of general prices to competition, increased efficiency and innovation: they stop prices from falling.
Entrepreneurs, innovators, inventors and new businesses exist because they believe that they can satisfy society’s wants better than they have been served before. They have ideas, innovations and take risks in order to provide goods that are cheaper than they otherwise would be. Businesses operating in a competitive environment always seek to reduce costs, be that one step more efficient and produce a cheaper or better widget. As group of people, entrepreneurs bring efficiency and innovation, and they make stuff cheaper.
The benefit to Mr Smith should be that his income goes further. As time progresses, technological innovation should mean he can buy more with the same cash. But that’s not what happens, as any pensioner knows. Saved money buys far less now than it did at the time it was saved.
Governments achieve rising prices by encouraging the supply of new money. This new money comes from the central bank via its control of the banking system. The first users of this new money are invariably politicians, finance capitalism and big business. These guys get to use the newly minted money first, and thus spend it first. This process bids up prices, leaving everyone else chasing behind, and poor old Mr Smith last in the queue.
What an evil system it is then, when government can control money in such a way as to give it a first user advantage that penalises all those in the general population whose wealth is being rapidly diluted. A process that systematically violates and loots pensions, savings, fixed incomes and the actions of prudent, and rewards the profligate, the speculative borrowers and above all, rewards the biggest borrower of all: Government.
Let’s be clear. The current system is a process that diverts the benefits of innovation and technological advancement that should accrue to the general population, and thrusts it towards the desired spending of the well connected and the political class.
We need to stop this continual violation of the little man. Mr Smith has to start realising what is happening to him.
That’s why I’m proud to support the efforts of the Cobden Centre.
By James, on 20 January 10
A speech by James Tyler to the Adam Smith Institute Next Generation Group, 6th October 2009. This speech is also available on hedgehedge.com.
I have spent the best part of the last two decades picking my wits against the market. It’s an unforgiving game: I’ve seen ups and downs, and many of my rivals buried under an avalanche of hubris, passion, illogical thought and unchecked emotion.
I have witnessed the sheer folly of the ERM crisis, the Asian crisis, the failure of the Gods at Long Term Capital Management and the insanity of the tech boom.
I have enjoyed the ‘NICE’ decade (None Inflationary Constant Expansion), and scared myself silly during the credit crisis.
I am a trader.
I risk my own money and live or die by my decisions, and face the threat of personal bankruptcy every time I switch my screens on. I get no salary – indeed I turn up at the start of the month with a large office overhead – a ‘negative’ salary. I have no fancy company pension scheme, no lucrative monopoly or franchise.
I eat what I kill.
Mistakes cost me my livelihood, so, above all, my decisions have to be rooted in practical and logical decision making.
Some have called my kind parasitic, but I would have said that I bring order, efficiency, predictability, stability and deep liquidity to crucial process: a process that makes the whole world keep ticking.
I make money work.
I make the market in interest rate derivatives: a market born out of the neo classical revolution in finance fostered in Chicago during the 1970s. I am a child of Freidman, Fisher Black, Myron Scholes and the modern international financial system.
My analysis was steeped in the neo-classical, efficient markets paradigm.
Friedman’s ideal was working. Enlightened central bankers guided the free market with gentle nudges and short term liquidity infusions, free floating currencies gently adjusted themselves to the constant flow of new information and efficient and rational markets took all in their stride.
Credit flowed, people got wealthier, economies developed and all was well.
And then the crisis struck.
Continue reading “My Journey to Austrianism via the City”
By Steven Baker, on 1 January 10
From Lord Welby’s preface to The Political Writings of Richard Cobden, 1903 (PDF):
The State is a severe mother. She demands from her noblest sons their intellects, their energies, and, if need be, their lives; but she is not ungrateful. The men who have guided her destinies live in grateful memory and in memory the more honoured, if to great service and lofty aims they have added disregard of self, directness of purpose, and simplicity of character. Such men become household words of the nation. They create the standard by which the nation measures itself and by which it is measured. They strike the keynote of national character. Such a man was Richard Cobden, a type of a great Englishman to Englishmen of all times, a type in his truthfulness, in his simplicity, and in his devotion to the welfare of his countrymen.
