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David Cameron, Tory leader, appears determined that it will not be just the current government that comes out with serious errors on policy. This refusal to not state that a new, higher tax band of 45 per cent “on the rich” will be repealed is a serious error. The error is to ignore the history of what happens when marginal tax rates are cut – these cuts lead to more, not less, revenue. Now of course, as small-government folk, we support tax cuts because we want taxes to fall, and not because we want higher revenues. But if it is revenues you are worried about, then raising taxes is dumb.
The UK and many other economies are falling down the wrong side of the Laffer Curve. It is profoundly depressing that the lessons I thought had been learned have been so totally lost. It makes me wonder whether any senior politician has a clue about economics whatever. On an earlier Samizdata discussion thread following on from my post about the Kevin Dowd lecture, was a long and very involved debate about the issue of fractional reserve banking, for example. You commenters are a smart bunch and I say, without false modesty, that we rate consistently above many other UK blogs in that respect. I wonder whether there is now a single major politician who has a clue about FRB, the arguments for or against, etc. Seriously, does anyone in the major parties understand even the most basic concepts of economics?
Maybe the most gloomy answer is that some do understand but are too frightened or cynical to do anything about it.
Maybe someone should put this on Mr Cameron’s summer reading list.
The Cato Institute has the report.
Now that leftists at Harvard want to portray laissez-faire philosophy as being somewhat akin to a mental disorder, maybe the next step will be re-education camps for Cato staff? Maybe the next “stimulus” bill could include a few earmarks for such facilities? I’m keeping my fingers crossed that I get sent some place warm.
South Park could not even come up with these characters.
As promised, I have some thoughts following on from the talk given by Kevin Dowd, a professor at the Nottingham University Business School and a noted advocate of what is called “free banking”. He gave his talk at the annual Chris R. Tame Memorial Lecture as hosted by the Libertarian Alliance. (The LA was founded by Mr Tame, who died three years ago at a distressingly young age after losing a battle against cancer.)
Professor Dowd covered some territory that is already pretty well-trodden ground for Samizdata’s regular readers, so I will skim over the part of the lecture that focused on the damage done by unwisely loose monetary policy of state organisations such as central banks, or the moral-hazard engines of tax bailouts for banks.
→ Continue reading: The Kevin Dowd lecture on free banking
“It was John Maynard Keynes, a man of great intellect but limited knowledge of economic theory, who ultimately succeeded in rehabilitating a view long the preserve of cranks with whom he openly sympathised.”
F.A. Hayek, Choice in Currency, a Way to Stop Inflation, Institute of Economic Affairs (1975), page 10.
Prof. Hayek was usually a restrained and polite demolisher of nonsense but in this quote, I think we get a sense of the rage that he must have felt at how Lord Keynes, with his easy charm and confident manner, could persuade politicians of what they wanted to hear anyway – that you can create wealth by spending other people’s money. But even later on Hayek tries to argue that Keynes would have been alarmed at how his ideas have been used as cover for monetary insanity. I think that is a mark of how basically decent an intellectual opponent Hayek was.
Meanwhile, following on from Kevin Dowd’s lecture last night – which I thought was very good – I will have more to say about his talk later on.
Tyler Cowen has an interesting post up about the whole business of pundits betting their own money on their views. Economics students may remember a particularly satisfying one involving the late, great Julian L. Simon and the alarmist writer Paul Ehrlich. Simon, who might be thought as a “cornucopian” writer, bet that the price of a basket of commodities would not, when adjusted for inflation, rise over a certain period. Erhlich had been claiming that commodities were running out at an alarming pace and their price would therefore skyrocket. He lost the bet. Simon suggested they have another go but Erhlich, being at least not totally stupid, decided not to accept the offer. The affair has not blunted his views, a fact that demonstrates the incorrigibility of some so-called academics.
I wonder if there controversies over which you’d be prepared to stake a few pounds, dollars or pints of beer?
Regular Samizdata commentator Ian B made a good point on this comment thread (scroll down) about the issue of economic cycles. As he says, many of the boom-bust cycles have been associated with new products and markets where there is scanty information about how large a market might be. For instance, the technology boom of the 1990s involved an area – the Web – which was still unknown territory to most of us. Yes, most of us now are familiar to the nth degree with the Internet but that is because a lot of bold, not necessarily reckless, investors, geeks and entrepreneurs took a punt. With hindsight, some of these investment propositions were pie in the sky. Well, without perfect knowledge of the future, malinvestments get made. The same can be said of the 1840s railway boom. There were shysters and boosters like the 19th Century financier George Hudson, but out of the inevitable mistakes and broken dreams came a country that was criss-crossed with railways. Out of the bust of the tech boom came the Googles, Yahoos, Amazons and Facebooks of today. These technologies, for instance, have changed how I can do my job in all manner of ways, almost all of them for the better. Out of the hundreds of automobile companies set up at the start of the last century came the motoring titans of today. The examples multiply.
