Bitcoin and the English legal system, part I
When Mt. Gox went offline last week, taking half a billion dollars’ worth of bitcoin with it, many of the cryptocurrency’s public advocates – some of whom lost “life-changing” sums – moved swiftly to its defence. Erik Voorhees’ rallying cry, in particular, was a standout piece of Austrian rhetoric, warning against the near-universal social-democratic impulse to “cry out for Leviathan’s intercession” to remedy every petty inequity and misfortune.
This reaction should not be a surprise. Many early adopters, and practically all bitcoin users I know personally, are libertarians (Roger Ver, in his video-recorded post-Gox appeal for calm, can even be seen wearing a voluntaryist lapel pin). Many are mathematicians; few are lawyers. From this outside perspective, I’ve therefore arrived at a conclusion with which most of them will disagree.
To achieve its full potential, cryptocurrency needs a legal system in the traditional sense. It therefore needs a state.*
This view is unpopular. “Regulators,” writes Voorhees, “are men too, and wield the very same evil and incompetence” that destroyed Mt. Gox, “only enshrined in an authority from which it can wreak amplified and far more insidious destruction. Let us not retreat from our rising platform,” he cries, “only to cower back underneath the deranged machinations of Leviathan.” The alternative, in the purist view, is to decentralise everything – financial institutions, the courts, the state – and replace them with mechanisms governed by voluntary consensus. This means new rules, new judges, new modes of enforcement, and indeed a new legal order mediated entirely by the blockchain.
Though this solution makes sense to my inner libertarian, and could function well in limited applications, it makes no sense to my inner commercial lawyer. Despite its day-to-day derangement, Leviathan’s rules are extremely well-suited – and in my view essential – to commerce.** We would be foolish to not employ them. As I will explore in the coming months, wholesale decentralisation, though ideal in principle, will in practice cause many more problems than it solves: changed circumstances and market demand will not countenance a payment, asset transfer and contract mediation system which lies entirely beyond legal control. Monday’s HMRC brief on the tax treatment of bitcoin is a case in point.
First, the bad news: making money in bitcoin has tax consequences.
Before recoiling in horror, we should consider the improvement this position represents. Just last month, HMRC mooted classifying bitcoin as a voucher, in respect of which VAT on any transfer would be charged at 20%. This, as any user of cryptocurrency will know, diverges widely from how cryptocurrency is actually used. By contrast, the March 3rd guidance accords it numerous VAT exemptions, and treats profits and losses on trading as being subject to income, capital gains or corporation tax (as applicable) in such a way as to render it – in the words of the International Business Times – “treated almost identically to other currencies, in terms of taxation.”
I don’t propose to go into the guidance note in detail here, save to say that I think HMRC qua regulator is on the right track.*** But I will also say HMRC’s work is far from complete. Though its assessment shows the tax authorities have acquired a basic understanding of how the technology works, the guidance falls well short of constituting a comprehensive framework for its taxation across cryptocurrency’s existing applications.****
Building that framework requires dialogue. Sympathise with Voorhees though I may, the alternative between his position and the pragmatic one is stark; had we followed the purists, HMRC might still see bitcoins as a gift certificate rather than the dynamic and multifaceted technology it actually is. What actually happened was substantial engagement between industry and the government – “months of meetings” – which produced a highly favourable result for cryptocurrency.
Long may it continue. Whether we like it or not, people and corporations have long paid taxes and obeyed the law, irrespective of the merits, because the cost of not doing so (reputationally or otherwise) is prohibitive. Legal architecture is therefore a prerequisite to adoption, not an impediment. The development of new, legally-minded protocols will allow the cryptocurrency community to capture the attention and investment of existing market players, including financial institutions (who would benefit by using cryptoledgers for, e.g., automation of research and quantitative labour, or structuring smart derivatives and smart securitisations) and governments.
New blockchains, so designed, would offer the efficiency savings of the technology while possibly mitigating its significant deficits (e.g., allowing the reversal of fraud, and inclusion of consumer protection, where used to transfer title by way of proplet a la Nick Szabo). What such a blockchain loses in anonymity and irreversibility, it gains in accountability and legal certainty, the kind of stability cryptocurrency desperately needs. And none of this prevents the technology from being used extra-legally or in achieving its original, and in effect progressively redistributive, aims of reducing transaction costs on (e.g.) remittances, providing banking for the unbanked, acting as a hedge against inflation or even in applications which have not been predicted, or only foreseen by a few.*****
Rejecting the trusted third party and decentralisation dogmatism of Voorhees and others is, however, a necessary first step. We shouldn’t fear legalisation of this technology.
There is nothing to lose and practically everything to gain.
*Bear with me here. Same team, right?
**English law is already competitive for financial applications with its concept of equity, and in particular the trust, which continental jurisdictions lack. Increasing the UK’s competitiveness in this regard is to be encouraged.
***If you have tax questions this blogpost is not an adequate summary. You should hire a lawyer.
****HMRC still has a ton of work to do. Issues include:
(1) blockchain, transaction and contract situs and implications;
(2) how units of currency awarded by way of transaction fees (once a currency is fully mined) are to be treated for tax purposes;
(3) accounting for trading losses and gains in respect of trades made solely between cryptocurrencies (i.e. no element of fiat);
(4) determining what sort of trading is of an income or capital nature, particularly in respect of cryptocurrencies like Ethereum where units will be used not only as units of currency, but primarily to distribute, manage and settle smart contract applications;
(5) whether a consumer purchase made in cryptocurrency constitutes a chargeable disposal or realisation of profit;
(6) how cryptocurrency is taxable as part of a decedent’s estate;
(7) how, if at all, DAOs [ http://blog.ethereum.org/2014/03/01/daos-are-not-scary-part-2-reducing-barriers/ ] are to be treated as being sited, incorporated, or taxed, in which case all of the above need to be asked again (with the exception of (6)).
*****Zachary Caceres of the Startup Cities Institute has proposed using cryptoledgers – through a program called MuniBit – to improve transparency of government finances in the developing world. A developed private sector cryptoledger infrastructure in the West would, due to the increased availability of software tools and trained manpower, make such a program considerably more straightforward to implement.
Commercial lawyer and ASI Fellow Preston J. Byrne explains why, despite the cries of his inner libertarian, more government involvement in Bitcoin would be a step forward for the cryptocurrency-cum-payment-system, rather than its end.
Scottish rates aren't fair
Introduction
Although the UK as a whole is at last escaping recession, there is great regional disparity in the growth figures. Scotland has performed relatively well through all of this, but despite strong growth in some sectors the recovery remains uncertain. It is clear that the current level of poundage in Scotland, though no higher than the level in England, has forced many firms to close, and hampered the ability of many other firms to save or to invest in restructuring the supply side of their business. A large number of empty commercial properties have become involved in a rates trap, whereby the revenue gain from returning them to the commercial market would be less than the amount they currently earn from any long term lease they may be under while sitting empty. The scheduled 5.6% rates increase from the first of April 2013, will exacerbate the problem, imposing an effectively arbitrary burden on private firms. Although the Scottish Government has determined to delay any reappraisal of business rates until 2017, it is vital that proper consideration is given to which reforms, if any, should be implemented. The substantive area for debate, however, remains the structure of local government finance.
Property taxation as a whole is essentially a Medieval and Victorian solution to the problem of local government finance, and is perhaps no longer appropriate given the increased demands on public spending and the changed business environment. Additionally, it is unclear whether devolving powers over the level of taxation to local government would encourage fiscal responsibility or instead permit a short term binge of ‘tax and spend’ that would go unpunished at the ballot box. While local accountability and local control are at the heart of our philosophy, this principle is secondary to our desire for low taxation as a means of maximising personal freedom. It is impossible to argue, from a truly liberal perspective, that semi-local socialist fiefdoms should be allowed to impose whatever burden they chose on taxpayers, or that this form of local control should trump control by the most local of all agents: the individual themselves.
Why Abolish Non-Domestic Rates?
The desolation of the Scottish high street is a social as well as economic tragedy. Like council tax, business rates are levied on the basis of property value and not income. As a result, falls in consumer spending and profitability have no impact on the tax status of commercial properties. As town centre businesses operate the most valuable properties in proportion to their incomes, their share of the burden of rates is disproportionally great. The price of maintaining a presence inside towns and cities can become discouragingly high, leading to closures of ordinarily profitably stores. This exodus from the central business district further reduces the appeal of surviving businesses, leading almost inevitably to further closures and further unemployment. It is unsurprising that a sense of ennui and malaise should set in amongst local residents experiencing this process.
Property taxation requires regular revaluations of commercial property in order to accurately assess a fair tax bill. These valuations, however, are costly in both political and financial terms and so are routinely postponed. Consequently, long term shifts in business activity and property value go unnoticed by the assessors, further distorting the link between ability to pay and the actual rates payment. A similar problem has emerged with the council tax system, which bases its charges on the domestic property market of 1991. The subsequent boom in property asset values was uneven across the country, though particular pronounced in the south east of England, London and Aberdeen. Homes in these cities are charged on the basis of valuations they have long since superseded. Businesses and homes located in beyond the areas that most immediately benefited from the credit bubble might well wonder why the tax system should deny them a competitive advantage through lower rates bills.
The retail letting market in Scotland has moved in the direction of long term leases to chain stores. These leases are often high value, and thus represent a sustainable means of paying the rates. As consumer demand falls however, and firms seek to consolidate their business, many of these stores will be closed even while the lease is maintained. The high level of poundage prevents long term rental agencies from returning their empty properties to the market at lower rental values. The present system encourages these landlords to keep existing leases in place in order to raise sufficient sums to pay rates, even if that property remains vacant. These leases remain unbroken as rental agencies are unable to find new customers for their properties, as prospective business are both unable and unwilling to pay the overhead cost of rates. The business demand for property in recession is all too often depressed bellow the fixed costs of rates, and as with all interference with natural market pricing, business rates suppress the latent urge to regenerate empty properties. While there are reliefs offered to reduce the rates trap, these have been recently curbed from a 50% reduction to a new regime whereby firms are liable for a full 90% of the charge. CBI Scotland have rightly labelled this “a tax on distress” as it hampers the efforts of new enterprises to regenerate business areas that been made vacant.
Property taxes are out of step with modern business environments. Large profits may be made in industries with a lower rateable incidence than less profitable businesses that are still dependent operating out of rateable properties. The total effect of NDR skews the market and places a regressive burden on many key industries. This economic distortion not only blunts growth, but harms the social fabric by penalising small and traditional businesses. While the promotion of low taxation is vital for the creation of jobs and wealth, market distortions created through an uneven tax base and a complex system of reliefs are not to be welcomed. As the current system of reliefs is complex; the administrative cost to business in determining which reliefs are available is considerable. In addition, taxpayers are required to fund the administrative cost to the Scottish Government and unitary authorities. When spoken to, few council workers in either finance or business rates departments seemed to understand even the basic outline of how business rates are collected; a finding which confirms the present inadequacies in the structure of local government finance. Equally, the tax advantage for charities damages the ability of for-profit business to compete on the high-street. This can lead to high-streets being stripped of all shops bar those who operate with charitable status. The current patchwork of reliefs distorts the market by favouring certain industries for political reasons. The Renewable Energy Relief, for instance, encourages the construction of inefficient forms of renewable power at the expense of potentially cheaper alternatives. This relief benefits the already wealthy over smaller businesses, which are less able to afford entry into the renewables market. The cost of multiple reliefs comes at the expense of lower marginal rates of poundage which would be of benefit to a greater number of businesses. While the Scottish Government may wish to boast that the reliefs programme is more generous than equivalent schemes in England, this claim has to be balanced against the reality that this political gesture comes with the opportunity cost of fairer taxes for everyone.
