On God: Why I Believe

Something I always struggle to put into words is why I believe in the existence of but one God. I wasn't raised to believe in Him. At a superficial level, I actually tend to prefer to think as an atheist. I'm definitely a great big sinner by the standards of many religious creeds. But believe I do, and I think, at this moments, I may actually have the words. Hopefully I can get them down before they fly from my mind yet again.

Suppose you were an engineer, and you came across a functioning device of unknown origin. You spent many years studying this device, seeing how all the parts go together, determining the principles by which it operates. However, the one thing you could not get a look at no matter how hard you tried was the power source. The device was clearly self propelling, but the power by which it operates was, for whatever reason, hidden from view. You'd diagrammed the entire thing, but at the heart of the diagram was an empty spot simply labeled "phlebotinum device". No other configuration seemed workable, and any other model you could come up with required a lot of arbitrary adjustments to even function, a bit like the Ptolomeic model of the solar system. In a situation like this, it would be foolish to debate the semantics of what the device should be called, or the existence of the device.

For me, the field is moral philosophy. No, I am not formally trained, but the majority of my life has been spent musing on the subject, whether I believed in God's existence at the time or not. To me, one of the primary functions of scientific thinking is to discover the order in a seemingly chaotic mixture of facts. And so far as I could tell, notions of right and wrong were only questions of seeming, and could not be justified according to any ultimate principle or structure of thought. Ultimately, right and wrong were purely matters of either futile and circular reasonings, or assertion.

And nobody asserts that more than the more traditional, less thoughtful believers... but ironically, the time I spent trying my best to be as religious as possible, attending church and reordering my thoughts to account for His existence, brought a spark of order to all these chaotic musings. For though in the short term, submission to a written code and a social order (so far as I was able... I've never been good at submitting to social order) brought me a brief reprieve from my own crisis of morality, in the long term, the "God" principle became the "phlebotinum device" at the core of my own moral structure.

(Note that I recognize that this "God principle" is not God himself, but rather a memetic structure that fits into the only consistent memetic structure I have ever run across. I do not worship this principle; that would be idolatrous. Indeed, I do not ordinarily worship, unless my wonder at the brief flashes of insight this principle enables me to have counts. I say this not to brag, but more as a confession.)

What is this structure? Hopefully I can elaborate on this further in future entries, but there are a few platitudes that I regard as being more true than false, that point to the existence of some benevolant guiding force.

For example, "leave the rest up to God," or "Matters beyond that will attend themselves." It is, I believe, a fact that there are limits to individual responsibility. One simply does not have the power to order the entire world around him... but there are so many who drive themselves to the grave attempting to do so. Worry worry worry... but it isn't even necessary. For the world is not a dark place with potential enemies around every corner... unless you have made those enemies yourself. One CAN focus his attention on that which is within one's own power without worring about sudden unexpected disaster... and be more effective at life as a result. For though sudden unexpected disaster does strike from time to time, worrying about it accomplishes nothing. And afer a natural disaster, or "act of god", the key to moving on is acceptance of the situation, "trusting God", not howling at the arbitrary and senseless nature of the universe.

What is the engine that enables "matters" to "attend themselves"? One can suppose an inherent benevolance of humankind... this is not, in my opinion, a reasonable supposition. One can throw up his hands and simply say "I don't know." I don't know either, but the first phrase I quoted suggests something that is true...

What is the mind that guides the "invidible hand" that guides the distribution of resources? How are the species that survive amid extinctions on the one hand, and the social and moral systems that continue to the present day, selected? Is the chain of cause and effect infinite, with no original cause? Or is there a "base" cause from which all effects arise... and what is that "first cause"? What is the equation behind the fractal pattern that seems to emerge in such disparate places in nature? And why does it always seem to function, at the macro level, better than any human planner?

What is it that made Jews and Jewishness indestructable? What is it about the cult of YHWH that was so compelling it spawned two world religions, and numerous other ofshoots? What was it that drove Jesus to knowingly and willingly approach the cross? Which is less reasonable: to entertain the notion that the old prophets may have known something (or someone) we do not, or to valiantly squeeze one's eyes from even the possibility (whatever you think of the old religions) that the ordering of the universe has a conscious intent behind it?

To me, human morality simply does not make sense without a "God principle" at the center.

Something To Read

I enjoyed Robert P. Murphy's recent article refuting some objections against Austrian Business Cycle Theory. Just thought I'd bring that up.

