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When You're Popular, You Don't Need Freedom of Speech

5 november, 2015 - 07:00

Free speech is not something that people would normally see as a realm of economics, but in many ways, an economic understanding of the support and opposition to free speech can shed a lot of light on what’s happening now in the West.

The first thing that needs to be noted is that the left is winning the culture war. Even though more people identify as “conservative” than “liberal” in the United States, more people now identify as “liberal” than in the past by a substantial margin. Attitudes toward gay marriage shifted extremely quickly toward the left while support for legal abortion stayed mostly steady. And obviously the media, academia, and Hollywood are far to the left as a study by the non-partisan political analytics firm Crowdpac found (and as anyone who watches anything other than Fox News can tell after about five minutes).

Now, some of this is certainly good, such as the shifting views on marijuana legalization. Some is troubling, such as the growing popularity of socialism.

Regardless though, the left, having ascended to cultural dominance, is no longer in need of free speech. After all, no one ever got in trouble for agreeing with the conventional wisdom. As Noam Chomsky said, “Even Goebbels was in favor of free speech he liked.”

On the other hand, the right is behind the eight ball in the culture wars and thereby supports the concept of free speech because they need it lest their very opinions be outlawed. In an economic sense, this could be called the “diminishing marginal utility of free speech.”

The law of diminishing marginal utility states that while keeping consumption of other products constant, there is decline in marginal utility that a person derives from consuming an additional unit of that product. In this case, the product is free speech. New leftists may have proposed unfettered free speech back in the early 1960s, but that was just because the right was the one in power culturally at the time. Free speech had a high utility to the left at the time and low utility to the right.

Now the situation has reversed. The right is at the disadvantage so it appeals to free speech. The left is ahead and no longer needs free speech, so it has discarded it.

If that statement sounds hyperbolic, just think of all of the campus speech codes and the ever expanding list of mostly trivial microagressions that can be taken for “hate speech.”  Here is just a small sampling of examples to illustrate how absurd this has become:

Brendan Eich was forced to resign as CEO of Mozilla after a massive backlash for having opposed gay marriage.A candidate in the European elections was arrested in Britain for quoting a passage from Winston Churchill about Islam.Gert Wilders, a politician in the Netherlands, was tried on five counts including “criminally insulting Muslims because of their religion.”Conservative radio host Michael Savage was banned from the airwaves in Britain.Both Mark Steyn and Ezra Levant were dragged in front of the Canadian Human Rights Commission on charges of being “Islamophobic.”A man was fired because someone eaves dropped on his joke about dongles and caused a fuss about it on social media.A group called Color of Change applied enough pressure to get Patrick Buchanan fired from MSNBC for expressing politically incorrect opinions in his book Suicide of a Superpower.The “Pickup Artist” Julien Blanc was barred from entering Britain for making sexist comments.A student at Purdue University was found guilty of “racial harassment” for reading (yes, reading) a book called Notre Dame Vs the Klan in which — it should be noted — the Klan is the bad guy.

Indeed, the list goes on endlessly, and is perhaps best summed up by the almost unconscionable lack of self-awareness required by University of Manchester feminists who recently censored the anti-feminist columnist Milo Yiannopoulos from participating in a debate on — you guessed it — censorship.

Of course much of this is just social pressure or the decisions of private institutions, which is permissible (albeit not condoned) under a libertarian framework. But much of it does involve outright government force, or the longing to use it. For example, Adam Weinstein wants to literally “Arrest Climate-Change Deniers.”

Indeed, while many believe that the youth of today are the most politically tolerant in history, they are actually the least. As April Kelly-Woessner notes, “political tolerance is generally defined as the willingness to extend civil liberties and basic democratic rights to members of unpopular groups.” Which groups are unpopular, is not the question being asked.

So, for example, someone who believes that a man should be able to marry his pet goat is not necessarily politically tolerant. What would make him tolerant in this sense is whether he is willing to recognize the rights (particularly regarding speech) of those who disagree with him and his marital proclivities.

In this respect, political tolerance has declined substantially. For the first time since it was measured, the political tolerance of young people has fallen below that of their parents and as Kelly-Woessner again notes, “… is correlated with a ‘social justice’ orientation,” at least for those under forty.

Indeed, the inability to tolerate political views that run counter to one’s own, particularly on the left, has become so ridiculous to be comical. Just take, for example, Judith Shulevtiz’s description of the “safe space” set up at Brown University because of a debate between the feminist Jessica Valentia and Wendy McElroy where McElroy was likely to criticize the term “rape culture.”

The safe space … was intended to give people who might find comments “troubling” or “triggering,” a place to recuperate. The room was equipped with cookies, coloring books, bubbles, Play-Doh, calming music, pillows, blankets and a video of frolicking puppies, as well as students and staff members trained to deal with trauma.

Well, at least they actually let the debate happen.

But the left has not always had a monopoly on anti-free speech thought and legislation. Nor does the right seem to be opposed to it when it can push such things through today. Helen Thomas was fired from the White House Press Corps for saying “The Jews should get the Hell out of Palestine.” Shirley Sherrod was fired for allegedly anti-white statements, a Kansas woman was fired for a fifty-word Facebook post that was considered anti-American-soldier, and the right went into a fervor over Jeremy Wright’s “chickens coming home to roost” comment.

Whereas liberals want to ban words such as “slut” and, at least in Sheryl Sandberg’s case, “bossy” too, conservatives used to all but ban those “seven words you couldn’t say.”

When the right had more cultural authority, alleged communists were being dragged in front of the House Committee on Un-American Activities, Civil Rights activists were harassed, and the Motion Picture Production Code banned Hollywood directors from showing things such as miscegenation.

But that was then and this is now. As the pendulum of cultural prominence swung from one side to the other, the left and right swapped their support for free speech.

Nevertheless, I don’t want to draw a false equivalence here and say the right would be just as bad as the left if they were winning the culture wars. Much of the ideology on the left, at least the far left, is derived from the likes of Herbert Marcuse and other cultural Marxists who explicitly wanted to limit the free speech of “oppressor classes.”

Discerning what exactly free speech is can sometimes be challenging, as in cases of libel, slander, and direct threats. But these are really not the issues at heart here. The vast majority of speech being “regulated” today is simply that of an unpopular opinion. Yes, many ideas are bad. And they should be refuted. Moreover, resorting to the use of political force to silence adversaries is a sign of the weakness of one’s own position. But, in using force to silence others, anti-speech crusaders are making another argument. They’re arguing that political force can and should be used to silence people we don’t like. What idea could be worse than that?



The Week In Review: November 7, 2015

5 november, 2015 - 07:00

Elections took place across the country this past Tuesday with some interesting results. Voters in Ohio decided they hated monopolies more than they liked marijuana, while residents in Houston voted down the left’s latest egalitarian menace. While there is never a reason to trust the empty promises of pandering politicians, elections can occasionally offer insight into who is winning the battle for ideas. So there may be reason for optimism when you see Hawaiians’ discussing secession or the fact that there is global momentum in the fight against prohibition. While central planners struggle — both in the US and abroad — to maintain the status quo, bad government will never be able to repeal good economics.

The question then turns to how to we advance the cause of Austrian economics, peace, and freedom? That is the topic of this weekends’ Mises Circle in Phoenix, Arizona. One of our speakers, Dr. William Boyes, joined Jeff Deist this week to offer a preview of his talk. The founder of Arizona State University’s Center for Economic Liberty and a successful author of economics textbooks, Dr. Boyes discusses how to advance liberty and capitalism in the face of a statist educational system. One option — our new Online Mises Boot Camp!

In case you missed any of them, here are this week’s featured Mises Daily articles and some of our most popular articles at Mises Wire:

Activists Seek to Impoverish Thai Villagers to Save Monkeys from "Slavery" by David AdamsFor WHO, Red Meat Is a Red Herring by Yuri N. MaltsevThe Fed Desperately Tries to Maintain the Status Quo by Ronald-Peter StöferleHow Beijing and the West Work Together to Manipulate the Global Currency War by Brendan BrownWhy We Need Private Property to Deal with Scarce Resources by Patrick Barron"Social Expenditures" In the US Are Higher Than All Other OECD Countries, Except France by Ryan McMakenZwolinski and Woods on the Basic Income Guarantee by David GordonPot Battle in Ohio by Mark ThorntonPoverty Does Not Cause Obesity by Ryan McMakenWill Regulation Destroy a Revolution in Physics? by Matt McCaffreyMy Irish Eyes Are Smiling by Mark ThorntonA Practical Guide to Hawaiian Secession by Ryan McMakenMexico, Canada, and Ten American States Look Toward Marijuana Legalization by Ryan McMakenYellen on Negative Interest Rates by Jonathan Newman

Activists Seek to Impoverish Thai Villagers to Save Monkeys from "Slavery"

4 november, 2015 - 07:00

Leave it to NPR to add guilt to your pleasure. That bon-bon hidden behind your two-year-old bottle of Scotch just took on a whole new layer of sin. With child slavery in the production of chocolate and animal cruelty in the harvesting of coconuts, the conflict confection is born.

According to an animal rights group featured in a recent edition of NPR’s The Salt, abused monkeys are a key ingredient in your Panang curry. While the Thai/Malay practice of using monkeys to harvest coconuts dates back hundreds of years, landing in the crosshairs of activist vegans and SJWs (Social Justice Warriors) is a new phenomenon. Anthropologist Leslie Sponsel, quoted briefly in the NPR article, offered a defense of simian symbiosis. I caught up with Dr. Sponsel at his Hawaii home in hopes of learning more about his fieldwork. “Debate on the morality of enslaving monkeys to get a job done is a Western dilemma, not a Thai one,” Sponsel explained.

A lifelong environmentalist and author of Spiritual Ecology: A Quiet Revolution, Sponsel had reservations about watching primate pickers at work. Instead of calling for a nationwide boycott of coconut products as some have done, Sponsel did what every anthropologist worth his salt is trained to do: take pause and observe. He noted that neither his wife — a Thai Buddhist — nor a fellow Thai professor from a local university framed the practice in moral terms. Add a complete lack of compunction from the local Muslim population and Sponsel concluded that monkeys on task are not a cause, but a part of the “isness” of peninsula living.

