“Ministers may need to put Britons off taking the train between Birmingham and Manchester because the decision to axe the second phase of HS2 means there will be fewer seats on existing rail services, parliament’s spending watchdog has warned..
“Among the National Audit Office’s other findings is a warning that the NHS in England may “break” before it can meet standards expected by patients and that ministers have tried to clear an epidemic of potholes without having “a good enough understanding of the condition of local roads”..
“In perhaps the most eye-catching report, the NAO said former prime minister Rishi Sunak’s decision to axe the northern leg of HS2 may force the government to incentivise people to avoid using trains. The watchdog said scrapping the northern leg of the flagship high speed rail link would take three years and cost up to £100mn, and that some platforms would still be built even though they would never be used..
“New custom-built HS2 trains that will run on the existing tracks north of Birmingham when the link becomes operational could result in 17 per cent less capacity than existing stock, the watchdog said in a report on Tuesday. As a result, the government may need to manage demand by “incentivising people to travel at different times or to not travel by rail”..”
Get your Free
financial review
The economist Milton Friedman is credited with the following aphorism:
“If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.”
The actual origin of the quotation remains unclear, though it would appear initially to have been used in the context of Communist government. It matters not. The sad reality is that all forms of Big Government are bad, and almost equally injurious to a healthy and well-functioning economy.
The English philosopher Thomas Hobbes discussed the ideal structure of society and government in his 1651 Treatise ‘Leviathan’. Written during the English Civil War, ‘Leviathan’ reflects the time of its writing, and Hobbes’ horror at the war’s destruction and brutality. His response was to advocate for an absolute sovereign power, and some of his recommendations are distinctly distasteful to the modern reader, notably his support for press censorship and restrictions on freedom of speech in the interests of social control. On its publication, contemporary critics pointed to its variety of inconsistencies. The English bishop Brian Duppa wrote that:
“..as in the man, so there are strange mixtures in the book; many things said so well that I could embrace him for it, and many things so wildly and unchristianly, that I could scarce have so much charity for him, as to think he was ever Christian.”
The Scottish writer Alexander Ross observed:
“I finde him a man of excellent parts, and in this book much gold, and withal much dross; he hath mingled his wine with too much water..”
And the English historian Hugh Trevor-Roper concluded, of Hobbes and ‘Leviathan’:
“The axiom, fear; the method, logic; the conclusion, despotism.”
The word ‘Leviathan’ today is invariably used as synonymous with the overmighty, over-arching State. Its use is not so much as an endorsement, but as a warning.
But at least Hobbes debated the issue. The tragedy of the human condition is that so many generations (not least of politicians) stubbornly hew to ‘accepted’ practice, regardless of the results.
Governments always believe they can mould markets and economies to their will. Almost all interference in the free market leads to some form of inflation, as market efficiency is impaired or finally destroyed. As Schuettinger and Butler point out in their history of wage and price controls, government- provoked inflation is nothing new. Nor are the proposed solutions, as they explain in ‘Forty centuries of wage and price controls: how not to fight inflation’ (The Heritage Foundation, 1979):
“The co-authors began working on this book in 1974, just after the termination of President Nixon’s controls in the United States. Since that time, we have examined over one hundred cases of wage and price controls in thirty different nations from 2000 BC to AD 1978.
“We have concluded that, while there have been some cases in which controls have at least apparently curtailed the effects of inflation for a short time, they have always failed in the long run. The basic reason for this is that they have not addressed the real cause of inflation which is an increase in the money supply over and above the increase in productivity. Rulers from the earliest times sought to solve their financial problems by debasing the coinage or issuing almost worthless coins at high face values; through modern technology the governments of recent centuries have had printing presses at their disposal. When these measures resulted in inflation, the same rulers then turned to wage and price controls.”
The Roman Emperor Nero (AD 54-68) responded to growing economic problems by devaluing the currency. The devaluation started relatively modestly but accelerated under Marcus Aurelius (AD 161-180) when the weights of coins were reduced. “These manipulations were the probable cause of a rise in prices,” wrote historian Jean-Philippe Levy. The Emperor Commodus (AD 180-192) turned to price controls and decreed a series of maximum prices, but things deteriorated and the rise in prices became “headlong” under the Emperor Caracalla (AD 211-217).
