Showing posts with label Economics. Show all posts

A quick primer on modern economics:

Hat Tip: The Anchoress

This comes from Claire Berlinski at the City Journal, on the government takeover of the auto industry.

The only truly relevant measure of productivity is consumer choice: if people don't want to buy a company's products at the company's price, it may have been busy, but it has not been productive. This point escaped all concerned.

She is talking about the heavy government subsidies and planning of British Leyland, that started in the 1970's. The best bureaucrats the British government had to offer failed to run the auto industry with anything approaching success. Since Americans are better than the British, expect the American government's takeover of the auto industry to be an even more spectacular failure.

Hat tip to Instapundit.

Courtesy of Unqualified Reservations. Go read it.

I found this at the Other McCain today. It comes originally from Shannon at Chicago Boyz.

The left doesn't actually have a developed system of thought regarding the economy. They can't actually explain why the real world political process will systematically make better decisions than the free-market. Instead, they simply point to any reversals in the real economy, regardless of cause, and then assert that in their imaginations, leftist politicians could have done better.

It's hard to argue against people's imaginations. You end up with a discussion much like two D&D geeks arguing over whether a dwarf with a +10 axe could take an elf with a vorpal sword.

I agree with McCain and Shannon. The dwarf wins.

Heh: "pathologically incapable of accepting responsibility"

Hat Tip: Cassy Fiano

One of the statist fallacies is that there exists people who are more intelligent and virtuous than everyone else; nobles who need to tell the uneducated masses what to do. The problem is that no such man has ever existed that is able to resist the temptation to abuse his powers. (Except for that one guy 2000 years ago.) So statism fails to help the people, as the leaders help themselves instead. Capitalism at least tries to work around this lack of virtue, as Friedman puts it.

Hat Tip: Big Hollywood

It's a Recession when your neighbor loses his job. It's a Depression when you lose your job. It's a Recovery when Obama loses his job.

Hat Tip: Burt Prelutsky at Big Hollywood

I found this article while wandering around the Anchoress' website today. It's on the prisoner's dilemma. The prisoner's dilemma is as follows:

Two suspects, A and B, are arrested by the police. The police have insufficient evidence for a conviction, and, having separated both prisoners, visit each of them to offer the same deal: if one testifies for the prosecution against the other and the other remains silent, the betrayer goes free and the silent accomplice receives the full 10-year sentence. If both stay silent, both prisoners are sentenced to only six months in jail for a minor charge. If each betrays the other, each receives a two-year sentence. Each prisoner must make the choice of whether to betray the other or to remain silent. However, neither prisoner knows for sure what choice the other prisoner will make. So this dilemma poses the question: How should the prisoners act?

Wikipedia

I've seen this before in video games where my character is prisoner A and one of my companions is prisoner B. The question is always phrased as a moral choice, do I screw my friend over, or do I stay loyal to my friend and risk losing? I always choose based on whether I'm playing a good guy or a villain.

But Bill Whittle points out something I hadn't considered before. If the other prisoner chooses to screw me over, then it is best for me to do the same. And if the other prisoner chooses to cooperate, then it is best for me to betray him. It is always in my best interest to betray my opponent. And if the other prisoner is rational, he'll choose the same and we both server two years.

This is pretty straight forward, and I might have gotten their had I considered it an economic question rather than a moral question. But what really interested me is what happens when you play the game over and over again, with the same two prisoners. Computer simulations show that choosing what the other prisoner chose last turn (tit-for-tat) gives the least time in jail for the prisoner.

Most Americans know that it is cooperation that generates the most wealth. I make my stuff, you make your stuff, and we and everybody else trade it all around until we have the stuff we want. Every economic system, from capitalism to socialism, is based off this idea that each person makes/does something useful and gets useful things in return.

Where things get interesting is in how each system deals with cheaters. If cheaters are punished, then cheating will be rare and cooperation will prevail. That is, if the imposed costs of cheating, fraud, stealing, going back on your word, and whatnot are greater than what you gain from cheating, you will play by the rules, even though cooperation has its own costs.

This is the tit-for-tat. Cooperation, specialization, is required to create the type of wealth seen in the United States. In order to write good software, I have to focus most of my time and energy on it. Which means to get food, I have to buy it, which requires that I trust that the company will pay me for what I write, and that the grocery store will accept that money in exchange for food and not give me a box of shredded paper instead. But this only happens if cheaters are removed from the game.

