+ EXCLUSIVE + Extracts From Steven Levitt and Stephen Dubner’s new book “Life Coasing” + EXCLUSIVE +

Subtitled “How The Economic Way Of Thinking Can Justify Your Horrible Personality”, Life Coasing is a terrific return to form for Levitt and Dubner. These two authors have done more than anyone else to bring the economic way of thinking to the attention of popular culture. Freakonomics and Superfreakonomics were cultural phenomenons which hugely influenced a generation of horrible people. I am pleased to exclusively offer extracts from their latest book.

Inspired by the saga of the knee protector, this kindle single (pictured above) introduces the ideas of Ronald Coase, and how his idea of making small side payments can totally justify your horrible treatment of everyone around you. Going beyond Coase, who focused on policy, Levitt and Dubner show that through the total disregard for other’s feelings only arseholes have, they can enable more transactions by ignoring the feelings of others. It’s going to be huge in Silicon Valley, I assure you.

Without further ado, I have a few teasers to share with you:

“Chapter 1: How is reclining your seat like buying a newspaper?”

We were shocked to hear people were using knee protectors to prevent people reclining other people’s airplane seats. I’m sure you were outraged too. But how do you solve a problem like a reasonable person trying to remain comfortable in a hostile environment? Contrary to what your mother told you, the answer is to make the environment more hostile. Every person has a price, and although some people might pretend to be moral, what they actually mean is they are expensive.

Newspapers, remember them folks? They’re expensive, not only because you have to distribute a paper parcel (not even by drone), but you have to bundle up a variety of different news items together to someone who only wants part of it. Hence you pay for a lot of information you don’t want. Conversation around reclining seats if often a lot like this. People take forever to get to what you want: the price of their comfort.

[…]

So as you have seen already, the economic way of thinking is already proving incredibly useful in justifying your horrible personality. We’ve got you a more comfortable seat and you’ve learned something along the way, but we’ve passed over something which needs explaining.

“Chapter 2: What are transaction costs anyway?”

What is a transaction cost anyway? You’re probably unfamiliar with some transaction costs because arseholes have low transaction costs. A transaction cost is a way of describing the frictions people face in life contracting. You might be familiar with lawyers fees from copyright disputes over poorly conceptualized satires. That’s an enforcement cost. I wouldn’t bother about these. Nope.

There are other costs too, searching for something you want and getting the information you need to make an informed decision are important. Most important for this book are bargaining costs. These are the costs required to come to an acceptable agreement with the other party to the transaction, drawing up an appropriate contract and so on.

In Coase’s The Problem of Social Cost he explains how property rights can enable those who suffer the pollution of a nearby factory to negotiate with the owners. If people own the right to clean air then they can sell that right for the right price. Pretty neat huh? You don’t necessarily own a polluting factory (although I’m sure some of our entrepreneurial readers actually do.), but in a way your personalities are pollutants. But just like the answer to global warming is to pollute the air in a slightly different way, your terrible personality pollution is also the answer to your problems.

[…]

Because you have low bargaining costs, because you quite literally don’t care if people hate you, you can negotiate your way out of being an arsehole. One of the largest barriers to these transactions is hurting other people’s feelings. Luckily, if you’re reading this book you probably don’t care about people’s feelings. You can facilitate many more transactions. Your horrible personality really can make the world a better place. And isn’t that the wonder of the economic way of thinking.

“Chapter 3: Out of the mouth of babes”

[…]

The ultimate coasean bargain is the extraction of lunch money by school “bullies.” (H/T) Everyday, up and down the country, 11 year olds are rediscovering Coase’s seminal work. But instead of praising them we punish them. If children did not value the services of the bully (and what else is a bully but a proto-state, a stationary using bandit), they would not hand over their lunch money. The money involved is often low denomination and usually very small fees actually exchange hands.

We could work out the cost of bullying directly if we knew the wages of children, but sadly we do not. However, thanks to these coasean pioneers we can extrapolate from these bullying fees figures to come up with the reservation wages of children. From these we can imagine what transaction fees must be like for children and develop a rough cost of bullying (Perhaps Mr Piketty thinks the only way of collecting this data is to tax children!).

[…]

If bullying mattered, don’t you think the children would have sorted something out by now themselves? Because the reservation wage of children is so very low it can’t be transaction costs which prevent them successfully preventing bullying themselves, it really is just uneconomical to do so. The bully rent is too damn low. Remember to bring this up in the next PTA meeting when someone suggests another anti-bullying campaign. Your terrible personality (and that of your demonic spawn) really will save everyone time and money. Don’t wait for any other business just shout out at the beginning of the meeting. Remember, you’re keeping bargaining costs low.

“Conclusion”

[…]

Alongside internet atheism and men’s rights activism, the economic way of thinking is among the best ways of justifying your horrible personality. But until now these advantages have not been codified. I hope in this book, “Life Coasing: How The Economic Way Of Thinking Can Justify Your Horrible Personality”, we have explained how coasean bargains and the economic way of thinking can provide cover for your horrible personality.

Economics is not the study of choice

Turns out I actually do have something to write about. A propos of Yglesias and Rodrik, I think people really need to stop thinking about Economics as some sort of study of choice, which is how it is traditionally conceived. Yglesias quotes Rodrik…

The Friedmanite perspective greatly underestimates the institutional prerequisites of markets. Let the government simply enforce property rights and contracts, and – presto! – markets can work their magic. In fact, the kind of markets that modern economies need are not self-creating, self-regulating, self-stabilizing, or self-legitimizing. Governments must invest in transport and communication networks; counteract asymmetric information, externalities, and unequal bargaining power; moderate financial panics and recessions; and respond to popular demands for safety nets and social insurance.

…and notes that non-interventionist environments don’t really exist. The market doesn’t appear ex nihilo and it isn’t really helpfully conceived of as a way of aggregating individual choices.

For a long time individual choice involved fighting and then using brute force and intimidation to get what you want. The key innovation of modern states wat to turn brute force and intimidation towards the realm of enforcement of contracts.

I think economics is much better thought of a study of contracts, expectations and choices last. The contractual elements of live take up most of your expenditure, housing, healthcare and saving for retirement and all of those things depend far more on your (and our collective) expectation of the future.

Choice comes into the picture only later on. Rational Choice theory is useful for estimating how people make certain choices, but it is the imposition of brute force strengthening contract enforcement and making the future more predictable that may be better routes for thinking about economics.

For example, Scott Sumner‘s proposal for central banks to adopt NGDP targeting, level targeting. This isn’t economics about choice, this is economics which is intended to make contracts easier to create ex ante and enforce ex post because it is about aligning expectations with what the future will actually be like in a stable way. Contracts and expectations form the core of economics, they are just very complicated in real world and difficult to model in the theoretical.

Where did money come from?

Doing the rounds on teh interwebs is this fantastic post by David Graeber, and anthrolopogist, on where money comes from.

The basic “story”, and it is only a story, is that first there was barter, then people realised you couldn’t always swap your stuff for what you wanted (no double coincidence of wants), so people invented money, then people invented lending money at interest, then, eventually, capitalism.

This is an economist’s fairytale but the truth, or at least what we know so far is infinitely more interesting…

The actual evidence is that in Mesopotamia—the first case we know anything about—these more widespread pricing systems in fact emerged as a side-effect of non-state bureaucracies. Again, non-state bureaucracies are a phenomenon that no economic model would even have anticipated existing. It’s off the map of economic theory. But look at the historical record and there they are. Sumerian Temples (and even many of the early Palace complexes that imitated them) were not states, did not extract taxes or maintain a monopoly of force, but did contain thousands of people engaged in agriculture, industry, fishing, and herding, people who had to be fed and provisioned, their inputs and outputs measured. All evidence that exists points to money emerging as a series of fixed equivalent between silver—the stuff used to measure fixed equivalents in long distance trade, and conveniently stockpiled in the temples themselves where it was used to make images of gods, etc.—and grain, the stuff used to pay the most important rations from temple stockpiles to its workers.

[…]

The numismatist Phillip Grierson long ago pointed to the existence of such elaborate systems of equivalents in the Barbarian Law Codes of early Medieval Europe. [7]For example, Welsh and Irish codes contain extremely detailed price schedules where in the Welsh case, the exact value of every object likely to be found in someone’s house were worked out in painstaking detail, from cooking utensils to floorboards—despite the fact that there appear to have been, at the time, no markets where any such items could be bought and sold. The pricing system existed solely for the payment of damages and compensation—partly material, but particularly for insults to people’s honor, since the precise value of each man’s personal dignity could also be precisely quantified in monetary terms. One can’t help but wonder how classical economic theory would account for such a situation. Did the ancient Welsh and Irish invent money through barter at some point in the distant past, and then, having invented it, kept the money, but stopped buying and selling things to one another entirely?

The killer blow for economists comes here though…

Murphy argues that the fact that there are no documented cases of barter economies doesn’t matter, because all that is really required is for there to have been some period of history, however brief, where barter was widespread for money to have emerged. This is about the weakest argument one can possibly make. Remember, economists originally predicted all (100%) non-monetary economies would operate through barter. The actual figure of observable cases is 0%. Economists claim to be scientists. Normally, when a scientist’s premises produce such spectacularly non-predictive results, the scientist begins working on a new set of premises. Saying “but can you prove it didn’t happen sometime long long ago where there are no records?” is a classic example of special pleading. In fact, I can’t prove it didn’t. I also can’t prove that money wasn’t introduced by little green men from Mars in a similar unknown period of history.

Read it all, very interesting.

A Model For Micro Finance

For the second time in a week, I was late for work following a conversation with a street “chugger.” I’m not really in a financial situation to be committing to all these direct debits (which in the past have caused me to ‘donate’ more to the banks with their extortionate overdraft charges) but I always like to hear their pitch, see what the charities are pushing and get an indication of how they’re doing. Its a bonus too that usually the collectors are genuinely interested in the cause and it always makes for an interesting conversation.

But it came to me, when making my excuses upon arrival at work, that I seem to spend far too much time defending charity. Lately I’ve found myself mounting this defence, particularly to the upper-class, ‘more experienced’ friends of my parents who generally take a sympathetic, but sceptical approach to it. Anything that you’re passionate about you will defend to the death. But if something keeps failing you have to reconsider your stance.

As passionate as a Tranmere Rovers football supporter may be, does he really believe it when he sings that his team is “by far the greatest team, the world has ever seen”? That kind of blind passion, leading the heart to rule the head is something that the developing world does not need. And constant criticism causes you to analyse your stance. If I think about charity honestly, it has a vital part to play in a lot of people’s life, but should not be considered the be all and end all. The major focus should be on development – a concept so broad it is difficult to define and effectively evaluate in a lengthy textbook, let alone a humble blog post. So following these defences my focus today is on one particular developmental concept I have some experience of – micro-financing.

Micro financing as an ideal is a fantastic concept. Small, manageable loans presented to families within a community where their services are paramount to the whole group. Where their financial advancement can encourage and inspire business and investment among the whole community. When the results yielded are positive, as they often are, then it is an undeniably great service. As such, micro-financing has been widely embraced in the developing world, but like many other great ideas in life, has been open to be exposed by the greedy and the selfish. Whilst development initiatives have, by their very nature, their fair share of hurdles to cross, the added bonus of corruption and greed is particularly unwelcome. It can inspire cynicism and retrogression, and become a significant and disheartening stumbling block.

When the weak financial systems in place in developing nations are relied upon so heavily by the vulnerable, uneducated and, to be frank, predominantly desperate population, it’s a recipe for disaster. If we’ve learnt anything about development in the last few decades, it’s that progress must not rely on the goodwill of the more fortunate. Providing a poor population with the means to provide for their own needs is the basis of all development ideals. It’s why, when successful, this concept is so great.

