Tuesday, December 17, 2013

Bukowski on Democracy

Poet Charles Bukowski reads a humorous poem, "Law," on the dangerous nature of democracy.


Thursday, December 12, 2013

Upcoming Broadcasts of Economic Freedom in Action

EFIA BR Dates 12-11-12-22

For a complete list of all currently scheduled broadcasts, visit the film's website and view the carriage reports.

Holiday Sale!

Now through Dec. 20th, get 50% off all products (except t-shirts and mugs) in the FTCN store! Use the promo code Holiday50 at checkout.

Give the gift of knowledge this holiday season.

Ftcn holiday-sale-box

Choose or Decide?

What is the difference between "to choose" and "to decide?"  Does the difference have implications on the nature of freedom?  For this and more, read this neat analysis on the fundamental component of liberty: Choice.

Tuesday, December 3, 2013

FEE: Drones: Not Just for Missiles Anymore

The internet is abuzz after Amazon unveiled their latest idea: the delivery of goods to your doorstep within thirty minutes via drone. Yes, the infamous drone will finally be put to constructive use. Here's the video, if you haven't already seen it:

The technology is incredible, and their goal is to have these piloted by computers, not humans. Imagine: You punch in your GPS coordinates, wherever you are, and an Amazon "octo-copter" flies quickly to your location and delivers your package.

Drone technology provides us with a clear, sobering contrast: The private sector innovates new ways to create value for people. The government innovates new ways to destroy value and kill people.

Some commercially viable technologies start out in government R&D labs. But this is merely due to their ability gobble up human and other resources that could be used in other ways. There's nothing special about the individuals "innovating" on behalf of the government' if they weren't employed by the inefficient and destructive government, they could work for private, peaceful companies, at no cost to taxpayers.

I would like to point something else out, however. What a contrast between the individuals working for the private sector and those working in government. Here we have extraordinary technology, and the folks at Amazon ask, "How can we use this to serve people better?" and "Can it make everybody's lives easier?"

The first thing many governmental officials ask is, "Can we strap missiles to it?" and "How effective could this be at killing people?"

Someday, with Amazon's help, it might be exciting to see drones flying overhead, rather than being a reason to run for shelter.

Read more: http://www.fee.org/the_freeman/detail/drones-not-just-for-missiles-anymore#ixzz2mQeU4EVU

Wednesday, November 6, 2013

Johan Norberg discusses Economic Freedom at CATO

Johan Norberg, the host of our "Economic Freedom in Action: Changing Lives," speaks to the sincere improvements around the world due to increased economic liberties.  Changing Lives is airing now, go here for National Review's review of the documentary broadcast.


Cafe Hayek: The Greatest Risks to Food Supplies Are Posed by Anti-Market Sentiments and Intrusions

            by DON BOUDREUAX

Here's a letter that I sent a few days ago to the New York Times:
You report that "Climate change will pose sharp risks to the world's food supply in coming decades" ("Climate Change Seen Posing Risk to Food Supplies," Nov. 2) - with the premise that this impending calamity requires aggressive government curtailment or modification of industrial capitalist activities.

Color me skeptical.  Wherever industrial capitalism has flourished over the past three centuries it has eliminated for the first time in human history the millennia-long curse of recurrent famines.  Today, food is in short supply only in societies without market institutions and cut off from global trade.  (The people suffering the greatest risk now of fatal shortages of food are true locavores, such as the North Koreans and the Somalis.)  Relatedly, some of the worst famines in modern times "most notably, in Stalin's Soviet Union and Mao's China" have been caused by the hubris of government officials curtailing market forces with command-and-control regulations.
The greatest risk to the world's food supply is not the industrial capitalist activities that environmentalists are keen to curtail.  Rather, the greatest risk is the trust that many currently well-fed westerners blithely put in government to rein in the only force in human history that has proven successful at eliminating starvation: market-driven capitalism.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

Monday, November 4, 2013

Jefferson on Firearms


A Quick Fix Courtesy of Karl Marx: Privatize Social Security and the economy will roar back

            by MAX BORDERS

It is always a good time to privatize Social Security. In the long run, it is better for people to save for retirement, via portfolios of stocks and bonds, than to be dependent in old age on government handouts. The long-run case for Social Security privatization has been discussed before, especially in 2005, when George W. Bush had just been elected on a platform featuring Social Security reform. But doing it now has short-run benefits. Privatizing Social Security is the best way to get us out of this economic slump. Here's why.

In broad terms, a pay-as-you-go system of public pensions, such as America's Social Security program, reduces the overall savings rate, and therefore the growth of the capital stock and the economy. It corrupts the political system, turning it into a tug-of-war for society's resources, as older generations demand payback for years of forced contributions "but get it from younger generations" current production, via public tax-and-transfer systems. The government gets more current income, which it spends, and long-term obligations, burdening future taxpayers. Pay-as-you-go systems cheat the future, but the government can't save without partially nationalizing private banks and corporations.

As for the current recession, economists and other pundits have a number of explanations. Keynesians like Paul Krugman and Matt Yglesias blame a "liquidity trap," in which further injections of liquidity don't stimulate the economy; they just get hoarded. In their own way, "market monetarists" like Scott Sumner (who blogs at www.themoneyillusion.com) believe this as well.

On the other side, Tyler Cowen sees the 2008 financial crisis and the slump that followed as a symptom of a "Great Stagnation" that has been decades in the making, while Casey Mulligan argues that we are suffering a "redistribution recession" because minimum wages, more generous unemployment insurance, and other policy changes have made people less willing to work.

Escaping the Liquidity Trap

All of them are right. But it is the liquidity trap that Social Security privatization could solve. Two charts will help to illustrate what the liquidity trap means. First, business investment (using Bureau of Economic Analysis data):

Whereas strong business investment created jobs and raised wages during the late 1990s boom, business investment grew slowly under Bush and plummeted under Obama. I constructed a somewhat arbitrary but nonetheless revealing "trend" based on the years 1967-1996. By this standard, business investment is about 14 percent too low. Second, look at the time path of the "safe" interest rate paid on U.S. Treasury bonds:

Do you see what's happening? Since 2008, interest rates have stopped their normal fluctuations and become stuck at the zero lower bound. That's the liquidity trap.

The obvious part of the liquidity trap is that U.S. Treasury bonds can't pay less than 0 percent nominal interest. If they did, investors would hold cash instead. The subtle part is that just because interest rates are stuck at zero doesn't mean the forces that affect the interest rate have stopped operating. Rather, it is a safe bet that the natural equilibrium interest rate has been fluctuating as usual, only in negative territory. Money, by offering a riskless 0 percent return, has been preventing the market for investment funds from clearing properly.

The Natural Interest Rate

The natural rate of interest is a tricky concept to understand. Start here: Economic growth requires risk-taking. Indeed, even for the economy to hold steady requires risk-taking, since even routine maintenance is an investment that may not pay off. But initiating new economic activity "launching new projects, developing new products, building new plants, founding new companies, hiring new employees" usually involves more risk. To attract investors to a risky project, you need to compensate them. You need to offer a risk premium.

In an investments class, you might be taught to treat the rate paid on T-bills, or the "safe" interest rate, as a baseline to which a risk premium must be added to attract money into riskier asset classes. To understand the concept of the natural or equilibrium interest rate, we can turn this around. Think of the expected rate of return on the risky projects entrepreneurs want to pursue. Then subtract the risk premium. That's the natural rate of interest.

Of course, that explanation is a bit vague and oversimplified. Entrepreneurs have many projects in mind; not all will be pursued; there are many different risk premiums; and financial markets cunningly sift through it all in setting asset prices that balance risk and return. Still, for present purposes all we need to understand is that the natural rate can be negative, if entrepreneurs' projects offer rather poor returns and/or investors are especially risk averse.