Cobden sacrificed his fortune and even, for a time, his health to further the interests of the ordinary person. His fortune was restored to him by public subscription.
Let us hope that in 2010 we see a little more of Cobden’s spirit in British politics.
By Steven Baker, on 29 December 09
 Razeen Sally’s Trade Policy, New Century (PDF) succeeds magnificently in explaining the 21st-century case for free trade and, specifically, unilateral trade liberalisation to the interested, non-specialist reader.
From the IEA home page of the book:
The World Trade Organization (WTO) is failing to deliver the trade liberalisation desperately needed to bring prosperity to developing countries, according to a new study released today by the Institute of Economic Affairs. The WTO is hamstrung by a cumbersome negotiating model and the influence of vocal protectionist lobbies who oppose free markets. At the same time, increasingly popular regional ‘free-trade agreements’ often create as many barriers as they remove by erecting new obstacles to trade with countries outside the blocs concerned.
In the context of policy paralysis at the WTO, the author, LSE trade expert Dr Razeen Sally, argues that governments must take back the initiative from supranational institutions. The priority must be unilateral liberalisation – removing trade barriers to benefit domestic consumers rather than waiting for tortuous international negotiations to be resolved. Governments can also help maximise the benefits of free trade by liberalising their economies and strengthening key institutions.
But what is the imperative for the UK? Surely, European Union citizens enjoy free trade?
The EU is a customs union: we trade ostensibly freely within it, but, as can be seen from the EU’s TARIC database, we find ourselves behind a complex system of tariffs on, for example, wheat, notwithstanding the battle long since won by our inspiration, Richard Cobden, to repeal England’s Corn Laws in the general interest.
And this is the key point: free trade is in the general interest. We may make the political and economic arguments in detail, but the public good is our ultimate aim, and not just at home. Razeen Sally explains (pp179-180, emphasis mine):
Adam Smith fortified his presumption in favour of free trade with an explicit political argument. Protectionism is driven by ‘the clamorous importunity of partial interests’ who capture government and prevent it from having ‘an extensive view of the general good’. Free trade, in contrast, tilts the balance away from rent-seeking producer interests and towards the mass of consumers. It is part of a wider constitutional package to keep government limited, transparent and clean, enabling it to concentrate better on the public good.
As important to Smith and Hume was the moral case for free trade, centred on individual freedom. Individual choice is the engine of free trade, and of progressive commercial society more generally. It sparks what Hume called a ‘spirit of industry’; it results in much better life-chances, not just for the select few but for individuals in the broad mass of society who are able to lead more varied and interesting lives.
To sum up: free trade is of course associated with standard economic efficiency arguments. But the classical-liberal case for free trade is more rounded, taking in the moral imperative of individual freedom and linking it to prosperity. Finally, free trade contributes to, though it does not guarantee, peaceful international relations. Freedom, prosperity, security: this trinity lies at the heart of the case for free trade.
In a short article, I can scarcely do justice to this monograph’s insight in relation to the case for classic liberalism nor to its observations on emerging geopolitics: I heartily recommend the book.
Further reading
By Toby Baxendale, on 11 December 09
By Toby Baxendale, on 8 December 09
The infamous “no such thing as society” interview given by Prime Minister Margret Thatcher to Women’s Own magazine, October 31, 1987:
I think we have gone through a period when too many children and people have been given to understand “I have a problem, it is the Government’s job to cope with it!” or “I have a problem, I will go and get a grant to cope with it!” “I am homeless, the Government must house me!” and so they are casting their problems on society and who is society? There is no such thing! There are individual men and women and there are families and no government can do anything except through people and people look to themselves first. It is our duty to look after ourselves and then also to help look after our neighbour and life is a reciprocal business and people have got the entitlements too much in mind without the obligations, because there is no such thing as an entitlement unless someone has first met an obligation [...]
