30 June 2014

Speculation in light of Catholic Social Teaching

To-day the Institute of Economic Affairs posted my essay ‘Pope Francis should praise speculators, not spurn them’. Addressing a conference in Rome meeting to discuss the topic of impact investing, the Pope praised its work on behalf of the poor and marginalised, with a not-too-subtle condemnation of investment for self-interest.

Yet from the economic perspective, any legal investment is an investment toward the common good (barring criminal activities), as any successful enterprise will benefit not only the entrepreneur but also provide employment opportunities and make available a new good or service that serves a public need. At the same time, the increase in wealth makes additional charitable-giving possible. Asking the State to intervene in the investment process will only set up new bureaucratic obstacles, leading to economic decisions that are not motivated by the efficiency of free consumer-choice but by the wastefulness of political agendas.

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#DMI_Reads Update — Here is a list of current reading for the month of June:
  • Dwight R. Lee and Richard B. McKenzie, Failure and Progress: The Bright Side of the Dismal Science (Washington, DC: Cato Institute, 1993) [insightful analysis that economic growth also entails failure as innovation and competition jostle in the marketplace; fortunately, though, the failure of some usually means better opportunities for all]; and
  • S.C. Littlechild, The Fallacy of the Mixed Economy: An ‘Austrian’ Critique of Recent Economic Thinking and Policy, 2nd ed. (London: Institute of Economic Affairs, 2009 [1986]) [a lovely account of Austrian economic principles in relation to classical economic theory and planned economies, particularly in relation to the early years of the Thatcher ministry].
I have also been reading up on scholarly articles, listing them under the category of ‘Journal jottings’. Follow-up comments or suggestions for complementary reading are most welcome.

And to-morrow, enjoy a peaceful Dominion Day!

30 May 2014

The perpetual protest against economic error

Just a single posting for review, ‘The Infernal Resilience of Economic Fallacies’, examining the British government’s 2014 Budget and various commentaries on it, good and less good. Frédéric Bastiat, the French classical economist, once wrote that confronting bad economics was a ‘perpetual protest’ — a point illustrated in the necessity to correct the recurrent errors inherent in Keynesian policies of state intervention and protectionist trade programmes.

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#DMI_Reads Update — Here is a list of current reading, since the last message in February; perhaps it will lead to some interesting discussion:
  • Frédéric Bastiat, Economic Sophisms—Second Series, in The Bastiat Collection, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2011) [masterful short essays that demolish mercantilism and protectionism];
  • Christopher Hibbert, The Destruction of Lord Raglan: A Tragedy of the Crimean War, 1854-55 (Boston and Toronto: Little, Brown, 1961) [I cannot read Hibbert’s account of Lord Raglan’s misadventures in the Crimea without picturing Sir John Guilgud’s marvellous portrayal in The Charge of the Light Brigade];
  • Henry Hazlitt, The Inflation Crisis, and How to Resolve It (New York: Arlington House, 1978) [Hazlitt’s writings on the illusions of inflationary salvation are an education in themselves];
  • C. Brad Fraught, The Oxford Movement: A Thematic History of the Tractarians and Their Times (University Park, PA: Pennsylvania State University Press, 2003) [a lovely overview of Newman, Keble, Froude, and Pusey and their impact upon the Victorian Church of England];
  • Friedrich Gentz, The Origin and Principles of the American Revolution, Compared with the Origin and Principles of the French Revolution, John Quincy Adams, trans., Peter Koslowski, ed. (Indianapolis: Liberty Fund, 2010 [1800]) [Gentz’s summary of the causes of the American revolt is seminal in understanding the War of Independence]; and
  • Stephen Macedo, The New Right v. The Constitution, 2nd ed. (Washington, DC: Cato Institute, 1987) [a fascinating critique of conservative attempts to read the U.S. Constitution according to ‘democratic’ principles].
I have also been trying to catch up on scholarly articles, listing them under the category of ‘Journal jottings’. Follow-up comments or suggestions for complementary reading are most welcome.

06 May 2014

The Infernal Resilience of Economic Fallacies

If only economic fallacies were characteristic of economic goods — and scarce! Unfortunately, this is not so, and fallacies in favour of protection and stimulus flourish and spread their noxious untruths. For Frédéric Bastiat, it was the task of political economists to do battle against them in a ‘perpetual protest’1.

Sometimes, though, the source of the economic fallacy surprises, as it did when reading a brief John Redwood commentary on Britain’s latest Budget from its Chancellor of the Exchequer, George Osborne.

