Archive for July 2012 – Page 2

Who Should Be Ashamed? The USOC Versus Senator Harry Reid

So Senator Harry Reid, D-Nevada, thinks that the privately-funded United States Olympic Committee “should be ashamed” for providing its teams with uniforms made in China and that the uniforms should be “burned.”  Senator Kirsten Gillibrand and Representative Steve Israel, both Democrats from New York, quickly  weighed in on the controversy with a joint letter to the USOC expressing their displeasure.  After courageuosly defending its initial decision and in the teeth of a growing controversy,  the USOC blinked and announced that henceforth it will require team uniforms to be domestically manufactured

But why should the USOC be ashamed of its initial decision?  Ashamed–for using its donors’ and sponsors’ dollars wisely and economically by outfitting the U.S. Olympic teams with  attractive and high quality uniforms that can be produced less expensively in China than in the U.S?  Ashamed–for doing what millions of ordinary Americans do every day when they make the most economical use of their scarce dollars by buying Chinese-made products at Walmart, or when they use an Acer notebook, watch a Sony television or vacation on a Norwegian cruise line?  I think not.

Indeed, it is Senators Reid and Gillibrand and Representative Israel and their ilk in Congress  who should be ashamed and burned in effigy.  For they and their cronies are responsible for the profoundly anti-consumer trade barriers that keep the inefficient, zombie U.S. clothing  industry alive.  Despite  the enormous protection afforded apparel companies and their union against competition from more efficient foreign manufacturers, in the last ten years employment in apparel manufacturing has fallen from 350,000   to 147,300.   Last year,  it was estimated, 98 percent of all apparel and 99 percent of all footwear sold in the U.S. was manufactured abroad.  There is nothing regrettable or shameful about this result.  It was brought about by the voluntary choices of American households looking for quality and value in spending their hard-earned incomes.

What is shameful and scandalous  is the robbery of  American consumers  by  corporate welfare policies that prevent them from buying in the lowest cost markets.  In 1994, when the last comprehensive study of the costs of protectionism in the U.S was published, it was estimated that the annual cost to consumers of clothing (apparel)  protection was $21.158 billion.  Of this amount, apparel  firms and their workers reaped an extra $9.901 billion of ill-gotten gains, while the rest was lost to the economy through “dead-weight”  inefficiencies or went to the U.S. government in the form of  tariff revenues and quota rents.   There were an estimated  152,583  jobs “saved” in this industry at an average  annual cost of  $138,666 per job, far more than the average worker earned.  It would have been far, far cheaper to permit the workers to be laid off and simply pay them their regular wages and retraining costs out of general government revenues until they found new jobs.  This transparent policy would have saved consumers billions, permitted them to engage in free trade with whomever they wished, and prevented inefficient production from continuing to distort the U.S. economy.  But of course this would have cut off corporate welfare to clothing firms and caused a powerful union to shrink and lose dues revenues, both of which contribute heavily to Congressional elections.  And it is unlikely that the heavily-burdened U.S.  taxpayer would have approved of such special treatment of a small group of workers.    

In any case, you can be sure that Reebok, Levi’s, and Champion, the previous U.S. manufacturers of Olympic and Team USA uniforms,  as well as the Union of Needletrades, Industrial, and Textile Employees (UNITE) are very grateful to Senator Reid et al. and come election time will somehow find a way to generously show their gratitude.

Sorens on Raico

Jason Sorens has posted a very thoughtful review of Ralph Raico’s outstanding recent book, Classical Liberalism and the Austrian School.

I admire the post and learned from it, but I’d like to differ with Sorens on two points. He suggests that methodological individualism is vulnerable to criticism. “We can know that firms try to maximize profit even if we do not have a good explanation for why each individual firm tries to maximize profit, or why individuals have chosen so to organize themselves. ” He appeals here to what Bob Nozick called a “filtering device.” The explanation, I take it, is roughly this: to the extent that firms engage in profit maximization, they will tend to supplant firms that don’t.

