Going South

They've helped bail out southern weaklings. Now Europe's northern countries may be doomed too.

BY MOHAMED A. EL-ERIAN 

How about this for irony: Remember the solid, strong economies of Northern Europe, the ones that signed up for one bailout after another of their less well-off brethren to the south? Remember how, together with the guiding hand of the European Central Bank (ECB), they pulled the eurozone back from the brink of disaster? Not so fast. Now it's their turn to feel economic pressure, meaning they could soon risk going from being part of the solution to being part of the problem. That should be of interest to markets around the world.

This is exactly what's happening in Europe today. And it speaks to a phenomenon captured brilliantly decades ago by John Maynard Keynes, the famous British economist, who observed: "If you owe your bank a hundred pounds, you have a problem. But if you owe a million, it has."

At the outset of the eurozone debt crisis more than three years ago, everyone looked to a group of AAA-rated countries (Austria, Finland, France, Germany, Luxembourg, and the Netherlands) to anchor the European ship and throw life preservers to the struggling peripheral countries (initially Greece, Ireland, and Portugal). Their intervention was to be surgical, temporary, and reversible. They were to commit to direct lending, and they were to support additional funding from regional organizations like the ECB. And they were to do so combined with cleverly designed incentives to encourage the weaker countries to reform and, so the plan went, regain economic and financial strength.

That was, at least, the widely telegraphed intention, one that was critical to securing sufficient political and popular buy-in among the skeptical citizens of Germany and its rich neighbors. Three years later, the reality is different.

Although you might not know it from reading the newspapers, the situation in Europe remains worryingly fragile. Yes, financial markets have been calmed substantially by the "whatever-it-takes" commitment of the ECB. But underlying economic conditions continue to deteriorate at a worrisome pace. Every month Europe's stronger economies are getting pulled deeper and deeper into a crisis they neither can control nor have fully explained to their citizens.

In the coming months, Germany and others will feel forced yet again to make additional loans -- this time knowing that they will not be repaid in full. They will see their economies disrupted by a more generalized slowdown in the European trading bloc. And when these events inevitably collide, the underpinnings of the current regional economic integration, including the effectiveness and credibility of the European Union itself, will again be at risk.

What Bill Gates Got Wrong About Why Nations Fail

Did the Microsoft founder even read our book before he criticized it?

BY DARON ACEMOGLU , JAMES ROBINSON 

Our recent book, Why Nations Fail: The Origins of Power, Prosperity, and Poverty, received the harshest reviews from those who see geography and culture as the root causes of poverty, and enlightened leaders -- or even more enlightened outside donors and organizations -- as the keys to economic development. Perhaps unsurprisingly, given his dedication to international aid, billionaire foundation chief Bill Gates falls into this category: His Feb. 26 review of our book was particularly uncharitable. Unfortunately, however, it was also dead wrong on many counts.

Gates's review is disappointing, but not just because he disagrees with us. As academics, we expect that. Research is all about arguing and contradicting, finding new pieces of evidence, developing new concepts and perspectives, and getting closer to the truth. Alas, Gates fails in this endeavor. His inability to understand even the most rudimentary parts of our thesis means that his review fails to invite constructive argument. Nonetheless, we feel compelled to respond because of the undue attention the review has generated.

To start with, Gates makes some pretty baffling statements about our book, such as his assertion that "important terms aren't really defined." Actually, all of the major concepts we use in the book are defined; one just needs to read the book. Other assertions demonstrate not only that Gates is unfamiliar with the academic literature, which is understandable, but that he actually did not bother to consult the bibliographic essay and the references at the end. He writes, "The authors ... attribute the decline of Venice to a reduction in the inclusiveness of its institutions. The fact is, Venice declined because competition came along ... Even if Venice had managed to preserve the inclusiveness of their institutions, it would not have made up for their loss of the spice trade."

This is just bad history. Venice didn't decline because of the loss of the spice trade. If that were the case, the decline should have started at the very end of the 15th century. But the decline was already well underway by the middle of the 14th century. More generally, research by Diego Puga and Daniel Trefler shows that Venice's fortunes had nothing to do with competition or the spice trade.

Likewise, Gates seems to think that the Maya declined because of the "weather." Though there is certainly scholarly dispute over why Maya civilization decayed, to our knowledge no reputable scholar argues that it was due to the weather. Instead, most scholars emphasize the role of inter-city warfare and the collapse of Mayan political institutions. Nor does the book, as Gates would have it, "overlook the incredible period of growth and innovation in China between 800 and 1400." We discuss that period, and explain why it didn't translate into sustained economic growth (see Chapter 8, in particular, pp. 231-234).

Intellectuals and Race

Street corner demagogue nonsense

By Thomas Sowell

There are so many fallacies about race that it would be hard to say which is the most ridiculous. However, one fallacy behind many other fallacies is the notion that there is something unusual about different races being unequally represented in various institutions, careers or at different income or achievement levels.

