Economics

The Theory of the Non-Working Class

Fred Foldvary Economics , , , , , , , ,

In the USA, people of age 16 and above are considered of working age. Of those of that age range, those who are working, seeking work, or hired but not yet working, are designated to be in the labor force. The labor force participation rate is the number of people in the labor force divided by the number of those of working age.

From 1950 to 2000, the labor force participation rate in the USA rose from 59 percent to 67 percent. Much of that increase came from the doubling of the participation rate of women, from 30 percent in 1950 to 60 percent in 2000. But total labor participation has declined since 2000 to 63 percent.

While the portion of women in the US labor force rose, the portion of men has been declining. The prime working years are considered to be from age 25 to 54, and one sixth of the men of that age range are not working. In 1950, only four percent of men of that range were not employed.

Many of those not working are not seeking work, and are therefore not counted in the labor force. They are also not counted as unemployed, because by definition, the unemployed are those actively seeking work plus those who have been hired but not yet started to work for wages. Two thirds of working age men are not seeking work, although some who sought work but stopped because they were discouraged, would take a job if offered.

About 40 percent of the men seeking work have been unemployed for six months or more. The chronically unemployed are less likely to become employed, so the long-term unemployment feeds on itself.

The real wage of lower-skilled workers has been falling since 1970. For workers who did not finish high school, the real wage (adjusted for inflation) has fallen 25 percent. That fall in wages is offset somewhat by the availability of new products such as cell phones and by the fall in the relative prices of electronics and other goods, but the cost of housing, medical care, taxes, and college tuition have risen to offset some of that productivity gain.

There are several reasons why male labor participation has fallen. First, more men are attending college. Second, due to the expansion of the war on drugs, the portion of men in prison has risen. Third, as more women work for wages, some male partners choose home production, doing house work and child care at home, which is real labor but not counted in the output data. Fourth, more people are obtaining government’s disability income. Very few on disability go back to work. Fifth, many in the first of the baby-boom generation, born during 1946-1950, are retiring.

The downward trend of labor participation will continue. The Congressional Budget Office estimates that the participation rate will fall to 61% by 2024. CBO calculates that the Affordable Care Act reduce the labor force by more than 2 million jobs. Workers will be able to quit their jobs without losing medical coverage, and the expansion of Medicaid will induce many more adults to obtain medical care without having a job.

One of the problems with a lower labor participation rate is that it reduces the ratio of workers to non-workers. Social Security and Medicare are supported by transferring income from workers to non-workers. A smaller labor participation rate will use up the trust funds and create a deficit for these programs sooner. Also, fewer workers results in lower economic growth, which implies that more of those in poverty will stay that way.

Much of the labor participation decline is not voluntary, but caused by tax and subsidy policies. Without taxes on wages and enterprise profits, both wages and employment would be higher. If the funds now going into Social Security instead went into tax-free private retirement accounts, those who retire would rely on their own past savings rather than transfers from those working. Without the income-tax distortion caused by tax-free medical insurance and taxed money wages, workers would be able to choose the insurance plan that fits them best rather than having to accept the limited plans offered by employers and the government.

The best alternative to taxing wages is to tax land rent or land value. But even without such a fundamental shift in policy, the labor force participation rate can be made more voluntary with employee and self-employment incentives for those long out of work, such as tax offsets and exemptions from restrictions (e.g. licensing, union rules, and city zoning) that prevents working at home, and exemptions from litigation risks. Immigration reform – legalizing those already in the country and allowing more of those with labor skills into the country, would also substantially increase the labor population.

The basic problem with labor world-wide are restrictions on hiring and firing labor, and the heavy costs imposed by taxes, regulations, and mandates on employers. If an employer, including a self-employer, could simply hire a worker without having to deal with forms and regulations, and with no taxes on the employer and the employee, we would have full employment at wages that would provide a decent standard of living. The labor problems we have are iatrogenic, a disease caused by the doctor, in this case, the economic malady caused by government policy. The government people look to for solving economic problems has caused them in the first place.

California’s Environmental Mal-Litigation

Fred Foldvary Current Events, Economics, Law , , , , , ,

The worst intervention by governments, aside from aggressive war, is excessive litigation. Taxes are burdensome, but they are predictable. The reason that enterprises are not entirely crushed by taxation is that much of the tax burden is at the expense of land rent, so it ends up destroying the economy’s surplus, but not totally wreaking the economy. Regulations act as a tax to impose costs on enterprise, and much of the cost is passed on to workers and the public, so they make us poorer but don’t totally stifle the economy. Subsidies create distortions that generate inequality and the boom-bust cycle, but subsidies is what politics is all about. The worst intervention, that does the most to crush enterprise and employment, is vicious litigation.

A prime example of litigative intervention is the California Environmental Quality Act. CEQA is codified at the Public Resources Code Section 21000 et seq. As California’s web site for CEQA states, “Most proposals for physical development in California are subject to the provisions of CEQA.” The “frequently asked questions” web section explains that “CEQA is a self-executing statute.” That means that “its provisions are enforced, as necessary, by the public through litigation and the threat thereof.” Past court cases can be seen on the web site of the California Natural Resources Agency.

As described by a “Schumpeter” blog article in the 25 January 2014 Economist, “The not so Golden State,” this law “has mutated into a monster.” Anybody in California may file a CEQA lawsuit against any project using environmental protection as an excuse. The plaintiffs win half the cases. If someone sues a company and loses, the defendant still has to cover his legal expenses. Many of the lawsuits under CEQA are also against governmental development projects and against permits by local governments to enable private development.

