Wednesday, August 16, 2006

The Wonderful Mises University 2006

Mises.org has posted a news bulletin and thank-you to all the donors that made the Mises University 2006 possible. Take a few minutes to read the article and the comments of the students.


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Monday, August 14, 2006

Time for some pictures...

And now, Chronicles of Mises presents... Mises University 2006 in pictures!

Me and a couple of good friends, Darwyyn and Allan!

Here's Dr. Hoppe before the Mises Circle discussion. He looks so... ponderous...

Salerno. Soaked!

Sakari goes to work discussing libertarianism...

Tom Woods is the best. I just stand and look pretty (yeah yeah, laugh it up...)

This is Matt, the winner of the 2006 French Award at Mises University! He was a pretty happy guy that night...

LVMI's neon sign, soooooo sweet!

Sunday, August 13, 2006

Part 7: Of Presidents, Groceries, and Inflation

Thomas Woods' lecture title was a little deceiving, "American Presidents vs. Economic Law." He did not so much talk about particular presidents as much as he did two lesser known general examples of presidents going against economic law: income transfer programs and foreign aid programs.

 

Once upon a time, one Charles Murray wrote a book called Losing Ground, which explained the theoretical background to income transfer programs. His thesis was that many social problems are actually caused by the welfare programs. In fact, he proposes not merely difficult but absolutely impossible to devise a wealth transfer program that will not create net harm. He justifies this with a thought experiment. Suppose we wanted to institute a government program to discourage smoking. We would need to provide incentive for people to quit, so we decide that giving the quitting smoker money would be appropriate. Suppose we make a law that says if you quit smoking and abstain for a year you get $10000. Furthermore, we can't just let anybody get in on the deal, so only those who smoke a pack a day for 5 years will qualify.

 

Think about the repercussions for this type of program. Those currently in their 4th year of smoking would have no incentive to quit at all! It's much more difficult to kick the habit if you've been smoking for 5 years, but now you have incentive to keep going if you have more recently started. The person who isn't quite smoking a full pack a day would increase their consumption of cigarettes. Teenagers on the edge of smoking have incentive to start, because of course the government will bail you out in the end! Murray concludes that whatever you do, however you change the program, regardless of the incentive, you will disproportionately cause more harm than good. Read the book if you don't believe me.

 

Murray describes three laws of income transfers. First, the law of imperfect selection - any objective rule for a program will irrationally exclude some persons, and by extension could irrationally include some persons. Second, the law of unintended rewards - any social transfer increases the value of commencing with the action that prompted the social transfer. People on the edge will get into the bad situation in order to receive that social transfer. Third, the law of net harm - the less likely it is that the behavior will change voluntarily, the more likely it is that a program will cause net harm. A program that consists of entirely positive characteristics will not work, as being part of the "helped group" becomes more valuable for each positive reward give.

 

Clearly Murray's laws and observations can apply to foreign aid programs also, which create absolutely perverse incentive effects in the countries receiving the aid. Few (notably Peter Bauer) dissented from the conventional wisdom in the 60s and 70s that poor countries cannot lift themselves out of their "vicious circle of poverty." Supposedly, a poor country cannot get the capital investment to improve industry. Of course, that statement begs the question: how did ANY country EVER get out of poverty? How did the FIRST country get out of poverty? Martians?

 

Even basic humanitarian assistance has the potential to hurt the economic life of a country. Many countries with developing industries are short-circuited by unnecessary aid. For instance, countries trying to build textile industries suffer from other countries sending them free clothes all the time. In other words, the transfer may manage to do more harm than good. Clearly, this doesn't mean all privately funded assistance is bad, but one can't just tacitly assume what another country really needs.

 

More often than not, foreign aid money gets monopolized by politicians who then siphon it to political connected people. Thus, the poor never see the money anyway, because they are never politically connected. In fact, studies show that increases in aid are positively correlated with corruption, especially aid from the US. Of all despotic governments who received aid, only one has not received money from the US. To those who think the Marshall Plan was good, Africa has received the equivalent of FIVE MARSHALL PLANS and yet still is destitute. Bauer concluded that for a country to lift itself out of poverty the country does not need foreign aid, but rather the rule of law and respect for private property. Since none of these despotic countries have any true rule of law and true respect for private property, is it any surprise that they are what they are?

 

The new stupidity in government's foreign aid department is that "You just need to find good recipient governments for foreign aid!" But even if you find a government who isn't committing atrocities against private property, the aid is a problem in and of itself because it increases the power of the public sector. Aid increases the propensity of population to seek to obtain that aid - negative incentives are encouraged regardless of the recipient government.

