Video: Mises Institute's Peter Klein on Bitcoin, Central Banking and Ideology

Peter G Klein, Mises Institute’s Executive Director and Carl Menger Research Fellow, explains of the importance of ideology in the evolution of cryptocurrencies.

(source Mises Blog)

As the great Austrian economist Ludwig von Mises wrote

The genuine history of mankind is the history of ideas. It is ideas that distinguish man from all other beings. Ideas engender social institutions, political changes, technological methods of production, and all that is called economic conditions. And in searching for their origin we inevitably come to a point at which all that can be asserted is that a man had an idea

Why the Pork Barrel Will Unlikely be Abolished

From today’s headlines:

In face-to-face interviews with 1,200 respondents aged 18 and above who were randomly selected nationwide, Pulse Asia also found that 67 percent believed that corrupt practices during the Arroyo administration involving the PDAF continued under the Aquino administration.

Most Filipinos, thus, approved of President Aquino’s announcement that the time had come for the scrapping of the pork barrel.

For about one in three Filipinos (32 percent), politicians were using the PDAF to get themselves and their relatives elected, while another 27 percent said the pork had given lawmakers an opportunity to receive bribes and commissions.

A fundamental reason why the Pork Barrel will unlikely be abolished (but will likely be transformed into another Pork with a lipstick) can be deduced from the consensus perspective which views the problem of Pork as having been based from personality virtues rather than an institutional-structural disease 

 

And media and their experts reinforce the populist belief that nirvana will be achieved (or the Pork will be of merit) once “angels” would run the government. 

But as 4^th President of the United Sates and “Father of the Constitution” James Madison Jr. warned in the Federalist papers (Federalist 51),

If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself. A dependence on the people is, no doubt, the primary control on the government; but experience has taught mankind the necessity of auxiliary precautions.

Government is about political power or the control of people and of resources by a few. Or political power is about the rule of men over men.

This means political power is hardly about righteousness for the simple reason that political power is about organized force. And to acquire and wield political supremacy means political agents will resort to all forms of manoeuvrings (which includes unethical means) for the purpose of acquiring the privilege of control over men.

The principle of economics tells us too that politicians and bureaucrats, like all the rest, are mere mortal human beings who are driven by self-interests (Public choice) and thus will be subject to the frailties and temptations of the common men.

But instead of promoting equality through opportunity and law, political power is about unjust coercive redistribution, as the illustrious economist Thomas Sowell says it best

The first lesson of economics is scarcity: There is never enough of anything to fully satisfy all those who want it.

The first lesson of politics is to disregard the first lesson of economics. When politicians discover some group that is being vocal about not having as much as they want, the “solution” is to give them more. Where do politicians get this “more”? They rob Peter to pay Paul.

After a while, of course, they discover that Peter doesn’t have enough. Bursting with compassion, politicians rush to the rescue. Needless to say, they do not admit that robbing Peter to pay Paul was a dumb idea in the first place. On the contrary, they now rob Tom, Dick, and Harry to help Peter.

In a related separate but related issue we see a variant of the Pork Barrel in action… (from another Inquirer article today)

In spite of widespread public outrage, the presidential body tasked with overseeing the pay and perks of state corporations justified Monday the bonuses that the Social Security System (SSS) had rewarded its managers while ramping up contributions of members, noting that 19 other state corporations have also handed out such management windfalls.

Paolo Salvosa, the spokesman of the Governance Commission for Government Owned or Controlled Corporations (GCG), talked to reporters after the panel members went to Malacañang to defend the much-maligned P1 million that the SSS board, headed by Emilio S. de Quiros as president and vice chair, ordered for each of its directors.

De Quiros announced at the same time that employees’ contributions to the SSS would be increased by 0.6 percent, raising their monthly salary contributions from 10.4 to 11 percent.

He said this would stretch pension funding capability “to perpetuity.” He indicated further increases in premiums were forthcoming.

The SSS chief has been roundly criticized, among others, for taking trips abroad, first class, all expenses paid, every two months since he took over the pension agency.

One may not be “corrupt” in the sense of 'kickbacks' and directly from pocketing of taxpayer funds, but the principle has been the all the same…

The politics of coercive redistribution is about the spending other of people’s money through the predation of Juan to pay Pedro and from the intermediation of political agents, who likewise benefits by getting a cut from such forcible transfer process. 

And Pork Barrel represents an element of the politics of coercive redistribution. It has been always easy to spend the toils and savings of other people in order to get elected or to maintain populist approval or for personal perks.

And in defense of the system, politicians run circles on the public by emitting smoke screens of putting the blame on previous administrations rather than to come clean by being transparent or by proving to the public of their alleged moral excellence by opening their earmarks (past and present) for scrutiny. 

Politicians also resort to legal technicalities to prevent such happening.

