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Economic Myths #11 - The Mixed Economy
The world’s political systems today are, generally, neither fully despotic on the one hand nor completely free on the other. Instead, most of us languish under so-called “social democracy”, a curious mixture in which a degree of sovereignty in the form of voting rights reside in the citizenry while political leadership and control remains distinct in the form of various functionaries such as Presidents, Prime Ministers, Congressmen and Members of Parliament.
A libertarian might contend, of course, that such a social democratic system ends up being worse for individual liberty than a dictatorship or monarchy. The important point, however, is that the ideological extremes have been blended into some kind of soup which, at least from the de jure point of view, represent neither total freedom on the one hand nor total despotism on the other.
In exactly the same way, neither do our economic systems represent any ideological purity. We are neither fully capitalist nor are we completely socialised. Instead we have to put up with some kind of “mixed” economy that contains both capitalistic and socialistic elements.
Although the relationship between economic and political systems is one joined at the hip, the justification of social democracy on the one hand and of the mixed economy on the other appears to come from different directions.
Democracy, rightly or wrongly, is believed to a good and noble thing in its own right – a positive and independently justifiable improvement over any other option. The mixed economy, however, appears to be based on little more than the intellectually slothful adage that “the truth lies somewhere in the middle”.
Capitalism will bring us massive economic prosperity and improvement in the standard of living – but, so it is alleged, it leads also to unstable business cycles and encourages greed, selfishness and extensive inequalities in wealth and income. Socialism, on the other hand, may make things “fairer” and more equal; yet, in the face of a hundred years’ worth of evidence, it is difficult not to conclude that it decimates the productive capacity of a nation and the standard of living stagnates or even reverses. The “correct” system “must”, so the argument goes, lie in between these two points so that we can take the best of both systems while avoiding the alleged pitfalls. Hence we end up with the mixed economy.
The first question we might as well ask when tackling this fallacy is that if we adopt a position somewhere in between the two “extremes” then what argument is there to suggest that we will end up with the best aspects of each system rather than the worst? In spite of the socialistic element of our economy income inequality and wealth concentration in the hands of a few elites seems to be worsening, not getting better; and in spite of the capitalistic element we have failed to have any meaningful growth since at least the onset of the global financial crisis ten years ago. May be it is the alleged good parts of each system that are cancelling each other out rather than the bad?
The fundamental flaw, however, is that the assessment of capitalist and socialist economies that identifies their good and bad characteristics is partly wrong. These wrongly diagnosed parts are then exaggerated in making the case for a mixed economic system.
The good aspects of capitalism, private property and free exchange – such as economic progress and marked increases in the standard of living – are, as we know from “Austrian” economics, entirely true; the bad aspects, on the other hand – selfishness, inequality, greed, the business cycle, and so on – are largely false or misstated.
Capitalism does not encourage anyone to be greedy or selfish at all – it just gives you the freedom to be either as greedy or as altruistic as you like, provided that you fulfil those ends through voluntary trade and do not engage in outright theft or fraud. The aspect of capitalism that its opponents do not like is that people, when set free, usually choose to pursue their material welfare as the first priority. However, the resulting increase in productivity confers upon people the wherewithal to be more charitable out of choice. Thus we should not be surprised to learn that many of the great charitable or humanitarian institutions – such as the Salvation Army, the YMCA, the Scout Movement and the Rotary Club – were founded in the nineteenth or early twentieth centuries, the relatively most capitalistic period in history.
Moreover, the business cycle, as we know, is not an inherent feature of a free market economy, but is caused instead by the artificial creation of credit, something that is only sustainable with state central bank sponsorship.
However, in spite of these truths, whenever some justification is made for the “mixed” economy, we will still hear “greed”, “selfishness”, “inequality” and “boom and bust” being cited and emphasised in an attempt to cajole people into accepting a blended economic system.
Turning to socialism, we know that such a system would obliterate all productivity and the standard of living would sink far below that to which we are now accustomed. Its bad aspects are, therefore, all true. Yet the good aspects – greater equality, fairness, and anything that can be categorised under the current, in-vogue term of “social justice” – are all patently false.
Socialism does not create any equality at all; it does not result in every portion of wealth in existence being carved up into equal shares for everyone to then enjoy. Instead, it transfers the power over whole resources from private producers (who must maintain their ability to satisfy consumers in order to retain that privilege) to politicians and bureaucrats. Nationalising an industry does not give you, the average citizen, any greater access to the goods and services tied up in that industry. Rather you are pushed further to the bottom of the heap than before as the political lords and masters decide what that industry will produce, what prices you will pay and what level of service you will receive. You are stuck with whatever they decide to give you – providing that the inefficiency and waste of state run industries has anything left to give.
