Bitcoin – Currency or Bubble?

Bitcoin, the first crypto currency of the world, has come a long way. When I first heard about it, I thought it was a joke. A purely digital currency, really? Since bits are almost free these days, it seemed obvious that the value of such a currency would have to be zero.

It took me a while to understand that bitcoin was actually based on a genius new technology called the blockchain. This technology limits the amounts of bitcoins with mathematical certainty. More than that, it appears to be entirely libertarian. The whole purpose of bitcoin is to create a currency, that is as scarce as gold, and cannot be controlled by governments. But unlike gold, it also comes with a whole integrated, anarchic banking infrastructure. What an amazing idea.

Bitcoin could really be a great form of money. It has almost all the characteristics that we know money needs to have. Firstly, it is durable. So far, the software seems secure, and the bitcoins cannot be destroyed. Secondly, it is divisible. There are many bitcoins, which in itself can be divided into many subunits. Thirdly, it is fungible, meaning all bitcoins are interchangeable. It does not matter which bitcoin you own. And finally, bitcoin is convenient. It is easy to use. In fact it is probably more easy to use than anything else out there that tries to be money. All it needs is an internet connection and a very simple computer, and it can be transferred anywhere instantaneously.

There is however one problem with bitcoin. Unfortunately, it is lacking a characteristic that, according to the Austrian School of Economics, a potential currency needs to have. And that is an intrinsic value. For something to be money, it first needs to be used for something else but being money. Only then will enough people trust to keep their savings in that new currency, because only then they will have a guarantee that they can never fully lose their savings. The intrinsic value puts a floor into how far the currency can fall. It also spreads the usage of the commodity, and therefore establishes a market, before it is used as money. This is, so the argument, essential to give it the necessary trust, and acceptability to function as a currency.

Gold, for example, has been used as money for thousands of years. But it is also an extremely useful metal for other purposes. Even at current prices, it has a limited usage in the industry. If prices were to fall, it would immediately become attractive for all kinds of purposes. That puts an effective floor into the value of gold. It is this what we can call an intrinsic value.

Bitcoin however, does not seem to have an intrinsic value. It tries to jump this important first stage, and wants to be money straight away. The question is, is this possible? Or at least, is this possible on a free market. Sure, it is probably possible if a state forced people to use it. We have seen this happening with fiat currencies like the Euro. But will people voluntarily adopt something as money, that does not have an intrinsic value. With crypto currencies, we are currently in the process of finding out.

So far, one could make a strong argument that bitcoin proofs the austrians wrong. When I discovered bitcoin, the price was already around $30. Not bad for something without an intrinsic value. Ever since, the price has hugely fluctuated, but the tendency has been clearly up. As I am writing this, a single bitcoin sells for way north of $2000. It has more than doubled within a few month, and the chart seems to have turned parabolic.

But is this enough to proof that the Austrians were wrong? I thought about this a lot in the last few years. Since bitcoin already seemed to have a dollar price when I discovered it, I originally tended towards thinking that it indeed can be money without having an intrinsic value. However, I have since more and more changed my mind about this. I now think that bitcoin, or any other crypto currency, will not become a widely accepted currency. The idea that high bitcoin prices in dollars proof the opposite, seemed to have been a bit premature. It was literally wishful thinking on my part. I wanted it to be true.

I am sorry to say this, but I think what we are currently seeing is a classic speculative bubble. And far from being encouraging, this is going to kill crypto currencies in the end. That is because, as long as it is in a bubble, people are going to hoard it. This prevents it from being used in daily business transactions. And once the bubble pops, lots of people will get burned. For good reasons, humans don’t tend to forget painful experiences like that quickly. That means that when this is over, they will have likely learned to mistrust crypto currencies.

From very early on I realized that people who own Bitcoins were not all idealists. Yes, they kept telling me about the great technical functions this new currency had, and how it would create big problems for governments. But a scarily high number of people also told me, that they expected the price to skyrocket and consequently for bitcoin to make them rich.

These two things are not really compatible with each other. Sure there are currently a lot of traders in all kinds of established currencies. That means, the idea of making money on a currency is not unique to Bitcoin. What is unique however, is the scale of upwards volatility that people predicted in the crypto currencies, and also the high percentage of speculators.

Despite the fact that there are traders in all major currencies, the main function of these currencies is to facilitate everyday business activities. Most people use them that way. For that reason the volatility in these currencies is relatively low. It would be a major problem for any currency, if people started to abandon it for their everyday business. That is what we are seeing in a hyperinflation, which usually marks the end of a currency.

