QUESTIONS FROM NEO-MALTHUSIANS ANSWERED BY THE VOICE OF REASON ON THE INTERNET
1) Question: Have we reached the asymptotic limit to growth?
Answer: The asymptotic limit actually describes what will happen AFTER we reach the stationary state of a fixed capital-labor ratio with stagnant technology. We have not yet reached that state, so we are not having to deal with the asymptotic limit. If we limit growth in natural resources by fiat or because of natural limitation, we will start in our progression towards the asymptotic limit to growth (unless technology saves us, which many Malthusian Environmentalists do not believe). So the real question is: have we reached the natural limits of resource extraction?
I believe that from a purely technical perspective, the answer is no, for all the reasons I will shortly enumerate. However, from a holistic perspective, the answer is yes, that we are probably approaching it. In other words, I suspect that we will decide that we do not wish to continue resource extraction ad infinitum for at least some of the reasons the environmental movement itself was born: we like to have pristine venues; our prosperity has awakened us to desires beyond our immediate needs; and we have realized that there are at least some resources for which we cannot maintain the current level of extraction.
As to why, technically, we are nowhere near the limit of (total) resource extraction possibilities:
* There are certain resources that we do not have to worry about conserving (solar power, silicon).
* There are other resources that are likely reaching the plateau of production and thus we will have to find substitutes in those cases where we utilize these resources extensively (gold) or we will have to discontinue their use in favor of alternative technologies (uranium). However, we have such substitutes available.
* There are still other resources where we once had limits but, due to changing technology, we can now create these resources and thus its limits are actually expanding rather than contracting (diamonds, oil).
* Then there are those resources for which we have exceeded our ability to extract them responsibility, chiefly due to the "tragedy of the commons" which can be solved by better allocation of property rights and improved awareness and regulation of externalities (fish).
* Only in the latter case, where we have already exceeded sustainability do we have to worry about limitation on the resource and only in the case where there are no good substitutes. However, there are substitutes for almost everything except the broadest of classes of goods and there are no such broad classes of goods (including energy) that are in imminent danger of complete and total collapse.
As noted, oil is really a case of a resource with expanding limits because of our ability to synthesize it from other materials (coal, natural gas, oil shale). In addition, we can often convert our oil-based products to alternative fuels (cars have run on power from the electric grid and even solar power).
As to the question of increased resource usage, I would argue that is a red herring. We really do not need increased resource usage to grow the economy. When we are faced with limited resources, we find other ways around these limits (using human ingenuity). In the face of an economy that could not generate sufficient finances to import petroleum in the aftermath of onerous conditions imposed on their country by France after World War I, German scientists developed the Fischer-Tropsch process to synthesize petroleum from coal. When diamond production threatened to limit industrial production (diamonds being a important resource used in machine tools), scientists successfully synthesized the diamond.
The interesting thing is that necessity (so to speak) is the mother of invention, as the saying goes. So I would not in the least object to doing everything in our power through selective taxation to make resources that pollute the environment or appear to be extracted at an unsustainable pace more expensive. In such a manner, we will spur innovation.
In addition, we should look at having a separate resource usage tax based on waste. The more you waste of a resource, the higher your tax rate. This will create the proper incentives to conserve and recycle. For example, here in North Carolina, I find it abhorrent that the government charges the same rate for garbage regardless of how much garbage you create and provides no credit for those who recycle. Indeed, when I decided to acquire a larger recycling bin (specifically so that I could reduce the amount of garbage going into the city landfill), the city made me pay the same price for that recycling bin as they charged for someone to purchase a garbage can. Furthermore, even though our household disposes less than the equivalent of one 13 gallon trash bag a week of garbage, recycling everything else that comes into our household, I pay the same rate as those who put 20 times that amount into the landfill and who fail to recycle at all. It is public policies such as this, not the economics profession, that is to blame for our wastefulness (indeed, it amuses some of my colleagues in the economics profession to no end in that I derive absolutely no individualistic benefit from my action and actually have driven up my costs because of my proclivity to recycle).
As to pollution, in point of fact, economic growth has proven to be a boon to the environment. As shown by Grossman and Krueger (1995), while economic growth at lower stages of development is harmful to the environment, after an economy reaches a certain point (a little over US$10,000 in per capita income), the process reverses and environmental quality improves with economic growth. One of the reasons for this is that once a population a certain threshold of prosperity, they can devote more resources to emissions control (prior to that point, other objectives tend to outweigh environmental concerns for the populace).
Now as to the question of an environmental tipping point, we very well might reach one with regard to CO2 emissions and, on that point, I believe that we need to do everything we can to keep a lid on those. However, that does not require the shuttering of our economy. Indeed, by reducing payroll and income taxes while simultaneously introducing a carbon tax, we solve two fundamental problems in our economy: creating incentives for work while reducing incentives to pollute. Indeed, if we do this by reducing predominantly rates at the lower end of the economic spectrum (perhaps by granting exemptions from taxation on the first $50,000 of income), we can accomplish a politically popular objective that both conservatives (who want lower taxes on business and individuals) and liberals (who want the tax burden transferred to the relatively affluent, which it would be in both cases since it is the affluent who would tend to pay the carbon tax and the poor who would receive the largest benefit from the raised tax exemption) could embrace. It will also likely promote economic growth even as it reduces global greenhouse emissions.
2) Question: Are we are currently far into ecological overshoot and must therefore drastically reduce the physical inputs to the economy in order to come into balance with the environment so as not to risk the collapse of our society?
Answer: We DEFINITELY disagree on this point. The reason is actually why I keep arguing that Neo-Malthusianism is pointless. You see, from my perspective, if we are "way into ecological overshoot and must . . . drastically reduce the physical inputs to the economy" it really sounds to me like we need something on the order of a reduction of 80% in our resource usage within the 10 years (or some similar reduction/time frame), which I believe is not achievable without mass extermination (which we all agree is not a viable option).
However, maybe I am misinterpreting the call for reduction because of the doomsday warning attached to it. So we need to be careful and define EXACTLY how quickly and how fast we need to reduce these inputs. You see, neo-Malthusians are arguing that we are essentially on a runaway train with the tracks out ahead. Therefore, it sound like they want us to slam the breaks. Now slamming the breaks is not without its problems: it tends to cause a lot of injuries along the way so we don't want to slam them if there really is no reason to do so. On the other hand, if we are too far-gone already to be able to do anything about it, there is no point in slamming the breaks either. Why cause panic? We are all goners anyway. Thus, my question to you is: why can't we slowly (say cut in half over 50 years) reduce consumption of those resources that have harmful environmental consequences owing to their production or consumption? If we can do this, why the doom-saying? There are plenty of good reasons to reduce the consumption of these resources without doom and gloom. If we can't do that, tell me how fast we have to reduce them. The problem is that if we have to reduce them too fast we will cause, at best, the very collapse that you wish to avoid or, at worst, the killing off a good chunk of the population. Neither of these are viable solutions to the problem.
