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Henderson on State Inefficiency

Economics Posted on Wed, March 01, 2017 22:29:23

The following is a reply by David McDonagh to Robert Henderson’s blog post “Public and private confusion (and, yes, there is an alternative)“, in particular, section 15 on “Public service inefficiencies and politicians”. It was edited by Lee Waaks.


Robert Henderson believes that the state is inefficient owing to the irresponsible behaviour of politicians rather than to their access to taxation; and that it enables the state to rule, or govern, the people rather than to serve them, as firms set out to do. He believes that the politicians pass too many laws, or that they introduce other measures not requiring legislation, but that demand such action as the meeting of “targets”, which he thinks are simply beyond the state ever meeting. But the Libertarian Alliance [LA] case against the state is that it seeks to rule by flouting our liberty as well as using taxation to be indifferent to efficiency; but, out of the two, it is the flouting of liberty that is mainly illiberal.

There is no real incentive for politics to be efficient. The political projects even have incentives to be inefficient for if they make savings in their allowance, then they usually get less funds as a result the next financial year, so they need to spend what they have been granted every year to maintain their income. Therefore, they are rewarded to stay still and often punished by having less income for their departments for any economising. Firms, by contrast, gain funds for other things by economising. When firms fail to attract customers by serving them, they lose the money they might have earned from the customers. State projects are not automatically affected by any public neglect.

We are told that there are too many laws and he gives tax law as a prime example, as there is just too much of it for anyone to master; even the best experts know only a small part of the law relating to taxation. Many of the laws themselves are not very clear, leaving it open to cogent new innovations of interpretation that can show up bureaucrats at the Inland Revenue as incompetent or unreasonable, and that can be the case at the Customs and Excise Office too. The ordinary bureaucrats are not trained well enough to cope with the obscurely written laws as they stand, says Henderson, and he thinks this is why the state is inefficient. But the reality seems to be that the state (and politics) is fundamentally negative sum in nature and the authority to tax the public leads the state to rule rather than serve the public.

He believes the lack of consideration on the part of politicians in framing laws to be used practically is a problem and many neglected laws that should be repealed are simply left on the books. But those that are used need a great deal of common sense to enforce as literally written or they would not be practical, so they are only partly enforced.

Even then, the gaols are overcrowded owing to politicians being too careless in passing laws and those in charge of the Home Office calling for longer sentences. If they ensured gaol places beforehand, then what the politicians do might be more viable, or at least more acceptable to Henderson. But liberals will ponder that responsibility needs liberty to be fostered, so any time in gaol is highly likely to diminish responsibility, and thus social liberty; so liberals will look for a limited use of gaol, if they allow any use at all. Weekends in gaol, with the offender remaining in his job during the week and paying for his weekend gaol stays, as well as for some compensation to the victim of his crime, is in the way of liberal thought on crime and punishment. This might allows prisons to pay for themselves or, at least, cost the general public way less. Remaining in work will also foster more responsibility in the offender.

I think Thomas Szasz was basically right in his myth of mental illness thesis. I have seen some criticism from LA members that there might be some mental illness, despite what Szasz said, but in hearing some of this criticism, especially in the talk on Szasz by David Ramsay Steele on YouTube, it did not seem to discount the fact that what Szasz said still seemed to apply to the overwhelming majority of those classified as mentally ill. The recent drive to care for those with mental illness by the political elite, over the last five years or so, is in the direction away from Szasz, and it looks like the sort of kindness that messes lives up. The earlier “care in the community” seemed to be, at least, going the right way. But Henderson seems to think that many should be locked up for life and he regrets that a few have found their way into gaol. But as Szasz repeatedly suggests in his books, that is where some of them were more fitted to than in the asylums.

Henderson gets the Community Charge, that its opponents called the Poll Tax, completely wrong. It was an attempt to foster active local government by making them responsible for the setting of the Community Charge and by competition between such areas to put it up or down as the voters saw fit. It was a long shot, as voters tend to forget to bother much at the voting polls to make an instrumental use of elections and they use them for voter loyalty instead.

Anyway, it was not given the coup de grace by a violent protest in Trafalgar Square, as we were told by Henderson; it fell only after Mrs Thatcher fell; and she fell mainly owing to her opposition to the EU, not owing to the attempt she made to foster an active local instrumental electoral system relating to the Community Charge. That was slowly settling down, after the opposition to it had been largely seen off. It took former MP Michael Heseltine about a week to think it might be good propaganda to repeal it, and then he was eulogised by many Tory MPs, who had forgotten all about it.

To truly cost the medical services in the UK, the National Health Service [NHS] would need to be privatised completely. Only then will the real anarchic price system price things. It is not practical to simulate the price system. That is to say there is no way that the state projects can get realistic prices to rival those set by the price system. Henderson errs badly if he imagines there was a time since 1948 when the NHS was trouble free. It never can deliver what it is supposed to deliver. It will always fall short of that.

Henderson imagines that schools in the UK are more than child minding centres. He believes that the educational aims have only recently been lost.

Reply to Robert Henderson on Corporate Efficiency

Economics Posted on Sun, February 26, 2017 19:06:58

The following is a reply by David McDonagh to a blog post by Robert Henderson. It has been edited by Lee Waaks.


Firms do serve the public when they seek to get customers for what they produce. But maybe Robert Henderson means providing uneconomic services, like running empty buses on a regular and frequent timetable just in case a few might need them. The fact is that this sort of “public service” is clearly very wasteful. It means there is a need for taxation to subsidise it, or a high ticket price that most people might well shun. Such “services” are intrinsically inefficient, as few want the services currently provided.

We are told that a monopoly is needed to run an uneconomic “public service”, but that is not right (though it might help a bit), as competition might otherwise remove some income by cherry-picking off the parts that might be economic. But the mere monopoly would not usually bale out the universal service as a whole even with a no cherry-picking; instead it is taxation that is vital to this wasteful activity. Contrary to Henderson’s claim, a monopoly cannot ensure such universal services that are often bound to be uneconomic.

We are told that “no private company would ever provide a universal one-price service without massive public subsidy”, but that is false, as we can see with the usual prices of commodities, for we pay the same price for most of them whether they are in Cornwall, Warwickshire or Antrim. Most wares sell at the same price throughout the UK. The mass urban sales do allow ordinary firms to charge the same price for the same goods in largely rural areas as they do in the big cities.

The Post Office cut the second post as it wanted to cut the subsidy. Ditto, it has put the last post earlier in the day. A monopoly might ease it, but it is taxation that alone allows it to exist.

It is not clear to me what Henderson imagines is the public service aspect of the BBC. Whatever he thinks it is, he says it would ebb if the licence fee were to go and the BBC went more, or completely, state free. It would become more like the other TV channels, he says, but it looks rather like them anyway, accept that its adverts do not interrupt the programmes, but they do look abundant enough between the programmes, even if they are not commercial.

