Farewell, Dr Smith

We don’t know exactly when Adam Smith was born. It was some time in July 1723. But we do know that he died, on this day, in Edinburgh, in 1790.

The story is that he was entertaining friends at his home, Panmure House off the Canongate, as he often did, being a lover of informed and educated conversation. At some point in the evening, he felt unwell, rose and said: “Gentlemen, we will have to resume this conversation in another place.” He died that very night.

Well, not exactly, it was a few days later. But the story is in the right spirit. And Adam Smith’s religious beliefs are a matter of debate; it unlikely he believed in an afterlife anyway. Indeed, though he died seventy years before Darwin’s Origin of Species, from 1759, in his own Theory of Moral Sentiments, he was grasping towards an evolutionary explanation of why human life, in economics, morality and other areas, seems to serve us in generally beneficial ways, without the need for any conscious direction from governments or anyone else. As if directed by an Invisible Hand, he wrote, though he knew there was no conscious entity moving that hand. Or Providence, he suggested. Smith’s mentor David Hume, in the last book of his 1739 A Treatise of Human Nature, was also grasping for an evolutionary explanation, and he was certainly not a believer.

A few days later, the smoke of a bonfire could be seen rising up from the garden of Panmure House. Smith had ordered that, on his death, all his papers should be burned, apart from one essay on The History of Astronomy. It was not such an uncommon request at the time: people did not want to be judged on their random notes and half-though-out jottings. But we were lucky he spared The History of Astronomy, a remarkable essay in the philosophy of science, advancing a trial-and-error thesis that would not be lost on the twentieth-century author of The Logic of Scientific Discovery, Sir Karl Popper.

Smith was indeed a polymath. As well as the economics for which he is most remembered today, he also wrote and lectured on the use of language, on the arts, on justice, on politics and on moral philosophy. It was The Theory of Moral Sentiments that in 1759 made him internationally famous — and brough him a generous income for life that would give him the freedom to think about economics and write his 1776 masterpiece An Inquiry into the Nature and Causes of the Wealth of Nations.

Today we call that simply The Wealth of Nations. And in it, he shows how the spontaneous order of the free market works. For centuries, people imagined that the only gainers in any economic transaction were those who ended up with the money. But Smith noted that their customers benefited too, by getting goods or services that they valued more than the cash. Indeed, the trade would not happen unless both sides got value from it. So we need to be facilitating free exchange — not thwarting it with protectionist measures against foreign imports or domestic regulations on trade.

This ‘system of natural liberty’, he explained, allowed the spontaneous society to flourish and raised nations from poverty to prosperity. It enabled families to strive to ‘better their condition’. By contrast, regulations and laws were too often laid down by politicians and their business cronies: to promote their own interests, most generally in opposition to the interests of the working poor.

Smith would have regarded a government that controls nearly half the economy, spending nearly half the nation’s GDP —  a concept that he introduced to the world on the very first page of The Wealth of Nations — as the greatest tyranny. Taxes, he thought, were another way in which established interests skew things in their favour and block potential competition. Taxes, he argued, should be as low as possible, should encourage rather than restrict free trade and innovation, and should be simple, understandable and convenient to pay. Unlike today’s.

When economic freedom, tempered by Smith’s moral virtues of prudence, justice, beneficence and self-control, has been allowed to flourish, it has led to the greatest increase of human prosperity. The free trade era of the nineteenth century enriched the world and brought humanity cheap food and manufactures. The globalisation of the twentieth and twenty-first brought nearly all nations into the world trading system and pulled a billion people out of dollar-a-day poverty. 

Adam Smith’s lessons are plain enough. The question is why governments so rarely learn them.

There really is no money left, you know?

Yes, yes, government can just instruct the Bank of England to print more money. But even then there’s no money left.

Labour needs a “growth miracle” if it is to fund its aspirations for public services, economists have warned, ahead of the King’s Speech. Economists have raised doubts over the new Government’s ability to boost the economy and expect a repeat of the slow expansion in growth since the global financial crisis.

We can’t have government buying us lovely new things because all hte money’s already been spent. The promises that have been made to us about pensions, services, depend upon economic growth happening already. They can’t be afforded if there is no growth - if there is growth we can only have what we’ve already been promised.

But it gets worse:

The Resolution Foundation has estimated that Labour’s spending plans commit the party to around £18bn of annual budget cuts over the next parliament. As they stand, these would affect “unprotected” areas of government such as the Department for Work and Pensions, the Ministry of Justice, local councils and higher education – and a funding shortfall for a depleted NHS. Ahead of this week’s king’s speech, when the new government will lay out its legislative agenda, five public sector workers give their verdict on Labour’s approach.

