Chapter 5 ECONOMICS FROM AN OBJECTIVIST VIEWPOINT Part Two: Several miscellaneous issues * Foundations * Bootstrap Economics * Economic Calculations * The Tragedy of the Commons * The Public Goods Problem * Fascism-Communism * Marx * The Luddite Phenomenon * Liability * Productivity * Trade vs Theft * Foundations Believe it or not, economists do not know what they know. That is, with regard to various aspects of their field, economists cannot say "these aspects are what we know to be true, and those aspects we know little or nothing about." If a discipline after centuries of intellectual activity still does not know what it knows, it cannot be said to be in good condition, or based on a solid foundation. In spite of this admitted ignorance, economists have for at least two centuries debated the merits of specific manifestations of government interference in the market, frequently using abstract mathematical models whose essential flaw is that they have little relevance to actual human behavior. In line with this, the strength with which each different model is advocated by the economists is frequently inversely proportional to the amount of empirical evidence that it is correct. Such a situation would be laughably ridiculous except for the harrowing fact that politicians distill their policies from the proposals of these economists, whilst the economists are distilling their proposals from fantasy. As Herman Daly, a senior economist with the World Bank, eloquently observed: "My major concern about my profession today is that our disciplinary preference for logically beautiful results over factually grounded policies has reached such fanatical proportions that we economists have become dangerous to the earth and its inhabitants." If one insists on analyzing an imaginary problem which has no real-world equivalent, it may be appropriate to use an analytical model which has no real-world application. By the same token, if a model is designed to deal with real-world situations, it may not be able to handle purely imaginary problems. In either case, a solution is meaningless. But these "meaningless" solutions do indeed have real-world consequences when they are implemented through political coercion. A thief who presumed to justify his theft by saying that he was really helping his victims by his spending, thus giving retail trade a needed boost, would be slapped down without delay. But when this same idiocy is clothed in Keynesian mathematical equations and impressive references to the "multiplier effect," it carries far more conviction with a public that has been bamboozled into accepting the "mystique" that conventional economics is a valid tool of analysis. In the 1989 edition of his famous textbook, ECONOMICS, Samuelson described the Soviet Union as being proof that, contrary to what many skeptics believe, a socialist economy can function and even thrive. Statements such as this show a contempt for truth that would turn Paul Goebbels green with envy. The fact that they are not considered an embarrassment by the economics profession speaks of the fatuity of that profession. But such statements, which tell us nothing about the real economic world, may tell us something about the minds of the people who make them. Many of the most dogmatic and fanatical socialists are not interested in personal wealth and live in self-imposed poverty. They think that asceticism is noble and virtuous (otherwise they wouldn't practice it themselves), and believing that it is virtuous, they want everyone else to live the same way. This is one reason why socialists never get discouraged if their ideology doesn't work (that is, doesn't produce prosperity). They never really wanted it to. As long as socialism mandates self-sacrifice and forestalls prosperity, its most zealous advocates will keep proclaiming it a success. Commenting on economic "bubbles," Samuelson admits that "in all the arsenal of economic theory we have absolutely no way of predicting how long such a bubble will last." Well, anyone who takes a close look at "the arsenal of economic theory" will readily observe it to be so filled with fallacy that the world envisioned by Samuelson and his colleagues bears little correspondence to the world of reality. No wonder it has so little predictive power. Keynesian economics is unable to provide a theory that can even describe, let alone explain, observed economic reality and experience. If economists really knew what they are talking about, the Soviet Union never would have collapsed. Another manifestation of unreal economic analysis can be seen in Ayn Rand's quasi-deification of industrialists as being men of punctilious ethical scruple and rigorous logical acumen. In fact, businessmen are just like many other people: stupid, shortsighted, and as quick to make use of coercion if they think it will serve their purpose. In a free marketplace they would have an ethically useful function, but the trouble is, and always has been, that there is no FREE marketplace. Societies have always been based on institutionalized coercion, and the people (including businessmen) accept this as natural social behavior. This acceptance is ingrained on many mental levels and during the entire life of the citizen, so it should be no surprise to see it exhibited by businessmen. In spite of these gross flaws, economic theory lives on, surviving largely because there are some fundamental truths about the human condition that call for principled explanation. First enunciated in THE WEALTH OF NATIONS, these truths are: 1) The overwhelming majority of people are naturally and unswervingly interested in improving their material condition. 2) Repression of this natural desire leads only to impoverished societies. 3) When this natural desire is allowed sufficient expression so that commercial transactions are widespread, everyone does eventually indeed improve his condition, however unequally in extent or time. This is not all we need to know, but it is what we do know, and it is surely not asking too much of economic theory that in its passion for sophisticated methodology it not ignore this knowlege. But yet it does. * Bootstrap Economics The Bootstrap Effect An economy will rise to the highest level of wealth creation that is possible to it, subject to three restraints: 1. Limitation of natural resources. 