Tag Archives: Economics

Efforts to Regulate ‘Wild West’ Markets are Long Overdue

A Christian Science Monitor article Efforts to regulate ‘Wild West’ markets are long overdue contains a number of misstatements.

For one thing, characterization of the American West as “wild” in the sense that mayhem prevailed, and that life and property were not safe, is not correct. An article in the Journal of Libertarian Studies titled An American Experiment in Anarcho-Capitalism: The Not So Wild, Wild West tell us this:

The West during this time often is perceived as a place of great chaos, with little respect for property or life. Our research indicates that this was not the case; property rights were protected and civil order prevailed. Private agencies provided the necessary basis for an orderly society in which property was protected and conflicts were resolved. These agencies often did not qualify as governments because they did not have a legal monopoly on “keeping order.” They soon discovered that “warfare” was a costly way of resolving disputes and lower cost methods of settlement (arbitration, courts, etc.) resulted. In summary, this paper argues that a characterization of the American West as chaotic would appear to be incorrect.

The article quotes E.J. Dionne as saying “A well-functioning capitalist system relies on clear rules.” Very true, but there are two rules that anyone can understand that are in danger of being overturned. First, if you borrow money, make sure you understand the terms of the loan and are prepared to repay the loan as required. Second, if an institution such as a pension fund buys repackaged securities (like subprime loans) without understanding the risks, they shouldn’t expect others to make good their losses. These two clear principles or rules are in danger of being overturned.

If they are overturned, then we might ask Mr. Dionne just what rules can be trusted to be clear?

This article also states: “The oddity of today is that a Republican administration is pushing an expansion of government regulation.” If the author of this article did a little research, he would learn that regulation has increased rapidly in recent years. According to the Heritage Foundation” “Despite the claims of critics — and some supporters — of the Bush Administration, net regulatory burdens have increased in the years since George W. Bush assumed the presidency. Since 2001, the federal government has imposed almost $30 billion in new regulatory costs on Americans. About $11 billion was imposed in fiscal year (FY) 2007 alone.”

If we look at the root causes of this crises, we would understand that excessive government control in the form of the Federal Reserve is largely responsible for this crisis, such that it is. Now government calls for even more power to solve the problem that it created. These extra powers, pitched to the public as necessary to deal with some current emergency, rarely disappear after the emergency has passed. Instead, they live on as a permanent part of expanded government.

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.

The Threat of Social Progressives

In the July 5, 2008 Wichita Eagle, a Mr. Chet Syres of Hutchinson contributes a letter promoting the virtues of liberalism, proponents of which he now wants us to call social progressives.

I remind Mr. Syres that leftists stole the terms “liberal” and “progressive” from the classical liberals. From For A New Liberty by Murray N. Rothbard:

One of the ways that the new statist intellectuals did their work was to change the meaning of old labels, and therefore to manipulate in the minds of the public the emotional connotations attached to such labels. For example, the laissez-faire libertarians had long been known as “liberals,” and the purest and most militant of them as “radicals”; they had also been known as “progressives” because they were the ones in tune with industrial progress, the spread of liberty, and the rise in living standards of consumers. The new breed of statist academics and intellectuals appropriated to themselves the words “liberal” and “progressive,” and successfully managed to tar their laissez-faire opponents with the charge of being old-fashioned, “Neanderthal,” and “reactionary.” Even the name “conservative” was pinned on the classical liberals. And, as we have seen, the new statists were able to appropriate the concept of “reason” as well.

In recent years, it is liberals themselves that have given their mis-appropriated term a bad name by advocating the policies that Mr. Syres now sells under a new name: social progressivism. Who could be against progress? Only Neanderthals, of course.

But look under the covers. Does raising the minimum wage help those who its proponents want to help? For those lucky enough to retain their jobs after an increase in the minimum wages, yes. For those who lose their jobs, no. For those who have made their way through the public schools (the grand achievement of social progressives) without graining much in the way of skills, and therefore can’t find a job at the new higher wages, no. See Problem of Low Wages Not Easily Solved.

Then there is Mr. Syres’ desire to tax the rich at higher rates, for they are not paying their “fair share.” Trickle-down economics does not work, he says. But the problem is that government can’t create wealth. All it can do is to transfer money from one person to another. Instead, it is people who create wealth and a higher standard of living, most often by accumulating and investing capital. The less capital there is to invest — and taxes reduce that — the less economic progress can be made. With less capital, workers have to dig ditches with shovels instead of power machines. Which would you rather work with? Who earns a higher wage, the man with a shovel, or the man operating a power backhoe? But without someone accumulating wealth and capital, there can be no backhoes, only shovels, and even they require the accumulation of some capital.

