The Guardian boosts sales of Hayek

Last week, I was on Amazon and noticed that The Constitution of Liberty by Freidrich Hayek had a “bestseller” badge appended to it. Given that it was published 62 years ago, I wasn’t expecting that. Then I realised why: George Monbiot had given it some free publicity in The Guardian. Monbiot writes:

The founding father of neoliberalism is Friedrich Hayek. His frankly deranged tract The Constitution of Liberty enjoys almost biblical status among his disciples. Margaret Thatcher was perhaps the book’s most famous advocate, and Truss now carries the flame. It inveighs against the protection of the living world. Rather than seeking to protect the soil – the delicate ecosystem from which 99% of our calories are produced – Hayek says it makes sense to extract as much value as it can produce, exhaust it “once and for all”, then abandon the land. The role of soil is to create a “temporary contribution to our income”, which we can then invest in other moneymaking schemes. For “there is nothing in the preservation of natural resources as such which makes it a more desirable object of investment than man-made equipment”.

Unfortunately, Monbiot has misunderstood the section of The Constitution of Liberty from which he is quoting. Hayek is talking about whether businesspeople should use particular natural resources, and the effect of prices on these choices. He is describing how farmers (thinking commercially) might invest in improving the fertility of the land. If, however, the cost of this is too great, they might choose not to continue cultivating it rather than commercially farm it, especially if the geographic or climatic conditions of the land are not well suited to growing crops.

The book does not, as Monbiot claims, inveigh “against the protection of the living world”. A few paragraphs later, Hayek writes about how society should protect the environment, preferably through voluntary associations such as the National Trust, or government purchase of land to protect it for future generations. Hayek is a believer in small government, but is not doctrinaire about it.

Hayek’s main point is that resource depletion is influenced by the price mechanism - that is to say that as resources are used, they become more expensive, which changes behaviour. An example of how prices influence behaviour might be the way that, while there is oil and gas in the North Sea, much of it became too expensive to exploit relative to other energy sources. Now that there is a shortage of oil and gas due to events in Ukraine, and energy prices have increased, there is a renewed incentive to invest in the North Sea. In practice, as resources become more expensive, the market encourages people to find alternatives and also innovate so that we use them more efficiently.

Hayek, of course, wrote The Constitution of Liberty in the 1950s, prior to the creation of the modern environmental movement. He didn’t write much about environmental issues - “Environment” doesn’t even appear in the index of the sizeable intellectual biography of Hayek by Bruce Caldwell. Really, his contribution to thinking about the environment is not this small section in The Constitution of Liberty, but his more general thinking about how prices convey information in the “spontaneous order” of society.

Hayek’s ideas certainly influenced the business professor Julian Simon, who described Hayek as “arguably the greatest social scientist of the twentieth century”. Simon showed decisively that, contrary to popular belief, natural resources were not running out, through a famous bet against the “population bomb” author Paul Ehrlich. He bet in 1980 that by 1990 a set of natural resources (chosen by Ehrlich) would be cheaper, reflecting more years’ of supply being left. He won.

Well, it could work, to be fair about it

This is not necessarily a bad plan:

“The next Labour government will scrap business rates.

“We will carry out the biggest overhaul of business taxation in a generation, so our businesses can lead the pack, not watch opportunities go elsewhere.

“And here is our guarantee: the system we replace it with will incentivise investment, feature more frequent revaluations, and instant reductions in bills where property values fall, reward businesses that move into empty premises, encourage, not penalise, green improvements to businesses, and no public services or local authorities will lose out from these changes.

There are significant problems within the business rates system. For example, that it is based upon both land values and also improvements - it should be land values only. There should indeed be more frequent re-ratings, revisions downward should happen just as quickly as upward and so on.

But the devil in such reform plans is always in the detail. Here’s someone from the property industry decrying certain types of reform:

John Webber, head of business rates at Colliers, said: “ While we would support Labour if introduced significant reform to the current system, we would not support total abolition or any form of land value tax.”

But a move to be more of a pure land value tax is exactly the reform that business rates requires.

