Of all tyrannies, a tyranny exercised for the good of its
victims may be the most oppressive.

This post originally appeared at cobdencentre.org.

Via FT.com, Ofgem urges a shake-up of the energy market,

Sweeping reforms of the UK’s energy market must be brought in urgently to protect energy supplies, reduce greenhouse gas emissions and deliver the £200bn investment needed in the power sector, the energy regulator said on Wednesday.

Ofgem said options for reform would include placing more stringent legal obligations on energy suppliers, and “improved market signals”, which could include a higher price on carbon dioxide emissions. More drastic options could include a centralised renewables market and a central buyer of energy for the whole of the UK.

Which all seems very well, until you realise that this is the fruit of an ideological aversion to the free mutual cooperation of individuals and corporations. Ofgem apparently tell us, “It would mean taking away the market’s role in delivering that investment.”

We need to make our minds up about whether planned or free economies can provide us with the means of our survival and prosperity. History’s answer is clear: planned economies cause misery and then collapse.

Further reading

• Living with Leviathan, David B Smith
• Moral Markets and Honest Money
• Ofwat, Water UK, the Consumer Council for Water and The Managerial Revolution (via stevebaker.info)
• XXXVI. THE CRISIS OF INTERVENTIONISM: The Harvest of Interventionism (via mises.org)

This post originally appeared on cobdencentre.org.

Via FT.com / US / Economy & Fed – Fed signals pullback in liquidity supports, we learn:

The Federal Reserve on Wednesday upgraded its assessment of the US economy and highlighted its intention to shut down most of its crisis-fighting liquidity facilities in early 2010.

And consequently:

Stocks eased slightly after the Fed statement, while the yield curve in the bond market steepened.

Which brings us on to Roger Koppl’s Big Players and the Economic Theory of Expectations.

I am indebted to Cobden Centre Supporter Bruno Prior for introducing me to Koppl’s work which extends the tradition of Ludwig von Mises, Friedrich Hayek and others, unusually, applying empirical methods to demonstrate the application of the theory.

Koppl demonstrates, with extensive reference to other scholars, that investment and all other economic actions depend on “subjective” expectations. He then presents a theory of expectations which assumes people interpret their situations in unpredictable ways. This theory includes a theory of “Big Players”:

Big Players are privileged actors who disrupt markets. A Big Player has three defining characteristics. He is big in the sense that his actions influence the market under study. He is insensitive to the discipline of profit and loss. He is arbitrary in the sense that his actions depend on discretion rather than any set of rules. Big Players have power and use it.

We learn that Big Players reduce the reliability of expectations, thereby disrupting markets. They encourage herding and produce perverse effects on entrepreneurship: traders must pay attention to the Big Player and not the fundamentals.

And so we find today, for example, the markets moving in response to the Fed not the realities of the economy…

In this article, I make the case that we live in a managerial society, one born in the tragedy of the first half of the twentieth century, and that it is this social system which is failing today. I also set out what can be done about it: the future is hopeful.

This morning, I watched on the BBC a fascinating series of interviews in connection with this story about water pricing:

Average water bills in England and Wales will be reduced slightly over the next five years, regulator Ofwat has announced.

It has ruled that typical bills will fall by £3 to £340 by 2015, before the impact of inflation is considered.

Of course, the interviews were not in themselves fascinating; they were fascinating for what they said about the way we have set up our society.

First, Ofwat’s Chief Executive explained with palpable enthusiasm what the regulator is going to do to the industry: force them to operate their businesses in certain ways, insist that there is a record amount available for investment, hold them to account and so on. Ofwat is of course a quango: its estimated expenditure for 2008-9 was £14,856,000.

At some point we heard the industry’s concerns. In September, Water UK, who are “working on behalf of the water industry towards a sustainable future”, said:

Unless Ofwat thinks again, the draft determinations will:

• put at risk capital expenditure needed for the sustainability of water services;
• delay service improvements consumers have requested and expect to be delivered;
• reduce investors’ confidence in the financial stability of the sector leading to higher prices in the medium-term; and in consequence
• provide a poor bargain for customers and society.

It might be worth reminding ourselves that there was a windfall tax on the utilities but we face an energy crisis: now we find the water industry saying, using jargon, that price controls threaten water supplies.

