Collective Conscious

He says:

Ben, you are so con­fused on the mat­ter, virtue dic­tates that my response will have to be longer.

The mere fact that we can have this dis­cus­sion, with you claim­ing that a cer­tain course of action or a cer­tain set of invest­ments is ‘right’, means that you also think the cor­re­spond­ing eco­nomic pro­duc­tions and allo­ca­tions have a moral weight to them, that the win­ners and losers in your pre­ferred scheme are ‘deserv­ing’ of what they receive. This is ridicu­lous on its face, and I’m shocked you’re offer­ing this seri­ously. If you and I were to walk down a street and see an “Out of Busi­ness” sign for a fac­tory that pro­duces exclu­sively size 32 bowl­ing shoes, and I remarked to you “Boy, that was a stu­pid invest­ment of cap­i­tal,” you would respond “Hey, let’s not bring ethics into it.”? Sug­gest­ing that some­thing is an effi­cient mode of pro­duc­tion has absolutely noth­ing to do with moral­ity (your own type, util­i­tar­i­an­ism no doubt). It’s rec­og­niz­ing tech­no­log­i­cal and eco­nomic rela­tions between sets. Robin­son Cru­soe dig­ging a hole in the sand for water is less effi­cient at deliv­er­ing water than if he could oper­ate a desali­na­tion plant single-​​handedly from a tech­ni­cal stand­point, as well as a value stand­point. Eco­nom­ics is not a sun­day school les­son, no mat­ter how much Keynes (or Schum­peter as it may be) opines that it is. When the Aus­tri­ans make the case that cer­tain invest­ment was made poorly, it’s not a ques­tion of ethics or virtue. It’s sim­ply an acknowl­edge­ment that these resources could have been used more prof­itably else­where. You do under­stand oppor­tu­nity cost, right?

If not, what is hap­pen­ing to those mal­in­vestors who you would like to see bank­rupted even though they can be saved? They are being removed from their posi­tion because the con­sumers have dic­tated that they have used resources inap­pro­pri­ately. That’s what profit and loss is. Profit in an unham­pered mar­ket illus­trates that pro­duc­ers are adding value to their prod­uct and that con­sumers are will­ing to pay for it. Loss, on the other hand, illus­trates that resources are being destroyed or wasted. When an entre­pre­neur suf­fers such con­sid­er­able losses, it would be folly to allow him to con­tinue the same pro­duc­tion process that con­sumers obvi­ously do not wish to patron­ize. Is he “pun­ished?” Not really. That’s a bad way to illus­trate him. The cap­tain is sim­ply being removed from the helm because he doesn’t know which way to guide the ship.

What does it mean for a mar­ket to be effi­cient, and why is that desir­able? In the short­est sense, it means that resources are used in ways that max­i­mize con­sumer value. Max­i­mum effi­ciency is that point where oppor­tu­nity cost never exceeds the mar­ginal prod­uct. The clos­est we can get to that unreach­able point is in an unham­pered mar­ket, where liv­ing stan­dards and real wage rates will be high­est. Do I really have to answer why that’s desirable?

The ques­tion remains: why let awful things hap­pen to peo­ple who you are respon­si­ble for pro­tect­ing? In the first place, the state is not respon­si­ble for pro­tect­ing peo­ple from mak­ing poor invest­ments. And that’s what all these almost-​​bankrupt entre­pre­neurs did. They made a guess based on avail­able mar­ket infor­ma­tion about what kinds of invest­ments to make, and they lost. They made what Lionel Rob­bins famously described as a “clus­ter of errors.” And in the sec­ond place, no one is describ­ing awful things; bank­ruptcy isn’t awful at all. It’s a nec­es­sary process of a dynamic econ­omy that poor investors that can­not direct resources accord­ing to their most value-​​productive end will be forced to relin­quish their con­trol over them, and new entre­pre­neurs can try their hand.

you would reject an out­come that pro­duced the max­i­mum pos­si­ble amount if that out­put was allo­cated to a sin­gle per­son, wouldn’t you? No, I would embrace that out­come. That means that the over­whelm­ing major­ity of the pop­u­la­tion wouldn’t be forced to work for their prod­uct. It would save bil­lions from the neces­sity of stren­u­ous, gru­el­ing labor. It seems like you — the one who insists peo­ple should work at all times and with­out ref­er­ence to mar­ket activ­ity — who might reject this.