That is what has happened since 2008. Why, is debatable. If we believe in Cowen's Great Stagnation, we might say there just aren't many good projects around for entrepreneurs to pursue right now. If we believe in Casey Mulligan's redistribution recession, we might say that unemployment benefits are turning potential entrepreneurs into couch potatoes. Uncertainty, especially due to huge deficits and Obamacare, is a major culprit in the eyes of the business community, but uncertainty is hard to measure. Keynesians like to say investment is down because aggregate demand is down: Why build capacity when you have too much already? That can't be the whole story, because much investment is oriented toward the medium- to long-run future. The graying of the U.S. population may be reducing investors "collective appetite for risk. Seniors, set in their ways, like fixed incomes. Whatever the reason, interest rates don't lie. Expected returns on entrepreneurs" projects, minus risk premiums, must be zero or less. Otherwise investors wouldn't buy T-bills that pay so little interest.

When interest rates hit the zero lower bound, you're in a liquidity trap.

The Money Store

Money is said to have three functions: (1) as a medium of exchange, (2) as a unit of account, and (3) as a store of value. In normal times it is a poor store of value. When you get it, you want to either spend it or buy assets that pay interest. At the zero lower bound, though, money becomes competitive as a store of value.

This can initiate a vicious cycle. With interest rates at zero, people start taking cash out of circulation to use it as a savings vehicle. Money in circulation gets scarcer and rises in value vis-a-vis goods; that is, prices fall. Deflation makes the real return on holding money positive: Hoard a dollar today, and it will buy more tomorrow. So hoarding leads to falling prices, which encourages more hoarding. That's more or less what happened in the Great Depression.

The Fed since 2008 has been determined not to let that happen again. It flooded the system with money and, though housing prices fell sharply, it prevented a general deflation. But we're still stuck at the zero lower bound.

In a liquidity trap, entrepreneurs who could use investors' money to grow the economy have to compete for investment capital against cash and against T-bills that are now almost equivalent to cash. Entrepreneurs would try to create real future value. Cash and T-bills don't. So when money goes to cash and T-bills instead of to entrepreneurs, too little economic activity occurs. But we can't get out of the liquidity trap by abolishing cash. So what is to be done?

We tried fiscal "stimulus" in 2009. In the wake of the financial crisis of 2008, federal deficits surged to over $1 trillion per year. In Keynesian theory, tax cuts and extra spending should have boosted consumption by putting more money in people's pockets, but they didn't. Instead, people and firms saved more. That's just what "Ricardian equivalence," the theory that people are rational and save to offset future fiscal policy, predicts.

Since 2011, the government has raised taxes and begun to bring spending under control. In Keynesian theory, these moves should have curtailed consumption, but they didn't. As the government began to get the budget under control, the stock market surged. Consumers with less disposable income but more wealth have little reason to cut their spending. Again, the facts fit "Ricardian equivalence' "a nemesis of Keynesianism"operating in this case via stock prices.

Although the Fed's normal methods for managing the macroeconomy via interest rates don't work in a liquidity trap (if they ever do, which is debatable), the Fed could get us out of the liquidity trap by printing enough money to ignite inflation. In that case, since cash would be losing value, entrepreneurs; projects would become relatively more attractive to investors. But inflation makes it hard for people and firms to make long-term plans. Relative prices become maladjusted, as some rise faster than others, causing inefficiency. A lot of unfair redistribution takes place: for example, from lenders to debtors, or from people on fixed incomes to landowners and workers. Once inflation gets started, it's hard to control. That cure may be worse than the disease.

A Way Out

So far, so bleak. And yet there is a solution. The irony is that even as investors; high demand for government debt is causing all these problems for the economy, there is a lot of quasi-government debt outstanding whose owners would be happy to sell it, if only they were allowed to do so. This debt consists of the Social Security Administration's largely unfunded promises to future retirees.

Legally, these promises are not debts. According to the Supreme Court decision Flemming v. Nestor, there is no right to collect Social Security benefits; Congress can revoke them at will. It would be nice to convert these revocable "entitlements" into real property rights, but how to do so is tricky.

Transitional challenges aside, Social Security privatization would essentially convert people's entitlements to future Social Security benefits into explicit government debts contained in private accounts. That done, individuals would be allowed to sell at least some of these bonds in exchange for private-sector stocks and bonds' and they would, since stocks perform best over the long run, yielding an average of 7 percent per year. Volatility doesn't matter for workers far from retirement. So Social Security privatization would lead to (a) a flood of Treasury bonds into the bond market, and (b) a flood of money into the stock market, as individuals optimized their portfolios.

With so many new Treasury bonds coming into the market, flight-to-safety investors would be more than satiated. The government's liabilities under Social Security are huge, and there's no way investors would buy them all at a near-zero interest rate. Interest rates would rise. We would be free of the liquidity trap.

At the same time, the new money flowing into the stock market would push stock prices up further, and that would drive a revival in business investment. Nobel laureate James Tobin long since explained why high stock prices promote business investment, and the data back him up. Stock prices express the market's opinion about what the existing capital stock is worth, and therefore whether it's worth making more of it. When stock prices are low, the best way to get structures and equipment is to buy existing firms that have them, not to build. When stock prices are high, entrepreneurs are motivated to start new companies and make initial public offerings. Existing companies can sell new shares to raise capital to finance new ventures.

As Social Security privatization raised stock prices, therefore, it would fuel a boom in business investment, leading to job creation and rising wages. Goodbye, economic slump. The financial logic is a little tricky, but here's the essential point: Someone needs to take risks to get the economy moving, and Social Security privatization would empower ordinary Americans to do it.

Social Security privatization is more a smart-government reform than a small-government reform, though it does give individuals a bit more say in how their lives are run. It has been adopted both in the world's best-run capitalist mecca, Singapore, and in the world's best-run social-democratic welfare state, Sweden.

Ironically, especially for a free-market economist like myself, Karl Marx provides some inspiration. Marx wanted the workers to own the means of production; Social Security privatization would bring this about. Through private retirement accounts, ordinary workers would own shares in the private firms that own the country's productive capital stock. That promotes social solidarity. Workers of the world could unite; to make bets on the country's future. With that vote of confidence from all these newly minted capitalists, the economy would come roaring back.

Read more: http://www.fee.org/the_freeman/detail/a-quick-fix-courtesy-of-karl-marx#ixzz2jh5mVhI7

Thursday, October 31, 2013

FEE: The Root of Evil

            by SARAH SKWIRE

"The Pardoner's Tale" from Geoffrey Chaucer's Canterbury Tales is a grisly little moral tale, perfect for Halloween, that we are told is intended to illustrate the grim truth of the maxim, "Radix malorum est cupiditas" or "The love of money is the root of evil."  It is referenced quite often as evidence of the way literature feels about money. But stories are not mathematical equations, and the things they say they will accomplish are not always the things they really want to accomplish. This is particularly true of Chaucer's set of tales' told by remarkably unreliable storytellers, for a variety of complex reasons, to a fairly unpredictable audience. So when the Pardoner is urged to tell "some moral thing" and promises to provide a tale that will illustrate the wickedness of avarice, we should be cautious about assuming that we know what will happen next.

It is true that the plot of "The Pardoner's Tale" is a classic example of greed gone wrong. After a long introduction in which the Pardoner (a layman who sells pardons or indulgences to sinners) excoriates the sins of drunkenness, gluttony, and gambling, he begins to tell the tale of three young men who indulge in all these vices' plus a few more just for fun. They are sitting and drinking in a tavern one day when they hear a bell announce a funeral procession in the street. Finding out that the deceased is an old drinking and gambling companion, they vow to take their revenge on Death.

The three friends wander out into the street and come across an old man who tells them that if they are seeking Death, he can help them find him. He sends them to look for Death under an old oak tree. They find the tree, and underneath it they find eight bushels of gold coins. Distracted by their newfound wealth, they put their plans to wreak vengeance on hold and decide to wait until nighttime and carry the treasure home under cover of darkness. One of the three is sent into town to bring food and wine to sustain the group until then.

