Friday, May 27, 2016

TANSTAAFL: A GOLD Analysis

Every libertarian is familiar with the term TANSTAAFL, the abbreviation of the sentence "There ain't no such thing as a free lunch," from the bestselling science fiction novel The Moon is a Harsh Mistress, where a group of libertarian radicals overthrow the government of a lunar colony. This idea, that free stuff is an illusion and doesn't really exist, and that when someone tells you they are going to give you something for free it is a scam, is common among libertarians.
Here I will not present the idea as such, but, taking this idea for granted, I will show its justification in GOLD economics. GOLD posits that an economy is merely a group of individual humans, each of whom produces wealth, trades this wealth to other individuals in return for wealth they wish to consume, and consumes this purchased wealth.
The economy, even in a highly advanced country, is fundamentally a barter economy where goods and services are traded for goods and services, but money has developed as a mechanism to make large trades among many different people possible. For example, if I make eyeglasses and you make pizzas, and I want to buy a slice of pizza, you might not need or want my eyeglasses, but there might be a pair of shoes that you want. So, instead of trading you eyeglasses for pizza, I trade you money for pizza, with the guarantee that this money is backed up by a pair of eyeglasses. You might then buy shoes from a shoemaker whose daughter is nearsighted. The shoemaker then buys eyeglasses from me for the money, and money facilitated a trade between three people, each of whom produced, traded, and consumed goods and services--but the money just as easily could have facilitated a trade among 300,000 people instead of just 3, and in today's economy, this describes what happens.
When I make the pair of eyeglasses, I "make money", which means that I create the wealth which is represented and symbolized by the money that I gave you to pay for the slice of pizza. You accepted that money because you can use it to buy any product from any seller for that amount of money, and the sellers will all accept it because it is backed by my eyeglasses that they can be buy with it, and by all wealth in the pool of wealth in the economy that can be purchased by money.
As I argued in an earlier blog post entitled Introduction to Hasanian Economics, theft is actually an inaccurate trade: a thief takes money without producing anything and uses the stolen money to buy something, and the seller mistakenly is forced to believe that he is trading that product he sells to the actual producer of the wealth which justifies this money, and not to a thief, because it is assumed that a person who owns money owns it rightfully. Because each dollar bill is not clearly labeled with the identify of the producer who made that money, i.e. the person who created the wealth that backs that money, it is possible to take money by theft instead of by trade, and to spend it to then get goods and services that rightfully belong to the person who made that money. I will argue that, in some instances, free stuff is like theft, while in other instances, it is like a trade where one person produces wealth but a different person consumes the wealth obtained from trading it.
So, according to GOLD, wealth is created, traded, and consumed. What happens when something is given away for free instead of being traded for something else? There are three possibilities:
1. Someone created wealth and gave it to someone else who consumed it without trading any wealth back to the producer. In this case, it truly is free, in a sense, from the point of view of the consumer, but only because the producer paid for it, and so it was not free for the producer. A gift fits this description, as does charity. In this case, the producer really pays for the wealth that someone else consumes, because the person who made the money decided to give that wealth, in the form they wished to consume it in, to a different person other than themselves.
2. Someone says that something is free, when in reality it has hidden costs that pay for it. For example, when a business provides a free lunch buffet at a presentation of their sales pitch, the lunch is actually being paid for by the money they will make from sales off the people who are drawn in to eat it. If it wasn't ultimately profitable, to pay for the lunch, the sales pitch, and all other costs, the business would not do it. So the "free" lunch is actually paid for by some of the people who eat it, namely, by the ones who are hooked by the sale pitch at the luncheon and buy the product. For the business to say it is free is a lie, and it is a scam and a con game. For another example, on the web there are dozens of dating sites that claim to be "free", and 99% of them are scams where you join for free and then have to pay to fully utilize the site. Generally, if someone offers you something for free, it is too good to be true.