That being said, I do not object to the concept of eliminating waste in resource usage and engaging in greater conservation and recycling efforts (especially as you have apparently conceded that we do not have to mandate a reduction in our economic growth). What I really have trouble with is the neo-Malthusian "sky is falling" attitude. We all seem to asking for policymakers to the same thing (reduce things that are bad for the ecosystem) but how you say something is often just as important as what you say. If you argue that economic growth ITSELF is a problem and that it must be controlled directly, you alienate a large segment of the population. Furthermore, you have all but admitted that this is not a necessary condition for your end result. Indeed, I would go so far as to argue that if you place artificial limits on economic growth so as to actively seek to stifle it, the result will backfire as a retrenchment of economic growth is inimical to your stated goals.
That being said, is it the case that taxation will reduce economic growth. It is possible but it is not guaranteed. That was my key concern. The problem that I saw with the argument Neo-Malthusians first put out was that economic growth itself is NOT the cause of any of the ills in our society, although economic growth is sometimes associated with those ills. For example, economic growth can lead to environmental degradation when a company engages is strip mining. At the same time, economic growth can actually lead to environmental rejuvenation when strip mining operations are required to account for their negative externalities by paying taxes on their activities that will (1) fund adequate land reclamation after their mines close (and the key is ADEQUATE, not the half-baked schemes allowed under current US law) and (2) pay for the externalities that they cause because of their operations on other parties during the operation of the mines (for example, but not limited to, paying for the cost of effluent treatment so as to not pollute water supplies and requiring mining companies to acquire the surface rights as well as the substrata rights for the entire breadth of their mining operations so that you do not have the problem as in Pennsylvania wherein homeowners and businesses are potentially endangered by having mine sinkholes develop under their properties).
The point is that we can come up with revenue-neutral tax systems that will penalize heavily all of the activities you do not like while reducing taxes on other activities that do not cause the harm over which you are justly concerned. In so doing, we can not only maintain economic growth but, in the long-run, we can actually INCREASE it because of the reduction in human health costs (and a consequent increase in human productivity).
You see, I don't have a problem with environmentalism when it framed in a win-win situation because it gets buy-in and makes us realize that we can utilize free-market capitalism (although guided in its direction via taxation of undesirable activities) as the engine for ecological change. Indeed, one of the major reasons for utilizing the taxation approach instead of the banning approach is that it will typically lead not only to more revenue but also increased compliance (see Prohibition in the United States for a good example as to why the banning approach is not as effective as the tax and let the free market decide approach).
All that is a roundabout way of saying, "yes AND no" to your question of whether we need to drastically reduce our resource inputs. We certainly have to drastically reduce CERTAIN inputs (those that cause environmental harm and those which are unsustainable in their extraction levels) but we don't have to drastically reduce ALL inputs for the reasons stated earlier.
Furthermore, HOW we choose to reduce them matters: a free market taxation-based approach will simply move our economy faster in the direction that we wish to take it and thus is the same type of positive modern state intervention that I have advocated for years. It also matters HOW FAST we choose to reduce them. Certainly, I doubt that most Neo-Malthusians advocate an complete abolishment of our oil consumption by, say, 2020. No, instead, we should seek to reduce our consumption levels and slowly increase taxation levels (or reduce cap and trade levels) so that we can reduce oil consumption at a manageable pace. Very small but steady reductions in our current consumption patterns will achieve large reductions in the not too distant future without causing severe pain to the economy (2% reductions each year in conventional crude for 25 years = 40% lower consumption of that resource) and can be achieved exclusively using higher taxation of such resources. Furthermore, this raising of the price of such resources will encourage the development of alternatives and the rapid introduction of new technologies so I prefer to give a positive spin on the whole thing and point out that there are good reasons to tax that have NOTHING to do with "running out of oil" (overreliance on trading partners who do not hold our same ideals, a trade imbalance that threatens our economic stability and the dollar, and the environmental damage caused by oil spills and increased CO2 emissions that is not paid for because of inadequate property rights regimes).
So, it isn't really true that going with my vision of the future will get us anywhere differently from the Peak Oil enthusiasts (at least with regard to oil). However, scaring people into thinking that the world (or at least our society) will end, I do not believe is the proper mechanism to motivate people and, furthermore, I do not believe that such a calamity will ever come to pass no matter what happens because as I've stated before, I believe that technology will find a way out. That means that even if we do nothing, eventually, the environmental issues will get to be so great or the cost will get to be so great for the resource (due to an imbalance between current production and consumption that cannot be met by drawing down inventories) that, like in Germany in the 1920s, scientists will find a way to substitute for another resource.
There are two dangers, however, with a neo-Malthusian approach that imposes non-market based solutions that are not present if we use a positive argument for economic transformation. First, we might panic into going too far too fast the other way is that the incentive mechanism for coming up with innovations will break down and we will find ourselves with a collapse of the economic system and no mechanism in place to save us. Thus, arguing that technology can't save us and that we are in imminent danger of economic collapse unless we put the breaks on economic growth has far greater potential for destroying our society. The second danger is that because we have heard the neo-Malthusian argument repeated for 210 years without ever having its dire predictions come to pass, many will simply ignore you as they currently are doing and thus you will get nowhere fast. The fact is that if we let the free market work, the price mechanism will cause resources to increase in price when their extraction rates are no longer sustainable and evidence from fisheries suggests that rather than complete worldwide cataclysmic collapse after years of rising production, we will instead see an undulating plateau for quite some time (and one of the reasons that fish stocks face the potential of collapse in the next 50 years is a lack of enforceability of property rights whereas if there were adequate property rights, better management of the resource would likely occur).
3) Question: Can we grow population for some time?
Answer: We MUST grow population for some time unless you want to engage in a mass extermination program (which I would hope all Neo-Malthusians would be completely against). There really is no alternative (well, I guess there is also mass sterilization but I would gather they are against that approach as well). The developing world is still rapidly growing (although at a lesser rate than before, due to enhanced economic opportunities and literacy, especially for women, and greater access to contraception). Even in cases where fertility has dropped precipitously, it will take a long time for this to translate into population reductions. For example, China, with its one-child policy, won't see a stabilization of its population until 2030.
