Socialism, Communism, and Three Paradoxes

According to Wikipedia, socialism

is a range of economic and social systems characterised by social ownership of the means of production and workers’ self-management, as well as the political theories and movements associated with them. Social ownership can be public, collective[,] or cooperative ownership, or citizen ownership of equity.

Communism

is the philosophical, social, political, and economic ideology and movement whose ultimate goal is the establishment of the communist society, which is a socioeconomic order structured upon the common ownership of the means of production and the absence of social classes, money, and the state.

The only substantive difference between socialism and communism, in theory, is that communism somehow manages to do away with the state. This, of course, never happens, except in real communes, most of which were and are tiny, short-lived arrangements. (In what follows, I therefore put communism in “sneer quotes”.)

The common thread of socialism and “communism” is collective ownership of “equity”, that is, the means of production. But that kind of ownership eliminates an important incentive to invest in the development and acquisition of capital improvements that yield more and better output and therefore raise the general standard of living. The incentive, of course, is the opportunity to reap a substantial reward for taking a substantial risk. Absent that incentive, as has been amply demonstrated by the tragic history of socialist and “communist” regimes, the general standard of living is low and economic growth is practically (if not actually) stagnant.*

So here’s the first paradox: Systems that, by magical thinking, are supposed to make people better off do just the opposite: They make people worse off than they would otherwise be.

All of this because of class envy. Misplaced class envy, at that. “Capitalism” (a smear word) is really the voluntary and relatively unfettered exchange of products and services, including labor. Its ascendancy in the West is just a happy accident of the movement toward the kind of liberalism exemplified in the Declaration of Independence and Constitution. People were from traditional economic roles and allowed to put their talents to more productive uses, which included investing their time and money in capital that yielded more and better products and services.

Most “capitalists” in America were and still are workers who made risky investments to start and build businesses. Businesses that employs other workers and which offer things of value that consumers can take or leave, as they wish (unlike the typical socialist or “communist” system).

So here’s the second paradox: Socialism and “communism” actually suppress the very workers whom they are meant to benefit, in theory and rhetoric.

The third paradox is that socialist and “communist” regimes like to portray themselves as “democratic”, even though they are quite the opposite: ruled by party bosses who bestow favors on their protegees. Free markets are in fact truly democratic, in that their outcomes are determined directly by the participants in those markets.
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* If you believe that socialist and “communist” regimes can efficiently direct capital formation and make an economy more productive, see “Socialist Calculation and the Turing Test“, “Monopoly: Private Is Better Than Public“, and “The Rahn Curve in Action“, which quantifies the stultifying effects of government spending and regulation.

As for China, imagine what an economic powerhouse it would be if, long ago, its emperors (including its “communist” ones, like Mao) had allowed its intelligent populace to become capitalists. China’s recent emergence as an economic dynamo is built on the sand of state ownership and direction. China, in fact, ranks low in per-capita GDP among industrialized nations. Its progress is a testament to forced industrialization, and was bound to better than what had come before. But it is worse than what could have been had China not suffered under autocratic rule for millennia.

Putting in Some Good Words for Monopoly

Long ago and far away, when I studied economics, one of the first things that was drummed into my head was the badness of monopoly, oligopoly, and other forms of imperfect competition. The ideal, of course, is perfect competition because it

provides both allocative efficiency and productive efficiency:

  • Such markets are allocatively efficient, as output will always occur where marginal cost is equal to average revenue i.e. price (MC = AR). In perfect competition, any profit-maximizing producer faces a market price equal to its marginal cost (P = MC). This implies that a factor’s price equals the factor’s marginal revenue product. It allows for derivation of the supply curve on which the neoclassical approach is based. This is also the reason why “a monopoly does not have a supply curve”. The abandonment of price taking creates considerable difficulties for the demonstration of a general equilibrium except under other, very specific conditions such as that of monopolistic competition.
  • In the short-run, perfectly competitive markets are not necessarily productively efficient as output will not always occur where marginal cost is equal to average cost (MC = AC). However, in long-run, productive efficiency occurs as new firms enter the industry. Competition reduces price and cost to the minimum of the long run average costs. At this point, price equals both the marginal cost and the average total cost for each good (P = MC = AC).

All of this assumes that a market for a particular product or service is amenable to perfect competition. Economists recognize that such isn’t always the case (e.g., natural monopoly), but most of them nevertheless preach about the evils of market concentration (i.e., monopoly and other forms of less-than-perfect competition).

Contrarian economist Robin Hanson attacks the general view about the badness of market concentration in a pair of recent posts at his blog Overcoming Bias (here and here):

Many have recently said 1) US industries have become more concentrated lately, 2) this is a bad thing, and 3) inadequate antitrust enforcement is in part to blame….

I’m teaching grad Industrial Organization again this fall, and in that class I go through many standard simple (game-theoretic) math models about firms competing within industries. And occurs to me to mention that when these models allow “free entry”, i.e., when the number of firms is set by the constraint that they must all expect to make non-negative profits, then such models consistently predict that too many firms enter, not too few. These models suggest that we should worry more about insufficient, not excess, concentration.

*    *    *

My last post talked about how our standard economic models of firms competing in industries typically show industries having too many, not too few, firms. It is a suspicious and damning fact that economists and policy makers have allowed themselves and the public to gain the opposite impression, that our best theories support interventions to cut industry concentration.

My last post didn’t mention the most extreme example of this, the case where we have the strongest theory reason to expect insufficient concentration: [multi-monopoly]….

The coordination failure among these firms is severe. It produces a much lower quantity and welfare than would result if all these firms were merged into a single monopolist who sold a single merged product. So in this case the equilibrium industry concentration is far too low.

Hanson’s posts caught my eye because I am pleased that at least one practicing academic economist agrees with me. Somewhat long ago, I put it this way (with light editing and block-quotation format omitted for ease of reading):

Regulators live in a dream world. They believe that they can emulate — and even improve on — the outcomes that would be produced by competitive markets. And that’s precisely where regulation fails: Bureaucratic rules cannot be devised to respond to consumers’ preferences and technological opportunities in the same ways that markets respond to those things. The main purpose of regulation (as even most regulators would admit) is to impose preferred outcomes, regardless of the immense (but mostly hidden) cost of regulation.

