Last year my uncle and I ran a blog where I posted mostly about economics. We started the blog after I wrote an editorial in my high school newspaper, partly about economice. We ran it for about a year and I posted the new things each week I was learning in my readings.
I hope to do a more step-by-step economics tutorial on this blog, but until then here are all the posts I had on economics on that site.
Be aware that a lot fo these posts were repsonses to things I heard from people at my school who though McCain or Obama was the Messiah, so they may sound angry or be about elementary common sense subjects.
Get a Clue High School Students! - March 15 2008
The Economy
The Economy is the system of activities related to the production and exchange of goods and services in a country. Basically, it is the flow of money in a country.
The poll asked what affects the economy, of the 77 students polled only four answered taxes which is perhaps the most debated factor between liberals and conservatives.
Liberals tend to try to inflict voter’s emotions by stating that tax cuts serve just to help the rich and add to the national debt. Whether it is their own ignorance or blatant dishonesty this stance alone should prove the candidate to be faulty, but back to the article.
When the government cuts taxes taxpayers get a refund on taxes originally withheld from their paycheck. The taxpayers then go out and spend the money refunded to them by the government; this influx of money into the economy creates a greater demand for goods which in turn causes employers to hire more employees in reaction to the increased demand. This leads to economic growth and in the end greater tax revenues to the government.
This theory was put in action and proved during Ronald Reagan’s presidency, while he was president tax rates fell from as high as 91% to 28%, but by the end of the 1980’s the tax revenues had doubled.
Trade deficits are another tactic liberals use in an attempt to play with voter’s emotions. According to the liberal ideals trade deficits with China and India are sucking money out of the US economy and the outsourcing of jobs is hurting Americans.
This subject was mentioned by eight of the 77 polled, who called it imports or exports, a trade deficit is when the imports from a country exceed the exports to that country.
A common analogy used by Free Market Economists to combat the liberal viewpoint is this: Should a doctor find what his trade deficit is with every restaurant in town and then change his eating habits so that all his money isn’t suckled up by the restaurants? Obviously not, his trade deficit with the restaurants is offset by his trade surplus from the hospital where he works.
In the same way the US trade deficits are partially counterbalanced by surpluses with places such as Australia and Hong Kong.
The net deficit could not stay that way forever, because dollars are used to pay for goods from other countries they have to somehow make their way back to the US economy – unless someone is just hiding them all under his bed, they don’t disappear – if they don’t the exchange rate between the two countries will eventually rise to the point that it would be more logical to buy products from a different country.
Finally, the stock market was named by eight people as a factor which affects the economy. The inverse is true: the economy affects the stock market. Each stock is partial ownership in a corporation, the stock price rises and falls as people will pay more or less to own part of the company. The sentiment of people who want to buy the stock is because of their view of how the current economy will affect the stock in the future, their positive or negative views push the stock price in the corresponding direction.
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Most Influential Books - July 4, 2008
The Politically Incorrect Guide to Capitalism
I believe this is the best book for putting down leftist (it may be more prudent to just start calling them Marxist) myths on the economy. It's very readable (I read it just a few months after getting my driver's license) and systematically states the liberal arguments then breaks them down using facts and common sense, two things which liberals seem to be short on these days.
Up until reading this book I kind of understood why tax cuts work and that there wasn't really a reason for liberals to whine about trade deficits. Including these two subjects the books talks about:
· Why rent control doesn't work
· Why slave labor doesn't make sense
· The Free market kills any discrimination
· Charitable givings were up 50% during the 'Decade of Greed'
· Athletes and CEOs deserve their high salaries
After reading this book I had a foundation for my philosophy, but had not yet cemented in my mind the philosophy of limited government.
This is possibly my favorite book. I originally bought on the recommendation of the PIG to Capitalism, which spent a chapter on the same subject.
The book sets out to prove that the so called 'Robber Barons' (Rockefeller, Vanderbilt, Carnegie, etc.), helped the US and were not just ruthless and greedy, well Robber Barons.
It easily accomplishes this, but also proves another extremely important fact, that has become a huge part of my philosophy: Businesses receiving government help generally suck.
The relatively short (170 pages) book goes over 6 barons and shows how they beat the competition, which many times had government help.
This was the first book I read that explained the libertarian philosophy of limited government.
Boortz is a talk show host in Atlanta who uses humor and a no-nonsense approach to politics in this book.
It goes over why welfare is bad, government subsidies to art, what should be taught in school, why you don't have the right to vote and many more subjects that made it the first book that really put the idea in my head of small government.
I had read that Ayn Rand's books The Fountainhead and Atlas Shrugged were two Libertarian stalwarts, so when I needed an extra hundred pages read for English Anthem was the book I chose.
To this point I understood why small government is the best for prosperity and many economic things, but Anthem is very good at showing why collectivism will vastly stunt progress.
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The Audacity of Ignorance - July 12, 2008
"What I've said is that I would look at raising the capital gains tax for purposes of fairness. The top 50 hedge fund managers made $29 billion last year--$29 billion for 50 individuals. Those who are able to work the stock market and amass huge fortunes on capital gains are paying a lower tax rate than their secretaries. That's not fair." – Barack Obama on Tax Reform
This statement is wrong in so many levels its maddening, let's go over it piece by piece.
