Category Archives: Economics

The Myth that Laissez Faire Is Responsible for Our Present Crisis

Professor George Reisman contributes the excellent (and lengthy) article The Myth that Laissez Faire Is Responsible for Our Present Crisis. I’ve had the distinct honor of attending a number of Professor Reisman’s lectures at the Ludwig von Mises Institute, and I’m slowly working my way through his monumental book Capitalism: A Treatise on Economics. Here’s a few excerpts from this article:

“Laissez-faire capitalism is a politico-economic system based on private ownership of the means of production and in which the powers of the state are limited to the protection of the individual’s rights against the initiation of physical force.

Then Professor Reisman lists some of the ways in which our present system is far removed from anything resembling laissez-faire capitalism:

The utter absurdity of statements claiming that the present political-economic environment of the United States in some sense represents laissez-faire capitalism becomes as glaringly obvious as anything can be when one keeps in mind the extremely limited role of government under laissez-faire and then considers the following facts about the present-day United States: 1. Government spending in the United States currently equals more than forty percent of national income … 2. There are presently fifteen federal cabinet departments, nine of which exist for the very purpose of respectively interfering with housing, transportation, healthcare, education, energy, mining, agriculture, labor, and commerce … 3. The economic interference of today’s cabinet departments is reinforced and amplified by more than one hundred federal agencies and commissions … 4. the Federal Register contained fully seventy-three thousand pages of detailed government regulations. This is an increase of more than ten thousand pages since 1978, the very years during which our system, according to one of The New York Times articles quoted above, has been “tilted in favor of business deregulation and against new rules.” 5. And, of course, to all of this must be added the further massive apparatus of laws, departments, agencies, and regulations at the state and local level.

What this brief account has shown is that the politico-economic system of the United States today is so far removed from laissez-faire capitalism that it is closer to the system of a police state. The ability of the media to ignore all of the massive government interference that exists today and to characterize our present economic system as one of laissez faire and economic freedom marks it as, if not profoundly dishonest, then as nothing less than delusional.

Then, under the heading “Government Intervention Actually Responsible for the Crisis:”

Beyond all this is the further fact that the actual responsibility for our financial crisis lies precisely with massive government intervention, above all the intervention of the Federal Reserve System in attempting to create capital out of thin air, in the belief that the mere creation of money and its being made available in the loan market is a substitute for capital created by producing and saving. This is a policy it has pursued since its founding, but with exceptional vigor since 2001, in its efforts to overcome the collapse of the stock market bubble whose creation it had previously inspired.

I could go on for some time with more quotes from this article, but it is well worth reading the entire piece. Please do so at The Myth that Laissez Faire Is Responsible for Our Present Crisis.

Beyond Bailouts Is Recommended

I recommend BeyondBailouts.org as a place to learn about the current situation in our financial markets. From their site:

BeyondBailouts.org is a joint venture of the National Taxpayers Union (NTU) and Competitive Enterprise Institute (CEI). The purpose of the website is to educate about government’s role in our current financial difficulties, suggest reforms that address those root causes, and provide a clearinghouse for the latest analysis of the financial crisis. But most of all, it’s an outlet for Americans to contact their Members of Congress and the Administration to express their frustration.

Earmarks are (not) OK

In a Wichita Eagle letter, writer Prem N. Bajaj of Wichita makes the case that Earmarks are OK. But only by tortured reasoning, in my opinion.

First, he states: “Earmarks finance local projects that the community is unable to support.” I ask Mr. Bajaj this question: Where, if not from community, does money for earmarks come from? If you consider just two parties — your local community and the federal government — earmarks may seem like a great thing. Free money! Who doesn’t want that? But communities across the country lobby for and get earmarks too, and they may be represented by congressmen more skilled at obtaining earmarks than ours.

At best, earmarks might be a wash, where each community receives earmarks equal to what it sends to Washington. But even if this were the case, why have Washington involved at all? Each community could keep its own money and spend it as it sees fit, without subjecting itself to the waste and corruption inherent in the present earmark process.

