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The Digital Revolution Has Empowered Central Banks

Thu, 23/11/2017 - 17:00
By: Brendan Brown
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We won’t know till the end of this cycle how much mal-investment has occurred under the great monetary inflation which started in 2010. We may already suspect, though, that much of this will be in “big tech” and related fields. Any final reckoning should also include wider political and socio-economic damage not included in a narrow economic calculus. 

Scott Galloway describes skilfully and colourfully the power of the big tech narrative in his just published and highly readable book “The Four: the hidden DNA of Amazon, Apple, Facebook and Google”. The general critic would take issue with his repeated use of a four-letter expletive. The monetary critic can point to a bigger problem with the book – a lack of any analysis linking the amazing spread of the big tech narrative to the prevailing monetary disorder.

If central banks had not created a famine of interest income, the big four would surely not have enthralled investor audiences to anything like the actual extent. Hunger for yield means that investors become willing to take on bad bets (actuarial value highly negative but some possibility of a big pay-off) rather than suffer certain loss on monetary assets. This is an example of “loss aversion” as diagnosed in the pioneering work on mental flaws of investors by Daniel Kahneman and now prominent in behavioural finance theory.

A hypothesis not yet explored in that literature, but which seems to fit the spread of asset price inflation in present and previous episodes, is that investors do not like to admit to themselves that they are taking on bad bets. They turn bad into good by awarding irrationally high probability of truth to speculative stories which accompany the wagers. The positive feedback loops from initial capital gains add to their complacency with the metamorphosis.

Consistent with that hypothesis Galloway identifies the success of the Big Four in being able to attract cheap capital by articulating a bold vision that is easy to understand. 

For Amazon the story is Earth’s Biggest Store: the strategy – huge investment in consumer benefits that stand the test of time – lower cost, greater selection and faster delivery. Google’s vision is organizing the world’s information; the strategy – with a compelling reason for investors to buy its stock, Google has more money to invest in engineers than any media company in history. Facebook’s vision: Connecting the world. And as to Apple, who you really are has become what you text on.

As Galloway puts it:

The strength of visionary capital begets competitive strength. Why? Because you can more patiently nurture assets and place more bets on more pockets of innovations. Of course, you ultimately have to show shareholders tangible progress against your big vision. However, if you are able to make the jump to light speed and the market crowns you the innovator, the reward is an inflated valuation – and the self-fulfilling prophecy that comes from cheap capital. The ultimate gift in our digital age is a CEO who has the storytelling talent to capture the imagination of the markets while surrounding themselves with people who can show incremental progress against that vision each day.

All the story-telling cannot hide the fact that this digital revolution — represented by companies like amazon and Google — has not delivered the general increase in prosperity of previous technological revolutions. The stories have been captivating, told by would-be messianic narrators who find nourishment in monetary disorder. But living standards have been stagnant or falling except at the top (including those working in the Big Four).

Nonetheless digitalization has created a strong downward rhythm in prices for the past two decades. Increased transparency and information absorption potential mean that consumers and businesses can find at much less cost than before the cheapest provider of a given good or service (albeit with distortions due to the monopolistic abuse by the internet search engine). Across a wide range of industrial sectors, the most efficient firm has gained market share and power. The “star firm” has been born. And in general digitalization has led to downward pressure on wages of human capital which lacks any star-like attribute or any special connection to the star firms. 

Digitalization, by setting off a wave of “price transparency” and "globalization" has camouflaged the process of monetary inflation in the goods and services markets.  Hence central banks have been able to continue a wild experiment with their non-conventional tool box.  The big visible effects remain restricted so far to asset markets and these enjoy considerable popularity.   

The mechanism essential to the spread of asset inflation —  the telling of speculative narratives which entice investors to discard rational skepticism — has gained strength from a coincidental aspect of digitalization.  “Big Tech” has had a uniquely captivating narrative matched by a tremendous new power to spin.   

But, we have re-learnt in this cycle that the speculative narratives which spread asset price inflation under conditions of overall monetary inflation do not always depend on a surge of prosperity and productivity. Instead they can thrive on a transformative re-organization of lifestyles which provokes much buzz and excitement.

The Big Four have dominated this re-organization — internet search rather than encyclopedias and library visits, instant messaging rather than fax, groceries within a two-hour time slot to one’s door rather than driving to the store, trading firms getting the latest information in fractions of a second rather than several seconds. The unattractive downsides of the reorganization have not dimmed the sparkle, at least in frothy financial markets — whether hacking, the empowerment of Big Brother, the “commoditization” of broad swathes of human capital, or the aggravated capacity of employers to monitor, control, and exploit employees especially in the context of grown monopoly power. 

The excitement and the downward rhythm of prices might turn out to be much more transitory than many now imagine in the financial market-places. 

A technological revolution which Increases transparency and lowers information costs has a once and for all downward influence on prices and wages albeit spread over some years and this is consistent with increased profits in the star firms. The disinflationary forces as described are self-limiting in time and scope. As they wane, and as monetary disorder grows, the camouflage of inflation in the goods and services markets wears thin. Meanwhile the speculative narratives grow tawdry amidst tales of abusive monopoly and consumer revulsion. Bottom line: we could find that reported goods inflation climbs just as asset price inflation moves on to its final stage.



Categories: Current Affairs

Thanksgiving: A Celebration of Domestic Life

Thu, 23/11/2017 - 12:00
By: Ryan McMaken
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If recent years are any indication, this year we'll be treated, yet again, to a smattering of articles about the supposed political agendas behind Thanksgiving, and how our political enemies (whether on the left or right) are opposing all things decent by refusing to celebrate the holiday in a way that promotes the correct political agenda. On one side are the leftists who feel compelled to use Thanksgiving as an extension of Columbus Day, in which we're all reminded that it's a bad thing to steal from indigenous tribes. One the other side are the conservatives who insist on making Thanksgiving into a day celebrating a national origin story. July 4, it seems, isn't enough for them. 

Unfortunately, both of these efforts at hijacking the holiday for political battles refuse to go away. Fortunately, it appears that the vast majority of Americans don't care, and most plan to enjoy the holiday in the way it has been enjoyed for about 150 years: as a celebration on domestic life and economic prosperity. 

The Evolution of Thanksgiving 

As a holiday, Thanksgiving has gone through several different forms. As described in James Baker's study of the holiday, Thanksgiving: The Biography of An American Holiday, there had been a variety of Thanksgiving traditions practiced throughout the US, but few of them closely resembled the Thanksgiving we now know today. 

Moreover, the activities people adopted to commemorate the holiday changed significantly over time. According to Baker, in the holiday's early years, it served as "the Puritan stand-in for Christmas (a holiday they rejected as noncanonical and pagan), an early winter time for feasting and pious hope before the long, dreary months of cold and privation to follow." 

While a large meal was often had at the celebration, the holiday was mostly religious in character. The "highlight" of the day was a long, stern sermon, presumably from a Calvinist clergyman. 

The holiday had long been celebrated in New England and other regions as a sort of harvest festival, but it did not commonly involve any narratives about Pilgrims. That sort of thing was reserved for "Forefather's Day" which had its own commemoration in New England on December 21. Needless to say, the rest of the country — especially those with little connection to New England — did not enthusiastically celebrate the establishment of the Plymouth Colony.

Indeed, the use of tales about the Pilgrims' "first Thanksgiving" did not become a widespread practice until the 1900s. It was a complete invention of the public schools which then, as now, spent precious little time on academic skills in favor or concentrating on endless hours of busywork and cultural indoctrination. According to Baker: 

[T]he inculcation of those Thanksgiving images in generations of schoolchildren was probably a major factor behind the ultimate success of the Pilgrim Thanksgiving iconography. This familiar cycle was not an important part of American education before the end of the nineteenth century. There had been earlier holiday activities for kids and children’s books such as Hamilton’s Red-Letter Days in Applethorpe (1866) that explained the basis for holiday observances, but the complete subsumption of the civic calendar into the school curriculum was the result of a new progressive approach to education that paralleled the contemporary impulse to create new holidays for everything from labor and flags to birds and trees. This grammar school adaptation of civic ritual not only exposed students to the lessons of “Americanism” but also turned traditional holiday stories such as that of the Pilgrims into children’s fare.

By the time the public schools were turning the holiday into a day about Pilgrims, though, the annual rituals of Thanksgiving — which persist to this day — had been established quite independently from the political agenda. Far from being a national day to celebrate "forefathers" or the Plymouth Colony, Thanksgiving had already become a celebration of domestic life and family fun.

The Rise of Thanksgiving as a Domestic, Consumer-based Holiday 

In her history of Victorian America, The Feminization of American Culture, Ann Douglas explains the transformation that took place as US culture moved away from the hard-nosed theology and philosophy of the 18th century, and toward something quite different.1 Baker notes:

As Ann Douglas has demonstrated, the middle-class women involved in this “domestic revolution” found ready allies among the liberal clergymen of the era, who had been deprived of the political and social clout of their established Puritan predecessors. Laying claim to the social conscience of their generation, they instituted a regime of “sentimental” values in place of the old Enlightenment no-nonsense rationality and the tough-minded, aggressive Calvinist theology of the previous era.

This domestic revolution that Douglas describes went hand-in-hand with the rise of Victorian culture in the United States, and combined with the new economy of mass production and mechanization to help create the nostalgic, sentimental, and consumption-fueled event we now think of as the Thanksgiving holiday in practice. 

Although the Gilded Age is today routinely badmouthed as an era in which working people suffered greatly as Robber Barons ran factories with an iron fist, it was during this period that countless Americans were able to move out of poverty, and into the middle classes for the first time. 

Thanks to the advancing industrialization and mass production of the late 19th century, consumer goods became increasingly affordable making housing and household items more accessible than ever before. 

These changes made it easier for families to create a domestic experience with all the trimmings that Victorians valued — and which are now hallmarks of the standard American Thanksgiving celebration. Not only was food becoming more affordable for many, but now more Americans could afford more and better versions of silverware, china, clothing, and furniture. They could afford more building supplies for nicer homes, and — as was happening in Europe as well — more workers could afford to actually take some time off to enjoy recreational team sports, a day at a park, and other pastimes.

Thanksgiving was no longer a religious holiday — in which Americans contemplated complex theological truth — and much more so a holiday of consumption, recreation, and the domestic life of home and family. 

This new phenomenon of buying mass-produced goods to augment one's domestic enjoyment expanded into the early 20th century, so that by the 1920s, Thanksgiving was looking more and more like a holiday geared around buying things. 

Baker continues:

A new holiday event emerged in the 1920s—the Thanksgiving Day parade. Strictly speaking, Thanksgiving parades are not about Thanksgiving at all but Christmas, yet they do provide a Thanksgiving Day activity that is enjoyed by millions of Americans in person or on TV. ... The first Thanksgiving parade was put on by the Gimbel Brothers Department Store in Philadelphia on November 25, 1920. It consisted of fifty people, fifteen cars, and a fireman dressed as Santa Claus who marched in the parade and then entered the Gimbels Toy Department by a ladder. The central feature of the Gimbels Thanksgiving Parade, like all similar parades, was the “official arrival of Santa Claus” in his most marketable guise as patron saint of holiday commerce. 

Of course, department stores were themselves a creation of Victorian culture, first in England, and later in the United States. In terms of economics, they offered a higher standard of living for their customers and they offered many goods not available anywhere else. And what goods they did have were often at lower prices than at smaller stores. On a cultural level, the department stores were important as well. They offered unprecedented freedom for women who could use the department stores as a safe place to meet with others in public places, unescorted by men. Employment at these stores also offered many young women an escape from farm work and factory work. And, of course, for the primary managers of the household budget — which is what many middle class Victorian women were — department stores offered a new, clean, and comfortable place to do business.

Thus, it's no wonder that our modern practice of Thanksgiving is so wrapped up with the Victorian version of the holiday. It sprang from the 19th-century spread of consumer goods — and the social freedoms that came with them. The Thanksgiving that we know, and which most of our grandparents knew, is a an apolitical holiday formed around the modern world of relative plenty made possible by the modern industrialized economy. 

Don't expect any of these facts to stop the crusaders who will try to ruin the holiday with lots of talk about "the first Thanksgiving" and whether it was a Holy Meal or a prelude to genocide. For 150 years, Thanksgiving has really been about sitting around with friends and family, and eating a very large meal. This is one thing we shouldn't let the culture warriors take away from us. 



  • 1. I examine Douglas's book at greater length in my book Commmie Cowboys, and note how the post-world-War-II Western film was a rejection of the domestic, bourgeois lifestyle that had been promoted during the Victorian era in America. 


Categories: Current Affairs

The Christiana Resistance: The First Shots of the Civil War

Thu, 23/11/2017 - 02:00
By: Chris Calton
 Season 2

Chris Calton looks at one of the first episodes of armed resistance to the Fugitive Slave Acts. He explains how abolitionist William Parker, a free black man, changed America forever.



Categories: Current Affairs

How to Beam Factories to Mars

Wed, 22/11/2017 - 17:30
By: Robert P. Murphy
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In a recent blog post, Paul Krugman tried to illustrate a point about the GOP tax cut plan by imagining interplanetary trade with Martians. (At least he’s now entertaining voluntary transactions, rather than an alien invasion.) Yet in his zeal to downplay the potential benefits to workers from a corporate tax cut, Krugman ends up shortchanging the versatility of markets. As a teaching exercise, I’ll walk through the full implications of Krugman’s story about Martians, to show the elegance of capitalism.

Krugman’s Martian Scenario

The context for Krugman’s fanciful thought experiment is the GOP plan to cut the corporate income tax rate from 35 to 20 percent. In order to sell this plan as pro-worker, the GOP defenders are arguing that capital is very mobile on the international market. Therefore, global investors can be picky, and must earn the same after-tax rate of return (due account being made for risk), wherever they invest. This means — so the GOP argument continues — that a large cut in the US corporate tax rate will simply invite a flood of foreign capital into the US, pushing down the pre-tax rate of return to reestablish equilibrium across all countries. Yet this process helps American workers, who are now mixing their labor with a larger capital stock. Because labor productivity is higher with more tools and equipment, wage rates end up rising. Thus, so the argument concludes, the primary beneficiaries of the GOP tax cut won’t be international capitalists, but instead will be American workers.

