Liberty throughout history

Many critics of libertarianism argue that there have never been an anarchic society or purely free markets. I am not completely sure what they are trying to say by that (most arguments they make using those two facts are fallacious non sequiturs), but here is why the whole approach is wrong. (This is ignoring the fact that there have been societies like medieval Ireland or Iceland, where law, for example, was anarchic. I.e., the government was not in charge of law production or enforcement. There were still kings, but they didn't write the laws.)

One can analyze carefully what made societies prosper and/or fail, both legally (i.e., what promoted or reduced justice) and economically (i.e., what promoted or reduced prosperity). I think such an analysis reveals that specifically freedom-promoting principles that specific societies adhered to allowed them to prosper, while adherence to anti-libertarian principles acted detrimentally and was eventually the cause of the societies' downfall and/or transformation.

There are multiple reasons for this, but the basic one is that freedom promotes competition and exploration, and those promote the best adaptation of a society to its conditions and realization of its goals. If one centralized organization is trying to find a solution, it will always do so worse than ten organization (or individuals) doing the same and competing/comparing notes with each other. This is why increased freedom leads to increased prosperity.

(Incidentally, this is true about all natural systems. Greater freedom leads to greater adaptability. When a bird learns a song, its brain creates many semi-randomized patterns of motor commands (the notes for the song, if you will) of which the bird picks the best variation; this repeats until the bird, through such neurological experimentation, finally learns the song.)

What about legal freedom? The whole concept of law is to promote peace and cooperation. It is the alternative to violence, by definition. (That is why law produced by the government is oxymoronic unless it happens to coincide with the "natural law", the natural ways to peacefully resolve conflicts.) When and where violence was embedded in a society's legal system, it led to arbitrariness of justice system, increased conflict, stifling of cooperation, and increased tyranny. Those led to decreased economic freedom and decreased prosperity. When freedom and respect for peaceful, non-violent resolution of the conflicts (which is the basis of natural law) were favored, there was increased cooperation, decreased violence and tyranny, and increased prosperity.

I won't prove this principle on one foot. There are many examples, from Roman Empire to modern Europe and US. (I don't know much about the history of East Asia, but I believe the same must be true about it too.) In every society, "pockets" of freedom within its legal and financial framework allowed it to prosper, while "pockets" of tyranny led to stagnation and eventual death.

Unfortunately, British society, where the great respect for freedom was cultivated for centuries, has turned its back on freedom in the 20th century. No wonder that it is at the same time a police state and a European hub of criminal activity. No wonder London is called "the most expensive third-world capital".

We are yet to see what direction the American society will take. That direction will determine its fate.

* * *

For analysis from legal perspective (that inspired the above thoughts), see this quote by Roderick Long analyzing Lysander Spooner's legal views:

Apparently, then, the immanent presence of natural-law maxims in the legal tradition is not confined to America but stretches back through the English Common Law to Roman law and beyond. 

But just why is it the case that all these different historical legal systems have enshrined libertarian natural-law principles in their maxims? After all, it’s not as though Spooner supposes that most of these systems have been especially libertarian in practice; on the contrary, he assures us that “[a]ll the great governments of the world – those now existing, as well as those that have passed away – have been .... mere bands of robbers, who have associated for purposes of plunder, conquest, and the enslavement of their fellow men.” (Natural Law I.3.2, p. 18.) 

His answer, it seems, is that some degree of reliance on libertarian principles is necessary in order to have a workable social order: the conditions on which “mankind can live in peace, or ought to live in peace,” are “first, that each man shall do, towards every other, all that justice requires him to do; as, for example, that he shall pay his debts, that he shall return borrowed or stolen property to its owner, and that he shall make reparation for any injury he may have done to the person or property of another, and “second … that each man shall abstain from doing to another, anything which justice forbids him to do” such as “theft, robbery, arson, murder, or any other crime against the person or property of another.” 

So long as these conditions are fulfilled, men are at peace, and ought to remain at peace, with each other. But when either of these conditions is violated, men are at war. And they must necessarily remain at war until justice is re-established. 

Through all time, so far as history informs us, wherever mankind have attempted to live in peace with each other, both the natural instincts, and the collective wisdom of the human race, have acknowledged and prescribed, as an indispensable condition, obedience to this one only universal obligation: viz., that each should live honestly towards every other. (Natural Law I. 1. 1, pp. 5-6.) 

In short, libertarianism is simply the consistent application of those norms whose approximate application is a universal precondition of peaceful coexistence. Even a sadistic tyrant needs most of his subjects to be cooperating peacefully with one another most of the time if he wishes to retain any power. It is thus no wonder – and no accident – that legal systems have historically appealed, at least to some extent, to libertarian principles – which is why they are there in the legal record for Spooner to find and invoke them.

It takes a while to build up...

In response to Edmund Conway's post–break up (with Apple) letter comparing Apple with Obama, one comment said:

Apple and Obama fan here. Agree about Apple/iOS 6, but zero sourness about Obama. What does economy problem have to do with him, again? He did a damn grand job helping to smooth the landing and overseeing the takeoff. Building takes a lot longer than destroying; people forget that. So yeah, no matter how hard I look, I can’t see anything sour in my Obama relationship, so you’re wrong that all fans would admit that.

My response:

You are right, orchestrating and building a new bubble takes longer than contracting from an old one. It takes days or weeks for people to realize that the papers they are holding are trash. It takes years to build up the con. 

Maybe the administration has been busy choosing malinvestments into which new commodity should be encouraged.  

Perhaps it should be the tulips again. The government should declare that if you invest in tulips, but your investment flops, the government will bail you out. Then, when the over-blown tulip investments burst and crash the markets, the government should provide a ‘soft landing’ by bailing out the tulip farmers and prolonging the resulting contraction from a month to another four years. 

Obama should learn from the Japanese. They have been in stagnation for three decades. Four years are like a butterfly’s dream to them.

More on topic:

Why Did Solyndra Fail? 

Is price gouging evil?

A really nice article about how price gouging in extreme situations plays an important social role. (And making price gouging illegal does the opposite.)

Simply put, price gouging separates luxuries from necessities. imagine someone raises the price for a bag of ice from $4 to $15. Now, the first few lucky people coming into the store aren't going to buy up 10 bags each (leaving the rest of the people who need bags with empty hands). They will think: 'Do we really need so many bags?'

