Lambert v Spiers

I do appreciate Ed's challenges, and I believe he represents widely held views.  The discussion continues:

Ed:

Krugman didn´t show that people take goods and services to the market... he showed where people take themselves to the market... the mobility thing... voluntarily or involuntarily...


John: 
Yes, but that is not remarkable. What is interesting is why the Irish left Ireland to get to USA opportunity.  Not surprising or very interesting that they moved.  The question is why did Ireland not have opportunity or market enough to retain Ireland's most adventurous.  Of course, English overlordism made for crushing poverty in Ireland.  The problem is why people leave, not where they go.

Ed:You don´t discount bank loans and stocks... you don´t put much emphasis on them either... the core of capitalism is the general access to credit/capital within a free market... So as I see it, your free market has to have an element of capitalization...

How do you separate free markets from capitalism then???


John:  
You continue to conflate the two, when it is either or, it is dichotomous.  I say I am a free-market anticapitalist because free markets are grounded in human rights, of which one is property rights.  In a free market property ownership is limited to what resources you can mix with your labor.  Those distorting power aggregations that result in the horrors for which you want govt to ameliorate just cannot obtain in a free market. In a free market law is based on who owns the property.  In capitalism, the system very much allows power to be aggregated (with its attendant evils, power corrupts, etc) and in capitalism the law is based on who owns the capital. The powers that be, the courts, the legislature, the executive all come down on the side of the capitalists now. (It was not always so in USA) The human faces to both sides in USA are Jefferson and Hamilton.  Jefferson is human rights, property; Hamilton capitalism, empire, devil take the hindmost, war, etc.

Ed:And on the subject of government intervention... let´s look at the work of the economist Amartya Sen... He explored inequality, freedom and poverty among other things... 


John:
Yes, I occasionally visit the University Bookstore to see what texts the econ students are reading, and a while back it was Amyrta Sen's Development as Freedom.  Sounded encourging, so I read it.  But like all marxists, he gets his facts exactly right, the analysis right, then veers off when it comes to policy.  Ultimately he believes it is just a matter of getting the right people and the right policies in place.


(Please don't get riled at my characterization of Sen as a Marxist.  He is.  It is no insult, I like marxists better than capitalists.  Marxism is based in materialism, atheist, believes in an elite that will set policy right to bring us to anarchy.  I like where they want to go, I just don't think they will get there.  Capitalists believe we are there, the best of all possible worlds, and how do we know?  Because capitalism works for capitalists. End of debate.)


Ed:In a paper once, he asked... Why do famines occur?... Most people say, "not enough food for everybody"... but he saw that the 1974 famine in Bangladesh occured despite there being more food per person that year than the two years prior and the following year... the cause of the famine was unemployment of the very poor caused by weather that didn´t allow them to work in the farms that year... Thus, the very poor could not buy food... as a result, thousands died... then as people starting dying, the affluent stockpiled food, raising the prices even more, causing more people to die...

He also wrote about the famine in 1943 in Bengal... 2 to 3 million people perished... but he saw that no one in the middle class, nor upper class felt any of the effects of the famine... only landless rural laborers died... Why?


John:
You left out the important part of his answer: war. Both of those famines were preceded by nasty wars, which are usually compliments of left wing vs right wing capitalists.


Ed:His work went on to teach governments how to provide programs to keep these things from happening... He pointed out the government´s indifference to the dying...


John:
Govt indifference is rather guaranteed... the results don't matter, and to muck things up merely assures govt will get more power.

Ed:Many governments since his work now know how to prevent famines... it is through government intervention... his work has saved millions of lives...


John:
Come on...  millions have still died due to govt indifference since he started "teaching..."  if not in India or Bengla Desh, it is only because it is not time yet.  There is only so much a govt can do.


Ed:Sen once wrote, "Economics is not solely concerned with income and wealth but also with using these resources as means to significant ends..." 
So if government can use resources to significant ends, this is good... 


