The Guardian confuses capitalism with feudalism*, yet again.

* For clarity, I bracket feudalists; corporatists and monopolists together, i.e. those sources of income which require the protection of the government.

'Capitalism' on the other hand, isn't an '-ism'. It's just normal human nature expressing itself. People invent and use labour saving devices, those are true 'capital'. (Clearly, some really large scale labour-saving devices, like the National Grid or the road network can only be provided by the State, but they are still capital).

People like having nice stuff, so they want to earn as much as they can for a given level of risk or effort (or minimise risk for a given level of income etc). Somebody else has got to make that nice stuff. People like to keep their earnings rather than seeing them siphoned off in tax or rent or by a monopolistic employer. Human nature.

Sorry for the length of this footnote :-)
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The article is headed: It’s not thanks to capitalism that we’re living longer, but progressive politics.

In recent years prominent pundits including Steven Pinker, Jordan Peterson and Bill Gates have invoked the progress in global life expectancies to defend capitalism against a growing tide of critics.

Pinker is a decent sort (even though he's based his whole career on padding out one chapter from a Jared Diamond book); Peterson is a right wing lunatic; and Gates is a monopolist-corporatist masquerading as a capitalist.

It’s a familiar story. The prevailing narrative is that capitalism was a progressive force that put an end to serfdom and set off a dramatic rise in living standards. But this fairytale doesn’t hold up against the evidence.

Serfdom was a brutal system that generated extraordinary human misery, yes. But it wasn’t capitalism that put an end to it. As the historian Silvia Federici demonstrates, a series of successful peasant rebellions across Europe in the 14th and 15th centuries overthrew feudal lords and gave peasants more control over their own land and resources.

Those serfs wanted to run their own small businesses (farms). Life under feudalism (or Communism) is miserable and there is no point in working any harder than you are forced to. So this was a revolt by people wanting to run their own small businesses for their own benefit i.e. a revolt by capitalists against feudalists.

The fruits of this revolution were astonishing in terms of wellbeing. Wages doubled and nutrition improved. It was a period of dramatic social progress by the standards of the time.

Hardly surprising. Capitalism works better than feudalism.

Then the backlash happened. Upset at the growing power of peasants and workers, and angry about rising wages, a nascent capitalist class organised a counter-revolution. They began enclosing the commons and forcing peasants off the land, with the explicit intention of driving down the cost of wages.

Those weren't capitalists, those were feudalists re-asserting themselves.

With subsistence economies destroyed, people had no choice but to work for pennies simply in order to survive. According to the Oxford economists Henry Phelps Brown and Sheila Hopkins, real wages declined by up to 70% from the end of the 15th century all the way through the 17th century.

Yes, the employers in towns and cities took advantage of the cheap labour (most quite cruelly so, but if all your competitors do it, you have to do it as well). Better to eke out a miserable living in a town that starve in the countryside.

Famines became commonplace and nutrition deteriorated. In England, average life expectancy fell from 43 years in the 1500s to the low 30s in the 1700s. In short, the rise of capitalism generated a prolonged period of immiseration.

For sure, we've established that. Successful peasants' revolt = wages doubled and nutrition improved. Feudalists re-assert themselves = the opposite happens.

He's also jumping the gun a bit here. The industrial revolution started sometime after 1760, depending how you define or measure it.

Drawing on a wide range of studies, Szreter shows that populations directly affected by industrial growth in Britain experienced a steady decline in life expectancy, from the 1780s through the 1870s, down to levels not seen since the Black Death in the 14th century.

Yes, that was because of poor nutrition (see above); employers exploiting the cheap labour that the feudalists had turfed off the land (see above); and appalling living conditions in towns and cities...

It wasn’t until the 1880s that urban life expectancies finally began to rise – at least in Europe. But what drove these sudden gains? Szreter finds it was down to a simple intervention: sanitation.

Agreed.

And yet progress toward this goal was opposed, not enabled, by the capitalist class – libertarian landlords and factory owners refused to allow officials to build sanitation systems on their properties, and refused to pay the taxes required to get the work done.

Their resistance was broken only once commoners won the right to vote and workers organised into unions. Over the following decades these movements leveraged the state to intervene against landlords and factory owners, delivering not only sanitation systems but also universal healthcare, education and public housing. According to Szreter, access to these public goods spurred soaring life expectancy throughout the 20th century.

OK, broadly correct.

Democracy is inherently a good thing, and it leads to universal healthcare/education which are clearly also good things (why the government should get involved in these rather than 'leaving it to the markets' is a separate topic). But proper free-market capitalism (as opposed to corporatism and cronyism) is part and parcel of democracy, each requires the other. I don't think it's possible to have one without the other. PR China is a totalitarian system which does not have free-market capitalism; it has crony capitalism.

But the interventions that matter when it comes to life expectancy do not require high levels of GDP per capita. The European Union has a higher life expectancy than the United States, with 40% less income.

The '40% lower' appears to be true. GDP in Europe has flat-lined since 2008, in the USA, it rebounded quite nicely, so well done them! (glossing over the fact that incomes/wealth are even more unequally distributed in the USA than in Europe, so median American is not better off than in 2008 either). I think the point here is that European countries spend on average 8% of GDP on price-regulated healthcare. For a similar level of service, the medical-industrial bloc in the USA is allowed to charge two or three times as much.

Costa Rica and Cuba beat the US with only a fraction of the income, and both achieved their greatest gains in life expectancy during periods when GDP wasn’t growing at all.

So why are people trying to flee Cuba and get to Florida, and not the other way round?

So let’s give credit where credit is due: progress in life expectancy has been driven by progressive political movements that have harnessed economic resources to deliver robust public goods. History shows that in the absence of these progressive forces, growth has quite often worked against social progress, not for it.

How is Cuba 'progressive'? LOLZ.

He's missed the point anyway; the optimum is proper democracy and proper free-market capitalism, where the government restricts itself to doing what it does best (e.g. providing; or subsidising and  regulating privately-provided universal healthcare and education) and lets the private sector to do what it does best (anything it wants, basically).

We do not know what the Industrial Revolution would have looked like if it hadn't been fuelled by cheap labour/peasants driven off the land. Factories would have had to offer much higher wages to tempt people off the land, for a start, so it might have been slower, but with much more favourable outcomes for all concerned.

Claiming credit where it isn't due (cognitive dissonance part II)

From the comments to a recent post:

paulc156:

@ Lola "For quicker wealth creation we want more laissez-faire."

Doesn't really match up with rapid post war expansion of wealth creation in the US and Western Europe which happened to coincide with more activist government and powerful trade unionism. That's the trouble with 'cognitive dissonance'. It's always easier to spot in others... ;)

Lola

@ Paul156. Nope. You have to correct for inflation, and you have to factor in the false growth created by having to rebuild stuff destroyed in WW2. http://monevator.com/a-history-of-uk-inflation/ I found a graph the other day that I can't now find that corrected GDP for inflation...stand by.

