Archive for the ‘economics’ Category

Relying on “Experts”   Leave a comment

I have emerged from the writer’s cave once more. I hope you’ve enjoyed the various reblogged articles. Thank you for your patience and I should probably even be back on Twitter when this runs. Lela

 

For April Fools Day of 1957, the British Broadcasting Corporation broadcasted a short segment about a bumper spaghetti harvest in southern Switzerland. The “documentary” explained that the bumper crop was due to “an unusually mild winter and to the virtual disappearance of the spaghetti weevil.” The television audience “watched video footage of a Swiss family pulling pasta off spaghetti trees and placing it into baskets. The segment concluded with an enthusiastic “for those who love this dish, there’s nothing like real, home-grown spaghetti.”

Related imageThe BBC reports that “hundreds of people phoned the network wanting to know how they could grow their own spaghetti tree.”

Okay, did you know that the word “gullible” is not in the dictionary?

Apparently, 7% of the American public believe chocolate milk comes from brown cows. Yeah, some of us are really that ignorant.

But, wait ….

I know a little bit about a lot of things. Writers research and we’re curious. But I really wouldn’t know how to build a car or manufacture a toaster. So while ignorance can be alarming, is it really so surprising? Few Americans live on farms anymore and most urbanites have never gardened. Many of us use appliances and gadgets with no idea how they are constructed and work. Without the skills, knowledge, and efforts of others, most of us would quickly perish. None of us would enjoy our current standard of living.

Conversely, one of the advantages of living in a modern society is that we don’t need to know how to construct the things we take for granted. We don’t even need to understand how they work. This frees us up to be “experts” in other fields while enjoying the benefits of what others know.

In 2008, British artist Thomas Thwaites set out to make a toaster from scratch. After nine months of mining, smelting, and assembling raw materials, he succeeded in making a rudimentary but extremely expensive and single-use toaster. When he used it for the first time, it melted.

Matt Ridley (The Rational Optimist) summarized the lesson of Thwaites’s toaster:  

To Thwaites this illustrated his helplessness as a consumer so divorced from self-sufficiency. It also illustrates the magic of specialization and exchange: thousands of people, none of them motivated by the desire to do Thwaites a favor, have come together to make it possible for him to acquire a toaster for a trivial sum of money.

Our state of boundless ignorance leads directly to “the case for individual freedom,” Hayek argues in The Constitution of Liberty. Achieving “our ends” depends upon us recognizing that we are ignorant of much of what we need to flourish. Hayek writes:

It is because every individual knows so little and, in particular, because we rarely know which of us knows best that we trust the independent and competitive efforts of many to induce the emergence of what we shall want when we see it.

We live comfortably in a state of ignorance because, in a modern economy, others are free to cooperate and provide for our needs without necessarily even knowing we exist.

The possibility of men living together in peace and to their mutual advantage, without having to agree on common concrete aims and bound only by abstract rules of conduct, was perhaps the greatest discovery mankind ever made. (Hayek in Law, Legislation and Liberty, Volume 2)

 

Of course, nowadays, our ignorance is used as an argument insisting we need to be directed by the self-proclaimed wisest among us. Listen to the “experts” because they aren’t ignorant. Really? I’m willing to bet that any expert you look at is personally ignorant in some field in which you are expert. Expertise is usually in a narrow field and outside of that field, the “expert” is just an ordinary ignorant person. So why do we act as if their expertise in some narrow field makes them expert in all fields? Einstein was a great mathematician, but he once lost his ticket on a train and had no idea where he was going.

A part of the push toward technocracy has to do with our desire to control others through government force.

“Humiliating to human pride as it may be, freedom means the renun­ciation of direct control of in­dividual efforts,” Hayek explained. When we renounce controls, “a free society can make use of so much more knowledge than the mind of the wisest ruler could comprehend.”