As you can imagine, Krugman has been doing his best to throw cold water on this chain of reasoning. One line of attack has been the casual assumption that a flood of new foreign investment could come into the United States and quickly increase the capital stock, in order to push down the earnings of capital (while raising the earnings of workers). Krugman argues that because global markets are not fully integrated, that the adjustment process could take decades, meaning that workers would have to wait a long time to see the alleged benefits from the big tax cut on corporations.

To drive home his point, Krugman dreams up a Martian scenario:

In such matters, it’s often helpful to start with extreme cases. What if nothing were tradable? Suppose, for example, that we were to discover a capitalist society on Mars, with a stock market, a corporate profits tax, and everything. We could easily send data back and forth, with only a few minutes’ delay imposed by the speed of light. We could conceivably trade assets, since ownership is really nothing but data. But until Elon Musk finds a way to reduce transport costs by several orders of magnitude, we can’t really ship useful stuff to or from our new Martian friends.

So, suppose Mars cuts its corporate tax rate. How much is the incidence of that cut affected by the existence of an interplanetary capital market? Not at all: we can’t send physical capital to Mars, we can’t convert any earnings on Martian assets into something with any Earthly use, so nothing happens. The total lack of real integration makes financial integration irrelevant.

Now suppose that somehow a teensy bit of Martian output becomes tradable – say, certain services that can be provided over the Solar Wide Web, amounting to 1 or 2 percent of Martian GDP. Surely this can’t drastically change the story. [Krugman, bold added.]

It’s this last part of Krugman’s scenario that I think is wrong. Depending on the specifics, the opening up of Mars to (limited) trade with Earth could have large consequences for the Martian capital market.

How to Beam Factories to Mars

In this short post, I am not of course trying to exhaust all possible thought experiments involving Martian economic growth. My modest purpose is to show that Krugman—motivated no doubt by his desire to pooh-pooh the defenders of the GOP plan—was far too hasty when concluding of the Earth/Mars trade channel that “Surely this can’t drastically change the story.”

So let me stack the deck in my favor by picking an extreme example. Suppose the Martians have very high time preference, meaning that (other things equal) they strongly prefer to consume sooner rather than later. Before they make contact with the Earthlings, the Martians have a real interest rate of (say) 100%. Because they are so prodigal, the Martians don’t save much, even at this high interest rate. Consequently they have very little physical capital invested per worker. Indeed the entire Martian capital stock only represents 2% of GDP. Currently, the Martians only save and invest a tiny amount each year — say, 0.2% of GDP — to replace the worn-out tools and equipment as they depreciate.

Now suppose that the Martians finally get their wifi routers working, and they are shocked to discover intelligent life on the nearby blue planet. After figuring out how to communicate and consummate financial transactions, an amazing thing happens: Massive amounts of financial capital from human investors start pouring into the Martian economy. The human investors are amazed at the real interest rates of 100% available on the red planet, and rearrange their portfolios accordingly. This pushes down the market rate of interest on Mars, and pulls up the market rate of interest on Earth, until the Martian interest rate — due account being made for the riskiness of the investments — is comparable to the yield on terrestrial assets.

Yet to answer Krugman, we need to be more specific about how this process occurs physically. Well, in the extreme example I’ve constructed, we can imagine that the huge Earth economy swamps the Martian economy. So what happens in the first year is that all trade goes one-way. Specifically, anything that can be imported from Earth is imported from Earth. This includes database and cloud hosting, CPA services, math tutoring, and website design. Any work that can be done by Earthlings and then beamed to Mars, will be performed.

Yet as Krugman says, this may only account for, at most, 2% of the Martian economy. Even so, consider the impact. The Martian workers who used to maintain databases and perform CPA services, will now be freed up to do other jobs. Indeed, Martian workers and industries will be reshuffled so that they now devote 2% more of their economic output to the production of machines, tools, and other equipment.1

The capitalists on Earth ultimately wanted to send physical capital goods to Mars, where the “marginal product of capital (goods)” is much higher than on Earth. But because of prohibitive shipping costs, instead what they did was export electronic services to Mars, in order to earn the Martian currency with which to hire Martians to build capital goods. Then the Earthlings retained ownership of those capital goods (located on Mars), where they would generate high earnings because capital goods are so initially scarce.2

Does It Matter?

Finally, we can ask of our fanciful scenario: Would the option of trading with Earth matter to the Martians? Yes, it certainly would in the extreme example I constructed. Specifically, the influx of 2% of Martian GDP’s worth of foreign investment would allow the capital stock on Mars to double in the first year.3 (Remember I said that they started out with a capital stock equivalent to 2% of Martian GDP.) This would push down Martian interest rates and would raise the real wages earned by Martian workers. (Note that we should be careful not to confuse physical and financial capital, as I explain here. But for our simple story we can be somewhat loose.) So contrary to Krugman, we can’t automatically dismiss the impact of 2% of the economy being tradeable.

The point of my article isn’t to defend the GOP tax plan, and it’s certainly not to study the economy of Mars. Rather, Krugman’s whimsical thought experiment provided an opportunity to showcase the ingenuity and opportunities that can be unleashed in financial markets. Even if they were limited to transfers of information, we have seen how capitalists on Earth could effectively “beam factories” to Mars, in order to boost the productivity of Martian workers.



  • 1. Strictly speaking, in a more formal argument I’d have to specify the labor skills and other capabilities of the Martian economy, to see how much of the influx of human financial capital translated into increased investment on Mars, as opposed to increased Martian consumption. I could make generous assumptions to pin that down. Or, I could also go the other way and say that the initial Martian capital stock was only 1% of Martian GDP, so that even if the influx of Earth “imports” pushed the electronic sector down to only 1% of the Martian economy (since relative prices on CPA services, database management, etc. would plummet once trade with Earth opened up), nonetheless we could still get roughly a doubling of the Martian capital stock in the first year.

  • 2. If you’re wondering why the Earthlings would do this, we could simply say that they are amassing wealth for when the first humans start moving to Mars. But even if that could never occur, it would still be a mutually advantageous exchange for the humans to send the Martians a big influx of electronic services upfront, in exchange for a net flow of electronic services back to Earth down the road. This is the same pattern of a win-win exchange as when a bank lends money to a homebuyer, who then pays back more money over the life of the mortgage.

  • 3. I am disregarding the probable outcome that the Martians themselves would stop reinvesting, and so (counting depreciation) the Martian capital stock would end up at only 3.8% of their initial GDP. However, I obviously could have played with the initial numbers to still get the bottom-line result of a doubling during the first year.


Categories: Current Affairs

The Christian Ethics Behind the Pilgrims' Rejection of Communism

Wed, 22/11/2017 - 12:00
By: Shawn Ritenour
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Historically, Thanksgiving has been a feast day during which Americans are called upon to thank the Lord for the many blessings he has bestowed upon us. Richard J. Maybury and Gary Galles both explain the economic lessons to glean from the experience of the Pilgrims and both note that the primary reason for God's blessing them with relative prosperity after years of famine and hunger was a shift away from socialism and toward private property. In their essays, both authors draw upon William Bradford's History of Plymouth Plantation to get the story straight from the source.

One misconception that is still with us is that the Pilgrims adopted socialism out of religious conviction, as if Christian ethics requires a Platonic communist utopia. Galles notes that this is a misconception, but it is beyond the scope of his essay to provide the full historical back drop to that initial fateful economic design.

In fact, as Bradford makes clear, the Pilgrims did not desire to establish Christian communism. The Pilgrims' original communal property arrangements were foisted upon them by their colonial sponsors. The sponsors did this after they learned that they would not be granted a monopoly of fishing rights in Cape Cod. The sponsors’ original agreement with the Pilgrims was such that the Pilgrims were to work for four days for the sponsoring company and then would have two days to work for themselves. The sponsors later changed their deal and told the Pilgrims that they would have to work all six days of the work week for the sponsors. At the end of seven years, the Pilgrims would be granted title to the property they worked. The Pilgrims were not happy with the change, several of them recognizing that the new arrangement would make them virtual slaves of the sponsors, but they went along with the deal because many had already made large investments toward the move and they were convinced that emigrating to the New World is what God wanted them to do.

Bradford’s establishing private property was not a repudiation of any belief they had that Christian charity requires communism. They had no intention of implementing such a system. The Pilgrims’ move to private property was, in fact, a move to a properly Christian ethic as it regards property.

Historically, the majority report from Christians embraces private property as required by Christian ethics. The morality of private property was recognized by many of the patriarchs in the early church and the broader Scholastic tradition. Alas, what is not always recognized by contemporary evangelical Christians is that key thinkers in the Protestant tradition also argued for the legitimacy of private property.

One such figure was Francis Wayland, a Baptist minister and educator who was the president of Brown University for 28 years. An excellent introduction to Wayland and his social thought has been written by Laurence Vance, director of the Francis Wayland Institute. Wayland explained the Christian ethic of property in his treatise on ethics, The Elements of Moral Science. In his chapter on personal liberty, Wayland explains that everyone possesses a physical body, mental understanding, and will. He then argues that if a person uses them “in such manner as not to interfere with the use of the same powers which God has bestowed upon his neighbor, he is, as it respects his neighbor. . . to be held guiltless. So long has he uses them within this limit, he has a right, so far as his fellow-men are concerned, to use them, in the most unlimited sense, suo arbitrio, at his own discretion.”

Such a view of property has clear implications for economic policy. Wayland counseled against usury laws, government trade restrictions, government funded internal improvements, and government intervention in the banking industry. He also opposed confiscatory taxation, government granted monopolies, and government regulation of money. He did so because he believed that interventionist economic policy is not only economically destructive, it also violates Christian ethics.

Bradford’s and the Pilgrims’ move away from socialism and toward private property was not, therefore, a repudiation of their vision of the Christian ideal. It was a move toward obedience to their maker. Bradford interpreted the material plenty they enjoyed as they forsook their original socialist economic arrangement as a blessing from God for adopting a system more in agreement with Christian ethics.



Categories: Current Affairs

Government Didn't Save Us From Apple's iPhone "Monopoly"

Wed, 22/11/2017 - 12:00
By: Ariel Lighterman
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In 2007 Apple Inc made a move that changed the whole High-Tech world when it launched the first iPhone. The iPhone easily dethroned Nokia, and became the first smartphone that appealed to technophiles, businessmen, and everyday consumers.

Apple generated exceedingly high profits from the iPhone’s success. According to iSuppli, Apple made a $326 profit for every unit of the 2nd generation iPhone sold (excluding development and capital costs). Attracted by these profits, many companies had tried to find the formula for a mobile phone that will cut into Apple’s market share. Palm and Nokia failed miserably, while RIM’s Blackberry managed to find success only with businessmen.

This is a classical example of a corporation which has an almost absolute monopoly on a specific product. Over time, this product could become essential for many, allowing the corporation to sell it at a very high profit.

The conventional solution for this problem, suggested by many economists and politicians, is to impose price controls. After all, the free market failed in preventing a market failure from occurring so the power of government is required to save the day.

Professor Israel Kirzner, Austrian school economist and 2014 Nobel prize candidate, offers a different perspective. According to Kirzner’s important publication, the book Competition and Entrepreneurship, temporary monopolies do indeed exist. But using the powers of the antitrust authority is not the correct response. The high price itself is be the instrument that stimulates entrepreneurs to find ways to overcome, repair those failures, and invent a whole new competing product. Conversely, artificially regulated prices will instead send false signals which suggest there is no need in a competing product, and so in the long run we will stay with the monopoly. Of course, competition is dependent on market freedom; The freer the market, the easier the entrepreneurial efforts are. In a heavily regulated market, entrepreneurs must overcome artificial governmental barriers in order to compete with the monopoly, and in many cases, the barriers are too high for a new entrepreneur to surpass.

Kirzner’s theory turned out to be true — after many attempts Samsung’s Galaxy 2 was announced in 2011, and finally managed to bring Android based smartphones into the mainstream. Today, there is a wide range of smartphones ranging from affordable to luxurious, with new technologies and upgrades appearing frequently. Apple’s monopoly is shattered.

What would have happened had we listened to those who demanded price controls? To be sure, if the antitrust authority had used its power to restrict the price of an iPhone, the price would not have been as high as it was during the first years following the introduction of the 1st generation iPhone. But what about the long-run consequences?

The artificially low price of Apple’s smartphone would have reduced the incentive of competing companies to invest heavily in an attempt to take market shares away from Apple. Forget about Galaxy, LG Nexus, HTC One, etc. We, the consumers, would have still been using Apple 2nd generation today. After all, what incentive would Apple have had to invest in launching new generations if there’s little competition and it is forbidden by law to charge higher prices from consumers?

The lesson from Kirzner’s theory goes beyond the dynamics of the free market. The bigger picture is that government coercion is not only immoral, its unexpected implications are mostly destructive. Even if it seems that “just a bit” of coercion can improve everyone’s life, the real long-term consequences usually makes us all poorer.



Categories: Current Affairs

Do We Really Need a Federal Ban on Horse Meat?

Tue, 21/11/2017 - 23:00
By: Ryan McMaken
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For decades in the United States, turkey has become the centerpiece of the Thanksgiving meal. Some eccentrics may offer other choices, such as roast beef or duck, but nowadays, it's a sure bet that few households will be offering horse meat as one of Thursday's featured dishes. 

Horse meat has largely disappeared from the Western diet, and not even our pets eat much horse anymore.

In the United States, however, this flight from horse meat has been helped along by the federal government, which, as with so many other matters, has taken up the task of micromanaging how meat is produced in the United States. 

In fact, while Congress debates issues like Obamacare and tax reform, it has also been debating whether or not to end a federal ban on horse meat production

Animal advocates are keeping close watch on Congress amid concern that a moratorium on horse meat production may be in jeopardy.

Congress shut down the industry nearly a decade ago by cutting off funds for USDA meat inspectors. But in July, a key House committee approved an annual farm spending bill that would lift the ban.

The full House then ratified that shift in policy, for the first time in two years — opening the door to revival of an industry that many Americans find repugnant, but which some horse owners view as a practical way to dispose of unwanted livestock.

