By Simon Grey, on October 28th, 2011
Like A Financial Analysis of al-Qaeda in Iraq, this book is rather technical and highly academic in approach. Unsurprisingly, it is a rather boring read for the most part. Furthermore, the book isn’t particularly insightful.
There were some who apparently claimed, presumably around the time this book was written, that capitalism was responsible for causing and perpetuating apartheid and racial division. Williams seeks to correct this misconception, and does so quite adequately by pointing out how it was government legislation that created, enabled, and perpetuated apartheid and the corresponding racism.Williams’ arguments are not unique or original, in a sense, because racial biases can, and have been, easily corrected on the free market by the “inferior” race offering lower prices for their labor. The reason this didn’t happen in South Africa was because the government forbade competition, or elsewise severely hindered it.
Williams’ book, then, is useful primarily as an academic resource. It is not easy or enjoyable to read, part of which is due to the structure of the book. For me, it only reinforced my beliefs in the general equitability of the market. I imagine that the same will be true for those who are inclined to read this. My recommendation is to only read this book if you are doing research on South Africa or apartheid.
By Simon Grey, on May 26th, 2011
I hope this isn’t the case, but if it is, it probably suggests a far more radical regulatory approach than the Independent Commission on Banking has considered. It might even point in the direction of ‘narrow’ or ‘limited purpose’ banking, which would involve imposing strict structural divisions in the finance industry, and require banks to hold dramatically higher levels of liquid reserves. Bank of England governor Mervyn King has nodded in this direction.
Of course, I’d much prefer the free market option, but the trouble with the Independent Commission on Banking’s proposals is – arguably – that they do neither one thing nor the other. They don’t eliminate moral hazard and risk subsidies or restore real market discipline to the financial sector. But they don’t offer a particularly strong regulatory response either. As such, the banking sector is liable to cause more problems in future.
Regulation is the natural and proper response to subsidies. If the government is going to subsidize something, it is only natural that the government also regulates it in order to ensure that the new incentives don’t lead to financial (or behavioral) malarkey. In fact, the general purpose of incentives is not to upend the market, but rather to tweak it slightly. Of course, not all consequences can be appreciated in advance, which is generally why regulation is an inevitable response to subsidies.
As such, there are two proper responses to subsidies: either abolish them, or regulate the recipients. The banking commission appears to have taken the worst approach, which combines the free-market approach to regulation coupled with an interventionist approach to subsidies. One need not be a genius to see that this plan is doomed. If the banking commission desires to be successful, it needs to have a consistent philosophical approach: either free markets or proper intervention. It does not need some half-way measure combining the two. Compromise is counterproductive and damaging in the long-run, and so the commission simply needs to get off the fence.
By Simon Grey, on May 10th, 2011
I was talking to a preacher buddy of my dad’s a while ago, discussing my future plans, and I told him how I wanted to be an economist. Being a free-market apologist who had the audacity to challenge him on his favorable views of unions (from a historical perspective), he felt compelled to tell me that while he was pro-capitalism, he thought that some restrictions were necessary.
His argument for interfering in the market was based on how God had interfered with the free market under the old law. Specifically, he cited how God required that farmers leave remnants in their fields for the poor to borrow and how God forbade the Israelites from charging their brethren interest on loans). Unfortunately, there are at least three problems with this line of thinking.
First, God presumably possesses more knowledge than any central planner would. This difference is crucial because it means that the Old Testament theocracy is not comparable to any human-devised system. The biggest difference between the two systems would be that the theocratic system would not face near the knowledge constraints that a human system would. As such, God could be reasonably sure of the future and plan accordingly; mere mortals do not have these powers and abilities and thus would not have the ability to plan out an economy.
