Red Gold and the curse of EU conformity

In a telling article about Greece, Nick Cohen say this about the European 'project':

The EU cannot take responsibility for what it has done and be magnanimous for reasons British readers may not grasp. Raised in a Eurosceptic country, we do not understand how an absolute commitment to the European project was a mark of respectability on the continent. Like going to church and saying your prayers for previous generations, a public demonstration of commitment to the EU ensured that the world saw you as a worthy citizen. If you wanted to advance in Europe's governing parties, judiciaries, bureaucracies and culture industries, you had to subscribe to the belief that ever-greater union was self-evidently worthwhile.

And this is true. But Nick Cohen needs to look closely into the UK's public sector and corporatist business sector where being anti-EU is the badge of the sinner. I recall my election campaign of 2001 in Keighley where we were handing out those much sneered at 'Save the Pound' leaflet. A senior local Labour politician was aghast that I - what he patronisingly called 'the decent sort of Tory' - could possibly oppose the single currency.

In my perambulations around public funding both as a councillor and also as someone working in the voluntary sector, I have encountered the unquestioning commitment to the EU project, to the funding it provides and to the opportunities for pleasant junkets to nice European cities that come with the EU game. To conform to the mindset of the public sector - especially in my field of regeneration - you have to do just what Cohen describes, to have that "absolute commitment to the European project".

To borrow from David Eddings, the EU has spread its red gold across the continent - funding this project and that scheme, supporting international exchanges and generally making people feel that the project is a great big cuddly Father Christmas sort spreading joy and happiness. Very different from the stern and questioning national and local governments.

Greece - and soon Spain, Italy and France - are reaping the full cost of this red gold. Suckered into its spell they hooked their fortune to the fortune of Germany believing that this magical union of currencies would lead them to that better, richer, more Germanic world. As Nick Cohen concludes:

Europe does not seem pleasant, prosperous or peaceful today. When historians write about the end of its postmodern utopia, they will note that it was not destroyed by invading armies anxious to plunder Europe's wealth or totalitarian ideologues determined to install a dictatorship, but by politicians and bureaucrats, who appeared to be pillars of respectability, but turned out to be fanatics after all.

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Schools, hospitals and money...give me just a little more choice!

We live in a world of choice. Think for a brief moment about how many different types of cheese you can buy in your local supermarket. Consider the aisle filled with varied and exciting bread. And ponder on a world where one relatively small space can contain over 45,000 different products from, it seems, everywhere in the world. Still further, if you live in Bradford at least, a different journey can also take you to market stalls and shops selling great locally sourced fresh vegetables, fantastic hand-crafted sausages and super fresh caught fish.

Note as well that, when it comes to that convenient portable communications device we all love, there's a still more bewildering choice of handset, of contract and of places where we'll get some informed help making our decision. It truly is a wonderful world, a world created by that simplest of simple ideas - one that's been around since the dawn of time - free exchange for mutual benefit. Or if you want it put a different way - the market.

Yet when it comes to three things that are pretty fundamental to everyone's lives - education, health care and money - we're told that free choice is a bad thing and instead government must decide on the nature, quantity and distribution of these essential requirements. What makes this so very odd is that we can see how free choice in free markets improves the lives of everyone, yet we continue to tell ourselves that somehow markets would be a bad thing in these three vital areas.

Instead of the liberty of markets, what we choose instead for the provision of schools, hospitals and cash is a thing called 'government'. And what a thing that is - confused, secretive, lying, deceiving and troublesome. I was talking the other day with some public health folk and (I forget the precise details) the matter of 'who runs the NHS' arose. Scales fell from my eyes as I appreciated that no-one actually runs the NHS. For sure there's a chap called Simon who has the title 'Head of the NHS' or similar but he doesn't really run this vast many-headed hydra except that, because there is no consumer sovereignty in health care, there has to be a process for allocating the money set aside by government to pay for said health care. And Simon is in charge of that process.  He doesn't run hospitals, he has no say over primary care, he doesn't train doctors or nurses - he sits atop a pile of other people's money and uses it as a bully pulpit.

The same goes for schools - there's no-one in charge and no market either (although there is a chimera of choice in the ability of parents to 'express a preference'). We have Michael who is in charge of Ofsted, we have a collection of 'Directors of Children's Services' in 'Local Education Authorities' and we have the management of individual schools (governors and school 'leadership teams'). As with the NHS these people aren't 'in charge' of the system and there is no fair or efficient system - nor can there be outside of a choice mechanism - for the distribution of either funds or for the making of 'allocation' decisions.

For both health and education we use bureaucracy moderated by the unseemly rabblerousing that is political debate as a proxy for the market. But the systems are too large for effective central direction so some things are 'devolved' to different parts of the system. Except that two things remains - one is what we might call the Widdecombe Principle and the other is our expressed preference for consistency.

The first of these two things refers to Anne Widdecombe who explained that central direction would never change so long as the Minister was dragged kicking and screaming into the Newsnight studio to explain. Even though ministers - like the Head of the NHS and the Head of Ofsted - are not really 'in charge' of the system, they are the ones who get verbally berated when stuff goes wrong.

