Filthy Lucre: Economics for those who hate capitalism

I've just finished reading this book by Joseph Heath, and the title alone should be enough to send alarm bells ringing.

Surely, we don't want to empower the fools who hate capitalism with some unjustified ideas that there are rational economic reasons to oppose capitalism.

And the first half of the book is quite a disappointment. The author says the 1st half is dedicated to dispelling right wing economic fallacies, and the 2nd half attacks left wing ideas and fallacies.

The first half seems to think that a libertarian "night watchman state" as described by Nozick has been proven unfeasable, that minimum wages do a lot more than create unemployment and that the real world has all kinds of prisoner's dillemas - situations where the individual parties do not act in the optimal sense and should be regulated by the state.

In each one of these chapters, Joseph Heath simply remarks that it is "more complicated than free market economists suggest" without really justifying why regulations, social welfare and taxes are all justified and beneficial.

The 2nd half of the book is much more agreeable, although it can be a bit long winded in making its point. One chapter that attacks the idea of "fair prices" takes aim at the Fair Trade campaigns, and shows how Oxfam asked for African coffee farmers to be paid double the market price, predictably resulting in a huge coffee glut, and then Oxfam reacted by asking the US gov't to destroy 5 million bags of coffee to keep the prices high.

Similarly, the Body Shop launched its "trade not aid" campaign in the early 90s, where they agreed to buy 6.3 tonnes of shea butter from cooperative producers in northern Ghana, at a price 50% above the local rate. The company decided to add an additional bonus to the price, which was to be invested in local schools or development projects.

What resulted should be obvious to any rational person.

...news of the Body Shop's order created a "shea nut rush", followed by an entirely predictable glut. Farmers stopped growing all sorts of crops in order ot get a slice of the shea-nut action: In the first season, the northern villages, which normally produced about 2 tonnes of shea butter a year, churned out twenty tonnes, nearly four times what The Body Shop wanted... Making matters worse, The Body Shop, after discovering it had overestimated the international market for shea-related products, quickly scaled back its orders for the next season.

In the end, the author managed to attack other bad ideas such as "profits are bad", "capitalism is doomed", "equal pay for all" and "sharing the wealth". Joseph Heath positioned himself as somebody who supports the status quo.

He should double check his blind spots - government spending is wasteful, minimum wages do create unemployment, social security creates moral hazards, and regulation is ineffective.

Why are we trying to tax carbon again ?

The Broken Window fallacy

You don't need to be an economist to have enough common sense to realise that pointless destruction of valuable goods and materials is pointless destruction.

In fact, only a special class of pseudo-economists and intellectuals would argue otherwise. They are fans of the broken window fallacy, which revolves around the idea that you can generate prosperity by breaking a window and paying somebody to fix it (because it keeps them employed and keeps money in circulation).

So many people have used reason, logic and sense to dispel this old myth, but it still lives on and has infected the halls of power in Washington and Canberra alike. Obama and Rudd believe in all kinds of pointless make work schemes.

Rudd believe in replacing existing school halls and playgrounds with new ones - even though the existing ones are only a year or two old, or in some cases, belong to a school with a handful of students.

A classic example of a make work program (which Keynes, Krugman, Rudd and Obama would love) involves paying thousands of people to dig holes, and thousands more to fill them in.

Pres. Obama gave the rubber stamp to the idiotic Cash for Clunkers scheme - where older cars are traded in for newer cars and the government chips in with a fat subsidy - up to $4500 per car. The older and the bigger the used engine, the bigger the subsidy.

This scheme is idiotic on so many levels, and the basic sentiment behind it is a make work / circulate money type of scheme to "stimulate" economic activity.

Failure #1 - $1 billion was allocated to Cash for Clunkers and US government forecasted it would last till November, but the funding ran out in just 6 days as thousands of car owners rushed to take advantage of this scheme.

Failure #2 - one condition for the dealership who buys the used cars, is to destroy the existing engine so it cannot be resold or recycled. Watch the following video and imagine this destructive process being repeated thousands of times across America:

Thats a good question.

Mark Steyn asks:

In the mid-nineties, which climatologist and which model predicted the cooling trend of the turn of the century and the oughts? And, if they didn’t, on what basis do you trust their claims for 2050 or 2100?

(hat tip: Tim Blair)

Movie Review: Wall Street

Can I think of 2 words to sum up Oliver Stone's Wall Street ?