As Ian put it, if people don’t want these busts, then maybe they are expecting the impossible if they also want to get still all the good things that a boom can produce. For sure, it would be good to stop fuelling mad cycles with fiat money, and that is why I want genuine free market banking, and not the quasi-statist dog’s breakfast, instead. But I am most certainly not in favour of the “calm” that comes when there is no change or disruptions at all. That is to demand the peace and quiet of the grave.
Update: via the National Review’s Corner blog, I came across this in a similar mood to my point.
There are so many things to do these days, especially in a place like London, that often you make up your mind about what to do of an evening at the very last moment. So, maybe you have the coming Tuesday evening, tomorrow, March 17th, still free. If you do, I strongly recommend the Libertarian Alliance’s 2nd Annual Chris R. Tame Memorial Lecture, which this year will be given by Professor Kevin Dowd.
Getting on for a hundred people have already signed up to attend this event, in other words quite a few more than showed up for last year’s inaugural Chris Tame lecture given by David Myddleton. But there is room for more still. Attendance is free of charge. All the organisers ask is, if you want to be there, email them beforehand. Follow the link at the top of this for all the details of the event, and for the email to confirm attendance.
What excites me about this lecture is that Dowd is both an unswerving libertarian, and an expert on banking, on the history of banking and on the baleful effects over the decades of state monopoly fiat money and of banking regulation. This is a man who not only believes in the idea of a free market in currencies and in banking, but someone who can actually explain in detail why that would be a better arrangement than anything else now being proposed. He also has firm and positive views about what should immediately be done, right now, to alleviate the crisis. And because he is a Professor, he has some leverage for getting his ideas reported in the mainstream media.
Having been looking forward to this event for several months, I now realise that I have, infuriatingly, a teaching commitment set in concrete for that very same evening. But the good news for me, and for anyone else who won’t be able to attend the lecture in person, is that it will be videoed, and video internetted just as soon as that can be contrived. You may depend upon me to have further things to say about this potentially very important lecture just as soon as that video is available and linkable to.
Can we win the ideological war that now swirls about the current financial catastrophes? Personally I remain optimistic about this possibility, but whether we can actually win or not, we should surely try to win. And those of us who conveniently can should surely support those people, like Kevin Dowd, who are making the biggest efforts to this end. Most of Samizdata’s readers do not live in London and can’t be at this lecture in person, although lots are Londoners and could. But, Londoners or not, I very much hope that a healthy proportion of us will at least give the video our closest attention. Meanwhile, I am sure that almost all of you will join with me in wishing Professor Dowd all the best for tomorrow evening.
It’s like a parallel universe out there. Politicians, newspaper journalists and television presenters are running around like headless chickens with no clue as to how to deal with the economic crisis. But the truth is out there.
Things are quite different from the recession of the 1970’s, which coincided with my discovery of libertarianism and Austrian School economics. Back then one had to be extraordinarily lucky to come across the likes of Mises, Hayek and Rothbard. Now correct explanations of why the crisis arose are just a few clicks away.
– David Farrer
This is a tremendous rebuttal of the claim that British manufacturing is in decline. Of course, there is nothing specifically wonderful in having a large or small manufacturing sector, but for those who care about such things, this article nails a lot of cliches about how Britain is supposedly losing the art of making stuff well. In fact, a lot of the manufacturing that goes on in the UK is first class. Take the aero-engine business, for example.
Well, it is nice to grasp at positive news that is going.
One of the recent themes of this blog’s authors has been to challenge, and hopefully demolish, the “narrative” of how the current crisis proves the weaknesses of “unregulated capitalism” (I could be far ruder than that but I am not a swearblogger). Another, related theme that we try to plug away at is to show how previous acts of interventionism, with politicians playing the role of strong hero on a big white horse, have failed or if they have “worked”, been by-products of massive state mobilisation for war.
Prime exhibit: the New Deal of Franklin Delano Roosevelt. When I was a child doing my O-Level history course in the early 1980s, I got this broad version: the New Deal demonstrated the success of Keynesian pump-priiming economics, therby proving also that support for fuddy-duddy things like the Gold Standard, or balanced budgets, or “sound money” was silly, reactionary and wrong. And some of my impressionable teenage brain agreed. I did rather sense that there was something fishy about this, but it was not until I was a bit older, and started reading all those wicked reactionary Austrians and Chicago economists that the issues began to clarify.
Recently, there have been moves by some writers to challenge the Roosevelt-As-Great-Man story more explicitly. One of the most recent examples is Amity Shlaes’ book, The Forgotten Man (borrowing her title from a famous essay by Willam Henry Sumner). And Jonathan Chait, a leftist writer for the New Republic, is angry at Ms Shlaes’ analysis. Reading his review, there are some points where I think he is being quite fair, but his article fails to deal with what I think is the most damning thing about FDR’s record during the 1930s, namely, that unemployment, according to official US data, never fell below double percentage figures right up until the outbreak of WW2. However one slices and dices it, that is an appalling record. Chait tries to claim that unemployment roughly fell by half, in percentage terms, during FDR’s period of office in the 1930s but that does not seem to be born out by the official statistics. Chait even tries to claim that FDR was not much of a consistent Keynesian anyway.