Despite the hype that we are witnessing at the moment, bitcoin currently is not used often as an actual currency. In fact, percentage wise, the number of people who use it as such seems to decrease rather than increase, as more and more speculators enter the market. So why are prices going up? Instead of seeing solid demand from real businesses for these currencies, the demand appears to come from people, who are betting on higher prices instead. I currently see a lot of media attention for bitcoin, hardly any of which is praising it as a currency. Pretty much all are promising new investors big fortunes. And that is even true for articles coming from the hardcore bitcoin community itself. But where exactly are these fortunes going to come from, if bitcoin is not used for real business?

And to my knowledge, there really is currently no major business out there that accepts bitcoins. I know, people will tell me that that is not true. Bitcoin can be spend in many shops. Yes, you can pay with them, but that does not mean that the business accepts bitcoin. I still have a euro account in Germany, with an attached VISA card. I can buy stuff with that card in pretty much any shop in the UK. That does not mean that euros are widely accepted in this country. The prices and all the accounting are still done in pounds. My euros are simply immediately exchanged into pounds at the time of the purchase. So what is really happening is that I have to sell my euros for pounds, and then pay the business in pounds. The technology simply enables me, to do all these things in only one step.

The same is happening when someone pays with bitcoins. However, at least for euros, there are many businesses outside of the UK which account in the European currency. But how many businesses are pricing and accounting in bitcoin at the moment? Hardly any, or maybe even none. For a legal business this is indeed close to impossible. Everyone has to pay their taxes in the local fiat currency. But also, it is impossible, because bitcoin is extremely volatile. This volatility makes business calculation and planing impossible.

A lot of people will argue that yes, currently the volatility is high and therefore bitcoin is not yet a currency. But the more people have it, the more it is going to be used as one. That way, over time, the volatility will go down and bitcoin will become a real currency.

There are two problems with this. Firstly, for the volatility to go down, people need to stop using it as a speculative asset. The speculators are driving volatility up, not down. First, they are driving prices up very quickly, which is what we are seeing at the moment. And then, when the time comes that enough people want to take their profits, they will drive down prices even more quickly. If bitcoin wants to become money, the speculators will have to go.

The problem is, they currently appear to be the only people who give the crypto currencies value and liquidity. That is because of bitcoin’s lack of an intrinsic value. At the moment, it is essentially just a Ponzi scheme. In other words, it is a zero sum game. For every winner there must be a loser. Winners are usually the early adopters, if they manage to get out in time. This puts a big incentive on these people to cash in their bitcoins for a more accepted currency. And as mostly in investing, the losers are the ones that come late to the party, which is often the majority of people. Those people will get burned.

That creates the second problem. Once these people got burned, the crypto currencies will gain a very negative reputation. While before anyone new about them, the reputation was at least neutral, after a major crash, the reputation will be bad. And that of course is not helping on the way to establish these currencies as trustworthy for business and savings.

So what we are seeing right now does not look like the breakthrough of crypto currencies. It looks more like the beginning of the end. It is a classic speculative bubble, in which people enter for no other reason but prices going up.

If you don’t believe that this is indeed the main reason for the current strong interest, then explain to me why are all of the crypto currencies going up simultaneously? If we were witnessing the breakthrough of a crypto currency, we would need to see one or two market leaders going up, but not all. The others would need to go down to zero. We cannot have all of these currencies establish themselves. That defeats the purpose of a currency, which needs to be as widely accepted as possible. The fact that there are so many appreciating crypto currencies out there, also proofs the critics right, who argue that, despite the blockchain technology, these currencies are not really scarce. Yes the internal number of units is limited, but there is no limit to the number of currencies itself. Anyone can easily create one.

I am sorry, but what we are seeing right now very much looks like a speculative bubble, a Ponzi scheme. Some people will make a fortune, while the majority will get burned. I am therefore fairly convinced that, although we are still in the middle of the party, the bitcoin experiment has failed. That is not to say that this party will necessarily end soon. But it does mean that bitcoin, or another crypto currency, will not become an actual currency. Before a crypto currency can take off, it will have to have a use in some other wide spread application.

None of this however means that the blockchain won’t be successful. We will almost certainly see this technology transforming the world in many, non money applications. And maybe one of these applications will get widely used, and eventually becomes a form of money. But as for bitcoin, it seems the austrian’s will be proven right again. At least on a free market, we will not see anything being adopted as money that does not have an intrinsic value first.