John:
But it cannot, there are no instances in the history of mankind when govt employed resources in a manner superior to private enterprise.  People say, there are insurmountable problems, therefore we need government.  Experience tells us, there is govt, therefore there are insurmountble problems.  History tells us this.  


Ed:He also talks about how the poor in countries like China and Sri Lanka are healthier than the poor in Brazil and South Africa... First, income is unequally distributed in Brazil and South Africa, even to this day... Second, China and Sri lanka have public health policies that address the most vulnerable...


John:
I don't buy either part of this argument - health stats are political, and generally bogus.  Income is unequally distributed everywhere to some degree, and my sense is on a continuum those four countries are pretty close compared to all countries, grouped tightly on a bell-curve.  Hong Kong is one of the freest political entities, and excels in both income distribution and health care, and you do not need to read reports, you can see it on the streets.

Ed:Here again we see the word... vulnerable... this is a role of government... to support the most vulnerable in society...


John:
I've never met a vulnerable person who needed my help.  They wanted freedom, not my help.  They wanted to trade with me, not bum some money off me.  Their dire circumstances was a result of govt policy.  AS Sen points out it is both "freedom to" and "freedom from" that makes or breaks development.

Ed:Again ... how does the free market take care of the most vulnerable???
The answer is not simply through freedom...


John:  
Yes it is.  Freedom to order their lives free of interference from policy makers.  You are right to lay much blame on capitalism, so do I.  You are right to prefer communism to capitalism.  So do I, if forced to make a choice. Communism has the advantage of failing quicker. (And by that standard, the ideal is national socialism, since those guys, from Qin Shi Huang di to Hitler, cannot keep it together for more than a dozen years, although every one of them starts out claiming they'll rule for a thousand years.)


The inherent error is to believe that govt, an impossibly small group of people somehow can come up with the right policies for everyone else.  Who are these people who are exceptionally enlightened, how do they get the power to make the rules, how is it that they alone are incorruptible?  Are they really angels in disguise sent to help us? Why pretend govt can do this when they cannot?  Why pretend people cannot solve their own problems in freedom when they can?  Yes, the story from 1 Samuel 8 is distressingly familiar, and a consolation for those who wish to oppress others, but in case of emergency, govt needs to get out of the way.

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Islam and Interest

I’ve made the argument in a free market interest charges would cease to be a market feature.  I based my prediction on the premise interest agreements violate inalienable human rights, and people generally agree to this, in practice, now. Generally, we care if someone does not pay back a loan, we do not care if one does not pay interest. And if in a free market there is no sanction outside of the opinion of cooperators, and if few care if interest payments are made, as a money-maker, charging interest would wither on the vine.  And with it would wither the prime tool of oppression, war and market destruction.

The argument was controversial.  While the debate proceeded, I noted in the Hong Kong Standard John Wiley has published a textbook called The Stability of Islamic Finance by four Western-trained Moslem econ Phds.  

With a dedication page reading “In the Name of Allah, the All Merciful, the All Beneficient” it should be no surprise the book takes an orthodox line on interest agreements.  Few may realize that Islam spread in the chaos following the rolling economic bust after the fall of Rome.   Mohammed (pbuh) was a merchant and well versed in praxeology, and clear about the danger of interest agreements.

The austrian business cycle theory may be esoteric in the West, but it is exoteric in the East.  The Cantonese merchants I traded with in the 70’sI now realize were all “austrians” even though they never heard the term.  By page two of The Stability of Islamic Finance the authors have laid out the danger of central banking, the fraud of unmatched maturities in deposits and loans, and gold as money.  By page five they are citing Ricardo and Bohm-Bawerk among others favorably and discounting Keynes. What we call austrian economics they call obvious.

Their argument against interest in the introduction parallels my argument: it is a trap to agree to pay a profit no matter what; only participation in the risk is just in business. They add what might be an interesting concept to the argument we had as to whether money (defined again as gold) is a store of value.  Money in reserve is only potential capital, “it becomes actual capital only when it is joined with other resources in undertaking a productive activity.”  Interest is not rent on money, because rent is payment for usufruct of capital goods, not capital. I’ve only finished the introduction, and I am keen to read the full argument on this point.

