Moving

I've decided to move this blog and simultaneously to rename it. Find the new blog here:

http://newgoldstandard.wordpress.com/

The Antiregulation Case

My article "The Antiregulation Case" is one of today's Mises dailies.

"The Deepwater Horizon crisis has sparked the next battle in the never-ending war of ideas between the proponents of government intervention and the defenders of laissez-faire. The tactics in this battle are familiar, the trenches well-established, and the troops well-drilled. The whole scene invokes a sense of déjà vu. The last major battle is still continuing, though it started years ago with the realization that the grand financial edifice built upon years of cheap credit was falling to pieces.

In this continuing tradition, the proponents of government regulation and intervention have put forth many comparisons between the financial collapse and the Deepwater Horizon crisis.[1] The problems they see were identical in each case — large, profit-seeking corporations, in the absence of regulations, made risky decisions that then resulted in harm to others. Their solution is simply to regulate these companies. . .

Read the rest here.

Deficit Spending: The Many Wrongs of Robert Reich Pt. 2

Now focusing on Robert Reich's failure to realize that large government deficits hurt rather than help the economy (2).

According to Mr. Reich, the "1.5 dip" recession "should cause deficit hawks to stop squawking about future debt" and "Herbert Hoover's ghost seems to have captured the nation's capital. We're back to 1932 (or 1937) and the prevailing sentiment is government can't and mustn't do anything but aim to reduce the deficit, even though the economy is going down."

First of all, Mr. Reich is being rather economical with the truth about Herbert Hoover. He is implying Hoover Hoover wanted balanced budgets instead of "fiscal stimulus." Hoover, contrary to the myths, did not believe in laissez-faire, free markets, or the "liquidationist" proposals for recovering from economic crises. He never believed in any of these, not before he was president, not in the beginning of his presidency, and not at the end of his presidency.

Herbert Hoover ran the largest peacetime deficits of any president who came before him. He explicitly repudiated all of the laissez-faire and "liquidationist" proposals for economic recovery. He embarked on a massive scheme of government intervention to hold up wages, keep employment up, to use the government to "fix" the market.

To quote Hoover in 1932: "We might have done nothing. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic . . . Some of the reactionary economists urged that we should allow the liquidation to take its course until we had found bottom . . . We determined that we would not follow the advice of the bitter-end liquidationists."

FDR is usually credited with coming after the "laissez-faire liquidationist Hoover" and "fixing" his lack of intervention in the economy with his New Deal. In fact, FDR's platform in running against Hoover consisted of reining in government spending, deficits, and intervention. The "New Deal" was a creation of Herbert Hoover, and we never had a great depression like the Great Depression until we had the Hoover "New Deal" and the FDR New Deal.

We can, in fact, say that the government is currently channeling the ghost of Herbert Hoover. Just take a look at a graph of the federal deficit. Hoover's deficits, the highest peacetime deficits in history then, barely show up when this graph has to show the deficits of the Bush and Obama administrations. Obama is channeling Hoover 700-times over with his "New Deal" type policies. (For a more extensive historical analysis of Hoover's "New Deal," see the third part of Murray Rothbard's America's Great Depression, available free).

The assumption in Mr. Reich's indictment of the deficit hawks is that government deficits directly help economy recovery, while reducing the deficit harms economic recovery. Many people hold this view and therefore see the issue as a trade off between the economic benefits of a better economy and the economic damages done by increasingly large government debts.

In reality, there is no such trade off. Government deficits are unequivocally damaging to economic recovery in every way possible. The attempt to justify the opposing view springs from the faulty notion that reductions in consumer spending are necessarily bad for the economy. Therefore, as this "economic depression as lack of aggregate demand" theory goes, to "support" the economy the government has to make up for any reduction in consumer spending.

This fallacy is based off of the focus placed on a single, simple tautology: that the total amount of money income is equal to the total amount of money spent. All "consumptionist" fallacies come from the use of this tautology, which obviously must be true in monetary or nominal terms, and by trying to ascribe to this fact a significance which it does not have. A fall in consumption expenditures in monetary terms does not mean that real income will necessarily fall, or that any real aspect of the economy will fall.

That total consumption is falling is totally irrelevant to the proper working of the economy, and merely indicates either a shift to more saving and investment or a demand for higher cash balances, neither of which is harmful. In fact, if people on the market are actively demanding more investment or higher cash balances, any attempt to prop up consumption spending prevents adjustment to these changed conditions and draws out the discoordinated period of time, extending the length of the economic depression.

In fact, to the consmptionist, a fall in income that results from a fall in consumption supposedly leads to further drops in consumption, resulting in a vicious cycle from which the economy cannot recover unless the government intervenes to either prop up spending or prevent monetary income from falling. This view, of course, does not explain how civilization could have possibly developed before the coming of Hoover, FDR, and Keynes and the support for massive government deficits to "stimulate" the economy.

What deficit spending does accomplish is a three-fold distortion of the economy, and therefore a three-fold compounding of the economic problems facing a depressed economy. The first distortion is the spending of the government itself. Every penny the government spends affects prices and production on the economy in a manner inconsistent with the ultimate demands of market participants. Since economic recovery can only occur when prices and production are coordinated and aligned with the demands of market participants, government spending is a retardant to economic recovery and growth.

The second distortion accomplished by governmental deficit spending is the eventual appropriation of taxes to pay for the increased level of spending. At some point, every penny the government spends has to either come from taxes or inflation (inflation will be discussed in part 4). Taxes distort the economy by taking income from certain individuals in the economy and thereby adversely affecting their consumption and production plans, adding uncertainty to people's present day actions and thereby dampening the kinds of activities essential to rehabilitating economic activity.

The last distortion is the effect on the interest rate caused by government borrowing. When the government enters the loan markets, it has a completely unfair advantage. It is the only entity in the economy with a guaranteed source of revenue, and therefore it can easily attract lenders. It can also offer whatever interest rates it wants to because it has this unchecked potential for raising future revenue (even if it has to inflate to get this revenue).

This position in the economy causes the government to attract the savings in the economy, diverting them from use in actually useful, valued investment projects. This is particularly damaging in a depression because the causes of an economic depression stem from a lack of savings in the economy to complete lengthy and capital-intensive projects in the economy. The usual response after an economic crisis hits is for people to save more, thereby relieving some of the pressure on the shaky investment projects. Deficit spending simply adds to the pressure.

With no upside to governmental deficit spending and a host of difficult problems that result from it, the fact that the deficit is higher than it ever has been is cause for alarm, and more importantly, a change in policy. Let us kick out the ghosts of Hoover and FDR and return to a policy based on the reality of economics, that associated with Andrew Mellon and the liquidationist, laissez-faire proposals for economic recovery.

The Many Wrongs of Robert Reich

Today's target: Robert Reich, and his article "We're in a One-and-a-Half Dip Recession." The absurdity of the title immediately caught my eye (I'd like to see a graph with one-and-a-half minimum points), as I sorted through the Huffington Post's daily articles looking for a true gem of ignorance--a task they make quite easy. Surely Mr. Reich has some reasoning for naming this a "one-and-a-half-dip" recession rather than simply a "double dip" recession, but if he does he fails to share it with the reader.

This is trivial, however, when compared with the actual body of the article. Mr. Reich's main contention is that "The 1.5 dip recession should cause the president to demand a large-scale national jobs program including a new WPA that gets millions of Americans back to work even if government has to pay their wages directly," this, and his general "government must do something!" attitude.

Unemployment is obviously bad, so we could hardly fail to expect someone, some simpleton, ignorant of all cause and consequence, to propose that the government should do anything and everything possible to get rid of it. Indeed, Mr. Reich characterizes opponents to his plans for society as being concerned not with the economy, not with the unemployed, and not with real people, but with supposedly meaningless budget figures and deficit numbers.

