Archive for April, 2010

MONETARY REFORM

April 30, 2010

Monetary Reform
Gold was long ago chosen by the free market, by the people, as the best money. The gold standard is a convenient way to use gold as money. This means honest banknotes (no counterfeits) and token coins in circulation, redeemable at any time in gold at face value. Face value should be stated not in discredited units like dollars, pounds sterling, francs or yen, but in ounces or grams of gold.
Banking adds convenience to the gold standard, with checks and electronic transfers for convenient payment. Honest banking would mean simply enabling easy transfer of ownership of gold from one person to another, and acting as go-between for loans of gold.
How do we get from here to there?
Many economists have proposed assorted schemes to return to the gold standard. Most of them require either the co-operation or overthrow of the government. I see no chance of any government depriving itself of the power to use us with fiat currency. Therefore, I propose a free market re-creation of a gold standard, in free competition with government currency. Here’s how I see this happening.
First, get the message to the people- they are being cheated and manipulated through the stealth tax and the government control of the money supply. Their votes are needed to force the government to give up the monopoly in the money business. This would not force the government to quit the money business; it would simply require them to compete.
Next, repeal any laws that prohibit trade and contracts in other currencies. This would make it legal to buy, sell, lend, and make contracts (loans, insurance, annuities, mortgages, etc) in any currency, including, of course, gold.
Make it legal and easy to buy back our gold from the government at the free market price.
With this freedom, the market could provide us with an honest currency, with private banks and private mints dealing in gold coins, subsidiary token coins and bills.
Can we trust these private individuals to deal honestly with us? Not entirely. However, we won’t do business with private, competing banks and mints unless they give ironclad guarantees, and develop a reputation for honesty. They have to earn our trust, as any business operating in the free market has to earn our trust. An easy route to trust would be Insurance contracts that guarantee the safety of our deposits. The insurance company would have an excellent motive to detect and eliminate any cheating.
If banks don’t abide by their contractual obligations, we, or the insurance company, can bring them to justice and try them for fraud. That’s just what we can’t do to government, and that’s why we can’t trust government with our money.
There is no telling just how such a system might evolve. The free market is forever surprising us with new ideas. It could well give us an honest currency and an end to the boom and bust cycle. I would expect banks to evolve explicit contracts on the terms for withdrawing funds, such as advance notification for larger withdrawals, and deposit insurance (but not by government) as a guarantee against fraud or failure.

