What the Monetary Authorities Should Do

Why Low Rates and High Taxes Won’t Help Against Inflation

By Josh L Ascough

“Inflation; in the truest sense, is an excess increase in the money supply over the real demand for money (MS > MD)”

With CPI hitting a 40 year high of 9.1%, the Bank of England has responded by raising interest rates to 1.25%; up by 0.25 from the previous period. This, alongside ex chancellor and PM hopeful Rishi Sunak planning to ‘tackle inflation before tax cuts’, signals a poor plan for combating the rising effects of inflation.

Firstly inflation must be defined by its cause rather than its effect, in order for the monetary authorities to enact a sound policy of recovery. Inflation; in the truest sense, is an excess increase in the money supply over the real demand for money (MS > MD). MD; which is an inverse of velocity, is measured by the quantity of nominal pounds sterling economic actors hold over a period of time, in order to acquire a higher purchasing power for future consumption. Meaning individuals are withholding current consumption in preference of future consumption.

This time preference is an important concept, as it is the foundation of what makes interest possible. Other variables may effect interest rates; such as high risk or time till final settlement, but it is the time preference for future/current consumption which lays the foundation. Despite Milton Friedman’s wise words, inflation is not simply a monetary phenomenon, but a monetary and time phenomenon.

The time difference between the stages of production to consumption, alongside the furlough scheme during the 2020 Covid outbreak, can help to better understand the financial cost and trade-off people now face, and what the monetary authorities should do.

The Hayekian Triangle above denotes the stages and time process of production, where the production process is hypothesised as an input-output process; ‘the horizontal leg is representative of the production time, and the vertical leg is a measurement of the value of consumable outputs’ (Garrison, 2001).

“Another way of looking at the nature of the high inflation rate, is that an excess of money has entered the economy faster than the production of goods and services”

As economic actors restrict their current consumption in favour of future consumption, a pooling of the social savings occurs. This results in a structural change in the multi-period production process, whereby the later stages of production face a contraction and the early stages face an expansion. This allows for the rate of interest to fall, as there are more financial resources available for loans, investment, and expansion.

By withholding from current consumption, earlier stages of production are permitted to expand, so consumers in the future will be able to consume more goods they value for a lower price.

This is what occurs under “normal” circumstances. Due to lockdowns and the furlough scheme however, distortions in the money and time market have been brought to bear.

Another way of looking at the nature of the high inflation rate, is that an excess of money has entered the economy faster than the production of goods and services.

This can be observed by returning to an adjusted Hayekian Triangle:

Here the darker triangle represents the production process during the covid outbreak and lockdown, and the scattered grey triangle represents current consumption. Due to the lockdown, production processes in many stages were halted, and with stimulus payments via furlough going to businesses to keep them afloat and to ensure workers could still receive pay without productivity, the money supply was increasing faster than production was growing, because production was immobilised.

So why are we only now feeling the effects of inflation?

The distortion effects of inflation are not felt instantaneously, because money circulates through the economy at differing velocities for different sectors. This is why it is important not to only look at the average rate, but to look at all the price changes for the goods within the basket; this helps to identify where the excess money is circulating to-from, and how much.

Therefore not all price distortions will be the same; some will rise faster than others, some much slower; others may increase by larger percentages while goods valued less may increase by lower percentages.

This is seen by looking at the basket of goods for the CPI and PPI input goods, from the report of March 2022:

As shown above, the most extreme changes in the CPI and PPI reports were 31.4% for housing and household services, and 98.0% for crude oil, with a range between the extreme upper and extreme lower for both being:

The average rate of change shown in CPI and PPI reports is the mean (), and is calculated by adding the total % changes to one sum then dividing by the number of goods in the CPI and PPI baskets:

For the CPI:

Furthermore we can visualise the spread of the price distortions by using a dotplot:

Getting back to the matter, the low rate policy of the Bank of England, and the remaining high tax rates are not effective policy measures for curbing the rising inflation.

“it is saving and investment that will help fix the distortions, by allowing for secular growth deflation”

The high tax rates leave consumers with less expendable income, meaning their cost of living is forced up and are less inclined to save. Moreover, government spending contributes to circulating excess money supply, and simply changes the makeup of our GDP. Instead of goods consumers want, we get more of what government wants; instead of more houses and petrol, we get more ditches being dug up to be refilled.

Additionally the low rate policy of the bank of England fails to address that the excess money is being spent faster than is being saved; a low rate of interest fails to reflect not only people’s expectation of higher inflation to come, but the preferences economic actors presently hold for current consumption.

So what should the monetary authorities do?

With the current rate of interest being 1.25%, adjusted for inflation the real rate is in the negative; as is calculated:

The Bank of England should aim to raise interest rates to a minimum of 13.5%, so as to ensure after adjusting for inflation, the real rate would not be in the negative, but would sit at 4.4%. This would help to properly signal that now is an appropriate time to save, and assist in incentivising the private sector into such actions. This would also, in principle, help curb incentives for banks looking to take high risk loans.

By increasing the interest rate to a nominal level of 13.5% for non outstanding loans, savers and investors will see there is a high demand, so as to allow earlier stages of production to expand for high levels of future output.

Additionally, the government should temporarily freeze VAT and sales tax in order to reduce the tax burden on consumers during the cost of living crises.

Finally, the government should temporarily freeze the capital gains tax until inflation is brought down to its target rate of 2%. This would ensure that investors receive 100% of their returns, providing a further incentive for large scale investments into expanding production processes and creating new, value inducing jobs.

The inflation and cost of living crises were created by large injections of money into the economy, and it is saving and investment that will help fix the distortions, by allowing for secular growth deflation.

Despite the Keynesian “paradox of thrift”, increased saving is not a decrease in economic activity, but a dynamic process that invests in a wider, more affordable future consumption.


Monetary Policy and Environmental Progress

Why Bad Money Drives Up Pollution

By Josh L. Ascough

“actions towards the green economy are for nought; not just while the tragedy of the commons and eminent domain remain, but while monetary policy remains in favour of secular inflation”

Many people are growing concerned about pollution and its growing effects on our environment and quality of life. So much so it seems, that politicians are now taking nuclear power much more seriously than previously.

We’ve seen a greater push towards solar and wind power, as alternative and more renewable means of providing energy for national and global economies.

Despite this, actions towards the green economy are for nought; not just while the tragedy of the commons and eminent domain remain, but while monetary policy remains in favour of secular inflation.

Secular inflation is a term used to describe a state of affairs, where the policy of the monetary authorities; in the UK’s case the Bank of England, is to have a prolonged or gradual increase in prices via inflation targeting. The current target of the Bank of England sits at 2%, so the BoE aims to increase the money supply (MS) over the quantity demanded (MD) during each period to meet their price index targets of an increase by 2%.

This excess expansion of MS, leads to a decrease in the purchasing power of the pound, meaning that money is not as valuable as it was in the previous period, nor is it as valuable as that of the base year. The base year, also known as year 1, is the starting point for measuring changes in the price level and purchasing power of money. It is derived as being equal to 1.00. If the purchasing power of the pound decreases by 50%, then the price index in year 2 will be marked as 1.50; similarly if the purchasing power increases by 50% it is marked as 0.50. (For more simple calculations shown later below, a comparison will be made between the price index of 2021 to 2020, rather than the base year).

From a secular inflation perspective, the value of money for one year holds an “expiration date” in the next year.

This policy effect on environmental quality and progress can be examined using the Kurznets Curve.

The Kurznets Curve measures environmental quality by per capita income.

“as we become richer, we place a higher value on the environment and are more able to maintain it”

The curve shows that as economies begin to develop, environmental quality worsens, because new activities are being enacted which impact the environment, but there is not enough monetary productivity to incentivise the maintenance of the environment. As per capita income increases, the cost of maintenance or seeking renewable alternatives, in proportion to income allows for a cleaner environment becomes a desired activity; as we become richer, we place a higher value on the environment and are more able to maintain it. This is shown by the location of low income; denominated as LYand HY in relation to their relationship to the x and y axis.

The problem is that the Kurznets Curve measures nominal income, rather than real income. Nominal income refers to the total quantity of current money (10 £50 notes = £500), whereas real income refers to the actual purchasing power of that £500. This real money balance is calculated as:

Where m is the real money balance, M is the nominal and P is the price index.

The current CPI 9.1, so the real value of the £500 is, so by comparing the price index of June 2021 (111.3), to June 2022 (121.8)

Meaning £500 M (nominal) from 2021 is worth £456.89 (£457 rounded) in m (real) in 2022.

We can also calculate the real level of income by denoting y as real income, and by dividing Y (the nominal level of income) by the price index P:

Suppose average per capita income is £30,000. According to the curve measuring nominal income, a per capita income of £30,000 should see us shifting to the right of the curve. However, adjusting to the real level of income via P we obtain:

This means that Y £30,000 level of income from 2021, is worth y £27413.79 (27414 rounded) level of income in 2022.

The trend of reduced real value can be shown further. Treating 2008 as the base year and looking towards the receding purchasing power of the pound, it can be observed how the pound has reduced in value over time:

This means that Y £30,000 level of income from 2021, is worth y £27413.79 (27414 rounded) level of income in 2022.

The trend of reduced real value can be shown further. Treating 2008 as the base year and looking towards the receding purchasing power of the pound, it can be observed how the pound has reduced in value over time:

Above we see a time plot of the real value of the pound from the period 2008 to 2022. The plot starts at the base year and looks at the value of the pound (measured in pence) for each year in comparison to the previous year. For example a nominal money balance of 100p in 2013 is worth 97.15 in real money balance terms, compared to nominal 100p in 2014, which is worth 98.10 in real balance terms.

We can also observe the contraction in real money balances as a comparison to the base year and further compare it to the year by year data:

In the graph the blue line represents the real value (m) of 100p on a year by year comparison (the real value of 100p in 2009 compared to the real value of 100p in 2010 etc), whereas the red line represents the onwards reduction in the real value of 100p compared to the previous years real value, from the point of the base year.

To give an example of this, in the period 08/09, the real value of 100p compared to the base year was 93.84, whereas in 09/10, the real value of that 93.84 in the next year was 92.02.

“The largest fall in real value occurred after the financial costs of the covid lockdown, where the real value of £30,000 in 2022 is £27,413.79”

A similar phenomenon can be observed with regards to wages. Supposing the median nominal income is £30,000, we can see the change in the real value of the median income over the period from 2008 to 2022:

Here we see the real value of income from 2009 to 2022, where 2008 is treated as the base year. During the aftermath of the 2008 financial crises, we see the real value of £30,000 drop from £29,480.97 in 2009 to £28,778.14 in 2011. The largest fall in real value occurred after the financial costs of the covid lockdown, where the real value of £30,000 in 2022 is £27,413.79.

Translated back to the Kurznets Curve then, it can show the following:

By adjusting nominal to real, we see that the slope of the curve rises and overall shifts further to the right. Meaning that adjusted to real money balances, renewal of the environment becomes a lot less affordable for the average person. As time moves on with a policy of secular inflation in place, the value of the £30,000 wage decreases, and people need to acquire higher nominal balances each year in order to reach previous levels of real income; ad infinitum.

This means that we are always a step behind (or according to the CPI, 9.1 steps behind) when it comes to environmental quality. This leads to one of the many costs of inflation; protection.

When people expect inflation to rise or to be constant, they spend resources to protect the value of their assets from the effects of inflation. This is in the form of personal finances, investing in precious metals such as gold or silver, or seeking advice from accountants.

While this type of activity is rational to the person(s) looking to protect themselves, it is also wasteful compared to the value that could’ve been satisfied had there been no inflation to begin with. This further adds to slowing down the process of per capita incomes moving to the right of the curve, because the loss of purchasing power for financial capital, diverts resources to “wasteful” endeavours.

Our current policy of price stability by injecting excess money into the economy, as an attempt to avoid deflating prices, provides us with the very effects that slow the Kurznets Curves process; a rise in output prices which detract from falls in unit production costs.

If we want to take environmental degradation, and improving the environments quality seriously, then it is important to address secular inflation and abandoning the policy of inflation targeting, in favour of a productivity norm to allow for growth deflation, financial stability and a reduction in unit production costs to spur on reduced output costs.


Fuel Shortages ≠ Inflation

Inflation Is Here, But There’s Also A Shortage Game In Town

By Josh L. Ascough

In almost all mainstream economics textbooks, when the subject of inflation is reached, the standard definition is that inflation is a general increase in the price level. This definition has sparked numerous conflations of the cause and effects of oil and gas prices and inflation during the financial aftermath of Covid restrictions, policies and the current conflict between Ukraine and Russia; Investopedia recently attempted to provide a clear answer to the correlation of inflation and the resulting high oil prices caused by the shortage by stating “Higher oil prices contribute to inflation directly […] by increasing the cost of inputs.”

“this definition of inflation is facetious at best and leads to bad policies at worst. The general increase in the price level definition, defines inflation by its symptom; or effect, rather than defining it by the cause”

But the fact of the matter is this definition of inflation is facetious at best and leads to bad policies at worst. The general increase in the price level definition, defines inflation by its symptom; or effect, rather than defining it by the cause. Nicolas Cachanosky, an Assistant Economics Professor at Metropolitan State University, sums this confusion up stating that:

if there is more than one reason why the price level may change, then defining inflation by describing a movement of a variable that can have multiple reasons invites confusion. This confusion can eventually lead to errors in monetary policy. More accurate would be to define inflation by its cause rather than its effect.” (Cachanosky, 2020, p. 33 emphasis in original).

A general increase in the price level can occur outside of the means of inflation. If an economic resource; which is demanded in multiple lines of production and multiple production periods faces a shortage, this will create a general increase in the price level. The same effect will be seen if demand for this multi-specific good arises. Excess demand, supply shortages and inflation may hold similar effects but they do not hold the same cause.

“inflation must be defined by its cause rather than its effect. Inflation is the occurrence of an excess increase in the money supply over the demand for money”

In order to better combat the confusion, inflation must be defined by its cause rather than its effect. Inflation is the occurrence of an excess increase in the money supply over the demand for money:


It is not simply an increase in the supply of money full stop; money must have an excess (surplus) over the quantity demanded in order to classify it as inflationary; just as a monetary deflation cannot be classified as a general fall in price: a monetary deflation requires that:

MD > MS.

The Cambridge and Fisher equations respectfully provide a clear picture of the variables required, both however measure separate aspects of the money equation; the Cambridge equation focusses on the demand for money (MD) and the Fisher equation looks at the money supply (MS). the MS equation; adjusted to measure real output, is calculated as:

MS × Vy = Py × Y

Where Vy and Py are the money velocity and price levels related to all real output transactions. On the other side is the Fisher equation which is calculated as:

MD = k × (PyY)

Where k is capital and PyY is the nominal income held by economic actors. If the price level fluctuates up (down), then MD rises (falls) in addition as a result to maintain a constant monetary balance. In other words the demand for money is the demand to hold money balances which can be liquidated easily at later periods.

If MS = MD then it follows that Vy = . This shows that MV is an inverse of MD. A higher (lower) MD entails a higher (lower) k; therefore a lower (higher) Vy.

To reiterate, the cause of inflation is not MS in period 1 is greater than in period 2, but that ∹ MS > MD = inflation.

The effects of inflation on the price level are equally not as simple. Since excess money supply enters the economy from a specific point, inflation seldom effects all prices at the same rates, nor during the same time setting, as economic actors plans may hold earlier or later time structures of implementation. It is unsound to assume that the percentage increase of all prices would hold the same rate, as the rate of each price increase will vary depending on a variety of factors. We can hypothesise a median or mean rate, but this would not suggest a single rate, as it would be subject to deviations in relative price increases.

“This lack of in-house sourcing, whether one is in favour of the measure as a counter to climate change or not, is a key source of the current high price fluctuation in oil and gas”

While the current effects of inflation are nothing to shrug at, it does not mean all the woes are inflation related. The current fuel crises is a supply shortage caused by the conflict between Ukraine and Russia. Many Western governments have taken the position to not import Russian oil while the conflict is ensuing, whilst also not pursuing in-house sourcing in order to mitigate the price fluctuations. This lack of in-house sourcing, whether one is in favour of the measure as a counter to climate change or not, is a key source of the current high price fluctuation in oil and gas.

This is not to say the price level should not be permitted to adjust and must remain constant. Assuming monetary equilibrium to be desirable, changes in productivity which generate fluctuations in prices should not be obstructed by restrictive monetary policy, as this would destabilise monetary equilibrium (Monetary Equilibrium is a state of affairs where the quantity of money supplied is equal to the quantity of money demanded).

In a case where productivity increases (decreases) would generate an increase (decline) in supply, a fall (rise) in prices would be an appropriate movement; attempts to halt such movements would cause distortions in the market process. This is what is referred to as the productivity norm and is formulated as:

MV = P↓ Q↑

Where M is the stock of money, V is the velocity, P is the price level and Q is the quantity of goods and services.

It could be argued that price fluctuations caused by a supply shortage can contribute to the effects of inflation, and that the distinction between cause and effect is a game of semantics, but the distinction is a very real and important one in order to enact a sound monetary policy, and to ensure economic actors are better informed to make microeconomic solutions; as the late Professor Steve Horwitz put it:

“While there are Macroeconomic problems, there are only Microeconomic solutions.”

