Category Archives: Economics

The Trade-Offs of Bailout

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There is an extensive belief that: if the government can hand out money in a crisis, why it can’t do more of that during normal times? It’s quite a common belief because nobody learns that economics is the study of trade-offs. A former student delighted the nerd in me and emailed me to help understand the consequences of such a policy of direct cash “stimulus” to alleviate the crisis. Here was my response:

The idea should raise red flags, but how harmful the results are can depend on a variety of other factors.

The basic economic logic is that because money is not wealth, simply injecting money into the economy (if there are no other mitigating factors) will increase price inflation.

However, the Keynesian explanation (the economic theory behind this sort of stimulus/bail out) does seem plausible on first glance. Advocates of this would say something like:

“Because business are not able to keep staff productive and working (both because they stay home for safety, and because their clients are staying home and not buying stuff), a direct cash payment to people will both help them survive financially, but will also encourage people to spend that money, which means that the coffee shop actually has more money coming in again, which means that they are then able to hire more workers, and so forth.”

Again, that seems to be plausible. It seems both benevolent to individuals and is alleged to spur economic growth more generally. I’ll tackle both of those two things in turn.

First…

The problem is that in economics there are always trade-offs. First of all, where is the money coming from? Well, it’s coming from either…

1) current taxpayers (“here’s your money back”)

2) from future taxpayers (debt)

3) from printing money out of “thin air” (which is a tax on people’s money because it causes the value of money to decrease…inflation).

I could argue about the problems with the first source, but I don’t think I need to. The problem is, of course, that the bailout money will have to come from the latter two because the U.S. government already spends (annually) all its tax revenue and then another half-trillion on top of that. So it will borrow (which transfers a debt burden to future generations) or print (which causes price inflation).

Actually, the latter two will be essentially the exact same thing. When the government borrows money, it gets it out of thin air from the Federal Reserve, which then “buys” the debt by “making” the money (adding zeros to the Treasury’s balance). The Fed may or may not then sell those bonds to a bank, which would pull already existing money out of circulation and mitigate price inflation, but it doesn’t have to. It almost certainly won’t in this case, since their goal is more money in the economy.

So the inflationary effects are caused by either option 2 or 3 above.

Of course, many people will likely be legitimately helped in the short run. Again, there are benefits, and there are costs.

As for the inflation issue, there is legitimate concern.

In the 2008 crisis, there were bailouts, but most of the newly created money went straight to banks, which then held on to it because they were worried about more instability, which I think really restricted the price inflation we saw then (money doesn’t cause price inflation if it doesn’t circulate into the economy). This time, if they give so much directly to Americans, I’d be concerned of at least a short run of rapid inflation (probably not hyper inflation). I can’t predict the future, because there may be forces at work I don’t see. For example, if Americans hold on to a lot of that cash for a while and don’t spend it, you may not see the price inflation right away, it may just cause a slightly higher inflation rate in the mid- to longer- term. But historically, times when governments have started injecting money into the economy directly has always caused a period of rapid, or even hyper inflation, especially when the economy is contracting the production of goods and services (producing less), as it is right now with so many people staying home. The more they give, the worse the potential consequences. Worse case in history: the Weimar government paying German workers in the Ruhr not to go to work in 1923–that caused hyperinflation worse than anything the world has ever seen. Do I think it’d be that bad here? I highly doubt it, but obviously any price inflation affects the very people intended to be helped.

And that gives us the framework for understanding the second part:

Second…

On the broader goal that this is supposed to stimulate economic growth (the Keynesian idea of “priming the pump”—technically called creating “liquidity”), or, at least, slow the economic recession, that goal is offset by inflationary effects. People aren’t made better off when prices increase, for obvious reasons.

But what about keeping businesses open and so forth? Well, yes, some business may stay open that might have closed. Some workers might remain hired that would have been fired. I grant that. Again, economics is about trade-offs.

Fundamentally, however, you have to look at other costs–what is given up. We’ve looked at inflation. Let’s look at another one, and this gets at the very core of the matter:

People buying things isn’t what causes economic growth or a rising standard of living. You could give everyone 100 oz of gold in the Middle Ages, and sure, they could all go buy more shoes, clothes, horses, etc, right away before prices caught up and the gold became less valuable. The blacksmiths and cobblers and seamstresses would have been delighted…for just a little while. But what actually causes the standard of living to rise? It was the saving and investing that allowed for innovative technological advances. When saving is channeled into research and development to create new capital (machinery, computers, etc), that’s what creates more economic efficiency and raises real (inflation-adjusted) wages.

If everyone is out spending a lot of money, they are saving less money, which means there is less available for those investments that take a while to develop or invent. Imagine if Thomas Edison had just spent all the money on fancy clothes and shoes and nice homes that sustained him and financed his research while he worked on the light bulb! No light bulb, at least from him.

Back to our previous medieval example… let’s say one person chooses to take 100 oz of gold and use it to pay for his basic necessities for a year while he works on a new fertilizer that will ultimately quadruple agricultural output, making food cheaper and less labor-intensive for everyone. That one person has done more for everyone else because he invested his money rather than spent it. That’s how the economy grows.

A couple final points:
– Inflation encourages spending rather than saving. If you know your money is going to buy less in the future, are you more likely to buy stuff now or wait to buy stuff later?
– Spending reduces the amount of money that goes into investment.

