Monday, March 9, 2009

The UK and the Silent Bank Run

There is nothing so dramatic as a line of people lined up outside a bank, hopeful of retrieving their money whilst there is still money left. It makes a good picture for the papers. What of the silent bank run? This is where there are no lines of people, but just a long line of electronic transactions as institutional investors remove their funds. No pictures. No drama. No headlines.

Some of the regular readers will know that I have been discussing such a bank run for a long time. I have suggested that the current financial crisis is all about overseas depositors steadily withdrawing their funds from the UK economy (it is not the underlying crisis). The pouring of money into the banking system by the government is an attempt to save the banking system, not only from catastrophic losses, but also from this steady bank run that is resultant from these withdrawals. As that money pulls out of the economy, it is no surprise that the economy comes ever closer to full collapse. It was, after all, the foundation on which the economy was built.

I have recently had a commentator point to an article in the Independent newspaper (many thanks to the anonymous poster). Whilst an occasional browser of the paper, I missed this very important article which, as the commentator points out, was tucked away in the dark corners of the finance section. However, this article should be the stuff of headlines and, in light of the importance, I will quote at some length:

A silent $1 trillion "Run on Britain" by foreign investors was revealed yesterday in the latest statistical releases from the Bank of England. The external liabilities of banks operating in the UK – that is monies held in the UK on behalf of foreign investors – fell by $1 trillion (£700bn) between the spring and the end of 2008, representing a huge loss of funds and of confidence in the City of London.

Some $597.5bn was lost to the banks in the last quarter of last year alone, after a modest positive inflow in the summer, but a massive $682.5bn haemorrhaged in the second quarter of 2008 – a record. About 15 per cent of the monies held by foreigners in the UK were withdrawn over the period, leaving about $6 trillion. This is by far the largest withdrawal of foreign funds from the UK in recent decades – about 10 times what might flow out during a "normal" quarter.

If we think of the numbers that we are looking at, it becomes self-evident why the endless bailouts by the government are falling into a black hole. The government is having to bail out the banks to repay these overseas investors such that, as fast as the money is pumped in, it is pumped straight back out to meet the demands of overseas depositors. With the banks sitting on mountains of toxic debt, with no market left for the sales of these toxic assets, there is nowhere to turn except to the government.

It is as I have long suspected. I have always been of the view that this is not really just about bailing out little old ladies with their savings held by RBS, but also about bailing out all of the overseas investors who stand to lose so much money.

The reason for the bailouts is the can be found in a comparison with the banking crisis in Chile many years ago. I read a paper some time ago on the subject, where an attempt was made by Chile to allow banks to fail, but international pressure forced a reversal of the policy (apologies, I hunted for the paper on the subject, but it is now lost in the 1000+ papers I have lying around). Added to this pressure is the internal pressure caused by politics, and the fact that many advisors to government come from the system that is being bailed out. This has driven governments to think that the banks must be saved, even at the risk of their own downfall.

This ongoing outflow of money from the UK banking system, and also from the UK economy more widely, is at the heart of the financial crisis. Whilst there are no headlines, there is no question that the nature of the problem is as severe as the Northern Rock fiasco. However, the UK government is in the position of guaranteeing this huge outflow and, one way or another, they will somehow need to find ever more money to support the outflow.

Quite simply, the government has made a commitment that it will never be able to keep. The only method will finally be to default through the printing press. As the demands from overseas deposits continues, more money will pour in to the banks from the government, and much of it will just transfer out of the country. The government was never going to have access to such an astonishing amount of resource.

It was a very long time ago that I first realised that the UK was bankrupt. As each day goes by, there are ever more stories that confirm this. It really is very simple. The UK collectively borrowed money that it could never pay back, as it simply does not have the wealth to make the repayments.

Note 1: It may be with relief that you note that this is a short post. I have several real life commitments that are pulling me away from time on the blog. I am hoping to be back to more regular and more deeply considered posts in a while.

Note 2: I have also been distracted by a book which is heavily promoted by the Austrian Economists. It is called 'Economics in One Lesson', by Henry Hazlitt. The book was published a long while ago, so there is a free online version here. It is relatively short ( I read it in about 3 hours approx.) and is one of the most outstanding works on economics that I have read (The Wealth of Nations by Adam Smith still tops my list). As such I strongly urge you to read it (in particular for a regular commentator Lord Keynes, as it covers many of the points that he has made in recent posts).

Note 3: Some replies to the comments on my last post on Quantitative Easing (QE - printing money):

Tiberius mentions that buying gilts directly through QE by the Bank of England (BoE) might 'be in direct violation of the Maastricht Treaty'. I think this is another reason for the circumspection....

Ketley highlights some of the BoE's statements to point out that much of what is going on is about confidence. My feeling is that 'playing' with confidence is a very dangerous game. As soon as the truth 'outs' then the confidence game comes to a messy end. Ketley also notes that there is a possibility of much of the media simply regurgitating press releases on QE, and this does seem to be the case. If only the press would take the time to look around, they might actually find some different perspectives.

An anonymous poster points out the damage of this policy to savings, and asks how much inflation will follow. My simple answer at this stage - I simply do not know. Once this process of money printing starts, it can create self-reinforcing feedback - and this makes it beyond prediction. Equally, there is no firm timescales for when it will kick in.

Lord Sidcup asked for M0 and M4 figures. M0 is no longer reported (interestingly went in 2006, I think), and M4 can be found here (only reports to January 2009 at the moment). For those that do not know what these are, basic definitions can be found here on Wikipedia.

An anonymous poster offered this analogy for QE, which is very good:
It's like we're collectively trying to refuel a car with four flat tyres.
If I can take the liberty, I might suggest an alteration - that it is trying to pump air into 4 flat tyres, all of which have punctures.

Paulsc expresses interest in the reply from the BoE to my letter to them seeking clarification of the policy. I have had a reply that they are putting together an answer, and am therefore awaiting a response. (see below for update)

Paul offered an interesting point with regards to the press, identifying their lack of spine over QE. I note that some commentators are dusting off their critical points of view, so there is still 'hope' for the press.

Lord Keynes: You say in your example:
The banks are hoarding the £30 that they have been receiving as interest. Also, the banks refuse to lend any new money to people, so the economy just can’t get that extra £30 to get the economy on track.
You are talking about lending for consumption. Lending for consumption = a future contraction....Also, nobody is 'hoarding' money. They are lending it to governments....the banks do not sit with piles of cash in vaults, but buy 'safe' assets according to Basel II requirements. 'Hoarding' is an emotive word for saving and investing. When money is not being consumed (whether by governments or consumers) it is used to invest in new business ventures. This is not hoarding.

You also say:
The central bank removes the extra £30 it injected. We are back to the original situation of £100 in the economy.
But who is going to buy the Gilts, and when are they going to be sold again. In a year, in two years, in five......

You later say:
Of course, printing money can be put to productive purposes. If the money was lent directly to the government and they spent it on building new factories producing manufactured goods (e.g., in a high value added industry like high tech) and these goods were bought by domestic and foreign consumers, then of course printing money can generate real growth
In this case, why not print £1 trillion? This would provide massive amounts of money to do things...but the money money would cease to have any value. Money is not a 'magic' thing. It represents a unit of exchange and (if it is not printed in this way) a store of value, and in a good monetary system also represents a contract.

Overall, I do urge you to read Economics in One Lesson. I believe that you read widely on economics, and believe that this book may have a profound impact, as it will give a different perspective to that of the economic theory that led us to this disaster, and is leading us ever deeper into crisis.

Lemming: Regards to borrowing/lending. The key here is that borrowing for consumption is problematic, not that all borrowing/lending is bad. You later mention:
Similarly, is it equally possible that a 'make work' scheme, or a money printing operation *could* produce genuine wealth?
If this were the case, then we could hand everything over to government and dig ditches for £1 million a day. There is only one way to increase wealth - to produce goods and services for which there is demand, and increasing wealth can only be achieved in an economy by producing more goods and services. The issue distribution of wealth is another matter, but the root source of wealth is output, not money.

On the other hand, having someone do 'make work' contributes nothing.....what is their output worth? If it is make work, nobody wants the output enough to pay for it....

I hope that helps.

Red: Very interesting link about the China spending spree. The article is broadly supportive of my recent speculation on the Chinese exit from Treasuries, but we will see....

Note 4: I am still hoping to take a look at US QE, but will struggle against events, as I think they are moving fast. One point of note comes from an article here:

European banks face a US dollar “funding gap” of almost $2 trillion as a result of aggressive expansion around the world and may have difficulties rolling over debts, according to a report by the Bank for International Settlements.

It seems that more and more trouble comes out of the woodwork. If everyone goes down the QE route.....what happens then? Global hyper-inflation? How do you guess at the future value in currencies with ever more 'dirty laundry' appearing. I made a bold prediction of the collapse of the $US, and still believe this is about to happen....but....will this delay it? I am not sure....

Note 5: I have finally got hold of a copy of Niall Ferguson's 'The Ascent of Money' and should be able to let you know whether it meets expectations in a day or two. So far, it is excellent.

Note 6: I have just found a reply from the BoE in my inbox, and will post on their reply shortly.

34 comments:

  1. Hi Mark

    Thanks for your reply (and for yours earlier Lord Keynes).

    You said:

    "There is only one way to increase wealth - to produce goods and services for which there is demand."

