One way to read Wealth of Nations

Given the length of it Adam Smith’s “An Inquiry into the Nature and Causes of the Wealth of Nations” has a number of possible interpretations. One that we find useful at times is as a prolonged scream against the iniquities of the guild economy:

Chris Young, coordinator of the Real Bread Campaign, said new bread labelling rules need to be imposed on supermarkets and leading bread companies to protect smaller-scale traditional bakeries. The campaigners have complained of a “sourfaux free-for-all”.

He said: “We believe many people are being misled when they are buying their bread. Making sourdough is a slower process. We would want the definition to be ‘bread made without additives and using a live sourdough starter culture’.”

The government has formed a bread and flour technical working group to review the regulations, and the Real Bread Campaign has submitted a raft of proposals for a radical overhaul of bread labelling.

One of the things which makes Wealth of Nations timeless - despite the length of the 18th century prose - is that there are always attempts to reimpose those guilds and guild rules upon the economy. Attempts which, as in the original scream, need to be fought against.

If Mr. Hughes and his compañeros wish to label their bread as “bread made without additives and using a live sourdough starter culture” then so be it. We do have truth in advertising laws and so if that’s what they say it is then that is - likely enough - what it is. And if people prefer to have something marked “sourdough” that does not meet that standard then the absence of “bread made without additives and using a live sourdough starter culture” will be something of a clue. There will be some portion of the nation that does prefer some modicum of the sourdough process, some modicum of the flavour and at half the price after all. The insistence upon “sourdough” meaning “bread made without additives and using a live sourdough starter culture” is an attempt to reimpose those guild distinctions of who may make what and how.

The other way to put this is that the people buying the bread are capable adults. This must be so otherwise we’d not be running a democracy where all have the vote. If people are to be trusted to select, by careful consideration, their political representatives then it logically follows that they can buy the bread they prefer.

Exponential growth in the use of minerals and natural resources

A small thought on that idea that human society is just going to have to stop using those natural resources because they’re going to run out. We have dealt with this at length by outlining quite how much there is out there to use before. Here though the point is just about that idea of exponential growth.

We use more of a resource each year, then more again, then more - and so it doesn’t matter how vast the total resource is, that multiplication of use over time is simply going to bring us up, hard, against that limit then, obviously, we all die.

Aiee!

This does depend upon the idea that usage rises exponentially of course. It isn’t true of certain materials. Thorium usage has declined substantially since we stopped using it to make gas mantles. Mercury usage is declining so much that there are - real and honest - plans to dispose of the recycled excess back into the mines it first came from. But those are minor metals and so could be said to not illustrate the concept properly. That they are minor metals because we don’t use much of them and even that in declining quantities won’t hold much weight with the catastrophists.

So, something much more basic. Iron ore. Global usage is rising, yes, it is. Building out a civilisation for the first time - as China is a long way through the process of, India is perhaps starting - takes a lot of steel. But do we get to a point at which consumption of that necessary raw material, the iron ore, declines?

As it happens yes, apparently we do. US iron ore consumption stats for this year are here. US production, including a net export, is around 50 million tonnes a year. US resources are 110 billion tonnes. So, that can go on for a very long time without problem. Except, of course, for that pesky exponential growth. So, does that occur?

Historical statistics are here. Current production of iron ore appears similar to what it was in 1906. Well under half what it was in 1955. Imports and exports in 1905 were trivial, the US was a - large - net importer in 1955 and is currently a net exporter.

We appear to have something akin to the Kuznets curve here concerning basic resource consumption. Yes, it rises as civilsation is built. Then it falls again.

As to why, yes, the US does recycle much scrap steel these days. The majority of steel used now comes from this source. No, this wasn’t because the hippies demanded it - Nucor’s first electric arc furnace that works only on scrap was opened in 1969 when the hippies were still coming down off those first bong hits.

But the US also uses less steel than it did back then. 25 million tonnes in 1906, 28 million tonnes today but in 1955 it was 70 million tonnes. It isn’t just the rise of recycling, it’s not replacement with imports, it is just true that as a society matures it uses less of these most basic of products, iron ore, iron and steel.