The two friends who remain guarding the gold rapidly decide to kill the third friend for his share of the coins. He, meanwhile, is poisoning their bottles of wine for exactly the same reason. When he returns with the bread and wine, they kill him. Celebrating their success with healthy swigs of the wine he brought, they fall dead as well.

The moral lesson could hardly be clearer: Sin leads to sin. And the love of money leads to the worst sins of all.

The tricky thing about this apparently transparent little tale is the person who tells it. Chaucer's Pardoner is not a particularly reliable moral guide. In fact, he's a fraud, a con artist, and a blasphemer. In "The Pardoner's Prologue," before the tale, he tells his audience all about it quite plainly. He begins by describing the false holy relics he carries with him to display and to use to solicit donations, and notes that:

By this fraud have I won me, year by year,
A hundred marks, since I've been pardoner.
I stand up like a scholar in pulpit,
And when the ignorant people all do sit,
I preach, as you have heard me say before,
And tell a hundred false japes, less or more.
I am at pains, then, to stretch forth my neck,
And east and west upon the folk I beck,
As does a dove that's sitting on a barn.
With hands and swift tongue, then, do I so yarn
That it's a joy to see my busyness.
Of avarice and of all such wickedness
Is all my preaching, thus to make them free
With offered pence, the which pence come to me.
For my intent is only pence to win,
And not at all for punishment of sin.*

In other words, the Pardoner is dishonest, immoral, and driven by the same sin he preaches against. Indeed, he is worse than just avaricious. Because his job is to sell real indulgences and provide sinners with an honest opportunity to repent and be saved, his fraudulence damns the souls of those who trust him to assist in their salvation. He is at least as murderous as the three men in his tale, if not more so.

The Pardoner insists that "though I am myself a vicious man,/Yet I would tell a moral tale, and can." But surely we cannot be meant to take his story at face value, knowing what we know of him. Indeed, the moment his tale is told he swings into his old sales pitch, trying to persuade his audience to overlook what he has told them about his false relics and his personal avarice, trying to sell them a lying salvation as well. We are not allowed, for a minute, to forget the vile lying huckster he really is.

So is "The Pardoner's Tale"  really about "Radix malorum est cupiditas"? Yes and no. Certainly the tale that is told has that as its moral. But that particular tale, told by that particular teller, may well serve more as a cautionary tale about trusting in clerics and their promises of salvation, than as a warning about the dangers of wealth.

Read more: http://www.fee.org/the_freeman/detail/the-root-of-evil#ixzz2jK0AqpPd

Thomas Sowell reminds us...

...that we can, at the very least, ask the necessary and reasonable questions.


Saturday, October 26, 2013

Cafe Hayek: The Science of the Minimum-Wage Debate

            by DON BOUDREAUX

Among the topics discussed in my Econ 103 (Principles of Microeconomics) class this past Tuesday night was minimum-wage legislation.  The minimum wage is, every semester, my chief real-world example of a legislated price floor – a government policy that I discuss immediately after I cover legislated price ceilings such as rent control and the 1970s caps on energy prices.
As always, I informed my students that, compared to twenty or thirty years ago, a smaller portion of economists today agree that minimum-wage legislation harms low-skilled workers.
After class a handful of students walked with me to my car to continue the minimum-wage discussion.  I went with them into more detail into the monopsony model.  (I’m tempted to be pleased that the reaction of each of these four students to the claim that employers such as McDonalds and Wal-Mart have monopsony power as employers of low-skilled workers was one of disbelief – and with no prompting from me.  But I resist this temptation because many students – I can’t speak for those specific four – also react with disbelief, when they first encounter the argument, that Americans should cheer rather than fear free trade with low-wage countries such as Mexico and China.  Untutored instincts are sometimes accurate and sometimes wildly inaccurate.)
Anyway, I sent to these students links to many of the relevant posts here at the Cafe on this topic as well as links to the Card-Krueger paper and to this recent PBS interview of Krueger.  I promised – in exchange for their promise to read and ponder the materials I sent to them – a follow-up blog post on some questions that I believe proponents of a legislated minimum-wage must answer before their policy recommendations are taken seriously.  Some of these questions have been asked here before; some are new.
So, here are some more questions to proponents of legislated minimum wages. Let’s assume that studies by Card and Krueger, and others such as Katz, are accurate: higher minimum wages in the situations studied empirically in these papers did indeed increase, or not decrease, the number of jobs (or hours of employment) for low-skilled workers.  Let’s assume also that (1) no other difficult-to-observe terms of employment (for example, the strictness with which workers are worked per hour) are negatively affected by the minimum wage, and (2) the reason for these happy outcomes is employers’ monopsony power.
1. How general are these situations in which the straightforward predictions of the law of demand are overridden by the effects of monopsony power?  You say that those of us who are skeptical that minimum-wage legislation is a net benefit to low-skilled workers unscientifically dismiss as either mistaken or incomplete the empirical findings of these studies when we continue to generalize our understanding of the dominance of the law of demand to the market for low-skilled workers.  What is your proposed degree of generalization of your findings?  In your view, do these findings apply only to the particular places and time periods covered by the empirical studies that you find convincing?  Or do you propose that we – economists, citizens, and policy-makers – generalize these findings to cover other firms and industries that employ low-skilled workers and other time periods in which low-skilled workers seek jobs?
2. I live in October 2013 in Fairfax, Virginia.  Have careful empirical studies of the effects of minimum-wage legislation on the job prospects of low-skilled workers in October 2013 in Fairfax, Virginia, been conducted and, if so, have these studies found that a legislated minimum wage has no negative effects on these workers?  If no such studies of this particular labor market have been conducted, isn’t it unscientific to conclude that a higher minimum wage that affects low-skilled workers in October 2013 in Fairfax, Virginia is beneficial?  If I am unscientific in generalizing my understanding of the dominance of the law of demand to the market for low-skilled workers – and generalizing the conclusions of the many empirical studies that, consistent with the fundamental law of demand, do find that minimum-wage legislation shrinks the job prospects of low-skilled workers – aren’t you equally unscientific when generalizing your empirical findings to locales, firms, industries, and time periods beyond the particular ones that are the direct objects of your studies?
3. Given the fact that there seems to be no obvious reason to justify your generalization as opposed to my generalization, what principle do you propose that we employ to determine which of these two propositions – that the law of demand is dominant, or that monopsony power is dominant – is the best proposition to rely upon to make government policy that applies to all Americans?
4. Is the only labor market marred by monopsony power the market for low-skilled workers?  Is there no monopsony power (as you understand this force) in the market for semi-skilled or high-skilled workers?  If low-skilled workers are the only ones unfortunate enough to be employed by monopsonists, what is it about this labor market that generates monopsony power so uniquely?  If, in contrast, other labor markets too are infused with monopsony power, do you propose also a scale of minimum wages running up to, say, the wages of neurosurgeons and professional basketball players?
5. I’m sure you’ll agree that new firms that hire low-skilled workers start up frequently.  Are these start-up firms monopsonist employers of low-skilled workers?  Is the ready ability of these firms to hire low-skilled workers evidence of monopsony power in the market for low-skilled workers?  If so, how so?  If not, what becomes of your hypothesis that the market for low-skilled workers is marred by monopsony?
6. Do you infer monopsony power in the market for low-skilled workers from the fact that some (although hardly all) empirical studies of the minimum wage find either positive, or no negative, effects on the employment prospects of low-skilled workers?  Or do you have reasons independently of those studies to believe that employers of low-skilled workers enjoy monopsony power?  If the latter, what are those reasons?
7. Given your belief in the (apparently widespread, across time and space) existence of monopsony power in the market for low-skilled workers, what is your theory of the source of that monopsony power?  Surely it’s not collusion, so what is that source?  Relatedly, if such monopsony power exists independently of some government enforcement of such power, why do not you – who are convinced of the reality of this monopsony power – start your own firms to hire these workers?  You’d make a bundle if your theory of reality is accurate.
8. If employers of low-skilled workers do in fact have monopsony power in the market for low-skilled workers, what happens to the excess profits these firms enjoy as a result of exercising this monopsony power? Do these profits remain excess, period after period after period?  If so, do these firms also have some monopoly power to fend off new entrants who greedily would love to join in earning these streams of excess profits?  If so, what is the source of this monopoly power?