It would be ignorant to say that there is no such thing as society. Society is the purposeful actions of all the individuals who participate in it. As such it is simply the sum of all its parts. Delve a little bit deeper and you will see that is in fact the most liberating and fulfilling invention of mankind discovered by the use of reason. The ability for man to cooperate and pursue his ends is society. Working within the societal structure of mutual co-operation to facilitate exchange of goods and services, you get the additional benefits of friendship and a sense of belonging or togetherness. This is often hailed as one of the greatest benefits of living and cooperating together.
The principle of the division of labour that allows us to avoid providing individually for all our goods and services, shelter and warmth, with the necessary impoverishment this would mean for the majority (and probably death), make us what we are as human beings. We are lifted out of the survival of the fittest war of all against all.
The Darwinian nightmare is not writ large in the human species as it seems to be for most other life forms.
Mrs Thatcher was taken out of context, as can be seen when you read the full text of the talk. However I suspect she, or her speech writers, displayed little understanding of the true benefits of the discovery of mutual human co-operation. I think they were also of the school of thought that would quite rightly argue for less government, as is Cameron, one of her successors. However she did not have much of an idea of what to put in its place. The transition from a government-run, welfare-providing, rule-making, centralised decision-making society to individual responsibility, local-community-led society is quite a painful process. To be smoothly transitioned to a society more compatible with liberty, I fear warrants only a constructivist approach to getting top-down government out of our lives and to rebalancing responsibility away from government and to the individual and the family. Cameron is spot on the money with regard to this.
Consider these extracts from “The Big Society” speech by David Cameron our aspiring PM.
I believe that in general, a simplistic retrenchment of the state which assumes that better alternatives to state action will just spring to life unbidden is wrong. Instead we need a thoughtful re-imagination of the role, as well as the size, of the state.
And:
The size, scope and role of government in Britain has reached a point where it is now inhibiting, not advancing the progressive aims of reducing poverty, fighting inequality, and increasing general well-being. Indeed there is a worrying paradox that because of its effect on personal and social responsibility, the recent growth of the state has promoted not social solidarity, but selfishness and individualism.
This is an extremely important point. Absent personal responsibility and the mutual bonds that bind us together through the universal division of labour fall away. The selfish, those who do not take individual responsibility, the person who says he has a “right” to a job, a house, an income etc, these people believe others must provide for them. This is selfishness in its extreme, if they are fit and ready to work. We all suspect that with 2.7 million people on Incapacity Benefit, there is extreme selfishness and little societal / individual responsibility at play. In war, enemies have tried their best to bomb the hell out of us and incapacitate as many of us as possible, but I suspect in 1945 there were not 2.7m people incapacitated in the UK!
[T]he re-imagined state should not stop at creating opportunities for people to take control of their lives. It must actively help people take advantage of this new freedom. This means a new role for the state: actively helping to create the big society; directly agitating for, catalysing and galvanising social renewal.
If this means encouraging tax breaks of social entrepreneurship or social action schemes then bring it on, as this will truly bring benefit to society and strengthen the bonds of individual responsibility. If this means some arbitrary intervention to make one class of person better off at the expense of another, his project will be doomed to fail. It all seems to be positively pointing to the former.
So yes, in the fight against poverty, inequality, social breakdown and injustice I do want to move from state action to social action. But I see a powerful role for government in helping to engineer that shift. Let me put it more plainly: we must use the state to remake society.
Cameron’s main contention is that the closing of the income gap between the highest and the lowest sectors of society provides a better society.
So the evidence suggests that up until the late 1960s, the expansion of the state to advance social justice was not only well-intentioned and compassionate, but generally successful. However, even in this period, it’s important to look at the complete picture. Some state extensions helped tackle poverty, others were less effective. Some did so while encouraging responsibility and local pride at the same time others undermined these virtues.
Since 1997,
the state continued to expand under Labour, our society became more, not less unfair.