A hundred years ago, the fact that people from different racial backgrounds had very different rates of success in education, in the economy and in other endeavors, was taken as proof that some races were genetically superior to others.

Some races were considered to be so genetically inferior that eugenics was proposed to reduce their reproduction, and Francis Galton urged "the gradual extinction of an inferior race."

It was not a bunch of fringe cranks who said things like this. Many held Ph.D.s from the leading universities, taught at the leading universities and were internationally renowned.

Presidents of Stanford University and of MIT were among the many academic advocates of theories of racial inferiority -- applied mostly to people from Eastern and Southern Europe, since it was just blithely assumed in passing that blacks were inferior.

This was not a left-right issue. The leading crusaders for theories of genetic superiority and inferiority were iconic figures on the left, on both sides of the Atlantic.

John Maynard Keynes helped create the Cambridge Eugenics Society. Fabian socialist intellectuals H.G. Wells and George Bernard Shaw were among many other leftist supporters of eugenics.

It was much the same story on this side of the Atlantic. President Woodrow Wilson, like many other Progressives, was solidly behind notions of racial superiority and inferiority. He showed the movie "Birth of a Nation," glorifying the Ku Klux Klan, at the White House, and invited various dignitaries to view it with him.

Such views dominated the first two decades of the 20th century. Now fast forward to the last few decades of the 20th century. The political left of this era was now on the opposite end of the spectrum on racial issues. Yet they too regarded differences in outcomes among racial and ethnic groups as something unusual, calling for some single, sweeping explanation.

Global outlook rosy; Europe's outlook grim

We are copying the Ming empire

By Matt Ridley
A "rational optimist" like me thinks the world will go on getting better for most people at a record rate, not because I have a temperamental or ideological bent to good cheer but because of the data. Poverty, hunger, population growth rates, inequality, and mortality from violence, disease and weather - all continue to plummet on a global scale.

But a global optimist can still be a regional pessimist. When asked what I am pessimistic about, I usually reply: bureaucracy and superstition. Using those two tools, we Europeans seem intent on making our future as bad as we can. Like mandarins at the court of the Ming emperors or viziers at the court of Abbasid caliphs, our masters seem determined to turn relative into absolute decline. It is entirely possible that ten years from now the world as a whole will be 50 per cent richer, but Europeans will be 50 per cent poorer.

Not that the world economy is a zero-sum game. It is a good thing if Africans and Latin Americans join Asians in getting richer at breakneck pace, as many now seem to be doing, even if we don't join in: not only because want and misery are bad whoever they happen to, but also because if others grow productive and inventive they can supply us with valuable goods and services. Why should the development of new antibiotics or thorium nuclear power remain a burden exclusively on the shoulders of Western taxpayers?

Even so, relative decline can be painful. Spanish people are richer and live longer than when their silver-sated conquistador ancestors strutted the European stage, but I am sure it does not feel like it to an unemployed youth in Bilbao. Whatever happens, we Europeans will probably have to get used to watching Asians book the best restaurants and launch the biggest aircraft carriers in the years ahead.

Absolute decline is far more scary. If Europe cannot rediscover how to grow its economy, then it will have to default on its vast debts, either directly or by inflation. Either way savers will be poorer, tax receipts will be lower and spending on schools and hospitals and roads will be lower: genuine austerity.

As the MP Douglas Carswell reminds us in his book The End of Politics, here in Britain we have public and private debts that are five times our annual economic output; we are spending £46 out of every £100 we earn to buy government - a product that, unlike most, delivers less output for more cost each year. As the Ming empire found out, the more government you buy, the less economic activity you get. A Fujian travelling salesman in 1400 was enmeshed in such a tangled bureaucracy that he could neither travel nor sell without bribes and permits, and he had to submit a monthly inventory of his stocks to the emperor.

Sound familiar? Every small businessman I talk to these days has a horror story to tell about the delays and costs that have been visited upon him by planners, inspectors, officials and consultees. Using the excuse of "cuts", the bureaucracy is taking even longer to make decisions than five years ago. In the time it has taken Britain's Government to decide whether to allow a fifth exploratory shale gas well to be drilled in Lancashire, and from the same standing start, the same investors have drilled 72 producing wells in Argentina. That the country of Watt and Stephenson should look a potential cheap-energy gift horse in the mouth in this way is staggering to this jaded optimist.

Green Cars Have a Dirty Little Secret

Producing and charging electric cars means heavy carbon-dioxide emissions

By Bjorn Lomborg

Electric cars are promoted as the chic harbinger of an environmentally benign future. Ads assure us of "zero emissions," and President Obama has promised a million on the road by 2015. With sales for 2012 coming in at about 50,000, that million-car figure is a pipe dream. Consumers remain wary of the cars' limited range, higher price and the logistics of battery-charging. But for those who do own an electric car, at least there is the consolation that it's truly green, right? Not really.

