Competition vs. Conflict

Last week President Obama said that we do not live in autarky.  In other words, one person did not build a business, he had help.  Well, duh!  No one argues that we should each live in solitude, not even the more ardent Randian Objectivist.  


So what is he really getting at?  He is trying to emphasize that communities need to work together.  Fine.  However, his emphasis is on the public sector's "contribution" to society.  Here are a few thoughts on this...


First, before government can make any contribution to society, it must first take from society.  Just because the public sector has spent money on an area, e.g., roads, schools, etc., it does not mean that such things would not be produced if the private sector was left alone.  In deed, the public sector tends to crowd out the private sector whenever it does anything.  Additionally, the public sector is unable to determine whether it is spending money efficiently and thus is always more wasteful of resources than the private sector.


Secondly, autarky may be a starting point for economic theorizing, but it does not mean that we stay there.  Austrians almost always start with the assumption of a lone individual on an island when developing theories of capital and interest.  However, one of the most important insights of all of economics is the Law of Comparative Advantage, which Mises takes to the level of the individual and calls it the Law of Association.  It says that when we specialize and trade, we are made better off.


Finally, many on the left simply do not understand how a free society works.  At the center of the economic system all they see is one person trying to out-compete all rivals--doing whatever it takes to get resources for that dollar of profit.  This conception of the market economy is a skewed envisioning by Marx and the left.  


While there is competition, to be sure, the market cannot operate at odds with itself.  The market is less about competition than it is about harmony.  Consumers have preferences that are subjective and unknown to the producers of goods and services.  Manufacturers have resources and plans to make goods, but do not know which goods to make and in what quantity or quality.  The problem that faces every society is to convert the resources into  goods and services, but not just random goods and services.  They need to make items that satisfy the most intense wants and desires first, and then work down the consumers' preference list.  The market coordinates the conversion of these resources through the use of the price system.  The result is a harmony of action.  Different firms, through trial-and-error, through profit and loss, through competition discover the best combination of resource blends.  The result is that more people are served with less waste than any other system ever.


The reason why the left, Marxists in particular, focus on the single aspect of competition is that they view the world through the lens of conflict.  Marxism is born from Hegelianism.  Hegel saw the world in terms on conflict.  There is a thesis, which is today's mainstream.  Through time, a reaction builds in opposition to it, the antithesis.  A conflict eventually ensues and a synthesis emerges.  For Marx, the Monarchy was the thesis and the exploited were the antithesis.  The result that emerged from the French and American revolutions were the rise of Capitalism.  Capitalism is the new thesis, in which the proletariat will rise up against the bourgeoisie.  The result of this conflict will be Communism.  To the Marxists, the totality of history is conflict, so why should the internal workings of a free society be any different?


What a horrid way to look at the world--conflict, fighting and death!  A vision of a free society is one of liberty and one of individual responsibility.  In this vision, I need you and rely on you so that I can better myself.  When I trade with you, we are not in conflict, we are mutually helping each other.  We are both made better off by the trade.  A free society is the furthest thing from autarky.  If, in college, our President read Bastiat instead of Marx,  I doubt he would be able to make such foolish statements.

The Real Thanksgiving Story

The first Thanksgiving is not a story of dumb whites who came to the New World to conquer and spread disease amongst the idyllic, nature-loving natives.

It is, instead, a story of the triumph of Capitalism over Socialism.

There have been several retellings of the first Thanksgiving, I have linked to Richard Ebeling's recounting last year.  Thomas DiLorenzo writes an excellent account in the third chapter of his book, How Capitalism Saved America.

This year I found a nice YouTube version that does a good job.  It explains why private property rights saved the pilgrims and triumphed over the collectivist ideal.

I find Thanksgiving to be one of the best holidays for exactly that reason.




Since the posting of this video, I have found Reason.TV's version.  Very funny.

Austrian Economics Forum Fall 2010 #5—MegaPost

Socialism is a failure, but why does it keep coming back? That’s the perennial question. In the latest Austrian Economics readings Group forum at NC State University, we discussed the final Hayek readings on socialism. In particular, "Socialist Calculation II: The State of the Debate (1935)" and "Socialist Calculation III: The Competitive 'Solution.'" These are chapters 8 and 9 in Individualism and Economic Order.

