Category Archives: Economic Fallacies

Trade Balance

Last week’s article touched on seen benefits and unseen harms wrought by political intervention into people’s lives. This week we pivot to a somewhat new corollary of that principle, that of imagined harm. This is harm that can’t exist but because of a fundamental ignorance one has an expectation that it will occur. Ignorance of economics leads to a broad range of bad predictions and decisions and even businessmen (e.g. Donald Trump, Warren Buffet, etc) are not immune to such ignorance. Despite Trump’s repeated protestations that “we” (America) are “losing” because of the presence of trade deficits with some countries (notably Mexico and China) there is simply no cause for concern. The current trade deficit between the US and Mexico is $58 billion. That means that Americans purchased $294 billion in goods from Mexico but Mexicans purchased “only” 236 billion in US goods.  In Trump’s mind (and many others) this constitutes a loss. Well if that is so I guess I had better stop buying my groceries from Publix – my family’s trade deficit with Publix is thousands of dollars every year! Yes, I would be much better off if I grew all my own food, than my trade deficit with Publix would be zero. Do you see how ridiculous this sounds now? So to solve a trade deficit Americans should pay even more for the goods they want? This is supposed to somehow compel the Mexican government to coerce its citizens into buying more US goods? How can any government make its people buy more from a particular country? Countries are not monolithic entities; they are composed of individuals.

Trade is not a zero sum game where one side “wins” and the other side “loses”. Both sides gain or profit from any trade in the sense that if either party did not value the thing they got more than the thing they gave up they would not have engaged in the trade. Trump and his ilk view trade like a game of Monopoly because they fall for the fallacy of anthropomorphizing countries into single actors and then distill all trade down to a single good: money. So in his mind the US gave Mexico $294 and Mexico gave the US $236 – as though they were just swapping currency and nothing else. Yes, that would be a loss, but that is not at all what is going on. It is an absurd distillation of the transactions of millions of individual actors into a meaningless aggregate. To get a clearer picture of what is going we need to disaggregate these numbers. Let’s imagine that Joseph buys $10 worth of goods from José. Joseph now has a $10 item and José has a $10 bill. Who lost here? No one. Trump would view this as a $10 trade deficit. But a deficit implies some sort of debt obligation, that something is owed, but nothing is owed, both sides swapped value for value. Now imagine that José buys $7 worth of goods from Joseph. Joseph now has $3 in goods and $7 cash, or $10 of value. José now has $3 in cash and $7 in goods, again, $10 in value.

Indeed all trade follows the rules of double entry accounting. Mexico’s cash account goes up while their goods account goes down: in balance. The US’s goods account goes up while their cash account goes down: in balance. Claiming a trade deficit exists is the equivalent of looking at only one side of a standard accounting balance sheet and claiming it is not balanced because one refuses to look at the other side of the sheet.

To the extent that jobs and industry are moving out of the US and that this harms in the short term those that lose their jobs perhaps it would be more appropriate to not lay blame at the feet of those business moving away but rather ask the origin of the incentives they are responding to (regulations, unionization, taxes anyone?)

Trading Places

A basic economic principle is the necessity of accounting for both the seen and the unseen (first elucidated by the great French economist Frédéric Bastiat). It provides a basis for understanding how politicians perennially cast themselves in the role of Santa Claus whilst picking our pockets. We are a willing audience to the magician who dazzles us with (for example) public works project (the seen benefit) while remaining unaware of the unseen harms unfolding (those things not done, created, or attempted due to diversion of resources into the political projects). The principal works for any intervention into people’s lives. For example, sanctions or trade embargos are often put in place in order to influence the actions of the leaders of another country. Although there is not a single historical precedent for this ever working, it remains the most popular passive-aggressive tool in the arsenal of the state. The language used to speak of such embargos employs the ruse of anthropomorphization (“America” cuts off trade to “Iran”) in order to hide the underlying reality that rather than the target country being harmed it is the individuals that constitute that country that are harmed. See, it’s not millions of people being made to suffer; it’s just a nebulous non-human “country”. Those who engage in these practices of course understand the reality of weighing human suffering and misery against the greater good of their desired ends. Indeed it was Madeline Albright’s admission that the deaths of approximately half a million Iraqi children during the 1990s sanctions against Iraq were “worth it” in order to achieve their goals (this remark was specifically cited by Osama Bin Laden as one of the many reasons behind the 9/11 attacks).