For proponents such as the actor and activist Leonardo DiCaprio, the main argument is that their electric cars—whether it's a $100,000 Fisker Karma (Mr. DiCaprio's ride) or a $28,000 Nissan Leaf—don't contribute to global warming. And, sure, electric cars don't emit carbon-dioxide on the road. But the energy used for their manufacture and continual battery charges certainly does—far more than most people realize.

A 2012 comprehensive life-cycle analysis in Journal of Industrial Ecology shows that almost half the lifetime carbon-dioxide emissions from an electric car come from the energy used to produce the car, especially the battery. The mining of lithium, for instance, is a less than green activity. By contrast, the manufacture of a gas-powered car accounts for 17% of its lifetime carbon-dioxide emissions. When an electric car rolls off the production line, it has already been responsible for 30,000 pounds of carbon-dioxide emission. The amount for making a conventional car: 14,000 pounds.

While electric-car owners may cruise around feeling virtuous, they still recharge using electricity overwhelmingly produced with fossil fuels. Thus, the life-cycle analysis shows that for every mile driven, the average electric car indirectly emits about six ounces of carbon-dioxide. This is still a lot better than a similar-size conventional car, which emits about 12 ounces per mile. But remember, the production of the electric car has already resulted in sizeable emissions—the equivalent of 80,000 miles of travel in the vehicle.

So unless the electric car is driven a lot, it will never get ahead environmentally. And that turns out to be a challenge. Consider the Nissan Leaf. It has only a 73-mile range per charge. Drivers attempting long road trips, as in one BBC test drive, have reported that recharging takes so long that the average speed is close to six miles per hour—a bit faster than your average jogger.

Keeping tribes in cultural formaldehyde

India’s Supreme Court is right to reject a Western-led bid to keep the Jarawa people isolated from everybody else

by Patrick Hayes 

Why would a UK national newspaper join forces with a Western campaign group to try to close a road thousands of miles away on a small Indian archipelago, the Andaman Islands – a road which allows over 100,000 people to access vital medical services?

For the 105,000 residents of the North and Middle Andaman districts, spread over 400 villages from Diglipur to Baratang, the Great Andaman Trunk Road provides indispensable access to the islands’ capital, Port Blair. The road, which opened in the 1980s, is a vital trade and communications route for locals, and crucially allows them to make road journeys to the only government hospital on the island. Without the road, many such journeys would have to be made by sea instead.

But the wishes of tens of thousands of local inhabitants pale in comparison to those of London-based campaign group Survival International (SI) and the Observer newspaper. As the self-appointed guardians of the ancient Jarawa tribe, thought now to number between 250 and 400 people, SI and the Observer complain that the road passes through the Jarawa tribal reserve.

The Jarawa reserve is over 1,000 square kilometres - over 12 per cent of the land area of the Andaman and Nicobar Islands, despite Jarawa making up a mere 0.1 per cent of the island’s population. Since the opening of the road, many Jarawa have chosen to cluster around it, receiving gifts and food from the locals. This has led to some unsavoury incidents, one of which was recorded on video when an off-duty local policeman was filmed goading Jarawa tribeswomen to dance for food to please visiting tourists (reported in the Observer last year).

In January this year, the Indian Supreme Court responded to what the Observer dubbed ‘domestic and international pressure’ and partially closed the Andaman Trunk Road, preventing any tourists from accessing the area. Traffic levels reportedly fell by two thirds; even before that, only eight convoys of cars were permitted to pass through each day. The Observer, which had written a series of campaigning articles supporting the closure of the road, gushed: ‘For the first time in a generation, members of the tribe are able to wander through their jungle safe from the prying eyes of the tens of thousands of tourists who travel to the islands in the Bay of Bengal every year to view them.’ SI, meanwhile, hailed the decision to partially close the road as a ‘victory’.

Bizarre Lagardonomics

The Joys of Inflation – Apparently No-One is Safe

Hello everyone, listen up, I had this really splendid idea …

by Pater Tenebrarum

If the papers and sell-side analysts can call the inflationism propagated by Shinzo Abe 'Abenomics', we feel free to call similar policy proposal from the IMF's Mrs. Lagarde 'Lagardonomics'. If we have a free-for-all in which everybody gets to make up his own economic laws on the go, we should probably make clear that this is the situation now.
Mrs. Lagarde heads a vast bureaucracy that would not even exist in an unhampered free market economy and frequently pipes up with her latest epiphanies. She has done so once again last week by making her most recent recommendation for euro area monetary policy public. It is based on the absurd theory (occasionally seen propagated in the editorial pages of the Financial Times, which is per se proof positive of its quackery status) that the best way to make the situation in euro-land as a whole better, is to make the situation in Germany worse.

