Thursday, January 8, 2009

What is Inflation?

Prices rise over time. Today, people call this general increase in prices, “inflation.” In the past, however, when the government created new money, people said the government was inflating. Whenever the government inflated the amount of money, there was a general rise in prices.

Before we discuss inflation, it is important that we have a firm grasp on what money is.

Before there was money, there was barter, or direct exchange – my wooden club for your piece of sharpened flint, or my goats for your daughter. Direct exchange is problematic because, among other things, you may not be able to find someone who wants to trade what you want for what you have.

At some point, people began to engage in indirect exchange. I want bread and I have candles, but the baker doesn’t want candles. So, I ask the butcher if he wants some candles in exchange for some meat. If he agrees, I can exchange candles for meat. Then, I can exchange the meat for the bread that I actually want. The meat has functioned as a medium for the exchange.

Some things are more easily traded away than other things. The things that are most easily traded away eventually become desired exactly because they can be easily traded away and become a medium of exchange or money. This is how money begins. Dried fish, pelts, dried tobacco, seashells, and other goods have been used as money. The most famous monies are gold and silver. Note that, even though the function of money as a medium of exchange does not require that the money be useful for anything other than exchange, a medium of exchange cannot come into use without first having had a direct use for consumption.

The earliest form of inflation occurred when kings would debase gold or silver coins. Since people naturally exchange gold and silver coins on the basis of weight and purity, the names of coins used are simply weights. The British pound sterling was a (physical) pound of silver, for example. The king begins the process of debasement by first minting coins of pure gold or silver and calling them by some official name which is not a unit of weight. For example, the Romans called their monetary unit the denarius. The king then bans all other forms of money or – more commonly - requires all taxes to be paid in the official unit. To pay taxes, the individual holding unofficial (and probably pure) coins has to trade these to the king to get official coins to pay the taxes. The pure coins are melted down and minted into more official coins, which reduces the amount of unofficial coins in circulation and increases the amount of official coins. Eventually, the official coins dominate the circulation. The official coins that are collected in taxes are also melted back down and reminted at a lower purity than before – this is called debasement. This allows the king to spend more than he collects in taxes since taxes are unpopular and can lead to revolt.

Now, it should be clear that debasement is fraud. When the king mints more coins with the same amount of precious metal and decrees that the new coins with less precious metal are worth the same amount as the old coins with more precious metal, he is committing fraud by any other name. But who is the king defrauding and how?

When the king rides out into the market with his newly minted debased coins, the prices which merchants are charging reflect the value of the old, less debased coins. When the king goes to buy a sword or a horse or some other item, he gets to purchase it with less valuable coins but at the old prices. Since the king’s spending is greater than his taxation, he is injecting money into the local economy. As a result, the vendors and merchants the king buys from receive a boon. They should be happy that the king is spending his newly-minted, debased coins with them since they too will get to buy things at the old prices with the new, less valuable coins. As the additional coins are spent and respent, there is “more money chasing the same amount of goods” this means that more coins must be offered for the same goods. Eventually, once the effects have rippled out, prices will be a fraction higher. Those who never got to use the new coins now have to pay higher prices, but still only have the same amount of coins to their name. They now have less effective buying power but the king and the vendors and merchants he spent his money at had greater buying power with the same money. It should be obvious what has happened – buying power has been transferred from the late (or never) users of new money to the early users of new money.

Modern inflation, however, is more sophisticated than simple dilution of the amount of precious metal in a coin. To truly understand modern inflation we must first understand banking.

Banking originated with what we today know as secure storage and pawn brokering. A wealthy man needed a secure way to store his money and confidence that he could recover the money when he needed it. The secure storage of coins or other valuable artifacts was made possible with the ability to issue receipts – if the trusted party tried to steal the stored valuables, the receipt could be used to prove the theft.

Pawning or brokering enabled individuals to obtain loans by using their valuables as collateral against default. If I want to borrow 100 coins, I might deliver my horse to the pawn broker with an agreement to repay the loan with interest or forfeit the horse. In this way, I can temporarily convert my valuables which are not useful for exchange into money which is useful for exchange. When I am done using the money – perhaps to buy something and resell it at a profit – I repay the loan, with interest, and recover my valuables.

When depositing coins into a secure storage, the storage may either issue a receipt or make an entry in its books for the amount of the deposit. The issuance of receipts is the origin of paper money. The book entry is the origin of checking accounts.

When a secure storage becomes used widely enough, its receipts take on a value for exchange independent of the money stored. Anyone who recognizes and trusts the reputability of receipts issued by Bank XYZ will be willing to sell goods or services in exchange not for coins, but for a receipt from the bank. And individuals who both have deposits with the same bank can draft checks which instruct the bank to transfer money from one customer’s to another customer’s account.

Obviously, secure storage of money or other valuables is a trust relationship, where the depositor is the vulnerable party. A secure storage which issues receipts can steal from all users of its receipts by printing false receipts and using them to pay its own expenses. Or, it can steal from specific customers by making fraudulent withdrawal entries in the customer’s account and stealing the deposits for its own benefit. Directly defrauding individual customers by entering fraudulent withdrawals into their accounts is the riskiest way to steal since those customers will know they have been defrauded and will spread word and seek justice for the theft.

However, if the bank operates not only as a secure storage, but also as a creditor, the ways in which it may steal increase and become harder to detect. If the bank begins paying its bills with fraudulent receipts, it increases its own risk of failure as the number of customers wishing to withdraw their deposits may at any time exceed the amount of deposits it actually has. Therefore, direct payment of bills with fraudulent receipts is very risky.

If the bank does not make direct payment of receipts but rather loans out fraudulent receipts, when the loan is repaid, the bank will again be safe from failure due to inability to satisfy withdrawal demands, and will have earned profit in the form of the interest paid on the fraudulent loan. Similarly, the bank may make fraudulent deposit entries to customers’ accounts by not entering a withdrawal to its own account when giving loans. Once these fraudulent loans are repaid, the fraud will not be detected.

Note that a bank customer can engage in exactly this same fraud by writing checks against an account whose values sum to an amount greater than the amount deposited in the account they are drafted against. As long as the checks are themselves circulated as money (this used to be common) and not redeemed at the bank, the fraud can go undetected. The banking customer, in essence, becomes his own bank and can engage in his own fraudulent loans if he chooses. Let’s say Bob’s Grocery has a reputation for reliable payment of checks, so reliable in fact, that a $100 check from Bob’s Grocery is as good as a $100 bill. People may use checks from Bob’s Grocery in exchanges. Since many of his checks may not clear for a very long time, Bob realizes he can write more checks than money he has in his account. So, Bob begins to give $100 loans by writing $100 checks which circulate as money. Bob has, in fact, become a fraudulent banker.

The first kind of fraud – the printing of fraudulent receipts – is the original form of paper money inflation. I will call this printing-press inflation. It is nothing other than counterfeit. Using the same kind of procedure as with debasing coins, the government first declares a unit of paper money which is independent of any coin or other physical object or quantity. Then, it either bans all other forms of money or requires taxes to be paid with the official paper money and uses the same process the king used to debase coins to convert unofficial money into official paper money. By continually printing more paper money, the government can surreptitiously steal from its citizens, avoiding the political problems associated with taxation.

Printing-press inflation is still a very direct and measurable form of inflation. It is not too difficult for an interested observer to figure out how fast the government is printing new paper money. This evidence makes it difficult for the government to deny responsibility for price increases, which even the financially unsophisticated public understand to be a surreptitious tax.

The most subtle form of fraud – the direct deposit of non-existent money to an individual’s account to satisfy a loan – is the latest form of debasement. This is how modern governments inflate. The government can do this by operating its own bank and forcing other banks to keep their deposits in this bank – the so-called “bank of banks” or “central bank.” The central bank is authorized by law to buy government debt with new money that it creates on its charter authority. I will call this checkbook inflation, as opposed to simple printing-press inflation.

This enables the government to print bonds instead of money. The bonds are only necessary to avoid the appearance of outright fraud. If the government simply authorized the deposit of new money into its accounts at the central bank, everyone would know this was no different than printing-press inflation, just on the accounting books instead of with paper receipts.