Second, not even God’s command was enough to ensure compliance with regulations that would work in theory. Time and again, the children of Israel ignored God’s laws. (It should be noted that usury laws and gleanings laws are not the only “economic” laws. Mandatory sacrifices have an economic component, as do the various regulations on commerce and production.) There were multiple times when the Israelites failed to keep God’s commands, which goes to show that even the laws implemented by the Lord of Hosts can be violated. If God’s laws can be violated then how can we expect any different for man’s laws?
Finally, note that some of God’s laws were intended to be signs of the Abrahamic covenant (e.g. dietary restrictions). Also note that some of God’s laws were intended to be signs of the coming Christ (e.g. sacrificial laws). As such, a good portion of God’s interference served a spiritual purpose. Not all laws that interfered with the Israelite economy had spiritual significance, but some did, and it is not always easy to discern between the two (e.g. Lev. 19:19).
At this point, it should be obvious that the argument that God’s interference in the Israelite economy during Old Testament times justifies Man’s interference in any economy today fails because it is an invalid comparison, it neglects to consider how even with God non-compliance with economic statutes was possible, and it fails to consider to consider the spiritual component of some of God’s economic laws, which is also an invalid comparison.
By Russ Nelson, on April 8th, 2010
Apparently some Democrats object to the idea that Jamestown was run as a socialist enterprise, as Dick Armey pointed out. They say “Oh, no Jamestown was established as a capitalist venture to make a profit.” Well, that’s true, but internally (which is the only thing that matters) it was run in the same way as any socialist venture. There was no money, no market, everyone got free food and housing, and — this is key — there was no incentive to work because only the corporation made profits. Individuals who wanted to work harder than others had no incentive to do so. So naturally, the enterprise foundered, as any socialist venture does.
Before you object by pointing to Sweden, do please consider that Sweden is nothing like a socialist country. It has high taxation and generous social benefits, but it has a vibrant and free market. Socialist countries don’t have free markets. They have government-controlled markets. The idea that socialist countries can have free markets is a recent and ignorant one. Go read up on the history of socialism, and you will see that their first goal was to eliminate the marketplace, preferring instead government allocation of profits.
Okay, now you can object with Sweden, but at least now you’ll know in advance that I think you’re wrong. And crazy, but mostly wrong.
By Ajay Shah, on March 12th, 2010
When central planners take the outcome away from the self-organising system of the market economy, we often get strange outcomes. At the end of June 2009, 32 foreign banks
were in India with 293 branches. In addition, 43 foreign banks were in India through `representative offices’. (Source: RBI Annual Report. Hat tip: Radhika Pandey).
In a news item today, I saw Domino’s say that they have 300 branches in India and will go up to roughly 500 in three years. With RBI giving out permissions for all foreign banks (put together) to open 18 branches in India a year, this means we’ll soon have more outlets of Domino’s in India than all foreign banks put together.
By Ajay Shah, on January 4th, 2010
On 5 October 2007, I had written a blog post Does urban India favour liberal economics?, where I had used survey data released by the Pew Institute, which measures attitudes of roughly 45,000 people worldwide with roughly 2,000 in India. Their sampling mechanism has an urban bias.
Today, I saw current information, and cross-country comparisons, on their website.
Support for the free market
The wording of the question was: Please tell me whether you completely agree, mostly agree, mostly disagree or completely disagree with the following statements: Most people are better off in a free market economy, even though some people are rich and some are poor. `Agree’ combines “completely agree” and “mostly agree” responses. `Disagree’ combines “mostly disagree” and “completely disagree.”
The results, showing the proportion of those polled who `Agree’:
In 2002, India was halfway in the list with 62% support. In 2009, India is at the top of the list, with 81% support.
Support for international economic integration
The wording of the question was: What do you think about the growing trade and business ties between (survey country) and other countries – do you think it is a very good thing, somewhat good, somewhat bad or a very bad thing for our country?. `Good Thing’ combines “very good thing” and “somewhat good thing” responses. `Bad Thing’ combines “somewhat bad thing” and “very bad thing.”
The results:
Here also, India is now at the top of the list in terms of support for plugging into globalisation.