Paulc156, being a hard leftie credits the government with the rapid post-war growth, and Lola, being laissez faire, appears to admit that the government did have a larger role, but claims that the growth was either purely inflationary or down to post-war rebuilding (although the USA didn't suffer any damage, it just had to turn production lines from tanks back to cars).

IMHO, there was significant economic growth and development post WW2, but there's no point crediting exclusively 'big government' or 'laissez faire', it was both and neither. For the umpteenth time, "the government builds the roads, private businesses manufacture the cars and private individuals uses the cars" -  in a metaphorical and literal sense.

If the government decides that 'we' need more cars, all it needs to do is expand the road network, have more car parks where needed, ensure traffic runs smoothly. Then people will use their cars more, and will want to buy cars more, and private businesses will build and sell more cars.

If, conversely, the government decides to take over a moribund car manufacturer and just subsidise the production of more cars, then... British Leyland! Even worse, the government sub-contracts decisions on new roads and toll charging to the likes of Carillion or Capita...

The same goes for just about everything. The right way round is the taxpayer funds basic education for all children* (a kind of infrastructure or raw material for the private sector) and thus improves overall average skill levels and the private sector then employs school leavers. Try that the other way round - no state school system, only private education for the middle and upper income levels, and everybody leaves school and goes to work for the government or a nationalised industry?

So the 1950s-1970s were the brief Golden Age of Capitalism because public and private sectors were sticking to their own side of the line (British Leyland excepted) and doing its best. Government stuff (like owning MoD housing and collecting from the MoD, FFS) was not sub-contracted to private companies, that's the worst of both worlds.

The other point is, we had Georgism Lite in those days in most of the developed world, so wealth was distributed more equally and financial crises didn't interrupt everything and put us back ten years every eighteen years forward.

* In turn, this could be done just as well with education vouchers given to parents. This is bottom-up privatisation (like with pre-school nurseries) which provably works, as opposed to top-down privatisation like 'academies', where the council hands over an entire school and million pound budgets to their mates in the nominally private sector (which is doomed to failure, see Carillion and Capita etc).

North Sea OIl - the eternal resilience of capitalism.

The Telegraph, 14 April 2015:

Britain's oil industry faces a deep and long-lasting crisis, according to the International Monetary Fund, which said the collapse in oil prices would stifle investment and hit production at a much faster pace than other countries.

Analysis by the IMF and Rystad Energy showed North Sea oil producers would be among the hardest hit by the slump in prices because huge operating costs meant they could not absorb the decline as easily as countries such as Kuwait, Iraq and Saudi Arabia... The fund’s oil industry analysis showed that UK producers faced the highest operating costs in the oil producing world, equating to an average of around $40 per barrel. By comparison, operating costs were less than $5 a barrel in Iraq and Kuwait, and about $6 on average in Russia. The figures will deal a further blow to the Scottish nationalists who have claimed North Sea revenues could help sustain an independent Scotland.

Oil prices have fallen from their June high of $115 a barrel to just $58 today. While this has led to a collapse in the use of oil rigs, most notably among US shale oil producers, the IMF said "significant efficiency gains" in the sector would help to limit falls in production.

CNBC, 16 May 2017:

North Sea oil output is expected to jump by a net 400,000 barrels per day (bpd) or about a fifth in the next two years, defying gloomy forecasts for the oldest deepwater basin that produces the world's benchmark crude price... The region is expected to report its third annual production rise in a row in 2017, reversing years of sliding output...

"The drop in the oil price forced everyone to focus even more than they were on (production) uptime and operating efficiencies which have risen dramatically over the last two years," Premier Chief Executive Tony Durrant told Reuters, "We've been at over 90 percent operating efficiency and a lot of the other players are very high as well. If you roll back to 2012-2013, then the North Sea had a shocking record of about 65 percent," he said.

Mark Thomas, BP's regional president for the North Sea, said in September that BP's cost of production had fallen to about $16 or $17 a barrel from above $30 in 2014.

For sure, there is a lot more to this than meets the eye and I have quoted selectively, but you get the general idea.

What does the "capital" mean in "capitalism"?

Just thinking out loud, at its core, doesn't "capital" really mean "man-made labour saving devices which are of overall benefit to humanity"?

That enables more people to produce more stuff and thus enjoy their lives more to the overall benefit of everybody.

The notion that capitalism means that each individual must build up "capital" and whoever ends up with the most is the winner is nonsense; capitalism would benefit everybody and should not necessarily lead to inequality - apart from the fact that people have different talents and some are luckier than others.

The concepts of saving up during the good times and drawing on the savings in the bad times pre-dates capitalism and is always a good idea on an individual level. As a society, there is no point trying to build up capital faster than new labour saving devices can be developed.

And similarly, anything that is not actually a man-made labour saving device owned by the person who made it, or paid fair value for it, is not capital. Land, patents, monopolies etc are not capital. They are either natural resources or government made; and if the landowner or monopoly holder does not pay the government fair value for the land or the monopoly, that makes them even less like capital as they are of overall detriment to society.
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As an illustration:

Consider a farming community who dig the earth with sticks. That's an agrarian society, but they will still save up grain after the harvest, store it and eke it out over the rest of the year.

Some enterprising people work out how to make iron digging implements. So now a couple of people in the village are blacksmiths and the rest are still farmers, but more productive farmers. Each farmer has his own spades and hoes (capital) and the blacksmith has a kiln and tools (capital) for making the spades and hoes.

So the blacksmith has more 'capital' but unless he keeps his technology secret or has his trade protected by guilds and government certification (rent seeking/monopoly behaviour), any excess income he makes would be competed away when his apprentices leave and set up their own business, so everybody in the village ends up with a similar but larger income than before.

If technology does not move on, there is no point everybody trying to build up capital. Why should the farmers buy more spades than they need or the blacksmith produce them? Pointless. There is only a point in building up more capital when somebody invents hose pipes or horse drawn ploughs or something.

If there is a self-appointed landowner who sees that output has increased and his villeins now are making a surplus, he can help himself to that surplus in higher rents. That's where it starts to go wrong, especially if you fall for the lie that land is capital (man made improvements to land, like walls, drainage, good composting etc clearly are "capital" for these purposes, that's quite distinct to what nature made).

In extremis, landowners drive people off the land and they have no choice but to work in factories. The factory as such is a vital part of capitalism, and with equal bargaining power, workers would get a decent wage and the factory owner would get a decent return on his capital. Hooray, everybody wins. But Victorian factory owners could pay ridiculously low wages and live in opulence because the landless peasants, faced with a choice of starving in the countryside or working for a pittance in the towns preferred to take the pittance.

And so on and so forth.

The Professor's New Clothes

There was some special pleading in City AM yesterday in an article titled Why financial markets matter for the real economy. His full paper his here.

He lays out the issue concisely enough:

Of course, real production requires funding. And so it’s clear that primary financial markets create value, by providing new capital to businesses. But the vast majority of activity occurs in secondary financial markets, where no new funds are being raised. Hedge funds, mutual funds, and other investors typically trade second-hand stocks and bonds, and do so among each other. Real companies are not involved, so surely they can’t benefit?

