Capitalism – the Real “Third Way”

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Conventional understanding views economic history as some kind of big battle between unfettered capitalism on the one hand (as supposedly demonstrated by the late nineteenth to early twentieth century United States) and full blown socialism on the other (as the Soviet Union was supposed to have been). Allegedly, both extremes have their positive aspects but are, individually, weighed down by their supposed negative ones. So capitalism, for example, is able to raise the standard of living by several-fold in a person’s lifetime and showers us with more goods than we could possibly imagine. On the other hand, so this conventional belief goes, it promotes a consumerist, materialist and greedy “sink or swim” society that has no regard for the unfortunate and the least well off. Hence the vision of the US as the kind of place where you can buy whatever you want but if you happen to be poor or become afflicted with an illness then you are on your own. Socialism, however, stagnates and reverses the standard of living to the extent that nothing ever works and the population is mired in permanent poverty. On the other hand, so this conventional wisdom dictates, everyone is apparently more equal and the goods that they do manage to produce are distributed “fairly” across society. (Curiously this understanding of economic history seldom tends to acknowledge the tyrannous nature of socialism which, in the Soviet Union, resulted in the deaths of tens of millions of people – one might ask whether this negative feature is so off the scale that it would completely obliterate the chance of socialism being taken seriously as an ethical proposition at all?). Thus, in order to create the best society, we allegedly have to try and combine the economic growth of capitalism with the supposed equality and fairness of socialism, discarding the negative aspects of those two systems in order to arrive at we have today – a social democracy, the “third way”, an economic order that is “somewhere in the middle” between greed and need.

The first problem with this conventional thinking is that neither of the two polar opposites have ever really existed, or at least not in the manner that their proponents imagine them. Capitalism has never existed because government interference in the economy has always been present, simply in lesser or greater quantities at different points in history. Often the interferences at lesser points have provided the catalyst for more intense government activity in later periods, such as the booms and busts and the stop-start flirtation with centralised banking in the last half of the nineteenth century paving the way for the Federal Reserve System that dawned in 1913 just in time to print enough money to pay for World War One. Socialism has never existed because, as Ludwig von Mises so convincingly told us nearly one hundred years ago, it is, quite literally, impossible to build a socialist commonwealth without economic calculation. The Soviet Union survived to a large extent because it could refer to international markets for prices for the factors of production which enabled it to provide at least some kind of functioning economy, albeit at a vastly reduced rate of output compared to the rest of the world.

The real polar opposites that we have endured in the post-Renaissance era are not unfettered capitalism and unfettered socialism at all, but, rather, state corporatism and state socialism. State corporatism, the alignment between government and business, has its epitome in fascist economies such as Nazi Germany and Fascist Italy, but it describes also the imperialism of nineteenth century Britain and the evolution of the United States, which received corporatist boosts during the War between the States, World War I and the New Deal, the latter of which, modelled on Fascist Italy, has successfully sealed the fate of the US as a permanent “corp-tocracy”. State socialism, on the other hand, is not the ownership and use of the productive assets by all for the benefit of all. Rather, it is their ownership by the government and the bureaucracy with productive capacity devoted to their ends, such as missile parades in Red Square, rather than the ends desired by the people, with the people themselves treated as expendable public slaves whose disobedience warrants a one way trip to the gulag.

Second, the blend that has actually been achieved in modern government is not between capitalism on the one hand and socialism on the other. Rather, it is between state corporatism and a democratised form of state socialism. On the state corporatist side, we have central banks printing massive quantities of money, dishing it out to Wall Street which expands credit, creating artificial booms and busts and lining the pockets of the financiers. At the same time large swathes of industry are subject to government patronage and privilege to the extent that in sectors such as energy, transportation, finance, healthcare, and so on there is no genuine free competition. To top it all off, armaments manufacturers profit from the continued proliferation of invented and unjustified foreign wars. On the state socialist side, however, we have politicians bribing voters with other people’s money, and demands for social justice, fairness and equality, anti-discrimination are met through the forced redistribution of wealth and income.

The fissure between these two extremes has not produced any kind of successful mixed economy that selects the best aspects of each system at all. Rather, it has resulted in some kind of bifurcated system that is based on antagonism and resentment. Those clamouring for state corporatism, fake privatisations and government support for business simply want to line their pockets while leaving everyone else to foot the bill. Those wanting state socialism, noting that state corporatism seems to do nothing except make the rich richer and the poor poorer, want to end the anti-democratic structure of state corporatism and return key industries to “public ownership”.

Third, if the two dominant social systems have been state corporatism and state socialism and the postulated “third way” of blending the two has failed, then what, we might ask, is the real third way? There are only three possibilities. First, unfettered socialism; second, unfettered capitalism; and third, a mixed economy of genuine socialism and genuine capitalism (what we might call “interventionism”).

The first option, socialism, is clearly a non-starter as its inability to perform economic calculations means that it is suitable only for bringing chaos out of order. A socialist economic order is no order at all; it is a disaster that would quickly relegate the human race to the Stone Age. The third option, interventionism, is also a non-starter as it produces distortions that must either lead to further interventions or to a complete abandonment of the intervention altogether. For example, if the government intervenes to set a price ceiling on a certain good that is below the market price the result, all else being equal, will clearly be a shortage of that good. The government therefore has one of two options in order to restore supply – to intervene further and take over the supply chain; or to abandon the price control. If it takes the first option, this requires further interventions in other industries which will create similar distortions and disarrays which will breed further interventions all the way until there is full government control over everything – i.e. socialism. Socialism, however, is impossible as so will collapse almost immediately. If it takes the second option, then capitalism is simply restored. In the opinion of the present author we are now reaching the apex of the so-called mixed economy where this decision will have to be made. Decades of excessive money printing and perpetuated malinvestment through the resulting credit expansion has driven financial markets to a zombie-like existence bathing in a sea of insolvency. We are now close to the point where governments will either have to completely socialise financial markets or abandon their policy of cheap credit and restore sound money and credit.