“However, if Labour is looking at a tax based on a valuation process (probably a mix of land and rental value), we do not think this would work as the tax would probably be levied on landlords.”

Which is to miss the point entirely, The current business rates system is incident upon landlords right now. And the very point of the taxation system is to tax those rents the landlords receive anyway. Repeated charges to real property being the least distortionary tax possible and the one with the lowest deadweight costs. We like least distortionary and low deadweight - and so should everyone else.

Business rates should indeed be reformed and there’s nothing wrong with the Labour Party being the ones to propose it - good taxation is good taxation. Hmm, OK, the least bad system of taxation is the least bad system perhaps.

But the point we all have to recall during any discussion of such reform. Landlords currently - really - pay business rates. The aim of this sector of taxation is to lighten the wallets of landlords. So, any refinements or reforms to the system have to ensure that we continue that process - lightening the wallets of landlords.

The Georgists have written entire libraries on this subject, Milton Friedman said “the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago”.

Whoever proposes or even enacts reforms to business rates we all must recall the aim here - lighter wallets for landlords. And don’t let the landlords tell us any different.

Perhaps the LSE could encourage the anthropologists to talk to the economists?

One of the things that we’ve pointed out over the years is the idea that the London School of Economics might want to encourage its anthropologists to wander down the corridor to speak to the economists. Before, you know, making grand economic claims? On the basis that this might prevent certain avibus ovum meets faciem events.

One of the points that Paul Krugman makes in Ricardo’s Difficult Idea is that economies do have to add up. He applies that insight to the idea that wages are not rising with productivity. If that is so then the labour share of the economy must be declining - things must add up - and as the labour share is not (was not when he wrote) then therefore wages must be keeping up with productivity.

The insight is that if this claimed thing is happening, or had happened, then this other related thing must also have happened. Which gives us a simple tool to evaluate claims of things that are, or have, happening, -ed. Take that connected thing which must also have happened as a result of the claim of the first and look for evidence of it. If it hasn’t happened then the original claim must be wrong.

We can, if we wish to be detailed, then go and work out why the claim is wrong but that’s not actually necessary. The absence of the necessarily linked event is all we need to prove - prove note - that the claim is wrong.

Krugman then goes on to point out that the economy is complicated. It’s not always obvious to the non-economist what such a linked and necessary happening is. But then as he doesn’t quite say that’s the good reason to toddle off down the corridor to talk to the economists and ask. Which is, as we say, our advice to the Alma Mater, the London School of Economics.

Jason Hickel of the anthropology department has just released a paper insisting that capitalism lowered the living standards of the population. So much so that it dropped below subsistence level and only rose back up above it once socialist-like redistribution arrived at the beginning of the 20th century.

It’s an interesting claim, certainly, one worthy of analysis. Even if our starting point would be “Well, he would say that, wouldn’t he?” - we might be a little unkind in this but we do think his arguments too often boil down to we must be poor so that we can be socialist. But to take the claim fairly and attempt that analysis.

The rise of capitalism caused a dramatic deterioration of human welfare. In all regions studied here, incorporation into the capitalist world-system was associated with a decline in wages to below subsistence,

Hmm.

Where progress has occurred, significant improvements in human welfare began several centuries after the rise of capitalism. In the core regions of Northwest Europe, progress began in the 1880s, while in the periphery and semi-periphery it began in the mid-20th century, a period characterized by the rise of anti-colonial and socialist political movements that redistributed incomes and established public provisioning systems.

That is the core of the claim.

So, what must also have happened if this is to be true - or have been true? They define subsistence roughly correctly, as one adult wage being enough to support two adults and two children. As both Ricardo and Malthus pointed out that being the requirement for the population to replace itself over the generations. Go below this subsistence level and the population will necessarily fall over time. Equally, if the population is growing then the general living standard must be above this subsistence, replacement, level.

Which gives us our independent test. It is only possible for capitalism to have lowered incomes below subsistence if population fell at that dawn of capitalism. If population grew at that sunrise then the contention is disproven.

Oh. English population started to grow, significantly, in the late 18th century, accelerating all the way through the 19th. A century before that socialism and redistribution. English living standards must have been above subsistence in that period of time.