Returning to the BBC story, after Ofwat, we heard from the National Chair of the Consumer Council for Water, who explained how the Council would be standing up for consumers. Superficially, this is all very well — we would all like someone to stand up for us — but I immediately thought, “Is this a voluntary body of concerned consumers or a government body funded by the taxpayer?”

It is, of course, a government body, one with net operating costs of £5,836,000 in 2007-08.

We now wait for Water UK’s response to Ofwat’s announcement. We see a struggle of Titans in the media, all Titans funded by us: presumably operating Water UK costs the industry — and therefore all of us — a considerable sum every year (their accounts did not come immediately to hand).

So, in a nutshell and leaving aside indirect burdens, it appears the government is spending well over £20 million of our money every year just to deliver a ruling that we shall pay £3 a year less for water by 2015, ignoring inflation.

That will perhaps not come as a great comfort to the gentleman who was telling me recently that, at the age of 74, he is still paying income tax on the modest income he gleans from his savings and state pension. This is a man who worked and saved all his life.

He is right to be angry.

The nature of the system

Now, I have spent enough time with public servants to know that everyone means well. I know from personal contacts that senior civil servants are, on the whole, people of the very highest calibre, people of intellect and talent, good communicators with the best of motivations.

Nevertheless, the system which has been set up is one of conflict. Conflict between “the industry” (represented by Water UK), “the consumer” (represented by the Consumer Council for Water) and the regulator (Ofwat). It spends a great deal of money that we do not have.

Now, I do not propose in this article to prove whether this system is in any sense working or not: I attempt only to set out the pattern of our society and stimulate thought. Plenty of others have set out the case at length: see for example the Institute of Economic Affairs’ Living with Leviathan by David B. Smith. As Smith explains (emphasis mine):

New Labour’s so-called ‘third way’, and the prevalent economic paradigm in much of ‘Old Europe’, appears to correspond to none of these categories [free market, socialist and 'Butskellite' mixed]. Instead, it appears to be a system under which the private sector maintains a nominal legal control over its capital and labour, but the returns on these factors of production are so heavily influenced by tax and regulation that the public sector ends up effectively controlling such returns. This sham form of mixed economy, which needs to be distinguished from the British mixed economy of the 1950s, has traditionally been associated with fascist regimes – for example, the gelenkte Wirtschaft (supple or ‘joined-up’ economy) that Goering implemented in Nazi Germany in 1936. Such systems represent an obvious intellectual attempt to reconcile a socialist-inspired desire for a powerful interventionist state with the wealth-creating force of ‘bourgeois-liberal capitalism’, and tend to be popular with politicians and bureaucrats, because they force all sectors of society to kowtow to the state and its functionaries if they are to remain in business.

This is not a system of freely-chosen mutual cooperation: it is a system of managerial control.

The Managerial Revolution

It is very easy to find polemics against the social changes which were born in the first half of the twentieth century through two world wars and the Great Depression. They include, for example:

• Karl Popper’s The Open Society and Its Enemies: Volume 1: The Spell of Plato and Volume 2: Hegel and Marx;
• Friedrich Hayek’s The Road to Serfdom;
• And, bringing things more up to date, Jonah Goldberg’s Liberal Fascism: The Secret History of the Left from Mussolini to the Politics of Meaning

And it is very easy to find the relevant propaganda. However, it was only recently that I discovered a scholarly attempt to set out, in 1941, “What is happening in the world”: James Burnham’s The Managerial Revolution.

Burnham identifies and examines three theories of the development of society:

• The permanence of capitalism,
• The inevitability of socialism,
• The transformation of capitalism into some non-socialist form of society.

Burnham — previously a Trotskyist — dismissed the first two and explained that society was experiencing a “Managerial Revolution”. Consider (emphasis mine):

Burnham looked around the world for indications of the new form of society which was emerging to replace historic capitalism and saw certain commonalities between the economic formations of Nazi Germany, Stalinist Russia, and America under Franklin D. Roosevelt and his “New Deal.” Burnham argued that over a comparatively short period, which he dated from the first world war, a new society had emerged in which a “social group or class” which Burnham called “managers” had engaged in a “drive for social dominance, for power and privilege, for the position of ruling class.” For at least a decade previous to Burnham’s book, the idea of a “separation of ownership and control” of the modern corporation had been part of American economic thought, with Burnham citing The Modern Corporation and Private Property by Berle and Means as an important exposition. Burnham expanded upon this concept, arguing that whether ownership was corporate and private or statist and governmental, the essential demarcation between the ruling elite (executives and managers on the one hand, bureaucrats and functionaries on the other) and the mass of society was not ownership so much as it was control of the means of production.