The British explorer Robert Shelford observed in his 1916 book: A Naturalist in Borneo:

The modus operandi is as follows: — A cord is fastened round the monkey’s waist, and it is led to a coconut palm which it rapidly climbs, it then lays hold of a nut, and if the owner judges the nut to be ripe for plucking he shouts to the monkey, which then twists the nut round and round till the stalk is broken and lets it fall to the ground; if the monkey catches hold of an unripe nut, the owner tugs the cord and the monkey tries another. ... [At times] the use of the cord was dispensed with altogether, the monkey being guided by the tones and inflections of his master’s voice.

According to Sponsel, “Working macaques are the difference between a livelihood and abject poverty for many South Thailand farmers. Snake bites, stinging ants, and life-ending falls face whoever or whatever goes up those trees.”

Given the best monkeys harvest coconuts at over twenty times the speed of the most skilled man, the incentive to continue a centuries-old partnership is clear. During his fieldwork, Sponsel never observed or heard of monkey abuse by their handlers. He noted that many were treated similar to the way a Westerner treats a family pet. “For some households,” he observed, “they may even rise even to the level of being a family member.”

For a country that sees its stray dog population driven in crates to Vietnam every Tet New Year to become a side dish, the Thai macaques could have it worse. According to Sponsel, “Young ones are trained and kept on a rope or chain tethered to the handler or to a shelter when not working.” It is this practice that has earned the ire of some activists. Sponsel counters that in our society it is a matter of civility to keep a pet on a leash. And who hasn’t seen the mother who ties a string to her own children on a walk through a busy mall! According to Sponsel, the monkeys he observed were well-fed, groomed and cared for. Indeed, he often saw macaques being pushed in carts by their handlers on the way to the plantation.

“This debate is not new,” Sponsel explained. “Back in 1952, Jean Marcel Brulle’s The Murder of the Missing Link tackled our moral obligation to primates.” In an account of science fiction, a man impregnates a female monkey and then kills the newborn to force a jury to deliberate whether murder extends beyond humankind. Be it a hairy chest, or his way with the ladies (simians included), Burt Reynolds played the lead in Skullduggery — a 1970’s take on Brulle’s dilemma.

As some ramp up calls for a boycott, Sponsel cautions the bandwagon. “They should seriously consider how their campaign may negatively impact the livelihood of poor farmers. Some activists appear to be more worried about non-human animals more so than humans; even though the latter are also animals and have rights too.”

In a perfect world, Thai farmers would have machines and monkeys would have unspoiled wilderness. But, for the world we have — one in which habitat destruction wipes out entire populations — coconuts and farmers in need may be all that keeps the macaques in the trees and off the dinner tables.

For WHO, Red Meat Is a Red Herring

4 november, 2015 - 07:00

Our booming green-industrial complex built up by administrations of both parties in the US is effectively using the United Nations, its thirty two “sister” institutions — such as the World Bank, UNESCO, and numerous “tribunals” — and hundreds of training and research centers. This huge international bureaucratic buildup is already employing over a million “international civil servants” to administer what our socialist visionaries hope will become the world government of the future.

An increasingly important “sister institution” of the UN system is the highly politicized "World Health Department" also known as the World Health Organization (WHO) which, as part of a new scare campaign, has issued new declarations that sausages, hot dogs, bratwurst, and ham are carcinogenic, and that all red meat is “probably carcinogenic.”

This new anti-meat campaign, however, is not about your health, but about the “health of the planet.” WHO’s attack on meat is happening just before the Paris gathering on global warming and is a part of the slow motion socialist revolution poorly disguised as “climate change awareness.” As usual, socialist policies today are justified as “necessity for future generations.” Famous Nobel Laureate in physics, Dr. Ivar Giaever, once an Obama supporter, now stands against the president on global warming. “I would say that basically global warming is a non-problem.” Giaever ridiculed Obama for stating that “no challenge poses a greater threat to future generations than climate change.” The physicist called it a “ridiculous statement” and that Obama “gets bad advice” when it comes to global warming. I am sure that Obama and other politicians are peddling the climate change agenda not because of “bad advice,” but because advocates provide them with the argument for central planning and curtailing of individual liberty.

The 2015 United Nations Climate Change Conference, which will be held in Paris from November 30 to December 11, is designed by the Obama administration as the major leap forward toward world government and central planning. It will be the twenty-first yearly session of the Conference of the Parties to the 1992 United Nations Framework Convention on Climate Change (UNFCCC), and the eleventh session of the Meeting of the Parties to the 1997 Kyoto Protocol. The conference objective is to achieve a legally binding and universal agreement on climate, from all the countries, including the US.

All globalists were mobilized for preparation to this event. Pope Francis, for example, published an encyclical called Laudato Si’ help to secure success for the conference. The encyclical calls for immediate action against human-caused climate change. The International Trade Union Confederation, which traces its origins back to the First International founded and addressed by Karl Marx, has called for the goal to be "zero carbon, zero poverty," and its general secretary Sharan Burrow proclaimed that there are “no jobs on a dead planet.”

The war on meat is part of this public relations blitz. Lord Stern of the UK, a former chief economist of the World Bank, believes that “meat is a wasteful use of water and creates a lot of greenhouse gases. It puts enormous pressure on the world’s resources. A vegetarian diet is better.”

Another Stern, this time our own, is a US special envoy for climate change appointed by the Obama administration to secure a strong climate agreement at the Paris climate conference. Ambassador Todd Stern is now traveling to Brazil and Cuba to obtain support from these corrupt socialist governments to stand against “the global threat of climate change.”

In the US, socialist zealots and their “capitalist” cronies have already destroyed the coal industry and the whole energy sector is under attack. Now they are after the meat industry which is, according to them, “unsustainable.” The left-wing Union of Concerned Scientists lists meat-eating as the second-biggest environmental hazard facing the Earth. (Number one is fossil-fuel vehicles.)

In the Soviet Union, when it existed, beef was available only to Communist Party functionaries and everybody else could only find it on the black market. It was “explained” to the masses that meat was bad for their health. In Cuba today you cannot find beef in the food stores. Ground beef (usually mixed with soy), chicken, sausage, and ham are rationed by the government in the amount of a half pound per person every fifteen days. My Cuban friends complain, however, that most of these deliveries are unreliable and can be “canceled” without any explanation.

In the US, the 2015 Dietary Guidelines Advisory Committee worked on concocting a 571-page report of pseudoscientific “evidence” to encourage Americans to avoid red meat. US departments of Agriculture and Health and Human Services will use this junk science to guide federal nutrition policy, including the $16 billion school lunch program.

And it’s all being done at our own expense. The United States is bankrolling the UN and its “sister” institutions, including WHO, from one-quarter to one-third of their operating budgets. Let’s hope we don’t get all the world government we’re paying for.

The Fed Desperately Tries to Maintain the Status Quo

3 november, 2015 - 07:00

During the press conferences of recent FOMC meetings, millions of well-educated investment professionals have been sitting in front of their screens, chewing their fingernails, listening as if spellbound to what Janet Yellen has to tell them. Will she finally raise the federal funds rate that has been zero bound for over six years?

Obviously, each decision is accompanied by nervousness on the markets. Investors are fixated by a fidgety curiosity ahead of each Fed decision and never fail to meticulously observe Janet Yellen and the FOMC, and engage in monetary ornithology on doves (growth- and employment-oriented FOMC members) and hawks (inflation-oriented FOMC members).

Fed watchers also hope for some enlightening information from Ben Bernanke. According to Reuters, some market participants paid some $250,000 just to join one of several dinners, where the ex-chairman spilled the beans. Apparently, he does not expect the federal funds rate to return to its long-term average of about 4 percent during his lifetime.

In a conversation with Jim Rickards, Bernanke stated that a rate hike would only be possible in an environment in which “the U.S. economy is growing strongly enough to bear the costs of higher rates.” Moreover, a rate increase would have to be clearly communicated and anticipated by the markets — not to protect individual investors from losses, Bernanke assures us, but rather to prevent jeopardizing the stability of the “system as a whole.”

It is axiomatic that zero-interest-rate-policy (ZIRP) cannot be a permanent fixture. Indeed, Janet Yellen has been going on about increasing rates for almost two years now. But, how much more lead time will it require to “prepare” the markets? In both September and October the FOMC chickened out, even though we are not talking about hiking the rate back to “monetary normalcy” in one blow. The decision on the table is whether or not to increase the rate by a trifling quarter point!

The Fed’s quandary can be understood a little better by examining what “monetary normalcy,” or a “normal interest rate,” is supposed to be. Or, even more fundamentally: what is an interest rate?

We “Austrians” understand an interest rate as an expression of market participants’ time preference. The underlying assumption is that people are inclined to consume a certain product sooner rather than later. Hence, if savers restrict their current consumption and provide the resources for investment instead, they do so only on condition that they will be compensated by increased opportunities for consumption in the future. In free markets, the interest rate can be regarded as a measure of the compensation payment, where people are willing to trade present goods for future goods. Such an interest rate is commonly referred to as the “natural interest rate.” Consequently, the FOMC bureaucrats would ideally set as a goal a “normal interest rate” that equals the “natural” one.

This, however, remains unlikely.

Six Years of “Unconventional” Monetary Policy

ZIRP was introduced six years ago in response to the financial crisis, and three QE programs have been conducted. This so-called “unconventional monetary policy” is supposed to be abandoned as soon as the economy has gathered pace. Despite the tremendous magnitude of these market interventions, the momentum in the US economy is rather lame. Weak Q1 data, which probably resulted from a weak trade balance due to a 15 percent rise of the US dollar, shocked even the most pessimistic of analysts; the OECD and the IMF have revised down their 2015 growth estimates. A long-lasting, self-sustaining growth is out of the question. This confirms the assumption that ZIRP fuels everything under the sun — see “The Unseen Consequences of Zero-Interest-Rate Policy” — except long-term productive investment.

And what about unemployment and inflation that are key elements of the Fed’s mandate? The conventional unemployment rate (U3) has returned to its long-run normal level, so the view prevails that things are developing well. However, those figures conceal a workforce participation rate that has fallen by more than 3 percent since 2008, indicating that some 2.5 million Americans are currently no longer actively looking for a new job. However, should the economic situation improve, they would likely rejoin the labor force. Furthermore, the proportion of those only working part-time due to a lack of full-time positions is much higher now than before the crisis. “True” unemployment currently stands rather at about 7.25 percent.

