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Samizdata, derived from Samizdat /n. - a system of clandestine publication of banned literature in the USSR [Russ.,= self-publishing house]
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Competition has utterly transformed telecommunications after the state Post Office monopoly was ended. The same happened with deliveries when Amazon came along with an innovative service. Uber and Airbnb have each transformed their markets.
That is how competition works. It is Schumpeter’s creative destruction. Like evolution, it works by a selective death rate. It is not who owns the production, it is how easy it is for potential competitors to gain access to the market. Growth, productivity and innovation are driven by competition. Producers vie to satisfy the consumers, and those who do so survive, for a time, over those who do not.
One thing that competition ensures is change. It leads to a dynamic economy, just as its absence leads to a static one.
– Madsen Pirie
In all the calls I come across from the Left, it is not often to find examples of how rich people are attacked because if they are allowed to keep more of their wealth (even if is legitimately acquired and without coercion), the money disappears. Forever, kid. It’s lost.
Yes, you read that right. The money vanishes into a black hole. An argument against “trickle-down” economics (which is a term no serious free marketer I have heard of actually uses) is that nothing “trickles” anywhere. Apparently, there is this place, someone on Earth, where money is just sitting around, gathering dust, all on its unproductive exile, just waiting to be rescued by a benevolent State so it can be put back into work. It sounds like a first draft of the plot from the Count of Monte Cristo and the bit about the secret treasure that Edmond Dantes discovered and used to persecute his foes.
Why do I mention this bizarre idea? Because I read it defended and set out in a book, The Future Of Finance: The Rising Tide of Fintech Lending and the Platform Economy, by Francesco Filia and Daniele Guernini, (Whitefox Publishing, 2024). The book is a mostly informative account of how modern digital technology is changing finance. It talks about the role of blockchain; decentralised finance (DEFI) and other developments. It has lots to commend it if you want to understand these ideas, and the use cases in finance for technologies such as AI. But…some of the economic contentions in the book are bonkers.
For example, the authors claim that “we know” that wage growth and equality drive economic growth. (No clear evidicence is given for this contention.) They argue that wage growth continued for about 100 years until 1970, when it apparently stopped.
However, that begs the question of whether there was a lot of equality in that period. Was there a lot of equality, in relative, equality-of-outcome terms, during the “Gilded Age” of the Rockefellers, Carnegies and the rest? (There was not, but the rising tide of wealth nevertheless was considerable.) Was there much of that during the 1920s? I suspect that equality, brought about by steeply progressive tax rates (and they caused issues) did not really manifest itself greatly until after WW2, and even then, given exemptions and other forces, American society in some ways was less egalitarian than in Western Europe.
The authors argue that a labour shortage drove this wealth growth, but surely, absent the restrictive and destructive impact of labour union restrictive practices, it was superior capital investment, and hence superior productivity, that meant tight labour markets coexisted with rising real wages in certain countries. (West Germany rapidly overtook the UK, and it was a country where income tax rates kicked in at higher levels, unions were less obstructive, and there were fewer price controls under the Adenauer administrations than, say, the UK.) The authors make no reference whatsover in this part of the book to investment in capital. But it is total factor productivity (physical capital, human capital, etc) that makes the difference over time to income growth. The US labour market was, relatively, less unionised in the post-war period than the UK one, for example, but the standard of living in the US rose relatively faster, as Milton Friedman pointed out in his book, Free to Choose.
The idea that real incomes have somehow stagnated because wages have stopped rising ignores what might have caused that stagnation. I argue that they get causation back to front. If it is a shortage of labour that causes wages to rise, then surely, absent state intervention, capital will flow into machinery and the like to make up the shortfall, and such a country will also attract immigration (hopefully, of the sort that adds value via skills). In the US, as recounted by Alan Greenspan and Adrian Wooldridge in their masterful account of American capitalism, that’s exactly what happened. During the 19th century, even before the US Civil War, the US saw tremendous growth of labour-saving devices to handle this labour shortage issue. For instance, the McCormick reaper-binder, Singer sewing machine, and more. Light bulbs, early air conditioning…you name it, have also increased returns on human labour because light bulbs allow 24-hour shift work; AC enables places that are otherwise stinking hot to be more economically viable, and so on. And this capital equipment made US workers more productive and increased their real income, other things being equal.
