CentreRight

This week at the LSE, Jesús Huerta de Soto will set out how to reform banking.

A year ago today, I was in Salamanca for the joint Ludwig von Mises Institute and Instituto Juan de Mariana Supporters Summit 2009. It's not a trip I shall forget: the call from Wycombe Conservatives, letting me know I had been shortlisted, brought me to within seconds of missing my flight. 

Salamanca was the birthplace of systematic economic theory. Long before Adam Smith, between the 14th and 17th centuries, it was in Salamanca that the Thomist scholastics set out the mechanisms of human social cooperation. They opposed intervention by the state, particularly in money, recognising the damage and disruption it would do.

It was in Salamanca that I met entrepreneur and academic Professor Jesús Huerta de Soto, a thoroughly inspiring man with the most exceptional intellect and passion for society. Jesús is this year's Distinguished Hayek Visiting Fellow at the London School of Economics, supported by Toby Baxendale.

In his masterpiece Money Bank Credit and Economic Cycles (PDF), first published in 1998, Jesús set out the origins of the business cycle – flaws in the system of money and bank credit – and proposed five stages in the process of bank reform. Following in the footsteps of Irving Fisher's 100% Money, drawing on the tradition of Peel's 1844 Bank Charter Act and as verified by economist Sean Corrigan, the next step of Huerta de Soto's plan offers the possibility of restructuring the national debt, potentially paying it off and delivering a substantial tax cut.

On Thursday, Jesús will deliver his lecture at the LSE, Financial Crisis and Economic Recession. Admission is free: I hope you will join me.

The 2010 LSE Baxendale Hayek lecture

Date: Thursday 28 October 2010
Time: 6.30-8pm
Venue: Sheikh Zayed Theatre, New Academic Building
Speaker: Professor Jesús Huerta de Soto

Jesús Huerta de Soto is professor of political economy at King Juan Carlos University and a Senior Fellow of The Cobden Centre. This event is free and open to all with no ticket required. Entry is on a first come, first served basis.

More details via the LSE.

Other coverage

• Dan Hannan MEP
• The Adam Smith Institute
• The Cobden Centre

Comrades are confused about capitalism - they shouldn't be.

I listened to Comrade Milliband's tedious historical revisionism with interest: apparently New Old Labour are to become the party of enterprise and small business in order that wealth can be created and redistributed. With Comrade Milliband's remarks following so closely after Comrade Cable's denunciation of capitalism, I am reminded of Churchill:

Some people regard private enterprise as a predatory tiger to be shot. Others look on it as a cow they can milk. Not enough people see it as a healthy horse, pulling a sturdy wagon. 

Comrades seem to understand that there is something wrong with capitalism, but they seem unable to say what it is.  Grotesque, long-since discredited Keynesianism, innuendo and ad hominem attacks fall somewhat short, in my view.

Let me try to explain, for if I find myself referring next week to Comrade Osborne's attack on unhampered social cooperation and his call for additional intervention, I shall wonder if we won the Cold War after all...

Allow me to explain with reference to systemic risk, what we want from a bank and regulation.

Systemic Risk

The brilliant intellectual edifice of Modern Financial Theory is founded on an incorrect assumption: market events do not obey a Gaussian distribution. Events which ought not to happen in the life of the Universe happen every decade or so. The point was made by Mandelbrot in the sixties, but passed over: see his The (Mis)Behaviour of Markets, Dowd and Hutchinson’s The Alchemists of Loss and Taleb’s The Black Swan for more detail.

The consequence of this error is that much of the debate regarding risk is on the wrong terrain. The failure of complex financial instruments intended to spread risk is a testament to the inadequacy of contemporary thinking. This must be revised but, at the very least, institutions should bear the cost of making this mistake.

The debate we ought to have is how we remove the apparatus of the state, which was predominantly responsible for turning local experiments into system-wide problems. Splitting investment and clearing banks is not the answer and the unintended consequences could well make the banking system even more volatile.

If we turn to the apparatus of the state in relation to banking, these are some of the problems we find:

• Central planning,
• Legal privilege including exclusion from general bankruptcy proceedings and otherwise unconventional application of the law of property and contract,
• Socialisation of the cost of failure, including deposit guarantees,
• Government monopoly of currency,
• A medium of exchange which is predominantly electronic bank credit combined with no effective restraint on the extension of credit by banks,
• A vast and inordinately complex system of regulations, not simple, effective law based on property rights and contract,
• Unsupervised, ad hoc intervention by governments in banking crises.