Well, we might explain it by net migration but no, that sadly doesn’t do it either.

While the number of immigrants entering Britain during the nineteenth century was not insignificant, during every decade after the 1830s, emigration from Britain vastly exceeded immigration. Between 1815 and 1914, approximately ten million people emigrated from Britain.

Net migration figures emphasise our point in fact. For the population to around quadruple from 8 million-ish to 30 million plus also export 10 million means that wages, incomes, simply must, must, have been very much higher than subsistence.

We can make the same test with global population even if that proof is a little weaker. A near doubling between 1800 and 1900 shows that the general condition cannot have been below subsistence.

We have our thing - population - which must have varied in a specific manner if incomes or wages fell below subsistence. Population did not vary in that necessary manner therefore wages and or incomes did not fall below subsistence. QED.

Krugman is correct, economies are complex things but they also have to add up. Economists know this and so does the economics department at the LSE - that’s where we learned all of this after all.

Which is why we repeat our advice to the anthropology department there. Try a little toddle down the corridor to the economics folk just to see if your claims pass that first sniff test. You might find out that there’s necessarily an error in your calculations……population grew at the time you are claiming incomes were below subsistence. This cannot possibly be correct and it’s not reality that contains the error.

To mildly disagree with Tim Congdon

Not that we would vehemently disagree with Tim Congdon - he’s called far too many things correctly over the decades for us to want to do that. But to mildly disagree with this:

He argues that borrowing in order to cut taxes, as Kwarteng plans, actually risks expanding the size of the state because it will lead to higher interest payments on national debt and thereby increase public expenditure.

More of the economy flowing through the maw of the State - subject to the incentives of politics, not consumers - is not something that pleases us. We even, heresy though it is, think that some vague idea of balance between taxation and spending might be a good idea.

However, while this might only be an idea that comes to the front of the mind on bad days, we do sometimes think that paying interest is less bad than government actually doing something with the money.

Some will call us cynical at this point but we prefer realistic. The argument against large government is that government isn’t very good at things. The ultimate limitation on the size of government is how much they can wring out of the population to pay for government. If some healthy chunk of that possible exaction has to be used to pay interest then that means there’s less available for government to spend not very well on doing things badly.

That is, the more interest has to be paid then the less government we get. Given the performance of British governments in actually spending money this strikes us - those bad days again - often enough as a good thing.

Another way to make much the same point. Interest on government debt is money the government is taking in taxation - Boo! Bad! - and then returning to the population in those interest payments. The round trip is inefficient, certainly, but at least it doesn’t stick inside politics where it will get entirely wasted.

We’re not sure how entirely far we would want to take this line of thought so take this as an attempt at finding that silver lining which apparently exists inside every cloud. The more interest government has to pay the less money they’ll have to waste.

Please, stop doing this - GDP is not a measure of wealth

Yes, yes, we know, making a plea for economic good sense to Guardian writers is an isometric exercise but please, please, could people stop doing this?

It’s here that Blackstone’s investment decisions are made. Last year, the company invested $270bn, bringing the total value of the assets it manages to $881bn, slightly more than the gross domestic product of Switzerland, and more than twice that of Denmark.

GDP and wealth are simply not the same thing. Therefore using the one as a measure of the size of the other is not just wrong it’s wholly misleading.

Gross Domestic Product is the value added in that economy that year. It’s also - by definition and design - equal to all incomes in that economy that year (we’ll leave the differences with GNP aside for a moment). So, it’s a measure of income.

Capital, well, that’s a measure of wealth - especially so here when what is being discussed is the investment of wealth into assets. The two are very different.

For the UK GDP is some £2.2 trillion a year or so. Household wealth is getting on for £15 trillion. A couple of trillion in “financial” wealth, a bit in furniture and so on, then the vast bulk split between pensions and housing equity. Blackstone is investing pensions money, by and large, and the complaint is that it’s into that housing. But pensions and housing are both - each that is - about three times UK GDP and that’s just the wealth of the UK. Blackstone is of course both collecting capital and also deploying it from and to many different countries.

