Our Beneficent Masters

The Western model of democratic government is broken. Successive body blows to individual liberty have left our political system with more than just a bloodied nose. Everywhere you look you see the slow creep of unchecked Executive power,  new restrictions on freedom of speech and all-powerful central planners and technocrats making decisions with absolutely no democratic mandate.

Long cherished and hard-fought for rights, such as freedom of the press are now under serious threat. Your  allegiance to a mainstream political party could exclude you from fostering a  child. The most powerful man in the world is able to send unmanned drones into another sovereign territory to perform ritual executions, without so much as  a whiff of due process. The expression of an opinion that is contrary to the mainstream groupthink will ensure you receive a swift visit from the state’s bully boys in blue. George Orwell move over. 1984? This is 2012.

The state has assumed so much power in part because it has been able to cushion people from the consequences of their own actions. Concentrated gains for some are paid for by dispersed costs for the many, thus ensuring the minimum of hissing from the goose as it is slowly plucked. Decisions are centralized and tax and regulation is harmonized. The pluralism and competition that was responsible for pre-World War II Europe’s staggering growth and innovation has now been stifled by the increasing erosion of national sovereignty by the EU. The state offers it’s citizens answers to many of life’s problems, hilariously unaware that many of these problems exist because of state intervention in the first place. Intervention upon intervention is called for to fix the side effects of previous interventions.

Cui bono? Do you ultimately believe in the maternal/paternal model of the state that runs society to the benefit of it’s incapable of children? Or do you see the modern state as the machinery of a ruling elite for extracting the maximum amount of wealth out of the productive portion of society?

Philip Bagus illustrates the true nature of the state in “The Tragedy of the Euro”  (if you have an e-reader you can download the e-book or PDF from mises.org for free!):

“The state is the monopolist of coercion and the ultimate decision maker in all conflicts in a given territory. It has the power to tax and make all manner of interventions.

The ruling class is exploitative, parasitic, unproductive, and has a strong class consciousness. It needs an ideology to justify its actions and prevent rebellion of the exploited class. The exploited class represents the majority, produces wealth, is indoctrinated into obedience to the ruling class, and has no special class consciousness”

The current ideology of the ruling class is a toxic mix of welfarism,  interventionism and mercantilism. They have cleverly narrowed the field of debate so that any opinions and ideas contrary to the service of their own vested interests are frowned upon as taboo, or even punished by imprisonment.

The elitist left display a staggering level of cognitive dissonance  when they talk about the danger of monopolistic corporations exploiting consumers whilst simultaneously providing hearty support to such paragons of consumer choice as the BBC and the NHS. The elitist right lavishly applaud the wealth generating (sic) financial industry with blind ignorance to it’s priveleged position to create money out of thin air, backstopped by the white-hot ink jets of an independent (sic!) central bank.

It’s enough to drive a man to drink… No wonder minimum alcohol pricing is on the cards.

The Tale of the Slave

“Consider the following sequence of cases, which we shall call the Tale of the Slave, and imagine it is about you.

1. There is a slave completely at the mercy of his brutal master’s whims. He often is cruelly beaten, called out in the middle of the night, and so on.

2. The master is kindlier and beats the slave only for stated infractions of his rules (not fulfilling the work quota, and so on). He gives the slave some free time.

3. The master has a group of slaves, and he decides how things are to be allocated among them on nice grounds, taking into account their needs, merit, and so on.

4. The master allows his slaves four days on their own and requires them to work only three days a week on his land. The rest of the time is their own.

5. The master allows his slaves to go off and work in the city (or anywhere they wish) for wages. He requires only that they send back to him three-sevenths of their wages. He also retains the power to recall them to the plantation if some emergency threatens his land; and to raise or lower the three-sevenths amount required to be turned over to him. He further retains the right to restrict the slaves from participating in certain dangerous activities that threaten his financial return, for example, mountain climbing, cigarette smoking.

6. The master allows all of his 10,000 slaves, except you, to vote, and the joint decision is made by all of them. There is open discussion, and so forth, among them, and they have the power to determine to what uses to put whatever percentage of your (and their) earnings they decide to take; what activities legitimately may be forbidden to you, and so on.