A Weak Economy and Weak Inflation

With regard to inflation, the Fed’s target is 2 percent, as measured by growth of the PCE-index. This aims to buffer the fiat money system against the threat of price deflation. In a deflationary environment, it is believed, the debt-servicing capacity of market participants (e.g., governments, private enterprises, financial institutions, and private households) would come under intense pressure and likely trigger a chain reaction in which loans collapse and the monetary system implodes.

In many countries, and among them the US, inflation is remarkably low — partly due to transitory effects of lower energy and import prices — while low interest rates have merely weaved their way to asset price inflation so far. But, as price reactions to monetary policy maneuvers may occur with a lag of a few years, we should expect that sooner or later inflation will also spill over to normal markets.

As a response to anything short of massive improvement of economic and employment data, a rate hike is scarcely likely, and inflation in the short-term is also unlikely. Moreover, the current composition of the FOMC — which is extremely dovish — implies inflation-sensitive voices are relatively underrepresented. This gives rise to the suspicion that rate hikes are not very likely at all in the scenario in the short-term.

What Will the Fed Do If There’s Real Economic Trouble?

One is concerned about economic development, which has a shaky foundation and headwinds from other parts of the world; it appears that growth has cooled down substantially in the BRICS countries. Meanwhile, China might be on the brink of a severe recession. (Indeed, China was possibly the most decisive factor to nudge the Fed away from raising rates in September and October.) This implies that world-wide interest rates will remain at very low levels and a significant rate hike in the US would represent a sharp deviation in this environment, bringing with it massive competitive disadvantages.

The markets are noticeably pricing out a significant rate hike. The production structure has long since adapted to ZIRP and “short-term gambling, punting on momentum-driven moves, on levered buybacks” are further lifting the opportunity costs of abandoning it. In order to try to rescue its credibility, the Fed may decide to try some timid, quarter-point increases.

But what will they do if markets really crash? Indeed, they are terrified of the avalanche that they might trigger. If there are any symptoms that portend calamity, the Fed will inevitably return to ZIRP, launch a QE4, or might even introduce negative interest rates. Hence, there does not seem to be a considerable degree of latitude such that a return to conventional monetary policy could seriously be expected.

“The Fed is raising rates!” — This has become a running gag.

How Beijing and the West Work Together to Manipulate the Global Currency War

2 november, 2015 - 07:00

From reading the commentaries you might have imagined that the process of a currency winning international reserve status depends on getting the IMF seal of approval. At least that seems to be the story with China.

So, strange to tell, the great international monies of the past evolved either before the IMF was created or without its help. Think of the Deutsche mark and Swiss franc — the two upstarts of the 1970s and 1980s — or briefly the Japanese yen when it enjoyed great popularity. Their emergence was due to the path of monetary stability chosen by their issuing authorities together with complete freedom from restrictions.

So why is the world of currency diplomacy now playing along with the nonsense of the IMF examining whether the Chinese yuan has met the criterion to become a reserve currency?

Incidentally, the last time that Washington body bestowed “reserve currency status” it was with respect to the Australian dollar and Canadian dollar, on the eve of the bust for the respective commodity and carry trade bubbles which sent them to their respective skies.

Beijing and DC Pick the Winners and Losers

The question as to why the Western world is playing along with the official Chinese currency charade is part of a more general point. Why do Western governments pursue non-market trade diplomacy so enthusiastically with Beijing?

Think of the repeated times that Chinese communist party dictators traveled to a particular Western capital to hand out their list of chosen beneficiaries of Chinese corporate (mostly state) spending. These dictators were welcomed by fawning officials and bureaucrats who assured us that they also brought up, with muted whispers and inaudible comments, the problem of human rights to their guest.

And, by the same token, why are there high profile visits of Western leaders to China, presenting their own list of chosen industrialists selected to pick up the new business deals? This is not the way free markets, and global free trade, in particular, is meant to work.

If it smells like a rat it probably is a rat, and so it is with respect to these deals by collusion between China and Western governments, and their chosen corporate protégés, whether on currency or trade or investment matters. This is all an exercise in some combination of crony capitalism (with cronies on both sides!) and diplomacy by stealth. The gains and gainers are deliberately kept opaque. The losers are much less evident than the gainers, on whichever side of the fence, but principle and practice tells us that the total losses are much larger than the gains.

The Cronies’ Currency War

In particular, how much more prosperous would China be today under a regime of currency freedom and well-functioning markets, than under the cozy order of restrictions and preferred access (to capital and trade) put together by Beijing and foreign governments in cahoots? And how much are Western priority systems for getting Chinese capital and orders to favored domestic destinations distorting the signals which guide the invisible hands? And how far is the secret — or not so secret — G-20 currency diplomacy, related to China, abetting the most serious episode of currency warfare since the 1930s?

Think about the new currency offensive launched by Europe last month when ECB Chief Draghi’s calibrated remarks about further QE drove the euro down by 3–4 percent against the US dollar in 24 hours, which was double the extent of any Chinese currency maneuvers earlier in the summer. And in the bigger picture, China’s mini currency devaluation hardly smacks of currency warfare compared to moves ten or even twenty times greater by Europe and Japan in the past three years.

So why did Beijing agree to the mild censoring which occurred at the last G-20 meeting (in Lima) of its own mini-devaluation when it could have called on Europe and Japan to halt their currency warfare?

A plausible answer is that Beijing has no interest in facilitating the emergence of a free market in its currency together with full convertibility. If silence is required on currency warfare as the price of getting its coveted currency reserve status, then so be it.

Yes, a fully convertible Chinese currency might well find a substantially lower level than today’s official rate. Much would depend on what steps accompany the road to convertibility. Would there be broad-based liberalization in the Chinese economy and markets such as to make assets there more attractive to both domestic and international investors in the context of improved prospects of economic prosperity? Or would the road to convertibility simply facilitate a flight of capital out of the country with little foreign appetite to engage in the opposite direction?

There is little indication that the Chinese leadership would take the market reform route, which incidentally might seriously undermine the basis of the rents enjoyed by themselves and their connected state enterprises. In effect, there is an unholy alliance between the West and Beijing on only limited reforms and the currency status quo as blessed by the IMF. Meanwhile, currency wars remain a protected activity of the large powers outside China.

Official game plans do not always work out as hoped. It remains to be seen whether the continued and accelerated path of monetary easing by Beijing is consistent with only a mini-devaluation of the Chinese currency. There is anecdotal evidence of Chinese retail investors now engaging themselves in a new bout of yield-search frenzy in the local high-yield bond markets. That may not endure in the face of a rising tide of default. And the massive yuan carry trade which built up in the past few years could contract much more forcefully in coming months in the context of shrunken yield gaps and credit market cool-down.

The Mises Week in Review: October 31, 2015

30 oktober, 2015 - 06:00

On Wednesday, the Federal Reserve once again reaffirmed its zero-interest rate policy. Amusingly, this commitment to the monetary status quo is being seen by some as “hawkish” which, as Ryan McMaken points out, “shows just how much the goal posts have been moved in recent years.” Unfortunately all the spin and promises of future rate hikes doesn’t change the fact that we are nearing the seven year anniversary of ZIRP with an economy Janet Yellen doesn’t think is strong enough to survive the reversal of the Fed’s monetary morphine. Hopefully our central bankers will one day realize their war on deflation is leaving us poorer, but in the meantime — at least we can laugh about it.

In this edition of the Mises Weekends, we have the third in our series on the current state of healthcare. Our first episode featured Charles Hugh Smith who discussed the consequences of a healthcare market taken over by government regulators and insurance lobbyists. Our second featured Dr. Michel Accad giving his perspective as a practicing doctor in a post-Obamacare world. This week, Robert Murphy discusses his new book, The Primal Prescription, which he co-wrote with Dr. Doug McGuff. Murphy not only applies his understanding of Austrian economics to highlight the problems plaguing us today, but offers advice on how to navigate through the current state of American healthcare.

In case you missed any of them, here are this week’s featured Mises Daily articles and some of our most popular posts at Mises Wire:

The Fed Can’t Raise Rates, But Must Pretend It Will by Thorsten PolleitRobert Shiller Imagines What Consumers Should Want, While Ignoring What They Do Want by G.P. ManishThe War on Cars Is a War on Workers and the Poor by Gary GallesToday's War Against Deflation Will Make Us Poorer by Frank ShostakThe World Bank Threatens Free Markets in Peru by Simon WilsonIf Sweden and Germany Became US States, They Would be Among the Poorest States by Ryan McMakenThere’s More to Money than Hyperinflation by Matt McCaffreyPew: Homicide Rates Cut in Half Over Past 20 Years (While New Gun Ownership Soared) by Ryan McMakenSpectre by Matt McCaffreySunday of the Blind, or the Failed Revolution by Carmen Elena DorobățUS Soldiers Are Paid Significantly More than Civilians with Similar Skills and Education by Ryan McMakenWith Interest Rates, "There Are Two, Opposite Causal Chains at Work" Murray RothbardFOMC: We'll Raise Rates Some Day; We're "Hawkish" Now by Ryan McMakenUnderwear Prices to Remain Near Zero by Peter KleinTextbook Definitions of Economics: An Informal Survey by Jonathan NewmanPoliticians Pander to an Anti-Fed Public by Tho BishopIn Sweden Cash Is Becoming Radioactive by Joseph SalernoFirst they came for the cash, then they came for the microwaves by David Howden

Why We Need Private Property to Deal with Scarce Resources

29 oktober, 2015 - 06:00

Scarcity of resources exists in many forms and is the problem in economics. If resources were not scarce, there would be no need to economize. The existence of scarcity is true of all resources (such as time, human energy, and natural resources). However, it is not necessarily intuitive that allowing scarce resources to be owned privately is the solution to this problem.

Consequently, socialism appears attractive to many and they turn to having all resources owned collectively for the “common good.” Unfortunately, a society which spurns private property — and hands resources over to government planners instead — often learns the terrible lessons of central planning and the tragedy of the commons (i.e., commonly held resources will be plundered to extinction).