Iraq: Why Leaving Slowly Isn't Enough

A subject that came up recently was Why I Didn't Vote in 2008, and my answer was Obama Wasn't Going To Leave Quickly Enough. But pressed with the question, what's so great about leaving quickly, Leaving The Iraqis Out To Dry, I found myself unable to answer. While cleaning up after dinner, I found myself musing on the subject, and I think I have an answer.

I'd forgotten, since it'd been a moot point for some time now, but originally, the Iraq (totally not a) War was not, for me, about America vs. The Terrorists, or America vs. the Islamist Extremists, or America vs. The Insurgents, or any form of America vs. Those Guys Over There. I was well aware that nobody in Iraq had anything to do with the 9/11 attacks (or at least, nobody that anybody knew of). So far as I was concerned, America had nothing to do with anything going on in Iraq. Regardless of whoever else was involved across the seas (in this case, the enemy of my enemy is definitely not my friend, nor does he need to be), the Iraq War (sic) was to me about a coalition of military suppliers, oil companies, Iraqi exiles, others who thought they might gain from the conflict, and a few genuinely deluded souls, vs. the American People, and our Constitution.

It is my understanding that military officers, congressmen, and the President himself swear an oath to defend the Constitution against all enemies, "foreign or domestic." My opinion: exiles seeking to embroil this nation in their own conflict? Foreign enemies. Big business interests seeking the same end for their own purposes? Domestic enemies. I was well aware that the "conflict" part of the Iraq "War" would end during the next administration, regardless of who won the election. The only question was, would it happen quickly enough to burn those who were reaping an advantage from the fight? Would it be a victory over the enemies of the Constitution, both Foreign and Domestic? Because that's what the election of 2008 was about, for me.

A quick and total withdrawal from Iraq would have hurt the balance sheets of the military supply companies reaping American tax dollars, by bringing a swift end to the practice. For the big oil companies, dreams of securing advantageous contracts with a compliant Iraqi government established with other people's money would have quickly gone up in smoke. The exiles who lobbied to have us fight their enemies for them would have suddenly found that their "allies" had signed a separate peace... their own plans foiled.

And what of the Iraqi People, who had to go through military invasion and occupation, all for naught? The people whose hearts bleed fat the thought are often the very same people for whom there is an acceptable level of "collateral damage" (that is, the destruction of the lives and livelihoods of noncombatants) to be had in war. So lets just call it that: the fate of the Iraqis after we "leave them hanging" or whatever is "collateral damage"... with a difference: neither I, nor anyone else involved in our side of the conflict are the ones pulling triggers and pushing buttons, if indeed the nightmare scenarios painted by some supporters of the "slow withdrawal" are, in fact, the actual result.

Musings on Moral Equality

I have at the tip of my mind a series of essays on how the ideal of moral equality can be described in terms of the proper relationships of individuals and communities to the general categories of labor, land, and capital. The problem I am having is the verbalization of the reasoning behind the concept itself: Why should people be regarded as being morally equal?

At first, I wonder if it's even necessary. For me, the ideal that all people have equal moral rights to things like freedom, even existence, is self evident. It's axiomatic. It's not something I question, and as is the case with all people, my natural presumption is that everybody shares this axiom, and that disagreement is a matter of the interpretation of the logical consequences of this axiom.

But this isn't the case, because a lot of people, quite possibly a majority, seem to have a tiered system whereby some people matter more than others not only in practice, but in reality. At the top is the self. Just below it is a circle of immediate family and close friends. Next comes one's extended family and peer group. Below that comes the primary identity group, whether it national, religious, racial, class based, or otherwise. There may be a series of secondary identity groups below that, but, at the very bottom, come the "unpersons."

Certainly, one cannot get away from the reality of distance, that one is only capable of carrying out responsibility to a limited number of people. But I see, in the voraciousness with which large numbers of people are able to literally cry out for the blood of people they've never met and who have not been proven to have done any harm, a moral relativism. "We" do not only know one another better, "We" are not only more able to both to help and to judge one another, "We" matter more than "they." "We" have a right to rob, oppress, or even kill anyone we perceive as a threat, so long as they aren't one of "Us." "Our" existence takes priority over "theirs." The standard of proof, if even necessary, is lower for convicting "them" of wrongdoing; and on the flip side we should stand united against any of "their" accusations against our own.

