Inflation: the ultimate corruption
"With the exception only of the 200-year period of the gold standard (1714 to 1914 in Britain), practically all governments of history have used their exclusive power to issue money in order to defraud and plunder the people." FA Hayek, Choice in Currency
The truth is that government spends a lot of time and resources continuing the facade that they too are the hapless victims of this scourge called inflation. This illusion is maintained by social science academics having created a whole ‘science’ around the myth of inflation.
“We have indeed at the moment little cause for pride: as a profession we have made a mess of things”. ~ FA Hayek
Inflation has a street definition which is ‘rising prices’ and even academics now pander to this definition. Rising prices in fact, are the effect of increases in money supply which is determined by government and its agencies. It suits government to have this skewed view of this 'intractable problem'.
The great danger of inflationary policies is that there exists a tipping point at which the loss of purchasing power and confidence begins to accelerate out of control. Since psychology and perception play a large role in determining that point, it is impossible to know where it lays ahead of time. And once started, the rapid erosion of a currency’s value is very difficult to halt. ~ Henry Hazlitt
Inflation is caused by governments continually expanding the nation's money supply for which it holds a monopoly. The heart of the inflation engine is the credit creation process that banks are licensed to engage. The rewards for that process are immense in that banks are the first to receive the benefits of increases in money supply.
Inflation generates a sense of false prosperity and is the basis of booms and busts occurring in the economy. As Hayek indicated in his book, 'The Political Order of a Free People':
"Government would be deprived not only of the main means of damaging the economy and subjecting individuals to restrictions of their freedom but also of one of the chief causes of its constant expansion."
Inflation keeps people trapped on a perpetually moving hamster wheel and you cannot get off. Inflation constantly erodes the value of your savings and creates the illusion that you are getting wealthier because the money value of your assets is getting higher. This is illusion. If you sell your asset, your cash proceeds are soon depreciated away. It forces you to keep purchasing - to not purchase means your money loses purchasing power. This causes people to make wrong purchasing decisions, just as business people make wrong investment decisions because false pricing, including interest rates, create a distorted sense of an economy's prospects. Whether it's an investment property, or some consumer good, the hidden need drives you to divest your money because it has no store of value. Ironically this is good for economic growth. Buying things you don't really need is wasteful for you when your resources are better employed in some other way.
Inflation encourages debt. If you know something is going to cost more in the future because inflation will drive up the price of your purchase then, it makes sense to buy it now. If you need a little credit to help you with your purchase, that’s ok! Inflation helps by eroding the value of the money owing on your credit contract and IF your earnings keep pace with inflation, you are the winner.
You see, this is how governments benefit. They borrow massive amounts of money to pay for schemes and promises, made by politicians to win your vote and ensure your loyalty. They pay interest on the loans they take out on your behalf and inflation erodes the value of the debt over the life of the debt. But you are the one that ultimately pays the price and this is why inflation is the ultimate corruption and abuse of the people. As I said, the government gives nothing that it does not take from you first.
For government this has been such a good scheme. Left unchecked, government has made many promises and borrowed more and more to meet those promises so that now we have reached the stage where the jig is up! Examine the UK debt situation below. You can see government has a problem which means you have problem. After all you are the one that will be left to pay.
“Government is the great fiction, through which everybody endeavors to live at the expense of everybody else”. ~Frederic Bastiat
We are not too many steps away from the situation where government defaults on its obligations to you. Unthinkable before - a realistic proposition now! Not only in the UK, but European countries, USA, China. We have all passed the point of no return.
Inflation also contributes to unhappiness and lack of wellbeing. Being trapped on the hamster wheel and having your standard of living perpetually eroding does not build confidence for the future nor does it build future, real prosperity. The sense is - enjoy the party now! At best it creates manipulated booms, doomed to failure. And the numbers don’t lie when they say ‘the jig is up!’
Inflation promotes corruption by showing people that they too can game the system. It becomes a feeding frenzy of ‘grab what you can’ whether you are in business or receiving benefits. Rent-seeking, subsidies, moral hazard, market distortion, lobbying, regulation, government license and unintended consequences are the behaviors of people playing the government game.
"Corruptissima republica plurimae leges. (The more numerous the laws, the more corrupt the state.)" ~Tacitus, the Annals ca. AD 69
What would it mean if we could end inflation?
Ending inflation would allow people to accumulate real wealth and they could aspire to an affordable quality of life based on real savings and investments and real equality of income based on their money having constant purchasing power. In other words £1 today would purchase £1 of equal value in one or twenty year’s time. Social and economic dislocation and disparity would be much diminished.
Ending inflation would mean that people could begin to save for their retirement without worrying that their savings will shrink as inflation chomps away. For people already retired, it would mean they no longer have to worry about how they will make ends meet.
Ending inflation also means that the national savings pool could begin to grow again so that the economy would have a sustainable basis for solid economic growth without the boom-bust fluctuations we have become accustomed to. Investors and entrepreneurs could feel secure in their decision making once again.
Ending inflation would mean affordable housing and real prices for goods and services. Inflation has caused property prices to soar over the last 20 years creating a gap between nominal house prices and real property prices. When the property price bubble burst in 2007-2009, nominal prices quickly fell. Ending inflation would allow real and nominal property prices to come together over time making housing affordable for more people.
Ending inflation also means governments would have to find another way of doing things rather than continuing to cheat the people.
“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists”. ~Ernest Hemingway
What can we do?
We can send a signal to our politicians - enough is enough! In fact this is what voters did in 2010 when the general election returned a vote with no clear majority to govern. But that is not enough. They need to know that you do not want their meddling in your lives. Ignoring the promises of your politicians is another step. Remember, anything government offers you is firstly taken from you.
We need choice for consumers by allowing people with savings to hold their money in the form of cash, gold or silver. Allow banks to offer gold and silver savings accounts. Give people the choice about the kind of money they want to hold. It’s time to end the paper money farce and make money the store of value it could be.
The international monetary system has undergone change roughly every 40 years for the last 150 years. It's due for a change now. It’s likely the new system will introduce a store of value because the old is technically bankrupt. Many central banks around the world are already purchasing gold bullion because they see the writing on the wall. It’s not enough to wait for the change because that may worsen the catastrophe. We need to effect change now, even if it is too late.
Peter Twigg is CEO and Futurist for Pointmen Pte Limited and runs http://emergingevents.com, a website offering scientifically based prediction services for navigating the future.
America’s Chief Magistrate and the Spirit of ’76
But a solemn spectre of ’76 hung over the United States this November as Americans voted for representatives and senators in Congress and a Chief Magistrate to occupy the White House — for the promise of economic and political liberty has turned dark.
Individual liberty
The spirit of ’76 was animated by the desire for personal freedom, both in our relations with others and in our transactions with them. Adam Smith wrote against the mercantilist system which thwarted innovation and entrepreneurship, while the Declaration of Independence affirmed that ‘all men are created equal’ and ‘endowed ... with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness’; that we establish governments to protect these rights, said governments ‘deriving their just powers from the consent of the governed’.
In an early lecture anticipating The Wealth of Nations, Smith was recorded to have said
Little else is requisite to carry a State to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. All governments which thwart this natural course, which force things into another channel, or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical.
Smith’s ‘unnatural course’ is now commonplace. It is impossible to pick up a newspaper, switch on the television, or surf the internet without being inundated with propaganda about how government can improve our lives through intervention, paid for through the imposition of ‘oppressive and tyrannical’ taxation. ‘Since time immemorial two political systems have confronted one another and both have good arguments to support them,’ wrote the nineteenth-century economist, Frédéric Bastiat. ‘According to one, the state has to do a great deal, but it also has to take a great deal. According to the other, its twin action should be little felt. A choice has to be made between these two systems.’
Governments now do ‘a great deal’ never before imagined, and while the heights of politicisation may be unheard of, the phenomenon isn’t. In ancient Greece, Aristotle taught that ‘it would be absurd for someone to think that political science or practical wisdom is the best science, unless human beings are the best things in the cosmos (Nicomachean Ethics, 1141a)’ — he thought not; these sentiments were echoed in mediaeval times by Thomas Aquinas: ‘Man is not ordained to the body politic, according to all that he is and has; and so it does not follow that every action of his acquires merit or demerit in relation to the body politic (Summa Theologica, I-II, 21.4, ad 3).’
But in civil society to-day, most relations are graded on whether or not they contribute to ‘social democracy’, with bitter recriminations for anyone refusing to justify himself by seeking sanction from the majority. ‘What else would you expect?’ retorts Trevor Burrus, an associate at the Cato Institute.
Over the past 50 years, politics has crept into nearly every area of our lives, affecting our most personal and consequential decisions. Our political parties no longer fight over simple regulations of interstate commerce and tariffs, we fight, on a national level, over the nature of American health care and how we will educate our children. How could these fights not be schismatic, vicious, and underhanded?
Since politics has invaded every corner of our lives, everything has become political, and fair game for a ‘great deal’ of unwelcome intrusion.
Constitutionally limited government
Of Bastiat’s two systems, America’s founders had envisioned a union of limited government, whose actions ‘should be little felt’; witness James Madison’s promise in Federalist No. 45, that ‘the powers delegated by the proposed Constitution to the federal government are few and defined. Those which are to remain in the State governments are numerous and indefinite.’ Yet the constitutional framework of the Founders — that ‘the State governments may be regarded as constituent and essential parts of the federal government; whilst the latter is nowise essential to the operation or organization of the former’ — has been set upon its head. Washington intrudes upon state jurisdiction as a matter of fact, usurping powers it has no authority to assume. Nowhere is this reversal more evident that in the office of the president. As Gene Healy writes in The Cult of the Presidency,
Neither Left nor Right sees the president as the Framers saw him: a constitutionally constrained chief executive with an important, but limited job: to defend the country when attacked, check Congress when it violates the Constitution, enforce the law—and little else....