I may be ignorant in many areas, but when I encounter a field where my ignorance will be a problem, I take it upon myself to become educated on the subject. That’s one reason that I feel free to offer my opinion on so many topics. I may not be “an expert” in that I lack a license and haven’t spent four years studying it in an accredited college, but I know enough on some subjects to know what works and what doesn’t. I can see, for example, that old-fashioned supply-and-demand economics makes more sense in reality than Keynesian voodoo. By and large, I am comfortable with making my own decisions, secure in the knowledge that I can educate myself, weigh the value of the advice derived from “experts” and take the hits if my analysis fails.

There is evidence that a declining percentage of Americans believes that uncoerced cooperation is the best way to satisfy our needs. “According to an April 2016 Harvard University pollsupport for capitalism is at a historic low.” The Harvard poll echoes a 2011 Pew Research Center survey, in which 46% of 18- to 29-year-olds had a positive view of capitalism, and 47% held a negative one. Many of these young people would prefer if the government controlled the economy at the level of individual interactions because they believe people other than themselves are just too ignorant to make their own decisions.

Being ignorant that spaghetti is produced by processing wheat is not inherently a problem, but ignorance of how markets work can become one. The cornucopia of food that predictably appears on supermarket shelves today is the product of a market process in which farmers, manufacturers, trucking companies and supermarkets spontaneously cooperate on our behalf. It’s been feeding us very well for many years. Government would only complicate the functional system. If Americans are ignorant of these invisible market processes, they may support socialism and policies that interfere with the freedom of others to cooperate and create. Just look at how the thriving Venezuela of yesterday became the impoverished, chaotic, socialist Venezuela of today.

Were we directed from Washington when to sow and when to reap, we should all want for bread. (Thomas Jefferson, Autobiography, reprinted in Basic Writings of Thomas Jefferson, 1944)

Not knowing how spaghetti or chocolate milk gets made won’t cause starvation, but socialistic inference in the market is causing it in some countries today and could cause it in the US if we don’t curtail our human arrogance and desire to control what others do.

Is Income Inequality Real? | Antony Davies   Leave a comment

Income inequality has been in the news more and more, and it doesn’t look good. It’s aggravating to see people making more money than you, and we’re told all the time that income inequality is on the rise. But is it? And even if it is, is it actually a bad thing? This week on Words and Numbers, Antony Davies and James R. Harrigan talk about how income inequality plays out in the real world.

Source: Is Income Inequality Real? | Antony Davies

 

For more on this, see:

And for research, see:

Posted August 4, 2017 by aurorawatcherak in economics, Uncategorized

Tagged with ,

Can the Jones Act, Save Alaska   1 comment

Protectionism does damage to the economy. How do I know? I live in Alaska, where the Jones Act has been protecting the American Merchant Marine for nearly a century. I pay 30% more for my groceries than you do anywhere else in the United States. I paid $3.89 a gallon for gasoline yesterday. The rest of the country paid, on average $2.46. Some of our high prices are due to higher shipping costs (we are, afterall, 2000 miles from the mainland), but hidden in those costs is the cost of the Jones Act.

Related image

For almost 100 years, the act has created monopolies for domestic shipping interests, undermined the U.S. shipping industry, and done long-term damage to local economies in Hawaii, Alaska and Puerto Rico. Like nearly all protectionist efforts, the law has, over time, undermined the very thing it was designed to support: national security during times of war through an unparalleled shipbuilding industry and U.S. Merchant Marine.

Under terms of the law, sea trade between any U.S. ports is required to be carried on U.S.-built ships that are also U.S.-owned and flagged and populated by crew composed of at least 75% U.S. citizens. These manufacturing and labor restrictions took effect when the German U-boat submarine — not offshoring — was the biggest risk to U.S. commerce. But research by the George Mason University’s Mercatus Center shows the law has contributed to making the U.S. shipbuilding industry largely uncompetitive over the past 60 years.

As the Mercatus study notes, there were 2,926 large ships in the U.S. commercial fleet in 1960, making up 16.9% of the world fleet. By 2016, that number had fallen to 169 ships, only 0.4% of the world fleet. U.S.-flagged ships carried 25% of U.S. international trade in 1955; by 2015, the share had dropped to 1% of total exports.