Let us pause in this sequence of cases to take stock. If the master contracts this transfer of power so that he cannot withdraw it, you have a change of master. You now have 10,000 masters instead of just one; rather you have one 10,000-headed master. Perhaps the 10,000 even will be kindlier than the benevolent master in case 2. Still, they are your master. However, still more can be done. A kindly single master (as in case 2) might allow his slave(s) to speak up and try to persuade him to make a certain decision. The 10,000-headed monster can do this also.

7. Though still not having the vote, you are at liberty (and are given the right) to enter into the discussions of the 10,000, to try to persuade them to adopt various policies and to treat you and themselves in a certain way. They then go off to vote to decide upon policies covering the vast range of their powers.

8. In appreciation of your useful contributions to discussion, the 10,000 allow you to vote if they are deadlocked; they commit themselves to this procedure. After the discussion you mark your vote on a slip of paper, and they go off and vote. In the eventuality that they divide evenly on some issue, 5,000 for and 5,000 against, they look at your ballot and count it in. This has never yet happened; they have never yet had occasion to open your ballot. (A single master also might commit himself to letting his slave decide any issue concerning him about which he, the master, was absolutely indifferent.)

9. They throw your vote in with theirs. If they are exactly tied your vote carries the issue. Otherwise it makes no difference to the electoral outcome.

The question is: which transition from case 1 to case 9 made it no longer the tale of a slave?”

Nozick, Robert (1974). Anarchy, State and Utopia

The Blame Game

From page 154-155, “Alchemists of Loss: How Modern Finance and Government Intervention Crashed the Financial System” by Kevin Dowd and Martin Hutchinson. Referring to the causes of the 2008 financial crisis:

“It is here that one can most ferociously blame Fed Chairmen Alan Greenspan and Ben Bernanke, and their decade and more of irresponsibly cheap money. By distorting price signals throughout the economy and producing burst bubble after burst bubble without any significant improvement in living standards except at the very top, they have not only gravely damaged the economy, but enabled the Left to claim that free markets “don’t work” so we must bring in government and the unfortunate taxpayer to solve our economic problems. Of course, this crisis is not a failure of free markets and not even a failure of capitalism – unless you accuse modern mangerialist crony capitalism, in which case you would be right.”

This quote jumped off the page at me. It surmises the cause the cause of the boom that lead to the bust – low interest rates and loose monetary policy (as the authors point out on page 154, from 1995 the Fed expanded the money supply 5% faster than output for 13 years). It hints at the damage this has caused to the reputation of both free markets and capitalism, even though it had very little to do with either. It also correctly acknowledges that much of the growth and rise in living standards enjoyed during the boom was illusory.

It is a fascinating world we live in. There are few people who suggest that the government should control the price of milk or manipulate the supply of shoes.  Luckily, most people recognise that government is hilariously incompetent at the functions it already performs and would resent it encroaching into areas where the free market already provides a valuable service.

Yet when it comes to money, the masses are blissfully ignorant. Money is a commodity like most other goods, albeit a special one with value added as a widely accepted medium of exchange. So why are we happy that governments (through their central banks) are allowed to manipulate the price (interest rates) of money?

We accept that the government would do a lousy job of supplying milk but simultaneously believe that it’s all knowing bureaucrats can somehow get the supply of money just right. We would rightly shudder at the thought of the government setting the price for a pair of shoes but are perfectly happy to allow  it’s all knowing functionaries the discretion of setting interest rates.

Money is not the creation of the state. Just as the state did not invent money, nor is the state required to manage money. Money came from people, emerging through “spontaneous order”. People, interacting with each other through voluntary exchange gradually realised that certain commodities are uniquely desirable to use as money (due to properties such as divisibility and function as a store of value etc).

So what materials did individuals (free from government coercion) decide to use as their preferred money? The historical record is clear – they chose gold and they chose silver. I know of no example when people, free to choose, have settled upon paper. This is because paper money is intrinsically worthless. It can only function as money via government “fiat”, coercively imposed upon society via legal tender laws.