    I am very intrigued by the clear cut, black-and-white way that you see wealth creation, and I think this question is at the very heart of the mystery of economics for me. It seems that *by definition* you see any form of 'stimulus' as going into a black hole because it wasn't demanded by ordinary people on the street (and these are the same ordinary people whose collective wisdom demanded into being the amazing wealth generating capacity of tulips!)

    In your reply you categorically imply that a make-work scheme cannot produce genuine wealth, which I find amazing. I can see that it could be argued that it might be less likely to produce genuine wealth than the ordinary free markets (I am perfectly open to that idea), but to say that it is impossible is surely wrong? I think I see a gap in your arguments here: I would like you to explain why it is, for you, so self-evident that ordinary people make better decisions than governments - I suspect you are probably right but so far you have always treated this as a given (something which Henry Hazlitt is also guilty of in his book, I think).

    And what do you mean by "demand"? Is this the demand that arises following an 'aspirational' advertising campaign that makes people feel poor no matter how wealthy they really are? Or that persuades poor people that they must take out a loan to pay for the 'product'?

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  2. Great post.
    Not on topic I know, but here is an article that accords with your view on QE

    http://www.independent.co.uk/news/business/comment/stephen-king/stephen-king-the-policy-to-print-money-is-right-but-we-must-be-told-how-it-works-1640290.html

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  3. Take a look at the reserves of various countries. China tops the charts by a long way.

    But now look at the holdings of gold. You'll see that this shows a very different picture.

    You believe China is in a strong position. I think they are about to be screwed over. With most of their 'wealth' in foreign currencies - if there's a global race to zero rates and QE then China is going to be holding lots of worthless paper and the Chinese people will realise they've toiled in factories for a decade for nothing.

    Far from taking over the world, the Chinese leadership will have their hands full trying to contain the rioting and keeping the country in one piece.

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  4. On Printing Money

    In this case, why not print £1 trillion? This would provide massive amounts of money to do things...but the money would cease to have any value. Money is not a 'magic' thing. It represents a unit of exchange and (if it is not printed in this way) a store of value, and in a good monetary system also represents a contract.

    Of course, excessive printing of money is a danger. Reasonable amounts would be printed.

    This is what Lincoln did in the civil war (government-issued paper money called "Greenbacks"), though the money was obviously not spent on new productive investments, and curiously what Hitler did in Germany in the 1930s (I would hasten to add that this is in no sense an endorsement of Nazism or fascism).

    Moreover, in an economy where demand has collapsed and there is massive overcapacity (and in today’s world massive overproduction in East Asia), an increase in demand is not going to cause massive supply problems.

    Also, you never answered my argument.

    If the government prints a moderate amount of money and spends it on opening a new mine which produces and exports minerals, increasing earnings from exports, how has the money not been used productively?

    It has increased the wealth in society, not diminished it.

    I am reading Economics in One Lesson by Henry Hazlitt.

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  5. On the Fallacy of Free Trade in Henry Hazlitt’s Economics in One Lesson

    Henry Hazlitt’s Economics in One Lesson has a chapter entitled “Who's ‘Protected’ by Tariffs?”

    Since free trade is a central element in most libertarian or free market ideology, this seems to be a good starting point for some comments on the book.
    I list my objections to this chapter below:


    (1) Hazlitt uses a Caricature Version of Infant Industry Protectionism

    Typically, the chapter doesn’t even properly understand the “infant industry” argument (the modern version of which is import-substitution industrialization [ISI]).

    Hazlitt presents a caricature of it. He never mentions that once tariffs have allowed a domestic industry to get to the point where its products are as cheap, or cheaper than, the foreign goods they were originally imposed on, they are unnecessary and can be abolished. The alleged “tax” on consumers that existed while the tariff was in place is gone, and the new industry no longer requires tariffs.

    In fact, it will now produce a product that can be exported and will earn export dollars.

    For example, Hazlitt says:

    The effect of a tariff, therefore, is to change the structure of American production ... It makes the industries in which we are comparatively inefficient larger, and the industries in which we are comparatively efficient smaller. Its net effect, therefore, is to reduce American efficiency, as well as to reduce efficiency in the countries with which we would otherwise have traded more largely … In the long run it always reduces real wages, because it reduces efficiency, production and wealth.

    This statement is palpably false. The purpose of infant industry protectionism is precisely to create an industry that can compete with foreign ones by reducing costs and making domestic production more efficient. In fact, its purpose is to allow the domestic industries to be created, and then bring their prices down to a point where they can compete with the foreign products, not just domestically but internationally as well. The tariffs are abolished when the domestic industries are competitive, just as Britain did in the 1840s and the US did in the 1940s/1950s.


    (2) The Classic Version of Free Trade Theory is Grossly Flawed

    Hazlitt uses the same tired Classical argument for free trade that never takes account of the benefits of industrialization to a Third World economy.

    Most of the classical arguments for free trade were written before the full effects of the industrial revolution. Ricardo, for instance, wrote the book Principles of Political Economy and Taxation in 1817. In free trade theory, it does not matter what you produce (e.g., you could produce pottery), as long as you do it in a way that gives you comparative advantage.

    But this idea is utterly absurd. It does matter what you produce. The basis of a modern First World economy is manufacturing and high-value added industries. In a world in which it is cheaper to buy these good from overseas, a Third World country will never industrialize.

    It will be permanently mired in poverty, commodity exports or service industries (the typical type of Third World economy).

    There are sound reasons for violating free trade theory and creating your own high-value added industries that will eventually be able to compete with foreign ones.

    Moreover, mainstream economists are coming to recognize the problems with Classical free trade theory:

    “David Ricardo’s 200-year-old theory are no longer present in the modern world. Moreover, the latest work in trade theory, Global Trade and Conflicting National Interests (MIT Press, 2000), by Ralph E. Gomory and William J. Baumol, shows that the case for free trade was incorrect from the beginning ….
    A number of competent economists have taken [Classical] free-trade theory to the cleaners … Professor Robert E. Prasch, in a 1996 article in the Review of Political Economy, demonstrates fundamental problems with the theory. Professor Ron Baiman at DePaul University has shown that Ricardo’s theory is “mathematically overdetermined and therefore generally unsolvable.” Economist Ian Fletcher demonstrates
    “Fatal Flaws in the Theory of 6, 2008, American Economic Alert. In 2004, America’s most famous economist, Paul Samuelson, wrote that an improvement
    in the productivity of one country can decrease the living standard of another.


    Paul Craig Roberts, “The Problem of Free Trade,” Counterpunch 16.2, Jan. 16-31, (2009).


    (3) ‘Absolute Advantage’ is not Comparative Advantage anyway: Classical Free Trade Theory no longer applies to a World with highly mobile Capital

    David Ricardo observed that the immobility of capital in his day prevented capital from seeking absolute advantage: he described it as “the difficulty with which capital moves from one country to another, to seek a more profitable employment, and the … [ease] with which it invariably passes from one province to another in the same country.”

    But it never occurred to Ricardo that in a world of mobile capital and easily transferable technology, capital would seek absolute advantage. in a destructive way to its home country. Ricardo apparently believed it was a good thing:

    “It would undoubtedly be advantageous to the capitalists of England, and to the consumers in both countries, that under such circumstances, the wine and the cloth should both be made in Portugal, and therefore that the capital and labour of England employed in making cloth, should be removed to Portugal for that purpose. In that case, the relative value of these commodities would be regulated by the same principle, as if one were the produce of Yorkshire, and the other of London: and in every other case, if capital freely flowed towards those countries where it could be most profitably employed, there could be no difference in the rate of profit, and no other difference in the real or labour price of commodities, than the additional quantity of labour required to convey them to the various markets where they were to be sold.”
    (Ricardo, On the Principles of Political Economy and Taxation, 7.18).

    In Ricardo’s day, this did not happen on a large scale because capital and technology were more difficult to transfer.

    The Classical argument for free trade is dependent on the capital of one country remaining in that country and being put to work in some other productive domestic industry.

    This is not what happens today, where capital from Western countries seeks absolute advantage in the Third world.

    Movement of capital to a place where it has absolute advantage simply causes de-industrialization in Western countries.

    Moreover, the movement of service industries overseas (often called outsourcing these days) is just as catastrophic.

    Does anyone serious think that the US or the UK benefits from capital and service jobs moving out of their country and causing the collapse of their domestic manufacturing and service industries?

    On this blog, you have repeatedly drawn attention to the massive trade surpluses in East Asia as a danger to Western economies. This is the result of capital seeking absolute advantage.

    Yet this process is defended as free trade by practically all main-stream economists.

    But even the Classical theory of Ricardo is hopelessly flawed.

    In short, Henry Hazlitt’s Economics in One Lesson is severely flawed and is not even remotely convincing on the issue of free trade.

    I hope to address other chapters soon.


    BIBLIOGRAPHY

    Paul Craig Roberts, “Commentary & Analysis: Economists In Denial; Blind To Offshoring's Adverse Impact,” Manufacturing & Technology News, February 6, 2007, Vol. 14.3., http://www.manufacturingnews.com/news/07/0206/art2.html

    Charles Schumer and Paul Craig Roberts, 2004, “Second Thoughts on Free Trade,” New York Times, 6 January 2004.
    http://query.nytimes.com/gst/fullpage.html?res=9A02E6DD1231F935A35752C0A9629C8B63

    Elliott, Larry, “Two countries, one booming, one struggling: which one followed the free-trade route?” Guardian December 12, 2005
    http://business.guardian.co.uk/story/0,,1664984,00.html

    Prestowitz, Clyde, 2004, “Free Trade and Outsourcing Are Not the Same,” The Financial Times, 25 April 2004

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  6. Response to Henry Hazlitt’s PUBLIC WORKS MEAN TAXES

    Hazlitt complains about bridges to nowhere.

