23 Shades of Free Market Capitlism

Tim Worstall is writing a very amusing set of pieces for the ASI called "23 Things We're Telling You About Capitalism", I think it's intended as a kind of rebuttal to Ha-Joon Chang's 23 Things They Don't Tell You About Capitalism. Reading it is really quite amusing, simply for the number of omissions and giant stretches it requires to make Tim's worldview work.

"...But don't forget, Chang is writing a book about how capitalism and the free market just aren't all they're cracked up to be: if so, then how did we end up with the better technologies, better institutions, better firms and infrastructure  Could it, possibly, have anything to do with the fact that we've been largely capitalist and free market for a couple of centuries?" 

 The word "largely" in this particular point is doing one hell of a lot of work here, the USA for example has had a long history of imposing protectionist tariffs  in addition all western countries have spent a large number of decades developing their welfare states. The problem becomes even more acute when you get to some of the more recent developing countries.

 "..This isn't confined to any one group or set of countries either. Just since WWII, Hong Kong, Japan, Taiwan, S. Korea have all joined the nations that enjoy that distinction. China is catching up fast. Those countries that haven't haven't: like, for example, the bureaucratic and planned Licence Raj in India which still impoverishes Ram..." 

Let's we start with suggestion that democratic India is somehow not as capitalist or free market as a nation who's ruling body is called "The Communist Party of China"? Also, perhaps we can look at one of Chang's previous works for some fine examples of free market capitalist innovations South Korea.

For example, by the ASI's definition, the following government policies are now "free market" and "capitalist":

• Government seizing control of the nations bank's and using them as a tool to control industrial development. 
•  Government instructing one firm that it is only allowed to produce diesel engines for marine vessels while instructing another to work exclusively on diesel engines for motor cars.

The problem all through Worstall's piece is that the definition of free market capitalism that he defines as a good thing is so broad almost as to encompass a gigantic variety of policies. All this would obviously be fine, except that reading the work of both Worstall and the Adam Smith institute they would seem to subscribe to a rather narrower definition of free market capitalism in their own work. S

Still, for now I'm quite happy in advocating policies that will further extend the welfare state and increase the size of the state sector in the happy knowledge that I'm being a good free market capitalist.

Making the Case for Borrowing

Last night I watched Angela Eagle struggle to explain why austerity is a bad idea and why the government borrowing more is a good idea. As a result I thought I'd put forward what I think is a good way of explaining this.

For me, the way to do this is to stick the question in their head: "Where do my wages come from?"

I suggest saying something like this:

"Our wages are not manna from heaven, instead they depend on a steady flow of customers for our employers but that's something that's at risk. The british consumer is already struggling under a burden of debt, Europe has it's own problems and while we're talking about exporting to China and India it'll be a while before it actually happens.

We've had austerity and the result is that economy is barely moving and people are struggling to make ends meet. In an ideal world we wouldn't have to do this, but right now the only way we can keep the economy moving is for the government the government to borrow more so we can stop the cuts and let the economy heal."

Tired Old Arguments

Thought I'd create a post dedicated to those arguments that occasionally crop up in politics but have generally been refuted elsewhere in far more detail with far more evidence. This post will be dedicated to those arguments and the best posts/articles refuting them.

Grammar Schools are the Answer
Chris Cook looks at the data and compares UK counties with grammar schools to those without. The supposed benefits of grammar schools do not appear to be forthcoming.

Hidden Dangers in the Unemployment Figures

It was recently announced that unemployment had fallen by 37,000, this certainly led to a lot of boasting from Conservative types  but it may not be as much of a cause for celebration as they first think. The key to this likes in the way the statistics are put together.

The first point to consider statistics are not month on month statistics, but are rolling statistics that compare the most recent 3 month period with the previous 3 month period. As an example, the most recent statistics relate to unemployment from the months of September, October and November 2012 and compare those figures with the months of June,July and August 2012. So, over the period Sep-Nov 2012 unemployment was around 37,000 lower than the period Jun-Aug 2012*. This diagram should help to explain things visually.

