[B]y the greatest miracle of all, this postwar world of super-international controls and coercions is also going to be a world of "free" international trade! Just what the government planners mean by free trade in this connection I am not sure, but we can be sure of some of the things they do not mean. They do not mean the freedom of ordinary people to buy and sell, lend and borrow, at whatever prices or rates they like and wherever they find it most profitable to do so. They do not mean the freedom of the plain citizen to raise as much of a given crop as he wishes, to come and go at will, to settle where he pleases, to take his capital and other belongings with him. They mean, I suspect the freedom of bureaucrats to settle these matters for him. And they tell him that if he docilely obeys the bureaucrats he will be rewarded by a rise in his living standards. But if the planners succeed in tying up the idea of international cooperation with the idea of increased State domination and control over economic life, the international controls of the future seem only too likely to follow the pattern of the past, in which case the plain man's living standards will decline with his liberties.
Monday, 8 December 2008
Henry Hazlitt on the so-called “free market”
I have recently been reading Economics in One Lesson by Henry Hazlitt, and this section from the end of Chapter XVI particularly caught my attention:
So much for “peak oil”
It seems a long time ago, now, but just prior to the recent recession the price of oil reached new heights and wild predictions of $200 a barrel and more were flying around. At the time, many energy- and environment-pundits, including some among the Liberal Democrats, believing that we had now reached “Peak Oil”, that mythical time when the increase in our rate of consumption outpaces the increase in our rate of discovery and so initiates an accelerating decline in supply until the oil runs out and civilisation as we know it ceases to exist.
Those who talk about it often have a slightly excited look upon their faces, as though they cannot wait for the final cataclysm to come so that they can say “I told you so” as the cities begin to go up in flames and people collect together in small bands to try to eke out some semblance of survival in the mountains.
They appear to have gone rather quiet recently, however. Once again, “peak oil” has turned out to be nothing more than a foothill in the great undulating range of energy prices. Oil prices have fallen by two thirds in the past six months to end up $100 a barrel below their Summer peak at just $50 a barrel.
Of course, peak oil is nonsense anyway. Firstly, it is based upon a deliberate obfuscation of known, economically viable reserves on the one hand, and what is in fact under the crust on the other: oil companies only list the reserves that they have so far identified, and they do not list reserves that are, at current prices, too expensive to be viable, while at a higher price they would be worth drilling for. As Russell Lewis explains,
In fact, this last points to another flaw in the peak oil theory: it ignores human ingenuity. Even accepting that there is a set amount of oil, it is irrelevant to our ability to produce power from it. By inventing an engine that is twice as efficient, or a new means of producing plastics that requires half and many hydrocarbons, we have effectively doubled the amount of fuel available even if we have the same number of litres. If we invent alternative technologies, lakes of oil are made available for the remaining needs. In truth, we will never run out of oil, because before that ever happens human action and rising prices will have rendered oil surplus to requirements.
So the next time you see that fuel prices are rising and hear somebody mutter about peak oil, you can rest assured that new research is underway that will soon bring prices back down, and that there is plenty of oil left under the ground. More, in fact, than we will ever need.
Those who talk about it often have a slightly excited look upon their faces, as though they cannot wait for the final cataclysm to come so that they can say “I told you so” as the cities begin to go up in flames and people collect together in small bands to try to eke out some semblance of survival in the mountains.
They appear to have gone rather quiet recently, however. Once again, “peak oil” has turned out to be nothing more than a foothill in the great undulating range of energy prices. Oil prices have fallen by two thirds in the past six months to end up $100 a barrel below their Summer peak at just $50 a barrel.
Of course, peak oil is nonsense anyway. Firstly, it is based upon a deliberate obfuscation of known, economically viable reserves on the one hand, and what is in fact under the crust on the other: oil companies only list the reserves that they have so far identified, and they do not list reserves that are, at current prices, too expensive to be viable, while at a higher price they would be worth drilling for. As Russell Lewis explains,
Oil reserves are never remotely equivalent to all the oil in the earth’s crust.This does not mean that oil could never run out, however. That is left to the price mechanism. As the supply of oil diminishes, the price will inevitably rise. This will not, however, trigger a mad rush to capture ever shrinking reserves until the oil economy collapses; rather, it will lead to a steady rise in prices that will encourage greater efficiency, spur research into make alternatives more cost-effective. For example, if fossil fuels quadrupled in price, wind turbines would be able to generate electricity more cheaply and so they would become a viable alternative. The increase also pushes up the cost of high-energy products and services (such as flights) and so discourages consumption. And finally, as we have already seen, rising fuel costs encourage consumers to pay more attention to the miles-per-litre that their car can achieve and so encourage producers to invest in more efficient engines.