There should be a place of honor in regulatory hell for those who pursue “monopolists”, even though the only true monopolies are run by governments or exist with the connivance of governments (think of courts and cable franchises, for example). The opponents of “monopoly” really believe that success is bad. Those who agitate for antitrust actions against successful companies — branding them “monopolistic” — are stuck in a zero-sum view of the economic universe, in which “winners” must be balanced by “losers”. Antitrusters forget (if they ever knew) that (1) successful companies become successful by satisfying consumers; (2) consumers wouldn’t buy the damned stuff if they didn’t think it was worth the price; (3) “immense” profits invite competition (direct and indirect), which benefits consumers; and (4) the kind of innovation and risk-taking that (sometimes) leads to wealth for a few also benefits the many by fueling economic growth.

What about those “immense” profits? They don’t just disappear into thin air. Monopoly profits (“rent” in economists’ jargon) have to go somewhere, and so they do: into consumption, investment (which fuels economic growth), and taxes (which should make liberals happy). It’s just a question of who gets the money.

But isn’t output restricted, thus making people generally worse off? That may be what you learned in Econ 101, but that’s based on a static model which assumes that there’s a choice between monopoly and competition. In fact:

  • Monopoly (except when it’s gained by force, fraud, or government license) usually is a transitory state of affairs resulting from invention, innovation, and/or entrepreneurial skill.
  • Transitory? Why? Because monopoly profits invite competition — if not directly, then from substitutes.
  • Transitory monopolies arise as part of economic growth. Therefore, such monopolies exist as a “bonus” alongside competitive markets, not as alternatives to them.
  • The prospect of monopoly profits entices more invention, innovation, and entrepreneurship, which fuels more economic growth.

(See also “Socialist Calculation and the Turing Test“, “Monopoly: Private Is Better Than Public“, and “The Rahn Curve in Action“, which quantifies the stultifying effects of government spending and regulation.)

Tragic Capitalism

Capitalism, when it isn’t being used as a “dirty word” by “socialist democrats” (the correct rendering, and an oxymoron at that), simply entails three connected things:

  • There is private ownership of the means of production — capital — which consists of the hardware, software, and processes used to produce goods and services.
  • There are private markets in which capital, goods, and services are bought by users, which are (a) firms engaged in the production and sale of capital, goods, and services and (b) consumers of the finished products.
  • The owners of capital, like the owners of labor that is applied to capital (i.e., “workers” ranging from CEOs and high-powered scientists to store clerks and ditch-diggers), are compensated according to the market valuation of the worth of their contributions to the production of goods and services. The market valuation depends ultimately on the valuation of the finished products by the final consumers of those products.

For simplicity, I omitted the messy details of the so-called mixed economy — like that of the U.S. — in which governments are involved in producing some goods and services that could be produced privately, regulating what may be offered in private markets, regulating the specifications of the goods and services that are offered in private markets, regulating the compensation of market participants, and otherwise distorting private markets through myriad taxes and social-welfare schemes — including many that don’t directly involve government spending, except to enforce them (e.g., anti-discrimination laws and environmental regulations).

None of what I have just said is the tragic aspect of capitalism to which the title of this post refers. Yes, government interventions in market are extremely costly, and some of them have tragic consequences (e.g., the mismatch effect of affirmative action, which causes many blacks to fail in college and in the workplace; the withholding of beneficial drugs by the FDA; and the vast waste of resources in the name of environmentalism and climate change). But all of that belongs under the heading of tragic government.

One tragedy of capitalism, which I have touched on before, is that it leads to alienation:

This much of Marx’s theory of alienation bears a resemblance to the truth:

The design of the product and how it is produced are determined, not by the producers who make it (the workers)….

[T]he generation of products (goods and services) is accomplished with an endless sequence of discrete, repetitive, motions that offer the worker little psychological satisfaction for “a job well done.”

These statements are true not only of assembly-line manufacturing. They’re also true of much “white collar” work — certainly routine office work and even a lot of research work that requires advanced degrees in scientific and semi-scientific disciplines (e.g., economics). They are certainly true of “blue collar” work that is rote, and in which the worker has no ownership stake….

The life of the hunter-gatherer, however fraught, is less rationalized than the kind of life that’s represented by intensive agriculture, let alone modern manufacturing, transportation, wholesaling, retailing, and office work.

The hunter-gatherer isn’t a cog in a machine, he is the machine: the shareholder, the co-manager, the co-worker, and the consumer, all in one. His work with others is truly cooperative. It is like the execution of a game-winning touchdown by a football team, and unlike the passing of a product from stage to stage in an assembly line, or the passing of a virtual piece of paper from computer to computer.

The hunter-gatherer’s social milieu was truly societal [and hunter-gatherer bands had an upper limit of 150 persons]….

Nor is the limit of 150 unique to hunter-gatherer bands. [It is also found in communal societies like Hutterite colonies, which spin off new colonies when the limit of 150 is reached.]

What all of this means, of course, is that for the vast majority of people there’s no going back. How many among us are willing — really willing — to trade our creature comforts for the “simple life”? Few would be willing when faced with the reality of what the “simple life” means; for example, catching or growing your own food, dawn-to-post-dusk drudgery, nothing resembling culture as we know it (high or low), and lives that are far closer to nasty, brutish, and short than today’s norms.

There is also an innate tension between capitalism and morality, as I say here:

Conservatives rightly defend free markets because they exemplify the learning from trial and error that underlies the wisdom of voluntarily evolved social norms — norms that bind a people in mutual trust, respect, and forbearance.

Conservatives also rightly condemn free markets — or some of the produce of free markets — because that produce is often destructive of social norms.

Thanks to a pointer from my son, I have since read Edward Feser’s “Hayek’s Tragic Capitalism” (Claremont Review of Books, April 30, 2019), which takes up the tension between capitalism and conservatism:

Precisely because they arise out of an impersonal process, market outcomes are amoral. Hayek thought it unwise to defend capitalism by emphasizing the just rewards of hard work, because there simply is no necessary connection between virtue of any kind, on the one hand, and market success on the other. Moreover, the functioning of the market economy depends on adherence to rules of behavior that abstract from the personal qualities of individuals. In particular, it depends on treating most of one’s fellow citizens not as members of the same tribe, religion, or the like, but as abstract economic actors—property owners, potential customers or clients, employers or employees, etc. It requires allowing these actors to pursue whatever ends they happen to have, rather than imposing some one overarching collective end, after the fashion of the central planner.