"What I've said is that I would look at raising the capital gains tax for purposes of fairness...
Maybe, I haven't been drinking the kool-aid, but I fail to see how raising taxes on anything can possibly be construed as fair, but let's see…
"The top 50 hedge fund managers made $29 billion last year--$29 billion for 50 individuals…
I think the correct term here would be: earned, the top 50 hedge fund managers earned $29 billion last year....
They earned this $29 billion by managing, probably, trillions of dollars after going through many years of college, where they probably paid hundreds of thousands of dollars. Perhaps, I'm just too much of a capitalist, but maybe the reason these people went through all the years of college and are willing to take the stress of managing this vast sum of money is to obtain the possibility to earn this amount, but that would involve common sense.
"Those who are able to work the stock market and amass huge fortunes on capital gains are paying a lower tax rate than their secretaries….
Again with the clever term usage, Senator Obama; many of these hedge fund managers, who 'work' the stock market, wake before 5 a.m. (Jim Cramer wrote about never sleeping more than 3 hours, and I talked to a manager who spoke of drinking excess amounts of water, right before bed, so he would be forced to wake-up in the middle of the night to go to the bathroom, before checking the foreign markets). Their dedication to their job is immense, many putting in 16 hour days to keep up with the mass amount of money they are managing (oh, and for those who think these hedge fund managers don't need to work hard, think twice, many times, if they have just one bad year (even quarter or month) the majority of their Assets Under Management will be pulled and they can kiss their huge checks good bye).
The secretary comparison is cute (though I am surprised you didn't use the more politically correct term: administrative assistant, you're gonna have to pay more attention next time, Senator). However, you fail to mention that the amount of schooling it takes to answer phones and type 90 words a minute is probably a little less than that to manage billions of dollars. Of course, you know this, but refusing to use it on such grounds wouldn't get you the emotional response from your less educated supporters, would it?
Also, is it just me or would it make TOO MUCH sense to lower the secretary's tax rate?
"That's not fair."
Here's where I agree with you, Senator. It's not fair that the secretary has about a third of her money withheld from her paycheck each month.
Why should this secretary have to support lazy people on welfare, the impossibly terrible and inefficient Department of Education or the unwinnable 'war' on drugs?
The answer is she should not; it is not that her boss should have to pay twice as much in taxes.
When did this great country turn from the, "land of dreams," to the land of, "Be ambitious if you want, but when you become successful and make a bunch of money the government will take it from you, but on the other hand you could just not work and sit in your house all day, why else have the rich if they aren't to support the rest?"
Sounds like socialism to me.
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Minimum Wage Non-Sense - July 28, 2008
On Thursday the minimum wage increased 70 cents, to $6.55 per hour. Many liberals feel this will have a positive impact on the economy (one commenter on the New York Times site thinks the wage low needs to be tripled to force the economy to turn-around).
It will definitely have an impact, though there is very little chance it will be anything positive. Like most liberal sentiments minimum wage knowledge is clouded by ignorance, here I will go through the facts and common sense on them.
To tear apart the myth of minimum wage I could quote economic studies showing it increases the unemployment rate, or reference the 90% of economists who believe it is harmful to workers, but none of this is necessary, because I can easily explain the negatives with common sense.
I used to work at KFC, so I'll use my story as an example.
I moved to Utah when I was 15, before I moved I worked for a movie theatre for five months (where coincidentally I was never paid minimum wage and received two raises based on performance before leaving).
After arriving to Utah I was unable to get a job because of strict labor laws (which are for a different day), but I applied in the month of my birthday and interviewed a few weeks before to allow my first day of work to be the day I turned 18.
I was hired for $5.50 per hour, already more than the minimum wage based on my five months of experience at an only partly-related job.
Within six months I was up to $6.70 and was on the verge of beginning management classes.
In total I worked there for a year and a half, in that time I learned how to do all positions (cook, register, pack food, shift supervisor), took two courses on management and as a result ended up with an $8.50 per hour wage before leaving to focus on school in the fourth term of my senior year.
I achieved this through hard work, the simple virtue which most liberals despise.
I was literally never late for work; I took only one sick day when it could not be avoided because I worked in a restaurant; I was never disrespectful to a person in a position of authority (or any others for that matter); I took every opportunity to further my knowledge of my work and move-up; and regardless of the situation I always worked hard and never asked for a break or sat-down.
I view the ability I had to achieve this when I was 16-17 years-old as proof that any semi-competent worker who cannot earn minimum wage is a loser, and save for any medical problems, has no excuses.
For those who disagree, there was a woman who worked at KFC at the same time I did.
She had three kids with her boyfriend who was addicted to drugs. She usually showed up 15 minutes late for work, smelling like smoke and complained her whole shift, begging for a break.
Though she was an obviously bad employee she still made $8 per hour simply because people who could work during the day were in demand. This is called Capitalism and is the result of the Free Market.