Crucially, the Bank of England’s Monetary Policy Committee attempts to “manage the economy” - the subjective choices and cooperative actions of millions of people - by controlling the rate of extension of bank credit. As with all central planning, this is bound to run into the Socialist Calculation Problem: even setting aside the inadequacy of so coarse a control, the necessary information to coordinate society centrally is simply not available.

Consider: 

• It is impossible to obtain, store and process the vast amount of practical information in the minds of different people. 
• Most of the necessary information is subjective, practical, tacit and non-verbal: it cannot be transmitted.
• Information which people have not yet discovered or created and which arises from the market process cannot be transmitted.
• Coercion — that is, regulation — prevents the discovery or creation of the necessary information.

Consequently, we find credit extended far in excess of real savings and the economy dis-coordinated through time as an inevitable result. Contemporary thinking around credit expansion and QE neglects their effects on the structure of the economy and the outcome is our present situation.

In banking and credit, the situation resembles that of the socialist countries of the former Eastern Bloc: central planning and legal privilege are endemic. It is therefore not surprising that we are living through the same inefficiency and failure which plagued command economies, ultimately causing their collapse.

What do we want from a bank?

We need three things from banks:

• A safe and efficient payments system.
• A mechanism for routing real savings into the hands of entrepreneurs, which is the only way to deliver sustainable economic progress.
• Other investment activity, including those activities necessary to meet consumers’ expectations for retail banking, such as interest rate swaps to provide fixed rate savings and loans.

We do not know the optimal size of a bank: that is something the market must decide. We should therefore reduce barriers to entry and allow all mergers. Consider microfinance: the entry costs to banking are low but the barriers are high. The proper role for politicians is to remove those barriers which hamper social cooperation in the market.

Similarly, regarding opening hours and other aspects of customer service, banks must be allowed to judge their customers' preferences and meet them accordingly in an unhampered market.

Finally, it is worth noting that the banks are simultaneously failing both savers and entrepreneurs. This is egregious.

Regulation

As my Cobden Centre colleague Gordon Kerr - a financial engineer - has not tired of pointing out (1,2,3), financial regulation is doomed to fail. For example, another of my City colleagues told me gleefully that they had figured out how to sidestep BASEL III over a weekend... All of these measures should be abolished: in the context of the problems sketched above, they are a waste of time and probably counterproductive.

It is good that bankers are intelligent, driven and innovative: they are merely operating a flawed system to their own advantage, which is to be expected. As I wrote in the Wall Street Journal(£), explaining the present crony capitalism, it is the power of the state which has corrupted banking and consequently the entire economy. Persecuting bankers for the crisis is no more sensible than criticising farmers for the CAP.

Returning to Churchill, to restore the horse to health and repair a once sturdy wagon, we must introduce capitalism proper to the financial system. The answer is not more and more complex intervention by authority: it is simple, effective law based on property rights, contract and the principle that risks should be borne by those who may benefit from their rewards, not the taxpayer.

You can find ten plans which go in the right direction here. Comrades may be confused about capitalism, but they shouldn't be. 

See also

Riegel, The Right-Wing Socialists:

THERE ARE three classes of socialists: the left-wing, or Marxist, group, who believe that the government should own and control everything; the middle-of-the-road socialists, who believe the government should own and operate public utilities; and the right-wing socialists, who believe that the government should control only the monetary system.

The right-wing socialists are by far the most dangerous, because they are not known as socialists and call themselves capitalists, individualists, private enterprisers, etc. They even believe themselves to be anti-socialist and profess full faith in private enterprise. They are not only numerically the largest group of socialists but are also individually the most influential. Among them are the leading industrialists and mercantilists and bankers and statesmen.

The right wing socialists believe that with production and distribution facilities in the ownership and operation of private interests, and with monetary facilities in the hands of government, we can have free enterprise. They might as well believe that if a man owns an automobile, he need not worry about who or what controls the gas.

...

Surely the Big Society is about more than volunteering?

Yesterday, I received a sneering email from an obviously partisan campaign group which implied that the Big Society is about nothing more than people giving their time. I beg to differ.

If society is "the sum of human conditions and activity regarded as a whole functioning interdependently" (Concise OED), then it comprises everything we do. Society includes family, friendship, volunteering, giving and exchanging.  It is a rich and comprehensive tapestry of human relationships which includes business.

If only some enterprises are "social", does that mean all others are anti-social? Surely not. We are sustained by an intricate network of production, exchange and consumption. Producing and selling the means of human survival, fulfilment and enjoyment is a vital social activity. All enterprise is social.