Thursday, October 24, 2013

FEE: Master Jugglers and Social Engineers

            by PETER BOETTKE

"Economics," Henry Hazlitt wrote in Economics in One Lesson, "is haunted by more fallacies than any other study known to man. This is no accident. The inherent difficulties of the subject would be great enough in any case, but they are multiplied a thousandfold by a factor that is insignificant in, say, physics, mathematics, or medicine" the special pleading of selfish interests.

Hazlitt, who in essence was simply updating Férric Bastiatés "What Is Seen and What Is Not Seen," defines the bad economist as one who looks only at the immediate consequences of a policy, whereas the good economist looks not only at the immediate consequences, but at the longer-term (and often indirect) consequences of the policy.

Calm Examination and Spending

In normal economic times, interest groups have a strong incentive to align with bad economics to lobby for direct benefits from public policies. In times of economic crisis, this natural tendency to concentrate benefits and disperse costs becomes even more pronounced. Thinking becomes emotional and political, and the logic of economic analysis fails to win the day. As Hazlitt put it: "Emotional economics has given birth to theories that calm examination cannot justify."

Consider the current discussion about government spending and public debt. This is clearly an economic issue that evokes strong emotion and little careful economic analysis—that is, more heat than light. This is not new. On January 6, 1935, Hazlitt published a New York Times article, “The Road to Recovery: Spending or Saving,” in which he gives a fair hearing to both sides of the debate. To the contemporary reader, the discussion will be eerily familiar. Government spending, then as now, is seen to be a source of immediate and direct benefit. If we don’t spend, people will have less money; if people have less money in their pockets they will not buy; if they don’t buy, then stores will not be able to sell; if they don’t sell, they cannot stay in business; if they don’t stay in business, people will lose their jobs; if they don’t have jobs, they will not have money in their pockets; and so on.

Spenders do not address the indirect consequences of public policies requiring increased government spending. On the other hand, the savers support long-run growth. The savings of some become investment funds for private actors through financial intermediation. The savers also criticize the spending agenda in a two-fold manner: Government spending tends to crowd out private investment, and public investments tend to be far less efficient than private investments. Government spending distorts the pattern of investment in an economy, and comes with serious costs for the long run.

The Triumph of Bad Economics

Ignoring the long-run consequences of spending policies is what leads Hazlitt to label such thinking as bad economics. Good economics not only looks at the direct and immediate consequences, but traces out the logic of the indirect and long-run consequences. Good economics is what led Adam Smith to condemn the fiscal irresponsibility of government. "When it becomes necessary for a state to declare itself bankrupt,” Adam Smith wrote in the fifth book of The Wealth of Nations, in the same manner as when it becomes necessary for an individual to do so, a fair, open, and avowed bankruptcy is always the measure which is both least dishonourable to the debtor, and the least hurtful to the creditor. The honour of a state is surely very poorly provided for, when in order to cover the disgrace of a real bankruptcy, it has recourse to a juggling trick of this kind, so easily seen through, and at the same time so extremely pernicious.

Juggling Tricks

Unfortunately, as Smith points out in the next paragraph, all governments, ancient as well as modern, have resorted to juggling tricks rather than face up to their fiscal irresponsibility. The juggling trick that Smith is referencing is the cycle of deficits, debt, and debasement. The classical economists and many modern-day political economists argue that due to the negative consequences of "juggling," we need to establish binding rules that curtail such behavior on the part of governments. Keynes, or more accurately Keynesians, broke with this tradition of constraining public authorities and binding them by rules. They opted instead to embrace the juggling with theory and train generations of economists as social engineers to be master jugglers. But for all their "mastery" we are right here: bankrupt.

If you believe official public accounting, we are $16 trillion in debt. If you look at the work on intergenerational accounting by Laurence Kotlikoff, the fiscal gap is far greater: roughly $211 trillion. Promissory government has resulted in a bill that there is simply no way to pay without crippling our economic future.

What this implies is that we have not fixed the problems that led to the bankruptcy six decades ago; the State has simply been attempting to cover the disgrace with juggling tricks. This is what the economist Albert Hahn referred to as The Economics of Illusion, and the United States and Europe embraced the economics of illusion after World War II. The sort of $211 trillion fiscal gap that Kotlikoff reports is not a figure you arrive at overnight; it takes decades of promissory politics backed only by faith.

A Bold, Public Conversation

How to undo this mess is the task that has fallen on this generation. One method is repudiation. Polite folks will not want to talk about matters, believing as they do that you can simply carry on with the juggling. For most of us, this juggling has lasted a lifetime, after all. But this is simply another example of bad economics. Perhaps repudiation is not the answer, but we need to encourage a bold, public conversation about fiscal responsibility and, I would add, sound money. We need to rethink the damage caused by efforts at master juggling by public authorities, and think seriously about Adam Smith’s claim about a policy choice that is “least dishonourable to the debtor, and the least hurtful to the creditor.”

Read more: http://www.fee.org/the_freeman/detail/master-jugglers-and-social-engineers#ixzz2ifN8M69n

Sidney Hook on Marx's Shortcoming


Thursday, October 17, 2013

            by DON BOUDREAUX

A Cafe patron who prefers to remain anonymous sent to me a copy of this short letter to Pres. Obama from several members (from both political parties) of Congress.  The Cafe patron asks my thoughts.

The letter seems fine to me.  I could pick a nit or two, but I'm in overwhelming agreement with it.  Market-driven foreign investment in America is indeed a good thing — because any market-driven investment is a good thing.  The nationalities of the investors don't matter at all.  And the more the merrier.

I don't know if the letter has any hidden purpose, such as to prompt Mr. Obama to support U.S. taxpayer subsidies to foreign investors.  If that were the case, then I'd object strenuously and without condition or reservation to its purpose.  But at least on its face, this letter is pretty darn good.

But "I can't resist" note its opening paragraph:
America has a proud history of promoting trade and investment policies that encourage the top companies in the world to invest billions of dollars in our economy.  The investments these global companies make here in the U.S. help create hundreds of highly skilled American jobs.

What the letter writers say about the consequences of foreign investment in America is true (assuming that that investment is driven by market, and not political, forces).  But a gloss should be added to the first sentence of the above quotation — namely: Such investments increase America's trade deficit (or, more accurately, America's current-account deficit).  Given the incessant moaning, groaning, and sometimes shrieking that comes from both ends of Pennsylvania Avenue about America's trade deficit, it's not quite accurate to describe America's history of dealing with such investments as a "proud" one.  We can be proud that America has largely been, certainly compared to many other countries, actually open to foreign investment here — but the complaints about the trade deficit reveal that many people likely do not understand the simple fact that more foreign investment in America means, ceteris paribus, a higher American trade deficit.

I wonder how many of the signers of this letter are on the public record as complaining about rises in America's trade deficit.  It would be (perhaps unintentional) hypocrisy if one or more of this letter's signers are also among those who express concern about the size of America's trade deficit.

While I'm on the subject, consider also this line from the letter:
This commitment [to invest in America] by some of the world's leading car makers has resulted in the creation of over 76,000 U.S. jobs.
Without vouching for this specific number, the economics here is certainly correct.  Foreign investment in America typically creates jobs in America — yet it also, again, invariably increases America's trade deficit.  I hope that someone sends this letter to Prof. Peter Morici — and highlights this line — the next time Morici asserts, as he frequently does, that America's trade deficit necessarily is a drag on job-creation in America.  (Actually, even Mr. Krugman sometimes commits the same error that Prof. Morici often commits.)

Tuesday, October 15, 2013

Some In-Depth Shutdown Analysis from out friends at FEE

Debt-Ceiling Crises: Imagined and Real

            by DW MACKENZIE

The government shutdown and impending debt ceiling "deadline" have led to near panic over possible default on the national debt. This imagined "default crisis" is a canard used for demagogic fearmongering. That said, the long-term federal financial issues are all too serious.

