The Politics of Liberal Economic Policies

Posted by PITHOCRATES - November 18th, 2013

Economics 101

What doesn’t Kill You Makes you Stronger

They say what doesn’t kill you makes you stronger.  And you can see that in military basic training.  There have been some good movies showing what military basic training is like.  Perhaps one of the best is Full Metal Jacket.  Where Gunnery Sergeant Hartman played by R. Lee Ermey wasn’t acting as much as reliving his days as a Marine Corps drill instructor.  Watching it you may come to hate Sergeant Hartman for he was pretty sadistic.  But they didn’t design basic training to be a pleasant experience.  They designed it to prepare recruits for the worst thing in the world.  War.

In the miniseries Band of Brothers we follow Easy Company, 2nd Battalion, 506th Parachute Infantry Regiment, 101st Airborne Division, from basic training through D-Day and to the end of the war.  Airborne training followed basic training.  And was harder.  Fewer people make it through airborne training than they do basic training.  Ranger training is even harder.  And fewer people make it through Ranger training.  But airborne units and Rangers get the more difficult missions in combat.  Because they can do more.  For their training is more difficult.  But it didn’t kill them.  So it made them stronger.

Perhaps the most difficult military training is the Navy’s SEAL program.  Where if they get a good class of recruits they may have 1 in 10 complete training.  For it is that hard.  In fact, some have died in training because they refused to give up.  That’s why you will find few tougher than a Navy SEAL.  They are tough.  And they never quit.  Which is why we give them the most difficult missions to complete.  Missions that others would find impossible.  Proving that the more brutal and difficult training is the stronger and more able we get.

During the 20th Century the American Left has tried to replace Rugged Individualism with the Nanny State

Those who founded this nation were tough people who worked hard and never gave up.  They provided their own housing, food, clothing, etc.  If they needed something they figured out how to provide it for themselves.  They worked long hours.  Survived brutal winters and hostile environments.  But they never gave up.  In fact, they raised families while doing all of this.  With no help from government.  As there were no government benefits.  Yet they survived.  Even prospered.  For what didn’t kill them only made them stronger.  These rugged individuals could do anything.  And did.  Which is why the United States is the leader of the free world.  And the world’s number one economy.  Because of that rugged individualism.

This is the way America was before the progressives came and softened us.  And made rugged individualism somehow a bad thing.  Beginning with Woodrow Wilson.  Then FDR.  LBJ.  And then President Obama.  A long line of American presidents who eschewed individualism.  And thought in collective terms.  When the Americans rejected socialism they gave us progressivism.  When we rejected communism they gave us liberalism.  The 20th century has been a tireless attempt for those on the left to replace rugged individualism with the nanny state.  With their brilliant selves in power.  Managing the economy.  And making life fair.  To undo the unfairness of laissez-faire capitalism.  To make the United States better.  And more according to their vision.  Just like the socialists did.  And the communists did.  Yet no socialist or communist state became the leader of the free world.  Or the world’s number one economy.

Those who lived in those socialist and communist utopias learned one thing.  It was better to live someplace else.  And their ultimate destination?  The United States.  Yet those on the left refused to believe that life was worse in those states where they put people first instead of profits.  Like that unfeeling and cruel laissez-faire capitalism did.  Which is why Wilson, FDR, LBJ and Obama worked tirelessly to move the United States in the direction of socialism and communism.  Because they cared for the people.  Or the power they got by making so many people dependent on government.

Someone receiving a Comfortable Level of Benefits will not be pushed to Leave their Comfort Zone

So is it about the power or that thing about helping people?  What is it exactly that progressives/liberals really want?  Well, we can look at the historical record to determine that.  By looking at a point in time when America really changed.  With the assassination of JFK.  JFK’s chances of reelection weren’t great.  Which is why he went to Texas.  As he needed LBJ to deliver Texas to the Democrats.  Instead of electoral victory, though, he fell to an assassin’s bullet.  The great outpouring of grief and love for their fallen president exceeded the love he got before the assassination.  The heightened emotions allowed LBJ to pass the many programs of the Great Society into law.  In the memory of JFK.  The greatest expansion of the federal government since FDR’s New Deal.  Making the welfare state the largest yet.  In an attempt to put people first.  Not profits.  In fact, LBJ declared a war on poverty.  By providing government assistance to lift everyone out of poverty.  And he championed civil rights.  LBJ was going to make the United States that utopia socialists and communists always dreamt about.  For everyone.  Blacks.  And whites.  Especially blacks.  Who were suffering great discrimination then.  But things would be different for them.  Starting in the Sixties everything was going to get better.  And how are blacks doing today?  Well, if you use employment as a measure, not good (see Table A-2. Employment status of the civilian population by race, sex, and age by the Bureau of Labor Statistics)

Unemplyment Rates by Race Age Sex Rev 2

The federal government has done a lot for blacks.  More than any other minority group.  Affirmative Action was to correct all past wrongs.  By making it easier to get into college.  And to get a job.  Yet we don’t see that when looking at the unemployment numbers.  In fact, the group the government does the least for—white men—is doing the best.  They don’t need any help because they won life’s lottery.  By being born white.  According to liberals.  So there’s no Affirmative Action for them.  Yet they have half the unemployment rate black men have.  While white women have half the unemployment rate black women have.  And white 16-19 year olds have half the unemployment rate black 16-19 year olds have.  Brilliant progressives/liberals have been trying to make life better for blacks for 50 some years now and have failed.  Despite this blacks have never been more loyal to them.  Which answers the question what the Democrats care more for.  The people?  Or the power the people give them.  By getting them dependent on government.  Who they tell over and over again that they would have nothing if it weren’t for them.  The Democrats.  For blacks just can’t make it on their own without help.  Even though after receiving all of that help blacks are suffering the greatest levels of unemployment.  Clearly something isn’t right here.  And it goes back to that thing that made America great.  Rugged individualism.

You know what the difference is between a white SEAL and a black SEAL?  Nothing.  Blacks have equality of opportunity in SEAL training.  And that’s all they need.  They don’t need special treatment.  And the Navy doesn’t tell them that they do.  All they need is the strength.  And the will.  Which will be there if you don’t keep telling people that they can’t succeed without the government’s help.  Because if you keep doing that they will come to believe that.  And they will keep voting Democrat.  Looking for help.  Whereas those who face adversity and overcome it grow stronger.  Because what doesn’t kill them makes them stronger.

Handing out government benefits will make people like you.  But it won’t get them a job.  For someone receiving a comfortable level of benefits will not be pushed to leave their comfort zone.  And while they languish in their comfort zone they will not gain work experience.  Allowing others to gain experience and move up in their careers.  Making them more employable.  While those with less experience and less education are less employable.  And that’s what Democrats do when they buy votes with government benefits.  Make people less employable.  And blacks have been especially useful to them.  As they can stoke the fires of racism to drive blacks even further to the Democrat Party.  By calling Republicans racists.  Because they want to take away their benefits.  Just because they hate black people.  Or so goes the Democrat line.  So they keep voting Democrat.  While losing their rugged individualism.  And suffering higher levels of unemployment than everyone else.

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Keynesian Economics is as Corrupt and Immoral as is Crony Capitalism

Posted by PITHOCRATES - May 5th, 2013

Week in Review

Before John Maynard Keynes came along the established economic thought was classical economics.  Those principles that made America the number one economic power in the world.  A sound money like the gold standard gave you.  Low tax rates to encourage economic risk taking.  Responsible government spending for only those things a federal government should be doing.  And only spending what that minimal federal tax revenue could pay for.  Little government intervention into the private sector economy.  And thrift.  People spending money very cautiously.  And saving as much as they possible could.  To save for the future.  While providing investment capital for businesses.

These policies made the United States the number one economic power in the world.  Laissez-faire capitalism.  Tried and proven for over a century in the U.S.  But then government got big in the beginning of the Twentieth Century.  The progressives came into the government.  And they needed a new way to lie to and deceive the American people.  And then came along John Maynard Keynes.  The answer to their dreams.  Whose Keynesian economics has destroyed nation after nation with his assault on classical economics.  And now debt crises from excessive government spending in the Twentieth Century have plagued Greece, Italy, Spain, Portugal, Ireland, the United Kingdom, Japan, the United States, and other nations that dared to embrace Keynesian economics.

President Obama’s economic recovery has been horrible because he embraces Keynesian economics.  He lied like a good Keynesian to the American people to pass his stimulus.  It did nothing.  As predicted by everyone that isn’t a Keynesian.  He continues to destroy the American economy with near zero interest rates.  Destroying our savings.  Creating stock market bubbles while the labor force participation rate falls to its lowest since the Seventies.  And caused the federal debt to soar to levels that we can never pay down.  Putting us on the road to Greece.  All because of the corrupt economic school of thought John Maynard Keynes gave us.  That governments everywhere are using to increase their size and power.  To elevate the government class into a new aristocracy.  That lives very well thanks to those people beneath them.  The working class.  That works longer while earning less.  Like the nobility and peasants of old.  And a little Orwellian.  As they built this upon a house of lies.  Beginning with changing the meaning of words (see Two Sides of the Same Debased Coin by Hunter Lewis posted 5/2/2013 on Ludwig von Mises Institute).

