Europe, Greece and The Current Mess

The current mess in Greece is not the real problem. Greece is simply the outcome of a much larger problem. The problem is the entire Euro project, which was from the beginning doomed to fail. It will probably survive the current crisis, but in the long run it has to die. When it does, we can only hope that the entire idea will be buried so deep that it'll be right next to dinosaur bones.

What do I mean? Philipp Bagus offers us a brilliant explanation in his book The Tragedy of the Euro(also in .pdf). Click here to see a short article by Bagus on how the ECB compares to the Fed. Bagus deals mainly with economics, but the authoritarian origins of European integration have been documented elsewhere.

European integration had many liberal proponents who dreamed of a free Europe. We didn't get that; we got an unaccountable bureaucracy of elitist technocrats. Let me quote Hans-Hermann Hoppe to show why this shouldn't surprise us.

...every state is threatened with "exit." Especially its most productive citizen may leave to escape taxation and the perversions of law. No state likes this. To the contrary, instead of seeing the range of control and tax base shrink, state agents prefer that they be expanded. Yet this brings them in conflict with other states. Unlike competition between "natural" persons and institutions, however, the competition between states is eliminative. That is, there can be only one monopolist of ultimate decision-making and taxation in any given area. Consequently, the competition between different states promotes a tendency toward political centralization and ultimately one single world state.[1]

As a de facto part of the American Empire, political integration could hardly be carried out through war in post-war Europe. Less aggressive means were used, and thus we got the EU and as an extension the Euro.

This may seem like a rather cynical and pessimistic view of the world, but let's see how the Euro fits into all of this. Like the Fed, the national central banks in Europe operated as a way to monetize public debt and serve political interests(mainly banks).[2] The political powers in Europe had a big problem, though. The German central bank, the Bundesbank, wasn't doing what others(mainly the French) wanted. Or, to put it another way, the Bundesbank wasn't printing money fast enough.

Every time the Bundesbank raised its interest rates, the French were obliged to follow suit. [...] "We may have the nuclear bomb, but the Germans have the deutsche mark," officials at Elysée Palace, the office of the French president, apparently said.[3]

Chapter 5 of Bagus' book and the Der Spiegel article really explain it in detail, so check them out. To put it bluntly, the French gave Germany reunification on the condition that Germany gives up the Mark. France wanted to get rid of Germany's monetary authority and saw the collapse of the Soviet Union as an opportunity to get rid of the dreaded Bundesbank. Obviously the ECB needed to be more inflationary than the Bundesbank, otherwise it would've been pointless. Unsurprisingly the ECB is just like that.

Ironically the collapse of the Soviet Union and the secession of Eastern Europe from the Soviet Empire coincided with a completely undemocratic(e.g. a large majority of Germans wanted to keep the Mark) political maneuver and power grab in Europe.

The Tragedy of the Commons

At this point let me quote Philipp Bagus at lenght:

The Fed buys government bonds outright, while the ECB accepts them as collateral for new loans to the banking system. Economically, the effects are identical. The money supply increases when the Fed buys government bonds. When the ECB grants a loan with government bonds pledged as collateral, the money supply increases as well.
...
Because the ECB does not publish the collateral provided for its loans, we do not know how many Greek government bonds, for example, are provided as collateral for ECB loans.
...
Imagine that the government has a deficit and issues government bonds. Part is bought by the banking system and used to get additional reserves from the central bank, which buys the bonds or grants new loans, accepting them as collateral. The banking system uses the new reserves to expand credit and grant loans to, for example, the construction industry. With the new loans, the construction industry buys factors of production and pays its workers. The workers use part of the new money to invest in funds. The investment funds then use the new money to acquire government bonds. Thus, there is an indirect monetization. Part of the money created by the fractional-reserve-banking system ends up buying government bonds because of their preferential treatment by the central bank, i.e., its direct monetization.[2]

So the ECB monetizes government debt both directly and indirectly. Ok, so basic stuff and nothing new? All central banks do this, but with the Eurozone there's a problem(many different issuers of government debt).

Monetizing debt means that new money is created. Those who get the new money first benefit, because they now have more money and prices haven't risen yet. Those who get it last suffer, because prices rise before their incomes do. It's a transfer of wealth. In this case to the government who issues the debt.

So the Euro is an institution that transfers wealth to those governments who run the biggest deficits. So why should the situation in Greece surprise us? Their extravagance was being financed by the more responsible nations.

That means that the ECB was bailing out Greece even before May 2010. It did not have to buy the Greek bonds outright; it only had to accept them as collateral. If the ECB had not accepted Greek bonds, Greek debts could not have mounted to such an extent. The Greek government would have had to default much earlier.[2]

As long as the ECB and the banking system work as they currently do, there will be no escape from disaster. If all of this is not bad enough, the moral hazard is being worsened with bailouts.

