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Tuesday, June 27, 2006

Curly Capitalist Questions 6 & 7

Aonymous asks

1. Is it true that the freer a market is, the faster it will grow?

Firstly, all other things being equal, the less fettered a market is, the faster it will expand. What is a free market? To me it is an arena, whether in cyberspace, the stock exchange, or a school fair, where individuals may make trading decisions with no outside interference.

Logically if there are only two parties per trade (buyer and seller) the transaction may proceed more quickly, wealth may be built at a faster rate.

If a third entity, (or forth, fifth, sixth.....) should join the party it gets more confused, More variables have to factored in, the trade becomes less "pure" and less likely to be beneficial to both original parties.

Tax for example, really slows things down. Imagine two rugby teams, playing at full pace in a nailbiting game.

Imagine they all have to give up 39% of their energy and divert it as a form of tax to the soccer players down the road.

The game will slow, tension will ease and vitality will be sapped.

Anything will grow faster if it is fed properly and not artifially hampered.

2. Is maximising growth, utilitarian?

I understand "utilitarian" to mean, to do something because it is practical, with little reference to the underlying principle. Right now, China is using capitalist methods, with no reference to the principles of human liberty that underly capitalism, to grow their economy. That, to me, is classic utilitarianism .

What did Deng Xiaoping say? "Who cares whether the cat is black or white, as long as it catches mice?

That's fine, but there is a bit of an underlying trap. Labour's "reforms of the '80s" were sold in a utilitarian way. There was little talk of the principles of liberty, the rights of people to make their own decisions or liberal social values. It was all about efficiency, economic rationalism and re-vitalising the econonomy.

That was OK as far as it went, but with little public understanding of the principles behind the actions, people were very unwilling to put up with the associated pain. They were also happy to allow the current Labour regime to roll back many of the gains of that era.

It should not be a government's aim to maximise economic growth. It should aim instead to create the freest possible society so that people, if they so wish, may grow the economy at whatever rate they desire.

Freedom must come before prosperity. Prosperity without freedom is a very temporary phenomonon.

31 Comments:

Blogger Yacap said...

It's not true that the freer a market is the faster it will grow. Not all "unfreedoms" that might apply are restrictive unfreedoms, like taxation, that slow growth. For example, unbacked credit expansion (e.g., lower-than-natural interest rates) undoubtedly causes faster growth than otherwise would be the case (and which must eventually collapse, causing a lot of pain and damage).

12:07 AM  
Blogger Gekko said...

Also, in a true 'free' market the rate of growth (or contraction) will be determined by the actions of the participants. Growth is not necessarily inevitable nor, necessarily, desirable.
To force 'growth' on the assumption that it is always good is just another example of why economies should not be 'managed', much as the interest rate should not be 'managed' as it will be determined by the market itself.

9:05 AM  
Blogger Trevor Loudon said...

yacap and gekko, you are both right, but notice I used the phrase, "all other things being equal"

Perhaps I should have added "over the long term"

The freer the market, the steadier, more solid and in the long term, faster, growth will be.

Governments can temporarily speed up growth by relaxing credit, lowering interest rates etc, but because of the distortions and inevitable "crashes" that will occur, growth is actually slowed in the long term.

Perhaps a better way to put it might be, the freer the economy, the more optimal the growth.

10:37 AM  
Anonymous Anonymous said...

"Firstly, all other things being equal, the less fettered a market is, the faster it will expand. "

But other things don't remain equal due to trade offs.

What if tertiary education spending by the government was cut entirely to make way for a tax cut? Would that boost growth? Imagine the scenario of someone who has the grades but not the money to get into tertiary education. It would take many years for that person to save up enough money from their low wage job (imagine if the minimum wage was also removed) in order to get the education to make them more productive.

Imagine how much worse the economy would get if primary and secondary education spending by the government ended.

2:54 PM  
Anonymous Anonymous said...

"Imagine they all have to give up 39% of their energy and divert it as a form of tax to the soccer players down the road."