Nor will you have any greater ability to control how resources are used in a socialised economy compared to in a capitalist economy. The very reason why property rights and exclusive ownership exist is precisely because there is no agreement on how resources should be used. This problem exists under socialism as it does under capitalism and one person’s decision must, at some point, overrule all others. If you are to have any influence in this regard in a socialised system then it will be restricted to a handful of catch-all elections every four or five years or so. In the meantime you have to suffer whatever it is that the electoral victors throw down from their table.
Under capitalism, however, your voting influence is felt all the time in a highly specific manner through your spending habits. If a producer fails to produce what you want at a price that you can pay then he loses you there and then, while resources at his disposal are transferred to other producers who can meet your needs. Not so under socialism where you have to put up with whatever the upper elite, controlling all resources, decides will be produced.
Furthermore, providing social safety nets and welfare states in pursuit of some kind of “social justice” does not result in a society that is more caring and sharing. If anything, the adage “from each according to his means to each according to his needs” completely disintegrates any moral fervour. By separating individual productivity from individual reward, wealth creation is no longer an endeavour in which each person tries to better his own life and the lives of his friends and family. Instead, it becomes an exercise in “stockpiling” – the digging of a communal trough to which a person contributes that which he is able according to his “means” and from which he slurps out according to his “needs”. Unsurprisingly, every person seeks to minimise the amount he has to put in through toil and sweat while maximising that which he can take out in goods and services that he can enjoy in return for minimal effort.
The result of this is a population that fails to cultivate its talents towards increasing wealth such as hard work, responsibility and self-reliance and replaces them with characteristics that make them needy and pitiful, with an added layer of laziness, corruption and freeloading. This is precisely the problem faced by our bloated welfare states today and why they are completely bankrupt – demand has swollen to such an extent while supply has been hopelessly dwindled. None of this is exactly the antidote to “greed” and “selfishness” that advocates of the mixed economy might expect.
Moreover, the resulting shortages in a socialist system usually spawn black markets and underground trade, increasing the scope of legally defined criminality and, in worst case scenarios, penalising the population for attempting to acquire what should be every day goods and services – as has happened in the social democratic paradise of Venezuela.
A further fallacy that is often used to justify the mixed economy is the assertion that private enterprise does some things “better” than the state while the state does other things “better” than private enterprise. Thus we are encouraged to look at the “evidence” to decide who can do what better.
The obvious retort to this is by what standard do you conclude that something is being done “better” by either the state or by private enterprise – and, moreover, by what standard do we judge whether a certain activity should be carried on at all?
Private enterprises make this judgment through the profit and loss test; the quantity and quality of resources devoted to production of a good and service is rationed by its ability to make a profit, indicating the relative height of its demand by consumers. If a service is of low quality or unavailable to certain sections of the population it is simply because consumers are not willing to support a more extensive level of production in that particular industry.
For example, the fact that broadband internet was not, in the UK, extended to all rural communities leads our evidence-obsessed policymaker to conclude that this is a case of “market failure” – an instance where the private enterprise has rendered itself unable to provide something that it “should” provide, and so the state must step in.
This is utter nonsense. If the “free market” has failed to provide broadband internet to rural areas then it simply means that the more extensive resources necessary to do so compared to urban areas were required more urgently to produce other goods and services that people wanted to buy. Any “evaluator” who determines from the “evidence” that the state is needed for rural broadband cabling is necessarily substituting his own value judgments for everyone else’s, denying them the goods that they really demand and giving them those that they do not (or, more accurately, denying resources to one set of people who are willing to pay for them in favour of another set who are not).
Nor can we fall back on the assertion that the state should run “essential” industries for there is no such thing as an “essential” industry. Humans do not evaluate goods and services in whole, homogenous concepts such as “fire services”, “health services”, “electricity”, and so on. Rather, each good or service is demanded in specific quantities in specific times and places.
For instance, while we may think of “medicine” as “important” we can easily imagine ourselves in a situation where we would prefer to do something “unimportant” like watching television rather than produce another bottle of penicillin. Moreover, some people may not want penicillin at all if they maintain their health. The difficult task is not, therefore, determining whether penicillin is generally more “important” than television – it is identifying the precise point at which we stop devoting resources to the production of penicillin (and, thus, the point at which continuing to do so would be a waste) and move them instead towards producing television sets. This is something that can be done only by the profit and loss test of the free market. Any other judgment is necessarily arbitrary and at variance with the demands of consumers.
In any case, as libertarians, we might also ask if an industry is really critical then why on earth would you want it in the hands of the state where it can be royally screwed up? And why would it even need to be under state control? If the good or service produced is heavily in demand then profit opportunities will abound and private entities will have no problem in meeting that demand. It is, in fact, the unessential industries with low demand that struggle to stay afloat without state support.
