This ALS Friedman dinner will be co-hosted by the newly formed Queensland branch of the HR Nicholls Society, chaired by Graeme Haycroft.

When?     7pm, Wednesday 15th of February
Where?   Kookaburra Cafe: 280 Given Terrace, Brisbane
What?      Pizza, ribs, salad, chocolate cake & good debate
Who?       Hon Peter Reith, Prof Judith Sloan & others
Topic?     Labour market reform
Price?      $30 ($25 for ALS students)

You can RSVP by e-mailing john.humphreys99@gmail.com or by joining the facebook event. This is an open event, so please feel free to invite friends, but you must RSVP to ensure a place at the dinner.

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About the speakers:

Peter Reith has degrees in law and economics and worked as a solicitor before entering politics. He served as shadow Treasurer for the Liberal Party under John Hewson and was involved with the “fightback” policy document. In government, Peter served as the Minister for Workplace Relations and then Minister for Defence, until retiring in 2001.

Judith Sloan has 1st class honours in economics, and two masters degrees (from Melbourne & LSE). She has worked previously as the Director of the National Institute of Labour Studies, Professor of Labour Studies at Flinders, and a Commissioner at the Productivity Commission & the Australian Fair Pay Commission. Judith is currently an Honorary Professorial Fellow at the University of Melbourne and a contributing economics editor at The Australian.

That doesn’t just mean that I support Andrew Bolt’s right to say whatever he likes about aboriginals, irrespective of who gets offended. And it doesn’t just mean that I oppose all censorship, such as the banning of Mein Kampf in some European countries. It also means I oppose defamation laws, and I believe you should be allowed to say anything about anybody, whether true or false, for whatever reason. It even means I believe that tobacco companies should be free to advertise.

I believe attempts to limit speech “for the public good” will mostly do more harm than good, and that messy and imperfect freedom is better than neat and tidy (but even more imperfect) government control.

Today I was discussing another of the controversial areas of free speech. Yesterday, that crazy old kook of the blogosphere grumpy-Graeme Bird wrote an eloquent rant aimed at me, where he said:

“He must die. John Humphreys must die so that this country can live.  He has betrayed this country too many times and he must no longer live … This is too important a subject to let John Humphreys live. Where does the lying end. I’m convinced that it only ends when John Humphreys is cold and stiff … HE MUST DIE, FOR THE LYING TO END. AND THIS IS A LIFE OR DEATH MATTER … I am accusing Humphreys of being a knowing traitor … SO MY NEW CLAIM IS THAT HUMPHREYS WILL NEVER STOP LYING. THAT HE WILL NEVER BE A SAFE PAIR OF HANDS. THAT HE WILL ALWAYS BE A TRAITOR. WHILE HE YET LIVES.”

My first death threat. Now I know that I’m important. A few friends have suggested I take it seriously, and one kindly offered to call his federal police friend who would call Graeme… but I nixed that idea. For his part, Graeme says that it is not a death threat because he doesn’t plan on doing any killing himself. That’s good to hear. But another friend pointed out that the above sentiments might still be considered incitement to violence… which got me thinking about free speech.

My conclusion, once again, is that death threats such as above should be allowed as free speech.

The moral reason to allow the above sort of rants is that Graeme hasn’t actually directly hurt anybody with his rant, nor has he tried to coerce anybody (by saying “do XYZ, or else”), and so he should be left alone. He has simply stated that he wants me dead. If somebody were to act on Graeme’s death wish, then in my opinion the responsible person is the killer, and not Graeme.

We are surrounded with advertising every time we turn on the TV or go outside. We are more subtly being influenced every time we read a newspaper or book or website, or when we talk with our friends. We are even being influenced when we simply watch strangers on the streets. But ultimately, I believe that each person needs to be held responsible for their own actions, and that responsibility can not be passed on to the people who have influenced the actor. If I say that a book is good, and you go and buy the book… then it is you (not I) who is responsible for your actions. Likewise, if grumpy-Graeme says he wants me dead, and mad-Doug (another freak with an unhealthy fixation on me) actually comes and kills me… then it is mad-Doug (not grumpy-Graeme) who is responsible for the murder.

