Saturday, August 28, 2010

Accumulation of Capital and Knowledge

Accumulation of Capital and Knowledge
by Alex Merced

 While I've discussed capital accumulation a couple of times before I though I'd re-explain this concept and it's implications again since it's so pivotal in understanding many of todays fundamental political questions such as...

Why do the rich grow wealthier at a faster rate than the none rich, why do the smarter get smarter faster than the none-smart?

Capital Accumulation

 The basic premise is this, every input creates output, so the more inputs I have the more output I can create. While innovation and new technology will help magnify the effect of this process let's suspend disbelief and that technology is no longer progressing forward how can a society still become more prosperous?


Smith has $100 with which he can buy a machine that he can create enough goods that he'll generate $20 each week when bringing those goods to the market. So in 5 weeks he'll have recovered his cost and buy another of the same machine and begin to generate $40 and now it'll only 2 1/2 weeks before another machine can be bought.

So even though the machines weren't getting any better or efficient, accumulating the capital of this machinery allowed Smith to generate more wealth in a smaller period of time. It's this process that explains why people with more capital, or "rich" people may be able to accumulate more wealth at faster rates. Those who aren't rich are either earlier in this process of wealth accumulation if they are making these investments, or may be stuck in their circumstances due to lack of investment spending, because they chose to consume instead.

If smith instead bought $100 worth of apples and ate or consumed them, the end results is that smith has nothing left. So consumption in itself does not create more for smith, he must make an investment in order to ensure he can continue his consumption habits. In this case he could save $50 worth of the apples for later or sell them for $100 (assuming he can find a buyer) and consume the other $50.

Notice the difference...

In the first scenario Smith consumed $100 of apples and now has nothing

While in the second scenario Smith consumed $50 of apples and invested/saved the other $50 of Apples is still left with $100 in the end even after consuming $50 meaning a total of $150 of wealth existed for Smith throughout this scenario.

(NOTE: It's with this realization that one should look very suspect at statistics like Gross Domestic Product which assume the creation of value for Consumption spending is the same as Investment Spending, and that all Government spending is equally valuable whether it's on investment or consumption since it only measures the dollars committed not the dollars returned from expenditures. In either of the above examples the GDP of smith would be $100 yet it's obvious he was better off in one example over the other.)

(NOTE 2: The Reason GDP would only be $100 for Smith personally either way cause the only purchase he made was the $100 of apples, and GDP ignored the $100 returned from selling half his apples until he spends it. So GDP is always ignoring return of expenditures, which is this example are vastly different.)

Knowledge Accumulation

 Now if your reading this it's safe to assume your interested in accumulating knowledge, and knowledge accumulation works very similar to that of the example above.

For example, when you were a child in Kindergarten or First Grade you were learning the basics of communication such as the alphabet and how to read, and it takes long time develop those basic skills. Yet, as you get older and you master these fundamental pieces of knowledge your able to attain other pieces of knowledge at greater rates in smaller time frames, or else no child would be able to handle the difference in workload from 1st grade to college. The more you participate in this process the faster and great it becomes. The smart get smarter faster cause they've invested more in previous knowledge to attain future knowledge in the same way smith had invested more in previous capital to purchase future capital.


Many find this magnification of wealth growth to be a sign of inequity, although it's actually the result of the process that creates prosperity, knowledge and wisdom. To demonize capital accumulation and say capital must be taken from the rich and given to the poor is like saying we must take knowledge from a genius and give it to someone who may be referred to as "stupid". We should not fault those who are later in the process of capital accumulation for other being in the early stages of it, their participation in this process does not prevent other from participating in it.

Also, it's this process that separates developed countries from underdeveloped countries. It's not that technological innovations and practices are kept secret from these developing nations, but they are earlier in the stages of capital accumulation making growth seem slower relative to countries further along in the process. Yet if countries further along in this process take it for granted and consume all the fruits of these investments they may find themselves falling behind quite quick.

Wednesday, August 25, 2010

The New Revolution: Anarcho-Creatarianism

The New Revolution: Anarcho-Creatarianism
by Alex Merced

Many people call themselves many things yet come to the same conclusions, but many of us come to those conclusions for many reasons, for example...

Conservatives find themselves wanting to preserve traditional values of the United State which happen to be Life, Liberty, and the Pursuit of Happiness

Libertarians value Liberty as an End in itself so policy that leads Liberty is the goal

an Individualist values the individual above all collectives

Anarchist find freedom from coercion and oppression as the utmost value while they may disagree how to manage resources once this is done (Anarcho-Capitalist versus Anarcho-Socialist)

Although while I agree with many of the views and conclusions of Anarchist, Libertarians, and Conservatives I can't say I really fit any of these philosophies in it's purest sense. At the end of the day my arch virtue, my chief principal is Creativity. So if I spent a moment and try to figure what you would call someone who's life doctrine focuses around Creativity and the term I came up with is...

Creatarian (Someone who holds the doctrine of Creation)

Although this word alone only explains the ends which is creativity/creation which also explains my disdain for it's antithesis, Destruction/Violence. Although what institution embodies violence more than government, which at the end of day is a monopoly on violence over a given people, so to emphasize this realization I figured I'd add the Anarcho pre-fix to emphasize this. Although I guess if you valued creativity and believed in government you'd be a Creatocrat (Rule/Strength by Creation).

Why have a Doctrine of Creation?

Well, I've always been someone who's loved creativity, loved music, art and anything that gives me new experiences. Creativity is Creation, and there is nothing greater than to create and bring something new into this world whether it be a song, an idea, or even a child. New is a beautiful thing, and if you live you life pursuing the creation of relationships, ideas, hope and anything else it can only lead to an enriching life. Vice Versa, living a life of destruction can only lead to life of misery as you live your life destroying relationships and hope around you.

So what are the views of an Anarcho-Creatarian?
 (I'm now writing the Anarcho-Creatarian Manifesto, it'll be released soon)

Liberty: If you are an An-Creat you do value Liberty but not as an ends but as a means because having and valuing Liberty not only allows you the autonomy to be creative but also the mental autonomy, if you think it terms of liberty not only are your actions free'd so is your mind to generate endless ideas on how to create in the world around you.

Life: To give life is creation, to take it is destruction. Also, While people due to their liberty have the autonomy to live a life of destruction they cannot destroy the creations of another (homesteading).

War: Violence, especially war are acts of destruction and the aim of an An-Creat is to reduce destruction in the world and induce creation without violating anyones Liberty (since Liberty is pivotal to a Creative Environment)

Economics: An-Creat desires a strong economy because it fosters incentives for creativity and provides for more leisure and resources for society to pursue creative endeavors. So An-Creat is a strong support of real free market economics (Austrian Economics) in pursuit to these ends.

When the Anarcho-Creatarian Manifesto is created further issues will be illustrated and discussed, and hopefully this will begin the development of Creatarian Philosophy and Ethics.

I have Created a Facebook Page Anarcho-Creatarian if you want to join this new movement as it develops please search and join the page.

Tuesday, August 24, 2010

A Response to Alan Harvey's Demand Side Podcast

A Response to Alan Harvey's Demand Side Podcast
by Alex Merced

This is a Response to THIS episode of Alan Harvey's Demand Side Podcast

 As an anarcho-capitalist aspiring austrian economist, one may ask why would I bother consuming such media such as the Rachael Maddow Show or Alan Harvey's Demand Side podcast which are the antithesis of my own personal opinions and belief structure. Of course, in order to be effective in debate one must be able to empathize and understand the opposing view or debates end up being a shouting match without any progress towards any consensus.