We agree that global production and consumption of iron ore - of iron and steel - is larger than it used to be. It’s also true that iron ore resources are around 800 billion tonnes. Exhaustion of that will require that exponential growth in production and consumption. Which appears not to be what does happen. Rather, consumption rises as a society is built then tails off again.

Resource consumption does not rise exponentially. Therefore the catastrophists are wrong. Which is a welcome and cheerful thought, isn’t it?

HRT and the joys of government planning

Beaming in from outside the Westminster Bubble we now have the news about the Great HRT Shortage. HRT solves a problem, it should indeed be widely available. Having government in charge of it therefore seems like a bad idea:

HRT ‘betrayal’ forces women to buy on the black market

One line of thought to follow here is that prices, in markets, are what prices in markets will be. The NHS pays an agreed amount to those who make the HRT materials and if that’s not enough then supply will be short. Prices will then become what prices actually are, not what the NHS determines they should be. This is something that those who would abolish markets and prices need to understand about the reality outside that Bubble - markets and prices will out whatever you do or say about them.

The other useful line of thought concerns this:

Why are there HRT shortages?

Demand has surged in recent years amid high-profile menopause awareness campaigns, which have reassured women over HRT side-effects and highlighted the benefits of the therapy. The number of monthly prescriptions in England has increased from 238,000 in 2017 to almost 538,000 in December 2021.

However, there are insufficient stocks to meet this demand.

Government deliberately and specifically - and probably righteously - drove up demand. At the same time government failed to add to supply. Therefore prices rose as a result of the dearth of supply to meet that rising demand. Markets - and prices - will out as we say.

The takeaway here is that we should not be using government to plan things. It’s possible to make all sorts of theoretical arguments both for and against the idea. But as with any scientific hypothesis it is the evidence of reality that wins. Government simply isn’t competent to plan things therefore we should not use it to plan things.

Among the wider ASI family there are a number of young children, grandchildren, nieces, nephews and so on. All of whom do grasp that if Mummy’s to take more drugs then there need to be more drugs to take. As government is incapable of realising what is apparent to babes and sucklings we really do need to reduce the number of times we try to use government to do things.

A possible future for Mariupol

The Ukrainian city of Mariupol has been almost totally destroyed by the Russian invaders. Putin has created a wilderness, and will probably call it peace. The question arises as to how Mariupol can be rebuilt, and who will fund it? The Russian occupiers do not have an economy that is up to the task, and international aid will be concentrated on rebuilding and restoring Ukrainian cities and infrastructure that have been less devastated.

One possible future for Mariupol would be if it were declared an international free city, such as Hong Kong was before the Chinese Communist Party destroyed it in their power grab. Stranding on the Sea of Azov, it has passage via the Black Sea and the Mediterranean to the Atlantic Ocean and the world beyond. It has excellent trading opportunities, and is connected to the resources of the hinterland beyond it.

If it were to follow the Hong Kong model with low taxes any sympathetic regulations, it could rapidly emulate that city’s success in transforming itself from a poor and insignificant place that started as a low-cost manufacturer of cheap clothing, wigs, plastic goods and toys, into one of the world’s leading economic powerhouses.

Foreign investment would flood in as international companies sought to locate there, and it would be rebuilt with private money pouring in to create office and industrial space, as well as housing for its booming workforce. Its governance could follow the lead set in Hong Kong by its benign British administration led by Sir John Cowperthwaite, its City Treasurer and director of its economy.

Given the full play of free markets, free trade, open access, easy immigration and light burdens upon commerce and economic activity, Mariupol could rapidly flourish as Hong Kong did, and could benefit its surrounding area, as Hong Kong itself did with its economic overflow.

It could become, as Hong Kong became, “a city on a hill” and an example and inspiration to the world. Putin himself would be unlikely to countenance such a step, but the black-robed figure with the scythe will come knocking at his door before long, and Putin’s successor might be prepared to seize the huge economic advantages an international free city would draw in to the entire area, Russia included.

Now that the original Hong Kong has been destroyed, the world has space for a successor, and Mariupol could be the starting point to show once again what human creativity and effort can achieve if it is given the space to do so.

