Category: Economics

Some Ideas are More Worth Spreading than Others

The Technology, Entertainment, and Design (TED) conference is fairly well known by the denizens of the Internet. TED’s tagline is Ideas Worth Spreading, and the conference is supposedly about spreading new and innovative ideas. Most of my friends absolutely love to watch TED videos, and there is good stuff to be found, but the conference isn’t the open platform of ideas that many claim it to be. According to TED some ideas are more worth spreading than others:

If you’re plugged into the Internet, chances are you’ve seen a TED talk – the wonky, provocative web videos that have become a sort of nerd franchise. TED.com is where you go to find Facebook COO Sheryl Sandberg explaining why the world has too few female leaders, or Twitter cofounder Evan Williams sharing the secret power of listening to users to drive company improvement. The slogan of the nonprofit group behind the site is “Ideas Worth Spreading.”

There’s one idea, though, that TED’s organizers recently decided was too controversial to spread: the notion that widening income inequality is a bad thing for America, and that as a result, the rich should pay more in taxes.

TED organizers invited a multimillionaire Seattle venture capitalist named Nick Hanauer – the first nonfamily investor in Amazon.com – to give a speech on March 1 at their TED University conference. Inequality was the topic – specifically, Hanauer’s contention that the middle class, and not wealthy innovators like himself, are America’s true “job creators.”

A transcript of Hanauer’s speech can be found here. Reading it I must say that Hanauer has a better grasp on the market than most venture capitalists and almost any politician does. For example, he understands that the rich aren’t really the creators of jobs because if it isn’t for consumer demand there are no jobs to be created:

That’s why I can say with confidence that rich people don’t create jobs, nor do businesses, large or small. What does lead to more employment is a “circle of life” like feedback loop between customers and businesses. And only consumers can set in motion this virtuous cycle of increasing demand and hiring. In this sense, an ordinary middle-class consumer is far more of a job creator than a capitalist like me.

Trickle-down economics is an idea often espoused by “conservatives” and the idea is that tax breaks and other state benefits given to the cronies wealthy will eventually “trickle down” to benefit the less wealthy. The claim is that the wealthy will have more money to invest into business and that investment will create jobs and economic growth. This theory falls flat on its face because it doesn’t take into consideration the fact that investing all the money in the world into the creation of businesses is meaningless if nobody can buy the products. What good would Samsung be if there was nobody to buy their televisions or phones? Would Remington be able to function if nobody purchased their firearms?

Capitalism is about mutually beneficial trade. It relies on everybody being a producer and a consumer. An auto-mechanic produces working vehicles by expending his labor to repair others’ vehicles. In exchange for this the owners of those vehicles exchange the product of their labor, usually in the form of money. If the vehicle owner didn’t have a vehicle there would be no purpose for the auto-mechanic. If the auto-mechanic didn’t exist the vehicle owner would find themselves having to purchase a new vehicle every time their current one needed maintenance or repair. The agreement between the vehicle owner and the auto-mechanic is mutually beneficial, they both gain from the transaction.

Tax breaks and other benefits for the wealthy don’t give the less wealthy any advantage because it doesn’t free up any of their money to be used to purchase goods.

Hanauer’s education isn’t complete unfortunately because he still finds himself stuck in a cycle of false economic ideas:

And taxing the rich to make investments that grow the middle class, is the single smartest thing we can do for the middle class, the poor and the rich.

There is no way to use taxes to grow the middle class. Taxation is money that goes to the state and the state lacks the market feedback mechanism so is unable to invest money wisely. The market feedback mechanism determines whether or not resources are being invested wisely through an often vicious cycle of finical success and failure. If you’ve invested your resources wisely, that is if you’re using resources to produce products and services consumers want, you will receive more resources to use. Apple has managed to produce products and services a large number of consumer want and have been rewarded by great deals of wealth. They have demonstrated the ability to use resources wisely and are now being trusted with more resources.

On the other hand entities that use resources poorly face financial ruin. The DeLorean Motor Company went into bankruptcy because the produced a single model car and not many people wanted it. General Motors (GM) would have followed if the state didn’t prop them up. In fact GM is a perfect example of the state’s inability to judge the soundness of investments. GM distributed their resources poorly and were punished accordingly. Their resources went into paying overly high wages, pensions, salaries of higher ups, and automobiles that weren’t desirable enough to make up for the other erroneous spending. All of this caught up to GM and they started hemorrhaging money. Continues loss of money is the market’s way of informing you that you’re doing something wrong and need to correct it. GM didn’t correct its problems and thus was facing bankruptcy. Had the market been allowed to work GM would have went under and their resources would have been put up for sale so other entrepreneurs could buy them and attempt to put them to better use. Instead the state injected a ton of taxpayer money into a business that demonstrated an inability to managed resources meaning those new resources are likely to be squandered.