Horse meat is consumed in a number of countries, including Mexico, Japan, France and Belgium. Two of the three U.S. slaughterhouses serving the export market before the 2006 ban were in North Texas, in Kaufman and Fort Worth.

When confronted by such a story, the first thing one might wonder is "why is this a federal issue?" And then: "where exactly in the Constitution is the part that grants federal power to regulate horse meat." Hint: it's not in there. 

Obviously, this is the sort of issue that can be handled quite easily at the municipal and county level — if at all — but since the US long ago seized for itself the power to inspect meat, it can just as easily decide what meat can be sold in the marketplace. 

A Brief History of Horsemeat 

To understand how horse meat came to be something that most Americans couldn't care less about, we must first take a look at its history. 

It appears the last time there was a concerted effort in the West to encourage the consumption of horse meat by humans as high-end cuisine may have been in the late 19th century. According to Frederick Simoons, particularly notable was a French campaign to promote consumption of horse meat, including a posh event at the Grand Hotel in Paris in 1865. At the event, "the horse soup was judged good, and the boiled horsemeat and cabbage was acclaimed excellent."

Simoons continues:

That same year, a horsemeat butcher shop (boucherie hippophagique or boucherie chevaline) was opened in Paris, and it was soon followed by others...the French campaign stimulated an interest in horse meat in England; a rise in meat prices following an epidemic among cattle enhanced this interest and led to the holding of horsemeat banquets in England in 1868.

In the US, consuming horse has never been terribly popular, largely because other sources of meat have long been so readily available.

On the other hand, horse meat was frequently used in the past as pet food. 

And by "the past" I mean just one generation ago. One need only peruse this June 21, 1963 issue of Life to find an ad for Friskies dog food that announces "Horse Meat with Gravy" dog food, which the ad informs us is made from "selected cuts of finest horse meat." 

Many Americans over the age of 50 may remember that butchers often made a selection of horse meat cuts available, usually for use as pet food. Children who are fond of the novels of Beverly Cleary may remember that Henry Huggins's beloved dog Ribsy was known to eat horse meat. 

The prevalence of horse meat in pet food up until the 1960s was even featured in an episode of Mad Men (Season 3: "The Gypsy and the Hobo") in which a dog-food company sought the help of an advertising firm to help hide from the public the fact its food was made from horses. The episode, which portrayed the public as being horrified by horse meat, is actually anachronistic. Few people in the 60s cared that horse meat was still being fed to dogs. 

It is true, though, that by the 1960s, the use of horses for meat was in decline. But much of this was driven by the fact that there were fewer and fewer horses in the United States as the decades rolled by, although a previous glut of horses had made horse meat a staple. 

The Rise of Horse Meat as Pet Food 

In Catherine C. Grier's history of Pets in America, she notes that pre-packaged pet foot was itself highly unusual before the 20th century: "Canned dog food first appeared in the 1910s and developed as a regional business with relatively low start-up costs."

Prior to the 1900s, metal cans were too expensive to be feasible for low-priced animal food, and were only used for higher priced food for human consumption. Thanks to the proliferation of mass production methods and mechanization in the early 20th century, however, canned food became a product that families could afford even for their dogs. Prior to this, people fed their pets scraps, and hardly devoted much of the family budget to specially-prepared meals for cats and dogs. 

But mechanization also contributed to the rise of horse meat as an ingredient in pet food, precisely because the horses themselves were being replaced by automobiles and tractors. As Grier notes, "the American public turned from equine- to gasoline- powered vehicles in the 1910s and 1920s."

In the 1930s, butchers began offering regular delivery of horse meat for dog food along with deliveries for the usual human fare, and "[b]y 1940, canned dog food was a profitable business for regional packers."

The Stage Is Set for Banning Horse Meat

Back then, of course, few people were interested in banning the slaughter of horses, but even if many had been, they would have met fierce opposition from a great many family businesses and local communities were horsemeat was an important source of income. 

By the 1970s, though, federal legislation and regulation was making it increasingly difficult to sell horse for either human or animal consumption. Thus, by 2006, processing horse meat for consumption in the United States had become a thing of the past. Horse meat is still exported, and horse meat in the form of "animal byproducts" still finds its way into pet food. but long gone are the days when Friskies was openly advertising its use of horse meat. 

Those who advocate against the federal prohibition on horse meat face an uphill climb, not least of which because sentimentalism about horses — even among people who daily eat beef and pork — is very widespread. A rapidly rising American living standard throughout the 20th century made horse meat irrelevant to the daily lives of Americans. In parts of the world where meat is especially expensive, horse meat continues to be a viable industry, but in the US, thanks to an abundance of pork and beef, horse meat is a concern only of a tiny minority. And in a democratic system ruled by interest group politics — as is the American political system — the wants of the minority are very frequently disposable.



Categories: Current Affairs

Are Markets Really as Calm as they Seem?

Tue, 21/11/2017 - 17:00
By: Thorsten Polleit
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Indicators for financial market "stress" have reached their lowest levels in decades. For instance, stock market volatility has never been this low since the early 1990s. Credit spreads have been shrinking, and prices for credit default swaps have fallen to pre-crisis levels. In fact, investors are no longer haunted by concerns about the stability of the financial system, potential credit defaults, and unfavourable surprises in the economy or financial assets markets. How come?

Monetary policy plays the significant role. By slashing interest rates and ramping up the quantity of money in the banking system, central banks around the world have kick-started the economies following the 2008/2009 crash. But this is not the full story. The fact that investors expect central banks to stand at the ready to fend off a slowdown of the economy and price declines in stock and housing markets is by no means less important.

The truth is that investors expect central banks to provide a "safety net." This expectation encourages them to make risky investments again (which they would otherwise have declined). That said, central banks have caused a colossal ‘moral hazard’: Investors feel pretty much assured that the risk-reward profile of their investments has become more favorable — that they can enjoy a considerable upside, while the downside is limited.

As a result, investors drive asset prices upwards. As stock prices rise, firms' cost of capital falls, encouraging risky investments. Consumers, with their real estate assets appreciating, go into even more debt. Maturing debt is rolled over at low interest rates, and borrowers’ spending capacity increases. In other words: The downward manipulation of interest rates and the decline in risk aversion translates into a cyclical strengthening of the economy.

But wait: Will the Fed's hiking of interest rates and the planned shrinking of its balance sheet not undo the very forces that have pushed economic activity back into positive territory? No, not necessarily. The crucial point is the Fed’s safety net: If investors continue to assume that the Fed willingly remains the ‘lender of last resort’, even a monetary policy of some short-term interest rate hiking is unlikely to do much harm to the current recovery. 

Here is why: If things turn sour, the Fed is expected to reverse its restrictive monetary policy. This may well explain why financial markets have remained rather relaxed in the light of the Fed's current hiking cycle, which has begun back in December 2015. And markets haven’t become unsettled because of the Fed’s plan to shrink its bloated balance sheet, which means, inter alia, a reduction of liquidity in the US banking system and the quantity of money.

Many people welcome output and employment gains, coupled with decent investment returns in asset markets, which have been brought about by the Fed’s ultra-expansionary monetary policy. However, the downside of all this should not be overlooked. Central banks around the world, under the leadership of the Fed, have in fact orchestrated yet another artificial boom — which, sooner or later, will falter and turn into bust.

This is, by no means, a pessimistic prediction. But it is based on sound economics: A policy of artificially lowered interest, a relentless increase in the quantity of money and politically manipulated market prices simply cannot bring about greater prosperity and higher employment in the long run. To think so is delusional. The truth is that such a monetary policy will cause another round of trouble further down the road.

Here Comes the Risk

Higher interest rates have the potential to make the credit pyramid coming crashing down. They would make it hard for many consumers to service their debt, would reveal malinvestment and result in corporate losses, and stock and housing prices would ultimately follow the law of gravity. Credit markets could become jittery as borrowers run the risk of defaulting on their debt, with banks having limited capacity to absorb payment losses in their loan books.

This is the scenario if central banks take away the Halloween candy (aka low interest rates). Higher interest rates are one thing. Another thing is the flattening of the yield curve (meaning the difference between long- and short-term yields). A decline in the yield curve makes banks to reign in their credit supply. As bank credit supply dries up, financial market liquidity drops. The party comes to an end. Asset prices start nosediving.

As the graph below shows, a flat or even negative yield curve has in the past been accompanied by a stock market crash. Since early 2014, the yield curve has been declining, basically because short-term interest rates have gone up, while long-term interest rates have been declining. Even though the Fed’s interest rate increases have not translated into higher borrowing costs, an ongoing flattening of the yield curve remains a reason to expect the unexpected.

But maybe this time is different? Perhaps there is good reason to expect that the Fed will bring up interest rates just a little bit and not too much? By pursues a policy of bringing interest rates back up very slowly, the Fed makes it somewhat easier for debtors and the whole economy to adjust to a regime of higher borrowing and capital costs. As the extreme low level of volatility indicates, markets expect the Fed to succeed in avoiding the next crash.

The Fed's slow and gradual approach to tighten monetary policy might indeed be reducing the risk that it could "be raising interest rates too much too fast," pricking the credit bubble, and bringing down the house of (credit) cards. However, a considerable risk remains that the Fed will once again turn the boom into bust. And let’s be honest: In view of its track record, there is little reason to expect that the Fed won’t mess things up this time.



Categories: Current Affairs

Why Are People Buying Bonds with Negative Yields?

Tue, 21/11/2017 - 16:30
By: Doug French
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Bloomberg reports an astonishing bit of interest rate news from France. Mark Gilbert reports,

French utility Veolia Environnement SA is one of a handful of low-rated borrowers — assessed at BBB or lower by Standard & Poor's — with fixed-rate debt repayable in three years or longer that trades at yields below zero in euros.

Fleckenstein Capital LLC put it this way,

Sacré BBB-leu!

Yesterday a Parisian BBB-rated company (i.e., quasi junk) issued $500 million in three-year notes yielding -0.026%.

We have been peppered with so many absurdities, nothing seems absurd anymore, although you can be sure when folks look back at this period, they will wonder, "What were they thinking?" and the list of examples will be quite long.

One wonders how this could be. As Guido Hülsmann concluded in his QJAE article “The Theory of Interest,” an acting man earns money interest when his “originary interest causes a positive spread between the money proceeds from selling his product and the money expenditure on the related factors of production.”

Time preference is paramount in Austrian theory and Hülsmann quotes Böhm-Bawerk, “Present goods have in general greater subjective value than future goods of equal quantity and quality.”

Professor Hülsmann emphasizes Böhm-Bawerk’s qualifying words, “in general.” Böhm-Bawerk didn’t assert that time-preference was always positive, unlike latter Austrians who followed Ludwig von Mises —Murray Rothbard, Walter Block, Roger Garrison, Hans-Hermann Hoppe, and Jeffrey Herbener.  

Mises wrote,

acting man does not appraise time periods merely with regard to their dimension. His choices regarding the removal of future uneasiness are directed by the categories sooner and later. . . . Satisfaction of a want in the nearer future is, other things being equal, preferred to that in the farther distant future. Present goods are more valuable than future goods.

Time preference is a categorical requisite of human action. No mode of action can be thought of in which satisfaction within a nearer period of the future is not—other things being equal—preferred to that in a later period. The very act of gratifying a desire implies that gratification at the present instant is preferred to that at a later instant. He who consumes a nonperishable good instead of postponing consumption for an indefinite later moment thereby reveals a higher valuation of present satisfaction as compared with later satisfaction.

But Hülsmann points out that Irving Fisher, Frank Fetter, and Israel Kirzner also believed time preference could be negative.

So we have France’s Veolia Environnement S.A.floating €500 million of debt, rated just 2 notches above junk, with a three year maturity priced to yield negative 0.026%. As Grant’s Almost Daily writes, “Even better: Investor demand for the Veolia issue was such that the offering was oversubscribed by more than 4:1.  Said another way, three out of four investors who wished to lose money on a yield-to-maturity basis were left disappointed.”

Widows and orphans considering the Veolia bonds might want to consider what the analysts at S&P have to say. While they “praised the Veolia C-suite for its ‘prudent and proactive liability management’ in a June 2 report, while nevertheless noting that: ‘We assess Veolia’s risk profile as significant, given the group’s material debt.’”

It seems the only way lenders can make out with negative yielding bonds is for the world to experience massive deflation, while total central bank assets have climbed from $6 trillion in 2008 to $20 trillion in less than a decade with no end in sight.

Mario Draghi contends central bank-imposed negative interest rates and an indiscriminate bid under corporate bonds will help “the quality of loans.” Grant’s has its doubts:  “For now, potential issuers of all stripes are able to finance themselves for virtually nothing.  But a crack has recently appeared in the façade: Amidst the modest selloff in U.S. high yield seen recently, the yield on that Bloomberg Barclays Pan-European High Yield Index jumped to a four month high of 2.88% on Wednesday from 2.19%, a 10 year low, recorded less than two weeks prior.”

Is this really negative time preference or a central bank induced crack-up bond boom? 



Categories: Current Affairs

Thanksgiving: Celebrating the Birth of American Free Enterprise

Tue, 21/11/2017 - 12:00
By: Richard M. Ebeling
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This time of the year, whether in good economic times or bad, is when Americans gather with their families and friends and enjoy a Thanksgiving meal together. It marks a remembrance of those early Pilgrim Fathers who crossed the uncharted ocean from Europe to make a new start in Plymouth, Massachusetts. What is less appreciated is that Thanksgiving also is a celebration of the birth of free enterprise in America.

The English Puritans, who left Great Britain and sailed across the Atlantic on the Mayflower in 1620, were not only escaping from religious persecution in their homeland. They also wanted to turn their back on what they viewed as the materialistic and greedy corruption of the Old World.

Plymouth Colony Planned as Collectivist Utopia

In the New World, they wanted to erect a New Jerusalem that would not only be religiously devout, but be built on a new foundation of communal sharing and social altruism. Their goal was the communism of Plato’s Republic, in which all would work and share in common, knowing neither private property nor self-interested acquisitiveness.