Provided the exchange of goods and services is not coerced, it is the creation of value for other people. Profit earned without privilege or compulsion is a measure of value produced for other people, in their opinion. Entrepreneurship is then the creative search to help other people.

Society is not built on gifts of goods and services. Giving is good, but a gift economy would soon run into the socialist calculation problem: how much of what to give to whom?  Yet a healthy society requires good will and the recognition that not everything can be bought and that not everyone has the means to buy. 

The change we need is a change within. From a belief that human relationships should be based on class conflict and mutual plunder mediated by the State, to a reliance on mutual cooperation. From the view that business is somehow bad, to the realisation that all enterprise is social. From condemnation of profit, to an understanding that it is a measure of the value created for others. From fear of bearing risk, to the truth, that the search to create value for other people is the foundation of worthwhile community. From waiting for the State to decide and provide, to energetic, innovative mutual support.

For me, the Big Society is about people having more to do with one another and the government less. It is about rediscovering the Golden Rule, the ethic of reciprocity which has underpinned so many traditions and communities and which was famously stated as:

Love your neighbor as you love yourself.

Those who sneer at the Big Society are sneering at the foundations of civilisation. They are dangerously mistaken.

Further reading

C S Lewis, The Abolition of Man, in which Lewis considers the Tao, the traditional body of natural law, and efforts to abandon it. My summary is here. 

On the choice between society or government, see Albert Jay Nock's classic, Our Enemy, The State (PDF).

Will the spending review be bold enough?

Today is already the tomorrow which the bad economist yesterday urged us to ignore. – Hazlitt, Economics in One Lesson

As the Telegraph reported on Friday, the Institute of Economic Affairs "has calculated that the national debt is £4.8 trillion once state and public sector pension liabilities are included, or £78,000 for every person in the UK." 

I referred to their paper - A Bankruptcy Foretold - in my Commons speech of 22 June before turning to the Bank for International Settlements' The future of public debt: prospects and implications. That paper calls for "drastic measures" to reduce government liabilities. I said that the implications of our debts were profound and that we risked social catastrophe long before our levels of debt interest reached those projected by the BIS for 2040.

Independently, the theme is gaining currency.

On 11 August, Professor Laurence Kotlikoff of Boston University wrote an article for Bloomberg, U.S. Is Bankrupt and We Don't Even Know It. I recommend the full article, but here is a flavour. He wrote:

[...] the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act.

Further, after explaining that the US fiscal gap is more than 15 times the official US debt, he writes:

This is what happens when you run a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck.

Kotlikoff estimates this Ponzi scheme liability at $202 trillion, which dwarfs the recent US bailouts at $12 trillion. Even the scale of the bailouts is beyond imagination, but stopspendingourfuture.org have produced the following visualisation (and remember this video illustrates about 1/17 of the US problem):

On 21 August, Sean Corrigan, Chief Investment Strategist at Diapason Commodities Management, wrote for The Cobden Centre, saying that Hannibal is at the gates:

Unsound money and unrestrained credit combines far too readily with Man’s inherent disinclination to live off the sweat of his brow to make him an easy mark for every smooth-tongued, silk-suited chancer who promises him a ticket out of the Land of Nod and, once, again, this fatal weakness has led us to a ruin which has engulfed the innocent along with the guilty.

...

The first thing to realise is that the caterer’s bill for our Banquet of Fools cannot possibly be paid, that our debts are already too high and our promises cannot be redeemed in full.

Today, Professor Kevin Dowd declares the UK bankrupt. He picks up the IEA's theme:

The Government’s true debt is the present value of all the commitments it has entered into, on the expectation that these commitments will be paid for by future taxpayers. Some prominent examples are the commitments implied by the public sector pension system, the state pension system, the health system and PFI. The costs of these commitments are staggering.

...

One recent estimate suggested that a UK citizen born in 2011 will inherit, on birth, a debt of perhaps £200,000, and it could easily be much more.

It is simply inconceivable that debts on this scale will be paid off in full.

Dowd explains the moral as well as fiscal bankruptcy of our present system. He paints a potential future which we would be well-advised to avoid. As I said in my 22 June speech:

If Members on both sides of the House are serious about building a better society, we have no choice but to reform radically the size, scope and role of the state.

David Cameron is correct when he says, "The era of big government has run its course." The questions now are whether the spending review and our subsequent reforms will be bold enough to deal with the world as it is and whether we shall win the argument for change. 

On economic forecasting and double-dip recession

Via The Financial Times:

The US Federal Reserve on Tuesday took a first step toward extending its crisis-era monetary policy regime, as it downgraded its view of the economic outlook amid rising fears of a “double-dip” recession.

