Category Archives: Austrian economics

Do no harm?

A recent conversation with a friend highlighted the fact that even among conservatives there is a pervasive belief that “unfettered” markets require some level of “control” by the government. The poster child for this viewpoint is Rockefeller’s Standard Oil which at its peak achieved 90% market share. The formation of such a “monopoly” (it wasn’t, a monopoly would be 100% market share – something only a government can achieve in the many areas it deems worthy of nationalization) is sufficient proof in their minds of both ill deeds and ill intent. Unfortunately the facts do not support a narrative of ill will. In 1865 when Rockefeller was just starting and had virtually no market share kerosene cost 58¢/gallon. By 1870 Standard Oil’s (SO) share was a mere 4% and yet they had driven the price down to 26¢. Only 10 years later SO’s market share had shot up to 90% and did prices skyrocket as well under this “monopoly”? No, prices declined to 9¢. And by 1890 still at 90% market share prices fell even further to 7¢.  So who exactly was harmed here? Certainly not the consumers of kerosene.

One could argue that the competitors were “harmed” but so what? SO achieved its market position by becoming more efficient so that it could profitably charge lower prices. It did not engage in violence or the threat of violence to achieve its goals, as the state/government is wont to do. Mere “harm” cannot be the nebulous standard by which we invoke the necessity of state intervention. If five people apply for a job then the four that did not get the job are arguably harmed, so, should the state step in and penalize the person who got the job by making him or her share it with the others? When two sports teams play each other is not the losing team “harmed”? Upset fans, potential decreased ticket sales, lower potential ad revenue – all these things constitute types of harm, yet no one is (yet) screaming for the state to step in. Most likely because all recognize the solution would be absurd – they would simply mandate all games end in a tie or that wins and losses must be equalized. We certainly can’t have an unequal “win” distribution, how unfair.

One type of specific harm that anti-trust proponents say must be banned is the practice of “predatory pricing”. This is the practice of a competitor temporarily lowering their price and losing money in order to drive out competitors that can’t afford to lose money as long (the economic equivalent of a game of “chicken”). Problem is, this has never actually happened. Sure there might be temporary “price wars” between competing retailers that go on for a few days, but neither side gets ahead and at the end of the day no company has ever actually been driven out of business this way. The reason for this is the following: either you have to buy up the whole world (impossible) or the act of driving competitors into bankruptcy creates replacements that can more readily compete on price. For example, if a competitor went into bankruptcy then someone else would buy up their assets at pennies on the dollar and reopen the business with a much lower operating overhead. Now they are in a much better position to compete with you. Not a useful outcome.

But lets say for the sake of argument somehow it all worked and you could drive out competitors this way. Where is the natural rights violation? What is essentially happening here is large competitor A is using their deep financial resources (savings) to compete with small competitor B in a way that B is incapable of because of their smaller size. Is this unfair? Well before you answer that consider that this goes on all day long in the business world. Larger companies can spend a lot more of their financial resources (savings) on: more sales personnel, larger R&D budget, improving efficiency through automation and so on. That is deemed perfectly fair, however using those exact same resources to facilitate deep pricing discount is not. Simply put, there is no reason to arbitrarily single out such a practice and threaten to throw people in cages if they engage in it. It is no more of an excuse for state intervention in the market than is a dislike of the font in a company’s logo.

As long as no aggression (fraud, violence, or the threat of violence) is occurring then any and all actions or businesses or products should be permitted. No one should live in fear that men with guns will throw them in cages because of someone’s subjective opinion of what constitutes fairness or harm. Opinions are fine, but opinions backed up by a threat of violence violate everyone’s natural right to liberty and the pursuit of happiness.

VW: Cookie Thief

So, Volkswagen has been evading the EPA’s rules and regulations regarding emissions from diesel engine? Well good for them. Yes I realize that is not a very PC thing to say amongst all the cacophonous lamentations of those holding Proper Opinion on the “damage” to the environment that this little ploy has wrought. Regrettably VW swiftly engaged self-flagellation mode, seeking forgiveness from those that run the many worldwide plantations we today refer to as states. In other words, they quickly went to mommy and daddy and begged to not be spanked too hard if they would just quickly clean up their mess. If only they had stood up to the EPA and told them “Yes, we skirted your stupid rules, we do not recognize your authority, we only recognize the authority of our customers who will buy our products if they meet their standards and won’t if they don’t”. Of course that is not what happened. Instead VW bent over and obsequiously bleated, “Thank you sir, may I have another.” VW’s crime is about as morally significant as a slave stealing cookies from the master’s kitchen. It is but a technical violation of an arbitrary rule with no real victim.

