Too little consumer spending?

A common fallacy, fostered directly by the net-income ap­proach, holds that the important category of expenditures in the production system is consumers’ spending. Many writers have gone so far as to relate business prosperity directly to consumers’ spending, and depressions of business to declines in consumers’ spending. “Business cycle” considerations will be deferred to later chapters, but it is clear that there is little or no relationship between prosperity and consumers’ spending; indeed almost the reverse is true. For business prosperity, the important considera­tion is the price spreads between the various stages—i.e., the rate of interest return earned. It is this rate of interest that induces capitalists to save and invest present goods in productive factors. The rate of interest, as we have been demonstrating, is set by the configurations of the time preferences of individuals in the society. It is not the total quantity of money spent on consump­tion that is relevant to capitalists’ returns, but the margins, the spreads, between the product prices and the sum of factor prices at the various stages—spreads which tend to be proportionately equal throughout the economy.

...says Rothbard in Man, Economy and State (chapter 6). Those (economists) who focus on "consumer spending" (or spending in general) as an indication of the health of the economy are missing the point.

Function and income of the capitalist

Thus, capitalists advance present goods to owners of factors in return for future goods; then, later, they sell the goods which have matured to become present or less distantly future goods in ex­change for present goods (money). They have advanced present goods to owners of factors and, in return, wait while these factors, which are future goods, are transformed into goods that are more nearly present than before. The capitalists’ function is thus a time function, and their income is precisely an income represent­ing the agio of present as compared to future goods. This interest income, then, is not derived from the concrete, heterogeneous capital goods, but from the generalized investment of time. It comes from a willingness to sacrifice present goods for the pur­chase of future goods (the factor services). As a result of the pur­chases, the owners of factors obtain their money in the present for a product that matures only in the future.

... says Rothbard in Man, Economy and State (chapter 6). This truth has been bent and manipulated by many. The socialist propaganda says that the capitalist is exploiting the worker, because the capitalist "only" pays his workers e.g. 95% of the sales revenue and pockets 5% himself. The fact, however, is that the capitalist is paying the worker from his own savings, so that the worker can carry out consumption immediately after work, while the capitalist has to wait until the product is sold at a later time. The "fee" for this waiting is the income of the capitalist.

Price determines costs

Factor payments are the result of sales to consumers and do not determine the latter in advance. Costs of production, then, are at the mercy of final price, and not the other way around.

... says Rothbard in Man, Economy and State (chapter 5). This important economic fact is mostly misunderstood by economists and the public in general. Most people think that prices are determined by costs of production (and I do admit, that this sounds logical). This is not true. Rothbard explains that in detail. So be aware!

Capitalists and income

If the owners of land and labor factors receive all the income (e.g., 100 ounces) when they own the product jointly, why do their owners consent to sell their services for a total of five ounces less than their “full worth”? Is this not some form of “exploitation” by the capitalists? The answer again is that the capitalists do not earn income from their possession of capital goods or because capital goods generate any sort of monetary income. The capi­talists earn income in their capacity as purchasers of future goods in exchange for supplying present goods to owners of factors. It is this time element, the result of the various individuals’ time preferences, and not the alleged independent productivity of capital goods, from which the interest rate and interest income arise.

...says Rothbard, in Man, Economy and State (chapter 5). This is a very useful quote since it addresses the whole socialist-agenda of "capitalist exploitation" of workers. Are workers getting less than they deserve if they, combined, earn less than the price paid for the products they worked on and made? No. Why not? See above quotation.

That which is not 'for sale'

There are many possible examples of grading exchangeable and nonexchangeable goods on one’s value scale. Suppose that a man owns a piece of land containing an historic monument, which he prizes on aesthetic grounds. Suppose also that he has an offer for sale of the property for a certain sum of money, knowing that the purchaser intends to destroy the monument and use it for other purposes. To decide whether or not to sell the property, he must weigh the value to him of keeping the monument in­tact as against the value to him of the consumers’ goods that he could eventually buy with the money. Which will take precedence depends on the constitution of the individual’s value scale at that particular time. But it is evident that a greater abundance of consumers’ goods already at his disposal will tend to raise the value of the (unexchangeable) aesthetic good to him as compared with the given sum of money. Contrary, therefore, to the com­mon accusation that the establishment of a money economy tends to lead men to slight the importance of nonexchangeable goods, the effect is precisely the reverse. A destitute person is far less likely to prefer the nonexchangeable to the exchangeable than one whose “standard of living” in terms of the latter is high.

..says Rothbard in Man, Economy and State (chapter 3). And how true! Who cared about things of beauty or historical significance when everyone was poor? It is only when the people become rich that they can afford to preserve, protect and preserve things of beauty and historical significance (as judged by someone). So do you want preserve the wildlife in Africa or the Buddha-statues in the Middle-East? Then preach capitalism for those regions!

Market failure or lack of understanding?

Once one chases down the rabbit trails of "utility maximization" and the esoteric notions of "market failure," it is doubtful that one is going to understand simple opportunity cost.

Exactly! More on this here: Krugman's Straw-Man Market System. Do you want to learn about economics? Then don't study economics in school.

Environmental scare tactics

It is important to recognize the behavioral pattern of governments, NGOs, and scientists by looking at similar scares, such as acid rain, Y2K, mad-cow disease, H1N1, and now climate change and terrorism. Fear and guilt are the usual tools used to rob citizens of their liberty and money. These scares foster the centralized masterminding of our choices and allow ever-greater transfers of power and wealth toward the government.

The Ozone Scare: A Retrospective - a valuable reminder of the tactics of the environmental movement (not to be confused with people actually concerned about the environment, without a socialist agenda).

The 'inevitability' of planning

The movement for planning owes its present strength largely to the fact that, while planning is in the main still an ambition, it unites almost all the single-minded idealists, all the men and women who have devoted their lives to a single task. The hopes they place in planning, however, are not the result of a comprehensive view of society, but rather of a very limited view, and often the result of a great exaggeration of the importance of the ends they place foremost.

..says Hayek, in Chapter 4 in his great classic, The Road to Serfdom. And how true!

Health experts want the State to "plan" cigarettes out of society of law-abiding citizens. Architects want cities demolished and rebuilt after their drawings (Icelandic example). Farmers demand State protection and subsidies to protect their current way of life and keep harsh competition away. Economists preach the need for powerful State central banks and data gathering institutions so they can play with interest rates (the price of money) and see how the real life reacts compared to sophisticated computer models.

The list is endless. Everywhere, "experts" and "specialists" in various studies talk about the need for some great State plan on their favorite subject, with themselves in control (of course). The inevitable result: A central command economy of some sort. Is that what we want?

Market Prices Versus “Make It So”

The free market is not an ideology or a creed or something we’re supposed to take on faith, it’s a measurement. It’s a bathroom scale. I may hate what I see when I step on the bathroom scale, but I can’t pass a law saying I weigh 160 pounds. Authoritarian governments think they can pass that law—a law to change the measurement of things.

Quote taken from here (which took it from here). And how true it is!

Liberty, Freedom or just plain Tolerance?

Says Hayek in Road to Serfdom (page 14):

"Freedom" and "liberty" are now words so worn with use and abuse that one must hesitate to employ them to express the ideals for which they stood during that period [the Renaissance]. Tolerance is, perhaps, the only word which still preserves the full meaning of the principle which during the whole of this period was in the ascendant and which only in recent times has again been in decline, to disapper completely with the rise of the totalitarian state.

Perhaps something to keep in mind in todays political climate where "freedom" has begun to mean "slavery" and vice versa? Tolerance for the free activities of men is on huge decline. Everywhere, some planner has an idea on how to "revise" the free actions of humans, to obtain some socialist ends (e.g. equal distribution of wealth or equal access of all to the property of few).

Why both fascism and socialism lead to tyranny

Many socialists consider their ideals to be somewhat "just" or "fair", and that they have nothing in common with the terrors of Nazism of Fascism. But there is a strong resemblance. Hayek explains:

"Planning", therefore, is wanted by all those who demand that "production for use" be subsituted for production for profit. But such planning is no less indispensable if the distribution of incomes is to be regulated in a way which to us appears to be the opposite of just. Whether we should wish that more of the good things of this world should go to some racial élite, the Nordic men, or the members of a party or an aristocracy, the methods which we shall have to employ are the same as those which could ensure an equalitarian distribution.

...says Hayek in his Road to Serfdom (pages 34-35 in this edition).

Stimulators vs. Austerians

In a commentary about a month ago, I described how the economic world seemed to be drifting into two opposing camps: the Washington-based "Stimulators," who insist that more government debt is the best means to end the financial crisis, and the Berlin- and London-based "Austerians," who argue that debt is the crisis itself. If recent economic data and currency movements can be considered votes of confidence, then the Stimulators should be sweating. Moreover, these recent signals should provide economic analysts and investors with a road map for the future.

...says Peter Schiff. Something to remember when one "camp" spirals down to an inflationary depression, and the other one maintains and perhaps a little more.

Libertarian suckers?

Says Rothbard in A Stragedy for the Right:

The left-liberal vision, then, of good conservatives is as follows: first, left-liberals, in power, make a Great Leap Forward toward collectivism; then, when, in the course of the political cycle, four or eight years later, conservatives come to power, they of course are horrified at the very idea of repealing anything; they simply slow down the rate of growth of statism, consolidating the previous gains of the Left, and providing a bit of R&R for the next liberal Great Leap Forward. And if you think about it, you will see that this is precisely what every Republican administration has done since the New Deal. Conservatives have readily played the desired Santa Claus role in the liberal vision of history.

I would like to ask: How long are we going to keep being suckers? How long will we keep playing our appointed roles in the scenario of the Left? When are we going to stop playing their game, and start throwing over the table?

Good question! Are libertarians just suckers when it comes to stragedy?

A favorite Rothbard-quote of mine:

If libertarians refuse to hold aloft the banner of the pure principle, of the ultimate goal, who will? The answer is no one, hence another major source of defection from the ranks in recent years has been the erroneous path of opportunism.

More inspiration in The Case for Radical Idealism - an article I strongly recommend for the libertarian who wonders why he isn't being heard.

(Monetary) tragedy of the commons

In our monetary system, property rights in money are not adequately defined or defended, giving rise to inflationary credit expansion. Our fiat fractional-reserve banking system produces a tragedy of the commons, leading to an overexploitation of resources. A typical example of a tragedy of the commons is overfishing in the ocean. As fish swarms are not the property of anyone, the costs of fishing are externalized on all other fishers. If I do not fish as many fishes as fast as I possibly can, my competitor will fish them. Similarly, the property rights in bank deposits are not clearly defined. Banks have the incentive to expand credit and externalize the costs onto society.

Exactly!

The Not So Wild, Wild West

In conclusion, it appears in the absence of formal government, that the Western frontier was not as wild as legend would have us believe. The market did provide protection and arbitration agencies that functioned very effectively, either as a complete replacement for formal government or as a supplement to that government.

says here. Surprising?

The Forgotten Depression of 1920

Do you think government is doing to little to fight the recession/depression? Do you wish for "more stimulus" and "government spending" to revive the economy? Do you think that the Great Depression was won with deficit spending and government programs (such as World War II)?

Think again. Here is the real lesson to be learnt from the history of booms and busts during the Century of Central Banking - the forgotten depression of 1920, where government was shrunken, deflation was allowed to correct the malinvestments of World War I, and the free market was allowed to restore economic order on its own pace (which is pretty fast I might add!).

The Federal Reserve's activity, moreover, was hardly noticeable. As one economic historian puts it, "Despite the severity of the contraction, the Fed did not move to use its powers to turn the money supply around and fight the contraction." By the late summer of 1921, signs of recovery were already visible. The following year, unemployment was back down to 6.7 percent and it was only 2.4 percent by 1923.

So what are we waiting for? Let the free market clean up the mess we are in. The sooner, the better! Or, so says sound economic theory and history in one screaming voice.

So how about some interference?

There are those who say: The free market is not to be left unbound or without regulation and interference. It needs to be "regulated" or "adjusted" to some or this political agenda.

Fair enough. Free individuals and their companies need, apparently, a third party (or fourth or fifth, etc.) to push them in this or that direction for the benefit of something else than freedom, such as consumers, competition, environment, ethic standards, etc. Or so I hear.

But has anyone tried to compare the free market to nature? Nature is a finely tuned mechanism of preys and predators. There are those who are eaten, and those who eat. If those who are eaten are too many, then they eat too much vegetation, starve and die in huge numbers. If those who eat the grass-biters become too many, they will also starve. They will eat too much, kill off their prey, and starve.

In short, a finely tuned mechanism which always seeks a balance, but will never reach it for long. That's nature.

So how about the free market? Those who preach endless interference of the free market are almost without exception those who preach endless laizzes faire when it comes to nature. One system of natural law is to be left alone, but another to be heavily regulated by a huge, all-knowing central government.

Do I smell a lack of coherent thinking?

Taxman - The Beatles animated music video

The Beatles got the point!

Intellectuals and the Death of Capitalism

Intellectuals and the Death of Capitalism

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Destroy all computers!

I have a proposal: Lets destroy all computers of the world! Why? Because this would create an enourmos amount of "jobs", where instead of a single computer hacking away trillions of numbers to find a solution, millions of persons would do the same, using pocket calculators and pieces of paper. Right?

No, wrong. Destroying computers will not create jobs. It will destroy the productivity of all those who work with computers, and by doing so diminishing their value as employees, so that their wages would have to come down (to almost zero).

Today, there are strong voices for "protecting" industries by subsidizing them. Agriculture is a prime example. Farmers are paid by the taxpayer and not the consumer so that their livelihood is not "jeopordized" by competetion from farmers in countries where farming actually pays off. In Iceland, the state pays farmers to grow sheep for a market of 300,000 people because this "protects" the domestic agriculture from sheep growers who work in much better climate. Computers are being destroyed in Iceland in the name of job-protection, so to speak.

What if one day someone would discover the "replicator", a machine which can create food and recycle matter with no effort? Then we would not need a single farmer to grow food. Farmers would go out of business and find other jobs, which actually fulfil consumer demand. Would the European Union allow this device?