The second factor is what we say to opinion pollsters - essentially that we don't like 'postcode lotteries' and therefore we don't like difference and variation within national systems. Our slightly warped idea of 'fairness' tells us that everybody should get the same, even if that 'same' is mediocre because the avoiding of difference destroys innovation, initiative and creativity.

All this brings me to the third thing government won't let choice and markets play with - money. It seems to me that what we might called 'modern applied macroeconomics' is predicated on the continued 'control' of money by government. But, just as with health and education, there's only an illusion that someone is in charge of the system. There's Mark who is the boss at the Bank of England - he gets to set interest rates (and, were I a cynic, keeps his job if he doesn't stray too far from what HM Treasury wants to do) but it doesn't seem to me that he's really in charge.

There may be very good reasons for all this lack of choice - that idea of fairness, the convenience for all of a defined and guaranteed currency. Plus, of course, the big important thing for government - collecting taxes. Indeed the scared rabbit reaction of banking regulators to 'cybermoney' like Bitcoin is rather revealing of this fact!

It seems to me that the next few years - perhaps a couple of decades - will see a huge tug-of-war between these big three government monopolies and a set of technology-driven innovators. Some of these innovators will be looking for a fast buck through exercising some sort of arbitrage while others will be seeking to develop choice models within the systems themselves - building on the availability of data to disrupt that desire for sameness I described earlier.

I don't know how this contest will play out but I hope that, whatever the long term role for government systems, it results in more choice. Or rather in systems where consumer sovereignty is allowed to operate. I hope for this result because it will deliver the greatest rate of improvement for the least effort (and probably least money). There's a big debate in the NHS about a future funding gap - it seems to me that the solution to this challenge isn't running the good old centralised NHS and trimming a bit here or rationing a bit there. Rather the funding gap is closed by allowing innovators to innovate and the best way to do this is by the development of real choice systems rather than the current 'plan and provide' approach.

The same goes for education. And for money. Choice is the best driver of improvement both through consumers exercising that choice and through providers responding to consumers is developing new, different and better way to serve their needs. And what works for bread and cheese, what delivers for mobile phones, TVs and insurance, will given a chance deliver for schools and hospitals and will provide a more stable economy less open to the abuse of politicians buying their way into power or bankers manipulating their way into wealth.

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Is £5 a lot of money?

I know it's an odd sort of question but it's one that has, from time to time exercised my mind. I think it helps to show how our understanding of value is shaped by perceptions and circumstance.

The story starts back in, I think, 1990 or 1991 when John Hinchcliffe and I has a heated debate about this very question - "is £5 a lot of money". Now at the time we were the account planning and research boffins at a leading direct marketing agency - the issue had arisen during a 'meeting' (I use the word loosely here) to talk about a savings product we promoted with the line 'only £9 per month'.

So, given that we had the skills and resources available we conducted some research. Not the most scientific piece of research but rather better than much of the rubbish that masquerades as public policy research these days. And our findings were significant - some people though £5 was a lot of money and some people didn't. However, we'd expected those answering 'yes' to the question would be the less well-paid employees of the agency (and any clients we stumbled across in the couple of days we were paying attention to our vital study).

What we found (you'll have to trust me on this because we didn't keep the results) was more interesting - the only factor that appeared to correlate to thinking £5 a lot of money was age. The older people were the more they thought £5 a significant lump of cash. The 55 year-old agency director saw £5 a more valuable that the 17 year-old receptionist. We concluded - before moving on to more important things (that we were actually paid to do) - that this might have something to do with inflation.

So for all those clever behavioural economists and such here's the question again:

"Is £5 a lot of money?"

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After the Bitrush - a comment on the politics of money

Well, I dreamed I saw the silver
Space ships flying
In the yellow haze of the sun,
There were children crying
And colors flying
All around the chosen ones.
All in a dream, all in a dream

The predictions - oh yes, the predictions! Everywhere we see them, all giving their take on the future of money following the remarkable growth of Bitcoin.

But first let me tell you of a little story. It's not my story, it's Neal Stephenson's story. And it's the story of in-game money and the way that money (and assets created in the game by that money) 'leak' into the real world. Moreover, like Bitcoin's recent ups and downs the focus is on China and the desire of rich Chinese folk to get round their government's tight control of money leaving for other countries.

Remember folks that this desire is real - it actually happens. Here's something from an article back in 2006:

In one extreme case last year, an online gamer in Shanghai killed another player who had taken his cyber-weapon, called a Dragon Sabre in the popular online game Legend of Mir III, and sold it for 7,200 yuan (US$871).

The gamer almost forfeited his real-world life for doing so when he was handed a death sentence with a two-year reprieve.

Still, Tencent spokeswoman Catherine Chan said in a written statement that the company's virtual money did not pose a threat to the real-world economy.

Q coins were created to work as tokens for the consumption of the company's online services, and the Q coin "is definitely not a currency," she said.

All sounds a bit familiar, eh? And, if the bubble theorists and tulip fans are right and Bitcoin falls over, there will be another way for people to circumvent the nosiness of government. Another on-line system - call it a currency or an exchange system, maybe even a game, it doesn't matter. People will use it to get round the arbitrary controls governments place on our actions.

