back to article Adam Smith was right about that invisible hand, you know

We have a nice little empirical proof that Adam Smith really was right about us all being guided by that invisible hand. Yeah, I know, you're sooo tired of the free market maniac telling you that governments are all wet and laissez faire is where it should be. Except that's not something Smith ever said nor is it what he meant …

Algorithmic trading

So would it be fair to say that the current trend for algorithmic trading is likely to subvert this beneficial invisible hand by removing human quirks from the system? I wonder how HFT investments stack up in comparison? Could they ultimately be detrimental to the wider economic well-being by eliminating human nature from the market? Will they make markets that suit the aims of our future AI masters? (Sorry, had to get a paranoid ROTM reference in there, this is el reg after all)

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Re: Algorithmic trading

Well, HFT makes absolutely no difference at all to investment allocations. To the trading of them, yes, and almost entirely beneficial at that level. But *what* people invest in almost entirely unaffected by HFT.

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Re: Algorithmic trading

Hi, chris swain,

With particular, peculiar regard to three questions posed there for answering ......

So would it be fair to say that the current trend for algorithmic trading is likely to subvert this beneficial invisible hand by removing human quirks from the system? Could they ultimately be detrimental to the wider economic well-being by eliminating human nature from the market? Will they make markets that suit the aims of our future AI masters?
..... the politically correct and direct and unambiguous answer is YES to all three.

And such presents a titanic broad band of wealth and virtually unlimited opportunities in a whole host of brave new orderly world orders for zeroday vulnerability exploiters and exporters to explore and profit obscenely from. And such is the real present day nightmare scenario which current establishment power elite, too big to be thought allowed to fail systems are crashing and burning themselves into. Take a great look around you at the stalled and failing bigger picture shows starring in sub-prime mainstream media productions today.

Dim stories with crazy memes running around like headless chickens springs to mind. And in times and spaces and ages of smarter enlightenment are they and their supporters always gonna perish and explode/implode spectacularly.

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Re: Algorithmic trading

So humans still choose the stocks, the machines just trade them more efficiently? I can envisage a time when someone successfully applies machine learning to the picking process too and when they do everyone will jump on the bandwagon. It would only take a relatively small increase in margin to make it worthwhile.

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Re: Algorithmic trading

"HFT" and "investing" or choosing stocks are two entirely different things. The investing bit is, say (quick, quick, think of an analogy!) fueling a car on diesel or petrol, as appropriate. HFT affects the method of the fueling: are you pouring cans of stuff in or have you got a pump there?

Not quite right but it is like that. HFT is a method of stuff being traded around. what is being traded, or by whom, is a different thing.

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Re: Algorithmic trading

Nobody picks the stocks.

HFT is mostly either arbitrage (this stock in London is 0.1% cheaper in New York if the exchange rate from GBP->Euro->USD is slightly less than X.)

Or front running; people are buying stock X so if I am 0.1km closer to the exchange I can buy it 100us before them and resell it for 0.1% more.

Or market watching; a big pension fund has to hold 30% of a certain class of bonds. On the last payday of the month it will get a huge chunk of new money which it has to buy these bonds with, so just before this the price goes up.

HFT can be a good thing in that it makes the market more efficient, everybody gets to buy Apple for the same price, anybody attempting to sell apple for 0.1c more is going to get zero business. That's why some IPOs and those little "only certain customers can buy these stocks" deals that a bunch of (now bankrupt) merchant banks did - are so bad.

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Re: Algorithmic trading

That's why I read your column: I obviously know little about such things and it is good to broaden my limited knowledge and be entertained. So no machines pick what they trade? I think MIT were playing around with AI-based natural language analysis of financial journalism to facilitate efficient machine stock picks a few years back, guess it came to nothing.

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Re: Algorithmic trading

That could be true. But it wouldn't be HFT. High Frequency Trading. What you're describing there is using an algo to decide what to invest in. About as scary as people using Excel to analyse stock prices really.

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Terminator

Re: Algorithmic trading

Machines do pick what they trade. Certain large banks have fully automated systems running their own books. They are carefully monitored by humans because once you get into automation they can run up rather large positions rather quickly. Plus, once a computer starts doing something ... mechanically ... then some smart person, or better programmed computer, can take advantage of foreknowledge of what the original machine is going to do.