But that is just the seen harm. There is also an unseen harm levied against US citizens and businesses who are barred from trading with the country embargoed (for example, Iran). Iranians want to buy US made goods. US businesses want to sell those goods. We have a willing buyer and a willing seller being prevented from engaging in trade because of a belligerent busy-body-bully in the middle. Those lost sales for US businesses will not be made up somewhere else – they are simply gone. These missed opportunities lead to more unseen harms – lost jobs, or rather jobs that would have been created but never were.

To the extent US businesses have foreign competitors in countries lacking an embargo against Iran then it is our own government that is pushing sales into the arms of their competitors. Brilliant. Some might say that this loss in sales to US companies is “worth it”, that it is their patriotic duty to suffer through such lost sales in order to help our country battle the existential threat we face from a country… that has never threatened us nor attacked any other country in over two-hundred years. Well that is certainly easy to say when you’re not the one cruising past potential income you are barred from touching. Ask yourself, would you willingly skip annual bonuses if your government told you it would help influence Iran? Yeah, I didn’t think so. And apparently Boeing doesn’t think so either   – this politically well-connected company managed to get itself on a short list of companies exempt from the current trade embargo with Iran. How convenient. Apparently the expediency of pleasing big donors trumps the so-called “national interest” that applies to everyone else. Justice for all indeed.

Market Failure: Revenge of the Commons?

If you missed last week’s article be sure to read it here, however, a synopsis of the article’s thesis is that “market failure” is impossible. Markets are closed systems and as such anything internal to the system affects the entire system. A market can no more “fail” than a pot of water exposed to a flame will fail to boil. Apropos the pot of water example: if a pot of water does not boil after 5-seconds of exposure to a lighter we do not say “ah-ha, physics has failed, here is proof that flames cannot boil water!” No, we realize that if sufficient heat is applied, it will boil (thermodynamics) but that the process takes time (kinetics). Failure of something to occur instantly or even within our own lifetime does not equate to “failure”. Markets regulate themselves; perhaps not as fast as some would like, but it occurs nevertheless. As the saying goes: you can have it fast, cheap, or good: pick any two. With state regulation of the market you only get one: fast, at the expense of it being both expensive (inefficient) and poor (ineffective). Natural market regulation is both good (effective) and cheap (efficient), but tends to be slow, which many find frustrating. This gradual process thus provides a framework of excuses for state intervention to speed things up. These people fail to see the thermodynamic forest for the kinetically slow-growing trees.

At first glance it might appear the pot example is not illustrative of a closed market system. The pot is exposed to the surrounding air, which can transfer the heat away. So we must clearly demarcate the borders of the system under discussion; let us say the pot and flame are in an insulated box. Everything outside is irrelevant to what occurs in the box.

So, we define the market as that system containing everything that is (apparently) part of the market. However, the counterargument here would be that things outside of the market system, unlike the pot and flame, do effect what is in the system. That is, the “commons” outside of the market (into which things may be dumped or extracted) apparently play a role. To the extent such commons are artificial in nature (“public” spaces) and thus through state coercion the market’s efforts to allocate and economize those resources via private property are frustrated, we cannot say then that any abuse of such spaces is a market failure. The state itself is setting up the very situation that opens them up to abuse. The state is not part of the market. The market is peaceful voluntary trade where both parties “win”; the state is violent involuntary trade where one side wins and one side loses.

However, there are natural common areas (the oceans and the sky) that are not amenable to conventional private property demarcations (e.g. fences) – although technology is slowly changing that reality. These would appear to be areas outside of the closed market (private) systems and thus immune to feedback from the market even though the market may benefit from them. For markets separated by a commons but connected through other means, the feedback occurs at the border with the commons and this information is transmitted via the other connection just as though they directly bordered each other.

But, let us consider the more difficult example of two isolated markets, not in communication, separated by a commons. We will consider the ocean (although the sky works equally well). Imagine that you live on the coast and fish for a living. Far across the ocean another settlement pollutes the water. Eventually that pollution reaches your shore and affects your fishing productivity. You have no idea where it is coming from (non-point source pollution), all you know is that it is a new cost you did not have before. Since you do not know the source you only have once choice: to clean up/remove the pollution at the bordering point to where you customarily fish.