Conversely, any desire for reform must be measured against the political and financial cost of restructuring the tax system. Tax simplification can easily be labelled a tax increase by political opponents, as in the case of the “pasty tax” and the “granny tax” following the 2012 budget. The desire for reform of the operation of reliefs must be measured against considerations that rural areas and selected small businesses benefit from targeted reliefs, and that challenging these business perks, if handled indelicately, could be politically difficult. Many of these businesses are vital community hubs; closure of these businesses due to higher rates bills would have considerable social implications. Any reforms would have to be piloted with considerable care in order to ensure that they carry public opinion with them. The political dimensions of reform will most palatable if marketed as a means of saving jobs and high streets from continued decline, emphasising the positive role for economic freedom in revitalising Scotland’s excluded towns. Policy implementers face a further dilemma, as once there is common agreement on the need to abolish rates, the issue of with what should they be replaced emerges. As no option offers an immediate panacea for growth and revenue, the decision as to which policy option should be selected is difficult indeed.
The Next Steps Forward: Options for reform
The rates system is unfair, and illiberal. Non-domestic rates should be replaced with an alternative form of business taxation based on income, land value or total sales. These alternatives could potentially use existing information such as VAT returns or corporation tax receipts to calculate the local tax due. This should ideally save additional administration costs that would be necessitated by taxing business on some new basis. It might be possible to abolish business rates altogether if a proportional increase was made to the headline rate of corporation tax or significant cuts were made to public spending. This could further save on administration costs and the dilemma of double taxation of income. Unfortunately, this model would eliminate the possibility of local control and accountability.
Abolition with an Increase in Corporation Tax:
Such a model provides the greatest administrative savings for both private and public sectors. Moreover, the corporate tax model is more responsive to market forces than business rates. Resultantly, businesses would be more able to absorb economic shocks, while providing a proportionally fairer rate of tax for the high street. Conversely, increases in headline rates of corporation tax may discourage business investment in Scotland, putting certain Scottish businesses at a competitive disadvantage when compared to other EU and UK companies. Further, this option jars with the present localism agenda, taking little account of regional variations or preferences. Regrettably, tax avoidance by major firms might well discredit this form of taxation, as small and medium sized enterprises perceive themselves to be paying an unfair proportion of the overall tax take. The greatest concern by far remains that firms might relocate elsewhere or decline to invest further in any Scottish centres of industry. Scotland’s market share of UK wide FDI employment has risen in recent years to 16% of the UK total, with 30% of this investment directed at manufacturing. Scotland is therefore highly dependent of foreign direct investment; any shift in investment behaviour away from manufacturing in Scotland would be harmful Scottish employment and prestige. It might be possible abolish rates outright without raising taxes, but only if the Scottish Government or 32 local authorities were prepared to find £2.252 billion in savings, which would cover the tax take for 2011-12. While public spending at national and local levels remains wasteful, this reduction in would still be a considerable undertaking. There is currently little appetite in Scotland for further reductions in public expenditure, beyond the still popular reductions in welfare spending being pursued at Westminster. This option is equally impractical and sadly must be dismissed at the present time.
Business Income Tax
BIT shares in many of the advantages of the previous option; however, it could additionally be altered in line with local decision making. Despite these advantages, intelligent solutions would have to be found to avoid the problems of double taxation of the same income at national and local level. Furthermore, taxes levied on profits are relatively easy to avoid and evade. Tax avoidance not only robs government of revenue, but is unfair to businesses that pay the intended amount. BIT could prove to be distortionary, favouring large companies who are more readily able to advantage of loopholes in tax policy. As a local tax however, it would remove the need for raising the marginal level of nationwide taxes. Further, it might induce a culture shift in local authorities, as they are weaned off dependency on block grants. Central grants encourage a statist mind set, by creating a political pressure for ever more spending that seems, at least to local electors, to be ‘free’. When councils are required to raise their own revenues, incentives emerge to be efficient with their resources in order to tax their residents less.
Land Value Tax
Although LVT is essentially a property tax, it is levied on the value of the site, and not the capital value of the property built over it. Consequently, the tax penalty for improvements is removed. Taxes, when levied on income, naturally discourage productive enterprise; a land value tax by contrast punishes economic inactivity. Beyond the economic impact of such a reform, there may also be a resulting change in values. The philosophical underpinnings of LVT are largely conservative, valuing hard work and individual enterprise in the tax code. Though it can be postulated that the tax system should be morally neutral, these are undoubtedly positive behaviours that are essential for the functioning of a truly liberal society. As this is reform would represent a tax reduction and not a direct subsidy, its moral favouritism partly justified. The practical points of implementation however, may prove more difficult. It is incoherent to imagine how the value of a site can be considered as being distinct from the improvements made around it; in essence all property taxes have to factor in the capital value of the property being taxed. It would be absurd to assert that the values of sites in commercial city areas are worth equivalent sums to sites in deprived or rural areas. Therefore, implicit in LVT is a further burden on prosperous or commercially viable business sites which are necessarily more valuable. Certain industries, such as agriculture are land intensive, and might be rendered unviable by this shift in taxation. Nor is it clear that once taken out of productive use these sites would be returned to economic activity. Such pressure on rural areas could result in land having to be sold for development, harming green belt or rural areas. It is doubtful whether LVT would aid town centre regeneration, as non-domestic rates already penalise the owners of vacant properties, containing congruent incentives to maximise profit over the value of property. It is the long term lease arrangements in combination with high fiscal overheads that prevents the return to commercial use, and these problems could not be ameliorated by this selected model of taxation. Indeed, as property taxes as a whole discourage landowners from letting properties to new owners as the rental income is often lower than fixed sum they pay in rates; this problem may well be aggravated by a land value tax. Moreover, the policy would require routine revaluations which are politically treacherous. Without these revaluations however, accurate taxation of land would be impossible. LVT would prove a politically and economically disruptive policy that suffers too many of the faults of NDR to be worth the cost of reform.
Local Sales Tax
A local sales tax could be modelled on, and take advantage of the existing system for calculating and collecting VAT. It should therefore have only a minimal impact in terms of business administration costs. VAT contains effective anti-avoidance measures, by compensating businesses for tax already paid. As such, businesses have an incentive declare their full liability. By comparing LST returns against VAT returns, local finance departments could be relatively certain that they were being paid the full sum due. Unlike VAT, it would be possible to operate LST without repaying firms for the tax already paid, reducing further any manipulation of the tax system by predator firms. The standard VAT exemptions could broadly be maintained, including the threshold for payment, this would effectively act as an allowance for small and rural businesses. Sales taxes do not penalise either work or capital accumulation, having the advantage of being the most economically efficient method of raising revenue. In the long run, this will provide for higher growth rates and employment. As income and capital taxes reduce the ability of companies to restructure their production, they greatly slow the ability of an economy to recover from an economic recession. Unlike taxes on business, sales taxes are more readily noticed by the public; as a consequence this option best supports local accountability.
Why Localism?
Devolving power over local government finances is usually met with only lukewarm support. In Scotland, prominent business groups, such as the CBI have opposed it as a measure of reform. As with the community charge, there is a risk that centre-left authorities, of which there are many in Scotland, raise spending in the run up to the introduction of the new tax. The resulting tax levied on businesses would be unexpectedly high, with the political fallout damaging the central rather than local government. This could result in the whole package of reforms being abandoned, with damaging consequences for Scotland’s high street. If voters do not change their vote according to the actual policies of their council, then the devolutionist agenda will have failed to provide the keystone of accountability. These problems could potentially be resolved by introducing a nationwide cap on the level of poundage. Rate capping is an established policy in Scotland, having been applied to domestic rates through-out the 1980s. This would prevent local authorities from raising their charges above a certain amount; ensuring individuals would be protected from irresponsible behaviour by certain authorities. A further measure of mandatory spending restraint during the transition period may also be necessary in order to avoid opportunist increases in taxation justified by higher spending.
By contrast, there is also great opportunity for certain local authorities to pursue measures to increase our freedom from taxation, as councils compete to attract businesses to their area. Not only would tax policy be changed, but additionally the other policies of local authorities towards businesses and consumers. Transport and parking present major problems for town centre shoppers, often these difficulties are the result of a local decision that was made regardless of the impact it might have on the business community. With greater financial dependence on these same businesses, it will be in the interests of ever council to ensure that local enterprises continue to flourish. Simultaneously, the dependence on central authority will be reduced. With the reduction in financial powers over local authorities, these bodies will be free to innovate with new methods of providing public services. Scotland lags far behind Europe and the UK in the structure of its public bodies, freedom to change will at least provide a certain impetus to reform in the interests of higher quality.
The pooling of resources nationwide is a palpably unfair policy. The popularity of localism must be that money raised in one area should be spent in that same area. Major cities such as Edinburgh and Aberdeen, and rural authorities such as Perth and Kinross lose millions of pounds in revenue to both the Scottish Government and to spendthrift neighbours. This is partly concealed in the official figures which show revenue collected by local authorities gross with any public utility revenues they may collect from other authorities. This method of calculating the tax take by local authority is used for Fife; South Lanarkshire; Highland; Renfrewshire; Falkirk; and West Dunbartonshire. In the case of South Lanarkshire, when revenues are collected net of public undertakings, an almost balanced account is revealed to include a shortfall of £153 for the financial year 2011/12 rising to £165 million in 2012/13. This is a deficit that must be paid for by the hard-pressed rate payers in other authorities. While this generous donation is coerced from other councils, net recipient authorities will make little attempt to be prudent with their spending. When this fact is fully known, residents cheated of revenues by nationwide pooling of resources will recognise the need for powers and resources to be devolved.
Final thoughts
It seems clear that the best interests of Scotland demand reform of business rates. That power should be devolved is a vital part of the process of transforming the culture of Scottish political life; centred on the principle that power should be held closest to the people that it affects. Local authorities have endured decades in which there has been an erosion of their powers and responsibilities. It is no coincidence that as the size and impotence of local government has grown they have seemed ever more distant and less able to govern. Restoring the place of local government in Scotland is predicated on greater financial independence and freedom to respond to diverse local social and business environments. It may be possible to avoid the pain of a new tax if business rates are retained but with significant alterations to their structure. If property taxation is to be implemented, it must be coordinated with real market conditions and values rather than the results of long redundant revaluation reports. Moreover, any system of reliefs must be considerate of the impact that such policies have in disrupting the overall market. The renewables subsidy, which offers discounts of up to 100% off rates, must be discarded, and many other rates amalgamated so as to offer a clearer picture of how much firms really owe. Yet ultimately, this patchwork solution to local government finance will never be as satisfactory as the abolition of rates. Of the replacement options, a local sales tax is preferable to any local corporation tax. Sales taxes carry less of a fiscal deadweight to private enterprise, and are therefore more likely to promote the values that are necessary for success. Moreover, a sales tax linked to VAT returns will be more likely to reduce avoidance, ensuring both a more equitable environment for firms that do pay the amount due and maximum returns for the community. The level of sales tax would be held down by the Scottish Government nationally, which would ensure investors and foreign business could be guaranteed a reasonable tax climate, while also allowing prudent authorities to do yet more to protect town centre shops. Scotland’s towns and small cities have for too long been held back by the heavy burden of business taxes, tax freedom will allow for local renewal and a release of Scotland’s enterprising and creative potential. It is in this spirit that I consider reform of rates an urgent national priority.
Technology, Privacy and Innovation in 2014
One thing clear from Fast Company's list is that 2014 will bring a continued increase in the volume and depth of the personal data we create. Things like Google Glass, the ‘quantified self’, hyperpersonalised online experiences and the interconnectivity of the Internet of Things all create new reasons and mechanisms for data capture. This in turn increases the value of our data to ourselves, the companies with access to it and, in some situations, the state.
However, the article also predicts that 2014 will see increasing concerns over cyber-privacy and a movement towards greater digital anonymity. Users will increasingly chose to control their own data and how this is profited from, whilst we will begin to discover the joy of ‘disconnecting’ from the digital world and see the creation of intentional blackspots.
The fact that we seem to be embracing deeper technological integration yet simultaneously finding ways to mitigate and avoid its consequences is certainly interesting. Does this show that we’ve raced forward too fast and are trying to claw back a space we’re realising we’ve lost? It’s perhaps possible that this is the case, but far from giving us cause for concern the two-track path we’re seeing shows the ability of consumers and the tech sector to adapt over time, and in turn gives some hints on the optimal tech policy.
Reservations about an increasingly digitized and tech-heavy world are common, be it concerns over ‘hyper-stimulation’, the aggressive monetization of our digital footprint or wide-scale data collection and its abuse by unscrupulous firms and governments. Concerns often partner with conservatism; a desire to slow down the pace of technological rollout and impose prior restrictions on how things may be used. More often then not, government regulations and restrictions are cited as the way to hold a check on technology and keep us safe.
