ECONOMICS & TRADE (Mini-articles) Index

Western Europe has no shortage of capital or educated people. Yet it is not creating enough entrepreneurial firms. The solution is blindingly obvious to some: use a stockmarket to put those with the grey cells in touch with those with deep pockets. America has done as much with Nasdaq, the stockmarket where most small American firms are first listed.

Why do European firms not do the same? Some are trying to do. On 20 February the Paris bourse announced that it will set up a Nouveau Marche in January 1966 to help firms with assets of at least $3.8 million to raise capital. Also, another initiative will shortly create Easdaq, a pan-European equivalent to the Americans' Nasdaq.

In London, the first attempt at this, the Unlisted Securities Market has to be disbanded because of new European Regulations. However, the London Stock Exchange has now published rules for its second attempt at a small company exchange of its own, called the Alternative Investment Market (AIM), which is due to start in June.

What we also need now is some form of investment in loca communities of people who have no hope of getting into the formal job market or economy. The problem is, of course, that the dividends will be intangible.

Newsletter of Job Society, June 1995

In 1335 King Edward III of England defaulted on his debt to Italian bankers in 1335 and international investors have fretted about high levels of government indebtedness ever since. It is no coincidence that the countries that have seen the biggest falls in their exchange rates in the past year, and the sharpest rises in bond yields, have been those that are the most heavily indebted.

There are at least four reasons to worry about high levels of public-sector debt: (1) Crowding out. Heavy government borrowing may push up interest rates, displacing private investment; (2) Inflation. Many worry that governments will finance their deficits by printing money, and so allow inflation to erode the real value of their debt. Fears that countries may inflate their way out of trouble could lead investors to demand higher interest rates, exacerbating debt burdens; (3) Fiscal elbow room. Excessive government debt can constrain governments' ability to use fiscal policy to support demand in a recession; (4) The debt trap. Beyond a certain level, indebtedness can cause a vicious circle: rising debt boosts interest payments, which in turn leads to extra borrowing, and so on. If higher debt also pushes up interest rates, the circle becomes even more vicious. The arithmetic is simple: if real interest rates are higher than a country's growth rate (as is the case in all the rich economies now), debt will rise indefinitely unless the government is running a big enough surplus on its primary budget (excluding interest payments). All the rich countries are in trouble now.

Newsletter to Job Society, June 1994

Chinese and Russian officials vowed yesterday to reverse the decline in trade between the two reforming communist giants by adopting a more capitalist way of doing business. Mr Li Lanquing said they should abandon the barter deals which characterised the trade relationship before Russian communism collapsed.

Instead, Mr Lanquing said, trade between Moscow and Beijing should be regulated according to western-style contracts and conducted in hard currency. The attempt to introduce capitalism into the trading relationship between the world's erstwhile leading communist states and potentially the world's two largest trading nations shows how profound the shift in domestic policies has been in both countries. Today, as both countries, in various ways, are seeking to move towards the market, they have become rivals in the effort to attract western capital. Tension between the two, particularly along their border, as taken on a decidedly economic tone as Russians in the Far East fear competition from more aggressive Chinese traders.

The Sino-Russian economic commission is an attempt to reduce these hostilities and find ways to stimulate trade, which has slumped as both countries struggle to adjust to the market economy. This year's trade turnover was likely to reach $5 to $5.5 billion but the potential is far higher.

From the Financial Times, 14 June 1995

Transatlantic co-operation is necessary to agree new "rules of the game" to prevent ruinous "cut-throat" competition by multinational companies and their governments in their world markets, a senior US official said yesterday. Mr Jeffrey Garten, US commerce undersecretary for international trade , said competition in the emerging markets could easily lead to a "rapidly inflating spiral of inducements" by governments seeking to help their own companies secure contracts. "It is not in the interests of industrial nation taxpayers, and not in the interest of the big emerging markets, which would find it much more tempting to undertake projects that would not make economic sense under market rates and conditions," he said. "Nor is it in their interest to build up excessive debt, even at very low interest."

He said the US and Europe must develop a common vision for the 21st century of the future, based on the realities of mushrooming trade, trillions of dollars of capital flows and new information technologies. The US will promote expansion by American companies from the UK, where it holds 11 per cent of the import market, to the rest of Europe, where its share is only 6 per cent. "The initial focus will be to boost US market penetration in Germany, France, Italy and Spain." Small and medium sized companies will get the bulk of the assistance in four sectors: aerospace, environmental technologies, information technologies and power generation.

