Too Big to Bail

I heard on the radio yesterday, the latest in the long spate of “advertisements” which the UK government uses to educate its hapless citizens that leaving their valuables lying around the house in places that are easily observable is generally not a good idea. The general gist of their message can be gleaned from the following:

http://letskeepcrimedown.direct.gov.uk/index.html

Now the reader may be puzzled as to why I mention this scheme. Is it not surely the zenith of libertarian pedantry to be blogging about an issue involving a government scheme as defensible as this? Indeed, I surely do find its aims agreeable, it is surely in individuals’ and society’s interests that their property is not stolen by criminals, and this is one of the rare instances that the state’s interests align with those interests to an extent.

Of course, the reason why the state or government is eager that citizens are not robbed is the same reason a mafia or any protection racket would generally like to “keep the peace”, from other criminals unaffiliated with its organisation; it serves against the mafia’s own interests, perturbing the conditions that allow for its own collection of income to be as maximal and peaceful as possible. However, given that the government is a monopolist of final decision making over its territory, and by necessity its mode of achieving its ends is largely restricted to compulsion via threats of violence; it is hampered from utilising incentives that can only be achieved in a method of governance that could be achieved through voluntary contractual arrangements. The work of Hans Herman Hoppe is great at illustrating this principle of governance through private courts, insurance and defence, in the following essay.

We can illustrate this using the topic of this post as an example. The way in which governments, and therefore their police forces are funded is through taxation and debt financing. This is a system for the provision of security that is rather disconnected from those presumed to be its beneficiaries; the taxpayers. The incentives which allow for the best possible provision of services in a market scenario are considerably weakened, there is little choice and buying power the consumer and receiver of these services can exercise with such a monopoly can exercise. Hence, given the state is really only interested in protecting “vital interests” in preserving law and order, we see that it generally is not able to tackle and convict effectively the criminals that pursue small scale crime. We are expected not to “waste their time”, having paid for services that they cannot sufficiently complete, with the police concentrating mainly on limiting only heinous crimes like murder and victimless crimes like the possession and sale of drugs.

This is without regard to the problems that occur from disputes citizens may have with the state. If the mafia has committed a crime against you, and your only court of appeal comes from a part of the mafia, no sane person would argue that such a trial could be immune from bias, dictating the settlement.

In any case, this “problem” that is the topic of this article, insofar as it is not a consequence of the incompetence of police not being able to catch the criminals that perpetuate small scale robbery, thereby not providing a suitable deterrent to this behaviour; is one of citizens erring in protecting their valuables. This strikes me however, as something that would be a complete non-problem under a system of private governance.

Imagine that your security is not provided by the state, but by an insurance company under which you would be compensated for any damages to your person or property they were not able to prevent or correct. For such a company, providing insurance for those who are reckless with their property in the first place would be immensely damaging to their bottom line. Indeed, companies that did pursue such a policy could be expected to swiftly go out of business. Hence, in addition to providing and warning people with information relating to the risks associated with reckless show boating of their valuables; they would be able to issue a far more effective financial incentive for people to behave in a more responsible way, by charging higher premiums for their less risk averse customers.

This in many ways, could be reasoned to be far more effective in tackling this problem, than pouring money for years and years down a rabbit hole with a  largely ineffective PR scheme.

The state cannot be in principle this effective, since it is not a voluntary entity. People have no choice over who provides their security, policemen are paid largely the same whether they catch criminals or not, and it is completely a lost concept that citizens would ever be redeemed on what property they lost. However, since everyone pays at the same rate for the provision of security, no matter how poor it may be; they would not have the same incentive provided by private system of security since they would be paying the same for security regardless of how careful they are of their property. To the extent they can “free-load” on the security services provided by other taxpayers, people will, and this helps explain why many people in modern society may be less careful in preventing their goods being stolen than they otherwise would be.

I would first of all like to apologise for the relative hiatus in my activity since November, with university course and project work time has been scarce, and even now seems to be getting scarcer. Nevertheless, the important things in life bear repeating, and since we are coming to the close of a year of horrible government interventions in the economy and moreover in violating property rights; it would be worth reflecting before Christmas on a simple truth taught by a great French man over 150 years ago.

This post is adapted from part of an essay I am currently in the process of writing.

Much of academic economics is filled with jargon, difficult to communicate and is itself rather conceptually muddled. Without entering into a discussion of its specific attributes and the reasons for its flaws, it should become fairly clear that the same cannot be said for Bastiat’s simple lesson of the broken window. Indeed try to think how many government interventions in the last year or so resemble the adoption of the simple fallacy in this tale.

Science is united in its use of logic and deductive reasoning. What may differentiate the sciences and characterise them, will of course be the facts and material that are the focus of their investigations, as well as the particular methods used to gain accurate statements across their subject matter. This would not of course mean, and never has meant that any science is necessarily restricted to utilising one form of procedure with which to build its theories.

