The ability of the state to bring about inflation of the money supply is one of the most deadly weapons twentieth century states have had. If it doesn’t itself cause wars (which some would claim) it at least enables them to be funded by sleight of hand masking the true costs to everyone of such misadventures. Our money has been devalued 98% since the founding of the Fed less that a hundred years ago. This is a hidden tax. But alongside it goes the understanding that the banking system and the political system are in close cahoots – against whom, I wonder? Why, you, me and productive enterprise, that’s who.

If you argued that too loose monetary policy was just one influence among many that caused the credit crunch, I would agree with you but on any reasonable reading the banks had a hand in matters. Any other interpretation fails the sense test.

AIGFP was deeply embdedded in this merry-go-round.

Now, sure, all these “innovations” gave lots of people opportunities to make vast sums of money, but they would have been unnecessary and, I am sure, unachievable, in a free money system and there would have been no state trigger for this round of inflation. All the while, there was a considerable confidence that the powers that be would “see them allright” – after all, a complete meltdown would have been just as unacceptable politically as it would have been for the bankers themselves. A loss of confidence in a currency supposedly under the management of a sovereign state is far more dangerous politically than a loss of confidence in a currency under the management of an individual bank.

Are you suggesting that getting rid of the ‘money monopoly’ will somehow remove financial institutions’ ability to influence public policy in their favour? There are a zillion ways that they influence policy that have nothing to do with ‘money monopoly’. As capitalists and entrepreneurs they are constantly seeking ways to improve their business. Some are perfectly reputable and socially productive, some involve finding more or less dodgy ways to modify the system to their own advantage and some are downright illegal by any normal standard ethics.

Moreover in the original example of AIGFP this was a purely insurance operation and nothing to do with ‘money monopoly’ and extending credit etc. Such evidence as I have seen suggests that it was the result of driven individuals highly motivated by a perverse incentive scheme, working in a pretty dysfunctional group of companies with inadequate controls and a cavalier culture, and working outside of any regulatory oversight – partly achieved by moving the operations involved to London and partly because there was a belief in govt circles, fostered by neo-liberals, that any sort of regulation is toxic. Possibly also campaign contributions had enabled AIG effectively to buy some lawmakers.

On your point about universities – well, at the moment at least, the state is responsible for universities. You are *not* on your own by any means. We have QAA audits and RAE exercises and HEFCE Institutional Audits and all sorts of things

You appear to have missed the point that I am writing from the basis of someone who actually works in the field. I do not believe that what I teach and how I teach it would alter if I were teaching it privately and on the basis that I was teaching what I believe to be the most useful material taking into account my own experience. That is, I do not feel the heavy hand of government in the way you are claiming it falls.

That is not to say I do not feel the heavy hand of government in other ways. I have already mentioned elsewhere today the perverse incentives caused by the RAE. The QAA is largely a useless box-ticking exercise, it means you can teach utter crap and come out with full marks, so long as you do it in the correct box-ticking ways.

Frankly, I do shudder to think what sort of doctors you accredit, if your myopic view point cannot compute something so utterly different from today’s state that to believe it would be like now (or 1979) but with no controls.

Well, had you read what I wrote you would see I am not personally involved in accrediting any doctors, unless by this you do not mean medical doctors.

However, if you did not really mean doctors but instead meant graduates in Computer Science, I think you yourself are showing what you accuse me of. I can perfectly well see the point you are making. As I have already said, in the field where I work there is a great deal of commercial training and accreditation. You appear to feel you are so wonderful and right about everything that just because someone questions your assumptions it must mean they don’t understand them. And you appear to feel your views are so wonderful and right, that anyone who questions them and tries to put the case against is just some fool motivated by base means. You appear not to have grasped that part of the reason I question them in this sort of forum is that I believe in debate and skepticism, and that therefore if I feel in some forum one side of a question has been put in a sloppy way with too many assumptions, I will concentrate on putting the opposite case. There was a time when I contributed heavily to a discussion forum on Ireland, where many of its contributors supposed, because like you they were one-track-mind people, that I was a supporter of Ulster Unionism. In fact my position was pragmatist, and if I were in Northern Ireland I would be a moderate Nationalist, SDLP type. But because the bias in that forum was heavily Republican, I tended to be the line posting the Unionist case arguments.