Egypt was the imperial province most severely affected. During the fourth century, the value of the gold solidus changed from 4,000 to 180 million Egyptian drachmai. Levy also attributes the grotesque rise in prices which followed to the increase of the amount of money in circulation. The price of the same measure of wheat in Egypt rose from 6 drachmai in the first century to 200 in the third century; in AD 314, the price rose to 9,000 drachmai and in AD 334 to 78,000. Shortly after AD 344 the price had reached more than 2 million drachmai. Other provinces endured similar inflations.
Levy:
“In monetary affairs, ineffectual regulations were decreed to combat [Gresham’s Law, that bad money drives out good] and domestic speculation in the different kinds of money. It was forbidden to buy or sell coins: they had to be used for payment only. It was even forbidden to hoard them ! It was forbidden to melt them down (to extract the small amount of silver alloyed with the bronze). The punishment for all these offences was death. Controls were set up along roads and at ports, where the police searched traders and travellers. Of course, all these efforts were to no purpose.”
Perhaps the most notorious attempt to control wages and prices took place under the Emperor Diocletian. Commodity prices and wages reached “unprecedented heights” shortly after he assumed the throne in AD 284. The Empire’s economic troubles have been attributed to a vast increase in the armed forces (to repel invasions by barbarian tribes); to a huge building programme of questionable value; to the consequent raising of taxes and the employment of ever more government officials; and to the use of forced labour to accomplish much of Diocletian’s public works programme. (Note the ‘success’ of the UK Government’s HS2 rail programme.)
Diocletian, on the other hand, attributed the inflation entirely to the “avarice” of merchants and speculators. He could have been an EU Commissioner.
What is undeniable is that as taxes rose, the tax base shrank, and it became increasingly difficult to collect taxes, resulting in a vicious circle.
Probably the single biggest cause of Diocletian’s inflation was his debasement of the coinage. In the early Empire, the standard Roman coin was the silver denarius. Its value had gradually been reduced in the years leading up to his reign as emperors issued tin-plated copper coins which still kept the name “denarius”. Under Gresham’s Law, silver and gold coins were hoarded and left circulation.
During the 50 years ending in AD 268, the silver content of the denarius fell to one five- thousandth of its original level. Trade was reduced to barter and economic activity stagnated. The middle class was almost obliterated. To overcome the baleful influence of his bureaucracy, Diocletian introduced a system of taxes based on payments in kind, which had the effect of destroying the freedom of the lower classes and tying them to the land. Then came currency reform, and the Edict on prices and wages. Historian Roland Kent:
“Diocletian took the bull by the horns and issued a new denarius which was frankly of copper and made no pretence of being anything else; in doing this he established a new standard of value. The effect of this on prices needs no explanation; there was a readjustment upward, and very much upward.”
Diocletian had the option of either inflating – minting increasingly worthless denarii, or to deflate – in the form of cutting government expenditures. He chose to inflate. He also chose to fix the prices of goods and services and suspend the freedom of the people to decide what the currency was actually worth. He fixed the maximum prices at which beef, grain, eggs and clothing could be sold, and the wages that workers could receive, and prescribed the death penalty for anyone who disposed of his wares at a higher figure. Prices still went up.
Less than four years after the currency reform associated with the Edict, the price of gold in terms of the denarius had risen by 250%. By AD 305 the process of currency debasement began again. Levy:
“State intervention and a crushing fiscal policy made the whole empire groan under the yoke; more than once, both poor men and rich prayed that the barbarians would deliver them from it. In AD 378, the Balkan miners went over en masse to the Visigoth invaders, and just prior to AD 500 the priest Salvian expressed the universal resignation to barbarian domination.”
David Meiselman, in a foreword to Forty centuries… writes as follows:
“What, then, have price controls achieved in the recurrent struggle to restrain inflation and overcome shortages ? The historical record is a grimly uniform sequence of repeated failure. Indeed, there is not a single episode where price controls have worked to stop inflation or cure shortages. Instead of curbing inflation, price controls add other complications to the inflation disease, such as black markets and shortages that reflect the waste and misallocation of resources caused by the price controls themselves. Instead of eliminating shortages, price controls cause or worsen shortages. By giving producers and consumers the wrong signals because ‘low’ prices to producers limit supply and ‘low’ prices to consumers stimulate demand, price controls widen the gap between supply and demand.