Henderson sees, or he says he sees, a clash between profit and public service in providing things like the National Health Service (NHS), but the NHS deliberately flouts economic viability in that it attempts free access paid for by taxation. A private insurance policy also might provide free access, but only for those who took such a policy out by paying for it. Such a policy might well make a profit.

If work is subcontracted out then the main contractor usually needs to see it is done to the extent that would have been the case had it not been subcontracted out. Henderson wants to deny that normality.

Reply to Robert Henderson on Efficiency

Economics Posted on Sun, February 26, 2017 18:23:00

This post is a response by David McDonagh to Robert Henderson’s blog post on efficiency. It was edited by Lee Waaks


Robert Henderson asks “what do we mean by efficiency?” We need to note that there are at least two vitally different but germane meanings that we need to consider here: economic and technological efficiency. These two distinct meanings produce the interesting fact that they often clash. If we have to produce what might be technically efficient, but what we cannot really afford, then that is to be saddled with what is called a white elephant. A good example of a white elephant is Concorde, the supersonic jet aircraft. It was only viable with support from tax payers and even even then most could not afford to use it.

Society is organised by firms needing to make a profit. Profits are earned by gaining the patronage of customers by competition for their customers as against all other firms. The entrepreneur attempts to guess what the customers will buy. His costs will include wages, rent, interest on any loans and other costs relating to supplying the good or ware. Anything earned by the project over and above all the costs will then be the earnings of the entrepreneur as profit, but he also risks making a loss in this competitive quest. This is the small competitive section of the market economy where entrepreneurs rival each other and it is zero sum, insofar as the total amount of customers out there only have so much at any one time to spend. The rest of the market economy is co-operative and, like all trade, it is positive sum.

The state depends on successful economic activity on the market for taxation. No state can earn its own way for politics is negative sum, and thus wasteful, from an economic point of view. But nationalists ususally look at the state as a grand collective end or consumer good. Robert Henderson is clearly a nationalist rather than a liberal.

Profit shows that what the customers want has been successfully produced by the firms that make a profit. This is a way of rejecting most of what we technically might have done but is actually very uneconomic. The range of what is rejected as uneconomic is very wide and to go down any one of those wasteful uneconomic paths would be to enter a metaphorical crushing stampede of wasteful white elephants. Profit mainly allows us to dodge that stampede but the state is always there to tax the public in order to rescue some unprofitable projects, thereby saving the odd white elephant from the metaphorical stampeding herd. Profit is a good sign of successful economy in the mass urban society.

Henderson imagines the state gives public service but the reality is that it sets out to govern the public. Profit is feedback that the customers have been served but the state never truly serves. We are told that firms merely get lucky when they make a profit, but that such luck runs out. This account is very unrealistic. It is more likely that firms ebb not owing to bad luck, but due to all who wanted the good having already purchased it, with the result that not enough new customers prevent the firm from making a loss. The firm then either produces something else that some customers will patronise, or it ebbs away to go eventually defunct. By contrast, state projects like NATO rarely go defunct, but continue to draw taxpayers money and to look around for new ways to continue their wasteful spending.

There is no general boon that allows all firms to make a profit, but Henderson tends to imagine otherwise, and he believes there are periods when profits are easy to make. The reality is that at all times firms have to provide wares or services that customers will value more than the price the firm puts on the wares. They may always prefer to spend their money on other goods.

Henderson thinks some goods are so vital that it is hard not to make large profits regularly. He gives the banks as an example. But if things were left to the market in 2008, then a lot of banks would have been replaced by new banks. He pushes the dogma that monopoly is emerging, once again, but there has been no percentage increase in monopoly since about 1800. Growing monopoly is a mere myth rather than a growing problem. For example, we are told that the march of Tesco supermarket is relentless but then we might have said the same of Mac Fisheries
supermarket in the 1960s. Only Sainsbury’s amongst the 1960s rivals among the then big supermarkets has made it into the 2010s. This will most likely be the case by the 2060s, too, but which one it will be is far from clear. Tesco has certainly had a lot of trouble in the last three years, so it may not survive far into the future.

What metaphorically “destroys” firms is not their rivals but the their lack of customers. Stores that do serve the customers well can continue indefinitely. The customers always have a superabundance of other things that they can buy with their money. They never lack lots of choice in the big city but they might in a small village because it might be more costly to drive beyond other than local stores. But the Internet cuts that cost somewhat even in a village in the last decade or so.

Firms pretending to be more successful than they are does not affect the public very much. Their ebbing is largely their own private affair.

Henderson thinks it is debatable whether profit is a good yardstick of efficiency in any case, but even if it true in some cases, he still believes it is not true in all cases. He believes universal public services need a lot of unprofitable work to be done. But in what sense are such things efficient in any sense whatsoever? He says the Post Office makes a loss on delivering posts to rural areas because it charges the same price as those posted within the city. But this means rural service is aided by taxation. However, universal prices can be achieved by the market (e.g. Mars bars) without state aid from taxation. In such cases, city buyers pay the costs of transportation to rural areas in order for firms to maintain a cheap universal price. We are told the state aids private firms by its Post Office prices because, they too, pay the universal price. But this is hyperbole, as firms can charge customers for delivery.

Henderson thinks that two criteria can replace profit as a sign of efficiency: “(1) is the service being delivered to all who need it? and (2) is the cost reasonable in comparison with equivalent operations in other countries?” But neither criteria indicate any economic efficiency whatsoever, as (1) allows no economy at all because it cuts out germane input from the needy; and (2) other nations are not likely to be efficient in state projects because they are bound to be wasteful, as all the state does is negative sum. Judging by his criteria, Henderson thinks the National Health Service (NHS) looks efficient. However, since 1970 the NHS has been a hospital closing programme and it is no more clear that the 1940s fad of nationalisation has done better there than elsewhere, such as the railways or in coal mining. People love the NHS only as they fear free trade in health care. But that is public fear and corruption rather than a sign of any actual economic efficiency. The NHS exists only owing to general taxation.

The Economics of Intolerance

Economics Posted on Thu, July 16, 2015 12:37:28

Libertarianism is advocating to maximize the liberty of individuals. The idea is that every person should have the right to be left alone as much as that is practically possible. Originally, I was under the impression that Libertarians must be people who have a lot of faith in human beings. That is because, one of the major arguments against liberty seems to be that a lot of people are simply not fit to make their own decisions in every aspect of their lives. They need to be forced or at least guided with some mild pressure to make the right choices. While libertarians will be quick to admit that people are not infallible and not all of them are decent, they nevertheless believe that even a superior elite group, or a single genius, cannot get the right personal choice better for the average or even below average person than the person can for themselves. They also believe that there are only a small amount of potential or real trouble makers. The vast majority of humans are basically good, trustworthy people. This to me, seems to be a very positive and optimistic view of humans.