From the Financial Times, 10 Mar 95

Comparing changes in taxation in the OECD countries between 1965 and 1992, two groups of taxes can be clearly distinguished: those which have steadily risen and those which have steadily reduced. The same general trends are observed in all the rich countries, whatever their political complexion--left or right--inside and outside Europe, and in the Northern and Southern hemispheres. The group of taxes that have steadily increased are dependent on the circumstances of the individual and include social security tax (18.2 per cent to 25.0 per cent), income tax (26.3 per cent to 29.7 per cent) and general consumption taxes such as VAT (1.7 per cent to 17.1 per cent).

The group of taxes that have steadily decreased in the same period include corporation tax (9.2 per cent to 6.1 per cent), property tax (8.0 per cent to 5.5 per cent) and specific consumption taxes with apparently beneficial intentions (e.g. alcohol, smoking, petrol--3.2 per cent to 11.5 per cent). Is there a plot here? Is it that rich property owners and TNCs have been able to persuade governments by one means or another (bribery, lobbying, requests for subsidies) to reduce their burden of taxation and heap more of it onto the individual?

It's no wonder that governments have to find more individuals to pay the taxes by dropping tax thresholds, even if taxation reaches the low-paid. In the UK, for example there are now 26.2 million income tax payers, 500,000 more than in 1994-95 and 800,000 more than in 1992.

Meanwhile, the TNCs are throwing even more people out of work and reducing the number of wage-earners.

Newsletter of the Job Society, May 1995

Might the US become the first nation to base taxation on what people spend rather than on what they earn? A 'USA' (unlimited Savings Account) plan is being advocated by by Pete Dominici, the incoming chairman of the Senate budget committee, and Sam Nunn, one of the most respected conservative Democrats in the Senate.

The basic idea of replacing ordinary income taxes with a levy on 'consumed income' has been popular among academics since the late 1970s when a committee of experts led by Prof James Meade proposed this reform in the UK.

In essence, the tax-base for individuals would be ordinary income plus net cash flow from financial transactions; borrowing or asset realisations would thus increase your tax liability, while purchase of equities or bonds would reduce it. It would be equivalent to a direct tax on income with an exemption for all forms of saving; since it would be paid by individuals, it could be levied at higher rates on the well-to-do. Businesses would also pay taxes based on cash flows: the corporate base would be sales revenue minus the cost of inputs purchased from other companies, such as plant, equipment and inventories.

The new tax regime would penalise the profligate and reward the prudent. In the longer run, all would benefit greatly from tax-free savings and from the enhanced dynamism of an economy liberated from income tax.

From an article in the Financial Times, 9 January 1995

In the early days of global business, such experts as Raymond Vernon proposed, in effect, a United Nation model of globalisation. Companies with aspirations to diversify and expand throughout the world were to do so by cloning the parent company in each new country of operation. If successful, they would create a mini-UN of clone-like subsidiaries repatriating profits to the parent company, which remained the dominant force at the centre.

We have a different model now--a competitor-focussed approach--because companies can no longer simply pile up their goods on foreign shelves and expect to sell them easily. Competition is multifactorial. Successful companies enter fewer countries but enter them more deeply.

By this new logic, if we are a European producer of medical electronics equipment and want to remain strong, we have to take on General Electric in its own country, the US. We have to learn the American culture faster than General Electric can learn ours and attack us on our home ground.

Today, the pressure for globalisation is driven not so much by diversification for its own sake as by the need and preference of customers. It is their needs which have globalised, and the fixed costs of meeting them from distant headquarters have soared. That is why firms are globalising.

From The Borderless World by Keniche Ohmae, 1989

The most important developments in mainstream economics since the war have taken place in the US. This was true of Prof Milton Friedman's monetarist revolution in the 1960s, which challenged the assumpotion of Keynesian interventionism that policymakers could trade off indefinitely a little more inflation for a little less unemployment. The same is true for the "New Classical " revolution in the 1970s, which asserted that a trade-off between inflation and unemployment was impossible even in the short term.

And, most recently, it has been true of the "real business cycle" theorists. They argue that the ups and downs of the business cycle are triggered by changes in technology, which means they are desirable as well as inevitable. As each revolution has flared in the US, so the language in which the ideas have been expressed has become ever more mathematical and impenetrable. Algebraic elegance has led economists increasingly to interpret real-world behaviour in ways that are theoretically defensible but palpably absurd. Some real business cycles theorists argue with straight faces, for example, that unemployment topped 3 million in the UK during the 1980s because the jobless were voluntarily taking more leisure time in the belief that work would be better paid a couple of years later. It is no wonder that a 1990 survey of top US graduate students found that only 3% cited "having a thorough knowledge of the economy" as important to their professional success.

