Stepping back

Lots of comments about how exchange rates and equity-price movements show that the UK is (a) doomed or (b) well-placed post-Brexit. Movements and values over a few days tell us nothing except the climate of hope or fear in those few days. How do things stand on a broader perspective? Let's compare:

A. Currencies: USD vs GBP vs EUR

B. Markets: FTSE100 vs FTSE250 vs Dow vs DAX

Promote industry. Bag a banker.

Boris Johnson is quoted in MoneyWeek as having said to Management Today:

"To the banker bashers I say, what's your economic model? We can't ignore and hate the bankers. What would that achieve? Show me how reducing financial services boosts manufacturing."


For years, the UK ran a massive balance of trade deficit, i.e. as a nation we bought and consumed more than we produced and sold. It is no more sustainable for a nation's income to exceed its outgoing than for an individual.

Wet or dry

I'm feeling a little damp. Or at least, feeling like I look a little damp to others. I've found myself on what many would perceive as the more moderate, centrist side of the argument several times recently.

What makes this all the moister is that I can't even state most of this boldly. I lack the certainty of the "driest" libertarians (but then again, I'm not a libertarian). I can imagine that I could be persuaded otherwise on most of this (except the means-testing).

And yet, I don't think I'm really wet. In fact, I feel like I am on the drier side of these arguments. I'm just not sure I can explain why (to myself, as much as to anyone else). This post is a bit of thinking out loud to see if I can put my finger on it.

Plus ça change

Maybe they really were the good times. The last few years didn't feel like it, but at least the Government was subtle enough in its winner-picking that I would have to explain how its targeted measures were really supporting losers.

Now, our supposedly conservative and liberal government plans to pick its winners overtly and proudly.

Mr Cameron says that we need to target government support at “those industries where Britain enjoys competitive advantage”.

If they already enjoy competitive advantage, why should we tax industries with fewer advantages in order to support industries that don't need it?

The distinction between free markets and managed markets is, according to Dave, “a sterile debate between laissez-faire and hands-on government”.

What a pity Maggie wasted so much of her time on such a sterile issue.

The question” he says “isn't 'Should government be involved?' - because it is involved. It taxes, it regulates, it invests. The real question is, 'What is the right kind of involvement?'”

i.e. “If I choose not to pick winners, I am effectively penalising them, so even non-intervention is intervention in my sophisticated, Oxbridge-addled, looking-glass world.”

Borrowing and spending our way out of debt

One feature that distinguishes the current financial crisis from earlier ones is how widely the problem is spread. We have had bigger public debt than today, but never with so much private sector debt. We have had leverage-fuelled bubbles in one or other sector, but never managed to blow such massive, simultaneous, debt-fuelled bubbles in the public, financial, other business, and household sectors:

Chart of the sectoral composition of debt in major economies

         From McKinsey Debt and Deleveraging report.1

Nice to see, then, that each sector is doing its best to pull back from the brink:

A business unlike any other

According to Angela Knight, Chief Executive of the British Bankers' Association:

"A bank is like any other business - if its fixed operating costs go up then so does the price of its product."

Angela has provided a nice illustration of how (a) banks are not like any other business, and (b) she has the same grasp of business and economics as most other politicians.

Enlightenment time?

The economic debate is coalescing increasingly into two camps: those who think that the Government can prevent a further economic correction through deep spending cuts, and those who think that the Government can prevent a further correction through continued deficit spending. On This Week, Will Hutton just described the two camps respectively as Catholics and Protestants. As the British government is implementing a (roughly) Catholic programme, it is likely that the failure of this programme to prevent a correction will be interpreted by much of the media, academia and the population as evidence that the Protestants were right. Conversely, Catholics will point to the failure of Obama's essentially Protestant programme as evidence that they were right. Both sides will pay attention only to the evidence that suits their views. Neither side will consider that they may both be wrong.

Why are there so few atheists and agnostics in this debate? Maybe there is no God, maybe economic imbalances can reach a point where corrections are both necessary and inevitable, and maybe governments promising to prevent them only make matters worse in the long run, whichever creed they follow.

Our intellectual establishment (dominated by the Oxbridge prelacy) is ranged as powerfully against such heresy as the religious establishment was once ranged against those who placed reason above faith. Without the fear of eternal damnation, the promise of perpetual bliss, and the immutability of an order prescribed by a higher power, how were the clerical and aristocratic hierarchies to maintain their authority? And without the promise that they can make things better than they would be without intervention, how is our intellectual establishment to persuade us to keep listening, voting and paying for their arrogant yet ignorant prognostications?

Things didn't turn out too bad when we allowed reason to supersede faith. Authority did not collapse, but became based more on merit and less on position. There turned out to be other foundations of morality than simply having (often delphic or contradictory) rules handed down from above. Technology and our standard of living improved more quickly. People might find similar benefits resulted from apostatisation of the government-deity.

Who are the lying, snivelling bastards?

The energy companies? Our central bankers and Treasury representatives? Or both groups?