When we turn to Keynes’s economics, perhaps the most fantastic self-contradiction was that an alleged savings glut, too much supposed idle cash, could be cured by flooding the economy with more cash, newly printed by the government. Perhaps even more bizarrely, Keynes says that we should call this new cash “savings” because it represents “savings” just as genuine as “traditional savings.” That is, the money rolling off the government printing presses is in no way different from the money we earn and choose not to spend.

All this new “savings” enters the economy through the mechanism of low interest rates. At this point, Keynes further confounds his forerunners and elders by arguing that it is not high interest rates, as always thought, but rather low interest rates, that increase savings, even though we started by positing too much savings in the first place.

Keynes’s followers echo this even today. Greenspan, Bernanke, and Krugman have all written about a savings glut which is supposed to be at the root of our troubles, and have proposed more money and lower interest rates as a remedy, although they no longer call the new money “genuine savings.” They prefer quantitative easing and similar obscure euphemisms…

The General Theory does argue that interest rates could and should be brought to a zero level permanently (that’s pages 220–21 and 336)…

Keynesians hate savings.  They don’t want people saving their money.  They want them to spend every last dime.  And then borrow more money to spend when they run out of their own.  Because consumer spending is everything to them.  Spending is what drives economic activity.  And any money they save they don’t spend.  And drain out of the economy.  Which is why they want zero interest rates.  Or even negative interest rates.  To discourage people from saving.  For if you lose purchasing power when you put your money in the bank you might as well spend it now.  And generate economic activity.

This is, of course, a ‘live for the day and screw the future’ mentality.  For if people spend all of their money going out to dinner, buying new cars, going on more vacations, running up their credit cards, etc., that will create a lot of economic activity.  But when these people retire they will have to live like paupers.  Because they didn’t save for their retirement.  Even if someone loses their job and is out of work for a few months if they have no savings they will struggle to pay their mortgage or rent.  Struggle to put food on the table.  They will struggle to pay their utility bills.  And their credit card bills.  This is the problem of living as if your income stream will never end.  It sometimes does end.  And if you didn’t bank a rainy day fund you could find yourself suffering some extreme hardship as you can no longer afford to live like you once did.

Keynesians once called printed money ‘savings’.  Today they call tax cuts ‘spending’.  A little Orwellian doublespeak.  Change the meanings of words.  So they can fool the people into believing that the government printing money and depreciating the currency is the same thing as you working hard and saving for your retirement.  And not taking more of your hard-earned paycheck is irresponsible government spending.  The only government spending, incidentally, they find irresponsible.  This is a fundamental tenet of Keynesian economics.  Deceiving the people.  So politicians can continue to recklessly spend money they don’t have to buy votes for the next election.  And to reward their campaign contributors with the favors of crony capitalism.

These Romney advisors also, of course, believed in the fairy tale of borrow-and-spend stimulus. It is usually forgotten that Keynes assured us that each dollar of such stimulus would produce as much as twelve dollars of growth and not less than four dollars. Even the most ardent Keynesians have, of course, been unable to demonstrate as much as one dollar. How did Keynes know that you would get four dollars at least? He didn’t. He told the governor of the Bank of England, Norman Montague, that his ideas were “a mathematical certainty” but that was just a crude bluff.

What is empirically verifiable is that all debt, private or public, has been generating less and less growth for decades. In the ten years following 1959, the official figures say that you got 73 cents in growth for each dollar borrowed. By the time of the Crash of ’08, that was down to 19 cents. And I expect it was really negative by then and is deeply negative now.

Keynes lied.  But that lie sanctioned governments to expand into the private sector economy.  So they embraced the lie.  And continue the lie.  Because none of these politicians want to give up the good life and get a real job.  They like it the old fashioned way.  Before the Founding Fathers had to muck it up with their attacks on the nobility.  They like being part of the aristocracy.  To live better than any of the poor schmucks that work a 40-hour week.  They just want to take a percentage of that poor schmuck’s earnings for themselves.  Rub elbows with the beautiful people.  And laugh at the working class.

The idea that you can take a dollar from the taxpayer, run it through a costly bureaucracy that a portion of that dollar has to pay for and think you’re going to generate more than a dollar in economic activity is absurd.  By the time that dollar reenters the economy the government has skimmed so much off the top that any economic activity it generates is negligible.  Now compare that to how the taxpayer who earned that dollar spends it.  He or she spends a dollar out of that dollar.  Because they’re not putting it through a costly bureaucracy before they spend it.

Which begs this question.  If a wage earner gets more economic activity when spending that money why not let that wage earner keep more of his or her money to spend?  For each additional dollar they can keep they can generate another dollar of economic activity.  Not the 19 cents the government will be lucky to generate from it.  Ah, well, if they can keep their money they may just do something responsible with it.  Like save it.  Which Keynesians hate.  And the government won’t be able to skim at least 81 cents from each dollar if they don’t tax it away.  Which Keynesians hate even more.

The common theme [of Keynesian Economics] is that market prices don’t matter…

Is this, then, the essence of Keynesianism, its blind destruction of the price mechanism on which any economy depends, as Mises demonstrated? Yes. But there may be an even deeper essence…

For the Victorians, spending within your means and avoiding debt were not just financial principles. They were moral principles. Keynes, who was consciously rebelling against these same Victorians, described their “copybook morality” as “medieval [and] barbarous.” He told his own inner circle that “I remain, and always will remain an immoralist…”

So, in conclusion, when we strip down Keynesianism to its essence, the relationship to crony capitalism becomes even clearer. Crony capitalism represents both a corruption of capitalism and a corruption of morals. Keynesianism also represents both a corruption of economics and a corruption of morals. Crony capitalism and Keynesianism are just two sides of the same debased coin.

The price mechanism allocates scarce resources that have alternative uses.  Through the laws of supply and demand.  Guaranteeing that the people who most want a resource—and are willing to pay more for it than others—will get that resource.  While those who don’t want that resource as badly are not willing to pay the higher prices others are willing to pay.

This is capitalism.  This is what enables you to go out and buy the things you want.  Because the price mechanism has automatically allocated millions upon millions of resources in the economy to get them into the things people most want to buy.  Crony capitalism smashes this apart.  By distorting market forces.  With government fiat.  Which allocates those resources first to their close friends who, in return, favor their friends in government with generous campaign contributions.  Or gifts of gratitude.  While others must pay a higher price.  If they can even get these resources at all.  Which they might not be able to do if they don’t please someone in government who has power over these resources.

This is crony capitalism.  Corrupt.  And immoral.  Just as is Keynesian economics.  Unlike the classical economics that made this country the number one economic power in the world.  Thanks to the gold standard, low taxes, low government spending, little government intervention into the private sector economy and thrift.  Things that kept a government moral.  However hard they may try not to be.

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FT159: “There’s more to know than most people know.” —Old Pithy

Posted by PITHOCRATES - March 1st, 2013

Fundamental Truth

Some want to Lower the Voting Age despite our Teens’ Penchant for Making Poor Decisions

Parents can’t tell their kids anything.  Because they know everything already.  Despite doing a lot of stupid stuff.  They smoke cigarettes.  Do drugs.  Binge drink.  Drink and drive.  Have unprotected sex.  And a whole lot of other things that can have lasting consequences.  Consequences such as cancer.  A drug addiction.  An arrest for driving under the influence.  An arrest for vehicular manslaughter.  Catching a venereal disease.  Becoming a single mother while still in high school.  Or becoming a single mother with a venereal disease.  While still in high school.

Teens and young adults have a history of making poor decisions.  Why?  Is it because they are stupid?  No.  It’s because they are young.  Inexperienced.  And grow up in an environment that tells them they are far wiser than they are.  As they grew up people constantly told them that they are smart.  They are wise.  And that we need to listen to what they say.  For they are our future.  Some even wanting to bring them into the political process earlier.  By lowering the voting age.  Which is an odd thing to do.  Considering their penchant for making poor decisions.

Of course kids are all for lowering the voting age.  For if they could vote earlier there would probably be more than 2 states that have decriminalized marijuana by now.  And they could lower the drinking age, too.  For let’s face it kids are going to binge drink no matter what we say.  Just as they are going to smoke marijuana and have sex.  So we might as well help them do these things.  And lowering the voting age will be a step towards making that happen.