Congress, not the executive branch, was to be the prime mover in setting national policy ... the chief magistrate’s role was mainly defensive. He could interpose himself between Congress and the people when Congress acted beyond its authority, but he was neither Tribune of the People nor Chief Legislator. His true role at home was at once more humble and more important: Constitutional Guardian. Modest but firm, dignified but not regal: this was the president as the Framers envisioned him.
Any existential threat to America is first posed by government itself — continuing deficits (now annually in the trillion-dollar zone); accumulating debt (with harrowing GDP ratios); and burgeoning entitlement burdens for various welfare and social security programmes. The Republican presidential ticket — arguably the more fiscally prudent of the two major parties — abandoned fiscal guidelines based on constitutional, limited government principles and adopted a utilitarian standard for cutting government waste: ‘As president, Mitt Romney will ask a simple question about every federal program: is it so important, so critical, that it is worth borrowing money from China to pay for it?’ (Mainstream GOP attitudes toward increased military spending and ‘loose’ monetary policy are anathema to libertarian conservatives, for instance, who warn that America’s sovereign debt crisis will lead to imminent financial collapse.)
Although Smith would question — as did the Framers — faith in the chief magistrate’s acumen to arbitrate any economic scheme (for good or ill) for the American people. ‘The sovereign is completely discharged from a duty, in the attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient,’ he proclaimed; ‘the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of the society (IV.ix.51).’ But Smith knew of the proclivities of political leaders.
It is the highest impertinence and presumption, therefore, in kings and ministers, to pretend to watch over the œconomy of private people, and to restrain their expence either by sumptuary laws, or by prohibiting the importation of foreign luxuries. They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expence, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will (II.iii.36).
Unfortunately, impertinence and presumption are most often the coin of the realm for politicians. Nor is this despondent critique fuelled by partisan affiliations. True, the cause of limited, constitutional government with individual liberty and responsibility has more ostensible supporters in one of the two major political parties than the other. This applies especially to those Tea Party members of the GOP who espouse the enumerated powers Madison described above and an ever-more constrained role for America’s contemporary chief magistracy. Sadly, in reality, fidelity to the constitution is contingent upon which party enjoys power. Healy calls this equivocation ‘Situational Constitutionalism’:
...the Right had largely abandoned its distaste for presidential activism and had begun to look upon executive power as a key weapon in the battle against creeping liberalism. Sadly, that pattern is all too common in political battles over the scope of presidential power. The tendency to support enhanced executive power when one’s friends hold the executive branch....
‘Government Failure’
In America of the twenty-first century, many would aver that the very opposite of Smith’s triad of ‘peace, easy taxes, and a tolerable administration’ dominates the agenda. Within the school of Public Choice Theory, this is known as ‘government failure’.
The faults of the market are well-known; innovation causes old industries to wither away, and unemployment and financial dislocations occur as the marketplace adapts to new economic realities. To address this supposed ‘market failure’, governments step into the breach, but they are no more omniscient than chief magistrates — and what results instead is ‘government failure’. The State’s misadventures in mercantilist policy, for instance, animated Smith’s Wealth of Nations.
The stateman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it (IV.ii.10).
The IEA’s Arthur Seldon summed up the ‘dilemma of democracy’ brilliantly: ‘Government remedies are begun before the market’s imperfections have been removed by growing knowledge of its continuing flow of new, competing alternatives,’ he observed. ‘They are applied too widely to where the market has not yet emerged, but could have been foreseen, to where it is expanding. And they are maintained long after they have become superfluous and could be replaced by the new supplies and demands.’
Seldon’s remedy was equally apt — ‘The option is no longer for politicians to tell the people what they will do in government but to confess what they cannot do. The question for the future is increasingly not “What should government do now?” but increasingly “What can government do?”’
More troubling, however, are politicians’ vested interests in government intervention. Public Choice observes that the desire to get elected means that public officials are not always so pure in their pursuit of the common good, and will promise state-sponsored incentives to ensure their victory at the ballot box. Frédéric Bastiat opined in The Law that
...when plunder is organized by law for the benefit of the classes that make it, all the classes that have been plundered attempt, by either peaceful or revolutionary means, to have a say in the making of laws. Depending on the level of enlightenment which they have attained, these classes may set themselves two very different aims when they pursue the acquisition of their political rights; they may either wish to stop legal plunder or they may aspire to take part in it.
Increasingly, Bastiat’s latter scenario has come to pass.
And the struggle continues
But all is not lost. ‘The uniform, constant, and uninterrupted effort of every man to better his condition, the principle from which publick and national, as well as private opulence is originally derived,’ wrote Smith optimistically, ‘is frequently powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of government, and of the greatest errors of administration (II.iii.31).’ And in The State, Bastiat believed that a system of justice could prevail.
As for us, we consider that the state is not, nor should it be, anything other than a common force, instituted not to be an instrument of mutual oppression and plunder between all of its citizens, but on the contrary to guarantee to each person his own property and ensure the reign of justice and security.
(Canadians of a certain age will recall Liberal prime minister Pierre Trudeau’s reflections when he lost majority government in 1972, when he quoted from the popular prose poem, Desiderata: ‘no doubt the universe is unfolding as it should.’)
Ultimately, if Americans are to restore constitutionally limited government instituted to guarantee their personal liberty, then they must revive the Spirit of ’76. One avenue lies with the states, by adhering jealously to constitutional prerogatives and the power to ‘nullify’ or ‘interpose’ between their citizens and federal over-reach; another with citizens themselves who must remember the principles of the Declaration, by withholding their consent to the leviathan within their midst. ‘A healthier political culture would follow the Framers not just in their skepticism toward power, but in their sense that the federal government was one of limited responsibilities and limited powers’, notes Gene Healy in a speech on the contemporary chief magistracy. ‘Until we restore that sense of limits, I’m afraid that we’re going to get more of the same, no matter who becomes president.’ God bless America.
In praise of sprawl
In the meantime, the Government’s interest in planning policy has clearly not waned. The Treasury and the Department for Communities and Local Government (DCLG) have both issued a stream of announcements and comments on the subject, with a particular emphasis on the effects of planning policy on economic performance. In addition, it is worth noting that the Prime Minister commented on the subject in his speech at the 2012 Conservative Party conference, referring to the need to construct additional homes, and to ameliorate the planning impediments encountered by businesses.
Despite their hitherto limited nature, the Government's planning reforms, both actual and mooted, have been the subject of significant attention and controversy. Readers will doubtless recall the turbulence caused by the NPPF reforms, with opponents, including the normally quiet National Trust, prophesying the eradication of any and every patch of green space; a Los Angeles for the Home Counties, no less. More recently, the DCLG's proposal temporarily to relax the requirement to seek consent for certain property alterations has generated its own, if rather more modest, controversy; certain individuals and organisations appear to envisage the destruction of every garden in the land, complete with attendant social strife as previously civilised neighbours wage war over conservatory designs.
Such controversy is a useful reminder of the difficulties that any Government can expect if it is deemed to be liberalising planning policy. Quite aside from the fact that state bodies have a tendency to overestimate their own interventionist wisdom, it is worth bearing in mind that they, or more precisely, their political masters, are always under significant pressure to restrain the freedom to develop land. Therefore, even the limited liberalisation that has been implemented to date is to be welcomed, for no one should underestimate the political difficulties that such liberalisation can entail.
However, there are, of course, some very good reasons as to why the Government should not only persist in its planning policy endeavours, but should go much further, and seek fundamentally to curtail the operation of the planning system.
We will now turn to consider, in outline, some of the reasons for doing so.
Planning control is founded on two primary assumptions. Firstly, that the owner of a parcel of land is not entitled to use that land as he or she would necessarily wish. Secondly, that the state is in a better position to determine how a given parcel of land should be used than is the case for the owner of the land in question.
By reference to the normal standards that underpin a liberal, capitalist democracy, those assumptions are clearly eccentric. They are also clearly unwise, given our knowledge and experience of the effects of intrusive state intervention upon personal liberty and economic prosperity. At best, state control of the supply, development and use of land is a misguided anachronism. At worst, it is an economically illiterate obscenity.
The consequences of state control of land use have been rather predictable, especially with regard to the housing market. Firstly, the supply of new housing has failed to keep pace with demand. Secondly, the type of housing that has been built has often failed to match consumers' expectations and requirements. This has led to scarcity, high cost, limited choice and overcrowding, with all the deleterious problems that follow. In short, the housing market is not functioning in the way in which an efficient market should. The principal reason for this is the operation of the planning system, which places greater faith in the state's, rather than the free market's, ability to determine the optimal extent, pattern and nature of land development.
To many involved in the (attempted) development of land, the British planning system has the feel and appearance of a timeless monolith. However, it is worth bearing in mind that it is, in fact, a relatively recent intrusion. The legislation that underpins the system has, of course, changed over time, but the conceptual framework was largely the creation of the Town and Country Planning Act 1947. It is therefore worth giving some consideration to the Act in question.
The main rationale for the 1947 Act can be summarised in three points. Firstly, it was conceived at a time when confidence in state control and direction of economic activity was very strong. Secondly, it was intended to assist the Government of the day in resolving some long-standing housing problems, especially in urban areas. Thirdly, it was a response to some strident criticism of some of the development seen during the inter-war period.
How do those three points fare when considered under today’s conditions?
On the first point, confidence in state control and direction of economic activity is much less pronounced. Of course, there is, regrettably, a rather stubborn residue of confidence, and the current economic climate appears to be strengthening it. However, it can, at least, be said with some certainty that public and official attitudes have changed markedly since the 1940s.
On the second point, the housing problems that afflict modern Britain are largely the result of Government action and intervention. As such, Government inaction would be infinitely preferable, albeit on the condition that the inaction in question is not used as an excuse for not repealing certain items of legislation!
What, therefore, of the third point?
The criticism in question was largely a response to the acreage of suburban housing that developed around major towns and cities between 1919 and 1939; the archetypal semi-detached sprawl. Such development was, and indeed still is, regarded by many as a blight, and an example of the risks posed by a liberal planning regime. Inevitably, such views are most prevalent among those who are enthusiastic supporters of the notion that the state should decide what type of development is ‘right’.
