The Greedy Capitalist

More lunacy

Kerry's plan to create 10 million jobs -- a plan that Republicans branded yesterday as unworkable and ineffectual -- depends on an array of tax cuts and changes in the tax code. The centerpiece is an end to a tax break enacted in the early 1960s, known as deferral, that allows US companies to delay paying taxes on foreign income so long as those profits are reinvested in those overseas operations. Kerry said this change would strip away an incentive for companies to move jobs abroad and generate about $12 billion annually, which would be used to pay for a 5 percent reduction in the corporate tax rate, from 35 percent to 33.25 percent. Citing IRS studies, campaign advisers contended that 99 percent of US companies would owe less in taxes after these twin changes. The plan also includes a one-year "tax holiday" for corporations that invest foreign revenues into their US operations, proposing to tax those profits at a special 10 percent rate.

Now first of all, economic predictions of this kind are insanely impossible. Second, politicians cannot “create” jobs by the very definition of politics – they can either make it illegal for people to work, or get out of our way so bussinessmen can create wealth. Third, let me get this “recovery plan” straight:

1. American companies are forced to be less competitive by limiting outsourcing.
2. Investment funds dry up as Bush tax cut is repealed.
3. Double-tax American companies for profits they make abroad.
4. (Some miracle)
5. Deficit is gone, so we can decrease taxes one again, making everyone happy.

Is that how it works?

Commie Economics

I've often wondered how socialists can possibly explain away the actual track record of socialist regimes in countries like the USSR, Cuba, and China. Now I know: they were actually capitalist countries all along!

It is widely assumed that capitalism means a free market economy. But it is possible to have capitalism without a free market. The systems that existed in the U.S.S.R and exist in China and Cuba demonstrate this. These class-divided societies are widely called ‘socialist’. A cursory glance at what in fact existed there reveals that these countries were simply ‘state capitalist’. In supposedly ‘socialist’ Russia, for example, there still existed wage slavery, commodity production, buying, selling and exchange, with production only taking place when it was viable to do so. ‘Socialist’ Russia continued to trade according to the dictates of international capital and, like every other capitalist, state, was prepared to go to war to defend its economic interests. The role of the Soviet state became simply to act as the functionary of capital in the exploitation of wage labour, setting targets for production and largely controlling what could or could not be produced. We therefore feel justified in asserting that such countries had nothing to do with socialism as we define it.

Apparently, a regime is “socialist” only if it’s an egalitarian’s utopia, and “capitalist” as long as it has any amount of inequality. Since an egalitarian society defies basic human nature, these Marxists can safely claim that “Capitalism is the social system which now exists in all countries of the world.” In fact, the basic alternative in all social systems is not between egalitarianism and inequality, but between a hierarchy based on the superior application of talent and innovation and a hierarchy based on the superior application of organized violence. By rejecting the possibility of the first, it is clear which one all varieties of socialists choose.

"Wage slavery" and other falacies...

This post is mostly for my reference. I responded at a local forum in answer to some questions about the nature of wages and the effects of productivity improvements. I don’t have much experience debating economics (as opposed to capitalism) so suggestions are welcome…

What is a job?

A job is a contract between two parties, in which one party agrees to provide certain services on a certain schedule in exchange for payment from the other party. By definition, an employee agrees to do job for a particular wage by his own voluntary consent. This is opposed to slavery, in which a slave is forced to work without his consent or compensation.

What determines wages? Can't employers pay workers whatever they want?

A wage is the price an employer pays for the services his employee. While the two may negotiate any wage they come to mutual agreement on, the mutual self-interest of both and market forces intersect at a market-set price that represents the intersection of their interests. Disregarding non-economic factors, an employer wishes to wishes to pay his employee as little as possible. The maximum amount he will pay however, is the value of the marginal productivity a given worker provides. (The marginal productivity is the value per unit of time the worker provides to the employer.) If the worker refuses to work at or below his marginal productivity, then the employer will not hire him, since doing so will incur a loss. Conversely, disregarding non-economic factors, the employee wishes to be paid an infinite amount. The minimum wage he will actually accept is the marginal value of his labor. This can be measured in terms of the next-most useful value-producing activity the workers may engage in. For example, suppose that my marginal productivity as a programmer is $30 per hour. I will accept any job paying above $30 an hour, but no job below it, since I can find an employer paying that much in another computer or tech-related industry. A fast-food worker might have a marginal productivity of say, $6 an hour – the value per hour that his labor creates for the business. From the employer’s perspective, I create $40/hour of value, and the fast food workers creates $7 of value, so he will be willing to hire us. (Assuming that no one is willing to provide the same value for a lower wage.) However, if I only provide $20 of value, the employer will not hire me, because he would incur an hourly loss of $10 in doing so. Similarly, if the fast food worker only provides $5 of value, he would no be hired either because he would cause a loss of $1 for each hour he works.

Can government increase wages when employers don't pay enough?

Suppose that the government imposed a minimum wage of $8. Would the fast food worker who provides a value of $7 per hour now be paid $8? No, he would lose his job - because keeping him would mean a $1 loss for each hour he works to his employer. All minimum wage laws have a similar effect - they cause everyone with a marginal productivity below the minimum wage to lose their jobs - most often teenagers and the very poor. Wage caps (including progressive income taxes) have a similar effect - they lead the most productive individuals of our society to retire early or forgo new opportunities -- resulting in a lost opportunity for them, and for everyone who might have benefited from their ideas.

What if the government creates a job by paying an unemployed worker to do make-work such as digging holes in the ground?

Where would the money to pay for his wage come from? It would have to be taken by force from the remaining employed fast food workers and computer programmers of course. (The government could print the money, but the result would be similar to taxation.) So everyone will be paid less to pay for the government workers, but has a job been created? No - now the fast-food employer has $1 less to pay to his other $8 employees, so he must fire some of them or go out of business. Each new $7 government worker costs at least one $7 privately employed worker. This is always a social loss because by definition, the government worker is less productive. If he were not, then the private business would voluntarily employ workers to perform his job.

So, a minimum wage will cause everyone who produces less than the marginal productivity of the wage to lose their jobs, while each new government job cause at least one more productive privately-employed worker to lose his job.

So where does wealth come from, anyway?

The wealth of any society equally the capacity to think of the productive men living it. Wealth is a value - a physical or intellectual good that an individual values as beneficial to his life. An object in reality has no intrinsic value until mental and physical labor is applied to it to make it a value to a man's life. Prices are an objective evaluation of the value men assign to a given good. Prices are determined by the marginal value of a given good, just as a wage is determined by the marginal productivity of an employee. The aggregate value judgments of individual consumers and producers determine prices and wages. This is why prices are the only objective value of a good, and why government imposed price and wage controls quickly lead to shortages and more controls -- it's impossible for a bureaucrat to know how much every consumer values every good, or how much ever employer values every employee.

What about economic growth?

Increases in the productivity in the production of a good come from the application of mental effort to the production of values. A profit (the difference between the value of a good to a consumer and the cost to produce it) is the reward of an entrepreneur for bringing about the new wealth he's created. In the absence of government coercion, profits can exist only as long as men continue to create new values - by creating new ones, or improving on existing ones.

Doesn't a more efficient product result in lost jobs for those who were replaced by automation or better processes?

When oil lamps replaced candles, the cost of producing affordable lighting greatly decreased. In the absence of a government monopoly, competing lamp-makers quickly started making their own lamps, which brought the price decrease to the consumer. In the process of transitioning from candles to laps, many thousands of candle-makers lost their jobs. Their protest must have been one of the first recorded anti-technology arguments. The new jobs gained in lamp-making did not in fact equal the lost jobs in candle-making, since making light fixtures required fewer people. However, oil lamps did greatly increase the prosperity of society, just as electric lighting did several hundred years later. How? Since consumers could buy cheaper lamps, they now had more money to spend on other things, good which increased the comfort of their live and created many more jobs than were lost. This is because the average worker could now create more value per unit of time. Meanwhile the light-fixture makers could now afford in invest in even better lighting.

The adoption of electricity had a similar effect - cheap lights caused many lamp-makers to lose their jobs, but created a huge new demand for electricity and increased productivity and the standard of living for everyone. Now only were more jobs created, but the jobs also paid more - because workers could now had a higher marginal productivity of labor.

Can government "soften the blow" when all these candle-makers lose their jobs?

In today's world, the government would probably try to subsidize the candle or lamp-makers when their chief product became outdated. What would that subsidy accomplish? It would save the candle-makers jobs - but it would cost the jobs of everyone who stood to benefit from the increase wealth that came from cheaper lights. In the short term, the candle-makers might benefit - but in the long term, they would lose too, since they would lose the new, higher paying jobs the could have making electric lights and the new products the cheaper lights would allow consumers to afford. Meanwhile, the Thomas Edisons, Graham Bells, Thomas Moore's, and Bill Gateses would be too busy working to pay off taxes to have the time or money for research. Of course, we know that all these inventors and entrepreneurs succeeded. But how many didn't because they had too many taxes to make that initial investment, or never got their initial break because of a minimum wage, or gave up before they even tried because the red tape was too much, or the taxes too high, or they knew that the old, outdated industry would use the government to tax and regulate them out of existence? The real tragedy is that we will never know.

"Economics for Real People" website

Collectrix.com is now hosting Economics for Real People, a new introduction to Austrian economics in the spirit of Economics of One Lesson. Other than excerpts, I haven’t read it yet, but from what I understand, it’s a great book.

Are You an Austrian?

Check out the "Are You an Austrian?" quiz at the Mises Inst. I scored 94/100 (96, if I hadn't misread a question.)
Not surprisingly, the two questions I got "wrong" are the Mises Institutes' take on "market anarchism" and pacificism. Ex: "A market society needs no antitrust policy at all; indeed, the state is the very source of the remaining monopolies we see in education, law, courts, and other areas." and "Security [ie: the military], like any good desired by individuals in society, can and is provided by the market economy, which is to say, by individuals organizing themselves voluntarily within the matrix of private property and exchange." (Emphasis mine)

Last time I checked, Ludwig von Mises himself was no anarchist. Which brings up the question – is Austrian economics defined by what the actual Austrians thought, or what Rothbard’s anarchist followers believe?

In Praise of Sweatshops

My response to an ugly smear job:
In Praise of Sweatshops – In Response to Jonathan Steeds Editorial

Jonathan writes that sweatshops “represent the worst of capitalism.” In fact, sweatshops are a great example of the virtues of free trade and free markets. Consider what conditions the citizens of third world countries live in before the multinationals arrival. The great majority live in desperate conditions, with no jobs and no future to look forward to other than the backbreaking labor of subsidence farming. Healthcare is non-existent, children work almost from the time they can walk, and most die young from starvation or malnutrition.

The multinationals that build factories in poor nations face many challenges: oppressive and unpredictable governments, long distances, language barriers, primitive roads, and labor activists back at home. They choose to do so because the lower marginal productivity of the workers in poor countries allows them to save on labor costs. The workers of the sweatshops choose to work there because they consider it better than the alternatives: the endless toil of subsistence farming, prostitution, or crime. They are free to quit or look for another job anytime, but they remain at the factories because they consider it their best alternative. Their pay and working conditions may seem low to us, but they are heavenly when compared to their life prior to the multinationals’ arrival.

All the efforts to ban, boycott, or otherwise shut down third world factories will do nothing but lead to the starvation and death of the very people the activists claim to protect. The best thing we can do to help citizens of third world countries is to support free trade and free markets to bring the wonderful benefits of capitalism to every poverty-ridden country in the world.

From Mises.org: Isabel Blew Fallacy Ashore. The Fallacy of the Broken Window is one of many great examples from Henry Hazlitt's awesome book Economics in One Lesson.
Also: check out the latest Cox and Forkum.

Greenspan's "bubbles"

Economists at the BIS (The Bank for International Settlements is a central-bank for the world) have issued an inane ruling that shows just how clueless they are. They told a Fed conference that "Central banks should tackle emerging asset bubbles head-on rather than wait till they burst and then clean up afterward."
The only point in question with these statists seems to be how much state intervention is necessary to “soften the blow” of these mysterious and seemingly natural and unpreventable “bubbles.” Not much though is given anymore as to whether these bubbles actually exist, and what, if any, is their cause.

Any economist worth a damn would start by asking what traits of the market could cause such “bubbles” to occur. The answer is simple: none. The self-correcting nature of a free market prevents any such “bubbles” from occurring by setting interest rates that accurately reflect the public's ever-changing time preference for future growth versus current spending. It is only manipulation by the only entity that has the power of a gun – the government – that can create changes large and lasting enough to create the “artificial” changes that cause economic depressions. The government cannot even create the so-called “booms” in the economy – it can only create destabilizing shifts to or from investment and consumer spending that disrupt the normal flow of goods and investment capital. It can also destroy very real economic growth – such as that during the 1920’s and 1990’s -- by practicing monetary and regulatory interventionism. I don't want to launch into a polemic on economics, so if you want to learn more about actual economics rather than pure interventionist propaganda, I recommend Mises.org, or Capitalism.net

The lesson that we should draw from the results of the Telecommunications Act of 1996 is that efforts to partially privatize the industry are likely to retain those elements of regulations that benefit concentrated interests in business most.

If this point is not immediately evident to you, I highly recommend you read "The Question of the Cable Monopoly"

Regarding Monopolies...

I had to cut short a letter to the editor I wrote about monopolies, but if you want to read some common misconceptions about monopolies, you can do so here.

Yet another communist "utopia"

Check out these Satellite photos of North Korean prison camps.

Then read this: Death, terror in N. Korea gulag.

Microsofts and standards compliance...

