Friedrich A Hayek (1899–1992)

F. A. Hayek, who died 25 years ago today, was one of the most important liberal thinkers of all time. He wrote not just about economics (for which he won a Nobel Prize), but also politics, psychology, and the history of ideas.

He was a good friend of the Adam Smith Institute, and spoke at many of our seminars, where his great wisdom was apparent. Often our participants would be discussing some difficult subject, getting tied in knots: whereupon Hayek would rise, cut straight to the heart of the matter, and provide the answer.

Hayek’s 1944 The Road To Serfdom, which showed how easily the ideas of social democracy could (and did) morph into totalitarianism, brought him popular fame. Soon after, he founded the Mont Pelerin Society, an international forum that kept liberal ideas alive during the bleak times after the Second World War. Its ideas influenced a whole generation of intellectuals and informed the policies of Margaret Thatcher (1925-2013), Ronald Reagan (1911-2004) and the new Eastern European leaders who emerged after the fall of the Berlin Wall.

His life as an economist began when he was hired by Ludwig von Mises. In 1927 they set up an institute to explore business cycles. They concluded that these cycles were caused by central banks setting interest rates too low — encouraging excessive borrowing, investment and spending. But low rates also discouraged saving, and when funds dried up, investments had to be abandoned and people were thrown out of work. It explains much of our present predicament.

In the 1930s, Hayek came to Britain, becoming professionally famous through his disputes with Keynes, who wanted government spending to kick-start the economy. Hayek countered that this would bring only inflation, disruption and debt.

But Keynes won the day, and Hayek turned more to social and political philosophy. His key insight was the concept of spontaneous order. Human and animal societies, he observed, show obvious regularities. Yet nobody planned the society of bees or the rules of human language or the operations of markets. They evolved spontaneously, and endured simply because they were useful.

But they are also complex and devolved. We tamper with them at our peril — as evidenced by the dismal failure of economic ‘planning’ behind the Iron Curtain.

We did not design the market system. We stumbled upon it. When people traded, prices emerged: and prices contain all the information needed for the system to work. We do not need to know why people want more of something, or why not enough was being produced: a rising price says it all — and draws effort and capital into serving those wants.

Hayek saw freedom as critical to spontaneous orders. When we force people to act in preconceived ways, we disrupt the delicate workings of society. And if spontaneous social orders are to evolve and strengthen, they need new ideas, not preconceived ones.

Freedom, to Hayek, meant minimising coercion, including state coercion. The state should be limited to preventing people breaking the rules by which society survives and prospers. But to prevent state power being abused, we need a rule of law that restrains government officials just like the rest of us. 

Hayek saw justice as the rules that enabled the social order to work. We could not invent justice: we had to discover it through trial and error. What people call ‘social justice’ was quite different — not a set of rules but a preconceived social outcome. Achieving that outcome meant treating people differently — and once we began to do that, there was no obvious stopping point on the road to serfdom.

Eamonn Butler is author of Friedrich Hayek: The Ideas And Influence Of The Libertarian Economist (Harriman House).

Robots are taxed, Mr Gates – too much

Microsoft creator Bill Gates says that robots that take human jobs should pay income tax. Zillionaire businessman he may be, but does he understand basic economics? It seems not.

First, robots are already taxed – to the hilt. They are a form of capital, and capital has long been an easy mark for high-spending politicians. But capital does not just grow on trees, you have to create it. That means cutting your consumption and putting something aside to make all the tools that you hope will make your life easier and more productive in the future.

Of course, the only certainties in life are death and taxes (and unfortunately they come in the wrong order), so the labour-saving robots we buy for our homes and kitchens come out of taxed income. And if we are silly enough to actually invest our savings until we have enough for that new computer or new car, we pay tax on the interest (and on inflation as well).

Regarding the businesses that make robots and computers other tools, the investors who finance them already pay income tax, or company taxes on the return that their investment makes.

Second, remember that a robot is just a tool. They may be very fancy tools, but to economists they are no different from any other kind of tool going back to pre-history. They are just another form of capital that boosts your productivity.