However, one man's architectural blight is another's economic triumph; the opponents of the inter-war suburban development have clearly forgotten, or have chosen to ignore, the fact that the development in question brought some remarkable benefits. Around four million new homes were built during those years, of which some 75% were provided on a commercial basis. This was a veritable building boom, one that not only provided millions of people with new homes, but also provided extensive employment opportunities during a period that is rather better remembered for grinding stagnation and chronic unemployment.
The Government should keep such analysis of the 1947 Act in mind when it is contemplating planning policy. We should certainly hope that it does so; after all, even if it chooses not to adopt a stance informed by a principled commitment to personal and commercial freedom, it could still decide to curtail planning control out of a desire to repeat the economic success of the inter-war development.
In addition, the Government could use the experience of the inter-war development as a reference point for consumer opinion on the subject of planning control. Given what was said above regarding public and political controversy, this may seem counter-intuitive. However, in this case, there is arguably a crucial difference between ‘public opinion’ and ‘consumer opinion’. Of the two, it is the latter that is most persuasive, as it reflects economic actions and decisions, rather than stated opinions of the type that are far too easy to manipulate. Fortunately, it appears that consumer opinion is, in fact, supportive of loose planning controls, or at least of the results of loose controls. By way of an illustration of this, we will turn once more to the inter-war housing referred to above.
It should be borne in mind that millions still live in the housing of the inter-war period. Furthermore, those millions are probably perfectly content with the housing in question, especially when it is compared with some of the alternatives. After all, given a free choice between the free-wheeling sprawl of a 1930s housing estate, the Soviet dystopia of a 1960s social housing tower block, and the Lilliputian scale model that passes for many a modern housing development, most people would be happy to choose the first option. This is hardly surprising, for the housing in question is reasonably close to the ‘ideal’ housing that most consumers want; a reasonably spacious house, three or more bedrooms, a garden that is larger than a dining table, and an adjacent space in which to park a car.
Put another way, the consumer has spoken, and not in favour of the status quo. The Government should take note, for a Government that provides consumers with what they want, rather than what is thought to be good for them, is likely to be rewarded accordingly.
Tax freedom for the poor!
Not slow to capitalise on this ‘leak’, the Spectator’s blog drew attention to a Centre for Policy Studies report published by Lord Maurice Saatchi and Peter Warburton in 2001, Poor People! Stop Paying Tax!, that itself recommended £10,000 at which the low-paid began to pay. For the think tank that Margaret Thatcher and Keith Joseph built, it is absurd that the State ‘even taxes people who can’t afford to pay tax at all.’ But insult is added to injury:
Governments put up tax, which reduces individual incomes and creates more dependence on the state. And citizens claim more state benefits to compensate. And so it goes on until the government is claiming billions of pounds a year in taxes from citizens who also claim billions of pounds a year in benefits from the government.
This political duel over who is truly the friend of the poor should set off a policy debate on taxes in general; namely, is it better for taxes to be wide and shallow — that is, paid by everyone, allowing for overall rates to be low — or narrow and deep — again, paid by the wealthy few who are considered able to pay them and, necessarily, rather high?
Establishing the framework of income tax policy
In the predominant social democratic environment of current debate, the arguments for the latter option are well-rehearsed, and are usually couched in terms of making the well-to-do ‘pay their fair share’, if not in the less-benign tone of ‘soaking the rich’. But the rationale for the former position is less well-known — certainly among the leftist intelligentsia — and so deserves a short hearing. One reason is based on shared solidarity; as Saatchi and Warburton note, ‘One of the arguments that is frequently aired is that the payment of income tax or council tax, even at a low level, is a mark of civic responsibility: an acknowledgement of the cost of government services.’ Or as Madsen Pirie has written, ‘Simple taxes ... make clear the duties of citizenship, and allow people to feel that they are partners with government, making the sacrifices required to enable society to function, and knowing what that involves on their part.’ To quote the Prime Minister and his Chancellor, ‘We’re all in this together.’
Another reason is based on subtle factors of containing the growth of the State and its entitlement culture: Citizens are more aware of abuse of the public treasury and State-aggrandisement if they bear a portion of the tax burden, less concerned if they personally bear none of the costs — especially so if they are among the recipients. ‘As long as it is admitted that the law may be diverted from its true purpose,’ cautioned Frédéric Bastiat in The Law, ‘— that it may violate property instead of protecting it — then everyone will want to participate in making the law, either to protect himself against plunder or to use it for plunder.’ The aim, then, according to this interpretation of comprehensive income taxes, is to make all citizens conscientious taxpayers, and therefore make everyone invested in good government.
Yet another, a bit esoteric in nature, posits that various business interests gain unfairly from the selective practice of ‘tax expenditures’ — a feature spawned from crony capitalism (or ‘corporatism’) — and that if such loopholes were removed, then a truly competitive free market economy would exist, with subsequent lower tax rates for all.
The socio-economic virtues of income-tax freedom for the poor
The first taxation policy — wide and shallow — has much to recommend it, though with respect to the subject of personal income taxes, the alternative position — narrow and deep — may be preferable: Taking those who are low-paid off the income tax register serves the greater common good.
Low earners still must pay any number of direct and indirect taxes, whether consumption taxes, property taxes, or National Insurance. They, like all other British taxpayers, know of sacrifice and social solidarity, and thus it cannot be argued they are oblivious of the costs of government to them. They certainly meet the standard as set forth by Adam Smith in The Wealth of Nations: ‘The subjects of every state ought to contribute toward the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state (V.ii.b.3).’
Nor is raising the income threshold necessarily a complete loss to government revenues. Allowing the low-paid to keep more of their salaries is an incentive for increased productivity (which declines when despair and despondency hit the unemployed); furthermore, these new-found earnings may be saved or spent — both which serve businesses either looking for investment or sales opportunities. Other benefits outlined by Tom Clougherty include eliminating the ‘benefits trap’ and reducing the size of the ‘tax wedge’.
Raising the income threshold by removing the low-paid from the tax rolls also removes many from the welfare rolls, too. ‘The most effective way of giving extra income to low earners is not through a cumbersome system of credits and allowances, but by not taxing them in the first place,’ wrote Pirie (who envisions a slightly higher benchmark). ‘If their money is not taken by government, it does not need a complex bureaucracy to give some of it back to them.’
Some of those earning less than half the average wage find themselves needing benefits only because part of their money is taken in tax. If the threshold at which income tax is levied were raised to half the average wage (which is almost the same as the minimum wage, about £12,000 a year), those earning less than that would not pay it at all. Only income earned above the £12,000 level would come under income tax. This would not only be simpler and more efficient than the present welfare system, it would end most its poverty traps. There would always be an incentive to earn more, for no additional income would bring with it a reduction in benefits. Even above £12,000, people would only pay the basic rate on each pound earned above it, and none at all on the first £12.000. The incentive would always be there to earn more if people could.
Bastiat foresaw the adverse consequences of these traps: ‘The present-day delusion is an attempt to enrich everyone at the expense of everyone else; to make plunder universal under the pretence of organising it.’ Tax-credit and tax-benefit policies, however well-intentioned, have become perverted and often serve as barriers to advancement and independence for those whom they were intended to help.
Curbing a ravenous government of its revenue dependency
Need it be said that a preference for personal income taxes that are narrow and deep is not an endorsement for wild abandon? (And by ‘deep’, what is connoted are taxes which are ‘deeper’ in comparison to those applied to the poor.) Smith anticipated Laffer Curve findings which suggest that higher taxes do not unquestioningly entail enhanced revenue streams (see quotation below) — not to mention the moral issues involved with the gratuitous confiscation of private property. Both Pirie and Clougherty, as well as Saatchi and Warburton, emphasise that a significant cause for generating ever-more revenue to fund expenditures has been the unprecedented growth of the Welfare State — of which tax reallocations form a part.
Though it has become a cliché among conservative circles, it is no less true that most Western democracies don’t suffer from too few taxes, but rather from too much spending.
These effects of over-government affect all taxpayers and, along with providing tax relief for the poor, should constitute a major reform of government policy. Smith’s eighteenth-century standard for taxation is as relevant now as then:
Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the publick treasury of the state. A tax may either take out or keep out of the pockets of the people a great deal more than it brings into the publick treasury, in [that] ... it may obstruct the industry of the people, and discourage them from applying to certain branches of business which might give maintenance and employment to great multitudes. [...] It is in some one or other of these ... ways that taxes are frequently so much more burdensome to the people than they are beneficial to the sovereign (V.ii.b.6).
The results are in: Spending cuts, not tax hikes, are the road to recovery
Here's the abstract:
"This paper studies whether fiscal corrections cause large output losses. We find that it matters crucially how the fiscal correction occurs. Adjustments based upon spending cuts are much less costly in terms of output losses than tax-based ones. Spending-based adjustments have been associated with mild and short-lived recessions, in many cases with no recession at all. Tax-based adjustments have been associated with prolonged and deep recessions.” (Alesina, Favero, Giavazzi (2012) "The output effect of fiscal consolidations" Figure 3, pg. 40.)
Tax-based (RED) and Expenditure-based (BLUE) adjustment
The figure shows the results they got when comparing tax-based and expenditure-based fiscal consolidations, using a sample of 17 OECD economies, over 25 years (1980-2005). It is clear that for every country in the sample, tax increases resulted in a negative or stagnant output, whereas expenditure cuts resulted in an increase of output two years after the adjustment.
They have also found (not shown in the graphs) that business confidence picks up immediately after the expenditure-based adjustments, unlike consumer confidence for which it takes longer to recover. Finally, the most important finding, in my opinion, is that the "heterogeneity in the effects of the two types of fiscal adjustments is mainly due to the response of private investment, rather than that to consumption growth". This means that private investments tend to drive recoveries, not consumption as the Keynesians would claim.