Incidentally, this is why computers are much better than humans at chess but nowhere near as good as them at poker - yet - in spite of the enormous money to be made by an unbeatable poker bot and the relatively minor rewards for making good heuristics for minimising the gamespace in chess.

PS. My portfolio: 40% UK, 20%US, 15% EU, 20% Asia (exc. Japan), 5% Japan.

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Anonymous Coward

Re: Algorithmic trading

@Tim. Having an algo choose what to trade in isn't a problem provided the algo is well tested and something else runs the trading limits around that strategy and is also well tested. I have worked at a place that performed medium frequency algo trading and did it very well. It is in no way as scary as people using Excel to analyse stock prices.

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Holmes

Re: Algorithmic trading

The current stock market is more like a frictionless engine with constant acceleration. HFT is just increasing the speeds at which it spins, but at some point it's still going to tear itself to pieces. We've already had a couple of interesting scares from what were only minor wobbles...

Strongly recommend Flash Boys by Michael Lewis. There's a new invisible hand in the house, and it's about to slap us silly.

To close with the obligatory constructive suggestion: There needs to be some minimum transaction charge (dare I say "tax") to create metaphorical friction. Not certain, but I believe the transaction charge would also redefine the delay times that Michael Lewis is focusing on.

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Re: Algorithmic trading

What you're describing there is using an algo to decide what to invest in. About as scary as people using Excel to analyse stock prices really.

Of course it would be daft to use Excel to... do anything, really. But isn't it true that picking stocks completely at random yields (on average) better results than picking stocks by thinking with our fleshy brains? I'm sure it would be a simple matter to write an algo to pick stocks randomly.

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Anonymous Coward

Congratulations

A clear and informative account of what Smith actually wrote. I'm impressed.

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Re: Congratulations

Partly in response to, I think it was you, being less than impressed with my Smith in another piece recently.

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Anonymous Coward

Re: Congratulations

If so, then my negativism has achieved something useful.

(I'm a great admirer of Smith, but I also happen to think that if you ignore all the blue sky thinking and rabbinical background hangover, Marx was a pretty good economist. Even though Engels did a lot of the leg work.)

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Re: Congratulations

Marx's analysis of some stuff was pretty good. He did understand both Ricardo and Smith a lot better than many moderns for example. I'm certainly guided by some Marxian (ie, influenced by, rather than swallowing the kool aid) stuff. For example, all this robots will take all our jobs stuff. OK, that's what Marx saw as the incredible efficiency of future capitalism, meaning that economic scarcity stops being something we have to worry about. At which point true communism can occur. OK with me.

And I often use his description of how and why wages rise: in the absence of both a reserve army of the unemployed and also monopsony (what he called monopoly capitalism) then wages will rise with productivity as capitalists compete for access for that scarce labour from which they make their profits. It was from this that he derived his warnings about monopoly capitalism.

Of course some of his predictions are looney tunes ....like, say, the idea that monopoly capitalism is inevitable, rather than just something to be aware of and thus avoid.

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Re: Congratulations

> predictions are looney tunes ....like, say, the idea that monopoly capitalism is inevitable,

Ironically since most capitalists regard the idea that they themselves can't, or shouldn't, be a monopoly as looney tunes .

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Anonymous Coward

Re: Congratulations

"And I often use his description of how and why wages rise: in the absence of both a reserve army of the unemployed and also monopsony (what he called monopoly capitalism) then wages will rise with productivity as capitalists compete for access for that scarce labour from which they make their profits. It was from this that he derived his warnings about monopoly capitalism."

I think the problem is that the two contingencies mentioned have appeared. With a broader market (access to more potential workers) and increased efficiency and automation (meaning you need fewer hands to get the job done), you end up with that reserve army of the unemployed. As for the monospony, you can get that with an oligospony as well. They conspire to milk the consumers dry and only then fight for what's left, and you end up with cartel behavior.

"Of course some of his predictions are looney tunes ....like, say, the idea that monopoly capitalism is inevitable, rather than just something to be aware of and thus avoid."

Well, unregulated, capitalism WILL eventually result in an ultimate winner: one who has all the cards and can use them as an infinite barrier of entry to block any upstarts. Think of it like a poker tournament. As players fall out, others amass lots of chips and can use them to muscle out the competition. Sure, some get unlucky, but on average the more you have the better you can fend off. And eventually, someone's going to have all the chips.