The tools that have ‘taken’ most human jobs are not robots, but the most basic tools developed by our early ancestors. Think how many workers you could save by digging the peat to fuel your roundhouse with a wooden spade, rather than by hand. It is a hundred times easier. If you then transport the peat back home using a wheelbarrow – another tool – you save even more time and back pain. And so it goes: the spinning jenny, the cotton gin, the water frame, steam, internal combustion, electricity, the internet, industrial robots… they all allow us to produce and enjoy much, much more. Bill Gates’s logic is that we should tax all tools, from spades to spanners. Nuts.

And do these tools actually ‘cost’ jobs? No, they have allowed humanity to prosper and increase, with far more of us now engaged in far more productive and useful things with far less effort, time and cost. 

Most of us would think that a rather good thing. When you tax things, you tend to get less of them. So why tax tools? Why tax progress?

Third, do not get taken in by the politicians’ talk about how great jobs are. Leisure time is Christmas: jobs are the January credit-card bill. Jobs are the sacrifice you have to make to get what you want.

Entirely naturally, we want that sacrifice to be as small as possible. We want to work less, work in more enjoyable forms of labour, and have more time for ourselves to spend with our families, our leisure, our interests, our philanthropic activities and all the rest. You don’t help human workers by making the tools they need to achieve these things more expensive. Indeed, if robots liberate us to do all these desirable things – as they do – they should get a reward, not a tax bill.

Fourth, if you really do want to help humankind, is yet another tax the answer? We’re taxed on what we earn, what we spend, the spirits we put into our cars and our stomachs, the flights we take, the investments we make, the people we employ, the gambling we enjoy. Taxing our tools too is too much.

A much better idea than putting income tax on robots would be to remove income tax on humans. That would spur human progress faster than even the visionary Mr Gates could ever imagine.

iPhone anniversary

Apple CEO Steve Jobs was a visionary who wanted to put a computer – and a cool, easy-to-use one at that – not just into everyone’s home but into everyone’s pocket. Ten years ago, on 9 January 2007, he succeeded, launching his “magical” iPhone at MacWorld in San Francisco.

Everyone knew that Apple was ‘getting into the telecoms business’. But he did not just promise his audience “a revolutionary mobile phone”. He promised them two other new products: “a widescreen iPod with touch controls”, and “a breakthrough internet communications device”. It was only after a few moments that he made his audience realize that these were all the same device. “Today Apple is going to re-invent the phone,” he said. “It will revolutionize the industry.” And it did.

Apple stock soared. But I doubt that even the visionary Steve Jobs anticipated just how much his invention would change our lives. The iPhone did not just revolutionize the telecoms industry. It revolutionized the conduct of all industry. Take banking as an example: we now routinely move money and pay for our coffee with a tap of a finger or a phone. I can’t remember the last time I actually went into a bank or saw a paper statement: the retail banking industry has gone almost entirely digital, and increasingly, almost entirely mobile.

For five years now, smartphones have been outselling PCs. It is reckoned that 5 billion of the world’s 7 billion population have a mobile phone – pretty well everyone except the infants, in other words. And half of those are smartphones.

We each carry in our pockets an entire warehouse-full of useful tools: a phone, a camera, a movie camera, a map that tracks you (like in James Bond’s Aston Martin DB5 in Goldfinger), a calculator, a radio, a stopwatch, a timer, an alarm, an address book, a notepad, a health monitor, a music store, a complete set of train timetables, a torch, an itinerary to anywhere you want to go, and one that avoids traffic too, a credit card, a compass, a thing that wakes you up when you reach your station on the train… well, the list goes on and on.

As Apple’s ingenious marketing team noted, whatever you want to do, “there’s an app for that”. Indeed, it is estimated that there are 2 million iPhone apps, and perhaps 2.2 million apps for its Android competitors.

And remember, that all this is in the hands and pockets of over a third of the world’s population, while another third have something that looks more and more like it every day.

This is, truly, a miracle of capitalism.

