Soros

Well before Donald Trump was elected President of the United States, I sent a holiday greeting to my friends that read: “These times are not business as usual. Wishing you the best in a troubled world.” Now I feel the need to share this message with the rest of the world. But before I do, I must tell you who I am and what I stand for.

I am an 86-year-old Hungarian Jew who became a US citizen after the end of World War II. I learned at an early age how important it is what kind of political regime prevails. The formative experience of my life was the occupation of Hungary by Hitler’s Germany in 1944. I probably would have perished had my father not understood the gravity of the situation. He arranged false identities for his family and for many other Jews; with his help, most survived.

In 1947, I escaped from Hungary, by then under Communist rule, to England. As a student at the London School of Economics, I came under the influence of the philosopher Karl Popper, and I developed my own philosophy, built on the twin pillars of fallibility and reflexivity. I distinguished between two kinds of political regimes: those in which people elected their leaders, who were then supposed to look after the interests of the electorate, and others where the rulers sought to manipulate their subjects to serve the rulers’ interests. Under Popper’s influence, I called the first kind of society open, the second, closed.

The classification is too simplistic. There are many degrees and variations throughout history, from well-functioning models to failed states, and many different levels of government in any particular situation. Even so, I find the distinction between the two regime types useful. I became an active promoter of the former and opponent of the latter.

I find the current moment in history very painful. Open societies are in crisis, and various forms of closed societies — from fascist dictatorships to mafia states — are on the rise. How could this happen? The only explanation I can find is that elected leaders failed to meet voters’ legitimate expectations and aspirations and that this failure led electorates to become disenchanted with the prevailing versions of democracy and capitalism. Quite simply, many people felt that the elites had stolen their democracy.

After the collapse of the Soviet Union, the US emerged as the sole remaining superpower, equally committed to the principles of democracy and free markets. The major development since then has been the globalization of financial markets, spearheaded by advocates who argued that globalization increases total wealth. After all, if the winners compensated the losers, they would still have something left over.

The argument was misleading, because it ignored the fact that the winners seldom, if ever, compensate the losers. But the potential winners spent enough money promoting the argument that it prevailed. It was a victory for believers in untrammeled free enterprise, or “market fundamentalists,” as I call them. Because financial capital is an indispensable ingredient of economic development, and few countries in the developing world could generate enough capital on their own, globalization spread like wildfire. Financial capital could move around freely and avoid taxation and regulation.

Globalization has had far-reaching economic and political consequences. It has brought about some economic convergence between poor and rich countries; but it increased inequality within both poor and rich countries. In the developed world, the benefits accrued mainly to large owners of financial capital, who constitute less than 1% of the population. The lack of redistributive policies is the main source of the dissatisfaction that democracy’s opponents have exploited. But there were other contributing factors as well, particularly in Europe.

I was an avid supporter of the European Union from its inception. I regarded it as the embodiment of the idea of an open society: an association of democratic states willing to sacrifice part of their sovereignty for the common good. It started out at as a bold experiment in what Popper called “piecemeal social engineering.” The leaders set an attainable objective and a fixed timeline and mobilized the political will needed to meet it, knowing full well that each step would necessitate a further step forward. That is how the European Coal and Steel Community developed into the EU.

But then something went woefully wrong. After the Crash of 2008, a voluntary association of equals was transformed into a relationship between creditors and debtors, where the debtors had difficulties in meeting their obligations and the creditors set the conditions the debtors had to obey. That relationship has been neither voluntary nor equal.

Germany emerged as the hegemonic power in Europe, but it failed to live up to the obligations that successful hegemons must fulfil, namely looking beyond their narrow self-interest to the interests of the people who depend on them. Compare the behaviour of the US after WWII with Germany’s behaviour after the Crash of 2008: the US launched the Marshall Plan, which led to the development of the EU; Germany imposed an austerity program that served its narrow self-interest.

Before its reunification, Germany was the main force driving European integration: it was always willing to contribute a little bit extra to accommodate those putting up resistance. Remember Germany’s contribution to meeting Margaret Thatcher’s demands regarding the EU budget?

But reuniting Germany on a 1:1 basis turned out to be very expensive. When Lehman Brothers collapsed, Germany did not feel rich enough to take on any additional obligations. When European finance ministers declared that no other systemically important financial institution would be allowed to fail, German Chancellor Angela Merkel, correctly reading the wishes of her electorate, declared that each member state should look after its own institutions. That was the start of a process of disintegration.

After the Crash of 2008, the EU and the eurozone became increasingly dysfunctional. Prevailing conditions became far removed from those prescribed by the Maastricht Treaty, but treaty change became progressively more difficult, and eventually impossible, because it couldn’t be ratified. The eurozone became the victim of antiquated laws; much-needed reforms could be enacted only by finding loopholes in them. That is how institutions became increasingly complicated, and electorates became alienated.

The rise of anti-EU movements further impeded the functioning of institutions. And these forces of disintegration received a powerful boost in 2016, first from Brexit, then from the election of Trump in the US, and on December 4 from Italian voters’ rejection, by a wide margin, of constitutional reforms.

Democracy is now in crisis. Even the US, the world’s leading democracy, elected a con artist and would-be dictator as its president. Although Trump has toned down his rhetoric since he was elected, he has changed neither his behaviour nor his advisers. His cabinet comprises incompetent extremists and retired generals.

What lies ahead?

I am confident that democracy will prove resilient in the US. Its Constitution and institutions, including the fourth estate, are strong enough to resist the excesses of the executive branch, thus preventing a would-be dictator from becoming an actual one.

But the US will be preoccupied with internal struggles in the near future, and targeted minorities will suffer. The US will be unable to protect and promote democracy in the rest of the world. On the contrary, Trump will have greater affinity with dictators. That will allow some of them to reach an accommodation with the US, and others to carry on without interference. Trump will prefer making deals to defending principles. Unfortunately, that will be popular with his core constituency.

I am particularly worried about the fate of the EU, which is in danger of coming under the influence of Russian President Vladimir Putin, whose concept of government is irreconcilable with that of open society. Putin is not a passive beneficiary of recent developments; he worked hard to bring them about. He recognised his regime’s weakness: it can exploit natural resources but cannot generate economic growth. He felt threatened by “colour revolutions” in Georgia, Ukraine, and elsewhere. At first, he tried to control social media. Then, in a brilliant move, he exploited social media companies’ business model to spread misinformation and fake news, disorienting electorates and destabilizing democracies. That is how he helped Trump get elected.

The same is likely to happen in the European election season in 2017 in the Netherlands, Germany, and Italy. In France, the two leading contenders are close to Putin and eager to appease him. If either wins, Putin’s dominance of Europe will become a fait accompli.

I hope that Europe’s leaders and citizens alike will realise that this endangers their way of life and the values on which the EU was founded. The trouble is that the method Putin has used to destabilize democracy cannot be used to restore respect for facts and a balanced view of reality.

With economic growth lagging and the refugee crisis out of control, the EU is on the verge of breakdown and is set to undergo an experience similar to that of the Soviet Union in the early 1990s. Those who believe that the EU needs to be saved in order to be reinvented must do whatever they can to bring about a better outcome.

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Anarcho-capitalism

Scholarly considerations of economic regulation and governance generally take the state as a precondition, the necessity and centrality of which is not to be seriously questioned. The bold, creative scholarship of Edward Peter Stringham has, for some time now, begged leave to differ. Stringham explores the possibilities of private law and private governance, never more ably than in his new book.

Private Governance: Creating Order in Economics and Social Life sets out to show that, despite strong biases against them in the academic and public policy communities, voluntary associations and their private solutions to social and organizational problems continue to prevail and propagate, undermining the “deus ex machina theory of law.” This theory, “popular in bad social science,” treats the law as an “exogenous corrective device”  that exists entirely outside of the people and institutions on which it acts.

Stringham’s work draws extensively on public choice theory to expose the flaws in the deus ex machina outlook, challenging the largely unexamined assumption that law is uniquely and necessarily the province of government. As he notes, “Even if one assumes that certain problems require legal rules, one need not assume that a compulsory monopoly must provide them.” Indeed, observation of existing governmental monopolies should have taught us the very opposite: that unaccountable, concentrated power yields arbitrary results and opens the door to serious abuses of power and discretion, and that these are exactly the conditions a stable legal system ought to avoid.