Why is this happening?
I think there are three factors at work.
First, everyone in India instinctively knows that when we tried our hand at socialism, GDP growth crashed, and vice versa:
| 1950s |
3.59 |
| 1960s |
3.96 |
| 1970s |
2.94 |
| 1980s |
5.58 |
| 1990s |
5.68 |
| 2000s |
7.22 |
The worst of India’s years — 2.94% average GDP growth with a fast growing population — were in the peak of Indira Gandhi’s socialism of the 1970s. As India stepped away from that, things got better. This process began with the Janata Party in 1977, was carried forward by following governments, and yielded results from the early 1980s onwards.
These changes were big enough and rapid enough that they are as persuasive as a natural experiment. Comparing socialist India vs. unsocialist India is almost as persuasive as comparing East Germany vs. West Germany. So the ordinary citizen, who does not know the GDP data, knows in his bones that getting away from a big State made sense.
The second factor is that a random sample of India has a lot of young people in it, who are less influenced by our socialist baggage. When you look at the political leadership, bureaucracy, academics or media, the views of old people have a lot more importance in shaping positions and the external perception. Old people in India seem to have more socialism, autarky, and unconfidence. Opinion polls show an unfiltered picture of India as it is.
Here is some data, from the CMIE household survey database, about the age distribution of Left supporters:
The CMIE data, with a tiny share of the population which supports the Left, is consistent with data from election vote shares and the Pew data. All three information sources thus increase our confidence in the basic message.
In your mind’s eye, you need to think that India is a young population, with a lot of people below 30, and declining cohort sizes beyond. So the early years in the graph are disproportionately important.
In the overall population, Left support stands at 5.36%. India’s future is young and urban — but these two regions are where the Left support is the weakest.
However, another hypothesis can be cited: Maybe it is the experiences of young people which convert some of them from being un-Left when young to being Left supporters in middle age. Maybe political attitudes are not stable through time; maybe the young of today will turn left when they reach their late 30s and early 40s. In coming years, as the data of this survey builds up, we’ll be able to evaluate this hypothesis.
The third dimension is about the welfare state. India does not have a welfare state and is unlikely to build one.
Voters do not seem to want a large welfare state. Political scientists say that a homogeneous population is more likely to support population-wide welfare programs: Each voter intuitively feels that the benefits of the program go to people-like-him. In countries with heterogeneity along the lines of ethnicity, class, religion, etc., voters are less inclined to favour population-wide welfare programs, because the picture in their mind of a recipient of welfare is not a person-like-them.
The intellectuals are not pushing a welfare state. In Western Europe, in the 1930-1960 period, the best intellectuals pushed the welfare state as an antidote to the brutality of the communist or Nazi ideologies. That sort of problem has not been an issue in India, where support for communism seems to be ebbing away.
The implementation capability is weak. When politicians have tried to setup large systems — SSA or NRHM or NREG come to mind — the limited administrative capacity has come in the way.
The bottom line is that India has a small expenditure/GDP ratio, and there is no welfare state that is under stress. Elsewhere in the world, there is a conflict between retaining the welfare state vs. plugging into globalisation. The gains from international economic integration are weighed against the perpetuation of the welfare state. In India, that conflict of interest is absent: people only see the gains from globalisation.
By David Barr, on September 18th, 2009
Efforts to fix our health insurance system have found no found shortage of critical flaws in the “market”. I have yet to hear a coherent argument for the continued existence of private health insurance. Health care differs in three critical ways from traditional markets. Taken together I doubt that it is even conceivable for a private market to exist for health insurance.
In a true free market those who got sick and couldn’t afford care would be left to die or suffer the consequences of their conditions. This is a rational, yet morally abhorrent policy. Even the most die hard free marketers don’t advocate this. The unwillingness to condemn the poor to preventable death is the first significant obstacle to a functioning private health insurance market.