Every single one of them insists that the correct move is to send them lots more money. Hey, that could even be true. But it’s another reason why we can’t have nice new things from government. Any extra money around is simply going to pay those who do what we currently get more.

There’s no money for new things because we need growth to pay for the current promises. Even if we do have growth we’ll not gain new things because we’re going to end up paying the current suppliers more. There really is no money left for new things. To gain new things we’ll have to stop having some other things. We are back in that world where opportunity costs reign.

So, what does government currently do that we’d be happy to do without in order to gain some other new and lovely thing? That’s the world we’re in…..

Tim Worstall

If people don’t grasp the basics then…..

We’re willing to be fair to Will Hutton here. That’s a difficult job but someone’s got to do it. This line comes from the Observer’s subeditor, not Hutton himself - headlines and subheads are written by subs, not journalists or columnists. It does capture, well, the argument Hutton is making but these still aren’t his direct words:

Wealth is a privilege, and with it comes the obligation of paying tax to benefit society

This is, obviously, piffle. For what is being said there is that only by paying tax does wealth benefit society. Which is, obviously, that piffle.

It’s actually true that wealth is the product of having benefitted society. As in the William Nordhaus paper about who gains from entrepreneurial activity. It’s us out here, us consumers, who gain the vast, vast proportion of it. The entrepreneurs themselves gain some 3% or so of total value created. Only 3% too.

As an example, Jeff Bezos has some $200 billion. A lorra cash, agreed. It’s also true there’s been the “Amazon Effect”. By making the retail system more efficient the simple existence of the company has knocked 0.1 to 0.2% off the inflation rate. Every year for two decades. No, not 2 to 4% off retail sales that is, but 2 to 4% off the whole cost of living for everyone. That’s a sum vastly larger than the Bezos pile - especially when we convert that annual benefit into a capital sum so as to be able to compare it with the Bezos capital sum.

It simply isn’t true, not in the slightest, that the justification for wealth is the tax paid upon it. It’s how much better off are we made by someone having made that wealth?

Tim Worstall

Adam Smith for the win once again

There are those who think that the mere existence of billionaires is, as the cool kids say these days, problematic. There are those who say that it doesn’t matter very much. We’re in that second camp:

The three-day wedding itself — which begins on Friday evening with the traditional Hindu ceremony, followed by the shubh aashirwad or blessings ceremony on Saturday, and a reception on Sunday — would make an extravagant maharajah blush. While the cost of the months-long wedding celebrations has not been confirmed, analysts have estimated that they may have cost up to 50 billion rupees (£462 million). This would still represent a small fraction of Ambani’s net worth of $123 billion (£94 billion), according to Forbes.

An extravagant display indeed. And yet, as Britannica has Adam Smith saying:

….that the self-seeking rich are often “led by an invisible hand…without knowing it, without intending it, [to] advance the interest of the society.”

The point being made is not that someone having $94 billion is either good or bad, this is a comment upon a different part of the action. Those self-seeking rich, through their extravagant display, are moving £462 million from their pockets to the pockets of all those others supplying that wedding.

That initial argument is that billionaires should not have so much. They now have less than they started with and others now have more. That’s that very initial argument - that the Ambanis should have less, others more. So, it’s happening - good, eh?

This mention of “invisible hand” in Theory of Moral Sentiments is not saying that wealth, billionaires, are good. Nor that free markets are the very tops, the Colisseum, the Louvre Museum. Rather, just the obvious note that rich people spend their money which means that other people end up with it.

Which, you know, seems obvious despite all the vitriol directed at the idea.

Tim Worstall

To remind, the Laffer Curve applies to all

A complaint here about marginal tax rates at one point on the distribution:

More than half a million people are paying income tax of up to 60 per cent on the top slice of their earnings. A punitive tax trap catches out those on salaries of between £100,000 and £125,000 a year and the number being caught in it is higher than ever, …

That’s a bad idea, obviously. Well above any rational estimation of the peak of the Laffer Curve where revenue is maximised*. So, it should be lower, obviously.

But one of our regular reminders, the Laffer Curve does not only apply to rich people. Marginal tax rates can be too high for poorer people too. As that interface between the income tax system and universal credit is:

Under the UC taper, payments are reduced as claimants earn more. The current taper "rate" is 55%.

That’s too high by the best estimate the literature seems to have of that peak of the Laffer Curve. That is, we’ve already tapped out the ability of squeezing money from the populace in the form of incomes taxes (note, that means taxes upon income, income tax itself plus national insurance, both employees’ and employers’).

Which is why there’re so many beady eyes upon other methods of squeezing of course. Our own solution would be that government just spend less. Sadly, an extremely unpopular idea among those who gain the joy of spending however much the populace might like it.