Even in the developed world, where we have been below the replacement ratio for more than a generation, it will take at least another generation in many countries to see a dramatic decline in population. Lets look at a country like Japan (a country that has no net migration and only 1.3 births/woman, which is WELL below replacement rate), we find that the population is projected to drop by only 30% over the next 50 years.
4. Question: Can we grow resource usage for some time?
Answer: I think that the real question is: what do you think the carrying capacity of the Earth is and how fast do we need to reach it? The answer to that question dictates a wide range of policies. If we are way over the carrying capacity and we need to change things fast, it sends the wrong message to those in power to start thinking about genocide in order to achieve the goal of rapid reductions in resource usage (and we both agree that isn't a good solution). After all, it would take more than a century to cut the world population by 75% by 2100 even if tomorrow we were able to reduce the total fertility rate to the Japanese level (all of this is assuming that we reduce death rates in the developing world at the same time--if we don't improve their medical care and allow them to continue to die at current rates, especially as infants, in some countries of the developing world the fertility rate could be as high as 3 or more births per woman in order to achieve the demographic transition due to high infant mortality).
If we are only just above it or we can afford to engage in a short waiting period (say a generation or two) to start worrying about these limitations, we will achieve the demographic transition and our days of worrying will soon be behind us. After all, Japan's total fertility rate dropped in HALF (from 4 to 2) in a span of just 5 years in the 1950s and was basically steady for a generation before starting its precipitous decline in the 1970s. If we can get the growth rate up in the rest of the developed world, just as had happened in Japan, we could see our world population leveling off a lot quicker than anyone realized.
References:
Grossman, Gene M & Krueger, Alan B, 1995. "Economic Growth and the Environment," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 353-77, May.
Tuesday, July 22, 2014
Thursday, July 28, 2011
Why 'No New Taxes' and Cut, Cap and Balance are Horrible Ideas (from a Conservative Perspective)
Conservatives should be ashamed of themselves with their insistence on Cut, Cap and Balance, for a balanced budget and a pledge of no new taxes (as it is currently envisioned) will lead to the rise of the regulatory state and even more tax expenditures, ultimately ushering in a new socialistic entitlement state the likes of which have never been seen before. Remember to beware getting that which you wish for as there are always unintended consequences.
Let's take each of these concepts in isolation and see why they are such bad ideas. The idea of cutting government expenditure itself isn't a faulty one but how do you define government expenditure? For example, suppose that we look at the Earned Income Tax Credit. Is that an expenditure or merely a tax cut? Does it only become an expenditure when it results in a refundable credit? If not, what about things like the mortgage interest deduction?
What is the difference between a charitable contribution deduction or tax credit and simply giving the charity the money out of government coffers? In the end, very little. The charity has more money. The individual who gave to the charity has less. The government is merely the pass-through agent. Now, some would say that the difference is that when an individual gives to charity, they are directing the money to that purpose, whereas when government does the same, they are robbing everyone to accomplish the same goal. That is one way of looking at things. However, at the same time, if money goes to charities through private giving, there is less of a "need" for government redirection of funds. As such, government expenditure goes down but it is merely replaced with private expenditure. The biggest difference is that individuals, rather than the voters, are making the decisions as to the allocation of funds. Thus, it is equivalent to giving more votes to those with more money rather than based on 'one person, one vote.'
At first, this seems like a good conservative principle. After all, what could be better than having each individual decide what is best to do with his or her own money. Yet, by giving a tax credit or deduction, what really happens is that everyone else is forced to pay for the charitable contribution. Think about it for a second. If we reduce government spending to what conservatives believe it should be: national defense, maybe the department of state, a few public works projects, and that's about it, tax credits and deductions represent a regulatory state gone amok. It basically favors certain types of behavior over others and, by creating these incentives to reduce your taxes, those of us who do not believe in such activity are left holding the bill for the things that we all truly do need (national defense, etc.). However, this all begs the question: why is government regulating through an incentive mechanism private behavior at all? Furthermore, why should you get to pay less for national defense because you are giving to your church, while I don't?
In addition, the truly insidious and onerous aspect of government isn't that it taxes, but that it regulates--and regulation can occur even if the government doesn't tax at all! Why bother giving subsidies for 'green energy', just ban 'non-green energy'! Why worry about redistribution of income through the tax system if you require everyone to tithe or go to jail? These may be extreme examples but the government can get almost anything it wants done through regulation, including things that it could not accomplish through taxation.
Now what about cap and balance? Sounds like a good idea, doesn't it? We need to balance our family budget, so why not the government? Shouldn't we cap government expenditures?
Actually, the answer is 'no'! We should instead cap government revenues but let government expenditures rise and fall with the business cycle. Furthermore, we should not cap at 18% but rather during good times we should be saving about 20% of GDP (and if the public won't do it, the government should)--and that doesn't even include government expenditure on the military and public works (which should be no more than about 10% of GDP or so)! Where did I get this idea?
Well, God told me.
Even God himself has dictated that 'cut, cap, and balance' is a bad idea (and, if conservatives believe in anything, it is God). Indeed Keynesianism, if properly practiced, is conservative thought and anything different is, well, sinful. So sayeth the Lord in the story of Pharaoh and Joseph:
Genesis 41:17-40 (New International Version):
17 Then Pharaoh said to Joseph, “In my dream I was standing on the bank of the Nile, 18 when out of the river there came up seven cows, fat and sleek, and they grazed among the reeds. 19 After them, seven other cows came up—scrawny and very ugly and lean. I had never seen such ugly cows in all the land of Egypt. 20 The lean, ugly cows ate up the seven fat cows that came up first. 21 But even after they ate them, no one could tell that they had done so; they looked just as ugly as before. Then I woke up.
22 “In my dream I saw seven heads of grain, full and good, growing on a single stalk. 23 After them, seven other heads sprouted—withered and thin and scorched by the east wind. 24 The thin heads of grain swallowed up the seven good heads. I told this to the magicians, but none of them could explain it to me.”
25 Then Joseph said to Pharaoh, “The dreams of Pharaoh are one and the same. God has revealed to Pharaoh what he is about to do. 26 The seven good cows are seven years, and the seven good heads of grain are seven years; it is one and the same dream. 27 The seven lean, ugly cows that came up afterward are seven years, and so are the seven worthless heads of grain scorched by the east wind: They are seven years of famine.
28 “It is just as I said to Pharaoh: God has shown Pharaoh what he is about to do. 29 Seven years of great abundance are coming throughout the land of Egypt, 30 but seven years of famine will follow them. Then all the abundance in Egypt will be forgotten, and the famine will ravage the land. 31 The abundance in the land will not be remembered, because the famine that follows it will be so severe. 32 The reason the dream was given to Pharaoh in two forms is that the matter has been firmly decided by God, and God will do it soon.
