Economics

Around the web: Casual Friday

muricaderp Economics, Law, Links

1. How to reduce absenteeism by monitoring the help instead of maybe abusing it less.

2. The Great Australian Sickie: “People taking a sickie are more reluctant to fake it to a kindly nurse on the other end of the phone line.”

If you’re thinking that of course you wouldn’t fake it with an Australian nurse, remember:

3. Men can be nurses, too.  See also Exhibit 3B.

4. Another reason not to give your son the middle name of Lynn. Some of this stuff just can’t be made up: “On March 2, 2005, the Park City council terminated Rader’s employment for failure to report to work or to call in.”

Because RULES. But it’s fitting. Rader has always believed in them, at once too much and too little.

5. Don’t believe me? Ask my buddy Kasper. D. Lynn Rader is much more of a model prisoner than some of my people are. The Roths left some real scuzzies behind.

Classical Liberals Who Weren’t Right About Everything

henrymoore Economics, History , , , , , , ,

Many classical liberals and their ideas have been maligned by their interpreters. We must set the record straight. Professor Ross Emmett, in “What’s Right with Malthus,” from The Freeman, champions the cause of Thomas Robert Malthus, who, contrary to what one might think after encountering Malthus’ followers and critics,

argued that private property rights, free markets, and…marriage were essential features of an advanced civilization.

Some disciples of Malthus took his erroneous population theory as evidence of the need for eugenics, population control, and environmental “regulation.” They ignored Malthus’ arguments favoring institutions more capable of (and more compassionate in) achieving their desired ends; institutions that first came about not by design, but by convention. The eugenicists Francis Galton and Julian Huxley (both related to Darwin), and eco-catastrophist Paul Ehrlich come to mind.

But there were also critics, who, preferring utopian visions of the perfectibility of mankind, denounced Malthus’ pessimistic views. Anarchists William Godwin and Pierre-Joseph Proudhon are most notable in this regard. Godwin and Malthus had exchanged criticisms (noted by Emmett) in some of their essays. Malthus attacked Godwin’s utopianism. Godwin assailed Malthus’ assumption of arithmetical increase in agricultural output, as compared to geometrical increase of population. And Proudhon targeted the overzealous Malthusians of his day, citing as grievances the former’s antagonism toward the lower classes. While neither Godwin nor Proudhon did terrible injustice to Malthus himself, they unintentionally contributed to the myth that the worst variety of population catastrophists were the most orthodox.

Notice the themes that Professor Emmett brings to our attention. First, that even in their controversial and disputable contributions, great theorists illuminate the path for later philosophers. Second, that human institutions can mitigate human nature’s undesirable effects.

In light of these, consider two other social theorists whose ideas have been abused by overenthusiastic students and overreactive peers alike: Herbert Spencer (insightful Malthus adherent), and the aforementioned Mr. Proudhon (noteworthy Malthus critic).

Leading “social Darwinist” (a pejorative used to link eugenics and capitalism), Herbert Spencer (considered a conservative anarchist by Georgi Plekhanov) was, like Darwin, influenced by Malthus’ idea that the fittest tend to survive overpopulation-induced catastrophes. He is known for having coined “survival of the fittest,” a term later used by Darwin in the fifth edition of On the Origin of Species (1859). Spencer originally used it to convey Darwin’s concept of natural selection, and drew parallels between biological evolution through natural selection and social evolution through market competition. But he never implied that they were identical or that marketplace competition was necessarily an outgrowth of natural selection.

If anything, it should be thought of as an alternative to natural selection. Humans, to survive as a species, might practice natural selection as a matter of biological fact. And without the ability to reason this might eventually lead to a Hobbesian jungle. But since man is rational, natural selection’s role in social evolution is significantly lessened. Society arises from the natural order of things. There is no need for the Commonwealth or the General Will to step in and provide it.

Friedrich Engels saw things differently when he wrote in the introduction to his Dialectics of Nature (1872/1883):

Darwin did not know what a bitter satire he wrote on mankind…when he showed that free competition…is the normal state of the animal kingdom. Only…production and distribution…carried on in a planned way, can lift mankind above the rest of the animal world…

Competition exists in both the natural world and free markets, so the connection between natural selection and marketplace competition, though spurious, seems all too obvious for critics of one or the other. They wrongfully project the cold, deterministic properties of nature onto economic freedom. But marketplace competition is an outgrowth of the ability to reason, not base survival instincts. The will to survive is certainly a factor of social progress, but taken on its own would tend toward more similarities with nature, such that the life of man would be “solitary, poor, nasty, brutish, and short.” Man has the faculties to escape the jungle, to leave the animal kingdom, to better his life without worsening others’.