The findings of the paper are important in trying to explain the process of "right" or "wrong" fiscal adjustments. Using an increased taxation burden combined with spending cuts is a wrong approach since it depresses the economy temporarily (loss of public sector jobs leads to a loss of consumption before these people are reemployed), but fails to offer incentives for it to grow. All the laid off public sector workers that are supposed to find jobs in the private sector are unable to do so since the private sector isn't hiring due to the many existing constraints it is facing.
Unemployment starts to go up, supported by an increasing number of graduating youths for whom finding a job is now even more difficult, making the situation look bad for the politicians in power. This means that the politicians, still under pressure to close the budget deficit, now need to cease spending cuts and stop firing more civil servants and bureaucrats, since they don't want to make the unemployment picture even worse than it already is. So the government then relaxes the spending cuts and public sector reforms and focuses mostly on increasing taxes to close the budget deficit. The government starts running out of options, as further spending cuts become politically unfavourable while increased taxation is needed to continue closing the budget deficit.
Are public investments the key to recovery?
This got me thinking further on one of the most popular policies aimed at kick-starting a recovery, one that is especially being advocated in the UK - infrastructure spending. The idea is as follows: the government is suppose to kick-start growth via infrastructure spending by two ways; (1) directly creating jobs, and (2) cutting costs to businesses through improved infrastructure.
The first idea implies that hiring more workers in construction, who will use their new wages to increase spending, will ultimately boost consumption (the classical demand-side story, followed by a Keynesian government spending multiplier). However, if the idea is to hire more workers to start a demand-side increase in consumption, why not have the government hire 100,000 workers (or more), give them all a job to dig holes around the country, and then fill them up? That's a perfectly meaningless job, but as long as the workers get paid, they will begin the cycle of recovery, right? Wrong! Modern consumption theory teaches us that expectations of temporary income aren't the same as expectations of permanent income.
If people anticipate a rise in income, tax rebates or any other form of stimuli (this is true for companies as well, not just consumers) to be temporary, they will save this money instead of spend or invest it. But when they anticipate a permanent rise in income (like getting a new or better paid job) they are much more likely to spend or invest now as they anticipate a certain future stream of income.
The second way is having the newly build infrastructure lower the costs of businesses and help them grow. But how long does it take to build major infrastructure projects like motorways or railways? A long time! Much longer than the average bankruptcy rate for businesses in the UK. And much longer than the current recovery is going to last (hopefully). Full benefits won't be visible in another 10 years, during which time the very same businesses advocating the project will be using old roads and old railways.
This isn't to say that infrastructure projects aren't important - they are, for long term growth almost definitely, but they cannot be the priority in starting up a recovery. One can argue that major infrastructure projects and things like the New Deal made a big difference during the Great Depression, but the world is much different today than it was 80 years ago. For starters back then information was being distributed either through the radio or word of mouth. In that case the people hearing that the government is ready to do something to help them out was enough to get confidence going. Their knowledge of possible negative effects on public finances was very limited. In the modern age of vast informational availability this is certainly not the case anymore. Particularly among investors, but that's another story.
To start up a recovery, the priority should be on supply-side reforms aimed primarily at resolving labour market inefficiencies and at reducing the regulatory and taxation burden on businesses. These will decrease costs much faster and much more efficient than any new road or rail-link, no matter how good or fast they could be.
Conspiracy theories: Back and to the Left?
This has naturally annoyed the aforementioned sceptics/deniers, who dispute the researchers’ claim that their blogs were invited to take part in the online survey that provided the study’s data. Regardless of whether or not this is true, the methodology used was about as impressive as the phrase “online survey” implies. In 2010, a questionnaire was posted on the various climate change blogs where the two sides thrash the issue out, often in forthright tones. Questions involved belief in the extent of man’s contribution to global warming as well as one’s preferred economic system, the moon landings, Princess Diana’s death, Area 51 and other wacky conspiracy theories. Since it would not be difficult to guess the purpose of the survey, it strikes me that there was a non-trivial incentive for each side to use it to discredit the other by claiming to hold the opposing view on climate science whilst pretending to believe in every tinfoil hat idea on the list.
This is the kind of flaw that all researchers who rely on anonymous internet-based surveys completed by a self-selecting sample group must contend with. One would ordinarily hope that the false positives cancel each other out. However, in this instance, as the authors of the paper note, none of the climate sceptic websites took part, and so it is quite conceivable that ‘debunkers’ pretending to be ‘deniers’ made up a larger proportion of the responses.
That being said, it would come as no great surprise if free marketeers were more likely to be sceptical of climate change than left-wingers since many of the most prominent global warming advocates are on the left and many of the proposed solutions involve encroachments on economic or social liberties. There is, therefore, a greater motivation for them to seek out alternative hypotheses. Conversely, one might conclude that socialists are more likely to embrace the issue than right-wingers, and for the same reason, but since the study did not use a control group, we have no way of knowing if free marketeers are over-represented in the sceptic camp or if the numbers are what you would expect from a random sample of the population.
The (considerably weaker) relationship between climate change scepticism and conspiratorial thinking is more interesting and it made me wonder whether the study also found a link between free market beliefs and conspiracy theories. The researchers do not say—although they must have the data—and I would be surprised if such a link exists. One striking aspect of David Aaronovich’s excellent book Voodoo Histories is how many conspiracy theories are of the left. The two biggest conspiracy theories of the last century—the JFK assassination and the 9/11 ‘inside job’—surely do not correlate with free market beliefs. More likely, they correlate with the politics of Oliver Stone and Michael Moore, both of whom have managed to keep their careers on track despite publicly promoting some quite outrageous drivel.
I dare say that free market views would also not correlate with the belief that the invasion of Iraq was a ‘war for oil’ with Halliburton pulling the strings, or that Hilda Murrell, John Lennon, Martin Luther King, Robert Kennedy and David Kelly were murdered by the government, or that the 2000 US presidential election was rigged, or that the government blew up New Orleans’ levees during Hurricane Katrina, or, for that matter, that anyone who is sceptical about climate change is funded by the fossil fuel industry.
Perhaps I am being unfair. In many cases, conspiracy theories have no clear political undertones and their believers have an incoherent ideology at best. I would find it difficult to place David Icke, for example, anywhere on a traditional left-right axis. Yes, the moon landing ‘hoax’ involved Nixon and the cold war, but I would be surprised if its adherents are overwhelmingly of the left. Similarly, a belief in the ‘assassination’ of Marilyn Monroe does not obviously further any faction’s political agenda. It is possible that the Daily Express’s obsession with the death of Princess Diana has made that particular conspiracy theory more popular on the right in the UK, but it is probably popular with lunatics of all persuasions.
Aaronovich balances his book with two notable right-wing conspiracies: the absurd claims about Bill Clinton’s supposed orgiastic and murderous criminal syndicate, and the ‘birther’ cult surrounding Barack Obama. It seems that anyone who holds the office of US president can expect to become the subject of a conspiracy theory, and I do not seek to downplay the stupidity of these accusations when I say that they are of a different order to the JFK and 9/11 theories. The Clinton allegations were bizarre and became more so the longer he held office, but rumours of Slick Willy’s adultery were not entirely misplaced and the ‘Clinton Body Count’ was started largely as a response to the earlier ‘Bush Body Count’. The Obama birth certificate ‘scam’, while patently baseless and mildly racist, would have required only a petty criminal act and a handful of participants. Neither necessarily required the connivance of government and it is this, I think, that distinguishes a right-wing conspiracy theory from a left-wing conspiracy theory.
The theories of the right portray innocent individuals as criminals while the theories of the left blame the government for acts of evil committed by individuals (notably assassins and terrorists). This difference in outlook means that the left’s theories are on a much grander scale. The 9/11 ‘plot’ would have required years of planning and a cast of thousands all of whom would be forever expected to remain silent. The JFK conspiracy would have required at least a couple of hundred people in various branches of government to be in the know on the day, followed by thousands more in the subsequent ‘cover up’. Both would have required immaculate preparation and execution on the part of multiple government agencies.
Herein lies the big problem with the most grandiose conspiracy theories. They require a degree of government competence which is rarely exhibited in their official activities. They depend on numerous arms of the state working together efficiently and effectively to orchestrate an event with meticulous attention to detail, on time, and without putting a foot wrong. And only a statist could believe in that.
Prohibition returns
The Tasmanian ruse, which was first mooted in Singapore, retains a ‘think-of-the-children’ element by forbidding those born after the year 2000 from purchasing tobacco products. Since the eldest of these people are currently twelve years old, this is not immediately controversial, but in a few years time it will mean prohibition for the first wave of adult consumers. This crucial fact seemed to escape some Tasmanians, like the gentleman who told ABC News that the proposal "definitely has my support mate because I believe that children shouldn't be smoking." This sentiment is, of course, besides the point. The real question is whether future generations should be treated like children forevermore; the Peter Pans of tobacco control.
This is not the first time tobacco prohibition has raised its head this year. The advocacy journal Tobacco Control kicked things off with a special edition featuring several articles about what it calls the ‘endgame’. In February, the historian Robert Proctor published the first overtly prohibitionist book of the new era, the title of which—‘Golden Holocaust: Origins of the Cigarette Catastrophe and the Case for Abolition’—requires little explanation. More recently, an academic named Craig Dalton has set up a website to campaign for a “ban on retail tobacco.” In a clever rhetorical twist, Dalton portrays a total ban on the sale of tobacco as less mean-spirited than the current approach:
“When will we finally reach the logical conclusion that banning tobacco is much more compassionate than squeezing smokers with more and more painful stigmatisation?”
This is a text-book example of a false dichotomy. Option B is better than Option A therefore we must do B, never mind that C, D, E, F etc. have been unexplored. Never mind either that options A and B are both the creations of the same group of extremists. Dalton seems to acknowledge that the doctrine of ‘denormalisation’ lacks humanity, but only in order to move towards a still more draconian phase.
A detailed game-plan for the “logical conclusion” of the anti-smoking endeavour appeared in Tobacco Control as a faux-retrospective article titled ‘How smoking became history: looking back to 2012’ in which Richard Daynard imagines living in 2032 when smoked tobacco is banned worldwide. In this fantasy, New Zealand outlaws sales in 2020, a prohibition which “went so smoothly that many countries followed suit”. Twelve years later, the work of tobacco controllers is limited to campaigning against smokeless tobacco and “stamping out cigarette smuggling where it still arises”.
