Liberal Vision

Tories call on David Brent to save the UK economy

Politics makes strange bedfellows; coalitions especially. In the 1970s the Liberals made a pact with socialists despite socialism being the antithesis of liberalism; in 2010 the coalition finds us in bed with Conservatives despite the Tories opposing liberalism for centuries.

Coalitions therefore require us to remind the voters how we differ from the parties with which we are aligned in government. This week a new report from the Conservative-leaning think tank Civitas reminds us of one crucial difference: the Tories have always opposed free trade.

Reviving British Manufacturing: Why? What? How? appears to be a throw-back to a former time, when the Tories banned wheat imports to protect the interests of their landed backers. Between fawning praise for Margaret Thatcher (“No one doubts Mrs Thatcher’s commitment to a market economy, [Er... Yes they do - Ed] but she was no market fundamentalist and her pragmatic patriotism is often forgotten“) Civitas suggest that the UK should indulge in one of the most fundamental economic blind-alleys in the Handbook of Bad Government: protectionism.

The reason that Civitas cite for this bizarre and dangerous policy is the UK’s balance of trade deficit, which measures the net flow of payments for goods and services into/out of an economy. Civitas argues that “We already have a balance of payments problem… With the annual trade deficit in goods now at a new record of £97.2 billion… only radical Government action will prevent Britain’s permanent decline as an industrial society“.

In fact, they later admit that the real trade deficit is £46.2 billion, but that they are choosing to ignore the trade-surplus from services. This is an absurd confidence trick, which ignores the fact that the UK’s comparative advantage is in services (Yes, even financial services! – try to contain your disgust). This attempt to make us focus only on one part of the economy is risible: I suspect that if one ignored manufacturing and focussed solely on services one could argue that China is running a trade deficit; if so, the politburo do not appear too bothered.

Even accepting that there is a trade deficit, this does not matter. As Milton Friedman noted, £100 billion is only of use to foreigners because it enables them to buy £100 billion worth of British goods. The pounds themselves are useless to them: “they cannot eat them, wear them, or live in them. If they were willing simply to hold them, then the printing industry – printing [pounds] – would be a magnificent export industry… [that] would enable us all to have the good things in life provided nearly free by the” nations foolish enough to swap perfectly good goods and services for paper adorned with the Queen’s face.

In fact, many foreign nations seem quite prepared to do that, and worse: they then lend the money back to the UK. This has created twin problems: on the one hand, it enabled us to buy even more of the good things in life (such as the public services spending splurge from 2001 to 2010), but only by borrowing against our future and that of our children. Secondly, it kept our currency high and theirs low, thus making our exports less competitive and theirs more attractive, and so exacerbating the balance of trade problem.

The solution, one might therefore think, is to stop borrowing the money. If they can’t lend it to us, they will have to spend it in the UK, and so we will achieve equilibrium in our balance of trade (but with a weaker pound). However, if you are a Tory think tank, there is an alternative: protectionism.

“the Government should encourage an increase in manufacturing output by about £10 billion per year”, the report argues, (why not £11 billion? 12 billion? What’s so special about £10 billion?), but crucially, this should not be done through promoting exports (itself dodgy, but now is not the time), but by import substitution: “exporting is costly… in the short run … it will be much easier to focus on the home market and out-compete importers.”

Import substitution is economic madness: not even Labour recommends this sort of thing anymore. It completely ignores the Law of Comparative Advantage(aka. the Ricardian Law of Association) and indeed undermines the whole basis of trade, which is specialisation and the division of labour.

And what are the four industries that Civitas wants the UK to specialise in over the next few years? Where should we focus our efforts, expanding domestic supply by throwing up walls to prevent cheap foreign imports?

In a companion essay, Civitas cite four particular industries that might not strike the average reader as particularly promising: Paper; Glass; Steel and Motor Vehicles. Admittedly, we have some good companies operating in each of these industries, but the idea that Wernham–Hogg paper merchants will become engines of the British economy is hopelessly naive.

Add to this the suggestion that Britain should establish a “Ministry for Economic Growth, focused purely on reducing the trade deficit through increasing production” (where to begin with this one?) and a tacked-on side-swipe at the European Union and you have a classic piece of Tory wonkery.

In 1962 Milton Friedman argued that “It is not too much to say that the most serious short-run threat to economic freedom… is that we shall be led to adopt far-reaching economic controls in order to ‘solve’ balance of payments problems. Interferences in international trade can seem innocuous: they can get the support of people who are otherwise apprehensive of interference of government into economic affairs… yet there are few interferences which are capable of spreading so far and ultimately being so destructive of free enterprise.”