The many wrongs of Mr. Reich include his failure to realize that (1) massive government employment projects do not help with the problem of unemployment or with the underlying problems in the economy; (2) his failure to realize that large government deficits hurt rather than help the economy; (3) his failure to realize that unemployment benefits do not help by providing "fiscal stimulus"; (4) and his failure to realize that having the Fed print more money and throw it in the economy distorts, destroys, and sets back the economy.

Analysis time: (1) The root of the unemployment problem is discoordination in the labor markets: the supply of labor exceeds the demand for labor at current wage-rates. With sudden change in market conditions, such as the onset of an economic crisis, the labor-requirements of different industries and of different firms within industries suddenly change, requiring that workers move from industries where they are less urgently needed to those where they are more urgently needed. Industries whose consumer demand fall are rendered less profitable, and they correspondingly cut down on production and the amount of labor they employ. Other industries have increased consumer demands and a concomitant increase in profitability, encouraging them to increase production and their employment of labor.

The objection that a "general fall in consumption" makes all industry unprofitable and therefore drives employment in all industries down is untenable because it ignores the relevance of changes in prices in determining profit and loss. If a firm invests $100 in a production process to make 10 widgets, but can only get $8 for each widget, thereby making its revenue $80, or $20 less than its expenses, a superficial analysis will declare that this widget-making firm suffered losses. In reality, the purchasing power of the monetary unit, as determined by general changes in prices, has to be taken into account. If in this same example the purchasing power of the dollar rose by 30% over the firm's period of production, then the firm has made a "real" profit, even if it looks like a nominal loss. Math: ($80)(130%)=$104 which is greater than $100, which is a profit (abstracting from originary interest which is beyond the scope of this article).

If consumption on all goods falls because of a general increase in people's demand for money to increase their cash balances (usually denigrated as "hoarding"), then the purchasing power of money rises, all other things equal. Consumption at some level has to continue to occur regardless of how bad the economic crisis is, and therefore even with a potential reduction in nominal revenue across all sectors of the economy and all firms, the phenomenon of real entrepreneurial profits always persists, as adaption to the changing balance of consumer demand between different goods and services continues.

However, if prices are falling across the board, then all prices have to follow suit. Especially important is the price of labor, or wage-rates in the economy. As has already been pointed out, the problem of unemployment is that supply and demand for a particular labor service are unequal at the current wage-rate. The solution is obviously that the current wage-rate is not correct and has to be lowered for employing the unemployed to become profitable. That wage-rates fall in nominal terms, however, does not necessarily mean that those workers are poorer as a result, because as we have already seen, the purchasing power of money is rising/prices for consumption goods are falling, leaving real wage-rates generally intact.

Government work or unemployment projects that take unemployed workers and give them artificial employment at the expense of taxpayers, either present or future (through deficit spending), do not relieve any of the problems of unemployment. Au contraire, they actively prevent labor from moving from unprofitable uses to profitable uses by stratifying workers in newly made unprofitable uses. The senselessness!

It also cannot be argued that these government projects help relieve the suffering of the unemployed during the recovery or transitional period while the economy "recovers." The assumption is that these unemployed people can simply not find any work at all. The ludicrousness of this assumption is clear if we just think of who would not employ several dozen unemployed workers if these workers were willing to work for just one cent per hour. Obviously, if every unemployed person in the market were willing to work for such a low wage, there would be no unemployment left. Unemployment is almost always simply a sign that wages need to fall, at least in nominal terms. And unemployment is always voluntary in that a person remains unemployed because they do not like the types of jobs offered or the wages they pay.

The economy does not "recover" until economic resources have been returned to their most profitable uses (a process that never stops, hence the consistent phenomenon of entrepreneurial profits. Yet, during an economic depression, factors of production such as labor are particularly maladjusted to reality). If the government make-work programs are implemented, economic recovery can never occur because the labor diverted into these projects is not in its most highly valued uses as determined by market conditions! You can't just employ people in artificial projects until the economy recovers for this reason, the government merely creates permanent economic depression that will only end when the artificial projects end, and then the problems of maladjustment still have to be corrected by transitions of factors of production (mostly labor) away from the artificial make-work project and into actually useful jobs.

And of course, this is all without even mentioning the negative effects of taxation or deficit spending required to fund these projects.

Next post, we'll move on to the issue of deficit spending.

Educate Thyself in Economics

The following is a passage from Ludwig von Mises' book Bureaucracy:

The most detrimental outcome of the average citizen’s repugnance to a serious concern with economic problems is his readiness to back a program of compromise. He looks upon the conflict between capitalism and socialism as if it were a quarrel between two groups—labor and capital—each of which claims for itself the whole of the matter at issue. As he himself is not prepared to appraise the merits of the arguments advanced by each of the parties, he thinks it would be a fair solution to end the dispute by an amicable arrangement: each claimant should have a part of his claim. Thus the program of government interference with business acquired its prestige. There should be neither full capitalism nor full socialism, but something in between, a middle way. This third system, assert its supporters, should be capitalism regulated and regimented by government interference with business. But this government intervention should not amount to full government control of all economic activities; it should be limited to the elimination of some especially objectionable excrescences of capitalism without suppressing the activities of the entrepreneur altogether. Thus a social order will result which is allegedly as far from full capitalism as it is from pure socialism, and while retaining the advantages inherent in each of these two systems will avoid their disadvantages. Almost all those who do not unconditionally advocate full socialism support this system of interventionism today and all governments which are not outright and frankly pro-socialist have espoused a policy of economic interventionism. There are nowadays very few who oppose any kind of government interference with prices, wage rates, interest rates, and profits and are not afraid to contend that they consider capitalism and free enterprise the only workable system, beneficial to the whole of society and to all its members.

Yet, the reasoning of the advocates of this middle solution is entirely fallacious. The conflict between socialism and capitalism is not a struggle between two parties for a greater share in the social dividend. To see the matter this way is tantamount to a full acceptance of the tenets of the Marxians and the other socialists. The adversaries of socialism deny that any class or group would fare better under socialism than under outright capitalism. They contest the thesis that the workers would be better off in a socialist commonwealth and are, consequently, wronged by the very existence of the capitalist system. They do not recommend capitalism for the sake of selfish interests of the entrepreneurs and capitalists but for the sake of all members of society. The great historical conflict concerning the problem of society’s economic organization cannot be dealt with like a quarrel between two businessmen concerning an amount of money; it cannot be solved by splitting the difference.

Economic interventionism is a self-defeating policy. The individual measures that it applies do not achieve the results sought. They bring about a state of affairs, which—from the viewpoint of its advocates themselves—is much more undesirable than the previous state they intended to alter. Unemployment of a great part of those ready to earn wages, prolonged year after year, monopoly, economic crisis, general restriction of the productivity of economic effort, economic nationalism, and war are the inescapable consequences of government interference with business as recommended by the supporters of the third solution. All those evils for which the socialists blame capitalism are precisely the product of this unfortunate, allegedly “progressive” policy. The catastrophic events which are grist for the mills of the radical socialists are the outcome of the ideas of those who say: “I am not against capitalism, but . . .” Such people are virtually nothing but pacemakers of socialization and thorough bureaucratization. Their ignorance begets disaster.

Division of labor and specialization are essential features of civilization. But for them both material prosperity and intellectual progress would be impossible. The existence of an integrated group of scientists, scholars, and research workers is an outcome of the division of labor just as is the existence of any other class of specialists. The man who specializes in economics is a specialist like all other specialists. The further advancement of economic science will in the future also be an achievement of men devoting all their endeavors to this task.

But it would be a fateful error for the citizens to leave concern with economic studies to the professionals as their exclusive domain. As the main issues of present-day politics are essentially economic, such a resignation would amount to a complete abdication of the citizens for the benefit of the professionals. If the voters or the members of a parliament are faced with the problems raised by a bill concerning the prevention of cattle diseases or the construction of an office building, they may leave the discussion of the details to the experts. Such veterinarian and engineering problems do not interfere with the fundamentals of social and political life. They are important but not primary and vital. But if not only the masses but even the greater part of their elected representatives declare: “These monetary problems can only be comprehended by specialists; we do not have the inclination to study them; in this matter we must trust the experts,” they are virtually renouncing their sovereignty to the professionals. It does not matter whether or not they formally delegate their powers to legislate or not. At any rate the specialists outstrip them. The bureaucrats carry on.