3. It was produced by someone, but has been taken by force and given to someone else to consume. This is like theft, in that the existence of a money economy is used to con and scam the people into not seeing who has created the wealth that is being consumed. When a government says that it is giving something to the people for free, this is inevitably what it means: that someone created wealth, and the government is taking that wealth by force and giving it to someone else for free.
4. There is a more limited category, where people say that something is free, but only because it is paid for in kind with goods and services, not with printed money. For example, in computer programming there is famously a "free software" movement, where software engineers make software and give it away for free to other software engineers. But here, there is actually an invisible trade happening behind the scenes: the computer programmers give free software to the coding community, and at the same time these same coders take other people's free software and use it without paying for it, in a continuous give and take. There is no exact balance where what one gives equals what one takes, but the principle of trade is there. A trade is a trade and what you receive is paid for by what you give, whether it is paid for in money or in some other form of value. For another example, a social club might let members join for free, like a book club or Meetup, but in that case each member pays for his membership through showing up and participating and being social. In some limited situations, things must be paid for in values other than dollars, and people tend to call such things "free", when in fact they are paid for by non-money wealth.
From this analysis, several principles emerge, most of which I detailed in my book Golden Rule Libertarianism.
First, you cannot consume something that has not been produced, unless someone else produces something and then does not consume it. Wealth, at a given point in time, is finite, although along a line into the future it can grow or shrink. At any point in time, in an economy, a pool of wealth is created, and it is consumed (and, in this sense, being invested is like being consumed in the future). Each unit of wealth was produced by an individual producer in the economy, and is consumed by one. In this finite map of wealth, if one unit of wealth is consumed and there is no creation of wealth to compensate, the pool of wealth is minus one unit, so someone must go without--and this can be either evenly distributed (the taxpayers pay) or the producer can be robbed of the unit of wealth he produced. The government likes to pretend that when it gives things away for free that it created this wealth, as if it grew on trees, but this is obviously impossible. Someone had to create the wealth for people to consume, but, as in theft, people only see the money that pays for what they consume, they don't see the producer who "made" that money by creating wealth, since the producer behind the money is hidden in a money-based complex economy, since no individual can easily be attributed to any particular dollar in a trade with thousands of participants.
Second, if the government gives out enough free stuff, it bankrupts the economy. Each free thing that is given away is actually paid for by the wealth that was created by the people who make money. As we have seen, the created pool of wealth is finite. If more wealth that that amount is given away--and fuzzy accounting, and a divorce between production and consumption, could easily lead a government to try to give wealth away without paying attention to how much wealth is actually there to give--then the economy tries to consume more wealth than was created. If it trues to do this, it consumes all the wealth, there is no more left to consume, and this is how we define bankruptcy. This danger can be hidden early on by consuming the investment capital that the future is relying on, so we consume the wealth that belongs to future generations while leaving our own wealth alone--Social Security debts for future generations, and the massive amount of money the United States federal government has borrowed from the Federal Reserve, essentially borrowing against its own future--is an example. This can hide the threat until it is too late to reverse.
Third, in conclusion, there is no such thing as a free lunch, there is no such thing as stuff that is truly free, because there is no such thing as wealth that was not created by someone--it is a scam to get you to buy stuff, or to vote for someone, or, if it is a sincere genuine gift, it was free for you because the person who gave it to you has paid for it, and it wasn't free for them. People don't see the connections between money and the wealth that backs it, so, in today's capitalist economy, many people, and the government, and even some of the rich, throw money around without really worrying about the value that underlies it. GOLD illustrated the hidden connections between money and value behind the scenes to enable you to see what is really going on.