Mr. Syres says he wants to promote “social justice” through charity implemented through legislation. Is progress made when voluntary charity is replaced by government programs, fed by taxation? Is progress made when the voluntary cooperation of free people trading in free markets is replaced by the heavy hand of government coercion? Of course not, except for those who believe that they know better than everyone else how things should be, and seek to implement their ideas through expanded government. These are the social progressives, and they are a threat to liberty and prosperity.

Wichita Business Journal: Please Explain the Wichita School Bond Impact

In an article in the June 27, 2008 Wichita Business Journal (Passage of 2000 school bond issue highlights Brooks’ legacy in Wichita), reporter Josh Funk makes another error. (The first error is explained in Wichita Business Journal: Where is the Increasing Enrollment in Wichita Schools?)

In this case, Mr. Heck claims, in his tribute to departing USD 259 (Wichita public school district) superintendent Winston Brooks, that “He leaves Wichita before resolution of a $350 million bond issue, but his legacy as superintendent will be the passage of another bond issue — this one for $284.5 million — eight years ago that bailed out a city from a depressed post-9/11 economy while making necessary improvements to the school district.”

Mr. Heck must be relying on reporting from his own newspaper, for a few months ago it printed the article “Brooks: Bond issue possible in spring” (December 28, 2007 Wichita Business Journal) in which Brooks and Joe Johnson, head of the school district’s architectural firm Schaefer Johnson Cox Frey Architecture say that the bond issue in 2000 did, indeed, save Wichita.

This is nonsense of the highest order. Government spending cannot create prosperity. Borrowing against future tax revenue only compounds the problem. See Wichita School Bond Issue Economic Fallacy.

The Wichita Eagle let its guest columnist make the same mistake when Wichita school board member Lynn Rogers tried to make the case that the 2000 bond issue was an economic benefit to Wichita. See Wichita School Bond Issue Impact Is an Illusion for discussion.

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.”

Wichita School Bond Issue: Is Economic Impact Real?

Recently USD 259, the Wichita, Kansas public school district, used a study prepared by the Center for Economic Development and Business Research at Wichita State University to illustrate the success of the bond issue from 2000, and, by inference, make the case for a bond issue in 2008. There are many defects in this study, and this Voice For Liberty in Wichita article explains some: Wichita School District Economic Impact.

I wrote to Janet Harrah, the lead author of this report, with some questions. One of her responses, not to any particular question I asked but just by way of general explanation, was this: “These studies are designed to estimate the impact of expenditures for a particular activity. These studies are not designed to determine the ‘best and highest’ use of money.”

This revelation makes this study useless as a guide as to whether spending by the Wichita school district is wise. Spending by government creates economic activity. If government paid one group of workers to dig holes in the ground, and paid another group to fill in those holes, that would be government spending creating economic activity. (And governments have done pretty much just this.) The workers, whether they were creating or destroying holes, would spend their pay just like any other workers would. But these workers — after the holes are filled in — have created no economic wealth.

The fact that government spends money, therefore, does not mean it is spent wisely in ways that create wealth and makes people better off. The study the Wichita school district uses to prove its worth makes no attempt, according to its lead author, to judge the relative worth of its spending.

In fact, governments, including school districts, are poor judges of how to best spend money. Bureaucrats and politicians who spend other peoples’ money face different incentives than regular people spending their own money. Who do you think spends most wisely?

A Believer in Good Government Programs

An audio version of this post is available here.

A Mr. Greg Abbott of Clearwater, Kansas makes the case in the June 13, 2008 Wichita Eagle that there are many good government programs: the interstate highway system, the post office, the air traffic control system, police and fire departments, etc.

I believe the writer makes a huge error in logic by assuming that because these programs exist and have been provided by government, then they are good things to have, and that these things can only be provided through government. To make this conclusion requires a huge leap and a good measure of misplaced faith in the institution of government.

Many of the programs the writer cites as examples of good government programs are frequently criticized. The interstate highways in our nation’s cities are often congested to the point where loss of time spent stuck in traffic is a serious problem. Then there is the problem of safety of the nation’s highways, on which some 40,000 people die each year, and many more are seriously injured. Walter Block writes “As far as I am concerned, [these deaths are] taking place in spite of, not so much because of, the actions of the National Highway Traffic Safety Administration, despite their tendency to take credit for anything positive that happens on their watch, as do all statist agencies.” I recommend his article Deaths by Government: Another Missing Chapter.

