Why governments' attempts to pick winners produce more losers than winners.
What do they teach these people on Oxbridge human sciences courses? First the Cameroons demonstrate their ignorance of what it is that is holding British business back (clue: it isn't that it takes 14 rather than 7 days to register a business). Now, with their plans for "worker co-operatives" to run public-sector services (echoing their calls for a "post-bureaucratic age"), they demonstrate their ignorance of the difference between bureaucratic management and profit (or commercial) management.
It looks like George has been reading the wrong book.
Here's a tip, George: try Ludwig von Mises' Bureaucracy, and then you'll understand what profit management means, why it is preferable but not always suitable, where bureaucratic management is necessary, and how it operates on an entirely different basis to profit management. It's only a little book, and a better introduction to real economics than any mainstream textbook or Oxbridge course. Excuse me for quoting at length, but it has never been more clearly explained (and the Tories obviously need it spelling out in very simple terms):
Bureaucratic management is management bound to comply with detailed rules and regulations fixed by the authority of a superior body. The task of the bureaucrat is to perform what these rules and regulations order him to do. His discretion to act according to his own best conviction is seriously restricted by them.
Business management or profit management is management directed by the profit motive. The objective of business management is to make a profit. As success or failure to attain this end can be ascertained by accounting not only for the whole business concern but also for any of its parts, it is feasible to decentralize both management and accountability without jeopardizing the unity of operations and the attainment of their goal. Responsibility can be divided. There is no need to limit the discretion of subordinates by any rules or regulations other than that underlying all business activities, namely, to render their operations profitable.
The objectives of public administration cannot be measured in money terms and cannot be checked by accountancy methods. Take a nation-wide police system like the F.B.I. There is no yardstick available that could establish whether the expenses incurred by one of its regional or local branches were not excessive. The expenditures of a police station are not reimbursed by its successful management and do not vary in proportion to the success attained. If the head of the whole bureau were to leave his subordinate station chiefs a free hand with regard to money expenditure, the result would be a large increase in costs as every one of them would be zealous to improve the service of his branch as much as possible. It would become impossible for the top executive to keep the expenditures within the appropriations allocated by the representatives of the people or within any limits whatever. It is not because of punctiliousness that the administrative regulations fix how much can be spent by each local office for cleaning the premises, for furniture repairs, and for lighting and heating. Within a business concern such things can be left without hesitation to the discretion of the responsible local manager. He will not spend more than necessary because it is, as it were, his money; if he wastes the concern's money, he jeopardizes the branch's profit and thereby indirectly hurts his own interests. But it is another matter with the local chief of a government agency. In spending more money he can, very often at least, improve the result of his conduct of affairs. Thrift must be imposed on him by regimentation.
In public administration there is no connection between revenue and expenditure. The public services are spending money only; the insignificant income derived from special sources (for example, the sale of printed matter by the Government Printing Office) is more or less accidental. The revenue derived from customs and taxes is not "produced" by the administrative apparatus. Its source is the law, not the activities of customs officers and tax collectors. It is not the merit of a collector of internal revenue that the residents of his district are richer and pay higher taxes than those of another district. The time and effort required for the administrative handling of an income tax return are not in proportion to the amount of the taxable income it concerns.
In public administration there is no market price for achievements. This makes it indispensable to operate public offices according to principles entirely different from those applied under the profit motive.
There is much more of similar insight and clarity in this little book, which I urge you to read (it's worth buying, or available to read online if you prefer). But hopefully you get the drift. An understanding of and preference for markets does not imply rejection of bureaucracy where necessary, but it does require an understanding of the critical differences between them. Someone with a real understanding of markets can easily distinguish between the activities where markets are the best means of coordinating social cooperation and the activities where the conditions necessary for markets to work are not present and where bureaucratic management is therefore necessary. In fact, many people unencumbered by an Oxbridge education would probably have a reasonable intuition of which type of management is best to apply in many cases. But the Tories (and Philip Blond, the "Red Tory" who originated this nonsense) are so sophisticated that they believe they can breed exotic hybrids from markets and bureaucracy to coordinate activities in private- and public-sector activities. Of course, they end up with a mule.
Third in the list of this week's bad policy ideas* is the revival of talk of a state-owned or -backed infrastructure bank. The FT wrote approvingly of how both major UK parties are considering this option:
By reducing the risk to investors, it could bring down the cost of capital for the industry and hence the ultimate cost to consumers...
The bank could fund projects such as nuclear plants and wind farms, spreading the risk over a range of investments and issuing bonds that could carry tax advantages and possibly a state guarantee...
In return for the cheaper funding, the industry would have to accept tighter regulation, moving away from the UK's free market for energy towards a framework of returns agreed between companies and the regulator.