The Founding Fathers wanted a Government of the People not a Ruling Elite in a Faraway Place telling them what’s Best for Them

So we know what kids want.  Less parenting.  And more fun.  They want the freedom to enjoy whatever they want to enjoy.  And believe they are enlightened like our Founding Fathers were when they wanted the freedom to do what they wanted to do.  Of course, the Founding Fathers’ Enlightenment was a lot different from that of the kids’ today.  The Founding Fathers were interested in science, economics and religious freedom.  They were familiar with the history of Greece and Rome.  Magna Carta.  The Protestant Reformation.  The English Civil War.  They were proud of their membership in the British Empire.  The most enlightened and free empire, or country, in the world.  Thanks to their representative government.  But when Parliament did not let them have any representation in that house while passing laws to govern them, well, they didn’t love the British Empire as much as they once did.

The Founding Fathers weren’t fans of mercantilism.  Then the dominant economic policy of the day.  European powers fought each other for colonies.  Their colonies shipped raw materials back to the mother country.  Who then used them to manufacture finished goods.  That they then sold to the world.  And to their colonies.  Keeping the net flow of gold and silver flowing to the mother country.  While exporting more finished goods than they imported.  With the state helping a few well-connected domestic businesses.  Keeping the state coffers flush with money.  While the people paid higher prices than they normally would have paid.  Thanks to those government policies favoring the well-connected businesses.  Basically like what China is doing today.  Maintaining a strong export economy with cheap labor.  That doesn’t benefit the Chinese masses all that much.  Creating basically two Chinas.  The rich in the cities.  And the poor and impoverished everywhere else.

The Founding Fathers wanted liberty.  Political liberty.  And economic liberty.  Laissez-faire capitalism.  Where the people taking the greatest risk profited the most.  Not the state.  They wanted a limited federal government.  Just large enough to protect the nation.  To treat with other nations.  Those things best suited for the federal government.  While the vast majority of power belonged to the states.  Closer to the people.  And not in some distant land.  They wanted a government of the people.  Not a ruling elite in a faraway place telling them what’s best for them.  That’s why they fought for their independence from a distant power in the first place.  The British Empire.  And they sure didn’t want to trade one distant power oppressing them for another.  They didn’t want money corrupting the federal government.  They wanted the seat of financial power and the seat of government power separated.  For the greatest abuses of power came when wealth joined power in the Old World capitals.  London.  Paris.  Madrid.  Thomas Jefferson wanted the federal capital as far from the bankers and merchants in New York as possible.  Which is why they placed the new federal capital in a swamp on the Potomac River.

Sadly, those who Know the Least often determine who Wins Elections

Those who have studied history understand how the United States came to be.  And what made it the world’s number one economic power.  Laissez-faire capitalism.  Free trade.  Sound money.  In particular the gold standard.  They saw history prove Say’s Law.  Supply creates its own demand.  No one demanded personal computers or the Internet.  But when those who brought these to the market place showed how wonderful they were demand soon followed.  They saw history prove David Ricardo’s comparative advantage.  How free trade lets nations produce what they do most efficiently and trade for what they don’t.  Thus increasing the economies of all nations trading freely.

People who know history understand that the prevalent economic policy today, Keynesian economics, is a failed policy.  For Keynesian economic policies are more like mercantilism than free market capitalism.  Calling for more government intervention into the market.  Inflationary monetary policy (i.e., printing money).  As well as tax and spend fiscal policies so the government can redistribute wealth.  So the government can choose winners and losers.  Not the free market.  Policies that all go against what made America the world’s number one economic power.  The Seventies, a time when the Keynesians got everything they wanted when President Nixon decoupled the dollar from gold, saw double-digit inflation, high unemployment and a stagnant economy.  Everything the Keynesians tried failed to improve the economy.  In fact, their policies only made the economy worse.  And the only thing that pulled us out of the stagflation and misery of the Seventies was Ronald Reagan.  Who embraced the classical economic policies that made America the number one economic power in the world.  Laissez-faire capitalism.  Say’s Law.  David Ricardo’s comparative advantage.  Sound monetary policy (i.e., noninflationary).  The policies we call Reaganomics.

People who study history know this.  But teens and young adults?  Those more interested in drinking alcohol, smoking marijuana and having sex?  They haven’t a clue about economics or their history.  Yet they often determine elections.  Sad but true.  And it’s just not teens and young adults who don’t understand economics or know their history.  Thanks to the hippies of the Sixties moving into education most people coming out of our public schools don’t.  For the hippies of the Sixties changed the curriculum.  To help them in their quest to destroy capitalism.   By dumbing down the curriculum.  So it’s easier for Keynesians to keep passing the failed policies of the past.  To help them keep expanding the size of government.  To turn this nation back to what the Founding Fathers fought to get away from.  The mercantilism of the Old World.  Of present day China.  Where the few in power have all the power.  And all the wealth.  All because people think they know more than they know.  And vote as if they know everything they need to know.  But there’s more to know than most people know.  And, sadly, those who know the least often determine who wins elections.

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Moving from Capitalism towards Socialism in America and Life in the Former Soviet Union

Posted by PITHOCRATES - October 28th, 2012

Week in Review

Clearly President Obama is trying to move the country away from laissez faire capitalism.  And towards something where the government has a much larger role in our lives.  Such as Obamacare.  More government into our lives.  The question is where does it end?  For it is a slippery slope.  In Europe there was capitalism before there was social democracy.  A transition from capitalism towards socialism without a revolution.   Does a social democracy end in socialism?  Which is a real concern as America is moving ever closer to the European social democracy.  For someone who lived in a full-blown socialist state, this trend isn’t a good one (see If You Had Actually Grown Up In A Soviet Country, This Is What You Would Have Experienced by Rob Wile posted 10/22/2012 on Business Insider).

“I grew up in a socialist country. And I have seen what that does to people. There is no hope, no freedom. No pride in achievement.

“And that’s what I see happening here.”

So begins an ad that’s been airing in the run-up to November elections, narrated and paid for by Thomas Peterffy, in support of Republican candidates.

Peterrfy, the CEO of Interactive Brokers, came to America in 1965 to escape Communist Hungary.

He fears a world where, if we’re not careful, “people will lose interest in really working hard and creating jobs. I think this is a very slippery slope.

“It seems like people don’t learn from the past…”

We turned to “Steeltown, USSR,” a book-length work of reportage from current Princeton University History Professor Stephen Kotkin, to see what life under socialism is really like.

Published in 1991, the book is Kotkin’s account of his trips to the Russian city of Magnitogorsk in the late-80s, on the eve of the fall of Communism, and his interviews with the city’s residents.

If you follow the above link you can see what it was like to live in a socialist country.  In the Union of Soviet Socialist Republics (USSR).  Here are some excerpts:

“This apartment, I waited 18 years for it. During that time, we lived four in one room. No one remembered what color the walls were. You couldn’t see them, they were so covered with our belongings stacked up to the ceiling. I worked and struggled and endured all manner of humiliation for eighteen years for this pathetic, unexceptional new apartment. It makes me sad and angry to think about it. How much evil has accumulated! I have so much on my soul!”

“If you work hard, they demand from you. You have to get up in front of everyone and make speeches; they give you medals with pompous names. So it’s best to stay quiet, not attract attention to yourself. Once in a while, you work like a bull; the remainder of the time, you rest.”

“No one makes a move until we see where the power lies. As soon as it is clear, we all quickly take that side. We’re completely dependent on them. Food, clothes, apartments, furniture, day care, summer camp, vacations — everything is allocated by them according to their lists, with which they rule over our lives. Everyone has something to lose. It might seem you have nothing, but they take something away, and you have even less.”

“A handful of Magnitogorsk youth were fortunate enough to gain acceptance to university in Sverdlovsk, the ‘capital’ of the Urals, or even to Moscow University. Yet even this select group often found itself back in Magnitogorsk upon graduation, unable (in some cases unwilling) to secure the necessary official permission to remain in the larger city.”

“For every 100 Magnitogorsk families, there were 96 radio receivers, 99 TV sets, 39 tape recorders, 34 photo cameras, 92 refrigerators, 70 washing machines and five cars.”

Sugar, meat, butter and sausages had to be rationed — they could only be purchased using coupons distributed at residences in accord with the number of people in the household.

Fewer than 50 percent of Magnitogorsk residents enjoyed their own self-contained apartments without living with the rest of their relatives. You had to qualify for new housing by having less than 9 square meters per person. And you couldn’t move.

“There were approximately 30,000 cars for the city’s 438,000 residents (135,000 households). Only 22,000 were privately owned… the wait to purchase a car was more than 10 years.”

“There was only ‘children’s’ shoes, ‘women’s’ boots or ‘men’s’ coats…Discounts or markdowns were not permitted, even if goods were not selling. There were no seasonal sales.”