The real reason why we have ended up with the mixed economy is, in fact, pragmatic rather than principled. Capitalism is the goose that has laid the golden egg and any decimation of capitalism would very quickly destroy the standard of living of the citizenry, prompting a swift revolution. Yet the state yearns for power and control and cannot be content with letting things be; it therefore has to paint capitalism as this necessary evil that must be stewarded and supervised – like a dangerous pet which, if managed “correctly”, will cuddle and comfort us instead of biting us on the backside.
Ironically, of course, it is state interference attempting to inject a socialistic element to the economy that brings about the chaos and injustice that is blamed on capitalism. We have boom and bust precisely because of state-sponsored credit creation, while the rich are getting richer and the poor poorer because the government bails out these cronies from the resulting disarray at the expense of the rest of us. Indeed, having a “safety net” against the alleged “sink or swim” nature of capitalism has turned out very well if you are an investment banker. None of this would happen in a genuine, capitalist economy.
The mixed economy is therefore nothing but an unjustifiable charade, built upon alleged weaknesses of capitalism and supposed strengths of socialism that simply do not exist. Genuine economic prosperity for everyone in a fair and just society populated by morally healthy individuals can come about only through unfettered private property and free exchange – not through the state’s attempt to meddle with it.
Next week’s myth: The Deflation Danger
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Economic Myths #10: Taxes Benefit "Us"
Whenever there is the appearance of some headline berating large corporations for arranging their affairs so as to pay as little tax as possible on profits earned in the UK, the indignation from the general public seems to centre on the belief that the “lost” state revenue was somehow a “lost” benefit to the average citizen. After all, won’t lower tax revenues result in fewer hospitals and worse schools? Such was the fury greeting the news, on August 3rd of this year [2018], that Amazon UK’s tax bill fell from its 2017 figure of £7.4m to just £1.7m in spite of pre-tax profits having almost trebled.
Unfortunately for libertarians, tax avoidance (together with the deliberate blurring of the legal and moral distinction between that concept and that of tax evasion) has become a favourite topic of heavily indebted governments as they attempt to balance their books without reducing their profligate spending.
For anyone who has ever heard of him, Danny Alexander (now “Sir Danny”, for some reason) is something of a political has-been, having been ousted from his parliamentary seat and, consequently, his ministerial role of Chief Secretary to the Treasury in the 2015 General Election. Nevertheless, the following excerpt from a speech he made to the Liberal Democrat party conference in the autumn of 2014 remains one of the most chilling utterances of the state’s sense of entitlement with regards to taxation:
Liberal Democrats have led the crackdown on tax avoidance. The investment I announced at this conference in 2010 is now bringing in an extra £7bn. We are now insisting that tax dodgers pay the right tax up front – they will only get any money if their scheme is later proved in the courts to work. And we are using psychologists and behavioural economists in HMRC to get the money quickly. Tax dodgers beware – we know where you live, we know how much you owe, and now we know how you think. Your behaviour is unacceptable, and we are coming for our money.
Part of the vitriol of the general public is explained by the fact that people desire some kind of tax equality and don’t want to be shouldering the burden of public expenditure themselves when others appear to be shirking their alleged responsibility to “society”. Indeed many of the cries for reform all appear to be in the direction of making people their “fair share” of taxes – an amount that is, conveniently, never defined or quantified but always means more, in spite of the fact that the highest earners already pay the vast majority of income tax revenue. Yet the core focus appears to be that life will somehow be worse off without Amazon and Google paying tax in the UK.
This is, of course, nonsense. Profits that are retained by private shareholders (many of whom, incidentally, are ordinary people’s pension funds rather than wealthy fat cats) do not magically “vanish” from the economy. Rather, they are reinvested in productive enterprises that create capital goods in order to churn out more products that people want to buy at lower prices. Fewer profits retained by investors means fewer capital goods and fewer products on the shelves. So if that money disappears into the hands of the state it is not invested prudently in productive business. Instead, most of it disappears into the pockets of favoured state contractors to spend on wasteful projects – with very little resulting in marked improvements for the average citizen.
According to the 2014 Bumper Book of Government Waste, while Alexander was busy demanding more money from those who earned it, his was the same government that, in 2012-13, wasted the extraordinary sum of £120 billion on delights such as the following:
- £1.2bn on subsidising foreign farmers through the Common Agricultural Policy;
- £20.6bn on public sector fraud;
- £406m on EU fraud and error (the UK’s share of a total amount of £5.5bn across the continent);
- £3.0bn on benefits to people who don’t need them;
- £145m on “ghost patients” on the books of GP surgeries;
- £300m on unused medicine;
- £113m in subsidies to trade unions;
And somewhat famously:
- £4m funding by the Department for International Development to create an Ethiopian version of the Spice Girls.