Review: A New Understanding of Poverty

Liberals frequently find themselves in the middle of debates. That on poverty is little different. What is poverty and how it is measured is an academic discussion, but one that has far reaching consequences for welfare policy and those impacted. The Institute for Economic Affairs, the leading free market think tank, has examined this issue through Poverty Fellow Kristian Niemietz’s new monograph “A New Understanding of Poverty” .

On the wings of this discussion are the two best understood concepts, absolute and relative poverty. Preference for those measures tends to ascribe to the right and left wings of politics respectively.

The study shows that different poverty measures are poorly correlated. Countries that have seen large rises in relative poverty recently have seen sharp falls in the absolute. Even different relative measures are more weakly linked than we might assume. It is then incorrect to assume different measures are just alternate views of the same thing. What measures are used to assess poverty then matters.

Absolute poverty, the measurement of access to some unchanging basic necessities such as water, food, and shelter was popular in the Victorian era (for example the Rowntree Budget Standard Approach) and accurately describes subsistence, but doesn’t adapt to progress. Access to a phone 50 years ago was a luxury, today it is essential. The poor in Britain today are better off than the middle classes in the 1950s. Applying Victorian or third world standards to Britain today tells us mainly that the Northumbia students who compared their tuition fees plight to famine victims last November are getting a poor return on their investment in education.

Relative poverty, for example setting a poverty line at 60% of median income, moves with economic changes, but it does so perversely. RP for example falls in recessions as relatively more expensive employees are laid off. It can increase as everyone gets better off if that growth is uneven. In uncertain times someone might find themselves labelled poor or not poor several times over without any actual change in their standard of living. It depends entirely on what geography is selected.

RP has little relation to what most people think is poverty and breeds resentment of the welfare system. By focusing on income it labels fabulously asset-rich pensioners, future well off students, and temporarily unemployed professionals as poor. Targeting RP leads to policies focusing on the line and shuffling money about not tackling the root causes of deprivation. By making a fetish of redistribution RP targets can encourage high taxes and welfare spending that destroy growth and makes joblessness a lifestyle choice (under socialism we all get poorer together, but none more so than the genuinely deprived).

Targeting inequality as proposed by the debunked pseudo-science of the Spirit Level doesn’t work. Current UK policies aspiring to abolish relative child poverty and other targets, will either never be achieved, or rely on economic collapse.

Subjective poverty measures are usually survey based. Either percentages self-reporting ‘I feel poor’ or based on an income/wealth line where that becomes more true than not. Such emotive measures are interesting studies in self-perception, but don’t tell us much about how deluded those perceptions are or why they matter. As a policy tool they have much of the utility and of an ‘Am I fat’ survey in Heat Magazine. A policy prescription to tackle subjective poverty might include a National Hugs Service*.

Material Deprivation measures are based on reported expenditure on goods and services, weighted by how important they are to the individual, and how widely they are owned (consensual approach). The result is a range of context specfic deprivation scores rather than a poverty line.  Expenditure measures move with economic progress, correlate with popular perceptions of poverty, and can account for spending from assets. The survey element is binary – do you have this, don’t you; do you want it, don’t you – which should mitigate against perception bias.

Another advantage of MD measures is that they improve when essentials get cheaper, usually as a result of more competition or innovation. The deteriorate when the converse is true. Government schemes that increase the price of rent, petrol, electricity, food and clothes for example, and the subsequent household spending adjustments are better captured by an MD scale than RP. They can account for regional differences in price.

The main problem with MD is preference bias. Some who forgo ‘basic’ goods as a matter of preference would count as deprived.

Niemietz then suggests going back to basics by applying some elements of Rowntree’s BSA to a consensual MD measure (CBSA), or less wonkishly applying some common sense and data to the validity of expressed preferences. So for example deprivation of access to a washing machine should depend on the price of available cheap machines not the average price.

The CBSA poverty line could vary by regions and types of household (e.g. families, pensioners, students) according to local prices. Households below the expenditure line that allows you to purchase the consensus view of necessity would be classed as poor. Those above that choose not to buy those goods (they may for example spend more on clothes and cigarettes) would not.

The policy implications of a CBSA would be to more accurately draw attention to government policies that make life tougher for the poor such as planning restrictions, producer subsidies, and minimum prices. It would highlight the importance of economic growth, open markets, removing poverty traps, lowering marginal tax rates, simplifying the benefit system, removing couple penalties, school choice, workfare, and the interactions between such measures.

The rest of the monograph includes an interesting history and analysis of measures and policies in the UK.

All in all this in important and interesting contribution  well worth reading to understand what is often an impenetrable debate.

*When team Cameron propose this, you heard it here first

BOOK REVIEW – Hayek’s The Constitution of Liberty: An Account of its Argument

• Hayek’s The Constitution of Liberty: An Account of its Argument, by Eugene F. Miller
• Institute of Economic Affairs (www.iea.org.uk), 2010
• Get your copy HERE.

