The hills are alive with the sound of praxeology

When I told a friend of mine three years ago that I was interested in Austrian economics she asked “Isn’t that just selling cuckoo clocks and lederhosen?” True, she wasn’t the brightest, but Austrian economics was fringe stuff. An influential school originating in Vienna in the late nineteenth and early twentieth century it was largely buried under the Keynesian avalanche of the 1930’s. That’s changing.

The Austrian school survived in America where émigré economists escaping the turmoil of 1930s Europe inspired a new generation. Perennial presidential candidate Ron Paul is an advocate of Austrian economics and the Ludwig von Mises Institute dominates the field.

But the economic crisis has seen the school gain new popularity in Britain. Radio 4 broadcast one show, “Yo Hayek!“, which examined the ideas of one of the leading Austrian school economists, and a debate between Keynesians and “Hayekians” (the Austrians won). The Economist, bastion of conventional economics, recently carried a complimentary piece. The Institute of Economic Affairs has produced or reproduced a number of works in and on the Austrian school and Eamonn Butler has written an excellent short introduction for the Adam Smith Institute. In The Cobden Centre the UK now has its own Austrian-minded think tank and in May last year the first (to my knowledge) Austrian MP, Steve Baker, was elected.

Much of this newfound popularity is down to the ability of Austrian Business Cycle Theory (ABCT) to explain the current mess. The Marxist theory of economic cycles with its declining rate of profit is clearly useless as businesses were making record profits on the eve of the bust. There was no shock to Total Factor Productivity which a Real Business Cycle explanation would require. Keynesian ‘animal spirits’ are also unsatisfactory. The liquidation of certain enterprises was a totally rational response to the Federal Reserve raising interest rates between 2004 and 2007.ABCT, by contrast, fits the facts rather well. Briefly put, ABCT says that when a credit expansion occurs, say, as a result of lowering interest rates in response to the bursting of the dot com bubble in 2000, ever more marginal investment projects begin to look viable. Entrepreneurs borrow to finance them or businesses and individuals borrow for current consumption.But eventually, even in a world with dodgy inflation figures and, thanks to the vast productive capacity of countries like China, prices which should be falling, the inflation caused by this credit expansion starts to show even in the central bank’s figures as when inflation went above 4 per cent in the US in 2006. Interest rates are raised; the Fed Funds rate went above 5 per cent the same year. Those marginal investments that looked viable at 1 per cent are now scuppered.

This is the recession. Over the previous boom period, capital has been allocated to investments, more properly called malinvestments, which have no hope of ever producing a return above their borrowing costs unless interest rates are kept low and credit is kept flowing. The recession is the liquidation of these unviable credit positions and it will not be over until this process is complete.

Even though this grim diagnosis seems to be coming true daily the reputation of Austrian economics as a council of despair remains a potent repellent. But truth is truth even when it is unpleasant.

And this reputation is undeserved. Seeing the problem as one of fluctuations of credit Austrians focus on the sources of that credit, banks and central banks, and several lively schools of thought, including Free Bankers and hard money advocates, draw their ideas for reforming the financial system from Austrian thinking. That Austrians zero in on the causes of the slump is hardly a reason to ignore them.

But there is more to Austrian economics than ABCT. Indeed, it is a fairly comprehensive critique of much of modern mainstream economics.

Austrians reject the notion that there is something called “the economy” which can be stimulated or cooled at will. Instead they see economics as rooted in the behaviour of individuals. This makes Austrians generally rather dismissive of the aggregate values which make up macroeconomics and the obscure quantitative mathematics which ties them together.

For Austrians the economy isn’t a thing but a process, one of discovery and coordination of dispersed knowledge. In its rejection of equilibriums and embrace of information asymmetries Austrian economics pre-empts many of the criticisms of neoclassical economics.

Austrian economics is a rich field of the study of human beings, their actions and interactions, what Ludwig von Mises called praxeology. Because it is based on the study of individuals, the only agents in economics, its model has produced a robust interpretation of recent events. It also indicates the way out. Painful, yes, but we are learning that that’s unavoidable. The Austrian school’s time has come.

