How Does a Barber Thrive?

            Yesterday I had to cut my own hair (again--thanks COVID).  I cannot say that I did a great job, but it got me thinking about barbers.  How much has the job of a barber changed over the past several decades?[1]  I don’t think it has changed too much.  So what does a barber need?  A chair.  A cloth and a strip of paper that tucks under into the collar.  Scissors.  An electric clipper and attachments.  A comb and some blue liquid to drop the comb into.  And maybe a water squirt bottle.  Maybe.  And not much more.

            So here is my question: As the world progresses, how does the barber thrive?  I can imagine a company which comes out with a new product, expands into new markets and thrives.  I can also see a scenario where a company cuts its costs, thereby increasing its profitability and thrives.  However a barber, not a chain of barber shops, can’t really come out with new products nor expand into new markets.  And it isn’t likely that the barber is able to cut his costs year-after-year to enhance his profit margins.  So how does a barber thrive?  In other words, how does the barber increase his standard of living when he doesn’t have the same paths open to him as other businesses do?  Let’s explore some possibilities.

            If the barber raises his prices each year, would he then be able to raise his standard of living?  Let’s think that through.  First of all, it is probably true that the barber’s prices do rise, but this is most likely due to inflation.  As the money supply expands, each dollar loses some of its value.  This drop in purchasing power requires the barber to raise his prices to keep pace.  So the real question is not whether the barber can raise his prices each year, but can he raise his prices faster than inflation and make a larger profit?  To answer this question, we first have to recognize that demand curves slope downward.  That means as the price falls, people will want more; and as the price rises, people will want less.  So as the barber raises his prices faster than the rate of inflation, he will lose some business.  It comes down to which change is bigger: quantity or price.  A business’s revenue is Price × Quantity.  If the change in price (say +10%) is larger than the loss in quantity (-5%), then the revenue will increase.  Economists call this situation inelastic demand.  Whenever a company faces inelastic demand, raising prices will lead to an increase in revenue.  However, there comes a point where the demand stops being inelastic.  And so companies (even in complete absence of competition) stop raising their prices when they reach that last point of inelasticity.

            So let’s assume that our smart barber has found that point.  Now what?  He can’t raise his price any further without losing too many customers.  In fact, let’s assume that barbers found that most profitable point long ago.  Let’s say they found it some time back in the 1950s.  How can we explain that the barbers’ standard of living has improved even though they can’t raise prices faster than inflation, can’t diversify into other markets, and don’t really have any mechanisms to consistently cut costs?

            What can the barber do to raise his standard of living?  The simple answer is nothing.  There is nothing that he can do, all by himself, to raise his standard of living.  He needs the help of others.  And this truth is the miracle of the market.  Markets help people and improve lives without intending to do so.

            The barber’s life improves every time another person introduces a good idea to the market.  When that other person figures out a new way to cut his own costs, he is able lower his price.  He doesn’t lower his price to help the barber.  He does it to gain market share and increase profits.  Nevertheless, the barber’s standard of living improves as the price falls.  Every time an entrepreneur improves a product, he does it for his own gain.  However, the barber benefits from that improvement, too.  As the smart phone replaces the flip phone, the barber’s life is improved.  As streaming services replace expensive cable and satellite providers, the barber’s life improves.  When a business launches a new product, it does so out of its own greed for profits.  However, the barber now has another option on which to spend his money. 

The barber’s life is improved, not because he has done anything different.  He hasn’t raised his prices, increased his revenue, increased his market share, nor cut his costs to increase profits.  Nevertheless, his standard of living improves year-after-year because of the help and cooperation of countless numbers of strangers that he could never meet even if he were to try. 

The miracle of the market is quite simply something that we too often take for granted.  It is invisible.  It is quiet.  It is humble and does not boast.  And it is possibly the most powerful force to improve human life the world has ever seen.  So before we throw it all away, let’s pause and think about why a barber thrives.

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[1] One caveat: I know nothing of women’s hair dressing.  I am only thinking about men’s barbering.

AEF Spring 2016 #2--Rothbard's "Toward a Reconstruction of Utility and Welfare Economics"

It has been several years since I first read this article as an undergraduate.  When I reread it for this session, I was glad to see that it still holds up.  The same cannot be said for Cordato, he thinks that Rothbard makes several mistakes.  

