Oliver Kamm

Benefits of immigration

Philippe Legrain writes excellently about globalisation, trade, immigration and the case for European integration, among other subjects. I started corresponding with him almost a decade ago, when he cogently explained to various readerships the role and value of the World Trade Organization, then l'ennemi du jour of a certain type of "progressive" thinking. Philippe has a piece today on Comment is Free, about immigration. I recommend his article and strongly support what he says:

The economic benefits of opening our borders are vast. Just look at cosmopolitan London, the richest place not just in the UK, but in Europe, The social and cultural benefits are huge too, as anyone with a foreign-born parent, partner or friend can testify. Ultimately, migration is about creating an open, dynamic and progressive society, rather than a closed, stagnant and reactionary one.

Britain urgently needs a heavyweight, economically rigorous report into the economics of migration, along the lines of the Stern report on the economics of climate change. The House of Lords report is certainly not it.

The emptiness of authoritarian populism

I wrote recently about the experience of Latin America in the past generation. Much of the continent (Chile is an oustanding example, but far from the only one) has gone from brutal military dictatorship to stable, well-governed constitutional democracy. Parties of the Left have played an important role in that transition. That type of Left is sharply to be distinguished, however, from a stubborn and atavistic political force exemplified in the rule of Hugo Chávez in Venezuela. Chávez is an authoritarian populist who is much closer to the traditions of corrupt military rule than left-of-centre reform.

I'd recommend in this context an interesting article in the current issue of Foreign Affairs entitled "An Empty Revolution: The Unfulfilled Promises of Hugo Chávez" by Francisco Rodríguez, formerly chief economist of the Venezuelan National Assembly. Rodríguez maintains that "Chávez's social policies are inadequate and ineffective", and locates this misrule in a historical context: the populist mismanagement through much of the continent in the 1970s and 1980s. His diagnosis is discouraging:

"Simón Bolívar, Venezuela's independence leader and Chávez's hero, once said that in order to evaluate revolutions and revolutionaries, one needs to observe them close up but judge them at a distance. Having had the opportunity to do both with Chávez, I have seen to what extent he has failed to live up to his own promises and Venezuelans' expectations. Now, voters are making the same realization -- a realization that will ultimately lead to Chávez's demise. The problems of ensuring a peaceful political transition will be compounded by the fact that over the past nine years Venezuela has become an increasingly violent society. This violence is not only reflected in skyrocketing crime rates; it also affects the way Venezuelans resolve their political conflicts. Whether Chávez is responsible for this or not is beside the point. What is vital is for Venezuelans to find a way to prevent the coming economic crisis from igniting violent political conflict. As Chávez's popularity begins to wane, the opposition will feel increasingly emboldened to take up initiatives to weaken Chávez's movement. The government may become increasingly authoritarian as it starts to understand the very high costs it will pay if it loses power. Unless a framework is forged through which the government and the opposition can reach a settlement, there is a significant risk that one or both sides will resort to force."

I hope that a moderate, constitutional Left can make its influence felt. One thing the moderate Left might do in Europe is to make it clear that Hugo Chávez is no hero of ours.

More on Friedman

The economist Paul Ormerod has a provocative short comment on Prospect magazine's web site entitled 'The Fading of Friedman'. He considers the intellectual influence of Milton Friedman relative to J.M. Keynes and Friedrich Hayek:

Keynes and Friedman are bedfellows. Both believed that suitably empowered clever chaps could work out rules of behaviour that would smooth the fluctuations of the business cycle. Friedman came up with the rule of an independent central bank controlling the expansion of money at a fixed rate. Keynes essentially thought that if he and other old Etonians were put in charge, everything would be fine. At the end of the General Theory, he writes, “I conclude that the duty of ordering the current volume of investment cannot safely be left in private hands." But Hayek sharply disagreed. He believed that there are inherent limits to knowledge in human social and economic systems which no amount of intellect can overcome.

Developments in economics are taking the subject in the direction of Hayek rather than Friedman and Keynes. The burgeoning areas of behavioural and experimental economics confirm that, for the most part, decision-makers reason poorly and act intuitively rather than rationally. Theoretical models in which actors have very limited, or even zero, understanding of how their environment operates are having striking success in explaining a wide range of phenomena.