He goes on to say
In the past decade, the gap between the richest and the poorest got wider. Indeed, inequality is now at a record high. The very poorest in our society got poorer – and there are more of them. The incomes of the bottom ten percent actually fell by £6 per week between 2002 and 2008 before housing costs, and £9 per week after housing costs. The number of people living in severe poverty has actually risen – not fallen, risen – by 900,000 in the past ten years.
I have to say, I hope this part of the speech is political posturing as who cares how rich the rich get as long as the bottom section is rising, everyone is indeed benefiting.
Cameron then poses a good question that we would all love to know the answer to:
How is it possible for the state to spend so much money, to devote so much energy, to fighting poverty – only for poverty and inequality to win the fight?
Part of the answer is as follows:
We have surely learnt that it is not enough merely to keep funding more and more generous tax credits. Indeed, the harm that means-tested benefits do to work incentives is beginning to undo the good they do in raising people’s incomes.
As the Institute for Fiscal Studies observed of the Government’s approach:
“Its current strategy of increasing … [means-tested] child tax credit is effective at reducing poverty directly, but its indirect effect might be to increase poverty through weakening incentives for parents to work.”
Payment under Cameron will not be by right, but by performance. Hallelujah!
Responsibility of the individual will be placed at the centre of a Cameron agenda:
as the state continued to expand, it took away from people more and more things that they should and could be doing for themselves, their families and their neighbours. Human kindness, generosity and imagination are steadily being squeezed out by the work of the state. The result is that today, the character of our society – and indeed the character of some people themselves, as actors in society, is changing.
Cameron recognises the value of education: those with better educations will do better in a globalised world. So there is self governing status for schools and much more parental involvement:
when you are paid more not to work than to work, when you are better off leaving your children than nurturing them, when our welfare system tells young girls that having children before finding the security of work and a loving relationship means a home and cash now, whereas doing the opposite means a long wait for a home and less cash later; when social care penalises those who have worked hard and saved hard by forcing them to sell their home, rather than rewarding them by giving them some dignity in old age; when your attempts at playing a role in society are met with inspection, investigation, and interrogation, is it any wonder our society is broken?
And here lies the rub.
The paradox at the heart of big government is that by taking power and responsibility away from the individual, it has only served to individuate them. What is seen in principle as an act of social solidarity, has in practice led to the greatest atomisation of our society. The once natural bonds that existed between people – of duty and responsibility – have been replaced with the synthetic bonds of the state – regulation and bureaucracy.
Our alternative to big government is the big society.
But we understand that the big society is not just going to spring to life on its own: we need strong and concerted government action to make it happen.
The policy prescriptions are a wealth of initiatives, backed by strong legislation to devolve the current powers of the state to the smallest local unit: neighbourhood empowerment:
Where neighbourhood empowerment is not practical we will redistribute power to the lowest possible tier of government, and the removal of bureaucratic controls on councils will enable them to offer local people whatever services they want, in whatever way they want, with new mayors in our big cities acting as a focus for civic pride and responsibility.
This decentralisation of power from the central to the local will not just increase responsibility, it will lead to innovation, as people have the freedom to try new approaches to solving social problems, and the freedom to copy what works elsewhere.
[...]
Galvanising, catalysing, prompting, encouraging and agitating for community engagement and social renewal. It must help families, individuals, charities and communities come together to solve problems.
We must use the state to remake society.
We must use the state to help stimulate social action.
If Cameron can achieve all of this he will be advancing the tradition of the Great Manchester social reforming Liberals such as Cobden & Bright. He will also be working in the tradition of Gladstone. One of those Great Manchester Liberals, Richard Cobden said:
Peace will come to earth when the people have more to do with each other and governments less.
After reading this speech by Cameron and appreciating his deeper understanding of society than Margaret Thatcher, I realise that, like Cobden, he will be a great social reformer: he deserves our support and encouragement in this project.