I expect the Bank of England to do similarly at 10:30 this morning. 

On 2 September 2009, I took the risk of explaining why a senior economist writing in The Times was bound to be disappointed when he wrote, Now it’s looking like V for victory over recession. I explained that he was wrong because the contemporary mainstream lacks a robust capital theory, so most economists are misled by distorted data. 

I wrote

No one is arguing that the present interventions by government are not giving the impression of prosperity; we agree that injecting new money creates economic activity. However, these measures create only an illusion which cannot last and which succeeds only in postponing and worsening the unavoidable crash. Society can ill-afford that outcome. 

O’Neill is right: things look better. Unfortunately, this is another artificial boom which will not last.

You can find the article here.  

In due course, the Times reported, Economists revolt over surprise recession data. I repeated that "most economists allow themselves to be misled by a superficial reading of numbers distorted by central bank action." 

Injecting more new money, whether through QE or credit expansion in excess of real savings, will not "fight recession". It will merely delay and worsen the eventual downturn, because injecting new money is bound to shift activity from sustainable economic action to action supported only by that new money.

Sooner or later, the mainstream economic paradigm must shift to accept the importance of time and hence a robust capital theory. Everyone's prosperity depends upon it.

See also

• “The Pretence of Knowledge”: how economists come to make astrologers look good. 
• How an Economy Grows and Why It Crashes: Two Tales of the Economy
• Academic economic literature may be found here.

Conservatism, liberalism and the little platoons - do ideas matter?

Wycombe's local paper is running a story on the possibility of the LibDems disappearing so, with reference to the structure of political ideas, I have explained on my blog why the practical questions are more important. Tim has explained that the origins of the Big Society lie with Burke (quite right too!) and that the theme runs through Churchill to today.

I am left wondering, "Do ideas matter?" 

The Labour Party apparently thinks so: I have lost count of the number of times they have denounced the Government as "ideological". We have even been called "pre-Keynesian neo-liberal ideologues" in the course of a speech.

Famously, Mrs Thatcher banged on the table a copy of Hayek's Constitution of Liberty with the words "This is what we believe!" It's rather ironic that Hayek's postscript to that book was titled, "Why I Am Not a Conservative".

I have been an aerospace and software engineer and engineers are quintessentially pragmatic. However, in aerospace engineering, action uninformed by good ideas is positively dangerous. Software itself comprises ideas in action; trying to write good software without highly developed ideas is futile. In either field, I would not tolerate engineers who acted without thinking first. Indeed, I once had to fire someone for just that: he was a liability in his own right, a burden on his colleagues, and he would not respond to coaching.

It seems to me that ideas matter, if one wants to succeed, and it seems I am not alone. From the Foreword to our manifesto:

What is that change? Some promise solutions from on high – but real change comes from collective endeavour. So we offer a new approach: a change not just from one set of politicians to another; from one set of policies to another. It is a change from one political philosophy to another. From the idea that the role of the state is to direct society and micro-manage public services, to the idea that the role of the state is to strengthen society and make public services serve the people who use them. In a simple phrase, the change we offer is from Big Government to Big Society.

When I reflect on these dark years of New Labour, I see as complete an implementation of the ideas of Gramsci, Foucault and Althusser as one of sound mind could dread. "Pre-Keynesian neo-liberal ideologues"?  It's a bit rich, coming from hypocritical neo-Marxist demagogues. 

The idea of the Big Society has a rich, pragmatic heritage. For me, it is about altruistic individuals in positive relationships. Some of those relationships will be charitable, some personal and some commercial. All are social, because society is the cooperative action of individuals, not the coercive power of the State.

It's certainly time for change and that change is a shift to pragmatic ideas based on the dynamic, spontaneous reality of human life. That is the change this Coalition offers.

What we need is good ideas in action.

Monetary bingeing and the spirit of the British people

At The Telegraph, Ambrose Evans-Pritchard calls for a further extension to our monetary binge:

Tight fiscal policy offset by ultra-loose money is the only option for Europe, the US, and Japan.

However, at The Cobden Centre, Professor Kevin Dowd says that calls for further monetary expansion are cuckoo, and James Tyler, Chief Executive of Tyler Capital, describes the article as Monetarist whitewash.

Contemporary economic thinking takes too many aggregates, amongst other faults (see for example Money, Bank Credit and Economic Cycles, pp 519-583): monetarists ignore the structure of production. A consequence is policy advice which is bound to cause worse problems later.