We can argue about where we want the bal­ance, but you can­not be so silly as to claim that the output-​​maximizing posi­tion is always the most socially desir­able. We have moral con­cep­tions of fair­ness, and our eco­nom­ics must be dri­ven by them. Non­sense. The output-​​maximizing posi­tion, or as I’ve described — the posi­tion where all resources are directed to their most value-​​productive ends — is always prefer­able. You can­not pre­fer a less pro­duc­tive posi­tion! That is log­i­cally inde­fen­si­ble because pref­er­ence directs pro­duc­tion. If there is an anarcho-​​communist col­lec­tive that divides work in an egal­i­tar­ian fash­ion — but, as you admit, builds less things or builds less com­plex things — that IS the most pro­duc­tive end! Because pro­duc­tion con­sists in more than just the “objects” that are built. Clearly, this tribal soci­ety gains a great deal of sat­is­fac­tion from their “broth­er­hood” or what­ever abstrac­tion you want to call it. By def­i­n­i­tion, if they are all in agree­ment and unco­erced, that is their most pro­duc­tive position.

Eco­nom­ics is a value-​​free sci­ence. Eco­nom­ics describes rela­tions between cat­e­gories of action that we deduce by known, a pri­ori truths. Eco­nom­ics as such has noth­ing to do with what type of soci­ety we SHOULD build, but only the con­se­quences of what we choose to build. You’re smug­gling in your own set of val­ues and try­ing to jus­tify it as “eco­nomic sci­ence.” At least I’m hon­est about what my pref­er­ences are.

The Fed is not respon­si­ble for the boom/​bust cycle; reces­sions were far more com­mon and far more destruc­tive before the devel­op­ment of mod­ern cen­tral bank­ing. Just read Kindleberger’s Manias, Pan­ics, and Crashes for a dozen empir­i­cal exam­ples. The Fed is cur­rently respon­si­ble for busi­ness cycles. Far more destruc­tive? I don’t recall read­ing about a 19^th cen­tury Great Depres­sion. The pre-​​Fed pan­ics and manias were dri­ven by cen­tral banks, state spon­sored sus­pen­sion of specie pay­ment, state spon­sored frac­tional reserve bank­ing, and other inter­ven­tions in the free mar­ket for money pro­duc­tion. Go read Rothbard’s A His­tory of Money and Bank­ing in the United States.

But if, on the whole, middle-​​class sav­ings have been neg­a­tive (ie mas­sive con­sumer bor­row­ing), then infla­tion actu­ally cre­ates sav­ings and helps the mid­dle class.Infla­tion might wipe out debts but it won’t stim­u­late cap­i­tal accu­mu­la­tion. It will sim­ply destroy what­ever sav­ings the poor and mid­dle class do have, raise prices, and raise the time pref­er­ences of every­one. This is ele­men­tary, Ben.

In many sec­tors, wage increases can actu­ally cause an increase in employ­ment. I’m sorry — I can’t let this go. There are a hand­ful of things that all econ­o­mists agree on, and the fact that the min­i­mum wage causes unem­ploy­ment is one of them. Are you going to dis­pute sub­jec­tive the­ory of value, next? What­ever monop­son­is­tic data you have from the Atlanta Fed does not over­rule the dic­tum that, ceteris paribus, price floors cause surpluses.

Why is the ‘nat­ural’ cap­i­tal struc­ture any bet­ter than an alter­na­tive I could pro­pose and enact You need to read more Hayek — I rec­om­mend his essay ‘The Use of Knowl­edge in Soci­ety.’ The nat­ural cap­i­tal struc­ture is more value-​​productive because the infor­ma­tion to make allo­ca­tion deci­sions, as well as the infor­ma­tion about psy­cho­log­i­cal pref­er­ences, is dis­persed among bil­lions of peo­ple. Your alter­na­tive would be based on your own pref­er­ences and infor­ma­tion and would there­fore be less effi­cient at meet­ing the desires of every­one else com­pared to a sys­tem where each per­son could influ­ence the direc­tion of the cap­i­tal struc­ture to his lik­ing. A free econ­omy is a decen­tral­ized econ­omy, where each per­son “votes” so to speak in favor of his pref­er­ences. Thus, the cap­i­tal struc­ture in an unham­pered mar­ket wouldtend toward sat­is­fy­ing as many needs as pos­si­ble because the price mech­a­nism sig­nals which resources are desired by whom and where. Your alter­na­tive would be, at best a sta­tion­ary econ­omy, and at worse a ret­ro­gres­sive economy.