The idea that advertisers or influential people are responsible for the actions of others undermines individual responsibility, and it sets a dangerous precedent for controlling who is allowed to say what to whom. And once we start controlling speech to only “good speech” we get into dangerous territory.

None of this is to say that all speech is equally ethical or nice. If you spread untrue and nasty rumours about someone, then you’re an asshole according to my view of ethics. If you incite people to violence, or say things with the intention of hurting others, or knowingly defame somebody, or encourage people to do something you think will likely be bad for them — then you’re not a nice person. This is why most people think Graeme & Doug are jerks. But I do not believe that the government should set laws that require us to be “nice”.

The idea that the government should enforce their “correct” ethics on everybody is problematic both because different people have different ethical systems (consider different religions) and also because to impose the “correct” ethics it is first necessary to have a perfect person who knows the divine truth. I doubt that the government is run by such divine perfect people. Indeed, I doubt such a person exists. The best way to encourage ethical behaviour is the natural approach of civil society, where nice people tend to have friends and assholes tend to be excluded, and where people with similar ethics tend to congregate together. This explains why grumpy-Graeme and mad-Doug are the only people who take each other seriously.

There is also a practical reason why the above sort of death threats should be legal. If there actually was some sort of plan to kill me, then it would be very helpful for me to know. Keeping such sentiments underground may protect some delicate sensitivities, but it will not necessarily reduce the sentiment. Now at least if I wake up dead everybody will know where to start the investigation.

P.S. Christopher Hitchens also has some choice words to add regarding free speech:

This was cross-posted at my personal website johnhumphreys.com.au

These two issues need to be addressed separately. The first is a deontological issue about whether FR-banking is consistent with a free world. The second is a consequentialist issue about whether FR-banking leads to bad outcomes. It is possible that FR-banking is consistent with freedom and yet leads to bad outcomes, and then those libertarians who accept the “non-aggression principle” would have to tolerate FR-banking even if they don’t like those outcomes. But before delving into that debate, it is worthwhile quickly explaining what we are actually talking about with FR-banking.

Vaults, loans & banks

Anything can be money. In jail (and POW camps) cigarettes have been used as money. In the early years of Australian settlement, rum was used as money. In some small island nations, shells have been used as money. Through much of history, precious metals (especially gold and silver) have been used as money. And today, the most common sort of money is “fiat” paper money that is created by government but is intrinsically worthless (ie it has no value except as money). This is not the place to go into a debate about what should be money or who should decide, but the important point is simply that there is some original supply of money that then becomes the standard “unit of account” and “store of value” and “medium of exchange” in an economy. For the sake of this discussion, this original supply will be called “base money” and in Australia it is created by the Reserve Bank of Australia (RBA).

As soon as money existed, people founds ways to store their money. One option is to put it in your wallet. Or under your bed. Or you could put the money in a vault to make it more difficult to steal. These options have always existed, and they still exist today.

And while many religions have frowned on “usury“, the idea of lending money is also an ancient concept. You sister needs to borrow $10 for the bus, and so you give it to her on the understanding that she will pay you back when you see her next.

But providing “vault services” or even “simple non-tradable loans” is not really banking. For all intents and purposes, when people talk about banking they are talking about FR-banking, which involves another important step. The innovation that gave rise to modern banking was the idea that you could have a secondary market for loans. That means that after you lend $10 to your sister, she gives you an IOU$10 voucher. That IOU$10 voucher is a “financial asset” that you can then sell to somebody else.

If the IOU$10 voucher is widely accepted as being worth the equivalent of $10, then it will circulate in the economy similarly to the original $10. This is why some people say that FR-banking allows for the “creation of money out of thin air”. They are partially right. To be more specific, the “IOU$10 voucher” is actually credit (not base money). However, if the credit is traded like base money then it too becomes a “store of value” and a “medium of exchange” and so the base money (created by the original money supplier) and the credit (created by the people who created the loan) are fungible.

If we allow people to voluntarily create and voluntarily trade in financial assets, then we have allowed FR-banking.