As Hayek said in his Nobel lecture (and by "inflation" he means an increase in the money supply, not the consequent affect on prices):

The continuous injection of additional amounts of money at points of the economic system where it creates a temporary demand which must cease when the increase of the quantity of money stops or slows down, together with the expectation of a continuing rise of prices, draws labour and other resources into employments which can last only so long as the increase of the quantity of money continues at the same rate - or perhaps even only so long as it continues to accelerate at a given rate. What this policy has produced is not so much a level of employment that could not have been brought about in other ways, as a distribution of employment which cannot be indefinitely maintained and which after some time can be maintained only by a rate of inflation which would rapidly lead to a disorganisation of all economic activity. The fact is that by a mistaken theoretical view we have been led into a precarious position in which we cannot prevent substantial unemployment from re-appearing; not because, as this view is sometimes misrepresented, this unemployment is deliberately brought about as a means to combat inflation, but because it is now bound to occur as a deeply regrettable but inescapable consequence of the mistaken policies of the past as soon as inflation ceases to accelerate.

As Kevin writes:

The reason the economy is doing so badly is because the banking system is still broken, and the economy will continue to do badly until the banking system is properly fixed. Some of us have been hammering on about this for years.

I am put very much in mind of a quote from Churchill:

I must point out ... that the British nation is unique in this respect. They are the only people who like to be told how bad things are, who like to be told the worst, and like to be told that they are very likely to get much worse in the future and must prepare themselves for further reverses.

We should tell the British people that the state of the economy is worse than they think and that it is going to get worse yet when, inevitably, our monetary binge ends. A compounding factor is that the vast majority of economic commentators lack an adequate theory of capital, and so they will tend to give the wrong advice, even as things deteriorate. People must prepare themselves for future reverses.

The good news is that the intellectual climate is changing. For example, on Thursday, the Institute of Economic Affairs is holding an event, Why today’s political class needs Ludwig von Mises, with speakers including yours truly.

For those who think economics is too complex, a good place to start is Peter Schiff's How an Economy Grows and Why It Crashes: Two Tales of the Economy. More detail may be found in The Cobden Centre's Primer.

Much needed health reforms will positively challenge private hospitals and trade unions

In terms of the anxiety and concern felt by Wycombe constituents, no other issue compares to the future of our hospital and local health care. That's why, as MP for Wycombe, the NHS is my top local priority. 

As you can see by searching our local paper for stories relating to my work in relation to our hospital, the current structure of the NHS manufactures discontent and ill-will. We simply must move beyond the present cycle of despairing powerlessness amongst local people, including clinicians. 

That's why I'm backing Andrew Lansley's health reforms. 

I am delighted that the coalition is planning to empower patients by introducing what amounts to a shadow-voucher system. By enabling patients to choose their general practitoners and then routing the vast majority of NHS funds through their hands, we will finally be able to reduce bureaucracy by scrapping Strategic Health Authorities and Primary Care Trusts. 

I am also pleased that the government will return NHS hospitals into a rich and diverse tapestry of independence. In the future, no one in this country should have to go into any hospital owned or directed by the state. Whether for-profit or not-for-profit, mutual, worker co-operative or charity, all our hospitals, clinics and care homes must be set free from political control: they must reside in a greatly expanded and genuine independent sector. 

These organisations should then be free to raise money commercially, free to reap the rewards of delivering excellent service to patients, and freed from the shackles of the Treasury. In the future, not only should all hospitals be allowed to raise investment and capital as they see fit from non-governmental sources, but the caps on their private work should likewise be removed. 

For too long, high-quality independent provision has been the sole preserve of the well-heeled and those able to afford exclusivity. For too long, private hospitals have exploited high margins as a result of the manifest failings of state hospitals. It is, as we have said, time for change.

With Nurses for Reform and other campaigners, I believe that national collective pay bargaining has run its course and should be abandoned. Alongside denationalising NHS hospitals, I therefore urge the government to similarly encourage a more vibrant and open labour market for the benefit of all doctors, nurses and other health workers. No one in healthcare should have their professionalism and integrity undermined by one-size-fits-all politically-decreed pay scales. Nor should remuneration be imposed and held back at regional levels. To properly value doctors, nurses and other health workers, remuneration must be set at proper commercial levels and this will only happen in a more open, dynamic and responsive market. 

Employment contracts should be a matter for each independent employer and their staff – not the government or any of its ‘appointees’. Indeed, it is in this context that trade unions should proactively push for, and embrace, this new world of welcome opportunity. Gone will be the tedious days of top-down state direction, beer and sandwiches at number ten, and endless, counter-productive, national strikes. 