Although the answer is clearly 'no', he argues that the answer is 'yes'. It's worth reading the article in full just to see how threadbare his arguments are, but his logic boils down to this:

Many of the key drivers of a firm’s long-run value, such as its strategic positioning, are difficult to measure objectively. Like an efficient polling system, the stock price aggregates the information of millions of investors, each with their different viewpoints, and summarises them into a single number which can be used by anyone for free.

For example, a bank deciding whether to lend, a worker choosing which company to join, and a customer or supplier deciding whether to enter into a long-term relationship can use the stock price (in addition to other measures) to guide them.

It's clearly all nonsense (especially the bit about banks basing lending decisions on the share price!) and you will see why if you are prepared to consider the obvious alternative to having companies with quoted shares.

(Clearly, it's best if businesses are privately owned and that the profits accrue to the people prepared to invest in the business, we are agreed on that.)

That obvious alternative to plc's with quoted shares is a corporate ownership/financing model somewhere between a 'Limited Liability Partnership' and a 'building society'. Let's call it a 'deposit funded company' (DFC) for sake of argument.

A quoted plc raises money by issuing new shares for cash on the primary market. Investors get one vote for each share. Directors decide how much of the profits to allocate to general reserves and the rest is paid out as dividends. If the business makes losses, the shares go down in value.

If shareholders want to realise their investments, they can only sell their shares 'second hand' to subsequent investors on the 'secondary market'. This means that the directors of a quoted plc are largely insulated from their own bad decisions. They've got the shareholders' money with no obligation to return it. I know that theoretically a majority of shareholders could vote to sack them and replace them with new management, or vote for the company to be liquidated, but that hardly ever happens.

A DFC raises money in much the same way as a plc. Investors would deposit money into 'capital accounts' with them. Investors would get one vote for each £ average balance held in the period in question. Directors would allocate part of the profits to general reserves, and the balance would simply be credited to investor's accounts as interest or profit share, just like a building society or an LLP. If the business makes losses, this will be netted off with the general reserve and if the losses are huge, the difference will be deducted from 'capital accounts' like negative interest.

So far so good. The big differences are:

1. Investors in a DFC would realise their investment by withdrawing money from their accounts again - just like when you withdraw money from a building society account or when a partner leaves a partnership and is repaid his capital. That might be because they don't like the directors' decisions, because they want to spend the money or they want to invest elsewhere.

2. The amount an investor pays in to the business is broadly speaking equal to his share of the company's actual assets. If an investor buys shares second hand, what he is paying for is the value of future profits or dividends, which is usually (but not always) a much larger figure than actual assets but this figure is pure speculative guesswork, so fluctuates wildly and more or less at random.

3. Investor's total profit allocation in a year would be pretty much the same as the dividends they would have received, but expressed as a percentage of cash invested, it would be much higher than the dividend yield on shares.

4. The yield on a DFC account would be a very accurate reflection of how well or badly the actual business is doing. There is no smoke and mirrors, investors cash position would mirror the fortunes of the business very closely. Investors would look closely at the performance of the business and not be distracted by share price fluctuations. A DFC investor knows what return he is getting in near-cash, and he can compare that with previous years or with the return which other DFCs are paying. That is all be needs to know.

If you own plc shares, half of your total return is dividends, fair enough but these bear no relation to your pro rata share of the assets; it is more the case that the share price is a function of the dividends. And your share price gains or losses in a period bear little or no relation to your share of the assets, the business' actual performance or anything else 'real'.

5. If DFC investors are unhappy with directors' decisions, they will simply withdraw their deposits, so directors will get instant feedback on what 'the markets' want them to do. Or the whole thing will become much more democratic. Some directors might think it a good idea to branch out into new market or product XYZ but instead of just steaming ahead, they are more likely to ask investors to vote on whether they think it is a good idea.

If the business is in a real mess and too many investors want to withdraw at the same time, the directors will just have to put a stop on withdrawals for the time being. This is no different to trading in the shares in a company being suspended, or a quoted company becoming a private company again (private company shares are very illiquid).

6. With plc's, there is a primary market for companies to raise new capital, a secondary market for people to trade them later on and sporadic share buy backs.

With DFC's there is not even a need for a primary market, let alone a secondary one. The middlemen are completely cut out. Investors pay directly into and withdraw from 'the business'.

There would be no need for directors to stage gimmicky share buy backs when they run out of new things to invest in, because this would happen organically - if the DFC's business has run out of new things to invest in and is just accumulating surplus cash, then investors yields (expressed as a percentage of their account balances) will fall and they will withdraw funds to invest somewhere better, thus pushing up the percentage yield on the new lower account balances.

7. This will allocate real capital most efficiently. Ignoring risk premiums, investors will tend to withdraw and invest in such a way that each DFC is paying a very similar 'interest rate'.

8. It would also be a boost to employee share ownership. The value of plc shares depends on the company having the right workforce. So if an employee wants to buy shares in the plc he works for, he is paying for the value of his own future efforts - the harder he works, the higher the share price, which is a subtle form of debt slavery.

With a DFC, employees would rank the same as everybody else, if they invest in their employer, all they are paying for is a share of the actual assets used in the business, the same as a self-employed person having to pay for the assets he needs in his business, which is perfectly fair and reasonable.

9. There would be hardly any 'insider trading' or high frequency trading as there would be nothing to speculate on. This is entirely unproductive activity and their loss is proper investors' gain, improving returns to investors by a small margin. There would be little 'asset stripping', because it would be impossible to buy shares in a business at below net asset value. Investors would always be paying close to market value for the underlying assets.

What's not to like?

Sweet

I find capitalism repugnant. It is filthy, it is gross, it is alienating... because it causes war, hypocrisy and competition. Fidel Castro, Adidas Brand Ambassador

Economic Myths: Capital is internationally mobile

This is half of a larger over-arching economic myth, i.e. "We can't have corporation tax because capital is internationally mobile".

I've already covered the fact that corporation tax is, by and large and if so only inadvertently, not a tax on capital, duh, it is a tax on profits however they arise*, so let's do the second half.

(* This does not make it a good tax - far better to have zero tax on normal business profits, earned income and return on real capital, of course, and a much higher tax on rental and monopoly income of course - but at a low flat rate of about 20% on everything, it is far from the worst tax).

From e.g. here:

The question of who bears the burden of the corporate income tax is important and controversial.

Proponents of higher taxes on business argue that these taxes mostly fall on firm owners and thus redistribute income from ‘rich to poor’.

Critics object that higher taxes on profits will not be borne by capital because capital is internationally mobile, with the burden of higher corporate taxes will be shifted to immobile factors of production, in particular labour.

If their bleeding heart, crocodile tear logic were true, then owners of "capital" have nothing to fear from corporation tax as they are passing it all on to somebody else, and if not they can evade it by moving their "capital" abroad.

I suspect that the real objection is because the burden of all nearly all taxes - be they corporate or personal - are shifted to the least mobile factor of all… the rental value of land.