The bonds are the root source of the inflation. In essence, bonds are a new kind of printing-press inflation. The bonds are supposed to reflect a future intent to pay the debt from future tax revenues. Sometimes, this even happens but government debt usually just increases. When private individuals buy government bonds, an argument can be made that the purchases reflect a belief on the part of the private individuals that the government can collect the promised future taxes and pay out the bonds on maturity. But when the central bank buys bonds from its government, this is just a way to justify the printing of money by the central bank on the pretense that all this new money will be collected in taxes at some point in the future. This is an absurdity – it’s like the king claiming it is acceptable for him to mint an extra 10,000 coins by debasement this year because he will be collecting 10,000 extra coins in future taxes. The king’s subjects should hope that he will limit his pilfering to just the minting of the extra 10,000 coins by debasement and renege on his promises to tax them even more in the future!

One last puzzle piece is necessary before fully explaining the mechanism by which modern governments create money. The government allows banks to legally engage in checkbook fraud, but it regulates the extent to which they can commit fraud. This is called “fractional reserve banking.” Basically, the government allows a bank to use up to 90% of the amount of deposits it has on hand to make new loans. An honest bank would only loan its own money or money that it has been loaned by its depositors (in the form of time deposits or CDs), that is, capital that it has acquired to its own account through profits earned on interest from pas loans, and its own credit. The government allows a private bank to loan not only its own money, but up to 90% of the money which it has on deposit.

Now, when the government wants to buy something, it plays a financial shell-game using these tools of bonds, checkbook fraud and fractional reserves. Let’s say the government needs $9 billion to buy some new tanks or to bail out some “crucial” financial company. It might take steps that look like the following: 

1)      Print up $9 billion of bonds

2)      Have the central bank “loan” $1 billion to its commercial banks by simply adding $1 billion dollars of assets to their balance sheets and $1 billion dollars of liabilities to its own balance sheet

3)      Have the commercial banks make loans to one another with this new $1 billion of up to 90% of the new deposits – this creates the money multiplier which inflates the original $1 billion to as much as $10 billion

4)      Have the commercial banks buy the $9 billion in bonds from the government (the original $1 billion has to be held as required “reserves”)

The effect is the same as ordinary printing-press inflation – the government can buy things with money that didn’t exist before. The crucial difference is that, just as fraudulent banks long ago discovered, giving loans of fraudulent money on the books is much less risky than directly issuing fraudulent receipts because fraudulent receipts, once printed, never go out of existence and represent a continual threat of failure. In theory, once all the government bonds are repaid, the books would be balanced and the money supply would have returned to whatever its base value is.

This convoluted system serves two purposes. First, it appears that at no point has money been created – at most, new loans have been authorized by the central bank to its commercial banks, backed by the government’s promise to repay from future taxes. But this is actually where the money is created – from what reserves does the central bank buy the government’s bonds? It has no reserves of its own, so this original “loan” is just a simple fraud and is purely inflationary. Second, the amount of money at the point where money is being created is just 1/10th of the actual final amount of inflation. This is politically helpful in minimizing the extent of the government’s inflation.

By using the money multiplier, the commercial banks help the government cover its tracks. Inflation, as measured by the fresh money the central bank deposits into the accounts of the commercial banks, appears 1/10th as large as it actually is. In exchange, the government allows the commercial banks to earn interest on the 10x multiplication of money, which “spreads the wealth” – the government spends the principal, but the private banks get their cut in the form of the interest.

Whether the central bank is structured like the privately controlled Federal Reserve or on the model of the publicly owned European central banks makes no difference. It is ultimately the private banks who enable the government to cover its tracks with the help of the central bank. It is the fact that there are many private banks which helps the government cover its tracks – think of it like the tor network for money.

The national debt has been non-decreasing for at least the last 60 years and is growing at an exponential rate (in non-inflation adjusted terms). For every dollar which the Federal Reserve creates, there is potentially $10 of actual inflation which the government has generated.

Inflation is debasement is counterfeiting is fraud is theft. Whether it be diluting coins, printing reams of paper money, or playing accounting shell-games, it’s always the same deal. The fiat money system is a con game writ large. Unfortunately, with the power to print money at will comes the power to buy legitimacy because the movers and shakers of public opinion can be bought. Everyone has a price and when you own a legal money printing press, no price is too high. Most people – even most economists – believe that the central bank system is somehow legitimate. This can only be the result of a failure to think clearly about the nature of money and banking. Ironically, this is all an open secret. The Federal Reserve long ago published a description of exactly how it creates new money in a booklet entitled Modern Money Mechanics.

The government has ostensibly stopped the practice of simply printing new money. The reality is that the printing of money has just changed forms. Before, the government simply printed circulation money. Today, it prints bonds and then uses the central bank and the banking system to convert these bonds into circulation money. Either way, the government is continually increasing the amount of money which continually causes prices to increase, just as the king’s debasement did. If you believe the government uses this power legitimately, you are a very special person. Most people understand that debasement and printing-press inflation are fraudulent and destructive to the economy. The key, today, is helping people understand that what the government is doing through the central bank is logically equivalent to debasing coins or printing new paper money. If it really is useful to inflate the currency, why the complex acrobatics to conceal the extent to which inflation is occurring?

My sources are Rothbard’s What has Government Done to Our Money?, The Mystery of Banking and Gary North’s Mises on Money. All of these are freely available online, and I highly recommend you read them. There are many videos available on YouTube which attempt to address the root problem of the modern central banking system – most notably Zeitgeist and Paul Grignon’s Money as Debt. While these videos are correct in sensing that the central bank is inflationary and is the root of the problem, they also contain factual or technical errors and propose solutions that are as bad, or worse, than the current system. When you have read Rothbard, Mises and North on the nature of money and banking, you will understand that our money should not be trusted to the government or its central bank. No individual or organization should be trusted with a monopoly on the issue of money. This is the closest thing on Earth to absolute power and the absolute corruption of the modern inflationary system is evidence of this.

We must end the Fed.

Sunday, January 4, 2009

The Economics of Reproduction

Consider this, if every woman on planet earth has two children, the human population will essentially flatten to a constant (it would decline very slowly). For the sake of this discussion, let us define human survival as "replenishing the current population" - neither increasing nor decreasing it. Survival is achieved exactly when the human population does not decrease. On this view, let's think of two children as a woman's "expected contribution" to human survival. Of course, this is a fantastical criterion, but note that our genes are obviously hardwired to maximize reproductive success to assure survival. If they were not so hardwired, we would not be here today.

For each woman who chooses not to contribute her two children, some other women must pick up this burden if the human population is to be replenished. If half of all women were to choose to have no children, the other reproductive half would have to have 4 children on average in order to ensure human survival. This is a significant additional burden to the women who pick up the reproductive duties because pregnancy and childbirth is incredibly difficult.

Because human reproduction is highly asymmetrical, with the male contributing very little effort and the female contributing a great deal of effort, the situation is not the same for men as it is for women. Let us start with an egalitarian distribution of reproductive "duty" for men - fathering two children is a man's "expected contribution" to human survival. But for each man who chooses not to give his expected contribution, the additional burden placed on the remaining men is very small, from a biological point of view. Let's say half of all men chose not to father children. The remaining men would be responsible for fathering an average of four children to ensure human survival. But fertilizing a woman four times is hardly more difficult than fertilizing her two times. There is essentially no additional cost to the other men (biologically, not economically).

Because of the massive cost differences between men and women in the process of reproduction, men are more "disposable" than women. That is, each woman's contribution to human survival is far more important than each man's contribution to human survival.

This disposability manifests itself in human history and male social roles. In general, it is men who fight wars, defend property, work high-risk jobs and so on. As Miller and Kanazawa explain in their fascinating book on evolutionary psychology, Why Beautiful People Have More Daughters, men have more to gain by taking risks and more to lose by not taking risks, and this is why they do. Some men who took risks (i.e. going to war or working a high-risk job) and succeeded achieved reproductive success and, while some men who took risks and failed did not achieve reproductive success. But men who did not take risks generally did not achieve reproductive success.

Women, on the other hand, do not face the same risk/reward curve. A risk-taking strategy has few benefits and many risks to female reproductive success. A man can be far more reproductively successful than a woman can (a woman can have at most tens of children, a man can have thousands of children). So, men who chose risky strategies to achieve greater reproductive success had more children than other men and passed on those risk-taking genes to their sons. Women who chose low-risk strategies that conserved the reproductive success they already had (i.e. kept their existing children alive) instead of following a high-risk strategy to have more children, were more likely to pass on their risk-averse genes to their daughters.