In short, supply shortages cannot contribute to inflation as, unless policy makers respond to a shortage with a monetary stimulus; further adding to an excess money supply, the shortage itself contributes nothing to MS > MD; it can add salt to the painful effects of the wound, but not contribute to the wound itself.

Continue reading “Fuel Shortages ≠ Inflation”

2022 Predictions and Wishes – Part 1

Image from Ragnar1904

With the New Year upon us, we asked our contributors for their predictions on, and wishes for 2022.

Thanks to Nick, Mal, Chris and Josh for their contributions.

On to Part 2 >

“Next Winter, there will be fears of the NHS capacity being swamped by Flu, regardless of Covid, as they are every year”

Local Brexiteer Nick Mane.

Prediction: Next Winter, there will be fears of the NHS capacity being swamped by Flu, regardless of Covid, as they are every year and always will be until spare capacity (e.g. Nightingale hospitals) are permanently factored in. This won’t happen, so we will go straight back to square one!

Prediction: The poorer EU countries will use their rejection of EU Law supremacy as a bargaining chip to get better allocation of the pot from the richer EU states. This will cost richer EU economies and their citizens so they continue to pay more and receive less. Public pressure will turn ugly against the EU, let’s face it, the French spent an entire year rioting and this was before their EU budget went down the toilet!

Wish: I would love to see the hospitality sector have VAT removed from alcoholic sales (supermarkets don’t have VAT levied) and costs such as mandatory door staff at all live venues relaxed (so smaller venues can afford to pay musicians) so we could return to the roaring twenties (post Spanish flu), revive our nightlife, let people go out and feel good again. More comedy, more music, more entertainers, more art, more reasons to be cheerful, more revenues for the government from a booming hospitality sector. Sadly, this has absolutely no hope of happening as Boris will be busy fighting off a leadership challenge and is way too risk averse to actually make much needed and decisive changes.

“What I would love to see happen is a return of secondary industry to the West. Giving real ordinary people good stable working class jobs”

Libertarian Mal McDermott.  Mal can often be found at London Agora meet-ups. 

Prediction: All Covid sanctions will be lifted in the first six months of the year.  With the Omicron variant spreading through the population regardless of vaccination status and thus in turn bringing herd immunity with a lower mortality rate, the government will have to declare the epidemic over.

Prediction:  The EU bond market will collapse and a major player will begin the leaving process. The EU has being playing a risky game with bonds for years now and it’s use of the ECB as a constant buyer is not sustainable. There is a reckoning coming that will not be bailed out and this could definitely happen in 2022.

Wish: What I would love to see happen is a return of secondary industry to the West. Giving real ordinary people good stable working class jobs would be the best thing that could happen to us right now. Over relying on our ideological and geo political enemies is a disaster waiting to happen, combined with the alienation and disillusion caused by too many people working in the service industry. My hope is that somehow, some way we could bring real productive jobs back to the West.

“the anti-scientific, anti-human health crisis narrative peddled by governments has been rendered ineffective at convincing the millions of individuals who are awake and actively resisting the removal of human rights”

Independent Libertarian Chris Wilkinson. Chris is the host of the Libertarian Listener and can be found online and on Facebook.

Prediction: My first prediction is that the trajectory of increasing authoritarianism and tyranny on the part of states across the world will continue under the name of COVID-19. It is now abundantly clear that the anti-scientific, anti-human health crisis narrative peddled by governments has been rendered ineffective at convincing the millions of individuals who are awake and actively resisting the removal of human rights including the right to protest and freedom of speech, and the push for mandatory vaccination through a coercive state-funded fear mongering propaganda campaign among other priorities. That narrative has also been rendered untruthful in the face of mounting factual evidence to the contrary, yet our elitist masters are now finding themselves too far in to bail out – the vaccines are not reducing the spread of the virus and may be causing more harm than they cure, lockdowns have been proven on no fewer than three occasions in Britain to not stop the transmission of disease, social media giants are censoring information that contradicts their chosen (false) narrative, the wearing of face masks is ineffective and has become a socialist identity issue, the use of social distancing and enforced isolation has split families apart, driven people to avoidable suicide and has spurred domestic violence. Above all, the elderly and vulnerable who are ill have left to die alone. All of this will undoubtedly worsen during the coming year.

Prediction: My second prediction is that Western capitalism will be threatened through a systematic destabilisation of the global financial system and the installation, through COVID passports and other measures, of a rudimentary social credit economy under the tagline of the ‘Great Reset’. Inflation in developed countries has already started an upward cost-push spiral as wages rise without being matched by increases in production – coupled with supply chain blockages and shortages, tax increases, profligate government spending, job losses and the worst downturn in economic activity seen in centuries, the conditions are ripe for a major catastrophe. As already seen, the deleterious impact of universal COVID passports will have on international travel, cultural development, consumer spending and standard of living will compound the decline. While China continues its imperialist objectives in belt and road nations and expands its military in preparation for a war in the mid-2020s, the West is still obsessively concerned with bottom-of-the-list issues such as enforcing the use of gender-neutral pronouns and embracing illegal immigration as though it were virtuous. With globalists occupying key political positions across the globe parroting a uniform narrative that actively places individuals in jeopardy, we couldn’t be worse prepared for what’s to come.

Wish: My wish for 2022 is that the freedom movement continues winning the information war against state and media institutions. The early signs are positive, not least the consistent strength in numbers witnessed at protests and rallies even in colder months but also the new streams of alternative media emerging that are presenting unbiased and accurate information enabling individuals to make informed decisions about current affairs. Unlocking individuals’ ability to think critically is key to securing the real objective of restoring freedom. Beyond that, I’d like to see a push for decentralisation of the human way of life – an increase in self-employment, self-reliance and self-sustainability coupled with the empowerment that stems from private ownership. Though I see 2022 as continuing further the descent into collectivist madness, there are glimmers of a silver lining – but the real reward of liberty is for individuals to fight for and secure for themselves.

“I would like to see Steve Baker become the new Prime Minister should Johnson be ousted: a libertarian who is well read, & has been against government mandates since the beginning”

Libertarian, and economics writer Josh L. Ascough.  Josh can be found on Twitter and Instagram.

Prediction: 2022 is going to be an important year for those of us who are against the government’s mandates. 2022 will be exactly 2 years since the coronavirus act was established, which holds a clause that the act expires exactly 2 years from its inception; March 27th, with the possibility of an extension of 6 months if voted for. We must keep a watchful eye on the government; more so than before. The government will very likely extend the act for an additional 6 month period; during which time we should expect the milking of measures more draconian than prior, as Johnson and co are of the mindset that to do something is better than nothing; even if legitimate data doesn’t support such measures. If the act has not expired after at the latest of 27th September 2022, then in technicality the government will be breaking the law, & people must demand they abide by the act & allow for its expiration.

Prediction: With Johnson losing a parliamentary seat which has been held by the Conservatives for 200 years, a vote of no confidence is likely to occur. The most probable candidate is Rishi Sunak; the economically illiterate chancellor of the exchequer; new enough to the political game & ambitious enough to be a puppet PM.

Wish: I would like to see Steve Baker become the new Prime Minister should Johnson be ousted: a libertarian who is well read, & has been against government mandates since the beginning; it is an unlikely event though that Mr Baker would be elected, though if he were it would be the first time I’d be proud to vote for a candidate & actually believe in them, rather than begrudgingly voting for the candidate I despise the least.

Wish: I wish I could be more optimistic about the future of civil liberties, economic freedom & the political sphere in Britain, but it appears the only right the British care about is the right to complain; so long as we can complain the government can do whatever it wants. The most optimistic predictions I can give, is that we’ll go to the default before the worst comes, rather than a better and brighter future; I sincerely hope I’m wrong and can look back, and be pleasantly surprised.

On to Part 2 >

Net Zero – We came together to fight a referendum do we need a new one? – Part 2

As a group that came together to fight a referendum on membership of the EU, we thought we would ask you, what your views are on Net Zero, a possible Referendum, and more generally the environment.

Part 2 in our series of your views. More responses can be found in Part 1 and Part 3.

Thanks to Josh L. Ascough, Tam Laird, Georgina Guillem, and Sandy Wallace for their responses.

“We could throw billions at the environmental cause, but if we don’t address the tragedy of the commons we will never improve anything. In order to address the environment, we need the market process”

Libertarian, economics writer Josh L. Ascough has contributed many times to our site. He can be followed on Twitter and be heard on our Podcast from earlier this year.

Is Global Warming a threat?
Yes I would argue it is a threat, but doomsday predictions by people desperate to be proven right about humanities demise are useless actors. While we should acknowledge what negative effects pollution has, we must also acknowledge what we have done well.

Should we have a referendum on enforced Net Zero targets?
Net Zero no matter the target is an impossible venture, as all choices have trade-offs. It’s in human nature to adapt our environment around us in order to survive, rather than the rest of the animal kingdom which must adapt to its surroundings in order to survive. Because of this nature there will always be negative feedback. So yes, we should have a referendum but we must instead of targeting figure out how to internalise the costs to those who made the trade-offs.

What action should we be taking on the environment?
We could throw billions at the environmental cause, but if we don’t address the tragedy of the commons we will never improve anything. In order to address the environment, we need the market process. We should campaign for mass privatisation of all land, allow for the private ownership of seabed’s, do away with subsidies, abolition eminent domain laws, completely privatise rubbish collection & rubbish dumps. As long as we persist in the idea of “common ownership”, & “the public good” through eminent domain laws, we will never incentivise innovation; we will simply spread out the time it takes for costs to be socialised.

“Global warming is and never has been an existential threat. It’s one of the many hobgoblins used by government to justify it’s own incompetence, interference and increasing authoritarianism”

Tam Laird is the leader of the Scottish Libertarian Party.  You can read our interview with Tam, and browse other articles on the party.

Is global warming a threat?

No. Global warming is and never has been an existential threat. It’s one of the many hobgoblins used by government to justify it’s own incompetence, interference and increasing authoritarianism.

Should we have a referendum on enforced Net Zero targets?

The danger of a referendum is that the government might win. Simply strengthening its position. Scientific fact should not be decided by consensus but by reason and empirical evidence.  By all means vote out the perpetrators at the next General election.

What action should we be taking on the environment?

Government should concentrate on fostering an environment that encourages human flourishing and wellbeing. The best way it can do that is by leaving us alone.  Polluters should be made pay for damages through the courts. Instead of big business and pharma being afforded government protection.

“I do not think Global warming is a threat… The Climate as we call it has been changing and indeed is constantly changing since the beginning of time”

Brexit campaigner Georgina Guillem, is a former UKIP candidate in Purley and has run many street stalls and station leafleting sessions across the borough.

Is global warming a threat?

I do not think Global warming is a threat. I think the climate is so complex a system that we should not meddle with it. The Climate as we call it has been changing and indeed is constantly changing since the beginning of time.

Should we have a referendum on enforced Net Zero targets?

Yes, I do think there should be a referendum on whether we want to spend trillions of pounds on Green Energy to end up with Lukewarm houses in winter.

What action should we be taking on the environment?

I do think though that we as human being owe the planet care and management as to not pollute in the way that we are doing. We must Behave better starting with plastic and throw away packaging, that is sometimes unnecessary.

“There is a close to absolute establishment consensus that the way forward is the imposition of costs and restrictions on liberty upon ordinary people, with predictable exceptions for those who are important enough.”

Aberdeen Councillor Sandy Wallace brings our second contribution from the Scottish Libertarian Party. Sandy can be found on Twitter and you can read our interview with him.

Is global warming a threat?

Life is not that simple, climate change is both a threat and an opportunity, depending on who and where you are, the actions of mankind clearly have an impact, how much is hard to gauge, what effect different actions would have is harder to gauge and certainly not proven and the cost of those actions versus the hoped-for benefit of them is at best marginal if every wish comes true and at worst far worse than the effect of climate change

Should we have a referendum on enforced Net Zero targets?

There is a close to absolute establishment consensus that the way forward is the imposition of costs and restrictions on liberty upon ordinary people, with predictable exceptions for those who are important enough. The only possibility that the establishment row back is if normal politics is disrupted and governments see the possibility of losing power. Calls for a referendum seem to me to be part of that, but there needs to be some sort of political movement emerge to cause Tory MPs, in particular, to fear for their future

What action should we be taking on the environment?

We should be planning for environmental change, not planning how to avoid it. The latter is wholly unproven technology, the latter even with official state opposition across the developed world is wholly proven. Can we terraform Mars? Probably. Can we terraform Earth? Of course we can. Desalinate water, irrigate deserts, plant trees, capture carbon. Deliver nuclear power. Reclaim land. Permit and enable economic migrancy.
Mankind needs to believe in itself.

This is the second set of your responses, further responses can be found in Part 1 and Part 3

Free Banking Theory and History of the Monetary Sphere

Monetary Piece by Josh L. Ascough

Read in PDF: https://croydonconstitutionalists.uk/wp-content/uploads/2021/09/Free-Banking-Theory-And-The-History-of-the-Monetary-Sphere.pdf

Throughout the history of economic development, banking, and the monetary sphere as a whole, has been the subject of widespread unease to people and a seductive opportunity for Governments. Indeed, there is likely no other institution that has seen such a wide array of Government controls in some form or another; whether that be the formation of central banks, regulations, interventions or monopolisations; all for the purposes, we are told, of maintaining stability and ensuring any economic crises is averted or lessened.

This however is not the case. In fact governments’ seizing control over any aspect of money and banking, has seldom been for the purposes of stability or fiscal reasoning.

The purpose of this piece is to demonstrate the theory of what has been coined, Free Banking. Free Banking looks at the theoretical, historical and empirical examples of a money and banking system, free from government control; with private banks setting their own reserve rates, and issuing their own competitive notes.

The piece will go over several key subjects, in order to provide a greater, in depth analysis of the Free Banking theory; with corresponding historical and empirical evidence.

The topics of discussion are:

The Free Banking Theory

Unstable Restrictions and Bad Regulations

History and Instability of The Bank of England

Bygone Gold Standard – The Possible Future of Free Banking

– The Free Banking Theory –

The first and naturally the most important question to answer at this time is, how does free banking operate?

Banks are allowed to issue any liabilities they wish; subject only to the constraint that they persuade their customers to accept them of their own free will. The competition between the banks forces them to make their notes convertible. The banks are compelled to make their notes convertible by persuading a noteholder that it will retain its value; this trust in the stability in the notes value, is achieved by making a legally binding guarantee of the future value of the note. A bank that makes its notes convertible holds a competitive advantage over rival banks that do not have convertibility. Because entry into the competitive market is free (freedom of entry), the banks are unable to form a lasting cartel of inconvertibility; if such an act was tried, it would merely encourage new competitors to enter the market, who would gain an advantage by offering convertible notes, and the cartel banks would lack legal means of privilege and protection to keep the competitor out. Member banks of the cartel would be incentivised to undermine the competition by offering tacit convertibility to noteholders in order to gain an advantage.

In order for a bank to increase the demand of its notes, it would have to expand its attractiveness and trust among customers; advertising more, branching out, increasing its reputation etc. but it could not do so simply by putting more notes out into circulation, when the demand to hold these notes is not there.

This freedom to issue notes competitively, is not without constraint, which is attained via what can been referred to as being similar to a chain gang, and is regulated by market forces.

Kevin Dowd gives details into the restraints banks face and as to why unlimited, undesired expansions of issued notes would not work in the banks favour; stating that:

“Given the fact that banks will choose to commit themselves to convertibility, then it is the need to maintain convertibility which forces banks to limit their note issue. This is so because the circulation of convertible notes is limited by the public demand to hold them. […] Any notes issued beyond the demand to hold them […] would simply be returned for redemption, since the notes would not remain in circulation for long enough to justify the expense of putting them out and taking them back again.” (Dowd 1989, pp. 8-9)

Banks not just in a free banking system, but in all systems have to guard themselves from two kinds of financial risks: an insolvency risk, and an illiquidity risk. Insolvency is the risk of a bank’s net worth becoming negative, and this kind of risk is one which banks share with all private businesses. Illiquidity is the risk that a bank may default on its legal obligation to redeem its notes or deposits. To protect and attempt to prevent the former, a bank will look to diversify its portfolio, so that fluctuations in asset value are likely to cancel each other out, or be of minimal harm. However, if the bank’s net value is found to be negative, its creditors would run on the bank and shut it down, since said bank is shown to be badly managed with loans not performing, and a risk to its creditor’s capital. When it comes to the latter (illiquidity), the banks could, in principle, operate as “warehouses” in which there is no risk of illiquidity due to operating on a 100% reserve rate. The problem with this though, is the banks would be unable to lend and could only make profits from charging deposit fees. Additionally historical evidence indicates depositors prefer fractional reserve banking due to receiving interest on their deposits; rather than the fees 100% reserve “warehouses” would have to charge its depositors, in order to cover expenses.

Before continuing, an important distinction of the different degrees of money needs to be made:

MOE = Medium of Exchange: Refers to the debt instrument which is transferred in the exchange process (notes). MOA = Medium of Account: Refers to the commodity in terms of units which are quoted as prices (gold) (so many units of good x for one unit of good y). UA = Unit of Account: Refers to those units (MOA). The distinction is important because different considerations apply to MOE and MOA. MOE tends to require the use of an instrument that cannot be used for some other purpose at the same time. A MOA however is free of this limitation an can be used by any number of people simultaneously.