Suppose a developer seeks to build an industrial park. If he hires non-union workers, the union attacks with a CEQA lawsuit. So the builder hires expensive union labor. Suppose someone owns a gasoline station, and a competitor wants to set up a station nearby. The station owner stops the potential competitor by filing a CEQA case. In 2011, there were 254 “California disinvestment events,” in which companies employing more than one hundred workers either left the state or expanded in another state rather than in California. This is estimated to have gotten worse in 2012 and 2013.

The litigations and regulations of California fall hardest on manufacturing. California’s high sales tax and low property tax also induces cities to favor retail stores over manufacturing. Hostile policies in California are largely responsible for the flight of manufacturing to other states and to foreign countries. As noted by the Economist article, electronic devices are designed in “Silicon Valley,” the region from San Francisco to San Jose, but manufactured in Asia. Some environmentalists realize that CEQA does little to protect the environment, but attempts to reform the law have stalled. The frivolous lawsuits reward lawyers, unions, companies seeking to stifle competition, and “not in my backyard” opponents of development.

Litigation is the worst way to handle social problems. Lawsuits impose unpredictable and expensive costs on enterprise. Such laws let opportunists exploit legitimate job-creating industries. Excessive litigation is further rewarded by making the winning defendants of lawsuits have to pay their legal costs. We then get excessive malpractice suits that force doctors to buy expensive insurance. Federal and state laws that enable litigation for job and housing discrimination and environmental protection end up enriching lawyers who get much of the gains.

The best ways to handle environmental destruction is with covenants and easements, along with a liability rule for damages. If some development harms the natural environment, then the government assesses the damage, and the polluter pays for the damage, either as a one-time charge or as periodic payments for on-going pollution. Developers know in advance that they are liable for damage, and so they would have the incentive to prevent the payment by doing their own environmental assessment. The issue would be between the developer and the state, without involving attorneys and court costs.

Economic theory has recognized for the past hundred years that the optimal policy for pollution is a charge paid by the polluters, passed on to the customers, fully compensating society for the damage. That can be done by a pollution tax.

English common law traditionally provided law-suit protection against potential negative effects and damages to one’s property. Litigation can be a useful enforcement and restitution tool, but it has to be within a sensible legal system. In the English tort system, if a plaintiff loses a law suit, the loser has to pay the legal costs of the winner. So if a company sues another firm just to stifle competition, using the environment as an excuse, and that company loses the lawsuit, then that company has to pay the legal costs of the winning competitor. That would stop frivolous or phony law suits. And that is why the lawyer lobby will stop such a legal reform in the USA.

Risks Of Regulation

Adam Magoon Current Events, Economics, History, Law, Liberty, Politics , , , , , , , ,

A bit dated but still very relevant.

Regulation; the four letter word of the business world.  Many people see regulation as a protective shield from the ‘dangers’ of the businessman; a way to protect people, property and the environment.  The oil industry is one of the most heavily regulated enterprises in the United States.  Despite being intended to protect us; these regulations failed catastrophically on April 20th, 2010 when the Deep Water Horizon oil rig suffered a mechanical failure resulting in an explosion which sank the rig two days later(1).  Yet, when the disaster happened, we were met with pleas for more government oversight and more red tape.  The regulations on that industry, both in the Gulf Mexico and throughout the country, helped cause the Deepwater Horizon disaster and removing them would help prevent similar disasters in the future.

Regulations in the Gulf of Mexico begin with the Minerals Management Service (MMS).  Created in 1982 due to the Federal Oil and Gas Royalty Management Act the MMS “both regulates the [gulf oil drilling] industry and collects billions[of dollars] in royalties from it”(2, 3).  The MMS’s responsibility to regulate includes monthly inspections, issuing safety documentation, and issuing safety citations(3).  Royalty collection is based on number of barrels of oil removed and varies from well to well.  The MMA also provides  “royalty relief“ to a number of rigs based on previous legislation. Until November of 2000 the royalty relief was issued based on the Outer Continental Shelf Deep Water Royalty Relief Act of 1995, better known as DWRRA.  This act “relieves eligible leases from paying royalties on defined amount of deep-water production”.  At depths over 2,526 feet oil companies did not have to pay the United States royalties on 87.5 million barrels of oil, between 1,312 and 2,625 feet the relief was 52.5 million barrels and between 656 and 1,312 feet the relief was only 17.5 million barrels.  While this act expired in the year 2000 it was replaced by an incentive program that allowed royalty relief to be “specified at the discretion of the MMS”(4).  This incentive program provides more relief if a drilling site is “more expensive to access” even if it is at the same water depth as another rig receiving less relief (2).  The royalty relief system provides incentives for Oil Rigs to operate in deep waters, especially those classified as “Ultra-Deepwater” by reducing the royalties paid on those sites(5).

While not specific to the gulf, there are a variety of moratoria on drilling throughout the country.  These moratoria take two forms.  The first set, known as “leasing moratoria” are general bans on drilling in select areas , the second set are temporary bans due to specific incidents.  Since   the fiscal year 1982 congress has denied funds to the MMS to “conduct leasing for the specified Outer Continental Shelf areas”.  Currently there is a “blanket moritorium” on leasing in effect “through 2012” that covers a large portion of both the East and West coasts( 2).  One of the largest bans on drilling however exists in the Arctic National Wildlife Refuge(ANWR).  Located in the “northeast corner” of Alaska over ten million acres of land are off limits to drilling.  In this wildnerness it is estimated that there exists “between ten billion and sixteen trillion barrels of oil” that could supply twenty percent of U.S. demand for nearly thirty years(6).  The most recent temporary bans have been a result of the Deepwater Horizon disaster.  A “30-day pause in offshore drilling” followed the sinking of the Horizon rig(11).  This did not only cover BP’s rigs but all offshore drilling “based on water depth”(7).  That ban was removed by a federal court, but was replaced with a revised ban that will be in effect until November, 2010(7).