How simple it all sounds, with that brief reference to smuggling being the only acknowledgement of the serious unintended consequences associated with alcohol suppression and the War on Drugs. And yet, even at this late hour, the word ‘prohibition’ remains verboten. Proctor talks only of the ‘abolition’ of the cigarette industry, Tobacco Control uses the euphemism of an ‘endgame’ and Dalton is eager to distinguish his ban on “retail sales” from America’s ‘Noble Experiment’ of the 1920s:
“A comparison to the days of alcohol prohibition are not entirely relevant as this is not a ban on the substance desired by smokers – nicotine, which will still be available – but a ban on its most deadly form of delivery: retail tobacco sales.”
This is little more than sophistry. If smokers found pharmaceutical nicotine products to be suitable replacements for cigarettes, we would not be having this discussion. As for his contention that “we cannot assume that a black market will flourish with a retail ban”, copious historical evidence exists to the contrary, not only for drink, drugs and tobacco but for all sorts of products.
Proctor’s insistence on talking abut ‘abolition’ rather than ‘prohibition’ presumably reflects the positive connotations of the former (being primarily associated with the end of slavery) and a desire to distance himself from the toxic legacy of Al Capone et al. Under his scheme, cigarettes would not be sold or manufactured commercially but people would be free to grow their own tobacco. As a historian, he must know that this differs in no way from the Volstead Act, which effectively abolished the drinks industry, but did not forbid the consumption or domestic production of alcohol. Proctor’s ‘abolition’ is prohibition in both intention and detail.
Advocates of the so-called ‘endgame’ also espouse “ending commercial sales but allowing tobacco growing for personal use”, but they are still more optimistic about the post-abolition world. In an article entitled ‘What are the elements of the tobacco endgame?’, they suggest that there is a real possibility of reducing the smoking rate to just 0.5% of the population. To put this in context, after a century-long War on Drugs, 0.5% of the British population have used heroin in the past year. By contrast, smoking prevalence in the UK is 20% and there are 1.2 billion smokers in the world—a number that rises every day. Undaunted by these figures, the authors retreat into their dream world and worry that “some might argue that even this [0.5% smoking rate] is insufficient, as this prevalence would still kill many.”
It is doubtful that even a smoking rate of 0.01% would satisfy them. For the moral entrepreneur, the only tolerable rate of consumption is zero and surely nobody imagined that the stated goal of a “tobacco-free world” could be achieved by persuasion alone. The lurch towards prohibition should therefore not be surprising. And yet their squeamishness about using the P word, and the scramble to find a more friendly-sounding term, would not be necessary if these advocates believed that prohibition was a noble goal. They know they are naughty boys and girls, these crusaders, and they hope the public will be fooled if they coin new terms for their discredited ideology of suppression.
There will be a certain historical neatness if this decade sees a gathering storm of prohibitionist fervour followed by a struggle to undo the damage in the next, as it will mirror the second and third decades of the last century when America’s idealism got the better of it. If New Zealand does indeed ban tobacco in 2020 it will coincide with the centenary of the 18th Amendment, which came into force in January 1920, and will be a fitting tribute to humanity’s endless failure to learn the lessons of history.
We can, of course, have a debate about how the prohibition of cigarettes might differ from the prohibition of drink or the ‘abolition’ of marijuana. We can, if we must, listen to those who promise that the laws of supply and demand, and human nature, have changed in the 100 years since the “retail sale” of whisky and cocaine was banned. But what we must not do is pretend that the ‘endgame’ of tobacco control is anything other than prohibition, nor that those who support it are anything other than prohibitionists.
'We built it together, Mr President, through the division of labour.'
Friday the thirteenth wasn’t kind to Barack Obama. In a speech in Roanoke, Virginia earlier this month, it was the American president’s bad luck to proclaim a howler heard round the world: ‘If you’ve got a business — you didn’t build that. Somebody else made that happen.’ — An affront to sound economics and Adam Smith, for whom Malthus’s ‘dismal science’ was instead a path to personal freedom and prosperity for all.
Obama privileges ‘corporate’ co-operation at the expense of individual achievement. It’s not that he emphasises the benefits of civil society where we come together voluntarily for mutual benefit, which is a good thing. No, when he says ‘we succeed because of our individual initiative, but also because we do things together’, the subtle message is that we are a means to a communal end greater than ourselves, for ‘if you were successful, somebody along the line gave you some help.’
Government is at the apex of this ‘you’re not on your own, we’re in this together’ pyramid, as evidenced by the President’s redistributive tax policy. By no means was Adam Smith a private property anarchist, for in The Wealth of Nations he acknowledged ‘the duty of erecting and maintaining certain publick works and certain publick institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain (IV.ix.51).’ Such is the theme of Book V of this great work, ‘Of the Revenue of the Sovereign or Common wealth’ (which occasions opprobrium from contemporary libertarians). Rather, it was the State’s coercive tax policies in aid of social justice to which Smith objected:
The sovereign is completely discharged from a duty, in the attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of the society (Ibid.).
Until singled out by Smith, the unheralded champion of the poor was the division of labour. ‘The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is any where directed, or applied, seem to have been the effects of the division of labour (I.i.1).’ We cannot ourselves fashion all the necessities which life requires (though Smith would prefer the term ‘wants’), but instead produce goods and services for which we excel and exchange them with others who have exploited their own particular aptitudes. ‘It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy (IV.ii.11),’ noted Smith.
What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage (IV.ii.12).
By disparaging ‘outsourcing’ in favour of ‘insourcing’, President Obama is obviously not an apt student of the Kirkcaldy professor.Goods are not brought forward on the market because of altruistic motivations — nor by State diktat — but rather because the self-interest of one leads to well-being for another. ‘It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest,’ Smith wrote. ‘We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages (I.ii.2).’
In addition, it is the surplus product from the division of labour which serves to propel production models forward, in financing labour-saving devices or investing in innovative methods that may revolutionise current production or lead to the development of entirely new products: ‘It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people (I.i.10).’
Burdensome taxes which exceed those necessary for Smith’s ‘certain publick works and institutions’ reduce this surplus, and redirect it to schemes for redis tribution and social justice. ‘The stateman, who should attempt to direct private people in what manner they ought to employ their capitals,’ Smith warned, ‘would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever (IV.ii.10)’.
Moreover, this meddling from on high defeats the purpose of helping those who are low, for surplus is the answer for alleviating poverty, for which, writes Eamonn Butler, ‘Smith asserts is an essential condition for economic progress’:
The creation of surpluses makes exchange and specialisation possible. This specialisation helps build even greater surpluses, which in turn can be reinvested in new, dedicated, labour-saving equipment. It is a virtuous circle. Thanks to this growth of capital, prosperity becomes an expanding pie: one person (or one nation) does not have to become poorer in order for another to become richer. On the contrary, as wealth expands, the whole nation becomes richer [see II.3-4].
When abused on behalf of the clientele of the Welfare State, however, this circle becomes vicious. ‘Such people, as they themselves produce nothing, are all maintained by the produce of other men’s labour,’ Smith observed.
Those unproductive hands, who should be maintained by a part only of the spare revenue of the people, may consume so great a share of their whole revenue, and thereby oblige so great a number to encroach upon their capitals, upon the funds destined for the maintenance of productive labour, that all the frugality and good conduct of individuals may not be able to compensate the waste and degradation of produce occasioned by this violent and forced encroachment (II.iii.30).
Having blundered on the big questions, it’s no wonder that Obama caricatured Republican policies based on free-market principles as merely ‘They’ve got the tax cuts for the high end, and they’ve got rollback regulation.’
Writing against the mercantilists and cronyism of his time, Smith argued that government’s principal function was to establish a system of necessary laws and to allow the marketplace free reign. ‘All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord,’ he advised. ‘Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men (IV.ix.51).’
Smith would hardly be surprised that politicians continue to distort economic policy for partisan gain; ‘They are themselves always, and without any exception, the greatest spendthrifts in the society (II.iii.36).’ President Obama’s policy of high taxation on the real job creators, to fund his spurious job creator — the State — is a well-worn political trick. Fortunately, defenders of liberty have as a foil their well-thumbed copies of The Wealth of Nations.
You didn't build it? What would Adam Smith say, asks Stephen MacLean.
These Olympic Games are nothing to be proud of
Months later, as the tangible effects of the Olympic Movement's month-long occupation of central London started to make themselves felt, my thoughts once again turned to my cycling buddy. After reminding yourself for a moment that Boris once gave some constructive criticism to the city of Portsmouth by saying it was "too full of drugs, obesity, underachievement and Labour MPs," and that barely two months ago he referred to the BBC – which, like that brainchild of the Blairite Labour Party, the 2012 Olympics, is state-run – as “corporatist, defeatist, anti-business, Europhile and… overwhelmingly biased to the Left”, I take the view that BoJo -- currently the Games' biggest cheerleader -- would be doing one thing, and one thing only if he were in opposition (if he were so inclined).
He would tear the government, the media, and anyone even remotely associated with bringing the Olympics here to shreds.
In his absence, others have tried. Most have failed to make a dent. Dominic Lawson, writing for the Independent, fired the opening salvo of reason against Olympics fever last month — writing a fairly broad-brush piece which covered most of the general criticisms of this circus (cost, inconvenience, armed police), he scored his best points at the ‘leftist’ BBC's expense: "[news coverage of the Games] really does make one feel as if this is North Korea,” he wrote, “rather than a country supposedly characterised by individualism and nonconformity."
Providing a precis of recent on-line news headlines, drew our attention to but a few: 'Excitement at relay across Wales', 'Elephants salute Olympic Torch,' 'Police want torch centre stage' and 'People unite around Olympic flame'. Frightening, indeed. But few others, doubtless keen to retain their Olympic press passes and ZiL Lanes… excuse me, “Games Lanes” transport, appear to have followed suit. This is a great shame, magnified by the fact that neither Lawson nor I could wield the awesome powers Boris could under the circumstances.