Then he writes this: “The money comes from the taxpayers, and they are the beneficiaries.” Mr. Bajaj writes as though relying on government, rather than markets and the private sector, leads to greater wealth. In fact, the opposite is true. The incentives that government faces and responds to are not the same as the private sector, where waste and inefficiency are punished. Not to mention failing to supply what consumers really want to buy.

A few quotes from economist Thomas Sowell seem appropriate at this time:

“This was all before politicians gave us the idea that the things we could not afford individually we could somehow afford collectively through the magic of government.”

“If you have been voting for politicians who promise to give you goodies at someone else’s expense, then you have no right to complain when they take your money and give it to someone else, including themselves.”

“Mystical references to ‘society’ and its programs to ‘help’ may warm the hearts of the gullible but what it really means is putting more power in the hands of bureaucrats.”

“The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”

Are We Angry Only Because We Were Caught?

In his column Welcome to ‘Moral Hazard’, Wall Street Journal editorial writer Daniel Henninger writes:

For behind it all sat Fannie Mae and Freddie Mac, running mortgage liquidity into the nation’s neighborhoods like an open fire hydrant. Several years ago, when the Journal’s editorial board met with Fannie Mae’s top executives and pressed the issue of financial risks, we were told by way of ending the conversation that Fannie was merely fulfilling the “mandate of Congress” to spread home ownership across the land. Congress, of course, is a temple to moral hazard. …

For all the wailing about the high price being paid now of ignoring manifest risk beneath the mortgage crisis, are we angry at bad decisions that must never be repeated, or just upset that it all blew up? Because if it’s the latter, politicians will try to game the system again to get more risk-free benefits.

Which is it?

Our problem is the manager of our money

Judy Shelton makes this case in the Wall Street Journal editorial Loose Money And the Roots Of the Crisis:

Think of it: Nothing is more vital to capitalism than capital, the financial seed corn dedicated to next year’s crop. Yet we, believers in free markets, allow the price of capital, i.e., the interest rate on loanable funds, to be fixed by a central committee in accordance with government objectives. We might as well resurrect Gosplan, the old Soviet State Planning Committee, and ask them to draw up the next five-year plan.

“There are numbers of us, myself included, who strongly believe that we did very well in the 1870 to 1914 period with an international gold standard.” It would be easy to dismiss this statement as a quaint relic from Mr. Greenspan’s earlier days as an Ayn Rand acolyte; his article on “Gold and Economic Freedom” appears in her 1966 compendium “Capitalism: The Unknown Ideal.” But Mr. Greenspan said it, rather emphatically, last October on the Fox Business Network. He was responding to the interviewer’s question: “Why do we need a central bank?”

Whatever well-intentioned reasons existed in 1913 for creating the Federal Reserve — to provide an elastic currency to soften the blow of economic contractions caused by “irrational exuberance” (and that will never be conquered, so long as humans have aspirations) — one would be hard-pressed to say that the financial fallout from this latest money meltdown will have less damaging consequences for the average person than would have been incurred under a gold standard.

Dry-Cleaning Economics in One Lesson

The Foundation for Economic Education reports that an American clothes hanger company has succeeded in persuading the government to slap a tariff on its foreign competitors. Who wins?

…the tariff is expected to cost some $212,765 for each of the 564 jobs saved. …

The lesson is that the misguided attempt to save jobs for domestic hanger manufacturers comes at the expense of other domestic employment. Failure to base policy on Hazlitt’s wisdom has led to the substitution of political competition and bureaucratic fiat for the market process. Not only has M&B [the domestic hanger maker] enriched itself by using the political process to stifle competition from foreign firms, it has also taken advantage of the reduced competition by raising its price by more than 10 percent.

See Dry-Cleaning Economics in One Lesson for the whole story.

Wall Street Crisis Fruit of Government, Not Free Markets

Radley Balko writing about the activities of the United States Government in Reason Magazine:

Many commenters have blamed all of this on capitalism. This isn’t capitalism. It’s a peculiar kind of corporatist socialism, where good risks and the resulting profits remain private, but bad risks and the resulting losses are passed on to taxpayers. There’s nothing free-market about it.