Friday, May 13, 2016

Hooey and History

I have tried to argue, to libertarians, that a truly libertarian federal government in the United States could actually end poverty, completely, if libertarian policies were enacted and a libertarian utopia was created. Not overnight, obviously, but after about 30 to 60 years, which is how long it usually takes for a political sea change to take effect.
The federal budget is about $3 trillion annually, and it seems clear to me that if that budget were cut to $1 trillion/year for military spending and the federal courts only, and $2 trillion worth of value were kept in the economy in the hands of the productive private sector instead of going towards government spending, under the magnification of wealth that comes from increased production (see my recent blog posts about the Upward Spiral Theory), this increased productivity from $2 trillion of capital per year that gets invested into business and otherwise would not have existed but instead would have been spent by the government in waste, might lead to $10 trillion/year of additional wealth in the American economy created over 30 years.
This idea is supported by the common economic theory known as the Time Value of Money Theory: for example (and this has been proven true by economic analysis) if you had invested $1 in the stock market in 1900, your investment could have been worth $1 million in 2000, 100 years later, because invested capital grows exponentially in a typical capitalist economy, so that the monetary value of time is far greater than what common sense would assume. So it is quite plausible and realistic to think that an additional investment of $2 trillion per year today could generate a net surplus of $10 trillion per year in 30 to 60 years, without me even needing to rely on a prediction of technological breakthroughs funded by that investment to lead to vastly increased efficiency to end poverty, such as genetically modified foods that make it much cheaper to feed the hungry, although that too is a plausible argument.
Assume that in 30 years there would otherwise have been 400 million Americans, of whom 200 million would have lived in poverty. This could put an additional $50,000/year in the pocket of every poor person in the country, effectively abolishing poverty. My numbers are estimates, not exact, but you get the general idea.
I have said this and been sharply criticized, insulted, and rebuked, not by liberals and socialists, but by libertarians! The main argument against me is that my theory is "hooey"-- simply naive and unbelievable. So let me reply to the skeptics with a lesson about human history.
Let us posit a simple thought experiment. Suppose you took a European person from the year 950 C.E., back when feudal kings ruled their serfs with horses and iron swords. You tell him that, in the future, there will be no kings nor peasants, but something called democracy, and the people will have televisions and refrigerators and washing machines and cars and vaccines, and that humans will set foot on the Moon. He would either not even understand what you were saying, lacking the concepts of cars and vaccines etc. with which to know the meanings of your words, or he would say that this is unrealistic and improbable to such an extreme extent as to be impossible--in other words, he would accuse you of spouting "hooey", and then he would return to tilling his field for his lord or eating his bowl of gruel.
Do you see the point? Ending poverty seems impossible. But what we have today would have looked impossible to someone even 200 years ago, let along 1000 years ago. The internet and smartphones would have been inconceivable to someone 60 years ago, in 1955. So this idea that I am being naive is itself ignorant of the capacity for historical human progress.
Having established that no reasonable person can rule out the possibility of ending poverty, it simply remains, then, to determine which political policy would achieve it--libertarianism, or socialism? I would have hoped that among we libertarians, the answer to that question would be obvious. If, sadly, it is not, see my recent posts about the Upward Spiral Theory, which explain why libertarian policies are capable of achieving literally exponential economic growth. Once a certain amount of new wealth is created, there will be so much wealth that even those who have little will still have a standard of living that to us we would call middle class, just as the American middle class right now has a standard of living that to European peasants in 950 C.E. would have seemed like literally Heaven on Earth.

