Category Archives: Economics

If I ruled the world…

That's me kneeling down

I used to be passionate about politics. I debated at school and college, edited the Oxford Union magazine and generally had arguments at the drop of a hat about how the country should be run. Happily, I’ve calmed down since then, and I know now that my political beliefs are just the expression of a few pesky genes. That means there’s no ‘right’ and ‘wrong’ in these matters. We’re all simply following orders. This post will simply outline what would make me happy. I don’t claim it would solve all the country’s problems, but it would be nice to think it would appreciated by any like-minded readers out there. Apart from Daniel Hannan, there aren’t many popular writers and politicians speaking from the libertarian camp, so they need all the help they can get.

I believe in freedom of contract and caveat emptor. I believe the role of government is to decide binary questions of right and wrong where there is a clear victim of force or fraud. In all other cases, the market has the flexibility to arrange as many different solutions as there are people on the planet. Some libertarians believe in limited government. As far as taxation goes, I don’t believe in government at all. I also don’t believe that the end justifies the means. That means that every law has to apply to every citizen in every situation. If it doesn’t, it should be scrapped.

So what would the world look like if I had my way? Clearly, transitional arrangements would have to smooth the road to this economic and philosophical nirvana, but I don’t imagine all that much would change. We would still go on with our lives, earning money and tending to our loved ones. All that would happen is that we would get richer much faster, and the scope for government corruption and inefficiency would be dramatically reduced.

Government

The first thing to say is that we would still have a government. Laws would still have to be passed or (more importantly) repealed. Treaties would still need to be signed and decisions made in all walks of life. However, the scope for misgovernment would be much smaller because there would be no taxation to pay for government spending. Parliament would have to be funded by voluntary subscription on the part of the voters, and there would be so little it could do without any funds that it would probably only sit for a few weeks or months a year. I would keep the House of Commons and either abolish the House of Lords or replace it with politicians voted in by proportional representation. To be honest, the exact shape of parliament wouldn’t matter, because it would have so little power. Updating the criminal justice system every now and then is not a full time job for 650 politicians, and major decisions would be taken far more often on the basis of referenda. The population would even have a say over whether we went to war or not. After all, killing people costs money, and kings throughout history have had to go down on bended knee to their paymasters when they wanted to go to war. In this case, the paymasters would be the citizens of the entire United Kingdom, and that means that we would no longer be able to be members of the European Union. If there is one thing I’d be sure to do, it would be to make certain that parliament was once more sovereign. The idea of foreigners passing laws affecting citizens in the UK is wrong, and that’s all I have to say about that.

Taxation

Taxation is wrong in my view, so the first and most obvious change to people’s lives would be that we stopped paying taxes. That sounds like pie in the sky, but we’ve become so used to the post-war status quo that we’ve forgotten the historic norm. Over hundreds and thousands of years, people haven’t been taxed until the pips squeaked. There have been cruel despots and tyrants aplenty, but the total peacetime tax take and government spending as a share of GDP has hardly ever been as high as it is now. Sixty per cent of our taxes go towards paying for services. If I ruled the world, the government would stop providing those services and hand over the job to the private sector. The other 40% of the funds is currently earmarked for redistribution. All that would happen in future is that people would have to examine their own consciences and decide how much to give and to whom. Worthy causes would flourish. Others would get little support. The voluntary sector would take over looking after the poor and needy, and we’d never again have to complain about poor government decision-making during economic hard times.

Health

People worry about the privatisation of the NHS, but it’s clearly not fit for purpose in its current state. Something has to change, and the obvious solution is to spin off individual hospitals into the private sector. Doctors are already largely private practitioners, so it’s not as though we have an entirely government-run healthcare system at present, and there are already major health insurance providers such as BUPA. People may protest that smokers or those who have ‘unhealthy’ lifestyles are a drain on the system, but that is one of the glorious benefits of the private alternative. Nobody would have to pay for anybody else’s bills. That doesn’t mean that the poor would starve or be left to die. Hospitals and clinics were always until very recently set up by benefactors, charities or the church. Returning to such a system would restore the incentive to live a healthy life by linking personal choices to the price of healthcare insurance and treatment.