Unfortunately a number of micro-finance institutions (MFIs) have found that there are weaknesses to be exploited. Generally speaking, much of the developing world has been without both education and experience of money. Both of which are clearly useful when considering how to handle a loan. At the start of the micro-finance process, literacy levels are generally low (the majority of MFIs I came across used a fingerprint instead of a signature due to widespread illiteracy), moreover a prior knowledge of the notions of interest, structured repayments and banking are often lacking too.

All of this means this means that the naivety of the loan applicant is so often easily manipulated. In placing down collateral, the only option is often land and what little property they might have, which subsequently may, and often will be repossessed. Even those micro-finance organisations with a moral conscience will not be too eager to take on such high risk applicants in this ‘current economic climate.’ Especially considering that even if the applicant happens to own land, the legal system in their respective country may not have afforded them effective title to it.

A major problem is reliance on good will and a charitable nature. No-one needs to explain to people living in the third world the notion that the wealthy majority are not only willing to benefit off the poor majority, but often actively seek to do so. This international relationship can map onto power relations at a national level. Rather than inspire some sort of revolution, this injustice can encourage local entrepreneurs to follow their lead, and exploit any marginal position of power they may gain. Small, local NGOs providing micro-financing facilities often have bad reputations for corruption in poverty stricken areas due to this very process. It alienates the community and restricts the grassroots organisations by limiting funding opportunities. The powers-that-be all to often prefer larger, more trusted organisations to handle the financial resources. If one of the primary goals of micro-financing – that it should be able to fund itself and provide economic growth to an area is to be achieved, then this cannot continue to be the case.

Regretfully there are no simple solutions to this problem. We also have to navigate problems concerning the traditions and customs of poverty stricken areas. Having experienced cultures around sub-saharan Africa and southern Asia, it immediately became apparent that males are held with much higher regard than females. In Uganda for example, the stereotype of a male, head of the house, was of little assistance to the family – floundering the family’s money on alcohol and ladies of the night. The usual reaction appeared to be to accept it as being “part of the culture” reminiscent of a disability that society has managed to adapt to. It’s unfortunate, but not always a million miles from the truth, which makes a MFI’s scepticism more understandable.

It’s not in my nature, however to take such a gloomy, pessimistic view on great ideas like this and it doesn’t take much searching to find great results.

I came across a hugely inspired example of this in northern Uganda, an area still very unstable despite the near expulsion of Joseph Kony’s child-fuelled LRA. A noticeable side effect in post-conflict areas is on the male to female ratio. A side-effect, that in areas often dependent on a male breadwinner often proves very serious. In northern Uganda, traditionally women are far more poorly educated, have far fewer rights, and are considered as being of far lower standing than males. For a woman to elevate herself to the status of breadwinner requires a significant level of achievement. This societal oppression has forced adaption to long hours, tough work, and set-backs – the flipside of which is that it makes an ideal candidate to benefit from a properly executed education and opportunity for a life-changing loan. In taking this focus it can also strengthens bonds among the community. Walking though rural villages it was alarming how few adult males were amongst the hordes of children and mothers, popping in and out of random huts and sharing responsibilities amongst themselves.

The grassroots, non-profit MFI I encountered took this community element as a core focus of its work. In doing so it showed great ambition to attempt to empower women within the community. Rather than depriving resources due to cynicism of the males’ supposed spending, it encouraged groups of women to come forward and apply for community based loans. Completely blurring the lines between an advice and education centre and an MFI it followed aims that were simple enough, but each idea was thought out to benefit the community at large:

  • Acquisition of the loan requires a community based group of at least 5 people, but is open to anyone, regardless of tribe, wealth, age, social status or level of literacy.
  • All prospective applicants must be willing to complete a course of education prior to collecting the loan. It is strongly impressed on all new applicants that it is not ‘free money’ but an aid for investment, and an opportunity to build a business.
  • Only once every member of the group has been assigned a role (eg treasurer, president) and demonstrated enough of an understanding of interest, business and how the loan works, will they be eligible for the loan.
  • The whole point of a community-based loan is that there is no need for collateral. Trust is an incredibly important part of the process and works two ways. If one party cannot make a repayment then it is the other parties’ responsibility to help with repayments.
  • If a group feel that they will be unable to make a repayment then as long as they come to the office and honestly explain the situation they will be able to arrange extensions and seek assistance.
  • Once a loan has been fully repaid, the group are encouraged to keep in contact and to share their experience and the things they have learned with prospective applicants.

The organisation didn’t take long to be able to support itself through the low level of interest accumulated, and has subsequently branched off to support and rehabilitate former child soldiers, provide community based education regarding HIV/AIDS and support groups for sexual and gender based violence. It has incorporated the culture of the area and furthered the empowerment of women by arranging tribal dance and drama performances with an educational focus to school groups, whilst providing further opportunities to strengthen businesses and investment opportunities amongst the poor communities who have suffered so much in the past few decades. If this blueprint were more universally applied at a grassroots level, the development possibilities could be endless.

Incoherent Tories

Margaret Thatcher said “Socialist governments always run out of other people’s money. It’s quite a characteristic of them.” In the not too distant past – with a popular Labour Government spending public money on popular things – the Tories had been reduced to merely asking for the “proceeds of growth be shared” between tax cuts and smaller spending increases. Spending other people’s money seemed to be doing the electoral trick.

Since our lopsided economy imploded they have been able to switch back to their good old fashioned ways. They want spending cuts, they want deep spending cuts, and if Nick Clegg hadn’t said it first, they’d want savage spending cuts. Some on the right are positively relishing the prospect of throwing a million of state employees out of their jobs.

Key to the Tories new line is that Brown’s feckless spending in the good times has led to a fiscal catastrophe in the bad times. From 2000, when Brown was really allowed to let rip, to 2009 Britain’s net debt has grown from just over £300 Billion to just under £800. For George Osborne the fiscal cupboard is bare.

The arguments for running deficits in a slump are well worn. By taking up the slack in the economy, state spending can act as a counter balance in recessions. The arguments for running a large deficit in boom times are a little less cogent and revolve around a rather inconsistent set of Golden Rules.

The Tories have taken up a position attacking Brown’s boom time spending for worsening the fiscal situation now times are bad. Despite what Chris Dillow has argued I feel I must agree with them one this small point.

But of course I can never bring myself to agree with the Tories too much. Given the Tories allergic reaction to the mainstream economic opinion on the benefits of stimulus spending it seems foolish to suggest that if they were in power we would see a glut of countercyclical spending. In fact we would still have been treated to a Government reaction and economic collapse like that seen in Ireland.

  • Irish unemployment is 12.5 per cent;
  • The country is experiencing deflation at –6.6 per cent.
  • GDP has fallen 7.4 per cent over the past year and 10.5% from its peak;
  • And despite the cuts they have still had their credit rating downgraded.

In the Pre-Budget Report Darling said Labour were acting from a position of strength, much to the mirth of the Conservative benches. But in a way he is correct, right wing pundits are keen argue that the public sector has not kept pace with the productivity of the private sector yet they have still seen a massive increase in spending. From Tom Freeman on the NHS:

Osborne thinks the bad news far outweighs the good; I respectfully take the opposite view. Productivity is down 4.3% but the actual output of the health service is up 52.5%.

Earlier on the news George Osborne was bemoaning Labour’s PBR, he demanded that Darling announce a time table for cuts now: “Budgets must be balanced every household knows that.” A Government is very unlike a household, and its outgoings do not always have to balance with its income, but George Osborne seems worryingly or wilfully oblivious to this.

Our fiscal situation could have been far better entering this recession, but the party most vocal in its lamentation for this failing is also the one which would have been least willing to make the most of it.

Slavery and the Periphery

The Industrial Revolution saw a previously unspectacular part of the world become the centre of a new worldwide economy.

To put how inconsequential Europe was in perspective we can look at agricultural productivity throughout Europe and compare this with Asia. Agriculture made up the overwhelming majority of a pre-industrial economy so the harvest to seed yield ratio [1] tells us a lot about how wealthy a pre-industrial society is.

In the 1500s the harvest to seed yield in England and the Netherlands was 7.4 to 1. This would decline as we travel out from north western Europe so that as we reach Poland this yield falls to something around 4 to 1. In contrast by the 1100s the Chinese state had induced a yield of 10 to 1.

The introduction of water power [2] and the spread of mechanical innovations in England and then northwest Europe raised manufacturing production to previously unknown levels.

In 1750 Britain had 1% of the world’s population and already produced an impressive 2% of manufactured output, but by 1860 Britain had 2% of a greatly swelled world population and produced 20% of a more than equally swollen manufactured output.

Accompanying this growth in industrial productivity was a massive increase in the demand for food and non food agricultural goods such as wood, tallow and leather tallow for building machines, oiling machines and connecting the rotating parts of these machines.

The other thing which accompanied the growth of Industrial Capitalism was the creation of slave societies on an unprecedented scale. Slavery was not something new, it had existed in western Africa for centuries and in the eastern Mediterranean Slavs had been enslaved by Venetian merchants for sugar cultivation since the time of the crusade.

In premodern economies most commerce and nearly all of day to day economic life took place within microeconomies with a radius of  around 20 mile. This was the longest distance that grain could be profitably transported and where water transport was unavailable it was nearly impossible before the railway to link these micro economies.

These microeconomies were formed of rough concentric rings with each further out ring less profitable than the last. The simpler production systems used on the edges of this economy imply a lower level of Smithian specialisation and lower productivity per worker.

With the advent of industrial production and cheapening of mass transport the limits of profitable agricultural production was pushed out and out until it reached North American, the Caribbean and even Australia.

I “clashed” with Thomas Byrne on the benefits or drawbacks of Fairtrade and I found these von Thunenian zoning useful to explain how trade with an industrial centre will cause inequality as described above, rather than inequality merely being a residual of a premodern world.

This spatial inequality in the uneven world of the 19th century may have helped feed England’s Satanic Mills but it also induced the far greater evil of slavery in Europe’s colonies.

To see why we have to look at the failure of these colonial economies to attract labour from across the outermost ring of our agricultural zones. Beyond the very least profitable zone, where transport costs make even wheat produced on almost free land too expensive to ship, is the subsistence zone.

In this zone labour is free to migrate and produce enough to live even with only minimal contact with the “civilised” world and there is little incentive to cross the subsistence barrier to take up wage labour at a lower rate than that available through subsistence agriculture.

We can see why slave labour becomes “better” than wage labour in this situation by looking at the difference in luring labour across the subsistence barrier in low land-to-labour and high land-to-labour situations.

In a high land-to-labour situation a worker can migrate across our subsistence barrier and establish a self sufficient lifestyle outside our production rings. With the existence of this option, to lure workers to our agricultural zone the needed wages exist

Whereas in north-western Europe, our low land-to-labour situation, productivity in the subsistence zone is so low that any subtraction of workers from this zone to work in our agricultural zones does not diminish total production in the subsistence zone. The wage needed to attract workers is therefore very much lower than in our above example.

In the newly emptied New World there were relatively few people occupying a huge amount of land. For a long time it was impossible to enforce European style property rights over this land; it was impossible to use force to disposes those present as the peasants had been expelled from their homes in Europe.

This meant that the cost of voluntarily attracting labour to these zones was very high – and once there is was prone to set up farm on its own. Consequently this made slaves and indentured servants by far the cheapest option to encourage production in the New World.

The vast slave movements across the Atlantic, the convict shipments to Australia and the indentured servants from Asia all helped feed the industrial revolution the raw goods which it demanded.