“An individual established himself or herself in the community not by purchasing a home in a particular neighborhood but by landing a job in a favored shop. ‘The shop or work unit is an entire social milieu,’ one official explained. ‘It’s not a job, but a life.’ In short, the steel plant was not relaly a ‘business’; rather, it was an industrial welfare agency.”

“At home we get together with friends, sit around the talbe. All we do is talk about our problems, and insufficienceis, endlessly, until someone bangs the table and shouts, ‘Enough. No more about that.’ But what else can we discuss?”

This is where you end up when you move away from capitalism and towards socialism.  A grey and dreary life.  Long waiting lists for apartments and cars.  Where hard work is only rewarded with more hard work.  So workers strive to do the minimum.  You live in fear of the authorities because everything you have in life is dependent on how they felt towards you.  If you were quiet and suffered your privations quietly you experienced no new privations.  If you complained you suffered more privations.  The state allowed few to go to college.  And those that did rarely saw an improvement in their lives.  They rationed your food.  And forced you to live with your relatives in tiny apartments.  Everyone wore the same shoes, boots and coats.  And few found any enjoyment in life.

So should Americans be worried about sliding towards socialism?  Well, soon our health care will be dependent on some bureaucrat’s whim under Obamacare.  Student loans are now provided by the government.  More people are dependent on the government for their food than ever before.  And their housing.  The government is subsidizing green companies that can’t compete in the market place.  To provide ‘high-paying’ jobs in companies that often go bankrupt.  So a lot of what is happening typically doesn’t happen in laissez faire capitalism.  These are things that are closer to socialism than capitalism.

These expansions in the welfare state come courtesy of class warfare.  The government’s relentless attacks on those who don’t need government benefits.  Accusing them for not paying their fair share in taxes.  Creating anger in lower-income people.  And agitation.  To support further transfers of wealth.  All the elements of a worker revolution.  But without the actual revolution.  Because they’re doing it at the ballot box.

Life is better under capitalism.  Which is why athletes from behind the Iron Curtain left their socialist paradise whenever they could.  Ballet stars.  Even military jet pilots who flew their planes to freedom.  Unless Americans want a country like the country these people fled we probably should do something about our slide on that slippery slope.

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The Federal Reserve, Roaring Twenties, Stock Market Crash, Banking Crises, Great Depression and John Maynard Keynes

Posted by PITHOCRATES - September 25th, 2012

History 101

The Federal Reserve increased the Money Supply to Lower Interest Rates during the Roaring Twenties

Benjamin Franklin said, “Industry, perseverance, & frugality, make fortune yield.”  He said that because he believed that.  And he proved the validity of his maxim with a personal example.  His life.  He worked hard.  He never gave up.  And he was what some would say cheap.  He saved his money and spent it sparingly.  Because of these personally held beliefs Franklin was a successful businessman.  So successful that he became wealthy enough to retire and start a second life.  Renowned scientist.  Who gave us things like the Franklin stove and the lightning rod.  Then he entered his third life.  Statesman.  And America’s greatest diplomat.  He was the only Founder who signed the Declaration of Independence, Treaty of Amity and Commerce with France (bringing the French in on the American side during the Revolutionary War), Treaty of Paris (ending the Revolutionary War very favorably to the U.S.) and the U.S. Constitution.  Making the United States not only a possibility but a reality.  Three extraordinary lives lived by one extraordinary man.

Franklin was such a great success because of industry, perseverance and frugality.  A philosophy the Founding Fathers all shared.  A philosophy that had guided the United States for about 150 years until the Great Depression.  When FDR changed America.  By building on the work of Woodrow Wilson.  Men who expanded the role of the federal government.  Prior to this change America was well on its way to becoming the world’s number one economy.   By following Franklin-like policies.  Such as the virtue of thrift.  Favoring long-term savings over short-term consumption.  Free trade.  Balanced budgets.  Laissez-faire capitalism.  And the gold standard.  Which provided sound money.  And an international system of trade.  Until the Federal Reserve came along.

The Federal Reserve (the Fed) is America’s central bank.  In response to some financial crises Congress passed the Federal Reserve Act (1913) to make financial crises a thing of the past.  The Fed would end bank panics, bank runs and bank failures.  By being the lender of last resort.  While also tweaking monetary policy to maintain full employment and stable prices.  By increasing and decreasing the money supply.  Which, in turn, lowers and raises interest rates.  But most of the time the Fed increased the money supply to lower interest rates to encourage people and businesses to borrow money.  To buy things.  And to expand businesses and hire people.  Maintaining that full employment.  Which they did during the Roaring Twenties.  For awhile.

The Roaring Twenties would have gone on if Herbert Hoover had continued the Harding/Mellon/Coolidge Policies

The Great Depression started with the Stock Market Crash of 1929.  And to this date people still argue over the causes of the Great Depression.  Some blame capitalism.  These people are, of course, wrong.  Others blamed the expansionary policies of the Fed.  They are partially correct.  For artificially low interest rates during the Twenties would eventually have to be corrected with a recession.  But the recession did not have to turn into a depression.  The Great Depression and the banking crises are all the fault of the government.  Bad monetary and fiscal policies followed by bad governmental actions threw an economy in recession into depression.

A lot of people talk about stock market speculation in the Twenties running up stock prices.  Normally something that happens with cheap credit as people borrow and invest in speculative ventures.  Like the dot-com companies in the Nineties.  Where people poured money into these companies that never produced a product or a dime of revenue.  And when that investment capital ran out these companies went belly up causing the severe recession in the early 2000s.  That’s speculation on a grand scale.  This is not what happened during the Twenties.  When the world was changing.  And electrifying.  The United States was modernizing.  Electric utilities, electric motors, electric appliances, telephones, airplanes, radio, movies, etc.  So, yes, there were inflationary monetary policies in place.  But their effects were mitigated by this real economic activity.  And something else.

President Warren Harding nominated Andrew Mellon to be his treasury secretary.  Probably the second smartest person to ever hold that post.  The first being our first.  Alexander Hamilton.  Harding and Mellon were laissez-faire capitalists.  They cut tax rates and regulations.  Their administration was a government-hands-off administration.  And the economy responded with some of the greatest economic growth ever.  This is why they called the 1920s the Roaring Twenties.  Yes, there were inflationary monetary policies.  But the economic growth was so great that when you subtracted the inflationary damage from it there was still great economic growth.  The Roaring Twenties could have gone on indefinitely if Herbert Hoover had continued the Harding and Mellon policies (continued by Calvin Coolidge after Harding’s death).  There was even a rural electrification program under FDR’s New Deal.  But Herbert Hoover was a progressive.  Having far more in common with the Democrat Woodrow Wilson than Harding or Coolidge.  Even though Harding, Coolidge and Hoover were all Republicans.

Activist Intervention into Market Forces turned a Recession into the Great Depression

One of the things that happened in the Twenties was a huge jump in farming mechanization.  The tractor allowed fewer people to farm more land.  Producing a boom in agriculture.  Good for the people.  Because it brought the price of food down.  But bad for the farmers.  Especially those heavily in debt from mechanizing their farms.  And it was the farmers that Hoover wanted to help.  With an especially bad policy of introducing parity between farm goods and industrial goods.  And introduced policies to raise the cost of farm goods.  Which didn’t help.  Many farmers were unable to service their loans with the fall in prices.  When farmers began to default en masse banks in farming communities failed.  And the contagion spread to the city banks.  Setting the stage for a nation-wide banking crisis.  And the Great Depression.

One of the leading economists of the time was John Maynard Keynes.  He even came to the White House during the Great Depression to advise FDR.  Keynes rejected the Franklin/Harding/Mellon/Coolidge policies.  And the policies favored by the Austrian school of economics (the only people, by the way, who actually predicted the Great Depression).  Which were similar to the Franklin/Harding/Mellon/Coolidge policies.  The Austrians also said to let prices and wages fall.  To undo all of that inflationary damage.  Which would help cause a return to full employment.  Keynes disagreed.  For he didn’t believe in the virtue of thrift.  He wanted to abandon the gold standard completely and replace it with fiat money.  That they could expand more freely.  And he believed in demand-side solutions.  Meaning to end the Great Depression you needed higher wages not lower wages so workers had more money to spend.  And to have higher wages you needed higher prices.  So the employers could pay their workers these higher wages.  And he also encouraged continued deficit spending.  No matter the long-term costs.

Well, the Keynesians got their way.  And it was they who gave us the Great Depression.  For they influenced government policy.  The stock market crashed in part due to the Smoot Hawley Tariff then in committee.  But investors saw the tariffs coming and knew what that would mean.  An end to the economic boom.  So they sold their stocks before it became law.  Causing the Stock Market Crash of 1929.  Then those tariffs hit (an increase of some 50%).  Then they doubled income tax rates.  And Hoover even demanded that business leaders NOT cut wages.  All of this activist intervention into market forces just sucked the wind out of the economy.  Turning a recession into the Great Depression.