To Hayek, the problem that faces an economic system is one of coordination. How do individuals coordinate their actions with one another without the guidance of a central planner? And if there is a central planner, then will that system be able to incorporate all of the information necessary to not waste resources while satisfying the most intense wants and desires of the consumers? Will the people who live under a central planner still be able to choose their own consumer goods, or will goods just be rationed to them? Will workers get to choose where they work or will they simply be assigned their station in life?

Hayek begins by pointing out that the Russian experiment is a failure. The people are more impoverished than under the Czarist régime. Turning to the theoretical side of the debate, Hayek focuses on the mathematical approach to solving the production and distribution questions. In order to calculate the correct solution, the knowledge of opportunity costs is needed. More than mere “technical” knowledge is needed to run an economy. Just because we know how to build something does not answer the question of should it be built at all.

Furthermore, there is a need for the knowledge of consumer goods. Consumers’ tastes and preferences are continuously changing and the central planner, to be successful, will need some sort of feedback mechanism to incorporate the changes. Bureaucracies move too slowly to accomplish this task. The bottom line of this analysis is that the market processes the information that the central planners cannot. In order to achieve some sort of solution, consumer sovereignty has to be sacrificed. Consumers no longer can choose what they prefer; must simply take whatever goods and services that are placed before them.

In the conclusion, Hayek seems to have left the door open to the possibility of a workable socialist solution. Hayek states,

“that today we are not yet intellectually equipped to improve the working of our economic system by ‘planning’ or to solve the problem of socialist production in any other way without very considerably impairing productivity. What is lacking is not ‘experience’ but intellectual mastery of a problem which so far we have learned only to formulate but not to answer. No one would want to exclude every possibility that a solution may yet be found. But in our present state of knowledge serious doubt must remain whether such a solution can be found.”

I argued that unlike Mises, Hayek is leaving the door open. Cordato said that he thought the Hayek was being gracious towards his academic colleagues. While this may very well be the case, this is not how the debate progressed in the 1940s. The chief rivals to the Austrian challenge, like Lange, thought that Hayek was retreating from Mises’ position that socialism is impossible, even on paper.

It was at this point in our discussion that I read from an article that was published in 1948. The article, “Socialist Economics” was published by the American Economic Association in a collection of papers entitled, A Survey of Contemporary Economics. The article was written by Abram Berson, at that time he was a professor at Columbia University and earned a Ph.D. from Harvard. So his interpretation of the debate is not some fringe interpretation, it was, basically, the mainstream of the time. Furthermore, Bergson cites, not just the two articles that we read for the readings group, but he also cites “The Use of Knowledge in Society,” and Schumpeter and Mises as well.

Here is what Bergson says,

“To come finally to Mises, there are two questions to ask: What does he say and what does he mean?

“On the first question, let Mises speak for himself:”

Then there is a lengthy quote from Mises on how without private property there can be no market and no prices and then no economic calculation. Mises concludes, “Exchange relations between production goods can only be established on the basis of private ownership of the means of production.”

[back to Bergson]

“As to what Mises means, there appear to be two views. According to that which seems to have gained the wider currency, Mises’ contention is that without private ownership of, or…a free market for, the means of production, the rational evaluation of these goods for the purposes of calculating costs is ruled out conceptually. With it goes any rational economic calculation. To put the matter somewhat more sharply than is customary, let us imagine a Board of Supermen, with unlimited logical faculties, with a complete scale of values for the different consumers’ goods and present and future consumption, and detailed knowledge of production techniques. Even such a Board would be unable to evaluate rationally the means of production. In the absence of a free market for these goods, decisions on resource allocation in Mises’ view necessarily would be on a haphazard basis.

“Interpreted in this way, the argument is easily disposed of. Lange and Schumpeter, who favor this interpretation of Mises, point out correctly that the theory is refuted completely by the work of Pareto and Barone. …

“According to the other interpretation of Mises, which has the authority of Hayek, the contention is not that rational calculation if logically inconceivable under socialism but that there is no practicable way of realizing it. Imputation is theoretically possible; but, once private ownership of the means of production has been liquidated, it cannot be accomplished in practice.

“Hayek’s own thinking and that of Robbins, seems to be along these lines. Lange, who interprets the views of Hayek and Robbins as being in reality a retreat from the original position of Mises, considers that his own analysis refutes their argument…”

In the second reading, Hayek argues that it is the Socialists who have changed their arguments. And it is he who is chasing after them. Hayek states, “[I]t is surely unfair to say, as Lange does, that the critics, because they deal in a new way with the new schemes evolved to meet the original criticism, ‘have given up the essential point’ and ‘retreated to a second line of defense.’ Is this not rather a case of covering up their own retreat by creating confusion about the issue?”