    We have already had a similar argument on this blog.

    “Bridges to nowhere” are no doubt a waste of money. But a competent government would calculate the economic benefits of its public works before it constructs them. This of course requires public planning bodies.

    I notice Hazlitt is not an extremist libertarian. He believes that “a certain amount of public works—of streets and roads and bridges and tunnels, of armories and navy yards, of buildings to house legislatures, police and fire departments—is necessary to supply essential public services. With such public works, necessary for their own sake, and defended on that ground alone, I am not here concerned.”

    Therefore, under his system, large public works like roads, streets and highways (when they are justified by economic benefits) are perfectly acceptable. Quite so.

    This is in fact a type of socialist system for producing things that are public goods, because the cost is socialized and the things created are free to use by all citizens of the country.

    But by this one inconsistency—this failure to be a consistent advocate of free market economics—Hazlitt has severely undermined his whole thesis.

    No genuine and consistent libertarian or free market advocate would make such a damaging concession (Murray Rothbard would be turning in his grave!).

    If something like a road or a bridge should be free and paid for by socializing the cost, then with even greater reason we should have free and socialized medical care and education.


    (1) Hazlitt makes this comment about public works:

    A bridge [built in a government work program] has to be paid for out of taxes. For every dollar that is spent on the bridge a dollar will be taken away from taxpayers. If the bridge costs $10 million the taxpayers will lose $10 million. They will have that much taken away from them which they would otherwise have spent on the things they needed most.

    In a progressive tax system, the cost is borne largely by the wealthy anyway, so demand from lower and middle income earners is not seriously affected.

    And anyway if the cost is spread out evenly, how much will it be?

    The current US population is 303,824,640 (July 2008 est.). So $10 million divided by 303,824,640 is 0.032.

    Every person would pay about 3 cents of their yearly income for the bridge. Do you really believe that a loss of 3 cents in income will significantly affect consumption in that year?
    (Or if it’s paid for over two years, it will be 1.5 cents).

    But in reality of course a progressive taxation system would mean the amount paid by low income and middle income earners would be less than 3 cents.

    In short, I don’t buy his argument for one minute.


    (2) The rest of the chapter is taken up with attacking unnecessary public works.

    But then since I don’t support unnecessary public works anyway, I don’t see why it undermines the case for well thought out public works, especially in times of recession when large numbers of people are unemployed.

    The new goods he keeps talking about that would be created by allowing the workers building the bridge to be employed in other industries would not be produced anyway during a recession when demand has collapsed, so his argument doesn’t work.


    (3) Public Housing

    I do not intend to enter here into all the pros and cons of public housing ... Taxation for public housing destroys as many jobs in other lines as it creates in housing. It also results in unbuilt private homes, in unmade washing machines and refrigerators

    But this argument assumes no new money is being created in the economy by the central bank to match demand.

    Is this man living in a fantasy world where he thinks that a 100% reserve gold standard is still in existence?

    I notice the book was written in 1946, so fiat money and central banks had long been in existence.

    We have seen post after post on this blog talking about the process by which central banks can create money and put it into private banks for lending.

    In reality, in this system there will be plenty of money around for the investment in creating “private homes, unmade washing machines and refrigerators.”

    So again Hazlitt’s arguments fail to convince.

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  7. Lemming:

    Thanks for your reply. The government can only make investments by using the money of tax payers, or by borrowing and later taxing. In both cases the money **always** comes from the taxpayer in the end. This is what actually happens. If the government takes money in taxation, it is not available as savings. The government does not create new investment, but replaces private investment.

    The alternative has been tried in, for example, Malysia. They invested heavily in development of various industries and infrastructure, and this has seen ongoing losses in nearly all of their investments. To be sure, it will always be possible to find a few examples of success, but the key word is few (or more accurately very, very few in proportion to the number of attempts).

    Whilst private investments also fail, this is different to taxation. In the case of taxation, we all must contribute to the investments.

    As for demand and aspiration, it has always been so. Take a look at the sumptuary laws in Rennaissance Italy, and the conspicuous consumption. The only difference now is that we have *been* in a situation where we thought we could all have it all. The debtors prisons of the past are a testimony that borrowing more than we should has ever been the case...

    With regards to the implicit critique of consumption culture in your comment, I have just been reading in the Niall Ferguson book on money about the shocking levels of financial knowledge amongst most ordinary people. Governments can not protect fools from themselves.... all of the information is 'out there' and easy to access. However, no one wants to look, so they spend, spend, spend on credit at crazy interest rates.....

    You could take a paternalistic approach and stop them from borrowing, but that is an argument about whether it is okay to tell an adult how they must manage their life/finances.

    Lord Keynes:

    Thanks for your comments.

    You make a related argument, asking why it is that a government would not create wealth if it opened a mine and exported the produce. The question here is, if the mine was going to be competitive, then why on earth would someone not do it as a private investor? I can not see any reason why this would not be the first question that is asked.

    With regards to free trade, you appear to be confused. Any form of protection is not free and fair trade (note: I personally emphasise fair), whether through currency manipulation, administrative rules or outright tariffs. When a country 'protects' infant industries, the logical answer is to not trade with that country. You may note that, in my posts, I am consistent on this. If a country 'plays' the system - shut them out.

    Your idea of infant industry protection assumes no response.

    This has been the case with China, South Korea and Japan and many other cases. There was no serious response, but largely for political reasons. If you respond, and shut the countries out, under such circumstances it is not clear how the country could benefit from their protection.

    Your examples just go to show that there is only one answer to any country that seeks not to trade openly or fairly. Shut them out completely until they play the game. None of the half measures of retaliatory tariffs. Just shut them out 100%. Their choice as sovereign nations....play by the rules or not?

    Comparative advantage can only work in genuine free and fair trade. However, it is the playing of systems that prevents comparative advantage from operating.

    With regards to your later discussion of free trade theory, you have some contradictions. On the one hand you are saying that third world countries will never develop economically, but on the other hand you suggest:

    "On this blog, you have repeatedly drawn attention to the massive trade surpluses in East Asia as a danger to Western economies. This is the result of capital seeking absolute advantage."

    Which is it - they can never progress, or they have an absolute advantage in one of the key inputs of goods and services? You have written both arguments in the same post.

    As I have argued many times on this blog, China did not need to use the methods they used, and the use of the methods of currency manipulation have led them to the brink of disaster. What we are seeing is exactly what happens when 'infant industry protection' is allowed to be undertaken with no response made. It is the problem of lack of free and fair trade writ large.

    How do you think we got into this mess? This crisis is exactly the argument for free and fair trade...had China not used such methods, the West would have seen more competition, a period of wealth distribution to the East, a certain period of painful adjustment, but no catastrophe. I can not summarise the argument, but it is to be found in many of my posts.

    Enactment of genuine free and fair trade is no easy thing, but I make no apologies for suggesting it.

    Part of the problem in enacting it is that there are exactly the kind of arguments that you refer to that are made by so many economists. There are always 'special cases', exceptions, 'under this or that circumstance' but the outcome is always the same. Distortions and problems. The natural balancing mechanisms of the capitalist system are removed.....

    I am a realist, so I accept that politicians will always seek to distort, that trade will never be free or perfectly fair. However, gross distortions such as infant industry protection (such as in the case of China) can be stamped upon, and the world trading system will remain more or less balanced. Imperfect, but a system in which the gross distortions that we see now will not take place.

    For example,I have argued for a fixed money supply in earlier posts, and this is one of the ways of removing the distortions in currency. However, this is only one element that needs to be addressed. There are a massive raft of distortions that need to be resolved....

    I am also aware that, under the current circumstances, in which capitalism is being blamed for a crisis caused by government distortions (how convenient that is for the politicians), that my message will fall largely on deaf ears.

    However, one day, we will climb out of this disaster, and I just hope that we do not make the same mistakes all over again.

    Anonymous: With regards to China being in trouble, you will find in many of my posts a very similar point to that which you are making. They have possibly created their own destruction....

    Anonymous 2: Thanks for the link to the Independent. Good to see that I am not alone in thinking the methods of the BoE policy communication are lacking the requisite detail.....

    General: I hope that I have answered some of the points. The answers are a little rushed, but I hope I will be forgiven that. I am very aware that a free and fair trade argument is not a popular one at the moment, but I hope that the example of China does illustrate my point.

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  8. Henry Hazlitt on the The Lesson Applied The Curse of Machinery

    Incredibly, this chapter is directed against those who think that the introduction of machinery is a bad thing (Luddites in 1946?).

    Since I have no issue with automation and machines improving efficiency, there’s little I disagree with here.

    Here are 2 observations:

    (1) His description of the introduction of technology in the 18th-century British cotton textile industry misses the point that this industry’s creation was done behind high tariff barriers and infant industry protectionism. At the time, Indian cotton textiles were more competitive and would have wiped out the domestic British industry even with early mechanization. It was only in the 1810s that British cotton goods became competitive and started winning out in world markets. So his argument that tariffs always harm a country is also undermined here.

