To attempt to coordinate society through
coercion is an intellectual error.

Having just read Chuka Umunna’s speech yesterday, I am sorry I was not able to make the debate. There is one particular fallacy underlying Labour’s rhetoric and this particular speech’s bluster: government cannot live forever beyond its means.

Evidence I have presented elsewhere shows that the total tax burden has been around 42% of GDP for 40 years, whoever has been in power. It looks like there is a practical limit to how much of national income the state can seize. If the state spends over about 40% of GDP for a long time, it must borrow and yet never repay. That this reality was hidden through currency debasement – inflation – for a generation is one of the most important causes of the present crisis.

In Economics in One Lesson, Henry Hazlitt wrote:

The precaution of looking for all the consequences of a given policy to everyone may seem elementary. Doesn’t everybody know, in his personal life, that there are all sorts of indulgences delightful at the moment but disastrous in the end? Doesn’t every little boy know that if he eats enough candy he will get sick? Doesn’t the fellow who gets drunk know that he will wake up next morning with a ghastly stomach and a horrible head? Doesn’t the dipsomaniac know that he is ruining his liver and shortening his life? Doesn’t the Don Juan know that he is letting himself in for every sort of risk, from blackmail to disease? Finally, to bring it to the economic though still personal realm, do not the idler and the spendthrift know, even in the midst of their glorious fling, that they are heading for a future of debt and poverty?

Yet when we enter the field of public economics, these elementary truths are ignored. There are men regarded today as brilliant economists, who deprecate saving and recommend squandering on a national scale as the way of economic salvation; and when anyone points to what the consequences of these policies will be in the long run, they reply flippantly, as might the prodigal son of a warning father: “In the long run we are all dead.” And such shallow wisecracks pass as devastating epigrams and the ripest wisdom.

But the tragedy is that, on the contrary, we are already suffering the long-run consequences of the policies of the remote or recent past. Today is already the tomorrow which the bad economist yesterday urged us to ignore. The long-run consequences of some economic policies may become evident in a few months. Others may not become evident for several years. Still others may not become evident for decades. But in every case those long-run consequences are contained in the policy as surely as the hen was in the egg, the flower in the seed.

From this aspect, therefore, the whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence:

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

Today is indeed already the tomorrow which the bad economist yesterday urged us to ignore. It’s a pity Labour want us to keep on ignoring it. If their goal isn’t poverty and general immiseration, one wonders what it is.

A new video from the Party:

Sayeeda Warsi, Co-Chairman of Conservative Party, has written:

Labour’s incompetent handling of our economy will hit all of our pockets. The cuts to come are Labour’s cuts. So, it’s only fair that the people responsible should share some of the pain. That’s why today I have written to each of Labour’s leadership candidates asking them to voluntarily give up their severance pay, worth £20,000 each. Forfeiting this pay would be the first step towards rehabilitation, and the first time they had come to terms with the mistakes of the past.

As I sit here on the train, reading a book on ethics, I am mindful of being an engineer in politics.

Engineers are quintessentially pragmatic. We get things done, in the circumstances we face, with the resources we have. We may accept falling short of perfection, but we deliver things which work and improve them.

However, we don’t flounder around uninformed. Aeroplanes do not fly thanks to fairy dust and software does not write itself. Aerospace engineering requires the application of correct ideas. Software engineering is little more than ideas implemented.

However, as anyone who has engineered aircraft or software will know, engineering is compromise.  No vehicle travels faster than light and no computer program has found the second Meerten’s Number¹ The former is fantasy. The latter, a practical impossibility.

That is, if you wish to achieve something in the real world, it is important to understand how the real world works, even if you cannot perfectly apply your ideas.

And so we turn to the attitude of the opposition benches yesterday.

Labour’s jeering, self-righteous indignation and lack of remorse over the public finances seems to suggest two premises. The first is that the government has an inexhaustible horn of plenty.  The second is that the financial crisis was an automatic feature of the economy which could not have been avoided.

The Government does not have an inexhaustible horn of plenty. Government funds itself by taking today, promising to take a greater sum tomorrow and debasing the currency. We have reached the limits of all three and the consequence is an entirely predictable crisis.

Thanks to something called the Laffer Curve, it now seems likely that increasing taxes will reduce government revenues.

We are at the limits of government borrowing. As one commentator put it, Gordon Brown’s borrowing was “reckless in the extreme”.  Furthermore, as was argued yesterday in the Commons, government borrowing last year was facilitated by buying from the market with new money government bonds of a value broadly the same as that which the government needed to sell.

Rulers have always debased the currency to pay for their escapades. When they clipped coins of intrinsic value, the immorality of it was obvious. Now that effect is achieved by something which sounds terribly technical (“quantitative easing“) and by the nature of the banking system (private banking with a fractional reserve, controlled by a central bank) the immorality of it is less obvious. However, as Toby Baxendale explains, the pound has lost around 99.5% of its value over the last century. Debasement is a stealth tax, one which redistributes wealth towards those who receive the new money first: it is primarily a tax on those with low and fixed incomes. At its extremes, currency debasement ends in a Crack Up Boom which finally destroys the currency.

As I have explained before, the banking crisis and the wider economic and fiscal consequences are not attributable to the free market. It was all horribly predictable.

Labour’s premises are wrong. There is no inexhaustible horn of plenty from which a benevolent government can dispense unlimited gifts. This crisis is not an automatic result of the operation of the free market, but a result of bad banking law and government intervention.

It is no good the opposition jeering and pointing as they oppose cuts to unaffordable Government spending. If we are serious about human well-being, prosperity and social progress for everyone, then we need to face the world as it really is and find a way through. Neither fantasy nor insistence on defeating practical impossibilities will do.

This begs the question, “How does society work?”. It turns out, of course, that our generation is not the first to ask. The first systematic treatises on the nature of society and social cooperation were written by the Thomist Scholastics of Salamanca in the 15th and 16th centuries. Their ideas resurfaced with scholars including Menger, Bohm-Bawerk and Mises. Their system of thinking may or may not be complete, but it appears to have the greatest explanatory power for our circumstances today.

Where to begin? Mises’ Human Action is perhaps the definitive treatise, though it has been extended and refined over the years. However, if you only have time for a pamphlet, I recommend Eamonn Butler’s primer on Mises, available to download or buy from the Institute of Economic Affairs.

We may not like reality, but we do have to deal with it. Pragmatic we must be, but let’s at least grasp some good ideas.

1. A Meerten’s Number is an integer which is its own Gödel Number: given a sequence x₁x₂x₃…x_n of positive integers, the Gödel encoding of the sequence is the product of the first n primes raised to their corresponding values in the sequence. That is, the problem of Meerten’s Numbers is one simply of arithmetic, albeit of large numbers and large primes. There is at least one Meerten’s Number but if you have found the second or subsequent number in the series, please let me know. [↩]