Thursday, October 31, 2013

Beware The Debt Monster

"As a very important source of strength and security, cherish public credit.  One method of preserving it is to use it as sparingly as possible."

George Washington (1732-1799)

The word "public" in Mr. Washington's day meant gubment and by credit he means borrowing or debt.

Under the Articles of Confederation, the Continental Congress and during the Revolutionary War the country had amassed huge debt by the time Washington was elected president.

The First Report On the Public Credit was issued by Alexander Hamilton.  Its purpose was to analyze the country's financial standing, set up a system to organize the federal debt and to arrange for public credit.  At that point the combined US debt, consisting of domestic, foreign and the states combined, added to a huge $77 million.  

Not getting bogged down in the details of how this was handled, the population at the beginning of the country stood at about 3.5 million.  Dividing that number into the federal debt would leave about $22 per person to pay it off.  A daily wage in those days was much less than $1.  The average hourly wage in 1790 was about 2 cents.  

The debt would also have worked out to about $6 million per state.

The debate on how to pay the debt centered on speculation as regards promissory notes (enriching only a certain class), which Hamilton referred to as "redemption," and a James Madison opposition, which he called "assumption."  Madison's idea was that the gubment should help shield the less powerful, agrarian interests that composed his constituency.  He wanted the IOUs that "battle-worn veterans of the war for independence" had been paid to be honored to allow them better opportunity toward capital development for their farms and plantations.

With the help of Jefferson, a dinner party was arranged between Hamilton and Madison, during which a major concession was made in the restructuring of Virginia's debt.  And Madison acquiesced.  Congress voted in favor or Hamilton's plan.  

Washington was in favor of Hamilton's plan insofar as it paid off the state and federal debts, established a tax system (excise and tariff) to help pay it off and establish a national bank.  He did not want to grow the federal debt.

What would Mr. Washington think about the country today?  

We have operated year after year without a budget, instead relying on "continuing resolutions," designed to hide what monies are spent on, and extended debt limits to "fund" the gubment.  And with this increased borrowing our gubment tells us that doing so does "not increase debt."  Well, okay.  But exactly how is that again?

As the debt has burgeoned interest rates have not.  What if, when interest rates increase, as they surely will, paying only the interest of the debt exceeds our financial ability to do so?  Personal savings is way down now, which has lead to a large decline in capital investment.  No capital investment means no economic growth.  No economic growth means, well, no economic growth.  And that at a time when there are those pressing for increased immigration and national "health" care as an added federal and state debt feature.

If we are borrowing to the point of the inability to pay, at the same time as obligations increase, and capital investment stagnates or continues to decline, what happens to the  
"strength and security" 
that Mr. Washington was pleading we preserve?  Are we stronger and more secure?  Or not?

Think carefully.

Saturday, October 19, 2013

In Economics, We Reap What We Sow

"The great blessing of private property, then, is that people can benefit from their own industry and insulate themselves from the negative effects of others' actions.  It is like a set of invisible mirrors that surround individuals, households, or firms, reflecting back on them the consequence of their acts.  The industrious will reap the benefits of their industry; the frugal the consequences of their frugality; the improvident and the profligate likewise.  They receive their due, which is to say they experience justice as a matter of routine."

Tom Bethell

This is another way of saying that we reap what we sow.

A word deserves a definition here.  It is the word "profligate."

Profligate is an adjective, and it means recklessly extravagant or wasteful.  It comes from the Latin word profligare, which means to overthrow or ruin.

All of these groups, according to Tom Bethell, the industrious, the frugal and the profligate, will receive what they have sown, like morning follows the night.  But we know this instinctively.

But what does this have to do with private property?  He seems to mean that our home (or business) is our castle.  In it we can arrange ourselves, our lives, our organization, to act for themselves and therefore be less acted upon.  For certain, if we don't act we WILL be acted upon - by others, the society, the trends, the policies, even nature itself.