Defence

Some say the armed forces are a ‘public good’ that cannot be provided by the market. Well, I cannot imagine even for an instant that the people of this country would discard our army, navy and air force just to save a few quid on their taxes. I honestly don’t know how we would arrange to pay for our defence without the guaranteed income from taxation, but it would have to be from some form of voluntary levy. Yes, some people wouldn’t pay it, but others would. As with every other service the government currently provides from money taken by force from the taxpayer, it would in future be provided by the market, by charity or voluntary subscription.

Emergency services

If the armed forces can be paid for and organised without the benefit of taxation, then the emergency services certainly could. Different towns might set up different systems. In some places, there would be a voluntary levy, in others an insurance-based system for fire and theft. Whatever the solution, it would be down to the local population to decide.

Education

It boggles the mind how far people are prepared to test a failing system to destruction. Albert Einstein once said that the definition of insanity was doing the same thing over and over again and expecting different results. Again, I honestly don’t know what the education system would look like in my imagined future, but one thing is certain: the government would have no say in it. It’s not the government’s job to school our children. It’s not the government’s job to set exams. It’s not the government’s job to decide the entry requirements of our universities. Government was never a part of the equation until late in the 19th century, when it took over the role from the church and other charitable providers by bribing them with taxpayers’ money and then finally nationalising almost all schools.

Business

Individuals would not be the only beneficiaries of the abolition of taxation, of course. Businesses would benefit hugely from the removal of VAT, corporation tax and National Insurance. There would probably be a flood of foreign businesses setting up shop in the UK to benefit from the generous new régime. Red tape and tariffs would also have to be cut to stimulate trade and employment. The minimum wage is an offence against freedom of contract so would have to go, as would any government licences to practise medicine, the law or any other profession. People should be free to choose the doctor or lawyer they prefer without having to pay for the hike in fees brought about by government-sanctioned monopolies. Our withdrawal from the EU would also mean an end to the Common Agricultural Policy and any other regulations brought in to interfere with free trade. We would finally be able to trade with whomever we liked and prove David Ricardo’s insight that removing all trade barriers – even unilaterally – would make the country richer, not poorer. There would be winners and losers, and in some cases the new rules would not benefit the country as a whole, but then that’s not the point. ‘Natural monopolies’ would not have their profits reined in by regulators, so prices might go up, but at least the companies would reap the rewards of their investment, and the monopolies could be contested by new entrants. There are always network effects and economies of scale in every business. The answer is not to create a special regulator for each industry but to grant companies a level playing field.

The dream

I have a dream, and the consistent feature of this dream is the removal of government interference from my own life and the lives of millions around me, whether family, friends or strangers. In this dream, I would try to put in place a system that was fair to each individual. I wouldn’t try to maximise the wellbeing of the whole country, but I’m quite sure Adam Smith’s ‘invisible hand’ would make sure that the country was still better off than it is now, whether economically or from any other point of view. I know my view of ‘fairness’ is not everyone’s – in fact, I know it’s just a product of my genes – but even a prisoner of his genes can write a manifesto.

My fair nightmare

All publicity is good publicity

All’s fair in love and war…and politics, apparently.

Bankers’ bonuses, workfare, the 50% tax rate – every headline in the news at the moment seems to be about ‘fairness’. Now, I know what we regard as ‘fair’ is simply a byproduct of our genetic strategies, and I know you can’t prove a ‘should’, but despite that – or perhaps for that very reason – I’m still amazed (and deeply depressed) by people’s extraordinary double standards. If rich people go shopping for groceries, we don’t expect supermarkets to charge them higher prices than poorer customers – in fact, it’s illegal – and yet the tax system is built on the assumption that the rich should pay more than the rest of us. We now know that the richest 1%  pay over a quarter of this country’s income tax bill, but that’s not just because they earn so much more than the rest of us. We expect them to pay tax at a higher marginal rate, irrespective of the fact that they generally use public services less than those who can’t afford private healthcare, public schools and chauffeur-driven limousines. Why is their extraordinarily disproportionate contribution not enough? When will it ever end? Will ‘fairness’ never be achieved until all our bankers are forced to retreat to their ski chalets in Switzerland?