So, while Burnham made many incorrect predictions, it does appear that, at last, here we are, firmly entrenched in a managerial society. Ownership is separated from control. We do indeed have a managerial system along the lines Burnham identified: technical managers, executives, finance capitalists and stockholders. We see that the stockholders do not actually control the companies they own and that attempts to motivate managers by making them stockholders seem to fail because the downside is not shared: bank staff were already paid in deferred stock options before the crisis and, in any event, the crisis was caused by government intervention.

It is this managerial system of society which is now failing us. Let me give two further examples.

As I have reported here in respect of the European Union, an organisation whose propensity to issue detailed rules hardly needs a reference:

So we have the bizarre spectacle of socialists who think the EU may be neo-liberal, capitalists who think it is a socialist project and democrats who illustrate the EU’s democratic deficit to the agreement of its supporters and even the EU itself.

And yet Burnham wrote (1941):

The day of a Europe carved into a score of sovereign states is over; if the states remain, they will be little more than administrative units in a larger collectivity.

It seems to me that the European Union is neither neo-liberal, with all its restrictions on external trade, nor is it socialist, with its emphasis on a supposedly free market: the European Union is managerial.

In “The Living Dead: Switched Off, Zoned Out – The Shocking Truth About Office Life”, David Bolchover makes the case that:

The real truth is that there are millions upon millions of people who are actively disengaged from their jobs, who spend months and years sitting in offices doing next to nothing, lost in the cracks of laughably inefficient and abysmally managed large organisations, their talents wasted and long forgotten.

And there is the tragedy: talents wasted and forgotten. No one is arguing against individuals: we criticise the system in which we live and work. Surely the stellar success of Dilbert and The Office speak for themselves? Why not encourage a new system?

The fundamental problem and the route to progress

Society is the cooperative actions of billions of thinking, acting people. It is an unimaginably complex system which is not only beyond complete comprehension at any particular instant, but which remakes itself and its trajectory as people make subjective choices, moment by moment.

In other words, society cannot be managed. It is a self-organising system which must be allowed to do just that: organise itself.

Ironically, the scholastics of mediaeval Salamanca, who first wrote systematic treatises on economics, knew this, as did many of the enlightenment philosophers. Perhaps the “scientific socialists” forced us to forget.

Management is a worthwhile and laudable profession — I would say that, as a manager myself — but to apply a tool to a problem it cannot solve is a mistake. We have been making this mistake long enough. As Professor Jesús Huerta de Soto writes:

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

Thankfully, David Cameron has been setting out, consistently over several years, a vision of a post-bureaucratic age:

We’re living in an age where technology can put information that was previously held by a few into the hands of almost every one. So the argument that has applied for well over a century – that in every area of life we need people at the centre to make sense of the world for us and make decisions on our behalf – simply falls down. In its place rises up a vision of real people power. This is what we mean by the Post-Bureaucratic Age. The information revolution meets the progressive Conservative philosophy: sceptical about big state power; committed to social responsibility and non-state collective action. The effects of this redistribution of power will be felt throughout our politics, with people in control of the things that matter to them, a country where the political system is open and trustworthy, and power redistributed from the political elite to the man and woman in the street.

For all the rough and tumble of contemporary politics, I am convinced that David Cameron and the Conservative Party have the right vision and the right policies to transform our society into a system which will prosper and endure. People need more power over their own lives, more opportunity, more responsibility and a secure environment within which to determine their own destiny.

The managerial revolution is at an end: it is time for change.

