Tuesday, August 24, 2010

Optimism About Free Markets

Let me introduce you to the best 640 words on optimism and free markets that I have read for a long time. They were written by Eamonn Butler, Director of the British think tank, The Adam Smith Institute, London. He is also the author of Adam Smith: a primer (IEA) and more recently, Austrian Economics: a primer (2010).

They are a nice complement to another piece of rest and restoration reading that I have enjoyed these few weeks in France (two more to go). I refer to Matt Ridley’s, ‘The Rational Optimist: how prosperity evolves’, from Fourth Estate (Harper Collins, London), of which I may write something soon.

Eamonn Butler’sOptimistic about free markets’ is fine presentation of liberating ideas that throw light on the current crisis and what can be done, utilizing markets and judicious tax reforms, rather than fiddling about at the behest of pressure groups, worthy and otherwise (mostly the latter):

Read and enjoy:

‘Though my colleagues at the Adam Smith Institute regard me as the 'down' man, always seeing the difficulties presented by any new idea, underneath I'm really an optimist. I really believe that the free market will triumph, despite everything that our system of government conspires to do to shackle it. The free market is an entirely natural system, like evolution itself, which grows and adapts whatever adversity it faces. You can concrete over a path but still, before long, the grass pokes through. So do markets.

And I'm optimistic that Britain will sort out its tax and benefits system, and adopt a flat tax on incomes and a negative income tax to relieve poverty. Looking at the first tentative proposals of the coalition government in general and of the welfare and pensions secretary Iain Duncan Smith in particular, I think we can see the first green blades of common sense breaking through here too.

Our tax system is fiendishly complicated. Civil servants like it that way, because it creates work for them. Whenever you try to tax people, they will find ways round it. And when your own money is at stake, it is worth buying in good accounting brains to protect it. So tax becomes a cat and mouse game with the Treasury: a new tax is introduced, people find ways to avoid it (quite legally), so the Treasury has to close off the loopholes with new rules. A few years of that, and the rule book gets pretty complicated. The standard tax guide for accountants now runs to about 11,000 pages across four volumes.

We should cut right through all this nonsense and have a flat tax – as we have said many times in our publications on the flat tax. Cut out all the deductions, the loopholes and the clawbacks, and have a low, standard rate of tax that applies to everyone. Then everyone knows what they and their fellow workers are expected to pay. No escape and (sadly for accountants and Revenue civil servants), no need for a lot of complicated measures to avoid tax or to make sure people pay it.

I am optimistic that similar simplicity might come to social benefits too. We have roughly 51 different social benefits. They are designed – well, that's too strong: they have grown up under pressure from various interest groups – to make sure that everybody's unique circumstances are catered for, and that nobody falls through any cracks in the system. A laudable aim, but a madly complicated result. We should scrap it all and have perhaps just two benefits – a long- term benefit for those who simply cannot earn for themselves, and a short-term benefit for those struck by temporary unemployment. Instead of a complicated raft of benefits, we should have a negative income tax. If you have a good income, more than enough to live on at a decent level, you should pay tax. If you don't have enough to live on, you should get cash – the negative bit of the tax.

After all, when you get a job, your employer pays a rate for the job. Employers don't ask you about your exact family and personal circumstances before setting your wage. It should be the same with the benefit system. That makes it simple to administer, and it encourages people to curb their costs instead of thinking about how to maximise what they can get from the authorities. True, some people in special circumstances will face hardship. But alleviating that is something that seems the proper role for the charitable sector. True, we need then to liberate the charitable sector, with things like US-style tax deductibility to encourage more philanthropic giving, so that charities can step in where the state falls short and real help is needed. But I am optimistic that we can do that, too.’


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Blogger Terry Paulson said...

Adam Smith was such a fantastic thinker about what makes economic opportunity possible. I loved your post as it reflects some of the research on optimism that I discuss in my new book, "The Optimism Advantage." Instead of discussing the problem, it focuses on what people can do to change their attitudes and actions to take advantage of opportunities even in difficult times. This works in the US, in Britain, and in any country with he freedom to use free enterprise to achieve success.
I wrote about this in an Optimism Advantage Blog post. I'd love to have your readers visit http://optimismadvantage.com/?p=216 and comment on their own experience in making optimism work.
By the way, I agree with your flat tax suggestion. Even Russia has a flat tax. It's time America and Britain have a truly fair tax that encourages achievement instead of income distribution to people who haven't earned it.

6:14 p.m.  
Blogger Gavin Kennedy said...


Let us be clear: Eamonn Butler of the Adam Smith Institute wrote the article, not me. I was so impressed with his optimism and practical proposals that I reprinted it on Lost Legacy. He is an exceptionally good writer and cleat thinker.

I wish I could write as well as him


6:28 p.m.  

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