By Steven Baker, on 7 December 09
Via Demand for £50 notes ‘fuelled by lack of faith in banks’ – Telegraph:
Demand for £50 notes has risen sharply during the recession because the public has lost faith in the banks, the Bank of England’s chief cashier Andrew Bailey has suggested.
…
The suggestion is that more people are hoarding cash, rather than depositing it with banks, after the whole banking system was on the brink of collapse post-Lehman.
Which tends to reinforce Prof Jesús Huerta de Soto’s reform plan, explained by Toby Baxendale here and James Tyler here.
Further Reading
By Toby Baxendale, on 13 November 09
Norma Cohen in the Financial Times of 26 October 2009 wrote:
Britain’s economy cannot recover unless its damaged banking system is restructured, the newest member of the Bank of England’s monetary policy committee warned on Monday night.
For a short moment, I thought we might see the Cobden Centre’s proposal for bank reform discussed intelligently! I publish the usual warnings that when you read it, you will find that the Emperor has no clothes. I will also be showing you that the world is not flat, but it is in fact spherical.
Posen quite rightly contends that we need to “fix” our banking system. This fix seems to be more banks. We have between 8.5 and 13.26 banks per million people in the Group of Seven countries. I do not see the connection with this earth shattering proposal to create more banks and new economic prosperity. It seems to rest on just having more lending channels.
I will stick with the banking proposal mentioned above, which is based on sound legal principle and robust economic theory.
Separately, however, he scotched suggestions that the £175bn devoted so far to quantitative easing in the UK – the vast majority of which involves gilts purchases rather than corporate bonds – could sow the seeds of future inflation, dismissing supporters of such a view as “nutters”.
If the Bank could create inflation easily under such circumstances, and if the majority of market participants and households believed that – not just the nutters – then we would be halfway home,” said Mr Posen.
Posen will certainly deem the Cobden Centre as “nutters” as we have opposed the terrible, unjust effects of QE. The last time I wrote fully on this matter was here.
In simple terms, new money introduced into the economy never enters it evenly. Indeed, it first goes to the bankers who organise to both sell and buy the bond and the bond holder who receives the newly minted money. In possession of this purchasing power, they may pay off a bit of debt which will make lenders think there is more liquidity to lend.
This means projects which were marginal and, more than likely, do not have much hope of survival come into existence. When this happens broadly, it is called a “boom”. This is a distortion of the capital structure and will only sow the seeds of a new bust. Thus Posen has no Theory of Capital. In the second section of this article I explain in more detail why you need to have a good theory of capital and a working understanding of the structure of production.
Conversely, recipients may go out and buy something with this newly-minted purchasing power. This will bid up prices. This will slowly but surely ripple through the economy and at each point in time, the next spender / purchaser down the line pays that little bit more for goods and services. Now, those on fixed incomes, pensioners, people on the dole or low incomes tend to spend less frequently. This means that they will pay, more than likely, the higher prices. Thus, we have a wealth transfer from the poorest in society to the richest in society.
For people interested in social reform as we are at the Cobden Centre, a stealthy transfer of wealth from the poorest to the richest is exactly the wrong thing to be achieving.
Also, when QE hits the banking system, as we have seen from our contributor Gordon Kerr’s brilliant article, the banker will create a credit derivative from this transaction and book up to 30 years’ profit to his P&L for doing so.
This is another reason why banks are now showing record recovery profits and our political masters are allowing this to go ahead.
I always ask readers who doubt what I say regarding QE to ask themselves, “if QE is so good for the economy, why not carry it on and end world poverty now?” Mr Posen is in the infamous company of the likes of Gideon Gono. This is the Reserve Bank of Zimbabwe supremo who in his book “Casino Capitalism” gloriously savours how all the best governments in the World have now followed his lead in printing money (another name for QE) so he must be right!
Much as we all want to come out of this recession as soon as possible, we must take note that it is only by entrepreneurs making things that people want, better and cheaper, creating more wealth than existed before, that we will be able to climb out of this Labour Party induced mess. Lower burdens on the productive class are the only sure policy initiative for doing this.