The dis­tri­b­u­tion of resources was cer­tainly not nat­ural; quite a bit of wealth was con­fis­cated, stolen, redis­trib­uted, etc. in the past; to my mind, there is no ‘nat­ural’ — only bet­ter and worse, right and wrong.“Nat­ural” indi­cates the course of the cap­i­tal struc­ture. Where did I ever talk about wealth acqui­si­tion being “nat­ural” or proper? You’re con­fus­ing yourself.

Why not work to make an econ­omy in our own image, to our own desires, rather than be fanat­ics to a market-​​theology? We can either allow con­sumer pref­er­ences to guide pro­duc­tion, or let the per­sonal pref­er­ences of a monop­o­list (i.e., gov­ern­ment) dic­tate what should be pro­duced and how. When the ques­tion is posed this way, the choice is pretty clear, which is why the ques­tion is never posed this way. Inter­est­ingly enough, the mar­ket does “make an econ­omy in our own image.” By giv­ing con­sumers sov­er­eignty in decid­ing where resources should be allo­cated, the unham­pered mar­ket tends to reflect what we like to see.

By the way, I really love your euphemistic phrase “make an econ­omy in our own image, to our own desires” in place of “force every­one to fol­low what we, the elites, have decided is in your best inter­ests.” You’d make a great politician.

Entre­pre­neurs invest in goods that pro­vide finan­cial returns to them, with lit­tle or no regard for soci­ety. You’ve evi­dently taken many classes, so I know you’re not stu­pid. Tell me, how exactly can entre­pre­neurs — in an unham­pered mar­ket — earn finan­cial return (profit) if nobody ben­e­fits from their prod­uct? Who would spend money patron­iz­ing estab­lish­ments that did noth­ing for them? Do you really think that profit just comes from the sky — and has noth­ing to do with sat­is­fy­ing con­sumer tastes? Apple and Microsoft are wildly prof­itable because con­sumers are will­ing to pur­chase the fan­tas­tic prod­ucts they offer; they thus cre­ate a great social ben­e­fit. Do I have to rec­om­mend Adam Smith to you as well?

We know all about neg­a­tive exter­nal­i­ties and pub­lic goods, and we know that entre­pre­neurs have zero social con­science when it comes to these things, and we know that price sig­nals are use­less there too. So man­age­ment and reg­u­la­tion is essen­tial. I guess you didn’t take me seri­ously when I told you to stop talk­ing like “we know about X” when whole schools of thought dis­agree with you. It just makes you look pretentious.

Neg­a­tive exter­nal­i­ties are not solved through a gov­ern­ment appa­ra­tus. That just cre­ates more neg­a­tive exter­nal­i­ties. Exter­nal­i­ties that vio­late the prop­erty rights of other peo­ple are, in effect, a tres­pass and ought to be han­dled in court — not adding Pigov­ian dis­cour­age­ment. Pub­lic goods argu­ment is bank­rupt. Price sig­nals are use­ful, if noth­ing else, in the Coasian sense. And finally, man­age­ment and reg­u­la­tion by whom?

As Tom Woods writes, “[An] obvi­ous ques­tion rou­tinely over­looked in this con­text is why a reg­u­la­tor with no finan­cial stake in an enter­prise would know bet­ter how to sat­isfy con­sumer demand than a busi­ness owner whose own wealth depends on get­ting it right. How super­sti­tious can you get?”

Nasty, brutish, short? No mil­i­tary pro­tec­tion? No polic­ing? — not to even begin with proper social insur­ance pro­grams. I was refer­ring specif­i­cally to eco­nomic inter­ven­tion. But if you really think it is the benef­i­cent hand of the state that is uphold­ing safety and law in this coun­try, you’re enti­tled to cling to your fantasies.

And how can you argue that a person’s out­put is lit­er­ally not worth hav­ing? When nobody is will­ing to pay for it?