The short-term solution for Greece is a balanced budget and a (partial) default. It really is that simple. It might be "politically impossible," but that's just another way of saying that politicians don't want to do it. The point is that even if they don't want to, they can and they should.

The long-term solution is the end of the Euro.

[1] Hans-Hermann Hoppe The Paradox of Imperialism
[2] Philipp Bagus The Fed and the ECB: Two Paths, One Goal
[3] Der Spiegel Was the Deutsche Mark Sacrificed for Reunification

Additional reading on the relationship of the state and money:
Hans-Hermann Hoppe Why the State Demands Control of Money

Barry Schwartz: The Paradox of Choice - The Critique

In case anyone thinks Renata Salecl is alone with her ideas, she isn't. I'm sure most of you have heard of TED. In 2007 they had Barry Schwartz to talk about the Paradox of Choice(also a book). I think I watched this years ago and IIRC it isn't as bad as Salecl's nonsense(we'll see, as I'm actually watching the talk as I write this).

03:40 Healthcare used to be simpler. You went to the doctor and the doctor told you what you should do. Now the doctor gives you choices(A has these risks and these benefits, B on the other hand has these risks and these benefits; now choose).

First of all Schwartz's example is a caricature.

Second of all doctors do this to avoid legal liability. Schwartz ignores the legal institutions that have been erected around healthcare and simply offers this as an example of how more choice complicates things. The solution is to return to a doctor-patient relationship that is based on voluntary contracts, not legislation and legal uncertainty as it is now. Schwartz gives us an example of forced choice, not freedom. In Schwartz's example the patient asks the doctor what he should choose, and the doctor replies by repeating the risks and benefits of each treatment. It's amazing how anyone could think that such a situation could be in any way natural or simply a result of more choices. Schwartz's example in fact implies that more choice prevents doctors from doing their job.

08:10 More choice produces paralysis. With so many options to choose from, people find it difficult to choose at all. Vanguard example.

Schwartz gives us an example of how more choice in retirement investment funds leads to no choice at all. Yeah, more choice probably makes people realize that they don't know a god damn thing about how to invest money. So they don't invest. Schwartz argues that this is a bad thing(i.e. people should invest). Who is he to make that judgement? [*snip* Edited a rather weak argument away. My main point still stands.]

Schwartz's argument reminds me of this xkcd strip. Let's see...

Crazy phenomenon: More choice leads to paralysis(i.e. limiting choice removes the paralysis and makes people more likely to choose/buy stuff).

If it worked, companies would be using to make a killing in... selling anything that currently comes in "too many" varieties.

Are they? No, if the amount of salad dressings in a normal supermarket is an indication of anything.

10:15 With a lot of different choices it's easier to imagine that we could've picked a better choice than the one we actually picked.

With a lot of different choices it's a lot easier to think about all the bad things we avoided by choosing what we chose. With a lot of choices we observe competition in action, and thus we are more likely to think that what we choose is good and don't care that much about the alternatives. With limited choices we might think we're more likely to pick the worst choice of them all... And so on.

Nice theorizing, but as I can't recall a single example of where I've thought like Schwartz says we think, I have a hard time relating(i.e. Schwartz and his armchair theorizing does not convince me).

12:25 Escalation of expectations: No more pleasant surprises!

I experience pleasant surprises all the time. Besides, our expectations are formed by the reality we live in. Low expectations are usually a sign of a crappy life.

But what does it mean to have high expectations? As reality changes, so do our expectations. Concretely speaking as society becomes wealthier we expect things to be better than in the past. But this does not mean we can't experience pleasant surprises. For this to be true our expectations should be high compared to the reality we live in; not the past. Schwartz completely ignores this. Comparing our current expectations to the expectations people had in the past is meaningless. It tells us that we've become wealthier as a society, but it does not in any way affect our ability to experience pleasant surprises. This is a serious error in Schwartz's thinking.

16:00 Self-blame, clinical depression, suicides...

Unfortunately I can't completely refute any of these with armchair logic(just like Schwartz can't prove anything), but I do have some off-the-top-of-my-head theories, which I might refine and talk about in the future(or probably not). Let's just say I have a great trouble accepting the entire self-blame theory and I especially can't relate it to choice.

17:00 Some choice is better than none, but more choice isn't necessarily better than some choice. We've long passed the point where more choice leads to greater welfare. We shouldn't "waste" resources on more choices, and should make the pareto-optimal decision to shift income(and choices) from affluent societies to poorer ones.

Global wealth redistribution, what a shocker. Schwartz is basically a central planner who wants to provide for the optimal amount of choices. If Schwartz was right, then I have a very simple solution. Governments in affluent societies should simply show this talk to as many as possible. Then people would realize how they could be better off by sending money to poorer countries(plenty of organizations make that possible).

But Schwartz doesn't base his welfare analysis on demonstrated preference, so he wouldn't be satisfied with just that.