For example, Google's announcement to purchase the home thermostat company Nest was met with calls for a "much-needed conversation about data privacy and security for the internet of things". However, despite the fact this conversation hasn’t actually taken place yet, the same article expresses dismay and concern that the US government has been reluctant to legislate in this fledgling area.
Clearly, security breaches and the abuse of sensitive information are unwanted, and the more data collected the larger a slip-up could be. However, as Adam Thierer points out “conjectural fears and hypothetical harms should not drive regulation”.
Even when a problem can be identified, it’s unlikely that a committee of concerned yet under-informed policy makers are best placed to deal with it. A case in point is the EU’s Privacy Directive, the progress of which has been continually stalled by conflicting interests and general confusion. Moreover the pace of government action often runs way behind business and societal developments, and policies forged to address a pressing issue today may be redundant in five years’ time.
Worse still, restrictions dampen innovation and risk choking off the next big breakthrough – clearly advances are less likely to come about if we can’t use our resources creatively. This is particularly true in fast-moving and dynamic technology sectors. It’s hard to imagine the success of the internet if companies and experiments had been subject to governmental approval and top-down control.
Ultimately, however, we should be reluctant to adopt state-imposed ‘solutions’ to technological problems is because the market is actually incredibly good at dealing with these issues itself.
This is exactly what the two sides to 2014’s tech trends show. 2013 gave us reasons to be more wary about what we give away about ourselves & put online – and developers have taken note. If we feel at the mercy of data-sucking giants we can begin to avoid them. As the public tires of Facebook, alternative social networks centred upon privacy and control continue to emerge. Hate search engines knowing what you’re looking for? Try out DuckDuckGo . Want greater control over your data? Look out for indiePhone and OS. This new wave of open-source and privacy-conscious technologies is marked by an increasingly sleek user experience as it moves out of the realm of geeks and into the mainstream.
Of course, not everybody will care about these things, and neither should they have to. The beauty of a world where experimentation is encouraged is that people can pick and choose what things (anonymity, relevant ads, seamlessly connected devices and so forth) are important to them, and make their tech usage decisions accordingly. In contrast, government restrictions impose a cost on the whole of society and assume that we hold the same preferences and level of risk aversion. When faced with new dimensions to questions like ‘How should companies use my data?’ and ‘Is it wise to let technology to do x?’, we’re more likely to find answers we’re happy with through personal experimentation and adaption than taking the word of interest groups and politicians.
We might get things wrong along the way and maybe even double-back on ourselves, but its clear that so long as we continue to innovate, we’re likely to solve our own problems and satisfy a range of preferences.
Small firms and the EU: Curate's Exports
Only those firms who export to other parts of the EU should have to comply with EU regulations or so says Business for Britain (Daily Mail, 18th January). Business for Britain claims that as 95% of UK firms do not trade with the rest of the EU, £7.5bn. could be saved for the UK. The knee-jerks in response were what could be expected from those pro and sceptical of the EU. The proposal has had little considered analysis.
Business for Britain has re-ignited the debate about exempting small firms from most regulation. Brussels has accepted this in principle but has done little or nothing about it. Briefly the arguments are: • As a percent of turnover, the cost of regulation is far higher for small than large firms. This is unfair and distorts the market. • Regulation is a barrier to entry and therefore reduces competition. Start-ups in a market are typically small and require a low regulatory threshold to facilitate entry. • Small companies are more regulated, in effect, by market competition than their oligopolist big brothers and therefore require less legal regulation.
The Business for Britain proposal is therefore welcome insofar as it brings pressure for the relief on small businesses.
On the other hand, their proposal is flawed in the following respects;
• Having a single market across the EU, albeit with standard reliefs for small firms, is such a fundamental principle of the EU that there is no chance Brussels, or the EU Court of Justice, would tolerate these concessions for domestic firms. It would give domestic firms competitive advantage over importers from other EU member states.
• Business for Britain expect that other member states would reciprocate and that Brussels should therefore accept that the arrangements were even-handed. However allowing all member states to make up their own rules for domestic businesses would put UK exporters, or those doing business in other member states, at a competitive disadvantage. Since the rest of the EU is a great deal bigger than the UK, the net effect would be negative for the UK.
• The UK economy desperately needs more exports and overseas trade, notably in the EU. Having to step up, as Business for Britain suggest, from no EU regulations to implementing them all the minute one sends a box to Calais would be a major disincentive to overseas trade. One of the EU’s great successes has been to make EU exports easy. It would be a mistake to reverse that.
• A single market is defined by having a single set of regulations. The EU is slowly, too slowly, moving in that direction. Yet the last 20 years have seen far more UK business regulations than we have endured from Brussels. Whitehall is happy to fan the flames towards Brussels but the fact of the matter is that all UK business regulation is “gold plate”. I am not referring to the relatively trivial matter of adding to EU Directives but to the much bigger matter of having a huge number of UK regulations in addition to the EU ones.
• In a single market, if the UK needs a regulation, then so does the rest of the EU. If the rest of the EU does not require a regulation, then nor does the UK. Yes, we should jettison much EU regulation but that needs negotiation. Dumping UK business regulation does not. A major reason why Brussels rejects pleas for deregulation is that Whitehall sets a bad example and then blames Brussels. We need to put our own house in order first.
• It has been suggested that other large countries, such as the USA and China, are single markets which nonetheless have separate regulations in separate states. Of course there are shades of grey in all this but the USA and China, and other large markets, are not single markets. In the USA, for example, it is illegal to trade alcoholic products across state borders. Each state is its own market. The low regulation single market may be an impossible ideal but it is a clear goal towards which we should push.
• The UK is unpopular within the EU family not least because it is always demanding concessions for itself without regard for the community as a whole. The Foreign Office and government ministers play to UK media headlines with calls for red lines and such like. This may get a good UK press in the short term but it reduces Britain’s standing in the eyes of others. It is poor EU negotiation. The French and the Germans get their own way, to a great extent, by framing their arguments as being good for the EU. The more the issue is really for their sole advantage, the more they stress the EU perspective. The only significant UK negotiating successes have been Thatcher’s Rebate and Major’s opt-out of the Social Chapter. Unsurprisingly both were resented and Blair handed most of them back without any offsetting UK benefits. In presenting their case as an advantage for the UK, Business for Britain compromises Britain’s overall negotiating position.
• The Common Market is what the British public signed up for. Prime Ministers Heath and Wilson knew perfectly well that the fine print included social and political integration but most of us only cottoned on many years later. We should now do all we can to promote the benefits of the Common Market for the EU as a whole to our fellow member states. We are not alone in our concerns about political and social standardisation but we should accentuate the good rather than attack the dubious.
The Business for Britain are right to put the spotlight on regulatory relief for small businesses and it would be good to see that issue taken forward.
The Universal Credit can still improve Britain's welfare
Clearly, responding to the challenges posed by 21st Century welfare is not as simple as throwing more money at the problems to make them go away. With hundreds of thousands of people failing to claim benefits that they are entitled to, any reform must aim to reduce the complexity of the claiming benefits for eligible individuals, whilst increasing work incentives. Ensuring that our welfare system is simple to use for those that need to is an important step on the road to raising the incomes of the less well off to a reasonable standard.
Sources: Office for National Statistics/HBAI statistics from Department for Work and Pensions
It is these goals of simplicity and increasing work incentives that inform Universal Credit (UC), which first came to prominence in Iain Duncan Smith’s exposition of the scheme in a speech to the Conservative Party Conference in 2010. Discussing his intentions, he hoped that Universal Credit would “restore fairness and simplicity to a complex, outdated and wildly expensive benefits system”.
Almost three years down the line, Universal Credit still features prominently in the media, but largely for the wrong reasons. There is no doubt that there have been serious shortcomings in the implementation of Universal Credit to date, which have been detailed in the National Audit Office’s latest report on the progress of the project. The report highlights millions of pounds wasted on failed IT programmes, unrealistic timetables for implementation and a lack of transparency; these issues hardly fill one with confidence for the future of UC.
It is hoped that the recent appointment of Howard Shiplee (former Olympic executive) as director-general of the project will bring the experience and skill necessary to steer Universal Credit back on course. This piece will argue that despite the negative publicity surrounding Universal Credit’s implementation thus far, the concept itself is still worth supporting and will help large numbers of people find work and escape severe poverty. Behind the partisan games of political football being played out between parties lies consensus; all three major UK parties support Universal Credit in principle, and the reasons why will be set out below.
How does Universal Credit work, and what are its advantages?
Universal Credit is part of the Coalition’s Welfare Reform Act 2012, and aims to replace six working-age benefits/tax credits with a single welfare payment: income-based jobseeker's allowance, income-related employment and support allowance, income support, child tax credit, working tax credit and housing benefit. This payment will be accompanied by a single, constant taper rate (the rate at which a benefit is reduced to take account of earnings) of approximately 65%.
Consolidating all existing working-age benefits and tax credits into one payment simplifies the system massively: one application, one statement of earnings and entitlements, and one coordinating agency. A welfare system comprehensible to those that need to make use of it is essential. It ensures that the greatest possible number of those in severe poverty are provided with the minimum income they are entitled to. Making the UK’s benefits system easier for claimants to understand will help ensure that taxpayers’ money goes to those that need it. Therefore, the adoption of Universal Credit is expected to substantially increase take-up amongst those eligible to claim: tackling the trend of rising severe poverty that has taken place over past years.
Of course, it is essential that those who claim benefits are encouraged to find work, and the most effective way of doing so is by ‘making work pay’. This is, at least in part, accomplished through a lowering and streamlining of effective marginal effective tax rates (METRs). Marginal effective tax rates represent the amount of money forgone by working more hours through loss of welfare money and paying taxes. METRs under the current system are often inordinately high and unpredictable (see examples in the charts below). As a consequence, they act as a major disincentive to work for many people.
Universal Credit will help to address problematic marginal effective tax rates by introducing a single taper rate of 65%, meaning that those on low earnings will be better off on UC and work will pay more. Work incentives are also increased by the inclusion of an “earnings disregard” (£700 per year for single people): a significant improvement on the standard £260 per year (£5 per week) of the current system. UC’s taper rate will therefore only apply to earnings above this threshold, improving the attractiveness of work.
It is inevitable that in the short-term, more resources will be required to set-up the machinery by which Universal Credit can operate effectively. Official estimates tout the figure of £2.4bn as the total cost of implementing UC, but focusing purely on the short-run cost fails to highlight potential efficiency savings and the reduction of various costs that arise from unemployment. In the Centre for Social Justice’s report Dynamic Benefits, welfare reform proposals largely indistinguishable from the DWP’s version of Universal Credit are estimated to increase UK GDP by £4.7bn. In fiscal terms, the short-term costs of Universal Credit borne by the taxpayer are more than compensated for by significant increases in employment and the consequent prosperity this engenders.
Answering the detractors
There have been various criticisms levelled at UC which raise legitimate concerns about the specifics of the DWP’s proposals. One of the most common objections is that Universal Credit will be managed largely online, meaning that those who struggle to connect to the Internet or lack computer literacy may have trouble claiming benefits they are eligible for. Whilst it is true that without suitable provision of computing facilities and guidance this would affect some people, plans to install 6,000 new computers across Jobcentres is likely to remedy any lack of digital access. Claimants who can make use of the online system from home will benefit from not having to travel to their local Jobcentre, and at worst there will be no change from the current system for those who require assistance with their claims.
A further potential drawback of Universal Credit that has been highlighted is the move to welfare payments on a monthly basis, rather than the current system’s varying weekly, fortnightly and (in some cases) monthly payouts. The Social Market Foundation’s report on Universal Credit, Sink or Swim?, cites a sample of thirty households affected by the move to UC: the majority of which held negative opinions of monthly payments. This opposition stemmed largely from the issue of having to budget more responsibly, and concerns about running out of money before the end of the month. However, it can be argued that encouraging greater responsibility for financial planning could prove advantageous for households: for example, gaining experience of budgeting in jobs with a monthly salary. Moreover, the Department for Work and Pensions is looking to include the options of advance UC payments and alternative payment arrangements in extenuating circumstances, helping to mitigate any difficulties experienced from adjusting to monthly budgeting.
