Archive for September, 2012

“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

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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.

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.

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.

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…