Author: Fred Foldvary

Radical Democracy

Fred Foldvary Liberty , , , , , ,

Going to its roots, democracy is kratos, rule, by demos, the people. Pure democracy is the rule by all the people, not just some of the people. The only way to implement absolute democracy is for each participant to voluntarily agree to the governance structure, and be able to exit when one no longer agrees.

Democracy can be divided into mass democracy versus “cellular” or small-group democracy. Mass democracy occurs when the voting group is so large that the people cannot individually know the candidates. In a small-group democracy, the voters are able to join meetings with candidates in groups small enough so that every person is able to fully participate. In a small group, a candidate may distribute literature at a low cost. Although money can play a role in a small group, the influence of moneyed interests is limited by the ability of other candidates and promoters of propositions to counter large spending with personal contacts. A small voting group solves the problem of having both free speech and the will of the people.

The German sociologist Max Weber, writing in the late 1800s and early 1900s, wrote that “bureaucracy inevitably accompanies modern mass democracy in contrast to the democratic self-government of small homogenous units.” Mass democracy cannot be pure, radical, and absolute. “The demos itself, in the sense of an inarticulate mass, never ‘governs’ larger associations.”

A mass democracy is governed by how the leaders are elected. The politicians must use the mass media to send their messages to the public in order to curry their votes. These messages have to be condensed and simple, as most of the public will not pay attention to detailed issue analysis. The messages are often negative attacks on opponents. And the messages have to be paid for, which generates an inherent demand for large amounts of campaign funds. While individuals do send contributions to parties and candidates, much of the financing comes from special interests such as corporations, labor unions, lawyers, and the financial and real estate industries.

Economists use the odd term “rent seeking” for the seeking of subsidies, privileges, and protection from competition. The classical economists recognized that land rent is a surplus. They generalized the concept to “economic rent,” any payment beyond what is needed for production. Subsidies to special interests are economic rents.

Governments today practice imposed representative mass democracy. The implied ideology is the moral supremacy of the majority in each particular issue. The majority imposes its will by force on the minority. As Weber stated in his essay “Politics as a Vocation,” “He who lets himself in for politics, that is, for power and force as a means, contracts with diabolical powers.”

Many people think that democracy is based on equality, since each person has an equal vote. But Weber wrote, “The propertyless masses especially are not served by a formal ‘equality before the law.’” The poor believe that justice requires compensation for their economic deprivation. But the political process determines how this is done, and “under the conditions of mass democracy, public opinion is communal and born of irrational ‘sentiments.’” The sentiments of the poor tend to seek a forced redistribution of wealth in their favor, since that is the superficial solution.

The radical alternative to imposed mass democracy is voluntary small-group voting. The political body is divided into tiny neighborhood cells, just as the human body is composed of small cells. The population of a neighborhood cell should be about 1000, small enough to know the candidates and meet personally to discuss issues. Citizens vote only for a neighborhood council.

Then a group of neighborhood councils, say about 20 or 30, elect, from their members, representatives to the next higher or broader council. The second-level council elects the next higher level legislature, and so on, all the way to the highest level parliament or Congress. That legislative body then elects the president.

Such cellular democracy can replace the mass democracies that prevail today, and that would be a major improvement, in extricating money from politics. But radical democracy also requires another change: replacing imposed democracy with voluntary democracy. The neighborhood cells would be voluntary contractual organizations.

In law, the written contract is required for major decisions, such as the purchase of real estate. The American political philosopher Lysander Spooner wrote in The Constitution of No Authority:

“It is a general principle of law and reason, that a written instrument binds no one until he has signed it… The laws holds, and reason declares, that if a written instrument is not signed, the presumption must be that the party to be bound by it, did not choose to sign it, or to bind himself by it…. Neither law nor reason requires or expects a man to agree to an instrument, until it is written; for until it is written, he cannot know its precise legal meaning. And when it is written, and he has had the opportunity to satisfy himself of its precise legal meaning, he is then expected to decide, and not before, whether he will agree to it or not.”

If a signed contract is needed for real estate transactions, how much more important is the political transaction of governance? If one joins a residential or condominium association, the law requires a display of the laws governing that association, and the new member must sign if he is to join. How much more important, then, is this principle for general governance? Radical democracy requires the signed consent of each member to the written contract.

The rule of all the people begins with the recognition of individual sovereignty, a contract among equal sovereigns for governance, and then implements small-group multi-level governance to let the people govern and minimize transfer-seeking by special interests.

Of course, even radical democracy does not guarantee liberty. A free society must have a constitution that protects individual liberty from the tyranny of the majority. But without genuine democracy, a constitution is an unsigned document that becomes manipulated to provide the appearance of equality and freedom. Behind it is the reality of imposed “diabolical powers,” the tyranny of both majorities and minorities.

(This article is also at http://www.progress.org)

The Two Ultimate Religions

Fred Foldvary Religion , ,

Religions provide ultimate visions of reality and values. They have different views about the reality of the divine, and about what is sacred, but for life on earth, what counts most is religious ideas about the reality of human beings and the value of human life.

The two basic concepts about human life are equality and supremacy. Either one believes that all human life is equally worthy, sacred, and important, or else one believes that the members and followers of one’s religion have supremacy over other human beings. Either one values all human beings as equally human, with equal rights to life and property, or else one values the members of one’s religion as superior, with superior rights to life and property.

Almost everyone believes that one’s own religion is the correct one. Some people may have doubts, but few believe that other religions are more true, otherwise they would convert, unless forbidden to do so. Religious egalitarians believe that even though their faith is the true one and the best of all religions, nevertheless the people of other faiths have an equal moral worth, and so their lives, property, and freedom are to be respected.

Religious supremacists believe that not only are their beliefs true, and their values correct, but also that holding their beliefs, or being descended from believers, entitles them to superiority in human worth, so that they are authorized, and even required, to forcibly convert others and, at the most extreme, take their property and lives.

The divide between egalitarians and supremacists cuts across all the major religions. People of all faiths have attacked, enslaved, killed, looted, and conquered those of other religions. Even when supremacy is not an explicit religious belief, when one group conquers and enslaves another, their members at least implicitly believe that they are superior, even if only because of their power.

There are also members of all faiths who believe that, however superior, true, and sacred are their own beliefs and values, those of other faiths are equally entitled to live according to their creeds. Whatever else their religion may say about others, they believe that all people are equally human and of equal human value.

This, then, is the great religious divide, which affects every person. Atheists too are part of this divide. The atheists chiefs of Communist parties believed in the superiority of their creed, and they conquered lands, killed opponents, and imposed their control over others. Extreme nationalists have had a supremacist nationalist belief in addition to other ideas, which formed their overall religion. Supremacism may be personal, ideological, and otherwise not associated with a theistic belief, but as a view of ultimate reality and values, it is a religion that is mixed in  with other ideas.

Human beings live in a mental as well as physical universe. In our mental universe, either we believe in human equality, or not. Egalitarianism and supremacism are, however, matters of degree. Some may be more mildly supremacist, letting those of other beliefs live, but subjecting them to higher taxes, tighter restrictions, and lacking the privileges of those of superior beliefs. In the relatively tolerant societies, people are allowed to practice their religions to some extent, but there are beliefs and values, even if not in a theistic creed, that are imposed on everyone. This is why throughout the world, governments have victimless crimes. They prohibit activities such as drug use and gambling, and they censor some words, ideas, and depictions.

One supremacist idea shared by most people is the moral worth of majorities relative to minorities. Most people in today’s world believe in the superiority of majorities. If a majority of voters believe that everyone should be taxed, restricted, and forced, this is, in their view, proper, because the majority has moral supremacy. Majoritarianism is a religion, as a belief and value.