Hayek did not deny that all of this entailed an alienating individualism. On the contrary, he emphasized it, and warned that it was the deepest challenge to the stability of capitalism, against which defenders of the market must always be on guard. This brings us to his account of the moral defects inherent in human nature. To take seriously the thesis that human beings are the product of biological evolution is, for Hayek, to recognize that our natural state is to live in small tribal bands of the sort in which our ancestors were shaped by natural selection. Human psychology still reflects this primitive environment. We long for solidarity with a group that shares a common purpose and provides for its members based on their personal needs and merits. The impersonal, amoral, and self-interested nature of capitalist society repels us. We are, according to Hayek, naturally socialist.

The trouble is that socialism is, again, simply impossible in modern societies, with their vast populations and unimaginably complex economic circumstances. Socialism is practical only at the level of the small tribal bands in which our psychology was molded. Moreover, whereas in that primitive sort of context, everyone shares the same tribal identity and moral and religious outlook, in modern society there is no one tribe, religion, or moral code to which all of its members adhere. Socialism in the context of a modern society would therefore also be tyrannical as well as unworkable, since it would require imposing an overall social vision with which at most only some of its members agree. A socialist society cannot be a diverse society, and a diverse society cannot be socialist.

Socialism in large societies requires direction from on high, direction that cannot fail to be inefficient and oppressive.

Returning to Feser:

… Hayek—who had, decades before, penned a famous essay titled “Why I Am Not a Conservative”—went in a strongly Burkean conservative direction [in his last books]. Just as market prices encapsulate economic information that is not available to any single mind, so too, the later Hayek argued, do traditional moral rules that have survived the winnowing process of cultural evolution encapsulate more information about human well-being than the individual can fathom. Those who would overthrow traditional morality wholesale and replace it with some purportedly more rational alternative exhibit the same hubris as the socialist planner who foolishly thinks he can do better than the market.

Unsurprisingly, he took the institution of private property to be a chief example of the benefits of traditional morality. But he also came to emphasize the importance of the family as a stabilizing institution in otherwise coldly individualist market societies, and—despite his personal agnosticism—of religion as a bulwark of the morality of property and the family. He lamented the trend toward “permissive education” and “freeing ourselves from repressions and conventional morals,” condemned the ’60s counter-culture as “non-domesticated savages,” and placed Sigmund Freud alongside Karl Marx as one of the great destroyers of modern civilization.

Hayek was committed, then, to a kind of fusionism—the project of marrying free market economics to social conservatism. Unlike the fusionism associated with modern American conservatism, though, Hayek’s brand had a skeptical and tragic cast to it. He thought religion merely useful rather than true, and defended bourgeois morality as a painful but necessary corrective to human nature rather than an expression of it. In his view, human psychology has been cobbled together by a contingent combination of biological and cultural evolutionary processes. The resulting aggregate of cognitive and affective tendencies does not entirely cohere, and never will.

Feser than summarizes three critiques of Hayek’s fusionism, one by Irving Kristol, one by Roger Scruton, and one by Andrew Gamble, in Hayek: The Iron Cage of Liberty (1996). Gamble’s critique, according to Feser, is that Hayek

never adequately faced up to the dangers posed by corporate power. Most people cannot be entrepreneurs, and even those who can cannot match the tremendous advantages afforded by the deep pockets, legal resources, and other assets of a corporation. Vast numbers of citizens in actually existing capitalist societies simply must work for a corporation if they are going to work at all. But that entails an economic dependency of individuals on centralized authority, of a kind that is in some ways analogous to what Hayek warned of in his critique of central planning. As with socialism, conformity to the values of centralized authority becomes, in effect, a precondition of the very possibility of feeding oneself. By way of example, we may note that the political correctness Hayek would have despised is today more effectively and directly imposed on society by corporate Human Resources departments than by government.

Feser concludes with this:

None of this implies a condemnation of capitalism per se. The problem is one of fetishizing capitalism, of making market imperatives the governing principles to which all other aspects of social order are subordinate. The irony is that this is a variation on the same basic error of which socialism is guilty—what Pope John Paul II called “economism,” the reduction of human life to its economic aspect. Even F.A. Hayek, a far more subtle thinker than other defenders of the free economy, ultimately succumbed to this tendency. Too many modern conservatives have followed his lead. They have been so fixated on socialism and its economic irrationality that they have lost sight of other, ultimately more insidious, threats to Western civilization—including economism itself. To paraphrase G.K. Chesterton, a madman is not someone who has lost his economic reason, but someone who has lost everything but his economic reason.

Alan Jacobs offers an orthogonal view in his essay, “After Technopoly” (The New Atlantis, Spring 2019):

The apparent captain of technopoly [the universal and virtually inescapable rule of our everyday lives by those who make and deploy technology] is what [Michael] Oakeshott calls a “rationalist”…. [T]hat captain can achieve his political ends most readily by creating people who are not rationalists. The rationalists of Silicon Valley don’t care whom you’re calling out or why, as long as you’re calling out someone and doing it on Twitter….

Oakeshott wrote “The Tower of Babel” at roughly the same time as his most famous essay, “Rationalism in Politics” (1947), with which it shares certain themes. At that moment rationalism seemed, and indeed was, ascendant. Rejecting the value of habit and tradition — and of all authority except “reason” — the rationalist is concerned solely with the present as a problem to be solved by technique; politics simply is social engineering….

Oakeshott foresaw the coming of a world — to him a sadly depleted world — in which everyone, or almost everyone, would be a rationalist.

But that isn’t what happened. What happened was the elevation of a technocratic elite into a genuine technopoly, in which transnational powers in command of digital technologies sustain their nearly complete control by using the instruments of rationalism to ensure that the great majority of people acquire their moral life by habituation. This habituation, of course, is not the kind Oakeshott hoped for but a grossly impoverished version of it, one in which we do not adopt our affections and conduct from families, friends, and neighbors, but rather from the celebrity strangers who populate our digital devices.