If federal officials simply continue on with their current financial plans, the U.S. government could run into trouble in early November. Without a debt ceiling increase, the Treasury would be unable to meet some of its financial obligations. Treasury bills would take a hit in international markets. With T-bills losing value in markets, interest rates "especially short-term interest rates" would start to rise. Rising interest rates would impair recovery from the 2008 financial crisis.

The assertion that a debt crisis would impair an already weak economic recovery is correct. However, any claim that the federal government is up against a hard deadline to meet its legal financial obligations is utterly untrue. The federal government holds vast amounts of property, all of which is available to be sold off. How much is needed to cover federal interest payments?

Interest rates are, for the moment, very low. Accordingly, interest payments on the debt are a small percentage of the total federal budget, despite the large size of the national debt.

With annual interest payments at a couple of hundred billion dollars, there is no impending debt-ceiling default crisis.

How exactly could the federal government pay interest on the national debt? To start with, the Federal Reserve now holds large numbers of mortgage-backed securities. There is some uncertainty over the market value of these securities, but their face value is immense, well over one trillion dollars. Sales of some of the better quality mortgage-backed securities could fund interest payments in the short term.

U.S. gold reserves are also substantial. The U.S. holds thousands of tons of gold at Fort Knox and at the New York Federal Reserve.

Sales of a small part of U.S. gold reserves could be used to make immediate interest payments.

The U.S. government also holds large amounts of idle real estate. The federal government spends $8 billion on vacant buildings annually. That's for an estimated total of 55,000 to 77,000 buildings. The fact that our federal officials aren't sure how many buildings they manage is itself disturbing, and a sign of incompetence. However, it seems that there are at least over 50,000 such buildings. How many hours would it take for federal employees who "manage" these buildings to post some of them on eBay? Surely sales of these properties would raise enough money to cover federal interest for about a month or two of the next year, even if each of these buildings sold for only a half a million dollars on average.

Efficient, competent public officials could simply announce auctions and begin to sell some of these buildings. Of course, red tape could delay property auctions. However, the Fed could make immediate interest payments by using its discretionary powers to sell mortgage-backed securities and gold reserves. President Obama could, in the meantime, expedite sales of vacant federal buildings "not to mention federal lands" by cutting red tape. (See map of federally managed land.)

The President has already acted in arbitrary "and some would say illegal" ways: by granting special exemptions from the Affordable Care Act to favored corporations, by using drones to kill U.S. citizens, and by targeting unfriendly political groups for audits. If Obama really wants save his beloved federal government from default, why shouldn't he just use the extraordinary powers that he has already claimed to order the immediate sale of vacant buildings? The point here is not to encourage further illegality on the part of this President (he needs no assistance in such matters). The point here is that Obama does not have his back against a wall; there is no "gun to his head." Obama has already claimed more than enough discretionary powers to prevent a debt-ceiling default in November. If default does happen it is entirely his choice, given that he has legal options and has already assumed various unconstitutional powers.

Obama has occasionally mentioned that some programs might be trimmed or cut. As Obama put it in 2010, "We cannot sustain a system that bleeds billions of taxpayer dollars on programs that have outlived their usefulness, or exist solely because of the power of a politician, lobbyist, or interest group." He added, "We simply cannot afford it."

The federal government holds over 700 million barrels of oil in the Strategic Petroleum Reserve. Obama could raise billions of dollars for interest payments without selling the whole reserve. Some people might see sales of the SPR as irresponsible. However, the oil in this reserve is a small fraction of monthly oil consumption, U.S. oil production is rising, and owners of foreign oil have overwhelming financial interests in continued oil sales to the United States.

The federal government also holds a Strategic Helium Reserve. It was created for "national security," for blimps used by the military leading up to and during World War II. This program is archaic and the government already sells some helium. It could sell all of it and shut this program down.

Default on the debt is always possible. Obama and his people at the Treasury Department could have refused to pay interest on the national debt last month even though they had this money at hand. They could choose to default next month even though they can get the money; either through legal means or according to Obama's demonstrated willingness to act illegally. The sale of federal assets and closing of federal programs would do more than just meet short-term interest payments on the national debt. Movement of securities, gold, buildings, oil, and helium would put these resources in the hands of people who would not merely put these resources to better use, but to actual use. The leeway that exists in federal finances points to longer-term financial and economic problems. Why would Obama engage in fearmongering on the national debt when obvious solutions to this problem exist? For that matter, why would federal officials hold so many idle resources for so long?

The reason why the federal government runs deficits nearly every year, despite collecting trillions in annual taxes, is because it wastes vast amounts of money on dysfunctional programs and special-interest payoffs. An efficient government would not need to tax and borrow nearly as much as does the federal government. The gross inefficiency of government has put federal finances in long-term jeopardy.

The real debt ceiling is determined by the ability of all working Americans to pay more taxes. How much more can we pay? Continued structural deficits and rising entitlement spending will result in default on the national debt, but not for a number of years. The existing path of long-term federal spending does surpass the capacity of taxpayers to fund the federal government, as it is currently designed. Future default on the national debt will have severe consequences. However, Obama's willingness to engage in demagoguery on the immediate debt-ceiling issue is one of many signs that politicians are unwilling to take necessary steps to fix long-term fiscal finances.

The legal debt-ceiling crisis of 2013 is manufactured and phony. Even if Congress refuses to raise the legal debt ceiling this year, there are many ways of avoiding immediate default. The real problem we face is wasteful and irresponsible spending that will make default unavoidable eventually. Long-run default is, of course, avoidable. What we need are real cuts in federal spending, actual sales of federal assets and properties, and rationality in federal finances. Cutting spending and selling assets are easier said than done. Achieving smaller government will require a dramatic shift in public opinion. Americans need to realize that politicians who try to scare us are the ones that we really should fear.

Read more: http://www.fee.org/the_freeman/detail/debt-ceiling-crises-imagined-and-real#ixzz2hoaSXVsg

Tuesday, October 8, 2013

FEE: Fifty Ways to Leave Leviathan


State management of society is not only contrary to human liberty; it is also unworkable. It cannot achieve what it seeks to achieve, which is often all-round control of some sector of economic and social life. The attempt provokes a social backlash. People find loopholes and workarounds or just invent new ways to make progress possible. This is because people will not be caged. They struggle to be free and sometimes they succeed.

Over the last century-plus, the Leviathan State has gained the upper hand, sometimes through big periods of upheaval but mostly through a million daily nicks and cuts. What if this process is being reversed in our time? What if the apparatus of control is being undermined with a million acts of entrepreneurship that evade the State's attempt to plan and command? There is a fundamental asymmetry between the structure of government and the structure of a networked people.

In our times, innovation has provided people with more tools. And often they use these tools to get around the barriers that politicians and bureaucrats have erected. Some of us take note of them every day. And while we may revel in their cleverness, we don't take time to look at the big picture. Here is where this phenomenon of small ways to break out from and break down the system — which pop culture often labels "breaking bad" — gets really interesting.

Consider the post office. It has not been privatized. It's just fallen gradually into disuse thanks to the advent of email, texting, and thousands of other ways of communicating. It may stick around for another decade or so, but as a kind of zombie. Surely its days are numbered.

This is the archetype. Government was supposed to provide but didn't. Now markets are picking up the pieces and making new products and services that facilitate better living, which reduces the role and significance of public policy. Every time the State shuts a door or closes a loophole, people find and exploit two more doors, two more loopholes.

If this model of disruption and defiance is part of a larger trend, it provides a very revealing look at a strategy that liberty-minded people ought to intellectually codify, encourage, and practice. We've mentioned it before here when we've talked about "hacking Leviathan" and Kirznerian "alertness" to undiscovered methods and approaches.