How is the value and quantity of bank-issued money determined under free competition; more specifically, if the banks are subject to no ceiling on currency issue, nor a floor on their reserve ratios, what market forces are in place to compel the banks to limit their issues and hold positive reserves? Assuming gold to be the basic money that acts as the MOA and the MOR (Medium of Redemption), then the purchasing power of money (or MOE) is the purchasing power of gold (PPG); the demand and supply of money determines the PPG; or, the rate of issue relative to the velocity of money or demand to hold determines the purchasing power, which tends to be reflected in prices: MV=PY (money velocity = price of output). The monetary stock demand for gold is the sum of the banks’ demand for reserves, and the demand for bank reserves derives from each bank solving a reserve-holding optimisation problem. In the event of a money shock to supply or demand, the stock quantities supplied and demanded for gold, are represented as:

These are brought back into long-run equilibrium by international flows of gold. This is what the classical Economist David Hume classed as the ‘specie-flow mechanism’.

To obtain a greater understanding of long-run equilibrium, we can observe it in diagram format:

The vertical axis represents the banks supply of reserves, with the horizontal representing the banks demand for reserves. The rate of money velocity determines the rate at which the banks hold a demand for reserves; as well as the market rate of interest: for example; if no one spends anything and people are signalling a demand to hold liabilities (notes and deposits) then the bank wouldn’t need reserves and could issue more loans, and transfer larger quantities of credit; the reverse effect takes place if MV is high. If people’s demand for bank liabilities is low and their time preference is for goods sooner, then the banks notes will be returned to them sooner for redemption in gold; meaning the banks will need to hold a higher reserve ratio.

In long-run equilibrium, with PPG being the same worldwide, then the individual country’s share of the world stock of gold; represented as (G i / G w), corresponds to that country’s share of demand for gold-holding on the world scale:

What happens if an individual bank over-issues? Before delving into this important question, we need to take a look at a bank’s balance sheet. This very basic bank balance sheet displays variables for the bank, which seeks to maximise and optimise the total size of each side of the sheet. If we simplify things a bit more and assume K is fixed, then the balance sheet imposes the following constraint:              

(R + L = N + D + K).

The banks have an incentive to hold an adequate reserve ratio; not only to enhance profits but to reduce its liquidity cost Q, which is the estimated value of costs incurred in the event the bank runs out of reserves, or reaches negative reserves. The cost of negative reserves may be in the form of legal penalties, the clearinghouse issuing a penalty, or the bank seeking to liquidate its assets in order to cover short notice calls for redemption. The bank’s choice of its level for R and its circulation of  N and D, depend on how its choice influences Q. Having a greater volume of  N and D circulating raises the number of claims against the bank that can be brought for redemption, and therefore clearings large enough to bring about negative reserves.

There is an equilibrium size of a bank’s currency circulation that satisfies equi-marginal conditions. This is measured by the value of the public’s desire to hold currency issued by the bank i. This value is measured as N i* p, where ‘p’ indicates the public who hold it as an asset, ‘i’ is the issuing bank, and * is the desired value. If the bank’s circulation exceeds the desired level

what would happen? If we assume the excess currency is introduced via loans, the borrower spends the currency; leading to the recipient to have balances of bank i in excess of their desired holdings. The recipient; for which notes issued are greater than notes desired, can respond to this excess in several ways.

(1) Direct Redemption

(2) Deposit Into Another Bank

(3) Spending the Excess.

As a consequence of reserve losses from over-issue, the bank i finds its reserves below its desired ratio, formulated as:

The net benefits of holding reserves now exceed the net revenue from making loans via continued over-issue.

So what of the risks of bank runs? What happens if the banks expansionary endeavours lead to a run? The first thing to note is isolated bank runs are tolerable, because what bad banks lose, better ones gain. Secondly, we need to make a distinction.

There are two kinds of bank runs:

(1) – Deposit Runs: Deposit runs occur when the public runs to convert deposits into notes.

(2) – Note Runs: Note runs occur when note holders run on the bank in order to redeem in specie (gold/silver).

Before we continue we need to define our terms. A deposit is a liability of a bank, which is redeemed with one of the banks liabilities, called a note. A note, is a bank liability that has to be redeemed with an asset, known as specie (commonly gold/silver). A deposit run therefore, is when the public run upon the bank to convert one liability with another; deposits for notes. Note runs then, are runs where the public demands to convert bank liabilities into assets which is an outside medium; or, to put it another way, a medium of redemption that is not a product of the bank such as gold and silver. In the situation of a deposit run, there is a sudden but short demand to convert deposits into notes. This sudden shortage of liquid assets will be reflected in the liquidity market, and will (temporarily) drive up the interest rate. So long as the deposit run does not turn into a note run, the bank could temporarily create extra liquidity simply by issuing more notes. In short, if a deposit run were to occur, the banks would have the incentive to create the necessary liquidity in order to correct it. Note runs on the other hand occur when the public run on the banks to redeem bank notes for specie. Under a fractional reserve system, the banks would be unable to redeem all their notes at once without prior notice; nor is it within the banks abilities to create more specie at will, unlike notes to deal with deposit runs. A single bank may be able to purchase additional specie to cover the redemption, but if the note run is on the banking system as a whole, then all banks will be short of reserves. The banks can avoid the possibility of defaulting on redemptions, by relaxing the convertibility contracts; instead of being bound to redemption on demand without notice, they would use an option clause, giving the banks the option to defer redemption for a pre-specified period of time, so long as they pay a pre-specified rate of interest on the notes which had deferred redemption. It would not be worth suspension if the overnight interest rate is less than the compensation rate the bank would have to pay from deferring. The question then arises: why would the public be willing to have redemption deferred? The noteholders would be compensated if a bank suspended redemption, and the presence of an option clause would reassure risk-averse holders that they would lose little or nothing if they were not first in line during a note run.

“If the public withdraws currency from deposit accounts, then reserves will be drained from the banks, which forces them to contract their balance sheets; unless the central bank expands the monetary base. A centralised, monopoly of currency is then seen to create incentive and epistemic problems seldom present with a decentralised, competitive system”

An advantage of letting banks issue their own notes, without state-enforced reserve requirements, would be that the banks would be better suited to accommodate changes in the public’s desired currency-deposit ratio, simply by changing the mix of note and deposit liabilities. To give a simple example, let us assume a case, where banknotes alone are used as currency and the desired reserve ratios for notes-deposits are the same; no expansion or contraction would be required of overall money or credit. The stock of base money, ‘B’ is equal to the stock of reserves, ‘R’, while the money stock ‘M’, is equal to that of bank deposits, ‘D’ plus outstanding banknotes, ‘N’.

B = R and M = D + N

Equilibrium here requires that actual bank reserves are equal to the desired bank reserves:

R = r(D + N); where ‘r’ = R/M is the desired bank reserve ratio. By adding ‘B = R’ – ‘R = r(D + N) to subtract D and N gives us: M/B = 1/r. Which indicates the independence of the money multiplier, M/B, from the publics’ desired currency-deposit ratio. Under a central banking system however, all currency takes the form of base money. This means instead of the above mentioned (B = R and M = D + N) we have:

‘B = R + C’ and ‘M = D + C’

Where ‘C’ is the publics’ holding of base money. As commercial bank liabilities don’t include banknotes, the condition for reserve equilibrium is:

R = r(D)

Having c = C/D denotes the publics’ desired currency-deposit ratio, and substituting to subtract D and C gives:

M/B = (1 + c)/(r + c)

The expression in brackets is the standard money multiplier. Unlike a free banking multiplier, the standard under central banking implies that, holding ‘B’ constant, a change in the publics’ desired currency-deposit ratio alters the equilibrium quantity of money. If the public withdraws currency from deposit accounts, then reserves will be drained from the banks, which forces them to contract their balance sheets; unless the central bank expands the monetary base. A centralised, monopoly of currency is then seen to create incentive and epistemic problems seldom present with a decentralised, competitive system.

Under a free banking system, directors of competitive banks have no specific difficulty meeting demands for currency. If a depositor wishes to convert some or all of their balance, the bank need only to supply the depositor with additional notes. If many or all of the banks depositors come forward for the same reason, the bank simply issues further additional notes. The form of liabilities demanded is not a matter of concern for the bank in question, what matter is their total value. When depositors convert deposits into notes or vice versa, there is simply a reduction of one balance sheet item in exchange for an increase in another; this would be similar to changing a £5 note for five £1 coins. As a final point this relates back to what was discussed about deposit runs; a deposit run is a simple action for a bank to deal with, so long as there are no restrictions of note issue in place.

Another way of looking at the calculation problems under central banking can be shown further in two diagrams. We’ll assume two different scenarios; one where central banks operate on a fractional reserve basis, and the other where central banks operate under 100% reserves:

If the central bank holds a monopoly of currency; thereby all the gold stock goes to the central bank and commercial banks treat its IOU’s as their reserves, and it doesn’t back its notes 100% then that spells serious trouble, as when the central bank operates on a fraction it can shift Rs out. As the central bank’s reserve ratio effectively determines the reserve ratios of other banks, this would lead to PY seeing an increase. Where P is the price and Y is output.

In the second scenario where the central bank operates on a 100% reserve requirement, we can see the effects below:

Under 100% the central bank is forced to issue nominal quantities of notes equal to the quantity of gold in its vaults; the central bank is forced to hold on to its gold reserves. This may seem a better scenario, however, we need to remember that the central banks notes; because it has monopoly of currency, are treated as reserves to the commercial banks. The effects of this are shown in the diagram: If people withdraw more notes, then reserves decline; if they redeposit them, reserves go up; meaning we would obtain instability in the currency ratio, making it still inferior to free banking and the natural, market mechanisms which regulate the banks.

Opponents of Free Banking; or fractional reserve banking in general, base their criticism on two key areas:

The first being the argument that fractional reserve banking is fraud. This argument is focussed on looking at the credit banks issue; viewing it as “created credit”, and that two people cannot hold a claim of ownership to the same coin.

There are two important factors which make the bankers ability to operate on a fractional reserve basis possible. The first is the fungibility of money, which allows depositors to be repaid in coin, bullion or whatever the commodity may be, other than that which was originally handed to the banker. Second is the law of large numbers; which as George Selgin notes, is that which

“ensures a continuing (though perhaps volatile) supply of loanable funds even though single accounts may be withdrawn without advance notice.” (Selgin 1988, p. 20)

The operation of banks classifying deposits of gold in any shape other than an ornament, and acting as savings-investment intermediaries goes back to the days of the goldsmiths. Historically in England, as early as the time of King Charles II (1660-85), the role of the bailee and the debtor of the depositor, developed side by side.This lead to money warehouse receipts becoming IOU notes, or debt instruments. This has been named as the bagging rule. Under this rule coins placed in a sealed bag or container saw the goldsmith treated as a bailee; storing them safely, with a fee charged for storage. On the other hand loose coins brought to the goldsmiths, were acknowledged as loans to the banker; the goldsmith was seen as a debtor, with the depositor holding the right to call upon their loan for repayment. By 1672 the practise of free loans (demand deposits) to the bankers had become widespread.

Since its early development, a fractional reserve bank free from regulation, performs an intermediary role. The bank recognises credit granted to it by depositors/holders of the banks notes, and makes the funds available for loans and investments. As confidence in the demand liabilities of the bank rises, the entire demand for MOE can be performed successfully by them, so all commodity money is withdrawn from circulation and left at the disposal of the bank. Stock equilibrium is reached at the point when the demand for the money commodity for non-monetary purposes (such as bank reserves; industrial/consumption purposes) is sufficient to absorb the surplus created by the use of bank notes. The size of the bank money stock, is determined by the demand to hold bank money at the new equilibrium rate. From this stage onwards, additional expansion of bank money will only appear viable as the aggregate demand for money balances expands. Under a free banking system, historically the banks have continued to demand commodity money for their reserves. This is to maintain a margin of error with regards to the redemption of an individual bank’s notes. Furthermore, banks will regularly send rival bank notes back to the issuer for redemption through the clearinghouse. By returning its rivals notes for redemption, the bank only gives up assets which earn no interest and in return, receive either its own notes (which protects it from unexpected redemption) or it’ll receive commodity money in the form of gold, which is more liquid and a risk-free asset.

On the subject of “created credit” it is agreeable that lending not backed by voluntary savings contributes to instability and financial crises. However, the distinction between transfer credit and created credit helps to illuminate the difference between warranted and unwarranted expansions of the inside money stock. Transfer credit is granted by banks in relation to people’s desire to abstain from current consumption by holding. Created credit on the other hand is generated regardless of any voluntary abstinence of spending. If the nominal supply of inside money is not reduced in tune with a fall in demand for holding money, then the credit is created, rather than transferred. Created credit can only exist in the short run; credit created leads to an adjustment of prices which (eventually) restores monetary equilibrium, causing all outstanding credit to adjust back to the aggregate demand. Since nobody holds inside money in excess of the balance he desires to hold, all credit under monetary equilibrium is transfer credit; meaning any referral to created credit, is the temporary expansion of the money supply due to excess bank lending or investment. Unlike operations  of credit transfer, created credit leads to disproportional activities in the production process. This artificial diversion of resources due to the “forced savings” of created credit is halted once prices adjust to eliminate the excess money supply. This expansion and credit creation, is the classic example of the boom-bust cycle; unwarranted expansion, followed by a contraction back to equilibrium. To give a further examination of the difference, credit creation arises when credit granted gives rise to bank liabilities being in excess of the demand for inside money balances. Transfer credit on the other hand, consists of credit granted which gives rise to liabilities in tune and consistent with the demand to hold inside money. It is on this topic that sadly many Austrian Economists fall flat on their theories; including unfortunately Rothbard and Mises. They viewed any credit not backed by 100% as unwarranted, but this would not be a form of credit; any “bank” holding 100% reserves on all its liabilities is not an institution that grants credit, it is merely a warehouse.

Another common argument against Fractional Reserve Banking; besides the “fraud” argument previously discussed with reference to the bagging rule, goes as the following: A warehouse storage on money is legitimate, a time deposit account is legitimate; a demand deposit account is neither a warehouse nor a time deposit. Therefore a demand deposit is illegitimate. This argument however, is based on what is known as fallacy of denying the antecedent, or fallacy of the inverse. It would be on similar lines to saying: a car has wheels and is transport, a bus has wheels and is transport; a train has no wheels, therefore a train is not transport. The difference is not that of kind, but is instead a difference in degree.

In a debate with Economist George Selgin, Robert Murphy makes the claim that it is Fractional Reserve Banking that makes bank runs possible, and that, under a 100% reserve system, bank runs can’t happen. This claim is extremely flawed however, because it looks at the matter backwards; bank runs are seldom unprovoked. This claim holds that banks fail because they are run upon; rather than the banks being run upon because they’re failing. Additionally, this concept insinuates that under a 100% Reserve system, it is not possible for banks to be run upon due to bad loan’s being invested in, poor management by banks of their policyholder’s money, or because of any other criteria which may lead to distrust of the banks. This almost seems like a use of Neo-Classical ‘General Equilibrium Theory’; that under such a banking policy, we must presume the banks to have perfect information and know the costs, desired outcomes, and time preferences of consumers; under such a theory we must presume already achieved states of equilibrium, and for bankers to be omniscient. Such presumptions and already known possibilities, removes the possibility of disequilibrium in the monetary sphere. This seems dishonest, due to the Austrians rejecting the general equilibrium theory of Neo-Classical Economics.

So if it is not fractional reserves which cause instability, cycles or bank panics*, what are the causes?

*A bank panic occurs when a run on the bank liabilities threatens the solvency of the banking system. They’re not only a cause for concern due to threatening the liquidity of the banks; leading to the public questioning the soundness of their medium of exchange, but additionally because they disrupt the information gathering functions of the financial sector. This type of panic raises the cost of credit, though an important distinction to be made is this increase in cost for credit is not accompanied by any increase in incentives to save or to expand credit. The resulting pressure on credit caused by the panic runs a real risk of causing a recession.

There are three schools of thought on banking instability:

(1) – The Bubble Explanation: Instability is caused by bank runs as random phenomena.

(2) – The Incomplete Information: Banking instability is due to bank runs, as rational responses by depositors who are imperfectly informed.

(3) – State Intervention: Suppressing the automatic stabilising mechanisms that evolve in the market; these suppressions can take the form of restrictions of note issue, restrictions of banks as intermediaries, state-mandated liability insurance, using the monetary system to raise revenue, and the lender of last resort.

The bubble explanation sees bank runs as speculative bubbles; underlying a mob psychology. The main characteristic of this, is prophecies are self-fulfilling – any factor that makes people anticipate a panic, will lead to a panic, however irrelevant the factor may be. This theory has the following explanation: (1) banks operate on fractional reserve banking and are unable to redeem all liabilities at once. (2) Banks are obliged to redeem on demand, and do so via a “first come, first serve” basis. (3) The public knows the banks cannot redeem all liabilities, and is concerned to avoid capital losses. As a result, depositors have an incentive to beat runs.