Even if we take the extreme, simplistic view that all corporate profits are derived from "capital" then we can draw up a list of sources of/reasons for corporate profits, and consider how "internationally mobile" are. The seven broad and overlapping categories which immediately spring to mind are:

1. Reclassification of self-employment income as corporate profits.

Let's imagine a bloke who started out as a sole-trader plumber, painter and decorator who has built up a good reputation in his area, has got two dozen employees, a dozen vans and all the tools etc, if he ends up paying income tax/NIC at 42% and 47% of his profits but doesn't need to spend it all, he'd be well advised to transfer his business to a limited company so that he only pays 20% corporation tax on the profits which he doesn't need to take out as dividends or salary to fund his lifestyle.

Although he could move his vans and tools at the drop of a hat, he can't take his customer base and his employees with him, so his business is not mobile in the slightest, he can try and expand his catchment area to the nearest few towns, and that's about it.

2. Paper profit shuffling crap

Agreed, to some extent large corporates can deem their turnover and profits to arise anywhere they like, i.e. wherever they get away with paying least tax, by mucking about with transfer pricing, reclassifying dividends as interest, setting up letterbox companies, rewriting contracts so as to downgrade a taxable branch or subsidiary to a non-taxed "representative office". This changes nothing on the ground in the real world. The business is where it is, it is just the profits which magically appear somewhere else. That's a whole separate topic, which generates more heat than light.

And of course bank balances can be shifted from anywhere to anywhere in the world but that changes little or nothing on the ground either, we also observe that most people prefer having a bank account or a mortgage with a bank from their home country anyway. Many people will move savings or mortgage from one UK bank to another to get a bit more/pay a bit less interest, but few will use an overseas bank.

3. Rental income - access to markets - customers

Retailers especially need to have the best sites, i.e. where they get the most customers, i.e. where most people have the most access to the site, which could be in the middle of town if there is enough parking space/high enough population density and/or in out of town retail centres with good transport links and plenty of parking. A few hundred yards either way can make a huge difference.

The rental income element is a huge chunk of business profits. The total rental value of UK commercial land and buildings is £90 billion a year (£60 net rent and £30 Business Rates) against total corporate profits of about £160 billion. About half the the rental income is included in corporate profits (because a business is owner-occupied or because the landlord is himself a corporate), so the true split is non-land profits of £115 billion and land profits of £90 billion (albeit taxed at higher rates due to Business Rates).

4. Rental income - Access to market - labour and raw materials

An employer needs labour and raw materials.

With retailers, the pool of potential employees is directly proportional to the number of potential customers. Then there are highly specialised employers who are all fishing in a smaller pool of potential employees, which is why we see agglomeration or hubs - all the banks are in the City of London, the high tech businesses are at Silicon Roundabout or in the M4 corridor, car manufacturing is (or was) all in the Midlands etc.

Formula One is, along with golf and tennis, the most truly international sport, but half of all constructors have their main base in the UK, and all within a small arc across the south and east of England.

Even if a business breaks new ground and e.g. Honda sets up a brand new assembly site near Swindon, after a while, you will find that there are a lot of good, trained car workers and sub-suplier businesses in that area. So if another manufacturer wanted to set up a new plant in the UK, the obvious places to start would be in the Midlands or near Swindon so that he can poach workers and sub-suppliers rather than starting from scratch.

And if you want to make steel, the best place to make steel is somewhere near where the coal mines and iron ore mines are. If you make oil rigs, then Aberdeen was a good place to be for the last forty years, but if and when the oil runs out, those businesses will re-train as oil-rig dismantlers and then the whole industry will vanish.

5. Goodwill, brand name, customer loyalty etc

Some brand names are known all over the world (Rolls Royce, Coca Cola, Manchester United etc) but many businesses only have a brand name in one single country or even in a much smaller area.

So McDonalds is known world-wide, Greggs is UK-wide and while Percy Ingles has a baker's shop on most high streets in north-east London, but people anywhere else in the UK have never heard of them.

The advantage of this brand name depends on how internationally mobile their customers are. So if you like McDonalds (the world's best public toilet operator, if nothing else) and you are in a strange land, you are quite likely to visit one. If you like Greggs and are in a different town in the UK, you will visit a Greggs if there is one. And if you are from Leytonstone and like Percy Ingles and happen to be a few miles away in Walthamstow, you will visit the Percy Ingles in Walthamstow.

This is where UK retailers have often come a cropper. Marks & Spencers or Tesco means a lot in the UK, so a new M&S or Tesco branch anywhere in the UK will immediately attract business. Their management then get big headed and think they can apply their business model in other countries and so far have always fallen flat on their faces and lost huge amounts of money.

So this type of "capital" in its widest sense has to be slowly built up by trial and error, and is a kind of self-generated rental income.

6. Intellectual Property Rights

These are capital (the result of earlier investment in skilled labour) up to a point, and can be exploited anywhere in the world.

So a pharma company can sell its whizz-bang new drug anywhere in the world. But no pharma company is going to say "We will only sell our drugs in countries with a low corporation tax rate", they will simply sell as much of it in as many territories as possible (probably using price differentiation, i.e. selling at higher prices in rich countries and at lower prices in poor countries, which then requires enforceable contracts preventing reselling in the grey market).

So if they can sell the drug in the UK paying 20% corporation tax, this does not discourage them from selling it in the USA paying 40% tax, because the net profits in the USA are still incremental extra profits.

7. Real actual capital that arises as a result of real investment

Yes, physical plant and machinery can easily be moved around the globe, and even if not (too large), such capital constantly has to be replenished out of new income, so it might happen that a company allows its asset base in one country to be eroded and starts investing/creating new capital in another country.

But again, it is a constant process, a company can only create capital in the first place if he has access to skilled labour and raw materials. The Antarctic is the only territory which is not part of a nation-state and has no taxes of any kind whatsoever as there is no nation-state with the right to enforce them, but so far, very few businesses have decamped there because nobody lives there and nobody wants to live there.

8. Question

Having examined the evidence, how "internationally mobile" are all these things, even if we are prepared to accept that they are all capital in the first place?

Basic accounting & Basic accounts

1. Basic accounting

The FT peddles the same old myth, that somebody can make a profit by trading with himself:

Changes to the state pension announced at the weekend will bring the exchequer a stealth windfall of almost £6bn a year from 2016-17, mostly paid by public sector employers and employees in the form of increased national insurance contributions.

The extra NIC deducted from public sector employees' pay packets (if they end "contracting out") is indeed a reduction in government spending, and HMRC can book an increase in receipts from public sector employees as extra income if they so wish but the extra receipts from public sector employers is matched by an equal increase in government spending to pay the extra employerer'sNICs in the first place.

It's an uphill struggle all this. A working assumption must be that most people really are as thick as pig shit (is pig shit actually "thick" or is it more runny? No idea.).