33 “And now let Pharaoh look for a discerning and wise man and put him in charge of the land of Egypt. 34 Let Pharaoh appoint commissioners over the land to take a fifth of the harvest of Egypt during the seven years of abundance. 35 They should collect all the food of these good years that are coming and store up the grain under the authority of Pharaoh, to be kept in the cities for food. 36 This food should be held in reserve for the country, to be used during the seven years of famine that will come upon Egypt, so that the country may not be ruined by the famine.”
37 The plan seemed good to Pharaoh and to all his officials. 38 So Pharaoh asked them, “Can we find anyone like this man, one in whom is the spirit of God[a]?”
39 Then Pharaoh said to Joseph, “Since God has made all this known to you, there is no one so discerning and wise as you. 40 You shall be in charge of my palace, and all my people are to submit to your orders. Only with respect to the throne will I be greater than you.”
However, note what the story says: we must save during the good years to spend during the bad years. We must balance the budget, not yearly, but rather over the business cycle (in the days of Pharoah, the business cycle followed the grain cycle). And how much should government take? Look at Genesis 41:34: "Let Pharaoh appoint commissioners over the land to take a fifth of the harvest of Egypt." So "cut, cap, and balance" is a horrible idea and so is the balanced budget amendment. It would lead to us squander our treasure during our feast years, only to starve during our famine years.
So ideally, from a conservative perspective in good times, government should take 30% of our GDP and be required to SAVE 20% of GDP (so that would mean a $2.8 trillion budget surplus). In bad times, 0% (yes, cut all taxes to zero during recessions--I mean they are recessions, right?) and run a budget deficit of whatever it takes to generate full employment during recessions. Now that's a good conservative prescription for success.
Only one potential problem (and it is a big problem -- probably fatal to this plan): how do we know we are in good times or bad times? Unfortunately, too many people think it is the famine time even when it is the feast time. Oh well.
Let's take each of these concepts in isolation and see why they are such bad ideas. The idea of cutting government expenditure itself isn't a faulty one but how do you define government expenditure? For example, suppose that we look at the Earned Income Tax Credit. Is that an expenditure or merely a tax cut? Does it only become an expenditure when it results in a refundable credit? If not, what about things like the mortgage interest deduction?
What is the difference between a charitable contribution deduction or tax credit and simply giving the charity the money out of government coffers? In the end, very little. The charity has more money. The individual who gave to the charity has less. The government is merely the pass-through agent. Now, some would say that the difference is that when an individual gives to charity, they are directing the money to that purpose, whereas when government does the same, they are robbing everyone to accomplish the same goal. That is one way of looking at things. However, at the same time, if money goes to charities through private giving, there is less of a "need" for government redirection of funds. As such, government expenditure goes down but it is merely replaced with private expenditure. The biggest difference is that individuals, rather than the voters, are making the decisions as to the allocation of funds. Thus, it is equivalent to giving more votes to those with more money rather than based on 'one person, one vote.'
At first, this seems like a good conservative principle. After all, what could be better than having each individual decide what is best to do with his or her own money. Yet, by giving a tax credit or deduction, what really happens is that everyone else is forced to pay for the charitable contribution. Think about it for a second. If we reduce government spending to what conservatives believe it should be: national defense, maybe the department of state, a few public works projects, and that's about it, tax credits and deductions represent a regulatory state gone amok. It basically favors certain types of behavior over others and, by creating these incentives to reduce your taxes, those of us who do not believe in such activity are left holding the bill for the things that we all truly do need (national defense, etc.). However, this all begs the question: why is government regulating through an incentive mechanism private behavior at all? Furthermore, why should you get to pay less for national defense because you are giving to your church, while I don't?
In addition, the truly insidious and onerous aspect of government isn't that it taxes, but that it regulates--and regulation can occur even if the government doesn't tax at all! Why bother giving subsidies for 'green energy', just ban 'non-green energy'! Why worry about redistribution of income through the tax system if you require everyone to tithe or go to jail? These may be extreme examples but the government can get almost anything it wants done through regulation, including things that it could not accomplish through taxation.
Now what about cap and balance? Sounds like a good idea, doesn't it? We need to balance our family budget, so why not the government? Shouldn't we cap government expenditures?
Actually, the answer is 'no'! We should instead cap government revenues but let government expenditures rise and fall with the business cycle. Furthermore, we should not cap at 18% but rather during good times we should be saving about 20% of GDP (and if the public won't do it, the government should)--and that doesn't even include government expenditure on the military and public works (which should be no more than about 10% of GDP or so)! Where did I get this idea?
Well, God told me.
Even God himself has dictated that 'cut, cap, and balance' is a bad idea (and, if conservatives believe in anything, it is God). Indeed Keynesianism, if properly practiced, is conservative thought and anything different is, well, sinful. So sayeth the Lord in the story of Pharaoh and Joseph:
Genesis 41:17-40 (New International Version):
17 Then Pharaoh said to Joseph, “In my dream I was standing on the bank of the Nile, 18 when out of the river there came up seven cows, fat and sleek, and they grazed among the reeds. 19 After them, seven other cows came up—scrawny and very ugly and lean. I had never seen such ugly cows in all the land of Egypt. 20 The lean, ugly cows ate up the seven fat cows that came up first. 21 But even after they ate them, no one could tell that they had done so; they looked just as ugly as before. Then I woke up.
22 “In my dream I saw seven heads of grain, full and good, growing on a single stalk. 23 After them, seven other heads sprouted—withered and thin and scorched by the east wind. 24 The thin heads of grain swallowed up the seven good heads. I told this to the magicians, but none of them could explain it to me.”
25 Then Joseph said to Pharaoh, “The dreams of Pharaoh are one and the same. God has revealed to Pharaoh what he is about to do. 26 The seven good cows are seven years, and the seven good heads of grain are seven years; it is one and the same dream. 27 The seven lean, ugly cows that came up afterward are seven years, and so are the seven worthless heads of grain scorched by the east wind: They are seven years of famine.
28 “It is just as I said to Pharaoh: God has shown Pharaoh what he is about to do. 29 Seven years of great abundance are coming throughout the land of Egypt, 30 but seven years of famine will follow them. Then all the abundance in Egypt will be forgotten, and the famine will ravage the land. 31 The abundance in the land will not be remembered, because the famine that follows it will be so severe. 32 The reason the dream was given to Pharaoh in two forms is that the matter has been firmly decided by God, and God will do it soon.