Eugene Miller, who sadly died earlier this year, wrote a summary and commentary on Hayek’s book of 1960 where he explained a modern version of classical liberalism in relation to political theory, public policy, law, and history, as well as economic principles.

Together with Law, Legislation and Liberty (1979), The Constitution of Liberty is Hayekʼs fullest presentation of his
version of classical liberalism. It is probably more widely read than the later text, and is one of the key texts in Twentieth Century liberal thought.

It is not a very difficult book to read, but it is long and it does integrate a very wide range of material, so there are strong reasons for publishing an introductory version, with guidance for the reader. Hayekʼs book of over 400 pages is condensed into a summary, together with comments, into less than 200 pages. Miller puts passages into the context of other works by Hayek, and sometimes the history of liberal thought. The reader gets a good idea of the issues in The Constitution of Liberty and the flow of arguments, along with a few ideas about how to interpret and contextualise.

Miller points out that the proposed policies in The Constitution of Liberty will not satisfy the most radical libertarians, though though Hayek’s analysis can be used for more radical ends. Hayek himself did not use the word “libertarian”, because he considered it an artificial substitute for the word liberal; and he did not support the idea of a radical lurch in society of the kind that “libertarianism” might suggest. Hayek regards the state as having a legitimate role, not only in the night watchman functions of law and order, and national security, but also with regard to maintaining the incomes of the poorest, and providing core public services. Hayek emphasised the improved efficiency of government as well as reducing the size of government. The two go tother to some degree, as over-extended government becomes inefficient, but Hayek did not think that smaller meant better in every circumstance. He suggests that the tendency for government to do to much went back to the 1870s, when classical liberalism started giving away to a “progressivist” statism, trying to find, and impose, state solutions for everything.

The reasons that large government is inefficient, and threatens liberty, were explored by Hayek in earlier books and papers on economics, most famously in The Road to Serfdom (1944). What Hayek adds in The Constitution of Liberty in particular is more detail about dysfunctional planning, and an overview of the development of law. As Hayek had already argued, any planning agency has limited information about the economy it is trying to plan, and the consequences of intervention. This problem cannot be solved by more information, as the agency will never match the constantly changing totality of information, that individuals in aggregate have through the price mechanism. Since this mechanism conveys dynamic information about the constantly changing preferences of many individuals, no plan can capture it. Even by 1960, Hayek suggests, state socialism in the sense of the state owning everything in the economy, was an exhausted ideology. However, statism was still growing, and has since, through attempts to improve society from above.

What makes this book most distinct in relation to Hayek’s earlier work, is the emphasis on law. Hayek obtained a doctorate in law before his fame as an economist and political thinker, and here he puts an interest in the history and theory of law to great use. Hayek had developed a strong belief in the benefits of evolutionary law, or law as a discovery procedure, that is law that evolves through judgements in particular cases. Hayek opposed an evolutionary understanding of law, in terms of legal theory, to the major schools of positivism and natural law. According to positivism, law is the system of legal commands issued by the sovereign power; according to natural law, law is the commands deduced from basic natural rights.

Hayek thinks that we know what ‘law’ is from the activity of judges as opposed to the commands of any sovereign body, or any notion of what is right by nature. This gives Hayek a basis for criticism of legislation, which goes beyond what emerges from the independent judicial process. The evolutionary understanding of law led him to highly value the British common law tradition, of law from precedent; and German administrative law before it became absorbed into a centralised state system in the late Nineteenth century. Administrative law comes from the continental European tradition of courts, which evaluate acts of the state machinery, and which clarify, and refine, the principles that underly them. Miller is particularly helpful in providing contextual information on Hayek’s attitude to law, referring to lectures Hayek gave in Cairo in the 1950s; and he explains how Hayek used the trip to Cairo to follow the European travels of John Stuart Mill, a great hero of Hayek’s, particularly in his earlier years.

Through this kind of analysis, historical information, Miller succeeded in providing an ideal introduction to the reading of The Constitution of Liberty, and interpretation of it. Those new to Hayek will find this the perfect introduction to his thought, along with The Road to Serfdom, and The Use of Knowledge in Society (1945). Those already familiar with Hayek will also find it very useful as a thought provoking overview.

Five Books interview with Brink Lindsey

Check out this fascinating interview with the Cato Institute’s Brink Lindsey:

I think the typical view of politics from inside a partisan mindset is to see politics as a battle of the good guys versus the bad guys. Maybe the good guys are on the left, maybe the good guys are on the right, but it’s this Manichean struggle and the way to get progress is for the good side to win and impose their will. Mill sees through that and sees that, in fact, politics is a dialectical process. At any given time truth is partly on one side and partly on the other. It’s more a battle of half-truths and incomplete truths than of good versus bad. The excesses of each side ultimately create opportunities for the other to come in and correct those excesses. Liberalism, in Mill’s view and in mine, provides the basic motive force of political change and progress. It will go astray, it will have excesses, it will make terrible mistakes – and a conservatism that is focused on preserving good things that exist now will be a necessary counterweight to that liberalism.