But this explanation is entirely consistent with methodological individualism. This doctrine does not require that social outcomes be reducible to the motives of individuals. To the contrary, appeals to “the results of human action but not of human design” are quite common among Austrian methodological individualists.  In thinking that use of “filtering devices” in Nozick’s sense, irreducible to the psychological motives of individuals, conflicts with methodological individualism, Sorens has I think wrongly taken over Nozick’s unduly restrictive account of that doctrine, in his essay “On Austrian Methodology”

Sorens also remarks:  “However, what I have heard from contemporary Austrian economists such as Peter Leeson is that Mises himself was not opposed to hypothesis testing, even using statistical methods. He was merely opposed to Popper-style falsificationism (i.e., that every element of a theory must be falsifiable), which has in any case been superseded in mainstream philosophy of science. ”

Certainly, Mises did not oppose hypothesis testing in applying economics to historical issues; but in economic theory itself he was very much an apriorist. Mises himself is a much better guide to his views on method than “contemporary Austrian economists”; and if one consults Mises, whether he was an apriorist is not a difficult question to answer.

 

Land Monopoly

“There are two types of ethically invalid land titles: “feudalism,” in which there is continuing aggression by titleholders of land against peasants engaged in transforming the soil; and land-engrossing, where arbitrary claims to virgin land are used to keep first-transformers out of that land.  We may call both of these aggressions “land monopoly”–not in the sense that some one person or group owns all the land in society, but in the sense that arbitrary privileges to land ownership are asserted in both cases, clashing with the libertarian rule of non-ownership of land except by actual transformers, their heirs, and their assigns.”

–Murray N. Rothbard, The Ethics of Liberty

The Selgin Story

Over the years George Selgin has dished out quite a bit of abuse in various and sundry blog posts to Murray Rothbard and those who hold that fractional reserve banking is inherently unstable and cycle-generating.  I must concede Selgin is enormously entertaining in his balls-out, over-the-top ferocity in defense of something that he lately has been calling “monetary freedom.”    Danny Sanchez noted Selgin’s most recent rant in his blog yesterday. Delivered in George’s trademark serioso, ill-humored style, I must admit it made me smile over my morning coffee.  Here is a sample:

Although the first priority of every believer in monetary freedom must be to combat bogus arguments for monetary central planning, we cannot do this effectively unless we are just as relentless in exposing the 100-percent reserve movement for the moronic cult that it is, to keep its clownish convictions from giving the entire movement for monetary freedom, if not free market economics more generally, a bad name.

Moronic cult?  Clownish?  Now these are great polemics and I love George’s style; if he did not exist, I would invent him.  But he is notoriously prickly when confronted with criticisms of his own position.  He regularly trolls the Mises Community blogs sniffing out and trouncing one or another twenty-something Rothbardian “loony” (a favorite Selginian term of derision) who has worked up the temerity to utter even the mildest criticism of his idiosyncratic brand of “free banking.”  But, entertainment value aside, this is unseemly behavior for a senior scholar of Selgin’s status.  And it has caused Selgin to be seen as a parody of the aging and addled pedant running to and fro frantically trying to stamp out heresy but whose hilarious antics only invite further attempts to rattle and provoke him.  Indeed, he has become something of a standing joke among many younger students of Austrian economics who proudly boast of being “flamed” by Selgin.  Some already are joking about fashioning a T-shirt proudly displaying: “I Am a Member of a Moronic Cult.”

Given his hypersensitivity to criticism, I should hope George would be somewhat empathetic that a Rothbardian like myself responds to some of his abuse in a sharp and less than polite manner.  Somehow, I doubt this though.  George takes himself VERY SERIOUSLY and never seems to be in good temper, or to show the slightest shred of good will toward his opponents.

So let me briefly tell the Selgin story in less than flattering terms.

To cut to the chase Selgin’s conception of the nature and aim of “monetary freedom” can be summed up as follows:

1.  He adopts the New Keynesian position that nominal price rigidities cause any change in the reservation demand for money relative to the supply of money to generate a (positive or negative) excess demand for money that requires a prolonged adjustment process involving either deflationary depression or inflation.

2.  Following the New Keynesians, he uses the loaded term “demand shocks” to describe the voluntary  decisions of individuals to alter the amount of money they desire to hold.   For Selgin, any change in what he and the Keynesians call “aggregate demand,” i.e., total spending, even if it is the result of the voluntary actions of businesses and households, destabilizes the economy.