Long story short: cash like that might really help some individuals and small businesses in the short run (and who’s complaining about getting an unexpected check?). In the short run, it might also cause some serious price inflation, but even if it doesn’t (and I certainly hope not), you will certainly see higher price inflation in the mid to longer run. And ultimately a bunch of spending makes it look like there’s a flurry of economic activity, but under the surface, it’s like a college student getting a bunch of extra money and going out and spending it all. Things seem really good for a time–nice car, nice TV, etc–but really, he is no better off economically in the long term.

(And none of this looks at the consequences of adding that amount onto the federal debt. But this is way too long already.)

Corporatism in the Progressive Era

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It is a common misconception that the Progressive Era of the United States was a critical turning point in U.S. business–a time when vicious big companies were brought under the wise guardianship of state regulatory agencies for consumer protection.

Why, then, were these very businesses the main driving force in the creation of these regulatory agencies?

The following selection is pulled from my upcoming book, The Tale of Two Gospels. While the book does not primarily have an economics focus, the chapter on the American Progressive Era deals a bit with the creation of the corporate state in the United States, and a selection of that chapter has been edited for use here. If you would like to learn more about the book, visit LCKeagy.com/TwoGospels.

During the latter half of the 19th century, America experienced a veritable industrial explosion, bypassing all industrial European counterparts in production several times over. By 1910, the United States produced 30% of all manufactured goods globally, followed by Great Britain and Germany, each at 10% of global output. Output surge can be seen in a sampling of these statistics. From 1869 to 1899, commodity output increased 350%, agriculture more than doubled, construction increased 250%, manufacturing increased 600%, and mining increased 800%. Steel production increased ten times over, and crude oil production increased by twenty-six fold. And despite massive population increases during this time, commodity output per person (per capita) doubled from 1865 to 1900. [1]

Gross National Product (adjusted for inflation) from 1871 to 1891 increased 80%, while real (inflation adjusted) wages increased by an average of 13% from 1865 to 1891. In sharp contrast to the belief that living conditions worsened during this so-called “Gilded Age,” the cost of living fell on average 31% during those same years. Taken together, those figures equal a 64% increase in real wages with adjustments made for price changes, even while the average number of hours worked dropped from 11 to 10. The massive increase in outputs saw prices for virtually everything fall precipitously. Average prices fell by about 2.5% per year from 1870 to 1890, and the price for essentially every household item fell (and of so-called “monopolies,” only two product prices rose: matches and castor oil.[2])

Prices fell so sharply as business battled tooth and nail to stay ahead of competition both in innovation as well as quality and prices. Even behemoth companies that relaxed their competitive edge found themselves quickly surrendering large portions of market share to new agile companies. True to human nature, the major bosses of these big companies sought ways of preserving their constantly hemorrhaging profits. Specifically, they would seek to cartelize (form a cartel): voluntarily or legally preventing individual companies from having control over prices.

The process followed a pretty typical pattern. First, the major players in an industry would try to form a voluntary cartel (called “pooling” at the time): an agreement that they would not sell for less than a given price, offer discounts, or otherwise try to undercut each other. This would inevitably fail, either because a cartel member would secretly find other ways to draw in more customers or new companies would undercut the cartel, forcing prices down once more.

So companies would turn to politics to secure their process of cartelization, pouring money and energy into lobbying for government regulatory agencies that would allow for price-fixing (preventing a price from going above or below a certain point). Of course, the politicians had to sell such plans as a public benefit or else risk electoral backlash, so regulatory legislation was typically sold as a means of protecting consumers against high prices or vicious monopolies. But once these regulatory agencies were created, they would more often than not be staffed by members of the major companies, as well as so-called expert managers who were able to argue that their regulations were established by scientific expertise. This last point was already an easy selling point; such was a trademark of the era.

In many cases, even the regulatory agencies would not serve the companies as well as hoped. This was frequently because once it was established, political money would consume the process of trying to draw the agencies to certain competing ends. For example, Theodore Roosevelt, whose major donors and allies were associates of big banker John Pierpont Morgan, would frequently use regulatory agencies to attack companies affiliated with the Rockefellers, who were major rivals to the Morgans. Meanwhile. he would virtually leave Morgan-affiliated companies alone. Or the Interstate Commerce Commission (ICC), set up to regulate railroad rates (with the full support of the railroad companies,) ultimately fell sway to the major shipping companies—the customers of the railroads who wanted the lower prices. So when even regulation did not prove to adequately protect the big businesses from competition, they finally sought nationalization: direct government control, which most accomplished during World War I (at least for the duration). Of course, their own “scientific” experts would still populate the government offices in charge of the regulations.

The first major industry to follow this process would be the railroad companies. Throughout the 1860s and 1870s, attempts at voluntary cartels failed over and over for reasons already stated. As railroad guru Albert Fink said in 1876, bemoaning this reality, “Government supervision and authority may be required to some extent to accomplish the object in view.”[3] When, in the late 1870s and early 1880s, Congress began discussing regulatory legislation (which would produce the Interstate Commerce Commission), railroad bosses were pleased. As John Green, the vice president of the Pennsylvania Railroad company testified before the House Commerce Committee in 1884, “a large majority of the railroads in the United States would be delighted if a railroad commission or any other power could make rates upon their traffic which would insure them six per cent dividends, and I have no doubt, with such a guarantee, they would be very glad to come under the direct supervision and operation of the National Government.”[4]  

When the bill passed in 1887, the Chicago Inter-Ocean wrote that “Perhaps the strongest argument that can be presented in favor of the passage of this bill is found in the fact that many of the leading railway managers admit the justice of its terms and join in the demand for its passage.” [5] So the ICC was created, and as the railroad boss Charles Adams said, “In the hands of the right men,” the bill “would produce the desired results.”