The Upward Spiral #2

I would like to elaborate upon my theory of the Upward Spiral, which I presented in a recent blog post. My previous description was flowery and illustrative, whereas here I will be more academic, clear, and concise.
According to GOLD economic theory, the paradigm of economics a trade where Mr. X creates goods or services Y, Mr. A creates goods or services B, and X trades Y to A in return for A trading B to X, and X then consumes B while A consumes Y. This trade, of one to one bartering of goods for goods, is the foundation upon which the system of money and prices is added to enable trades between three or more different people: A trades B to C for money, A buys Y from X for that same money, X then buys D from C using the money from A, etc. So, in a GOLD analysis of economics, you always follow the values and the trades, you do not "follow the money", in fact you ignore the money and you instead look at what was created, traded, and consumed.
Now let us consider each additional marginal unit of Y that can be created by X. Assume that A wants to use 3 Ys, and A owns 3 Bs. Assume that X has only produced 2 Ys. Now, consider the theoretical possibility that X could produce one more additional Y--a marginal unit of production. Obviously this one additional Y will enable one more trade, or one more unit of trading, to happen--one more Y can be traded for one more B. If X creates the one more Y, up to the limit of A's demand for Y, then one additional unit of trade happens. The result of one additional unit of trade is that A now has one more Y to consume. Assuming that A consumes goods and services to live his life and also consumes goods and services as raw materials to produce the value, the B, that it is A's job to create, this one additional consumable Y for A then contains one additional marginal unit of productive capacity to create B. That one marginal unit of Y that X decided to create then creates a marginal unit of additional B that A will create.
That B, which, for example, C and X want to consume, then creates a chain reaction within the pool of value, within the economy, with more production leading to still more production, which leads to even more production, in an upward spiral that can keep growing and growing. X's choice to invest the blood, sweat and tears to make one more Y, enables A to make one more B, because A consumes Y to make B, and A's new B might be consumed by C and enable C to make one more D, and so on, and so on.
According to GOLD XYAB theory, demand actually consists of the supply on the other side of the trade, in other words, the demand for the supply of Y is the supply of B, so increased supply will increase demand. The additional Y enables A to make more Bs, so more Bs will be created, hence more trades will happen of Y for B, and each marginal additional trade then gives X more B and A more Y, which increases X's capacity to make more Ys and likewise increases A's capacity to make more B's. Having one more Y enables A to make one more B to trade to X for X to make another Y tomorrow, because, in GOLD terms, the Y that A consumes is the means by which A creates B: part of the consumable value, part of the Y that A consumes, is necessarily the "seed stock" and raw materials and intermediate goods used to in the process of producing consumable end goods, in A's case, to make B, and any truly consumer value of Y that A consumes simply enables A to physically survive or to live a happy life, which then enables A as a worker to produce B.
In other words, part of Y is the means for A to make B, and A buys Y, so X's additional Y will lead to more B, which A will trade to X, who will use that additional B to make more Y, which he will sell to A, who will use it to make still more B, which will then be sold to X, who will make still more Y, and so on in an infinite upward spiral. Just one additional unit of newly created value, just one more Y made by Mr. X that otherwise would never have existed, can have an exponential growth effect in economics. Then, when you add Mr. C to the analysis, and everyone else who trades with X and A, and lots of different newly created values, and lots of trades of value for value, we can have an economic growth effect that is an exponent of exponents.
This is why every increased marginal unit of production, up to the limit of demand for that supply, increase the number of trades that can be made, which leads to economic growth, and makes the economy and everyone in it better off. Hence supply-side economics: maximize production, by libertarian policies that benefit the producers, which gives X the freedom to make more Y, and you maximize the amount of wealth in the economy. This summarizes Upward Spiral Theory, which I also call the principle of marginal productivity.