The incomplete information explanation states that bank panics are caused by the depositors’ lack of knowledge of the net worth of banks. This theory suggest that bank runs occur when depositors get noisy signals that suggest the banks are insolvent. The difference between this and the Bubble is that the indicators that cause the panic are relevant economically; they convey information – imperfect as it may be about the state of the banks. In the case of the bubble argument any variable can cause a bank run if it leads to depositors to anticipate a panic. The run of the Incomplete Information theory is “rational”, if relying on it ex-ante. This does not mean the speculation is correct; if it is correct that a bank is insolvent, then the bank run will have served a socially useful purpose by shutting down an insolvent bank. If the speculation is incorrect then it will lead to depositors shutting down a solvent bank.

“Free bankers do not deny that a bank may be run upon without state interference, but the theory differs from the other two by denying the banks fail because there are runs; free banking instead recognises the banks are run upon because they’re failing”

The regulatory explanation* explains that bank runs are caused by bad regulations of the banking system. The market would protect itself from bank runs if it were unrestricted, and allowed genuine market forces to operate and coordinate, but is prevented and stalled by outside, state-based interference. Free bankers do not deny that a bank may be run upon without state interference, but the theory differs from the other two by denying the banks fail because there are runs; free banking instead recognises the banks are run upon because they’re failing. There is imperfection in information, but free bankers state that these discoordination of signals; as well as most bank runs throughout history, are the cause of interference in the monetary system from the government, as well as the monopoly position and exemption from market restraints of central banks.

*The effects of regulations and central banking on stability and crises will be discussed in detail in the Bad Regulations and Central Banking sections.

On the subject of the history Free Banking holds, many countries throughout history operated on a free banking basis; Canada is the closest contrast to the American system of regulations and national banks prior to the Federal Reserve system; to keep close to Europe, Scotland was arguably the most successful system close to free banking.

The Scottish Free Banking era begins roughly around 1695 by an act of the Scottish Parliament; one year after the creation of the Bank of England. The Act gave the Bank of Scotland a legal monopoly over the issuing of notes and banking activities. While an act of legal monopoly may not seem like Free Banking, the Bank of Scotland thought its position safe; assuming Scotland could not accommodate more than one bank, and took no effort to renew its monopoly position when it expired in 1716.

Though the Bank of Scotland had an official sounding title, it was not treated nor recognised as a state institution. Larry White explains the details of this, stating that:

“The government neither did business with the bank nor regulated it. […] the act creating the bank prohibited its lending to the government, under heavy penalty.” (White 1995, p. 22)

White continues explaining the circumstances which lead to such arrangements:

“The crown of Scotland had been joined to that of England since 1603, and union of the parliaments was soon to in 1707. Shortly after the bank’s founding there would no longer be a Scottish government with which to become entangled. In London the Bank of Scotland was commonly suspected of disloyal Jacobite leanings throughout the early 18th century. The British Parliament therefore turned a deaf ear to the bank’s petitions against the chartering of its first rival, the pointedly named Royal Bank of Scotland, in 1727.” (White 1995, p. 23)

“The Royal Bank tended to dispatch agents to trade its notes for the notes of The Bank of Scotland, and would present large quantities of them for redemption; with hopes of embarrassing their rival. The Bank of Scotland retaliated in the same manner, but lost the game. It was forced to suspend payment in 1728, due to the continued conflict draining it of its reserves”

A rivalry between the two banks in Scotland began from day one of the Royal Bank opening for business. The Royal Bank tended to dispatch agents to trade its notes for the notes of The Bank of Scotland, and would present large quantities of them for redemption; with hopes of embarrassing their rival. The Bank of Scotland retaliated in the same manner, but lost the game. It was forced to suspend payment in 1728, due to the continued conflict draining it of its reserves. The bank made calls for its loans to be paid, a 10% call to its shareholders, and resorted to closing its doors for several weeks. This was not a single occurrence however, The Bank of Scotland had already faced suspensions; a run in 1704, which was sparked by rumours of revaluations of coin, forcing it to suspend for four months. While the bank was not insolvent, its assets were illiquid. It was at the time of this run that the bank set an important procedure, by announcing that all notes would be granted a 5% annual interest, which would be in effect during the period of a delay of payment to the bearer. This clause was called again for the eight month suspension in 1715, following a run during the civil unrest, and once more in 1728. During the suspension of 1728, a merger was proposed by the Royal Bank’s directors. However, the two sides were unable to reach an agreement in terms of how to value the Bank of Scotland’s stocks; providing historical evidence of the difficulty of securing a cartel of an industry. The competition between the two banks offered innovation in the banking industry. In 1728, the Royal Bank introduced the cash credit account, which was a form of overdraft. An individual applying for a cash credit account was required to provide evidence of sound character, and at least two co-signatories. Once the account was opened, the holder of the account could draw upon the whole amount or a fraction for personal or business transactions. There was interest charged on the account, but only in the event of an outstanding balance. The CCA lowered the cost of maintaining note circulation for the bank, by introducing more of the public to the use of notes. The account allowed an individual to borrow against his capital at lower costs; allowing him to take on productive endeavours that otherwise would have been unprofitable. The Bank of Scotland followed suit, by introducing their own CCA in 1729. The rivalry between the Royal Bank and Bank of Scotland began to come to an end in the 1740s. In order to counter the popularity of the Royal Bank among merchants in Glasgow, the Bank of Scotland granted a sizable cash advance to a partnership in Glasgow in 1749, for the purpose of forming the Glasgow Ship Bank. The partners promised to promote the circulation of the Bank’s notes. In an attempt to counter the promotion, the Royal Bank sponsored the founding of the Glasgow Arms Bank in 1750. In what was seen as a surprising move to the two banks in Edinburgh, the Ship Bank and Arms Bank began issuing their own notes; leading to the two Edinburgh banks to cease their feud. The Edinburgh banks chose to withdraw their credit from the banks in Glasgow, and stopped credit to any bank in Edinburgh or Glasgow which was circulating Glasgow notes. By 1756 the Glasgow banks proposed a geographical division of the Scottish market between the banks. However, to add more evidence to the difficulty of cartelisation, no agreement could be reached; allowing competition to be maintain in the industry. An important entrant into the banking sector was the British Linen Company. The corporation was chartered in 1746 to promote the linen trade. In 1747, the company’s directors began issuing interest bearing promissory notes, which would be used to pay its agents weavers, manufacturers and other customers. In 1750 it began shifting into the banking sector by issuing non-interest bearing notes payable to the bearer on demand. The Linen Company began to devote its time entirely to banking and withdrew from the linen industry; renaming itself to the British Linen Bank. The bank held a truly innovative role, by being the world’s first success with branch banking. By 1793 the bank had 12 branches in operation, leading to the British Linen Bank having the industries greatest note circulation in 1845. The entrepreneurial efforts of the British Linen Bank; from linen company to bank, showcases the innovative competition achievable under freedom of entry.

An important innovation in banking development, was that of bank-issued notes transferable by endorsement. Assignable notes gave way to fully negotiable banknotes assigned to no one in particular, but instead payable to the bearer on demand. A further development was the non-negotiable check, allowing the depositor to transfer balances to a specific party. Thus, at this time the modern form of inside money; redeemable bearer notes and checkable deposits are established. In England bearer notes were first recognised during the period of Charles II’s reign, it was around this time that warehouse banking was giving way to fractional reserve banking. Initially the courts reluctantly gave approval to the growing practice. Then after some controversy, fully negotiable notes were recognised by an act of Parliament.

While it may be argued no bank would accept a competing bank’s notes at par value, the reality is that banks hold more to gain from accepting foreign notes at par, as both a defensive mechanism to maintain their reserves, but also to attract more customers depositing and conducting business with them. Established banks that refused to take the notes of newly entering banks, or of established rivals soon had to change their policies, since the new banks would accept the established bank’s notes, and would drain their established rivals reserves; providing many an embarrassment for the banks who refused acceptance or par value, while the mentioned established banks were not offsetting their losses, due to not accepting at par. The rivalrous behaviour of banks accepting at par, causes inside money to become more attractive to use over commodity money. This is due to the fact that, since notes from one town are accepted at par value at a bank in another town, there is little reason and is seen as more convenient to carry notes, rather than lugging huge sacks of gold across towns and dealing with the large costs which would come from transporting gold. As George Selgin states:

“As par note acceptance developed during the 19th century in Scotland, Canada, and New England — places where note issue was least restricted — gold virtually disappeared from circulation. In England and in the rest of the United States where banking (and note issue in particular) were less free, considerable amounts of gold remained in circulation.” (Selgin 1988, p. 25)

The notes of Scottish banks, unlike that of Bank of England notes, could be issued into small denominations; though no notes smaller than £1 could be issued under the Act of 1765.

Contrary to the notion, Scottish banks were less at risk to counterfeiting, whereas counterfeiting of Bank of England notes was commonplace, especially in periods of suspension. The reason behind this is that the likelihood of counterfeiting going undetected coincided directly with the length of time a note circulated before being returned for redemption at the issuing bank. Scottish notes on average held a brief time of circulation, as rival banks would not hold the notes of competitors in their tills, but would return them through the clearinghouse for redemption. This was not the case for Bank of England notes, due to restrictions of note issue on banks in London, and the Bank of England’s notes acting as reserves for commercial banks. The six-partner rule as part of the Act of 1708, prevented England from experiencing strong join-stock banks similar to those based in Scotland.

The alarm in February of 1797 that an invasion from France was imminent, accelerated a draining outflow of gold which had already encouraged the Bank of England to restrict its discounts in 1795. This alarm led the Bank of England to suspend payments in specie on its notes. The suspension was approved by Parliament and was not lifted until 1821. While banks in Scotland were mostly exempt from ther drain, when managers received the news that London banks had suspended payment, the managers of the leading banks; the Bank of Scotland, Forbes, Hunter & Co, the Royal Bank and the British Linen Bank, met and came to the conclusion to follow the actions of the Bank of England and suspended payments. The reason for this, was that the Scottish banks feared, if they had made payment in specie available while the Bank of England maintained suspension, the English demand would have drained them of their reserves. It is theorized that the banks continued to quietly redeem their notes in Scotland for specie, handed to them by favoured customers.

The Free Banking era of Scotland came to an end with the passage of the Peel’s Bank Acts of 1844 and 1845. The Act further imposed the privileged monopoly position of the Bank of England, and suppressed freedom of note issue in the countryside, Ireland, and Scotland.

– Unstable Restrictions and Bad Regulations –

We have now shown in detail the history and theory of free banking, but what of an unfree system of money and banking? what are the effects of regulations on the banks?

While it may be argued that the biggest cause of instability are central banks, financial instability is not restricted to central banking. Bad regulations and restrictions can, and do, affect an economies stability.

While England gives a clear example of the instability of central banking, America (which until the Federal Reserve Act has been wrongly classed as free banking) provided clear examples of bad regulations.

While there were various “free banking” laws passed in the US between 1837 and 1861, the classification of these as “free banking” is facetious at best. State laws for “free banking” may have allowed for freer entry into banking, but they required banks to collateralise their notes by lodging them to state government bonds, which in turn tended to fall in value and not be very stable, and so bank portfolios would be stuffed with state bonds not worth their salt. This is in combination to the fact that many state governments restricted branch banking and outlawed notes that gave the issuing bank an option to delay redemption; or an options claws. In short the American “free banking” experience could be summarised as a free entry ticket into quick sand: you can enter for free, but it’s highly volatile with very little benefit.

“Interstate and Intrastate banking laws (Unit Banking) – restrict banks to operate only within the state or county they are chartered; limiting the banks’ economies-of-scale and their ability to branch out; the benefit of not restricting these would be the diversification of capital portfolios to limit the risk of failures, and withstand a crises”

The United State held two consistent regulations which had a huge effect on its financial instability; one being eluded to above, namely a restriction on branch banking.

Interstate and Intrastate banking laws (Unit Banking) – restrict banks to operate only within the state or county they are chartered; limiting the banks’ economies-of-scale and their ability to branch out; the benefit of not restricting these would be the diversification of capital portfolios to limit the risk of failures, and withstand a crises. American Glass-Steagall Act – The Glass-Steagall Act separated commercial banks from investment banks; prohibiting deposit-based institutions from engaging in investment securities, and investment-based institutions from issuing deposits. It was introduced with the belief that the combination of these institutions was a contributor to the banking collapse of the 1930s, but the restriction actually increases the risk of bank failure, because the banks are restricted in their ability to diversify their portfolios.

Another is that of a restriction on the issuing of bank notes. Restrictions on the note issue are potentially destabilising because they interfere with the mechanisms by which the free market can correct a deposit run; we remember, a deposit run is simply a run for bank notes, not a note run, in which the public is running to redeem their notes for the MOR. A monopoly lender of last resort can be destabilising, because it removes the automatic check on over-issue; the note-clearing system, which would have arisen spontaneously had the note issue not been monopolised and restricted.

Economist Kevin Dowd comments on the increased risk of deposit runs after the American civil war; stating that:

“After the Civil War the note issue was effectively cartelised under the National Banking System and banks of issue were subject to various limits on their note issues. Deposit runs were very frequent but the banks’ ability to deal with them was limited. These runs usually lead to suspensions.” (Dowd 1989, p. 33)

It’s not just regulations which can have negative effects on the monetary system. State interventions, combined with bad regulations, tend to have the effect of inducing instability and bad incentives for maintaining said instability.

State Sponsored Liability Insurance is a perfect example of this. While they protect banks against runs in the short run, in the long run they have the side effect of encouraging policies and bad incentives which are more likely to produce failure, due to the fact that big risk taking banks pay the same premiums as those that pursue safer policies.

The two primary arguments in favour of interventionism in the money and banking sphere are:

(1) Confidence.

(2) Information.

The Confidence Externalities Argument for State Intervention: This argument for state intervention in the monetary sphere takes the basic stance of: Government intervention is necessary to increase insufficient confidence levels that would be provided under a free market in banking. This argument can refer to either a single bank or the banking system as a whole. It runs against the fact the banks, as private establishments have every incentive to promote confidence. Each bank will recognise that, if it does not maintain confidence, it will face greater risk of a run; at beast, forcing it to borrow liquidity, or use its option clause to give it time to liquidate assets to gather the proper funds to meet demands to cash out; at worst, it will be driven out of business. Given this, there is no a priori argument for why a bank will take insufficient measures to promote confidence. Either way if this argument is true it proves too much. If it justifies the suppression of competition within the banking system, then it may justify suppression of competition among other industries which rely on competition; such as insurance, healthcare, broadband, commercial airlines etc.

The Information Externalities Argument for State Intervention: This argument for state intervention states that a competitive banking system would impose large information requirements. It argues that the uniformity of money is a public good, which reduces the information burden; with the conclusion that the government must suppress the varieties of money that would arise under competition. This argument, like the former asks too much, and could apply to any good or service. It can be equally argued against a variety of products or brands. It is simply the argument that too much choice makes life difficult, and should be suppressed by government decree, with the government choosing for its ‘subjects’.

There are many issues for when Governments intervene in the monetary sphere, the two primary issue however are:

(1) The establishment of a central bank to act as a lender of last resort (LLR),

(2) The establishment of state-sponsored deposit insurance.

The LLR role of the central bank – according to proponents – is to provide liquidity to banks who otherwise cannot obtain it. Since the LLR role is meaningless to a good bank; as they can almost always obtain loans to maintain liquidity, LLR protects bad banks from the consequences of their own high-risk investments, over-expansions and lack of confidence from its clients. This leads to central banks encouraging the very instability they claim to be set up to keep under control. It also affects the market in a less obvious manner. Since the LLR role of the monopoly bank tries to keep weaker, less stable banks open, the very existence of LLR reduces the incentives for good banks to build up their customer base, diversifying their portfolio, and generating higher confidence in anticipation of winning the bad banks market share. That competitive aspect of banking relies on weaker, less sound banks facing ruin, and this aspect cannot yield much pay-off if the over aggressive banks are to be bailed out under a LLR. The LLR leads to circumstances where even good banks may act more aggressively in their lending and take more, high-risk investments that weaken the confidence of its client base. As stated above, the irony of the lender of last resort role is it can produce the very instability its proponents claim would otherwise occur without a central bank. The sad reality is, the central banks LLR role could be falsely seen as the cure to financial instability; unfortunately, it often is. Deposit insurance has similar, negative incentive effects. DI leads to depositors being less scrutinising of the banks activities and its management; managers see this and no longer need to worry about maintaining confidence. A rational response from a bank would be to reduce its capital, since one of the main roles of maintaining capital of high strength; to maintain confidence of its depositors, no longer applies. Even if a good bank wished to maintain the high strength of its capital, it would be beaten by bad banks acting on bad incentives who cut their capital ratios to reduce their costs; the fight for shares of the market, would force ex-ante good banks to imitate the bad. State-mandated deposit insurance therefore turns strong capital positions and client confidence, into competitive liabilities and waste.

A final note to make, is on the topic of contagions. Proponents of State involvement look to the nation-wide panic in America during the 1930s. However, these panics were not occurring due to a lack of regulation; on the contrary, they occurred because of regulation and State involvement. The runs which occurred throughout the 30s were due to fears that FDR would devolve the dollar, alongside speculation; prompted by the Governor of Nevada, that the other States would issue bank holidays; if people in one State see another’s governor issuing a bank holiday in which redemption is void, they will begin to speculate and fear similar actions by their own States.