Much of the time our opinions across many spectrums come from similar values and virtues so a consensus can be achived by merely repositioning an issue in a way to reflect that. When Values and Virtues underlying our opinions on an issue differ greatly then of course conclusions will vary in a non-reconcilable way, so being able to recognize this helps one realize that the current debate is useless that the debate must be shifted a step back to a more fundamental ones of which values, goals, and principles should take priority before moving foward. This is important cause if you and your opponent to agree on the underlying assumptions then you debating two completley different issues.

So listening to the views and ideas of your opponents help identify these important variables in debate. Although aside from this reason while I often disagree with the conclusions Maddow comes to, I do appreciate the research and ability to identify problems or symptoms of other problems even if her insinuated solutions are often worse than the problem. As far as Alan Harvey I can't say the same, he's staunch defender of the Keynesian stronghold and it's amuzing to listen to a show that positions itself to the LEFT of Krugman who is pretty far left as it is.

So what is it I want to respond to? Well in his most recent podcast he was makings some critiques of Reinharts and Rogoffs new book "This Time It's Different". While I'm not here to defend the conclusions of this book, since I have no read the book as of yet I do want to address many of the bizzarre insinuations on behalf of Harvey in his critic.

#1 The Government can Never go Bankrupt

 For the most part, to an extent this is true. If a government has control over it's money supply it can always increase the money supply in order to tender it's debts. For example if you can always just print money to make your monthly credit card payments, no matter how much debt you have you won't technically go bankrupt. Although this is not a good thing, cause this means politicians have no incentive to make difficult political decisions and will generally lean towards spending as a solution (which a keynesian would say is good, cause they believe consumption is THE economic driver).

 Although this is not the only problem since an ever increasing money supply leads to inflationary pressures and mal-investment as an increased money supply leads to less saving since interest rates drop yet more investment in capital intensive long term projects which will have no consumer base when completed since there is no savings to purchase them (how many high rise condo were planned but never completed in las vegas). So overall even though the government won't go bankrupt this has been little solace for Zimbabwe and their inflationary problem (everyone in Zimbabwe is a Millionaire... but they still can't buy a cup of coffee). Although if you bring up the inflationary argument it leads to Harveys next ridiculous statement...

#2 that for Developed economies there is little relationship with debt from inflation

The argument Alan Harvey is trying to make is that high debt levels have little to do with inflation if the economy is advanced enough. I would disagree that the size of the economy just eliminates the relationship but that it has more ability to mitigate the conditions that lead to dire consequences in the short run. A larger economy with lots of imports and trade deficits such as the US sends it's dollars abroad as the money supply increases, mitigating the supply increase (although this would still devalue the dollar vs other currencies since people are essentially selling off the dollar to buy foreign goods, but it prevents the domestic flood of dollars). So while a large economic importer economy like the US has this mechanism to deal with money supply increases the result of this is that business and industry follows the money abroad (why be in the US if US dollars are going abroad?).

Although if perpetual money supply increases are perceived then foreign exporters will begin to refuse to take dollars cause of expected supply increases, increasing their currency risk. If enough foreigners refused to take dollars there would be nowhere to soak the growing supply of dollars which would be the trigger for hyperinflation. Although we've been able to buy time cause the US is currently the reserve currency of the world so for the time being for foreign exporters will take dollars despite the currency risk but already many countries are divesting from the dollar.

So will the debt essentially lead to overnight price inflation... maybe not but it eventually will and in the meantime we'll just have to watch all our industry leave first.

#3 Bad Economics Times cause runaway government debt, not the other way around

Once again, on the surface like most Keynesian talking points is very plausible and has a sort of logic to it. The argument that Havey puts forth is that much of thes stimulus spending and deficits wasn't the cause of the 2008 recession but a response to it, which is totally true. Although he tries to pidgeon hole the correlation between government debt and economic difficulties in one direction where the former is caused by the latter. In all reality you have a feedback loop, a viscious cycle.

Government Spending on things like oh say the Iraq War leads to deficits -->
Which Leads to increases in the money supply -->
which leads to lower interest rates -->
which leads to mal-investment -->
which leads to a boom -->
which leads to a bust -->
Government then increases Spending as response... and the cycle begins again....

So yes the current recession wasn't caused by the stimulus but can definetly be tied to Greenspans monetary policy and Bushs deficit spending which sowed the seeds for the mal-investment in the housing sector which allowed for a lack of worker mobility an over commitment of labor in construction which I don't have time to get into. So yes bad economic times can prompt government spending, but government spending can also lead to tough economic times. The answer to this feedback loop is to break the cycle and not spend similar to what was done in the recession of 1920. To anyone who's been following this in depth can see we're making the same mistakes we did in 1929.


At the end of the day Keyensians love to flip-flop causality sometimes just out of the academic challenge of doing so, but if the question is which begets which (production -> consumption) or (consumption -> production) it's easily visible with the following the anology.

(Production -> Consumption)

I baked a cake (production) so now I can eat the cake (consumption)

versus (Consumption -> Production)

I eat the Cake (consumption) so now I can abke a cake

As you can see in the second example the person ate a cake which did not exist, so it's essentially a non-sensical statement since cake MUST be baked first for a cake to be eaten. Consumption is the result of production processes being developed in an economy, although if you focus on getting everyone to consume like Keyensian economics does without disregard if the work people do actually produce (work programs, public sector jobs). Production must occur in order for their to be something to consume  and if not then you'll just find people fighting over more fiercly over a shrinking pie in which everyone has developed an insatiable appetite (Imagine an all you can eat buffet that never gets replenished).

Bottom Line... as much as I try to empathize and understand, the flaws in Keynesian Economics are too obvious and too many to ignore.

Saturday, August 21, 2010

Private Charitability

Private Charitability
by Alex Merced

One of the main justifications for many public services, especially ones that provide for the poor and needy is that the private sector can't or won't provide these services in enough quantities. Although, I would argue that when you coerce resources from the private sector to appropriate for these programs it shrinks the private sector meaning more people will need to participate in these welfare program which creates a self-destructive cycle. This does not this mean there is no way to provide for those who may need a helping hand without throwing a wrench in the mechanisms of capital accumulation and investment that lead to the prosperity we so enjoy.

There are many mechanisms outside of government to provide help such as religious organizations which often do community outreach and charitable work which benefits everyone even if you don't hold the same religious views of the institution. Also, people even independent of religious institutions start charitable organizations in the form of non-profits or even for profit groups.

The problem nowadays is that many rules keep religous organizations and charities from raising funds and actually using the funds to help society. The issue is not only does this make it hard for these funds to be raised and used but in many instances demotivates people to start these organizations in the first place. I know many people with great ideas and intentions just intimidated by the idea of filing the right tax forms and any laws they may violate accidentally for not meeting some health regulation or local ordinance in helping the public.

So essentially, government increases the amount of poor and needy by taking resources from the private sector but then prevents the private sector from giving as much of a helping hand as it could by having complicated red tape and tax laws.

Does this mean we have to wait to shrink government before the private sector can expand it's charitable efforts? No, you should still do your best to give to charities and volunteer your time cause it's a great way to learn lots of skills and meet the right kind of people to enrich your life and your career and of course the lives of others. For example me and my girlfriend put together backpacks and supplies for homeless kids for school for the coalition for the homeless.

As we put together these backpacks I got very into it and started throwing in more goodies than was on the original list of what the kids needed such as geometry sets, USB drives, different books on topics like economics. My girlfriend thought I was being competitive with her bag which I probably was and I was thinking why can't competition be harnessed to maximize the results from this event.

If the average person spends maybe $20 on this effort buying the cheapest supplies, how can we encourage them to do a little bit more? How about a contest, have local businesses submit a variety of gift certificates that whoever puts together the most generous backpack will receive. So now this gives an incentive for people who wouldn't normally participate to participate and those who would to spend a little bit more. Similar to the X Prize sometimes putting forth a prize for one winner will stimulate investment in many individuals.