The Conservatives' New Economic Model, launched on Tuesday, promises:
We will create Britain’s first Green Investment Bank, which will draw together money currently divided across existing government initiatives, leverage private sector capital to finance new green technology start-ups and back the bright ideas of the future. Lord Stern has agreed to advise us in the creation of this Bank.
It turned out that Lord Stern had agreed no such thing, thank goodness (haven't the Tories noticed that fewer and fewer people think the Stern Review's approach to carbon valuation holds water?). But that's just a sideshow. The point is that, with or without Stern, the Tories are quite committed to the concept.
Meanwhile, Labour (according to the FT) is:
considering such a bank as a way to raise funds from long-term investors such as pension funds
It looks like most of our intellectual class thinks we need goverrnment-managed lending to deal with the difficulties of long-term investment in infrastructure. They are wrong. We need to deal with the reasons that businesses judge there to be insufficient reward to justify the risk of investment in infrastructure, not preserve those inefficiencies by hiving off a chunk of the risk to taxpayers, pension-fund beneficiaries and the like. The following is an attempt to explain how and why.
Second in the list of this week's lousy initiatives* announced by the Government is the micro-generation Feed-In Tariff (FIT), or "clean-energy cashback" scheme. The micro-gen FIT is a scheme to pay significant amounts of money, over and above its value to consumers, for every unit of electricity generated by renewable generators upto 5 mega-watts (MW) in scale.
You may feel that 5 mega-watts doesn't sound very "micro", and indeed it is enough to supply the needs of several thousand houses, but let's not carp. That is hardly the main issue.
Now, I have to declare an interest. Our company may benefit from this initiative. So I would like to thank all of you for your generosity - your extraordinary, overwhelming generosity. But you can afford it, can't you? It's not like we're all strapped for cash or anything...
Don't take my word for it. The Government has detailed exactly how generous you are being. According to their Impact Assessment (IA) of this initiative, it will cost...
£8.6 billion (bn).
But you can't just look at the costs. You have to weigh the benefits against it. And those come to the princely sum of...
£420 million (m).
That's right. According to the Government, it is worth spending £8.6bn in order to make carbon savings of £420m.
As reported on the Environment Agency's website:
A series of civil sanctions will give the Environment Agency the discretion to avoid the time consuming and costly process of having to take businesses that commit certain types of offences to court. These will include monetary penalties, the power to make business repair environmental damage and the power to stop businesses from continuing operations that are damaging the environment. Organisations will also be given a formal opportunity to restore voluntarily any damage they cause. The new powers will not replace the Environment Agency’s approach of using advice and guidance and are expected to be used sparingly. The Environment Agency will still take criminal cases against business and individuals that cause deliberate, reckless and grave environmental damage. Such activities also often undercut law abiding business.
The Environment Agency has already been allowed to usurp the planning process. If you get planning approval, they can effectively over-ride it by applying impossible strictures, and they can overturn it by retrospectively imposing non-viable conditions.
They shoot first and ask questions later, even going public with baseless accusations. Any retraction is grudging, delayed, and not publicized, and apologies rare as hen's teeth. Their behaviour and attitude is arbitrary, depending largely on the attitude of the individual agent. They are one of the single most important obstacles to economic development and to good environmental practice in the country.
They have an infinite budget (because the Government is bound to provide them with funds for any actions they take, however many and spurious). Their powers were already excessive, unaccompanied by responsibility or restraint. And now the Government proposes to further expand those powers, without the inconvenience of having to prove their case in court.
"You have been judged!"
In the established NuLab manner, language is perverted to portray this as a benefit to business:
more flexible powers will be used that make it easier and more cost effective for businesses to operate within environmental laws.
This will mean fairer and more effective environmental regulation.
So progressive is this development, in fact, that it is to be the model for the expansion of such powers to other regulatory organisations:
The Environment Agency today became one of the first organisations to be granted new civil powers to complement existing regulatory powers.
"One of the first"? So there are others to come?
The reason they are to be trusted with extra powers is because the Better Regulation Executive reckon that they have improved their performance. One would think that a purpose of the BRE would be to oppose extensions of arbitrary regulatory powers. If they can't do that, in fact if they are recommending extension of powers, what good are they? Proof that you can't improve regulation by creating regulators to regulate the regulators, or quangos to recommend on how to control the quangos. Another candidate for the bonfire of the quangos that the Tories have promised and probably won't deliver.
There is much more to make you want to scream or sob in the EA's announcement of this development. Read it and weep.
