I, Smartphone

The "I, Smartphone" video above is a modernized 21st century version of the classic essay "I, Pencil," written in 1958 by Leonard Reed, founder of the Foundation for Economic Education.

Krugman vs the Austrian School's Schwartz

Unless you are a Spanish speaker, skip the intro and pick up Krugman's lecture at 9:19. Professor Pedro Schwartz responds to Krugman’s comments in excellent English at 35:25.

"Keynesians got us into this mess and now we (non-Keynesians) have to sacrifice our principals so that they can get us out of this mess."

~ Pedro Schwartz

Economic History of the World

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Free market capitalism is the best path to prosperity.

Nassim Nicholas Taleb - How to Prevent Other Financial Crises

Nassim Nicholas Taleb (author of Fooled by Randomness and The Black Swan) co-wrote a paper with George Martin that appears in the SAIS Review of International Affairs vol XXXII no. 1 (Winter-Spring 2012).

This article argues that the crisis of 2007–2008 happened because of an explosive combination of agency problems, moral hazard, and “scientism”—the illusion that ostensibly scientific techniques would manage risks and predict rare events in spite of the stark empirical and theoretical realities that suggested otherwise. The authors analyze the varied behaviors, ideas and effects that in combination created a financial meltdown, and discuss the players responsible for the consequences. In formulating a set of expectations for future financial management, they suggest that financial agents need more “skin in the game” to prevent irresponsible risk-taking from continuing.

[N]obody should be in a position to have the upside without sharing the downside, particularly when others may be harmed. While this principle seems simple, we have moved away from it in the finance world, particularly when it comes to financial organizations that have been deemed “too big to fail.”

The best risk-management rule was formulated nearly 4,000 years ago. Hammurabi’s code specifies:

“If a builder builds a house for a man and does not make its construction firm, and the house which he has built collapses and causes the death of the owner of the house, that builder shall be put to death.”

Clearly, the Babylonians understood that the builder will always know
more about the risks than the client, and can hide fragilities and improve
his profitability by cutting corners—in, say, the foundation. The builder can
also fool the inspector (or the regulator). The person hiding risk has a large
informational advantage over the one looking for it....

The Hammurabi rule marks the separation between an agent’s interests and those of the client, or principal, she is supposed to represent. This is called the agency problem in the social sciences. Often closely associated is the problem of moral hazard, wherein an actor has incentive to behave in an economically or socially suboptimal manner (e.g. overly risky) because she does not bear all of the actual and/or potential costs of her action. In banking, these two are combined most acutely in the case of large institutions that may be deemed “too big to fail,” as increased risk taking (moral hazard) may lead to greater interim compensation to management (agent) at the expense of junior claimants such as shareholders and guarantors (taxpayers, etc.) (principals). The Hammurabi rule solves the joint agency and moral hazard problem by ensuring that the agent has sufficient non-diversifiable risk to incent the agent to act in the joint interest of the agent and the principal.

Read the full paper here [PDF].

The Myth of Wage Stagnation

In this video mythbuster Don Boudreau takes former Clinton Labor Secretary Robert Reich to task on his dubious use of statistics while dispeling the common narrative of 'wage stagnation.'

Additionally, on Cafe Hayek, Boudreaux writes:

In this presentation (ppt), I calculate how many hours each non-supervisory worker earning the average nominal hourly wage of such workers had to work in 1975 to buy a variety of ordinary goods, and how many hours each non-supervisory worker earning the average nominal hourly wage of such workers must work in 2011 to buy similar (or, really, in almost every case far superior) or comparable goods.

The dollar figure beside each photo from the 1975 Sears catalog is the 1975 price(s) of that product(s) adjusted, using the CPI, into 2011 dollars. (The photos of the various pages of the 1975 Sears catalog, BTW, were taken with the camera in my iPhone. Just FYI.)

Before starting this PowerPoint presentation, I showed this recent clip from Robert Reich – one of many, many instances of people insisting that ordinary Americans are no better off today (at least materially) than they were since just before the age of alleged laissez faire descended upon us circa 1980.