    (2) Hazlitt of course knows nothing about the role of the state in creating and developing new technologies that can be applied to industry to make production more efficient.

    US military and state spending has been a major factor in technological innovation over the past 60 years since 1945.

    Computers, for instance, came straight out of the state sector, as did the internet.

    Can anyone seriously calculate the savings that these technologies have allowed in business or the increases in productivity that have resulted from their introduction?

    And yet they only exist because of “socializing” the cost of R&D that created them in the state sector.

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  9. Lord Keynes:

    Hazlitt is recognising that there are public goods which are not amenable to usage charging. A good example is street lighting as it is very clear to imagine the difficulties- How can charges be allocated to this?

    You say he is an extreme libertarian, but he accepts that there are some roles that can be undertaken only by government. This is reasonable, and not extreme.

    Local road use illustrates the point. Toll booths littered all over a town or city would be counterproductive. However, with new technologies, a charging system without toll booths becomes practical and cost effective.

    I can say that I am in favour of a road charging scheme in the future, that pay as you go makes sense. However, on local roads, there is no possibility of competition, so government must still have a role (e.g. how can you practically have three roads alongside each other in a city/town).

    I do not see that provision of some services undermines a libertarian argument, as it depends on how you view libertarianism.

    My approach is that government should be minimised, and this reflects in my posts on reform. Each case should be considered on its relative merits, but the default starting position should be against government involvement. If you read my posts, I seek to use **genuine** market mechanisms, but align them with some elements of government involvement. In all cases government's role is minimised...In some cases it is possible to remove all roles of government, in other not.

    Another rushed answer (even more so than before) but I hope it answers the points....

    ReplyDelete
  10. Response

    The question here is, if the mine was going to be competitive, then why on earth would someone not do it as a private investor? I can not see any reason why this would not be the first question that is asked.

    No, this is not the question.

    I never for a moment doubt that private investment can create wealth.

    The question was whether a government can, in theory, use money it has printed to create an industry that is productive.

    Clearly, it can. The fact that private investment can do it is not in doubt. The question is whether a government can do it.

    The existence of nationalized oil industries or mines, incidentally, shows it can be done in practice and not just in theory.

    Also, there is another gapping hole: if private banks can create money from nothing under a central bank and use it to create a productive industry, then there is no reason whatsoever why a government cannot do the same with debt-free fiat money.



    When a country 'protects' infant industries, the logical answer is to not trade with that country. You may note that, in my posts, I am consistent on this. If a country 'plays' the system - shut them out. Your idea of infant industry protection assumes no response. This has been the case with China, South Korea and Japan and many other cases. There was no serious response, but largely for political reasons. If you respond, and shut the countries out, under such circumstances it is not clear how the country could benefit from their protection.

    In this case, there would have been no cotton textile manufacturing industry in Britain in the 1800s (the basis of the industrial revolution), no manufacturing industries in the US, and no economic miracles in Japan, South Korea, and Taiwan.

    This policy would be a recipe for permanent Third World conditions for many countries.


    With regards to your later discussion of free trade theory, you have some contradictions. On the one hand you are saying that third world countries will never develop economically, but on the other hand you suggest:
    "On this blog, you have repeatedly drawn attention to the massive trade surpluses in East Asia as a danger to Western economies. This is the result of capital seeking absolute advantage."
    Which is it - they can never progress, or they have an absolute advantage in one of the key inputs of goods and services? You have written both arguments in the same post.



    I don’t see any contradiction.

    I say that without infant industry protectionism (but these days its modern form, import-substitution industrialization [ISI]), there will be no significant industrialization in the Third World. This can be accomplished by internal growth, without the destabilizing effects of massive export-led growth (which is just one model).

    Capital seeking absolute advantage has nothing to do with comparative advantage in classical free trade. That was the point I was making. It is quite different.

    I assume you concede (unlike Hazlitt) that infant industry protectionism can create productive industries.

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  11. Response 2

    You say he is an extreme libertarian, but he accepts that there are some roles that can be undertaken only by government. This is reasonable, and not extreme.

    Actually I said: I notice Hazlitt is not an extremist libertarian.


    Local road use illustrates the point. Toll booths littered all over a town or city would be counterproductive. However, with new technologies, a charging system without toll booths becomes practical and cost effective.

    Even an efficient system of levying tolls would be a massive drain on society’s wealth.
    Why on earth should a private company make a profit on a road that could be free and simply maintained with a small amount of tax money by the state?

    There is no need whatsoever for this private leach to siphon off society’s wealth.

    Just think of how business costs would be increased by the addition of multiple charges for the transportation of their goods.

    I want to go on a holiday to a resort 100 kilometers to the north of my city. Now I am hit with a $50 (or $20) fee to get there and back. I decide to not go. This causes a contraction in the local economy of the resort because tourists visits decline. The free use of roads actually promotes business activity.

    Furthermore, is there any regulation at all of the prices charged for tolls? What is to stop the owner of the only main highway between city x and city y charging an exorbitant amount for his toll?

    What will you do? Build another highway? Waste a massive amount of private capital building a second highway that is totally unnecessary, just to create competition?

    ReplyDelete
  12. Lord Keynes:

    A last reply. You are playing with history here, and being very selective. Where was the money for the development of the internet provided from, and all of the technologies that allowed such a development. Surely these originated in the (semi) capitalist system?

    I say you are being selective, because socialised economies have been tried in many countries and all led to impoverishment of their people.

    You Say:

    "His description of the introduction of technology in the 18th-century British cotton textile industry misses the point that this industry’s creation was done behind high tariff barriers and infant industry protectionism. At the time, Indian cotton textiles were more competitive and would have wiped out the domestic British industry even with early mechanization. It was only in the 1810s that British cotton goods became competitive and started winning out in world markets. So his argument that tariffs always harm a country is also undermined here."

    But the system within the UK was capitalism and mercantilism. The industrial revolution had nothing to do with socialism, but with capitalism. The key developments of the modern world arose under these systems.

    The inventions and technologies in the UK would have eventually been applied to the textile industry in any case. Tariffs may have sped the development, but they did not cause the development....as soon as each new technology or process develops, it finds new applications.

    I mentioned that it is always possible to find examples of good state funded industries. All is possible. However, which systems consistently delivers the innovation and advancement in living standards.....socialism or capitalism?

    Whilst there has never yet been a true form of capitalism, it is variants of the system that have consistently delivered and socialism that has consistently failed to deliver. Does that not say something?

    How many experiments with socialist economies will it take to convince that it just does not work. Or will you make the argument that all of the cases are not real socialism etc. If you do, then please identify why the systems always end as they do....You frequently cite history, but do not cite the history of socialism in action?

    Instead, you find examples of state interventions within a system that is based upon capitalism. In each of the cases you cite, would it not have been the case that the technologies would have in any case emerged, albeit in slightly different forms?

    Curiously, the examples you cite both originate in military spending (as you point out). How much money pours into this sector to provide such results? What would happen if that money was allowed to be used for private investment....Take a look at the massive costs of military expenditure....and R&D costs....

    In other words you are making exactly the mistake that Hazlitt identifies. You see a massive investment making some positive outcomes, but then forget that the money was taken out of the private sector. What could the private sector have done with those $US trillions?

    As such, I (and I guess Hazlitt) would argue with the ideas of 'savings' in industry from this expenditure....

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  13. Lord Keynes:

    Apologies. I misread your comment on Hazlitt as an extreme libertarian.

    However, I think you have not read my post on roads. I am advocating charge per use, not private provision free of government involvement.

    I do not have time to answer all of your points, but note this comment:

    "There is no need whatsoever for this private leach to siphon off society’s wealth."

    This is emotive. Are people who provide a telephone service 'leaches', or a private hospital, or for that matter, any of the services and products that we enjoy. If you see people investing their wealth in the provision of goods and services in terms of 'leeches', I can see no point in continuing the debate. Our worldview is just too far apart....and can not be reconciled....

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  14. Without wanting to distract... look! George Osbornes recent speech is the first 'front line' MP who seems to be on the right track.

    http://www.conservatives.com/News/Speeches/2008/12/George_Osborne_A_different_vision_for_the_economy.aspx

    ReplyDelete
  15. Steve:

    Thanks for the link - I am in agreement that the tone is in the right direction, some of the diagnosis looks good, and there are the first glimmerings of moves to reform. I will try to be optimistic, and see this as the start of a move in the right direction overall. Encouraging, but needs to go much further and deeper.

    This is the first I have heard from any of the parties which indicates a clear recognition of the problems, and that the financial crisis reflects something deeper. In particular he is indicating a recognition of the financial crisis as a symptom - not the cause. That is a start.

    A Conservative Party win at the next election looks likely (as long as they do not do anything too outrageous in the meantime). It is also possible that, if the crisis accelerates, the Labour government might even fall. As such, Conservative policy thinking is worth observing.

    However, by the time they gain power, I suspect that their action will be constrained, and therefore tone and principle are the points to watch.

    Readers (such a Lemming) who read the blog from the start will know that I believed that this depth of crisis might have been averted. We are past that point, and the next government will be left with the wreckage. I just hope that they have the courage to face the people of the UK and tell them what it will take to really rebuild.