If society spurns allowing private ownership of resources, it must find some other means to prevent the tragedy of the commons and to allocate goods. Historically, the means chosen is the use of force and central planning. Throughout history, most of mankind has been divided into a hierarchical system of masters and slaves with some gradations between the two extremes. The masters (pharaohs, emperors, kings, sultans, warlords, etc.) devised complex rules-based systems for resource distribution that were decided by a small number of people and not by markets. And ultimately, these plans depended upon pure terror for enforcement. But this so-called solution to the problem of scarcity — restricting the people’s liberty through the use of force — does not work.

Problem 1: We Can’t Economize Without Effectively Ordering Our Preferences First

The gradual growth in the understanding of what we now regard as basic economics eventually ended thousands of years of subsistence existence for the masses in the West. Modern economics explained that without private ownership of resources, there was no mechanism for observing or acting on ordinal preferences in which persons prioritize desires from highest to lowest. Without a way to allocate goods according to ordinal preferences, there is no rational means to economize for the betterment of society.

In other words, without markets and prices, there is no way to know what people really want or need, so the masters never really knew what to order the slaves to produce, what technical means to use, what alternative materials to use, the quality desired, or how much to produce. Thus, the commissars of the Soviet Union ordered the production of inefficiently produced, shoddy goods. The Soviet empire collapsed, despite the fact that Russia is blessed with vast natural resources and an industrious population.

Problem 2: Few Raw Materials Are Ready to Consume

A second fatal problem with common/government ownership of resources is that few readily available, consumable resources actually exist. There are no resources on the planet that do not require at least a minimum of effort to transform into a consumable product. Even edible berries growing in the wild must be harvested, meaning that someone must transport himself to the berries’ location and pull them from the bush at just the proper time. The cost of doing so is the value one places on forfeiting his leisure. Of course, other natural resources require much more effort to convert to consumable products, passing through many stages of production.

For example, timber and minerals must be extracted, harvested, etc. and then molded into something that can be consumed. Consider a hiker lost in the wild. It matters not at all to him that great stands of timber lie within easy reach or that valuable minerals lie under foot. These natural resources require great effort over very long time periods to be converted into something consumable, as is the case with converting timber into a shelter or crude oil into gasoline. A lost hiker does not have the knowledge, time, or previously produced means to convert these basic resources into consumable products to ensure his survival. All this is far beyond anyone's autarkic abilities.

Now let us assume that someone did harvest trees by felling them, transporting them to a lumber mill, milling them, storing them in a ventilated and dry place for many months before kiln-drying them (all processes that are required to turn trees into useable lumber), advertising their availability to contractors, keeping sales records, sending out bills, and collecting the bills, only to have a socialist call him a plunderer and confiscate his lumber for free distribution to whomever the masters deemed to be politically advantageous to their continued privileged position. No one other than the favored cronies of government would ever harvest another tree. In other words, production of usable lumber would be monopolized, and as with all cases of monopolies, prices would increase and quality would decline. Moreover, with no voluntary market at work in timber and forest land, there would be no means of knowing if these resources were being used in a way valued by those who valued them most.

At the same time, the central planners could not let just anyone harvest the trees or access the land. If the trees had no owners, great forests would be denuded in short order because there would be no social mechanism to prevent what would amount to a tragedy of the commons by order of the state.

Problem 3: We Need Private Property to Build Capital

Without the ability to profit from privately owned property, there would be no incentive to provide or withhold capital for any endeavor. Also, a system of private ownership is necessary to determine if that capital is being used in a way the consumers value. The consequences of ignoring this fact of economic science is most evident today in China's ghost cities, where resources, both natural and human, have been expended for no observable benefit except to advance the careers of politicians who can claim to have met the requirements of the latest Five Year Plan. Timber and other resources were provided to build ghost cities, not because the owners of the resources sought to be economical with their resources, but because government edicts required that timber, concrete, gasoline, and more be used to produce what are now empty cities.

The opposite case of resource waste comes from special interest groups who capture the political apparatus of the state and prohibit exploitation of resources by private individuals. In the name of protecting Mother Gaia from being plundered, modern environmentalists have convinced the political class that most progress is unsustainable, dangerous to our health, or any number of other specious claims. Society is prevented from benefiting from their conversion to consumable products. The poor suffer the most from these policies as the prices of raw materials — and thus finished consumer goods — are driven up.

Private ownership insures that valuable resources will never be plundered to extinction, because their value will have been capitalized. Instead, private owners will seek to make resources as widely available as possible without endangering the long-term prospects for future harvesting of resources. The process of determining a resource’s capitalized value is impossible absent free-market capitalism with strict defenses of property rights.

Despite both the theoretical and empirical evidence to the contrary, socialists tell us the opposite; i.e., that state ownership of all resources will prevent their plunder and ensure prosperity for all. As Ludwig von Mises explained, though, socialism is not an alternative economic system of production. It is a system of consumption only, and a system of economic ignorance and economic plunder.

The World Bank Threatens Free Markets in Peru

28 oktober, 2015 - 06:00

Peruvians were pleasantly surprised, if a little bewildered, by the news that on the 8th of October they were to receive an extended weekend holiday. The reason for the impromptu vacation was the arrival of the “international community” in Lima for the IMF and World Bank’s annual board of governors meeting. Peru’s president, Ollanta Humala (enjoying a brief respite from an ongoing scandal involving his wife’s embezzlement of state funds), encouraged Peruvians to take pride in the fact that the leaders of international finance would deign to choose Peru as the venue for their conference and suggested that it “demonstrates to the whole world, the excellent stewardship of the Peruvian economy and the secure climate in which investment can be made” under his auspices.

These comments are interesting because Peru is indeed an undeniable economic success story. If you want a casebook example of markets lifting people out of poverty, look no further than Peru. However, what Humala skipped over is the fact this transformation took place long before his presidency and also that its causes are rooted not so much in wise statecraft, but rather Peru’s long and venerable tradition of state incompetency which has left it up to individuals to provide for themselves.

Fifteen years ago, the economist Hernando de Soto in his provocative book The Mystery of Capital wrote at length about the byzantine workings of Peruvian bureaucracy where registering titles to property or incorporating a business involved jumping through expensive administrative hoops and waiting not months but years for the right approvals. De Soto lamented the fact that this lack of legal recognition prevented the poor collateralizing and leveraging what were in reality quite considerable assets. However, his analysis overlooked the important question of whether, in the presence of an efficient Western-style regulatory state, ordinary Peruvians would have been able to accumulate the wealth to leverage in the first place.

It still remains — as every Peruvian and occasionally horrified western visitor knows — that Peru is a place where if you want to do something no-one, especially not the government, is going to stop you.

If you want a house, you can go to the outskirts of a city as millions of other Peruvians have done, take a piece of land and build one. If you want a business just start trading, on the street. If you want a garment factory just start one, in your house. Ditto if you want to set up a restaurant or even a school. It may be the case, as de Soto pointed out, that on paper it takes twenty-six months to officially recognize a bus route, but that did not stop enterprising individuals setting their vans or converted school buses on the road, marking out the beginnings of what are now the surprisingly efficient (if crowded) bus routes that carry passengers to almost every imaginable nook of Peru’s sprawling capital, for a fraction of a dollar. The successful bus and van enterprise is a remarkable display of spontaneous order in action.

In Peru there is no need to pay a consultation fee to a gatekeeper to authorize a medical procedure: blood analyses, endoscopies, and radiograms can be purchased on the spot from an array of sole proprietor clinics. All kinds of generic drugs can be bought under the counter. If in need of some entertainment, on nearly every street you can purchase a hi-resolution pirated DVD of the latest Hollywood blockbuster.

It’s not like Peruvians have never heard of regulatory permits, taxes, professional licensing, zoning laws, patent protections and so forth; they exist in a statute book somewhere, but they are largely abstract concepts, which, for most of the time can be safely ignored. Everything is for sale and barriers to entry are virtually non-existent.

The result of this serendipitous meeting of the cavalier Latin spirit with an apathetic state apparatus is a resilient civil society where low-cost privately provided health and education are available to all and people enjoy nutritional- and life-expectancy levels that sit high on the World Bank’s own development indices.

However, this achievement is only inadequately recorded in GDP statistics and is certainly not being celebrated by Peru’s president or the dignitaries at the World Bank. Indeed, rather than recognize informal and small enterprises as the true instantiation of free market principles, and the quintessence of liberty, the Bank quite openly decries its existence.

For the World Bank, absence of regulation automatically equates to underdevelopment. For the Bank, “development” is the attainment of specified metrics in consumption and social spending, years of state education, and implementation of legal provisions like minimum wage entitlements. The problem is that realization of these development indicators rather conveniently entails a populace in wage-labor, working for regulated businesses (corporations), where they can be taxed at the source. These taxes then are used to fund an array of social programs manned by "poverty professionals" who dedicate their efforts to finding out why everyone is strangely depressed once no-one is allowed to make a living that’s not mediated by state institutions or their corporate vassals.

This unimaginative development model also does nothing to detract attention from the questionable manner in which the Bank — and more specifically its private lending arm — the International Financial Corporation (IFC), work to bring people out of poverty. Peruvians are now quite aware of just how sincere the IFC’s motto of “creating opportunity where it’s needed most” really is.

For instance, one flagship project to provide access to high-quality health care saw the IFC provide a $120 million loan for the construction of the palatial Clínica Delgado now sitting in the middle of Lima’s exclusive Miraflores district. Lima’s residents can now enjoy consultations there for around $150.

Another needy Peruvian the IFC was happy to help was Peru’s richest man, Carlos Rodriguez Pastor, whose Intercorp group received $164 million dollars to expand its financial services divisions. Not to be outdone was Grupo Romero (owned by Peru’s wealthiest banking family) which received $180 million to renovate two vegetable oil processing plants, and Grupo Gloria which received a $25 million loan to build a factory that would solidify their total monopoly on dairy processing in Peru.

The IFC has also extended its influence into Peru’s tourist industry which attracts millions each year and provides a sizeable income to small companies, local tour operators, and indigenous communities that run it. Despite this success story, the IFC evidently thinks that there are still some Peruvians who could use a helping hand, like the plucky “Peru Holding de Turismo” group and its partner the “Orient Express” hotel chain who own and manage some of Peru’s most lucrative real estate. They received a $40 million loan to refurbish a number of luxury hotels in the Cusco region, catering to precisely the kind of jet-setting international elite sitting on the board of the IFC. One can only assume that the planners at the World Bank would like Cusco to become the Latin American Davos, all part of a poverty reduction strategy to assure Peruvians bright futures in hospitality, catering, and adult entertainment.

