One Major Source of Our Problems

Posted At : December 7, 2009 9:09 AM | Posted By : name
Related Categories: Economics Errors

An economist friend of mine, who is a Salesian Brother, recently gave a lecture at Oxford University reminding us of one major problem that is neglected by many economists and by papal writings on economic things. Yet this just might be the biggest problem that we are facing. All attacks on the free market by Catholics saying that it fosters greed, etc., have been shown to be nonsense, and that greed resides in the human heart. I learned this many years ago in the philosophy courses I took at a good Catholic university as an undergraduate. You would think that our clergy would also have learned it as well. Both the rich and the poor can be just as greedy.

But the “morality” industry, that is, those who make their living, so to speak, arguing that the cause of our financial problems is the lack of morality inherent in the free market, have missed the major point made by my Brother colleague: the problem of “rent seeking.” Famous economists Robert B. Ekelund and Robert D. Tollison define rent seeking as: “The behavior associated with the use of scarce resources in the pursuit of monopoly profits created by government action; the process of using scarce resources in an effort to obtain rents or a transfer of wealth.”[1] A rent is the payment to a factor of production such as land, labor, capital and/or entrepreneur skill in excess of its opportunity costs.[2] Basically a rent is profit. What the lay person calls rent, as in apartment rent paid to a landlord, is just one type of rent. And the rent paid becomes a rent only when the money paid for the apartment exceeds the cost of maintaining it and repaying the money loaned to build it. (This is one of the problems of rent control—government rent ceilings are usually too low to maintain the building so the owner has to abandon it and chalk it up a loss. The result is a slum.)

Notice that the definition given above includes government. How this works is that in exchange for financial and other support in future elections,[3] government leaders have an open door for those in business or unions who seek monopoly privileges. The privileges must be licensed by government, or the goods or services of the rent-seeking company will be open to competition, which will allow competition to drive down the prices charged for a similar product or force the rent-seeking company to improve the quality. Take the example of General Electric, oddly the company for which Ronald Reagan used to be a spokesman. GE is a failing company, but it also owns NBC. It appears that GE president Jeffrey Immelt got a lump of money from the government TARP funds, which was only intended to go to banks. It was given to GE’s financial arm, but since GE is not a bank, none of the strings attached to the TARP money banks received were applied to General Electric. GE CEO Jeffrey Immelt is a frequent visitor to the White House, and I am sure they have a coffee cup with his name on it. You can see the rent seeking here as NBC and MSNBC, owned by GE, were almost news outlets for the Obama campaign and now for his administration, bitterly attacking Obama’s critics. In addition, GE is a big supporter of the cap in trade (cap and tax) bill. One of the reasons behind its support is that it would stand to manage billions of in cap and trade contracts if the deal goes through. Not coincidently, Mr. Immelt is on the Board of Directors of the New York Federal Reserve Bank, which is the most powerful of the Fed banks.

I am not picking on GE, but I am attacking the notion that the government has a role in managing the economy, because this opens the door to groups and companies looking to get a hand on government monopoly privileges and your tax money, instead of earning it the hard way. Take the current “Jobs Summit” now being held in the White House. All of the Obama cronies are there: big unions, some big corporations, all looking for handouts or privileges. Noticeably missing was the US Chamber of Commerce, a public critic of Obama’s economic policies, and other representatives of small business owners—small business which employs most American workers. It was reported that when one person at the conference told the President that if he wants to help the growth of jobs, do not pass the health care plan, Obama replied that “we” are going to pass it whether you like it or not.

All this is rent seeking, and government is the middleman in the process. If the government were strictly prohibited for touching business or labor in the country, these folks could not get anything from it. Sadly, Catholics are among the biggest supporters of government’s running of the economy; therefore, Catholics are big supporters of rent seeking to the detriment of the economy and the common good.

[1]Robert B. Ekelund and Robert D. Tollison, Microeconomics, 3^rd edition (New York: Harper-Collins, 1991), 676, my italics.

[2]Ibid.

[3]In other countries, outright bribery.

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Some Suggestions for an Austrian Theory of Organizational Behavior

Posted At : October 15, 2009 9:46 PM | Posted By : name
Related Categories: Economics Errors

Introduction

The purpose of this paper is to suggest ways in which the insights of the Austrian school of economics can be applied to the understanding of exactly how institutions behave. While this question has been probed somewhat by political scientists and scholars in the field of management, the results are far from adequate. Firstly, the political scientists have been afflicted with the same positivistic plague that has infected economics. This “physics envy” has them reducing everything to statistics and graphs that are just as vague and generic as those of the neo-classical economists. Just as the economic models assume full knowledge and a single product, the political scientist presumes that all governmental officials and persons working in organizations want power. All attempts to discuss the behaviors of actors by using a version of the Austrian “mind construct” methodology are termed “journalistic,” and not taken seriously. This prevents any methodological breakthroughs. Even so, this method of analysis is still fraught with the presumption that power is almost the only value of persons in their organizational roles, and it seems to pan out in the form of a revealed preferences theory.^{^[1]}

By contrast, management scholars have made more headway in examining the behavior of individuals in organizations.^{^[2]} The reason for this is that the management scholars deal in real case studies, and have more empirical evidence at their disposal. Nevertheless, their studies are hampered by the fact that they have no interest in developing an overall theory of behavior in organizations, if, in fact, this is possible.