Modern banks accept “deposits” from savers, which basically is the creation of a financial asset. The bank now has your $50 deposit, and you now have a financial asset called “IOU$50 voucher” from your bank. If people are willing to voluntarily accept your financial asset as money (for example, when you use EFTPOS or B-Pay) then there is now effectively $100 in the economy — $50 base money held by the bank (which they can then use), and $50 credit held by you (which you can use).

It is worth pointing out that credit is risky. The person (or bank) who owes you money might not pay it back.

So why would you be willing to exchange $50 of base money for $50 of credit? Probably because it is (1) safer from thieves; (2) more convenient for transactions; and (3) the bank may offer you interest. But for whatever reason, when you deposit with a bank you are engaged in FR-banking and the creation of credit. Congratulations. It is this action that Leithner, BHH & friends want to ban.

One consequence of FR-banking is that if the money supplier creates $100, then there will be more than $100 circulating in the economy. Indeed, it is quite easy for the amount of “credit” to exceed the amount of “base money”, and this is the case in all modern economies. The relationship between (base money) and (base money + credit) is called the “money multiplier” or the “credit multiplier”. For example, if the base money supply is $100 and the credit multiplier is 3 then the (base money + credit) is $300.

There is one more small point to note here before going on. It is possible for the same $1 to be spent several times in the same day. If I go out and spend $20 on lunch then there might have been $20 circulating that day. But if the lunch seller then uses that $20 to buy a hat, then actually $40 has circulated. If the hat seller then uses the same $20 to buy movie tickets then $60 has circulated. The multiple use of the same money is called “velocity”. With all of these concepts in mind, we can now define:

Broad money = base money * credit multiplier * velocity

For most of this article we will ignore velocity, but it is important to know that it exists to have a full understanding of monetary economics. As far as I know, not even Leithner, BHH & friends want to ban the same-day re-use of money and so they don’t object to the existence of velocity.

FR-banking as fraud

Since Leither, BHH & friends claim to be strict libertarians, they can only justify their call for a ban by arguing that FR-banking is fraudulent. But here their argument immediately runs into trouble, because people who enter into FR-banking contracts do so voluntarily and then they clearly follow the rules of their agreement. Where is the fraud?

Hoppe responds by saying “two individuals cannot be the exclusive owner of one and the same thing as the same time” (quoted in BHH, 21) and then BHH go on to say “yet this, precisely, is what a fractional reserve agreement between a bank and a customer involves” (22). This is an extraordinary admission of ignorance. Under FR-banking there is no instance where two people own the same thing. When you deposit $50 in a bank the bank now owns the $50 base money and you own the IOU$50 financial asset. They are two different things.

Leithner makes a similar argument, saying: “It’s also logically impossible for two people simultaneously to own the same item of property. They may, of course, say or even certify otherwise — just as I may say, certify and sincerely believe that 1 + 1 = 3 or that I own a kangaroo that can speak Finnish”. Leithner is of course correct that two people cannot simultaneously own the same item, but FR-banking does not involve simultaneous ownership (or talking kangaroos). Like BHH, Leithner is showing that he simply doesn’t understand how banks work.

It is actually astounding that we should even be having this discussion, and it deeply embarrassing for Leithner, Block, Hoppe and Hulsmann.

BHH go on to say that the creation of new credit (which they call “fiduciary media”) does not create any new property. That is true, but also blindingly obvious and totally irrelevant.

At one point BHH imply that the simple act of creating credit is fraudulent, saying that because credit comes “out of thin air” and because it isn’t linked to new property then the existence of credit “in and of itself, constitutes fraud” (22). Wow. They are literally saying that it should be illegal to give somebody a loan, since the act of giving a loan creates credit. Their basic problem here is that BHH don’t understand that “base money” and “credit” are different things, and so they think that credit is fraudulent because it pretends to be base money. But the simple truth is that base money and credit are different things, as explained in the introduction to this essay. This sort of undergraduate mistake makes BHH painful to read and utterly meaningless.

Suffice to say, if two people voluntarily agree to a loan, there is no fraud. This is true under any definition of contract. It also doesn’t matter if you call the newly-created credit a “financial asset” or “fiduciary media” or “widget” or whether we discuss the issue in French or Chinese or Esperanto. Saying that “credit is fraud” is no better than the pointless communist slogan that “property is theft”.