Another supremacist view is that persons who have conquered land, and their heirs, when there are no other documented claimants or survivors, have a superior status. The egalitarian position is that all human beings have an equal right to the benefits of the land that nature provided. Equality does not require equality in possession, which is not possible, but an equal share of the economic benefit, as measured by what people are willing to pay to use land.

If we take human equality to its ultimate logical conclusion, each person has an equal natural right to live, work, own property, and completely direct his life, with no restriction or imposed cost on his peaceful and honest actions. Liberty and equality are complementary.

Very few people believe in complete human equality. But we should at least strive to achieve  equal rights for life and equal rules for property. Whatever else our creeds may say, we should have a minimal egalitarianism in law and policy, so that innocent people may live, own property, and be able to live, to a great extent, in accordance to their beliefs and values. If we can achieve minimal global egalitarianism, that would be a great achievement.

Note: this article also appears in http://www.progress.org

Towards a Confederation in the Holy Land

Fred Foldvary Liberty , ,

The proposal for a “two state” solution to the Palestinian-Israeli conflict has failed. The Israelis reject it because they want to keep their investment in West-Bank settlements, and they fear that a completely independent Palestinian state would become a launching pad for an attack against Israel. But many Palestinians reject anything less than the full evacuation of the Israeli settlements, as happened in Gaza, and full sovereignty for a Palestinian state that includes all of East Jerusalem.

A “one state” solution is rejected by most Israelis, as the greater population of non-Jewish Arabs would wreck the Jewish self-determination that is the purpose of the State of Israel. The ideal would be a “no state” solution of peaceful voluntary governance, but that is not realistic.

Therefore the logical resolution to the conflict is a “three state” solution: Palestine, Israel, and a confederate government. Palestine would become a member of the United Nations and other international organizations, and Palestine could join the Arab League. But foreign countries would be asked to maintain embassies to the Confederation.

The idea of a confederation has been proposed multiple times, and there is an organization promoting it: IPC, the “Israeli Palestinian Confederation,” which has written a Constitution of the Israeli Palestinian Confederation. Yet this idea has not penetrated the official negotiations, and has had relatively little discussion in the media.

The IPC has created a governance structure, but has deliberately left out policy contents such as the public finances and the division of the land. It is now time to create a peace plan with justice, which would then be offered to the parties as a contract to accept or reject.

The pre-1967 boundaries of Israel have achieved international recognition, and pragmatically should be accepted as the national boundaries of Israel and Palestine. But the forcible removal of people because of their ethnicity or religion has to stop. The just solution is leaseholds. The Israeli settlements would become leaseholds of the Palestinian state. The governments of the Israeli communities would pay the market land rent of their leased land. The rent would be collected by the Confederate government and passed on to the government of Palestine. Thus Israelis would be able to live in the ancient lands of Judea and Samaria, but at a price. Probably some of the settlers would move to Israel, as they would no longer be subsidized.

To avoid continuing conflict, Israel and Palestine would agree to bury past grievances, not to forget them, but to not let them dominate and ruin future relationships.

One problem with a two-state solution is that it would again divide Jerusalem. The Confederation proposal would let East Jerusalem be the capital of Palestine, but would copy the confederate concept to the city as well. There would be an Israeli administration of West Jerusalem, a Palestinian administration of East Jerusalem, and a confederate government for all Jerusalem. The administrations of West and East Jerusalem would not necessarily be along the 1967 boundary, but could incorporate current residency and also put the Old City under the Confederate government.

To assure security for the Israelis, the Palestinian government would not have a military. It has no need for armed forces, as no Arab state will attack it. The Confederation would have a police force, and over time, as trust is developed, some of the military capacity of Israel would be transferred to the Confederate government, whose troops would be volunteers.

The two parts of Palestine would be West Palestine (Gaza) and East Palestine (the West Bank). The Confederation would solve the problem of connecting West and East Palestine. With peace, the checkpoints would be eliminated, and the routes from West to East Palestine would be managed by the Confederate government.

If the Palestinians seek economic growth, they would be wise to eliminate the economically punitive taxes they now have, and implement a prosperity tax shift. Palestine would replace the value-added tax and import duties with a tax on land value. The Israeli settlers would already be paying rent to Palestine, and the payment of ground rent would be extended to all the lands of Palestine. The Palestinians would no longer be dependent on Israel for government revenues.

The Palestinian refugees and residents would have a limited ability to move to Israel, but the returnees would have Palestinian citizenship. The other refugees would be granted compensation, and the Arab countries in which they reside would grant them citizenship in those countries.

The Golan Heights would remain under Israeli jurisdiction, as any negotiations with Syria would have to await the end of the wars and the establishment of democracy in Syria.

The United States should propose the Confederate solution. If it is rejected by the government of Israel, the USA should stop its governmental aid to Israel and promote Palestinian membership in the UN. If the Palestinian authority rejects the Confederation, the US would require new elections in both Gaza and the West Bank, and acceptance of confederation, to continue US aid. The US and Europe would put financial pressure for the acceptance of the just solution.

What needs to be done now is to break through the two-state slogan, to create global publicity for a confederation. The IPC has been attempting it, but the confederate idea will have more substance and more acceptance when it includes a solution to the land question.

The Dalai Lama on Inequality

Fred Foldvary Economics, Liberty, Philosophy , , , , , , , , ,

There are many people who blame “capitalism” for the world’s economic problems, such as poverty, unemployment, inequality, and environmental destruction. This common belief is based on a confusion of meaning, and a lack of analysis. It is neither surprising nor noteworthy that many people fail to apply consecutive thought to economic issues, but it is sad that the Dalai Lama, as an influential religious leader, has not fully applied his compassionate thought to examine the causes and effective remedies of social problems.

The Dalai Lama, leader of Tibetan Buddhists, has identified himself as a Marxist socialist. He blames “capitalism” for economic inequality, and sees the Marxist alternative as the alternative that would increase equality. He advocates a more “human approach,” which implies less “capitalism” and more socialism. The Dalai Lama adds that he is not a Leninist, meaning that his Marxist views do not imply a desire for a totalitarian state.

The Dalai Lama believes that Marxism is founded on moral principles, such as economic equality, while “capitalism” is founded only on the pursuit of profit. His social and economic views were published in the 1996 book Beyond Dogma: Dialogues and Discourses. He said there that Marxism is concerned with the poor and with exploited minorities. Therefore, he said, “I think of myself as half-Marxist, half-Buddhist.” The Dalai Lama had studied Marxist ideology in China during the 1950s, and became attracted to it.

The essential problem with the word “capitalism” is that it is used both as a label for current economies, which are a mixture of markets and governmental interventions, and for the concept of private enterprise and free markets. Its use as a label for mixed economies makes it meaningless to blame “capitalism” for economic problems.

This confusion is similar to blaming diets for ill health. The diet of most people is a mixture of healthy foods such as vegetables and unhealthy stuff such as excessive sugar. The proposition that “diets” cause illness may be true, but it tells us nothing about which elements of our diets are causing the problem.

Likewise, to blame “capitalism,” meaning the mixed economy, for economic inequality, is meaningless, as this does not tell us which elements of the economy are causing the problem, whether it is markets or interventions. Blaming “capitalism” is worse than useless; it fogs the mind, because the label for mixed economies gets confused with the other meaning, private enterprise, so that, in a sly tacit shift of meanings, markets get blamed for economic woes.