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Re: Congratulations

"As for the monospony, you can get that with an oligospony as well. They conspire to milk the consumers dry and only then fight for what's left, and you end up with cartel behavior."

That's monopoly or oligopoly you're talking about there, control of supply. What Marx was (rightly) much more worried about was monopsony, a single buyer. In this case, a monopoly purchaser of labour, who would then be able to determine wages.

Delightfully, the only place this has ever happened was in Soviet states and boy, was Marx right, labour got screwed big time.

"Well, unregulated, capitalism WILL" which is why even classical liberals like me are just fine with regulatory action to break up monopolies.

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Anonymous Coward

Re: Congratulations

"Delightfully, the only place this has ever happened was in Soviet states and boy, was Marx right, labour got screwed big time."

Ah, no, it also happened in Nazi Germany (I'm re-reading Shirer at the moment). The Nazi State allocated workers to industry (and tied peasant farmers to the land) then set wages. Although the propaganda was that the German worker was better off under Hitler, the truth was that the reduction in unemployment was paid for by a bigger reduction in real wages. Not only were hourly rates reduced, but a series of new taxes were introduced, some of which went to the Labour Front - which absorbed some of the unemployed in its huge bureaucracy. The resulting inefficiency is partly demonstrated by the way that the Western allies outproduced Germany without slave labour, though cheap energy in the US played a part in this.

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Re: Congratulations

The production in the US was due to more than cheap energy, having all sorts of raw materials on hand was also a big help. Another big help was the machine tool industry seeing a war coming and engaging in a large scale program training people to run machine tools. Having managers picked on th basis of competency as opposed to part loyalty was another big help. Finally, given individual workers some incentive didn't hurt.

The downside of the big push for production was an incredible industrial accident rate, IIRC ~120,000 fatalities between December 1941 and May 1944.

One last fallout from WW2 was that American manufacturing developed a lot of ways to cut down on the amount of labor required to produce a given widget.

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Re: Congratulations ... Osbornomics Unmasked. ‽

Ah, no, it also happened in Nazi Germany (I'm re-reading Shirer at the moment). The Nazi State allocated workers to industry (and tied peasant farmers to the land) then set wages. Although the propaganda was that the German worker was better off under Hitler, the truth was that the reduction in unemployment was paid for by a bigger reduction in real wages. Not only were hourly rates reduced, but a series of new taxes were introduced, some of which went to the Labour Front - which absorbed some of the unemployed in its huge bureaucracy. The resulting inefficiency is partly demonstrated by the way that the Western allies outproduced Germany without slave labour, though cheap energy in the US played a part in this. ....... Arnaut the less

Sounds very much like current Conservative Party rhetoric and economics, Arnaut the less? Are we to conclude and realise that a new age and wave of creeping neofascism is alive and well and a right old Eton mess for the masses and the errant and arrogant ignorant Bullingdon type Boy?

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Devil

Re: Congratulations

"Of course some of his predictions are looney tunes ....like, say, the idea that monopoly capitalism is inevitable, rather than just something to be aware of and thus avoid."

Actually..

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Re: Congratulations

Hmm, Aly's analysis is rather different. Real wages for the workers rose considerably.

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Re: Congratulations

"That's monopoly or oligopoly you're talking about there, control of supply. What Marx was (rightly) much more worried about was monopsony, a single buyer. In this case, a monopoly purchaser of labour, who would then be able to determine wages."

Why can't an oligospony work as well? If all the members of a cartel agree to limit their wages equally, since there's no need to compete for, say, a glut of workers they need less of (one dies/leaves, get another), then can not a cartel exert the same kind of single-buyer influence as a monospony?

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Anonymous Coward

Re: Congratulations

Isn't this pretty much what a group of Silicon Valley tech companies effectively did and were fined for, though in part it was based on no compete agreements on poaching staff

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Re: Congratulations

" What Marx was (rightly) much more worried about was monopsony, a single buyer."

This is the effective case in a number of areas (mostly agricultural), thanks to the size of large supermarket chains and the lockin supply deals they have.

One of the favourite tricks is to cancel a large supply order a few weeks before it's due for delivery and then offer to take the stuff off the farmer's hands at half (or less) of the contracted value.