So if I were calling the shots I would get government out of the charity business and simplify the tax code and regulations to make it easier for the private sector to be able to handle the load. Although if government must be involved how about giving out the money as a rebate for charitable work or as prizes like the X prize foundation.

One example of a rebate, if you mentor a homeless kid you get a rebate for the investment if he makes honor roll or gets accepted into college. If a town builds a community center it operates with a budget surplus a rebate for the costs of intially setting it up. What we must avoid most of all is subsidizing programs running budget deficits and programs which yield no results for this offers little to no benefits to the benficiary or society and only lines the pocket of political entrepeneurs.

Sunday, August 15, 2010

Labor Economics #4 - Unemployment Insurance

Labor Economics #4 - Unemployment Insurance
by Alex Merced

These days unemployment insurance has become more of an issue than it has in recent times. The debate on this issue seems to be misguided. To really understand the unemployment insurance issue, or the issues regarding any kind of insurance you must understand what insurance really is.

Many government advocates always discuss the role of goverment in providing a safety net for those who can't afford to pay for one themselves, this is the purpose of insurance. An insurance company pools the resources of those who have more to write contracts to cover the costs of unforseen risks for premiums that are far less than the cost of not having the insurance contract. This creates a mechanism to handle risk that doesn't deplete resources in the economy since the premiums from unrealized risks pay off the costs of those contracts which are exercised. (although due to corporatist/monopolist partnerships between insurance companies, government power has dimished the accountability of Insurance and other industries to it's consumers. an issue for another time...)

This is why many Anarcho-Capitalist such as myself see a stateless world as one where many insurance companies and similar institutions arise and compete to fill the place of the social safety net in the absence of government, with arguably much better results. One of my favorite writings on the subject is Robert Murphys "Chaos Theory".

Unemployment insurance specifically can be a useful service to help make the transition between jobs for individuals much easier, and in the grander scheme of things ease the pain when resources shift from one industry to another as the wants and needs of people change. The issue becomes what is best way to provide such insurance to individuals, the government or via private enterprise?

The Forgotten Role of Insurance in Risk

In assessing this situation is what is lost is that insurance has much great role to play than just the benefits received when exercising a insurance contract. Insurace also serves as a mechanism to internalize many risks and costs, and incentivize prudent behavior.

 Let's use the example of car insurance. The premiums you may pay for your car insurance factor in many different variable; your driving record, your age, education, the model of the car, even the color to assess the risk of you getting into an accident or having your car stolen. If you buy a Red Ferrari, the chance somone may want to steal your car increases and so does your insurance premium which creates a financial incentive to choose safer car which will less likely be stolen. Also, if you were to get into an accident and file a claim the next time you purcahse insurance your premiums will be higher which again creates an incentive to be a safer driver. Overall, the premium mechanism is arguably vital to having a safety net like car insruance not cause moral hazard.

 Let's pretend the government provided quality car insurance free or at a uniform fee versus what you would've paid in the private markets. The incentive to not buy the ferrari or drive safely are now diminished, cause you either didn't pay or didn't have a differential in what you would pay depending on your behavioral choices.

So it's not only about the benefit, but cost to have the benefit that helps regulate the abuse of the benefit. So now let's apply this concept to unemployment insurance.

The Moral Hazard of Unemployment Insurance

Under the Government provided system of Unemployment the employer pays the costs of insurance, very similar to the situation in retirement and healthcare created out of ERISA. The Premium the employer pays is based on a percentage of the taxable salary of the employee (which is an incentive to give smaller salaries), and is not keyed into in any way other risks such as...

- Does the Employer run a sustainable company that is fiscally sound (if not, the risk is greater)
- Does the Employee have a stable work history (if not, the risk is greater)
- What is the background/education/skills of the Employer/Employee
- What is the Turnover Rate of the Employer (higher, the greater the risk)
- How difficult is it find a similar job

Since there things are not priced into the premium, the premium may be below market or above market depending on the employer and their employee. Since the employee doesn't pay the premiums directly, they have no incentive to take a sustainable job at a company that's well run, because the unsustainable company will probably pay higher salaries which makes it harder for good companies to compete with reckless companies in purchasing talent. The reckless company may go out of business a year later but the unemployment benefit as a percentage of the higher salary may outweight the smaller salary at the sustainable job which makes it hard for modest growth sustainable companies to compete.

This is similar to deposit insurance and the savings rate, the more reckless banks will generally have a higher savings rate but since depositors don't pay their deposit insurance directly they will deposit their money in the higher savings rate bank which more than likely has some liquidity problem causing a whirldpool of good resources into bad places.

All this doesn't take into consideration the political ramifications of having government run unemployment insurance, as we see now with congress using unemployment as a fierce political issue to buy votes by extending the benefits well beyond what has been payed into them and was promised.

The Virtue of a Private Unemployment Insurance

If people could and would purchase their own private unemployment insurance, or employers voluntarily provided it from priavate insurance companies all the factors that weren't calculated into the premium now would. The insurance company would investigate the employer and the employee to assess the risk they both present in the risk of the employee becoming unemployed. So more risk, would equal high premiums leading to a lot of good incentives such as...

- An employer running a sustainably well run company who can't afford lavish salaries will be more competetive. The higher salary at the reckless company would also carry higher premiums, internalizing the risk of which is the more sustainable job. This would also be an incentive to be sustainable, cause it'll be hard to attract talent if working for the company generates high insurance premiums.

- The company would be incetivized to have a pleasent and safe work environment, cause not having one would increase their turnover rate which would increase unemployment premiums.

- The employee would have an incentive to be more prudent in choosing jobs, and to pursure more education and skills. Having a stable work history and lots of credentials and skills will only help them lower their unemployment premiums.

- If working in a niche industry that may take a year or two to find a similar job, the employee can choose to buy benefits beyond what's currently mandated (6 1/2 months) this allows the freedom for those who need more to get more and those who need less to get less.

The Bottom Line

Unemployment Insurance like insurance against any unforseen risk is a healthy institution to have, but the role these institution play in the economy is far greater than just providing benefits but also pricing in the risks of every actor into premiums internalizing many otherwise external costs. When government gets involved in the insurance business it often distorts this mechanism causing the externalities of these risks to remain external causing moral hazard and an economic drain from the increased claims from this moral hazard.

Saturday, August 14, 2010

Labor Economics #3 - The Minimum Wage

Labor Economics #3 - The Minimum Wage
by Alex Merced

One of the most sancrosanct bastions of Labor laws is the minimum wage, and if you want to go beyond this article in learning about it listen to Roger Garrisons lecture on topic from Mises U 2010. Essentially what I want to demostrate through a brief example is...

1. The Minimum Wage actually transfers wealth from the those at the bottom, to the people marginally above them, so it transfers wealth upwards instead of downwards like it intended.

2. The Minimum Wage Creates Unemployment

So let's imagine a world with 300 people in Labor force working at the current wages.

100 People working at $8/hr ($800 spent)

100 People working at $7/hr ($700 spent)

100 People working at $6/hr ($600 spent)

of course, the lower paid workers are the lower skilled and lower educated workers who may be payed more in the future if they learn skills and information on the job. What happens right now is that the economy can allocate work for the entire labor force at these wages, but what happens if we establish a minimum wage of $7/hr. Now our workforce looks like so...