I often wonder what might have happened if the telephone industry were still in state ownership, as it was here in the UK until Mrs Thatcher privatized them in 1984, and had decided to produce portable phones. I can’t believe that they would even now be any smaller than the brick that Sean Connery had in Doctor No (and just like the map, even that, at the time, was merely a figment of the director’s imagination).

And if, ten years ago, some government department or quango had been charged with developing applications for a smartphone, how many do you think there would be today? I would guess maybe six, with another fifteen in development. 

But we have millions of apps, precisely because their development is not centralized, but is spontaneous and competitive. Millions of people have good ideas and it is cheap to promote them as apps. If other people find them useful – or even just fun – they will gladly pay a dollar to have them. It’s the very essence of capitalism – except that you don’t necessarily need much capital, just vision and determination, to create a bestselling app.

I doubt that even we, ten years later, can anticipate just how much Steve Jobs’s invention, and its successors, will change our social and business lives over the next decade. But that’s capitalism for you – always surprising us with new wonders.

Put an end to this Brexit bickering

Having voted to leave the European Union in a referendum, Britain is now expected to initiate that process by triggering Article 50 of the Treaty of Lisbon. This was designed to reduce uncertainty in the event of an EU Member State wanting to leave, by providing for a two-year negotiation period.

In fact, it will have the opposite effect. In any political negotiations, both sides tend to adopt extreme positions in order to get the other to make concessions. Only just before the clock strikes twelve does agreement break out – if indeed it does. Such a game of chicken hardly encourages investors, as we discovered during the trade unions v government disputes of the 1960s and 1970s. Article 50 is a recipe for two years of uncertainty – or maybe three or four, knowing how these things are often eked out.

And what will we achieve from all this stress? Probably, two-thirds of diddly squat, which is what David Cameron got from his great ‘Renegotiation’ back in the Spring. The reason is that, if the EU concedes anything to us, it will face demands from other nations, both in the EU and outside, for a bit of the same. Give us a special deal, and everyone will want one.

A third problem is that it is not the leaders of the 27 other nations who will lead the discussions, but the eurocrats in Brussels. How else could it be? You cannot have 28 people round a negotiating table and expect agreement. But, as we have seen, the folk in Brussels are the most intransigent negotiators. They are invested in The Project, and the UK has put two fingers up in their face. Again, concede to us and The Project of ever closer union disintegrates, along with their own purpose, jobs and pensions. (Well, not pensions, of course.)

German carmakers and French food and pharma companies and everyone else who benefits from the UK’s £60-£90 billion trade deficit with the EU might be keen to keep tariff-free trading links open with the UK, fully aware that the UK, as the world’s fifth largest economy, would be good to keep sweet. But those who are actually leading the negotiations have a different, more political, agenda.

So two or more years of Article 50 negotiation will be worse than a waste of time. It will simply generate bitterness between the UK and the rest of the EU, and stir up uncertainty among investors on both sides of the English Channel. So what is to be done?

We could, of course, take the off-the-peg EEA solution, the ‘Norway model’. But that still means paying in to the EU budget and a large measure of free movement of workers, which were firmly rejected in the Referendum. And as Prime Minister Theresa May tells us, “Brexit means Brexit”. But her Great Repeal Bill idea of taking all EU law into UK law – where we can amend or scrap it as we like, on or own timetable, makes perfect sense.

Given that Article 50 will take us nowhere, however, the best thing is simply to invoke it and leave. Goodbye to the single market and the customs union, we will be governed by the WTO rules that actually govern our trade with the other 80% of the world. Since the rest of the world is 60% of our trade and rising (and the EU is 40% and falling), what’s the loss? Would our financial services be ruined because of the loss of passporting? Hardly, we were No1 before passporting, and our biggest single services customer is America, where we don’t have passporting. And in any case, we do not have a single market in services. It’s one of our biggest irritations, but it’s never going to change.