The examples go on and on as indeed does the story which can be retold from any other country in the “developing” world. The only thing that changes are the names of the domestic elites and some of the western corporations in receipt of this lucrative form of international state patronage.

The thousands of Peruvians who turned out to protest the conference are probably right to be suspicious of the motives of the bureaucrats and directors of the international institutions whose plans (like the Trans Pacific Partnership Agreement signed at the conference) and economic models would, if realized, remove real competition, deaden entrepreneurship, and curtail their freedoms.

As the conference came to a close, the sun came out and some of the informal street vendors, who had been rounded up and pushed outside the conference area before it commenced, began making their way back. If they looked hard enough they might have recognized Christine Lagarde, Jim Yong Kim, et al., speeding away in their blacked-out government cars. One had to wonder, whether this taxpayer-funded financial elite would recognize a free-market, even if were staring them in the face.

Today's War Against Deflation Will Make Us Poorer

28 oktober, 2015 - 06:00

The yearly growth rate of the US consumer price index (CPI) fell to 0 percent in September 2015, from 0.2 percent in August and, 1.7 percent in September last year.

The yearly growth rate of the European Monetary Union CPI fell to minus 0.1 percent in September from 0.1 percent in the previous month and 0.3 percent in September last year.

Also, the growth momentum of the UK CPI fell into the negative in September with the yearly growth rate closing at minus 0.1 percent from 0 percent in August and 1.2 percent in September last year.

The growth momentum of China’s CPI eased in September with the yearly growth rate falling to 1.6 percent from 2 percent in August.

Deflation Fears Gain Steam

Consequently, many experts are expressing concern regarding the declining growth momentum of the CPI and are of the view that rather than tightening the monetary stance, central banks should loosen their stance further in order to counter the emergence of deflation, which is regarded as a major threat to economic well-being of individuals.

For most experts, deflation is bad news since it generates expectations of a decline in prices. As a result, they believe, consumers are likely to postpone their buying of goods at present since they expect to buy these goods at lower prices in the future.

This weakens the overall flow of spending and in turn weakens the economy. Hence, such commentators believe that policies that counter deflation will also counter the slump.

Will Reversing Deflation Prevent a Slump?

If deflation leads to an economic slump, then policies that reverse deflation should be good for the economy, so it is held.

Reversing deflation will simply involve introducing policies that support general increases in the prices of goods, i.e., price inflation. With this way of thinking inflation could actually be an agent of economic growth.

According to most experts, a little bit of inflation can actually be a good thing. Mainstream economists believe that inflation of 2 percent is not harmful to economic growth, but that inflation of 10 percent could be bad for the economy.

There’s good reason to believe, however, that at a rate of inflation of 10 percent, it is likely that consumers are going to form rising inflation expectations.

According to popular thinking, in response to a high rate of inflation, consumers will speed up their expenditures on goods at present, which should boost economic growth. So why then is a rate of inflation of 10 percent or higher regarded by experts as a bad thing?

Clearly there is a problem with the popular way of thinking.

Price Inflation vs. Money-Supply Inflation

Inflation is not about general increases in prices as such, but about the increase in the money supply. As a rule the increase in the money supply sets in motion general increases in prices. This, however, need not always be the case.

The price of a good is the amount of money asked per unit of it. For a constant amount of money and an expanding quantity of goods, prices will actually fall.

Prices will also fall when the rate of increase in the supply of goods exceeds the rate of increase in the money supply.

For instance, if the money supply increases by 5 percent and the quantity of goods increases by 10 percent, prices will fall by 5 percent.

A fall in prices cannot conceal the fact that we have inflation of 5 percent here on account of the increase in the money supply.

The Problem Is Really Wealth Formation, not Rising Prices

The reason why inflation is bad news is not because of increases in prices as such, but because of the damage inflation inflicts to the wealth-formation process. Here is why:

The chief role of money is the medium of exchange. Money enables us to exchange something we have for something we want.

Before an exchange can take place, an individual must have something useful that he can exchange for money. Once he secures the money, he can then exchange it for the good he wants.

But now consider a situation in which the money is created "out of thin air," increasing the money supply.

This new money is no different from counterfeit money. The counterfeiter exchanges the printed money for goods without producing anything useful.

He in fact exchanges nothing for something. He takes from the pool of real goods without making any contribution to the pool.

The economic effect of money that was created out of thin air is exactly the same as that of counterfeit money — it impoverishes wealth generators.

The money created out of thin air diverts real wealth toward the holders of new money. This weakens the wealth generators ability to generate wealth and this in turn leads to a weakening in economic growth.

Note that as a result of the increase in the money supply what we have here is more money per unit of goods, and thus, higher prices.

What matters however is not that price rises, but the increase in the money supply that sets in motion the exchange of nothing for something, or "the counterfeit effect."

The exchange of nothing for something, as we have seen, weakens the process of real wealth formation. Therefore, anything that promotes increases in the money supply can only make things much worse.

Why Falling Prices Are Good

Since changes in prices are just a symptom, as it were — and not the primary causative factor — obviously countering a falling growth momentum of the CPI by means of loose a monetary policy (i.e., by creating inflation) is bad news for the process of wealth generation, and hence for the economy.

In order to maintain their lives and well-being, individuals must buy goods and services in the present. So from this perspective a fall in prices cannot be bad for the economy.

Furthermore, if a fall in the growth momentum of prices emerges on the back of the collapse of bubble activities in response to a softer monetary growth then this should be seen as good news. The less non-productive bubble activities that are around the better it is for the wealth generators and hence for the overall pool of real wealth.

Likewise, if a fall in the growth momentum of the CPI emerges on account of the expansion in real wealth for a given stock of money, this is obviously great news since many more people could now benefit from the expanding pool of real wealth.

We can thus conclude that contrary to the popular view, a fall in the growth momentum of prices is always good news for the wealth generating process and hence for the economy.

The War on Cars Is a War on Workers and the Poor

27 oktober, 2015 - 06:00

A just-released poll of Los Angeles residents found that 55 percent of respondents indicated their greatest concern was “traffic and congestion,” far ahead of “personal safety” — the next highest area of concern — at 35 percent. So if their city government was working in their best interests, it would be doing something about automobile congestion.

It is. Unfortunately, it will make things worse.

Los Angeles’s recently adopted Mobility Plan 2035 would replace auto lanes in America’s congestion capital with bus and protected bike lanes, as well as pedestrian enhancements, despite heightening congestion for the vast majority who will continue to drive. Even the City’s Environmental Impact Report admitted “unavoidable significant adverse impacts” on congestion, doubling the number of heavily congested (graded F) intersections to 36 percent during evening rush hours.

Driving Saves Time and Offers More Opportunity

Such an effort to ration driving by worsening gridlock purgatory begs asking a central, but largely ignored, question. Why do planners’ attempts to force residents into walking, cycling, and mass transit — supposedly improving their quality of life — attract so few away from driving?

The reason it takes a coercive crowbar to get most people out of their cars is that automobile users have concluded cars are vastly superior to the alternatives.

Why is automobile use so desirable:

Automobiles have far greater and more flexible passenger — and cargo-carrying capacities.They allow direct, point-to-point service.They allow self-scheduling rather than requiring advance planning.They save time.They have far better multi-stop trip capability (this is why restrictions on auto use punish working mothers most).They offer a safer, more comfortable, more controllable environment, from the seats to the temperature to the music to the company.

Those massive advantages explain why even substantial new restrictions on automobiles or improvements in alternatives leave driving the dominant choice. However, they also reveal that a policy that will punish the vast majority who will continue to drive cannot serve residents effectively.

How Restrictions on Automobiles Punish the Working Poor the Most

The superiority of automobiles doesn’t stop at the obvious, either. They expand workers’ access to jobs, increasing productivity and incomes, improve purchasing choices, lower consumer prices and widen social options. Reducing roads’ car-carrying capacity undermines those major benefits.

Cars offer a decrease in commuting times (if not hamstrung by government planning), providing workers access to many more potential employers and job markets. This improves worker-employer matches, with expanded productivity both benefiting employers and raising workers’ incomes.

One study found that a 10-percent improvement in travel time raised worker productivity 3 percent. And increasing from a 3 mph walking speed to 30 mph driving speed is a 900-percent increase. In a similar vein, a Harvard analysis found that for those lacking high-school diplomas, owning a car increased monthly earnings by $1,100.

Cars are also the only means of assembling enough customers to sustain large stores with highly diverse offerings. Similarly, “automobility” dramatically expands the menu of social opportunities that are accessible.

Supporters like Los Angeles Mayor Eric Garcetti may dismiss the serious adverse effects of the “road diets” they propose (a term whose negative implications were too obvious, getting it benched in favor of the better-sounding “complete streets”). But by demeaning cars as “the old model” and insisting “we have to have neighborhoods that are more self-contained,” the opponents of auto use do nothing to lessen the huge costs or increase the very limited benefits they plan to impose on those they supposedly represent.

Further, the “new model” of curtailing road capacity to force people out of cars is really a recycled old far-inferior model. As urban policy expert Randal O’Toole noted in The Best-Laid Plans:

Anyone who prefers not to drive can find neighborhood … where they can walk to stores that offer a limited selection of high-priced goods, enjoy limited recreation and social opportunities, and take slow public transit vehicles to some but not all regional employment centers, the same as many Americans did in 1920. But the automobile provides people with far more benefits and opportunities than they could ever have without it.

Robert Shiller Imagines What Consumers

23 oktober, 2015 - 06:00

In a recent New York Times article, Robert Shiller takes aim at the idea that “an unregulated competitive economy is optimal for everyone.” While a defender of certain aspects of the free market, he has misgivings about the amount of manipulation and deceit that permeates it. A competitive economy, in his eyes, features numerous entrepreneurs preying on consumers making decisions that run counter to their best interests.