What resulted is recorded in the diary of Governor William Bradford, the head of the colony. The colonists collectively cleared and worked the land, but they brought forth neither the bountiful harvest they hoped for, nor did it create a spirit of shared and cheerful brotherhood.

The less industrious members of the colony came late to their work in the fields, and were slow and easy in their labors. Knowing that they and their families were to receive an equal share of whatever the group produced, they saw little reason to be more diligent in their efforts. The harder working among the colonists became resentful that their efforts would be redistributed to the more malingering members of the colony. Soon they, too, were coming late to work and were less energetic in the fields.

Collective Work Equaled Individual Resentment

As Governor Bradford of the Plymouth Colony explained in his old English (though with the spelling modernized):

For the young men that were able and fit for labor and service did repine that they should spend their time and strength to work for other men’s wives and children, without recompense. The strong, or men of parts, had no more division of food, clothes, etc. then he that was weak and not able to do a quarter the other could; this was thought injustice. The aged and graver men to be ranked and equalized in labor, and food, clothes, etc. with the meaner and younger sort, thought it some indignant and disrespect unto them. And for men’s wives to be commanded to do service for other men, as dressing their meat, washing their clothes, etc. they deemed it a kind of slavery, neither could husbands brook it.

Because of the disincentives and resentments that spread among the population, crops were sparse and the rationed equal shares from the collective harvest were not enough to ward off starvation and death. Two years of communism in practice had left alive only a fraction of the original number of the Plymouth colonists.

Private Property as Incentive to Industry

Realizing that another season like those that had just passed would mean the extinction of the entire community, the elders of the colony decided to try something radically different: the introduction of private property rights and the right of the individual families to keep the fruits of their own labor.

As Governor Bradford put it:

And so assigned to every family a parcel of land, according to the proportion of their number for that end . . . This had a very good success; for it made all hands very industrious, so as much more corn was planted then otherwise would have been by any means the Governor or any other could use, and saved him a great deal of trouble, and gave far better content. The women now went willingly into the field, and took their little-ones with them to set corn, which before would a ledge weakness, and inability; whom to have compelled would have been thought great tyranny and oppression.

The Plymouth Colony experienced a great bounty of food. Private ownership meant that there was now a close link between work and reward. Industry became the order of the day as the men and women in each family went to the fields on their separate private farms. When the harvest time came, not only did many families produce enough for their own needs, but also they had surpluses that they could freely exchange with their neighbors for mutual benefit and improvement.

In Governor Bradford’s words:

By this time harvest was come, and instead of famine, now God gave them plenty, and the face of things was changed, to the rejoicing of the hearts of many, for which they blessed God. And the effect of their planting was well seen, for all had, one way or other, pretty well to bring the year about, and some of the abler sort and more industrious had to spare, and sell to others, so as any general want or famine hath not been amongst them since to this day.

Rejecting Collectivism for Individualism

Hard experience had taught the Plymouth colonists the fallacy and error in the ideas that since the time of the ancient Greeks had promised paradise through collectivism rather than individualism. As Governor Bradford expressed it:

The experience that was had in this common course and condition, tried sundry years, and that amongst the Godly and sober men, may well convince of the vanity and conceit of Plato’s and other ancients; — that the taking away of property, and bringing into a common wealth, would make them happy and flourishing; as if they were wiser than God. For this community (so far as it was) was found to breed confusion and discontent, and retard much employment that would have been to their benefit and comfort.

Was this realization that communism was incompatible with human nature and the prosperity of humanity to be despaired or be a cause for guilt? Not in Governor Bradford’s eyes. It was simply a matter of accepting that altruism and collectivism were inconsistent with the nature of man, and that human institutions should reflect the reality of man’s nature if he is to prosper. Said Governor Bradford:

Let none object this is man’s corruption, and nothing to the curse itself. I answer, seeing all men have this corruption in them, God in his wisdom saw another course fitter for them.

The desire to “spread the wealth” and for government to plan and regulate people’s lives is as old as the utopian fantasy in Plato’s Republic. The Pilgrim Fathers tried and soon realized its bankruptcy and failure as a way for men to live together in society.

They, instead, accepted man as he is: hardworking, productive, and innovative when allowed the liberty to follow his own interests in improving his own circumstances and that of his family. And even more, out of his industry result the quantities of useful goods that enable men to trade to their mutual benefit.

Giving Thanks for the Triumph of Freedom

In the wilderness of the New World, the Plymouth Pilgrims had progressed from the false dream of communism to the sound realism of capitalism. At a time of economic uncertainty and growing political paternalism, it is worthwhile recalling this beginning of the American experiment and experience with economic freedom.

This is the lesson of the First Thanksgiving. This year, when we, Americans sit around our dining table with family and friends, we should also remember that what we are really celebrating is the birth of free men and free enterprise in that New World of America.

The true meaning of Thanksgiving, in other words, is the triumph of Capitalism over the failure of Collectivism in all its forms.

Reprinted with permission from the Future of Freedom Foundation. 



Categories: Current Affairs

Freedom for Television and Radio

Mon, 20/11/2017 - 20:00
By: Murray N. Rothbard
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There is one important area of American life where no effective freedom of speech or the press does or can exist under the present system. That is the entire field of radio and television. In this area, the federal government, in the crucially important Radio Act of 1927, nationalized the airwaves. In effect, the federal government took title to ownership of all radio and television channels. It then presumed to grant licenses, at its will or pleasure, for use of the channels to various privately owned stations. On the one hand, the stations, since they receive the licenses gratis, do not have to pay for the use of the scarce airwaves, as they would on the free market. And so these stations receive a huge subsidy, which they are eager to maintain. But on the other hand, the federal government, as the licensor of the airwaves, asserts the right and the power to regulate the stations minutely and continuously. Thus, over the head of each station is the club of the threat of nonrenewal, or even suspension, of its license. In consequence, the idea of freedom of speech in radio and television is no more than a mockery. Every station is grievously restricted, and forced to fashion its programming to the dictates of the Federal Communications Commission. So every station must have “balanced” programming, broadcast a certain amount of “public service” announcements, grant equal time to every political candidate for the same office and to expressions of political opinion, censor “controversial” lyrics in the records it plays, etc. For many years, no station was allowed to broadcast any editorial opinion at all; now, every opinion must be balanced by “responsible” editorial rebuttals.

Because every station and every broadcaster must always look over its shoulder at the FCC, free expression in broadcasting is a sham. Is it any wonder that television opinion, when it is expressed at all on controversial issues, tends to be blandly in favor of the “Establishment”?

The public has only put up with this situation because it has existed since the beginning of large-scale commercial radio. But what would we think, for example, if all newspapers were licensed, the licenses to be renewable by a Federal Press Commission, and with newspapers losing their licenses if they dare express an “unfair” editorial opinion, or if they don’t give full weight to public service announcements? Would not this be an intolerable, not to say unconstitutional, destruction of the right to a free press? Or consider if all book publishers had to be licensed, and their licenses were not renewable if their book lists failed to suit a Federal Book Commission? Yet what we would all consider intolerable and totalitarian for the press and the book publishers is taken for granted in a medium which is now the most popular vehicle for expression and education: radio and television. Yet the principles in both cases are exactly the same.

Here we see, too, one of the fatal flaws in the idea of “democratic socialism,” i.e., the idea that the government should own all resources and means of production yet preserve and maintain freedom of speech and the press for all its citizens. An abstract constitution guaranteeing “freedom of the press” is meaningless in a socialist society. The point is that where the government owns all the newsprint, the paper, the presses, etc., the government—as owner—must decide how to allocate the newsprint and the paper, and what to print on them. Just as the government as street owner must make a decision how the street will be used, so a socialist government will have to decide how to allocate newsprint and all other resources involved in the areas of speech and press: assembly halls, machines, trucks, etc. Any government may profess its devotion to freedom of the press, yet allocate all of its newsprint only to its defenders and supporters. A free press is again a mockery; furthermore, why should a socialist government allocate any considerable amount of its scarce resources to antisocialists? The problem of genuine freedom of the press then becomes insoluble.

The solution for radio and television? Simple: Treat these media precisely the same way the press and book publishers are treated. For both the libertarian and the believer in the American Constitution the government should withdraw completely from any role or interference in all media of expression. In short, the federal government should denationalize the airwaves and give or sell the individual channels to private ownership. When private stations genuinely own their channels, they will be truly free and independent; they will be able to put on any programs they wish to produce, or that they feel their listeners want to hear; and they will be able to express themselves in whichever way they wish without fear of government retaliation. They will also be able to sell or rent the airwaves to whomever they wish, and in that way the users of the channels will no longer be artificially subsidized.

Furthermore, if TV channels become free, privately owned, and independent, the big networks will no longer be able to put pressure upon the FCC to outlaw the effective competition of pay-television. It is only because the FCC has outlawed pay-TV that it has not been able to gain a foothold. “Free TV” is, of course, not truly “free”; the programs are paid for by the advertisers, and the consumer pays by covering the advertising costs in the price of the product he buys. One might ask what difference it makes to the consumer whether he pays the advertising costs indirectly or pays directly for each program he buys. The difference is that these are not the same consumers for the same products. The television advertiser, for example, is always interested in (a) gaining the widest possible viewing market; and (b) in gaining those particular viewers who will be most susceptible to his message. Hence, the programs will all be geared to the lowest common denominator in the audience, and particularly to those viewers most susceptible to the message; that is, those viewers who do not read newspapers or magazines, so that the message will not duplicate the ads he sees there. As a result, free-TV programs tend to be unimaginative, bland, and uniform. PayTV would mean that each program would search for its own market, and many specialized markets for specialized audiences would develop—just as highly lucrative specialized markets have developed in the magazine and book publishing fields. The quality of programs would be higher and the offerings far more diverse. In fact, the menace of potential pay-TV competition must be great for the networks to lobby for years to keep it suppressed. But, of course, in a truly free market, both forms of television, as well as cable-TV and other forms we cannot yet envision, could and would enter the competition.

One common argument against private ownership of TV channels is that these channels are “scarce,” and therefore have to be owned and parcelled out by the government. To an economist, this is a silly argument; all resources are scarce, in fact anything that has a price on the market commands that price precisely because it is scarce. We have to pay a certain amount for a loaf of bread, for shoes, for dresses because they are all scarce. If they were not scarce but superabundant like air, they would be free, and no one would have to worry about their production or allocation. In the press area, newsprint is scarce, paper is scarce, printing machinery and trucks are scarce, etc. The more scarce they are the higher the price they will command, and vice versa. Furthermore, and again pragmatically, there are far more television channels available than are now in use. The FCC’s early decision to force stations into the VHF instead of the UHF zone created far more of a scarcity of channels than there needed to be.

Another common objection to private property in the broadcast media is that private stations would interfere with each other’s broadcasts, and that such widespread interference would virtually prevent any programs from being heard or seen. But this is as absurd an argument for nationalizing the airwaves as claiming that since people can drive their cars over other people’s land this means that all cars—or land— must be nationalized. The problem, in either case, is for the courts to demarcate property titles carefully enough so that any invasion of another’s property will be clear-cut and subject to prosecution. In the case of land titles, this process is clear enough. But the point is that the courts can apply a similar process of staking out property rights in other areas— whether it be in airwaves, in water, or in oil pools. In the case of airwaves, the task is to find the technological unit — i.e., the place of transmission, the distance of the wave, and the technological width of a clear channel—and then to allocate property rights to this particular technological unit. If radio station WXYZ, for example, is assigned a property right in broadcasting on 1500 kilocycles, plus or minus a certain width of kilocycles, for 200 miles around Detroit, then any station which subsequently beams a program into the Detroit area on this wavelength would be subject to prosecution for interference with property rights. If the courts pursue their task of demarking and defending property rights, then there is no more reason to expect continual invasions of such rights in this area than anywhere else.

Most people believe that this is precisely the reason the airwaves were nationalized; that before the Radio Act of 1927,stations interfered with each other’s signals and chaos ensued, and the federal government was finally forced to step in to bring order and make a radio industry feasible at last. But this is historical legend, not fact. The actual history is precisely the opposite. For when interference on the same channel began to occur, the injured party took the airwave aggressors into court, and the courts were beginning to bring order out of the chaos by very successfully applying the common law theory of property rights — in very many ways similar to the libertarian theory — to this new technological area. In short, the courts were beginning to assign property rights in the airwaves to their “homesteading” users. It was after the federal government saw the likelihood of this new extension of private property that it rushed in to nationalize the airwaves, using alleged chaos as the excuse.

To describe the picture a bit more fully, radio in the first years of the century was almost wholly a means of communication for ships — either ship-to-ship or ship-to-shore messages. The Navy Department was interested in regulating radio as a means of ensuring safety at sea, and the initial federal regulation, a 1912 act, merely provided that any radio station had to have a license issued by the Secretary of Commerce. No powers to regulate or to decide not to renew licenses were written into the law, however, and when public broadcasting began in the early 1920s, Secretary of Commerce Herbert Hoover attempted to regulate the stations. Court decisions in 1923 and 1926, however, struck down the government’s power to regulate licenses, to fail to renew them, or even to decide on which wavelengths the stations should operate.1 At about the same time, the courts were working out the concept of “homestead” private property rights in the airwaves, notably in the case of Tribune Co. v. Oak Leaves Broadcasting Station (Circuit Court, Cook County, Illinois, 1926). In this case the court held that the operator of an existing station had a property right, acquired by prior use, sufficient to enjoin a new station from using a radio frequency in any way so as to cause interference with the signals of the prior station.2 And so order was being brought out of the chaos by means of the assignment of property rights. But it was precisely this development that the government rushed in to forestall.