So each side accuses the other of retreating and shifting the debate because of the other side’s inability to respond to the criticism. Personally, I am less interested in who shifted first. What does interest me is the shift in the debate. I agree with the first Bergson interpretation of Mises that under Mises’ analysis, socialism is unworkable, even on paper. I think that Mises’ argument that grounds itself on the fundamental foundation of socialism—communal property—is the stronger argument, because it attacks the very core of socialism. There is simply no getting around it. Either there is private property and a market that guides production or there is a central planner who controls it all.

I find it amazing that Bergson so easily dismisses the first interpretation of Mises. Bergson, Lange, Taylor, etc, all say that Mises was answer by Pareto and Barone. However, in the second reading, Hayek cites Pareto and shows that Pareto “expressly denied” the mathematical solution. Bergson obviously read this article and makes no attempt to address this point. Why?!?

I liked the second article more than several other people in the group. In section 5 of the article, we can clearly see the famous phrase “the circumstances of time and place” appear before the “Use of Knowledge” article. We also see an early sketch of the “man on the spot” concept a few paragraphs later.

One last point in the article that needs attention comes at the end of section 6. Hayek points out that under central planning there will be no improvements made. He states, “Any improvement, any adjustment, of the technique of production to changed conditions will be dependent on somebody’s capacity of convincing the SEC (Supreme Economic Council) that the commodity in question can be produced cheaper and that therefore the price ought to be lowered. Since the man with the new idea will have no possibility of establishing himself by undercutting, the new idea cannot be proved by experiment until he has convinced the SEC that his way of producing the thing is cheaper. Or, in other words, every calculation by an outsider who believes that he can do better will have to be examined and approved by the authority, which in this connection will have to take over all the functions of the entrepreneur.”

Innovation and creation will die under central planning. There is no incentive for the bureaucrat to take a risk. Bureaucrats, are by their nature, the opposite of risk-takers. They are the opposite of entrepreneurs.

For more on this debate, I found an article written by Murray Rothbard. It is found here:
http://www.lewrockwell.com/rothbard/rothbard132.html

Investing Social Security Funds arises from the Dead (Just in time for Halloween?)

Today I was listening to the radio and a story came up stating that Andy Stern, former President of SEIU (the state employees union), suggested that in order to keep Social Security solvent, a portion should be "invested" into the stock market.  So I looked for the story and sure enough it is found on the Huffington Post here.  (Okay the article is from the end of June, but I heard it today, hence the Halloween reference.)

As mentioned in the article, this idea was once proposed in the Clinton Administration.  This idea was bad then and it is bad now.  Fortunately in May 1999, I wrote an article on the dangers of "investing" Social Security funds into the stock market.  That article, "A Socialist Stock Market?" is found here.

Here are a few paragraphs...

Murray Rothbard once asked Ludwig von Mises at what point on the spectrum of statism can a country be designated as "socialist." To his surprise, Mises said that there was, indeed, a clear-cut delineation: the stock market.

Mises said, "A stock market is crucial to the existence of capitalism and private property. For it means that there is a functioning market in the exchange of private titles to the means of production. There can be no genuine private ownership of capital without a stock market: there can be no true socialism if such a market is allowed to exist."

A corollary to this idea is that if the government is allowed to "invest" in the stock market, then the economy can no longer be called market-based. President Clinton has proposed a plan to use up to one-fourth of new Social Security funds to buy shares in our stock markets. The danger of this plan may not be as obvious as his previous health-care plan, but they are just as serious. The justification for this argument is that the Social Security system is unstable and will face financial strains in about 2014 and will be exhausted by 2032. There are a few options that the Washington elite have deemed as "solutions." Most of these ideas are politically unpalatable. The first is an increase in taxes. Over time, the needs of the Social Security fund will be so high that it will stifle the entire economy. There have been some projections showing FICA taxes as high as 82 percent in forty years.

The second option is to reduce the "benefits" being paid out by the fund. This action is also politically unacceptable. The third alternative is to somehow increase the rate of return on the current surpluses to cover the future. The thinking in the Clinton administration is simplistic at best. The plan assumes (wagers) that the stock market will continue to increase (forever) at rates high enough to meet the projected needs.