The state gains its money through force and therefore doesn’t have to face the possibility of failure. When it fails to make productive use of resources it can just steal more, there is no possibility of failure until its victims run out of money. Because of this the state can’t grow anything, it can’t even create wealth. I don’t believe I even need to go into the fact that the state doles our resources to its cronies and thus the middle class will never have a crack of getting those resources.

Hanauer appears to be on the right track and may eventually learn this fact and finally rid himself of the economic fallacy that taxation of any kind is desirable. He is correct that giving tax breaks and other state benefits to the wealthy isn’t the key to creating a solid economy but he is incorrect that taxing the wealthy is a good solution. Eliminating the state’s involvement in all economic matters is the way to achieve economic prosperity. Unfortunately that idea will probably never be spread by TED if they’re not even willing to spread Hanauer’s idea.

Self-Interest

I spend a great deal of my time writing posts talking about the benefits of capitalism. My primary goals in doing so are to explain why there is no need for a coercive state and to couter all the socialists out there that claim capitalism is some kind of evil blight upon the Earth. Capitalism is a workable solution because it relies on the self-interest of individuals whereas socialism relies on the altruism of individuals. Unfortunately for the socialists altruism isn’t a common human trait, even apparently altruistic acts are usually ones of self-interest.

The Mises Institute website has a good article titled Another Case of the Anticapitalistic Mentality It’s a criticism of Michael Sandel’s book What Money Can’t Buy: The Moral Limits of Markets. In it Sandel makes several common socialist claims against the free market, basically claiming the introduction of money into a situation somehow corrupts it. An excerpt from the book that was discussed in the article deals with blood donations:

The answer [to Arrow’s objection] is that commercializing blood changes the meaning of donating it. For consider: in a world where blood is routinely bought and sold, is donating a pint of blood at your local Red Cross still an act of generosity? Or is it an unfair labor practice that deprives needy persons of gainful employment selling their blood? (p. 126)

This is a common criticism of the free market by those who oppose the idea of capitalism. Somehow receiving compensation for donations changes the meaning and that change of meaning is undesirable. What these people fail to realize is that gifting blood is no more altruistic than selling it. I know that’s a pretty bold claim but bear with me.

Throughout most of your life you’ve been taught that it’s better to give than receive, that sharing is caring, and that the highest honor one can attain is sacrificing self for another. It’s beat into us that giving is the ultimate act of good. Therefore, societally speaking, we can achieve the most recognition and congratulations by giving something to another. What do people generally want in life? Acceptance and recognition by their fellow man.

Of course everybody believes they are above that. They want no recognition from society, they merely want to help somebody in need because that person is in need. We still return to the fact that acts performed to help another without any expectation of recognition are acts performed in self-interest. Humans act to alleviate discomfort. Everything we do ultimate derives from discomfort. If we were entirely comfortable, if all our needs were met and we were entirely content, we would not act. To alleviate the discomfort of hunger we eat, of bordom we read or socialize, of sickness we take medication, etc. Empathy, being able to share the feeling of others, causes discomfort. When you see somebody suffering and you are able to emphasize the feelings you experience are discomforting so you move to alleviate the sufferer’s discomfort to alleviate your own. Seeing a beggar on the street can stir different emotions in people. Some will think about the hungry state of the beggar and through their empathy they will be discomforted and desire to help that person. Others will experience guilt, one of the most discomforting feelings humans can experience, for having more than the beggar and move to alleviate their discomfort by giving money to the beggar. We seek to relieve our own discomfort by relieving another’s.

Whether it is to gain societal recognition or to alleviate discomfort caused by empathy, acts of altruism are performed in self-interest. Socialists will often claim that self-interest is evil and that relying on self-interest is what causes all problems for humanity. Self-interest isn’t good or evil, it’s merely the nature of all living creatures. Working entirely in self-interest at the cost of others isn’t good for society but humans have developed empathy that balances the scale of self-interest vs. society. There are those who lack empathy and do things that most of us find deplorable but the majority of us have some ability to empathize (and society ostracization of those without is often enough to prevent them from harming others). I don’t think society would work if a vast majority of people were without empathy. Hell, societies themselves are built upon self-interest. Humans are generally social creatures and desire to be around other humans and we also wish to take advantage of dividing labor.