I think I perceive in their argument that they are pitching to modern colleagues by grounding the teaching in utilitarianism.  Interest agreements lead to nasty arrangements (moral hazard is covered in the introduction) and financial instability, and financial stability is the goal of Islamic finance.

There is a hint that Moslems have plenty to contribute to “austrian” economics.  25 years ago Peter Drucker, who claimed Mises as an early influence, pointed out entrepreneurs do not take risks.  To any entrepreneur, this is obvious, in fact we are compensated in part for eliminating risks.  Nonetheless, to this day austrian thinkers proceed from the premise that entrepreneurial activity is based on risk.  Taking risk is fatwa in Islam.   

Instead of reviewing a book after I am finished, in which case I rarely actually get around to revciewing the book, I’ll review it chapter by chapter as I read it. 

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More Discussion On Free Markets

HI John, Just a quick comment... I know you say there is a difference between capitalism and free market... but aside from that... 

there is the over-riding process of global industrialization... whether this process is under capitalism or free market, you still end up with family and community disintegration through urbanization and labor mobility... 

***Back up, we cannot ascribe the negative rsults to free markets, because that would be ahistorical; we know the dislocations that cause the stress you are about to detail comes form communism and capitalis, this is historical...  the over riding process of global industrialization (as I am guessing you see it) cannot come from free markets.  It can only come from power aggregated in a few hands.  Human rights, one of which is property rights, has to be violated to achieve these deleterious results. ***

Are you saying that a free market would maintain family and community support systems irregardless of industrialization and global wide urbanization???

***I am saying we would have something different, not industrialization as we know it today.  Hong Kong, Singapore, Andorra, Monaco, Lichtenstein, and countless other modern places have seen family and community support systems and modernity.***

How would it do that without govt programs, like medicare, meals-on-wheels, job training, food stamps, temporary unemployment benefits, disability support...?

***Yikes, what a litany of evil?  Who needs any of the above?  Whatever problems the above are supposed to solve, mere freedom would do the trick. Freedom to contract, freedom from interference.***

A responsible society does not let these needs go unmet...

***Free markets do not let these needs go unmet.***

About mobility... many desired the mobility... that is why you see massive urbanization for over 100 years... and you see lots of immigration

***People leave when the greener grass is more alluring than the present misery.  It takes a lot of pain to make people move.  People do not flee free markets.***

The book has a clear definition of capitalism..."Capitalism is an economic system in which employers, using privately owned capital goods, hire wage labor to produce commodities for the purpose of making a profit."

***  As good as any.  Of course, it is a silly definition since it describes only one part of human action that makes up an economy.***

How is the idea of Free Market different?

***We have an inalienable right to freedom.  “Employer” and “employee” means both sides of the transaction have violated inalienable human rights.  Let me exagerate to make the point: a human has an inalienable right to freedom - he can neither sell himself into slavery nor be sold into slavery.  In a free market there is division of labor, but power cannot be aggregated since there is no sanction if someone declines to continue with an “employment” contract. In a free market sanctions are limited to how people react ot you and your repuation.***

I hear what you are saying about suffering the consequences of a recession to purge the rottenness, but my point is that social support systems have been eroded over the past 100 years in the US, and currently so in emerging markets... 

***Indeed, I condemn it and the capitlism behind it. But the solution is freedom, not more programs.  Take section 8 housing. landlords love packing empty apartments with poor people subsidized by the taxpayers, becuase the poor paying what was standard a few yeas ago keeps the rents high when they should be falling fast after this construction boom.  By eliminating Section 8 immediately, the rent of apartments and houses would drop to where the poor could pay their own money for rent.***

If you let people suffer from the collapse of an economic system that actually eroded the social supports over time leading up to that collapse, you continue to do damage to society...

***The only people who would suffer are the landlords ripping off the taxpayers...*** 

My question is if govt´s role of social services is more important because workers are expected to get and go where the work is... 

*** this “government” that gets nothign right, as far as I can see, somehow matches workers to work well enough?***

Have you seen the recent articles showing that worker mobility is limited now because of the problems with mortgages, foreclosures, refinancing and housing sales...?

***I would think it is limited by lack of imagination.  People are so indoctrinated to “get a job” their ability to innovate and provide for themselves in a free market has atrophied.  There is plenty of gainful work to be done, there are just no jobs out there.***

People are left stranded, tied to a house, and can´t go to where the work is... this is a consequence of the economics...

***Please!  Anyone can walk away from any house with no more than 3 years before they can buy again.  Even the wealthy are doing it as “strategic default.”***

The role of govt is to support the vulnerable part of the population...

*** I cannot think of anything more miserable than to be vulnerable and supported by the government. Of course the rich are supported by the government, and how! ***

Because of Germany´s workshare program unemployment did not rise there... 

***Well, that may be tendentious, there are many factors in Germanies economy, and what we call unemployed and what the Germans call unemployed are very different.***

This maintains a strong and active work force... 

***But free markets do, undeniably.. why not cut out the middleman?**

Centuries ago, the unemployed could always find support within the community, but not now...

***Decades ago people could depend on their families, let alone centuries...  but with capitalism and communism, utilitarianism moved to the fore.***

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It Can Get Complicated

So legendary wine collector Eric Greenberg had a lot of his wine sold at auction in the ballooning fine wine market of Hong Kong.  But wait, Greenberg is being sued by Billionaire Bill Koch for passing on fake wines from Robert Parker-associated wine merchants from New York, bogus rare wines.  This comes out AFTER the auction.  Ouch.

Fraud follows economic bubbles, as markets are distorted and misallocation of resources gives the needed opportunity to fraudsters.  Here again though, experts spotted the fraud early on, so the burned players have no one but themselves to blame.

The solution is of course in a free market everyone in the supply chain knows and vouches from their source.  In Seattle a mini-scandal erupted when a 100% organic butcher could not actual demonstrate either 100% or organic.  Feathers flew.

The problem comes when people get used to buying from Safeway, and figuring Safeway is not going to mess with its customers, what with award-happy juries ready to fleece the Big Grocer.  So we get used to trusting, our capacity for skepticism atrophies, and in walks scam artists who can back up a semi to our bank accounts.

If we are to return to better food ingredients, we are going to have to whip the innovator retailers into line.  Whatever the facts are, the magazine Stranger did a service questioning the course of putative organic meat.  If the stuff is legit, then Bill the Butcher does nothing but becomes more transparent.  If not, he'll have to get legit.  And either way, it is a lesson to anyone starting up something innovative.

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Move This Question to the Top

Edward Lambert said...

John, I am reading about the history of capitalism and industrialization... 

***What is the title?***

One direct effect was the mobility of workers for employment in businesses... This ended up breaking down the cohesiveness of families and community... 

***Hang on, this is tendentious phrasing... few of these workers desired mobility, they were rather forced to head where work was and privation was not...***

Therefore the social support systems broke down as a result of the free market... 

***Hang on, you are trying to slip a fast one by...  capitalism is not the free market...  I've said so many times, and I am certainly no capitalist, in fact I call myself an "anti-capitalist free marketer" (among other things).  If you want to say social support systems broker down as a result of capitalism, you'll get no argument from me.  IN fact is it one of many ways capitalism is identical to communism.  Nothing the capitalist did was possible without big govt/big bis cooperation...  if you want a case by case study of this read Morton Horwitz listed below.  Inalienable human rights and property rights had to be violated to arrive at the problems you cite, and only with govt cooperation.***

My question:::
Doesn´t this make the role of govt services more important to make up for this consequence of the free market???

***No, given the definition problems.  No, even if you want to say as a consequence of capitalism.  The solution to the problems of capitalism is not more govt programs, it is freedom.  We have a housing crisis right now... one of overcapacity.  Instead of ramping up section eight vouchers and bailing out banks and big builders, govt should shrink and let the market lay waste the big banks, and housing prices will fall to where poor people can afford a home with what they earn.  ***

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