One can posit that the behaviour is cartel-like because the supermarkets are a small group of very large buyers and they're all pushing to keep their purchase prices down in order to maintain profits on what they sell.

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Re: Congratulations

"One last fallout from WW2 was that American manufacturing developed a lot of ways to cut down on the amount of labor required to produce a given widget."

You speak like this is a bad thing.

As fewer people are involved in production, more become involved in services. It's not in the manufacturers interest to set prices too high (pricing is never based on cost plus, it's "what the market will bear") even if they hold a monopoly as lack of sales will put them out of business even if the per-item profit is high - but it's better for society overall not to allow monopolies to develop in the first place.

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Anonymous Coward

Re: Congratulations ... Osbornomics Unmasked. ‽

"Are we to conclude and realise that a new age and wave of creeping neofascism is alive and well?"

No.

It's the opposite; under fascist governments, large corporations made big profits but at the expense of total political subjugation to the government. Today, governments are told what to do by the banks and the super-rich (as with the Greek crisis.)

If you read Piketty you will see the situation is completely different from the 1920s and 1930s.

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Re: Congratulations

"As fewer people are involved in production, more become involved in services."

But the problem with this scenario is that fewer people are becoming necessary in services, too. With more intelligent computerization, fewer people are needed to do the same amount of servicing. Bosses can now be their own secretaries, self-checkouts mean you need fewer clerks at the register while ordering tablets means less work for waiters in restaurants (meaning you need fewer waiters), web shops mean you don't need someone on the phone taking an order, and advanced inventory systems mean less human intervention is needed to place orders. It's going to take more specialized (and harder to obtain) skills in order to have a better footing in an increasingly computerized world, and many people (such as the anti-social with no "people" skills: one of the few skills resistant to computerization) will find they've hit the proverbial dead end.

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The invisible hand of the market

is almost always just a little too late. Perhaps the S plane was named after Smith?

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There was I thinking....

That the FTSE-100 was at the level it was because of all those Antipodean & Russian etc Mining Stocks that choose to list in London thus leaving less room UK PLC based companies.

How does this square up with the bias towards local companies?

One of the above is wrong? Or nearly right as with pretty well everything 'Economic' (-al with the truth)

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Re: There was I thinking....

FTSE is a fun one. Because some 50% or so of the total UK stock market is foreign owned. More of FTSE is. So, we could think that this is evidence of people not having that domestic bias. Or we could look to your point, that many are foreign companies simply listed in London, and think of it as evidence of that domestic bias.

Your choice.

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Re: There was I thinking....

Isn't that two different things?

Most of the FTSE could be foreign owned, you would expect that in a major market the majority of the shares would be owned by international insurance, pension funds etc - rather than necessarily by share owning British citizens.

The majority of firms in the FTSE being foreign controlled is because the London market is a so much better place to list than Moscow or Singapore, or because they were all originally British firms that have now been taken over.

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Unhappy

You say "High Frequency Trading"

I say "Man in the Middle Attack."

Buyer. "buy X shares of Y" (from Seller)

300 microseconds later...

"Hello Mr Buyer, I'm the HF Trader who bought those shares 200 microseconds ago. Pay me instead".

It's no surprised trading volume doubles when HFT's turn up.

There are now 2 transactions going on for every real trade in the market.

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Anonymous Coward

Re: You say "High Frequency Trading -I say "Man in the Middle Attack."

The stock market has usually been about getting asymmetric information by speed, whether it was someone in a post chaise bring news of military victories, the telegraph, or the move to electronic trading.

Rather than mess around with Tobin taxes, I do feel regulators should be focussing on the creation of a truly level playing field. If someone makes money by buying servers closer to the stock exchange and faster networks, then any pretence of transparent markets is just that. If I can understand it and you can understand it, so can a regulator. Perhaps they just don't want to.

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Anonymous Coward

Re: You say "High Frequency Trading -I say "Man in the Middle Attack."

It's more than that. A market like that has a natural tendency for "cheating". No matter how you try to level the playing field, someone will come along and find a loophole. It's like with "buying" political influence. No matter how much you try to regulate it, someone will come up with a new one: eventually finding one you can't regulate because it hits a guaranteed right. For example, how can you stop someone being influenced by a lobbyist who also happens to be their spouse or immediate relative? Or they otherwise live together so they meet every night under normal circumstances? You can't isolate them since they may be actively raising children, so at some point you'll probably end up raising the white flag because we're only human, we can be influenced whether we like it or not, and a determined adversary will get through to us no matter what we do.