If we think instead of the US economy then GDP is around the $25 trillion mark, household wealth possibly $150 trillion and the nation as a whole might be anything from $200 trillion to $400 more than that - depends how we measure the value of what the government owns.

At which point - yes, of course Blackstone is investing sums that are vastly larger than the GDP of some places. Beause wealth, that thing being invested, is very much larger than the income against which it is being compared.

So, could people stop doing this please? GDP is not an appropriate comparator to wealth.

Yes, foreign government ownership is better than domestic nationalisation

One of our less strongly held but more controversial views here - foreign government ownership is more efficient than domestic government ownership or nationalisation. The point becoming important when we think of the latest cunning plan:

Currently, many British energy generators are wholly or partly owned by foreign governments or companies. In his speech, Starmer cited “the largest onshore windfarm in Wales”, adding: “Who owns it? Sweden. Energy bills in Swansea are paying for schools and hospitals in Stockholm.

“The Chinese Communist party has a stake in our nuclear industry. And 5 million people in Britain pay their bills to an energy company owned by France.”

At one level it does seem simple enough. If foreign governments can run companies in Britain efficiently then the British government can too. One answer to that is that the British government is uniquely incompetent and having met many of Westminster’s inhabitants that’s a view we have some sympathy with. But then we’ve also met a number of foreign politicians and have to report that the surmise doesn’t in fact stand up.

We think that the actual issue is that if a government owns a company that operates outside its own voting base or population then it’s possible to run it as a market and capitalist based company. It’s when the customers and the workers become part of the voting block that managing government is trying to attract that the problems really start. Because this inevitably means that electoral politics becomes part of the management system of that company.

The Swedish voters are interested in that windfarm in Wales to the extent that Welsh windpower produces profits for Swedes to enjoy. Thus the Welsh windfarm is run efficiently to maximise those profits. Also, the Swedish government has no input into what the subsidy level, output prices or wage levels are or should be in Wales. It’s a free market and capitalist operator - therefore it works.

The moment it becomes the British government running that same windfarm the operation - and staffing levels, wages, output prices and so on - become subject to those British domestic political pressures. As proof of this we’d call into evidence that (possibly mythical) five levels of middle management that British Gas fired immediately upon privatisation, the surge in investment in the privatised water companies - politics simply wouldn’t pay for maintenance, let alone upgrading the system.

Of course, to some the irruption of politics into operating decisions is the very point. But by definition decisions made for political reasons are ones not made for efficiency ones. Otherwise, why would the decisions based on the two sets of concerns differ?

So, our opinion becomes that foreign governments do better at managing economic assets than domestic ones. Precisely because a foreign government, unaffected by domestic politics, can act as a capitalist organisation in a market. A domestic government is inevitably affected by domestic politics and therefore so is the operation of assets owned by that local government - at the expense of the efficiency of the operation.

As we say, the concluding proof here is the very insistence that a domestic government owned operation would do things differently- that influence of politics, that insistence upon decisions made for political, not efficiency, reasons, is the proof that the decisions made will be less efficient.

Polly will be happy - we're more like Sweden

As we’ve been known to point out the Nordic social democracies are rather more, under the hood, capitalist and free market than the UK is. Their system depends upon being exactly that, more viciously red in tooth and claw but with a higher tax slice off the top to ameliorate matters. Not that we recommend such a system - we prefer both the red in tooth and claw and also the lighter tax burden. But we do like to point out that the system in use is why those places work. Precisely because they are more market and capitalist the economic engine can still support that higher burden placed upon it.

As Polly Toynbee has spent decades pointing out we should be more like Sweden.

At which point, something to make us both happy:

But Peel Group, owned by shopping centre billionaire John Whittaker, said on Monday that the South Yorkshire airport was no longer financially viable. The airport’s 800 staff are now facing redundancy.

Beckie Hart, CBI director for Yorkshire & Humber, said the closure was a “serious blow” to the region.

The Labour-run South Yorkshire local authority offered to bankroll the airport until October 2023 and claimed it had teed up a potential buyer.

Peel said that it had received a letter from the mayor’s office earlier this month saying that it had a bidder waiting in the wings, but had not received any further information.