It shouldn’t take a great deal of imagination to understand why the state likes it this way. The printing press gives the state an unrivalled power – the ability to create money out of thin air. Except it is nothing like as harmless as that. The price is paid for by those who save, those with pensions and those on lower incomes. Inflation is a stealth tax on the poor and the thrifty, simultaneously eroding the value of saved capital and redistributing wealth from the poorest to the richest in society.

The financial sector is largely complicit in this redistribution, benefiting as the first recipients of the freshly printed money. They enjoy the benefits of the new money before inflation has eroded its purchasing power. By the time the new money reaches the poorest in society, any benefit to be derived from it has been wiped out by the increase in prices. Thus are the poor forced to pay more for everyday items and sacrifice a portion of their savings through loss in purchasing power.

Further damage is caused by the “misallocation” of capital as a result of low interest rates. In English, this means that when money is cheap people invest it in products, processes and ventures which are not sustainable. Sub-prime housing bubble anyone?

Interest rates should convey information about the time preferences of society. When people value present consumption more they will save less, driving interest rates up. When people defer consumption they save more, which drives interest rates down. However, in our current, centrally planned monetary system the interest rate is just an arbitrary number decided upon by a central bank committee (sound soviet enough for you?). The entrepreneur looking to invest capital receives a false signal – artificially low interest rates will falsely signal that society is prepared to defer consumption and has saved more capital to be in invested in longer, more marginal production processes. Except that society has done no such thing. Businesses inevitably make foolish investments and begin production of products which later turn out to be unprofitable. The end result? Boom followed by bust.

The neatest trick of all is that somehow all of this is blamed on free market capitalism. It should be clear that there is nothing free market about fiat money and centrally planned interest rates. The blame lies squarely with the state.

Minted or Printed?

The debate between fiat and commodity monetary standards is slowly re-entering the mainstream. See here, here and here. To those new to the subject, this is simply a debate as to whether the money in your pocket is backed by nothing other than government mandate and coercion (fiat) or a by a physical commodity that has value beyond it’s use as money (usually gold or silver).

This is a debate which many had considered to be closed, an argument that only existed on the fringes of academia amongst eccentric free marketeers. Succesive rounds of quantitative easing, coupled with negative real interest rates have thrust this debate back into focus.

It is bizarre that it has taken so long for this issue to re-surface. The intellectual superiority enjoyed by paper money is based on a 42 year experiment that has seen the value of all paper monies race each other toward their intrinsic value – ZERO.

The alternative, a commodity standard based on gold or silver (or a combination) is viewed  by the mainstream as atavistic, “a barborous relic”. This completely overlooks the historical track record of commodity money as society’s choice of preferred choice of exchange media.

The majority of coverage will argue against the gold standard, no doubt citing the flawed gold bullion standard (1925-1931) and Bretton Woods system (1946-1971) as representative of the failings of commodity backed monies.  Neatly overlooking that both standards were not the product of the free market but centrally planned and enforced by government.

The establishment has good reason to fear the return of a TRUE gold standard via the free market, beyond the control and manipulation of government and central bank. Such a gold standard would enforce fiscal responsibility, removing the state’s ability to run up unsustainable debt backstopped by the printing press. The current monetary world order is a top down system, designed, implemented and controlled by state bureaucrats and apparatchiks for the benefit of the establishment and it’s chosen favourites. There are plenty of vested interests who are keen to see it remain that way.

I would encourage the reader to look beyond the standard criticisms. One thing is for certain – the gold standard is back on the radar. This can only be a postive thing, especially as the loose monetary policy pursued by central banks world over causes more people  to wake up to the reality of their savings  being stolen through central bank induced inflation.

Buses vs Mobile Phones

Unfortunately, I have to get a bus to work everyday. Generally speaking, buses are pretty awful. They are usually one (or a combination of) the following; late, smelly, relatively expensive, overcrowded, uncomfortable, indirect.