Even for each individual bag, each person will ask: 'Do I simply need it as a luxury, or do I have something really important I am trying to keep on ice?'

The people for whom it's really important will pay the $15 for a bag. The people for whom it's merely a luxury (e.g., they want to have some vodka on the rocks while they are waiting the storm out) will mumble something about those 'damn capitalist pigs' and go away.

This way the resources are 'rationed' appropriately throughout the society.

As the article mentions, it may be that a given store may set the price too high or too low. Well, that's why there is competition on the market. The stores that set their prices too high will have bags left over (since people will go to their competitors), and people who set their prices too low will be quickly sold out, not getting the 'right' amount of the capital for the merchandise.

If you're interested, read on: 'Price Gouging Saves Lives in a Hurricane'.

On a related topic, if you want to know how speculation can play a positive role in the society, watch this video by Bob Murphy:



P.S. By the way, the fact that New Jersey's governor made a warning against price gouging shows once again that though the Conservatives may talk about being friends of the free market, they are not. And they are as ignorant of how free markets work as the Liberals.

False sense of safety

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The worst invention in the Western Civilization's recent history was a result of Americans' attempt to reduce fatalities from road accidents. They introduced the inflatable airbag into the cars. Now the passengers drive, having a sense of safety.

If I were trying to reduce the accidents, I would put a sharp knife in the middle of the steering wheel. And that would reduce the accidents, because, by G-d, people would be driving carefully now.

-- Hugh Hendry, British hedge funds manager (and a famous critic of the government's attempts to manage the economy)

The point of the above quote is that by creating agencies that manage our safety for us, without our choice, the government makes us less safe. First, the agencies like FDA are extremely inefficient and in general bad at what they're trying to do, as a result of being monopolies. But more severely, they prevent us from caring for our own lives and safety.

As a result, you have attempts at logical arguments that state that without FDA, unsafe drugs and food would fill the markets, because the people wouldn't have anyone watching out for them (while the businesses would of course care more about selling the drugs and not about the safety of their customers). The people who make them cannot imagine that someone might want to care for his own safety, relying (if necessary) on private inspection agencies whose reputation he would keep an eye on.


And I think, in the end, that is the worst result of socialism: it changes the culture. It creates a nation of slaves, of people who are similar to a 30-year-old who lives with his parents and is unable to make a decision himself about his life. (As I have written before, studies show that children who were given some small allowances and allowed to manage their purchases themselves grew up to be more responsible adults.)

This is the worst result of American and European governments' policies. We see this culture of dependent junkies in Greece today. When their government attempts to cut down on spending, they come out to streets and protest, since they are not getting the free pie.

The same thing happened in the Roman Empire: in an attempt to please the public and win popularity, the government created welfare programs, feeding and entertaining the masses for free (the source of the 'bread and circuses' expression). Unfortunately, this could not be sustained forever. In an attempt to pay for the ever-increasing demands of the public, Roman government debased the currency, creating massive economic crisis that spanned the centuries and was one of the reasons for the downfall of the Empire.

In my opinion, unless drastic change of course is undertaken (by the people themselves -- for the government will never change itself for the better), both American and European societies are headed the same way. They will destroy themselves from the inside, degenerating socially, economically, and culturally.

___________________________
* source of image

Keynesian emergency response

If you don't get it, read this.

More on the topic: Keynesianism simplified.

Time preference and the wealth (or poverty) of nations

A few hours ago, I was sitting in an airplane after it had just landed and observing the people taking their belongings from the overhead compartments and proceeding towards the exit. Everyone was very polite. Some people who had fewer things could have rushed forward, but they did not.

The cause of this politeness was patience (among other factors). In other countries, like some Western European countries, or Russia, or Israel, people might be pushing and behaving aggressively. One of the reasons for this difference, I think, is cultural predisposition to time preference -- a need for an instant gratification vs. ability to put things off.

A recent article by a Harvard economist hypothesized a link between the wealth of nations and the languages they spoke -- in particular, whether they spoke a language in which the future tense was definitively expressed (e.g., "It will rain tomorrow") or one in which the future tense was expressed as a form of the present tense ("It is raining tomorrow"). The article was very bad mainly because the data contradicted it. For instance, English-speaking countries tended to be the richest in the last few hundred years. On the other hand, while modern Germany is relatively stable, Germans have suffered one of the worst inflations in the world's history in 1930s. I.e., there simply is very little correlation.

But the premise of the article is correct. Time preference is an extremely important factor contributing to the wealth and prosperity of nations. Nations in which saving and investing are valued over spending tend to prosper more. Not just the nations. Many know of the famous experiment in which children were given a choice: to eat a marshmallow right away or wait for ten minutes and get two marshmallows. Most children chose to eat a marshmallow right away. Some were able to wait. Some time in future after the experiment, researchers tracked down those children who had now grown up. Those that had been able to wait (who had low time preference) did much better in their personal and financial lives that those that had needed the instant gratification.

High time preference can lead not only to economic ruin, but also to health problems associated with overeating or addictive behaviors. It can also lead to crime: a study has shown that most criminals have tendency towards high time preference.

Interestingly, most governments do too. (Well, as someone who considers all governments essentially criminal, I am not surprised.) By their nature, governments tend toward "quick" solutions to problems. Slavery? Let's invade the South and spend hundreds of thousands of lives. (The so-called Civil War remains the bloodiest American conflict. Never mind that most European nations got rid of slavery through peaceful means, driven by changing economic conditions. Not to mention that the result of the so-called Civil War was freeing the slaves but enslaving the free for the next century and a half to come. American Republic was essentially destroyed by Abraham Lincoln.)

Poverty? Let's tax the rich and give money to the poor. Poor education? Let's give more money to the schools, make it difficult to expel students, make teachers have greater assurance in tenures. Poor people can't afford medicine? Unsafe working conditions? Long hours? Traffic accidents?

All these problems have very effective solutions that markets can provide. The only thing is: one must wait for them. Sometimes they may take years or even a few decades. But, it's worth it. Because the solutions will truly improve everyday life and will be a real increase in the lifestyle, an advance in civilization.