To begin, Rothbard states that valuation is the "keystone" of economic theory.  Cordato disagrees.  He says that action is the keystone, not valuation.  Is this difference real or is it just one of semantics?  Rothbard clearly agrees that Human Action is the purposeful use of means to arrive at preferred ends.  Cordato clearly agrees that the Austrians have a unique perspective where all valuation is subjective.  The Austrians differ from the mainstream on both of these fronts.  The mainstream does not think that action is important, and it also does believe (sometimes implicitly if not explicitly) that some values are objective and not subjective.  So I am not going to argue which is more important.  I am not going to argue that they are equally important.  However, I will argue that each is important and critical to the Austrian perspective of economics.

Rothbard begins his argument with his perspective on Demonstrated Preferences.  Since we live in a world of scarcity, we must choose.  When we choose, we are demonstrating our preferences.  Rothbard uses this technique in Man, Economy and State to build his Law of Demand and Law of Supply.  (When I teach my foundational economics courses, I also follow this approach.)  When we use preference rankings and choices, we are able to conclude that as people use scarce means to achieve ends (as they define them), the people will "work down" their preference scale.  Simply put, they will do the thing that yields the most happiness first and the next most second, and so forth.  From this line of reasoning, we are able to deduce the Law of Diminishing Marginal Utility.  If we flip the preference scale around and look at it in terms of opportunity costs, then we can deduce the Law of Increasing Opportunity Costs.  Rothbard is following the same reasoning that Böhm-Bawerk first put forth in 1886.

In the article, Rothbard laments that Samuelson has beaten him to the punch by appropriating "Revealed Preferences" before him.  "Demonstrated Preferences" was the second-place choice.  Rothbard credits Mises for making a point of difference between revealed and demonstrated preferences, and that is is the difference between constancy and consistency.  "Consistency means that a person maintains a transitive order of rank on his preference scale (if A is preferred to B and B is preferred to C, then A is preferred to C).  But the revealed preference procedure does not rest on this assumption so much as on an assumption of constancy--that an individual maintains the same value scale over time." Cordato added that in the model of Perfect Competition there is no time and thus all preferences are constant over infinity. 

In Rothbard's section on "Utility Theory," Rothbard stresses how utility cannot be measured.  Furthermore, notions such as "Total Utility" are also meaningless because it assumes that utility is additive.  If I eat one candy bar and then a second am I really adding those two utilities together?  If we stop to think about it, what would it mean to add them together?  

During this discussion, Cordato made the interesting quip that there is no such thing as a "sunk benefit."  

As always, it seems that we run short of time when we finally get to the "good stuff."  (I actually have made the suggestion that we start the discussion at the end of the paper and move forward.)  So when we got to Rothbard's section on Welfare Economics, time was scarce.  (Yes, that was a pun.)

Cordato listed several problems that he has with Rothbard's reconstruction of welfare economics.  We discussed them (briefly), but I will just list them here:

1. A person can only demonstrate preference, not disutility.
2. A person cannot demonstrate his opportunity cost.
3. As a result from points 1 & 2, we cannot demonstrate profit.
4. Finally, all judgements of social improvements are ex post, but in Rothbard's model they are all ex ante.

We certainly tried to chew through these points, but time was short.  Nevertheless, I invite anyone and everyone to make comments on these points.

AEF Spring 2016 #1--Hayek's "The Meaning of Competition"

For the spring semester at NC State University, we decided to continue to look at some of the more foundational articles in Austrian Economics.  One of the more famous is F.A. Hayek's "The Meaning of Competition."  It was originally presented as a lecture at Princeton University on May 20, 1946.

Our session took place on January 29, 2016.  It was attended by several graduate and undergraduate students.  Roy Cordato and I (Paul Cwik) were the hosts.  Cordato presented the article this week and outlined four major points in Hayek's article.

1. There are major conceptual flaws in the model of Perfect Competition (PC).
2. The use of Perfect Competition (PC) as a Normative Benchmark is misleading and dangerous.
3. Hayek presents a proper role in which to view competition.
4. Hayek creates a brief outline of the Austrian Theory of Monopoly.