It added that it would be inappropriate to use taxpayer funds to keep the airport afloat "against the backdrop of an unviable, loss-making operating business".

Oh well, nice idea, doesn’t work, close it. Red in tooth and claw. And also most Swedish:

Olofsson has called a meeting of the three sides to discuss the situation in Trollhaettan, southwestern Sweden, on Dec. 21. But she reiterated the government's position that the state cannot takeover Saab, saying it has no place owning car companies."We don't have that knowledge or the money," she said.

"I don't think GM really knows how the wind-down is going to take place but GM has to take its responsibility," Olofsson said, adding: "The most important thing right now is to take care of the employees and the future, how to make the most of their know-how."

As Sweden did do - no one wanted Saab, it couldn’t make money, close it. Ah well, mistakes are made and the issue is how quickly to we get rid of them to then concentrate upon things that work?

Yes, let us be more like Sweden. Let us be more free market and capitalist. Close things that don’t work, liquidate the assets, redeploy them to things that might, possibly, work.

We can have that argument about the tax burden and redistribution afterwards, after we’ve created a system that hums along. After all, it’s only even possible to redistribute if there’s a surplus available, right?

Government wants growth; shame it knows not how

When the Chancellor introduced his “Growth Plan” in the Commons on 23rd September, he used the word “growth” 142 times but did not mention “innovation” even once. The closest he got to it was: 

“Of course, to drive growth, we need new sources of capital investment. To that end, I can announce that we will accelerate reforms to the pension charge cap so that it will no longer apply to well-designed performance fees. That will unlock pension fund investment into UK assets and innovative, high-growth businesses. It will benefit savers and increase growth. And we will provide up to £500 million to support new, innovative funds and attract billions of additional pounds into UK science and technology scale-ups.”

Making money to support innovation is indeed helpful but not the way Business, Energy and Industrial Strategy (BEIS) does it nor stodgy pension funds, nor large companies.  Procter & Gamble discovered it had too many committees blocking new product development, so it gave up and restricted itself to buying the new products once they were already doing well in the market. Baileys Irish Cream, one of the most successful drinks brands in the last 100 years, was born because the Irish Finance Minister offered a 10 year tax moratorium on a new product’s exports if the parent company came up with one. They did, but the main board considered it dreadful. Management turned a blind eye and went ahead anyway.

Growth is driven by innovation, sometimes in the form of new, or changes to, products or how they are made, perhaps using new technology, or how the producer businesses are run. Stifling immigration and declining birth rates mean that growth has to come from increasing productivity, i.e. output per capita, and that can only come from innovation. Mathew Syed, in the Sunday Times on 25th September, wrote a misguided article claiming that growth is driven by the availability of energy: “growth in real economic systems (as opposed to abstract economic models) is ultimately determined by thermodynamics — that’s to say, energy.” Of course if we consume more (growth) we have to make and then use more energy, cars for example. But Syed is confusing correlation with causation. Innovation drives growth and that needs more energy. Professor Karl Pearson was teaching the difference between correlation and causality at UCL back in 1911. It is time Syed caught on.

At the Labour Party Conference, Sir Keir Starmer promised to “turn the UK into a growth superpower” although he did not say how and, almost certainly, does not know.  Handing more power to the unions will certainly undermine growth. Blocking change, whether by boardrooms or shop floors is the enemy of innovation, and therefore growth.

BEIS means well. It invites people to pitch for money and has middle-aged committees to sit in judgement. Sometimes they get lucky and back winners but usually not. The real-world market does not operate that way. Offering tax breaks is a far better way to go: if the innovation fails, it makes no money and therefore costs the government nothing. If it succeeds, it is a win-win.

The simple truth is that neither Truss nor Starmer have a clue how to achieve innovation, and with it increasing productivity, because they have not studied how innovation, and therefore growth, comes about.  It is time they did. Or at least tell BEIS to go find out.

Jobs are a cost, not a benefit

It seems ridiculous that it’s necessary to make such a basic and obvious economic point - jobs are a cost of doing something, not a benefit of the thing being done. But sadly it is indeed necessary to point this out:

A clean power system by 2030 will lay the foundations of the drive to net zero, but it will also unleash waves of dynamism and industry across our country with a million well-paid jobs in the renewable and nuclear industries, built on strong trade unions.

