Posts Tagged ‘Free Market’

FREE MARKET PENSIONS

July 1, 2010

FREE MARKET PENSIONS

The welfare state is under threat by demographics. Many people are now living for many years beyond retirement age. The US social security pension system is an ever growing government obligation. Financially, it is a pyramid scheme which is doomed to collapse. We badly need something better. The free market can always provide the best answer. The Social security system is a major and growing government intervention into the economy of each household. It’s time to retire the government pension scheme.

Following current US trends, we have people spending fewer years in productive work, more years preparing for work, and living more years after retirement. The number of people living past 100 is growing rapidly. I retired in 1991. Since then, my children’s generation has supported me. Now my grandchildren’s generation is also supporting me. If I live to 100, my great-grandchildren’s generation will be supporting me and also supporting my children. Perhaps I should do them all a favor and die now.

But what happened to all the money I paid into the social security fund? Wasn’t it invested so that the proceeds of the fund would support me now? No, it was “loaned” to the US government. But the US government doesn’t pay its debts. It spent the money and just kept on “borrowing” from the social security fund. The “fund” is a fiction. My pension is paid out of the social security contributions of the present working generations.

The free market alternative is obvious. Instead of investing in the fictitious government fund, you could invest it in some free market institution, which will be legally obliged to deal honestly with you.

If you pay into an annuity during your working years, you will have a pension for as long as you live.

A mutual fund of stocks and bonds can provide your pension in your old age. If you spend only the dividends in your retirement, you can leave the fund to your children to build up their pensions.

In each case your savings are invested in something productive which will earn dividends and interest for you by producing goods for consumption.

Paying into the social security retirement was easy when I started work back in the 1940s. As I remember it, my deduction was 3%, including the matching payment from my employer. Now, the total would be 33% if I were still working.

Phasing in a free market system, while still paying enough to cover the entitlements already committed to, will mean even greater taxation for the next working generation. The politicians haven’t yet found the political courage to start the transition. Will they ever? They may just paper it over with inflation, the stealth tax.

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BYPASS GOVERNMENT

June 27, 2010

BYPASS GOVERNMENT

As I said in a previous blog, it’s not impossible to reform the government, but very unlikely. The parasites, the politicians and bureaucrats, who benefit from the current statist system, have a great stake in its continuance and expansion. They will strongly resist any reform.

There are ways, however, that we can bypass some of the burdens of government by employing competing free market substitutes. We might find enough support for freedom in Congress to prevent interference with the competing services. I’m thinking in terms of private schools, private arbitration courts, and private police,

Our justice system is very costly. Its only aim is to “bring the criminal to justice” with no attempt to bring justice to the victim. Arbitration courts are much cheaper. A victim would prefer arbitration, because he can claim compensation for his loss. A criminal might prefer arbitration because he can avoid imprisonment, and instead earn the money, to pay compensation to the victim, in relative freedom.

We already have private schools. We would have many more of them, and many more students attending private schools, if their parents were relieved of the tax burden of supporting public schools as well as paying tuition to private schools. Home schooling or private schooling would enable parents to choose the values to be taught to their children.

The chief obstacle to competition with government agencies and services is the inclination of government to claim or grant monopoly privilege. For many years private shipping companies have competed successfully with the US post office, with the single exception of letters. The post office survives today only by virtue of the remaining monopoly for delivering letters.

Perhaps you can think of other government functions that could be supplanted by private enterprise.

ECONOMICS IN ONE LESSON

June 25, 2010

ECONOMICS IN ONE LESSON

The best book I know of to learn the essentials of free market (Austrian) economics is: “Economics in one lesson” by Henry Hazlitt. It is written in plain English without jargon, graphs, charts, statistics or math. Even I can understand it. I believe it is essential that we all understand economics, for it is in this battlefield that governments rob us of our income, wealth, and freedom. The book is available at http://mises.org/store/ for $12

The book teaches simply that to understand any economic choice, it is necessary to consider all effects on all people, both short-term and long-term. This is not much of a problem for you and me in our own individual economies; we generally do it automatically. The problem arises in macroeconomics, when government intervenes with some law or ruling which affects many people. Most such interventions are driven by pressure from lobbyists for special interest groups who hope to benefit from a change.