 

For more information about income transfer programs, check out FDR's Folly by Jim Powell, and Out of Work by Vedder and Gallaway.

 

Thomas DiLorenzo's lecture was a fun exposition on the economics of the public sector. He proposed a facetious plan for "restructuring the grocery industry." First, each family will be assigned a neighborhood grocery store by the government. This family will pay one lump-sum fee per month for use of the grocery store. Every employee of the stores will be paid the same wage, regardless of their type of job. Any cost increases will mandate a fee increase, and each family will bear that burden. If a family decides to shopping at a non-neighborhood store, they will have to pay twice. This sounded like a pretty horrible idea to me, and I laughed at its absurdity! The proposal is effectively a government monopoly, first of all. There will be excess demand because it's free! Shelves will simply be empty from the demand. There will be no incentive to work, because everyone gets paid the same. In turn, there are no incentives to cut costs, because any problems end up being the burden of the families. The poor, although they get something, may be unable to get what they really want - and what right does anyone have to tell them what they need.

 

Imagine our surprise when DiLorenzo said this is exactly like the public school system! It's strange how profits and losses drive business, but in government you need failure to continue your funding. When analyzing a government program, you must first think about opportunity cost, what Frederic Bastiat calls the "seen and the unseen" in an economy. Whenever the government does something, consumer sovereignty is replaced by the whim of the bureaucrat. Think about that for a while…

 

George Reisman gave a lecture focused on inflation and central banking. There are two definitions of inflation. The first definition, which is popularly used in the news and such, is that inflation is rising prices. However, this definition is so wrong it deserves to be smashed! Rising prices are a result of inflation, but rising prices are most certainly not inflation! Ludwig von Mises defines inflation as "an undue increase in the quantity of money" (Human Action, pp 422-423), or that the increase in the quantity of money exceeded the corresponding increase in gold. Many confusion result from the definition of inflation as "rising prices." For one thing, it results in too many explanations for the rising price, causing ignorance in any particular case. Rising prices could occur because of a wage push, profit push (Sellers' inflation), supply shock (oil or bad crops), a wage-price spiral, an exchange-rate depreciation, credit cards, inflation psychology, or even consumer greed. Calling inflation "rising prices" implies that the cause is businessmen, when in fact it is government. It also implies to many people that price and wage controls are the solution. Price controls, however, will result in shortages of those controlled goods and services - short-circuiting the market process. It's like moving the needle in a pressure gauge to say the tank is not going to blow up. The faulty definition also implies that one can limit inflation by expanding the quantity of money, such as subsidizing sellers to keep prices lower. Yet the expansion of the fiat money supply without hard money is the root cause of inflation, so how could that help?

 

Inflation is ultimately the fault of the government, which can only be mitigated by the Federal Reserve Bank losing the power to print money at the will of the government. Only then can we begin the path to the restoration of sound money - based on gold and not government fiat.

Friday, August 11, 2006

Part 6: Health Economics

Left to Right: Rod Long, David Gordon, and Walter BlockFinally, time to write more about Mises University 2006!

For me, Friday heralds a bitter-sweet taste. I am going home in two days, and I can see my wife again! On the other hand, I am going home in two days, and who knows when I'll have this type of intellectual opportunity again. It seems like I'm getting less and less sleep, spending too much time writing, thinking, and talking economics and government then replenishing my energy. The adrenaline and excitement, though, make it all worth it! The caffeine helps too…

The following lecture was so important, in my opinion, that I think it deserves its own post. Health issues are perhaps the most pressing thing on people's minds, these days, and yet the only option that seems to be considered is the "nationalization of health care," which really should be read as "socialist health care plans." Bush is a health socialist. There, I said it. (Of course, so is everybody else in congress except Ron Paul.) Don't think that Bush can solve your problems on this issue (or any other issue, for that matter), he will only make it worse. This, of course, will merit more outcries from the hurting people of this nation dependent upon "government benevolence." Libertarians, you need to know everything you possibly can on this subject.

Walter Block, as I have mentioned before, is quite a character. He has an excellent lecture style that just draws you into the subject matter. This lecture was on "health economics." He started with the world-famous Nestle Breast Milk Substitute case, a classic criticism of the "dangers" of a free market. Nestle marketed this product in underdeveloped countries to help nursing mothers give proper nutrition to their children. The problem, however, was that many underdeveloped countries have poor water supplies. People used the substitute with dirty water, despite the obvious problem that no one should drink dirty water, much less newborns. So of course, critics said it was Nestle's fault. But think for a second - is this really the fault of Nestle? Is this really the fault of capitalism? This tragedy is the fault of the dirty water, not Nestle's product, and the water was supposedly the government's jurisdiction. Looks to me like the government is at fault. Another criticism of Nestle is that the people couldn’t read the warning labels saying that dirty water should not be used (never mind that it would be illogical to give anyone dirty water). But those same people would say that it is the government's responsibility to educate people - which I think would include literacy. Again, it seems to be the government's fault, not Nestle's.