Over the years however, I came to notice that libertarianism does seem to attract some people who are not particularity positive about humans in general. Their attraction to liberty seems to be two things. Firstly, they are attracted to the idea of liberty allowing them to reject others so they do not have to deal with a lot of humans that they do not like. In other words, it is the ability to dodge others, to be intolerant of those that they do not like, that is attracting some people to libertarian ideas. And secondly, they seem to have come up with the idea that economic forces will be an even stronger restrain on people’s behavior than the state. In other words, they paint the picture of a libertarian society being mostly homogenous and conservative.

Their arguments never made much sense to me and I am going to explain why. I am going to argue that a libertarian society will most likely be very colorful and multicultural.

Let us start with the first argument that liberty is about the right to discriminate. It seems clear that we can only have absolute unrestricted liberty in a world of superabundance. But since we live in a world of scarcity, it is inevitable that our liberty will be limited by the liberty of others. What is the best way of maximizing the ability of people to be left alone in a world of scarcity? The libertarian answer to that is to grant people certain property rights. Only with these property rights, it seems possible to practically leave people alone at least to some degree. With property, I am at least able to do what I like with a small part of the real world, most importantly with my own body and life. Without property I would not be able to make any decision without asking all other people interested in the same property for permission first. Therefore, it seems correct to assume that property really does maximize liberty.

From this, the intolerance crowd will follow, “see, liberty is all about discrimination, therefore a libertarian society will see more of it”. Well, not so fast. Just because in principal you can do something, does not mean that it is always a good idea. Yes, it is absolutely true that liberty entails the right of people to exclude others from their property or business activity for very shallow reasons. But then liberty gives you the right to do all kinds of things. You could restrain from showering and being polite to other people. But from that does not follow that this is a good survival strategy. I would suspect that it is probably not.

People who stress the ability to intolerance through property overlook the fact that property is not absolute liberty. It is merely a strategy to maximize liberty in an otherwise scarce world. As such it also demands a lot of tolerance. While it is true that you can use your property in any way you like, it is part of the property deal that you absolutely respect other people to do the same with their property. That means that you can for example prohibit people from burning the Koran on your property, but you also must not interfere if your neighbor is doing something like that on his. This might not be an easy thing to do. Liberty therefore clearly demands tolerance from people.

Our well being as individuals very much depends on the cooperation of us with other humans on this planet. And the larger the amount of people we are cooperating with the better, in other words the larger the market in which we take part, the better off we are. This is causing a few problems to intolerant people. First, if you really do not want to be confronted with things that you find hard to tolerate, you will have to do more than just own a small piece of property. You will have to find a way to legitimately control your whole neighborhood. There are of course ways of doing that. But no matter how you do it, whether you are buying up all the properties in your neighborhood or join a gated community, the costs for this lifestyle will be higher than for people who are more relaxed about their neighbors. And the more intolerant you are, the further away from other people you will have to move, or the higher walls you will have to establish around you. This however drives up the costs to cooperate with others. This is the reason, why so many people are living in crowded cities. Having a large amount of diverse people around you, opens up a lot of possibilities. That means it is economically costly to pursue an intolerant lifestyle. Sure in a free market, everything will likely become cheaper as productivity rises. But the relative economic disadvantage compared to people who are tolerant remains.

And there is more economic disadvantage. Say you are running a company and you are a racist. In that case you are excluding a lot of potentially helpful people from your business. That should cause you disadvantages compared to a competition that is more open minded. There is a reason why racist societies force people to be intolerant by law. Left on their own, most people quickly start realizing that hatred is not a very attractive philosophy.

What about the claim that a libertarian society will likely see more conservative lifestyles. I don’t find this completely convincing either. I think conservatives are right in one aspect. Cooperation on a free market demands responsibility. So some of the irresponsible behavior we see being produced by the welfare state will likely go away. On the other hand however, markets are known to produce a lot of wealth. And particularly creative people are doing well on free markets compared to rigid bureaucratic structures. If people are more wealthy they are less dependent on others approving of their lifestyle. In other words, free markets tent to benefit individualism.

This can be seen historically. For example, to my knowledge it was not so much feminism or the welfare state that made women independent from their husbands. It was the industrial revolution. Factory owners often paid for facilities where mothers could leave their children while at work. That way they had access to their labor, which was needed. Or mothers were earning enough to pay for child care themselves. So it was the wealth production of free markets that allowed women to break out of conservative family structures.

I cannot see much basis for the idea that liberty is about intolerance or that a libertarian society has to be conservative. This seems to be wishful thinking from some libertarians. If that is true, then the question arises, are they really libertarians or are they people who see libertarianism as a means to achieve very different ends? And if the latter is true, are they trustworthy to stick with liberty even if liberty appears to produce different results?

I think a good test to answer these questions is state immigration controls. Are libertarians willing to support getting the state out of the way of the free movement of people or not. It seems to me that people who are arguing in favor of state immigration controls give away that they really are more interested in their conservative/racist idea of a society than in liberty. And they seem to sense that it really needs the state to produce this result. If we get the state out of the way, we will likely see an increase in multiculturalism. The economic incentive of people to mix seems too large.

Since this is not a result that these libertarians expected, they are quick to proclaim that really this is all due to other state policies like non-discrimination legislature or the welfare state. But this is an odd argument in many ways. While these policies are indeed anti-libertarian and have to go, there does not seem to be much evidence that supports the idea that they have a big influence on immigration. At least no were near enough to support the idea that without them, we would not see a lot of movement of people from all over the world. And regardless of how many people will end up moving, it seems false to argue that the state cannot be rolled back unconditionally, as that would lead to problems. That argument can be used to prevent any rollback, as almost any abolition of a policy will cause some trouble for some people. So if this argument sticks, we will be stuck with the status quo forever. No, if the abolition of one policy causes problems with other policies in place, then we just need to abolish more state until the state is no more.

For all these reasons I personally remain skeptical of people who are interested in liberty because it promises them intolerance. Of course it is good when people are interested in libertarianism and want to call themselves libertarians. Any common ground is a basis for debate. However, I don’t know how much I can trust them when it comes to the fight for liberty. I also don’t believe this image of liberty is helpful to spread the message. We are sharing this planet with a lot of people. And we will have to find a way to live peacefully with them. Our standard of living is also very dependent on a maximum of collaboration with others. I therefore consider tolerance to be an important value. Intolerance simply does not seem to be a good survival strategy. But tolerance can be difficult. It needs to be learned. That will take some training. Telling people that it is perfectly fine to be intolerant is therefore not very helpful.

Adam Smith

Economics Posted on Sun, March 01, 2015 21:47:31

The Wealth of Nations (1776) discussed.