• It blows.
• Get real.
• Bull-s@*t
• Anti-capitalist

Seriously, this movie is so childishly simple, it just doesn't make sense. I could go over the entire plot, which at times seems plausible, but instead I'll just point out the plot twists that leave any intelligent person just gasping in disbelief.

• Gordon Gekko as the ruthless capitalist who is shown to never consider any long term strategies that may be profitable - i.e he flatly rejects improving / cost-cutting any business he owns for future returns, but always opts to "trade" or sell-off the assets
• Bud Fox as the blind obedient lackey of Gekko, becomes an industry spy, eager to follow and monitor other big players and give the insider information to Gekko. Of course, he was eager to sell his soul and betray everybody around him, and Gekko rewards him with countless millions. Is that what Oliver Stone thinks capitalism is all about ?
  
• The SEC as the ever present and watchful authority who trap Bud Fox on charges of insider trading in the very end... are you kidding me ? The SEC couldn't catch Bernie Madoff and with their huge resources, have never been able to uncover anything at all that wasn't handed to them on a silver platter by the media and by industry insiders !

There are many more examples of how misguided Oliver Stone's anti-capitalist brain is. The truth is that free markets are not short-sighted, and they do not require some wise and prudent government oversight to steer them towards long term prosperity. In fact, business owners and employees are far better suited to plan for long term outcomes, whilst government bureacracies are much more fickle and held sway to short term political influences.

If free markets, which are based on individuals making free choices, were short sighted by nature, then we would see people spend all their money today, never build or renovate a home, never set themselves a budget, never manage to raise children, never manage to study a degree, never devote years towards developing their careers etc etc etc.

Oliver Stone's characterisation of capitalism as short term, profit grabbing, destructive game of backstabbing is ridiculous. Gordon Gekko plays a comic book villain, at one scene confessing that he "creates nothing, makes nothing, produces nothing for anybody".

Those working in banking and finance do indeed play a very productive and important role in an economy. First and foremost, they help determine prices for a whole range of assets - stocks, commodities, energy, private debt, sovereign debt. They create financial products to hedge risk - insure against future price movements, allocate capital to the best investments, and help liquidate the worst investments.

You don't see banking and finance workers building homes or cars or gadgets, but many of those real things do require some kind of finance.

Another ridiculous theme is that Charlie Sheen becomes more rude, aggressive, dishonest, disloyal and anti-social to his close friends and family as he becomes more succesful. The idea that climbing the corporate ladder means stepping on everyone else's head is something straight out of the communist manifesto.

The icing on the cake was the scene were Charlie Sheen is humiliated in front of his co-workers when the S.E.C catch him for insider trading, and arrest him in front of his floor. The very same S.E.C who slept through every financial scam and crisis in recent history.

There is one positive thing for me out of watching this

- if Wall Street sums up the very best case that the left wing can present against capitalism and free markets, then they really ought to think it through and get back to us when they've got some real theories.

The Critics of Keynesian Economics

I've finally completed reading this excellent and comprehensive book exposing the key Keynesian fallacies, first compiled by Henry Hazlitt in 1960, and as relevant as ever today.

To be honest, the author didn't have to write anything new. He simply researched and dug up roughly "some two dozen important critiques by eminent economists" and published them in one volume.

Each critique forms a chapter of this book, and I found that each economist would attack Keynes from a different angle. Some would remain very mathematical and duplicate his model, but by adjusting his narrow assumptions, found conclusions that were completely opposite to Keynesian remedies.

Jean Baptiste Say, the originator of Say's Law, (that you cannot consume that which you have not yet produced) which lies at the heart of the dispute between classical and Keynesian economists, has his full statement reproduced to prove that Keynes did not accomplish any such feat as proving Say's Law to be incorrect.

As Hazlitt explains, "It will be observed that Say's Law itself was intended as an answer to pre-existing Keynesian fallacies."

Another economist who made his contribution long before Keynes, was John Stuart Mill who elaborated and defended Say's Law.

Hazlitt helps do the subject justice by reproducing in full, John Stuart Mill's full writing under "Of the Influence of Consumption on Production" which Keynes had misinterpreted and truncated.

At this early stage in the book, I was left feeling as though Keynes had not addressed his rivals and he had simply constructed an elaborate model based on narrow assumptions, and tried to pass it off as a general theory of employment and business cycles.

One thing is for sure, by reading this book, you will get a clearer understanding of Keynesian ideas than actually reading Keynes himself, who seems to be very obscure and sometimes contradictory in his style of writing. Basically, Keynes ideas boil down to the following:

• When an economy is left to the free market, it reaches a natural equilibrium where the employment level is below "full employment"
• There exists a deficiency of demand in this equilibrium
• Savings are a waste of capital
• Deflation is a problem because wages just can't move downwards, even if the price level moves down.
  