Beyond physical limitations on drilling there are also economic regulations.  There are a number of federal subsidies and tax breaks for the drilling industry.  David Kocieniewski says that “examination of the American tax code indicates that oil production is among the most heavily subsidized businesses”.  These tax breaks occur for a number of reasons.  Many are simply to lure oil companies to American shores, others were “born of international politics” or “date back nearly a century”(8).  Beyond that the United States government has put “Liability Limits” on drilling operations.  The Oil Pollution Act of 1990 limits an oil companies liability for damages to only $75 million dollars.  Any remaining damages, up to $1 billion, are payed through the Oil Spill Liability Trust Fund.  This fund is “financed primarily through a fee on imported oil”(1).  Senator Robert Menendez from New Jersey recently introduced bill, S. 3305 which would raise that cap to $10 billion(9).

All of these laws and regulations have one thing in common.  They increased the probability of a catastrophic oil spill in the Gulf of Mexico.  Each regulation increased the risk of such a spill in some way and when combined they resulted in the disaster that is causing massive destruction in the Gulf today.  The Minerals Management service was organized to be the overarching regulatory body for the Oil Industry.  Why did it fail in its duty?  Why did “spills from offshore oil rigs…in U.S. waters more than quadrupled this decade” despite the MMS’s oversight(10)?  This question was answered by economist Walter Block in his book The Privatization of Roads & Highways (12).  Quoting Cecil Mackey, former Assistant secretary of transportation, he says:

“As the more obvious regulatory actions are taken; as the process becomes more institutionalized; as new leaders on both sides  replace ones who were so personally involved as adversaries in  the initial phases, those who regulate will gradually come to reflect,     in large measure, points of view similar to those whom they regulate.”

Quite simply, the MMS adopted the views of the Oil Industry completely negating their ability to regulate it.  Congressman Nick J. Rahall confirms this saying “MMS has been asleep at the switch in terms of policing offshore rigs”.  Using numbers supplied by the MMS in the prior 64 months before the incident “25 percent of monthly inspections were not performed”(3).  Are we to believe another agency would be any more efficient?  Bureaucracy and corruption are not the only things to blame however; legislation played a vital role in this disaster as well.  DWRRA, for example, incentivized the risk to drill in deep waters.  Under DWRRA the greater the depth being drilled the greater the royalty relief amount.  These waters are inherently less safe to drill in.   It is easy to compare the difficulties in dealing with a site 5000 feet below the ocean against one 500 feet below the surface.  These incentives were made worse when DWRRA expired.  Under the new program “the most economically risky projects would receive the most relief”, safer projects on the other hand would receive “little or no relief”(4).

While acts like DWRRA incentivize the risk of deepwater drilling the greater incentive to drill in the Gulf of Mexico is simply that there are so few places to drill in the continental United States.  The United States Exclusive Economic Zone extends “200 nautical miles” from all of it’s shores(2).  Yet, much of this area is off limits to drilling.  The “blanket moratorium” issued by former President George H.W. Bush in 1990  restricts drilling in “all unleased areas offshore Northern and Central California, Southern California except for 87 tracts, Washington, Oregon, the North Atlantic coast, and the Eastern Gulf of Mexico coast”.  The Gulf of Mexico is the only economically viable offshore area left for them to drill.  This of course pales in comparison to the Arctic National Wildlife Refuge.  Most of the 10-million-acre area is not even adjacent to the ocean, surely drilling on land or in shallow water is much safer than drilling 5000 feet under the ocean(6).  Beyond helping to cause the spill in the first place the government is increasing the risk of future disasters.  The temporary ban issued in response to the Horizon spill “neither improves safety nor mitigates risk”(11).  By forcing drilling to stop you immediately cause a number of problems.  Reentering a location is as dangerous, if not more so, than the original drilling operation.  Experienced workers have been fired, laid off, or relocated and will need to be replaced with less experienced ones.  Equipment in worse quality will be all that remains when the moratorium ends(11).

The economic regulations were the proverbial straw that broke the camel’s back.  A single tax break for the Deepwater Horizon oil rig covered “70 percent of the rent” or “$225,000 a day”.  Or, as policy analyst Sima J Gandhi describes it “We’re giving tax breaks to highly profitable companies to do what they would be doing anyway”(8).  These breaks are not only an unfair advantage, they incite these companies to make riskier choices.  If the potential cost of the Deepwater Horizon rig wasn’t offset by these breaks it may not have been economically viable to drill in such a dangerous location.  On top of the lower cost of the initial operation; the Liability Caps ensured that any potential risk was marginalized by the government.  The $75 million limit that has been in effect since 1990 was a message to the industry to attempt increasingly risky drills(1).

The oil companies should be liable for the full cost of any damages done by their rigs.  The worry that “operators and nonoperators in the U.S. Gulf of Mexico will be unable to obtain adequate protection from insurance” is totally unjustified (1).  If the site is not economically viable then there is no reason to drill there.  If BP and Transocean knew they would have been liable for all damages they would not have received a citation for “not conducting well control drills as required and not performing ‘all operations in a safe and workmanlike manner'”(3).  There would have been an incentive to spend money on safety, training and equipment instead of the incentive to take risks knowing they would be protected.  Or as one lawyer explained the situation “arbitrary liability caps are just not reasonable.  You cannot decide the expense of a disaster before it happens.  Liability caps allow companies like BP to avoid bearing the responsibility for the full cost of the damage they inflict”(9).

The oil has stopped flowing from the bottom of the Gulf; for now.  The question remains: How can we prevent this from happening again?  There, of course, is no easy answer.  Accidents, mistakes, and disasters can never be guarded against completely.  We can however mitigate the risk involved in those dangerous operations that are needed for the sake of humanity.  The best way to increase the safety of the oil industry is to remove the regulations that incentivize the risks involved in their industry.  Preventing drilling in safer areas, tax breaks, royalty reductions, liability limits; all these things make an already dangerous prospect that much more perilous.  We need to neither help nor hinder these companies, they must succeed or fail on their own merits.