Let's take a closer look at each.

The major conceptual flaws in the PC model begin with the assumption of Perfect Knowledge.  By making the assumption of perfect knowledge, the economist is essentially assuming away the problem.  In fact with the assumption of perfect knowledge the entire need for competitive behavior disappears.  It is the absence of competitive activities.  Why?  It is simply due to the fact that all of the supply curves (cost curves) and demand curves are fully known.  If all of the curves are known then the problem is one of simply grinding through a mechanical process.  The problem reduces to "given these two lines, please compute where they cross."  Austrians define "competition," which we will see in Point #3 below, as a rivalrous process.  Furthermore, the question of how the market actually works in the real world is never really investigated.  The perfectly competitive model is a static (no time) and competition is a sequential series of equations to be solved.

The second point that Cordato presented was using the PC model as a benchmark.  The PC model was originally designed to be a tool to show a sequence of cause and effect.  For example, suppose that a firm or an industry was using steel as an input.  If we see that the price of steel rises, what will the effects of this change have on the industry?  The PC model does a good job of tracing out the cause and effects of this question.  Unfortunately, the tool has become the entire toolbox.  It was originally supposed to look at very narrow questions.  However if you walk into a mainstream International Trade class, one of the very first assumptions that is made is to assume perfect competition.  This assumption is the beginning of the building of the Heckscher-Ohlin model.  (I just pulled my old International Trade textbook off my shelf and it literally says, "First, we assume that perfect competition prevails in both output and factor markets."  When every model starts with the PC model, it creates a false standard.  On one end of the spectrum is perfect competition and on the other end is monopoly.  Everyone knows that monopoly is bad and so the thing on the other end must be good.  What's that thing?  Why it is nothing less than perfect competition.  And if we even look at the name, we know that it is something to desire--it's even called PERFECT.  What's not to like?

Actually, there is a lot not to like about using the PC model as the benchmark.  The rules and regulations that government policies create set the PC model as the goal.  This goal setting is misleading and dangerous.  Let's take a look at a simple example.  In the PC model, there are many, many sellers.  In fact there are so many that not a single one of them can influence or affect the price; they are "price takers."  If a company is larger than simply being a mere price taker, then to get us closer to perfect competition, the government needs to intervene and make it smaller.  Think of how silly this standard truly is.  When I go to work I drive past two gas stations and one's price is a penny lower than the other.  Clearly, one of them is not a price taker.  So they are too big!  When I look for used DVDs, I see that there are several prices.  Clearly these sellers are also not price takers.  The idea of setting "price taking" as a goal is confusing an assumption of the PC model with an outcome.

The third point that Cordato brought up was on how we should look at competition.  Competition is a rivalrous process.  Why do sports teams play the game?  They do so because regardless of what the teams looks like on paper, any one team can beat another team on a given day.  Furthermore, how many are needed to have competition?  When I ask my students this question, most will say at least two.  However, I ask how many run or swim.  I then ask if they ever keep time.  Why would they do that?  With whom are they competing?  They are competing with themselves.  The minimum number needed for competition is one.  Even if you are the only producer in a market, there are always potential rivals.  Leonard Read once said that getting rid of competition was like standing in a stream with a broom trying to sweep the water away.  With one stroke, the water is gone for a moment, but then it comes rushing back in.  To be a natural monopolist, it means that one must out compete everyone else on every single vector of competition there can be.  That means one must have better prices, better quality, better hours, better location, better customer service, and so forth.  It must be better in absolutely everything.  If one area slips, say customer service, then that opens the door for a niche competitor to get into the market.  And besides, how would a customer view such a monopoly? If it has better everything, then consumers would be very happy.  However, the PC model says that only small price taking companies are good for customers.  How counter-intuitive!  In the real world, the companies that please the customers by doing a better job grow larger.

Hayek says that competition is the mechanism that allows entrepreneurs to acquire the knowledge that the PC model assumes to be known.  Competition tells us who will serve us well.  It is a "Discovery Process."

Finally, Hayek presents an Austrian Theory of Monopoly.  Cordato was surprised at how well Hayek and Rothbard line up on this point.  For them, the only barrier is government.  In contrast to this point are Mises and Kirzner.  They allow for the possibility of a resource monopoly.  While this might seem to be a minor technical point that never occurs in the real world (and it truly is), it is one of the few instances where Rothbard and Hayek are not on the same side as Mises.