The 1926 Zenith decision striking down the government’s power to regulate or to fail to renew licenses, and forcing the Department of Commerce to issue licenses to any station that applied, produced a great boom in the broadcasting industry. Over two hundred new stations were created in the nine months after the decision. As a result, Congress rushed through a stopgap measure in July 1926 to prevent any property rights in radio frequencies, and resolved that all licenses should be limited to 90 days. By February 1927 the Congress passed the law establishing the Federal Radio Commission, which nationalized the airwaves and established powers similar to those of the current FCC. That the aim of the knowledgeable politicians was not to prevent chaos but to prevent private property in the airwaves as the solution to chaos is demonstrated by the legal historian H.P. Warner. Warner states that “grave fears were expressed by legislators, and those generally charged with the administration of communications . . . that government regulation of an effective sort might be permanently prevented through the accrual of property rights in licenses or means of access, and that thus franchises of the value of millions of dollars might be established for all time.”3 The net result, however, was to establish equally valuable franchises anyway, but in a monopolistic fashion through the largesse of the Federal Radio Commission and later FCC rather than through competitive homesteading 

Among the numerous direct invasions of freedom of speech exercised by the licensing power of the FRC and FCC, two cases will suffice. One was in 1931, when the FRC denied renewal of license to a Mr. Baker, who operated a radio station in Iowa. In denying renewal, the Commission said:

This Commission holds no brief for the Medical Associations and other parties whom Mr. Baker does not like. Their alleged sins may be at times of public importance, to be called to the attention of the public over the air in the right way. But this record discloses that Mr. Baker does not do so in any high-minded way. It shows that he continually and erratically over the air rides a personal hobby, his cancer cure ideas and his likes and dislikes of certain persons and things. Surely his infliction of all this on the listeners is not the proper use of a broadcasting license. Many of his utterances are vulgar, if not indeed indecent. Assuredly they are not uplifting or entertaining.4

Can we imagine the outcry if the federal government were to put a newspaper or a book publisher out of business on similar grounds?

A recent act of the FCC was to threaten nonrenewal of license of radio station KTRG in Honolulu, a major radio station in Hawaii. KTRG had been broadcasting libertarian programs for several hours a day for approximately two years. Finally, in late 1970, the FCC decided to open lengthy hearings moving toward nonrenewal of license, the threatened cost of which forced the owners to shut down the station permanently.5



  • 1. 2In the decisions Hoover v. Intercity Radio Co., 286 Fed. 1003 (Appeals D.C., 1923); and United States v. Zenith Radio Corp., 12 F. 2d 614 (ND. Ill., 1926). See the excellent article by Ronald H. Coase, “The Federal Communications Commission,” Journal of Law and Economics (October 1959): 4–5.

  • 2. Ibid., p. 31n.

  • 3. Harry P. Warner, Radio and Television Law (1958), p. 540. Quoted in Coase, “The Federal Communications Commission,” p. 32.

  • 4. Decisions of the FRC, Docket No. 967, June 5, 1931. Quoted in Coase, “The Federal Communications Commission,” p. 9.

  • 5. The best and most fully elaborated portrayal of how private property rights could be assigned in radio and television is in A. DeVany et al., “A Property System for Market Allocation of the Electromagnetic Spectrum: A Legal-Economic-Engineering Study,” Stanford Law Review (June 1969). See also William H. Meckling, “National Communications Policy: Discussion,” American Economic Review, Papers and Proceedings (May 1970): 222–23. Since the DeVany article, the growth of community and cable television has further diminished the scarcity of frequencies and expanded the range of potential competition.


Categories: Current Affairs

Venezuela's Default Disaster

Mon, 20/11/2017 - 16:00
By: Daniel Lacalle
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Socialism always promises heaven and gives hell.

In the early hours of Thursday, November 2, the Maduro regime certified its latest failure with what they promised would never happen: technical default. With his usual arrogance, Maduro issued a “decree” demanding “the refinancing and restructuring of the debt as of November 3.” That is, default.

The bad news for investors or high-yield hunters is that the likelihood of being swindled again is almost 100%.

Chavez once said “put me oil at zero and Venezuela will not suffer,” and Maduro stated that “a revolutionary government with economic power as the one I preside has plans to surpass any situation arising from any price of oil.” Reality has now kicked in.

Venezuela was not destroyed by low oil prices, but by high socialism.

Socialism has led Venezuela to an unparalleled economic disaster . No, it’s not “the price of oil.” Venezuela is the only OPEC country that has fallen into default, depression, and hyperinflation. It’s not oil, it’s socialism.

The management disaster is spectacular and the greatest example of the devastating effect of socialism is the state-owned oil company. PdVSA, the national oil company, has gone from being one of the most efficient and profitable twenty years ago, to end up importing oil.

Although Venezuela has the largest reserves of crude oil in the world — 296 billion barrels — the country began importing oil last year. Its production is less than 2.7 million barrels per day, a drop of 20% in less than two decades, while the Chavez.Maduro regime multiplied its workforce by five, to 175,000 “workers”.

Brutal cost increases, spectacular worsening of production, collapse in margins and plundering of the cash to pay for subsidies led the company from being one of the most profitable and with the best balance sheet in the world to borrow more than 43 billion US dollars.

During the presidency of Maduro, the regime has led the country to hyperinflation, which already exceeds 2000% and a shortage of more than 80% in goods, while foreign currency reserves have plummeted 64%, the worst level in forty years.

This disaster is not because of low oil prices, it is a reflection of the reality of what socialism does. No oil producing country shows such atrocious figures, not even close.

In fact, if anything can be said about the fall in oil prices is that the vast majority of producing countries have managed it admirably, with GDP drops that ended being much lower than feared, keeping their reserves in foreign currency at comfortable levels, and adapting to the new reality quickly and efficiently. Almost all, except Venezuela.

The True Economic War in Venezuela: the Chavez-Maduro Regime Against the People

Venezuela had 12,700 private companies when Chávez took power, according to Conindustria. Today there is less than one-third of that figure. To the economic destruction, the regime added the assault on private property with expropriations of more than 690 companies in twelve years. Today, those expropriated companies are technically bankrupt and those that survive are zombies producing less than half of the figures prior to the confiscation.

As always happens in socialism, the first thing was to deny reality. “Investors should not worry about the debt repayments of 2017 and 2018,” said Rafael Ramírez. And indeed, they should not have worried. They should have panicked. One of the largest investment banks in the world, which bought $ 2.8 billion of bonds is now facing the false “restructuring” decreed by Maduro.

Maduro “decrees” restructuring as if it were a miracle. But it is another nail in the coffin of the regime. Economic destruction is not only not changing, it is getting worse.

The restructuring simply has no solution. Correa, in Ecuador, has already experienced the “success” of default.

Ecuador, the “example” that populists used on how to “confront the IMF” and encourage default, has doubled its debt, mortgaged the country with China at much higher rates than those of the IMF and finally had to ask for help to… the IMF. This is “success.”

Correa in Ecuador defaulted on 3.2 billion US dollars to finish depending on China at a much higher cost (7.5%) and shorter maturities (8 years). And Ecuador now discovers that its real debt is more than 41.8 billion dollars instead of the 27.8 billion that Correa left as “official”. That hole will cost billions in adjustments. This is the reality of default and re-structuring. Things get worse.

But Ecuador at least had an economy with growth possibilities. Maduro now seeks to refinance with … what? He has devastated the country. Between 1999 and 2014, Venezuela received 960.5 billion US dollars of oil revenues, 56.5 billion annually for 17 years, five times more than the average annual real income of previous governments between 1993 and 1998, according to the BBC quoting Ecoanalítica.

That huge oil revenue was squandered and at the same time the economy was destroyed by assaulting legal security and investment initiative with savage expropriations. Who is going to lend to such disastrous managers, even at higher rates and different terms? Now the string of litigation and complaints about breach of contracts will begin. And the credit tap closes.

This restructuring is not going to be a relief nor the beginning of the solution. It is the verification of an absolute failure of the Venezuelan government and it will cost a lot, as always, to the poorest citizens. Because there has never been a story of default that is accompanied by higher real public spending. Never .

The lesson of this new example of socialist failure is that it is a system based on lies that ignores the most basic principles of the economy and destroys even the richest country.

In the end, the socialist promise of free money is very expensive for all. Let’s learn the lesson.



Categories: Current Affairs

The Daily Hell of Life in the Soviet Bloc

Mon, 20/11/2017 - 12:00
By: James Bovard
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This month is the 100th anniversary of the Communist Party’s seizure of power in Petrograd, Russia. British Guardian columnist Paul Mason recent declared that the Soviet revolution provided “a beacon to the rest of humanity, no matter how short lived.” The New York Times has exalted the Soviet takeover in a series of articles on the “Red Century” – even asserting that “women had better sex under communism” (based largely on a single dubious orgasm count comparison of East and West German women.)

Professor Hunt Tooley’s November 1 Mises article on “The Bolshevik Great Experiment: 100 Years Later” vividly captured the stunning death tolls communism produced in Russia and elsewhere. Stalin reputedly said that one death is a tragedy, a million deaths is a statistic.

Communism’s mortality toll does not capture its full horror – the daily degradation that its victims suffered. In the mid-1980s, there were plenty of Soviet apologists writing in the western media. Practically any Soviet Bloc reform was touted as the turning of the corner to sustained economic progress. I was mystified why people living in freedom would idealize a system of state slavery.

In 1986 and 1987, I slipped behind the Iron Curtain a half dozen times to study economic perversity and political slavery, writing articles for The New York Times, Wall Street Journal Europe, Freeman, Journal of Economic Growth, and other publications. My final trip - in November 1987 – began in Budapest, Hungary, before heading on to the most repressive regime in Europe.

The train from Budapest to Bucharest, Romania was called the Orient Express. The original 1880s Orient Express connected Paris to Constantinople. The menu on the train’s first run included oysters, soup with Italian pasta, turbot with green sauce, chicken ‘à la chasseur’, fillet of beef with ‘château’ potatoes, ‘chaud-froid’ of Game animals, chocolate pudding, and a buffet of desserts. In the communist rendition of the Orient Express, there was no food on the train in Romania, though a few morsels may have been available in Hungary.

I had a cabin to myself as the train rolled southeast from Budapest. I had been told that if border guards found a map of Romania or any other dubious papers, I would be arrested or denied entry. Late at night, nearing the Romanian border, I studied documents one more time, drilling into my head the things that I should be looking for, and then tore them up and threw them out the train window, piece by piece.

Shortly after midnight, the train lumbered to a stop in Transylvania, at the Hungary-Romania border. The scene had all the ambience of the original 1931 Dracula movie. I didn’t hear wolves howling but the mountain terrain, low-hanging fog and military guards with German shepherds endlessly circling the train sufficed.

My cabin was searched four times, with each team outdoing their predecessors. The mattresses on the bunk beds were jostled and practically every cubic inch of space was poked or prodded.

The final inspection was supervised by a cute (by communist standards) military officer. Perhaps the authorities thought I would confess my perfidy to a different gender. Nope: I was just another tourist heading to the "Paris of East Europe," as Bucharest preened itself in pre-communist times. Except that there were almost zero tourists in a land renamed "the Ethiopia of Europe." I entered Romania illegally, relying on an easily-acquired tourist visa instead of going through the hassle of getting a journalist visa (which would have also assured more harassment).

After the final search, guards bolted my cabin shut from the outside. The pseudo-luxury train had officially been transformed into a traveling jail. My American passport had earned me special treatment again. I leaned back and counted my blessings. In Western Europe, they charged double for a private cabin.

The Orient Express was no longer an express after it entered Romania, taking 13 hours to rumble 400 miles and running far behind schedule.

Everywhere were signs of a government increasingly fearful of its people. Throughout Transylvania, radio towers were surrounded by military guards and barbed wire. The train stopped at Brasov - a medieval-era city that had been briefly renamed Stalin City - until relations with Moscow chilled. Shortly before I passed through, thousands of workers responded to wage cuts by ransacking communist party offices and killing two government militia men.

There were horse-drawn wagons next to spewing factories and huge apartment complexes. Many people had abandoned their slipshod cars after government sporadically banned the sale of gasoline for private vehicles.

Around 9 the next morning, there was a rapping on my cabin door - like someone sending a secret message.

I heard someone struggling with that bolted lock and then the door popped open and half a dozen ill-clad Romanian factory workers rushed in. They had heard there was a foreigner confined on the train. They stared at me like I was E.T. from outer space. Two workers leaned over and pawed my leather boots, eyes wide in amazement. Leather boots had apparently become the same luxury there that full-length mink coats were in America. Yet, in the pre-communist era, leather boots were probably commonplace for factory and farm workers. We communicated with simple gestures since I did not speak Romanian and they spoke no English. They seemed to be full of good will, but vanished after a few minutes - perhaps fearful of being caught with a foreigner.

The workers were likely no fans of communist dictator Nicole Ceausescu, who seemed determined to starve the people into submission. Though Romania had been one of the world’s top grain exporters before World War One, food had become as rare as honest economist statistics.

Children could not get milk without a doctor's prescription. It was forbidden for foreigners to send food to Romanians. The government responded to food shortages with a publicity campaign on the danger of overeating. The government also revved up advertising in western nations touting Romania’s "world famous" weight-loss clinics. Food shortages became so bad that the lion in the Bucharest Zoo was converted into an involuntary vegetarian and lost his teeth as a result.

The communists destroyed hundreds of square miles of prime farmland to erect factories and open pit mines. Hundreds of villages were razed and the residents corralled into cities and conscripted to work in factories. The government put almost all investments into heavy industry — the ultimate source of bragging rights for communist leaders. But roughly half of Romania’s output was so shoddy that it was ready for the junk heap moments after it rolled off the assembly line. Romanian industry was also extremely inefficient, consuming up to five times as much energy per unit of output as western factories. The government compensated by cutting off electricity to people’s homes for up to six hours during the winter, and permitting only one 25-watt light bulb per room.

The health system was collapsing, and the infant mortality rate was so high the government refused to register children as being born until they survived their first month. The government also routinely cut off power to hospitals, causing a thousand deaths the previous winter.

Yet, some western experts hailed Ceausescu as a path-breaking visionary. A 1979 World Bank report, the "Importance of Centralized Economic Control," praised the Romanian regime for pursuing "policies to make better use of the population as a factor of production" [italics added] by "stimulating an increase in birth rates."

And how did the benevolent ruler do this? By prohibiting distribution of contraceptives and banning abortions. Because the Plan called for higher birth rates, every female forfeited the right to control her body or life. Ceausescu proclaimed in 1985: "The fetus is the socialist property of the whole society... Those who refuse to have children are deserters." The government forced all women between the age of 18 and 40 to have a monthly gynecological exam to assure that no one robbed the State by having a secret abortion. These policies turned Romania into the World Capital of abandoned babies.