A Common Error in Organizational Theory

The first problem that appears in the formulation of a theory of organizations is the tendency to see an organization as a monolith. Hayek rightly criticizes the tendency of our culture to see everything as a product of design. In point of fact, the activities of an organization are the outcome of the actions of the many individuals which compose it. While there is certainly some (even much) design in the formation of the organization and its operations, routines, and outcomes, the actual, factual activities of the organizations can never be completely predicted. This is true, not only of organizations working in the market selling a product or service, but also of the not-for-profit organizations such as churches, schools, Project Hope, etc. It may be even more true for these latter organizations simply because they are not beholden to the vicissitudes of the market.

Some Applications of Austrian Theory to the Understanding of Organizations

The first insight that Austrian theory suggests is that organizations must be seen as semi-closed systems. While organizations deal with the public at various levels, how they do that is very much a product of the internal machinations of the people in the organizations who have varying levels of the influence on policy.

Secondly, the reason for the above is very well stated by Menger himself. In the Principles, he points out that all goods can be classified either as material goods or useful human actions.^{^[3]} The very reason that these are called goods is because they are useful to the satisfaction of human needs.^{^[4]} People, will, then, pursue goods (in the Menger sense, and not in the limited neo-classical sense of “consumer goods”) in whatever they do. While these goods can be power, more often than not they are many other things. Abraham Maslow, for instances, argues that there is a hierarchy of needs that can be arranged in ascending order from physiological needs (such as pay), to safety and security needs (such as benefits and job security), then love and belonging-ness (such as being invited to picnics, or being asked to be on a team or committee), esteem needs (grants of autonomy, increasing responsibility, pay raises as a sign of esteem), and lastly, self-actualization and growth needs (job challenge and increasing autonomy). While pay is part of many of these levels, it is only an integral part of the lowest level. In all of these levels, the lowest unsatisfied need becomes the most powerful and significant need.^{^[5]} The realization that there are a variety of needs that each person tries to fulfill nullifies much of the previous thinking regarding the behavior of persons in organizations.

How each employee or member of an organizations will satisfy his or her needs and what level each is on at the time are questions that lead us to the next, or third, application of Austrian insights into the theory of organizations—subjectivism. Without knowing each member of an organization intimately, it is impossible to tell what are the real goals each is seeking at any one time. The closest we can come is the use of “pattern analysis” which assumes a certain amount of regularity about certain types of employees, and that there are parameters outside of which non-psychotic employees will not venture.

Fourthly, time and ignorance have a role to play in the internal workings of an organizations. Time is important for the same reason it is in the market economy. People’s perceptions and tastes, and even family life, change with time. The age of an employee or the length of service affect his world-view. In addition, organization members have problems finding out what others are planning or doing, or how their division is seen by the higher levels of management. They way these persons carry out their tasks is determined in large part by their guesses about these subjects. A wrong guess could be disastrous or providential in the fulfilling the needs spoken of in the last section.

What about the entrepreneurism inside an organization? Actually, in the face of a more competitive market, firms that want to survive must encourage entrepreneurial behavior. This allowance for experimentation within a firm is called “intrapreneurism,” and it takes place outside of the R & D channels. To be successful, it must be allowed without reprisals for failure.^{^[6]} Neo-classical economics have generally ignored this kind of internal change overtaking many companies today in favor of the “black box” version of firms. Here the method by which decisions are made in real companies and organizations (not to mention the government) is ignored in favor of the old assumptions. This approach is not only of no help in understanding organizations, but is actually misleading.

Lastly, what about the application of Austrian insights to the behavior of government. While this is the subject of another paper, a quick perusal of the above subtopics provides some insight into the seemingly irrational action of government actors aside from the socialist calculation ideology so effectively defeated by Mises and Hayek.^{^[7]}

Finally, it could be said that within the level of formal verifiable constraints set by policy makers in organization, an organization is a spontaneous order just as market economy is. The reason for this is that, as Mises shows, Economics is really a universal science of human action—praxeology, and can no longer concentrate merely on the mere catalatic aspects of that science^{^[8]}. Hence, it can be used to analyze the macrocosm of the society at large, or the microcosm of the organization.

^{^[1]}See, for example, the analysis by Evens and Novak, The Reagan Revolution: An Inside Look at the Transformation of the U.S. Government (New York: E.P. Dutton, 1981).

^{^[2]}See, for example, Judith Gordon, A Diagnostic Approach to Organizational Behavior, 4^th ed. (Boston: Allyn and Bacon, 1993).