I believe I have sufficiently proved minimum wage is unnecessary, now let's go through some logic to prove it hurts the economy.
- 1. It is common sense every business is run to make a profit, if it didn't it would no longer be a going concern.
2. 2. So, employers can only pay employees the value of their work, if they paid more they would be unprofitable and go out of business.
3. 3. Since employers can logically only pay the value of the employees work, the minimum wage causes them to lay-off employees whose work is worth less then minimum wage, usually those who just started working.
4. 4. As employers nationwide lay-off employees who they can't afford to pay the unemployment rate goes up (the employees who make themselves worth more to the employer are usually kept).
1.
If there were no minimum wage, employers would have the ability to hire people for below the minimum wage, and allow them to prove themselves to earn a higher wage (The vast majority of people who earn the minimum wage get a raise within a year and 40% get one within four months). As the employee made himself valuable to the employer he would either be forced to pay the employee more, or watch him go elsewhere to make more. Either way the employee ends up with a relatively good wage, without the government's help.
Finally, it's necessary to show that upping the minimum wage does not turbo-charge the economy.
The liberal argument is that when employees make more they will have more money, which will allow them to spend more helping the economy (this sounds very similar to trickle-down economics, but not related to tax cuts).
It's true that people who make minimum wage (or something tied to it which many union workers make) will be able to spend more. But, that money has to come from somewhere.
Businesses can't just print new cash (though the fed seems to be unable to learn this simple fact), so to pay some workers more they will have to lay-off others and raise the prices of the things they sell.
Let's look at a simple pencil, if the minimum wage goes up the company that cuts down the trees will have to cut workers and raise the price of the wood, as will the:
- Company that mines the graphite for the 'lead'
- Mines the metal to put on the eraser
- Makes the eraser
- Puts it all together and makes the pencil
- And sells it at the retail level
Even this is an overly simplified example, there are many more possibilities, but the end result is the same: the prices will rise!
Now to use a little more logic, if a lot of people lose their jobs and the prices of goods rise, the economy will go down!
Wow! Revolutionary.
Roark is the pseudonym of an 18 year-old writer based in Utah. He remains surprised at the ignorance of most politicians, related to many other areas than Minimum Wage. For more on him visit our About Page.
For more on kinimum wage see: Somebody's Gotta Say It
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A Must Read - August 12, 2008
How Capitalism Saved America
The author, Thomas J. DiLorenzo, is a columnist for LewRockwell.com and his written a few books before, including two arguing that Lincoln was one of our worst
DiLorenzo goes over many time periods I American history and shows how Capitalism helped America or the opposite (either Mercantilism, Socialism or New Dealers, all are the same pretty much) hurt America, some things he goes over are:
• When the Pilgrims came they all worked for the collective and they were starving, Sir Thomas Dale came over and started private property where each colonist had to work for his own food and the colonists were prosperous almost immediately.
• The Americans who started the Revolution were for liberty (or capitalism as we would call it today) and were against the mercantilism run by England’s parliament (which is pretty much the same as socialism).
• ‘Robber Barons’ in the late 1800’s and early 1900’s were supposedly greedy, but they actually created jobs for millions of Americans and drove the prices of every day goods down.
• Anti-Trust laws are always bad, and there has literally never been a case where anti-trust helped ordinary citizens and wasn’t pushed through by the competition or special interest groups.
• It is common knowledge that Herbert Hoover’s Laissez Faire economic policies caused the Great Depression. However, it is a fact that Hoover’s response to a recession with more government caused the depression, and Franklin Roosevelt’s socialist policies kept the unemployment rate high and the economy in the dumps for twenty years.
In addition to the above DiLorenzo explains Capitalism, explores the never-ending war on it and shows hoe price controls caused the 70’s energy crisis. The book is a great addition to any bookshelf, in history and economics.
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In Defense of the Oil Companies - August 19, 2008
After watching an incredibly biased interview of Exxon CEO Rex Tillerson, being interviewed by ABC’s Charles Gibson (the video can be found here and transcript here) I decided to write the first energy-policy related article on Agents of Liberty.
Three big points, infinitely touted by the biased media, need to be countered.
‘Obscene’ Profits
First, to kill the ridiculous notion of obscene profits. ExxonMobil had ~$138 billion in revenue last quarter, and ~11.7 billion in net income. This net income number may seem huge, but it is just 11.8% of Exxon’s profits, by comparison Google’s profits are 23% of its Revenue, Microsoft’s are 27%, in fact a Google Stock screen turns up over 1,300 companies with net margins of at least 12.2%.
Exxon has huge profits, but this is from huge volume, not from price gouging, in fact if Exxon was stupid enough to price gouge it would probably immediately lose business to other gas companies who are willing to sell their product at an 11% margin.
Exploration vs. Buybacks
The following exchange was the most revealing of the interview:
CHARLES GIBSON: When profits are so high, why is spending on exploration so low?