So, are men really more powerful than women? The biological reality is that men are far more disposable than women in terms of human survival because each woman contributes far more to the survival of the human species than does each man. I think once this is understood, the standard view of the relationship between the sexes that assigns a dominant, power relationship to the male in marriage is untenable.

The first and most important principle that Kanazawa and Miller discuss is that of female choice. Because females invest more effort into reproduction than do males, sex occurs when and where the female says it will occur, not the other way around. The second principle that Kanazawa and Miller discuss is the polygynous nature of human sexuality. This is the consequence of male competition for females. Because of the significant cost and risk of pregnancy and childbirth, reproductive opportunity can be seen as a scarce resource - wombs are a scarce resource with a price. The price is set by competition between males for access to that resource (buyers) and females who choose who gets access.

Now, this is all ignoring the costs of raising children and the (potential) costs of additional resource-consuming humans in the population. Steven Landsburg persuasively argues in this article that each new person born into the world, today, is a net benefit for everyone except their siblings (and I would add, their parents, since most parents have to accept a marginally decreasing standard of living for each additional child they choose to have). Landsburg's argument is persuasive but he does not speculate about why each new individual born today is a net benefit to the rest of us.

Let's look at other species to see the "state of nature" in which humanity originated. For each new caribou born, there is a marginal decrease in the available lichen and other food resources available to all other caribou. Each new caribou born is a net cost to all other caribou. As more caribou are born, feeding grows more scarce and malnourishment increases. The wolves that prey on caribou find more easy prey (as malnourishment increases) and the population of the caribou is brought back down. Similarly, each new wolf born marginally reduces the amount of food to go around with each kill but, unlike the caribou who cannot make more lichen grow, each new wolf born marginally increases the number of kills. When the wolf population is low, the marginal benefit of an additional wolf is high since each additional hunter is likely to contribute more to the pack (in terms of the marginal increase in kills) than he takes from the pack (in terms of marginal decrease in share per kill). When the wolf population is high, the inverse holds.

Pre-humans were omnivorous. As far as the herbivorous diet of pre-human species goes, each additional member born, like the caribou, was a net cost to the rest of the members. However, insomuch as pre-humans hunted other animals, each hunter could potentially contribute marginally more kills than he marginally reduced the share per kill. However, in the carnivorous respect of the pre-human diet, pre-humans were still population limited by the force of privation at the point where marginal kills of new members did not offset marginal decrease in the share per kill.

But when we come to modern humans, the human brain and technology fundamentally alter this equation since it is possible for modern humans to produce far more than they consume through technological means. Landsburg's argument shows that this must be the case today, at least for the last two centuries or so. As a rule, each new human that is born will produce far more than they will consume. The Malthusian view, which still holds sway with many people even where its formal shortcomings are acknowledged, that human population will run away and outstrip the growth of resources is not rigorous. Proponents of population control are obviously correct in pointing out that the exponentially growing productivity of humans cannot go on indefinitely in this physical universe where no exponential continues indefinitely. However, we have to take into account the ways in which humans make the choice to have more children or not and what drives this choice.

The Industrial Revolution is driven by a variety of technologies that have amplified the ability of the individual to produce food, clothing and other basic necessities. Economic history also shows the importance of specific innovations (indirect exchange via money, credit, double-entry bookkeeping, etc.) in dramatically increasing the division of labor which has further helped to amplify the gross productivity of the human population.

If we accept the Malthusian argument that population will always, inevitably outstrip productivity in the long run, then this means that the only real limits on human population growth are war and famine, as they have always been. Of course, few people alive today have seen either war or famine function as a meaningful limiter on population. The idea of living in a world where war and famine are the primary limiters of human population - as our pre-historic ancestors once did - is terrifying.

But if we apply marginal analysis to the productivity and resource-burden of humans, we can easily see that the Malthusian argument is simply incorrect. Take the internal combustion engine, for example. The internal combustion engine made possible the lowly farm tractor. The farm tractor has massively amplified the productivity of the individual farm laborer to the point that the United States has gone from a country where as much as 80% of the population worked in farming or in an industry directly related to farming to a country where only a couple percent of the population work in farming, yet feed far more people both within and outside the country.

Before the internal combustion engine, an individual could cultivate by hand or drafted plow. If he cultivated by hand, he may not be able to grow enough food to feed even himself and his family. If the average farmer cannot grow enough to feed himself, his having been born is a net cost to the rest of society because he will have to make up the shortfall in his productivity from either the environment, for example, by eating wild berries (reducing the amount of wild resources available to everyone else) or else by stealing from the productivity of others.

By contrast, each new individual who is born and manufactures or operates a tractor is marginally increasing the agricultural productivity of the earth by an amount far greater than the marginal increase in food consumption which he creates. We can see in this how the correct intuition underlying the environmentalist's angst about population increase (unsustainability of an exponential growth curve) can be salvaged while correcting the Malthusian argument. Human population will reach its carrying capacity when the marginal increase in human productivity for one more baby born is exactly offset by the marginal increase in human consumption. Beyond this point, additional population growth can only be controlled by war and famine, but it should be obvious that we are still some way off from reaching this point.

The question that remains whether there is any other alternative to controlling population by war or famine or - which is in no wise preferable to either of these - coercive population control via government policy. To answer this question, we have to look at the "market" for human reproduction, that is, the incentives facing baby producers.

There are two key components to human reproduction. Making babies and feeding them. The cost of making babies falls entirely onto the females - only females can gestate. The feeding of children can be accomplished by either males or females, though most often it has been males who have taken on the majority of this cost. I will not try to settle here the age-old debate over who contributes more, the breadwinner or the homemaker. Suffice it to say that this is becoming less of a gender debate since, as women have increasingly become able to fulfill the role of a breadwinner, there is less demand for them to fulfill the role of a homemaker.

Both making babies and feeding them are costs. Obviously, no one would reproduce if there were no benefits. While it can be argued there is economic benefit to parents when their children grow old enough to care for them or support them, this is a long-term benefit that is not likely to outweigh the very high short-term costs of pregnancy, childbirth and rearing. If this were the only benefit, very few people would have children. We have to look to genetics to find the benefits - they are primarily psychological. Those humans who were indisposed to have children because of the present costs were less likely to pass on their cost-counting genes. Those who derived psychological satisfaction from the joy of having a child and reckoned the costs of pregnancy, childbirth and rearing to be "worth it", passed on those liberal genes. We are descendants of people who thought the costs of child-rearing to be worth it. This is why people have children, despite the obvious economic costs.

However, remember that the human population is just replenished if each woman has two children. When reproduction reaches 2.0 children per female (actually, slightly more than this due to incurable disease and accidents), the human population plateaus. We have to consider the relative reproductivity of females. When the human population is nearing its carrying capacity, it becomes ever more costly to keep each additional child alive. This means that women who overestimate their ability to support children become less likely to pass on those optimistic genes as their overcrowded, underfunded children are more likely to starve. In this situation, overestimation can be as genetically unsuccessful as underestimation (due to a psychological or other disinclination to bear the present costs of child-rearing).

So, the rising costs of population growth are transmitted through the degree of joy of child-rearing that women pass on to their offspring. When the costs of new children were dwarfed by the productivity those children would eventually have, women with an indisposed attitude to child-bearing were less relatively reproductively successful than their more enthusiastic sisters. But when the costs rise, women who are indisposed to have very many children (maybe having just one or two) are not much less relatively reproductively successful than the more enthusiastic baby-makers. In this scenario, we would expect the female population to become significantly less disposed to reproducing more than a couple children, as a rule, because the less enthusiastic females become just as good at passing on their non-plussed genes as the more enthusiastic.

While this can occur through the hard limit of famine or actual starvation, to assume that women will not limit their reproduction as resources become more scarce is to deny that humans can make predictions, which is obviously false. While some women will have more children than they can support and they will starve (this happens even now), most women can be expected to predict that they will not be able to afford additional offspring and limit their own reproductivity, despite their enthusiasm for reproduction. The foreseeable starvation of their children is a massive psychological cost and should offset the present joy of having a child.

Birth-control technologies have made the human reproductive decision-making process 
more exact, but birth-control is largely negligible to the population analysis. Its primary benefit is to reduce the costs of recreational sex, especially for women. However, one reproductive technology with particularly important consequences to the economics of reproduction is surrogate motherhood. Limited to just our natural biological capacities, the most reproductively successful men have orders of magnitude more children than the most reproductively successful women. However, surrogate motherhood allows a woman to become almost as reproductively successful as a man can be. Of course, it is still more costly for a woman to be spectacularly reproductively successful than it is for a man, since surrogate mothers cost a great deal.