Communist anarchist Pyotr Kropotkin (influenced by Godwin) juxtaposed social Darwinism, evolution requiring competition, with his own take, evolution requiring cooperation, in his book Mutual Aid: A Factor of Evolution (1902). In so doing, he disagreed with Engels on Darwin, by describing how natural selection depended at least as much upon cooperation as it did biological competition. But unfortunately he conformed to Engels on the false dichotomy between rational competition (free markets) and cooperation (mutual aid).

Our second subject, Pierre-Joseph Proudhon was a mutualist, an anarchist and a socialist. Yet some of his ideas are more in line with libertarianism than with contemporary socialism. They were often based on a fairly consistent concept of natural rights, but understood in light of fallacious economic principles, especially the labor theory of value (held by Locke, Smith, Ricardo, and Marx).

But utility-based theories are in vogue among today’s classical liberals and much of Proudhon’s economics has been rightly tossed aside. But his theory of spontaneous order and support for free markets should not be so readily discarded. Leave that to conservatives fearful of anything tainted by the socialist label, and to leftists whose only alternative would be to admit that the labor theory is passé.

Proudhon (General Idea of the Revolution in the Nineteenth Century, 1851) was also opposed to Hobbes’ and Rousseau’s social contract theories, having his own:

What really is the Social Contract? An agreement of the citizen with the government? No…The social contract is an agreement of man with man…from which must result what we call society…Commerce…the act by which man and man declare themselves essentially producers, and abdicate all pretension to govern each other.

Organic institutions, neither designed nor imposed!

It seems there’s much knowledge and inspiration to be gained by examining the forgotten words of discredited intellectuals. Warts and all.

Cognitive Blocks and Libertarianism

Brandon Christensen Economics , , , , , , , , , ,

Last year Brian Gothberg, who was lecturing at a summer seminar I attended in 2009, left the following comment in response to a post about media coverage and Austrian economics:

I think there’s a perceptual or cognitive block, that simply makes it hard for many people to see government activity in the foreground of the story, as an actor which actively and (often) arbitrarily changes outcomes. It reminds of the recent Brian Greene programs on cosmology on PBS. In one, he compares the treatment of space, through most of scientific history, as simply being the unadorned theater stage, upon which the truly interesting things actually happen. It’s only later that Einstein (using Riemann’s math) described space as having positive, unambiguous characteristics. After Einstein brought space itself into the foreground, you could make statements about particular things that space did do, and other particular things that space did not do.

Another example: at a gathering of friends with children, my wife and I were observing a small boy (3-ish) who kept biting the other children. When it came to tears, parents would come in and intervene, and scold him. Later, we watched the same parents — who were baffled at the boy’s biting — laugh and giggle as the father playfully bit his son. Apparently, nobody had ever brought the father’s behavior into the foreground, for their scrutiny, as a possible influence on the son’s problem. Sometimes, the obvious does stare people in the face. I think that the way we describe the role and actions of government, in the press and schools, goes a long way to explain this cognitive block. Libertarianism is nothing like common sense; not nearly.

I was reminded of this as I read the following 2008 piece by Roger Lowenstein in the New York Times, where he documents the regulatory regime that was built by the state in the years leading up to the Great Recession. Check this out: Continue reading →

A note on compulsory IRS linedancing

muricaderp Current Events, Economics, Liberty

As a matter of course, I ignore the anti-government donnybrooks that consume Fox News, such as the recent furor over the IRS’s eccentric “conferences.” To my own surprise, I’m not inspired to do this out of any animosity towards Fox; although I find maybe half or two thirds of the politics that it promotes noxious, I enjoy watching it from time to time, and I have come to find it less frequently revolting than CNN, whose pomposity and sleights of hand tend to drive me up a wall. Rather, my reasons for ignoring Fox’s causes du jour are, first, that I just don’t have time to follow its donnybrooks on top of all the more important things that I’m trying to cram into my life, and second, that I find Fox’s signal-to-noise ratio too erratic to take its pronouncements at face value. In practice, this means that I usually insist on hearing corroboration from a significantly less shrill source before believing that Fox isn’t blowing its reports completely out of proportion for partisan and business advantage. Ronald Reagan called this approach “trust, but verify,” but by any honest appraisal it’s a form of distrust.