Ms Chan, quoted above, is right - virtual money isn't a threat to the real-world economy, it's a threat to government. Hence the concerns about taxation and the polemics about Bitcoin being evil. I would therefore leave you will an alternative view - not from some techno-whizz or Randian obsessive but from Hayek:

"We have always had bad money because private enterprise was not permitted to give us a better one.  In a world governed by the pressure of organized interests, the important truth to keep in mind is that we cannot count on intelligence or understanding but only on sheer self-interest to give us the institutions we need.  Blessed indeed will be the day when it will no longer be from the benevolence of the government that we expect good money but from the regard of the banks for their own interest.”

Those who believe that the only safety is the safety of government guarantee are wrong - cruelly wrong. This supposed guarantee is a fraud, corrupted by inflation and fed by the need of bureaucracy to fulfil Parkinson's Law.  It doesn't matter whether or not Bitcoin is a good investment, whether it is safe or whether other people use it for illegal acts. It really doesn't matter because the stopper is out of the bottle - the genie of liberated money is out of the bottle and is a weapon for those who would tear down the castle.

How we respond to these changes will be a measure of how much we want liberty and whether we prefer choice to government edict.

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Bitcoin threatens government ergo Bitcoin is evil

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This is the essence of Paul Krugman's argument suggesting Bitcoin's sinful nature. And this evil is defined in a quote Krugman takes from Charlie Stross:

BitCoin looks like it was designed as a weapon intended to damage central banking and money issuing banks, with a Libertarian political agenda in mind—to damage states ability to collect tax and monitor their citizens financial transactions. 

It is on this basis that Krugman makes the judgement that Bitcoin is evil. Indeed, he recognises that the debate about the morality of private money is very different from the debate about how (or whether) the private money actually does the job that state money does.

Krugman's core criticism of Bitcoin - and one assumes other means of exchange (or value storage) that aren't controlled by government - is that is undermines big government. Moreover, if private money succeeds (and the jury is out on this) then there is no foundation for monetary systems that drive these big state, big corporation systems - what we can call 'national accounting arithmetic' or 'magic money tree' models.

This is only a moral question is you accept that there is a moral basis for taxation.

Since I don't believe there is any moral case for taxation (as opposed to pragmatic, practical cases) then I see no reason at all to be concerned that private money makes it hard for the government to monitor my financial transactions.

What happens under this system is that government has to make the case for raising taxes - to set the price of government at a level where people willingly pay. Just as importantly, such a change more or less destroys the use of  income taxes to promote 'equality'. Taxes become what they should always have been - means for government to provide the services that people require of that government rather than a blunt instrument of social control.

We still have a way to go - these private monies are risky and unproven. But if the direction is towards a smaller, less intrusive and consent-based government then, far from being evil, Bitcoin is a source of moral salvation.

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Government was always a rent-seeker and it's now the biggest robber baron by far

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In broad terms profits are a consequence of imperfections in the market - I know this because it's in the first few chapters of the economics text book I had at A-level. In that utopian perfect market there is no rent ergo no profit. However, what makes markets so wonderful isn't this de facto rent-seeking but the consequences of exchange. In most cases (in theory, in every case) I get something I want and, in doing so, allow you to get something you want.

If I were one of those people who think 'neoliberal' is a swear word and consider markets to be akin to beating you over the head and steal your stuff then I would be all aquiver about these evil profiteers and their rent-seeking behaviour. This is not to suggest that those evil profiteers do not seek rents but to remember that the real world meaning of 'rent-seeking' isn't about markets per se but about the fixing of markets to favour the rent-seeker.

Rent-seeking is a culture in which the principal route to wealth is not creating wealth, but taking possession of or benefiting from wealth created by others.

So says the Financial Time (and who am I to argue). Indeed that definition makes reference to the Rhine's medieval robber barons charging river tolls.

Now let's switch a bit in our focus - away from rapacious plutocrats - and look at government. The government we might, in our naivety, want to protect us from those profiteers. The problem here is that government, in its origins and subsequent behaviour, has always behaved as a rent-seeker. For sure, the feudal lord in his shiny armour promised to protect the serf (from whence the lord's wealth derived) but this was via taking from the serf that which was his - the product of his skills and labour.

To do this government's exercised controls over those things that might threaten their ability to take rents by force. Thus governments created monopolies - chiefly and most powerfully a monopoly of money. They did this absolutely and specifically so they could continue to seek those rents, the rents that paid for the baron's new horse and the king's new crown.

I know, I heard you shouting 'stop' and talking of democracy. But the truth is that democracy didn't see the end of that capture of markets through rent-seeking. In truth that capture has extended through the rhetoric of what Tony Blair called "schools-'n'-hospitals", a sort of 21st century version of giving the masses food and entertainment. Over the period from the 1870s to the turn of the 21st century, government nationalised health care and education drawing schools, universities, hospitals and much else within the control of government - handing them over to rent-seekers within those businesses and then, when those rent-seekers caused problems with the masses (by not being good enough), bringing in external rent-seekers to create a sort of faux competition.

Note how the main form of rent-seeking - taking wealth rather than creating wealth - comes in the form of taxes. In the UK this is over four pounds in every ten - a triumph of rent-seeking beyond the wildest dreams of those medieval robber barons with their ship tolls. And within each of those places seeking rent there are the enthusiasts for more - the teacher unions, the BMA and medical colleges, the CBI. A whole host of well organised (and paid) folk each agitating for more rents, for more taxes to be grabbed from the pot of wealth.