Sources available upon request.

“Cybernetics in the Service of Communism”

Brandon Christensen Economics, History , , , , , ,

In October, 1961, just in time for the opening of the XXII Party Congress, a group of Soviet mathematicians, computer specialists, economists, linguists, and other scientists interested in mathematical model and computer simulation published a collection of papers called “Cybernetics in the Service of Communism”. In that collection they offered a wide variety of applications of computers to various problems in science and in the national economy.

From this video interview of MIT Lecturer (and historian) Vyacheslav Gerovitch conducted by the website Serious Science. The interview is only 15 minutes long.

Another Belated Warm Welcome

Brandon Christensen Current Events, Economics , ,

Readers have been enjoying Rick’s contributions for a while, but I just realized I haven’t formally introduced him yet. So finally:

Rick Weber received his B.S. in economics at San Jose State University and his M.S. in economics at Suffolk University, where he is currently working on his Ph.D. He is fascinated by the beauty of spontaneous order, and constantly astounded by the inexpressible wealth bestowed on him by the division of labor.

I met Rick at an IHS summer seminar waaaaay back in 2009. He was the toast of the town back then, and I’m really stoked that he’s blogging with us here at the consortium. Scroll through his musings. You won’t be disappointed. He also kicks it with the Free Market Institute gang at Texas Tech.

Fractional Reserves in Free Banking

Fred Foldvary Economics, Liberty , ,

by Fred Foldvary

A bank is a firm that accepts funds as deposits. The generic term “bank” includes various institutional types, such as credit unions. The bank is an intermediary between savers and borrowers. The interest paid by borrowers pays the expenses of the bank, and what remains is paid to the depositors.

There are two ways to organize a banking system. The first is with central banks, such as the Federal Reserve (the “Fed”) in the USA. The central bank issues the currency and regulates the private banks. In the USA, the Fed includes regional Federal Reserve Banks, which are the bankers’ banks. The private banks hold accounts with a Federal Reserve Bank; the funds are called “reserves.” The Fed creates money by buying bonds: it pays the seller a check, the seller deposits the check into a bank, the bank presents the check to the Federal Reserve Bank, and the Federal Reserve Bank covers the check by increasing the reserves of that bank, thus creating money out of nothing. The interest income from bonds pays the expenses of the Fed, and the remaining interest is paid back to the US Treasury.

The other method of banking is with free-market banking, or “free banking,” whereby there is no central bank; the private banks issue their own currencies and are not restricted other than by laws that prohibit fraud. The banks would usually use the same unit of account, such as the dollar or euro.

There are two ways to do banking. The first is called “one hundred percent reserves” or “full reserve” banking. In that method, the bank may not loan out the funds that are deposited. One of the challenges of banking is that with checking accounts, also called “demand deposits,” the account holders may withdraw their money at any time. In contrast, loans are typically long term, such as for mortgages or business loans or car loans. So if depositors suddenly want to withdraw much of their funds, the money will not be there. With full-reserve banking, the money is always there, but the bank get no interest payments. The depositors pay a fee to have their money stored at the bank.

The workings of a banking system also depend on the money system. The three basic types of money are 1) commodity money, where a commodity such as gold or silver is used as a general medium of exchange, 2) a fiat money system, in which the currency has no fixed convertibility to any natural commodity, and 3) an artificial-commodity system, where the unit of account is constructed in a way that limits the supply.

With commodity money, banks create money substitutes convertible to the real money at a fixed rate. For example, if gold is the real money, banks issue paper currency convertible into gold, so that, for example, a $20 paper note can be exchanged for a $20 gold coin with $20 worth of gold. All government-created money today is fiat. With fiat money, the real money is paper currency and coins, and bank deposits are money substitutes. The prime example of artificial-commodity money today is the bitcoin, an electronic currency created by computer programs.

The other method of banking is called “fractional reserve banking.” With that method, a bank holds only a small fraction of deposit funds in its reserves. Governments typically impose some minimum of required reserves. The remainder are “excess reserves,” which may be loaned out.

For example, suppose Samantha deposits $100 of currency into her account, and the required reserves are ten percent. The bank keeps $10 in reserve, and loans out the other $90 to Ralph. The loan consists of an account created by the bank. The loan therefore creates $90 in new money, since Samantha still has her $100 in the bank. With the $90 account, the bank again keeps 10%, or $9, and loans out $81. This money creation can continue until all the excess reserves are fully loaned out, in which case the original $100 deposit is multiplied into the creation of $1000.

With all reserves loaned out, if the depositors seek to withdraw their money, the bank will not have sufficient currency. A bank can deal with this liquidity problem in several ways. One is to have most of the funds in time deposits, funds that are held for a fixed period of time, unless the account holder pays a large penalty. Another method is for a bank to be able to borrow funds from other banks or from a central bank. A third way is for the bank to have contracts that state that the bank may not be able to provide withdrawals at times when it has insufficient funds.

Critics of fractional reserve banking claim that the private banks are a private monopoly cartel that inflates the money supply by making loans and obtains interest that robs the economy of money and goes to privileged bank owners.

With fiat money and central banking, there is indeed a potential for inflation, as there is no limit to money creation. The main problem with central banking is that there is no scientific way to know in advance the optimal money supply, and historically, the Fed created destructive deflation in the 1930s, high inflation in the 1970s, and the cheap credit that generated the real estate bubble and the Crash of 2008.

Some critics of central banks want the government to directly issue money. But if the Treasury or Finance department can issue money at will, political influences can induce inflation, and even hyperinflation as happened in Zimbabwe.