Compared with politics or the slow road of mass education, the work of hacking Leviathan through innovation is a promising road forward. Something's happening. It's like the Singularity for civil disobedience. Pandora's box. Perhaps a series of innovation tidal waves. A whole lot of people are participating in a great unfolding. And if you're drawing up grand social engineering plans, throw them out. The world is about to get a lot more dynamic.

Here are just 50 ways people are working around State obstacles:

1. Airbnb: This service allows people to rent out their homes for a couple of days. It offers competitive prices compared to hotels and gets around the whole of the regulatory apparatus, zoning control, union monopolies, and other barriers to entry. Of course, in some states, hotel cartels aren't happy.

2. Uber: Taxis have their licenses, which drive up fares. It's a cozy and well-protected cartel. Uber lets you get around this system, finding great rides in clean cars for better fares — all while checking (gasp! unlicensed) chauffeurs with reputation ratings.

3. Bitcoin: Government ruined money long ago. The market has made an end-to-end crypto currency. It could mean death for the euro, the dollar, and other fiat currencies. The implications are awesome and inspiring.

4. Private power generation: Big companies like Google are tired of dealing with regulated utilities. They fear outages and need more reliable power. They're generating their own power. There are only a few, but then again there used to be only a few rich guys using cellphones. That's where innovation happens. Then, the price goes down and the quality goes up. Moore's Law kicks in. Someday this trend could challenge the grid.

5. Concierge healthcare: Doctors are opting out of Obamacare and the third-party payer system. Pay them up front and pay them out of pocket. Get the care you need and go buy a catastrophic plan if you can (instead of taking whatever's on the Obamacare exchanges).

6. Bitmessage: Want to evade the surveillance state? Bitmessage is the latest in crypto communications, poised to replace email. A few more tweaks on the user interface, and we are good to go.

7. Email: The process of destroying the USPS as a monopolistic provider of mail is pretty much a done deal. It took 20 years, but now email is the new first-class mail. Meanwhile, the government's service loses billions each year. Such a moribund provider could go for decades as a tax-subsidized monopoly. But the market moves on.

8. Silk Road: This anonymous website lets you use crypto currency to buy illicit substances, including not-yet-FDA-approved drugs and food. You might find this alarming but consider: the site brings a beautiful peace to an unstoppable market that government has otherwise caused to become violent and deadly. (Shut down on Oct. 2. Remember Napster. The hydra lives.)

9. YouTube copyright rules: They were once simple, but as remixing, parody, and covers evolve, the exceptions to strict copyrighting are growing. Now a Miley Cyrus video released at sunup is covered 1,000 times before sundown. In effect, the initially imagined scenario of copyright "government confers monopoly status on every piece of art" is dying before our eyes.

10. 3-D printing: Not only will people circumvent unconstitutional gun restrictions (like Cody Wilson has), but people will be able easily to get around patents and regulations by printing their own high-flow showerheads. When everyone is a maker, no one is regulated.

11. P2P lending: Prosper and Lending Club let people bypass big incumbent banks and crowdfund as borrowers and lenders. Where there is communication, there are deals being made.

12. Health coverage cooperatives: It doesn't have to be just Christian organizations that set up health coverage coops. These groups cover catastrophic healthcare costs for members, bypassing "for now" Big Insurance and the government regulatory apparatus. (See also this group.)

13. The raw milk movement: The government has tried for decades to suppress this unpasteurized brew, but fans won't be stopped. Buyers' clubs are everywhere. The more the feds crack down, the more the demand for the product grows.

14. Private arbitration: If you have a dispute with someone, the last place you want to end up is in the thicket of the government's court system. People are opting for private arbitration. Private arbitration may be nothing new, but the extent of reliance on it is. There are a zillion bricks-and-mortar arbiters. Online, Judge.me is now defunct, but Net-Arb is still working. Stay tuned.

15. Escrow: How do you guarantee that you will get what you pay for online? Escrow.com is glad to hold the payment and verify the transaction before rewarding both sides with the results. It is security for property that lives in the cloud; and no government courts (or even laws) are involved.

16. Space tourism/exploration: XCor, SpaceX, and lots of other groups are getting into the private space race. They're doing NASA — only better, faster, and cheaper.

17. YouTube stars: People like Lindsey StirlingRebecca Black, and a thousand others are bypassing the old centralized system of getting an agent and begging a monopolistic record label to take control of your life. Lindsey has made sharp YouTube videos that have launched her into stardom, complete with lucrative tour dates. Such decentralization is happening in movies, music, and more.

18. TOR/Deep Web: This browser for the crypto web bounces your originating IP address all over the planet. That way you can surf anonymously — i.e., away from the eyes of the NSA panopticon. (What is a cypherpunk?)

19. Universal publishing: At one point, a few people maintained the primary conduits of information. Blogging and Web publishing make it easier to express yourself. Censorship has become nearly impossible. The newspapers are finally staking out their territories online. But they are losing control of the primary conduits of information. Tumblr alone has 50 million unique publishers. (Liberty.me will offer a new, distributed platform soon.)

20. Death of prescriptions: You can order your inexpensive drugs from many countries now safely, cheaply and securely (and with no prescription). No need to give your overpriced Obamacare doctor or Big Pharma a cut.

21. Medical marijuana/decriminalization: States are relaxing their prohibitions on marijuana. It's becoming increasingly clear that the drug war is lost and that some drugs, like cannabis, have real therapeutic value. Regardless, prohibition is a fool's errand and punitive measures are increasingly viewed as cruel and unnecessary. Even as the crackdowns continue, these are the first signs of the Drug War's obsolescence and popular dissent.

22. Expatriation: Sometimes if you don't like it somewhere, you just have to leave. It's easier and easier to find better climes, whether for weather, taxation, or culture. Expatriation from the United States is reaching record levels in 2013. While this number is still only in the thousands, the option to leave is there and more people are availing themselves of it than ever.

23. Startup cities: People in developing countries are starting to understand that rich countries are rich for a reason. So poor countries are starting to import good institutions, or are "rezoning" for prosperity (all while the rich countries are going in the wrong direction). Outside of China's special economic zones (SEZs), Honduran startup cities are a new experiment worth watching.

24. Seasteading: Blueseed is one of the earliest examples of entrepreneurial ventures that will take people to the sea in search of opportunity and superior rule sets. The Seasteading Institute has also successfully worked with a Dutch firm to design the first seasteading modules. The harder the tax and regulatory State pushes, the more viable the sea becomes as a place to live and do business.

25. Radicalization of media arts: Goodbye network television from the Cold War era and hello subscription-based content. The shows that are running ("Breaking Bad," "Orange Is the New Black," "Mad Men," "Boardwalk Empire") sport themes of defiance, disruption, and the persistence of freedom in the face of regimentation. Not only is the a la carte model disruptive, the content is subversive.

26. Private schooling/homeschooling: If you don't like the government schools, take your kids out. Millions of families are doing it. Some are even forming virtual coops and getting content from online sources.

27. Online education: Are you after a real education or a signaling mechanism? MOOCs and other online sources (like Khan Academy) are reducing the costs of education — away from the inflated guild of higher ed and publicly funded indoctrination camps.

28. Alternative nicotine delivery: From a revival of roll-your-own cigarettes to snus (smokeless tobacco) to e-cigarettes, people are responding to health concerns and ever-higher cigarette taxes' just not the way anti-tobacco zealots think they should. Cue increasingly shrill backlash.

29. Farmers market cooperatives/urban homesteading: Farmers market coops have people trading goods in kind. People barter and contribute their labor outside the auspices of government skimmers. Plus, people in big cities are growing their own food — USDA free. (Here's a tip!)

30. Private neighborhood security: Check out new apps like Peacekeeper. It's just one example of the ways local communities can reduce the cost of security and emergency services' and keep it local. (Here's another in Detroit.)

31. Barter markets: If you are in business, you know the score. If you can trade services or goods directly, it's best to forego the paper trail. You donate programming time, I'll give you web space. You promote my product, I'll promote yours. If money doesn't change hands, you can avoid all kinds of problems with the government. Barter has become a natural response to the tax collector.