As Economist George Selgin notes:

“Contagion effects also appear to have played a more limited role than is usually supposed during the “Great Contraction” of 1930 to 1933. Prior to 1932, bank runs were confined mainly to banks that were either pre-run insolvent themselves or affiliates of other insolvent firms […] Serious regional contagions erupted in late 1932, but these were aggravated if not triggered by state governments’ policy of declaring bank “holidays” in response to mounting bank failures […] The truly nationwide panic that gripped the nation in the early months of 1933 appears to have been more a run on the dollar than a run on the banking system, triggered by rumors that Roosevelt intended to reduce the dollar’s gold content […].” (Selgin 2015, p. 25)

The combination of reserve requirements, anti-branching laws and restrictions on note issue fostered the panics of America’s National Banking era, as these prevented banks from issuing additional notes to meet growing demand to hold, or effectively mobilising reserves to meet demands; instead these regulations promoted interbank scrambling for base money. Looking at Canada as a contrast to the US; as Scotland was to England, gives us further indication that regulatory restrictions were fundamental in fostering panics, since Canada had a large absence of panics and lacked the restrictions found in the US.

– History and Instability of The Bank of England –

The most malevolent means for a Government to hold control over the monetary sphere, outside of regulations, is through that of a Central Bank. If the United States gives us examples of the instability of regulations and interventions, England gives us an old history of monopolisation and financial instability under central banking. Indeed, the two things which perpetuate State power the most, are financial crises and wars; a Central Bank helps the State in financing the latter and (to give benefit of the doubt; unintentionally) enacting the former.

History shows many examples of governments seeking to use the banking system to raise more revenue. An example of this is in Britain from the period of 1793-1797, in which the government needed funds in order to wage a war with France, so it pressed the Bank of England for loans. These ended up depleting the Bank of its reserves, and when rumours in 1797 of French invasion surfaced, it caused a run on the Bank that it did not have the resources to withstand. This lead the government to stepping in, in order to save the Bank from failure, by relieving it of its obligation to redeem its notes for gold. The early history of the Bank of England can be summed up as a series of purchases of privileges by the Bank from the Government. Originally, the Bank made a loan to the Government of £1,200,000 for William III’s war with France, in return for the right to issue notes to the same amount. This fixed amount was extended in 1697, when it was argued that the Bank should enjoy a monopoly of chartered Banking in England, and the privilege of limited liability for its shareholders.

This privilege is expanded on by Economist Kevin Dowd. Dowd comments on the privilege over monopoly of note issue; stating that:

“[An] example of destabilising restrictions on the monopoly note issue is provided in the 1844 Bank Charter Act in the UK. This act gave the Bank of England an effective monopoly of the note issue, but it also divided the Bank into an Issue Department (responsible for the note issue) and a Banking Department (responsible for the rest of the Bank’s business), and these two departments were to be entirely separate from each other. […] The effect was to leave the Bank wide open to deposit runs since the Banking Department had no access to additional notes (or specie, for that matter) if it were faced with a run on its deposits. This created the absurd possibility that the Bank of England might default on its obligations to redeem its liabilities despite the fact that the vaults of the Issue Department were full of gold. Three times subsequently – 1847, 1857 and 1866 – the Bank was faced with such runs […].” (Dowd 1989, pp. 32-33)

In order to obtain proper context of the Bank of England, we require going back ex-ante its establishment, as well as ex-post its monopoly roots reaching into the core of money and banking.

The origin of modern banking can be traced back to around the middle of the 17th century, when merchants took up depositing their MOE with goldsmiths. In order to expand their operations, the goldsmiths began offering interest on deposits; the receipts they issued out for deposits would begin to circulate as a good alternative to lugging around heavy bags of bullion; this is what would lead to the paper receipts becoming IOU’s, or debt-instruments. Banking development took a change towards more centralised and monopolised methods around 1694, by events of purely political nature. King Charles II had run himself into considerable debt via relying on loans from the London Bankers, and 1672 Charles II suspended payments, and the repayments of bankers advances. This caused the King’s credit to be thereby ruined for several decades. This lead to William III and his Government to follow the scheme of a financier, named Patterson for the founding of an institution known as the Governor and Company of the Bank of England; later to be known as it is today as simply the Bank of England. The early period of the Bank of England’s origin was summarised by a series of exchanges of favours between a needy government and a corporation more than happy to accommodate. The BoE was founded with a capital accumulation amounting to £1,200,000, which was immediately lent to the government; in return, the BoE was authorised to issue notes of the same amount. In 1697 the government renewed the BoE’s charter, along with extended privileges; allowing it to increase its capital stock, and thereby its note issue, in addition to providing it the monopoly possession of government balances, via the order that all sums due to the government (taxes), must be paid through the BoE. Furthermore, a clause in the Tunnage Act provided limited liability to the members; this favour was to be denied to all other banking associations for over a century, giving the monopoly bank not only a great degree of privilege, but a “head-start”. Further grounding in the BoE’s monopoly and privilege was established in 1709 when the Bank’s charter was renewed once more. In addition to allowing it to raise its capital in return for a loan to the government, the Act decreed that no firms of more than six partners may issue notes payable on demand less than six months; this decree excluded joint stock banks from issuing their own notes. There were further renewals of the BoE’s charter which reaffirmed its privileges, accompanied loans and increase in capital and note issue in 1713, 1742, 1751, 1764, 1781 and 1800. To put it briefly, the Treasury had benefitted from the BoE’s monopoly position no less than seven times. Soon after the French war broke out, Pitt requested advances from the BoE. However, the 1694 Act had prohibited advances to the government without direct authorisation from Parliament; though for many years small amounts had been advanced on Treasury Bills made payable at the Bank. In 1793 the BoE applied to the government to indemnify it against liability of loans made in the past, and give it legal authority to carry out transactions in the future. Pitt agreed to bring the Bill to Parliament, but conveniently left out a limiting clause, leading to the Bank becoming compelled to complying with government requirements of any amount. By the period of 1795, these borrowings had reached such an excess that it affected the foreign exchanges, and endangered the BoE’s reserves; leading to the Bank’s directors to plead with the government to keep its demands down. Finally, in 1844, an Act was passed which ensured the Bank of England held monopoly of the issuing of notes in the country.

Many proponents of central banking would point to the British journalist and essayist Walter Bagehot and his famous book Lombard Street as argument for the existence of the Bank of England; stating that Bagehot called the Bank’s primary responsibility to be a lender of last resort, in order to ensure financial stability.

The problem with such an argument is that Bagehot’s call for the Bank to operate as a LOLR, was not out of belief that a central bank is necessary, but because he saw it as the only viable option to ensure the Bank of England performed as little damage as possible; that if a nation finds itself stuck with a monopoly bank of currency, it is to act in this way but that nations should not aim to establish such a bank in the first place.

We can see proof of this, anti-central bank position by simply reading straight from the source:

“In consequence all our credit system depends on the Bank of England for its security. On the wisdom of the directors of that one Joint Stock Company, it depends whether England shall be solvent or insolvent. This may seem too strong, but it is not. All banks depend on the Bank of England, and all merchants depend on some banker.” (Bagehot 2009, pp. 19-20)

Bagehot continues by stating that:

“The result is that we have placed the exclusive custody of our entire banking reserve in the hands of a single board of directors not particularly trained for the duty – who might be called ‘amateurs’, who have no particular interest above other people in keeping it undiminished – who acknowledge no obligation to keep it undiminished who have never been told by any great statesman or public authority that they are so to keep it or that they have anything to do with it who are named by and are agents for a proprietary which would have a greater income if it was diminished, who do not fear, and who need not fear, ruin even if it were all gone and wasted.” (Bagehot 2009, pp. 22-23)

“We are so accustomed to a system of banking, dependent for its cardinal function on a single bank, that we can hardly conceive of any other. But the natural system – that which would have sprung up if Government had let banking alone – is that of many banks of equal or not altogether unequal size.” (Bagehot 2009, p. 33)

Here Bagehot makes the remark on not returning to a system of competing banks of issue; not due to the superiority of the Bank of England, but due to the belief that no one would listen to him if such a call was made, as well as how the Bank should behave as a second best to it not existing at all:

“On this account, I do not suggest that we should return to a natural or many-reserve system of banking. I should only incur useless ridicule if I did suggest it.” (Bagehot 2009, p. 34)

“I can only propose […]. There should be a clear understanding between the Bank and the public that, since the Bank hold out ultimate banking reserve, they will recognise and act on the obligations which this implies; that they will replenish it in times of foreign demand as fully, and lend it in times of internal panic as freely and readily, as plain principles of banking require.” (Bagehot 2009, p. 35)

Walter Bagehot makes his final remarks here on how impossible it seemed to do away with the Bank of England; equating it to being easier to imagine the abolition of the Monarchy:

“I have tediously insisted that the natural system of banking is that of many banks keeping their own cash reserve, with the penalty of failure before them if they neglect it. I have shown that our system is that of a single bank keeping the whole reserve under no effectual penalty of failure. And yet I propose to retain that system […] I can only reply that I propose to retain this system because I am quite sure that it is of no manner of use proposing to alter it […] You might as well, or better, try to alter the English monarchy and substitute a republic, as to alter the present constitution of the English money market, founded on the Bank of England, and substitute for it a system in which each bank shall keep its own reserve.” (Bagehot 2009, p. 144)

If one were to look at the shaky ground the English Monarchy has found itself in recent years with questions about its future, it can only be hoped that the British public will soon begin to question the validity of the Bank of England.

History shows not only the financial crises and major restrictions of regulations mentioned previously, but also those of central banking.

Below we see a historical record of financial crises and major restriction from the period of 1793 – 1933; the record shows America and England with their free banking counterparts, Scotland and Canada. An x indicates a crises for that period, and a black square indicates major restrictions enacted.

Source: George Selgin 2015, pp. 196-197 [condensed]. In reference to Bordo “Financial Crises”, Schuler “World History”, Schwartz “Financial Stability”.

Here we can see that the systems of high regulations, restrictions and monopoly of currency far out-performed for the grand prize of most crises riddled system than their free banking counterparts; not a good achievement to say the least, but an achievement none the less.

Under a central monopoly bank of issue system, as opposed to a free banking system of competitive note issue, things are radically different, due to the monopoly bank’s notes acting as reserves for the commercial banks, with the commercial banks issuing central bank notes, and are prohibited from issuing their own. In order to pay out notes to customers, a bank must acquire the notes in the interbank market, or from the bank of issue. If no additional notes are made available, then reserves become deficient and the banks must perform a contraction of their liabilities to avoid a default. In this scenario the supply of loanable funds is constrained, and lending rates rise above equilibrium, which then leads to a scarcity of credit, despite individuals’ demand to hold having seen no change. If the monopoly bank provides the desired reserves then a credit shortage is prevented. However, there is no certainty that the central bank will cooperate. Even if said central bank were to do so, there is no certainty that the notes issued for emergency purposes will be retired once the public no longer demands them. Unless such a precaution is taken, the surplus notes could return to the deposit banks, leading to them serving as the basis for inflationary expansion of bank credit.

Negative effects of central banking continue into the realm of deflation. In economics there is a distinction between good deflation and bad deflation.

Good deflation occurs due to an increase of productivity and reduced cost of production; leading to supply shifting to the right, and prices falling. This kind of deflation has a tendency to be relative; meaning certain industries such as computers, cars, crops or (in a parallel universe for Britain) housing.

However most central bankers don’t (or can’t) make the distinction between good and bad deflation.

A shortage in the money supply below that demanded, will lead to deflation; with reduced sales leading to production cutbacks in certain sectors, followed by reduced demand for the products of other sectors and finally to general unemployment. This is the bad kind of deflation which is not caused by productivity; either in a particular sector or the economy as a whole. Unfortunately, central bankers persist in regarding all deflation as the bad kind.

To add further setback to the general understanding of deflation, many Austrian Economists* persist in insisting that there is no such thing as bad deflation, and that all deflation is good. This perspective very much comes across as merely contrarianism; simply looking at the central bank’s view of deflation and frantically insisting on the opposite as a fact, when in reality the fact is based on a difference of degree.

In addition to what can be classed as “Young Austrians” and “Rothbard Fans” rather than readers.

What is the method to the madness? Why and how does the government benefit from a central monopoly bank of currency? For an answer we need to look at Siegniorage.

Siegniorage is the concept that governments reap the profits from producing new money at an expense less than the value of the money produced. The government is then able to finance additional expenditure by spending the new money into circulation. If the new money is interchangeable with the old, then an expansion of the stock of money taxes money holders by reducing the value of already established money balances (i.e. inflation). Under a specie standard of gold or silver, siegniorage was the differing value of minted coins and the actual content of gold/silver in them. This minting process, algebraically was subject to the following accounting identity:

M = PQ + C + S.

Where ‘M’ is the nominal value assigned to a batch of coins (e.g 100 pounds) ‘P’ is the nominal price paid by the mint per ounce, ‘Q’ is the number of ounces of precious metals embodied in the coins, ‘C’ is the remaining average cost of operating the mint, ‘S’ is the nominal siegniorage.

Modern banking and monetary systems do not operate under a specie system though, so how does siegniorage operate under a fiat system? Since the bullion content is 0 and production costs are close to 0, we need to set Q as Q=0; to further simplify we’ll set C as C=0. This follows that M=S. Nominal siegniorage equals one pound for each pound produced. Therefore a government’s siegniorage per year is equal to the change in the money stock. This can be written as:

S = ^H

Where ^ (delta in Greek) indicates the change in H, which is the stock of base money. Real siegniorage is marked as:

s = ^H/P

Where the lower case represents deflated variables, and P is the price index.

The budget constraint for a government that issues fiat money is:

G = T + ^D + ^H

Where G is government spending and T is tax revenue. ^D is the change in interest-bearing debt held by the public and not government. ^H is the change in non-interest-bearing debt (base money) held by the public.

The financing benefits to government via siegniorage is obvious when it comes to the mere printing of money. Via the method of open market operations, the method is a bit more indirect. By purchasing ^H worth of bills in the open market, the central bank retires that much debt; with the interest going to the central bank, and makes it possible for the treasury to finance a host of new streams of spending, whose current value is equal to ^H. In order to conduct the new spending in the current period, the treasury sells new debt to the public, replacing the debt which the central bank bought. The central bank’s open market purchase expands H and contracts D. The treasury’s issue of new debt sees D rise back up, followed by a rise in G. The overall impact is an increase in G financed by ^H; just as if the central bank had simply printed new currency and given it to the government to spend.

Vera Smith sums up the potential of central banks for governments in a statement from her book The Rationale of Central Banking:

“[…] it must be admitted that it is almost certain that by far the most powerful reason leading to the maintenance of Government intervention in the banking sphere, at a time when it was on the decline in other industries, was that power over the issue of paper money, whether such power is direct or indirect, is an exceedingly welcome weapon in the armoury of State finance.” (Smith 1990, p. 9)

– Bygone Gold Standard – The Possible Future of Free Banking –

As the final section I wish to present to the reader the following hypothesis:

Many supporters of free banking have suggested we would require returning to a gold standard, or keep a small remnant of the central bank if we retain a irredeemable fiat system.

The argument mentioned above goes along these lines:

If we were to return to a free banking system of competitive banks issuing their own notes, we would have to return to a gold standard in order to have the currency anchored to something. Irredeemable IOU’s would provide too much risk for financial instability. If we cannot return to a gold standard, then in order to have something like a free banking system, we would have to keep some degree of central banking, but get rid of the discretionary power to manage the monetary standard.

I propose that thanks to the technological developments of the past 10 years, a return to the bygone gold standard is not necessary; nor is maintaining a remnant of a central bank of monopoly issue.

“the fiat system should be converted to a crypto format of pound sterling, with scarcity artificially built and coded into the outside money and MOR. The new crypto-based outside money and MOR, would be obtained alongside the banks issuing their own debt instrument”

The proposal goes as follows:

Maintaining the MOA and UA as pound sterling, the fiat system should be converted to a crypto format of pound sterling, with scarcity artificially built and coded into the outside money and MOR. The new crypto-based outside money and MOR, would be obtained alongside the banks issuing their own debt instrument; IOU’s on a fractional reserve, with no floor restriction on how small denominations may be, with redeemability of the crypto MOR being transferred to a customer’s private wallet should they call upon the bank to pay the bearer on demand; an option clause would remain in place with interest to be pay of 5% should the bank require time to redeem.

It may be argued that such a proposal is not needed, because we have Bitcoin.

While I am a fan of Bitcoin I don’t think it is up to the task, due to its high volatility, and because I don’t think Bitcoin maximalists actually know what they want it to be when they say “Bitcoin can be the new money”.

The typical counter from Bitcoin maximalists on the subject of volatility is “if you think Bitcoin is volatile you should see the fiat money. What about that? Why not criticise government money?”

My response would be simply I have criticised State centralised, monopolised, irredeemable money throughout this piece, and this argument is simply Whataboutism; a variant of the tu quoque fallacy. The response to criticism of volatility being “look what the other guy’s doing” is not an argument nor a solution.

On the point of Maximalists not knowing what they want, I refer to the case that, the demographic in question tend to not make a distinction and other times will blend terms together.