Further reading

• The Managerial Revolution
• Political Power and Democratic Control in Britain: The Democratic Audit of the United Kingdom
• Chaos: A Very Short Introduction
• The Pretence of Knowledge, my precis of Hayek’s Nobel lecture
• Human Action: A Treatise on Economics, which sets out the key issues in the first volume (PDF)
• Theory and History: An Interpretation of Social and Economic Evolution (PDF)
• The Boundaries of Order (PDF)
• Moral Markets and Honest Money
• Economic Freedom and Interventionism (online)

After debating today with my pastor whether what the world needs is more or less government intervention in the cooperative actions of individuals (ie, the economy), I rediscovered the following from De Tocqueville (1835/1840). The passage paints his vision of a future democratic society, indicating how he foresaw people might live:

I seek to trace the novel features under which despotism may appear in the world. The first thing that strikes the observation is an innumerable multitude of men, all equal and alike, incessantly endeavoring to procure the petty and paltry pleasures with which they glut their lives. Each of them, living apart, is as a stranger to the fate of all the rest; his children and his private friends constitute to him the whole of mankind. As for the rest of his fellow citizens, he is close to them, but he does not see them; he touches them, but he does not feel them; he exists only in himself and for himself alone; and if his kindred still remain to him, he may be said at any rate to have lost his country.

Above this race of men stands an immense and tutelary power, which takes upon itself alone to secure their gratifications and to watch over their fate. That power is absolute, minute, regular, provident, and mild. It would be like the authority of a parent if, like that authority, its object was to prepare men for manhood; but it seeks, on the contrary, to keep them in perpetual childhood: it is well content that the people should rejoice, provided they think of nothing but rejoicing. For their happiness such a government willingly labors, but it chooses to be the sole agent and the only arbiter of that happiness; it provides for their security, foresees and supplies their necessities, facilitates their pleasures, manages their principal concerns, directs their industry, regulates the descent of property, and subdivides their inheritances: what remains, but to spare them all the care of thinking and all the trouble of living?

Thus it every day renders the exercise of the free agency of man less useful and less frequent; it circumscribes the will within a narrower range and gradually robs a man of all the uses of himself. The principle of equality has prepared men for these things; it has predisposed men to endure them and often to look on them as benefits.

This does appear to be more or less where we are today. Thankfully, De Tocqueville ends with one option which is cause for optimism:

A constitution republican in its head and ultra-monarchical in all its other parts has always appeared to me to be a short-lived monster. The vices of rulers and the ineptitude of the people would speedily bring about its ruin; and the nation, weary of its representatives and of itself, would create freer institutions or soon return to stretch itself at the feet of a single master.

Certainly we are close to ruin and certainly we are weary of our representatives: shall we create freer institutions or stretch at the feet of a single master? It should be obvious to even the most inconstant reader that I propose freer institutions and a life of responsible liberty under the rule of law.

A problem with this approach is that at least a significant minority insist on choosing actions which harm others or which produce in themselves harms which the compassionate seek to remedy. Perhaps wide-ranging freedom from government coercion can only survive if what is within us produces free choices which promote the well-being of ourselves and our fellows.

One source of this morality within is well-understood Christianity. What is to be offered to those and by those whose reason or disposition rules out Christ? Perhaps rational self-interest would do:

When one speaks of man’s right to exist for his own sake, for his own rational self-interest, most people assume automatically that this means his right to sacrifice others. Such an assumption is a confession of their own belief that to injure, enslave, rob or murder others is in man’s self-interest—which he must selflessly renounce. The idea that man’s self-interest can be served only by a non-sacrificial relationship with others has never occurred to those humanitarian apostles of unselfishness, who proclaim their desire to achieve the brotherhood of men. And it will not occur to them, or to anyone, so long as the concept “rational” is omitted from the context of “values,” “desires,” “self-interest” and ethics.

So, we should live in freedom, but we should recognise for ourselves the boundaries to that freedom. For many of us, that requires a change within. For those who fail to recognise the boundaries of order, there must be law.

Read more of “What sort of despotism democratic nations have to fear” here.

The statutory body “The Committee on Climate Change” has announced:

Cutting gross UK aviation emissions in 2050 to 2005 levels together with 90% emissions cuts in other sectors would achieve the required economy wide 80% emissions reduction which has been committed to by the UK under the Climate Change Act.

Yesterday, I learned there is an agile sports car in development which will achieve 75 mpg: very impressive, but cutting emissions by 90% means a target of about 300 mpg. In the meantime, this is what people want, Nissan’s new supercar, the GT-R, spotted on the way home amongst Subaru rally cars for the road:

We should note the presumption by the CCC that it is for government to plan society.