This leaves, then, only capitalism, the genuine free market, as the only prospective and sustainable economic order. Only capitalism, based upon voluntary trade resulting from each individual peacefully pursuing his purposes, is able to avoid the pitfalls of socialism, of the pseudo-capitalism in state corporatism, and of the pseudo equality and fairness of state socialism, all of which are based on force, fraud and antagonism. As we discussed before, all of the alleged pitfalls of capitalism – inequality, greed, selfishness, and so on – are not part of the capitalist system at all and are more appropriately assigned to one of the other systems where everyone attempts to live at the expense of everyone else. Only the restoration of a genuine free market capitalism can therefore lead to a peaceful and prosperous society.

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Libertarianism – A Utopian Ideal?

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Libertarianism – and any sort of more general freedom from government as advocated by anyone with a pro-free market leaning – is opposed both ethically and economically on a number of substantive grounds. The proposition that without government we would have inequality, destitution for the masses, rampant greed, and so on is a familiar charge. A further point of opposition is that libertarianism, and the drive towards it is simply utopian or idealistic and that libertarians are hopeless day dreamers, lacking any awareness of how the world “really” works. It is this objection that we will attempt to answer in this short essay.

There are two different basic guises of the argument that libertarianism is utopian. The first is that a libertarian world will simply never come about; that government is so entrenched in the world and people are so inherently statist that any hope for a libertarian society will founder upon the rocks. In the first place we might as well point out that libertarianism is a normative theory; just because we live in a society overwhelmed by statism does not mean that things should be that way. The current situation may make it harder to achieve but it does not undermine libertarianism as an ethical theory. But if we ignore this we do have to recognise that much of the fight for freedom will be an uphill struggle – as it always has been in history. The present author does not expect a libertarian world to appear within his lifetime. But from a strictly practical point of view this fight is a lot less “utopian” than many other goals such as the fight against poverty or against disease. These things require positive action and endless patience to wait for enough wealth to accumulate in order to provide some alleviation. Indeed even the most popular ideal in the world today – the so-called spread of democracy – requires armed invasions, active peacekeeping, the setup of institutions for which to hold to elections and the willingness of the population to get off their backsides and vote. This is assuming, of course, that such an ideal is genuine and not simply a veneer for power and control over resources. Freedom, however, only requires negative action – the abstinence from violence against the person or property of another person. Every single individual in the world has the physical ability to bring this situation about right now with no effort whatsoever. Freedom could practically be achieved much more quickly than wealth, democracy, inequality, happiness, fulfilment or any other ideal that one could care to mention. This does of course suffer from the drawback that people need a passion for liberty and a willingness to cease their promotion or tacit acceptance of the ruling regimes. Inducing recognition of the illegitimacy of government on a wide scale is a formidable task for libertarians, especially as it is so radical. But what is truly utopian, however, is the belief that the current situation of debt, spending and kicking the can down the road can ever continue. At the birth of social democracy, Western nations had accumulated several generations’ worth of capital that had raised the standard of living by a significant magnitude. This provided a seemingly inexhaustible fund for politicians to bribe voters, showering them with goodies in the form of retirement benefits, welfare payments, nationalised industries, publically owned infrastructure, and so on in return for their votes. Because politicians like to spend and spend without raising current taxes, much of this spending was fuelled by borrowing, with the productivity of accumulated capital enabling tax revenue to service this debt. The borrowing and inflation has benefitted the bookends of society – the poorest who receive the majority of the welfare payments and the very rich whose assets survive the inflation by rising in nominal value – as well as the baby boomer generation, which has received most of the lavish benefits without having to pay for them. The profligate waste disguised a slow but relentless capital consumption until now productivity can no longer provide for the burgeoning level of spending. Governments today are struggling to even service the interest on debt through tax revenues, having to borrow more just to pay down previously accumulated debt. Particularly now as the aforementioned baby boomer generation has begun to retire, leaving behind it a decimated workforce supporting a heavy generation of retirees, this situation is likely to only get worse. There are three possible options available – to default on the entitlements; to default on the debt; or to print enough money to pay for everything. The first option would cause mass social unrest, the second would cause financial markets to collapse and the third would cause hyperinflation of the currency. This is an unpleasant but soon to be necessary choice. It is precisely because the paradigm of social democracy, its welfare state and social justice no longer appear to be working that liberty (and “Austrian” economics) are beginning to be viewed as viable alternatives. As suggested previously, the view (and hope) of the present author is that this will be a relatively bloodless and un-revolutionary process, taking effect through the simple circumvention of government by people who simply want to live their lives and maintain their standard of living. Regardless of their precise knowledge of the virtues of liberty, a libertarian world will come about by people seeking to assert their individuality. That seems a lot less utopian than desperately attempting to prop up the current, zombie-like system.