Dismantling The Basic Income Proposal

The basic income is an idea that is being discussed in many countries and political circles at the moment. The idea is to give every citizen of a state a certain amount of money, unconditionally every month. It is in essence a proposal to organize the welfare state differently to make it work better.

Understanding economics, this, on the surface, seems like big nonsense. And if you dig deeper you will find that indeed it is. However, amazingly, this idea has even won the support of some people who are sympathetic to free markets.

One of the people who supported this idea, in form of a negative income tax, was Milton Friedman. And in the UK, the Friedman worshiping think tank The Adam Smith Institute, openly supports the approach. So unfortunately, it seems the proposal cannot just being ignored as obviously bad. Some time needs to be spend addressing the arguments and showing why it is a bad idea.

To start with, I want to emphasize that a basic income, provided by the state is of course completely incompatible with libertarianism. Any form of wealth distribution via mandatory taxes is a blatant violation of people’s liberty. However, there are people who do not argue from principles. They think of themselves as pragmatic. People who think of themselves as pragmatic are usually confused about philosophy. They do not want to put things into a broader moral theory. Instead they take every situation one at a time.

Of course principled people tend to choose their principles in the hope that following them will lead to reliably good results. They are therefore just as “pragmatic” as people who reject principles. But since they have a broader theory, they tend to be more successful in achieving their goals. So my aim in this article is to show that following libertarian principles, and rejecting the basic income, indeed leads to better results.

Why do people support the basic income?

There seems to be two groups of supporters. Those who truly believe that the basic income is a good policy and those, more libertarian leaning, who believe that it is the lesser evil. However, looking a little bit closer, it seems that the ones pretending that it is a lessor evil, really seem to buy into some of the basic falsehoods of the real supporters.

So we really can address both groups in the same way. Last year, the Adam Smith Institute published a piece explaining their support for the basic income. Let us take this as a basis to show, why their support is misguided.

The basic income deals with in work poverty

The basic idea of a welfare state is, to use taxation to redistribute wealth from wealthy people to the poor. So far, the poor were meant to be people, who, for whatever reason, were unable to work and provide a living for themselves. That is why, in almost every welfare system, people who want to claim benefits, somehow need to show that they are out of work and unable to provide for themselves.

This makes a lot of sense. It is difficult to make a moral argument in favor of people being able to claim the product of other people’s labour, when they could work themselves. This is too obviously a form of exploitation.

Enter the basic income proposal. It makes an argument that it does indeed make sense to give free capital to people who are able to, and ofter are working. One of the arguments for this, is supposed to be a moral one. The idea here is that in our time, a lot of jobs do not provide enough income to make a decent living. We are told that:

“The clearing power of lower skilled labour is simply not high enough, to provide what electoral willpower, political stability and innovation would require: some form of welfare income policy is necessary.”

This is a conclusion that is being presented after an economic analysis. The analysis is based on piecemeal data collection which allegedly shows that globalization and technology have replaced a lot of unskilled labour. Therefore, low skilled workers cannot make ends meet on their own in a modern economy. The solution is that these workers need to be helped with the incomes of higher skilled workers.

Far from being new, this argument has always been the basic idea behind the welfare state. There are losers in the market place. Therefore, we need welfare politics to balance out the inequality that markets produce. Once the need for welfare is established, the argument then shifts towards what is the best way of providing welfare.

The truth however seems to be that, neither is there a need for state welfare programs, nor would the basic income be the best welfare program if there were such a need.

The reason for poverty is the state

But first things first. Why is there no need for state welfare programs? The answer can be found in economics. Real economics that is. The economics presented in the defense of the basic income, is a good example of how not to do economics. One cannot understand economics by simply analyzing random data and try to find correlations. The foundation of every economic analysis needs to be based on principles of human action. If we do not start with these principles, we are at constant risk of missing at least half of the picture. And if we only understand half of the picture, we, at best, only get it half right. Half right however, is still very much wrong.

This was best explained in Frederic Bastiat’s genius article “That Which is Seen and That Which is Not Seen”. Let us say we have a policy of taking money from a person and spending it on a good A. What we can see now is that the demand for this good A is going up. However, there is of course another side to this policy. Since money can only be spend once, if the money is spend on good A, it is not spend on another good B, which was the original choice of that person to spend his money on. But we cannot see the non transaction of not buying B. We only see the transaction of buying A. Reasoning however tells us, that this non transaction must most likely be true, and we need to take it into account when we examine the economy. So if we were to analyze the situation purely by statistical data, we are doomed to miss half of the effects of that policy. Only arguing from principles can tell us about the full picture.

