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Displaying posts with tag Welfarestate.Reset Filter
Life and Liberty
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Economic Myths #11 - The Mixed Economy

[First published on Free Life]
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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Rich vs Poor - a False Dilemma

Conventional thinking about social, political and economic matters tends to narrow the options available to a set of policies advocated by two, possibly three political parties of scarcely dissimilar ideologies. Any genuinely radical approach concerning these topics is abandoned given that the fundamentals are deemed to be beyond question. Thus, alternatives to these entrenched matters – such as whether the state should have any positive role at all in anything – are seldom given the light of day, let alone the opportunity of being debated.
This phenomenon, presenting a distinct challenge to anyone with radical views, is known as the “false dilemma”: the illusion that the only choice is between a very constricted range of possible options, preserving the status quo in favour of the state and its cronies while at the same time bestowing the illusion of control on a gullible electorate.
One effect of this ossification is to obliterate a very basic, but critical truth: that all humans are able to flourish while co-existing peacefully. For instance, those pundits and politicians claiming to be either “conservative” (or otherwise leaning to “the right”) may believe that business should be “helped” in order to boost “economic growth”; at the same time, they may say that cuts should be made to welfare and to public services in order reduce the government “deficit” while slimming down the cash cow that the benefits system has become to the allegedly lazy and unproductive. Those identifying with “the left”, on the other hand, may believe that a strong welfare state, heavy taxes on the wealthy and increased government spending are needed to end the scourge of poverty.
Each of these points of view contains a kernel of truth. It is true, for instance, that business needs to flourish if there is to be any economic progress at all, while the need of the state to reduce its profligate borrowing, taxing and wasting with all due haste is beyond question. On the other hand, it does not seem just that a society should apparently produce vast quantities of wealth for a few while leaving others to languish in stagnating poverty. Moreover, even though their own economic prescriptions are dire, the left is correct to point out that wealth creation is not a “top-down” (or, to use the more familiar phrase, “trickle down”) process; prosperity will not result from stocking the tables of the rich with plenty so that everyone else can catch the falling crumbs. But the constraint of these narrow views tends to channel all political choices into being between two broadly defined groups of people in society: those who are “rich” and those who are “poor”, with what is gained by one group necessarily being lost by the other.
This impression is exacerbated by the fact that the political parties whose rhetoric represents these different points of view never end up achieving their aims (assuming they ever intend to do so in the first place, of course). State subsidy, “bailouts” and the cartelisation of businesses will never create any genuine economic prosperity ahead of perpetuating malinvestment and waste (although they do manage to save the politically connected from the consequences of their actions while leaving everyone else to foot the bill). On the other side, increased government spending and a burgeoning welfare state only siphon funds from the productive sector to be equally consumed and wasted by the state. Moreover, by providing a cash cushion for poverty, unemployment and sickness, the welfare state ends up becoming a permanent, industrial scale enterprise. If neither side is able to achieve its stated aims, then they each provide plenty of ammunition for the opposition, leading to a negative feedback loop that ends up exacerbating this apparent basic gulf between “rich” and “poor”.
If we are ever to establish genuine, sustainable prosperity, we must seek for a repudiation of this false choice and a restoration of the understanding that everyone can prosper side by side.
At the heart of the problem is the equally false belief that the state itself has a necessary part to play, and, as such, must do something for somebody in order to create a better world. Each faction tends to deploy a curious mixture of economic and ethical arguments to select whom government should help on the one hand and to whom it should deny that help on the other.
Take, for example, the supporters of big business. They will say that it is right to use taxpayers’ money to, say, bail out the banks in order to avoid a complete financial meltdown. Conveniently their “chums” in the city will reap fat rewards from doing so. But they then deny this very same method – the diversion of taxpayers’ money – to welfare programmes aimed at helping the poor on the grounds that people should work for what they earn without leeching from the productive. In other words, so-called “benefits scroungers” should get off their backsides and find a job. Thus, they emphasise economic arguments in justifying corporate welfare while using ethical ones to deny personal welfare.
Their “lefty” opponents, on the other hand, will argue that throwing cash at the rich who made mistakes is unjust, and that they should be left to foot the bill themselves. Yet they then state that welfare spending is needed to eliminate poverty and fuel growth from the “bottom up”. So they too deny the flowing of taxpayer’s cash to certain groups based on ethical grounds, but then promote it’s payment to others based on economic grounds. Each side, will of course, pepper their ethical arguments with economic ones and vice versa – the “right”, for example, will, as we have said, argue that welfare spending needs to be cut in order to reduce government outlays, while the left will argue that alleviating poverty is a just and noble cause. But the main thrust of each side’s opinion cannot be denied.