The bottom line is humans act based on self-interest. Whether that self-interest comes from compensation, social recognition, or to alleviate our own discomfort is irrelevant. I would argue that there is no altruism, at least not the type socialists generally advocate. The idea that acts performed out of self-interest instead of altruism are somehow dirty or evil is absurd because that would mean all acts are dirty or evil. We need to get away from the idea that self-interest is undesirable.

An obvious criticism by those who oppose acts of self-interest is that advocating people act in self-interest will justify acts of self-interest at the expense of others. Fortunately acting in self-interest at the expense of others isn’t a common desire for humans so we needn’t worry heavily about such issues. Think about the vast amount justifications most people have to make in order to overcome their internal feelings against harming others in order to harm others. People have to convince themselves that acts harmful to others are for some kind of “greater good” or that the person they’re harming is bad in some way. When somebody smashes the window of a bank they justify the action to themselves by claiming the bank owners are evil. When somebody murders another they often justify the act by claiming their victim was evil. When politicians rob from people they claim it’s for the greater good. We spend great deals of time twisting our beliefs so that we can justify acts that are harmful to others because human nature is to do the opposite, we desire to help each other because seeing suffering in others causes discomfort to ourselves.

Still we’ve developed safeties against those who would harm others. Self-defense comes in physical and societal forms. If somebody attacks you you flee or fight back. If somebody steals from you you either take your property back or seek compensation through the legal system. We’ve attempted to make acting in self-interest at the expense of others costly so that it’s no longer in one’s self-interest to act at the expense of another.

Capitalism works because it relies on our inherit self-interest while socialism has failed time and time again because it relies on altruism. Implementing a system that requires us to oppose our very nature is destined to fail. Trying to regulate the free market by restricting what can and can’t be sold can never work. If there is a market it will be fulfilled, if not by the regulated market then it will be by the black market.

Those Evil Capitalists

That evil capitalist company Apple has really gone and done it this time:

Apple Inc and its key supplier Foxconn Technology Group will share the initial costs of improving labor conditions at the Chinese factories that assemble iPhones and iPads, Foxconn’s top executive said on Thursday.

Foxconn chief Terry Gou did not give a figure for the costs, but the group has been spending heavily to fight a perception its vast plants in China are sweatshops with poor conditions for its million-strong labor force. It regards the criticism as unfair.

“We’ve discovered that this (improving factory conditions) is not a cost. It is a competitive strength,” Gou told reporters on Thursday after the ground-breaking ceremony for a new China headquarters in Shanghai.

“I believe Apple sees this as a competitive strength along with us, and so we will split the initial costs.”

Apple is going to foot a portion of the costs required to improve the working conditions at Foxconn. While I point to this as a demonstration of capitalism others are quick to point out that Apple is only doing this out of self-interest. These people claim the only reason Apple is working to improve the conditions at Foxconn is to improve their image in the eyes of the world. And you know what? Those people are right.

One of the primary differences between capitalism and socialism is that capitalism relies on individuals’ self-interest while socialism relies on individuals’ altruism. In general humans are like any other animal, we’re interested in what’s best for us. What advocates of socialism miss is the fact that self-interest, in a society, usually means mutual benefit. Apple is the perfect case. Their customers have been noting their unhappiness with the conditions at Foxconn so Apple has moved to improve its image by improving the working conditions at Foxconn. Unhappy customers often aren’t repeat customers and when you’re a business you want as many repeat customers as you can get.

Ludwig von Mises defined the action axiom as, “purposeful behavior. Or we may say: Action is will put into operation and transformed into an agency, is aiming at ends and goals, is the ego’s meaningful response to stimuli and to the conditions of its environment, is a person’s conscious adjustment to the state of the universe that determines his life. Such paraphrases may clarify the definition given and prevent possible misinterpretations. But the definition itself is adequate and does not need complement of commentary.” Humans act to alleviate discomfort. When you’re hungry you eat, when you’re thirsty you drink, when you need to tell the time you buy a wristwatch, when your neighbor’s plight causes you unease you help them, etc. In the case of a business man action often comes from making his customers happier. His customers’ needs is the motivating factor in providing goods and services because it is through the providing of those goods and services that the business man is able to enrich himself.