I can hear the objections now, “But, but, the environment! They were damaging the environment!” Really? How do you know that? Because the EPA said so? Because this single agency run by a handful of bureaucrats established a committee whose job it was to climb Mt. Sinai and return with stone tablets upon which was inscribed the exact amount of safe emissions? Please. I do not know if the level of emissions emitted by VW diesels, or any diesel or gasoline engine is “safe”, and neither do you or anyone else. Maybe the level set by EPA now is itself “too high” but everyone seems ok with it. The level of emissions VW’s cars were actually producing complied with the EPA standards in existence as recently as 2004. So in 2004 the level was perfectly fine and not “harmful” at all, but two years later the target changed and suddenly VW is the anti-Christ for continuing to meet the old target? The new “clean diesel” standards were not a trivial change. VW and other manufacturers left the US diesel market and worked on the problem for 4 years! In the end VW balanced the demands of cost, power, and emissions and felt their customers would be better served by lower cost and higher power at the expense of higher emissions as opposed to higher cost and lower power in order to achieve lower emissions. Luxury brands like BMW and Mercedes could produce diesel engines conforming to the new rules more easily because their customers are less sensitive to cost considerations. When regulations force product costs upward it is the luxury brands that benefit at the expense of the value brands. If all diesels cost $50k because of the new rules, then why buy a VW when you can have a BMW?

Now some might object that when it comes to the environment cost should not be a consideration. However that assertion flies in the face of economic reality; everything has a cost and everything has tradeoffs relative to those costs. Those espousing the “ignore costs” mantra engage in a performative contradiction. Their actions in their own lives contradict their philosophy. If the environment should reign supreme to all other considerations they should return to the wilderness as hunter-gatherers. And yet they do not.

Cost is always a consideration, even in our daily lives. For example, we all obviously value our personal safety, but to what degree? Even with our safety we are willing to make cost tradeoffs. If we truly valued it above all other things we would either drive tanks or never exceed 5 mph. The sheer cost of driving a tank or the time-opportunity cost of traveling so slowly is far beyond what any of us deem reasonable. Nobody does this; we collectively have shifted that balance between time, safety, and money to the one we see today. Technology will likely change that balance in the future, but for now it is the best compromise available given current costs and benefits. Absent the EPA we would be afforded the opportunity to balance environmental concerns relative to cost in a market where different manufacturers would offer a variety of products that they hope will suit the demands of consumers. It would be the most successful model (the one people buy the most of) that would be emulated. This purely market based approach is thus the most democratic means of the people deciding where that tradeoff should be. To believe that the EPA knows best and we should all bow to their will is no different than believing the King or Queen is much wiser than us all and we should do whatever they say. Although we lack royalty in this country today, that is in name only. We have unwittingly elected the same sort of top down one size fits all approach to governance (tyranny) that so many pay lip service to opposing while blithely waving flags and swearing oaths in support of it (the state). E Pluribus Pluribus.

Paddling in Circles

One of the more frustrating “Trumpisms” is his idea that in order for American to “win,” US exports must exceed US imports. He sees the entire country as just one big corporation whose sole purpose is to make a “profit” by exporting more than it imports (that is, sells goods at a greater value than what it paid for them). This simplistic viewpoint is deeply flawed. It presumes trade is a zero-sum game where one side always “wins” and the other side “loses” in the exchange. Indeed this mindset would mean every time we buy groceries the store has “won” and we have “lost.” Trade is always a win-win game; both parties have gained more than they gave up, otherwise they would not have made the exchange.

Viewing trade at a macro-level is myopic at best (as it ignores the underlying individual decisions being made by billions of people) but in order to make a point we will proceed with that fiction. That point is this: a trade surplus or deficit can never exist. Although that may sound shocking at first it really shouldn’t when you consider the nature of any trade. If I buy a candy bar, I hand the clerk a few dollars. Does the store now have a trade surplus with respect to me? Do I have a trade deficit with respect to the store? Of course not. The store traded away a candy bar and traded in money. I did the exact reverse. So when we consider China and US trade we see that China sends us a whole host of goods and we send them green paper rectangles. Now, ignoring the fact that Federal Reserve is constantly swelling the money supply for its friends on Wall Street, we’ll assume that the supply of US currency is constant. Given that assumption we must ask: how did we acquire those pieces of paper to give to China? We got them by producing goods and services for someone else. So if we send $x to China for $x worth of goods A that means we had to first produce $x worth of goods B. China didn’t want goods B, they wanted the money. That is the nature of indirect exchange and is why money is an emergent property of trade (it solves the double coincident of wants problem).