I can imagine his perfect article in this alternative history in my dreams. Written in the Spectator and littered with self-deprecation, references to dead or fictitious Greeks, Liverpool and wiff-waff, Boris would have danced across the pages as he gleefully excoriated the Labour administration for the absurd idea of inviting a bunch of prima donna athletes and bureaucrats, most of them foreign, to compete in an outdoor stadium during the coldest, wettest summer in British history.
He might have pointed out that all this would take place in Newham, a place not altogether unlike Portsmouth and, in any case, one most Londoners consider more alien than Paris, with among the highest incidence of robbery and assault in the entire city. He might have joyfully foretold the pain and suffering of millions of income taxpayers on account of the shut-down of major roads and TfL advising know-nothing tourists to hop the tube at rush hour to make the 10 AM events, and seriously questioned the wisdom of erecting a steel wall around Hyde Park for an entire summer before fouling it up beyond recognition.
In our alternative history he would have savaged, rather than prodded, the implementation of widespread censorship undertaken by a hit squad of intellectual property ninjas; he would have lamented the fact that our police were arresting "marginal" (i.e., possibly innocent) suspects – living, breathing, thinking people – on terrorism charges which they might not be able to prove. If he had really driven it home, he would have pointed out that, under normal circumstances, those arrests would never have been made. He would also have asked why nobody seems to care.
By this point, his oeuvre would have been the most hilarious political essay ever written. He would flay alive in full public view the pathetic, uncritical, fawning news-media industry which crafts its Olympic stories with all the creative flavour of an oak plank, their proxy world to escape from our own inadequacies where professional athletes become "heroes" (seriously, find a different word), washed-up "heroes" become "legends," and civil liberties violations and government largesse are completely ignored.
He might have pointed out how we lapped up this shallow, wooden mythology through broadcast television, advertising, and unrelentingly positive media coverage, and he would almost certainly have ribbed us for using names of people we hadn't even heard of the week before with an easy, casual familiarity, as if we'd known them for years -- you always knew of Dwain Chambers and Adam Gemili, right? Good guys, both. We go way back.
For those of us behind the curve, Almighty Television would bring us up to speed – as indeed it already is doing -- telling all we needed to know about our champions’ upbringing, their hopes, their dreams, their fears, all set to orchestral compositions in major keys and non-stop slow-mo dubstep montages on the BBC which convey upon the proceedings a kind of superhuman majesty, all of which gives us permission to, while also insisting that, we give a damn.
Once the politicians, brain-dead journalists and our friends and colleagues have whipped us into a frenzy of Olympic zeal, Boris might tell us how, almost overnight, we metamorphosed from ordinary secretaries, postmen, teachers, doctors and van drivers into paraprofessional athletes, seasoned international experts in scoring diving and gymnastics routines (despite never having set foot in a gymnasium or on a diving board); only, in September, regress into our fat, chain-smoking, boring selves again.
He would almost certainly point out the absurdity of praying "for a handful of gold", when there were rather more pressing concerns to deal with, like the £120bn deficit at the Treasury. He would very likely have mocked us openly for believing that a bunch of homegrown hero-legend-redeemer-titans, brought here by a golden chariot powered by flaming £20 notes with silver spokes, bronze wheels, and reins of bullshit driven by none other than Jacques Rogge himself, "can fulfil our dreams" and secure our entry into a paradise where people of all creeds and nations will dance in harmony under the Olympic rainbow for all time. Which these Olympics had better do, since we're paying up to £24 billion to host this dog and pony show - roughly twice (inflation-adjusted) of what the United States government spent on the Manhattan Project, and roughly half of what it spent on the Apollo Program.
For the libertarian, of course, the London 2012 Olympic Games (c) -- like most public sector-led projects -- are emblematic of everything that is wrong with society and government. Long has it been known that humans, essentially weak, are willing to surrender their individuality to powerful leaders, celebrities, or a greater whole (see Fromm, Trotter, etc.) or for a higher cause; a modicum of safety, God, the Nation, Occupy Wall Street, the Insane Clown Posse (seriously), or whatever, something apart from and outside of themselves which does very little for them in terms of tangible results. It is also long been the case that the Olympic Games is not, or at least it should not be, a common endeavour, but an individual one: per the Olympic Charter, the athletes compete as individuals or teams on their own personal capacities. Countries simply do not have standing to compete.
Indeed all of the Olympic rhetoric about unity and the like only makes sense if nationalism is utterly uninvolved. If the Americans and the Chinese are really competing directly to "win the medal count," in a phrase we will hear quite often over the coming weeks, the whole Olympic movement is a bunch of bunk and they might as well have at it in a good, old-fashioned war, to demonstrate superiority in a more meaningful and direct way.
If, however, the American and Chinese state collectives say, "hey, you send your best guy, we'll send ours, may the best man win and hey, the human species comes out ahead in the end," well that is a sentiment worth expressing. And it was this sentiment was in the minds of the founders of the Olympic Movement 120 years ago; in the words of Pierre de Coubertin, the Movement's co-founder, the purpose of the Games is to "ennoble and strengthen sports, to ensure their independence and duration, and thus to enable them better to fulfil the educational role incumbent upon them in the modern world.”
If not for the countries, then, who are the Games for? Easy answer: the IOC's mission of promoting world sport has nothing to do with stroking our national egos, but rather, is a cause which serves the interests of athletics, and thus athletes. Fast-forward to today, and the mass market for sport drives even more lucrative rewards: Olympic gold spells sponsorship packages, administrative posts with sporting federations, and steady coaching work once athletes are no longer fit for international competition.
Under even the most cursory of examinations, the pre-eminence of self-interest in these Games becomes undeniable: every athlete, given the choice between doing it for us and doing it for themselves, is almost certainly doing it for themselves. In the Telegraph, try reading a pompous article by Steve Redgrave telling us that "should our British team succeed, they can achieve nothing less than the galvanising of a nation"; then watch how it is almost immediately deflated by the fact that, at the bottom of the page, it links to another article in the Telegraph which states matter-of-factly that "Team GB competitors who win gold will... have to cash in on their triumph after the Games".
I should point out, there is absolutely nothing wrong with this.
Unfortunately, however, this country – along with many other countries – doesn’t get behind individual achievement easily. As a consequence, the IOC is happy to turn a blind eye to ignorance of its mission, and let us think that the Olympics settles matters of national, rather than personal, importance. Surely enough, for the next two weeks every television channel in the country will count "our" medals won by "our" athletes (as possession of these alloyed pieces of coloured tin confers clear, unchallengeable and eternal superiority, pro rata, upon all members of the state collectives that win them).
But these medal wins do nothing to reduce the tax burden of the secretary at a GP surgery in Fulham today, shelter the homeless man sleeping rough in a tunnel by Marble Arch tonight or improve the life of child in care in Haringey tomorrow.
Despite this lack of utility to the common man, there is ample precedent to suggest he will not care. Because this is sport(!), and sport can marshal and command all manner of resources and loyalty for its own purposes while offering the vast majority of its adherents virtually nothing in return.
Take, for example, when Manchester City won the Premier League final: a hundred thousand people – count ‘em – turned out in the streets to toast their "valiant heroes." (No word on who was left with the bill for clean-up and police overtime, but I'd be willing to bet it was council taxpayers in Manchester.) That is but one example of very many particular cases. Throw national pride into that volatile mix, and the levels of false heroics and self-congratulatory, sanctimonious garbage skyrocket to heights that even Jacques Rogge’s golden chariot cannot reach.
Unfortunately, most of our fellow citizens are not going to see this for what it is, so it is here that the fightback of reason must begin. Falling on a grenade is heroic. Winning an athletic competition is not. Professional athletes are now so specialised, and the industry that produces them so well-established, that they are perhaps better viewed as highly-trained, but nonetheless ordinary people with highly particular skills carrying out their particular jobs, and if they are winning gold medals, they are people who are making some very intelligent career decisions.
I say without hesitation that I do not give a flying, swimming, running, javelin-throwing damn whether my or any other country comes home with zero medals, or one hundred. It is the individual, rather than the national, outcomes of Olympic training efforts which are worthy of celebration. To believe that we as a nation derive any benefit from their acquisition is useless, tribalistic, illiberal stupidity; the fact that for the past several years our political class has been knee-deep in this folly does not make it any less tribal, any less stupid, or any less useless.
We should recognise and respect human achievement without regard for the strip the winner happens to be wearing since that is where the true credit for victory belongs. I envision an ideal Olympics being like watching some mundane track meet in the middle of nowhere, where we didn't know any of the competitors' names, where television, billboards and newspapers hadn't been telling us that if we buy Adidas trainers we will turn into Flo-Jo: they run a race, good job to the winner for being the best, better luck next time for everyone else. After it’s over, go home, have dinner, and move on with our lives.
The outcome of this approach to the Olympics is that my religious zeal for London 2012 is roughly the same as everyone else's religious zeal for other, lesser-known athletic competitions; namely, it is non-existent. This is a far more reasonable and mature approach than that which has been adopted by the British government. Our "heroes," lest we forget, engage in individual competition all the time, none of which the media seems to call heroic -- for example, on a biennial basis in the European Athletic Championships (2006, Gothenburg; 2010, Barcelona; and 2012, most recently, in Helsinki). But (1) nobody apart from track and field buffs talk about the hero-rockstar-legends who changed the course of history in Gothenburg and (2) no multi-billion-pound infrastructure investments were made in Helsinki anytime recently.
This is because (1) none of us were paying any attention when they were running in circles in Gothenburg and (2) it was a track and field meet, for Christ's sake, not first contact with an alien civilization. It is perfectly possible to hold a track and field meet without spending a dime: you just set a time and a date for everyone to turn up, say "go," and time how long it takes them to go from A to B. Winner gets a ribbon. Piece of cake.