The post office? Do many people rely on the post office for delivery of critical shipments when private alternatives such as FedEx and UPS are available?

As for flood control, the federal government’s flood insurance program, by suppressing signals that would be expressed in the price system as insurance premiums, if there was indeed a free market for such insurance, has lead to numerous deaths. Ask the residents of New Orleans how they feel about government levees and government flood insurance. See How Government Insurance Destroyed New Orleans.

Need I continue? Each government program Mr. Abbott mentions has severe problems, and most crowd out efforts by private enterprise to provide alternatives.

There is a truth in the writer’s letter in this sentence: “We need to wake up and realize that we all depend on the government.” That this is true is profoundly sad. Government, Mr. Abbott, operates through force and coercion. Wouldn’t it be better if we could solve problems and provide services through the voluntary cooperation of people?

Tax Abatements in Wichita

Remarks to Wichita City Council, June 3, 2008.

A few months ago I spoke before this council asking that you not grant a tax abatement. At that time I was told that granting a property tax abatement doesn’t have any impact on City of Wichita spending.

I found this quite remarkable, that new homes and buildings can be built but not consume any additional resources that the city and other local governments supply. If this is truly the case, why should a new development of any type at any location have to pay any property tax at all?

There is a cost to the city and other local governments in granting tax abatements. Actually, the cost is born by the taxpayers who don’t achieve the favored status that these developers are seeking. These non-favored taxpayers — homeowners and businesses alike — have to pay for the services this development will consume but will not pay for because they seek to avoid paying their property tax.

Mr. Mayor and Members of the Council, if there were no impact on city spending, no cost to the taxpayers of the City of Wichita when a TIF district is created or tax abatements given, why would we not grant these benefits to anyone building anything in any part of town?

It is now apparent that TIF districts and tax abatements are entitlements that developers in politically-favored areas of town can count on receiving, while everyone else pays.

The granting of these benefits to developers working in certain parts of Wichita amounts to central government planning. It is government, instead of people trading freely in markets, deciding to direct capital from one part of town to another for political, instead of economic, reasons. In effect, this council says to entrepreneurs who chose to invest their capital somewhere else in Wichita — somewhere that doesn’t qualify for tax abatements — that they made a mistake. And they will pay for that mistake, as they pay the property tax that these developers will escape paying.

It may be that this project is not economically viable unless it receives the tax abatement. If so, we should ask why our taxes are so high that they discourage investment and economic activity.

Investment in Wichita Public Schools

Part of the Wichita Eagle opinion watch series. An audio broadcast of this article may be heard by clicking here.

A letter writer in the April 27, 2008 Wichita Eagle makes the case that investment in USD 259 (the Wichita, Kansas public school district) has a good return.

By way of comparison, the writer argues that the Wichita airport, having been built with public funds, represents “an investment return.” Whether it represents a good return on investment the writer doesn’t say, but I believe he means that the airport was a good investment of public funds.

The mere fact that the airport exists, however, doesn’t prove a good return on investment. Since the airport is owned by government and doesn’t calculate its profit or loss in a competitive market, we can never know how wise is the “investment” made in the Wichita airport.

Then the writer really gets off track. He speaks of “my own school bond issue within my family,” that being day care, preschool, K through 12, then a degree at the University of Kansas and a master’s degree. These activities are all voluntary choices that the writer and his family made. Taxation by the government, however, is not voluntary. The writer might also be reminded that it may be a voluntary choice to attend the University of Kansas, but the people of the State of Kansas have no choice but to fund its operations.

Finally, the writer states “Some opponents of the school bond issue have even said the kids in USD 259 don’t need tornado shelters. That is ridiculous.” It is true that 60 schools in the Wichita school district don’t have safe rooms, and this situation is the result of decisions made by the school district and its board. They had an opportunity to build more safe rooms as part of the bond issue in 2000, but they decided to spend the money on other things. Similarly, each year the district has a large capital budget to spend, and each year they decide to spend it on things other than safe rooms. Blame for the lack of storm shelters, therefore, rests solely with the Wichita school district. They have decided that other things are more important.

Wichita school bond issue economic fallacy

A recent article in the Wichita Business Journal (December 28, 2007) about USD 259, the Wichita public school district, bond issues contained this passage:

“The economic benefit was fantastic,” says Joe Johnson, a partner at Schaefer Johnson Cox Frey, who was on the 2006 steering committee. “No one predicted the downturn, but this community got tremendous value from the bond issue.”

There was also this passage concerning Wichita Schools Superintendent Winston Brooks:

There is a misconception, Brooks says, that the bond issue was a drain on the economy. Actually, he says, the bond issue had a positive economic impact on Wichita.