A more balanced look at the P&O Ferries case

The decision by P&O Ferries to end its contract with almost 800 seafarers has touched a nerve, provoking intense public debate. In the fury, the tendency has been to ignore a number of elements that throw new light on the situation - they deserve closer attention.

First of all, this decision must be seen as part of P&O Ferries’ mission to save itself. The company is a true 180-year old British icon, with a fleet of more than 20 ships, operating over 30,000 sailings a year on routes between the UK, France, Ireland and elsewhere in Northern Europe. The fact that it is now owned by Dubai-based logistics group DP World does not change any of that. To withdraw the redundancies, as requested by the British government, would, in the words of P&O Ferries CEO Peter Hebblethwaite, ignore “the situation's fundamental and factual realities” and “would deliberately cause the company's collapse, resulting in the irretrievable loss of an additional 2,200 jobs.” 

However, a mere look at the losses suffered by P&O during the Covid crisis should convince sceptics that the business situation is dire. The company lost more than £100 million in 2021 due to virus-related restrictions. Even before then, the situation was problematic, to say the least. The most recent year that the company logged a profit was 2018. 

Undeniably, it is very painful for people to lose their jobs, even in the context of record low UK unemployment rates, and record high job vacancy numbers. But soft healers make stinking wounds. Life support may only delay the inevitable. The drastic move to a new business model may well be the measure which finally allows P&O to escape from years of crisis. Certainly, there are travel competitors in the Channel Tunnel and low cost airlines, but across the world, sea ferry services continue to be in great demand, and there’s no evidence that it would be anyhow different in the UK. This year, P&O is rolling out a new class of ships, two state-of-the-art ‘superferries’, this alone should provide extra confidence that the company has turned a corner. 

Secondly, whilst it is correct that P&O did not comply with the law requiring consultation with the unions beforehand, which according to Mr Hebblethwaite was a considered decision because “no union could accept it” anyway, it should also be pointed out that the company has been compensating workers expressly for this. All but one of the seafarers concerned has accepted a deal with P&O to settle the matter. Despite initial plans to legally challenge the decision, the transport secretary has now declared that “the government are not in a position to take court action.” This is welcome, since it was more than a little perplexing that a Conservative transport minister was thinking of bowing to public pressure and considering restrictive measures against all organisations that fail to consult with the Trade Unions in a bid to secure their survival.

Thirdly, it is true that P&O Ferries will be paying workers below the UK minimum wage, but this is allowed in international waters for vessels registered abroad. The company has made clear it is all in favour of a level playing field, but it is not able to change the international legal regulations providing for this. It would certainly not be lawful for one company to be held to different standards than its competitors. There is work to be done here in the medium term for the long term future of the industry. 

Fourthly, friends and foes should admit that P&O’s owner, DP World, is clearly invested in the United Kingdom for the long haul. Not only has it been quietly covering P&O’s losses over the last few years, and is now also covering the £36.5 million redundancy payout, it has also invested a whopping £2 billion in the UK over the past decade. In addition to that, it has put forward £300 million to support Thames Freeport – one of the exciting new post-Brexit ventures that should enable Britain to open itself up to the world even more than before. Finally, DP World Southampton has been awarded freeport status, as part of Solent Freeport, which further highlights the pivotal role the company plays in the UK’s international trade.

Therefore, as terrible as it is for so many people to lose their jobs, the alternative of a British icon disappearing altogether is clearly a lot worse. Considered in the context of the ample opportunities P&O Ferries has ahead of it, this decision may indeed be described in time as a “painful but necessary” measure to restore the company back to greatness.

Better first, not ban first

A general principle is being violated here:

A ban on the sale of new boilers will be needed to persuade people to switch to greener heat pumps, the Government’s infrastructure chief has said.

As Terry Pratchett noted about the difference between sheep and goats - one can be led, the other has to be driven. Humans are on the goat side of this divide. To continue mutilating animal analogies, humans will drink if led to water without forcing.

That a behaviour change is desired, well, OK. The necessary action is thus to lead, to tempt, to incentivise, not to drive or ban.

This means that we do not ban - or, sorry, should not ban - a particular technology because we desire that behaviour change. Instead it is necessary to create the better alternative first then marvel as everyone adopts it entirely voluntarily.

