“We look to Scotland for all our ideas of civilisation.” –Voltaire
In the face of nearly universal warnings from other nations, including England, the Scots have taken a pause from their legendary bravery to vote against full independence from the United Kingdom. Yet given the evident financial and monetary failures of most major developed economies in recent years, not only the UK, the Scots should take full advantage of the greater autonomy already promised by Westminster. In this report, I present a plan, inspired by the ‘Scottish Enlightenment’ of the 18th century, that would enable the Scots, probably in less than six years, to become the most prosperous Anglosphere region in the world. It won’t be easy, but then the easy isn’t for the brave.
who needs independence anyway?
The Scots may have shied away from decisive action on this particular occasion, but to paraphrase Shakespeare, “Independence is the undiscovered country.” Like death, it can be rather intimidating. But then the Scots, including their cousins the Scots-Irish, once settled the New World in vast numbers—an act of supreme bravery if ever there was—and played a critical role in the formation of the United States. This role included providing the bulk of the militia that would fight and eventually vanquish the formidable British army and their Hessian mercenaries.
There was another critical role played by the Scots in the 18th century, however, a rather more civilised one to be sure. This was the intellectual movement known as the ‘Scottish Enlightenment’, to which belonged prominent philosophers such as David Hume and the father of so-called ‘classical’ economics, Adam Smith. These ideas, in particular that of Scottish ‘Common Sense Realism’, would provide much of the basis for the original, Jeffersonian political culture of the United States, as documented by Alexis de Tocqueville, among others.
The US founding documents, including the Declaration of Independence—drafted by Jefferson—and the Constitution, are replete with Enlightenment concepts, including those of Natural Law; the centrality of commerce in society; private property rights; individual responsibility and the essential but limited role of government. Associated documents such as the Federalist Papers elaborate on the official documents, making the Enlightenment associations more obvious.
While not a term used in any of the above, the concept of ‘lasseiz faire’ economics, associated with Adam Smith’s famous ‘invisible hand’ of the marketplace, in time became a commonplace explanation for the astonishing prosperity of the young United States. Indeed, notwithstanding notable exceptions, such as the two Banks of the United States and a handful of national infrastructure projects, the US government remained but a tiny part of the national economy prior to the exigencies brought about by the Civil War. Even thereafter, the US government remained small in comparison with that of most European countries. Indeed, the US government had almost zero debt and financed itself almost entirely though excise taxes (eg customs duties) until the creation of the Federal Reserve and introduction of the federal income tax in 1913.
THE ORIGINAL SCOTTISH SUCCESS STORY
It is perhaps no coincidence that, given the prominence of Scots in early American commerce, culture and politics, and the English dejection at losing the Colonies, Scotland would emerge as the most important trading partner of the US in the early 19th century. Glasgow soon became the world’s largest shipyard and due to associated local advances in engineering and science, it has as strong a claim as any city in the world to being the heart of the industrial revolution that would eventually sweep the globe. This was no doubt assisted by the ‘Scottish Diaspora’ of engineers, scientists, skilled tradesmen and businessmen of all stripes.
This astonishing success can be repeated again with sufficient home rule autonomy, as has already been promised by Westminster. Scotland need only reach back into its own past for guidance in order to secure a prosperous future and, quite possibly, overtake not only England but the entire Anglosphere world. The most important ingredients for success can be broken down into six essential elements.
SIX SCOTTISH ELEMENTS FOR SUCCESS WITHIN SIX YEARS
The Scots’ legendary bravery is equalled by legendary parsimony, the first essential element of success. There is no growth without investment and no sustainable investment without savings. It stands to reason that you aren’t a parsimonious society if you carry around a massive, accumulating national debt. Debt service is also a drag on future growth. Thus if the Scots want to prosper long-term, they are going to need to pay down their share of the UK national debt.
Of course, this is easier said than done. It is also highly preferable to pay down debt out of a growing rather than stagnating income. Thus the key to successful debt reduction is strong growth, which to be sustainable requires strong private investment, the next essential element.