Let­ting that labor go to waste is an unac­cept­able loss to soci­ety, and if our ‘entre­pre­neurs’ don’t care about other people’s well-​​being (and I’m not say­ing they should), who will? An unac­cept­able loss to whom? Clearly not other entre­pre­neurs or con­sumers. Is it really a loss if nobody is will­ing to pay a wage, no mat­ter how small, for my labor — much less an “unac­cept­able” loss? Pre­sum­ably peo­ple should care about their own well-​​being so they aren’t up the creek if they get laid off.

Because employ­ment is an end in itself; labor has value to peo­ple beyond what they get paid for it; labor-​​spoilage is pure dead­weight loss — and so we had bet­ter not let unem­ploy­ment hap­pen when we have the tools to avoid it. Employ­ment is an end in itself? Really? When was the last time you worked solely for the work involved? When was the last time you labored and toiled and sweated in order to sim­ply enjoy the labor and toil? Remem­ber when I men­tioned the hand­ful of things all econ­o­mists should agree on? Disu­til­ity of labor is one of them. Labor has no value to peo­ple beyond the prod­uct. There is no value what­so­ever to my labor if I don’t pro­duce any­thing. That’s a loss. Back break­ing labor for noth­ing is a loss. Labor spoilage (in the sense that peo­ple aren’t as pro­duc­tive due to idle­ness) — when they could be doing some­thing pro­duc­tive — is loss, of course. But that’s the prob­lem with the busi­ness cycle. As I wrote ear­lier (to which you nei­ther quoted nor responded): It’s because of the dis­tort­ing effect of credit expan­sion that spe­cific and non­spe­cific cap­i­tal goods — includ­ing labor — go through changes in their DMVP to ren­der their employ­ment less attractive.

I say:

In this response I’m going to let go of a lot of tan­gen­tial argu­ments and cut straight to the core of our dis­agree­ment. I think almost every­thing else fol­lows from these few things.

1: Mar­kets and Efficiency

a) You say: “Max­i­mum effi­ciency is that point where oppor­tu­nity cost never exceeds the mar­ginal prod­uct. The clos­est we can get to that unreach­able point is in an unham­pered mar­ket, where liv­ing stan­dards and real wage rates will be highest.”

I say: This does not fol­low. There is no link between unfet­tered cap­i­tal­ism and max­i­mum pos­si­ble wage rates/​living stan­dards. Even if I con­cede that cap­i­tal­ism max­i­mizes total out­put, it is not a nec­es­sary con­se­quence that this max­i­mizes total happiness.

b) You say: “No, I would embrace that out­come [that pro­duced the max­i­mum pos­si­ble amount if that out­put was allo­cated to a sin­gle per­son]. That means that the over­whelm­ing major­ity of the pop­u­la­tion wouldn’t be forced to work for their product.”

I say: I’m sorry, I wasn’t clear enough here. I meant an out­come that pro­duced the max­i­mum pos­si­ble amount if that out­put was allo­cated to a sin­gle per­son and every­one else receives noth­ing.

c) You say: The output-​​maximizing posi­tion, or as I’ve described — the posi­tion where all resources are directed to their most value-​​productive ends — is always prefer­able. You can­not pre­fer a less pro­duc­tive position!

I say: The Rawl­sian dilemma above makes me cer­tain that I can pre­fer a less pro­duc­tive posi­tion if the out­put is dis­trib­uted more fairly.

2: Eco­nom­ics and Ethics

You say: “Eco­nom­ics is a value-​​free sci­ence. Eco­nom­ics describes rela­tions between cat­e­gories of action that we deduce by known, a pri­ori truths. Eco­nom­ics as such has noth­ing to do with what type of soci­ety we SHOULD build, but only the con­se­quences of what we choose to build. You’re smug­gling in your own set of val­ues and try­ing to jus­tify it as “eco­nomic sci­ence.” At least I’m hon­est about what my pref­er­ences are.”

I say: If you’re hon­est about your pref­er­ences, then you admit you have them, and you also admit that they drive your eco­nom­ics. I do try to be explicit about my val­ues and pref­er­ences as well, not ‘smug­gle’ them in (feel free to be spe­cific if you think I’m fail­ing to say some­thing), and the fact that our dis­agree­ments over val­ues is so cru­cial only proves how respon­sive eco­nom­ics is to ethics. The sci­ence of eco­nom­ics is a tool for pro­duc­ing out­comes that are con­sis­tent with our values.