If I allow reason to take over from emotion for a moment, I can see exactly why. As Darwin eventually revealed, we’re all in competition with one another. Never mind the fact that we have a set of genes left over from the African savannah that’s 40,000 years out of date, we still want to be better than our peers. And it just so happens that democracy and economics are fundamentally at odds. We live in a constantly shifting equilibrium, in which the distribution of wealth is skewed dramatically towards the wealthy, whereas political power is apportioned equally to each voter, regardless of income. That means the poor will always be able to demand more from the rich – up to a point. A balance is only struck because the maximum levels of wealth creation and income redistribution lie at opposite ends of the curve. As Arthur Laffer pointed out, too high a tax rate removes any incentive to work, but too low a tax rate results in zero income available for redistribution. The calls for punitive taxation from the masses constantly bump up against the limits imposed by economics, while the rich are beaten with the ‘fairness’ stick to within an inch of their lives.

I understand the inevitability of the ratchet effect, as government grows and grows, but I comfort myself with the knowledge that there is a limit. If one of our parties were brave enough to shrink the tax burden and therefore the deadweight cost of government, people might find out that the economy would grow faster, and rich and poor alike would be better off, but that wouldn’t solve the problem. People will always want to compete with one another, which means absolute levels of wealth are never so important as relative wealth. Given a choice between earning £20,000 when their neighbours earn £15,000 and earning £50,000 when their neighbours earn £100,000, people will, sadly but inevitably, choose the former. It may not be ‘rational’ to an economist, but it makes perfect sense if you’re in a race. The lesson is: be careful what you wish for. You might get the economic system you deserve!

Sharing or stealing?

"I don't get a bad back from filesharing"

If I have an apple and you have an apple and we steal each other’s apples, we both end up with one. If I have an idea and you have an idea and we steal each other’s ideas, we both end up with two!

I’ve never understood why people don’t distinguish between stealing things and stealing ideas. It may be easy (and common) now to download music for free from various Napster-like peer-to-peer file-sharing sites, but that doesn’t make it legal. We have laws to protect copyright, trademarks and other intellectual property (IP). To me, making copies is a victimless crime because nobody loses anything. The original product has no intrinsic value when it can be copied so cheaply and accurately. Producers of music and other IP products obviously feel it’s ‘wrong’ for people to deprive them of revenues and profits by doing it, but it depends where you stand. Every problem is a fact plus a judgment, and you can’t prove a ‘should’. You might as well say it’s ‘wrong’ for artists and authors to have a monopoly on their own works for 70 years after their deaths. Monopolies are illegal in most other industries, so why should copyright be any different? Should Amazon really be the only company allowed to offer ‘one-click’ purchase?!

Another objection is that repealing copyright legislation would remove any incentive to produce any new works of art or indeed think up any new idea, but, again, it depends on your point of view. Are we not simply removing an unfair subsidy? And are we not restoring the original incentive to keep commercial secrets secret? That may be hard work, but that doesn’t give IP owners the right to complain. It shouldn’t be a moral problem but a technical one: how can I best distribute my product to make sure I get paid every time a copy of it is consumed?

Technology plays a large part in causing and solving all these problems. Copyright wasn’t an issue when scribes in monasteries took months to make a single copy of the Bible, but photocopiers and digital computing changed the rules of the game. Equally, the BBC and other free-to-air broadcasters were given their monopolies when it was impossible to restrict access to the airwaves, but Sky and other satellite providers showed that such a justification is long past its sell-by date. How can the BBC justify getting billions in guaranteed income from the licence fee when viewers could simply be forced to subscribe to the channels they want?

The basic choice is between cross-subsidies and free-riders. Either people pay for something they don’t use or they use something they don’t pay for. Neither sounds very appealing – although I prefer free-riders! – but there isn’t any alternative when goods are non-rival (ie can be freely copied) and non-excludable (ie freely available to all). These are known as ‘public goods’. ‘Common goods’ like fisheries (non-excludable but not non-rival) and ‘club goods’ such as cinemas (non-rival but not non-excludable) throw up similar problems.