Private Governance is a comprehensive and sophisticated answer to a question with which libertarians, particularly those of the free-market anarchist sort, are confronted: “But how would it work?” Stringham shows that a completely private, stateless system of governance is not only practicable but far superior to the coercive monopoly systems from which we derive our governing structures today.

The author previously edited an authoritative collection on this kind of ordered, private-property anarchism, Anarchy and the Law: The Political Economy of Choice (2007), which spanned a period of over a century and included contributions from such libertarian luminaries as Murray Rothbard, David Friedman, and Benjamin Tucker. His conversance with the extensive libertarian literature in this area is unsurpassed.

Stringham’s work follows directly from that of radical libertarians like Gustave de Molinari in the 19th century and Murray Rothbard in the 20th. It bears noting that “anarchism” may not be the most helpful of labels to apply to these thinkers, since it has long been fused to the economically retrograde, anti-market, and anti-property philosophy found in the works of, say, Peter Kropotkin or Mikhail Bakunin. In this case private property and market competition are not evil but good; these “anarchists” seek not their abolition but their universalization—their application to areas of political and social life that are today dominated by governmental monopolies.

Molinari’s The Production of Security (1849) argued that the free market could provide even defensive services. We in turn find the germ of this revolutionary idea in the “industrialism” of French radical liberals Charles Comte and Charles Dunoyer (the former of whom was an acolyte and son-in-law of the great classical economist, Jean-Baptiste Say). Comte and Dunoyer sought to depoliticize society, to “municipalize the world,” allowing peaceful free market forces to decentralize and ultimately dissolve governments.[1]

The themes of Private Governance hinge to a great extent on questions about how our institutional frameworks could better channel incentives and human nature. Public choice analyses are therefore at the center of Stringham’s project: if human beings are self-serving and avaricious in markets, then they will likely be no less so when inhabiting governmental bodies, at least if we’re being realistic rather than romantic about governmental agencies.

Early in the book, Stringham frames the question this way: the Nobel Laureate James Buchanan “never applied public choice to law . . . , but what if he did?” He proceeds to take the application of public choice to questions of law and social order as far as anyone before has dared—and then farther—cogently combining theory, historical lessons, and empirical research. The results are embarrassing for legal centralism, the idea that only government can supply law and order.

To replace legal centralism, Stringham posits a polycentric legal system “in which courts are engaged in an ongoing, dynamic discovery process of experimentation, trial and error, and feedback.” Drawing on Adam Smith, Stringham observes that even among governmental courts, competition “led to ‘superior dispatch and impartiality.’” Potential litigants might avail themselves of the law merchant, or the chancery, or manorial courts, just to name a few, the contest between these courts impelling each to produce fast, fair justice.

We can generalize from this and turn ever more governance functions over to market mechanisms. And we should because, as it happens, governments are not very well positioned to protect our rights. As Stringham explains, “Legal centralists’ wishes notwithstanding, law enforcement officials may not have maximizing utility in society or maximizing Kaldor-Hicks efficiency in their objective function.” Rather, it is just taken for granted that government bureaus and the “public servants” that inhabit them will automatically act selflessly, devoted undeviatingly to the common good.

It is as if the human beings working for the government were of a different kind, exempt from the assumptions we make about the fundamentally self-interested nature of those working in capitalist firms. Of course, those who accept such facile explanations don’t bother to confront either the fact that the “public good” is a famously slippery notion, or that people do not magically metamorphose into messengers of the heavens when they move from the private sector to the public. Public choice theory doesn’t let political philosophy’s gospelers of statism off the hook so easily; if people are selfish and incentives matter, then these facts hold across the board.

Public choice reveals that in fact there is no deus ex machina. It shows that, if our institutional designs are going to work, they have to work with and for actual human beings, not the perfectly altruistic constructs of Progressive political theory. Economic thinking, when applied to policy questions and political theory, contests many of the facile assumptions of the deus ex machina notion of government.[2]

And that’s where Stringham’s book enters the scene, filling a gap in the literature and explaining how market mechanisms and spontaneous orders account for these flaws in human nature. Centralized, unilateral power and discretion, Stringham shows, are not the solutions they pretend to be but are fraught with moral hazard and information problems. Historically, market relationships—horizontal, decentralized, and voluntary—have actually been much better at managing risk and protecting interested parties. The array of historical examples and case studies that Stringham has collected give the lie to the argument that private governance is just the fantasy of fanatical libertarians.

We learn, for example, that during the Gold Rush in San Francisco, when the city’s police failed the people who lived in the city and were often “considered worse than the private criminals,” businessmen worked together to organize a private police service. This example is especially compelling insofar as San Francisco was then a rowdy boom town, just the kind of place for which private governance is supposed to be inadequate. At the middle of the 19th century, it was a Wild West maelstrom of criminals and single young men (80 percent of the population) in search of quick riches. And this rogues’ gallery had in it rogues who had emigrated from every corner of the globe. Such conditions are thought to preclude “social cooperation without government,” yet small business owners mobilized efficiently for their own protection.

Where government did not have the ability, knowledge, or incentive to solve the problem, concerned merchants did. Stringham likewise shows how the rules of the London Stock Exchange emerged from the specific needs and challenges of its participants, faced with laws that forbade many of their contracts. Undeterred, brokers devised ingenious rules and procedures through which to guarantee investments and prevent fraud.

The progenitors of such private forms of governance were not Rothbardian anarcho-capitalists or libertarian ideologues. They were practical businessmen, concerned with creating an environment in which economic value is protected cost-effectively. Thus were their solutions developed spontaneously, responding to specific, identified problems, often on an ad hoc basis.

“Providers of private governance,” writes Stringham, “recognize government is not the solution, so they take the initiative and provide private ones.” They are different from government bureaucrats in that they have a concrete incentive to take the initiative and, better still, to come up with solutions that actually work. With skin in the game and specialized knowledge of their own businesses and industries, private governance innovators are uniquely equipped to problem solve.

Just as important is their lack of the kind of binding coercive power possessed by legislators and government regulators. Where the customer is not a captive, bound by law to a package of services, a given provider must constantly readjust to changing circumstances and consumer preferences. Participants in such voluntarily ordered systems want and expect to deal with one another again; this expectation of repeated business interactions—if not with the very same individual, then at least within the same small network—is part of a highly complex, extra-governmental groundwork for honesty and fair dealing.

All that governments can ever do is compel and coerce, and this they often do rather arbitrarily, without due regard for the unforeseen (and indeed unforeseeable) consequences of their meddling. Government bureaucrats have an incentive problem: they are paid to meddle, whether it is necessary or not. And they aren’t rewarded for coming in under budget, for the efficient use of time and resources.

Private Governance demonstrates that free market competition in law and order is not unprecedented and does not yield an unregulated chaos in which the consumer is defenseless against greedy capitalists. Regulation is indeed everywhere: it is competition, rather than compulsion, that serves as the regulatory tool. The sophistication of markets, itself an outgrowth of expressed consumer needs and preferences, enables them to allocate risk much more effectively and safely than governments. Market actors with financial skin in the game, it turns out, end up formulating rules far superior to those arbitrarily handed down by regulators, too often oblivious or (what is often worse) just overzealous. The mandatory, one-size-fits-all rules of government are not without their costs. And when everyone is locked into government rules and regulations, the costs of bad rules—those that don’t actually serve regulators’ purported consumer safety goals—are that much higher.

Stringham shows that private organizations, equipped, unlike government, with specialized knowledge (peculiar to time, place, or their profession) can outperform government and formulate better protocols for social and economic behavior. The effective assembly of such rules is in fact just the kind of task to which specialization within a market economy is most well-adapted.

Classical liberal and conservative readers who are unable to follow Stringham to full-fledged private-property anarchism are nonetheless likely to find his arguments persuasive. Private Governance handily levels conventional wisdom about the necessity of coercive monopolies for the provision of law and law enforcement. As Molinari explained over a century and a half ago, free and voluntary associations are more than competent to dispense law and justice, however uncomfortable this fact may be.

With a careful combination of historical examples, empirical evidence, and old-fashioned (in the best sense) political economy, Edward Stringham offers an stimulating and challenging perspective on the intersection of law, politics, and economics. Destined to be a libertarian classic for all three fields, Private Governance is a testament to the power of free individuals, to the potential of a society without sanctioned coercion.