REX TILLERSON: Well, we're spending at record levels. Through the first half of this year, we have spent $12.5 billion. That's a record level of capital and exploration expenditures for us. We expect we will spend about $25 billion this year. And we have forecast over the next five years that we will invest $125 billion in capital and exploration expenditures. And to give you some perspective on that, that's a little more than half of what all 13 OPEC nations are going to invest as they've announced. So we are investing at record levels and expect that we will continue to be doing that in the years ahead.
CHARLES GIBSON: You're spending more money buying back stock than you are on exploration.
REX TILLERSON: Well, that's a cash flow question, Charlie, in terms of how should we manage our cash flow. And that's important for our shareholders, obviously. It's important for our future health as well.
The first thing we do is invest in all the projects that we have available to us and that make sense to invest in. And the second thing we do is pay all our taxes, pay all our operating costs, all of our employees and all the people that do business with us. And then we see what's left over. And what's left over we try to return efficiently to the shareholder, because it's their money. So we do that through dividends, and we do it through share buybacks. Our shareholders then take all that money, and they're doing something with it elsewhere in the economy.
Tillerson effectively dismantled Gibson’s heinous argument that the buybacks should be lower than exploration, but as Gibson mentioned many more times that Exxon buys back a lot of stock, the arguments needs to be clarified.
ExxonMobil is a business; therefore it is run to produce a profit. Gibson mentions that they: Invest in projects, pay taxes, pay operating costs pay labor then return the rest to shareholders.
This is pretty easy they pay what they need to continue running the business then return the rest to shareholders, who own the business.
Gibson either doesn’t understand this or is too ignorant to care, as he digs himself into a hole by trying to tell an experienced CEO what he should be doing with his business. Let’s return to the business definition: it’s run to make a profit, by that definition everything in which Exxon invests must be capable of producing a profit for the shareholders in the future.
Gibson is of a different opinion and for some illogical reason thinks Exxon should invest billions of dollars in unprofitable investments (something I believe he has absolutely no knowledge of) instead of returning the money to the shareholders, who, through their positions, have the right to it.
Windfall Profit Tax
Later, in the interview Gibson talks about windfall profits taxing and Obama’s plan to tax the ‘windfall profits’ of oil companies $65 billion over the next five years. Again, Tillerson has a simple response that Gibson seems incapable of comprehending, “What would that accomplish.”
This is something Obama has not addressed. Senator Obama: we understand you think taxing is the answer to everything, and that you understand that when uneducated people see Exxon’s large profit dollars they are angered. However what exactly would this accomplish?
In a world where too much government has caused the price of oil to soar, how is more government the answer?
Also, the price of all food related to corn has soared almost the same amount as oil over the past few years. Yet corn farmers are getting subsidies from the government, to produce corn to make ethanol, a fuel that just about every scientist believes has no reasonable use, and would be more expensive than gasoline.
Where’s the difference? Why should the shareholder’s of the oil companies have their money stolen three times: To subsidize the farmers, to pay higher food prices and to kill their dividends?
The Real Problem
The real problem is unrelated to any oil companies, but good luck finding that on any news channels.
There are two big reasons for the high oil prices, the dollar and supply and demand.
The supply and demand issue is not very revolutionary, the demand for oil went up, but the supply did not, as a result the price went up. This is basic economics.
One way to increase the supply of oil is to open up off-shore drilling and ANWR, regardless of how long this would take to produce oil, I fail to see what gives the government the right to forbid drilling.
The dollar issue, however, is more complicated. The US dollar is not backed by any commodity and is currently being printed willy-nilly by the Fed. Whenever more of a currency is printed inflation goes up (this is because if you have more of something it loses its value, if everyone had $150 million, it would not be a big deal to have $150 million).
So inflation is going up, the value of the dollar is falling, and all the oil in the world, with the exception of that under the control of Mahmoud Ahmadinejad, is traded in dollars, as a result the price of oil is up.
This may seem negative as there is nothing the government can do to help (as if there has ever been anything where the government helped), but true Capitalism was shown in June as the demand for oil fell the most in ~30 years, this affected the price of oil and it fell from over$140 per gallon to below $115.
This whole situation reminds me of a conversation between Dagny Taggart and Hank Rearden in Atlas Shrugged
Maybe the government should stand aside and let man invent a solution.
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Basic Economics - September 10, 2008
I finished listening to Thomas Sowell's Basic Economics today, and considering my last article was very short, I've decide to write a quick review on the book.
Also, for those TJ Maniacs, don't worry he'll be back this week after having some computer problems last week.
Sowell has taught Economics, "the study of scarce resources with different uses," at Cornell, Amherst and Cal-LA, currently he is a scholar in residence at the Hoover Institution at Stanford.
I don't have my copy of the book here at school, so I can't do a thorough review, but here are some of the main points explored in the book:
- Prices are essential and price controls always cause shortages. Using hotel rooms as an example: after a hurricane hits many people leave their homes and try to find a hotel somewhere. If the hotel kept the normal low price a family of four or five may choose to rent two rooms, causing the supply of rooms to drop. However, if the price is raised sufficiently, the family will probably choose to use just one room, this allows some other family to use the other room.