Seeing the (at least temporary) success of the railroad companies and having experienced their own failures in voluntary cartels, other major businesses followed suit in seeking government regulation as a means of cartelization. This would be seen in sugar, manufacturing, banking, iron, steel, petroleum and so forth. Murray Rothbard offers a great summary:

In manufacturing as well as railroads, then, mergers as well as cartels had systematically failed to achieve the fruits of monopoly on the free market. It was time, then, for those industrial and financial groups who had sought monopoly to emulate the example of the railroads: to turn to government to impose the cartels on their behalf. Except that even more than in the railroads the regulation would have to be ostensibly in opposition to a business “monopoly” on the market, and even more would it have to be put through in conjunction with the opinion-molding groups in society. The stage was set, at the turn of the 20th century, for the giant leap into statism to become known as the Progressive Period.[6]

To proceed through all the various measures taken by government officials and big business leaders would merit a much more extensive post, and the full discussion can be read about in Rothbard’s extensive The Progressive Era. But a few significant advancements in pursuit of these goals ought to be noted.

Individual companies increasingly lobbied the government throughout the 1890s and the early 20th century. Over time, however, they also began to work together. In 1900, the National Civic Federation (NCF) was organized as an expansion of the Chicago Civic Federation (CCF). The CCF had been created in 1893, and held a series of conferences in the late 1890s. One CCF conference—the Chicago Conference on Trusts (1899)—featured speakers such as the progressive economists Jeremiah Jenks and John Commons. Also in attendance were numerous governors, including then New York governor Theodore Roosevelt. At the conference, speakers called for government regulation of virtually all industry. Then, to focus their goals, they held a unanimous vote among the CCF executives to create the National Civic Federation.

The NCF was quickly headed and staffed by big business leaders and allies[7], and would go on to push for a number of goals in the cartelization process of industry.[8] A major move toward government regulation was the NCF’s National Conference on Trusts and Combinations (NCTC) in 1907, at which businessmen were the largest group and closely affiliated with then-U.S. president Theodore Roosevelt. The NCTC recommended a number of major proposals. Not the least significant of these was a recommendation that the government license and regulate corporations “in the public interest.”  This would virtually give major quasi-monopolized companies (called trusts) legality by getting a government stamp of approval and removing them from threat of lawsuit under the Sherman Anti-Trust Act.[9]

Roosevelt and many of the hundreds of government representatives at the conference were delighted by the proposals, and asked the NCF to write the very legislation that would enforce these proposals. Of course, the NCF complied with a committee of business leaders to draft the bill.[10] The bill would temporarily fail when a flood of opposition by smaller businesses made the bill politically untenable. Still, the NCF would eventually pursue their goal again through what became the Federal Trade Commission in 1914, and would effectively accomplish many of the earlier goals.

Numerous other measures were taken to pursue the corporate state during the Progressive Era, including, but not limited to the creation of the Department of Commerce and Labor, the Food and Drug Administration, and so forth. Many readers today will understand these to be basic essentials of consumer protection, but their beginnings, too, were laden with anti-competition motive, and intended to protect and cartelize the major producers.[11] Also notably, the era saw the creation of the Federal Reserve System in 1914. This was the bankers’ ultimate cartelization devise, drawn up by the major bankers and a few politicians in a highly secret meeting on Jekyll Island off the coast of Georgia. In the words of Senator Nelson Aldrich, a key figure in its creation, “The organization proposed is not a bank, but a cooperative union of all the banks of the country for definitive purposes.”[12]

Additionally, the three major Progressive Presidents—Theodore Roosevelt, William Howard Taft and Woodrow Wilson—would all enact a host of Progressive reforms and measures, many helping to create a corporate state—a state closely associated with the big businesses of the time.

[1] By 1910, the United States produced 30% of all manufactured goods globally, followed by Great Britain and Germany, each at 10%. Output surge can be seen in a sampling of these statistics. From 1869 to 1899, commodity output increased 350%, agriculture more than doubled, construction increased 250%, manufacturing increased 600%, and mining increased 800%. Steel production increased ten times over, and crude oil production increased by twenty-six fold. And despite massive population increases during this time, commodity output per person (per capita) doubled from 1865 to 1900. Source: U.S. Department of Commerce, Historical Statistics of the United States, Colonial Times to 1957 (Washington, D.C.: Government Printing Office, 1960). All statistics in this section are derived from this source, vis-à-vis Murray Rothbard’s The Progressive Era on page 92.

[2] This information is cited in the article here by Thomas E. Woods, Ph.D., which dismantles the commonly held belief that monopolies in a free market are harmful. As a few added statistics, during the 1880s, the price of steel rails fell from $68 to $32 a ton (and ultimately to $17/ton by 1898), refined sugar fell from 9 cents to 7 cents, and zinc prices fell from $5.51 to $4.40 per pound. Likewise, oil prices fell from 30 cents a gallon in 1869 to 8 cents a gallon by the end of the 1880s.