This article originally appeared at ConservativeHome

A public sector strike over pensions will neither elicit public sympathy nor especially inconvenience us

Hands off our wages

The news that the Deep Thought computer would be programmed to unravel the great questions of existence was bad news for the philosophers in Terry Pratchett’s Douglas Adams’ classic Hitchhiker’s Guide to the Galaxy. “We demand rigidly defined areas of doubt and uncertainty” shouts one, another warning that “You’ll have a national Philosopher’s strike on your hands!” Deep Thought pauses then asks: “And who will that inconvenience?”

You might have felt a little like Deep Thought this week reading the various warnings of mass public action emanating from the public sector unions. “It will not be one day of action”, warned Dave Prentis of Unison, “it will be long-term industrial action throughout our public services to prevent destruction of our pension schemes”

A period of prolonged and extensive strikes could be bad news for a government battling to get runaway borrowing under control. So far the muted support for the coalition’s fiscal programme outweighs the noisy opposition. But, given that with high inflation and interest rate rises on the way we probably haven’t seen the end of the downturn yet, this could change.

But you can never underestimate the stupidity of trade unions.

If they were choosing to strike in opposition to the coalition’s fiscal programme they might garner some wider support. But they aren’t. They are striking over pensions. They are striking in defence of their right to retire earlier than their private sector counterparts on pensions higher than anything on offer to their private sector counterparts – and all paid for by higher taxes on their recession ravaged private sector counterparts. Almost every story about the threatened industrial action has been illustrated with pictures of banners reading ‘Hands off my pension’. Taxpayers should say ‘Hands off my wages’. The idea that unions will attract much support on this battlefield can generously be described as fanciful.Not only is the union leaders’ rhetoric divorced from morality, it is also divorced from reality. June 30th is being hyped up by some as a General Strike intended to bring the country grinding to a halt, taking its inspiration from the 1926 General Strike.That Britain came to a standstill in 1926 is not in doubt, but back then the strike included railwaymen, iron and steel workers, dockers and transport workers. Many of those jobs, in as much as they are performed in the UK any longer, are no longer heavily unionised. This is part of a more general trend of deunionisation which has seen the Trade Union Congress lose half of the 12 million members it had in 1980.And the makeup of the general strikers of 1926 indicates another force telling against today’s unions; their work is simply far less vital to the day to day working of the British economy than it used to be.

The public sector contains workers, such as health workers and teachers, who undoubtedly do important work. But the last Labour government created 849,000 public sector jobs and it is doubtful just how many of these do anything really useful or cover their opportunity cost. In 2006, 1.2 million public sector workers staged a one day strike over pensions in what was described as the largest industrial action in the UK since the General Strike. Nobody noticed. Indeed, strikes could backfire spectacularly on the likes of Unison. If the economy continues to rumble along regardless even at its current feeble rate it could show just how easily the UK could get along without a lot of these workers. With private sector job creation roaring ahead David Cameron might well whisper ‘Bring it on’.

So next time you hear someone like Prentis or the even more ridiculous Mark Serwotka, who rants like some modern day Mick McGahey while leading the Public and Commercial Services Union, warning of industrial chaos, do what Deep Thought did: pause, then ask “And who will that inconvenience?”

This article originally appeared at ConservativeHome

Why I’m proud to call myself one of Thatcher’s children

When Maggie ruled the world

That “Thatcher’s children” is still a term of abuse shows how Margaret Thatcher and the decade she dominated are still relevant. Conjured up by Eds Miliband and Izzard ‘Thatcher’ is shorthand for greed and destructive selfishness.

But there’s a problem. If it was all so bad and she was so awful how did she win every one of the three elections she fought with large majorities? How did she win such impressive numbers of working class votes? Who on earth voted for her?