Unfortunately, it gets worse. For these amounts are only the headline figures of a long schedule of smaller sums such as the following, the spending of which leaves one wondering whether to either laugh or cry:
- A £200K grant from the Cabinet Office to multi-millionaire supermodel Lilly Cole to set up a website where people make wishes;
- £76K was spent by Bournemouth Borough Council on a piece of 3D artwork intended to give visitors a “sense of arrival” (in hell perhaps?);
- Bromyard and Winslow Town Council paid £32K to compensate a man who slipped on a berry in a churchyard;
- £20K compensation was paid by Kirklees Council to a teacher who was bitten by a flea;
- £4K was spent by Angus council on a whisky tasting event for international golfers;
- £1K was spent on a council officer to investigate a picture taken of the mayor looking at her phone during an Armed Forces Day ceremony;
- Preston Council spent £500 on an art performance consisting of a man walking up and down a flight of stairs;
- £70 was spent by the Forestry Commission on a bunny outfit.
Every pound that is taken by the state to be spent on these wasteful ends is one pound less that can be invested in genuine, private enterprise that must produce products that people wish to buy. Which category of spending – public or private – are we really worse off without?
Some of the more extreme rhetoric with regards to tax avoidance – that the likes of Amazon and Starbucks have “blood on their hands” because hospitals have to deny treatment to patients owing to the lost tax revenue – is akin to a sick joke. Apart from the fact that those public officials who wasted all of the sums above are far guiltier, what about the lives that are saved because the state was not able to use Amazon’s tax revenue to throw bombs at civilians in the Middle East?
Yet even if we ignore this, the disapproving attitude of corporate tax affairs owes itself to the belief that companies are like vampires, sucking the blood out of Britain before fleeing into the night – and that they should be punished accordingly. There is no mention of the fact that, in contrast to the state, these companies are creating jobs and producing stuff that people want to buy – and right at the time when we are barely out of a deep, state-induced economic malaise and so should be celebrating what little success there is. It is true, of course, that most large corporations are in bed with the state and benefit from state largesse. However, this should be dealt with directly by removing state regulatory privilege and making businesses wholly dependent upon their ability to serve consumers. It is not an argument in favour of increased taxation.
In any case, every company has to pay tax somewhere even if it is at a lower rate in an alternative jurisdiction. If Google pays tax in Ireland then what is wrong with that? To the rejoinder that this means a foreign government and foreign public services are benefiting from profits earned in the UK, well doesn’t the £13bn or so foreign aid budget do the same thing?
Increased taxes on the people who take risks to provide us with jobs and produce goods and services that improve our lives do not make things better for “us”. It only benefits the state and those recipients of its bloated, wasteful spending. Fewer taxes and vastly reduced spending, with more of the state’s legitimate functions being wholly privatised, would be far better for all of “us”.
Next week’s myth: The Mixed Economy
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Economic Myths #9 - Social Safety Nets
[First published on Free Life]
The first problem with this theory is that poverty is not some selectively appearing disease that makes a magical appearance every now and then to infect an otherwise healthy and wealthy society. Rather, poverty is the natural state in which human beings first found themselves. When Adam and Eve were expelled from the Garden of Eden they saw that the world was a barren and harsh place that is capable of providing precious little – may be just air to breathe – without the conscious effort of its inhabitants. The only way to alleviate this terrible situation is for humans to work to produce the goods that they need and, eventually, to bring about capital investment in order to expand the amount of consumer goods that can be enjoyed – whether it’s cheap food, housing, education, holidays or whatever – a process that only really got underway in any significant form in the 1800s.
If, therefore, the individual beneficiaries of a social safety net are not able to produce these goods themselves then it follows that somebody else must do so. Legislating the welfare state into existence does not, unfortunately, create the goods and services it needs to dispense to the poor and needy in order to banish poverty and want. Rather, existing goods have to be forcibly confiscated from those who have produced them and dished out for free to those that haven’t. Social safety nets are compulsory redistribution programmes, not wealth creation programmes and any benefit one receives under them will be at the expense of another person.
The economic effects of this are familiar to economists not only in the “Austrian” tradition but of other free market persuasions also. The most naïve error made by any proponent of redistribution is to believe that people’s behaviour is somehow hermetically sealed from the government intervention that seeks to achieve a certain end – i.e. that increased taxes on a certain activity will not discourage people from carrying out that activity; or that increased funding to eliminate a “dire” situation will not, in fact, exacerbate that situation. Whenever a new tax is proposed the estimations of new revenue to be raked in are often based, incorrectly, on the assumption that people will still wish to carry on doing the taxed event just as they did before, as if the tax makes no difference. And if some new programme to be financed by this revenue is proposed, they will calculate the amount of money needed to cure only the existing problem without considering whether throwing money at it will make that problem worse. All else being equal, if you pay people to do something they will do more of it; if you charge someone to do something they will do less of it.