The proven reserves are what the oil companies have decided to look for and
which are known to be exploitable under prevailing technical and economic
conditions. They are designed to provide the oil industry’s working inventory of
oil stocks. There is a limit to the amount of money the oil companies can spend
on searching for more or deeper wells because prospecting and drilling are
expensive, and there are other competing obligations which affect their
long-term profits, such as advertising, marketing, research, building refineries
and distribution. The best indicator of whether oil is getting scarcer is its
price, and though prices have risen sharply in the last two years [and bearing
in mind that this was written before the collapse in prices in the last six
months], that fact does not necessarily point to a long-term upward trend.
In fact, this last points to another flaw in the peak oil theory: it ignores human ingenuity. Even accepting that there is a set amount of oil, it is irrelevant to our ability to produce power from it. By inventing an engine that is twice as efficient, or a new means of producing plastics that requires half and many hydrocarbons, we have effectively doubled the amount of fuel available even if we have the same number of litres. If we invent alternative technologies, lakes of oil are made available for the remaining needs. In truth, we will never run out of oil, because before that ever happens human action and rising prices will have rendered oil surplus to requirements.
So the next time you see that fuel prices are rising and hear somebody mutter about peak oil, you can rest assured that new research is underway that will soon bring prices back down, and that there is plenty of oil left under the ground. More, in fact, than we will ever need.
Wednesday, 3 December 2008
Queen's Speech a textbook example of meddling and failure
Today’s Queen’s Speech is another fine example of government meddling and failure.
One Bill after another is being introduced to interfere with people’s legitimate freedoms and try to paper over the cracks in their interventionist system.
I have recently written on the phenomenon that government intervention is doomed to fail and that in doing so it encourages further intervention as governments try to repair the unintended consequences of their own legislation. Clear examples of this are to be found in the Queen’s Speech.
There is too much in the speech, and there is too much as yet unclear, to make a comprehensive attack on the Labour agenda for 2008-9, but the following is an analysis of some of the problems raised.
Business Rate Supplements Bill
The proposals to enable upper tier local authorities and the Greater London Authority to levy a supplement on their business rates, and use this to promote economic development, have a certain charm in that they restore a tiny modicum of tax-raising discretion to local authorities (though not, infuriatingly, to the 32 London Boroughs!).
Of course, any wise local authority would exercise the better part of discretion and not exercise the power. Increasing business rates by up to 2p in the pound will simply squeeze business profits, putting some out of business, driving others away and reducing the ability of the remainder to invest in capital goods (including training) that improve their productivity (and thus the wages of staff). The money raised will never achieve the level of “economic development” that would otherwise be achieved by individuals allocating resources based on their own priorities (a level of information detail that no government can hope to emulate) but will instead be wasted on schemes that appeal to legislators and those who are best able to influence them. It will replace the freedom, efficiency and effectiveness of the market with imperfect politicised outcomes.
Interestingly, the Bill makes provision for allowing businesses to vote on any proposals. It must be assumed that this vote will not be extended to those businesses (with rateable values of less than £50,000) that will not be taxed, as representation without taxation would just allow them to pillage the profits of their more-successful rivals.
It does raise an interesting question, however: why not allow Council Tax payers a similar freedom: a plebiscite enabling them to veto any council policy that would be funded primarily by local taxation. That would certainly put the wind up spendthrift officers and councillors.
Local Democracy, Economic Development and Construction Bill
The devil is in the word “Construction”. Little detail is available on this one, but it does appear to include provisions for a more level playing field for construction businesses, particularly smaller local ones, in construction contracts. Whether this is more anti-success regulation is unclear, but considering the onerous costs that businesses and authorities already have to incur putting tenders through OJEU and other legal competitiveness tests, this can only be detrimental to business. Fairness is best achieved through a free market, where those that discriminate against providers for any reason other than efficiency will be forced to pay higher prices for poorer goods or services and so will see their businesses suffer.
Saving Gateway Accounts Bill
The government’s plan to establish a Saving Gateway scheme, administered and approved by HMRC, with the government “matching” every pound saved with 50p from government up to a maximum of £300 (not the “matching” that Anglophones will be familiar with!), is old-fashioned redistribution of wealth with an added paternalistic twist: the poor must “do the right thing” – by which Labour means save money in bank accounts – to earn their redistributed wealth.