As surrogate motherhood becomes more common and normed, we should expect to see women engage in more risk-taking behavior. In particular, we should expect women to begin to take on more of the attributes that enable men as a class to be high-earners because there is the potential for greater reproductive success with the increased resources - an extremely wealthy woman might pay hundreds of surrogate mothers to propagate her genes far more than has ever been possible for a female in human history.

Technological innovations have reduced the need for physical strength in many occupations, enabling women to enter the workforce. Combined with the technology of surrogate motherhood, this fundamentally alters the dynamics of the question of who makes and feeds the babies.  In the past, men competed with one another for access to wombs - the most reproductively successful men were polygynous and passed on their polygynous genes, which is why humans, especially men, are promiscuous. Unlike the case with men, however, there is no reason to believe that surrogacy could affect female promiscuity - hiring a surrogate mother does not occur as a result of a sexual urge or impulse (so women who employ surrogates may be promiscuous or not and pass on those genes intact... surrogacy is indifferent to promiscuity).

With the option of surrogacy, a woman can use her own womb, or she (or the man or men she reproduces with) can purchase access to the wombs of other women. Men, on the other hand, through means of the sperm bank or other means, are competing with one another to fertilize the eggs, regardless of whose womb the fetus eventually develops in. In other words, surrogacy changes the old identity between womb and egg. A womb is not identical with an egg since eggs can be fertilized and implanted in wombs where they did not originate.

Men, now, are not competing for access to wombs, but access to eggs and couples are competing for access to wombs. This should dramatically increase the price of wombs since the number of reproductive couples is roughly the square of the number of reproductive men (assuming there are about as many reproductive women as reproductive men). This means there is a dramatic increase in the number of bidders for wombs, while the supply of wombs is the same as it was before. As a consequence, women should be able to demand much more in return for access to their womb.

Note that each woman who bears a child in surrogate is giving up access to her own womb to pass on her own genes. She bears a double loss, genetically, since she is forgoing the opportunity to pass on her genes for the duration of the surrogate pregnancy and she has expended a great deal of energy and time to pass on another woman's genes instead. Similarly, the woman who pays for surrogacy has a double win - not only has she passed on her own genes, she has prevented the surrogate mother from passing on her genes (during the duration of her pregnancy). In other words, she's "crowding out" the competition. In a sense, this is a bit like cuckoldry without the trickery - a man who is cuckolded by his wife is tricked into investing his time and effort into propagating the genes of another man. A surrogate mother is paid to invest a great deal of time and effort to pass on the genes of another woman.

We can expect that objective human beauty should increase as a consequence of this - a wealthy man can subsidize the surrogate motherhood of the most attractive women, amplifying their beautiful genes far more than would be possible without surrogacy. Conversely, the least attractive women can obtain far greater economic compensation for giving up their womb for use by more attractive, subsidized women than they could by using their womb for their own genes (since they will only be able to attract the least desirable men, that is, the poorest men).

The economics of surrogacy may also throw some light on the puzzle of why wealthy societies have become less reproductive than less wealthy societies. A poor woman can benefit by giving up the use of her own womb as a surrogate mother (she can use this money to, perhaps, feed and clothe her own children, thereby increasing their chances of reproductive success). A rich woman can buy access to the wombs of other women through surrogacy. As women in the West have become more wealthy, but surrogacy has remained stigmatized, the incentives for reproduction have decreased. That is, wealthy Western women have less economic incentive to use their own womb for reproduction, but since surrogacy is still stigmatized, they are not likely to have children through surrogacy, either. So, the reproductivity of the wealthy West has simply declined.

The technology of surrogacy itself does not create this situation but it will eventually solve it. Wealthy women will become less likely to use their own wombs to reproduce, pushing the burden of pregnancy and childbirth off onto less wealth women, while still attaining reproductive success. It would be instructive to know whether wealthy women have historically always been less likely to reproduce than poorer women. In any case, I think that the "price of the womb" is what is responsible for the decline in Western population growth - the economic incentives which a wealthy, Western woman must be offered to go through the pain of pregnancy and childbirth are much higher than those which women in less wealthy countries must be offered.

While the price of wombs should increase as a result of surrogacy, the price of eggs should actually go down. While eggs are still not nearly as biologically plentiful as sperm (ensuring that sperm will always be cheaper than eggs), they are much more plentiful than wombs. With natural reproduction, the majority of the cost is the womb (pregnancy, childbirth), not the egg. Once separated, the egg is relatively cheap - a man could father a child with any of many attractive mates using their eggs, just as a woman reproducing naturally may choose among many men with which to conceive, forcing them to compete and offer significant benefits to outbid one another for access to the womb. Women who are seeking to reproduce through surrogacy face competitive challenges similar to those men have always faced.

I have discussed the economics of reproduction in purely material terms, but this is not to deny the intangibles which factor into the calculation of reproduction. Women compete for access to the most desirable men, but wealth is not the only metric of desirability. Similarly, men compete for access to the most desirable women, but physical beauty is obviously not the only metric of desirability.

Friday, January 2, 2009

Is It Immoral to Charge Interest?

A common misconception about finance and economics is that those who give a loan are abusing (hence the term "usury") the borrower by charging him interest. However, it is easy to see that this notion is both naive and wrong.

Let's say I have $100 in my pocket. I can either keep the money in my pocket or spend it on something. Now, let's say you come to me and ask to borrow $100 for one month and I agree. However, if I give that $100 over to you, then for one month (until you repay), if I see something I want to buy - perhaps on a clearance sale that will be gone in a day - I have to forgo that purchase because you are using my money for the time being. Once the month is up, you repay me my $100 but it has cost me to allow you to use the money. Perhaps I could have saved $20 on a pair of boots that were marked down but sold before you gave me my money back. In that case, I have borne what economists call opportunity cost because I lost an opportunity to save some money, or perhaps earn some money.

In other words, the cost to me of giving you the loan is the forgoing of all the opportunities to purchase things or otherwise put that money to use while you were using it instead for whatever purpose you needed it for. It is only fair that I ask you to recompense me for that cost. Since the cost is real (I'm not just saying it costs me, it really costs me), you won't find anyone else who will give up $100 for a month without asking for something in return to compensate them for their trouble. Even if they didn't plan to use the money for a month or more, they could have just kept it in an account as insurance against loss of their job, or a natural disaster washing away their house, or whatever.

Now, this brings me to the general economic concept underlying the charging of interest and this is what economists call time preference. People prefer desirable things sooner rather than later (and undesirable things later rather than sooner) That is why consumers will pay interest to have a consumer item now, rather than waiting until such time as they have saved sufficient money to purchase the consumer item outright. Or, they will put off paying their bills until the absolute last minute required to avoid fees. Few people pay their bills more than a few days earlier than required and only then for convenience (usually because they're paying other bills due at different times all at once).

People prefer things sooner rather than later for the same reason they prefer more of something to less - consumption now means more total consumption, but deferral of consumption may mean less total consumption. Also, time involves risk - risk of death, risk of loss of senses, property etc. - so that deferral of present consumption may mean loss of the ability to consume at all. If I choose not to eat a banana today, it may become overripe by the next opportunity I have to eat it, for example. Or, if I forgo getting a massage today, I may die tomorrow without having received the massage I had wanted. And so on. For these reasons, I prefer things sooner rather than later.

Some people prefer present consumption much more than future consumption. People who strongly prefer present consumption we call "spenders" and people who strongly prefer to defer present consumption we call "savers." But, overall, there is a certain degree of time preference that emerges between those who are deferring present consumption and those who are presently consuming and this is what Austrian economists call the originary interest rate. This originary interest rate does not apply only to money, but to any good or service. It is the price that must be paid on the market by someone wanting to consume something in the present to persuade someone else to defer their present consumption.

The use of money is no different than the use of any other good. People prefer to have their money in their hand now, rather than later. To get someone to forgo the use of their money (or any other property they own which they might like to use, e.g. renting their house), you will have to pay them. The price which must be paid for the use of money is called interest. The interest rate for money is directly related to the originary interest rate and it reflects the price which must be paid to persuade someone to give up the use of their money so someone else can use it instead.