We seek behaviour comparable to those robber barons where the poorest in the land are rolled over for taxes - think for a second about the justice of someone earning just £12,000 having to cough up taxes so some public sector plutocrat can earn over £200,000! That is the sort of immorality that would bring joy to the Sheriff of Nottingham's dark heart.

So next time you see someone frothing about 'neoliberal rent-seekers' or some such other left-wing nonsense, just tell them that the government is by far the biggest rent-seeker. And that government has always been the biggest rent-seeker, indeed government exists purely to capture wealth for those who control government to spend on what interests them.

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Bitcoin and the new fascism...

Guiseppe Volpi, Mussolini's Finance Minister

Like this from Izabella Kaminska:

Currencies of the realm represent a social contract between citizens and the government. Not only are they mandated as official tender, they end up being inherently superior to other units because of that government affiliation. This is because the government is the one common denominator between all participatory agents in the economy, all of whom at some point have to pay taxes. Why would you accept settlement in BP shares, when you know that ultimately your liability to the government is in national fiat.

That currencies exist because we have to pay taxes is not only untrue but a misrepresentation of the point of currency. Indeed, the liberation of money from state monopoly must be one of the objectives we strive for - monopoly is always bad and doubly bad when it exists solely for the purpose of allowing the government to take that which is ours by main force.

The other reason this is nonsense is because the direction we are travelling is away from government not towards it - thus it is no surprise that governments dislike systems of exchange they don't control. Moreover the size of government requires that these initiatives be stopped - if they are not then government cannot sustain itself (other than by debauching the very currency that Isabella claims is 'inherently superior'). That superiority is simply a consequence of government's monopoly of effective force rather than anything inherent in some mythical 'social contract'.

But then the writer here compounds the misperception by revealing her prejudice:

This is because it is still based on anti-social instincts and the pursuit of personal gain over the common good in a nefarious and unproductive way for society. 

Now - given that the writer claims some economic knowledge - I'm not going to talk about Adam Smith and that famous bit about the butcher's self-interest. Rather I'm going to ask who defines the 'common good'? If (as I suspect is the case here) the definition is 50%+1 then we are simply living in a tyranny and creating the circumstances for the rebirth of what Finer called the 'oikos' state. And the tyranny would be a platonic one - the great and good, the heads of that 'oikos' would decide the common good. Anything - such as a private currency - that would threaten what those heads determine is 'good' must be stopped. As our author puts it:

At its heart the currency is founded on anti-social tenets, which will always tempt capital that wishes to be used unproductively, especially in an economic environment where the only productive use of capital is increasingly through government spending.

Or as Benito Mussolini would have put it:

Everything within the state, nothing without the state.

Welcome to the new fascism folks!

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A lesson in money and marketing...

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This only works because it runs close to illegality. It's not the edginess (although that helps), it's that others won't play:

The manager at the McDonald’s on Northwest Yeon Avenue glanced at the money in the customer’s hand, a $2 bill that looked as if its edges had been dipped in blood. He grew tense, shook his head and turned away.

“Oh, no,” he says. “We’re not allowed to accept those.”

So where do you go? The bar won't take the bills, the bank won't take the bills - so it's back to the strip club that dipped them in red ink:

But despite these warnings, Casa Diablo keeps doling out the blood-red money. A WW reporter last week was still able to get a stack of the $2 bills from the bar.

Of course, the marketing would still work if the authorities smiled and let the bills circulate. But right now Casa Diablo are getting a double hit - promo from the red bills and a captured audience.

The strip club is simply gaming official sensitivity. More power to its elbow.

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Sorry Archbishop but you're wrong...you won't beat Wonga by having moneylenders in church halls

****

The new Archbishop is off at a gallop gleefully sticking his neb into all and sundry including the iniquities of the down-market credit business and it's Arch-Demon, Wonga. To give the Primate his due however he didn't promise to force the government to change the law - a welcome break from the seemingly eternal lobbying that has plagued the church since 'Faith in the City':

“We’re not in the business of trying to legislate you out of existence; we’re trying to compete you out of existence”. 

And the boss of Wonga - good capitalist chap that he is - responded by welcoming the competition and the extension of choice in the consumer credit market. All this has been a little spoiled by the silly business of the Church having invested some of its billions in the evil that is Wonga.

Let's be clear, I think the Archbishop is wrong. Not in wanting to encourage credit unions as an 'ethical' alternative to payday lenders, nor in seeing that the solution lies in extending choice rather than in the more usual regulation and restriction. No, the Archbishop is wrong because he doesn't appreciate the realities of the market he intends to enter (well sort of enter - more support of encourage really).

The interest rates (leaving aside all the macroeconomics for a minute) that lenders charge are made up of three things: the more or less fixed cost of setting up a loan, the lenders margin and what we can call a guess at the risks involved (i.e. how many borrowers will default and owing how much). Now we can do a little about the first two things but not much so, if we are to reduce the amount charged we have to reduce the risk of financial loss.

Assuming there is no government subsidy or underwriting of the risk (and guessing that the Archbishop doesn't intend to stick the Church's assets on the table) and no realistic surety, the effect of reducing risk is to reduce the number of people who can borrow. Or, to put it another way, to exclude the very people who are most at risk from loan sharks and other assorted folk peddling loans.

So credit unions with limited assets have to focus on low risk lending - not at all the market in which the Archbishop wants them to operate. If the Church is to compete with the payday lenders it must canonise one of them - we would need St Wonga.

This little headline grabbing initiative is great PR, brilliant politics and poor business. If the church wants to do something to reduce the need for lenders like Wonga the way to do this is to help reduce the reasons why vulnerable people use them. And to do this the Church should build on the work already being done out there by organisations such as Christians Against Poverty - working in local neighbourhoods to advise people on how to avoid debt, how to budget and how to get out of the mess once you're in it. And, while credit unions have a role in all this, they really aren't the solution.

If every church had a debt advisor or two plus a little relief fund, the chances are that thousands of people might be guided away from the risks of short-term borrowing. Rather than compete, the Church should simply remove Wonga's market.

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The Conservative Party needs to move the talent - and money - further than Millbank...

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The Spectator reports that my Party is onto full long election footing (good of you to tell me, Dave). And this means that the talent is moving apparently:

...I now hear that talent is being moved out of Whitehall and back to Millbank to beef up the team there. Giles Kenningham, one of the most effective Tory spin doctors, is taking leave from the Department of Communities and Local Government, to head up CCHQ’s media operation following Susie Squire’s secondment to Downing Street.

Sorry to pour cold water on all this excitement but, if we're to make a difference, the talent needs to be in Leeds, Birmingham, Bristol and Manchester not 400 yards down the road from Whitehall. If the Party is serious about remaining in power, it needs to start to support the grassroots.

Why you ask? Simple really - those grass roots are dying faster than the ash trees. Instead of another spin doctor how about some member recruitment, funding some agents in target constituencies, providing support to hard-pressed conservative groups - spending some of that cash from those rich donors on stopping the Party from dying.

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Who needs cash?

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Looks like my wife might be right. She's been saying for a while that the days of cash are numbered and now I read this:

The foundation, which runs the micro-donation scheme Pennies, commissioned a survey of 1,700 UK adults in October to establish which forms of payment they now use and their giving habits. One in 10 respondents aged between 25 and 34 said they never carry cash and rely entirely on cards, while one in three regularly leaves the house without cash. Five per cent said they live a completely cashless existence.

Interesting stuff...


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I wish Bristol well with their 'pounds' but it won't work

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I'm a big fan of alternatives to money. Especially in this age of governments debasing the currency year after year and pretending it's all for our good (rather than as a favour to their pals in banking and property development or to cover up their past mistakes). So the Bristol 'pound' sounds like a great idea - here's the BBC bigging the idea up:

More than 350 firms in the city have signed up, making it the UK's largest alternative to sterling. Unlike previous schemes which have relied on paper, the Bristol Pound can be used online, even by mobile phone. 

So that's progress. The problem is that the motivation for the introduction of the Bristol Pound isn't escape from the tyranny of state controlled money but a rather righteous desire to 'keep more of the money in Bristol'.

"If you lock the money into the area, rather than it going into the international finance system then you keep more money actually working in the city here."

This is - in effect - an attempt to game the local multiplier. But the problem with the Bristol Pound is that there's not incentive to play. For sure, the trader (or other user) is locked in because there's an exchange fee of 3% to turn Bristol Pounds into Sterling. So why should the trader go to the bother of converting real pounds into Bristol 'pounds' knowing that there's a built in loss and there are only 350 businesses who will accept them. Businesses that don't include any suppliers outside Bristol.

When we look at successful alternative currencies they either fill a real need (for example Linden dollars in Second Life) or else contain a strong sales promotional element. The Bristol Pound would have a lot greater consumer purchase (if you pardon the pun) it it offered discounts at the 350 businesses rather than simply trying to pretend that there really is a "local multiplier effect" and you can game it with a make believe currency.

I hope I'm wrong - perhaps Bristol Council (I'm guessing it's the City's biggest employer) will offer pay rises to staff only if they take them in Bristol Pounds. Or perhaps offer an incentive on personalisation payments for social care - 110% of value if 20% is taken in Bristol Pounds. If something like this happened then there's a chance that the new currency will work. Otherwise it will splutter and struggle on without really making much of a difference in the City.

Finally the lesson from LETS type currencies is that you need a big area - the successful Chiemgauer system covers the whole of Bavaria for example.So the whole of the South West is a better basis for success than just the fine city of Bristol.

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It never was the money...

At times, at least in the fevered on-line world, it seems that there’s a coalition of the heterodox. At least where talking about the world economy and the ways in which its current ailment might be cured is concerned.  The assorted oddities of economic thinking are as one – old-school Marxists, modern Marxists, believers in the magic money tree, goldbugs and schools of thinking named for places in central Europe. All these folk share two revealed truths (to them at least) – the “orthodox” is wrong and our salvation lies in doing something about “the money”.

The thinking of these disparate adherents to the heterodox goes as follows:

• The current orthodoxy (however described and defined) got us into the mess we’re in
• This orthodoxy doesn’t describe or define the problem where as (insert heterodoxy du jour) does
• Therefore apply our solutions and we will all be happy, smiling and rich

And the solutions are always simple (and we should remember what H L Mencken had to say about simple solutions) and wrapped in an irreducible logical certainty.

I recall a friend at university – Neil he was called – who spoke of the problem with articles written by incredibly clever politicians such as Enoch Powell or Tony Benn. Neil’s thesis was that the writing of these men was logical, clear and convincing but that, when you read the text carefully, it contained – roughly half way through – a piece of breath-taking intellectual legerdemain. And so it is with heterodoxy. The seamless, almost commonsensical argument contains something that causes it all to fall apart. Adherents do not see the illogicality despite having it pointed out to them all the time (mostly by followers of a different illogicality).

I don’t know the answer. But I’m prepared to admit this as an essential starting point.  What I do know is that economics isn’t about money. When you pick up the founding texts of the discipline – the works of Adam Smith, David Ricardo, Vilfredo Pareto, even Karl Marx – the writing isn’t about money but about the ordering (or not) of human activity. For sure, the writers spoke of money but not as an economic driver. The thing driving the economy is the enterprise of men and women the world across not the notes, coins, ones and zeros we use to exchange, to measure and to store the fruit of that enterprise.

It is in the idea that the problem begins and ends with money – less of it, more of it, spent, saved, taxed and squandered – that our crisis lies. But money is just a will ‘o the wisp tempting us away from what makes the economy – enterprise, effort, work, exchange.  And into a mire where money is detached from these things where voices tell us that we can have it without effort – just print some money, the government can provide, the deficit doesn’t matter, enterprise didn’t create our wealth, effort isn’t an aid to success, those who are rich have stolen the government’s money.

The solution isn’t in that mire. My guess is that is lies with us remembering that it’s not the money but the food on the table, the roof to keep the rain out, the means of transport, the great novel, the wonderful music. It’s a pint of ale sat with friends, it’s the cinema and the restaurant. It’s all these things and many many more. It’s not the money. It has never been the money.

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More on that money stuff...

I was scrabbling around looking for something the other day and I stumbled across this book. I'd forgotten about it - which is odd given how much I'd been burbling about money recently. Flicking through I was again reminded why the case for competing currencies is so strong:

"We have always had bad money because private enterprise was not permitted to give us a better one.  In a world governed by the pressure of organized interests, the important truth to keep in mind is that we cannot count on intelligence or understanding but only on sheer self-interest to give us the institutions we need.  Blessed indeed will be the day when it will no longer be from the benevolence of the government that we expect good money but from the regard of the banks for their own interest.”

Government through force has prevented private money. In doing so (and once the inconvenience of money having any link to value was removed in the 1970s) those governments opened up the floodgates of state squander. We need a check on those governments, a means of preventing another grand economic debauch, something to prevent the deranged myth of valueless money from taking hold. And competition is the best check of all.

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It's not the government's money - none of it

Understand this:

"The State has no source of money other than the money people earn themselves." 

It is not the case - however much some folk want to tell us so - that the government is the source of value. This isn't to say government has no purpose but to say that not only isn't there a money tree in the basement of the Bank of England but to claim so is to perpetrate a gross and unforgivable deception.

But it is worse to manufacture a whole ideology that believes all money emerges magically from the state. This is to rediscover the god emperor, to carve a 21st century' oikos' and to create a new slave state. The revelation of liberalism is not that we discovered the power of the state for good but that we gave ourselves the tools to escape from leviathan - personal freedon, personal choice and personal responsibility.

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How money differs from magic fairy gold

OK so we like money. And we rather understand money. We work at producing stuff and get money in return. We know that is really is as simple as that - the idea of money isn't complicated at all. It is a conduit for turning the added value that our labour or our investment generates into the things we want - houses, cars, food, drink, nice holidays in warmer parts of the Mediterranean, satellite TV and much else besides. It isn't the money we want (unless you're Scrooge McDuck) its the stuff.

But then these people - clever economist types with PhD's and tenured professorships at fine sounding American universities - pop up and tell us that it ain't so. They have discovered a different, previously unknown form of money - let's call it 'fairy gold'. And the people who play with the fairy gold work in banks, in government treasury departments and other grand finance houses.

The first idea behind this fairy gold is simple - the government cannot run out of money so long as it has a central bank and a printing press. Indeed, the government does not need to raise taxes, issue bonds or all the paraphernalia of the news around budget time. All it has to do is run the presses. Those taxes and those bonds are merely useful tools for regulating the economy - stopping inflation running riot, facilitating redistribution and encouraging growth.

The essential premise of this 'modern money theory', this belief in magic fairy gold, is that is accurately describes the system of finance that has existed since the collapse of the Bretton Woods agreements back in the 1970s. Money exists because governments wills it to exist and those governments can will as much (or as little) of the lovely fairy gold into existence as they wish. And - within certain arguments - this is true, the theory does describe the financial system under which we live. Something we should worry about given the complete disaster that it has proven to be over recent years.

However, the second idea behind this 'money as fairy gold' theory is much the more worrying one. Our clever economist types tell us that only governments can create money and that unless they create that money, we cannot capture the value of our labour or investment and buy that good stuff we want. We are but serfs labouring at the (largely metaphorical) coalface depending on the willingness of the government to create money. If that does not happen our labour will be in vain!

Unlike the description of the financial system (and the fact that a government controlling a sovereign currency cannot run out of money) this position is not an accurate description of reality but a deeply disturbing ideological position. It takes as it premise that all the money is the government's and, therefore, that all the value we add by our labour or investment belongs first to that government. Indeed, how much value we add has no bearing on how much fairy gold there is for us to scoop up.

So the government - regardless of value added - can produce as much fairy gold as it wishes and this accumulation can masquerade (indeed has been masquerading) as money. We are afforded the idea that the government, should it wish to build a new railway, increase welfare payments or build a 100ft statue of the central bank governor, has only to magic up enough fairy gold and issue the contract.

The reason why all this is mad, bad and dangerous - however much it may accurately describe the lunatic casino that is our financial system - is that it turns money away from its purpose. Remember back at the start of this piece - how money is a conduit for turning the added value that our labour or our investment generates into the things we want. That is what money is for - by inventing a 'theory' that describes the production of fairy gold, we do not get to an understanding of money. And pretending that you can put the fairy gold production system on steroids so as to solve the problems created by the fairy gold is to destroy entirely the idea of value. Why on earth should anyone work if the government can just summon a bit more fairy gold?

This modern money theory rather reminds me of the labour theory of value and the lump of labour fallacy - superficially appealling, internally consistent but ultimately an ideological fix that places ordinary folk as mere hamsters scampering round the state's wheels and nibbling at the goodies that state allows us to have. If I have learned one thing from 'modern money theory' it is that the system it describes - however accurately - is a kingdom of madness. And the fairy gold turns to fairy dust, useless. Blown away on the wind.

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In defence of tax havens (and why we should be one)

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I have this mental image of rich folk in tax havens. It’s the mental image that the people who don’t approve of tax havens want you to have – slightly foreign-looking men hunched over piles of filthy lucre smirking as they count it or slightly overweight blokes in badly co-ordinated clothes lighting cigars with $100 notes. We might summon up a scene by the pool as portly plutocrats frolic with blonde bimbos laughing all the while at their ill-gotten gains.

It is clear that these tax haven denizens are the lowest of the low prepared to leave the ordinary people of their homeland in Dickensian squalor while they live in the lap of (rather poor taste) luxury. And – according to so self-appointed experts – this is $21 trillion’s worth of luxury’s lap. How dare they!

This selfish act – shifting the cash to a place where it’s not a risk of confiscation – is the 21^st century’s most monstrous evil. It’s not their money – it is taxes.

These estimates reveal a staggering failure," says John Christensen of the Tax Justice Network. "Inequality is much, much worse than official statistics show, but politicians are still relying on trickle-down to transfer wealth to poorer people.

"This new data shows the exact opposite has happened: for three decades extraordinary wealth has been cascading into the offshore accounts of a tiny number of super-rich."

Well actually “this data” shows nothing of the sort. What the data shows is threefold:

1. The people in charge of undemocratic, autocratic regimes in the developing world have shifted their cash (whether or not it is ill-gotten) to places where it’s safe. This isn’t about tax avoidance – one of the features of developing countries is their inability to raise taxes (which, by the way, is why over a third of Uganda’s national budget is overseas aid). It’s about ensuring that most of the cash stays in the family and isn’t lifted by the next generation of kleptocrats. According to the Guardian’s jolly infogram just 20 developing countries account for $7.5 trillion of the stashed cash.
2. The second problem is that no distinction is made between income and assets. Most places don’t tax assets so it’s perfectly possible for a lot of this cash to have already been taxed. Perhaps not at the confiscatory rates prefers by Guardian readers but taxed nonetheless. And the implication (a pretty daft one if you ask me) is that all this money is held as cash. And that it’s stored in a big vault in the manner of Scrooge McDuck. Forgive me for thinking that most of these bloated capitalist billionaires would prefer that their cash did some work for them while stashed away avoiding tax? Which means it’s generating more wealth and (as a by-product) creating jobs, supporting businesses and generally doing that good stuff that money well-used – note this you wasteful governments – does.
3.  Finally, no-one spots the other part of the problem – tax rates on income are too high. This isn’t just the moral offence of taking half of what someone works to earn. It’s much more practical than that – if, as a result of our tax regimes or other confiscatory laws, rich people bundle up their cash and stick it somewhere else, then it’s our tax system that is the problem rather than the “ethics” of the rich people.

I like tax havens. They help – or should help – keep governments honest in matters of tax.  More importantly these places attract billions (trillions even) of lovely pounds, dollars, euros and yen. Wouldn’t you rather that all this money was being managed from your country instead of sitting in Switzerland, Jersey or the Seychelles making those places filthy rich?

The solution is really simple – institute privacy protection on personal assets and set the tax rates on income and capital gains at a lower level. Do this and watch the money pour into your coffers where it can be reinvested in new business, creating wealth and, by these acts, jobs and income for the poor in their Dickensian squalor.

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Does it really cost that much?

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Hampshire County Council are proposing to put video of their council meetings on-line - all well and good but...

The estimated cost to taxpayers is £223,000 over five years. This includes £199,000 to install audio and video equipment in the chamber plus a mobile kit for use in other meeting rooms.

The bill also includes the cost of an outside organisation filming meetings in 2012 with council officials possibly taking over in future years. 

Surely all you need is a decent video camera and a computer? How does that cost nearly quarter of a million quid?

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Will we still have banks? Pondering on the future of money....

This is a serious question about banks – in days to come will we still have banks as the businesses we love and cherish (so much we’ve given then billions of newly minted pounds and dollars so they didn’t have to cry any more)?

Now I don’t know the answer to this question – except to say that there will be a need to store money safely away from the burgling and thieving sorts (and perhaps the taxman too), there will still be investments made with aggregated funds and there will be an important role advising us on how we should be using the cash we’ve earned, inherited or squirreled away.

Firstly however we need to distinguish between the various businesses calling themselves ‘banks’ and the bank (and banking) itself. It is very likely those businesses will survive – or most of them will – but not as banks in as much as we understand banks:

The principle has been proved that innovation often occurs where the need for change is greatest. Look to Africa, where there are few banks, poor physical infrastructures and a rural population often dependent on remittances from the city. It is here that technology can really demonstrate value by offering a secure, efficient alternative to cash transactions. Such has been the success of products like M-PESA in Kenya that we are at a point where, looking forward to 2020, many experts, as well as the key players such as banks, governments and retailers, can see a world, particularly in emerging economies, where the majority of cash transactions have been replaced by digital ones – and where most of these will be made by our phones.

In the developed world we are lagging behind – partly because we have an extensive, mature and (wrongly) over-protected banking system and partly because consumers are very conservative in matters financial. In Africa people don’t have access to banks – you know those big buildings in the town centre – but are very likely to have a mobile phone:

In Ghana, for example, one in 20 people has a bank account. Meanwhile, one in three has a cell phone. 

So the mobile phone means that we are going to move our money around digitally and this money – the stuff the government prints – will be joined by a host of other forms of digital “cash”. From supermarket points schemes through coupons to ever more sophisticated digital bartering systems. After all barter is alive and well out there:

Watches, baseball cards, cupcakes and cookies, artwork, a journal entry, a bike and even a dog have all found new homes at Main Street Family Dentistry in Tupelo, Miss.

Dentist Harry Rayburn and his staff accepted the tokens as a barter from patients on a single day in exchange for fillings, extractions and cleanings, mainly from uninsured patients.

And it is but a short step from this situation to the creating of transferable forms of what amounts to “private money”. By this I don’t mean non-banking investment such as that from angels but de facto money that can be used instead of pounds, dollars and euros.

The problem with all this change isn’t that it isn’t possible – converting Tesco Clubcard points into transferable currency is simple and they could join emerging on-line approaches to payments such as Bitcoin, PayPal and so forth. It is that the authorities don't like it.  Where we previously had no effective competition in the administration and effecting of transactions – you used the government’s money – we now have a more complex, enterprising and creative system brokered on-line but (as we know from Clubcard) applicable in the real world too.

The problem with making this happen faster is that it isn’t what either the banks or the government want. After all, they will tell us, we can’t have just anybody setting up an on-line system for financial transfer and transaction – that’s what we have banks, banking regulation, banking lawyers and treasury departments to do.

Indeed, as virtual cash pops up the lawyers aren’t far behind (although, being lawyers rather than economists they don’t actually understand what money is):

Dax Hansen, an attorney at Perkins Coie in Seattle and one of the experts in this field, says virtual currency can be used to buy anything from a sword or armor in a game to a ring tone on a phone.

"It can be given away for free as a promotion," Hansen says. "It also can be given away as a marketing campaign if you provide some information. It has a value for which the marketer is willing to pay."

The trouble begins when that virtual currency can be redeemed for cash--particularly if it involves more than one company. At that point the financial services laws kick into gear, including those used to prevent money laundering.

Mr Hansen stills sees this emerging ‘money’ as a sales promotion rather than as a competitor to what he call “real money” but it is clear that we shall see challenges – indeed China has already begun:

In the latest wrinkle in the fabric separating reality from virtual reality, virtual money is being exchanged for real yuan on a booming scale. The practice is so widespread that it has raised concerns that virtual money could challenge the renminbi's status as the only legitimate currency in China. 

And not just a competing currency but one outside the control of the government. Which bothers American politicians too:

This has not stopped some American politicians from expressing grave concern about the virtual currency. Charles Schumer, a prominent Democratic senator, has inveighed against it, claiming it is just what drug dealers have been waiting for. All the clever cryptography means Bitcoin dealings are difficult to trace. But not impossible.

It seems to me that these people are railing against the dying of banking’s light – the industry has had a decent innings - latterly with the connivance of government in preventing new entry, controlling innovation and protecting the profitability of the existing system. However, just as the on-line world is transforming publishing, altering the dynamic of political discourse and changing how we communicate, we may see it first destroy banking as we know it today and then remove the state’s monopoly over money.

And this change will take place in places where government is weak – in Africa particularly – rather than in the developed world where government is strong. It will be interesting to see this play out and to discover how systems created to sell more tins of beans or allow gamers to buy a magic potion will challenge and perhaps replace the monetary systems of today.

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