Hayek's 1974 Nobel lecture, 'The Pretence of Knowledge', is a major statement of his belief in the inherent limits to knowledge in political and economic affairs.

Friedman and policy

Of the many obituaries for Milton Friedman, Samuel Brittan's elegant essay in the Financial Times is well worth reading. Also worth reading are two deliberately polemical comments by Richard Adams of The Guardian on the newspaper's Comment is Free site. Adams argues:

The death of Milton Friedman has provoked an outpouring of tributes to one of the modern era's most controversial economists. But given how little success he had in translating his ideas into practice, it is worth asking just what his legacy is. Thanks to his status as a hate figure for the left, many assume that Friedman's agenda was cemented by the Reagan and Thatcher regimes of the 1980s - especially his famous view that inflation is solely influenced by changes in money supply. But few of his most cherished proposals were ever put to the test. Of those that where, such as monetarism, almost all dissolved into failure.

He follows this comment with another post:

Yesterday I posted a blog entry Milton Friedman: a study in failure attempting to assess the direct impact of Milton Friedman on public policy, who died this week. The post sparked a string of interesting debates on the great man's life and works (and whether he was a great man at all). It was fascinating to read the responses to my original piece, which I originally wrote to head off the left-wing bloggers who would surely spring forward to denounce the (in their eyes) malign influence of Friedman. Instead, I argued that his impact didn't really amount to as much as some people thought it did.

Adams is of course not disputing Friedman's intellectual importance or achievements. He is commenting specifically on Friedman's importance for public policymaking. That limited question, and not the content of Friedman's technical work, is the topic of this post too. In my view, Adams has a fair point, but also misses an important point.

While associated with the Reagan and Thatcher 'revolutions', Friedman's influence on public policymaking was concentrated in a particular period - roughly 1979-83 - and was indirect. The most visible aspects of President Reagan's early economic policies were fiscal: cuts in taxes and cuts in spending (except in defence). But the most enduring shift in policy at this time was in monetary policy. This was of course the preserve of the Federal Reserve, under Paul Volcker, rather than the President; under Volcker, policy was deliberately shifted in 1979 to stress stability and countering inflation. Friedman believed that policy still retained too much of a discretionary element, and he was by no means of direct influence in this important political development. John W. Sloan, in his excellent study The Reagan Effect: Economics and Presidential Leadership (1999, p. 241), notes: "The success of Volcker's pragmatic, discretionary monetary policy, as opposed to Friedman's automatic monetary policy, played an indispensable role in supporting Reagan's presidency."

But there is another, and more fundamental respect, in which Friedman influenced public policy. This relates to his discussion of the proper scope of policy, rather than to particular policies that he advocated, and goes back to his influential Essays in Positive Economics, 1953. Friedman argued for the importance of positive economics - questions of what is, rather than value judgements about what ought to be. Value judgements are ultimately irreconciliable, but many policy issues depend on predictions about their effects. Friedman argued that differences over policy (minimum wage laws, for example, or other issues concerning state intervention or regulation) could be narrowed by the study of positive economics. He wrote (p. 5): "I venture the judgment that curently in the Western world ... differences about economic policy among disinterested citizens derive predominantly from different predictions about the economic consequences of taking action ... rather than from fundamental differences in basic values, about which men can ultimately only fight."

Friedman's approach was thus one of scientific method and empirical inquiry, to narrow the ground and reduce the number of issues on which agreement will be impossible. That critical approach is fundamental to the principles of a liberal order. Even for those who do not share Friedman's conservative (or in the American sense, libertarian) political ideals - as I do not - the great economist was thereby an important and intellectually distinguished defender of a free society.