However, with free banking and commodity money, these problems do not arise. Banking would not be a monopoly cartel, since new banks, including credit unions can be created. The convertibility of money substitutes into real money prevents inflation, as the quantity of money substitutes is limited by the demand by the public to hold them. Competition among banks limits their profit to normal returns, as the rest of the debt service paid by borrowers goes to interest payments to depositors. Fractional-reserve free banking generates a flexible yet stable money supply. Free banking does not generate inflation, because new deposits into the banking system come from additional real money, such as from gold mining, which is costly to produce.

The failures of central planning in the economy include the failure of central banks to successfully manage the money supply and optimally manipulate interest rates. Free banking worked well where tried, such as in Scotland until 1844, when the Bank of England took over its money system. A pure free market would let the market determine both the money supply and the natural rate of interest. In Scotland, the banks formed an association to lend funds to banks that needed more liquidity. With free banking, the market’s natural rate would avoid the distortions that arise from either cheap credit or a shortage of credit.

The boom-bust cycle will only be eliminated by the prevention of the fiscal and monetary subsidies to real estate. Sustainable economic progress requires both the public collection of land rent and a free market in money and banking.

Note: this article appeared as “Fractional Reserve Banking” in the Progress Report.

African development and mismeasuring economies (two separate topics)

Brandon Christensen Economics, Links , ,

Sorry I’ve been away for so long. I’ve been much busier than I wanted to be. I’ve been reading an essay by an economic anthropologist (Keith Hart) on African development that is definitely worth your time, though be sure to grab a cup of coffee first.

I liked this blog post from economist Ed Dolan on GDP versus GDP per capita measurements (I myself like to use the GDP (PPP) per capita measurement).

Addendum: Be sure to read Warren’s blog post on informal economies in the post-colonial world before reading the economic anthropologist’s essay. Warren’s post is a great primer for the topic.

New issue of Econ Journal Watch is out

Brandon Christensen Current Events, Economics, Links , ,

You can find it here, and here is the summary:

One Swallow Doesn’t Make a Summer: In a 2014 AER article, Zacharias Maniadis, Fabio Tufano, and John List grapple with the problem of the credibility of empirical results by presenting a framework for statistical inference. Here Mitesh Kataria discusses some of the assumptions and restrictions of their framework and simulation, suggesting that their results do not, in fact, allow for general recommendations about which inference approach is most appropriate. Maniadis, Tufano, and List reply to Kataria.

Should the modernization hypothesis survive the research of Daron Acemoglu, Simon Johnson, James Robinson, and Pierre Yared? New evidence and analysis is provided by Hugo Faria, Hugo Montesinos-Yufa, and Daniel Morales, supporting the hypothesis that there is a long-run positive relation between socio-economic development and political democracy.

Ill-Conceived, Even If Competently Administered: In a 2013 JEP article, Stuart Graham and Saurabh Vishnubhakat argue that the Patent and Trademark Office (PTO) is doing a good job of interpreting patent law, and suggest that the “smart phone wars” and related disputes are not evidence that the patent system is broken. Here Shawn Miller and Alexander Tabarrok argue that the main problem is not with the PTO but with patent law as it has been applied, particularly to software, resulting in patents that are overly broad and ambiguous, and hence vexing and stifling.

Ragnar Frisch and Norway: Arild Sæther and Ib Eriksen contend that for several decades bad policy derived in part from the climate of opinion among the country’s eminent economists.

The ideological evolution of Milton Friedman: Lanny Ebenstein explores developments in Friedman’s thinking, particularly after the mid-1950s.

EJW Audio: Lanny Ebenstein on Milton Friedman’s Ideological Evolution

I might add that notewriter Fred Foldvary is an Editor for the journal, and notewriter Warren Gibson is its math reader, so give the newest issue some family love!

Kant och kapitalismen

Jesper Ahlin Economics, Philosophy

Immanuel Kant (1724–1804) är en av de mest framstående filosoferna genom tiderna. Han skrev bland annat inom etiken och kunskapsteorin, men också inom den politiska filosofin. Jag tänker här inte redogöra fullständigt för hans tankar utan endast snudda vid några av de huvudsakliga dragen.

Anledningen till att jag skriver om Kant är att jag den senaste veckan har mötts av tre av varandra oberoende misstolkningar, ja, rena missbruk, av Kants filosofi. Man har mot bakgrund av ett av hans mest kända påståenden hävdat att Kant var antikapitalist. Så var inte fallet. I sin bok Groundwork of the Metaphysics of Morals skriver Kant såhär:

“All handel, alla hantverk och alla skickligheter har gynnats av arbetsfördelningen, alltså då en person inte gör allt utan att varje person begränsar sig till en specifik uppgift som skiljer sig markant från andra i sättet det utförs, så att hen erhåller förmågan att utföra det så perfekt som möjligt och med största lätthet. Där arbete inte är så avgränsat och fördelat, där alla är sin egen allt-i-allo, förblir handeln barbarisk.”

(Stycket är fritt översatt från engelska, avsnitt 4:388, Groundwork.)

Kant var samtida med moralfilosofen och ekonomiteoretikern Adam Smith, som bland annat är känd för sin redogörelse av arbetsfördelningen som Kant skriver om. Som stycket visar, tillsammans med Kants vurm för frihet (se nedan), påstod Kant att andra system än det som vi idag kallar för marknadsekonomi är barbariskt (”greatest barbarism”). Den som påstår att Kants filosofi är antikapitalistisk måste förklara sin ståndpunkt väldigt väl.