And finally, finally, we do have fun in these sessions.  One of the fun things that arose (at least to a geeky economist such as myself) was this turn of phrase:

Private Sector:
"Where there's a problem, that's where the money is."

Public Sector:
"Where there's money, that's where the problem is."

A Course in Free Markets

This year I was asked to put together a class that does not shy away from the virtues of the free market.  This Summer I was speaking at Clemson University for the Foundation for Economic Education (FEE) and I showed my course outline to Larry Reed, the President of FEE.  After looking at it, he not only liked it, but asked if I could make the outline widely available.  And so here it is, my economics course that argues that Free Markets are a good and moral system that creates good character and expands societal wealth and living standards.  I hope you like it and if you have any comments, please feel free to do so.

Tentative Course Outline:     

WEEK #1     Read Part I: “Non-Contradiction” of Atlas Shrugged

     Morality of Markets

1.                “The Economic Foundations of Freedom,” by Ludwig von Mises, in Economic Freedom and Interventionism: An Anthology of Articles and Essays, 1990, pp. 3-10.  Found here: http://mises.org/efandi/ch1.asp

2.                “Liberty and Dignity Explain the Modern World,” by Deirdre N. McCloskey, in The Morality of Capitalism, 2011, pp. 27-30.  Found here: http://atlasnetwork.org/wp-content/uploads/downloads/2011/10/The-Morality-of-Capitalism-PDF.pdf

3.                “The Intellectual Defense of Liberty,” by Walter E. Williams, October 1, 2007.  Found here: http://www.fee.org/the_freeman/detail/the-intellectual-defense-of-liberty#axzz2Rt0sMHqQ

WEEK #2

4.                Honesty and Trust,” by Walter E. Williams, February 1, 2005. Found here: http://www.fee.org/the_freeman/detail/honesty-and-trust#axzz2Rt0sMHqQ

5.                “Competition and Cooperation,” by David Boaz, in The Morality of Capitalism, 2011, pp 31-36.  Found here: http://atlasnetwork.org/wp-content/uploads/downloads/2011/10/The-Morality-of-Capitalism-PDF.pdf

6.                “Ayn Rand and Capitalism: The Moral Revolution,” by David Kelley, in The Morality of Capitalism, 2011, pp. 69-.  Found here: http://atlasnetwork.org/wp-content/uploads/downloads/2011/10/The-Morality-of-Capitalism-PDF.pdf

7.                “The Elite Under Capitalism,” by Ludwig von Mises, in Economic Freedom and Interventionism: An Anthology of Articles and Essays, 1990, pp. 18-25.  Found here: http://mises.org/efandi/ch3.asp

8.                “The Market Economy and the Distribution of Wealth,” by Ludwig Lachmann, in The Morality of Capitalism, 2011, pp. 87-95.  Found here: http://atlasnetwork.org/wp-content/uploads/downloads/2011/10/The-Morality-of-Capitalism-PDF.pdf

LABOR DAY September 2nd -- NO CLASS

WEEK #3

     Counter-Factual Reasoning

9.                 “The Lesson,” by Henry Hazlitt, Economics in One Lesson, 1946, Ch 1 pp. 3-7.   Found here: http://library.mises.org/books/Henry%20Hazlitt/Economics%20in%20One%20Lesson.pdf

10.             “The Broken Window,” by Henry Hazlitt, Economics in One Lesson, 1946, Ch 2 pp. 11-12.   Found here: http://library.mises.org/books/Henry%20Hazlitt/Economics%20in%20One%20Lesson.pdf

11.             “The Candlemakers’ Petition,” by Frederic Bastiat, in Economic Sophisms, part 1, 1845.  Found here: http://www.fee.org/the_freeman/detail/the-candlemakers-petition#axzz2Rt0sMHqQ

12.             Bastiat “Something Else,” by Frederic Bastiat, in Economic Sophisms, part 2, 1848.  Found here: http://www.fee.org/the_freeman/detail/something-else#axzz2Rt0sMHqQ