I didn’t, I was too young. I was born in 1980 in Sheffield in the People’s Republic of South Yorkshire, so called because its far left Labour council wasted its time on silly stunts like flying the red flag over the city hall on the day of Charles and Diana’s wedding while this once great industrial centre withered. My father, who worked in the steel works, was the son of an Irish immigrant and had grown up in a single parent family in the 1950’s. My mother’s father had never worked and as a socialist student and trade unionist in the early 1970’s she had been on exchange trips to Eastern Europe. Both of them voted for Margaret Thatcher.

Why?

My dad put it this way:

“When I was growing up in Sheffield in the sixties you had, on the one hand, the patrician Tories like Harold Macmillan, saying ‘Stay where you are lad, know your place, we know what’s best’. On the other you had the socialists like Harold Wilson saying ‘Stay where you are lad, the forces of capitalism are out to get you and you need us to protect you’”.

Either way the message was the same; stay where you are.

Maggie changed all this. She believed, and communicated the belief, that people could, through hard work and a willingness to take risks, improve their situation, that they were masters of their own fate. What’s more, there was no shame in wanting to do better for yourself and your family. By conquering double digit inflation, which had ravaged middle class savings and working class earnings in the 1970’s, and cutting taxes, allowing workers to keep more of the money they earned, she created the opportunity for individuals and their families to get on.

My family seized this opportunity. By the mid 1980’s my parents could see the grim prospects for Sheffield and, to borrow a phrase popular at the time, the three of us got on our bike and went looking for work. We ended up on the northern edge of London where we ran headlong into inner Londoner’s moving the other way.

These people who I grew up among had once lived in council properties and been tenants of the government. Then Thatcher passed the Housing Act of 1980 which allowed them to buy their homes at a discount reflecting the rent paid previously. Two million people in eight years took advantage of the scheme and, for the first time, were owners with their own capital and not dependents on government handouts. These were the C2’s, the skilled working class voters Labour had taken for granted, who grasped the Thatcherite ethos of opportunity and responsibility.

Individualism didn’t mean isolation.  A lively group was formed by residents of my estate called HART (Hundred Acre Residential Team) who hassled the council over bus shelters and bins and organised a big community barbeque on the green by my house every summer. The ‘Big Society’ hadn’t been coined but we already had it. Eating hot dogs, listening to Chas and Dave, and moaning about Spurs with their neighbours, that is how I remember these people.

This might all sound a little ‘I’m alright Jack’. This was the decade of 3 million unemployed and areas like Sheffield devastated when Thatcher switched off the taxpayer funded life support systems which had kept zombie industries like coal and steel going. Where an ever increasing share of Britain’s ever decreasing wealth had been sunk in an unproductive public sector, Thatcher liberated it for the wealth generating private sector. That, not austerity, is the relevance for the UK today.

And working people benefitted. As the median income rose by 25%, foreign holidays doubled. The year before Thatcher cut taxes my family’s annual holiday was a day out in Castleton. After nine years of Thatcherism my dad could take me to France for a week. As state owned companies were sold off the number of shareholders increased by 266%. Thatcher did more to give workers ownership of the means of production than any left wing government.

The changes wrought by Thatcherism upset those “socialists” and “patrician Tories” my dad spoke of. For the socialists theatre luvvie Jonathan Miller (St John’s College, Oxford) decried Thatcherism as the “anarchism of the lower middle classes”. For the Tories Macmillan is said to have bemoaned a Thatcher cabinet that contained “more Estonians than Etonians”, a reference to upwardly mobile Jews like Keith Joseph, Nigel Lawson and Leon Brittan who were so prominent in it. In 1990, after 15 years of chafing under the rule of a greengrocer’s daughter, the patrician Tories finally scraped together the backbone to do what the left had proved incapable of; they brought her down.

Left behind were the people who refused to know their place, who believed, as the popular song went, that the only way was up. On TV they were celebrated as Terry McCann or Del Boy or sneered at as ‘Loadsamoney’ by a privately educated left wing comedian. The people who voted for the ‘evil’ Thatcher in large numbers were not the well heeled likes of David Cameron or George Osborne who prompt cries of ‘Thatcher!’ now. The voters who really made it possible were the hard working, friendly, risk taking, optimistic working class men and women I grew up with who Margaret Thatcher helped to become middle class. These were Thatcher’s children.