In any other industry, this sort of economic decline would have set off alarms and drawn a major political response. In a 1999 study, the U.S. International Trade Commission estimated the Jones Act cost U.S. consumers $1.32 billion annually, its requirements being the equivalent of a 65% tariff on shipping services.

So where’s the outrage? Both the Interstate Highway System and cheaper aviation have made massive inroads into interstate commerce over the past century. Meanwhile, U.S. export and import businesses simply use cheaper foreign-flagged vessels. It also helps that U.S. airlines aren’t prevented from purchasing aircraft from Europe, Canada, or Brazil nor U.S. truckers from buying German or Japanese-made big rigs. While no one would propose banning airlines or truckers from relying on these foreign industries, this is precisely what the Jones Act does for the U.S. shipping industry.

Itermodal transportation options have exploded throughout the contiguous United States, while the seafaring industry’s decline has largely been hidden from view, except for the non-contiguous states of Hawaii and Alaska and insular territories like Puerto Rico. In Puerto Rico’s case, the Jones Act is the structural foundation behind much of its current economic woes. It’s estimated that the cost of all non-U.S. goods imported into the commonwealth are 15 to 20% higher than on the mainland, with three or four Jacksonville-based shipping companies handling all Jones Act-related transport to Puerto Rico. Thanks to these shipping costs, cars cost roughly $6,000 more in Puerto Rico than on the mainland, and food is roughly twice as expensive as in Florida.

It’s easy to find similar examples of major trade distortions between West Coast ports and Alaska and Hawaii. Cattle ranchers from the Big Island have to charter a weekly 747 cargo jet to get their cattle to the mainland because it’s cheaper than Jones Act shipping. In the 1970s, it was cheaper for a Japanese-owned pulp mill in Southeast Alaska to send its products to Japan and then back to Seattle — 8,000 miles round-trip — than to ship the 700 miles directly to Seattle. There is no wood pulp industry left in Alaska today. While some would like to say it was a victim of environmentalism, the last company to operate here says the real culprit was the Jones Act and its insane costs. In the 21st century, such irrational shipping decisions would bear the additional worries about the excess carbon emissions they produce.

Of course, this has been allowed to continue because Alaska, Hawaii and Puerto Rico have tiny little voices in Congress, so they can’t be heard over the bellicose slogan shouting of the Longshoreman’s Union. Coincidentally, the shale oil and gas revolution is bringing attention to the Jones Act in parts of the country with more political clout. The December 2015 lifting of the 40-year ban on crude-oil exports has boosted oil exports to more than 500,000 barrels a day out of Texas and Louisiana ports. Yet according to the Congressional Research Service, refineries along the U.S. East Coast on average import more than 500,000 barrels of crude a day from Nigeria, Angola, and Iraq, rather than from the U.S. Gulf Coast — thanks, once again, to costs imposed by the Jones Act. Shipping from Texas to Northeast refineries costs roughly $5–6 per barrel using domestic shipping, while shipping even further up the Eastern Seaboard to refineries in eastern Canada (using international tankers and crews) costs just $2 a barrel. For a standard tanker carrying 300,000 tons deadweight, this amounts to cost savings of about $1 million per shipment.

Labor costs are the most significant difference. A unionized U.S. sailor is 5.5 times more expensive than one on a foreign-flag vessel, and such vessels are usually populated with sailors from many nations, especially the Philippines and China. A separate 1915 U.S. statute, written when ships were run by steam boilers, adds to the cost by mandating larger crews to keep watch over the boilers 24 hours a day. The statute is still in effect, even though U.S. ships are now powered by much safer diesel motors or, increasingly, by natural gas turbines.

Jones Act defenders argue loudly that the Act must be preserved because “national security” is at stake. But few commercial ships are useable by a 21st century Navy. There have been thousands of foreign-flagged commercial vessels docked in US ports every year since 2001 without a single terrorist incident tied to them. How would traffic between U.S. ports by these ships somehow increase the terrorism threat?

The 97-year-old law is many decades past due for serious amendment and perhaps even complete repeal. The upcoming centennial, in 2020, presents an ideal opportunity to highlight the Jones Act’s mercantilist history — and to bid it a final un-fond farewell.