But it is on page 64 that Filia and Guernini ramp up their error wholesale and put forward what I call the “consumption theory of wealth”, which puts spending, rather than investment, innovation and creativity, as the cause of why we are better off: I am going to quote a passage in full:
“When employees and ordinary people (as opposed to odd people, ed?) have more money in their pocket, they spend it. The go out and spend money in restaurants and bars or entertainment venues, they buy new cars or modernise their homes. As a result, that money goes into the real economy to create demand for goods and services and helps businesses prosper and the economy to grow. But when already wealthy people and business owners keep more money via tax cuts, that money is squirrelled away. It’s dumped in offshore trust funds to minimise tax till further or it’s used in stock buybacks. It never reaches the real economy. All it does is to create even greater inequality.” (My emphasis in bold.)
So, if a person saves any money or “squirrels it away”, it is potentially gone. The idea that savings are important, and a source of investment, is totally absent in this account As several on this blog such as Paul Marks regularly point out, a problem in many modern economies is that when investment is financed by central banks’ printing of money, and not real savings made possible by foregoing consumption, it bids up the factors of production, and that without injecting yet more funny money to keep the party going, there’s a crash. The importance of savings cannot be overstated in making sustainable growth possible. The authors claim, with no real evidence, that if money is salted away in a low/no-tax jurisdiction such as the Cayman Islands, Mauritius, Jersey or Dubai, that this money disappears. It’s gone. But that’s plainly rubbish: that money is invested. Why else put it offshore? Even if that money is put into government bonds, that is lent to someone to finance something.
It is true those who use such jurisdictions hope to reduce their overall tax, and in many cases, they defer tax burdens rather that remove them. After all, a person may still want to repatriate their wealth eventually, for whatever reason, and they pay tax on it when that happens. They could, I suppose, give it to charity – but then that money will also go into the “real economy”.
But the idea that money that is not taxed goes out of existence is beyond bizarre. I don’t even know if Thomas Piketty, the French academic who called for progressive taxes and assaults on wealth, went so far into arguing that rich people’s money just vanishes from “real economy”.
Anyway, apart from page 63 and 64, it is a decent book.
UK government tech policy must become libertarian, writes Preston Byrne.
The government wants to boss tech companies around, but it might not get its way any more, because the market is small, tech companies are mobile, and:
…the permanent bureaucracy in the United States which might otherwise have helped the UK apply informal pressure on Americans who dared to disobey its decryption and censorship edicts – none of which, it bears mentioning, are enforceable against an American who refuses them and is happy to avoid setting foot in British territory – is gone.
We should adapt.
If the UK chooses to be the worst place for an AI company, or a social media company, or a digital asset company to incorporate and do business, it will find that it has very few such companies. Regardless of your opinions on how British society should be structured, the NHS, immigration, or the appropriate quantum of social welfare, if you don’t have high tech employers generating revenues and paying taxes, social programs become very difficult to pay for.
Will we get a government capable of making this realisation? Or will we continue to self-destruct?
“Mr. Trump sometimes sounds as if the U.S. shouldn’t import anything at all, that America can be a perfectly closed economy making everything at home. This is called autarky, and it isn’t the world we live in, or one that we should want to live in, as Mr. Trump may soon find out.”
– Wall Street Journal (£)
I think this post is going to annoy Trump defenders, and of course he’s done a few things (shutting DEI down in schools and so on) that I applaud. But this is not the time for whataboutery when considering how terrible Biden was and Harris would have been, as they were and would have been. Those talking points have their place, but now Mr Trump is in office. He’s the President for the next four years.
So there’s no way to finesse this. Tariffs are a form of self-harm, and the reasons given in this particular case shows they are seen as clubs to hit countries with in order to make them change this or that policy. It creates uncertainty, hits inward investment and domestic activity. Domestic and global economic growth will be reduced from where it might have been. Tariffs are taxes, however hard one might try and spin that fact away. Since Adam Smith pointed this all out 250-plus years ago, the damaging impact of tariffs have been widely understood.