Ok, but some will say that’s all fine and good, but the problem we have is that the total export of goods to all countries is less than total imports of goods from all countries. So even though the US may have a trade surplus with respect to US dollars, we have a deficit with respect to goods. That is true. But it doesn’t it matter, or rather it shouldn’t matter. The only reason this is viewed as a problem is because of the artificial attempts to solve it actually make the problem worse. In order to explain the problem we must once again assume that the quantity of money is constant. In that case, as more goods come into the US and more money flows out of the US there will be fewer and fewer dollars remaining in the US. This is called deflation (a contract of the quantity of money). This is natural and does not cause depressions or any other nonsense like that (no matter what your 4th grade teacher told you). Under deflation money is in high demand (because there isn’t a lot of it), which means the money price of goods decline (in order to get that scarce money, people will trade more and more goods for it – hence prices fall). So if prices of goods made in the US fall, what do you think that would do in terms of making American goods more competitive to overseas buyers with fistfuls of dollars? That’s right, they’ll start buying all those cheap US goods which will naturally swing the trade pendulum the other way, with more goods leaving the US than coming in and likewise more money coming in than leaving.

That this does not occur presently is a testament to how much the Federal Reserve and US monetary policy has distorted these natural incentives. The Federal Reserve short circuits this natural feedback system and inflates the money supply. This very temporarily makes US goods cheaper overseas (buy devaluing the exchange rate of the US dollar relative to other currencies that are inflating less rapidly), but (a) it doesn’t last long because other countries quickly adjust their inflation to counterbalance the effect and (b) it has the deleterious side effect of making US goods MORE expensive for US buyers (that’s what inflation does, it increases the money price of goods). So, under the natural system of deflation ALL prices fall which benefits both domestic and international trade. However under the artificial Fed induced inflation system we have domestic prices rise while relative prices for international buyers fall for a short period but then quickly also rise resulting in market disruptions and distortions. Using money creation to solve trade problems is like rowing a boat with one paddle forward and the other paddle backwards.

If we want to “fix” trade we need to examine the current incentives created by the distortions into the market introduced by Fed monetary policy. Only then will we see we need to do less, not more, to “fix” the situation.

You can lead a horse to a carousel, but you can’t make him eat a free lunch

A persistent myth in this country is that even though the government may do things we do not approve of, We the People ultimately have control of the reigns. We elect representatives, senators, and a President and it is they that decide how this country is run. So the theory is that if we don’t like what they do we can “vote the bums” out. That Congress’ approval rating is perennially in the low teens and yet incumbents are re-elected at a rate exceeding 80% speaks volumes about how successful that strategy has been. However, the dirty little secret is that most government functions originate not from elected officials but rather faceless bureaucrats who write, approve, and enforce what is known as “administrative law.” This process proceeds quietly in the dark underbelly of Washington, completely immune from “outsider” (that is, “the peoples”) influence. Like the static animals and chariots of a carousel, the unchanging bureaucracy provides support to our elected officials, who come and go like so many children believing they are driving when in fact they are merely passengers.

Case in point: The Department of Labor. Last month President Obama announced that the Department of Labor would be implementing a doubling of the white-collar salary threshold for overtime exception to $50,440. Although there is a request for comments period from the public, ultimately none of that really matters. The DOL committee voting on the change is in no way bound by those comments. President Obama knows that getting a minimum wage increase through Congress is likely to fail. However he can unilaterally ramrod a change to the overtime rules with little oversight if he employs the autonomous rule making authority of the DOL. Such changes do not require a new law or public debate. Only a handful of bureaucrats need to simply decide “ok, let’s just change this” and that’s it.

The shockingly sad part about all of this is not so much that a handful of people get to substitute their personal opinion of acceptable work conditions for the opinions of 120 million employees and employers but rather that they actually think this change will, in the words of Obama “help promote higher take-home pay… and shore up the middle class.” You can lead a horse to water, but you can’t make him drink. These people seem to labor under the fairy tale that employers are just sitting on a big pile of cash that they selfishly refuse to share with their employees. So to rectify this we need the government to step in and force them to share. Employee wages are a business transaction just like any other. Each transaction is negotiated between both parties to a level that is acceptable, otherwise were it not acceptable there would be no exchange. If these transaction costs are externally forced upward then employers will respond just as anyone else would, cut back in other areas to compensate.

