Quote of the Day: The Difference between Marketists and Statists

At the Cafe Hayek, Professor Don Boudreaux differentiates free marketers "marketists" and collectivists "statists"

Here’s one difference between marketists and statists: We marketists understand (or think we understand) that the margins are many on which private people can adjust their actions in response to changes in constraints and in opportunities – be these changes caused by the market or by the state. And not only is the number of possible margins of adjustment large, many of these margins are so small in size or fleeting in their existence that they are undetectable by outside observers.

Statists, in contrast, seem me to suppose both that the number of margins on which private people can adjust their actions is relatively small, and that these margins are mostly detectable by outside observers.

This difference between marketists and statists results in marketists – compared to statists – being less pessimistic about markets and more pessimistic about state action.

Why more optimistic about markets? Because with many margins on which to adjust, private market actors have great scope to find or to craft market outcomes that are closely tailored to each actor’s individual preferences.

Why the pessimism about state action? Well, the large number of such margins and the invisibility of their details to everyone who is not ‘on the spot’ combine with the subjectivity of each person’s preferences to make it practically impossible for government officials to assess how well or how poorly markets are working. Too much is unseen – indeed, too much is unseeable – to render imposed collective decisions likely to improve the general welfare.

So my thesis is this: marketists understand, appreciate, and respect the enormous complexity of reality; statists do not. Statists believe reality to be far simpler than it is.

Perhaps statists are misled into such a misconception of reality by their theorizing. For example, the variables conventionally used in economic models to express economic relationships and connections are easy to mistake for being realistic and exhaustive representatives of real-world entities.

Or perhaps such people just do not think deeply. Perhaps they are misled by words used to describe collections of people – for example, “low-skilled workers”; “the steel industry”; “retailers”; “college students”; “smokers” – to miss the multitudinous differences that often separate the individual entities within any one of these categories from others within the same category.

Whatever the reason, the simpler one supposes reality to be, the greater are the prospects – one supposes – for outsiders to grasp reality fully enough to engineer it into a better state.

Here’s a related hypothesis: the simpler one supposes reality to be, the more readily one forgets Thomas Sowell’s observation that there are no ‘solutions,’ only trade-offs. Put differently, the simpler one supposes reality to be, the more prone one is to fall for a good-guy / bad-guy account of reality.

All problems are easily identifiable and are caused by evil-doers: deceitful business executives; hate-filled racist homophobes; stingy middle-class voters. The solution is to send in the good guys to defeat the bad guys; to exorcise the devil and undo his deeds, replacing Satan, if not with angels, with noble public servants bent on saving the day and doing what’s right.

When the economy is seen as a relatively simple mechanism – when society is viewed as one views a passion play or a Hollywood movie in which good and evil are unambiguous, and in which evil persists only because too few good people have yet to spring into action – then there seems to be a natural urge to call in a superhero to obliterate evil and misfortune.

Statists fail to appreciate the complexities of reality and, therefore, exhibit hubris when proposing public policies. Marketists, in contrast, do appreciate the complexities of reality and, therefore, are humble about prescribing government interventions.

How Free Trade Promoted Peace in Mindanao

It is refreshing to read about anecdotes of how the largely unappreciated free markets works unnoticeably in the Philippine setting

Dave Llorito World Bank’s communications officer at World Bank’s East Asia blog writes

“It was a war zone, one of the most dangerous places on earth.” 

That’s how Mr. Resty Kamag, human resource manager of La Frutera plantation based in Datu Paglas (Population: 20,290) in Maguindanao (the Philippines) described the national road traversing the town from the adjacent province.

Residents and travelers, he said, wouldn’t dare pass through the highway after three in the afternoon for fear of getting robbed, ambushed or caught in the crossfire between rebels and government soldiers.

“That was before the company started operations here in 1997,” said Mr. Kamag. La Frutera operates a 1,200-hectare plantation for export bananas in Datu Paglas and neighboring towns, providing jobs to more than 2,000 people.

“Today, the town is peaceful,” he said. “Travelers now come and go without fear of getting harmed. People have better things to do.”

La Fruta Inc. is the Philippines largest banana exporter, whose chairman and president Senen Bacani was conferred the 2006 Entrepreneur of the year award in 2006 by the SGV Ernst and Young (wiki Pilipinas).

And to promote trade, the private sector led by La Fruta and other private firms made huge investments in the region’s infrastructure.

Again Mr. Llorito:

A joint project by foreign investors (Unifruitti group) and Filipinos including Toto Paglas, a charismatic Muslim leader, La Frutera spent millions building roads, bridges, irrigation systems and other facilities.

The company infuses the local economy with 11 million pesos of monthly payroll, encouraging local entrepreneurs to set up retail shops, banks and small businesses. Other companies like Del Monte followed suit establishing agribusiness plantations in other parts of the province.

Today, paved highways cut through thriving towns and fields planted to rice, corn, coconuts, palm oil, rubber trees, and bananas.

The point is that markets on its own will invest and finance on infrastructure projects without the need for taxpayer exposure and for government directive.

Trade reduces war and promotes social harmony and cooperation due to the division of labor.  

As the great Ludwig von Mises wrote (Omnipotent government p.122)

Social cooperation and war are in the long run incompatible. Self-sufficient individuals may fight each other without destroying the foundations of their existence. But within the social system of cooperation and division of labor war means disintegration. The progressive evolution of society requires the progressive elimination of war.