This is one of the rules of capitalism. The actors in the market are generally honest, and the dishonest ones are punished, so that self-interest leads to cooperation.

Communism, on the other hand, simply assumes that cheaters will disappear.

If cheaters are allowed to play, then society quickly devolves into a free-for-all. If some people take without giving back, then everyone else has to work harder to make up the difference. But as more people realize it is better for them personally to cheat rather than cooperate, then there will be more cheaters and the good people will have to suffer the additional costs of providing for them.

A concrete example: I want electricity for my house. I can either buy it from the electric company, or I can hook my house to my neighbor's house, who is paying the electric company. If there is no punishment for not paying, then of course letting my neighbor pay for both of us is my cheapest option. But if cheating is acceptable, then everyone will cheat. And if nobody pays for electricity, then the electric company stops providing it.

For most of history, and even much of the world today, people have been stuck in this state of not trusting. It is a point of equilibrium. I take advantage of others where I can because if I don't I will be taken advantage of.

This is why family is such an important part of most cultures. You can trust family, in a way you can't trust the random strangers you might meet doing business. So the clan or tribe becomes a group of people you can cooperate with, because you know they won't take advantage of you.

I think this will be a very useful lens through which to examine America's current economic crisis, and the societal break down that has preceded it.

It's time for another long article on worldviews and philosophies and how they form the foundation of our actions. Our underlying premise here is that your beliefs, your view of how the world works, whether you know those beliefs or not, determines how you act in the world. As opposed to your actions being simply random. There is a method to the madness. The reason I want to know how and why the world works, why I want a coherent and comprehensive worldview, is that I want to make informed decisions. The reason I want to know other people's philosophies is so that I can take their probable actions into account.

And here I must make an important distinction. A worldview does not necessarily conform to reality. That is, some people accept as fundamental truths things that are not true. But their actions may be reasonable based on that belief. The question is, what are those fundamental beliefs, both the ones that are true and the ones that people only think are true? What do people really believe? And is it really real?

Differences in what people accept as truth cause most of the partisanship in America today. The biggest point of contention is what to do about this economic crisis. On the right side, we have people saying that government regulation created a bubble that has now popped, and to fix it, the government needs to leave things alone and let the free market sort things out. On the left, people are saying that immoral capitalists created a bubble at the expense of everyone else, and to fix it, the government needs to take over everything to prevent any kind of unfairness. Both sides are claiming the other side's solution was the root problem.

Or at least that's what the people in general appear to believe. The Democrats in power seem to be playing by Saul Alinsky's rules, and while that says a lot about their beliefs, it doesn't say much about their beliefs about the economy. So what are people's beliefs about the economy? The ones they base their actions on, not the ones they just say they have.

We're going to approach this problem rather obliquely. And we'll start with a simple question: what is wealth? Wealth is stuff. It is the food you eat, the clothes you wear, the house you live in, your shiny baubles, electronic gadgets, tools, art, toys. Wealth is the physical things you consume or collect because you value you them for some reason or another.

I like this definition because it is both absolute and easily quantifiable. Absolute in that you either have a thing or you don't. You either have a big screen TV or you don't. Quantifiable because you can determine who has a thing and how good a thing is. Who has a TV and how big is it. I think most people accept this definition of wealth.

If that is wealth, then it follows that wealth is created when people make stuff. At the very front end, wealth is made from the raw materials found in nature, whether food from a fertile field, wood from a stand of trees, or metal from mined ore. The this raw wealth is combined and modified ad infinitum until stuff people want is produced. An iPod is a long way from the raw ore and oil that went in to its component parts, but that's what it was when it was dug out of the ground. Again, I think most people accept that for stuff to exist, someone has to make it.

But who gets the stuff? Do you get to keep what you make? Or do you put whatever you make in the global commons for whoever needs or wants it? Most people believe that the things you make are yours. If you make a bookshelf, it's your bookshelf. You may keep it or give it away or trade it as you choose. When you are talking physical things that an individual has made, people expect to keep and do what they want with what they have made. See this incident reported by House of Eratosthenes. And yet the idea that the things a person has made should be taken by the government and given to someone else persists.