But if BHH allow loans to exist, and they allow people to voluntarily trade in the consequent financial assets, then they have allowed FR-banking. So they really are caught.

That is the end of BHH, but Leithner comes back with one more argument. He claims that putting money in an FR-bank cannot be called “deposit” because that word has some sort of sacred meaning that can never be violated. Consequently to misuse the sacred word is to commit fraud, even if the definition of the word is clearly stipulated in the contract. It is not clear why Leithner thinks he has divine inspiration about the “one and only correct” use of one specific word in the English language, but part of his justification seems to be the rules of Rome 2000 years ago.

This is an amazingly shallow argument, that rests entirely on a pointless semantics game. If every bank did a “find and replace” in their contracts and changed the word “deposit” to “pedosit” (or whatever other word you like) then the exact same system of banking would exist and Leithner could have no more objection. Further, Leithner’s complaint must disappear for the banking system of any country that doesn’t use English (unless Leithner’s divine language powers extend to other languages too). And finally, if we use a standard dictionary instead of the Leithner dictionary, then we discover that the word “deposit” is already accepted to mean money placed in a FR-bank account.

In a final desperate attempt to salvage the “fraud” theme, Conaghan argues that he accepts people’s right to create credit (which he also calls fiduciary media), but his “problem is when that gets traded with someone who isn’t aware, thinks that the promissory note is backed by something and later finds out it’s not”. In other words, Conaghan is worried that when you offer to pay using EFTPOS or B-Pay, the seller may not know that you are using EFTPOS or B-Pay. Once again — wow.

One of the Austrian economists who are caught semi-defending BHH & friends is Stephan Kinsella, who concludes that “the solution is for the bank to be very clear about what they are doing … as long as things are clear, we have no fraud, no problem”. There is nothing particularly wrong with this sentiment, except that banks are already extremely clear about what they are doing. It is in the contract you sign with the bank. It is in every banking and finance textbook. It is blindingly obvious if you think about banks for more than 5 seconds. And if you’re still not sure, you can simply ask your bank, and they will tell you to your face how banking works.

FR-banking as dangerous

While the “fraud” arguments are embarrassingly silly, the arguments about the consequences of FR-banking are more complicated. Allowing people to make and trade in financial assets has a number of consequences, some good and some ambiguous.

The main benefit of allowing trading in financial assets is that it provides more efficient matching between savers and investors. This means lower real interest rates for borrowers and higher real interest rates for savers — which leads to more saving and investing. Basically, FR-banking reduces transaction costs in the inter-temporal market, and so the invention of FR-banking was an amazing economic innovation that allowed for a significant increase in real investment and capital accumulation. It is no surprise that the growth of FR-banking is correlated with economic development.

If we were to ban the creation of credit, then there would be no matching between savers and borrowers, and so significantly less investment. Even if we take the watered down “you may make loans, but not trade in them” then there would be much higher transaction costs as you could only borrow from somebody who had the exact same debt-maturity preferences as yourself. This also would significantly reduce investment, therefore reduce capital accumulation and economic growth.

The obvious benefits of FR-banking is further shown by “revealed preference”, where people who have the choice between FR-banks and vaults overwhelmingly chose to put their money in FR-banks. If FR-banks provided no benefit, then why have they been so popular? Selgin and White make this point, but unfortunately it was too complicated for BHH to understand. In response, BHH try to draw an analogy between “voluntarily dealing with banks” and “involuntarily having to deal with government”, but amazingly fail to understand that the former is voluntary and the latter is involuntary.

There is another consequence of FR-banking that is harder to assess — and that is the impact on broad money, monetary distortions & the business cycle.

Here it is necessary to quickly review some monetary economics. When the amount of broad money increases faster than the amount of production, then there will be inflation. When the amount of broad money increases slower than the amount of production, there will be deflation. If all prices adjusted instantly then there would be no problem (money neutrality). But prices do not adjust immediately or uniformly around the economy, which leads to mal-investment and artificial boom/bust cycles (also called “monetary distortions”). This is the short version of the Austrian Business Cycle Theory. So far, so good.