Very poor analogy. 39% is the top marginal income tax rate, not the top average income tax rate. Rugby players' taxes aren't being reallocated in their entirety to soccer players. I don't know of anyone who would advocate such a policy.

2:59 PM  
Anonymous Anonymous said...

"I understand "utilitarian" to mean, to do something because it is practical, with little reference to the underlying principle."

I was meaning utilitarianism as the greatest good for the greatest number of people; or more precisely the sum of all individual utilities.

Under my definition, is maximising growth, utilitarian?

3:01 PM  
Anonymous Anonymous said...

"The freer the market, the steadier, more solid and in the long term, faster, growth will be."

Do you have any empirical evidence to back this up?

3:03 PM  
Anonymous James said...

"Do you have any empirical evidence to back this up?":

Yes its called history...look it up.

3:53 PM  
Blogger Yacap said...

What if tertiary education spending by the government was cut entirely to make way for a tax cut? Would that boost growth? Imagine the scenario of someone who has the grades but not the money to get into tertiary education. It would take many years for that person to save up enough money from their low wage job (imagine if the minimum wage was also removed) in order to get the education to make them more productive.

Cutting taxes would boost growth. Cutting government involvement in education would improve education, which would probably growth a bit down the track. Removing the minimum wage would allow unskilled people to save faster, and get what they want earlier - including education, though without government interference other options would open up to pay for that (more private scholarships and such).

Imagine how much worse the economy would get if primary and secondary education spending by the government ended.

A consummation devoutly to be wish'd.

5:06 PM  
Blogger Yacap said...

Oops; "growth a bit down the track" should be "boost growth a bit down the track", of course.

5:06 PM  
Anonymous Anonymous said...

"Yes its called history...look it up."

... well actually it is statistical data I am talking about, not something available in many history books.

5:08 PM  
Anonymous Anonymous said...

"Cutting government involvement in education would improve education, which would probably growth a bit down the track."

How?

"Removing the minimum wage would allow unskilled people to save faster, and get what they want earlier - including education, "

How could they if their wage rates go down?

5:11 PM  
Blogger Yacap said...

At what is your "how?" directed? How would it improve education, or how would improved education contribute to growth? It would improve education by allowing it to be directed by market forces rather than government edict; the current crop of socialists would quickly be displaced. It would improve growth, I expect, because better educated people, with a better understanding of how things really work (less state-directed brainwashing in schools) would be more productive.

To the second question: their wage rates wouldn't go down. Minimum wage laws don't raise wages, they just disemploy people. Some wages would go down, because it would now be legal to employ lesser-skilled people in those jobs (greater supply of potential workers), but the wages of those newly-employed would be going up (they couldn't get a job at all, before); the net effect is greater income, not less.

My question is, why do you think it's a good idea to make it illegal to employ the very people who need it most?

8:00 PM  
Blogger Trevor Loudon said...

Anonymous. Yes I believe that maximising growth is "Utilitarian" under your definition.

However this is not the government's role.

The government should simply establish a fair legal framework and then get out of the way.

Free peole, acting in the market will determine the most suitable pace of growth.

8:03 PM  
Blogger Trevor Loudon said...

Good point on minimum wages Yacap.

Try telling these champions of the minimum wage that they must pay $12 per Kg at the supermarket for apples.

They'll laugh at you. They either will buy fewer apples, no apples, or bananas instead.

Yet they want emploers to pay low skilled workers $12 per hour even if they're so untrained that you couln't make a profit on them at $8 per hour.

What are emploers going to do.? They're going to buy less or no unskilled labour or replace it with machines or skilled labour.

Unskilled labour will go on the scrapheap and be denied an opportunity to develop marketable skills

You simply cannot force people to pay more for something than it is worth to them.

A free market in wages increases economic efficiency and leads to greater wealth for all participants.

8:18 PM  
Anonymous Anonymous said...

"Yes its called history...look it up."

Could you give me a historical example of:
1. A libertarian society/economy.
2. A government that used to fund education, deciding to cut all govt education spending and as a result was a huge success.

8:22 PM  
Anonymous Anonymous said...

"It would improve education by allowing it to be directed by market forces rather than government edict; the current crop of socialists would quickly be displaced."