Let's revisit our definition of wealth. Notice what this definition excludes. Money. Money is not stuff. It is a medium of exchange, a measure of the relative worth of the actual stuff. How many purses to the giant TV? A currency allows everything that people make to be ranked on a common scale. A person makes X number of purses and sells them for Y amount of the currency. That person then goes to someone who has a TV and buys it. He has effectively traded his purses for a TV. But the wealth is the purses and the TV, not the money used to make the trade.

But that means that borrowing more money or printing more currency doesn't affect the amount of stuff. Or even the relative worth of stuff. It just changes the absolute number at which the stuff is valued. You can only trade what you really have. If you have two purses, you cannot trade away three of them. When you trade for a TV, you want the TV now, not six months down the road.

This is our first disconnect. Some people see that money buys stuff, and the more money, the more stuff. If you stop there, then acquiring money to buy stuff is reasonable. It doesn't really matter where the money comes from, so long as your relative amount of it goes up. Take it from someone else, print more of it, borrow indefinitely, with more money you can buy more stuff. And with more stuff, your relative wealth goes up.

But in none of those do you actually produce any wealth. You merely consume. Conservatives believe that stuff is wealth. Therefore, to get stuff, you must make stuff which is yours, and then trade it around for other stuff that you want or need. Liberals believe that money is wealth. Therefore, to get money, you can print, borrow, sell, or steal, and then exchange it for stuff that you want or need.

This is why I have not been overly bothered by the current recession. I make stuff (software) that people want. I sell it to them (or strictly speaking I sell it to the company I work for, who the sells it to other people). I go buy things I want that other people have made. Nice, neat, and simple. And as long as I make stuff people want, I can get wealth.

But notice something else. Because I see wealth as stuff, borrowing means I take stuff from someone now and promise to make them stuff at some point in the future. Well, at that some point, that someone will want the stuff I promised them. If I can deliver, great. If I cannot, I am in trouble, because now I have stolen their stuff. So I try to borrow as little as possible. But if money is wealth, then you are not delivering stuff in the future, so you don't have to worry about making any. You can just give them money you got from somewhere.

But the problem is that people insist on having stuff instead of just a bank account. So everyone who borrowed money to acquire stuff is being asked to produce some stuff so that the lenders can acquire stuff. That stuff has failed to materialize, so people are trading stuff for stuff, instead of stuff for future stuff, and we've ended up with a huge market correction. And this problem will continue so long as people continue to confuse currency with actual, physical stuff.

Let us continue where we left off, reviewing our list of principles for good government. We are trying to determine if it is a good list, and if it leads to democracy or something else.

"People, through private enterprise, create wealth; government does not."

Yes. But let's expand on that. Wealth is stuff, and should not be confused with money, which is a measure of the relative worth of the stuff. By stuff, I mean physical things like your house, food, car, computer, and other odds and ends that you collect because you have some use for them, and intangible things such as car repair, good service at a restaurant, the ability to travel wherever, and other services that make your life better. All these are made or provided by people, often organized into large groups to take advantage of specialization and economies of scale.

But historically, government has been one of the worst organizations at making or providing. For if the wealth you create is not wanted by anyone, then you have not really created wealth. Your organization should either change what it does or go out of business so they don't waste resources. This is how a free market economy is supposed to work. But a government can't go out of business. And a government can force the people to take what it provides. This means that the people can't change providers and so bad decisions on wealth creation stick around. Note that this is a problem with monopolies in general.

"Government can give nothing except what it first takes from someone else."

This is generally true of any market transaction. Delta cannot fly me to Hawaii without first taking airplanes from Boeing and fuel from BP. I can't write software without first taking food from a grocer or clothes from a store. This is the basis of trade. Whatever is provided is a change in wealth from whatever was taken (say from food into software). But the exchange is bidirectional, I transfer some of my existing wealth back to whoever I took wealth from (I give money for the food).

Saying that the government can only provide what it takes isn't much of an indictment, since most industrialized people do the same thing. And those who create without taking from someone else are taking from nature, such as a farmer or miner. The problem here is that many people don't think what the government provides is worth what the government takes, and we are not allowed to opt out of the system.