But somehow, some way, the Olympics are different, and when they came to England, they unveiled the Unholy Trinity of British Government in all its glory: ineptitude, inconvenience, and expense. None of which, in my opinion, is justifiable.
By now, of course, we are well past the point of no return. The press has already swallowed the false nationalist narrative, hook line and sinker, and most of us will, as surely as the sun rises over Newham in the morning, follow their lead and identify with these heroes doing battle on our behalf on the playing fields of the Gods. Perhaps this is the reason why the press, the government, and the IOC manage to get away with the nauseating imperiousness with which the games have been foisted upon us: although winning these medals will temporarily slake our thirst for collective post-imperial recognition, our irrational zeal for the home team has completely blinded us to the serious negative externalities of the Olympic debacle, and the fact that none of this actually needed to happen at all.
What Londoners are about to endure is without precedent in the history of this city. The New York Times makes light of our predicament, saying how "Londoners get to engage in their favourite sport - complaining", but the reality is actually pretty grim, especially if you work in the City or Canary Wharf, where one pound in ten of this country's income is generated. Much has been written of the Olympic rings appearing on the tarmac along the city's main thoroughfares which many people, cyclists and drivers, use to get to work and get around, chiefly via Park Lane and the Embankment.
For our New York readers, the equivalent would be shutting Fifth Avenue and the East River Drive. Millions of taxpayers' lives will be made measurably more unpleasant in a real and very tangible way for one and a half months as a consequence of what the British government has done, is doing, and will continue to do. And it is not some evil robot which will inflict this misery upon us it is a yet another group of living, breathing, thinking human beings representing all of this country's major political parties. Think about that when you've been stuck in traffic on Park Lane for two hours straight.
By now many of you will have noticed that the Olympics is eating people, too. By now no-one will have missed the overweight folks in pink and purple tracksuits with matching pink and purple satchels and pink and purple water bottle holders: these are temp employees and the volunteer corps who (in the case of the volunteers) have given up their free time (which must be ample if they do not have to be at work for a month) in exchange for tickets to the games that we, the working taxpayers, could not afford, were not able to obtain or simply could not justify leaving work to use.
Perhaps aware of the longstanding British cultural aversion against wearing a uniform unless one is a postman, policeman, clergyman or on-duty soldier, every time I see these volunteers they seem a little embarrassed, and are trying their level best to not engage with their surroundings, either by looking straight down at the ground or by chatting to other tracksuits, smoking cigarettes while loitering idly near London landmarks and Mayfair hotels. (Incidentally, I don't think the uniform is that bad. I had a one-piece skiing get-up just like it back in the ‘90s.)
Somewhat improbably, many can be found milling about at Canary Wharf. Over the course of the last two weeks, not one of them has been of any assistance to me or, as far as I can tell, to anybody else. I can't imagine how they might be.
With the exception of the Financial Times, London's print and broadcast media constitute little more than a claque; whether this is as a consequence of fear engendered by the Leveson Inquiry or simple laziness, I cannot tell. The Telegraph, arguably the only serious newspaper in the country after the FT, signalled for all to see that it too has surrendered to hype when it installed advertising all over the city that exhorted its readers to "follow every moment with our Olympic legends" through the Telegraph's iPad app.
The Telegraph’s deeds have matched its rhetoric; coverage of the London-based torch relay, the same one maligned by Dominic Lawson, received an entirely free pass. In case you missed it, the torch was delivered to London in grand style by a Royal Marine abseiling out of a Sea King helicopter over London Bridge.
But in the middle of the greatest recession in modern history and sovereign debt crises at home and abroad (even if the one at home is not yet officially admitted), nowhere did anyone mention the operating cost of a Sea King helicopter (£14,000 -- per hour, in an Olympics which is already five to ten times over budget). Even assuming that only one hour of flying time was involved (and this would seem conservative), look at your next payslip, and ask yourself how many months you would have to work to pay for that little caper on your own: 12 months? 18 months? More?
The security operation, too, is scandalous; not because, as one might think, the security firm which was contracted for the games at a staggering cost of £284 million couldn't deliver the goods, but because it was decided to deploy thousands of soldiers to make up the difference, so dire was the need, and so serious was the emergency.
I will leave it up to you to decide what it says about this great country that we were willing to deploy the army at great expense, carrying the most lethal weapons we have, to protect a sporting competition when our police forces were nowhere to be seen as our businesses were ransacked and our homes were burned.
As you drag yourself to work every day and hear Boris Johnson's harmonious voice on the tannoy, remember that you cannot Get Ahead of the Games: for two weeks there simply is no escape, only the inevitable passage of time will set you free. If you live in London, your key transport links will be closed off; your trains will be even more uncomfortable and overcrowded; your city, your government, and your day-to-day life will take a back seat to heroes without deeds, legends without songs, and events to which you couldn't get a seat, no matter how you tried.
What’s worse, once the Olympic Flame is extinguished and the music in Hyde Park fades to silence, you will be left holding the £24 billion tab.
These Olympics are emblematic of a century-long mistake known as social democracy, a form of government which arrogates to itself virtually limitless power to hold its entire population -- its taxpayers, its civil servants, those living, those recently dead and even those yet to be born – in complete and utter contempt.
There is now nothing we can do. The deed is done. So, for the next two weeks, enjoy, be merry; root for our British boys and girls. Take an overcrowded Jubilee Line train to Newham. Watch our promethean warrior heroes be delivered from life unto Avalon through the vigorous and liberal application of our plucky brand of uniquely British courage.
When the party ends, the stadium lies fallow for twenty-three hours a day and we are left behind with several decades of sovereign debt slavery, there must be a reckoning. We must hold those responsible for this debacle to account. We must rededicate ourselves to the cause of limited government; and not merely thinking about limited government, but making it happen by electing MPs who support the cause of limited government, and speaking out against the most outrageous excesses of the unfree, pork-barrel democracy we have had the misfortune to inherit.
We should start by ensuring that no British national government is allowed to pull a stunt like this ever again.
Review: Why Nations Fail: The Origins of Power, Prosperity, and Poverty
In the very beginning of the book the authors hint to the reader how it will be organized – through a series of historical case studies upon which they illustrate their theory of institutional change and the consequential success or failure of nations. It starts with the example of Nogales, a city on the US-Mexican border, which is split in half by a fence. One city, in the same geographical position, characterized by the same cultural upbringings, same population, same diseases, but one part three times richer, much healthier, safer, and with higher living standards. The crucial difference is the very border separating the two parts of the city depicting the different institutional settings within them.
The authors make a strong claim that this great divergence on a localized level had its roots in the very start of colonization of North and South America. As the Spaniards came to the Aztec, Mayan and Inca empires they had a single aim of conquering the indigenous population and extracting their wealth. By founding their settlements the colonizers designed a system that would coerce the indigenous people to work for them and extract resources while enriching only the small ruling Spanish elite. This made the Spanish Crown quite rich at the time, as massive amounts of gold and other resources flooded into the country.
The colonization strategy of the English was the same as of the Spaniards – extract the resources and force the indigenous population to work for the colonial elite, which would, along with the Crown, obtain maximum benefits from it. This strategy worked well in India and Africa, but it failed in North America. First of all, they were late. North America was less attractive and much scarcer in gold than South America. In addition, the Native Americans put up far greater resistance and more importantly didn’t allow themselves to become enslaved and forced into manual labour for the newcomers. It was up to the settlers to work themselves. At first they were coerced into working by the colony’s rulers but this strategy failed due to a range of possibilities for the coerced to escape to the Indians. As a result, the colony needed to create different institutions to create incentives for the settlers. With more personal freedom came demands for more political freedom. In fact, the authors claim that the historical prelude to the monumental 1774 US Constitution and the colonists’ fight for liberty was the formation of the General Assembly in colonial Jamestown in 1619.
It was these initial institutional differences manifested through the limitation of political power, democratic principles, and economic incentives that paved the different development paths of US and Mexico, generating the crucial difference between the two parts of the city of Nogales.
An intriguing case study approach analyzed through the lens of institutional formation is the framework used throughout the book. The emphasis is on how inclusive political institutions can lead to inclusive economic institutions which will lay the foundations of wealth creation and sustainable growth. The combination of inclusive political and economic institutions shapes the incentives needed for a society to prosper. If people have their wealth expropriated, they will lack the incentives to create or sustain it. They will fail to innovate and fail to achieve progress. People need an initial set of institutions to reduce uncertainty and maintain stability.
This initial set of inclusive economic institutions includes secure property rights, rule of law, public services and freedom to contract. The state is relied upon to provide all of these. It is the role of the state to impose law and order, enforce contracts and prevent theft and fraud. When the state fails to provide such a set of institutions it becomes extractive, where its main objective is to satisfy a small powerful elite (whether the ruler of the country, a set of rulers or prevalent interest groups).
Acemoglu and Robinson formulate their central hypothesis around the fact that a strong set of economic institutions which will guide incentives towards creating wealth can only be achieved through more political freedom. Political inclusiveness and the distribution of political power within a society are the key elements that will determine the success or the failure of nations.
The outcome of this insightful thesis originating from the works of Adam Smith can often depend on random historical events. They refer to these as the critical junctures of history that exploited the initial small institutional differences and led to diverging development paths of nations. One interesting example of a critical juncture that probably contributed to the divergence between Western and Eastern Europe was the bubonic plague, better known as the Black Death, in the 14th century. Another example is the aforementioned different colonization pattern in many countries, the most notable one being between North and South America.
In their pursuit of an explanation for the role of politics in development, the authors touch upon other dominant theories that have tried to explain poor growth and under-development. They stress three approaches: (1) the geographical position of the country (countries in the sub-tropical area), which blames exposure to rough climate, barren land and tropical diseases; (2) the cultural attribute, where the population is to be blamed for not being hard-working (less productive) due to their ethical, religious or cultural boundaries (a famous example here is Max Weber’s Protestant ethic argument); and (3) the ignorance of the country’s ruling elites, implying that if they had better economic advice, they would be able to emerge from poverty. They also touch upon the dual economy paradigm that blamed African underdevelopment on the co-existence of two sectors within an economy between which social mobility was almost impossible.