It is meaningless to accuse “capitalism,” as a label, as only caring about profit and ignoring the poor, because the actual “mixed economy” cannot have any thoughts or feelings. Moreover, the concept of a pure market economy does have an ethical basis. The pure market is an economy in which all activity is voluntary. The concept of voluntary human action implies the existence of a universal ethic, or natural moral law, that designates acts as good, evil, or neutral, with voluntary action being good or neutral, and involuntary action consisting in coercive harm, which is evil.

One of the premises from which natural moral law is derived is the concept of human equality, that human beings have an equal moral worth, and should therefore be equal in the application of law. Human equality does not imply that all persons should have an equal income or wealth, because moral equality implies an equal self-ownership (or ownership of one’s body) of all persons. Therefore, each person properly owns his wage and the goods and investments bought from his wage. Income, however unequal, that comes from labor, including entrepreneurship, is not an evil outcome.

The mixed economy does create poverty, but not from private entrepreneurship. The poverty comes from government’s taxing the poor and subsidizing the rich. A study by the Institute on Taxation and Economic Policy and the Pew Research Center recently concluded that the poorest fifth of households pay more than twice the state and local tax rate (11 percent) as the richest one percent. Also, although the rich pay a much higher tax rate on their income, many of the rich get their money back implicitly in the form of the higher rent and land value generated by government spending, paid for by taxes on wages, goods, and enterprise profits. The taxes on the poor are even higher than that found in the study, as there are federal excise taxes included in goods, and also, federal taxes and restrictions on labor and self-employment add to the interventionist burden of the poor.

The economist Henry George wrote that “There is in nature no reason for poverty.” Poverty and excessive inequality are caused by human institutions. If Marxism implies income redistribution or government ownership of industry, this treats, and mistreats, the symptoms, not the causes. The main causes are the stifling of labor and enterprise from taxation and imposed barriers. The ultimate remedy is a completely free market, with voluntary, contractual, decentralized governance. Given today’s states and taxes, government interventions can be minimized with a constitutional prohibition of restrictions and imposed costs on peaceful and honest enterprise, thus with taxes only on bad effects – pollution – and on the ground rent generated by government’s public goods.

If he understood the ethics and economics of liberty, then the Dalai Lama would become a much greater global leader in promoting effective reforms that would not only promote liberty but also greater prosperity and social peace.

What is a Governmental Intervention?

Fred Foldvary Liberty ,

A governmental “intervention” is a law or action which changes what people would otherwise voluntarily do. Interventions are market-hampering, as the use of force by government reduces the well-being of the people who are coerced. In contrast, laws which protect property rights are market-enhancing, as they increase the well-being of people; such laws are not interventions.

The word “intervene” derives from the Latin words “inter,” between, and “venire” to come. To “intervene” means to come between two or more things, to interfere in order to change the outcome. If a US company seeks to export goods to Cuba, and the government prohibits this trade, the government comes between the parties that sought to trade, changing the outcome to not trading.

To analyze intervention, we first need to understand its absence, liberty. In a purely free society, the law prohibits only acts which coercively harm others. A harm is an invasion into a person’s proper domain: his body and his property obtained by voluntary means. Theft, murder, kidnaping, and trespass are invasions. In contrast, an offense is an act that a person deems displeasing only because of his beliefs and values.

When people are offended by images, speech, or the observation of actions they don’t like, these offenses are not prohibited in a free society. If one is not allowed to make a speech whenever any person does not like it, then there is no freedom of speech. Morally, a victim is a person who has been coercively harmed. Acts which may offend but not harm people are victimless crimes.

Laws prohibiting offenses, such as gambling, prostitution, drugs, nudity, and words regarded as obscene, are interventions. In a society that has complete liberty, people are free from interventions. The law prohibits acts which coercively harm others, but not acts which are merely offensive.

Government officials enact interventions because of political pressure by special interests, but also because some people, perhaps a majority, believe that society is better off with the intervention. For example, illegal drugs may be physically harmful to health. But we need to see the broader effects of the intervention. Prohibitions create an underground market, and then the government responds with more interventions, invasions of the privacy of financial accounts, intrusions into homes, the confiscation of property, and an increase in the prison population. But aside from these effects, the policy of intervention erodes liberty and rights to property and privacy.

Governments also interfere in the belief that the intervention makes markets more competitive. In the USA, anti-trust action is intervention by government into firms that dominate a market, such as IBM did in computer hardware, or Microsoft with computer operating systems. Governments require licenses to practice law, medicine, and hair styling. The provision of public goods such as security and streets is done with taxes that intervene into earnings and spending.

Such interventions have as an alleged justification, the prevention of “market failure.” The economics textbooks claim that markets fail when there are externalities, uncompensated effects such as pollution, which justify the intervention of regulations. But a pure free market would not have negative external effects, as these would constitute trespass, an unwanted invasion into others’ property. Government can play a market-enhancing role by enforcing property rights, such as enabling a lawsuit against a polluter, or making polluters pay periodically for on-going damage. Such compensations would not be interventions. Thus a law requiring a smog test for a car is an intervention, but a payment by a polluter for causing damage is not an intervention, as the latter helps to establish a voluntary market.

Advancing technology, such as the Internet, has made information more widely available, often at no charge, and so whatever justification there was for interventions such as licensing laws has become obsolete. Technological progress also erodes the rationale for the intervention of anti-trust action, as companies need to continuously innovate as new companies reduce the dominance of existing firms.

Interventions are often bad substitutes for sound economic policies. For example, the economic solution for traffic congestion is tolls just high enough to let the traffic flow smoothly. But instead, governments typically impose restrictions such as high-occupancy lanes, an intervention that prohibits cars from entering an underused lane. Today, it is possible to have electronic charging along streets and highways that enable the tolls to be paid as the car moves along.

Interventions include subsidies that reduce the prices of products below the cost of production. The taxes that pay for the subsidies have a social cost greater than any gain to consumers. Taxes on events, other than negative externalities, intervene into these events. Events include earning wages and profits, buying goods, and adding value by production. But truly voluntary user fees are not interventions, and a levy on ground rent or land value is not an intervention, since it does not depend on any event, and the fee prevents what would otherwise be the implicit subsidy of the rent generated by government’s provision of public goods.

Governmental interventions destroy liberty and damage economies. People want interventions partly because of their misunderstanding of ethics and economics, and partly because our constitutions have structured government in a way that gives special interests political clout. But as interventions cause the plundering of the earth, and cause poverty and war, it is all the more necessary for people to understand the meaning and consequences of intervention.

A Quiz on Public Finance

Fred Foldvary Economics , ,

How well do you understand public finance? Below is a quiz. Answer whether the statements are true or false, and briefly explain why. If you think that the statement is only sometimes true, or true under particular conditions, say “maybe” and explain. My answers follow the quiz, but first write down your own answers.

1. After a high tax on land value is in place, it will impose a burden on landowners and reduce the productivity and efficiency of the economy.
2. The most efficient way to pay for a city bus service is to make the bus riders pay for the full cost.
3. The best way to decide whether a club should have a party is by a yes-no vote, with the majority of those voting deciding the outcome.
4. No decentralized pricing system can optimally provide collective consumption.
5. Subsidies that reduce the price of goods below the cost of production typically have net benefits to society.
6. The best policy for government budgets is always to avoid deficits, hence to finance all spending from current revenues such as taxes and fees.
7. The best way to handle pollution is with restrictive regulations, as these are less costly than pollution taxes or permits.
8. The least worst tax for the USA would be a flat-rate income tax with no deductions or credits.
9. The least worst tax for the USA would be a national sales tax that replaces the income tax.
10. A pure free market generally fails to provide adequate public goods and to efficiently and equitably handle externalities such as congestion and pollution.