The legalization of drugs is one of the most controversial parts of Libertarian thinking. First, one must realize that there is a difference between favoring the thing itself and favoring the legalization of it. I wouldn't want my children to use drugs but I wouldn't want them to get sent to jail if they did so. Furthermore, this isn't even the way the government tries to get rid of drugs. The government attacks the supply side of the drug industry, not the demand. Basic economics shows that whenever there is a demand for a product, someone will try to be the supplier - even if it is "illegal"! Why? The price is so high. Some drug dealers make hundreds of thousands of dollars a year selling drugs because their product is so sought after they can charge that much for it. Why? Because of the demand. Do not be so naïve as to think that the U.S. is actually winning the war on drugs, either. The powers at be can't even control drugs in prisons! Every "success" in the drug war breeds failure - the supply curve shifts and makes it even more lucrative to get into the drug business.

If you can't put what you want into your own body, that is a small amount of slavery. A nation should never allow the government to take away their personal, private property rights - which first and foremost is the right to self-ownership. Consider, if I can't make a decision about what to put in my body, then why shouldn't the government regulate fast food, soft drinks, coffee, or alcohol. Consider further, if the government thinks I can't make choices effectively for myself, why am I given the right to vote in the first place.

Ever heard a commercial on television encouraging you to "give" blood to a blood bank? It seems like there's an awfully high demand for blood, and yet no one is allowed to sell their blood! Richard Titmuss said it was immoral to sell blood, and we should all simply have "public spirit" about it! But when you need something important, you have to marshal more forces in order to supply the need - in this case we should pay people to donate blood. Furthermore, what about body parts? Kidneys, hearts… why can't people sell these? It could almost act like life insurance for your family: I die an accidental death, my organs are sold to help support my wife. Everyone wins - my wife receives financial support, someone receives the organs they need. How is this morally wrong?

Do you know how medical benefits became a standard part of American jobs? Medical benefits came into being after World War 2 because of maximum wage levels (that's right, MAXIMUM, not minimum). Maximum wage rates prevents employers from attracting the most talented individuals with higher pay, and hence there is a shortage of labor. Employers got around this problem by giving benefits. Eventually, it became embedded into the American job market so deeply that now people are crying for subsidized health insurance. But this is a recipe for disaster - do you really want to give the power to control medicine over to the same people who run the post office and the road systems? Here are some arguments for socialized medicine:

It's immoral to make money off of people's sickness. Well, restaurants and grocery stores make money off of people's hunger, and clothing stores make money off of people's nakedness. Since there's more of a necessity for food than medical care, should we nationalize this stuff too?

The only motivation for medicine is to make money. Why is this so bad? What do you think the motivation of food sellers is? I hope they are motivated to make money, that gives them incentives to do a good job!

40 million Americans don't have health insurance. Along the same argumentation of the first objection, should we then have food insurance? Furthermore, the

You can be more efficient by getting rid of health costs. Yeah right, just look at the Soviet Union! Did their health care system work? Was advanced medical care available for anyone other than the Soviet elite? Not often enough to say that it worked.

Okay, now for the PROBLEMS with socialized medicine…

Socialized medicine destroys the price system. As I have written about before, the price system is essential to a healthy economy. If you don't have competitive prices giving information, you have no possible rational way of knowing how to plan the economy. If you don't believe me, see Parts 1 through 5.

The bulk of medical expenses are on the last 6 months of life. This might not be the way we would choose to do it if we had to pay for it ourselves.

It ends up demeaning human rights and human life. Block described the true story of one Canadian's socialized medicine experience: a woman who raised horses saw one of her horses in pain. She brought the animal to the veterinarian, who said that the horse had gallstones and needed immediate surgery. One night was all it took, and the horse was back home the next day. A short while later, that woman's sister was diagnosed with gallstones, and was recommended for immediate surgery. But her sister had to wait 18 months for the surgery, because the waiting list was so long. The woman noted that if the horse had to wait 18 months for this procedure, she would have been brought before a judge for "animal cruelty." So cruelty to animals is bad, but cruelty to humans is ok because we have the higher goal of socialized medicine?