The Keynesian cures:

• Inflation to force real wage rates down
• A central bank to lower interest rates, which reduces savings.
  
• Governments using fiscal stimulus, even running deficits, to stimulate current consumption.
  

Every other critic in the book seems to land a solid blow against Keynes and his assumptions.

• Jacob Viner attacks his definition of involuntary unemployment and the rigidity of wages
• Etienne Mantoux does an excellent job of demolishing the idea of a multiplier as follows:

  "Given the definition of the multiplier, the propensity to consume therefore becomes equal to (1 - 1/k), which amounts to saying that as the propensity to consume approaches unity, the secondary effects of a primary investment would approach infinity. Remarkable !"

• Franco Modigliani reproduces the Keynesian model as a set of simultaneous equations, but adopts the classical theory of the supply of labour function where wages are no longer downward-rigid... the conclusions and outcomes from this are very un-Keynesian -

  "The liquidity preference theory is not necessary to explain under-employment equilibrium; it is sufficient only in a limiting case: the "Keynesian case". In the general case it is neither necessary nor sufficient; it can explain this phenomenon only with the additional assumption of rigid wages.

Many other critics nail the point home, some of them short and easily understood, like Mises and Hayek, others doing a lengthy methodical deconstruction of Keynesian assumptions and claims.

Keynes seems to be the biggest source of all economic fallacies in the modern era.

You cannot spend your way to prosperity. You cannot turn a stone into bread. You cannot pump-prime an economy perpetually, stimulate consumption, and not suffer any negative consequences. Inflation is not costless. Deflation is not an eternal spiral. Prices can indeed adjust to balance the supply and demand of labour and savings.

If only the wider public, or at least the economics profession and political advisors, would consider reading this book.

The minimum wage only hurts the poor.

Courtesy of the ALS comes this excellent summary of how minimum wage laws make us feel good about ourselves, whilst they actually price poor people out of performing work.



The CIS have a terrific article about minimum wages too. Read it all.

Site Feeds up and running

The blog has been updated, hopefully the RSS feed will work for users who choose to subscribe via the sidebar. Next task - I will soon update my favorite links.

Unbridled and unrestrained capitalism ?

Thomas DiLorenzo has an excellent smackdown of the myth that the global financial crisis (GFC) was caused by unrestrained, unregulated American capitalism.

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Laissez-faire run amok in financial markets is said to be a cause of the current crisis. But the Fed alone - a secret government organization that is accountable to no one and which has never been audited - performs hundreds of regulatory functions, in addition to recklessly manipulating the money supply. And it is just one of numerous financial regulatory agencies (the SEC, Comptroller of the Currency, Office of Thrift Supervision, FDIC, and numerous state regulators also exist). In a Fed publication entitled "The Federal Reserve System: Purposes and Functions," it is explained that "The Federal Reserve has supervisory and regulatory authority over a wide range of financial institutions and activities." That's the understatement of the century. Among the Fed's functions are the regulation of

• Bank holding companies
• State-chartered banks
• Foreign branches of member banks
• Edge and agreement corporations
• US state-licensed branches, agencies, and representative offices of foreign banks
• Nonbanking activities of foreign banks
• National banks (with the Comptroller of the Currency)
• Savings banks (with the Office of Thrift Supervision)
• Nonbank subsidiaries of bank holding companies
• Thrift holding companies
• Financial reporting
• Accounting policies of banks
• Business "continuity" in case of an economic emergency
• Consumer-protection laws
• Securities dealings of banks
• Information technology used by banks
• Foreign investments of banks
• Foreign lending by banks
• Branch banking
• Bank mergers and acquisitions
• Who may own a bank
• Capital "adequacy standards"
• Extensions of credit for the purchase of securities
• Equal-opportunity lending
• Mortgage disclosure information
• Reserve requirements
• Electronic-funds transfers
• Interbank liabilities
• Community Reinvestment Act subprime lending requirements
• All international banking operations
• Consumer leasing
• Privacy of consumer financial information
• Payments on demand deposits
• "Fair credit" reporting
• Transactions between member banks and their affiliates
• Truth in lending
• Truth in savings

That's a pretty comprehensive list, the result of 96 years of bureaucratic empire building by Fed bureaucrats. It gives the lie to the notion that there has been "too little regulation" of financial markets. Anyone who makes such an argument is either ignorant of the truth or is lying.