Slavery was very much central to the creation of a modern world economy and there is no way Europe and later North America could have satisfied their thirst for raw materials without it.

Slavery only stopped being necessary for production in this outer zone once the state had been successful in creating a land market past the frontier of our subsistence zone. A market in labour presumes a market in land to prevent exit. By parcelling out land labourers were forced to find work on the market.

In the New World the violence of the state and its ability to commodify land enabled the creation of a low land-to-labour world which would otherwise not have existed. This transformation was more successful in the north eastern part of the North American continent than it was in most of Latin America with massive and unequal consequences for the development of each.

[1] This figure is the number of grains harvested to one planted. For example a harvest to seed yield of 4.5 on a field scatered with 1,000 seeds would yield 4,500 seeds as harvest.

[2] Steam power would later be introduced too of course. However, the importance of steam is usually overstated and that of the humble water mill too often overlooked.

With much gratitude to Hermann Schwartz and his excellent States Versus Markets.

Hypocrites

Welcome to Faisal Private Bank, the first Swiss bank exclusively dedicated to innovative wealth and asset management in accordance with the principles of Islamic finance.

With Faisal Private Bank you will benefit from a banking model that is highly personalised, global and competitive; the result of our deep experience in the Swiss private banking sector and our unique ethical heritage.

GOOD Islamic Practise.

The SVP used the [referendum on banning the minaret ] as an assault on what it depicts as the inroads of political Islam in Switzerland, including Sharia practices and oppression of women. “We just want to stop further Islamisation in Switzerland,” Walter Wobmann, head of a committee backing the initiative, said after the vote.

BAD Islamic Practise.

It appears the Swiss are only keen on banning some “Islamisation.” You know the stuff you can ban to keep migrants and minorities in their place but which doesn’t lose you any money.

Switzerland has decided to send a message and message is loud and clear! No Islamification, except where it is profitable!

The principles of Islamic finance are somewhat differnt to the finance which we are used to.

In Islamic banking the payment of interest fees is forbid, as it  investing in businesses that provide goods or services considered contrary to its principles. There are lots of other rules, but you can research those yourself.

For example you cannot provide a loan of £10,000 payable at 10% interest per annum  over a 30 year period to a Sausage maker. However, you can offer to buy someone a house for £200,000 and have them pay you back £300,000 over 30 years instead of charging interest.

The arguments against the building of Minarets all tend to fall down once a careful look is taken.

The referendum cannot have been about disturbance caused by the call to prayer issued form Minarets, as that is already covered by noise pollution legislation.

Nor, could it be about the imposition of Minarets of the rural idylls of Switzerland as local planning laws could stop unwanted Minarets.

Neither in the light of the presence of Islamic finance is it a backlash against some phantom “Islamisation.”

Unfortunately Switzerland has reached a point where building a Minaret is the height of imposition. However, running a bank based on Sharia principles is not.

The only place where Sharia law is practised in Switzerland it appears to have been welcomed. However, a small number of minarets built by law abiding citizens and residents appears to be a step to far for the Swiss.

Shorter BBC: Chief Drug Adviser sacked for truth telling

Long BBC:

Drug adviser sacked for comments

Woman smoking

 

Proff Nutt criticised the reclassification of cannabis

The UK’s chief drugs adviser has been sacked by home secretary Alan Johnson after criticising government policies.

Professor David Nutt had been critical of the decision to reclassify cannabis to Class B from Class C.

He accused ministers of devaluing and distorting evidence and said the drugs classification system was being used in a “political way”.

The Advisory Council on the Misuse of Drugs, which he headed, is the UK’s official drugs advisory body.

Shorter BBC: Chief Drug Adviser sacked for telling the truth. And we don’t want the truth anywhere near our drugs policy, now do we?

Even shorter BBC: Chief Drug Adviser sacked for being better at his job than the home secretary was at hers.

If this is true then it is a slap in the face for anyone who thinks that policy should be based on evidence.

It seems experts are now expected to give the evidence they are asked for and to say “Thank you, sir. Can I have another?” when their evidence is ignored and they are rudely slapped down.

An Open Letter to Libertarians and Socialists

A spectre is haunting the blogosphere – the spectre of Libertarianism.

Nothing would please me more than to give in to its haunting charms. Libertarianism is neat, it is consistent and it is beautiful. Its economics are marvellously simple; a tidy web of self-interested individuals reaching an equilibrium and prospering.

People can exchange what they have earned for what others have created, and through this voluntary exchange everyone ends up even more prosperous than before. Ad infinitum.

When pure, Libertarianism is consistent too; drugs are yours, as is sex and smoking indoors, so long as you don’t coerce anyone to get hold of them.

Those “without” go with what charity can provide. Those “with” keep it, because there are no grounds for removing it; you own yourself and what you produce. Because when people are free they produce fabulous wealth those without become less and less numerous, and the burden on charity becomes less and less burdensome.

However, like a rubber sheet loaded with a lead ball, Government distorts and tangles this beautiful web, drawing prosperity towards its own centres of gravity and will eventual tear a hole in it.

The only thing that’s warns me away from this beautiful web is the overwhelming body of evidence in favour of Socialism.

Libertarians

Now that I’ve set up the straw man, it is time to flesh him out so that I can explain what I really mean.

As mentioned at LibCon, some people really don’t get Libertarianism and I don’t want to talk about morons like Roger Helmer – Bella Gerens explains what a real Libertarian is to her. No, it is Charlotte Gore, our humble Devil, Mr Eugenides, Tim Worstall and The Economist that I need to challenge.

First things first

The economics of Libertarianism are not what got us here. The world is fabulously but it isn’t the free market that got us here, it was a hobbled, chained and unfree market.

England, Hong Kong, Singapore. I’ll admit that these are the places which got to where they were mostly by the free market, however each is unique in its own way and has little to teach us.

Germany, America, South Korea – in fact, the rest of the rich world – got to where it is today by ignoring Libertarian fantasies and by embracing some form of blatant non-market intervention. This is where there are lessons for those that really need them.

Germany didn’t lead the second industrial revolution when the state “got out the way.” It became an industrial leader when state created entrepreneurs set up businesses and state sanctioned banks created credit for strategic industries.

America is not a free trade nation and never has been, it is the home and bastion of protectionism. It built up its industries not in competition with Britain, but with intense protection from her output.

South Korea’s firms did not compete against each other under the careful eye of a night-watchman state. These firms were arranged into giant chaebols, they were infected with nepotism and were deep in the pockets of Government, yet it produced one of the great miracles of the 20th Century.

Property Rights

In an argument atypical, perhaps anathema, to some Libertarians Tim Worstall argues that…

…creators have rights over their creations because we want to encourage the next creator to create. Nobody gives a damn how much effort goes into creating something, the labour used or indeed any other resource used. All we actually care about is encouraging more people to create more things: and to do so we reward those who have created.

In essence, Tim’s argument is that intellectual property rights – and by extension, all property rights – need to be protected because they make us all better off. By working backwards from results to the system which yields them, Tim gives us the classic Libertarian argument that respect for property makes us richer.

This argument is well worn, although usually presented in a completely different. For most Libertarians property rights are sacred because what you produce is yours, and what you buy with that is as much yours as if you produced it yourself. Tim inserts the proviso that it is also the best way to get the results we all want.

However it is not nearly this simple, sometimes property rights can get in the way of wealth creation, no simple Libertarian rationale will cure what ails us.

Enclosure involved stealing land from those who owned it in common. Yet it helped kick start the greatest wealth creation in human history.

Ignoring or not granting patents on medication has helped increase the quality of life for millions of Indians, and others around the world. The research into treatments and cures continues.

Directing tax revenue towards strategic industries can be beneficial. When the tax revenue of South Koreans was directed towards the manufacture of Microwaves it was neither an area they specialised in nor one which returned a profit. However, they soon became market leaders and the welfare of all was increased.

Property rights don’t need to be treated as a sacrament, in fact it can be damaging to do so.

Beyond Economics…

… Libertarians are generally right.

  • Huffing on a crack pipe? Your choice, a drug’s illegality only makes it more harmful.
  • Girls Aloud murder porn? Your choice, banning it only drives it underground.
  • Smoking in a pub? Your choice, surely this one doesn’t need an explanation.
  • Want a divorce? I won’t force you into a “cooling down period.”
  • Fancy a pint or ten? Sod it, I’m heading to the bar myself, I’ll get them in.

So long as you don’t hurt anyone else, do as you like. But for not one second does the evidence suggest this is a good guiding principle when it comes to economics.

The evidence around us in  points to a system of economics and a vision of the good society that is markedly differnt from that presented to us by Mises or Hannan.

And the Socialist shall lie down with the Lambertarian

Socialism as I understand it, is the only way to a better material existence and a more free life for all of us. A smaller state can be compatible with Socialism, and social liberalism has long gone hand in hand with the left, Socialism is not anathema to what Libertarians want. So join us.

This is our rallying cry. Bloggers have nothing to lose but the chains of an ideologically consistent viewpoint. They have evidence based policy to win!

EMPIRICALLY MINDED SOCIALISTS OF THE WORLD, UNITE!

Socialists

Mr Eugenides, Devil’s Kitchen, Tim Worstall (you’re a classical liberal, I know, but sadly there’s no CLPUK), Charlotte Gore, Thomas Byrne, Dave Semple, Chris Dillow, Paul Sagar, Paul Cotterill, A Very Public Sociologist, Will Straw, Paul Krugman and Steven Levitt you are my favourite Socialists and Libertarians and this letter is directed towards you. Discuss.

Further Reading: A Memorandum to Libertarians and Socialists: Part One

Even Further Reading: A Memorandum to Libertarians and Socialists: Part Two

A belated reply to Giles Wilkes on China

I wrote a piece shortly following the publication of the Tory’s One World Conservatism on how it was full of crap.

The recommendations of this paper were not particularly different from the policies of our current Administration. Of course it continued within the dreadful framework of the post-Washington Consensus (and therein lies the problem).

I divided my discussion into several subtopics for easy navigation, as it ran to some 3,000 words.

Contradictions, Choosing Winners and Losers, Gimmicks: “Bhutan’s got Talent”, Turing up in pair of flip-flops offering to build a school, Vouchers, Microfinance, Rejecting Universal Education, Rejecting Universal Healthcare, Fixation on Private Sector Wealth Creation, The Sanctity of Property Rights, Fighting the Wrong Battles, Some good points made it though

One topic provoked particular criticism from Giles Wilkes of freethinkingeconomist and CentreForum fame.

China-60.svgUnder the heading “Choosing Winners and Losers” I criticised the Conservatives for withdrawing aid from China despite it still being particularly poverty stricken. The offending paragraphs follow below.

China and the Chinese are often treated as a political football. Those wishing to vacillate on Climate Change can use China’s pollution as an excuse to do nothing.

It appears that the suffering of the Chinese people in sweatshops, mines and factories is now to be rewarded with a banner which reads “Mission Accomplished.”

Please allow me to put this move into perspective, in 1750 England’s GDP per capita (likewise measured in 1990 dollars) stood at $1,328. In 2006 China’s per capita GDP stood $128 below this.

Today, on the brink of the worst global recession in a generation, China’s GDP pet capita is still only half of what the UK had achieved by the end of the 19th Century. The Tories announce that “Every life is precious” but when those live are collectively labelled “the People’s Republic of China” their well-being becomes a necessary sacrifice.

Giles contends that he “smells a rat.” He argues that I am ignoring the clear differences in Purchasing Power Parity (PPP) that exist between modern China and Victorian Britain.