Too Many Assumptions

This view of the free market is the result of a particular theoretical perspective that unfortunately pervades mainstream economics. In this view, which draws its inspiration primarily from Vilfredo Pareto and John Hicks, markets are optimal because they bring about a state of near-perfect rationality. Each consumer’s preferences are assumed to be error-free, reflecting the latest scientific knowledge. Thus, a consumer, when making decisions about what to eat, follows the advice of dietary experts. He never makes a “mistake” by consuming products that are deemed to be unhealthy. He never indulges himself in a candy bar or a box of chocolates.

Similarly, when making decisions which affect his health the consumer never runs afoul of his doctor’s instructions. Smoking cigarettes, excessive alcohol consumption or inadequate exercise are options that are off the table. Each consumer, moreover, has perfect knowledge regarding the state of the market and the prevailing prices. Therefore he never purchases a good and then finds out that it was available cheaper elsewhere. Such errors are ruled out by assumption.

The process of competition ensures that resources are allocated to best satisfy these rational consumer preferences, thereby bringing about a state of equilibrium that is optimal for everyone. In such a state each market participant is maximizing his or her welfare, allocating the scarce money income at his disposal to satisfy the most highly ranked wants that will truly contribute to it.

It should come as no surprise that the neoclassical economist, when turning his attention from such a defense of the free market, should gasp with horror at the irrationality pervading the real world. The consumers he meets in the supermarket are very different from those that pervade his theoretical model. They purchase candy, often in abundance, eat junk food, consume excessive alcohol, and make a host of other choices which experts in various fields would disapprove of. Why, they even happen to have a proclivity for gossip magazines, something that any rational being would surely see as nothing but a complete waste of time!

It is then a short jump to the conclusion that the entrepreneurs providing the consumers with the means to satisfy these irrational wants are mere manipulators and deceivers. Their desire to make profits in the face of competition forces them to exploit the human frailties of their customers, often finding ways to make them choose in a manner that is contrary to their true welfare. They take advantage of a consumer’s weak moments, when he fails to reason like a scientist or an expert and is inclined to give in to mere whims and fancies. In the process the entrepreneurs, far from ensuring the maximization of welfare, push consumers to make choices that leave them worse off.

Observing the Economy as it Is, Not as it Should Be

Economists working in the Austrian tradition provide a completely different defense of the benefits of the market that are immune to the criticisms advanced by Shiller. The heart of this defense lies in the concept of consumer sovereignty. The characteristic feature of a free, competitive economy is that the decisions of the entrepreneurs and the allocation of resources are always aligned to anticipated consumer preferences, however irrational they may be.

These preferences don’t have to stand up to rational scrutiny. They don’t have to be guided by the most up to date scientific knowledge. Instead, they reflect the momentary valuations of men as they are: erroneous, imperfect, and whimsical. As Mises notes, “Not what a man should do, but what he does, counts for praxeology and economics. Hygiene may be right or wrong in calling alcohol and nicotine poisons. But economics must explain the prices of tobacco and liquor as they are, not as they would be under different conditions.”

Consumers, Not Producers, Direct the Market

The prices that entrepreneurs bid for the factors of production merely reflect their expectations of these preferences. And those who are correct in their anticipations are rewarded with profits whereas those who are not are punished with losses. Thus, the real boss in the realm of the market, the true captain of the ship, is the consumer, irrational and ignorant as he is, and it is he who decides what should and should not be produced.

Any notion of welfare is inseparable from the satisfaction of these imperfect and irrational preferences. The market maximizes consumer welfare because it caters to the whims and fancies of consumers, not because it satisfies the wants of men guided by knowledge deemed to be perfectly rational by the economist.

Thus, when an Austrian economist walks into a supermarket he does not see irrationality, manipulation, and deceit. Instead he sees the miracle of the market at work; he sees the manifestation of the price system and its ability to ensure the satisfaction of the whims and fancies of consumers. When he notices candy bars and gossip magazines being sold in the checkout aisles he does not conclude that entrepreneurs are trying to manipulate consumers. Instead, he realizes that this allocation of resources merely mirrors the preferences of the vast majority of his fellow men. The ability of entrepreneurs to correctly anticipate these preferences and to cater to them enhances rather than diminishes consumer welfare.

Defending the free market is important but how one goes about doing it is equally important. Austrian economists defend the market not because it is perfect but because it allows us to prosper and thrive while letting us embrace our innate human frailties and limitations.

The Fed Can’t Raise Rates, But Must Pretend It Will

23 oktober, 2015 - 06:00

Waiting for Godot is a play written by the Irish novelist Samuel B. Beckett in the late 1940s in which two characters, Vladimir and Estragon, keep waiting endlessly and in vain for the coming of someone named Godot. The storyline bears some resemblance to the Federal Reserve’s talk about raising interest rates.

Since spring 2013, the Fed has been playing with the idea of raising rates, which it had suppressed to basically zero percent in December 2008. So far, however, it has not taken any action. Upon closer inspection, the reason is obvious. With its policy of extremely low interest rates, the Fed is fueling an artificial economic expansion and inflating asset prices.

Selected US Interest Rates in Percent

Source: Thomson Financial

Raising short-term rates would be like taking away the punch bowl just as the party gets going. As rates rise, the economy’s production and employment structure couldn’t be upheld. Neither could inflated bond, equity, and housing prices. If the economy slows down, let alone falls back into recession, the Fed’s fiat money pipe dream would run into serious trouble.

This is the reason why the Fed would like to keep rates at the current suppressed levels. A delicate obstacle to such a policy remains, though: If savers and investors expect that interest rates will remain at rock bottom forever, they would presumably turn their backs on the credit market. The ensuing decline in the supply of credit would spell trouble for the fiat money system.

To prevent this from happening, the Fed must achieve two things. First, it needs to uphold the expectation in financial markets that current low interest rates will be increased again at some point in the future. If savers and investors buy this story, they will hold onto their bank deposits, money market funds, bonds, and other fixed income products despite minuscule yields.

Second, the Fed must succeed in continuing to postpone rate hikes into the future without breaking peoples’ expectation that rates will rise at some point. It has to send out the message that rates will be increased at, say, the forthcoming FOMC meeting. But, as the meeting approaches, the Fed would have to repeat its trickery, pushing the possible date for a rate hike still further out.

If the Fed gets away with this “Waiting for Godot” strategy, savings will keep flowing into credit markets. Borrowers can refinance their maturing debt with new loans and also increase total borrowing at suppressed interest rates. The economy’s debt load can continue to build up, with the day of reckoning being postponed for yet again.

However, there is the famous saying: “You can fool all the people some of the time and some of the people all the time, but you cannot fool all the people all the time.” What if savers and investors eventually become aware that the Fed will not bring interest rates back to “normal” but keep them at basically zero, or even push them into negative territory?

If a rush for the credit market exit would set in, it would be upon the Fed to fill debtors’ funding gap in order to prevent the fiat system from collapsing. The central bank would have to monetize outstanding and newly originated debt on a grand scale, sending downward the purchasing power of the US dollar — and with it many other fiat currencies around the world.

The “Waiting for Godot” strategy does not rule out that the Fed might, at some stage, nudge upward short-term borrowing costs. However, any rate action should be minor and rather short-lived (like they were in Japan), and it wouldn’t bring interest rates back to “normal.” The underlying logic of the fiat money system simply wouldn’t admit it.

Selected Japanese Interest Rates in Percent

Source: Thomson Financial

The Fed — and basically all central banks around the world — are unlikely to accept deflation clearing out the debt, which would topple the economic and political structures built upon it. Fending off an approaching recession-depression with more credit-created fiat money and extremely low, perhaps even negative, interest rates is what one can expect them to do.

Murray N. Rothbard put it succinctly: “We can look forward … not precisely to a 1929-type depression, but to an inflationary depression of massive proportions.”

The Mises Week in Review: October 24, 2015

23 oktober, 2015 - 06:00

On Friday, a desperate China announced another round of interest rate cuts — its sixth such announcement in the past year. Cheered on by Nobel Prize winning economists, and pundits who dream of socialists utopias, governments continue to cling to the follies of central planning, easy money and growing debt.

Of course, not even science fiction can change the hard realities of economics.

Luckily, the resulting chaos that inevitably leads from these disastrous policies creates opportunities for the truth to prevail. Examples can be seen when panicked regulators taking a second look at the benefits of 100 percent reserve banking or the emergence of healthcare providers have broken the shackles of the government-distorted insurance model.

One doctor that has taken that stand is Dr. Michel Accad. A frequent Mises Daily contributor, Dr. Accad joined Jeff Deist this week on Mises Weekends to discuss his experiences as a practicing cardiologist in the Age of Obamacare. If you feel like just a number at the doctor’s office, you’re right: the entire visit culminates in a particular code being entered into the insurer’s database. That code determines how much your doctor gets paid, and it’s all part of a system of bureaucratic overhead and perverse incentives.

If you’re interested in learning about the true state of medicine in a post-Obamacare world, this interview is a must listen.  


In case you missed any of them, here are this week’s featured Mises Daily articles and some of our most popular articles at Mises Wire:

Reflections on Venezuela’s "Economic Miracle" by Andrew SyriosBeavis and Butt-Head Take Over Silicon Valley by Paul CantorStar Trek Is Wrong: There Will Always Be Scarcity by Jonathan NewmanRobert Shiller Is Shilling for Socialism by Peter St. OngeNew Berlin-Based Master's Degree Program in Austrian Economics by Ryan McMakenHappy Birthday, Ralph! by David GordonThe Fed Says No to Pot Money, Unless it's the Government's Pot Money by Jonathan NewmanHow Currency Exchange Rates Are Determined by Frank ShostakDesperate Financial Regulators Turn to ... 100% Reserves by Joseph SalernoThe Complexity of Violent Crime and the Role of State-Sanctioned Killing by Ryan McMakenCanadians (Sort of) Vote for Less Interventionism and More Freedom by Ryan McMakenA Tax I Can Support by Per BylundMy Day at the Fed by Mark ThorntonFantasy Sports and the State of Nevada Go Head-to-Head by Jonathan Newman


Reflections on Venezuela’s "Economic Miracle"

21 oktober, 2015 - 06:00

Back in 2013, Salon took a quick break from criticizing a caricature of libertarianism to let David Sirota write an embarrassing article praising socialism in what turns out to be a fantastic case study in both the dangers of socialist economics and of course, speaking too soon.