ACA Repeal Failed … So What?   Leave a comment

Related imageSo the Republican Senate failed to tweak the misnamed Affordable Care Act (ACA) and then they failed to repeal the individual mandate and most of us who are being damaged by this destructive law are frustrated, but let’s be honest – what Congress was proposing wasn’t going to fix Obamacare. It is a deeply flawed law at fundamental levels because it ignores economic realities and anything that affects 1/5th of the US economy must be grounded on firm economic principles. So we shouldn’t be surprised that it’s failing.

We also shouldn’t be surprised that the GOP can’t fix it because they fear a backlash from the public who are being brainwashed to believe they need to prepay approximately 16,000 a year for medical care.

That is how US medical “insurance” works. It is not health insurance as insurance normally works. I have car, house and life insurance. These policies are much less expensive than medical “insurance”. I pay less per month for all three of these policies than I do for my portion of my employer-provided medical insurance. Why do I have those insurances? I mean, my car insurance doesn’t pay to repair my car or put new tires on it. My life insurance is only going to pay out if I die. My house insurance will pay me something if I have a fire or a tree falls on the roof, but it won’t replace the shingles if they wear out and the money for the new kitchen flooring must come out of my pocket. So why do I have these insurances since they don’t act like medical “insurance”? I have them to mitigate my financial liability in the event of a catastrophic event. If I die, if my house catches on fire, if some idiot slides into me at an intersection … but not for everyday expenses.

This is substantially different from how medical “insurance” works under the ACA. It covers day-to-day medical expenses. You can even get reimbursed for some over-the-counter medications. It’s not, truly, insurance. It’s prepayment of a portion of future medical care. I pay about $5000 a year for my portion of my employer-provided medical prepayment, but I have friends who are paying more than $16,000 a year for the same service and I know some people who would be paying nearly $30,000 a year (through the ACA exchanges) but they’ve opted not to participate in the stupidity any longer. Some people would say they are the reason the ACA is failing.

Let’s give them a round of applause!

 

In the Alaska Dispatch News this week, commenters were saying the ACA was required because the insurance and medical care systems were on the verge of collapse in 2009 and without the ACA, none of us would have medical care now. Let’s not get confused here — medical insurance is NOT medical care. I have medical insurance and the cost of it makes it difficult for me to afford medical care. I have never used more than $5000 in a year for medical care. If I had that money, plus the pay raise that would be possible if my employer weren’t paying $20,000 for their portion of my insurance, I would have a huge savings account at the end of 10 years instead of being unable to pay for medical care.

So, I got shouted down on the Dispatch and here’s my response.

Health care was hardly an unfettered, dynamic source of free-market driven innovation before President Obama decided to turn it into a socialistic system. Really! Take a look at history.

 

Repeal of the ACA would make an impressive headline and give the GOP something to crow about, but the short and long-term political consequences of repeal for Republicans would have been worse than doing nothing. After all the promises the ACA made of a medical care nirvana, we would have returned to the less-than-stellar system that existed before the ACA came into effect. The folks who are being crushed by trying to pay for unaffordable health insurance would be relieved not to be going bankrupt, but the problems with US medical care that existed in 2010 will still exist.

The ACA was a foolish legislation that ignored economic reality and it is already failing because of that. Go back to my articles from Economics in One Lesson by Henry Hazlett. Government policies fail because they focus on a temporary benefit for a narrow slice of the population instead of focusing on the long-term consequences of the broad swath of the country. Obamacare gives some Americans a lot for a little, with a lot taken from others in return for very little. Of course, it’s failing.

What evidence do I offer that it is failing? The rapid exit of insurance companies from the ACA exchanges indicates that the system is failing. The 300% increase in premiums in Alaska is further evidence. The 200% increase in premiums in several other states is another sign. The huge deductibles most of us now have on our insurance policies should wake us up. Some of us are woke up, but more of us are still brainwashed to believe this is medical “insurance” when it isn’t.

 

None of the politicians or those who support them are discussing how there is no right to any good or service of any kind. That means there is no right to health care, which didn’t really exist as we know it before the 20th century. In the 19th century, people routinely died of injuries and illnesses. A broken hip was a death sentence. If you got cancer, you were going to die. A sizeable percentage of women died in childbirth. Death was the norm before the 20th century.