This is very relevant in this analysis of what is happening in a modern economy. What we see is that markets become more global. What we see is that more and more things are being done with computers. What we see is that it is more and more difficult for low skilled workers to find jobs and that the jobs they can find are often not providing them with a decent standard of living. If you piecemeal all of this data together, you come to the obvious conclusion that the modern economy lets low skilled workers behind.

None of this data is of course wrong. But it is only half of the picture. The other half is much more difficult to see in statistics and can only really be understood indirectly by reasoning from sound economics principles.

Unlike a lot of austrians today, I do not believe that these principles are a priori correct. Mises’ praxeology method unfortunately seems wrong. The principles of human action can be observed and tested. And every scientific theory, including the austrian school of economics, should be tested. There seems no other way of knowing whether a theory describes reality correctly or not.

But despite this little confusion in the modern austrian school fellowship (of course historically, Mises was the only austrian economist who thought austrian economics was a priori true), the great thing about the austrian school is that its predictions seem to pass the test.

One of the predictions that the austrians have made is that state intervention into the economy leads to misallocations of capital. These misallocations in the economy lead to a loss of productivity and to a crisis when these misallocations are being discovered. This crises is then being addressed by more state intervention, which leads to more loss of productivity etc. A loss of productivity means that not as much wealth is being produced as it could be. Through more and more state interventions in the economy, in the long run, the economy is so distorted and unproductive that it literally start to destroy existing wealth. That is because, at some point, more wealth is being consumed than produced. This then constantly reduces the amount of capital available and makes production more and more difficult.

Other than described in the article, technological progress is the other big factor that increases productivity. So this is not in the way of a good life for the poor. It should make life more and more affordable.

More capital accumulation and an increase in technology should therefore lead to a huge deflation that makes lives more and more affordable. We should be at a point now where being able to afford a roof above our heads and food on the table is possible with a minimum amount of work.

What we are seeing instead, just like the austrians predicted analyzing state interventions, is a constant increase in the costs of living. People have to spend more and more of their salary to be able to afford a home. And even prices of food in the supermarket are constantly going up. As a reasult, people who have low incomes have trouble to make a living. That this is going on despite the huge advances in technology and despite the huge increase of people taking part in work sharing worldwide in the last 25 years, tells us a lot about how wealth destructive our economies have become.

This is a very different analysis from the one presented by the defenders of a basic income. Therefore, it is clear that it is important to get the economics right. If the austrians are correct, then not only is welfare not needed to provide for the poor, welfare is the reason why we have so much poverty. And if that is true then creating more welfare programs will only crush the poor even more. The poor, more than anyone else, need to be freed from the welfare state.

Does the basic income reduce the welfare state

But then there is the argument that the basic income is actually the better deal to the existing welfare state. It makes the welfare state more efficient and therefore reduces the negative effects of it. Or it may even reduce the welfare state all together.

But this does not seem to be correct. At least not if we really talking about a basic income that provides for a living. Let us first look at the assumption that it makes the welfare state more efficient. The argument is that if everyone gets a basic income unconditionally, there is no need for all the bureaucracy involved in applying and testing eligibility for benefits. This may be true, if we really replace the whole welfare state with a basic income, but that does not necessarily mean it is a good thing. Making tyranny more efficient does not make it any better.

Bureaucracy is nasty, no doubt. However, it is a symptom not a cause of evil. Bureaucracy is the tool to put some constrains on a monopoly of power. Getting rid of this restrain does not help us. It is the state programs that the bureaucracy tries to facilitate that are the problem. Just abolishing the bureaucracy without the state program is usually not helping. As long as we have a state, we will have to live with some bureaucracy. The real solution to the bureaucracy problem is to abolish the state altogether.

The second argument is that the basic income reduces the costs or the negative economic effects of the welfare state. Whether this is true or not seem to depend on how high the basic income is and how it is going to be implemented. The problem is that as soon as the basic income is high enough to actually make a living out of it, the answer seems to be no.