And the true meaning of ‘customs union’ is ‘protectionist club’. The average tariff is only 2.4% – so it is no big deal either way. But the EU raises large tariffs against certain products, especially food products, to protect its own farmers. Outside the customs union, we could buy food from the whole world, much cheaper. Our old Commonwealth partners would be delighted to sell it to us. That is good for us, and good for the poorest in many developing countries in particular. Not only the UK, and UK business, would benefit from us simply leaving, and making an offer to all the world to trade with zero tariffs. Some of the world’s poorest would too. But also, we would end all this Brexit bickering and be able to get on with real life.

Prosperity Mr President? The EU is the slowest-growing trading bloc in the world

President Obama says the UK needs to stay in the EU to promote ‘peace, prosperity and democracy’. Sadly, the EU does not promote any of these.

Peace in Europe is promoted by NATO. Look at the Balkans war. Though appalling genocide was going on under the noses of EU ‘peacekeepers’, the EU was unable to bring the conflict to an end. It was only when NATO – led in large part by the UK – stepped in that the carnage was stopped. 

And take Ukraine. It wanted closer links with the EU, but the EU’s ‘all or nothing’ policy made Putin fearful that this buffer state would turn into a Western enemy. The EU could do nothing to resist the occupation that followed.

Prosperity? The EU is the slowest-growing trading bloc in the world. Partly that is because of its sclerotic common currency, the euro – a political project that was pursued in the face of economic commonsense. 

Democracy? Power in the EU centres on the Commission, a group of appointed, not elected, politicians and officials. The public do not directly elect the national politicians who sit on the Council of Ministers – nor, for that matter, the panels of finance and foreign-policy ministers. And the vast majority of people in the UK have no idea at all who their Member of the European Parliament is. Not that the Parliament has any power to initiate legislation anyway. Our own legislation, and our Supreme Court, are overridden by EU institutions. 

For such a powerful nation, America is remarkably naive about foreign policy. The Administration seems to think that the EU is a kind of NAFTA, a loose free-trade agreement. In fact it is a political union – and one that no American would, on closer inspection, ever wish on itself or its friends.

Panama, ethics and the law

Discussing the Panama Papers with the BBC's Moneybox presenter Paul Lewis, I said I thought it odious that politicians were deliberately conflating (illegal) tax evasion with (legal) tax avoidance – such that innocent people who simply park their money offshore because it would be taxed to death at home are lumped in with Russian mafia bosses and scumbag dictators concealing the proceeds of their thefts. Lewis was having none of it: there is a big difference, he claimed, between simple folk putting a few bob in an ISA, as Parliament fully intended they should, and smart advisers setting up short-lived paper companies in Panama just to get round the tax rules.

For some years, UK Chancellor George Osborne have been on the same bandwagon, criticising "aggressive tax avoidance" – such as companies shifting cash round subsidiaries in other jurisdictions in order to get the best tax treatment, celebrities billing the BBC from purpose-made companies so that they don't pay 40% income tax, people paying themselves in ways that are not liable to national insurance contributions, wheezes to avoid capital gains tax – and all that sort of thing. And Prime Minister David Cameron has fully signed up to that line.

Now he is being hoist by his own petard. As his father, a financial adviser, put clients' funds in Panama, people naturally wondered whether the Prime Minister benefited from Panamanian tax avoidance. He yielded to pressure to publish his tax returns. These showed that (among other things that will be pored over by the papers) he stood to save £80,000 in inheritance tax by using the 'lifetime gift' mechanism. 

Millions of middle-class families do the same, of course. But when you have been so strident in denouncing 'tax avoidance', it looks – and is – hypocritical. The Prime Minister could, of course, do the Paul Lewis thing and say that 'lifetime gift' tax-avoidance is allowed by Parliament and is OK, but 'aggressive' tax-avoidance is shady and unpatriotic. But the distinction is lost on most people – who don't know what a 'lifetime gift' is and certainly would not have enough money to benefit from it.

The pressure is now on all politicians to reveal their tax affairs. The claim, by critics such as the Shadow Chancellor John McDonnell, is that this will expose tax-avoidance, self-interest and corruption. Some chance: smart accountants would have no problem concealing the affairs of their career-politician clients. What it would do, however, is to discourage talented people, such as those who have had a successful career in some other sector, from going into politics in the first place. You might be a model citizen, but would you want your finances, and those of your family, exposed in the national newspapers?