There is no free lunch. Newly overtime-eligible employees will find their base hourly rate decreased so that at the end of the year they still have made the same dollar figure. Employers will also cut back on discretionary bonuses and benefits or simply cut back on hours so that there is no overtime. This will force such employees to become more efficient with their time and those that can’t will find themselves demoted or unemployed. Another way employers may respond is to reduce the number of managerial positions, which ultimately makes it harder for people to climb the corporate ladder into solidly middle class wage territory.

Another aspect often overlooked by the ivory tower elite is that many employees do not want to be classified as overtime eligible. A job requiring clocking in and out is viewed by employees as a job that is “not important.” Somebody with a college degree making $45k a year feels demeaned if they are told they must now clock in and out like some pimply-faced fry cook. Being on salary is a point of pride for these employees who feel they have worked quite hard to earn that status. That the government is now condescendingly informing them that this is for their own protection reflects the magnitude by which those in government are out of touch with the real world. As with all government interventions, conditions are made worse, not better. Employees either lose benefits and bonuses, get demoted, or end up making the exact same as before but not without first being made to feel less important due to their new status as “just” hourly.

Job! 2016

With the 2016 Presidential election season in full swing it seems nearly every candidate (from far right Trump to far left Sanders) is falling all over themselves to do “something” about illegal immigration. Problem is, the top three economic reasons cited in favor of “closing the border” are utterly fallacious despite their unquestioning acceptance by the media and voters alike.

 

Fallacy#1: Immigrants force wages down making Americans poorer.

Reality: Wages have two parts: a money part (the number) and a real part (the buying power). The money wage is arbitrary and irrelevant because all that matters is the real wage – how much that arbitrary amount will buy. Lower money wages (like lower prices) reflect a concomitant increase in production and should be welcomed. Yes, the money wage is lower, but there is more “stuff” available to buy at lower prices than before, thus real wages increase. Where would you rather live, in a town with a population of ten or one thousand? How much more must everyone work to produce everything needed in the town of ten vs the town of one thousand? Many hands make light work – on this principal alone we should be welcoming more, not fewer, immigrants into this country.

 

Fallacy#2: Immigrants steal jobs.

Reality: This fallacy is rooted in the mistaken notion that “jobs” are a form of fixed resource welfare. It views jobs like soup at a soup kitchen; there’s only so much to go around (see Fallacy#3 below). This view sees jobs as a completely one-sided affair when in fact it is of course a mutual exchange; you can’t be “stealing” if you are giving something in return. So jobs “given” to immigrants are not welfare – they produce something in exchange. Ah, but you say a job “given” to an immigrant was thus “stolen” from an American. This rests upon the assumption that there is some ideal level of workers and we must not exceed that. Well if that is true than how can we have this totally unregulated system of childbearing in this country? There is no control over how many children are born and who ultimately enter the work force only to “steal” jobs from other Americans. Should we restrict births in order to ensure just the right amount of jobs in this country? Shall we soon face the specter of the “illegally birthed”?

It is not possible to “steal” a job because one cannot own their job. The term “stealing” is a red herring that misdirects us into thinking a crime of sorts has been committed when in fact the real issue is one of competition. Competition lowers prices or increases quality. Normally we welcome that…when we are the buyer of a good. But when we are the seller, well then the story changes doesn’t it? Immigration control is simply another flavor of protectionism intended to limit competition. It is no different than tariffs or other import restrictions. The seen benefits accrue to the sectors of the economy so protected (whether that be agriculture, steel, or labor) while the unseen harms inflicted upon the consumer paying higher amounts are ignored.

 

Fallacy#3: There are only so many jobs so more immigrants means fewer for everyone else.

Reality: Jobs are unlimited. They are unlimited because humanity will never quench its desire to alter the world. We create our own jobs when we perform work for our own benefit. Others can create jobs for us if they are allowed to save that which they do not consume (profit) and use it to entice others to perform work on their behalf. Since the creation of jobs by others is a direct function of the amount of money they have saved and the amount of money saved is a direct function of profit, then it follows that decreased profit (through higher taxes or costs) will necessarily reduce the quantity of jobs at a given money wage. If one could pay any wage that both parties agreed upon there would be no limit on the quantity of jobs available. Jobs could be doubled overnight if everyone paid one-half the prevailing wage.