Of course if we had a very low basic income of say £100, then that would be great. No one can live on £100 per month. That means everyone would basically go out and work and pay for the £100 with their taxes themselves. Such a low basic income would essentially be a trick to more or less abolish the welfare state. Great! The problem is, it is too obviously a trick. We might as well be honest and advocate the abolition of the welfare state.

If we take the idea seriously we need to have the basic income set at a level that provides a basic standard of living. What is the lowest amount we might argue for? Assuming that we realistically keep the NHS and replace the rest of the welfare state, we might say we give a person £200 a month for food and £400 to rent a small single room somewhere. That will mean £600 per month per person.

Assuming there are 60 million people in the UK, this basic income would cost the taxpayer 432 billion pound a year. Currently the expense for welfare and pensions together is about 260 billion. And that is assuming you could replace pensions with such a low basic income. So even this very minimal basic income would be hugely more expensive than the current welfare system. That is no good.

A better way of implementing it is to slowly phase it out like a negative income tax. So if you don’t work you get £7200. If you start working you will get less and less until you start paying income tax on everything you earn above £7200. The problem with this is clear. Anyone who does not earn significantly more than £7200 will have a big incentive not to work at least not officially.

To avoid that, another proposal, to implement the basic income, is to give people a top up on their earnings until a tax free allowance. Let us assume we have a basic income of £7000 and a tax free allowance of £12000. if you earn nothing, you get your £7000. If you earn something you get a top up of 50% of the different of the tax free allowance and your income. So if you earn £6000, you get another 50% of £12000-£6000. That is £3000, so your total income would be £9000.

There is a problem with this though. It seems expensive. For this to not have big negative effects, the tax free allowance need to be significantly higher than the basic income. Of course I am all for high tax free allowances, it should be 100% of your income. But if you want a basic income, someone needs to pay for it. The lower the tax free allowance is, the less you can keep from your earnings. In the example above, you need to earn £6000 to make an extra £2000. Even if the tax free allowance is twice the basic income, you still need to earn £2 to have an extra pound in your pocket. This does not seem to encourage people to work.

Advocates of the basic income might counter this by saying that the current system is a disaster to encourage people to work, because someone loses all his benefits once he starts working. With the basic income however, he just loses some.

That is true, but it overlooks that everyone gets the basic income unconditionally. At the moment, you still will have to go to the state and ask for benefits. For a lot of people, this is still something embarrassing to do. And of course there are conditions to get the money. It becomes only an option if they are really desperate. But you don’t have to apply for the basic income. This is presented as some kind of natural right of a citizen. As a result, even ordinary people will take it into account in their ordinary financial planning.

They might start looking for nicer jobs, to top up their basic income. Say for example someone is trying to make a living as an actor. Unless he is famous, he can most likely not make a living out of this. But he might make a few bucks with a gig here and there. Currently, a lot of these people take small jobs in bars or hotels to cover their basic costs. With a basic income, they might just top their government check up with a few gigs. No need to do some real work anymore. Yes, living on £7200 might be difficult. But then, going out and clean toilets full time, just to top up your basic income a bit, might not be worth the hassle. Never underestimate the value of leisure. Whether it would be worth it or not, would of course depend on how miserable you are living on your basic income.

But there are two problems with a very low basic income. The first is, that, once introduced, it will be politically difficult to keep it very low. People will start seeing it as their right as a citizen and start making the argument that this low level is violating their right. People already make these arguments with current benefits. Luckily, the latter are still very much conditional.

The second problem is, that if we were to replace the welfare state with a basic income and than manage to keep it very low, this would hit people, who really do need help, because they are not able to make a living, very hard. They would be unable to make a good living out of the basic income. Simultaneously, they would be deprived of other roots of income. In a society, in which the general mindset is that the state has to care for the poor, it is very difficult to set up private alternatives to the welfare state. So these really weak people, the once that the welfare state was originally designed to help, they would probably be the biggest losers of the basic income.

Now, you might say, well we just give those people a bit more. But then you are essentially starting the welfare state, that we have at the moment, all over again. Immediately, other groups will come and say that they too, will need something extra. In that case, the basic income would not replace the welfare state, but would essentially become an extra on top of it (which is something some socialist argue for anyway). It is as always in politics. It constantly tries to solve the latest problem that would not exists if it wasn’t for politic’s last solution.

Conclusions

No matter how you look at the basic income proposal, it does not seem to produce any good results. If it is set at a decent level, it is very expansive and would hugely discourage people from work. The lower it is set, the less damage it causes to the economy and society. But even set at a level, at which it might not lead to a collapse of the economy, it would still be a very destructive policy. And the really poor and helpless would be the ones to suffer the most under it.