In America, prices fell in April, led by reductions in the cost of fuel and other energy. From The New York Times:

"Consumer prices over all fell in April by 0.1 percent, the Labor Department said in its monthly report on Wednesday. The decline was the first since March 2009... The downturn was led by a decline in energy prices, especially for gasoline and natural gas, the report said. Energy prices fell by 1.4 percent in April, the department said."

In the UK, prices rose in April, led by increases in the cost of fuel and other energy. From The Guardian (quoting Mervyn King, explaining why he was taking no action on inflation at nearly double his target rate of 2%):

"First, the impact of higher oil prices, which on average in April were nearly 80% higher than at the beginning of 2009, pushing up on petrol price inflation; second, the restoration at the beginning of January of the standard rate of VAT to 17.5% and third the continuing effects on inflation of the sharp depreciation of sterling in 2007-8" 

The movement in the Pound/Dollar exchange rate between April 2009 and April 2010? The Pound had strengthened a little.

The aggregative delusion

On Question Time tonight, there was yet more discontent with the politicians* claiming that "the people had voted for a hung parliament". It is becoming a well-trodden but sterile debate for most non-politicians to point out that none of us voted for a hung parliament, nor did many of us hope for that outcome, while most politicians (and some associated intellectuals) point out that as a group that is exactly what we did.

Bureaucracy for beginners

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.

Osborne for Dummies 

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.

Banking on the taxpayer

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.

FIT for nothing

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. 

The Ignoble Prize for Economics

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:

  • Fischer Black and Myron Scholes
  • Eugene Fama
  • Milton Friedman
  • Alan Greenspan
  • Assar Lindbeck
  • Robert Lucas
  • Richard Portes
  • Edward Prescott and Finn E. Kydland
  • Paul Samuelson
  • Larry Summers 

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.

The simplistic, aggregative economics of our intellectuals

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.

The route to sound money

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.

A Christmas thought

I think we in secular society are missing God. Too many people have an inflated estimation of human understanding, power and impact. They think that our economic activity can be understood and controlled to everyone's benefit by a few experts looking at statistics and pulling economic levers. They think that, of all the animals on the planet and all the forces in the universe, man is the dominant force on our climate, and that we can calculate accurately the causes of changes to our climate, predict those causes and impacts for a century into the future, and know how much of which measures to take over the course of that century to mitigate our impact. They think that they can know what is right for other people and other cultures that they barely know, and impose it on them.

I'm sorry. This is human action, nature and the future we are talking about. We don't even know that much about ourselves. We know less about our acquaintances, almost nothing about the vast majority who are strangers to us, less than that about the complex web of interacting factors that is nature, and the only thing we know about the future is that it will almost certainly turn out differently to how we expected.

That, incidentally, is why I am particularly sceptical about "solutions" to anthropogenic global warming like "carbon-capture and storage" and "geo-engineering". Geo-enginering - "engineering the world" - how arrogant is that? Are we to be real-life Slartibartfasts, putting finishing touches to Norwegian fjords? It is bad enough that we over-estimate our understanding and impact. But to compound that by over-estimating our powers to manage the climate and to anticipate the consequences of global-scale engineering projects with absolutely no benefit other than the theoretical impact on the climate, is to take our arrogance to extremes. Climate sceptics promoting geo-engineering are a particularly strange combination of humility and hubris. "We humans are too insignificant to impact the climate, but sufficiently powerful to engineer that climate", they seem to be saying.

Belief in an omnipotent, omniscient God makes believers acutely aware of their insignificance, ignorance and impotence. It may not be a coincidence that America retains a higher proportion of active worshippers than most other developed countries, and also retains greater scepticism about the power of the state and the accuracy of climate models (though their attitude to exporting democracy shows that their faith has not made them immune to delusions of omniscience). Nor that the growth of the managerialist mindset has been increasing for the century and a half that faith has been declining.

Unfortunately, I cannot bring myself to believe something simply because that belief has social benefits. Fortunately, there is an alternative that can make atheists and agnostics (like myself) feel as insignificant and impotent as any god can make a believer feel.

I am off skiing in a couple of days. As any experienced skier will tell you, you must not fight the mountain - the mountain will always win. If you have stood and looked, overawed, at a sea of peaks as far as the eye can see, you cannot have failed to realise your own insignificance. If you have skied in powder that could slip and bury you at any moment if you do not treat it with the utmost respect (and a good dose of luck), you will have been mortally aware of your own impotence.

It doesn't have to be skiing. Go to the coast during a storm for a graphic reminder of nature's power. Better still, get out on the sea. Windsurfing on a big wave, you are aware that there will be only one winner if you get it wrong. You can never anticipate perfectly how even that tiny section of sea that you are riding will behave. The inevitable sinus-full of salt water at the end of the day is a reminder that you will never conquer the sea, you can only do your best to work with it. And what a feeling it is for those brief moments when you are in harmony with the sea and the wind.

For others, it could be mountaineering, or kayaking, or mountain-biking, or sailing, or surfing, or paragliding. It doesn't matter what, so long as it exposes you to the force and infinite variety and unpredictability of nature.

The greatest understanding we can have is to know the limits of our understanding. So this Christmas, get yourself to a place of worship or to the great outdoors (whichever works for you), and experience a force so great and incognisable that it refreshes your humility and humanity.

Merry Christmas.