WEEK #4

13.             “I, Pencil,” by Leonard Read, 1958. Found here: http://www.fee.org/library/books/i-pencil/

     Methodological Individualism

14.             “The Individual in Society,” by Ludwig von Mises, excerpted from Human Action, 1966. Found here: http://www.fee.org/the_freeman/detail/the-individual-in-society#axzz2Rt0sMHqQ

15.             “The Class Struggle,” by Ludwig von Mises, Theory and History, pp. 112-122.  Found here: http://mises.org/document/118/Theory-and-History

TEST #1  September 11^th

WEEK #5                   Movie: Atlas Shrugged Part I

WEEK #6     Read Part II: “Either-Or” of Atlas Shrugged
     The Individual and Society

16.             The Law, by Frederic Bastiat, 1950, pages 1-9, 17-21, 24-29 and 63-64.  Found here: http://www.fee.org/files/doclib/20121116_TheLaw.pdf

17.             “Economics and Property Rights,” by Walter E. Williams, January 1, 2008.  Found here: http://www.fee.org/the_freeman/detail/economics-and-property-rights#axzz2Rt0sMHqQ

18.             What Social Classes Owe to Each Other, William Graham Sumner, 1911, Chapters 1 & 2.  Found here: http://oll.libertyfund.org/index.php?option=com_staticxt&staticfile=show.php%3Ftitle=346&Itemid=99999999

WEEK #7                  
     Law of Association / Comparative Advantage

19.             Not a Zero-Sum Game by Manuel Ayau, 2007, Part 1, pp. 23-50.  Found here: http://library.mises.org/books/Manuel%20F%20Ayau/Not%20a%20Zero-Sum%20Game%20The%20Paradox%20of%20Exchange.pdf

WEEK #8                  
     Direct and Indirect Exchange: Supply and Demand

20.             The Mystery of Banking, by Murray Rothbard, 2008, Chapter 2 and Chapter 1. (Yes, read them in reverse order.)  Found here: http://www.mises.org/document/614/Mystery-of-Banking-The

WEEK #9                   MID-TERM  October 14^th

     Profit & Loss

21.            “Profit Management,” by Ludwig von Mises, in Bureaucracy, 1962. Found here: http://www.mises.org/etexts/mises/bureaucracy/section1.asp

22.            “Bureaucratic Management,’ by Ludwig von Mises, in Bureaucracy, 1962. Found here: http://mises.org/etexts/mises/bureaucracy/section2.asp

WEEK #10

23.            “What Is Profit?” by Fred Foldvary, 2012.  Found here: http://www.fee.org/the_freeman/detail/what-is-profit#axzz2Rt0sMHqQ

     Effects of Markets

24.            “The Economic Role of Savings and Capital Goods,” by Ludwig von Mises, in Economic Freedom and Interventionism: An Anthology of Articles and Essays, 1990, pp. 26-30.  Found here: http://mises.org/efandi/ch4.asp

25.            “Luxuries into Necessities,” by Ludwig von Mises, in Economic Freedom and Interventionism: An Anthology of Articles and Essays, 1990, pp. 31-32.  Found here: http://mises.org/efandi/ch5.asp

26.            “Political and Economic Freedoms Together Spawn Humanity’s Miracles,” by Temba Nolutshungu, in The Morality of Capitalism, 2011, pp. 96-99.  Found here: http://atlasnetwork.org/wp-content/uploads/downloads/2011/10/The-Morality-of-Capitalism-PDF.pdf

     Critiques of the Welfare State

27.            “Middle-of-the-Road Policy Leads to Socialism,” by Ludwig von Mises, April 18, 1950.  Found here: http://mises.org/daily/2370

WEEK #11

28.            “Tragedy of the Welfare State,” by Tom G. Palmer, in After the Welfare State, 2012, pp. 5-14. Found here: http://studentsforliberty.org/wp-content/uploads/2012/06/After-the-Welfare-State-PDF.pdf

WEEK #12                 TEST #2  November 4^th

WEEK #13                 Movie: Atlas Shrugged Part II

Read Part III: “A Is A” of Atlas Shrugged

29.            “The Welfare State as a Pyramid Scheme,” by Michael Tanner, in After the Welfare State, 2012, pp. 91-96. Found here: http://studentsforliberty.org/wp-content/uploads/2012/06/After-the-Welfare-State-PDF.pdf