On Thursday, 19 February 2015, Melvyn Bragg and his guests, Richard Whatmore, Donald Winch and Helen Paul, on In Our Time, radio 4, discussed Adam Smith’s celebrated economic treatise The Wealth of Nations (1776). I will say what each speaker approximately said then add a few comments of my own. This method hardly reproduces the programme as it was but it does report the substance of it.

Bragg said that Smith was one of Scotland’s greatest thinkers, a moral philosopher and pioneer of economic theory, whose 1776 masterpiece has come to define classical economics. Scotland was way ahead of London intellectually for this was the time of the Scottish Enlightenment and Smith was one of the major thinkers of that phenomenon.

As a boy, Adam Smith was a scholar who did well at Grammar school then later at the University of Glasgow but he found the University of Oxford way below par. However, he used his time there to do a lot of reading. He went to France and met Voltaire, amongst many others. His 1776 book was based on his careful consideration of the transformation that was wrought on the British economy by the Industrial Revolution, and it looked at how the result contrasted with marketplaces elsewhere in nations around the world, so the book outlined a theory of wealth, and how it is accumulated, that has arguably had more influence on economic theory than any other book so far. Bragg said he rather liked the fact that Adam Smith was willing to let the seat of the British Empire move from London to Philadelphia to preserve it.

Richard Whatmore, the Professor of Modern History and Director of the Institute of Intellectual History at the University of St Andrews said the book was basically against the state regulation of markets. The Wealth of Nations (1776) came out of the Enlightenment in general and the Scottish Enlightenment in particular. Adam Smith was born in 1723into a Scotland full of problems, not least the divide between the Highlands and Lowlands. David Hume saw that commerce needed to be taken seriously by the state, but owing to early losses the rulers in Scotland agreed to the Act of Union with England in 1707 on the promise of compensation, or full replacement of the losses, so many thought that “Scotland was bought and sold for English gold”. But despite those fears that it might be bad for Scotland, the free trade zone that 1707 introduced seemed soon to be a success. But there was the upset of the 1745 Jacobite Uprising, so all was not harmony.

Commerce was seen as the basis of society so the state needed to be concerned with it. As the basis of society commerce was new, though commerce itself was old. The new society needed to be justified. In the past commercial cities had been defeated by agricultural or shepherd states, as Rome had beaten Carthage for example.

Commerce was not so good at war, so commercial societies did not tend to last long. But in Europe, by the eighteen century, commerce had become more stable. Why? This needed to be both explained and justified and this is what Smith set out to do in his book.

Smith found that part of the explanation was that ordinary men saw that, if they saved a bit, they could soon make conditions for themselves and their families a bit better by working on the market system in some specialised job.

Adam Smith was a very historical writer and he held that an economist would need to be an historian too. He held an account was needed from the fall of Rome up to modern times and he planned a big book to show the rule of law was needed but he burnt the notes for this third book on not getting round writing them up, but he revised his two main books repeatedly till the end of his life. The Theory of Moral Sentiments (1759) was not just an early stage that he later abandoned but rather central to his life’s aims.

The invisible hand metaphor is used in The Wealth of Nations (1776) once but in The Theory of Moral Sentiments (1759) a few times. Adam Smith saw himself as a moderate between mercantilists on the one hand and the physiocrats, or complete free traders, on the other.

Adam Smith did not expect this book to have much influence. One of his major ideas was unintended consequences. Tom Paine loved book III and IV of the 1776 book. But Edmund Burke also loved The Wealth of Nations too. But his major book on law was not begun but rather he burnt the notes for it.

Donald Winch, the Emeritus Professor of Intellectual History at the University of Sussex said that Adam Smith’s father had died early and his mother became very close to her son, who soon attended the local Grammar School, in Kirkcaldy. At the age of 14, the boy went on to the University of Glasgow and he was good at both the school and the college. At the college he had Francis Hutcheson as his teacher. Hutcheson was one of the first not to lecture in Latin but rather in English. All the teachers he had at the college were full professors.

The Theory of Moral Sentiments (1759) was revised till Adam Smith’s last days. He burnt his notes and plan for his big third book. He was against the egoism of Thomas Hobbes. He favoured social rather than selfish activity.

By Smith’s time, England no longer had a peasantry, though other nations still did and they also retained other aspects of feudalism too. But in England all had become partly merchants, as Smith noted. His 1776 book was in five books. “Greed is good” but Adam Smith did not say so. But he held that each can make things somewhat better by saving for the future.

Mercantilism was the very opposite of what Adam Smith wanted, as it was the inverse of liberalism.

Smith delayed publishing The Wealth of Nations for three years to see what happened in America. He lived in London away from his beloved Kirkcaldy home owing to his concern about the fate of British Empire. He held that mercantilism was no good so the colonists were right to reject that aspect of the British Empire.

Smith was against corporatism. Beware of businessmen when gathered together as they might well be in a conspiracy against the public, he warned.

Helen Paul, a Lecturer in Economics and Economic History at the University of Southampton said that Adam Smith was against both the mercantilists and the physiocrats. Mercantilism was old but the politicians in Smith’s still largely held to it. This old paradigm held that trade was zero-sum.

Adam Smith used the example of the pin factory where one man could not even make a single pin a day on his own but with about eighteen others with distinct tasks on the division of labour then thousands of pins might be produced.

He did work that led to the current knowledge we of the price system but he worked before that was completely achieved.

As he thought that shipping should be protected as it aided the problem of defence he was not quite fully in favour of free trade.

COMMENTS: The three experts did not do too badly. They might have said that Joseph Butler was the big influence in David Hume to get him to reject Thomas Hobbes on egoism and Butler also said there is not enough self-love too. Hume adopted both in his ethical writings and later Adam Smith did too in the 1759 book.

Clearly, Smith’s main idea of the division of labour gears all who join it to serve others as a by-product whilst doing their best for themselves and thus the metaphor of the hidden hand, as it is usually interpreted, is quite superfluous.

Richard Whatmore was right to note that trade rarely fits well with war for trade is aimed at service rather than with abusing people but the state sets out to rule the people, rather than to serve them, and its coercive governing can soon spill over into war, especially when state meets state.

Richard Cobden saw that free trade crowds out war, a thesis he found in The Wealth of Nations (1776).

The a priori method in economics – In defence of Ludwig von Mises (essay)

Economics Posted on Fri, May 09, 2014 13:52:04

I gave a speech on this topic at the Libertarian Alliance in March. A link to the video recording of that speech is on the main website. The following essay covers similar ground but is not identical with the speech. I develop the argument differently here. My hope is that this text is a better articulation of my views and hopefully a good basis for further debate.

The topic of this essay is broadly the method of economics: What phenomena does economics deal with? How do economists develop and test economic theories? What type of statements are the “laws of economics”, and what are they useful for?