Answers

1. False. A tax on land value reduces the price of land and replaces what would have been paid in mortgage interest. A land-value tax pushes land to its most productive use, increasing productivity and efficiency.

2. False. The best way to pay for mass transit is to charge riders only when the service would otherwise be too crowded, and just enough to prevent congestion. The rest of the cost is best paid for from the increase in the land rent generated by the transit.

3. False. The best way to decide on a club party is the method called “demand revelation.” Each member records the most he would pay for the party. The amounts are added up. If the total is greater than the cost, have the party. To keep the members honest, if any member changed the outcome, relative to stating one’s cost, that person has to compensate the group an amount equal to the net loss of everyone else (their stated values minus their costs). This method is better because it measures how much the members want the party, not just whether they want it.

4. False. Collective consumption paid for by land rent can be decentralized, because the rent reflects the demand to be located there, and the land will not flee, hide, or shrink when its rent is tapped to pay for collective goods.

5. False. The social cost of taxes that pay for subsidies is greater than the gain to consumers.

6. False. Government borrowing can be a good policy if the funds are spent for investments that are more productive than if the funds were spent in private investments. Otherwise, the budget should not have a deficit.

7. False. A charge or tax on pollution, based on its damage, is more effective than regulations and permits, and the funds can replace taxes that harm the economy.

8. False. A land-value tax is better for the economy than a flat-rate income tax.

9. False. A land-value tax is better for the economy than a national sales tax.

10. Some textbooks say this is true, but the better answer is, False. Private communities such as homeowners’ associations and shopping centers can and do provide public goods from the site rentals. In a pure market, pollution is trespass that requires compensation. Private transit can have congestion charges. A pure free market would have contractual governance that could adequately provide public goods and prevent pollution and congestion.

Unemployment is Completely Unnecessary

Fred Foldvary Economics , , , , , ,

In U.S. government statistics, a person is unemployed if he is 16 years of age or more, and that person is able and willing to work at prevailing wages. The labor force includes the employed and the unemployed. If one is not employed for wages because one does not wish to work or to seek work, that person is not in the labor force, and not counted as unemployed.

The unemployment rate in the USA is now about six percent, down from a peak of ten percent in 2009. About one percent of the labor force is in “frictional” unemployment, meaning that the worker is between jobs or recently graduated from school and engaged in job search, or about to be hired. When the economy is depressed, there is “cyclical” unemployment, those not working as firms reduce employment. There is also the “structural” unemployment of workers losing their jobs in declining industries, and the seasonal unemployment of those employed only during a season such as in resorts or during harvests.

An economy is in full employment when the only unemployment is frictional. The economic puzzle is why there is any other unemployment. Cyclical unemployment is no mystery, as firms have fewer sales as demand falls, and falling demands become a downward spiral as falling purchases by some become falling production by others. The recession ends when materials prices and real estate rentals have fallen so low that production becomes profitable again.

Since recessions are caused by monetary and fiscal subsidies, a pure market economy would have neither, so it would have no recessions and no cyclical unemployment. So the puzzle consists of chronic unemployment, those unable to obtain work even during prosperous times. Most of the unemployed have been out of work for months or years. Those long unemployed have even more difficulty finding employment, because employers wonder why that person can’t find any job.

Some economists consider idle labor to have a positive side. You car is not wasted when you don’t use it, because it provides the service of availability. Empty seats in a theater have value because the theater needs that capacity for popular shows. Likewise, in this viewpoint, idle labor provides workers when firms need to hire. Also, the unemployed need time to engage in job search, so they are busy even if unemployed. But one can be employed at least part time while looking for better work, and while idle labor may be good for employers, it is bad for workers who need the income, and for taxpayers who have to support those not working.

In a pure market economy, there would not be any unemployment at all. There would be no seasonal unemployment, because workers could find other jobs in other seasons. There would be no structural unemployment, because workers could shift to other industries, and work in temporary jobs while searching for full-time employment. Even workers in frictional unemployment would be able to work some of the time, since job search is not full-time.

One of the premises of economics is that human desires are unlimited. There is always a demand for something. That demand provides an opportunity for workers to be employed to satisfy that desire. In a pure market economy, one could also be easily self-employed. Any person who is not totally incapacitated would be able to offer some service at some wage. If the wage one can obtain is too low to bother with working, then that person would not wish to work, not be in the labor force, and not be unemployed.

Unemployment exists because there are barriers that prevent labor from having access to land and capital goods. If the cost of hiring a worker is greater than his productivity, he will not be hired. In a pure market, the wage would be set where the quantity of labor supplied by workers equals the quantity demanded by employers.

Government policy raises the cost of labor above the pure market wage. Minimum wage laws prevent employers from hiring the least productive workers. On top of the minimum wage are imposed costs: the employer’s share of payroll taxes, mandated medical insurance, worker accident insurance, and the unemployment compensation tax. The firm also has to withhold taxes from wages and send then to the government. There is also a litigation risk and cost of hiring labor, as labor laws promote excessive litigation to combat malpractice, discrimination and sexual harassment. Also, union labor monopolies, and laws favorable to unions, push up the wages of union workers at the expense of less employment. Finally, laws making it costly to fire workers raise the cost of hiring them, creating more unemployment.

In a full-employment economy, when firms seek to expand, they would pull workers away from other firms, or pulled into the labor force, by offering higher wages and better conditions. There is no need for idle labor.

The best policy for labor is full employment. Labor laws that seek to protect workers end up imposing barriers that prevent employment. Full employment requires hiring flexibility and the removal of government-imposed costs. Full employment requires the elimination of taxes on labor, exchange, production, and consumption. Public revenue from land rent or land value could replace all these labor-hampering taxes, while promoting the productive use of land which would further increase wages.

A shift in taxation from labor to land would both increase employment and increase wages, while letting the worker keep his wage. It is not unemployment that is a puzzle, but rather why workers are not demanding the abolition of their wage-tax burden.

The 100th Anniversary of the Defeat of Economic Land

Fred Foldvary Economics, History , , , , , , , , ,

The year 2014 is the 100th anniversary of an economics article that was the final nail in the coffin of classical economics, as it marked the victory of the neoclassical economics war against land. This was a victory so great that economists today do not even realize that there had been such an academic war.

Alvin Saunders Johnson (1874-1971) was an American economist at several universities, including Columbia, the University of Chicago, and Cornell. He was a co-founder of the New School at New York City. In 1902 he wrote “Rent in Modern Economic Theory: An Essay in Distribution.” Johnson, along with other economists who were turning the classical theories of the 1800s into the neoclassical doctrines of the 1900s, generalized “rent,” from the yield of land, into any surplus above opportunity cost, i.e. above the cost needed to put a resource to its most productive use. For example, a movie star paid $1 million to act in a movie, whose next best opportunity is being a salesman earning $100,000, has an economic rent of $900,000.

In 1914, Johnson published “The Case against the Single Tax” in The Atlantic Monthly. As has been well explained by Prof. Mason Gaffney in The Corruption of Economics, Johnson played a major role in suppressing, by falsification, the land-tax ideas of Henry George. Land is now visible everywhere except in academic economics. For example, the generation of land value by public goods is not even mentioned in the general textbooks.

Johnson correctly stated that a tax on the entire rent of land would bring the purchase price down to zero, but he expressed it as: “the value kernel of landed property will have been seized by the state.” In policy analysis, we need to examine inflammatory vocabulary. The moral case for land-value taxation rests in the proposition that the benefits of nature belong to all humanity equally, that the creation of local land values by population and commerce belongs in equal shares to the members of those communities, and that the rentals generated by public works may be used to pay the providers, whether this be private-sector or government providers. None of this is confiscation or seizing by the state.