Crossing the Line

It is entirely appropriate for BP to be held responsible for the damages it has caused in the wake of the Deepwater Horizon accident and to ask that they pay for those damages. Covering the cost of the cleanup effort along with compensating those who have directly lost their livelihoods is to be expected. However, there are plenty of things that BP is not responsible for and should not be held accountable for: and when they are in fact called on to pay for something that they did not cause, a line has been crossed.

The Obama administration has just claimed that BP will have to pay the salaries of all oil-industry workers laid off because of the federal moratorium on deepwater drilling. That's right, because the government has decided to prevent oil companies from operating as they wish, BP must pay the resulting damages. "Several legal experts said they couldn't think of any law or precedent that would allow the U.S. to try to recover damages from BP on behalf of rig workers thrown out of work by a government moratorium on deep offshore drilling," (from above article) and that's no small wonder: most laws are designed to hold the guilty accountable for their actions, not to hold the innocent accountable for the actions of the guilty. That is the essence of law, and that is precisely what is now being openly discarded by the current administration, which chooses to make others responsible for their damaging decisions.

The Broken Window Fallacy --Video

Disastrous Economic Fallacies --Terror as Stimulus?

This is a link to a very short video (courtesy of the Atlas Institute) that illustrates a point that shouldn't take very long to explain in the first place, and yet one that even Nobel Prize-winning economists like Paul Krugman cannot understand: namely, why the broken window fallacy is in fact a fallacy, or in other words, why destruction is not good for the economy (yes, this point is disputed by some, watch the video).

A Letter I Wrote to David Brooks

David Brooks recently wrote an op-ed in the New York Times entitled "The Return of Histroy," in which he argues that economics is, today, fundamentally flawed in its scientistic methodology (that of constructing abstract models that heavily rely on mathematics and believe themselves to be based on empirical evidence). However, his prediction for the future of economics is that economics will hopelessly fail as a science at all, and will become an "art." So I decided to write him this letter, explaining why both the method of "scientism" and simply dropping all scientific technique are both flawed. Here's that letter:


Dear Sir,

In reading your article "The Return of History," I have reason to believe that you are currently unaware of a glaring answer to your question about the future of economics. This answer I refer to is not a victim to the pitfalls of scientism that you mention in economics, namely the fallacy of analyzing "economic man," or the perfectly rational, calculating, utility-maximizing individual. There is an entire economic school of thought that not only recognized all of these errors, but also corrected the foundations of economics, proposing a sound basis for economics: that of the concept of human action. This school of thought also has predicted the Great Depression, the stagflation of the 70's, and other economic crises including the current one. This school of economic thought is the Austrian School.

In the analysis of the Austrian school, economics consists of the study of the fact that human beings have to make choices between various ends. In doing this, it is free from the failure of many economists to recognize that things like love, friendship, and having children are not "uneconomic," but simply choices that people make. People, when making decisions, compare all possible ends that they may desire on one scale of valuations. Choosing to have a child given the cost is not "irrational" to the person making the decision, and it is an error to say that the actor in this case is behaving irrationally, because the purpose of economic analysis is to analyze how people act, not how the economist thinks people should act. In other words, value is subjective.

Because Austrian economics starts with an objective analysis of human action, it does not fall into the hole of thinking that econometric and empirical studies of past data from the marketplace can either prove or disprove an economic theory, on the grounds that the data of the marketplace is a result of specific value judgments held by market participants at a previous point in time. Economics as a science has to look for universally valid laws and, fundamentally, causal relations between variables, and correlation (think: econometrics) does not imply causation. Using reason and the the principle of human action, real economic claims can be derived, not mere models that describe past market performance perfectly, but which fail when it comes to predicting what will come to pass.

Furthermore, psychology and economics are two entirely separate things: economics in the Austrian view studying the results of human action given their individual valuations and preferences, while psychology studies where those individual valuations come from, and currently psychology cannot make definite, universally valid statements about how a specific circumstance can cause all people, at all times, anywhere to make the same choice given their surroundings. Thus, a methodological dualism exists between these two fields, and psychology is not an aid to economics.

It might also be tempting to dismiss the idea of the ability to deduce universally valid laws about human action that would be applicable in any way to the real world. However, the proof that this is indeed possible is present in the results of Austrian economics, whose theories properly explain everything from the basic functioning of markets to the business cycle. Ludwig von Mises' book Human Action is the deduction of all of economics not from empirical studies, but from axioms and basic, realistic assumptions that hold in our economies (such as the valuation placed on leisure time, or the use of money).

With a proper methodology in place, Austrian economics is neither scientism nor an art: universal laws and principles can exist but not be quantifiable and testable. The future of economics relies, one could only hope, on the adoption of the proper, logical basis for the field of study. It would not be the end of the "development" of economics if all attempts at objective laws and causal relations were dropped in favor of an "art of economic." You mentioned F.A. Hayek in your article, and Russ Roberts, but please look more into Austrian economics, not merely for your sake but for the sake of your readers and the future of economics. And besides Human Action, which I recommend everyone to read, you would find another of his works, Epistemological Problems of Economics, interesting in that he defends the basis of Austrian economics in contrast to the competing schools.

Hoping that you have given this some thought,

Eric Perkerson

Theory and Empiricism

It is all too common a trait to attempt to dismiss an economic claim on the grounds that the economic claim in question applies “only in theory,” and not in the real world. It is argued that economics makes an array of assumptions which are fantastically impossible, and therefore, in spite of what may be sound reasoning from those premises, has no relation to the events of the real world. And to be fair, this is true of some schools of economics, such as the neoclassical school, with models assuming perfect competition, perfect information, and whatnot.

However, Austrian economics makes no such otherworldly assumptions: economics is treated as a subset of praxeology in the Austrian school, and is therefore based on the action axiom, or the simple fact that people act with certain goals in mind. That is a statement that cannot simply be dismissed as not applying to the real world. There are a few auxiliary postulates, but these merely guide the progression of economics; and are likewise real features of the world, such as the fact that leisure is one of the things that people value. The otherworldly assumptions of the neoclassical school have no equivalent in Austrian economic theory, which indeed focuses on the aspects of the real world such as a lack of perfect information that the neoclassicals assume away.

The crucial point here is that, if the reasoning from these premises is sound, then if what they assume is true, then so is the theory. To quote Ludwig von Mises, “All the propositions established by the universal theory hold to the extent that the conditions that they presuppose and precisely delimit are given. Where these conditions are present, the propositions hold without exception.” This is unquestionable: to question it would be to question reasoning itself, an endeavor for which there can be no recourse. A sound theory of money, for example, is descriptive of the real world if the real world economy being analyzed uses something seen as money according to the theory.

What is often proposed as being an alternative to theory is empiricism, where one attempts to “test” economic theories in the “real world” to either falsify or verify them, with no recourse to the theories themselves. It is posited that if a theory cannot be falsified, it cannot be considered true, or descriptive of reality, and that theories can be demonstrated to be false using empirical evidence. This is the most brought up criticism of Austrian economics by both academic economists and by the public in general, if they are aware of Austrian economics at all, that is.

However, this criticism is entirely based upon long-standing myths in economic thinking. In reality, it is impossible to verify or refute an economic theory on the basis of empirical evidence. An economic theory describes how an economy works, and the process by which anything functions does so because there are certain causal relations that exist. However, by looking at empirical data, there is no way to determine causation in a complex system such as society. This leads us to the first reason why it is impossible to test theories in economics: there is no way to conduct a controlled experiment in a complex system where no variables can be controlled. A change in one variable can never be shown empirically to result in a change in another variable.