Such far-reaching and deep issues cannot be covered adequately in an essay, so the following must remain a brief outline. The position I take on these questions is that of Ludwig von Mises, whose views remain controversial to say the least, even among many who are otherwise sympathetic to his positions (including the regular contributors to this blog: David Ramsey Steele, David McDonagh, and J. C. Lester, all of whom I rate highly as writers and libertarian thinkers.).

Brief sketch of Mises’ position

Mises argued that economics was an a priori science. Economics is fundamentally different from the natural sciences in terms of subject matter, method, and the type of statements it can make. The natural sciences are (mainly, at least) empirical sciences (a posteriori as opposed to a priori). Economics is not an empirical science. It does not discover the regularities that constitute its laws through observation (for example, the collection and interpretation of statistics) or laboratory experiments (difficult in economics) but through careful logical deduction from certain starting propositions (axioms), although some observation may be involved in establishing these starting propositions. Because it is not an empirical science, it does not make empirical predictions and its key theses are not testable by empirical means. (If this sounds strange to you, don’t worry. Most economists today disagree with Mises and practice, or believe they practice, a different kind of economics, though in my view, they are quite mistaken. A lot of what is presented as “economics” to the public today does not quite deserve the label and is often intellectually weak. All this will hopefully become clearer soon.)

So is it useful? Yes, very much so, in fact, it is indispensible. Economic theory is antecedent to experience (a priori Latin: “from the earlier”). It provides a tool for understanding experience, for making experience intelligible in the first place, in this case the experience of economic phenomena, which are by definition complex phenomena. Without the laws of economics, we could not speak intelligently about observed market phenomena, make sense of what happens around us in terms of economic behaviour, and in any reasonable way collect, organize and interpret economic data. Economics provides the essential abstract mental tools (which are necessarily independent of time and space, and thus generally valid) for approaching a specific situation in real life and dealing with a specific real-life problem of economics.

The laws of economics provide a searchlight, a type of X-ray, that illuminates the bony structure underlying all economic phenomena, the patterns and regularities that are at work in all human action as it relates to economic goods. (Mises famously defined economics as a subset of a wider science of human action in general, which he called praxeology, but for the purpose of this essay I stick to the narrower field of economics.)

Falsifiability” through experience

As economics so defined is general, abstract and prior to experience, it cannot be falsified by experience, which means it is not “testable” or “refutable” in the way that most natural sciences are, and which has become in fact the generally accepted definition of what makes an inquiry a scientific inquiry in the first place, namely for the scientist to come up with testable hypotheses that can be falsified through experience.

It is this aspect that most riles many economists (the few that care about the epistemology of their science), other social scientists, and many epistemologists and philosophers. If the economist produces stuff that cannot be falsified empirically, so this criticism goes, then he may either produce tautologies (he simply re-arranges his starting axioms) or arbitrary nonsense, maybe both, and he can go on repeating it because the alleged non-falsifiability of it immunizes it against refutation.

In the following I will try and defend Mises. I believe that his position on the method of economics is correct. This topic is also extremely relevant, in my view, for any discussion of economic phenomena and ultimately for any policy discussions. We need to understand what economics can do and not do, and how it can go about its business reasonably and intelligently.

Importance and examples

It is important to stress from the start that Mises did not suggest that this method should be adopted, or that this was a method that should distinguish the Austrian School economists from other economists; that this was one available method next to others, and that the a priori one was just better than any alternatives. He claimed – correctly, in my view- that this was the method of economics. All the key tenets of economics developed over 300 years of systematic economic investigation, from Cantillon to Hume to Adam Smith to Ricardo to Carl Menger, were of such an a priori nature. Observation might have led these economists to develop their theories. Observation might have provided an initial spark; provided ideas or aroused interest. But economic theory proper is always logically derived from human conduct; it tells us something about the logic of action. To be an economist in the sense of being an economic theoretician is to think in terms of a priori concepts. To apply the laws of economics to specific economic problems in a given situation is to apply again a priori concepts. Some examples may help illustrate this:

The law of diminishing returns is an a priori law. It is essential for any analysis of real life economic situations. If economics were an empirical science and if its laws were subject to empirical testing, must we not fear that tomorrow we might encounter a maverick economic good to which the law of diminishing returns did not apply? This is impossible. An economic good that was not subject to the laws of diminishing returns would not be an economic good, as there would be no reason to economize on it. Being an economic good means being subject to the laws of diminishing returns.

Interest is the phenomenon that we value the same or similar goods differently if they are available at different points in time, and specifically, that we value future goods lower than present goods. If economics were an empirical science, would we not have to fear that tomorrow we encounter a group of people to whom that law did not apply? No, this is impossible (at least as long as these people have not yet discovered the secret of eternal life). Interest follows directly from time preference, and time preference is an integral part of what constitutes an economic good. “To want something means to want it, all else being equal, sooner rather than later” (George Reisman). Or, to put it differently, to be indifferent as to whether you enjoy a good today, in five years time, or in twenty years time, is equivalent to not caring about it, which means, the good in question is not an economic good to you in the first place. “Economic good” means you care about it, which means you experience time preference in relation to this good, which means the concept of interest applies to it, which means all a priori laws of interest apply to it.

Ricardo’s law of comparative cost has led to the law of association, which shows that it is advantageous (always marginally wealth-enhancing) for individuals and groups of individuals (nations) to engage in cooperation via free trade, even if one or more members of this trade network do not possess any comparative advantage, meaning their marginal productivity is lower in every relevant area than the marginal productivity of other members. Even then, everybody benefits from the inclusion of this member/these members in the network. This law is ultimately derived from the law of marginal utility, of which the law of diminishing returns is a subset. If economics were an empirical science, would we not have to fear that tomorrow we might encounter a group of people to whom the law of association did not apply? That is, again, impossible. Wherever there is trade in economic goods, to which the laws of marginal utility apply (otherwise they wouldn’t be economic goods), the law of association applies. The law of association is a priori. It is not subject to empirical testing but is logically derived from the key tenets of economic action and it is therefore a tool for making something as complex as trade and cooperation of people with different skills intelligible in the first place. (It is also the most powerful argument against any type of restriction to free trade.)

Let’s take an example from the field of money. David Ramsey Steele who is very knowledgeable about Mises and generally sympathetic to his work but rejects Mises’ apriori-ism, correctly emphasizes in his book and also recently in his blog entry on this website, that it is often difficult to ascertain precisely which financial assets fulfil the function of money at a specific time and place. Over time, what is used as money has changed, and in a modern economy with a highly developed financial system the distinction between money and non-money can be blurred. Seemingly safe assets for which very liquid markets exist have occasionally assumed the role of quasi-monies. However, these are not problems of economic theory but of application of theory to specific situations. Once we ascertain what is used as money in a specific economy at a specific time, the laws of money as specified my monetary theory necessarily apply to this form of money.