The second guise of the argument that libertarianism is utopian is the proposition that non-aggression is counter to human nature and there will always be people who seek to murder, rape and steal. Or, even worse, a free society will just create a society of looters and murderers and the peaceful and harmonious world that libertarians envisage will simply never appear. With government, however, peace is maintained (enforced?) and we have a controlled and orderly redistribution subject to democratic oversight and this is far more in keeping with the nature of humans. First of all, freedom is the raison d’être of human nature and not its antithesis. Undoubtedly it is true that the political means of achieving wealth through theft and redistribution, as well as the abdication of individual responsibility through devotion to a leader, are powerful and attractive propositions that may form part of human nature. But this is simply a part of the universal law of human action that seeks to minimise individual cost and maximise individual benefit. People seek to promote government action because they think it will promote what they want while forcing others to shoulder the burden. They want government to enact their ideas and their plans and for everyone else to march in time. They seldom consider the fact that they may be suffering the costs of implementing somebody else’s plan. As soon as government ceases to serve this function in the opinion of individuals, it will be dropped. It is, therefore, individual freedom and not an automated, robotic adherence to the government that is in keeping with human nature. Second, bearing this in mind, it is far from clear that society would simply disintegrate into murderous chaos if government was abolished instantly. While there may be a transitory period of restlessness, people will soon take steps to privately protect and defend their property, with these private means replacing the monopolistic provision of the state – as happened recently in the riots in Ferguson, Missouri, when police were ordered to stand down. Moreover, there is no reason to believe that the division of labour and social co-operation would suddenly be obliterated overnight. People engage in these things not only because it is the most productive form of organisation but also, and perhaps more importantly, because the number of people willing to commit private murder and theft would still be in the minority. The majority of people abstain from these acts not because the government is preventing them from doing them but because they are evil. Abolishing the state will not change this view. If any proponent of government was to suggest otherwise then it is permissible to ask him what he would do if government vanished suddenly. Would he be among the looters and plunderers? And if not, why should anyone else? Third, libertarians have never made the claim that the world will be completely eradicated of aggression and we do not assume that, once governments and states are abolished, evil people will suddenly vanish from the face of the Earth. Indeed, libertarians do not even have to prove that a world of liberty will be absolutely flawless and totally free of evil and violent people; it simply has to be better than any other option. What we are firmly opposed to is the legitimisation of aggression when it is carried about by an elite group called the government; that if we recognise acts such as murder and theft as immoral and evil then they shouldn’t be done by anyone. In other words, libertarians oppose the legalisation of aggression under any circumstance, applying simply what resides in everyone’s understanding of basic morality to those who are in government. The fact that illegal acts will still be done is fully acknowledged; but allowing a legitimate channel for the initiation of violence dilutes this basic moral understanding and serves as a vehicle for evil acts such as murder and theft rather than for their prevention. In any case, even if libertarians strove for a world of the complete, de facto eradication of all aggression, private and public, then what would be wrong with that? It is not likely, for example, that rape will ever be completely eradicated whatever legal regime is put in place and any person who sets out to achieve such a total banishment would certainly be “utopian”. But we would hardly dispute the honourable nature of his goal, nor would we castigate his efforts to achieve it. Governments themselves participate in causes even more utopian than this, such as the seemingly endless “War on Drugs”. Doubtless many of us would love to have a world free from substance use but, regardless of the ethics of either drug use or the attempts to prevent it, from a strictly practical point of view it is hopeless to attempt to regulate with the force of law what people desire to put into their own bodies.

Libertarianism will never create a perfect world; but it will create a world that is most in step with the fact that humans think, feel, desire, choose and act as individuals. Undoubtedly, according to some “higher” ideal, the human race is flawed but any practical and sensible political theory has to account for humans as they are, warts and all. It is for this reason that libertarianism, as opposed to its statist and collectivist rivals, is one of the least utopian theories.

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Economic Myths #11 – The Mixed Economy

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The world’s political systems today are, generally, neither fully despotic on the one hand, nor are they completely anarchical on the other. Instead most of us languish under so-called “social democracy”, a curious mixture in which a degree of sovereignty in the form of voting rights reside in the citizenry while political leadership and control remains distinct in the form of various functionaries such as Presidents, Prime Ministers, Congressmen and Members of Parliament. A libertarian might contend, of course, that such a social democratic system is worse for individual liberty than a dictatorship or monarchy, but the important point is that the ideological extremes have been blended into a kind of soup which is, at least from the de jure point of view, really neither total freedom on the one hand nor total despotism on the other. In exactly the same way, neither do our economic systems (which amount to pretty much the same thing as political systems) represent any ideological purity. We are neither fully capitalist nor are we completely socialised but, rather, have to put up with some kind of “mixed” economy with capitalistic and socialistic elements.

Although the relationship between economic and political systems is one joined at the hip, the justification of social democracy on the one hand and of the mixed economy on the other appears to come from different directions. Democracy, rightly or wrongly, is believed to a good and noble thing in its own right – a positive and independently justifiable improvement over any other option. The mixed economy, however, appears to be based on little more than the intellectually slothful adage that “the truth lies somewhere in the middle”. Capitalism, it is alleged, while bringing massive economic growth and improvement in the standard of living, leads to unstable business cycles and encourages greed, selfishness and extensive inequalities in wealth and income. Socialism, on the other hand, may make things “fairer” and more equal yet it totally decimates the productive capacity of a nation and the standard of living stagnates or even reverses. The “correct” system “must”, so the argument goes, lie in between these two points, somewhere that can seemingly take the best of both systems while avoiding the alleged pitfalls. Hence we end up with the mixed economy.