 

[1] The definitive treatment of Comte and Dunoyer’s radical liberalism is David M. Hart’s Class Analysis, Slavery and the Industrialist Theory of History in French Liberal Thought, 1814-1830: The Radical Liberalism of Charles Comte and Charles Dunoyer. Unpublished doctoral dissertation, King’s College, Cambridge, 1994.

[2] Economist and political scientist Michael Munger calls this the “unicorn fallacy,” observing “that people who favor expansion of government imagine a State different from the one possible in the physical world.” When these people imagine the state, they quite unconsciously ascribe to it a range of superhuman qualities; that is, they abstract it from its component parts, which are the very same self-interested human beings who make up market institutions. On its face, this is a problem for those who favor compulsory monopoly for some goods or services (for example, providing police and roads) but not others (for example, the manufacture of shoes and widgets).

 

Blue Labour, a rebutal.

This is an essay on the approach to economics suggested by Maurice Glasman’s essay ‘Labour as a Radical Tradition’. Glasman’s essay forms part of the ebook ‘The Labour Tradition and the Politics of Paradox’.

An essay on capitalism from Dr.D.

I’m not particularly keen on the ‘Blue Labour’ moniker, but the ideas behind Maurice Glasman’s approach bear serious examination. Interestingly, his approach bears some comparison with that recently espoused by Amartya Sen in his book ‘The Idea of Justice’. This is that it is difficult to win political arguments with abstract ideas, and that practical and localised amelioration of well-recognised wrongs is the best way forward. Glasman (in Labour as a Radical Tradition) looks back to the early days of Labour when the movement of which it was part was defined by relationships and ‘practices that strengthen an ethical life’. These practices included reciprocity, mutuality and solidarity, and they led to actions such as the formation of mutual societies, co-operatives and trades unions. These may not and need not have had an explicit or even coherent philosophical underpinning.

I have highlighted the book by ‘Sen’ ‘The Idea of Justice’ so that I can briefly summarise the gist of the book. Essentially it would seem to seek to develop an alternative theory of justice based on ‘comparative justice’. This is certainly consistent with Dr.D’s previous positivist leanings within economics. I on the other hand espouse the a priori position of justice based upon ‘property rights’. In the past our disagreements hinged upon the veracity of assumptions taken, or stated to be axioms from which progression via deductive logic could take place. I shall revisit this sticking point.

According to Glasman, however, ‘The founders of the labour movement understood the logic of capitalism…and the threat this posed to their lives, livelihoods and environment.’ Maybe they did, but this is somewhat in contradiction of Glasman’s narrative, since the ‘logic of capitalism’ is itself an abstract idea. And it’s not at all clear that we understand this ‘logic’ today, or if we do, whether we know how to refute its conclusions.

I’m not sure who the ‘founders’ actually are, nor their understanding of the logic of capitalism. Glassman has stated that ‘abstract ideas’ are essentially too complicated for the majority of the people, so as Dr. D states, this is somewhat of a contradiction.

‘Capitalism’ can be a slippery concept, but the relevant definition here is a society in which market exchanges are the default mode for organising the matching of goods and services from producers to users and some form of non-commodity means of payment (money) is the default medium with which these exchanges are carried out. Clearly, pre-requisites for such a system are clear and enforceable property rights and widely trusted forms of money. One of the consequences of this is to automatically bring in the first ‘contradiction’ of capitalism. While market exchange may be the default mode of allocation it cannot be the only mode, since justice, policing and bank regulation are not feasibly provided by the market.

Two related, but separate areas of knowledge are conflated. The first and central problem is how best, or most efficiently, to organise individuals or groups of individuals [society] to promote the production of wealth. This is the study of economics or ‘Political Economy’.

The second question falls outside the realm of the positive sciences. Rather, the question now asked is whether the goals of ‘Political Economy’, can be justified as goals, and whether or not then the means employed are ‘just’, which is ‘Political Theory’ and ‘Ethics’.

Such a capitalist system has great advantages in the abstract and frequently also in practice. Market exchanges depend on the mutual consent of the exchanging parties. Rational participants in a market only exchange when they expect a gain, so all market activity produces gains for all its participants. Preventing or reversing any market transaction must make one or more people worse off. With a trusted medium of exchange, essentially any re-allocation of goods and services desirable to all those involved is feasible. Unless a non-market system can somehow replicate the exact distribution of the market then the market system will be preferable. The usual assumption is that the information-gathering power required would be beyond any single human institution. I’m not going to dispute this assumption here.

No major disagreements here.

So, whatever the practices of the labour movement, the logic of capitalism always appears to have been a strong opponent. And it remains so today, despite many failures of the practice of capitalism. The logic of capitalism has to be tackled on its own abstract level. Like all logic, it stands or falls on its assumptions. Logic needs facts before it can give us any conclusions, and not all the assumptions of capitalist logic are fully-fledged facts.

So we get to it.

No economist would deny that the first three of these issues detract from the success of market systems – the debate centres more around to what extent they can be corrected by collective actions such as taxation, regulation, insurance and information management. The fourth is fairly obviously untrue. The last is somewhat more controversial, since traditional economic theory regards money as having little independent consequences for economic activity and distribution.

Well I dispute them, and certainly economists also dispute them.

The falsity of the first three of these assumptions has some well-recognised results. For example, transactions may not take place because one or both parties aren’t sure of what they are getting or whether they are being taken for a ride.

For example the purchase of a second hand car. Where the seller of the car has far more historical information than the potential purchaser. This is of course the purpose of prices and discounting the future to present values. If I suffer from an ‘asymmetry of information’ the present value I assign will be far lower, not knowing the future. So this objection is incorrect.

This is why some things can’t be insured against.

Information asymmetries do relate to insurance. The rather lacking in detail of the statement rather distorts the accuracy of the statement. Information asymmetries can be important, or, they can be far less so. One form would preclude insurance, the other would not.

Class probability means, that we know nothing about an individual outcome, but we know everything about a whole class of events, and are certain about the future. In a lottery, for example, we know how many tickets are in total and how many will be drawn. But that does not say at all, if a particular ticket or tickets will win, and buying more tickets does not increase the chance of winning. An instance of class probability is called risk. It is possible to insure against risk, because the behavior of a class of events (or a reasonable subset of it) is well known.

Case probability means, that we know some of the factors which determine the outcome of a particular event; but there are other determining factors which we don’t know. The cases are individual, unique, and nonrepeatable, their result is uncertain. If in roulette a ball falls ten times on red in succession, the probability, that in the next turn will be the result black, is not greater than it was before. Football games cannot be predicted on the results of last games, nor can be presidential elections.

Sometimes transactions that have a total negative effect on society take place because the negative is ‘external’ to those doing the transacting in that the cost is largely borne by someone else now or in the future. This is the problem of dealing with climate change.

Negative externalities, or the ‘tragedy of the commons’ is a failure not of ‘capitalism’, rather it is a failure of ‘property rights’. Property rights can only be enforced through the ‘law’ which has been monopolised by the ‘State’. The tragedy of the commons is therefore a failure of ‘government’. The apologists for socialism always promulgate this lie.

Sometimes transactions that have a total positive effect on society do not take place because the positive is largely ‘external’ to those doing the transacting. This is the problem of ‘public goods’; items such as clean air and national defence that cannot be produced for private profit because once produced they can be enjoyed by everybody.

Simply nonsense. First, clean air, assuming pollution, should be included under the ‘tragedy of the commons’ as it is a ‘negative externality’. Public goods deal with ‘positive externalities’ that would not be provided due to the ‘free rider’ problem. National defence is always put forward as the ultimate ‘free rider’ problem. Government as a monopoly can only ‘grow’ larger and more powerful through acquiring more territory and population to exploit through theft of property. Capitalism promotes competition, the very anti-thesis of monopoly. Government is the prime institution that promotes aggression and war, which is clearly highlighted throughout history. The larger ‘governments’ have become, the larger and more destructive the wars or potential wars have become.

Thus government promote this idea that they protect us. Nothing really could be further from the truth. It is not us that they seek to protect, rather it is their area and population monopoly that they seek to protect from other governments that are seeking to eliminate ‘market competition’ in monopoly coercion.