My corroborating source confirming the seriousness of this IRS linedancing/Star Trek role play idiocy is my mom. By her own admission she’s a hardcore leftist. What she is not, however, is a worshiper of bureaucracy. She spent too much time working for the Veterans Administration, an agency whose dysfunction she can describe in much greater detail and much more cynically than I can, to assume that the IRS is not run by the objectively deranged. So when my mom mentioned to me in a recent phone conversation that the IRS had gotten egg on its face over these ridiculous training seminars, I figured that whatever Fox had to say about the scandal, no matter how shrill, had some merit.

Having now watched Greta van Susteren’s coverage of these training exercises, I agree with her and with my mom that they were absolutely ridiculous and should never have been undertaken. The IRS has clearly delegated responsibility for its employee training to a bunch of useless nutcases. Governments that spend their money on stuff like that are troubled.

Where I disagree with van Susteren is on her insistence that these junkets stand out as wastes of taxpayer money. As a matter of principle, it’s certainly improper to misallocate tens of millions of dollars on ridiculous staff training exercises at posh resorts, but the sums in question ($52 million or so) are chump change in the context of federal spending. Preventing these particular instances of featherbedding and cronyism would have done nothing to appreciably improve the federal treasury’s prudence and solvency. There’s just too much systemic fiscal laxity and corruption for the prevention or redress of these really juicy scandals to make a real difference. The real improvements have to come from concerted, systematic reform. The Inspectors General responsible for curbing this kind of waste are important internal watchdogs, but by its very nature their work has to be done incrementally, often at a pace that seems glacial because the rot is so pervasive. In any event, they’ll be cleaning out the Augean Stables until such a time as the underlying cultures at their agencies start undergoing genuine reform. In a very real way, we’re stuck dealing with the hearts of men, and doing so in a country where the systemic corruption extends far beyond the public sector. I honestly don’t see how systemic reform is viable as long as so many Americans so sincerely believe in hustling, and in being hustled, rather than in plain dealing.

At rock bottom, I believe, it’s a matter of what Vaclav Havel called living in truth. I’d love to see an American leader of Havel’s prominence spread that message with such clarity, but I don’t expect to come across one, especially given the chronic tendency of so many Americans to reject reasonable politicians of goodwill in favor of abject demagogues of the lowest character imaginable this side of the genocidal.

Clearly, one of the factors that drives this deference to openly sadistic leaders is servility. There’s a powerful cognitive dissonance between the rhetoric of American freedom and independence and the reality of a population hesitant to challenge even its most ridiculous and pointless degradation at the hands of its superiors. This is how we’ve ended up with our proliferation of idiotic, disingenuous corporate “teambuilding” exercises, motivational posters and videos, and rude, bumptious, grandiose, incompetent managers. We let them get away with it. Walmart employees in Germany responded to mandatory motivational rallies by fleeing to the restrooms and calling their union reps. They recognized petty tyranny and had too much self-respect to submit to it; American workers generally don’t.

That’s the buried lede in the IRS “conference” scandal. These “training” seminars and the videos made of them had nothing to do with the employees’ job duties, and they must have caused sentient employees who were unwillingly drawn into the fray great annoyance, if not also discomfort. Extraneous seminars of the sort, although rarely extreme enough to involve Star Trek costumes, are so ubiquitous in American corporate and bureaucratic life that they’re widely regarded as unremarkable.

Submitting to such degradation under duress is not a hallmark of a free people. There are certainly extenuating circumstances for doing so, in fact, usually powerful ones, given the abusive dynamics at workplaces where management inflicts this sort of thing on subordinates, but meek, servile submission to this sort of belittling idiocy is not honorable. The proper response is to tell the instructor, “You’re a moron, this is bullshit, and I’m getting a gin and tonic.”