In Georgist ethics, the people own the rent, not the chiefs of state. A government may justly act as the agent of the people to protect their property, such as the atmosphere, from damage, and a government may, as the agent of the people, collect the rent to distribute it among them, or to use to pay for public goods. The premise that the rent belongs to the people implies that the rent is not being seized from the landowners as though these title holders are the morally legitimate owners, but rather that the state is facilitating the collection of the rent to the proper owners, the people. Hence the terminology used by Johnson taints his analysis and begs the question of the proper ownership of land rent.

Johnson continues his attack by calling the single tax on land value “propaganda for the universal confiscation of land.” Henry George had unfortunately stated in Progress and Poverty that “It is not necessary to confiscate land; it is only necessary to confiscate rent.” The Latin origin of “confiscate” is “confiscare,” from “fiscus” meaning the government’s treasury. Fiscal policy is about governmental revenue and spending. Thus in linguistic origin, to confiscate means simply to tax, to transfer assets to the public treasury. But in modern popular usage, to “confiscate” means to take by force, with the implication that the state is seizing property that was legitimately owned. And despite George’s statement that it is only the rent, not the land itself, that is being “confiscated,” Johnson attacks the single tax as confiscating the land.

Moreover, by dismissing the theory behind the single tax as “propaganda,” Johnson denigrated the logic and evidence for land-value taxation in an anti-scholarly manner, and thus he himself indulged in propaganda.

Johnson’s mixing up the ownership of land and of its rent is also shown by his statement that if all the value of land is taxed, the revenue would cover the costs of government, “provided, of course, that the public can manage the lands as efficiently as they are now managed by their private owners.” This despite the statement of George that “I do not propose either to purchase or to confiscate private property in land.” Land-value taxation would not disturb private titles; it would not alter private control and possession. The government would not “manage the lands.”

Johnson states that much of the financial wealth of the middle class is in land value, and that the full taxation of land value would take more value from them than they would regain in the removal of other taxes. Of course in 1914, the 16th Amendment had just been enacted in 1913, and the middle class did not yet suffer from the income tax.

Nevertheless, Johnson’s statement is illogical. Suppose the total land rent is $1 trillion, and the cost of government is half of that; then the rent does not disappear, but is distributed back to the people in cash. So the effect of land value taxation would be to equalize the ownership of the rent, and a person who owned an average amount of rent would get half back in cash, and half back, ideally, in valued public goods. If government is squandering some of the rent, then the remedy is to give it all back to the people. Then the average land owner is in a neutral position.

Johnson falsely declared that “The Single Tax is, then, essentially a device for the spoilation of the middle class.” One could justly say that Johnson’s malicious attack was a device for the spoilation of the remedy for poverty, depressions, and land conflicts. What has spoiled the middle class is high taxes on their wages and on the goods they buy. Johnson’s falsifications were the spoilation of a policy that could have promoted sustainable prosperity and prevented needless economic inequality. Johnson’s propaganda succeeded in helping squash land-value taxation, but to the ruin of economies worldwide.

With the neoclassical victory against land, most economists today suffer from cognitive dissonance. Even if economists reject an egalitarian view of natural resources, they know that the supply of land is inelastic, so public revenue from land rent avoids the excess burden that other taxes have. But they do not extend this knowledge to the rest of theory and to policy. Mason Gaffney calls this the “corruption of economics.” I call it “academic brain freeze.” At any rate, it is worth marking the 100th anniversary of Johnson’s attack.

Restore the Turkish Empire!

Fred Foldvary Current Events, History , , , , , ,

The Turkish Empire, also called the Ottoman Empire, was founded in 1299 and lasted until 1922. At the start of World War I, the Turkish Empire still included much of the Levant, including what are now Syria, Iraq, Lebanon, Jordan, Israel and Palestine, and part of Saudi Arabia. The Sultan, as the emperor, was also the head of the Caliphate, the realm of Islam.

Libertarians are generally opposed to empires. However, a great historical error was made by the victors of World War I. The chiefs of France, the United Kingdom, and the United States, broke up the Austro-Hungarian empire and the Turkish Empire. Whereas the Arabs helped the British defeat the Turks in the expectation that they would achieve independence, the British and French betrayed these hopes by making the Arab lands colonies. The British obtained Palestine, Jordan, and Iraq, while the French took Lebanon and Syria.

Under the Turkish Empire, the diverse religions of the Middle East were able to co-exist. The Empire had a policy of local self-governance under the “millet” system whereby people could use their own religious laws. The term derives from the Arabic word millah, for meaning “nation.” Because they were all under one empire, the ethnic groups such as Kurds and the religious minorities did not fight over land.

Today’s problems in the Middle East, including the Palestinian-Israeli conflict, the Syrian civil wars, the dictatorship and war in Iraq, the violence in Lebanon, and the rise of supremacists, all stem from the breakup of the Turkish Empire. That realm had its problems, including violence against Armenians and others, but most of the residents of the former Turkish areas would probably wish they had stayed in the Empire.

With the discovery and development of oil Iraq became of strategic interest. If the Turkish Empire had not been broken up then the oil would have served the Empire; and the dictatorships and tyrannies of Syria and Iraq would have been prevented. Most likely, the Turkish Empire would have been a constitutional monarchy. The retention of the Caliphate would have avoided the nostalgic yearning of Muslims for its restoration by violence.

But now, is it too late? We cannot restore broken Humpty Dumpty, can we? Maybe not, but what is the alternative? Nobody is talking about restoring the Turkish Empire, but there does not seem to be any better solution.

The restoration of the Turkish empire does seem crazy, ridiculous, and absurd. But it would unify the region. There was no Sunni-Shia war under the Turks. Christians were able to follow their faith. Jews who had lived in the region since the BC times did not have to flee.

The new Turkish Empire would include Turkey, Syria, Lebanon, Israel and Palestine, Jordan, and Iraq. Kuwait was separate from the Empire, and could join or not as it wished. The government of Turkey would start the process by sending in troops to take control of Syria and sections of Iraq. The other states would be invited to join in.

The new empire would not be called “Turkish,” although Turkey would be the major power holding it together. It could be called the Confederation of the Levant. The states of the confederation would retain their own institutions. Israelis and Palestinians would benefit by joining the new Turkish empire. Just as Muslim cities once had Jewish quarters, the Empire would regard Israel as the Jewish quarter of a Muslim empire, while Palestinian Arabs would no longer be under Israeli occupation; they would constitute a state within a Muslim Caliphate, and the Israeli settlers would recognize the Palestinian jurisdiction by paying rent.

The US is now reluctant to send in troops to pacify the Levant, and Turkey is in the best position to do so. Having become more Islamic, now is the time for it to take the next step and restore an Islamic empire with a Caliphate, but a peaceful, democratic, and tolerant one.

Just as breaking up the Austro-Hungarian Empire was a big mistake, which allowed Nazi Germany to swallow up Austria and then Czechoslovakia, so was the dismantling of the Ottoman Empire. The European Union has replaced the old European realms as it becomes a new empire of democratic states. Nothing like that is happening in the Middle East.

It’s time to talk Turkey!

Blaming Finance, Ignoring Real Causes

Fred Foldvary Economics , , , , , , , , , ,

The fall 2014 Cato Journal has an article, ‘The Financial Crisis: Why the Conventional Wisdom Has It All Wrong,” [pdf] by Richard Kovacevich, Chairman Emeritus of Wells Fargo. The author is correct in saying that the conventional wisdom is wrong in blaming the slow recovery on the “uniqueness of a financially led economic recession.” The US economy recovered from the severe 1980 recession within two years, while now the economy is creeping like a turtle.