“Despite the clear lessons of history, many governments and public officials still hold the erroneous belief that price controls can and do control inflation. They thereby pursue monetary and fiscal policies that cause inflation, convinced that the inevitable cannot happen.
“When the inevitable does happen, public policy fails and hopes are dashed. Blunders mount, and faith in governments and government officials whose policies caused the mess declines. Political and economic freedoms are impaired and general civility suffers.”
John Butler sees light at the end of the tunnel:
“Were Hayek still with us, he would have helped to explain it. High taxation, burdensome regulations and a generally elevated level of government intervention in the economy discourage investment in equipment, training, you name it. Less investment in physical and human capital eventually results in weaker productivity.
“However, in a twist of fortune, there is one area where UK investment is set to boom, and that is North Sea energy production. Geologists have long known that the North Sea’s resources are far from being fully exploited. Drilling technology is also much better than it was during the first North Sea boom in the 1970s and 1980s.
“If there is one thing that would help to bring general price inflation down, including food price inflation, it would be cheaper energy. Fertiliser, production, processing, transport… Ever since the introduction of mechanised agriculture during the Industrial Revolution, energy costs have been a primary input into food prices.
“That the UK is blessed with substantial low-hanging fossil energy fruit is well known. When things get to the point where the government is considering imposing food price controls, desperation has clearly set in. It might be politically awkward given the current government’s green credentials, but I believe that we are about to embark on a huge detour on the Road to Net Zero.
“I’ll take that over the Road to Serfdom any day, and I suspect a large part of the British public would too. As an investor, I’m also going to take advantage of the huge amount of investment I believe is heading towards the North Sea. Following years or drought, I expect a deluge.”
Since we started this week with reference to a story from ‘The Financial Times’, we will also end with one, this from 11th July 2024:
‘Labour considers ban on new North Sea licences in pipeline’.
………….
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio – with no obligation at all:
Get your Free
financial review
…………
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks.
“Ministers may need to put Britons off taking the train between Birmingham and Manchester because the decision to axe the second phase of HS2 means there will be fewer seats on existing rail services, parliament’s spending watchdog has warned..
“Among the National Audit Office’s other findings is a warning that the NHS in England may “break” before it can meet standards expected by patients and that ministers have tried to clear an epidemic of potholes without having “a good enough understanding of the condition of local roads”..
“In perhaps the most eye-catching report, the NAO said former prime minister Rishi Sunak’s decision to axe the northern leg of HS2 may force the government to incentivise people to avoid using trains. The watchdog said scrapping the northern leg of the flagship high speed rail link would take three years and cost up to £100mn, and that some platforms would still be built even though they would never be used..
“New custom-built HS2 trains that will run on the existing tracks north of Birmingham when the link becomes operational could result in 17 per cent less capacity than existing stock, the watchdog said in a report on Tuesday. As a result, the government may need to manage demand by “incentivising people to travel at different times or to not travel by rail”..”
Get your Free
financial review
The economist Milton Friedman is credited with the following aphorism:
“If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.”
The actual origin of the quotation remains unclear, though it would appear initially to have been used in the context of Communist government. It matters not. The sad reality is that all forms of Big Government are bad, and almost equally injurious to a healthy and well-functioning economy.
The English philosopher Thomas Hobbes discussed the ideal structure of society and government in his 1651 Treatise ‘Leviathan’. Written during the English Civil War, ‘Leviathan’ reflects the time of its writing, and Hobbes’ horror at the war’s destruction and brutality. His response was to advocate for an absolute sovereign power, and some of his recommendations are distinctly distasteful to the modern reader, notably his support for press censorship and restrictions on freedom of speech in the interests of social control. On its publication, contemporary critics pointed to its variety of inconsistencies. The English bishop Brian Duppa wrote that:
“..as in the man, so there are strange mixtures in the book; many things said so well that I could embrace him for it, and many things so wildly and unchristianly, that I could scarce have so much charity for him, as to think he was ever Christian.”