Now you may be aghast in horror at the thought of making one-half what you do now. And therein lies the problem. We have becomes so fixated on the money wage we ignore the reality staring us in the face, which is that with twice the number of people employed, output would increase far beyond two-fold (owing to the synergy of combined resources). Honestly, would you really care if you made one-half the money wage you do today if it bought five-times as many goods than your current wage does?

 

The blind spot that infects every conversation about immigration vis-à-vis jobs is this central fact: we are all buyers and sellers in the economy. You cannot simultaneously protect yourself as a seller without harming yourself as a buyer. Decreasing money wages, when driven by the competition originating from increased production, are reflective of a necessary growth in real wages.

Paddling Upstream

“We kept losing our men, they kept escaping from the factory life from a pesthole–till we had nothing left except the men of need, but none of the men of ability.” Atlas Shrugged, Chapter 10

 

This quote from Ayn Rand’s “Atlas Shrugged” highlights the ultimate outcome of a “to each according to his need, from each according to his ability” pay scale at the fictional Twentieth Century Motor Works. That this novel has been so eerily prescient on so many topics is a testament not so much to Ms. Rand’s prose but rather to her ability to recognize cyclical patterns that emerge in society due to those that succumb to ideas driven by emotion rather than reason. One of the most common fallacies is to conflate the value of one’s humanity (which is equal for all) with the value placed on what one produces. It is an easy error to make; after all it certainly seems “fair” that if two people work equally long and equally “hard” they deserve equal remuneration. Even though this fallacy (the labor theory of value) is easily overturned by considering the case of a mud-pie baker in comparison to an apple pie baker, it continues to infect the minds of all too many. When our leaders are infected with this nostrum, their position of power permits them to spread the damage far and wide. Governmental implementations of this idea include the minimum wage coupled with welfare. Such policies with one hand make it illegal for those with low experience or skills to work while with the other hand pays those same people to not work, crushing their spirit and the motivation to improve themselves.

Private implementation of this idea is more rare, but it does happen. The most recent and well-publicized example is that of Gravity Payments located in Seattle. The company’s CEO, Dan Price, apparently took a page from Atlas Shrugged and announced they would implement a new $70,000 minimum salary pay scale (that’s a $33.65 minimum wage).

Those on the left predictably rejoiced at this news – here was someone finally doing privately what they have been insisting for so long government must force everyone to do. Irrespective of who implements such a plan (public or private) it is doomed to failure on psychological grounds. The first signs of that failure harkens back to the Atlas Shrugged quote above – “we kept losing our men.” Early on two of Gravity Payment’s key employees quit citing the inequity of a pay scale they saw as rewarding the least productive at the expense of the more productive. Like a talent sieve there is nothing to retain or attract the more productive employee when it is need, and not effort, that is rewarded. Likewise, like an anti-talent magnet only those with the lowest drive and skillset will be attracted, for where else could they have any hope of earning such a high wage?

The irony here is that Mr. Price started his company in order to provide the lowest cost alternative in the payment processing industry. He saw others charging too much and he knew he could do the same for less (that is, be more efficient and hence more productive). Now he claims he will not raise prices in order to support this new wage scale (he’s already lost some customers over this fear). But, it seems, if he is going to be consistent it would be perfectly acceptable to raise prices and lay a guilt trip on his customers if they were reluctant to pay the higher rates. After all, his company “needs” the money to pay his employees who “need” their high wages.

Wages, like everything else, are a function of supply and demand. Demand is a function of the subjective valuations humans place on things. Supply is a function of the uneven distribution of varying talents. We can no more expect uniformity in wages than we can expect solidarity in opinion or an equal distribution of talents. One can paddle up stream only for so long; eventually nature will overpower our feeble attempts to counter to it.

I’ll Gladly Pay You Tuesday – Not!

