UK Brain Drain

In the past 10 years almost 2 million 25-44 year olds emigrated from Britain. 

Four of them are related to us: a nurse, a doctor, a banker and a management consultant.
This is both personally a heartache and nationally a big problem. Our economy is losing skilled, energetic, productive and innovative men and women. And their children. 

economics must be taught!

... we live in a society plagued by an activist government. Unlike other scientific disciplines, the basic truths of economics must be taught to enough people in order to preserve society itself. It really doesn't matter if the man on the street thinks quantum mechanics is a hoax; the physicists can go on with their research without the approval of the average Joe. But if most people believe that minimum wage laws help the poor, or that low interest rates cure a recession, then the trained economists are helpless to avert the damage that these policies will inflict on society. (p8-9 Lessons for the Young Economist - Robert Murphy)

An intriguing evangelistic shape to this: ('only economics can save us')! But still very interesting nonetheless and hard to argue against the importance of studying the real exchanges of real people in all their vast array. I thought economics was dull and irrelevant when I chose not to study it at school. How wrong I was. 

What is a 'fair price'?

Last night I observed our lads at BB doing a very simple Banana Role Play Game. I don't know where it came from - possibly BB HQ? But it presented itself as an exercise in economics (the 'banana trade') and in justice. By the end it seemed more like an exercise in propaganda for FAIRTRADE™ - even if that wasn't the intent.

So five minutes digging yielded some interesting fruit. There is another side to this! 

• an Adam Smith 2008 report about Fairtrade: unfair trade. 
• a short documentary film The Bitter Aftertaste: 

The terms 'fairness', 'that's not fair', 'fair trade' were all used a lot both by the material last night and by the lads in response to the 'scenario'. But, I think it is fair to say this 'fairness' business is not as simple as an emotive call to side with (poor) workers of the world against the (evil) 'rich guys' [in this case 'LESCO' ... mmm, some more propaganda going on!].  This is  especially so when the role play game consisted of only one worker, one producer, one exporter, one importer and one supermarket - thus eliminating a very important aspect of trade. Choice. 

So it reminded me. 
Watch out for banana skins! 
It is possible to slip on one. Even if it is fairly traded. 
Maybe especially if it is fairly traded. 

So, back to the question of a fair price. What is a 'fair price' ... whether it is a 'fair' labourer's wage (in this case he or she is selling their labour to someone who wants to buy it) or the amount we pay for the bunch at the supermarket?

'any price agreed upon between a willing buyer and a willing seller the just price, that alone is what makes it the just price.'

'People exchange goods in a market economy to their mutual advantage. Each party to an exchange values what he receives more than what he exchanges for it. Both parties are better off after an exchange than they were before the exchange. In a free market, suppliers compete with suppliers and buyers compete with buyers. Suppliers do not compete with buyers. The only exchanges that result in winners and losers are Christmas gift exchanges between parents and children. But even that is a voluntary loss. Competition for business between suppliers reduces prices, which is to the advantage of the consumer, while the bidding of consumers against each other for goods raises prices, which is to the advantage of the supplier. The free market allows suppliers (who naturally want the highest price they can get for their goods) and consumers (who wish to acquire those goods at the lowest price possible) to come together in harmony.' 

[from The Myth of the Just Price]

Tipton Christians Against Poverty

We've just begun to connect with Christians Against Poverty as a church (and thanks to them I have just enjoyed a superb breakfast at Frankie and Benny's!). A few weeks ago at Grace we had the local Tipton Against Poverty Team visit our evening service. They are lovely and doing good work. It is a privilege to begin to get behind them in this. 

God and Bob

The Problem with God is that He thinks He's Bob Geldoff
A provocative title for a very good (and quite provocative) article about foreign aid. 
Here is it's pithy summary: 

Trade, good. Free markets, good. Aid, bad. Tax, bad.

But don't settle for that. Read the whole thing! 

Government should first do no harm!

He does speak a lot of sense that Hannan.

A Politician saying that Politicians don't have the power to create jobs - refreshing. 

Is there a cure for Foreign AIDS?

EUggghhhh!