Today, unions should know that, to be relevant, they must provide representation and engagement in a new world of work which will increasingly be built on collective self-help through worker ownership, co-operatives and mutuals. In some cases, unions already provide, not just legal advice, mortgage discounts and so on, but also private health cash plans: this should continue and develop in a rediscovery of the labour movement's tradition of mutuality, a rediscovery which can be expected to increase membership.

When Tony Blair first sought support for independent foundation trusts nearly a decade ago, he was vehemently attacked by an unholy alliance that included elements of the Labour Party and the trade union left plus new-found friends in Britain’s private hospitals. Riven with a fear of putting power in the hands of patients, professionals and consumers, the private hospital sector in particular encouraged the Labour left and the Conservative Party variously to oppose Blair’s legislation. 

And so it came to pass that Gordon Brown watered down the foundation trust bill while the Conservatives opposed it on the grounds that “it did not go far enough”. 

Now, for the sake of patients and health workers alike, our trades unions and health privateers must find a more positive way forward, not fall back to reactionary opposition. That means not only supporting the government, but also joining me in urging the coalition to go further. For if we strive for real openness and diversity, not only will we push more resource to the front line of healthcare but, crucially, we will open up independent provision for the benefit of all. 

It is to this end that I welcome the government’s recent white paper on the future of the National Health Service and I urge the trades unions and private hospitals to do the same. Anything less than full support will be bad for our unions and Britain’s private hospital bosses. For it will further compound their challenges and put them squarely on the side of history’s losers. British people deserve better. 

If we get these reforms right and if they are sufficiently radical, then we can re-engineer the NHS as a key funder of healthcare, delivering more and higher quality care where it matters. We can also obtain better pay and conditions for those who provide care, skill and long-term dedication. If we are bold, we can end the present cycle of local disempowerment and staff disenchantment. 

It is in this sense that I believe these much-needed health reforms will positively challenge private hospitals and trade unions. 

People deserve health care which meets their needs and aspirations. It is time government provided the right environment. Health professionals, unions and management, right across the spectrum of health provision, should seize the moment.

A political economy popquiz

A brief quiz on the growth of the state, how that growth was funded and our future. I will follow this up next week.

How the state has grown

Source: How Should Britain’s Government Spending and Tax Burdens be Measured?, 10 June 2009, David B. Smith, IEA

Online Surveys & Market Research

The faith and folly of the Brussels elite

In this week's Economist, the departing Charlemagne columnist reflects on "the faith and folly of the Brussels elite". He explains that Brussels officials really do want more Europe because they believe nationalism is the greatest of evils. They have faith that the European project is eliminating nationalism and that "the existence of the EU is a bulwark against fresh horrors".

In particular:

Brussels insiders are convinced that critics of the EU are nationalists. They are wrong. As he ends his Brussels posting, this critic accepts that many of Europe’s worst follies can be blamed on the selfishness and cynicism of governments, not Brussels bureaucrats. The EU holds nationalism in check, and that is a high calling. Charlemagne believes in the EU. On balance it has swept away barriers to internal trade and the free movement of people. It has modernised poor regions. It has anchored southern and eastern Europe in the free world: an historic achievement.

Of course the EU has delivered free trade within its borders - it is a customs union after all - but anyone who thinks the EU genuinely promotes global free trade should look at the TARIC database. TARIC (Integrated Tariff of the European Communities) includes not just tariffs, but also tariff suspensions, tariff quotas and tariff preferences. You might enjoy searching the database for wheat for example. Do click through and survey the subdivisions of each tariff, noting provision for variations according to country of origin or destination. 

Richard Cobden might well wonder why he bothered with the Anti-Corn Law League.

Current debate on immigration demonstrates that EU member states have not fully surrendered border controls, but this is, of course, in the pipeline.

If the outgoing Charlemagne defines nationalism, and it appears he does, as comprising trade and migration barriers, then the EU has merely elevated nationalism to the level of the European continent, has it not? 

Serendipitously, I just finished a book which surveys the issue of European nationalism. Omnipotent Government - the Rise of the Total State and Total War (1944) is perhaps a little strident but then the author, Ludwig von Mises, was an economist of Jewish descent, born into the Austro-Hungarian empire, who predicted the collapse of the Mark, the Great Depression and the rise of German political radicalism before being forced to flee his homeland via Switzerland to the USA.

Mises' thesis, in a nutshell, is that aggressive economic nationalism is the inevitable consequence of increasing government intervention in the economy. For reasons he explains, he calls this ultimate cause "etatism":

The most important event in the history of the last hundred years is the displacement of liberalism by etatism. 