If we unscramble all of this by looking at the ethical and economic arguments separately, we will find that there are no grounds whatsoever for any state involvement. If it is unjust to violently confiscate tax revenue from innocent citizens to fund the lifestyle of bamboozling bankers then it is equally unjust to do the same to fund the lifestyles of those who are poorer. The difference is one of degree rather than of kind. Nobody, whether he is a prince or a pauper, a saint or a sadist, or a capitalist or a labourer has the right to wrestle away the property of other people for his own benefit. From the economic side, bailing out bad business will simply perpetuate the moral hazards and malinvestments that need to be eliminated from the economy; at the same time, continuous funding of “the poor” through welfare spending will only exacerbate poverty as it reduces the incentive for people to lift themselves out of that position, while, at the same time, diminishing the role of benevolence and charity for the genuinely needy. And, in any case, the state would do a lot more for the poor if it stopped interfering in wealth creation in the first place; prosperity, not charity, is what truly eliminates poverty.
The real choice, therefore, is not between “rich” and “poor”, “left” or “right”, “employer” and “employee”, “Conservative” or “Labour”, “Republican” or “Democrat”, or whichever other faux division that the establishment throws at us. The real choice we have to face is, on the one hand, continuing with a political and economic system that will only result in a parasitic existence for whomever happens to secure political favour in the moment; or, on the other hand, we could choose a system in which nobody has the violently enforceable right to live at the expense of everyone else, and where everyone is free to trade and produce whatever he wants with his own private property – a system that will raise the standard of living for everyone, not just a select few.
Only by considering radical options, and by overcoming the belief that certain assumptions of our society are beyond debate, can we hope to build a world that is both truly just and economically prosperous.
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Free Choices or Forced Choices?

The “nanny state” is one of the most irritating traits of statism affecting people’s daily lives directly, and one that has been growing ever more matronly over the past generation or so. In fact, if you think it is bad today, The Academy of Medical Royal Colleges (which, apparently, presents a "united front" of the medical profession) was complaining nearly ten years ago that doctors were seeing the consequences of unhealthy diets. Needless to say they recommended whole raft of interventionist measures to curb this apparent problem:
  • A ban on advertising foods high in saturated fat, sugar and salt before 9pm;
  • Further taxes on sugary drinks to increase prices by at least 20%;
  • A reduction in fast food outlets near schools and leisure centres;
  • A £100m budget for interventions such as weight-loss surgery;
  • No junk food or vending machines in hospitals, where all food must meet the same nutritional standards as in schools;
  • Food labels to include calorie information for children.

For the purposes of this article, we will ignore the question whether these medical mandarins have, in fact, managed to identify the “right” choices for people to make with their own bodies. (As we saw with COVID-19, our current, materialist society always seems to hold bodily preservation as the highest possible value; however, it is by no means obvious that a statistically longer life devoid of innocent pleasures should be preferable to a shorter life that is more enjoyable.)
Instead, the problem we wish to address here is rather more grievous: that whenever members of the public make supposedly “bad” choices there is the ever present assumption that, as these choices are made with apparent freedom, that it is the free market that has “failed” in preventing the emergence of the "undesired" outcomes. What is never discussed, or even raised, is the possibility that people's choices are influenced by existing state interferences into that market. If that should be the case, it is impossible to say that the same choices would be made in a genuine free market. Worse still, if the state itself is the ultimate cause of the undesirable choices, then any call for more state intervention is likely to either exacerbate the original problem or lead to the emergence of entirely new problems in the future.
The present author has examined in detail why socialising healthcare will lead to greater ill health in the long run. There is little need to repeat all of this here except to say that people tend to prefer doing that which comes at a lower cost, all else being equal. Lowering or removing the cost of becoming ill will tend to lead to more people leading lifestyles that will result in poorer health. As such, it is state control of healthcare that is causing people to do things that are likely to make them sicker. But the same ignorance of the state’s role can be seen in many other cases where the proximate cause of a problem is people's apparent free choices. Let's examine some of the most popular.
"There is not enough food in the world! If the free market has brought such widespread hunger then states much intervene!"
The allegation here is usually some variant of the rich world refusing to “share” its wealth with the poor world. Leaving aside the fallacious, zero-sum belief that if one person has wealth another person must have gone without it, just why is it that we have widespread poverty in the age of the smartphone?