Now, a real liberal would understand this. A real liberal (you know who I am talking about) would not be so blinkered as to suppose that anyone who disagreed with her must not even be human. A real liberal, it seems to me, is someone who can see both sides of an argument, and who feels putting the case against something is important even if it is something he basically agrees with. Someone who thinks putting the case against is “pollution” (you know who I am taking about) is, in my opinion, so far removed from real liberalism that I think it quite right to liken him in some ways to other one-true-way people, like Trotskyists.

All it means is that that supply and demand are in equilibrium at a price that approximates to the most efficient cost of production and that there is therefore no market price signal that more production of that particular good is required. If prices rise and the producer is pocketing monopoly profit then in a free market where no agency (usually government) is preventing competition then it will drive the other producers into the market for that good in order to try and pick up some of that profit until equilibrium returns.

In other words, to use your phrase (which I did not use) monopoly *power* does not exist in such a market, even if a monopoly technically does – the fact that there happens to be a single supplier is not exacting a supra-normal profit from the consumers. Personally, I think such circumstances would be rare, and would probably be temporary if they did exist, but not inconceivable.

Jock,I disagree with you about monopoly power – In business it has to be a bad thing. Think about regulatory and government capture , as well as price wars- allowing the monopolist to crush any nascent competitor.
We have seen too many examples in real life to disprove any theory that it is OK.

Hayek’s point about being a Liberal rather than a Conservative was precisely that – that a Liberal should be able to take such a bold step confident that human ingenuity and voluntary collective action unimpeded will develop coping strategies, whereas a Conservative has to be certain that his proposals will do exactly what he says they should before acting.

There is nothing, per se, wrong with “bigness” – even monopoly – so long as it is based on being the best provider at the best value and is *open* to competition if it strays from that. Remember that profit is a signal that there is scope for competition to muscle in.

Libertarians seem to have difficulty accommodating this fact in their theology.

Supermarkets have benefitted hugely from their lobbying power with the state however – in terms of land use policy for example, over the years from agricultural compulsory collectivism – most especially in markets such as dairy, where if you were not a member of the MMB you’d likely not be able to seel to these mega-buyers. They pay nothing like the full costs of transportation networks they use, pocketing the difference from the producer and so on.

Still, as your last blog post showed, having a heavy handed state, which handed them these advantages in the first place, has not stopped them using trickery to get more money out of us.

Yes, they have to be a little careful, but only because of the residual power of the state. Over time, acting as a group with similar influences and objectives (an informal cartel), they are able to shift the ground rules. In milk for instance their gross margins have gone from very low 10+ years ago (about what one would expect for a commodity product) to very high – strong prima facie evidence for an uncompetitive market.

Libertarians, it appears, believe in a theology in which ‘free’ markets replace God and fiat money replaces the apple as the source of Original Sin.

On your point about universities – well, at the moment at least, the state is responsible for universities. You are *not* on your own by any means. We have QAA audits and RAE exercises and HEFCE Institutional Audits and all sorts of things. And on the medical side, which was what was under discussion in this little bit about accreditation, the state maintains the monopoly of organizations such as the GMC.

Who said anything about “do-it-yourself” qualifications in medicine? I stated that middle class white colleges found ways of denying accreditation to womens’ and blacks’ medical colleges in the US in order to protect their incomes. That does not mean that these community based colleges were any the worse at producing doctors, just that they suddenly found themselves unable legally to do so because of lobbying on the part of moneyed interests.

Frankly, I do shudder to think what sort of doctors you accredit, if your myopic view point cannot compute something so utterly different from today’s state that to believe it would be like now (or 1979) but with no controls.