    ReplyDelete
  16. A few responses to things CE has said:-

    'Economics in One Lesson', by Henry Hazlitt is brilliant book. I read it some time ago and it strips away the clever wordplay to reveal some stark economic truths.

    As I've said before I agree with the vast majority of what CE says, but there is an exception and it is this:-

    >>On the other hand, having someone do 'make work' contributes nothing.....what is their output worth? If it is make work, nobody wants the output enough to pay for it....<<

    It seems obvious that for economics to be 'pure' then it needs to look at the simple maths at its core and ignore the 'human factor'. That's what CE does and its what most of us appreciate and agree with.

    But... I believe that in an ideal world you *have* to consider the social implications as well as the purely logical mathematical ones.

    The quote above illustrates exactly my problem. "Make work contributes nothing." Obviously it is one of the rungs on the 'last resorts' ladder, but its important we don't forget the social value of work.

    "Make work" as opposed to "welfare" does not 'contribute nothing'. Perhaps, monetarily, it contributes little. But psychologically it contributes a lot. It helps restore or retain a 'work ethic' that can be lost on welfare. It is good for pride, self-esteem and confidence. It can allow skills to be learnt or practised to retain their edge. It can cushion relationships and family structure during difficult times.

    Economists can sniff at this, but they do so at their peril. Self-Esteem, Confidence and practised skills all increase productivity and output once makework ends and 'real work' begins. Consequently, they are part of the mathematical equation.

    It is much better to have people involved in 'make work' programs than on welfare for all these reasons. It's not ideal, of course, we'd much rather encourage genuine jobs. But neither is it valueless.

    ReplyDelete
  17. Lord Keynes:-

    >>Luddites in 1946?).<<
    I laughed when I saw your post which was startled about the idea that people could: "protest against the introduction of machinery".

    You might try working in Royal Mail for a while...

    Without wanting to be rude, because I do enjoy your posts very much but... why do you come here? You clearly disagree with much of what CE says and come firmly from the 'other side' of the fence to most contributors.

    Now I'm the same, I often frequent sites with whom I disagree profoundly, just for the value of debate. But I don't spend the sheer time and effort you do. Its impressive, but seems futile. Surely you realise that most of us have heard your side of the argument before and, to quote Cynicus core message, just don't buy it?

    ReplyDelete
  18. Response 3

    Where was the money for the development of the internet provided from, and all of the technologies that allowed such a development. Surely these originated in the (semi) capitalist system?

    The internet’s subsequent development in the private sector is not the issue. The issue was its creation by state-allocated R&D money by government.

    Which private business in the 1980s would have invested a vast amount of capital in the creation of a technology that nobody knew would revolutionize communication, and with no foreseeable return?


    However, which systems consistently delivers the innovation and advancement in living standards.....socialism or capitalism?

    We know perfectly well which system has delivered the highest average growth rates in GDP over the past 200 years and the fastest rise in real living standards: the system that existed between 1945 and the about 1979 in Western countries and parts of the Third World.

    The era of Keynesian social democracy, fiat money, fixed exchange rates, financial regulation, a large state sector and regulation of business.

    This was a mix of both regulated capitalism and policies labeled as “socialist” by most libertarians.

    In the Western world, with its enormous wealth, this system was extremely successful.

    It’s called a “mixed economy.”

    I say you are being selective, because socialized economies have been tried in many countries and all led to impoverishment of their people.

    If by “socialised economies,” you mean rigid planned command economies with no private property or private enterprise, then they have not been successful.

    If you mean mixed economies with social democracy, then they have been quite successful.

    In fact, the Scandinavian model of social democracy (particularly Sweden), which is vilified and hated by most libertarians, has been extremely successful.

    These countries are rich, peaceful, have civil liberties, and good economic growth.

    Their quality of life is outstanding.

    The per capita GDP (in PPP) figures are as follows, with some other countries:

    Rank Country Per capita GDP

    5 Norway 55,600
    6 United States 46,000
    24 Denmark 37,400
    25 Sweden 36,900
    27 Finland 35,500
    28 UK 35,300
    31 Germany 34,400

    I note that Norway ranks above the US. Norway is just as social democratic as Sweden.

    Here is a delightful article by George Monbiot, comparing Swedish economic performance with the UK. The UK does not fare well.

    Sweden vs England, January 11, 2005
    http://www.zcommunications.org/znet/viewArticle/7113


    Whilst there has never yet been a true form of capitalism, it is variants of the system that have consistently delivered and socialism that has consistently failed to deliver. Does that not say something?

    Funny that there has never been a pure and completely laissez faire version of capitalism in the real world.

    I suspect it’s because such a system is unworkable, just like pure doctrinaire versions of Marxism.

    The only variant of capitalism that was delivered is the mixed economy.

    How many experiments with socialist economies will it take to convince that it just does not work. Or will you make the argument that all of the cases are not real socialism etc. If you do, then please identify why the systems always end as they do....You frequently cite history, but do not cite the history of socialism in action?

    The last time I looked Sweden and Norway were highly successful and wealthy First World countries. There are also social democratic countries.
    Their success convinces me that mixed economies with strong welfare states work extremely well.

    Curiously, the examples you cite both originate in military spending (as you point out). How much money pours into this sector to provide such results?

    Actually, I don’t advocate huge military spending at all.

    In the example I gave, I was just pointing out an empirical fact about the US economy and the spill-over effects of its military spending on other areas.

    Other countries have much more efficient civilian R&D funding programs, like Japan.

    In fact, you can cut them military budgets of most countries, save money and then spend a smaller amount directly on R&D, scientific and medical research and other promising areas of research (e.g., robotics, Artificial intelligence, new computers, genetics, gene therapies etc).

    In fact, direct spending on R&D would be much more efficient and justifiable, than the military spending done in the US.

    As for the private sector, it is absurd to believe that they will make massive capital investments in areas that will give no profitable returns for decades.

    ReplyDelete
  19. I do not have time to answer all of your points, but note this comment:
    "There is no need whatsoever for this private leach to siphon off society’s wealth."
    This is emotive. Are people who provide a telephone service 'leaches', or a private hospital, or for that matter, any of the services and products that we enjoy. If you see people investing their wealth in the provision of goods and services in terms of 'leeches', I can see no point in continuing the debate.


    When a private entity unjustifiably extracts wealth from society, I don’t see what is wrong with a metaphorical description of them as leeches.

    In this instance, the situation is quite different from a private hospital or telephone service.

    The banks today, for instance, are accepting vast amounts of public money with no accountability, and are leeches destroying our economic system.

    My point is this: in the case of public goods like transportation, health care, and education, I see no need whatsoever for these goods or services to be provided privately or privatized, when the most efficient system is to make them free for those who need them.

    If all roads and transportation networks had been built purely by private enterprise in a particular country, then there would be a case for keeping it private.

    No such country to my knowledge exists.

    On reflection, I think the leeches analogy is best applied to a private company that has taken over a road build by the public (a privatisation, in other words) and then charging exorbitant fees for its use.

    I notice you still don't answer my question: will there be regulation to stop excessive fees in such a system of private ownership of roads?

    ReplyDelete
  20. Mark,

    Regarding "Economics in One Lesson", I'm afraid I'm with Lord Keynes on this one. The Hazlitt book is a typical example of Austrian economics propaganda - close reasoning based on simplistic models and false assumptions, with pretty nasty ideological biases lurking in the background.

    The "proof" that "the government cannot create jobs by funding construction projects, for example bridges" goes something like this:

    To pay for the bridge, the government needs to "steal" (according to libertarians) say $1M from taxpayers. This million then supposedly gives employment to 500 people for 6 months. But the taxpayers have $1M less to spend on private investment and job creation. So the wealth and jobs created by government are offset by the wealth and jobs which would have been created by private investment and hence the net result of this government action is at best zero. But it gets worse. By "distorting the market" through its actions, the government virtually guarantees that the $1M will be inefficiently utilized (since only a free market ensures optimal allocation of resources in an economy). If building the bridge made economic sense, private enterprise would build it itself. Therefore government action not only does not create additional wealth and jobs, but actually destroys them. QED.

    Essentially all Austrian "thinking" follows similar patterns. It is tedious to argue with them, because the fault does not lie in the "proofs", but simply with the fact that their (stated and unstated) assumptions are false. Conclusions reached by logically rigorous reasoning from false premises are worthless. Libertarians have a very naive view of economics that seems to have stopped paying attention to the actual history of capitalism around 1880...

    To return to the "bridge" proof. Notice, that this argument supposedly "proves" the thesis that **any** government investment (not just bridge-building) destroys wealth and jobs. But what are the silent assumptions necessary for this proof to be valid?

    Libertarians believe in "Say's law" - i.e. that supply creates its own demand. If Say's law is true, then unemployment and overproduction are not possible in a market economy. But surely, one may say, unemployment **does** exist. It's all the fault of government meddling in the operation of the free market, says the libertarian. Unemployment exists solely because of the minimum wage and welfare. Eliminate those and unemployment will disappear. Thankfully, outside the "Austrian school" not even mainstream economists believe in Say's law anymore.

    In addition to Say's law, the argument relies on an assumption of perfect markets and competition (capital and labour), the fact that a capitalist will invest his every dollar in a way that will produce the most "wealth", that the investment will magically (the "invisible hand") benefit not only him but also the largest group of people possible etc. Needless to say, none of these assumptions hold in the real world.