Pointing out that this is a self-cancelling transaction is about as futile as trying to explain that interest paid to HM Treasury on its holding of UK gilts is HM Treasury's income but it's also HM Treasury's expense because they are paying the interest in the first place. Or the fact that Housing Benefit claimed by social tenants is not government spending because the money is being paid by one branch of the government (DWP) to another branch (local councils) who then pass it back to HM Treasury anyway, who in turn fund the DWP and so on ad infinitum.
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2. Basic accounts

Lola alerted me to Douglas Carswell's bright idea on banking reform, which is pretty much the same as Positive Money's bright idea, and they say so themselves:

My Bill would give account holders legal ownership of their deposits, unless they indicated otherwise when opening the account. In other words, there would henceforth be two categories of bank account: deposit-taking accounts for investment purposes, and deposit-taking accounts for storage purposes.

Apart from the fact that the government do not want to reform banking in the slightest, as the UK government (like so many other governments, including but not limited to the USA and the EU) is run by, for and on behalf of bankers, this will not achieve anything:

1. Let's gloss over Carswell's fundamental error that credit creation starts with somebody depositing money in the bank. No it does not. It starts with the bank making a loan.

2. And let's gloss over the fact that banks would manage to circumvent the rules on a practical level, for example by lending out money taken for "storage purposes", booking the corresponding receipt as being for "investment purposes" and then slipping the money back into "storage" again before anybody notices, i.e. by the end of the each day's trading.

3. The point is, we do not need to mull over what would happen if customers were offered two different types of accounts, because we already know.

Twenty years ago, we still had the Post Office Bank and the Trustee Savings Bank, which were government run/sponsored, implicitly 100% government guaranteed and safe. And we had commercial banks, which also had some sort of government guarantee for deposits, but it wasn't very high (it was up to 90% of the first £30,000-odd until a few years ago, I've no idea what it was twenty years ago).

And twenty years ago, we had a lot of building societies, which were inherently safer than banks (because of what they did, how they did it and all the restrictions imposed on them).

4. So instead of making commercial banks offer two different types of accounts (which can be easily circumvented, see 2.) we could simply set up a new government bank (similar to PO or TSB) and offer people "basic accounts" which pay little or no interest, offer no overdrafts, which do direct debits and offer a debit card and not much else, and which are 100% government protected.

In this case, there would be no need to make commercial banks offer "storage purpose" accounts or to give a government guarantee for deposits with commercial banks because if people want that, they can put their money with the new PO-TSB. And if they want something a bit racier without a guarantee, they are free to open an account with a bank on whatever terms and conditions they please.

5. Will commercial banks continue to merrily blow credit bubbles and land price bubbles, like they always have done, with or without government guarantees for deposits, with or without there being safer types of investment, with or without all but the fiercest bank regulations? Yes of course they will. They'll keep splitting the zero and creating new loans and new "investment purpose" accounts.

6. Will people be happy with this? No of course not. During the next boom, people's urge to make a quick buck and get something for nothing (or the politicians desire to be seen to be giving the voters something for nothing) will take over, the PO-TSB will be privatised, demutualised, become a quoted company, over-trade and then go bankrupt again, the government will bail them out etc, and then the cycle starts again.

7. And during the next bust, the government will simply extend the deposit guarantee to all accounts again, or increase the eligible amount, just like they did this time.

As ever, the real problem here is the bankers (and landowners) tapping into people's desire to make a quick buck and get something for nothing, and the politicians just going with the flow.

People have to remember that they are the ones who end up paying for the quick bucks - for sure, all Halifax members got £1,800's of "free shares" in the 1990s (I've still got my contract note selling them on the first day) but we've ended up paying a lot more than £1,800 each to bail out Lloyds-HBOS. Its the usual vested interests who are getting richer from all this, not the likes of us common or garden voters.

Take the test: are you a Home-Owner-Ist or a free-market capitalist? (2)

Here's the second set of questions to help you decide (part one of the quiz is here). Jot down your answers (As and Bs) on a piece of paper, then click and highlight at the end to check your result.

6. What percentage of the UK by surface area is covered by homes and gardens?
A. About thirty per cent
B. About three per cent

7. As an economy grows and becomes more sophisticated/specialised, the fraction of the economy which can be collected in ground rent...
A. Decreases
B. Increases

8. When a landlord collects ground rents, he is...
A. Adding to total wealth in the economy
B. Soaking up wealth from the economy

9. If you sell land, you are collecting the net present value of the rental value of that land.
A. Don't agree
B. Agreed

10. Which of the following increases the level of owner-occupation:
A. Heavy taxation of earned income/profits combined with subsidies to and light taxation of land ownership
B. Light taxation of earned income/profits and heavier taxation of land ownership.
------------------------------------
Results:
Mainly As - Oh dear, you are a Home-Owner-Ist.
Mainly Bs - Congratulations, you are a free market capitalist.
-----------------------------------

Take the test: are you a Home-Owner-Ist or a free-market capitalist? (1)

Jot down your answers (As and Bs) on a piece of paper, then click and highlight at the end to check your result.
---------------------------------------
1. All other things being equal, when house prices increase we become...
A. Wealthier
B. Poorer

2. The rental value of any plot of land is roughly equal to the burden placed on the rest of society by virtue of them being excluded therefrom.
A. Don't agree
B. Agree

3. The most important type of 'private property' is:
A. Land and buildings
B. The value we create by exercising our skills and labour and the things we obtain by free exchange.

4. The estate agent's mantra "Location, location, location" is another way of saying that "Land values are created by the community".
A. Don't agree
B. Agree

5. Adam Smith, David Ricardo, Henry George and Milton Friedman all said that taxing land values was preferable to taxing labour and profits. They were:
A. Closet socialists.
B. Proper free market capitalists
------------------------------------
Results:
Mainly As - Oh dear, you are a Home-Owner-Ist.
Mainly Bs - Congratulations, you are a free market capitalist.
-----------------------------------

Keeping up with the Joneses

If you watch these archeology programmes on telly, what's always striking is that the urge to show off is as old as mankind itself; they identify a civilisation by its jewellery, elaborate burial rituals, decorated pottery, cave painting etc, none of which is essential for actual day to day survival.

Modern capitalism "Buying things you don't need with money you don't have to impress people you don't like" isn't very much different is it?

1. For some reason, there is an inhibition in this country to simply say how much you are paid and have done with it. On the one hand, there is a risk that people who are paid less than you are will resent it, and on the other, there is a morbid fear that others round the table are paid twice as much as you are for doing a job which appears to be either dead easy or totally pointless. So we give clues to how much we earn by buying stuff, be it jewellery, new golf clubs, holidays, the first round in the pub etc.

2. A lot of British people also love boasting about how much they think their house is worth, but again, most only do it indirectly by saying how much a similar house on the same street sold for recently.

3. Again, we note that people are mildly averse to bandying about actual figures, and with house prices, who has the better trump card? The low earning couple who boast about how much they think their house has gone up in value since they bought it decades ago, even though they would be priced out now, or the higher-earning new arrivals who can actually still afford to buy one on the same street?

4. Also, people absolutely love complaining about how much tax they have to pay, but without mentioning an actual figure, as the more mathematically minded would be able to guesstimate their actual income (thus conflicting with Rule 1 above).