According to a Reuters report:

“The euro zone may need higher inflation in countries like Germany and lower interest rates across the bloc to ensure a sustained economic recovery brings palpable benefits, the head of the IMF said on Friday.

Speaking during a visit to bailed-out Ireland, Christine Lagarde said while Europe had come a long way since last summer and financial anxieties have eased somewhat, more needed to be done to deal with "depressingly familiar" underlying issues.

Reiterating a call in January for the European Central Bank to keep its monetary policy easy, the former French finance minister said there was room for a further cut after Frankfurt kept rates at 0.75 percent this week.

"Monetary policy should remain accommodative, and we believe that there is still some limited room for the ECB to cut rates further," Lagarde said in remarks prepared for a speech delivered in front of an audience that included Ireland's representative on the ECB governing council, Patrick Honohan.

"Restoring a sense of balance means lower inflation and wage growth in the south (of the euro zone), but it also might mean allowing somewhat higher inflation and wage growth in countries like Germany. This too is an aspect of pan European solidarity."

The Global Endgame

Is pushing consequence forward the same as eliminating consequence? We will find out at some point in the near future.

by Charles Smith

This chart of the modern credit cycle, which examines the Cycle of Deflation through the lens of financialization:

The key point is that the entire global economy is in the final stages of the "winter" cycle of credit destruction and collapse of phantom collateral. 

Let's start with the 14 points:

1. "Boost Phase" of Credit Expansion 2. Overextended Credit Expansion and Over Capacity 3. Financialization and Collateral 4. Era of Financialization 5. Growing Malinvestment 6. Phantom Collateral from Asset Bubbles 7. Bubble Implosions 8. Impaired Debt and Policy Decisions 9. Stalled Consumption 10. Cheap Money Offered 11. Shrinking Loans and Bank Speculation 12. Search for Yield from Shrinking Pool of Productive Assets 13. Increasingly Speculative Investments with high Risk 14. Stagnation: Over-indebted, overcapacity with limited growth

The key dynamics here are debt saturation and diminishing returns: 

piling on more debt (i.e. borrowing more money) to stimulate spending only leads to fantastic excesses of speculation and mal-investment: $70,000 biopsies, $200 million fighter aircraft, $200,000 bachelor's degrees, McMansions in the middle of nowhere, and so on.

The actual yield on all that borrowed money keep falling: ever-larger sums are borrowed and spent, but there are fewer jobs created and ever-diminishing returns of value created.

Even though central banks are holding interest rates near zero to enable governments to borrow vast sums, substituting debt expansion for actual value creation eventually leads to debt-serfdom as interest payments start crowding out all other spending.

All too soon governments and households alike are borrowing more just to pay the interest on the mountain of existing debt. This is the inevitable result of incentivizing credit expansion and speculation.

The central banks are attempting to nullify the cycle of credit expansion and destruction by buying much of the sovereign debt being issued by profligate, hopelessly insolvent governments. Left to the open market, interest rates would rise as the risk of massive debt expansion becomes undeniable.

Eventually, higher rates would pinch off borrowing or trigger default.

The central banks are playing an unprecedented game: suppressing interest rates by expanding their balance sheets, i.e. creating money, and buying vast quantities of government bonds.

This has given government leaders a free hand to keep borrowing more to avoid any politically painful limits on substituting debt for tax revenues. The expansion of central bank balance sheets is apparently painless and apparently consequence-free. So what if the Fed expands its balance sheet from $3 trillion to $30 trillion as it enables the debt-junkies to keep borrowing without limits?

Is pushing consequence forward the same as eliminating consequence? We will find out at some point in the near future: perhaps 2015, perhaps 2021. 

How Social Darwinism Made Modern China

A thousand years of meritocracy shaped the Middle Kingdom

By RON UNZ

During the three decades following Deng Xiaoping’s 1978 reforms, China achieved the fastest sustained rate of economic growth in human history, with the resulting 40-fold rise in the size of China’s economy leaving it poised to surpass America’s as the largest in the world. A billion ordinary Han Chinese have lifted themselves economically from oxen and bicycles to the verge of automobiles within a single generation.

China’s academic performance has been just as stunning. The 2009 Program for International Student Assessment (PISA) tests placed gigantic Shanghai—a megalopolis of 15 million—at the absolute top of world student achievement.¹ PISA results from the rest of the country have been nearly as impressive, with the average scores of hundreds of millions of provincial Chinese—mostly from rural families with annual incomes below $2,000—matching or exceeding those of Europe’s most advanced and successful countries, such as Germany, France, and Switzerland, and ranking well above America’s results.²

These successes follow closely on the heels of a previous generation of similar economic and technological gains for several much smaller Chinese-ancestry countries in that same part of the world, such as Taiwan, Hong Kong, and Singapore, and the great academic and socioeconomic success of small Chinese-descended minority populations in predominantly white nations, including America, Canada, and Australia. The children of the Yellow Emperor seem destined to play an enormous role in Mankind’s future.