'Respectable' Theft

On the same day I read this: 

Stealing calls to mind such felonies as robbery, extortion, and burglary. People do not commonly realize that it has more subtle and respectable forms. We may understand this better if we consider why money is useful for the conduct of economic affairs. The shoemaker accepts money in exchange for his product, even though he has no direct use for it, because he knows that it can be exchanged for articles he values. Money serves him as a medium of exchange and thus, although it is perfectly useless as a commodity, permits him to transcend the barter system and to engage in a specialized economic function. Secondly, it serves a store of value, permitting the shoemaker to save rather than consume, and so accumulate capital for investment. Without capital investment there can be no prosperity, a fact that is true of all economic systems. To steal from the shoemaker the fruit of his labour, one can take his product or the money he has received for it. Or else one can so tamper with the monetary system that the money will not serve to purchase economic goods equivalent to the product the shoemaker provides. Outright stealing is widely recognized for what it is, but the economic crime that accomplishes the same thing through debasing the money is not. Yet the motive and the effect are the same.

(p89-90 Idols for Destruction: The Conflict of Christian Faith and American Culture)

 I read this by Jeff Randall. Here is an appetising quote from it: 

The problem with counterfeit paper is that it’s not backed by gold or any other store of value. Whereas proper money, printed by the Bank of England, is, of course, er… also not backed by gold or any other store of value.

Cradle to Grave

When is 53% extraordinary?

The share of our economy taken up by the government (ie the public sector) is now 53 per cent; in Communist China the figure is 25 per cent. Even at the peak of the Soviet Union the figure was only 70 per cent. At the height of Britain’s economic power in the Victorian era, the figure was 10 per cent. James Delingpole

I don't know where the information comes from to back these figures up. Are they right? 

But if they are anything close to being right then it is extraordinary:

a) that this is the case and b) that this isn't seen by most people as extraordinary (and extraordinarily bad at that!). 

Modern slavery

Look after the pennies and ....



THIS is the scary thought: Proverbs 22:7 

Should this be a pigeon post?

[Notes on Ch 7 The Curse of Machinery] 

The belief that machines cause unemployment, when held with any logical consistency, leads to preposterous conclusions. Not only must we be causing unemployment with every technological improvement we make today, but primitive man must have started causing it with the first efforts he made to save himself from needless toil and sweat. 

If it were indeed true that the introduction of labor-saving machinery is a cause of constantly mounting unemployment and misery, the logical conclusions to be drawn would be revolutionary, not only in the technical field but for  our whole concept of civilization. Not only should we have to regard all further technical progress as a calamity; we should have to regard all past technical progress with equal horror. Every day each of us in his own activity is engaged in trying to reduce the effort it requires to accomplish a given result. Each of us is trying to save his own labour, to economize the means required to achieve his ends. Every employer, small as well as large, seeks constantly to gain his results more economically and efficiently - that is, by saving labor. Every intelligent workman tries to cut down the effort necessary to accomplish his assigned job. The most ambitious of us try tirelessly to increase the results we can achieve in a given number of hours. The technophobes, if they were logical and consistent, would have to dismiss all this progress and ingenuity as not only useless but viscous. 

Case Study:
A clothing manufacturer gets a machine that makes coats at half the price. Half the labour force are let go as this machine is bought.
Now, this machine didn't drop from the sky. So offsetting this loss of labour at the clothing factory is employment in the machine manufacturing industry.
But after the machine has produced the economies expected and has offset its cost, the manufacturer has profits. And with that three things can be done:
a) an expansion of operations (buying more machines to make more coats)
b) investing in some other industry
c) spending on consuming something [being a 'fat cat' if you like!!]
So, every pound of the profit that this machine brings that the manufacturer did not have before and that he is not paying to coat makers, goes in indirect wages to the new machine makers, or workers in other capital using industries, or the builders of the new house, or the jewelers or the chefs or the car industry or whatever!
But more than this ... if these machines do generate profit, others coat makers will copy and soon the price of coats will drop as competition hots up between manufacturers. So there will be savings for consumers too. And this means more money in a household budget for other things... benefiting other industries. It may also mean that more people can afford a coat, such that more overcoats are made than before ... even allowing the expansion of that industry and the employment  over time of many more workers than there were originally.

The real result of the machine is to increase production, to raise the standard of living, to increase economic welfare. 

Economics in One Lesson (p 49-60)

Bailing out with pick axes

Notes on Ch 6 - Credit Diverts Production

Government 'encouragement' to business is sometimes as much to be feared as government hostility. This supposed encouragement often takes the form of a direct grant of government credit or a guarentee of private loans.