Jimmy enjoyed life. To more fully enjoy it Jimmy needed some money. Jimmy could have worked and saved and worked and saved – but that takes too long. Jimmy wanted to enjoy life NOW. So Jimmy borrowed money from Bob and promised to repay it later – he was a young man; he had plenty of time to pay it back. But Jimmy quickly burned through that loan and was unwilling to suffer the indignation of giving up his carefree lifestyle. So he asked to borrow some more – and he was given more, but at a higher interest rate that reflected Bob’s growing uncertainty about Jimmy’s ability to pay him back. This cycle continued for a while until the interest rate got high enough that Jimmy started to borrow less and less. Then came along Jimmy’s wealthier, older brother Timmy who agreed to co-sign all future loans with Jimmy. Knowing how wealthy Timmy was, Bob felt a lot better about his prospects for getting repaid, so he agreed to a lower interest rate. With this new found credit-worthiness Jimmy went on a binge of borrowing that vastly exceeded what he had done up to that point. This cycle of new Timmy-guaranteed loans continued until one day Timmy said “no more.” To help his brother out Timmy convinced Bob (owing to their strong business relationship) to take a “haircut” on the outstanding loans (that is, write down the amount owed) if Jimmy promised to get his financial affairs in order. Jimmy agreed and Bob complied. But after only a few years Jimmy was back to his old borrow and spend ways and Timmy and Bob had had enough. No more loans until Jimmy paid his loans on time. Jimmy was capable of doing this, but only by drastically cutting back his expenditures. Predictably Jimmy balked. He insisted he would not pay back anything unless Bob once again took a “haircut” and gave him more time to repay. The moral of the story? Don’t live beyond your means by borrowing from tomorrow to pay for today’s luxuries. Also, don’t lend money to those that obviously are unable or unwilling to repay it. This advice applies equally to individuals as well as to countries.

For those unfamiliar with the details of the current Greek debt crisis this little tale above illustrates in the abstract how Greece has behaved over the years. All the details are true, only the names have been changed to protect the innocent. Jimmy is Greece (Jimmy the Greek, get it?), Bob represents all those banks that have lent money to the Greek government over the years, first by buying Drachma based bonds and now EU-based Greek debt, and lastly, Timmy represents the EU itself. After the Euro was fully adopted in 2002 in the EU all member nations retired their national currency in favor of the Euro. The economically more productive countries imbued the Euro with a fiscal resilience that the economically weaker countries (such as Greece) have exploited. Like a reckless teenager using daddy’s credit card, under the Euro regime Greece has been able to borrow more and at a better rate than they ever could have under their Drachma.

Some have suggested if only the EU were more like the US Greece would not be in this bind. In the US the wealthy states subsidize the poorer states via federalized tax transfers (Social Security, welfare, infrastructure projects etc) without the poorer states “owing” anything. That, however, is in invalid comparison. Those are federal programs forced upon all the states. Greece is not in financial straights because of EU mandates. Greece is in trouble because of its own internal government spending. A more apt comparison would be the looming pension crisis in US states (e.g. California, Illinois, New Jersey, etc) where the governments of those states made promises to public worker retirees that are impossible to keep. Citizens of Georgia will be no more interested in bailing out Californian public sector pensioners than are citizens of Germany interested in bailing out a similarly profligate Greece. The pattern is universal in democracy: a gullible public showers with the most votes those politicians who promises them financial security with one hand by robbing their children’s piggy bank with the other.

Although we rubbernecking Americans may feel secure atop the perch of our SUV-sized economy while we idle past the spectacle of Keynesian-influenced deficit spending and Socialism that is Greece, our time is coming. When debt is measured in relation to a country’s tax revenue (that is, the ability to repay it) the US comes in third  – right behind Japan… and Greece. Be afraid. Be very afraid.

Too Much Choice

Bernie Sanders, the (self-described) socialist Senator from Vermont recently quipped in a CNBC interview that “You don’t necessarily need a choice of 23 underarm spray deodorants or of 18 different pairs of sneakers when children are hungry in this country.” The absurdity of this remark should be self-evident, but for those that think perhaps he has a point I thought it might be instructive to deconstruct the remark so as to reveal the base ignorance of economics and markets that lead to such thinking.

The first flaw is purely a logical one. He engages in what is known as a ‘non-sequitur’ fallacy. A true claim is made (that numerous choices exist in the market) followed by another claim (children are hungry) that supposedly is a causal result of the obviously true condition already stated (too many market choices causes children to be hungry). To more clearly illustrate the absurdity of this remark, let’s modify it slightly while retaining the spirit of his rhetoric: “You don’t necessarily need a choice of 23 types of cereal or of 18 different vegetables when children are hungry in this country.”

Marxist romanticists like Sanders still pine for a past that never was in order to justify a future we should all fear.

This notion of wasteful duplication is unabashed Marxism. It has been thoroughly debunked by over one hundred years of empirical evidence. To make this claim today is tantamount to pondering if perhaps we shouldn’t rethink this whole “earth goes around the sun” thing again. Market based economies that “allow” their citizens to pursue their own independent ends in bringing goods to the market have vastly outpaced centrally controlled command-driven economies (Russia, Cuba, North Korea, former Eastern block countries) in terms of growth, overall standard of living, and reductions in poverty. But Marxist romanticists like Sanders still pine for a past that never was in order to justify a future we should all fear.