The second reason why it is impossible to test economic theories is because the fundamental data at the base of the economic system have no basic constant relations between one another. For example, no one would ever propose that a rise in the price of potatoes of 50% will always and everywhere result in a decrease in the quantity demanded of potatoes by 50%. In physics and chemistry, such constant relations do exist and experimentation is the method by which they are determined. In economics, the personal values of individual people determine such things as the demand for potatoes, and these personal values are arbitrary, subjective, and changing. No one would ever stop and think that a certain condition will cause for all people and at all times the exact same response in everyone. People react different to the same conditions.

Knowledge of these important facts about the foundation of economic science, the Austrian school of economics does not attempt to make quantitative predictions about economic variables, but instead tries to describe how the economy works in general, i.e. at all times and for all places and people. A remarkable body of thought has then been developed from simple, axiomatic propositions, and the best evidence for this is in the great economic treatise by Ludwig von Mises Human Action. It should now be evident that the most fundamental assumption of most people on economics, that economic ideas and theories need to be proven with empirical evidence, has no basis and is impossible to comply with. Instead, a logical, or apriori, method is the only method suitable.

An Open Letter to President Obama

Don Boudreaux, posting on the blog CafeHayek, wrote this earlier today:


An Open Letter to President Obama

by Don Boudreaux on March 8, 2010

in Health, Prices, Reality Is Not Optional, Seen and Unseen

8 March 2010

Mr. Barack Obama
President, Executive Branch
United States Government
1600 Pennsylvania Ave., NW
Washington, DC 20500

Dear Mr. Obama:

CBS radio news this morning ran a clip of one of your recent speeches. In it, you criticize insurance companies because they “ration coverage … according to who can pay and who can’t.”

My first thought was “not exactly; coverage is rationed according to who pays and who doesn’t.” Ability to pay isn’t the same thing as actually paying, and what insurers care about is the latter. Many folks – especially young adults – have the ability to pay but choose not to do so. They get no coverage.

But further pondering of your point leads me to look beyond such nit-picking to see fascinating possibilities. Not only insurers, but all producers who greedily refuse to supply persons who don’t pay should be set aright. Now I’m sure that you don’t ration the supply of the books you write according to any criteria as sordid as requiring people actually to pay for them. But our society is full of people less enlightened than you.

For example, the typical worker rations his labor services according to who pays and who doesn’t. That must stop. Oh, and supermarkets! Every single one rations groceries according to who pays. Likewise with restaurants, clothing stores, home-builders, furniture makers, even lawyers! You name it, rationing is done according to who pays. Indeed, my own county government has been corrupted by this greedy attitude: if I don’t pay my taxes, the sheriff takes my house – effectively booting me out of the county merely because I didn’t pay for its services.

Preposterous!

I look forward to your changing this selfish and unfair system of rationing that for too long now has kept Americans impoverished.

Sincerely,
Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA 22030

Response on Praxeology

I was just recently given this critique of praxeology, to which I wrote a response.

Here is the critique:

"Praxeology is founded on the premise that "humans act," & by "act," they exert their will with the intent to accomplish goals. Because this is taken as axiomatic - that is, because this proposition is taken as an independent, stand-alone, self-evident truth - by the Austrian school, it is argued that a whole system of thought can be derived from this axiom purely through deductive means, akin to any given branch of pure mathematics.

The problem is though, that this "axiom" is anything but self-evident. Many cognitive scientists believe that the will, intent, & goals are just illusions pre-fabricated by our brains, & indeed, Praxeology just assumes outright that we have free will. Now, whether or not those cognitive scientists are correct is beside the point - the fact that it's even *possible* that the action axiom is wrong means that if it's true, it's an *empirical* fact, not an axiomatic one. As such, Praxeological methodology is rendered invalid, & thus the study of human action, as well as of economics in general, must be conducted through largely inductive (empirical) means, like any other science.

Now, there's another angle to this, namely, Goedel's Incompleteness Theorem. The Incompleteness Theorem states that in any axiomatic system, there are always going to be true conclusions relevant to said system which can't be derived from the axiom(s). This means that Praxeology is subject to the Incompleteness Theorem. In other words, if the proposition that humans act is an axiom, then not everything which is true about human action can be derived from Praxeology; if, however, the proposition that humans act is an empirical fact, then everything which is true about human action can be inferred as an implication of said fact.

Not only does that mean that an empirical "Praxeology" would be more complete than an *a priori* one, but an *a priori* Praxeology is squarely at odds with reality, as it leads to the conclusion that not every implication of the proposition that humans act is really an implication thereof. And this isn't a flaw that can be contained to whatever conclusions that Praxeology can't reach, e

ither, for if one methodology leads to a partially accurate but false result, & another, radically different, methodology, leads to a true result, then it can be concluded that there is a rather profound flaw in the former methodology that casts a shadow on the whole enterprise.

To put it another way, conceiving of human action as axiomatic (assuming that from it you can derive all of its implications) leads to the conclusion that the action axiom cannot predict all of its own implications, & indeed, that only a radically different methodology *can,* so Praxeology is thoroughly self-refuting.

So there you go, two logical proofs that Praxeology is bunk."



Here is my response:


In response, I would first point out that in no way does praxeology assume "free will." Where our perceived goals and motivations come from is not the realm of inquiry of praxeology and is unrelated to the conclusions based on praxeologic methods. It does not matter if our will is an illusion, because praxeology studies only the results of what happens when and if people do act. The impetus to action is a different area of study. The criticism that "praxeology is actually empirically based" can apply equally to pure mathematics in this sense, because mathematics assumes such things as numbers into existence. One can argue equally well that this assumption is not "axiomatic," but that is simply pointless semantics. Wherever the idea comes from, it cannot simply be refuted in the world we live in, regardless of whether it might not be true in all conceivable universes.

Secondly, praxeology and economics by no means strictly limit themselves only to those things which can be deduced directly from the action axiom: there are many auxiliary postulates and assumptions involved. For example, we could study praxeology without the assumption that human beings value leisure time to some extent, but that would largely make such study useless. This assumption gives us all of the information we have on how labor is relevant to our economy. Goedel's Incompleteness Theorem certainly holds true: this is not in dispute, but it is irrelevant because so-called "praxeological economics" as practiced by the Austrian School is not "purely" axiomatic. It is simply based in an axiomatic framework. There is not some huge debate between defenders of "apriori praxeology" and "empirical praxeology" as holistic systems, as far as I'm aware, because no one simply defends a pure "apriori praxeology" as being the end of all praxeological study. The "empirical" assumptions give most of the breadth of praxeology qua economics, and that is recognized widely, I believe, by those calling themselves "praxeologists." The crucial point is that the auxiliary assumptions involved treated appropriately within the axiomoatic framework provided by the action axiom. Some are held loosely because they apply to our day and age and some are so universal to be considered universal truths in and of themselves, such as the proposition that human beings value leisure to some extent (which can be demonstrated through biology, for instance).

And all of this is not to say that "praxeology is bunk": all of the various implications of an axiom must be true, even if there are other things existing in our reality which are not direct implications of that particular axiom. Simply because one thing is incapable of explaining everything does not mean that the things it does explain are false. And Austrian economics does not limit itself to "pure," axiomatic praxeology. Murray Rothbard, the defender of "extreme apriorism," to use his own term, writes in a footnote of the first chapter of his Man, Economy, and State, that only the first chapter is solely derived from the implications of the action axiom: the remainder of the 1500 page book is dedicated to studying the implications of the subsidiary assumptions that give meaning to the study of economics.