Conclusion
After starting in October this year, Universal Credit is due to expand to Jobcentres in Hammersmith, Rugby, Inverness, Harrogate, Bath, and Shotton; it is planned that this expansion will be completed by Spring 2014. Whether the government will meet its objective of UC being fully operational across the country by 2017 seems unlikely, but it is hoped that with new management and swift responses to the criticisms highlighted in the National Audit Office’s recent report, this important reform to Britain’s welfare system will be up-and-running by the target date.
The temptation to confuse valid criticisms of Universal Credit’s implementation with condemnations of the overall policy itself must be resisted. No policy is perfect, but as discussed above, there are concrete benefits that Universal Credit can bring to the lives of Britain’s poorest people. It will incentivise work, alleviate poverty, encourage responsible budgeting, and (in the long-run) bring the plethora of economic gains that are linked to increased employment. In these ways, the Universal Credit can work.
Ayn Rand: More Relevant Now Than Ever
"First of all, I would like to thank The Adam Smith Institute and Eamonn Butler for having me here. I would also like to extend a big thank you to Yaron Brook and the Ayn Rand Institute for suggesting me as the speaker for the second annual Ayn Rand speech at this renowned institution. I am very proud of being offered this opportunity, and would also like to thank all of you in the audience for coming here tonight. I hope it will interest you to hear about both the positive aspects of deploying Ayn Rand in practical, day-to-day life, as well the more grim part of the speech – about a world that is on the wrong track and where change is desperately needed.
Now – I am going to start by quoting someone that anyone who knows me realizes is not my favourite politician. I consider him a very significant part of the problem we currently increasingly. But at least he did us a favour by underlining just exactly how relevant and important a voice Ayn Rand is even today, more than 30 years after her death. Let me quote the 44th president of The United States, Barack Obama, for the first and last time this year, I promise.
“Ayn Rand is one of those things that a lot of us, when we were 17 or 18 and feeling misunderstood, we’d pick up. Then, as we get older, we realize that a world in which we’re only thinking about ourselves and not thinking about anybody else, in which we’re considering the entire project of developing ourselves as more important than our relationships to other people and making sure that everybody else has opportunity – that that’s a pretty narrow vision. It’s not one that, I think, describes what’s best in America.”
We will get back to who has the greater vision for America and a human life, but I have a confession to make. I did not pick up Ayn Rand as a misunderstood or insecure 17 year old. I wish I had, but unfortunately, I was a 38 year old man when I first read Atlas Shrugged. And to some extent insecure, I will admit.
I still remember clearly how my chief economist, the outspoken and very politically incorrect, Steen Jakobsen, threw a paperback on my desk after the summer holidays, soaked in sun oil, and told me – this book you HAVE to read.
I did, and it was a terrific experience, as it is for many when they are first exposed to Rand’s thinking. Now, when I say I was an insecure 38 year old, it was in a slightly different sense to the insecurity of a high school kid. I had my own business, was married with four kids, and had formed strong views about society and politics. Incidentally these were not much different from the views I hold today. But I always had a underlying worrying concern about what was the real foundation and justification of the views I held. Whether it was only my particular circumstances, ambitions and career path that had led me to be a life long fan of individualism, freedom and capitalism. I would never have admitted it, of course, but I did think about it from time to time.
This is a question that most political and philosophical writings at best don’t answer or at worst, answer with a confirmation that, yes, indeed it is random and only a result of your situation and environment which world view you choose. Ayn Rands answer to that question is fundamentally different. Her answer is that as a rational being, as man and not an unthinking animal, you have to choose the path of freedom and individualism. Not just because it works better, and not just as a utilitarian observation, but because it is fundamentally in your nature and because it is right. It is a necessity for you to fulfill all you can be as a man, and it is a necessity for your survival. The use of your mind and the observance of reality and influence thereon by your mental capacity – it cannot lead to any other logically correct conclusion or result.
So in other words, Ayn Rand removes your insecurity about whether your choices were right and unavoidable or just random and fickle. She provides a philosophical foundation for what most other commentators only present as a utilitarian argument – individualism and capitalism simply works better than collectivism and socialism. Very few advance the moral argument, but that is ultimately the real argument.
That is a very important distinction that has profound consequences. And that begins to reach out for an explanation of ‘The Big Disconnect’ – why is it, that in spite of socialism failing so completely again and again, in spite of capitalism and freedom improving peoples lives and creating wealth and welfare wherever it is applied – why is it– that even with this knowledge and experience – that we have to fight new attacks on freedom, year after year, decade after decade? The attacks come in different disguises, but always with a moral root – capitalism is evil, it is destructive, it is egoistic, it is anti-nature. We ourselves, on the other hand, fail to advance the moral argument, but the opponents of capitalism always sell their rotten philosophical goods by claiming a higher moral ground, altruism and the need for control of human freedom, to protect man against himself by handing over responsibility to collectivists and anti-individualist leaders who know so much better than the rest of us. With enough moral high ground claimed, there is no need for any clear explanation why or how they would know better, and there is no questioning of why the leadership should necessarily fall to them.
This is an ancient problem, and has recurred in different ways throughout the centuries. Right now, we are seeing a solid revival, a significant pushback against all the advances that were made when the Iron Curtain came down, and the despotic leaders of the Soviet Union and their satellites were overturned. Some of us foolishly thought that this was the final victory of capitalism and freedom, and that surely now the world would move quickly in a better direction, while the remaining dictatorships in the world would collapse one by one before too long. It hasn’t worked out that way. In fact, maybe the disappearance of that very obvious enemy and obvious failure of the Soviet Union has had the opposite effect. Without a strong example of how inferior socialism really is, many people believe again that it is the solution to problems in the West, and if just capitalism could be reigned in, we will all experience a better and more fair society.
Well, there are multiple fallacies in that view. First of all, free capitalism hasn’t really been experienced by many people alive today. The strange hybrid of western societies today allows only limited capitalism to create enough wealth to support a wider range of political and social ambitions, largely controlled by anti-capitalists. Secondly, of course we know by now – indisputably - that socialism doesn’t work. Full blown socialism doesn’t work at all, and lesser degrees of socialism restrict to a higher or lower level the creation of growth and prosperity. Thirdly, socialism is not fair; equality in outcome is not fair. Equality in opportunity is indeed fair, yes, but if the outcome is then collectivized and shared irrespective of effort and dedication, fairness completely ceases to exist.
To hear a US president saying that it is wrong to “consider the entire project of developing ourselves as more important” than a set of social obligations is rather disturbing, I think, and it goes to show that the malady that has long beset Europe is spreading rapidly to the US.
Before turning to the particular relevancy of Ayn Rand to the current economic and political debate, I would like to talk a little about her relevance not just for individuals, but also the benefit for the multiple forms of cooperation with others that such individuals may choose by their own free will. More specifically, we realized in our business that her ideas also hold plenty of relevance and opportunity for commercial organisations.
I am the co-founder and co-CEO of Saxo Bank, an international investment and trading bank with offices in 25 countries, headquartered in a socialistic country named Denmark. With that kind of base, and more than 50 different nationalities among our employees and clients from all over the world, my partner Kim Fournais and I felt early on that it was necessary to specify a set of principles and values to ensure that our business developed in a sustainable and coherent manner. A way in which we could benefit from the diversity of our employees and clients, without the many differences leading to confusion and chaos in the organization. When you are from many different cultures, and spread over many different locations, it is valuable to operate from a set of agreed principles. In fact, successful organisations do that intuitively, but it is good to be explicit about exactly what those principles are.
The good thing is that capitalism brings people – by their own choice - together around joint goals that make sense for everyone and that benefit the employer, employee and client alike. As a result, finding common ground is easier than if we were a political organization or a cultural or religious forum. In fact, we have representatives of every major religion, culture, nation and race among our employees and although we face issues from time to time- like any other organization- they are never really based in those differences. It is a given that in a meritocratic organization it is the results, the ethical behavior and the productive efforts that count over above and anything else.
In our first, pre-Rand, corporate statement from the late 90s, we still felt the need to state things like that explicitly, but today it is all about the set of values and the interaction we can expect from each other that we set out to describe.
And after having read Ayn Rands works, and becoming familiar with her Seven Virtues, Kim and I were in no doubt that in effect what was meant as guidance to living a successful, prosperous and productive life for an individual, could equally well serve as values that an organization can build upon. Later on, I was very pleased to discover that at least one other bank had made exactly the same decision. BB&T Bank in the US, led by the formidable Rand supporter, John Allison, who incidentally gave this speech last year, had been successfully applying the Seven Virtues well before we heard of them, and has built a great business on this foundation. It is interesting that BB&T Bank was about the only major American bank to come out of the financial crash unscathed.
I would like to run through the Seven Virtues and describe how we ask our employees to consider and understand them in a business context.
Some of you will know that Rand developed the Seven Virtues, or Values, as we have chosen to call them in the Saxo Bank context, as a non-exhaustive list of important virtues to adhere to –
RATIONALITY, INDEPENDENCE, INTEGRITY, HONESTY, JUSTICE, PRODUCTIVITY AND PRIDE.
We introduce the Seven Values to our employees along these lines:
You may not be guaranteed a successful career or a great life – accidents, illness or other random elements may interfere – by applying the values to your work, but it is difficult to imagine that anyone could live successfully if he or she continuously disregards and violates these values.
Just try this experiment with each of the values: If you were continuously dishonest to the point where no-one trusted you, would you be successful, and could you continue this for all your life?
What if you were to disregard justice, so that you never encouraged what was good around you, and made no distinction between valuable and worthless activities – making no distinction between productive and destructive actions?
No decent human being would want to associate themselves with you, if they felt you did not distinguish between good and evil, right and wrong.
And so it goes for all these values – they are necessary ingredients in a good life, and, for Saxo Bank, essential for building a strong, reliable, competitive business.
What is so great about this novel is that it gives you a more detailed, philosophical foundation for what you intuitively know is right. It tells you what creates results and why other, contradictory sets of values are unlikely to create long term success.
We go on to give ideas for practical application of the values in everyday work:
About Rationality
Behaving in a rational fashion seems like an obvious thing to do, but actually, in many organizations a lot of time is spent on very irrational and unproductive activities. Rationality means applying a logical approach to identifying how to arrive at a desired end – or to gain a desired value – in the most efficient and direct manner. It also means taking into account the relevant information required to reach these decisions and to decide on an optimal path of specific action.
If a competitor has created a better product than our own, you cannot talk it into oblivion. Even if in the short term you might convince a client to accept an inferior solution, longer term, you are always at risk of this client becoming more informed and, ultimately, you will lose out.
The only way to deal with competitive products is to investigate them thoroughly, take an active interest in industry developments, and meet any challenges head-on by improving your own service and the features of your products.
You cannot dream, wish, hope or lie yourself out of a difficult-to-fulfill, but reality-based client demand.
If the client can get a better service or product somewhere else, you need to deal with this reality and improve in order to maintain the relationship.
If you have a disagreement with another employee you also need to deal with it head-on. If you are right, then you should stand up for your point of view, but if you are wrong, acknowledge it and move forward.
You should not pursue any line of action for any other reason other than it being the most rational and logical way to move forward – even if it means giving up your own (inferior) idea, or if it means the justified recognition of one of your colleagues instead of you. Making the right, rational choices is what life is all about. Just as irrationality leads to failure or at the very least dependency on other people’s rationality, rationality often leads to success and independence - in fact it almost always does if consistently applied and carefully and intelligently executed.
About Independence
All of the virtues are actually derivatives of “rationality”, and this one, in particular, means using rational thinking in an independent manner. In spite of all types of teamwork, all types of organisations and all forms of society, it simply boils down to one brain per individual.
There is no such thing as “group thinking” (don’t confuse that with individual thinkers choosing to work together in a group…) or a “collective brain”. Whether you like it or not (and we hope you do like it!), everyone has their own individual mind that he can choose to use or not.