The Scottish writer Alexander Ross observed:
“I finde him a man of excellent parts, and in this book much gold, and withal much dross; he hath mingled his wine with too much water..”
And the English historian Hugh Trevor-Roper concluded, of Hobbes and ‘Leviathan’:
“The axiom, fear; the method, logic; the conclusion, despotism.”
The word ‘Leviathan’ today is invariably used as synonymous with the overmighty, over-arching State. Its use is not so much as an endorsement, but as a warning.
But at least Hobbes debated the issue. The tragedy of the human condition is that so many generations (not least of politicians) stubbornly hew to ‘accepted’ practice, regardless of the results.
Governments always believe they can mould markets and economies to their will. Almost all interference in the free market leads to some form of inflation, as market efficiency is impaired or finally destroyed. As Schuettinger and Butler point out in their history of wage and price controls, government- provoked inflation is nothing new. Nor are the proposed solutions, as they explain in ‘Forty centuries of wage and price controls: how not to fight inflation’ (The Heritage Foundation, 1979):
“The co-authors began working on this book in 1974, just after the termination of President Nixon’s controls in the United States. Since that time, we have examined over one hundred cases of wage and price controls in thirty different nations from 2000 BC to AD 1978.
“We have concluded that, while there have been some cases in which controls have at least apparently curtailed the effects of inflation for a short time, they have always failed in the long run. The basic reason for this is that they have not addressed the real cause of inflation which is an increase in the money supply over and above the increase in productivity. Rulers from the earliest times sought to solve their financial problems by debasing the coinage or issuing almost worthless coins at high face values; through modern technology the governments of recent centuries have had printing presses at their disposal. When these measures resulted in inflation, the same rulers then turned to wage and price controls.”
The Roman Emperor Nero (AD 54-68) responded to growing economic problems by devaluing the currency. The devaluation started relatively modestly but accelerated under Marcus Aurelius (AD 161-180) when the weights of coins were reduced. “These manipulations were the probable cause of a rise in prices,” wrote historian Jean-Philippe Levy. The Emperor Commodus (AD 180-192) turned to price controls and decreed a series of maximum prices, but things deteriorated and the rise in prices became “headlong” under the Emperor Caracalla (AD 211-217).
Egypt was the imperial province most severely affected. During the fourth century, the value of the gold solidus changed from 4,000 to 180 million Egyptian drachmai. Levy also attributes the grotesque rise in prices which followed to the increase of the amount of money in circulation. The price of the same measure of wheat in Egypt rose from 6 drachmai in the first century to 200 in the third century; in AD 314, the price rose to 9,000 drachmai and in AD 334 to 78,000. Shortly after AD 344 the price had reached more than 2 million drachmai. Other provinces endured similar inflations.
Levy:
“In monetary affairs, ineffectual regulations were decreed to combat [Gresham’s Law, that bad money drives out good] and domestic speculation in the different kinds of money. It was forbidden to buy or sell coins: they had to be used for payment only. It was even forbidden to hoard them ! It was forbidden to melt them down (to extract the small amount of silver alloyed with the bronze). The punishment for all these offences was death. Controls were set up along roads and at ports, where the police searched traders and travellers. Of course, all these efforts were to no purpose.”
Perhaps the most notorious attempt to control wages and prices took place under the Emperor Diocletian. Commodity prices and wages reached “unprecedented heights” shortly after he assumed the throne in AD 284. The Empire’s economic troubles have been attributed to a vast increase in the armed forces (to repel invasions by barbarian tribes); to a huge building programme of questionable value; to the consequent raising of taxes and the employment of ever more government officials; and to the use of forced labour to accomplish much of Diocletian’s public works programme. (Note the ‘success’ of the UK Government’s HS2 rail programme.)
Diocletian, on the other hand, attributed the inflation entirely to the “avarice” of merchants and speculators. He could have been an EU Commissioner.
What is undeniable is that as taxes rose, the tax base shrank, and it became increasingly difficult to collect taxes, resulting in a vicious circle.
Probably the single biggest cause of Diocletian’s inflation was his debasement of the coinage. In the early Empire, the standard Roman coin was the silver denarius. Its value had gradually been reduced in the years leading up to his reign as emperors issued tin-plated copper coins which still kept the name “denarius”. Under Gresham’s Law, silver and gold coins were hoarded and left circulation.