Now all loans, in the eyes of honest borrowers, must eventually be repaid. All credit is debt.... ...They would seem considerably less inviting if they were habitually referred to by the second name instead of by the first. 

...there is a decisive difference between the loans supplied by private lenders and the loans supplied by a government agency. Each private lender risks his own funds. (A banker, it is true, risks the funds of others that have been entrusted to him; but if money is lost he must either make good out of his own funds or be forced out of business.) When people risk their own funds they are usually careful in their investigations to determine the adequacy of the assets pledged and the business acumen and honesty of the borrower.
If the government operated by the same strict standards, there would be no good argument for its entering the field at all....(so) the whole arguement for its entering the lending business, in fact, is that it will make loans to people who could not get them from private lenders. This is only another way of saying that the government lenders will take risks with other people's money (the taxpayers') that private lenders will not take with their own money (or other people's). 

Sometimes this point is conceded, even gloried in - you know, sometimes government should take the risks that private industry is unwilling to take.  The argument runs: the benefits to the economy through the sucess of those who do pay back their loans are even greater than the losses that occur through the higher than usual level of defaulting that happens. Mmmm.

Remember, we have to look at the whole picture. This might be all lovely for these sucessful famers or fisherman or 'small businesses'. But what about those who lose out through this? These are those people who don't get a farm or a tractor or the premises for a new building or whatever (there are limited resources - real capital - at any given moment). If A is lent the money to buy X then B can't buy it, or he buys it but at an increased cost (because demand has been spiked by all these A's wanting X). Trouble is, B is a guy with a proven track record of serving others well with what they want and A is not!

And what about the other factors that now creep in. Do the bureaucrats adminstering these loans have special friends they are keen to help (personal or political, or both)? Will they accept bribes? And how much are their salaries ... who is paying for the cost of the layer of administration that this 'credit' requires? And how is this fair, that an individual will profit when all his neighbours have born all the risks (as taxpayers)? Shouldn't they benefit from the profits? Taken to it's logical conclusion this should inevitably lead to an increase in the size of the state.

...the net result of government credit (will not be) to increase the amount of wealth produced by the community but to reduce it, because the available real capital (consiting of actual land, buildings, machines, labour etc.) has been placed in the hands of the less efficient borrowers rather than in the hands of the more efficient and trustworthy.

Another aspect of private loans is this, that repayment is expected with interest:

This is a sign that the persons to whom the money has been lent will be expected to produce things for the market that people actually want.

Government loans are more likey to be lent for vaguer purposes, such as 'job creation'. Well, the more inefficient it is, the greater the job creation and the greater success it has been! Oh, wait a minute, that doesn't sound right (wait for ch 7 I think).

The government can give no financial help to business that it does not first or finally take from business. The government's funds all come from taxes. Even the much vaunted 'government credit' rests on the assumption that its loans will ultimately be repaid out of the proceeds of taxes. When the government makes loans or subsidies to business, what it does is to tax sucessful private business in order to support unsuccessful private business.

Remember we have to look at it from the standpoint of the country as a whole.

---

This is a great quote about the general concept of credit:

There is a strange idea abroad, held by all monetary cranks, that credit is something a bank gives to a man. Credit, on the contrary, is something a man already has. He has it, perhaps, because he already has marketable assets of a greater cash value than the loan for which he is asking. Or he has it because his character and past record have earned it. He brings it into the bank with him. That is why the banker makes him a loan. The banker is not giving him something for nothing. ... He is merely exchanging a more liquid form of asset or credit for a less liquid form.

I must remember this next time a credit card company phone me up. I'd love to know what they know about about me that makes them think that I am a good bet to lend money to.

Economics in One Lesson - Henry Hazlitt

Taxes don't win matches

Notes on Ch 5 - Taxes Discourage Production

This is the chapter where Hazlitt explains why it is unlikely that the wealth 'created' by government spending (see here) will fully compensate for the wealth destroyed by the taxes imposed to pay for that spending.