Thus, a nobleman has the right to harass, rob, or even kill a peasant, simply because he is not a fellow noble... but woe to the peasant who strikes his better! Master may beat his slave mercilessly, deprive him of food, or take any other measures he feels appropriate... but a slave who so much as glares at his master may be struck dead on the spot. Native may abuse, torment, con, or even murder foreigner at will... but a foreigner who so much as grumbles against his treatment has overstepped his bounds. Any from the conqueror's people may do what they will to the natives, and at worst will be transferred back to the homeland for "rehabilitation", but if a native too slow to obey his conqueror's orders he may be justifiably shot, in "self defense." And if my brother strikes you, it was justified... no investigation is needed. However, if you strike my brother, that demands retribution!

Certainly, some people place some identity group above themselves in their moral hierarchy: family, nation, religious organization, or what have you. Such people can potentially dehumanize to a greater degree, since such a hierarchy requires that they submit their own will to that of the group... meaning that if their group is at odds with another, the individual member has no choice but to respond with hostility to individuals of the other group!

My general moral hierarchy has but one or two tiers. One contains the mass of humanity... all of them, regardless of nation, race, creed, or even possibly occupation... and within this, men are judged by their actions, not their origins. The only other possible tier is one above, the one in which God resides, with authority over all men individually and directly.

Certainly, there are structures of authority within that second tier, but those grants of authority are always exchanges in which both seek and deserve advantage; one is not "above" the other, but rather simply has something different to offer than the other. Laborers exchange their efforts for access to resources and knowledge they otherwise would not have. Laymen exchange their deference and resources for the wisdom of his priest of pastor. Soldiers submit to their commanding officers in exchange for a better chance of surviving, or at least not dying in vain. Children submit to their parents in exchange for sustenance, guidance, and the approval all children desire from their parents. Husbands and wives submit to one another in exchange for the various things one can obtain only from the other.

However, in any relationship, both sides have the right to terminate the relationship if they believe they are being cheated or abused. Note that the following are not necessarily established rights in our society, but rather things I believe flow naturally from the notion of the moral equality of humankind. The laborer can quit his job and seek another, while his boss may fire him. Laymen can stop listening to their clergymen, and a clergyman may step down from serving an ungrateful congregation. Soldiers, should they believe their commander unfit for leadership, can decline to serve further; the commander can likewise refuse the service of any he regards as unfit for duty. The child, though he must rely upon his own abilities for sustenance in such a case, is under no moral compulsion to return to his parents should he decide to leave; likewise, though despicable to consider, I can see no profit in attempting to force a parent that lacks a natural paternal instinct to support a despised child. And husbands and wives, though they should make every effort to continue the relationship for the sake of any children that might be involved, ought to have the right to unilateral separation.

This is my question to my readers: do you regard moral equality as an acceptable axiom (even if you don't think I've correctly applied it in the preceding paragraph)? Or is it really okay to judge men more or less favorably depending upon their social distance from yourself? Figuratively speaking, if your brother wronged another, would you protect him from the consequences? If another acted against your brother, would you consider that in itself a wrong, without investigating what your brother may have done to provoke that response? Is it truly acceptable that US contractors, when found guilty of crimes, are simply transferred back to America, while an Iraqi or Afghani that is too slow to obey orders barked by soldiers can be shot on site often with little consequences? Is it okay that a policeman need only claim he was "scared" to get away with shooting a dog, let alone a man, but that the average person is often denied even the right to carry a weapon... and that regardless of the outcome, a policeman may not generally be prosecuted for his crimes, but only "disciplined"?

I am actively requesting feedback on this one. Is moral equality axiomatic for you? Do you have a deeper reasoning for it? Or do you regard moral equality as a falsehood? What do you propose in its place? Why?

Gold: Theoretical Nexus between Austrian and Geoist Economics

Lately, I've been paying a lot of attention to the work of Dr. Michael Hudson, whom I discovered via his many interviews on Guns and Butter, a radio show I used to listen to regularly via KFCF. (It's a shame my newly local WPFW doesn't carry that show.) A theory that is somewhat new to me that I've encountered via his work concerns taxation as the source of money value. Initially odious to a libertarian thinker like myself, some thought about the role gold typically plays has lead me to believe there might be some truth to the notion.

I wish I could point you to a definitive page outlining this theory. I'm pretty sure it's at least related to the Fiscal Theory of Price Level (the wikipedia article could use some development, but it's the best introductory link I could find, the others being equation-heavy and highly technical papers from various Federal Reserve Banks). But the basic idea I'm so recently exposed to is that money derives its value from the demand for it created by its acceptance to satisfy tax liabilities.