The first question we might as well ask when tackling this fallacy is that if we adopt a position somewhere in between these two alleged extremes what argument is there to suggest that we will end up with the “best” aspects of each system rather than the worst? In spite of the socialistic element income inequality and wealth concentration in the hands of a few elites seems to be worsening, not getting better; and in spite of the capitalistic element we have failed to have any meaningful growth since 2008. May be it is the alleged good parts of each system that are cancelling each other out and not the bad? The fundamental flaw, however, is that the assessment of the characteristics of capitalist and socialist economies that identifies their good and bad aspects are partly wrong and it is the wrongly diagnosed parts that are exaggerated in making the case for a mixed economic system. The good aspects of capitalism, private property and free exchange – such as economic growth and marked increases in the standard of living – are, as we know from “Austrian” economics, true; the bad aspects, on the other hand – selfishness, inequality, greed, the business cycle, and so on – are largely false or misstated. Capitalism does not encourage anyone to be greedy or selfish at all – it just gives you the freedom to be as greedy or altruistic as you like, provided that you fulfil those ends through voluntary trade and do not engage in outright theft or fraud. What opponents of capitalism don’t like is that people, when set free, usually choose to pursue their material welfare as the first priority, while also overlooking the fact that the resulting productivity usually reduces poverty anyway. Even if it didn’t, however, it confers upon people the wherewithal to be more charitable out of choice and it is no mystery that many of the great charitable foundations – such as the Salvation Army, the YMCA, the Scout Movement and the Rotary Club – were founded in the nineteenth century or early twentieth centuries, the relatively most capitalistic period in history. Moreover, the business cycle, as we know, is not an inherent feature of a free market economy, but is caused by credit creation, something that is only sustainable with government and central bank sponsorship. Yet when justifying the “mixed” economy it is these bad aspects that are cited and emphasised in an attempt to cajole people into accepting a blended economic system. Turning to socialism, we know that such a system would obliterate all productivity and the standard of living would sink far below that to which we are now accustomed. Its bad aspects are, therefore, all true. Yet the good aspects – greater equality, fairness, and anything that can be categorised under the current, in-vogue term of “social justice”, are all patently false. Socialism does not create any equality at all; it does not mean that every portion of wealth in existence will be carved up into equal shares for everyone to then enjoy. Instead, it transfers the power over whole resources from private producers, who must maintain their ability to satisfy consumers in order to retain that privilege, to politicians and bureaucrats. Nationalising an industry does not give you, the average citizen, any greater access to the goods and services tied up in that industry. Rather you are left even more at the bottom of the heap than before as the political lords and masters decide what that industry will produce, what prices you will pay, what level of service you will receive and you are stuck with whatever they decide to give you – providing that the inefficiency and waste of state run industries has anything left to give. The very reason why property rights and ownership exist is precisely because there is no agreement on how resources should be used. This problem exists under socialism as it does under capitalism and one person’s decision must, at some point, overrule all others; any equal “voting” influence that you might have in this regard may be restricted to a one off, catch-all election every four or five years and in the meantime you have to suffer whatever it is that the electoral victors throw down from their table. Under capitalism, however, your voting influence is felt all the time in a highly specific manner through your spending habits. If a producer fails to produce what you want at a price you can pay he loses you there and then. Not so under socialism where you have to put up with whatever the upper elite, controlling all resources, decides will be produced. Furthermore, providing social safety nets and welfare states in pursuit of some kind of “social justice” does not result in a society that is more caring and sharing. If anything, the adage “from each according to his means to each according to his needs” completely disintegrates any moral fervour. By separating individual productivity from individual reward, wealth creation is turned into an stockpile to which a person contributes that which he is able according to his “means” then takes out according to his “needs”. Unsurprisingly, every person seeks to minimise the amount he has to put in through toil and sweat and maximise what he can take out in goods and services that he can sit back and enjoy without effort. This results in a population that fails to cultivate its talents towards increasing wealth such as hard work, responsibility and self-reliance and replaces them with characteristics that make them needy and pitiful, with an added layer of laziness, corruption and freeloading. This is precisely the problem faced by our bloated welfare states today and why they are completely bankrupt – demand has swollen to such an extent while supply has been hopelessly dwindled. None of this is exactly the antidote to “greed” and “selfishness” that advocates of the mixed economy might expect. Additionally, the resulting scarcity usually spawns black markets and underground trade, increasing the scope of legally defined criminality and, in worst case scenarios, penalising the population for attempting to acquire what should be every day goods and services.

A further fallacy is the assertion that private enterprise does some thing” better than government while government does other things better than private enterprise and we should look to the “evidence” to decide who should do what. But by what standard do you conclude that something is being done better by one or by the other – and by what standard do we judge whether a certain activity should be carried on at all? Private enterprises make this judgment through the profit and loss test; the quantity and quality of resources devoted to production of a good and service is rationed by its ability to make a profit, indicating the height of its demand by consumers. A service will be of low quality or unavailable to certain sections of the population simply because consumers are not willing to support a more extensive level of production in that particular industry. The reason why broadband internet was not, in the UK, extended to all rural communities without the force of government was not evidence of “market failure”. It simply meant that the more extensive resources necessary when compared to urban areas were required more urgently to produce other goods and services that people wanted to buy. Any “evaluator” who determines from the “evidence” that government is needed for rural broadband cabling is necessarily substituting his own value judgments for everyone else’s, denying them the goods that they really demanded and giving them those that are not. Nor can we fall back on the assertion that government should run “essential” industries for there is no such thing as an “essential” industry. Humans do not evaluate goods and services in whole, homogenous concepts such as “fire services”, “health services”, “utilities” and so on – rather they are demanded in specific quantities in specific times and places. What is most highly valued by an individual changes from moment to moment. While we may think of “medicine” as “important” we can easily imagine ourselves in a situation where we would prefer to do something “unimportant” like watch television rather than produce another bottle of penicillin – and some people may not want medicine at all if they maintain their health. Precisely the point where we stop devoting resource to the production of penicillin and move them towards producing televisions can only be judged by the profit and loss test of the free market. Any other judgment is necessarily arbitrary and at variance with the demands of consumers. In any case, as libertarians, we might also ask if an industry is really critical why on earth would you want it in the hands of the government where it can be royally screwed up? And why would it even need to be? If it is heavily in demand then profit opportunities will abound and private entities will have no problem meeting it – it is the unessential industries with low demand that struggle to stay afloat without government support.

The real reason, of course, why we have ended up with this system is, in fact, pragmatic rather than intellectual. Capitalism is the goose that has laid the golden egg and any decimation of capitalism would very quickly destroy the standard of living of the citizenry, prompting a swift revolution. Yet government yearns for power and control and cannot be content with letting things be; it therefore has to paint capitalism as this necessary evil which, like a dangerous pet, somehow brings good things when controlled in the right way. Ironically, of course, it is government interference in an attempt to provide a socialistic element that brings about the chaos and injustice that is blamed on capitalism. We have boom and bust because of government-sponsored credit creation, and the rich are getting richer and the poor poorer because the government bails out these cronies from the resulting disarray at the expense of the rest of us. Indeed, having a “safety net” against the alleged “sink or swim” nature of capitalism has turned out very well if you are an investment banker. None of this would happen in a genuine, capitalist economy.