Government doesn’t accredit doctors, universities do.

Well, I’m not involved in accrediting people as medical doctors with the MBBS, but I am involved in accrediting people as Computer Scientists with the BSc and MSc and PhD. I can assure you government does not tell me, or my colleagues what to do when we do this. We choose the curriculum, we assess the students. There is an agreement with the British Computer Society (which is not controlled by government) to accredit our degrees (not every BSc in Computer Science has this, it isn’t really seen as a major thing). There is also a system where the degree awards are overseen by external examiners from other systems. It’s not a perfect system by any means, but the idea that government involvement is the biggest problem with it is ludicrous.

I have also been involved with admissions to the degree programme, and can say for sure that private sector accredited training qualifications are useless for this purpose. A-levels and equivalent overseas national qualifications are the only trustworthy things. Government interference in A-levels hasn’t helped – for example, the insistence that I have to treat a useless “vocational qualification” as equivalent to A-level Maths is very, very silly, but so far, thank goodness, this is only a guideline I am free to ignore as a university admissions tutor.

Private sector training certificates are useless because no private training company wants to tell anyone that they’ve done anything but pass 100%. You’d soon lose your customers to a rival if you did that. In any cases, the certificates are only really for clueless people in HR to use to tick boxes. If private sector accreditation was really so good, and universities really so bad, wouldn’t the big companies pick up on this and use something other than a good degree from a top university as the first sort in picking trainees?

A-levels are getting watered down because league table madness creates perverse incentives. So FE colleges encourage their students to do useless qualifications which gain high grades rather than useful ones which don’t. It’s all market driven – get the students, you keep your job, lose them, you don’t.

Ideological loonies like Jock who can’t see beyond their own noses and twist the world to fit their theories are real pains, aren’t they?

For further considerations on the stupidity of do-it-yourself qualifications in health care, consider the rip-off which is private complementary health. How many people I know are throwing their money away paying for sugar pills, and worthless “therapy” and the like. It’s because it’s a business, and those running it are good at spotting a sucker. That’s the free market Jock so loves and this is the solution to everything.

I am actually a pragmatist. There’s lots good about markets, there’s a place for them. Just because I condemn the loony extremists on this issue doesn’t mean I’m an extreme doctrinaire type on the other side who wants state run everything. It’s a mark of the looniness of the loonies that they can’t see this. And they are so lacking in true liberalism that rather than welcome robust discussion of their ideas, they accuse me of “polluting” their discussions for putting the other side, and of being not really human because I dare to disagree with them.

Absent the state, these would a. not exist, or b. if they did, would only do so through visible probity since anything else would draw competition freely into that market.

It doesn’t matter whether the particular directors of AIG said to themselves “the state will bail us out, so let’s go for it”. The *system* has been at fault. All have been trading in fake commodities – state based fiat money – taking a lead from state financie managers who think they can “manage” an economy by signalling more or less inflation of the money supply usually against market trends and expectations.

Personally, I would not say that libertarians simply say, a priori, that the state should be abolished. If all its benefits outweighed all its costs I think we would care less about it. But we have concluded that they don’t. Also, *government* need not mean *state* in the sense that a group of organizations or people – they may be geographically connected or otherwise connected by a common trade or other interest – could arrange a mutual government that was not predatory, not coercive, not violent or that could be overthrown if it became so.

Had they somehow changed their ways – for instance either so that they were paid by the buyers rather than the sellers or by making themselves into unlimited liability partnerships so their directors would feel the financial pain resulting from errors – then we would all be much better off today.

But, in a free market, why should they change their business model or corporate structure? As it was it suited them just fine with much personal reward and little personal risk. In a worst case scenario the directors could simply slope off to a comfortable retirement. Any change would have had to be forced on them by some external intervention.

