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.

31 January 2014

Public Choice and the Free Press

Although freedom of the press does not usually occupy a central theme in introductory Public Choice Theory texts, it is an essential part of keeping government, politicians, and the bureaucracy honest. Without constant scrutiny and accountability, the political class is apt to become careless and equate their private interests with the public good — one of the key warnings elaborated in the Public Choice philosophy.

This independent oversight is threatened, therefore, when the State believes it has the right to oversee the modus operandi of the press (beyond the general legal norms which are prescribed for all citizens). Will the Fourth Estate be punished with legal coercion for publishing information that uncovers official malfeasance? Or will it tailor its reporting to satisfy its political masters, enabling future acts of impropriety?

Students of Public Choice, then, believe a free press is a necessary safeguard to individual liberty.

My full argument for the Institute of Economic Affairs is here.

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#DMI_Reads Update — Two volumes are in the reading queue this month:  A Humane Economy (Regnery, 1960) by Wilhelm Röpke and Economic Sophisms—First Series (Ludwig von Mises Institute, 2011) by Frédéric Bastiat.

31 December 2013

DMI 2013 Round-Up

While there have been no official DMI updates in a very long time, research has continued apace — although very slowly due to various computer malfunctions and interruptions. Nevertheless, here is a round-up of essays published this year:
Several projects-in-hand will continue in the new year: One example is the paradox interwoven in F.A. Hayek’s economics and politics; another involves the phenomenon of ‘liberal Toryism’ — the dynamism between classical liberal laisser-faire economics and the traditional Tory belief in ‘limited paternalism through the State’, ideas which have overtones in the work of Adam Smith and Edmund Burke, and find continuing expression in the 21-st century through various British and American theorists — more to come!

Another experiment in the coming months will be #DMI_Reads, where I will ‘tweet’ my current reading lists and ask for feedback and complementary book recommendations.

As always, remember to follow DMI on Twitter, on Facebook, and (here) on its dedicated page.

All best wishes for 2014!

21 December 2012

DMI Omnibus Update on Disraeli’s Birthday

Earl of Beaconsfield
While research and writing at DMI continue unabated, I have been remiss at sending out update notices for several published columns over the last several months. And so without further delay — and in honour of Benjamin Disraeli’s 208th birthday! — here are links to recent postings at the Institute of Economic Affairs and the Adam Smith Institute to get you caught up:
  • The organic roots of oaks and free markets’ takes a tongue-in-cheek Telegraph column and illustrates why the Conservative party’s modern icon of an oak tree is an excellent exemplar of the organic dynamism of free markets, and why a return to the ‘Thatcher torch’ — representing the light of liberty — is a bad omen if taken to mean more robust government intervention in the economy.

  • Tax Freedom for the Poor!’ is an appeal to raise the threshold at which the low-paid begin to pay income tax — allowing them to keep more of what they earn will build their self-respect and act as a work incentive, while at the same time curbing the extent of government redistribution. (A second theme of this posting is that while the poor who earn less than the threshold will necessarily be removed from the income tax register, they nevertheless still do pay any number of ancillary taxes, which may itself be considered a good thing: An esprit de corps is fostered with their fellow citizens while making them conscious of the true costs of government.)

  • Without capitalism, can there be culture?’ argues that we owe much of our cultural attainment because of the free market and the division of labour which it encourages — not despite of them. (I will admit that other factors contribute to culture, too.) This avenue of defence will be familiar to students of Adam Smith and to admirers of Josef Pieper’s small classic Leisure: The Basis of Culture.

  • America’s Chief Magistrate and the Spirit of ’76’ looks at American politics from the perspective of the Founders’ vision of individual liberty and limited government. Intended to be a rather minor position, the Presidency has assumed powers never intended either for the Chief Executive or the Washington establishment. Intrusions into the actions of individuals and the marketplace are hallmarks of ‘government failure’ that only a spirited return to constitutionalism can avert.

  • Can Americans afford compromise on the fiscal cliff?’ demonstrates that, à la Laffer Curve analysis, if higher tax revenues are the object, then raising the marginal tax rate on the wealthy is not the answer; though Aristotle taught that compromise as a mean between deficiency and excess is oftentimes the route to realising the common good, when the options are between right and wrong there is only one option. (Cross-posted at Public Finance International.)

Well, that’s a wrap. A reminder, too, to join the discussion on DMI’s Facebook page (please sign-up if you are not already a member) and tell your friends and neighbours about us.

Wishing you a very Merry Christmas, Season’s Greetings, and all best wishes for 2013!