During the 50 years ending in AD 268, the silver content of the denarius fell to one five- thousandth of its original level. Trade was reduced to barter and economic activity stagnated. The middle class was almost obliterated. To overcome the baleful influence of his bureaucracy, Diocletian introduced a system of taxes based on payments in kind, which had the effect of destroying the freedom of the lower classes and tying them to the land. Then came currency reform, and the Edict on prices and wages. Historian Roland Kent:
“Diocletian took the bull by the horns and issued a new denarius which was frankly of copper and made no pretence of being anything else; in doing this he established a new standard of value. The effect of this on prices needs no explanation; there was a readjustment upward, and very much upward.”
Diocletian had the option of either inflating – minting increasingly worthless denarii, or to deflate – in the form of cutting government expenditures. He chose to inflate. He also chose to fix the prices of goods and services and suspend the freedom of the people to decide what the currency was actually worth. He fixed the maximum prices at which beef, grain, eggs and clothing could be sold, and the wages that workers could receive, and prescribed the death penalty for anyone who disposed of his wares at a higher figure. Prices still went up.
Less than four years after the currency reform associated with the Edict, the price of gold in terms of the denarius had risen by 250%. By AD 305 the process of currency debasement began again. Levy:
“State intervention and a crushing fiscal policy made the whole empire groan under the yoke; more than once, both poor men and rich prayed that the barbarians would deliver them from it. In AD 378, the Balkan miners went over en masse to the Visigoth invaders, and just prior to AD 500 the priest Salvian expressed the universal resignation to barbarian domination.”
David Meiselman, in a foreword to Forty centuries… writes as follows:
“What, then, have price controls achieved in the recurrent struggle to restrain inflation and overcome shortages ? The historical record is a grimly uniform sequence of repeated failure. Indeed, there is not a single episode where price controls have worked to stop inflation or cure shortages. Instead of curbing inflation, price controls add other complications to the inflation disease, such as black markets and shortages that reflect the waste and misallocation of resources caused by the price controls themselves. Instead of eliminating shortages, price controls cause or worsen shortages. By giving producers and consumers the wrong signals because ‘low’ prices to producers limit supply and ‘low’ prices to consumers stimulate demand, price controls widen the gap between supply and demand.
“Despite the clear lessons of history, many governments and public officials still hold the erroneous belief that price controls can and do control inflation. They thereby pursue monetary and fiscal policies that cause inflation, convinced that the inevitable cannot happen.
“When the inevitable does happen, public policy fails and hopes are dashed. Blunders mount, and faith in governments and government officials whose policies caused the mess declines. Political and economic freedoms are impaired and general civility suffers.”
John Butler sees light at the end of the tunnel:
“Were Hayek still with us, he would have helped to explain it. High taxation, burdensome regulations and a generally elevated level of government intervention in the economy discourage investment in equipment, training, you name it. Less investment in physical and human capital eventually results in weaker productivity.
“However, in a twist of fortune, there is one area where UK investment is set to boom, and that is North Sea energy production. Geologists have long known that the North Sea’s resources are far from being fully exploited. Drilling technology is also much better than it was during the first North Sea boom in the 1970s and 1980s.
“If there is one thing that would help to bring general price inflation down, including food price inflation, it would be cheaper energy. Fertiliser, production, processing, transport… Ever since the introduction of mechanised agriculture during the Industrial Revolution, energy costs have been a primary input into food prices.
“That the UK is blessed with substantial low-hanging fossil energy fruit is well known. When things get to the point where the government is considering imposing food price controls, desperation has clearly set in. It might be politically awkward given the current government’s green credentials, but I believe that we are about to embark on a huge detour on the Road to Net Zero.
“I’ll take that over the Road to Serfdom any day, and I suspect a large part of the British public would too. As an investor, I’m also going to take advantage of the huge amount of investment I believe is heading towards the North Sea. Following years or drought, I expect a deluge.”
Since we started this week with reference to a story from ‘The Financial Times’, we will also end with one, this from 11th July 2024:
‘Labour considers ban on new North Sea licences in pipeline’.
………….
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio – with no obligation at all:
Get your Free
financial review
…………
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks.
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