Monopoly

April 28, 2010

MONOPOLY IN THE FREE MARKET
Monopoly is an absence of competition. When I first studied Economics, I got a strong impression that monopoly was the big, bad, wolf in the free market, an example of failure of the free market to provide the best possible deal for the consumer. Not So. Not in a free Market.
How do you achieve a monopoly? By being the first to produce a new product that people will buy. By serving the consumers. So far, everybody is a winner. The producer makes a profit, and the consumer gets a marvellous new gadget.
How do you maintain your monopoly position? Your profits attract competition which can soon eliminate the monopoly. To avoid this, the monopolist must act as though he already has competition. He must continue to improve his product, reduce his costs and his prices, and keep coming up with new products that people will want. Everybody is still a winner. Potential competition is all it takes to make the monopolist provide the best deal for the consumer.
Each worker has a degree of monopoly, because each worker is a unique person with unique attitudes, aptitudes, skills and experience. I have had the happy experience of getting an immediate job offer more than once because of particular experience in my past employment.
MONOPOLY IN THE UNFREE MARKET
If I could somehow eliminate competition, I could relax and make profit without the insecurity that comes with competition. How? I might use coercion, but that would be illegal unless I could get permission from the government, which holds a monopoly on coercion. This is how the Guilds operated in the middle ages; they were granted a monopoly by the monarch.
In the late 19th and early 20th centuries, labor unions used coercion with the tacit approval of governments. This was an era when Unions could control millions of votes to influence politicians. Later they managed to get laws passed to give them power: to exclude non-members from jobs, to strike without fear of being fired, to picket while on strike.
The 20th century produced dozens of government agencies to regulate commerce. In many cases, commercial interests took control of these regulators to shut out newcomers to an industry, creating cartels of the companies that got there first.
All of these monopolistic arrangements are empowered by Government and give profit to the monopolists at a cost to the consumers. Consumers pay higher prices, often for products of diminishing quality.
Union monopolies often prove self defeating. Increased wages to union workers increase production costs so that their employers can no longer compete, unless the employers also enjoy the advantage of a monopoly, or unless the unions can achieve a monopoly control of labor throughout the industry. In this case the increased cost of production, passed on to the consumer, reduces demand. This means reduced production and layoffs in the industry. In a unionized industry, this meant layoffs among those with the least seniority.
Even unionization of an entire industry can be self defeating if the industry has significant competition from abroad in countries with less union power. For this reason, early efforts to unionize tried to build international unions.
None of these monopolies could exist in a free market, which is driven entirely by the wants of the consumers (That’s you and me). These monopolies are the product of government intervention or collusion. There is, however, a legitimate way to achieve a monopolistic advantage. That way is to excel at competition, to “build a better mousetrap”, and keep doing so.
This is the realm of the entrepreneur (which is simply French for “enterpriser”). If you can find a way to greatly improve on an existing product, or better yet, dream up an entirely new and different product, get the capital and the people to design and produce it, you have a monopoly, for a time, on that product.
This has been an increasingly important way for a company to grow and profit, especially since the mid-20th century. Imitators will spring up, in time, to compete in producing this new product. The secret of success is to keep ahead of the imitators by forever developing newer, better products. In this situation, everyone is a winner, especially the consumer.

The Wage Freeze

April 28, 2010

World War 2, like all modern wars, was financed by monetary inflation, essentially printing lots of legal counterfeit money. The result, in time, was increasing price inflation, including wage inflation. In a vain attempt to curb price inflation, our government set price caps (and eventually rationing) and a wage freeze.
With 10 million Americans away at war, there was a severe labor shortage. With employers struggling to get the best workers, (mostly producing war goods), and a wage freeze, employers started adding “fringe Benefits”, a package of company-paid pension plans, medical insurance, and expanded paid vacations. Comparisons between job offers became more complex, but essentially they all offered more than the frozen wage as an inducement.
This defeated the wage freeze, but when the freeze ended after the war. Employers were saddled with the added overhead of managing these fringe benefits. Fringe benefits have now come back to haunt employers, as government keeps adding mandated fringe benefits to our employment.
Like all price controls, the wage freeze solves no problems and causes many more problems. People usually manage to minimize the problems by finding “loopholes” in the law, but always with a cost. The black market is the closest thing to a free market we can achieve but has an extra burden of overhead cost to evade the law.
Price and wage controls are a simple minded effort to avoid the unavoidable consequence of counterfeiting. It’s a case of one intervention causing problems which are used to justify one more intervention and so on and on and on. And with each intervention government increases in size, cost, and power, as we become less and less free. As Mises said, “Government is the negation of liberty”