This contrasts with the theory I'm most accustomed to, which is a simple question of supply and demand with its utility being a question of its durability, divisibility, and scarcity, and general acceptance in payment for other goods. Durability: How long can it be stored before it degrades? Divisibility: Can I make change? Scarcity: How much value can I store in how little space? Acceptance: Will anybody care that I have this? Gold fits all four of these. It doesn't generally oxidize, nor does it shatter, you can divide it down to tiny grains without reducing its "goldness" one bit, it is rare enough that one could potentially buy, for example, a car, for an amount of gold that could be carried in a small sack. So then the question arises: where does its initial demand come from? Why would anybody want gold?

The answer is obvious: the stuff looks good, and unlike other things that look like gold but aren't, it will continue to look good pretty well indefinitely. It makes an excellent decoration. There is always somebody who is willing to accept it in payment. The question then becomes: who? And in payment for what?

The short answer is "the rich", the richer the person is, the more gold they are (were?) likely to make use of, relative to their use of everything else. A middle class person might hold a few important pieces of jewelry (such as a wedding band), but a rich person might have many otherwise common items either constructred from or plated with gold. In other words, he'll use more. But who is likely to be rich?

These days, we like to focus on the successful entrepreneur: the Bill Gates' of the world. And yes, it is true that the richest tend to be those whose efforts have produced new tools, products, processes, and so on. But this has not always been the case historically, and even today, below the super rich "new money" types you have "old money", who largely collect their wealth in the form of rents.

"Rent" is nothing more than money received for access to an opportunity or good in excess of the resources actually needed to enable access to it in the first place. Land is the primary example, the cost of making it available being the cost of securing exclusive access (basically the protection of capital improvements against thieves, vandals, etc.), and economic rent being the amount actually received in exchange for access minus that cost. Those who are in the business of collecting rents will tend to be richer than those who pay them, and those who are rich by other means will tend to "invest" their newly earned wealth in rent collecting opportunities (adding their descendants to the existing aristocracy).

We now have a reason gold is always acceptable in payment for goods: it is always acceptable in payment for rent, due to the fact that the rent collectors are also the ones who have the most use for gold other than as a medium of exchange. If the gold supply becomes excessive (as can happen after a large discovery), the rent-collecting class will tend to absorb the excess in the form of luxary goods. This, then, ensures that there is always a demand for gold, making it acceptable at nearly all levels of society as a medium of exchange. You can't eat gold, but you can pay rent with it.

If one considers rent to be a "tax" of sorts (and I do), then what you have is gold satisfying the "tax value" theory of money value (or whatever its called), and it does so naturally, without the intervention of legislative declaration, monetary "policy", or even a functioning government.

Oil Supply: Is War the Answer?

I recently read a fictional scenario in which two countries were engaged in a war over disputed territory... which had oil under it. This border had been disputed for years, and in the latest round of border skirmishes, one had seized the oil territory from the other. This region was a major exporter to the US up until this point, and as a result of the conflict, the price of oil had risen 30% or so. It was part of a survey, and was followed up with a lot of questions about my opinion as to whether the US should send troops, why, the aftermath of a conflict, etc. It got me thinking.

My first thought is this: oil prices are rising? Oh noes. Big fucking deal. Yeah, it cuts into our standard of living... but violence for raising or maintaining a standard of living has another name when done at the individual level: theft. Its their dispute, the dispute is probably the result of an incorrectly drawn colonial border (and colonial borders cannot but be incorrectly drawn), and so probably the two sides need to figure out where exactly it should be, if anywhere. Such matters are often decided via warfare, unfortunately, and the US sending troops is not going to help them with that question, in the long run.

But what about the oil? Wouldn't the world be better off if this oil were available? And when an oil rich region is in a state of perpetual conflict, wouldn't it be better if someone brought an end to that conflict, making this resource available for extraction? I'm going to analyze the probable effects of leaving the conflict alone.

First, the higher prices remain at that level in the short term, and no signals are sent that the supply from this region is going to resume at any point in the near future. This higher price does curtail consumption, potentially impacting the standards of living of everybody dependent on oil, but it also stimulates production. First off, the potential profits of resuming production in the war torn region can tempt both governments to working out some arrangement by which production can resume. If not, they miss an opportunity, which is taken by others.

These others include other oil producing regions that are inhabited by people that do not engage in warfare every decade or so. In the short term, they reap greater profits due to the higher price. In the long term, these profits make available and/or attract additional capital into oil production. The result: the war torn region no longer has as great an opportunity for profits in oil production. Peace is rewarded; war is penalized; the market is the mechanism by which this occurs.... naturally.