Although parsimonious with respect to consumption, the Scots were once great investors. As mentioned above, Glasgow and the Scottish Lowlands generally have as strong or stronger a claim than the English Midlands as the heart of the industrial revolution, the most rapid accumulation of productive capital in recorded human history. But how could the Scots best facilitate investment today?
There are several policies that would quickly create an investment boom. Most important, Scotland should do better than celtic rival Ireland, with a low corporate tax rate, and abolish the corporate income tax altogether. Yes, you read that right: The effective corporate income tax in many countries now approaches zero anyway, due to all manner of creative cross-border accounting. But while it might be creative, international tax arbitrage accounting is also expensive. Corporations the world over would far prefer to put clever employees to work on real productive activities, if possible, rather than on elaborate accounting schemes requiring constant updating, a dead-weight loss for their customers who pay higher prices as a result.
For those concerned about the tax revenue implications of a zero corporate tax rate, don’t be. What is not paid by corporations in tax is eventually paid out in profits (dividends). Those can be taxed instead, as ordinary income like anything else, thereby simplifying the local personal income tax, which ideally should be a flat amount, say 20%, prepared on a single sheet of paper once a year. So not only will corporations want to relocate to and invest in Scotland; skilled workers will be attracted by the only ‘One-Rate, One-Page’ personal income tax in the entire Anglosphere. Already resident Scots will benefit most from the associated general expansion of the domestic labour market.
Another tax policy that would both attract global investment and simplify things would be to tax capital gains at the same flat rate as on ordinary income. Capital gains are really nothing more than deferred investment income anyway, so by leaving the interim income untaxed, a huge incentive to save is created, thereby providing for the domestic savings required to fund the high investment rates enabling strong and sustainable growth.
As for other taxes, there is much more that Scotland could do to attract investment and support healthy, sustainable growth. Willie Walsh, CEO of BA, has suggested the Scots might sharply reduce duties on airfares. This would have the effect of re-routing much transcontinental air traffic, including profitable connecting flights, from congested London area airports to Scotland.
Developing human capital, at which the Scots excelled in the 19th century, is the third element. Consider which industries are most likely to relocate to Scotland: Those requiring neither natural resources nor extensive industrial infrastructure, that is, those comprised primarily of human capital. Although financial services comes to mind, there is tremendous overcapacity in this area in England and Ireland, including in unproductive yet risky activities, so that is better left to the English and Irish for now. Better would be to concentrate on health care, for example, an industry faced with soaring costs and stifling regulation in much of the world.
Scotland could, inside of six years, become the world’s premier desination for so-called ‘healthcare tourism’. Scotland lies directly under some of the world’s busiest airline routes, an ideal location. Medical professionals from all over the world would be attracted by the zero tax rates on their small businesses and low tax rates on paid-out profits, passing much of the savings along to their patients. In turn, patients from all over the world would travel to Scotland, attracted by the low cost and high quality of healthcare. To further lower costs, the Scots could leverage off their strong legal traditions to reduce opaque malpractice liability disputes to a minimum, thereby making certain that the healthcare industry remains centred around doctors, nurses and patients, rather than lawyers, regulators and bureaucrats, as has become the case in the US, for example.
By attracting much global healthcare talent, Scotland could easily become the leading global location for medical research, development, training and education. Healthcare could thus provide the 21st century equivalent of Scottish shipbuilding in the 19th: A central industry that, in turn, facilitated the development of many other associated industries.
No doubt, in addition to Healthcare and Air Transport, at a minimum a handful of other industries would take advantage of sensible Scottish tax policies. Software firms, nearly devoid of anything other than human capital, would almost certainly respond. Film makers and artists of all stripes would be enticed by the low tax rates on their creative productions. Accountancy and business services firms would follow all of the above.
A fourth essential element to success is to implement Scottish Enlightenment principles for sound banking. This is of utmost importance due to the potential monetary and financial instability of the UK and much of the broader Anglosphere.