The economic cause of recovery and growth is simple. Economic investment – the production of capital goods – drives the business cycle. Recessions are caused by a sharp fall in investment. Then, as the prices of raw materials fall, and as land rent drops, a depression reduces these costs of production, therefore increasing profits, so investment recovers. Government can boost the recovery by further reducing the costs of production, by decreasing the taxes and regulations it imposed previously. This is the “supply side” policy of increasing investment and production by reducing the costs of regulations and taxes.

But this time around, the federal government did the opposite. Costly regulations have magnified, with an anti-supply-side effect. Every year, there are thousands more regulations that hamper enterprise, and finally, regulations plus taxes have achieved the tipping point of making it too costly for enterprise to invest and hire labor.

After the Crash of 2008, the federal government had two basic policy options: it could help the economy recover with market-enhancing supply-side policies, or else the government could enact the welfare-state agenda of greatly increased governmental medical services. The government chose the latter option, which imposed even greater costs on enterprise and labor.

When the recession hit the economy in 2008, one of the responses was TARP, the Troubled Asset Relief Program. As the article states, one of the problems with TARP was that it did not focus on the troubled banks, but imposed the policy on all banks. The banks that were not troubled had to obtain the funds and then pay interest on them. TARP imposed the impression that all banks were in trouble, which destroyed confidence, and then Congress responded to the turmoil by imposing 25,000 pages of Dodd-Frank regulations.

None of the financial regulations, going back to the Great Depression, confront the causes of the boom and bust. The fundamental cause is massive subsidies to land values. The Cato article focused on the financial industry, but the more fundamental issue is government policy regarding real estate. The problems of the financial industry originate in their financing of real estate.

The history of the Americas has been that of grabbing land and enslaving labor. In the American colonies, the British government promoted European settlement to control land and to profit from trade. After the defeat of the French in 1763, the United Kingdom changed policy to avoid conflict with the people of Quebec and with the Indians, by restricting western speculation and migration. That annoyed the landed interests enough to declare independence, and to establish a constitution that would better extend and protect land speculation. Huge grants of land were given to railroads, veterans, colleges, and speculators.

After the public domain was disposed of, the government continued the subsidy of the large landed interests with implicit policies that are invisible to the public and to most economists. The provision of public works, welfare to the poor and elderly, and artificially cheap credit, all generate greater land rent and land value. This amounts to a vast redistribution of wealth from workers, tenants, and enterprise owners, to landowners, especially the concentrated owners of commercial and farm land.

With a fixed supply of land, much of the gains from an economic expansion is captured by higher land rent and land value, which then attracts speculation that carries real estate prices to unsustainable heights. When land values crash, they bring down with them the financial system that provided the loans. None of the financial regulations touch this basic cause, and land-value seeking is so deeply ingrained in American culture that people favor it even at the price of high taxes, high unemployment, and the destruction of liberty.

Ask a typical American, “Would you favor a tax reform that eliminates taxes on your wages, on interest from your financial assets, and on buildings, replaced by a tax only on land values?” The answer is, “No! I would rather suffer unemployment, insecurity, crime, poverty, and loss of liberty, than have my precious land taxed!”

“OK, then, would you favor the complete replacement of government’s public goods with private, contractual, provision that eliminates the subsidy to land values?” “No! We need government to provide these things!”

Then you ask, “So why do you want the word ‘liberty’ put on our coins?” The answer is, “I want liberty so long as it is not put into practice!”

And that is why government deals with the superficial financial appearances, and not the implicit reality that causes the booms and busts.

Rent Control: a Case Study

Fred Foldvary Liberty

“Rent control” is better called the “rental-recipient control,” because government cannot directly control housing rentals. We can understand “rent control” by dividing the rental paid to landlords into the rent of the land and the rental of the building and management services.

The rent of a plot of land is an economic fact that cannot be directly changed by a governmental law, just as government cannot change the real price of gold. Suppose the world price of gold is $1200, and a government imposes a gold-price control of $1000. A seller would receive $1000, but the buyer is still getting $1200 worth of gold, so in effect the buyer gets a $200 subsidy.

Similarly, if an apartment would be rented for $2000 per month in an unhampered market, but government decrees a maximum rental of $1500, the tenant is getting $2000 worth of housing, and is implicitly receiving $500 of the rental per month. The law controls who receives the rental, rather than directly setting the rental.

By setting the legal rental below the market rate, the rental-recipient control creates a shortage, as the quantity of housing demanded is greater than the quantity supplied at that legal rental. The shortage then has several economic effects. Landlords do not maintain the property as well, since there is a waiting list for tenants, and the Cambridge Rent Control Board typically did not allow rental increases for property improvements. An underground market arises, with brokers who arrange to provide an apartment for a fee shared with landlords. Property values fall, and the construction of apartments is reduced. If allowed, dwelling units get converted to condominiums, further decreasing the supply of rental housing.

When the rental-recipient control is eliminated, property values rise back up. This was shown empirically in a Cato Institute research report of September 3, 2014, “Housing Market Spillovers: Evidence from the End of Rent Control in Cambridge, Massachusetts” [pdf] by David H. Autor, Christopher J. Palmer and Parag A. Pathak, based on their article of the same title in the Journal of Political Economy 122 (3) (June 2014), pp. 661–717.

From 1970 through 1994, rentals in Cambridge for units built prior to 1969 were price-controlled, and the law restricted the removal of units from the rental market. Controlled units rented for 40 percent lower than non-controlled apartments. In 1994, Massachusetts voters eliminated the rental-recipient control. That change provided a test case for what happens when rental control is abolished.

The termination of rental control raised the property values in Cambridge by $2 billion. Since the wages of labor services of rental management did not decrease, and since the costs of construction did not decrease, the rise of property values constituted an increase in the total land rent received by the landlords of the city. In part, this increase was a shift of the rent distribution from tenants, who had been implicitly receiving some of this rent, back to landlords.

But most of the increase of the land rent was a real rise due to a better market for dwellings. The property owners increased their property maintenance and renovation, and the increase in the quality and appearance of houses and neighborhoods raised both the value of the buildings and also the land rent, as measured by the increase in the land rent of the units that had not been price-controlled. As stated by the authors, the “rent-control removal spurred overall gains in neighborhood desirability.”

The political purpose of rental-recipient control is to make housing more affordable to low-income tenants. But this price control only treats the effects of unafordability, rather than curing the cause. The housing market is distorted by governmental interventions, as taxes on wages, along with other costs imposed on employers, push down the net wage level, while subsidies to real estate get capitalized into higher land rent and purchase prices.

Subsidies to real estate include artificially cheap loan rates, pushed down by the monetary policy of the Federal Reserve. The fiscal subsidies include depreciation deductions from income taxes, as well as deductions of property taxes and mortgage interest, plus the ability to sell properties with no capital gains tax if a similar property is bought around the same time. The biggest subsidy to land values is the creation of higher rentals and land values from the public goods provided by government, paid for mostly from taxes on, or at the expense of, wages.

So government pushes down wages and pulls up the rental cost of housing. That is why housing is unaffordable. The remedy is the eliminate the cause, to stop the pushing and pulling. Shift all taxes to land values, eliminating taxes on wages, goods, enterprise profits, and interest. With wages high and land values low, dwellings become affordable.

Most advocates of reform call for higher minimum wages, rent controls, and other taxes and subsidies, rather than the fundamental reform that would make these effects treatments unnecessary. The puzzle is why most of the reformers keep seeking to only treat the effects, and seldom seek to cure the causes of our social problems, even when the economics is explained to them. They reply that rental controls and higher minimum wages are politically feasible, while basic reforms are resisted, but that response then become self-reinforcing.