Video: Miltion Friedman on the Difference Between Pro Free Enterprise from Pro Business

Associating capitalism or free markets with pro-business agenda remains a popular or common misperception, which the late illustrious Nobel awardee Milton Friedman eloquently refutes in the following video. (hat tip AEI Carpe Diem's Prof Mark Perry)

Aside from the above, Mr. Friedman makes an important point in dealing with social problems which plagues mainstream thinking

(3:38) we must separate diagnosis of problems from cure…

Video: I, The Pencil: The Movie

Fantastic remake of Leonard Read's "I, the Pencil" produced by the Competitive Enterprise Institute 

[hat tip Prof Steve Horwitz at the Coordination Problem.org]

Quote of the Day: Better Regulation Means Regulation by Markets Forces

No stock market commentary for this week

We do need better regulation. But what does that mean? Once we understand the nature of markets and bureaucracies, there’s only one reasonable conclusion: Better regulation means regulation by market forces. Free markets are not unregulated markets. Instead, they are severely regulated by competition and the threat of losses and bankruptcy. Anything government does to weaken those forces simultaneously weakens the otherwise unforgiving discipline imposed on business firms (and their counterparties)—to the detriment of workers and consumers. Public well-being suffers.

Admittedly, this is a hard sell. Explaining how markets work when they are free of the government’s easy money, favoritism, implicit guarantees, and other perverse incentives takes time and the listener’s concentration. Denouncing markets, railing against greed (which of course never taints politicians), and calling for more government power makes for good sound bites. In the Internet and remote-controlled-cable-TV era, patience is a scarce commodity. So advocates of liberty have barriers to overcome.

Of course government interference with free exchange (misleadingly called “regulation”) is portrayed as necessary for the public good. A key to understanding why it is not is grasping the inability of bureaucrats to know what they would  need to know to do the job they promise to do. Markets–particularly financial markets–are too complex for government officials (or anyone else) to manage. No matter how much power they are given, they will not be able to see the future, spot “excessive risk,” or anticipate how things might go wrong.  But they can be counted on unwittingly to interfere with innovation that would yield public benefits. Any move toward central direction courts disaster. Decentralization and the discipline of competition are our only hope for economic security.

 This is from Sheldon Richman at the Freeman on how political regulation leads to the “money power” (cronyism)

Quote of the Day: The Free Market is in Full Harmony with the Principles of Christianity

I am a very staunch believer that free-market principles are in full harmony with Christian principles and that the free market is the only economic system that is consistent with Christian or Judeo-Christian principles. I must say that in recent years the organized churches, both the Protestant and the Roman Catholic, have not been in harmony with free-market teachings, nor have they been in harmony with what I must hold are the principles taught in the Bible. The organized churches have largely accepted the welfare state ideology so popular today. This ideology has changed the original meaning of the Ten Commandments. I could give you quite a speech on that. However, I want to make just this one point. There is the Commandment which in English is only four words: "Thou shalt not steal." Today, most of our people think that it has been expanded to eight words. They think it is: "Thou shalt not steal except by majority vote." They seem to think that any stealing done by majority vote is all right.

Except when necessary for defense, neither capitalism nor Christianity approves of the use of force or coercion. The fundamental principle of the free market, voluntary social cooperation for mutual advantage, is in full conformity with Judeo-Christian teachings.

This is from an article or transcript from a talk given by the late free-market economist Percy L. Greaves, Jr. (1906–1984).

Video: The Difference between Free Markets and Pro-Business Policies

Free markets or laissez faire capitalism has frequently been mistaken as being "pro-business"

In the following video from LearnLiberty.org, Professor Steve Horwitz explains their differences (thanks to Learn Liberty's Tim Hedberg for sending the video)

The following digest from LearnLiberty.org

In this video, Professor Steve Horwitz advocates for free market economic policy. He refutes the often recited claim that "What is good for General Motors is good for America" by explaining that pro-business legislation encourages behavior that is not beneficial to society or the business itself. He suggests that, in a free market, factors such as profit and competition encourage behavior that ultimately benefits society. Professor Horwitz illustrates that pro-business legislation restricts progress and therefore caters to the interests of industry rather than to consumers, whereas "supporters of free markets are ultimately pro-human and pro-people because it is through markets that we get the most innovation and we get the most goods and the cheapest prices."

China’s Blossoming Peer to Peer Credit Industry

More proof that markets abhor a vacuum.

While we seem to be getting mixed signals about the real credit conditions in China, where I suspect that lending growth has been happening among State Owned Enterprises (SoE) but may have been contracting in the private sector due to the overleverage in the shadow banking system (mostly from financial vehicles setup by regional authorities), many of the average Chinese seems to be exploring direct credit transactions via the internet: Peer to Peer lending.

From Bloomberg,

Peer-to-peer lending is taking off in China as traditional methods of private lending among family and acquaintances, part of the country’s unregulated $2.4 trillion shadow-banking system, move online. More than 2,000 websites have been set up nationwide since 2007, China National Radio reported in May. Loans brokered online increased 300-fold to 6 billion yuan in the first half of 2011, the latest figures available, from the full year total in 2007, the report said.