But why should this be so? Horse drawn buses were used in the early 1800s so you would think that 200 years of innovation and technological progress would have produced something far more adequate than our present day reality. I mean think about it, the first commercially available mobile phones were introduced in 1983 and just look what has happened a mere 20 years later! Phones that are not just mobile but maps, music players, computers, diaries, Internet equipped… you get the idea. What is even more amazing is that this technology is increasingly available to almost everyone in society.

Back in 1983 a mobile phone have cost you $3,995 (almost $10,000 in today’s terms if you factor for inflation!!). For your money you would get a 790g block with err…  30 minutes talk time. Today I can walk into any mobile phone shop and walk straight back out with a product vastly superior to it’s 1983 forebearer for a fraction of the cost. How is this so?

Well it’s certainly not due to government intervention. Rather predictably, it’s our old friends – capitalism, competition and (relatively) free markets. A combination of these factors ensured that the quality of mobile phones went up and the price went down, making this product ubiquitously available across society. Government intervention in the form of taxes and regulation has no doubt had some negative effect on this sector but has not been significant enough to have seriously dampened the productive force of capitalism.

Let’s return to the example of the bus. The bus network (in Britain at least) is prone to a plethora of state interventions. Much like the rail network, most routes are awarded by a regional QUANGO to private operators. Other bus companies are then not permitted to compete on the same route. The obvious result of which is that there is little/no competition for a bus company once it has won the right to a route. This type of privatization is better than direct state ownership of the industry, but only marginally.

Without allowing truly free competition between different operators service, quality and affordability will never improve. No doubt the bus companies like it this way and likely lobbied hard to achieve this status quo, which would exemplify the unholy alliance between big business and government.

In the meantime, my mobile phone contract is up for renewal and I have an veritable bounty of cutting edge devices to choose from. Coincidentally my bus pass is also up for renewal. Sadly, my choices in that respect are rather more limited.

Unexpected Wisdom..

I’ve been given a book to read by a colleague. I hate it when that happens.

After a month of gathering dust on my windowsill I have started it, with a sense of duty rather than because of any interest in the title itself. The book is “Life’s a Pitch: What the World’s Best Sales People Can Teach Us All”  and is by Philip Delves Broughton. Not my usual cup of tea would be an understatement.

Anyways, I thought I would try and get through the book by speed reading it on the bus to work and back so I could at least return it to its owner knowing broadly what the content is (helps answer any quiz questions!). And then, out of nowhere, the author neatly summarizes the following quote,

 

“” You get these young salesman who think they can sell anything, and in sectors like financial services they’re selling things with a very negative impact on people’s lives. They’re selling a crappy product with no accountability[.]…. I’ve been called  a huckster, a snake oil salesman, everything. But now more than ever, if a product doesn’t work, or people don’t think they’re getting value, they can destroy your reputation online. It’s easy. If that happened to me, I wouldn’t still be in business”.

The strange thing is, he’s right. Sullivan is exposed as s salesman in a  way the salesman of Wall Street are not. Institutions and governments protect the latter when things go wrong. Sullivan may only be dealing in toilet cleaners and mops, but his reputation is constantly exposed to the bleaching sunlight of consumer scrutiny and market response. His professional safety net when selling gadgets is far smaller than for those selling products that can sink an entire economy.”

 

Quite. Perhaps this book won’t be as painful as I first imagined…

Journey to the Anarcho-Capitalist Side?

I’m becoming more and more interested in the idea of anarcho-capitalism.

We are conditioned to view the world through the paradigm of the nation state, international borders and sovereign power. But just what is the state? Is it relevant? Is it even legitimate?

The more I think about it the more I realize just how arbitrary the state actually is. I certainly don’t think that the state was created to benefit all mankind. More likely it was a cynical power grab by a plutocratic elite who realized that the state could be used to legitimize their use of force to consolidate their privileged position. Some may argue that the state is a means of performing collective action which would not be possible through voluntary interactions between free individuals, such as war. This may be true but how do we actually know? Who is to say that private individuals couldn’t arrange their own defence satisfactorily through private means? If that puts a stop to aggressive war mongering all the better. The record of the state in this regard is well documented, with centuries of war, aggression and killing to stand as testament.