Our very word economics comes from the Greek word oikonomia, which means household management.  That in and of itself implies prudence, discretion and just title.

Just title is ownership, and certainly when we own something we act in the best interests of that thing, be it a piece of jewelry, the yard around the house, a business, etc.  We act out of SELF INTEREST.

Recently I had occasion to travel.  On one leg of my journey I sat next to an economics student, a college sophomore, studying a book about how economics can eliminate poverty in the world.  She was studying the book, and very diligently, making notes in the margins and underlining key phrases.

When she took a break I asked if I could see the book.  I read the back, about the author, and the prologue and preface.  I skimmed over the chapter titles.  Basically the thesis is that if just equal out the "stuff" worldwide, which you might call redistribution, we can end poverty, and very quickly!

One of the notes she had written in the margin was something like, "impoverished countries are really poor."  I asked her about the book, and that notation.  I asked her if she knew why.  Embarrassed, she was afraid to answer.  

The basic reason, I suggested, was that in those very, very impoverished countries, there is little or no ability for individual expression, the people lack just title (private property) or there is no system established that allows the people to act out of self interest.  The people in these countries often exist to support the system set up by the dictator, or lack the economics and general education to exploit natural resources.

And I suggested that Adam Smith had proposed the thesis that when allowed an Invisible Hand would direct all of that.  I further suggested that he said the butcher, the baker and the beer maker provide us our dinner not because they like us so much, but out of self interest.  The better the product they produce the more we will return.  This encourages them to provide more, and then receive more in return from us.  The resulting increase in profits improves their personal conditions, and therefore raises the standard of living they can provide themselves and their families.  Multiplied throughout a country this system, one of free enterprise, has a massive and lifting effect.  All who thus participate can therefore be raised, and with this improvement in the gross domestic product grows, and a higher national income follows.

One important criteria lacking in these impoverished countries is private property, just title, protected individual rights and therefore self interest.  There is little industry to reap, little to be frugal about, and the people cannot be extravagant in any manner.  There is usually profligacy, however, by the state.

While the dictators or other "leaders" in these impoverished nations live an improved lifestyle, at least by comparison to the general rabble they demand serves the state, they do so with profligacy, and spawn ruin.

Such gubmental profligacy does cause ruin, in the short and long runs.  The general populace is enslaved in supporting it, whether through reduced industry or increased taxes, or bending to crushing regulations, high interest rates or inflation, and enforced obedience to laws which impede economic individualism.  And the progress of capitalism is stultified, free enterprise lacks, and a general malaise results.  

I remember once being accused of participating in a general malaise.  I was accused by my country's president, as was the rest of society.  We were told to get back to work!

That was not a malaise created by the people, and their unwillingness to work, but instead was imposed by policies generated from above.  

Malaise, like economics, trickles downward.

Tuesday, October 8, 2013

To Work, Exchange MUST Be Voluntary

"And so, in one case," says he, "I once got a flogging for not deciding correctly.  The case was like this:  a big boy with a little tunic, finding a little boy with a big tunic on him, took it off him and put his own tunic on him, while he himself put on the larger one.  So when I tried their case, I decided that it was better for them both that each should keep the tunic that fitted him.  And thereupon the master flogged me, saying that when I was a judge of a good fit, I should do as I had done.  But when it was my duty to decide whose tunic it was, I had this question to consider - whose title was the rightful one; whether it was right that he who took it away by force should keep it, or that he who made it for himself, or had bought it, should own it."

Xenophon, Cryopaedia, Book 1, Chapter 3
Greek Historian (430 - 354 BC)

Xenophon wrote many books, and this one about the raising of King Cyrus.  His books have influenced economists for millenia since, from Adam Smith to Karl Marx, and the conqueror Alexander the Great used one of his books as a field guide for his travels.

His book Oeconomicus still influences economic thought as regards the specialization and division of labor even today.

The concept he developed above has been called exchange value by economists.  Xenophon said that for exchange to work it must be a voluntary exchange, or there is no value in the exchange.