Applying this understanding to the case of social safety nets, if people are charged to produce wealth in order to fund them then the cost of creating wealth is forcibly raised. Relative to other activities such as engaging in more leisure time, the attractiveness of producing more goods, more capital and more resources is reduced. There will, therefore, be less production, less capital investment and fewer consumer goods at higher prices – hardly the situation that one would expect to be conducive to the abolition of poverty. Similarly, if you grant a guaranteed right to be paid upon the occurrence of a bad event – such as sickness and unemployment – then you lower the cost of that event while the relative cost of preventative measures is raised. All else being equal, you will have more sickness, more unemployment and so on. Indeed, most of the afflictions which may cause a person to fall into hardship are not sudden accidents but are, in fact, a consequence of the lifestyle and environmental choices that a person may make – choices that are influenced by relative costs/benefits.
For instance, children, in particular, appear to be little more than a metaphorical blank cheque that the state writes to “protect” them from poverty and hardship (indeed, the focus of many social safety nets today appears to be on so-called “hardworking families” – never mind the fact that single people or childless couples may also work hard and struggle to make ends meet). Children, however, do not appear out of nowhere and, but for the most exceptional of circumstances, a conscious decision must have been made at some point to have a child – or at least to carry out the act of procreation. The economic effects that we outlined will therefore result from any safety net that benefits parents with children. If you pay people when they have children then all of the existing children will not suddenly be transported to the land of milk and honey. Instead, there will be more children in more families struggling to pay the bills who are desperate for a handout. The resources to feed these hungry, young mouths must be confiscated from those who do not have children – either through inability, a lack of desire or as the result of a financial decision – and redistributed to those who do.
The running theme through all of this, therefore, is that throwing free money at a problem in which people have at least some kind of influence will only aggravate that problem. Indeed, in spite of more than half a century of the welfare state the Western world still seems to be afflicted by the scourge of poverty – although a rather bizarre form of it where those who are poor appear to suffer more from obesity rather than from starvation. Moreover, it is also the case that expenditure on healthcare and other entitlements is shoving most states down the road to bankruptcy. Should it not be the case that “progress” is characterised by a reducing, rather than an expanding social safety net?
A powerful weapon in the arsenal of proponents of the welfare state is the false dichotomy – that the choice is either between a government social safety net motivated by “care” and “compassion” on the one hand or some kind of selfish, greedy, sink-or-swim and dog-eat-dog society on the other. This is plainly ridiculous; the free market exists precisely because people have needs and others are willing to advance the means to fulfil them. The whole edifice of investment and capital accumulation is not to benefit only the well off – rather, its task is mass production of more and more goods and services at lower prices for the ordinary person. Moreover, the purpose of insurance – presently and regrettably distorted by government interference – is to protect you from genuinely catastrophic events that are not your fault in return for a premium paid in advance.
Opting for the alternative of the free market does mean the abolition of care and compassion and the sudden appearance of selfishness and “rugged individualism”. Rather, it gives people the freedom to be caring and compassionate. Indeed it is such private benevolence that is discouraged by the social safety nets as they obliterate the need to cultivate familial and personal relationships upon which you can rely. Real benevolence, selflessness and caring for one another springs from these relationships and from private choice; the forced redistribution demanded by the state, however, leads to the very opposite – bitterness, antagonism and cynicism when your hard earned money is taken to be given to others, all of whom – in spite of whether they are genuinely needy or not – are tarnished as work shy, endless breeders. It is no accident that many of the great charitable foundations and mutual organisations appeared in the nineteenth century, the most relatively free and capitalist period in history – and not in the era of the welfare state. As for the argument that social safety nets are necessary for civilisation, what could be less civilised than wrestling something you want from someone at the point of a gun?
The social safety net therefore needs to be realised for the destructive force that it is; not as a hallmark of economic and societal progress but as one of retrogression of civilisation and as a retarding influence on the very real cure for poverty and illness – more capital, more production and more goods for everyone to be able to buy at cheaper prices.
Next week's myth: Taxes Benefit "Us"
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Economic Myths #8 – Capitalism is Exploitative
The myth that capitalism is exploitative – or rather, that capitalists and entrepreneurs are responsible for the exploitation of both workers and consumers – is almost as old as the history of this political-economic system itself, having been a primary driving force behind the growth of the state and, indeed, of outright socialist and communist revolution. Although much watered down from those early days, the idea that there is some kind of antagonism between the capitalist “class” and the rest of us seems to persist.