Also: Bailout plan splits free-market backers

Bailout Raises Libertarians’ Market Value

“The specter of the most titanic intervention in the markets since Franklin Roosevelt started sewing the safety net has folks at the Cato Institute reaching for something strong.” See Bailout Raises Libertarians’ Market Value in the Washington Post.

Also from the Cato Institute:

Because of their quasi-governmental status, there is a market perception that Fannie Mae and Freddie Mac mortgage-backed securities and debt carry an implicit federal guarantee against default. Hence, the GSEs expose the federal taxpayer to an ever-increasing potential contingent liability that could ultimately cost tens of billions of dollars to rectify.

When was this written? A week or two ago?

It’s from 1997. See The Mounting Case for Privatizing Fannie Mae and Freddie Mac.

The Bailout Reader

The Ludwig von Mises Institute has compiled The Bailout Reader, a collection of articles relevant to the current situation.

Not all these articles are from the past few weeks, as Austrian economists have long understood the dangers of government interventionism, the fruits of which we see today.

The events taking place in the financial market offer an illustration of the soundness of the Austrian theory of money, banking, and credit cycles, and Mises.org is your source not only for analysis of these events but also the economic theory that helps explain what is happening and what to do about it.

Click here to access The Bailout Reader.

Ron Paul’s Wisdom on the Current Financial Crisis

Ron Paul writes My Answer to the President, noting that the “financial meltdown the economists of the Austrian School predicted has arrived.” He introduces a quotation from Hayek this way:

F.A. Hayek won the Nobel Prize for showing how central banks’ manipulation of interest rates creates the boom-bust cycle with which we are sadly familiar. In 1932, in the depths of the Great Depression, he described the foolish policies being pursued in his day — and which are being proposed, just as destructively, in our own.

In my opinion, a great danger we face is that just as the Great Depression lead to Roosevelt’s huge expansion of government, so too this current situation will lead to similar expansion of government power. This has already happened with the Federal Reserve system.

I urge you to read My Answer to the President by Ron Paul.

Laissez faire in Washington? On what planet?

Sheldon Richman of the Foundation for Economic Education contributes analysis of the current economic situation in the article Government Failure. A few quotes:

Laissez faire in Washington? On what planet? Governments at all levels have regulated the financial industry from the time of the founding. …

At the Division of Labour blog, economist Lawrence H. White asks: “What deregulation have we had in the last decade? Please tell me.” …

What about greed? Here White also has something important to say: “If an unusually large number of airplanes crash during a given week, do you blame gravity? No. Greed, like gravity, is a constant. It can’t explain why the number of crashes is higher than usual.” Likewise, greed (however you define this essentially useless concept) can’t explain the current economic troubles. Why didn’t these troubles occur earlier? Were people less greedy then? …

What about irresponsibility? Now we are getting to the crux of the matter. There was irresponsibility — but only because the government for decades has pursued a policy of relieving big companies of the responsibility that otherwise would have been imposed by market discipline and competition. …

Good intentions count for nothing in this context. The laws of human action (praxeology) can’t be repealed or got around.

Praxeology. Ludwig von Mises has an explanation for everything, it seems.

Drug Runaround: Solved by Universal Health Care?

A letter writer in the July 12, 2008 Wichita Eagle has issues with his health insurance coverage, and wants us to discard our present system in favor of universal health care coverage.

Mr. Ronald Voth of Halstead (a candidate for the Democratic party nomination for the U.S. House of Representatives for the fourth district of Kansas in 2006) criticizes the health insurance company he uses. He doesn’t say how he obtained this coverage, but if he’s like most Americans that don’t receive their health care from the government, he and his family probably have an insurance policy selected and paid for by his employer. While many employers let their employees choose from a few variations of coverage, for most employees, they have to take what their employer is willing to provide. There isn’t much of a market for individual health insurance policies in America.

If there were a large market for private health insurance, customers would have the benefit of companies competing for your business in free markets. This means that if Mr. Voth doesn’t like the coverage he’s getting from his current provider, he can change. But for most people whose policies are provided and largely paid for by their employers, switching insurance carriers is not a realistic option. This employer-provided coverage, a relic from the circumvention of World War II price controls, results in less competition for customers.