Tariffs, particularly given how they been justified and enacted, are a grave mistake by Mr Trump. Trying to claim that the US hit economic heights when tariffs existed in the late 19th century is another case of correlation and causation getting all blurred. The US in the post-Civil War era was a low-tax place: no federal income tax, no Fed, hardly much of a Welfare State as we’d call it, immense inflow of immigrants from places such as Russia, Germany, Italy, Sweden, etc. (Because there was little state welfare, such folk had to work their backsides off, and they did.) Here is an essay that in my view debunks the idea that the post-Civil War tariffs were a good idea.
There are facts that might be a puzzle, but not when you consider that Mr Trump loves tariffs even because they are a weapon. That’s what gets him out of bed in the morning, sometimes for good causes, often not. But the economic rationale is even worse when you consider that American energy costs, thanks to all that fracking he’s in favour of (a plus for him, in my view) means American manufacturing in some ways has a big competitive advantage on Europe, which self-harms because of Net Zero, red tape and high taxation.
Here is an essay I came across via social media and I think it is worth a read:
“I’m going to get a little wonky and write about Donald Trump and negotiations. For those who don’t know, I’m an adjunct professor at Indiana University – Robert H. McKinney School of Law and I teach negotiations. Okay, here goes.
Trump, as most of us know, is the credited author of “The Art of the Deal,” a book that was actually ghost written by a man named Tony Schwartz, who was given access to Trump and wrote based upon his observations. If you’ve read The Art of the Deal, or if you’ve followed Trump lately, you’ll know, even if you didn’t know the label, that he sees all dealmaking as what we call “distributive bargaining.”
Distributive bargaining always has a winner and a loser. It happens when there is a fixed quantity of something and two sides are fighting over how it gets distributed. Think of it as a pie and you’re fighting over who gets how many pieces. In Trump’s world, the bargaining was for a building, or for construction work, or subcontractors. He perceives a successful bargain as one in which there is a winner and a loser, so if he pays less than the seller wants, he wins. The more he saves the more he wins.
The other type of bargaining is called integrative bargaining. In integrative bargaining the two sides don’t have a complete conflict of interest, and it is possible to reach mutually beneficial agreements. Think of it, not a single pie to be divided by two hungry people, but as a baker and a caterer negotiating over how many pies will be baked at what prices, and the nature of their ongoing relationship after this one gig is over.
The problem with Trump is that he sees only distributive bargaining in an international world that requires integrative bargaining. He can raise tariffs, but so can other countries. He can’t demand they not respond. There is no defined end to the negotiation and there is no simple winner and loser. There are always more pies to be baked. Further, negotiations aren’t binary.
China’s choices aren’t (a) buy soybeans from US farmers, or (b) don’t buy soybeans. They can also (c) buy soybeans from Russia, or Argentina, or Brazil, or Canada, etc. That completely strips the distributive bargainer of his power to win or lose, to control the negotiation.
One of the risks of distributive bargaining is bad will. In a one-time distributive bargain, e.g. negotiating with the cabinet maker in your casino about whether you’re going to pay his whole bill or demand a discount, you don’t have to worry about your ongoing credibility or the next deal. If you do that to the cabinet maker, you can bet he won’t agree to do the cabinets in your next casino, and you’re going to have to find another cabinet maker.
There isn’t another Canada.
So when you approach international negotiation, in a world as complex as ours, with integrated economies and multiple buyers and sellers, you simply must approach them through integrative bargaining. If you attempt distributive bargaining, success is impossible. And we see that already.
Trump has raised tariffs on China. China responded, in addition to raising tariffs on US goods, by dropping all its soybean orders from the US and buying them from Russia. The effect is not only to cause tremendous harm to US farmers, but also to increase Russian revenue, making Russia less susceptible to sanctions and boycotts, increasing its economic and political power in the world, and reducing ours. Trump saw steel and aluminum and thought it would be an easy win, BECAUSE HE SAW ONLY STEEL AND ALUMINUM – HE SEES EVERY NEGOTIATION AS DISTRIBUTIVE. China saw it as integrative, and integrated Russia and its soybean purchase orders into a far more complex negotiation ecosystem.
Trump has the same weakness politically. For every winner there must be a loser. And that’s just not how politics works, not over the long run.
For people who study negotiations, this is incredibly basic stuff, negotiations 101, definitions you learn before you even start talking about styles and tactics. And here’s another huge problem for us.