From an article by Robert Chote, Economics Editor of the Financial Times, 28 Mar 1995

Human beings are the only animals to exploit the law of comparative advantage. The Yir Yoront aborigenes live at the mouth of the Coleman river on the York Peninsula in northern Australia. Until the last century, they were living in the Stone Age. They possessed no items made of metal. They were also true hunter-gatherers, who lived by hunting game, catching fish and gathering vegetable food in the forest. They had no crops and only one domesticated animal, the dog.

They lived under no system of government and answered to nothing that might be called the law. They had, therefore, none of the great inventions to which we attribute the origin of our civilisation: no iron, no State, no farming, no justice, no writing, no science. Yet they had one thing we would consider modern, something so precious it is probably worth more than all the others put together, a thing we usually assume cannot be carried out without a State, without jutice, without writing. That thing was a sophisticated system of trade.

Surprisingly, the evidence from anthropology new suggests that trade is one of the oldest human traits, inherent in our nature in the same way that language is. Like language, trade is also a hallmark of our species. Other animals create divisions of labour among individuals, but none create them among groups.

From "The Origins of Virtue" (Viking) to be published in 1996

We have discovered the only proposition in the whole of social science that, according to Paul Samuelson, is both true and non-trivial. It is also the one proposition that virtually no politician seems to believe: David Ricardo’s Law of Comparative Advantage. It states quite simply that trade is mutually profitable even when one country is more productive than the other in every commodity that is being exchanged.

Suppose that there are only two commodities being traded: spears and axes. One tribe is efficient at making spears and also very efficient at making axes; the other is rather inefficient at making spears and extremely inefficient at making axes. Superficially, it seems to make sense for the first lot to make their own spears and their own axes and not indulge in trade at all. But hold on. A spear is worth a certain number of axes. let us say, for the sake of argument, one spear is worth one axe. So every time the first tribe makes a spear, it is making something it could buy more easily from the other tribe if it were to make an axe by its even more efficient methods.

Since it takes this tribe less time to make an axe than a spear, it would be sensible to make an extra axe, instead of a spear, and swap it for a spear made by the second tribe. The second tribe reacts likewise. Every time it makes an axe, it could have achieved the same result by making a spear more quickly and swapping it with the first tribe for an axe. So if the first tribe specialises in axes and the second in spears, both tribes are better off than if each tries to be self-sufficient. This is true, despite the fact that the first tribe is better at making spears than the second tribe is.

From "The Origins of Virtue" (Viking) to be published in 1996

A LETSystem is a community trading network that uses a locally-invented currency with which members of that community record the exchange goods and services. LETS was originally devised by Canadian Michael Linton as a way of helping his small rural community in British Columbia, which had been hard hit by the recession of the 1980s. Since that time the idea has spread and there are now about 600 LETSystems worldwide.

The local currencies are used in the same way as people use cash or cheques. Goods or services may be paid for in local money or in a mixture of local and national currency. For example, in the Blue Mountains, Australia, units of local money are referred to as "ecos", and have a nominal value of one Australian dollar. One Blue Mountains builder advertises his services for half ecos, half dollars; the cash covers his tax, tool and vehicle expenses, and he uses the ecos to pay for locally-grown vegetables or other local services.

How does it work? In order to use LETS, you must first join (or start) your local LETSystem. LETSystems charge a nominal fee to cover cash costs, but other costs of running a system are covered by a small charge on transactions. LETSystems are managed by the users and wages are paid in local money. Most LETSystems distribute a regular newsletter, listing goods and services available or required. From the information in this newsletter, you can contact people with whom you wish to trade. Finally, you record the transaction with the LETSystem recorder who processes the transaction, usually with a computer and special software. The appropriate number of currency units are transferred from the buyer's account to the seller's, and a regular statement is issued detailing trading and balance. It's that simple.

http://www.u-net.com/gmlets/home.html

Matt Ridley's account of trading gives a fascinating account of the origins of economic behaviour (See THE PRIMAL URGE and LAW OF COMPARATIVE ADVANTAGE). Perhaps an understanding of how those basics work will yet improve present day economic policy. On one basic, however, Matt Ridley is mistaken in his book ( The Origins of Virtue). The "concept of credit" was not a new invention of the 12th century AD. He is out by over three thousand years.