The article was titled “Hugo Chavez’s Economic Miracle” and it was certainly not the only one of its kind to come out at the time. It may seem like twenty-twenty hindsight to criticize such foolishness, but it might be instructive as well. However, looking at Venezuela now as compared to the country Sirota saw in 2013 and thought provided an economic alternative to American capitalism (a truly free market was never discussed) serves as a good example of what Nicolás Cachanosky calls “the bait-and-switch behind economic populism.” Or namely, that government policies focused highly on consumption and lowly on investment will show good economic signs at the beginning, only to be followed by an inevitable decline and likely disaster.

Sirota’s article at least begins by lamenting Chavez’s rather poor record on civil rights (like shutting down a TV station that was critical of him) and noting “a boom in violent crime.” This may somehow be an understatement as Venezuela ranks second in the world in murders per capita at a terrifying rate of 53.7 per 100,000 citizens annually! (So much for socialism alleviating crime.) He finally does arrive at his case for this “economic miracle” that Venezuela was experiencing under Chavez (which, I should note, makes up only one paragraph of his entire article),

…according to data compiled by the UK Guardian, Chavez’s first decade in office saw Venezuelan GDP more than double and both infant mortality and unemployment almost halved. Then there is a remarkable graph from the World Bank that shows that under Chavez’s brand of socialism, poverty in Venezuela plummeted (the same Guardian data reports that its “extreme poverty” rate fell from 23.4 percent in 1999 to 8.5 percent just a decade later). In all, that left the country with the third lowest poverty rate in Latin America.

How much of this was due to Venezuela being an oil-rich nation is debatable. But it’s also very much worth observing that these positive (and underreported) trends existed throughout Latin America, including in countries such as Colombia that have moved in the opposite direction economically. According to the World Bank, Between 2005 and 2013, Colombia’s poverty rate (as opposed to extreme poverty) fell from 45 percent to 30.6 percent, Peru’s fell from 55.6 percent to 23.9 percent, Uruguay’s from 32.5 percent to 11.5 percent, Paraguay’s from 38.6 percent to 23.9 percent, and Ecuador’s from 42.2 percent to 25.6 percent. Venezuela, for its part, fell 43.7 percent to 25.4 percent, which seems to be about average. The same could be said for GDP and Venezuela’s infant mortality rate also only ranks in the middle of the pack.

And of course, all of this was prior to Venezuela’s recent economic crisis.

The fall in the price of oil has certainly harmed Venezuela, but then again, the rise in oil prices during the last decade certainly contributed to its “economic miracle.” However, Venezuela’s problems were starting to become apparent before the drop in oil prices. Back in October of 2014, just before the price of oil sank, Venezuela ran a 17 percent budget deficit and was dealing with a variety of shortages. Furthermore, while every major oil exporter has been hurt by the low oil prices, they have all weathered the storm much better than Venezuela.

It appears that the drop in gas prices simply exacerbated, and more accurately, exposed the problems caused by Chavez’s (and his successor Nicolás Maduro’s) extreme populist policies. As Nicolás Cachanosky notes in his review of Rudiger Dornbusch and Sebastián Edwards work on Latin American populism, regimes that follow such policies go through four economic phases. In stage I,

The populist diagnosis of what is wrong with an economy is confirmed during the first years of the new government. Macroeconomic policy shows good results like growing GDP, a reduction in unemployment, increase in real wages, etc. Because of output gaps, imports paid with central bank reserves, and regulations (maximum prices coupled with subsidies to the firms), inflation is mostly under control.

This is the stage Venezuela was in when Salon saw fit to publish Sirota’s article in 2013.

But then comes Stage II when “bottleneck effects start to appear” and “the underground economy starts to increase as the fiscal deficit worsens …” In Stage III, “Shortage problems become significant, inflation accelerates, and because the nominal exchange rate did not keep pace with inflation, there is an outflow of capital (reserves).”

This is exactly what’s happening in Venezuela today. Venezuela’s projected inflation for 2015 is a whopping 64 percent! The country with the second highest rate in South America is Argentina at 10.9 percent. The CIA Factbook lists Venezuela’s budget deficit at 29.4 percent and Moody’s downgraded Venezuela’s credit rating to the lowest rating possible for a country not in default. And there is serious talk of that coming to pass as well.

The government has instituted price controls to fight inflation and predictably, massive shortages have forced Venezuelans to turn to the black market for ordinary daily goods such as milk and toilet paper.

Venezuela’s unemployment rate shot up from 5.5 to 7.9 percent in January of 2015 and is likely to rise further. Even as it stands now, it is the third highest rate on the South American continent (excluding Central America). And as one would expect, poverty has started to rise again as well.

After Stage III comes Stage IV, which Cachanosky describes as follows,

A new government is swept into office and is forced to engage in “orthodox” adjustments, possibly under the supervision of the IMF or an international organization that provides the funds required to go through policy reforms. Because capital has been consumed and destroyed, real wages fall to levels even lower than those that existed at the beginning of the populist government’s election. The “orthodox” government is then responsible for picking up the pieces and covering the costs of failed policies left from the previous populist regime.

Whether it comes to that is still yet to be seen. But what this economic crisis does highlight is that short-term success should never be taken as proof of a long-term solution. And this is particularly true when it comes to quasi-socialist and extreme populist governments. In the long-run, countries that follow these policies have a consistent track record, which is basically the same as what we’re witnessing now in Venezuela.

We’ll have to see if Salon writes a follow up.

Beavis and Butt-Head Take Over Silicon Valley

21 oktober, 2015 - 06:00

[This article appears in the September-October 2015 issue of The Austrian.]

With Beavis and Butt-head and King of the Hill, Mike Judge earned his place in pop culture history. His new HBO comedy Silicon Valley seems an unlikely follow-up to his earlier successes. The man who made a film called Idiocracy has been specializing in portraying really dumb people, or, at least in the case of propane salesman Hank Hill, really ordinary people. “It’s not exactly rocket science” pretty much sums up the lives of all Judge’s earlier characters.

So why has Judge now turned to computer science as his subject? His new show is set in the glamorous and sophisticated world of high tech, featuring a brilliant programmer who comes up with something called a “lossless compression algorithm.” The answer is that Judge wants to show that computer programmers and software moguls can be pretty dumb, too. The joy of Silicon Valley is watching these would-be high-flyers crash and burn in one self-created disaster after another.

Judge deals with a particular kind of stupidity in Silicon Valley, the stupidity of smart people, that is, people who are smart in one area and therefore foolishly think that they are smart in all areas. The reason his characters keep getting in trouble is that they understand computer science, but they have no clue how to run a business. What makes Silicon Valley stand out among television shows is that it displays a sound grasp of what actually makes a business successful. Judge’s show even dares to suggest that a “mere” businessman might be smarter than a computer whiz kid when it comes to running a software startup.

One of the main characters in the first season is a venture capitalist named Peter Gregory. Gregory comes across as a bit of a nutcase, eerily detached from everything happening around him. But the show understands that in business, as in art, the line between madness and genius is difficult to draw, and Silicon Valley ends up offering a classic example of what it is to be a true entrepreneur.

In the third episode, Gregory develops an obsession with the product line of Burger King; he zeroes in on the ubiquitous use of sesame seeds in the burger buns; he analyzes the global dynamics of sesame seed production; and, finally, spotting one crucial moment in its historical cycle, he sets himself up to make a killing in sesame seed futures. The developments I have put together in one sentence are scattered throughout the episode, creating a narrative jigsaw puzzle for viewers. Only at the end do all the pieces fall into place and we realize that we have been watching an entrepreneurial genius in action — someone capable of finding a pattern where no one else would even bother to look.

By contrast, the computer genius at the center of Silicon Valley, Richard Hendricks, is great on the details of digital coding, but he is utterly clueless when it comes to the business big picture. The story begins when Hendricks comes up with what he thinks is a brilliant new app, which will allow composers to search instantaneously all the music online to determine if they are violating someone’s copyright. Unfortunately, everyone to whom he shows the app thinks it will have a limited market. But they also notice — as Hendricks did not — that the innovation that makes his app capable of this instantaneous searching — the aforementioned “lossless compression algorithm”— has uses far beyond anything Hendricks imagined. The ability to compress sound, video, and other files with no loss of quality will revolutionize data transmission and retrieval, and should make the algorithm’s inventor very wealthy.

In pop culture, innovation is usually presented as a purely technological matter, not at all as an economic problem. Businessmen are typically depicted as obstacles to innovation, not the people who in fact make it possible. Pop culture celebrates the oddball inventor, the nerd who comes up with a new gadget, a gizmo that does something that has never been done before. But a gizmo is not yet a product. A genuine product requires a business team to make it succeed. For example, it requires capital to develop and produce it, and it also needs to be marketed properly. That is the lesson Hendricks must learn in Silicon Valley — and the audience learns it too. Rather than Computer Science 10, the show is Economics 101.

Hendricks begins with the programmer’s pride in his mathematical know-how and contempt for the business end of Silicon Valley. In the first episode, he dismisses Apple’s Steve Jobs as “a poser,” points out that “he didn’t write code,” and belittles him because he only “knows how to package ideas.” Within a few episodes, Hendricks is desperately wishing that he had a bit of Steve Jobs in him. Under pressure to preserve his venture capital funding, he is incapable of articulating a vision for his company in a business plan, and he has to rely on a glib partner to regale Gregory with marketing clichés and buzzwords like “The Cloud.” In the second season, Hendricks has to link up with a rival company that has a weaker compression algorithm but does have a marketing staffalready in place to push a product that really works.

Silicon Valley does portray some businessmen as greedy, childishly competitive, pretentious, and vain. But on the whole it offers a refreshing alternative to the negative view of business generally found in American pop culture. Even while making fun of the follies in the world of start-ups and venture capitalism, it makes a point familiar in Austrian economics — that the true entrepreneur is a visionary and the chief motive force behind technological progress.

Employment Is Nothing Like Slavery

20 oktober, 2015 - 06:00

What is necessary to take away a man’s freedom? For many progressives, nothing more then a bad workplace. Amazon takes ongoing heat for its work environment, with opponents like Business Insider calling it a “slave camp.”

But this comparison mistakes the fundamental nature of coercion.