100 People working at $8/hr

185 People working at $7/hr

15 people unemployed

The minimum wage law did not make these employers magically have more resources, so the $600/hr that was was going to the 100 laborers at $6/hr in the first scenario can now only afford to continue to employ 85 out of the 100 laborers leaving 15 unemployed since there is no more resources to employ them. Essentially the lower you are on the wage ladder the more negatively affected you will be by an increase in the minimum wage, it's those in between the bottom wage and the new minimum wage who benefit at the cost of those at the bottom.

(NOTE: One may ask why wouldn't the labor force reduce the wages of the $8/hr workers to keep the $6/hr workers? The answer is simple, the $8/hr workers add more value which is why they are payed a higher wage in the first place so if you had to choose between possibly causing a valued worker to quit from a  pay cut or laying off workers who add the least value you'd choose the latter.)

So this example shows how it causes unemployment, and how increases the wealth of a few at the cost of not those at the top but those at the bottom. So what happens to these unemployed people, they still have to find work so they may move to another location with a lower or no minimum wage in which they can enter the labor force at their skill/education level. Although, if these uneducated/unskilled people migrate from all the places with a minimum wage to this one bastion of freedom with no minimum wage it causes a huge concentration of uneducated/unskilled people in one place.

This explains why the places that are the most free sometimes seem to have some large concentration of uneducated people (a very gross and misplaced charachterization of many souther red states), not because freedom is backwards but because these free places are the only places that will welcome with open arms those from other locations who've been kicked out by wage laws, forbidden to enter the labor market and develop the skills to later make higher wages.

"Give me your tired, your poor,

Your huddled masses yearning to breathe free,

The wretched refuse of your teeming shore.

Send these, the homeless, tempest-tost to me,
I lift my lamp beside the golden door!"
- Statue of Liberty

Labor Economics #2 - Labor Geographic Mobility

Labor Economics #2 - Labor Mobility
by Alex Merced

 There is usually a decent job somewhere out there waiting, but the ability for someone to take advatage of that oppotunity also has to do with their willingness and ability to move to where the job is located. Like all capital, labor can be mal-invested for many reasons and this problem occurs out of the laborer actions themselves. Capital usally naturally moves to where it's needed, but if it does not in the form of labor or can't it can slowdown growth or a recovery. While many people will always be hesitant to move due to family, friends, and the life they'd leave behind I want to explore how policy can and usally makes this problem well... more problematic.

Problem #1 - Housing

In the US in particular they've made the pursuit of something they like to call an "Ownership Society" where more and more of the population owns homes. Although ownership of the land or house that you live in, can make it quite encumbering to make changes and follow the demand for labor leaving someone stuck in a bad labor market. So while well documented are all the bad loans, derrivatives, etc. from all the housing incentives in the US, less talked about in the media is reduction in mobility caused by pushing for more housing ownership by more and more people.

Problem #2 - Employer Benefits

If your someone who really enjoys the benefits that your current job provides you you may forgoe a better opportunity elsewhere (I guess it wouldn't be better if you didn't choose it). So one thing the government can do to make things worse is to make more and more services that you may have purchased individually intrinsically attached to employment such as what was done with healthcare and retirement in ERISA in 1974. So if legislation and at the time much higher tax brackets cause an overwhelming incentive for employer to take care of you instead of you yourself, then it'd be difficult to cut ties with an employer in order to keep those non-monetary benefits.

Problem #3 - Local Wage Laws and Taxes

Sometimes Labor doesn't need to move where the demand is, the demand can move to where the labor is. A good example of this is where people start web start ups in cupertino cause it's know for having a base of technology oriented labor. Although some businesses may not move their offices or operations to somewhere with a huge supply of labor with certain skills if the taxes are too high or labor laws too penalizing which actually tend to be the places that give labor the kind of government benefits where they wouldn't want to move from (I'm looking at you California), this is a bad combination of mobility reduction.

The interpersonal reasons why one may move or not move somewhere are endless, but government policy can often create harfmful manipulations of these incentives.

Friday, August 13, 2010

Labor Economics #1 - Sticky Wages

Labor Economics #1 - Sticky Wages
by Alex Merced

The next few posts I'll be writing will be a series on some aspects of labor economics which will mainly center around wages and upward mobility. In this initial part of the series I'm going to address one of the main Keynesian buzzwords, "Sticky Wages".

 John Maynard Keyes (read "Where Keynes went Wrong") makes the admission that it's plausible that an economy can self correct by allowing all prices to adjust downwards if the money supply is reduced for whatever reasons, but contends that there is a problem cause wages are "sticky" so this would make it difficult for businesses to adjust their inventories and prices to maintain the current labor supply since wages won't fall in line with everything else so unemployment ensues. This unemployment will then cause further contraction of the monetary supply causing the economy to just spiral downwards as Keyenes expounds on ideas first proposed by Irving Fisher which really are just echoes of antiquated mercantilist thinking.

 What I contend is not to deny that wages move slower than the prices of consumer goods, but if anything this should be a reason to want deflation not inflation. First let's look at the structure of production to explore why wages would move slower in either direction.

Let's say my structure of production looks like so...

Labor+Materials+Tools = Consumer Good

Deflation Scenario

So if the Demand for the consumer good increases I have three choices on where I can costs in this simplified scenario. For many reasons I may try to cut costs as much as possible in Materials and Tools since they are homogenous instead of giving up my trained skilled labor which is heterogenous. I may still have to ask my labor to take some level of a cut in pay but only after I exausted my ability to lower the other prices. So essentially I may have been able to cut my costs enough to get a drop in price in the good of 10% yet from cutting costs elsewhere only had to cut labor costs by 5%.

So if this is going on across the economy essentially laborers will have gotten an effective pay raise cause goods have dropped in price more than their wages did. Given if you look at editorials in times like 1870's or late 1830's when you had this sort deflation without massive unemployment (actual growth in the 1870's) going on, yet psycoligically many people felt things were bad cause they saw the nominal numbers going down so there is something to be said for the psycological state of people.

Inflation Scenario

So let's say the demand for my goods has increased cause the money supply has grown for whatever reasons. Since demand is increasing all over the economy, the demand for the same materials and tools I use will increase over different industries and firms that use those same tools. This widespread demand increase will cause an increase in the price of my materials and tools which I'll have to pass on to the consumer yet this increase will be larger than any raise I may give to my laborers in a attempt to prevent too much of an increase in the final goods price that would effect it's demand.

So basically due to increases in costs primarily in capital goods the price of the good has gone up 10% and wages went up 5% which if this is a widepread phenomena results a pay cut for the laborer. Again, psycologically they feel good cause they see their nominal wages going up without realizing their real wages are going down. This is essentially the story in any bubble or boom, except due to problems with CPI calculations inflation is usually understated.


If sticky wages are a real phenomena then deflation would be the much better environment for real wages and for the laborer. Although what is usally proposed by Keynesians and other types of leftist is to push for more inflation which actually hurts real wages yet psycologically breeds consent of the labor class since they only think in nominal terms. In order to have the benefits of deflation yet without the psycological pessimism, it would be a proper use of an economic figurehead such as a president to explain this phenomena to manage expectations and sentiment.

Thursday, August 12, 2010

Elaborating on the Austrian Time Preference Theory

Elaborating on the Austrian Time Preference Theory
by Alex Merced

I write this article after listening to Robert Murphys lecture Capital and Interest from Mises U 2010

While Listening to this having heard explanations of Time Preference theory plenty of times, I started having flash backs to an Austrian Scholars Conference lecture where Robert Murphey was actually giving a critic of the ATPT based on his dissertation, basically challenging the idea that a future good is always less valued than a present good. This made me start to think, I do understand ATPT, but I'm not sure if it fully explains why this preference exists fully other than a sort of hedonistic view of human nature to want to satisfy all it's wants now. Then again Patience is a virtue, and one can look at virtues as efforts to fight human nature.