Tim Worstall

*No, really, the Diamond and Saez estimate is of 54% (including employers’ NI) as the peak in a system like ours

And so it begins

A new government, yes, and what excitement, eh? Then it begins - the shrieks for more money from this or that sector:

Labour will miss its target of delivering 1.5m new homes this parliament without an emergency cash injection into the affordable housing sector, providers have warned.

Housing associations and councils have written to deputy prime minister, Angela Rayner, saying her promise to deliver “the biggest boost to affordable housing in a generation” will be impossible unless there are urgent interventions to fix the financial pressures providers face.

Our word, this is a surprise. More of everyone elses’ money simply must be poured into our, our very vital and special, sector. Well, perhaps not so much of a surprise, the only piece of news here is who has been first out of the blocks.

There is, of course, an alternative solution:

….cash from rents was currently not enough to cover its costs.

Umm, rents could rise?

….the provider had stopped buying new sites because….

Or, possibly, lower the cost of new sites. Which really does mean that supply side reform of blowing up the Town and Country Planning Act 1947 and successors. Proper blow up - kablooie.

For as we’re being told here, even the taxpayer assisted social housing sector cannot afford current land with planning permission prices. The solution is therefore to flood the zone with land with planning permission and so reduce those prices. This then makes housing cheaper for everyone, of every type of tenure. Further, we don’t need to increase the subsidy to the social housing sector and, even, the housing benefit bill will fall.

In fact, if we really flood the zone with land for building we’ll not need to have a social housing sector at all - for housing will be cheap for all.

Amazin’ what a bit of supply side reform can achieve, no?

Tim Worstall

We can’t see the problem here - sounds pretty good actually

A current complaint echoes one made by Naomi Klein a decade back. Which is, as the kids say these days, problematic. For if you’re echoing a Naomi Klein economic argument you’re going to be somewhere between wrong and wildly wrong.

The amount of wind and solar power under construction in China is now nearly twice as much as the rest of the world combined, a report has found.

Research published on Thursday by Global Energy Monitor (GEM), an NGO, found that China has 180 gigawatts (GW) of utility-scale solar power under construction and 15GW of wind power. That brings the total of wind and solar power under construction to 339GW, well ahead of the 40GW under construction in the US.

…

The findings underscore China’s leading position in global renewable energy production at a time when the US is increasingly worried about Chinese overcapacity and dumping, particularly in the solar industry.

Klein whined, bitterly, about the absence of trade tariffs on Chinese solar panels. As those were illegal under WTO rules they got banned and as a result a solar panel factory in Canada went bust. Well, OK, you can be nativist if you like but Klein’s actual complaint was that this was a blow in the fight against climate change. Canadians being restricted to only expensive home made panels would lead to more solar panel installation than Canadians being able to buy cheap solar panels from China. No, really, that was her argument. Wildly wrong, of course, but then Ms. Klein rarely does let us down.

The American complaint is that China has wildly overinvested in - perhaps even subsidised - the solar panel and cell industry. As a result the price to buyers is below what anyone unsubsidized or not wildly overcapacity can possibly sell at. The claim then is that this is a problem.

But we also have this climate change will be the death of us all idea. We’ve got to install solar as fast as we possibly can. Further, we actually subsidise factories to make such solar systems.

So, what’s actually happening here is - by allegation at least - that it’s the Chinese taxpayer taking the hit of saving the world not our own home grown and patriotic taxpayers.

We think this is an excellent idea. They’re paying and we’re not, the climate gets saved all the same.

Really, someone needs to tell us why cheap solar cells is a problem. Possibly of more importance in the long run is why is anyone lifting economic ideas from Ms. Klein?#

Tim Worstall

Get Ready for Growth?

Fewer than 72 hours since her appointment, the Chancellor seems to have emphatically set the tone for a new pro-growth agenda. Speaking at the Treasury, Reeves pledged to take the fight to the NIMBYs.

The Chancellor has already given the green light for the construction of two new data centres which had previously been halted by red tape. Promising 1.5 million new homes in five years, the Chancellor announced the reintroduction of mandatory house building targets; which should lead to a 15% increase in GDP- according to the Home Builders Federation.

Perhaps most interesting was the framing of growth at the centre of any planning decision. For too long has the national interest been sacrificed at the altar of local bureaucracy, costing the taxpayer billions without any material result. Many infrastructure and planning decisions will be made nationally rather than locally, taking power out of the hands of local government bureaucrats and NIMBYs. With DHLUC and HMT taking the reins, infrastructure programmes can be deployed more quickly and efficiently, if it is done right. But the war on housing bureaucracy does not end there – 300 new planning officers were announced to clear local backlogs, alongside a taskforce to accelerate approval for over 14,000 homes currently held in planning purgatory.