“I think we did bail out this community with the bond issue,” Brooks says. “… Often times when you hear the district talk about bond issues, it’s ‘Here they come again. It’s going to kill the economy.’ The fact of the matter is that’s not what happened last time.

“That bond issue helped the economy.”

I have no doubt that the school bond issue in 2000 was a tremendous benefit to Mr. Johnson’s firm. I’m sure Superintendent Brooks, in some way that I don’t understand, benefited from the bond issue, too.

As to the rest of the community, however, the benefit claimed by these two men doesn’t exist. It never existed. It is only a fantasy flowing from an economic fallacy. It comes from being so focused on one’s own self that nothing else matters, and is therefore not seen or considered. As explained by Henry Hazlitt in his book Economics in One Lesson:

This [fallacy] is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences.

Consider: If the bond issue in 2000 had not passed and people in Wichita kept the tax money that goes to retiring the bonds (and the future payments yet to be made), what do you suppose they would have done with that money? Wouldn’t it be possible that they would have spent and invested it, and that spending and investing would have provided economic benefit to our community too?

I am reminded of another passage from Economics in One Lesson regarding a bridge to be built:

Therefore for every public job created by the bridge project a private job has been destroyed somewhere else. We can see the men employed on the bridge. We can watch them at work. The employment argument of the government spenders becomes vivid, and probably for most people convincing.

But there are other things that we do not see, because, alas, they have never been permitted to come into existence. They are the jobs destroyed by the $1,000,000 taken from the taxpayers. All that has happened, at best, is that there has been a diversion of jobs because of the project.

It is as simple as that. Every dollar taken by taxes is a dollar that isn’t spent somewhere else, with the attendant loss of economic activity. When we hear arguments about how much a new school bond issue will benefit Wichita’s economy, remember this.

Problem of low wages not easily solved

Writing from New Orleans, Louisiana

A group in Kansas has been pressing for raising our state’s minimum wage. Other groups in Kansas seek to impose a “living wage” that is higher than the federal minimum wage, which itself has been raised recently.

The great appeal of a higher minimum wage mandated by an act of the legislature is that it seems like a wonderfully magical way to increase the wellbeing of low-wage workers. Those who were earning less than the new lawful wage and keep their jobs after the increase are happy. They are grateful to the lawmakers, labor leaders, newspaper editorialists, and others who pleaded for the higher minimum wage. News stories will report their good fortune.

That’s the visible effect of raising the minimum wage. But to understand the entire issue, we must look for the unseen effects.

The not-so-visible effect of the higher wage law is that demand for labor will be reduced. Those workers whose productivity, as measured by the give and take of supply and demand, lies below the new lawful wage rate are in danger of losing their jobs. The minimum wage law says if you hire someone you must pay them a certain amount. The law can’t compel you to hire someone, nor can it compel employers to keep workers on the payroll.

The difficulty is that people with lose their jobs in dribs and drabs. A few workers here; a few there. They may not know who is to blame. The newspaper and television reporters will not seek these people, as they are largely invisible, especially so in the case of the people who are not hired because of the higher wage law.

If we are truly concerned about the plight of low-wage workers we can face some harsh realities and deal with them openly. The simple fact is that some people are not able to produce output that our economy values very much. They are not very productive. Passing a law that requires employers to pay them more doesn’t change the fact that their productivity is low. But there are ways to increase productivity.

One way to increase workers’ productivity is through education. Unfortunately, there is ample evidence that our public education system is failing badly.

Capital — another way to increase wages — may be a dirty word to some. But as the economist Walter E. Williams says, ask yourself this question: who earns the higher wage: a man digging a ditch with a shovel, or a man digging a ditch using a power backhoe? The difference between the two is that the man with the backhoe is more productive. That productivity is provided by capital — the savings that someone accumulated (instead of spending on immediate consumption or taxes) and invested in a piece of equipment that increased the output of workers and our economy.

Education and capital accumulation are the two best ways to increase the productivity and the wages of workers. Ironically, the people who are most vocal about raising wages through legislative fiat are also usually opposed to meaningful education reform and school choice, insisting on more resources being poured into the present system. They also usually support higher taxes on both individuals and business, which makes it harder to accumulate capital. These organizations should examine the effects of the policies they promote, as they are not in alignment with their stated goals.

The Candlemaker’s Petition

By Frederic Bastiat

A PETITION

From the Manufacturers of Candles, Tapers, Lanterns, sticks, Street Lamps, Snuffers, and Extinguishers, and from Producers of Tallow, Oil, Resin, Alcohol, and Generally of Everything Connected with Lighting.