Critics of FR-banking point out that allowing credit will mean that broad money is higher than base money (due to the credit multiplier), and that this must be inflationary. The most simple form of this argument rests on a confusion between “stocks” and “flows”. It is true that if you suddenly introduced FR-banking then broad money would increase by the amount of the credit multiplier… but the simple fact is that we already have FR-banking and we already have a credit multiplier. So long as the credit multiplier doesn’t change, then it will not impact on the amount of broad money (and so it will not impact on inflation).

A more nuanced argument is to point out that the credit multiplier does change, and that a sudden and significant change in the credit multiplier will create a sudden inflationary or deflationary distortion. This is true, but it begs the question “why does the credit multiplier change”? Put another way — “why would people/banks be more willing to give loans”?

On this issue, BHH actually agree with Seglin and White and other libertarians that in a free market people/banks will be more willing to give loans because there are more productive investment opportunities. The logical consequence of this is that the increase in the credit multiplier (and consequently broad money) will be related to an increase in production, and so there would be no significant monetary distortion. Indeed, as Seglin and White explain, the growth of the credit multiplier would be necessary to prevent a potential deflationary monetary distortion. But while BHH effectively admit that FR-banking doesn’t cause inflation, they go on to argue that prices adjust instantly and so there is no such thing as “monetary distortion” anyway. They don’t seem to realise that such a situation of money neutrality makes the whole debate irrelevant and FR-banking perfectly benign.

Opponents of FR-banking could perhaps claim that people/banks will start providing more loans due to “animal spirits” or “irrational exuberance” or some other random force, and this is possible. It is certainly true that when you allow people to provide loans (or undertake any activity), they may make mistakes. If enough mistakes are made, then it could create a monetary distortion. However, this potential cost must be weighed against the above benefits. Further, it is worth remembering that monetary distortions can easily be created even without FR-banking (a sudden change in production, or the base money, or velocity) so banning FR-banking will not prevent monetary distortions.

We don’t just have to rely on theory about FR-banking and inflation; we can look at the evidence. During his speech at the Mises Seminar, Chris Leithner claimed that FR-banking caused inflation. He then proceeded to show a graph of price changes over the 19th and 20th century which showed mild deflation over the 19th century and then continued inflation in the 20th century after the introduction of government central banking. What Leithner failed to notice was that FR-banking existed all throughout the 19th century, and yet it didn’t lead to inflation. In other words, he proved himself wrong.

There is one other reason why people may complain that FR-banking is dangerous, and that is the possibility that FR-banks could go bankrupt. That is certainly true, but it is also true for any other business in the world. When you give money to a bank, or any other business, you need to take responsibility for the risks you take. If you give money to a high-risk bank (presumably for higher interest) then you must accept the possibility that you could lose some of your money.

To each their own

The beautiful thing about a free economy is that if people have different preferences, they can buy different things. Under “free banking” there would be competition between different money suppliers, and competition between different banks, each offering their own products. There is no need for BHH to determine the “one true way to bank”, just as we don’t need to determine the “one true way to bake bread”. In a free economy, we can simply allow people to make their own choices, and the more effective system is likely to win out.

There are of course many problems with the current monetary system, and those problems were a significant cause of the American financial crisis. Key among these problems were government mismanagement of money supply (printing too much money) and moral hazard where the government effectively subsidises bad banking decisions, and so they get more bad banking decisions. Austrian economics has a lot to say about these matters, and the economic discussion would improve significantly if Austrian ideas were better understood. Unfortunately, while we have some Austrian economists arguing that “credit is fraud” and wanting to effectively ban banking, it will be hard for the broader economic community to take us seriously.

Originally published at my personal website johnhumphreys.com.au

Submission to the Legal Affairs, Police, Corrective Services and Emergency Services Committee

RE: CIVIL PARTNERSHIP BILL 2011

On behalf of the Australian Libertarian Society (ALS), I would like to suggest that the government does not belong in marriage at all. The debate about how the government should regulate our love lives and our personal relationships rests on the idea that the government should be involved in the first place. That starting assumption is flawed. Love and relationships do not become better or worse because you inform a politician. Few married people conclude that their love is real only because it has been approved by Anna Bligh or Julia Gillard.