“We need a Bitcoin standard” Well this a loaded statement. What is meant by it? Are we looking at Bitcoin as a future medium of exchange, medium of account, unit of account, medium of redemption, or a blend? If we are looking at Bitcoin being a MOE, then it would simply act as a base money with the UA remaining as pounds, dollars etc. If we are looking at it being a MOA, then we are going to have some extortionately high costs. It’s not cheap or of no cost to change the account medium or the unit; excessively large amounts of time would be the price for accounting how much x quantity of a good is worth of y unit; it would not be a simple difference of “2+2=4” and changing it to “2×2=4”, it would be as if creating an entirely new number; the time and costs of figuring out what is less, what is more, and what it equals when correlated with other numbers.

This does not mean Bitcoin or any other cryptocurrency cannot or should not play a role in the proposal. It is entirely possible that an individual bank could issue Bitcoin as an alternative medium of redemption, should it find itself unable to redeem in crypto pounds.

To get back to the matter, what of the banks’ individual debt instruments? Crypto is entirely digital so how would banks issue IOU’s?

in the crypto sphere there is what is known as paper wallets. These are essentially slips of paper with QR codes which keeps track of the currency a person holds, which can be redeemed into their private wallets via scanning the QR code.

Bank IOU’s would function in a similar manner to that of paper wallets, and the debt instruments issued by various banks during the Scottish free banking area.

Above we see some basic designs to provide an idea for how these bank IOU, “paper wallets” could be presented.

The banks would issue debt instruments with their logos printed on to the slips to better advertise their services in the hopes of raising demand for their notes; just as banks in a free banking system would do. These notes would be issued to customers after making a deposit of crypto pound sterling (from this point we’ll refer to it as CPS); unless the account created is a time deposit, the deposit will be treated as a loan to the bank, with the bearer having the right to call upon the bank for redemption and for the bank to make payment upon its debts. This method of redemption would function on the same grounds as it does with paper wallets in the crypto sphere. When the debt instrument is brought for redemption, the QR code will be scanned and the CPS electronically transferred to a customer’s private wallet.

When it comes to the velocity of the bank notes, the transferring of notes would work the same way it does today and during the Scottish free banking era. Notes used for financial exchanges, after the settlement is made, can be deposited at the recipient’s bank, spent further, or redeemed at the bank of issue for CPS.

If an individual bank were to over expand beyond the demand to hold its notes, the same equation mentioned previously would occur:

Leading to the same outcome when over issued notes are brought for redemption by the public, or at the clearinghouse:

What about coins? There are many instances where small change is needed for transactions, would small denominations of coins remain or would the smallest be notes of £1?

To answer simply, yes denominations smaller than £1 would remain; in either the form of coin or, if an individual bank’s customers held a demand for smaller denominations but held a preference for notes, the bank could issue notes of 50 pence, 20 pence, 10 pence etc.

We’ll assume a similar case to that of our current one with the exception of £1 notes existing.

Denominations smaller than £1 would be conducted as minted coins, tow which either the banks would mint their own with the ability of redemption in small denominations of CPS (or small “p” for crypto pence; Cp), or independent minters would provide said coins for circulation; similar to what occurred with the Birmingham Button Mints.

These coins would not necessarily have to be minted from silver but could be simple plastic tokens as, the material they’re made from would not be of great importance.

These coins, like the notes displayed above, would hold a QR code raised on the coins similar to that of braille. When used in a machine for payment such as parking, the raised QR code would be scanned to assess what denominations are being entered; alongside ensuring the braille-like QR code is unique to the denomination in question and is not a counterfeit.

Depositing the small coins and redemption would work the same way as the notes. The code would be scanned and the MOR would be transferred to the customer’s private wallet; in the case of depositing into the bank, it would be managed in the same manner with the balance being issued and credited to the customer’s account.

Who would “mine” the CPS?

Banks themselves would not mine for the CPS, this venture would be handled by private coders being commissioned to produce the CPS; receiving a percentage as payment based on hash rate and proof of work, as is similar to how miners are compensated in the crypto sphere. It is unlikely banks would find an attraction to mining themselves, due to the difficulty of obtaining results the closer a cryptocurrency reaches its scarce limit, as well as the costs of maintaining their own resources for mining and coding, due to requiring high powered technology for efficient hash rates. It is therefore more plausible that the banks and minters would find it more efficient to shop around; find high quality miners who have good track records and contract them for their work and offer a percentage of the coins mined as compensation.

– Final Thoughts –

While this proposal is a short one and more work is certainly needed to expand further details, it should be clear that cryptocurrency technology offers a viable method of abolition central banking without reinstituting a bygone gold standard. We have the technology, we know it’s possible to encrypt scarcity into cryptocurrencies, and it does not require the high costs and delays of changing the MOA or UA. Under such a system it is more likely and probable of getting government out of money and banking; learning from the more free systems of the past, and developing a more private, competitive and free monetary system.

– Sources –

  • Dowd, K 1989, The State and the Monetary System, St. Martin’s Press, New York (pp. 8-9)
  • White, L 1999, The Theory of Monetary Institutions, Blackwell Publishers, Oxford (pp. 54 – 61)
  • Selgin, G 2015, Bank Deregulation and Monetary Order, Routledge, New York (pp. 19-21)
  • Selgin, G 1988, The Theory of Free Banking, Rowman & Littlefield, New Jersey (p. 20)
  • Selgin, G 2015, Bank Deregulation and Monetary Order, Routledge, New York (p. 99)
  • Selgin, G 2015, Bank Deregulation and Monetary Order, Routledge, New York (p. 61)
  • Selgin, G 1988, The Theory of Free Banking, Rowman & Littlefield, New Jersey (pp. 60-62)
  • https://www.cato.org/blog/bagging-rule-or-why-we-shouldnt-arrest-all-bankers
  • Does Fractional Reserve Banking Endanger the Economy? A Debate, (2018), YouTube video, added by ReasonTV [online]
  • White, L 1995, Free Banking in Britain, Institute of Economic Affairs, London (pp. 22-23)
  • White, L 1995, Free Banking in Britain, Institute of Economic Affairs, London (p.24-26)
  • Selgin, G 1988, The Theory of Free Banking, Rowman & Littlefield, New Jersey (p. 25)
  • Selgin, G 2015, Bank Deregulation and Monetary Order, Routledge, New York (p. 62)
  • White, L 1995, Free Banking in Britain, Institute of Economic Affairs, London (pp. 41-42)
  • White, L 1995, Free Banking in Britain, Institute of Economic Affairs, London (p. 85)
  • Selgin, G 2015, Bank Deregulation and Monetary Order, Routledge, New York (pp. 30-31)
  • Dowd, K 1989, The State and the Monetary System, St. Martin’s Press, New York (p. 33)
  • Dowd, K 2014, Money and the Market, Routledge, New York (p. 21)
  • Selgin, G 2015, Bank Deregulation and Monetary Order, Routledge, New York (p. 25)
  • Dowd, K 1989, The State and the Monetary System St. Martin’s Press, New York (pp. 32-33)
  • Smith, V 1990, The Rationale of Central Banking, Liberty Fund, Indiana (pp. 9-21)
  • https://www.bankofengland.co.uk/markets/bank-of-england-market-operations-guide/our-objectives
  • Bagehot, W 2009, Lombard Street, Seven Treasures Publications, United States (pp. 19-20)
  • Bagehot, W 2009, Lombard Street, Seven Treasures Publications, United States (pp. 22-23)
  • Bagehot, W 2009, Lombard Street, Seven Treasures Publications, United States (p. 33)
  • Bagehot, W 2009, Lombard Street, Seven Treasures Publications, United States (p. 34)
  • Bagehot, W 2009, Lombard Street, Seven Treasures Publications, United States (p. 35)
  • Bagehot, W 2009, Lombard Street, Seven Treasures Publications, United States (p. 144)
  • https://www.bankofengland.co.uk/knowledgebank/what-is-deflation
  • Selgin, G 2015, Bank Deregulation and Monetary Order, Routledge, New York (p. 112)
  • Selgin, G 2015, Bank Deregulation and Monetary Order, Routledge, New York (p. 145)
  • White, L 1999, The Theory of Monetary Institutions, Blackwell Publishers, Oxford (p. 39)
  • Smith, V 1990, The Rationale of Central Banking, Liberty Fund, Indiana (p. 9)

Image: https://unsplash.com/photos/WgUHuGSWPVM

The Anti-Free Trade Position Returns

Protectionism, Mercantilism, and the Denial of Consumer Sovereignty

Image: https://pixabay.com/photos/container-goods-ship-porto-4675851/

Opinion Piece by Josh L. Ascough

On the 21st June, 2021, Labour MP Emily Thornberry appeared on BBC radio 4, insisting that the government must cease the lifting of protections in place for British Steel; stating that:

We have to stop this government lifting the protections that steel has at the moment, because if we don’t, then we could end up with cheap steel being dumped in this country and it being the end of the steel industry.”

Throughout the Free Trade talks with Australia as well, farmers unions have been demanding for greater protections to be in place, with suggestions of restrictions on the number of meat produce that can be imported into the country, while allowing the free export of British meat.

One has to ask whether we’re seeing a return to Protectionism and Mercantilism.

In a sense the UK has never truly abandoned fallacious positions of trade. The British Steel industry has a history of bail outs and subsidies; in 2019 the government issued British Steel a £300 million bailout. In the same year, it received £43 million in subsidies.

But what is Protectionism, and what is Mercantilism?

Protectionism is idea that government must implement policies that restrict international trade, with the guise of helping domestic industries, and protecting consumers from making “harmful” choices.

Mercantilism is an economic policy designed to maximise the exports of the nation and minimise the imports to said nation, via regulations, tariffs, and to a degree outright bans of imports for certain goods.

On the surface there is very little difference between the two positions, as in the end both stifle competition and offer privileges to protected industries.

The conclusion from many Protectionists and Mercantilists is to issue tariffs on foreign imports, and offer subsidies to national industries in order to avoid a trade deficit, and have fair competition.

“domestic consumers face the costs of these tariffs, as they find the goods and services they wish to buy cost more; thereby reducing the consumers standard of living”

Tariffs however, hurt a nations consumers. While the country’s government in question may issue tariffs for the purposes of protecting domestic industries and consumers from apparent “dumping”, the domestic consumers face the costs of these tariffs, as they find the goods and services they wish to buy cost more; thereby reducing the consumers standard of living.

The issue of subsidies has a similar effect on consumers. A subsidy at the end of the day is a tax, and by extorting from consumers in order to prop-up a domestic industry, you’re reducing their expendable income.

The area Protectionists wish to avoid however, that of a trade deficit, is fallacious at best. The trade deficit myth looks at purely the flow of financial capital from one nation to another, yet it fails to look at why money is flowing and what those who transferred capital received in return; that being, the goods; whether that be goods of higher order for the purposes of more efficient production processes, or lower order goods (final goods: consumer goods). The problem with the concept of a trade deficit is, it answers too much: If more money via trade flowing from one country to another, while disregarding the goods received is a serious issue, then we must also look at the trade deficit between England and Scotland; or London and Oxford.

“the trade deficit doctrines logic, I have a trade deficit with the hobby business, Games Workshop. Over the course of 10 years, I’ve probably given £50,000 to the company. We have to ignore the products I received in exchange”

By the trade deficit doctrines logic, I have a trade deficit with the hobby business, Games Workshop. Over the course of 10 years, I’ve probably given £50,000 to the company. We have to ignore the products I received in exchange, and all the subjective value I attained from these goods, and time spent utilising them; we should only look at the movement of money. I need to issue quotas against Games Workshop of how many goods they’re allowed to sell me, in order for the payments between me and them to equalise.

The ends which Protectionists wish to reach, is that which they loosely label “fair competition”. The problem is, their concept of fair competition is not only far from any meaning of fair; as it requires the protection of some industries and barriers in place of others, but, also that the fair competition doctrine is very similar to the idea of perfect competition.

The theory of Perfect Competition is the state of affairs, where there are a certain number of buyers and sellers, selling (buying) the same quantities for the same price. The question that arises is; where is the competition?

The market is not a state of affairs; it is a process of discovery. To get right to the core of the problem with this doctrine, via the perfect competition doctrine, you rule out the possibility of the entrepreneur discovering an absence of information that is held by consumers and his competitors. Under the perfect (“fair”) competition doctrine, it is attempted to maintain what could be called a static form of the market; the subjective values, marginal utilities and choices of consumers, and the multi-period production processes of competitors put a wedge in your plans. Consumers have made the “wrong” choices; competitive entrepreneurial producers have discovered how to sell the same product cheaper – it’s not “fair”.

The Market is a process of discovery. At any moment, market participants can face utter ignorance; not just that of optimal ignorance – where participants know what they don’t know, but the costs outweigh the gains, but that of an absence of information; we do not know what we don’t know.

It is the role of the entrepreneur to be alert to the ignorance of market participants, and predict what the future price and value of goods will be. It is the role of the entrepreneur to see incoordination in the market –  where there are two prices for the same good; indicating to the entrepreneur that sellers(buyers) are offering(charging) too high(low) a price; if he is alert and sees one selling for 20 and one for 10, he will buy at 10 and sell for 15. It is through this entrepreneurial process of discovery, that we move away from disequilibrium and closer to equilibrium.

There is not just the pure entrepreneur who sees sellers, one at 10 and one at 20 and chooses to sell at 15. The entrepreneurial producer discovers he can produce the same product for a lower price, and the entrepreneurial seller may request his employees to smile more to appear friendlier in order to sell more goods.

The only way to allow the market process to operate, and to have entrepreneurial discovery is to have actual “fair” competition, which is freedom of entry; i.e. no privileges.

That which is often; intentionally or not, overlooked, ignored, and disregarded by the Protectionists; Consumer Sovereignty, must be stressed here.

“Consumer sovereignty is often something that Interventionists of all stripes; no matter the term we use, wish to stamp out. …Consumers vote with their feet and wallets”

Consumer sovereignty is often something that Interventionists of all stripes; no matter the term we use, wish to stamp out. Consumers ultimately have the final say of which goods are produced; how successful a production processes product will be, and who provides greater value via the epistemic nature and signal of profits. Consumers vote with their feet and wallets.

There is an entrepreneurial aspect to the consumers as well as those mentioned previously. An entrepreneurial consumer, who discovers he can satisfy his wants/needs for a cheaper price, will seek to obtain these means to satisfy his wants, and utilise them for the value they achieve, and profits from their service to him.

The practices of the Protectionist and the Mercantilist require denying the consumer of his sovereignty, and to classify the praxeological aspect of the consumers’ choice as wrong; the interventionist ideals of these two require not only the denial of consumer sovereignty, but the denial of subjective value.

Is Our Core Argument Based On Efficiency?

The answer to this question, to which we’ll finish with, is in the negative. The core of the argument for free trade is the same as that for the market process as a whole: coordination.

The purpose behind why the free market in all areas is the superior system; including that of trade, is because it better achieves coordination of the subjective values of individuals. The free market, through the entrepreneurial process of discovery, and the freedom of entry into the competitive market, allows for greater ability to coordinate market signals, and Protectionism stifles with this coordination; placing static over the signals and providing false or faulty signals – in total reducing the quality and leaving values unsatisfied.

It is for coordination that we should reject Interventionism in all its forms; whether it be Protectionism, Mercantilism, or Nationalism.

Undead Capitalism – The Effects on Time Preference and Interest Rates If Humans Were Immortal

Image: https://pixabay.com/vectors/zombie-spooky-scary-creepy-monster-521243/

Josh L. Ascough

– This Piece Is Satire and Should Not Be Taken Seriously –

– If You Do Take This Piece Seriously, Please Thoroughly Research The Term ‘Satire’ –

– Dedicated To Jessi Bennett. You Made Me Do This –

Human life, as all life, faces a time constraint; it is in large part due to this constraint that humans rely on their subjective time preference with regards to the choice for current consumption or future consumption.

To add to this, the time preference over current/future consumption is what makes interest rates possible. The time preference aspect of interest is based on the notion that humans’ prefer to consume in the present, rather than at a designated later, future time period; it is this time preference which helps to explain monthly payments of, for example, a TV.

(Due to time preference, people tend to accept small payments over a set time period for full ownership in the future, i.e. £500 for a TV to buy it in the present, or a £50 deposit followed by monthly payments plus interest, unless ceteris paribus, their ordinal ranking of the good is high, as well as the demand to satisfy their wants/needs for current consumption, i.e. they’re not willing to postpone; people would not be willing to pay the final settlement price for a good they want to satisfy their wants now, if they have to wait for the future to receive the good)

What would happen though, if some genius entrepreneur discovered a way to make humans immortal?

“Governments would hate it because they wouldn’t be able to issue a Death Tax or Inheritance Tax, so they would probably try to ban it”

Firstly Governments would hate it because they wouldn’t be able to issue a Death Tax or Inheritance Tax, so they would probably try to ban it, it would then enter the black market and cartels would tamper with it and turn everyone into zombies.

But assuming Governments don’t interfere (I know, it’s a big assumption more unlikely and unrealistic than this piece), the other question to ask is, how immortal would it make people? Would it be a simple case of humans wouldn’t die of old age, but could die from starvation and disease, or, would it be a case of complete immortality; no disease, mortal wound, aging, or level of hunger could kill a human?

We’ll assume it to be the more simple case, since it’s easier to grasp and if we assumed complete immortality, then the Hyperventilating Overpopulation Ensemble (HOE) would have a heart attack.