All government solutions, on the other hand, seem like they might solve the problem right away, but: a) they almost never do (in many cases they make the problem worse), b) they create a lot of side-effects in a form of perverse incentives and unintended consequences.

So, one can wait for the markets to come up with solutions to low wages (accumulated capital will lead to expansion of industry, which will lead to an increased demand for workers, increased competition for the workers and thus increasing salaries), or one can pass minimum-wage laws, which effectively increase the unemployment among the low-wage earners. (If hiring a worker X will give me profit of $5 and hour, but the minimum wage is $7 an hour, I will not hire anyone from this group of workers. So, instead of helping the workers who were earning "only" $5 an hour, the government made them unemployed. On the other hand, had the government waited, I would have maybe invested capital, increased efficiency of production, increased marginal profit from hiring a worker, and increased each worker's salary. If I decided not to, competition with other business owners who were doing the same thing would force me to do that or lose my employees and much of the profit.)

Any time you hear of some social ill and the proposed solution that uses government's coercion, think of this idea. The government is nothing but a crack addict's quick dose that does not help the problem at all; it makes it worse, makes the real solution more distant, less likely, and more difficult, and introduces a lot of side effects (which in turn need to be solved... and the cycle continues).

And, as a little bonus, this is the kind of people that made American great (can you imagine this kid as a bureaucrat?):

Three answers to the vast majority of liberal arguments

I think if there was a way to answer in one sentence to the vast majority of liberal arguments of why the government should do X or Y, this would be the best answer from constitutional point of view:


(source)

In the famous case of United States vs. Lopez, it was argued whether the government has powers, under the Interstate Commerce Clause, to make it illegal to carry concealed firearms on school campuses. The argument that the General Solicitor (the government's lawyer) presented was that carrying guns on school campuses disrupts education, which eventually has an effect on commerce of the nation. Therefore, in an effort to preserve the national commerce, the government has a power to ban guns on the campuses.

The defense lawyer argued that the Congress has to make findings explicitly linking the banned activity to the interstate commerce, not a hypothetical that might affect interstate commerce. Furthermore, he argued, it is not within jurisdiction of the Federal Government to fight crime on campuses or protect education — that remains a State's prerogative, and when the Government tries to interfere, it is crossing into the State's jurisdiction.

Justice Kennedy asked whether the Federal Government can make it illegal to throw a firebomb into a school house.

Before the lawyer had a chance to answer, Justice Scalia said the text quoted above. Sometimes the concept of the limit on the government's powers means a limit on the government's powers to do good things as well.

Or what one considers to be a good thing.

This, then, is another argument that one can throw at the liberals. The reasons why the government should not regulate people's private lives in an effort to improve the society are:

1. It is pragmatically bad, because the government is plagued by all the problems of a central planner and cannot predict (as nobody can) how to distribute resources most effectively, how to regulate without creating perverse incentives and unintended consequences, etc. In short, when the government interferes, it makes things worse. Opposite from what it was trying to do. Therefore, distribution of resources and improvement of society is best left to private entities competing on a free market. This is an economist's argument.

2. It is a violation of people's natural rights. Even if something is a good thing, you can't violate natural law, in the form of people's natural rights, to achieve this good thing. It is naturally illegal. The function of the law is not to improve society, but to resolve conflicts. When the government attempts to do the former by interfering with people's private lives, it is not only misusing the function of the law but is in fact going against it. This is a libertarian legal philosopher's argument.

3. It is unconstitutional. The people simply have not given the government such powers in the Constitution when it was written. If people wish to do so later, they can do so by ratifying an Amendment. But until that has been done, the Constitution must be interpreted according to the original intent, because the original intent shows which powers the people and the states have clearly ceded to the government.

For instance, imagine I give you a job of cleaning my house under the arrangement that you only clean in the specific places that I told you to. Then, if you want to enter room A, you have to make sure I have given you explicit instructions to do so. If "situation has changed" and, say, there was a spill that went under the door into room A, you can try to call me and obtain my permission to enter the room A. But until I have given you an explicit permission to do so, it is unlawful for you to enter my property without a permission. The same way, under the Constitution, the government has been given a limited list of enumerated powers that the individuals and the States have delegated to it. If the government tries to do something that it was not delegated to, it is infringing the States' and the individuals' rights. This is a conservative constitutionalist's approach.

This is a good video about Justice Scalia:

Keynesian economics simplified

Does being able to vote make us free?

Very nice video.



More on the topic:

Thomas Jefferson's Nightmare 

Critique of Benign Democracy

Why did Solyndra fail?

This is the response to the above question that I wrote on Quora. The answer is in no shape or form my own original thoughts, although I have thought about these concepts and tried to understand them. The answer is, however, in my own words. It is a little repetitive, but that's because I wanted to make sure I got the mechanism of boom–bust cycle from the Austrian point of view across.

(Also, the reason I keep going on about tulips is because I find the subject interesting.)

* * *

If one studies Austrian Business Cycle Theory (created by such economists as Hayek, Mises, and Murray Rothbard), one learns that boom phases of the business cycle are engendered by too much easy credit provided by cheap sources of money, like Spain robbing South America in the 15-17th centuries, or Ben Bernanke adding a few zeroes on his Excel spreadsheet. As a result of this rapid expansion of monetary supply, interest rates go down, and banks lend money more easily.

Because the interest rates go down, entrepreneurs are encouraged to invest in various long-term projects that suddenly look more profitable (since long-term borrowings are more sensitive to interest rates). The long-term projects usually include "capital-goods" industries, like steel or tractors, but can include any project with a long-term gain, like housing today or tulips in the 17th century Holland (why tulips?.. well, tulips take 7 years to appear from a seed).

This results in a malinvestment in these projects. Why malinvestment? Well, let me back-track.

Under free-market conditions, interest rate matches public's spending time preferences. So, if people want to spend not now, but in the future, they save. The increase in savings accounts leads to the banks holding more money, which they loan out more readily, lowering interest rates. The entrepreneurs, as I mentioned, then invest in long-term projects. Luckily, this matches the public's spending time preference! As the consumers decide to spend in the future, the long-term investments of the entrepreneurs lead to appearance of the future products, for which there is demand in the future.