Brink also talks about the great books that influence modern classical liberalism in a very thoughtful and considered manner. Excellent stuff.

Samuel Fleischacker: a Third Concept of Liberty, Judgement and Freedom in Kant and Adam Smith (1999)

Fleischacker is a Professor at University of Illinois-Chicago. Though all his degrees and academic appointments are from the USA, he is English in origin. He is a leading Adam Smith scholar, author of On Adam Smith’s Wealth of Nations: A Philosophical Companion (2004) and co-editor of Essays on Adam Smith’s Moral Philosophy (2010). Amongst currently active thinkers inspired by classical liberalism, he could be taken as representing the other pole to Chandran Kukathas, who was discussed in my last post. Fleischacker is definitely a ‘liberal’ in what is now the normal sense in America, that is someone of egalitarian left leaning inclinations. However, he is also much less of a statist social democrat than the average American ‘liberal’, and he tries to establish an alternative to the kind of top down statism often employed to advance social egalitarianism. He is critical of libertarians for what he sees as indifference to the need for government action to aid liberty, but much of what he says fits with those libertarian thinkers who believe government has a role in promoting public goods.

Fleischacker looks back to Adam Smith and to the German philosopher Immanuel Kant, who will be addressed soon in this series of posts. Kant was greatly influenced by the Scottish Enlightenment, and has similar ideas to Smith about the benefits of free trade, property rights, and individual liberty under law. Kant also puts those Scottish Enlightenment ideas in the context of a philosophy much more concerned with ‘transcendental’ questions, that is questions of the limits of knowledge, and the way our knowledge of the world depends on the nature of our consciousness.

One part of Kant’s study of our consciousness is concerned with the power of judgment itself, which he thinks is at work in our taste for beauty and our philosophy of nature. Fleischacker is particularly concerned with beauty in Kant, which Kant connects with the most inner and subjective aspects of judgment. Kant’s view of our power for subjective judgements of beauty, is that it joins with everyone else’s judgement of beauty in ways which are the basis of communication, which join subjective pleasure with universal standards. For Kant, the capacity for judgments of beauty is deeply connected with our freedom as human beings and with our capacity to make moral judgements regarding other free individuals.

This aspect of Kant builds, in part, on ideas in Hume and Smith about the improvement of human morality, liberty, and taste over history. It is this capacity which provides a third concept of liberty beyond, the ‘negative’ liberty of freedom from interference, and the ‘positive’ liberty of collective action to provide conditions of liberty.
Fleischacker looks at liberty and self-determination in Kant in the first part of the book, and follows it up in the second part with an examination of the moral and political aspects of Smith’s Wealth of Nations (1776). Fleischacker thinks of Smith’s political economy as referring to the kind of values of moral reflection and freedom from external domination, that can be found in Kant. He looks at how for Smith, the increase in the prosperity and independence of labourers is a prime concern.

Fleischacker refers to the various points in Smith, which identify the manipulation of markets by the rich and powerful who try to exclude competitions. Merchants collude in trying to rig markets against new competitors, guild masters try to limit and control the people entering that guild.

Fleischacker looks at Smith’s famous line about the benefits we receive from the self-interest of butchers, bakers and brewers, rather than from their benevolence. The main point for Fleischacker is the value of personal independence. It is better for me to depend on myself for my food and drink, rather than depend on anyone’s charity. Fleischacker also notes Smith’s enthusiasm for indirect taxes on luxury goods rather than taxes which bear on the poor, and his disdain for those who look down on, and preach at, the poor for their supposed irresponsibility. Fleischacker’s extrapolation that Smith would be a supporter of redistributive tax and welfare policies are no doubt open to debate, but his views are certainly based on deep knowledge of Smith’s writings.

The last part of A Third Concept of Liberty is concerned with John Rawls, the dominant figure in recent egalitarian liberal political theory. Though Fleishacker agrees with Rawls’ overall view, he thinks Rawls leans too much towards rigid views of social organisation and distribution of income. Fleschacker argues for a more contextual approach, in which policy solutions emerge in reaction to particular conditions. He argues for public action to be directed against monopolistic economic power, rather than towards distribution of income. Rawls himself is often take as master thinker of left-liberalism and social democracy, but he also been taken up approvingly by some classical liberal and libertarian thinkers including Friedrich Hayek (Law, Legislation and Liberty, Vol. 2 The Mirage of Social Justice, 1979). So if Fleishacker takes Rawls, and tries to move away from the more designed from above elements of Rawls thinking, he certainly has something positive for classical liberals and libertarians. Rawls himself will be dealt with in a future post.