I start with Angus Madison’s data.  In “1990 International Geary-Khamis dollars“, he has China’s GDP in 1800 at about $600.  Two centuries of woe, caused by both internal and external factors, as well as the disasters of totalitarianism, mean that it is still around $600 in 1960.

There is SOME growth to 1980, bringing us to $1000, but then the new freedoms growth starts motoring from a change in ideology. By Madison’s data, this puts Chinese GDP in terms of 1990 dollars at over $4000 in 2003 – in line with IMF figures. In terms of Purchasing Power Parity, it has grown even faster, to $8500 – reflecting, no doubt, the strengthening currency – from $248 in 1980.

Purchasing Power Parity probably explains much of what Left Outside has Left Outside his analysis.  It is what counts in this sort of discussion: what matters is how much you can get for your buck, not the state of international markets in tradeable items.

I have to accept that I was playing a little fast and loose with the facts in my last post. Giles excellently underlines what was “Left Outside” of my post, however the point I was trying to briefly outline remains valid. (Hopefully only slightly wounded by my slapdash short hand argument.)

Left Wing Imperialism

However, Giles oversteps the mark when he accuses me of “Left wing Imperialism.” He is wrong to do so on a number of counts, however for brevity I will try to limit to discussion on China’s relative wealth and poverty. More general discussions on aid and global justice along Marxist, Rawlsian and Humanitarian lines will have to wait for another time.

No one is going to argue that China’s per capita GDP is not still very low. Using the IMF’s Data Mapper China’s 2009 per capita PPP GDP at current international dollars is $6,546. As Giles argues this is significantly more than our Victorian forbears, however the structure of China’s society makes this simple fact increasingly difficult to map onto concrete reality.

Firstly, I would like to turn to Dave Osler’s recent post on Soft Sinophilia, mainly because it caught my eye recently, but specifically because it addresses an important element of Chinese society.

The sycophancy of many on the left to China’s dictatorial, murderous, exploitative, repressive and capitalist rulers is peculiarly disturbing. While China’s GDP has soared since 1978 the results have clearly not led to as widespread a rise in living standards as could be expected. Speaking about a contemporary calculation on the rate of exploitation Dave says…

…perhaps the closest equivalent metric in mainstream economics is the overall wages bill for a given country, expressed as a proportion of gross domestic product. This is, crudely, the workers’ share of the social product. Even despite the onslaught of neoliberalism, it typically amounts to around 55% throughout western Europe.

But a recent study by Chang Xiuze, an economist with a National Development and Reform Commission think tank, revealed that the salary component of China’s GDP dropped from 17% in 1980 to just 11% in 2007. In other words, the bosses are taking a dramatically greater cut.

It appears that the Chinese are getting a smaller cut of a bigger pie. Some would argue that this is a good thing if the pie is big enough, I would argue that this is a sign of the failure’s of China’s economic model and this sort of imbalance will lead to massive problems soon.

Furthermore, Giles argues that the health of the Chinese is one of the most obvious ways in which modern China is a better place to live than Victorian Britain. However,  as always in China it is far more complicated than that.

It is mostly agreed that “wealthier is  healthier.” However, evidence from China is doing a great deal to prove that the form of society and social institutions matter a great deal for how much healthier a society gets for its wealth.

In this paper form the New Left Review (gated) evidence is provided that shows that China is getting healthier far more slowly than other comparable countries as they got wealthier. Again, it appears that the Chinese are getting a smaller cut of a bigger pie. I don’t think this is good enough, because evidence exists from other countries that it can be done better.

According to this report from the UN Development Programme 15.9%  of China’s population live on less than $1.25 a day and 36.3% live on less than $2, my preferred metric. This is the sort of Dickensian poverty which can be missed if you insist on looking at the number of skyscrapers going up in Shanghai.

When you insist on looking at the number of skyscrapers you can be so awestruck by the shear scale of the things that you fail to notice that up to half of the commercial property in the city sits empty.

This dislocate is what interests me. China is no nut, but the sledge hammer that is being used to crack this society is massive.

Football

While I concede that Giles makes some excellent points I find his casual dismissal of my argument that “China and the Chinese are often treated as a political football” somewhat bemusing.

First of all, there is the historical context. In 1949 Mao’s forces declared the foundation of the People’s Republic of China. In the West this was not treated as a mere violent change of government. Repeated, again and again, was the idea that “we have lost China.” We was the West and implicit in that statement is that China was ours to lose in the first place. The fall of China became a central plank of anti-Red hysteria throughout the 1950s and onwards.

China’s many economic successes are used to underline how powerful the development consensus of free-markets and free-trade is.  It is responsible for the majority of those lifted out of poverty in the last few decades. Dani Rodrik argues that China’s development path could hardly be further from the consensus of the last 30 years, and he is right. However, when some argue that it is bogus to include China’s growth and poverty reduction when discussing global poverty reduction strategies they are described as trying to stage “Hamlet without the Prince.”

And the Tories. They want to act tough on aid by cutting help to China. Despite  the dubious ground on which they stand for cutting aid to a country with such manifest problems they were applauded by the right of their party. 60 years ago, 6 years ago and 6 months ago, China is used again and again as a political football.

It is only in the minutiae of real life that the suffering of the Chinese working classes can really be assessed. Per Capita Purchasing Power Parity Gross Domestic Product can’t illustrate the 72.5% of workers who have had their wages paid late or not at all; although perhaps it does include the 6%-12% of GDP estimated to be contributed by the sex industry (page 20 of the preview). I’m no prude, but nobody can fail but to be taken aback by the prevalence of sexual exploitation in China.

The fact is that China is still poor, that there are those in desperate need in China and that the CCP will not provide the assistance necessary to help them.

Further posts will explain exactly why I think that the institutions that helped China to succeed so far as a country of cheap, healthy, educated and disciplined workers are being undermined. I will argue further that the very process of marketising their economy and opening up to the world economy that initiated its tremendous growth, is also undermining it.

My preference is for those involved in multitude of protests, strikes and industrial actions that take place in China on a daily basis to wrest power and control back from those exploiting them. But until then I don’t feel supporting a transfer of wealth, institutions and knowledge from the rich world to the poor as left wing imperialism.

An Argument in Favour of the CAP

EU FlagThe Common Agricultural Policy of the EU is one of the largest subsidies in the world “it represent[ed] 48% of the EU’s budget [or] €49.8 billion in 2006.” That is a lot of money in anyone’s book, but when it appears hardly anyone is happy with the outcome generated it starts to look anomalous.

From the right, it is attacked by The Economist, which itself is flanked by the Adam Smith Institute.

[European consumers and taxpayers] will have to continue paying for this wasteful and wicked system. It is terrible for poor-country farmers, who have long suffered from being shut out of rich-world markets, and having rich-world products dumped on them. Now they can hear the gates of fortress Europe clanging shut just when world prices should be triggering an export boom. And it is dreadful news for the hungry poor, because restricting trade in food exacerbates shortages.

Similarly, the left attack the CAP for hurting smaller farmers while handing huge handouts to a handful of larger producers.

In a detailed breakdown of aid payments across the EU in 2000, the EC calculated that 78 per cent of EU farmers receive less that 5000 per year in direct aid. Furthermore, fewer than 2000 of Europe’s 4.5 million farmers between them rake in almost €1bn in direct aid from the CAP. Farm subsidies also vary in scale across Europe. In Portugal, approximately 95 percent of farmers receive less than 5000 each year, compared with 43 per cent in the UK. Moreover, 380 of the UKs landowners and large-scale agricultural businesses glean aid in excess of the 300,000 per farmer ceiling on annual payments proposed in the mid-term review.

By concentrating subsidies in the hands of its richest agricultural landowners, EU agricultural policies are hastening the demise of smallholder agriculture in Europe. (pdf)

Please allow me to take you back a century and a half.

The British Corn Laws were import tariffs designed to protect British agricultural workers and the landed aristocracy. In a way, they worked similarly to the CAP. Their effect was certainly similar, higher domestic prices and a reduced market for the agricultural products of the developing world. Of course at this point the developing world was Western Europe and the USA.

The Economist argues that the CAP is terrible for the contemporary developing world because it artificially deflates the value of their agricultural products and it hinders their access to markets for these products.

Famed free marketeer Richard Cobden may have taken an altogether different view on matters. He was a prominent member in the Anti-Corn Law League and argued voraciously for their abolition so as to lower the cost of food for the British.

But he did not argue for the abolition of the Corn Laws out of a sense of altruism for the poor wronged American, German and French citizenry.

He argued that the continuation of the Corn Laws positively aided the catching up of the developing world with Britain.

The factory system would, in all probability not have taken place in America and Germany. It most certainly could not have flourished, as it has done, both in these states, and in France, Belgium and Switzerland, through the fostering bounties which the higher priced food of the British artisan has offered to he cheaper fed manufacturer of those countries.

Perhaps The Economist is wrong. Perhaps the CAP has the potential to act as an additional stimulus to the developing world to move from agriculture  to higher value added activities like manufacturing.

Perhaps the abolition of the CAP is just another form of free trade imperialism designed to keep the third world in its place, out on the periphery.Well, done, you highlight when you read just like me and this white text has shown up. I’m hoping this post might cause some controvery so I’m hiding a disclaimer here. In my opinion the abolition of the CAP wouldn’t be a piece of free-trade imperialism, nor would it hurt the industrialisation of the developing world. Of course on the other hand its abolition wouldn’t be the panacea some describe it as, as always I think you’ll find it’s a bit more complicated than that. (Previously white on white. I’m sick of people thinking I’m a moron unnecessarily. There’ll be enough reasons for the Working Class Tory to hate me without making extra ones up)

BBC: UK economy ‘is growing/is still not growing/is shrinking’

Great reporting form the BBC.

Contrary to expectations, the UK economy did not grow in the third quarter of the year, an influential economic group has predicted.

Gross domestic product (GDP) was unchanged from July to September, the National Institute of Economic and Social Research (NIESR) calculated.

That’s bad news isn’t it? Oh wait a minute.

The NIESR points out that its forecasts tend to be within 0.2 percentage points of the first official estimate from the ONS, which means that it is likely the economy will show either a small amount of growth or decline.

So the story comes down to: “we might be growing, we might not be growing, or we might be doing neither.”

Really enlightening. You may as well read the press release (pdf), at least it has a pretty graph.

Given that at one point the “NIESR incorrectly predicted earlier this year that the downturn ended in March” and in the hope of finding some scoop, I checked the the NIESR figures on their own accuracy.

Annoyingly they are particularly accurate and fair.

The NIESR declare to have an error rate in the region of o.1 to o.2 percent of GDP. Below are figures comparing the quarterly GDP change from the NIESR and the Office for National Statistics.

NIESR        ONS
2008 Q1 +0.7    2008 Q1 +0.8
2008 Q2 -0.1    2008 Q2 -0.1
2008 Q3 -0.7    2008 Q3 -0.7
2008 Q4 -1.8    2008 Q4 -1.8
2009 Q1 -2.5    2009 Q1 -2.4
2009 Q2 -0.6    2009 Q2 -0.8
2009 Q3 0.0    2009 Q3 N/A

At this point this is a non-story but it fits nicely in with the “new” narrative  from the Conservatives’ that “Labour isn’t working”.

This is another example of a story that gets coverage even when it lacks content because it fits within a dominant media narrative.

Labour still isn't working

China at 60: Misunderstood

China-60.svgMao’s China has been annihilated. 60 years on from its founding on the 1st October 1949 there is little recognisable about it.

Although some on the left will lament the loss of this slightly more presentable face of state Socialism, this is a cause to celebrate. The Cultural Revolution and Great Leap Forward are two of the biggest tragedies to hit humanity. The gains which accrued under Mao are too small to outweigh the horror which occurred.