As a first step, Scotland should forbid any bank from conducting business in Scotland if they receive any direct financial assistance from the Bank of England or from the UK government. In turn, Scotland should make clear to Westminster that Scottish residents will not contribute to any taxpayer bail out of any UK financial institution. No ‘lender of last resort’ function will exist for financial activities in Scotland, unless such action, if formally requested by a bank, is approved by the Scots in a referendum. (Taxpayers are always on the hook for bailouts one way or the other; why not make this explicit?) The Scots deserve to make any bank bailout decision for themselves, should they deem it necessary or desirable, rather than leave it to an unelected bureaucracy easily captured by the financial industry, as appears to be the case with the Bank of England and the US Federal Reserve.
How then will banks operating in Scotland be perceived as safe and credible institutions? Well, the old-fashioned Scottish way: They will capitalise themselves sufficiently so that investors and depositors will consider their investments and deposits to be secure under all reasonable scenarios. Yes, this implies a high cost of capital and low financial leverage, which in turn imply that bank profitability will be very low. But the Scottish future should not belong to economic financialisation, rather in real, productive activities. Finance should serve the economy, not the other way around.
The fifth element reaches particularly deep into Scottish history: Self-Reliance. Peoples that inhabit relatively inhospitable or infertile lands tend to establish cultures with self-reliance at the core. No, this does not make them culturally backward, but it does tend to contribute to a distrust of foreign or central authority. The Scots, while brave, were frequently disunited in their opposition to English rule, something that had unfortunate consequences for many, not just William Wallace.
While disunity may not be effective in the face of foreign invasion and occupation, there are few who argue that modern governance structures in most developed economies, including the EU, have not become inefficiently over-centralised in recent decades. The Scottish independence movement is not merely a local phenomenon. There are peoples throughout the EU seeking greater local autonomy. The Belgian Flemings have been at it for years. The elder Catalonians have memories of the Spanish Civil War. Various regional organisations in northern Italy have pressed for degrees of independence from Rome. And anti-EU sentiment, in general, has been on the rise over the past decade, even before so-called ‘austerity’ set in post-2008.
Local government tends to be more responsive and accountable to the citizenry, in particular a culturally self-reliant one not tolerant of abuses. More efficiency and effectiveness in government is the result. Decentralisation and self-reliance, together with the adoption of modern communications technologies will make it possible for Scotland, in a short time, to serve as a governance model for others to emulate.
Finally, there is the sixth element: the collective cultural traditions of Scottish Presbyterianism. There are few religions in the world that hold not only faith, but hard work, thrift and charity in such high regard as that of traditional Presbyterianism. Yes, as with most all Europeans, the Scots have become more secular in recent decades. But the same could be said of the Germans, who nevertheless cling to their own, solid Protestant work ethic and associated legal and moral anti-corruption traditions.
The charitable tradition is misinterpreted by some to support a unique form of Scottish socialism, but this contradicts the core Presbyterian concept of man’s direct relationship with God. Presbyterianism holds that to work hard, to be thrifty, to be charitable, is to do God’s work and thus all three can be understood as forms of worship in their own right. However, genuine faith in God, genuine worship, cannot somehow be coerced by a central authority. It must be left to the individual, through their direct relationship to God, to find enlightenment, albeit with the strong support and influence of the local community. To put it somewhat humorously, a Presbyterian minister might say to a Scottish socialist: “Jesus told YOU to help the poor, not to create some centralised government bureaucracy to coerce others into doing so on your behalf!”
Nowhere in the developed world today is private charity taken so seriously as in the United States. Notwithstanding certain wayward cultural traits of modern America, active private charity remains an integral part of the society. This is without doubt a legacy of Presbyterian cultural tradition: Limited government yes, but with limited government comes far greater private and personal responsibility to help the poor or otherwise needy in the community.
So in the home-ruled Scotland of the future, in which self-reliance reasserts itself and government becomes more limited as per Scottish tradition, so the vacuum can be filled by private charitable initiative. This will serve to assist those who struggle to wean themselves off a shrinking public sector safety net, notwithstanding the strong labour market associated with high rates of domestic and foreign investment.
Yes, some Scots might be intimidated by this ambitious six-year plan, notwithstanding its firm rooting in Scottish cultural traditions, the Scottish Enlightenment, and the Scottish industrial revolution. But I’m hopeful that bravery will carry the day, with or without full, formal independence from the UK.