A key point to consider is that this means that the figures overlap, the fall of 37,000 in November includes two of the same months as the fall of 82,000 in October. The large fall of 82,000 in October is not necessarily a sign that October was a good month, it may simply be that a sign that the month of July where a fall of only 7,000 was in fact an underestimate and that this point dropping out of the data caused October's figures to be a good deal higher.

It's important to note is that because the unemployment figures are moving averages that there is a delay between something happening in the economy and it feeding through to the figures. If unemployment actually rose in November then we may not see it immediately since the months of September and October would prop up the figures. What we would see initially would be the fall in unemployment dropping relative to the previous months. The 37,000 figure, being a good deal smaller than the previous month could be a sign of this.

A final thing to note is that that these numbers come with a pretty big health warning. First up, the 95% confidence interval for the unemployment figures is +/-91,000 meaning that that they are 95% confident in the most recent 3 months the change in unemployment was somewhere between +54,000 and -128,000. Second it's worth pointing out that although the figures are announced monthly they are only quarterly figures, unemployment has only fallen by 185,000 in the past year and the 95% confidence intervals here at -67,000 and -303,000.

The point I want to make from all this is that the government should be wary about what it boasts. The was the figures are presented means that the news can still look good even as the things start to look bad. And that while unemployment looks like it's moving in the right direction it's a long way back to anything resembling full employment and there are still plenty of pitfalls.


* I should also add that the figures are adjusted to take into account seasonal variations.

An Interesting Little Experiment

The Bank of England has said that it will be giving the interest it receives from the debt it holds as a result of quantitative easing back to the treasury. In one way we can regard this as giving George Osborne a way of wriggling out of his deficit targets, in another way though it can be regarded as the first step on a path towards some very interesting monetary policy.

 So..a bit of quick fag packet maths: debt interest currently costs around 3% of GDP, the bank owns about 1/3rd of government debt so this amount in total is about 1% of GDP, this 1% of GDP gives a tiny bit of extra wiggle room to the treasury. An awful lot then depends on how the treasury uses that wiggle room. Assuming the treasury uses this wiggle room as an excuse to reverse a few cuts and undertake a few minor stimulus measures, the policy essentially amounts to a very minor, controlled form of helicopter money.

 My take on this is that this intervention is an attempt by the Bank and the Treasury to experiment with monetary transmission mechanisms. Both will be watching various economic indicators to see how this little experiment plays out in terms of GDP growth, inflation and long term expectations and will use the results as a basis for future policy.

How to do a Hatchet Job on Ed Miliband

Step 1: Find transcript of Ed Miliband speech intended for a politically astute audience, the Fabian Society is always a good one.

Step 2: Locate a suitable passage from said speech that uses obscure political language, strange buzzwords or similar.

Step 3: Take said speech snippet and place in an article as evidence of why Ed is clearly out of touch with the ordinary people of this country.

Extra marks will be given for explanations of why the latest poll showing 99% of people wanting Ed Miliband as Supreme Emperor of the universe clearly indicate that his leadership is in trouble.

David Davis should learn a little more history

Yesterday we had David Davis offering his opinion on what to do about our economic situation, and while I'm not exactly a George Osborne fan hearing the proposed "solutions" to our problems emanating from the Tory right makes me thankful for Osbornes (relatively) sensible approach to our situation.

There is no doubt that many of the ideas emanating from Davis et al are very bad, for example his proposal for faster deeper cuts has us asking where the new demand will coming from, I've not seen the speech but none of the coverage I've read indicates he can provide a clear answer on this. What I'd like to concentrate on for now though, is a comment he made on Osborne's small business bank idea.

"They may help a small amount. The history of government-sponsored banks is not a very good one in any country in the world, let alone ours."

I've pointed out in the past that the extraordinary growth witnessed in South Korea began with the government nationalising most of the banking sector. Indeed, it's argued that in this case freeing the banks from government control was a factor in the 1997 Asian financial crisis. China is also an example of a country that has used state run banks to aid in it's development.

The examples I give above are reasonably well documented, they are also far from the only examples that can be found. What Davis has said about government sponsored banks is just plain wrong.