The mixed economy is therefore nothing but an unjustifiable charade, built upon alleged weaknesses of capitalism and supposed strengths of socialism that simply do not exist.  Genuine economic prosperity for everyone in a fair and just society populated by morally healthy individuals can only come through unfettered private property and free exchange – not through government’s attempt to meddle with it.

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Free Choices or Coerced Choices?

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The Academy of Medical Royal Colleges, which apparently is a “united front” of the medical profession, says its doctors are seeing the consequences of unhealthy diets every day and that it has never come together on such an issue before. Needless to say a whole raft of interventionist measures are recommended to curb this apparent problem:

  • A ban on advertising foods high in saturated fat, sugar and salt before 9pm;
  • Further taxes on sugary drinks to increase prices by at least 20%;
  • A reduction in fast food outlets near schools and leisure centres;
  • A £100m budget for interventions such as weight-loss surgery;
  • No junk food or vending machines in hospitals, where all food must meet the same nutritional standards as in schools;
  • Food labels to include calorie information for children.

We will set aside for the moment the issue of whether it can be said that there are “right” choices for people to make when it comes to what they want to do with their own bodies (why, for example, should people prefer a longer life to the enjoyment provided by a burger and fries washed down with a pint of coca-cola?). Instead, the problem here is rather more grievous which is that, whenever members of the public make choices about how they want to live their lives there is the ever present assumption that, as these choices are made with apparent freedom, that it is the free market that has failed in preventing the emergence of the “undesired” outcome. What is never discussed or even raised is the possibility that people’s choices are already constrained or influenced by existing Government interference to the extent that, not only is it impossible to say that the choices made would be the same as those that would be made on a genuine free market, but that Government intervention is itself causing the undesirable choices to be made. And, lo and behold, blinded by such ignorance, the call is always for more Government intervention to augment that which we already have to put up with.

The present author has examined in detail why socialising healthcare will lead to greater ill health. There is little need to repeat all of this here except to say that people prefer doing that which comes at a lower cost, all else being equal. So that if you lower or remove the cost of becoming ill then, relatively, you will have more people who lead lifestyles that will result in ill health.

But the same fallacy is advanced in all cases where the proximate cause of a problem is people’s apparent free choices. Let’s examine some of the most popular:

“There is not enough food in the world! If the free market has brought such widespread hunger then Governments much intervene!”

The allegation here is usually some variant of the rich world refusing to share its wealth with the poor world. Leaving aside the fallacious belief that one person having means that another must not have, just why is it that we have widespread poverty in the age of the iPad? The plight of poor nations has nothing to do with being unable to understand technological development, nor are they in anyway lacking a rich diversity of raw materials. Rather it stems from the lack of capital investment per head of the population compared to the West. In the West, we have more machines and better tools that can churn out more and better goods per person than they can in poor nations. So yes, investors and capitalists have not invested in poor countries. The free market has not reached these nations, it must have failed! But the precise reason why the West has benefited from the free market is that it has long cherished institutions that have allowed to the free market to flourish, in particular strong legal rights to private property and relative political freedom. These are precisely the conditions that are lacking in poor nations, conditions that cause entrepreneurs to seek other havens for their investments. At the back of their minds, no doubt, is also the mass expropriation of foreign investment in the post-colonial era. Why should anyone bother investing in a poor nation if their wealth will just be pinched by the Government? To make matters worse, poorer nations began to model themselves on their Western role models just at the point when the latter started to turn away from a social order based on private property towards interventionism and social democracy with the result that the wrong lessons are being learnt. A product of this tide has been that Western governments now heavily interfere in world food markets, whether it be through such wicked and wasteful outfits as the Common Agricultural Policy, subsidies for farmers to devote farmland to ethanol production, or the vast regulatory network that impedes food production at the behest of a few powerful lobbyists. The recent scandal of horse meat appearing in processed beef products sold in UK supermarkets should be viewed in this context.

Poverty and hunger are therefore a failure of Government, not of the free market.

“The forests are disappearing! The free market, seeking ever greater profits, is decimating our natural resources! The Government must stop it”

Let’s go even further: add to the list fish stocks, elephants, whales, and any other of the countless number of “endangered” species that you like. Yes, there is a great problem, and yes, looking at the issue at face value, it appears that capitalists are running down these resources.

But this raises the question of why has the free market not produced similar shortages of other things? The dairy industry, for instance, exploits cows for profit but we never hear of a shortage of cows. Nor do we seem to be in short supply of chickens to supply us with eggs on our breakfast plates. So why is it only some resources that seem to be in danger of depletion? What is the difference between the endangered group and all the others?

The reason is that people are not permitted to own the capital value of forests, parts of the sea, elephants, tigers, etc. If one is able to own the capital value of the resource then exploiting it for present revenue has to be balanced against the loss of capital value in doing so (a full explanation of this is available here). But if one does not own the capital value then the only concern is for present revenue – there is no cost to exploiting resources to their fullest now. In fact the only cost is that someone will get there before you. So instead of all the myriad of Government restrictions and regulations concerning these depleted resources in order to “cure” the alleged free market ravaging all that is needed is to extend full private property rights to these resources and they will be conserved. Once again the problem is not too much free choice but the fact that people have been prevented by the strong arm of the Government from having a reason to make the “right” choices.

And let us conclude with the most pertinent of all alleged market failures, the phenomenon of “boom and bust”:

“Free market greed has caused capitalists to invest in wasteful projects! Clearly they need the Government to give them speed limits!”

Once again, looking at only the proximate causes of boom and bust will reveal that entrepreneurs invested too heavily in a particular sector, inflating a bubble that eventually pops, causing widespread misery and unemployment. In the 2007-8 financial crisis, the effects of which are lingering with the current malaise, a summary of the charge is that greedy bankers had lent money to people who could not afford to pay it back. End of story. But what is not told by peddlers of this narrative such as Paul Krugman is the moral hazard created by the so-called “Greenspan put” which had the effect of financial institutions expecting their profits to be retained and their losses to be borne by an influx of monetary liquidity during any risk of collapsing asset prices (i.e. in short paid for by inflation). If one can keep one’s profits and socialise one’s losses is it any wonder that people took wild risks? If there is only ever an upside then wouldn’t you? This is before we consider the fact that credit expansion is the cause of the business cycle in the first place that will always lead, by falsifying the societal time preference rate, to the expansion of unsustainable investment projects that must be rendered wasteful as soon as the inflation stops.