(In addition, as the customers spend less at the restaurants and movie theaters, the resources, human and material, are freed up to be used by the long-term projects.)

But when the interest rates are lowered artificially by the Fed (or King of Spain whose gold ended up in the Bank of Amsterdam) and there is a lot of easy credit, the investments in the long-term projects are unmatched by the changes in spending preferences! The people never decided to save up now to spend more in the future. So, when the time comes for the long-term investments to reap reward, they don't.

This is why in any bust that follows a boom of malinvestment, there is usually a cluster of long-term project failures. In the 19th century, it was the railroad companies (that failed during every boom-bust cycle created by newly formed Central Banks). In the 21st century, it's housing and solar panels. In the 17th century, it was tulips. From macro-economics perspective, this cluster of failures looks like "recession" and "economy down" and "no growth", but if we realize that these businesses grew as a result of malinvestment, we will see that this recession phase is nothing but a healthy process of capital flowing from wrong targets of investment to the proper ones (as the businesses that have the consumers' custom buy up the equipment and hire the workers from the failing businesses).

In addition, if an investment fad was created (for example, the government pushing for easy housing or green projects, or a fad in tulips), this helps to create the malinvestment bubble — but what makes the bubble possible is the easy credit! (In fact, oftentimes, when the easy credit money runs out, the bubble bursts immediately, such as happened in the case of 17th-century Dutch tulipmania. Sometimes it takes years to realize that the increased supply -- for instance of houses or solar panels -- was unmatched by the demand from the populace.) This is an article by Mises in which he proves that without easy credit, no boom would be sustainable.


So, why did Solyndra fail? For the same reason the housing market failed. The government created (for political reason) new fads: housing and "green" energy. Federal Reserve (first Alan Greenspan, then Ben Bernanke) pumped the banks with the money that it created from the thin air (literally by adding zeroes to their accounts through open market operations after buying back government bonds at a price very profitable for the banks). This lowered interest rates, made the cheap credit of newly created money available for the entrepreneurs, for whom long-term investments in housing, steel... and green energy now looked profitable. But all of these investments were not matched by changing public spending time preferences (people in the early 2000s were not saving up money to spend in the late 2000s on houses and solar panels... at least not enough people to match the investments). Eventually, the bubble burst.

The banks that made bad investments in the housing market were bailed out. Solyndra and a bunch of other businesses went bankrupt.

The thing is: the fact that it failed was a good thing. It was investment of capital (from entrepreneurs and Obama) that was never matched by the customers' demand. That this capital was re-bought by the people (or was it?) who knew how to match the customers' demand is a good thing.

The fact that the banks (or car industry) were not allowed to fail, their assets being bought (and their personnel hired) by more responsible firms, was a bad thing.

Free market for medicine?

One of the comments to the post called "Halachic Basis for Medicare" said, in part (check the thread to see the rest of the comment and my answers to it), the following:

In fact, Health Care is a great example of an industry that likely confounds the free market. 

Consider: For thousands of years, health care operated with free market principles. Yet, there was very little relationship between the amount of money spent on a treatment and its efficacy. This is because health care providers have something I like to call a "Confuse-opoly". 

The product they are selling requires a lot of specialized knowledge to detect quality. As a result, customers have a very hard time making rational market decisions. The best treatments fail to work many times, and patients often recover without any medical care, so it is super-hard to separate out the value of the care being offered.

I would like to ask the author of the comment to provide evidence for what he is talking about, but I assume he is talking about practices like bloodletting.

Back in the day, when a person felt sick, he went to a doctor. The doctor looked into the current medicine books (which were based on pseudo-scientific Aristotelean view of the world) and opened up the patient’s veins to let some blood out. Obviously, this did not help the patient, but he still paid for the service, because the doctor said it was the best treatment.

If a patient was richer, he might have ordered more blood-letting services, like leeches. Or maybe some smelling salts. Or, if he was in China, he might have ordered accupuncture or tiger-bones soup, which were also not helpful.

So, why were these patients paying for bad treatment? Why didn't the free markets improve the quality in this service?


First, I urge everyone to read this article: "Socialized Healthcare vs. the Laws of Economics".

And these are my answers to the above argument:

1. I assume my friend would be able to tell a difference between healthcare in Russia (back in the day or now) vs. China vs. county hospital in the US vs. a private clinic. I assume the same about most people. And it's not just about the fact that some hospitals have Au Bon Pain in their lobbies.

2. Yes, some treatments hoodwink people into paying for them and thinking that they got better as a result of the treatment. But some treatments do make them feel better because they treated the symptoms. So, just because people sometimes get confused about the quality of the service they are receiving, doesn’t mean that they are always confused. I.e., if the population selects (with their money) the services that they think make them feel better, sometimes they will have false positives (and false negatives), but on average, they will select for improvement of the services.

3. My friend's argument is making a value judgement. It’s similar to saying: "Some people buy cars that have velvet seats and nice A/C and eye-pleasing color. Fools! A good car is a good engine, brakes, transmission, etc. How is the free market controlling for car quality?" Well, who says velvet seats and nice A/C are not products?

Perhaps the doctors who did leeching and accupuncture provided the patients with a sort of psychotherapy or a comfort therapy. They did not cure the disease (because they didn’t know how), but they provided them with a peace of mind (not to mention the possible placebo effect). It is not different from someone today doing pain management as opposed to curing the actual cause of the disease.

4. Yes, the doctors were only able to provide mumbo-jumbo treatment when there was none better available. But as soon as science and technology improved and the better results of the new treatments were clear, the patients were not so stupid as to stick to bloodletting and ignore vaccination, penicillin, and surgery. In the late-19th-century England, the free markets drove out the country doctors who practiced medicine the "good old way", because younger Sorbonne-educated doctors produced visibly better results. Plus, they explained their treatments, and many people (first of higher and middle classes, then even the rest) were educated enough to know the difference.

Going back to the car example, there are people who like "red cars" that have nice leather seats and good stereo system, and there are people who like Italian sport cars that are stripped of everything except the basic parts and have a really powerful engine.

Which brings me to my next point:

5. The markets are only as good and as efficient as the people who fill the markets. The product that the markets select for depend on the people's preferences. If people have bad taste in movies, you will get American movie industry. (Here, I know, I am making a value judgement.) So, if people are uneducated, they might select for the mumbo-jumbo comfort treatments.