Legislation didn’t change that. Trial and error by medical providers experimenting on their patients led to healing advances such that a market was created. In the late 19th and early 20th centuries, consumers began to seek medical care. Doctors were affordable. Churches operated hospitals. Fraternal organizations offered memberships to direct primary care clinics so that even laborers could afford medical care. Politicians then discovered medical care and decided it needed to be regulated.

It started small … with the American Medical Association complaining that doctors who were not part of the primary care clinic system were at a competitive disadvantage to those that were AND, convincing some politicians that doctors in general needed to be regulated by a wise, overseeing organization. Selflessly, the AMA offered itself as the wise director of this ultra important service. Of course, they didn’t have a crystal ball — in 1910, they didn’t foresee the coming of antibiotics let alone the MRI. That’s the problem with regulating any industry. Nobody can see the future. And, so as the future slowly presented itself, the government regulators kept looking back at 1910 medicine and trying to hold that standard, requiring innovation to climb a high regulatory wall before it can come to the marketplace. It takes 12 years of post-secondary education to create a doctor. It costs millions of dollars to bring new medications and treatments to the public and nowadays it’s very hard to test them on animals or people. But the real problem kicked in the Nixon administrations with the certificate of need requirement. That is the regulation that requires medical providers to show if a new facility, addition, or treatment is really needed. That can take years and add millions of dollars to any project or treatment. That boosts the cost of everything medical and often there is a requirement involved that new facilities don’t undercut existing facilities, which does nothing to reduce costs. The high costs and barriers to medical school reduces the number of doctors available to see patients, which means the existing ones don’t have to be concerned about competition, so can charge whatever they want.

All that existed before the ACA became the law of the land. Instead of fixing those problems, Obamacare exacerbated them. The absolute worst way to solve any problem, particularly one involving goods and services created in the marketplace, is to try and legislate it, but that’s exactly what we’ve done with medical care in this country. We had a good “system”, but we have gradually turned it into a nightmare with over-regulation.

I don’t believe that the ACA delayed the comeuppance of the medical care markets in the US. I think it accelerated it. Now the ACA is failing. Forget what the GOP failed to do … I know a half dozen people who have stopped paying for medical insurance. They came to a place where the premiums were higher than their mortgage payment and decided to break the law. Some of them  have mitigated their financial risk by buying a major medical (catastrophic) policy and piling up savings. Others are still scrambling to figure it out, but I trust they’ll work it out. I’m not worried about them. They know what they need to do and they’ll get there soon enough. I expect a lot of people will be going that route in the near-future. I wish I could join them, but I’m stuck in an employer-provided system.

So, the ACA is failing and that will be unfortunate for the people who bought into the “free to you” rhetoric. It’ll probably work out well for the middle class who didn’t qualify for subsidies and were being crushed by premiums. I’m concerned that govenment will insist they have to make it work even when it can’t work. I’m less concerned with the GOP in Congress, but I think President Trump — who has said in the past that he prefers univeral, single-payer medical insurance — will be tempted to slow down the crash with regulatory tinkering. I hope he doesn’t do that because as soon as it fails is when a real and productive conversation about medical care (not insurance) can start.

I don’t have a crystal ball, but I’m going to use my writer’s imagination here.

The ACA fails and the medical insurance industry crash hard. People who have been prepaying $16,000 a year for a few thousand dollars of medical care will now be desperate to mitigate their fianncial risk in the event of a medical crisis. They will rush to the major medical/catastrophic insurance providers. They will take the additional $14,000 and either pile up savings or join a direct primary care network. They will now pay $3000 a year for medical insurance and medical care access which will allow them to pile up savings to pay out-of-pocket expenses or to invest that additional $10,000 a year in something that will actually provide productive value to their lives. Medical care will still be available. A lot of it will be expensive, but as people realize how much it costs to get an MRI, for example, they will begin to demand to know why and the costs will come down. What’s more, people will start taking care of themselves and taking responsibility for their own stupid behaviors. New insurance products will appear. If you’re an extreme athlete, you may be able to get an insurance policy to cover the potential consequences of your stupidity, for example. That would be an insurance policy that couch-potatoes don’t have to buy because they are not flinging themselves off cliffs with snowboards tied to their feet.