Therefore, next time you read that the “free market” has caused this, that, or the other, stop and think as to precisely what the options of the free market participants were. More often than not you will trace the source of the bad decision to some kind of Government interference.

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Social Democracy

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The author responded to a lengthy article, posted online, that advocated strongly social democracy. Unfortunately the original link has broken but the text below quotes the article in its entirety, interjected by responses.

“Democracy is a form of government in which all citizens take part. It is government of the people, by the people, and for the people. Socialism is where we all put our resources together and work for the common good of us all and not just for our own benefit. In this sense, we are sharing the wealth within society.”

Socialism is the abolition of private property in the means of production, i.e. no individual owns the physical entity of or is entitled to the capital value of any capital or producer good. Once this has been accomplished there remains the problem of how to direct these resources to the most highly valued ends. Contrary to the tacit assumption of many socialist thinkers there is no separate, conscious entity who feels and knows what the “common good” is; there are only individual humans who each value different ends independently; they may agree, in some cases, on what are valuable ends but they still hold these values as individuals and they are liable to change. Further, there will be disagreement on how these ends are to be achieved and precisely which of the scarce means are to be allocated to them. So how is a) the most valuable ends and b) the most suitable means for those ends to be determined under Socialism? How is disagreement on these matters to be reconciled?

All valuable ends are confronted by the same problem – scarcity of the means of production. Hence the economic problem is how to direct scarce means to the most highly valued ends. You can advocate that this can be done either through socialised property or private property but you cannot argue in favour of both together – they are entirely different solutions to the same problem. If you start from the premise that “certain industries” may be socialised you are already advocating that at least some of the factors of production should be allocated to these industries, but this can only be arbitrary. How do you know? And if you know how do you know which factors should be allocated and in which proportion? How do you compare one set of allocations with another set?

A system of private property in the means of production answers this through pricing, profit and loss. For private property gives way to exchange which creates supply and demand which produces prices which produces profit and loss. Hence costs and revenue can be reduced to a single common denominator, the unit of exchange (money), that allows resource allocation to be compared across the entire economy.

In the absence of private property, however, there can be no exchange. There are therefore no prices in the factor of production and no profit and loss. How are the factors of production to be compared? How is the electorate or its democratically elected caretakers of the means of production to compare the cost of 5 tonnes of steel, 3 tonnes of wood, 40 labour hours, 500 sheets of paper, 6 billboards of advertising, 30 hours of telephone calls if it cannot reduce these inputs to a common denominator?

“Of course when people hear that term, “Share the wealth” they start screaming, “OMG you want to rob from the rich and give it all to the poor!”  But that is NOT what Democratic Socialism means. To a Democratic Socialist, sharing the wealth means pooling tax money together to design social programs that benefit ALL citizens of that country, city, state, etc.”

If a person is wealthy in a pure private property society (where trade is entirely voluntary) it is because he has produced a comparatively high quantity of goods that other individuals are willing to purchase. A poorer person has produced comparatively less. The wealth of the rich can only grow if they abstain from consumption of their income and invest it in order to increase the number of goods they can produce. Most of the wealth of the rich consists of, or is derived from, real valuable assets – factories, commodities, plant, shops and inventories. They continue to be rich because these assets are productive – other people are willing to exchange them for another valued good, i.e. money. If they cease to be productive their capital value will decline and so will the wealth of the owner.

If the amount of pooled wealth available for government programs is to increase these real resources have to be liquidated from their current uses and the workers have to be laid off and transferred to Government employment. For every resource that is consumed in a government program that is one resource less that can be used for something else. By which method do you calculate whether the resources are being put to their most valuable ends in the hands of private entrepreneurs or in government programs?

“The fire and police departments are both excellent examples of Democratic Socialism in America.  Rather than leaving each individual responsible for protecting their own home from fire, everyone pools their money together, through taxes, to maintain a fire and police department. It’s operated under a non-profit status, and yes, your tax dollars pay for putting out other people’s fires. It would almost seem absurd to think of some corporation profiting from putting out fires. But it’s more efficient and far less expensive to have government run fire departments funded by tax dollars.”

This is no different from insurance. Individuals pool their premiums together with a private provider in order to provide the resources for extinguishing fires in an emergency and/or compensating the unfortunate victims of fire damage. The only difference is that each individual can choose whether to pool his premiums with one particular provider or not (or at all). The insurer therefore has to act in a way that will retain its customer base, one of which is to keep premiums lower than those of its competitors. The primary method of accomplishing this is to minimise the amount that has to be paid out in compensation and the only way to do this is to prevent and control fires as much as possible. The insurer may, therefore, specify that your home be fitted with some basic fire-fighting equipment such as fire extinguishers or fire blankets and that all of your equipment is electrically tested, for example. If the cost of this is less than the saving you make on a lower premium then you are likely to do this. They may charge higher premiums in cases where flammable substances are stored on a property, or refuse to insure you altogether because the risk would be too great, thus discouraging the accumulation of dangerous materials. The result of this is that each person pays according to the amount of risk he is willing to bear and everyone, consumer and insurer, is equally interested in taking steps to minimise the number of fires as much as possible.

If a fire does start, however, the longer they burn the more the insurer has to pay in compensation to a covered individual. They are therefore likely to respond with the utmost urgency with their own, privately owned, fire fighting equipment or privately contracted fire fighting supplier in order to minimise the amount of damage.