33 “And now let Pharaoh look for a discerning and wise man and put him in charge of the land of Egypt. 34 Let Pharaoh appoint commissioners over the land to take a fifth of the harvest of Egypt during the seven years of abundance. 35 They should collect all the food of these good years that are coming and store up the grain under the authority of Pharaoh, to be kept in the cities for food. 36 This food should be held in reserve for the country, to be used during the seven years of famine that will come upon Egypt, so that the country may not be ruined by the famine.”
37 The plan seemed good to Pharaoh and to all his officials. 38 So Pharaoh asked them, “Can we find anyone like this man, one in whom is the spirit of God[a]?”
39 Then Pharaoh said to Joseph, “Since God has made all this known to you, there is no one so discerning and wise as you. 40 You shall be in charge of my palace, and all my people are to submit to your orders. Only with respect to the throne will I be greater than you.”
However, note what the story says: we must save during the good years to spend during the bad years. We must balance the budget, not yearly, but rather over the business cycle (in the days of Pharoah, the business cycle followed the grain cycle). And how much should government take? Look at Genesis 41:34: "Let Pharaoh appoint commissioners over the land to take a fifth of the harvest of Egypt." So "cut, cap, and balance" is a horrible idea and so is the balanced budget amendment. It would lead to us squander our treasure during our feast years, only to starve during our famine years.
So ideally, from a conservative perspective in good times, government should take 30% of our GDP and be required to SAVE 20% of GDP (so that would mean a $2.8 trillion budget surplus). In bad times, 0% (yes, cut all taxes to zero during recessions--I mean they are recessions, right?) and run a budget deficit of whatever it takes to generate full employment during recessions. Now that's a good conservative prescription for success.
Only one potential problem (and it is a big problem -- probably fatal to this plan): how do we know we are in good times or bad times? Unfortunately, too many people think it is the famine time even when it is the feast time. Oh well.
Thursday, April 14, 2011
More on Corporate Personhood
By dispensing with corporate personhood, we simultaneously get rid of two important things: limited liability and the corporate income tax.
After all, if the corporation is not a legal separate person, funds flow directly to the shareholder (similar to a partnership or sole proprietorship). Now we could create a legal structure to allow these funds to be held at the corporate level by arguing that each person really simply owns a certain percentage (share) of the corporation and can only realize gains or losses by selling. This would treat corporations as what they really are: assets of the owners.
While many conservatives would like to rid themselves of the corporate income tax, they simultaneously do not understand that if they do this, they lose the rationale for limited liability. Limited liability is a benefit but not as great as it might at first appear. What it really does is help not the common stockholder (who can always sell before his or her stock value goes to zero) but rather the last stockholders who is left holding the proverbial bag. Yet what limited liability does is exaccerbate the asymmetry between short sellers and long buyers. Short sellers already have unlimited liability (theoretically) and limited potential benefit (when the stock price goes to zero). Long buyers have limited liability and unlimited potential benefit. Eliminating corporate personhoood will reduce this asymmetry.
Here are a few questions that I have received concerning this proposal:
Couldn't companies simply get limited liability through contract?
The answer is no. While a company can negotiate limited liability with suppliers and customers, third parties who are injured cannot be so casually dismissed.
Couldn't executives simply find a way around these restrictions?
Well, they could purchase insurance but who would insure them? Since they are the ones making the decision that would lead to the corporation's demise, it would be foolish to provide insurance. After all, you would be stepping directly into moral hazard. They, of course, could also reduce their exposure below the 1% threshold provided they resign their office immediately. However, they cannot keep their office and their benefits without incurring the costs. Receiving reward without risk is immoral and must not be allowed to continue.
The point is that those who want the rewards should take the risks. No risk = no reward. It works for shareholders. Why not corporate executives?
After all, if the corporation is not a legal separate person, funds flow directly to the shareholder (similar to a partnership or sole proprietorship). Now we could create a legal structure to allow these funds to be held at the corporate level by arguing that each person really simply owns a certain percentage (share) of the corporation and can only realize gains or losses by selling. This would treat corporations as what they really are: assets of the owners.
While many conservatives would like to rid themselves of the corporate income tax, they simultaneously do not understand that if they do this, they lose the rationale for limited liability. Limited liability is a benefit but not as great as it might at first appear. What it really does is help not the common stockholder (who can always sell before his or her stock value goes to zero) but rather the last stockholders who is left holding the proverbial bag. Yet what limited liability does is exaccerbate the asymmetry between short sellers and long buyers. Short sellers already have unlimited liability (theoretically) and limited potential benefit (when the stock price goes to zero). Long buyers have limited liability and unlimited potential benefit. Eliminating corporate personhoood will reduce this asymmetry.
Here are a few questions that I have received concerning this proposal:
Couldn't companies simply get limited liability through contract?
The answer is no. While a company can negotiate limited liability with suppliers and customers, third parties who are injured cannot be so casually dismissed.
Couldn't executives simply find a way around these restrictions?
Well, they could purchase insurance but who would insure them? Since they are the ones making the decision that would lead to the corporation's demise, it would be foolish to provide insurance. After all, you would be stepping directly into moral hazard. They, of course, could also reduce their exposure below the 1% threshold provided they resign their office immediately. However, they cannot keep their office and their benefits without incurring the costs. Receiving reward without risk is immoral and must not be allowed to continue.
The point is that those who want the rewards should take the risks. No risk = no reward. It works for shareholders. Why not corporate executives?
Monday, April 11, 2011
The Evils of Corporate Personhood (and the legal solution)
The fact that corporations have personhood and not limited liability is the root of the problems with respect to modern capitalism. Limited liability actually emanates from this idiotic idea because one person cannot be responsible for the debts of another unless that person co-signs on the loan application. Yet, while limited liability leads itself to the problem of excessive risk-taking (because you gain all of the upside and limit your downside), it is corporate personhood that is actually even more problematic.
As I sit here in the Wyhdham Resort and Casino in The Bahamas typing this blog, I am reminded of something I tell my students in my classes about the problems of corporate CEOs receiving stock options. Since they receive only upside (stock prices can only go to zero in the extreme on the downside), it would be like handing $50,000 to each of them and telling them to go to the casino and whatever they win with my money we will split but if they lose the money, they are not liable for my losses.
I would want them to play Blackjack -- they will go for Roulette and the Slot Machines. By going for the riskiest games, they increase their chances of large scale gain. After all, it isn't their money.