Redwood, once a protégé to Thatcher and a respected scholar and politician, understands the dynamism which underpins the Laffer curve2, writing that ‘tax revenues are rising ... by allowing more tax revenue to arise naturally through the growth of the economy’, underlining the fact that higher taxes do not necessarily result in higher revenues:

Where the government has tried higher tax rates on income and capital gains it has actually damaged the revenues, not increased them. If any government tried to reduce the deficit quickly through a series of tax rate rises, considerable damage would be done to the economy and tax revenues might fall.

Plus, he advocates a route to balanced budgets through such growth, which ‘...has always been the main requirement to help correct the large imbalances in the economy without pushing it into deep recession.’ Yet in the same paragraph, Redwood lauds government fiscal interventions that are just as likely — depending upon the steps taken — to be impediments to the economic growth he favours. ‘We need more exports, more homes, more domestically produced goods to replace imports, ‘he asserts. ‘The budget seeks to help bring that about.’

Export expansion, for instance, can benefit from reductions in regulations that artificially raise the price of British goods. As for housing, such regulatory reform would doubtless be of more benefit than the Chancellor’s ‘help-to-buy’ initiative: ‘The chancellor’s sub-prime subsidies risk further inflating the housing market,’ warns Richard Wellings. ‘More households will take on debts that could become unaffordable should interest rates return to normal levels. Thus significant default risk has been loaded onto taxpayers. There are also potentially very serious implications for the banking sector should government policies ignite another boom-bust cycle.’

All things being equal, Redwood goes off the beam, though, in his condemnation of foreign trade which he views as a threat to domestic industry or, nearer the mark, British employment. The organic ramifications of trade are by no means static, as Geoffrey Wood outlines in Fifty Economic Fallacies Exposed:

Producers are guided by the prices they see confronting them to produce what is most profitable for them and to do so as cheaply as they can. Prices thus direct resources to where they are most useful, as those producers to whom they are most valuable will pay most for them. If an economy is trading freely, without tariffs, its resources are making the most of the opportunities prescribed to them by the patterns of prices in the rest of the world.

The economy’s resources will thus be used where it is most productive, relative to the rest of the world, for them to be. The economy will be making the most of the opportunities available to it.3

In an harmonious trading environment, then, countries produce according to their strengths, and buy from countries with respective productive advantages. Far from a zero sum transaction as Redwood suggests, this is an economic policy with positive sum benefits — and a respectable pedigree: David Ricardo called it ‘the law of comparative advantage’, whereas for Ludwig von Mises it was ‘the law of association’.

But for sheer entertainment in slaying this protectionist bugbear, one must return to Bastiat, who doubtless would have relished a go at Redwood’s economic faux pas. From his essay ‘Domination through Industrial Superiority’, we can imagine how he would set upon Redwood’s admonition against imports:

We produce at home neither tea, coffee, gold, nor silver. Does this mean that our industry as a whole thereby suffers some diminution? No; it means only that, in order to create the equivalent value needed to acquire these commodities by way of exchange, we employ less labor than would be required to produce them ourselves. We thus have more labor left over to devote to satisfying other wants. We are that much richer and stronger. All that foreign competition has been able to do, even in cases in which it has absolutely eliminated us from a particular branch of industry, is to save labor and increase our productive capacity.4

Bastiat acknowledged that even the best are tripped up by economic fallacies, due to their sheer tenacity (and controversy over balance-of-trade issues is among the most intractable). Fortunately for Redwood (and us), there remain those political economists who can diagnose these errors and prescribe the needful antidotes. The Chancellor of the Exchequer himself would do well to schedule an appointment.

ENDNOTES

1. Frédéric Bastiat, ‘Property and Law’, in Selected Essays on Political Economy, George B. de Huszar, trans., Seymour Cain, ed. (Irvington-on-Hudson, NY: Foundation for Economic Education, 1995), 115.

2. See Arthur Laffer, The Laffer Curve and the Failure of Stimulus Spending, Lecture delivered to the Institute of Economic Affairs, London, 27 June 2012.

3. Geoffrey E. Wood, Fifty Economic Fallacies Exposed (London: Institute of Economic Affairs, 2002), 34.

4. Frédéric Bastiat, ‘Domination through Industrial Superiority’, in Economic Sophisms, Arthur Goddard, trans. & ed. (Irvington-on-Hudson, NY: Foundation for Economic Education, 1996), 268.

28 February 2014

Economic Laws Trump Political Prestidigitation

‘It is the highest impertinence and presumption ... in kings and ministers, to pretend to watch over the œconomy of private people,’ observed Adam Smith. ‘If their own extravagance does not ruin the state, that of their subjects never will (Wealth of Nations, II.iii.36).’

This theme is explored in two essays posted this month. The first, ‘No Crystal Ball Needed to Forecast Fundamentals of Sound Economics’, takes a look at what constitutes ‘wealth producers’ and ‘wealth destroyers’, and why government — when it goes beyond providing the basic framework of law and order, and acting as a service provider of last resort — is so often a member of the latter group and not the former.