Bottom line: for as long politicians will be able to persuade their constituencies of the supposed necessity of spending other people’s money, the Pork barrel won’t likely be abolished.

The constituency should demand to scrutinize the Pandora’s Box as I earlier wrote

Yet the public should clamor for an independent non-partisan audit on earmarks (Pork barrel) of all incumbent officials (which should include previous tenures or positions) beginning with the highest to the lowest ranking.

This means abolishing the Pork may only happen from a radical reformation or transformation of public opinion. Or said differently, only when the public will be thoroughly convinced that the Pork is an incorrigible institutional defect will abolishing the Pork become a reality.

As the great Ludwig von Mises wrote (bold mine)

What determines the course of a nation's economic policies is always the economic ideas held by public opinion. No government, whether democratic or dictatorial, can free itself from the sway of the generally accepted ideology.

India’s Economic Growth Slows, Choked by Politics

From Bloomberg

India’s economy expanded at the weakest pace in at least eight years last quarter, hurt by a slowdown in investment that has undermined the rupee and set back Prime Minister Manmohan Singh’s development agenda.

Gross domestic product rose 5.3 percent in the three months ended March from a year earlier, compared with 6.1 percent in the previous quarter, the Central Statistical Office said in a statement in New Delhi today. The median of 31 estimates in a Bloomberg News survey was for a 6.1 percent gain. GDP climbed 6.5 percent in the year to March, the office said.

Singh faces a struggle to bolster expansion as Europe’s debt crisis dims the global outlook and elevated inflation and a record trade deficit limit room for more interest-rate cuts to boost spending at home. Discord within the ruling coalition and claims of graft have impeded his push to open up the economy, deterring investment and sending the rupee to its lowest level.

Well, India’s economic deceleration poses as another factor that contributes to the current environment marked by accentuated uncertainty.

The chart above from tradingeconomics.com does not include the today’s data.

Left of center analyst Satyajit Das at the Minyanville.com has a pretty good account of India’s lingering economic woes, and a list of obstacles towards attaining a developed economy status. (bold emphasis mine)

In recent years, India has consistently run a public sector deficit of 9-10% of GDP (if state debt and off-balance-sheet items are included). The problem of large budget deficits is compounded by poorly targeted subsidies for fertilizer, food, and petroleum, which amount to as much as 9% of GDP. Currently the official deficit is just over 3% of GDP, but trending higher and the highest in the G-20.

In March 2012, India brought out a budget forecasting an official fiscal deficit of 5.9%, well above its previous fiscal deficit target of 4.6%. India’s strong rate of recent growth (an average rate of 14% between 2004-2005 and 2009-2010) made large deficits, in the order of 10% of GDP, relatively sustainable. Slowing growth will increasingly constrain India’s ability to manage large deficits.

As its debt is denominated in rupees and sold domestically, India faces no immediate financing difficulty. Instead, the government’s heavy borrowing requirements crowds out private business.

However, exports are slowing as a result of weakness in India’s trading partners. Higher imports, mainly non-discretionary purchases of commodities and oil, have increased. India imports around 75% of its crude oil from overseas.

India’s weak external position has manifested itself in the volatility of the rupee, which was one of the worst performers among Asian currencies in 2011. Indian businesses, which have unhedged foreign currency borrowings, have incurred significant losses as the value of their debt rises as the rupee falls. Many Indian companies face large debt maturities in the coming year.

India has around US$250-300 billion in currency reserves. Foreign debts that must be repaid in the current year represent about 40-45% of this amount which highlights the increasing weakness in India’s external position.

Further, India is plagued by inadequate infrastructure especially in critical sectors like power, transport, and utilities. While its workforce is young and growing, there is a shortage of skills which has led to large increases in salaries for skilled workers.

The above account shows how India has been TOO reliant on the government.

Since government spending is ALWAYS politically determined, where decisions are usually made according to the needs of the moment or on what is presently popular or on what will accrue to votes for politicians (public choice theory), then the obvious result has been wastage, inefficiency and corruption.

Such dynamic has been the same even in the US, the erstwhile bastion of the market economy where dependence on government spending can be equated to crony capitalism.

Also infrastructure problems represent symptoms of too much politicization, viz., regulations and bureaucracy.

Now for the fun part. Adds Mr. Das… (bold highlights mine)

Corruption and Political Atrophy

Another major problem is large-scale, deep-seated and endemic corruption, highlighted by scandals surrounding the issue of telecommunication licenses and the sale of coal assets.

Used to accessing power and influencing politicians, businesses have advanced their interest in securing rich natural resources, especially land and minerals, and ensured a favorable regulatory framework restricting competition, especially from foreign companies.

India’s economic challenges are compounded by internal and external security concerns. For 2012, Indian defense spending is forecast to be $41 billion, around 1.9% of GDP or the ninth highest in the world. Financing this spending diverts resources away from other parts of the economy.