Many leftists, such as left-libertarian Susan Webber at Naked Capitalism, argue that we must work in order to live, and that therefore work is coercive. If you must do X to live, then surely whoever controls your ability to do X is coercing you.

The problem with this argument is that the state of nature is not a Rousseauian paradise, but a brutal place where most die. The state of nature involves poverty and endless drudgery to catch, kill, and cook whatever food one can to stay alive. The workday is every waking moment, and the pay is little more than an occasional meal.

There’s nothing stopping people from living this way in the modern world — say, off the grid — but the beauty of capitalism is that it offers us a way out of this wretched existence. When a company offers a man a job, they are not saying, “work or die!” the way a slaver does; they are promising him that, if he helps them to succeed, they will give him money to improve his life.

Professors Bertram, Gourevitch, and Robin at Crooked Timber make another argument: that the workplace is coercive by virtue of an unequal power balance. Employers can, after all, fire employees if they don’t do X. But this mistakes the nature of work and ignores the power of employees.

Coercion, according to the Oxford English Dictionary, is, “The practice of persuading someone to do something by using force or threats.” It involves a threat to harm someone if they don’t do X. In a prison or slave camp, prisoners can be beaten or killed for not complying with orders.

This is fundamentally different from the promise of an employer like Amazon, which is to engage in a relationship with workers so long as that relationship is mutually beneficial. As long as the employee performs good work, Amazon will continue to help him improve his life. If the employee no longer provides value to Amazon, then Amazon is under no obligation to continue to help him.

Refusing to continue helping someone is fundamentally different from the use of “force or threats” inherent in coercion. A slaver’s whip makes a person’s status quo worse if he doesn’t do as he’s told. An employer’s continued payments make one’s status quo better if he does as he’s asked.

Admittedly, being fired can leave former employees in a tough spot, and that’s more true if they’re fired without warning. Amazon’s harsh work conditions, combined with the specter of being suddenly let go if we don’t perform every day, don’t constitute a job most of us would choose. But equating this with a slave camp does employees a disservice by denying their agency.

The comparison ignores the power of employees. They can leave a company whenever they want, and wielding that power can leave their former employers in a bind. In a small company or a busy firm, an employee who quits can leave the company without the manpower to meet its obligations. If an accountant suddenly quits H&R Block during tax season, he'll leave their franchise struggling to make up lost ground.

Even in a big firm like Amazon, employees who leave suddenly cost their bosses money. According to the liberal-leaning Center for American Progress, the turnover costs for employees earning under $50,000 per year averages 20 percent of that employee's annual salary. These costs incentivize employers to retain staff, and grants bargaining power to employees.

Such language also ignores the fact that people tend to find jobs that represent their best option.

This is true of Amazon’s “fulfillment centers,” which took a lot of heat in 2013. But as The Guardian notes, Amazon builds these centers in, “places of high unemployment and low economic opportunities.” Workers who otherwise wouldn’t find a job flock to Amazon, knowing that it may not be perfect but that it beats their baseline — unemployment. It’s also true of Amazon’s white-collar workers who just happen to be the subject of the latest controversy.

Amazon has, “one of the most rigorous hiring processes in America,” according to Business to Community, and those hired could find jobs at most other tech companies. But they choose to work at Amazon. Rather than considering that these men and women may choose to work at Amazon for a reason, progressives deride their choices and their agency with talk of coercion.

The issue of coercion is important to understand because it’s the central difference between government and the private sector. If you don’t do X, government can punish you: it can take away your savings, throw you in jail, even shoot you. That’s true coercion. By contrast, if an employer asks you to do X, she can’t threaten you; all she can do if you say no is refuse to keep giving you money.

This difference highlights the essential freedom of the market. In any market-based relationship, one party can leave and the other party can do them no harm. This is a freedom that is noticeably lacking in our interactions with government.

<p>With the recent successes and

19 oktober, 2015 - 06:00

With the recent successes and announcements of sci-fi movies and TV shows like The Martian, Interstellar, and new incarnations of Star Trek and Star Wars, no one can deny that we crave futurism and stretching our imagination on what advanced technology can accomplish. Many look to the example of these fictional worlds as an indication of what life might be like when technology can provide for all of our basic needs, a condition some call “post-scarcity.”

The same people call on dramatic government interventions to make sure everybody can earn a “living wage” when robots and automation do all of the producing. They say that “post-scarcity” conditions will completely overturn economies and even economics itself.

But, scarcity can never be eliminated because our infinite human wants will always outnumber the means available in this finite universe. Scarcity is found even in the shows and movies that supposedly represent worlds without scarcity.

A prime example of what is meant by “post-scarcity” and its contrast to present-day is presented in the Star Trek: The Next Generation series.

In the final episode of the first season, the Enterprise happens upon an “ancient” vessel floating through space. Lt. Commander Data and Security Officer Worf find three humans from Earth, frozen in cryonic chambers for 400 years, which gives the twenty-fourth century crew a chance to interact with people from the viewers’ time period.

One of these late twentieth-century humans, Ralph Offenhouse, was preoccupied with regaining control over what he expected to be a gigantic fortune from a 400-year-old stock portfolio. Indeed, one of the first things he asked for after being thawed and resuscitated was a copy of the Wall Street Journal.

Captain Picard informed him that “A lot has changed in the past three hundred years. People are no longer obsessed with the accumulation of things. We’ve eliminated hunger, want, the need for possessions. We’ve grown out of our infancy.”

The show paints a Marxist picture of how humans arrived at being able to warp across space with food replicators and beaming devices and all sorts of technology that renders even our early twenty-first-century scramble for scarce resources a mere curiosity.

During centuries that stretch between the crew of the Enterprise and their time capsule visitors, technology changed in such a way to abundantly provide for people’s material needs. Therefore human society phased out of capitalism and trade and into socialism, which Karl Marx predicted in his theory of history.

The economics of the Star Trek universe is the subject of a forthcoming book by Manu Saadia, called Trekonomics. Saadia proposes that we should take sci-fi seriously and prepare ourselves for “post-scarcity” conditions:

Good science fiction like Star Trek can be great fun. Yet, at the same time, it is deadly serious. Its central purpose is to explore the changes that lie ahead of us. What are the economic, social and even psychological consequences of technological change? What will happen to us humans in a world that runs on automata?

Noah Smith gives a similar prognostication: 

the rise of new technology means that all the economic questions will change. Instead of a world defined by scarcity, we will live in a world defined by self-expression. We will be able to decide the kind of people that we want to be, and the kind of lives we want to live, instead of having the world decide for us. The Star Trek utopia will free us from the fetters of the dismal science.

Both argue that markets and trade will become unnecessary once we arrive at so-called “post-scarcity” conditions. The study of economics itself will be a thing of the past, like VCRs and 8-tracks.

Scarcity Is Fundamental to the Physical Universe

Unfortunately for all of us, however, scarcity isn’t going anywhere. And the only way to maximize human want satisfaction with a limited pool of resources is with unhampered markets: private property and prices. Scarcity is a fundamental fact of our universe — we are bound to it by physical laws and logic.

Scarcity is even present in the fictional Star Trek universe, as well as self-ownership and private property. In the very same episode, Captain Picard and the crew have a tense confrontation with the Romulans, who have invaded Federation space. Both parties were investigating the destruction of some of their outposts in the “Neutral Zone.” Space is not only the final frontier, but apparently ownable. The Romulan and Federation outposts are also scarce and owned.

When Ralph Offenhouse wandered onto the main bridge during this confrontation, Captain Picard ordered security officers to “Get him off my bridge!”

We can’t even conceive of a fictional universe with no scarcity. There can be no time, space, or anything that has any limited capabilities in satisfying our desires. Such a universe would be timeless, incorporeal, and all satisfying. It’s hard to imagine a TV show based in such a universe because there could be no conflict for the characters to overcome.

What Manu Saadia and Noah Smith mean by “post-scarcity,” then, is just that some things are more abundant than before. But this prospect does not mean the end of economics, because even today many goods are more abundant than they have been in the past.

No matter what, individuals will still be making choices about how to use the resources that are scarce. We may make things relatively less scarce, but we can never repeal scarcity as a fundamental condition of our universe.

Suppose every household in the world has all of their biological needs abundantly satisfied. Food is provided by replicators like those on the Enterprise. Everybody has as at least as much shelter as they need. Super-medicines and all health services are easily provided with the touch of a button in your own home.

Moving Beyond “Subsistence” Is Not the Same as Moving Beyond “Scarcity”

All this means is that people can pursue other ends besides survival, like art, entertainment, learning, or simple relaxation. Our demand for goods and services does not stop once we are at subsistence levels of consumption. This is obviously true for anybody with the means to read this article.

Also, there may be demand for food and other goods specifically made by human hands even when robots or replicators could have made something identical or more precisely machined at a lower cost. We see this today, and we are far from Star Trek.

Sometimes we like knowing something was made in a certain way, and this translates into demand for goods with a specific, usually labor-intensive, production process. Craft and hand-made trade fairs are common, even when many of the items offered are mass-produced elsewhere.

Toward the end of the episode, when Ralph Offenhouse is reeling in an existential crisis, he asks Captain Picard about the purpose of twenty-fourth-century life if it’s not “accumulating wealth”:

Captain Jean-Luc Picard: Material needs no longer exist.Ralph Offenhouse: Then what's the challenge?Captain Jean-Luc Picard: The challenge, Mr. Offenhouse, is to improve yourself. To enrich yourself. Enjoy it.

What Picard doesn’t realize is that improving and enriching yourself, even with the Enterprise’s mission: “to explore strange new worlds, to seek out new life and new civilizations, to boldly go where no one has gone before” involves the use of scarce, material resources, like starships, starship crews, planets to explore, communicators, teleportation machines, phasers, and warp drives.

Picard also doesn’t realize how wealthy he is. Wealth is the ability to satisfy ends, and his spot on the Enterprise makes him enormously wealthy, with all the replicators and the holodeck (environment simulator) and the instant access to top-notch medical care. For someone who rejects accumulating wealth, he has accumulated a lot of it.

Although biological needs may be abundantly satisfied, human desires outnumber the stars. As such, scarcity is unavoidable in the same way gravity is unavoidable, or the forward “continual flux” of time, to use the words of Mises. Our goal is the optimal allocation of those scarce resources, and only unhampered markets can “make it so.”