2. Paucity of knowledge. 3. politically-imposed restrictions. The solar system, considered in its entirety, contains a sufficiency of natural resources to provide the human race with an unlimited supply of wealth. During the past 300 years Man has acquired enough knowledge of technological processes and economic institutions to convert those natural resources into that unlimited supply of wealth. Thus mankind is now in a position to raise its standard of living to an unlimited height, and would indeed do so if not for the third restraint. It is politically-imposed restrictions alone that prevent this. The overwhelming number of human beings are concerned each to increase his own standard of living, and to the extent that it is possible each will act to do so. In fact, to the extent that it is possible each DOES act to do so, unless he is inhibited by law from doing so. Each individual person is continually looking for a way to improve his personal standard of living - continually looking for a way to circumvent ANY obstacles that are placed in his path. The aggregate expression of all of these individual concerns results in what I call the Bootstrap Effect. Everywhere within an economic system the people who perform economic actions will raise the level of wealth creation of that system. And they will continue to raise it until they can find no way of raising it any further. Until they are balked by some restriction. If that restriction is removed, the individual people to whom it had been a barrier will now perceive a possibility to further raise their own personal standard of living - and will commence to do so. Increasing the general level of wealth creation until they encounter another obstacle. And if there are no obstacles, there is no limit to the height to which people will push their standard of living. * Economic Calculations A grave deficiency in any centralized economic system results from inadequacy of information. The controlling authorities in a centralized system are never able to obtain a comprehensive and accurate depiction of the society under their command. Government data is often meaningless on its own terms and almost always misrepresents the nature of an economy. For example: one man spends to build a bridge, another to destroy it. Does it make sense to sum these two expenditures together into a "GNP"? Incompatible plans do not add up to some kind of "super-plan" nor does spending on them add up to an aggregate reflecting total productivity of any kind whatever. Also, government expenditures are always considered to be a productive contribution to the economy. But in fact government is a drain, and hence its expenditures should be subtracted from any aggregate of productivity. All figures on economic performance are false in one way or another, each compounding itself on the others until the economic forecasts generated by the state are as fictitious as a list of Nixon's virtues. About the only thing the government's economic indicators truthfully indicate is that the market has ceased to function properly. It has ceased to function properly because the natural regulating mechanisms have been severely crippled by government interference. One function of prices is to guide the factors of production so as to apportion the relative output of thousands of different commodities in accordance with demand. No bureaucrat, no matter how brilliant, can solve this problem arbitrarily. An example of the problem can be seen in The Guffey Act of 1937, which forbade the sale of coal at less than certain minimum prices fixed by government. Though Congress had started out to fix "the" price of coal, the government soon found itself (because of different sizes, thousands of mines, and shipments to thousands of different destinations by rail, truck, ship and barge) fixing 350,000 separate prices for coal. Prices provide suppliers with signals of what consumers want, and relative prices are an important source of information - they represent the relative value of alternative uses of resources. Willingness to pay a high price typically means that the producer is doing a good job of providing for consumers. If that high price generates high profits, then the producer is able to obtain more of the resources and produce more of the desired commodity. By allocating resources on the basis of willingness to pay, the market results in resources being allocated to the highest valued uses, because those who are willing to pay the price clearly value the use of the product more than those who are unwilling to pay. As a result, resources are guided toward their most desired uses. But a government-controlled economy does not use this source of information when determining how to allocate its resources, and thus the flow of profit does not act as a channel directing resources toward the most desirable uses. When a bureaucrat makes a mistake in regulating your affairs, he does not receive any feedback, in the form of personal economic loss, to alert him to his error. You receive all the feedback, but you are not in a position of control, so you cannot correct the error. Hayek calls the implicit decision structure underlying the market the Extended Order. Nobody designed it, nobody fully understands it, and no one knows a fracton of what it "knows." As Leonard Read points out, there is not a person living who has the complete knowledge required to manufacture so much as a pencil. Yet the extended order knows how to make pencils, laptop computers, nuclear-magnetic-resonance body scanners, and hundreds of thousands of other products. It also knows where and when they are required and in what quantity. It was the failure to comprehend this phenomenon, more than anything else, that was the chief intellectal flaw in Marxism and all its intellectual progeny. The