This article originally appeared at ConservativeHome

Ed Balls is the Peter Ridsdale of economics

“Mummy, the scary man is trying to take control of our economy again!”

You would have to be mad to run a football club the way Leeds United were run in the late 1990s and early 2000s.

Between 1995 and 2000 they spent £48 million more on players than they brought in. For a short time this brought success. The club secured Premiership finishes of 4th, 3rd and 4th between 1998 and 2001, earning the money-spinning bounty of Champions League football. By New Year’s Day 2002 Leeds United were top of the League.

Five days later came the exogenous event. Leeds were knocked out of the Cup, their form slumped, and at the end of the season they were pipped to the fourth Champions League spot. Without the European money Leeds couldn’t pay the interest on their loans and began offloading players for fractions of what they had paid. By 2004 they were relegated, owing £100 million. In 2007 they were relegated again to the backwaters of the third division where they languished until last year.

Leeds had, according to chairman Peter Ridsdale, “lived the dream”. Ridsdale’s successor sounding like George Osborne, said he had “inherited the nightmare”

You would have to be even madder to run an economy like that. Nevertheless, that is exactly what the last Labour government did, a government in which Ed Balls, grudgingly appointed as Shadow Chancellor, played such a prominent part.

In 1997 Labour inherited an economy which had been growing for five years and would continue to grow for another eleven. Money flowed into the Treasury’s coffers, income tax receipts rose from £70 billion per year in 1997 to £130 billion in 2005.But Brown, with Balls as his chief economic advisor, managed to spend even more than this. Total Managed Expenditure surged from £407.8 billion (37% of GDP) in 1999-2000 to £550 billion (42% of GDP) in 2006-2007. With government spending a growing share of a growing economy, Brown and Balls ran up debt in the good years. But they didn’t need to worry, the pair loudly and regularly claimed to have ended “boom and bust”.

In 2007 came the exogenous event. Instead of the boot of Scott Young, it was sub prime mortgages in America. The effect was the same. They huffed and with no need of further puffing the whole house of cards came crashing down. For the British economy the third division beckoned.

Everyone can make mistakes. The ‘This Time is Different’ syndrome identified by economists Carmen Reinhart and Kenneth Rogoff has led to some of the biggest howlers in financial history. It can, to an extent, explain why it might be possible for a football club chairman to convince himself that his team will never finish lower than fourth again or for a Treasury adviser like Ed Balls to think that there really never will be another downturn.

But what is most staggering is that Ed Balls still appears to use ‘The General Theory of Leeds United’ as his economic textbook. This is the same textbook that saw Britain head into a recession on the back of six years of borrowing – but Balls doesn’t see anything wrong with this. When he was running for the Labour leadership, Balls said “there was no significant structural deficit in the public finances until the collapse of tax revenues from the City of London in 2008”. This echoed what Ridsdale said in the wake of Leeds’ meltdown: “We gambled, but it did not seem like gambling when we finished in the top five five years running. We thought we would be self-financing. The safety net, selling players, fell away because the transfer market collapsed”.

Both reckless gamblers, Balls and Ridsdale, saw nothing wrong with the strategy, it was the exogenous event that was to blame, the pesky Black Swan that pooped on their windscreen.

In both cases this amounts to saying that everything was fine as long as everything was fine. Of course, it doesn’t help much when everything is not fine, but that’s not something you have to worry about when there will be no return to boom and bust.

When he ran for the Labour leadership and indeed now, Balls’ answer to the debt crisis he helped create is to keep borrowing. Indeed, the economic philosophy the Labour party now espouses can be summed up as: when the economy is growing. borrow; when it slips into recession, borrow; and when it’s recovering, borrow.

This is why George Osborne should not be too worried as he sits in the other dugout. His opponent is not a follower of the economic doctrines of Adam Smith or even John Maynard Keynes but of Peter Ridsdale. The public will not be impressed with a Shadow Chancellor who would have them playing Yeovil.

This article originally appeared at ConservativeHome

How Ireland’s 88-year experiment in self-government came to an end

A Province Once Again?