Cyrus, as the judge above, was castigated for not considering the subjective, voluntary and moral nature of the exchange between the two boys.

Although his tunic did not fit him, the small boy may have been wearing his grandfather's tunic.  Or his mother may have made it from a special cloth produced by the family, and he intended to grow into it.  As such it had special, yet subjective, value to him, value never to be appreciated by the larger boy.

While it may have been a better circumstance for each boy to wear the tunic that fitted him best, according to the law, it was not a moral circumstance as rightful title was not considered.  And forcing the exchange between the two was immoral.

This brings economics to the consideration of private property rights and natural law.  Each of these things must be considered for markets to work.  If one has no ownership of property there is no self interest, no natural market can be created, and no exchange value can be assessed.  The subjective, personal value of things must be considered for a market to efficiently distribute goods and services.  Such is the nature of free enterprise.

When a third party enters the marketplace with force, or attempts to alter it with "the law of the land," for whatever the political aim, distribution of any good or service is haphazard at best, and the market will collapse or worse.  When force is introduced, the factors of production (land, labor, capital and risk-taking entrepreneurship) cannot effectively create efficiency, and undue costs will influence product distribution so negatively that the natural market cannot operate, and will fail.

Xenophon would argue that with such market interruption voluntary exchange has not occurred, and none of the parties is suited, and that rightful title no longer exists, and market value is lessened or nil.

Consider that the next time you hear that this or that gubment program is failing, or going broke, or more expensive than advertised, or its "intentions" are good but results are inadequate.  And pick your program - those gubment programs that have existed and those that are just getting started.

Private property and natural law trump political aims every time.
And the marketplace is the only moral place to be.

Wednesday, October 2, 2013

There Is Such A Thing As A Free Lunch?

In economics it is said there is no such thing as a free lunch.

Well, there might just be such a thing as free college courses!

In past years Hillsdale College of Michigan, founded 1844, has offered free on-line courses on the United States Constitution.

Yes, they were free!  And they are still offered if you want to take them.  I HIGHLY recommend them!

I have said for a long time that before people can vote they must pass an annual test on the U.S. Constitution.  While perhaps tongue in cheek, there is a lot of truth there.  Why should people ignorant as to what the country is about, and how the country works, actually vote for somebody to "run" the country?

In a previous post I quoted George Bernard Shaw who said, "a people has the government it deserves."

But I digress.

As to the post at hand, Hillsdale College is continuing its on-line education classes with a series on economics.  It is called, simply, Economics 101.


I think you should!  One thing that is woefully misunderstood, and few understand at all, is economics.  On thing that few have studied in this country is economics!

That is why the gubment can get away with so much economically-damaging stuff without a complete uprising!  And "they," the ever-present "they," know it.

Economics 101 has 10 classes, and each is only 40 minutes long.  You can take the classes at your leisure.

The topics are:

  • Free Market Economics And The American Founding
  • How Markets Work
  • Understanding Demand
  • Supply And Equilibrium
  • The Role Of Profit
  • Incentive And The "Information Problem"
  • Keynesianism And Macroeconomics
  • Monetary Theory
  • Case Study:  The Great Recession 
  • Restoring Economic Liberty

The classes are taught by Hillsdale College President Dr. Larry P. Arnn (Claremont College and the London School of Economics) and Dr. Gary Wolfram (University of California, Berkeley).

The classes will be taught from a free-enterprise point of view.  From an individual freedom point of view.  From a free-market-capitalist point of view.  From a founding principles of the United States point of view.  That is expressly understood in the first class.

Taking Economics 101 you will have a better understanding of my free-enterprise posts!  And my personal economics bent.

Remember, this is a beginning class!  You can always go on from there!   Maybe your interest will be piqued and you will follow on and study more because of a particular class.

Economics 101 offered on line by Hillsdale College is my recommendation.

Now you're going to say there IS such a thing as a free lunch?