The California Solar Energy Property-Tax Exemption

Fred Foldvary Economics, Law , , , , , , , , ,

California exempts solar energy equipment from its property tax. The exemption will last until 2025. The California Wind Energy Association has complained that this exemption puts solar energy at an artificial advantage relative to other renewables such as windmills. Biomass, the use of biological materials such as wood and leftover crops, is also at a relative disadvantage.

Rather than eliminate the solar tax exemption, the other energy industries should seek to eliminate the property tax on all energy capital goods. With this exemption, the government of California is recognizing that property taxes on capital goods – buildings, machines, equipment, inventory – impose costs that reduce production and innovation. Since this tax is toxic, the property tax should be removed from all improvements.

The best revenue neutral tax shift would be to increase the property-tax revenue from land value by the same amount as the reduction in the taxation of capital goods.

The other energy industry chiefs call the solar property-tax exemption a subsidy. We need to distinguish between absolute and relative subsidies. An absolute subsidy occurs when government provides grants to firms, or limits competition. A relative subsidy occurs when one firm or industry receives a greater subsidy than its competitors. All absolute subsidies are also relative subsidies, because they exist relative to the rest of the economy. But if the subsidy is not in funds or protection, but from lower rates on industry-destructive taxes, this is a relative but not an absolute subsidy.

Suppose that there are patients in a hospital suffering from continuous poisoning. The doctor stops poisoning one patient, and he recovers. But the other patients are still being poisoned. The other patients complain that it is not fair for one patient to be singled out for favored treatment. But the just remedy is not to resume poisoning the recovered patient, but to stop poisoning the others. The taxation of capital goods is economic poison, which the state recognizes would poison the solar energy industry they seek to promote. But why poison the other industries? The property tax should exempt all capital goods, all improvements.

A broader issue is the subsidies to energy. All forms of energy, except human muscles, are subsidized by the state and federal governments. Energy from oil and coal are implicitly subsidized by exempting them from the social costs of their environmental destruction. There is no economic need for any subsidies. But to obtain the true costs of energy, governments should also eliminate taxes not only on their capital goods but also on their incomes and sales. We cannot know whether renewable energy can stand on its own until we eliminate all the government interventions, including taxes, subsidies, and excessive regulations.

Since a radical restructuring of public finances is politically impossible today, a politically feasible reform would be to exempt all capital goods investments from the property tax. If this needs to be revenue-neutral, California could replace its cap-and-trade policy with levies on emissions. The relative subsidy to solar power is unfair to the other energy industries, but the real unfairness is the property tax on their investments.
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This article first appeared at http://www.progress.org/views/editorials/the-california-solar-energy-property-tax-exemption/

The Concept of Profit

Fred Foldvary Economics , , ,

The basic concept of “profit” is simple: profit equals revenue minus costs. But “cost” is a complex concept, and “revenue” too is not all that simple, so the economic analysis of “profit” ends up being complicated.

A business typically calculates the appearance of profit rather than the economic reality. Most enterprises use money for purchases and sales, so for accounting, the appearance of profit is easy to understand. The revenue equals the proceeds from sales, and the costs are what is paid for the inputs: wages, rentals, interest, and materials. In economics, this is called “accounting profit,” which equals revenue minus the explicit costs, costs paid to others.

But the payments for inputs can include capital goods – inventory, buildings, machines and other tools – that last a long time. If an enterprise buys a machine that lasts for ten years, the cost is really spread out over the duration of the capital good. So in the accounting, rather than treat the purchase as a cost in the year purchased, the cost is the depreciation, the loss of value, in each year. For simplicity, the accounting can depreciate the tool in equal amounts each year, or, following tax laws, it could accelerate the depreciation, deducting more in the first years than the last years. The annual depreciation is an explicit cost, since the original purchase consists of funds paid to others.

This accounting convention ignores the effect of price inflation. Suppose a tool costs $100 and lasts for 20 years. Without inflation, the depreciation would be $5 per year. But if during that time, prices have doubled, it will cost $200 to replace the same tool. In the 20th year, the actual depreciation should be $10, but for the income tax in the USA, inflation is ignored, so the company has to record a $5 expense.

To get the real cost, we have to move from accounting profit, which only subtracts explicit nominal costs (not adjusted for inflation), to economic profit, which also subtracts the implicit costs, those which are not paid in money to others, but are nevertheless real.

The implicit costs include all the “opportunity costs,” the costs of giving up next-best opportunities. Suppose you are the sole owner of a business, and your accounting profit is $200,000 per year. Your next best opportunity would be to be employed at another firm for $80,000 per year. Since you give up a $80,000 wage by being self-employed, that is a cost of your business, and in effect you are paying yourself the $80,000 out of your accounting profit.

Suppose also that you own the real estate used by your firm. If you rented, the rental would be $60,000 per year. The opportunity cost of owing your business is the $60,000 you give up if you instead rented the place to a tenant. In effect, your business is paying you as property owner the $60,000 rent from your accounting profit.

Subtract $80,000 and $60,000 from your accounting profit, and your real gain is $60,000. That is the economic profit from your self-owned business.

The same concept applies to corporate profits. Suppose a corporation has an accounting profit of $10 million per year. It owns assets worth $100 million. If the assets were sold and converted into safe bonds, suppose the bonds would pay four percent interest, or $4 million annually. That foregone income is subtracted from the accounting profit, for an economic profit of $6 million. The firm obtains $4 million as an asset owner, and $6 million as an enterprise.

Another aspect of profit is honesty. If a thief steals $1000, this is not economic profit. True profit means that the gain came from voluntary enterprise and legitimately owned assets. Gains from force and fraud are not economic profit. From the viewpoint of the whole economy, profit also has to take into account costs imposed on others, such as from pollution. The absence of compensation for damages is really an implicit theft.

Accounting profit can include government subsidies. But since such subsidies are not from voluntary production, they are not included in economic profit, the real gain from production.

Profit can also consist of capital gains. If you buy shares of stock at $1000 and sell them later for $1500 (after paying the broker’s fee), the $500 capital gain is profit. If you instead had the $1000 in safe bonds and obtained $100 in interest, that would be the opportunity cost of the capital gain, so the economic profit from the asset is $400.

We can also look at opportunity cost from the point of view of society and the whole economy. The opportunity cost of government spending is what the taxpayers would have spent on. Land has an individual opportunity cost for the owner, but for the economy, land has no opportunity cost. The land is here by nature, and no more can be built or imported. Therefore, for the whole economy, all land rent is economic profit.

Economic profit has three origins. First there is entrepreneurial profit, the economic profit of an entrepreneur, due to his skills, insights, and talents. Second is monopoly profit, the economic profit that comes from a price greater than a competitive price, such as the profit from holding a patent. Third is the gains from asset appreciation.

Profit can be negative and zero. When an enterprise has costs greater than revenues, the loss constitutes negative profit. In a highly competitive industry, economic profits tend towards zero, as firms enter to gain profits and exit to avoid losses. But zero economic profit implies just enough accounting profit to pay for all costs, including normal returns on assets values.

If you want to be clear when talking about profits, you should not just say “profit” but indicate whether you mean accounting profit or economic profit. It gets a bit confusing, because when economists say “profit,” they mean economic profit, but when anyone else says “profit,” they mean accounting profit. It may be difficult to calculate economic profit, but we need to do it, because economic profit keeps it real.
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This article is also in http://www.progress.org/views/editorials/the-concept-of-profit/

Individual Sovereignty

Fred Foldvary Liberty , , ,

Individual sovereignty means that it is evil for any other person to interfere with one’s honest and peaceful choices. This prescription comes from natural moral law, as expressed by the universal ethic:

1) “Harm” means a invasion into another’s domain.
2) All acts, and only those acts, which coercively harm others, are evil.
3) Welcomed benefits are good.
4) All other acts are morally neutral.