As “Austrian” economists we know, of course, that it is absolutely and undeniably true that any free and voluntary exchange, upon which capitalism and private property must rely, only takes place because each party expects to benefit from the transaction. This alone is sufficient scientific proof to dismiss any idea that capitalism exploits one party for the benefit of another. Nevertheless we should, of course, tackle directly the specific incarnations of this myth as they appear today.
The myth has its roots in the Marxian confusion of political castes with economic classes – the idea that the relationship between capitalists and workers, which is free and voluntary, was akin to that of king and subject, or lord and serf, relationships that were involuntary and subjected the masses to servitude. Caste systems were static and designed to keep people in their place; under conditions of free exchange, however, economic classes have a continually changing membership based upon one’s ability to serve consumers.
This ability varies from person to person, of course, but the critical point is that nobody is legally prevented from becoming an entrepreneur and nobody, once they are a successful entrepreneur, has either their wealth or status legally protected. A wealthy capitalist might find his fortune decimated when he loses this crucial ability to serve consumers as the latter turn to other suppliers for their wares; he may have to re-join the ranks of salaried employees if he is to make ends meet. On the other hand, an ordinary worker may see a gap in the market that has been unnoticed by the current entrepreneurs of the day and he may set up a successful business accordingly.
This does not mean say, of course, that political castes do not exist today. We can see quite clearly from bank bailouts and the like that there is a distinct upper caste that is protected from its mistakes and is able to retain its wealth and status at the expense of the rest of us. Indeed all the similar injustices that did occur during the early history of capitalism were not owing to the capitalists’ reliance upon genuine private property and free exchange – rather, they used the power of the state to enforce their illegitimate property interests. The mercantilist Corn Laws, for instance, which artificially propped up the price of corn for the benefit of domestic cereal producers are a good example from the early nineteenth century. Capitalism itself, however, does not produce these injustices.
Moving on to some more contemporary arguments, do businesses exploit the “needs” of consumers for whatever it is that the latter want? Do they withhold “vital” and “necessary” wares releasing them only at extortionate prices thinking only of their selfish greed for profits?
This argument is ridiculous because all trade and exchange relies upon the desires of the trading parties – whether it is for food, housing, cars, computers, or trips to the cinema. The entrepreneurs in business exist to fulfil and satisfy, not exploit these needs. If they are able to charge high prices it is only because the supply, relative to demand, is low and has to be rationed to those who value the goods the most.
This argument regarding exploitation usually surfaces today in one of two situations. The first is during sudden supply shocks or demand spikes that send prices soaring and allows suppliers to book large profits as they obviously paid for the inputs at earlier wholesale prices which were much lower. As these usually occur during times of emergency or crisis, aren’t the businesses exploiting the dire need of the consumers for such staples as water, canned food and fuel?
Such an argument ignores the fact that it is not the businesses driving the demand – it is other people who are willing to pay more to get their hands on the suddenly scarce items. The only options are to a) allow other entrants to be attracted into the marketplace by the higher prices, bringing with them more resources into the production of the scarce goods and thus lower their prices with an increased supply (thus solving the problem); or, b), to fix the prices of the wares below their market clearing level which would lead to guaranteed shortages as the existing supply is simply exhausted. Needless to say, government always opts for the latter.
The second situation that attracts criticism is when the entrepreneur is in the business of providing something “essential” such as energy or healthcare. Yet these businesses are almost always so cripplingly regulated and interfered with by the state that it is impossible to define them as anything approaching free markets.
Britain’s energy market is a case in point. Apart from the vast state bureaucracy that oversees the industry, idiosyncratic interferences such as threats by the government to either freeze or cap energy prices also take their toll upon consumers. One of the criticisms advanced is that firms fail to “pass on” any reduction of wholesale energy prices to consumers in the form of lower retail prices. But apart from the fact that the wholesale cost is not the only factor that suppliers have to consider when setting prices for their consumers, what are the chances of them offering lower retail prices now if they fear that the government will one day lock them into furnishing energy at these low tariffs in a future period when wholesale prices might be rising?
In contrast if you look to any industry that the state tends to leave alone you do not find the same vitriol hurled at the dominant suppliers. Up until now we have seen that supermarkets, although subjected to food standards regulations that no doubt have served to raise prices, have benefited from relatively less state interference. Apart from a few murmurings from food purists and activists promoting local supply and produce, inexpensive food has ensured that they have never been a serious political issue. However, should food prices ever begin to rise, could we expect the state to start poking its nose increasingly into the food industry and blaming the resulting shortages and disarray on “exploitation” by the big supermarkets?
Furthermore, if we follow the logic of the “exploitation” argument, we could also say that, given that trade is always a two-way process, the consumers “exploit” the need of businesses for money. These entities have suppliers and employees to pay and they are often desperate to get their hands on your cash. If some other business offers a lower price they could be left high and dry by your decision to shop elsewhere, threatening the employment and livelihoods of all of those people that work in the business you shun simply because you have the guile to find what you want for less! It is partly for this reason that the supply curve for consumer goods, once they are in stock, is generally vertical, with merchants willing to sell them for any price they can get simply to shift them and bring in at least some cash to meet their future outgoings.
