About This Blog

Ludwig von Mises (1881-1973) was the greatest economist of my time. His greatest works can be accessed here at no charge.

Mises believed that property, freedom and peace are and should be the hallmarks of a satisfying and prosperous society. I agree. Mises proved beyond a shadow of a doubt that the prospect for general and individual prosperity is maximized, indeed, is only possible, if the principle of private property reigns supreme. What's yours is yours. What's mine is mine. When the line between yours and mine is smudged, the door to conflict opens. Without freedom (individual liberty of action) the principle of private property is neutered and the free market, which is the child of property and freedom and the mother of prosperity and satisfaction, cannot exist. Peace is the goal of a prosperous and satisfying society of free individuals, not peace which is purchased by submission to the enemies of property and freedom, but peace which results from the unyielding defense of these principles against all who challenge them.

In this blog I measure American society against the metrics of property, freedom and peace.

Thursday, December 15, 2011

Off To See The Wizard, Part V

This is the fifth installment of my series of posts criticizing President Obama's historic speech Tuesday, Dec. 6, in Osawatomie, Kansas. The entire text and a video of the President's speech is here.  The first four installments of my criticism are here, here, here and here.

According to President Obama, the kind of "inequality" we are experiencing in America today --  "a level that we haven’t seen since the Great Depression -- hurts us all."

In his Osawatomie speech Mr. Obama was quite obsessed with inequality and fairness. Isn't it fair to ask the President to defend his position on inequality?

Why exactly is there "inequality" in America? How, exactly, does "inequality" hurt us all? If Bill Gates, for example, is super-rich and I have next to nothing, why exactly is that, and how exactly does this inequality of wealth hurt me?

The President says that a "recent study showed that countries with less inequality tend to have stronger and steadier economic growth over the long run."

So, economics and prosperity has nothing to do with rational individuals making choices. It has everything to do with government equalizing the incomes of the unthinking automatons.


If such a study exists, why didn't the President name it, so critics like me could examine its findings, study its methodology and analyze the logic of its conclusions? I put little if any credence in empirical studies of economic data. 

As Mark Twain once said: "There are lies, damned lies and statistics." Economics is an analytical science. It's method is logic, not juggling statistics. Everything I know about economics argues against what the President claims this anonymous study "showed." So what is Mr. Obama's logical argument in defense of income equality?

Inequality, says Mr. Obama, "distorts our democracy. It gives an outsized voice to the few who can afford high-priced lobbyists and unlimited campaign contributions, and it runs the risk of selling out our democracy to the highest bidder."

Isn't it obvious that Mr. Obama is describing politics, not economics? He certainly isn't describing free market economics. Mr. Obama assumes that our country's economic system is and should be a Keynesian system of massive political interventions into the marketplace. Nevermind that this is contrary to what he said earlier, i.e., that the American economy is a free market economy in need of regulation. (See Part IV of this series for a detailed explanation of free market vs Keynesian economic theory.) 

Obviously, if a country's economic system is ruled and regulated by politicians, the little guy does have a lot to fear. Those with great wealth can hire lobbyists and can make huge campaign contributions to influence politicians. Those politicians can sell out "to the highest bidder." The little guys can wind up struggling in an economic system "rigged against them."

The question is: What is the solution to this situation? Is it forcibly leveling the income of everyone so that each individual has an equal and "fair shot" at buying off their Congressman? 

Or does it make more sense to simply establish a genuine free market in the United States, i.e., prohibit Congress from intervening in the market by taking away the politician's power to rule and regulate free and voluntary trade?

The answer is obvious, but Mr. Obama doesn't want to go there. Why? Perhaps he is comfortable with politicians telling you and me what we may or may not do. Perhaps he doesn't think you're capable of making trades in your own best interest. 

Mr. Obama also explains that "over the last few decades, the rungs on the ladder of opportunity have grown farther and farther apart, and the middle class has shrunk." Apparently, Mr. Obama assumes that our economy is a zero sum game, that total aggregate wealth in a society cannot increase, that if someone grows richer, someone else must necessarily grow poorer.