Because the American people have become such sheep, in need of the government to tell them what to do on the most basic things, I suspect things won’t work out this well, but I can hope.

Posted July 31, 2017 by aurorawatcherak in economics, Uncategorized

Tagged with , ,

The Folly of the Horizon Air Pilot Shortage   Leave a comment

Supposedly robots are going to take over our jobs pretty soon, but there are six million job openings in the US, and large companies in a range of industries claim they are running short of humans to perform labor, so maybe the truth is that robots aren’t quite ready to take all of our jobs. American companies don’t have a shortage of people. Their problem rests with wages, benefits, and training, and that’s a problem they could fix, but haven’t.

Horizon Air is a prime example. A regional airline and subsidiary of Alaska Air Group, Horizon services the Pacific Northwest including Alaska. The Seattle Times reports it’s “cutting its flight schedule this summer because of a severe shortage of pilots for its Q400 turboprop planes. The shortage became a crisis this summer when Horizon was forced to cancel more than 318 flights because it didn’t have enough pilots to fly all its planes. That represents 6.2% of the flights Horizon runs between Seattle and places like Boise, Spokane, and Portland.

Let that sink in a moment. Horizon’s bread and butter is flights between Seattle and smaller airports like Boise and Spokane and Nome, Alaska. Flying these routes isn’t a side business for Horizon. That’s it’s only business. Canceling flights damages their brand and their company’s long-term prospects — it alienates and annoys customers who have already purchased tickets. It also hits short-term profits. If you’re in the business of moving people from Point A to Point B, the more you can move the better. You’ve already committed to pay the overhead of planes, insurance, gate slots at airports, maintenance, and ground crews. You should want passenger volume to be as high as it can be. This is the equivalent of Starbucks deciding not to open several hundred existing stores because it doesn’t have enough managers.

Recognize that Horizon Air isn’t some fly-by-night operation unable to cope with the mysterious ways of the marketplace. It’s a unit of Alaska Air Group, a publicly held company that has a market capitalization of $11 billion and chalked up $1.7 billion in revenue and $99 million in net income in its most recent quarter. That’s a big balance sheet, representing vast resources, stock, borrowing capacity, and access to all kinds of services. While not considered one of the majors yet, Alaska Airlines is an up-and-comer who is pushing the major airlines to either do better or get out of the way. So, what’s going on?

alaska airlines horizon air

There’s a metaphor in a big airline intentionally grounding flights because it can’t find pilots. Horizon (and other companies in this situation) are paying the price for a decade or more of corporate sickness surrounding wages. Here’s an economics lesson.

Labor is a commodity … just like gasoline or sugar. It’s subject to the laws of supply and demand.

When labor is in abundant supply and lots of people with the needed skills are looking for jobs, but openings are few, companies don’t have to pay as much to fill positions.  That’s where we were from 2008 to 2012 … a lot of hungry people, not that many openings, so the companies could set whatever wage they wanted and workers would take it because they needed to make some money rather than make no money.

Conversely, when labor is in short supply and few people with the needed skills are seeking work, but there’s lots of openings, companies have to pay a lot more to fill positions. That’s the reality of airlines in the last few years. The number of people flying has increased, but a lot of Baby Boomer pilots have retired, so now the pilots who are still working are in demand and they know it, and expect to be paid more.

So why aren’t businesses adapting? Maybe a lot of business managers never took Economics. They’ve become accustomed to thinking they can have all the labor they want, with all the skills they need, without having to pay much for it. They no longer want to offer good benefits or long-term job security or they refuse to fund the training needed for pilots to qualify to fly new aircraft.

We’ve been hearing complaints about a pilot shortage for a few years now. The problem seems particularly acute at regional airlines, which often pay exceedingly low wages for jobs that require training and education that can cost up to $100,000. To weather its current problems, Horizon will pay some pilots overtime to fly extra hours. Of course, there are FAA rules against flying too many hours in a given day, so that’s a temporary fix at best.