[3] Qtd. in Rothbard, 67.

[4] Ibid, 72.

[5] Ibid, 74.

[6] Ibid, 107.

[7] Examples include Marcus Hanna, a close associate to John Rockefeller, the Chicago utilities boss Samuel Insull, Chicago banker (and later Treasury Secretary) Franklin MacVeagh, Andrew Carnegie, and several members of the J.P.Morgan company. Of the largest 367 corporations in the United States, one third had representatives in the NCF.

[8] One example included regulations such as mandatory workman’s competition that would impose costs on all businesses, but proportionally more on smaller businesses, cutting back on competition. The NCF also pushed for public ownership of utilities (gas, trolleys and electricity), which meant that the government would award a single company in an area the right to produce these utilities. Of course, for the company that received the contract, profit was guaranteed; it was a government-created monopoly. In 1905, members of the NCF, including John Commons, were part of a commission specifically intended to scientifically study the European method of public utilities, which ultimately formed the basis for their proposals and a series of laws enacted in states.

[9] Readers who know this history are aware that the Sherman Anti-Trust Act was passed in 1880 ostensibly to allow the government to break apart monopolies, or trusts. It had seldom been used, partly because monopolies under the free market were nearly impossible to maintain, as we’ve seen. Theodore Roosevelt began to use the Act to sue companies—namely Rockefeller affiliated companies—as president. Roosevelt, however, was not against trusts, per se, as he was quite happy with the NCTC recommendation that the government simply regulate rather than abolish trusts that it approved of.

[10] In order to ensure that readers are not simply having to take my word for it, some of the members of the committee created to draft the legislation were as follows. Judge Gary: chairman of the board of U.S. Steel. Isaac Seligman and James Speyer: major New York investment bankers. George Perkins: significant Morgan ally. The copy of the bill was ultimately written by J.P. Morgan’s attorney, Francis Stetson and the attorney for a major railroad company, Victor Morawhetz.

[11] For example, the Chicago meat packing plants were firm lobbyists for the Food and Drug Act, as getting the federal government’s stamp of approval would make them more competitive in European markets and create higher regulatory costs for competitors. Contrary to the popular belief that meat was heavily unsanitary, however, the meat packers still had local inspectors (which European governments did not recognize; Europeans wanted state-approved meat), and no lawsuits were ever brought against the meat packers for adulterated meat. That does not mean that it was always pure or clean, but the idea of good government versus bad corporations takes on a far more complex and interesting than our cartoonish versions of history suggest.

[12] Qtd. in Rothbard, 476.

[13] Qtd. in ibid, 294.

How Consumer Demand Determines the Price… of Everything

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Hey folks! I’m diving into economics again today. As it turns out, my own classroom teaching often fuels content for a post, and given my shortness of time, I might as well kill two birds with one stone. This is a description of how consumer demand drives prices, and though it seems logical enough, most of us don’t even think about this until someone actually walks us through it.

Until Carl Menger, the founder of the Austrian School of Economics, really started the Marginal Revolution in the latter half of the 1800s, it was generally accepted that prices were more or less based on the value of their inputs (land, labor and capital). Carl Menger revolutionized the conception of prices with his explanation that it is not the value of inputs that ultimately determine prices, but consumer demand. And as an extension of that, the value of inputs (the factors of production: land, labor and capital) themselves are determined by consumer demand for finished goods.

Carl Menger (1840-1921)

Let’s try to explain this with an example. Let’s say that in the year 2019, Widget X becomes a major hot product; everybody wants it (or almost everybody). Let’s say that to make Widget X, it takes a very rare resource which we will call Lamboviam. Lamboviam, in our example, is as rare as diamonds, but it not used for any other product other than in Widget X. Suddenly, as the demand for Widget X spikes, the price for Widget X will go up. The producers of Widget X, excited about the profit they can make, will want to now make even more. Other entrepreneurs will also start to make Widget X, hoping to capitalize on the profits.

Of course, all this means that they will need more—much more—Lamboviam. So the demand for Lamboviam goes up, which will push its price up. Guess what that means. It becomes more profitable to mine Lamboviam. So more mining companies will be drawn to mining Lamboviam in the Lamboviam mines of northern Canada (we’re making this all up…) because they can make more money mining Lamboviam than they could mining other things (which is why they start mining more). That also, by the way, pushes up the wages for the miners themselves, because the demand for their labor has gone up.

In that way, consumer demand for Widget X not only drove up the price of the Widget, but also the price of all the inputs.

To see how this really works from another angle, now let’s look at the year 2020, when suddenly nobody wants to buy Widget X anymore; the new cool fad –Widget Y—has replaced it. As it turns out, Widget Y does not use any Lamboviam. So in 2020, nobody is buying Widget X (demand drops to 0), so what demand is there for Lamboviam? Again, none. So what demand is there for the miners of Lamboviam? None. What can a Lamboviam miner now earn? Nothing. It doesn’t matter if Lamboviam mines are incredibly dangerous and the work seems like it should be compensated with high wages for such dangerous work; if nobody is buying Lamboviam to make Widget X, nobody will pay a worker to mine Lamboviam.