I wrote this post because it is a recurring misconception on this board and elsewhere that the charging of interest is an immoral and arbitrary abuse of borrowers by lenders. Not only is the charging of interest not immoral, it is a basic building block of the industrialized world. Without the charging of interest, it is impossible to allocate resources over time. And setting the interest rate to zero through price controls (laws prohibiting the charging of interest) simply causes a shortage of capital and excess present consumption. It destroys the division of labor by preventing those who would rather defer present consumption for greater future consumption from transferring their deferred consumption to be used by others who would rather consume more in the present at the cost of giving up more future consumption. In other words, it leads to underinvestment and this is exactly the consequences wherever the charging of interest is prohibited. Infrastructure is not built and capital investments are not made. Why bother? If you have a lot of money, better to spend it on luxuries for oneself than loan it out because no profit can be made from capital loans. Those who need capital to pursue a business idea can't bring their idea to fruition because the money they would have paid to use is being consumed for present luxuries.

War, What Is It Good For?

Here is an article discussing a book on a fascinating event in the history of WWI. This event underlines the fact that war is solely the consequence of the existence of the state. The state is war. I am reading Machiavelli's The Prince and he inadvertently makes the case that the state is war in section XIV "What a Prince Should Do Regarding the Military", where he says:

Thus a prince should have no other object, nor any other thought, nor take anything else as his art but that of war and its orders and discipline; for that is the only art which is of concern to one who commands. And it is of such virtue that not only does it maintain those who have been born princes but many times it enables men of private fortune to rise to that rank; and on the contrary, one sees that when princes have thought more of amenities than of arms, they have lost their states. And the first cause that makes you lose it is the neglect of this art; and the cause that enables you to acquire it is to be a professional in this art.

War is the health of the state. The state is war. World peace? Eradicate the state.

"Marines Kill Innocent Family"

Butler Shafer - a columnist at - described his disgust while staying in San Francisco during a Navy Blue Angels demonstration in an article written several weeks back. The first time I read it, I felt he was being a bit of a whiner - almost everybody loves to see stunt airplane performances... so what if it irritates Butler Shafer?

But one of the things he discusses is the double-standard between rules on private sector and government air safety. There is a double-standard between private and government performance of stunts, or levelling of houses in residential neighborhoods with jet fighter aircraft during routine training flights.

If this had been a private jet, we would read something like, "Nike Corporate Jet Kills US Immigrant Family" and we would hear of lawsuits being filed against Nike, Leer, and so on. But since this was the Marines, why, the father ought to forgive the pilot for saving his own skin while letting the jet hurtle, unguided, into a residential area. The thought that, perhaps, the Marines are responsible for killing an innocent American family is unpatriotic and unthinkable. There will be no lawsuits against the US Government, the Navy, the Marine Corps, Northrup Grumman or General Electric (who built the engines which apparently failed). We should all quietly mourn with this man who has given the ultimate sacrifice for his country... his wife, two daughters and mother-in-law. We should all be willing to make the same sacrifice if called upon by our country, should we not? After all, it is the US Government who will deliver us during times of economic uncertainty with their stimuli and bailouts.

Etienne de la Boetie belittles the Roman citizens during the height of the Roman empire who did much the same as we do today:

"Tyrants would distribute largess, a bushel of wheat, a gallon of wine, and a sesterce: and then everybody would shamelessly cry, “Long live the King!” The fools did not realize that they were merely recovering a portion of their own property, and that their ruler could not have given them what they were receiving without having first taken it from them. A man might one day be presented with a sesterce and gorge himself at the public feast, lauding Tiberius and Nero for handsome liberality, who on the morrow, would be forced to abandon his property to their avarice, his children to their lust, his very blood to the cruelty of these magnificent emperors, without offering any more resistance than a stone or a tree stump. The mob has always behaved in this way—eagerly open to bribes that cannot be honorably accepted, and dissolutely callous to degradation and insult that cannot be honorably endured." (from The Politics of Obedience: The Discourse of Voluntary Servitude)

Maybe if Nike starts sending out "stimulus checks" they can lower the maintenance standards on their aircraft and everybody will forgive them when a Nike jet hits their house, killing the women and children inside. Of course, if Nike could fund this liberality by first taking the money from us in the form of taxes (they could justify taxing us as follows, "Shoes are a necessary good that would not be produced without very expensive factories that no private investor could ever afford to build without the collection of taxes"), they would have hit the gravy train called "government." I wonder what a worldwide Nike government would be like? At least we'd all be well-shod. But I digress.

We all know what is going to happen. Absolutely no one who should be held responsible will be held responsible for this incident. The Department of Defense won't even pause its training regimen of flying thousands of tons of steel and jet fuel at sonic speeds over the bedrooms of our children. After all, Osama bin Laden might sneak in to the country and we have to have these planes on alert to bomb him. An investigation will be opened and some hapless mechanic who has been following the established maintenance guidelines will be faulted by some engineers and lawyers for "not having followed maintenance procedures" and sent to Fort Leavenworth to break rocks for some ungodly lengthy sentence and the Marines and "all branches of the Defense Dept." will adopt new guidelines, oversight and audit procedures to "ensure" that aircraft maintenance achieves the "high standards which the US public has come to expect from its finest" and so on.

Where Do Lost Jobs Go?

Here is a disturbing article from today's New York Times. Obama is apparently really planning a New New Deal (I'm crossing my fingers and hoping this is all very exaggerated).

But I wanted to talk about one specific line from the article, "His address on Saturday followed the report on Friday indicating that the country lost 533,000 jobs in November alone, bringing the total number of jobs lost over the past year to nearly 2 million."

So where did these jobs go? Did they just evaporate into thin air? There were 2 MILLION things that one year ago needed to be done, but today no one can afford to pay someone to do. This is very difficult for me to believe!

To me, it seems to be fallacious to speak of jobs as if they are some kind of product, e.g. "The government vows to create X new jobs by this time next year" or, as above, "Y jobs were lost during the last Z months." Jobs are neither a good or service, they are a contract between an employer and employee. The contract itself is not a good or service.

Employers are buyers of labor and employees are sellers of labor. Some people buy their own labor, these people are called "self-employed" or "entrepeneurs." Labor in itself is not really a good (you could say the employee is selling a service to the employer, but we have to be careful not to think of labor as a generic service... most labor is a specialty, requiring some kind of skill, experience, certification or qualification) but labor is usually employed in the production of goods and services. Labor has a price, like anything else, and this price is called "wages." Different kinds of labor have different prices in different areas of the world, depending on the demand for and supply of the kind of labor demanded.

Of course, labor prices for wage employees are highly political since the vast majority of people prefer to work for wages. This is why there are many kinds of price controls and other regulations on labor services. If labor prices were not political, however, there would be a free market in labor. During economic downturns, a free market of labor would result in a broad-based, relatively smooth, decline in the price of labor, usually along with a decline in the prices of lots of other things (like gas). In other words, the big, bad D-word.... deflation.

When price floors are implemented (to keep the price of something up), the inevitable consequence is surplus. This is for two reasons. Buyers buy less of something when the price is higher and sellers make more of something when the price is higher. The price tells buyers, "stop buying so much of this high-priced thing" and it tells sellers, "go make more of this high-priced thing." When the price controls of labor keep the price high, buyers buy less of it (employers cut their staff or hire fewer people) and sellers make more of it (more people want to be employed when wages are high than would want to be employed with lower prevailing wages). In other words, the number of people wanting a job, but not able to find one, increases during an economic downturn with wages fixed through price controls.

What are the price controls on labor? The most obvious one is the minimum wage, but this doesn't affect a lot of people. Other price controls are administered indirectly by restricting supply of a specific kind of labor through licensure (electricians, doctors, etc.) Union contracts* and wage laws that make it difficult to reduce pay or benefits also result in a kind of price-control effect as employers have to show people the door rather than offer them lower pay. Companies may lay off workers at one wage and then hire a slew of new workers at a lower wage to replace them if this is cheaper than the expenses entailed in trying to bargain reduced wages with their existing employees.

In short, jobs don't just disappear. The price of labor may go down during an economic downturn like the price of anything else. Employees seeking employment may have to readjust their wage expectations down during economic downturns. Those who have not yet adjusted their wage expectations down will remain unemployed. As wage expectations begin to adjust downward, the effective price of labor (as seen by labor-buyers, employers) goes down, resulting in increased purchasing of labor by employers.