By Chris Neal, on 14 October 09
Chris Neal explains how the reports of the Centre for Social Justice and Conservative Party policy are converging in a direction which tends towards Cobdenism: people having more to do with one another and the government less.
The Centre for Social Justice’s 2007 “Breakthrough Britain” report identifies five pathways to poverty: family breakdown, economic dependency and worklessness, educational failure, addiction and serious personal debt. This seminal work has led to the development of over 190 policies to reverse social breakdown.
The CSJ’s influence at the 2009 Conservative Party Conference was evident with their policy recommendations influencing much of the modern Conservative approach unveiled in Manchester. Decentralisation, Social Action, Accountability, Housing, Welfare Reform, Family, Law and Order, Schools, Skills, Re-training, Apprenticeships were among the topics on the main agenda for this Conference and it was clear that Breakthrough Britain had permeated Conservative Policy on each. Iain Duncan Smith has shown great courage in tackling issues of social justice head on with his team at the CSJ and was rightly acknowledged by David Cameron who said about IDS in his Conference speech “I am proud to announce today that if we win the election he will be responsible in government for bringing together all our work to help mend the broken society.”
David Cameron vowed to devolve power to communities in his landmark speech to the Open University on 26th May 2009 and this again was underlined in Manchester. Empowering local people and communities to take control or as Iain Duncan Smith puts it “Our approach is based on the belief that people must take responsibility for their own choices but that government has a responsibility to help people make the right choices.”
This all makes great reading and when combined with Tory promises to sweep aside great swathes of bureaucracy and quangocracy would have been music to the ears of ‘Manchester Liberals’ such as Richard Cobden. But are we ready for this as a Nation? Has society become too reliant on economic dependency and worklessness after 12 years of top down government? Are some of the poorest Britons now so emasculated and devoid of aspiration that they won’t be able to adapt to a less intrusive state, one that encourages enterprise and personal choice?
The modern Conservative message makes a lot of sense and could doubtless see the revival of our Nation’s fortunes. Prosperity based on production rather than spiraling debt and replacing a culture of instant gratification with one of hard work and thrift. A Government committed to rewarding social responsibility, families, savings and enterprise. Government can create the framework but unless corporately we embrace the opportunities on offer all the elegant oratory heard at the Conservative Conference and the profoundly accurate conclusions made by the Centre for Social Justice will amount to nothing.
David Cameron in his Conference speech on Thursday 8th October spoke about opportunity “I know how lucky I’ve been to have the chances I had. And I know there are children growing up in Britain today who will never know the love of a father. Who are born in homes that hold them back. Who go to schools that keep them back. Children who will never start a business, never raise a family, never see the world. Children who will live the life they’re given, not the life they want. That is what I want to change. I want every child to have the chances I had.”
Opportunity has been missing for the poorest in society and they need more than a lottery ticket to escape poverty. I am not talking just about the children growing up now but the preceding generation, the so-called NEETS and NINJA’s. They are entrenched in economic dependency with no motivation to work as frequently they are better off financially by staying on benefits. Many aren’t interested in working even when offered the opportunity, as the old saying goes “you can lead a horse to water but you can’t make it drink”. Well they certainly know how to drink but they have never been led to water! What would happen if real opportunity came crashing in on their lives? Opportunity in the form of skills training, mentoring and micro venture funding. The opportunity to begin apprenticeships without formal qualifications. Opportunities that can build respect, self esteem and encourage ambition. Some would respond and through hard work begin to benefit from the change in their circumstances, in turn maybe their success would rub off on others.
Top down state solutions do not work as public servants have to tick boxes for ministers and are not free to react to individual needs. Those of us in the business community however are unencumbered by bureaucracy therefore allowed to think laterally and react appropriately to individual needs. Stop for a moment to consider your own situation and how you might be able to contribute. I was inspired by the Get Britain Working Campaign to set up local Job Clubs and can testify first hand the good that comes from people getting alongside one another when facing the difficulties bequeathed by unemployment. I have introduced a second strand to the Clubs where those prepared to start their own ventures have the opportunity to be mentored and even funded by members of our local business community. Mentoring in itself is socially cohesive creating friendships between people whose paths would not otherwise have crossed. This is more a case of leading someone to water and having a drink with him! Could you start a Job Club in your community or support budding entrepreneurs?