(Of course, how much Lamboviam is available—ie, supplied—can push prices up or down, but demand is the ultimate driving factor, because supply is meaningless if consumers don’t first want to buy something in the first place, which is the whole point of this description.)

And in this example, we can see how it is not the value of inputs that determine price, but the demand for the finished goods that then ripples out to all the inputs, and that includes labor, as many people seem to forget.

Now just replace Widget X with something more familiar, like diamond rings. If nobody wanted to buy diamond jewelry, the demand for diamonds would be much lower (but not gone completely, as I’ll explain shortly), and hence the demand for diamond mines would be much lower, and the wages of diamond miners would be much lower. Incidentally, even if nobody wanted diamond jewelry, diamonds are also used in high-precision cutting of glass, for example, so there is industrial demand for diamonds in addition to consumer demand. But we can see how it is demand for diamonds that ultimately drives the prices for the diamonds themselves, and the other inputs.

So, you might ask, what about the dangerous conditions of diamond mining? Doesn’t that push prices up for diamonds? Yes, it does, but my main point doesn’t change. In order to attract diamond miners, diamond mining companies have to offer higher wages. (We’ll set aside right now the real issue of involuntary mining; there is some of that globally.) But why is it worth it to the company to offer higher wages to attract workers to dangerous work? Because the profit potential is still high enough that they are willing to pay more. If demand for diamonds slackens and there is not as much potential for profit (so mining companies have to pay less or fewer people in order to keep making a profit), they will not be able to attract as many miners to the dangerous work, and so will see fewer people applying to work for them (or people leaving for safer and/or higher paid work). But again, this is not ultimately based on the level of danger of the work, but from those who want the diamonds and are thus willing to pay more for the labor. Still confused? Imagine how much the dangerous work of diamond-mining will pay if nobody wants to buy diamonds anymore. $0.

I would highly recommend you watch the following video, at least from 50:38 to the end.

Want to join the rest of us nerds and learn the history of economics? Economist Bob Murphy has an entire two-part series on just that at LibertyClassroom.com.

The Public Service of “Price Gouging”

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Every time another natural disaster threatens havoc, media and layman alike come prepared with their rhetorical scourge for the price gougers: those who would dare take advantage of severe shortages to rake in a windfall in times of crisis at the expense of the helpless. Surely, it must be the most selfish of mankind who would stoop to such deplorable practices. Government, come the cries, must stop this public menace with price controls and steep penalties for violations.

Selfish desire to take advantage of a crisis may indeed be the motive of the so-called price gouger, but a focus on motives in crisis should not divert our attention from very real economic incentives and consequences. Contrary to popular opinion, the price gouger, in fact, serves as an important step in alleviating a food and supply crisis. And to stop him only encourages hoarding and delays a return to normalcy.

How can this be? To charge $10 for a bottle of water forces households to spend possibly hundreds on such an essential resource. And $500 hotel rooms inland from a hurricane’s path may cripple a low-income family’s savings. The pain felt by “price gouging”, especially by those of less means, is too obvious to ignore.

But we need not ignore it. We must instead understand the positive effects of “price gouging” and the negative impacts of price controls to prevent it. That is just my intent.

First, price gouging encourages rationing in the most equitable way.  In times of crisis, severe scarcity is inevitable; there is no way around this. Resources in crisis become a product in high-demand, which is exactly why prices rise so quickly. Fewer resources relative to the demand for those resources push prices upward, and steeply in crises. Such high prices then cause people to limit purchases of such vital resources and goods to just what they need. This, in turn, leaves more for everyone else.

To impose price controls, on the other hand, encourages hoarding. What’s to stop the first people who get to the store from purchasing far and above what is absolutely essential for their needs, leaving less for everyone else?[1] And of course, those with the greatest difficulty of reaching stores—the elderly, sick, or disabled without adequate family support, or those without transportation—are those who will end up being hurt the worst. “Appeals to people to limit their purchases during an emergency,” Economist Thomas Sowell writes, “are seldom as effective as raising prices.”[2]

In times where mass evacuations may otherwise drive up hotel room prices, price controls encourage less efficient use of space. A large family may rent two rooms for comfort rather than uncomfortably squeezing into one if prices are not allowed to rise, leaving fewer available rooms for others. At a time when space is at a premium, its most efficient use and rationing should be encouraged, not discouraged. Sowell writes, “The role of prices in allocating scarce resources is even more urgently needed when local resources have suddenly become more scarce than usual.” Likewise, he adds, “When the local population wants more hotel rooms than there are available locally, these rooms will have to rationed, one way or another, whether by prices or in some other way.”[3]

Second, so-called price gouging will be the most effective means of alleviating a shortage. If a single bottle of water in a crisis area can earn a massive profit margin, and thousands or millions of such bottles windfall profits for a water bottle company, then water bottle companies will go through great lengths to be the first to bring supplies into a disaster area. And to take a slice of the earnings, they must be one of the first, for they know that competition will soon also rush into the area and very quickly drive prices down to normal levels. (Of course, the same is true for batteries, flashlights, gasoline, et cetera.)

It is just this competition to be the first to capitalize on the high prices that drops prices again and brings vital supplies into a disaster area. Yes, there will always be a praiseworthy effort by many individuals, businesses and charities to bring in supplies, but to remove the profit-incentive from high prices necessarily delays a complete re-supply of the necessary resources needed to alleviate the shortage of a severe disaster.