3.  Like any  garden-variety Keynesian, Selgin sees these fluctuations in aggregate demand as a market failure that must be offset by Fed policy.  He thus advocates that the Fed  implement a “productivity norm” that boils down to a nominal income target, a policy first proposed by Keynesian economist Benjamin Friedman in the 1970s.   In Selgin’s case he would  have the Fed target zero growth in aggregate demand, thereby maintaining the circular flow of money spending and income constant.   Most Keynesians would target a higher rate of growth in nominal income to allow for real output growth plus a small inflationary cushion against deflation.  But this is a minor difference.    The outcome is that in Selgin’s world prices would trend downward by a few percent per year rigidly mirroring the productivity-driven growth in real income; in the New Keynesian world prices would trend up by a few percent a year.  In both cases this would be achieved by Fed manipulation of the money supply (and interest rates)

4.  In other words, Selgin wants the Fed to continually expand or contract the supply of money in order to exactly offset any change in the social demand for money.  This is why Selgin, right along with Mankiw and other New Keynesians,  was a proponent of QE1 and (maybe) QE2.

5.  But binding a central bank to a “productivity norm” is a second best solution to economic instability for Selgin.  His preferred policy is something called “free banking” or “monetary freedom.”  Under the Selginian regime of monetary freedom, banks would be permitted to operate without any central bank or legislative interference, while subject to general contract law under which they would be obligated to convert their note and deposit liabilities into gold (or other market chosen commodity) on demand.  In particular, banks would  be able to determine their own cash reserves necessary to meet these obligations.   The result would be that the supply of money is automatically adjusted to the demand for money by market forces. Furthermore, foretells Selgin,  this system may evolve to the point where gold is completely expelled from monetary circulation into nonmonetary uses while a small amount is retained in quasi-monetary use as  an interbank clearing asset.  This evolutionary process would thus involve a massive expansion of the money supply.  Moreover at the end of this process, bank money will in effect become a fiat money.  But rest assured, at every step of the way seemingly infallible bankers will ensure a constant aggregate stream of money spending.

Given these views, it appears to me that what Selgin means by ”monetary freedom” is attaining Keynesian ends via market means.  But I do not think Selgin’s story is plausible in the least.  In fact, in my recent Congressional testimony, I gave another account of the likely outcome of a Selginian free banking system, which I advocated as the most practical means of getting rid of fractional reserve banking and suppressing the further issue of fiduciary media, that is, unbacked bank notes and deposits.  Both Mises and Rothbard advocated free banking for the same reasons.  In his last major publication on the subject, Rothbard proposed free banking under a genuine gold standard as an “excellent [albeit second-best] solution” to the problems of inflation and the business cycle.

Both Mises and Rothbard were therefore “currency school” free bankers–as I consider myself to be–who believed that the money supply should behave like a purely metallic currency and who rejected the “stabilization” of aggregate statistical constructs like the price level or total spending.  For currency school free bankers, free banking is a means for suppressing all political influence on the supply, value and distribution of the money commodity and allowing these variables to be determined exclusively by market forces.  Period.   Selgin on the other hand reveals himself as a Keynesian free banker who wants to stabilize a meaningless aggregate by employing a peculiar scheme.  In Selgin’s scheme, a certain narrow class of banker-entrepreneurs are uniquely privileged as error-free automatons and the particular market in which they operate, in contrast to all other markets, is “efficient”  in the neoclassical sense of almost instantaneously adapting supply to demand.

N.B. In this response to George I never once alluded to the issue of whether fractional reserve banking is fraudulent or not, a question that he seems to be fixated on.

Why Mises Matters

Yet another great resource page (with an associated video) by Tom Woods.

On the Epistemological Foundations of Science

“Animism ascribed to all things of the universe the faculty of action.  When experience moved people to drop this belief, it was still assumed that God or nature acts in a way not different from the ways of human action.  The emancipation from this anthropomorphism is one of the epistemological foundations of modern natural science.”

–Ludwig von Mises, The Ultimate Foundation of Economic Science: An Essay on Method

Selgin’s Strategy

Ron Paul recently showed  how he is very open to debate, by having both Professor Joseph Salerno (a 100% reserves advocate) and Professor Larry White (a “free banker”) testify before his sub-committee on the subject of fractional reserve banking.  (See my Misesians in Mordor posts here and here.)

However, as he made clear in this post in his Congressional web site, Ron Paul is very much on Salerno’s side of the debate.