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Re: You say "High Frequency Trading -I say "Man in the Middle Attack."

"For example, how can you stop someone being influenced by a lobbyist who also happens to be their spouse or immediate relative?"

If their areas of concern are different there's no problem. But you should require them to declare a conflict of interest and one of them to resile. But maybe I'm old-fashioned.

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Re: You say "High Frequency Trading -I say "Man in the Middle Attack."

The problem lies in the lobbyist MAKING the legislator turn towards that area of concern. That's why lobbyists exist: to convince legislators to see things their way. Meaning, even if they don't see eye to eye at first, they probably will by the end.

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SVV
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biting the invisible hand that feeds it

I love my tech news laced with a dose of Milton Friedman inspired economic rants. Not entirely sure why a technology news site feels the need to publish such stuff, but if you really want to make money start publishing pics of scantily clad young ladies for spurious reasons - that always works.

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Re: biting the invisible hand that feeds it

It can't be for spurious reasons - that would be sexist.

It has to be to accompany a vital public interest story about fashion, skin care or the beach holiday of some minor royal.

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Re: biting the invisible hand that feeds it

This is good. T.W. throws a compliment at Marx and is criticized for being Freidman-inspired. When he disparages Keynes and compliments Freidman, he is called a Lefty. His explanations are called rants. I think Mr. Worstall is not here for our benefit. Rather, he comes here to practice skin-thickening for his political life.

As to economics on a tech site, what sector is more involved in global trade than IT? IT enables global trade on a massive scale, is traded globally, tallies global trade, suffers out-sourcing, down-sizing, expansion and competition according to global economic factors. Your next chip_drive_OS_security bits are subject to global economic(and political) happenings. My long-ago Middle East posting is now filled by someone with English as a second language - global labour trade (some will work for less). I for one like to hear about politics and economics, especially as to how they affect IT. I would even like a bit on the menu bar for just that.

Now That's a rant, not an explanation:)

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Re: biting the invisible hand that feeds it

> It has to be to accompany a vital public interest story about fashion, skin care or the beach holiday of some minor royal.

Or about an EEE-PC.

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Anonymous Coward

Re: biting the invisible hand that feeds it

"It has to be to accompany a vital public interest story about fashion, skin care or the beach holiday of some minor royal."

What about the latest automobile stats?

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Yawns.

Marketards.Go figure.

In reality, we grow food. People purchase it. We profit.

Global politics & economics don't really apply here (sorry, Greece!).

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Too true

Of course, if the west spent more investing in 'third world' countries maybe we wouldn't have the current mass immigration problems we are currently suffering. Too true that we are suffering from unintended effects of our own policies.

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Re: Too true

You mean like lending them money then having their local warlord fritter it away on everything but the intended purpose. There is a lot more to 3rd world poverty than lack of investment...

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Re: Too true

Indeed there is but much of it seems to be down to poor governance, which in turn is often a result of post colonial failure caused by imperial powers politicking and maintaining subtle control. Borders drawn up in line with colonial territories when colonial powers left rather than natural borders based on pre-existing tribal/ethnic realities don't help either.

I'd love to see the day when Africa utilises its massive reserves for the general good of its people but it's hard to see how we in the wealthy countries can help given our shared histories. Same goes for the middle east. Only when the wealth is shared more evenly (by economics under good governance, not some communist planned economy or debilitating 'aid' programme) will we see a reduction in the kind of backward thinking that gives strength to the nutty militias of boko haram, isil and their like.

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Re: Too true

So what they need is the wise leadership of some western power to go in, remove the local warlords, manage their resources and tell the natives to stop doing the silly local religion stuff and attend church fetes ?

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Re: Too true

That's not what I'd suggest, nor did I allude to that. I suspect we've done more than enough meddling and imposed solutions are unlikely to work anyway. As I said I don't know what the answer is but I live in hope that it will turn up, I guess I'm a left-leaning internationalist who hopes that one day we'll drop the short term self interest and parochialism in favour of a global approach to enabling all of us to benefit from our common resources.

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