The Real World Economic Review is taking votes for its Ignoble Prize for Economics, "to be awarded to the three economists who contributed most to enabling the Global Financial Collapse (GFC)." The shortlist is outstanding, and indeed many of the nominees who didn't make the shortlist deserve greater recognition for their roles in the destruction of real economic understanding. The candidates are:
I hadn't heard of Richard Portes (his economic "achievements" being rather less significant than his political "achievements"), but once I read his resume (which you can find in brief on the same page as the poll), I had to demote Robert Lucas to fourth place so I could give Portes my vote. This has provided a key missing piece in the jigsaw of causes for the complete obliteration of real economics in the UK, to a greater extent than any other country.
One name is particularly conspicuous by its absence. Where is Shriti Vadera? Gordon Brown is more culpable for the global mess than people realise, and guess which "beneficiary" of an Oxford PPE education joined his team as economic adviser in 1999, roughly when he started his spending splurge? She is now economic adviser to the G20, because you just can't do enough damage within the British government.
A poll for a Noble Prize for Economics will follow, but get your votes in now for the biggest knaves or fools in the field.
I have been lucky enough to be involved in several discussions recently in small, ostensibly-liberal* groups including some leading figures in public life and other fields. They were all private gatherings, and some were under Chatham-House Rules, so I am not going to talk about the content or the individuals, but about a depressing conclusion, which the combination of experiences makes it hard to avoid.
Most of these supposedly-liberal figures are not really liberal. They talk a good game about the generalities and principles of smaller government, but when you push them on the details, they object to the government's winner-picking not on the basis that it's not what governments should or can do effectively, but on the basis that they believe the government has been picking the wrong winners. They have a list of their own winners, and believe that picking winners would work fine if only the government took better advice (i.e. picked their winners).
That is depressing enough - that in a society where self-professed liberals are probably in a minority, only a minority of that minority really are liberal. But that is just the context, not the truly depressing conclusion.
I have seen it said, and believe it to have more than a grain of truth, that one reason why (real) liberals lose is that liberal beliefs are ill-suited to the political fight. The liberal believes in other people's rights to do and say what they want, and respects contrary opinions. His respect for reason, principle, freedom, and the rights of the individual means that the ends can never justify the means. The socialist, or conservative or other authoritarian, believes himself to be possessed of moral superiority over his opponents, that the purpose of government is to steer people towards outcomes that are good for them (whether or not they realise it), and that the ends therefore often justify the means. While the liberal tries to achieve his ends armed only with his powers of persuasion, the authoritarian uses whatever means he judges effective to achieve his ends, without worrying about treading on toes and breaking eggs. Collateral damage is a price worth paying. He will gather many people to his side by such means as self-interest, fear or appeal to base emotions, and undermine his opponents by such means as misrepresentation or tricks of rhetoric and false logic, while the liberal struggles to persuade many people to his view.
That also is depressing, but is also not the depressing conclusion I have in mind. After all, having realised this, the liberal may (though rarely does) alter his approach. I, for one, have no problem with the illiberal imposition of liberal policies. They may not realise it, but those liberals who are not prepared to bite that bullet might as well give up on political delivery of their ideals. They are unlikely to achieve anything other than passing on their ideas to the sympathetic minority.
As I listened to the pseudo-liberals at these gatherings, with their pet technologies or solutions, I began to realise another reason why it would always be difficult for genuine liberals to gain enough political support to implement a genuinely liberal programme. One pseudo-liberal's magic bullet is rarely contradicted by another's magic bullet. But they are both contradicted by the real liberal's opposition to all magic bullets.
The pseudo-liberals can deploy the "politics of and", while that luxury is not available to the real liberal. If one pseudo-liberal likes coal and another likes nuclear, they can agree that the government should promote the use of coal and nuclear power. The real liberal cannot compromise in the same way. There is no meaningful trade-off to be had. They cannot agree to have no winner-picking, but also to pick coal (or nuclear) as a winner.
Of course, the "politics of and" dissolves once in power, faced with the reality of budget constraints. (The pseudo-liberals and authoritarians never have properly understood the concept of scarce resources.) So they compromise again and have (in their respective views) not enough coal and not enough nuclear, but (through the alchemy of taxation and government-debt) more of both than can realistically be afforded or would have been justified by undirected investors. This compromise provides the handy excuse (or "saving lie") when their winner-picking fails - it wasn't their idea or the whole concept of winner-picking that was at fault, but the other person's bad idea. They then start building new coalitions and new compromises, which they believe will work better next time. And so on, ad infinitum.