This is, of course, complete and utter nonsense, except of course if one is describing a Keynesian economic system wherein politicians offer tax breaks to some and not to others, wherein central banks are able to print money at will and funnel the new dollars to their friends first, and wherein politicians and regulators can "bail out" favored banks and brokerage houses with tax receipts and public debt.

In the free market the only way for the rich to get rich and stay rich is to satisfy the demands of other traders in the marketplace. Those who fail to do so are soon supplanted by others who will satisfy demand. These others soon become the newly rich, but they must continue to satisfy demand or they will go belly up.

In the meantime, those who are not rich -- the so-called middle and lower classes -- benefit from the competition among manufacturers by enjoying product innovations, an increased supply of manufactured goods and services, lower prices and an increased market for their labor services.

But Mr. Obama criticizes the free market. He insists that "there’s another view about how we build a strong middle class in this country—a view that’s truer to our history, a vision that’s been embraced in the past by people of both parties for more than 200 years." He continues:
It’s not a view that we should somehow turn back technology or put up walls around America. It’s not a view that says we should punish profit or success or pretend that government knows how to fix all of society’s problems. It is a view that says in America we are greater together—when everyone engages in fair play and everybody gets a fair shot and everybody does their fair share.
Is it me or is Mr. Obama spouting gibberish? First of all, what institution can be "truer to our history" than the free market? We've had a mostly free market in this country since its founding.

Second of all, what exactly does Mr. Obama mean by "fair play," "fair shot" and "fair share?" "Fair" is a subjective term. One man's "fair play" is another man's "unfair play." It's why we have umpires and referees in sports and judges in court. The truth is that in Mr. Obama's economic system politicians will decide what exactly constitutes "fair play." Politicians will rule on what is a "fair shot," and determine what comprises each man's "fair share" of taxes and income. President Obama is comfortable with that system. Are you?

When the President suggests that "everybody does their fair share," I think it's plain he means that those who earn "profit" and that those who enjoy "success" must be taxed at higher rates than the rest of us. Isn't this a backhanded way to punish profit and success?

When the President suggests that government might not know how to fix all of society's problems, isn't the clear implication that he thinks government knows how to fix most of them better than you and I acting voluntarily in a free market? Why else does the President suggest that the government massively intervene in a wide range of individual economic activity?

Mr. Obama wants the government to make "education a national mission" by increasing spending on teachers, scientific research, retraining workers in "high tech manufacturing," making "wind turbines and semiconductors and high-powered batteries."

What magical wisdom makes the President more prescient than the free market in deciding how precious and limited capital should best be spent? Yes, it is obvious capital needs to be spent on schools, teachers and "scientific research?" But how much capital and whose? Capital is fungible. There are many uses for it and many competing needs. Who is better able to decide which need should take priority? The President and his lobbyists and political contributors? Or you and I in the market freely voting with our dollars?

Mr. Obama wants government to guide students into "science and engineering" rather than "banking and finance." Is this properly a bureaucrat's decision? Or should it properly be made by individual students and their families?

The President wants government to spend on "rebuilding our roads and our bridges, laying down faster railroads and broadband, modernizing our schools" and subsidizing college tuition. Why? Should such decisions be made on the basis of political whim or interest? Or should such decisions be dictated by the laws of supply and demand in the free market?

The President of the United States thinks he knows what creates a high standard of living. He thinks we're involved in some sort of high stakes game, some sort of Great Race For Prosperity with the rest of the world. He says:
The race we want to win, the race we can win is a race to the top—the race for good jobs that pay well and offer middle-class security. Businesses will create those jobs in countries with the highest-skilled, highest-educated workers, the most advanced transportation and communication, the strongest commitment to research and technology.
The world is shifting to an innovation economy...we need to meet the moment. We’ve got to up our game.
Does the President know better than Ludwig von Mises what creates higher wages and a higher standard of living? Mises wrote:
All pseudo-economic doctrines which depreciate the role of saving and capital accumulation are absurd [...] What has improved the wage earners' standard of living is the fact that the capital equipment per head of the men eager to earn wages has increased. It is a consequence of this fact that an ever increasing portion of the total amount of usable goods produced goes to the wage earners.
It is capital accumulation, i.e., investments in machinery and tools, that ultimately benefit the so-called middle and lower classes. Without capital investment innovation, research and technology are useless.