Political paralysis is another impediment to economic development. Successive governments have failed to undertake meaningful reforms. Complex coalition governments are a barrier to decisive action. The current government failed to implement its own plans to allow limited entry of foreign retailers. The government also failed to get a key anti-corruption bill through parliament.

Changes in land and property laws have not been made. Problems in acquiring land, for instance, are a factor in 70% of delayed infrastructure projects. The land acquisition process falls under a 19th century law and amendments proposed three years ago remain unlegislated.

Tax law reforms, including introduction of a direct sales tax correcting cumbersome differences in individual states, have not been completed. Changes to mining and mineral development regulations to allow proper, environmentally controlled exploitation of India’s mineral wealth have not been made.

Other crucial areas that remain unaddressed include rationalizing unwieldy and economically distorted subsidies; implementing economic pricing of utilities; promoting foreign investment in key sectors; reforming agriculture, especially the wasteful and inefficient logistics system for transporting produce to market. Reform of labor markets and privatization of key sectors has not progressed.

To sum it up, the basic reason why India’s economic advances has stalled has been due to the lack of economic freedom: particularly, too much government spending (crowding out effect), too much regulations (evidenced by stringent labor regulations, corruption), political concessions (subsidies, price controls), protectionism (restriction of foreign investments, and restrictions on agricultural and mining investments) and problems concerning property rights (land and property laws)

Indians have been used to the “License Raj” mentality or a business or commercial environment strangulated by elaborate licenses, regulations, and stultifying red tape, where vested interest groups fervently compete to acquire political power to generate economic clout at the expense of society.

India’s structural problems has important parallels with the Philippine political economy.

Nonetheless people’s opinions signify as the most important force in determining political trends that ultimately affects the state of the economy.

Another quote of wisdom from the great Ludwig von Mises

Many who are aware of the undesirable consequences of capital consumption are prone to believe that popular government is incompatible with sound financial policies. They fail to realize that not democracy as such is to be indicted, but the doctrines which aim at substituting the Santa Claus conception of government for the night watchman conception derided by Lassalle. What determines the course of a nation's economic policies is always the economic ideas held by public opinion. No government, whether democratic or dictatorial, can free itself from the sway of the generally accepted ideology.

Bottom line: the direction of economic growth will run along the prevailing ideology held by the citizenry. The greater the dependence on governments, the lesser the dynamism of the economy and vice versa.

Economic freedom ultimately determines the society's prosperity.

Confusing Corporatism with Capitalism

Bashing capitalism has been the chic thing to do for people who bear ideological spite on it or for those who advance statism as solution to social ills.

Yet in reality, current crisis has not been laissez faire capitalism but about the nefarious relationship of the welfare-warfare state, their private sector allies and their behind-the-scene guarantors or backers, the central banks. Such political arrangement comes in various nomenclature: state capitalism or corporatism or crony capitalism or economic fascism.

Professors Edmund S. Phelps and Saifedean Ammous at the Project Syndicate explains the difference, (bold emphasis added) [hat tip Peter Boettke]

Capitalism became a world-beater in the 1800’s, when it developed capabilities for endemic innovation. Societies that adopted the capitalist system gained unrivaled prosperity, enjoyed widespread job satisfaction, obtained productivity growth that was the marvel of the world and ended mass privation.

Now the capitalist system has been corrupted. The managerial state has assumed responsibility for looking after everything from the incomes of the middle class to the profitability of large corporations to industrial advancement. This system, however, is not capitalism, but rather an economic order that harks back to Bismarck in the late nineteenth century and Mussolini in the twentieth: corporatism.

In various ways, corporatism chokes off the dynamism that makes for engaging work, faster economic growth, and greater opportunity and inclusiveness. It maintains lethargic, wasteful, unproductive, and well-connected firms at the expense of dynamic newcomers and outsiders, and favors declared goals such as industrialization, economic development, and national greatness over individuals’ economic freedom and responsibility. Today, airlines, auto manufacturers, agricultural companies, media, investment banks, hedge funds, and much more has at some point been deemed too important to weather the free market on its own, receiving a helping hand from government in the name of the “public good.”

The costs of corporatism are visible all around us: dysfunctional corporations that survive despite their gross inability to serve their customers; sclerotic economies with slow output growth, a dearth of engaging work, scant opportunities for young people; governments bankrupted by their efforts to palliate these problems; and increasing concentration of wealth in the hands of those connected enough to be on the right side of the corporatist deal.

This shift of power from owners and innovators to state officials is the antithesis of capitalism. Yet this system’s apologists and beneficiaries have the temerity to blame all these failures on “reckless capitalism” and “lack of regulation,” which they argue necessitates more oversight and regulation, which in reality means more corporatism and state favoritism.

In short, capitalism essentially is about serving consumers (or the needs of the masses), while corporatism is about fulfilling the interests of political masters.

