A State Bank

Chris Dillow has been arguing in favour of a state bank. Recently I finished reading "The Truth About Markets" by John Kay, in which Kay describes the fiasco of the development of British Advanced Gas Cooled nuclear reactors.

These reactors were announced in 1965 by the Labour Minister of Power Fred Lee, who promised that we would "hit the jackpot" in exports of AGRs.

The AGRs were sold for £1.9 billion when British Energy was privatised in 1996, along with a promise by the government to underwrite any future clean-up costs. The total cost of developing the AGRs was around £50 billion at 1996 prices.

On the face of it this sort of thing makes it look like it is a bad idea to put the state in charge of allocating investment. Kay's point is more subtle though, he explains that what markets possess and the state does not, and what makes markets such effective wealth creation systems, is the disciplined pluralism of the market.

In the market new ideas are implemented all the time. Most fail. Companies either ditch the bad ideas or go bankrupt. The problem with the AGRs was that the government wanted the electricity industry to speak with "one voice", and the civil servants who made such bad decisions were never properly held to account. There was no plurality of ideas and no discipline when things didn't work.

The problem then is not that necessarily with the state funding things, but rather with the state funding things without its decisions being subject to any kind of disciplined pluralism.

Back to Dillow's point: can it really be so hard for the government to create an independent state bank? It could be run in a similar fashion to the BBC, with an independent income guaranteed from some kind of levy.

As Dillow points out, the future is inherently unknowable. Professional VCs expect only around 1 in 8 of their investments to work out. Small loans made in sufficiently large quantities may generate enough benefits to outweigh the losses.

Morals and Markets with Robert Skidelsky

Economics boffin Robert Skidelsky has written an interesting article over at CiF about the morality of capitalism, this is my paragraph-by-paragraph response:

"...Because no social system can survive for long without a moral basis..."

This isn't really correct. Slavery persisted for centuries in the ancient world as the economic prime mover and yet was and is morally suspect.

"...It has often been claimed that capitalism rewards the qualities of self-restraint, hard work, inventiveness, thrift, and prudence. On the other hand, it crowds out virtues that have no economic utility, like heroism, honour, generosity, and pity..."

I think this depends on other cultural factors. Capitalism may encourage or discourage certain characteristics, but it doesn't mean these don't exist.

Also it isn't entirely true that honour and generosity are "crowded out" - good businessmen and businesswomen know the value of honour and generosity.

"...For quality of life, we have to rely on morals, not markets..."

This is very true.

"...But it is truer to say that the market economy is sustained by the stimulation of greed and envy through advertising..."

I wonder if it is useful to distinguish between capitalism and consumerism, and if it is useful to distinguish between "good" (buying organic, locally produced, low-CO2-profile vegetables) consumerism and "bad" (cigarettes) consumerism?

"...In a perfectly competitive market, with full information, models of the market show that all the factors of production receive rewards equal to their marginal products, ie all are paid what they are worth..."

As in the market, so in life. If everyone had "full information" we'd all be much happier. But because having "full information" is unfeasible it isn't useful to use this as a stick to beat capitalism with.

"...But no actually existing capitalist market system spontaneously generates justice in exchange..."

This is why liberal democracies have (democratically elected) representatives who control the state and who provide justice.

"...That is why the liberal theory of justice demands at a minimum equality of opportunity: the attempt - as far as is compatible with personal liberty - to eliminate all those differences in life chances arising from unequal starting points..."

Sorry, I should read down further before I comment. I agree completely.

"...Finally, the claim that everyone is - under ideal conditions - paid what they are worth is an economic, not a moral, valuation..."

Yes, I agree with this.

"...The simplest way of doing this is to restrict advertising. This would prune the role of greed and envy in the operation of markets, and create room for the flourishing of other motives..."

Governments do restrict advertising. "Re-moralising" wants is an interesting idea. But I don't see how "restricting" advertising accomplishes that.

Promoting morality is a difficult thing to do without being morally puritan and judgmental of other people's pleasures.

I would say that a good step would be to replace "RE" lessons in UK schools with "morality and ethics" lessons where students were taught about different moral and ethical structures and asked to consider moral and ethical problems.