We'll keep this principle, since it drives home the point that a government ought to be held accountable for what it takes and what it provides.

This one comes courtesy of Margaret Thatcher:

The problem with Socialism is that you eventually run out of other people's money.

This should be an obvious observation, but it seems that many people are unable to wrap their head around the idea that taking money from one group and giving it to another group does not change the amount of money. That means it is impossible to stimulate the economy by 'spreading the wealth.' Those who had the money taken away would have spent it on something, or saved it in a bank, who then would have loaned it out. Either way, the money gets spent, whether you spread it around or not.

But throw in the lost productivity associated with transferring that wealth through a bureaucracy and you are actually shrinking the economy.

Hat Tip: House of Eratosthenes
(As an aside, I did get the idea for Best Quote from Freeberg's Best Sentence I've Heard or Read Lately.)

I found brilliant quote by Mark Steyn today. I'm going to take it here out of context:

We're now told that the problem with the last New Deal is that it was too small, so Obama's new New Deal has to be even bigger. That's like telling New Orleans that the problem is they're not far enough below sea level so they need to dig deeper.

This seems to be the direction the government is taking. Seems being an understatement. The economy is 'in trouble' so the federal government is going to throw money willy nilly at everyone who comes to call. Van Helsing actually gives a much more appropriate analogy:

If you'd like to test out the Keynesian theories that guide Democrats, take on unmanageable expenses until you're as deep in debt as our government, then go out to the shopping mall and max out your credit cards. According to liberals' "theoretical knowledge," it will return you to solvency.

This crisis revolves around people taking on more obligations than they could afford. Simply put, Americans on average spent more money than they earned. This can work in the short term. The whole point of credit cards and even long term loans is to get now and pay later. For long term loans, you typically know what the monthly obligation is and can budget accordingly. You can even do this with credit cards.

But the idea is to eventually pay off the debt, not extend it in perpetuity. This is where the problem lies. You cannot consume more than you produce. A single person can, certainly, but as a whole, people cannot consume more than they produce. If Sony produces 1000 TVs, the people cannot buy 1200 TVs. This is a very basic concept.

And I say production and consumption because I wish to distinguish it from earning and spending. Money is just currency, a measure of the ratio of worth between various goods and services. The ratio is set by supply and demand. The money supply determines the actual unit of worth. Spending more money than you earn does not change the fact that there is only so much stuff to go around. What it does is inflate the money supply. This scales the unit of worth, but doesn't actually change the ratios of worth.

Well, actually it does, because there is a lag time between money supply inflation and price inflation. So it looks like an increase in demand, which affects supply (production). Where it falls apart is where someone remembers that money only represents wealth. Someone says, 'wait a minute, you said you're giving me 1200 TVs, but you only have 1000.' Plus you promised another 1200 to that other guy. When people realize that they cannot meet their material obligations, the economy halts while everyone sorts things out. You can borrow money from the future from now until doomsday, but you cannot borrow stuff from the future. And the economy is made of stuff. Money is just bookkeeping.

Hat Tip: Conservative Grapevine

I have, over the past year, begun developing a philosophy to life. A worldview, if you will, that gives a foundation for knowing how things work and how best to deal with life. I first started thinking about my understanding of the world when my bible study did a series called the Truth Project. Its goal was to explain the Christian philosophy.

What makes this remarkable was that this was the first time I had ever heard of philosophy explained as a holistic foundation from which to approach life. I had gotten the impression in school that philosophy was a pointless exercise in debating and explaining things that nobody in the real world thinks about and has no bearing on one's decisions. The Truth Project showed me what the point of a philosophy is, and why it's worth thinking about.

Namely, that everyone has a philosophy. That is, the set of foundational beliefs that drives a person's decisions. You may not know what those beliefs are, and they may not have an 'ism' attached to them, but somewhere, there is something that makes you choose option A over option B. This is what drives people. It explains why people do the things they do. Something which often takes some serious explaining.

With my philosophical foundation being Christianity, I start off with an assertion that directly contradicts society: people are basically evil. People put themselves first, seeking after their own desires and pleasures, and only secondly, if at all, think of others. However, most Westerners seldom think of fulfilling your desires and pleasures as evil. Didn't Maslow say that self-actualization was the highest form of being? But they never seem to think that most people self-actualize at the expense of others. If your goal is yourself, then what do you care if you have to rape to get sex, or steal to get money?