Here is a quote from an email I sent out on the Brazos Valley Web Design listserv regarding Microsoft's lack of compliance with the W3C standards:

I think that it's helpful to realize that Microsoft's browser is in effect a de-facto standard, which by overwhelming user preference is preferred over the W3C-compliant Mozilla. If you think of MS as the U.S. and W3C as the U.N., it's easy to see that the "consensus" of a bunch of undemocratic, oppressive regimes is not any more valid that the individual judgment of the freest, richest nation on earth. The analogy is better than you might imagine, since both the US and MS are being derided precisely because of their virtues (freedom and successful products) by nations/companies that are failures precisely because of their flaws (tyranny/bad products.)

The Antitrust Racket

Check out this blog from initium:

In 1977, Congress passed the Hart-Scott-Rodino Act, a law intended to make life easier for FTC and Antitrust Division officials in deciding which mergers to prosecute and stop. Under HSR, all mergers worth at least a certain value (approximately $50 million under the current law) must be reported to the government prior to consummation. This "pre-merger notification" grants the government a waiting period to decide whether they wish to act against the merger. In most cases, the waiting period is terminated early, and no official action is taken. In a handful of cases-less than 2%-the FTC or Antitrust Division will seek conditions to allow the merger or attempt to stop it outright. Such official action generally results in a "consent agreement," where the merging companies agree to surrender a portion of their assets to a third-party chosen by the government.

Every Hart-Scott-Rodino "notification" must be accompanied by a filing fee. For mergers valued at less than $100 million, the fee is $45,000; for mergers of more than $500 million, the price is $280,000. The fee is non-refundable, and the monies collected from said fees are what finance the $330-plus million of the FTC and Antitrust Division budgets not financed by direct appropriation.

In other words, the government is forcing businesses to pay for the very antitrust enforcement that is targeted directly against their interests. This is a classic racketeering scheme. A business is forced to pay protection money to a thug who could turn against them at any time.

Marxism

Interesting article on Marxism at the Economist.

Here is the conclusion:

Anti-globalism has been aptly described as a secular religion. So is Marxism: a creed complete with prophet, sacred texts and the promise of a heaven shrouded in mystery. Marx was not a scientist, as he claimed. He founded a faith. The economic and political systems he inspired are dead or dying. But his religion is a broad church, and lives on.

Economic Freedom and Prosperity

For my econometrics class, I am comparing the relationship between economic freedom and prosperity, and I just got my first regression results for 2001 for 155 nations. The results are very preliminary, but the evidence is clear: there is an extremely high correlation between economic freedom and prosperity, explaining over 73% of the variation in wealth. This means that 73% of the difference between the wealth of nations is explained by the economic policies of their government, with only 27% accounting for differences in natural resources, location, climate, culture, other nations, etc.

This fact alone is not very surprising (unless you're a socialist, in which case you're probably ignoring these results), but it is interesting to see which specific factors affect per capita GDP the most. Not surprisingly, property rights and the fiscal burden (taxes) of government have the greatest effect, and significantly monetary policy (inflation) -which shows that (as Lenin said) the best way to destroy capitalism is to go after the currency. Factors which (to my surprise) do not affect prosperity individually are foreign investment and regulation - which may not be true if these variables are significant jointly -I'm not sure yet.

After my analysis of economic factors is complete, I am going to see what effect non-economic factors such as political freedom, government welfare, and population control have on prosperity.

(Note: while the black market correlation is highest, this is more a result of government regulation than a cause, which is why I don't consider it a factor. Data comes from the 2001 CIA Factbook and 2001 Heritage Inst. Economic Freedom Index. The 2001 data was used because 2002 GDP's are not available for all nations yet.)

Here is the regression output:

Model 3: OLS estimates using the 155 observations 1-155
Dependent variable: indGDP

VARIABLE	COEFFICIENT	STDERROR	T STAT	2Prob(t>|T|)
const	20723.3	2201.61	9.413	<0.00001	***
Trade	-1186.36	434.009	-2.733	0.007042	***
FiscalBu	1538.63	467.05	3.294	0.001238	***
Governme	1003.78	583.324	1.721	0.087407	*
Monetary	-627.609	326.967	-1.919	0.056873	*
BK	-793.975	646.082	-1.229	0.221083
Wagesand	1420.41	650.191	2.185	0.030513	**
Property	-2108.96	663.036	-3.181	0.001794	***
BlackMar	-2899.29	522.668	-5.547	<0.00001	***

Mean of dependent variable = 8854.32
Standard deviation of dep. var. = 9169.89
Sum of squared residuals = 3.43936e+009
Standard error of residuals = 4853.58
Unadjusted R-squared = 0.7344
Adjusted R-squared = 0.719847
F-statistic (8, 146) = 50.4624 (p-value < 0.00001)
Durbin-Watson statistic = 2.13614
First-order autocorrelation coeff. = -0.0694149

Excluding the constant, p-value was highest for variable 11 (BK)
(Variables are explained here: htp://www.heritage.org/research/features/index/2002/chapters/chap5.html)