WEEK #14

30.            “The Evolution of Mutual Aid,” by David Green, in After the Welfare State, 2012, pp. 55-65. Found here: http://studentsforliberty.org/wp-content/uploads/2012/06/After-the-Welfare-State-PDF.pdf

31.            “Mutual Aid for Social Welfare: The Case of American Fraternal Societies,” by David Beito, in After the Welfare State, 2012, pp. 67-88. Found here: http://studentsforliberty.org/wp-content/uploads/2012/06/After-the-Welfare-State-PDF.pdf

 

WEEK #15                 (finish #31)

THANKSGIVING November 27^th – NO CLASS

WEEK #16

32.            “How the Right to ‘Affordable Housing’ Created the Bubble that Crashed the World Economy,” by Johan Norberg, in After the Welfare State, 2012, pp. 97-105. Found here: http://studentsforliberty.org/wp-content/uploads/2012/06/After-the-Welfare-State-PDF.pdf 

33.            “Greece as a Precautionary Tale,” by Aristides Hatzis, in After the Welfare State, 2012, pp. 21-30. Found here: http://studentsforliberty.org/wp-content/uploads/2012/06/After-the-Welfare-State-PDF.pdf

 

A Very Marxist Movie

With utter and complete disregard of the Oscars yesterday, I watched a movie....

I watched one of the most Marxist movies I have seen in a long time.  Fortunately, it was also a terrible movie.  It's called, "In Time" (2011) with Justin Timberlake and Amanda Seyfried.  I won't get into anything that a normal movie critic would look at like acting or cinematography; I'll concentrate on what I know--economics.

The story takes place in a dystopic future.  Normally, I love dystopic movies because usually they are about an oppressed people who throw off their chains and fight for freedom.  While this movie is about an oppressed people, who throw off their chains, it is a world in which the Marxist vision of capitalism is alive.  The rich are parasites that feed off the poor and that system must be overthrown.

So here is the premise of the movie...

People have been genetically modified so that they stop aging at 25 years, what you look like at age 25 is locked in.  (Amazingly, everyone is gorgeous.  I don't remember 25 like that, but I guess my memory has faded with age.)  When one reaches 25, numbers on your left arm light up and start counting down from 1 year.  If they reach zero, you die.  Fortunately, time can be added and subtracted.  As a result, time has become the medium of exchange.  Literally, time is money!

In a classic Marxist perspective, society is divided up into distinct "Time Zones" or socio-economic classes.  The ghetto (zone 12) is populated by the poor who labor day-to-day barely scrapping by, whereas in the rich district of New Greenwich, the rich live idle lives.  In fact since they have all the time in the world (again literally!) they are accused of not actually living at all.

The "hero" explains that prices rise for no apparent reason.  The cup of coffee's price was 4 minutes, but then jumps up to 5 minutes the next day.  A bus ride was an hour, but now has a price of 2 hours.  As a result, the hero's mom is (in a tragic and supposedly heart-wrenching scene) the first shown to die when time runs out. Actually, I didn't feel all that bad, mostly because the movie was terrible.  Or is it because I am not a Marxist?  hmm...

The plot moves forward when the "hero" helps a rich guy slumming it.  His name is Henry.  Henry is tired of living and is contemplating suicide even though he has over a century on his clock.  The movie shows its true Marxist colors in the following exchange between Henry and the "hero" Will.

Henry Hamilton: For a few to be immortal, many must die. 
Will Salas: What the hell is that supposed to mean? 
Henry Hamilton: You really don't know, do you? Everyone can't live forever. Where would we put them? Why do you think there are time zones? Why do you think taxes and prices go up the same day in the ghetto? The cost of living keeps rising to make sure people keep dying. How else could there be men with a million years while most live day to day? But the truth is... there's more than enough. No one has to die before their time. If you had as much time as I have on that clock, what would you do with it? 

The point is that the population is increasing and so prices (from an assumed Central Planner) rise to reduce the surplus population. The result is a transfer of time (wealth) to the rich.  And so the rich get richer by stealing from the poor.