We assume Great Nation stature in times of adversity and maybe this deep recession will manifest the legendary but dormant British qualities of cooperation, courage, determination and hard work to overcome looming economic and social bankruptcy. David Cameron’s vision of a modern Conservative Britain deserves to succeed and we must take responsibility to make it happen.
I would enjoy hearing from anyone who might consider forming a Job Club: please use our contact form.
Further Reading
By Toby Baxendale, on 4 October 09
Toby Baxendale exposes flaws in the economic thinking of the left, indicates the dangers of deficit spending and points to a better way to fund welfare while stimulating genuine commercial investment.
Published in the FT on Friday the 2nd of October under the title “A cool look at the current deficit hysteria”, we find an article by a respected economist saying that there is nothing to worry about running a deficit at the present and predicted size. Our predicted budget deficit of 12.4% of GDP in the current financial year, gradually declining to 5.5% in 2013-14 is no big deal. Coupled with the public sector debt itself, we see it leveling out at 76% of GDP. Sir Samuel says “Debt ratios of this size are historically far from unprecedented. In the Victorian period the ratio was nearly 200% and almost reached that level again in the early 1920s. In 1956 it was just under 150 per cent.” He goes on to add, “the debt was gradually reduced from the peaks mentioned above without any heroic gestures.” In a classic Keynesian tone, he concludes “The big error of the current discussion is to confuse the budget balance of individuals and companies with the government budget balance, which needs to be in deficit so long as attempted savings exceed perceived investment opportunities. Gordon Brown more or less understands this, and I wish he would use his talents to explain such fundamentals instead of stirring up an outdated class war.”
For our international readers, Gordon Brown’s speech to the Labour Conference 2009 was a class war-laced speech worthy of some of the most envy driven and hating sections of the Left. The full text is available here, if you want to take yourself back to the start of the last century. I presume this is what Brittan refers to in the last quote.
Also deficit spending — living beyond our means — in the language of the left is “investment.” There are 5 references to this type of activity in this speech. I recall a timely quote to remember from Ludwig Von Mises in Human Action (Scholar’s Edition), Page P.737:
At the bottom of the interventionist argument there is always the idea that the government or the state is an entity outside and above the social process of production, that it owns something which is not derived from taxing its subjects, and that it can spend this mythical something for definite purposes. This is the Santa Claus fable raised by Lord Keynes to the dignity of an economic doctrine and enthusiastically endorsed by all those who expect personal advantage from government spending. As against these popular fallacies there is need to emphasize the truism that a government can spend or invest only what it takes away from its citizens and that its additional spending and investment curtails the citizens’ spending and investment to the full extent of its quantity.
How is Wealth Created?
As I have said on this web site before, wealth is created on the factory floors, in the boardrooms and in the offices of people making their factors of production — land, labour and capital — work better for them in satisfying the needs and requirements of their consumers. Invariably, this means those factors need to be brought together in better combinations or made more productive. The latter is the most common way and this almost always needs savings — i.e. forgone consumption — to invest in the newer, more productive processes.
Governments do not create wealth, they can only take it from A and give to B.
What does an Interest Rate do?
As I have said before on this web site:
Simply put, you value more highly present goods of the same quality and quantity than you do future goods. Furthermore, the value of future goods diminishes as the length of time necessary for their completion increases. This sets up a price differential between goods now or goods later. This price differential is called an interest rate.
In reality it is also the rate of profit in the economy, as it is these saved resources that are the only source of future funding for investment and the associated return on that investment. So it is arguable to say that this is the most important metric in the economy.