First off let's recap the ATPT for those of you unfamilar...

Austrian Time Preference Theory

The Bottom Line: Present Goods are always more valuable then Future Goods

Example: Pre-Sale Tickets (future good) are cheaper than tickets at the door (present good)

This is an important theory for explaining the Austrians view on Capital and the Interest from Capital. For example I have a $100,000 and I have these two choices which would I make.

Buy $100,000 of Bonds and invest them in Bonds that yield 5%


Buy a $100,000 of fishing supplies expecting to catch enough fish to make $110,000 (10% yield)

So you see here the capital I have I'll put towards the fish equipment cause In the end I'll have a greater yield from my investments, this is how capital naturally gravitates towards it's most productive purpose. If my calculation was correct I can now buy another $100,000 of fishing equipment and next year catch enough fish to make $220,000. As you can see the more I go through this process the more capital I accumulate and the better my life gets even though no new science or technology has been developed, cause I've accumulated capital and can continue to re-invest that capital for interest.

This is what seperates developed countries from developing countries cause they may only be able to afford $20,000 of fishing equipment so a year later they'd only have $22,000 so it'll take some time and re-investment before the capital accumulation brings them to the developed level.

So where time preference theory comes into play is in the issue of why would someone pay me $110,000 for the fish if they can instead get the same fish by buying the Fishing Supplies for $100,000 and save themselves the $10,000. The reason is cause they have a time preference, they don't want to have to wait for a year of fishing to save $10,000 so they rather pay the extra $10,000 to have the fish now. So as we stated, the current good, these fish I've already fished is worth more than the future good, the fish they'd fish if they made the same capital investment.

Ok, so that should sum it up, so now for my addition...

Is it a "Time" Preference or a "Tangibility" Preference

I think the time preference exists not cause there is a time bias, but because there is a tangibility bias. A future good isn't as tangible as a current good so provokes less of a reaction. This Tangibility preference can not only be applied to intemporal scenarios but also other scenarios of differeing subjective values.

Example 1:

"The Stimulus Bill has saved the Jobs of Teachers and Public Sector Workers"


"If the Government had not gotten involved new jobs would've been created from capital reformation"

You ask the typical person which statement seems more plausible, they'd more than likely say the bizzarre keyensian statement I put up first. Why, it's more tangible to them cause they see the jobs that would've been lost, but they can't see the jobs that were prevented from being created. Now of course an Austrian is trained to understand opportunity cost so the increased tangibility from that understanding may have them choose the second statement.

Example 2

"Spend 10% of Income on Your Loved Ones"


"Have 10% of your income taxed which hypotheically benefit your loved once objectively just as much"

Which one you'd think a person would subjectvely value more, the first statement cause the results of this same expenditure is tangible, this would probably be true if the tax money got spent in the same way at the same time cause of it's tangibility. Although a left wing Keynesian might actually value the second statement cause they've been trained to value the benefit to society of impersonal expeditures like in the second statement so them it'd be more tangible.

So in conclusion, I feel time preference is a preference that exists but because of the tangibility of intemporal value. I would expect that a Austrian who is trained to think intertemporally would prefer future goods on occasion, cause it's more tangible. For example we prefer the future value of recession that the current good of stimulus spending. While it's a bit more complicated than simply jobs now versus jobs later a lot of Austrian theory actually emphasizes long term benefits over short term.

If you agree, we can still call this the ATPT, it'd just now stand for the Austrian Tangibility Preference Theory

The Federal Reserve, Price Stability, and CPI

The Federal Reserve, Price Stability, and CPI
by Alex Merced

While here at I've been discussing several economic and philosohical concepts regarding individualism and Liberty, no war is won over night yet strewn across many hard fought battles. The battle at hand is similar to the battle fought by Andrew Jackson/Martin Van Buren against the entrenched banking and government interests protected by a central bank. Aiding in the battle against these interests was treasury secretary under both presidents Levi Woodsbury who I'm now currently researching to write a book on his role in this time period and in the panic of 1837. Any primary sources you can direct me too on these subjects please send over.

So to understand the battle ahead let's go back understand why the fed was created, what was the feds purpose, and their performance.

Why the fed was created?

In the early 20th century the country was subject to very regular banking panics, a large part due to branching restrictions on banks known as Unit Banking. Although you can take a look a look at the Canadian banking system at the time which didn't have these restrictions (and no central bank) did not have the same problem with banking panics as we did. In this interview on EconTalk, economist Charles Calomaris discusses this part of history in building the context for the recent financial crisis.

Part of what really made these banking panics frequent and regular was that agriculture was a bigger portion of our economy that it is now. So in farm towns, between harvests you'd have panics at the local bank. So there were two options on how to deal with this problem:

1. Lift the Branching restrictions to allow banks to diversify their deposits geographically
2. Create a central bank to inject liquidity into these banks between harvests

As documented in the book "Creature from Jekyl Island" by Edward G Griffith many prominent bankers got involved in the creation of the policy that followed to address this problem. Bankers did not want to the extra competition that would come from having banks branch out, so the central bank was the favored route since it preserved bankers local monopolies.

In beginning (1913) the Federal Reserve only lent to banks through it's discount window where banks could bring "high quality" collateral (usually in the form of government bonds/treasuries) in order to get overnight loans to meet their reserve requirement, which is a fixed percetage of their liabilities they must have deposited at the Federal Reserve (currently 10%). This was for the most part the extent of the Federal Reserves actions till later on.

In 1920 a large Recession took hold in the economy during the end of Woodrow Wilsons administration and the beginning of Warren G Harding. As Harding took office, his Secretary of Commerce (Herbert Hoover) and his Secretary of the treasury (Andrew Mellon) did not see eye to on what actions should be. Herbert Hoover advised that Harding should conduct protectionist high wage policies and also advocated spending increases to which advice Harding ignored and allowed deflation to take hold and unemployment had started going down. The federal reserve had taken little action, cause at this point they had not yet entered something called open market operations.

Come 1924 the Federal Reserve was having problems covering it's operation costs with only the proceeds from loans of the discount window, so it began the purchasing and selling of government debt better known as open market operations. These OMO's had great effects on interest rates and mid-decade began to push interest rates down from these actions which arguably triggers the Austrian Theory of the Business Cycle which I explain in this video.

This leads to the recession of 1929, yet now the president was the former Secretary of Commerce Herbert Hoover. Now that he was the one calling the shots, he conducted the expansionist schemes he wasn't allowed to under Harding and Coolidge. Having increased spending to historical highs, enacting the smoot hawley tariff, and establishing informal cartels in most industry to prop up wages; the economy had only worsened unlike in 1920 which saw a relatively speedy recovery.

As things get worse, a Charismatic contender from the opposing party comes along calling Hoover out and extravegant spending and intervention. This candidate, Franklin Delano Roosevelt, wins handidly and yet increases the spending and intervention well beyond his predeccessor (sound familiar).

At this point the rest is history, but now you have a foundation in where the Fed came from, now let's talk about their dual mandate.

The Federal Reserves Dual Mandate

The Federal Resere has dual Mandate to Carry out...

1. The Pursuit of Price Stability
2. The Pursuit of Full Employment

So let's see their score card since 1913...

- Recession in 1920 w/ double digit inflation
- The Great Depression in the 1930's one of the most dire economic event in history
- Major Rationing and Price Controls during World War II
- Intense Stagflation in the 1970's
- High Interest Rates in Response to Inflation in the 80's
- Dot Com Bubble at the turn of the Century
- Housing Bubble in 2008

Let's also sprinkle on a series of mini recessions in between all of that... although to be fair many of those recessions may be over-pronounced due to how GDP is calculated and the effects of deflation, for example the 1870's was known as a long depression but was actually one of the most robust periods of growth in the country. So when looking at a recession one must take a look with a critical eye.