    Libertarian texts are not entirely worthless. In addition to their recreational value, they do provide the most consistent and pure presentations of market fundamentalism. For those not afraid of plowing through hundreds of pages of turgid prose, the works of L v. Mises are highly recommended. The ravings of Rothbard are also greatly entertaining. Together, the works of these two thinkers constitute the best reductio ad absurdum of the entire neo-liberal "intellectual" project.

    Best regards

    ReplyDelete
  21. Steve:

    Thanks for your comment. I agree in principle with the idea of dignity of work, but the question is whether such make work projects (by diverting capital from productive work into non productive work) will just lead to a prolonged downturn, causing more people to be unemployed.

    In particular, the make work is going to be expensive, needing significant resource to make it work (if that is not too confusing).

    At a moment such as this, when capital is in such short supply, the problem may be even more acute. As George Osborne points out, there is a problem with lack of savings...

    On your later point, I would not want Lord Keynes to feel unwelcome on here due to different opinions, which provide a good challenge. My problem is with the use of the word 'leech' which is emotive, and is more than an analogy. It removes humanity and is an image that provokes disgust. Also for Lord Keynes, I will quote something that I wrote on the subject of dehumanization a while ago.

    It is not intended for this subject area, but covers the point (also a diagram is missing). I worry when people use such terms as they are terms which stir hatred, and therefore can have very negative effects. This means that I will make a rare move away from economics, but I hope will encourage debate and discussion without such terms.

    You will see that, later on in the discussion below, we already have a tendency to dehumanise business people. This perhaps is a contrbutory factor (along with language using terminology similar to that which Lord Keynes used) in the hatred that saw the butchery of the Kulaks in Russia, and the landlords in China (as just two examples). Those who do not like overly philosophical debate may want to skip this:

    ----------------
    For example, Goff et al (2008) commence a review of the process of dehumanisation by presenting the example of how African people were regarded as apes by some early European explorers, and show from research that some modern day people still make these associations. Haslam (2006) reviews the many domains in which dehumanisation features and lists ethnicity and race, pornography, disability, medicine, technology, and many others. The very breadth of the domains discussed implies that the ability to dehumanise is widespread.

    As an explanation of dehumanisation Leyens et al (2000) discuss the idea of ‘in-groups’ and ‘out-groups’, racism, and ‘delegitimisation’ in the process of dehumanising. Harris and Fiske (2006) have investigated brain activations for in-groups and out-groups, and provided evidence that such processes are neurological and that some social groups are indeed dehumanised. In addition people tend to ascribe somewhat greater humanity to their own self, than they do to others, even where those others are part of an in-group (Haslam & Bain 2007; Haslam et al. 2005).

    Demoulin et al (2008) discuss infra humanisation, or the attribution of a lesser degree of humanness to out-groups “making them appear less or not human at all” (p2) and is connected by some researchers as a stage in complete dehumanisation. Whilst certain primary emotions (e.g. anger, surprise - Demoulin, Saroglou & Van Pachterbeke 2008) can be attributed to both humans and animals by people, certain secondary emotions (e.g. admiration, pride, conceit - Leyens et al. 2000) are seen as uniquely human. As Demoulin et al (2005) discuss, there is a consistency in the way that “people attribute significantly more secondary emotions to the in-group than to out-groups” (p417-8).

    Another categorisation of humanness is supra-human (Demoulin, Saroglou & Van Pachterbeke 2008), which is where gods score very highly on certain personality trait measures such as conscientiousness (Ciarrocchi, Piedmont & Williams 2002). One explanation for this is that individuals project their personality onto the gods (Leach, Piedmont & Monteiro 2001), and another is that viewing gods as supra-human makes people feel more positively about themselves (Bassett & Williams 2003). Interestingly De Moulin et al (2008) conclude that gods offer an opportunity for people to create a hierarchy on which they can locate their own humanity as a mid point between gods and animals.

    Haslam and Loughnan (2007) took a different perspective, investigating whether there were different perceptions of humanness in different social categories, for example comparing perceptions of business people and artists. Their finding supported a differential such that they conclude that “denying human attributes to other people and likening them to nonhumans are subtle and everyday phenomena” (p121). Haslam et al (2008) expanded this research comparing humans, robots, animals and supernatural entities across cultures finding that there were many common conceptions of mental capacity that indicated humanness.

    From the various strands of research on dehumanisation, it is possible to identify a relatively simple continuum of perceptions of humanity which is detailed in figure 20.

    Figure 20: Continuum of attribution of humanity [not included]


    The inevitable flip side of dehumanisation research is highlighting what is perceived as human. Leyens et al (2000), citing in rank order, typify as human characteristics intelligence, sentiments, language, positive sociability, values and negative sociability. Their own research showed that, for the attribution of secondary emotions, humanity was far more easily accomplished for in-groups than out-groups. Haslam (2008) offers a sophisticated model in which human uniqueness is perceived as being rooted in qualities such as moral sensibility, whilst animalistic dehumanisation is illustrated by attributes such as lack of culture.



    Bassett, J & Williams, J 2003, 'Protestants' Images of Self, God, and Satan as Seen in Adjective Check List Descriptions', The International Journal for the Psychology of Religion, vol. 13, no. 2, pp. 123-35.

    Bosnjak, M, Bochmann, V & Hufschmidt, T 2007, 'Dimensions of Brand Personality Attributions: A Person-Centric Approach in the German Cultural Context', Social Behavior and Personality, vol. 35, no. 3, pp. 303-16.

    Caprara, G, Barbaranelli, C & Guido, G 2001, 'Brand personality: How to make the metaphor fit?' Journal of Economic Psychology, vol. 22, no. 3, pp. 377-95.

    Ciarrocchi, J, Piedmont, R & Williams, J 2002, 'Image of God and personality as predictors of spirituality in men and women', Reearch in the Social Scientific Study of Religion, vol. 13, pp. 55-74.

    Demoulin, S, Leyens, J, Rodríguez-Torres, R, Rodríguez-Pérez, A, Paladino, P & Fiske, S 2005, 'Motivation to support a desired conclusion versus motivation to avoid an undesirable conclusion: The case of infra-humanization', International Journal of Psychology, vol. 40, no. 6, pp. 416-28.

    Demoulin, S, Saroglou, V & Van Pachterbeke, M 2008, 'Infra-Humanizing Others, Supra-Humanizing Gods: The Emotional Hierarchy', Social Cognition, vol. 26, no. 2, pp. 235-47.

    Goff, P, Eberhardt, J, Williams, M & Jackson, M 2008, 'Not Yet Human: Implicit Knowledge, Historical Dehumanization, and Contemporary Consequences', Journal of Personality and Social Psychology, vol. 94, no. 2, pp. 292–306.

    Harris, L & Fiske, S 2006, 'Dehumanizing the Lowest of the Low: Neuroimaging Responses to Extreme Out-Groups', Psychological Science, vol. 17, no. 10, pp. 847-53.

    Haslam, N 2006, 'Dehumanization: An Integrative Review', Personality and Social Psychology Review, vol. 10, no. 3, p. 252.

    Haslam, N 2008, 'Attributing and denying humanness to others', European Review of Social Psychology, vol. 19, no. 1, pp. 55-85.

    Haslam, N & Bain, P 2007, 'Humanizing the Self: Moderators of the Attribution of Lesser Humanness to Others', Personality and Social Psychology Bulletin, vol. 33, no. 1, pp. 57-68.

    Haslam, N, Bain, P, Douge, L, Lee, M & Bastian, B 2005, 'More Human Than You: Attributing Humanness to Self and Others', Journal of Personality and Social Psychology, vol. 89, no. 6, pp. 937–50.

    Haslam, N, Kashima, Y, Loughnan, S, Shi, J & Suitner, C 2008, 'Subhuman, Inhuman, and Superhuman: Contrasting Humans with Nonhumans in Three Cultures', Social Cognition, vol. 26, no. 2, pp. 248-58.

    Leach, M, Piedmont, R & Monteiro, D 2001, 'Images of God among Christians, Hindus, and Muslims in India', Research in the Social Scientific Study of Religion, vol. 12, pp. 207-26.

    Leyens, J, Paladino, P, Rodriguez-Torres, R, Vaes, J, Demoulin, S, Rodriguez-Perez, A & Gaunt, R 2000, 'The Emotional Side of Prejudice: The Attribution of Secondary Emotions to Ingroups and Outgroups', Personality and Social Psychology Review, vol. 4, no. 2, pp. 186-97.

    Loughnan, S & Haslam, N 2007, 'Animals and Androids: Implicit Associations Between Social Categories and Nonhumans', Psychological Science, vol. 18, no. 2, pp. 116-21.

    Morris, P, Gale, A & Duffy, K 2002, 'Can judges agree on the personality of horses?' Personality and individual differences, vol. 33, no. 1, pp. 67-81.
    -------------------------

    Lord Keynes:

    You do not address the issue of what the private sector might have done with the huge sums allocated to defence R&D. That there were civilian spin-offs does not justify state investment, as the amount of money pouring into this sector is astounding. I return to my question, which is to ask what the private sector might have done with the money? You suggest it might be diverted to the state, but that enters the question of whether there need be military spending, which really is beyond the remit of the blog. It does not address the question of what private investment of the money might achieve.