This stands to reason. Science fiction writers can dream up all sorts of futuristic marvels of technology. Movies like "Star Wars" and "Star Trek" envision a future world of space stations and interstellar space ships. But without the capital to build them, these ventures remain mere dreams. 

Tools make men more productive. They allow 100 production-line workers in modern industry to do the work of thousands. A fishing net allows one fisherman to do the work of a hundred men fishing with a pole. But in order to build tools capital must be invested. Where does capital come from? From deferred consumption. From saving. He who wants to be prosperous tomorrow must save today.

The President advocates investing, but not investing in capital. He wants to invest in "people" (education, medical care, unemployment compensation and other social safety net programs). He wants to invest in futuristic technology (solar energy, "wind turbines," "faster railroads," "high-powered batteries). By "investment," of course, he means government spending. 

He's not stupid. He says "productive investments cost money." Where is he going to get the money? From the private market. From the "wealthy." From those who grow rich "from their investments." From "banks and investors."

Do you see the disconnect here? Mr. Obama proposes to remove capital which is being invested in the free market and move it to government where it will be "invested" in people, i.e., government employees and business friends favored by government where the capital is eventually consumed.
When capital is consumed instead of invested, poverty and hardship are soon to follow. We've all been warned about "eating the seed corn." Yet, this is what government does. It removes capital from the market which could be invested in future production and spends it on "people" who consume it today.

This is true, of course, so long as the market is truly "free." If investors in the so-called "private sector" are little more than favored recipients of government largesse (loans, bail-outs and the like), capital is already being squandered.

In a truly "free" market capital flows to where it is most demanded by traders, to where it best satisfies their wants and needs for future production. When government intervenes and taxes this capital, it almost never flows to future production demanded by free individuals in the market. It flows to programs and projects demanded by politicians. 

In short, rather than deciding our own future, our future is being decided for us by self-interested and pandering politicians.
Another efficient means by which government squanders savings or capital is by inflating the money supply. Inflation discourages saving. Why save your money if inflation will eat it away?

It is interesting that Mr. Obama didn't deign to mention the Federal Reserve, the money supply or inflation in his Osawatomie speech. Yet, printing money out of thin air inflates the money supply and leads to rising prices. Who has absolute control of the money supply in the United States? The Federal Reserve, ostensibly a private banking institution, but in reality a lackey of the federal government.

Politicians like monetary inflation because it provides them increased revenue as taxpayers are continually and automatically kicked into higher, progressive tax brackets. In addition, politicians can borrow money, run up debt and repay that debt with devalued dollars. Monetary inflation also allows politicians to dish out billions of dollars worth of borrowed "stimulus" (subsidies and bailouts) to their friends on Wall Street and elsewhere.

Those who receive newly printed money first gain the most advantage, because the new money has not yet circulated through the economy and bid up prices. So, the first-est get the most-est, as they say. Who is first to receive new money from the Federal Reserve? Banks, investment houses and the government.

President Obama pretends to care about the so-called middle class which he says is in danger of disappearing:
Because what’s at stake is whether this will be a country where working people can earn enough to raise a family, build a modest savings, own a home, secure their retirement.
How can this President say he is deeply concerned about the shrinking incomes of "working people," yet not discuss the corrosive effects of monetary and price inflation, which is slowly destroying the value of the dollar and eating away at the savings accounts of middle-class retirees? 

The economic danger faced by the so-called middle class is not world competitiveness as the President alleges; it is monetary inflation and its inevitable corollary, price inflation.

Inflation makes those in government and those who are favored by government fantastically rich; it slowly turns the rest of us into paupers. How can the President rail against wealth "inequality" in this country and not even discuss the monetary policy that is primarily responsible for creating it. 

The sad fact is that inflation is a choice made solely and absolutely by the Federal Reserve and the United States government monetary authorities. Mr. Obama could do something about it if he wanted to. Apparently, he doesn't want to.
More to come.

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