George Selgin is none too happy about this, and Ron Paul’s post has elicited from him a quite vituperative comment.  Selgin goes so far as to accuse 100% reserves advocates as being a “moronic cult.”

Selgin, in a post commenting on his own comment, says:

Although the first priority of every believer in monetary freedom must be to combat bogus arguments for monetary central planning, we cannot do this effectively unless we are just as relentless in exposing the 100-percent reserve movement for the moronic cult that it is, to keep its clownish convictions from giving the entire movement for monetary freedom, if not free market economics more generally, a bad name.

Selgin is obviously endorsing two approaches to advancing fractional-reserve-friendly free banking.  There is the “argumentation” approach he leads off with.  And then there is the “expose the cult” approach he insists must not be neglected.  But what exactly does he mean by that?

Nowhere in Selgin’s original post does he make any kind of pscyho-sociological case for the anti-fractional reserves set qualifying as a cult, much less a moronic one.  He asserts that they’re in error (and vaguely references economic refutations against them made elsewhere, without giving a hint as to their content).  But it is doubtful that he means that refuting them is how he means to expose them as a cult, because then it wouldn’t really be a separate approach from the first approach he brings up.

When a commenter on his blog called him to task for his incivility, Selgin gave tell as to what he might mean by “exposing” his intellectual opponents.

Rest assured, Pedro, I am no more interested in being “nice” to 100-percenters than I am interested in being so to central bankers. Nor am I intent on persuading them about anything–I’ve tried that, as have others, to no avail. Ridicule is no more than their just deserts.

So perhaps, what Selgin means is to “expose” his opponents by ridiculing them.  Perhaps his aim is to prevent his opponents from achieving what he thinks of as undue influence and notoriety by simply calling them names.  In other words, he aims to “expose” his opponents as a moronic cult by the mere act of calling them a moronic cult.  It’s not like this approach never works.  If, in middle school, one student calls another “an idiot” enough times, that will often cause other students (especially the first student’s followers) to write the second student off as one.  What is ironic is this kind of social strategy is itself more typical of cults than anything.  Not that I would ever accuse Selgin of being a cultist.  I’m not even an academic, and even I know that would be unbecoming of one.

Is Washington a Misesian Shire?

Daniel Kuehn objects to my referring to Austrian economists testifying in Washington as “Misesians in Mordor.”

After the last House monetary policy subcommittee hearing (which featured several prominent Austrian economists), the Mises.org blog had several posts titled “Misesians in Mordor“, riffing on the idea that Austrians are somehow strangers in a strange land when they come to Washington D.C., confronting an evil menace which is not very welcoming to them.

Is that really the case? Hardly. It’s more like Misesians in the Shire lately. I was going to tabulate it all out, but instead I’m just going to invite people to poke through the subcommittee’s hearings while Ron Paul has been at the helm. There are basically three groups of people that are asked to testify during these hearings (and usually any given hearing is exclusively composed of one of these groups):

1. Fed officials or other government employees the subcommittee has oversight over
2. Private industry - often people like gold dealers or others involved directly with monetary affairs, and
3. Academic economists

Under Paul’s chairmanship, all of the academic hearings have been dominated by Austrian economists. It’s hard to think of a single prominent Austrian monetary thinker friendly to the Auburn crowd that hasn’t been invited to testify (guys like Steve Horwitz haven’t, but that’s largely because of Paul’s relationship with the Auburn group, I imagine).

Congressional discussions of monetary policy are very, very friendly to the Austrian school.

So, a handful of Austrian economists testify in the last year and 5 months, and that makes the Washington environment qualify as “friendly” to the Austrian school, even though virtually everything else that happens in Washington is completely antithetical to what Austrians call for?

An astounding claim.  In the comments, “Patch” tried to put thinks in perspective for Kuehn:

Huh? You might have jumped the gun on that one. Better to say “Congressional discussions of monetary policy [run by Ron Paul] are very, very friendly to the Austrian school.” My memory may not serve me well, but I don’t believe Austrian economists were invited before Ron Paul (on policy legislation, during the banking crisis, etc etc).

“If you’re a Keynesian or a Monetarist you need international renown and decades of seminal publications to testify on monetary policy before Congress. If you’re an Austrian you don’t even need to be a freaking monetary economist – you just need Ron Paul in charge. And yet we’re often told that it’s Keynesians who have the ear of politicians and it’s Keynesians that get the special treatment.”