A video of the Sear's catalog presentation can be found here.

Paving the Road to Hell

Consider:

Just look at all the jobs that have been abolished by the minimum wage—good and worthwhile jobs for those who are taking their first step on the economic ladder. Movie ushers, gas station attendants, caddies, fruit pickers, dishwashers, fast food help, and a wide variety of other entry-level job opportunities have been either cut back or eliminated because the minimum wage has rendered them unaffordable. How tragic this is, when you consider the true value of these low-level jobs to young and unskilled workers.

~ Roger Koopman

Or Walter Williams on his early years in a Philly slum:

None of these jobs paid much, but then I wasn’t worth much. But the real value of early work experiences is much more important than the little change a kid can earn. You learn how to keep a job. You learn how to be prompt, respect and obey superiors, and develop good work habits and attitudes that can pay off in the future. Additionally, there is the self-respect and pride that comes from being financially semi-independent.

~ Walter Williams

Or Williams again:

It is important to note that most people acquire work skills by working at “subnormal wages” which amounts to the same thing as paying to learn. For example, inexperienced doctors (interns), during their training, work at wages which are a tiny fraction of that of trained doctors. College students forego considerable amounts of money in the form of tuition and foregone income so that they may develop marketable skills. It is ironic, if not tragic, that low skilled youths from poor families are denied an opportunity to get a start in life. This is exactly what happens when a high minimum wage forbids low skilled workers to pay for job training in the form of a lower beginning wage.

~ Walter Williams

Michael O'Leary: EU Gadfly and Low Cost Innovator of Ryan Air

Michael O'Leary is a man to be emulated. If more CEO types spoke out about regulatory burdens and corporate taxes, we might start to see a popular revolution. O'Leary's frustration is not unique to the airline industry, either. The frustration with regulatory zeal goes across a great swath of industries.

Let's be honest. Some CEOs love regulations. The biggest industry players know that regulations are barriers to their industry. Regs become a cost of doing anti-competitive business. But there are still a lot of CEOs out there who get it. They are tired of trying to make life better for customers wearing straightjackets. They are tired of being tax collectors for bureaucrats -- and passing the costs onto their customers.

Via Ideas Matter

The Legacy of North Korean Communism

While many in the OWS crowd are longing for a Communist takeover of the United States so all the nation's wealth can be distributed equally among the comrades, they would be well instructed to look economic legacy of the two Koreas. The chart above shows another comparison of the economies of North and South Korea, based on data from Angus Maddison. Between 1950 and the early 1970s, real GDP per capita in South Korea was exactly the same as in North Korea. As South Korea implemented market reforms, its economy and output per person started consistently rising while economic conditions to the north stagnated. After forty years of market-based growth, real GDP per capita is now about 17.5 times higher in South Korea compared its norther neighbor.

Night on the Korean Peninsula

Grouch: So shouldn't the OWS crowd be protesting against crony capitalism and excessive government intervention in the economy in favor of more free market reforms for their own future prosperity and success?

Clarifying OWS for OWSers

Few protest groups exhibit more ignorance over what they are protesting than the OWS crowd. Is there something there to protest against? You bet, but none of them that I've seen can present a coherent argument about what is broken and how to fix it that goes beyond simplistic platitudes and propaganda. This video helps clarify what the OWSers should be protesting against, and where the problems truly exist. Will the taxpayers ever get their money back from Fannie Mae, Freddie Mac, GM and AIG? Only time will tell, but my bet is that the taxpayers will eat some massive losses on these companies.

The Real Story of the First Thanksgiving

This article originally appeared in 1985 in The Free Market and is from the Mises Institute.

The Great Thanksgiving Hoax

by Richard J. Maybury

Each year at this time school children all over America are taught the official Thanksgiving story, and newspapers, radio, TV, and magazines devote vast amounts of time and space to it. It is all very colorful and fascinating.

It is also very deceiving. This official story is nothing like what really happened. It is a fairy tale, a whitewashed and sanitized collection of half-truths which divert attention away from Thanksgiving’s real meaning.