In sum, capitalism is an amoral means to material ends. It is not the servant of society, properly understood. Nor is it the servant of conservative principles, which include (inter alia) the preservation of traditional morality, both as an end and as a binding and civilizing force.

I therefore repeat this counsel:

It is important (nay, crucial) to cultivate an inner life of intellectual or spiritual satisfaction. Only that inner life — and the love and friendship of a small circle of fellows — can hold alienation at bay. Only that inner life — and love and close friendships — can give us serenity as civilization crumbles around us.

Free Markets and Democracy

I am not slavishly devoted to free markets.

And I am deeply cynical about democracy as it is effected through electoral politics. But to almost everyone “democracy” is electoral democracy — and a “good thing”.

Of course, a goodly fraction of the people who think of “democracy” as a good thing have a particular formulation in mind: The “people” ought to decide how resources are allocated, businesses are run, profits are distributed, etc., etc., etc. The only practical way for such things to be done is for the “people” to elect office-holders who will use the power of government to make such things happen, as they (the office-holders and their unelected bureaucratic minions) prefer them to be done.

So the end result of electoral democracy isn’t democratic at all. The masses of people who are affected by government decisions about their social and economic affairs don’t really have a say in the making of those decisions. They only have a say in the election of office-holders who offer vague and nice-sounding promises about the things that they will accomplish. Those office-holders then turn things over to bureaucrats who have their own, very specific, undemocratic views about what should be accomplished, and how.

Which brings me back to free markets. Free markets are those in which buyers and sellers, through the price mechanism, determine what products and services should be produced, at what prices, and for whom. Every market participant acts voluntarily, and no one is coerced into selling something that he doesn’t want to produce or buying something that he doesn’t want to have. (Government intervention in markets yields exactly that kind of coercion by dictating, in effect, what can and cannot be produced, under what conditions, and by whom. The consumer is therefore coerced into a range of choices, or non-choices, that aren’t the ones he would prefer.)

Free markets, in sum, are democratic, in that their outcomes are determined directly by the participants in those markets.

And so we are left with the paradox that the loudest proponents of “democracy” are responsible for subverting it by their adamant opposition to free markets.

“Economic Growth Since World War II” Updated

I have updated key portions of “Economic Growth Since World War II“; specifically, these sections:

II. The Record Since World War II

VI. Employment vs. Big Government and Disincentives to Work

There’s a long way to go before the dead hand of big government has been lifted enough to allow the restoration of robust growth — last enjoyed in the 1980s (see the table following figure 3). If a Democrat is elected president in 2020, the dead hand will, instead, lie more heavily on the economy.

Conservatism’s Fundamental Dilemma: Markets vs. Morality

Conservatives rightly defend free markets because they exemplify the learning from trial and error that underlies the wisdom of voluntarily evolved social norms — norms that bind a people in mutual trust, respect, and forbearance.

Conservatives also rightly condemn free markets — or some of the produce of free markets — because that produce is often destructive of social norms.

Simple Economic Truths Worth Repeating

From “Keynesian Multiplier: Fiction vs. Fact“:

There are a few economic concepts that are widely cited (if not understood) by non-economists. Certainly, the “law” of supply and demand is one of them. The Keynesian (fiscal) multiplier is another; it is

the ratio of a change in national income to the change in government spending that causes it. More generally, the exogenous spending multiplier is the ratio of a change in national income to any autonomous change in spending (private investment spending, consumer spending, government spending, or spending by foreigners on the country’s exports) that causes it.

The multiplier is usually invoked by pundits and politicians who are anxious to boost government spending as a “cure” for economic downturns. What’s wrong with that? If government spends an extra $1 to employ previously unemployed resources, why won’t that $1 multiply and become $1.50, $1.60, or even $5 worth of additional output?

What’s wrong is the phony math by which the multiplier is derived, and the phony story that was long ago concocted to explain the operation of the multiplier….

To show why the math is phony, I’ll start with a derivation of the multiplier. The derivation begins with the accounting identity Y = C + I + G, which means that total output (Y) = consumption (C) + investment (I) + government spending (G)….

Now, let’s say that b = 0.8. This means that income-earners, on average, will spend 80 percent of their additional income on consumption goods (C), while holding back (saving, S) 20 percent of their additional income. With b = 0.8, k = 1/(1 – 0.8) = 1/0.2 = 5. That is, every $1 of additional spending — let us say additional government spending (∆G) rather than investment spending (∆I) — will yield ∆Y = $5. In short, ∆Y = k(∆G), as a theoretical maximum.

But:

[The multiplier] it isn’t a functional representation — a model — of the dynamics of the economy. Assigning a value to b (the marginal propensity to consume) — even if it’s an empirical value — doesn’t alter that fact that the derivation is nothing more than the manipulation of a non-functional relationship, that is, an accounting identity.

Consider, for example, the equation for converting temperature Celsius (C) to temperature Fahrenheit (F): F = 32 + 1.8C. It follows that an increase of 10 degrees C implies an increase of 18 degrees F. This could be expressed as ∆F/∆C = k* , where k* represents the “Celsius multiplier”. There is no mathematical difference between the derivation of the investment/government-spending multiplier (k) and the derivation of the Celsius multiplier (k*). And yet we know that the Celsius multiplier is nothing more than a tautology; it tells us nothing about how the temperature rises by 10 degrees C or 18 degrees F. It simply tells us that when the temperature rises by 10 degrees C, the equivalent rise in temperature F is 18 degrees. The rise of 10 degrees C doesn’t cause the rise of 18 degrees F.

Therefore:

[T]he Keynesian investment/government-spending multiplier simply tells us that if ∆Y = $5 trillion, and if b = 0.8, then it is a matter of mathematical necessity that ∆C = $4 trillion and ∆I + ∆G = $1 trillion. In other words, a rise in I + G of $1 trillion doesn’t cause a rise in Y of $5 trillion; rather, Y must rise by $5 trillion for C to rise by $4 trillion and I + G to rise by $1 trillion. If there’s a causal relationship between ∆G and ∆Y, the multiplier doesn’t portray it.

In sum, the fiscal multiplier puts the cart before the horse. It begins with a non-functional, mathematical relationship, stipulates a hypothetical increase in GDP, and computes that increase in consumption (and other things) that would occur if that increase were to be realized.