Strike down the state with all of your hatred and your journey towards the anarcho-capitalist side will be complete

The problem I have is this – how can I advocate liberty but at the same time support any kind of state, regardless of how small? How can I decide what the proper remit of the state should be without imposing my own preferences on the rest of society? Nobody can opt out from what the state imposes because it is not a voluntary relationship. I can stop eating at McDonalds, choose to shop at Tesco instead of Asda and wear Nike trainers instead of Adidas. I have no such discretion in matters which involve the state.  The chimera of democracy is offered as a piecemeal sedative to the masses, an illusion that the masses possess some sort of influence over their beneficent masters. But no matter who you vote for, the government always wins. This is the danger when we decide what we think it is appropriate for the state to do – we are forcing others to conform to a way of living which we find desirable but which others do not. Can this ever be justified? Is it not hypocritical to think that state intervention and coercion is morally illegitimate yet only go as far as promoting a “smaller” state?

Free Markets and Healthcare… Again

A colleague recently told me that the reason that US healthcare is so expensive is because of market forces. Putting aside the fact that the US Government spends more as a proportion of GDP on its Medicare and Medicaid programs than the UK does on the NHS, I found this claim utterly preposterous and self defeating.

Free markets work to reduce the price of commodities – just look at many of the items we take for granted everyday; cars, smart phones, laptops etc. All these goods were at one time unaffordable to the poorest in society but a flourishing market in these goods increased competition, reduced costs and passed on the benefits to consumers.

Now look at areas where the state has a monopoly on a service. Education, healthcare, defence – these are all things which continue to escalate in their cost. As I touched on in my previous post, you don’t have a choice when the state comes to collect its dues for these things. You cough up or go to jail.

To those who would cite the argument that prices have a tendency to rise I would counter that this, in its broadest measurable form, is due to inflation caused by government and central bank debauching the currency. In a true gold standard a government has no ability to manipulate the currency. History shows that periods where a gold standard has existed have tended towards mild deflation, reducing the costs of goods and increasing the purchasing power of the monetary unit.

It’s hard to put a price on a persons health, even harder to put a price on life. But the medical means to keep you healthy and extend your life DO cost something. These resources have to come somewhere. Here in the UK I’m sure that most people when asked would support the NHS. However, this question does not highlight how much people would be prepared to pay for it. Would they pay 50% of their income? 75%? 100%? It may sound ridiculous but there is a point at where it no longer becomes service that represents real value to the individual. The free market is the only system capable of assessing where this tipping point is.

The Price of Information

Truly free markets are just that – free, and do not suffer the interventions of the state. The state has always looked on jealously at the innovation and wealth creation made possible by markets, like a burglar peeking through someone’s front window.  The tendency of the state is always to grow larger, a self replicating monolithic bureaucracy that breeds its own army of foot soldiers on a staple diet of dependency and empty promises. This ever expanding monster needs money to sustain its growth. The private sector is easy prey for a state with a big appetite as the state can always rely upon its monopoly on the legal use of force to extract revenue from private individuals and businesses.

The more the state encroaches on the private sector, the more life it sucks out of the economy. Eventually it becomes trapped in a circle of ever diminishing returns. Every malinvested penny spent by the state  is penny that could have been used by the private sector. Sure, not all money spent by the state is wasted. Likewise, not all money spent by the private sector is invested wisely. But the private sector has a key advantage – prices.

Prices are amazing. They convey information between participants in a market. This allows the private sector to efficiently allocate resources based upon people’s real demands. Of course, markets are never perfect and mistakes are often made. But free markets have the ability to assess this misallocation of resources and adjust accordingly because prices will guide the market to correction. For instance, if a rubber duck costs more to make than people are willing to pay for it  then companies producing rubber ducks will lose money. This signals to entrepreneurs that resources are not being used efficiently and should be redirected towards other activities, such as producing yo-yos. The entrepreneurs could also work out more efficient and productive techniques to produce  the ducks. By doing this they may be able to lower the cost of production to a level which allows  the duck to be sold a price acceptable to the consumer and  also create a profit.  This profit tells the entrepreneur to keep doing what he is doing. It rewards the producer for enriching the lives of his customers. It encourages him to do it more. If profits are big it encourages others into the market, thereby increasing supply to satisfy demand and thus normalize profits. This increased level of competition also makes producers work harder to maintain their market share and profit margins (or in other words, their signal that they are using resources efficiently) by coming up with more efficient and productive processes. This competition drives down the cost of the product and society benefits from cheaper goods.