’Innovative Lending’

Akin to LendingClub.com or Prosper.com in the U.S., China’s peer-to-peer lenders let individuals invest a minimum of 50 yuan in projects ranging from small-business expansion to funding newlyweds’ honeymoons for as much as 23 percent interest, the highest rate allowed under Chinese law. While the returns are higher than parking the money in bank accounts earning 3 percent, they’re dwarfed by some underground shadow-banking investment yields that can go as high as 100 percent.

“This is an interesting and innovative lending platform with a lot of goodwill,” said Liao Qiang, a Beijing-based director for financial institutions at Standard & Poor’s.

Existing outside of regulators’ jurisdiction, online lending sites aren’t without risks. The China Banking Regulatory Commission in September issued a warning about web-based brokers, cautioning that their bad-loan ratio is “significantly higher” than that of banks -- without specifying the figure -- and that they can cross the line into illegality such as fraud, funding illegitimate businesses or money laundering.

A Beijing-based spokesman for the banking regulator said peer-to-peer lending isn’t under its official purview.

“There is no discipline at all,” Liao said, calling it a “short-lived fad” that won’t affect the role banks play in the economy. “There’s no enforcement should borrowers default.”

P2P lending will hardly be a short-lived fad, as they are in reality representative of free markets and of the deepening trend of the information age.

It’s bizarre how the mainstream talks about the paucity of discipline when today’s over-indebted shadow banking in China has mainly been fueled by reckless local government units in pursuit of political goals. China’s shadow banking industry consists of the investment trust industry, pawn shops, guarantors, underground banks and wealth management products.

Politicians and their apologists always try to shift the blame on markets the monsters which are, in reality, products of their self-creation.

Eventually P2P credit markets will get significant volume enough to challenge the conventional banking and financial industries, where the latter would seek interventions to curb competition. Don’t forget that conventional banking and governments will strive to uphold their symbiotic relationship which has been backed by the central bank.

Nonetheless, again China’s blossoming P2P credit markets are growing evidences of the deepening of the information age and of the parallel free markets (free banking?) that can be accessed, in case the conventional political- interdependent banking system undergoes a seizure (similar to Lehman episode of 2008). if not a collapse.

Quote of the Day: The Market Does NOT Ration

The market was never set up by people to achieve a purpose. It is not a device or an invention aimed at satisfying an intention. “Market mechanism” is a metaphor. The market — as a set of continuing relations among people — emerged, unplanned and unintended, from exchanges, initially barter, in which the parties intended only to improve their respective situations. Lecturing at FEE . . . , Israel Kirzner recalled that one of the first things Mises said to him as a graduate student was, “The market is a process,” by which he meant “a series of activities.” This is similar to what the French liberal economist Destutt de Tracy (1754–1836) wrote in A Treatise on Political Economy, “Society is purely and solely a continual series of exchanges.”

Mises, Hayek, and Tracy help us to sort out the rationing question. I submit it makes no sense to say that an undesigned series of exchanges rations goods. If we were to observe a free market (wouldn’t that be nice?), what would we see? Rationing? Allocation? Of course not. We would see people exchanging things—factors of production, services, and consumer goods—for money. Where would they have gotten those things? From previous exchanges or original appropriation from nature.

Consumer Choice

When a person buys five apples in a grocery store rather than ten because he wishes to use the rest of his money for other purposes, it seems entirely wrong to say the market (or even the grocer) has rationed the apples. The customer makes his choice on the basis of his preferences and the money available (which is the result of previous transactions).

It is true that as a result of market exchanges, goods and resources change hands and (except for land) locations. But in no sense is this rationing or allocation. The resulting arrangement of resources is simply a product of many transactions. Of course, people’s choices of what and what not to buy and sell at which prices create an arrangement of goods and resources that tends to be intelligible in terms of consumers’ subjective priorities. But that does not warrant calling the process rationing or allocation.

Those words—especially ration, which shares its root with rational–suggest conscious decision-making—as part of a plan—by an agent. In a free market there is no consciousness overseeing this “distribution”—another inappropriate word when it comes to describing the market process.

That’s from Sheldon Richman at the Freemanonline defending the free market from statist healthcare reformers.

Let me add, dictionary.com defines rationing as “a fixed allowance of provisions or food” or “an allotted amount”. Differently put, a one size fits all distribution of resources that are NOT based consumer choices (preferences or valuations) are barely about free markets.

Quote of the Day: The Secret of the US Shale Gas Revolution: Free Markets

From the Wall Street Journal editorial (hat tip Prof Mark Perry) [bold emphasis added]

The U.S. ranked 159th in GDP growth last year. But in natural gas production, it's now No. 1.

How did that happen? Partly it's the luck of geology, though plenty of other countries have abundant shale resources. Partly, too, it's American technological leadership in developing hydraulic fracturing (fracking) and horizontal drilling. But those techniques are now widely understood the world over.

What has given the U.S. its edge is that the early development risks were largely borne by small-time entrepreneurs, drilling a lot of dry holes on private land. These "wildcat" developers were gradually able to buy up oil, gas and mineral leases from private owners while gathering enough geological data to bring in commercial producers…

Now compare this to Europe, which sits on an estimated 639 trillion cubic feet of shale gas yet remains heavily dependent on Russian imports. The governments of France and Bulgaria have banned fracking on dubious safety grounds, with nary any pushback from their publics. That might not be the case if French farmers, for example, were able to profit from the riches underneath their terroir.