Although these developments might have shocked Westerners of the mid-20th Century—when China was best known for its terrible poverty and Maoist revolutionary fanaticism—they would have seemed far less unexpected to our leading thinkers of 100 years ago, many of whom prophesied that the Middle Kingdom would eventually regain its ranking among the foremost nations of the world. This was certainly the expectation of A.E. Ross, one of America’s greatest early sociologists, whose book The Changing Chinese looked past the destitution, misery, and corruption of the China of his day to a future modernized China perhaps on a technological par with America and the leading European nations. Ross’s views were widely echoed by public intellectuals such as Lothrop Stoddard, who foresaw China’s probable awakening from centuries of inward-looking slumber as a looming challenge to the worldwide hegemony long enjoyed by the various European-descended nations.

It’s Not John McCain’s GOP Anymore

By PATRICK J. BUCHANAN
Last Wednesday, Sen. Rand Paul rose on the Senate floor to declare a filibuster and pledge he would not sit down until either he could speak no longer or got an answer to his question about Barack Obama’s war powers.
Does the president, Paul demanded to know, in the absence of an imminent threat, have the right to order U.S. citizens killed by drone strike on U.S. soil?
By the time he sat down, 13 hours later, Paul had advanced to the front rank of candidates for 2016, and established himself as a foreign policy leader whose views must be consulted equally with those of John McCain.
How did he pull this off?
First, Attorney General Eric Holder arrogantly refused to rule out the possibility that President Obama could order execution by drone-strike of U.S. citizens, even here in the United States.
When Rand demanded to know what Holder was talking about, all across America people tuned in.
Here was a deadly serious issue: had we, in our determination to prosecute the war on terror ferociously, begun to sacrifice our constitutionalist rights?
Libertarians, conservatives, and liberals have all grown alarmed at the steady expansion of drone attacks from the Af-Pak to Yemen and Somalia and Lord knows where else, and from bin Laden jihadists in Afghanistan to Islamist propagandists like Anwar al Awlaki and his 16-year-old son, both U.S. citizens, in Yemen.
Whom do we have a right to kill? Americans are asking. What are the borders of the battlefield upon which we may designate an individual an enemy and kill him without warning?
Has America become part of that battlefield? Paul asked.

The 1984 Playbook Has Arrived

U.S. Air Force Deletes Drone Strike Data

by Mike Krieger

If you recall, Winston Smith’s job in George Orwell’s classic novel 1984 was to go into historical records and literally change history.  He would alter photographs and text in the archives so that history would always portray “The Party” in a positive light and as omniscient.  Well folks, this behavior has arrived in America and we better nip it in the bud fast before one of these drones is flying right over our heads.  From the Air Force Times:

As scrutiny and debate over the use of remotely piloted aircraft (RPA) by the American military increased last month, the Air Force reversed a policy of sharing the number of airstrikes launched from RPAs in Afghanistan and quietly scrubbed those statistics from previous releases kept on their website.

Last October, Air Force Central Command started tallying weapons releases from RPAs, broken down into monthly updates. At the time, AFCENT spokeswoman Capt. Kim Bender said the numbers would be put out every month as part of a service effort to “provide more detailed information on RPA ops in Afghanistan.”

The Air Force maintained that policy for the statistics reports for November, December and January. But the February numbers, released March 7, contained empty space where the box of RPA statistics had previously been.

Additionally, monthly reports hosted on the Air Force website have had the RPA data removed — and recently.

On Sunday, U.S. Central Command said in a statement that the decision was made to remove the statistics because the data disproportionately places emphasis on the airstrikes. The majority of the RPA missions are for intelligence, surveillance and reconnaissance, with a small percent involving airstrikes.

The data removal coincided with increased scrutiny on RPA policy caused by President Obama’s nomination of John Brennan to head the CIA. Brennan faced opposition in the Senate over the use of RPAs and his defense of their legality in his role as Obama’s deputy national security adviser.

Nothing to see here folks, move along.  Literally. Full article here.

Crackpot Central Bankers Are Destroying Society

Would the real Peter and Paul please stand up?

By Dylan Grice

In a previous life as a London-based ‘global strategist’ (I was never sure what that was) I was known as someone who was worried by QE and more generally, about the willingness of our central bankers to play games with something which I didn’t think they fully understand: money. This may be a strange, even presumptuous thing to say. Surely of all people, one thing central bankers understand is money?

They certainly should understand money. They print it, lend it, borrow it, conjure it. They control the price of it… But so what? What should be true is not necessarily what is true, and in the topsy-turvy world of finance and economics, it rarely is. So file the following under “strange but true”: our best and brightest economists have very little understanding of economics. 