The crucial point is that this is done within an axiomatic framework, and the "empirical" subsidiary assumptions work together with the action axiom instead of against it. They are not "empirical" in the loose sense of the word which is usually used (for example, Okun's "Law" is empirical in the loose sense, yet is entirely unacceptable from the praxeological methodology), and they are constructed in such a way that they apply universally. Okun's "Law" is empirically supported in a way, but it is much more unstable given changes in the day and time and lacks any real sort of "universality" unlike the proposition that people value leisure to some degree. One proposition here is fundamental (leisure) and one is not (Okun's "Law"), and seeing both as "empirical" without distinction is missing the point.

Small Business and Jobs

Whether it is tax credits to small businesses or some other kind of special privilege that is being extended to them, the focus on “small” business in many economic circles, particularly with speaking of jobs, is huge. If you were to listen to President Obama, you might get the impression that it is only the small businesses that create jobs, while big businesses simply create all of the problems. Legislation is then focused around this belief, which typically gives large benefits to small businesses, while, conversely, large businesses are burdened with heavy regulations and interventions in their operation.

What are the effects of this legislation? Well, the impact on small businesses is to give them a competitive boost and an economic advantage in the marketplace, and the impact on larger businesses is to slow them down, add costs to whatever they try to do, and often to prevent them doing something that they want to do. Both of these effects of the legislation self-fulfill its assumptions. When small businesses are given a governmental helping-hand, it makes them more likely to be hiring new workers and thus creating jobs; when big businesses are punished with heavy regulation, it makes them weaker and prevents them from wanting to take on new risks that would create jobs.

Furthermore, though the effects of this legislation do create jobs if overall they are lessening the overall burden on businesses and hiring practices, often the other burdens that the government puts on other sectors of the economy such as big business stop employment from bouncing back to where it would have been in the absence of increased regulation and intervention. The government cannot claim that it has created jobs by just pointing to the ones they think they created while ignoring the incalculable costs in terms of jobs that they may have also created in the same process.

Moreover, the focus on jobs in “small” business can also be damaging, because it is quite possible (and indeed, is usually the case) that large businesses have the funds and the projects that warrant increasing the amount of labor they use. Small businesses, particularly in turbulent times, do not have this advantage and are not ideal for hiring new workers. Furthermore, they are more likely to fail or collapse, destroying any jobs that they may have been supporting. Big businesses are in general much more stable than smaller businesses.

The most egregious claims are, however, that jobs are somehow things that are in scarce supply that have to be hacked out of existence by some organization, usually claimed by those in the government to be the government itself. This is an absurdity. A job is simply a transaction of labor; the only thing that is scarce is the labor itself. Unemployment, or a “lack of jobs” is nothing more than a distortion, manipulation, or period of transition in the fundamental economic conditions which result in people selling their labor in exchange for a wage, and concomitantly, businesses buying labor for a price. The only thing necessary is to let hiring conditions change to how they need to change and unemployment will quickly vanish, as it is beneficial to no one for there to be unemployment in the economy.

The fundamental thing that needs to change in order for there to be full employment is for the price of labor, or wages, to be as flexible as possible. This is something that most people reject, for one reason or another. Labor unions, minimum wage laws, and regulations concerning hiring and firing practices all serve to make wages and the labor market inflexible, which means that when there is a sudden economic change, unemployment or disequilibrium emerges. Allowing a free market in the labor market is the only conceivable way to ensure full employment in any realistic way. Otherwise, there is no force to equilibrate the forces of supply and demand. Having the government decide to employ everyone who doesn’t have a job does not fix the problem, but arbitrarily and decisively does the exact opposite by permanently preventing labor from going to those lines of economic production where it is most needed.

Economics in One Lesson

This short book, written by Henry Hazlitt, is one of the most concise yet easily comprehensible introduction to sound economics ever written. Hazlitt has the ability to take a commonly accepted idea and then to prompt the reader to think about that accepted idea, eventually showing that what may be commonly accepted is also thoroughly nonsensical. Though it was written in 1946, the vast majority of the fallacies which Hazlitt explodes are still commonly accepted today, and virtually everyone has something they need to learn from it.

Read it here: Economics in One Lesson.

Consumption and the Economy

It has become a highly entrenched orthodoxy in public opinion, public policy, and academia that consumption is fundamentally good for the economy. If the economy is not doing well, then it is because consumers are not doing their job well enough, and the solution is that consumption needs to be increased. If individuals are not willing to increase their consumption, then it falls to the government to increase its consumption by increasing expenditures; and typically deficits as well, because if the government were to pay for its increased consumption at the time through increased taxes, then that would further discourage individuals’ consumption. You can find this belief in people from Paul Krugman to George W. Bush. This orthodoxy is rooted in the General Theory of Employment, Interest and Money (which can be read online here), written by John Maynard Keynes, who is today considered the father of “modern economics.”

However, modern mainstream economics —more correctly known as the neoclassical synthesis, because it incorporates most of the formal structure of classical economics along with supposed Keynesian “insights” into how economies work on the macro level— has failed. It failed to predict this recession, and it has failed in trying to correct the flaws in the economy that have led to this recession. A major reason why it has failed is because of this view of consumption.

The crux of the debate over the nature of consumption is Say’s Law, often called the law of markets. In essence, Say’s Law states that the goods and services an individual supplies to the market also constitute that individual’s demand for other goods and services, or simply that people buy real goods and services and sell real goods and services in exchange for the ones that they buy. Your production determines how much you can consume, because the total amount of goods and services in the economy is simply the sum of the production of each individual. Money simply acts as a method of indirect exchange, but at the end of the day, it is real goods and services that are being produced, consumed, and exchanged. Money, and particularly changes in the quantity of money, can have interesting effects on the real economy, but we can never lose sight, as Keynes does, of the fundamentally “real” nature of the economy: the actual production and consumption of goods and services.

The major implication of Say’s Law is that there can never be a general “glut” or overproduction of all goods and services, or conversely, there can never be a lack of aggregate demand, or under-consumption: the reason being that the price mechanism of the market —where the actions of every individual in the market, through the goal of maximizing profit by buying in the cheapest market while selling in the dearest, result in prices that ensure an economic equilibrium— creates an equilibrium in which supply and demand are equal. The whole body of thought that is Keynesianism, however, rests on the belief that Say’s Law is false. Keynes’ reasoning for this belief was that he observed that, in the real world, prices could be “sticky,” or resistant to change. If some shock occurred in the economy that would encourage people to save more, such as a recession, and if prices for consumer goods did not fall in response to this change, then one could expect to see a general surplus of goods and services in the economy. Say’s Law assumes that prices can change.

However, there is one more important assumption that Say’s Law is based on, and that assumption is that the market in consideration is a free market, with the absence of government regulations, interventions, and special privileges for certain individuals or groups. The world in which Keynes was writing did not have a free market. For example, during the Great Depression, President Hoover quickly embarked after the stock market crash to ensure that wages would not fall, even though prices in the economy were falling all around. He met with business leaders and encouraged work sharing, all in the name of preventing wages from falling, because he believed, in a proto-Keynesian manner, that if wages were to fall because of the falling demand for businesses’ products, which was in turn a result of the falling demand for those products, then the fall in wages would cause a further decrease in demand and would result. This hypothetical scenario, where a small fall in demand could completely destroy the economy, is called a deflationary spiral. A deeply held belief in this possibility is a major way that Keynesians try to justify massive government spending and inflation in periods of economic turbulence. And so it came to be that through Hoover’s policies of propping up wages, and through the efforts of the unions through their special governmental privileges which enabled them to prop up, increase, and prevent their wages from falling, the economy ended up in a situation in which the price of labor was no longer easily changeable in a downward direction. The result in the deflationary economy of the depression was, as expect, a large surplus of labor, generally known as unemployment, which reached unprecedented levels during the Great Depression.