Free markets promote free entry and competition. This limits the size of dominant firms and their market power. Without government, areas would return to much smaller areas that are governed through the free market with regards to law and law enforcement, city states. City states would, even if they required a military, would have a much smaller and less powerful military, which would limit military actions. Even should military actions take place, the involvement and duration must be lesser.

Thus the whole myth of government providing protection is a giant propaganda exercise, reinforced by technocrats and apologists who draw their living from the government depredations upon the producers in society.

Capitalism’s most problematic assumptions include:

1) All individuals affected by the outcome of a transaction have a say in that transaction;

This is the argument of ‘negative externalities’ or ‘tragedy of the commons’ which is as already shown, a fallacy.

2) The transacting individual has the necessary amount of information to make the best decision for him or herself;

No individual will have ‘all’ the necessary information, or even if in possession of the information, necessarily draw the correct conclusions therefrom. This is not a failure of ‘capitalism’ this is a failure of ‘humanity’.

3) The transacting individual knows the future;

Again, hardly a failure of capitalism, more a failure of ‘humanity’.

4) Individuals access to and power in the market depends entirely on the value of the skills and resources they bring to the market and nothing else;

True. As it should be. Government intervention via subsidies, tariffs, taxes, regulations, etc. distort the free market and directly lead to inefficiencies in producing societies optimal wealth, thus violating ‘political economy theory’. Second all the ‘interventions’ violate ‘ethics’ as they are theft and in violation of ‘property rights’, thus violate ‘political theory, theory’. On both measures, government is a failure.

5) The ‘logic’ of money doesn’t interfere with the ‘logic’ of market exchange.

Whatever that means?

Economists earn their money by analysing these ?market failures’ and devising corrective taxes and regulations, so perhaps it is less than surprising that most of them are unwilling to propose more radical reformation of such a flawed system.

Time to differentiate ‘economists’. There are technocrat apologist economists, those that dip their beak in the government trough, or seek to, those who have sold their souls, and there are ‘economists’ who espouse the ‘truth’, who are not, and do not seek government positions for power or pay.

The intellectual justification of this unwillingness is primarily contained within two standard conventions of economics. The first is the use of a so-called ‘representative agent’ that replaces the multitude of interactions between market participants with a single individual who may be both consumer and producer, may be infinitely lived and may well have perfect knowledge and foresight. The second is the so-called ‘neutrality’ of money (and frequently the complete absence of it) in economists’ models.

Both concepts being total nonsense. The rational agent, economic man having been demonstrated to be just so much hogwash by numerous writers on economics. The neutrality of money again has been refuted via the correct Misean ‘Theory of Money’.

The gap between the real world of markets and the economists’ world of the self-contained representative agent should be obvious – the real uncertainties and complexities in the meshing of human behaviours, incentives and use and abuse of natural resources are simply glossed over and ignored.

Correct.

The gap between a world with and without money, beyond that simply of convenience, is perhaps less obvious. Standard economic theory has little time for analysing how money acquires and keeps value. Money just arrives from outside the world of humans and real goods and is valued.

‘Standard economic theory’ is then fallacious and should be discarded as quickly as possible. The ‘Regression Theorem of Money’ describes how money first acquired value. ‘Time preference’ defines how money values fluctuate and why. This is in relation to a commodity money, that isn’t continually debased via government theft, although it will also explain the ‘value’ of a constantly depreciating money. ‘Standard economic’ theory is no ‘theory’ at all. A theory to be valid must fulfill ‘universality’ which is ‘true for all times and places’.

No source of this money is identifiable. If there is more of it compared to goods available for transactions then prices will rise across the board (including wages); if there is less of it compared to goods available for transactions then prices will fall across the board. No other effects are allowed.

The superficiality of this analysis lends itself to convenience, rather than any penetrating insights.

The real features of money in a modern economy are rather different. It does have identifiable sources; either a government-backed central bank or licensed commercial banks.

Again, only a version and distortion of the truth. Fiat money is a shadow of commodity money, designed to serve the holder of the monopoly, not the free market of exchanges. The very function and purpose of money is distorted and rendered highly inefficient through the use of ‘fiat’ money.

Since money is a claim on real goods and resources these institutions can only give value to money by ‘capturing’ goods and resources on which these claims can be exercised. The processes by which these goods and resources are captured either by the state on behalf of the central bank, or by the commercial banks, are critical to economic outcomes.

Replace the word ‘capture’ with ‘expropriate’ and you move closer to the truth and accuracy. When you have ‘government’ engaging in theft, and legitimising ‘theft’ for the banking system, is it any wonder that problems develop? Again, this is not a failure of ‘capitalism’ this is a failure of ‘government’.

These processes are triangular transactions between the issuers of money, its recipients and the holders of the goods or resources to be ‘captured’. These transactions are prone to similar failures as ordinary goods transactions and so add a further distance between the economists’ economy and the real world economy. Moreover, money transactions often produce total anonymity between the producers and ultimate users of goods, magnifying any information deficits. In addition, because the total ‘quantity of money’ is neither easy to ascertain nor fixed it is difficult to grasp how much any particular quantity of money relates to the total goods upon which its claim can be exercised. This tends to veil issues of market access and power.

The constant ‘money creation’ of government, the theft of property by government through this process of money creation leads to the ‘market failures’, which are of course not market failures at all, they are failure of the legal system, under the monopoly control of government, to prosecute the systemic and systematic theft of ‘property rights’ by government exercised against their populations, who are virtually imprisoned.

While a look at where your taxes went:

The role of markets and money in ‘oiling the wheels of commerce’, and so expanding economic activity and fostering new goods and technologies, is unquestioned.

Which is ‘free market capitalism’. Government, as a parasite, can only feed off of the production of the free market. Every government action is a negative to wealth production. Every government action is coercive.

They simply allow more permutations of resources and skills. The question frequently left unanswered is how the permutations that result are selected. Which technologies are used to mass-produce which goods?

Time preference exercised through a pricing system that allows cardinal accounting in terms of profit and loss.

In a market economy there are two criteria: demand (in terms of monetary sales) and profit (monetary sales revenue exceeding production costs). The ‘logic’ of capitalism equates these to the true expression of choice of consumers.

Also known as ‘demonstrated preference’.

With fully-informed consumers demand represents a true choice from all available possibilities. Demand brings revenue to producers. When revenue exceeds costs, there is a surplus of money for the producer to expand production. The fully-informed consumer chooses the price he is willing to pay to allow this expansion to take place. So all producer activity is driven by consumer choice with all alternatives open to view. No non-market intervention could produce a better outcome.

Correct as far as this analysis goes. There is more, but for the moment this will suffice.

But as we have made clear above, capitalism’s logic is based on many assumptions that simply cannot be true. No individual knows all the possibilities that are open to him or to the producer, or all the effects of their decisions. Not all those possibilities have even been articulated before choices are made. Few consumption or production decisions are completely free of consequences for those not involved in making them. Money and the price mechanism speed up the way choices are made while narrowing the information available to the consumer about the producer, to the producer about the consumer, and to everyone else about either. What is ‘external’ is actually made invisible. Shifts in distribution and economic power are disguised as streams of monetary numbers. Demand may be a result of informational errors, so that excess revenue is not pre-allocated to consumer-demanded production expansion and profits then become free claims for producers.

Not even close. Your ‘objections’ have already been refuted.

As soon as free claims are in the hands of producers (including the producers of money, banks), the logic of capitalism breaks down further, because markets are not free-floating but are embedded in a complex social and political network of information, norms and regulation.

This again conflates the issues between economics, which does not attach ‘value judgments’ to the recommendations, and politics, which have an ‘ethical’ component attached: fairness, justice, egalitarianism, etc, which are all about ‘value judgments’.

Once claims received are no longer pre-committed to consumer-driven uses, the producer is open to find ways of manipulating his market through its contacts with the social network. Advertising, sponsorship, lobbying and more underhand techniques now become available. And this is before considering the possibilities free claims give to producers for market manipulation, such as temporary under-pricing to damage competitors. As Glasman implies – this sort of freedom is opposed to the common-sense understanding of ‘liberty’ for the individual.

