Archive for April, 2012

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?

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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.

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?

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”.