So my current thinking on Land Value Tax would go with the grain of all that.

We'd somehow have to work out a precise official figure for the rental value for each plot of land on which a home stands or could be built. These official figures would only ever be accurate to +/- ten per cent or so, but so what, it's only relative and not absolute values which matter, so we might as well adopt the concept used in Council Tax of putting houses into bands, I reckon that having twenty-six bands, from Band A to Band Z, where each band is twenty per cent wide would be sufficient.

1.2 to the power of 25 is about 100, so homes on plots of land allocated to Band Z would have a rental value and hence tax bill a hundred times as high as those allocated in Band A. Whether tax bills go from £100 a year to £10,000 or from £1,000 to £100,000 all depends on how you set the bands, how many houses fall into each band, how many other taxes you want to replace etc. (By contrast, there are only eight Council Tax bands (in England), they are 41% wide, homes at the bottom of the top Band H are only about ten times as valuable as those in bottom Band A and only have to pay three times as much tax.)

So if somebody simultaneously wants to:

(a) show off about how much their house is worth,
(b) boast about how much they earn and
(c) moan about how much tax they have to pay,

then all they have to do is drop into the conversation that their home is in, say, Band L (which costs, say, £10,000 a year).

Other players in this round of Joneses Poker then have a choice; maybe their house is in Band M (£12,000 a year), in which they win the round (but somebody in Band N on £14,400 can trump them); and the inverted snobs can win the parallel game of "Bugger the government, I pay as little tax as possible" by stating that they are quite happy in their Band J home and only pay £7,000 a year.

Recent purchasers will point out the obvious, that although their house is in a fairly high band, the purchase price was depressed accordingly, so every £1 extra they pay in tax is £1 knocked off the mortgage payments, so they aren't bothered. It is also possible to show off by saying how cheaply you managed to buy something.

Finally, those who over-borrowed or who over-occupy relative to their income will probably remain silent, as few people like admitting that they are struggling financially (unless they already have traded down, in which they can play the "Bugger the government etc" card as per above). Current political thinking is to construct the whole tax system round the very narrow interests of this small group of over-borrowers/over-occupiers and tax all the other people in the room to death on their earned income. Does anybody know why?

Intellectual Mental Masturbation

I added an o/t comment to another thread that MW asked me to summarize. Here is the summary, courtesy of the RSA. Personally I reckon the speaker is a complete tosser, but you may think different....

Inefficient Markets Hypothesis

It strikes me that the language of proper free market capitalism has been completely hijacked by what we might loosely refer to as 'rent seekers'. Having free markets is a splendid idea, because clearly a free market works better than state planning or monopolies. But the fact that something is a 'market' does automatically means that is in any way 'efficient'.

There is a sliding scale of markets, which we can broadly categorise into two extreme cases and an intermediate case:

1. Very efficient

At one end - notwithstanding that most businesses are regulated and taxed to the n-th degree, and incumbents always try to erect barriers to entry - are markets in things we are constantly producing and using, stuff like food, entertainment, cars, consumer electrics, clothes etc. I'd say that these are efficient in terms of

a) Pricing, in so far as you can go to the shop and compare all the different features and prices, talk to friends, look at product reviews, keep going back to the same shop, restaurant or make of car if you are happy and going somewhere else if you are not, and

b) In terms of the pure mechanics of how stuff is produced, like the African farmers who produce food which is eaten thousands of miles away in the west, which requires an intricate web of farmers, transporters, packers, ships and aircraft, ports and airports, lorry drivers, shelf stackers and check out girls to get from field to plate.

Similarly, all businesses have to employ people, and those that do better can pay better wages and people make a trade off between how long it takes to qualify for the job (where relevant), working conditions, wages, career opportunities, job satisfaction etc when deciding what sort of job to do.

You seldom see rapid price swings or speculation in these things. Nobody buys hundreds of loaves of bread even if they think bread prices are going to go up because they'd all just dry out or go mouldy by the time you want to eat them; no employer takes on dozens of extra staff because he thinks that wages are going to rise (or indeed sack loads of people because he thinks wages will fall); likewise people who rent tend to live in the 'right size' property and so on.

And the market value of these things is a reasonable measure of 'wealth'. A second hand car worth £5,000 is an asset or wealth which is actually worth £5,000. A year later that car has depreciated to £4,000 and £1,000 in wealth has been lost for ever. Or maybe somebody repairs an old banger and its value goes up by £1,000, that is new wealth that has been created.

2. Woefully inefficient

At the other end are 'meta-markets', which is mainly things like land and buildings or shares in companies, where you are not buying the thing itself, you are buying a right to future income which has not yet been created.

The price of land has nothing to do with the cost of producing land (which is more or less nil), the price depends on people's estimates of the future rental stream; the value of shares in a company has little to do with its net asset value and all to with people's estimates of future profits, whereby profits are a fairly small balancing figure between selling prices and input costs (which are both largely outside the company's control).

Estimates of future rental income or future profits are just that, estimates, and this has to be divided by another estimate, being a discount rate or the interest rate you could earn by sticking your money in the bank (adjusted for higher risk). So if your estimate of earnings per share is 5p, and you could earn 3% interest by putting your money in the bank, you might expect a return of 5% by buying the riskier shares, so you value them at £1 each (5p divided by 0.05).

If interest rates go up to 5%, you now apply a discount rate of 7% to the company's shares, so even if it is just as profitable as before, the price of each share falls from £1 to 71p (5p divided by 0.07).

There are then a myriad of other things to take into account - earnings growth, inflation, political risk (which is why shares in tobacco companies have such a high yield, at the back of everybody's mind is that governments around the world love to give smokers a good kicking), how successful that company will be in maintaining barriers to entry or persuading the government to do so; how good the directors will be at wringing concessions or contracts from the government; if you're buying a house you want to know that the local council will raise barriers to entry (i.e. prevent any more construction in that area) to maintain the selling price etc etc.

As we well know, share prices and house prices can fluctuate wildly, and it seldom happens the price you pay is a fair reflection of the true wealth represented by that house or that company, i.e. there are very few places in the UK where you can buy a house for its rebuild cost, and very few companies whose shares are trading at the net asset value per share.

Usually you pay vastly over the odds for these things - but this excess can melt away very quickly, or if a bubble is in progress, it can increase very quickly as well, people buy it simply because it is getting more expensive (which is the exact opposite of the bread example above).

So it strikes me that house prices (more correctly, land prices) and share prices are not a measure of wealth at all, this is not real wealth, it is merely a wild estimate of the share of future income that other people will generate using real wealth which will accrue to you as landowner or shareholder. If house prices or share prices change without any underlying change in that house or the company's business, then real wealth has been neither created nor destroyed, people as a whole have become neither richer nor poorer (it is merely a relative shift between those that own the house or share and those that don't).

There is also a massive amount of fraud and skullduggery going on in these 'financial markets', and there is no particular reason to assume that they even 'allocate capital efficiently'. The 'efficient allocation of capital' is carried out by businesses making decisions about what machines to buy, what training courses to send their staff on; or by a student who decides to study something a bit dull because it will lead to a well-paying job etc.