The nature of logic is formal. Also, despite the intuitive nature of human inference, in the sense it can can correctly be considered a neurological and psychological process; the relation of implication it can grasp between propositions remains objective and formally governed by the principle that an argument based on true premises cannot yield a false conclusion.

It is perhaps an easy mistake to deny the cognitive value of reasoning from false premises. Yet there is scarcely anything more common than to regret and reflect on what could have been, but was not true. This is precisely what allows us to recognise the lesson of Bastiat’s parable of the broken window.

The hapless shopkeeper, who must repair the window broken by his son must enlist the services of a glazier paying him 6 francs. Many would falsely believe that this type of intervention is beneficial, since we are artificially spurring demand for goods and services, causing money to be spent, and flow around the economy. As Bastiat points out, this is rather facile and short sighted. If such an incident did not befall him, our shopkeeper could have spent the money buying shoes from the shoemaker while maintaining his window as part of his real capital. The former scenario on the other hand, ensuring the destruction of capital, is a negative sum game since the glazier gains at the expense of the shopkeeper losing his capital and the unseen shoemaker’s potential profit.

There is no need to artificially “spur” demand, the resources would have been utilised one way or another. All the intervention has achieved is to divert their use towards repairing damage of destroyed capital instead of furthering the consumption or capital investment(Bastiat notes the money could have been spent by the shopkeeper buying books for his library) that could have occurred instead.

Taken to its logical conclusion as an economic program, one could accurately portray the fallacy identified to advise widespread destruction, violent robbery and theft as a means of economic progress. Such is the wisdom of John Maynard Keynes. This is also the unfortunate reality of what is presently considered good economic policy, whether the fashionable buzzwords to mask it are fiscal stimulus, quantitative easing, cash for clunkers or “too big to bail” corporate welfare.

Indeed as the Keynesians seems to miss over and over again, the entire point of economising is not to boost aggregate expenditure or income but to ensure the correct resource utilisation and capital structure to meet consumer demand. With central banks buying government bonds with their counterfeited money, artificially increasing the money supply making money a “cheaper” commodity for bondholders, as well as lowering the interest rate at which banks borrow the counterfeited money from them; market interest rates were artificially lowered, also distorting their connection to consumer time preference and saving.

Their interventions with interest rates for the previous half decade helped distort this structure away, preventing the proper functioning of the price system two-fold.

The artificially lowered interest rates first of all distorted profit and loss, making longer term investment projects in higher order stages of production more attractive.

Subsequently, this artificially raised investment demand for scarce resources toward higher order stages of production, raising to an unsustainable level the prices of these scarce resources. This occurs precisely since increased investment does not coincide with increased savings and lower short term consumption demand from consumers for consumer goods ultimately derived from these scarce resources. As a result, this places inflationary pressures on all related goods, including consumer goods that are derived from these scarce resources, creating the much ignored impoverishment that occurs during the boom phase but is fashionably ignored by most financial commentators. During the housing boom, first time home buyers were more deeply disadvantaged, and many even went into debt further compounding the problem of capital consumption, in order to catch the trend.

With simply an economy of one person,  investing resources for a long term project at a rate that cannot be sustained since he has not reduced his rate of consumption; the error is easy to see, he is consuming his resources at an unsustainable rate. The only difference in our case is the way the mistake is realised. The losses made by businessmen at a later stage, indicate that the funds and capital diverted to long term projects were mal-invested precisely since they were not accompanied by the increased savings of consumers. Since consumer demand never shifted sufficiently away from present consumption, the savings necessary to enable them to purchase the products of these higher order processes were not gathered; losses were the inevitable result.

Yet these losses are the correction process, allowing the structure of prices and interest rates to correctly adjust to reflect the actual scarcity of capital. They are precisely the process that allows for the correct structure and distribution of capital to form; the one that correctly matches consumer demand as far as possible, and precisely for this reason allows for real, sustainable growth and progress.

Yet the same Keynesian economists, interventionist politicians and central bankers that created this problem are also the ones who appoint themselves the task of correcting it. Not only have they slashed interest rates so low they are practically negative, further preventing correction of this coordinating price mechanism, the coordinating function of which they had earlier broken; they also tell us to bail out the failed sectors using the money and capital that is diverted from the healthy parts of the economy, burdening the consumer who is the taxpayer and obligated user of their debased currency even further. They increase spending of course for their own political projects with no regard for what people actually want, since if they actually cared about that they would allow the market economy to function with the profits reflecting what people actually want.

They are nothing more than smiling murderers and robbers in expensive suits. To add insult to injury, those foolish enough to buy their scam think schemes like “Cash for clunkers” will help, when they are destroying capital and creating something worth less as dictated by its value on the market.