point is that the thousands of people whose unwitting cooperation has made our options viable, have put forward their respective contributions voluntarily. Admittedly, they have agreed only to the terms of their individual transactions, but since that is their only point of contact with the rest of the extended order, their involvement has been a genuine case of unanimous consent. "Regulating the market" is actually regulating people - preventing them from making trades which they otherwise would have made, or forcing them to make trades they would not have made. The market is a network of trade relationships, and a relationship can only be regulated by regulating the persons involved in it. Thus price control is people control. Being imperfect, man does indeed need a regulating mechanism, but free enterprise does this admirably. Competition enables the businessman to continually check his ideas against his competition to see whether what he believes (and does) really works. If it doesn't, then either he goes under or, if he is clever, he will change his ways and go on to meet the competition's challenge. Unfortunately, government is not regulated by competition. Hence, no plan that government puts into operation can be tested by a competitor. Thus an error in government policy is almost never eradicated, except by revolution, war, or depression. Market competition is far less painful. * The Tragedy of the Commons If 100 or less sheep graze a certain pasture, the grass will continue to replenish itself, but if more than 100 sheep graze the land, the grass will diminish and ultimately vanish. Suppose the land is owned in common by ten shepherds each of whom has ten sheep. If one shepherd acquires an additional sheep he will see himself as 10% better off, and will see the pasture as being only 1% worse off. Naturally, each shepherd will consider it to be in his self-interest to increase his flock, but in the long run this is to the detriment of all. The sensible solution to this problem lies in private ownership: each of the shepherds should own a tenth of the land. Then if he acquires one more sheep, he will immediately see that his pasture will be 10% worse off. Murray Rothbard, in FOR A NEW LIBERTY: "In the East, the 160 acres granted free to homesteading farmers on government land constituted a viable technological unit for farming in a wetter climate. But in the dry climate of the West, no successful cattle or sheep ranch could be organized on a mere 160 acres. But the federal government refused to expand the 160-acre unit to allow the homesteading of larger cattle ranches. Hence the open range, on which private cattle and sheep owners were able to roam unchecked on government-owned pasture land. But this meant that no one owned the pasture, the land itself; it was therefore to the economic advantage of every cattle or sheep owner to graze the land and use up the grass as quickly as possible, otherwise the grass would be grazed by some other sheep or cattle owner. The result of this tragically shortsighted refusal to allow private property in grazing land itself was an overgrazing of the land ... and the failure of anyone to restore or replant the grass.... Hence the overgrazing of the West, and the onset of the dust bowl. Hence also the illegal attempts by numerous cattlemen, farmers, and sheepmen... to fence off the land into private property - and the range wars that often followed." Again we can see that the establishment of private property rather than government-owned "commons" could have avoided these difficulties. The fact that government asserts domain over the air is what makes air pollution a "tragedy of the commons" problem. In this case, the problem is exacerbated by attempts on the part of the government to dictate specific solutions to the problem, rather than solving it by means of some market- oriented method of pollution control such as: Measure the amount of pollution being emitted and assess a quantity fine (e.g., $2/Kg/day). Gradually raise the amount of this fine, and continue to do so until the pollution falls to an acceptable level. Thus all the choices regarding production, handling and disposal of the pollutant would remain inside the ambit of voluntary behavior rather than being expressed through fascism. Another place in which the tragedy of the commons rears its ugly head is in the American judicial system. Its staggering backload of cases, resulting in years of delay in the clearing of trials, results in great part from its being a government-owned "commons" phenomenon. * The Public Goods Problem Remember the lighthouse, that legendary "public good" which your professor discussed in Economics 101? Though socially valuable, the lighthouse supposedly cannot be provided by the free market because it contains costs that cannot be reflected in the market price. It is claimed that ships will benefit from the light without paying for the service. Therefore, since the lighthouse owner can't exclude free riders, it will be unprofitable to provide the lighhouse at all. Your professor no doubt did not tell you that long before economists developed the theory of public goods and market failure, private entrepreneurs were building and operating profitable lighthouses throughout England. Another example, which you have all experienced: As I was chewing on my sandwich, a couple of girls came over and plugged the jukebox. When the music started, the boys began bouncing a little, obviously enjoying the rhythm, and the girls chatted away as they had been doing before. I realized that I had just witnessed a mirocosm of the "public goods" situation. Everybody was enjoying the music but only two had paid. They hadn't gone around shaking people down for their "fair share"; they hadn't insisted that the music be supplied for nothing; they hadn't even asked for contributions. The girls supplied everyone with a valuable good because they wanted it themselves. * Fascism-Communism There is no fundamental distinction between these two forms of society. They are merely two variants of Socialism - the means by which government asserts control over the economic affairs of individuals. The fundamental distinguishing characteristic of markets is whether your behavior is controlled by your own choices or by someone else's choices. Under both fascism and communism - or, for that matter, ANY form of government - you are not free to guide your behavior according to your own choices. The only questions which differentiate forms of government are to what degree you are enslaved, and in what manner the enslavement is imposed. Fascism: Under this system, many major choices regarding the operation of businesses are made by government, but the individual who operates each enterprise receives his income from the profits of the business. In America, these are usually fascist operations: Bus companies, Airlines, Truck lines, Radio and TV stations, Banks, Private elementary and secondary schools. Communism: Under this system, all the business decisions are made by government, and the people operating the enterprise are government employees who receive their income from the government. A communist government expropriates all businesses and operates them as departments of the government. In America, these are communist operations: Highway maintenance, Public Schools, Utility companies such as most water systems, and sometimes electric systems, Police (except private police companies, which are fascist). Under fascism, the people are led to believe that they are working for themselves, even though in fact they are not. Under communism, they know they are not working for themselves. That is why fascism is less incompetent than communism. In fact, the level of efficiency of an economic system is a direct consequence of the degree to which the individuals who control specific aspects of that system are free to implement their own choices, and are acting in a context in which their own personal income is dependent on their own personal choices. This explains why communism is the least efficient of these systems, fascism is somewhat more efficient, and a free market is the most efficient of all. Only a free market demands competence. Authoritarian regimes place obedience above all other considerations. I distinguish some other controls from the above categories of fascism and communism since these controls are not primarily oriented toward governing business operations but are intended as general restrictions on individual personal behavior. These are such things as driver's licenses, marriage and divorce, customs and immigration. Registration of vehicles, business licenses, building permits, land titles (deeds) and land tax are in yet another category - they are the government's assertion of eminent domain - the assertion that government is the ultimate owner of all property, and that the individual can make use of that property only with permission from the government. Of course all these are also means by which government obtains some of its revenue. * Marx According to Marx, no clear line can be drawn between economic and political processes. In his scheme, the forces of material production are a superhuman entity independent of the will and actions of individual men. Industrial production and wealth, he asserts, are not to be attributed to any individual's creative thought or action, but are a free gift of nature. Such gifts multiply automatically across time through the intervention of impersonal agencies called Science, Technology and Progress, and each man is morally entitled to his fair share of these gifts. Only the State can achieve social justice by wresting wealth from the hands of the vile, greedy rich, who have appropriated more than their fair share, and by redistributing it fairly among the virtuous, non-greedy poor. This is the underlying rationale of the Welfare State. Because the use of coercion to confiscate wealth has benefit for one group ONLY at the expense of another, Marxists are led to the belief that life must be viewed as a zero-sum process in which original wealth-creation is ignored or even denied. Inherent in this ideology is the view that economic power is the ability to prevent other people from satisfying their own economic wants by preempting or monopolizing the economic resources of the society. This reflects the "zero-sum" assumption that economic resources and economic output are fixed - a national pie to be distributed by the state. But this coercive redistribution of wealth undercuts the very process that produced the wealth in the first place, thus Marxist societies inevitably end up impoverished. When a theory invariably achieves only the opposite of its alleged goals, yet its advocates remain undeterred, you may be certain that the theory is not a conviction or an ideal, but a spurious rationalization. In a free market, a man's long-range failure, like his long-range success, is an objective reflection of his ability and his usefulness. It is precisely this inexorable rule of capitalism - "to each according to his ability" - that threatens the self-esteem of the Marxist, engendering his intense hatred for the free market. Ironically, the most passionately voiced charge against laissez-faire is that it is an unjust system. The man who hates and fears a free market does not confess that what he really resents is precisely the implacable justice of this market. The driving motive of the irrational policies of Marxism is the desire to destroy the hated system which rewards men according to their abilities, and to substitute one which will give to the frustrated mediocrity according to his needs. Their Marxism is a wonderful tool that gives them an answer for everything - even an answer for the failures of Marxism. A Marxist writes: "The method of analysis Marx used to understand social domination and conflict is the most powerful way of understanding the very failures of his theory." But how can a theory that has failed be used to understand itself? Thus there is no possibility of controverting the committed Marxist. His Marxism makes him invulnerable to argument. * The Luddite