Money is a medium of exchange, a facilitator of trade that is so widely used by the public that money prices also function as a reasonable basis for economic calculation and the monetary asset itself frequently as a store of value. Because money is the medium of exchange, demand for money (cash balances) is demand for readily exercisable purchasing power, and any changes in money demand can therefore in principle be met by changes in the purchasing power of the monetary unit and therefore without any additional production of money. At different purchasing powers the same quantity of money can satisfy different degrees of money demand, something that non-money goods cannot do. If economics were an empirical science, would we not have to fear that tomorrow we might encounter a form of money that was a maverick and that would falsify this rule, or to which this rule would not apply? No, this is nonsensical. By determining that something is money we also imply that changes in demand for it can be met by changes in its price. This is a priori.

Are these not simple tautologies? Are we not re-stating what is already entailed in the original concepts? – In a way yes. Mises was quite ready to accept this. We may label them tautologies but it does not make these deductions trivial, useless or arbitrary. In fact, more elaborate theories can and should be built on these basic theories. These theories are the keys to unlocking the logical structure inherent in all economic activity. As we are all economic actors we experience and we use these concepts daily, mostly without much further reflection. But the economist illuminates the underlying regularities and laws of economic action and makes intelligible the patterns that are necessarily at work.

Mises was not proposing a new method of economics. He was clarifying what it meant to do economics. As economics is a fairly young science (Mises said the youngest of all the sciences), it does not have a long history of epistemological analysis. Many of those who thought carefully about how economics works as a science came indeed to conclusions that are similar to Mises’: Nassau William Senior, John Stuart Mill, John Elliott Cairnes (maybe closest to Mises), Frank Knight, and Friedrich von Wieser. But Mises argued this position most consistently and convincingly.

What about modern mainstream economists?

Most modern economists appear to be doing something completely different. They are evidently using copious amounts of statistical data and applying mathematical procedures to it. How does this relate to what we just said?

Statistical data always describes historical events. It shows us what happened in a specific place at a specific time. It is impossible to approach statistical data, and to organize and interpret it without any theory whatsoever. Theory-free statistical analysis is impossible. The combination of (correct) a priori theory and historical data may allow us to understand what happened in the past, including the very recent past. Following Steele (as referenced before) we may, for example, try and understand to what degree liquid AAA-rated floaters functioned as near-monies in the run-up to the 2007 financial crisis. Or we may analyze how consumer good prices and producer goods prices behaved in the United States from 1929 to 1933. Or we may try to quantify the extent to which QE has probably lowered the borrowing costs of the state over the past 5 years.

What we cannot do is two things: We can neither verify nor falsify the a priori laws of economics, such as the ones listed above. Even more important (and potentially disappointing to those who derive their expectations as to what science is all about from the natural sciences) we cannot derive the laws of economics from mere observation, and that includes even the most extensive collection of data and the most elaborate and sophisticated analysis of it. The economists who claim to do this are either confused or simply play to the gallery (Piketty?) and are frequently not really proper economists, although some of them may even win Nobel Prizes. This may sound harsh but I believe it is true. The reasons for why we must fail to achieve these two things (test/verify/falsify economic laws and discover economic laws through statistics) are fundamental and I will give them below. Of course, if economics were a natural science, if it were an empirical science, these two things would not only be possible, they would be essential to its modus operandi as a science. Crucially, economics is not an empirical science in the sense that the natural sciences are.

This is in fact the reason why no amount of data mining and statistical analysis will ever settle disputes in the field of economics. Keynesian economists will forever quote historical data from around the Great Depression as evidence of their crisis theories and policy recommendations, just as those who subscribe to monetary explanations of the business cycle (as we “Austrians” do) will forever cite the same or similar data in support of their theories. It is a common complaint that anything can be proven with statistics, and in the field of economic debate this seems to be true to a large degree. (I subscribe to the “Austrian” explanation of economic crises not because it fits the data better but because it fits the principles of economics, the laws of economics that allow us to analyse the cycle in the first place. A detailed analysis of Keynesian theories leads to conflicts and mismatches with some key economic principles. This makes this theory much less convincing.)

Paul Krugman, praxeologist?

Any serious discussion of economic matters must ultimately drill down to first principles, to the a priori level. This means that every economist is ultimately forced to use Mises’ method, even someone like the belligerent archtypical Keynesian Paul Krugman, who would not want to be associated with any tenets of the Austrian School. But if we discussed an economic issue with Paul Krugman long and hard enough, and assuming for a moment the honest intention on both sides to get to the heart of the matter, we would ultimately have to arrive at the level of fundamental theory.

In the 1990s, Paul Krugman was known as a free-trade Keynesian. When financier Sir James Goldsmith published his anti-free trade pamphlet “The Trap” in 1994, Krugman attacked it and Krugman correctly pointed out that Sir James failed to grasp even the basics of trade. Appropriately, Krugman referred Goldsmith to Ricardo’s work and the great economists’ essential a priori insights as to the benefits of trade, benefits that must even accrue to allegedly “inferior” (less productive) trading partners (see my earlier point on Ricardo’s theorem). Ricardo, who had then already been dead for 170 years, did not have the better data but the better theory, as Krugman rightly acknowledged.

Because of the very nature of its subject matter – purposeful human action as opposed to natural phenomena – economics can, on the one hand, make incredibly powerful generally valid statements about human action of the kind of “no country can lastingly be a loser in free trade”, or “no minimum wage law can lastingly improve the material position of those on lower income”, which are true regardless of time and space, while, on the other hand, it cannot make the type of statements, in particular specific predictions, that one is used to from the natural sciences, such as “if the price of chocolate goes up by X, demand for chocolate will go down by Y”, or “if the minimum wage is raised by a unemployment will go up by b”, or “if the central bank doubles the money supply, the prices of milk will go up by Z, and the average wage by M.” (To solve these problems, we usually use entrepreneurs and speculators, not economists.)

Those who are disappointed by the latter and do therefore not consider economics “scientific”, unfortunately close their minds to the deep insights that can be derived from proper economic theory correctly applied.

Economic science versus natural science: The fundamental difference

“’All daffodils I have seen have been yellow, so the ones I have still to see will probably also be yellow’; refinements apart, the generalizations of natural science all rest on reasoning of this type, and none of them are certain, in the sense that we can see them to be necessarily true.” (Brand Blanshard, Reason and Analysis, 1962).

Natural scientists observe that A always coincides with B and make inferences from this “coincidence”. In analysing inanimate objects and instinct-driven non-human animals, this has been a very powerful technique. Why? – Because in the “natural world” there appear to be many regularities and reasonably stable relationships that allow us to make these inferences. Or, to put it differently, the natural world does not know valuing, purposeful behaviour, or “free will”. This changes fundamentally when we introduce human action.