Antikapitalistiska tolkningar av Kant bygger ofta på det välkända ”agera så att du använder mänskligheten (inklusive dig själv) som ett mål i sig, och aldrig endast som ett medel” (förkortat och omformulerat från avsnitt 4:429). Den antikapitalistiska tolkningen brukar då heta att när folk byter varor och tjänster med varandra använder de sina medmänniskor som medel för sina egna ändamåls skull, vilket ska strida mot Kants filosofi. Vad denna tolkning förbiser är att i en marknadsekonomi använder båda parter frivilligt varandra för att tillsammans uppnå ett tillstånd som de båda anser är bättre än det föregående. Ett brott mot moralen uppstår endast om denna ömsesidiga överenskommelse förvandlas till exploatering genom att den ena parten tvingar den andre till ett byte.

I det efterföljande avsnittet skriver Kant att principen enklast förstås om man föreställer sig ett ”angrepp på andras frihet eller egendom” (”freedom and property of others”, 4:430). Det ska alltså bli tydligt och lätt att förstå, menar Kant, att det moraliska ligger i fullständig ömsesidig respekt om man tänker sig kapitalismens två grundpelare – frihet och privat egendom. När någon bryter mot dessa ska man omedelbart se att handlingen är omoralisk.

Det finns goda skäl att kalla Kant för kapitalist. Han skrev ju också om institutionen att låna och låna ut saker till varandra. Om man inte lämnar tillbaka det man är skyldig faller tilliten sönder. Kant förespråkade alltså kapitalismens motor – arbetsfördelningen; dess två grundpelare – frihet och privat egendom; och dess klister – tillit och ömsesidig respekt. Vill man göra ett case av Kant som antikapitalist får man bita hårt i böckerna. Det mesta tycks tala åt motsatsen: laissez faire, laissez faire.

Rick Weighs on Intellectual Property: More Questions Than Answers

Rick Weber Economics , , ,

Adam recently posted that the British government is contemplating pretty outrageous penalties for Internet pirates. Naturally I wanted to chime in with an outrageously long comment about the nature of property and the (im)possibility of intellectual property (IP) rights. That’s just the libertarian thing to do! There’s a lot to say and it will take more than a few beers to sort this whole thing out, so I’m going to limit myself which means I’ll just raise more questions than I answer…

So let’s start with why IP doesn’t make a lot of sense. IP is information and information wants to be free. My use of a song doesn’t prevent you from using it. IP isn’t scarce in the way a car is. Besides, there’s some evidence that government enforcement of IP does more harm than good. And pirates end up spending more to buy IP than other people anyways (I usually listen to music for free on Grooveshark, but the other day I thought, “I’d really like to tell Willie Nelson that I think his music is great,” so I bought an album even though I could have listened to it for free!). And besides, musicians can make money by performing live.

But just because it isn’t a tangible thing, doesn’t mean we are forbidden from attaching rights to it, even in anarchy. Property rights are a “bundle of sticks.” I own my land, but you might have a right to the sunshine I would block if I built a skyscraper. Likewise, a society can come to some sort of quasi-unanimous agreement that the creator of a song has the right to control its use, even in the form of digital files.

Now, government enforcement of IP laws is fraught with difficulties even before we get to public choice issues. Should a patent be 20 years or 19.5? If the optimal patent length is 16 years, then the current system is a net subsidy and so creates economic inefficiency. But determining the optimal length in a world of benevolent political actors is an incredibly complex problem. How stringently should patents be enforced? How do we account for the differences in conditions that affect different patents (or copyrights, etc.)? This argument doesn’t say “don’t do IP,” it just says, “hey, this whole venture has its own set of costs we need to account for. It’s conceivable that we conclude that the optimal patent is probably between 5 and 20 years, but if we’re off by more than 4 years the costs of the error will outweigh the net benefits of the patent.

Then there’s the public choice problems. We don’t want IP law to be some Mickey Mouse operation set up to hurt consumers.

But (and that’s a big but!) we have to return to this issue of property rights. When I buy an apple, I’m concerned with the physical thing, but really I’m buying a bundle of rights. The rights are what’s being exchanged, and then later exercised. These rights are socially determined and often-but-not-always-or-even-mostly enforced by government. Yes, if I steal your car the government will probably get involved. Yes, the government provides a back-stop to rights enforcement in a lot of areas. But rights are ultimately a social-political construct that can exist in anarchy. What does this mean? First, it means that we could conceivably have intellectual property rights . Second, it means that we could have such rights in a state of anarchy.

Obviously the nature of the good will affect the viability of such a system. Enforcing IP laws is difficult enough when some third-party can come in and say “you’re a pirate and you’re going to jail.” In a common law situation where you have to make the plaintiff whole, it’s difficult to say what that means. Reputation plus property rights might keep comics from stealing others’ material, but it might just separate the comedy industry into auteurs with sophisticated audiences and Carlos Mencia with less sophisticated audiences.

We can safely label a law or institution as legitimate if it is unanimously accepted. In the case of IP, such unanimity seems unlikely. In any case, I still suspect that government involvement in IP does net harm although I’ll grant that it’s a (probably impossible to answer) empirical question.

Trade and cruelty

Rick Weber Economics, Liberty

Time for me to geek out on basic economics again. I’ve been on a Top Gear kick and I’m currently watching the North Pole special. Richard is taking a sled dog team to the north pole and Jeremy and James are racing him in a truck (in order to be the first people to drive a car to the North Pole).Their big advantage is that they can drive as hard as they want, whereas Richard is limited by how hard the dogs can go. Hypothetically he could push them harder and get their faster, but to do so would be cruel. This got me thinking.