In cases such as Hurricane Florence where the disaster zone is more or less predictable, the opportunities for high prices would draw in more resources even before the disaster. Sowell makes this case:

“Supplies of all sorts of things that are usually needed after a hurricane strikes…are more likely to be rushed to the area where the hurricane is likely to strike, before the hurricane actually gets there, if suppliers anticipate higher prices. This means that shortages can be mitigated in advance. But if only the usual prices in normal times can be expected, there is less incentive to incur the extra costs of rushing things to an area where disaster is expected to strike.”[4]

Sadly, the political gains of a ban on “price gouging” derived from the public praise of such policies deprives disaster areas of important economic incentives that would otherwise alleviate such a crisis faster or perhaps even in advance. The politician has much to lose from ignoring price spikes and much to gain from stopping them. Those impacted by the disaster, on the other hand, miss out on the public service provided by so-called “price gouging”, a service more equitably rationing much-needed supplies and more quickly alleviating a shortage.

[1] This is not just logical deduction, but is what has consistently been recorded as happening in cases like Hurricane Katrina and Sandy. For example, in the aftermath of Hurricane Sandy in 2012, the Wall Street Journal reported the following: “At one New Jersey surpermarket, shoppers barely paused for a public loudspeaker announcement urging them to buy only the provisions needed for a couple of days of suburban paralysis. None seemed to be deterred as they loaded their carts to the gunwales with enough canned tuna to last six weeks. … Shoppers take no risk in buying out a store’s entire supply at the normal price.” 

[2] Sowell, Thomas. Basic Economics. © 2015, Basic Books, New York, NY. Page 63.

[3] Ibid, 61.

[4]Ibid, 62.

Thumbnail photo credit goes to the Foundation for Economic Education.

What is Fascism?

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Many people claim—most often with despair—that we’ve elected a fascist president to the American White House. And a worse offense could not be fathomed by many who thought the time had finally come for a woman president.

Now, I’m not a Trump supporter or a Trump opponent. Though it may seem like a paradox, I take a broader and a more specific view. If you want more thoughts on that, sign up for my email! So, having said that, I don’t have any agenda in this post with encouraging readers to any extent of support or disdain. As with many of my posts, my purpose here is to bring clarity, not to utilize hyperbole to influence opinion. I believe that good opinion must be well-informed.

So, the accusations have been sounded: Trump is a fascist! And yet, I would guess that many who throw this term around do so with a tragic level of ignorance about the genuine meaning of the ideas involved with and behind fascism.

And to be clear (does that sound a bit too Obama-ish?), fascism isn’t a clear-cut set of ideas. Although Germany and Italy both followed fascist ideologies, there were certainly differences. Still, a generally good idea of the commonalities of various fascist regimes can be accurately identified.

So what is fascism? A bit of history helps, as usual.

Benito Mussolini

Fascism as a formal ideology with a political platform was founded by Benito Mussolini in Italy. During World War I, Italy had joined the fight on the side of the Allies in time to benefit, they hoped, from the peace terms. Yet, many in Italy were unsatisfied with the terms that finally emerged from Paris in 1919. Additionally, war debt and economic stagnation plagued the country, like most countries in Europe, and the popularity of socialism and its extreme version of Marxist-communism saw a huge leap in popularity.

Keep in mind that many socialists were actually opposed to communism, a point I’ll clear up in coming posts. But for now, it is suffice to say that a general desire for social and economic control by the government had become increasingly popular since the early 1800s, and the desire to implement this control by revolutionary means and authoritarian regimes saw a surge in the wake of World War I.

A quick point of distinction. Marxist ideas (ie, communism) place the worker as the center and central unit of society. Ultimately, Marxism advocates for the dissolution of political boundaries in favor of a united working class and the elimination of private property in favor of commonly-shared means of production and eventual social, economic and political equality. That this can never actually be realized notwithstanding, it was reaction to this idea that spurred the creation of the Fascist Party.

In Italy, the Fascist Party was started as a distinctly anti-Bolshevik (many communist parties took the name of their Russian counterpart) party. At its heart wasn’t the plight of the working class, but rather the pursuit of national glory. In direct rejection of the dissolution of political boundaries, its adherents sought to glorify the nation-state, epitomized by the government of that nation-state. And more specifically, the glorification of the nation-state being the foundation for political morality and the highest of ends, violence in pursuit of power and glory was not only condoned; it was celebrated. You might call fascism fiercely aggressive nationalism. Fascists and Bolsheviks broke out in fire fights across Italy prior to Mussolini’s rise to power in 1921, and when he was in power, Mussolini had no qualms about banning all other political parties and ensuring the “disappearance” of any potential political rivals. We see similar trends in Germany with the rise of the Nazi Party and their first attempt at sparking revolution in Germany in 1923 (which failed). Clearly, later actions by the Nazis in Germany followed the fascist praise of violence with precision.

On the economic front, fascism is profoundly socialist and admittedly anti-capitalist. (I discuss related terms and ideas here.) Mussolini and fascists in other countries, like the Nazis in Germany, ultimately sought to control and oversee the economy with strict regulation and direct take-over of major industries, setting up government-protected and directed monopolies. Bear in mind that this was the common trend of western society (and had been for a decades) and it was Mussolini’s economic policies that Franklin Roosevelt in the United States admired and sought to emulate (without the direct violence).