The official story has the pilgrims boarding the Mayflower, coming to America and establishing the Plymouth colony in the winter of 1620-21. This first winter is hard, and half the colonists die. But the survivors are hard working and tenacious, and they learn new farming techniques from the Indians. The harvest of 1621 is bountiful. The Pilgrims hold a celebration, and give thanks to God. They are grateful for the wonderful new abundant land He has given them.

The official story then has the Pilgrims living more or less happily ever after, each year repeating the first Thanksgiving. Other early colonies also have hard times at first, but they soon prosper and adopt the annual tradition of giving thanks for this prosperous new land called America.

The problem with this official story is that the harvest of 1621 was not bountiful, nor were the colonists hardworking or tenacious. 1621 was a famine year and many of the colonists were lazy thieves.

In his History of Plymouth Plantation, the governor of the colony, William Bradford, reported that the colonists went hungry for years, because they refused to work in the fields. They preferred instead to steal food. He says the colony was riddled with “corruption,” and with “confusion and discontent.” The crops were small because “much was stolen both by night and day, before it became scarce eatable.”

In the harvest feasts of 1621 and 1622, “all had their hungry bellies filled,” but only briefly. The prevailing condition during those years was not the abundance the official story claims, it was famine and death. The first “Thanksgiving” was not so much a celebration as it was the last meal of condemned men.

But in subsequent years something changes. The harvest of 1623 was different. Suddenly, “instead of famine now God gave them plenty,” Bradford wrote, “and the face of things was changed, to the rejoicing of the hearts of many, for which they blessed God.” Thereafter, he wrote, “any general want or famine hath not been amongst them since to this day.” In fact, in 1624, so much food was produced that the colonists were able to begin exporting corn.

What happened?

After the poor harvest of 1622, writes Bradford, “they began to think how they might raise as much corn as they could, and obtain a better crop.” They began to question their form of economic organization.

This had required that “all profits & benefits that are got by trade, working, fishing, or any other means” were to be placed in the common stock of the colony, and that, “all such persons as are of this colony, are to have their meat, drink, apparel, and all provisions out of the common stock.” A person was to put into the common stock all he could, and take out only what he needed.

This “from each according to his ability, to each according to his need” was an early form of socialism, and it is why the Pilgrims were starving. Bradford writes that “young men that are most able and fit for labor and service” complained about being forced to “spend their time and strength to work for other men’s wives and children.” Also, “the strong, or man of parts, had no more in division of victuals and clothes, than he that was weak.” So the young and strong refused to work and the total amount of food produced was never adequate.

To rectify this situation, in 1623 Bradford abolished socialism. He gave each household a parcel of land and told them they could keep what they produced, or trade it away as they saw fit. In other words, he replaced socialism with a free market, and that was the end of famines.

Many early groups of colonists set up socialist states, all with the same terrible results. At Jamestown, established in 1607, out of every shipload of settlers that arrived, less than half would survive their first twelve months in America. Most of the work was being done by only one-fifth of the men, the other four-fifths choosing to be parasites. In the winter of 1609-10, called “The Starving Time,” the population fell from five-hundred to sixty.

Then the Jamestown colony was converted to a free market, and the results were every bit as dramatic as those at Plymouth. In 1614, Colony Secretary Ralph Hamor wrote that after the switch there was “plenty of food, which every man by his own industry may easily and doth procure.” He said that when the socialist system had prevailed, “we reaped not so much corn from the labors of thirty men as three men have done for themselves now.”

Before these free markets were established, the colonists had nothing for which to be thankful. They were in the same situation as Ethiopians are today, and for the same reasons. But after free markets were established, the resulting abundance was so dramatic that the annual Thanksgiving celebrations became common throughout the colonies, and in 1863, Thanksgiving became a national holiday.

Thus the real reason for Thanksgiving, deleted from the official story, is: Socialism does not work; the one and only source of abundance is free markets, and we thank God we live in a country where we can have them.