The fundamental problem that the Clinton administration ignores is that the Social Security program is based on what is called a Ponzi Game or a pyramid scheme. You have probably seen this if you've ever received a chain letter that states, "Send money to the first five people on the list, remove the first person's name, and place yours at the bottom." In other words, the first people in the program (those at the top of the pyramid) are currently getting money from the new people enrolling (those who are at the lower stages of the pyramid).

Social Security works in the same way. Those who are retired are receiving money from those who are currently working. As long as the base of the pyramid is expanding at a geometric rate, the system will continue to function. However, U.S. demographics show that after the baby-boom generation, the base of the pyramid shrinks. It is mathematically impossible to continue the Social Security program indefinitely.

The best solution is to phase out the Social Security program by taking two steps.

The rest of the article is found here: http://mises.org/freemarket_detail.aspx?control=27.

Democracy in America?

On the day after the "Health Care" legislation was "passed," I am reminded of a lengthy quote by Alexis de Tocqueville. It comes from his book, Democracy in America. This quote comes from the second volume, written in 1840, section 4, chapter 6, "WHAT SORT OF DESPOTISM DEMOCRATIC NATIONS HAVE TO FEAR." It is well worth reading the whole thing.

"I seek to trace the novel features under which despotism may appear in the world. The first thing that strikes the observation is an innumerable multitude of men, all equal and alike, incessantly endeavoring to procure the petty and paltry pleasures with which they glut their lives. ...

"Above this race of men stands an immense and tutelary power, which takes upon itself alone to secure their gratifications and to watch over their fate. That power is absolute, minute, regular, provident, and mild. It would be like the authority of a parent if, like that authority, its object was to prepare men for manhood; but it seeks, on the contrary, to keep them in perpetual childhood: it is well content that the people should rejoice, provided they think of nothing but rejoicing. For their happiness such a government willingly labors, but it chooses to be the sole agent and the only arbiter of that happiness; it provides for their security, foresees and supplies their necessities, facilitates their pleasures, manages their principal concerns, directs their industry, regulates the descent of property, and subdivides their inheritances: what remains, but to spare them all the care of thinking and all the trouble of living?

"Thus it every day renders the exercise of the free agency of man less useful and less frequent; it circumscribes the will within a narrower range and gradually robs a man of all the uses of himself. The principle of equality has prepared men for these things;it has predisposed men to endure them and often to look on them as benefits.

"After having thus successively taken each member of the community in its powerful grasp and fashioned him at will, the supreme power then extends its arm over the whole community. It covers the surface of society with a network of small complicated rules, minute and uniform, through which the most original minds and the most energetic characters cannot penetrate, to rise above the crowd. The will of man is not shattered, but softened, bent, and guided; men are seldom forced by it to act, but they are constantly restrained from acting. Such a power does not destroy, but it prevents existence; it does not tyrannize, but it compresses, enervates, extinguishes, and stupefies a people, till each nation is reduced to nothing better than a flock of timid and industrious animals, of which the government is the shepherd.

"I have always thought that servitude of the regular, quiet, and gentle kind which I have just described might be combined more easily than is commonly believed with some of the outward forms of freedom, and that it might even establish itself under the wing of the sovereignty of the people.

"Our contemporaries are constantly excited by two conflicting passions: they want to be led, and they wish to remain free. As they cannot destroy either the one or the other of these contrary propensities, they strive to satisfy them both at once. They devise a sole, tutelary, and all-powerful form of government, but elected by the people. They combine the principle of centralization and that of popular sovereignty; this gives them a respite: they console themselves for being in tutelage by the reflection that they have chosen their own guardians. Every man allows himself to be put in leading-strings, because he sees that it is not a person or a class of persons, but the people at large who hold the end of his chain.

"By this system the people shake off their state of dependence just long enough to select their master and then relapse into it again. A great many persons at the present day are quite contented with this sort of compromise between administrative despotism and the sovereignty of the people; and they think they have done enough for the protection of individual freedom when they have surrendered it to the power of the nation at large. This does not satisfy me: the nature of him I am to obey signifies less to me than the fact of extorted obedience. "
The rest is found here.

The True Meaning of Thanksgiving

This month I was going to write about why Thanksgiving is one of my favorite holidays. Why? It's simple. It is because Thanksgiving represents the triumph of Capitalism over Socialism.

Beating me to the punch this year, is my former Hillsdale College economics professor, Richard Ebeling. He now teaches at Northwood University in Michigan and here is his post.

Enjoy!