The car is what economists call capital, whereas the dogs are labor. Strictly speaking the dogs are capital as well, but due to our enlightened modern ethical precepts we’re morally concerned with their welfare. Remember Planet of the Apes? Those damn, dirty apes had been thought of like chattel slaves, and the folly of that was shown by their taking over the earth. Legally, if your sled dogs won’t run, you can get rid of them. Putting them down might be considered cruelty to animals and thus illegal (I’m not sure), but it would certainly be considered immoral by many westerners. If we think about a labor-capital continuum, dogs are closer to the labor side than cattle, and a car is all the way over at capital.

So capital has a different moral standing than labor (or “quasi-labor” like dogs), but does that mean there’s no possibility of cruelty?Running the truck into the side of a glacier won’t make an engineer cry, but it would create work for a mechanic and wrecker operator (assuming they decide to recover it). “But wait,” you say, “jobs are awesome! JOBS!”

But I put it to you: jobs aren’t good. If they don’t pay the mechanic, then they’re making him (or her) suffer. To make someone work is to be cruel. But in the real world nobody makes mechanics do their work, people induce them to do that work by making it worth their time. Mutually advantageous trade is beautiful and kind. (Okay, that’s only certain with euvoluntary exchange).

Oh! And an I, Pencil moment: The truck made it to the north pole, allowing two middle aged, out of shape men, to make a journey that otherwise probably would have killed them. Through gains from trade, and capital that both represented and applied embedded knowledge, in order to reach a destination that has been visited by no more than a few dozen humans.

UK considering long prison terms for file sharers

Adam Magoon Current Events, Economics, Liberty, Philosophy

https://torrentfreak.com/uk-considers-throwing-persistent-internet-pirates-in-jail-140123/

Up to ten years in fact.  While there is debate in the libertarian community over intellectual property laws I think that I would be hard pressed to find many libertarians that think downloading a movie should put an “offender” in prison for a similar amount of time as stealing a car. 
 

Oxfam: Combined wealth of the 85 richest people is equal to that of the poorest 3.5 billion – half the world’s population

Rick Weber Economics , , ,

I’ll bet the 85 richest people in the world have been beneficiaries of a good deal of rent seeking, but I still think there’s a positive spin to stories like this.

Let’s say (for the sake of not working too hard to write this post) that when we adjust for theft and its dead weight costs, the net productive wealth of group A (the wealthy) is just 25% the total wealth, that’s a mean productive wealth of 10.3 million times the average member of group B. For a humanitarian, this means that their fight to improve the plight of the world’s poor, has the potential to pick up trillion dollar bills off the sidewalk. This isn’t just little embossed portraits of old dead white men, it’s genuine human flourishing! Of course this message would be more meaningful if the numbers were something like “combined wealth of the poorest 3.5 billion is equal to the combined wealth of the poorest X million residents of OECD countries.”

That made up percentage, if it’s even remotely accurate, is a similar call to arms for those of us opposing politically supported privilege. And it just so happens that the humanitarian and libertarian causes overlap nicely! There is institutionalized theft and there is poverty, and that’s bad news. But the problems have been recognized and solutions are being fought for.

Myths about Libertarianism

Fred Foldvary Current Events, Economics , , , , , , ,

Many articles have recently appeared in magazines, web sites, and social media criticizing free markets and libertarian ideas. It seems to me that this opposition is a result of a growing interest in freedom as people realize that the economies of the world are in serious trouble. As people see continuing high unemployment, slow growth, ever greater government debt, environmental disaster, more turbulent weather, and endless wars, some folks seek solutions in greater freedom while others seek solutions in greater state control. The critics of libertarianism and economic freedom have fallen for several fallacies.

1. Critics confuse today’s mixed economies, a mixture of markets and government intervention, with a “free market.” A truly free market is an economy in which all activity is voluntary for all persons. Government intervention changes what people would otherwise voluntarily do. A pure market would not impose the taxation of labor and capital. It would not prohibit trade with Cuba. Free markets would not subsidize industry. Any peaceful and honest action would be free of restrictions and taxes. That is not the economy we have today in any country.

2. Critics use the term “capitalism” to falsely blame markets for economic trouble. Those opposed to private enterprise call today’s economies “capitalist.” They then note that the economy has trouble such as poverty, great inequality, unemployment, and recessions. The critics conclude that “capitalism” causes these problems. This illogic uses a sly change in meaning. They use the term “capitalism” as a label for the current economies and also to refer to free markets. It makes no sense to label the economy as XYZ and then say XYZ causes problems. The critics use the double meaning of “capitalism” to blame the non-existing free market for social problems. This confusion is often deliberate, as I have found that it is almost impossible to get the critics to replace their confusing use of the term “capitalism” with clearer terms such as either the “mixed economy” or the “pure market.”

3. Critics think that the “market” means “anything goes.” For example, they think that a free market allows unlimited pollution. They often call this, “unbridled capitalism.” But freedom stops at the limit of harm. In a pure market with property rights for all resources, pollution that crosses outside one’s own property is trespass and invasion. This violation of others’ property rights would require compensation, and that payment would limit pollution.

4. Critics confuse privatization with contracting out. They then blame private enterprise for problems such as occurs with private prisons. When government contracts with private firms to produce roads, it is still a governmental road. When governments hire private contractors to provide services in a war, it is still government’s war. Government sets the rules when firms do work under contract. Genuine privatization means transferring the whole ownership, financing, and operation to a private firm.

5. Critics overlook subsidies. Government distorts the economy with subsidies to agriculture, energy production, and other corporate welfare. The biggest subsidy is implicit: the greater land rent and land value generated by the public goods provided by government and financed mostly from taxes on labor and enterprise. Critics not only ignore this implicit subsidy but also overlook the explicit subsidies to agriculture and programs such as the promotion of ethanol from corn.