Although, one can clearly see even if the federal reserve was the benevolent overseer of the economy with which it's avocates paint it as, the concept of price stability is a flawed one. Often price drop due to productivity increases as I explain in this article on deflation, this is a great thing that you can now buy the same goods for lower prices and have more to spend elsewhere in the economy. Although when the fed conducts policy for price stability it uses a method called inflation targeting, which very often is keyed to s statistic called CPI, the Consumer Price Index.

What is the Consumer Price Index?

By current day definitions, we look at inflation as an increase in the prices around us and the Keynsian/Monetarist Orthodoxy believes that a moderate amount of inflation is necessary so the federal reserve should target it at some arbritrary number like 3%. So how do we know how much price inflation is? We use CPI which takes a basket of goods and measures it's month over month price increase, so if CPI is up 3% then the basket of goods has increased in price 3%.

So what is in the basket of goods?

We take all the goods that an AVERAGE purchase purchases using the AVERAGE price from many urban cities

There are many obvious problems with the calculation of this number

- Who is this average person? How do we know what goods they buy?

- If we did know what good, don't those good change over time, so the basket of good must change over time as well which you might remember in any science class is a problem, cause if you constantly change your control variable your information is useless.

- Don't prices even differ in the same city, and what about replacement goods, if a price goes up of one good I may just replace it with another good essentially negating the effect of the price increase in my daily life.

- Also how about regional cultural difference, I imagine the prices in New York will be higher than prices in Detroit, and also the brands of goods and specific good will change due to regional cultural difference.

This all hints at the fundamental problem with all Macroeconomic indicators they destroy valuable information needed to understand why certain phenomena occurs. If I see an increase in CPI, sure this tells me certain prices have gone up but without further inspection I don't know which ones and where.

So in General, the Federal Reserve acts like all prices go down and up together uniformly and adjust the money supply to get CPI to hit their target which ignores so many regional factors that it ends up causing regional and microeconomic problems... but as long as those aggregate numbers like CPI and GDP look good, right?

For example, what if CPI drops and it's actually due to productivity gains in technology (cheaper laptops), it'll show up in CPI as a drop in price which doesn't fit the Federal Reserves definition of Price Stability so they put money into the economy to push the price back up to hit their inflation target and essentially erase that productivity gain. If this had not occured, the savings for people from that productivity gain could of been use to buy other goods which would allow more sectors of the economy to grow. Instead all prices have gone up, and generally wages move slower than consumer prices so if prices are increasing wages arn't increasing fast enough to keep up for a net loss. Vice Versa, in a deflation prices more down faster than wages move down, for example if prices dropped 20% and wages drop 11%, you're actually able to buy more stuff which will then again re-stimulate the economy.

Of course the Federal Reserve would never let prices drop for political reasons which I explain in the Deflation article I linked to earlier.

How about maintaining Full Employment?

Another bizzarre goal, cause for a economy to have a healthy transfer of resources from growing industry from a matured industry you'll have some frictional unemployment. For example as the industry for audio cassette manfuacturers died down unemplyment had to come from that industry before those jobs got replace with jobs manufacturing Compact Discs and other goods. So it's not neccessarily imperative to force the economy to constantly have little to no unemployment, (usally they have an arbritrary target). So by injecting money into the economy resources get diverted from transitioning industries into something else which may or may not be sustainable such as New Internet Start-ups or New Housing Construction, get the picture. It's not that the money wouldn't of been invested, it just would've been invested somewhere else that was sustainable. So if jobs get create in an unsustainable industry instead of an sustainable industry their may be an increase in jobs and consumption until it's realized that the job was unsustainable (AKA a recession).

Bottom Line:

While historically it has been shown that an economy can thrive without a central bank (early 1900's canada) or thrive during deflation (1870's USA) we still insist we cannot exist without a Central Bank who's mandates contradict basic economics who operate based on statistics that tell them very little about what is actually going on it the world. Maybe it's time we start taking economics and history a little bit more seriously...

Wednesday, August 11, 2010

Big Government (or any Government) Will Never Lead to Prosperity

Big Government (or any Government) Will Never Lead to Prosperity
by Alex Merced

What we constantly get told in some form or other, is that you need government for things to work... but in all reality things work in spite of government. It's like when your a kid and you want something, all the rules in the world won't stop you from trying.

For Example, two countries that are catching up very quickly if not surpassing the US and Europe in economic power are China and India, arguably their governments are bigger and more coercive in scope of control. You can take the economist approach and see that spending as a share of GDP is vastly less than the US, but what I want to take a look as is the rules they govern with, not so much the spending.

China: By having it's non-democratic central government, the current leadership in China has LIBERALIZED a lot of it's economic policy and up until recently has focused on having a savings economy. While it's intervention in the supply of savings has and will cause problems, it couldn't of done it without somewhere to invest those savings in which the US more than glad to play the role which arguably leads to more problems for the US as the Spending economy. Another aspect to take a look at is Hong Kong, once the best bastians of Free Marketeering on the globe which played it's role in sparking the economic growth in the region if not being the Seed that grew into it.

India: This country is known for some of the largest amount of red tape and barriers to entry of any country, with buildings filled with stacks of pending applications for all sorts of things. Yet no one can honestly make the argument that the excessive beuracracy has led to it's quickening growth. So while the same type of Liberalization we see in China isn't in india, a system of corruption and bribery has developed to supercede the beuracracy and foster a freer market... essentially a black market for merely "permission" to enter and participate in commerce.

People will never be diverted from purposeful action no matter what the rules, every rule in the US either eventually is found to have loophole or has some built into it initially. What keeps people honest is their respect for boundries which comes from their own self developed ethical framework. So if we care about what people do in their social and business lives we may affect more change by discussing principles to live life by than about which rules we should establish that people will ignore if their principles allow.

Capitalism and Democracy

Capitalism and Democracy
by Alex Merced

Detractors to Capitalism often will make satire of the idea of "the invisible hand" as if Free Market Capitalist believe there is an actual invisible hand. The Invisible hand is a metaphor for much more beautiful and plausible idea; that the actions and choices of every individual under no coercive influence can best manage scarce resources. I mean to anyone who calls themselves anti-establishment, how can this not be a beautiful idea, the lack of central power, the freedom from a top down world. Detractors will then make arguments about "Market Failure" essentially making claims that the market doesn't achive impossible and often impracticle goals such as EQUAL income distribution.

Proponents such as myself are always glad to point out any problems that do exist tend to often if not always come from the results of barriers to entry through prohibitions and costly regulations that inhibit the amount of choice and diversity that makes a market works to it's best ability. Essentially to believe in Free Market Capitalism is to believe in a sort of Market Democracy where instead of decisions being the votes of all individuals but by the purposeful actions of all individuals.

Detractors will claim that you can't trust people to make the right decisions with their resources and their lives, so of course you need a coercive foce such as government to correct these "failures". In order to choose who sits in government to make these corrections detractors will be proponents of a democratic process... believing that the choices of all individuals will put best people in power, basically a market for government power. My questions then becomes, if you don't believe peoples decisions individually can manage resources then how can you claim that those same individuals decisions on who to manage will be any better?

The counter arument would be "Like the markets, we believe it should be a regulated process", thus comes all the campaign finance rules, ballot access measures, and other regulations of the democratic process. Although, if this is a market process these regulations should achieve the same results we see in the market limiting choice thus limiting the ability for individuals to truly take actions that make the market mechanism work at finding the most valued result.

Bottom line...

If you can't believe in Markets, how can you believe in Democracy?