- Centrally planned economies cannot succeed. Simply: a farmer knows a helluva lot more about what to plant on his farm than a bureaucrat 1,000 miles away ever can. More complicated: most resources have different uses, with prices they will be put to the use that is most needed, because the low supply will cause the price to rise, if the economy is centrally planned these resources are likely to be misused and there may well be shortages of food, while something like ethanol is in full supply.
- Speculators help, a lot. A commodity speculator effectively takes all risk off the farmer, by signing a contract agreeing to pay that farmer a set price for the commodity, regardless of the eventual real price. Because of this, the farmer takes no risk if the price soars, and the speculator, through a diversified portfolio of commodities, can also reduce his risk
- In international trade there are no 'winners,' or 'losers,' and a lot more jobs are gained then lost. For example, because it is 'free' trade, there can be, by definition, no loser (both parties agree on terms, so both win). Because of this even if some jobs are lost many more jobs are created by the excess of profits.
Sowell goes over these points (in much better detail) and many others in the book. It is written very well, and is never hard to understand, thankfully, considering the nature of the book. It is also written with many references and real-world and business examples, that add to the enjoyment of the book while verifying its contents.
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Far Out - September 16, 2008
TJ and I recently learned that some business associates with a relative of ours have accused the website of being 'far-out.'
This is a common accusation of Libertarians, I'm here to show that many smart and important people in America's history were 'far out,' and this quality is certainly not negative.
"Remember, democracy never lasts long. It soon wastes, exhausts, and murders itself. There never was a democracy yet that did not commit suicide." – John Adams (1814)
Government is not reason; it is not eloquence; it is force. Like fire, it is a dangerous servant and a fearful master. – George Washington
Peace, commerce and honest friendship with all nations; entangling alliances with none. – Thomas Jefferson
No man’s life, liberty, or property are safe while the legislature is in session. – Mark Twain (1866)
The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin. – Mark Twain
Of all tyrannies, a tyranny exercised for the good of its victims may be the most oppressive. It may be better to live under robber barons than under omnipotent moral busybodies. The robber baron’s cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end, for they do so with the approval of their own conscience. – C. S. Lewis
If ye love wealth greater than liberty, the tranquility of servitude greater than the animating contest for freedom, go home from us in peace. We seek not your counsel, nor your arms. Crouch down and lick the hand that feeds you. May your chains set lightly upon you; and may posterity forget that ye were our countrymen. – Samuel Adams
Give me liberty or give me death! – Patrick Henry
Government at its best is a necessary evil, and at its worst, an intolerant one. – Thomas Paine
A little government and a little luck are necessary in life, but only a fool trusts either of them. – P. J. O’Rourke
Government never furthered any enterprise but by the alacrity with which it got out of its way. – Henry David Thoreau
The great virtue of a free market system is that it does not care what color people are; it does not care what their religion is; it only cares whether they can produce something you want to buy. It is the most effective system we have discovered to enable people who hate one another to deal with one another and help one another. – Milton Friedman
The Government is like a baby’s alimentary canal, with a happy appetite at one end and no responsibility at the other. – Ronald Reagan
Americans have the right and advantage of being armed – unlike the citizens of other countries whose governments are afraid to trust the people with arms. – James Madison
I should have loved freedom, I believe, at all times, but in the time in which we live I am ready to worship it. – Alexis De Toqueville
If you have ten thousand regulations, you destroy all respect for the law. – Winston Churchill
Among the many misdeeds of the British rule in India, history will look upon the act of depriving a whole nation of arms, as the blackest. – Mahatma Gandhi, in Gandhi, An Autobiography, p. 446
They that can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety. – Benjamin Franklin
Liberty is not a means to a political end. It is itself the highest political end. – Lord Acton
Useless laws weaken the necessary laws. – Montesquieu
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The Bailout - October 1, 2008
This week’s quote is:
"Most people who read The Communist Manifesto probably have no idea that it was written by a couple of young men who had never worked a day in their lives, and who nevertheless spoke boldly in the name of 'the workers'." – Thomas Sowell
The Bailout
A few days ago, I sat through a 30 minute explanation by one of my prof's, explaining why the bailout was necessary (thankfully I was able to resist the temptation to just leave) and have decided to write about it here.
First, I know the House voted against it on Monday, but that is by no means the end of it, I wouldn’t be surprised if Bush did it with an executive order, or some other similar event happened.
The Real Cause
Many ignorant people seem to think the ‘free market,’ and Bush’s Capitalism is the cause (as if this market is free and Bush is in anyway a Capitalist) of the current crisis, this is, however, not true.
The Government, as it most always is the cause.
After 9/11 the interest rates were lowered to 1%, this caused a lot of credit to be used at lower than the market rate, the response, shortly after, was a boom; businesses and people were able to grow using other people’s money.
This made Bush look very good, but, as it always does, the low rate gave people incentives to take out loans they could not pay and gave financial institutions incentives to loan money to people who may not have been able to repay it.
To compound the problem all these loans were packaged into bundles worth billions of dollars and sold and re-sold to the point where every financial institution (except Goldman Sachs which was short the same amount they were long, so their investments canceled out) had huge exposure to the loans.
After a boom caused by low credit there is always a bust, this is what is happening now; people who were enticed by low interest rates now cannot repay their loans and are defaulting, and the institutions who are owed the money are failing.
Note: this is the Austrian theory of the Business Cycle, which I literally had no grasp of two weeks ago and understand enough to be able to see what is happen after just a few hours of podcasts, this stuff isn’t that difficult to understand.
Now, government is definitely the cause of the current crisis, yet the Secretary of the Treasury, head of the Fed, President of the US and both Presidential Candidates have endorsed more government as the solution, it seems to me like they’ve punched a wall and bruised their hand and think the solution is more wall-punching.
Evolution
Most liberals seemed to be obsessed with the Theory of Evolution, which says in short, that as things with inferior traits die off, the population as a whole is improved, or survival of the fittest.
The same liberals seem to be unable to apply this simple theory to areas other than biology.
If there are inferior businesses, running at a loss, when they die off the country, as a whole, is better off. I don’t see any politicians in Africa following around herds (may not be correct term) of wildebeests bailing out the old and week about to be fed to lions.
Consequences
The people who got crappy mortgages, they couldn’t pay, defaulted on their debt which is putting the businesses who lent them money out of business, this is established. The politicians want to use the tax payer’s money (which is/was forced away from the taxpayers) to back the financial companies so they don’t go bankrupt, sounds good, right?
What about the future?
If we start down this slippery slope what happens in ten years, when worse loans are given and riskier investments are made with the thought that the government will just bail out the perpetrators? What happens when people live the life of someone
making $250,000 per year on $25,000 in income? Who will bail them out?
If people do not learn from their mistakes, what stops them from making the same or worse mistake?
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Beyond Stage One - November 19, 2008
Beyond Stage One
I am currently reading Applied Economics: Thinking Beyond Stage One
by Thomas Sowell, the focus of the book is looking beyond stage one of any situation. This is also touted by Bastiat and Hazlitt (both used the Broken Window Fallacy) and I believe is the easiest way to quickly kill any crazy economic notions preached by politicians or the media. Here are a few examples:
Minimum Wage- Stage One: Wages in general are lifted for workers.
Stage Two: Employers find themselves paying more in wages than before and have to correct other expenses to make up for it.
Stage Three: Prices rise, returns diminish and employees are laid off.
Stage Four: Employers who are held down by minimum wage laws cannot hire people with minimum experience because those people’s production would not be worth minimum wage.
Stage Five: People are unable to gain valuable experience and are never able to find a job.
Unions – Stage One: A union is put in place and the wages of workers in general rise.
Stage Two: Since the employer is being forced to pay his workers more than their worth (if he was paying them less in the first place they easily could have gone somewhere else where they could make more) he raises prices and lays off workers.
Stage Three: Good employees who ordinarily would have been influenced by bonuses no longer have that incentive because in union plants each worker must be given the same raise, and their quality of work goes down.
Stage Four: The person with seniority gets a promotion first; even though it is very possible (and likely considering he would have gotten a promotion sooner if he was capable) someone a lot better for the job is available.
Pay Higher Wages Multi-National Corporation- Stage One: A US Corporation who is producing its shoes in Mexico is forced to raise its raises to US levels. Immediately after, the workers have higher wages and are temporarily more prosperous.
Stage Two: The workers are about one/fifth as productive (an actual statistic) as US workers so as the factory begins to lose money many are laid off.
Stage Three: Eventually, the company cannot afford to keep the factory in Mexico and shuts it down moving back to the US. Workers who just a few months (maybe weeks) later were making twice as much as the average wage in their area now are jobless.
Stage Four: Consumers have to pay more for their product and investors lose money as the company first loses money then needs to spend a lot of it buying a new factory and hiring and training workers, all the while losing the products they would have been able to make in the past.
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Ramblings - December 11, 2008
Stop the Bailouts, Part 1
In a free market the only gauge entrepreneurs have as to whether consumers like a product and want scarce resources to be devoted to its production is Profit/Loss.
When a company has a profit it means consumers are willing to pay for the allocation of that resource, when it has a loss it means they don't.
Without this ability there is no way to see where people really want and need resources, when the government overrides prices and props up a losing company resources get allocated incorrectly (the USSR famously had too much machinery and not enough working factories in one part of its country, and too many factories with no machinery in another part).
Stop the Bailouts, Part 2
Many people say GM needs to be bailed out because it employs so many people, but as Briggs Armstrong pointed out 12 companies have more employees than GM and Wal-Mart has seven times as many.
Do we have to bail all of these companies out as well?
Can you name one liberal who would want to bail out non-union Wal-Mart instead of GM?
Russ Roberts Books
I read these books a while ago, but had to do a report on one for one of my classes so I've waited until now to post on them.
The Price of Everything: A Parable of Possibility and Prosperity
This is Roberts' most recent book, it tells the story of a college student who plans a protest against a big Corporation who doubled its prices in the aftermath of an airplane and the professor who talked him out of protesting in his graduation speech.
The Invisible Heart
My favorite of his books, it's about two teachers, one Economics and one English. The English is decidedly leftist and the Economics courts her with political debates.
The Choice: A Fable of Free Trade and Protection (3rd Edition)
The Choice is not as good as the other two, it centers around 18th century British Economist David Ricardo visiting a business owner who is lobbying for protectionist legislation and showing how protectionism does not work.
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Ayn Rand - December 17, 2008
Ayn Rand
I've been putting off writing about Ayn Rand's three main fiction books for a while, I don't have a lot of topics about which to write this week because of the short time in between articles, so I'll write about them now, in the order of my rankings of the three.
Atlas Shrugged
Story
Dagny Taggart is the heroine of the story, she is the Vice President of Taggart Transcontinental Railroad.
She is given the task of making the railroad survive during an economic depression. As she tries to do this a 'destroyer,' is roaming the country convincing all the captains of industry to disappear.
As all the people who run the best companies continue to disappear the economy starts to crash and Taggart struggles to run her company as more and more socialistic government laws are placed on the economy.
My Thoughts
I have not read the Bible in whole, so thus far Atlas Shrugged is my favorite book. There is no close competitor.
Nearly every story in existence preaches the goodness of self sacrifice, Atlas Shrugged shows how self-interest is logical and necessary. As every other book demonizes business and attempts to show government as a protector, Atlas Shrugged shows how the great businessmen are the producers in the economy and the government is the demon.
The book has the easily the best story I have ever read and although it is over 1,200 pages long I could not put it down and read it in just over three days. This book is a must read for literally everyone.
Anthem
Story
Sometime in the future the world has become so collectivized that the word 'I,' no longer even exists in the vocabulary, it has been replaced with 'we.'
In the dystopia created by collectivism all the progresses of the past are lost and the people spend all day working in the jobs chosen for them, many of these farming. There is no electricity and little technology of any sort.
The hero of the book, Equality 7-2521, finds a cave underground where there are remnants of old material, there he rediscovers electricity and creates a primitive light bulb, rejoicing in the fact that he has helped society.
But, when he shows it to the creative council they cast him out, because unless all men have thought of something it is necessarily bad. Equality eventually escapes with a woman he has fallen in love with and lives the rest of his life in the forest next to the city.
My Thoughts
This book is every bit as good as the more popular 1984, and carries more valuable lessons.
It is only 105 pages long and I read it strait through in about an hour and a half, after wards I had a great motivation to work and just create something for about a month.
This book is not as much of a must read, but I'd recommend it for anyone flights or for those with middle to high school aged kids or nephews/nieces etc.
The Fountainhead
Story
Howard Roark is an independent thinking architect, he refuses to go along with the norm.
As a result his life has a lot of ups and downs, but he never compromises on his independence.
In the climax he blows up the living complex he had designed, but was not built ot his specification.
My Thoughts
The Fountainhead is a good book, but I did not like it nearly as much as the first two.
Much of the book was about art, which is a subject I don't find very interesting, combine that with some very dry parts and you get the short summary I wrote above.
I would recommend it for those interested in art of just with a lot of reading time and want to read about individuality.
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Speculators - December 30, 2008
Speculators
This subject probably would have been more interesting a few months ago, but I'm running short on Economic topics I haven't already covered, so I'll post about it today.
By speculator I mean the type of entrepreneur who tries to gain by speculating in the future price of something, usually a commodity. Speculators are typically scorned by the media, usually because they make money for 'nothing,' (maybe a not-so-surprising event was all the right-wing talking heads teaming up against the Oil speculators this summer; and I thought they were pro-Capitalism).
However, speculators provide a huge service in the market; since I'm from the mid-west I'll use corn as an example.
Say there is Wisconsin farmer toiling through the spring planting all of his seeds for the corn, all the while worrying about the future price and losing sleep over it. Along comes a speculator who offers him $5 per bushel (not accurate) for all the corn he grows, speculating that it will be higher. The farmer considers it and takes the offer signing a contract in April.
As fall comes closer the price of corn varies widely on speculation that ethanol funding will be stopped or weather will be better than usual, but the farmer does not need to worry about it, because he has a set price, it is also likely the speculator does not because he may have a more diversified portfolio than the farmer could have managed.
Finally, Fall comes and three situations can occur:
- The price is lower than $5 per bushel in which case the farmer has been saved the trouble of selling all his corn at unprofitable prices, while the speculator probably makes up for the loss in other areas.
- The price stays the same and neither party seemingly cares, but the farmer was saved a lot of restless nights knowing he wouldn't have to worry about the price.
- This is the outcome which stirs up the most controversy, the price of corn is higher than $5 per bushel. Many farmers will probably go to the media which will cry about how the speculator 'stole' this profit from the 'poor' farmer (for some reason no one ever talks about the 'poor' speculator who had his money 'stolen' by a farmer when the price ends up lower). Many, unknowledgable and likely unintelligent, will even accuse the speculator of somehow manipulating the prices, as if that were possible. In reality, the Speculator is shouldering all the risk and his profit is easily justified.