Renata Salecl: The Paradox of Choice - The Critique

RSAnimate is here with another anti-freedom YouTube video. As expected, it's factually incorrect and absurd. These videos are obviously a great hit with the anti-market masses.

According to Salecl, supermarkets and the choices they offer make us feel "horrified." Imagine that from tomorrow onwards every supermarket had 80% less choices. It's a safe bet to say that then we'd actually be horrified.

The Causes of Anxiety

1. We choose what other people are choosing. Choice is a very social matter.

We often do choose the same things as others, but this doesn't mean we choose these things because others have chosen them. That's a complete non sequitur. Even when our choices are affected by the choices of others, I fail to see how this is a bad thing. I sure as hell am going to see what computer processors others have bought before choosing which one to buy. Salecl is partly right; we do indeed communicate things about ourselves through the choices we make. The possibility of doing this should be seen as a great aspect of our society, not some kind of evil.

2. We try to make an ideal choice. And yet we're always dissatisfied.

Both of these things have to be true for there to be any human action. These tautologies don't prove a god damn thing.

Every time we act we make a choice. By definition we choose the highest-ranked("ideal") option available. Without dissatisfaction, there can be no action(and thus no choosing). If there was no dissatisfaction, then why would you act? Acting and choosing means you want to change how things currently are. You wouldn't do that if you had achieved perfect satisfaction.

3. Choice always involves a loss.

Wow, Salecl has discovered opportunity cost! Another fact of life that has to be true by definition. This is supposed to prove what exactly?

Ideology of Choice

...which forces us to perceive ourself being guilty for the failures in our life, especially professional life.

This is an amazing claim. I thought it was pretty much common knowledge that people delegate guilt all the time as a psychological defence mechanism. This contradicts all my experiences and all I've heard on this; so unless someone can point to some sort psychological studies confirming Salecl's claim, I'm going to say this is BS.

We also feel ashamed for being poor...

This tendency has certainly decreased over the decades, as people have become accustomed to thinking that society owes them something(the "right" to welfare and other nonsense). But I don't exactly see what the controversy here is. You fail at being a successful member of society; why shouldn't you be ashamed of yourself(not counting the obvious exceptions)?

...even [though] decades ago, there was some kind of identification with being working class, now it's more the feeling of inadecacy, of not making it.

What a subtle way to conflate "poor" and "working class."

Capitalism is a system ... we work longer hours, we are rushing around and we are constantly consuming.

We don't work longer hours. One of the glorious consequences of capitalism has been the rise in productivity that has allowed for more and more leisure. We aren't "rushing." We simply economize time more than before. And why would we do this? Probably because wasting time has a higher opportunity cost than before. And why is the opportunity cost higher? Probably because we have so many choices in front of us(just think of everything you could do right now if you weren't reading this...). And yeah, we get to consume stuff. That's a good thing.

The subject starts believing that he is not simply a proletarian slave, but that he is a master. The belief that you are actually in charge, although you aren't; it's a very important belief.

Apparently I'm a proletarian slave, too. Maybe I should quit my job. But wait! I thought a part of being a slave was the inability to quit...

Salecl's ideas were stupid and boring, but the real culprit is RSAnimate. Without institutions like RSAnimate, bad ideas would never spread as effectively as they do.

On Ideologies

The Internet is probably the best example of how freedom works and it is probably also the greatest weapon available to those who want to promote freedom. Different theories and ideologies now have a more even battlefield, as anyone can fact-check pretty much anything and alternative views can't be hidden by the gatekeepers in society.

The great debates of the world aren't taking place in the halls of Congress, not the Eduskunta, the House of Lords or any such place. The debaters aren't politicians or other men of great influence. The debates take place on forums, blogs, YouTube, the comments section of reviews on Amazon.com and everywhere else. The debaters are normal people.

No one can escape the influence of a prevailing ideology.
~Ludwig von Mises

At the end of the day what matters is the dominant ideology among the public. At the very least, a state must have the passive support of its people, otherwise it will crumble, no matter what it does. Intellectual leaders promote their ideas, but it is up to the people to choose the ideology they wish to follow. And it doesn't end there; the intellectual battle must not be left to the intellectuals alone. The people themselves must engage in the ideological struggle of the day, unless they wish to see their ideology disappear or become marginalized.

Most people do not consciously do this. They promote their ideology of ignorance through casual conversations, through the votes they cast and their acceptance of the current situation. They do not have any well-defined principles, they often rely on pseudo-scientific utilitarianism, they make excuses for current policies and are anti-radical.

Ideology of ignorance: People don't know society works. Frédéric Bastiat wondered How Paris Gets Fed, and we may ask the same question still today. People know very little about economics, yet they still offer opinions on things that would require economic analysis to understand. As Bryan Caplan has observed, people are biased in their worldviews and do not let their ignorance get in the way.