What personhood does for the corporation is allow it to declare bankruptcy even before it destroys its common stock. Thus, corporate stockholders get effectively two bites of the apples -- no, actually three, for they can always turn around and sell to another sucker in the market (only the last one holding the stock has a 100% loss). Of course, eliminating limited liability entirely might prove too drastic a step for those who wish to be market participants but who have little in the way of actual assets. We can solve this problem by limiting limited liability only to shareholders who hold less than 1% of the overall common stock and who do not hold a senior management position at the C-level (CEO, CFO, CIO, etc.) or above (e.g., President, Chairman). Such di minimus participation is incompatible with being able to fundamentally alter the overall course of the business.
Furthermore, do not allow senior managers to be senior managers unless they have at least 1% of the overall common stock (make them have "skin in the game", so to speak) and then apportion the excess of limited liability to those senior managers. Sell so that you drop to less than 1% and you have to immediately resign your senior leadership position.
Now the personhood issue can actually be put to bed quite easily. After all, the US Constitution prohibits slavery and involuntary servitude (13th Amendment). If corporations are persons and they are owned by other persons (stockholders), isn't the corporation by definition a slave to the stockholders? Wasn't that outlawed by the 13th Amendment except in cases of punishment for a crime? I think that you cannot make a case that corporations are slaves because of such punishment, ergo, corporations are illegal in the United States. I rest my case (at least in the US case).
As I sit here in the Wyhdham Resort and Casino in The Bahamas typing this blog, I am reminded of something I tell my students in my classes about the problems of corporate CEOs receiving stock options. Since they receive only upside (stock prices can only go to zero in the extreme on the downside), it would be like handing $50,000 to each of them and telling them to go to the casino and whatever they win with my money we will split but if they lose the money, they are not liable for my losses.
I would want them to play Blackjack -- they will go for Roulette and the Slot Machines. By going for the riskiest games, they increase their chances of large scale gain. After all, it isn't their money.
What personhood does for the corporation is allow it to declare bankruptcy even before it destroys its common stock. Thus, corporate stockholders get effectively two bites of the apples -- no, actually three, for they can always turn around and sell to another sucker in the market (only the last one holding the stock has a 100% loss). Of course, eliminating limited liability entirely might prove too drastic a step for those who wish to be market participants but who have little in the way of actual assets. We can solve this problem by limiting limited liability only to shareholders who hold less than 1% of the overall common stock and who do not hold a senior management position at the C-level (CEO, CFO, CIO, etc.) or above (e.g., President, Chairman). Such di minimus participation is incompatible with being able to fundamentally alter the overall course of the business.
Furthermore, do not allow senior managers to be senior managers unless they have at least 1% of the overall common stock (make them have "skin in the game", so to speak) and then apportion the excess of limited liability to those senior managers. Sell so that you drop to less than 1% and you have to immediately resign your senior leadership position.
Now the personhood issue can actually be put to bed quite easily. After all, the US Constitution prohibits slavery and involuntary servitude (13th Amendment). If corporations are persons and they are owned by other persons (stockholders), isn't the corporation by definition a slave to the stockholders? Wasn't that outlawed by the 13th Amendment except in cases of punishment for a crime? I think that you cannot make a case that corporations are slaves because of such punishment, ergo, corporations are illegal in the United States. I rest my case (at least in the US case).
Wednesday, March 30, 2011
Property Rights are All Important: The Economics of The Lorax
While there have been lesson plans written around Dr. Suess's The Lorax, they have tended to centre around what liberals see as the fundamental tension between capitalism and the environment. However, I think that they are mistaken here. The issue is actually all about property rights and thus what is needed is more capitalism, not less.
Yes, it is true that Dr. Suess saw this story as such a parable, buried within its text is the evidence for the opposite. Consider this quote at the end (emphasis added in boldface and italics), which is what is supposed to be the true lesson:
"You're in charge of the last of the Truffula Seeds. And Truffula Trees are what everyone needs.Plant a new Truffula. Treat it with care. Give it clean water. And feed it fresh air. Grow a forest. Protect it from axes that hack. Then the Lorax and all of his friends may come back."
The only way that someone can "protect it from axes that hack" is by property rights. Unless you own something you have no right to tell everyone else that they cannot use it.
We note that at first the Lorax attempted to exert property rights (emphasis added in boldface and italics), "What's that THING you've made out of my Truffula tuft?"
The problem is that the Lorax makes two critical errors. First, he failed to emphasize that the Truffula tuft was owned by the Lorax. Instead, he concentrated on the Thnead that the Once-Ler made. Second, the Lorax attempted to appeal to the Once-Ler's altruism by showcasing the damage caused by Thnead production. But why should the Once-Ler care about this? Let's showcase what Adam Smith says about altruism versus self-interest in The Wealth of Nations:
The Lorax has this reversed. He attempts repeatedly to address the Once-Ler's humanity, not his self-love. So, naturally, the Once-Ler would not listen.
What The Lorax should have done was sue the Once-Ler for theft or, in the absence of responsible government, he should have shot the Once-Ler (never brings a knife/ax to a gun fight!). However, he apparently did not have a property deed nor a gun (believe me, however, launching a lawsuit is far more preferable to taking matters in your own hands).
Of course, the Lorax does make several property claims. He talks about "my trees", "my poor Bar-ba-loots", and "my poor Swammie Swams." But he makes no attempt to enforce those claims besides blistering talk. Yet without enforcement of property rights, the rights mean virtually nothing.
Indeed, by not enforcing his property rights, he allowed the Once-Ler to argue as follows:
"All you do is yap-yap and say, Bad! Bad! Bad! Bad! Well, I have my rights, sir, and I'm telling you I intend to go on doing just what I do!"
You see, folks, it is important to have property rights but it is equally important to enforce those property rights-- and that is the true lesson we should take from The Lorax, not the feel-good environmentalism about what we should do. After all, even the environmental movement requires that force be applied against those who would seek to cause harm to the environment but how do we know how to balance the needs of the environment and the needs of the economy? You can argue until you are blue in the face that the environment should take precedence but you would end up only being blue in the face. What matters is whether you have the authority to force others to respect your decision and that can only come from one of two sources: authoritarian command and control (i.e., Communism) or freedom with property rights (i.e., Capitalism). I'll take Capitalism every time.
Of course, those on the Left will argue that it is "unfair" that those with so much will be able to run roughshod over those with so little but they are mistaken in their critique. For those with so much always run roughshod over those with so little whether under Communism or Capitalism. The difference is that if you can acquire wealth under capitalism, the capitalists will freely respect and uphold your right to do with your property as you wish. However, no one will respect your rights under communism -- you must uphold them by force.