Saturday, May 7, 2016

Economic Efficiency and Outsourcing

I firmly believe that if a President were to enact protectionist laws to force American companies not to outsource jobs to Mexico or China, as seems to be the trend in the rhetoric from both the Republican and Democratic Presidential candidates, this would constitute theft of money from the Mexicans and the Chinese, and the American government does not have the right to engage is massive theft.
Let me explain why. I will present two examples to make my case. First, consider a scenario where there is a lot of coal that can be cheaply mined and burned for fuel to produce electricity, and it is also possible to build solar panel farms to harvest sunlight for electricity, but that would be much more expensive. Because the coal would be cheaper, the market, through the price system, is telling us that the coal would be more economically efficient than the solar, because the coal is cheaper relative to the solar. Now assume that the working class is forced, by law, to build the solar power plants, instead of mining for coal, to protect them. So, what has happened? If the coal would cost $5 million, and the solar would cost $20 million, the workers are now forced to do additional work to build the solar that they would not otherwise have had to do. What this really means is that $15 million worth of slave labor was forced onto them, in other words, $15 million worth of labor was stolen from them. $15 million is what the market valued the difference between coal and solar at, so this is the price of the amount of work that was needed additionally above what would have been needed for coal to get the solar, and that is the work that was done.
Aha! But, the liberal will say, the cost of medical care for coal miners with Black Lung, pollution harms from coal smoke poisoning the air and water, etc., made it worth it. But here we are toying with the thought experiment. In a libertarian utopia, a person has the right to sue to recover damages if violence is done to him, and poisoning is a type of violence--Rothbard conceded as much, at times. So the cost of medical lawsuits and pollution lawsuits, in a truly free market, would be factored into the $5 million that the marketplace priced the coal at. In other words, in a libertarian utopia all negative externalities are naturally internalized due to the functioning of the free market as well as a functional judicial system that enables legal recovery for harms.
So, no, there truly was $15 million of wealth that could have belonged to the people if they had been able to pay $5 million instead of $20 million for the same amount of electricity, and this was a loss to the people, felt most painfully by the working class and the poor, as the lack of money always is felt by them most poignantly. The law that forced people away from the economically efficient pattern of production that was based on the objectively existing set of available resources represents an amount of wealth stolen from the people who must pay a price over the efficient market price.
GOLD theory holds that money is an illusion and we must always look at the underlying value that the money represents, and ignore the money, to see what is going on. In the coal vs. solar example, there are really three things, coal, sunlight, and a bunch of resources, such as food and water to feed the workers who could mine coal or build solar panels. If the workers mine coal, it is more efficient--faster, for example--so a certain amount of food and water is consumed to do that. But if they build the solar power plant, it is more expensive--say, it takes more work and longer hours--so they must consume more food and water to build the solar power plant. That $15 million that is lost is actually $15 million worth of food and water that is consumed to build the solar plant and would not have been consumed to mine coal for the same amount of electricity as a result. It is this loss of wealth which is the result of economic inefficiency--the destruction of surplus, to use the economist's terminology.
By the way, the purpose of this example is not to debate coal vs. solar. They are hypothetical examples only. I could have said apples vs. oranges to make the same point.
Now, having established our theoretical framework, let’s look at outsourcing. Naturally, the American workers would compete with the Mexican workers and the Chinese workers, and the group who did the best work for the cheapest price would get the jobs. But, because of socialist economic policy, the American workers are not allowed to compete. Minimum wage laws prevent them from competing on price, and the various employment benefits that must be given to American workers makes it even more expensive. Factor in currency exchange rates, and the Mexicans and Chinese workers are far cheaper, perhaps charged $6/hour for work that, with all costs accounted for, American workers would demand $35/hour for. The American workers’ skill set is not worth an additional $29/hour.
These prices were not necessary, but because of bad laws they are forced into existence. The market, then, must deal with reality as it exists. So, after the bad laws take their effect, the pattern of resources available means that economic efficiency is for the Mexicans and Chinese to get the jobs. If, instead, more laws force the jobs to go to the Americans, then wealth is stolen from the Mexicans and Chinese, who had earned those jobs in fair competition against the Americans, and this wealth will then be stolen from the people who must buy more expensive products, as the sellers seek to recover their added expense relative to the added cost of paying their factory workers, by forcing the consumers to pay more for these products which were more expensive to manufacture. Again, the poor and working class are hit hardest by more expensive products, as well as the working class in China and Mexico, which lack the American welfare system to fall back on.
Obviously the solution to the plight of the American working class anger is to roll back the minimum wage and employment benefits laws, so they can compete in the global labor market and win, but the labor unions won’t hear of this, and the workers themselves are not educated enough about economics to see that it is in their long-term rational self-interest to take a lower wage in order to have jobs and avoid the total loss of all salary when their jobs are taken by foreign workers.
In this context, the Chinese and the Mexicans deserve those jobs, and any protectionism is theft, and will wreak havoc upon the delicate balancing act of economic efficiency in the interconnected and complex world of international trade. Of course, a trade war of embargoes and tariffs may result, and then access to cheaper resources in foreign countries is blocked, making things still more expensive, and so on. So, the poor, to buy something made in a factory, will pay $35 for something that should cost $6, so that the political parties can get the labor unions to line up votes. I’m sorry, but it’s true, and somebody had to say it, and I guess that someone just happens to be me.