The government spenders tell us, for example, that if the national income is $1,500 billion then federal taxes of $360 billion a year would mean that only 24% of the national income is being transfered from private purposes to public purposes. This is to talk as if the country were the same unit of pooled resources as a huge corporation, and as if all that were involved were a mere bookkeeping transaction. The government spenders forget that they are taking money from A in order to pay B. Or rather, they know it very well; but while they dilate upon all the benefits of the process to B, and all the wonderful things he will have which he would not have had if the money had not been transferred to him, they forget the effects of the transaction on A. B is seen; A is forgotten. (p 37)

and the consequence for A goes like this:

taxes inevitably affect the actions and incentives of those from whom they are taken

So, for the company who is taxed (heavily), all it's losses are 100% losses and all it's gains are 40/50/60/70% gains (depending on the rate of tax). So it is hard, if not impossible, for it to offset its losses in bad years in the good years and as a result it will adopt a strategy that will minimise the possibilities of any losses (not expanding so fast, not trying new things, not employing more people, improving machinery and factories happen with less vigour etc.):

The result in the long run is that consumers are prevented from getting better and cheaper products to the extent that they otherwise would, and that real wages are held down, compared with what they might have been.

This effect is also seen for individuals and families:

People begin to ask themselves why they should work six, eight or nine months of the entire year for the government, and only six, four or three months for themselves and their families.

In conclusion:

In brief, capital to provide new private jobs is first prevented from coming into existence, and the part that does come into existence is then discouraged from starting new enterprises. The government spenders create the very problem of unemployment that they profess to solve.

Economics in One Lesson - Henry Hazlitt

We can't pay ourselves more than we earn (Jim Hacker!)

Notes on Chapter 4 of 'Economics in One Lesson' by Hazlitt

There is no more persistent and influential faith in the world today than the faith in government spending. Everywhere government spending is presented as a panecea for all our economic ills.

Everything we get, outside of the free gifts of nature, must in some way be paid for.

So, it follows that every pound of government spending must be paid for by a pound of taxation (or more if there is interest to pay on loans) {inflation must kick in here somehow, but here at ch 4 we haven't got to that yet}

In this chapter Hazlitt is not addressing the need for public spending, which he upholds for 'essential govenerment functions' (by which he seems to mean, law and order (legislature, police, fire, army/navy/airforce) and roads). He is concerned with the idea that public works are a means of 'providing employment' or adding wealth to the community.

But:

If an (unnecessary) bridge is built in order to create 5000 jobs at a cost of £10 million then the taxpayers have lost at least £10 million.

And they would have (in a complex web of individual transactions) spent that on other things that would have resulted in an extraordinary amount of economic activity and jobs elsewhere. Just we don't get to see that (again ... he is encouraging us to see beyond the 'here and now') ... all we can see is the new bridge and the 5000 jobs.

And that lends power to the argument that government can 'create' jobs and wealth. And that the country would be poorer without them. After all, look at the bridge ( or cheap housing or dam or whatever).

And just think, if these economic dinausaurs and reactionaries and obstructionists had had their way there would be no bridge. They are mere 'theorists' ... but look at this bridge ... it is a really solid economic achievement of THIS government.

So, what is the lesson? We need to train ourselves to see the unbuilt houses, unmade cars, dresses, unsold, ungrown foods etc.

If taxes are taken from individuals and corporations, and spent in one particular section of the country, why should it cause surprise, why should it be regarded as a miracle, if that section becomes comparatively richer? Other sections of the country, we should remember,  are then comparatively poorer.

The thing so great that 'private capital could not have built it' has in fact been built by private capital - the captial that was expropriated in taxes

War, what is it good for?

[I continue to work at my education ... 'Economics in One Lesson' by Henry Hazlitt)
Chapter 3 - The Blessings of Destruction

From my brief brush with the warfare of the 16th & 17th Centuries (not a first hand experience admitedly) I would agree with Hazlitt that often this line is taken in assessing warfare:

They (economics professors ... or we could add, professional historians) tell us how much better off economically we all are in war than in peace. They see 'miracles of production' which it requires a war to achieve. And they see a world made prosperous by an enormous 'accumulated' or 'backed up' demand (p25)

But this is merely the Ch 2 fallacy 'in new clothing and grown fat beyond recognition'.

It also is a view that confuses need and demand. Need is not demand. Because effective economic demand requires not merely need but corresponding purchasing power. Ask the average 16 year old about that one!

And purchasing power is NOT JUST MONEY. Printing off the readies just reduces their value ... and that falling value can be measured in the rising prices of commodities.