We know, however, that with time, people's education improves and certain scientific facts and ideas enter the population's mind (partly because there are people who profit from spreading knowledge, either directly or indirectly). This should improve the effectiveness of judging the quality of medical service.

The assumption that people are going to stay on the same level of medical knowledge does not seem founded for me. That certainly has not happened over the course of the 20th century. (Most people know today about risks of strokes, the importance of exercise, and if someone got cancer at the age of 80, it's probably not because of the cell phones, but because of the old age. There are mythbuster TV shows and books everywhere that tell people that obsessively washing hands with antibacterial soap is bad and that we use more than 10% of out brain.)

6. It's very easy to point out the problems with something. But when one does so, one should point to a better alternative. Otherwise, all one is saying is that life is not perfect.

What’s the alternative? Ivory-tower sages deciding what is "really" the best treatment and what is "really" the best hospital? But it’s these ivory-tower sages that have historically told their patients that bloodletting was the way to go. Nowadays, ivory-tower medical giants recommend getting epidurals while giving birth, even though that increases the health risks for the mother  and oftentimes makes the necessity of a C-section more probable, which presents the risks to the fetus and decreases the future fertility of the mother. (My wife who has little background in Biology found this out by reading various medical sources by herself.)

Also, how do we control for the quality of the ivory-tower sages (the Surgeon General and the likes of him)? These people are appointed by bureaucrats and politicians who, like everyone else, can have trouble distinguishing between good treatment and the bad. (I mean, they definitely have a hard time distinguishing between good science and the bad in the area of climatology.) And how do we know that the politicians are doing a good job? Who controls them?

I guess it comes down again to the people. So, if the politicians appoint bad Ministers of Healthcare who make bad decisions about the medicine, people can always vote the politicians out, right? Basically, that's the system in Russia today. Except, of course, this doesn't work, since many people are not single-issue voters ("de gospitals are vorse, but Putin brot stability to de kantry"), because the alternative may be worse, and so on.

Also, how are the people to decide whether the politicians are doing a good job? They can look at the statistics, but they can also at the individual hospitals' statistics.

The bottom line is: people can control the quality of healthcare through a complicated system of bureaucracy and politics which is extremely inefficient (it's like trying to ride a bicycle while standing on ten-meter-high crutches), or they can "vote" for the efficiency of the hospitals and doctors directly, with their money.

19th century vs. 20th century

Someone, in a conversation with me, has claimed that if we went back to the gold standard, or at least, if the Central Bank did not inflate the currency, there would be zero economic growth (or even a recession).

I countered that we certainly did not observe this happening in the 19th century, when US and UK economies grew very rapidly.

He answered: Yes, they grew, but not nearly as rapidly as in the 20th century.

Let's see if he is right. One thing about the growth of the economy is that it is an auto-catalytic process: the product catalyzes the reaction, so the more product you have, the faster the reaction rate. If you start off with $100, your business will grow slower than if you start off with $100,000. (Your business will grow as a result of you re-investing a portion of your profit. The more you invest, the more it will grow. But since your profit from $100,000 will be greater than from $100, your business growth rates will be different.)

To correct for this, it's useful to look at the logarithm of growth, as opposed to pure growth. For those who don't know much math, logarithm is a function inverse of exponential function. So, if a graph shows exponential growth (as in the case of growth rate of an auto-catalytic reaction), its log will show a straight line.

After this introduction, let's look at the data. The following figures show growth of GDP in the United States, from 1790 to 2010. The graphs are logs (including the second one, despite the label). "Real GDP" is adjusted for inflation, as I understand (I may be wrong).

I don't know about you, but to me, growth rates seem very comparable. And GDP is just the first measure of growth that came to my mind and not necessarily the "purest" measure of the growth of "real wealth".

(Source: Measuring Worth > Datasets > US GDP)


This is also a rather interesting graph — Consumer Price Index, in logs:


Here are raw data:




If you go to the interactive graph, you will see that the prices rose rapidly when US entered a war (the US Revolution in 1776, the War of 1812, the War of Northern Aggres... I mean, the Civil War in 1861, and the First World War in 1916). Then, FDR took away Americans' gold, and the prices rose for the duration of the Great Depression and the Second World War. Then, in 1967, the last tie to gold standard was cut, and the prices were rising ever since.

So, basically, the effect of US government on the prices of products and services is similar to that of a war.

Yeah, but if there was no inflation, there would be no growth, right? Go back to the beginning of the thread.

Some more background:

First, this: http://www.tomwoods.com/inflation/

Second, this:

Effect of income tax on technological progress

[A re-post with some new points]

Oftentimes people tell me that science would not flourish as it has in the 20th century had it not been sponsored by income tax. The idea of private sponsorship of science (either in a form of investments, like in any other business, or in a form of donations) would not work, or at least would not work on the same scale as it has under governmental sponsorship. Until recently, I thought so too.

Let’s see if this is true — what effect has income tax (introduced in the late 19th century and made permanent in early 20th century) and, in general, government’s funding of science had on the rate of technological breakthroughs?




I think the effect is pretty clear. Until the end of 19th century, technology has been developing at an extremely high rate. Then, in late 19th – early 20th century, the rate started to slow down and then started to decrease. Saying “look how far we got in 20th century in terms of technology after government started sponsoring its development” is the same as saying “look how far I got walking on my feet after I abandoned my car on the side of the road”.

Recently someone told me that without inflation, there is no growth (apparently, Rick Santorum believes the same). I answered that England and US have grown tremendously in the period of 1700–1900 (when the currency was not only not inflating, but was actually deflating). He said: "yes, but it was the fraction of growth US has experienced in the last thirty years". I challenged him to provide me with evidence that the rate of growth was higher in the 20th century than in the 19th. Meanwhile, Tom Woods claims the opposite:



Going back to the question of governmental funding of science — so, why would private businesses fund science (after all, aren’t they interested in immediate profit?), and why don’t they do so now? Also, even if the businesses did fund science (and of course, they still do), it would be only applied, not fundamental science, right?

This claim is repeated by most scientists I know. No wonder most of them love the government.