The Upward Spiral

In order to explain an idea from GOLD economics that I refer to as the Upwards Spiral, let’s consider the example of a sculptor who finds some red clay in a field and molds and bakes it into a clay pot. I use this example a lot in the context of explaining the right to own private property, as it nicely encapsulated the reasons why the sculptor should own her clay pot, and why she deserves to own it even if she did not create the clay nor create the good luck of finding clay, because she made choices and decisions to shape the clay into the clay pot, using her labor to create something that wasn’t there before.
However, let’s consider it from a different angle here. What is the economic effect upon the economy as a whole of the creation of one new clay pot? In other words, what is the consequence of each additional marginal clay pot? If she hadn’t made the pot, then there would just be red clay beneath the dirt in a field. In the absence of the sculptor, there would be nothing. With the sculptor, there is now one additional clay pot. Evidently, she has created new wealth that did not exist before. What does this mean? There is now one new clay pot for someone, say a baker or a family that needs something to store flour in, to buy and use for their uses for a clay pot. They will purchase the clay pot. This then creates a new marginal unit of work for someone to do, say, to be paid by the purchaser to deliver the clay pot from the sculptor’s kiln to the house of the family that has bought it. That family then pays the deliveryman a fee for his work. None of these things--the purchase or the job it created or the salary for that job--would have existed in the absence of that one new clay pot. Then, in turn, perhaps the deliveryman takes his fee and buys a sandwich. This then gives a sandwich shop one new sandwich sale which it otherwise would not have had, it spends the money it made from selling that sandwich to buy a marginal additional amount of bread, the baker sells one more loaf and pays more to the farmer who sells him the flour, the farmer has marginally more money to buy seed and fertilizer for growing wheat, and so on.
In light of this example, we can see that each time a producer creates a new value, each time one new unit of wealth is created, it impacts the entire economy beneficially, creating new trades that would not have existed, and each new trade makes money that can pay for more opportunities to create more wealth. This is basically the Broken Window argument in reverse. The Fallacy of the Broken Window says that if you break a window, the money spent to repair it does not help the economy does not have a net benefit, because the net result is everything as it was before minus one window. The Upward Spiral theory says that if someone makes something, the entire economy benefits, in the traditional of Adam Smith, because everything is as it was before but there is now more wealth in the pool of value that is bought by everyone’s dollars.
Two conclusions result from this. First, that the key to economic growth is production. The Keynesians, who say that demand causes growth, as if consuming value is the engine of growth, are simply wrong. This should come as no surprise to most libertarians and Objectivists. The family’s need for a pot to store things in, their demand, would accomplish nothing if the sculptor did not actually make the clay pot from the clay. In contrast, supply side economics, which focuses on creating conditions favorable to production and the creation of wealth, is the best tool for economic growth. This is not Voodoo Economics, it is in fact basic logic, which sadly most leftists don’t care about, since they don’t think logically, they think in emotions, and not merely emotions, but negative emotions like envy and resentment. Note that creating more wealth benefits everyone, including the workers and the poor (see my other blog posts about the Great Recession for details), so supply side economics actually helps the poor. This is not a “trickle down” effect that I am asserting, I am instead asserting that economic growth increases prosperity and the standard of living, which helps lifts every tier of standard of living higher than it was before. Each marginal unit of new wealth created benefits the economy, so the more that is produced, the more trade creates additional opportunities to produce. Thus there is, obviously, the potential for--aptly named--an Upward Spiral.
Second, leftists who might agree with me about the lone female sculptor say that if a factory mass-produces clay pots, and is owned by a greedy capitalist owner, then all the created wealth is taken by the owner and does not benefit the people. Let’s consider this. First, the issue of scale. If one million clay pots are produced, then each one benefits the economy, for the same reason that one clay pot would--up to the point where there is unmet need for more clay pots, and once all need is sated, then supply meets demand and the additional creation of new pots is a waste of resources and does not create wealth. So, if a factory creates one million clay pots, they do good, but one million times more than one person could. The miracle of the Industrial Revolution, and the reason we don’t live in thatched-roof hovels in pig feces to die from Black Plague or work 18 hours a day for a bowl of gruel, like they did in medieval civilizations before capitalist economic progress and the Enlightenment that gave birth to that progress.
Second, if the factory creates the pots, the newly created wealth belongs to the people, in the sense that its benefit goes to the many people who buy them, the salary for the fleet of employees who now have jobs to deliver them, and to the sculptors, or factory machine workers, who make them, and get paid their salary. Maybe an owner takes a profit. Perhaps the majority of the revenue is the owner's profit, if a profit margin is high. But in the absence of the factory, one million clay pots could not be made, the jobs for delivering millions of clay pots, and salary for those jobs, would not exist, the salary for the factory workers to buy things would not exist, and the world would be the same except minus a vast amount of created wealth. So the owner takes what he deserves, and he gets the money that equals what the marketplace values his work in organizing a successful clay pots factory. You can either have thousands of working class factory workers making a low wage for unskilled fungible labor, or, in the absence of the capitalist owner, these thousands of people would have no job at all, no money, and they and their families would starve. (Of course, the leftists want to believe that the government could take wealth and give it to these people, but again, that wealth ultimately reduces to just a lot of clay pots, or created food, or created wealth, and someone must create it, and some factory must create it to make enough of it to make a difference--the government doesn’t create it.)