Humans appear to be unique in that they consciously act, that is, evaluate a situation, make choices, purposefully interfere with their surroundings, and consciously re-shape part of their environment. At the core of this process is the act of valuation, of preferring one thing to another. None of this is observable in non-human affairs. It is the unique feature of human action, and human action itself (not the consequences of it in the physical world) is the subject matter of economics. As Mises pointed out, one day we may be able to determine which chemical or physical processes cause a person to prefer A to B in a specific situation, but until we have done so there remains an unbridgeable gap between natural phenomena and the phenomena of human action, and they require fundamentally different techniques (this is called methodological dualism). When dealing with humans we have to assume an element of “free will”.

Put in the same or similar situation, two people may value and act differently, and the same person may value and act differently at different times. (This does, at this stage, not even relate to David Ramsey Steele’s points about rationality or consistency of preferences, as raised in his blog.) Furthermore, the complexity of the world we experience as humans means that we can certainly not “step into the same river twice.” If people responded to the rise in chocolate prices one way in the past, they may still respond differently the next time. But all that observation of history (statistics) can do, is ascertain how they acted at a specific time and place. The problem is simply is that people are not automatons, billiard balls, light rays, or amoebae. They do not respond simply to stimuli.

This puts the student of human action at a disadvantage to the natural scientist in one respect – namely, that he or she cannot assume the stability of observable relationships in the same way that the natural scientist can – but also provides a fundamental advantage: The scientist is himself or herself a rational human being, and as a social scientist uses human reason to analyse rational human behaviour. While the natural scientist remains forever outside the very forces he observes (he or she never has access to those “prime movers” that make billiard balls behave the way they do), the economist (or praxeologist) can relate to what he or she observes in a much deeper way.

It is, I hope, now becoming clearer, why the laws of economics are of the nature they are, that is, a priori, as illustrated before. They reflect the inherent logic of rational behaviour and are thus essentially restatements and careful further elaborations of the starting axioms that man prefers one thing to another, that he values and then acts. Notions such as economic good (and therefore marginal utility), time preference (and therefore interest), cost, benefit, profit, loss, are all logically deducted from these axioms.

The a priori in natural sciences

When one raises the issue of the a priori in economics there is usually a lot of pushback from natural scientists and this seems to reflect the harsh treatment the a priori concept had to endure in their discipline in the 20th century at the hand of the philosophy of analysis, of logical positivism and extreme empiricism. A priori concepts had always been indispensible for making sense of things, including natural phenomena, but particularly since David Hume there has also been doubt as to the validity of these concepts and their ability to tell us anything meaningful about reality. This scepticism was taken to new extremes in the 20th century. The question was raised whether the standard tools of abstract human reasoning, such as logic, mathematics, and geometry, that is, the classic a priori disciplines, did even meaningfully correspond to anything in the real world at all. Bertrand Russell seemed to have had this in mind when he said: “I thought of mathematics with reverence and suffered when Wittgenstein led me to regard it as nothing but tautologies.” Or, as Einstein said: “As far as the theorems of mathematics refer to reality, they are not certain, and as far as they are certain, they do not refer to reality.”

A key event behind this new trend seems to have been the discovery (by Bolyai and Lobachevsky) of non-Euclidean geometry, which seemingly knocked the undisputed paragon of a priori thinking of its pedestal. Here was the former superstar of a priori reasoning: entirely man-made, a creation of abstract thinking, yet a powerful and indispensible tool for dealing with the real world: Euclidian geometry. But after a more than 2,000-year unassailable reign it now had to face a newcomer. Today it seems to be widely agreed that Euclidian geometry is still useful for building bridges on earth but that when it comes to analysing big stuff in space, the new type is much better.

Should this shake our faith in the a priori method in economics? – No, said Mises. First of all, the idea that the tools of human reasoning are often just adequate rather than perfect did not surprise or shock Mises. “There is no such thing as perfection in human knowledge, nor for that matter in any other human achievement. Omniscience is denied to man. The most elaborate theory that seems to satisfy completely our thirst for knowledge may one day be amended or supplanted by a new theory.” (Human Action, Introduction) But importantly, the arrival of a new geometry did not mean that these a priori concepts were just arbitrary or simply the result of convention. We could not redesign a new geometry at will. In fact, to Mises, the history of geometry showed that the human mind was quite capable of developing a priori concepts that did meaningfully respond to the real world (as Euclidian geometry still does, even now that it has lost some of its lustre).

And furthermore, the epistemological problem of whether or to what degree the products of abstract human reasoning correspond to the physical universe may trouble the natural scientist, but it is in fact irrelevant for the economist. As we have seen, the economist deals with purposeful human behaviour, with human rationality at work (and, again, not even with the physical manifestations of human action, but with the inner logic of human action). He or she applies human reasoning to the work of human reasoning. In the “natural world” there may be no self-evident truths that allow for any necessarily valid deductions. Here, the human mind must always guess. But, to the human mind, rational human action is the ultimate self-evident truth, and here necessarily valid deductions are not only possible, such a priori inferences are the only statements we can make with any certainty.

There is, of course, much more to say about this important topic but I hope that the above provides at least a good basis for further discussion. The last word belongs to Mises:

“…the sciences of human action differ radically from the natural sciences. All authors eager to construct an epistemological system of the sciences of human action according to the pattern of the natural sciences err lamentably.

The real thing which is the subject matter of praxeology, human action, stems from the same source as human reasoning. Action and reason are congeneric and homogeneous; they may even be called two different aspects of the same thing. That reason has the power to make clear through pure ratiocination the essential features of action is a consequence of the fact that action is an offshoot of reason.” (Human Action, Chapter II).

Justice for the 1%!

Economics Posted on Wed, April 09, 2014 14:07:20

One of the many tired arguments left-wing intellectuals have been making for well over 100 years (including the uneducated man in the street) is based on the idea that the entire capital of the wealthy 1% (or 10%) is available for redistribution to the poor and middle-classes. All that need be done is to leave just enough money for the capitalists so that the incentives are calibrated to induce them to produce at (close to) the same rate as before. But this view is quite false, as explained below.

The wealthiest man in the world is Bill Gates, who is worth about $76 billion dollars. He consumes a small fraction of his fortune in the form of dividends (a lot of his consumption is charity). Let’s imagine he decided to become a monk tomorrow and chooses to give away his entire fortune. To do this, he would need to liquidate all his investments — funds that are currently being used to purchase labor and/or factors of production — and distribute those funds to various charitable causes. Assuming nothing was saved, the recipients of the money would spend 100% of the funds on various goods and services. (And there is the additional factor that in order to liquidate his funds, someone must lower his/her cash holdings, or liquidate his/her investments, in order to purchase Bill Gates’ stocks/bonds/real estate, etc.)

Yes, this money would find its way back into the economy, thereby generating some new jobs to “replace” the lost jobs, but it wouldn’t change the fact that the public had consumed $76 billion in capital funds — funds that would have been invested in new technologies, leading to expanded production and increased real wages. This expended capital would be gone forever (unless recycled — but always at a cost of more expended capital).