What to be Thankful For in the Land of Evil Capitalism: 25 Wonderful Trends of the 20th Century

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(Evil) Profits

Dorian Electra: Roll With The Flow

Dorian Electra has done a fantastic job of communicating the basic lessons of Austrian Economics in, well, a single song. She covers:

• Subjective value - One person's trash is another's treasure.
• Human action (in circumstances of time and place) - Your economic behavior is unique and perspectival.
• Knowledge problem, as well as problems of quantification and measurement - Macroeconomic models are pretty much useless.
• Unseen costs - Big digs and boondoggles mean foregone opportunities for growth.
• Bottom up versus Top Down - The collective behaviors of individual actors on the ground make up the economy (not aggregate demand).

Via: Ideas Matter

1975 Sears Catalog

This Youtube video is based on a talk by Don Boudreaux. For those who think things were better in the past than today, this is a gentle reminder of how technology and ingenuity is improving the human condition.

The War on Prosperity: Scenes from the Occupy Wall Street Protests

From the Occupy Wall Street website:

This statement is ours, and for anyone who will get behind it. Representing ourselves, we bring this call for revolution.

We want freedom for all, without regards for identity, because we are all people, and because no other reason should be needed. However, this freedom has been largely taken from the people, and slowly made to trickle down, whenever we get angry.

Money, it has been said, has taken over politics. In truth, we say, money has always been part of the capitalist political system. A system based on the existence of have and have nots, where inequality is inherent to the system, will inevitably lead to a situation where the haves find a way to rule, whether by the sword or by the dollar.

We agree that we need to see election reform. However, the election reform proposed ignores the causes which allowed such a system to happen. Some will readily blame the federal reserve, but the political system has been beholden to political machinations of the wealthy well before its founding.

We need to address the core facts: these corporations, even if they were unable to compete in the electoral arena, would still remain control of society. They would retain economic control, which would allow them to retain political control. Term limits would, again, not solve this, as many in the political class already leave politics to find themselves as part of the corporate elites.

We need to retake the freedom that has been stolen from the people, altogether.

1. If you agree that freedom is the right to communicate, to live, to be, to go, to love, to do what you will without the impositions of others, then you might be one of us.

2. If you agree that a person is entitled to the sweat of their brows, that being talented at management should not entitle others to act like overseers and overlords, that all workers should have the right to engage in decisions, democratically, then you might be one of us.

3. If you agree that freedom for some is not the same as freedom for all, and that freedom for all is the only true freedom, then you might be one of us.

4. If you agree that power is not right, that life trumps property, then you might be one of us.

5. If you agree that state and corporation are merely two sides of the same oppressive power structure, if you realize how media distorts things to preserve it, how it pits the people against the people to remain in power, then you might be one of us.

And so we call on people to act

1. We call for protests to remain active in the cities. Those already there, to grow, to organize, to raise consciousnesses, for those cities where there are no protests, for protests to organize and disrupt the system.

2. We call for workers to not only strike, but seize their workplaces collectively, and to organize them democratically. We call for students and teachers to act together, to teach democracy, not merely the teachers to the students, but the students to the teachers. To seize the classrooms and free minds together.

3. We call for the unemployed to volunteer, to learn, to teach, to use what skills they have to support themselves as part of the revolting people as a community.

4. We call for the organization of people's assemblies in every city, every public square, every township.

5. We call for the seizure and use of abandoned buildings, of abandoned land, of every property seized and abandoned by speculators, for the people, for every group that will organize them.

We call for a revolution of the mind as well as the body politic.

Grouch: Our comrades from the future are calling us, the wealth creators. They want their fair share of the nation's treasure.  They want economic justice.  The revolution has begun.  But I am one of the unenlightened.  I believe free market capitalism is the best path to prosperity for all, and will fight to my death to preserve whatever vestiges of that remain.

Peter Schiff Schools Congress on Job Creation

"Government stimulus will never grow this economy. It will never create jobs. It is the equivalent of trying to put out a fire by pouring gasoline on it. We have to understand that the housing bubble, the financial crisis of 2008, were the consequences of government stimulus.