A marriage or civil union is an agreement between two people, and the only people who should be able to make that decision are the people involved. So long as the people involved are consenting adults, there is no reason for the government to restrict their right to form a contract with each other. The idea that the government should restrict the basic economic freedom to contract, on the basis that the parties to the contract are the same sex, is a perplexing attack on liberalism and the rule of law.

Ideally, the government should fully deregulate “marriage”. But if the government insists on continuing its weird fixation with documenting our love lives, then at the very least they should conduct their kinky hobby without discrimination. Personal discrimination is necessary and normal in everyday life, but government discrimination should never be tolerated because the government has the privileged position of being able to impose their views on others through force, and without direct consent.

In case this isn’t clear, let me state it simply — marriage should be fully deregulated, but if that is considered “too radical” then the government should at least allow for same-sex civil unions.

Defenders of marriage will rightly say that marriage is traditionally a religious concept. If only it had stayed that way. I suggest that religious groups should be free to discriminate according to their beliefs, just as we all discriminate every day regarding who we date, meet, support, visit, like, etc. However, that discrimination must not be done with the backing of government. Churches should always be free to *not* conduct a same-sex marriage or a same-sex union, but that decision should be left to each church, and not imposed by the government.

Freedom is now considered a quaint concept in most of the western world, including Australia. While political talking heads will argue passionately about how the government should run our lives, most people are genuinely perplexed when they hear the idea that perhaps the government should not run our lives at all. Many people now feel comfortable in their gilded cage, debating about the rules that our “leaders” should impose on us. This letter is in support of civil unions, and to let you know that some of us still believe in human self-ownership and reject the idea of government control of our lives.

You may set restrictive laws if you like. I will consider obeying them. Who is Ron Paul?

Kind Regards,

John Humphreys
Australian Libertarian Society
libertarian.org.au

I found a few of his examples to be overly harsh, but found his thesis to be generally persuasive. Instead of trying to review his themes, I think it best to provide some extended quotes, and then encourage you to read the rest…

“This is how the game works: public money levied in taxes from the poor of the rich countries is transferred in the form of ‘foreign aid’ to the rich in the poor countries; the rich in the poor countries then hand it back for safe-keeping to the rich in the rich countries. The real trick, throughout this cycle of expropriation, is to maintain the pretence that it is the poor in poor countries who are being helped all along. The winner is the player who manages to keep a straight face while building up a billion-dollar bank account”

…..

“At $60 billion a year [in 1989]… aid is already quite large enough to do harm. Indeed, as this book has argued at some length, it is often profoundly dangerous to the poor and inimical to their interests: it has financed the creation of monstrous projects that, at vast expense, have devastated the environment and ruined lives; it has supported and legitimised brutal tyrannies; it has facilitated the emergence of fantastical and Byzantine bureaucracies staffed by legions of self-serving hypocrites; it has sapped the initiative, creativity and enterprise of ordinary people and substituted the superficial and irrelevant glitz of imported advice; it has sucked potential entrepreneurs and intellectuals in the developing countries into non-productive administrative activities; it has created a ‘moral tone’ in international affairs that denies the hard task of wealth creation and that substitutes easy handouts for the rigours of self-help; in addition, throughout the Third World, it has allowed the dead grip of imposed officialdom to suppress popular choice and individual freedom.

“Aid has its defenders, not least the highly paid public-relations men and women who spend millions of dollars a year justifying the continued existence of the agencies that employ them. Such professional communicators must reject out of hand the obvious conclusions of this book: that aid is a waste of time and money ,that its results are fundamentally bad, and that — far from being increased — it should be stopped forthwith before more damage is done.

“Whenever such suggestions are made the lobbyists throw up their hands in horror. Despite some regrettable failures, they protect, aid is justified by its successes; despite some glitches and problems, it is essentially something that works; most important of all — the emotional touch, the appeal to the heartstrings — they argue with passion that aid must not be stopped because the poor could not survive without it. The Brandt Commission provided a classic example of this line of thought: ‘For the poorest countries,’ it told us flatly in its final report, ‘aid is essential to survival.’