Wages: Some personal Experience

April 27, 2010

Nominal wages have risen continually since the 1930s, a natural result of perpetual legal counterfeiting. Thus prospective employers assume that they must offer you more than your wage on your last job.
At one point I was working as a production engineer for $65 a week. I quit there and applied for a job at another company. The only opening they had was as a technician at $60 a week. I was willing to take that, but they wouldn’t consider paying less than the $65 I’d been earning, so they gave me the title of engineer which paid $75 per week. I didn’t complain!
Working on military contracts is feast and famine. Years later I had a very successful job which I really liked. When the company ran out of contracts, they laid off every engineer but kept their technicians, who could work in production until another contract came through. I offered to downgrade to technician but the company wouldn’t consider it. Apparently that was against company policy.
On the other hand, many workers are determined to never accept a wage cut or a reduction in “status”. After many jobs and many titles, I’m convinced that titles are meaningless. Pay, and freedom to solve problems my own way, are the rewards that matter to me.
I have been laid off 5 times in the 44 years between school and retirement. Each time I moved on to a better job at better pay. The stress in the interval between jobs is painful. My shortest interval between jobs was 2 hours. The longest was 4 months. At one point I got a temporary job mopping floors, at the minimum wage, while my next employer spent 6 months obtaining a security clearance for me. All in all, I have probably spent 1% of my working life between jobs. I believe that is what a free labor market could achieve for all workers.
Workers, too, tend to spend up to the limit and “couldn’t possibly” live on less. When they have to, they find that they can live on less.
As a libertarian, I believe an employer has the right to hire and fire on any basis they choose, just as I have the right to accept or reject a job offer for whatever reasons I choose. If our reasons are foolish, we suffer the consequences, but liberty includes the right to be wrong.
I was once offered a good job in what I considered a good company, on the condition that I shave off my beard. I refused the offer. I sell my services, (and serve with enthusiasm), but not my personal freedom. Another prospective employer refused to even interview me because I didn’t have a college degree. I figure such arbitrary standards diminish their opportunities, as well as mine.
One of my employers, a government contractor, put on a drive to get every employee to buy government bonds. On principle, I refused. I was threatened with reprisals. When the drive ended, they froze my wages. That was their right. I found a much better job and left. I was the only electronics designer they had. They needed me more than I needed them.
Workers, as well as the entrepreneurs who start and guide companies to success, must be able to adapt to changes, and move on when necessary. There is no security, but endless opportunity in the free market.

Labor Unions

April 26, 2010

Unions
I have disapproved of unions since before I ever started working. First, I disapproved of their coercive nature; they used intimidation and violence. Second, a union is a commons, which subjects the individual to the will of the majority. Third, unions insist on uniform pay depending on job classification, without regard to effort or results. I instinctively felt that employment should be a freely chosen contract between an individual employee and his employer, and pay should be awarded on the basis of employee effectiveness, with competition between employees and between employers.
Later, my earliest encounters with unions added to my disapproval. I was beset by threatening union pickets when I crossed picket lines for job interviews. I was denied part-time jobs by unions when I tried to work my way through college. When I finally got a job as a junior engineer, I was forced to pay union dues to keep my job. Then my wage was frozen for more than a year while the union negotiated with management to determine my pay.
Until the New Deal of the 1930s, union violence was winked at by government. With the enactment of labor legislation in the 1930s, the government provided the coercion to force companies to accept and negotiate with unions. A labor union is now a government granted monopoly with little protection for the rights of individual workers or for the employers. There is now no freedom in the labor market except in companies where the workers overwhelmingly reject unionization.

The Minimum Wage Law

April 25, 2010

The Minimum Wage
The minimum wage law is at best an excellent example of the simple minded stupidity of our lawmakers. Or perhaps it is their cynical deference to the voting power of labor unions. It certainly illustrates the naively simplistic thinking of the altruistic voters who elect those lawmakers.
Let’s say the law sets a minimum wage of $5 per hour.
The law, on the surface, is supposed to give a helping hand to the unskilled and inexperienced workers who would, in the free market, earn less than $5 an hour. Of course it doesn’t achieve that. Since employers would take a loss from the increased wages, they could simply fire those employees. The fact that the employees have chosen to work at $3 an hour rather than not work at all shows their preference. So neither the employer nor the employee wants such a law. Who does want this crazy law?
The labor unions very much want a minimum wage law, and continually demand increases of the minimum wage level in line with price inflation. Their motive is not obvious but yes, even the unskilled workers compete with all other workers and so reduce all wages. Reducing the pool of available labor in any way makes it easier for the unions to demand higher wages. They base their reasoning on the idea of Karl Marx that all employment is exploitation, that they are “wage slaves”. Never mind that the $3 an hour wage is a voluntary agreement between employer and employee. Voluntary slavery is a self-contradiction.
The best way to illustrate the illogic of the minimum wage is to ask ;
Suppose that there were no minimum wage. Unemployment would be a few percent; those temporarily seeking their next job.
Suppose the minimum wage were $1,000 per hour. Yes, there would be a few people employed, but nearly all of us would be permanently unemployed.
Government unemployment statistics don’t reflect permanent unemployment, but I would guess that there are between 5% and 10% of potential workers permanently unemployed as a result of our ever rising minimum wage.
The effective minimum wage is actually much higher than the nominal minimum wage, because an ever-growing list of mandatory fringe benefits adds to the cost of each employee to an employer. There are also a growing number of people in “temporary” or “part-time” employment to avoid the cost of mandatory fringe benefits. My last job was “temporary” and lasted the two years until I turned 65 and retired.