Glossing over questions about the sense of or justification for transferring wealth, this is bad legislation for two reasons: firstly, because it creates a massive dead-weight cost in that the government will have to pay people who would have saved the money anyway; and secondly because it will encourage rent-seeking as people make arrangements to borrow-to-save, for example by borrowing on credit cards (at rates of, say, 25% or 30%) knowing that there is a guaranteed profit of 50% in the first year.
Children, Skills and Learning Bill
The Children, Skills and Learning Bill promises to enforce compliance with the Standard Teachers’ Pay and Conditions Document. The very existence of this document is a problem, as the setting of national standards across England ignores the different costs of living and levels of supply and demand, and further undermines educational independence. At worst, it could see pay and conditions set at too low a level to attract staff to some areas, while being unnecessarily generous (with the resources of local taxpayers) in others.
It also creates a statutory entitlement to apprenticeships for all those suitably qualified by 2013. Unless the meaning of “apprenticeship” has changed, this is idiotic. Apprenticeships involve qualified individuals working for established providers so as to learn on the job; the government cannot increase the number of apprenticeships beyond the demand among qualified workers for apprentices. The proposed duty on the Learning and Skills Council to provide apprenticeship places may easily morph into the provision of further course-based training, which would defeat the supposed purpose.
Policing and Crime Bill
A bill to protect vulnerable groups, particularly women and children, may seem welcome at first. But one has to wonder at a government that considers 51% of the population to be a “vulnerable group” simply because of their gender!
The main problem with this bill is the plans to tighten regulations on lap dancing clubs and the sale of alcohol. Lap dancing clubs are places where consenting adults go to watch other consenting adults perform erotic dances; it should have nothing to do with the government what these individuals (or groups) choose to do. Similarly, government has no business interfering with the right of businesses to sell, or adults to buy and consume, alcohol. As I have noted before, this kind of legislation is never directed at our claret-swilling elites, but at those whom they see as they look down their wine-flushed noses.
Where there are ancillary problems (for example, anti-social behaviour in the environs of the club or pub) they should be dealt with in their own right,
Marine and Coastal Access Bill
The Marine and Coastal Access Bill continues the assault on private property by forcing property owners to allow trespassers to walk over their land simply because they happy to have bought property adjacent to the sea. If the proposal was applied to all properties, so that ramblers may cross anyone’s land at will, it would be fair, but it would also be as welcome as the Poll Tax.
Constitutional Renewal Bill
Finally, something good in the government’s proposals. Thank heavens they are finally repealing their own, oppressive legislation. One law down, 10,000 more to go!
One Bill after another is being introduced to interfere with people’s legitimate freedoms and try to paper over the cracks in their interventionist system.
I have recently written on the phenomenon that government intervention is doomed to fail and that in doing so it encourages further intervention as governments try to repair the unintended consequences of their own legislation. Clear examples of this are to be found in the Queen’s Speech.
There is too much in the speech, and there is too much as yet unclear, to make a comprehensive attack on the Labour agenda for 2008-9, but the following is an analysis of some of the problems raised.
Business Rate Supplements BillThe proposals to enable upper tier local authorities and the Greater London Authority to levy a supplement on their business rates, and use this to promote economic development, have a certain charm in that they restore a tiny modicum of tax-raising discretion to local authorities (though not, infuriatingly, to the 32 London Boroughs!).
Of course, any wise local authority would exercise the better part of discretion and not exercise the power. Increasing business rates by up to 2p in the pound will simply squeeze business profits, putting some out of business, driving others away and reducing the ability of the remainder to invest in capital goods (including training) that improve their productivity (and thus the wages of staff). The money raised will never achieve the level of “economic development” that would otherwise be achieved by individuals allocating resources based on their own priorities (a level of information detail that no government can hope to emulate) but will instead be wasted on schemes that appeal to legislators and those who are best able to influence them. It will replace the freedom, efficiency and effectiveness of the market with imperfect politicised outcomes.
Interestingly, the Bill makes provision for allowing businesses to vote on any proposals. It must be assumed that this vote will not be extended to those businesses (with rateable values of less than £50,000) that will not be taxed, as representation without taxation would just allow them to pillage the profits of their more-successful rivals.