From ardent globalisers to hardline socialists it seems everyone can find something to celebrate in the New China.

Unfortunately the things highlighted by Andy and Tim underline the misunderstanding that surrounds the success of modern China.

But as the scholar and writer Perry Link has observed, it is more accurate to say that the people lifted the Communist party out of poverty – once it had the sense to get out of the people’s way.

This? This good sense in The Guardian?

Tongue-in-cheek, Tim highlights the Guardian’s coverage of China’s 60th and approvingly asks “So when do we start applying it in the UK?

The only problem is that Communist Party hasn’t got out of the way. Or at least not in the way Tim implies.

From the earliest days of agricultural reform to the performance of state owned industries now, the party has very much got in the way. The Chinese have found a recipe that works for them, for the moment.

That Tim wants to score political points from it is telling of the difficulty that the libertarian/classical liberal/free trading right has discussing China.

xin_5021006010642328146348Of course elements of the left are little better at understanding the complexities of modern China.

For some bizarrely reason, Andy Newman of Socialist Unity uses a PRC propaganda photo as evidence of the change in China.

It is certainly worth celebrating the victory which Mao won in 1949, however, to use it as a a reason to stifle legitimate criticism of the regime and its policies is ludicrous.

Both Tim and Andy fall into the same trap that most analysts of China do.

Although most people recognise that China cannot be easily placed on a continuous Left and Right, people still want to label elements of its economy as a left-wing or right-wing policy. I apologise for these caricatures of left and right but they illustrate major failings in some analyses of China.

The leftist penchant for state intervention can be totally inappropriate for China.

China’s agricultural economy was only really successful once peasant farmers once the Household Responsibility System was set up. In this, after selling a set amount of their crop at the low state determined price, peasants were allowed to sell their surplus at market rates. This fermented a boost in productivity not seen since the redistribution of land which followed the establishment of the PRC.

The right have of course been as wrong as the left when it comes to China.

In a developing economy state intervention is essential in creating, extending and maintaining a market. The traditional rightist view that state intervention equals bad does not hold.

It must be made clear that a lack of state involvement is not synonymous with the free market. The withdrawal of the state in China is often applauded, but institutions which were smashed by the retreating party cadres have not been replaced.

In a survey quoted in Hart-Landsberg and Burkitt’s China and Socialism 72.5% of respondents had at some stage had their wages withheld. David Harvey uses this as an explanation for how so much wealth has been accumulated by so few in such a sort amount of time.

In fact, most of the time this is presented as the evidence of how “extreme” capitalism has become in China. But the theft of labour is not part of capitalism. This is evidence of how poorly China has instituted its new economy. Capitalism relies on functioning markets and as Chris Dillow argues, markets can be undersupplied like all public goods.

It is this difficult framework which has made it so difficult for the big L Left Left and big R Right to discuss China. This is why I think the work of Karl Polanyi is so important to understanding China. In the next post I will outline some of Polanyi’s thought and why it is so useful when discussing China.

Harriet Harman: Pointless

Just heard Harriet Harman giving her speech from Brighton.

Clause one of our new Equality Bill will bring in a  legal duty on all public bodies to narrow the gap between rich and poor.  It will be a law that binds all government ministers, and all government departments as well as local government.

Calling such a clause pointless in generous. Totally unworkable, counterproductive and hypocritical would be another.

Harriet HarmanFirst of all it is unenforceable. Are policies to be judged before they are implemented and if so how will unintended side affects be accounted for? Or if they are assessed after the fact, what reprimand would be suitable or fair if the policy was embarked upon in good faith?

Not only that but it is totally out of step with past New Labour form, what about repealing anti-trade union laws or engaging in grassroots democracy instead of inefficient managerialism? Either of these would decrease inequality far more efficiently than this clumsy piece of legislation.

It may sound odd coming from a Socialist, but there are some things which may increase inequality that may actually increase everyone’s wellbeing too. For example, a more flexible and experimental NHS could leave people with unequal access to healthcare, but if it allows experimentation it may help increase everyone’s lot. Such a clause would censure this policy.

Creating a more equal society is not a pointless endeavour but I cannot see the point in this legislation. When we have Conservative MPs attempting to ban unicorns, and Lib Dems grandstanding with calls for savage cuts, I foolishly still like to expect more from Labour. But this is New Labour, rhetoric without substance or a route to realise it.

Thomas Byrne is still wrong on Fairtrade

This post is a response to Fairtrade, Bankers, and Development, a reply to Left Outside from ByrneTofferings, which was a response to Why Thomas Byrne is wrong on Fairtrade from me, which was a response to his original post here on why Thomas Byrne Boycotts Fairtrade. This debate was originally started on a whim but has now been submitted as part of the Blogger’s Circle project.

fairtrade-vertical-colourThomas Byrne is still wrong on Fairtrade

I hope Thomas Byrne will forgive the unnecessarily incendiary titles, as I don’t really want these posts to be negative or an attack on him, he is after all a lovely chap.

I would rather these posts provide positive arguments in favour of Fairtrade and – more specifically – effective development strategies.

I argued here that the main aim of development must be for a country to move from low value-added to high value-added activities. I argue that Fairtrade can be a useful tool in helping those in the developing world upgrade.

Thomas Byrne asks how subsidising and in effect artificially increasing the price of a commodity like coffee can possibly help a country upgrade.

By subsidising the production of a particular foodstuff or non-food agricultural item you will induce overproduction, a fall in price and exacerbate poverty, the opposite of what was intended. As unsavoury as we may find the results, it would be better to let the market take its course.

I think I have condensed ByrneTofferings’ argument accurately but if I have slightly misrepresented it I can of course alter it.

The reasons I support Fairtrade are fairly complex and tie in with my views on how successful countries have developed and what are good strategies for countries seeking to develop.

If I went into the detail necessary, the only response I would expect would be tl;dr. So for the sake of brevity I think the best way to begin to discuss Fairtrade is to look to the reflection on capitalism of a 19th Century German.

No not Marx, Johann Heinrich von Thünen

Johann Heinrish von Whonen I hear you say. Well, he was a nineteenth century landlord who wrote the book The Isolated State.

In this book posited a thought experiment that was to form part of the foundation of Economic Geography.

Imagine a very large town, at the centre of a fertile plain which is crossed by no navigable river or canal. Throughout the plain the soil is capable of cultivation and of the same fertility. Far from the town the plain turns into uncultivated wilderness which cuts off all communication between this State and the outside world.

That are no other towns on the plain. The central town must therefore supply the rural areas with all manufactured products, and in return tit will obtain all its provisions from the surrounding countryside. [1826]

<a href=In this society productive organisation  is going to be divided not just by class and by what is produced but also by space.

The cost of agricultural goods produced outside the city will consist of the cost of production plus the cost of transportation. As shown below an outer limit will be created beyond which it is uneconomical to produce a given good.

If we allow ourselves to imagine more than one agricultural item being produced, we can see that agriculture will divide itself into rings surrounding the city.

As land owners nearer the city will be able to extract a higher rent than those closer to the outskirts ,the agricultural production nearest the city will necessarily be the most profitable, those furthest away the least.

Transport Costs

If a traveller were to set out away from the city in a straight line they would pass through a number of different rings, each producing something different, and crucially each using a different production system.

This microeconomy is a remarkably accurate model of what pre-industrial revolution society was like. Roads were rare in continental Europe and most grain was consumed within a 20 mile cart ride of were it was produced; cities without access to sea or rivers rarely exceeded 1,000 persons.

We have moved on a long way since then, however this spatial inequality and differentiation between economic sectors continues.

Inequality, development and space

Before the industrial revolution inequality was rampant. However, inequality was distributed equally across the globe. For example, 500 years ago Asia and Europe were economically speaking roughly equal, however since then spacial inequality has rocketed.

World System Theorists argue that capitalism involves spacial inequality because wealthy nations get more wealthy by exploiting the poorer. By engaging in capitalist development the poorer countries are aligning themselves in a periphery which is exploited by a core and semi-periphery.

Neoclassical economics contends that poor countries are only poor residually and that capitalism does not create their poverty. In fact it argues that the positive spillovers of the rich world make the poorer countries richer indirectly.

Von Thunen’s thought experiment offers a critique of both views.

Although it is evident that an economy must be divided into zones similar to those described in World System Theory, it is also clear that economic underdevelopment does not necessarily result from this.

As you move away from our theoretical town the type of production engaged in changes. Closer to the town it is more capital intensive but further away it is more land intensive.

The simpler production systems used on the edges of this economy imply a lower level of Smithian specialisation and lower productivity per worker. In this scenario, as with World System Theory, the periphery of this economy is most likely to have lower incomes precisely because they are engaged in commerce with the core.

Coffee_Beans_closeup

Strategies for development and Fairtrade

Two strategies present themselves as a route to development, one is to follow your comparative advantage and to produce what you produce most efficiently. Essential to the success of this strategy is to move on from a sector when it begins to suffer from declining returns; that is to find an alternative leading sector in which a country has an advantage when inputs in the old industry begin to produce outputs that do not lead to development.

Another strategy relies on diverting the profits from the sector in which you have comparative advantage to enter a higher value-added industry which you are currently not specialised in. For example, South Korea used profits gained from agriculture, and other industries to subsidise the production of microwave ovens. Although they were originally producing microwaves at a loss, through learning by doing, increasing capacity and increasing returns to scale they created a new leading sector from scratch.

Both strategies have risks, by relying on comparative advantage a country can be held hostage because demand for a raw material can taper off. The second strategy implies the risk that the new firm will never become profitable and fold.

Returning to our coffee growers, it becomes clear that they are operating on the periphery of our global economy. Their impoverished state also makes it clear that their current niche is no longer capable of producing economic development.

Thomas Byrne’s logic dictates that coffee growers must leave the sector and seek employment elsewhere, the current price for coffee cannot sustain the current number of coffee growers.

There is little alternative employment available in Mexico, Peru, Ethiopia, Tanzania or Malaysia. This is why I support Fairtrade, by providing a subsidy Fairtrade provides a surplus which would otherwise be absent and provides funds to upgrade their production.

For example in Guatemala growers have been able to begin growing new crops to supplement their coffee production, this is not a great leap forward, but it is an improvement.

By providing capital to small producers and expertise in world trade Fairtrade can be a tool which can help create new sectors in previously stagnant economies.

Thomas is right that there are other things which need to change that can make a much larger impact than buying a different bar of chocolate.

  • In the rich world agricultural subsidies need to end and tariffs need to be scrapped.
  • Illegitimate debt needs to be dropped and countries must be allowed to follow the lead of Ecuador in unilaterally abandoning it where possible.
  • The tight constraint which World Trade Organisation, World Bank and IMF rules place on developing world policy makers must be loosened. They must be allowed the “policy space” which the developed world enjoyed.

All of these things would have a larger impact than Fairtrade, even if Fairtrade was to account for more than 0.5% of agricultural production worldwide as it currently does.

While there are better ways to help the developing world than buying Fairtrade it does not follow that it should be abandoned. Likewise, the problems of implementation described in this Adam Smith institute report are not convincing arguments against Fairtrade.

For example, at the moment only 10% of the premium paid for Fairtrade goes to farmers in the developing world, but this is due to an information asymmetry which domestic retailers exploit, it is not a reason to abandon Fairtrade.

Some companies like Cafe Britt roast all their coffee in the country where it is produced, something which Fairtrade is yet to take up. However, this is not a reason to abandon Fairtrade, it is another reason to improve it.