Well, think about this: oil companies invest money in geological research that will produce real profit 30 years from now. Sounds to me like investment into fundamental science that gives long-term profit. (I certainly hope that my personal discoveries will provide humanity, iyH, with some practical benefit, in addition to added theoretical knowledge, less than 30 years from now.)

Now, imagine if the government used taxpayers’ money to do the aforementioned geological research? Why would the oil companies spend money to do it then?

Meanwhile, the cost of doing science has risen greatly, because the companies that supply universities with materials know they can raise the prices, since the government will pick up the bill. The same is happening in medicine and education.

At the same time, the quality of service is going down. It is very hard to buy a good antibody nowadays (as opposed to, say, 10 years ago), since the market is full of antibodies that do not work or don’t work well. The companies mass-produce them and sell them, knowing that the government-sponsored labs will buy them no matter what, since they are less careful with their money spending (after all, the government will pick up the bill, and if you run out of one grant, there is always another to be applied for).

And this is just one example...

An injection of your own blood

If Obama can re-use his first stimulus speech from a few years ago (although I think he just plagiarized Hoover's 1931 stimulus speech), I can re-use one of my old posts:

Government can't really stimulate economy.

Why not? Read here:

Any statement about the economy that contains a mechanical metaphor is more than likely wrong. We’re told government must “jump start” the economy. How can it? Think about what happens when a car is jump started. Cables connected to a charged battery convey juice to a dead battery. Energy is injected into the broken-down car from outside.

Politicians and court economists want us think this is analogous to government’s jump starting the economy. But it cannot be. Since the government has no money lying around waiting to be spent*, it will have to borrow close to a trillion dollars to carry out the program President-elect Obama and the congressional leadership are planning.

But borrowing money for their pet projects injects nothing into the economy. It merely moves money from where it currently is in the economy to where politicians want it to be. How is that a stimulus?

Moreover, the debt will be covered (monetized) by the Federal Reserve by creating money out of thin air. That money will then be spent and “invested,” but notice the problem. Creating money is not the same as creating wealth. Imagine you were stranded on a desert island. Overhead you see a plane. It drops a large box down to you. Excitedly you tear open the box expecting to find food and water. But instead you find a printing press and a large supply of green paper. An instruction sheet states: “Print all the money you need.”

Are you better off?

All resources are scarce. A quantity of steel, for instance, can be used to make a washing machine or a machine to produce more steel. It can’t make both at the same time. When the Fed creates money, it increases the demand for scarce resources — but no new resources. How can that be a path to prosperity? Rather, it’s a path to higher prices and lower real incomes.

But it’s more than that. Since the new money gets into some hands rather than others first, monetary expansion — that is, inflation — changes the pattern of prices and production that would have resulted from voluntary exchange under sound money. Among the prices distorted are interest rates. By doing so, inflation transfers resources from those who produce wealth to others.

Inflation, therefore, is one more government income-distribution program. The lucky early recipients of the fresh fiat money gain purchasing power — command over scarce resources — at the expense of everyone else. The market process is thereby corrupted. In the absence of inflation (and other government interference), it is a system in which entrepreneurs pursue profit by pleasing consumers.

What makes this work amazingly well is the price system, which communicates to producers and consumers the relative scarcities of products and factors of production, the relative demands for such things, and the degree to which people prefer goods in the present to goods in the future. This permits production to be guided by consumers’ preferences.

Inflation distorts those relative prices, garbling the signals and ill-serving consumers. In the end society is poorer than it would have been. When the inflation is finally stopped, the economy suffers depression and mass unemployment as it corrects for the malinvestment. Or, if the inflation accelerates to hyperinflation, as it did in Germany in the 1920s and in Zimbabwe today, society will be thrown into chaos.

This is where the Obama-congressional “stimulus” plans will lead. Nothing is more dangerous than a politician who thinks he must “do something now”.

The last statement points at the root of the problem. People think of government as some creative force — government creates things (products, services, initiatives) and directs civilization. This is a model of a slave society, where people belong to the society, which itself is a big beehive.

On the other hand, a model of a free society, where each person is an individual who belongs to himself but agreed with others to build a society together, involves only one function of the government — not creative, but restrictive. Such a government merely protects people’s rights allowing them to make decisions in building civilization, providing services, inventing new products, etc. — something people have been doing just fine by themselves (and better than when government got involved).

In a free model of a government, the latter has no mitzvos aseh (“thou shalt”) — it only has mitzvos loi ta’aseh (“thou shalt not”).

___________
* Now, it's not actually true that there is no way to inject money into an economy from "without", as one injects juice into a dead battery. There is. Hitler, y"sh, used it to "jump-start" German economy. What you do is invade another country, rob it of its resources, and the "inject" those resources in your economy.

The only question is: should we invade Mexico or Canada? The first is full of cheap labor, but we already have more of their cheap labor than we know what to do with. The second is full of liberals and hippy guitar players (yes, I am thinking of Tzvi Freeman), and we seem to have too many of those too. Perhaps we can invade an oil-rich country and... oh, wait...

Money

A simple idea that many people don’t fully comprehend.

Money represents willingness of other people to provide you with necessary things, while you provide them with some kind of service or product that they value. Let’s say you paint. Professionally. You create beautiful works of art. But you’re poor, because people do not appreciate your art. “Ugh,” exclaim some people, “to measure art in dollars and cents!” Well, it’s not really the art per se that is being measured. What is being measured is willingness of other people to grow your food, obtain and transfer electricity to your home, provide you with housing, make clothes for you, assemble together cars, computers, and iPods (not to mention make easels, brushes, paper and paints) for you — all in exchange of your creating your paintings. And people may just be unwilling to do that.

See, I may value my neighbor’s paintings. I may value them very much. But I may still be unwilling to cook for him, do his laundry, cut his grass, and educate his kids so that he can be free to paint and maybe give me one of his paintings. Sorry. There are things that I can do during the day that I value more.

This is what society is all about, in the end. The ultimate value of society is division of labor. I grow food. You chop wood. He makes tools. She makes clothes. Then we exchange them. Instead of each of us growing his own food, chopping his own wood, making his own clothes, etc. That way each person can focus on doing whatever he wants to do or can do best. Or what is more demanded or valued at the time. Or what is less supplied at the time. All of which is measured (in a market society) in money.