The second critical obstacle is the great variation in expected health care costs. Insurance markets are designed to protect individuals from significant deviations from expected costs. Consider auto insurance, every driver faces some risk or an accident, but few expect to total their car in a given year. By pooling risk, the small percentage of drivers that do suffer serious crashes can avoid financial ruin.
But this logic in no way applies to health insurance. Many people suffer conditions that have high known costs. If you are HIV positive or have Diabetes or are paraplegic medical costs are not an unexpected catastrophe, they are a known expense of life. Only the richest individuals can cover these costs out of pocket. Insurance can’t solve this problem only subsidies can.
Timing is the third critical difference between health insurance and traditional health markets. For insurance to function a claim must be tied to a specific instance. A fire, a car accident, a death are all discrete events that can be placed at a specific moment in time. The bulk of health care spending is spent treating chronic conditions. Who’s to say exactly when a person developed high blood pressure or depression. Furthermore, health conditions incur costs that continue long beyond the length of an insurance contract.
Efforts to twist private insurance around these three restraints are destined to produce warped markets and twisted incentives. The regulations currently oozing through congress will make life better for many people, but they do not address the fundamental incoherence of private health insurance.
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By Trace Mayer, on August 26th, 2009
[Editor Note: The administration is exacerbating the greater depression by (1) preventing and delaying liquidation of toxic assets, (2) inflating the illusion currency supply beyond recognition, (3) attempting to keep wage rates up by bailing out structurally challenged industries, (4) attempting to keep prices up for example by destroying supply of old working cars and restricting demand through taxes and tariffs, (5) stimulating consumption and discouraging saving and (6) subsidizing unemployment by not stopping unemployment benefits; as outlined by Rothbard in America’s Great Depression.
Because these measures are massive interference with the free market, lead to gross misallocations of capital and for other reasons therefore there is a market crash coming and these green shoots are really red roots; in many ways.
The chart at the end of this article by Casey Research is particularly insightful regarding context and scope. There is too much debt and too little income; Americans spend too much and earn too little. They do not abide by provident living principles. Change is coming and has only begun.
I have added emphasis to the article regarding critical issues.]
GREEN SHOOTS OR GREATER DEPRESSION?
By: Bud Conrad and David Galland, Editors, The Casey Report
While we aren’t contrarian for the sake of being contrary, more often than not that is the position in which we find ourselves. Today, with the media falling all over itself to paint a rosy outlook for the economy while simultaneously voicing encouragement to the new administration in its remake of the nation in previously unimaginable ways, it’s hard not to question our conviction that the worst is yet to come.
Could the economy really recover this quickly from the traumatic trifecta of a record real estate bubble, leviathan levels of debt, and a global credit collapse? We don’t see it as remotely possible, but yet… but yet… there for everyone to see are countless happy headlines and breathless exhortations that the worst is behind us.
So, is it Green Shoots or Greater Depression?
Getting the answer right is critical, because from it flow serious consequences to each of us. And not just in our investment portfolios but in how we organize our lives.
Looking for an evidence trail leading to the correct conclusion, Casey Chief Economist Bud Conrad once again put in very long hours digging through the data. Here’s what he uncovered, about the claims of green shoots, and what may actually be in store for the economy moving forward.
Rather than accepting the many commentaries that our economy may be improving, for a minute on the important forces that will play out over the decade ahead the minor improvements – from disastrous levels – that have given commentators such hope that the worst of our problems are behind us.
What Do the “Green Shoots” Really Look Like?
While some individual measures of economic activity appear slightly less dire than previously, it’s important to understand that most improvements are largely attributable to government intervention.
For example, at the onset of this crisis, commercial paper spreads rose to the point that this important source of corporate short-term funding had virtually shut down. Today, those spreads have returned to almost normal levels. But the bulk of this improvement is not due to a return of confidence in the economic system but rather to the Federal Reserve directly intervening in the market with several hundred billions of dollars.