32. Email/social media swarming: With social media, it is possible to ignite popular outrage against the machinations of legislators. The outcry against SOPA/PIPA is a good example. The floods of protest against invading Syria had an effect on the pullback from that near disaster, too. Political activism will never be the same. It's desktop democracy. Aaron Swartz lives forever.

33. Camera phones: One powerful weapon against the State is probably in your pocket right now. Consider Copblock and the Peaceful Streets project. They keep cops accountable through tech-enabled "eternal vigilance." The more people who stand up in the face of intimidation (or simply film from their windows with a zoom lens), the better.

34. Private venture capital markets. There's a problem with Fed-set interest rates. No one really wins. Since the policy of zero-percent interest rates began, a gigantic non-bank lending and borrowing sector has picked up where the banks left off. And its rates are set by the market.

35. P2P file sharing: The survival and persistence of file sharing through "torrents" shows that civil disobedience in the face of intellectual monopolies is alive and well, despite a 20-year war on the practice. The more the monopolists fight, the more file sharers win.

36. Speed: At a certain point, no one bothered driving 55 any more (not just Sammy Hagar). People sped en masse until Congress decided to let the states set speed limits "higher. It's a paradigmatic case: People disobeyed until the law was changed.

37. Crowdfunding: If you need startup money, you can pass around the virtual begging bowl. But it can't be just any old thing. You have to convince the crowd to let go of their resources. But that might be a much lower barrier to get over than snagging the attention of venture capitalists or prying a loan out of your bailed-out bank.

38. Social entrepreneurship: The welfare State tends to make people dependent supplicants. Foreign aid does, too. But entrepreneurs with causes are creating better ways of helping the poor, from microfinance to the return of mutual aid societies like the Christian healthcare coops cited above. The social entrepreneurship sector is enjoying a tech-enabled renaissance despite the State. (See alsoyoung social entrepreneurs.)

39. Medical tourism/opt-out: For a while now, people have been taking their medical problems to other countries that offer comparable care more cheaply and without all the red tape. In fact, people used to come from Canada to get care they couldn't get in the land of "free" healthcare. Medical inflation is so bad in the United States now that a lot more people are leaving to get treatments abroad, or opting out of the third-party payer healthcare cartel. Meanwhile, some people are leaving to get treatments the FDA hasn't approved.

40. Self-managing organizations: Firms like Valve and Morning Star show that you don't need formal hierarchies" "bosses" "for an organization to run well. These firms might teach us that the world doesn't need bosses, either.

41. Tax sheltering: Value creators are tired of having their rewards raided by the people with the guns and the jails. Apple, for example, uses a multinational tax-sheltering scheme so complicated that mere mortals can't possibly follow it. The result: extra capital to make the iPhone ever cooler. Politicians whine but consumers cheer. (Just when you thought Swiss privacy laws were finished, there's no doubt that clever people will find new ways to hide their capital from the State.)

42. Supper clubs: Underground foodies are paying visits to chefs and great cooks outside the auspices of the public health nannies. Every home is a restaurant, every kitchen an income earner. Similar supper clubs sprouted up in Chicago when aldermen in that city banned foie gras (a ban that was eventually overturned thanks to popular outcry, civil disobedience and counter-special interests).

43. Offshoring and inshoring: Sometimes corporate taxes, union controls, and regulatory control are all just too much. U.S. corporations take their production elsewhere (currently the United States has the highest corporate tax rate in the world, when state taxes are taken into account), even as foreign corporations venue-shop for the best production facilities in the United States (away from high taxes and cartelized unions).

44. Food trucks: Bricks-and-mortar restaurants love regulations because they can keep a boot on the necks of competitors. That's why cities that tolerate food truck culture are giving these restaurants a run for their money. If you can stand to eat your tacos on a park bench, it might be worth hitting a food trailer — the ultimate in microentrepreneurship. They are often at the forefront of experimentation and variety.

45. Social networks and Skype: Millions of people from all over the world are interacting as if they were next-door neighbors. Subtly this blurs the lines created by nation-states and creates a far more cosmopolitan world; one that exposes the arbitrariness of jurisdictions that you may or may not happen to have been born in.

46. Driverless cars: The technology is here. It certainly changes the calculation' for distracted or intoxicated drivers, and it fixes the problems with public roads the State won't fix. Driverless cards will give us safe, automated travel and deny the State funds it gleans from hassling people for both major and minor offenses that result from bad infrastructure, human error, and poor judgment. It'll just take one or two areas of the world to deploy them successfully to unleash the change.

47. Crowdsourcing private equity: Kickstarter and other online fundraisers were required by law to restrict their services to donations and not sell stock. But what about premiums for donations? How big can they be? The limits are being tested. In a few years, you will be able to buy startup equity with Bitcoin and the whole world will benefit. In any case, the loophole has been already been created.

48. Private conservation: You can be an environmentalist without agitating to have pristine lands given to the State for taxpayer management. Groups like the Nature Conservancy and Ducks Unlimited do great things when they don't turn land over to the State. And private individuals are opting to conserve land rather than sell it.

49. Immersive environments: We're in the process of creating the Matrix around us. From Second Life to immersive games, we may soon see linkages between the virtual world and the crypto economy that result in interesting new forms of order.

50. Twitter revolutions: Having troubles with a tinpot dictator or religious zealots? Organize, demonstrate and overthrow with Twitter — #overthrow. (But be careful you don't end up installing a regime that's worse than the one you helped overthrow.)

Now that you see the machinery in operation, step back for a moment. Imagine that the world spinning through time has been like an onion. Over the years human beings have wrapped layers of progress around our blue orb. First it was the Stone Age, then the Agricultural Age, then the Industrial Age, then the Commercial Age. Now we live in the Connected Age.

In this most recent era, a lot of interesting stuff is starting to happen — the most interesting of which is the increasing obsolescence of the State. It doesn't know anything we don't know, and the only thing it can do that we can't is force everyone, at gunpoint, to fund its whims. Our knowledge is crowdsourced, and we never stop learning from each other. We are integrated as in one global, self-ordering city. A few people are starting to see that the circumstances of birth and culture are contingent and the lines are blurring. National boundaries are less tied to the people within them.

The cost of connecting with other like-minded people is going down. Each of us in our private spheres of activity can get on with the business of interacting without the need for terra firma or permission. It's as if we're creating communities in the sky and commerce in the ether. It's nobody's business because millions of us simply make it so. It's the ultimate form of democracy.

There may be a technological arms race with "authorities" in the short term, but unless said authorities are willing to get really totalitarian, really fast, the pace of interconnection and creation will simply overwhelm them — even as they try to regulate it all away (with the best of intentions, of course).

This is the way bad laws and bad regimes die. Enforcement becomes impossible. Exceptions are made. Authorities get exhausted. People feel emboldened. It happened this way with anti-usury law in the Middle Ages. Eventually they became unviable in the face of modernization.

And in the days of Prohibition, the law meant every other neighbor was participating in the black market. Repeal came not because Al Capone and his competition were playing shoot-em-up. Repeal came because Americans learned the hard way that you cannot legislate morality — not easily, anyway. And the bootleggers didn't have Snapchat, Bitcoin, and Tor.

Now, imagine not just alcohol, but 10,000 simultaneous products, services, and communities operating concurrently. And in each of these 10,000 products and services, imagine markets of millions.

It seems there are a few possibilities for the State given its largess and power:
  • Grow rapidly along with these industries — metastasizing throughout this economy, creating millions of virtual gestapo-like agents that would have to cross national borders to track people down and keep them in line;
  • Make examples of a few people in each of the 10,000 industries with punishments severe enough that it would frighten the rest and keep everyone else in line, causing many of those grayish industries to go out of business; or
  • Skim a little bit off all of it, but tolerate it.
In any of these scenarios we can imagine cooperating international agencies, maybe coalescing into something that would be a big, rather rabid INTERPOL with the eyes of the NSA and the aspirations of the UN. It's not inconceivable that this creature would come into existence. In fact, it seems rather likely. After all, these new communities and markets would be international.