To the Honourable Members of the Chamber of Deputies.

Gentlemen:

You are on the right track. You reject abstract theories and little regard for abundance and low prices. You concern yourselves mainly with the fate of the producer. You wish to free him from foreign competition, that is, to reserve the domestic market for domestic industry.

We come to offer you a wonderful opportunity for your — what shall we call it? Your theory? No, nothing is more deceptive than theory. Your doctrine? Your system? Your principle? But you dislike doctrines, you have a horror of systems, as for principles, you deny that there are any in political economy; therefore we shall call it your practice — your practice without theory and without principle.

We are suffering from the ruinous competition of a rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation.

This rival, which is none other than the sun, is waging war on us so mercilessly we suspect he is being stirred up against us by perfidious Albion (excellent diplomacy nowadays!), particularly because he has for that haughty island a respect that he does not show for us.

We ask you to be so good as to pass a law requiring the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull’s-eyes, deadlights, and blinds — in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses, to the detriment of the fair industries with which, we are proud to say, we have endowed the country, a country that cannot, without betraying ingratitude, abandon us today to so unequal a combat.

Be good enough, honourable deputies, to take our request seriously, and do not reject it without at least hearing the reasons that we have to advance in its support.

First, if you shut off as much as possible all access to natural light, and thereby create a need for artificial light, what industry in France will not ultimately be encouraged?

If France consumes more tallow, there will have to be more cattle and sheep, and, consequently, we shall see an increase in cleared fields, meat, wool, leather, and especially manure, the basis of all agricultural wealth.

If France consumes more oil, we shall see an expansion in the cultivation of the poppy, the olive, and rapeseed. These rich yet soil-exhausting plants will come at just the right time to enable us to put to profitable use the increased fertility that the breeding of cattle will impart to the land.

Our moors will be covered with resinous trees. Numerous swarms of bees will gather from our mountains the perfumed treasures that today waste their fragrance, like the flowers from which they emanate.

Thus, there is not one branch of agriculture that would not undergo a great expansion.

The same holds true of shipping. Thousands of vessels will engage in whaling, and in a short time we shall have a fleet capable of upholding the honour of France and of gratifying the patriotic aspirations of the undersigned petitioners, chandlers, etc.

But what shall we say of the specialities of Parisian manufacture? Henceforth you will behold gilding, bronze, and crystal in candlesticks, in lamps, in chandeliers, in candelabra sparkling in spacious emporia compared with which those of today are but stalls.

There is no needy resin-collector on the heights of his sand dunes, no poor miner in the depths of his black pit, who will not receive higher wages and enjoy increased prosperity.

It needs but a little reflection, gentlemen, to be convinced that there is perhaps not one Frenchman, from the wealthy stockholder of the Anzin Company to the humblest vendor of matches, whose condition would not be improved by the success of our petition.

We anticipate your objections, gentlemen; but there is not a single one of them that you have not picked up from the musty old books of the advocates of free trade. We defy you to utter a word against us that will not instantly rebound against yourselves and the principle behind all your policy.

Will you tell us that, though we may gain by this protection, France will not gain at all, because the consumer will bear the expense?

We have our answer ready:

You no longer have the right to invoke the interests of the consumer. You have sacrificed him whenever you have found his interests opposed to those of the producer. You have done so in order to encourage industry and to increase employment. For the same reason you ought to do so this time too.

Indeed, you yourselves have anticipated this objection. When told that the consumer has a stake in the free entry of iron, coal, sesame, wheat, and textiles, “Yes,” you reply, “but the producer has a stake in their exclusion.” Very well, surely if consumers have a stake in the admission of natural light, producers have a stake in its interdiction.

“But,” you may still say, “the producer and the consumer are one and the same person. If the manufacturer profits by protection, he will make the farmer prosperous. Contrariwise, if agriculture is prosperous, it will open markets for manufactured goods.”

Very well, If you grant us a monopoly over the production of lighting during the day, first of all we shall buy large amounts of tallow, charcoal, oil, resin, wax, alcohol, silver, iron, bronze, and crystal, to supply our industry; and, moreover, we and our numerous suppliers, having become rich, will consume a great deal and spread prosperity into all areas of domestic industry.

Will you say that the light of the sun is a gratuitous gift of Nature, and that to reject such gifts would be to reject wealth itself under the pretext of encouraging the means of acquiring it?