As anyone who has ever been involved in setting up any sort of incentive pay scheme (in effect an internal market aiming to match rewards to results) knows it is extremely difficult to get right and the whole process is fraught with unintended consequences. So why would we expect any business to emerge from the pains of its start-up in a form that minimises risks and perverse incentives in the larger markets in which they participate? The reality is that a business will usually follow the path of least resistence even if that creates bigger and/or different risk later.

As for AIG, the problems arose from selling insurance against financial defaults through its Financial Products Group (AIGFP). It managed to wholly evade insurance regulation by various means – eg by basing AIGFP in London although it is doubtful if, given the anti-regulatory bias since Reagan, this was really necessary. Even the most cursory regulatory inspection would have shown that AIG did not have the capital to support the risks it was covering. Did they do this knowing that the Govt would bail them out? Possibly, but it is more likely they believed their own propaganda to the effect that they had abolished risk and/or that internal communication failures and perverse rewards (eg a culture of no-one rocking the boat by questioning how so much profit is being made – or else!) blinded them to the real risks.

How AIG (and hence its customers) was then bailed out is utterly inexcusable but libertarians draw the wrong conclusion. In obsessing about and constantly bad-mouthing the state they weaken it yet it is the power of the state that ordinary people need to protect them from the predatory practices of bad people whether they be thieves or thieving businesses.

The problem is that the state is at risk of regulatory capture. So surely the thing to object to is regulatory capture, not the state per se. In many ways this leads to the same results – a market economy in which people bear the consequences of their actions – but there is also a difference. I want to rescue the state from bad men, libertarians would rather abolish it. But in doing so they forget that large firms can, so to speak, make their own weather. Once sufficiently dominant, they can impose self-serving conditions and the market is then most certainly not ‘free’.

Ratings agencies, so far as I recall, were not bearing the risk of their ratings as, say, a doctor’s insurance underwriter would be. The insurance writer has considerably more economic incenive to get it right than the state. The risks the principals risk AIG were able to take on would not be possible in an era of competitive money systems with no “last resort” lender prepared to defraud its citizens in order to keep its financial friends afloat.

There is indeed a special protection to be found in a free market, not interfered in by organizations like governments that can enforce its destabilizing interventions – and that is competition. The insurance market is burrently one of the most interfered in, the lobbying of the established players to erect barriers to entry of others. One of the biggest interferences is compulsory insurance – motor, professional indemnity, employer where legislation enforces what has to be covered and who has to buy cover. As I said: no free market to see here.

Compulsory insurance is in fact a covert state mandated transfer of wealth, and usually the wrong way – from responsible, thrifty people. The state – you gotta love it!

Granted accreditation is fraught with problems, not least that it has often been targetted by interest groups seeking to preserve the exclusivity of their patch.

But private sector accreditation is no panacea either. The financial rating agencies, monoline insurers and AIG – all formerly highly respected and trusted firms – have made megabucks from rating or insuring mortgage-backed securities and CDSs yet it turns out that much, perhaps most, of the business they transacted was fraudulent as the buyers of the various products have discovered, too late, to their (and our) enormous cost.

In other words, there is nothing special about the private sector and no special protection to be found from markets.

It is human nature for people to twist any system – public or private – to their (rent seeking) advantage if they can. We just have to stay vigilant.

In order to preserve the exclusivity of a medical career and its ability to earn high fees, the number of accredited institutions was slashed. Even today, you cannot practice in the US if you’ve qualified elsewhere in most cases. All protectionist rent-seeking on the part of that profession. And enabled only because a state exists that can legislate and enforce such protection.

One of the biggest changes government could make is to get out of the business of accrediting things – because it’s not terribly good at it. Insurance companies could accredit doctors for example – if they’re good enough to get a professional indemnity insurance from Clerical Medical you’d know they’re good, if they could only get one from Bodgit and Stitch you’d maybe be more wary of using them. After all, yet again, government does not have the right incentives to ensure such things are accurate, because it can get away with apologizing to victims of its incompetence a great deal more frequently than could, say, an insurance company carrying the risk itself.