“we would likely see a large shift in the market from current consumption to future consumption, with the time preference for goods and services extending for future periods of ownership and consumption”

If humans had the basic degree of immortality (cannot die of old-age, but can from mortal wounds, starvation and disease), then since the time constraint of life would be unaffected by old age, while the time preference and marginal utility of food and medicine would remain the same, we would likely see a large shift in the market from current consumption to future consumption, with the time preference for goods and services extending for future periods of ownership and consumption.

Under this assumption, since peoples’ time preference as a whole has seen a shift to the future, if people still prefer small payments over a prolonged time period, then we would likely see, ceteris paribus interest rates plummet, since people would be saving far more than they are spending; meaning an exponentially larger pool of funds, would be available for long-run multi-period projects of production, expansions in capital goods for larger scale productions of consumer goods in the future, a larger housing supply etc.

In conclusion: I the writer clearly need to get out more.

The Cure for Healthcare

Reforming Healthcare against NHS Propaganda

Economic Piece by Josh L. Ascough

No subject could be more controversial to discuss in the UK more than reforming; or abolishing the NHS. The NHS has existed for over 70 years, and over that time the British people have insisted in telling themselves that, they have ‘the best healthcare system’, and that the NHS is ‘the envy of the world’.

The only problem is…none of this is even close to being true.

The idea that the organised working classes were demanding a government takeover of healthcare is a post-hoc rationalisation, which projects the fondness for the NHS, which the public subsequently developed, back into the period of its creation”

We continue to tell ourselves that the NHS was the great achievement of the working classes; rising up and demanding national healthcare, in which free access would give power to the people. But, as Kristian Niemietz of the Institute of Economic Affairs points out:

“The creation of the NHS had little to do with pressure from below; it was not a change that ordinary people had fought for. Far from being People Power in action, the NHS was a brainchild of social elites, to which the general public just passively acquiesced. The idea that the organised working classes were demanding a government takeover of healthcare is a post-hoc rationalisation, which projects the fondness for the NHS, which the public subsequently developed, back into the period of its creation.” (Kristian Niemietz. Universal Healthcare Without the NHS. p. 19)

Nick Hayes has reiterated this ex-post rationalisation; explaining that huge support for a nationalised health system was merely a pipe dream piece of propaganda:

“The evidence before us seems to indicate a fairly large amount of resistance to State interference in the field of medicine […] roughly half the population was opposed to any major change on the health front, a quarter disinterested and a quarter in favour of State intervention.” (Nick Hayes. English Historical Review. p. 659)

Evidence in our modern times, gives an interesting expansion on this. The British Social Attitudes Survey (2015) reveals when members of the public, are asked if they would hold a preference for being treated by an NHS-based provider of healthcare, a private profit driven, or a private non-profit provider, 43% state no general preference. A further 18% provide an explicit preference for independent, non-state-based providers of healthcare.

The phony info from NHS propagandists’ continues. The system prior to the creation of the NHS was not a bleak world where people died in the streets; desperately searching for a doctor only to find none exist. Before 1948, the health system operating in the UK was well developed. The system was rooted in the mutualism of the 19th century. The creation of the NHS was not the development of a new system; it was simply a government takeover.

Let’s get back to the common phrase mentioned earlier: the NHS is the envy of the world. The argument is that the NHS is the envy of the world, due to instituting a system, which does not base its service on an individual’s ability to pay for said service. This is treated as an outstanding achievement, yet the vast majority of the developed world has universal access to healthcare (the US is the exception, but we will come to that later). Are we not begging the question of how the NHS is the envy of the world, when the reality of the developed world’s health systems indicates otherwise? Your neighbour can hardly envy you for what you have, if he already has it.

“if the NHS is the envy of the world, then why is it, after over 70 years no developed nation has copied the structure the UK has; why does it refuse to copy the system it apparently envies so much?”

Furthermore, if the NHS is the envy of the world, then why is it, after over 70 years no developed nation has copied the structure the UK has; why does it refuse to copy the system it apparently envies so much? The answer comes in two:

(1) Other developed nations understand there is a difference between universal access as a standard, and the nationalisation of healthcare.

(2) The NHS is not the envy of the world; nor has it ever been.

The NHS is not just far from the envy of the world when looking at the universal healthcare status of other developed nations, but according to the OECD, the UK has one of the worst healthcare systems within the developed world. When the report was first published, The Independent stated:

“The quality of care in the UK is “poor to mediocre” across several key health areas […] and the NHS struggles to get even the “basics” right […] Britain was placed on a par with Chile and Poland.”

The Financial Times in addition reported on the findings; stating the following:

“Britons are less likely to survive a heart attack, stroke and leading cancers than people in many other developed nations, according to an assessment of international health systems”

Many apologists for the NHS, would be quick to point to the Commonwealth Fund Study; proclaiming that the CFS “proved” that the NHS is the best system in the world, because it was ranked 1st.

This completely ignores that the CFS looked at inputs, not outcomes. When it came to the one category which looked at outcomes, the UK came out second to last, only slightly above the US. In addition the Commonwealth Fund Study was designed to systematically favour healthcare systems which are tax-funded. The CFS asked patients if their insurer ever declined payment for treatment, and whether they have ever incurred out of pocket payments in excess of over £1,000. These declining of payments and out of pocket payments, would not only be almost impossible under the NHS, but under the systems of Sweden and Norway also. Looking to the CFS for neutrality is like looking to the Central Bank of England for financial stability; you have to lie and make assumptions that fit the outcome you want. The CFS held a category for cost issues titled ‘Cost-Related Access Problems’; this however is based on price limitations with regards to consumers, and mentions nothing on the matter of non-cost based restrictions, such as state rationing.

Many proponents of the current system, when presented with this information, would be quick to state: “okay sure, the NHS has some problems, but that’s just because of underfunding and the spending being cut.”

“In 2018, spending on the NHS was £214 billion; an increase in spending of 296% over a 20 year period. If there has been a cut in spending on the NHS, I’m failing to see where it is”

Well, reality paints a different picture.

According to data from Statista, from the period of 1997 to 2018, spending on the NHS has been on a continuous increase, as shown below:

As shown in the data, in 1997, spending on the NHS was at roughly £54.9 billion, and has been on a consistent rise. In 2018, spending on the NHS was £214 billion; an increase in spending of 296% over a 20 year period. If there has been a cut in spending on the NHS, I’m failing to see where it is.

Before we touch on the US healthcare system, and the myth of it being a free market system, I think the reader would agree it is important to “put my money where my mouth is”, and provide examples of how the NHS fares compared to other developed nations.

The next few sections will look at the following:

  • NHS Outcomes Compared to Other Developed Nations.
  • The Universal Systems of Other Developed Nations

After we’ve discussed the US healthcare system, we will go over potential reforms and alternative means of providing healthcare, while keeping the essence of universality.

NHS Outcomes Compared to Other Developed Nations

Let’s take a look at performance rates of the NHS and other systems.

The above table showcases how countries’ healthcare systems compare when it comes to waiting times for GP appointments and A&E.

Nations marked as green indicate an average waiting time of less than 1 hour, yellow in between 1 – 3 hours, and red over 3 hours.

As we can see, the top performers are Belgium, Denmark, Portugal, Switzerland, the Czech Republic, and Hungary. The worst performers include Lithuania, Sweden, and England. Under the NHS, obtaining a same day appointment to see a GP is close to impossible, and waiting times in A&E on average are over 3 hours.

In the second table we look at the waiting times for surgeries and cancer therapies. The top performers here are: Belgium, Denmark, Finland, France, Germany and others. The worst performers include Ireland, Poland, and Slovakia. The NHS rates yellow, meaning roughly 50% can be conducted within 3 months.

The third table looks at the waiting time for diagnostics, and how easy it is to receive specialist care; if a patient can access such care directly, or if there is gate-keeping in place such as going through a GP.

The top systems in this regard are Austria, Belgium and Switzerland. The longest waiting times for diagnostics and restrictions in place for accessing specialist care occur in Ireland, Malta, Spain, Sweden and England.

Throughout all of these areas, many systems dip between green and yellow, some more than others consistently keeping in the green. The NHS on the other hand, the majority of the time remains in the red, with only one example of being in the middle (yellow).

We’ve taken a look at waiting times, what about survival rates? Let’s take a look at cancers first.

In the UK the most common form of cancer is breast cancer. The diagram above shows the 5 year survival rate for breast cancer patients. The UK’s survival rate is 81.1%; roughly 5% behind South Korea, and roughly 2% behind Austria; if NHS patients had been treated under the South Korean system, we can speculate roughly 2,500 lives could have been saved, and extended every year.

The second diagram shows the five year survival rate for prostate cancer. Under the NHS system, the survival rate is 83%, which is lower than most of the developed world. For patients in Sweden which ranks 12th in the diagram, the survival rate is roughly 6% higher. We can estimate that if NHS patients were treated there, a further 2,800 could have survived.

Lung cancer is next on the list. The UK has a survival rate of less than 10%, making it the worst performing compared to all high income, developed nations. Roughly 2,400 additional lives could have been saved under the Australian system, which is 5% higher than the UK.

Let us take a look at stroke mortality rates:

Ischaemic strokes are one of the most common types of stroke in the UK, with roughly 150,000 cases per year (Stroke Association 2016). The UK has a survival rate of 9%. Again, if NHS patients were treated in Sweden, around 3,000 extra lives could have survived an Ischaemic stroke.

Finally, we look at the mortality rate for Haemorrhagic strokes. The UK, once again, is a poor performer for survival. The UK has a mortality rate of 26.5%, which is over 4% higher than the US; translating to roughly 1,000 excess deaths.

“The systems of Switzerland, the Netherlands, Germany and Belgium, can be described under a broad term of operating under Social Health Insurance systems. In the rankings previously shown, these countries have consistently outperformed the NHS”

The Universal Systems of Other Developed Nations

We’ve looked at survival rates and mortality under the NHS system, and so we shall now go over what the universal character of other developed nations looks like.

The systems of Switzerland, the Netherlands, Germany and Belgium, can be described under a broad term of operating under Social Health Insurance systems. In the rankings previously shown, these countries have consistently outperformed the NHS.

How Does Social Health Insurance Work?

Social Health Insurance works a similar way to standard insurance. There are however a few unique qualities which are:

  • Community Rating: Under a SHI system, insurance companies cannot raise premiums based on an individual’s health risks.
  • Obligation to Accept: SHI systems prohibit insurers from rejecting coverage based on an individual’s medical history.
  • No Exclusion: Pre-existing conditions cannot be denied for coverage under a system of SHI.
  • Individual Mandate: Under a SHI system, it is compulsory for all individuals to purchase SHI, and is mandated by the state. If an individual does not purchase SHI, then they are put on one automatically; even against their will.
  • Premium Subsidies: Due to the point of mandates, the government subsidises the SHI of people on low incomes. For some nations this is a means-tested based subsidy, in others it is income dependent.

Under the Swiss system of SHI, it could be argued there is a higher degree of freedom of choice for patients than in other SHI systems, including a cost-sharing measure worth looking into. Out-of-pocket payments under the Swiss SHI, account for roughly a quarter of total healthcare spending (according to W.H.O 2015: 132-133). This system has two distinct components: deductible and proportional co-payments. Deductible works similar to most insurance systems with excess; there is a minimum cost threshold which, once costs exceed this, the insurance covers the excess costs. People can freely have a higher minimum threshold set, in return for premium rebates.

Co-Payments are capped at a certain amount per year. Once a patient’s collective medical bills reach said amount, then they face no further expenses.

“In order to prevent the cost of healthcare rising exponentially during old age, German PKV insurers are required to smooth premiums over people’s lifetime. This “pre-funding” mechanism works in a similar way to a pension”

The German health system has two types of healthcare coverage. These are the standard type of Social Health Insurance; known as GKV, with the community rated premiums and other qualities mentioned above, and a conventional, private health insurance; known as PKV, with varying premiums, and no risk compensation.

Additionally, the German system has a quality that many nations could learn from: an accumulation of old-age reserves. We understand that healthcare costs are flat for the majority of life (not including exceptions), and then rise with age. In order to prevent the cost of healthcare rising exponentially during old age, German PKV insurers are required to smooth premiums over people’s lifetime. This “pre-funding” mechanism works in a similar way to a pension; insurance companies build up an old-age fund on behalf of their clients during their working life, and later draw on this fund for care during old age.

Before we go into the US, I want to briefly talk about the South Korean system.

South Korea has a universal health insurance system, similar to that of SHI; the difference being though, is that the state is unable to set market prices. Many Koreans seek additional private coverage due to the state-based insurance being insufficient to cover all the costs; around 8 out of 10 Koreans take out private coverage, with an average cost of 120,000 Won (£75) a month.

Care in South Korea is provided by hospitals which are 94% private, a fee-for-service model and no direct subsidies. This private system is not purely for-profit, the Korean system has a mix between for-profit, non-profit and charity foundations. The presence of private hospitals expanded in the early 2000s; from 2002 to 2012, private hospitals rose from 1,185 to 3,048. Further information on the South Korean system with a comparison to Italy, and a look at how it handled the outbreak of Covid-19, can be found here:

The USA: Free Market Healthcare?

Most of the time NHS propagandists will point to the US and decree: “See! That’s free market healthcare for you! If we didn’t have the NHS (praise be upon it) then we’d have a US system!”

There are two problems. firstly, NHS propagandists intentionally ignore the vast majority of other SHI systems which outperform the UK; relying on the publics ignorance of other systems outside the UK and US. Secondly, the US has not had anything close to a free market in healthcare for at least 100 years. It has become an interventionist, heavily regulated system with positions on competition similar to that (which I’ve discussed a fair number of times) of Neo-Classical General Equilibrium Theory and Perfect Competition. I won’t go into the subject in order to save the reader time, but if you’re interested in understanding what I’m referring to, you can check out my article where I discuss it in detail here – https://croydonconstitutionalists.uk/marshallian-curve/

As was mentioned above, the United States has not held a free market in healthcare since 100 years ago. Jacob Hornberger, the founder and president of the Future of Freedom Foundation, gives a mention to this in his book, The Dangers of Socialized Medicine:

“For over one hundred years, the American people said no to governmental intervention into health care. Americans did not permit their respective states to licence physicians and other health-care providers. They did not permit government to provide health care to the poor and needy. No one was required to purchase health insurance.” (Jacob Hornberger. The Dangers of Socialized Medicine. p. 15)

The government has always attempted to interfere in healthcare, including various lobby groups and unions wishing to curtail care with the use of government power, however it could be argued the defining moment American healthcare changed for the worst forever was the successful lobbying done by the American Medical Association. To further quote Mr Hornberger, he goes into great detail on the impact the AMA had on healthcare in the US:

“The American Medical Association is perhaps the strongest trade union in the United States. The essence of the power of a trade union is its power to restrict the number who may engage in a particular occupation. This restriction may be exercised indirectly by being able to enforce a wage rate higher than would otherwise prevail. If such a wage rate can be enforced, it will reduce the number of people who can get jobs and thus indirectly the number of people pursuing the occupation. This technique of restriction has disadvantages. There is always a dissatisfied fringe of people who are trying to get into the occupation. A trade union is much better off if it can limit directly the number of people who enter the occupation-who ever try to get jobs in it. The disgruntled and dissatisfied are excluded at the outset, and the union does not have to worry about them” (Jacob Hornberger. The Dangers of Socialized Medicine. p. 65)

“the number of medical schools in the US, from the period of 1910 to 1920 dropped from 131 to 85. This cut in medical schools not only had; and continues to have, a supply-side effect by causing prices to artificially be forced up”

The AMA’s successful lobbying campaign, was to restrict the number of doctors who could enter the medical profession by drastically reducing the number of medical schools in the country, and enforcing mandatory licencing into the nation. After the successful lobbying for accreditation was granted, the number of medical schools in the US, from the period of 1910 to 1920 dropped from 131 to 85. This cut in medical schools not only had; and continues to have, a supply-side effect by causing prices to artificially be forced up, it had a huge impact on women and African Americans entering the medical profession. By the time of 1944, the total number of medical schools which admitted black people was cut from 7 to 2.

Many may argue that licencing is good particularly for healthcare. But a licence does nothing to prove a doctor is competent. A doctor could have been in the medical profession for 30 years and be completely incompetent. Two types of objections can be made against licencing:

Economic Objections | Licencing puts a gap between patients and healthcare providers. By restricting the trade of healthcare through additional costs for licencing, it reduces the supply; by reducing the supply this, as stated previously, artificially forces the price up. This added cost is passed on to the consumers of healthcare services. This barrier to entry goes completely against the freedom of entry required for a competitive market to function, under entrepreneurial discovery.

Social Objections | Licencing gives a false sense of security to patients that lead to unfulfilled expectations of doctors being medical automatons; incapable of making human errors and bringing nothing but unnatural perfection to the table. This can harm the relationship between the doctor and patient; causing high dependency and resentment. Furthermore licencing as indicated above, discriminates against not only African Americans and women, but poor people too. While it has been used to keep women and minorities out of the medical profession in the past, the continued effect it has on the poor, is to force them out of the market through disincentives; via expensive education and other requirements for licencing.

Licencing, to some up, is designed to keep doctors free from competition, and increase their wages, through the means of the government giving out privileges and putting up barriers to entry. It is a throwback to the old, European Guild system, and has made the healthcare market aristocratic.