Therefore, because the labor market is so important to the economy as a whole, given that most people rely on selling their labor to make an income and the fact that all goods and services require labor to be produced, the sabotage of the price mechanism in the labor market had drastic economic results. So what is the solution to such a problem? The answer is quite simple, and should have been to Keynes as well: it is that the government should stop restricting the movement of prices in the market and should stop enabling other organizations, such as labor unions, from doing the same. Keynes, however, a liberal of his day, did not want to attack the unions or prevent them from doing as they pleased, and so his proposed “solution” was to print money and use government spending to raise prices in the economy, which would then cause any wages that stayed constant to drop in real terms. Inflation would lower any prices that did not move up proportionately with the rate of inflation. The excess of labor caused by prices being too high would be reduced and employment restored.

Keynes’ “solution,” however, fails not only to address the underlying problem in the economy, but it also entails a course of action with a host of its own problems. While writing and arguing against what he considered the fallacies of the laissez-faire economists, he argued against the current economic policies present in the world, rather than actual free market economies, of which there were none. He fails to realize that a free market would in fact be stable and equalizing, where there could be no lack of aggregate demand because it would be in the interest of the individuals in the markets to lower their prices until they could sell all of their products. He inspired fear of deflation, and a love of inflation and government spending, all of which continue to damage our economies and our study of economics to this day. Consumption may be the final purpose of all economic activity, but saving and capital accumulation is a vital process to the production of consumer goods. Keynes not only thought that saving was unimportant, but destructive in itself; contradictory he could be on the subject, however. Many of today’s economists continue in this tradition: “consume more, save less, and the economy shall prosper” goes their mantra. We are, however, all the poorer in more sense than one because of this grand mistake.

Notes on Healthcare, Part I: Fundamentals and the ERC-GAC

Opinions and arguments in the recently renewed debate over healthcare have been quite strong, and thus the debate has been a heated one. One need merely look, for example, at Rep. Joe Wilson’s outburst of “you lie!” during Obama’s speech on healthcare, or at the thousands of people who have spoken out at “town hall meetings” to debate such issues. Republicans and Democrats, it seems, are entering into a confrontation greater than any in the last few years, even though everyone speaks of the need for “healthcare reform.”

So it may be surprising to think about how much alike our members of Congress really think on healthcare. Politicization has created a huge debate out of, relatively speaking, small differences. Just about everyone agrees on certain major points. Such issues on which there is general agreement include the desire for universal healthcare insurance, a demand for a general government program on healthcare, a want to continue the Medicare and Medicaid programs, a need to reform both of these programs to cut their costs while not benefits, a stipulation that insurance companies not discriminate on the basis of existing medical conditions, an agreement that health insurance “costs too much” and that the insurance companies make “too much profit,” an agreement that large amounts of regulation, bureaucratization, subsidization, and government involvement in healthcare are all needed in the industry. But most fundamentally, there is roughly a consensus that having a free market in the healthcare industry would fundamentally be wrong. Even most of the congressmen who often talk about free markets are not proposing a free market for the healthcare industry.

Why is this so? What is their reasoning for these different claims and this virtual consensus? This is what I want to start analyzing in this blog post, but this is a huge issue: several large books could be written on the subject with still plenty left over to consider. And so we must begin with a fundamental insight into the general nature of the anti-free market thought process. This insight is that the arguments against the free market in the healthcare industry focus on supposed “exceptions” that the healthcare industry has with regards to the proper working of a free market, thus requiring government intervention because of these exceptions. There are, of course, those socialists who reject markets all together, but those arguments get less support than those that speak of “exceptions” to the general rules of markets in the healthcare industry, and so I focus more on the “exception” supporters.

One of the biggest so-called “exceptions” that healthcare poses deals with emergency medical care. The chain of reasoning goes something like this: Joe can’t afford health insurance because he’s too poor and it’s too expensive, or because he has some preexisting condition that causes the insurance companies to refuse to insure him. Joe then has to rely on emergency medical care for his healthcare. Emergency medical care is expensive, and Joe has no way to pay. Then because the emergency medical provider is taking on a large cost without remuneration from Joe, they have to raise their prices on all of their other, paying customers. Because the prices for healthcare go up, fewer people can afford them, and then there are more Joe’s out there who have to rely on emergency medical care and continue to drive up the costs, resulting in a vicious cycle. Let us call this vicious cycle the emergency room common-good abuse cycle, or the ERC-GAC.

The fallacy involved here is that this problem of free emergency medical service for those who cannot pay is a result of some market process. It is considered a “market failure” in a basic neo-classical analysis. This is particularly ironic given that many liberals/socialists constantly lambast businesses for callousness against the poor when it comes to making profits, because these liberals/socialist then turn around and blame the “free market” for providing free healthcare to those who can’t pay for it and then blaming the “free market” for the problems which result because of this. This is, of course, a problem resulting from government intervention in the healthcare industry, supported by the liberal/socialist sentiment that no one should be denied healthcare on the basis of ability to pay for it, as they see healthcare as a “right.” The government has passed laws that prevent hospitals and emergency rooms from turning away anyone in need, partially socializing emergency medical care, and now that this partial socialization is causing major problems in the industry, the liberals are proposing... why, more socialization of course!

In a free market, any hospital or emergency room that took in people who had no ability to pay and who are now expecting free medical care that then tried to turn around and pass those costs to its paying customers would be driven out of business by the competition of those hospitals who would not pass on other people’s costs to those with the ability to pay, and healthcare costs would stay low. The immediate objection that most people pose to this is that healthcare is a “right” and that no single person should ever be denied healthcare if they do not posses the ability to pay the full price for their healthcare. However, if there existed a free market in the healthcare industry, it would not mean that a large number of people, particularly the poor, would be unable to purchase healthcare. But due to reasons discussed further on, this would not be the case.

The second part of the ERCGAC has to do with insurance and people with preexisting conditions. This brings up the very important definition of the function of insurance, which is blatantly ignored in virtually any discussion on healthcare insurance. Insurance is something bought and sold in a market which guarantees the purchaser of the insurance policy to certain remuneration if a certain event happens to occur. The purpose, of course, is for people to reduce the amount of risk they take on in their life.

Market Power

When one thinks of a monopoly today, one thinks of large business or corporation that exercises total control of an industry while often exercising any means necessary to maintain that control. The common thoughts are that no one can stand up to a monopoly, take down a monopoly, and that the effects of a monopoly are destructive to the general welfare. The common conclusion is, therefore, that government should regulate or break up monopolies or companies with “too much” market power wherever they happen to arise. This is, however, a frightfully misguided chain of reasoning that ignores the mechanics of a free market, when such a market exists, that is.

In a free market, the ability of an individual, business, or corporation to compete on the market is not restricted by any government rules, regulations, obstructions, or inhibitions, and nor is any individual, business, or corporation allowed to use force to prevent or discourage others from competing (which is the government’s responsibility to prevent). And so if one thinks of a monopoly that uses practices such as intimidation, threats of physical violence, special government privileges, or bribery of public officials to maintain its monopolistic position, then one is either not thinking about a free market or is thinking about situations which should not exist in a free market and which the institutions present in a free market tend towards eliminating, though there is only so much that can effectively be done at any time to prevent criminal activity in any system.

However, many people will take their objections to monopolies farther and say that monopolies that fit the common conception of a coercive business or corporation that is unchallengeable and destructive to the general welfare will arise even in a free market where no direct force is used against competitors or potential competitors. Many of them therefore think that the government should intervene in these markets in order for the market to even be considered free in the first place. It is not true, however, that market power accumulated in a free market is either unchallengeable or destructive to the general welfare. To see why, one must have a proper understanding of the mechanics of a free market.

And so in order to understand these mechanics, let us first examine a situation in which there are no governmental barriers to competition and also in which there are proper governmental restrictions of the use of force and coercion. For example, no potential entrant in the market can be legally prevented from competing and no business can threaten the entrant with physical force, whether initiated from the business or from the government on the business’s behalf. This is the free market. Now let us suppose that we have a certain industry, and in this industry, let us say that there is a particular firm with a large amount of market power: for example, suppose it has a market share of 80%, meaning that this particular firm sells 80% of the good or service that the industry it is a part of produces. In essence, this firm is a monopoly. Let it also be stated, however, that a company with a high market share does not necessarily decide to raise prices to a monopolistic level, for reasons which should become clear after reading this.