The Mesopotamian civilisation was using clay credit/debt tokens from the third millenium BC onwards. The British Museum has well in excess of 100,000 of them; German museums many more. They mark the origins of both writing and number.

For economists the interesting point is this. There is no evidence of money, the coinage, before 670BC. So credit transactions preceded money transactions by about 2,000 years. This throws some doubt on the monetarist assumption that money is the root of all economics: it is in fact a johnny-come-lately. It could be that the real way forward should be Creditary Economics. The one aggregate which all governments ignore is total credit supply. Money supply, be it M0, M1, or M4c, is just one shifting component of that much larger aggregate. It is this total credit supply which fuels the trading economy which Adam Smith explained and which Matt Ridley rightly refocuses attention on.

59 Court Lane, Dulwich, London SE1 7DP (originally printed in the Financial Times, 10 July 1995)

A revolution has tranformed international capital markets over the past 10 years. Helped by the ending of exchange controls and driven by advances in computing, and by new derivative products, this revolution has changed the face of the industry. The size and importance of the challenge now facing regulators is acknowledged, but it does not just hinge on improving the flow of information across markets and jurisdictions but also on appreciating the risks posed by the securities markets. These are qualitatively different from the credit risks faced by banks in their traditional business of commercial lending.

It is becoming increasingly difficult to differentiate between the business of banks and securities houses. Indeed, most of the 50 or so leading participatns in the securities industries are not securities houses as suich but divisions of international banking and financial groups. This is no accident. The declining profitability of commercial lending over the past 10 years has encouraged banks to diversify into other businesses. Having expanded into securities, banks have been quick to exploit the advantages accruing from their typically high credit ratings, access to cheap funding and extensive capital bases. But the speed with which disaster may be visited on unwary security market users has increased dramatically with the growth of derivative products, such as futures and options. Established market structures are breaking-up.

These developments will also enable trading to be undertaken in so-called offshore financial centres -- conceivably in jurisdictions that, for example, do not recognise insider trading as improper, let alone as a crime. The possibility of such a development raises questions of investor protection that requires more than regulatory co-operation. The political will must be deployed to ensure that modern forms of piracy will not be tolerated. Depositors’ funds in banks are now exposed to the risk of the securities markets, making the safety and soundness of such companies and markets matters of systemic concern.

From the Financial Times 12 July 1995

The normally placid town of Swindon resembled a banking convention last week as hoards of pinstripe-suited executives poured in to witness the birth of a new payments system that may render cash a thing of the past. Mondex, a joint venture between NatWest, Midland Bank and British Telecom, picked the Wiltshire town as the test site for its new card, which aims to replace notes and coins with electronic cash. With Visa and Mastercard in the wings, payment systems could be revolutionised.

Mondex claims to be a perfect substitute for cash with a few key advantages to tempt customers into the system. Money is stored on a computer chip embedded in the card. When the card is used, the retailer slots it into a terminal that will transfer the money without the need for a signature, as with a credit card. When the credit on the card is exhausted, it can be recharged again at a bank, or over the telephone. Just like cash, people can use it to make payments to other individuals by using an electronic wallet. Unlike cash, however, it is more secure; the stored credit can be protected by using a security code so that if the card is stolen the thief cannot spend the money. It can be used on buses, or in vending machines, without having to worry about the correct change.

For retailers and bankers, electronic money has huge advantages over the traditional folding stuff. It is estimated that the cost to the retailing industry of storing notes in tills and then taking them to the bank is £2 billion a year. The banking system then then spends another £2.5 billion taking the notes in and handing them back to customers to spend again. There would also be huge savings to the government in the cost of producing notes and coins.

But will customers be persuaded? Mondex believes they will, even though it may take another 10 or 15 years before the technology is really accepted. In the same period, Mondex is hoping that the proportion of payments in cash will fall from about 78 per cent to 50 per cent. However, critics think that folding notes in wallets or purses are useful for budgeting in a way that Mondex and its competitors will find hard to imitate.

From the Sunday Times 9 July 1995

Mr Dick Armey, the majority leader in the House of Representatives, is pushing for a flat tax of 17 per cent on all forms of income. He wants a tax code that is so simple that the tax return for even the largest corporation would fit on a postcard. He cannot be serious, can he? Yet, if Republicans win the White House by a big margin next year, startling changes to the US tax system in 1997 are possible.