As economist Steve Landsburg explains in “The Landsburg Multiplier: How to Make Everyone Rich”,

Murray Rothbard … observed that the really neat thing about this [fiscal stimulus] argument is that you can do exactly the same thing with any accounting identity. Let’s start with this one:

Y = L + E

Here Y is economy-wide income, L is Landsburg’s income, and E is everyone else’s income. No disputing that one.

Next we observe that everyone else’s share of the income tends to be about 99.999999% of the total. In symbols, we have:

E = .99999999 Y

Combine these two equations, do your algebra, and voila:

Y = 100,000,000

That 100,000,000 there is the soon-to-be-famous “Landsburg multiplier”. Our equation proves that if you send Landsburg a dollar, you’ll generate $100,000,000 worth of income for everyone else.

Send me your dollars, yearning to be free.

Tax cuts may stimulate economic activity, but not nearly to the extent suggested by the multiplier. Moreover, if government spending isn’t reduced at the same time that taxes are cut, and if there is something close to full employment of labor and capital, the main result of a tax cut will be inflation.

Government spending (as shown in “Keynsian Multiplier: Fact vs. Fiction” and “Economic Growth Since World War II“) doesn’t stimulate the economy, and usually has the effect of reducing private consumption and investment. That may be to the liking of big-government worshipers, but it’s bad for most of us.

Megaprojects, Cost-Benefit Analysis, and “Social Welfare”

Timothy Taylor writes about “The Iron Law of Megaprojects vs. the Hiding Hand Principle“. He begins by quoting a piece by Bent Flyvbjerg in Cato Policy Report (January 2017):

Megaprojects are large-scale, complex ventures that typically cost a billion dollars or more, take many years to develop and build, involve multiple public and private stakeholders, are transformational, and impact millions of people. Examples of megaprojects are high-speed rail lines, airports, seaports, motorways, hospitals, national health or pension information and communications technology (ICT) systems, national broadband, the Olympics, largescale signature architecture, dams, wind farms, offshore oil and gas extraction, aluminum smelters, the development of new aircrafts, the largest container and cruise ships, high-energy particle accelerators, and the logistics systems used to run large supply-chain-based companies like Amazon and Maersk.

For the largest of this type of project, costs of $50-100 billion are now common, as for the California and UK high-speed rail projects, and costs above $100 billion are not uncommon, as for the International Space Station and the Joint Strike Fighter. If they were nations, projects of this size would rank among the world’s top 100 countries measured by gross domestic product. When projects of this size go wrong, whole companies and national economies suffer. …

If, as the evidence indicates, approximately one out of ten megaprojects is on budget, one out of ten is on schedule, and one out of ten delivers the promised benefits, then approximately one in a thousand projects is a success, defined as on target for all three. Even if the numbers were wrong by a factor of two, the success rate would still be dismal.

So far, so good. But then Taylor says this:

A common comeback to the Iron Law of Megaprojects is that if we pay attention to it, we will be so dissuaded by costs and risks of megaprojects that nothing will ever get done. Alfred O. Hirschman offered a sophisticated expression of this concern in his 1967 essay, “The Hiding Hand.” Hirschman argued there there is rough balance in megaprojects: we tend underestimate the costs and problems of megaprojects, but we also tend to underestimate the creative with which people address the costs and and problems that arise.

I will come to the irrelevance of Hirschman’s argument, but first a few more tidbits from Taylor:

[Flyvbjerg] argues that a number of prominent megaprojects have been completed on time and on budget. When choosing which megaprojects to pursue, it is useful to avoid underestimating costs and overestimating benefits. [Wow, what an astute observation.] …

Further, Flyvbjerg offers a reminder that even when a megaproject is eventually completed, and seems to be working well, project may still have been uneconomic–and society may have been better off without it.

The second comment brings Taylor close to the heart of the matter. But he never gets there. Like most economists, he overlooks the major flaw in the application of cost-benefit analysis to government projects: Costs and benefits usually have different distributions across the population. At the extreme, benefits that accrue only to the indigent are borne almost entirely by the non-indigent. (The indigent may pay some sales taxes.)

Cost-benefit analysis (applied to government projects) effectively rests on the assumption of a social welfare function. If there were such a thing, then it would be all right for people to go around punching each other (and worse), as long as the aggressors derived more gains in “utility” than the losses suffered by the victims.

Social Security Is an Entitlement

Entitlement has come to mean the right to guaranteed benefits under a government program. In the nature of government programs, those who receive the benefits usually don’t pay the taxes required to fund those benefits.

I recently saw on Facebook (which I look at occasionally) a discussion to the effect that Social Security isn’t an entitlement program because “we (the discussants) paid into it”.

Well, paying into Social Security doesn’t mean that you paid your own way. First, the system is rigged so the persons in lower income brackets receive benefits that are disproportionately high relative to the payments that they (and their employers) made during their working years.

Second, the money that a person pays into Social Security doesn’t earn anything. You are not buying a financial instrument that funds productive investments, which in turn reward you with a future stream of income.

True, there’s the mythical Social Security Trust Fund, which has been paying out benefits that have been defrayed in part by interest earned on “investments” in U.S. Treasury securities. Where does that interest come from? Not from the beneficiaries of Social Security. It comes from taxpayers who are, at the same time, also making payments into Social Security in exchange for the “promise” of future Social Security benefits. (I say “promise” because there is no binding contract for Social Security benefits; you get what Congress provides by law.)

So, yes, Social Security is an entitlement program. Paying into it doesn’t mean that the payer earns what he eventually receives from it. Quite the contrary. Most participants are feeding from the public trough.

Thaler’s Fatuousness

Richard  Thaler, with whom I had a nodding acquaintance many years ago, is one of my least favorite economists — and a jerk, to boot. (See, for example, “The Perpetual Nudger“, “Richard Thaler, Nobel Laureate“, “Thaler’s Non-Revolution in Economics“, “Another (Big) Problem with ‘Nudging’“, and ” Thaler on Discounting“.) What the world needs isn’t a biography of the nudger-in-chief, but that’s what the world now has, no thanks to The Library of Economics and Liberty, where the mercifully brief bio is posted.