But how long will the State be able to keep up with the dizzying pace of innovation, as this civil disobedience hydra sprouts two heads in the place of any one severed? Unless the State gets really repressive really fast (and we're all prepared to let them), its functionaries will not be able to control the swarms and the gales of creative destruction those swarms bring with them. Fifty ways will become 50,000. This is our present. This is our future.

Voltaire's Thoughts

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Thursday, October 3, 2013

Cafe Hayek: On the Relatively Low Salaries of Relatively Essential Workers

            by DON BOUDREAUX

Last night in my ECON 385 class (International Economic Policy) my students and I began discussing the effects of international trade on wages.  As a preface to this discussion I reviewed the basics of the economic theory of wage determination.  (Most of my students in this class are Global Studies majors; for many of them, this class is the first one in economics that they've ever taken.)  That theory, in a phrase, predicts that workers; pay is determined by the value of the "marginal" worker's output.

Among other facts, this theory clearly explains that we in modern society should be pleased that so many occupations that are essential to the maintenance of human life and civil order pay those who work in those occupations so little relative to what workers in many other and less- "essential" occupations are paid.

At first, this insight is counterintuitive.  How often do you hear friends and acquaintances lament, or express befuddlement over, the fact that the pay of people who work as paramedics, as police officers, as firefighters, or as home-health-care providers is only a tiny fraction of the pay of professional athletes, Hollywood stars, or opera divas?  'It's appalling!" goes the standard complaint.  "Throwing touchdown passes on Sunday afternoons is a frivolous activity while prying unconscious people out of wrecked automobiles literally saves lives.  And yet the guy who throws a football for a living is paid millions of dollars annually while the men and women who risk their lives as first-responders to save others' lives are each paid, if they're lucky, $40,000 annually."

It's an understandable sentiment.  But when you know economics, this reality — so upsetting and mysterious to so many — is also understandable.  And this reality becomes, at some level at least, a cause of celebration rather than lamentation.

First-responders' pay is as low as it is because there are plenty of people able and willing to work as high-quality first-responders relative to the "need" that we have for first-responders.  With so many highly skilled and dedicated people already working as first-responders, the value of the additional first-response services that we'd enjoy if we hire one more equally skilled and dedicated person to work as a first-responder is very low.  So we're —  rightly — unwilling to pay very much to hire this additional first-responder.  It makes no sense to pay an additional, say, $100,000 annually to get labor services that produce an additional, say, $30,000 worth of output.

So understand our good fortune!  We live in a society blessed with an abundant supply of high-quality live-saving labor services.

Ask: would you prefer to live in a society in which people's ability and willingness to work as first-responders were as scarce, relative to our "need" for such services, as is the ability to work as a N.F.L. quarterback?  If our society were populated not with tens of thousands, but only with a few dozen, people who can supply top-notch first-response services, would we be better off than we are in reality today or would be worse off?  The answer is obvious: we'd be worse off.

First-responders would be better off.  They would each be paid very handsomely for their services.  But many more of us would, as a result of this wage-raising scarcity of first-responders, die in automobile accidents and home and workplace fires.  High-quality first-response services would be very scarce and, hence, very highly priced.  Fortunately for us, our world has an abundance of high-quality first-responders.  It's a blessing that we get such essential life-saving and life-enhancing services at relatively low costs.

See this recent, related post by Alex Tabarrok.

After class, one of my students, Ricky Ewell, pointed out to me that people who complain about life-saving pharmaceuticals costing so much are inconsistent if these people are also among those who complain that life-saving first-responder services cost so little.  Ricky's insight is brilliant.  It's one that I wish I'd have thought of.  I have no idea if others elsewhere made the point that Ricky made, but it's a credit to Ricky — and to my colleagues at GMU Econ — that Ricky made this fascinating and spot-on connection.  (Ricky is one of the few students in my ECON 385 class to have had more than one econ class at GMU.)

Monday, September 30, 2013

FEE: The Mystery of the Mundane

            by Dr. PETER BOETTKE

The world is full of marvels, from FaceTime to air travel. But the real action is in the mundan—those everyday: things we take for granted. Economics, and the economic way of thinking, are indispensable for learning how to see the mystery of the mundane. And when we do, it's awe-inspiring.

This is one of the crucial insights in Paul Heyne's The Economic Way of Thinking, which I've relied on for more than 25 years now (and of which, along with David Prychitko, I've been coauthor for more than a decade). Along with another rule "don't overteach the principles" we can show others how economics belongs in everyday life and not just in the classroom.

Don't Overteach the Principles

Heyne's first rule was this: "Teach the principles of economics to your students as if it was the last time they will ever take an economics course, and it will be the first of many."

In other words, there's no reason to teach basic economics with an emphasis on the tools of economic reasoning, such as mathematical formulas, graphs, and statistical relationships. Instead, you want your audience to be intrigued by the insights that one can gain by persistently and consistently applying the economic way of thinking to the puzzles and problems they confront in their daily lives.

We must show our students—or anyone with whom we talk about economics—how the principles of economics make sense out of the buzzing confusion that makes up a modern economy. And we must show how to clarify and correct the daily assertions they read in newspapers and hear from political figures, axe-grinders, and talking heads commenting on economic affairs.

Our job as teachers is to help students cut through the nonsense and begin to understand the world around them. So we have to outfit them with the right lenses.

The Mystery of the Mundane

Paul's second rule was, "Allow yourself and your students to be amazed by the mystery of the mundane."

As we say on page 1: "When we have long taken something for granted, it's hard even to see what it is that we've grown accustomed to. That's why we rarely notice the existence of order in society and cannot recognize the processes of social coordination upon which we depend every day."  Don't focus exclusively on the miracle of exotic or peculiar things, such as how we can FaceTime with family across the country, what forces enable a plane to fly, or why did Miley Cyrus do that. Instead recognize and be astonished at the feats of everyday social cooperation that you engage in and benefit from. Think about the how, what, why of the shoes on your feet, the hat on your head, the car that you drive, the smartphone on which you may be reading these words.

Adam Smith, in attempting to get his readers to appreciate the mystery of the mundane, went through the numerous specializations in production, the exchange relationships that must be established, and the mutual adjustments that must continually be made just to provide the common woolen coat to the average citizen.

More recently, FEE founder Leonard Read used the example of the No.2 pencil to convey the same point as Adam Smith when he described the production of a woolen coat. Milton Friedman used Read's No.2 pencil to explain the power of the market to coordinate economic affairs, in contrast to the tyranny of government controls that failed to produce such an overall order.

F. A. Hayek used the example of the market's guidance of the use of tin in production and consumption. Hayek wanted to convey the ability of the price system to provide the required information and incentives for economic actors who must adjust their behaviors one-to-another until all the mutual gains from trade are realized.

Adam Smith pointed out in The Wealth of Nations that every man lives by exchanging. The successful coordination of economic activity in society, where everyone lives by specializing and exchanging, is an extraordinarily complex phenomenon. The "invisible hand" metaphor for the market economy—with its private property, relative prices, the lure of pure profits (not to mention the penalty of loss)—is meant to capture the wonder of this complex coordination. Social cooperation happens through constant mutual adjustment. Once we appreciate this fact, it is easy for us to lose our awe at the miracle of it all. Hayek referred to the "marvel of the market" to try to jolt his readers from their intellectual complacency.

Economics Out the Window

So as you are studying economics this year as a teacher, a student, or a casual reader, step back from the chapter or the lecture notes and look out the window of your room. Drive around town. Pick any good or service and track down all the exchange relationships that must have been formed to enable that good or service to be available to people like you. From lawn services to milk shakes, the marvel of the market is on full display. If you allow yourself as you study economics to be open to the mystery of the mundane, then the teachings of economics will be that much easier to absorb and appreciate.

Read more: http://www.fee.org/the_freeman/detail/the-mystery-of-the-mundane#ixzz2gOauWqmO