Category Archives: The World

Free markets and the sovereignty of the human spirit

Having recently pissed off the members of the Institute of Economic Affairs (IEA) and their peers in the Adam Smith Institute and of course those at the Freedom Organisation for the Right to Enjoy Smoking Tobacco (FOREST) who are an tobacco industry funded sock puppet (all of whom seem to be a little  thin skinned )

I’ve been forced to clarify, for myself, my views on free markets.

Simon Clark and other trolls tend to sail under the flag of free markets, as if free markets were an end, in and of themselves.

This is a bizarre contention for organisations which are primarily funded by companies, firms that are themselves mechanisms for avoiding the costs associated with utilising the marketplace. As Coase argued , firms exist because they circumvent the market: That is their raison d’être. Companies are tools which we use to in order to escape the volatility of prices on the open market.

By creating organisations which are sustained over long periods of time costs such as that of discovering what the present market price of a given factor of production or say, temporary collapses in supply for some other factor of production the company exchanges the organisational costs of the enterprise for those of the marketplace. Where firms can produce their product for less that or equal to the market price, the firm produces profit for its owners, when it can’t, then it ceases to have a function and, ideally, is liquidated.

Firms therefore compete to have the most efficient internal structures as large numbers of firms compete (in an effort to become internally ever more efficient, and therefore profitable) where they maintain the supply of given factors of production the increase supply, thus driving down their product’s price where there is no excess demand. In so doing, the marketplace as a whole becomes more efficient in its use of the factors of production, and precisely because the marketplace has been evaded.

Free markets are not important simply because the exist, they are important because they allow our individual preferences to be expressed via the price mechanism. When other actors invade the marketplace and affect the market prices of available products, they corrupt the information associated with the price, artificial reductions in supply (say from import limits, licences, or monopolies) lead to higher prices which distorts other prices as purchases are diverted away from the ideal product, and towards other alternative products that do not match our individual preferences as closely, therefore overall utility declines from the ideal.

Tools, such as free markets, can easily be mishandled, and a tool mishandled quickly becomes a weapon. Where factors of production are not priced correctly, say if resources are held in common, and therefore accessed for free; or where freedom of occupation is repressed, this will depress the wage price of labour. Then, commonly held assets are despoiled, or liberty is crushed under serfdom.

Those who profit from the status quo (by transferring the costs of production onto others, via some non-market method like the adverse health effects which can result from pollution) have always turned the argument towards “free markets”. Knowing that a correct price would reduce their profits they rationally utilise their excess profits to maintain the circumstances which so benefit them. Therein we find that some of those who would be free marketeers are merely rent-seekers that clothe themselves in the vestments of liberty to continue current oppressions.

And so we return to the game that Clarke et al. in FOREST are playing when they rationally promote their self-interest under the cloak of free markets:

They undermine the purpose of free markets (as a tool to establish what set of relative prices maximise total utility) by manipulating the individual preferences of consumers. They do this through the mechanism of addiction; addiction which they claim, like Jardine and Matheson before them, doesn’t exist:

Addiction is the fracture point of their paradigm, either we are all rational, and therefore those that smoke do so of their own choosing, or we are acting irrationally in some fashion. Addiction is not a rational act, addiction is a form of chemical duress, those under addiction are compelled to consume the chemicals their brain has become accustomed to.

Different drugs have different powers of addiction; caffeine is addictive, but only weakly so. Furthermore, caffeine hurts us only in our pockets, we do not enter into caffeine thraldom, people do not sell their children for caffeine as they do for alcohol and opiates. Nicotine does not have alcohol’s power to bludgeon consciousness into submission, neither does it have opium’s powers of withdrawal, but for a large cohort it is strongly addictive. In the  Eurobarometer report that Chris Snowdon  is so fond of cherry-picking from we find that the majority of smokers have tried quitting, and have failed. A third of smokers have tried to quit only in the last year. Of the 12,700 respondents who had ever smoked 2,600 had never tried to quit (predominantly younger and poorer people) 4,400 had tried to quit and failed; 5,700 had quit and were still off tobacco (predominantly older or wealthier people).