Your mind is your primary tool of survival, but also the gateway to much more than mere survival – to a great extent, the more and the better you use your mind (which implicitly means independently), the more successful and – at least if applied to commercial business – the more comfortable a living you will be able to create for yourself and whomever you choose to share your life with. And the more personal fulfillment and self-esteem you will experience.
Independence does not mean re-inventing the wheel, or not accepting the Law of Gravity or Einstein’s scientific theories before you have checked all the facts and calculations yourself.
It does not mean a lack of respect for where you work, if that is freely chosen by yourself, or for the managers or leaders you interact with as a result of that decision; nor does it mean having to define or create every single process personally before implementing it. Independence does not mean that you should not learn from anyone else. But it does mean that blindly copying or repeating anything and everything you see or hear uncritically will not get you anywhere in the long run.
If you unquestioningly accept anything that sounds good without further consideration of its consequences or any idea that simply seems to be agreed upon by other people (even – or maybe even particularly - if they are a majority), you can be fairly sure that this will not cause you great success in life.
About Integrity
Integrity means standing up for what you believe, and being prepared to execute your ideas and defend your values. Integrity is therefore closely related to the value of independence. Integrity is about doing what you say you will do, honoring your commitments and fulfilling your promises.
Integrity is accepting that there is a relation between the dreams you have for the future, and the work you need to put in every day to reach those goals – otherwise your life will just be an endless repetition of frustration and disappointment.
In Saxo Bank, extending this integrity to our clients and partners is of course critical. We need to manage expectations correctly, so that we invariably deliver at least what we promise.
Conversely, we need to be very careful to explain to the clients exactly what our services are, and what risks and opportunities they will face while working with us.
There is no real substitute for a life of integrity. If you are not basing your life on reality, either you will fail or you will be entirely dependent on someone else to support you, because they act rationally on your behalf – a parasitic and unsatisfactory existence at best, and a highly risky proposition for the long term.
About Honesty
Honesty should be understood both in the normal sense – i.e. do not unnecessarily lie to others – but also in an intellectual manner. Being honest means meeting reality head-on, and trying not to fool yourself or others by not trying in an objective manner to interpret and deal with the facts that you are faced with.
Dishonesty can take many forms, such as lying to clients, colleagues or friends. This is not beneficial in the long run, as the truth inevitably becomes clear sooner or later and future relationships will be greatly damaged.
Dishonesty also includes pretending to be something you are not. For example, would getting a particular job because you lied about your abilities not be more disastrous than not getting the job at all? You will ultimately end up failing, losing credibility and in the meantime having failed to make progress at something you could have been great at instead?
Attracting a spouse or a circle of friends by pretending to be a different character than you really are?
Forcing yourself to live a life that is not what you really wanted – presenting a façade that you need to think about every minute of the day because it is not honest to your nature – and again, probably eventually getting your bluff called after all those efforts…
Being honest is a selfish value, as are all sustainable values. Honesty is for your own benefit; it is not just a duty you owe to others.
All of Rand’s values serve the purpose of making your life more successful and your philosophy more coherent. The great thing is that applying the values also has beneficial implications for your surroundings, friends, colleagues, the Bank, society… which are all components in helping your life to be successful. So there is a win-win effect in honesty, just as in the rest of our values and the contents of the corporate statement, which is exactly what we want to portray.
About Justice
Justice, in our terms, essentially means that you should not just sit back and accept everything around you without having a view on it. You should not be afraid to speak up when somebody does wrong or behaves in an unacceptable manner.
By keeping quiet you are not doing the person a favour, because that person may not be aware that what they are doing is questionable, or, if he or she is, they may think that doing the wrong thing will never have any negative consequences for themselves – hence encouraging them to continue that way.
Along the same line of thinking you also should give praise when someone does something positive, not just to be nice, but to encourage such actions in the longer term, to show that you notice and that it makes a difference to you.
In terms of Saxo Bank, this is closely related to the value of honesty, and essentially means that you should neither hold back constructive and justified criticism nor should you fail to praise a colleague that does something of value or ethically correct, when you see it.
When we are doing unbearable damage is when we fail to appropriately recognise those people who are doing great things.
Whether this is out of envy or indifference, it is very damaging if people who should be praised fail to get the recognition they deserve.
Being just is both the right action towards your colleagues, and a way to increase your own chances of long term success – by correcting mistakes, and encouraging good work.
About Productivity
Being productive means creating products, systems and services that are valued sufficiently by our clients to enable us to run a successful business and for all of us to be paid a salary that allows us to care adequately for our families and ourselves.
Being productive means taking pride in providing for your own life, and avoiding relying unnecessarily on other people’s production, as well as recognising that any other way of living – stealing, voting for politicians that give you money by taking it from other members of society, begging – may work for you short term, but would be completely unsustainable unless someone else made the decision to produce.
I think that we all know the joys of a job well done. To achieve success, to use one’s mind creatively and productively and to see things grow and expand through your own efforts is a great experience, and life would be much poorer if we did not experience this individually, and together, every day of the working week.
Enjoying the fruits of work, getting the things you want, having fun and free time on your hands and enjoying hard-earned time with your family is all great – but getting there, securing this through your own efforts is a big part of the exercise.
Productivity plays a big part in all we do. It is important that we always bear in mind productivity in our lives as a necessary and logical objective. It is great for us to spend time on research and thinking ahead, and having great plans and long discussions if necessary – but at the end of the day, the goal is productivity.
Any initiative we undertake in our business must have productivity as the key objective – because if we allow ourselves to lose sight of productivity, eventually the business will fail, and we will all lose out in life.
About Pride
Most people and certainly most Danes have been brought up with the notion that pride is mostly a bad thing and that people should rather be humble than proud.
“The Law of Jante”, a particular Danish version of the “tall poppy syndrome” deriving from a famous novel, criticises the success of individuals and portrays their achievements as unworthy, wrong or inappropriate.
We believe that you are indeed responsible for your own character, your own achievements and your own results; and it does matter that you try to do well.
Even in your fundamental choice – deciding to be a productive individual, taking charge of your own destiny and responsibility for your life instead of relying on other people for your sustenance – you have reason to be proud. By having chosen to work for a living, instead of stealing or begging your way through life, you have established a critical foundation for justifiable pride.
The rewards for leading such a life are the values – both physical and spiritual – that you can create, allowing you to have self–esteem and to be proud of your life.
I hope this has given you an idea about how we practically deploy Ayn Rand’s ideas in a modern business. We have seen that people embrace this message, and want clear values in their life and in the business they work for, and we have seen a lot of interest in these thoughts since we introduced them more formally through our corporate statement.
Most employees have read Atlas Shrugged, and most are good capitalists. I don’t think you would be very happy as a socialist in Saxo Bank- I certainly hope not. We have several sessions every year where new employees learn about the values and principles, and old employees can refresh their knowledge.
Now, after this practical example I would like to turn to the broader relevance of Ayn Rand in society today.
First and foremost, Ayn Rand remains among the few who recognize with crystal clarity that we will not win the battle by simply proving that freedom and capitalism work. It has already been proven beyond discussion. Nevertheless, we are still facing new attacks on freedom every day.
One of the biggest mistakes we can make is to assume that rationality will prevail, and that just through superior economic performance freedom will capture enough people’s hearts in a democracy to win the day. This creates a major problem for those of us that like to argue rationally, rather than emotionally.
It creates a major opportunity for politicians who intuitively know that in a rational world, there would be little demand for their services. Only in an irrational, emotional universe, where opportunists can gain access to media and visibility to express “feelings” and try to take the moral high ground no matter how unfounded in reality it is – only in such an environment can you survive without having to produce practical, productive results, and instead prosper and benefit from empty talk and third rate acting performances.
This tendency, unfortunately, has only gotten stronger during the recent crisis. There is often a complete disconnect between the reality and the words used to describe it, and the actions pretending to deal with it. In particular, this is very noticeable in the Eurozone these days.
Secondly, Ayn Rand has gained renewed relevance and attention, because her predictions have become fulfilled in many different areas. This of course pleases and reconfirms long standing admirers, but also bring many new supporters to the scene, looking for answers to the crisis we are in.
To name but a few predictions clearly the dynamics of democracy and interfering politicians are very well described in Atlas Shrugged, where constant intrusive corrective attempts to fix a given problem leads to new, unforeseen problems that need additional correction. This triggers an endless series of correcting moves, where only two things are certain.
First, The politicians assign ever greater powers to themselves, as they manage to convince the citizens of the need for even more interference, although the problems are created by interference in the first place.
There are endless examples of this in both the US and the Eurozone, where one mistake invariably leads to call for even more powers, leading to new mistakes. The EUs standard answer to any of their own failures is that had they just had even greater powers, things would have been much better. The real question to ask here is not why they claim this, because what else could they really do, if the only alternative is to admit incompetence and failure?
The real question is how do voters continuously manage to ignore the reality and believe in their politicians, rather than themselves?
Second, freedom and capitalism, the only real answer to the current crisis, get ever more restricted and prevented from working efficiently, meaning that the underlying strength of human ingenuity and creativity is stopped from working and becomes increasingly powerless to pull us out of the morass we are in.
Another of Rand’s predictions of business people using government favors in return for giving up their independence, has sadly been confirmed better than anywhere else in my own industry. It is embarrassing to see the extent the banking industry has relied on support from governments, and how ruthlessly they are currently exploiting the offers of cheap money available from the central banks.
Very little of the bailouts filters down to the real economy, as it is easier to hold onto safe returns in a variety of government paper, cementing the unhealthy relationship between banks buying government securities and in return being propped up by the same governments to secure them as an outlet for these very securities and their printing machines.
At the same time, banks are now in the firing line all over the world, helpless to resist an endless row of enquiries, fines, regulatory tightening and excessive compliance costs pushed onto their p/l sheets, hurting earnings and making them ever more dependent on the state for support. It is a vicious circle for an industry if I ever saw one, and I fear that we are approaching the end of banking as a private industry. But once we have a government controlled banking industry, our problems will really begin.
Pick-a-winner, corporate social responsibility, employment rules, affirmative action, the creation of fictional jobs and plain political popularity and obedience will then rule who prospers and survives in all industries, not just banking. Beware of this development, for it is poison to capitalism and growth and to prosperity for all of you. The new central bank regulator and the banking union, ultimately draining the sound banks for money to support the failing ones, could be the nail in the coffin from the EU to a bank near you soon. In fact, the undemocratic, powergrabbing, emotional, populistic Washington that takes over in Atlas Shrugged is today most closely resembled by the EU and the Eurozone in the real world.
It is quite frightening how much of the rhetoric in Brussels and some of the Eurozone countries resembles Ayn Rand’s universe. Constant talk of solidarity, of progress under difficult circumstances and the need for more central power is almost taken directly from Atlas Shrugged. There is absolutely no connection with reality and no humility whatsoever in the face of near total failure. Absolutely no wish to face the public or give it a say in any of the major new initiatives and blunt direct intervention in national governments.
There is arrogance in the extreme against deviating views of Europe such as those displayed by even a meek David Cameron. This organization is failing big time, and its only response is to gather ever more power in the hands of Brussels, clearly against the will of the populations of Europe that are beginning to see that in fact The Euro may be the practical equivalent of Project X in Atlas Shrugged.
In France, we now have a President that by his own admission, hates the rich. So much so that he is trying to circumvent his own constitution to introduce punitive taxes on them, although illegal, and so much so that he drives relentlessly forward with proposals for a financial transaction tax that has been shot down by pretty much every historical experience and most economists as a massive own goal which damages the very countries that deploy it.
Well, it seems that the rich also hate their president, judging by the number of them leaving – famously spearheaded by Gerard Depardieu - for places like Belgium, that amazingly actually acts as a tax haven for the French in spite of all the EU rhetoric, or Switzerland, where inflows of new immigration requests according to my sources are at record highs, particularly from Scandinavia, UK and France. Depardieu, of course, chose Russia, which speaks volumes of what deep trouble Western Europe is in.
This leads to a very interesting question, a question full of hope. Is there indeed also a solution to the problem, such as the one Ayn Rand foresaw with the flight to Galt’s Gulch? It will be difficult to find a place entirely outside of the reach of aggressive governments eager for tax dollars, as Switzerland has learned to its misfortune. But is there a possibility for creating an area so attractive and so successful that it will attract enough good and productive people to become a good example for other nations to follow?