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Opportunity Costs

Posted by PITHOCRATES - June 4th, 2012

Economics 101

Those on the Left are all for Choice as long as you Choose what they want you to Choose

Choice.  It’s what life is.  Every day we make hundreds of choices in our life.  The communists called that a burden.  And that their way removed all that stress from our lives.  The stress of constantly having to choose.  They came up with a new freedom.  Freedom from choice.  To live under oppression.  Like a slave.  Where you no longer had the burden of making a choice every waking hour of your day.  You simply took what the government gave you.  And relaxed.  Truly free.

It turned out the people living under communism preferred having that burden of choice.  And took every opportunity to escape the communist ‘freedom’.  To a freedom where you were free to choose whatever you wanted.  Instead of taking what central planners gave you.  Those on the Left always had a soft spot in their hearts for communism.  And Soviet central planners.  For they never cared that much for free markets.  Laissez faire capitalism.  Freedom of choice.  Because people so often chose poorly in their opinion.  For they weren’t as educated and enlightened as they were on the Left.  And therefore chose the wrong kind of foods to eat.  The wrong kind of beverages to drink.  The wrong kind of cars to drive.  The wrong kind of power to generate.  And the wrong people to vote for.

No.  Those on the Left are no fans of choice.  Except, of course, when it comes to abortion.  When it comes to abortion then they are big fans of choice.  But not so much when it comes to us choosing what to eat, drink and drive.  Or how we generate our energy.  So when it comes to choice those on the Left are like the Soviet central planners.  They are all for choice.  As long as you choose what they want you to choose.

When making any Economic Decisions we make our Choice based on Opportunity Costs 

But we choose.  Because we can.  At least with most things.  But how do we choose?  Does price determine what we choose?  Sometimes.  Quality?  Sometimes.  Loyalty?  Sometimes.  Sometimes it’s one of these things.  Sometimes a combination of all of these things.  Sometimes it’s none of these things.  So what is it that makes up your mind when confronted with a choice?  Do you know?  You do.  For obviously you’re making the choice.  But the ‘why’ we may have to coax out of you.  For you will probably not be able to explain why.  At least not as well an economist can.

The study of economics is all about choice.  And trying to determine what influences people’s choices.  So economists can offer economic policies to maximize economic activity.  By maximizing that thing we ultimately trade for.  Which is what?  Happiness.  We choose to increase our happiness.  Or utility in the parlance of economics.  The things we choose are the things that will give us the greatest happiness.  Or the greatest utility.  But if you’re like me you never saw ‘utility’ or ‘happiness’ expressed as units on a price tag in a store.  Price tags show only price.  Which tells us little how happy something will make us.  So how do we choose the things that will maximize our happiness?  Especially if you’re looking at two different things that have the same price?

Easy.  We don’t make our decision by looking at what we’re buying.  We make our decision based on what we’re not buying.  What we are giving up by buying this thing or that service?  What might have been had it not been for this purchase?  What opportunity we’re passing on to make this purchase?  What cost are we paying in lost opportunity by committing to this purchase?  In other words, when making any economic decisions we make our choice based on opportunity costs.  On an amount of happiness we’re giving up to acquire some other amount of happiness.  And whatever the number of our choices the end result is the same.  What we choose gives us more happiness than all other possible alternatives.  Regardless of price, quality or loyalty.  Though they could influence us when there is a tie.

Liberals make us Buy not what Increases our Happiness but what Increases their Happiness

You can’t put a price on happiness.  That’s what they say.  And they are right.  Whoever they are.  For example, luxury cars are nice.  But they are expensive.  Subcompacts are not as nice as luxury cars.  But they are not as expensive either.  So if you were choosing between these two cars which one would you choose?  I can’t tell because I don’t know your income.  But I can guess at your decision process.  You’re going to compare opportunity costs.  Driving a luxury car gives you enormous amounts of happiness.  For the limited time you spend driving it.  Enormous happiness for a limited amount of time.  Okay.  But what are the opportunity costs?

Let’s say your daily commute to and from work is one hour.  But when you get home you enjoy 4 hours between surfing the Internet and watching cable television.  When you’re not at work or home you like to use social media on your smartphone interacting with your friends.  And using your smart phone apps to maximize your fun in the evenings and on the weekend.  You like to spend your Sunday mornings at the coffee shop with you tablet reading the online Sunday papers.  The hours of driving happiness come to 10 hours a week.  And the hours of online/watching cable happiness comes to 32 hours a week.  Now being that you spend more time online or watching cable than driving then it’s safe to say that driving brings you less happiness than those other activities.  Because luxury cars are expensive they come with a high monthly payment and a high insurance premium.  Which means you will have to cut back on other spending to afford the luxury car.  So to afford the luxury car you have to give up your cable and home Internet access.  And cut back on your minutes on your smartphone.

The opportunity cost of the luxury car is giving up cable TV and cutting back on Internet access and smartphone minutes.  The opportunity cost of keeping those things is getting a subcompact car instead of a luxury car.  This is the ultimate decision we make in all of our economic decisions.  Which will cost us more in sacrificed happiness in the long run?  Which makes those decisions easy.  In the above example you would probably have never given the luxury car any serious thought.  This is why free markets work so well.  Why laissez faire capitalism works so well.  Because the economy is full of individuals making these decisions quickly.  Far quicker than any Soviet state planner.  And with far more insight into our own wants and desires than any Soviet state planner.  And in the aggregate this drives economic activity.  Bringing the things we want to market.  The things that give us the greatest amount of happiness.  The things that have the lowest opportunity costs.  Unlike Soviet central planning.  Or American liberal Democrat central planning. 

No.  These people try to change our purchasing decisions.  Making us buy not what increases our happiness.  But what increases their happiness.  Which is why when liberal Democrats are in power there is a general economic decline.  Because they do alter our purchasing decisions.  By increasing the opportunity costs of the things that increase our happiness.  So that we buy fewer of them.  But we don’t buy more of the things they want us to buy.  Because those things don’t increase our happiness.  When they subsidize hybrid cars (paid for with higher taxes from us) to get us to buy them it doesn’t make the hybrid cars give us any more happiness.  It just leaves us with less money because of the higher taxes.  So we buy less of everything else.  And in the aggregate this lowers economic activity.  Leaving us all less happy.

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FT120: “Give a man a fish and he can eat for a day; give him a job and he can have an obesity problem.” -Old Pithy

Posted by PITHOCRATES - June 1st, 2012

Fundamental Truth

In Warfare Starvation and Famine are the most Potent of Weapons

Starvation and famine has plagued mankind since the dawn of time.  It was the driving force in evolution.  Those who took control of their food supply lived.  Those who didn’t disappeared from the evolutionary path.  Like Neanderthal.  And those who came before him.  Our earliest civilizations massed their populations to farm.  And the masses lived in cities.  Setting down roots and saying goodbye to their hunting and gathering ways.  In the Wei River valley.  In the Indus River valley.  The valleys of the Euphrates and Tigris.  In the Nile River valley.  Where modern life took root.  Produced our first food surpluses.  And gave birth to urban life.  And the middle class.

The rise of the middle class allowed civilization to flourish.  For every person that didn’t have to produce food could do something else.  Build better tools.  Create a better government.  Create art.  In general, think about other things.  Those other things that made humans different.  By giving us a more interesting life.  And more sophisticated ways to express ourselves.

But this growth was a double-edged sword.  For large urban populations that made life more enjoyable was also a great threat to the food supply.  A cool and wet summer could destroy crops.  Poor food storage could spoil the food surplus.  A war could see an enemy purposely destroy your crops and your food surplus.  Causing famine.  Where half or your city population could easily die before the next harvest.  Or more.  Especially if the famine resulted from an act of war.   As an act of genocide.  To clear people off land that others want to use for their own food needs.  Which was Hitler’s plan in Russia.  To take the food from the Ukraine.  Kill the indigenous population.  And replace them with Nazis.  Thus creating more living space for the Third Reich.  Or Lebensraum.    Because in warfare starvation and famine are the most potent of weapons.

History has shown that the most Food-Abundant Countries are the most Capitalistic

England led the way in agricultural advances.  Increasing crop yields such that small tracts of land could support greater populations.  As well as produce such huge food surpluses that they had food to export.  As the British Empire spread across the globe so did their advanced agricultural ways.  During the 19th century starvation and famine were becoming rarer in the technologically advanced West.  The 19th century Irish Potato Famine reduced Ireland’s population by up to 25%.  A tragedy of epic proportions.  But it was an exception to the rule.  For food was growing so abundant in the advanced Western World that rarely did people go hungry.  Or feared famine.  And when mechanization and chemistry hit the farm our crop yields exploded.