Unlike Thomas Byrne and the Adam Smith Institute I am unhappy to rely on the market to dictate the rate at which the poor world develops. Given the enormity of the problem facing the world we should embrace Fairtrade as a palliative even as we strive for a more solution effective too.

Further Reading is available from the Fairtrade Foundation’s own reports and some  interesting arguments against the organisation can be found in this assault on Fairtrade Fortnight from the Adam Smith Institute. Another pro free-trade anti Fairtrade post can be found here at Suburban Musings. Much of the information on von Thunen, economics and the state comes from the truly excellent States versus Markets by Herman M Schwartz. It makes an excellent companion to Kicking away the Ladder and The Open Veins of Latin America for someone curious about the economics and politics of development.

Why Thomas Byrne is wrong on Fairtrade

fairtrade-vertical-colourThomas Byrne has been slurred by his friends as an ‘evil capitalist swine’, [who would] ‘rather see people suffer’, than be brought out of poverty through these wonderful Fairtrade schemes.

And rightly so.

His arguments against Fairtrade show a fundamental misunderstanding about how a poor country develops into a rich one.

ByrneTofferings‘ main argument against Fairtrade is that it is not free trade. I’ve reproduced some below with my emphasis to illustrate where he’s gone wrong.

[Fairtrade] distorts the markets, and while it may be good for the coffee grower in the short term, it’s bad for them in the long term, it’s bad for other coffee growers who aren’t part of the schemes (because they have to sell at the same price as everyone else), and it’s bad for the consumer because it costs us more than it should. Obviously we have the choice to go elsewhere, but that necessitates that there are some producers not part of the Fairtrade group which again, hurts them.

Where ByrneTofferings goes wrong is that he assumes distorting markets is a Bad Thing. For a developing country nothing could be further from the truth.

Exporting primary materials like coffee or rubber is a precarious situation for any country to find itself in. For example, the economies of Peru and Chile nearly collapsed after their export of nitrate fertilisers was obliterated by the creation of the Haber Process in the early 20th Century, which provided a cheaper, closer and more reliable source of fertiliser.

This is why distorting markets is so important, it allows countries to move from low value-added to high value-added activities more swiftly. For example, moving from low value added coffee growing, to coffee roasting, to coffee packing and finally to high value added coffee marketing will increase people’s well being and domestic stability as the economy diversifies.

Relying on a natural resource is dangerous and waiting for your domestic economy to upgrade naturally is risky.

There are plenty of ways which Governments can distort markets to make development and domestic upgrading occur more quickly.

  • For the capitalist out there, a government could grant tax exemptions or holidays to businesses engaged in capital investment. For example, tax breaks for firms that invest in new facilities rather than pay higher dividends.
  • For the centrists, firms engaged in similar endevours could be encouraged to congregate in selected “special economic zones” via various subsidies. By bringing these together the government would encourage positive spillovers which would not occur without some guiding visible hand. For example, car manufactures sharing widget producers.
  • For my comrades, a state firm could use tax revenues to promote full employment pushing up agregate demand and subsidise domestic demand.

Fairtrade goods are an excellent way to get money into these developing countries to allow them to undertake these sorts of endeavours. ByrneTofferings argues that it would be better to give money to a charity, but charities are accountable to their donors, not the recipients of the aid. Fairtrade puts money in pockets and channels it through productive businesses, this is the advantage it has over charity.

Fairtrade on its own will not change many lives, but coupled with an activist Industrial, Trade and Technology policy it can provide a vital step to improving the condition of those in the third world.

A reply from Thomas Byrne is here http://www.byrnetofferings.co.uk/2009/09/brief-reply-to-leftoutside-on-fairtrade.html

Migration is not a crime, but the way it’s discussed is criminal

Carl Packman has very nicely leap frogged from my post to a discussion on the limitation the left faces when discussing immigration. Nice enough for him this is now the second post of his which has been cross posted to LibCon, and as usual for posts on immigration it has incited a very “lively” discussion.

However, it is not the just the left which has difficulty discussing immigration. The right does too, because they just can’t help themselves distorting the truth or outright lying.

As I began to discuss here, talk about immigration in this country is tainted by decades, indeed centuries, of prejudiced stereotypes that are difficult to escape. Unfortunately some papers extend so little effort to escape this regrettable history that numerous blogs have been created to monitor them.

A lack of originality, a surplus of bile

Migration is not a crimeWhat I want to create is a crib sheet for any article you see on immigration, migrants, refugees or asylum by looking at the history of that discussion. Our modern debate on migration has not developed out of a vacuum. In fact, we are forced to watch tedious reruns of discussions concerning Huguenots in the 1680s, Irish migrants in the early 19th Century and Eastern Europeans in the late, Jews in the 1930s and West Indians and South Asians in the 1960 and 70s. As Paul Gilroy describes in There Ain’t no Black in the Union Jack “the wearisome task of dissecting the rhetoric is not helped by its lack of originality: ‘they’ are taking our jobs and houses, using up local resources and undermining ‘our’ culture and, in return, offering ‘us’ disease and terrorism.” However, dissect it we will, again and again, until they fucking learn.

Any immigration story you read in the above papers will be shaped by the groundless assumptions under which the anti-immigrant polemicist operates. These do not pop out of thin air, they are drawn from the past. Pick an article; I will guarantee that it will contain a combination of the below:

The Disloyal Immigrant

This is perhaps the oldest argument of them all. It certainly dates back to the 17th Century. In Catholic France the Huguenots stood out as Protestants and in 1685 the Edict of Nantes was revoked and open season was declared on France’s heretics. They left France for more welcoming shores and arrived in England. [1]

They have since been co-opted as the “good immigrants;” those that integrated, brought valuable skills and blended seamlessly with the indigenous Anglo-Saxon-Norman-Norse-Roman-Celtic population. Those opposed to immigration often make disparaging comparisons with the Huguenots. [2]

In fact the Huguenots were subject to much the same treatment that welcomes modern day refugees, sometimes even worse. They could be subject to double the normal parish dues and national taxes. Petitions were organised against them and their daily lives a constant struggle. The Huguenot’s being refugees inhabited the poorest parts of town, and were soon charged with causing poverty. Even seeking it out in order to undercut the indigenous workforce. These most loyal of migrants were in fact treated like criminals.

This was repeated with each subsequent migration. The most interesting comparison can probably be drawn between Muslims and Catholics. In the early 19th Century the Great Reform Act was in the offing and there was much talk of how far suffrage should be extended. One key sticking point was whether Catholics should have the vote or not. The problem was that a Catholic’s ultimate loyalty was to the pope, not parliament; sound familiar?

The Ummah has been cited as a reason to distrust Muslim immigrants, Muslims in general in fact. This makes about as much sense as denying Catholics the vote, but it won’t stop some people parroting this argument. This is because the migrant must prove their loyalty, they are not innocent, they are guilty until proven otherwise. Even if no one knows guilty of exactly what.

Soft Touch Britain

In the late 1990s William Hague accused New Labour of being “too soft” on immigration. This period saw a marked increase in the number of asylum applications received in the UK and was snatched upon by the press that Britain was being targeting for its benefits system and wide open borders. As early as 2001 the BBC were running myth debunking stories. In fact throughout Europe record numbers of Asylum Seekers were being received. The collapse of Yugoslavia will do that

Even as benefits have been slashed, this discussion has not ended. Even as Labour enacted five Acts on migration and asylum this discussion has not moved on. At the worst of the “asylum crisis” the numbers reaching Britain were comparable to Germany, France or Italy. Rather than being a “soft touch” Britain was finally receiving its fair share of refugees.

There are few things which make me feel patriotic, as a Socialist I’m sure that doesn’t surprise you. But one thing that makes me intensely proud of this country is that up until 1905 we had no immigration controls. None. Nada. Zip. The irony for the casual anti-immigrant-armchair-colonialist is that the height of Soft Touch Britain™ coincided with the height of Empire.

Diseased and sex obsessed migrants

Concentrating on health concerns, the language is unequivocal, “asylum seekers raising HIV risks.” The Times also contributed to the press personification of contemporary immigrants as carriers of disease with it’s that demands for HIV checks for all immigrants, to prevent “draining the resources of the NHS.”

Previously it has been Tuberculosis that has been the immigrants disease of “choice.” The update does nothing to hide the worrying trend to target migrants as a carrier of disease and instigator of national decay. Now from above you can tell the asylum seekers are going to give you AIDS. HIV is a scary illness, but a particularly had one too contract if your not going to share syringes or have sex with those infected.

This is of course irrelevant because the one that has been associated with migrants is sex: a very unBritish thing indeed. By threatening the local population with HIV The Mail and The Times very effectively demonise asylum seekers as either promiscuous or drug users or both.

The links to sexualised black and asian immigrants or the Opium dens of past Chinese immigrants are plain to see; and about as well founded. There is a lot of could, may, might in those articles, and very little proof that migrants are infecting the “indigenous” population.

Criminal immigrants

It seems, shortly after loyalty, firmness, cleanliness and sexual inadequacy, the one thing we British pride ourselves on is our law abiding nature. Migrants, if we judge by the hysterical historical record, are anything but law abiding. The same that was true of anti-Jewish agitation in the 1900s is true today; the lies remain the same too.

Likewise, in the 1970s it became “common sense” that criminality was a distinct way of expressing “Black Culture,” whether it was a Rastafarian smoking marijuana or a black youth mugging someone. Although these crimes were certainly committed by members of this “immigrant group,” this was not in any proportion to the dominance that this issue had in the 1970 and 1980s.

The obsession with crime and the durability of its images are a focus for discussions on national decline. More than that, they are a way of articulating a crisis of national confidence totally separate from the crimes and criminals themselves. After all, the tumult of the 1970s and 1980s had little to do with race.

Lump of Labour/Housing/Hospitals/Women Fallacy

Yes the Jews/Irish/Blacks/Asians/Chinese/Asylum Seekers are taking your Job/House/Woman/Healthcare [delete as applicable]. This theme is no doubt familiar to you.

The economics of migration are fairly clear. Even Migration Watch UK and the infamous James Slack admit that migrants benefit the UK’s economy. It is instructive that the worst claim they can create, using the most miserly figures, is of a modest benefit. The NHS would collapse without migrant labour and it would never have started without the tremendous work of West Indian nurses in the 1950s.

Similarly, the Lump of Labour Fallacy is often displayed when people argue that immigrants are “stealing” jobs. The jobs and wealth created by immigrants, from Huguenot Weavers to Jewish Cabinet makers to Bangladeshi caterers, is ignored.

Although the immigrant “stealing” theme is a fairly large one I will only pass over it briefly, it is so common as to be particularly irritating. I would like to conclude this short section with a personal gripe; by asking those arguing that immigration in the last decade has made housing less affordable: How would reducing the numbers of builders, plasters, plumbers and electricians in this country make it easier to build a house?

Swamped

Perhaps behind all of this is the idea of being “swamped.” Whether on an individual level, like the little old lady in Powell’s “Rivers of Blood” speech, or on a national level, like the paranoia that created this article, swamping is pervasive to discussions of immigration.

Of course over the last couple of thousand years these islands have absorbed millions of migrants, and a sense of continuity  has remained. In the 1680s in a matter of years fully 1% of the population became Huguenot, it sounds like a small number, but far smaller increases cause massive ripples today. These Huguenots have become British.

The same swamping was seen by Powell in the 1960s

Sometimes people point to the increasing proportion of immigrant offspring born in this country as if the fact contained within itself the ultimate solution. The truth is the opposite. The West Indian or Asian does not, by being born in England, become an Englishman. In law he becomes a United Kingdom citizen by birth; in fact he is a West Indian or an Asian still.