^{^[3]}Carl Menger, Principles of Economics, trans. by James Dingwall and Bert F. Hoselitz (Grove City, Pennsylvania: Libertarian Press, 1994), 55.

^{^[4]}Ibid., 52.

^{^[5]}Abraham H. Maslow, Motivation and Personality 3^rd. Ed. (New York: Harper and Row, 1987).

^{^[6]}See, G.F. Pinchot, III, Intrapreneuring (New York: Harper and Row, 1985). For an extreme version of entrepreneurship inside firms see, Tom Peters, Thriving on Chaos: Handbook for a Management Revolution (New York: Harper Perennial, 1988).

^{^[7]}An interesting foray into this area probably not realization that he is using a loose Austrian methodology is Harold Seidman, Politics, Position and Power (New York: Oxford University Press, 1975).

^{^[8]}Ludwig von Mises, Human Action: A Treatise on Economics (Chicago: Regnery, 1966), 3.

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Back to Nature

Posted At : September 25, 2009 8:14 AM | Posted By : name
Related Categories: Economics Errors

There are a number of Catholics, thankfully not too many, who believe that it would be more pleasing to God if we all gave up our highly technical lives, or money, vacations, etc., and lived on a subsistence level. These same folks are always championing “Western Civilization.” They never ask what made Western civilization possible. The existence of great writers and thinkers does not make a civilization. A civilization is made up of all those people who have learned and accepted the values of the great thinkers of that civilization, and in the West, the teaching and contribution of the Catholic Church, not all of which is doctrinal, but intellectual as well. Notice that it is not just the teachings of the Church that made up Western civilization, but the accumulated wisdom of that whole civilization. Even the Church in its theological debates uses philosophical language and concepts developed by the great, and frequently pagan, thinkers.

But how did this wisdom get around? It got around because some folks had excess wealth to finance the development of schools to educate thinkers. The early Church Fathers were very educated men. The money of dedicated people sponsored schools which they attended. Think about it: one cannot spend time getting the required learning if one has to put food on the table. Learning requires leisure. Leisure is purchased for the student by someone else. That someone else gives that money to the student or the school, or both, so that the student and teachers do not have to spend their time putting food on the table by farming, or working in an asphalt plant (as yours truly once did) and the like. This means that someone in the society has to have discretionary funds. If we all lived in a subsistence mode, there would be no discretionary funds, and there would be no learning, no churches, no artists.

Nor is that all. The reader might notice that the life expectancy of people in the West has taken tremendous leaps since the 1800s. Why? Because in the West the free market system has discovered ways to create wealth. Much of that created wealth goes into the paychecks of households and is spent on medical care. But where did the medical care come from (“Take out two pints!”—Theodoric of York, Medieval Barber)? It comes from the fact that some people and the “evil” corporations take their discretionary income and save it. This money is then used to develop diagnostic medical equipment, medicines, and surgical equipment, and support medical schools which train practitioners who are able to use these great things for the health of every patient. The households pay these practitioners to keep them healthy. It is nice for the healthy 20-year-old to talk about living on a subsistence farm or owning a small shop, like you see in the movies—until he contracts cancer, or gets hit by a car. He does not run (or crawl) to old Theodoric (above), but he goes to the oncology department of a good hospital, or the trauma center of the same hospital, none of which would exist if these “back to nature” folks had their way.

Those people who think “small is beautiful” need to think how much of a disservice they are doing to the rest of us because of their fantasies disguised as Catholicism. If it was up to them, we would all die at 25 years of age. We would have little sanitation, little medical care, no education, and the creativity of mankind would be stifled, or limited to painting pictures on cave walls.

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Population-Control Weirdos

Posted At : September 5, 2009 11:28 AM | Posted By : name
Related Categories: Economics Errors,Current Events

The population-control weirdos believe that people are a blight on the planet. (I am not being harsh calling them weirdos—wait until you see my argument). They think that all people do is use up resources, and eventually the planet will be void. In fact, as the late, great economist Julian Simon pointed out, national income accounting counts the birth of a calf as an increase in capital, but the birth of a baby as a decrease in capital. Those economists who worship mathematical methods divide amount of capital by population. So, if you have $1,000,000 in capital and you have 1,000,000 people, you have one dollar of capital for every person. But if you have $1,000,000 of capital and then give birth to 10 babies, you get $1,000,000/1,000,010, or .9999 cents of capital per person, clearly a decline. One thing that these folks never seemed to learn in Economics 101 is that everybody, except the most handicapped or the most lazy people, produce more than they consume. This is true even in less-developed countries.