How would market forces improve education?

8:24 PM  
Blogger Yacap said...

1) A libertarian society/economy: the most obvious example is the United States between 1776 and 1780, 1860, or 1933, depending on how you count (it was quite libertarian before 1780, a bit less so after the constitution (1780), very much less so from Lincoln (1860), and not at all after the New Deal (1933)). Even better examples of libertarian societies existed for a time in the colonial US (Rhode Island, Pennsylvania). Etc.

2) I'm not sure what the question is; "and as a result was a huge success" - what was a huge success? It sounds like you mean the government was a huge success, but I don't know what that means. What does a "successful government" look like? One that's popular? Surely the important thing would be that the educational system was a success, not the government. Well, I don't know of any government cutting education spending anyway, but you can compare education today with before government took over, if you want.

Why do you need "historical examples" of things? They don't tell you anything.

How would market forces improve education?

Well, from the point of view of "growth", the market would direct education in ways most valuable to employers (and hence to the students), not in whatever way the government thinks might be most valuable (something they have no way of knowing, and no way of finding out even after the fact -- exactly the same reason government planning of the economy doesn't work; tens of millions of people starved to death in the last century when governments tried that one). Also, there'd be no incentive to "teach" false information that makes the state look good at the expense of everyone else (just look at the state of economics - you can get a PhD in economics today, and when asked "who was the greatest economist?" you can say "John Maynard Keynes" with a straight face! In reality, Keynes was probably the worst economist in history - actually, he wasn't even an economist at all. The correct answer would be "Ludwig von Mises", but I'll give you good odds your PhD has never even heard of him! Look at the number of people who think minimum wage laws help the poor, etc.)

Again, compare the state of general education before government involvement to today. (I remember reading about a university professor who gave his freshman students a textbook from the 19th century that was intended for high school freshmen, which they all found way over their heads, to demonstrate the decline in education standards; wish I could remember where I read about it)

12:03 AM  
Anonymous Anonymous said...

"Minimum wage laws don't raise wages, they just disemploy people. "

There are a range of values where the minimum wage would have little or no effect on unemployment.

In a modern economy most minimum wage jobs have a fixed demand for them. All of the jobs need to be filled in order for the firm to be functional; and adding more workers to capital wouldn't raise production or profit levels.

Think of the fast food industry. A single restaurant would have one person at each till (or less if it isn't busy), several people cooking, someone at the drive through etc. It would still be profitable for the firm to keep all of these people employed even if the minimum wage was raised slightly. If the minimum wage was abolished, the workers at these fast food chains are likely to receive lower wages and the number of jobs in the industry isn't likely to increase.

A small increase in the minimum wage would only cause jobs to be lost in firms that are barely breaking even. The higher wages for the vast majority of low income workers who would keep their jobs is likely to raise consumption spending which would raise revenue for firms and partially counteract the rising costs of production.

It is only when the minimum wage is raised to high levels that it would have a significant effect on unemployment.

12:55 PM  
Anonymous Anonymous said...

" Anonymous. Yes I believe that maximising growth is "Utilitarian" under your definition."

One way of measuring growth is to take the percentage change in consumption per capita (corrected for inflation).

Maximising growth doesn't imply that aggregate utility is being maximised.

Most people have diminishing marginal utility with respect to consumption. Imagine starting off with nothing then being given $1 million to spend. Imagine that after spending that $1 million you are given a second million. The increase in utility would be far greater going from nothing to $1 million that it would be going from $1 million to $2 million.

Both the center and spread of the income distribution will have an effect on aggregate utility. If there was a choice between raising the incomes of the lowest 1% of households by $20 a week, or raising the incomes of the top 1% of households by $25 a week, the latter is not necessarily going to have a utilitarian advantage over the former.

1:16 PM  
Anonymous Anonymous said...

" 1) A libertarian society/economy: the most obvious example is the United States between 1776 and 1780, 1860, ..."

Slavery wasn't abolished in the US until 1865. Even after it was abolished, there wasn't equal treatment of races.

For Caucasians there still would have been big government in the form of rules/policing relating to social freedoms.

Back in the 1700s, knowledge in science and technology would have been very limited. As a result, healthcare and education spending by the government wouldn't have been very effective and so wasn't done much. Since incomes were so low back then, social welfare spending wouldn't have been an option either.

If you look at a modern economy, the taxation and spending related to education has raise living standards greatly.

1:32 PM  
Blogger Yacap said...

There are a range of values where the minimum wage would have little or no effect on unemployment.

Sure - it has no effect on the employment of people who are already worth more than the new minimum. Though, actually, it may - by disemploying lower-wage workers, the remaining higher-wage workers are required to do some of the jobs the newly unemployed used to do, and spend less time doing the more useful work for which they were getting paid; their wages will come down over time, ceteris paribus.

In a modern economy most minimum wage jobs have a fixed demand for them.

What do you mean by "fixed demand"? A minimum wage doesn't shift the demand curve, but the demand curve is not vertical. Even if it was, that would only displace resources from other industries to pay for the one with the vertical demand curve - different people would be hurt, is all.

It would still be profitable for the firm to keep all of these people employed even if the minimum wage was raised slightly.

Maybe they'd hire fewer people to cook, or clean the floors, or have fewer tills open or something. Sure, they're not going to lay everybody off the day the minimum wage increases. In fact, they may not lay anybody off at all, but simply not hire new people who would have been hired otherwise - that's still disemploying people.

The higher wages for the vast majority of low income workers who would keep their jobs is likely to raise consumption spending which would raise revenue for firms and partially counteract the rising costs of production.

Keynesian nonsense. The economy runs on savings, not on spending.

1:33 PM  
Blogger Yacap said...

If you look at a modern economy, the taxation and spending related to education has raise living standards greatly.

Google "post hoc ergo propter hoc"

1:36 PM  
Anonymous Anonymous said...

"What do you mean by "fixed demand"? A minimum wage doesn't shift the demand curve, but the demand curve is not vertical. Even if it was, that would only displace resources from other industries to pay for the one with the vertical demand curve - different people would be hurt, is all."

When I say fixed demand, I mean relatively fixed. Imagine a labour demand curve that is vertical from a wage of zero to a wage at some critical value. Above that critical value either the demand curve becomes a conventional shape or there is a jump to a vertical line at quantity zero.

If the labour supply is below the critical value then in theory a change in the minimum wage would have no effect on the equilibrium quantity.



"Keynesian nonsense. The economy runs on savings, not on spending."

You should learn about the Great Depression and Japan's deflation problem. Think about what would happen if people limited their spending to just basic necessities. What incentive would there be for investment if people stopped consuming. In reality there needs to be a balance.

5:19 PM  
Blogger Yacap said...

If the labour supply is below the critical value then in theory a change in the minimum wage would have no effect on the equilibrium quantity.

I don't know if such a thing is even possible, but if so, as I said above, it would just displace resources from elsewhere.

What incentive would there be for investment if people stopped consuming

None, obviously: people who stopped consuming would be dead, and have no further incentives to do anything. Of course, before they died, they'd have rather strong incentive not to stop consuming!


(PS: the Great Depression would have been a small recession, over in a few months, if it hadn't been for people believing your Keynesian rubbish and trying to increase consumption spending to get out of it!)

6:03 PM  
Anonymous Anonymous said...

"I don't know if such a thing is even possible, but if so, as I said above, it would just displace resources from elsewhere."

If you are a libertarian extremist then you will think that displacing resources is a sin. When it comes to inequality, most people would want a balance between the trade offs of:
- incentives to train in high wage jobs where skill shortages exist.
- fair pay for a fair days work i.e. people get paid close to their actual value in the production process.




"None, obviously: people who stopped consuming would be dead, and have no further incentives to do anything. Of course, before they died, they'd have rather strong incentive not to stop consuming!"

I was talking about the consumption of non-necessities.


"(PS: the Great Depression would have been a small recession, over in a few months, if it hadn't been for people believing your Keynesian rubbish and trying to increase consumption spending to get out of it!)"

Keynesian methods weren't used until towards the end of the Great Depression. The Great Depression wasn't the only great depression. In the past there used to be inflationary as well as deflationary phases. During the deflationary phases there was very high unemployment as well as price instability. It would have been more accurate to call the Great Depression, the last great depression.

At the start of the Great Depression, governments in the developed world reduced spending when there was a reduced tax intake due to lower consumption (with the exception of Germany).

Keynesian methods were used successfully as a short term economic stabiliser for a few decades but had the problem of high inflation and government debt. There was a switch to monetarist methods around the 1980s. The monetarist methods are losing potency due to globalised trade and finance. For small countries, some monetarist methods have the problem of distorting the exchange rate.

Keynesian methods aren't nonsense. The methods were successful in the short term and even though they aren't used much now, the dynamic still exists.

12:43 PM  
Blogger Yacap said...

incentives to train in high wage jobs where skill shortages exist.

What, the high wages aren't incentive enough?

fair pay for a fair days work i.e. people get paid close to their actual value in the production process.

That's what happens in a free market.

Keynesian methods weren't used until towards the end of the Great Depression.

E.g., Roosevelt's "New Deal" was just a continuation and expansion of the policies of Hoover's administration, before 1929. Broadly "Keynesian" policies are what led to the crash and the Great Depression in the first place, not just extended and deepened it. See America's Great Depression.

Keynesian methods aren't nonsense.

You're right; that's too unkind to mere nonsense. Keynesianism is literal insanity.

2:28 PM  
Blogger Trevor Loudon said...

Right on re Keynes Yacap. Keynesian methods work in the "short term", but so does robbing a bank. What was that famous Keynesian quote "In the long run we'll all be dead"

Short term, irresponsible quick fix solutions, dressed up as science-thats Keynesianism in a nutshell.

3:08 PM  
Anonymous Anonymous said...


"incentives to train in high wage jobs where skill shortages exist."

"What, the high wages aren't incentive enough?"


Lowering the minimum wage would raise the income gap between high wage earners and the minimum wage earners. This would create a greater incentive (when taking into account the opportunity cost) to up-skill in order to get a high wage job.

The opportunity cost component of the incentive would probably be small relative to the high wages, so yes I agree to some extent with the context of your rhetorical question. Removing the minimum wage won't improve incentives by much.




"fair pay for a fair days work i.e. people get paid close to their actual value in the production process."

"That's what happens in a free market."


I disagree. There is a discrepancy between the actual value in the production process and the income received by the worker.

If worker productivity increases, wages aren't likely to increase. If profit per worker increases, wages aren't likely to increase. If people become desperate, they are more likely to accept lower wages.

Sweat shop workers in Indonesia have been known to work 16 hours a day, 7 days a week for $2 a day. They are vital to the production process but get very little pay because:
1. There are many potential employees for every employer.
2. They don't have a "safety net" provided by the government.
3. There is no minimum wage, workers don't have the freedom to form effective unions and the electoral system is corrupt and undemocratic.

I am sure that you would agree that workers should have the freedom to form unions but I doubt that social freedom alone would eliminate the problem.

Beyond the value to value issue of the minimum wage, there are issues relating to utilitarianism, and whether or not the wage covers the cost of living.

4:09 PM  
Blogger Yacap said...

Well, yes, of course people should be free to form unions; but in the previous paragraph you say "effective unions" - no union could ever be effective under a regime of freedom: the effectiveness of unions relies on their ability to use violence (either directly or through the medium of government) to force people out of work (or specific lines of work) in order to privilege their members. In a free society, no such violence would be tolerated, so unions would be ineffective in that role.

There is a discrepancy between the actual value in the production process and the income received by the worker.

If there is such a discrepancy, that provides a wonderful opportunity for a competitor to come along and hire those underpaid workers away from their current employer to increase his own profits. It must be obvious that such a situation can only persist if there's some artificial barrier preventing that from happening. I.e., legislation working against freedom. Remove it, and the situation will fix itself.

7:53 PM  
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8:03 PM  

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