Don’t think of an act performed out of self-interested as bad because all acts are ultimately performed out of self-interest. Self-interest can be a bad thing when one chooses force to attain their goals but when one chooses the easier way, the way of trade, self-interest becomes a beautiful thing that improves the lives of all involved.

The Result of Attempting to Control the Economy

France is famous for Paris, wine, and interfering with business. If you wanted to start a business in France I would call you insane because the French government will punish you for daring to bring a little prosperity to their country. Some of the laws France has on the books are downright stupid but it’s good to see business owners have found ways around them:

Here’s a curious fact about the French economy: The country has 2.4 times as many companies with 49 employees as with 50. What difference does one employee make? Plenty, according to the French labor code. Once a company has at least 50 employees inside France, management must create three worker councils, introduce profit sharing, and submit restructuring plans to the councils if the company decides to fire workers for economic reasons.

French businesspeople often skirt these restraints by creating new companies rather than expanding existing ones. “I can’t tell you how many times when I was Minister I’d meet an entrepreneur who would tell me about his companies,” Thierry Breton, chief executive officer of consulting firm Atos and Minister of Finance from 2005 to 2007, said at a Paris conference on April 4. “I’d ask, ‘Why companies?’ He’d say, ‘Oh, I have several so that I can keep [the workforce] under 50.’ We have to review our labor code.”

If you’re a business owner and hire more than 50 employees you’re suddenly in for a world of hurt. Thankfully France hasn’t made it illegal for individuals to own more than one company although I’m sure such a law will be in the works soon since these “exploits” are being brought to life. Such a ban would be entirely pointless since business owners would find another way around the new law but it makes entrepreneurs less willing to start new businesses and therefore the economy continues to suffer greatly.

My Predictions for France

France, like the rest of the world, is facing economic ruin. The government has been doling out money so long that they’ve racked up a debt they can never hope to pay off and unemployment continues to creep up. To solve this problem the French have elected a socialist.

Think about that.

Due to economic failures the French elected a socialist. That’s like having a convicted repeat child molester babysit your children. Either way the new president of France, Francois Hollande, is calling for a 75 percent tax rate on those who earn more than 1 million euros a year:

“Above 1m euros [£847,000; $1.3m], the tax rate should be 75% because it’s not possible to have that level of income,” he said.

[…]

Mr Hollande himself renewed his call on Tuesday, saying the 75% rate on people earning more than one million euros a year was “a patriotic act”.

“It’s a signal that has been sent, a message of social cohesion, there is an effort to be made,” he explained.

“It is patriotic to agree to pay a supplementary tax to get the country back on its feet.”

Did you get that? It’s patriotic to have 75 percent of your wealth stolen! This idea isn’t going to fly as history has demonstrated. What most people who demand the rich be taxed don’t stop to consider is that the rich are wealthy enough to leave a country at will. The United States doesn’t have anywhere near a 75 percent income tax and many wealthy individuals are still renouncing their citizenships over the high taxation:

This year almost 1,800 people renounced their American citizenship and Green Cards as published in the Federal Register, thanks to a costly and timely tax requirement.

So here are my predictions for France, most of which are torn from the pages of Pictures of a Socialistic Future [PDF] (a great book written in the 1800s that successfully predicted what conditions in socialist countries would be like).

Upon the 75 percent tax rate becoming law many of the wealthiest in France are going to abandon the country and renounce their citizenships. After enough people start fleeing France the government will implement Soviet-esque border controls and prevent those with means from leaving unless they leave something behind as a hostage collateral. From there things will only get more draconian since the massively jacked up tax rate won’t actually improve economic conditions but will do quite the opposite. Not wanting to face the prospects of being successful people in France will cease any attempt at real entrepreneurship or turn entirely to the black market. As a last resort France may turn to issuing their own money again, which will be printed so fast hyperinflation will be guaranteed.

Basically France is fucked if they continue down their current economic road.

Butt Hurt Krugman

Paul Krugman is a little butt hurt after his debate with Ron Paul and has taken a little time to blog about it:

Think about it: you approach what is, in the end, a somewhat technical subject in a format in which no data can be presented, in which there’s no opportunity to check facts (everything Paul said about growth after World War II was wrong, but who will ever call him on it?).