Finally arriving in Bucharest, I learned that the Hotel Intercontinental was the only place westerners were allowed to stay. After I checked in, a beefy 30ish woman with bad eye makeup came flat-footing up. She asked in a gravely, three-pack-a-day voice: "Would you like to have some company?"

"Do what?"

"Would you like some company - in your room?" She smiled and pointed upstairs.

"Uh... no, I’m doing fine."

"Why are you here in Bucharest?" She cooed gutturally.

"I’m a tourist."

"But it is so cold outside. Let’s stay inside. Aren’t you lonely?"

There were several reasons I demurred, including my strict rule to never tussle with any woman who had a better mustache than I did.

The Romanian government was known for using intelligence agents as prostitutes. Instead of a simple honest hooker, she was probably a spook-hooker. Seeing how badly everything else in that country functioned, I had no itch to learn the Romanian standard for "good enough for government bawdy work."

I checked into my room, which looked custom-designed for surveillance. There was "dead space" and unmarked doors between each guest room. I flipped on the TV and saw choruses of peasants and workers in overalls listlessly waving flags and singing praises to Ceausescu, the self-proclaimed "Genius of the Carpathians," as the camera zoomed in for close-ups of the great man’s face.

Fascinating stuff, but the plot line was thin, so I sought entertainment elsewhere.

When I visit a new city, I love to spend hours walking around and getting a feel for the turf. I stopped and asked the concierge for a street map of downtown Bucharest. I figured he might have a guide to the Greatest Triumphs of Ceausescu-ism within an eight block radius of Communist Party headquarters.

The concierge grimaced even before I got to my verb. This gray-skinned, beady-eyed guy was hired for this job because he naturally exuded hatred of mankind.

"For what do you need a map?"

"Because I want to see the city’s landmarks."

"We have no maps. If there is some place you want to go, you tell me what it is and I will tell you how to get there."

"Where is the old part of the city?" I asked, knowing that most of it had been leveled to make room for the ugliest "socialist realism" monoliths outside of Pyongyang.

The concierge scowled and muttered something - perhaps a Romanian slur for vexatious foreigners. My hunch was this guy didn’t make a living from tips.

On the street, many people darted their eyes away - as if looking at foreigners caused leprosy. I had heard that it was a crime for Romanians to talk to strangers. But a few people summoned up a hodgepodge of English phrases to plead for a pack of Kent cigarettes to bribe doctors to treat their sick children. Because the Romanian currency was practically worthless, packs of Kents circulated as a black market currency. I had bought a couple cartons of Kents before going to Romania, and I gave packs to a few people who spoke to me.

I stepped into the largest department store in Bucharest; it was dark, dank and miserable. Sales clerks were sitting on piles of new clothing heaped on the floor. While workers in Hungary had lazed around, Romanian workers seemed stupefied. One of the store’s main attractions were incredibly rickety baby carriages - the kind to use when you want to kill your kid and sue the pants off somebody. Except that this government never had any liability to its victims, no matter how many perished from its products or policies.

I passed by the boarded-up front door of an ancient church, standing forsaken amidst construction projects that had obliterated surrounding edifices. Many Romanians fretfully crossed themselves as they passed it by.

Outside the U.S. embassy, Romanian guards with machine guns stood to dissuade locals from seeking asylum. My hunch was that stopping there would be far more hassle than it was worth. (I had been targeted by Czech police after visiting the U.S. embassy in Prague earlier that year.)

Like other communist regimes, Romania was an economic theocracy. The government used its iron fist to make sure everything happened according to Plan. For instance, according to the 1986-90 five year plan, Romanian scientists would make 4015 discoveries, of which 2,423 would result in new products by Romanian businesses. The Plan did not specify how insufficiently creative scientists would be scourged.

Romania was one of the World Bank’s favorite regimes, receiving more than $2 billion between 1974 and 1982. The World Bank predicted in 1979 that Romania would "continue to enjoy one of the highest growth rates among developing countries over the next decade... and become an industrialized economy by 1990." But much of Romania’s apparent economic growth was the result of World Bank aid. The more handouts the World Bank gives a country, the easier it becomes to portray the nation as a success story. World Bank president Robert McNamara cited Romania to vindicate his "faith in the financial morality of socialist countries."

The World Bank also praised the Romanian regime for its ability to "mobilize the resources" required to boost economic growth. In reality, the government was brutalizing its subjects to squeeze out "surpluses" to lavish funds on World Bank-approved industrial enterprises - the same tactic Stalin used to finance his Five-Year Plans.

The Romanian regime also "mobilized resources" by pawning its ethnic German and Jewish inhabitants. West Germany paid roughly $20,000 for each German exported, and Israel paid a similar amount for each Romanian Jew released. There were international agreements banning slave trading in the nineteenth century, but selling human beings in the twentieth century was acceptable if the receipts went for progressive purposes. (Eighty percent of Romanian children resettled in West Germany were judged to be severely malnourished.)

The World Bank never cut Ceausescu off; instead, he ceased borrowing after he became convinced that western debt was a curse on his country. Championing Ceausescu did not prevent McNamara from being appointed to the Board of Directors of the Washington Post or from being canonized as a benevolent saint by the American media when he kicked the bucket in 2009.

As I knocked around Bucharest, I assumed I was being followed. Roughly 1 in 15 Romanians was working as a government informant. Since I knew that pulling out a notebook would set off alarm bells, I instead jotted notes on the palm of my hand. Such behavior was seen as merely weird, not menacing. I could use single words as pegs to later pull up a strand of facts and thoughts.

When I arrived at Bucharest’s main airport to exit to Frankfurt, I noticed that most of the travelers ahead of me were openly giving a pack of Kents to each dreg at the multiple security checkpoints. I was soon passing out cigarette packs to guards like an old widow tossing candy to kids on Halloween.

I saw one or two German businessmen yanked aside for more punitive searches, and their clothes were scattered far and wide across the guards’ tables. As I passed the last checkpoint, I counted my blessings that I had avoided such depredations.

That Lufthansa jet on the tarmac was the prettiest thing I had seen since the Orient Express crossed the Romanian border. There was one past-his-prime soldier standing listlessly about 20 yards from the plane. I held up my passport and he waved me on.

I’d almost reached the plane’s gangway when I heard: HALT!

I turned and saw the guard running towards me, his submachine gun bouncing off his ample belly.

Puffing a bit, he caught up to me - grabbed my left arm, yanked it back, and, pointing at my palm, demanded to know: "WHAT IS THIS?!!!?"

I looked at my hand, then I looked at the guard.

"It’s ink."

He paused, squinted, nodded his head knowingly, and then waved me on to the plane.

As soon as the Lufthansa jet cleared Romanian air space, I retrieved my small notebook from the usual hiding place - inside my underwear - and began extracting my palm notes.

The following month, the New York Times printed my "Eastern Europe, the New Third World" which declared that "Eastern Europe is much closer to economic collapse than most westerners realize. After hundreds of so-called market-oriented reforms, there are still no market economies in Eastern Europe." The Readers Digest piece on the same topic appeared in ten foreign language editions. I was trying to help East Bloc regimes get the credit rating they deserved.

Throughout the Soviet Bloc, governments tried to reform economies while retaining government ownership and pervasive control of prices and production even for non-socialist activities. It was impossible to repair East Bloc economies without stripping communist parties of their power.

Unfortunately, as decades have passed since the fall of the Soviet Union, romanticism is deep-sixing the bitter facts of the lives people in communist regimes were forced to live. But any economic system that forces lions to go vegan should never be forgiven.



Categories: Current Affairs

Lyndon Johnson's Terrible Legacy

Sat, 18/11/2017 - 12:15
By: Patrick Barron
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Recently my wife and I spent a morning at the Lyndon Baines Johnson Presidential Library in Austin, Texas. The damage done by this big bully is incalculable. His library reminds us of the start of the blizzard of government expansion during Johnson's presidential term, which lasted from the Kennedy assassination in October 1963 to his decision not to run for a full second term in 1968, which usually is attributed to his failure to end the war in Vietnam.

Johnson was an admirer of FDR and was determined to revive and complete what he believed should have been integral parts to FDR's New Deal. Johnson called his program The Great Society. As if ignorance of the consequences of this socialist expansion of domestic control by government was not enough, LBJ expanded the war in Vietnam, promising America both Guns and Butter. Even today we live with this expansion of government domestic programs and seemingly never-ending wars as the modern Welfare/Warfare state.

The Johnson Treatment

I called Johnson a big bully in the paragraph above. I believe my assessment is justified by what actually is celebrated at his presidential library. The displays proudly explain and document "the Johnson touch" in print, photograph, and actual recorded telephone interviews. Johnson was a big man who towered over most people. He had a habit of getting very close to someone, leaning over at the waist, and forcing his partner in conversation to bend over backwards to avoid an uncomfortable encounter with LBJ's face. There is a large picture of Johnson giving Supreme Court Associate Justice Abe Fortas this "Johnson Treatment", literally face-to-face. Fortas, who was a long time LBJ supporter, appears to be taking the "Treatment" in good humor, but it is easy to see how it would be almost impossible to keep one's dignity with the president of the United States performing this obviously uncomfortable act.

Surprisingly the JBJ Library celebrates the Johnson Treatment with recorded phone conversations. One conversation was with powerful US Senator Richard Russell, a long time LBJ colleague. Johnson wanted Russell as his personal eyes and ears on the Warren Commission, tasked with investigating the Kennedy assassination. In the recorded phone conversation we hear Russell politely tell LBJ that he is honored but that he has no respect for Supreme Court Justice Earl Warren and must decline the offer. LBJ then badgers and bullies Russell into accepting the position. He says that he wants Russell to ensure that the commission does not investigate whether the Russians or Cubans had any role in the assassination. Russell's vociferous objection in writing to the Warren Commission's "single bullet" theory seemed to justify his opinion of Warren and the commission. The commission's staffers jumped through rhetorical hoops to claim that the report had the unanimous approval of all members.

That Which Is Seen and That Which Is Unseen

The library is full of typical memorabilia. The entrance has a huge display of pens with which Johnson signed hundreds of pieces of mostly domestic legislation. For example, Johnson authored and signed sixty pieces of legislation that effectively federalized education. Of course, the library is full of specious statistics that attempt to "prove" that all this legislation was effective, citing, for example, that the poverty rate decreased and that the percentage of Americans with college degrees increased. Even if one accepts such "facts" at face value, an Austrian economist would point out that all such so-called advances came at the cost of diverting resources from other, more highly sought preferences. Education is an economic good, as is healthcare, retirement savings, food, etc. If Americans valued higher education so much, they would have applied more of their limited resources to this end. The LBJ library ignores the cost, including the social cost, of all these programs and gives the impression that government supplied goods and services could be provided without any change in the nation's production of other goods and services. Thus, the famous "Guns and Butter" claim that we can have it all...a claim that survives to this day.

Perhaps the most enduring legacy of the LBJ years is that his Guns and Butter policies put the US on a path that ended the gold exchange standard, agreed upon at Bretton Woods in 1944, by which the US pledged to honor central bank dollar convertibility to gold at thirty-five dollars per ounce. In the 1950's Eisenhower's budget deficits were very modest and he actually balanced the budget for a short time. But Johnson's Guns and Butter policy caused huge deficits and prompted unprecedented money printing by the Fed. The Austrian economists in Charles de Gaulle's France understood the consequences--that the US did not actually have enough gold to honor central bank redemptions at thirty-five dollars per ounce--and began a run on the US gold supply that eventually drove the US off the gold standard in 1971. (Let me make it clear...the French did NOT cause the run on the US gold supply. The Fed caused the run by printing dollars to pay for LBJ's Guns and Butter policy.)

Vietnam Exposed the Limits of the Johnson Touch

The LBJ library openly shows us that Johnson never had a method for winning the war in Vietnam or extricating the US from what became known as a quagmire. In another telephone recording from early in his administration library visitors hear LBJ tell a partisan that he doesn't know how to win or how to bring the troops home honorably. That is a very bitter revelation to someone who had comrades in arms who died in Vietnam and others who endured captivity in the infamous "Hanoi Hilton". Repeatedly Johnson tried to get the North Vietnamese to a peace conference. This is pure LBJ hubris, convinced that everything is negotiable and that he can use the famous Johnson Touch on Ho Chi Minh. His pathetic bombing pauses to signal our desire to negotiate merely convinced the North Vietnamese that American involvement eventually would end.

What Have We Learned?

Apparently, not much. Today Johnson's Guns and Butter policy is alive and well. Few, if any, Great Society programs have been repealed. The federal government continues to wage war in faraway places and promises ever more goods and services, funded by fiat money set free from any semblance of a gold standard. There is no talk of eliminating any domestic programs or ending any of our wars. On the contrary our government seems determined to provoke new wars in Korea and possibly with Iran and even Russia. The legacy debt for all the federal government's programs--i.e., the unfunded obligations emanating from the government's entitlement programs — has been calculated to be well over a hundred trillion dollars. It is clear that it can be paid only nominally and not with money of even today's reduced purchasing power. So, was LBJ's presidency a success? Unfortunately for America, LBJ would say yes!



Categories: Current Affairs

We're Living in the Age of Capital Consumption

Sat, 18/11/2017 - 12:00
By: Ronald-Peter Stöferle
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When capital is mentioned in the present-day political debate, the term is usually subject to a rather one-dimensional interpretation: Whether capital saved by citizens, the question of capital reserves held by pension funds, the start-up capital of young entrepreneurs or capital gains taxes on investments are discussed – in all these cases capital is equivalent to “money.” Yet capital is distinct from money, it is a largely irreversible, definite structure, composed of heterogeneous elements which can be (loosely) described as goods, knowledge, context, human beings, talents and experience. Money is “only” the simplifying aid that enables us to record the incredibly complex heterogeneous capital structure in a uniform manner. It serves as a basis for assessing the value of these diverse forms of capital.

Modern economics textbooks usually refer to capital with the letter “C”. This conceptual approach blurs the important fact that capital is not merely a single magnitude, an economic variable representing a magically self-replicating homogenous blob but a heterogeneous structure. Among the various economic schools of thought it is first and foremost the Austrian School of Economics, which stresses the heterogeneity of capital. Furthermore, Austrians have correctly recognized, that capital does not automatically grow or perpetuate itself. Capital must be actively created and maintained, through production, saving, and sensible investment.