Arguments based on values can never be won (or lost), but what this all boils down to is individualism versus collectivism. It may be true that public goods are ‘under-supplied’ unless the regulator steps in, but relative to what, exactly? If it is the maximum level of economic activity (or ‘consumer surplus’) across the whole country, then the individual surely has the right to complain. Any Benthamite government taking decisions for the greatest good of the greatest possible number has effectively decided that the end justifies the means. Whether it’s the licence fee or compulsory purchase orders, a binary moral decision – is it right or wrong? – has been turned into an amoral economic or political sum – what’s the effect on GDP, and how many votes are in it? Where do we draw the line, though? Is one little murder justified if it’s a nasty man whom nobody liked? It may be true that killing is justified in certain circumstances (the ‘just war’, for example), but ethical guidelines have to be based on universally applicable rules to decide the outcome of any given conflict between individuals.

As the Gipper always said, the nine most terrifying words in the English language are: “I’m from the Government, and I’m here to help…”

Freakish economics

Simple, really...

A few months ago, I received a letter demanding £6,000. If I didn’t pay it by the end of January, the amount would start to go up. If I still didn’t pay it, I’d have all my possessions taken from me. If that still didn’t cover it, I’d be taken by force and locked up without ransom in an unknown location for months or even years. If I ran, I’d be followed. If I resisted, I’d be shot.

The whole experience was obviously incredibly traumatic, and I had no choice but to comply. The letter, of course, was my annual tax demand…

Only freaks see taxation as extortion or the police as kidnappers, but the only difference is that this is a crime our elected representatives have actually voted for! As one of those freaks myself – we like to be called ‘libertarians’… – I’m used to people disagreeing with me, but I’ve long since given up believing I’m right. I accept that economic arguments are almost always about values and not methods. Who am I to say that something is ‘right’ or ‘wrong’? You can’t prove a ‘should’. Like everyone else, all I have is a strategy for survival and reproduction. Just because my genes (and an early trip to America when I was ten) have programmed me to believe in individual freedom doesn’t mean I should become Chancellor of the Exchequer or Governor of the Bank of England. I just have a problem with authority!

John Rawls tried to finesse the values issue in A Theory of Justice by asking what kind of society each of us would like to be born into. The more equal the society, the less the risk of poverty and ill health, but the more unequal the society the greater the chance of ending up lord of the manor. It’s a brave attempt to define ‘fairness’ from first principles, but everyone from Socrates to Kant has had a different opinion. Even the Judaeo-Christian ‘golden rule’ is no more than a simple version of ‘tit-for-tat’: “I’ll trust you until you betray me, then I won’t trust you again until you’ve proved to me that you’ve changed.” This strategy (or a modified version of it) is the dominant strategy when pitted against less philanthropic – and even downright criminal – versions in computer simulations carried out by sociobiologists, but it still won’t drive out all the rest. The point of the exercise is to show that all of them can happily co-exist, even when the majority of ‘law-abiding’ citizens tries to lock up all the ‘criminals’.

People can’t easily or consciously change their strategies (even if there is such a thing as ‘free will’), and the idea that something is ‘not fair’ is a familiar rallying call, even if ‘fairness’ collapses into what sounds more like tribal loyalty. In an exit poll for a recent British election, the main reason Labour supporters gave for not voting Conservative was that it was ‘the party of the rich’, but, in the words of Mandy (Rice-Davies, not Lord Rumba of Rio), they would say that, wouldn’t they? Given a choice of voting for wealth creation or redistribution, the have-nots will always choose the latter as they have more to gain. It’s an unwritten law of economics that the many will always be poorer than the few. It’s an unwritten law of democracy that the few will always get screwed by the many!

Take the BBC licence fee as an example. When it was first introduced, the justification was that it wouldn’t be ‘fair’ for people to tune in to the BBC without paying something for the privilege, and the technology didn’t exist to prevent them. The unfortunate side-effect, though, is that anybody who doesn’t watch (or listen to) the BBC still has to pay for it. How can that be fair?! Well, in the game of high-stakes poker we call economics, a cross-subsidy always beats a free rider. Now that’s freakish…