All of these incentives are lost when fire-fighting is managed by the Government. The Government does not need to be concerned about losing your premium to a competitor – you have to pay it in taxes or it will incarcerate you regardless. Hence it is less bothered about minimising the amount of damage. Fewer homes will therefore be installed with preventive equipment and less electrical testing will take place. There will therefore be more fires. Further the tax paid towards fire-fighting services is not adjusted to your individual level of risk; rather it is determined by your income. There is therefore less incentive to avoid the accumulation of risks that contribute towards fire. Every preventative measure you take is an extra cost but there is now no added benefit – you still have to pay the tax and you are still entitled to the same service as everyone else. The result will be less prevention and more fires, more destruction of property and consequently less overall societal wealth.

And finally, once a fire starts, the Government is not going to lose any money if your house burns. Even if it has to pay you compensation the Government will not go out of business if it has to pay too much, unlike a private firm. The Government-employed fire-fighters know that, regardless of what happens to your house, they will, in principle, still be employed and paid tomorrow regardless of the cost to the Government of compensating you for your house. This is not to suggest that Government fire-fighting will always be slow, shoddy and negligent. But given these facts what is the likelihood that a Government fire service will respond more efficiently to a case of fire than a private fire service?

This is a typical case of Government having carried out a particular function for so long that everyone forgets what it looks like when it is carried out privately. Yet the above should demonstrate how it would most likely be done and to a higher degree of efficiency than by the Government.

“Similarly, public education is another social program in the USA. It benefits all of us to have a taxpayer supported, publicly run education system. Unfortunately, in America, the public education system ends with high school.  Most of Europe now provides low cost or free college education for their citizens. This is because their citizens understand that an educated society is a safer, more productive and more prosperous society. Living in such a society, everyone benefits from public education.”

No one denies that education is a beneficial and indeed a good and beautiful thing. But for every resource spent on education there is one less resource to be spent on something else. How do you know that education is the most productive use for these resources?

We could devote the entire productivity of the world to a huge and glorious education system where everyone pops out as smart as Einstein. But there would be no cars, no shops, no food, no computers, no houses, no offices, no factories etc. because all resources are devoted to the education system.

The problem faced by an economic system is not to determine what is valuable in the abstract – it is how to direct the scarce means to their most highly valued ends before all others.

“When an American graduates from college, they usually hold burdensome debt in the form of student loans that may take 10 to even 30 years to pay off. Instead of being able to start a business or invest in their career, the college graduate has to send off monthly payments for years on end. On the other hand, a new college graduate from a European country begins without the burdensome debt that an American is forced to take on. The young man or woman is freer to start up businesses, take an economic risk on a new venture, or invest more money in the economy, instead of spending their money paying off student loans to for-profit financial institutions.  Of course this does not benefit wealthy corporations, but it does greatly benefit everyone in that society.”

But the cost has to be paid by someone. If the graduate has to pay for his own education then yes he has less money to “start up businesses, take an economic risk on a new venture, or invest more money in the economy”. But if everyone else has to pay for his education through taxes then everyone else has that little bit less to do all of those wonderful things. The graduate has only gained what everyone else has lost.

“EXAMPLE  American style capitalistic program for college: If you pay (average) $20,000 annually for four years of college, that will total $80,000 + interest for student loans. The interest you would owe could easily total or exceed the $80,000 you originally borrowed, which means your degree could cost in excess of $100,000.”

If the cost of $80 000 tuition is paid back by the graduate without the interest of, say, $20 000 then that is $20 000 less that can be loaned to another student. There will therefore be fewer funds available to loan to more students for their education. Fewer students will therefore be educated. That is presumably not the intended outcome of this author. Governments, of course, could simply raise taxes to make up the shortfall. But again, all this will mean is that what the graduate has gained the taxpayer has lost.

“EXAMPLE  European style social program for college: Your college classes are paid for through government taxes.  When you graduate from that college and begin your career, you also start paying an extra tax for fellow citizens to attend college. Question – You might be thinking how is that fair? If you’re no longer attending college, why would you want to help everyone else pay for their college degree? Answer – Every working citizen pays a tax that is equivalent to say, $20 monthly.  If you work for 40 years and then retire, you will have paid $9,600 into the Social college program.  So you could say that your degree ends up costing only $9,600. When everyone pools their money together and the program is non-profit, the price goes down tremendously. This allows you to keep more of your hard earned cash!”

The cost of $20 monthly is arbitrary and no proof of this being the real cost under such a system is offered. The conclusion that “the price goes down tremendously” is, therefore, a non-sequitur. If anything, the cost of education is likely to go up as relieving every individual of the cost of his tuition will cause an increase in demand which causes prices to rise.

This is the reason, in the UK, for the recent “outrages” over higher education tuition fees. Government sanctioned loans systems artificially stimulate demand while the Government also caps the number of students, hence leading to a reduction in supply. Increasing demand and suppressed supply equals spiralling costs.

It is therefore Government interference with the higher education system and not private finance that makes bearing the costs of higher education so intolerable to graduates.

“Health care is another example: If your employer does not provide health insurance, you must purchase a policy independently.  The cost will be thousands of dollars annually, in addition to deductible and co-pays. In Holland, an individual will pay around $35 monthly, period.  Everyone pays into the system and this helps reduce the price for everyone, so they get to keep more of their hard earned cash.”

Healthcare premiums are so expensive in the US precisely because of Government interference in the insurance industry (and the only reason that insurance is the preferred method of funding healthcare is an anomaly that originates in The Great Depression). If Governments legislate so as to compel a provider to insure risks which are perceived by the latter as higher and more costly then the latter is forced to take on the burden of paying more than it would like when these risky events transpire (an almost guaranteed certainty if the insured event is something over which the policyholder has control. This is simply compensating individuals for their deliberate actions). Costs, therefore, rise.

Socialised healthcare under Medicare and Medicaid under which the healthcare consumption of an individual is divorced from its cost to the individual, the ease of malpractice suits, and lengthy and bureaucratic drug approval processes mandated by the FDA all contribute to the rise in healthcare costs in the US. None of these are phenomena of the free market.