Worst of all are 'markets in meta-markets'. If house prices or share prices are rising, then estate agents and stockbrokers will do well, and so the perceived value of the shares in these middlemen goes up, fuelled by the general bubble, but as these people produce absolutely nothing (they do provide a service, and unlike most people I don't do estate agent-bashing), there is no real underlying value to their businesses at all, so if house prices go down a bit or the stock market crashes (leading to much lower churn), all of a sudden, the price of the shares in the middleman's business simply evaporates to nothing.

3. Intermediate case

Examples of the intermediate case are things like oil or other commodities.

People do speculate in what the price of these things will be over the next twelve months or so, and speculators clearly push up or depress the price beyond what is rational (which does cause some damage to the efficient markets) but these bubbles tend to be short lived because these are all things which have to be consumed, i.e. you can keep buying wheat futures in the hope that the price of wheat goes up, but sooner or later those contracts come up for delivery.

No speculator in his right mind actually wants to take physical delivery of wheat because the storage costs would wipe you out, so all these contracts get reversed again within a few months at the latest, so any price surge the speculators may have caused quickly gets cancelled out again.

Dr Joseph Goebbels on 'capital'

From here:

Wie unterscheidet sich schaffendes Staats- und raffendes Borsenkapital?

Das Staatskapital ist ein unmittelbar schaffendes, produktives Kapital. Es ist in seiner reinen Form, vor allem in der Kleinindustrie, noch national und erdverbunden, es arbeitet und vermittelt Arbeit, es besteht zu seinem groBten Teile in immobilen Werten und nicht in barem Gelde, es darf und kann nicht vernichtet werden, da es fur das Leben des Volkes unentbehrlich ist. Allerdings hat es sich in den letzten Jahrzehnten zu so ungesunden Formen entwickelt, daB es einer durchgreifenden Reform bedarf.

Das Borsenkapital ist kein schaffendes, sondern ein schmarotzerisch-raffendes Kapital. Es ist nicht mehr erdverbunden, sondern bodenlos und international, es arbeitet nicht produktiv, es hat sich in den normalen Verlauf der Produktion hineingedrangt, um aus ihr Prozente zu ziehen. Es besteht in mobilen Werten, das heiBt in barem Gelde, sein Haupttrager ist die jüdische Hochfinanz, die das Bestreben hat, die schaffenden Völker fur sich arbeiten zu lassen und dabei doch die Erträgnisse der Arbeit in die eigene Tasche zu stecken.

Roughly translated:

What is the difference between productive state capital and parasitic financial capital?

State capital is directly productive capital. In its purest form, especially with small businesses, it is still national and earthbound, it works and creates work, it is fixed and not just in cash, it may not and cannot be destroyed, because it is vital for the life of the nation. Admittedly, it has developed in an unhealthy way in recent decades and needs a wholesale reform.

Financial capital is not productive, it is parasitic. It is not earthbound, but stateless and international, it produces nothing but has forced itself on normal production in order to suck out a percentage. It is mobile, in other words in cash and is owned by Jewish high finance, whose aim it is to let the productive peoples do the work but keep the profits for itself.
-----------------------------
1. I can understand that the Germans were a bit miffed about the aftermath of the Great Depression, that seems to have hit them three times as hard as any other country (and probably wasn't particularly their fault), but that polemic is familiar to me and it always struck me is that he is confusing the distinct concepts of capital and ownership.

2. Let's agree for the sake of this discussion that 'capital' is stuff like machinery and special skills (i.e. stuff that results from people's efforts and ingenuity) which can be used to increase output in future. But everything has to belong to somebody (even if some things belong to a vaguely defined group of people like 'the nation' or 'society in general' or 'the state'), and that entails 'ownership'. If you're slaving away at your machine or your desk or wherever, you're not really bothered whose machine or desk it is, you just want to be paid a decent wage.

3. So if the Evil Capitalist who owns the bakery on one side of the street pays low wages, people will just go and work for the slightly more enlightened baker on the other side who pays better wages; so the Evil Capitalist goes out of business and ends up getting bought out by another baker-entrepreneur and that is the end of that. And maybe that baker-entrepreneur starts up his business with borrowed money, so in economic terms, the physical capital belongs to the bank. His workers still don't care as long as they get a decent wage, and the banker-entrepreneur is doing it entirely of his own volition.

4. But it is more or less impossible for Evil Bankers to buy up all the physical capital, underpay wages and overcharge for their output because this will always be competed away, because people can always make new stuff, change jobs etc.
----------------------------
5. Returning to the present day, all this bank-bashing reminds me very much of Dr Goebbels' rant, and I think to myself, this is one path down which I will not go. But the self-same politicians who are at the forefront of bank-bashing are simultaneously merrily bailing out the banks in order to prop up land prices, i.e. transfer money from the productive economy to state-protected quasi-monopolists.

6. Land behaves exactly like a monopoly, if you think about it - it cannot be replicated and the income that you can generate from a bit of land depends on its location, not its physical condition, so cannot be competed away. In most cases, the income you can generate vastly exceeds the cost of 'production', which are precisely £nil in most cases. Interest payments are a just a way of divvying up the returns to 'ownership' and not a cost of 'production' of course, see first half of this post.

7. These bank bail outs (and tax breaks for land ownership or construction) are at their most extreme (i.e. criminal) in the USA or in Ireland, but are the prevalent economic philosophy in the UK as well, which I refer to as Home-Owner-Ism. Rising house prices are a very simple mechanism by which the relative return to working is depressed and the relative return to land- or home ownership (and the banks, who make money from rising land prices) is inflated, so this is hypocrisy of the highest ordure.

8. But like all forms of oppression, the trick is getting a simple majority of The Little People into thinking that they benefit from it as well - people will take a 2.5% VAT hike or a 2% National Insurance hike (which costs each worker or entrepreneur upwards of £500 a year each) on the chin as long you promise them a Council Tax freeze (which 'saves' each household maybe £50 a year), for example. Similarly, savers will put up with derisory interest rates of less than inflation just as long as the bank pass some of that benefit on to 'hard pressed borrowers', without anybody noticing that this is a £30 billion a year subsidy to banks and home owners.

Ah well.

Killer arguments against LVT, not (37).

Adam Collyer left a comment on "Killer arguments against LVT, not (36)":

"most poor people live in small houses or in cheaper areas where LVT wouldn't be much; most rich people live in big houses in nice areas where LVT would be a lot"... It depends what you mean by "poor". You are as usual blurring the distinction between being rich in assets and being rich in income. You can own a big nice house but have hardly any income (archetypal widow for example) in which case...

I am not blurring anything. That's exactly what I'm not doing. Just to be absolutely clear about this for the dozenth time.

1. There is proper 'wealth creation' i.e. going out and working or starting a business etc. which by definition creates new, net wealth. This is liable to income tax. Whether for moral or practical reasons, I oppose taxes on individual efforts and wealth creation.