And mortgage interest rates, which briefly dropped into the 4% range, did so not because of a surge in creditworthy borrowers or eager lenders… but rather because the Federal Reserve launched a program of buying $1.25 trillion of mortgage-backed securities. Doing its part, the Treasury has poured billions into Fannie and Freddie and provides guarantees for their mortgages.
In these and many other instances, the “green shoots” that optimists have spotted are really just the visible manifestations of the massive interventions by an increasingly bankrupt government [Note: Bankrupt fiscally, economically, morally and politically.].
Indeed, the massive fiscal stimulus provided by the federal government – and by the Fed, which has slashed interest rates to near zero, purchased mountains of toxic waste, and bought up Treasury debt with billions in freshly printed money – are unprecedented in the history of the U.S.
But even a cursory review of key metrics reveals continuing declines in housing prices, rising unemployment, and slowing consumption as measured by falling retail sales, GDP, and the collapse of world trade. Sure, housing unit sales recovered a little recently, but that’s due mostly to the distress sales of foreclosed homes and houses worth far less than the outstanding mortgage. These are not signs of a strong economy.
The only rational conclusion to be drawn is that the crisis is far from over and that we are not likely to see a strong recovery anytime soon. In fact, things are likely to get much worse before they get better.
The massive debt expansion that played a crucial role in creating the disastrously overleveraged economy is not shrinking. As you can see in the chart here, it’s growing ever bigger.
That debt growth was fostered by U.S. government debt growth, which is now getting out of control.
Don’t just believe what you hear about “green shoots,” or you could lose some serious money. To find out what’s really going on and where all this is leading then read the rest of Bud’s in-depth article or The Great Credit Contraction.
By Dan McLaughlin, on January 19th, 2009
In case you may not have heard it yet, our economy is a little under the weather lately. The patient is, however, under the watchful eye of a crack team of economic physicians, led by doctors Benanke, Paulson, Bush and, new to the team, Dr. Obama.
Their diagnosis is that the patient is sick. They have been trying various treatments, and when the treatment turns out to hurt the patient, they assume that all that is needed is a bigger dose. The analogy they use is that of a heart attack patient. They think they need to apply massive stimulation, stat!
Unfortunately for the patient, the doctors are the ones that made it ill in the first place. The real problem from the start was over-stimulation syndrome. What the patient needs is bed rest and a vacation from the doctors.
If the consequences weren’t so serious, the doctor play would almost be funny. Through most of the 2000’s, the economic medical team was applying serious stimulation. Interest rates were held significantly below market rates. The intravenous pump was cranked up and money poured in at a furious rate. Inflation appeared to be under control, so they kept the pump going strong. What they didn’t notice, however, was that their measurements of inflation don’t include half of the economy. The half that they measured was just fine. The other half was blowing up like a balloon. When the measured half started to inflate, it was already too late.
The real estate market is not included in the measurements of inflation, nor the credit markets, nor the financial markets. Massive bubbles in these areas didn’t set off the inflation alarm to our doctors, so they ignored the obvious symptoms that were building over the course of years. When, all of sudden, the bubble popped and became an open wound, they started running around franticly looking for someone to blame their incompetence on. The free market is, again, their scapegoat. It had worked so well in fooling the patient all of the other times, why not use it again.
The stimulus continues, and the dose is being cranked up to really serious levels. Uh, excuse me doctors. How well has that stimulus worked so far? Not so well, you say, the patient is getting worse? Hmmm, do you think that maybe the medicine could be the problem? Oh, you’re trying different brands. The stimulus checks to individuals didn’t work a year ago. So you switched to stimulating wealthy bankers. The patient still was getting sicker, so you started to stimulate wealthy non-bankers. You say you think you have the solution now?