Yes, it is true that Dr. Suess saw this story as such a parable, buried within its text is the evidence for the opposite. Consider this quote at the end (emphasis added in boldface and italics), which is what is supposed to be the true lesson:
"You're in charge of the last of the Truffula Seeds. And Truffula Trees are what everyone needs.Plant a new Truffula. Treat it with care. Give it clean water. And feed it fresh air. Grow a forest. Protect it from axes that hack. Then the Lorax and all of his friends may come back."
The only way that someone can "protect it from axes that hack" is by property rights. Unless you own something you have no right to tell everyone else that they cannot use it.
We note that at first the Lorax attempted to exert property rights (emphasis added in boldface and italics), "What's that THING you've made out of my Truffula tuft?"
The problem is that the Lorax makes two critical errors. First, he failed to emphasize that the Truffula tuft was owned by the Lorax. Instead, he concentrated on the Thnead that the Once-Ler made. Second, the Lorax attempted to appeal to the Once-Ler's altruism by showcasing the damage caused by Thnead production. But why should the Once-Ler care about this? Let's showcase what Adam Smith says about altruism versus self-interest in The Wealth of Nations:
| It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. |
The Lorax has this reversed. He attempts repeatedly to address the Once-Ler's humanity, not his self-love. So, naturally, the Once-Ler would not listen.
What The Lorax should have done was sue the Once-Ler for theft or, in the absence of responsible government, he should have shot the Once-Ler (never brings a knife/ax to a gun fight!). However, he apparently did not have a property deed nor a gun (believe me, however, launching a lawsuit is far more preferable to taking matters in your own hands).
Of course, the Lorax does make several property claims. He talks about "my trees", "my poor Bar-ba-loots", and "my poor Swammie Swams." But he makes no attempt to enforce those claims besides blistering talk. Yet without enforcement of property rights, the rights mean virtually nothing.
Indeed, by not enforcing his property rights, he allowed the Once-Ler to argue as follows:
"All you do is yap-yap and say, Bad! Bad! Bad! Bad! Well, I have my rights, sir, and I'm telling you I intend to go on doing just what I do!"
You see, folks, it is important to have property rights but it is equally important to enforce those property rights-- and that is the true lesson we should take from The Lorax, not the feel-good environmentalism about what we should do. After all, even the environmental movement requires that force be applied against those who would seek to cause harm to the environment but how do we know how to balance the needs of the environment and the needs of the economy? You can argue until you are blue in the face that the environment should take precedence but you would end up only being blue in the face. What matters is whether you have the authority to force others to respect your decision and that can only come from one of two sources: authoritarian command and control (i.e., Communism) or freedom with property rights (i.e., Capitalism). I'll take Capitalism every time.
Of course, those on the Left will argue that it is "unfair" that those with so much will be able to run roughshod over those with so little but they are mistaken in their critique. For those with so much always run roughshod over those with so little whether under Communism or Capitalism. The difference is that if you can acquire wealth under capitalism, the capitalists will freely respect and uphold your right to do with your property as you wish. However, no one will respect your rights under communism -- you must uphold them by force.
Sunday, March 27, 2011
Why the Chances for a Double Dip Recession Are Close to 100%
The global supply chain is broken and the falacy of "just-in-time" inventory control has revealed itself. Welcome to the Recession of 2011. Historians will date the cause of this to the earthquake and tsunami in Japan a couple of weeks ago but it will be dated by the economists as starting in the April-June quarter of 2011.
When one piece of a global supply chain goes down, it takes down the rest of the chain and it is all because of a really stupid idea called "just-in-time" inventory, a concept trumpeted by neoclassical economists as being the ultimate in allocative efficiency but which should cause them to go back and reevaluate their theories in light of this calamity.
The problem is that neoclassical economics has no proper conception of time. Oh, for certain, there is a conception of time but it is a logical time that concerns itself with sequencing rather than the temporal distance between sequences. It is one that allows for the "short-run" and the "long-run" and which treats technology as a non-stochastic process that marches on from one "period" to the next without defining how long a period actually is.
It is a theory that explains how competitive industries (perfectly or otherwise) operate and how monopolies operate but cannot explain how competitive industries turn into monopolies or vice versa.
Yet the world is wrought with stochastic processes, such as the earthquake in Japan and those stochastic processes end up wrecking havoc with the models. After all, whenever you introduce a random shock into a model, it is important to determine how long that shock will last, the 'persistence' of it, if you will.
The problem is that since random shocks are just that - random - companies that use economic theory to help decide on how to maximize profit tend to ignore them. Yet the random shock may reverb for a longer period of time with some decisions than with others. This earthquake is just one such example.
By attempting to excise all "inefficiency" from the system, we create inefficiency. Engineers fundamentally understand that, as do systems designers. Neoclassical economists often do not. Redundancy in engineering is not inefficient; it is a mechanism to reduce overall failure. Tolerance is not efficient; it is a mechanism to ensure reliability. Yet the global supply chain exhibits neither of these two important characteristics and it is especially problematic when we are dealing with high-value parts that take a long time to fabricate (in some cases, months--and even a brief interruption in power can send you back to step 1).
The irony is that many of the actual plants where these parts are made have redundancy and tolerance build in to them -- it is the global supply chain itself that lacks these characteristics. That is because the plants were build by engineers, while the global supply chain was created by neoclassical economists.
When we ignore redundancy and tolerance, we end up maximizing returns in the short-period, but end up sacrificing the long-run. Of course, as Keynes said, in the long-run, we are all dead. However, I would add that we all live in the long-run, not the short-run and that should be the lesson that the great Japan earthquake and tsunami of 2011 teaches us.
Unfortunately, what it will take for us to learn is another recession and that is exactly what will happen. This will be the first "made in Japan" global recession for two critical reasons.
First, all because that country is the hub of activity for the world's high-tech needs and because everything is high-tech these days. Automobiles will be the first to drop in terms of their productive capacity but the ramifications will be felt in other industries as well: computers, video game consoles, televisions, kitchen appliances--if it has a Japanese part in it, it is affected.
Second, and perhaps more importantly for the US, Japan's need for funds to rebuild will cause pressure on US interest rates as Japanese savers stop investing in our bonds and start repatriating funds home. It will also cause a large exodus by insurance companies from various investments as they must liquidate positions to pay claims. To the extent that these investments are in US treasuries, it will also cause a rise in US interest rates.
Third, although US construction companies are salivating at the prospect of rebuiling, much of the expenditure will be in Japan and, to the extent that they must delay or scrap building projects in the United States, this activity will lower construction spending in this country.
We have met the enemy -- and it is us. Just as I urged back in 1995 when the Great Hanshin earthquake hit Kobe and first exposed cracks in the global supply chain, I am going to urge this again: we must build in redundancy and tolerance into our supply chains before it is too late.