I happen to know several Alaska Airlines pilots (I have a friend who caters to them), who have privately told me what the problem is and it doesn’t just affect Alaska/Horizon. The airlines have become tightwads who don’t understand supply and demand. If Alaska Air Group wants to fix the problem, they need to:

  • offer higher wages to people who already have jobs so they will leave their jobs to work for the other airline
  • offer existing employees better long-term incentives — profit-sharing, stock options, pensions and other benefits that will encourage them to stay
  • Recruit new employees by offering to train them or pay back the loans they incur while getting the training, or offer to split flight school tuition in exchange for a long-term commitment to the airline

Coping with a shortage of skilled workers by shuttering a portion of your operations doesn’t seem like much of a solution. Of course, this affects me because Alaska Air Group provides the majority of air travel in and out of Alaska. So work it out, guys. Don’t allow your great customer service to deteriorate because you’re stuck in a business model from nearly a decade ago.

Mises on Economic Calculation   Leave a comment

I’m concluding my series on Ludwig von Mises’ 1920 essay “Economic Calculation in the Socialist Commonwealth”, appropriately enough, with his conclusion of the essay. I highly recommend you read it for yourself to get a fuller understanding of why socialism was a bad idea in 1920 and a bad idea nearly a century later.. Lela

 

He called for socialists to consider their position on a rational basis and realize that socialism does not  match reality. Their system has no way of determining the natural value of anything. Prices must be arbitrarily derived by bureaucrats in a socialist system, while in a capitalist system, supply and demand operate automatically to provide a “market value” price derived through exchange relations. The purchasers of a product determine the price depending on their personal choices.

Ninety-seven years after Mises wrote this essay, he’s still right and the Soviet Union and China have both proven his critiques. The Soviet Union is no more and Russia and the former Soviet bloc countries are largely market-based economies. Many of them are much more capitalistic than the United Kingdom or the United States. Meanwhile, China has taken a halfway position in state capitalism. Lenin thought of state capitalism as an intermediary step toward the paradise of socialism, but having tried social for several decades, China decided to introduce some capitalism.

Image result for image of american socialismName a socialist society that is doing well. There are a few capitalist societies that have a great admix of socialism — the United States, for example. Alaska too. The United States has suffered under a slowing economy for more than a decade now and is currently $21 trillion in debt. Alaska almost didn’t pass a budget this year. Socialism sounds good from the perspective where it hasn’t been tried yet, but inevitably it can’t operate without some market-economy features and so …. The United States has spent many decades slowly becoming more socialistic and our economy is teetering on the brink of collapse. Some observe that we appear to have been coasting on the dynamism of our past capitalism and that is now running out. Just look at the pace of inventions in the US between the end of the Civil War and now. You can see that we had a huge burst of activity and then we slowly fell away in an inverse ratio to the amount of government interference in the economy. So, what does that mean for us now? Is the solution perhaps reintroducing capitalism to the system?

The Most Recent Socialist Doctrines and the Problem of Economic Calculation   Leave a comment

This is part of a series on Ludwig von Mises 1920 essay “Economic Calculation in the Socialist Commonwealth”. I highly recommend that you read the full essay as I am just hitting the high points. Lela

 

Until socialists had some actual success in the world, they didn’t need to worry much about the problems of economic calculation without a price mechanism, so they didn’t. Really, what does it matter if your theory doesn’t work … until it becomes a reality.

In Mises’s era, socialist parties had obtained power in Russia, Hungary, Germany and Austria, which meant their theories now had to work in practice. So Marxist writers were beginning to actually look at the problems their theories walked hand-in-hand with. Mises had noted that they prefered to focus on drawing up programs for the path to socialism and not on addressing the problems of socialism itself.