Under Ron Paul it is undeniable that he chooses Austrians over others. But there were plenty of well qualified Austrian economists that could have been chosen for other events but were not invited. And while they may not have had the credentials of seminal publications and international renown, that was because they were Austrian. You can’t get the types of publications, writing textbooks etc, as an Austrian economist.

Morevoer, as Patch pointed out, Kuehn’s “guys like Steve Horwitz haven’t” statement is contradicted by the fact that Horwitz’s free banking and GMU colleague Lawrence White testified in the very video Kuehn linked to in his post.

There’s No Such Thing As a Free Cloud

With every new leap of technology, we hear cries that the Age of Abundance is dawning and that we must reject the old economics of scarcity for the new economics of abundance.  At the tail end of the technological boom of the the 1920s, John Maynard Keynes foretold that his contemporaries’ grandchildren would be living in an era of abundance as long as interest rates were driven down to zero to overcome the artificial scarcity of capital.   During the postwar prosperity of the 1950s, John Kenneth Galbraith proclaimed the advent of the Affluent Society, promising abundance for all if only government spending on public goods was expanded at the expense of frivolous private sector production and consumption.

The adaptation of ”Space Age” technology to everyday uses and the spreading commercialization of electronic data processing in the 1960s led  writers such as sociologist David Riesman, architect and systems theorist Buckminster Fuller and “futurist” Alvin Toffler to preach that the “post-industrial society” and the end of scarcity were near at hand.  The New Left seized on these writers as gurus and argued that what was barring humanity from entering the Post-Scarcity Age were evil social institutions and ingrained bourgeois morality.  Get rid of capitalism and suppress the Protestant work ethic and we all would be showered with free goods from this technological cornucopia.

The notion of a world without scarcity is thus usually propagated by leftist social theorists–but not always.  There were some libertarian futurists around in the early 1970s.  But lately many libertarians are among the vanguard of those who, dazzled by the marvels of the Digital Age, argue that many goods have become costlessly and,  therefore, infinitely producible.  Without government interference, they contend,  humankind will be able to satisfy more and more of their wants using the resources freely available inside the Cloud.

Our Post-Scarcity libertarians should tell this to the owners of the 500,000 data centers, which contain the hundreds of millions of servers worldwide that constitute the real and indispensable infrastructure of the Cloud.  According to a recent article in the Harvard Business Review Blog, these data centers take up space equivalent to 6,000 American football fields.  As of 2007, their annual consumption of electricity was 623 billion KWh.  Taken as a unit, these data centers rank behind only the U.S.,  China, Russia, and Japan in total annual electricity consumption.   They rank ahead of Germany, India, France and Great Britain.

So enormously costly is electricity use that Ebay has begun moving to renewable on-site energy sources to power its data centers.  Its new data center in Utah will be partially powered by renewable energy sources while some old ones are being  equipped with on-site power cells and  moved completely off the grid .  It has also integrated its facilities and IT to save on costs, with one executive in charge of  purchasing hardware and paying the power bills for the data center.

Facebook meanwhile has moved to a “vanity-free approach” in equipping its data centers to cut its power bill.  It is stripping its  data centers to the bare bones.  Anything not related to a work function in the building,  servers, and cooling system is being ruthlessly eliminated.  For example, the company has even gotten rid of its logo on the front of its servers.  The logo is typically displayed  on a six-pound plastic bezel provided by the manufacturer and mounted on the front of each server.  Not only did this eliminate the direct cost of the extraneous plastic it also improved the energy efficiency of the server because the plastic  hindered air flow to cool the server and made the fan work harder.

Once again, common sense observation of the real world reveals the ceaseless struggle of human actors to economize on the use of resources and vindicates the old and true economics of scarcity.

Krugman Challenged

Krugman gets a bit snippy at 48:20. His objection is confused. He says Professor Schwartz tried to criticize his credentials. But Schwartz criticized Krugman for going beyond his capabilities, not for going beyond his credentials.

Schwartz makes a strong point about the “ratchet effect” in government policy at 1:09:00. He credits “ratchet effect” studies to the Public Choice school, although of course, it’s mainly an insight of Robert Higgs’, who isn’t usually classed as a Public Choice economist.

Here is Zero Hedge on the event.