In it, the reader is treated to such “wisdom” as this:

Economists generally assume that more choices are better than fewer choices. But if that were so, argues Thaler, people would be upset, not happy, when the host at a dinner party removes the pre-dinner bowl of cashews. Yet many of us are happy that it’s gone. Purposely taking away our choice to eat more cashews, he argues, makes up for our lack of self-control.

Notice the sleight of hand by which the preferences of a few (including Thaler, presumably) are pushed front and center: “many of us are happy”. Who is “us”? And what about the preferences of everyone else, who may well comprise a majority? Thaler is happy because the the host has taken an action of which he (Thaler) approves, because he (Thaler) wants to tell the rest of us what makes us happy.

There’s more:

Thaler … noticed another anomaly in people’s thinking that is inconsistent with the idea that people are rational. He called it the “endowment effect.” People must be paid much more to give something up (their “endowment”) than they are willing to pay to acquire it. So, to take one of his examples from a survey, people, when asked how much they are willing to accept to take on an added mortality risk of one in one thousand, would give, as a typical response, the number $10,000. But a typical response by people, when asked how much they would pay to reduce an existing risk of death by one in one thousand, was $200.

Surveys are meaningless. Talk is cheap (see #5 here).

Even if the survey results are somewhat accurate, in that there is a significant gap between the two values, there is a rational explanation for such a gap. In the first instance, a person is (in theory) accepting an added risk, one that he isn’t already facing. In the second instance, the existing risk may be one that the person being asked considers to be very low, as applied to himself. The situations clearly aren’t symmetrical, so it’s unsurprising that the price of accepting a new risk is higher than the payment for reducing a possible risk.

That’s enough of Thaler. More than enough.

Shaky Trade Talk

Political Calculations has posted “Heavy Toll of US-China Tariff War Continues“.  Two graphs carry the burden of proof of the title’s thesis, namely, that the current tariff “war” is responsible for a “heavy toll” on U.S exports and the total value of trade between the U.S. (rather, entities therein) and China. My take is that the graphs don’t support the conclusions that the writer draws from them.

First:

A trend line through all the points represented by the 12-month moving average wouldn’t rise as sharply as the pre-trade war linear trend. I would be hard-pressed to say that the current decline below the 2008-2019 trend is significant, and so would the writer. Further, the current decline in the 12-month moving average is no greater than the one that began during Obama’s presidency.

Second:

The writer claims that the

year-over-year growth rate of each nation’s exports to each other continues to fall in negative territory, which in previous occurrences, has [sic] coincided with periods of sharply slowing economic growth or recessions.

What I see in the graph is a long-term decline in the year-over-year growth rate. The only significant (and more negative) departure from the trend occurred during the Great Recession.

(See “Rethinking Free Trade III“, which repeats the main points of the first two installments.)

That “Hurtful” Betsy Ross Flag

Fox News has the latest:

Two Democratic hopefuls have expressed their support for Nike after the sportswear company pulled sneakers featuring the Betsy Ross-designed American flag ahead of the Fourth of July holiday. The company did so after former NFL quarterback and Nike endorser Colin Kaepernick raised concerns about the shoes.

Former HUD Secretary Julián Castro told CBS News on Wednesday that he was “glad to see” Nike remove the shoes from the shelves, comparing the “painful” symbol to the Confederate flag.

“There are a lot of things in our history that are still very painful,” Castro explained. As an example, he cited “the Confederate flag that still flies in some places and is used as a symbol.”\

Former Texas congressman Beto O’Rourke also approved of Nike’s decision, noting that “white nationalist groups” have “appropriated” the Betsy Ross flag.

“I think its really important to take into account the impression that kind of symbol would have for many of our fellow Americans,” he said,  according to Jewish Insider senior political reporter Ben Jacobs.

As I understand it, the Betsy Ross flag, which became the symbol of the rebellious, united States (i.e., Colonies) in 1777, is “hurtful” because it dates from an era when slavery was legal in what became the United States. How that historical fact is “hurtful” to anyone is beyond me. The fact of slavery is reprehensible, but a flag that merely denotes America’s struggle for independence from Britain really has nothing to do with slavery, except in the slippery way that “social justice” warriors have just invented. (Clearly, they are running low on ideas.)

Well, if the Betsy Ross flag is “hurtful” to professional virtue-signalers and malcontents, it is certainly — and more legitimately — hurtful to me. I am a direct descendant of a man who, with three of his sons (one of whom I am also directly descended from), fought on the British side in the Revolutionary War. They had settled in the Colony of Pennsylvania in the 1750s and, perhaps not unwisely, chose to defend the Crown against presumptuous rebels like George Washington, Samuel Adams, Thomas Jefferson, and 53 other signatories of the Declaration of Independence — all of whom used to be called patriots. (Washington, Jefferson, and many other signatories owned slaves, but that wasn’t why they rebelled; slavery was then still legal throughout the British Empire.)

In any event, because my ancestors were Loyalists, they fled to Canada at the end of the war. And from then until the birth of my father in the United States more than 130 years later, the ancestors in my paternal line of descent were Canadian and therefore (nominally, at least) subjects of the British monarch.

So if anyone has a right to be offended by the Betsy Ross flag, it is I. But I am not offended by the flag, though I am deeply offended by the useless twits who profess to be offended by it.

“Free Stuff”

Here’s an explainer, which will go over the heads of Democrat presidential hopefuls and most Democrats:

Getting “free” stuff reduces the recipient’s need to work.

Therefore, giving out “free” stuff means that recipients work less than they would otherwise work, where “less” often means “not at all”.

But “free” stuff isn’t really free; someone has to produce it (i.e., work). (The work may be done by machines and computerized systems, but someone has to invent, build, operate, monitor, etc., those machines and computerized systems; and someone has to do some kind of work in order to generate the wherewithal for the invention, construction, and purchase of machines and computerized systems.)

As long as productivity rises fast enough, workers can continue to produce “free” stuff while maintaining or improving their own standard of living.

But if the value of “free” stuff rises faster than the value of the extra output afforded by productivity increases, something has to give. If the something is the real income of workers — what they get after providing “free” stuff for others — they will work less (though they may do so in ways that disguise the slowdown).

Some will argue that workers will just work more in order to maintain their standard of living. But just as companies will offer fewer goods and services as prices decline, so will workers work less as their real wages decline. The ability to buy stuff is an incentive to work, but there are other things to do with one’s time, so if a given amount of work buys less stuff, those other things look more attractive. (Greg Mankiw gives an economist’s explanation here.)