Now, this monopoly can change the price at which it sells its good or service, just like all businesses can. However, because this business has market power, when it changes its prices, the effect is not the same as when a business without market power changes its prices. In a very highly competitive market, when one business raises its prices, consumers can immediately just buy that same good or service from another business for a lower price, and thus by raising its price, that one business has lost money because it has lost all of or nearly all of its sales. When a certain business has a large amount of market power, then the effect is not nearly so powerful, and sometimes a business can profit by raising its prices because the increased amount of profit from its sales outweigh the total loss in the quantity sold. It is for this reason that most people learn in introductory economics that monopolies are “inefficient” compared to a perfectly competitive market, and it is for this reason that market power often makes companies who have it very profitable.

But it is this very profit that works to check the power of a monopoly. Let us say that our supposed business with an 80% market share is raising its prices and also making a lot more profit than it was before it decided to raise its prices. A standard, classical, Econ 101 analysis of monopoly would call this inefficient, because the higher price would discourage potential buyers that the monopoly could have produced for. However, in a free market, competition is free to all comers, and thus, if the monopoly has impacted the market price for a good or service, the monopoly has suddenly created a huge profit potential for potential entrants in their particular market. This potential profit then enables people to get the funds to start their own businesses in the monopoly’s industry and then the new competition drives the price back down to its efficient level. If the price for the good or service in this particular industry is too low, then the lack of profits will drive certain businesses out of the industry letting the remaining ones which were more efficient raise their prices back to where they can continue to make enough money to maintain their businesses.

There is however, still yet another objection to the postulate that a free market can properly deal with monopolies simply through the market process. This particular fallacy is what I call the shortsighted market fallacy with respect to market power (I have never heard anyone else give a name for this fallacy, so I took the liberty for efficiency’s sake), which goes something like this: if competitors try to enter a market in which a monopoly has raised prices higher than they should be, then the monopoly will be able to lower its prices below what prices should be so that none of the competitors can then profit, and will therefore go out of business. Then, because the monopoly has more resources and is more established than the newcomers, it will outlast them, and then the monopoly can raise its prices once again to a higher price than they should be at (the price that “should” exist in the market is determined by an inordinate number of factors, but it is always the price that a free market price tends towards. Simply consider it the “market price”).

This fallacy rests on several false assumptions. The first is that speculators in the market will not react to a large temporal inequality of prices. In other words, when the monopoly lowers its prices below a sustainable level, people who fall for the shortsighted market fallacy do not take into account the huge amount of profit to be made from buying large quantities of what the monopoly produces and then selling these quantities after the monopoly raises the prices back to the very high levels. There are huge gains to be made from taking advantage of this inequality of prices. “Buy in the cheapest market, sell in the dearest” has always been one of the easiest ways to make a profit. This weakens the power of the monopoly by first dramatically increasing its sales when its selling at a price that it cannot sustain and then again by creating a competitive market after the price goes back up, because the price cannot go back to where the monopoly wants it because the speculators begin selling the good the monopoly produces. The other false assumption that this fallacy lies on is that, after the price goes back up to an artificially high monopoly level, the same process of threatened competition resumes because the same profit motive is created. And so for these two reasons, I call this fallacy the shortsighted market fallacy, as it does not take into account the other actions that the supposed actions of the monopoly create and it does not take into account the continuation of time.

Therefore, it cannot accurately be contested that government methods of “anti-trust” are necessary, beneficial, or necessary to call a market “free.” Nor can a free market be opposed on the grounds that monopolies would take it over and destroy the general welfare of the economy. The free market is the best way to handle the issue of prices and market power, because competition will always monitor it and cause it to constantly tend towards the efficient level. And it should also be seen that a company, even with a large market share, will not usually try to raise prices to monopoly levels, even though still pursuing the benefits of selling a large quantity of a good to the market and the efficiency benefits that come from economies of scale.

Taxing Your Free Choice: The Proposal for a Soda Tax

With obesity levels in the United States steadily rising and with the national desire for a healthcare plan that will reform healthcare and cut costs while expanding benefits and insurance to more of the population, President Obama and leaders in the Senate are considering a new tax on sugary soft drinks. The potential goals for such an excise tax would be to discourage the consumption of sugary drinks, make the population healthier by fighting obesity, and to help pay for a potential healthcare plan that could possibly cost between $750 billion and 1$ trillion. The logic works like this: taxing a certain good raises its price, and taxing a certain good relative to other goods will, all other things equal, lower the quantity demanded of that certain good. And so if the government were to place an excise tax on soda, the amount of soda Americans consume would most likely decrease, which could result in health benefits, assuming that the decrease in consumption in soda is not offset by some increase in a different unhealthy eating habit. Then, if the tax were enacted, it would raise revenue for the government, which could be put towards paying for increases in government healthcare. It is certainly a simple enough plan.

However, there is one serious problem with this proposal, and that is that there is no justification for forcibly punishing people’s decisions about themselves and what they decide to eat or drink. This excise tax would be economically destructive because any thing that changes people’s decisions from what they would do in the absence of coercion makes them worse off, assuming that the activity being decided on doesn’t adversely affect third parties. What people decide to eat or drink doesn’t place any costs on other people in a free market. People are free both to decide what they consume and other people are free from possible negative affects of those people’s decisions.

But this brings us to another problem: healthcare. When the government “provides” healthcare by taxing the people and then paying benefits to other people, the condition on which freedom works in this regard is suddenly destroyed, because someone’s decisions about the foods and drinks they consume can suddenly cost everyone in society because they will end up paying for the increased healthcare costs someone with unhealthy habits through their taxes. Suddenly, there is a reason for everyone to have an interest in controlling what everyone else does. No longer will freedom of choice be beneficial to those who live healthy lifestyles because they will pay for the poor choices of others. And so the freedom of people to decide what they want to consume based on the costs to their health their decisions can cause will be restricted. This is just one of the many costs of government-provided healthcare.

In a free market, the costs of unhealthy decisions are born by the individuals who make the decisions, and thus they have the freedom of making the decision themselves by weighing the costs and benefits of each possible decision being considered, and then choosing the best course of action. If an individual wants to consume large amounts of soda and sugary drinks and to bear the costs of poor health from high caloric consumption among others, then they are better off if their decision is not affected and they are allowed to consume large amounts of soda and sugary drinks, because they have determined that the most beneficial course of action and anything that changes their decision forcibly such as discouraging that through an excise tax on soda is putting them into a situation in which all of their potential decisions are worse off than the decision they could have made in the absence of that tax.

There is also the issue of insurance. One might think that through insurance, the costs of someone’s decisions that pertain to their health could be placed on others through the way that everyone pays into insurance and then the costs are born by the insurance company as a whole, paid for by the premiums of everyone who wants coverage. However, this is not so, because those who place higher costs than others on the insurance company are made to pay for their decisions through higher premiums. The purpose of insurance provision is to provide security from risk, not to socialize someone’s personal costs, and that’s how it works in a free market, through if the government gets its way by making it illegal for insurance companies to discriminate on the basis of pre-existing conditions, insurance could be turned into a method of partial socialization. Discrimination is not a bad thing when it applies to pricing for insurance, because it’s discriminatory pricing that protects our individual freedom when it comes to health decisions.

So it should be clear to just about anyone that the soda tax is not a straightforward way to fix the healthcare problem, but a problem in itself as a threat to economic welfare and freedom in general. Healthcare has its problems, and these problems have their solutions, put this particular proposal is not one of those solutions, simply another problem.

Obama Threatens Economy with Protectionism

Last Friday, President Obama made the decision to place a three-year tariff on imported tires for cars and light trucks from China, starting at 35%. The decision was prompted by a complaint from United Steelworkers and it is supported by the A.F.L.-C.I.O, the largest organization of unions in the United States. There is, however, absolutely no excuse for placing barriers on trade, particularly when the world economy has been shaky due to the financial crisis. Labor unions are just about the only organizations supporting such tariffs, arguing that the tariff will increase production of tires in the United States and will protect or create American jobs.