Unfortunately, not much points in that direction as most countries pursuing such strategies lack sorely in that other commodity, personal freedom and security from governmental abuse.
And the few places that try to provide both, such as Switzerland seem to also be contracting the malaise. I chose Switzerland as my country of residence a few years back, and I have not regretted it for a second.
With its effective tax competition between cantons, and very direct democracy, it has many features aimed at keeping the state under control. But I have been disturbed to see recent attempts at reducing this tax competition, introducing death taxes, and latest, the infamous 12-1 proposal that seeks to limit executive pay to maximum 12 times the lowest paid employees. While not likely to pass, I still know of several big companies preparing contingency plans for spinning off management teams into separate units, and laying off their lowest paid workers to instead use temps and insourced services. Talk about an own goal for both the strong and the weak – wasting all this time instead of focusing on business, instead of creating jobs for the low paid laying them off.
So nowhere seems safe from populism and irrationality any longer. It is difficult to see the necessary reforms forthcoming, and sadly, we may have to go through a much more severe economic collapse before change will be forced upon us. Unfortunately, that change may also be totalitarian in nature, of course, which is in fact the more likely outcome in the short run.
I am not hopeful for change in the more excessively developed welfare states. Let me tell you why with an example from my own country, Denmark.
Denmark has the highest total tax pressure in the world and is towering far above the European average. It also has the smallest private sector in Europe, to support one of the biggest public sectors. Add to that a generous entitlement system allowing unemployed and unemployable citizens an income well above that achieved by full time employees in the private sector in many European countries, and you will observe a need for tax revenues nearly unmatched anywhere else in the world.
The majority of Danish politicians intuitively understand that – regrettably, in the view of many of them – capitalists are an unpleasant necessity to generate the necessary revenues to fund the social welfare state and the myriad of responsibilities it takes on. Nothing is too small to attract the attention of Danish politicians and nothing to insignificant to attempt to regulate it. And the answer is almost invariably to throw more money at the problem, or hire more public servants to regulate and supervise it.
So being a capitalist in a social welfare state means extreme supervision, a general scepticism and mistrust from your fellow citizens – and a feeling that most politicians are looking for the exact point of pain where maximum tax can be extracted – not to avoid harming business and growth but to avoid pushing you so hard that you choose to leave the country, close down your activities and transfer the jobs abroad. This incidentally, is obstructed through exit taxation (often of unrealized and theoretical profits), to the point that Denmark has been taken to the European courts several times in connection with these obstructions’ impact the free movement of labour within the EU.
The Danish parliament is nearly devoid of people with practical experience in private sector activity. Several important ministers have never held a job outside of political parties and organisations. When we got a new socialist government in 2011, supported on a de facto communist party, the prime minster brought in a 27 year old to be Minister for Taxation from the Socialist People’s Party (who did not get elected to parliament but was selected for this obviously very important post anyway), and a 28 year MP as Minister for Health and Prevention, also from the Socialist People’s Party (who started her new job by going on maternity leave immediately after being appointed). Other interesting choices included the former leader of the now defunct official Communist Party of Denmark, being selected for Minister of Business and Growth. He was, in all fairness, replaced by a school teacher after a year. In fact, only three out of 23 ministers have any noticeable practical experience in the private sector, and then mostly as low level employees.
So how did they get elected?
Well clearly, the Danish voters do not value business or business experience very highly. This is understandable as more than half of the adult population is either working in the public sector or living on some form of social transfer payment.
There are a much higher proportion of these payments than in countries that are otherwise very comparable on many parameters to Denmark, such as Sweden, Norway or Finland.
Out of a total population of 5.6m, approximately one million are under 15 years of age. A little more than 2m are pensioners, unemployed, sick or on social transfer payments for other reasons. Around 800,000 are employed in the public sector. This leaves around 1.8m Danes that are not directly dependent on state payments in some shape or form. But even among this group, there is high focus on cheap, subsidised child care, free health care, child bonus payments, subsidised housing and an infinite number of other ways to secure some additional income from the state.
At the other extreme, only 28,000 Danes have an annual income in excess of DKK1m (GBP120,000). Not surprisingly, more politicians cater to the 2.6m voters dependent on the state for their livelihood, than to the 28,000 hard working individuals making a good annual income. Because of this attempts to highlight the risks of brain drain by taxing such incomes more aggressively are regularly dismissed by socialist parties as a scare tactic. In fact, it is generally accepted by most politicians that there is no such thing as “dynamic effects” from tax policies, meaning that any suggestion to lower taxes in order to promote growth must – in order to be taken seriously – be fully financed dollar for dollar by other initiatives. This of course could be beneficial if such thinking led to reduced public sector expenditure, but unfortunately, it normally leads to a continuous moving up and down of different tax rates to compensate lost revenues on one tax, with new revenues from other taxes.
While no serious reforms are or apparently will be undertaken in the current environment, both voters and politicians like to create the illusion of reforms and security. Of course, many citizens sense that the current system is if not completely unsustainable, at least threatened (by what is perceived as mostly external causes, as there is little desire or political will to look at the more obvious internal causes). So a lot of time and political posturing is revolving around pretending to be involved in deep and difficult negotiations about wide-reaching decisions and reforms, but reality is that this is fundamentally an illusion intended to create a feeling of actually dealing with issues the country faces, and reassuring voters that the current system can be upheld without any serious cutback, sacrifices or changes.
This, unfortunately, will not lead to change anytime soon, and anything that we may do to improve our situation will be near impossible to execute without resistance from the EU, anyway.
As I said earlier, this battle will not be won by economic rationality. This goes out the door, once more than 51% of the voters live from the government – and probably even long before.
We need to change the values, the morality and the misunderstandings, and to undermine the deliberate lies our politicians feed the electorate about what constitutes solidarity, justice and the common good. Is it solidarity to make people into losers and victims and leave them totally unable to care for themselves? Is the common good to stop businesses and investors from creating wealth and prosperity? Is it justice to regulate every aspect of a normal person’s life and continuously monitor his every move?
The change must start with the changing the values. Focusing on the young that will get a terrible deal in the future. Focusing on the many SMEs and smaller entrepreneurs that create 80% of all new jobs in Europe today, but get only paperwork and bureaucracy in return from their governments. Focusing on micro rather than macro elements in the economy.
And when the message is values and fundamental change, no one is more powerful than Ayn Rand. Her books constitute inspirational, understandable and practically applied philosophy. Saxo Bank has given out more than 15,000 books in the past 10 years, and I hope that some of you here in the audience today will also feel inspired to help spreading her work among the receptive – the young, the entrepreneurs, the new political movements protesting EUs excesses and against the growing lack of respect for the individual.
If we don’t succeed in changing the values and direction of at least the next generation, I fear the full prediction of Atlas Shrugged will become reality – and while that may hold some promise for the distant future, it is not something that I think people of my age feel like going through if we can avoid it. Thank you.
Bitcoin is poised to shake the world: are you paying attention?
If you thought technology was already disruptive enough, here’s the news. We’re just getting started.
The Roman Rallying sequence in the Top Gear Middle East Special is an exhilarating example of the old world rubbing up against the new. As Jeremy Clarkson and Co charge around the sacred Jordan hippodrome in their battered sports cars, they inevitably start to kick up a lot of ancient dust. Clarkson starts to worry: “someone’s gonna see this dust, and then they’re gonna come, and then there’ll be anger and rage“.
There was a time when Bitcoin was able to rub up against the old financial world without anyone noticing. Now that time has gone. They’re simply kicking up too much dust to go unnoticed any more. Take the recent seminar at Stockholm’s School of Economics as a case in point. A simple two hour session featuring the current figurehead of the Bitcoin movement, Jon Matonis, turned out to be their quickest selling and most oversubscribed event in their 100 year history. But for those who know even a small amount about Bitcoin, this comes as no surprise. How could anyone resist a story involving giant stone money, gold, aliens, and the possibility of displacing some of the most significant polices of modern governments with an algorithm?
International Man of Mystery
Let’s start with a little background check. It’s a given nowadays that the most innovative internet technologies no longer emerge from the R&D labs, but from the world’s student dorms. The case of Bitcoin is no different. Well, not entirely different anyway. The twist in this particular story is that the originator – who goes by the name of Satoshi Nakamoto - is closer in style to the techno duo Daft Punk than Mark Zuckerberg. According to modern folklore, Nakamoto could be a combination of any of the following: a gifted Japanese student (or even group of students); a graduate of Trinity College Dublin called Michael Clear; and/or a group of international entrepreneurs who filed a patent for something very similar to Bitcoin only 72 hours before the domain was registered. However all attempts so far to arrive at a real person have ended in either denials or dead ends. Perhaps this is as it should be. All this anonymity is entirely fitting for a distributed P2P network that champions the (somewhat contradictory) dual principles of open source and cryptography. The simple fact that no one seems to own Bitcoin means everyone does.
So What’s Different This Time Around?
The world has seen innovation in ICT and Finance before. In fact, Sweden itself can even claim to be a bit of a world leader in the field. While things like iZettle’s iPhone dongle, and services such as Tink, Flattr and Klarna may seem (and indeed are) groundbreaking, they are still little more than a smart interface into the traditional banking world. As such they’re not creating a new game so much as simply making it more efficient to play the old one – and taking their cut to do so too. What’s cool about Bitcoin is that it’s inventing a totally new ball game altogether.
Here’s the rub. In the world as we know it, each institution, credit card, bank or financial service has it’s own ledger (or set of ledgers), and every time we ask them to transfer some money in or out of our accounts they do so by adjusting their ledgers. And when they adjust those ledgers, they charge a (not insignificant) transaction fee. Not only that, increasingly these transactions are electronic, and that means they’re tagged with our identity too. Depending on your point of view, this could be either good for tracking criminals and/or a convenient tool for governments to snoop on what their citizens are up to.
Bitcoin does two significant things which drive this traditional paradigm into the sand.
First, it makes the transactions anonymous, much like cash transactions. Any transactions you make on Bitcoin are not coupled to your identity. That’s bad news for nosey governments.
Second, it has only one giant ledger in the cloud, so the transaction costs of transfers are as close to zero as you can get, and (because of Moore’s Law) they will keep falling. Essentially, in the Bitcoin universe, there is no difference in the transaction costs between a) buying a loaf of bread at your local store, or b) sending millions of Bitcoins through the ether from one side of the planet to the other. The cost for both is more or less zero.
The Go-Betweens
But before we get all excited about hopping up and down on the graves of clearing houses, banks and other financial middleman, it’s worth mentioning that there’s actually a really sound reason why these kind of institutions exist in the first place. Convenience.
Convenience is the reason we buy our chewing gum and cigarettes from the local store and not from the out of town cash and carry. Even though we know the local store charges a premium, that’s still better than hopping in the car and driving across town for a small purchase. The same logic applies to the world of traditional banking. However unreasonable a transaction cost may be, it’ll still be cheaper than hopping on a plane with a sack full of cash. What makes the Bitcoin solution unique here is that it sidesteps this issue by making all financial transactions equally convenient. From the perspective of both the buyer and the seller that’s a very attractive proposition – from the perspective of the (possibly soon defunct) middlemen, it’s a nightmare. The emergence of Bitcoin is going to make a lot of very powerful, influential and traditional middlemen-style institutions very nervous.
Stark Contrast
Jon Matonis tells a great story to demonstrate just how different Bitcoin is to the traditional money world. When he gave a talk on Bitcoin at the monumental premises of Swift HQ in Brussels – one of the world’s largest central clearing houses – he asked if he could see the “live transactions” that roll through their computers every nano-second of every day. He was told that the ledger (the bank of computers doing the work) was private and kept in a locked room. By contrast not only is the Bitcoin clearing system totally decentralised, it is also public. Very public. In fact it’s so public you can even watch the transactions as they happen in realtime on the web, and, because the entire enterprise is driven by open source and thereby open to the creative talents of the dorm world, you can even listen to it.
One other big paradigm shift in the Bitcoin world is around credit. In the Bitcoin world, there simply is no fictional money. This would make fractional banking (the method by which banks lend out more money than they actually have in reserves) almost impossible. In the Bitcoin world, banks would only be able to lend the money they actually have. Perhaps loans would be spread across Bitcoin’s distributed network, much like crowdfunding. However it works in practice, the impact of reduced credit on a world currently addicted to the stuff is anybody’s guess.