Here are some government policy fallacies exposed and explained in the book:
Public works to relieve unemployment.
Taxes that discourage production.
Cheap Credit that diverts production.
Spread-the-work schemes.
Protective tariffs.
Mercantilism.
Saving the X industry.
Commodity price stabilization.
Price controls.
Rent Control.
Minimum wage law.
Inflation.
The assault on saving.

MICRO VS MACRO ECONOMICS

June 22, 2010

MICRO VS MACRO ECONOMICS

Microeconomics is what you and I practice every day. We live within our means. We earn what money we can with our skills and effort. We try to spend it wisely on our most important wants. We save for a rainy day, to put the kids through college, and to build a retirement fund.

Macroeconomics is about the bigger picture: the sum total of the microeconomics of all the people and businesses in a city, county, state, or nation, or the whole world. It is only important as a guide for governments in their interventions into our microeconomics.

The interventions which affect our personal microeconomics are taxes, subsidies, money supply, credit supply, international trade agreements and embargos. All of these interventions shackle the free market, reducing the satisfaction of people’s wants.

The intervention with the most far-reaching consequences is the control of the supply of money and credit; it affects every sale and every purchase, and every choice between present wants and savings for the future. It is the cause of the business cycle with its eternal sequence of boom, bust, depression, and recovery.

If we had real money, we would have no more business cycles. We could save for the future with confidence that our nest-egg wouldn’t evaporate in inflation.

If we abandoned all the other interventions as well, there would be no need for macroeconomics. If then we each live within our means, the total amounts of balance of trade, exchange rates, and such would be unimportant. Prices would give us all the information we need to direct our efforts to provide our most urgent needs most efficiently.

SOCIALISM AND THE FREE MARKET

June 12, 2010

SOCIALISM AND THE FREE MARKET
The free market and socialism are not totally incompatible. It’s true that a free market cannot exist legally under a socialist government. That’s what they call a black market. However, socialist countries usually do have a black market and probably would soon collapse without it. This is because socialist bureaucrats do a really dismal job of trying to achieve what the free market does so well; the assignment of the available labor, materials, and capital to efficiently satisfy the wants of consumers. That’s what economics is all about.

What I say about socialism applies equally to all of its variants: communism, socialism, fascism, the welfare state, and others. The differences between them are more a matter of degree than of principle.

Socialism can exist within a free market. The oldest form of commune, the family, has always been an essential tool of survival. Communes of any size can exist legally within a free market system, provided only that membership in the commune is voluntary. However, the larger a commune becomes the less efficient and the more dictatorial it becomes. Only strong bonds of family, tradition, or religion can hold it together.

A commune within a free market system soon reveals its inefficiency by its poverty in contrast with the prosperity of the people in the free market. This strains the bonds binding the commune together, and hastens its eventual collapse.

The solution for socialism is to completely isolate the commune from the outside world. Thus after WW2, the Russian empire (The USSR) proceeded to block all contact with the rest of the world. Winston Churchill put it aptly, “An iron curtain has fallen across Europe”.

All Russian soldiers who had contacted Europeans during the war, even if only in combat, were sent off to labor camps in Siberia, quarantined there until they had been decontaminated of any possible negative thoughts about communism. For decades the Soviet leaders tried to hide from their people their poverty in contrast with the prosperity of the rest of the Western world. Now the USSR has collapsed and Russia has adopted what might best be described as a “corporate welfare state”.

Meanwhile, the USA has become an ever-expanding welfare state with politicians buying votes, and gaining campaign contributions, by granting privilege and power to assorted special interest groups. Why do we so easily sell our votes? Do voters realize that they are being bought? Do they care?

Do they all believe that somehow each of them can get more out of the pot than they put in? (That’s impossible). Those who do get more out than they put in are parasites. The rest of us are their victims. This is theft, not a free market exchange, where each party profits by the exchange.

Government budget bills are always loaded with amendments submitted by congressmen to allot some money for some project which will benefit the people of their particular congressional districts. This is called the “Pork Barrel”. This is how your congressman tries to buy your votes. He has no trouble getting his amendment inserted in the budget bill. It’s an unwritten agreement among all congressmen; “you vote for my bit and I’ll vote for yours”.