A clean power system may or may not be a good idea. Judge that as you wish. But human labour is a scarce economic resource. If we use more of it to achieve one particular goal then we have less of it to master any other problem that may face us.

Jobs are therefore a cost of doing something, not a benefit.

It could be true that the jobs building a clean power system are the best allocation of that limited labour at our disposal. Judge that as you wish. But it is still true that the human labour - those jobs - are a cost of doing this thing, not a benefit.

All of which does give us an interesting insight into what’s wrong with the modern economy, doesn’t it? A substantial portion of those who would run it are ignorant of the most basic economic precepts. They’re touting jobs, costs, as a benefit of doing a thing. Really, catching up with the most basic ideas within economics would be a useful start to building economic plans.

Jobs are a cost, not a benefit.

It's not obvious that killing the 45% rate is actually a tax cut

Eliminating the 45% income tax rate is clearly a cut in tax rates. Whether it’s actually a cut in tax is another matter. Will those high earners end up paying more actual cash in tax as a result of the cut in the rate to be paid?

This is, of course, to consider where the peak of the Laffer Curve is. What is the tax rate that maximises tax income?

The usual and standard source for considering this has been, for the past decade at least, the Diamond and Saez paper. About which we should say a couple of things. It looks not at income tax rates, but taxes incident upon incomes. So, this includes employers’ national insurance, along with any other taxes that might be incident upon incomes (for the US Social Security perhaps, Medicare taxes, state taxes and so on). It’s also directed at the US tax system which is, most importantly, a passport based system. If one is an American citizen one does not leave the American tax system by leaving the country, earning no money there (and deriving all income from outside the US) and so on - as Boris found out when he sold his house. This is entirely unlike the system everywhere else (except Eritrea) where leaving the country means leaving the tax system by and large.

Within the calculations by Diamond and Saez this would be known as “a deduction”. Or even a possible method of tax avoidance - which is, note, the entirely legal process of reducing tax bills. As they say:

“When a tax system offers tax avoidance or evasion opportunities, the tax base in hen a tax system offers tax avoidance or evasion opportunities, the tax base in a given year is quite sensitive to tax rates, so the elasticity given year is quite sensitive to tax rates, so the elasticity e is large, and the optimal is large, and the optimal top tax rate is correspondingly low.”

Given that moving those 26 miles to Calais takes one out of the British tax system the optimal (by which they mean top revenue generating) top tax rate is lower in the UK than it is in the US. In fact, they give a useful estimate of what that rate might be:

As an illustration using the end tax avoidance responses is critical for tax policy. As an illustration using the different elasticity estimates of Gruber and Saez (2002) for high-income earners mentioned above, the optimal top tax rate using the current taxable income base (and ignoring tax externalities) would be and ignoring tax externalities) would be τ * = 1/(1+ 1.5× 0.57)= 54 percent, while the optimal top tax rate using a broader income base with no deductions while the optimal top tax rate using a broader income base with no deductions would be τ * = 1/(1+ 1.5× 0.17)= 80 percent.

In simplistic - too simplistic - terms 80% if there are no dedictions, 54% if there are. And shave a bit more off again if people can simply leave the system by leaving the country.

Again, this is taxes incident upon income, not income taxes. This month (it goes down again next) employers’ national insurance is 15%. We have to add that to the income tax rate to gain the full tax upon income rate.

The top tax collecting rate in the UK is lower than that in the US because of that construction of the tax system itself. We don’t tax citizens living in foreign. With the 45% income tax rate the combined rate is 53%, with 40% it’s 49%.

We do not, not at all, insist that this cut in the tax rate moves us from over the Laffer Curve peak to at it or under it. We’re deeply uncertain that something as complex as an economy can be modelled to this level of certainty. But we do point out that the currently accepted best guess at it leaves the possibility entirely open that it does.

That is, this might in fact be a tax rate cut and an increase in tax collected - so not a tax cut at all.