The middle-class and poor obviously wants higher real wages in the form of more and better goods and services. Capital, in the form of machines/factors of production, is what is used to create these goods and services. However — and this is the crucial point — it is not the goods and services in themselves. The error of confusing the money value of capital with the actual goods and services allegedly “available” for redistribution has terrible consequences. Redistributing capital does not put more goods and services into the hands of the middle-class or poor; on the contrary, consuming capital, as Ludwig von Mises argued, is essentially equivalent to burning your furniture to heat your house.

When the left presents statistics (true or otherwise) about how the profits/incomes of the wealthy have increased in the past few decades, this is an implicit call for capital consumption. They want the rich to “share” (sound of gun cocking) more of their income with the poor but confuse their capital with their consumption (about 10% of their capital). But this “sharing” is really only capital consumption and this is a disaster for the economy.

An additional error relates to the fact that the left seems to be comparing the rich with the poor in a sort of mental “one-to-one” comparison. Of course, in this artificial scenario it looks like every rich person could easily boost the incomes of every poor person. But the left is forgetting their own propaganda: the rich only comprise 1% (10%?) of society. How can the tiny fraction of income consumed by the rich be distributed to benefit the 99% in any significant way? The answer is that it can’t.

Many on the left will attempt to counter points like these by pointing out that the Nordic countries have massive welfare states with (allegedly) no ill effects. However, the Nordic countries (apparently) do not consume their capital at the level of the e.g. U.S. In fact, taxes fall much more heavily on consumption. And this is reflected in the fact that the Nordic countries have lower levels of consumption than the U.S. Robbing Peter to pay Peter is no great feat. The capitalist engine powers the welfare state in the Nordic countries (and Europe).

It should also be pointed out that the Nordic countries have taken in far fewer immigrants than the U.S. Since its founding, the U.S. has literally rescued millions of immigrants from poverty in their native lands. Naturally, this makes the U.S. appear to be more unequal compared to the Nordic countries because many fresh immigrants, not surprisingly, do not start out as middle-class. But this is hardly a valid criticism of capitalism. The welfare states of the Nordic countries would likely collapse if they took in vast numbers of immigrants. So they don’t. Should we really celebrate how well they take care of their own poor when they choose to leave millions of Third World people wallowing in poverty? Were it not for Godwin’s Law that states that those who are the first to invoke Hitler automatically lose the argument, I might be tempted to make an invidious comparison here.

What is also forgotten by the left is that it is the capital (including increased profits) of the wealthy that is employed to create nearly all the goods and services available to the poor. Without entrepreneurs who save and then put their capital at risk there would be stark poverty. This is one reason libertarians see entrepreneurs as heroes to be celebrated — as opposed to how the left sees them: cash cows. Of course, entrepreneurs are typically motivated by self-interest but this doesn’t diminish the fact that most of us have escaped wretched poverty due to their efforts. As libertarian philosopher Jan Lester argues, “The failure to grasp that intentions do not matter is the pons asinorum of all social theory”.

When I was a teenager I watched Norma Rae (1979), a movie based on a real-life union organizer (starring Sally Field). I haven’t seen the movie in years but I do recall that the standard of living she enjoyed was far above the factory conditions documented by Karl Marx in Das Kapital. Nevertheless, is it fair, even in the face of a dramatic rise in real wages, that millions of workers “struggle to get by” while factory owners live lives of grand opulence? No, it’s just plain ol’ bad luck. Furthermore, there is no “exploitation” (or even bad luck) involved when someone who would have likely lived at the level of an 14th. Century farmer/field hand in the absence of capitalism is now living better than kings and queens of that era. Most of us living under capitalism today were born with stainless steel spoons in our mouths.

Unfortunately, even Austrian and other free-market economists have perpetuated the myth of “exploitation” by teaching that interest is “deducted” from workers’ wages, i.e. the “discounted marginal productivity” doctrine — the theory that wealthy savers receive interest as a “reward” for advancing workers their wages out of savings — as if workers would be entitled to all profits from sales in the absence of an act of abstention by savers. Although it is true that time preference plays a part, the implication that interest is deducted from wages has been an intellectual disaster for free market ideology. (For a more complete explication and criticism of this view, see George Reisman’s Capitalism, pp. 484ff. and pp.666ff., available free online.)

Wages are funded out of savings and these saving are derived from prior sales, or from wages earned by workers who later become entrepreneurs, which means that profits are analytically prior to wages. Profits would be “infinite” in the absence of costs (this strange outcome results from dividing the profit numerator by zero costs in the denominator). In other words, wages are deducted from profits, not the other way round. Therefore, the income of the capitalist is derived from consuming his capital in the form of mansions, Jaguars, caviar, etc., not from the workers’ wages. Were it not for capitalists, there would be no significant division of labor and, therefore, no surplus value to squeeze out of the workers (as Marx alleged). Egalitarianism is really just a cry for the wealthy to provide more of what they have already made possible.

Of course, few if any capitalist undertakings could take place without the help of workers, but the capitalists are the ones who provide the capital, take the risks, and provide the labor of direction. They are workers too! Perhaps we could argue it is the workers who are “exploiting” the capitalists who, as a class, consume so little relative to the capital they contribute to the workers. And what about the externalities resulting from so many benefiting from so few? I demand justice for the 1%! Market failure indeed.

For the left, the existence of virtually any (even relative) poverty is an indictment of capitalism in and of itself, even though real wages have climbed dramatically over the last 100 years. But no free-market economist has ever argued that capitalism would cure all poverty overnight. It takes time. But there is no other solution. Socialism does not work unless you like the equality of poverty. Ironically, the redistributionist schemes of the left, because they involve massive capital consumption, have actually led to either a (relative) decline in real wages or, at the very least, drastically slowed economic progress.

As we can see, the left’s worldview is rife with major intellectual errors.

division of labour

Economics Posted on Mon, April 07, 2014 16:01:32

division of labour There is social division of labour, with people having different trades or *professions, and there is technical or detailed division of labour, with people having various small tasks that go to complete one product. One of the great advantages of the *market is that it promotes the division of labour in *efficient ways, thanks to its *anarchic *economic calculation. The greater specialization allows people to produce much more than they otherwise would. This is why the more people there are the easier it is to provide for them, as long as they are allowed to produce and reproduce without *state interference (see *population; *natural resources). One potential disadvantage of division of labour is that it can result in boring repetition. Only the individual labourer can judge his preferred trade-off between any tedium and higher wages in the choices of employment available to him. Apart from the *libertarian division of labour there can still be ‘efficiencies’ relative to the aims of any *criminal *organizations involved, such as *governments. But these will have abandoned the *invisible hand of the market.

See *comparative advantage.

A Dictionary of Libertarianism

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