The arithmetic is simple, recruit as many people to smoking as is possible, a fifth of those that pick up won’t ever bother to stop, a third will try to quit, but you’ll control them regardless of their will, and the balance you’ll lose. The trick is to get them when they are young and impressionable, and there, tobacco companies excel themselves, 70% of people who have ever smoked started before the age of 18. It’s a good thing for the tobacco industry that those who initiate smoking between 14 and 16 are 1.6 times more likely to become dependent on nicotine than those who start later in life.

Something that the apologists blissfully ignore with their line that children know the risks they are taking when they pick up tobacco:

Whether they are rational and competent to make a decision with such long-term effects is irrelevant to them.

In willfully, actively,  addicting children to tobacco the industry undermines the most basic tenet of the market economy: That of consumer sovereignty. In the absence of consumer sovereignty there is no consumer power shaping that the market requires and the edifice of the market economy crumbles, and with it the purpose of free markets.

This is where the involvement of the IEA is so peculiar, their support of the tobacco industry is not internally consistent with their philosophy of freedom of action, it is something which has been grandfathered into the present by the key role that the inveterate smoker Ralph Harris, Baron Harris of High Cross played in the formation of the IEA, and later as the chairman of FOREST, a position that he held until is death in 2006 by way of an aortic aneurysm (a condition seriously impaired by smoking) and irony which has ricocheted of the pig-iron prejudice of those at FOREST.

 

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November 7, 2013 · 7:37 pm

The scam of scams

 

Andrew Haldane has argued that:

rapid credit expansion, often through the development of poorly understood financial instruments

has been a scam on investors. Investors were hoodwinked by by the faux certainties of the mathematical chimera which backed up the financial products which they were sold. But the scam goes deeper than that, we are emerging from a forty year financial bubble.

Financial risk has been subsidised by taxpayers, where the interest on business loans becomes tax deductible then the costs of  accessing finance is depressed. The risk/gain ratio is compromised, and ever greater leveraging is incentivised.

Had this been used for the generation of wealth, invested in the future, then there would have been some argument for these subsidies. Instead they led to ever greater inflation within the equities markets, supported by the tax payer.

But worse,  returns on investment were benchmarked against financial products, where obfuscation and subsidy led to expected returns of 7% per annum. All investments were deemed to be inefficient where they underperformed against the financial product standard.

The consolidation within the newspaper industry is a classic example of how this destroyed real value in the actual economy. Access to cheap cash, enormous leverage has, across the world, seen small local newspapers eaten alive by conglomerates funded by high powered finance.

These investments had to produce returns at 7%.  How do you develop such returns in a labour intensive industry?

Sell more papers (in an already competitive market)?        Too difficult.

Increase prices?      Not at 7% per annum.

Sell more advertising?     Not sufficient.

Cull staff, and reduce quality of the publications?      BINGO!!!

 

Well, it is easier than the alternatives. And it has destroyed the media. We live in an information environment where journalists are expected to produce 5, 6, or 7 articles every day. A new story, every hour or two, every day of the week, every week of the year, from every journalist. No journalist can produce a valuable product under such restraints. Stories have become commoditised.

Journalists rewrite, or reproduce, other people’s stories, other people’s press releases; but that isn’t journalist, it is just lazy sub-editing.

Journalism suffers. Society suffers. Democracy suffers. We all suffer. And suffer because that 7% had to be squeezed out of a valuable industry.

The expansion of growth through finance has been a scam, but the diversion of investment, the devaluation of industry, the inefficiencies of the financial sector, the destruction of wealth has been a terrible cost to bear, a generation of opportunity tragically lost.

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Manufacturing and Capitalism in Ireland

Manufacturing in Ireland has been characterized by three threads of development.

There are:

The State/Semi-State Sector.

The Indigenous Manufacturers

The Foreign Direct Investment Manufacturers

From the formation of the state Ireland has suffered from an industrial deficit. This situation has often been exacerbated by transformations in the global economy and inappropriate policy making at home.