Natural moral law is derived from human individuality and equality, and the premise of equality implies individual sovereignty. For if one is not sovereign, some other person has the moral authority to be a master, and equality does not exist. Individual sovereignty is moral equality taken to its logical conclusion. The concept of “self ownership” is the same as individual sovereignty.

Because individual sovereignty derives from the universal ethic and its premise of human equality, it does not imply that a sovereign individual may do anything he pleases. A self-owner may not impose coercive harm on others. One may do as one pleases so long as one’s actions are honest and peaceful. An honest action does not coercively harm others through fraud.

“A person has a functioning mind and the actual or potential ability to make choices based on reason and awareness” (Dictionary of Free-Market Economics). Young children have such minds and are therefore also sovereign. But the ability to use reason is something that develops as children mature, and therefore the parents have a responsibility to exercise some of the sovereignty rights on behalf of their children. Conversely, creating a child also creates a moral obligation of the parent to provide judgment as well as material needs for their children. Upon some age of maturity, the child becomes a fully sovereign human being.

In political theory monarchs have been said to be sovereign, and are called “the Sovereign”. But even if the king has absolute legal power, he is a human being equal to all others, and any coercive power he has over others is a usurpation of individual sovereignty.

When republics and democracies replaced absolute monarchs, the state and its government were said to be sovereign. A country is sovereign when there is no other political body above it. In the United States, the federal and state governments have parallel sovereignty, and the native Indian nations are supposed to have some elements of national sovereignty. The US federal government has entered into treaty obligations and has joined international organizations such as the United Nations and World Trade Organization, but it could withdraw from these organizations and treaties, as the UN and WTO have no sovereignty, but only delegated powers.

Power is always exercised by individual persons, not by mental constructs. Governments and states are mental constructs, having no reality other than what people believe. If a government exercises its sovereign power, in reality, it is the president or prime minister applying the forces of government, ultimately its army, police, and prison guards. Arbitrary state power is ultimately the unequal power of some individuals over others. There is no moral authority or legitimacy for government other than to enforce the universal ethic, which implies that it is immoral for government to interfere with peaceful and honest individual sovereignty. If government makes theft legally a crime, it is already morally a crime, and government simply acts as an agent of the people to enforce moral law, although if it does that, the financing must also be moral.

Therefore individual sovereignty implies peaceful anarchism, with no imposed government, because even if the government confines itself to enforcing the universal ethic, the rulers are human beings who have no greater wisdom, in general, than others, and they could end up imposing their wills to alter peaceful choices. Therefore, pure equality implies that there be no rulers imposed on unwilling persons.

Anarchism, as the absence of imposed government, does not imply chaos and disorder, as connoted by the unfortunate other meaning of “anarchy”. Human beings have always lived in organized communities. In anarchism, most people would join associations such as condominiums, cooperatives, and proprietary communities (owners with tenants). These local communities would federate into broader or higher associations, ultimately covering a continent or the whole planet. The benefit of government – a uniform rule of law – would be provided, without its fatal flaw, the denial of individual sovereignty.

One more element of individual sovereignty needs to be addressed: the issue of land ownership. Self-ownership implies the ownership of one’s labor, the products of labor, and the wages of labor. But self-ownership does not apply to nature, all that is apart from persons and human action. The premise of human equality implies that all persons own an equal share of the benefits of natural resources, and that can be accomplished by collecting the economic rent of land, its yield when put to optimal use, and distributing that rent equally.

The local site rentals, generated by the local population, commerce, and public goods, would be paid to the community’s providers of civic goods. The multi-level federations of voluntary communities and associations would implement the collection of land rent and local rentals, and this geo-anarchism would provide the funding needed to implement the voluntary governance.

Individual sovereignty is therefore feasible and is consistent with, and indeed best generates, peace and prosperity. Wars, such as in the Middle East, would cease if most people recognized individual sovereignty and equal rights to natural benefits, rather than fight over the coercively collective and fictitious sovereignty of states.
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This article first appeared in http://www.progress.org/views/editorials/individual-sovereignty/

Is Australia’s Carbon Tax Repeal Really Market Enhancing?

Fred Foldvary Economics, Law , , , , , , ,

Some libertarians cheer whenever there is any tax repeal. However, we need to distinguish taxes in form versus taxes in substance. Taxes in substance have no relation to a benefit or penalty attached to the payment. Taxes in form, but not in substance, pay funds to the government, but are tied to some benefit or compensation for damages.

It is standard economic theory that the best way to prevent pollution, as with other negative The effects, is to make the polluter, hence also the buyer of its products, pay the social cost of the pollution. The economist Arthur Cecil Pigou provided a thorough explanation in his 1920 book The Economics of Welfare. A tax on pollution has since then been called “Pigovian.”

One of the most discussed Pigovian taxes has been on the use of carbon-based fuels such as coal, natural gas, and oil. A “carbon tax” can be on the fuel inputs or on the emission outputs. The most effective Pigovian levy is on the emissions, as that provides an incentive to reduce pollution such as by capturing the carbon before it gets spewed out. If the polluter does not compensate society for dumping on the commons, then in effect it gets subsidized, as it sells its output at less than the total social cost of production.

Many countries have been confronting pollution with inefficient policies such as regulations, credits for offsetting pollution with purchases of forest lands, and permits that can be traded. Australia enacted what was called a “carbon tax” with the Clean Energy Act of 2011, implemented in July 2012. But this was not a Pigovian tax. The Act created a “carbon price mechanism,” a cap-and-trade emissions trading scheme that at first set a price per ton of emissions. This mandated price had the effect of a ‘carbon tax’. But after 2015, the mechanism would have transitioned to a trading scheme.

However, in 2013 the newly elected prime minister sought a repeal of the “carbon tax” emissions trading scheme. In 2014, parliament passed the repeal.

The opponents of emissions taxes claim that this increases costs to business and households. This is narrowly true, but policy should consider the total costs to society. The pollution imposes a social cost on Australia and the rest of the world. This is not a cost paid in explicit money, but costs in the form of illness, a less productive environment, and possible effects on the climate.

The opponents of emission levies overlook that the absence of compensation for the pollution costs is in effect a subsidy to the polluters and their customers. A pollution charge is not a tax in substance, but rather the prevention of this subsidy, and compensation for dumping toxic materials on other people’s property.

The repeal did not provide a replacement, and this creates uncertainty for business about any future anti-pollution policy. This policy uncertainty reduces investment and growth.

The best way to implement a pollution tax is as a replacement of other taxes. Taxes in income, sales, and value added impose the excess burden of higher costs and less output and employment. If politicians are concerned with tax costs, why are they not repealing these taxes? When a pollution tax replaces such market-hampering taxes, the total costs paid by consumers does not increase, but rather shifts in favor of less- polluting products.

Actually, the revenue obtained from Australia’s brief carbon tax was used to compensate taxpayers and affected companies. But the most effective policy would have been to have an explicit tax on pollution instead of a trading scheme, and to lower other tax rates, along with a transitional compensation to those with net losses.

Some opponents claim that Pigovian charges would be good if applied globally, but in a single country, would put its industries at a disadvantage. But that would not happen with a “green tax shift,” the replacement of inefficient taxes with a “green tax” on pollution. A green tax shift would reduce the environmental cost of pollution while not increasing the total tax costs for the country’s economy.