Around the web: class, work, and a call for the totalitarian oppression of servants

muricaderp Economics, Law, Liberty, Links, Politics

In the course of a recent internet search for “lazy millennials,” “entitled millennials,” “milliennial brats,” and the like (call it an effort at self-diagnosis, if you wish), I came across one of the most biting and clearheaded blogs I’ve found to date covering work and the workplace. Normally, everything that I find on these subjects in any medium is some combination of banal, derivative, sycophantic, foolish, and intellectually dishonest. Perhaps this is in part because, although I disclose this at some risk to my credibility, I follow John Tesh on Pinterest (but mainly to enjoy him ironically and hipster-like; he, and Wilford Brimley, are my PBR). Tesh, however, does not set the lower bound for workplace advice; browsing workplace-themed blogs at random or the book section of any office supply chain is weirder and more disgusting. Michael O. Church, then, is a welcome relief from the endless drivel, and a fine writer and political thinker to boot.

One of Church’s favorite concepts is “libertarian socialism.” Outwardly, this may sound as ridiculous as the UK being governed by a Conservative-Liberal Democrat coalition, but what he proposes, a government safety net beneath a dynamic private sector, is exactly what most Western governments have attempted, with varying degrees of success, since the Second World War. Church’s proposal avoids by a wide margin the sclerosis of command economies (which, in extreme instances such as North Korea’s, causes an outright death spiral), but it also renders moot the sclerosis of large, ossified corporations, with their legions of marginal-to-useless bureaucrats, layers of political intrigue, and penchant for regulatory capture. His model is for an advanced sort of Jeffersonian yeomanry as an alternative to, and eventually a replacement for, the Hamiltonian model that predominates today. Here’s one of his critiques of the current system: Continue reading →

Ham-Fisted Coercion and Incompetence versus the Invisible Hand of Self-Interest

henrymoore Books, Economics , , , , , , , ,

A Tale of Two Hands

I came across Gary Galles’ recent article in The Freeman about Leonard Read’s analogy of government coercion as a clenched fist, “The Clenched Fist and the General Welfare.” I see a symmetry between this analogy and Adam Smith’s about self-interest unintentionally channeled into market organization, one that is so familiar to free market proponents and detractors alike that it is a common metaphor: the invisible hand.

Government coercion and market organization. Two very important concepts for any libertarian to master. Which one better provides for the general welfare? Smith and Read would contend the latter. The reasons for this are contained in the analogies. As Read and Galles point out, not much good can come from a clenched fist. Only violence and incompetence. It can punch. It can pound. That’s about it. What better description of government? Likewise, as Smith notes, the usefulness of markets is that they do better than government many of the noble things government tries to do, thereby rendering it redundant, if not unnecessary, in those areas. The all-too obvious fist of government regulations and mandates is no match for a more efficient, less obvious hand: self-interest. Continue reading →

Markets Strengthen Moral Values

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

[Cross-posted at the Progress Report]

Pure markets enhance people’s moral values. In a pure market economy, all activity is voluntary for everyone, and involuntary acts, those which coercively harm others, are outside the market as an invasion of rights. A pure market includes the governance that enforces natural moral law, thereby promoting acts that are good or neutral, while minimizing evil acts.

Critics of markets have claimed that when people search for the cheapest goods, this reduces moral concerns. But in a pure market, the products offered are produced by moral means, i.e. by a process that does not involve coercive harm. Therefore searching for the lowest-cost goods is not evil. Only when goods are produced by immoral means, such as with slave labor, is the product morally bad, but that could not occur within a pure market.

Unfortunately, some economists who conduct research on human behavior leap to incorrect conclusions because while they have been trained in experimental techniques and mathematics, their graduate-school training did not include market ethics. For example, Prof. Dr. Armin Falk at the University of Bonn and Prof. Dr. Nora Szech at the University of Bamberg conducted experiments in which persons were offered a choice between receiving ten euros versus letting a laboratory mouse get killed. If a subject decided to save a mouse, the experimenters bought the animal (“Morals and Markets”), allowing it to live a decent life. Continue reading →

See the Cat: The Heart of Economics in One Story

Fred Foldvary Economics , , , ,

A man was walking down a shopping street and came to a store window where there was a big drawing full of lines and squiggles. A sign by the drawing asked, “Can you see the picture?”

All the man could see was a chaos of lines going every which way. He stared at it and tried to make out some kind of design, but it was all a jumble. Then he saw that some of the lines formed ears, and whiskers, and a tail. Suddenly he realized that there was a cat in the picture. Once he saw the cat, it was unmistakable. When he looked away and then looked back at the drawing, the cat was quite evident now.