Phenomenon It is often not the widely diffused gain resulting from the new technology that most forcibly strikes even the disinterested observer, but the immediately obvious concentrated loss. The new machines' increased output of shoes, at lower cost to everyone, is ignored; what is seen is a group of cobblers thrown out of work. * Liability There is a current trend toward legislation, and court precedent, that virtually insures that every real or imagined social ill shall find its way into the courtroom for resolution. In his book LIABILITY, Peter Huber looks at the origin and consequences of this kind of litigation. He observes that because of "a wholesale shift from consent to coercion in the law of accidents (and) a shift from individual to group responsibility ....the number of tort suits filed has increased steadily for over two decades. So has the probability that any given suit will conclude in an award. And the average size of awards has grown more rapidly still." This cancer on capitalism results in a severe threat to fundamental features of our economic system, such as technological innovation and the sanctity of contracts. As examples, he observes that liability accounts for 30% of the price of a stepladder, 95% of the price of vaccines, and 1/3rd the cost of a small airplane. The threat of liability suits or cost of insurance has orphaned more than 500 drugs that are invaluable for treating rare but serious diseases. Fifty years ago, such liability litigation would not have been conceived. Twentyfive years ago, it would have been laughed out of court. Today it is seriously considered, and the really scary aspect is this: there is NO WAY to tell in advance what the ruling of the court will be. The courts are not bound by any semblance of rationality or any adherence to the principle of Justice, and yet they exercise total dominion over the economic life of the country. * Productivity The productivity potential of the American people was enormously enhanced by the practice of capitalism during its first hundred years, when government was too small to seriously hinder personal freedom. But as government grows larger and consumes more and more resources, a continually growing share of the productivity potential of the American people must be devoted to the maintenance of government. Computers have enabled a tremendous productivity boost since the 1970's, but no matter how much more wealth per capita improved technology makes possible, always there is something to soak up the surplus and condemn ordinary people to a lifetime of labor. No matter how much productivity increases, people never seem to work less, only differently. The government is consuming, at an accelerated pace, the productivity potential of the country. Jerry Pournelle: "It looks to me as if our choices are very limited: increase productivity, or have a declining standard of living. Or both. Unfortunately, most increases in productivity are eaten by new measures, such as the Clean Air Act. It's my opinion that most of the productivity increases made possible by small computers have disappeared into increased regulations." Another thing that has kept the government alive while the federal debt curve goes up is that it is confiscating much of the wealth produced by the women who have liberated themselves since the 1960's. * Trade vs Theft Interactions which involve the transfer of wealth can be generally divided into two categories: Trade and Theft. The fundamental distinguishing characteristic which separates these categories is the relevance of choice to the preservation of values. For example: If I put a gun to your head and demand your money, the situation is such that your choice has no relevance: you lose a value no matter how you choose. Either your money or your life. If your choice is to give me the money, then you lose the money. On the other hand, if your choice is NOT to give me the money, then you still lose the money - and your life, too. No matter how you choose, you lose. That's what makes the transfer a theft. If a person's choice is NOT relevant to the loss or non-loss of a value then the transfer is a theft. If the person's choice IS relevant, then the transfer is a trade. There is a situation in which choice seems to be relevant, but nonetheless the transfer cannot be termed a trade: when the transfer occurs within a context of deception. This is fraud. In considering the nature of deception, we must keep in mind that rights impose no obligations on other men except of a prohibitive nature. Rights are not a claim to affirmative action. Each man is obliged only to AVOID the violation of the rights of other men. Therefore, in my dealings with others: I have no obligation to convince them of anything. I have no obligation to educate them about anything. My only obligation is to refrain from telling them anything I know to be untrue. Nozick proposes three conditions for a just transaction: 1. It must be freely entered into by both parties. 2. There must be no deception on either side. 3. The goods traded must have been justly acquired - that is, acquired in circumstances that accord with the first two conditions. His third condition raises a critically important idea: the problem of trade cannot be solved "out of context," that is, outside the general context of the social institutions that shape our culture. Before such problems can be fully solved, society must be restructured away from institutions of government and toward ethically rational social institutions. Gulliver's Travels: "They look upon fraud as a greater crime than theft, and therefore seldom fail to punish it with death; for they allege, that care and vigilance, with a very common understanding, may preserve a man's goods from thieves, but honesty has no defense against superior cunning; and since it is necessary that there should be a perpetual intercourse of buying and selling, and dealing upon credit, where fraud is permitted and connived at, or hath not law to punish it, the honest dealer is always undone, and the knave gets the advantage."