Trump is utterly convinced that his experience in a closely held real estate company has prepared him to run a nation, and therefore he rejects the advice of people who spent entire careers studying the nuances of international negotiations and diplomacy. But the leaders on the other side of the table have not eschewed expertise, they have embraced it. And that means they look at Trump and, given his very limited tool chest and his blindly distributive understanding of negotiation, they know exactly what he is going to do and exactly how to respond to it.
From a professional negotiation point of view, Trump isn’t even bringing checkers to a chess match. He’s bringing a quarter that he insists of flipping for heads or tails, while everybody else is studying the chess board to decide whether its better to open with Najdorf or Grünfeld.”
— David Honig
So there you have it. A bad idea having a damaging impact. Is Mr Trump playing 4-D chess with us all, as his defenders and explainers (including those who consider themselves pro-capitalism seem to be doing in some places that I see on social media), or is this in fact a big error that will eventually hurt America and the freer bits of the world? My worry is that history tells us that, with exceptions, tariff clashes tend to go wrong, lead to slower growth, and even nastier conflicts. It may be that Mr Trump is cleverer than we can appreciate, but I am sceptical.
Not a good start to his time in office. May wiser heads prevail, as they say.
Update: Here is a good article today (4 January) from Daniel Freeman at CapX on how, in his view, Mr Trump has misread the causes of America’s ascent as a business powerhouse.
- Trade makes everyone richer.
- Tariffs make the country applying them poorer.
- The fact that the US government is doing something stupid does not mean you have to join them.
The British economy is lying flat on its back in an alleyway with wee dribbling down its leg.
– Rod Liddle (£)
In the Telegraph’s business section, Matthew Lynn writes about why Santander is thinking of leaving the UK:
Santander’s departure would certainly come as a crushing blow to Rachel Reeves’s ambition to turn the UK into the fastest growing economy in the G7. It emerged during the week that the Spanish bank, a familiar presence in the UK since it acquired Abbey National back in 2004, was considering getting out of the country.
It is not hard to understand why. The returns are pitiful, the regulations are a hassle, costs are rising all the time, and even if profitability does improve, there’s a risk the Government will accuse it of “profiteering” and confiscate whatever money it does manage to make with an extra windfall tax.
For a global bank such as Santander, there are better opportunities elsewhere. It has 76m customers already in South America, for example, and that would seem a better place to deploy its capital, not to mention management time, than the UK.
True, Botin [Santander’s executive chairman] moved quickly to dismiss the reports, telling a panel in Davos how much she loved the UK, and how the bank was committed to the British market for the long term. But then again, she would say that. Nothing will be confirmed until the day a final decision is made.
And yet the simple truth is this. It is a shocking indicator of how poor the prospects are in the UK market that a major corporation such as Santander is even thinking about leaving.
For the past decade or more, “neoliberalism” has been under attack. For example, a few years ago I read a book by the journalist Tom Bergin (Reuters), who argued, with a lot of data and references, that cutting marginal tax rates will not boost an economy. He poured cold water on the ideas of US economist Arthur Laffer, the “father of supply-side economics”, and denied that changes to tax rates make much difference to incentives to work, or so on. (Bergin’s analysis is politely and beautifully skewered, here, by Kristian Niemietz of the IEA. See also this new book by Tim Worstall.)
Of course, it is true that a 1% cut or rise to, say, capital gains tax or other tax will not produce an instant or commensurate change in economic behaviour. The elasticity of supply/demand relationships for labour, capital and land are variable. Labour is not homogenous, as Tyler Cowen notes (this also is a killer for the Marxian labour theory of value); there are frictional costs and sources of inertia that mean an economy cannot be turned on or off like a switch, contrary to the delusions of central planners or, indeed, naive advocates of free markets. But there IS an effect over time.
Changes to incentives compound: if you make it harder to hire and fire, and make it more expensive, irritating and difficult to achieve A or B, then less of what you want will get done. Hiking taxes on employment will reduce labour employed and encourage a substitution of capital for labour, just as taxes on petrol or food will causes changes to consumption, or force those who buy essentials to buy fewer so-called luxuries, or adjust in various other ways, not all of them predictable.