These characters also believe that the amount of natural resources in the earth has already reached its limits due to population growth. For example, Paul Ehrlich, a professor of biology specializing in butterflies, wrote the book The Population Bomb in 1968, in the middle of the hippie revolution. In that book, he predicted that in the 1970s there would be worldwide famines and resources would run out despite any emergency programs that would be put into place. To show the nonsense of this, in 1970, Dr. Julian Simon, late economics professor at University of Maryland, bet Ehrlich that the prices of any ten natural resources Ehrlich chose would be lower in 1980. The bet was for $10,000. Simon won; the prices were lower. Why? The resources were more abundant, not less. Ehrlich’s theory of worldwide shortages was an Armageddon fantasy. Simon offered the bet again in 1980 to anyone, but no one took him up on it. Why was that? They knew they would lose, which meant Simon was right, but also they had too much invested in this fantasy. One needs character to admit that one is incompetent, didn’t do his homework, and sold a profitable book on a fraud.

But today the racket continues. It is said that we must cut down on population, especially in developing countries, so they do not have so many mouths to feed. But economists know better, and the studies are there to prove it.

In a very well-researched book, The Mystery of Capital, Latin American economist Hernando de Soto shows that there are two main (among many others, none of which is population) causes of poverty in developing countries. The first is bureaucracy. The charts in his book show that sometimes it can take 20 or 30 years to get a permit to run a business due to all the offices which one must visit and to which one must submit paperwork. This would and does discourage many people from becoming entrepreneurs. The other reason is a caste system. Many people in developing countries are not allowed to own property. Despite this handicap, they run businesses anyway, with the fear that the government would ask for a property title which they could not produce, and thus lose the property and thus the business operated out of it. Notice that this has nothing to do with population.

But the population weirdos will not go away. In 1977, when Paul Ehrlich was watching the prices fall on the resources he picked in the bet with Julian Simon, Paul and Anne Ehrlich wrote another great tome with a man whose name is John Holdren entitled Ecoscience. In this book, the three authors continued Ehrlich’s apocalyptic scenarios of death and destruction due to population burgeoning. They recommended required abortions, dumping infertility drugs in the water supply, and forcibly taking babies from teen and single mothers and giving them to couples to raise. But the big question is (drum roll), who is John Holdren? He is Barack Obama’s science czar! Despite all that has been studied by economists, not to mention the morality and constitutionality of this kind of thing, these people never go away. Would you give a position of trust to someone who was dead wrong and never apologized for it?

This is what we are facing, and this is only the tip of the iceberg. If these folks who surround the president succeed in getting their plans into law, we will all be in danger, and by all, I do not mean just those now living, but the future generation as well, who may never exist.

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There’s a Bridge…

Posted At : August 27, 2009 10:28 PM | Posted By : name
Related Categories: Economics Errors,Current Events

“Cash For Clunkers.” This, as everybody knows, was the administration’s plan to get environmentally unsound cars off the road. The idea was that if somebody had a car that had been around too long, the piston rings were probably so worn down that you could drive a car through them, burning oil was spewing through the atmosphere, they were gas hogs, and were bought before the current environmental regulations on autos were imposed. If you turned your clunker in, you got $4500 in cash from the government which could be used to purchased a NEW car, which would be less harmful to the environment. The car you traded in would be destroyed so that it could not be resold and put back on the road.

Now, let me get this straight, and maybe put it in more truthful terms. If you were driving a real clunker, could it be that you could not afford a new car to begin with? Now you are to bring the ol’ jalopy in, and for $4500 in cash, go into debt for a new car costing, say, $25,000? While it is true that a clunker would not bring in much exchange value, so that this program would up the return, would you bring in your old car in for $4500 if you were not already going to sell it and buy a new one anyway? Just take my own experience. I drive a 2000 Buick. I bought it used, and it is a great car. I have no intention to sell it, but even IF I wanted to trade it in for a new one, and IF I could have gotten $4500 dollars for it, I still could not afford a new car. Would the promise of $4500 make me go into debt to buy a car I could not afford to make the payments on? Absolutely not. Forget the fact that I am a trained economist. My dog would not do that either.

Take another aspect. In my experience, real clunkers are driven by poorer people anyway. They can’t afford a new car either—hence they drive the clunker until it can drive no more. What do they do then? Buy another clunker from the used car market.

But, in fact, many people did trade in their cars. As mentioned above, some of those were going to trade them in anyway and buy new ones; they just got more on the trade in than they expected. What about the rest? Were these folks lured into the trade-in by the promise of government cash who never should have bought new cars? Is not this the same thing as the Community Reinvestment Act, which tried to persuade people to buy houses they could not afford? And what happened? Many lost their houses because the Act encouraged people to buy houses they could not make the payments on and subsequently they lost their houses. Don’t you think the same thing will happen to many people who foolishly brought in their old cars for brand new ones? I believe the repossession statistics will bear this out in a few months.

Maybe, despite the sucker ploy that this cash for clunkers program stimulated, the worst thing is that the country is in a recession. Just today, the Federal Reserve Bank of Atlanta said that the real unemployment rate is now 16%! Do families need more debt? If they can’t make the payments on their new car, they lose the car. If they do not live in a big city where there is lots of public transportation, how will they get to work? Did Obama do anybody any favors?