Take the current malaise as prima facie evidence.

Let me illustrate. Of the many elemental flaws in macroeconomic practice is the true observation that the economic variables in which we might be most interested happen to be those which lend themselves least to measurement. Thus, the statistics which we take for granted and band around freely with each other measuring such ostensibly simple concepts as inflation, wealth, capital and debt, in fact involve all sorts of hidden assumptions, short-cuts and qualifications. So many, indeed, as to render reliance on them without respect for their limitations a very dangerous thing to do. As an example, consider the damage caused by banks to themselves and others by mistaking price volatility (measurable) with risk (unmeasurable). Yet faith in false precision seems to us to be one of the many imperfections our species is cursed with.

One such ‘unmeasurable’ increasingly occupying us here at Edelweiss is that upon which all economic activity is based: trust. Trust between individuals, between strangers, between organisations… trust in what people read, and even people’s trust in themselves. Let’s spend a few moments elaborating on this.

First, we must understand the profound importance of exchange. To do this, simply look around you. You might see a computer monitor, a coffee mug, a telephone, a radio, an iPad, a magazine, whatever it is. Now ask yourself how much of that stuff you’d be able to make for yourself. The answer is almost certainly none. So where did it all come from? Strangers, basically. You don’t know them and they don’t know you. In fact virtually none of us know each other. Nevertheless, strangers somehow pooled their skills, their experience and their expertise so as to conceive, design, manufacture and distribute whatever you are looking at right now so that it could be right there right now. And what makes it possible for you to have it? Exchange. To be able to consume the skills of these strangers, you must sell yours. Everyone enters into the same bargain on some level and in fact, the whole economy is nothing more than an anonymous labor exchange. Beholding the rich tapestry this exchange weaves and its bounty of accumulated capital, prosperity and civilization is a marvelous thing.

But we must also understand that exchange is only possible to the extent that people trust each other: when eating in a restaurant we trust the chef not to put things in our food; when hiring a builder we trust him to build a wall which won’t fall down; when we book a flight we entrust our lives and the lives of our families to complete strangers. Trust is social bonding and societies without it are stalked by social unrest, upheaval or even war. Distrust is a brake on prosperity, because distrust is a brake on exchange.

But now let’s get back to thinking about money, and let’s note also that distrust isn’t the only possible brake on exchange. Money is required for exchange too. Without money we’d be restricted to barter one way or another. So money and trust are intimately connected. Indeed, the English word credit derives from the Latin word credere, which means to trust. Since money facilitates exchange, it facilitates trust and cooperation. So when central banks play the games with money of which they are so fond, we wonder if they realize that they are also playing games with social bonding. Do they realize that by devaluing money they are devaluing society?

To see the how, first understand how monetary policy works. Think about what happens in the very simple example of a central bank’s expanding the monetary base by printing money to buy government bonds.

That by this transaction the government has raised revenue for the government is obvious. The government now has a greater command over the nation’s resources. But it is equally obvious that no one can raise revenue without someone else bearing the cost. To deny it would imply revenues could be raised for free, which would imply that wealth could be created by printing more money. True, some economists, it seems, would have the world believe there to be some validity to such thinking. But for those of us more concerned with correct logical practice, it begs a serious question. Who pays? We know that this monetary policy has redistributed money into the government’s coffers. But from whom has the redistribution been?

The simple answer is that we don’t and can’t know, at least not on an amount per person basis. This is unfortunate and unsatisfactory, but it also happens to be true. Had the extra money come from taxation, everyone would at least know where the burden had fallen and who had decreed it to fall there. True, the upper-rate tax payers might not like having a portion of their wealth redirected towards poorer members of society and they might not agree with it. Some might even feel robbed. But at least they know who the robber is.

Let’s rip up the Human Rights Act

This act that treats humans as fragile creatures who lack autonomy should be dumped in the dustbin of bad ideas

by Barbara Hewson 

UK justice secretary Chris Grayling’s call for the repeal of the Human Rights Act 1998 has led to claims that he is betraying British values, and damaging Britain’s reputation abroad. But it is time for a grown-up debate about what, exactly, this piece of legislation has done to enhance our civil liberties and fundamental freedoms.

The public, who are not stupid, look askance at a statute which requires judges to block the deportation of those who are said to pose a risk to national security, or of criminals who invoke a right to family life. While not au fait with the arcane legal detail in these decisions, they have an uneasy sense of a prevailing misuse of the language of rights.

A number of respectable commentators are rights-sceptic, for reasons that deserve proper consideration, instead of being dismissed as heretical. In 2010, the economist John Kay penned a withering op-ed for the Financial Times, entitled ‘Not all rights should be defended to the death’, in which he spoke of the degradation of rights:

‘Confusing rights with things that are desirable is not harmless. In the past decade, we have seen the wider and wider use of the language of rights combined with a significant erosion of traditional and truly fundamental rights… The extravagant assertion of “human rights” by lawyers chasing briefs has created an environment in which many people treat the phrase with cynicism or even amusement. The misuse of the language of rights undermines the status of all rights. We should create rights sparingly, and defend them tenaciously.’