But if you take this position, you strike a mortal blow at your own policy; remember that up to now you have always excluded foreign goods because and in proportion as they approximate gratuitous gifts. You have only half as good a reason for complying with the demands of other monopolists as you have for granting our petition, which is in complete accord with your established policy; and to reject our demands precisely because they are better founded than anyone else’s would be tantamount to accepting the equation: + x + = -; in other words, it would be to heap absurdity upon absurdity.

Labour and Nature collaborate in varying proportions, depending upon the country and the climate, in the production of a commodity. The part that Nature contributes is always free of charge; it is the part contributed by human labour that constitutes value and is paid for.

If an orange from Lisbon sells for half the price of an orange from Paris, it is because the natural heat of the sun, which is, of course, free of charge, does for the former what the latter owes to artificial heating, which necessarily has to be paid for in the market.

Thus, when an orange reaches us from Portugal, one can say that it is given to us half free of charge, or, in other words, at half price as compared with those from Paris.

Now, it is precisely on the basis of its being semigratuitous (pardon the word) that you maintain it should be barred. You ask: “How can French labour withstand the competition of foreign labour when the former has to do all the work, whereas the latter has to do only half, the sun taking care of the rest?”

But if the fact that a product is half free of charge leads you to exclude it from competition, how can its being totally free of charge induce you to admit it into competition? Either you are not consistent, or you should, after excluding what is half free of charge as harmful to our domestic industry, exclude what is totally gratuitous with all the more reason and with twice the zeal.

To take another example: When a product — coal, iron, wheat, or textiles — comes to us from abroad, and when we can acquire it for less labour than if we produced it ourselves, the difference is a gratuitous gift that is conferred up on us. The size of this gift is proportionate to the extent of this difference. It is a quarter, a half, or three-quarters of the value of the product if the foreigner asks of us only three-quarters, one-half, or one-quarter as high a price. It is as complete as it can be when the donor, like the sun in providing us with light, asks nothing from us. The question, and we pose it formally, is whether what you desire for France is the benefit of consumption free of charge or the alleged advantages of onerous production.

Make your choice, but be logical; for as long as you ban, as you do, foreign coal, iron, wheat, and textiles, in proportion as their price approaches zero, how inconsistent it would be to admit the light of the sun, whose price is zero all day long!

Frédéric Bastiat (1801-1850), Sophismes économiques, 1845

Henry Hazlitt explains Frederic Bastiat, or, a broken window really hurts no matter what the New York Times says

This simple lesson from Henry Hazlitt’s Economics in One Lesson explains so much, yet so little people realize and apply the truths explained here. Even trained economists like Paul Krugman, writing in The New York Times, fail to recognize the truth of Bastiat’s lesson as explained by Hazlitt when he remarked that “the terror attack [of 9/11/2001 that destroyed the World Trade Center] could even do some economic good.”

Part TWO
THE LESSON APPLIED
THE BROKEN WINDOW

Let us begin with the simplest illustration possible: let us, emulating Bastiat, choose a broken pane of glass.

A young hoodlum, say, heaves a brick through the window of a baker’s shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Fifty dollars? That will be quite a sum. After all, if windows were never broken, what would happen to the glass business?

Then, of course, the thing is endless. The glazier will have $50 more to spend with other merchants, and these in turn will have $50 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever- widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.

Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $50 that he was planning to spend for a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $50 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as a part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.

The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.

The Shine Is Off Corn Ethanol

Our economy is so intertwined and interdependent that it is impossible for the government to guide it in any direction without setting off a long chain of consequences. This is another example of the folly of centralized economic planning.

As I’ve written in the past, to determine the true value of ethanol, remove all subsidies for producing it and the corn used to make it, and end the tariff on imported ethanol. Very rapidly the market will tell us just how much a gallon of ethanol is worth.

Dan Mitchell summarizes The Wall Street Journal:

The shine is off corn ethanol, and oh, what a comedown it has been. It was only in January that President Bush was calling for a yet a bijillion more gallons of the wonder-stuff in his State of the Union address, and Iowa’s Chuck Grassley was practically doing the Macarena in his seat. And why shouldn’t Mr. Grassley and fellow ethanol handmaidens have boogied? They’d forced their first mandate through Congress, corn farmers were rolling in dough, billions in taxpayer dollars were spurring dozens of new ethanol plants–and here was the commander-in-chief calling for yet more yellow dollars. All in the name of national security, too! Corn ethanol seemed unstoppable, but a remarkable thing happened on the road from Des Moines. Just as the smart people warned, the government’s decision to play energy market God and forcibly divert huge amounts of corn stocks into ethanol has played havoc with key sectors of the economy. Corn prices have nearly doubled, which means livestock owners can’t afford to feed their animals, and food and drink manufacturers are struggling to buy corn and corn syrup. Environmentalists are sour over new stresses on farmland; international aid groups are moaning that the U.S. is cutting back its charitable food giving, and many of these folks are taking out their anger on Congress. …The hugely influential National Cattlemen’s Beef Association has gone so far as to outline a series of public demands, including an end to any government tax credits (subsidies) for ethanol and an axe to the import tariff on foreign ethanol. Put another way, the cattlemen are so angry that they are demanding free markets and free trade–a first. …The National Turkey Federation estimates its feed costs have gone up nearly $600 million annually and is surely letting loose on members from turkey states such as Minnesota and Missouri. The National Chicken Council, which represents companies that produce, process and market chickens, has been hitting the southern political caucus, putting pressure on senators from big poultry states such as Georgia, Arkansas and Alabama. Chicken giant Tyson’s, the second largest employer in Arkansas (after Wal-Mart), even felt the need to warn about the effect of rising corn prices on its business in its first quarter earnings statement. Food and drink manufacturers, which rely heavily on corn and corn syrup for their products, are also making the Washington rounds. The Grocery Manufacturers Association this week called for Congress to undertake a study before it imposed a bigger ethanol mandate. Soft-drink companies such as Coca-Cola (of Mr. Chambliss’s Georgia) are also up in arms.
http://www.opinionjournal.com/columnists/kstrasselpw/?id=110010094

And summarizing John Stossel:

When everyone in politics jumps on a bandwagon like ethanol, I start to wonder if there’s something wrong with it. And there is. Except for that fact that ethanol comes from corn, nothing you’re told about it is true. …If ethanol’s so good, why does it need government subsidies? Shouldn’t producers be eager to make it, knowing that thrilled consumers will reward them with profits? But consumers won’t reward them, because without subsidies, ethanol would cost much more than gasoline. The claim that using ethanol will save energy is another myth. Studies show that the amount of energy ethanol produces and the amount needed to make it are roughly the same. …even turning all of America’s corn into ethanol would meet only 12 percent of our gasoline demand. …the standard mixture of 90 percent ethanol and 10 percent gasoline pollutes worse than gasoline. …Surely, ethanol must be good for something. And here we finally have a fact. It is good for something — or at least someone: corn farmers and processors of ethanol, such as Archer Daniels Midland, the big food processor known for its savvy at getting subsidies out of the taxpayers. And it’s good for vote-hungry presidential hopefuls. Iowa is a key state in the presidential-nomination sweepstakes.
http://www.townhall.com/columnists/JohnStossel/2007/05/23/the_many_myths_of_ethanol

Economic fallacy supports arts in Wichita

Recently two editorials appeared in The Wichita Eagle promoting government spending on the arts because it does wonderful things for the local economy. The writers are Rhonda Holman and Joan Cole, who is chairwoman of the Arts Council.

I read the study that these local writers relied on. The single greatest defect in this study is that it selectively ignores the secondary effects of government spending on the arts.

As an example, the writers in the Eagle promote the study’s conclusion that the return on dollars spent on the arts is “a spectacular 7-to-1 that would even thrill Wall Street veterans.” It hardly merits mention that there aren’t legitimate investments that generate this type of return in any short timeframe.

So were do these fabulous returns come from? Here’s a passage from the study that the Eagle writers relied on:

A theater company purchases a gallon of paint from the local hardware store for $20, generating the direct economic impact of the expenditure. The hardware store then uses a portion of the aforementioned $20 to pay the sales clerk’s salary; the sales clerk respends some of the money for groceries; the grocery store uses some of the money to pay its cashier; the cashier then spends some for the utility bill; and so on. The subsequent rounds of spending are the indirect economic impacts.

Thus, the initial expenditure by the theater company was followed by four additional rounds of spending (by the hardware store, sales clerk, grocery store, and the cashier). The effect of the theater company’s initial expenditure is the direct economic impact. The subsequent rounds of spending are all of the indirect impacts. The total impact is the sum of the direct and indirect impacts.

Relying on this reasoning illustrates the problem with the Eagle editorials: they ignore the secondary effects of economic action, except when it suits their case. The fabulous returns erroneously attributed to spending on the arts derive from this chain of spending starting at the hardware store. But what the authors of this study and the Eagle editorial writers must fail to see is that anyone who buys a gallon of paint for any reason sets off the same chain of economic activity. There is no difference — except that a homeowner buying the paint is doing so voluntarily, while an arts organization using taxpayer-supplied money to buy the paint is using someone else’s money.