…and by Major Evans Gordon of Jews in East London in the 19th Century…

East of Aldgate one walks into a foreign town. [The modern englishman lived] under the constant danger of being driven from his home, pushed out into the streets not by the natural increase of our own population but by the off-scum of Europe

It wasn’t true in the 17th century, nor in the 18th, nor in the 19th, nor in the 20th. The 21st century is certainly no different. But this “swamping” theme will be repeated ad nauseam, unless we challenge it.

Immigrant Bingo

Now we have tackled those basic assumptions we can move onto the language and imagery which is used. These can be used to spot which of the above ignorant preconceptions are the inspiration for the article you are reading. They are like a tell that a poker play just can’t hide. And they also make for an excellent bingo game. Cards at the ready:

Tabloid Bingo

I’m not going to argue that because some of the arguments descend from xenophobic drivel that they are essentially racist; I’m sure sometimes it is just coincidence. What offends me is the acceptance that this is the best way to discuss immigration. That the above assumptions form the basis for any discussion on immigration in our press or parliament would be a colossal national disgrace if things were not worse elsewhere.

This could be a fairly dry essay on the history of our national debate on migration. I have several thousands words written on the subject and just two thousand of the multitude are here. But just illustrating the pattern and repetition of the same tedious lies and distortions is not enough. We need to be able to combat it. This post is meant to provide people with a tick list to check and a way to say, “actually that was bollocks then and it’s bollocks now.”

[1] As an aside, there is a mosque on Brick Lane that used to be a Huguenot church. Later it became a Methodist chapel and later still a Synagogue, before finally becoming the Mosque you find there now. With each new migration migrants find their niché.

[2] In the same way, modern asylum seekers are castigated as being less deserving than the Jews fleeing Nazism, despite this being manifestly untrue.

________

For the record, philosophically I am for almost total free movement of people. I will outline why at a later date, but for the moment Paul offers quite a good discussion why a Socialist must fight for the rights of migrants. Funnily enough, this Paul does as well arguing against the arbitrary benefits of birth.

However, pragmatically (i.e. what I think can be achieved in the next 10 years) I am for a similar regime for economic migrants as is in place now, and a massive resettlement plan for refugees from all over the world.

This is a piss poor compromise and one I may have to reconsider, but I do think restrictions are inevitable while the world is so dangerous and while people are worried by the unknown. However, one thing I’m not going to compromise on is refugees, I wish the same could be said for this Government.

The best books to consult are Matthew J Gibney’s The Ethics and Politics of Asylum: Liberal Democracy and the Response to Refugees and Bloody Foreigners: The Story of Immigration to Britain by Robert Winder. The first is essential reading for those of an academic bent, but Robert Winder provides a good journalistic overview of immigration throughout Britain’s history.

Burned Deeply into the National Consciousness

While I have been away there has been some discussion on instituting a high pay commission.

Some people on the left have backed this, like Sunny from LibCon. Citing a New Yorker article Sunny argues that “you can blame [this recession] on the sub-prime crisis, confusing government regulation and increasingly complicated derivatives… but actually it comes down to two things: excessive, unchecked greed and disregard for shareholder returns.” A high pay commission would seek to counteract this dangerous and unsustainable greed.

Of course some like Chris Dillow think that a commission will be a big statist bureaucracy and will fail to target the right people. Ultimately Chris argues “high pay should be curbed (or not) not by the state but by workers themselves.” And I feel I have to agree with Chris that a high pay commission would be nothing but a waste of resources.

In my view a high pay commission will be unnecessary, at least in the short term. As John Kenneth Galbraith said when writing on the Wall Street Crash in the 1954, a repetition was unlikely as long as people were chastened by past events.

A good knowledge of what happened in 1929 remains our best safeguard against the recurrence of the more unhappy events of those days… The wonder indeed is that since 1929 we have been spared so long. One reason, without doubt is that the experience of 1929 burned itself so deeply into the national consciousness.

In a way tackling the “bonus culture” may not be necessary. It is patently obvious to the big banks that concentrating on intense short term profits is not a long term plan, and that bonuses contributed to this short sightedness.

The bonuses recently awarded and profits earned are unfair; perhaps even perverse, when you consider that banks would not be trading without Government help. But, without assessing if the investments made are the same kind of short term speculation that crashed the system, a blanket criticism of these bonuses is unhelpful.

The excessive profits of the Financial Services industries and the excessive pay of the top traders is damaging in itself. But, although definitely not a vote loser, a high pay commission is not going to be particularly effective either. The real economy is now being wagged by the financial tail. As Keynes argued, a financial system should be embedded in a real economy; a “bonus culture” was only ever a small part of much larger problem.

In other news: I’m back from Thailand and I feel great! Although the 13 hours layover in Mumbai airport was less than ideal… I’ve been tagged by Dave Semple over at TCF in a holiday reading meme but I’ll be coming to that later. First of all I need to deal with the fallout from my evisceration of the Tory’s Green paper on international development.

One World Con: The Conservatives’ ideas on Development are Dangerous

9.2 million children die before the age of five each year. Two million die on the day they are born – and 500,000 women die at childbirth. A third of children in Africa suffer brain damage as a result of malnutrition. 72 million children are missing out on an education. Every day 30,000 children die from easily-preventable diseases. That’s 21 children every minute. 33 million people are infected with HIV/AIDS. There are 11 million AIDS orphans in Africa. Every hour, 300 people become infected with HIV and 225 people die from AIDS…and 25 of these are children.

These bald facts are an insult to our humanity. Every life is precious. Everyone has unique talents and abilities. Every time the candle of life is snuffed out by disease, we all suffer. Every time ignorance triumphs over enlightenment, we are all injured. Every time a child is born into a cycle of poverty, we are all made poorer.

So opens the Conservative Party new Green Paper on International Development, One World Conservatism. These two paragraphs read like an accusation. They are contrasted with the Millennium Development Goals set out by the UN. With the 2015 deadline looming they seem wildly ambitious contrasted with such continued suffering.

  1. Eradicate extreme poverty and hunger
  2. Achieve universal primary education
  3. Promote gender equality and empower women
  4. Reduce child mortality
  5. Improve maternal health
  6. Combat HIV/AIDS, malaria and other diseases
  7. Ensure environmental sustainability
  8. Develop a global partnership for development

The Conservatives pledge a new approach to International Development should they win the next election. As this looks almost inevitable, it is important to examine what they propose as it will affect millions of lives.

What’s in the Report?

Contradictions, Choosing Winners and Losers, Gimmicks: “Bhutan’s got Talent”, Turing up in pair of flip-flops offering to build a school, Vouchers, Microfinance, Rejecting Universal Education, Rejecting Universal Healthcare, Fixation on Private Sector Wealth Creation, The Sanctity of Property Rights, Fighting the Wrong Battles, Some good points made it though

Horror stories abound on what was to be in the Tory plans. Although the Conservatives have pledged to dedicate 0.7% of GDP to Aid, it appears that appeals to populism and concessions to the right might have deprived the Department for International Development (DfID) of its autonomy. For example, the idea that an X-Factor style competition could determine where aid is spent is as horrifying as it is nonsensical.

Tories

I don’t think it is fair to judge the whole Tory policy on one sound-byte so I have waited to get a copy of the report before posting on it. To be honest, I have to agree with Paul Cotterill that it is “broadly well intentioned.” However, if executed I likewise believe it will do a lot more harm than good.

Contradictions

Paul does an excellent job illustrating the contradictions within the report. They perhaps giving a hint to the internal battles which rage within the Tory party when it comes to International Development. Or maybe Paul’s explanation, that the report is the result of a some junior staffers, Google and a handful of Tory rhetoric, is more likely. The contradictions come thick and fast, and substantially undermine the reports credibility.

Then there’s how work will be funded.

Apparently, funds will be paid in arrears, to make sure the job gets done:  ’We will adopt and champion the promising idea of ‘cash on delivery’ aid’ (p. 18).

Except that it won’t.  On the very same page, provision is made for payment in advance: ‘And we will need to ensure that developing countries are able to finance the up-front investments necessary to achieve the desired outputs’.

That’s clear then.

Choosing Winners and Losers

One of the ways in which the Conservatives claim to be  able to improve on Labour’s DfID is greater efficiency. This means not only an inevitable rhetorical flourish bemoaning Labour’s bloated bureaucracy but also an “[immediate] review [on] which of the 108 countries the Department for International Development currently gives aid to should continue to receive it.”

This should raise eyebrows. The full criteria for this review are not given but their target is clear. Spending $20bn on the Olympics was a step too far.

We will end aid to China, which has sufficient resources to fund its own development.

This may be one of the concessions which the right as wrung out of Cameron’s compassionate conservatives. Ben Brogan seems particularly pleased that aid to China is to be ended. However, it is utterly immoral, given all their prior grandstanding, to end aid to China.

From the IMF Datamapper. Prices shown at contemporary dollar value. In 1990 dollars China's current GDP per capita today stands at $2,172. In 1990 dollars China's GDP per capita in 2006 stood at $1,200

From the IMF Datamapper. Prices shown at contemporary dollar value. In 1990 dollars China's current GDP per capita ($3,622) is $2,172. In 1990 dollars China's GDP per capita in 2006 ($2,021) was $1,200. The relevance of these figures will become obvious below.

China and the Chinese are often treated as a political football. Those wishing to vacillate on Climate Change can use China’s pollution as an excuse to do nothing. It appears that the suffering of the Chinese people in sweatshops, mines and factories is now to be rewarded with a banner which reads “Mission Accomplished.”

Please allow me to put this move into perspective, in 1750 England’s GDP per capita (likewise measured in 1990 dollars) stood at $1,328. In 2006 China’s per capita GDP stood $128 below this. Today, on the brink of the worst global recession in a generation, China’s GDP pet capita is still only half of what the UK had achieved by the end of the 19th Century. The Tories announce that “Every life is precious” but when those live are collectively labelled “the People’s Republic of China” their well-being becomes a necessary sacrifice.

Gimmicks -“Bhutan’s got Talent”

The worst thing in this paper are the Gimmicks. They are not necessarily the most damaging proposals here, but they are a massive waste of resources and time. The MyAid section of the report is likely to be dropped, having been roundly denounced in the press and by charities. But I still feel it is instructive to show what was considered good enough to be included in the official Green Paper. The section is copied verbatim (pp 23-24)

“I think it’s a basic human instinct to want to help. But sometimes you just don’t know where the money’s going.” – Member of the British public

We are determined to strengthen public support for aid by giving individual British taxpayers a greater say over how and where it is spent. We will establish a new MyAid fund, worth £40 million in its first year. Every taxpayer will be able to log on to the MyAid website and view details of ten ongoing DFID-funded aid programmes, and vote for which one they think should receive the extra money. The options will include programmes run directly by DFID, as well as those run by respected NGOs. The Fund will then be distributed between the ten programmes in proportion to how many votes they  receive. For example, if 25 per cent of people vote for the DFID programme in Malawi, that programme would receive 25 per cent of the Fund – £10 million. Everyone who votes will be kept up to date with regular email updates about the progress of ‘their’ project.

We will consult carefully on the technical aspects of the voting system. The projects will be chosen so as to illustrate the range of activities in which DFID and NGOs are involved and the variety of countries they work in. This will increase public understanding of, interest in and support for Britain’s aid programme – and create a clear incentive for DFID to demonstrate and improve the quality and impact of its work. If this idea proves successful, we will scale it up in future years. One option would be to set the level of the fund so that it equals the total amount raised by Comic Relief.

Gimmicks – Turing up in pair of flip-flops offering to build a school…

Worryingly, there are plans to use “part of our growing aid budget to create opportunities for more young people to carry out voluntary work in developing countries as part of our plan for National Citizen Service.”