Essentially describing the rise of ‘Corporatism’ which is the buying of political power or support. Government being the coercive agent via the legal system can be ‘purchased’ via individual politicians to support corporate subsidies/interventions that benefit the corporation at the expense of the ‘free market’. This found it’s modern day origins in the 1890’s with the Houses of Morgan & Rockefeller, who purchased wholesale Presidents on down.

Today the most egregious violators are the banking system that are de facto partners of government in the monopoly of money creation. The Federal Reserve is the backstop to the fractional reserve system of money creation for the banking system, and through a monetization of government debt on fiscal matters.

‘Corporatism’ it must be said is categorically not capitalism. Capitalism promotes competition on the free market. Corporatism seeks to limit competition and thus pervert the free market. To end ‘corporatism’ you simply end government.

Most of these problems are well known to economists, but there is a tendency to see them as fixable by technical ‘patches’ of taxation and regulation by the state. But this ‘fixability’ is limited by two crucial considerations. Firstly, actual (as usually opposed to theoretical) taxation and regulation are expensive to administer.

Taxation is also theft, highly unpopular, destructive to wealth creation, creative of dependency to the welfare state and wasteful of resources via misallocation.

They require monitoring of the activities of producers. Full monitoring of those whose own interests are aligned with escaping monitoring may require resources equivalent to the value of the escape. Secondly, when the holding of free claims gives additional access to the political and social network, powerful levers become available to limit the application of taxation and regulation. Anything other then a complete fix always allows the producer to continually add to his war-chest in the battle against the ‘fixers’. Thanks to the positive feedback effect of free claims, he’s always winning, just winning more or less slowly. Justice and fairness move even further out of reach however much they may be willed politically.

A whole paragraph that details the amount of effort and resources that must be assigned to the business of ‘coercion’. What a sad pathetic joke.

‘Commodification’ is an ugly enough word, and probably isn’t a great help in winning political arguments these days, but if we translate it as being what happens when we give money prices more weight in decision-making than they can bear, then we are on the right track.

Rather than to ‘government’ who always make the right decision!

The early Labour institutions of co-operatives, mutuals and trade unions arose from this recognition, and sought to bring people together to discuss and plan action in ways that utilise the full panoply of human communication: intellectual, emotional and empathic. These institutions mirror humanity – they can be messy, dysfunctional and inefficient – but they cannot ignore huge swathes of people and their concerns simply because these cannot easily be fitted easily into price vectors to be processed by capitalism’s steely ‘logic’.

Trade Unions and the like, violate property rights. Trade Unions rely largely upon government legislation, thus once again distort the free market. Unions are ‘restrictive’ and actively seek to reduce employment supply, thus securing a higher ‘price’ for labour.

I think it is in this sense that a return to ‘tradition’ is required – a return to real human beings coming face to face with our common problems (even when they desire different outcomes from those problems).

What ‘tradition’ might that be? Feudalism, slavery? Just how far back, and how traditional are we going to get?

Here communication is not mediated through technology of any sort, it just exists at its most basic level. Without this possibility in all spheres of life Glasman is right that pluralism and diversity – while goods in themselves, much like markets and money – can accelerate the undermining of solidarity, when they erode old understandings between people without allowing new ones to develop.

I have no idea what is actually being said here.

Glasman dislikes abstraction, and feels it has led the labour movement astray. In the sense that the abstractions of money and market signals have been exalted against more complex human interaction, he is correct.

‘Abstraction’ is theory. There are any number of competing pseudo-theories in economics, most are simply nonsense. Unfortunately most of these pseudo-theories are the mainstream ‘economic models’ that are currently employed, more as apologist models to hide the truth than to actually achieve anything.

But abstractions in politics are powerful – ‘free markets’, ‘economic growth’, the ‘nanny state’ and ‘fairness’ will not be pushed aside without a fight – so what is our countering abstraction when challenged? I would suggest that it should be a new understanding of equality – neither the dull impossibility of ‘equality of outcome’ nor the impotent posturing of ‘equality of opportunity’ – but ‘equality of voice’, where all who have a stake in the outcome of any decision, whether economic or political, have the right to state their interest and case in some common forum.

This isn’t really economics at all. This is ‘ethical’ in nature. That the questions are ethical moves the abstract theoretical discussion to a different place altogether. Economics isn’t really concerned with ‘value’ as in ‘ethical’ pronouncements at all; economics answers the question, will the means employed achieve the ends aimed at, in the most efficient manner?

The link of this ‘abstract’ concept with the co-op, the mutual and the union should be obvious when these institutions are compared with big business and even ‘modernised’ (read marketised) public services. How exactly this equality of voice is to be put into effect in these latter spheres in a globalised and consumerist world is the great challenge for the labour movement. We must not shirk it if we are to have any right to claim its legacy.

I agree that the question is an important one. I just have serious doubts that politicians have even the vaguest clue. Assuming that they did, would they then do the ‘honorable’ thing and disband government? I seriously doubt it.

 

Occupy Wall St.

Increasingly the movement is gaining media coverage. So what’s it all about really?

The standard portrayal of the Wall Street protesters goes something like this: Ragtag group of unemployed young adults, venting often incoherent but overall legitimate populist outrage about economic inequality. But go down to the movement’s headquarters, as I did this past weekend, and you see something far different.

It’s not just that knowledge of their “oppressors” — the evil bankers — is pretty thin, or that many of them are clearly college kids with nothing better to do than embrace the radical chic of “a cause.” I found a unifying and increasingly coherent ideology emerging among the protesters, which at its core has less to do with the evils of the banking business and more about the evils of capitalism — and the need for a socialist revolution.

It’s not an overstatement to describe Zuccotti Park as New York’s Marxist epicenter. Flags with the iconic face of the Marxist revolutionary Che Guevara are everywhere; the only American flag I saw was hanging upside down. The “occupiers” openly refer to each other as “comrade,” and just about every piece of literature on offer (free or for sale) advocated socialism in the Marxist tradition as a cure-all for the inequalities of the American economic system.

From where did this ideology spring?

A Frenchman. Who is a Socialist. Socialism historically has always relied upon, and capitalised upon social unrest: this led to Communism and National Socialism or Nazism in the 1920’s and directly to WWII.

For Hessel, if politicians and bureaucrats had more power than they currently have, the system would be less corrupt.

Bastiat thought rather that government was the source of the problem;

I contend that this deification of Government has been in past times, and will be hereafter, a fertile source of calamities and revolutions. There is the public on one side, Government on the other, considered as two distinct beings; the latter bound to bestow upon the former, and the former having the right to claim from the latter, all imaginable human benefits.

The form of government that we have currently, Democratic Republics, arose from the ashes of WWI which was essentially the war of ideologies, that of Democratic Republics against that of ‘Monarchy’ of which the Austrian-Hungarian Empire was the most prominent and powerful. President Wilson took America into WWI to essentially crush the ‘Monarchy’ model.

Government grew through pandering to the electorate. Government sought popularity and a mandate to govern from the majority of the people through the promise of removing ‘self-reliance’ and replacing it with the promise of ‘rights for all’ or the Rousseauan ‘Social Contract.’ This is of course the ‘Welfare State.’ It is the payment for this ‘Welfare State’ that has brought the Western economies to their knees with ever expanding debt.

Government cannot support the massive spending programs that the Welfare State requires and entails through taxation. Taxation is coerced and always unpopular with the masses, thus debt is entailed and contracted to pay for the loss of self-reliance to the right-to-not work.

Government as a monopoly can only grow through expansion. Expansion is the taking control of another economic host currently controlled by a different monopolistic parasite. To do so means war. From the Middle-Ages and the myriad of small Principalities and Kingdoms, this inexorable concentration of monopoly power to tax and rule has progressed, and tax areas have grown ever larger as the more powerful absorb the smaller, weaker ones.

Bretton Woods with the dollar placed at the forefront, the world’s ‘Reserve Currency’ placed the US at the top of the tree, earned through the conquest of Europe in WWII. American hegemony could now be openly pursued through monetary control rather than simply by force of arms. Military dominance however would always remain, brandished periodically to remind any would be recalcitrants that US military power stood behind edicts issued from Washington.

The irony of the current ‘Occupy Wall St’ is this: the protesters, largely due to the monopoly hold that government has exerted upon the educational system, are entirely ignorant of the history and purpose of government. Through embracing the call of Hessel, they embrace the very monster, ‘Leviathan’ that put them here in the first place.