The UK government spending total, as a share of GDP, at the highest level since the late 1940s. And following the 31 Oct. 2024 budget, unemployment is rising. We also have about 1 in 5 working-age adults out of the workforce. Like a rusty naval frigate, large elements of the UK public have been decommissioned, fit only for a salvage yard, so it appears.
Tax incentives aren’t the only thing that count, but they are important. The UK has moved decisively down the wrong side of the Laffer Curve, and the results are clear.
(For the convoluted way see here.)
All that is needed to end Britain’s debt crisis is for Nigel Farage to say this:
In the event of a Reform government being formed we will not honour any debt issued by the current government from this date forward.
This will have the following effects:
- No one will lend to the Labour government.
- The Labour government will have to live within its means
- The Labour government will have to make dramatic cuts for which they may or may not get the blame.
- If and when Reform come to power they will not have to worry about the debt crisis.
Holman Jenkins Jnr, an opinion columnist in the Wall Street Journal, reflects on the mix of bad faith, moral cant and low protectionist nonsense that underpins so much Western policy on electric vehicles:
Subsidizing green-energy consumption is simply to subsidize energy consumption, including fossil energy. EVs are “strategic” only for China, to reduce its reliance on imported oil in anticipation of military conflict with the U.S. For the rest of the world, including the U.S., electric cars are a consumer technology, albeit a fast-emerging and promising one. Sensibly, they’re also a technology that should have been left to consumers and carmakers to adapt and develop without distorting handouts and mandates.
The result is finally in view: a colossal self-destruction of the Western auto industry, with Germany’s at the forefront. Volkswagen is in a panic about Chinese competition to the money-losing EVs that Berlin forces the company to sell. Germany’s export-led economy is in free fall. Its bellwether auto giant, VW, is pursuing its first-ever domestic factory closures and layoffs.
Likewise, Ford CEO Jim Farley sees his company’s survival in the U.S. threatened by Chinese EVs given the tens of thousands of dollars Ford already loses on each of its government-mandated electric vehicles. The author of Germany’s auto mess, Angela Merkel, is now reviled as an unprincipled bandwagon grabber. Don’t kid yourself. The same reputational fate is coming for Messrs. Obama and Biden. Mr. Biden’s EV protectionism is America’s admission of defeat. The U.S. went from “Americans must buy EVs to save the planet” to “Americans must be prevented from buying cheap, high-quality Chinese EVs to preserve a government-created domestic boondoggle.”
Jenkins also refers to the concept of “permission structures” and the malign legacy of the Obama administration. (He links to this article at The Tablet.) I like that term – it coheres with concerns about how an “administrative state” has evolved over the decades to impose policy outcomes at a remove from democratic oversight or the sharp and corrective blast of free market competition. Worth a read.
The UK’s Institute of Economic Affairs, the think thank, has recently opined about “mission-directed governance”, which is a sort of automated paternalism (I discussed this offline with Paul Marks of this parish). The IEA piece links to an interesting paper about East Asia and forms of authortarianism.
Update: From Guido Fawkes today:
The UK’s electricity grid came worryingly close to blackouts yesterday – just 580 MW shy of the lights going out – in what independent energy consultant Kathryn Porter described as the “tightest day since 2011 or before”. National Grid ESO had to issue its first Electricity Market Notice of the winter, along with a third Capacity Market Notice, though the latter was quickly binned. No surprise that cold weather means more heating and energy…
A sharp drop in wind output combined with limited electricity imports from Europe left the grid scrambling to keep the lights on. Yet Red Ed is still pushing to fast-track planning permission for a wave of new wind farms — despite the inconvenient truth that these turbines have to be switched off when there’s too much wind and the grid can’t handle it. Meanwhile Labour is ploughing ahead with their plan to make wind and solar the backbone of our energy system to hit 95% renewable energy by 2030.
TIME Magazine has made Donald J Trump, re-elected to the White House, as its Person of the Year. These POTY titles don’t necessarily mean the publication thinks that X or Y are good or praiseworthy; what counts is that they are significant in some overwhelming way. Trump fits the bill perfectly. Without a doubt, his election in November will shake things up, not always for the better. But shake them up they surely will.
