Sunday, 30 November 2008

I’m inside so shut the door

I was saddened to read comments today by the Indian-born entrepreneur Sir Gulam Noon.

According to the Daily Mail, the “controversial Labour donor” has called for a ten year ban on immigration to the United Kingdom so as to give time for the current immigrant population to settle in and integrate and to make sure that there are enough jobs to go around.

In his modestly titled autobiography, Noon, with a View: Courage and Integrity, the so called ‘Curry King’ writes “Bluntly, I think we are self-sufficient now. We should wait for five or ten years, until all the newcomers have been properly integrated and assimilated into the country. Until then we should just shut the door.”

This is a shame, as Noon is a perfect example the benefits of immigration to the UK economy and society. Arriving in 1966 with just £50 in his pocket, he has since made a fortune of £65m, employed thousands of people and satisfied many thousand more customers. He has contributed hugely to the economy and (through taxation) to the funding of public services. A few more Noons (Labour donations notwithstanding) would be welcome.

However, it a sad example of double-standards, he would now seek to deny that opportunity to other would-be immigrants and entrepreneurs.

His thinking is clearly flawed, resting on common errors such as the idea that the UK is ‘full’ (we in fact have far lower population density that the Netherlands, Belgium or Taiwan and approximately the same as Germany) or that there are only so many jobs to go round.

He also cites the rise of the British National(ist) Party as an example of the dangers of “disturb[ing] the balance and upset[ing] the … host community”, as though those fascist thugs represented mainstream opinion. Sadly, his comments are more likely to play into their hands – I can already imagine them reproducing his words on their literature.

The truth is that the quantity of work available in an economy adjusts with demand, so that the more people one admits the more work is needed. Of course it would be harmful to the economy if immigrants did not work, but the suggestion that immigrants arrive to take advantage of our welfare state and live I life of idleness is simply not born out by evidence. Many immigrants pay several thousands of pounds to reach the UK, which they would hardly do just for the privilege of living off £60 a week.

There is a regrettable tendency among some immigrants to wish to close the door after them, stemming the competition from the next wave of immigration. It seems that Sir Gulam has decided to throw his lot in with those who oppose immigration even though he is himself a prime example of how it benefits the UK . It is both ignorant and hypocritical.

Tuesday, 25 November 2008

An eerie echo of the past

Earlier on I set out how 80 years ago an Austrian economist predicted the ineffectiveness of current efforts to intervene to improve economic conditions.

I have since been directed to an interview with another Austrian economist (this one also a British citizen) that - aside from the poor quality and the stilted voices - could have been recorded yesterday.

In it, Nobel laureate Prof. Friedrich von Hayek explains that inflation is always the result of government action, is the great evil against which we need to battle, and that efforts to intervene to prevent recessions that follow from periods of government-led inflation are doomed to failure.
The part of the inteview from 14.00 minutes to 16.50 minutes is particuarly chilling!

The following is a summary of what he says (I have slightly augmented it with my own understanding of his take on economics, though where possible I have enclosed these additions in square brackets):