Why do some persist in subscribing to this fantasy, that if only a wise overseer could have the final say on economic activity we would have Utopia on earth? Because on an emotional level (that is, non-thinking) it feels superficially plausible. It certainly does seem like a lot of wasteful duplicative effort for many people to all make the same good in slightly different ways and then try to sell that good to the same people. Indeed when companies merge they can become more efficient by eliminating such duplication. What Sanders is actually implying (unwittingly?) is that all businesses ultimately should be merged into a single entity so as to remove all such inefficiencies. Of course this single entity would be run by the state. That hasn’t worked out so well in the past. But hey, maybe this time they’ll get it right.

In reality, we already have a centrally planned economy; every business is individually centrally planned by those running that business. It is also true that any business that directed all employees to perform the exact same task would quickly fail. So if central planning without effort duplication works at the small scale (individual business), why would it not work at the large scale, as Mr. Sanders imagines? Scaling effects and limits on human cognition. A business with 100 employees is more than ten times complex than one with 10 employees. At some point it is simply impossibly for the human mind to manage such a complicated system. We are simply incapable of processing that amount of data and making any sort of useful decisions with it. Indeed that is the biggest challenge for any growing businesses; effective management that ensures all parts runs smoothly and work together as a cohesive whole. It is far easier to manage 5 employees than 5 million. At least in the market if a large business is poorly run (and is not bailed out by the state) losses each year will tell them they are doing something wrong. In a state run economy there is no profit/loss test to tell the state they are doing it wrong; it will just merrily go about walking straight off a cliff

The amazing thing about the market is that all of these smaller parts work together in a cohesive whole without any market level central planning – it’s simply not needed. What some view as wasteful duplication is in fact a discovery process. Bernie might as well complain about all those drug researchers wasting time with experiments that go nowhere. Why don’t they just invent the drug that works from the beginning? The market operates like a science experiment. No one person can know ahead of time what is the best computer, cell phone, deodorant, or toothpaste. Many experiment with variations and then subject those experiments to the market test. A positive result equates with profit and a negative result equates with losses. The system is a self-reinforcing feedback loop that retains what we want and removes what we don’t.

So yes Bernie, we do need those choices. We all have the right both to offer whatever we want to the market and to vote with our dollars on what we will consume from that same market. Seeing as how you are not an omnipotent being, you and the state have no right to restrict those choices in any way.

Boulders in the Stream

The surety of the law of unintended consequences proceeding from state legislation is as steadfast as the law of gravity. Emblematic of this axiom is the massive drop  off (down 40-60%) in book sales in Israel this past year after the passage of a law intended to bolster book sales, protect small book sellers from “big chains” and of course guarantee a “living wage” to authors.  To those ignorant of basic economics and human behavior the terms of this law might appear reasonable. It guaranteed authors 8% of the sales of the first 6,000 books sold and 10% of all books thereafter while simultaneously criminalizing the discounting of books during their first 18 months of sales. Supposedly this would help the underdogs: small booksellers and new authors. Ironically it does the exact opposite. It is the unknown author that has the greatest incentive to discount heavily in order to entice someone unfamiliar with their work. It is small book sellers that are most likely to haggle or “make a deal” when someone makes a substantial purchase.

Sadly Israel is not alone in this sort of book market meddling. Quite a number of other countries (mainly in Europe) have what are known as “fixed book price agreements” type laws. These are “resale price maintenance agreements”, commonly used in the US on a voluntary basis between vendor and customer, codified into law and backed by the state. In the US if company A wants Vendors B-Z to sell a widget for $1 and Vendor D sells it for less, then the solution is simple: company A just stops selling to vendor D. But in countries where such agreements are enforced by the state, vendor D can be fined or jailed. Let that sink in: jail time for selling goods “too low.” What monsters.

The usual defense of these laws is the same tired protectionist propaganda deployed whenever an entrenched business model is threatened by a new competitor: we need the state to protect us from “unfair” competition. “Unfair” being code for “somehow these people figured out how to sell the product I’m selling for a lot less and I can’t figure out what they are doing or I’m unwilling to change my business model to compete”. For example France has a “Lang Law” which permits book publishers to set the price of the book and then forbid anyone from selling it for less than 95% off the cover price. Fast forward to 2014 and a tweak was added to this law that was targeted at Amazon.com who was both discounting their books 5% and offering free shipping. Apparently selling books into the French market for the exact same price as French bookstores is considered “unfair” if the seller is a ‘foreign’ company.