Monday, August 9, 2010

Capitalism, Socialism, and Voluntarism

Capitalism, Socialism, and Voluntarism
by Alex Merced

People blame all the worlds problems on it's systems of resource management, for in the end that is all that Capitalism and Socialism are, systems to managing scarce resources. Quality of life, happiness, joy; these are all things that are not quantifiable, and independent of how resources are managed. Someone in the most tyrannical despotic land can still find joy and happiness cause it's internal and has to do with ones perception of the world around them. So even if we agreed which system of resource management is better, does this mean people will be happy? Probably Not.

If you operate in a system that is objectively seen as "better" by others yet you subjectively see as "corrupt", "tyrannical", "immoral", and many other adjectives; you'll be unhappy since you feel forced to comply with something to which you not consent. This is the overriding issue than that of economics; that of consent. As long as their is a government imposing any system of any type on a entire population there will be despair and unhappiness from those who do not consent to participate. The road to happiness is that of your choosing.

This is the true Anarchist position, whether you call yourself a Anarcho-Capitalist or an Anarcho-Socialist or one of the many of other breeds of anarchist, your still advocating a system. The root of what makes anarchist different is the belief that participation in any of these systems should be voluntary, if everyone consents to play by the rules then any system is arguably workable like any board game is playable with those who are willing to follow the rules. No system can work when imposed on unwilling participants.

Arguably there is a case to be made that multiple communities running different systems that people volunteer in would actually have a positive synergy. If you had one voluntarist community of capitalist they would foster it's citizens competitive and innovative spirits and prices. If there was a neighboring voluntarist socialist community it would offer a place for those who don't want to or can't compete in the competitive capitalist system, yet can still benefit from the innovations of the capitalist society and not mis-manage resources as much cause of the prices set by the capitalist society.

Instead of focusing on which is better and who is right, how about we focus on individual liberty and how voluntarism and liberty leads to beautiful synergy.

Saturday, August 7, 2010

Summarizing Jorg Guido Hulsmann's Lecture on Deflation

Summarizing Jorg Guido Hulsmann's Lecture on Deflation
by Alex Merced

Listen to his Mises U Lecture on Deflation

One of my favorite topics and debates is the Inflation/Deflation debate, of Hulsmann has written extensively about putting him in my top 5 misesians (Murphy, Block, Woods, Hulsmann, and Salerno). This year his lecture was recorded much better than last years, so I was able to gleem much more of the finer points. Ok so let's sum up his argument about why growth can occur during deflation...

Three Examples Of This Good Deflation in the US:
1839-1843: Had Deflation in which unemployment remained near full employment
1870's: Where you had sustained deflation, and the most steady and robust growth in American History
1920's: Where the country went into recession, and allowing it deflate led to a speedy recovery unlike 1929.

(NOTE: In his lecture Hulsmann consciously decided to stick to the current mainstream definition of deflation as drops in the price level, not the typical austrian definition as a drop in the money supply, there is a difference.)

How do Prices Drop from Productivity Gains:

A pully system makes accomplishing a task easier by extending the distance of which I must exert force. So for example to pick something up 3ft I may have to use a force of 10, but if I use a pully and pull 10ft worth of string and only need to use a force of 3, so now with a force of 10 I can pull the block up 9.3ft. As you can see, by extending the distance the productivity has increases, and the structure of production works the same.

For Example Let's Use Hulsmanns Example of the Farmer

Structure One - The Farmer Plows the Field by Hand

Structure Two - Someone Raises the Horse -> The Farmer Uses the Horse to Plow the Field

Structure Three - Someone Mines Steel -> Someone Assembles Parts from Steel -> Someone Assembles the Parts into a Tractor -> The Farmer Uses the Tractor to Plow the Field

So looking at these three it should be obvious structure one would be the most expensive structure of production. In this scenario the farmer would either lose a lot of time plowing the fields himself, or money having to hire many worker to plow for him, so the end good would be more expensive. Although, in structure three, the farmer may be able to plow the whole field by himself in little time with the tractor so his goods would be cheaper. So as the structure of production grows, production becomes more productive, which means the goods can be cheaper, this is the kinda of productivity based price deflation we see in technology all the time.

Next Point: What if deflation occurs cause changes in the supply or demand for money? (IE people want to save more)

In an Equity Based Economy (people + businesses pay cash, little to no debt in the economy) - Producers who do not anticipate the price deflation with lose money when they can't sell their goods at the previous market price. In order not to lose money again the producer will renegotiate the costs up the structure of production making the whole structure nominally cheaper to adjust to the deflation to maintain the same profit margins. If the producer does anticipate, he may stay out of the market to not lose money and wait till some people have in order to negotiate the costs of structure of production. At the end of the day, after adjusting the structure the producer and all the higher stages of production will still have a similar margin of profit after adjusting.

In a Debt Based Economy (people+ businesses incur debt to purchase goods) - This is more painful since the debt's nominal value doesn't automatically go down with prices, so it's difficult to service the debt on the slimmer profits. Although, just like the structures of production, if the lender and borrower both want to continue on they'll renegotiate the principal (original money lent) of the loan probably at a higher rate of interest so it can be serviced in the equilibrium price level. Although not all lenders have the foresight to renegotiate so there will be a period of massive bankruptcy of borrowers and lenders purging the non-sustainable debt leaving the economy with a sustainable foundation. In the end though, new market entrants will surface with the lower costs of business to continue the structure of the production.

Final Point: Why do the elites and powerful fight so hard against deflation?

People need resources to gain power, those who are most powerful and elite in society more than likely have incurred lots of debt in the process of attaining that power. If deflation takes hold, while it doesn't change the overall structure of the economy it does ravage the elites and powerful as they go bankrupt not being able to maintain their large debts, and brings upon a proverbial political power shift to those who saved and acted responsibly under their reign of power.


Not only does deflation not destroy an economy, it actually can make it more robust as seen by historical evidence linked to at the the top. Deflation truly threatens the elite who's policies and reign causes the massive inflation that the deflation corrects, so it plays a very healthy role in making sure young fresh responsible people move up the power ladder while the old corrupt irresponsible power of old is punished for their mis-use of power and leverage.

Friday, August 6, 2010

A Respone to Peter Kleins Lecture on Entrepeneurship

A Respone to Peter Kleins Lecture on Entrepeneurship
by Alex Merced

This is a Response to Peter Kleins Lecture on Entrepeneurship

In this lecture Peter Klein does a great job discussing different aspects of defining the entrepeneur, so to sum up two of the main definitions discussed.

Mises - The Entrepeneur is those who employ certain means for uncertain rewards, and an Entrepeneur Promoter is someone who is eager to change the structure of production by employing those certain means, (something to this effect, listen to the lecture for a better explanation from Klein)

Schumpeter - The Entrepeneur is someone Who introduces something new to the economy and destroys the current equlibrium leading to a new one. (For example, If you introduce DVD's, the need to produce VHS's will change, so now the economy must adjust.)

Both Views on Entrepneurship get at the same point, that the entrepeneurs action will change the structure of  production, though mises view is more equilibrating (the entrepeneur is aiming to satisfy exisiting demands with good and services) while Schumpeter is disequilibrating (the entrepeneur destroys current demands and creates new one). Both are valid and seemingly accurate views depending on how you define many of the term associated, although understanding multiple frameworks sure helps to notice trends that may not be as visible in another framework.

I don't know where I originally got the definition that I've always used in my thought process and in my book, "Economics and Liberty: a Pocketguide for Beginners", but I'd like to spend sometime refining it and creating another framework that may be useful in assessing different situations.

Capital - The means of pruduction, a party can have title to the ownership, control, and liability of capital, and can give title of each to another party.