In a genuine free market businesses can never exploit anyone or hold anyone to ransom. A consumer would have the power to take his custom elsewhere if the business failed to meet his needs at an agreeable price. Although businesses as a whole set prices for consumer products and wages, no individual business can do so and each one must be prepared to sell goods for, at most, as much as the next business, and to pay wages at least as high. These boundaries can be crippling if the selling prices are lower or insubstantially higher than the costs that the business must bear. Businesses, unprotected by government privilege, therefore have to be on their toes constantly in case someone comes along with a better offer. The beneficiary of this process is the consumer-employee, who always knows he is paying the lowest price for what he buys and receives the highest wage for his work that can ever be paid.
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Economic Myths #7 - Government Means Harmony
[First published on Free Life]
This fallacy stems from the belief – accentuated by holistic concepts such as aggregate, pseudo-statistics like “GDP” or “the national income” – that what we refer to as “the economy” is some kind of enormous machine that has “input”, with a single operator “processing” these “inputs” into “outputs”.
In fact, rather than being one giant, amorphous blob “the economy” is made up of millions and millions of independent, unilateral acts of production and two-way trades, many of which will never have anything to do with each other. I may sell an apple to my neighbour for 10p in London; another person may sell an orange for 20p to his neighbour in Manchester. Neither of the two pairs of people has ever met, nor need any of them have any involvement with the exchange of the other pair; and yet both exchanges would be regarded as part of “the British economy” in mainstream discourse.
Rather than being a top-down operated machine, “the economy” is a bottom up network of independent transactions – motivated by the ends desired by each and every one of us rather than by some bureaucrat – joined together only through the communication of the price system. All of the trades together, stimulated by varying and changing desires and ends that people seek, will have a constant and unceasing influence on the prices that regulate the supply of goods relative to their demand. Ironically, it is precisely because of such complexity – the so-called “knowledge problem” – that the attempts of any central authority to control and direct it are nothing short of futile. Even worse, however, is the fact that without market prices generating profit and loss such an authority would have no rational guide to apportion resources to where they are most needed. This is what Ludwig von Mises established in his Economic Calculation in the Socialist Commonwealth, a work that was published at the birth of the world’s greatest collectivist experiment – the Soviet Union – and foresaw its ultimate failure.
An oft-heard complaint, particularly from the left, is that “globalisation” – by which we mean economic globalisation, characterised by increased trade across borders, as opposed to political globalisation, which is increased co-operation between states and/or the consolidation and centralisation of state entities – has led to a decimation of local communities and economies. All that this means, however, is that the market for goods has simply expanded so that one can source one’s needs from pretty much anywhere on the globe. It is still the case that the driving force of demand is not global or holistic – it resides very locally in every individual person’s tastes and desires. Such complaints therefore fail to recognise the irony in calling for a very distant and hardly local entity – the state – to halt globalisation and expanding markets by replacing what individual, local people desire with its own ends.
This myth, of course, goes further than economics and has more than seeped into philosophy as well, stemming from a basic misunderstanding about what is required for the human race to live in peace and harmony. Such peaceful co-existence does not demand that we all pursue the same ends or ultimate goals, follow the same plan or sing from the same hymn sheet; nor do we need some centralising authority to prevent “discordance” between the actions of one person and another. Rather, what is required is that we can each follow our own plans while not conflicting with the plans of others.
This is precisely the great achievement of the institution of private property. Recognising that all conflicts have their origin in the contest over physical goods, an exclusive right is granted to the first user-producer (or to the recipient of the good in a voluntary exchange) so that he may fulfil his ends without molestation from other people; and that other people can use the goods for which they are the first producer-user without interference from him. Any person arguing in favour of “one direction” and “harmony” at the behest of centralised control really means that everyone else’s plans should be overridden, with force, by his own. Indeed, in contrast to voluntary exchange, every transaction that is compelled by the state requires there to be at least one loser, one person who does not want his funds directed to the ends desired by the state. Rather than producing harmony what results is bitterness and frustration from at least one part of the population whose needs are denied in order to serve the needs of another part. Furthermore, aside from the economic chaos that such a system brings, rather than inspiring such qualities as productivity, self-reliance, hard work, prudence, patience and responsibility, the resulting social disorder instils, in their stead, laziness, apathy, conflict, corruption, impatience and cynicism – hardly the human qualities that one would wish to exemplify as the hallmarks of a “peaceful” and “harmonious” society.