Notice that Krugman is complaining about the useless nature of face-to-face debates because it doesn’t give the debaters an opportunity to present data or perform fact checking. I’ve seen plenty of debates between people who have presented a great deal of data to back their claims and given citations for their sources so people can check what they’ve said afterwards but I’m going to give Krugman this point for one reason… he shoots himself in the foot.

First he complains about his inability to present data or verify facts presented by Ron Paul then he states what Ron Paul said about growth after World War II was false but doesn’t actually provide any proof of his statement. It’s a damned blog post Krugman, you have plenty of opportunity to make your argument and present your facts since you’re not under the pressure of an opposing debater. If you’re going to complain about face-to-face debates because they don’t give an opportunity to check facts then criticize the person you debated you should actually present some data that backs your statement. You have a platform to make your argument and you totally blow it.

If Ron Paul got on TV and said “Gah gah goo goo debasement! theft!” — which is a rough summary of what he actually did say — his supporters would say that he won the debate hands down; I don’t think my supporters are quite the same, but opinions may differ.

Actually, if you watch the debate, Ron Paul was a little more elegant than “Gah gah goo goo debasement! theft!” Once again I will point out that Krugman has plenty of opportunity to backup his statement on his blog article but totally ignores it. I also like the fact that Krugman believes his supporters are different than Ron Paul’s supporters as far as reactionary positions are concerned. I guess Krugman loves a little conformational bias in his statements.

So why did I do it? Because I’m trying to publicize my book, which does have lots of data and facts — but those data and facts don’t matter unless I get enough people to read it.

I’ll give Krugman a point for honesty and admitting he just did the debate to publicize his book but take away points for failing to publicize his book. A debate would have been the perfect place to cite his new book for arguments. He could have said, “As I’ve written in my new book your statement about growth after World War II is false. You see…” and he could have presented his argument from there.

Krugman basically entered a debate to publicize his book, failed to publicize his book, failed to make any valid points during his discussion and then proceded to write a blog post about how pointless debates are without actually taking an opportunity to demonstrate his argument by presenting facts to backup his claims. I think this guy is the poster child for the meaningless nature of Nobel Prizes (which Krugman won one of in the field of economics).

Smashing Windows isn’t Justifiable Regardless of Property Rights

One of the core differences between libertarian philosophies and socialist philosophies has to deal with property rights. Namely libertarianism recognizes private property while socialism does not. This difference leads to a massive schism between the two philosophies that extends beyond simple disagreement. When socialist anarchists protest there are often shards of broken glass in their wake, which has lead many to believe anarchists just like breaking shit. The truth is more complicated and has to do with a complete lack of recognizing property rights and holding the belief that all forms of hierarchy are violent. First I want to address the reason socialist anarchists find the smashing of windows acceptable and then I want to present an argument against smashing windows outside of recognizing property rights.

If you’re ever looking for comments from socialist anarchists you can always rely on /r/anarchism on Reddit. I think this comment by 2paradoxes sums up the philosophy concisely:

But in principal, a window does not have some intrinsic right to not be smashed. If I bought a window and smashed it in my backyard, you would not accuse me of window abuse. So window smashing is not wrong in and of itself (this should come as a shock to no one)

As anarchists, property is not our thing (I’m assuming that’s your opinion, it’s the prevailing one around here). So it doesn’t make sense to say that breaking a window is property damage so it’s wrong.

Yet I do agree that window smashing can be wrong. I would say it is only wrong to the extent that it causes harm. Harm to a person. People have rights, windows don’t have rights. Break a window on a house and someone freezes, you have committed murder. Break a window in the front of a bank, they have to close down for a day and I lose zero sleep over it. banks actively harm people, and if you need to break some glass to stop it more power to you.

Since windows themselves lack rights and they don’t believe in property rights the smashing of windows is justified. The only time some socialist anarchists believe breaking a windows is wrong is when it physically harms another person. Personally I find such justification extremely convoluted. I’m sure you’re familiar with the phrase, “This is why we can’t have nice things.” If nobody recognizes property rights in any form (either collective or private) you really can’t have nice things because they will be destroyed.