The man then realized that the economy is like the cat. It seems to be a jumble of workers, consumers, enterprises, taxes, regulations, imports and exports, profits and losses – a chaos of all kinds of activities. Here are fine houses and shops full of goods, but yonder is poverty and slums. It doesn’t make any sense unless we understand the basic principles of economics. Once we have this understanding, the economy becomes clear – we see the cat instead of a jumble. We then know the cause of poverty and its remedy. But since most folks don’t see the cat, social policy just treats the symptoms without applying the remedies that would eliminate the problem.

What is this economics cat? It starts with the three factors or resource inputs of production: land, labor, and capital goods. Land includes all natural resources and opportunities. Labor is all human exertion in the production of wealth. Capital goods are tools (such as machines and buildings) used to produce wealth. The owners of land get rent, workers get wages, and the owners of capital goods get a capital return.

Picture an unpopulated island where we’re going to produce one good, corn, and there are eleven grades of land. Continue reading →

Words of Wisdom

Brandon Christensen Economics, Links ,

From Tyler Cowen:

This is a post about Jamaica and also about macroeconomic inference.  If you are tempted to write a post in response, criticizing me on the grounds that I am postulating a historical equivalence between the United States and Jamaica, or if you try to cover your tracks with semantics, by suggesting that I am “implying” such an equivalence, or implying some other mistake, or if you are committing any number of other fallacies or equivocations in response to this post, put on the dunce cap and go to the back of the class.  Please consider this a general warning to be attached to everything written by me on this site.

I just liked this because Dr Cowen is usually very polite, and if there is one thing I enjoy in this world, it is watching polite people dish out some wholesome snark casserole for the masses to devour. Read the whole thing.

Economic Rationality

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

[Cross-posted at the Foldvarium]

The concept of rational action is a frontier of economic theory. The new field of behavioral economics combines economics and psychology to analyze actions that seem to be irrational. For example, people value health and long life, yet they smoke and eat unhealthy food. A related field, behavioral finance, examines psychological and emotional traits that prevent people from making wise investments. Perverse psychological biases include anchoring to past prices and facts, the bias of weighing recent events too highly relative to the more distant past, being overly confident in one’s abilities, and following the herd to a cliff.

Neoclassical economics often assumes that people are purely self-interested and always seek financial gain, and that therefore altruism is irrational, whereas as Adam Smith and Henry George wrote, human beings have two motivations: self interest and sympathy for others. Since people get satisfaction from serving others, it is incorrect to label altruism or actions based on subjective views of justice as “irrational.”

The Austrian school of economic thought has a different perspective on rationality. The Austrian economist Ludwig von Mises envisioned human action as inherently rational. A person has unlimited desires and scarce resources. Human beings economize, seeking maximum benefits for a given cost, or minimizing costs for a given benefit. At any moment in time, a person ranks his goals, ranging from most to least important. He chooses the resources to achieve the most important goal at some moment, then the second most, and so on, until his gains from trade have become exhausted. This is the inherent rationality of human action. Continue reading →

Life underground

muricaderp Economics, Liberty, Links

Fabius Maximus tweeted an amazing series of links yesterday to articles about people literally living underground in US cities. Few manifestations of homelessness really surprise me, as opposed to merely saddening or disturbing me; these did.

The preceding link is to an article summarizing the others that Fabius Maximus publicized. The tone of this summary article is m0re breathless than it need be, as might be expected from a blog called The Economic Collapse, and it jumps to some of its conclusions in a manner that might be considered paranoid or conspiratorial, but if nothing else it’s fun reading, and quite illuminating to boot. The other caveat to keep in mind is that it’s probably erroneous to imply that these underground encampments are uniquely American or solely the result of uniquely incompetent and cruel US social services policy. I’d be quite surprised, in particular, if there are no such encampments beneath Paris, which has a renowned community of egoutophiles, who might be called “sewer lovers” in English, and a homeless problem of its own, which the authorities have been known to address by rounding up transients and busing them to the suburbs.

The “Tunnel People” may be down-and-out addicts and losers, but they’re damn well resourceful. Some of the people living in the storm drain system of Las Vegas (estimated at about 1,000 in all) have outfitted their living quarters with beds, closets, office chairs, and bookshelves, usually elevated on crates for protection from runoff. Check out the pictures. One of the couples living in this environment supports itself in part through “credit hustling,” i.e., collecting gambling credits that absentminded gamblers have left on slot machines: not particularly honorable, perhaps, but it takes some gumption.