On December 17th 1922 the Union flag was lowered over the Royal Barracks in Dublin, marking the end of British rule in southern Ireland. To a large extent (quite how large was the cause of the brutal civil war) this moment marked the achievement of the dream of Patrick Pearse who, on Easter Monday 1916, had announced, “We ordain that the elected Representatives of the Irish people alone have power to make laws binding on the people of Ireland”.

On November 22nd 2010, the 88-year experiment in Irish self-government came to an end. Worried that Ireland’s economic woes could infect them, its partners in the Euro, accompanied by representatives from the IMF, descended on Dublin to demand that the Fianna Fail government accept a loan. After days of brow beating and arm twisting that would have put Lloyd George and Churchill to shame, the Irish acquiesced.

The Irish experiment in self government ended in regret. In their anger, the Irish cursed everything that had happened to their economy in the previous twenty years, anything to do with the ‘Celtic Tiger’ was now reviled. This risked throwing a decent fiscal baby out with rancid monetary bath water. The famously low corporation tax of 12.5% introduced in the 1990s attracted business to Ireland; by 2001, more than 13% of all Foreign Direct Investment into the European Union went to Ireland. Between the late 1980s and Ireland’s entry into the Euro, this helped to add 500,000 jobs to the Irish economy’s existing 1.3 million. This led to a doubling of Irish GDP per capita. Then the Euro came along.

The experiment ended in excess. When they entered the Euro in 1999, the Irish inherited the low interest rates of the Euro area’s dominant economy, Germany. Able to borrow cheap, government and individuals alike went on a spending binge. Between 2000 and 2003 public spending rose by 48%. The boxwallahs from Brussels and Washington arrived at a Dublin Airport – whose manager is on a salary twice that of the German Chancellor.

For individuals, debt as a percentage of household income rose from 68% in 1999 to 113% in 2004 to keep up with house prices, which tripled over just ten years. Irish banks were happy to help the housing bubble inflate, tripling their lending between 2002 and 2007 to over €360 billion. Builders borrowed to supply the housing to meet this growing demand. At the height of the boom in 2006-2007, approximately 90,000 new dwelling units were built in Ireland. In the UK in the same year – with a population 13 times the size of Ireland – the number was just 120,000. When all this was revealed as unsustainable, Country Leitrim was found to have three housing units for every resident.The experiment ended in confusion. The Irish weren’t sure who or what to blame for their economic collapse. The ‘who’ became the ever popular bogeyman, ‘bankers’, the ‘what’ became fiscal austerity introduced to balance the budget. In reality the ‘who’ should be the politicians and European leaders who took Ireland into an unsuitable and unsustainable currency arrangement, letting economic reality get trampled in the rush toward the dream of “ever closer union”. The austerity is a consequence of this disastrous decision.
And it also ended in irony. There is a certain historical symmetry about the fact that the last German handout to Ireland, a boatload of rifles which found their way to the bottom of Cork harbour in 1916, were sent to aid Irish independence, to accomplish Pearse’s dream. The current one is intended to do exactly the opposite.

The last foreigner ‘invited’ to Ireland to sort the country out was Henry II of England and his descendants ended up staying for 700 years. Given the rumours surrounding the state of Portugal, Spain and Italy’s finances, you wouldn’t bet on the chaps from Brussels sticking around that long, although, if a bungalow in Leitrim tickles their fancy, there will be plenty of places for them to stay.

But given Ireland’s history of bloody struggle for its independence, we can ask whether it was all worth it. Commenting on Eamonn De Valera’s typically impenetrable alternative to the treaty with Britain, ‘External Association’, one participant in the Dail debates commented “For centuries men have been willing to fight and die for the cry of ‘Up the Republic!’ I can’t imagine many dying for the cry ‘Up External Association!’”

Indeed, would Tone, Emmett or Pearse have died and caused so many other deaths for the right of Irishmen and women to have their fiscal policy dictated in Germany? What would Thomas Davis write now? A Province Once Again?

This article originally appeared at ConservativeHome