True harmony can be brought about only by allowing each and every individual to pursue his own ends with the scarce resources over which he has lawful ownership, while allowing everyone else to do the same – permitting the human race to flourish peacefully and devoid of conflict. Not only does the state fail to aid this process, it is the active cause of its destruction – and the sooner we recognise this then the closer we will be to building a lasting peace and prosperity.
Next week’s myth: Capitalism is Exploitative
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Economic Myths #6 - Price Stability
One of the mandates that our economic lords and masters have arrogated for themselves is that of maintaining so-called price stability, a constant purchasing power of the monetary unit in our wallets.
At first blush, price stability sounds rather appealing – not only does it “bless” us with the apparition of certainty but are we not also “protected” by the potential of higher prices in the future? If so we can assure ourselves that our cost of living will be sustained and manageable, relieved of the horror that the essential consumables may some day be out of our reach.
Unfortunately this ambition is not only disastrous for a complex economy but is also antithetical to the nature of human action in the first place. The whole purpose of economising action is to attempt to achieve more for less – to direct the scarce resources available to their most highly valued ends and to gain the highest possible outputs with the lowest possible inputs. In short, economic progress means that we are gradually able to attain more and more for the same amount of labour; or, to put it another way, we could attain the same quantity of goods for a lower amount of labour. Any consistent attempt to stabilise the prices in the economy would not only target the goods that we buy with our money but also the goods that we sell – and that, for most of us, means our labour! But if we cannot sell our labour for any more and if we cannot buy our wares for any less then it means that we will simply be locked into a repetitive cycle of working, buying, consuming and working again for the same prices for the whole of our lives with no improvement in the standard of living whatsoever. Instead of economic progress bringing goods at cheaper prices to the lowest earners, the only way to improve one’s wellbeing in such a world would be to become a higher earner – i.e. by working harder or longer.
Of course, real price stability never does and never can work in this way for it is impossible for a centralised authority to monitor and regulate all the many millions of individual prices and exchanges that occur every day in the economy. Instead, such authorities monitor and target the mythical pseudo-concept of the general “price level”, usually concocted by taking a selective index of goods – an index that can be altered conveniently in order to paint the data in the fashion desired. Individual prices within the index, however, may still fluctuate relative to each other even though the absolute price average may appear constant. This fact may not mean a great deal to the bureaucrat but is of great importance to the individuals who wish to purchase those particular goods. Furthermore, because of the belief that a dose of price inflation is good for a growing economy, “stability” usually tends to be defined as including some measure of price inflation such as the Bank of England’s 2% inflation target. We are apparently “stable” when the government is robbing your pay packet of some of its purchasing power, it seems.
Such a policy is not restricted to existing as a mere moderate tempering of an otherwise healthy and growing economy. Rather, it can have disastrous and deleterious effects upon the entire system. The outcome of a genuinely progressing economy with sound capital investment should be a gradual, secular price deflation where goods and services become cheaper over time. If central banks attempt to counter this in order to achieve stability it must lower interest rates and print more money in order to devalue the monetary unit relative to goods in order to prevent prices from falling. However such an act is what induces the ill-fated business cycle; prices may appear stable but the relative prices of capital goods will begin to rise and those of consumption goods to fall as the new money gets sucked into ultimately unsustainable investment projects.
This is precisely what happened in the 1920s when a high degree of productivity was countered by a voluminous expansion of credit that masked price rises, giving the illusion of price stability and suckering promoters of the scheme (such as Irving Fisher) into believing that they were living in a new era of permanent prosperity. The same was also true of the run up to the tech boom collapse at the turn of the century and the housing market collapse of 2008; these had been preceded by a period of low interest rates and apparently low price inflation – alleged hallmarks of an successful economy – that camouflaged the underlying distortions, leaving mainstream economists scratching their heads in confusion as to what went wrong.
Far from creating certainty and consistency, achieving “price stability” is one of the very worst horrors of a centralised, bureaucratically managed economy. Free market prices mean something - they result from the underlying supply and demand relationships so that goods are rationed to their most productive uses. Interfering in that process will only mean that, one way or another, valuable resources are wasted - with the most catastrophic waste occurring in the malinvestment of boom and bust.
Somewhat ironically, however, it is likely to be the free market that is characterised by relatively more stable prices than an economy burdened by the rollercoaster rides in asset prices caused by state induced inflation. Moreover, the existence of speculators – who gain a bad name in an environment of monetary inflation/deflation – would serve to prevent seasonal, irrational or capricious variations in prices and to smooth the transition between genuine price changes. No one, in other words, is likely to find that bread, cheese or milk costs twice as much today as they did yesterday.
Therefore, let us leave prices wholly to the free market so that we can create a genuinely stable and lasting economic prosperity.
Next week’s myth: Government Means Harmony
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