The public sector has no equivalent to prices. For instance, if a entrepreneur in a company hires a new worker to increase productivity and generate more profits he will be able to use the price system as a way of assessing the success of his investment. If he makes more money as a result then the worker keeps his job, maybe even more people get hired. If he loses money then the price system will tell him that he is not utilizing resources efficiently, the likely result being in the worker losing his job.  The same process can not occur in the public sector. The government can not assess demand like the free market can. Society can not accurately inform the government how much it is prepared to pay for bridges, local council art, flower beds or whatever else the state aims to provide. The government tells you how much you pay for it. Think about that. In every private business individuals co-operate to increase their own wealth by trading for things which they value more than the thing they trade the other way. It’s a two way gain. The shop keeper values your 50pence more than he values his one newspaper. You value the newspaper more than the 50pence or else why would you give the 50 pence up for it? A trade is completed and both parties benefit. Both parties will likely thank each other, which neatly symbolizes the mutual benefit of this arrangement. Now try and remember the last time you thanked the government for taking your taxes. Sure, you get things in return. But you don’t necessarily value them more than the money the state took from you by force.  The cost to you in taxes may be clear, but the cost to your liberty is more subtle.

Is that a price worth paying?

Who’s gonna clean the fan?

Last weekend I had the pleasure of meeting Kevin Dowd at Liberty League Freedom Forum 2012.  

 

Kevin’s message is chillingly clear. The shit has yet to hit the fan. All the economic stimulus, money printing and bailouts haven’t solved any of the underlying problems in the economy – they have simply made the problem worse and deferred  it to a later date. 

 

I found Kevin’s explanation about why we have not experienced higher levels of inflation yet particularly interesting (and frightening). Using the government’s own figures he showed how the monetary base of the economy has been expanded several times over since the crisis in 2008 and how this extra money has been ‘trapped’ in the banking sector. The Bank of England bought the government’s debt with the freshly printed (or ‘clicked’, if you prefer) money. This depressed the interest rate that the government borrows at but also swamped the commercial banks with huge amounts of the new money. In a business environment severely lacking  confidence the banks are holding on to this money  rather than lend it out. After all, why would they go to the bother of lending this to small and medium businesses when they run the risk of going bust in the prevailing business conditions. The problem is that this money can’t stay there forever. Kevin used the example of a huge lake hemmed in by a glacier. Just like when the Ice Age ended, the glaciers melted and released a torrent of water across the land, leading to widespread destruction. The same thing will happen once this money is released into the wider economy. And once the inflation takes hold (and it will) it will be impossible to stop. According to Kevin, even Mervin King acknowledges that there is no exit strategy for this huge experiment in monetary policy. 

 

Other things to feel optimistic about include: 

 

• Record low interest rates can NOT stay at these levels forever and the banks are in no fit shape to survive the consequences of higher interest rates. Another banking crisis, even bigger than the last time, is just around the corner. 

• Inter-governmental interference in the world economy has exacerbated the problems (see Basel 1 &2 which created the regulatory framework which left banks hopelessly exposed to first the subprime and then sovereign debt crises)   

• The next crisis will be bigger. The same  policy prescriptions, having been shown to fail at every previous attempt, will be implemented again. The potential for rioting and societal breakdown is huge and Kevin is surprised it hasn’t happened already. 

 

Gloomy stuff. Apologies if I’ve got any of it wrong on here, I wasn’t taking notes during his talk so this is all just from memory. Kevin seemed like a genuinely nice guy and we should all hope and pray he is wrong with all his predictions. Unfortunately I happen to think he’s bang on the money (so to speak) and would recommend people to look at his book “Alchemists of Loss”.