We then get this:
“Moreover, the classic right-wing critique fails to explain how the economy recovered at all. In one of his columns touting Shlaes, George Will observed that “the war, not the New Deal, defeated the Depression.” Why, though, did the war defeat the Depression? Because it entailed a massive expansion of government spending. The Republicans who have been endlessly making the anti-stimulus case seem not to realize that, if you believe that the war ended the Depression, then you are a Keynesian.”
Well it is undoubtedly correct that unemployment did fall dramatically at this point. Well, for a start, it is not very difficult to achieve full employment if your country ends up, by a terrible turn of events, to be the sole economic power that has not been invaded or otherwise been bombed heavily. And Mr Chait completely ignores the rather important fact that a large chunk of the US male workforce was put into uniform. And yes, when the war was over, and with oil prices at rock bottom, the momentum the US had built during the war years continued. But remember, Mr Chait, that the US had a recession in the late 1950s and JFK, let it not be forgotten, cut taxes – they were implemented after his murder, in 1964. That was a supply-side measure, although not advertised as such, since the language adopted by Arthur Laffer and his school had not yet become common currency in US public affairs
But the broader point Mr Chait makes is troubling: is Mr Chait saying that what the world, or at least the US needs right now is the economic equivalent of a war, or of some massive, government-led direction of all economic activity, complete with rationing, forced service to the nation, etc? He needs to argue why it was that Britain, for instance, had managed arguably to recover quicker from the Great Crash than the US. By the late 1930s, Britain, at least in the south and east, was actually quite prosperous, although unemployment in the traditional industrialised regions was still bad.
Mr Chait makes a number of valid points about Shlaes’ book, which is not the most persuasive or rigorous demoltion job on Keyensianism that I have read. If you want to read such a book, this is a great place to start. And if one wants recent evidence of the problems with trying to reflate economies with cheap money, then the history of Japan over the last decade and a half is striking. Mr Chait will have a tough job trying to shrug that example off.
Following from my previous article about the alleged size of the role played by China/Asia in the current financial troubles, an eagle-eyed commenter by the name of Marc Sheffner pointed this excellent article out which clarifies a lot. My thanks to Mr Sheffner.
God but I love the internet.
Remember that email I got from Tim Evans flagging up this? Well someone called James Tyler responded to it, also sending his reply to all of us on Tim’s list, with a link to this, which I likewise recommend. It’s a piece in Portfolio.com called “The End of Wall Street”, by the guy who wrote Liar’s Poker. I’m still reading the piece, but this is my favourite bit so far, about the observations of a man called Eisner:
More generally, the subprime market tapped a tranche of the American public that did not typically have anything to do with Wall Street. Lenders were making loans to people who, based on their credit ratings, were less creditworthy than 71 percent of the population. Eisman knew some of these people. One day, his housekeeper, a South American woman, told him that she was planning to buy a townhouse in Queens. “The price was absurd, and they were giving her a low-down-payment option-ARM,” says Eisman, who talked her into taking out a conventional fixed-rate mortgage. Next, the baby nurse he’d hired back in 1997 to take care of his newborn twin daughters phoned him. “She was this lovely woman from Jamaica,” he says. “One day she calls me and says she and her sister own five townhouses in Queens. I said, ‘How did that happen?'” It happened because after they bought the first one and its value rose, the lenders came and suggested they refinance and take out $250,000, which they used to buy another one. Then the price of that one rose too, and they repeated the experiment. “By the time they were done,” Eisman says, “they owned five of them, the market was falling, and they couldn’t make any of the payments.”
Paragraphs like that make me optimistic that statists just will not be able to pass the catastrophe off as a mere failure of unregulated capitalism. Yes the whole Sub-Prime thing was aided and abetted by Wall Street, big time. But it was set in motion by Washington politicians, and in particular politicians of the Democrat persuasion. This was, as we cannot repeat too often, a failure of the mixed economy, not of the extreme free market of the sort we here favour.
The folly of the Republicans, which has already been electorally punished, deservedly, was that most of them didn’t see it all coming and panicked when it did, and those that did smell the coffee were unable to do anything to soften the blows when the coffee exploded, or whatever. My guess is that there will soon be a cull of Washington Democrats as soon as the voters next get a culling opportunity – two years from now, right? And the big question is, what will the new intake’s take be on it all? But, as I often say on my personal blog when discussing gadgetry of various kinds beyond my understanding, what do I know?
UPDATE: Although, I’ve now finished reading the piece, and it is clear that its author derives no such anti-statist moral from his wretched story. Wall Street is the villain, and Wall Street is being justly, although very insufficiently, punished. Not a word about Democrats, or for that matter Republicans.
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We are also a varied group made up of social individualists, classical liberals, whigs, libertarians, extropians, futurists, ‘Porcupines’, Karl Popper fetishists, recovering neo-conservatives, crazed Ayn Rand worshipers, over-caffeinated Virginia Postrel devotees, witty Frédéric Bastiat wannabes, cypherpunks, minarchists, kritarchists and wild-eyed anarcho-capitalists from Britain, North America, Australia and Europe.
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