The Enterprise - An entity which has control and title to the liability over a pool of capital from entrepeneurs and investors.

Entrepeneur - The person who assumes the liability of the enterprise and makes decisions on how the capital is put to use for production. The Entrepeneur may give titles over their capital to the enterprise for which he assumes liability.

Investor - A Person who gives title to control and liability of their capital to an enterpise yet keeps title over ownership, giving them claim to interest/profit from that investment.

In this framework, what truly seperates the entrepeneur from an investor is liability and control for production decision. This framework  I like cause it treats liability as property like anything else, and like a car you must find somone else to take title to it. In this framework it's easy to see how a C Corporation is illegtimate since instead of transferring title of the liability, liability has non title owner but the legal structure of the C Corporation.

I still got to to refine a this all little bit more, but thoughts and critics are welcome.

Wednesday, August 4, 2010

A Response to Peter Kleins Lecture: Corporations and the Free Market

A Response to Peter Kleins Lecture: Corporations and the Free Market
by Alex Merced

Listen to Peter Kleins Lecture here

 You've might have read in previous posts on Liberty is Now that I am one of the Libertarians who criticize corporations role in the free market. Although Let me make a few quick bullet points as far as where I do agree with Kleins lecture:

- I do agree that Limited Liability is not in itself illegitimate, through mutual contractual agreements one can delegate liability without special legal entities. Although, I think of liability as something you own, so through a contract your can transfer title to that liability, but unlike a C Corp it can't be completely separated from ALL owners, at least one owner will have to take title to the liability which is why a Limited Partnership I think is more akin to what is possible in a free market than a C Corporation.

- I agree several mechanisms prevent CEO's and other firm managers from being lazy, and making sure they are competitive, but this is not really from where I attack C Corporations.

The Premise of my Critic:

That due to the separation of management and liability unique to C-Corps that publicly traded companies are inherently unsustainable cause everyone in the checks and balance chain has short time horizons for example:

- The CEO and other Officers don't necessarily have ownership (though a lot of them do), although the overriding incentive is to keep their job, which means to please to shareholders proxy, the Board of Directors.

- The Board of Directors once again may or may not have ownership, but the overriding incentive is to keep their directorship and to do this they need to please the shareholders.

- Due the ease of getting in and out of an investment in a public company, investors tend to have short time horizons and will want short term gains, they don't care about the long term since they'll soon enough sell it and move to the next investment. So if Directors and Officers make decisions for the long term sustainability of the company that adversely affect the short term dividend and growth outlook be sure the shareholders will act to change the board.

Counter Point: Wait, won't a lot of this money be managed by professional money managers who should know better?

- Money Managers for Mutual Funds and Pension Funds also don't necessarily have ownership and are judged by their performance on the short term. So to keep their jobs, their time horizon is kept quite short, which is characterized by the number of pension funds that ran surpluses during bubbles but didn't change the allocation to more prudent variations to lock in those gains in order for the manager to keep their job. Now, most pension funds are under funded for the benefits they need to pay out.

Why is the Limited Partnership Better for Corporate Governance?

The General Partner - The people at the top of the totem pole making the highest decisions regarding the business has unlimited liability, so with that being the case, they have a stake in the long term sustainability in the company.

The Limited Partner - Has legitimate limited liability, yet can't liquidate their shares at a whim, they will need to find a buyer and get the approval of the general partner. Since the shares are less liquid, the limited partner wants the company to have a stable sustainable value so the value persists till he can find a buyer for their shares, meaning the investor now has a stake in the long term of the company.

Other Factors to Consider for Corporate Governance:

- To Moral Hazard of Public Unemployment Insurance on employer and employee incentives, versus the sustainable incentives of privately purchased unemployment insurance

Employee: If the employee has to pay higher premiums for more unsustainable jobs, then he might take a lower wage sustainable job cause he'll bring home more wages after the premiums, which will incentivize talent to go to sustainable firms not high paying unsustainable firms. Also if you work in a field where jobs are scarce, private plans can allow you to purchase more coverage beyond the 6 month standard at no cost to the tax payer. Employees can also lower their premiums by becoming more skilled and educated, since these would lower the risk of job loss.

Employer: If the employee won't work for the employer cause premiums are too high, this is an incentive for employer to develop a sustainable job atmosphere and company to lower those premiums.

- The effect of Corporate Tax Laws  many of the incentives for bizarre corporate expenditures is that they are tax write offs, and it's better that the company spend it on golden curtains and high priced furniture and than let the government take the same money from them in taxes.With simple tax reforms, corporation would have an incentive to be more frugal and let that money trickle to the bottom line for larger dividends to investors.

Monday, August 2, 2010

Addendum to Robert Murphy's Lecture by Alex Merced

Addendum to Robert Murphy's Lecture 
by Alex Merced

This is just some comments to add my two cents to Robert Murphys Responses to Critics of Austrian Economics.

Critic: How come unemployment wasn't the worst in the states that had the worst housing busts if it's a mal-investment problem?

RPM: The data actually is more in line with the Austrian Theory if you widen the time frame for calculation from the peak of bubble.

My Response: Just cause unemployment doesn't follow the size of the local busts means nothing, the mal-investment is only the seed who's roots implant itself all over the economy in different ways. Since wages increases due to the bubble, industries grow in areas not related to the bubble industries cause all industries suffer a mini bubble from the consumption boom from the high wages that originate in the bubble industry and spread elsewhere (how I'll explain in my response to the next critic). Another factor for differing state data is state and local legislation and culture which might magnify or dampen the effect of the bust.

Critic: If Mal-Investment is the problem during the bust why do consumption and investment move together during the bust and boom, why isn't their unemployment during the boom?

RPM: Murphy does a great refute explaining how people who take on these new higher wage jobs in the bubble sector don't realize it's bubble sector so they consume with the assumption that they'll make those wages forever. He also makes an amazing point that you don't have unemployment during a boom cause no one is losing their jobs but instead leaving their jobs for "seemingly" better ones, while during the bust people are losing their jobs and try to find another at a similar level so it takes time before they adjust their expectations. (I elaborated a little on RPMs response, listen to the lecture itself, it's really good)

My Response: The Only thing I would add it that when people leave their jobs for higher wage jobs in the bubble sector, to attract replacement labor all other sectors will raise their wages making it seem like the economy as a whole is doing well. Although, these wage rises are not cause of productivity gains, but because labor supply issues so this puts more pressure on the price inflation seen on the bubble as businesses charge more for their goods and services to pay these higher wages. So this wage competition aspect of the bubble is what helps systematize the bubble and dig it's root into the rest of the economy, cause now all jobs are paying unsustainable wages to compete with the bubble sectors wages.

Critic: Can the ABCT occur absent of central bank, and during a 100 percent Gold Reserve system?

RPM: Murphy Wrote an article which I read, which he brings back up here during the lecture. Basically he doesn't come down on either side of the question but instead makes Rothbardian arguments for both sides. Read the article to see both his arguments.

My Response: What I want to say that the Austrian business cycle as it's commonly thought about can't happen in a 100% reserve gold standard system cause of one crucial element... expectations. One thing that drives bust from low rates is the expectation of those rates persisting or the money supply continuing to increase. In Murphys example, someone comes upon a huge cache of gold, but this is a one time injection of money and yes there will be price adjustments to all goods from the increased money supply, but I doubt mal-investment will occur because the expectation that he'd continually find huge deposits regularly isn't a logical expectation. Under our current system, it's very logical to conclude the fed will continue to prime the pump, so these expectations drive the bubble behavior. In the end, with 100% reserve banking there is no way to expect a predictable trend of money supply growth to allow the bubble expectations/speculations to be held long enough for a large systematic collapse.


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