“Such statements, however, patronise and undervalue the people of the poor countries concerned. They are, in addition, logically indefensible when uttered by those who also want us to believe that ‘aid works’. Through history and pre-history all countries everywhere got by perfectly well without any aid at all. Furthermore, in the 1950s they got by with much less aid than they did, for example, in the 1970s — and were apparently none the worse for the experience. Now, suddenly, at the tail end of almost fifty years of development assistance, we are told that large numbers of these same countries have lost the ability to survive a moment longer unless they continue to receive ever-larger amounts of aid. If this is indeed the case — and if the only measurable impact of all these decades of development has been to turn tenacious survivors into helpless dependents — then it seems to me to be beyond dispute that aid does not work.

“On the other hand, if the statement that ‘aid works’ is true, then presumably the poor should be in a much better shape than they were before they first began to receive it half a century ago. If so, then aid’s job should by now be nearly over and it ought to be possible to begin a gradual withdrawal without hurting anyone.

“Of course, the ugly reality is that most poor people in most poor countries most of the time never receive or even make contact with aid in any tangible shape or form: whether is it present or absent, increased or decreased, are thus issues that are simply irrelevant to the ways in which they conduct their daily lives. After the multi-billion-dollar ‘financial flows’ involved have been shaken through the sieve of over-priced and irrelevant goods that must be bought in the donor countries, filtered again in the deep pockets of hundreds of thousands of foreign experts and aid agency staff, skimmed off by dishonest commission agents, and stolen by corrupt Ministers and Presidents, there is really very little left to go around. This little, furthermore, is then used thoughtlessly, or maliciously, or irresponsibly by those in power — who have no mandate from the poor, who do not consult with them and who are utterly indifferent to their fate. Small wonder, then, that the effects of aid are so often vicious and destructive for the most vulnerable members of human society.”

That ends the polite and optimistic part of the book. The rest is a disappointing story of repeated mismanagement, incompetence, bureaucracy, waste, and corruption. I fear that Hancock is right when he concludes that the problem is institutional. It is too easy for people to conclude that the system can work if only it is repeated enough times with “good people” instead of “bad people”, but the truth is that sometimes the institutional arrangement just doesn’t work.

I would argue that the key institutional problems relate to incentives and knowledge. There is nothing wrong with the concept of helping people, but before good intentions can become good outcomes you need to ensure that the institutions are such that people face the right incentives and knowledge can be effectively coordinated. Most of the sad stories in Hancock’s book are examples of people responding rationally to warped incentives, or people failing to effectively use available knowledge.

This is an echo of the same institutional debates that happened 100 years ago regarding business, where Hayek convincingly argued that a voluntary system will tend to provide better incentives and use of knowledge compared with a bureaucratic system. In hindsight it is clear that Hayek was right and that private business generally out-performs government business. A similar debate is now needed in the “social” sector, where we need to consider whether a voluntary civil society (including mutual societies, charities, extended families and social business) might provide a better institutional framework compared to the ever-growing (but seemingly ever-failing) welfare and aid bureaucracy.

So with only a little bit of poetic licence, I will run through the candidates in pairs… matching an “insider” and an “outsider” together for each category.

Frontrunners — Mitt Romney (establishment) v Michele Bachmann (outsider). Romney has been leading in all major polls since the start of the race, but many consider him to be a soft leader who is in front mostly on name-recognition. He was a contender in the 2008 nomination race before losing out to John McCain. Bachmann has been the outsider who has caught the most momentum in recent weeks, leading the polls in some states (all important Iowa) and second in others (New Hampshire). The problem with Romney is his history of supporting a health mandate and seemingly changing his opinions to suit the circumstances. Bachmann is considered more of a conviction and “tea party” politician, but lacks the experience and as a “mini-Palin” has occasionally suffered from “foot-in-mouth” disease. She’s free-market and socially conservative.