Why not go one step further and introduce approval for planning applications that have not received a response in six weeks? Getting shovels in the ground is a top priority, and so there is room for further progress. Nominally, housing of all kinds should be unleashed, allocated as per the market, to truly tackle the affordable housing crisis.

Envisaging a purposeful role for the state, there was also an emphatic endorsement of reform, the reversal of the ban on onshore wind represents both a cut-back in red tape, and future lower energy costs. The same is true of pledges to get building underway on ‘grey-belt’ land and brownfield sites. Similarly, transport too will benefit from planning reform, with projects such as the Lower Thames Crossing to be cut free from excessive regulatory tape. Unblocking resistance across the board – housing, transport, infrastructure, energy – will therefore be central to promoting long-term productivity and growth.

These plans will inspire hope that some of the barriers to building.– which have for too long obstructed growth and development – will finally fall.  But whilst announcements are promising , we must wait now for the results.

Ever get the feeling you’re being propagandised to?

Apparently that sugar tax was very good, very good indeed. So say all the newspapers:

A repeat:

The amount of sugar consumed by children from soft drinks in the UK halved within a year of the sugar tax being introduced, a study has found.

The tax, which came into force in April 2018, has been so successful in improving people’s diets that experts have said an expansion to cover other high sugar food and drink products is now a “no-brainer”.

The research, published in the Journal of Epidemiology and Community Health, looked at responses from 7,999 adults and 7,656 children between 2008 and 2019 to the annual nationally representative UK National Diet and Nutrition Survey.

It showed that the daily sugar intake for children fell by about 4.8g, and for adults 10.9g, in the year after the levy’s introduction.

Except pretty much none of that was true. Or even is true with the exception that there really was a sugar tax imposed on soft drinks.

As Chris Snowdon points out here. For example:

Firstly, the study doesn't claim sugar consumption halved, as the headline says, nor that "sugar consumed by children from soft drinks in the UK halved within a year of the sugar tax being introduced" as the article says. It found that sugar consumption by children from soft drinks halved between 2008 and 2019, with nearly all that decline occurring before the sugar tax was introduced in 2018.

That, of course, is a less than ringing endorsement of the success of the tax in reducing sugar consumption - and therefore obviously of the case for any extension. As Snowdown goes on to point out it’s also not had the slightest effect upon child obesity which is the background justification for the whole idea.

We’re being fed unsugared pap as propaganda here.

Which does make us think more kindly of that Welsh idea. It should be a criminal offence to lie in politics. As we’ve noted that is going to curb politics rather a lot. But it is going to be interesting.

This is clearly politics - it’s advocacy of a tax, that is politics. Somewhere between fact and what we’re being told there’s a certain error. So, who do we bring the private prosecution against for lying in politics? The authors of the original paper? The journal that published? The Press Association (we assume the reason everyone is running it is because that’s the intermediate source)? The individual newspapers? Or perhaps just all of them?

It really is going to be fun, isn’t it? Now, how does that crowdfunding lark work - if Jololyon can get piles of cash to pay lawyers then….

Tim Worstall

We always have enjoyed this social media carrying the news argument

Enjoyment comes in many forms of course:

Meta has claimed news is not the antidote to misinformation and disinformation spreading on Facebook and Instagram, as the company continues to push back against being forced to pay media companies for news in Australia.

Meta announced in March it would not enter into new agreements with media companies to pay for news following the end of contracts signed in 2021 under the Morrison government’s news media bargaining code.

The assistant treasurer, Stephen Jones, is considering whether the Albanese government should use powers under the news media bargaining code legislation to “designate” Meta under the code, which would force the tech company to enter negotiations for payment with news providers, or risk fines of 10% of its Australian revenue.

If that happens then perhaps Meta will do as it did in Canada, simply stop allowing news links on the site(s). That would be bad because:

Publishers have said the effect of a news block would be devastating. Broadsheet – which publishes city, restaurant and entertainment guides – told the committee in a submission it would lose up to 52% of its revenue should news be blocked. The publisher said it “would make it nearly impossible for the business to survive”.

The traffic from Meta is an essential part of the news business plan and ecosystem. Some of us here having worked in the online news industry it’s very much a part of the game to try to craft articles, headlines, that then go viral on social media. Pats on the back ensue from having done it successfully.

So, the actual argument being deployed by the news industry. We make lots of money from Meta sending us traffic but Meta must also pay us for running the articles - our copyright, d’ye see? - which send us lots of luvverly, profitable, traffic.

We do rather expect competent adults to be able to see through this but apparently some governments don’t have any of those.

There is that stated enjoyment of seeing an entire industry having enough brass neck to try it on in this manner. But we’d also make the observation that any government that can’t see through this perhaps doesn’t have enough competent adults to run the water systems, electricity industry and so on - all the things they claim they’ve also got to do.

Tim Worstall