Ultimately, libertarians are correct. Liberty is the solution, not trying to make the state more efficient. If we really want to help the poor, and live in a prosperous society, we need to get rid of the welfare state. There is no alternative to it.

Why “Accumulating Wealth” is Wrong

Last week I went to a humanist event on Human Rights. There were two speakers exploring the topic of whether human rights are universal or not. One of them was a young sociologist who argued for a relativist position. While he said that he liked the idea that human rights could be applied everywhere, he thought that this was not possible as long as social conditions vary in different places. During his speech, it quickly became clear that he was a hardcore communist. He did not really talk a lot about human rights as individual rights at all. Instead, all he was talking about was how social conditions needed to be changed in order to produce some greater good. That means, to him it was all about the collective having rights rather than the individual person. Therefore, he thought that rights cannot be universal, they need to be adapted according to the condition that the local collective is in. At one point, he literally said that the idea of universal human rights can be in the way of social progress. I almost fell off my chair when I heard that. Yes mate, you have to break some eggs to make an omelet, right?

Of course he was not defending the communist regimes of the past. These people know that that would make them look silly. And no doubt, he thought of himself as a good human being, fighting for the right cause. Although he had just laid out the totalitarian nature of the communist program, he did not seem to be fully comprehend what his conclusions really meant.

The other person was a little bit better. He was an international humans rights lawyer and was indeed in favor of universal human rights. He argued that human rights are universal by definition. If we demand them to be universal then they will be. That was more to my liking.

None of them however really could give a clear account of what exactly human rights are. They basically seemed to go along with the UN human rights declaration of 1948. This declaration entails a mix of positive and negative rights. They were aware of the difference and both agreed that human rights have to contain some positive rights. Therefore, human rights are constantly up for debate and can be extended.

Libertarians of course understand that if you are asking for universal rights, these can only logically be negative rights. A positive right has to be provided by someone else. That means that the provider of the positive right clearly cannot have the same positive right as the recipient. If both had the same, then they would cancel each other out. Therefore, none of them would have it.

Positive rights also necessarily need to violate negative rights. You cannot really have both. A negative right is essentially the right to be left alone. But since a positive right needs to be actively provided, the person who has to provide it is not left alone and therefore loses his negative rights. That means that as soon as you start talking about legitimate positive rights, you automatically open the door to totalitarianism.

Since even the lawyer advocated positive human rights as legitimate, he found himself in the absurd position to argue on the one hand in favor of universal human rights in space, meaning applying to any human being no matter where they are. On the other hand however, he was arguing that human rights can change in time, in other words that human rights are work in progress. Considering that, I think it is fair to conclude that both were actually moral relativists.

Then came the Q&A. One older person, who I knew was a communist from a previous event where he gave a talk asked the question, whether people could be allowed to accumulate an unlimited amount of wealth. Needless to say that there was quick agreement among the speakers, as well as most people in the room that that could of course not be allowed.

The agreement did not surprise me. But hearing this question in this context being asked by a communist, I suddenly realized that there might indeed be something wrong with “accumulating unlimited amounts of wealth”. Talking about accumulating wealth does not tell you anything about the source from which this wealth originates. Surely, one cannot simply be in favor of wealth accumulation. Say, someone accumulates wealth by robbing banks, in that case that would not be acceptable, would it?

The economics model of a lot of socialists is that the economy is a big pie of wealth that simply exists. All we have to talk about is who gets how much of that pie. That means within this model, everything is a zero sum game. If I win, someone else has to lose. That some people in the room really seemed to use this theory became clear when the speakers pointed out that rich people clearly have more property rights than poor people. They simply did not seem to understand that property right is a negative right and has nothing to do with how much property you actually own.

If you don’t understand this then clearly accumulating wealth in any form means to steal something from someone else. If that were really the case, I too would be against wealth accumulation. On the basis of this theory, I can also understand why people think we need positive rights. Positive rights then essentially become negative rights, as they just prevent some people from stealing too much.

Of course this theory is everything but true. It is complete nonsense. Wealth needs to be constantly created. And creating wealth is not always very easy. Some people are better at it then others. But no one who creates wealth is stealing from someone else. None of that however comes out in the formulation “accumulating wealth”. If he understood economics, what he really should have asked is, whether people can be allowed to create an unlimited amount of wealth.