Principles: The lack of principled stances is best seen in how often people define right and wrong based on lawfulness. Delegating responsibility and critical thinking to the legislative body of the government is the lazy way out of serious issues.

Utilitarianism: Utility is subjective and you can't make interpersonal utility comparisons. People ignore this, because they in fact do not respect the choices others make.

You don't have to smoke. Others can't force you to smoke. So what gives you the right to restrict others from smoking(unless they're on your property)? The answer will of course rely on health(which is "good") and maybe the medical costs("bad") society will have to pay for(you see when the opponents of socialism said that socialized medicine will eventually lead to the socialization of human bodies; they were right). If the purpose of life was to live healthily, then everyone would already do so.

Pseudo-science: Simply watch DiLorenzo's speech. It is possibly the best illustration of what I'm talking about.

No one can find a safe way out for himself if society is sweeping towards destruction. Therefore everyone, in his own interests, must thrust himself vigorously into the intellectual battle. None can stand aside with unconcern; the interests of everyone hang on the result.
~Ludwig von Mises

After all this gloom and doom, you would think that all is lost. The masses do not resist when freedom is being restricted. They do not oppose interventionism and even have a strong anti-market bias. But they also aren't committed ideologues. Their minds can be changed by a vocal minority, even though in the current environment it is unlikely that this will happen. If people weren't ignorant and still held the beliefs they hold, we'd be in much more trouble.

So do not stand aside with unconcern. Many people during the latter half of the 19th century probably did. Classical liberalism was going to produce peace, prosperity and freedom for all. And it would have, had it survived. What followed was a century of nationalism, totalitarianism, socialism, war and democide.

Ideas have consequences.

Reflections On My First Blog Post

This post won't be of much use if you do not already understand the concept of marginal utility.

My first post Some Thoughts On Money was in retrospect a pretty good post, but it didn't deal with why the ideas expressed were important. I dealt with how money originally emerged in the marketplace. So what's the big deal here?

The Marginal(ist) Revolution

Classical economists had some pretty good ideas about economics, but their cost-theory of value was seriously flawed. It wasn't until the 1870s that the concept of subjective marginal utility came and gave us a comprehensive and logically coherent theory of value.

A small problem remained, however. What about the value of money? Let me quote Robert Murphy to illustrate the problem:

But many felt that a marginal utility explanation of money demand would simply be a circular argument: We need to explain why money has a certain exchange value on the market. It won't do (so these economists thought) to merely explain this by saying people have a marginal utility for money because of its purchasing power. After all, that's what we're trying to explain in the first place—why can people buy things with money?[1]

1) Why is the value of money what it is? Because of marginal utility of course.

2) And how do people estimate the marginal utility of money(i.e. how do they decide their current demand for money)? By looking at expected prices of course(i.e. the expected value of money).

3) How do people form expectations about the value of money? By looking at the past value of money of course. People have memories. So people value money(i.e. they give money its purchasing power) because money has purchasing power(i.e. it is valued by people).

4) So the value of money in time t(now) is determined by the expected value of money in time t+1(future). The value of money in time t-1(the past) was determined by people's expectations of the value of money in time t(now). And the value of money in time t-2(even further into the past) was determined by people's expectations of the value of money in time t-1(the past). And so on...

But isn't this an infinite regress? Can't we just go back in time in perpetuity and never solve the problem of how money has value? No, this isn't the case. At this point it's important to remember how money was initially created in the marketplace. This means that if we go back in time long enough, we will eventually hit a point at which the monetary unit ceases to be money. It's just another good.

And there's no problem with explaining the value of "just another good" with marginal utility analysis.

[1] Robert Murphy The Origin of Money and Its Value

GDP, ISEW and Other Nonsense [Part 2]

So what's so bad about ISEW and GPI? The first thing to notice is that there is a large amount of subjectivity involved. In fact a quick overview seems to indicate that the methods used change very often depending on when and by who the indexes are done. But this is in fact a minor problem.

To understand some basic concepts of utility and welfare, I suggest starting with Murray N. Rothbard.[1] For a neoclassical critique of ISEW, I suggest the works of Eric Neumayer.[2]

This is a basic example of how ISEW is calculated. It reminds me of John Maynard Keynes' The General Theory of Employment, Interest and Money and Adam Smith's An Inquiry into the Nature and Causes of the Wealth of Nations because what these all have in common is that everything true in them isn't original and what is original isn't true.[3] [4]

A perfect example of what is wrong in ISEW is the concept of "defensive" expenditures. Let's quote from the FoE website:

...some health expenditures may be purely defensive against activities counted elsewhere in the economy as consumption, and it would seem inappropriate to include both sets of expenditures as additive contributions to welfare.

For example, it has been estimated that treatment of smoking-related illness in UK costs the National Health Service in excess of £600 million per year (HEA, 1993).

