Experience should teach us to be most on our guard to protect liberty when the government’s purposes are beneficial. Men born to freedom are naturally alert to repel invasion of their liberty by evil-minded rulers. The greater dangers to liberty lurk in insidious encroachment by men of zeal, well-meaning but without understanding.
– Justice Louis Brandeis (1928)
Economic freedoms is an essential requisite for political freedom.
Adam Smith and Thomas Jefferson saw the danger in giving government too much power.
During the great depression, the public was led to believe and still believes that it was caused by the free market but in truth it was the governments cause. As a result, government was given more and more power over the years.
[..] an individual who intends only to serve the public interest by fostering the government intervention is “led by an invisible hand to promote” private interests, “which was no part of his intention.”
a paraphrase of Adam Smith
The experience of recent years – slowing growth and declining productivity – raises doubt whether private ingenuity can continue to overcome the deadining effects of government control if we continue to grant ever more power to government, to authorize a “new class” of civil servants to spend ever larger fractions of our income supposedly on our behalf.
The power of the market
voluntary exchange is a precondition to achieve prosperity and freedom but it does not imply both of them.
key takeaway from Adam Smith’s Wealth of Nations: if an exchange between two parties is voluntary, it will not take place unless both believe they will benefit from it.
- what prices do:
- transmit information
- incentivize least costly production methods
- determines how the “pie” is divided
if you interfere in this process by artificially setting prices, things tend to go south.
- the major distorter of prices today are governments instead of private monopolies.
- restraints on international trade
- domestic action fixing
- government regulations
- monetary and fiscal policies
scholars who advocate a socialistic/communistic system where everything is commanded from above recognize that this does not work in their field but they impose it on others.
- Statue of Liberty:
Give me your tired, your poor,
Your huddled masses yearning to breathe free,
The wretched refuse of your teeming shore.
SEnd these, the homeless, tempest-tossed to me:
I lift my lamp beside the golden door.
The tyranny of controls
economists almost unanimously consider free trade the best way to go, yet policies look very different.
tariffs are labeled as protection. a good word for a bad cause.
consumers are never asked if they favor more expensive products in the light of tariffs.
the goods we export should be of less value than the goods we import. As Adam Smith said in a paraphrase: the citizens of a nation benefit from getting as large a volume of imports as possible in return for its exports, or equivalently, from exporting as little as possible to pay for its imports.
there is no unfair competition abroad due to lower wages abroad because in a system with a free floating exchange rate, the rate will balance out any irregularities.
the US had a negative balance of trade during most of the 19th century and flourished nonetheless.
in the name of the principle of comparative advantage, it is more advantageous to concentrate one’s efforts on activities where one excels. For example, a lawyer is five times more productive as his secretary at practicing the law but he is also two times more effective at typing than his secretary. should the lawyer do his own typing now? of course not. the same goes for international relations where one country excels at one activity far more than the other, it should concentrate on these rather than on those where it is less productive. (note: comparative advantage)
the separation of Germany is a prime examples where people of the “communist heaven” risked their lives to cross the wall to get to the “capitalist hell”.
the first Minister of Economics in (West-)Germany acted fast to abolish all controls on wages and prices in 1948 and after a short time the shops were open again. he did this on a Sunday to circumvent the likely interventions from the French, American and British occupation authorities.
Sloth and lack of enterprise flourish when hard work and the taking of risks are not rewarded.
The anatomy of crisis
- temporarily restricting the return of deposits seems to be an effective way to ease bank runs
during the 1930s the FED did too little to prevent the great depression.
- the fed takes credit for good economic results but it blames others if the economy goes down.
Cradle to grave
Read “Looking Backward” by Edward Bellamy
FDR changed the policy of individual responsibility of every citizen to a centralized and powerful government.
FDR also introduced Social Security, unemployment insurance, and public assistance. Moreover, the Securities and Exchange Commission also originates from his term.
The “Iron Chancellor” Otto von Bismarck was the first to introduce social security, worker insurance against sickness, accidents and old age.
Britain first introduced pensions in 1908 with the “Old Age Pensions Act”.