At some point, if productivity doesn’t rise enough (and it has been declining for a long time), while government continues to hand out more “free” stuff, enough workers will have reduced their output (in response to decreases in real wages) that the real (inflation-adjusted) value of total output will decline.

A kind of death-spiral will ensue: lower real wages leads to lower total output which leads to lower real wages (unless the “free” stuff is reduced drastically), etc., etc., etc. In the end, workers will do just enough work to afford a subsistence standard of living, and the actual value of the “free” stuff given to non-workers will be about the same as it is for workers. (In the USSR, most people were nominally employed (though not very productively), but there was so much “free” stuff being handed out — especially to the commissars and their favorites — that the result was the same: low real output and a low standard of living — by Western standards — even for the commissars and their favorites.)

Equality, ain’t it wonderful?

The Price of a Low Unemployment Rate …

… is worse service. It figures, doesn’t it? One of the things that firms must do to boost output is to hire people with lower qualifications than previous hires. That’s good for dumber and less-educated workers. But it’s frustrating for consumers who encounter them in stores and over the phone. The solution, from my perspective as a consumer, is to shop where automation reigns. My Amazon membership of 21 years becomes daily more valuable to me.

Time-Preference: A Shallow Concept

Economists put a lot of stock in the concept of time-preference. Certainly, time-preference has a lot to do with the setting of interest rates. But, as any respectable economist should admit, there no “interest rate” but a plethora of them, including many, many of them that aren’t captured by market activity.

In any event, time-preference is evanescent. It can even reverse itself over time. The time-preference for death is low, or even negative, when one is young. But it can be infinitely positive when one is suffering — at any age. In general, however, it is safe to say that it rises with age, perhaps sharply toward the end of one’s life.

Not with a Bang

This is the way the world ends
This is the way the world ends
This is the way the world ends
Not with a bang but a whimper.

T.S. Elliot, The Hollow Men

It’s also the way that America is ending. Yes, there are verbal fireworks aplenty, but there will not be a “hot” civil war. The country that my parents and grandparents knew and loved — the country of my youth in the 1940s and 1950s — is just fading away.

This would not necessarily be a bad thing if the remaking of America were a gradual, voluntary process, leading to time-tested changes for the better. But that isn’t the case. The very soul of America has been and is being ripped out by the government that was meant to protect that soul, and by movements that government not only tolerates but fosters.

Before I go further, I should explain what I mean by America, which is not the same thing as the geopolitical entity known as the United States, though the two were tightly linked for a long time.

America was a relatively homogeneous cultural order that fostered mutual respect, mutual trust, and mutual forbearance — or far more of those things than one might expect in a nation as populous and far-flung as the United States. Those things — conjoined with a Constitution that has been under assault since the New Deal — made America a land of liberty. That is to say, they fostered real liberty, which isn’t an unattainable state of bliss but an actual (and imperfect) condition of peaceful, willing coexistence and its concomitant: beneficially cooperative behavior.

The attainment of this condition depends on social comity, which depends in turn on (a) genetic kinship and (b) the inculcation and enforcement of social norms, especially the norms that define harm.

All of that is going by the boards because the emerging cultural order is almost diametrically opposite that which prevailed in America. The new dispensation includes:

  • casual sex
  • serial cohabitation
  • subsidized illegitimacy
  • abortion on demand
  • easy divorce
  • legions of non-mothering mothers
  • concerted (and deluded) efforts to defeminize females and to neuter or feminize males
  • gender-confusion as a burgeoning norm
  • “alternative lifestyles” that foster disease, promiscuity, and familial instability
  • normalization of drug abuse
  • forced association (with accompanying destruction of property and employment rights)
  • suppression of religion
  • rampant obscenity
  • identity politics on steroids
  • illegal immigration as a “right”
  • “free stuff” from government (Social Security was meant to be self-supporting)
  • America as the enemy
  • all of this (and more) as gospel to influential elites whose own lives are modeled mostly on old America.

As the culture has rotted, so have the ties that bound America.

The rot has occurred to the accompaniment of cacophony. Cultural coarsening begets loud and inconsiderate vulgarity. Worse than that is the cluttering of the ether with the vehement and belligerent propaganda, most of it aimed at taking down America.

The advocates of the new dispensation haven’t quite finished the job of dismantling America. But that day isn’t far off. Complete victory for the enemies of America is only a few election cycles away. The squishy center of the electorate — as is its wont — will swing back toward the Democrat Party. With a Democrat in the White House, a Democrat-controlled Congress, and a few party switches in the Supreme Court (of the packing of it), the dogmas of the anti-American culture will become the law of the land; for example:

Billions and trillions of dollars will be wasted on various “green” projects, including but far from limited to the complete replacement of fossil fuels by “renewables”, with the resulting impoverishment of most Americans, except for comfortable elites who press such policies).

It will be illegal to criticize, even by implication, such things as abortion, illegal immigration, same-sex marriage, transgenderism, anthropogenic global warming, or the confiscation of firearms. These cherished beliefs will be mandated for school and college curricula, and enforced by huge fines and draconian prison sentences (sometimes in the guise of “re-education”).

Any hint of Christianity and Judaism will be barred from public discourse, and similarly punished. Islam will be held up as a model of unity and tolerance.

Reverse discrimination in favor of females, blacks, Hispanics, gender-confused persons, and other “protected” groups will be required and enforced with a vengeance. But “protections” will not apply to members of such groups who are suspected of harboring libertarian or conservative impulses.

Sexual misconduct (as defined by the “victim”) will become a crime, and any male person may be found guilty of it on the uncorroborated testimony of any female who claims to have been the victim of an unwanted glance, touch (even if accidental), innuendo (as perceived by the victim), etc.

There will be parallel treatment of the “crimes” of racism, anti-Islamism, nativism, and genderism.

All health care in the United States will be subject to review by a national, single-payer agency of the central government. Private care will be forbidden, though ready access to doctors, treatments, and medications will be provided for high officials and other favored persons. The resulting health-care catastrophe that befalls most of the populace (like that of the UK) will be shrugged off as a residual effect of “capitalist” health care.