Another population, known locally as the “mole people,” lives in access tunnels fronting passenger rail tunnels in Midtown Manhattan. According to the New York Post, “Travolta, originally from the Dominican Republic, claims to have lived in these dark, rat-infested spaces beneath Manhattan for the past 20 years.” The other John Travolta owns a Boeing 707; this one uses a 7:15 am train as his alarm clock.

The most enterprising group of tunnel dwellers, however, is probably the group that was recently evicted from a network of apparently hand-excavated tunnels on the northeast side of Kansas City, MO. Police and social services believe that infants were being raised at that site because they found soiled diapers there.

The Kansas City and Las Vegas cases are unconscionable for another reason: these cities have lax housing markets. In contrast to New York, housing supply exceeds demand in these cities. To be succinct, and maybe a bit pat, about it, the original failure to house the residents of the underground encampments in Las Vegas and Kansas City is not a logistical problem, but a cultural and policy problem. I fear that it is one that will not be fixed until Americans stop thinking of housing as an investment and start thinking of it as a utility.

Moral Markets and Immoral “Capitalism”

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

The question, “Is capitalism moral?” was raised by Steven Pearlstein in a 15 March 2013 article in the Washington Post. He is a professor of public and international affairs at George Mason University and a column writer for the Washington Post.

Pearlstein writes that we in the US are engaged in a “historic debate over free-market capitalism.” Maybe so, but “free-market capitalism” is a contradiction in terms. There are two reasons why the economic system is called “capital”ism rather than “laborism” or “landism.” First is that capital dominates labor. The second reason to call the system “capitalism” is to hide the role of land, so that people focus only on the conflict between workers and capitalists. The chiefs of finance and real estate are able to dominate because of their political clout. They obtain privileges from government in subsidies, limits on competition, and periodic bail outs. In contrast, in a free market, there is no domination, with neither subsidies nor imposed costs.

Pearlstein then says that if “markets” were providing prosperity for most folks, there would be no need for governmental intervention. But we don’t have pure markets. We have a mixed economy, with intervention into markets, so one has to first analyze whether it is markets or else interventions that cause high inequality, instability, poverty, and unemployment. Since pure markets are not given an opportunity to work, how can they be responsible for economic woes?

He then asserts that for the past 30 years, the world has been moving towards a greater role for markets. That is so for China and the countries previously dominated by the USSR, and these economies have indeed experienced greater growth and prosperity.

But, contrary to Pearlstein’s assertion, the US has been moving away from a market economy. Frequent governmental crises – the fiscal cliff, budget deadlines, ever changing tax rates – threaten the stability of financial, industrial, and labor markets. The subsidies to real estate and its financial allies have never been greater. The domination of the Federal Reserve over money, banking, and interest rates has reached historic heights. The tax reforms of the 1980s have been reversed by Congress, which has made income taxes ever more complex. Costly regulations continue to pour out of Washington DC by the thousands each year. And now the government will dominate medical provision like never before.

The decline in the role of markets can be measured by an index of economic freedom. According to the Fraser Index of Economic Freedom, U.S. market freedom peaked out in the year 2000 at a rating of 8.5 out of 10, and then declined to 7.69 in 2010 as intervention grew. The US freedom ranking among countries dropped from third place in 2000 to 18th out of 144 in 2010, and most probably has continued sinking since then.

Critics of markets have asserted that stagnant household incomes and financial crises are the fault of a greater role for markets, when in fact, in the US and Europe, massive subsidies to real estate caused the recession, excessive government borrowing has caused the fiscal crises, and a governmental redistribution of wealth from workers to landowners has stagnated net wages.

I agree with Pearlstein that we should welcome the debate on economic morality. But we should use words that have real economic meaning, rather than propaganda terms. Any person who refers to “capitalism” other than with critical quotation marks contributes to the confusion. The critics of markets opportunistically use the term “free market” to refer to the mixed economy, and then use the term “capitalism” also for the concept of a pure free market. Hence they argue that “capitalism,” as the mixed economy, suffers from economic woes, and then jump to the false conclusion that “capitalism,” meaning the pure market, causes the problems.

A real debate should also unmask the role of land that hides under the label “capital”ism. Critics who speak of the “market’s” unequal distributions overlook the massive redistribution of income from workers to landowners, as taxes on wages pay for public goods that pump up rent and land values. Their call for higher taxes on the rich disregards the distinction between earned income from entrepreneurship and unearned income from governmental subsidies.

Pearlstein admits that “many of the arguments have been a bit flabby, with both sides taking refuge in easy moralizing.” That is true. An honest and robust debate should avoid the deceitful switching of meanings for “capitalism”, and indeed avoids using the flabby term altogether. Instead, use the clear and honest words “pure market,” “intervention,” and “mixed economy.” If we say that the mixed economy has economic woes, one cannot then conclude that the pure market has caused them, because the mix also includes intervention. Clear thinking about economic morality cannot begin until we have clear terms that reflect the full-spectrum of economic reality.

Cyprus, the EU and Competing Currencies

Brandon Christensen Current Events, Economics , , , , , , , , , , , , ,

There have been many critiques over the European Union from many different quarters over the decades since its inception. With the seizure of cash from customers of banks in Cyprus, the worst threat imaginable has now come to pass for Euroskeptics. Economist Frederic Sautet explains how the heist has so far gone down:

Some depositors at Cyprus’ largest bank may lose a lot of money (e.g. see article in FT). Those with deposits above €100,000 could lose 37.5 percent in tax (cash converted into bank shares), and on top of that another 22.5 percent to replenish the bank’s reserves (a “special fund”). Basically “big depositors” are “asked” to pay for (at least part of) Cyprus’ bailout (the rest will be paid by other taxpayers in the EU).

I cannot think of a faster way to completely destroy a banking system than to expropriate its depositors. This is the kind of policies one would expect from a banana republic, not from a political system that rests on the rule of law. But this is the point: the EU does not respect the principles upon which a free society is based.

An economist over at ThinkMarkets also has a good piece on the Cyprus heist. The EU has taken an incredibly good arrangement – free trade throughout Europe – and turned it into an attempt to unify Europe into a single behemoth of a state. And all under the auspices of “federalism.” This is a bad development for a number of reasons. Continue reading →

Borderless Economics: Chinese Sea Turtles, Indian Fridges and the New Fruits of Global Capitalism

Warren Gibson Books, Economics , , , , , , ,

Robert Guest, the business editor for The Economist, has organized insights gleaned from 20 years of reporting on and analyzing events around the world into a breezy yet profound account of the flow of people and ideas across borders.

Raw immigration statistics miss the “networks of innovation,” as Guest calls them. Immigrants may find it difficult to adapt to a new land with strange customs and a new language. But in just about any American city they find a community of people like themselves who can ease the transition and help them get established. This process is good for everyone involved.

For example, Indian immigrants to America—most notably Silicon Valley engineers—are tightly networked among themselves and have contacts in India and around the world. Having made their fortunes, some then return to India to pursue business or philanthropic activities. To illustrate, Guest describes the Universal Identity program. Hundreds of millions in India have no public identity beyond their immediate communities. A team of Indian expatriates returned to India and launched a program to create a computer-based system that would allow Indians to submit to fingerprinting and retina scans and to receive a national ID number that would serve as their entrée into the modern Indian economy. Libertarians look askance at government identification numbers, but in rich countries we take for granted our ability to prove our identities. Continue reading →

Free Banking Beats Central Banking

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

In “More Bits on Whether We Need a Fed,” a November 21 MarginalRevolution blogpost, George Mason University economics professor Tyler Cowen questions “why free banking would offer an advantage over post WWII central banking (combined with FDIC and paper money).”  He adds, “That’s long been the weak spot of the anti-Fed case.”

Free banking is better than central banking because only in a free market can the optimal prices and quantities of goods be determined.  Those goods include the money supply, and prices include the rate of interest.

There is no scientific way to know in advance the right price of goods.  With ever-changing population, technology, and preferences, markets are turbulent, and there is no way to accurately predict fluctuating human desires and costs.

The quantity of money in the economy is no different from other goods.  The optimal amount can only be discovered by the dynamics of supply and demand in a market.  The impact of money on prices depends not just on the amount of money, but also on its velocity, that is, how fast the money turns over. The Fed cannot control the velocity since it cannot control the demand for money, that is, the amount people want to hold. Also, even if the Fed could determine the best amount of money for today, the impact on the economy takes several months to take effect, and so the central bankers would need to be able to accurately predict the state of the economy months into the future. Continue reading →