Since consumer expenditure on smoking is counted under personal consumption as a contribution to welfare, it is clearly inappropriate to add the costs of treating the diseases caused as a direct result of that expenditure into the welfare measure.

I think Reductio ad absurdums are absolutely fantastic, so how about this?

Since consumer expenditure on running shoes is counted under personal consumption as a contribution to welfare, it is clearly inappropriate to add the expenditures on sports drinks caused as a direct result of the additional running into the welfare measure.

Stupid, right? Let's see what Neumayer has to say about all this.

The concept of defensive expenditures is very dubious and elusive since it is rather arbitrary what should count as defensive. This argument applies both to the question of what should count as environmentally defensive expenditures and to what should count as defensive expenditures in general. If health expenditures are defensive expenditures against illness, why should food and drinking expenditures not count as defensive expenditures against hunger and thirst? Are holiday and entertainment expenditures defensive expenditures against boredom? Should they all be subtracted from consumption expenditures? Daly and Cobb (1989, p. 78) defend their concept of subtracting defensive costs in saying that “ ‘defensive’ means a defense against the unwanted side effects of other production, not a defense against normal baseline environmental conditions of cold, rain and so on.” But even accepting this definition, one could argue that at least part of food, drink, entertainment and holiday expenditures are caused by the stressful, exhausting and boring modes of modern production that make these expenditures necessary as a defense against their unwanted side effects. As the United Nations’ revised system of national
accounts rightly retorts: “Pushed to its logical conclusion, scarcely any consumption improves welfare in this line of argument” (United Nations 1993, p. 14).

Several columns are devoted to negative externalities, which means you can get this index to say whatever you want. Negative externalities, as normally defined, are endless. So are positive externalities. As long as a you pick enough of either and give them enough weight, you can get the index to say whatever you want. Of course whether an externality is positive or negative depends on who is judging it(everyone would probably agree that pollution is always negative, but I've heard a well-reasoned case for why higher education isn't always positive, as is normally assumed).

Even if we assumed these problems away, I still wouldn't trust an estimate on the "long-term environmental damage incurred through energy consumption." To give specific values to these kinds of costs is nothing but a perfect example of God-like hubris. I could seriously write quite a long piece on this, but I'll try to keep this short and concentrate on just a few things.

A brilliant display of weirdness can be found in column R(Loss of Farmlands):

Like Daly and Cobb (1989) we assume that the underlying value of land exceeds the market value today, because the market value reflects the fact that productivity can be increased in the short term by the application of energy and nitrogen fertilisers. "Since our aim is to calculate sustainable economic welfare, we have chosen a figure that represents the value of land as if cheap energy sources had already been depleted."

Let's assume that the loss of farmlands is in fact a problem(that we're running out of something that can be produced almost ad infinitum). Let's assume that prices generated through the market process don't actually mean anything(that we know better and that people do not care about the future when they value farmland). Let's also assume a situation that does not exist and might not exist in the future(see where I'm going with this?). I'm sure this will in fact give us a very meaningful number...

The worst part is that ISEW can't measure what it claims, even if all its assumptions were correct and everything could be precisely measured. The index tries to mix sustainability and current welfare, so the resulting number can't possible measure "sustainable economic welfare." A country that has an extremely high standard of living but isn't sustainable in the long-term could easily have a higher score than a sustainable country with a lower standard of living. Another point Neumayer makes about strong and weak sustainability in relation to the ISEW:

What is really surprising, however, is that the ISEW does not explicitly distinguish sub-indices for different forms of total capital (e.g. man-made and natural capital) and different forms of natural capital (e.g. renewable and non-renewable resources), but eventually computes one overall index only. This meshing together of values from natural and other forms of capital amounts to a conceptual break since the heart of the concept of strong sustainability demands that natural capital itself and even sub-categories of natural capital are held constant. Ironically, the ISEW does not measure strong sustainability, but weak sustainability at best since it assumes perfect substitutability among different forms of capital!

A comment on my last post:

Dogo said...
What would you consider a good indicator of welfare, then?

There isn't one. GDP, unemployment, life expectancy(though here there are some methodological inconsistency problems between countries) , literacy rates and such are decent proxies sometimes. All of these tell me something, but no index comes close to telling me everything.

Usually I just look at GDP per capita to get an estimate of what the standard of living in a country is, but I do this rather loosely. For example a 10% difference in this figure between countries wouldn't make me automatically conclude that the other one has a higher or lower standard of living or "greater aggregate welfare" than the other.

Unemployment correlates pretty well with the business cycle in the short run(though here there are exemptions like massive public works or/and war, e.g. WWII and the US). Structural long-term unemployment on the other hand can be an indication of the extent of unemployment benefits in a given country.