Moreover, Austrians emphasize that one has to differentiate between two types of goods in the production process: consumer goods and capital goods. Consumer goods are used in immediate consumption – such as food. Consumer goods are a means to achieve an end directly. Thus, food helps to directly achieve the end of satisfying the basic need for nutrition. Capital goods differ from consumer goods in that they are way-stations toward the production of consumer goods which can be used to achieve ultimate ends. Capital goods therefore are means to achieve ends indirectly. A commercial oven (used for commercial purposes) is a capital good, which enables the baker to produce bread for consumers. 

Through capital formation, one creates the potential means to boost productivity. The logical precondition for this is that the production of consumer goods must be temporarily decreased or even stopped, as scarce resources are redeployed toward the production of capital goods. If current production processes generate only fewer or no consumer goods, it follows that consumption will have to be reduced by the quantity of consumer goods no longer produced. Every deepening of the production structure therefore involves taking detours.

Capital formation is therefore always an attempt to generate larger returns in the long term by adopting more roundabout methods of production. Such higher returns are by no means guaranteed though, as the roundabout methods chosen may turn out to be misguided. In the best case only those roundabout methods will ultimately be continued, which do result in greater productivity. It is therefore fair to assume that a more capital-intensive production structure will generate more output than a less capital-intensive one. The more prosperous an economic region, the more capital-intensive its production structure is. The fact that the generations currently living in our society are able to enjoy such a high standard of living is the result of decades or even centuries of both cultural and economic capital accumulation by our forebears.

Once a stock of capital has been accumulated, it is not destined to be eternal. Capital is thoroughly transitory, it wears out, it is used up in the production process, or becomes entirely obsolete. Existing capital requires regularly recurring reinvestment, which can usually be funded directly out of the return capital generates. If reinvestment is neglected because the entire output or more is consumed, the result is capital consumption.

It is not only the dwindling understanding of the nature of capital that leads us to consume it without being aware of it. It is also the framework of the real economy which unwittingly drives us to do so. In 1971 money was finally cut loose entirely from the gold anchor and we entered the “paper money era.” In retrospect, it has to be stated that cutting the last tie to gold was a fatal mistake. Among other things, it has triggered unprecedented instability in interest rates. While interest rates displayed relatively little volatility as long as money was still tied to gold, they surged dramatically after 1971, reaching a peak of approximately 16 percent in 1981 (10-year treasury yield), before beginning a nosedive that continues until today. This massive decline in interest rates over the past 35 years has gradually eroded the capital stock.

An immediately obvious effect is the decline in so-called “yield purchasing power”. The concept describes what the income from savings, or more precisely the interest return on savings, will purchase in terms of goods. The opportunity to generate interest income from savings has of course decreased quite drastically. Once zero or even negative interest rate territory is reached, the return on saved capital is obviously no longer large enough to enable one to live from it, let alone finance a reasonable standard of living. Consequently, saved capital has to be consumed in order to secure one's survival. Capital consumption is glaringly obvious in this case.

It is beyond question that massive capital consumption is taking place nowadays, yet not all people are affected by it to the same extent. On the one hand, the policy of artificially reducing the interest as orchestrated by the central banks does negatively influence the entrepreneurs’ tasks. Investments, especially capital-intensive investments seem to be more profitable as compared to a realistic, i. e. non-interventionist level, profits are thus higher and reserves lower. These and other inflation-induced errors promote capital consumption.

On the other hand, counteracting capital consumption are technological progress and the rapid expansion of our areas of economic activity into Eastern Europe and Asia in recent decades, due to the collapse of communism and the fact that many countries belatedly caught up with the monetary and industrial revolution in its wake. Without this catching-up process it would have been necessary to restrict consumption in Western countries a long time ago already.

At the same time, the all-encompassing redistributive welfare state, which either directly through taxes or indirectly through the monetary system continually shifts and reallocates large amounts of capital, manages to paper over the effects of capital consumption to some extent. It remains to be seen how much longer this can continue. Once the stock of capital is depleted, the awakening will be rude. We are certain, that gold is an essential part of any portfolio in this stage of the economic cycle.



Categories: Current Affairs

Chris Calton: The March to America's Civil War

Fri, 17/11/2017 - 21:30
By: Chris Calton, Jeff Deist
Chris Calton on Mises Weekends

Chris Calton, host of the Mises Institute's Historical Controversies podcast, is back with a second season. If you enjoyed his revisionist view of America's drug war during the first season, you'll love his take on U.S. history during the latter 1800s. This episode, titled "The March to America's Civil War", is a fascinating account of the antebellum era.

Tune in and find out why this podcast series is creating one of Stitcher's fastest growing audiences.

Historical Controversies is available online at Mises.org/HCPod, via RSS, and on StitcheriTunes, Google Play, and Soundcloud.



Categories: Current Affairs

Is Behavioral Economics Good Economics?

Fri, 17/11/2017 - 17:00
By: Frank Shostak
labrat.PNG

Recently, a relatively new economics called Behavioral Economics (BE) has started to gain popularity. Its practitioners such as Daniel Kahneman, Vernon Smith, and Richard Thaler were awarded Nobel prizes for their contribution in the field of BE.

The BE framework emerged on account of dissatisfaction with the neo-classical theory regarding consumer choices. A major problem with the neo-classical theory that people presented as if a scale of preferences is hard-wired in their heads. Regardless of anything else, this scale remains the same all the time.

The practitioners of BE hold that this is a very unrealistic case. Hence, to make the mainstream framework more realistic they suggested introducing psychology into economics.

It is held that people’s emotional state is going to influence their decision-making process. Thus, if consumers are becoming more optimistic regarding the future then this is going to be an important message to businesses regarding their investment decisions.

According to BE researchers whether consumers are generally patient or impatient determines whether or not they are inclined to spend or save today. If they are more patient and save more, then this can generate funds for entrepreneurs’ new investment projects.

Behavioral economists emphasize the importance of personality. An emphatic person is regarded more likely to make altruistic choices. Impulsive people are more likely to be impatient and not so good at saving up for their retirement. Venturesome people are more likely to take risks — they will be more likely to gamble (see Michelle Baddeley's Behavioural Economics. A Very Short Introduction).

While the BE criticism of mainstream economics is valid, the question arises whether BE solves the issue of unchanged consumer preferences and presents consumers as real people and not as human machines.

The key here is the definition of what human beings are all about. According to BE, people are not rational in a sense that they are using reason in various decisions. According to BE practitioners, the key driver for consumer choices are emotions. For instance, the Nobel laureate Vernon Smith holds,

People like to believe that good decision making is a consequence of the use of reason, and that any influence that the emotions might have is antithetical to good decisions. What is not appreciated by Mises and others who similarly rely on the primacy of reason in the theory of choice is the constructive role that the emotions play in human action.1

Obviously once the importance of reason is dismissed, what is then left is treating human beings like objects. According to this way of thinking, human action is not navigated by reason but by outside factors that act upon men. By means of a given stimulus, one can then observe various human reactions and draw all sorts of conclusions regarding the world of economics. According to Mises however,

It is impossible to describe any human action if one does not refer to the meaning the actor sees in the stimulus as well as in the end his response is aiming at.2

By rejecting the importance of the human reason, behavioral and experimental economists treat man as another animal. In fact, some of the experimental economists are conducting various experiments on pigeons and rats in order to verify various propositions of mainstream economics.3

Why the introduction of psychology in economics will not make economics more realistic

Psychology is an important element in behavioral and experimental economics on the ground that human action and psychology are inter-related disciplines. However, there is a distinct difference between economics and psychology. Psychology deals with the content of ends and values. Economics, however, starts with the premise that people are pursuing purposeful conduct. It does not deal with the particular content of various ends.

According to Rothbard,

A man's ends may be "egoistic" or "altruistic", "refined" or "vulgar." They may emphasize the enjoyment of "material goods" and comforts, or they may stress the ascetic life. Economics is not concerned with their content, and its laws apply regardless of the nature of these ends.4

Whereas,

Psychology and ethics deal with the content of human ends; they ask, why does the man choose such and such ends, or what ends should men value?5

Therefore, economics deals with any given end and with the formal implications of the fact that men have ends and utilize means to attain these ends. Consequently, economics is a separate discipline from psychology.

By introducing psychology into economics, one obliterates the generality of the theory. This is precisely what psychologist Daniel Kahneman, the Nobel laureate in economics, and his followers are doing.

Through various tests that he has conducted, Kahneman has concluded that people are not always behaving rationally, i.e., in accordance with the premises of mainstream economics. What Kahneman has discovered, however, has nothing to do with whether people are rational or not. It has to do with the flawed premise of popular economics — i.e., that peoples preferences are constant. In short, the proposition that people are like machines that never change their minds.

Contrary to mainstream thinking, the Austrian school of thinking always held that valuations do not exist by themselves regardless of the things to be valued. On this Rothbard wrote, “There can be no valuation without things to be valued.”6

In other words, valuation is the outcome of the mind valuing things. It is a relation between the mind and things.

Now, if preferences are constant then it is possible to compress these preferences into a mathematical formulation, i.e., one can capture people's wishes by means of a formula, so it is held. This is labeled by mainstream economics as a utility function. Curiously, the assumption of constancy is labeled as an important characteristic of rationality by popular economics.

Obviously, people do change their minds, so it is not surprising that Kahneman has "discovered" that real people's behavior systematically deviates from the one of the human machine as depicted by the mainstream economics.7

Rather than dismissing the assumption of constant preferences, Kahneman has retained this assumption and has only modified the mathematical formulation of consumer’s preferences, i.e., the utility function, in order to bring supposedly more realism into the model of mainstream economics. In his highly praised work, Kahneman wrote,

Hence, the derived value (utility) function of an individual does not always reflect "pure" attitudes to money, since it could be affected by additional consequences associated with specific amounts. Such perturbations can readily produce convex regions in the value function for gains and concave regions in the value function for losses. The latter case may be more common since large losses often necessitate changes in lifestyle.8

The Misesian framework of consumer choices

Following Mises’s framework of thinking, we can ascertain the distinguishing characteristic and the meaning of human action. For instance, one can observe that people are engaged in a variety of activities. For instance, they may be performing manual work, driving cars, walking on the street or dining in restaurants. The distinguishing characteristic of these activities is that they are all purposeful.

Furthermore, we can establish the meaning of these activities. Thus, manual work may be a means for some people to earn money, which in turn enables them to achieve various goals like buying food or clothing. Dining in a restaurant can be a means for establishing business relationships. Driving a car may be a means for reaching a particular destination.

In other words, people operate within a framework of ends and means; they use various means to secure ends. We can also, establish from the above that actions are conscious and purposeful.

The knowledge that human action is conscious and purposeful is certain and not tentative. Anyone who tries to object to this in fact contradicts himself for he is engaged in a purposeful and conscious action to argue that human actions are not conscious and purposeful.

Various conclusions that derived from this knowledge of conscious and purposeful action are valid as well, implying that there is no need to subject them to various laboratory tests as is done in the experimental economics. For something that is certain knowledge, there is no requirement for any empirical testing.

Behavioral and experimental economists such as Nobel Laureate Vernon Smith, however, reject the view that human actions are conscious and purposeful. Thus Smith wrote,

He (Mises) wants to claim that human action is consciously purposeful. But this is not a necessary condition for his system. Markets are out there doing their thing whether or not the mainspring of human action involves self-aware deliberative choice. He vastly understates the operation of unconscious mental processes. Most of what we know we do not remember learning, nor is the learning process accessible to our conscious experience—the mind. ... Even important decision problems we face are processed by the brain below conscious accessibility.9

Means-Ends and Consumer Choices

Purposeful action implies that people assess or evaluate various means at their disposal against their ends. Individual ends set the standard for human valuations and, thus, choices. By choosing a particular end an individual also sets a standard of evaluating various means.

For instance, if my end is to provide a good education for my child, then I will explore various educational institutions and will grade them in accordance with my information regarding the quality of education that these institutions are providing. Observe that my standard for grading these institutions is my end, which is to provide my child with a good education.

Or, for instance, if my intention is to buy a car, there are all sorts of cars available in the market, and as such I have to specify to myself the specific ends that the car will help me to achieve. For instance, a factor I may need to consider is whether I plan to drive long distances or just a short distance from my home to the train station and then catch the train. My final end will dictate how I will evaluate various cars. Perhaps, I will conclude that for a short distance a second hand car will do the trick. Since an individual's ends determine his valuations of means and thus his choices, it follows that the same good will be valued differently by the individual as a result of changes in his ends.

At any point in time, people have an abundance of ends that they would like to achieve. What limits the attainment of various ends is the scarcity of means. Hence, once more means become available, a greater number of ends, or goals, can be accommodated — and people's living standards will increase.

Another limitation on attaining various goals is the availability of suitable means. Thus, to quell my thirst in the desert, I require water. Diamonds in my possession will be of no help in this regard.

Observe that the means-end framework is the essence of any human action whether the action is in accordance with what is regarded as rational conduct, or not.

Furthermore, once it is accepted that human actions are conscious and purposeful it will not make much sense to extract preferences in a laboratory, or by means of questionnaires, since only something that is constant can be extracted. Hence, the various results obtained from laboratory tests, or from questionnaires do not advance our understanding of human action as far as economics is concerned, but on the contrary prevents us acquiring any meaningful knowledge.

Conclusions

By casting doubt on the notion that reason is the main faculty that navigates human actions behavioral economics emphasizes the importance of emotions as the key driving factor of human actions.

By means of psychological analysis, the practitioners of behavioral economics have supposedly demonstrated that people’s conduct is irrational.

Consequently, the practitioners of behavioral economics may have unintentionally laid the foundations for the introduction of government controls to "protect" individuals from their own irrational behavior.

For instance, wide fluctuations in financial markets can be attributed to irrational behavior, which can damage the economy. Hence, it will make a lot of sense to restrain this irrationality by a dosage of restraining regulations.