Then there is the used car market. Poor people live by the used car market. When their car dies, they cannot afford a new car, so they get a used car. But the cash for clunkers program has cut back on the used cars available. Assuming the demand is relatively stable, there are fewer cars to go around, so the price per car is higher. For all the rhetoric from Obama about helping the poor, and the Catholics who support him because he claims to be helping the poor, how did this plan help the poor?

Lastly, as we know, the plan ran out of money and had to be refunded and finally was recently stopped. What does this tell you? Coupled with the gigantic government debt, it says that government always underestimates the cost of programs. Social Security, Medicare, even wars are all underestimated in the beginning and always need massive injections of funds after that.

So, what does this have to do with a bridge? Well, a lot. If you thought that the cash for clunkers program was a good idea, there is a very nice bridge in Brooklyn, built in the late 1800s, beautiful style, and I will let you have it at a deep discount!

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My Money Lies over the Ocean…

Posted At : August 13, 2009 9:47 PM | Posted By : name
Related Categories: Economics Errors

In our last entry we discussed the necessity of savings for economic growth. It is savings which buys capital goods so that we can have consumer goods in the future. It was also pointed out that there needed to be enough savings to repair and replace current capital equipment just to consume at current levels, and that in order to grow economically, we must save more than that.

Having said that, it was shown that the United States does not save. We have a negative savings rate. But that does not seem to affect us very much. Sure, there is an economic downturn, but even before this recent recession we did not save, yet our lifestyles did not seem to suffer. Why is that if savings is so important?

The answer is that the savings had to some from somewhere. And if it did not come from the United States’ citizens, where did it come from?

We live in an international economy. Some countries actually save, like China. China, and nations like her, has more savings than it needs, so the people with savings look for places to put their money. Since China has a lot of savings floating around, its interest rates are naturally low (unlike ours, which are made artificially low by the money creation power of the Federal Reserve). If a person in China with savings is looking for a place to invest to make a decent return, he looks outside China to get a better return. One place is the United States. So, for example, Luckey’s Economics Textbook factory needs money to expand. But there is no savings in the United States—Hello, China! So the Chinese investor gets a higher return from investing in Luckey’s Textbook factory than he would get investing in something in his own country. So I borrow the money from him, and expand my business. But here’s the catch. I now owe a guy in China, say, two million bucks. And it’s not only me. Everyone who needs money for business purposes in the Unites States, and cannot find someone’s savings to borrow, must go to another country with savings to get a loan. So other countries own our stocks, bonds, and other securities.

It is the same with government debt. Our government has so saturated the bond market with its bonds, trying to live with a gigantic deficit, it has to go overseas to sell government bonds. In addition, the government and private corporations must increasingly offer higher and higher interest rates to attract foreign investors to take our bonds. US debt held by foreign countries is now $3.4 trillion. Interest on the Federal government debt alone is currently $261.6 billion. So, in other words, the Federal government is paying $261.6 billion dollars per year of your tax money just to pay the interest on the government bonds it has floated because we all want government services and do not want to pay the full price for them, and the companies in the US are paying a fortune to foreign citizens because the rest of us cannot get ourselves to save.

If you think that this is merely an economic problem, you’d better think again. The inability to live within one’s means is symptomatic of a character flaw whereby we think that we are entitled to more than we produce. Your salary is based directly on what you produce. When you spend more than you make, you are saying that you are entitled to what your production cannot buy. Sometimes this is necessary; for example, you can invest in an education, because having that education will pay off in higher wages, i.e., higher productivity, and you can pay the debt off and live at a higher standard. Also, many people spend money helping the poor or their young, recently married children who have special problems. But many of us are not that way. I did a study of the bankruptcy courts in Virginia years ago, and you would be surprised how many uneducated, marginally employed couples bought a big pickup truck that they could not afford, and then declared bankruptcy just to keep the truck. This is pathetic.

Now, you go and examine your conscience. If you are not saving merely because you want stuff, make a new budget (if you ever had one), put savings in it, and do us all a favor and live by it.

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Stimulate This!

Posted At : July 24, 2009 5:49 PM | Posted By : name
Related Categories: Economics Errors,Current Events

It is very seldom that economists have a laboratory in order to test theories. For an Austrian, this is not a problem because the axioms of economics are apodictic, meaning they are self-evident. But even so, to the average non-economist, some verification is nice as an illustration. Normally, a specialist in economics is necessary to delve beyond the host of activities in the economy and the government to isolate the economic factors that lead, say, to a recession. Praise God! Besides the Great Depression, which I find easy to diagnose, we have such a laboratory—JAPAN.

The Wall Street Journal recently summarized the Japanese recession that has gone on from about 1991 to today. When we older people think of Japan, we think of an up-and-coming, technologically savvy nation—a competitor of the United States. But in this article entitled “Obama-san” (the “san” is a respectful way of addressing people in Japan), it shows that Japan embarked on the exact same Keynesian path that President Obama and his Congressional allies are embarking on today, and that was started by President Bush. That path is to cure a recession by dumping large amounts of tax monies, through deficit government spending, into the economy.