Money is merely a medium for exchange of the services that different members of society provide for each other. There is nothing inherently dirty, ugly, or nasty about it; no more than there is anything inherently nasty about one person doing a favor to someone in exchange for another favor.

(And just like services can be done for free, just like products can be given as gifts, money can be given as a gift too. There is nothing “not nice” about that. You’re merely giving a choice to your friend which of the products or services of the society to select from for himself.)

Walter Block on radio

I am from New Orleans, and recently, a government river killed a lot of people.

A Jewish libertarian professor of law from Loyola University (New Orleans) talks about privatization of rivers and roads, about the ecological disaster in the Gulf, about the contribution of the free market (and avarice) vs. the government to the crisis, the difference between Keynesian (including the evil Chicago school) economists vs. Austrian economists, and many other topics.

Dr. Block is a libertarian, but it’s hard to figure out whether he is an anarchist or minirchist. (I think it’s like mishichist vs. anti-mishichist. Different libertarians say different things, but you know they are all secretly — or openly — you-know-what.) In any event, I think the interview is very interesting, whichever religious views about the economics you adhere to.

Listen here.

A priori penguins

Oftentimes when explaining how Math is very interesting in that we don’t derive the truths of Math from experience (you don’t need to “go out there” and see in the world that 2 + 2 = 4; you know this logically), I explain the difference between a priori and a posteriori statements and give the example of the sun rising from a certain direction. But yesterday I had a revelation that my example had been wrong. So, I will share my revelation with you. If you think what I am saying is banally simple, I don’t apologize.

So, is it an empirical question: does the sun always rise from the east on every planet? In order to answer this question, do you need to go out there and explore other planets, or can you answer it a priori — without any experience of the world?

Well, how do we know which side is east and which side is west on our planet? Or which side is north and south? Sure, for most civilized people, “north” is associated with “up there”, because most of us live in the northern hemisphere. But even though Australia is called “the land down under”, people living in Australia, surprisingly enough, don’t experience the world upside down. They can just as well think of the North Pole being “down there”.

If you think about it, it seems obvious that east and west (and, as a result, north and south) are just definitions — not definitions based on the particular physical parts of our planet, but definitions based on direction of the sun’s movement in the sky. Once we know what north and south are, based on that definition, we can figure out what is in our north and south: in the north, there is Greenland and Iceland and volcanoes and a bunch of socialist countries, and in the south there are penguins and a bunch of white racist landowners (I am talking about South Africa, not South Carolina).

Imagine that a couple of astronauts are sent by the Federal Government to another planet to figure out where the sun rises on that planet (it has to be Federal Government, since it would be the only one stupid enough to spend money on such a project). They arrive on the dark side of the planet and are waiting for the sunrise. Finally, they see the sun rising, and the following conversation happens:

— Nu?
— Nu what?
— Which side is the sun rising from?
— I dunno. Which side is that?
— Well, is that east or west?
— How can you tell?
— Well, ok, which way are the penguins?
— Actually, on this planet there are no penguins.
— No penguins? What a dump. What about socialists?
— Actually, this planet is inhabited by a much more advanced civilization than ours, and most people here are libertarians.
— OK, that’s it. I am getting out of here.
— What are we going to write in the report?
— “The study did not produce statistically significant results.”

Do you see the problem? With the planet being curved, there is no way to tell which way is objectively “up”. In fact, for ancient Jews, “up” was east. And “right” was south. That is why, the youngest son of Yakov Avinu, who was born in the South was called Binyomin — “son of the right hand”.

So, the sun always rises from the east — by definition. You don’t need to go “out there” and do any observations. You just know it. The same way that you know that all bachelors have no parents-in-law.

On the other hand, with the moon, it’s not so obvious. If you say “every planet which has life has a moon”, it’s an empirical statement. Even if you find one hundred planets that have life and a moon, you can’t be sure that one-hundred-first will definitely have a moon.

But with 2+2=4, you know it a priori. You don’t need to keep adding objects together to convince yourself of this. Any two objects and any two objects will add up to four objects — whatever the objects, the climate, or the political party in power.

Now, the question is: should economics be studied a priori, like Math, or a posteriori, like Natural Sciences? Is “all things being equal, instituting minimum-wage laws increases unemployment” an empirical statement that needs to be proven by observation, or is it a logical statement?

(To see why our moon is necessary for there to be life on our planet, read this post.)

What is really wrong with socialism?

In his famous two essays on the anarchist model of law and defense, Robert Murphy gives a good summary of libertarian critique of socialism while also explaining not just the advantage but the necessity of capitalism:

* * *

The traditional opponents of socialism argued that it had insufficient incentives for the average worker; without tying pay to performance, people would shirk and output would be far lower than in a capitalist economy. Only if a new “Socialist Man” evolved, who enjoyed working for his comrades as much as for himself, could a socialist system succeed.
     Although valid, this criticism misses the essence of the problem. It took Ludwig von Mises to explain, in a 1920 paper, the true flaw with socialism: Without market prices for the means of production, government planners cannot engage in economic calculation, and so literally have no idea if they are using society’s resources efficiently. Consequently, socialism suffers not only from a problem of incentives, but also from a problem of knowledge. To match the performance of a market economy, socialist planners would not need to be merely angels, committed to the commonweal—they would also need to be gods, capable of superhuman calculations.
     At any time, there is only a limited supply of labor, raw materials, and capital resources that can be combined in various ways to create output goods. A primary function of an economic system is to determine which goods should be produced, in what quantities and in what manner, from these limited resources. The market economy solves this problem through the institution of private property, which implies free enterprise and freely floating prices.
     The owners of labor, capital, and natural resources—the “means of production”—are free to sell their property to the highest bidder. The entrepreneurs are free to produce and sell whatever goods they wish. The ultimate test of profit and loss imposes order on this seeming chaos: If a producer consistently spends more on his inputs than he earns from selling his output, he will go bankrupt and no longer have any influence on the manner in which society’s resources are used.
     On the other hand, the successful producer creates value for consumers, by purchasing resources at a certain price and transforming them into goods that fetch a higher price. In the market economy, such behavior is rewarded with profits, which allow the producer in question to have a greater say in the use of society’s scarce resources.