Countries such as Poland and Great Britain are willing to develop their shale potential. Yet in both places the absence of private mineral rights has delayed exploration and production…

In time, perhaps even the French will recognize their lost opportunity and lift their ban on fracking. But the deeper lesson is that this is a revolution that came about not through government planning or foresight, but through a combination of individual risk-taking and private property. Europeans could benefit by doing more to broaden the latitude for both.

Video: How Cronyism Hurts the Economy

Another insightful video from LearnLiberty.org

Here is their summary:

It is clear big businesses wield great control over the federal government. How do we stop this so-called crony capitalism, or collusion? Professor Jason Brennan argues that while it may seem paradoxical the best solution is to limit government power. He provides two reasons for this. First, the power to "regulate the economy" is really the same thing as the power to distribute favors, which corporations will inevitably seek. Second, regulations actually benefit big businesses at the expensive of small businesses. Less government power means corporations have less power to compete for, fewer privileges to seek, fewer subsidies to enjoy, and no agencies to capture.

In short: Interventionism is the father of cronyism

Steve Forbes on How to Bring Back America

Media mogul Steve Forbes of the Forbes magazine recently interviewed by the Hera Research Newsletter gives his prescription for the restoration of America: Gold Backed Dollar, Simplified Tax Code and the return to a free market

From Hera Research Newsletter (Hat tip Zero Hedge)

The Hera Research Newsletter is pleased to present an incredibly powerful interview with Steve Forbes, Chairman and Editor-in-Chief of Forbes Media. The company’s flagship publication, FORBES, is the leading business magazine. Combined with international and licensee editions,FORBES reaches more than 6 million readers worldwide. The Forbes.com website is a leading destination for senior business decision-makers and investors with more than 30 million unique visitors per month.

Hera Research Newsletter (HRN): Thank you for joining us today. With the U.S. economy struggling to recover from recession and financial crisis, what policies would you recommend?

Steve Forbes: The only way to recover is to stabilize our money, have a gold backed dollar, simplified tax code and return to a free market.

HRN: You advocate the gold standard?

Steve Forbes: If there’s any better system to ensure a stable value for money, it’s yet to be found. For nearly all of America’s first 200 years, the dollar was linked to gold. Since we went off the gold standard, we’ve had more and more financial, economic and banking crises. For example,if the Federal Reserve hadn’t started to print so much money ten years ago, we wouldn’t have experienced the housing bust or the commodities boom or the sovereign debt crisis in Europe. Eventually, events become a persuasive teacher.

HRN: Don’t we need a flexible money supply?

Steve Forbes: That’s like saying that changing the number of minutes in an hour would be a great tool to increase productivity in the economy. Manipulating weights and measures, whether it’s the number of ounces in a pound or minutes in an hour, is a false way to think that you can achieve prosperity. All gold does is serve as a yardstick to measure the value of your currency.

HRN: Doesn’t increasing the money supply help to stimulate the economy?

Steve Forbes: The only way to increase prosperity is through innovation and productivity. Attempts to manipulate the value of money invariably fail. We’ve had numerous devaluations, and not once has it created lasting prosperity.

HRN: Under the gold standard, would there still be a lender of last resort to backstop the banking system?

Steve Forbes: The gold standard doesn’t prevent lending during a panic. The Bank of England pioneered acting as a lender of last resort in the 1860s under the gold standard.

HRN: Wouldn’t the gold standard prevent financial innovation?

Steve Forbes: No. Financial innovation has been with us for hundreds of years in terms of new financial instruments to meet expanding needs as the global economy becomes more complex. Many of the innovations of recent years, however, have come about in response to the instability of the dollar and other currencies, which has increased volatility in currency and commodity markets. New instruments have been designed either as insurance against volatility or to take advantage of it. If you had stable money, there would be much less hedging and financial speculation.

HRN: Can governments function under the gold standard?

Steve Forbes: Certain countries feel free to spend money whether they have it or not. Fiat money, which can just be printed up, has disguised the real cost. We would never have experienced the kind of government borrowing we’ve had in recent years if we’d had stable money. The gold standard would keep the government honest.

HRN: Doesn’t government deficit spending smooth over recessions?

Steve Forbes: The bottom line for the U.S. is that a weak dollar means a weak recovery. Stability is good for the economy. The simplest thing to do is to re-link the U.S. dollar to gold.

HRN: Wouldn’t that tie the hands of the Federal Reserve?

Steve Forbes: Tie their hands to do what, further harm to the economy? I don’t think that’s such a bad thing.

HRN: Isn’t the price of gold volatile like other commodities?

Steve Forbes: The reason to return to the gold standard is that gold maintains a stable, intrinsic value over time. Stable money meets all conditions. Gold doesn’t change in value. Currencies change in value. Gold is Polaris.

HRN: How would re-linking the U.S. dollar to gold work?

Steve Forbes: You simply peg the value of the dollar to gold. Let’s say, for argument’s sake, you peg the dollar to gold at $1,600 per ounce. If gold goes above $1,600, you tighten up on money creation. If it goes below $1,600, you ease up. You keep it around $1,600 by tightening or easing up on money creation. The gold standard doesn’t preclude a booming economy having more money or a stagnant economy having less money.

HRN: Isn’t the gold standard deflationary?