To underscore this, it is the saved resources of all the economic agents in society that produces the goods and the profits of the future. The return (interest) on the savings can only be the additional component that allows the additional investment in making the production structure — all those activities mentioned above going on in factories and offices — that will produce the new goods and services. The rate of return on these savings must in-fact be the rate of profit of that which is lent to enterprises.
How do we Fund a Deficit?
The Government Bond
If the government has taken less in tax receipts than it gives out in transfer payments i.e. it has deficit, then it will raise the difference on the whole through the selling of government bonds or “Gilts”. These are promises that the UK taxpayer will pay back the bond holder at a date in the future.
It is important to note here that the savings and investment process that ensures that saved resources are put to their most urgent investment needs, as described above, immediately becomes distorted when a government bond soaks up resources to go into the government coffers for spending and not into productive industry. In short, at the very time today when we need our best wealth creators, the owners of all the businesses in this country, to be firing on all cylinders, looking at making themselves more productive and selling goods and services more in tune with the new demands today, in this post-boom world, we have a policy of running a deficit which will starve these wealth creators of the wherewithal to start lifting us out of this mess.
Contrast this with the Corporate Bond
A wealth creator may sell a corporate bond to fund his investment activities. Thus we must also observe that when you work producing wealth, you create a surplus.
You had capital of £X and, by the end of the year, you have capital of £X + £Y. You can give a return — coupon or interest rate — back to your investor. The merry-go-round can start all over again with a greater level of wealth accruing in society.
With the government bond, capital is taken away form the citizen and the interest is extracted via the taxation system to pay the bond holder. There is no wealth created, only at best transferred to another person and at worst totally destroyed.
When the proceeds of the government bond are issued to people on the dole (2.6m) and people on incapacity benefit (2.7m), capital is completely destroyed and the tax payer then pays interest on nothing!
A Note on Welfare Spending and the Future Funding of Welfare Provision
We currently rob Pater to pay Paul: that is, we fund a good portion of our welfare budget via the on-going issuance of public debt, the need for which has arisen as we are not prepared to live within our means as a nation i.e. less tax is taken than is spent by HMG.
The Rt Hon Ian Duncan Smith MP has produced a report here called “Dynamic Benefits: Towards Welfare That Works” that starts the process of simplifying the system for the claimant and the administrator. This is very welcome and long overdue. It also starts the reversal of the process whereby, over the last 12 years of Labour Government, benefits have become so rewarding — in the sense that if you are on welfare and you take employment, your net pay decreases — there is a great incentive never to get off them. All of this is welcome.
However, what you need to do, in the smallest local regions possible, is create an insurance scheme in a mutual or let the old Friendly Societies — see here for a brief account of their great history — take subscriptions from the people in the area to provide welfare to the people who need it when they fall on hard times. This has the effect of forcing the Society to invest in productive business activities to get a return on their investment to pay any welfare claims.
Contrast a bond paying interest on nothing (no capital) like a government bond with a corporate bond generating wealth (paying interest on capital) which the old Friendly Societies used: the latter is beneficial to the economy because investment takes place. Government spending can only ever be a redistribution.
Summary:
As Ludwig Von Mises says in the Scholar’s Edition of Human Action p770/1:
If government spending is financed by taxing the citizens or borrowing from them, the citizens’ power to spend and invest is curtailed to the same extent as that of the public treasury expands. No additional jobs are created.
So the message I am hopefully giving here, with the best clarity that I can, is that deficit spending totally undermines the wealth creation process.
If the government is urged to step in and spend where the private sector sees no opportunity, as Sir Samuel says, this will only lead to more general impoverishment. Does it need saying that only wealth creators create wealth and not wealth re-distributors, that is, the government?
This gives rise to the notion that a public debt is no burden because we owe it to ourselves. Now in fairness to Brittan, he is not saying this, he is just saying that in the absence of enough opportunities for savings to be fully utilized, then the government should spend instead. I hope in the above I have demonstrated that if funded by bonds (the majority way), then this is in fact a set-back to recovery.
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