Mr Armey’s proposal is based on ideas advanced by Robert Hall and Alvin Rabushka in "The Flat Tax" (Hoover Institution Press). The goal is to tax all income, exactly once and as close to its source as possible. By imposing the same tax rate on all individuals and all forms of income, the scope for avoidance is minimised. Generous personal allowances for individuals and their dependents would keep most poor families out of tax. There would be no other exemptions -- not even for sacred cows such as mortgage interest or charitable donations. It is this broad widening of the base that makes a single tax rate below 20 per cent feasible.

Viewed in isolation, the flat wage tax may seem grossly unfair, but it has to be appraised with the parallel levy on business income at the same flat rate and at source. The tax base would be gross revenue from sales, less purchases of goods and services, less wages and salaries (taxed under the individual tax), less purchases of capital equipment, structures and land. Significantly, there would be no deductions for interest paid, dividends, rent or fringe benefits. It is because these forms of income are taxed at source under the business tax that they can be excluded from the individual tax. The flat tax includes a 100 per cent immediate write-off for capital investment, which amount to much the same as a full deduction for saving. The Armey tax is thus a disguised consumption tax. But is it fair? It is not as good a vehicle for redistributive income as conventional taxes. But high-income people would be hit harder than they epxect because they are the main beneficiaries of business income. Under the flat tax it would be much harder to shield returns on capital from taxation because the tax is levied at source.

Opinion polls indicate strong support for flat taxes. Americans care about economic incentives. They liek the idea of a tax return that fits on a postcard. A proportional tax meets commonsense standards of fairness. The frontiers of economic debate are being expanded. If America shows the way, other nations will scramble to catch up.

From the Financial Times, 17 July 1995

In the last 100 years, the advanced industrial countries were increasingly able to exploit the less advanced countries and their workforces until a yawning gap developed between their respective wage rates.The average incomes of workers in the richest countries, according to one estimate quoted by the World Bank in their most recent report, soared from 11 times that of the poorest countries in 1870 to the almost unbelievable figure of 52 times by 1985.

The worm began to turn about ten years ago. Financial deregulation, the continued growth of TNCs, and the close integration of the world economy by modern communications, has meant that massive flows of investment funds have been going to less developed and newly-industrialising countries because of the attraction of cheap labour. One result has been that there has been a rising tide of exports of labour-intensive products and services from low-income countries to high-income countries.In the EU and the US, such imports have risen from 5 to 12 per cent, and from 13 to 30 per cent respectively since 1970. Considering the unskilled wages of those workers in the rich countries who have been fortunate enough to keep their jobs (now averaging about $17,000 a year), they have been declining relative to the rest of the population for several years; while unskilled wages of the poorest newly-industrialising countries (now averaging about $1,500) are rising upwards -- not only relative to average wages in their own countries but also to unskilled wages in the advanced countries.

Economists are far from agreed as to how tight the coupling is between these trends. Adrian Hill of Sussex University claims that the growth in trade with developing countries can explain nearly all of the collapse in demand for unskilled labour. However, Richard Freeman of Harvard University says that the coupling is loose because -- taking the US as an example -- only 15 per cent of the low paid are in manufacturing. Paul Krugman of Stanford University and Jagdish Bhagwait of Columbia University say that it is mainly modern technology that has produced the slackening demand for unskilled and semi-skilled labour Jeffrey Sachs of Harvard University and Patrick Minford of Liverpool University find that the trade effect isn't large enough to account for more than between 10 and 30 per cent of the fall in demand for unskilled labour in advanced countries.

You pays yer money and you takes yer choice, as the saying goes. And . . . does it really matter precisely what the reason are? The fact is that all these trends are occurring, and occurring quickly, too. Given the leverage effect of the huge mass of agricultural workers now entering factories in the newly-industrialising countries, and at almost whatever the rate that their wages are rising, it is only a matter of a relatively short time before unskilled wages will be equalised everywhere.

Newsletter, The Job Society, July 1995

Under government patronage, the monetary system has grown to great complexity, but so little private experimentation and selection among alternative means has ever been permitted that we still do not quite know what good money will be -- or how good it could be.

Nor is such interference and monopoly a recent creation: it occurred almost as soon as coinage was adopted as a generally accepted medium of exchange. Though an indispensable requirement for the functioning of an extensive order of co-operation of free people, money has almost from its first appearance been so shamefully abused by governments that it has become the prime source of disturbance of all self-ordering processes in the extended order of human co-operation.

The history of government management of money has, except for a few short happy periods, been one of incessant fraud and deception. In this respect, governments have proved far more immoral than any private agency supplying distinct kinds of money in competition possibly could have been. The market economy might well be better able to develop its potentialities if government monopoly of money were abolished.

From "The Fatal Concept", Routledge, 1988