Meanwhile, it turns out there are plenty of peer-reviewed papers which contradict global warming alarmism. I read recently an article which asked “What will it take for the mainstream media to report reasonably on global warming?” I suggest the answer is a more serious “danger to the community” story, one which indicates where planned societies lead.

Did you hear the one about bobbing heads on Sunday agreeing that the cause of the Great Depression was the absence of government guidance? “The Great Depression would never have happened if there had been any economic regulations,” agreed the policy wonks.

Oh, really?

So you think a free society generated that monstrosity?

It is accurate to say that in 1900 a free society did exist. The government still approximated a minimal state, exerting minimal guidance, and commanding minimal economic regulation. But, after 1900, virtually all public policy proposals called for more extensive governmental guidance.

via Did You Hear the One About… by Floy Lilley.

Via FTSE 100: stock market has best month in more than six years – Telegraph:

The stock market has enjoyed its best month in more than six years, boosting the savings of millions of investors and bringing hope that the worst of the recession may be over.

The FTSE 100 index of leading shares climbed 8.5 per cent in July, adding £134 billion to the value of the stock market, its best monthly performance since the fall of Baghdad during the second Gulf war in April, 2003.

The rise in share prices followed a series of strong profit figures from Britain’s biggest companies, with many proving to investors that they are coping well in the recession by cutting costs.

However, according to Austrian-School Theorists¹:

[U]ninterrupted stock market growth never indicates favorable economic conditions. Quite the contrary: all such growth provides the most unmistakable sign of credit expansion unbacked by real savings, expansion which feeds an artificial boom that will invariably culminate in a severe stock market crisis.

In other words, and most unfortunately, the present stock market conditions are an illusion produced by quantitative easing that will not last. And:

The crash will take place as soon as economic agents begin to doubt the continuance of the expansionary process, observe a slowdown or halt in credit expansion and in short, become convinced that a crisis and recession will appear in the near future. At that point the fate of the stock market is sealed.

1. De Soto, “Money Bank Credit and Economic Cycles”, p462 [↩]

With all the debate about quangos, I wondered whether anyone had made the case against them based on the Rule of Law.

And so I found and added to my reading list Political power and democratic … – Google Books:

There is a sense in which quasi-government diminishes the role and authority of Parliament as well as its more obvious erosion of local government. In practice, the quango state removes layers and ares of policy-making and action from the parliamentary — and public — gaze. The absence of a constitutional framework and the informal and secretive nature of its policy processes blocks scrutiny and parliamentary and public debate about policy goals and outcomes. The government can co-opt and mobilise all manner of bodies, including private companies, consultants and advisers within the domain of quasi-government to carry out major tasks, such as industrial re-structuring, training and employment policies. Parliament has no oversight over the government’s creatures, their interests and processes, as they operate under cover of ministerial discretion. Indeed, even the government itself often has no direct control over them.

I am reminded of a quote attributed to Harold MacMillan:

We have not overthrown the divine right of kings to fall down for the divine right of experts.

And of the following campaign poster from the Conservative Party Archive (shelfmark 1929-31):

As we approach leaving the EPP, let’s remember someone else who gets it:

We must say openly that the present economic system of the EU is a system of a suppressed market, a system of a permanently strengthening centrally controlled economy. Although history has more than clearly proven that this is a dead end, we find ourselves walking the same path once again. This results in a constant rise in both the extent of government masterminding and constraining of spontaneity of market processes. In recent months, this trend has been further reinforced by incorrect interpretation of the causes of the present economic and financial crisis, as if it were caused by free market, while in reality it is just the contrary – caused by political manipulation of the market. It is again necessary to point to the historical experience of our part of Europe and to the lessons we learned from it.

via Václav Klaus – Speech of the President of the Czech Republic Václav Klaus in the European Parliament.

This wonderfully short book of just 120 pages explains through four essays, the influence of money and the capital structure of production on the trade cycle.

The authors are Mises, Haberler, Rothbard and Hayek. Each essay is short, approachable and insightful, while pointing to more detailed literature. Consider for example, Rothbard, remembering that here “inflation” is an increase in the money supply:

So now we see, at last, that the business cycle is brought about, not by any mysterious failings of the free market economy, but quite the opposite: By systematic intervention by government in the market process. Government intervention brings about bank expansion and inflation, and, when the inflation comes to an end, the subsequent depression-adjustment comes into play.

The book is available free online here.