Steve Forbes: No. The gold standard is neither inflationary nor deflationary. It’s like the mile: There are 5,280 feet in a mile; it’s a fixed length. That doesn’t restrict the number of miles of highway you can build. Between 1776 and 1900 the U.S. grew from a small, agricultural nation of 2.5 million people to a nation of 76.2 million people, and it became the greatest industrial power on earth. The money supply went up about 160-fold while the dollar was pegged to gold.

HRN: Wouldn’t the gold standard severely limit leverage in the financial system?

Steve Forbes: If you’re a worthy borrower, you can borrow at the market interest rate; if you’re an unworthy borrower, you have to pay a higher interest rate or you can’t get money. The gold standard would have prevented the wild lending and money creation we’ve experienced in the last few years, which has led to disaster. You can see it in the housing bubble and in the European government debt bubble. None of these things could have happened had we had stable money.

HRN: Is the Utah Legal Tender Act, which makes gold and silver legal in Utah, helpful?

Steve Forbes: I’m in favor of the states trying to get away from the Federal Reserve’s play-money approach. The key is for the next President to institute a gold-linked dollar policy.

HRN: Do competing currencies make sense?

Steve Forbes: The idea of a parallel currency is a perfectly good one. People would come to prefer a dollar based on gold rather than a dollar based on politicians.

HRN: Do you also suggest using silver as money?

Steve Forbes: The Chinese and other cultures have used silver as money, but silver doesn’t maintain its value the way gold does. Over time it takes more silver to buy an ounce of gold. About 120 years ago it took 15 ounces of silver to buy 1 ounce of gold. Today it takes more than 50 ounces. That’s why the U.S. moved away from a bi-metallic standard to the gold standard. One metal becomes more valuable than the other at different times. Silver is better than fiat money, but there’s only one gold standard.

HRN: Would the gold standard help the U.S. economy to recover?

Steve Forbes: In the 1980s, when we had very high unemployment and a stagnant economy, the way out was through a strong dollar, lower income taxes, entrepreneurship and new wealth creation. Remember, the values of assets go up when people see a future. They don’t today.

HRN: We didn’t have the gold standard in the 1980s.

Steve Forbes: Ronald Reagan killed the terrible inflation of the 1970s and sharply reduced income tax rates. Reagan wanted a return to the gold standard, but none of his advisors believed in it. Inflation was effectively killed by high interest rates. Deregulation was pushed forward, and America roared. In 1982, the Dow bottomed at 776; over the next 18 years it went up 18-fold.

HRN: You advocate cutting taxes?

Steve Forbes: Yes, and we should put in a flat tax. The advantage of the flat tax is that it enables people to focus on real things. Abraham Lincoln’s Gettysburg Address, which defines the character of the American nation, is all of 272 words. The Declaration of Independence is a little more than 1,300 words. The Constitution of the United States and all of its amendments are a little more than 7,000 words. The Bible, which took centuries to put together, is a mere 773,000 words. The U.S. federal income tax code—with all of its cross-references, descriptions of amendments and effective dates—is probably now in excess of 4,000,000 words. Nobody knows what’s in it. Last year the IRS announced that Americans spent 6.1 billion hours filling out tax forms and $300 billion on tax preparation. This is a huge waste of resources and brain power. Not to mention that it’s a corrupting influence. It’s a huge source of government power, and it brings out the worst in us. The sooner we get simplicity—and a flat tax would give us that—the more energy we can devote to productive pursuits.

HRN: How could the U.S. transition to a flat-tax system?

Steve Forbes: Since people get hung up on their deductions, we would institute a flat tax and give people the option of filing either under the new, simple system or the old, horrific system. If you’re a masochist and want to punish yourself, you can file under the old income tax system. If you want the simplified one, you can go with that. I think 99% of Americans, out of sheer convenience, would quickly switch to the new system.

HRN: You mentioned deregulation. How would that help the U.S. economy?

Steve Forbes: Take health care, for example. We don’t have a free market in health care. There’s a disconnect between patients and health care providers. If you go to a hospital and ask how much something costs they’ll look at you strangely because they think you’re either uninsured or a lunatic. How many hospitals put the prices of procedures on their websites? It’s like going into a restaurant and having no idea how much anything on the menu costs. It’s a crazy system.

HRN: How would you go about deregulating health care?

Steve Forbes: First, we should repeal the Patient Protection and Affordable Care Act—Obamacare—which is an abomination. Patients should have more choice. The insurance companies don’t compete freely for business. We should allow people to shop nationwide for health insurance. I live in New Jersey, which has a lot of senseless regulations. Why can’t I buy a health insurance policy in Pennsylvania that costs less? We should equalize the tax treatment of health care expenses. If you’re a business or are self-employed, you should be able to deduct the expense. And individuals should be free to go into the market and pay with after-tax dollars. We should make it easier for small businesses to form a collective to buy health insurance. There are a lot of simple things that could be done.

HRN: Do free markets really work?

Steve Forbes: Free markets, with sensible rules of the road, can do all the things that big government advocates say the government does but that it really can’t do. Free markets enable people to move out of poverty and break down barriers between ethnic groups and between nations. Free markets increase cooperation and foster a sense of humanity. Everything that big government says it will do, you get more from free markets than from government bureaucracies. Which one has a better future, FedEx or the U.S. Post Office? Do you want food stamps or paychecks? Big government makes a lot of promises, but it’s short sighted. Government is about meeting its own needs at the expense of the nation, and it’s immoral. Free markets have gotten a bad rap, which happens to be the subject of my new book.