Area 52
The key point about Bitcoin’s decentralised nature vs the centralised nature of the traditional money world is worth exploring in more detail. It’s also where our story takes a slight off-road detour into Area 52 territory.
Until recently, SETI (the project who’s aim is to Search for Extraterrestrial Intelligence) has been the number one global distributed computing network. However now that Bitcoin is on the rise, it’s been bumped down to second place. In fact the surge in Bitcoin’s distributed computing power is like nothing we’ve ever seen before. As Bill Gates said, “Bitcoin is a technological tour de force“.
This distributed nature also makes it incredibly resilient. Imagine if the SWIFT was somehow taken out, either physically or by attacks on it’s network. That would more or less cripple the money exchange markets that depend on it. Compare that to Bitcoin. The loss of a few computers in any given country on the network makes no difference – the system simply adjusts and life carries on as before. In this regard Jon Matonis likes to draw a comparison between Bitcoin and the ancient Rai Stones that were used on the island of Yap, Micronesia. These huge stone wheels were used to demonstrate the wealth on the owner and serve as a public record of significant transactions. Even though the ownership of any given stone would change over time, as long as people knew where it was, the physical location of the Rai Stone did not matter. In fact one Rai Stone even sank to the bottom of the sea during a voyage, but as the villagers could all agree it still existed, the stone was still able to be used.
A Dismal Science No More?
Despite the fact that we’ve already covered the mysterious origins of Bitcoin, its power to reduce transaction costs to zero, and its distributed, anonymous nature, we’ve still only scraped the surface of its disruptive powers. What it can potentially do to governments is mind blowing.
While some progressive governments (such as Germany) have already embraced the power of Bitcoin, the majority remain sceptical. Some – such as the government of Thailand – have even opted to ban it (and good luck with that…)
So why all the worry and hoo-hah?
Here’s the punchline. Bitcoin would not only effectively sidestep a government’s monetary policy, it would severally restrict its fiscal policy too. But what does this mean in practice?
For those of us who are not economists, we can explain it this way. First, on the monetary side of the equation, governments often like to reserve the option of setting the base lending rate (or discount rate) themselves through a central bank. They’re also keen on printing more money if needed to help pay for stuff, and they like to control the markets by buying and selling their own bonds (known as open market operations). In the Bitcoin world, it is the Bitcoin algorithm which controls the flow of new Bitcoins, not a central bank. This would make it much harder (if not impossible) for governments to rely on the fictional money they’ve grown so used to. That’s goodbye to quantitative easing for starters.
Second, on the fiscal side, as income gets harder and harder to trace back to individuals, governments would have to switch taxation to the consumption side of the equation. In turn this would rather limit the governments supply of tax revenues, and may even force them to get real about balancing their books.
As Al Gore has wryly noted, “I think the fact that within the Bitcoin universe an algorithm replaces the functions of [the government] … is actually pretty cool.”
System D
So now we’ve looked at the potential impacts on governments, we’re done, right? No.
Some of the most exciting implementations of all this kind of new technology isn’t happening in the old world, but the new. While the EU and the States are mired in government bureaucracy, restricted by powerful lobbying bodies, and stunted by military units run with half an eye on health and safety regulations, Africa and Asia are leapfrogging a lot of these issues to implement some truly original solutions.
At the Stockholm seminar, we also got to hear from the amazing Pelle Braendgaard who runs Kipochi. He told us about the everyday use of digital currencies like M-PESA in Kenya, and how people there who have been let down by the traditional banking sector have found an exchange lifeline with digital currencies that run on old cellphone technology and sim cards. M-PESA in effect gives a banking-like infrastructure to those people who would otherwise be “off the grid” and operating in the System D economy. Imagine the possibilities for anyone in Africa or Asia to either wire money in our out of the country for free (or as good as), while at the same time sell their goods without having access to a bank account. They could also shop around for a loan on a global scale, and even pay for their groceries at the local store in the same currency.
So What Happens Next?
The exponential rise of Bitcoin will no doubt start to generate some heat from here on in. It’s only a matter of time before we see the traditional gatekeepers start to cry foul. No doubt we’ll see a lot of anger and rage in the courtrooms. At least in the west. In Africa and Asia we’ll probably see things take off a little quicker. I predict it will only be a few years from now before we see Bitcoin (or other similar digital currencies) emerge as the exchange of choice for the majority of people otherwise denied access to the established money structures. And when that happens, prepare for the world to shake.
The government's new doomsmonger case for HS2
John Burton shows how the government's new case for HS2 is even less convincing than the last.
The Government -- or rather the Department for Transport (DfT), and its offspring, HS2 Ltd -- have (once again) today published "new, updated" reworkings1 of their strategic, business and economic cases for the High Speed 2 (HS2) rail mega-project; which is forecast for full completion (if eventually approved by Parliament) in 2037.
These are largely reworkings of their earlier argumentation; but they do, now, accept (grudgingly) that the Benefit-Cost Ratio (BCR) of their (Giant!) "pet" project is lower than earlier claimed; and the daft assumption that businessfolk do no work on intercity trains (eg, via ICT) remains, discreetly, embedded in the "new" analysis
What I also think is new about this "new, updated" case for HS2 is that it involves a histrionic resort to (what can only be described as) blatant scare tactics to try to "sell" the HS2 case to an increasingly sceptical public audience. A day before the publication of these new reports, a "Government source said":2 'The alternative to HS2 is a patch and mend job that causes 14 years of gridlock, hellish journeys, and rail replacement buses. 'The main routes to the north would be crippled and the economy would be damaged'.
However, these reports do not demonstrate this "doom-without -HS2" scenario! There would be some disruption arising from the implementation of alternative, rail capacity-enhancing projects; but not the "14 years of chaos" claimed by the Government. Moreover, the HS2 project would also involve much disruption (eg, around Euston, and in Middle England in particular)... but this is ignored by the Government in this pre-publication marketing ploy.
What should be done is to compare the alternatives side-by-side, dispassionately...which the new bevy of HS2 reports fails signally to do. In a seperate media attempt to market HS2 by doomsmongering, on the day before publication, the (London) Evening Standard3 was told: 'Tens of thousands more rail passengers will have to stand during their journeys if the HS2 rail link is cancelled, a new study warns. 'It says that there would be 17 passengers for every 10 seats on trains into London by 2026 if the current growth in rail travel continues...'. Obviously, this specific "marketing" ploy for HS2 was aimed at the (long-suffering) London commuter hordes, trying to read their Standard, whilst packed like cattle on some commuter line!
However, there are some very basic problems with this scare-tactic argument. First, Phase I of the HS2 project is not planned to open until 2027...one year after the 2026 "crisis scenario" fed to the Standard! So, HS2 could not head off this proclaimed capacity crisis! Second, HS2 is not aimed at all at relieving London (or other-city) commuting congestion at all...it is, by very design, a high-speed inter-city proposition (with a £50bn.+ price tag).
There are genuine capacity problems looming in the British Rail system; but these mainly relate to the very crowded commuter services in/around Britain's large cities -- notably London, Birmingham, Manchester and Leeds -- plus the Paddington-West Country/S.Wales lines . There are, moreover, plenty of potential ways of incrementally improving North-South rail capacity in the UK, without recourse to HS2 (should that demand arise).
I have elsewhere4 compared the doomsmongering that now accompanies proclamations of the case for HS2 to the Great Horse Manure Crisis of 1894; in which a (London) Times analyst forecast that London was doomed to be (literally) overwhelmed by horse manure -- to a depth of 9' -- by 1944 at the very latest... This Doom Scenario did not come about because alternatives to/substitutes for horse-drawn conveyance -- eg, cars, buses, rail, tubes, phones -- were developed. Likewise, if sensible alternative investments are made in infrastructure, we need not fear the "Doom-without-HS2" prospect that HS2's proponents now espouse to bolster their teetering case.
Sources referred to:
1:DfT, The Strategic Case for HS2, (29/10/13); HS2 Ltd, Economic Case and Other Supporting Documents, (29/10/13).
2: J.Groves, 'Passengers face "14 years of chaos" if HS2 is Derailed', Daily Mail, 28/10/13, p20.
3:Joe Murphy, 'Standing Room Only "Could Become Norm Without HS2"', Evening Standard, 28/10/13, p.8
4: John Burton, 'Conometricks and the new NAFF 'case' for HS2', Institute of Economic Affairs Blog, 24 October, 2013.
Thatcherism, trade unionism and all that
There have been many retrospective analyses of Margaret Thatcher and her influence and legacy since her death on 8th April 2013, but I doubt that any of them have given her sufficient credit for her greatest achievement - the taming of the trade unions. In this short piece I want to ensure that this omission is fully rectified.
During her premiership Margaret Thatcher faced external and internal threats. The main external one was from Argentina in 1982 when that country attempted to take over the Falkland Islands; and the main internal one was from the trade unions which seemed to many people to have been running the country for some time when she became Prime Minister. She told the Conservative backbench committee in 1984 that ‘the Falklands were the enemy without, but the miners were the enemy within, more difficult to fight, but just as dangerous to liberty.’ It wasn’t that the trade union threat had gone unrecognised, because all of MT’s three predecessors as Prime Minister – Wilson, Heath and Callaghan - had tried and failed to reform trade union law. In fact Harold Wilson had famously told Hugh Scanlon, President of the Amalgamated Union of Engineering Workers, to ‘get your tanks off my lawn’. But the trade union tanks remained on the Downing Street lawn, and Arthur Scargill was a more ruthless and dangerous foe than Hugh Scanlon.
Margaret Thatcher was elected to the office of Prime Minister in 1979 because of the preceding Winter of Discontent. Consequently her priority from that moment was trade union reform. But nearly everyone knew that was impossible because the trade unions had record high levels of membership and they had faced down her three predecessors. So how could our first female Prime Minister succeed where the men had failed? Clearly she had to have a toughness of character that was lacking in others. This had to include a willingness to take risks and to play for high stakes, knowing that many of the men would be delighted if she failed. It was often said, rightly in my view, that MT was the only minister around the cabinet table with balls. What must it have been like for her to sit at that table, surrounded by Tory wets, understanding that she couldn’t govern without them, but that they probably didn’t fully support her? But that was the situation she faced in 1979 and she had to come to terms with it.
Well aware that Ted Heath’s ‘at a stroke’ trade union reforms in 1972 had been a disastrous failure, MT decided to proceed with caution. Her policy, by contrast, was ‘step by step’ or ‘softly, softly catchee monkey’. That suited James Prior, her first Employment Secretary, who doubted that fundamental reform was possible. But MT understood that implementation of that policy required the right people in charge. James Prior was duly replaced by Norman Tebbit, one of the few true Thatcherites in her cabinet, and he (and his successor Tom King) moved the legislative reform process rapidly forward, the key pieces of legislation being the Employment Act 1982 and the Trade Union Act 1984. These reversed the Trade Disputes Act of 1906, which had put trade unions above the law for 76 years, and showed that the elected government, not the trade unions, were now calling the shots as far as the legislation was concerned
Trade union law had been reformed, but the coal miners were itching for a fight, led by the Marxist Arthur Scargill who had been elected President of the National Union of Mineworkers in 1982, and MT knew that this battle, too, had to be won. She had backed away from this fight in 1982, because she was not ready for it. But by then she was already ordering that coal stocks should be built up in preparation for this titanic struggle and in September 1983 she appointed Ian Macgregor, a tough businessman who had proved his competence on both sides of the Atlantic, as Chairman of the National Coal Board. Meanwhile on 2 April 1982 Argentina invaded the Falkland Islands at a time when MT’s popularity was at a low ebb because of high unemployment. This was a major test of character, and she came through it with flying colours. But, as suggested above, the miners would be an altogether more formidable foe, led by Arthur Scargill and backed by every left-wing politician and journalist in the country. Scargill, as a young official in the NUM, had made his name during the oil crisis of 1974, when he closed the Saltley Coke Depot, Birmingham with thousands of flying pickets. The police there were simply overwhelmed, and this was a tactic which he seemed to have perfected. No doubt he thought he could repeat this tactic as President of the NUM and he brought his members out on strike, ostensibly about the closure of uneconomic pits, in March 1984 with no holds barred.