Philippe Legrain

I have added the web site of Philippe Legrain to the side-bar on the right. Philippe is a young economist whom I first corresponded with some years ago after the anti-globalisation riots in Seattle. He has written widely on trade and globalisation, having been special adviser to Mike Moore during Moore's tenure as director-general of the World Trade Organization. Like Moore, a combative trade unionist and former Labour prime minister of New Zealand, Philippe believes - in the words of his excellent book Open World - "globalisation offers a richer life - in the broadest sense - for people in rich countries and the only realistic route out of poverty for the world's poor". He is also an advocate of greater European integration, having been Chief Economist for the ill-fated Britain in Europe campaign.

Philippe's web site carries a number of his articles on these and other subjects, including the monthly column on business, finance and economics that he writes for Prospect magazine. He has also lately added a blog. It makes excellent reading and is well worth following.

Charming but quite misguided

This comment appears in The Times today.

OBITUARIES FOR the late economist John Kenneth Galbraith have recalled his elegant prose and laconic wit. There is more biographical material in those characteristics than in Galbraith’s achievements as a public intellectual.

Even a sympathetic biography published last year concluded with the notably understated encomium — from the Nobel laureate Amartya Sen — that Galbraith’s work “doesn’t get enough praise”. More typical is the judgment of Paul Krugman in the mid-1990s that Galbraith “has never been taken seriously by his academic colleagues, who regard him as more of a ‘media personality’ ”.

Some motifs of Galbraith’s work have entered popular consciousness. Galbraith wrote of private opulence amid public squalor, illustrating it with a memorable metaphor of a family that travels by extravagant private car to picnic by a polluted river.

Yet while arguing for increased public expenditure on welfare, Galbraith gave scant attention to the limits of that approach. His writings perpetuate a debilitating weakness of modern liberalism: a reluctance to acknowledge that resources are scarce. In Galbraith’s scheme, said Herbert Stein, the former chairman of the Council of Economic Advisers: “The American people were only asked whether they wanted cleaner air and water . . . The answers to such questions seemed obvious — but they were not the right questions.”

Galbraith was no prophet. He maintained that the importance of planning augured a convergence of economic systems in the communist East and capitalist West. When writing about the Soviet Union, which exemplified public squalor amid private penury, Galbraith was obtuse. In 1984 he wrote that the “Soviet system has made great economic progress in recent years . . . One can see it in the appearance of solid wellbeing of the people in the streets.” Of China, Galbraith ventured: “Dissidents are brought firmly into line . . . but one suspects with great politeness.” This was shortly after the Cultural Revolution, which was, historians record, not a genteel affair.

J. K. Galbraith lived long, productively and happily. His contentment as public servant and intellectual may be partly attributable to the fact that he was, at the end of his life, almost as politically innocent as he had been at the start of it.

Financial markets, regulation & hedge funds

I have an article in the December issue of Prospect magazine, published today, on financial market regulation and hedge funds. The blurb runs:

The apparent arbitrariness and irrationality of financial markets do not inspire the admiration of liberal-inclined people. But many professionals in the financial markets also accept that there are structural failings in the system. Financial capitalism needs reform if it is to have popular legitimacy, but it needs the right kind of reform. Tighter regulation to constrain footloose capital is mainly a chimera.

The link requires a fee, and I have every expectation that, unless I enter the caveat now, some of my most frequent correspondents on the subject of, e.g., Noam Chomsky will write to me forcefully expressing their views on the value for money that paying for an article by me represents. Fair enough, but Prospect is an excellent publication, and I recommend taking out a subscription here.

Tsunami

Of course, I struggle for anything sensible to say on the awfulness of the deaths – their scarcely-conceivable number and manner – in South-East Asia. But some things are more obviously insensible than others.

One point made in The Times on Friday by Rosemary Righter does strike me as ominously reminiscent of earlier catastrophes and worth stressing. She noted that the British relief agencies – Oxfam specifically – were calling for aid to be channelled through the United Nations. Obviously the best arrangement is for the speediest disbursement of aid consistent with its being done effectively; I can see no particular reason that the UN is the natural vehicle for that, and quite a lot of evidence to the contrary. As Ms Righter says:

[I]t is worse that mindless piety for Oxfam to insist on the UN’s leading role. It is dangerous twaddle because manifestly this massively complex disaster is beyond it.