It does raise an interesting question, however: why not allow Council Tax payers a similar freedom: a plebiscite enabling them to veto any council policy that would be funded primarily by local taxation. That would certainly put the wind up spendthrift officers and councillors.
Local Democracy, Economic Development and Construction Bill
The devil is in the word “Construction”. Little detail is available on this one, but it does appear to include provisions for a more level playing field for construction businesses, particularly smaller local ones, in construction contracts. Whether this is more anti-success regulation is unclear, but considering the onerous costs that businesses and authorities already have to incur putting tenders through OJEU and other legal competitiveness tests, this can only be detrimental to business. Fairness is best achieved through a free market, where those that discriminate against providers for any reason other than efficiency will be forced to pay higher prices for poorer goods or services and so will see their businesses suffer.
Saving Gateway Accounts Bill
The government’s plan to establish a Saving Gateway scheme, administered and approved by HMRC, with the government “matching” every pound saved with 50p from government up to a maximum of £300 (not the “matching” that Anglophones will be familiar with!), is old-fashioned redistribution of wealth with an added paternalistic twist: the poor must “do the right thing” – by which Labour means save money in bank accounts – to earn their redistributed wealth.
Glossing over questions about the sense of or justification for transferring wealth, this is bad legislation for two reasons: firstly, because it creates a massive dead-weight cost in that the government will have to pay people who would have saved the money anyway; and secondly because it will encourage rent-seeking as people make arrangements to borrow-to-save, for example by borrowing on credit cards (at rates of, say, 25% or 30%) knowing that there is a guaranteed profit of 50% in the first year.
Children, Skills and Learning Bill
The Children, Skills and Learning Bill promises to enforce compliance with the Standard Teachers’ Pay and Conditions Document. The very existence of this document is a problem, as the setting of national standards across England ignores the different costs of living and levels of supply and demand, and further undermines educational independence. At worst, it could see pay and conditions set at too low a level to attract staff to some areas, while being unnecessarily generous (with the resources of local taxpayers) in others.
It also creates a statutory entitlement to apprenticeships for all those suitably qualified by 2013. Unless the meaning of “apprenticeship” has changed, this is idiotic. Apprenticeships involve qualified individuals working for established providers so as to learn on the job; the government cannot increase the number of apprenticeships beyond the demand among qualified workers for apprentices. The proposed duty on the Learning and Skills Council to provide apprenticeship places may easily morph into the provision of further course-based training, which would defeat the supposed purpose.
Policing and Crime Bill
A bill to protect vulnerable groups, particularly women and children, may seem welcome at first. But one has to wonder at a government that considers 51% of the population to be a “vulnerable group” simply because of their gender!
The main problem with this bill is the plans to tighten regulations on lap dancing clubs and the sale of alcohol. Lap dancing clubs are places where consenting adults go to watch other consenting adults perform erotic dances; it should have nothing to do with the government what these individuals (or groups) choose to do. Similarly, government has no business interfering with the right of businesses to sell, or adults to buy and consume, alcohol. As I have noted before, this kind of legislation is never directed at our claret-swilling elites, but at those whom they see as they look down their wine-flushed noses.
Where there are ancillary problems (for example, anti-social behaviour in the environs of the club or pub) they should be dealt with in their own right,
Marine and Coastal Access Bill
The Marine and Coastal Access Bill continues the assault on private property by forcing property owners to allow trespassers to walk over their land simply because they happy to have bought property adjacent to the sea. If the proposal was applied to all properties, so that ramblers may cross anyone’s land at will, it would be fair, but it would also be as welcome as the Poll Tax.
Constitutional Renewal Bill
Finally, something good in the government’s proposals. Thank heavens they are finally repealing their own, oppressive legislation. One law down, 10,000 more to go!
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.
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):
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):
- 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;
- 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;
- 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;
- 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];
- 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”
- Non-compulsory planning will have no effect and so can do no harm [or, indeed, any good];
- “Stopping the printing presses” is a euphemism as the real cause of inflation is credit expansion rather than the actual printing of hard money;
- “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];
- 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];
- 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];
- Political freedom exists hand-in-hand with economic freedom and the former cannot exist without the latter;
- The power of labour unions and corporations does not lead to inflation unless that power is used to encourage inflationary policies;
- 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;
- Equities remain a good investment in the long term;
- “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”;
- 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;
- Continued government-induced inflation and subsequent intervention by government will inevitably destroy capitalism [as Karl Marx predicted and hoped for].
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.
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.
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!
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!
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