Property rights, ultimately, are an attempt at creating a peaceful system to divide scarce resources. Reality is harsh and dictates that two people cannot use the same thing at the same time. Furthermore many things are one-time use such as food and water. Private property divides resources amongst individuals while communal property rights divide resources based on the whims of a community (they may be divided based on votes for example). A problem arrises when a proponent of communal property doesn’t recognize private property. In a case where an individual lays claim of ownership over a windows somebody who doesn’t recognize private property will smash it and claim their action was justified because of their lack of recognizing private property. This brings us to another fact, all forms of property rights are ultimately backed with the threat of violence.

Property rights only serve their purpose if they are recognized. When the system breaks down then the only option to continue protesting property is through force. Followers of the non-aggression principle state a violation of one’s property right is an initiation of violence and thus defending property is an act of self-defense. Under private property rights I have a right to use force to prevent you from burning down my home. Communal property is not different. Let’s say we have a cooperative where each worker owns an equal share of the business and somebody decides they are going to burn the business to the ground. What are the workers to do? They can either watch their business go up in flames or they can use force to prevent the individual from burning their business down. Opponents of private property are always quick to claim that private property can only be maintained through violence but the same is true of communal property rights.

If property rights are not recognized or backed up with the threat of violence then there is no point in having anything. Who is going to build a store if they know it’s going to be burned to the ground by a random thug? Let’s say somebody does build a store, what happens when the random thug shows up and the owner is unable to justly defend the store? Based on the statement I linked to above the thug would not be committing an act of violence so long as the store owner wasn’t physically harmed. Economically this leads to complete breakdown.

Economics when boiled down is nothing more than the study of human interaction, namely as it relates to cooperation. Whether you live in a capitalist society or a socialism society cooperation occurs. In a capitalist society that cooperation is based self-interest where both parties enter a transaction because they feel they will come out ahead. If you want bread but have eggs and your neighbor wants eggs but has bread you can trade eggs for bread so each person has what they want. Socialism is based on alturism. If your neighbor wants eggs and you have eggs you give him the eggs. No matter how you look at it these transactions breakdown entirely if you have no recognition of property rights.

Let’s assume you want to bake bread. You’ll gather the raw ingredients and equipment needed for the baking process then you’ll put the ingredients together and bake them. If you’re exceedingly good at baking bread you may decide to give some of your bread to others either in exchange for other goods or out of pure altruism… unless your ownership of the ingredients of equipment are not recognized. Would you tell people you have the raw ingredients and equipment needed to bake bread if it means they would simply be taken from you? Let’s expand on this idea, would you bother building a home or store if it was just going to be destroyed? In both cases the majority are likely to answer in the negative. At this point we end up having a complete breakdown in society. There is no longer any reason to come together with other people since any interaction with another is likely to lead to your stuff being taken or destroyed. Humans came together in societies to take advantage of division of labor. Hunting a wooly mammoth and carrying back to your cave is much easier when you have help after all.

Of course I’ve ignored the “harming others” aspect mentioned by the linked comment. Harm can be very subjective and thus actions of theft or destruction can be easily justified as not harmful. In the case of the bread maker above one could say stealing his raw ingredients and equipment wasn’t harmful because he also has potatoes growing and thus can eat. Burning a home to the ground can be justified as not harming the home owner if he has a tent or other source of shelter. It’s trivial to make justifications based solely on whether or not an action harmed a person or not. That leads to a subjective system and subjective systems lack stability of any sort. Once again somebody is unlikely to build a store even if they know it won’t be burned down now if the rules are entirely subjective. Just because the store won’t be burned down now doesn’t mean the rules won’t subjectively change later after all.

Returning to the beginning of this post smashing windows isn’t good for anybody either. Socialists are often proponents of workers seizing the means of production from capitalists. If you smash a bunch of windows in a capitalist owned factory the workers will have to replace them if they take control. Many socialist anarchists also believe and complete abolition of money and therefore believe banks cannot legitimately exist. For the sake of argument let’s assume a society free of money rises from the ashes of a worker revolution, what will happen to the unneeded bank? A smart society would repurpose it. Banks are merely buildings and like any building they can be used for things other than being banks. Perhaps a group of workers want to open a bicycle repair shop, if the bank is now unoccupied it would make a perfect place for the operation. Yet if the windows are smashed the workers will have to replace them before doing business. Ultimately smashing windows isn’t good for anybody because they must be replaced. This is why Frédéric Bastiat developed the broken window fallacy.

Destruction of in-use products of labor isn’t productive because those products will need to be replaced. If you’re trying to bring on the workers’ revolution then you must realize any windows you break will have to be replaced and if the capitalist that owns the window doesn’t do it then the workers will have to do it after they’ve seized control. Even if you don’t recognize private property rights smashing windows must be recognized as a negative action because labor must be expended to replace the window, labor that could have been more productively used elsewhere. It’s a net loss to the store owner and society as Bastiat pointed out. Sure, you may have robbed a capitalist of one window. Since the capitalist has to expend resources to replace that window he can no longer use those resources to buy food at the local cooperative (and many capitalist do shop at cooperatives). Effectively money has been robbed from the worker/owners of the cooperative who are usually held as the darling children of socialist movements.

It’s a no-win situation that can only be justified by short sightedness.

Ron Paul vs. Paul Krugman

Bloomberg held a short economic debate between Ron Paul and Paul Krugman. OK, calling it a debate is a stretch, it was more like a slaughter with Ron Paul absolutely devastating Paul “we need more inflation” Krugman:

You know what? I almost felt bad for Krugman. Honestly, he seems like a nice enough guy and I do believe he actually does care about people. It’s unfortunate that he’s such an idiot when it comes to economic matter and it’s even more unfortunate that people take him seriously on economic matters.

Also, good on Ron Paul pleading his allegiance to the Republican Party if Romney gets the nomination. I know a lot of people will criticize Ron Paul refusing to be a good little obedient dog to the Republican Party but I give him a great deal of respect for standing by his principles. His competition is a violent psychopath who wants to reign over the American people and denizens of foreign lands. I won’t support such violence and it’s good to hear Ron Paul say he won’t either.

Government Monopolies are Malinvestments

Since the turn of the century it has become common practice for the state to use its monopoly on force to expand its monopoly on natural resources. Canada and Norway both maintain a monopoly on minerals through state ownership of extraction companies and required licensing for any extraction by third-parties. Even the State of Minnesota has maintained mineral rights on most property sold after the state of the 20th century. Unfortunately the state, lacking the market feedback system, is unable to extract resources efficiently and usually squander any monetary gains from resource extraction on nonproductive uses such as expanding bureaucracy, maintaining a powerful military, and giving handouts to cronies. In fact many countries with abundant natural resources end up in worse positions than countries without such resources, a happening so common the term resource curse was coined to describe it.

Peru is a perfect example of this. During the 1840s an island off of Peru was discovered than held a great deal of guano:

In 1839, Peru was a devastated nation. Debt and destruction in the aftermath of both the War of the Confederation (1836–1839) and the War of Independence (1822–1825), a crushing debt default in 1826, and several hundred years as a Spanish colony had left its economy small and craft dominated, without even a banking system.

But in the early 1840s, explorers made an exciting discovery. Due to an uncharacteristic lack of rainfall and the unique variety of birds nesting there, Peru’s Chincha Islands were found to be covered by mountains of bird excrement several hundred feet high in places, which had accumulated over many centuries. They were thought to be the most enormous guano deposits in the world — and of a particularly high quality — at a time when guano was used worldwide for fertilizer. So, out of nowhere, a valuable natural resource was found, one which promised — if managed properly — to produce wealth that could “stagger the dreams of Oriental imagination,” possibly ushering in a new era of development and progress.

At the time guano was almost like gold since it was used by almost everybody as fertilizer. Guano was so valuable that the United States passed the Guano Islands Act:

Whenever any citizen of the United States discovers a deposit of guano on any island, rock, or key, not within the lawful jurisdiction of any other Government, and not occupied by the citizens of any other Government, and takes peaceable possession thereof, and occupies the same, such island, rock, or key may, at the discretion of the President, be considered as appertaining to the United States.

The act was used by the United States to lay claim to some 100 islands, so this wasn’t a law used sparingly to claim one or two islands. Needless to say with guano being such a valuable resource at the time the Peruvian government decided to law monopoly claim to their newly discovered treasure trove. Money made from selling the guano was used as money obtained by a state is usually used, for mostly frivolous projects:

Public works and private prebends remade the city … with stately museums, parks, plazas, academies, boulevards, mansions, and theaters, not to mention the latest in potable water systems and Italian opera. Imports — everything from workaday textiles to lavish accessories and vintage French wines [arrived in the city].