The Tragedy of the Commons

April 23, 2010

The Tragedy of the Commons
The basic principle of socialism is that people must share something: land, goods, income, or responsibility. The various socialist forms of government are: Communism, Fascism, and the welfare state.
The family is the simplest commune. All property, income, control, and responsibility are shared by the parents, but not necessarily equally.
A communist community shares ownership of property, especially the means of production: land, farms, factories, and machinery. It works, but it tends to become a dictatorship, and no member is free.
Fascism is only related to racism and genocide by coincidence; they both existed in Adolph Hitler’s Germany in the 1930s. Both Italy and Spain were fascist, too, at that time, but neither was involved directly in the Holocaust.
A fascist community retains nominal private ownership of the means of production, but governmental control of the economy is so complete that, in effect, the government owns everything and everybody.
The welfare state is primarily about redistributing wealth and income to make the citizens dependent and patriotic. The government’s unlimited power to tax, appropriate, and redistribute income and wealth makes common property of all income and wealth. To the extent that the government controls the economy by regulation and manipulation of the money, the government is fascist.
Common property distorts our incentives. The result is usually exploitation of the property by most of the communal owners, and improvement of the property by few or none of them. Some common property is unavoidable. To avoid wasteful exploitation, all else should be privately owned.
In a free market, enterprise, innovation, and taking risks are the road to riches for the most successful, and increasing wealth for all. Better, cheaper products and services benefit everyone.
Under socialism of any sort, the riches of the successful are taxed heavily. This stifles the incentive to take any risk and so stifles enterprise. Poverty, on the other hand, is rewarded with an extra slice of the common wealth, killing any incentive to try to earn a living. Only the coercion of a totalitarian state can induce workers to bother to even seem to be working. In its efforts to spread the wealth, the Socialist society effectively spreads the poverty.
Through the ages, thousands of socialist experiments have failed because the rules defeated the normal human incentives. People act to improve their lot, but under socialism, any improvement they achieve is divided among 100 or a million others, while without bothering to produce at all, they are still entitled to an equal share- of the poverty.
Of the pilgrims who landed on Plymouth Rock, most died of starvation rather than work for the benefit of others, until the socialist experiment was ended and the people were granted private ownership of some land and whatever they produced. From then on, they thrived. If you favor prosperity, the free market is the only way to go. Socialism is basically slavery. You own a share of a million people and the same million people share ownership of you.