To quote Hornberger once more:

“Licencing is a special-interest legislation for the benefit of physicians and other medical personnel. Its primary purpose and effect are to limit entry into the medical profession in order to protect medical people from competition. Does licencing ensure competent doctors and nurses? If it does, then why do we continue to have so many malpractice judgments against doctors and other medical personnel? And one problem with licencing is that it seduces the public into believing that because a person has been licenced by the state, he must be competent. What would happen if licencing were repealed? Well, no one would run out into the street looking for a quack to perform heart surgery on him. […] What if someone needed a new doctor? The likelihood is the person would rely on the recommendation of his current physician. Moreover, well-established and well-known physicians in the community would band together to publish a list of recommended doctors in the area; private certifying agencies (i.e., Consumer Reports or Good Housekeeping) would do the same.” (Jacob Hornberger. The Dangers of Socialized Medicine. p. 22)

“the government pays for roughly half of all healthcare purchased in the US. Since Medicare and Medicaid patients pay little or nothing, it creates an incentive to consume more than one would value if they incurred the costs”

Medicare and Medicaid

What are the interventionist effects of Medicare and Medicaid? Aside from the extortion of resources, the two forms of medical welfare have negative effects on the demand-side of the equation.

The way it is affected is, the government pays for roughly half of all healthcare purchased in the US. Since Medicare and Medicaid patients pay little or nothing, it creates an incentive to consume more than one would value if they incurred the costs, which if the costs were internalised, it would create incentives to shop around for care. Up until the 1980s, Medicare and Medicaid reimbursed providers, meaning neither patient nor doctor had any incentive to keep either costs down. This lead to a sharp upward movement in prices for insurance and healthcare in general. As a result, many people and small businesses were and are, priced out of the insurance market.

The FDA, patents and insurance regulations also play a huge role in the high expense American’s pay for healthcare.


Employer-Provided Health Insurance (1943) – While not mandatory in all states, Employer-Provided Health Insurance requires an employer to pay for the coverage of their employees. Since the individual patient is not facing the costs of said coverage, this leads to people not being as fiscally responsible as they would be; leading to higher risks and higher costs. This also plays a role in why low-pay workers find it hard to leave their job; if they did they would be at risk of not being covered should they face medical needs, leading to employees in states where it is mandatory being dependent on their employer.

Mandated Coverage – The state of California since 2011 has made it mandatory for insurance providers to cover maternity leave (legislation SB 299, AB 592, SB 222 and AB210) This means that even if a woman does not want children, or cannot have children for medical reasons; or because of age, she still has to pay for the coverage of something she will either never want, or never be able to have. This waste not only affects the insurer, but the policy holder, by forcing them to pay a higher price.

Mandatory Insurance – The Obamacare Individual Mandate, made it mandatory on the federal level for all American’s to purchase health insurance. This has the obvious effect of artificially forcing up the quantities being purchased and the demand, leading to higher prices for insurance and medical care. As of 2019 the mandate was no longer required on the federal level, however at least 5 states and the District of Columbia have maintained the mandate for purchasing health insurance.


Slow-Testing and Approval Process – The FDA’s process of approval times and testing has gone through a very regressive motion. Before 1962 the FDA was required to approve a drug within 180 days unless the new drug was proved to not be safe; meaning there was a time constraint on the FDA, and new drugs could get into the medical market faster. After 1962, said time constraint was removed, and since then the drug approval process has lengthened exponentially. To give a bit of context, prior to 1962 the time between filing and approval was an average of 7 months, after 1967 that time rose to 30 months, and by the late 1980s the time between filing and approval shot up to 8 – 10 years. This excessively lengthened process has seen the cost of testing new drugs rise to around $800 million per drug, and due to the lack of viable substitutes for patients has caused the price of drugs already on the market to rise.

Anti-Advertisement – Advertisement of approved drugs for newly discovered uses, which may be more beneficial than it’s conventional use, is prohibited under FDA rules. This leads to many companies not finding it worthwhile to re-evaluate an approved drug for alternative uses. This restriction has created a barrier to entry in the drug market; not only blocking entrepreneurial innovators from advertising their discoveries, in the attempt to alert consumers of what they may hold an absence of information over, but is designed to protect already existing drug companies from competition.


IP the Restrictor of Competition

IP is designed to protect the producer of a drug from competitors who wish to reverse engineer their drug, in order to sell similar drugs on the market. IP is not simply the protection of a brand, it restricts who can produce and sell what. It is IP which has led to the rising costs of epipens and insulin. An example of drugs without IP and drugs with, are painkillers and Epipens. In 2020 the average cost of a two-pack of Epipens was $699.82. Pain Relievers with no IP can be purchased at a low price of $3.88 for a 24 pack. If IP was removed from all drugs and reverse engineering by competitors was allowed, dominant drug companies would have to find new ways to innovate their drugs, lower their prices to withhold and stall competition, or be priced out of the drug market.

“Mandates and freedom are opposites. If a person is free, then that means he is not mandated to buy anything. If a person is mandated to buy something, then he is not free. Mandates are not a free-market alternative, because mandates violate free-market principles.” (Jacob Hornberger. The Dangers of Socialized Medicine. p. 14)

“Private doesn’t simply mean “for-profit”, private means there is no government intervention, micro-management, protections, controls or ownerships”

An Alternative to the NHS

Keeping in mind everything we’ve gone over, is it possible to have universal access to healthcare within a free market in healthcare? Yes; if you allow for variety in the means of acquiring medical care, and the ways to provide it.

What do I mean by this? Private doesn’t simply mean “for-profit”, private means there is no government intervention, micro-management, protections, controls or ownerships.

Assuming the reader understands how a for-profit provider would operate (like any other service provider), in order to save time we’ll simply look at what alternatives could exist alongside for-profit providers.

Limited Local Government Display

The British people are a very charitable people, and Britain has had a culture that values empathy and charity for centuries. The difficulty that comes with seeking help, is an absence of information, with regards to the existence of charities that can help people. Local councils can play a very limited role, in advertising all health-based charities that operate within their borough, or that operate nationwide, but which have easy access facilities within the borough. These advertisements could be in the form of notice boards in the council buildings, as well as mailing lists to communities the councils’ understand to have poor demographics.

This would not only expose large numbers of charities to potential donors who did not know these charities existed, but also to the poor who may not know where or who they can turn to.

To put my thoughts into actions, I recommend donating to BenendenHealth. They are a non-profit, affordable care provider that was established in 1905, with the purpose of joining people together to help with medical care when they need it. You can make a donation at https://www.benenden.co.uk/about-benenden/charitable-trust/donations/

Subscription Institutions

This one may seem a bit strange to the reader, so I’ll need to take some time to explain what I mean. The Subscription Institution proposal I’m making, is based on the structure and methods of provision of the Mises Institute. The Mises Institute is a non-profit organisation dedicated to spreading the economic theories of the Austrian School.

The Mises Institute, generates its funds via donations, but also raises funds through a subscription basis; where subscribers pay a monthly fee, and receive benefits such as discounts, newsletters, magazines, and updates on events for members. An additional means of raising funds is by selling products both to members and non-members. As of late, due to charitable donations the institute has begun its own Master Degree in Economics for a lower price than other universities; the average cost for a Masters course ranges from $20,000 – $60,000, whereas the Mises Institute charges around $4,000.

A similar format could be imagined for private, subscription-based healthcare institutions. We can refer to these as Healthcare-Subscription-Institutions (HSI).

Above we see a basic outline of how such an institution could function. They would receive donations from members of the public on a voluntary basis, as well as universities and other institutions who would mutually benefit from research being conducted.

Secondly, the option of a monthly subscription, would allow members of the public to receive certain benefits; such as free care services, newsletters on developments and research being conducted with/without collaboration with other institutions, and discounts on products such as books, human anatomy models, and health conferences.

Thirdly, the Healthcare-Subscription-Institution (HSI) would generate additional financial capital by selling books by academics, doctors and recently graduated students. This would benefit the producers of these books by expanding the access to their work, as well as assisting to build up a resume for recently graduated students.

Finally, Future-Reserve-Accounts would allow individuals to set up what could be likened to a savings account for their children or grandchildren. They would pay a monthly deposit, to which the HSI would use a fraction for further investments, branching out, diversifying their capital stock and creating additional research and services. At the payee’s end of life, the collected funds would be transferred to the declared recipient; either child or grandchild, with added interest.

This would result in a care service which would be free for members; due to continued commitment to their subscription payments, and a limited fee for non-members.

Healthcare in the UK is in desperate need of reform. We continue to not help our national situation by being in a state of denial and nostalgia for days and standards to which never even existed. One type of private healthcare would be as effective as a nationalised system; it cannot meet the demands of all. If universality is the principle which British people refuse to budge on, then a private system with a diverse way of providing care has a greater chance; allowing a wide variety of methods for providing care, would ensure a greater degree of people have access to care; we have a variety of methods for providing other products, so why not healthcare? Rather than an ultimatum between ‘for-profit or nothing’, or ‘nationalised or nothing’, let’s try a decentralised, denationalised variety of choice.

For-Profit, Non-Profit, Charities, One-to-One Personal Family Doctors, Healthcare-Subscription-Institutions; whichever you subjectively prefer, choice is the best cure for healthcare.



A Defence of Advertisement

Methods of Information Under the Market Process

Economic Piece by Josh L. Ascough

Advertisement has often been the aspect of the market most attacked; both by supposed supporters of the market and detractors of the market economy.

Decrees of false information, wasteful spending and other wide sweeping accusations are made against advertisers and their methods of marketing a product, but these are claims that can only hold artificial weight to them if our economic models are that of general equilibrium and perfect competition; in addition most arguments against advertising are based on ex-post the consumers choice to consume the product.

I’ve gone into criticisms of the general equilibrium theory and perfect competition before, so I won’t make this piece another critique; you can find the full piece here – https://croydonconstitutionalists.uk/marshallian-curve/ – but to summarise, the general equilibrium model relies on assuming a state of affairs where all economic actors are fully aware at all times of various economic activities: i.e. a degree of omniscience; perfect information. Under this model it acknowledges ignorance to which is optimal (we know what we are ignorant of, but the cost of information is higher than the benefit), but assumes away the possibility; or the high likelihood of an absence of information (we don’t know what we are ignorant of). The perfect competition model proposes that competition is a state of affairs where there is a certain number of buyers and sellers all buying (selling) the same quantities and qualities at the same price; no one sells higher because it would be economic suicide, and no one sells lower because he could sell the same quantity at the set market rate.

These two states of affairs not only assume no possibility of any absence of information, but deny the possibility of any entrepreneurial activity.

Let’s get back to the matter.

Advertisements are often criticised for pressuring consumers to buy particular products, providing over the top, loud commercials that could’ve been made for less, if they just got to the point with what they’re selling, and for providing no “relevant” information.

These criticisms are seldom legitimate when we analyse the market; including advertisement as a process, and when we acknowledge the role of discovery brought about by entrepreneurs.

I spoke earlier about arguments against advertisement to be based ex-post the consumer’s choice to purchase the product. The question to ask is: how did our consumer come to be aware of the product? What led to the decision to buy rather than to abstain? For the answer we need to look ex-ante the consumer’s activity and decision; furthermore we require acknowledging that at any time, the market can be filled with utter ignorance from economic actors, and to remember that we are in a process of disequilibrium where (successful) entrepreneurial activity tends to bring us closer to positions of equilibrium.

“Advertisers don’t just have to tell consumers that there is a product to buy; they need to make their adverts eye-catching in order for the consumer to discover the possibility of owning the product”

Advertisers don’t just have to tell consumers that there is a product to buy; they need to make their adverts eye-catching in order for the consumer to discover the possibility of owning the product. If we suppose a seller of petrol for cars, displaying a sign outside his establishment which says: “Petrol for sale. Lower than other sellers. £1 per litre”. An omniscience external observer would say he has made a clear concise advert for his product; if consumers don’t buy it is because the cost of finding this sign is too high. But humans are not omniscient, nor are they always on a deliberate search; our petrol seller requires making his advertising venture eye-catching not just to those already searching for petrol but to those who (a) don’t know that they need petrol, and (b) do not know that they don’t know they can buy petrol for a low price. Though the physical qualities of the product exist, and the seller is aware of what he can sell, to those who are not alert to its possibilities the product may as well not exist.

Where a seller decides to advertise also plays an important role in how many consumers will discover the product. If we suppose in a community none of the residence drive, because all sellers they are aware of have too high a price; leading to everyone either walking or cycling, no one is going to be searching for petrol and so an entrepreneurial producer, who can sell petrol for a fraction of the price of other sellers, cannot simply put a sign outside his business. In order for consumers to enter a process of discovery, our seller has to stand out.

Many times people will point to how simple advertisement was many years ago. They will point to old black and white adverts on television sets showing the product, its price and the brand. But this again is an ex-post argument, from the point after the advertisement has occurred.

I’d like to explain the ex-ante present advertisement argument with a little hypothesis:

Imagine if you will a school hallway where the walls are blank. Each day students walk to and from classrooms completely ignoring the blank walls. A student; let us call him George, finds there are no after-school clubs available, and so creates a chess club. George is unable to inform all the students of the school by talking to them, because he too has classes to attend. Supposing he is an alert individual, he comes to the discovery that he can place a poster on the blank wall informing students of the new after-school club; it will be the only poster on the blank wall, and so is likely to be discovered by his fellow students. This will not just be noticed by students who also know they wanted an after-school club, but possibly by those who hold an absence of information over the enjoy-ability of an after-school club, and by those who may not have known what chess even is; since there’s been no after-school clubs where they could see students playing chess.

Sooner or later, more students start advertising on the blank walls for a variety of things; some for clubs, events, and some for student-to-student tutoring. Because everyone is advertising with plain white paper and black text, many go unnoticed until one student makes the entrepreneurial discovery that he can use plain red paper with black text, and it is discovered by students etc.

As the process goes on, students find new ways to make their advertisements more noticeable.

This ex-ante look at the process informs us that when advertisement is absent, not a lot needs to be shown in order for the product to be noticed, but as more and more people advertise what they wish to inform others of, they require finding new ways of standing out and being eye-catching.

There are two final areas I wish to go into before we conclude; these will be with respect to the subjectivity of value and diminishing marginal utility on the part of consumers, and how these can affect our perspective of advertisement.

Due to value being subjective, the attractiveness of an advertisement can be affected by the value judgements of an individual; either by pre-existing tastes towards a general subject while holding an absence of information to the specific heterogeneous product, or by a known judgement towards a specific product.

To give an example for a better explanation, I hold no value for anything to do with football; I find the game dull, and so anytime an advertisement for football comes on; whether it’s a live match, a videogame or memorabilia, I find it irritating and a waste of time. If it is a new product to do with football, then I have discovered a new product I have zero interest in.

I am however a fan of snooker and pool, and so an advertisement for a live game will either (a) lead me to the discovery of the new possibility of satisfying a want for engaging in the game, or (b) if I had been on a deliberate search for a live match, will have allowed me to become informed of the whereabouts of a product I had known my ignorance of.

Diminishing marginal utility can also play a role with how attractive advertisement may be for specific products.

To give an illustration we take a look at figure 1.1:

In the diagram the vertical axis shows Marginal Utility, with the horizontal axis showing the Quantity of units consumed. As more quantities of the good are consumed, it reaches a peak where satisfaction is highest at MU8/Q6. After this point the marginal utility of the good begins to drop, and further consumption of the good will be unsatisfactory; as shown by Q8. An example of this could be the consumption of alcohol. At the start of a drinking session the consumption of unit 1 may not satisfy the want/need fully, as more and more units are consumed there will be a peak when total satisfaction has been reached. After this point; let us say unit 6, the marginal utility for further alcohol drops, and the want/need to satisfy the thirst for alcohol diminishes.

If an advertisement was to be seen ex-post the consumption of a satisfactory level of alcohol, it is likely the drinker will find little utility and value in further consumption.

This can also be translated into a change in tastes, as shown in figure 1.2:

A man who has achieved satisfaction of a want/need to consume alcohol, may find himself impelled to act in order to satisfy the want/need for food. A change in tastes simply refers to a reordering of the positions of items on the consumer’s scale of value; or ordinal ranking of goods.

This will lead to the altering of our individual consumer’s marginal utility of the unit(s) of some good to lower positions, while the marginal utility of some other good (in our case of the drinker, food) will be higher. Now our drinker is seeking to move expenditure from the lower ranked good (alcohol), to the higher ranked good (food).

In our diagram, the drinker had satisfied his want/need for alcohol at point P2. This indicates that a move from P2 to P3 along the opportunity line AB. Since our drinker’s tastes have changed, and shifted away from DP2 of Y, towards that of X, he has shifted to a position of DP3 of X, and so our consumer acts to achieve the situation of P3; i.e. the consumption of food.

To translate this back to advertisement, if our drinker is now seeking to satisfy P3, then advertisements for food will lead to a discovery of how/where to satisfy a want/need.

To conclude our look into advertisement, it is axiomatic that not all advertisements will appeal to every individual; it is not the purpose of this piece to make such an argument. It is to try and show that advertisement; like many areas of economics, is epistemic, and, to a degree, hold an entrepreneurial element of discovery to them. The world is full of scattered pieces of information in a realm of disequilibrium; advertisements, just like prices, play an important role in attempting to coordinate the expectations, actions, and value judgements of subjective individuals.

Picture: https://pixabay.com/photos/outdoor-street-road-city-view-3973811/