As the journalist Janet Daley says, this is the sort of mess you get into when politicians wander away from legislating and start moralising instead. The trouble with morals is that everyone has a different view on them. If you break the law, it is a matter of fact; whether your actions are moral or not is a matter of debate. Moralisers open themselves up to constant criticism.

The solution to this mess is quite obvious. Taxes on businesses and individuals should be so low that it is not worth evading (or even avoiding) them. And much simpler – the more complicated your tax code is, the more places there are to hide in it: and the UK tax code is one of the most complicated in the world. Indeed, George Osborne has made it even more complicated with all kinds of new reliefs, subsidies, schemes, limits and whatever else. If you are worried about money drifting off to Panama, you really need to start at home. 

Property rights and the wealth of nations

The International Property Rights Index, compiled by the Property Rights Alliance (based in Washington DC) and 92 partner think-tanks around the world, contains some interesting stuff. Finland tops the index, followed by Norway, New Zealand, Luxembourg and Singapore. At the bottom is (you guessed it) Myanmar, Bangladesh, Angola, Haiti and Venezuela. Indeed, the figures suggest a very strong and significant correlation (0.822) between a robust property rights system and GDP per capita. Countries in the top quintile of property rights scores have an average per capita income some 24 times higher than those in the bottom quintile. There is a positive but weaker correlation between property rights and economic growth, and property rights and foreign investment.

Interesting too is the result that the countries with the greatest gender equality, in terms of access to property rights, are again the richest, with Finland, Norway, New Zealand, Luxembourg, Sweden, Japan, Switzerland, Canada and the Netherlands topping the ratings. The countries with least gender equality feature many of the poorest, namely Bangladesh, Myanmar, Yemen, Libya, Angola and Nigeria.

So do countries have better property rights because they are rich, or do they get rich because their have better property rights? The remarkable decline of countries that have tried various brands of communism might give us a clue.

What a hopelessly mixed up policy the BBC is proposing

The BBC, Britain’s state-protected broadcaster, gets its funding from a tax of £145.50 on every household that possesses a TV capable of showing live broadcasts. That means live broadcasts from any broadcaster, so even if you never watch any BBC channels, you still have to pay. The exception is people over 75, who get their TV viewing for nothing because past governments ruled that television was an important source of companionship for the over-75s, many of whom live alone. This week it has been suggested that since the BBC is short of money, the over-75s should be asked to pay the licence fee voluntarily, even though they do not have to.

What a hopelessly mixed up policy this is. Firstly, Britain should not even have a state-sponsored broadcaster. It might have made sense in the 1930s when broadcast technology was new, and required fabulously expensive national infrastructure, but no longer. Increasingly, the BBC looks like a dinosaur among a growing number of independent and international broadcasters. But it has a near-monopoly grip over Britain’s media sector, of the sort that Rupert Murdoch can only dream of. Plainly, it should lose that protection and operate as a commercial broadcaster, using whatever mix of subscription and advertising it deems fit.

Not only should we not have a state broadcaster, nor should it be financed by what is in fact a poll tax on households. Nearly everyone has a TV, so the licence fee is more of a universal tax to support a state service, rather than a subscription for a broadcast package of your choice. And the same tax is paid by all households, rich or poor (apart from those comprising 75-year-olds, of course). So that is hardly a fair system either.

But if we are determined to keep this unfair license system and we really think it essential that people over 75 should be able to watch television without having to worry about the cost, there are better ways of doing it. One would be simply to raise the state pension by the equivalent £145.50 a year. At least then, the money would go to poorer households, because richer ones pay tax on their pension income. Again, the sate pension is an unfair and poor-value system (and it is also a Ponzi scheme, relying on current contributors to pay current pensioners), but this uplift would be better than what we have now.

There was a time when pensioners were, almost by definition, poor. That was the thinking behind making it universal at age 65 (for men, and 60 for women) when it was introduced in 1911. At that time, most people were in some form of manual labour, and by age 65 there was a fair chance that you were so exhausted by a lifetime of it that you could no longer do much useful work, and therefore could not support yourself. Today, however, pensioners are on average richer than the working population.