A fundamental problem with the prevailing culture of ‘rights’ is that they are not really rights at all, but a tool of social control: a far cry from civil liberties, as traditionally understood. They could not be more different from the Common Law concept of individual liberty promoted by the authors of the American Constitution, for whom government was a means of securing that liberty.

The Common Law is founded on two key concepts: the Lockean notion of ‘property’ (meaning ‘lives, liberties and estates’), and contract, whereby people come together legitimately. The Common Law approach is that people are born free, and the powers of government derive from the consent of the governed (1).

As Professor David Chandler explains: ‘For the founders of political and civil-rights theory, rights could only be guaranteed by the subjects of the rights themselves. If it could not be protected, or exercised, by its bearers, then it could no longer be a right, an expression of self-government. Democratic rights theorists developed this concept of the active and self-determining subject of rights in opposition to pre-modern hierarchical conceptions of rights as privileges bestowed on the deserving from above.’ (2)

An unspoken war on the Common Law

It’s time for a fightback

England’s rights-respecting Common Law is being shunted aside by new forms of arbitrary, inquisitorial power

by Josie Appleton 

For centuries, jurists have argued that the English Common Law is the best for liberty. In the fifteenth century, the judge Sir John Fortescue wrote that English law is ‘not only good but the best’ (1), contrasting the public jury trial of the English court with the torture-ridden, summary and secret proceedings on the Continent. In the 1700s, jurist William Blackstone argued that while Continental law fomented ‘arbitrary and despotic power’, the Common Law preserved the liberty of ‘even the meanest subject’ (2).

This wasn’t just national vanity; the French agreed. Montesquieu held England up as the ‘one nation in the world which has political liberty as the supreme object for its constitution’ (3), while Voltaire wrote that ‘the English are the only people on earth who have been able to prescribe limits to the power of kings by resisting them’ (4).

How times have changed. The realm of the Common Law abounds with laments about the loss of ‘fundamental freedoms’ and ‘age-old liberties’. In The Assault on Liberty, barrister and MP Dominic Raab identified a ‘tectonic shift in the relationship between the state and the citizen’, which is ‘inflicting lasting damage on the very bedrock of what it means to be British’. Conservative MP David Davis resigned his Commons seat in protest against the ‘insidious, surreptitious and relentless erosion of fundamental British freedoms’.

Our Common Law cousins in America complain of the same problem. In The Tyranny of Good Intentions, Paul Craig Roberts and Lawrence M Stratton chart the steady ‘erosion of the rights of Englishmen’ on American soil (5). While law once provided protection for the individual against the arbitrary power of the state, they argue, law now furnishes a weapon for the powerful to use as they please. In The Collapse of American Criminal Justice, William J Stuntz says the rule of law has ‘collapsed’: ‘Official discretion rather than legal doctrine or juries’ judgements came to define criminal justice outcomes.’ (6)

Indeed, we have reached the situation where British citizens arguably now find themselves with fewer legal protections than their Continental peers against the arbitrary power of the state, which would have been unthinkable to the likes of Blackstone or Montesquieu. What befell the Common Law?

Bypassing the court

One major shift has been a bypassing of the court, in favour of various forms of summary or concessionary justice. This is an historic change: Blackstone described trial by jury as ‘the glory of English law’, and the public jury trial became the primary form of trial in the twelfth century, a time when Continental Europe was developing an inquisitional system based on the free use of torture. Medieval English courts enjoyed significant popular legitimacy, and people were accustomed to ‘go to the law’ to defend their rights (7).

Yet now, in both Britain and America, the justice system is increasingly geared towards avoiding the court at all costs. In America the impartial jury trial has become a rarity, with some 95 per cent of criminal cases decided in advance by plea bargaining (where the defence agrees to plead guilty, and avoid a trial, in exchange for concessions). As Roberts and Stratton outline, the legal process becomes a stitch-up between defence and prosecution, and the court appearance a mere formality. Innocent defendants may be pressured to settle, and indeed the innocent sometimes ‘roll a lot easier’ than the guilty. Meanwhile, guilty defendants may confess to a more minor offence to avoid more serious charges, which amounts to ‘having people admit to what did not happen in order to avoid charges for what did happen’.

In the UK, out-of-court penalties such as on-the-spot fines (Penalty Notices for Disorder, PNDs), cautions and cannabis warnings have risen to nearly half of all offences ‘brought to justice’. As Dominic Raab outlines, the official issuing the penalty becomes prosecutor, judge and jury: ‘The explicit aim is to short-circuit the entire court process by allowing the police or council officials to investigate, prosecute, try and punish criminal offences – without any judicial check or consideration.’