It would be interesting to see if people could as easily say no to that. Why would anyone be against creating wealth? Of course that still leaves open the possibility of taxing people who have created wealth. But once we are talking about wealth creation rather than wealth accumulation then the whole debate is shifting away from redistribution. Once you have the right model of economics you can then more easily argue why taxation is bad. Unfortunately, none of that was understood by most people in the room and so it ended up being a rather confused debate. But it was fun anyway.

HS2: Should the Taxpayer Be Going Loco?

A recent study by the Institute of Economic Affairs (IEA), a free market think tank, has suggested that the cost of the proposed rail investment High Speed 2 (HS2) will be close to the £80 billion mark, nearly £40 billion more than the last government estimate. Does HS2 still have any economic rationale or is this ambitious investment rapidly running out of steam?

© Dotting

© Dotting

HS2 is a planned high-speed rail network that will create a route from London to Birmingham, with extensions to Leeds and Sheffield. The cost of building the rail link was originally projected at £32 billion but recent reports suggest this figure is wildly optimistic. Even if one accepts a conservative estimate, it is questionable whether HS2 will offer any value for money to the taxpayer.

Large-scale infrastructure projects are rarely financed by private capital simply because they aren’t commercially viable. The reason why HS2, and similar projects such as Crossrail, have been allowed to materialise is because of the external benefits they bring to society. The Government argues they will bring widespread returns to the country by increasing productivity in the economy and relieving pressure on the existing rail network.

The claim that HS2 will increase productivity seems a fairly reasonable one at first. People travelling on the new high-speed network will experience a much quicker service, with time savings from London to Birmingham, Manchester and Leeds in the region of 40%. However, the actual value of these time savings to the economy is less significant. As part of their cost-benefit analysis (CBA), the Government estimated that the value of time savings was £37 an hour, on the assumption that very little work gets done on train journeys. Needless to say this is completely ludicrous. Since the use of laptops, tablets and high-speed internet has become commonplace in trains across the country the opportunity cost of travelling by rail has gradually decreased. With this in mind the benefit of lower journey times is unlikely to create a major advancement in productivity.

The other primary justification for this huge investment is that it will relieve pressure on the existing rail network. HS2 will undoubtedly deliver a large increase in capacity with platforms at over 400 metres in length and trains able to accommodate 1100 passengers. However, such statistics divert attention from the core issue: whether or not these benefits outweigh the costs of building the network as well as the opportunity cost of the billions of pounds of taxpayer’s money. The short answer is no.

The Government has said that HS2 will generate £2 worth of benefit for every £1 invested. This calculation doesn’t take into account information from new studies, such as the IEA’s, which demonstrate that the cost of building the network has been massively underestimated. As the general election draws closer it is inevitable that the costs of building HS2 will continue to rise, due in part to environmental concessions being made on the route in order to satisfy local authorities and conservationists.

That aside, the opportunity cost is the most pressing concern. If we take the Government’s estimate of the cost of building HS2, it is still equivalent to 2% of the UK’s gross domestic product (GDP). This money could be used in more efficient ways, for example, lowering income and corporation taxes. Rather than targeting one particular area, reducing taxation will bring benefits to the whole of the economy through the creation of wealth and jobs, whilst encouraging investment and consumption. Furthermore, these impacts will be immediate and will not cost the taxpayer a penny.

It is true that the rail industry does need investment to increase its capacity, mainly due to overcrowding on the South East network and inter-city lines. However, HS2 is not the solution. The current rail market is organised so that if passenger revenues for train companies are more than 6% above their target, the government takes 80% of the extra revenue – equally the government makes up 80% of the extra revenue if takings are 6% below target. This system destroys the incentive for train companies to invest in extra capacity. The Government should let companies take more of the risk and reward of operating their services, which would then encourage investment into the rail industry without emptying the public coffers.

Whitehall must ignore the pressure from special interest groups and pull the plug on this enormously expensive project. Since the plan was first announced, the cost benefit analysis has deteriorated, leaving the economic foundations for HS2 crumbling. The Government will argue that the rail link will bring wider benefits to society but, as aforementioned, these benefits are either overvalued or heavily outweighed by the costs. There are other public road and rail schemes that will create jobs and relieve pressure on the railways without breaking the bank. Alternatively, the Government could let the free market decide where investment should go by lowering taxes and giving more autonomy to private train companies. It may be a bumpy ride but the sooner this project derails, the better.