The confusion with government [Socialism] and Capitalism stems from the confusion with Capitalism and ‘Corporatism’ which are conflated. Corporatism took hold in the the days of ‘Morgan & Rockefeller’ whose corporate empires came to control government. Their control and influence persist to this day. Corporatism is not Capitalism, it is rather a smoke-screen to hide Socialism behind.

 

The ‘China’ connundrum

A long post from Quint Tatro in relation to China which will crash at some point.

I recently returned from one of the most memorable trips I have ever taken, spending over one week in China with the Lexington Chamber of Commerce. From start to finish, this Chinese Government subsidized visit was jam packed with adventure, as we toured four cities, multiple-industries and countless historic locations. The ancient history alone is enough to impress anyone however I returned home with a slightly variant view of my travels and a fascinating outlook on where this communist country may be headed into the future.

As interesting as the trip may have been, and as informing, just how much access did you really get? Communist governments are not exactly known for being transparent. So if your eyes were opened by this, in reality, how much worse might it actually be?

Unless you’ve been living under a rock you are well aware of the strength the Chinese economy has shown over the last several decades primarily due to America’s insatiable demand for cheap goods produced in China and exported to the US.

Also to Europe and Eastern Europe and Australia/NZ. The US however would be a major market for sure, simply look at US Treasury paper held by the Chinese.

Of course this is a result of countless US companies relocating their manufacturing plants to a country where the minimum wage has recently been raised to approximately $200 a month, a pale comparison to the $1,256.67* monthly minimum wage in the United States.

The relocation of capital has in part been driven by wages, but also by environmental costs. Chinese pollution is a disaster, largely due to their production processes having no costs attached to them. The result? Environmental destruction on a huge scale.

The economic life-cycle of all of this has really been quite simple. Over the last several years competition for profits have increased in the United States substantially, as consumer appetites for goods have risen considerably. With much higher employment costs due to such things as pension obligations, health care, insurance and a deteriorating work ethic, US companies have had to look elsewhere to increase margins.

Regulation, as detailed, will always raise ‘costs’. In this manner a ‘regulatory’ economy will lower productivity, thus lowering wealth creation. When capital can be invested in low regulation areas, the costs are reduced, allowing higher productivity, with increased employment.

Furthermore, as our ‘want it all now’ attitude has exploded, no longer are we a society that possesses one family car but rather two or three. Each room in the American house possesses a flat screen television and the gadget demand has reached an unbelievable level.

It is the nature of the human condition to wish to substitute perceived ‘better’ conditions for less favorable ones. Values change. Up to this point the three cars, large house and gadgets were valued [as present value goods] more highly than future value goods/services. That could well, and in point of fact may be in a transition phase to the opposite.

Of course there are two sides of every story and we cannot forget that over the years due to this manufacturing transition, product prices have come down considerably allowing most Americans to improve their standard of living while saving money.

Which, unfortunately, has been reduced through the constant money creation by government resulting in an inflationary loss of real wealth creation.

Rarely does a family experiencing hard times venture to the local thrift store when they can buy similar priced, new products at their local WalMart.

And why would they?

Of course this has come at the expense of US jobs, and foreign substandard labor practices but the lower prices have been enjoyed by most, whether they realize it or not.

Of course it has. The damage from the ‘cheapness’ to the environment has also been exported. It has also driven an innovation cycle that is now regaining US competitiveness. Some of the newer areas, energy, are still nascent, but they are coming on. Allocation of capital to these industries has been damaged via the mis-allocation of capital by the banking system and government intervention within the markets. It remains to be seen whether government will pull-back and admit defeat in their impotence with regard to employment issues in the US.

This economic phenomenon is not isolated to the United States but has spread to other countries all throughout the world. Despite what we would view as a considerable low wage, it has also served to create a middle class in China that never existed before in this massively populated, incredibly poor country.

True.

Once the economic wheels began spinning due to foreign involvement, the engine started to roar as Chinese families who previously had no means of earning money outside of local farming, now earn a much higher wage for their time and effort. This too created a Chinese demand for goods and services in their own country resulting in what would rival our US Industrial Revolution among the 1.3 Billion people of China.

True.

For most of you, this economic history lesson is understood, however there are a few nuances still worth noting. First and most importantly is that China remains a communist country. This must not be forgotten as the economic growth has not come due to a democratic dream but rather a well concocted plan, executed with finite precision from a small minority of Communist leaders.

There is little to no difference between Communism and Democracy. Once you have ‘government’ you have a problem. The difference is in one of control. Communism has a much closer to 100% control of power than democracies.

Most major corporations or profit centers in China are government owned and are therefore the largest employer by far. While this new boom has allowed many to prosper in China, we cannot forget that the majority of gains have been captured by the Communist leadership, with a vested interest in keeping the machine running at full speed.

The closer you come to 100% ownership of the productive assets, the closer you come to the inability to apply economic calculation. Add to that an inflation, and massive losses will eventually accrue.

The other item worth noting and in my opinion by far the most important is the fact that the Chinese currency, the Yuan (pronounced “UN” spoken rapidly and meshed together unlike all media correspondents who pronounce it “YOUWAN”) is fixed or ‘pegged’ to the US Dollar.

Which means as a base, Chinese inflation mirrors US inflation.

You see most currencies in the world move up or down against other currencies in relation to their earnings strength against whatever country it is measured against. Commonly referred to as ‘floating’ a currency will always be quoted against another currency, for example the US Dollar vs. the Euro or US Dollar vs. the Yen. Unfortunately, we have a vastly misinformed American population when it comes to fiat currencies (another fancy name for paper money) which mandates I head down this road for just a moment.

It’s not limited to the man in the street. The confusion permeates through all strata of society and intellectual levels. The vast ‘profession’ of economists are hopelessly confused on the issue of ‘money’.

To better explain let me use an example that has always been helpful for me. A country’s currency can be equated with a company’s stock price,

And of course this is incorrect. A ‘stock price’ is quoted in money terms, but represents a ‘share’ of ownership of the productive assets in the business. A ‘share’ of fiat currency represents ‘purchasing power’ or a medium of exchange for goods and services. One [money] is present value goods, one [productive assets] is future value goods. The two are very, very different.

with the difference being that a currency is not measured on its own, like we would view a stock quote. For example, while I may say that Apple stock is currently trading at $369.80 or maybe IBM is trading for $182.39, we cannot do the same for currencies. Stating a stock quote gives us the amount of money it would take to purchase one share of company stock. Currency however is always quoted against another currency.

The individual is weighing the value of ‘present value’ against the value of ‘future value when looking at ‘money’ relative to ‘stock’. When comparing money to money, we are trying to value ‘present value’ against ‘present value’.

So for example, it drives me absolutely nuts when I hear a major media pundit talk about the significant decline in the US Dollar. These rants are typically used to bash the US Government with a nostalgic view of the fact that a dollar today just doesn’t go as far as it used to. While I understand the basis of the argument, the question that always must be asked after a dollar bashing statement is “against what currency?” For example, is the Dollar in a death spiral against the Zimbabwe Dollar or Mexican Peso? Of course not. More often than not, the dollar is most commonly quoted against the Euro which has in fact been on a multi-year decline until recently.

Clearly the author is confused. When major media ‘rant’ against the loss in purchasing power of the US dollar, they are ‘ranting’ against its loss of purchasing power against real goods and services, not against another fiat currency. All fiat currencies are money monopolies of their respective governments, save the Euro, which is an interesting experiment going horribly wrong very, very quickly. As such, all governments have inflated. Thus all fiat currencies have lost purchasing power vis-a-vis goods and services.

The reason for this common quote or ‘pair’ as it is known in the investing world is because the United States has the largest Gross Domestic Product in the world, followed by the Euro Zone or Euro, which is a combination of countries such as Germany, Italy, Spain and Greece, all making headlines recently for their growing debt issues.

But you can get a quote in any ‘pair’ that you wish. Of course in small currencies, the ‘spread’ will likely be significant.

Another topic for another day is the question of which would you prefer to own for the next several years knowing what is happening in Europe; the Euro or the US Dollar?