2. And there is privately owned land, which by definition is not 'net wealth' (to which see point (c) below)

So it must have been clear that I was using shorthand for the rather more cumbersome "most people who have lower incomes or had lower incomes during their working lives live in small houses or in cheaper areas where LVT wouldn't be much; most people who have higher incomes or had higher incomes during their working lives live in big houses in nice areas where LVT would be a lot..."

"The 5% of poor people who happen to live in a big house in a nice area will have to trade down; roll up the tax to be repaid on death; take in a lodger; get their heirs to pay it etc etc. Such is life." Easy to say if you're not likely to be a victim.

As I explained, 'my' theoretical inheritance would be diminished by about £700 a year for every year that my parents lived. And, as I also explained, if we used LVT to replace taxes on incomes and production, then every £1 I lose off 'my' inheritance is an extra £1 added to my net income. Why does having a higher net income now and a smaller inheritance later make anybody a 'victim'?

"If they don't want to pay it, then let them roll up the tax." (a) Ah, yes. So LVT is really Inheritance Tax in disguise (b). Put it another way: it's a wealth tax (c). Attractive if you're a Socialist I guess (d).

a) I can sympathise with the traditional objection to LVT or indeed Council Tax that pensioners want to stay living where they are living, and that their (largely taxpayer funded) pensions are not enough to live on and pay the LVT or Council Tax. But this is purely a cash-flow issue. So why not make the due date for the tax payment one that is convenient for all concerned?

(i) Inheritance Tax is a tax on the deemed value of all your assets when you die (subject to a hundred exemptions) - regardless of whether they represent money on which income tax has been paid or whether they represent hitherto untaxed windfall gains on rising property values. Again, for both moral and practical reasons, I oppose a blanket Inheritance Tax.

(ii) LVT is a tax on land values. Conflating LVT and IHT is tantamount to saying that fuel duty is a tax on cigarettes, or something.

(iii) Or let's imagine HMRC said to pensioners, your pensions will be paid to you without deducting income tax, but we will reclaim the income tax from your estate. Does that magically transform income tax into Inheritance Tax?

c) Private land ownership is not net wealth (the buildings on the land very much are net wealth, of course). For example, Crown Estates (owned by the government) owns loads of office blocks in Central London, it is indistinguishable from any other private landlord. It hands over its net profits to the government. If Crown Estate sold off these buildings to private owners for a lump sum, the income taxpayer would end up slightly worse off, because the government would squander the proceeds and in future, the government's revenue shortfall would have to be made up with ever so slightly higher income tax. Whether the tenant pays market rent to Crown Estates or a private landlord is neither here not there. The same applies to Council Housing (with caveats).

d) OK. Complete these sentence in a hundred words or fewer:
(i) "A tax on wealth creation encourages wealth creation in a capitalist economy because..."
(ii) "A tax on wealth creation cannot be regarded as Socialist because..."

A Nation Of Shopkeepers

From The Times (while it's still 'free'):

Sir, Despite his record of directorships, I struggle to believe that Kit Malthouse has ever been in business or knows anyone who has been (Away with tax! Abolish the lot (except one), Opinion, April 6).

I was a shopkeeper from the late 1970s to the mid-1990s. Throughout that economic rollercoaster period, the worst thing inflicted on my small business was the increase of VAT from 8 per cent to 15 per cent in 1979 and later to 17.5 per cent, purportedly balancing out the drop of the top rate of tax from 83 per cent to 60 per cent.

The psychological impact on consumers of this shift of taxation from income to expenditure far outweighs the revenue-neutral “big picture”.

People can avoid VAT by not shopping. This may be good for their pockets on a temporary basis. It might even be considered an unqualified good by a quasi-religious dirigiste Marxist, but it is fundamentally anti-capitalist and bad for the economy as a whole in the medium to long term.

Richard Cooper, Gosport, Hants.

Although Mr C assumes that 'consumers' bear the tax in the first instance, it must be pretty clear that there is a subsequent knock-on effect on economic activity and thus on 'businesses' (the distinction between 'consumer' and 'business' being highly artificial anyway); unless wages are increased (driving profits down further), the effect of hiking VAT must be to reduce the net turnover of VAT-able businesses by the amount of the hike.

Metroland

Banned left a comment here:

As a former north Londoner I would have been far more interested in a cross-rail north-south link if only to avoid the wastelands of Croydon. Your point that "once the stations are built they'll have no problem selling off a bit of land for housing or commercial uses" is of interest, greater London grew in the way that it did precisely because speculative railway/tube builders (many of whom went bust just like .com) built the railways that they did and speculative builders followed to produce the outer London suburbs for the workers of central London.

Leaving aside the north/south London snobbery, this illustrates that "a little knowledge is a dangerous thing". When the private railway companies built new railways, what usually happened was that they went bust. The rest is as Banned describes it, but he misses out the bit that says "those who owned land surrounding the new stations made massive windfall gains by selling off land to speculative builders".

One company noticed that land values in the areas surrounding the new stations rocketed (from thousands to millions of pounds per acre, in today's money), and that the capital gain on the land was more than enough to finance the entire capital cost of the railway and stations. So the company that built the Metropolitan line first bought up a lot of farmland stretching away from London, borrowed money, built the railway and sold off the land again, making a handsome profit overall.

That to me looks like a good "capitalist" model. Somebody does the numbers, makes the investment, takes the risks and (hopefully) makes a profit, with a corresponding gain to society as a whole (the operation helped London grow and prosper).

I might conclude that the cross-rail link is a Socialist venture, doomed to failure and/or permanent subsidy.

Why "socialist"? Are railways and transport infrastructure inherently "socialist"? Methinks not. Is it "socialist" to expect a property owner to pay for his own roof repairs or home-extension or to pay towards the street lighting or flood defences in his area? I'd think not (although hardcore Home-Owner-Ists may disagree).

Ergo, how can it be "socialist" to try and match up risk-and-reward, costs-and-benefits by expecting those people who are likely to benefit disproportionately from Crossrail (without otherwise bearing any risk - they lose little if it goes wrong) to decide whether the project goes ahead and ask them to contribute a small fraction of the resulting increase in their property values if they want it to?

In economic terms, surrounding landowners "own" the railway. Is it "socialist" to expect the shareholders of a business to pay up some share capital? Is that a "subsidy" to the business? Methinks not. Again, the Home-Owner-Ists, who want banks to be re-capitalised by slashing interest rates on mortgages at the expense of savers; and who will take massive tax increases on employment sullenly on the chin but are up in arms about modest Council Tax hikes, might well disagree.

I tell you, Home-Owner-Ism is pretty much like Socialism in blue clothes.

A little note on capitalism

Over at The Optimistic Cynic.

Michael Moore - Prick

I do enjoy his films, but only to laugh at him. He is an obese, rich, white American, whom on many occasions has SLATED capitalism, in particular middle class white Americans. What a hippie-crite. Many of you may remember his almost autobiographical Stupid White Men.

Capitalism: A Love Story.
Now a new film about... CAPITALISM! I wonder how much he'll make from it?