The study also pumps up the return on government investment in the arts by noting all the other spending that arts patrons do on things like dinner before and desert after arts events. But if people kept their own money instead of being taxed to support the arts, they would spend this money on other things, and those things might include restaurant meals, too.

The fact that these editorials have been printed might lead me to suspect that government-supported arts organizations and Eagle editorial writers might feel a little guilty about using taxpayer funds. They should. To take money from one group of people by government coercion and give it to other people, especially when that purpose is to stage arts events, is wrong. It’s even more so when the justification for doing this is so transparently incorrect.

Arts organizations need to survive on their own merits. They need to produce a product or service that satisfies their customers and patrons just as any other business must.

It may turn out that what people really want for arts and culture, as expressed by their own selections made freely, might be different from what government bureaucrats and commissions decide we should have. That freedom to choose, it seems to me, is something that our Wichita City Council, Arts Council, and Wichita Eagle editorial writers believe the public isn’t informed or responsible enough to enjoy.

I, Pencil: A Most Important Story

I, Pencil is one of the most important and influential writings that explain the necessity for limited government. A simple object that we may not give much throught to, the story of the pencil illustrates the importance of markets, and the impossibility of centralized economic planning.

From the afterword to I, Pencil by Milton Friedman:

Leonard E. Read’s delightful story, “I, Pencil,” has become a classic, and deservedly so. I know of no other piece of literature that so succinctly, persuasively, and effectively illustrates the meaning of both Adam Smith’s invisible hand — the possibility of cooperation without coercion — and Friedrich Hayek’s emphasis on the importance of dispersed knowledge and the role of the price system in communicating information that “will make the individuals do the desirable things without anyone having to tell them what to do.”

Link to a pdf of I, Pencil: http://www.fee.org/pdf/books/I,%20Pencil%202006.pdf

Link to Leonard E. Read reading I, Pencil: http://www.fee.org/events/detail.asp?id=6239

Hillary Clinton and Milton Friedman: The Contrast

The contrast between the statist Hillary Clinton and the libertarian Milton Friedman. Gathered by Thomas D. Kuiper.

The Free Market

“The unfettered free market has been the most radically destructive force in American life in the last generation.”
— First Lady Hillary Clinton on C-Span in 1996 stating her troubles with the free market

“What most people really object to when they object to a free market is that it is so hard for them to shape it to their own will. The market gives people what the people want instead of what other people think they ought to want. At the bottom of many criticisms of the market economy is really lack of belief in freedom itself.”
— Milton Friedman, Wall Street Journal, May 18, 1961

Social Security

“We can’t afford to have that money go to the private sector. The money has to go to the federal government because the federal government will spend that money better than the private sector will spend it.”
— First Lady Hillary Clinton in a disagreement with a Republican congressman

“I have long been a critic of Social Security, basically because I believe that it is not the business of government to tell people what fraction of their incomes they should devote to providing for their own or someone else’s old age.”
— Milton Friedman, WSJ, March 15, 1988

Health Care

“I had a few ideas about health care, and I’ve learned a few lessons since then, but I haven’t given up the goal, and that’s why we kept working step-by-step to insure millions of children through the Children’s Health Insurance Program.”
— First Lady Hillary Clinton at the 2000 Democratic Convention, still wanting socialized medicine in the United States

“It is taken for granted that workers should receive their pay partly in kind, in the form of medical care provided by the employer. How come? Why single out medical care? Surely food is no less essential to life than medical care. Why is it not at least as logical for workers to be required to buy their food at the company store as to be required to buy their medical care at the company store?”
— Milton Friedman writes against Hillary’s health care plan; WSJ, Feb.13, 1993

Government Spending & Taxes

“Other developed countries…are more committed to social stability than we have been, and they tailor their economic policies to maintain it.”
— First Lady Hillary Clinton writes her affinity for Europe’s cradle-to-grave welfare policies

“Cutting government spending and government intrusion in the economy will almost surely involve immediate gain for the many, short-term pain for the few, and long-term gain for all.”
— Milton Friedman, WSJ, June 15, 1995

Free Trade vs. Fair Trade

“Too many people have made too much money.”
— First Lady Hillary Clinton condemns the insurance industry, feeling it’s not fair that certain businesses are making ‘too much money’

“‘Fair’ is in the eye of the beholder; free is the verdict of the market. (The word ‘free’ is used three times in the Declaration of Independence and once in the First Amendment to the Constitution, along with ‘freedom.’ The word ‘fair’ is not used in either of our founding documents.)”
— Milton Friedman, WSJ, Mar. 7, 1996

Williams’ law: the vital role of profits

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.