The best way to get back to full employment is to allow the labor market to naturally readjust wages down. As wages go down, some people will stop wanting to work at the new, lower wages (preferring to take their leisure instead) and employers will begin to buy more labor - as the price of something goes down, that tells buyers, "buy more of this cheap thing" and it tells sellers "stop making so much of this cheap thing."

2 million jobs didn't disappear - the wage expectations of labor-sellers are readjusting during this period of general price deflation.

End the Federal Reserve

Anthony Gregory takes on the Federal Reserve in this terse but to-the-point article. In a few short paragraphs, he summarizes the arguments which debunk the myth that the Federal Reserve is something other than the engine of corporate fascism, the enemy of all free people.

Here's a quote:

"Then there is the idea that the Fed keeps the booms and busts in line. This is another total reversal of the truth. In a normal market setting, savings and inflation would be in harmony. The willingness of some to save and the demand of others for credit would work out to an equilibrium and produce the market interest rate. The Fed’s injection of new money into the system undoes this delicate balance. People get cheap credit and invest wildly in projects for the future, but those low rates no longer correspond to high savings. The consumers are still spending like crazy, the investors are investing like mad. This is what causes booms and eventually busts. When years later, people have not saved up enough to purchase all the products being produced through long-term investment projects, we have the bust. The Austrian Theory of the Business Cycle and sound economics help to explain the 1929 crash, 1970s stagflation after the guns and butter of the 1960s, the dot-com and real estate bubbles and all the other problems since 1913 that Keynesian economics doesn’t account for sufficiently. I suggest to everyone they read Murray Rothbard."

It's very elementary: time preference (the deferral of present consumption) itself has a market price, and this is called the interest rate. The more that investors demand money to invest (all things being equal), the higher the interest rate goes, which increases the supply of savings (deferred consumption), making real productivity available for investment. Likewise, as demand for present consumption increases (all things being equal), the interest rate rises, which decreases investment (by making it more expensive). As demand for investment decreases (all things being equal), the interest rate falls naturally spurring consumption as deferring present consumption becomes less rewarding (lower interest can be earned). Similarly, as demand for consumption decreases (all things being equal), the interest rate falls naturally, spurring investment.

Central bank counterfeiting is just a means to price fix interest rates down, which causes over-investment and under-saving. As with all price-control schemes, the necessary result is shortages and surpluses, but these are shortages and surpluses of the worst kind... shortage and surplus of capital itself. The effects on the economy are necessarily devastating. Voila Great Depression and Great Depression 2.0.

Is Just Government Possible?

During the Bush administration, we heard a lot of opposition to the efforts of the neo-conservatives and their "Project for a New American Century" with its chilling, bold desire to construct an American empire. I have presented reasons in the past to believe that the United States is a global empire. Irrespective of where you stand on the issue of whether the US technically is or is not an empire, the US government and every other government on earth is blatantly Machiavellian in their justifications for their actions.

In case you're wondering who Machiavelli is, he wrote an important book in the late 15th century titled The Prince which is basically a handbook on how to retain power, even at the cost of violence and other immoral acts, while yet retaining the external semblance of moral authority. In short, it is a guide on how to retain power at almost any cost.

One problem with modern politics is that it has, in many ways, become frankly Machiavellian. For example, have you noticed that the cable news networks spend very little time discussing the positions of candidates during elections? Instead, they focus a great deal of their energy on discussing meta-political issues - the candidates' style, manner of speaking, political triangulations and so on. Now, the netowkrs themselves are not to blame for this, apparently this is what people want to hear and see. But this is even more disturbing because it indicates that the public has become frankly Machiavellian in its outlook. How so? Well, if the point of having an election is to decide who is best suited to run the country, how do their respective political triangulations matter? All that really matters in an election is whether John, Joe or Suzie will govern most justly or whether this, that or the other way of organizing the state is more just.

As another example f you read a Supreme Court opinion, the Court will frequently refer to "the interests of the state" in concluding that things should be this or that way. But why should things conform to the interests of the state, anyway? So what if something is in the interests of the state, how is that a reason that things should be that way?

In short, as long as the US public and people throughout the world continue to hold the widespread view that the state may legitimately appropriate to itself any means whatever to accomplish its ends, just government is impossible. If you want to know how George Bush launched an unnecessary war based on nothing more than rumors, lies and innuendos, perhaps you need to look in the mirror. As long as you and I believe that the state has the legitimate power to appropriate to itself any means necessary to accomplish its ends, the state will remain the foremost human force for destruction in the world.

Of course, the statist believes that we can pass a convention on human rights or draft some other written document to limit the behavior of the state. The lesson of history is that words are cheap - it is money and the threat of violence which speak. The state cannot be limited by words which it is itself responsible to enforce. A constitution is powerless to limit a government, this is the lesson of US history.

Since the only real threats to state power are popular revolt, foreign overthrow or emigration, these are the only real limits to state power, even today. The real limit of state power is popular patience - how much the public will endure. How much taxation the public will endure, how much regulation, how much abuse, how much invasion of privacy and violation of other basic rights the public will endure. These are the true limits of state power.

But when the public begins to tolerate the state using the ends to justify the means, the state acquires more power than it already has. Extraordinary rendition, Guantanamo Bay, extortionary taxation, astronomical inflation and public debt all become just "necessary evils" which the state must use. Of course, it is only ever using these tools in its interests, which begs the question of why the state's interests should be served.

If there is such a thing as just government (which I don't believe there is) it certainly cannot exist in the context of a public opinion which is generally Machiavellian in its view of state power. The state does not have the right to appropriate to itself "any means necessary" to further its interests. The fact that something is in the interests of the state is irrelevant to any question of justice. And the ad hoc solutions of writing down supposed declarative limits to state power has been shown again and again throughout history to be nothing more than a farce. The only real (internal) limit to state power is fear of popular revolt and as long as the public is not outraged at the frankly Machiavellian behavior of our government and all governments throughout the world, we are guaranteed to have unjust government.

Bailouts Are Bad, Markets Are Good

I think one of the most common misunderstandings of the free market is in understanding why competition is good. Competition is not good because it makes businesses "try harder." Competition is good because only a business which produce goods and services that are more in demand than the goods and services which the business consumed to produce them does not go bankrupt. It is not because individual entrepeneurs are induced to try harder to give consumers what they want that competition is good but that those entrepeneurs who produce goods and services which are less in demand by the market than the goods and services consumed to produce them are bankrupted. This minimizes waste by constantly transferring resources from less valued uses to more valued uses.

In biology, there is a concept called "lamarckism." From Wikipedia, lamarckism "is the once widely accepted idea that an organism can pass on characteristics that it acquired during its lifetime to its offspring." For example, a body builder might pass on the genetics for large muscles in a lamarckist view. Aside from being quite silly on the face of it, all evidence contradicts the lamarckian view of biology.

I think that the misconception that market competition is good because it induces people to try harder is an analogy to lamarckism in biology. Organisms that work hard can improve the genetics which they pass on to their offspring. This is important because - if true - biological evolution is not guided only by reproductive success. If the primary benefit of market competition is making people "try harder" then the market is not improved solely by the survival of producers which supply products that are demanded by the market. Rather, producers are themselves improved by the fear of business failure and so go on to succeed and not go bankrupt.

If this is the case, then central planning through measures like bailouts should be an improvement over the market because the incentives facing businesses can be engineered, rather than left to the ad hoc vagaries of the market. Rather than waiting for entrepeneurs to fear business failure to provide some safety device or product disclosure, we can threaten them with government sanction ahead of time. This engineering improves the marketplace by giving entrepeneurs an incentive to try harder on things that the public has indicated through the political process that it wants the market to try harder on. Direct ownership and management of business by the government could also be an improvement since competition between the bureaucracy and the competition for funds from the public purse similarly induces the heads of government owned and operated business to try harder.

But market competition does not improve efficiency by giving businesses an incentive to try harder. It improves efficiency by bankrupting those businesses that do not produce goods and services that the market demands more than the goods and services consumed to produce them. Once bankrupted, the CEOs, board members and other directing individuals of the business no longer have the power to misallocate more valuable resources to the production of less valuable products.

Bailouts frustrate this process by keeping failed businesses alive so they can continue to misallocate resources. The reason for the bailout is that the business has been consuming resources which are in greater demand to produce goods and services which are in less demand. Propping up a failed business only ensures that this will continue. Allowing the business to fail frees up the misallocated resources to be put to more productive uses.