Just behind — Rick Perry (establishment) v Ron Paul (outsider). Rick Perry hasn’t entered the race yet, but if/when he does he will automatically be in the mix as he is already polling at or above 10%. In some ways he is a cross between Romney & Bachmann… with the experience and credibility of Romney but with some of the conservative convictions of Bachmann. He has previously voiced sympathy with the “independent Texas” movement, but some question whether America is ready for another Texan governor (following Dubya). On the other side is libertarian favourite Ron Paul who has consistently been coming in near the top of the polls (around 10%) and came in second in fund-raising so far. The principled doctor now has a more professional campaign, but he is still being over-looked by many in the media.

Probably won’t run — Rudy Giuliani (establishment) v Sarah Palin (outsider). Both Giuliani and Palin consistently figure highly in the polls (around 10%) but it’s not clear whether they will enter the race. While Palin consistently scores highly on likeability for Republicans, she also scores very high in unlikeability and does poorly in match-ups with Obama. At the moment it seems that her support is shifting over to Bachmann as the “new Palin”. If either of these candidates run they will join the top-tier and make it very difficult for the below candidates to rise.

Waiting in the wings — Tim Pawlenty (establishment) v Herman Cain (outsider). The insider media has been talking up Pawlenty for a while, but he doesn’t seem to be getting traction in the polls. He still has enough money and support to be a viable challenger, but at the moment he is running just off the pace. Cain also has enough support to be taken seriously, but not enough to be considered strong. For a while there was a whisper that he could be the dominant outsider candidate, but his support has fallen off in recent weeks as Bachmann stole the prize of “favourite outsider”. Cain is unique in this race both for being the only black candidate and also because he’s the only non-politician… instead making his name as CEO of a pizza chain. Both pitch themselves as solid conservatives.

2 percent — Jon Huntsman (establishment) v Newt Gingrich (outsider). Huntsman is probably the most “moderate” candidate in the field and it is thought he could do quite well against Obama… so long as he can get the nomination. He is the second Mormon in the race (along with Romney), is considered a “social liberal”, is fluent in Chinese, and currently lagging in the polls. He needs Giuliani to stay out of the race and Romney to stumble, and then he could be a strong challenger. Gingrich was the house majority leader back in the 90s and has a small band of dedicated followers, but he is also the most hated of all the candidates and his campaign seems to be stuck in first gear.

1 percent — Rick Santorum (establishment) v Gary Johnson (outsider). These guys are rank outsiders and are sometimes not even included in mainstream polling. Santorum is known for his socially conservative views while Gary Johnson is a pro-choice libertarian. Johnson is my personal favourite in the race, but I’m not holding my breath. He was a two-term governor in a Democrat state, has a proven record at cutting the size of government, and has climbed mount Everest… but nobody seems to be listening.

The betting markets suggest that the nomination is still most likely to go to an establishment candidate — Romney, Perry, Pawlenty or Huntsman. Though obviously Pawlenty and Hunstman have a lot of work in front of them to get their poll numbers up to match the betting odds. Bachmann is the most likely outsider, while the betting markets don’t like the libertarian candidates, significantly discounting Paul & Johnson.

Romney — 32%
Pawlenty — 15%
Huntsman — 12%
Perry — 12%
Bachmann — 6%
Palin — 6%
Cain — 4%
Paul — 3%
Gingrich — 2%
Giuliani — 2%
Santorum — 1%
Johnson — 0%

It’s hard for me to list my order of preference, because there are a lot of candidates who I am largely indifferent to or simply don’t know well enough to make an informed opinion. They are all now saying whatever they think they want the public to hear, which makes it hard to learn about them. Obviously, I prefer Gary Johnson and Ron Paul as the libertarian candidates in the race, but beyond that it’s hard to pick. Perry talks the talk on cutting government and states rights, and Huntsman is a social liberal who has cut taxes and opposes corn subsidies. I can’t think of any good reasons to get behind Giuliani or Romney, while Santorum and Pawlenty are probably too socially conservative for my liking.

Whoever wins, my great hope is that they are able to balance the budget and pay down the debt. The growing fiscal crisis in America is leading to inflationary monetary policy, which is seeing the US dollar fall compared to more stable currencies like the Australian dollar. And since I have various investments in US dollars, their falling dollar is hurting my portfolio. I am in effect being taxed by the US government because they don’t know how to run a budget.