Well, how did the spending program do? Japan’s GDP, adjusted for inflation, rose 16%—wait for it!—in 14 years. That means that the Japanese GDP rose slightly more than 1% per year. The Japanese economy is a corpse that does not know it is dead yet. The government, with the blessing of John Maynard Keynes, has spent $1 trillion (double this figure to see the US amount to date) and got what? Nothing. Even the United States from 1929-1939 had an annual GDP growth of a paltry, nevertheless better 3.05%.

So, you the reader, tell me, will this gigantic stimulus plan work? As any economics student knows, productivity only grows by investment, not consumption. If you doubt this, take the rest of the summer to read Jesús Huerte de Soto’s book Money, Bank Credit and Economic Cycles, available at Mises.org. What President Clinton started to call “investment” was a euphemism for the same kind of government spending we have now, just smaller. It was not investment at all. Take the recent housing boom. It was caused by expansion of the money supply by the Federal Reserve, artificially lowering interest rates, making buying houses more attractive, and because of rising demand, building them, and putting a huge strain on the building industry, forcing wages and prices of everything used to build, up until it became too expensive to buy a house.

And what is investment, really? It is using savings to purchase capital goods, goods such equipment and plant and inventions and the like. You can’t get that by massive government deficit spending. Well, you might add, if that is true, why is such a path so popular? Economists who haven’t sold their soul, and there are very few of those, know the truth of it. But the ordinary people have no clue about the necessity of investment, and politicians don’t care for anything except votes and polls (with few exceptions). So the politicians say that they can cure our economic ills with this massive government deficit spending, and the people believe it. There it is. Vice-President Biden, whose gaffes usually contain much truth that he lets slip out, said the other day that people can’t spend their way to prosperity, but government can! HA, HA, HA, HA, HA!

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Size Matters

Posted At : July 16, 2009 7:38 PM | Posted By : name
Related Categories: Economics Errors

Yesterday I had a conversation with a gentleman who argued that large corporations and “Wall Street,” whatever he meant by that phrase, worked to the detriment of small business. He complained that large corporations and “Wall Street” put small businesses out of existence.

While this conversation was too short because we both had to leave, I tried to point out that the facts do not bear out this theory. Small business employs two-thirds of all employees in the United States, and since Reagan was president, small business has flourished.

In his theory I detected the distributist, “big is bad, small is good” theory pursued also by Thorstein Veblen. I have argued before, and this kicked off our conversation, that the distributists have absolutely no serious economic theory to back up their assertions. I am waiting for a distributist to claim that he read one of the most important scholarly articles ever written which increased the understanding of economists regarding the nature and size of corporations. The article was by Nobel Prize–winning economist Ronald Coase in 1937. All persons who have pursued graduate study in economics have read this article. Up to my present experience, no distributist has even heard of it.

The article is entitled “The Nature of the Firm,” and it demonstrates that no one really examined this subject before. Why do firms exist, what do they do and how large should they be? We are here concerned with the answer to the last question. Firms are as large as they have to be in order to effectively and efficiently produce and market the product or service to the consumers.

This is so obvious, you’d have to have blinders of ideology on not to see it. Suppose I want to start a photocopying store. I see a need in a neighborhood where there is inconvenience in doing the specialized jobs that I would do; I rent my facility and I hire persons who have specialized training in these copying jobs. (I am simplifying just to show my point.) In terms of size of the firm, there may be three employees and myself, who directs the firm and assigns the work. Suppose I now see a niche market in auto manufacturing, now that the government is forcing General Motors to make “green” cars that few want to buy. I want to start a firm that will actually cater to consumers with large families who really want large cars, and for tall people who find it hard to fit comfortably into “smart” cars.

In this latter case, there will be a massive investment in time, technology, and specialized hiring, such as engineers, machinists and designers. And this is just getting starting. I need metal used to make parts, railroads to transport the product, dealers to distribute the “Luckeymobile,” and a lot of people to make it. I need a marketing staff and a large office staff to manage the whole affair. This is truly a gigantic project. Where will I get the money? In the copying business I could get a second mortgage on my house and then hit up my relatives. For the car project I need to go to the dreaded “Wall Street”! Investment banks and the stock and bond markets are the only places likely to be able to pool the enormous funds needed for my task, and I will have to demonstrate the market need for such vehicles by first paying for a market survey. (I have gotten tired just thinking about it.) My business will be as large as it needs to be to make “Luckeymobiles.” If it is any smaller, the car will not be properly made and marketed. Any larger, and I am wasting money. Why should I borrow money to get more than I need, seeing that the sales of the cars must be enough to pay that money back? If I want to stay competitive with the other car companies, I need to sell at a lower price than they. Extra, unnecessary expenses may force the price up and make me less competitive. If I do not get enough employees, equipment, etc., the car will not be made, or sales properly accounted for, or properly marketed, designed or engineered. In addition to this, I must show a decent profit, because the “evil” “Wall Street” folks did not lend me all those millions of dollars because I was handsome, but because they could get a return on that loan sufficient to give me the money rather than some alternative project. This forces me to be efficient, even if my company is large, meaning I need to keep expenses down so that I can clear a decent profit, to give a decent return to my investors.