Etatism appears in two forms: socialism and interventionism. Both have in common the goal of subordinating the individual unconditionally to the state, the social apparatus of compulsion and coercion. 

... 

Etatism assigns to the state the task of guiding the citizens and of holding them in tutelage. It aims at restricting the individual's freedom to act...

This might be a good moment to turn to the database of European Union law: EUR-Lex. It is gigantic of course, but allow me to point you to, for example:

• "Council Implementing Regulation (EU) No 580/2010 of 29 June 2010 amending Regulation (EC) No 452/2007 imposing a definitive anti-dumping duty on imports of ironing boards originating, inter alia, in Ukraine": PDF.
• "Commission Regulation (EU) No 547/2010 of 22 June 2010 establishing the standard import values for determining the entry price of certain fruit and vegetables": PDF.
• "JOINT DECLARATION BY THE COUNCIL AND THE REPRESENTATIVES OF THE GOVERNMENTS OF THE MEMBER STATES MEETING WITHIN THE COUNCIL of 5 May 2003 on ‘the social value of sport for young people’": PDF.
• "COMMISSION RECOMMENDATION of 28 April 2010 on the research joint programming initiative ‘A healthy diet for a healthy life’": PDF.

These are simply examples which come immediately to hand: by all means search for yourself.

In his section on "Peace Schemes", Mises writes presciently of our situation:

The main obstacle to the establishment of a supernational customs union with internal free trade among the member nations is the fact that such a customs union requires unlimited supremacy of the supernational authorities and an almost complete annihilation of the national governments if etatism is to be retained. Under present conditions it makes little difference whether the constitu­tion of the suggested union of the Western democracies is shaped according to the legal pattern of unitary or of federal government. There are only two alternatives open: trade barriers among the member states, with all their sinister consequences, economic nationalism, rivalries and discord; or free trade among the member states and (whatever the constitutional term adopted for it) strictly centralized government. In the first case there would be not union but disunion. In the second case the President of the United States and the Prime Minister of Great Britain would be virtually reduced to the status of provincial governors, and Congress and Parliament to provincial assemblies. It is unlikely that the Americans or the British will easily agree to such a solution of the problem.

The policies of government interference with business and of national planning beget economic nationalism. The abandonment of economic nationalism, an indispensable condition for the establishment of lasting peace, can only be achieved through a unification of government, if people do not want to return to the system of unhampered market economy. This is the crux of the matter.

Now, I can't help noticing that we live in a time of considerable government interference with business, that is, etatism. People are losing faith in capitalism, despite general acceptance of the argument that interest rates were too low for too long, a phenomenon manufactured by institutions of government. Business failure in banking has been comprehensively socialised, the banks still aren't lending as the authorities wish and yet bonuses were paid within taxpayer-subsidised institutions. Google returns pages of mainstream results for "euro collapse". There is a democratic deficit in the EU and its member states. Union leaders talk of strikes.

And amongst all this, the Brussels elite desire more power and central control, with Jean-Claude Trichet calling for a "quantum leap" in EU economic governance. 

At least he is consistent with Mises.

The Brussels elite certainly have some historic achievements behind them, but I can't help wondering whether they put their faith in the wrong god. Perhaps their folly has been to choose etatism plus the unification of European government when a better choice would have been a post-war return to unhampered social cooperation, that is, classical liberalism.

Let's hope their greatest achievements do not turn out to be merely raising economic nationalism to the continental level and an historic faux pas.

Further reading

• Mises, Omnipotent Government - the Rise of the Total State and Total War (1944) (Amazon, read online, download)
• Mises, The Causes of the Economic Crisis, and Other Essays Before and After the Great Depression (1923-1946) (buy, download)
• Hayek, The Road to Serfdom (1944) (buy, Wikipedia, read online)
• Popper, The Open Society and Its Enemies (1945) (Amazon: Volume 1 - The Spell of Plato, Volume 2 - Hegel and Marx, Google books: Volume 1, Volume 2)
• Burnham, The Managerial Revolution - What is Happening in the World (1941) (buy, Wikipedia, marxists.org)
• Alexis De Tocqueville, Democracy in America (1835-1840) (Amazon, Google Books - the relevant passage starts on page 389)
• Postrel, The Future and Its Enemies: The Growing Conflict over Creativity, Enterprise and Progress (1999) (Amazon)

Essential market analysis of the crisis

My Cobden Centre colleagues have been steadfastly producing further market analysis of the crash over the last couple of days:

• Sean Corrigan comments on the alarming US monetary contraction of the last few months and explains that we should see the economic effects by the end of the third quarter. Andy Duncan follows up with commentary from those who predicted the first crisis and who are now predicting a second, based on sound theory.