You have to own the one that operates in the geographical location in which you live. To have ownership for several years in a speculative sense implies that you are ‘investing’. In that case you want to sell your present value goods for future value goods, assuming that the discount to the future value returns a value that exceeds the present value + inflation.

Again, we’ll revisit this later so file it away for another time. Unlike a stock quote that can be reviewed against a company’s historical trading level to determine the general health of the company, for example Eastman Kodak trading at $1.39 after reaching a 1997 high of $92.31 would be viewed as a very ill company,

While this is true on one level, it is so wrong on many other levels. Using the Eastman Kodak example: the $92.31 to $1.39 price plotted against time is an empirical study that tells where Kodak was. It does not necessarily predict where Kodak will be in a future time/price series.

a currency quoted in relation to another currency can be used as a general way to determine the health of one country verse another. If one country’s currency has been rising against another, we could surmise that the economic health of the former is growing in relation to the other and vice versa.

Simply a superficial analysis. The purchasing power of a fiat currency vis-a-vis another fiat currency reflects the exchange value of one fiat currency against another. That may, or may not, have anything to do with the health on a relative basis of the two economies. The example of China vis-a-vis the dollar is case in point; where the Yuan is pegged to the dollar, there is no ‘free floating exchange’ of fiat currencies. Further currency flows are many times a function of interest rates. The current ‘carry trade’ is an ongoing example of this, and has seriously distorted the value of fiat vs fiat analysis with regard to economic health.

So, at this point one may ask then what is the relationship of the US Dollar and the Chinese Yuan? Well, interestingly enough, several years ago the Chinese made the incredible and brilliant decision to fix or ‘peg’ their currency to the US dollar. One US dollar currently buys 6.3 Yuan however it is a ratio that has remained relatively fixed for quite some time as they will move in relation to one another. Should the US dollar decline against other currencies such as the Euro, so to will the Yuan. Its hard not to believe the Chinese saw the writing on the wall with where the US was headed and decided that rather than allow their currency to gradually appreciate as their economy improved, they could hop a ride down with the US Dollar. But isn’t a declining currency a bad thing?

Also known as ‘Mercantilism’, and now, as in the past, doomed to failure. Mercantilism in the past emphasised tariffs as the barrier to imports, making them less competitive. Currency manipulation serves exactly the same purpose, making imports relatively expensive against the home currency.

It’s at this point currency movements can get very confusing so I am going to use some brush strokes on why currency values are so important, outside the normal ‘scorecard’ of health. Currency fluctuation boils down to imports and exports and can be summarized through two arguments. If a country’s currency is stronger than another it makes the first country’s goods more competitive within the second country. For example if the United States Dollar strengthened against the Yuan (remember this is not possible at present due to being pegged) then US Goods would become more affordable to the Chinese in their country. The other side of this is that foreign goods in our country would become more costly for us. In addition should the US dollar rise, US corporate profits would decline as money is brought back into the US from foreign countries. Again, this can be very confusing so at this point don’t get caught up in the details here and focus on the big picture. The thing to remember is that as the US Dollar increases in value against another country, it makes our products cheaper in that country, while making that country’s products more expensive in the US.

The point of importance that has been overlooked is that in an economy with high specialization and technology, that typically involves longer production processes, this loss of purchasing power actually equates with capital consumption over time. This is highly damaging to an economy over time.

This is precisely President Obama’s argument and what I believe to be the most important piece of news going on at this very moment as the US Congress makes a decision on whether or not to pressure the Chinese to unpeg their Yuan. The President’s argument is that by keeping the Yuan artificially low, it is hindering our US manufacturing and international sales.

Obama and Congress are clueless. Capital is the most important factor in productivity. Productivity results in increased supply. Increased supply lowers the unit selling price, making the product more competitive. Congress, through enabling massive money creation has destroyed the efficient allocation of capital, and thus destroyed productivity. China with its lack of pricing for pollution, other regulatory impairments and taxes, thus has become increasingly competitive in the low technology/innovation industries, where America should be trying to exit. Due to the endless interventions into the free market American government has made itself the biggest handicap to American competitiveness.

The Presidents political opposition makes the argument that if the President is successful in urging the unpeg Yuan, Chinese goods would be more expensive and thus hurt our economy even further.

Fiat currencies distort all economic decisions. The key is to return to a commodity money [gold] and remove the money monopoly from government entirely. Reduce their ability to intervene in the free market on an absolute basis.

Based on what each side believes would happen to the Chinese Yuan if it were unpegged from the US Dollar, the economic principals make complete sense however after spending time in the country and studying the situation, I believe them both to be wrong in their assumption as to the direct of the Yuan should it no longer be fixed to the Yuan. Let me explain.

Ok.

China has economic problems and when you visit the country, these problems can be seen by the naked eye. Everywhere you look, in every major city the casual spectator will notice miles of construction skyline. The buildings are amazing as high-rise after high-rise is being built however the interesting thing is, they are all empty. Everywhere you look there is incredible construction which sits vacant, dark and downright creepy. In certain parts it is not just empty buildings but entire cities dubbed ‘Ghost Cities” which go heavily unoccupied. Despite this strange phenomenon builders keep building and high-rises keep rising. But why? If the demand is not there, why would a country continue to build and build. Well, its really quite simple. The primary construction companies which are all communist government owned are building to keep people working. They’re keeping people working to keep people fed. They’re keeping people fed so they can stay in power. You see, it goes back to the original point which we must not forget about China. It remains a communist country and therefore has a central power source which has a vested interest in keeping its 1.3Billion people satisfied. One cannot forget that websites like Facebook are blocked by the government and everywhere we went as American business tourists, we were treated with unbelievable courtesy seeing all the best China has to offer. Yet under the surface a trained eye can still recognized a model that is simply unsustainable.

Government, the minority, must keep the majority pacified and compliant to retain power. This fact was observed by David Hume some 200yrs ago. It seems to be a lesson that keeps needing to be relearned, in large part due to the endless propaganda churned out via governmental technocrats and apologists.

The data points are mixed on Chinese growth however these are Chinese produced data points which I will view with a skeptic eye. Since we cannot determine their currency ‘score,’ the real measure of their health must be examined through the global price of raw materials they are in need of such as steel, copper and oil, all of which have plummeted in recent months. With such a slow down in raw material prices indicating a lack of significant true demand, how is it possible then for the government to continue this massive subsidized jobs program, the equivalent of an ongoing US stimulus package? Well, it is my opinion that the Chinese government is printing money at a far more rapid pace than even the United States or Europe. If printing Chinese money can go undetected due to their currency being fixed to the United States, why would they not just keep on printing, paying and building as long s they can? My view is that China is simply printing the money to pay what it needs to in order to keep the Chinese population satisfied. As long as they keep the population satisfied there will never be a hint of a any revolution as we have seen in other parts of the world within the last year. It my opinion as long as the Chinese youth can keep enjoying their quasi-western freedoms, there is no need for them to revolt however the minute this is put into question, they will take to the streets as they have in Libya, Egypt and Syria.

Agreed. China will, like the US in the late 1920’s hit that massive bust. It is inevitable. The question is of timing only.

So how is all of this possible? Well, it’s possible because the world cannot measure the real health of the Chinese due to their currency being fixed to the US Dollar. The Chinese could print as much currency as they so chose without it ever hitting the radar of the world.

You can take its temperature through the tracking of money and credit creation. It is a little more difficult with China, they definitely are not as transparent as the US who obfuscate their data somewhat.

The only way we will know this is if the Chinese Yuan is allowed to float on its own and receive a true grade from the world. If my assumptions are correct, the idea that the Yuan would strengthen against the US once unpegged is vastly incorrect and rather a floating Yuan would plummet thus revealing the true identity of the Communist agenda.

First let’s analyse exactly how the Chinese ‘peg’ against the dollar. An American firm, WalMart, purchases Chinese manufactured goods. WalMart exchanges dollars for the Yuan value of the goods purchased, and pays the suppliers. The supplying Chinese firms hold Yuan. In the currency markets the Yuan strengthens: WalMart sells dollars and buys Yuan.