None of this is true in the socialist state. Even if they truly intended the happiness of their subjects, the government planners would squander the resources at their disposal. With no test of profit and loss, the planners would have no feedback and would thus be operating in the dark. A decision to produce more shoes and fewer shirts, or vice versa, would be largely arbitrary. Furthermore, the individuals to ultimately decide the fate of society’s resources would be selected through the political process, not through the meritocracy of the market. [Ad kan.]

* * *

Sometimes people blame the failure of socialism in Russia on the dictators. But what did the violation of human rights have to do with the economy (besides the fact that they had to force people into socialism, just like today in the US people are forced into being taxed, so that US auto industry can be bailed out)? Killing off the intelligentsia did not cause the great famines of 1920’s and 30’s. Collectivization of the farms did. Suppressing freedom of speech was terrible, but it wasn’t the reason why the Soviet Union had to import grain from Canada after the Virgin Lands disaster (and other similar campaigns).

One adviser to Khrushchev was Trofim Lysenko, who promised greatly increased production with minimal investment. Such schemes were attractive to Khrushchev, who ordered them implemented. Lysenko managed to maintain his influence under Khrushchev despite repeated failures; as each proposal failed, he advocated another. Lysenko's influence greatly retarded the development of genetic science in the Soviet Union. In 1959, Khrushchev announced a goal of overtaking the United States in production of milk, meat, and butter. Local officials, with Khrushchev's encouragement, made unrealistic pledges of production. These goals were met by forcing farmers to slaughter their breeding herds and by purchasing meat at state stores, then reselling it back to the government, artificially increasing recorded production.

In June 1962, food prices were raised, particularly on meat and butter (by 25-30%). This caused public discontent. In the southern Russian city of Novocherkassk (Rostov Region) this discontent escalated to a strike and a revolt against the authorities. The revolt was put down by the military who opened fire on unarmed demonstrators. According to Soviet official accounts, 22 people were killed and 87 wounded. In addition, 116 demonstrators were convicted of involvement and seven of them executed. Information about the revolt and the massacre was completely suppressed in the USSR, but spread through Samizdat and damaged Khrushchev's reputation in the West.

Drought struck the Soviet Union in 1963; the harvest of 107,500,000 short tons (97,500,000 t) of grain was down from a peak of 134,700,000 short tons (122,200,000 t) in 1958. The shortages resulted in bread lines, a fact at first kept from Khrushchev. Reluctant to purchase food in the West, but faced with the alternative of widespread hunger, Khrushchev exhausted the nation's hard currency reserves and expended part of its gold stockpile in the purchase of grain and other foodstuffs.

Disinclination to work

In the present instance, going back to the liver-pill circular, I had the symptoms, beyond all mistake, the chief among them being "a general disinclination to work of any kind." What I suffer in that way no tongue can tell. From my earliest infancy I have been a martyr to it. As a boy, the disease hardly ever left me for a day.
— Jerome K. Jerome, Three Men in a Boat

I know I am posting too many things at one time, but this bit that I have just read is too brilliant to pass by. The Conservatives and Classical Liberals are oftentimes accused of being heartless pigs who do not care for the poor. Figures are oftentimes cited to reveal the levels of unemployment and poverty. And the solution is more free soup, more governmental charities.
        In his book, The Worldy Philosophers (hardly a work of libertarian economic philosophy), Robert L. Heilbroner writes (p. 24 in the 7th ed.):

Sir William Petty, an astonishing seventeenth-century character (who was in his lifetime cabin boy, hawker, clothier, physician, professor of music, and founder of a school named Political Arithmetik), claimed that when wages were good, labor was “scarce to be had at all, so licentious are they who labor only to eat, or rather to drink”. And Sir William was not merely venting the bourgeois prejudices of his day. He was observing a fact that can still be remarked among the unindustrialized peoples of the world: a raw working force, unused to wagework, uncomfortable in factory life, unschooled to the idea of an ever-rising standard of living, will not work harder if wages rise; it will simply take more time off.
        The idea of gain, the idea that each working person not only may, but should, constantly strive to better his or her material lot, is an idea that was quite foreign to the great lower and middle strata of Egyptian, Greek, Roman, and medieval cultures, only scattered throughout Renaissance and Reformation times and largely absent in the majority of Eastern civilizations. As a ubiquitous characteristic of society, it is as modern an invention as printing.
        Not only is the idea of gain by no means as universal as we sometimes suppose, but the social sanction of gain is an even more modern and restricted development. In the Middle Ages, the Church taught that no Christian ought to be a merchant [good news for the Jews, eh?], and behind that teaching lay the thoughts that merchants were a disturbing yeast in the leaven of society. In Shakespeare’s time the object of life for the ordinary citizen, for everybody, in fact, except the gentility, was not to advance his station in life, but to maintain it. Even to our Pilgrim forefathers, the idea that gain might be tolerable — even a useful — goal in life would have appeared as nothing short of a doctrine of the devil.

Now, I must point out, from my experience of having lived in New Orleans for four years, that the attitude described in the first paragraph of the quote is not unique to the “unindustrialized people of the world” — it is prevalent among many sub-cultures of American society as well.
        I know a Jew from Manhattan who was in real estate business in New Orleans. He would buy apartment buildings and renovate them to rent out. He employed one man who, according to my friend, was a very talented craftsman. Gaining his services, however, was very difficult. First, to find him, one had to cross a bayou on a boat. Second, even if found, the guy was most of the times in a state of intoxication from various substances. Third, even if employed, he more often than not would not show up to work.
        Now, if one personally wishes to stay poor, that’s his business (and there is a difference between “advancing one’s station in life” to the point of being able to buy a yacht vs. to the point of being able to buy two pairs of tefillin for each son and send all children to good schools, and maybe buy some Jewish books and invite a few guests for Shabbos). But if he wishes to help other poor people, he must encourage them to help themselves and provide them with economic means to do so, not encourage the government to hand out free soup to keep the poor barely alive.

AC vs. DC

There is a difference between bringing Torah down to people and bringing people up to Torah.

There is a difference between making Judaism modern and making everyday life Jewish.

There is a difference between conquest and assimilation.

It’s the difference between being a moderate and being a libertarian. In one case there is a compromise. In the other — maximization.