OASI in America is more like a “chain letter” than a trust fund. You have to believe in the fact the future generations are willing to impose taxes on themselves to pay you your pension.
Public expenditures are made for the primary benefit of the middle class, and financed with the taxes which are borne in considerable part by the poor and rich.
Director’s Law of Public Income Redistribution by George J. Stigler
Those on relief [payments] have little incentive to earn income.
- So called “sweat-equity” does more good than regular public housing projects as tenants feel a deeper connection to their homes than otherwise.
[..] The more bureaucratic an organization, the greater the extent to which useless work tends to displace useful work.
Under the chapter “What should be done” the negative income tax is described. You should be read by yourself as Friedman is very elaborate and summarizing it here is kinda hard.
paternalistic programs should be judged by the evil they do to society in the form of weakening the links in families, reducing the incentive to work, save and innovate, and most importantly reduce everyone’s freedom.
- How equality has evolved:
- Equal before god and the law
- Equality of opportunities
- Equality of outcome
Everybody has won, and all must have prizes.
– Dodo in Alice in Wonderland
- Equality of outcome necessarily necessitates an entity who defines fairness. This fairness inevitably has to use force to distribute the results of the more talented to the less talented.
Read George Orwell’s “Animal Farm”
- equality of outcome has to restrict the liberty of others to achieve its goal.
The uniform, constant, and uninterrupted effort of every man to better his condition [, the principle from which publick and national, as well as private opulence is originally derived, is frequently powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of government, and of the greatest errors of administration.]
– Adam Smith
- gross inequities in income are the widest in countries where the free market can not operate. Examples are medieval Europe, India, centrally planned societies and others.
What’s wrong with our schools?
mandatory education was enforced by teachers to secure a steady income by the government. in reality, almost everyone went to school already and the change only decreased the quality and diversity of schooling.
Friedman advocates a voucher program so that parents who send their children to private schools get a deduction on their school fees and can avoid paying twice, once via taxes and once for the private school.
if you have to pay for your tuition, dropout rates at colleges and universities are lower.
subsidizing tuitions for other people in the name of greater productivity is the same as giving General Motors money to buy new factories to build more cars. Common sense tells us that the latter is a no-go but why do we pursue the former?
instead of government loans to students, the government could pursue owning a percentage of the future earnings of student to limit the debt burden on unsuccessful students and increase its earnings on very successful students.
there is a difference between a person who is schooled and a person who is educated. the schooled person may know very little and have numerous certificates from diverse schools and spent a whole lot of time at school. An educated person may have attended school only for a short period like Alexander Hamilton but may be one of the most educated persons.
Who protects the consumer?
- even though government measures and the likes have good intentions, they invariable have one common result: slow economic growth. Some of these measures are:
- the consumer movement
- the ecology movement
- the back-to-the-land movement
- the hippie movement
- the organic food movement
- the protect-the-wilderness movement
- the zero-population-growth movement
- the “small is beautiful” movement
- the antinuclear movement
one only has to look at products where government involvement is huge and those where its low. For instance, schooling vs computers or super markets vs railroad services.
at the end of the 19th century, railroad companies gave in to government regulations by joining forces with them to increase the prices of the then cheaper fares for long distances. the push for regulations was initiated by the public to decrease the cost of short distances but the initiative only had a bad effect for the consumer as railroads now had the power to governmentally enforce higher prices for long hauls.
the consumer product safety commission is now one of the biggest agencies. they caused and prevented deaths but at which cost?
to produce a shortage in a product/commodity have the government introduce a maximum price. to produce an abundance in a product/commodity have the government introduce a minimum price.
OPEC is a cartel
the market is the best driver to enforce safe products as a shady business will go bankrupt very soon if the product is bad or does harm. on the other hand, a government agency that does a bad judgement call, will have its budget increased instead of being shut down.
distributer like retail chains are far better testers of products as they will have to hold the bag, if the product is bad.
- even though alcohol is one of the leading substances causing deaths worldwide, prohibition forced law-abiding citizens to support criminals to obtain alcohol. isn’t that a prime example of a backfired government regulation?