The Chinese government sees the purchase by WalMart of Yuan totaling $1 billion US. China ‘prints’ the equivalent 6 billion Yuan and buys $1 billion US. The term for this is ‘sterilization’. The Yuan is pegged to the dollar. Thus if US imports of Chinese goods exceed the exports to China, the trade imbalance creates a necessity to ‘print’ Yuan. The ‘dollars’ that China buys are ‘stored’ or warehoused in US Treasury Bonds. This warehousing has the effect of lowering US interest rates across the maturities purchased.

If the Yuan were ‘un-pegged’ then the outcome would depend on trade flows. Trade flows would depend on ‘purchasing power’ or exchange ratios, a circular argument. Purchasing power would largely be decided by interest rates. As interest rates are being set by the Central Banks across all maturities currently, even the interest rate, which should reflect the aggregate demand for present goods against future goods, is distorted by government intervention. The only way to end the interventions is to end governments hold on the money monopoly.

The Chinese are printing at the expense of the United States and are holding us hostage with a fictitious belief they have a strong economy and the fear that a rising Yuan would cripple our already unstable domestic economy. We all know that China owns trillions of US debt. What if China simply printed money to buy this debt and thus has made exorbitant investments in the US under the guise of a strong economy when in reality it is simply a strong printing press? This would truly be the ultimate Trojan horse and the most incredible method to ‘capture’ our interests history has ever seen.

Which is exactly what has happened.

Late Friday night I enjoyed a beverage in Shanghai’s Bund 18, overlooking the amazingly well lit financial district. I watched young people of all walks of life enjoying a heavily westernized experience. They danced to American music,enjoyed their alcohol and sent text messages to their friends from their iPhones. The energy was alive and I could tell that this taste for real freedom was not going to go quietly into the night. I can’t help but wonder what will happen should the country not be able to keep the government employment going. These youth will not go back to the way it was decades before. The only question is how long can the ploy continue? If the US government doesn’t stand strong, pressuring the Chinese to unpeg their currency, it could go on for a very long time at the continued expense of US Jobs and US manufacturing.

There is no question the Chinese have increased their domination over the last several years however now I know just how strategic they’ve been and downright amazed we’ve let it go on for so long.

Like all booms fueled by fiat money and credit creation nonsense, it is doomed to end in a massive bust.

 

Elizabeth Warren’s speech excerpt

There is nobody in this country who got rich on his own. Nobody. You built a factory out there? Good for you.

This is the theory of the division of labour. More goods and services can be produced through using specialisation and stages of production, adding comparative advantage to this, than the amount of goods and services that can be produced by an individual seeking to produce the entire good or service himself.

Thus the division of labour [under comparative advantage] has resulted in the wealth and living standards of all those who participate in the division of labour, free trade under the indirect exchange method using money, to rise. The initial statement is therefore true.

But I want to be clear: you moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did.

The argument only indirectly applies to the initial argument. The author assigns causation to the argument: because of roads, education, safety, provided through government taxation and provision of these goods and services, can the division of labour take place.

This argument for causation is incorrect. Second, all of the above services can be provided by the free market, and will be provided by the free market if their provision is demanded by consumers. They [the goods & services provided by government] will also be provided under conditions of competition, and not a monopoly of coercion, thus lowering their costs, both in money terms and psychic terms.

Now look, you built a factory and it turned into something terrific, or a great idea? God bless. Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along.

The ‘Social Contract’ is nothing more than an apologist argument for government taxation. If the free market can provide all the goods and services required by society, at lower costs, without coercion, or the violation of property rights, then there is simply no basis for government, and certainly none for taxation.

With private property rights, the passing forward of capital is allowed for. The capital is gifted, sold or passed through inheritance to the next private owner who takes possession of those property rights and any value associated with it. The new owners will have the self-interest to either continue to maintain or add value to that capital, or dispose of it to some individual who will. There is no requirement for government to assume any responsibility in this process at all.

Government taxation is purely and simply redistribution, with government pocketing the ‘handling charge’ in the redistribution process. Redistribution takes resources away from proven producers, and allocates them in part to proven deadbeats, or non-productive areas of the economy. In this way stagnation can only follow.

 

Where did the money go? part [iv]

Extrapolating from the Model

Let us now extrapolate how we might expect our three groups (considered separately for the sake of clarity) to react to a particular change in economic fundamentals. Economics is primarily about the distribution of ‘scarce’ resources (human and material) between individuals. The total amount of material and human resources to which we have access at any point in time is finite and cannot be altered by human action. Equally the fundamental characteristics of human beings do not change much over time. Yet the means by which resources are allocated to particular outcomes and between individuals is very much open to alteration by human action, indeed to an effectively infinite degree. Within our present economic system, usually described as ‘free-market capitalism’, how this is done depends on relative valuations of different resources and outcomes in money terms. So it would seem reasonable to look closely at the effect changes in money could have on our groups.

So just to reminds us of the model

And although I’m willing to play along with this model, let us actually remind ourselves what the model [data] is actually based on: it is simply based upon ‘diminishing marginal utility’, that is to say it’s not a model about production etc at all. To try and present it as such is nonsense.

With regard to the above, the only quibble that I have is that while the illiterate may call our system ‘free market capitalism’ it is a far cry from such. What we actually have is Socialism mixed with Corporatism, with some free market capitalism thrown into the mix.

Although money is the means of distribution and allocation and this is generally regarded as its primary purpose it has over time required the convention of value in itself, which in reality being nothing but paper and ink or numbers in a computer database, it does not have.

Money is a medium of exchange. When we had commodity money, the money had an exchange value on a commodity use, later, this use value was augmented by the use as ‘money’ value. Fiat ‘money’ has no use value other than its use as ‘money’.

Its ‘real’ value can never be greater than the sum of all available labour and materials and thus it can only have value if there are goods and services available to be exchanged for money.

True.

Yet because of its ‘convention’ value total perceived available wealth actually appears to be greater than this. And the amount of money an individual has access to will determine the way in which he or she values goods and services in terms of that money.

Here the ‘convention’ value would seem to be the use value as ‘money’.

The Perception of Wealth

One might show this relationship as one of under-valuation of real goods and services by the following expression:

%Undervaluation = Perceived Available Money Value (PAMV)/ PAMV + Perceived Available Labour and Materials Value (PALM)

where PAMV = the value an individual gives to all money he or she may have
access to directly, or indirectly through borrowing (taking into account the cost of such borrowing to him/her);

Which is simply saying: this is the subjective value of all money available to the individual, which reiterates the ‘diminishing marginal utility’ of money that we encountered earlier.

and PALM = the value in money terms an individual gives to all labour and materials he/she may have access to

Again, the subjective value in money terms, of goods of services, that can be exchanged against money.

The two definitions have however been arranged into a mathematical equation, which serves absolutely no purpose as far as I can ascertain…at all.

Let’s look at how this relationship affects the outlook of our different groups – Workers,

Consumers and Investors.
Workers, having little access to reserves of money, will generally have a low PAMV so they tend to give labour and materials a relatively high value.

This statement directly contradicts previous statements. We have agreed that the research provided, simply confirmed the ‘diminishing marginal utility’ of money. Thus the less money that you have, the more highly you will value each marginal unit. Therefore, the lower your money stock, the less you will value materials.

Labour is an entirely different concept altogether, and simply lumping it into this paragraph without any explanation or context seems odd to say the least. Suffice to say, the assertions made, are without merit.

They may work for low wages if it is fulfilling work or necessary for survival but may opt not to give their labour away if there are alternatives, legal or illegal.

They, like anyone, will ‘work’ when they value ‘work’ more highly than leisure on their ordinal value scale. Nothing more need be said. To posit alternatives, legal or illegal is simply indulging in idle speculation. It has no merit.

They will tend not to pay ‘over the odds’ unless persuaded to do so by effective marketing or advertising, or the creation of addiction, since this has a significant effect on their ability to purchase other items which can significantly improve their lives.

Here we see the contradiction made earlier. As holders of ‘low cash balances’ the marginal utility of marginal money units is high, thus the lower valuations assigned to goods/services that can be exchanged against this money. The above statement corrects the mistaken earlier interpretation.

Unfortunately, their relative lack of information, education and choice makes them more susceptible to advertising, marketing and manipulation.

Speculation. The educational level may be low, but then again, it may not be. In addition, even for the sake of argument, we accept that their educational level is low, this does not preclude ‘street smarts’ and a natural entrepreneurial spirit. Thus the statement makes invalid assumptions.