With market-based competition comes innovation. With universal health care provided by government comes the opposite. I wonder if Mr. Voth knows that Canadians come to places like Wichita to get the health care they can’t get under their universal system? See Wichita’s Galichia Provides What Government Health Care Doesn’t.

Mr. Voth claims that universal care systems in other countries are cheaper than ours, and that’s true. But we should ask why. The article referenced below states: “… because the U.S. is so much wealthier than other countries, it isn’t unreasonable for it to spend more on health care. Take America’s high spending on research and development. M. D. Anderson in Texas, a prominent cancer center, spends more on research than Canada does.”

(By the way, the high cost of health care can’t be blamed on high-paid CEO’s. If the CEO of a large insurance company that has 10 million customers is paid, say, $100 million a year, that’s only $10 per customer per year.)

For more information about universal health care in other countries, the article The Ugly Truth About Canadian Health Care provides balanced criticism of the Canadian health care system.

Where’s Leadership on Oil Speculation?

In the July 12, 2008 Wichita Eagle, Kenneth James Crist of Wichita blames oil speculators for ruining the U.S. Economy, writing that politicians should “do something positive to halt the rampant speculation in the stock market and oil futures that is really driving these runaway prices. All it really amounts to is tremendous greed on the part of a few, at the expense of the many.”

I wish that Mr. Crist had read Futures Markets by the economist Walter E. Williams before writing this letter. In this article we learn this:

The futures market, which takes into account both the present and the future availability of goods, is a vital part of a smoothly functioning economy. Unfortunately, that fact provides little comfort to people frustrated over the high prices of food and fuel. As such, it provides fodder for political demagogues, charlatans and quacks who rush in with blame and prepare “solutions” for the problems they themselves have created — the high prices for food and fuel are directly linked to the policies of the White House and Congress.

That’s right. Futures markets — that’s where speculators buy and sell — provide a valuable service by assuming risk that others are not willing to take on, and by smoothing the price of commodities over time. Speculators assume risk. That is their essence. They may make huge profits in their leveraged trades, but they also bear the risk of, and the actual realization of, equally huge losses when their guesses are wrong.

That illustrates an often overlooked property of futures markets. For one person — the “evil” speculator — to bet on the price of oil going up, someone has to take the opposite position, betting that the price will fall. Both can’t be right. One wins and the other loses. Is there sympathy for these speculators that lose in these trades?

The action of a speculator taking a “long” position in markets is to buy low and sell high. This benefits consumers in the long run. By buying when prices are low, the speculator does cause prices to rise and be higher that they would be without the speculator’s buying. Then, selling when the price is higher, the speculator causes the prices to be lower than it would be if not for his selling. This is how the speculator smooths prices and assumes risk.

Speculators can’t wait too long, either. From Greedy Speculators? published at the Cato Institute:

The current political charge is, “the speculators are driving up the price of oil.” But think about it for a moment. If the price of oil is being driven above the market clearing price where supply equals demand, demand will fall and the speculators will be stuck holding huge, unintended stocks of oil. Holding oil in tanks and ships is costly, and speculators will not incur these costs for long, so the price will drop.

We need to recognize the valuable role that speculators play in our economy. By focusing on an easy target, we fail to look elsewhere to find the true causes of our problems.

For more information on the valuable role that speculators play in the economy, see chapter 22 of Walter Block’s book Defending the Undefendable.

Price Controls Will Harm Iowa

In the article Price Controls Create Man-Made Disasters we learn that although the Iowa attorney general has imposed Iowa’s anti-price-gouging rule (Price-gougers beware, Attorney General says), the likely effect will be “shortages of needed supplies, long lines, delayed repairs, and, perhaps, increased incivility.”

The price system is very good at allocating scarce resources. That’s certainly the case after natural disasters, where things as necessary as drinking water may be in short supply. Allowing the price of even essential items rise to high levels means that hoarding is discouraged, leading to more widespread availability of goods as necessary as drinking water.