    With regards to the argument about post war growth:

    I have just plotted the GDP growth of the US from this paper into a chart (sorry, can not reproduce in this section, but it is a 5 minute job):

    C. Freeman / Research Policy 31 (2002) 191–211, table 2.

    http://www.de9.ime.eb.br/~intec/Sistemas%20de%20Inovacao/Artigos%20para%20aula/Continental,%20national%20and%20sub-national%20innovation%20systems.pdf

    You will find a steady upwards curve, with the gains quite reasonably being explained by process and technology innovation, including a strong growth before the period that you mention. 1860 is the lift off point. The growth conforms with a model of innovation leading to further innovation, leading to yet further innovation.

    We have had this discussion before. You point to a monetary policy based upon theories *proven* not to work in practice (the current crisis left all most of the economics experts baffled). I point to innovations which can see output out of business per unit of labour increasing in ways that can be directly measured.

    If you insist that this is through having a system of continually expanding money supply, then we have reached a dead end on this one. I will point to something measurable with endless empirical documentation, and you will point to a theory and models that failed to either predict this crisis, and which are currently failing to turn it around.

    As for your points on socialism, I can not agree more. There are many variants along the way between pure capitalism and socialism. However, all but the most extreme proponents of libertarianism accept a role for government in the economy, as do I (and Hazlitt).

    As you are aware, I have pointed out that different economies can succeed under different variants of capitalism. Again, we have had this discussion before.

    I have pointed out that monetary systems and other elements must be considered. You seem to insist on ignoring all of the other factors that go into economic success. As one example you cite Norway, which has a huge benefit of oil revenues. In another example you cite Germany. I have worked in a German company and understand that there is a cultural element to their success. This is difficult to measure, but many of those who have worked with Germans will know what I mean (although there are frustrations as well).

    The economic success of a country is not determined just by the economic system. The benefits of German culture can not be measured in simple monetary terms, but may also be the reason for their relatively high GDP. I do not make that claim, as there are a host of other factors.

    You say:

    "I notice you still don't answer my question: will there be regulation to stop excessive fees in such a system of private ownership of roads?"

    When I pointed out about the three roads, one next to the other, I was making exactly the point that there must be some kind of government intervention. I have answered your question. You may note that many of my proposed reforms do indeed involve the government still. I start from the point of view of defaulting to no government interference and, as I state clearly, take each example on a case by case basis with an aim of minimising government involvment:

    "Each case should be considered on its relative merits, but the default starting position should be against government involvement."

    However, in this case, I believe that the user paying for use is a good thing. That does not mean that the M1 motorway should be sold to a private investor who might charge anything that they like.

    Why this interpretation? I have given the example of local roads to illustrate the point that it is not possible or practical to have competition in this area. In the case of local roads we can see the absurdity of attempts at competition.

    However, there are many ways in which government involvement can be minimised, but that is a complete post of itself. If you look at my previous suggestions for reform, you can see how I try to strike a balance on a case by case basis.

    As a final note, I am assuming that you do not mean 'free' as you have said in the following section:

    "My point is this: in the case of public goods like transportation, health care, and education, I see no need whatsoever for these goods or services to be provided privately or privatized, when the most efficient system is to make them free for those who need them."

    It is not free, as they will also be tax payers (or should be) at some point. It is free at the point of delivery, but not free of charge. Everything that a government does is paid out of taxation and that is not 'free'.

    I will leave it there.....

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  22. I noted in the comments of the previous post that Red linked to a article about probable clashes in the upcoming G-20 summit
    (apologies if link doesn't come out right, first time tried it.)

    As the article points out, the UK and US are focused on bailing out the financial system while Germany and France among others focusing on tightening regulation on the banks and tax havens and sorting out the underlining causes of the crisis.

    One thing they do all agree on is that protectionism is bad, although that has not stopped any of them from doing it so far.

    The article makes this point about the policy to bail out the economies "The Anglophone economies are thought to be concerned that if they pledge to borrow vast amounts to spend on a fiscal rescue package but others do not reciprocate, the resulting disruption as investors worldwide shift capital from one country to another in response could cause further panicked episodes in the coming months."

    This is something I had mused upon, as I saw the possibility of capital shift not going the way the governments hoped if it were interpreted as being too costly by overseas and domestic investors. I had not really factored in what could happen if other countries refused to play ball so could anyone comment on if this assessment is realistic and that the UK and US going it alone could further damage their economies.

    As a side note, I came across This Showing plans for mass demonstrations at the G20, so I wonder if the media will focus on the fighting inside or outside the G20? :)

    Lefty Feep

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  23. Matt:

    I agree that the Austrian model has many flaws, but Hazlitt does not indulge in many of these. I believe that he does an excellent job of debunking much of what is currently being undertaken by governments. I saw many of the arguments that I have made on this blog reflected in Hazlitt's book (or rather my arguments reflected many of his). It is always good to find people in agreement with yourself, thus the enthusiasm.

    However, with regards to the Austrians more broadly, I have an unpublished/unfinished post which attacks an article put out by the Mises institute on the subject of intellectual property. I did not publish as it is too narrow for the blog. However, I was rather amazed at their dogmatic and self-contradictory approach.

    As you will notice, I see economics as more nuanced. For example, as I have mentioned in my last reply, I accept that there are many factors that make an economic system work that are outside the perusal of most economists, including the Austrians.

    From my perspective I see much of merit in what they say, but also see a similar dogmatism to other schools. For example, I agree with you on the idea that removing government meddling will not remove unemployment. There will always be booms, and busts, under any system, and that will cause unemployment.

    However, they have a point when they identify that governments (central banks) have played a major part in expanding booms and busts with monetary policy. We are seeing that now....

    You may note that Adam Smith remains at the top of my reading list....but Hazlitt offers some excellent contributions that debunks many of the ideas of the Keynesians...this is therefore a book for our times. As I said in the original post - outstanding.

    However, as I have always done, I will still base my own views on my own thoughts, though sometimes reading another person taking the same approach can help in expressing the thoughts better. For example, I acknowledge my debt to Adam Smith, but still like to work things out for myself.

    Of course, this approach may not be a good thing, as I put expresed in my blog profile:

    "I am completely unqualified to write on economics, except for having read the Economist magazine for several years. In the case of economics I am not sure that such a lack of formal training is not an advantage. However, the last time the world was ordered by non-experts was in Mao Zedong's China, and that led to the largest famine in history...."

    Apologies for the self-indulgence here.

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  24. Lefty Feep:

    Thanks for the link. It will be interesting to see how the G20 will work out in practice. I am not convinced that anything substantive will come out of it and, if something does come out, that any agreements might hold together.

    With everyone chasing the same pools of money, tensions will arise.

    As for unrest/disorder, that goes beyond the remit here, but seems to be a reasonable assertion, but the extent of the unrest is a different matter. Interesting question about which will grab the headlines. What do you think?

    I really will leave it here, as I need to start to prepare for post on the BoE letter of reply to my questions on QE. I hope to post that in the next day or two.

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  25. May I add something to the debate re private and public roads. Here in France we have both, the peage or toll roads and the parallel national routes. The peage is used by those that want a direct route without the problems of navigating towns and cities which means that most of the traffic is heavy trucks and people that want to get somewhere in a hurry. The fact there is a very good national road system the runs parallel (in some cases literally) to the toll roads keeps the charges reasonable, there are even sections that are free to use.

    Another thing I find a little odd here is the fact that the national and departmental roads are kept in good condition, in fact in my area they are being upgraded, but there is no road tax on cars! There was when I first moved here but they dropped it about eight years ago, yet I read that in the UK the road tax is going up and the road conditions are going down, I assume this is another example of how central control does not work.

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  26. Hazlitt's book is fine, government spending sometimes does have its merits but we're now over the point where it produces any further value (as far as Keynesians programmes are concerned). I've been through that debate several times so not particularly bothered to take part in another.

    CE, I think it would be worth having a look at the lower levels such as municipalities and counties, in the US California is not far from being bankrupt and failure at local level looks like the most likely cause of civil unrest. Before the government collapses lower levels will collapse. Furthermore the FDIC looks rather underfunded, also I saw a chart where in terms of deposits failures from C,BOA etc would have been larger than in the great depression

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  27. http://www.telegraph.co.uk/finance/economics/4967402/China-deflation-fears-as-consumer-prices-fall.html

    I wish someone could explain to me the horrors of deflation, in a country with huge, growing reserves and a population that is used to saving.

    Zed

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  28. Mark,

    Thanks for your reply. I think many people (myself included), disgusted with the idiocies of our government's actions, the waste, corruption, intrusiveness, lies and sheer incompetence etc. are naturally drawn to viewpoints and ideologies which advocate curbing government powers and expanding personal and economic liberties. The Austrian school and the libertarians who espouse it are "tailor made" for this job, since the movement crystallized its stance in opposition to the totalitarianism of Soviet Russia and Nazi Germany, and the perceived authoritarianism of the New Deal in the USA and the various welfare states which took shape in post WW2 Europe. Their arguments and conclusions about the evils of "big government" still strike a chord with many thinking people today.

    I started studying books by Austrian economists seriously about three years ago, drawn to this school by their "outsider" status, their opposition to many aspects of "mainstream economics", their rigorously logical methodology, and their apparent intellectual sincerity and honesty. My first attempts at reading Mises were not a success (I couldn't agree with his basic assumptions and his description of the methodology used by him), but "backtracked" to Carl Menger and some other "Austrians", which helped me understand where they were were coming from. Incidentally, it seems that Mises himself was confused about the methodology he inherited from Menger, that's why he was unable to provide a coherent account of it in "Human Action".