Since the state doesn’t have to concern itself with market feedback it is always apt to dump great deals of money into unwanted projects. How useful is a museum, mansion, or theater in a country where a majority of the population live in poverty? No very useful, which is noted by the fact no entrepreneur invested money in any of those enterprises. Unfortunately the more of those things a country has the longer its political dick is and countries love political dick measure competitions.

As these investments never return any profit they lead to economic ruin. We see this in the United States today with all the spending on Medicare, Medicaid, offense defense, bailouts, etc. have failed to return any profit and are leading to the slow collapse of our sham economy. When you keep dumping money into failed enterprises the only possible outcome is total failure, something Peru experienced when that state’s meddling in the guano market lead to other sources of fertilizer being sought out. At some point all resources become more expensive than people are willing to pay and at those times alternatives are researched by individuals wanting a piece of the pie from currently disgruntled consumers. When you can pay $5.00 for a pound of fertilizer or $50.00 for a pound of fertilize the choice of which one to choose becomes obvious:

The European crisis hammered the Peruvian economy in two ways: first, because the Peruvian government had incrementally (and with disregard for competitive substitutions) increased guano prices so much, stricken farmers turned to other, lower-priced fertilizers; demand for shipments from the Chincha Islands dried up. Second, with London money and commodity markets frozen, lenders had little appetite for extending additional credit to once-again-debt-encumbered Peru.

Peru’s gravy train came to a screeching halt. All of the sudden the worthless investments being made by the state became impossible to continue as money was drying up. What’s a state to do in such a situation? The only thing a state knows how to do, use violence in an attempt to maintain its monopoly:

In response to the economic crisis, in 1875, Pardo — now president of Peru — ordered the military to seize the southern nitrate fields on the border with Chile in an effort to offset the decline of the guano business with another source of fertilizer revenues. Even though the state hastily expropriated land and facilities from private investors, it was too little too late. Work on the railroad projects halted in August of 1875. Over the next few months, a variety of other government projects defaulted amid a widening financial contagion culminating in January 1876, as Peru defaulted on its sovereign debt for the second time in a century: mountains of loans from European banks in stark juxtaposition against diminished avian dung heaps.

This should be a familiar formula for anybody who pays attention to foreign affairs. Saddam Hussein ordered the invasion of Kuwait because their cheap oil flooded the market and challenge Iraq’s primary source of income. The United States has a history of invading or otherwise intervening in countries with vast natural resources including Iran, Iraq, Afghanistan. In fact the British and United States lead overthrow of the Iranian government in 1953 happened shortly after the country nationalized its oil resources (which was previously controlled by Anglo-Iranian Oil Company, a British owned company). Peru demonstrates such tactics are nothing new, the state has a long history of military invasions to seize natural resources.

Meanwhile the free market allows for peaceful distribution of natural resources to productive uses, since entities that invest resources into unproductive uses face insolvency in a hurry. On top of that the threat of insolvency prevents private entities from squandering resources on massive frivolous endeavors. The state, being free of market feedback, has no such worries and thus ends up dumping massive amounts of money into enriching itself:

In hindsight, “guano … proved a great ‘lost opportunity’ for [Peruvian] development … [as] state investments stymied possibilities for national entrepreneurs, diversification, and gains in domestic productivity.” In roughly four decades, under the supervision and at the direction of the government, between 11 and 12 million tons of excrement fertilizer were shipped, earning $500 million in revenues. (Another estimate holds the number at more than 20 million tons shipped and $2 billion in revenue.) But in the end, 53 percent of all of the guano revenue was spent on expanding the bureaucracy and the military, 12 percent on direct transfer payments, and 7 percent on reducing tributary impositions. Twenty percent had been spent on railroads.

Peru’s politicians spent 53 percent of all guano revenues on enriching themselves, creating more dependency on the state, and enhancing the military so they could steal other country’s stuff. None of these things are valuable for anybody besides the state and its cronies. That’s what states do and we should keep it in mind. It doesn’t matter where the money comes from either. Whether the state gets money from a monopoly on resources, taxation, or tariffs it will be spent mostly on worthless things. If we listen to those demanding the rich be taxed heavier where do you think that additional money will go? It won’t be Medicare, Medicaid, or Social Security; it’ll go to funding the military, hiring more government employees, and lining the pockets of state cronies.

When the state gets money it’s lose/lose unless you’re tied to the state. This is because any money obtained by the state is stolen. In the case of Peru’s claim of the guano filled island the property was stolen from individuals who could have put the guano to productive uses in the free market.