Romanesque Fasces

One more point of interest. In pursuit of the glorification of the Italian nation-state (created as a merging of multiple distinct regions in the 1860s), Mussolini adopted the Roman symbol: fasces. Obviously, this is where the name comes from. It is a symbol of national unity, strength, glory and power. The ax included epitomizes its praise of aggression. The fasces, in line with other Romanesque cultural elements adopted by the U.S. government, can be found in our capital, but often without the ax.

Knowing what fascism is and where it comes from helps to debunk the idea that fascism is merely passionate nationalism*. It is its celebration of violence to achieve its ends that distinguishes fascism. And despite and cultural conservatism it brings with it (such as celebrating the cultural traditions of the nation), it is also distinctly anti-capitalist and authoritarian.

If you’re up for a more extensive reading on Fascism, here is a link to a very thorough article over at Mises.org. At that post, author John T. Flynn presents comprehensive research and come to the following list of the components of fascism as implemented through policy. As the author says, fascism “is a form of social organization…

  1. In which the government acknowledges no restraint upon its powers — totalitarianism
  2. In which this unrestrained government is managed by a dictator — the leadership principle
  3. In which the government is organized to operate the capitalist system and enable it to function — under an immense bureaucracy
  4. In which the economic society is organized on the syndicalist model, that is by producing groups formed into craft and professional categories under supervision of the state
  5. In which the government and the syndicalist organizations operate the capitalist society on the planned, autarchical principle
  6. In which the government holds itself responsible to provide the nation with adequate purchasing power by public spending and borrowing
  7. In which militarism is used as a conscious mechanism of government spending, and
  8. In which imperialism is included as a policy inevitably flowing from militarism as well as other elements of fascism.”

(Source: https://mises.org/library/what-fascism)

(A note on coming posts: Back in my post, “The Issue of Standards”, I discussed the ambiguity of the typical left-right paradigm. The terms conservative and liberal carry a complex, confusing and dynamic—changing—history. As I am able, this will be the focus of coming posts. Sign up for my email to know when each one is posted!)

*I’ll have a post in the future expanding on what nationalism is; history always presents a much more complex and interesting picture than the media narrative.

Anarchy, Capitalism, Socialism & Totalitarianism

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We are finally going to start to overlap a bit into economics (no…don’t leave!)! Fear not; I will make economics clear for all who approached that class in high school or college with dread. In this particular post, however, we’re just dipping our toes in; we’re not jumping headlong in just yet. Hold out for that.

Here is the liberty vs. totalitarianism continuum again, with one modification:

Tot. v. An-Cap

Of course, you noticed that I replaced the word liberty with anarcho-capitalism. I already introduced you to that term in the previous post, but in this post I am going to specifically add a few more items that need to be fleshed out going forward.

First, a few more comments on anarchy. Having just begun my school year as a teacher, I asked my students in American Government what they thought of anarchy. The usual responses are somewhat predictable: a state of chaos, dog-eat-dog, lawlessness, et cetera.

Arguments about implications aside, that is not what anarchy is. Anarchy, as I said before, is merely a condition of statelessness—the absolute void of a state.

Now, to get into the more economic terms. What are capitalism and socialism? We hear these terms thrown around all the time:  Hillary Clinton wants to save us from the ills of capitalism. Bernie Sanders is a self-proclaimed socialist. Venezuela, Sweden and Denmark are all socialist. The U.S. and Hong Kong are capitalist.

The fact of the matter is, Venezuela and Sweden are worlds apart in terms of economic policy. (And we’ll clear up this very specifically in time.) In many respects, so are the U.S. and Hong Kong. So what do these terms really mean?

Let’s go old-school here for a moment (bear with me!) and get a Merriam-Webster definition for each:

Capitalism is “an economic system characterized by private or corporate ownership of capital goods…and by prices, production and the distribution of goods that are determined mainly by competition in a free market.” (*)

Socialism, in contrast, is “any of various and political theories advocating collective or government ownership and administration of the means of production and distribution of goods.” (*)

I am not 100% satisfied with these definitions and further clarifications are necessary, I think; that will be the attention of the remainder of this and the next several posts. For now, let us revisit the idea of anarcho-capitalism: a state in which the market has absolutely no infringement from any state. Everything—the resources, the means of production, the production process, and the distribution process—is owned by individuals.

As one proceeds from right to left on the continuum, they move steadily closer toward totalitarianism. This progression is a steady increase in socialism—a steady increase in the influence of government in the market economy. Every movement left from a state of absolute anarcho-capitalism is an increase in socialism to some extent, that is (at risk of redundancy), an increase in government control over any or all of each of the following: the resources, the means of production, the production process, and the distribution process.

Therefore, socialism is not a “point” on the continuum, but a range. Still, this bears a bit of pragmatic qualification. Calling Venezuela a socialist country is certainly more true than calling the U.S. a socialist country, even though both have elements of socialism, one much more than the other. To be sure, I will utilize the practical, generalized definition of socialism as a description of nations, but I think understanding the range associated with the term is needed first.