Additionally, in that same long term period, it isn't oil that is needed specifically, but energy generally. The higher price of oil results in profits not only for oil producers, but for energy producers of all sorts. This would stimulate investment in non-oil energy sources, such as coal, solar, biomass, hydroelectric and wind, and possibly things most of us haven't even imagined yet.

Thus, the end result of non-intervention:

1. More oil produced in peaceful regions.
2. Less oil revenues available to the belligerents in question, and thus reduced capacity for violence.
3. More energy from non-oil sources.

All of this, not from expensive government programs, but from our government refraining from action. Thus, we have a #4:

4. Less loss of life for US soldiers, lower taxes, lower public debt, a better national reputation, etc.

Honestly, I count only positives in this scenario, and absolutely no negatives, not in the "common good" sense, at any rate. There are certainly people who lose out in this scenario, and I can even accept a demand that the attacking side reimburse those among our fellow citizens who had property destroyed in the conflict (oil rigs, wells, etc.).

Applied Liberty Theory: The Morality of Land Property

This is just the most recent post in a thread I've been participating in at the forums on mises.org. It began with a discussion about "Scandinavian Socialism" and how, in many respects, they actually have a freer market than we do here in the United States. (The consensus seems to be that they allow considerably greater freedom... but also have very, very high taxes.) But there was one person who pointed this out, declaring that "social democracy" isn't anticapitalistic, but just a different approach to the same free market principle. Others attacked him, basically painting him red.

I decided to point out that many of the results a statist "liberal" (in the American sense) decries is potentially not the result of natural market functions, but rather various programs designed to redistribute wealth from producers to various representatives of the State, including an inflationary currency, tax fueled subsidies and politically favored contracting, a public debt which funnels tax dollars to those who are able to finance the government... and I even threw in a bit about unjust land distribution, which threw off one of the readers. I expanded on the other three, and dimissed that fourth bit, and, well, you can see the remainder below.

wilderness:

DASawyer:

(except the economic rent part, which I just threw in to see if anyone bit).

See, you threw that in and you cloud the whole perspective of what you're trying to say.

Actually, it doesn't really cloud it at all, except to the extent that the idea it rests upon an idea alien to most libertarians (actually, people in general) and even threatening to absolute believers in property rights... when misunderstood, that is. But when it comes to the concerns of more lefty-types (who are more concerned with ends than means), it is another area in which the failure to adopt the princples of liberty results in the very situation egalitarian statists decry.

So far as I can see, Libertarians accept the "homestead" model of property in land. If someone is already using it, and another's activities negatively impacts that use, that is a violation. However, if another's use does not impact that homesteaded prior use, it is not a violation. Thus, in a rural setting, the fact that a farmer has corn in the field does not preclude a hunter from shooting deer in it (so long as he doesn't damage the stalks). The fact that a vinter has grapes in the vineyard does not preclude a man walking through the rows to get to the other side. The fact that a man has a little ribbon of land he paved over and calls a "private road" does not preclude the chicken from crossing it... assuming the chicken does not disrupt the flow of traffic on his way to the other side.

However, property in land in this country does NOT operate under this model. Our land "property" is establishhed not by homesteading, but rather from the extension of the State's claim to absolute dominion. This is the case whether you have a king parceling it out to his most trusted vassals in exchange for service, or a republican executive parceling it out to the highest bidder, regardless of whether that highest bidder actually intends to occupy it... or even to land which is parceled out on the basis on a "homestead act"; even if it is an attempt to most closely approximate a natural right to land, it stil rests upon the principle that the source of claims is not the right of the individual, but rather the dominion of the State. The State's claim rests not on homesteading, but on conquest.

The result is that you have a society that has those who, by virtue of their service to the state (or more likely their compensation of others who served at some point in the distant past), collect economic rent from those who have not. It is difficult to see, since the distribution of land "titles" in our society is a wide continuum, defying anything like "class analysis". Additionally the common use of the word "rent" refers not to a division of wealth tied to land, but rather to any payment for temporary use of any kind of property... confusing the issue in the mind of the layman. But is is real, and a means by which those more favored by the state collect wealth they did not produce from those who did... another fashion in which the State messes with the distribution of wealth for its own benefit, contributing to precisely the conditions that the statist "liberal" seeks to solve via the power of the state.

Consumer Time Preference Part Two

Last week I described the nature of consumer time preference in terms of a primitive economy. Today I shall discuss how consumer time preference is regulated in a more fully developed economy.

The key feature of a highly developed economy is the specialization of labor: nobody does everything himself, but rather does one thing very well, in exchange for everyone else doing their one thing very well. A well developed financial sector allows the division of one more economic function: waiting.