The second essay, ‘Raising the minimum wage while debasing the currency: an illogical economic policy?’ (published courtesy of the Institute of Economic Affairs), argues that instituting minimum wage laws while engaging in quantitative easing of the money supply is a hopeless venture; each activity considered alone is less than innocuous, but pursing both at the same time is an exercise in futility as any doubtful benefits are cancelled out and nullified.

Smith recognised that ‘All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord (IV.ix.51).’ To-day, encouraged by social democrats and their Progressive ideology, governments are addicted to these systems, whether through the aforementioned minimum wage laws and currency debasement or other forms of welfare economics. But, in the end, economic laws trump political prestidigitation.
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#DMI_Reads Update — Two volumes are in the reading queue this month: The Case for Capitalism (E.P. Dutton, 1920) by Hartley Withers and Lectures on the French Revolution (Liberty Fund, 2000) by Lord Acton.

Do you know of a little-known and under-appreciated volume on the French Revolution that you’d like to recommend? Write and tell me about it. And do people still read Thomas Carlyle on the subject? I’ve looked at the first few pages of his massive tome and been daunted, but am game to have another look if anyone is willing to make an argument in its favour.

20 February 2014

No Crystal Ball Needed to Forecast Fundamentals of Sound Economics

Who wouldn’t want a crystal ball to forecast the route to economic prosperity? For while the fundamentals are available to all who care to study the basics of catallaxy, only charlatans will claim to have foreknowledge of consumer choice.

In reflexions about the likely course of global economies in the new year, Cato Institute senior fellow Richard Rahn agrees, acknowledging that ‘the reason so many forecasters miss the mark is because there are too many unknowns to be captured by mathematical models, particularly those unknowns dealing with human responses to changing events.’

But there are some things which can be known, based on the praxeological logic of human nature and social behaviour. Wealth is created by individual endeavour and shared through voluntary exchange. Another certainty is that when governments intervene in this process and aim at redistribution, both initiative and wealth are adversely affected, to society’s peril.

Rahn presents this as a case of wealth producers versus wealth destroyers — ‘the productive are those who add more value and wealth than they consume, and the destructive are those who destroy more value and wealth than they create’ — and their effects upon the dynamic market: Effects whose full consequences cannot be known in advance, cannot be ‘foretold’, given the individual choices of millions of participants in free markets and their subsequent reactions to government interventions, whether in the form of taxation, regulation, or too-generous welfare provisions.

In coming weeks, for instance, just wait for the debate in the U.S. Congress over increasing the minimum wage and extending unemployment payments: Each a government intervention into socio-economics, each counterproductive as a measure to promote wealth generation, and instead examples of wealth diversion and destruction. Better efforts would be focussed on the causes of employment impediments, whether through lowering punitive tax rates that hamper growth or removing regulations which touch on everything from competition to healthcare and serve as brakes on business development. By removing the barriers imposed by government, entrepreneurial activity will enjoy renewed impetus that will respond through increased employment opportunities, that will in turn redound to the State by way of reduced support burdens and heightened revenues.

But no statist applauds when the economy is allowed to heal itself from the cack-handed cures of physicians past; so social democrats will pride themselves on their enlightened, progressive policies, irrespective of the long-term economic or social ramifications. But these politicians are immune from the extravagance (and consequences) of ‘pretended’ charity, even if they are not entirely ignorant — thankfully! — of the folly of their prescriptions: For if the minimum wage were truly an antidote to income inequality, why limit its increase to $10.10 an hour, and why extend long-term unemployment benefits a mere three months? The reason is that economic laws of wages and incentives rout fiat government, and no amount of sleight-of-hand will mask the market meltdown if these progressive measures are given full rein.

Given the predominance of this State interference, then, Rahn confidently hazards one prediction for 2014: another financial downturn to come.

I am reasonably confident in saying the world is headed for a major financial crisis, because the numbers show that most large economies are projected to further increase their debt-to-gross domestic product ratios this year, which are already at record-high global levels. However, I cannot forecast with a high probability (nor do I know others who can) when this financial crisis will occur.

Regardless of ‘when’, the ‘why’ of crisis are the old, tried-and-failed distractions from the welfare economists’ bag of tricks: top-down central government planning; stimulus spending; regulatory excess; quantitative easing and interference with the natural rate of interest (with ensuing boom and bust cycles); and, of course, minimum wage laws and extended unemployment benefits, among other social security largess. What surprises is that there is still an audience for these maladroit manipulations.

It seems that only amongst the progressive élite, whose blind faith in their own prescience obscures the underlying dynamism of markets, is the crystal ball of economic reality either wanted or necessary. They may try to pull the wool over our eyes, but in the end, economic laws trump political prestidigitation.