During the Twentieth Century the Western World produced so much food that food prices plummeted.  Causing the Great Depression.  There was so much food available that farmers couldn’t sell their food at a high enough price to service the debt that they incurred mechanizing their farms.  But not everyone was producing bumper crops in the Twentieth Century.  Both the Soviet Union and the People’s Republic of China set records for death by famine.  As they shunned the ways of the West.  And the state took over their agricultural sectors.  States that were so inept at good farming practices and things economic that crop yields plummeted.  North Korea to this day can’t even grow enough food for her own people.  And has recurring famines.  Because they hold on to the communist ways of Stalin and Mao.  While the Russians and the Chinese have long abandoned them. 

History has shown that the most food-abundant countries are the most capitalistic.  Countries whose agricultural sectors use the latest in technology.  And/or have a rich and vibrant economy that can buy all the food they need if they can’t produce their own.  Like Hong Kong.  Basically a rock off the Chinese mainland.  It has little arable land.  Few natural resources.  But what it does have is low taxation and free trade.  And laissez-faire capitalism.  The Chinese lost Hong Kong to the British Empire (who have since given it back).  And the British used laissez-faire capitalism to make Hong Kong the gem it is today.  Where people are free and in want of little.  And in this island nation that can’t grow enough food to feed their population famine is unheard of.  Why?  Because they have the wealth to trade for all the food they desire.  In fact, while Mao gave the people in the People’s Republic of China famine Hong Kong were doing just fine.  Because they were wealthy and could trade for what they needed.  And they had the Royal Navy protecting her.

In America our Food Supplies are so Abundant and so Cheap that Poor People are becoming Obese

Poverty is the biggest killer.  Famine is prevalent in poor countries.  Like Haiti.  North Korea.  And sub-Saharan Africa.  People suffer in these countries unlike they do in the West.  Despite the amount of aid the West pours into them.  And it’s not because Western nations were blessed with natural resources.  Hong Kong doesn’t have anything other than laissez-faire capitalism.  Protected by the Rule of Law and minimal government interference into the private sector economy.  The very things that are missing from Haiti, North Korea and sub-Saharan Africa.  Where corruption rules supreme.  There is little regard for human rights.  Or property rights.  And no one can protect their people from the abuses of government.  Or from warring neighbors.  Like the Royal Navy protected Hong Kong.  And pretty much the rest of the world during the 19th century.  Just like America’s military might made the world safe for capitalism in the Twentieth Century.

Third world nations are not a victim of first world nations.  They are a victim of themselves.  Where corrupt rulers collect Western aid and live well while their people suffer.  Especially the nations that eschew capitalism.  And embrace socialism.  Like the Soviet Union did.  Like the People’s Republic of China did (the current Chinese regime is enjoying economic growth by allowing some capitalism into their still communist country).  And like North Korea still does.  These socialist utopias were a living hell for their people.  Where they live in fear of their government.  And of famine.

Meanwhile in the Western capitalist nations what do they suffer from?  Especially the poor people in America?  Obesity.  In New York they’re passing laws restricting the size of sugary beverages because they are dangerous to your health.  While they pass out free condoms and birth control as sex is far less risky behavior than a delicious carbonated beverage.  Apparently.  Yes, in America our food supplies are so abundant and so cheap that poor people are becoming obese.  Because capitalism has made those food supplies abundant and cheap.  And capitalism gave people jobs where they could afford to buy so much food that they can give themselves an obesity problem.  A problem they just don’t have in Haiti, North Korea or sub-Saharan Africa.  Because they can’t grow enough food.  Or earn enough money to buy enough food.  For they don’t have an environment conducive to creating jobs.  Which is why these nations are still impoverished and/or suffering famine despite all the aid the West gives them.  Food aid will run out.  And then they’ll just be starving once again.  If they have jobs, though, they’ll be able to buy food whenever they’re hungry.  Because it’s like that old saying.  Give a man a fish and he can eat for a day; give him a job and he can have an obesity problem.

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Monetarism, Laissez-Faire Capitalism, Augusto Pinochet, Chile, Hyperinflation, El Ladrillo, Chicago Boys, Milton Friedman and Miracle of Chile

Posted by PITHOCRATES - March 6th, 2012

History 101

During the 19th Century Mercantilism gave way to Laissez-Faire Capitalism and Free Trade

Portugal and Spain were superpowers around the 16th and 17th centuries.  Great monarchies with mercantilist economic policies.  Which was all about trade.  Maximize exports.  Minimize imports.  Settle colonies to mine/harvest raw material.  To ship back to the mother country.  Where they manufactured goods from the raw materials.  And exported them to other countries.  Selling them for gold and silver.  Which was key.  Maximizing the trade surplus in the balance of trade.  Finished goods going out.  Gold and silver coming in.  For the nation that gathered the most gold and silver won in the zero-sum game of mercantilism.  Where the monarchy works with business.  Picking winners and losers.  And rewarding the winners who help enrich the monarchy.

Of course, these policies force a kingdom’s subjects to pay higher prices.  By keeping out lower-priced imports.  And with special deals favoring some domestic industries so they can sell at monopoly prices.  They nationalized their Industries.  Creating an aristocratic class.  Composed of government officials.  And their partners in the nationalized industries.  Living the good life on the backs of the poor.  Who paid high taxes.  And high prices.  To support those mercantilist policies.  And it was these policies that settled South America.  Taking all of their gold and silver (bullion).  Shipping it back to the mother country.  The surge in bullion in Europe made it less scarce.  And less valuable.  Meaning it took more of it to buy the same things it once did before this surge.  Resulting in higher prices.  And inflation.  Hurting the consumer more.  And leading to the development of the quantity theory of money.  And monetarism.  Which held that the amount of money in circulation had a direct impact on prices.  The more money the higher the prices.

With the rise of Parliament in Britain power shifted from the king to the people.  Via their representatives in Parliament.  Instead of rule by dictate there was rule by consent.  Which made the business of choosing winners and losers more difficult.  Parliament had the power.  But Parliament was more than one person.  It was full of special interests.  Which made it more and more difficult to choose any one special interest over another.  Unable to curry favor for one’s own interest one didn’t support another’s interest.  At least not when that support came at the expense of your interests.  So there was another power shift in addition from the king to parliament.  There was also one from the king to the markets.  So during the 19th century mercantilism gave way to laissez-faire capitalism.  And free trade.  An economic system that let the British Empire dominate the world during the 19th century.  Making it rich.  And powerful.  Thanks to that vigorous economic activity that could build the world’s most powerful navy.  And pay for an army to garrison an empire.  Meanwhile the old school mercantilist empires fell from superpower status.  And became shadows of their former selves.  Soon the Spanish and Portuguese colonies would gain their independence from these dying empires.

Milton Friedman’s Monetarism turned the Chilean Economy Around

The South American nations may have hated their European masters but they liked one thing about them.  Their mercantilist policies.  Which survived into the 20th century.  Where government partnered with business.  In the worst of crony capitalism.  Where special interests that favored the ruling powers received government favors in return.  Usually protected markets.  And favorable legislation.  That allowed them monopoly prices.  Giving them great profits.  Generous union wages and benefits.  And generous health care and pensions.  At least, for those politically connected.  So the government rigged the game for them.  And they made it worth the government’s while to rig the game.  All of this paid for on the backs of the poor.  Who paid high taxes.  As well as high prices.  And suffered abject poverty.  Which made for an unhappy people.  And a large amount of government turnover through revolution as dictatorships and military juntas overthrew other dictatorships and military juntas.

In 1973 it was Augusto Pinochet’s turn in Chile.  Who came to power in a military coup.  At the time the country wasn’t doing so well.  And in full mercantilism.  The economy was in the toilet.  There was abject poverty.  And hyperinflation (peaking at 1000% or so) as the government printed money to pay for its out of control spending.  To try and bribe the angry mob and keep them from overthrowing the latest dictatorship.  Pinochet was the guy to fix that.  Like everybody that came before him.  And after his military junta failed as the previous military juntas failed, he tried something new.  Thanks to something called El Ladrillo.  And economic plan so thick and heavy they called it ‘the brick’.  A plan prepared by the Chicago Boys.  Chilean economists schooled in the Chicago school of economics.  Pinochet even met with Milton Friedman.  Prominent economist of the Chicago school.  And monetarist.  Who came down to give a speech.  (Interestingly, for the American left roundly criticized Friedman for giving a speech in a right-wing dictatorship.  Though he received no such criticism for giving the same speech in a left-wing dictatorship – communist China.  Showing that the political left was okay with human rights violations as long as they were committed in the left-wing dictatorships they so admired). 