Altruism

April 22, 2010

Altruism
On the basis of one simple rule the free market achieves a remarkable result. The rule is that all participants act voluntarily, without coercion. The result is that each party to an exchange profits by it. This means that the selfish motives of individuals provide benefits for all. Magic!
But what about the actions of people who operate from altruistic, unselfish motives? Is someone else always profiting at their expense?
My personal belief is that the most unselfish acts have an underlying selfish motivation. Whether it is our genes or our culture, we get satisfaction out of doing good to others. Personally, it makes my day if I do my “good deed for the day”. Yes, I was a boy scout long ago. So even if I gain nothing or even lose materially in an exchange, I gain enough in psychic satisfaction to more than compensate for the loss. All in all, I, too, profit from the exchange.
There are a million opportunities for altruistic action. You may feel strongly that we should save some endangered species from extinction, or perhaps save the poorest people everywhere from starvation. Good thought. You can do your part, but you can’t do it alone. You might think that everyone should do their share in aid of your favorite charity. You may take up collections, or spread the word in whatever way you can to persuade others to give. Alas, it still isn’t enough.
Then, if you have socialist leanings, you may decide that everyone else should be forced to support your pet cause. You turn to government to tax everyone to satisfy your altruistic project. This is where altruism becomes a menace to freedom, and the free market goes out the window.
By all means, support your favorite charity freely, but please leave me free to support mine, even if my own charity is just to build up my own wealth.

The Welfare State

April 19, 2010

The Welfare State

Private welfare- charity- is probably older than mankind: assistance for unfortunate members of your herd, pack, or tribe. It is voluntary.

Public welfare came with the appearance of government. Providing it (taxation) is compulsory.

The welfare state goes beyond providing for the unfortunate members of the state. It is designed to provide some benefit to nearly everyone.

The Welfare State was introduced in Germany in the 1880s by Chancellor Otto Von Bismarck. His stated purpose was to make all Germans dependant upon the State and convert them into good citizens: willing taxpayers and cannon fodder for the wars needed to build the German Empire.

Bismarck wasn’t the inventor of this scheme. The ancient Romans kept their commoners happy with “Bread and Circuses”. After World War 1, Bismarck’s ideas were copied throughout Europe and the Americas.

In the “rich world” (Europe and America) everybody pays taxes, so the State is simply redistributing our incomes to make us all feel indebted, and good patriotic citizens. In time we feel that we can’t get by without these benefits. But of course most of us get back less than what we put in. We have to support politicians and bureaucrats with the difference. It takes a lot of bureaucrats to operate welfare programs.

The welfare state has destroyed the initiative and self reliance of the pioneers who settled the USA. Now we seek safety and security in the arms of the welfare state, at great cost to our freedom from the ever encroaching power of the government.

The Medical Insurance Trap

April 18, 2010

The Medical Insurance Trap

Insurance can be an essential safety net in a catastrophe. Without insurance, death, natural disaster, or personal accidents can wipe you out financially. Savings, in time can build up a buffer against such, but the catastrophe may happen too soon.

Medical insurance, however, in its commonest form today, is not primarily for the occasional and unpredictable event. Much of it goes to pay for fairly routine things like visits to the doctor, prescription drugs, and tests. These are paid for from your insurance premiums, which pass through the insurance company and then to your physician, druggist, and test labs. The cost of all the paperwork involved is added cost, which increases your insurance premium.

More significant than this overhead, however, is the way this kind of insurance changes the incentives of all concerned. You may find yourself blocked off from certain treatments, tests, or drugs because your insurance doesn’t cover them. More likely, you may be getting treatments, tests, or drugs that you wouldn’t choose if you were offered them but had to pay for them yourself.

With insurance coverage, your attitude and your doctor’s attitude is “Why not? It’s covered”. But in the end, your premiums must expand to cover your extravagant decisions, and the extravagant decisions of all the other people with the same insurance.

And most significant, in my opinion, is the way this affects our attitudes to health. Our health care system operates on the idea that sickness, diabetes, heart problems, strokes, cancer, etc, are just random events which call for repairs.

That’s seldom true. These “accidents” are preventable through nutrition and lifestyle. YOU can prevent them. With some personal effort most of us can live and stay healthy and active for many additional years.

Lazily, we prefer to eat junk food that tickles our taste buds, spend long inactive hours at the computer and the TV, get fat and unhealthy, and buy insurance to pay for patching up the accumulated damage.