If I were to choose an alternative POTY from the ranks of politics, my choice would be Javier Milei, president of Argentina. He’s been in the job for just over a year. On his watch, inflation in a high-inflation country has sunk to low single-digits. He’s deregulated the rental market and prompted a flood of new rental housing, cutting rents as a result. He brandished a chainsaw as his symbol of what he wanted to do to government. Thousands of public workers have been laid off; a number of regulations have been scrapped. The price of Argentinian debt, both public and private, has risen, and the yields have fallen. This represents a massive vote of confidence in the creditworthiness of a nation renowned for its fecklessness for decades. This will attract capital and investment, helping the country pull out of recession and hopefully, boost living standards in a sustainable way. It needs to happen: there is a lot of poverty in that country.
As a result of some of this free market medicine, the Argentinian peso has risen in value: The peso-dollar has surged 22 per cent a year before. So much so, in fact, that Keynesian columnist Ambrose Evans Pritchard, who often predicts the case for reflating this or that country with lots of cheap money, has denounced this situation. For those who have seen Latin American currencies reduced to dogfood (apart from maybe in Chile) in recent decades, no higher praise for Milei can be higher than catching the glare of a columnist who is so often wrong in his predictions.
So there you are: My choice for Man of the Year would be a chainsaw-wielding fan of Austrian economics in Buenos Aires, an actual classical liberal in a world gone increasingly collectivist.
Update: I fixed the way of expressing the foreign exchange rate; apologies. The point stands: the peso is worth a lot more today than a year ago.
Another update: Does a stronger Argentina make it more likely the government might try and re-take the Falklands? Maybe; one risk factor now in play is that under a socialist and self-hating PM, Sir Keir Starmer (who has an inferiority complex about Mrs Thatcher), the Argentinian public might, with some reason, think there is a chance the UK could be persuaded to transfer control. There is a lot of oil down in the South Atlantic; Milei does not, as far as I know, give a damn about Net Zero and might eye the area as a key resource. But he is also not a fool and might, with justice, think that a row with the UK is not worth the trouble, particularly if Argentina looks to rebuild trade relationships, particularly in a world of rising tariff barriers.
“Argentina’s Javier Milei has made a horrible mistake”, says Ambrose Evans-Pritchard in the Telegraph. The article can also be read here.
A year after his landslide victory, Milei is still not letting market forces set the peso exchange rate, and it now looks as if his crawling dollar peg will continue into the middle of next year. He has jammed the process of macroeconomic cleansing.
Argentina is now among the most expensive countries in the world, close to Norway on the Big Mac index. It costs almost twice as much to buy a hamburger in Buenos Aires as it does in Tokyo, even though the pampas are full of cattle, while the rice terraces of Japan are not.
The peso is as overvalued today as it has ever been in Argentine history, or very close. This has suppressed inflation temporarily to a monthly rate of 2.4pc – so has economic contraction – but has in the process strangled the traded sectors of the textile, shoe and toy industries. Car parts, electronics, metallurgy, and heavy manufacturing are the next dominoes.
[…]
He should have taken his chainsaw to currency and capital controls on his first day in office. He is now trapped. Either he claws back lost competitiveness by means of deflationary wage cuts for year after year – nigh impossible in any democracy – or he lets the peso find its level and unleashes a fresh inflation, shattering his reputation at home and abroad as the Friedmanite purist who tamed prices.
A commenter called Krassi Stoyanova says, “Well, Ambrose, having listened to Milei and his plans for the Argentine economy, I have far more confidence in him than I do you.”
I want to agree. But, truth to tell, I do not have a good understanding of this branch of economics. Some of you guys do. What do you think?
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Who Are We? The Samizdata people are a bunch of sinister and heavily armed globalist illuminati who seek to infect the entire world with the values of personal liberty and several property. Amongst our many crimes is a sense of humour and the intermittent use of British spelling.
We are also a varied group made up of social individualists, classical liberals, whigs, libertarians, extropians, futurists, ‘Porcupines’, Karl Popper fetishists, recovering neo-conservatives, crazed Ayn Rand worshipers, over-caffeinated Virginia Postrel devotees, witty Frédéric Bastiat wannabes, cypherpunks, minarchists, kritarchists and wild-eyed anarcho-capitalists from Britain, North America, Australia and Europe.
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