And of course, at the far left we find ourselves in the condition in which the state has absolute control (there is no economic freedom). This was virtually the case of Soviet Russia under Stalin, as much as his secret police could enforce it. (An estimated 4 million Soviet Ukrainians died of starvation from 1932-1934, as it was Soviet policy to grow the food in the fertile Ukraine and transport it to the industrial workers is Russia.)

To conclude, let’s take one more look at the reverse direction. As one moves from left to right, we find an alternative increase in capitalism and incremental freedom.

Increasing Capitalism and Socialism

The whole point here is that socialism and capitalism operate on a range, or along the continuum, between anarcho-capitalism and totalitarianism.

Naturally, the diligent reader will note that this discussion necessarily has an economic focus at the neglect of social, ethical, fiscal or other issues. That’s all coming up.

(* provides the link to the original source)

 

The Issue of Standards

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I’m going to start this post with the first of the two continuums that I included in the last post.

Liberal v. Conservative

                       “the left”                                             vs.                                             “the right”

Since it’s been a few days since my previous post, I’ll come back to that now and expand a bit. (Please don’t feel insulted that I would suggest that my readers aren’t smart enough to get it; that is not at all my suggestion! I’d just like to unpack this a bit.)

Regarding the first continuum, whereby the political and economic paradigm, if you will, is framed between liberal and conservative ideology, or what people will often refer to as “left wing” or “right wing,” the first major that needs to be addressed is…

…there is no solidly identifiable standard by which either can be compared. All we have, as I pointed out a few posts ago, is a sort of nebulous “tends to” sort of stereotypes about each side.

Let’s look at the extremes to help make this point. Somehow, Fascists (and Nazis) get thrown in on occasion far on the right and communists and socialists get thrown in far on the left. According to what standard? Are Nazis far on the right because they are extreme nationalists? Then leftists must be anti-nationalists. And that standard falls apart.

Are communists and socialists on the far left because they seek an equality and government redistribution as a means to ensure that equality (and in the case of communism, ultimately eliminate private property)? If that defines the standard, then how do we contend with the idea that most fascist regimes employed the same government control over the economy that socialists do.  (Even the Nazi party, by the way, was the National Socialist German Worker’s Party.) And that standard falls apart.

See how nonsensical this is? The attempt at establishing a standard baseline for understanding “left” vs. “right” becomes even more precarious as you move from these extremes. The whole “each side tends to” approach is hardly canon across the board.

(A brief anticipation: I expect that my more traditional conservative readers will find among them the protest that moral issues, such as abortion, drug use, or marriage-related issues play a key defining feature. They are not altogether incorrect, but it still does not get beyond a “tends to”–even if strongly–argument. It is still too narrow a focus and doesn’t account for other important issues, such as fiscal matters. Don’t worry; these issues are important to me, and I will tackle them in time!)

Now to return to my preferred continuum for our context:

Liberty v. Tyranny

In this paradigm, the standards are concretely defined. Any framework of understanding must have fully definable standards in order to truly understand the range between.

On the far right is liberty. The state of utter and complete liberty in political, social and economic life is called Anarcho-Capitalism. (Incidentally, the slang for those who believe that this is ultimately the ideal state calls themselves “an-caps”.) Anarcho, of course, is drawn from anarchy, defined as a state-free society, and capitalism ties in the economic aspect that the market is likewise 100% free of any involvement from any authority.

On the far left is totalitarianism, which is absolute control by the state. Merriam-Webster defies totalitarianism as “the political concept that the citizen should be totally subject to an absolute state authority” (Merriam-Webster).

Both of these extremes are absolute, and because they are absolute and definable, they create a standard by which we can measure and understand state control to varying degrees from one end to the other.

And this will help us understand much more of the specifics of those varying degrees as we proceed.

 

Human Nature is Like Water

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water-rocks-stream-leaves-large

People are like water. At least, in one way critical to understanding why I would even bother creating this entire blog.

As a Christian, I believe that human nature is inherently bent toward sin. Many libertarians and liberty-minded people disagree with me. Well, frankly, I think most people disagree with me.

But whether or not you agree with that premise, I think I can win my case about water.

Water always takes the path of least resistance. It will not climb a hill when it could run down a ravine. It will readily spray from the faucet where a hose has been poorly connected while leaving the plants at the other end just as parched as before. But it is an obvious enough idea that it really doesn’t merit further examples.

Still, allow me to make the connection to human nature. With exceptions that are more rare than normal, most people, without a great enough commitment beyond their own desires, will pursue their needs and wants in the easiest way possible. This is not always necessarily bad. For example, it drives people to industry and efficiency. Why would I learn to write html code to design this blog when I could simply use the wonderfully simple tool of WordPress?

And yet, this pursuit of self-interest along the path that creates the least friction in that pursuit often is wrong, both subtly and not so subtly. The untrained human nature will tend to try to cheat on a test if there is no possibility it could be found out and it will guarantee them an A. But it is not always so obvious and most often is more about a balancing act between integrity—doing right—and lack thereof. Can I get a good grade in this class by only skimming the book? What is the minimum number of sales I must make to earn a bonus at work? Sometimes it’s not necessarily a moral or ethical question. Will I be willing to commit a larger portion of my salary for a longer period of time in order to get that bigger house now?

See where I am going with this? Now, before those who do not believe in an external or transcendent standard of morality that would inherently condemn my suggestions that there is a fundamental right and wrong, follow me to my more practical conclusion…in my next couple of posts.