HRN: The Federal Reserve recently announced that it will extend its “Operation Twist” program by $267 billion through the end of 2012. Will that help the U.S. economy?

Steve Forbes: No. The more Federal Reserve Chairman Ben Bernanke messes up, the more he’s hailed as a savior. The Federal Reserve’s programs—quantitative easing 1 and 2 and Operation Twist—are just fancy words for printing up more money. It’s a bunch of smoke and mirrors. They’ve done a lot of damage already, and they’re continuing to. What they’re doing is dangerous. Not only has the Federal Reserve created a lot of money and vastly expanded its balance sheet but, along with the U.S. Department of Treasury, it has dramatically shortened the maturity of U.S. government debt.

HRN: What do you mean when you say that the Federal Reserve has done a lot of damage?

Steve Forbes: By keeping interest rates artificially low, Chairman Ben Bernanke is cheapening the dollar, which punishes savers and harms future investment. It distorts financial markets and misdirects investments into things like creating the housing bubble. It subsidizes government borrowing at the expense of the rest of us. It’s the equivalent of a cut in pay for workers. Let’s say you’re earning $20 per hour and the government cheapens the dollar; then, in effect, you’re making $15 per hour. It violates contracts and undermines social trust.

HRN: What should Chairman Bernanke do instead?

Steve Forbes: Other than resign, Chairman Bernanke should realize that the gold standard works and that when you deviate from it, you create more and more uncertainty. He should re-link the dollar to gold. Doctors used to treat patients by bleeding them. Bernanke just keeps bleeding the economy.

HRN: Thank you for being so generous with your time.

Steve Forbes: Thank you.

Hera Research, LLC, provides deeply researched analysis to help investors profit from changing economic and market conditions. Hera Research focuses on relationships between macroeconomics, government, banking, and financial markets in order to identify and analyze investment opportunities with extraordinary upside potential. Hera Research is currently researching mining and metals including precious metals, oil and energy including green energy, agriculture, and other natural resources. The Hera Research Newsletter covers key economic data, trends and analysis including reviews of companies with extraordinary value and upside potential.

Quote of the Day: Factual Free Market Fairness

The free market is an ethical system better than all the rest

Professor Deirdre McCloskey makes a compellingly superb argument at the Bleeding Hearts Libertarians (hat Professor Peter Boettke) [bold emphasis mine]

Externalities do not imply that a government can do better. Publicity does better than inspectors in restraining the alleged desire of businesspeople to poison their customers. Efficiency is not the chief merit of a market economy: innovation is. Rules arose in merchant courts and Quaker fixed prices long before governments started enforcing them….

How do I know that my narrative is better than yours? The experiments of the 20^th century told me so. It would have been hard to know the wisdom of Friedrich Hayek or Milton Friedman or Matt Ridley or Deirdre McCloskey in August of 1914, before the experiments in large government were well begun. But anyone who after the 20^th century still thinks that thoroughgoing socialism, nationalism, imperialism, mobilization, central planning, regulation, zoning, price controls, tax policy, labor unions, business cartels, government spending, intrusive policing, adventurism in foreign policy, faith in entangling religion and politics, or most of the other thoroughgoing 19^th-century proposals for governmental action are still neat, harmless ideas for improving our lives is not paying attention.

In the 19^th and 20^th centuries ordinary Europeans were hurt, not helped, by their colonial empires. Economic growth in Russia was slowed, not accelerated, by Soviet central planning. American Progressive regulation and its European anticipations protected monopolies of transportation like railways and protected monopolies of retailing like High-Street shops and protected monopolies of professional services like medicine, not the consumers. “Protective” legislation in the United States and “family-wage” legislation in Europe subordinated women. State-armed psychiatrists in America jailed homosexuals, and in Russia jailed democrats. Some of the New Deal prevented rather than aided America’s recovery from the Great Depression.

Unions raised wages for plumbers and auto workers but reduced wages for the non-unionized. Minimum wages protected union jobs but made the poor unemployable. Building codes sometimes kept buildings from falling or burning down but always gave steady work to well-connected carpenters and electricians and made housing more expensive for the poor. Zoning and planning permission has protected rich landlords rather than helping the poor. Rent control makes the poor and the mentally ill unhousable, because no one will build inexpensive housing when it is forced by law to be expensive. The sane and the already-rich get the rent-controlled apartments and the fancy townhouses in once-poor neighborhoods.

Regulation of electricity hurt householders by raising electricity costs, as did the ban on nuclear power. The Securities Exchange Commission did not help small investors. Federal deposit insurance made banks careless with depositors’ money. The conservation movement in the Western U. S. enriched ranchers who used federal lands for grazing and enriched lumber companies who used federal lands for clear cutting. American and other attempts at prohibiting trade in recreational drugs resulted in higher drug consumption and the destruction of inner cities and the incarcerations of millions of young men. Governments have outlawed needle exchanges and condom advertising, and denied the existence of AIDS.