When one piece of a global supply chain goes down, it takes down the rest of the chain and it is all because of a really stupid idea called "just-in-time" inventory, a concept trumpeted by neoclassical economists as being the ultimate in allocative efficiency but which should cause them to go back and reevaluate their theories in light of this calamity.
The problem is that neoclassical economics has no proper conception of time. Oh, for certain, there is a conception of time but it is a logical time that concerns itself with sequencing rather than the temporal distance between sequences. It is one that allows for the "short-run" and the "long-run" and which treats technology as a non-stochastic process that marches on from one "period" to the next without defining how long a period actually is.
It is a theory that explains how competitive industries (perfectly or otherwise) operate and how monopolies operate but cannot explain how competitive industries turn into monopolies or vice versa.
Yet the world is wrought with stochastic processes, such as the earthquake in Japan and those stochastic processes end up wrecking havoc with the models. After all, whenever you introduce a random shock into a model, it is important to determine how long that shock will last, the 'persistence' of it, if you will.
The problem is that since random shocks are just that - random - companies that use economic theory to help decide on how to maximize profit tend to ignore them. Yet the random shock may reverb for a longer period of time with some decisions than with others. This earthquake is just one such example.
By attempting to excise all "inefficiency" from the system, we create inefficiency. Engineers fundamentally understand that, as do systems designers. Neoclassical economists often do not. Redundancy in engineering is not inefficient; it is a mechanism to reduce overall failure. Tolerance is not efficient; it is a mechanism to ensure reliability. Yet the global supply chain exhibits neither of these two important characteristics and it is especially problematic when we are dealing with high-value parts that take a long time to fabricate (in some cases, months--and even a brief interruption in power can send you back to step 1).
The irony is that many of the actual plants where these parts are made have redundancy and tolerance build in to them -- it is the global supply chain itself that lacks these characteristics. That is because the plants were build by engineers, while the global supply chain was created by neoclassical economists.
When we ignore redundancy and tolerance, we end up maximizing returns in the short-period, but end up sacrificing the long-run. Of course, as Keynes said, in the long-run, we are all dead. However, I would add that we all live in the long-run, not the short-run and that should be the lesson that the great Japan earthquake and tsunami of 2011 teaches us.
Unfortunately, what it will take for us to learn is another recession and that is exactly what will happen. This will be the first "made in Japan" global recession for two critical reasons.
First, all because that country is the hub of activity for the world's high-tech needs and because everything is high-tech these days. Automobiles will be the first to drop in terms of their productive capacity but the ramifications will be felt in other industries as well: computers, video game consoles, televisions, kitchen appliances--if it has a Japanese part in it, it is affected.
Second, and perhaps more importantly for the US, Japan's need for funds to rebuild will cause pressure on US interest rates as Japanese savers stop investing in our bonds and start repatriating funds home. It will also cause a large exodus by insurance companies from various investments as they must liquidate positions to pay claims. To the extent that these investments are in US treasuries, it will also cause a rise in US interest rates.
Third, although US construction companies are salivating at the prospect of rebuiling, much of the expenditure will be in Japan and, to the extent that they must delay or scrap building projects in the United States, this activity will lower construction spending in this country.
We have met the enemy -- and it is us. Just as I urged back in 1995 when the Great Hanshin earthquake hit Kobe and first exposed cracks in the global supply chain, I am going to urge this again: we must build in redundancy and tolerance into our supply chains before it is too late.
The Miracle of Compounding Interest (and Economic Growth)
Mitch McConnell tried to put $1 trillion into perspective when he told a crowd that if you spent $1 million a day every day starting on the day that Jesus was born, you would not reach $1 trillion. That seems like a lot, doesn't it? However, if you invested just $1 on the day that Jesus was born and received only 1.4% per year (less than what I earn on my certificate of deposit even in these low-inflation/low-interest times), you would reach, are you ready for this? $1.368 trillion.
That is the miracle of compounding interest. However, reduce the interest rate by only 0.4% down to a mere 1% per year and your total take would drop to -- are you ready for this? $485 million. Still not a bad take but notice that a difference of only 0.4% compounded over 2,010 years and you end up more than an order of magnitude away.
That is the miracle of compounding interest. However, reduce the interest rate by only 0.4% down to a mere 1% per year and your total take would drop to -- are you ready for this? $485 million. Still not a bad take but notice that a difference of only 0.4% compounded over 2,010 years and you end up more than an order of magnitude away.
This insight has important implications for economic growth. Notice that if we increase our growth rate by a mere 0.4% (or reduce it by the same), over two millenium we reach of level that is over 2800 TIMES greater. To put that in perspective, it is the difference between someone making $84.6 million a year and someone making $30,000. Since no economic system, even capitalism, has such large disparaties in wealth for more than a few outliers in society, any economic system that can increase economic growth by even an infintessimal amount is automatically superior to all others regardless of the wealth disparaties within it.
Yet, the only way to do this is to protect and extend private property rights. Why would I produce if I did not gain (most of) the fruits of my labors? Everyone understands this and yet too many are tempted by the evils of those who would take these rights away. Communism seems easy: from each according to their ability, to each according to their need. But it fails in practice. It really becomes: from each according to their ability to do as little as possible, to each according to their ability to convince the powers that be that they have "need".
I teach at a university. If I graded by the Communist mantra, everyone would automatically pass even if they did not deserve to do so. Each would work to their ability without being motivated by grades. How realistic is that?
No, people act not out of kindness but out of regard to their own self-interest -- and we have a better society because of it. From Adam Smith: "It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages."
And that, boys and girls, is why even small inefficiencies must be excised from our economy and why proposals for abolishing private property, such as those made by Communists, are nothing more than the purest form of evil.
Yet, the only way to do this is to protect and extend private property rights. Why would I produce if I did not gain (most of) the fruits of my labors? Everyone understands this and yet too many are tempted by the evils of those who would take these rights away. Communism seems easy: from each according to their ability, to each according to their need. But it fails in practice. It really becomes: from each according to their ability to do as little as possible, to each according to their ability to convince the powers that be that they have "need".
I teach at a university. If I graded by the Communist mantra, everyone would automatically pass even if they did not deserve to do so. Each would work to their ability without being motivated by grades. How realistic is that?
No, people act not out of kindness but out of regard to their own self-interest -- and we have a better society because of it. From Adam Smith: "It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages."
And that, boys and girls, is why even small inefficiencies must be excised from our economy and why proposals for abolishing private property, such as those made by Communists, are nothing more than the purest form of evil.
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