Note that behavioral economics, while criticizing the mainstream economics for not being realistic regarding human choices, treats human beings as automatons.



  • 1. Vernon L. Smith, “ Reflections on Human Action after 50 years,” Cato Journal 19, no.2 (Fall 1999): 200.

  • 2. Ludwig Von Mises, The Ultimate Foundation of Economic Science. See chapter 2.

  • 3. Frances K. McSweeney and Samantha Swindell, “Behavioral Economics and Within-Session Changes in Responding,” Journal of the Experimental Analysis of Behavior 72, no.3 (November,1999): 355–71.

  • 4. Murray N. Rothbard, Man, Economy and State, p. 63.

  • 5. Ibid., p. 63.

  • 6. Murray N. Rothbard, Towards a Reconstruction of Utility and Welfare Economics.

  • 7. Daniel Kahneman and Amos Tversky, “Prospect Theory: An analysis of decision under risk.” Econometrica 47, no. 2 (March, 1979).

  • 8. Ibid.

  • 9. Vernon L. Smith, “ Reflections on Human Action after 50 years,” Cato Journal 19, no. 2 (Fall 1999): 200.


Categories: Current Affairs

Leftist Billionaires Virtue-Signal on Tax Cuts

Fri, 17/11/2017 - 12:00
By: Gary Galles
tom steyer.jpg

As happens every time any sort of tax change that can be demonized as “tax cuts for the rich” is proposed, the Trump administration’s framework for tax reform has been met with “tax me more” virtue signaling. The latest installment I have seen was “I’m a billionaire. Tax me more,” in the October 6 Los Angeles Times. There billionaire Tom Steyer wrote, “As a billionaire, I would profit substantially from the tax cuts proposed…But I am strongly oppose to even one more penny in cuts for rich people and corporations,” because it would “defund the critical public programs on which American families depend.”

Unfortunately, such a signal of virtue is actually a signal of vice. Higher income earners already pay a vastly disproportionate share of the taxes used to fund government programs. Since those far higher taxes aren’t paying for greater benefits, Steyer’s position is essentially once of coerced charity--higher income people should be forced to pay more so that the government can give more to others, who didn’t earn it—and if other rich people don’t volunteer for higher taxes like I do, it is only because they are selfish (though one wonders why those who want something for nothing aren’t considered more selfish).

Because individual rich tax volunteers would pay only a small fraction of the actual cost of the programs they favor, forcing others to pick up almost all the tab, they provide just one more example of how the immense payoffs to taking others’ property through government lead people to torture logic to justify why others deserve your money more than you do, with government merely the necessary mechanism to achieve the required charity. 

However, the coercive charity logic is faulty. Few have made that clearer than F.A. Harper. In Liberty: A Path to Its Recovery, over a half-century ago, he decimated the “charity” excuse for violating liberty.

The right to the product of one’s own labor…is not in conflict with compassion and charity. Leaving these matters to voluntary action, rather than to apply compulsion, is in harmony rather than in conflict with Christian ethics… assistance given voluntarily…is truly charity; that taken from another by force…is not charity at all, in spite of its use for avowed “charitable purposes.” The virtue of compassion and charity cannot be sired by the vice of thievery.

“Political charity” violates the essentials of charity…taken by force from the pockets of others…All told, the process of “political charity” is about as complete a violation of the requisites of charity as can be conceived.

Those who contend that the rights of liberty are in conflict with charity falsely assume that persons generally have a total disregard for the welfare of others… The right to have income and private property means the right to control its disposition and use; it does not mean that the person must consume it all himself.

Nor is compassion so cheap a virtue as to be practiced by the mere distributing of grants of aid taken from the pockets of others…buying groceries and things for certain persons by using other people's money.

When a taxpayer is forced to contribute to “charity” in spite of his judgment of need, he will increasingly shun the sense of responsibility which is requisite to a spirit of compassion…as he more and more accepts the viewpoint: “That is the government’s business!”

Advocacy of these rights of liberty is sometimes called “selfishness.” “Self,” if used in this sense, means…anything which this person considers worthy of help from his income or savings.

If “selfishness” is to be charged against the one who demands the right to that which he has produced, selfishness of a far less virtuous order should also be charged against any non-producer who takes the income and wealth from another against his will.

If control of the disposition and use of income and wealth is to be called “selfishness,” then it is unavoidable that someone act selfishly…The question then becomes: Who should have the right to be selfish, the one who produced it or some other person? Is it selfishness to control the disposition of that which you have produced, but unselfish to control the disposition of that which you have taken?

Review carefully [the] starting assumption that justice and charity and selflessness can best be attained through giving legal or moral sanction to the taking by one person of the product of another’s labor by force.

Liberty is not in conflict with charity. More accurately, charity is possible and can reach large proportions only under liberty; and under liberty, the “need” for it would probably be greatly reduced.

Tom Steyer and other “rich tax volunteers” are no doubt well-intended. However, the virtue they thereby put on public display decoys attention from the necessary vice of violating others’ liberty it involves. While few today recognize it, F.A. Harper saw that gaping hole in arguments for why charity justifies government coercion of others. He demonstrated that government coercion both undermines charity and creates more “need.” Further, involuntary “generosity” threatens liberty:

Liberty…demands acceptance of separate domains within which a person is allowed to make his mistakes, if he does so with what is his…it becomes a prime moral right of a person “to do what I will with mine own” instead of to do what I will with your own.



Categories: Current Affairs

"Economic Development" Is a Corporate Welfare Scheme

Fri, 17/11/2017 - 12:00
By: Nathan Keeble
corrupt.PNG

The Beacon Center, a libertarian think tank based in Nashville, has released a new film highlighting and describing the impact of corporate welfare in Tennessee. Starring University of Tennessee professor Glenn Reynolds, Rigged tells the story of small business owners in Memphis who were harmed by the massive tax breaks which the Shelby County government bestowed upon the furniture giant Ikea for opening a location in the Memphis area. The film has sparked a renewed focus on cronyism across the state.

Just recently, the four largest media firms in the state published the results of a ten month investigation into Tennessee’s subsidy and incentive programs. They found that the volunteer state’s corporate welfare programs amount to $2.5 billion annually. The Times Free Press reports that the Department of Economic and Community Development, whose raison d'être is to dole out state privileges, has increased its spending by 80 percent since Bill Haslam became Governor.

The investigation also lamented the lack of oversight and accountability. The Times Free Press concludes that it is impossible to conclude if these corporate welfare programs have succeeded even on their own metric, creating jobs. Some officials didn’t even have records of the size of their handouts. However, one does not need to have numbers to prove that cronyism is inherently detrimental to an economy.

Why Cronyism is a Fool’s Errand

The main benefit touted by supporters of corporate welfare programs is its ability to create jobs. Proponents maintain that businesses who receive subsidies, tax credits, and other privileges would not be able to profitably locate themselves within their community. The establishment of these business means more and potentially better jobs for workers in their area. These jobs provide incomes for workers and therefore raise their living standards as well. Without corporate welfare programs, proponents maintain that they would likely face unemployment and economic hardship.

The first flaw in this reasoning is the idea that jobs would not be created in the absence of corporate welfare policies. While it is true that businesses may be lured to different areas through these policies, focusing on these immediate and visible results is to ignore the full effects of the policy.

RELATED: "Chamber of Corporatism" by Ryan McMaken

Corporate welfare advocates fail to see the jobs which would have existed in the absence of their programs. The resources which were redirected by the state to these new businesses by subsidies and other privileges would have been used by other businesses to produce other goods. In simpler terms, consumers would have used their money to demand goods that most effectively meet their needs, and entrepreneurs would have used the resources in these communities, including labor, to produce them. After all, one must deny human nature to think that entrepreneurs would not undertake profitable business opportunities.

The above paragraph touches on perhaps the most fundamental flaw in these policies. The benefits of corporate welfare are not determined by consumer choice, but by the political decisions of legislatures and bureaucrats. In a free market where consumers are allowed to freely exchange, profit and loss are naturally determined by how well a business predicts and satisfies consumer needs. Through this crucial mechanism, consumers ensure that resources are being used in the most effective and efficient manner, as nonproductive firms are consumed by losses and productive ones are lavishly rewarded with profit.

In fact, the only reason a business would need a subsidy or tax credit to exist is if it is not capable of adequately meeting consumer needs. Through corporate welfare, government forces resources into inefficient lines of production, allowing failing firms to exist at the expense of consumers. The economy’s production structure becomes distorted, and no longer reflects the real demands of the people. The misallocation of resources cause by the state’s crony policies means that less real wealth is being created than would be in their absence, consumer needs are poorly met, and wealth goes into the hands of those who have not properly earned it.

Once one recognizes this misallocation of resources, any jobs which are supported by corporate welfare are of a temporary nature. Barring any significant changes in economic data, these firms are only sustainable so long as the corporate welfare programs themselves are sustained. As soon as they stop or become otherwise insufficient, the business will fail, and the workers they employed will again find themselves in a period of unemployment. The severity of this transitional period is likely to increase as workers become increasingly specialized in these privileged fields, making it more difficult for them to fit into other industries.1

While undoubtedly a short term pain for those involved, the liquidation of these firms should be viewed as a major long term positive. With the state’s interference gone, resources would once again directed by profit and loss into production structures which more accurately reflect consumer preferences. With corporate welfare gone, less resources would be wasted, and more consumer needs would be met.

A Better Way to Promote Growth

Corporate welfare must come to an end if we want an economy which best fulfills its purpose, improving the lives of the most amount of people. The truth is that good businesses simply do not need the state’s handouts. Only bad ones do. If legislators truly wish to see their community grow and develop, they would be wise to pursue other reforms.

The best path for a legislature to take is to get themselves out of the private sector’s way. Economic growth is slowed, halted, or even reversed when the state taxes, regulates, or otherwise violates private property rights. Removing licensing laws, lowering taxes, and repealing burdensome regulations would all be great choices to accelerate economic development and promote the welfare of local communities. Crucially, these reforms should be as generally applicable as possible to avoid the same harmful and distorting effects of the current corporate welfare programs.




Categories: Current Affairs

Virtue Signaling on Tax Cuts

Fri, 17/11/2017 - 12:00
By: Gary Galles
tom steyer.jpg

As happens every time any sort of tax change that can be demonized as “tax cuts for the rich” is proposed, the Trump administration’s framework for tax reform has been met with “tax me more” virtue signaling. The latest installment I have seen was “I’m a billionaire. Tax me more,” in the October 6 Los Angeles Times. There billionaire Tom Steyer wrote, “As a billionaire, I would profit substantially from the tax cuts proposed…But I am strongly oppose to even one more penny in cuts for rich people and corporations,” because it would “defund the critical public programs on which American families depend.”

Unfortunately, such a signal of virtue is actually a signal of vice. Higher income earners already pay a vastly disproportionate share of the taxes used to fund government programs. Since those far higher taxes aren’t paying for greater benefits, Steyer’s position is essentially once of coerced charity--higher income people should be forced to pay more so that the government can give more to others, who didn’t earn it—and if other rich people don’t volunteer for higher taxes like I do, it is only because they are selfish (though one wonders why those who want something for nothing aren’t considered more selfish).

Because individual rich tax volunteers would pay only a small fraction of the actual cost of the programs they favor, forcing others to pick up almost all the tab, they provide just one more example of how the immense payoffs to taking others’ property through government lead people to torture logic to justify why others deserve your money more than you do, with government merely the necessary mechanism to achieve the required charity. 

However, the coercive charity logic is faulty. Few have made that clearer than F.A. Harper. In Liberty: A Path to Its Recovery, over a half-century ago, he decimated the “charity” excuse for violating liberty.

The right to the product of one’s own labor…is not in conflict with compassion and charity. Leaving these matters to voluntary action, rather than to apply compulsion, is in harmony rather than in conflict with Christian ethics… assistance given voluntarily…is truly charity; that taken from another by force…is not charity at all, in spite of its use for avowed “charitable purposes.” The virtue of compassion and charity cannot be sired by the vice of thievery.

“Political charity” violates the essentials of charity…taken by force from the pockets of others…All told, the process of “political charity” is about as complete a violation of the requisites of charity as can be conceived.

Those who contend that the rights of liberty are in conflict with charity falsely assume that persons generally have a total disregard for the welfare of others… The right to have income and private property means the right to control its disposition and use; it does not mean that the person must consume it all himself.

Nor is compassion so cheap a virtue as to be practiced by the mere distributing of grants of aid taken from the pockets of others…buying groceries and things for certain persons by using other people's money.

When a taxpayer is forced to contribute to “charity” in spite of his judgment of need, he will increasingly shun the sense of responsibility which is requisite to a spirit of compassion…as he more and more accepts the viewpoint: “That is the government’s business!”

Advocacy of these rights of liberty is sometimes called “selfishness.” “Self,” if used in this sense, means…anything which this person considers worthy of help from his income or savings.

If “selfishness” is to be charged against the one who demands the right to that which he has produced, selfishness of a far less virtuous order should also be charged against any non-producer who takes the income and wealth from another against his will.

If control of the disposition and use of income and wealth is to be called “selfishness,” then it is unavoidable that someone act selfishly…The question then becomes: Who should have the right to be selfish, the one who produced it or some other person? Is it selfishness to control the disposition of that which you have produced, but unselfish to control the disposition of that which you have taken?

Review carefully [the] starting assumption that justice and charity and selflessness can best be attained through giving legal or moral sanction to the taking by one person of the product of another’s labor by force.

Liberty is not in conflict with charity. More accurately, charity is possible and can reach large proportions only under liberty; and under liberty, the “need” for it would probably be greatly reduced.

Tom Steyer and other “rich tax volunteers” are no doubt well-intended. However, the virtue they thereby put on public display decoys attention from the necessary vice of violating others’ liberty it involves. While few today recognize it, F.A. Harper saw that gaping hole in arguments for why charity justifies government coercion of others. He demonstrated that government coercion both undermines charity and creates more “need.” Further, involuntary “generosity” threatens liberty:

Liberty…demands acceptance of separate domains within which a person is allowed to make his mistakes, if he does so with what is his…it becomes a prime moral right of a person “to do what I will with mine own” instead of to do what I will with your own.



Categories: Current Affairs

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