Tariffs, though they are often supported in the name of jobs, always have the effects of destroying trade, specialization, international cooperation, and ultimately economic wealth for all nations. The extent to which they “create jobs” is really their effect of creating a need for more work to produce the same amount of goods and services as the economy was producing before the tariff was enacted. This creates waste, inefficiency, and poverty, while also being entirely unnecessary and counterproductive with respect to employment levels; and when one considers the fact that tariffs are often responded to with retaliatory tariffs from other countries, the effects often end up being much more devastating than one would predict from the enactment of a single tariff. Such “trade wars” can devastate the world economy or make existing economic problems even worse, such as the one which occurred after the Smoot-Hawley Tariff was passed in the US in 1930 during the Great Depression. In response to the current act, for example, China has made threats that it might respond with retaliatory tariffs on chicken and auto parts. If a trade war were to break out between the US and China, it would probably be the end of the modern economy and would truly bring about another Great Depression.

The reason why tariffs result in lower economic productivity and welfare is that they reduce trade by placing additional costs, added by the government enforcing the tariff, on trading certain goods or services between certain countries. When trade is reduced, economic welfare follows because trade is the basis of virtually all of the wealth that we enjoy in our modern economy. Trade increases when specialization through the division of labor increases, because when two individuals specialize in certain productive activities, they become more productive than they could if they could not specialize and had to produce more of what they needed for themselves. And once two individuals are more productive through specialization, trade enables them to have the variety of goods and services they desire while also benefiting from the increased production acquired through specialization. In addition, David Ricardo’s Theory of Comparative Advantage shows how an individual or country can gain from trade even when much less productive overall than a potential trading partner.

However, this still leaves the question of employment unanswered. Even if we know that economic productivity is higher with unrestricted trade, that doesn’t necessarily mean that it is desirable if it means high unemployment and no gains for a significant part of the population. However, the causes of unemployment are separate and unrelated to how much trade occurs in the world economy. Long-term unemployment is caused by restrictions imposed by the government on the movement of labor in the economy, and cyclical unemployment, which accompanies recessions and depression, is caused by government distortions in the economy’s structure of production, which eventually have to correct, causing many people to be unemployed. There is no reason, however, why these unemployed people should be so for long. Like all goods and services, the supply of labor in the world is limited, and uses for it unlimited, as human wants are not bounded. Therefore, a market emerges for the exchange of labor. In this labor market, there is both the supply of labor and demand for that labor. And also like other markets, the price of labor adjusts to clear the market, because consumers of labor (the firms) have an interest in using more labor, while providers of labor have an interest in selling their labor. No one benefits from being unemployed when they want to sell their labor, and the price paid for labor adjusts so that producers can fully utilize the available amount of labor. If there is a large surplus of labor, or unemployment, then the price of labor is too high for producers to value employing more labor, and if there is a shortage of labor, then producers raise prices for labor to attract workers to their businesses. Regardless of trade, so long as people value goods and services that require labor (and all of them do), there will be a market for labor and there will be pricing system, which can ensure full employment. And so the labor unions have no ground for claiming that tariffs are needed to “protect jobs.” The argument is absurd on its face. Their real interest in supporting these tariffs is because the workers who work in industries that get special tariffs on the goods they work to produce can benefit at the expense of all of the consumers of the product the tariff is on.

However, there is yet another fatal flaw in the arguments in support of this tire tariff. Even if the United States enacts a tariff against China, that does not mean that suddenly American companies and workers will get more of the market for tires, the reason being that there are many other countries other than China that would be willing to produce tires for less of a cost than the United States: Brazil or India, for example. And so there would be absolutely no benefits, not even the supposed benefit of protecting American jobs.

The tariff on tires, or tariffs of any kind for that matter, have no benefits and can end up costing a lot, mostly to consumers. Free trade and a free market would maximize economic welfare and ensure full employment for all people in all nations, where protectionism breeds poverty and want for nations. Obama’s move against trade has set the nation back economically in the midst of a recession and has damaged trade relations with China, all to please the unions, who themselves hurt the economy and cause unemployment. The damage could be prevented, but to hope for such an outcome would be optimistic to the point of foolishness.

Is the Recession Over?

While Bernanke might want the recession to be over more than just about anyone else, it's only by the government's skewed methods of measuring such things that the economy appears to be getting better. In reality, we are still very deep in recession, and are very likely to stay here for quite a while because of the government’s attempts to create an artificial recovery through interventionist, Keynesian methods which involve government stimulus plans, government spending, and government restrictions on the market.

The first thing wrong with their determination of whether the economy is in a recession or experiencing economic growth is that they only look at whether or not economic growth is positive or negative. Had the economy not gone into recession, economic growth would be much higher than just the fraction of a percent that is expected in the near future. But the government, through the NBER, will claim that the recession is over the moment that GDP starts to increase by any amount. Whatever this small percentage gain will be, it won’t be anything like pre-recessionary levels, and it only makes sense if we consider a recession over once its effects are gone, which should mean a return to full productivity.

The second thing wrong with this determination is GDP itself. Gross domestic product is a very poor measure of economic welfare, particularly because it includes government spending. So naturally, if the government simply passes a large "stimulus bill," then GDP will increase, all other things equal. However, this spending doesn't actually increase economic output or improve the economy, and therefore does nothing to help the economy recover from a recession. In fact, it accomplishes the opposite. By spending money for the purpose of spending money, valuable resources in the economy are wasted and the structure of the market is prevented from changing to fit consumer demand, making certain aspects of the recession illiquid and thus prolonging the economic pain. And of course, any money the government spends is money the government must eventually take from taxpayers, making everyone other than the government and those who gain its favor worse off.

There is, however, one thing which typically frustrates the government's attempts to cover up a recession, and that is unemployment. Although the government has a faulty measuring system for unemployment to make the figures look better (reported currently at 9.6%, it is most likely around 16%. For example, if the economy is so bad that people give up on finding jobs, then that causes unemployment to go down by the government’s determination), and although government spending bills typically have provisions to use the government money spent to create jobs, the effect of trying to freeze the economy in the position it was in by propping up failed businesses and jobs by reducing the hours workers actually work is to perpetuate a non-equilibrium in the economy which means massive unemployment. Until a recession liquidates the whole of the malinvestments made during the economic “boom,” businesses won’t start growing and raising the employment level. In Europe, where interventionist measures have been taken farther, the unemployment problem is even worse than here in the US.

For the recession to be over, government bailouts need to stop, restrictions on labor mobility need to be destroyed, the Fed has to stop trying to keep the interest rate at zero, the government has to stop spending money like they’re going to pay with everything with the printing press, and of course, the printing presses at the Federal Bureau of Engraving and Printing need to be shut down for a good long time.

A Brief Introduction

Greetings. My name is Eric Perkerson; I am a first-year student at the University of Georgia in Athens; I am an economics major and am a follower of the Austrian School of Economics, which supports a very laissez-faire approach to economic policy. I discovered this school of thought just over a year ago, right before the financial crisis hit, and the financial crisis confirmed to me that the Austrian School had a better understanding of how the real-world economy works, as Austrian Business Cycle Theory predicted the crisis. The most well known Austrian economists today are Ron Paul and Peter Schiff. The best source of information that I have found to date on Austrian economics is the Ludwig von Mises Institute, which has hundreds of articles on recent events, journals, academic papers, and just about every book ever written from the Austrian perspective. And so on this blog, I hope to educate people and promote public policy based on the Austrian School of Economics, while both commenting on recent events in politics and in the economy and while also discussing economics in general. Hopefully, you will continue to read until you begin to accept this rational approach to economic problems. And with this brief introduction, we begin......