GDP is tricky and could be replaced by GNR(Gross National Revenue), GDO(Gross Domestic Output) or PPR(Private Product Remaining) or a combination of two of these. I'm going to be lazy and not check, but I think GDO and GNR are essentially the same thing or very similar at the very least. Here's George Reisman on GNR:

An accounting aggregate that would be far more appropriate to a genuine macroeconomics is what I have called gross national revenue (GNR). This is the sum of all business sales revenues plus wage payments. It also equals the sum of the consumption and productive expenditures that actually pay it.[5]

And Mark Skousen on GDO:

Gross Domestic Product systematically underestimates the expansionary phase as well as the contraction phase of the business cycle. For example, in the most recent recession, real GDP declined 1–2 percent in the United States, even though the recession was quite severe according to other measures (earnings, industrial production, employment) ... A better indicator of total economic activity is Gross Domestic Output (GDO), a statistic I have developed to measure spending in all stages of production, including intermediate stages. According to my estimates, GDO declined at least 10–15 percent during most of the 1990–92 recession.[6]

These would be more more helpful in the analysis on the business cycle, but as welfare aggregates they'd be about as useful as GDP currently is.

PPR is basically GDP after you substract government expenditures from it twice.[7] This removes many of the absurdities we can find in historical GDP figures; WW II as a prime example. During this period unemployment wasn't a helpful indicator, as millions of men were sent to fight a war. GDP wasn't helpful either, because prices were rendered meaningless through a combination of government expenditures(as I mentioned earlier, the price of military equipment has nothing to do with consumer preference), the creation of vast amounts of new money and price & wage controls. PPR would've shown that the welfare of the general public indeed fell during that time(I find it ironic that Keynesians claim that WW II created an economic boom, but I've never heard of an economic boom with rationing of basic necessities).

Dogo said...
On a tangential note, I happened upon Heritage foundation's Economic Freedom Index recently. Would you think that a high/low score on this indicator would correlate with a high/low score on some 'proper' welfare indicator?

The index mixes many things together to come up with one number and obviously there's no objective way to weigh the different freedoms listed, so it's not exact science. Also the ranking doesn't reflect the past, so if a country's been in the top 20 for 50 years and then drops by 10 points, it would take some time for it to affect measures like GDP. Obviously the reverse is also true.

On the other hand the ranking seems to validate economic theory quite well(one could also look at the last 300 years of history and it should become quite apparent what the benefits of economic freedom are). How many of the countries in the top 40 have "immigration problems" and how many in the bottom 100 have a net outflow of people? Where people actually want to live says a lot.

[1] Murray N. Rothbard Toward a Reconstruction of Utility and Welfare Economics
[2] Eric Neumayer The ISEW - Not an Index of Sustainable Economic Welfare,
Eric Neumayer Sustainability and Well-being Indicators
Eric Neumayer On the Methodology of ISEW, GPI and Related Measures
[3] Henry Hazlitt The Failure of the "New Economics"
[4] Murray N. Rothbard The Adam Smith Myth
[5] George Reisman Standing Keynesian GDP on Its Head: Saving Not Consumption as the Main Source of Spending
[6] Jesus Huerta de Soto Money, Bank Credit and Economic Cycles (footnote pp. 418-19, Originally presented by Mark Skousen in “I Like Hayek: How I Use His Model as a Forecasting Tool,” presented at The Mont Pèlerin Society General Meeting, which took place in Cannes, France, September 25–30, 1994)
[7] Murray N. Rothbard America's Great Depression (Appendix, pp. 339-41)

GDP, ISEW and Other Nonsense [Part 1]

GDP does not measure welfare. It is often used as a proxy for welfare, but an economist who thinks it actually measures welfare should find another job. That GDP does not directly measure welfare is usually mentioned briefly during some economics courses. But telling this is meaningless, if the rest of the material shown implicitly assumes the opposite. GDP is used as a proxy so often that people have come to forget that it is only that – a proxy. Let's quote Wikipedia to see what GDP is:

Gross domestic product (GDP) refers to the market value of all final goods and services produced within a country in a given period.

Ironically enough this is wrong, but even if it wasn't it still wouldn't measure welfare. Let's quote something else:

GDP was first developed by Simon Kuznets for a US Congress report in 1934, who immediately said not to use it as a measure for welfare...

This is not to say that GDP is useless, but it certainly attracts more attention than it deserves, especially when quarter-to-quarter numbers are being crunched. In the short run GDP can be not only useless, but misleading. I can assure you that monetary stimulus can boost GDP in the short run, but I'd hardly recommend it. On the other hand in the long run I have no big problem with using it as a proxy.