When something is free, you have infinite demand. If something costs you, you'll think more about it. You wouldn't go to the doctor for a cut finger if it cost you too much. Going to the Cadillac doctor with years of experience for every minor thing is not just cost inefficient, it prevents the doctor from seeing as many people with more serious illnesses who really need the help.

Friday, August 04, 2006

Here's a first...

Wow, for the first time I managed to get into the Mises Blog! Apparently I've also been featured at Peter Klein's blog. So now that I'm actually garnering attention, I had better put forth a disclaimer.

I am putting together these posts based on my notes from Mises University lectures. However, there will be very prominent instances where I have effectively quoted the lecturer. This is particularly true with the presentations of George Reisman and Roger Garrison. I think this is still appropriate behavior for this type of blog, and unless one of these eminent scholars would prefer for me to be absolute in quote attributions, I will proceed to the end of the conference in this fashion.

Part 5: History, Budgets, and the Benevolence of Capitalism


Thomas Woods is one of the most brilliant scholars I know. Moreover, he's cool. He also manages to hand out good advice: "If you're going to pursue economics and economics history, find an area and master it. Forever, you will be the go-to-guy for this subject. For instance, labor history!" Uh-huh...

But really, studying labor history is a good idea, and so was his suggestion of the Progressive Era. Very little serious free market work has been done on those subjects; you could certainly make a name for yourself doing this type of stuff. In general, just consider what the Austrian school can teach you in your study of history. The Austrian school has a unique business cycle theory with great persuasive power - this theory alone converts many to the Austrian cause. If you understand what the business cycle theory is telling you, you know what to look for and do good history. We have to go into the study of history with a preexisting understanding of how the economy works.

There is a misconception about the Austrian school and history because the laws of economics not dependent on history. Yet Mises and Rothbard were amazing historians. For instance Rothbard wrote a four volume history of America called "Conceived in Liberty." That's pretty hefty - especially since it covered only the colonial period. Yep, and he did it in his spare time.

You should always have a skeptical eye on conventional wisdom about history. The rest of Woods lecture focused on President Hoover and why he was not as laissez-faire as many economists make him out to be.

Roger Garrison presents a whole lot of info on the macroeconomy in his book, "Time and Money." His lecture today focused on current tax policy and tax "reform." Just as a reminder, there are two methods of acquiring wealth. The first is production and exchange, which is the economic means, and the second is confiscation and threat of violence, the political means. Guess which one the state falls under?

Garrison presented the charts that displayed the government's expenses and revenues over the course of the last 50 years, the Federal surplus and deficit, the gross Federal debt (by the way, the United States debt has taken a huge spike to over 8 trillion dollars), and the international trade deficit. He asked us to consider some questions…

Does the tax take measure the burden of government? Milton Friedman has a point - government spending, rather than the total tax take, is closer to the mark in gauging the burden.

Government spending = Taxes + the budget deficit

Yet Friedman said that only spending matters, not budget deficits. However, chronically large budget deficits really do matter. Some economists (Austrians!) add the burden of regulation. In effect, regulation could be considered an added tax-and-spend equivalent that just doesn't show up on the books. The same could be said of other burdens of government such as tariffs.

Are all taxes, dollar for dollar, equally hurtful? The narrower the tax base, the greater - or, at least, the more concentrated - the distortion of economic activity. Consider George Bush's "yacht tax" in 1989. This didn't really affect the wealthy a whole lot. There are plenty of other things to spend your money on. However, boatyards were suffering from people not buying yachts. These people were not high income people, but they were the ones who suffered from the yacht tax. Just one more government backfire case… The broader the tax base, the less the distortion of economic activity.

Are taxes better or worse than budget deficits? Those with experience in economics should note the flip-flop in deficit apologetics here. It used to be that democrats would make excuses for borrowing lots of money. Now, it's the supply-siders (Republicans) making the excuses. In the 1960s, people said "we owe it to ourselves" as justification for large deficits. Yeah, great idea, maybe we just shouldn't punish robbery anymore, because "we owe it to ourselves"! Of course, in the 21st century we have a new excuse: "We have access to world capital markets, we're just a drop in the bucket!" Umm, when does a drop in the bucket become significant? If one drop is fine, what about two? What about six? The logic fails me…

Are current and projected budges large? There are many ways to consider this, but what about comparing the budget to saving? This is hardly ever talked about, but is extremely important. Americans have had a net negative savings in the last few years, in fact, which should seem to imply that there is a serious problem in investment coming. There is no reason to count on foreign governments continuing to lend to the US government year after year. It's like jumping off a skyscraper and half way down saying, "Hmm, so far so good!"