• Toby Baxendale reviews Alchemists of Loss - How Modern Finance and Government Intervention Crashed the Finance System by Kevin Dowd and Martin Hutchinson:

  This book is a page turner. It is a must for anybody who has an interest in what has gone wrong with our financial system and thus the economy, and what can be done to fix the problems created.
  ...
  The alchemists in the title are 7 Nobel Prize winners, investment bankers, the political class, other economists, and regulators. They exploit the frailty of the human condition — our impulse to believe that “this time, things are different.”
  

• Andy Duncan reports on a Civitas lecture, asking, "Our Dysfunctional Financial Services Sector: Is there a solution?"

  Dr Woolley’s main contention was that the financial services system is clearly broken, particularly by the principal-agent problem where the agents (traders, fund managers, financial advisers) are milking the investment gains of the principals (that’s you, me, and everyone else with a retail pension), mainly through technological financial innovation, moral hazard, leverage, and the general opacity of the financial system.

  Andy considers the substance of the lecture before proposing a solution which differs from Dr Woolley's: correct the flaws in the monetary regime.

At The Cobden Centre, we are determined to widen the scope of the present economic debate. We are for honest money and social progress because we believe that productive human social cooperation requires as its foundation a better system of money and bank credit. As James M. Buchanan (Nobel Laureate, economics, 1986) has said,

The market will not work effectively with monetary anarchy. Politicization is not an effective alternative. We must commence meaningful dialogue with acceptance of these elementary verities. Far too much has been said and written in elaboration of the first statement, which too often is taken to be equivalent to the assertion that “capitalism” or “the market” has failed.

The market has not failed; money has failed.

The budget debate: why economists disagree, why they are so often wrong and where economic thinking goes next

Even setting aside Labour's gratuitous pantomime politics, I have found these days of budget debate frustrating. Arguments are being rehearsed and economists quoted without any regard to the nature of the social science that is economics or where various economists fit into the range of schools of economic thought.

I'll try to explain.

Why economists disagree

Economics is not like the natural sciences because individual people think, choose and act in a system of changing cooperative relationships. We are not inanimate objects buffetted by events, but people. It should be obvious that any study of economics - ie social cooperation - will be informed by a wide range of thinking about the nature of people and society.

Consequently, there are three prevailing theoretical frameworks in economics associated with three cities: Cambridge (Keynes), Chicago (Monetarist) and Vienna (Austrian). There are a few Marxists around too, with their cynical ideas polluting debate.

As I have put on record (1,2), there are real differences between these theoretical frameworks and these differences matter when it comes to public policy.  Once you understand the basics of each framework, the political commentary falls into place.

I will spare you a detailed comparative analysis here. If you want it, please see this paper by my Cobden Centre colleagues, Dr Anthony J Evans and Toby Baxendale.

Instead, you may enjoy this brilliant video:

The simple fact is this: Labour politicians are promoting Keynesian ideas with an unwarranted confidence.

Why economists are so often wrong

Labour's legacy is a choice between unpleasant cuts in public spending, a sovereign debt crisis or currency debasement

The new MP for Wycombe, Steve Baker MP, writes his first CentreRight contribution.

Since my arrival in Parliament, the Chamber has been characterised by a torrent of self-righteous indignation from Labour and their thoroughgoing lack of remorse about the state of the public finances. There is a sense that Labour think they are on the side of the angels.

Giving our opponents the benefit of the doubt, I can think of two premises which might support their attitude.

The first is that the government has an inexhaustible horn of plenty which could be forever poured out, if only the Tories had the will.  The second is that the crisis was an automatic feature of the global economy which the Labour government could not have avoided.

The Government does not have an inexhaustible horn of plenty. Government has nothing to give without first taking. Government funds itself by taking today, by borrowing against a promise to take a greater sum tomorrow and by debasing the currency. We have reached the limits of all three.

Thanks to something called the Laffer Curve, it now seems likely that increasing taxes will reduce revenues. People, especially people with plenty of choices, adjust their behaviour to pay less tax. This is reasonable and predictable.

We are at the limits of government borrowing. As Liam Halligan wrote in the Telegraph in November 2008, Gordon Brown’s borrowing was “reckless in the extreme”.  Furthermore, as John Redwood argued recently in the Commons, "The reason we have not yet got into the Greek situation is that the whole of last year's massive borrowing requirement was simply printed."