Given the build up of coal stocks, it might be thought that the miners’ cause was hopeless. Actually that was not the case at all, and between October 1984 and March 1985, when the strike ended, there were several occasions when it seemed likely that the lights would go out and the government would be defeated. The government was unwilling to test its new employment laws, and it was often touch and go as to whether the government or a militant trade union would prevail. That raises the question of ‘What would have happened if MT had been unwilling to face down the National Union of Mineworkers in 1984-85?’, and my answer is that we would have had a situation in which there would have been some degree of civil unrest and a clear recognition that the trade unions, rather than the elected government, were running the country. Given Arthur Scargill’s political views, isn’t it likely that the country would have quickly become ungovernable? And if so, shouldn’t we recognise that Margaret Thatcher not only saved our economy, but also our democratic political system?
As David Owen, now Lord Owen, wrote perceptively in The Times on 19 April 1989 two weeks before the tenth anniversary of Margaret Thatcher’s premiership:
Her most fundamental, far-reaching and sustainable success is the trade union legislation. Not only will that legislation stay on the statute book well into the21st century, but, though she will hate the word, she has achieved a consensus in this area which embraces a far broader constituency than that of the Conservative voter. Paradoxically, she achieved these reforms not by a bold and radical stroke, but by a series of steps building upon each other in a logical and indeed evolutionary manner. But the legislation would, of itself, have been insufficient. A successful confrontation with mindless militancy was the essential buttress. Until Arthur Scargill was soundly and humiliatingly defeated, the spectre of 1979’s winter of discontent hung over the country. It was Mrs Thatcher who, virtually alone, understood this.
So Margaret Thatcher not only reformed trade union law in a way that her predecessors had tried but failed to do, but in Arthur Scargill she faced a more ruthless and dangerous foe than her predecessors and succeeded in proving that a democratically elected government could prevail over a mindlessly militant minority who were trying to hold the country to ransom. Truly a prophet is not without honour except in his, or her, own country and especially in Oxford University whose members denied this most distinguished alumnus an honorary degree.
Despite the Thatcher reforms trade unions remain especially powerful in the public sector of the UK economy, much helped by the kowtowing of New Labour to its public sector paymasters. In this regard we need to keep the crucial achievements of Margaret Thatcher constantly in mind, and build upon them in the future.
Charles Hanson is the author of Taming the Trade Unions, Macmillan, 1991. He was Special Adviser to the House of Commons Employment Committee 1980-81 and had numerous papers published by the Institute of Economic Affairs and the Adam Smith Institute 1973-1993.
The life and legacy of Ronald Coase
Yesterday, at the age of 103, one of the greatest minds of our time, Nobel prize winner and emeritus professor at University of Chicago Law School Ronald Coase passed away.
His contributions to and influence on economic science are of monumental importance. His groundbreaking research has set the stage for a joint field of law and economics, and has also influenced the new institutional revolution in addition to a number of other fields and areas of research in economic theory.
It would be unfair to say he only made two major contributions since both of these (written 23 years apart from one another) not only won him the Nobel prize, but have continued to influence the economic science ever since. The first was his 1937 paper The Nature of the Firm where he introduced the concept of transaction costs in microeconomic analysis. He believed that firms exist because they economize on transaction costs - costs like market entry, acquiring information, managing a company, bargaining, etc. If these individual transactions can be reduced into fewer transactions by organizing a hierarchical body, then entrepreneurs will form firms. With microeconomic theory at the time focusing only on production and transportation costs, Coase's inclusion of transaction costs was a breath of fresh air into economics. However, in 2009 Coase said he was surprised how much The Nature of the Firm was being cited since it was "little more than an undergraduate essay".
The second was his 1960 paper The Problem of Social Cost, widely considered to be the seminal contribution to the joint field of law and economics. It is from this paper that the Coase theorem was later developed (it was Stigler who actually coined the phrase "Coase theorem"). In The Problem of Social Cost, Coase examines how a cost imposed on society by an individual firm (an externality such as pollution) can be solved by mutual negotiation and consent if transaction costs are zero and if property rights are well-defined. This idea was subject to vast misinterpretation, which Coase tried to clear up in his subsequent interviews and texts. Regarding the theorem, he later stated: “All it says is that the people will use resources in the way that produces the most value, that’s all ... I still think it’s an obvious point. You wouldn't think there was a need for a Coase Theorem, really.”
The path to greatness
Born in a London suburb, he received his BA from the London School of Economics in 1932 and was a member of staff at LSE from 1935 until 1951 (the same time Hayek was there). During his student times he spent a year in the US as a travelling scholar, where he studied the American automobile industry. It was from this experience that he formed ideas for The Nature of the Firm. For Coase, becoming an economist was pure luck, as he himself admitted, since he wasn't interested in economics until he met Sir Arnold Plant on his final year who introduced him to Adam Smith's invisible hand and explained the coordination mechanism of the price system to him.
It is also interesting that, at the time, Coase was more of a socialist, wondering why people thought Lenin was wrong to posit that a government can be centrally run in the same manner a big firms like Ford or General Motors (Lenin used the Deutsche Post to make his point). In answering this question, he developed a crucial insight about why firms are formed. Even though firms are like centrally planned economies, they are dissimilar to governments in that they are formed by people's voluntary choices, and are governed by the price mechanism. The cost of using the market induces people to make the choice of forming a firm to lower this cost, which leads to the most efficient production processes taking place within a firm: not a government.
During WWII, he worked for the Central Statistical Office of the War Cabinet in London, an experience he cherished as he saw how large organizations tend to operate. He left LSE in 1951 first to join the University of Buffalo, and then the University of Virginia in 1958 (James Buchanan and Gordon Tullock were there at the time). While working in Virginia, he studied the Federal Communication Commission's allocation of radio frequencies.
In his 1959 article, he suggested that the Commission should sell the frequencies to the highest bidders in order to solve the externality problem. It is here where he first suggested that with well-defined property rights, radio frequencies could be allocated in the market just like any other good. It wasn't until 1994 that his suggestions were actually implemented. What is interesting about this article is that he presented it to a group of economists from the University of Chicago (including Nobel prize winners George Stigler and Milton Friedman) trying to persuade them that if property rights were properly defined market actors would yield an efficient solution. George Stigler recollects on that night:
“We strongly objected to this heresy. Milton Friedman did most of the talking, as usual. He also did much of the thinking, as usual. In the course of two hours of argument, the vote went from 21 against and one for Coase to 21 for Coase. What an exhilarating event! I lamented afterward that we had not had the clairvoyance to tape it.”
It was from this anecdote that The Problem of Social Cost was written. Coase was hired by the University of Chicago in 1964. In 1965 he became the editor of the Journal of Law and Economics, a position he occupied until 1982. It is believed that his leadership was partly responsible for the journal achieving its influential status. Coase himself said that he used the journal to create a new subject, which he was successful at: not to mention that in this process he influenced the creation of many others.
Oliver Williamson and Douglas North (both Nobel prize winners) on several occasions single out Coase as their major influence behind the new institutional revolution. In 1991, Coase received a Nobel prize in economics "for his discovery and clarification of the significance of transaction costs and property rights for the institutional structure and functioning of the economy."
As with many great economists, Coase was active and fully engaged in his work until the very last day. (Elinor Ostrom graded PhD papers on her deathbed, and Paul Samuelson wrote op-eds just a few weeks before he passed away.) In his last years, he shifted his attention to China, which culminated in a co-authored book in 2011 (at the age of 101) entitled How China Became Capitalist (with Nina Wang). In the book, the authors claim that the Chinese transition wasn't because of deliberate actions of the communist party, but small, marginal changes in society. They dubbed China the product of human action, but not human design, as "China became capitalist while it was trying to modernize socialism". Not since Milton Friedman was there a more respected Western economist in China.
Perhaps the best description of Coase as a person, as well as of the essence of his work, was summarized by Gary Becker: "Coase didn't say a lot, but I began to realize that every time he did say something, it was really profound."
Misinterpreting the Coase theorem
The simplest interpretation of the Coase theorem is that individuals can resolve their disputes in their best interests without the need for government intervention, assuming no transaction or bargaining costs are involved. However, since transaction costs do indeed exist, there is a need for government to lower these costs via an efficient institutional design and properly defined property rights. In other words, courts and efficient institutions are necessary to solve disputes: but not laws that for example prevent smoking, or Pigouvian taxation of externalities like pollution. The right to create social costs like pollution or smoking would simply end up in the hands of those who value it the most.
Consider the following example that Coase himself has noted. A confectioner has machines that shake the office of a nearby doctor when operating, thus preventing him from performing delicate examinations. The answer, Coase would say, is not to enforce a government regulation to put the confectioner out of business. If the value of the machines to the confectioner is higher than the harm imposed on the doctor then there is scope for a mutually beneficial agreement of a payment (compensation) from the confectioner to the doctor for using the machine. It works the other way around as well - if the doctor's work is valued more than the confectioner's, he can make payments to the confectioner to stop production during his work. Another example is a factory whose pollution imposes costs on a dry cleaning business, but whose profits are much higher than that of the dry cleaner. If the factory owner values his production more than what the dry cleaner values his, he can simply pay him the cost he's imposing onto him.
Coase wasn't trying to describe a perfect world without transaction costs (he actually resented such inapplicable economic analysis), but rather make it clear what the role of transaction costs is in designing the institutions of an economic system. The theorem is actually a great showcase of the real world - a world full of transactions, bargaining and choices that are not only constrained by budgets, but by the design of an institutional system within which these choices are made. It is the real world where the Coase theorem has found many of its applications. An example I always think of is the hunting of elephants in Kenya and Botswana. While poaching was banned in Kenya to save elephants from extinction, in Botswana local farmers were given property rights to elephant herds. The ownership of elephant herds would incentivise the farmers to preserve their long term value. As a result in Kenya, which applied the ban on hunting, since the 1970s the amount of elephants has dropped from 140,000 to only 16,000 today, while in Botswana their number has grown from 20,000 to 68,000.
Apart from the externalities problem, Coase also had a few things to say about public goods. In his 1974 paper "The Lighthouse in Economics" he challenged the classical a priori view that a lighthouse is a typical example of a public good that cannot be provided by the private sector at a profit. He showed that in 19th century Britain, all lighthouses were privately provided and charged ships for their use as they entered a port.
The legacy
Finally, from the Institute bearing his name (), a closing point:
"Coase was critical of economics for being static and preoccupied with formalizing concepts that date back to Adam Smith. He believed that the goal of economists should be to change fundamentally the way we look at a problem. This goal was part of the inspiration behind the Ronald Coase Institute, which a group of scholars formed with Ronald Coase in 2000 to assist young scholars whose research has the potential to help transform their economies. Coase’s support for these young scholars was an act of generosity illustrative of a lifetime of scholarly generosity and confidence in the power of ideas. Ronald Coase himself was an outstanding example of an economist who changed fundamentally the way we think about problems, and the impact of his ideas continues strong today."
Here is a list of some of his most notable writings (a full list of publications can be found here):
- 1937: "The Nature of the Firm." Economica 4 (November): 386–405.
- 1938: "Business Organization and the Accountant." Reprinted in James M. Buchanan and G. F. Thirlby, eds., L.S.E. Essays on Cost. London: Weidenfeld and Nicolson, 1973.
- 1959: "The Federal Communications Commission." Journal of Law and Economics 2 (October): 1–40.
- 1960: "The Problem of Social Cost." Journal of Law and Economics 3 (October): 1–44.
- 1972: "Durability and Monopoly." Journal of Law and Economics 15 (1) : 143-149.
- 1974: "The Lighthouse in Economics." Journal of Law and Economics 17 (2): 357–376.
- 1992: "The Institutional Structure of Production." American Economic Review 82(4): 713-719. (Nobel Prize lecture)
And these two books that reprint some of his most important work:
- 1988: The Firm, the Market, and the Law. University of Chicago Press, Chicago.
- 1994: Essays on Economics and Economists. University of Chicago Press, Chicago.