So it is certainly unfair to make the younger population pay to subsidise the TV viewing of everyone over 75, many of whom will be far richer than they. The Queen, and Rupert Murdoch, are both over 75: but why should a single mother in depressed Middlesborough pay higher taxes, or a higher licence fee, so they can get free television?

This is the kind of absurdity you get when things like broadcasting and pensions are run politically. Now we are trying to make the over-75s feel guilty for the absurdities that the political process has created. They should not fall for it.

Google's tax bill is nothing to celebrate

Google is to pay the UK £130m in back taxes. This has been hailed as a great victory against international corporations, which make profits in the UK but 'do not pay their fair share' of taxes'. Many others, like Amazon and Facebook, have also been cited as delinquents. A great victory for the UK Treasury? A boon for UK taxpayers? Hardly: by my calculations, £130m will keep the UK government going for just 91 minutes. If governments spent (and overspent) a lot less, individuals and firms might be more willing to pay tax to fund them.

The fact is that economic reality has changed (as it necessarily does) and companies are no longer as rooted to the land, in their factories and plant, as they were. Many, particularly in IT and services, can locate just about anywhere on the planet that they choose. And of course a number of enterprising countries are delighted to host them.

Moreover, with increasing volumes of trade done internationally over the internet, supplies sourced from many different countries, and semi-manufactures created in yet others, it is by no means clear where such companies' profits are actually made. A government might claim it is theirs, but they will be competing with others who think differently. If we are going to tax international corporations, we need to find a better way of doing it.

In any case, the tax that is supposedly paid by corporations is in fact paid by people. Studies show that three-fifths of the impact of corporation tax falls on the workers, reducing their wages. Of the remainder, some falls on shareholders by way of reduced dividends, making it harder for enterprising firms to attract new capital and create more jobs. Some is borne by customers in the form of higher prices.

Remember also the enormous benefits that firms such as Google, Facebook and Amazon bring to ordinary people. They have become successful international companies precisely because they offer people goods and services that they pay for quite willingly. In other words, they add value to our lives. Indeed, these companies add a lot of value to our lives. It would be well worth having them operating in one's country even if they paid the government no tax at all. Worth it solely for the benefit they bring to the public.

If only one could say that governments were equally valuable....

On interest rates

In his 2015 Ayn Rand Lecture, US investment banker Ken Moelis explained why low interest rates might be the new norm – and a perfectly rational one, rather than just a desperate attempt by central banks to keep things afloat. The reason he gave is that, thanks to capitalism, things are getting better and cheaper. If you don’t spend your money today, and put it under the mattress, it will buy even more in a year or so. And if you lend your money to someone and they repay you interest-free in a year’s time, your principal will buy you more than it could a year ago. In certain sectors – consumer electronics, for example – it buy you a lot more, so fast are prices falling. Thus a nominal interest rate of zero is actually a real, positive interest rate. Investors are willing to accept lower rates because falling prices boost their real returns.

This made me think more about falling prices – not prices that are falling because of inept, over-restrictive monetary policy, but prices that are falling because we are getting better and better at producing stuff. Specifically, I reckon that we are getting better and better at producing stuff at an accelerating rate.

Why? Well, we have been building up capital for a long time, so it is not surprising that production is getting more efficient. But something else has magnified that productivity. In the last 25 years, countries such as India, China and those in Eastern Europe have become part of the global economic system. And I think the economic network is a bit like a phone network – the more connections you add, the (exponentially) more useful it becomes. Add a fair chunk of the world population onto the capitalist network, and its performance rockets spectacularly too. New ideas, new resources, new competition – it sharply and disproportionately boosts the efficiency of the economic network, drives costs and prices down and quality up. And each improvement breeds others. So things get cheaper and cheaper, faster and faster.

Globalisation, in other words, is making our money go further at an increasing rate. We no longer need large nominal returns in order to do well by lending it out. Which is why nominal interest rates in the future are likely to be much lower than they have been in the past.