Dr. Bernanke has come up with a brilliant treatment, sure to make the patient healthy. It is the transfer of toxic assets in the system from the wealthy, politically connected class to what they consider the slimy, worthless taxpaying class. Since mega-bankers made lots of money making incredibly irresponsible loans, and their wealth is now in jeopardy because those irresponsible loans are becoming uncollectible, the good doctor has come up with the idea of a “bad bank”. Seriously. No, I’m not kidding. The federal government, aka the American taxpayer, should, under this plan, establish an official bank for the express purpose of paying good money from taxpayers to wealthy bankers in exchange for the bad loans that they have on their books. That way, international bankers wouldn’t have to worry their little heads about how to collect on them. They can get back to business as usual, making stupid loans, which the taxpayer will purchase if they become uncollectible.
The good part about the bad bank idea is that the American taxpayers would own all of these valuable assets that they can collect money from to pay back their “investment”. The bad part of the idea is that they are generally uncollectible. That is the very reason that they are called bad loans. Hello, is anybody home!
It is becoming painfully obvious that 1. politicians have nothing but disdain for taxpayers, and 2. our economic medical team is a fraud. They have absolutely no idea what they are doing and are stabbing their scalpel in the dark. Even if the economy starts to come back, the massive amount of medicine they are applying is guaranteeing the next bubble in a few years, the resulting massive hemorrhage, and the further abuse of the patient as time goes on.
It’s time for the patient to dismiss the quacks. They have done enough damage. The next step should be to sue the economic physicians for incompetence and malpractice.
By Dan McLaughlin, on December 3rd, 2008
Most of the present day economists are the modern equivalent of the high spirited inventors of prior times, bent on designing a perpetual motion machine. Perpetual motion enthusiasts were convinced they could get around the laws of physics to produce motion without any external source of energy, even though those laws had long been identified and deny any possibility of success. In the same way, most modern economists tinker around with things economic with the belief that he or she knows better and can get around the immutable laws of economics, which have also been established long ago.
They tinker with taxes, government payments, regulations, price controls, market manipulations, etc, even though they fly in the face of the fundamental laws of economics and have been proven wrong in precisely every instance. You cannot artificially set maximum prices below the market price without causing shortages. You cannot artificially set minimum prices above the market without causing surplus. You cannot regulate supply, demand or anything else in the market without paying the price of a grossly distorted market and misery for at least some people, not in even one instance.
In the free market, both parties gain from a transaction. If it was not so, the transaction would not take place.
That is the very nature of a truly free market. Every member is free to enter or not enter into a transaction, whether it is buying a house, a loaf of bread or a tank of gas. The very fact that the transaction is consummated is absolute proof the buyer valued the good or service more than the money and the seller valued the money more than the good or service. The buyer or seller might not be happy that the price was not lower or higher, depending on perspective, but it was obviously the best use of resources, given existing conditions and knowledge.
When government interferes, with taxes, incentives, subsidies, stipends, payments, regulations, services or any other intervention, it picks the winner, the person who will benefit from it’s beneficence. But the only way to pick the winner is by also picking the loser, directly or indirectly. Government is a less than zero sum game, a negative sum game. Something, usually a lot, gets lost in the translation in every government action.
The big difference between the perpetual motion “engineer” of yesteryear and the social “engineer” of today is that the former was playing with toys, things that didn’t have much effect on others. The latter is very dangerous because his or her irresponsible and ill fated experiments affect millions, even billions of people.
The laws of economics are known and are just as immutable as the laws of physics. You can choose to ignore them, or hide them in a mountain of numbers and reports and public relations fluff, but you cannot choose the consequences of ignoring them, any more than you can ignore gravity when you drive off a cliff. History is full of lessons about political leaders who chose to ignore the simple, fundamental laws of economics. The reason that history repeats itself is because people in power, and their economic advisors, like to tinker, even though the punishment is predictable and inevitable. It often becomes obvious that they do know the consequences all too well, but they also know that they will be on the winning side and not be the ones to bear the punishment.
Guess who is always on the losing side.
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