3: The Dis­tri­b­u­tion of Wealth

You say: “A free econ­omy is a decen­tral­ized econ­omy, where each per­son “votes” so to speak in favor of his preferences.”

You also say: “Where did I ever talk about wealth acqui­si­tion being “nat­ural” or proper?”

I say: In this sort of decen­tral­ized econ­omy, those ‘votes’ come from wealth. If the wealth dis­tri­b­u­tion is improper, then by your own the­ory the out­comes will also be improper — that is, because votes are not prop­erly allo­cated ex ante, pref­er­ences will not be prop­erly reflected by the mar­ket action. How do you pro­pose to fix this? Surely you can­not dou­ble down on the mar­ket mech­a­nism from this situation.

4: Assorted Empir­i­cal Quarrels

a) You say: “There are a hand­ful of things that all econ­o­mists agree on, and the fact that the min­i­mum wage causes unem­ploy­ment is one of them.”

I say: This is sim­ply not true. The Atlanta Fed sum­mary, and the papers it cites, all demon­strate eco­nomic evi­dence and the­o­ret­i­cal ground­ing for the fact that the min­i­mum wage can increase employ­ment in indus­tries where labor monop­sony is the rule. If all mar­kets were per­fectly com­pet­i­tive I would agree with you — but they aren’t, so we have these cru­cial exceptions.

b) You say: “Neg­a­tive exter­nal­i­ties are not solved through a gov­ern­ment appa­ra­tus. That just cre­ates more neg­a­tive externalities.”

I say: See the sul­fur cap-​​and-​​trade mar­ket that basi­cally stopped acid rain for one good exam­ple of a gov­ern­ment appa­ra­tus solv­ing a neg­a­tive exter­nal­ity. Also manda­tory vac­ci­na­tions or pre­ven­ta­tive care. Also manda­tory sav­ings (Sin­ga­pore). Also centrally-​​funded basic research. Also pub­lic edu­ca­tion, deposit insur­ance, FDA and NLRB, and so on and so forth. Or Mexico’s Oportunidades/​PROGRESA pro­gram. The list is endless.

Or, to take an easy exam­ple: what about the judi­cial system?

c) You say: “if you really think it is the benef­i­cent hand of the state that is uphold­ing safety and law in this coun­try, you’re enti­tled to cling to your fantasies.”

I say: Are you say­ing that the pol­icy and the mil­i­tary pro­duce no value? And if not, then what is uphold­ing safety and law?

d) You say: “Remem­ber when I men­tioned the hand­ful of things all econ­o­mists should agree on? Disu­til­ity of labor is one of them.”

I say: Joan Robin­son (empha­sis mine): “For a worker in a world with­out social insur­ance, who has the choice between tak­ing a job at the going wage or hav­ing no wage at all, this con­cep­tion is very much off the mark .… The disu­til­ity of work may actu­ally be neg­a­tive if the alter­na­tive is noth­ing to do and nowhere to go, and is very high when the alter­na­tive is delight­ful, expen­sive treats .… Of all the con­cepts in the neo-​​classical bag this is the most irre­me­di­a­bly meta­phys­i­cal.”

And just so you know — I vol­un­teered all sum­mer. I fre­quently take extra work at home and else­where with­out any recog­ni­tion or com­pen­sa­tion. As a civic-​​minded econ­o­mist, Eagle Scout, cit­i­zen, and some­time stu­dent, I con­sider all these non­mar­ket extra-​​efforts to be essen­tial to coop­er­a­tive suc­cess. So, well, call me crazy, but I’m with Schum­peter when he says: “The stock exchange is a poor sub­sti­tute for the Holy Grail.… Eco­nomic lead­er­ship of this type does not read­ily expand … into the lead­er­ship of nations. On the con­trary, the ledger and the cost cal­cu­la­tion absorb and con­fine.” And this from the great hero of the entre­pre­neur! Schum­peter rec­og­nized that polit­i­cal deci­sions must nat­u­rally occur in par­al­lel with eco­nomic ones, and that in the moral sphere, economically-​​driven choices lack the noble lus­ter of true civic service.