Bauer leaves his readers completely ignorant of the fact that the nature of the banks is entirely changed in the process of nationalization and amalgamation into one central bank. Once the banks merge into a single bank, their essence is wholly transformed; they are then in a position to issue credit without any limitation. In this fashion the monetary system as we know it today disappears of itself. When in addition the single central bank is nationalized in a society, which is otherwise already completely socialized, market dealings disappear and all exchange transactions are abolished. At the same time the Bank ceases to be a bank, its specific functions are extinguished, for there is no longer any place for it in such a society. It may be that the name “Bank” is retained, that the Supreme Economic Council of the socialist community is called the Board of Directors of the Bank, and that they hold their meetings in a building formerly occupied by a bank. But it is no longer a bank, it fulfils none of those functions which a bank fulfils in an economic system resting on the private ownership of the means of production and the use of a general medium of exchange-money. It no longer distributes any credit, for a socialist society makes credit of necessity impossible. Bauer himself does not tell us what a bank is, but he begins his chapter on the nationalization of the banks with the sentence: “All disposable capital flows into a common pool in the banks.” As a Marxist must he not raise the question of what the banks’ activities will be after the abolition of capitalism?

Most other Marxist writers, even into the 21st century, don’t seem to realize that the bases of economic calculation are removed when you eliminate exchange and the price mechanism. That requires something be substituted in its place so as to avoid total chaos. There’s a fantasy belief that socialist institutions can easily replace those of a capitalist economy, but that has proven not to be the case. When the socialist markets in the USSR didn’t work, people turned to the black market. Mises was prescient in seeing that this would be the inevitable outcome.

Lenin’s ideas on the socialist economic system, to which he is striving to lead his people, are generally obscure.

Lenin trusted that the communes would be so efficient that they would provide a model for the rest of the country. Not too long after this, millions of people died in the Ukraine (the USSR’s bread basket) because the commune system didn’t work. In Lenin’s theories, every large agricultural and industrial concern was a member of the great commonwealth of labor. Those who are active in the commonwealth had the right of self-government. He said they exercised a profound influence on the direction of production and again on the distribution of the goods they were assigned for consumption. To Lenin, labor is the property of the whole society, and as its product belongs to society, society has a right to control product distribution.

How, we must now ask, is calculation in the economy carried on in a socialist commonwealth which is so organized? Lenin gives us a most inadequate answer by referring us back to statistics. We must bring statistics to the masses, make it popular, so that the active population will gradually learn by themselves to understand and realize how much and what kind of work must be done, how much and what kind of recreation should be taken, so that the comparison of the economy’s industrial results in the case of individual communes becomes the object of general interest and education.

Mises thought these “scanty allusions” to be a sign that Lenin didn’t understand statistics or monetary computation … that he might in fact be math deficient. You still couldn’t figure out how well the economy was doing or what a “fair” price was of any given product because there was no means of economic calculation within a socialist society.

Creative Ideas for Starving Artists

Brain juice that revives and refreshes

Real Science

"Science is the belief in the ignorance of the experts" - Richard Feynman

Marsha Ingrao

Traveling & Blogging Near and Far

Victoria (V.E.) Schwab

"You can't get a cup of tea big enough or a book long enough to suit me." ~C.S. Lewis

Darlene Foster's Blog

dreamer of dreams, teller of tales

All About Writing and more

Advice, challenges, poetry and prose

Tapestry ~ Treasures

My life is but a weaving between the Lord and me!

Sue Vincent's Daily Echo

Echoes of Life, Love and Laughter

S.R. Mallery's AND HISTORY FOR ALL

Everything Historical And Much More...

Smorgasbord - Variety is the spice of life

Blog with a view - on books, music, humour and health

The Lil' Mermaid

Dream. Believe. Achieve

susanne matthews

Living the Dream

MomzillaNC

A blog about issues, life in general, and being a mom, and sharing my poetry.

Felix Alexander Writer

Storyteller Philosopher Poet

YOURS IN STORYTELLING...

Steve Vernon - Nova Scotia writer, storyteller and master of the booga-booga

Dreaming In Blushh

You Are In A Beauty Contest Every Day Of Your Life💕 Beautiful.Colorful.You

Breaking the rules

with a smile

Aurora

Where the world begins

Twisted Thoughts

Pardon my Random Thoughts

%d bloggers like this: