Category Archives: Free Market Capitalism

The economic theory from Adam Smith, through Ricardo, Say, Mises, Hayek and Friedman

Tax and Grow

Aside from IQ, what do Fred ‘The Shred’ Goodwin, the Duke of Westminster, the Prince of Wales and dear old Bob Diamond have in common? Well, it’s not absolutely certain, but there’s a strong probability that they pay a lower rate of tax than you do. The interesting thing is ‘why?’ There are two reasons.

There is an elaborate theoretical structure which seeks to justify not taxing the rich. It operates at many different levels. There’s the Tea Partyish argument that tax is Bad. This is because government is Bad. Because government can only stop things happening, get in the way and generally inhibit the entrepreneurial dynamism of people like Fred, the Duke, the Prince, and Bob. Government and all its works should be minimised.
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The Real Economy Being Drained Away

The UK government hasn’t yet been able overcome its undergraduate belief in, and commitment to, markets free from government interference as the source of the most effective and efficient way to grow the economy. Unemployment has not yet reached the level, and persisted long enough, for that fundamental belief to be disturbed. But as unemployment grows, fears of further unemployment increase and result in general belt tightening which further reduces the prospects of economic growth. It is therefore only a matter of time before the government is forced to recognise its error.

Till then, and despite having made massive investment in the banking system to avoid Armageddon, the government will refuse to take control of the banks it owns. So, even though paid for by the tax payer, the banks remain free not to support the entrepreneurial businesses on which future employment growth is believed to depend. Any such interference in the free market would be anathema to this Chancellor. So, more quantitative easing, which it should be noted is a pretty fundamental interference, is likely to be effected without direction or control.
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The Real Rogue Traders

Kweku Adoboli lost some $2.3bn for his employer, Swiss bank UBS. A couple of years ago Jérôme Kerviel lost over $6.5bn for Société Générale, while a dozen years back, Nick Leeson cost Barings $1.3bn and their independent existence. In all, around $10bn of losses were accrued by these three nice young men who were no doubt the pride of their parents. $10bn may seem a lot, but it’s less than a billion a year – a small price to pay for the continued freedom from regulation which enables investment banks to continue their rogue trading, which is hugely profitable for them, even if it costs the rest of us an arm and a leg.

One of the recent articles on Adoboli’s exploits, suggested that banks had failed to learn lessons and had not controlled individual traders effectively. Another suggested that securities had grown in complexity making it difficult to assess the trading risks involved. The internal risk controls within UBS were said to be obviously inadequate. The same was said about Baring’s in its day. But UBS, Société Générale and Barings, seem pretty typical members of the investment banking community. UBS may have differed slightly in requiring its female employees to wear flesh coloured underwear, but otherwise they seem fairly normal. The lack of risk control in investment banking must be endemic.
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Tea Party Taxation

US presidential candidate, Michele Bachmann, stands up for the ordinary people of America, the factory workers and housewives, who she says are telling her to stand strong against raising taxes and to fight to reduce government spending, as the way to America’s economic salvation. But even in the self-reliant, can-do US culture, taxes are unavoidable. They are needed to pay for national defence and security as well as those provisions of education, healthcare and social security which support the ordinary people. But, it is argued, raising taxes undermines the US economy and would even be immoral, especially taxes which resulted in the redistribution of income and wealth from one category to another.

The Tea Party approach is by no means unique to the US. Vince Cable may refer to them as ‘right wing nutters’, but the free trade, open markets, minimised government, spending and taxes, are part of the UK coalition government’s mantra of which he is part, just as they are of the GOP in the US. Successive US and UK governments have, since Reagan and Thatcher, broadly accepted these positions. But times have changed and what may have worked as recently as a decade ago, is no longer appropriate, causing harm to both ordinary people and the overall economy, quite undermining Ms Bachmann’s contention. For example, the effects of personal taxation have changed radically.
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The Long Term Impact of the Murdochs’ Disgrace

It seems impossible to ignore the Murdoch saga: the seedy old martinet, his chosen heir apparent and the family sycophants and hangers on, shades of the Duvaliers’ era in Haiti, or a dozen or more banana republic tyrants. The Murdochs are clearly prepared to be as ruthless and dishonest as it takes in pursuit of their own self-interest. Their dishonesty, now being revealed daily, was confirmed early on, for example, by Harold Evans, much respected editor of the Times, when the Murdochs took over. Assurances of continued editorial independence were made as a condition of the acquisition, but within a year ‘every guarantee had been broken’. Evans concluded that the Murdochs would ‘promise anything to gain control’. As they are doing now to gain control over BskyB.

The Murdochs’ utter ruthlessness is also being demonstrated daily by the continuing revelations of criminal activity sanctioned in their organisation, and not least by the abrupt closure of the News Of The World with the destruction of around 200 jobs, in some vain attempt to rescue vestiges of public respect for the family.
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The Untruths Which Rule the World

There is quite a catalogue of actual and potential man-made disasters. They include the risk of Greece defaulting on its debts, followed by Portugal, Ireland and the collapse of the Eurozone, the hollowing out of real economy firms particularly in the UK and to a slightly lesser extent the US, the explosion in inequality of wealth and income symbolised by the obscenity of financial trader’s and bankers’ bonuses, the credit crunch, hedging and short selling, the size and power of financial sectors, the failure to distinguish between investment in real economic activity and purely speculative investment, growth of structural unemployment, the explosion of ‘hatred and contempt’ among ordinary people initially in Greece and Spain, poverty in sub-Saharan Africa, ideologically based policies of the IMF, WTO and the World Bank and the whole unsustainable enterprise destroying earth’s resources and climate, and even threatening human existence.
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How To Spend It

The bonuses earned by the bankers, hedgers and various fund managers arise as a result of making fast, smart decisions about price movements in currencies, commodity prices, food, energy and key resource shortages, mergers and acquisitions and the like. The quick returns from such deals ensure that mini speculative bubbles keep getting inflated, and the smarter fund managers make money when the bubbles burst as well as when they inflate. And the smartest and biggest fund managers are able to create bubbles and control their inflation and bursting, that is except the really big, conglomerate bubbles that gather once in a while. So speculative trading continues to grow and the problem of how to spend the resulting bonuses keeps on growing too. It really is quite a problem.

It’s not as though it’s a one off. And it comes on top of a basic salary which very much more than pays for living expenses at quite a generous level. You can do the Veblen thing and go for some conspicuous consumption – conspicuous waste is really not regarded as attractive today even if one was so inadequate as to find it intrinsically appealing. But conspicuous consumption is still seen as admirable. The Financial Times ‘How to Spend it’ Saturday supplement provides some ideas. For example, £81,000 for the Philip Treacy hat as worn by Princess Beatrice (??) at the royal wedding, except it looks so silly. Or £78,000 for the ex-Kate Middleton St Andrews dress. Or a wrist watch, amount spent depending mainly on the weight of gold and diamonds. But really such spends, even if one felt desperate to bolster one’s identity that way, could only provide relatively minor contributions to solving the problem.
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