Our first experiments in industrial development, 1927, were focused on developing our predominantly rural/agrarian economy. The Great depression, and the perceived failure in globalization, strengthened the position of those who called for self-sufficient nation.

A self-sufficient nation had to first feed its people, and then its industry; these were the foci of our State Industries. The state re-created the infrastructure needed to support the food and drink sector that had been destroyed during the Civil War.

We invested in the industries that supported this sector. But trade had collapsed with the great depression.

The Second World War further compounded this regression in trade. As a result, we, like the Easter Islanders, turned our backs upon the sea. The economic isolation we suffered as a result of our protectionist stance continued into the fifties.

Without trade, we lacked the capital to invest in the high-grade imports would allow us to produce quality exports. Our manufacturers produced Irish goods, for Irish people.

T.K. Whitaker saw the solution to our industrial deficit as the importation of capital. With Foreign Direct Investment we could leapfrog the time required to develop an indigenous industrial base. Barriers to trade were brought down and continued as we entered the European Economic Community.

This allowed us to market our goods abroad, but true to the Ricardian Model of trade, our exports expanded in two dimensions:

Foreign owned capital-intensive manufacturing

Locally owned, food and drink exports.

Local manufacturing had to compete with better foreign imports that had recourse to economies of scale far beyond Irish Industry.

With the Common Agricultural Policy supporting prices for our food production the Irish economy became one where we balanced our manufacturing imports against our exported butter.

With a surplus of labour and a deficit of local Capital we lacked the incentives and the resources to invest in our indigenous tradable sector.

Foreign Direct Investment could buy in the fruits of innovation from abroad this, combined with the agreeable tax environment made, us an efficient location for foreign capital – which would ultimately be repatriated.

For decades Irish Research and Development has been under capitalized, even the foreign industries which locate here fail to invest in Research and Development to the same extent that they do elsewhere.

As the ESRI has noted (Recovery Scenarios for Ireland, 2010) perhaps the greatest cost, associated with the recent collapse will be the opportunity cost of our poor use of capital.

The Irish people finally, in the 1990’s and the 2000’s, had access to capital.

But instead of developing a generation of capitalists who could invest wealth to create wealth, we forsook manufacturing and trade for the illusory solidity of bricks and mortar.

We Irish find ourselves again in an era of restricted capital; the lesson we must learn is how to differentiate between speculation and wealth creation.

Ours continues to be an immature economy.

We have been making the mistakes other countries learned two and three hundred years ago. We have to learn that what we borrow today, we steal from tomorrow.

If the fruit of our borrowing does not compensate for the losses we will experience tomorrow, then it is not an investment it is simply consumption.

Manufacturing requires us to be entrepreneurial capitalists not consuming speculators.

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Ireland, our Budget, and the Bond Markets

The bond markets are irrelevant now that the IMF are in the game.

When the IMF offer funds it is as a funder of last resort.

Realistically, no other lender will touch a country so long as an IMF funding programme is in place as the presence of the IMF suggests that the country is financially unstable.

The budget being planned now is the budget which would have been planned even if the IMF was not involved (as we have to deal with a budget deficit of 19 Billion, or 11.5%) and that gap can’t be narrowed by wishful thinking.

I believe that most of these ‘negotiations’ are just political bullshit.

There is a problem. The scope of the problem has to be ascertained. The scale of the funding requirements have to be calculated. All of which if fact finding (and you can’t negotiate the facts)

Which means that the interest rate is all that’s left. But the ESEF lends at 5% (not negotiable – see Germany, again). So this is all a play to ensure that Euro stays stuck together, something I’m increasingly less convinced of.

Any deal, which is done now, will be inevitably renegotiated in the future. The terms don’t matter that much because either so much will change that they’ll be irrelevant, or nothing will change and they’ll be shown to be unviable, where they are unviable, and there will be a controlled debt forgiveness programme (where the Germans will transfer Irish debts onto their books).

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