George Reisman once again gave a splendid lecture entitled "The Benevolence of Capitalism." The thesis: capitalism promotes human life and well-being and does so for everyone. Amen, preach on!

Freedom is the foundation of personal safety and economic security. Some people think there is a conflict of security and freedom, but really freedom is the foundation of security. Why? Freedom is the absence of initiation of physical force. When one is free, one is safe and secure from common crimes. To the extent we have freedom we are safe and physically secure. Free from government, which is potentially much worse than a common criminal gang. Furthermore, where there is freedom there is peace abroad, because once again there is absence of force. Economic security under freedom derives from the fact that you can do whatever you want to do without using physical force. With the use of force prohibited, he must use his reason to find ways to increase his own well being with others through trade and production. Hence, during the age of capitalism a continuing increase in the supply of economically useable, accessible natural resources has been made possible.

Production and economic activity, by their very nature, serve to improve man's environment. We hear a lot that man is destroying the environment, but it is really the exact opposite. We are constantly at work improving our environment and adapting it to ourselves. All we do is put chemical elements into forms and locations of greater utility to us.

The division of labor, which can exist in highly developed form only under capitalism, provides major benefits to the human race. Man continues to gain at ever increasing rates from the multiplication of the amount of knowledge that enters into the productive process. Just consider that each occupation has its own body of knowledge. The totality of this knowledge operates to benefit all consumers and hence all producers. We obtain the benefit of knowledge throughout the economic system, with new products to improve ourselves. Such products are not possible under anything but capitalism.

At least since the time of Adam Smith and David Ricardo, it has been known that there is a tendency in a capitalist economy toward and equalization of the rate of profit, or rate of return, on capital across all branches of the economic system. The operation of this principle provides balance among the different branches of production. In response to changes in prices, production is driven. Consumers drive where investment and production go. Any given business can earn an above average rate of return by innovating with new products or by cutting costs with more efficiency. These new earnings attract competitors, which encourages satisfaction of consumers by continuing innovation and by providing an incentive to lower prices.

As Mises has shown, in a market economy, private ownership of the means of production operates to the benefit of everyone, non-owners as well as owners. To receive the benefit of Exxon's production of oil, I don't even have to own stock in the company. I just have to use a car or something else that uses oil. A corollary of the general benefit from private ownership of the means of production is the general benefit from the institution of inheritance. Inheritance encourages people to save capital. More accumulated capital is, of course, a boom for the market, the benefits of those investments get passed on to consumers.

Under capitalism, not only is one man's gain not another man's loss, insofar as it comes out of an increase in overall, total production, but also - in the most important cases, namely , those of the building of great industrial fortunes - one man's gain is positively other men's gain - implications of earning a high rate of profit for a long period of time and saving and reinvesting the far greater part of the profits. As we have seen, the earning of profit for a long period of time results in new innovations, which also serves consumers.

Competition is an often misunderstood element of the capitalist system. For instance, it is often likened to biological competition as though we're all "fighting for our survival" hoping to be the fittest. Contrasted with biological competition, competition results in the positive creation of new and additional wealth. In fact, it's character is diametrically opposite to biological competition. Man, by virtue of his possession of reason, can increase the supply of everything. In contrast with animals, who compete for the limited supply of things, capitalists have the ability to create new things and earn new wealth. Instead of survival of the fittest, capitalism results in the potential of survival of all. The only "fittest" that survive are the fittest products and methods of production that increase wealth. Each individual out-competes all others for his special place in the capitalist system. For example, Bill Gates, who can obviously out-compete a janitor in the job for software mogul, could possibly be so talented as to also out-compete the janitor by being able to clean five times as fast as the janitor. Yet, the janitor can out-compete Bill Gates (and all others, for that matter) by being able to do the job at such a significantly lower price than Gates, who earns a grandiose salary. As a result, even janitors can enjoy the benefits of homes, tasty food, and cars. Farmers who were driven out of business by other farmers utilizing new innovations such as tractors didn't starve, but changed their profession and still enjoyed the benefits of industrialization. Competition allows normal people today to enjoy even a greater standard of living than Queen Victoria (save in the ability to purchase servants). The enemies of competition are the true advocates of the law of the jungle.

Far from being a "plan-less system", individuals plan their own existences and what they want to do with themselves to better their well-being. These plans are routine in the capitalist system. The means by which people are able to plan is through the consideration of prices in comparison to their own costs and incomes. Individuals planning to sell goods and services use prices to determine how to sell. Consumers plan by checking the prices of the goods available. Consumer plans and producer plans harmonize together in order to bring maximum feasible satisfaction to both. Planning and re-planning from all participants maximizes gains and minimizes losses. In destroying the means of production, socialism destroys the division of labor which makes possible the increase of the welfare of many.