Who protects the worker?
the standard of living was not raised due to government or labor unions.
unions are nothing new. even the hippocratic oath contains traces of a “closed shop” whereby only relatives and the likes are allowed to be taught the techniques of a physician.
To hold my teacher in this art equal to my own parents; to make him partner in my livelihood; when he is in need of money to share mine with him; to consider his family as my own brothers, and to teach them this art, if they want to learn it, without fee or indenture; to impart precept, oral instruction, and all other instruction to my own sons, the sons of my teacher, and to indentured pupils who have taken the physician’s oath, but to nobody else.
– Hippocratic Oath
Friedman predicted the medical cost would appreciate outrageously because of financing of this sector by the government in the future. (Note: written in 1979)
raising the wages of one union group, decreases the wages of another union group as the flow of money is only diverted to another end.
minimum wage laws are counterproductive as they hinder the employment of low skilled workers which do not produce a profit if they are payed too much. because from a business stand point, there is no reason to employ somebody who costs more than comes in.
in addition to minimum wages, low skilled workers often have poor schooling because of the “concentration effect” of low wage people in a certain area as this produces a higher load on the teachers. This can be in part attributed to the pooling of poor families into an area via public housing projects.
competition among employers is the best solution so far to attain the best results for employees.
The cure for inflation
the wealth of nations is determined by the capacities of their citizens, their industry, their intellect and their resources, among others. Not so much by its money.
money becomes a dangerous tool, if the supply increases too much too fast.
Gresham’s Law: Bad money drives out good.
Amongst the first settlement in America, tobacco was the legal tender. As it turned out, they had high inflation in terms of their currency and people started to riot.
Hyperinflations in Russia and Germany after World War I - when prices sometimes doubled and more than doubled from one day to the next - prepared the ground for communism in the one country and nazism in the other.
Hyperinflation was the cause of many other political turmoils in history.
Nowadays, governments are the primary cause of any inflation as currencies are not linked to any commodities anymore. It is produced by a higher quantity of money than output of a country.
The tide is turning
both Japan and India where influence by Britain to adopt their economic policies. Japan opted for a free market from the likes of Adam Smith and India the policies of Harold Laski. Both ended up in 2 different places in the 20th/21st century.
In the USA, the constitution and its amendments were designed to keep government small. this stopped working after supreme courts changed their interpretation of the text to favor the popular opinion of the population for socialistic policies. Even though in the USA the socialist party never achieved a good election outcome by any stretch.
the swedish tax revolt around 1979 is a prime example how through all income classes people looked for ways around the tax system because the rates were simply too high to support the welfare state.
in the USA, a new bill of rights should be drafted in the likes of the policy of “freedom of speech” to promote the same thinking in economic and social matters.
There has never been a poll asking: “Are you getting your money’s worth for the more than 40% of your income being spent on your behalf by government?”.
Congress shall make no laws abridging the freedom of sellers of goods or labor to price their products or services.
- If they do set prices and as prices are a way of uttering once opinion about something (here a good or service), one may say in others terms it prohibits free speech.
Congress shall not lay any imposts or duties on imports or exports, except what may be absolutely necessary for executing its inspection laws.
No State shall make or impose any law which shall abridge the right of any citizen of the United States to follow any occupation or profession of his choice.
The right of the people to buy and sell legitimate goods and services at mutually acceptable terms hall not be infringed by Congress or any of the States.
- progressive tax rates are only a farce given the numerous exemptions that high net worth individuals know and can afford to use.
A low flat rate – less than 20 percent – on all income above personal exemptions with no deductions except for strict occupational expenses would yield more revenue than the present unwieldy structure. [..] The only losers would be lawyers, accountants, civil servants and legislators [..]
only people should be taxed. No other artificial entity.
to keep inflation/deflation in check, a policy should be devised to keep the growth of money in the economy between a preset yearly range. nothing else.
From the proposed amendment (Appendix B): Inflation shall be measured by the difference between the percentage increase in nominal gross product and the percentage increase in real gross nation product.