I suspect that most of the public goes to the polls uninformed, except for the sound bites repeated over and over on TV, and paid for by campaign contributions from the corporate and special interest groups. If we are that careless about our votes, perhaps we deserve to be taxed for the benefit of these parasites.

The men who produced our Constitution imagined informed voters electing wise, public spirited men to represent them in Congress. What we got instead must have shocked them. How do you remove such corruption from government? Power is what creates corruption. Is it possible to create a government without power? Free market anarchy is the only answer I can see. If you can think of something better, please add your comment to this blog.

GOVERNMENT BY ANARCHY

June 10, 2010

GOVERNMENT BY ANARCHY
Just what is a nation? Is it the piece of land within some borders? Is it the people living therein? Or is it only the citizens therein? Is it the government of those people? What does citizenship mean?

I’m asking you to think from outside the box of the system we were all born into, and try to bring some insight into something so ingrained that we never really question it: the nature and purpose of government. I know that anarchy sounds scary, but anarchy is simply the absence of government. Thinking about anarchy could be a very powerful tool to understand government, and perhaps improve it.

From my perspective, government has always been an institution of power which enables some of us to use the rest of us, and to use the land, to their own benefit. A democracy or a republic is government which permits us some degree of choice of which bandits will “protect” us, just as the local mafia “protects” us. Democracy obliges politicians to offer us something in return for our votes. Usually we elect the ablest liars.

Conquest may clarify the relationship between people, land, and government. When we won the war with Mexico, the USA acquired what now comprises California, Nevada, New Mexico, and Texas. The inhabitants came with the land, and became Americans. They had no choice in the matter. So do the people own their land or does the land own the people? It seems from this example that the government owns both the land and the people. Wars are fought between governments to determine which government shall own the disputed land and people therein.

Do we really own the land we buy? I believe not. If government can tax us for “owning” the land, then the government really owns the land and we are paying rent to the government for the privilege of using it. When we “buy” the land we are really just paying the former “owner” for the transfer of the privilege of renting it from the government.

Who really owns the land becomes even more apparent when the government uses the power of eminent domain to take the property from you, compensating you with whatever amount it considers fair. That’s generous of government, since it really owns that land already, and you are just renting it. Government is just terminating your lease.

Income tax implies government ownership of people, and of what they produce. I have had the personal experience of having to file income tax returns for 2 different countries every year for several years.

From 1979 to 2000, I was resident in Scotland. Then I returned to the USA. I retained my US citizenship throughout that period, but was officially resident in Britain. During all that time, I had to file income tax returns for both countries.

The USA and Britain have a tax treaty agreement. The country of residence (Britain) at the time of the tax has first claim on my income. The country of my citizenship (The USA) has a second claim. If the American tax calculated on my whole income for the year exceeds whatever I have paid to Britain, I owe the USA the difference.

From this I deduce that, as a US citizen, the US owns me, and while I’m resident in Britain, the US shares that ownership of me with Britain.

Absolute proof that government owns us is the conscription of soldiers in time of war. The USA used conscription in the Civil War, WW1, and WW2.

So here’s my analysis; a nation is a territory with set borders. The land and the people therein are the property of the government. Wars are simply struggles between governments to secure ownership of the land and people.

A Libertarian/Anarchist Approach

As a libertarian, and a tentative anarchist, I find the power of government to be the big problem. With government, the government is sovereign and we are its servants. In the free market, the consumer is sovereign. He chooses those who serve him.

To view government from an anarchist or libertarian perspective, lets assume that government is here to provide some essential services for us, its citizens. How could we get the benefit of these services, but avoid the coercive monopoly of government?

Let’s see how a free market approach could provide these services. The free market prohibits coercion, and that eliminates monopoly. Suppose we have competing governments competing to provide us with their services. Such governments could offer services paid for by fee per service, or by subscription. You choose the government that offers the best value for money.

If you are disappointed with your choice, you can shop for a better deal from another government. Or you might get one service from one government and another service from some other government. There would be no room for politics, just competition. Competing governments would have to be efficient and honest to get and keep customers/subscribers/citizens. Government would be your servant, not your master.