So what we have here is a real world economics experiment, akin to raising the minimum wage to $50/hour. Israel has, in effect, dialed in the $50 option on book price fixing laws. While many countries have such economic interventionist type protectionism only Israel elevated theirs to stratospherically inane levels. From this we saw quick and clear signs of damage (just as we would if the minimum wage were raised to $50/hour). However, just as with the minimum wage laws, there still exist damaging effects in those countries with more “moderate” protectionist schemes such as France. It is perhaps apropos that a French economist (Bastiat, 19th century) speaks of the “unseen” damage wrought by market interventions.

If the demand for books is inelastic then to the extent book sellers earn more, the sellers of other goods earn less, while on net the public receives fewer goods for money spent. If the demand is elastic then book sellers earn less and other vendors earn more but the public still receives fewer goods. Indeed, the Israeli example demonstrated the elasticity of book demand. After their law went into affect, book sales went down and toy sales went up (as parents passed over high priced books for more affordable toys).

The fatal conceit of the politician is the belief that they can control nature (man) by dictate: people want they want and laws are like boulders in a stream  – it may slow, but it will not stop the flow of water.

Plugging the tailpipe

Newton’s third law of physics posits that every action has an equal and opposite reaction. From the kickback on a firearm to the lift provided by chemical propellants in a rocket, nothing in this universe acts in perfect isolation. This dictum applies equally to everything in the universe; from muon to man. Human action will also induce a feedback-based response; love begets love and violence begets violence. When the actions are voluntary and un-coerced we tend to see predictable outcomes (if I am kind, you are quite likely to be kind in return, but, if I hit you, you are most likely going to hit me back). When the actions are involuntary or otherwise unduly influenced then the results become unpredictable. Economic interventionism is like plugging a car’s tailpipe to silence it; it may bring temporary silence, but the building pressure will soon be relieved. The only question is when and where.

So just as plugging a tail pipe to silence a car is a fool’s endeavor, so too are forced attempts to mold society and the economy to suit the ideological leanings of those in power. Such attempts at societal meddling always end badly, typically in the form of increasing that bad thing one was trying to eliminate. The interventionist approach has all the logical soundness of hitting people in order to reduce violence in the world, yet the politicians continue to do such things everyday. For example, paying people to be unemployed augments, rather than diminishes, the number of unemployed. Likewise, subsidies for certain industries results in a whole array of undesirable side effects. Subsidization of corn production in combination with tariff-based protection of the domestic sugar market has distorted the economy and our health. Tariff-fueled high domestic sugar prices creates an incentive for sugar users to seek a lower cost alternative, which just so happens to be state subsidized HFCS (high fructose corn syrup). The state is simultaneously constraining supply of one product and expanding supply of another to make up for the ongoing constraint. This distortion alters the market in ways that would not exist absent this intervention. It has caused HFCS to become the dominant material used in domestic food production – pushing the somewhat healthier straight sugar out the door. That the overwhelming prevalence of HCFS has recently been implicated in the obesity epidemic (and all the costs associated with obesity related health ailments) should give anyone pause the next time a politician tells you they have the perfect solution to a problem.

Another side effect of agricultural interventionism is in of all places immigration. When the government guarantees a price floor for certain agricultural goods it creates a natural incentive to over produce those goods. The excess is then dumped at low subsidized prices into other countries (such as Mexico). Farmers there can’t compete with the low prices and soon go out of business. Those farmers are now desperate for work. So they come to the US. And then people wonder why so many “illegal” immigrants are pouring into the country. Time again for the government to fix the problem they created. You’ll never go out of the tire business if you keep dumping nails in the road.

The height of absurdity though is that when those in power are faced with the reality of the damage caused by subsidies they find it easier to expand those subsidies rather than to contract them. The most inane example of this is the fact that the US government pays Brazilian cotton farmers the same subsidies it pays US cotton farmers so that they can better compete with cheap US imports.

The moral of the story here is that economic interventionism (supported by the implied violent power of the state) will cause parties to behave differently than they otherwise would absent such threats. These differences lead others into altering their behavior so as to neutralize the effects of the initial intervention in a predictable sort of feedback loop. Plugging the tailpipe merely reroutes the exhaust. Equal and opposite reactions are on net a null.