Officials appear humanitarian when they impose anti-price-gouging measures, but this is just another example of the actual effect of something being very different from the intended effect.

Wichita’s Galichia provides what government health care doesn’t

A recent editorial in The Wichita Eagle (Dr. Bill Roy: Universal care is most economic, efficient) contains several mistaken impressions. One may be disproved by recent developments in Wichita.

The writer states “It has never been a secret that a single-payer system is the most economic, efficient and fair way of providing universal care.” Here’s something interesting that I’m sure the author of this opinion piece knows, but somehow disregards. In Canada, home to the type of health care system the writer favors, many people come to the United States for care. In fact, Wichita is now providing service to Canadians who, for one reason or another, are not satisfied with their own government-provided free care. “[Wichita’s] Galichia Heart Hospital treated its first out-of-country patient last month, a Canadian who needed a hip replacement and was willing to pay cash instead of waiting months — or even years — for what is considered elective surgery in Canada.” (Some U.S. hospitals try to draw foreigners with flat-rate care, May 29, 2008 Wichita Eagle.)

Someone needing a hip replacement in the United States probably doesn’t consider their need for surgery to be “elective.”

While we in the United States may complain about high drug costs and drug advertisements on television and in print, at least we have new drugs. We may complain about waiting a few weeks to see a specialist, but we usually get to see one. And some people complain that expensive advanced medical equipment has been installed in two of Wichita’s hospitals, when one should be sufficient. But we have these things. Countries with government health care often don’t: “All provinces continue to use rationing in an effort to contain the growth in government health spending. Governments ration health care with policies that reduce the effective supply of health professionals, reduce the availability of advanced medical equipment, and restrict the scope of coverage for new medicines under public drug insurance plans. Such rationing drives up waits for specialist medical care and inhibits access to new drugs.”

This passage is from a report titled Paying More, Getting Less 2007 from Canada’s Fraser Institute. The report makes this conclusion: “Based on the data and analysis in this report, we conclude that public health insurance, as it is currently structured in Canada, tends to produce rates of growth in government spending on health care that are not financially sustainable through public means alone. This is occurring while governments are restricting and reducing the scope of benefits covered under publicly funded health insurance.”

The Entrepreneur As American Hero

This is an excerpt of a speech given by Walter E. Williams on February 6, 2005 at Hillsdale College. The complete speech, titled “The Entrepreneur As American Hero,” can be read here: http://www.hillsdale.edu/imprimis/2005/03/.

At this juncture let me say a few words about the modern push for corporate social responsibility. Do corporations have a social responsibility? Yes, and Nobel Laureate Professor Milton Friedman put it best in 1970 when he said that in a free society “there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

It is only people, not businesses, who have responsibilities. A CEO is an employee, an employee of shareholders and customers. The failure of the corporate executive community to recognize this, and its willingness to engage in activities unrelated to the pursuit of profits, means national wealth will be lower, product prices will be higher and the return on investment lower.

If we care about people’s wants, rather than beating up on profit-making enterprises, we should pay more attention to government-owned non-profit organizations. A good example are government schools. Many squander resources and produce a shoddy product while administrators, teachers and staff earn higher pay and perks, and customers (taxpayers) are increasingly burdened. Unlike other producers, educationists don’t face the rigors of the profit discipline, and hence they’re not as accountable. Ditto the U.S. Postal Service. It often provides shoddy and surly services, but its managers and workers receive increasingly higher wages while customers pay higher and higher prices. Again, wishes of customers can be safely ignored because there’s no bottom line discipline of profits.

Here’s Williams’ law: Whenever the profit incentive is missing, the probability that people’s wants can be safely ignored is the greatest. If a poll were taken asking people which services they are most satisfied with and which they are most dissatisfied with, for-profit organizations (supermarkets, computer companies and video stores) would dominate the first list while non-profit organizations (schools, offices of motor vehicle registration) would dominate the latter. In a free economy, the pursuit of profits and serving people are one and the same. No one argues that the free enterprise system is perfect, but it’s the closest we’ll come here on Earth.