There is a clear inducement to accept the fine or caution rather than go to trial. The fine is offered as a simple, no-risk payment (‘you can pay in three easy steps’), while the court is used primarily as a threat: ‘If you fail to pay… your PND… the fine will increase by 50 per cent and you may be charged with the offence for which the notice had been issued. If you don’t pay the PND… you may have to pay additional bailiff’s fees or you may be arrested. If you are charged and convicted you will receive a criminal record and may have to pay court costs in addition to any fine imposed. You may also be given a custodial sentence.’

Again, it is possible that the innocent but thin-skinned will pay up or accept a caution. Raab says, ‘For an individual threatened with such a penalty, the incentive to avoid a criminal record and a heavier fine, or even prison, exerts heavy pressure to accept the fine – irrespective of guilt – rather than challenge it in court, which undermines the most basic principles of due process.’

The court is presented not as the site of justice, but as a place where the coercive powers of the state will be used against you. This presentation of the legal process is more familiar in developing countries, where officials threaten: ‘Just pay us and we will make this issue go away - it will be much harder on you if you don’t cooperate….’

Roberts and Stratton describe the plea-bargain system as ‘the return of torture’, in that its primary function is to persuade the defendant into a guilty plea. There may be no rack or thumb screws, but prosecutors exert very low forms of pressure, such as threatening to indict family members if the defendant fails to cooperate.

This is a novel turn for the Common Law. It was the Continental Inquisition which sought confessions above all else, with judges set against the defendant with the sole aim of breaking them; their confession was also a form of penitence. By contrast, Roberts and Stratton note that historically English justice was suspicious of guilty pleas, which were seen as a possible sign of undue pressure in custody, or somebody taking the fall for somebody else. English judges and juries preferred the proof of evidence in court to the defendant falling on the floor in confession. Now, the lands of Common Law prefer to get their confession in police cells or on the street, without the bother even of going to court.

The criminalisation of everything

The Common Law definition of crime required mens rea (the guilty mind) and actus reus (the guilty act). Where the consequences of somebody’s act were not intended, it could not be a crime (so accidents are not crimes, and one is not responsible for damage tangentially related to one’s own actions). Similarly, intent to commit a crime is not in itself a crime.

Mens rea and actus reus have been eclipsed from large sections of criminal law. William J Stuntzargues that mens rea ‘has gone by the boards’; he charts the diluting of intent across several branches of US criminal law. There is no need for the old ‘vicious will’ for the prosecution of many criminal offences: ‘The defendant is guilty if he intended his physical acts, and if these physical acts violate the conduct terms of a criminal statute.’ US drugs offences are drawn so widely that mere possession can be taken as evidence of intent to deal. Paul Craig Roberts and Lawrence M Stratton also note the growing tendency for an accident to be prosecuted as if it had been intended, which is a question not of prosecuting responsibility but of finding someone to blame something bad on.

In the UK, Section 5 of the 1986 Public Order Act (which criminalises the causing of ‘harassment, alarm or distress’) doesn’t require evidence of intent. Laws on anti-social behaviour considered only the ‘anti-social’ consequences of somebody’s conduct: a judge need only find ‘a causal link between the defendant’s behaviour and one of these consequences or an objective likelihood of such a consequence’ (8). The motivation of the person’s action is of no concern. This disinterest in the defendant’s motivations blurs one of the oldest distinctions in criminal law.

The watering down of liability means that people can be punished for the crimes of others. US police can confiscate an individual’s property if somebody else used it to commit a crime - so a landlord could lose his house if one of his tenants dealt drugs, or a woman could lose her car if her husband used it for kerb crawling. Stuntz cites the example of a drug dealer’s girlfriend convicted of ‘intent to distribute’ because of her ‘nexus’ with drug offenders, which is little more than guilt by association. In the UK, the old offence of incitement has been replaced with the much weaker offence of ‘assisting and encouraging’, which includes such defuse crimes as ‘encouraging’ the accessory to a crime (rather than the principal offender), encouraging a preparatory offence (rather than a criminal act), and encouraging an offence which is at the time impossible to commit (therefore a crime that could never have happened, with all the encouragement in the world).

Actus reus has gone similarly by the boards. Common Law was very clear on the point that intent to commit a crime was not in itself a crime. In his book on the Common Law in the late nineteenth century, the American judge Oliver Wendell Holmes illustrated this point with an example. If a man takes a train from Boston to Cambridge with the intention of committing murder, but is stopped en route and returns home, Holmes says this is not a crime: ‘He is no more punishable than if he had sat in his chair and resolved to shoot somebody, but on second thoughts had given up the notion.’ (9) An act is necessary for a crime to be prosecuted, and preparatory acts are only crimes when they are sufficiently close to an actual criminal act.