The apologist doctrines used to support these programs are of course complicated and convoluted. Yet once one understands the simple truth forwarded by Bastiat’s parable, one is able to pierce through much of this nonsense and see it for what it is. The truth, as is often the case in science has a real simplicity and beauty. Perhaps the reader shall enjoy reflecting on this lesson for a moment while enjoying their holidays.

Merry Christmas everyone.

It is incredible how accustomed we have become to the current state of affairs in the United States. Every major story in the news shows the hand of government reigning supreme with no end in sight. Every day the government continues its massive orchestration of the economic affairs of the US and, to a large extent, the world. The Fed continues to prop up failing banks and financial institutions that are “too big to fail.” With the bailouts come increased authority for the federal government, more burdens on business, and more taxes on individuals. First the Fed causes an artificial boom through its inflationary, cheap-credit policy and then everyone is shocked when everything collapses. And then when everything collapses, the government steps in to bail out the banks at the expense of the taxpayers to avoid the dreaded deflation that naturally should occur. Prices need to fall because there was malinvestment across the entire economy, spurred by false signals caused by poor monetary policy. But the government is operating under a defunct Keynesian economic theory that says that the government needs to step in where individuals won’t in order to prop up prices and bring back the “animal spirits” of the consumer. The upshot is that the government is just doing more of what it did that caused this whole mess in the first place: pumping out trillions of debt (which we don’t have) in an effort to cause  inflation at all costs. It is not at all clear that deflation would be the worst thing. In fact, good economic theory suggests that deflation is THE only cure for the ailing economy. Instead, the government is teetering on the brink of a major fiscal crisis in order to avoid this very cure. None of the stimulus has worked. Can anyone seriously believe that the member of the government are capable of “getting it right?” Are we really to believe that the partial members of government, who are mainly interested in protecting their careers in government and engineering some social agenda that they believe will pay dividends in the future, can get us out of this mess and restore economic prosperity? After all of the childish games play themselves out in the “deliberations” of our elected officials, is it really likely that what will emerge is some sensible and coherent resolution to our problem? New regulations will have more unintended consequences and the liquidity pumped into the system will either fail or cause excessive inflation. Either way, if the stimulus does nothing, which appears to be the case, America will be left with a huge mountain of debt. We cannot suddenly expect the government to come up with the political will to curb its appetite for debt. The only way out is a cataclysmic fiscal crisis unless the government rapidly changes course and finally gives up on the theories it has been operating under.

Just over the past few days we learned about how Nebraskan Senator Nelson’s vote was basically bought in exchange for a promise to divert taxpayer money to the constituents in his state. This should infuriate people! Most votes don’t even want this health care bill and yet the agenda is being pursued aggressively, with the administration using whatever tactics necessary to secure votes. Majority rule itself has theoretical problems. The basic problem with democracy is that there is no guarantee that the will of the majority will reflect virtue and if majority is the law, then it is basically a sanctioned mob. Think about it: if enough people want to vote for some agenda that serves their interests, they can compel everyone else under the force of law to part with their money and property in pursuit of the agenda. This could apply even if only 51% of the country desires the policy! But wait, right now only 32% (or some number close to that) even wants this health care bill! Yet Congress insists on shoving this bill through its “process” in order to ensure that its agenda comes to fruition. There isn’t even democractic representation in this country any more. Nelson’s little ploy sums perfectly the way the government operates. The government is made up of human beings who have spent their lives ambitiously pursuing “careers” serving the “public interest.” In other words, these guys have spent their lives advancing themselves so that they can some day make decisions for everyone else. Not exactly a comforting thought.

It is chilling to see how the worst fears of the framers have become reality. The framers carefully crafted a system of government in which the many factions and interests in the nation will be balanced out through separation of powers and checks and balances so that no one interest can dominate the rest of the population. This is exactly what is happening now. Obama and other members of the government have a dream of putting in place a vast social agenda that will shape the course of this country. With enough strong-arming, they can implement their agenda – of course they need to tax the citizens in order to do it since there is no such thing as the “public sector” in reality. Anything the government does can only be done because of and in spite of the citizens. The US government was intended to be a government of enumerated powers. There is no constitutional basis for most of the functions and powers that the federal government enjoys today. Think about: the basic image of the federal government as it stands right now is so incredibly at odds with the image that the framers had around that the framers would surely revolt if they were alive today. The government controls the monetary affairs of the country through its control of the money supply and is now reaching into the arena of health care and taxing the citizenry in order to do it.

People think you are a quack when you speak of revolt, but ask yourself this: do you think its really such a stretch to suggest that the framers of the Constitution would revolt if they witnessed the overload of government power that is in place today?