Is the fact that you have to devote resources to cleaning this up a market failure? No. Why not? Well imagine that if instead of it being some far away people polluting the water it was some natural event (volcano, mudslide, etc.). Your actions would be no different (cleaning the water) yet you would not say the market has failed just because Nature foisted additional hurdles at you. If the effect is the same, the cause is irrelevant if you have no way of knowing or influencing the cause.

Now lets say you do find out who is polluting and ask them to stop but they refuse. You do not trade with them so feedback cannot occur that way. You now have two choices that prompt me to pose this question: Is it morally justified to attack and kill them until they submit to your will if continuing to remove the pollution yourself may also solve the problem? One option involves the ending of human life; the other option is a mere inconvenience. Which would you choose? If you answer yes to the former then I suggest you reflect on how the state has warped your sense of reality such that it is considered morally acceptable to initiate violent actions against others in order to resolve non-violent conflict. Now consider that all state actions rest on a bedrock of threatening violence against those that will not bend to its will, no matter how trivial the concern. History does not judge kindly those who initiate aggression to force others to do their bidding

Removing all doubt

Poor Bernie, he went and opened his mouth and thusly removed all doubt that he has no grasp of economics. Such ignorance from an internet troll might be expected and can be amusing in the same way that a child’s explanation of something can be so. But when such breathtakingly inane statements emanate from a candidate for President of the United States, well, what can one do but weep for the future. To what perplexing attempt at pontification do I refer? None other than this Dec 26 Tweet from @SenSanders: “You have families out there paying 6, 8, 10 percent on student debt but you can refinance your homes at 3 percent. What sense is that?”

Now most people would probably look at this statement and not find it particularly outrageous. We as a society have been conditioned to accept the notion that interest rates are arbitrarily set from time to time by some talking head in government. The assignment of these rates is apparently disconnected from any external factors. They are like lotto numbers plucked from the ball machine. We assume other lenders (banks, credit cards, etc) set their rates in a similar pattern.

In reality non-government rates are primarily market driven. That is, the relative difference in rates is market driven while the net value rests on the arbitrarily set Fed rates. Interest rates are not arbitrary digits, they are prices. They are the price people are wiling to pay to not wait. Interest rates are a reflection of supply, demand, and risk. The demand for loaned funds is indicative of high time preference, that is, preferring something now rather than later. The supply of loaned funds is indicative of a low time preference, that is, the willingness to forego consumption in the present and defer it into the future – for a price. To understand high time preference, ask yourself, do you prefer to buy that 72” OLED 4k TV today, or in a year after saving the funds yourself? Most of us prefer to have it today so that we can enjoy it immediately. The cost of that sooner than otherwise realized enjoyment is reflected in the interest rate we are willing to pay. If there are a lot of people willing to supply loaned funds, then the interest rate will be lower (supply goes up, price i.e. interest rate, goes down). If there are few people willing to supply loaned funds then the interest rate will be higher (supply goes down, price, i.e. interest rate goes up). It’s really not that complicated.

The only wrinkle with interest rates relative to regular money prices exchanged for tangible goods is that unlike exchanging cash for a hamburger (where both parties have something after the exchange), with the process of loaning/borrowing, only one party has the thing they desire in the beginning. The other party has a promise to deliver the other half of the bargain at some future date. The future is uncertain and there is always risk that someone may not do what they say, either deliberately or for reasons beyond anyone’s control. That uncertainty is also reflected in the interest rate. If there is a high chance the lender won’t get paid back then the interest rate will be quite high. But, if something can be offered to mitigate that risk, something tangible, like say a house or a car, then the lender can feel more assured that at least they will get some portion of the loaned funds back in the worst case. So that brings the rate back down.

Bernie, this is why loans backed by tangible collateral (like a home mortgage or equity line) have a lower interest rate than a student loan which has no collateral. A student loan is no different than credit card debt – it is unsecured. Now, look at the interest rate on your credit card (likely over 20%) and compare to the 6, 8, or 10% figure being cited – doesn’t look so bad now does it? These rates are so much lower than they otherwise would be because of government intervention in the student loan market.

Now some might say the banks should be willing to invest in such human capital, that a college degree will translate into a high paying job that allows them to pay it off. That can be true. That is why years ago before government involvement lenders did give out student loans, but only to the most academically worthy of students, those that clearly would succeed. But even so, possible future income is not collateral, the bank can’t take possession of the student himself and enslave him or her to get their money; they can take a house or car, they can’t take a person.