Critics of capitalism have been engaged in equivocation by deliberately mangling the definitional context of capitalism.

Nevertheless, pushing for the same state based political solution will bring about the day of reckoning, as the Professors conclude,

The legitimacy of corporatism is eroding along with the fiscal health of governments that have relied on it. If politicians cannot repeal corporatism, it will bury itself in debt and default, and a capitalist system could re-emerge from the discredited corporatist rubble. Then “capitalism” would again carry its true meaning, rather than the one attributed to it by corporatists seeking to hide behind it and socialists wanting to vilify it.

I am with the professors that given the current direction of policymaking, the top-bottom or centralization based political economic system is likely headed for self-implosion.

And I am hopeful too that capitalism will emerge from their ashes, especially backed by accelerating advances in technology. But as caveat, nothing in life operates in a straight line or that the transition towards a decentralized-capitalist political economy could be messy.

Quote of the Day: Political Virtues from the Public Choice Perspective

Faced with the argument that politics is a game where self-interested businesses, labour unions and government bureaucrats use the state to enrich themselves at public expense, some left-wingers respond by denying that this is so. Politics they say is motivated by ‘values’ and this is something that the economistic focus of public choice theory simply doesn’t take account of. I for one have a good deal of sympathy with this line of argument. It seems far too simplistic to maintain that every public policy that exists is there because of special interest forces. To suggest otherwise is to be guilty of a sort of ‘right-wing Marxism’. The problem for left-wingers who make this sort of response to public choice, however, is that it implies that many of the quasi- conspiracy theories that are often their most important mobilisation tactic have to be abandoned as well. Might it just be that that central banks and financial regulators who pursued a policy of loose money and the lowering of lending standards did so because they believed it was the ‘right thing to do’ and not because they were in the pockets of corporate bankers? If politics is really about values and ideas then perhaps we should look to the power of ‘mistaken theories’ (such as Keynesianism and Monetarism) as the cause of government failure rather than the corrupt dealings of the ‘top 1%’.

From Mark Pennington.

Does 'mistaken theories' cause political "value and ideas"or the other way around (or biased "value and ideas" of special interest groups use the cover of mistaken theories to promote their policies)?

Quote of the Day: Dogmatism

Great stuff from Professor Steve Horwitz,

If dogmatism is the continued arrogant adherence to a set of ideas regardless of the evidence to support them or arguments against them, the real dogmatists right now are those who continue to cling stubbornly to the belief, against the piled up evidence to the contrary, that more government is the way out of this mess. Liberals and progressives (as well as a good number of conservatives) who claim to believe in reason and evidence and to oppose dogma need to take a good long look in the mirror and decide whether they want to take the advice of Einstein who defined insanity as "doing the same thing over and over again and expecting different results.

Side note: quoted definition of insanity has been frequently misattributed to Benjamin Franklin, Mark Twain or Albert Einstein (according to Wikipedia.org). Most likely origin Rita Mae Brown

Ideology, Economics and Policy Making

New York University's Mario Rizzo in his "In Defense of Reasonable Ideology" delivers a sterling dissertation of why economic ideology matters in conducting economic policy analysis.

Some noteworthy excerpts from Professor Rizzo,

``In the realm of scientific hypotheses, even the “falsificationist” Karl Popper accepted a principle of tenacity which had it that hypotheses are not to be dropped in face of any conflicting evidence. No hypothesis will have a 100% of the evidence in its favor. Is this rational? It depends on the nature of the prior probabilities or the prior hypothesis. Suppose someone says: “By and large the free market is best, among all of the feasible alternatives, at promoting human welfare.” Is this ideology? I think most people would say it is. What is it based on? Well, for some people it may be a religion or faith or sorts. But then its negation can be as well. However, it need not be a faith.

``Ideologies stress the interconnections among policies and problems. They may point us in the direction of the general principle implied by a policy and hence the implicit rationalization of further policies. They may make us alert to unintended changes in incentives in related problem areas especially when this worsening of other problems has happened time and again. They show us that when the State intervenes there is more than just some pinpointed technology involved.

``Most people are not scientists, economists or intellectuals. They are not testing hypotheses. They have other things to do. They are often rationally ignorant. How can they make up their minds about public policy? Many, though not all, are ideological. They choose a set or complex of beliefs that comports best with their observations and experience. For them too it is not rational to give up the world view because some (few) observations seem to conflict. Forgive some of them who are not willing to throw away long-held beliefs on the say-so of a president who is someone most never heard of eighteen months ago.

``Public policy questions are not simply technical questions. They involve ethical issues...The science is the technical aspect: causes and effects. The ethics involves the standards that are applied to determine whether a state of affairs is good or just. And the art involves the sometimes intuitive judgments of how to apply the science to get (or allow) the outcomes policymakers want."

Read the rest here