The plight of poor nations has nothing to do with the absurd suggestion that they cannot “understand” technological development, nor, in most cases, are they unable access to raw materials. Rather it stems from the lack of capital investment per head of the population compared to the developed world. Richer nations have more machines and better tools that can churn out more and better goods per person than can be done in poor nations. So in one sense, it is true that investors and capitalists have not invested in poor countries. But the precise reason why the West has benefited from the wealth produced by capitalist investment is that it has long cherished institutions that have allowed the free market to flourish, in particular, strong legal rights to private property and relative political freedom. These are precisely the conditions that tend to be lacking in poorer nations, conditions that cause entrepreneurs to seek other havens for their investments.
To make matters worse, poorer nations began to model themselves on their Western counterparts just at the point that the latter started to turn away from a social order based on private property towards interventionism, welfare and redistribution. The result is that the wrong lessons are being implemented in poorer nations as they develop policies and institutions that can only retard rather than enable economic progress. This is in addition to direct interventionism, for their own benefit, of large and powerful nations in the affairs of foreign nations, stifling the domestic prosperity of the latter.
The persistence of poverty and hunger is therefore a failure of the state, not of the free market.
"The forests are disappearing! The free market, seeking ever greater profits, is decimating our natural resources! The government must stop it"
Let's go even farther than this complaint by adding to the list of depleting resources fish stocks, elephants, whales, and any other of the countless number of "endangered" species that you like. Yes, there is a tremendous problem, and yes, looking at the issue at face value, it appears that capitalists are running down these resources.
However, if the free market is responsible for having decimated all of these things, then it raises a pretty obvious question: why has the “greed” of capitalists not created similar shortages of other resources? The dairy industry, for instance, exploits cows for profit but we never hear of a shortage of cows, nor do we seem to be in short supply of chickens to supply us with eggs for our breakfast plates. So why is it only some resources that seem to be in danger of depletion? What is the difference between the endangered groups and all the others?
The reason is that people are not permitted to own the capital value of forests, parts of the sea, elephants, tigers, etc. If an entity is able to own the capital value of a resource then exploiting it for present revenue has to be balanced against the loss of capital value in doing so. For instance, extracting copper from a copper mine will reduce the amount of copper left available to be extracted in the future, thus reducing the mine’s capital value. The firm operating the copper mine has to ensure that this reduction is offset by sufficient revenue from selling the mined copper, otherwise it will make a loss. If the copper does not sell for a high enough price, then it indicates that too much copper has been extracted. Thus, a signal is sent to the owner of the mine to reduce its mining operations, conserving more for the future.
If, however, an entity does not own the capital value of a resource then its only concern will be for the present revenue it can extract; there is no cost incurred as a result of exploiting resources to their fullest now. In fact the only cost is that someone else might get to the resource before you can, taking it for himself. Thus, in the absence of any balancing mechanism, resources are depleted far quicker than they otherwise would be. So instead of instituting a myriad of state restrictions and regulations in order to "cure" alleged free market greed, all that is needed is to extend full private property rights to endangered resources, and they will be conserved in line with the present and future preferences of consumers. Once again the problem is not too much free choice but the fact that people have been prevented by the strong arm of the state from having a reason to make the "right" choices.
Finally, let us conclude with the most pertinent of all alleged market failures, the phenomenon of "boom and bust":
"Free market greed has caused capitalists to invest in wasteful projects! Clearly they need the Government to give them speed limits!"
Once again, looking at only the proximate causes of boom and bust will reveal that entrepreneurs invested too heavily in a particular sector, inflated a bubble which, once it pops, leads to widespread misery and unemployment. In the 2007-8 financial crisis – the effects of which have still not been resolved – a summary of the charges is that greedy bankers lent money to people who could not afford to pay it back. End of story. But what is not told by peddlers of this narrative such as Paul Krugman is the moral hazard created by the so-called "Greenspan put" which had the effect of financial institutions expecting their profits to be retained while their losses to be borne by an influx of monetary liquidity during any risk of collapsing asset prices (i.e. paid for by inflation). If one can keep one's profits and socialise one's losses is it any wonder that people took wild risks? If there is only ever an upside then wouldn't you have done the same? This is before we consider the fact that credit expansion is the cause of the business cycle in the first place; by falsifying societal time preference rates, the result is a plethora of unsustainable investment projects that must be rendered wasteful as soon as the inflation stops.
Therefore, next time you read that the "free market" has caused this problem, that problem, or some other societal ill, stop and think as to precisely which options the free market participants were presented with. More often than not you will trace the source of a bad decision to some kind of state interference.
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