But of course, those are the exceptions, not the rule, right? If people are really evil, why do we have the idea of progressivism, the idea that people are good and working to make things better? Perhaps somebody should tell Darfur that they are basically good people. But here in America's favorite baseline for everyone in the world, we are raised with Christian morals and values. Which seek to curtail our evil desires. Morals which most people don't have. Americans simply don't think of murder as a form of advancement.

So I behave according to the idea that people are evil and only moral teachings (Christianity does not have a monopoly on these) keep people from being totally depraved. This means I should expect, as moral teachings are more and more removed from society, that Americans will become more selfish and more likely to harm others in seeking their desires, with the level of harm increasing. Which, anecdotally, seems to be the case.

Believing people to be selfish rather than altruistic gives rise to a number of interesting realizations. First, you can't really trust people. Or perhaps I should say you trust people to work in their interest and not yours. So if you want something from someone, be it honesty, goods, or help, you have to make it in their interest to give it to you. Else why should they bother? There are any number of ways to make someone help you, but payment and force seem to be the most popular. So I can take what I want by force, or simply buy it from you.

Force is easy to understand. I get what I want and you get to live. Or you're strong enough yourself to keep me from bothering you. Of course, I could get some buddies to tip things in my favor, splitting the loot, but then, so could you. This ends when one side wipes out the other, or 'buddies' grows into nations and everybody goes bankrupt with a military industrial complex.

Or we can come up with some other method of getting your cooperation, one that doesn't involve wasting time or resources trying to take...your time and resources. Such as payment. I convince you that it is more profitable to give me some of your stuff in exchange for some of my stuff, rather simply taking all your stuff outright. Perhaps at the end of the day, we are both better off with the trade than if we'd devoted time and resources to fighting and taking whatever is left.

But we still have to keep each other honest in our dealings (or at least honest enough). If you have overwhelming force, it's easy to keep me in line, but the idea was to not spend everything on fighting (so you can spend it on yourself, remember). You could stop trading with me and tell other traders I'm too dishonest to trade with. Or you could start trading dishonestly yourself. Of course, I could force you to trade with me, but now we're right back at using force to coerce good behavior. But we have changed the dynamic somewhat. You want to trade, because you know is often times more profitable than conquest. So you need strength of arms to prevent me from taking from you. But you only need enough strength to make it too expensive to be worth invading. As more people figure this out, those who trade will become richer, and stronger, than those who simply fight.

So from the biblical premise that all men are evil, selfish beings, we arrive at not only the foundational logic for capitalism, but also with maintaining a relatively strong fighting force to keep people from taking advantage of each other. This also reveals the fatal flaw of capitalism, that what's good for me is not necessarily good for you, and a strong arbiter is needed to prevent me from forcing deals that only go my way. The use of force, either to coerce good behavior, or for theft and conquest, is a natural outworking of men being evil, and capitalism cannot escape it.

But what of capitalism's big rival, socialism (called welfare in America)? The idea behind socialism is that each person contributes what they can, and each person takes what they need, regardless of how much they put in or how much they need. What you put in the pot is unrelated to what you take out. If people are good, with a natural inclination to share, this would actually work. But if people are evil, they will quickly realize they can simply not produce anything, but still take what they want. This will lead to poverty as production approaches zero, or someone will come in with a big stick and force people to produce. The historical examples of each should be obvious.

I will end with a prediction, since the point of a philosophy is to understand the world enough to make informed decisions. And while it might be many years, perhaps decades, before I'm proven right or wrong, it is worth writing down so that I and others can look back and take note.

As America implements more and more socialist policies, and by this I mean wealth redistribution by which the wealth of those who produce is given to those who do not, the per capita income will go down, and the GDP of America will shrink. Left unchecked, America will come to resemble a third world country, eventually unable to provide even for the basic needs of its people. This will happen quickly enough that people will remember living in the land of prosperity.

This will be stopped in one of two ways; either people realize socialism doesn't work and they go back to capitalism, at which point wealth flows back through America, or America becomes so poor that it can no longer force socialism, and America splits in rebellion and civil war, as each person or group tries to find wealth outside of socialism.

All this, just from believing people are evil.