When speaking about climate change this does still work. Recall, as the Stern Review tells us, that our aim is to maximise human utility over time. If a ban is deployed then that’s an obvious admission that the action being forced is not utility maximising - which is directly contrary to the aim we’re hoping to pursue.

Make heat pumps - or insulation, or Passivhaus, or solar water heating, or whatever up to and including shivering in the mire - preferable to gas boilers by developing those alternatives first.

That is, make the better way first rather than ban and hope one turns up.

Organic advocates against trial of organic farming

We think there’s a certain dark amusement to this:

Sri Lanka is grappling with the worst economic crisis since its independence in 1948, and foreign currency reserves sit at their lowest level on record due to what many see as gross economic mismanagement by the government. There is barely a citizen of this south Asian island who hasn’t felt the bite of catastrophic inflation and fuel, food and medicine shortages in recent weeks.

For the farmers of Sri Lanka, their problems began in April last year when President Gotabaya Rajapaksa, who now stands accused of pushing the country into financial ruin, implemented a sudden ban on chemical fertilisers.

No, that’s not the amusing part. That’s a multiplicity of tragedies as a result of entirely idiot policy making. This though, this does have its amusement:

On the face of it, a push to organic farming would be seen as laudable, given concerns over the use of chemical fertilisers. Yet it was the sudden and obtuse manner in which the ban was introduced – imposed virtually overnight and with no prior warning or training – and the questionable motives behind it, that have left even organic farming advocates furious.

Well, yes, the organic farming advocates would be furious, wouldn’t they? Imagine devoting your energies to an insistence upon a more land hungry, less productive form of agriculture. Then finding out that when it’s actually implemented it turns out to be just that, more land hungry and less productive. In fact, the results have been just what critics have been saying they would be all these decades of struggle.

Bit like MMT in fact, that other fashionable nostrum. As it turns out money printer go brrr as a method of financing government brings with it inflationary problems.

Other than all those who warned of it who could have known?

Capitalism and climate

Dr Rainer Zitelmann had a most interesting piece (£) in Monday’s Telegraph. He explores the connection between capitalism and the environment. He makes a point about Extinction Rebellion.

“One of this group’s central dogmas is that capitalism is to blame for climate change and environmental degradation – and that capitalism will ultimately lead to the extinction of humanity.”

But is it true? Dr Zitelmann examines the record, not from the point of view of theory, but from what has happened in capitalist and non-capitalist countries.

“The Heritage Foundation’s researchers compared the two indices, Yale University’s Environmental Performance Index and their own Index of Economic Freedom. They found that the countries with the highest levels of economic freedom – and thus the most capitalist countries – also had the highest EPI scores, averaging 69.8, while the “mostly free” countries averaged 66.8.”

“There is then a big gap to the “moderately free” countries, which were rated much lower (49.3 points) for their environmental performance. The “mostly unfree” and “repressed” countries, namely those that are least capitalist, registered by far the worst environmental performance (37.5 and 36.6 points in the EPI, respectively).”

What emerges is that the non-capitalist countries have a very much worse record of environmental degradation than do the capitalist ones. It is the reverse of what Extinction Rebellion and some other environmental campaigners tell us.

The Environmental Kuznets Curve is often used to describe the relationship between economic growth and environmental quality. It refers to the hypothesis of an inverted U-shaped relationship between economic output per capita and some measures of environmental quality. Developing countries are bad for the environment in the early stages, but as they become richer they can afford to produce more cleanly, and have the wealth to clean their rivers and the air in their cities. Dr Zitelmann draws the conclusion that emerges from the evidence.

“There is a very strong argument that, even in terms of climate change and environmental degradation, capitalism is not the problem, it’s the solution.”

We think the Labour Party is missing a trick here

No, don’t think rationally for a moment, just think like the public rhetoric for a bit. We’re told that the ghastly profiteers in these times of expensive energy must be hit with a windfall tax. We’re also told that wind and solar power are much cheaper than that horrible fossil fuel derived stuff.

Add in the manner in which prices are determined by the marginal supply and demand and we get the obvious implication that those suppliers of the cheaper to produce power - the renewables - must be coining even more money than those providers of the more expensive to produce - the fossil fuel folks.