The developing world has a surplus of people compared to the number of jobs available. Sending middle-class kids to build schools is only depriving the most needy of a job which could help feed their family. The experience will be fantastic for those that go but utterly useless as a development strategy.

Gimmicks – Vouchers

On page 25, the paper suggests the introduction of a voucher scheme similar that suggested for schools in the UK. Individual aid recipients will be given vouchers or cash directly and will be able to choose between various aid agencies and NGOs. This is designed to increase competition and efficiency. It will be a disaster.

In vast swathes of the world there are no aid agencies operating and in other places there are not enough to provide the choice these vouchers imply.

Where these vouchers are introduced there will simply be an increase in internal NGO bureaucracy to process the collection of funding, an increase in the marketing budget to the detriment of real work and a duplication of capacity as various agencies overreach themselves. In short, vouchers are a disaster waiting to happen.

Gimmicks – Microfinance

CoinsTheir plans to introduce Microfinance funding can be welcomed. Microfinance involves lending small unsecured loans to those who could never get credit from a bank, slum dwellers, women and propertyless entrepreneurs.

Unfortunately, Microfinance will only ever be a palliative, not a cure for the poverty of the developing world. By focusing on Microfinace the Tories seem to sidestep the problems posed by volatile transnational capital flows which those in developing are confronted with.

As a poverty reducing strategy its results are relatively ambiguous. An article in The Economist goes to lengths to examine the validity of the claim that Microfinance reduces poverty. Of 104 slums in Hydrabad, India, half were given access to Microfinance and half were not. The results are interesting as “there was no effect on average household consumption, at least within a year to 18 months of the experiment.”

Increasing the ease with which the entrepreneurial poor can get access to investment did produce some positive results, but not the sort of change which the Tories seem to expect.

Rejecting Universal Education

It is a truism for the Tories that the state does not have to be the sole provider of education. They plan to extend this logic to their International Development strategy. (p 35)

Unfortunately, given the Tories record of education I have to be sceptical about their intentions. Presented as a method for fighting “special interests” which oppose improvements in educations, it appears that their proposals are more interested in fostering a small well-educated cadre at the expense of a comprehensive universal education system.

The Tories want to help ensure a universal service, but they have turned their back on the state led education and knowledge dispersion which saw the creation of educated working and middle classes in the UK, Korea, Germany and Japan.

Rejecting Universal Education

Red CrossThe similarities between their attitudes towards education and healthcare are obvious. A (un)healthy dose of private investment and a promise that “[w]e will not insist that developing countries follow the exact path that we in Britain have taken – that is a choice for them to make.” (p37)

Evidence of another concession which the right have won from Cameron. The language is clear, there is no way Conservative funds will be used to support a comprehensive health system, not beyond malaria nets and rehydration therapy (although the £500m dedicated to fighting Malaria will produce real results).

Fixation on Private Sector Wealth Creation

It will sound odd to the right but the Private Sector is not the only wealth creator. Moreover, with the partial exception on England, the Government of most now developed Countries played a large and crucial role in their development.

In Germany, when it was attempting to catch up with England, the state directed bank lending towards certain industries. In early 20th century Russia, the Government provided investment funds directly to entrepreneurs to foster development. In Japan the countries first railways were constructed by the state. In general, and despite some lingering disagreements, development in South East Asia must be seen as a success of activist trade, investment and technology policies pursued by the state.

Contrary to popular conception, the later a country is trying to develop, the more vital the role of the state becomes in fostering entrepreneurship, building infrastructure, and managing trade. And there are no policies designed to foster this autonomous activist state in the Tories’ Green Paper.

The Sanctity of Property Rights

The Conservatives pledge to uphold property rights, however, sometimes violating property rights can lead to positive developmental outcomes. To quote Ha Joon-Chang:

Security of property rights cannot be regarded as something good in itself. There are many examples in history in which the preservation of certain property rights has proved harmful for economic development and where the violation of certain existing property rights (and the creation of new ones) was actually beneficial for economic development.

Hence, what mattes for economic development is not simply the nature of all existing property rights regardless of their nature, but which property rights are protected under which conditions. If there are groups who are able to utilize certain existing properties better than their current owners, it may be better for the society not to protect existing property rights, but to create new ones that transfer the properties concerned to the former groups.

For example, violating the property rights to the landed aristocracy in Latin America could provoke a huge increase in income for people who live in rural areas. So too, violating the intellectual property rights of pharmaceutical companies has extended thousand or millions of lives as HIV medication has become more affordable.

Fighting the Wrong Battles

handshakeThis is a dirty little secret. Whisper it: Corrupt countries get rich too. But you couldn’t tell this from the Conservatives’ determination to withdraw all funding from development projects if any corruption is uncovered (p 17).

This is a controversial position. I understand that the views expressed here may one day be quoted out of context so I would at least like to more fully explain before I am attacked. I believe an accountable democratic government is a basic human right, I also believe it is the best form of government for humane development.

However, the historical record of now developed countries like the UK, Japan or South Korea show that an democratically accountable government is not necessary to develop successfully. By concentrating on corruption the Tories are continuing to waste resources and direct attention from the real developmental tasks at hand.

The UK wasn’t a functioning democracy until 1928, when full suffrage was introduced. In Switzerland this stage wasn’t reached until 1971. The development of these countries’ economies certainly suffered as a result, but their successes still give lie to the idea that democracy and development go hand in hand.

As Japan and Korea developed, corruption was common and democracy mainly a sham. The state and private sector worked hand in hand, favours were exchanged for favours and nepotism was rife. However, the ties which this fostered, as corrupt and unfair as they were, produced economic miracles nearly unsurpassed in human history.

Some good points made it though

I do not want to pretend that nothing in this report is good. There are some concrete positive steps proposed which are to be welcomed. For example, “If elected, a new Conservative Government will be fully committed to achieving, by 2013, the UN target of spending 0.7 per cent of national income as aid.”

0.7% sounds small, but it can make a massive difference. The efficiency of the methods selected by the Tories leaves a great deal to be desired, but at least part of their programme is moving in the right direction. Likewise, if they are genuine about their commitment to support steps relieving Heavily Indebted Poor Countries of their debt, then that is another really positive step.

However, some other parts of the report contain promises which appear to pay little more than lip service to some very important issues, but if followed through can make a big difference. The section of Arms Control on page 45 is worryingly brief, and proposes an international settlement, rather than positive moves a new administration could instigate immediately. A focus on conflict resolution is fantastic too (p 42) as poverty and global inequality impact on  Britain’s security. This angle will make a ring-fenced DfID budget more palatable to the rest of the Party and may help safeguard a vulnerable department. However, again, I am unsure if the means proposed are going to achieve the ends to avoid conflict.

Their support for Fair Trade appears like a brief flirtation with a fashionable idea, rather than an ideological or pragmatic commitment. Much like their plans for Microfinance and putting all of DfID on the web. One thing which I hope will not be a gimmick is their commitment to reproductive health and to women’s rights (p 37). Poverty disproportionately affect women and a successful International Development strategy has to be gendered.

There are some genuinely positive steps proposed, but again the worry which I have is how effectively they can be implemented.  For example investment in Infrastructure is vital (p 35). But by insisting it is all contracted out to private companies there is a real danger that the roads will appear but that money will simply be exchanged between a western government and a western firm, without the money reaching the people who need it.

Likewise, the proposal to support both a Green (agricultural) and a Blue (water use) revolution in Africa is one step which could help lift millions out of poverty and dependency. (p34) But despite it being an essential part of a sustainable development strategy, the methods proposed above just do not tally with the expected results.

Perhaps one area where we can rely on the Tories to be ideologically and pragmatically aligned with the developing world, is the reduction of tariffs in the EU (p 30). They know it will get British people cheaper food (this is vital as they will be cutting state expenditure) and will increase the income of developing nations.

A Pernicious lie Takes Centre Stage

This report is a failure. There are more which could be teased out however, I hope that I have provided a more than adequate summary of the shortcomings of this report.

The lie which the Tories use to prop up their policies is that “Capitalism and development was Britain’s gift to the world.” It is ironic that this paper which is so quick to invoke history is so blind to the lessons that might have drawn from it.

Capitalism has led to huge increases in productivity, wealth and living standards. But it is not the free market that has led to countries becoming wealthier. Capitalism has only taken hold and produced this development when it is embedded within a state and society which directs it towards this task.

This is what the Tories have ignored when they focused on Gimmicks, the private sector and popularity contests in their hurriedly written Green Paper. One World Conservatism is a well intentioned but fatally flawed scheme.

Inheritance and Entrepreneurship Fail

Entrepreneurs are great. The fact that Dragon’s Den makes great TV and that Joseph Schumpeter thought they were great more or less confirms it.

The Other TaxPayers' Alliance, <em>our</e> TaxPayers' Alliance

The Other TaxPayers' Alliance, our TaxPayers' Alliance

Most in a society will always tend to favour a safe, pleasant life, if they can get it. So individuals who act to take risks and experiment are vital. By taking risks and attempting to innovate entrepreneurs add value to the world around them. They help create new technologies or organisational structures which change the way we live our lives. Ultimately they help unleash the storms of Creative Destruction which have helped create the tremendous wealth we see around us. Even as the price for this has been tremendous suffering. [1]

The TaxPayers’ Alliance have a new report which attempts to attack Inheritance tax from a new angle. They have proposed that our Inheritance Tax is a bar to entrepreneurship and job creation. In a recession, job creation is vital to recovery and so this tax and they argue this tax should be scrapped. This is a nonsense argument for a number of reasons.

Won’t someone please think of the Children

Firstly we will consider their argument that Inheritance Tax reduces the incentive to experiment, invest and save because it reduces the amount you can pass on to your children. This argument is dealt with well here and here. The TaxPayer’s Alliance claim that taxation on income, savings and inheritance lead to an effective tax rate of 90% and reduce the incentive to interest, start a business or innovate within an existing one.

Anyone who knows any entrepreneurs or the literature on entrepreneurship in general, will know that analysis of future inheritance tax rates rarely figure in the list of reasons businesses are started. You don’t consider your death before you have even lived.

Dropping bags of Money from Hearses

A second argument which has been proposed is that Inheritance is an effective method for providing low cost capital for business start ups. Forgive me for saying this of the TaxPayer’s Alliance (who I lampooned here and there only today) but there is a reasonable level of logic behind this argument.

It has been suggested by Dani Rodrik and James Galbraith and others that the market produces less entrepreneurs than is optimal. In other words, investment for entrepreneurs is undersupplied because, although the benefits are widespread, those who invest are not able to capitalise on all of this increase in wealth. Investors therefore do not provide as much capital as is best for society overall.

However there is no evidence or theory which suggests that allocating resources at random throughout the population, by virtue of birth alone, is a better way of stimulate entrepreneurship than a more redistributive system. The TaxPayers’ Alliance propose that creating a tiny minority of arbitrarily enriched individuals will boost entrepreneurship in the most efficient way. This is not ture.

It is, in fact, yet another reason to ask:  Who fund the TaxPayers’ Alliance? What are their links to the Tory Party? Why don’t they target corporate tax avoidance? Why are they so obsessed with Inheritance Tax when it affects only 6% of estates? And why don’t they stop pretending to represent you and I?

[1] Unfortunately, one factor which is always ignored by the pro-entrepreneur anti-redistribution right is that those employed by entrepreneurs are taking every bit as much a risk as the entrepreneur themselves. If a company fails then employees are in almost as precarious a position as the entrepreneur. Conversely, if a company is a success then they usually obtain at best a very minor share of the payout.