Pinochet asked for some economic advice.  Friedman gave it.  And Pinochet followed it.  He ditched the mercantilist policies.  Embraced laissez-faire capitalism.  Privatized the state industries.  Established free trade.  Cut government spending.  And stopped printing money.  Ending the hyperinflation.  Replacing it with a strict monetary policy.  This didn’t please the politically connected as they lost their privilege.  But Friedman’s monetarism turned the Chilean economy around.  Creating a prosperous market economy.  With a growing middle class.  The strong economic growth led to some healthy tax revenue.  Which in later years funded antipoverty programs.  The Miracle of Chile even replaced the military junta with a democratic government.  Chile now has one of the healthiest and freest economies in the world.  An economy better and stronger than their former colonial master.  Spain.  Who maintained enough of their mercantilist policies to pull them into the Eurozone debt crisis.  And probably could learn a thing or two from their one-time colony.  Who is doing very well these days.  Thanks to the Miracle of Chile.  Milton Friedman.  And the Chicago Boys.  Those great Chilean economists given a chance by of all people a military dictator.

Everyone does Better under Free Market Capitalism, not just the Politically Connected

In 2010 a 7.0 earthquake hit Haiti.  A country rife with political corruption.  With little, if any, free market capitalism.  And even less rule of law.  Where most people live in abject poverty.  In ramshackle housing.  This earthquake claimed 230,000 lives.  A heart-wrenching loss of life.  Especially sad because the impoverished masses suffered the most.  As is often the case in countries with poor economic and political institutions. 

Later that same year, an 8.8 earthquake hit Chile.  Thanks to the economic reforms that rebuilt Chile into a healthy and prosperous democracy, Chileans did not live in ramshackle housing.  The higher standard of living created by the Chicago Boys’ economic reforms created better housing.  And safer cities.  Because of this the far stronger earthquake in Chile killed far fewer people than the lesser earthquake in Haiti.  The death toll in Chile was less than 1,000.  Which is impressive considering that was one of the most powerful earthquakes in recorded history.

Economics matter.  Say what you want about free market capitalism.  Malign it all you will.  But you can’t change some facts.  In particular, everyone does better under free market capitalism.  Including the poor.  For if this wasn’t the case Chile would have seen the loss of life Haiti saw.  But they didn’t.  Because there were no impoverished masses living in ramshackle housing in Chile.  Because those economic reforms improved the standard of living for all Chileans.  Not just the politically connected. 

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The Chicago School of Economics

Posted by PITHOCRATES - March 5th, 2012

Economics 101

Monetarists believe in Laissez-Faire Capitalism and Fiat Money

Keynesian economics supports hands-on government management of the economy.  Using fiscal and monetary policy to move the aggregate demand curve at will to end business cycles.  The boom bust cycles between inflation and recession.  Leaving only the inflationary boom times.   Using tax and spend fiscal policies.  Or simply printing money for government expenditures.  For in Keynesian economics consumption is key.  The more of it the better.  And when people stop buying things the government should step in and pick up the consumption slack.

The Austrian school is a more hands-off approach.  The markets should be free.  Laissez-faire capitalism.  And the business cycle should remain.  For it is a necessary part of the economy.  Part of the automatic pricing mechanism that adjusts supply to meet demand.  When people demand more prices go up.  Encouraging businesses to expand production to sell at these higher prices (inflationary expansion).  Then when supply exceeds demand businesses have excessive inventory that they can’t sell anymore at those higher prices.  So they cut their prices to sell off this excessive supply (deflationary recession).  Also, that hands-off approach means no playing with monetary policy.  Austrians prefer a gold standard to prevent central bank mischief that results in inflation.

The Chicago school of economics takes a little from each of these schools.  Like the Austrians they believe that government should take a hands-off approach in the economy.  Markets should be free with minimum government intervention.  But unlike Austrians, they hate gold.  And blame the gold standard for causing the Great Depression.  Instead, they believe in the flexibility of fiat money.  As do the Keynesians.  But with a strict monetary policy to minimize inflation (which is why proponents of this school were also called monetarists).  Unlike the Keynesians.  For monetarists believe only a government’s monetary policy can cause runaway inflation.

(This is a gross simplification of these three schools.  A more detailed and comprehensive study would be a bit overwhelming as well as extremely boring.  But you get the gist.  At least, for the point of this discussion.)

We used Gold and Silver for Money because it was Durable, Portable, Divisible, Fungible, Scarce, Etc.

At the heart of the difference between these schools is money.  So a refresher course on money is in order.  Money stores wealth temporarily.  When we create something of value (a good or a service) we can use that value to trade for something we want.  We used to barter with other creative people who made value of their own.  But as the economy got more complex it took more and more time to find people to trade with.  You had to find someone who had what you wanted who also wanted what you had.  If you baked bread and wanted shoes you had to find a shoemaker who wanted bread.  Not impossible.  But it took a lot of time to find these people to trade with.

Then someone had a brilliant idea.  They figured they could trade their good or service NOT for something THEY wanted but something OTHER people would want.  Such as tobacco.  Whiskey.  Or grain.  These things were valuable.  Other people would want them.  So they could easily trade their good or service for one of these things.  And then later trade it for what they wanted.  And money was born.  For various reasons (durable, portable, divisible, fungible, scarce, etc.) we chose gold and silver as our money of choice.  Due to the inconvenience and danger of carrying these precious metals around, though, we stored our precious metals in a vault and used ‘receipts’ of that deposit as currency.  And the gold standard was born.

To understand the gold standard think of a balance scale.  The kind where you put weights on one side to balance the load on the other.  When the scale balances the weight of the load equals the sum of the weights needed to make the scale balance.  Now imagine a scale like this where the VALUE of all goods and services (created by talented people) are on one side.  And all the precious metal in the gold standard are on the other.  These must be in balance.  And the sum of our currency must equal the amount of precious metal.  (Because they are ‘receipts’ for all that gold and silver we have locked up someplace.)  This prevents the government from creating inflation.  If you want to issue more money you have to put more precious metal onto the scale.  You just can’t print money.  For when you do and you don’t increase the amount of precious metal on the scale you depreciate the currency.  Because more of it equals the same amount of precious metal.  For more currency to equal the same amount of precious metal then each unit of currency has to be worth less.  And when each unit is worth less it takes more of them to buy the same things they bought before.  Thus raising prices.  If a government prints more currency without adding more precious metals on the scale they increase the value of that precious metal when MEASURED in that currency.  It becomes worth more.  In other words, you can trade that precious metal for more of that depreciated currency than before they depreciated it.  You do this too much and eventually people will prefer the precious metal over the currency.  They’ll lose faith in the currency.  And when that happens the economy collapses.  As people move back towards a barter system.

Milton Friedman wanted the Responsibility of the Gold Standard without Gold’s Constraint on increasing the Money Supply

A healthy economy needs a stable currency.  One that people don’t lose faith in.  Imagine trying to shop without money.  Instead, taking things to trade for the groceries you need.  Not very efficient.  So we need a stable currency.  And the gold standard gives us that.  However, the thing that makes gold or silver a stable currency, its scarcity, creates a liability.  Let’s go back to that balance scale.  To the side that contains the value of all goods and services.  Let’s say it increases.  But the precious metal on the other side doesn’t.  Which means the value of that precious metal increases.  The currency must equal the value of that precious metal.  So the value of the currency increases.  And prices fall.  It takes less of it to buy the same things it bought before.  Not a bad thing for consumers.  But it plays havoc with those who borrowed money before this appreciation.  Because they now have to repay money that is worth more than when what is was worth when they borrowed it.  Which hurt farmers during the 1920s.  Who borrowed a lot of money to mechanize their farms.  Which helped to greatly increase farm yields.  And increased food supplies while demand remained unchanged.  Which, of course, lowered farm prices.  The supply increased on the scale.  But the amount of gold didn’t.  Thus increasing the value of the gold.  And the currency.  Making prices fall.  Kicking off the deflationary spiral of the Great Depression.  Or so say the monetarists.

Now the monetarists wanted to get rid of the gold supply.  The Keynesians did, too.  But they wanted to do it so they could print and spend money.  Which they did during the Seventies.  Creating both a high unemployment rate and a high inflation rate.  Something that wasn’t supposed to happen in Keynesian economics.  For their solution to fix unemployment was to use inflation to stimulate aggregate demand in the economy.  Thus reducing unemployment.  But when they did this during the Seventies it didn’t work.  The Keynesians were befuddled.  But not the monetarists.  Who understood that the expansion of the money supply (printing money to spend) was responsible for that inflation.  People understood this, too.  And had rational expectations of how that Keynesian policy was going to end.  Higher prices.  So they raised prices before the stimulus could impact unemployment.  To stay ahead of the coming inflation.  So the Keynesian stimulus did nothing to reduce unemployment.  It just caused runaway inflation.  And raised consumer prices.  Which, in turn, decreased economic activity.  And further increased unemployment.