People tend to have a very negative view of monopolies. In reality, though, socialism is the system of monopoly and capitalism is the system of freedom and free competition. Consider the requirement of being a sole supplier under capitalism: the price the business charges is just too low to enable others to enter the field. How is that bad for consumers? In order for the cost to enter be too high the capital must be used more effectively than anybody else trying to enter the market. A monopoly can only exist when the government protects an individual business by preventing through law any business from attempting to enter the market for that good.

How can someone say that capitalism isn't good for people?

Thursday, August 03, 2006

Part 4: Property Rights Bonanza

Wednesday began the concurrent seminar that you had to choose between. In this case, lectures and time are scarce resources, so I had to pick those that were ranked highest in my ordinal preferences. Ok, that was a bad joke. But still, all these lectures will have free mp3 files available online at www.mises.org starting next week, so maybe they lectures aren't so scarce?

Hans-Hermann Hoppe gave a dynamite lecture on law and economics that laid the framework for law starting with property rights. He explained the Austrian view of law in contrast with the Chicago school. He started, as he seems to always do, with a question: why do we need any rules at all? Imagine the Garden of Eden, which is characterized by super-abundance of goods. Conflicts cannot arise over the use of the Garden's food, because if you wanted something to eat you could instantly get it. We can conclude that conflicts can only exist when scarcity is present. That may seem a little far fetched, but it isn't as crazy as it sounds. You only have one body, you only can occupy a certain amount of space. In that case, even in the Garden of Eden there is scarcity of space and the possibility of conflict of bodily harm. The only way we can deal with this is to develop rules regarding the use of scarce resources. These are called property rules and property rights. In the Garden the rules become fairly obvious: if you want to do something to me, you must have my permission, and you cannot displace me for my space forcibly.

The real world is, of course, much more complicated. The real world is characterized by all around scarcity. Thus, all sorts of conflict arise. We need rules to avoid all these sorts of conflict for exclusive control of property. It turns out that rules have developed over time, especially in the west around the 1100s to 1700s.

These rules are as follows:
Self-ownership - Every person is the owner of his physical body. No one else can do something to your physical body without your permission.
First-use-first-own (original appropriation, homesteading) - Whoever is the first to use something that was previously unowned becomes the owner of such a thing. Scarcity in land is recognized, one appropriates that land, uses it, and now can exclude others from using it without permission.
Producers own products of his labor - If I make something out of what I own, it is mine.
Voluntary (contractual) transfer from earlier to later owner - Follows from previous rules. If I am the owner of what I have appropriated, than I have the right to voluntarily dispose of it as I please.

By and large, this is what people accept in their daily lives. You see it all the time in society, you see it even with kids playing! I was even thinking today that when somebody bumps into you accidentally, they often will apologize. Why is this? Because we know intuitively that our fellow man has property rights and that even in small cases such as this it is polite to apologize.

Think about what would happen if we didn't have these rules. What if, instead of self-ownership, the rule was "I own you, but you don't own me." That sounds like nothing more than slavery to me! You could also posit universal communism: "You own part of me, I own part of you." But you cannot even implement this! If you owned part of me, I would need your permission to even move to a different location. You would have to do this verbally, though, and you then run into another problem. Your vocal cords are now partly owned by somebody else whom you must gain permission from to use. But that person whom you need to get permission from would have the same problem. So you would have to do nothing, but even to do nothing you would need permission… Do you see how non-sensical this type of reasoning is? The other rules simply follow from in this sort of example. There is no way to deny these rules without getting yourself into deep intellectual trouble.

George Reisman did an incredible lecture on environmental and resource economics. He has been a very prominent critic of environmentalism, and has written extensively about this topic in his landmark treatise called Capitalism. He says the theme of environmentalism is that "continuing economic progress is impossible because of the impending exhaustion of natural resources, and dangerous to the extent that it is possible, because of harm to the environment."

But we must understand that the earth has a practically unlimited potential supply of natural resources - it's just that we don't know how to get at it all yet. The entire earth is full of matter that can be converted into useful things for human well-being with knowledge and skill. The earth isn't just going to "run out" of resources, all we have to do is find ways to harvest it.

Furthermore, clearly the environment only has value inasmuch as it is valued by humans.
The inherent tendency of production is actually to improve the environment, to better the relationship between the elements and man. This can be seen fairly readily when we see that the entire earth is packed of chemical elements. From the perspective of physics and chemistry, all of production of economic activity is the modification and change of location of chemical elements. We adapt the environment to ourselves to improve our well-being.