The regulatory regime will rebound with a vengeance, contaminating every corner of American life and regimenting all businesses except those daring to operate in an underground economy. The quality and variety of products and services will decline as their real prices rise as a fraction of incomes.

The dire economic effects of single-payer health care and regulation will be compounded by massive increases in other kinds of government spending (defense excepted). The real rate of economic growth will approach zero.

The United States will maintain token armed forces, mainly for the purpose of suppressing domestic uprisings. Given its economically destructive independence from foreign oil and its depressed economy, it will become a simulacrum of the USSR and Mao’s China — and not a rival to the new superpowers, Russia and China, which will largely ignore it as long as it doesn’t interfere in their pillaging of respective spheres of influence. A policy of non-interference (i.e., tacit collusion) will be the order of the era in Washington.

Though it would hardly be necessary to rig elections in favor of Democrats, given the flood of illegal immigrants who will pour into the country and enjoy voting rights, a way will be found to do just that. The most likely method will be election laws requiring candidates to pass ideological purity tests by swearing fealty to the “law of the land” (i.e., abortion, unfettered immigration, same-sex marriage, freedom of gender choice for children, etc., etc., etc.). Those who fail such a test will be barred from holding any kind of public office, no matter how insignificant.

Are my fears exaggerated? I don’t think so, given what has happened in recent decades and the cultural revolutionaries’ tightening grip on the Democrat party. What I have sketched out can easily happen within a decade after Democrats seize total control of the central government.

Will the defenders of liberty rally to keep it from happening? Perhaps, but I fear that they will not have a lot of popular support, for three reasons:

First, there is the problem of asymmetrical ideological warfare, which favors the party that says “nice” things and promises “free” things.

Second, What has happened thus far — mainly since the 1960s — has happened slowly enough that it seems “natural” to too many Americans. They are like fish in water who cannot grasp the idea of life in a different medium.

Third, although change for the worse has accelerated in recent years, it has occurred mainly in forums that seem inconsequential to most Americans, for example, in academic fights about free speech, in the politically correct speeches of Hollywood stars, and in culture wars that are conducted mainly in the blogosphere. The unisex-bathroom issue seems to have faded as quickly as it arose, mainly because it really affects so few people. The latest gun-control mania may well subside — though it has reached new heights of hysteria — but it is only one battle in the broader war being waged by the left. And most Americans lack the political and historical knowledge to understand that there really is a civil war underway — just not a “hot” one.

Is a reversal possible? Possible, yes, but unlikely. The rot is too deeply entrenched. Public schools and universities are cesspools of anti-Americanism. The affluent elites of the information-entertainment-media-academic complex are in the saddle. Republican politicians, for the most part, are of no help because they are more interested on preserving their comfortable sinecures than in defending America or the Constitution.

On that note, I will take a break from blogging — perhaps forever. I urge you to read one of my early posts, “Reveries“, for a taste of what America means to me. As for my blogging legacy, please see “A Summing Up“, which links to dozens of posts and pages that amplify and support this post.

Il faut cultiver notre jardin.

Voltaire, Candide


Related reading:

Michael Anton, “What We Still Have to Lose“, American Greatness, February 10, 2019

Rod Dreher, “Benedict Option FAQ“, The American Conservative, October 6, 2015

Roger Kimball, “Shall We Defend Our Common History?“, Imprimis, February 2019

Joel Kotkin, “Today’s Cultural Engineers“, newgeography, January 26, 2019

Daniel Oliver, “Where Has All the Culture Gone?“, The Federalist, February 8, 2019

Malcolm Pollack, “On Civil War“, Motus Mentis, March 7, 2019

Fred Reed, “The White Man’s Burden: Reflections on the Custodial State“, Fred on Everything, January 17, 2019

Gilbert T. Sewall, “The Diminishing Authority of the Bourgeois Culture“, The American Conservative, February 4, 2019

Bob Unger, “Requiem for America“, The New American, January 24, 2019

A Summing Up

This post has been updated and moved to “Favorite Posts“.

The Good News and Real News about Inflation and Earnings

GOOD NEWS

The CPI isn’t signalling a recession.

Household income, adjusted for inflation, continues to rise to new heights.

BUT . . .

Inflation is in the eye (or wallet) of the beholder. It is arbitrarily estimated by sampling the prices of defined “baskets” of products and services. Your “basket” probably differs greatly from the official ones used by the Bureau of Labor Statistics.

Almost no household is a typical one.

REAL NEWS

Aggregate statistics are almost meaningless. There is no such thing as social welfare. Only you can decide if you’re better off than you were yesterday.


Related posts:
Microeconomics and Macroeconomics
Unorthodox Economics: 2. Pitfalls (especially the third entry about social welfare)
Unorthodox Economics: 5. Economic Progress, Microeconomics, and Microeconomics

Recent Updates

In case you hadn’t noticed, I have in the past few days added new links to the following post and pages:

The Green New Deal Is a Plan for Economic Devastation

Climate Change

Favorite Posts

Intelligence

Spygate

I have also updated “Writing: A Guide“.

The Green New Deal Is a Plan for Economic Devastation

Here’s the essence of the “plan”:

The annual cost of the Green New Deal (GND) is about $5 trillion a year over the first ten years.

At the end of the ten years, government’s share of GDP would rise from about 40 percent to about 60 percent. This assumes, unrealistically, that the prospect and realization of the GND wouldn’t cause a drastic reduction in the size of the private sector.

Even making that assumption, the real rate of economic growth would decline from a weak 2 percent to a devastating minus 5 percent*.

In fact, within a generation what’s left of GDP would consist almost entirely of government spending. The socialist dream would have become reality, complete with long queues (physical and virtual) and rationing of shoddy products and services doled out by the state.

USSR, here we come.

__________

* My rough estimate of the GND’s effect of on the rate of growth is based on the equation presented here.


Related reading:

Erich Wallach’s interview with Deirdre McCloskey, Distinguished Professor Emerita of Economics and of History, University of Illinois-Chicago, February 10, 2019

Douglas Holtz-Eakin, Dan Bosch, Ben Gitis, Dan Goldbeck, and Philip Rossetti, “The Green New Deal: Scope, Scale, and Implications“, American Action Forum, February 25, 2019