If Bernie wants to help students he should promote the idea of removing government involvement from higher education. Every sector the government subsidizes (healthcare, housing, education) has seen explosive price inflation. That is no coincidence. The patient can’t heal until you kill the disease.

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.

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.

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.

Pope Francis: Lapdog of the Ruling Regime

The climate crusaders gained a “useful idiot” (look it up) in their cause this past week in one Pope Francis with the publication of his encyclical “Laudato Si’, On the Care of Our Common Home.”  Apparently the “settled science” and endless “climate shaming” over our “carbon-footprint” has been insufficient to motivate action (that is violence) at a global level – time to bring in the big guns: God. If people won’t listen to reason then let’s appeal to their sense of morality. And if that doesn’t work let’s just bombard them with vacuous nostrums that would embarrass even Deepak Chopra . Writing in his encyclical the Pope states, “There can be no renewal of our relationship with nature without a renewal of humanity itself.” Flowery prose about a collective (“our”) that exists only as metaphor underscores how our “leaders” perennially view humanity not as individuals but rather as mere clay to be pushed, prodded — and trimmed — as needed in order to reshape the world according to their vision.

As a Catholic myself (this statement now giving me a pass on the anti-Catholic label) I am dismayed by this Pope’s proclivity to not only issue papal pronouncements on issues he is ignorant of (e.g. economics, the climate) but to deliver those messages wrapped in an unabashedly pro-state and curiously un-biblical package. This Pope (and Vatican) have spewed a mountain of anti-capitalist rhetoric over the past few years that entirely misses the mark as to the cause of rising wealth inequality. It is entirely the result of big government and central banks colluding together to inflate the money supply and not, as he says, by “ideologies which uphold the absolute autonomy of markets and financial speculation.”  This is no mere pontificating on the dangers to the soul of single-minded pursuit of wealth, no, this is full on promotion of Marxist redistribution of wealth. For example from the above quote he further endorses, “…the right of control [of financial resources] to States…”. When he spoke to the UN last year he invoked the parable of Zaccheus as a way to justify the use of “political agents” that can force the “legitimate redistribution of economic benefits.” Wow. I wonder if he wears a Che Guevara t-shirt under that robe.

The Vatican even promotes the concept that evading taxes is equivalent to “stealing” from the state and the poor (because of course it’s all the state’s to begin with and their sole job is to help the poor).  I’m not sure which version of the Bible Pope Francis is reading, but in my version Zaccheus (the selfish tax collector) VOLUNTARILY chose to give to the poor. Jesus didn’t say “do this or else I’ll send the Roman guards after you”.

To underscore this Pope’s preference for state action, his new encyclical distills the fight against climate change down to a simple message: governments everywhere have a moral duty to fight climate change. Yes, you read that correctly. Fighting climate change is now a moral imperative for all mankind. The unique thing about this new flavor of “morality” is its ambiguity. Traditional moral issues (murder, rape, theft) are pretty straightforward: don’t do them. As long as I don’t murder someone, I have upheld that moral edict. But “fighting climate change”? How do I uphold that? What exactly am I supposed to do? If I drive a car that gets 30 mpg am I violating a moral tenet but not violating if it gets 40 mpg? Shall I get rid of my air conditioner (as Pope Francis has actually suggested!) in order to get in God’s good graces? Or should I just follow like a good little subject the climate edicts of my government… which may change with the prevailing winds of the latest computer model. This ambiguity should be more than sufficient to indict its moral status.

The Pope should indeed be promoting ideas of charity, peace, forgiveness, tolerance, and good stewardship. But to then endorse the authority of the state to impose these virtues upon the population is to utterly reject God’s message of salvation via the gift of free will. He gave us free will in order to allow the individual to make his or her own choices (choices which may or may not eventually lead to salvation). Apparently this Pope’s message is, “Do the right thing, but if you don’t, that guy over there (the state) will make sure you do.”

It is absolutely astounding that a Pope would make not just one but two gross theological blunders. First to cloak an ambiguous political issue in the vestments of morality and second to endorse the sacrifice of God’s gift of free will upon the altar of state sponsored utilitarianism. I don’t know whether to laugh at his brazenly sycophantic parroting of regime talking points or to cry for the untold billions that will die in the coming decades due to artificial constraints on energy production and economic output if the chicken little doomsayers like the Pope get their way.

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.