Frankly, I see no problem in this at all, and if I was running a car company, I would do it this way. What the man I was speaking with meant about big corporations and Wall Street attacking small business, I do not know, but I think I have the scenario that many anti-free market folks bring up. The devil in this case is John D. Rockefeller. The story, once presented to me at a cocktail party, goes like this: John D. Rockefeller was able to force small oil producers out of business, and then he aggrandized his empire and raised prices to abominable levels, because there was no place else to go. I told the man at the party that this was not true. Did you ever run into people that are so sure and forceful in their arguments, you start to doubt your own facts and arguments? This was that kind of person. Afterwards, I went and looked up the facts. I was right all along. (I always am.) John D. Rockefeller was a very religious man. He wrote in his diary that his purpose in life was to enable every family to have oil to light their lamps in the evening so that they could read! In those days, oil lamps created the only serious demand for oil, and only the rich could afford them, because most of the oil came from whales; difficult to catch and squeeze the meager amount of oil from. So the cost of oil was so high, only the rich could afford it and the rest had to live in the dark. The truth is that Rockefeller bought out inefficient petroleum producers, whose oil was way too expensive because of their inefficiency, and then produced oil more efficiently, lowering the cost so much that actually everyone could light their lamps in the evening to read.

This is true of buyouts. The capital markets, i.e., Wall Street, search for inefficient firms to buy out and make more efficient, thus turning a larger profit than the old owners and operators. The very threat of a buyout is a disincentive to x-inefficiency, which is where a company settles for a lower profit because their expenses are built up from junkets for the executives and the purchase of extra Lear jets. So the dreaded Wall Street does us all a service because inefficiency of any kind wastes resources, and causes prices to be higher than they ordinarily would be.

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Government “Health Care”

Posted At : June 20, 2009 9:09 PM | Posted By : name
Related Categories: Economics Errors,Current Events

Almost all the talk in the news today is about health care reform in the United States. I think that we should examine the true status of this “health care” situation.

Firstly, the proper term for what is being discussed is “medical care,” not health care. Health care is the responsibility of each and every person according to his ability to influence events that affect his or her health. This would include eating good foods, getting enough sleep, trying to stay away from dangerous situations if possible, and so forth. But when even doing these things do not work to preserve one’s health, one seeks out medical professionals to aid in returning to health, if possible. So we are really speaking about medical care, not health care.

Next, the medical care system in the United States is the best in the world. We have the best-trained physicians, nurses and technicians in the world, and we have the most up-to-date medical equipment.

Thirdly, we have the best medical financing system in the world. We have many medical insurance companies, including one that will insure you for $10 per day, which advertises on television. Our emergency rooms are required by law to take anyone who comes in, and our ambulances are required to take anyone who wants to go. This includes people who have colds, flu, a “boo-boo,” regardless of their ability to pay, and the cost for this is foisted on the paying patients of the hospital, unknown to them. The hospital is not required to cure the nonpaying patient who is seriously ill or injured, but must get them at least to where they are stabilized.

Fourthly, physicians and hospitals are willing to take payments.

Fifthly, there is Medicare and Medicaid for the poor.

What then is the problem? The question is raised by the current administration as to what to do with those who do not have health insurance. According to CNN, there are 86.7 million people who did not have health insurance in 2008. But reading further on, we find that this was not a constant number. Many people lost their health insurance because they were between jobs. Many young people, whose likelihood of illness is very remote, put off getting health insurance because they see it as a waste of money. Rich people tend to be self-insured. The poor, as stated above, have Medicaid and the elderly Medicare. So there is really no accurate data on the gaps in the current system, and therefore the much-touted need for “reform” may be based on a false premise, panicking good natured Americans into visualizing people dying right and left from minor and treatable illnesses.

Another problem is that many people do not take care of their own health. It is a commonplace that Americans are too fat and get too little exercise. Whose fault is that? Many lower class people are diagnosed with high blood pressure. A bottle of blood pressure pills costs about $6.00 per month. Just about everyone can afford this; the problem is, some people are notoriously bad at taking this medication, which must be taken every day regardless of how one feels. So young, virile people come into emergency rooms with irreversible kidney failure, because they did not follow the doctor’s instructions, and now they require dialysis for the rest of their life. Chronic alcoholics and smokers, etc., eventually come down with incurable diseases. All of this ratchets up the cost of medical care, and it is the fault of the patients themselves. Are those who take care of their health and pay for their own medical insurance supposed to pay for these people?