    In short, the Austrian project consisted in an attempt to create a deductive science of economics based on a few basic assumptions (axioms). If successful, such a science would have the same validity as e.g geometry. This project culminated in Mises' "Human Action" (later elaborated by Murray Rothbard in his numerous publications).

    Unfortunately, the project was not a success. The theory is impressive as an example of a purely intellectual construction, but bears little relation to reality. In particular, the models used are simplistic, for example, the theory does not distinguish wealth creation from rent seeking. Like Marxism, it tries to reduce all social life to economics. It is crudely reductionist, does not take into account political realities, human psychology, traditions, customs, power relations between groups, resource scarcity and so on and so on. It is also inconsistent with perceived empirical reality, common sense and itself.

    What it does provide, is a complete, more or less coherent (with a little verbal sleight of hand) system which provides "explanations" and prescriptions for most social and economic phenomena. This feature it shares in common with Marxism-Leninism, and this seems to attract a similar type of fanatical personality. Hence your disappointing attempt to engage in a discussion with them. Serious libertarians simply cannot concede many points, as Lord Keynes pointed out (e.g. that some state intervention may be beneficial) without putting their entire intellectual structure in jeopardy. Its a bit like trying to get a physicist to concede the law of conservation of energy, or a logician to suspend the law of excluded middle. This makes honest discussions with libertarians difficult and often impossible.

    There is no harm in "mining" liberterian literature for critiques of existing institutions, and mainstream economic theory. Some of their insights are valuable and can stimulate independent thought. The danger is that in accepting their criticism, people may be inclined to embrace their "positive" suggestions. And these are, frankly speaking, nightmarish - a recipe for some Darwinian dystopia.

    Best regards

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  29. Mark

    I would be interested to know what you think of that outmoded anachronism, the BBC. Its success is not so easy to measure as washing powder or toll roads, but according to pure free market ideology it should be a collossal waste of money, incapable of meeting the demands of the public. And yet... it is widely acknowledged to be the finest broadcaster anywhere in the world. I cannot prove it, but I am convinced that if we adopted an ideologically sound, pay-per-view or subscription system in the UK we would quickly find that we were paying more than the licence fee for less choice, and we would have lost one of the last remaining strands which binds us together as a nation.

    The reason why the BBC can afford to broadcast incredibly expensive concerts on Radio 3 to just a few thousand people (and why I heard some astounding music this evening by a composer I would never have stumbled upon any other way) is that it has access to a modest licence fee from virtually everyone in Britain. The fee pays for wall-to-wall game shows, viewed by tens of millions of people *and* for incredibly highbrow elitist programmes watched by a few thousand. And the clever bit is that someone a bit bored of Dancing on Ice can dip into a programme on economic history if they feel like it, without worrying that it's costing them a penny. Admit it: the markets could never produce such a perfect system spontaneously. They would be obsessed with charging 'fees' and insisting that viewers pay for their 'choices', which would introduce an ugly edge to the whole experience.

    In my opinion, the BBC is an example of true national "wealth" even though it offends free marketeers hugely.

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  30. Response 4

    You do not address the issue of what the private sector might have done with the huge sums allocated to defence R&D. That there were civilian spin-offs does not justify state investment, as the amount of money pouring into this sector is astounding. I return to my question, which is to ask what the private sector might have done with the money?

    The private sector is not deprived of money, because we live in a fiat money system with a Central Bank that can expand the money supply in accordance with demand for it.

    The argument that the private sector is deprived of money by taxes assumes you live under a gold standard with a static money supply.

    We had blog after blog here detailing how the Central bank creates money from nothing, so the expansion of the money supply more than makes up for lost capital available for investment.

    The only real argument you can make is that taxes deprive people of some spending power now; perhaps consumption is diminished slightly, but that’s the trade-off you get for the benefits of investing in new technologies.

    I have no problem whatsoever with foregoing some new clothes today for a cure for cancer in 10 years time

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  31. Response 5: On Technology and Economic Growth

    I refer you to this site with a graph that plots the annual increases in real per capita GDP in the United States over 200 years (the figures are in inflation adjusted 2004 dollars).

    http://mjperry.blogspot.com/2009/01/due-to-economic-growth.html

    In the article you cite (Chris Freeman, "Continental, national and sub-national innovation systems—complementarity and economic growth," Research Policy 31 (2002) 191–211), there is this main conclusion:

    But when all is said and done the main conclusion of the whole debate
    has been to vindicate the contention of many economic historians and neo-Schumpeterian economists that technical change and institutional change are the key variables to study in the explanation of economic growth.


    Quite so.

    If you accept that economic growth is in large measure the result of technological innovation (which I do), then this has very important consequences.

    From 1800 to 1904, the average annual increase in US per capita GDP growth was at 1.5%. From 1900 to 1950 the average rate is about the same (although it conceals the massive takeoff that happened from about 1940).

    From the late 1940s, the growth rate exploded.

    From 1945 to 1973, US per capita GDP growth was 2.24%.

    The rate of growth after 1945 makes the previous rate of growth look sluggish.

    The extraordinary growth of the post-war era has been the result of much greater government funded R&D, and its application to business. It would never have occurred without state funding.

    Technological innovation in the 19th century was severely reduced by lack of large scale state funding, and the absurd idea that all technological and scientific progress can be ascribed to single individuals working alone, with private funding.


    1860 is the lift off point.

    I see no such lift-off point in the graph I cite above. The lift off point for per capita GDP is the late 1930s/early1940s.

    You will find a steady upwards curve, with the gains quite reasonably being explained by process and technology innovation, including a strong growth before the period that you mention.

    There is no steady curve upwards: there is gradual and slow growth from 1800 until 1930s, then explosive growth from the 1930s onwards


    If you insist that this is through having a system of continually expanding money supply, then we have reached a dead end on this one.

    I do no such thing. Where have I ever claimed that increases in the money supply are the sole (the one and only) explanation of economic growth?

    There are many factors.

    Large-scale state investment in R&D is a major factor


    As one example you cite Norway, which has a huge benefit of oil revenues. In another example you cite Germany.

    Norway does have the benefit of oil revenues.

    Sweden and Denmark don’t. Yet they have per capita GDP levels higher than Germany, with all of its supposed cultural business superiority:

    Rank Country Per capita GDP

    5 Norway 55,600
    6 United States 46,000
    24 Denmark 37,400
    25 Sweden 36,900
    27 Finland 35,500
    28 UK 35,300
    31 Germany 34,400

    You claim that Germany has an extraordinary culture for business. Why isn’t its per capita GDP higher than Sweden?

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  32. On Emotive and Dehumanizing Language

    I agree that emotive and dehumanizing language is unhelpful and potentially dangerous.

    I also note that libertarians and extremist capitalists have no shortage of dehumanizing language when applied to those on welfare:

    The New Welfare Bums
    by Llewellyn H. Rockwell, Jr.
    http://www.lewrockwell.com/rockwell/welfarebums.html

    The article complains about people faking disabilities to get welfare, which is fair enough.

    However, its whole point is that all welfare is illegitimate and immoral:

    First, it is not enough to reform welfare. It must be abolished, lest the same programs be reinvented under a new rationale.

    Curiously, most libertarians firmly reject Malthus’ absurd population thesis, but still cling to the idea that people have no right to any support from the state, even in times of desperate crisis.

    The idea can be traced back to Malthus, who believed that if you cannot support yourself by renting yourself (basically, your labour) on the free market, then you have no right whatsoever to any form of public assistance:

    Our laws indeed say that [people have] this right and bind society to furnish employment and food to those who cannot get them in the regular market; but in so doing they attempt to reverse the laws of nature; and it is in consequence to be expected, not only that they should fail in their object, but that the poor who were intended to be benefited, should suffer most cruelly from the inhuman deceit practised upon them.

    (Thomas R. Malthus, An Essay on the Principle of Population, 1817, Vol. III, p. 154)


    As for the moral nature of communism and socialism, take your pick:
    The horrors of a kulak dying from Stalin’s collectivization of agriculture, or a unemployed worker starving to death on a street corner, because he cannot find work, and libertarian fanatics are adamant that it is immoral for the state to provide money for him simply to live.

    The second is only marginally less brutal, horrific and vicious than the first.

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  33. Hi Lemming & CE,

    My take on things like the BBC is that at its best the State or the Government is merely a very big corporation. Therefore, for the very biggest tasks (building a national education, health or broadcasting service) it is the most efficient and productive player. And for sure these things are genuine wealth for the vast majority of the Corporation's members (i.e. the population of the territory)

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  34. I've read George Osbournes speech. I'm trying to understand the point about the savings ratio.

    Mervyn King apparently has said that savings rates need to increase, but the BoE has just lowered the target rate to 0.5%.

    As I understand it the target rate is achieved by the central bank buying/selling money so if there isn't enough money in the system then the bank starts selling money cheaply, which drives the rate down towards their new target. But isn't the BoE undercutting savers with this activity?

    Isn't the savings ratio irrelevant when the BoE is supplying money at such low rates?

    As far as I can see, the only value of savings to the central bank is in removing money from the system to control general price inflation - the opposite of what they claim to be doing right now.

    ReplyDelete

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