Only in one rare and fleeting circumstance can real liberals hope to get the reluctant support of enough pseudo-liberals to implement a genuinely liberal programme - when the economy collapses so badly under the weight of complex and contradictory initiatives, that few people can fool themselves that there is enough money to fund the magic bullets. Some may even be converted to real liberalism by the evidence of pseudo-liberalism's failure, at least for a while. Most of them will gradually convert back, though, as the economic improvements created by the real liberal policies provide the funds to rekindle the belief that economic outcomes could be improved by a bit of judicious targeting here and there. Their reversion will be justified by the ridiculously high standards to which they hold the highly-imperfect, trial-and-error mechanism of the market, whereby any imperfections of outcome are seen as failures that could be improved through intervention, even though experience should have taught them that the outcomes of intervention were very much less perfect than the imperfect outcomes from the market.
The truly depressing thought, then, is the combination of all of this:
It's more grist to the Schumpeterian and Marxian mills. Circumstances like 1979/80 only come round once in a blue moon, and when they do, liberals will face severe competition from extreme authoritarians pushing the communist or fascist delusions. We may not be so lucky in the swing next time, and if we aren't, you can get locked into an authoritarian nightmare for a very long time.
But I still don't believe the Schumpeterian or Marxian theories that the collapse and replacement of capitalism is inevitable. I still believe it's a question of individual choice (aggregated as democratic choice), and that the promotion and defence of real liberal ideas is a fight that one must keep fighting. But, my God, it's an uphill battle, with no end in site, nor many allies, nor a strong chance of winning. It makes one appreciate the small number of allies there are, like the IEA, and the Cobden Centre, and Progressive Vision. At least their number is growing slowly, and some new initiatives (like the Cobden Centre) offer some prospect that it may start growing a little faster, and with stronger intellectual foundation.
A couple of months ago, I sat next to a leading economist, reputedly of the free-market variety (though our conversation led me to doubt it). I suggested to him that GDP was not a good indicator of the health of the economy. He said he thought it was, and (immediately betraying the weakness of his position) proferred the straw-man challenge that perhaps I preferred Gross Wellbeing.
Though the smarmy economist would not like to acknowledge it, it is possible to be critical of GDP without endorsing the hippy, Cameroony, pseudo-statistic of Gross Wellbeing. Here is one of many reasons why GDP hides a litany of economic and (particularly) political sins.
Consider two economies identical in every way - same size of population, same output of products, same prices - except for one feature. In one economy, the work is done by half the population available for work, working on average 70 hours per week whilst the other half of the working population do not work. In the other economy, the whole population available for work is in employment, working on average 35 hours a week. In aggregate, the same amount of money is paid in wages for the same amount of work to produce the same amount of goods, and the same amount of wages is spent on the same value (though probably not the same types) of goods. The GDP of the two economies would be identical. But are these economies equally healthy? To my mind, clearly not, and for fairly simple economic reasons.
In a speech reproduced at the excellent Cobden Centre website, James Tyler argues for the introduction of a free money system (i.e. independent, private issuers of currency). This is part of the ongoing debate between sound-money advocates about the best way to achieve their agreed objective. Some believe that money must be backed by a commodity (typically gold) whose quantity is difficult to change rapidly (we might tag this the Misesian approach), others believe like James that competition between issuers will favour currencies whose value is debased most slowly and that private, competitive currency is therefore the way to achieve sound money (this might be called the Hayekian approach, though strictly we ought to call it the late-Hayekian approach, as Hayek had for a long time favoured the former solution, until he despaired that state-owned banks would ever adopt a sound-money approach).
James presents the Hayekian case in positive form - that competing currencies themselves would be beneficial. I am more Misesian than Hayekian, but I can see a case for the Hayekian approach. But that case is negative, not positive. In my opinion, the best argument for Hayek's approach is that it would fail, not that it would succeed. Let me explain.
Money is not a good like any other good. Neither is any other good, of course (I hasten to add before I fall into the mainstream economists' trap of over-generalization). Each good has its own characteristics, which makes it quite difficult to express the value of one good in terms of another. That is why barter is impractical, and highlights two of the key characteristics of money (part of whose function is to get round this problem). To serve its purpose well, it must be liquid and fungible. It also needs to be durable, portable, finely-divisible, and of consistent quantity (so that it retains its value as a reliable metric against which supplies of and demand for other goods can be judged). But for these purposes, the key point is that the more widely accepted a currency is, the more useful it is.
"Like other tyrannies, the tyranny of the majority was at first, and is still vulgarly, held in dread, chiefly as operating through the acts of the public authorities. But reflecting persons perceived that when society is itself the tyrant - society collectively, over the separate individuals who compose it - its means of tyrannizing are not restricted to the acts which it may do by the hands of its political functionaries. Society can and does execute its own mandates: and if it issues wrong mandates instead of right, or any mandates at all in things with which it ought not to meddle, it practises a social tyranny more formidable than many kinds of political oppression, since, though not usually upheld by such extreme penalties, it leaves fewer means of escape, penetrating much more deeply into the details of life, and enslaving the soul itself", On Liberty (1859)