  1. Germany out-performed the UK in the three decades after WWII because the German trades unionists remembered that inflation is the enemy of the working man;
  2. If people do not recognise the danger of inflation they will continue to believe that it can be used as a short-term solution to economic problems, as a result of which inflation will continue to wreak havoc upon the economy;
  3. Unemployment results from inflation, which encourages the misdirection of labour [because easy money is made available to enterprises that would not, under normal conditions, be viable, allowing them to offer higher wages than would be possible if the easy money had not been thrown into the system by Government], so it is wrong to suggest that in the long term one needs to tolerate unemployment to curb inflation;
  4. Curbing inflation will cause short-term unemployment, but this need only last a year or so [before the market re-asserts itself and labour is employed once again];
  5. As Jeffrey Tucker notes, the “hilariously naive and idiotic” line of questioning demonstrates how “people really believe that policy makers can manipulate the economy like a machine, trading off unemployment for inflation and back again, with no trouble”
  6. Non-compulsory planning will have no effect and so can do no harm [or, indeed, any good];
  7. “Stopping the printing presses” is a euphemism as the real cause of inflation is credit expansion rather than the actual printing of hard money;
  8. “All inflation is ultimately the problem of activities which government determines and can control. And all inflations have been stopped in the past by the governments stopping creating money or preventing the central bank from creating more money” [thus putting the lie to the government’s suggestion that inflation is caused by outside factors such as rises in the cost of commodities];
  9. A tax cut will not work to stimulate the economy because deficiency of aggregate demand is not the problem. Rather, the problem is that the boom and employment that has been created by the previous inflation can only be sustained by further inflation [which, if perpetuated, would lead to hyper-inflation and ultimately a crisis];
  10. If government continues to inflate to sustain the boom it may have to try to ameliorate the effects by imposing price controls which will lead to the imposition of a planned economy [i.e. socialism];
  11. Political freedom exists hand-in-hand with economic freedom and the former cannot exist without the latter;
  12. The power of labour unions and corporations does not lead to inflation unless that power is used to encourage inflationary policies;
  13. Wages/Prices/Incomes policy is utterly ineffective except as a means of managing in the very short term the period of deflation/restoration;Not all problems are solvable in the short-term and trying to do so may cause more harm than good;
  14. Equities remain a good investment in the long term;
  15. “Inflation is like over-eating and indigestion. Over-eating is very pleasant; so is inflation. Indigestion comes only afterwards and so people do not see the connection”;
  16. Economists are intellectually attracted to the concept of a system that they can control and therefore are instinctively opposed to free markets and non-intervention;
  17. Continued government-induced inflation and subsequent intervention by government will inevitably destroy capitalism [as Karl Marx predicted and hoped for].
Hat tip to Kit for drawing it to my attention, and to for hosting it.

Forced bank lending the latest instalment in Labour’s doomed spiral of intervention

Alistair Darling appears set to commit an 80 year old mistake. In his misguided attempts to control the UK economy and force businesses to conform to New Labour’s agenda, he is again going to intervene between banks and their customers.

He has already intervened countless times over the past year, but this latest intervention is pitifully predictable. Indeed, as was explained 80 years ago, it was inevitable that his previous interventions would have unintended consequences that would be the opposite of what he intended, and that to counter those consequences he would be obliged to intervene again and again to ever greater degrees.

Published in 1929, just as another depression was about to rock the world economy, Ludwig von Mises’s Critique of Interventionism demonstrated that as soon as politicians began to intervene in the economy, they would have to continue to do so until ultimately the entire system came under their control. According to von Mises, interventionism was simply unsustainable: either one accepted the laws of economics or one was forced to implement socialism.

We can see how this works if we consider price controls – an example that has striking relevance to Mr. Darling’s current dilemma.

If government tries to fix the price of a commodity, it will not be able to sustain prices below those that the unhampered market would set. This is because with price controls:
"Sellers are forced to sell their goods at lower prices, so that proceeds fall below costs. Therefore, the sellers will abstain from selling and hold on to their goods in the hope that the government regulation will soon be lifted. But the potential buyers will be unable to buy the desired goods."
The result, therefore, will not be the increasing availability that the government sought but a reduced availability of the good resulting from suppliers having no wish to supply at such a low price. To raise supply to the level the government desires at the price the government has mandated, it must therefore intervene again to force suppliers to supply the good: “…it tends to supplement the price ceiling with an order to sell all goods at this price as long as the supply lasts."

However, as the good is now on sale for below its real value, far more customers will emerge than would do so if the good was priced naturally. And since the price is "below that which the unhampered market would set, the same quantity of goods faces a greater number of potential buyers who are willing to pay the lower official price. Supply and demand no longer coincide; demand exceeds supply, and the market mechanism, which tends to bring supply and demand together through changes in price, no longer functions."

There is still not enough of the good to go round, but now it is not because of suppliers reticence but excess demand caused by under-pricing. Government has prevented the price mechanism from operating to prioritise this demand. Therefore another means must be found to decide who gets what, which leads to the third wave of intervention: Rationing.

"Of course, government cannot be content with this selection of buyers. It wants everyone to have the goods at lower prices, and would like to avoid situations in which people cannot get any goods for their money. Therefore, it must go beyond the order to sell; it must resort to rationing. The quantity of merchandise coming to the market is no longer left to the discretion of sellers and buyers."
But why, if the price is below that at which suppliers can make a profit, would they produce the good at all? Only if the government intervenes to force the production of the good. Consequently, the fourth intervention takes place:

"When that is exhausted the empty inventories will not be replenished because production no longer covers its costs. If government wants to secure a supply for consumers it must pronounce an obligation to produce."
And how can this be achieved when costs are below prices? Only by driving down costs, which requires government to intervene to set the prices of the factors of production that go into producing the good. Ergo, "it must fix the prices of raw materials and semi-manufactured products, and eventually also wage rates, and force businessmen and workers to produce and labor [sic.] at these prices."