6. Critics do not understand the crowding out of private services because of government programs. The critics of libertarianism say that with less government, old folks and poor folks would starve and die because they would not receive social security and medical care. What they overlook is that the reason many of the elderly have little savings for retirement is that government took away half their income while they were working. Income taxes reduce their net wages, while sales taxes raise the cost of living. Low-income people pay little or no income tax, but they pay hefty sales and excise taxes, and they indirectly pay property taxes from their rental payments to landlords. Libertarians want to abolish poverty and have a society where all people have good medical care. They just want to accomplish this by letting workers keep their full pay, which would enable them to pay for their own medical services. Also, with no taxes on interest and dividend income, people would be better able to provide for their own retirement income, indeed to have much more than social security now provides.

7. Critics fail to understand contractual governance. A pure market would not consist of isolated individuals. Human beings have always lived in community associations. In a free market, communities such as condominiums, land trusts, and civic associations would provide the public goods that the members want.

8. The critics of market believe that corporations control the economy, exploit labor, and plunder the planet. Corporations do have power, but mainly because they obtain subsidies and monopoly privileges from governments. But labor unions and lawyers also lobby the government for power and favors. Rather than blaming private enterprise, the critics should examine how the structure of government enables special interest to obtain power and wealth.

Leo Tolstoy wrote in 1905 that nobody really argues with the economics and philosophy of Henry George and public revenue from land rent; the critics either misunderstand the concepts, or they create misinformation. The same applies to critics of libertarianism. The fact that the critics falsify the free market in criticizing it implies that the actual concept is sound, otherwise they would provide valid arguments.

Nobody has refuted the free market and the libertarian ethic of “live and let live”. The critics of liberty either misunderstand it or else falsify it. Even when their errors in logic, their false evidence, and their confused terminology are pointed out, the critics persist in their falsification. They are stubbornly anchored to their viewpoints. Why this is so is a problem I will leave to psychologists to figure out.

Seven Ways Libertarians Sometimes Run Off the Rails

Warren Gibson Economics, Liberty, Politics , , , , , , , , , , , ,

I’m a dedicated libertarian but my first allegiance is to accuracy.  It pains me when I see libertarians making arguments that are inaccurate, irrelevant, or just plain wrong.  When they do so, they do themselves and our movement a big dis-service.  I list seven such arguments here.  More could be added.

  1. The Fed is privately owned. This is true only superficially. Member banks own shares of stock in one of twelve district Federal Reserve Banks and they receive dividends on those shares. But they have little in the way of genuine ownership privileges. They cannot sell their stock and their voting rights are very limited. The President of the United States appoints the Board of Governors. Just because a legal arrangement is given labels that suggest private ownership, that doesn’t make it so.

  2. The Bureau of Labor Statistics disguises the true unemployment situation by excluding workers who are “discouraged,” i.e., not seeking jobs. This is true of the U-3 unemployment figure which is the most widely cited figure, and the one the Fed says it is targeting. That figure is currently about 6.5%. The BLS also publishes its U-6 figure, which includes discouraged workers and currently stands at around 13%, down from about 17% at the height of the Great Recession. The BLS is not covering up anything here, although politicians may certainly choose to emphasize one figure or the other depending on what ax they’re grinding. Which is the “true” unemployment rate? There’s no such thing. The figures are what they are and observers can make of them what they will.

  3. “Chain-weighted” versions of the Consumer Price Index are politically motivated.  These adjustments are intended to recognize the substitution effect, the classic example of which is when the price of beef rises and the price of chicken doesn’t, people eat less beef and more chicken. Peoples’ cost of living rises less than it otherwise would. CPI increases as measured by a chain-weighted formula reflect this fact, and the resulting price inflation estimates come out lower than under the old approach. That flashes a green light to some conspiracy theorists. While these adjustments are tricky business, substitution effects are real and the attempt to compensate for them should not be impugned.

  4. The Consumer Price Index is politically manipulated by excluding food and energy. There are many versions of the CPI. One of them excludes food and energy because those prices are usually very volatile. That figure may be useful to economists who want to filter out volatile effects and focus on secular trends. Again, the figures are what they are, and politicians or for that matter we bloggers can use or misuse them as we wish.

  5. “Banksters” control the U.S. government. There is a grain of truth in this one. The big banks are both victims and beneficiaries of government dominance of banking and finance. The reality of government regulation is that regulated firms employ many very smart and very well paid individuals who are constantly finding ways to manipulate or sidestep the regulations to which they are subject. The fact is that the regulators and the regulated are very thick. Banking and finance are controlled by a cabal of government and Wall Street firms and individuals. It’s a mistake to say that either group totally dominates the other.

  6. Global warming is a myth and a scam. Ron Paul, whom I admire very much, blotted his copy book when he said on Fox News, “The greatest hoax I think that has been around for many, many years if not hundreds of years has been this hoax on […] global warming.” A few basic facts are beyond dispute: (a) carbon dioxide is a greenhouse gas, (b) CO2 levels are at an all time high, and (c) human activity is the primary cause of the increase. Beyond that, the evidence starts to get sketchy and incomplete. We do seem to have melting polar ice caps, record high temperatures in some places, droughts, etc. But overall there has been almost no temperature increase during the last ten years or so.  Projections of rising temperatures and rising sea levels appear to be too pessimistic. This is a very complex issue and one where biases can overwhelm us if we aren’t careful. Statists are prone to accept the global warming thesis because they see it as a way to increase state power. Libertarians want the issue to go away for the same reason. This would be a great time for all parties to step back an exercise some epistemic humility. There’s a great deal about this issue that we just don’t know.

  7. Let’s get rid of the state entirely, and all will be well. Given the present primitive degree of evolution of our species, a new state will pop up wherever an existing one is overthrown. The key to peace and prosperity is not anything so simple as abolition of the state, but to convince enough people, thoroughly enough, of the advantages of long-term cooperation. Good institutions will follow.