This chapter includes a great line that summarises the chapter nicely:

No man burns down his own house on the theory that the need to rebuild it will stimulate his energies. (p27)

Why would we even begin to think this would be the right way to evaluate the great wars and the economic whirlpools & eddies surrounding them?

Many of the most frequent fallacies in economic reasoning come from the propensity, to think in terms of an abstraction - the collectivity, the 'nation' - and to forget or ignore the individuals who make it up and give it meaning. No one could think that the destruction of war was an economic advantage who began by thinking first of all of the people whose property was destroyed.

Presumably we could add lives into that too.

War destroys accumulated capital.

His conclusion:

There may be, it is true, offsetting factors. Technological discoveries and advances during a war may, for example, increase individual or national productivity at this point or that, and there may eventually be a net increase in overall productivity. ... But such complications should not divert us from recognizing the basic truth that the wanton destruction of anything of real value is always a net loss, a misfortune, or a disaster, and whatever the offsetting considerations in a particular instance, can never be, on net balance, a boon or a blessing.

It all makes work for the working man to do?

Highlights from Chapter 2 (Economics in One Lesson by Hazlitt)

Fallacy: when things break/get used up this is good for the economy

Example: a flood takes out much of the shops in some towns in Cumbria. Far from being a disaster, this is good. The shop owners pay the repair men & resuppliers of their shops, who then in turn give business to a range of other people both in their professional and private capacities. Whether this costs £20000 or £200 million...that money is providing employment and 'stimulation' to the economy in 'ever-widening' circles.

Half truth: Yes, the damage does bring business to the repair men and others. Considering it from an economic stand point alone, they will be no more unhappy to learn of the 'disaster' as an undertaker would be news of a death.

Full truth: But the shopkeepers are out by £20000 or £200 million* that they would otherwise have spent on the expansion of their business into a new town or discounts that encourage more business and bring greater quality of life to those around them, or in charitable donations or in staff wage increases or in any number of other ways personally - that new conservatory or boat!
So instead of still having their stock and nice shops and these other things, they now just have their stock and nice shops.
The community (local, national or global) is actually poorer than it was before - though there has been a lot of activity.

In short the repairman's business is gained at the expense of the shopkeeper (or the insurance company). No 'new' employment' or 'growth' in the economy has taken place.

As we see builders and goods 'flooding' Cumbria in the months ahead it will be tempting to think that this is an increase in business. And of course it will be for the builders and suppliers of those shops. But because the other 'potentials' (the expansion of business, the discounts, the purchases made) are 'invisible' - they don't happen - it is all too easy to forget them and leave them out of the equation. The things that don't happen or are not made so often don't feature in our analysis of a situation.

*Ok, they might be insured. So this is not so straightforward. Yet, still wealth has been destroyed somewhere line. And though there is a delay, the cost will be experienced in higher insurance premiums for themselves and others over time and/or that insurance company not being able to do what it would have with the money. So the 'problem' is just moved back/up a level.

right here, right now?

Chapter 1 Highlights: 

We can get things wrong at every turn in economics because :

#  we all see things from our perspective or our groups perspective ... or from the perspective of one interest group.
So some way of doing things might be good for one group (very directly) but at the expense of other groups (indirectly) or vice versa, might be very damaging for one group very directly but benefit all other groups indirectly. The interest group most directly affected will (often) argue persistently and plausibly that things should be seen their way.

# we tend to only see the immediate effects of a given policy or set of actions (whether in terms of the short term or the effects on one group most directly affected). The long term affects easily get ignored.

But of course...

to consider all the chief effects of a proposed course on everybody often requires a long, complicated, and dull chain of reasoning (p18)

...and lets be honest, most of us would rather open the can rather than brew the beer, or buy off the peg rather than knit the jumper. I realise there may be some beer brewing knitting enthusiasts who read this - you'll have to work with me on this one!
Half or quarter truths are easier to swallow than the whole.

The warm up

The preface
Ok, so this book is not going to be a tour de force of lots of economists and their theories (phew!) but a more general look at economic realities, principles and fallacies (some of which are 'so prevalent that they have almost become a new orthodoxy' p9).

Again, I am encouraged to dive in:

'I have tried to write this book as simply and with as much freedom from technicalities as is consistent with reasonable accuracy, so that it can be fully understood by the reader with no previous acquaintance with economics.' (p12)