Posts Tagged ‘Human Action.’

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.

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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.

In Justification of Interest

April 14, 2010

Interest

It should be unnecessary to justify interest but somehow there are strong feelings against debt and interest. The fact that interest is paid in a free market is a point in its favor. It is a voluntary action between two people and profits both of them or it wouldn’t happen.

However there is the biblical stricture against “usury” We get around that by creative interpretation of “usury”. Islam too has a rule against interest. Muslims make complicated loans which achieve the purpose of paying interest by calling it something else.

Finally, there is the common attitude of sympathy for the borrower and loathing for the “loan shark”. I suppose it is this attitude which produces our bankruptcy laws which leave the lender to take his losses, and free the borrower to borrow again.

Nobody likes to be in debt, but borrowing serves a purpose. For whatever reasons, we sometimes want more cash right now. Borrowing now may carry us through until we can repay the loan. For example:

I have been saving up to buy a new car, and have found my dream car at a bargain. However, I need another $10,000 to buy it. I approach you for a quick loan.

It happens that you have the $10,000 available. You too have been saving to buy a new car. But why should you give up buying a new car now so I can get mine now?

I’m desperate. I offer to pay you back next year with 10% interest. That’s $11.000 next year in exchange for $10,000 now. You agree.

Interest is the price of time.

This is what interest is all about. I’m willing to pay $1,000 so I can buy my dream car right now. You’re willing to wait another year to buy your next car in exchange for an extra $1,000. As in any free market exchange, we each profit in the sense that we each wanted what we got more than what we gave up.

The free market interest rate is determined, like all prices, by supply and demand and competition. At the free market interest rate, the amount of money available to lend equals the amount that borrowers want to borrow. The free market interest rate varies over time to match supply and demand.

The market rate is the basic rate of interest. However, each individual loan has unique circumstances which determine deviations from the free market rate. I borrowed from you at a 10% interest rate, but I could possibly get a bank loan with only5% interest if only my credit rating were good enough. Compensation for risk can be the greatest factor in determining interest on individual loans.

So there are good reasons on both sides of the loan for paying interest. On my part, as a borrower, interest is the price I pay for my impatience. On your part, as a lender, interest is the reward for your patience, plus compensation for the risks. I might default on the loan (I’m reasonably honest). I might die in the next year. You may desperately need that $10,000 sometime in the next year. And inflation may reduce or eliminate the value of the interest you collect next year In fact, that $10,000 could be earning some interest for you if it stayed in your savings account for that year.

Incentives

April 11, 2010

Incentives

The foundations of Austrian Economics are spelled out in the book, “Human Action” by Ludwig Von Mises. The whole of Austrian economic theory is based on the single fact the humans act purposefully. Man adapts to his situation by doing whatever he believes will achieve his goals, that is, to satisfy his wants. His situation of the moment provides the incentive for his actions.

For example, man’s basic physical wants, food, clothing and shelter, are not to be had for the taking. They give him the incentive to work to earn the money to buy these things. The purpose of his work is to support himself, his wife, and children.

Of course, in a situation where there is little or no risk of being caught and punished, these wants could provide the incentive to take them from someone else, by fraud, theft, or armed robbery. There are places in the world today where bandits are free to plunder without restraint. In such a place, there is little incentive to acquire wealth by any other means than banditry, since bandits will just take it from you.

There are many more civilized countries today where governments will do the plundering for you. This is the welfare state. Politicians in power, whether by stealth (inflation) or armed robbery (income tax) steal our hard-earned money to buy our votes with welfare.

Even more effective in recent years, the politicians can “buy” campaign contributions by passing laws favorable to special interest groups, in order to get re-elected. Apparently, voters will vote for the name and face most effectively placed before them in the newspapers and on TV. The voters act purposefully but not very wisely.

Basic to all the nasty results of human action is the power of government. That power attracts the worst sort of people and corrupts better people. It corrupts voters who become willing to live off the proceeds from theft, so long as government legalizes the theft. Robin Hood Has moved into City Hall.

Altruistic politicians find they must compromise their ethics to get elected, and then to get re-elected. At best, it enables altruists to force upon us choices that we would not freely choose for ourselves. In the words of Ludwig Von Mises, “Government is the negation of liberty”.

Please, somebody invent government without power.

Incentives and Bureaucracy

April 11, 2010

Incentives and Bureaucracy

Bureaucrats have very different incentives from politicians. They have no need to get elected, but once hired, they have a secure job, good pay, early retirement with a good pension, and power to interfere with the hapless taxpayers.

In fact, harassing us is the object of their job, as they must be seen to be doing something in order to advance in the bureaucracy.

The usual route to promotion in bureaucracy is empire building. Expand your activities beyond your capacity to handle, and build a department to take over the job. If the people in your department do the same, you become a manager of several departments. The only limit to expansion is your ability to justify your expanding activities. The incentives throughout bureaucracy are heavily tilted to activism and expansion.

Most bureaus were created to regulate some specific industry or activity. The Food And Drug Administration (FDA) was created to regulate the production, quality, and safety of foods and drugs, as well as medical equipment and procedures.

Even before the bill was passed to create the FDA, the food and drug industries had an incentive to try to control the shape of the bill to suit their interests. They succeeded. The FDA has been controlled from the start, especially by the biggest drug companies.

The FDA hires experts from the drug companies. After serving their real masters, the drug companies for years while employed by the FDA, they “retire” to a cushy position back in the drug company they originally came from. The FDA foolishly assumes that loyalties of their employees to their former and future employers will not prejudice their performance while employed by the FDA.

In recent years, most of the funding of the FDA has come from fees paid by the drug companies, but only if their drugs are approved. This leaves little incentive for the FDA to reject an application for approval.

Acceptance or rejection is based on research funded by the drug companies. There is no requirement to reveal any research which might cause a rejection.

The rules governing application and acceptance make it very expensive to apply for approval. This effectively prevents new or small companies, unless backed by lots of money, to get started and compete with the entrenched big boys in the business.

In practice, drugs are not seriously tested (on people) for safety before approval. After approval, we become the guinea pigs for testing the safety of the newly approved drug. A very ineffective system for reporting adverse reactions means that thousands must die before enough “adverse events” are reported and a drug is withdrawn from the market.

The patent system (another government bureau), when applied to drugs, creates a perverse incentive for the drug companies to push ineffectual, dangerous drugs. There are many substances which occur in nature which have proven safe and effective remedies for a thousand years. They are not patentable. To get a patent, drug companies must create chemicals which don’t occur in nature. Mostly, they imitate the natural remedies, almost always with inferior results and safety.

However, with approval by the FDA, and lots of hype to sell their product to the AMA, to the doctors who prescribe them, and to the public, they make literally billions of dollars out of the patent monopoly on their overpriced synthetic drugs.

Apparently, this is what happens in all government regulatory bodies. The people they are supposed to regulate gain control and use the regulator to suit their own purposes. This is simply human action, people reacting to their situation to achieve their wants. The fundamental cause is the power of government and the incentives this creates.