However before Henry kills himself, he gives the "hero" over 100 years.  Our "hero" then goes to the capital to experience the life of the idle rich.  He gains even more years by playing poker and meets Amanda Seyfried.  After romancing her, the cops come along and accuse him of stealing the rich guy's time.  After the usual escape and chase action found in Hollywood movies, Timberlake and Seyfried's characters decide to get back at the rich.  They use guns (Oh Hollywood!) and start robbing banks.  They redistribute the time to the poor who, of course, selflessly share this time with everyone else who is poor.  They then emigrate out of their zone and cross into the rich zone, thus collapsing the system.  

And if that simply isn't enough Communist preachiness for you, then there is the coupe de grace.  As the "heroes" are robbing the banks, there are a few moments when they ask if robbing the banks are wrong.  The answer is: no, this is not wrong.  They ask, "Is it stealing if it is already stolen?"  Yes, all the rich ever do is steal their wealth.  Yes, Proudhon lives, "All property is theft."  

If this is the sort of movies that Hollywood insists on making, you can see why I skipped the Oscars.

One last note, this movie lost money in the US.  It was budgeted at approximately $40 million and brought in $37.6 million.  So do they simply make it for ideological reasons?  No, because, according to IMDB, Non-US Income was $103.2 million.  Now what does that tell you?  Your guess is as good as mine.

Austrian Economics Forum Spring #1 2013 (Part 2)--Buchanan and Artifactual Man

The second reading in the first AEF meeting centered on an article by Buchanan called, "Natural and Artifactual Man."  While this article is found in volume 1 (The Logical Foundations of Constitutional Liberty--1999) of the collected works of James M. Buchanan, Liberty Fund does not have electronic rights to the first volume.  (So I can't link to it, sorry.)

Oddly we started with the end of the article.  In fact Roy Cordato said he posted the last few lines on his Facebook page and someone replied asking why he was quoting a long forgotten President.  (Buchanan immediately preceded Lincoln.)  So what is the last paragraph?

Man wants liberty to become the man he wants to become.  He does so precisely because he does not know what man he will want to become in time.  Let us remove once and for all the instrumental defense of liberty, the only one that can be derived directly from orthodox economic analysis.  Man does not want liberty in order to maximize his utility, or that of the society of which he is a part.  He wants liberty to become the man he wants to become.  (page 259.)

This article is clearly one of the most Austrian of his writings for in it he takes apart mainstream Neo-Classical economic theory.  In Buchanan's words:

My purpose [this article was originally a lecture, hence the informal style], however, is not to criticize particular areas of concentration, but to advance a broad criticism against economic theory generally.  If I may resort to philosophical terms, what I am objecting to in modern economic theory is its teleological foundations, its tendency to force all analyzable behavior into the straitjacket of "maximizing a utility or objective function under constraints."  In one way, I am suggesting that the utilitarian origins of nineteenth-century political economy may have come to haunt us and to do us great danger. (pages 249-250.)

What Buchanan is getting at fits neatly into the Mengerian/Mises tradition.  According to Mises, I act because of a "felt uneasiness."  I envision myself in a better future situation.  According to Menger I imagine my ends and I think of employing means to achieve those ends.  What Buchanan is pointing out is that the very act of accomplishing these ends changes me.  I am no longer the same person I was when I started.  I am able to artificially construct a new me, hence we are all "artifactual."

A few of the examples Buchanan uses are quitting smoking or going on a diet.  "As the smoker abstains, ..., he will find that he does become different from the person that he was.  He preferences shift; he becomes the non-smoker that he had imagined himself capable of becoming."  (page 253)  Under this umbrella, we find "any aspect of human behavior that represents 'civility.'"  This includes more than simply manners and codes of conduct, it contains morals.  (As an aside, it is worth noting that this inculcating and transference was a traditional purpose of a liberal arts education.)

Today, higher-level modern economics has been reduced to essentially a study of pattern recognition.  Modern economists collect data and attempt to find patterns and derive economic laws from regularities that are "uncovered" in the data.  While some economists dress their findings up in Positivism, most economists do not think about these "meta" issues.  They are more concerned with "doing research."