Therefore, if a windfall tax must be imposed in order to alleviate consumer pain there’s much, much, more money to be had by imposing that tax upon the renewables sector than there is upon the fossil fuel one.

So, why isn’t such a windfall tax upon the greedy windmill owners being suggested?

One reason could be an outbreak of common sense, for taxing supply to subsidise demand really isn’t the way to deal with a dearth. But this is the Labour Party we’re talking about here so economic rationality is not something we’ve got great hopes for.

It’s also possible that those proposing a windfall tax simply do not understand the point - that could be true of Burgon, even be likely, but we’ve higher hopes of the likes of Sir Keir.

The third, and we assume gripping, answer is that such a suggestion would be regarded as insane. Too much even for the economically illiterate to swallow. But then that’s just proof that taxing supply to subsidise demand isn’t a sensible thing to be doing in a time of dearth, is it?

An answer we can entirely reject is that the windmills aren’t making massive profits at present. For if that were true then they’d not be cheaper and absolutely no one would be gaslighting us all that badly, would they?

Prioritization

Privatization placed inefficient and ailing state industries, businesses and some services out of state hands and into the private sector. It was done to make them efficient, innovative and consumer responsive. It changed nationalized industries into privately-owned ones, subject to the rigours of market competition and consumer demand.

The Citizens’ Charter was implemented to change the thinking of both the Civil Service and the public at large about state services and government departments. The purpose was to have government bodies examine what it was they were trying to perform for the public, and to implement procedures that would click into place where they failed to deliver that. In effect, it turned citizens who were previously simply the recipients of whatever government felt able to deliver, into consumers to be consulted about the quality of services they wanted to be delivered to them, and where something would happen if that quality was not provided.

It is now time to change yet again the thinking of government at all levels and the Civil Service which administers its activities and puts them into effect. This third revolution, following in the wake of privatization and the Citizens’ Charter, must put into place a system under which government will concentrate its resources onto the things that are the most important, the ones that matter most. It is a process of prioritization, and must permeate all departments of government.

To prioritize means “to determine the order for dealing with a series of items or tasks according to their relative importance.” Precisely. Government, like private individuals, does not have unlimited resources. Opportunity cost tells us that we cannot spend the same monies twice. When we choose to spend it on one thing, we cannot also spend it on another. We prioritize, and spend it on what matters most to us. Money spent on a restaurant meal cannot also be spent on a day at the races or a night at the theatre. We choose between them according to our scale of priorities.

We need every part of government to do the same. First must come an examination of each activity that falls within the remit of that department, and the grading of it on a scale to represent its relative importance. We might choose a 1-5 scale in which activities deemed less important score lower on the scale, whereas more important ones score higher. For example, selling food by non-metric measures, where still illegal, might score 1 on such a scale, whereas keeping open containers of petrol close to a primary school playground might score a 5.

Each department must have a unit set up to determine the relative importance of its activities. This has to be done using extensive opinion research to ascertain how the public at large regards their importance. It is a simple matter to present people with a list of 10 items and ask them to pick out the 3 or 4 that they consider most important. When this is done with respect to crimes, for example, it might emerge that public opinion might place hate speech as a 1, as opposed to murder, which would almost certainly merit a 5.

In terms of health provision, people might rate cosmetic surgery less important than life-saving operations. The point is that there are not unlimited resources anywhere in government, so it makes sense to swing them heavily towards the activities that people think matter most.

In some aspects of public service there is an incentive to go in for box-ticking, listing the number of activities that have been carried out, regardless of their relative importance. Police might boast about the number of e-scooters they have seized because they were privately owned rather than hired, but the public might be more interested in hearing about their success against murder, rape, mugging and burglary. A public service programme of identifying the high priority targets would diminish the incentives of low priority box-ticking.

Such a programme would indeed constitute a revolution. Just as privatization and the Citizens’ Charter changed opinion about state industries and services, so would a programme of prioritization change the attitude of government towards its own activities.

The Adam Smith Institute will be developing this theme into a concrete policy proposal, and commissioning opinion research to ascertain what public reaction would be to such a programme, as well as preliminary research to establish what some of the public’s priorities might be.