Germany’s economic Lebensraum was obtained in the end by the private arts of peace, not by the public arts of war. The lasting East Asian Co-prosperity Sphere was built by Japanese men in business suits, not in dive bombers. Europe recovered after its two 20^th-century civil wars mainly through its own efforts of labor and investment, not mainly through government-to-government charity such as Herbert Hoover’s Commission or George Marshall’s Plan. Government-to-government foreign aid to the Third World has enriched tyrants, not helped the poor.

The importation of socialism into the Third World, even in the relatively non-violent form of Congress-Party Fabian-Gandhism, unintentionally stifled growth, enriched large industrialists, and kept the people poor. Malthusian theories hatched in the West were put into practice by India and especially China, resulting in millions of missing girls. The capitalist-sponsored Green Revolution of dwarf hybrids was opposed by green politicians the world around, but has made places like India self-sufficient in grains. State power in many parts of sub-Saharan Africa has been used to tax the majority of farmers in aid of the president’s cousins and a minority of urban bureaucrats. State power in many parts of Latin America has prevented land reform and sponsored disappearances. State ownership of oil in Nigeria and Mexico and Iraq was used to support the party in power, benefiting the people not at all. Arab men have been kept poor, not bettered, by using state power to deny education and driver’s licenses to Arab women. The seizure of governments by the clergy has corrupted religions and ruined economies. The seizure of governments by the military has corrupted armies and ruined economies.

Industrial policy, from Japan to France, has propped up failing industries such as agriculture and small-scale retailing, instead of choosing winners. Regulation of dismissal has led to high unemployment in Germany and Denmark, and especially in Spain and South Africa. In the 1960s the public-housing high-rises in the West inspired by Le Courbusier condemned the poor in Rome and Paris and Chicago to holding pens. In the 1970s, the full-scale socialism of the East ruined the environment. In the 2000s, the “millennial collectivists,” Red, Green, or Communitarian, oppose a globalization that helps the poor but threatens trade union officials, crony capitalists, and the careers of people in Western non-governmental organizations.

Yes, I know, you want to reject all these factual findings because they are “right-wing” or “libertarian.” All I ask you to do is, once in a while, consider. Don’t believe everything you read in the papers.

Amen.

Quote of the Day: An Inevitable Unity to Market Phenomena

And it was realized that there is an inevitable unity to market phenomena that even power cannot undermine. It was discovered that in the social arena there is something at work that even the one holding power cannot bend and to which, in achieving his ends, he must conform no differently than in submitting to the laws of nature. In the entire history of human thought and the sciences, there has never been a greater discovery.

That’s from the great Ludwig von Mises, The Myth of the Failure of Capitalism in Volume 2 of the Selected Writings of Ludwig von Mises (sourced at the Mises Blog)

Many people carry the insane notion that they can defeat the laws of nature whether in sports, the financial markets, economics or socio-political policies. And the crowd just loves them. Unfortunately nature eventually prevails and exposes the fabled emperor has really no clothes.

At the end of the day, the market system conforms best to the laws of nature.

Quote of the Day: The Moral Case of Free Markets: Achievement

The lesson is that defenders of free enterprise have to put less weight on happiness. Sure, happiness is one good thing. But so is achievement - doing something productive with your life. And on this score, free enterprise looks a lot better than welfare states that subsidize people who skate through life without even trying to make something of themselves.

Once you take achievement seriously, moreover, you start to see that redistribution is immoral in and of itself. When someone achieves something - whether writing an article or building a business - they deserve to keep the product. It matters little whether keeping the product makes the achiever happy. The point is that achiever earned what he has, and other people - including government - ought to respect his rights. From here, you're close to the truism that taxation is theft - and the moral case for free enterprise looks solid indeed.

That’s from Professor Bryan Caplan at the Econolog.

Economics in a War Prison Camp

It is said that nature abhors a vacuum. And since people are part of nature then obviously the human community also abhors a state of vacuum.

Even in prison camps the law of economics work. I earlier pointed out how recently Mackerel has emerged as money for prisoners of California’s prison camp.

Economist and author Tim Harford citing the work of Robert A. Radford on the “Economic Organisation of a P.O.W. Camp” has an amazing account of the workings of economics under a German war prison camp (hat tip Bob Wenzel). Writes Mr. Harford

First, a word about the basic economic building blocks. Prisoners received some rations from the Germans, but were mostly sustained by parcels of food and cigarettes from the Red Cross. The parcels were standardised – everyone got the same. Occasionally the Red Cross received bumper supplies, or ran short; in those instances everybody enjoyed a surplus or a shortage.

Radford’s first sociological observation was that there was no gift economy in the camp. Everybody started with the same, so what was the point? But trading quickly developed, because while prisoners had equal means they did not have identical preferences – the Sikhs sold their beef rations, the French were desperate for coffee. So middlemen who could speak Urdu or bribe a guard to let them visit the French quarters had the chance to make “small fortunes” in biscuits or cigarettes. In rare circumstances, the camp’s economy interacted with the outside world: coffee rations apparently went “over the wire” and traded at high prices in black market cafés in Munich.

Market institutions, Radford concluded, were universal and spontaneous, “a response to immediate needs” rather than an attempt to imitate civilian life. One of the spontaneous developments was the emergence of a currency: the cigarette, which was portable and reasonably homogenous. Not entirely so, though: cigarettes could be “sweated” by rolling them back and forth between the fingers to shake a little tobacco out. Gresham’s Law – “bad money drives out good” – asserted itself, as the plumper cigarettes were reserved for smoking, while those that circulated as money grew thinner. When Red Cross supplies were interrupted, deflation set in, as a cigarette bought ever more goods.