The term “government” would hardly be appropriate in such a situation. “Service Provider” might better describe the new role of government.

Anarchist proposals are similar to this but they tend to designate these servants as insurance companies. Individual companies might specialize in one service such as education or roadways. Some might provide groups of related services such as police, courts & prisons. An insurance company might insure your life, safety, & property in conjunction with providing home security measures and police services. A free market in the services that governments provide would give us many choices. Competition would assure value for money. Wasteful bureaucracies would disappear.

Under competing governments, you and I might subscribe to different governments. In any transaction between us, we should agree in advance which government shall be given authority in case of a dispute. The Anarchists have this sort of problem worked out in some detail. Such arrangements would probably give us arbitration courts independent of the other services of government. The free market always produces solutions to problems with variations to suit everyone. I suggest you read “Chaos Theory”, by Robert P Murphy, ($8 from Mises Bookstore)

When The Market Defeats The Government

May 11, 2010

When The Market Defeats The Government
Income tax currently taxes the interest you earn on your savings, which should deter you from saving. Then the tax code gives me an exemption for interest I pay, which should encourage me to borrow and spend. In a sense they’re trying to transfer some of the tax burden from me, the borrower, to you, the saver. What happens is that the market shifts the tax burden right back to the borrower.
This tax policy is the result of a current Keynesian economic fallacy that spending is the road to prosperity and saving brings stagnation to the economy.
But it doesn’t work out that way. Any change in government policy to influence our economic motivations will cause unintended side effects in the market. You and I and others will adjust our actions to maximize our satisfaction under the changed circumstances. (That’s the market in action). Here’s a thought experiment to show what will happen:
Our situation is this: You have loaned me some money for which I’m paying you 4% interest. Suppose there is no tax break for interest paid, no income tax on interest income, and the tax rate on all other income is 20%, and the market rate of interest is 4%. (Nice convenient round numbers.)
Now, the government decides to tax you, as a saver, on your interest income, also at 20%, but give me, as a borrower, a tax exemption on interest paid, which is equivalent to a 20% refund on the interest I pay you.
With your reduced return from the loan, you might decide to demand full payment of the loan. However, with the tax break from Uncle Sam, I’d be willing to pay more interest on the loan. I offer to pay 5% if you’ll renew the loan.
You’d still be getting a 4% return on your savings, after tax, and I’d still (after tax “refund”) be paying 4% interest.
So nothing has really changed. The government tries to take something from you and give it to me, and I voluntarily give it back to you.
The new system, with tax on your interest income and tax relief on my interest paid has had no effect and is therefore equivalent to a system without tax on Interest income and no tax relief on interest paid. The market (that’s you and I) has shifted the tax burden back to the borrower. In fact, it seems that the market shifts all taxes back to the consumer. The only consequence is that you, I, and the IRS all have more bookkeeping to do.
All this illustrates the lack of economic understanding in our legislators.
Or does it? There is always some political advantage to making it appear that they are punishing the “rich” moneylender (that’s you), and giving some relief to the poor, exploited borrower (that’s me). That’s politics.

Altruism

May 8, 2010

ALTRUISM
The miracle of the success of the free market is that it uses our selfish motives to impel us to serve each other efficiently, providing the maximum satisfaction of each person of his own wants according to his own priorities. Would unselfish motives, altruism, serve us any better? I can’t imagine what life would be like if we were all motivated by altruism alone.
Even within the close confines of a family, we find it difficult, even impossible, to know the wants and priorities of others. A bit of obvious evidence of this is the great number of people thronging in the shops after Christmas, to exchange their Christmas gifts for other things. Most people are a bit reluctant to do this; it seems like an insult to somebody who has made a real effort to please us. But even when I tell someone what I’d like for Christmas, I’m often disappointed with the result. Their choice is not what I would have chosen for myself. So I generally give gifts of money, and let the recipient make his own choice. (I’m lazy.)
Perhaps the whole question is irrelevant. People have to be selfish to survive, and although altruism may influence their choices, it is their selfishness which impels them to fill their own wants by serving others to the greatest satisfaction of the others. I think many supposedly altruistic political actions like the minimum wage, the welfare state, and foreign aid, are really selfish actions disguised as altruism. At any rate they often have disastrous results.

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.