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Anarchy - January 8, 2009
My Economic Reasoning
Before I begin I’d like to point out that I’m not near intelligent enough to come up with this stuff on my own, even though it may seem that way with my potentially poor explanation, and I will give some further reading at the end of this section or those who wish to see my sources and explore these theories deeper.
To start I need to explain the profit/loss measuring stick used by entrepreneurs. In a free market prices are used to dictate where scarce resources (any resource that is) are allocated, this happens when people who demand the resource more pay more for it (the resource is then allocated to those people). Through the chaos of a free-market and millions of transactions prices do a magnificent job of allocating resources to their best use, somehow in the end there is order and there are an extremely small amount of shortages, because when the demand for a certain good goes up, the price follows and as entrepreneurs are encouraged to find better ways to find the materials, or even enter the business, the higher price allows the producer to pay more for his necessary materials which allocates them away from other areas. This happens every second of the day as the market adjusts.
Because prices dictate where scarce resources need to be allocated entrepreneurs have a very easy measuring stick as to whether the market thinks the resources should be allocated in the ways they are using, this is profit and loss. If an entrepreneur is operating with a profit it means the market wants the resources to be allocated to that use, if not the then the market thinks there is a better use, and without any government intervention it just about always eventually diverts to that use (because the entrepreneur is losing money).
Before I go on here's a summary of the above: Because resources are scarce those who demand them the most pay higher prices, those higher price allows the market to allocate the resources in the best way, following this entrepreneurs will know how the resources should be allocated by their profit or loss.
The great economist Ludwig von Mises came up with the Calculation Problem Argument that said, basically, without this profit or loss measuring stick anything operating without the use of prices has no way of knowing if what they are doing is actually working.
Before going further it is necessary that the readers acknowledge that government does not operate on a profit/loss system if some area of government needs more money they give it more money through inflation of taxation, other than these two sins government has no way of getting money.
As a result of the two things in the preceding paragraphs government logically does not and literally cannot work in any way.
This does not mean there should only be government roads or defense or courts, it means that government cannot work in any way
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Market Model - February 11, 2009
Macro
We just took the test on the market model, so I thought I’d talk about artificial price ceilings and floors.
Ceilings
A price ceiling is when the government says no one can charge more than a certain amount for an item. For example the government may say that gas cannot cost more than $2 per gallon.
What then happens is the firms who sell the gas will supply the amount they would have if the
actual market price was $2, so some companies who could only profitably sell gas at $3 per gallon will stop selling. At the same time consumer demand for the gas will go way up because they can buy it at only $2 per gallon, so people who would only buy $20 before will fill up their tanks and people will speed up faster and drive more, thus more gas will be bought than before. So as the supply falls because firms cannot make money of the current price, the demand will sharply rise and buy up all the gas, thus there will be a shortage. Anyone who lived through the ‘70’s should remember this happening.
Floors
The best example for a price floor is minimum wages; currently the government says no one can sell his labor for less than $6.25 per hour.
So what happens is many people go out and try to find jobs paying this amount or more, upping the supply, but the firms who before purchased the labor for less than $6.25 will no longer demand the labor, and a surplus, or unemployment, of labor will be created.
Maybe, an easier explanation would be corn: (I have no idea what the price of corn is) say the government puts a price floor on corn saying people cannot charge less than $200 for it. Farmers would then en masse start growing corn to earn the higher profits on it, while at the same time people would change to eating green beans and other things instead of the expensive corn, the result, way too much corn than is needed and many farmers who need money to buy clothes and water, but instead have a crapload of corn.
The lesson: anytime government screws around with prices it takes away the proper market signals that show how much should be supplied of products and create shortages or surpluses of those products.
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Say's Law - February 20, 2009
Macro
This week we talked about Say’s Law, which basically says in a market system: as an entrepreneur supplies things he creates his demand for what other’s supply. At first savings (Some deluded Keynesians still believe this, including one of my more ignorant roommates) was thought to be a leakage in the system, until it was shown that savings creates the capital which businesses use to create supply, this is correct.
However, a guy named Malthus came said there is still a leakage in the cycle, when money is hoarded, however this is also incorrect.
Those who read this blog should be familiar with the fact that inflation is an increase in the money supply, this pushes the prices up. Conversely, when money is taken out of a system deflation is the result and prices fall correspondingly.
But, the amount of money taken out is so infantile it would take a while for the market to respond, you may say. This is possibly true, but then it must also be true that money hoarded does not represent a big enough amount of the money supply to create a depression as well.
Government Job Creation
A lot has been talked about in the news lately about the ‘jobs that Obama will be ‘creating.”
This is a huge fallacy, and an easy one to see. As Henry Hazlitt and Frederic Bastiat observed to create a correct economic framework, one must not look only at the short range consequences for one group of people, but at all the consequences for every group of people.
For the supposed job creation it is necessary to remember that government cannot create any sort of wealth it can only redistribute wealth. In the same vein the government certainly cannot create any jobs; it can only redistribute the jobs from where the free market thought they should be, so by definition the jobs will be unproductive and contribute nothing to society.
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