The law of one price also tended to hold: arbitrage meant prices rarely varied much within a permanent camp. The chaos of transit camps, however, created profit opportunities. “Stories circulated of a padre who started off round the camp with a tin of cheese and five cigarettes and returned to his bed with a complete parcel in addition to his original cheese and cigarettes; the market was not yet perfect.”

Relative prices moved in response to broader developments – such as an influx of new, hungry POWs – and from day to day. With bread rations handed out on Monday, on Sunday evening “bread now” traded at a premium to “bread Monday”. And yes, there was a futures market.

As the above experience shows, the natural tendency for people is to conduct trade or voluntary exchanges in whatsoever political conditions.That's why socialism fails.

Quote of the Day: Unintended Consequences of Regulations

Unregulated, a business’s reputation is its most valuable asset. A regulated business does not have the same problem, so long as it obeys the regulations. Regulations replace the overriding need for a business to protect its reputation, and it is no longer solely concerned for its customers: the rule book has precedence. And the more regulation replaces reputation, the less important customers become. Nowhere is this more obvious than in financial services…

The regulators assume the public are innocents in need of protection. They have set themselves up to be gamed by all manner of businesses intent on using and adapting the rules for their own benefits at the expense of their customers. These businesses lobby to change the rules over time to their own advantage and hide behind regulatory respectability, as clients of both MF Global and Bernie Madoff have found to their cost.

That’s from Alasdair Macleod at the GoldMoney.com

Actually this has represented more of the anatomy of crony capitalism and too big too fail corporations. Interventions upon interventions, through regulations, ultimately leads to politically captured industries.

Quote of the Day: The Key Thing Poor Countries Should Do

In a eulogy to Sir John James Cowperthwaite, a British civil servant and the Financial Secretary of Hong Kong from 1961 to 1971, the quebecoislibre.org wrote (hat tip Bob Wenzel)

Asked what is the key thing poor countries should do, Cowperthwaite once remarked: "They should abolish the Office of National Statistics." In Hong Kong, he refused to collect all but the most superficial statistics, believing that statistics were dangerous: they would led the state to to fiddle about remedying perceived ills, simultaneously hindering the ability of the market economy to work. This caused consternation in Whitehall: a delegation of civil servants were sent to Hong Kong to find out why employment statistics were not being collected; Cowperthwaite literally sent them home on the next plane back.

Cowperthwaite's frugality with taxpayers' money extended to himself. He was offered funds from the Hong Kong Executive to do a much needed upgrade to his official residence, but refused pointing out that since others in Hong Kong did not receive that sort of benefit, he did not see why he should.

Cowperthwaite's hands off approach, and rejection of the in vogue economic theory, meant he was in daily battle against Whitehall and Westminster. The British government insisted on higher income tax in Singapore; when they told Hong Kong to do the same, Cowperthwaite refused. He was an opponent of giving special benefits to business: when a group of businessmen asked him to provide funds for tunnel across Hong Kong harbour, he argued that if it made economic sense, the private sector would come in and pay for it. It was built privately. His economic instincts were revealed in his first speech as Financial Secretary: "In the long run, the aggregate of decisions of individual businessmen, exercising individual judgment in a free economy, even if often mistaken, is less likely to do harm than the centralised decisions of a government, and certainly the harm is likely to be counteracted faster."

Mr. Cowperthwaite’s contribution deserves even more credit. According to the Guardian

His example inspired the governments of Margaret Thatcher and Ronald Reagan, and was a key influence in China's economic liberalisation after the demise of Mao Zedong.

I add to my list of underrated and unsung heroes of capitalism Sir John James Cowperthwaite.

Video: The Economics of Valentine's Day

In the following video, Professor Chris Coyne explains (via Learnliberty.org) the importance of Valentine's Day as a product of free markets, as well as, highlights on the essence of Valentine's Day celebration--mostly as social signaling or the expression of emotions. (hat tip Mark Perry)

Happy Valentines Day!

Canada Deepens Free Market Policies

It’s time to be bullish Canada. Here is why.

From Reuters (hat tip Mark Perry)

Canadian Finance Minister Jim Flaherty said on Sunday the government would eliminate tariffs on dozens more products used by Canadian manufacturers, aiming to lower their costs and encourage more hiring.

The initiative would scrap custom duties on 70 items used by businesses in sectors such as food processing, furniture and transportation equipment.

Flaherty, who estimated the tariff cuts would save Canadian businesses C$32 million ($30.5 million) a year, said the cuts were part of the Conservative government's overall free trade policy.

"We believe in free trade in Canada," Flaherty said on CTV's "Question Period" program. "Some of these old-fashioned tariffs get in the way. So we're getting rid of them."

As part of its Economic Action Plan to pull Canada through the global slowdown of 2008-09, the government has eliminated more than 1,800 tariff items, providing about C$435 million a year in tariff relief. Its stated goal is to make Canada a tariff-free zone for manufacturers by 2015.

The tariff move comes as Canada and the European Union negotiate a deal to knock down trade barriers on goods and services and boost two-way trade by 20 percent.

Cheers Mr. Flaherty!

Again, free markets seem to be gaining political headway at the margins.