Perhaps the most well known economist in the Chicago school was Milton Friedman.  Who wanted the responsibility of the gold standard.  But without gold’s constraint on increasing the money supply to meet demand.  The key to monetarism.  To increase the money supply to match the growth in the economy.  To keep that scale balanced.  But without gold.  Instead, putting the money supply directly on the scale.  Printing fiat money as needed.  Great power.  But with great power comes great responsibility.  And if you abuse that power (as in printing money irresponsibly) the consequences of that abuse will be swift.  Thanks to the rational expectations of the people.  Another tenet of the Chicago school.

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LESSONS LEARNED #60: “Fool me once shame on you. Fool me twice shame on me. Fool me again shame on public education.” -Old Pithy

Posted by PITHOCRATES - April 8th, 2011

Slaves were Costly and Inefficient

George Washington made a profit on his plantation.  Better than some of his fellow Founding FathersThomas Jefferson couldn’t make a profit and was forever in debt.  But Washington could.  And did.  And would have been more profitable had he split up his slave families.  You see, he wanted to sell his slaves and use paid-laborers instead.  Why?  Because paid-labor was more profitable than slave-labor?  “What?!?” you ask.    Yes, that’s right.  Paid-labor was more profitable than slave-labor.  For a couple of reasons. 

First of all, slaves weren’t free.  People bought them at auction.  And anyone familiar with an auction knows that people sell to the highest bidder.  So there was an initial ‘investment’ in a slave that you didn’t have with a paid-laborer.  Think of this as the difference of buying or renting a house.  If you buy you pay a lot of money to own the house.  And you are responsible for all of the maintenance and upkeep on the house.  It’s different with renting.  You pay just a little bit each month for as long as you stay in the house.  It’s similar with paid-labor.  You rent people for the time they work.  Then they go home and feed and house themselves.  Slaves didn’t go home.  Because they were home.  And planters had to feed and house them.  And attend to their other needs.  These costs added up.  Especially if you had a lot of slaves out of their working prime (old men and young children) that you still had to feed and house.  And these are what Washington had a lot of.  Many generations of non-working slaves that he had to feed and house.  Which is why he wanted to sell them.  But people only wanted the workers.  Not the rest of the family.  But he refused to break up the slaves families.  So he kept them.  Even though it was a poor business decision.

Now Washington was no abolitionist, but he saw the conflict between the institution of slavery and the American ideal.  But his motives were financial at first.  His large crop of tobacco was not a money-maker.  So he wanted to diversify his crops.  And his risks.  Which meant different labor skills for different crops.  And this favored paid-labor.  Because you can always hire skilled laborers to grow these different crops.  Which was the great disadvantage of slave-labor.  Their advantage was in the large, single-crop plantation where a diverse skill-set was not required.  Trained in one skill, they kept repeating that single skill on a grand scale.  It was the best you could hope for from slave-labor.  Where people did the minimum to avoid punishment.  For that was their only incentive.  Paid-laborers, on the other hand, you can fire them.  Or reward them for bumper crops.  So they have an incentive to hone their skills and become the best at what they do.

King Cotton Abdicates

But Washington couldn’t break up the slave families.  And there was no way to give them the many years of farming skills overnight in these new skill areas and turn them into proper paid-laborers.  Who could take care of themselves and their families while integrating them into free society.  Unless he gave up his day job.  So he continued to use slave-labor.  However, his will freed his slaves after his wife passed away.  He and his wife were the last generation to live the old way of life.  His successors were to live the new way of life.  His will further instructed to teach the newly freed slaves trade skills and help them integrate into free society.

Many critics of the United States like to point to the institution of slavery and say that is why we became a great nation.  That we grew rich on slave-labor.  That we reaped huge profits because slaves were free.  Nothing could be further from the truth.  First of all, as noted above, slave-labor was not free labor.  It was costly.  And inefficient.  It was such a bad business model that it had almost died of its own accord.  As many of the Founding Fathers had earnestly wished.  But something happened.  Eli Whitney invented the cotton gin.  Now machines could separate the seeds from the cotton faster than they could pick it.  All of a sudden the large, single-crop, cotton plantations in the south needed to plant, grow and pick more cotton than ever before.  To feed these new, hungry machines.  Cotton was the new high-demand fabric.  The textile markets in Great Britain couldn’t buy enough of it.  And the Southern economy flourished like it had never did before.  Southern planters grew rich.  As did the Southern economy.  King Cotton they called it.  Because cotton was king.

And that is why the South lost the Civil War.  For if cotton was king that meant the South was a monarchy.  And for all intents and purposes, it was.  Most Southerners didn’t own slaves.  Most were poor.  Working on family farms.  The institution of slavery didn’t tarnish them.  No.  The rich planters owned the vast majority of the slaves.  The planter elite.  The planter aristocracy.  And it was an aristocracy in every sense of the word.  Just watch the classic Gone with the Wind and tell me what that world reminds you more of.  America?  Or European feudalism?  That wasn’t America.  America was the poor southerner working the family farm.  And the poor northerner working the family farm.  It was not inherited wealth passed from generation to generation.  Wealth created by labor bonded in servitude attached to the land (serfs in Europe, slaves in America).  No, this was not America.  It was a charmed life for the privileged few.  But only the privileged few.  Because it mattered what your last name was.

Laissez-Faire Capitalism wins the Civil War

The North won the Civil War because it was more laissez-faire capitalism.  The South had the better generals at the beginning of the war.  And the Southern soldier was a formidable foe in combat.  But factories in the North fed Northern shipyards.  Which built a navy that blockaded southern ports.  Making all that cotton worthless.  Great Britain would then turn to India for her cotton needs.  So much for King Cotton. 

The Southern economy was a cotton economy without a market.  They had factories and shipyards, too, buy not like the industrialized North.  The South never had a chance.  Unless she could strike a winning blow early.  Because they could not win a war of attrition.  Which is what the Civil War became.  Especially after the Confederate ‘high water’ mark.  Gettysburg.  The Confederacy shrank as the Union Army advanced.  Fed by a growing network of railroads.  This relentless advance of man and material made possible by the prudent investment of capital by savvy investors.  The genius of entrepreneurs.  And the drive of industrialists.

This miracle of capitalism would tip the scales again in World War I.  And in World War II.  The Arsenal of Democracy.  Laissez-faire capitalism.  Paid-laborers.  Incentive.  And profit.  The best things in life.  They gave us the comforts we now take for granted.  And they took us from a new nation to a superpower in little over one hundred years.

Pliant, Subservient Students grow up to become good Democratic Voters

So that’s history.  But people today still think slavery made us great.  They attack capitalism.  Incentive.  Profits.  And just about everything else that built and made this country great.  Why?  Because they learned somewhere that slavery made us great.  That capitalism is bad and unfair.  That incentive and profits exploit the working class.  Where?  In our public schools.  And our public universities.  Kids in our public institutions learn these things.  Not the things that made us great.  Because these schools indoctrinate.  They don’t educate.  Why?  For the same reason the planter aristocracy fought in the Civil War.  To protect a privileged class.

Today, the liberal Democrats are the descendants of the planter aristocracy.  Not literally.  But figuratively.  Liberal Democrats are not capitalists.  Or industrialists.  They don’t like incentive or profit.  They prefer patronage.  They like rewarding their friends.  And punishing their enemies.  And to have this power they need to have the people vote for them.  So they come across as the champion of the poor and friend of the working man.  Or any other minority or class of people whose vote they need to buy.  But they’re anything but.  For an example just look at one of their favorite cause célèbre.  The black family.  These white liberals want to ease other whites’ guilt over slavery by doing as much as they can for the black family.  To make up for all those years of injustice.  And they dropped a neutron bomb.  Aid to Families with Dependent Children.  AFDC.  A real feel-good thing to do.  But it led to an explosion of single-mother families in the black community.  Because of the incentives of the program.  It encouraged women to have more children.  Stay unmarried.  And not work.  For a young woman with no working skill this was a godsend.  The state would replace the father and provide for her and her children.  But as it turned out, the state was a very poor father figure.  Children need fathers.  We all know this.  That’s why there are big brother programs.  To provide a father figure for these fatherless children.  For they will stray without this strong role model in the family.  And have.  Economist Thomas Sowell blames AFDC for greatly destroying the black family.

But the liberal Democrats don’t look at the destruction they cause.  They look at the political power they’ve gained.  Much like the planter elite.  So they need to tweak history a bit.  To mask their failures.  And accentuate the good they meant to do.  But never did.  And what better way to do that than in our public schools?  So they take care of our teachers.  Pull them into their aristocratic class.  Help them get favorable contracts without allowing the taxpayers a say.  Feed them big salaries.  Some of which is returned to them via their union dues.  Quid pro quo. They live the good life.  The politicians get ‘campaign’ contributions.  And pliant, subservient students grow up to become good Democratic voters.

And thus the lie is sustained.  Those who destroy are portrayed as nurturers.  And those who nurture are portrayed as destroyers.  A political sleight of hand.  That pays dividends in the voting booth.

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