Holland also operates on an insurance-led basis. One should investigate whether the lower cost allegedly associated with this is because of less and not more Government involvement.

“In the United States we are told and frequently reminded that anything run by the government is bad and that everything should be operated by for-profit companies.”

This is a list of Federal Government departments and agencies. Just a brief glance will reveal Government involvement in commerce, transport, housing, education, broadcasting, agriculture, labour, security, energy, healthcare, environment and engineering. Even if America is “frequently reminded” by somebody “that anything run by the Government is bad” no person can look sensibly at this list and conclude that Government does not already control or regulate vast areas of the US economy.

“Of course, with for-profit entities the cost to the consumer is much higher because they have corporate executives who expect compensation packages of tens of millions of dollars and shareholders who expect to be paid dividends, and so on.”

Executive compensation cannot determine market prices of consumer goods. Every good purchased by you is evaluated on its merits alone, not on the costs that went into producing it. If you deem the merchant’s asking price to be less valuable to you than the utility you will gain from the good then you will make the purchase. Otherwise, you will not make the purchase. It is therefore because an entity’s goods are so highly valued and consequently sell so well that companies are willing to pay more to hire the best employees. Not so if their sales are less successful.

Profit (and loss) is revenue minus costs. In order to make a profit you must increase your revenue as much as possible but what is forgotten is that you must reduce your costs also. Employee compensation is a cost and the higher it is in relation to revenue the lower the profit of the entity will be; the lower the profit, the less it will be able to invest in growth and the sooner it is more likely to stumble in meeting the needs of consumers which is the first step to insolvency.

In 2011, total executive compensation at Tesco plc was £21.7m against a turnover £60.9bn, approximately 0.0356%. Even if executive compensation did drive up consumer prices one has to wonder how such a small percentage could make much of a difference.

Finally, regarding very large corporations one might wish to investigate the effects of monopoly and regulatory privilege granted by Government and the effects of Government–granted limited liability in generating a preference for the large, publically-traded entity before implying that these beasts are creations of the pure pricing, profit and loss system.

“This (and more) pushes up the price of everything, with much more money going to the already rich and powerful, which in turn, leaves the middle class with less spending money and creates greater class separation. This economic framework makes it much more difficult for average Joes to ‘lift themselves up by their bootstraps’ and raise themselves to a higher economic standing.”

You cannot leave the general population with less spending money and push up the price of everything simultaneously. If the population was left with less money then it would have less with which to bid for goods and services. The latter would therefore remain unsold until prices were dropped. If prices were dropped, profits for vendors would drop. If profits drop then costs have to be cut. One of those costs is executive compensation.

If a firm, however, is able to continue to raise its prices without affecting sales and this increases profit margins beyond that experienced in other industries, resources are diverted away from the less profitable industries and into the profitable both by the existing entity and by new competition. Supply is therefore increased and prices consequently decrease.

It is therefore very difficult for an entity to raise its prices to increase profits without a) choking off sales or b) attracting competing investment.

The most effective way for the latter to be avoided is for the entity to induce the Government to regulate the industry. Compulsory licensing, planning permission, Government imposed trading standards, health and safety standards, employment regulation, etc. all serve to deter competition. For every extra regulation that must be complied with is an extra cost that a new competitor must meet and, by virtue of its status as a start-up, must consist of a larger portion of its costs that those of an incumbent provider. There is therefore a tendency for larger firms to become entrenched and for the “Average Joes” to be unable to “lift themselves by their bootstraps” – all because of Government intervention.

“So next time you hear the word “socialism” and “spreading the wealth” in the same breath, understand that this is a serious misconception.”

That is precisely what the effect of socialism is. In a capitalist society wealth accumulates to each person according to his productivity. If another system is adopted then the wealth must be distributed in a different way with a different result; otherwise implementing socialism would be pointless. Hence socialist writers devoted part of their theory to the problem of distribution of goods in a socialist society, i.e. to “spreading the wealth”.

“Social programs require tax money and your taxes may be higher.”

Correct.

“But as you can see everyone benefits because other costs go down and, in the long run, you get to keep more of your hard earned cash!”

What has been demonstrated, in fact, is that costs rise under socialism. If an individual does not have to pay for his consumption, all else being equal he consumes more. Hence demand rises and so do costs.

“Democratic Socialism does NOT mean taking from the rich and giving to the poor.”

It means taking from the productive to fund the unproductive. This can be the only logical outcome of a system other than private property, where the fruit of production accrues to the producer.

“It works to benefit everyone so the rich can no longer take advantage of the poor and middle class.”

It benefits the unproductive ahead of the productive. The unproductive are able to take advantage of the productive. Productivity therefore becomes less valuable and decreases whereas un-productivity becomes more attractive. Societal wealth therefore declines.

POSTSCRIPT: The main error of the author of the original article (apart from providing blatant examples of Bastiat’s famous “broken window” fallacy) is the belief that a market economy provides benefits only for some whereas “democratic socialism” provides benefits for all. Precisely the opposite is true. Under the free market all exchanges are voluntary. If A exchanges a good with B then it must be because they each value what they receive more highly than what they give up. Both therefore benefit from the transaction and we can say that social utility is increased. A system of “democratic socialism” however would necessarily involve violently enforced transactions (taxes). If an individual has to be coerced into a transaction then it necessarily means that he values abstaining from the transaction more than entering it (otherwise he would have entered it voluntarily). The recipients of Government spending may gain (as does the Government itself) but here, in contrast to a market economy, some have gained at the expense of others. As we cannot make interpersonal utility comparisons (i.e. we cannot “measure” utility) it is impossible to say that the gain to one is greater than the loss to another. But even if this wasn’t true the fact remains that the coerced individuals would have gained greater utility from not being taxed and to them the transaction is very much a loss; hence a system of “democratic socialism” does not provide “benefits for all”.

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