Surprise! Spitzer Not Charged in Prostitution Ring Bust

So, apparently prostitution is only illegal if it's not really expensive. If you are too poor to be a client of the Emperor's Club, then you just might go to jail for accepting or giving money in exchange for a perfectly legal activity.

Yes, we need the Eliot Spitzers and Tom Darts of the world to come in and save us from the depredations of the evil connivers running Craigslist. A particularly chilling comment from the Right Illustrious Tom Dart, "If we had the resources, we could be making these arrests every minute of the day." Is that a world you want to live in? A world where half the population is incarcerated because they want to have sex (and are sometimes willing to pay or be paid for it)?

The state is a crime syndicate. Their Dons - like Spitzer - break the very rules we believe we have empowered them to enforce only to have their "indiscretions" swept aside "in the interests of the public" while the poor and minorities have outright war waged on them by jackbooted dragoons driving up-armor Humvees with lightbars. Thank heavens for the Spitzers and Darts of the world who send their thugs to throw people in jail for having sex! What would we do without them?!!

Democracy and Homosexuality

Here is an article discussing the votes in South Dakota, Colorado and California against gay marriage. In a democracy, what does this mean? More people were willing to mark their inclination against gay marriage on a ballot than were willing to mark their inclination in favor of gay marriage, that's all it means. So how can that justify the use of state coercion against gays to prevent them from entering into a marriage?

In the "good" old days (and in some parts of the world today), sodomy was outright illegal with punishments varying from an overnight stay in jail to torture and burning at the stake. Certainly, no moral justification can be offered for these behaviors and none but a Fred Phelps would even try to offer any, these days.

But we still rationalize the same behavior in principle, just not in degree. Inducing completely unnecessary emotional suffering on people who want to marry is not morally justifiable. How does 50%+1 or more of those participating in a poll indicating that they would rather homosexuals not be allowed to marry legitimize the use of state coercion to prohibit them? It doesn't because it can't for the same reason that a majority vote can't morally legitimize torture or murder.

The watchword among Democrats, liberals and others in the Obama era is "Change" but nothing is really changing so long as we continue to try to use the state as an instrument for imposing our ideas about the way it oughtta be onto others. All that has changed is that a new alliance of special interests and lobbies will have more influence in coercing us to conform to their desires and the special interests and lobbies that have prevailed for the last 8(+) years will go into hibernation and survival mode, awaiting their next opportunity to topple the old king of the hill and install their own.

Real Stimulus: Untaxing Tips

Ron Paul proposed a bill last year that would eliminate taxes on tips. This would provide genuine help to people in the "working class" - as the media Marxists like to condescendingly refer to productive people.

We need to get this bill back on the table and get relief from government taxation to productive people. 

So, big government liberals: how do you justify not untaxing tips?!

Producing Public Goods without Taxes

I'm writing this post because the most common objection to my position on taxes (that "taxes" is just a euphemism for "robbery") is that, even if taxes are immoral, they are necessary since there is no other way to pay for so many of the necessary services which government provides.

What is a public good? The technical definition is that it is a good which is non-excludable, which means that you can't charge for its use once the good has been produced.Take a fireworks display. Once you shoot off the fireworks, you cannot charge people to see them because they are up in the air, visible to everyone. If you can't charge anyone, then it obviously won't be profitable to do it, and the market will fail to produce the good.

Before delving into the technicalities of how public goods can be produced without taxation, let me address again why we should want to. There are two major reasons, one ethical, one utilitarian:

1) Taxation is robbery and moral acquiescence to taxation is slavery. 

Taxation is a claim by an individual or oragnization on the property of others. In ancient times, you more likely paid tribute to a foreign power than taxes to a local power... or you were a slave. The claim takes the form of "I/We have the right to ___% of your property because ________. If you do not comply, I/we will seize it by force." It really doesn't matter what goes in the second blank, since no justification can be offered for seizing property by force where no voluntary contractual agreement has been previously made.

But let's say you agree that the government "has the right" to some percentage of your property and you don't consider it stealing - then the question becomes how much do they have a right to? 0% (complete private ownership) and 100% (complete slavery) are natural boundaries, but any point in between is arbitrary. But since the government will always want more taxes over less taxes, it will always want to move the amount of your property it takes closer to 100% and, with the right justification, they may succeed. The top tax bracket during WWII was over 90%! Granting government "the right" to take any taxes at all is an implicit agreement that the government really has the right to 100%, but shows dispensation and self-restraint in taking less. In other words, if the government "has the right" to 1% of my property, it really has the right to all my property but is gracious enought to leave me the 99%.

2) Taxation is socialization. Milton Friedman states in his video series Free to Choose, "No one cares for the property of others as well as he cares for his own." Taxes - in the post-monarchy era - are the property of no one. So, they are not cared for. This is why government programs are so notoriously wasteful. "It's not my money!" Since tax monies are social, they are squandered and this leads to a net impoverishment of society which always hurts the poor the most.

For both the moral reason (taxation is robbery/slavery) and the utilitarian reason (taxation results in an increase of squandered resources), funding goods and services through taxation should be avoided wherever it can be.

Here is a pretty big list of articles treating the privatization of various kinds of goods and services which modern governments currently monopolize. From the same site, here is an eye-opening article by Roderick Long discussing six ways (not an exhaustive list, by any means) that public goods can be privately produced.

Let's start with the easy stuff like roads, bridges and other infrastructure. The only reason these are "public goods" is because we make them such, legally. There is no reason a road should not be privately owned. Once privately owned, the road is no longer a public goods problem since its use can be charged for (it is excludable). The same goes for water works, power lines, phone lines, railroads, etc. etc. There is nothing about these goods which makes them intrinsically non-excludable. It is only their legal status that makes them public goods. So, if you want to eliminate the need to pay for them from tax revenues, simply remove the legal barriers to private ownership of these goods and the market will naturally produce them like any other good or service. The same is also true of fire departments, emergency rooms and other municipal services. The only reason they "cannot" be privately produced is the legal barriers to their private production. Once the legal barriers are removed, the market will naturally produce them like any other in-demand good or service.

Next, we move to the harder problems like national defense, courts, and police services. Many of these problems are truly non-excludable at first brush. How do you defend from military attack only those households who paid for such defense?! Obviously, such fine-grained exclusion is impossible. However, that does not mean the problem is insoluble. David Friedman has suggested a money-back guaranteed bond method by which a region could voluntarily raise defense monies without resort to taxation. The bond works as follows: $X is needed to sign a defense contract to defend the region. Anyone who cares to have their region (and house) defended may purchase a bond towards the $X goal. If the $X goal is not reached after so many days of fund-raising, all bondholders receive their cash back. While free-riders still don't pay, non-free-riders also payno more than the amount at which they value the defense of their home and they do so without risk of losing their money in the event the $X threshold is not reached. This would be not unlike a United Way drive, with which people are quite familiar.

Since the military budget is the #1 expenditure of most governments, and taxes are socialized monies, it is not a large leap to conclude that military "defense" is massively overproduced. Hans Hoppe proposes funding military defense through insurance rather than bond measures, as Friedman proposes. Hoppe's approach is more minimalist (only very valuable properties and investments would have military defense, not homes) but may be more truly reflective of the actual defense needs of the public, since foreign armies typically don't invade in order to ransack people's homes. In the insurance model, large corporations or wealthy owners of valuable property would insure their property against foreign attack. The insurance agencies, in turn, would take on the costs of defense contracting. If a foreign power showed signs of aggressing on a particular region with valuable properties (i.e. a city or industrial region), the insurance company would pay defense contractors to move in and ward off or repel the attack.

These are just two possible solutions to the problem of producing national defense - they could even coexist, with overlap. The important issue is that even something as non-excludable as military defense can be produced without resort to taxation.

Police services are actually much easier to produce on the market because excludability is much more fine-grained. The same approaches of bonds or insurance can be used. Alternatively, homeowner's associations can require payment for community protection on a contractual basis (entirely different from taxes because voluntary). Bundling - which Roderick Long discusses in his above article - is another approach which could work, where security companies use advertising to pay their revenues. The movie Mystery Men depicts this idea, in fact (though in mockery) with private policemen who are superstars with uniforms that look more like racercar drivers instead of traditional police uniforms.