Each of these arguments is found faulty by the authors. The rule of a narrow elite that organizes the society for its own rent-extracting interest is a common trajectory every nation followed on its road to poverty. The differences between the two parts of Nogales, two Koreas, or East and West Germany cannot be explained by geography, culture, diseases or ignorance – it could only be explained by a different set of political institutions that resulted in different economic outcomes. As for the African dual economy paradigm, the dual economy was artificially created by the ruling (white) elite that maintained extractive political institutions.
The problem isn’t that poor nations remain poor because of outside (or inside) exploitation, economic ignorance or laziness of the population. It lies in the role of politics, and how the ruling elite will organize the country’s political and economic institutions. If political institutions are organized as extractive and concentrated in the hands of a narrow elite, then economic institutions will only serve the purpose of the ruling elites extracting the maximum wealth for themselves. If they are organized as inclusive, power being dispersed among the many rather than concentrated among the few, then this institutional environment will create incentives of inclusive economic institutions, where innovation and creative destruction will ensure the creation of sustainable economic growth and development. Becoming a rich nation necessitates the overthrow of the ruling elites and the distribution of power and political rights evenly within a society. The government has to become accountable and responsive to its people, who can then use this security and stability to advance on the economic opportunities available to them.
However, the authors do admit that growth can be achieved within a set of extractive political institutions. The elites can simply reallocate resources into temporary highly productive activities under their control (e.g. from agriculture to industry). But the problem is that this growth is unsustainable in the long run. When the economy runs out of steam, so will rapid growth and the country will first be exposed to an economic and ultimately to a political crisis. The example of the rapid growth of Soviet Russia illustrates this point. It wasn’t driven by innovation, but state control and when the foundations for growth were exhausted, nothing came to replace it. The authors predict the same thing happening to China. Even though China is different than Soviet Russia, as it deploys some inclusive economic institutions, the political elites still constrain creative destruction. They mention the example of a Chinese entrepreneur who wanted to compete with big, inefficient state-owned steel companies and ended up in prison as a result. The Chinese anti-entrepreneurship climate, censorship of the media, and technological growth based on adoption of technologies rather than innovation are all signals of an extractive political system in which growth is not sustainable. China can overcome this and reach sustainable growth if it manages to undergo a political reform that will introduce more individual and political freedom. Until then, they are destined to repeat the Soviet scenario.
***
The book develops as a fascinating storyline comprising of a multitude of vivid historical examples that support the central thesis of the authors. After identifying the main framework of the analysis in the first four chapters, it takes the reader on a journey through history featuring a number of famous historical and more recent stories of success and failure. This gives the reader an opportunity to see how politics can indeed play an important part in the development of a society.
We see the same historical pattern reoccurring in Venice and Ancient Rome, in Ethiopia and Mayan city-states, in Soviet Russia and Congo, in 18th century Spain, absolutist Austro-Hungary or tsarist Russia. The common characteristic that led them to failure was the extractiveness of their political institutions. Even if they did briefly experience rapid growth (such as the absolutist monarchies or Soviet Russia), this growth was temporary and unsustainable, unless a path towards inclusiveness followed. When Ancient Rome, Venice and the Mayan city-states had even partially inclusive institutions that offered the proper incentives for growth, they managed to experience it. However, when they switched to authoritarianism and usurpation of power by the elites, conflicts emerged and the downfall of their societies began. Inclusiveness was replaced by extractiveness and consequently development was reversed.
In England, something different happened. Whilst in other countries repression was the dominant type of social order, in England the demand for more property rights and a greater political voice set the stage for sustained growth and prosperity.
Creative destruction and technological innovation made people richer, led to a new distribution of wealth, and more importantly new distribution of power in the society. The elites, afraid of losing their privileges, opposed this process. They felt threatened and formed barriers to innovation. But in England, through political conflict, the rising wealth of merchants and manufactures was able to overcome this opposition and constrain the power of the sovereign, initiating the beginning of a new historical era.
This is precisely why the Industrial Revolution started in England, not anywhere else in the World. The Industrial Revolution developed on the trails of the Glorious Revolution. It was the importance of a broad coalition representing the people that succeeded. If there had not been such a broad coalition, one elite would have simply overtaken the other and continued with extractive institutions (as happened briefly during the dictatorship of Oliver Cromwell). Irreversible political change and the switch to inclusiveness transformed the economic incentives in the society and created enormous wealth and prosperity.
But not all countries followed this rapid development and not all countries embraced the benefits of the Industrial Revolution, some even for a long time. It is due to these defining moments of history (critical junctures) where the authors explain why all those countries that developed on the ruins of the Ottoman Empire tend to be relatively impoverished (provided that they are not oil exporters). The Ottoman Empire, instead of embracing change, felt threatened by it and sentenced its minions to another 200 years of extraction and poverty. The opposition to the elites in the Ottoman Empire never grew as strong as it did in England, which is why inclusive institutions never developed there. The same is true for a multitude of countries at the time, including Spain, Austro-Hungary, Russia or China.
Wherever those with political power felt threatened by technology and innovation, they prevented it, and by doing so they effectively prevented wealth creation and prosperity.
The summing-up of their analysis is through explaining the vicious and the virtuous cycles of prosperity. Whenever inclusive institutions are present, the virtuous cycle will create positive feedback loops that will prevent the elites overcoming them. It will make sure that inclusive institutions expand and become persistent. Similarly, in the case of extractive institutions vicious cycles will generate negative feedback loops that will prevent progress.
In order for the virtuous cycle to work the first precondition is to have pluralism, which will constitute the rule of law and lead to more inclusive economic institutions. Inclusive economic institutions will remove the need for extraction since those in power will gain little but lose a lot if engaged in a repression and constraining democracy. Finally, they also recognize the importance of free media to provide information on threats against inclusive institutions.
The virtuous cycle explains how the reforms of the political system in England or the US became irreversible, since those in power understood that any possible deviation would endanger their own position. The examples of British consolidation and its slow, contingent path to democracy in which the people gradually demanded and gradually received more rights; or the trust-busting in the US in the beginning of the 20th century; or the failed attempts of President Roosevelt to limit the power of the US Supreme Court illustrate this point.
Pluralism and the rule of law were critical conditions leading to the limits of political power that made the virtuous cycle possible in the US and Britain. And this was precisely why Fujimori’s Peru, Chavez’s Venezuela or Peron’s Argentina failed. They failed to create institutions to limit political power. These systems developed extractive institutions and generated a vicious cycle in which the ruling elite had no constraints on power and had great incentives for expropriation and wealth extraction. Even if this elite were to be overthrown by a revolution, the “iron law of oligarchy” implied that a new elite would simple replace the old one and continue in its extraction, sometimes even worse than under the old elite. This is why the authors are somewhat sceptical of the ability of the Arab Spring to produce the necessary shift towards inclusiveness.
Once again the authors convince the reader in the mechanism of the negative feedback loop and the iron law of oligarchy through a multitude of cases ranging from Sierra Leone, Guatemala, Ethiopia, Zimbabwe, Uzbekistan, Columbia, Argentina, Egypt and even slavery in the US South. However, the vicious cycle in the US South was easier to break due to the existence of inclusive institutions on the federal level. The Civil Rights Movement generated equality in the South and paved the way for economic growth.
Another good example of “breaking the mould” is Botswana, where the natural resource course didn’t lead to extraction from colonists or usurpation of power over who gets to control resource extraction and enrich upon it. They have managed to seize their critical juncture – postcolonial independence – and used it to develop inclusive institutions.
The authors refrain from trying to write a recipe for development since there is no such thing. Their theory based on critical junctures and specific historical paths loses predictive power since it is hard to tell which countries could break the mould anytime soon. The theory can say which countries are likely to stay poor for a long time but it cannot really answer the question on what will follow after events like the Arab Spring. A range of factors will decide whether the Arab countries undergo a gradual path towards inclusiveness or whether the iron rule of oligarchy prevails.
Finally, prosperity cannot be engineered by international institutions with a recipe for reform or foreign aid; it has to come from empowerment to the people and their inclusiveness in the political process. Once a broad coalition is formed this will enable the inclusive institutions to persist and the political reforms to become irreversible. One can conclude that based on this approach, inclusive economic and political institutions develop spontaneously, while extractive institutions are imposed by outside coercion. The road to prosperity is thus always achieved through more political, individual and economic freedom.
The only part the authors did not cover in more detail is what happens after political and economic inclusiveness are attained, when certain elites or organized interest groups try to obtain political support to serve their own self-interest. An answer from the book would probably be that this scenario falls out of the general definition of inclusive political institutions, where the media is (partially) captured and where narrow self-interests can curtail the system in order to extract certain benefit. It is here that their framework could be extended, but the already large scope and size of the book prevent the authors from engaging so deeply into the subject.
The framework used in the book is based on a rigorous fifteen-year research process conducted by the authors and examined previously in some of their earlier, more analytical work. Regular readers of their work will recognize many of the ideas on the consolidation of democracies and political transitions coming from their 2006 book, Origins of Dictatorships and Democracy, along with many academic articles. Why Nations Fail builds on these findings thus providing the crowning achievement in their political economy theory. It is a recommended read to all professions and anyone interested in finding out why some nations are rich while others are poor.
Even though the book lacks academic rigour in supporting the theory and proving the causality of certain events and their further manifestation, such virtues were probably not the authors’ objectives.
For anyone interested in the academic proofs behind certain historical events, I recommend their earlier work in which the analytical framework can be thoroughly analyzed. This book had different goals. Its emphasis on historical case studies to make it more interesting to the general reader succeeds in transferring the idea to all those outside the economic and political science profession. They have managed to summarize their theory and make the case for institutional change, while presenting it in an understandable, yet brilliant way for all those who are not economists. That alone marks the book as a success.
This review is forthcoming to be published at Financial Theory and Practice, a peer-reviewed journal published by the Croatian Institute of Public Finance.