This isn’t specifically a criticism of the UN, much of whose humanitarian work has managed to escape the more general strictures and scandals of recent years regarding its parent. It is to worry about whether Oxfam has learnt from its failures in the 1980s, most obviously in the Ethiopian famine. Famine, a man-made disaster, is of course not comparable to natural disasters such as storms and earthquakes, but the immediate humanitarian needs of its victims are: sustenance, shelter and the prevention of disease. Oxfam had long taken the position that development was more important than relief, and that position did appreciable harm to its relief efforts in Ethiopia. That isn’t just my view; Tony Vaux, who was the co-ordinator of Oxfam’s global emergency programmes in the 1980s, states:

The idea was revolution through development. This extraordinarily optimistic ideology … became so strong that aid agencies did not turn away from their developmentalist beliefs, even when poor people were suffering from the effects of famine.

The quotation comes from a salutary study of the role of humanitarian organisations A Bed for the Night by David Rieff (son of the critic Susan Sontag, who died last week and was better than you might assume from her well-known absurdities about 9/11, immortalised by Andrew Sullivan's 'Sontag Awards'). Rieff makes a strong case that humanitarian organisations have to remain independent if they are to succeed in what they are uniquely fitted to do, namely alleviating suffering. His argument is politically disinterested and in my view apt. It applies both to cases where humanitarian organisations generally favour military intervention and those where they generally oppose it. Their political judgement may be right or it may be wrong, but it is outside any specialist knowledge that they have and detrimental to the role that they ought to be playing. A particularly dispiriting example of agencies’ promoting a political judgement as a humanitarian one was their call for a bombing pause during the war in Afghanistan, an outcome that would have merely prolonged the rule of a theocratic tyranny that had for years expropriated western aid from its intended beneficiaries. They also issued warnings of a refugee crisis in the event of war in Iraq that were explicitly assimilated into an anti-war case and turned out to be entirely mistaken.

Tony Blair has also called, in his first public statement on the tsunami, for the leading role in aid to be taken by the UN, but Tony Blair is a politician and is thus entitled to play politics. The aid agencies have a different remit and one that they perform on the whole very well: they work much better as emergency relief agencies, operating on a more local and intimate scale than government or international institutions can reach, than they do as development agencies.

A new weblog...

Please check this one, which I'm adding to my links. It's by Chris Tinker, and is called Enquiries in Political Economy.

The late Merton Miller, Nobel economics laureate in 1990, used to lament that whenever he was introduced at parties he would be asked where he thought interest rates were headed. As he had no idea, he would generally try to get the question in first, to the surprise and occasional discomfort of his interlocutor. Chris, however, does offer some interesting thoughts of his own on the subject.

"How the EU is failing" - except it isn't

Stephen Pollard, writing in The Times about the European elections, argues:

[T]here is a pressing issue which goes to the very heart of the European Union: economically, it is failing. Not just in the odd sector or country but across the EU as a whole.

The drive behind the single market was sensible: to create a market so vast that it would dwarf even the United States. Putting that into practice has, however, been a perfect illustration of how the EU is failing. Instead of concentrating on what matters — ensuring that member states’ economies are as competitive as possible — EU leaders have insisted on constitutional reforms dressed up as economic reforms, such as the euro....

Today, the average American spends 77 per cent more on consumption than the average EU citizen — not only because US GDP is higher but also because taxes are about 12 per cent lower. The larger the public sector, the smaller the role of private decision-making and the entrepreneurial spirit which create growth, and the smaller the share of the economy open to competition. With trade across national borders growing all the time, those countries with economies not primed for competition will suffer.

Though Stephen and I occupy a similar position politically on the Left, and while I am no less committed an Atlanticist, I disagree with almost everything he says here. The drive behind the European single market was indeed sensible, but its rationale is not to act as a counterweight to the United States. It isn't about 'competitiveness', and isn't even particularly about trade. Rather it is principally about stimulating economic interdependence and realising the economic benefits of cross-border investment.