Producing courts and law is a much more complex topic and one that David Friedman has written an entire book on... Law's Order. I recommend that if you're interested in how courts and law can be privately produced that you take a look at his book.

In summary, most services which governments monopolize are only public goods because the law makes them such, not because they are inherently non-excludable. Those few services which are truly non-excludable at first brush can still be produced on the market with the application of ingenuity. And this is not all theoretical, as anarcho-capitalist scholars have delved into historical detail of how these services were privately produced in places like medieval Iceland, the Western United States and elsewhere. In the end, the specific details of how they would be produced on the market doesn't matter to my position that taxes are immoral and destructive. So long as it is possible for these services (courts, police, national defense) to be produced without resort to taxation, then no rationalization for taxation - even from the "greater good" or "necessary evil" position - is possible.

The Federal Resrve - Taxation without Representation

The Federal Reserve - whether you realize it or not - is the Federal government's secret money machine. As such, the Federal Reserve is a tax system. Bernanke himself admits in testimony before Congress that the Federal Reserve is a tax machine when he responded to questioning by Ron Paul that "... I couldn't agree more that inflation is a tax..." Of course, Bernanke does not admit that the Federal Reserve is the primary or solitary cause of the rise in prices, but instead adopts the mantle that the Federal Reserve is actually fighting inflation, a patently absurd notion. A dollar today buys what a dime bought in 1971. At the same time, the money supply has been expanded many times under the auspices of the Federal Reserve. Of course, this is only a coincidence! 

What is important is that you realize that the Federal Reserve expands the money supply (prints money), that the expansion of the money supply raises prices in general, and that a general rise in prices is a tax and that this tax occurs without any input or recourse from you. The Federal Reserve is the vanguard of the new crypto-aristocracy.

The Founding Fathers of the United States threw off British rule primarily for this reason. Perhaps it's time that some freedom-loving state in this Union consider repeating the same secession. If anything, we have far more cause than the American revolutionaries to throw off the oppression of our government. The Federal government is taxing us much, much more through inflation than the British crown ever taxed the colonists.

Stop Blaming the Free Market

It seems almost every time I turn on the TV or read a mainstream news article about the economic collapse, it is once again the "free market" who is the culprit. When times are good, everybody - even liberals - loves the free market. When the going gets rough, all of a sudden, it is the free market that is to be blamed!

But what is the free market? It seems that people have all kinds of funny preconceptions about what the free market is, ranging from criminal anarchy to European mercantilism.

The free market consists of just two concepts:

- Property
- Exchange

The free market has its ultimate roots in humanity and human evolution. Even animals exhibit the concept of property. Dogs mark their territory. Birds protect their nests, and so on. And, at some point in human evolution (possibly before), people began to exchange items with one another... my sharpened stone for your club. This is the origin of barter.

But not all property is alike and not all exchange is alike. What makes the free market free is:

Private property 
Voluntary exchange

The reason private property is superior to its alternatives is the simple principle Milton Friedman mentions in his video series Free to Choose, "People never care for the property of others as well as they care for their own." Since depreciation of the value of property is a significant social cost (i.e. when people don't keep up their homes or cars or other possessions), society is wealthier and the market operates more efficiently when property is privately owned. Private property makes the caretaker and owner one and the same person. Public restrooms versus your private bathroom are a perfect illustration of this principle at work.

It should be obvious why voluntary exchange is superior to the alternatives, but people seem to be confused about this, as well. In a voluntary exchange (say, my sharpened rock for your club), both parties have to desire the exchange to occur, otherwise it will not occur. Another way to say it is that either both parties desire the exchange to occur or it is not voluntary. If both people desire the exchange to occur, that is because both people believed they would be better off after exchanging than before. Since wealth is the subjective satisfaction with one's circumstances, wealth has almost invariably increased whenever two people voluntarily exchange.

The other possibilities are:

- One party coerces the other to exchange - most people understand this to simply be immoral, criminal
- A third party (usually, the government) coerces both people (usually justified by appealing to children, or the homeless, or the infirm, or whatever) to exchange.

The last condition - government coercing (or, logically equivalent, prohibiting) private exchange - cannot be as beneficial as voluntary exchange to the wealth of society (and each individual). It is simple to see why. Assume that the government has access to Divine omniscience. Whenever two people are about to exchange, a police officer steps in and consults the divine oracle whether they would have preferred to exchange with someone else for something else. Other people who were not intending to exchange at all might similarly be induced to make exchanges they had not thought to make since they will be better off this way than had they not made any exchange. Since God knows all, the exchanges always reflect the best, true desire of each individual and society is better off since people always make better choices through this intermediated Divine coercion than they would have if left to their own devices.

But what happens once we remove the access to Divine omniscience? State actors are no more omniscient than any other individual. They have no better information or intelligence than any average person and they certainly have no means of ascertaining what exchanges will maximize individual satisfaction with the state of affairs since the subjective is, by definition, not measurable. In short, coercion or prohibition of exchange can only result in a degradation of the degree of satisfaction (wealth) of all individuals in society with their circumstances compared to what would have obtained had individuals been left free to exchange with one another voluntarily.

So, back to the economic collapse - exactly how are private property and voluntary exchange to blame for this economic collapse? Would banks have made less faulty loans if property rights were weakened? Perhaps if the government had prohibited more transactions (e.g. the absurd derivatives), the economic collapse would not have occured.

But none of this holds up to even the most cursory scrutiny. Banks made these faulty loans as a direct consequence of the weakening of property rights and responsibilities - the socailization of risk and losses (aka Republican "capitalism"). By means of Fannie and Freddie, investors were betting that they would be bailed out on all these ridiculous investment vehicles which were ultimately backed by F&F mortgage guarantees. It was free money... the government would never let these institutions fail. Remember Friedman, "People never care for the property of others as well as they care for their own" - taxpayer dollars are no one's property, so no one cares for them. When taxpayer dollars are being risked on mortgages, no one takes care to ensure the mortgages will not default because it doesn't matter. "It's not my money."

You could lay the blame at the feet of deregulation (and in a very proximate sense, you'd be right), but this is actually special pleading. The job of the SEC, Fed, Treasury, et. al. et. al. is to prevent these kinds of catastrophes from happening. When catastrophe strikes, we say, "Oh, we need more of the same regulation and increased funding for oversight bodies!" when it was these very same regulatory agencies who were on watch when the failure occurred! In what universe does it make sense to increase funding and regulatory powers of agencies which fail to prevent fraud and economic collapse?!

The ultimate problem is not deregulation which, in the case of deregulating fraud, is bad (which is essentially what happened here). The deregulation of securities and the subsequent catastrophe are symptoms of a larger problem... the inability of a monopolistic regulator to control fraud in the market. Or, more poignantly, the incentive of a monopolistic regulator to subsidize certain kinds of fraud which are politically useful (e.g. Fannie, Freddie, CRA, etc.)

Every time you blame the free market - or support those who do - you are blaming yourself and excusing the ruling elite who are responsible. The ruling elite have always blamed the unwashed masses for the calamities the rulers have brought upon themselves (and the masses along with them). The free market is just the sum of all of our individual choices. The fat cats on Wall St. hate the free market whenever it's not making them rich (i.e. whenever they make a bad investment). Whenever this happens, they call up their buddies on Capitol Hill and start promising favors in exchange for a bailout, errr excuse me, an "economic rescue plan."

Economic downturns - even in a free market - are inevitable since resource allocation and prediction are never perfect. The free market is not a panacea. But the kind of artificial economic catastrophe which we are currently looking at (very much like the Great Depression) requires something more than random, isolated human errors and frauds spread throughout the economy. It is the consequence of coordinated, central action through the central banking system and monopolistic regulatory agencies. Not that they intended the economy to crash - far from it, they believed they could cause artificial prosperity to continue unabated. But in pursuing such an obviously impossible goal, the seeds for economic catastrophe were sown. Free money, easy credit, bad borrowers, taxpayer guarantees all combined to create a perfect storm of irresponsible investment.

This crash is not the fault of the free market. It is the fault of government and their corporate cronies. Consequently, more government intervention (which caused the crisis to begin with) is certainly not the answer. The government needs to stop causing harm to the economy as soon as possible. With each new intervention, the depth and magnitude of this crisis is increased.

Stop buying the ruling elite's pig slop about you and I being to blame for the mess they created. Stop blaming the free market. Start blaming the crooks on Wall St. and Capitol Hill (and the White House).