We stimulated our way into this problem, we’re not going to stimulate our way out. In fact, the stimulus is actually a sedative. The stimulus is preventing the free market from unraveling the problems that years of bad fiscal and monetary policies have created. We don’t need more spending, we need the opposite of spending. We need under-consumption. What the economy lacks is savings, investment, production. And if we try to preserve the jobs of the Bubble Economy with more reckless money printing and borrowing and government spending all we’re going to succeed in doing is preventing the restructuring that we need and preventing more productive jobs from ever coming into existence."

~ Peter Schiff

The Taking Tree

Sylvia Nassar: The Grand Pursuit

This video is a synopsis of Sylvia Nassar's new book on economics called The Grand Pursuit. I always find it very enlightening as to what material is presented and what is ignored. I must confess I'd wouldn't make a strong connection between Jimmy Carter and Milton Friedman, maybe Reagan, who gets no mention, but not Carter. It is also interesting that the beginning of the boom in living standards also marked the beginning of modern literary egalitarianism (Dickens) and theoretical egalitarianism (Marx), both redistributionists who held fast that the existence of want justified degrees of government interference with the economy to counteract what they perceived as hoarding by the rich. How little things change over time despite the dramatic increase in personal wealth and the rise of the middle class.

Economists, Mano a Mano

University of Maryland economist Peter Morici writes in a CNBC editorial on the Economic Impact of Hurricane Irene:

"Rebuilding after Irene, especially in an economy with high unemployment and underused resources in the construction and building materials industries, will unleash at least $20 billion in new direct private spending-likely more as many folks rebuild larger than before, and the capital stock that emerges will prove more economically useful and productive.

This is not to discount the direct costs to individuals by temporary and in some cases permanent displacements; however, when government authorities facilitate rebuilding quickly and effectively, the process of economic renewal can leave communities better off than before."

In what can only be described as a brilliant counterpunch, George Mason economist Don Boudreaux writes in his open letter to Peter Morici:

"I hereby offer my services to you, at a modest wage, to destroy your house and your car. Act now, and I’ll throw in at no extra charge destruction of all of your clothing, furniture, computer hardware and software, and large and small household appliances.

Because, I’m sure, almost all of these things that I’ll destroy for you are more than a few days old (and, hence, are hampered by wear and tear), you’ll be obliged to replace them with newer versions that are “more economically useful and productive.” You will, by your own logic, be made richer.

Just send me a note with some times that are good for you for me to come by with some sledge hammers and blowtorches. Given the short distance between Fairfax and College Park, I can be at your place pronto. Oh, as an extra bonus, I promise not to clean up the mess! That way, there’ll be more jobs created for clean-up crews in your neighborhood."

The Grouch: Morici jumps the Krugman with his editorial and Boudreaux slams him right back with an up close and personal exploration of the Broken Windows Fallacy. Absolutely brilliant.

Happy 99th Birthday, Milton Friedman!

There’s no way to appreciate fully the contributions of Nobel Prize-winning economist Milton Friedman (1912-2006), who would have turned 99 years old this weekend, to the growth of libertarian ideas and a free society.

This is the man, after all, who introduced the concept of school vouchers, documented the role of government monopolies on money in creating inflation, provided the intellectual arguments that ended the military draft in America, co-founded the Mont Pelerin Society, and so much more. In popular books such as Capitalism and Freedom and Free to Choose, written with his wife and longtime collaborator Rose, he masterfully drew a through-line between economic freedom and political and cultural freedom.

Yet his ultimate contribution to freedom and liberty is found less in any of the specific argument he made and more in the ways he made them. Friedman provided an all-too-rare example of a public intellectual who was scrupulously honest, forthright, and fair in every debate he entered. Whether he was duking it out with fellow Nobel Prize winners and other high-profile economists or making the case for the morality of capitalism with TV hosts such as Phil Donahue and angry students, he always argued in good faith, admitted when he was wrong, and enlarged the circle of debate.

Long after some of his technical points and social insights have been superseded, that commitment to relentless inquiry and search for truth wherever it takes us will survive.

Milton Friedman gave us something much better than revealed truth: He showed us the process by which we might continue to indefinitely learn about our world and the human condition. In this sense, the Friedman Century is far from over; indeed, it’s just getting started.