Unfortunately, that approach is ultimately fruitless.  Thomas Tooke, the German Historical School and many others have all gone down this very path.  If economics is truly a social science, if it can contribute to the betterment of mankind and enrich our understanding of our world, we should pay heed to this article.  Buchanan is able to undercut the whole of the utility maximizing model and simultaneously argue in favor of a free and open society.  His method is to essentially adopt the Austrian view of "ends and means" and how Austrians view cost and choice.  (Yes, that was a reference to part 1.)

Unemployment "Insurance"

North Carolina has new Republican majorities in both the House and the Senate.  With a new Republican governor, North Carolina has Republican control of the reigns of government for the first time since Reconstruction.  

The outgoing Democrats have left North Carolina with a $2.6 billion debt that it owes to the Federal Government for unemployment expenditures.  Since the recession NC has had higher than the national average unemployment.  Additionally, NC has had generous benefits (greater than our neighbors) that last for 26 weeks (that's half a year).  So when the economic recession settled in NC, the pool of unemployment funds were quickly drained.  The Democratic majority in the legislature and Democratic Governor had a choice to either reduce the outflow of funds or find a new source.  Their solution?  They decided to borrow the money from Washington D.C.  As a result, we now owe $2.6 billion and the unemployment rate is still above the national average.

The new Republican Governor and majorities in the House and Senate are moving legislation through each chamber that will reduce the "benefits" and shorten the span from 26 weeks to a range of 12 - 20 weeks depending on the state of the economy.  Such a plan will quickly pay off the debt and put money back (about $2 billion) into the unemployment insurance fund.

In economics, there are two axioms that everyone should be familiar with.  The first is if you want more of something, use taxpayer dollars and fund it.  The second is if you want less of something, tax it.  What is unemployment insurance?  Well, it certainly is not insurance.  

What is insurance?  It is a method to reduce risk.  It helps alleviate the cost of something bad  happening.  In order for insurance to work, we need to understand class risk.  Class risk means that I know that a certain percentage of people will be affected by something, but I couldn't tell you who in particular.  I might know that so many people will get cancer in a given year or that a certain percentage of people will be killed in a car accident in a year or so many homes catch fire, etc.  Since I know the percent of people harmed, I know the risk.  We can then pool together the funds and help offset the cost of the event.  

Suppose that it costs $100 to set a broken bone.  Further suppose that there is a group of 10 of us who fall into the risk class that says one of us will break a bone once this year.  Each of us then contributes $10 to the pool, for a total of $100.  The "winner" is the guy you breaks a bone.  The "losers" are those that do not.  So when it comes to insurance the "winners" are those that get cancer, those who are in car accidents, those who homes burn down, etc.  The "losers" are those who pay into the fund, but nothing bad happens to them.

So let's apply this reasoning to unemployment "insurance."  First, can we identify risk classes?  No, not really.  Can we estimate how many will lose their job in the next year?  Again, not really.  With many insurances, we can modify the risk class we find ourselves through our behavior, like good driving vs. a record of drunk driving.  Is there any consideration along these lines for unemployment "insurance"?  Sadly no, like most government things, it's one size fits all.  Finally, am I paying into the fund that I am insuring against?  Yes, but it is subsidized by those who don't work.  I don't simply mean the unemployed, I mean those that don't have a job and do not want a job.  To the extent that funds come from the General Fund, those that pay sales tax, the gas tax, etc. are also paying into this fund.

If unemployment "insurance" isn't really insurance, then what is it?  It is simply a transfer payment to those who meet the government's definition of eligible recipient.  And now, finally, we can apply that first axiom, which is if we want more of something, have the government pay for it.  If we want more people unemployed, pay them not to work.  If we want people to be without work for week after week after week, pay them week after week after week.

The critics of the new governor have asked him to try to live on $350/week (the new proposed rate).  However, they miss the point.  This transfer payment is not supposed to replace work.  It is to help offset the cost of an event, losing one's job.  People respond to incentives and if the cost of being unemployed is high, those people will be highly motivated to take the next job out there.  If they are not highly motivated, they will wait until the "perfect" job comes along.  The reality is that the "perfect" job does not exist.  The reality is that you take the next job (which will pay less) and you work up the ladder again.

It is only by using the natural incentives found in the market will the economy recover.  The market will put people back to work.  We just have to let the market do its job.