The populations of species and the quality of water and air supports this proposition. We are not wantonly destroying the species, we are radically multiplying the species that are of benefit to us. We have had amazing success at doing this with animals, such as cattle, and plant species, such as grains. What about water quality? Are we destroying the water supply? Just go to a third world country, the water is horrible! Industrialization means a vast improvement in the quality of water What about air quality? Air conditioning, heating, humidification - these are all improvements to our environment! Before the automobile, people had to deal with the stench of horse manure and urine (and human excrement for that matter) all over the road. Reisman said that similar to the phrase "stop and smell the roses," we should all every once in a while "stop and appreciate the products" that come from all our efforts to improve our environment.

This type of view of environment is completely rejected by the environmentalist movement. They hold to an intrinsic value doctrine, that the alleged value of nature is in and of itself, totally apart from all conection to human life and well-being. Even though things ultimately derive their value from human beings, environmentalism completely rejects that idea of value at all and regards value in things that aren't even living (like rock formations). Consider that the environmentalism movement is not concerned with cases of real harm to people, but concentrates on cases where there is no one who can be found who are being perceptively harmed. Humans have the capacity to adapt to situations, and we will continue to do so in response to environmental changes.

I've found here at Mises University that Walter Block is a really funny guy, and he continued to make me laugh and think in his lecture on private property. He said that the general case for privatization is to privatize anything that moves, and after that to privatize anything that doesn't move. That sort of sums up the whole of the world, don't you think? He gives two reasons for this rather radical viewpoint. The first is moral - when something is privatized it becomes part of the system of freedom. When it is public, it necessarily brings in the ethical problem of coercion. The second is practical - socialism can't calculate (see previous post on economic calculation).

He focused his lecture on a not-often-talked-about subject that happens to be one of my favorites - the privatization of roads. It just so happens that Block is rather famous for this subject, so I was quite excited to hear him speak on this. Block started thinking about road privatization for many reasons. First, if the case for privatization is to be robust, it needs to be just as effectively dealt with in the tough cases as in the easier cases. Not necessarily completely solved, mind you, we know just as much about roads as the next interstate driver, but robust. Second, 40,000 people die on roads every year. People don't get riled about this number often because they look at it like death and taxes - it's an inevitable part of highway systems. However, that number should give us pause. Third, traffic congestion. Everybody hates it, nobody deals with it very well, and it is the reason many of those deaths occur. Third, groups like Mothers Against Drunk Driving (MADD) can't be as effective because they can't own highways to help get rid of the problem. Instead, what we have is the Sovietization of highways. Let's be blunt (or just Block), most people are just road socialists.

Now, the argument for the privatization of roads really isn't as strange as it sounds. There are examples in history of private roads, that charged for various services. There's nothing about long thin things that automatically require them to be a government operation. How do we explain the hostility of so many mainstream economists towards these ideas? Well, maybe it's because so many are employed by transportation administrations? I don't know, just keep following the money and you may find the answer.

Generally, the top three reasons given that we have fatalities on highways (according to mainstream economists) is speed, drunk driving, and weather conditions. Block says that these are confusions of proximate and ultimate causes. Suppose a restaurant went bankrupt and the reasons I gave you were that the waitresses were bad, the food was bad, the place was dirty, it had a bad location, and the like. Those obviously are reasons I didn't like the restaurant, but in reality we wouldn't accept this as an answer. The real reason the restaurant failed is because of poor management. In the case of the roads, the fault is the government's, but there's a slight problem. They can't go "bankrupt" and get put out of the market.

What will this privatized road system look like? Well, we can't answer this question absolutely, we can only speculate. So let's speculate a little… How might we have more safety? We could institute higher penalties for infractions of rules set up by the owners. You could set out road markers for where people have died in accidents. This is already being done and reminds people that highway driving is dangerous. You could put up wrecked cars on poles like a billboard and show people what a wreck can do to you and your property. Let the price system deal with the peak times of traffic to relieve congestion. Again, we can only speculate to deal with these things, ultimately entrepreneurs would be able to handle these issues most effectively.

So, now that roads are privatized, how are we going to privatize oceans?

Wednesday, August 02, 2006

Part 3: Socialism Can't Calculate

Tuesday was filled once again with required lectures focusing on more fundamentals of Austrian school economics.