To that end, it has clearly been a success. Take just the bilateral European-US relationship. At no time in history has there ever before been an intercontinental economic relationship as vital and entrenched as that between Europe and the United States today. It accounts for $2.5 trillion in economic activity and employs some 12 million workers. It is so fundamental to our living standards that it tends even to be taken for granted amid consideration of more apparently newsworthy issues: diplomatic disagreements over Iraq, or well-publicised but comparatively minor trade disputes.

Other areas of the global economy - such issues as prospects for recovery in Japan, or the potential for integrating Latin America into a free trade area of the Americas - are certainly important in their own right. Yet no issue of international economics compares to the durability and necessity of this one. Looking merely at trade statistics misses the essence of this relationship, which is primarily about investment.

The figures tell their own story. American firms invested some $750 billion of capital overseas in the 1990s; most of it went not to the high-profile emerging markets but to the established industrial economies of Europe. US assets in Germany, at $300 billion in 2000, exceed those in the entire continent of Latin America. Conversely, European firms hold more than two-thirds of total foreign assets in the United States. Europe provides around half of the total foreign profits of the US corporate sector. (All these data come from the Centre for Transatlantic Relations at Johns Hopkins University.)

That relationship is uniquely close in the global economy. It is also frequently characterised incorrectly, with potentially harmful consequences. Stephen's article is a culprit: it is not true - and I'm not even sure I know what it means - to say that what matters is that EU member states' economies be as competitive as possible. Though European and American companies are competitors, America and Europe as economies are not. To present that bilateral economic relationship as adversarial is to misunderstand how a global market economy works.

The essential – indeed unique – feature of a modern liberal economy is that it limits the role of government by maintaining a separate market and civil society. In the 1990s there was much talk among policymakers, on both sides of the Atlantic, about the importance of building national competitiveness for world leadership in the global economy. That was a mistake. As Paul Krugman - in his role as an academic international economist rather than a shrill political polemicist - argued forcefully at the time (in his book Pop Internationalism):

[N]ational living standards are overwhelmingly determined by domestic factors rather than by some competition for world markets.

The notion that nations should aim at international competitiveness can lead to some fundamentally misconceived economic priorities. If the task of the EU is seen as being about competing economically, then the implication is that the European Commission should intervene aggressively, by subsidy to European industries or tariffs against foreign ones, in order to promote exports and gain market share. That way lies a lot of preventable damage to living standards on both sides of the Atlantic.

Stephen is a free-trader, and knows that international trade is not a zero-sum game, with relative winners and relative losers. It is an activity in which all sides benefit through being enabled to specialise. Likewise, investment – provided it is undertaken according to commercial criteria rather than considerations of national prestige – benefits both the investor, looking to maximise his expected risk-adjusted return, and the borrower seeking to deploy capital productively. The theory is borne out by the facts. The sheer volume of data on foreign direct investment, and to a much lesser extent trade, demonstrate that the global economy is not about national or continental competition. It is instead about a common enrichment through increasing interdependence.

Most of Stephen's strictures about European economic performance are either inapt or mistaken. He subscribes to the stereotype that whereas the US economy is geared to profit-maximisation and competition, the (continental) European economy is ossified because it stresses other goals such as stability of employment and social considerations. That's a severe over-simplification. The comparative dynamism of the US economy in long-run growth rates owes much to demographic trends; growth in per capita GDP in Europe and the US over the past 30 years is fairly comparable.

Moreover, to the extent that the stereotype is true, it is being eroded on the European side. Contrary to Stephen's ready dismissal of the euro as a constitutional rather than an economic issue, monetary union has already proved important in that process, by encouraging greater breadth, depth and transparency in financial markets in Europe. Look in particular at the expansion of the pan-European debt market. It's possible that some of my readers dispute that there is a link between capital market efficiency and economic performance, but Stephen isn't one of them.

These are the facts. You don't need to be an admirer of France and Germany's current political masters, or even a supporter of British entry into the euro, to acknowledge them. (For the record, I think the economic arguments for Britain's entry are inconclusive; I discussed them here.) I agree with Stephen that the European election campaign has been an inglorious one, but it would help if sensible people on the moderate Left and the moderate Right dealt with the EU as it is and not as the political parties' propaganda would like it to be.