But what, you may ask, has this to do with Mr. Darling? If one considers money and borrowing to be commodities, the answer is everything.

Government has long been intervening to keep the cost of borrowing below the market rate. This is the role of central banks: they enable governments to control the supply of money by forcing lending rates down below the market rate, so stimulating artificial and unsustainable booms that keep the voters sweet until the next election. The Bank of England did this again last month. Under normal circumstances, a “credit crunch” should result in an increase in the cost of borrowing. This would result in more saving and less borrowing until a new equilibrium was reached. However, the government has intervened to keep the cost of borrowing low.

As von Mises predicted, however, this has had unintended consequences. The government may have wanted low interest rates, but the banks were still inclined to set interest rates based on risk: as default is more likely now than it was a couple of years ago, the cost of borrowing is raised to take an actuarial account of risk. Also, as the banks have limited capital, they are bound to lend to the most profitable borrowers: those who will pay higher rates. So inevitably the government is again inclined to intervene to force banks to lower rates.

The predictable result is that banks won’t lend. They’d rather buy government securities or look abroad for more valuable investments than lend to businesses and householders at rates that are no higher than inflation or make a tiny real return but involve huge risk (companies will go to the wall; mortgagees will default). So the third intervention comes, as Darling forces the banks to lend.

Not to everybody, mind. Already the rationing is appearing: the BBC suggests that the intervention will be for favoured groups, which at this stage consists of “Small businesses” (which means it might be time to sack that 50th employee and cut one’s borrowing costs!).

One can only begin to guess at what the unintended consequences of this latest intervention will be. However, the two things of which we can be sure are that further interventions will inevitably follow as long as Labour ministers believe that they can over-ride the laws of economics, and that these interventions will continue to have unintended and negative consequences for all of society.

Tuesday, 11 November 2008

Have our leaders been drinking?

Ask yourself the following question: if you discovered that a sector of the economy had been colluding with one another to agree a minimum price for a good, rather than competing with one another, would you not be angry? Would you not accusing them of “price gouging” their customers? Would this not be a flagrant violation of competition law that ought to be investigated by the competition authorities?

Of course. It hardly takes a degree in economics or a sharp eye for injustice to see that.

Unless, apparently, the good is alcoholic. Then, apparently, the customer can go to hell, because what our beloved political masters want to intervene to raise the prices of alcohol.

And which political party is in the forefront of this paternalistic policy. I can barely bring myself to say it!

The Liberal Democrats have brought out an utterly illiberal policy that includes a proposal that we “Stop irresponsible drink promotions by introducing a minimum price for alcohol.”

Now price controls are a particularly pernicious tool with which to shape drinking policy. It is not, note, an increase in the cost of alcohol. Oh no! There will be no need for our beloved leaders to pay any extra for a bottle of Chateau Neuf de Pap. They can quaff all the Isle of Islay they like as they fashion ever-more-restrictive policies for the hoi polloi. Indeed, one has to wonder if they had consumed one too many bottles of Verve Clicquot before stumbling stupidly on this particular policy.

Because price controls will only affect those buying cheap alcohol. It is a policy deliberately targeted at the poor drinker; s/he who feels the need to avail him/herself of the three-bottles-of-white-for-ten-pounds offer at the local corner store, or those who cannot afford to drink anywhere except The Goose or a Westherspoon.

This policy means only one thing: to our political masters, it is poor people who are the problem. The wealthier classes never get drunk and cause criminal damage.

And it is not just some poor people. After all, if it were just some poor people that were causing the problem, the solution would be to target criminals and those who behave anti-socially. Price controls target everybody. The responsible father of two who wants to pop into the local for a swift pint on his way home to (Oh, lets rub this in!) cook a dinner for his hard-working wife and loving children will have to pay (Extra salt into wound!) more of his minimum wage income to unwind a little after his hard day.

But it’s good for him, right? After all, these poor people need nice, high-minded politicians to make moral judgements for them, to cajole them into behaving responsibly. It’s for their own good.

Frankly, it’s enough to drive one to drink!