Thomas DiLorenzo gave an excellent lecture on monopolies and competition. There's a lot written in textbooks on monopolies, but the Austrian view is different from the mainstream and has broad implications to business and government today. In the 18th century, business was viewed very much like the Austrians - rivalry and entrepreneurship and competition for consumer's dollars. If in the process you were able to corner the market because of your better business (and not because you got the government to force everyone else out of the market such as in utilities), then that was the market working itself out. It was known very well that the only way to create a true "monopoly" was through government restrictions and protectionism. When the first antitrust laws (the Sherman Act) were passed, there was almost unanimous criticism against them. Even socialists (of all people) said that these businesses were the natural outgrowth of business evolution. Who would have thought that the socialists would agree with the free market on anything, much less the aspect of monopolies.

This all changed with a revolution in thinking about markets in economic scholarship. Economists tried to "mathematize" economics to make it look more like physics. They developed the so-called theory of "perfect competition" and its assumptions of the "many firms," homogeneous products, free entry, and perfect information. I'd have to write a huge article to attempt to explain these things, so I'll let Hayek summarize it for me in his essay "The Meaning of Competition": "In perfect competition, there is no competition. It's all assumed away."

Peter Klein, our next lecturer, happens to be from the University of Missouri - Columbia. So there really is hope for Missouri! Peter is very kind and personable; I talked with him for a while after his lecture on the economics of the firm. So, what exactly is a firm? Many people would answer a factory, but that's not really true. That places too much emphasis on technology rather than valuation, and there is very little thinking from the consumer's point of view. Furthermore, there is no place for the entrepreneur or the investor in those ideas, and we haven't yet described the firm as a legal entity either. Without too much elaboration, Austrians say the firm is described in terms of the ownership of assets. The firm is the capitalist-entrepreneur (or a group of capitalist-entrepreneurs) plus the assets he owns. Firms can own many, or no, production processes.

Why do firms exist in the first place? Firms allow individuals to reduce the number of transactions needed to commence a market operation. It follows that firms also exist because of the need for economic calculation. Austrian economics does offer a unique theory of production, not merely a verbal rendition of neoclassical production theory. It can provide a causal, realistic analysis of factor pricing and usage that is grounded in marginal utility theory.

Robert Murphy then lectured on Austrian versus neoclassical analytics in economics. It was very interesting but doesn't apply as much to those newly learning the fundamentals of economics, so I won't elaborate upon it very much. Here's the essence of the differences: Austrians focus on studying the market process, or market equilibration. We try to find the forces that propel the market towards balance. They look for causal relationships through the lens of praxeology, the logic of action. Neoclassicals, on the other hadn, focus on finding the specific "equilibrium points" of those wacky equations they are always saying describe the market fully. Again, Austrians look at the process of equilibrium versus the points of equilibrium.

Now came Joseph Salerno's lecture on calculation and socialism. You've probably already read the words "economic calculation" in my posts, so I hope to explain in two or three paragraphs what Mises wrote books about.

One of the most important articles in economic history is "Economic Calculation in the Socialist Commonwealth" by Ludwig von Mises. It destroyed the theoretical foundation of socialism and proposed many revolutionary ideas for economists to consider. The debate regarding socialism when the article was published in 1920 was was over the problem of incentives. Mises said that for economic success to occur there must be three preconditions: there must be private property in all orders of goods, there must be freedom to exchange for money or other things, there must be sound money. Mises' analysis proved this, and then he showed that socialism abolishes each of these! Furthermore, when these conditions are abolished, the entire basis of social order is abolished. His argument was not that socialism could not exist on a very small scale (like a family), but that it could not be used as the basis for planning a state.

Consider an example such as the production of a car. Mises argued that under socialism no one would know what would be the best method for producing the car. Each scarce resource needed to produce the car (steel, electronics, labor, management, engineering, etc.) could be used to produce other things, likes bikes or houses. There is no way of knowing what will be the best mode of efficiency, though, because all the resources (capital goods) are owned by the state (that's what socialism is, by the way). Hence, you cannot compare the costs of production! Because one person/entity owns the resources, there can be no exchange and competition for the factors of production.

In capitalism, on the other hand, one speculates that the car will sell for $20,000, and then he counts his costs. He then calculates his costs as $18000 and concludes that he should make the car. He could be successful at this effort, make a profit, and continue to produce goods which he trades in the market economy. However, he could be mistaken in his speculation and not make a profit. Because of his inefficient use of production factorsl, those resources would be diverted to more productive pursuits. But here's the problem of socialism: no one can ever know if the resources should be used for that product! The system literally falls apart when applied to the production of goods. You cannot have valuation without calculation! As Mises would say, the central planner would be "in a vast desert without a compass." Do entrepreneurs ever make mistakes? Sure they do, but the errors are revealed quickly through the price system and then corrected. In socialism, it's just planned chaos. Mises was proved right with the ultimate collapse of the Soviet Union in the 1980s.