This week, both the president and his press secretary stated that there were countries where the people were completely satisfied with a “single payer” (i.e., socialist, government-run) medical system. When the press secretary was asked to name one, he could not. But a study by the Cato Institute has some very interesting data. Patients having to wait for more than four months for non-emergency surgery: Britain, 36%; Canada, 27 %; New Zealand, 26%; Australia, 23%; the United States, 5%. The elderly evaluate their health care way better in the UK than in either Canada or the United States. During a 12-month period, in Ontario, 71 patients died waiting for coronary bypass surgery. The United States also has the lowest hospital stay period compared to the other western socialist countries. Prostate cancer mortality rates among those diagnosed with the disease: UK, 57%; France, 49%; Germany, 44%; Australia, 35%; New Zealand 30%; Canada, 25%; and the United States, only 19%. Remember, this is under the current systems, which, in the US, is a free-market system, but in all the aforementioned other countries is a socialist system. (See http://www.cato.org/pubs/pas/pa532.pdf.) Do these other systems sound like ones where people are completely satisfied?

Lastly, there is the question as to whether the new government system will shut out private medical coverage. The Heritage Foundation stated that currently 170 million Americans have insurance coverage. Under the new system, 119 million could lose their coverage. Why? The competing government service will be cheaper than the private coverage, because the costs will mostly be paid with taxes. Companies, due to cost savings, will be strongly influenced to enter the government system. Since most of us have medical insurance through our jobs, we will have the public-run system foisted on us through our companies. Hence we will lose our private coverage, and hence our choices in medical care, and the efficiency with which the private system operates, as seen in the Cato Institute study discussed above. This, also, will force out of business many private companies, which, I argue, is the ultimate goal of the current administration.

During the recent presidential campaign, candidate Obama said that he would propose a system that would allow regular citizens to have the same health care system that members of Congress had. Congress members have a private system. Why not just open that plan to membership from anyone or any company who wants to join? Because his original statement was baloney, intended to get people to vote for him, since that plan sounded reasonable. The ultimate goal was socialism, which is why the deception.

By the way, we have not said anything about costs. Perhaps next time.

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Keynes: Alive and Well in Conservative Circles

Posted At : May 15, 2009 8:58 AM | Posted By : name
Related Categories: Economics Errors,Current Events

I have never listened to the Glenn Beck radio show, but I have enjoyed watching his television show, first on CNN Headline News, and, more recently, on Fox News Channel. I also agree with almost everything he says on that show, and I am impressed with his guests, especially, but not exclusively, the economists. However, today he blew it!

Glenn has been recommending the book Animal Spirits by two economists, Robert J. Shiller and George Akerlof. Now, Glenn has been complaining for months, ever since the original bailout during the Bush administration, about excessive government spending, and has been properly championing the idea that the free market can get us out of this economic mess. Since the Obama administration took over, Glenn has also ratcheted up his criticism of government spending, and the Federal Reserve’s printing of money, which economists call creation of credit ex nihilo, i.e., out of nothing.

So, what is with Animal Spirits? In the interest of full disclosure, I have not read the book, but now I do not have to. Shiller and Akerlof were on the Glenn Beck television program today. In his book The General Theory of Employment, Interest and Money (1936, p. 161), Keynes tells us that almost all of our economic activities are not a result of studying a situation, and estimating the probabilities of success or failure, but merely “animal spirits,” by which he means “a spontaneous urge to action rather than to inaction.” This is akin to what former Federal Reserve Chairman Greenspan called “irrational exuberance.” According to what Shiller and Akerlof said on the show, our current economic problems are caused exactly by these animal spirits, which make people make business decisions based on emotional factors such as “confidence” or “trust.” In addition to this, according to them, the only remedy to this “animal spirits” situation is, wait for it . . . fiscal policy (i.e., government deficit spending) and monetary policy (i.e., creation of credit ex nihlo by the Federal Reserve).

What nonsense! To make things worse, Glenn Beck, who has been complaining for months about government deficit spending and the Federal Reserve’s printing of money, thought that this was a great idea and a great book, recommending it to all his viewers.

The truth is that economics is a science and we know exactly what has caused the economic crisis we are in—government deficit spending and creation of credit ex nihilo by the Federal Reserve. (I have written about this in other articles in this blog.) These activities send false signals to entrepreneurs and other business people regarding prices and costs, and they make bad decisions. The fact that Freddie and Fannie were in the government’s pocket made things even worse, as well as the Community Reinvestment Act, which threatened banks with penalties if they did not lend to minority potential borrowers even if they were unqualified.

This whole scenario was predicted long ago by Ludwig von Mises in his Theory of Money and Credit, which was originally published in German in 1912, and also, more recently by Jesus Huerta de Soto, in Money, Bank Credit and Economic Cycles, originally published in Spanish in 1998, long before the current crisis erupted. It is a shock that Glenn Beck, a fierce opponent of government tampering with the economy, has now become the Dr. Frankenstein of the resuscitation of Keynes!

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