The Wikipedia article already lists some of GDP's limitations, but we can go further than that. For example you hear quite often that consumer spending makes up over 60% of GDP. And if we simply think that GDP represents the economy, then the obvious conclusion to draw is that consumer spending is what keeps the ball rolling. Actually saving is the main source of spending in the economy, but GDP hides this fact.[1]

An economist is supposed to look at demonstrated preferences(i.e. what people actually choose) and here we have a slight problem. GDP includes government expenditures, but there are no voluntary exchange or market prices there. Does the Pentagon pay market prices? Of course not, their purchases have nothing to do with consumer preferences. The price of a F-22 is next to meaningless. This is why the first Wikipedia quote is wrong, because it says market value.

GDP also doesn't measure sustainability. And I'm not talking about the end of natural resources or any of the other green myths. I'm talking about capital consumption. E.g. U.S. GDP grew 2002-2007, but that was possible only through massive capital consumption and future impoverishment.

Obviously GDP needs to be adjusted for inflation and inflation can't be accurately measured. Though it doesn't help that governments actively calculate inflation wrong on purpose, as it's good politics(I remember this very well).

There are other flaws, but I think I've made my point. To confuse GDP with welfare is bad enough, but some ecological economists(I didn't make that name up, I swear they even have a journal called Ecological Economics) have jumped on this issue. They claim that equating GDP with welfare is stupid(and they are right) and propose an alternative(and here they are wrong). GDP has flaws and people draw false conclusions out of it; it's an easy target. But if you have something to criticize, you might as well use it as a pretext to push your own alternative idea. I'm talking about the Index of Sustainable Economic Welfare(ISEW) and the Genuine Progress Indicator(GPI) and they are both crap(they're essentially the same thing).[2]

I'm sure collecting data and calculating ISEW & GPI provides jobs and academics then get to feel important and publish their findings in journals, but seriously speaking these abominations are bad science and contribute nothing to our understanding of how the world operates.

[1] George Reisman Standing Keynesian GDP on Its Head: Saving Not Consumption as the Main Source of Spending
[2] Eric Neumayer The ISEW - Not An Index of Sustainable Economic Welfare

The Wise Vote [Part 2]

The ideas held by the public certainly influence politicians. What is often forgotten is that politicians aren't mathematical functions that people simply feed numbers into. They are political entrepreneurs.

They Aren't Puppets; We Are

Politicians don't just absord ideas from the public. They themselves affect public opinion. Politicians give speeches, they are interviewed by the media and so on. Even if we subscribed to the ridiculous idea that politicians hold the same ideas as the voters when they get elected, what about afterwards? Society is in constant flux and new situations arise. Politicians don't then go and ask the people what they think about this new situation and what should be done about it. Instead, the politicians themselves get to influence public opinion on this particular issue. It doesn't matter whether it's human rights abuses, a natural disaster or a school shooting. The media is quick in getting the opinions of the hottest political figure of the day. Obviously it is in their interest to mold public opinion in a way that is beneficial to them. It's not like you'll ever hear a politician tell you that they screwed up.

One of the easiest ways to control public opinion is obviously through schools. What a coincidence; schools have positive externalities and have to be socialized to prevent "market failure" in education. What a coincidence!

Destructo-Denialist Optimism

The fact that people tend to look at history as a continuous march on the road of progress towards eternal bliss doesn't help at all(a bloated exaggeration, I admit). Everything old is seen as suspect, even if most people aren't self-conscious enough to notice this tendency. It's futile to point out for example that before the implementation of social welfare program X, there was no real problem to be solved there and that the program never accomplished its stated goals. This doesn't persuade anyone. That was then, this is now. Now is better, we can't go back to then.

This is a great psychological defence, since seeing the modern state for what it really is leads to some very depressing realizations.

If some oppressive measure is proposed, people will look at it and often conclude that it's insane and tyrannical. But if that oppressive measure is carried out, people will be more willing to accept it. After all, why would it be implemented if it wasn't good for us? This mentality is persuasive, even if sound reasoning or a common sense of justice can't point to any good aspect in the policy. We can even go as far as to say that it distorts people's perceptions about what counts as sound reasoning or a common sense of justice.

After all, who hasn't heard the age-old argument that goes along these lines:
"But hey, X is ok because we're already doing Y and Z that are similar." What's wrong with collecting a fingerprint database? After all, the government already has databases on information categories X and Y so what's one more on that list?

The popularity of something is largely dependent on who proposes or backs it. If it's just some friend of yours, you're more likely to reject it because you're arguing with someone of no authority. Politicians and experts on the other hand have authority and people are in their ignorance often willing to "leave it to the experts".

The Myth of the Informed Voter

People are good at identifying problems. They aren't good at figuring out the causes of those problems. They see or hear about a problem in society. Or maybe they have a personal problem that needs to be fixed. Okay, let's vote and get some government program enacted.

First let's do an analysis on whether the problem is caused by the government, or is it something a new government program can fix. Then we'll check for all the unintended consequences that follow, if this new program is enacted.

Ummm, let's make this simpler. Let's just ask the experts, who offer ...opinions. How do we choose which experts to listen to? Besides, they usually look at overall costs and benefits and know nothing of our personal situation(what the expert recommends might be good for society, but not for you personally).

In reality people don't really know anything about these things. Even something as simple as taxes is confusing for many. Everybody knows about taxes affecting incentives(or I hope they know), but no one's going to know what you're talking about when you mention the negative effect taxes have on capital accumulation.

In fact people don't even know what their taxes do. Sure they'll know something general like how much goes to welfare or national defence, but what do they know about the specifics of how those things are carried out? How many agencies, commissions and czars are there? In how many ways do they regulate the economy? No one knows, not even any state bureacrat. That's because many agencies have a lot of autonomy when it comes to what they do(so even reading through all existing laws wouldn't be enough). Just look at what the FTC does. Do you know how many people your government employs? Do you know which firms operating in your country have contracts with the governments? Contracts about what? How was it decided that the contract was needed?

Someone might object by saying: "But you don't know how companies produce things people buy, so where's the difference?" The difference is; I don't have to know. I only need to decide whether I value something more than its price or not. No one forces me to buy it. Other people buy stuff with their own money, not mine. None of this is applicable to the state.

Most people devote very little time to careful political analysis. They vote for representatives that aren't really representatives. They couldn't identify all the negative sides of their policies even if they tried to. They probably don't even know that such a thing exists as the economics of the public sector.

No one would be foolish enough to think that one person could know how to organize society. So let's take a lot of people who are equally limited in their knowledge and magically it works. Great idea.

So don't vote. I don't. Or pick a great philosopher you agree with and write his name in. I've done that, too.

-Oh what a really great idea, what would you say if everyone else thought like you?!?

Mission. Fucking. Accomplished.

The Wise Vote

The word democracy was coined from δῆμος (dêmos) "people" and κράτος (Kratos) "power"[1]. This is a political system in which the people are supposed to have the power.

It used to be said that only three things were definitely true of the Holy Roman Empire: it wasn't holy, it wasn't Roman, and it wasn't an empire. Similarly, two things are definitely true of representative democracy: it isn't democracy and it isn't representative.
~Gerard N. Casey

Let's see in practice: who has the power in a modern representative democracy? Obviously the one wielding the power is the state. But isn't the state controlled by the people? After all, they get to vote for people who decide on what laws are passed and so on.

But not everybody gets to vote. Most countries don't let children vote, even though children are a part of the people. This seems obvious to many, but in principle it's arbitrary exclusion. Children do not get to vote, because the grown-ups have decided(and passed laws) that children(in many cases defined as 17 years old or less) are not mature enough to make wise decisions.

What if these grown-ups picked some other group and did exactly the same thing? For example it could be rationalized that it's not wise to let the rich vote, because they are blinded by their greed and cannot look a the big picture. They are selfish and do not care for their fellow man, so why should they get to decide anything? I mean, that's just common sense. Obviously you could also argue that the poor shouldn't get to vote, because if they can't even handle their own money, how can they be put in charge of society?

Sure that sounds crazy, but the principle is the same. So to say that "the people" get to decide is inaccurate. Only adults get to vote, because in their opinion only they should get to vote.

If it is to be tenable, representative or indirect democracy requires a clear, robust, and defensible conception of representation.
~Gerard N. Casey

So what is representation? If someone represents me, then he is to do as I have instructed. He will stop representing me if I so demand. My representative is responsible to me and to some extent I am now responsible for my representative's actions.

Political representatives do not, and in fact, they cannot do as we instruct them to do. They do not know most of those they are supposed to represent. Even if they knew the wishes of all, then whose wishes will they listen to? People have different opinions on different things.

Political representatives do not stop at our command. They might not get re-elected, but before election day there's nothing one can do. On election day one can vote for someone else, but that is all.

Political representatives are not responsible to us. In fact without careful monitoring most of the things political representatives do in our name go unnoticed. We certainly aren't responsible for what they do.

Welcome To Democratic Utopia

In the Never-never land of perfect political competition, people do some pretty crazy stuff. Before voting people do extensive research on all kinds of different candidates. They vote for the one that they agree with the most. If the candidate they voted for does something they don't like then they vote for someone else.

In the real world people don't really care that much. In the marketplace people trade money for services and goods. Economic calculation is easy, ex post evaluation of their actions(should I have bought that or not? Etc...) is relatively straightforward and so on. What about voting? In the eyes of one person does that vote mean anything at all? Is it possible for him to evaluate if he should've voted for someone else or not? Can he in any way sense the change he's made in the world by voting?

These questions answer themselves. This lack of feedback leads to people feeling detached from the real impacts of the political process; thus they do not use much time when they decide who they're going to vote for. This is a completely rational thing to do. People economize time, too.

People also have a psychological tendency to vote for those who are more likely to win, even though they actually agree more with another candidate.

To be continued...

[1] Wikipedia Democracy