For that's what a saver does on behalf of a borrower: he waits, so the borrower doesn't have to. He can forgo leisure and consumption now for the sake of a better tomorrow, without knowing the exact details of how that future comes about. All he needs to know is how much another will pay him for the use of his savings today, and whether that potential borrower is trustworthy.

A civilization which has a higher time preference will have more borrowers than savers. This will result in a high interest rate, rewarding the few people who have a lower time preference, and ensuring that the extra resources made available by savers go only to the most potentially productive borrowers, limiting the impact of that overall high time preference upon the overall standard of living.

A civilization with a lower time preference will tend to have more savers than borrowers, resulting in a lower interest rate. The more effective the entrepreneurs that arise in that society, the higher the interest rate will be... but if the opportunities for innovation are more limited, the interest rate will fall, telling savers that it may be time to spend. Their time preference being low, they are more likely to spend that money on things like education... thus potentially increasing future innovations.

Thus, an unregulated interest rate does precisely what needs to be done: it shapes consumer time preference, rewarding those with lower time preference when overall time preference is high, and signaling when its time for people to take the cause of progress into their own hands.

"Consumer Time Preference"

The three words above sound like some forebodingly complex economic term... but what it means is really quite simple. An individuals "time preference" simply refers to how patient one is, whether one is willing to wait through hard work to reach a better result, or whether one is impatient and demands pleasure and leisure NOW, and damn the future. The later is an attitude many commentators decry about Americans in general. In economic jargon, the level of "consumer time preference" in America is very high.

What does this means? Imagine some kind of small community, living on a temperete island with about a hundred people, cut off from the world. Their future prospects are very dependent upon the level of "consumer time preference" found within the community. If they spend spring and summer just taking what food is available from the local environment, eating and wasting it all, saving nothing for later, when winter comes, there will be no food (or at least, not any food that doesn't come without extreme hardship). They will starve to death. If, however, they work a little harder, consume a little less, storing up preserved foods, when winter comes, they will have more and better to eat.

Even if the island is tropical, their future prospects are still dependent upon time preference. If they work to create a store of goods to draw upon, tools and structures to make living easier and more pleasant, in exchange for hard work earlier, they will have a more pleasant life later. If all they do is lounge about on the beach, eating what comes their way, they'll just have to suffer through the gaps in the food supply, and won't have good shelter against the occasional tropical storm. Time preference is important.

What is true of the small, aboriginal community (which can only advance beyond the aboriginal state by thinking beyond a single year), is also true of a civilized, industrial community. If people are willing to wait for the larger, more efficient factory, their future quality of life will be better, with consumer goods made more efficiently (and thus consumers paying lower prices and able to buy more of everything). If they're not, prices remain high.

It's worse is if a generation arises which has a lower aggregate consumer time preference than the previous one. Such a generation might neglect the maintenance of the large factory (prefering to be lazy and just let things fall apart than maintaining a high standard of quality) and actually reverse the community's standard of living. An industrial community has much farther to fall than an aboriginal one: they can spend considerable time consuming their capital structure before their standard of living falls as a result. An aboriginal community that neglects its minimal capital structure feels hardship rather quickly, a much swifter correction.

(A good way to imagine this at a very low level is to envision how one keeps his house. A clean, organized house is both more pleasant, and easier to navigate. Its easier to find things. It's less likely to have actual sanitation issues. It is evidence of a low time preference: the inhabitants are willing to spend their time now so they might enjoy the benefits of a clean house in the future. A high time preference person would rather goof around now and deal with the consequences later, even if it means he spends more time overall looking for things. Anyone who sees the way I keep my living space can see that, personally, I am a very high time preference kind of guy.)

Is consumer time preference something that can be shaped? Can a community which displays a low time preference be made to change for the better? Or is it purely random, or even static? Can it be measured? If it can be changed, I would imagine the method would involve some sort of encouragement or reward for those who have low time preferences (and thus are building the community up), perhaps some sort of penalty for those whose high time preference potentially erodes the community.

This is long enough for one entry, so I'll continue next week, with the shape of an institution that does, in fact, reward low time preference and offer a measure of a community's overall time preference.

The Ascetic Virtue

I'm not really sure how to introduce this one, so I'll just jump right into it.

People who are accustomed to being well served by the system, will generally think there is nothing wrong with it. Systems of longer term stability will generally be the ones that allow thinkers to profit from their ability, and will thus tend to be well regarded by intellectuals. The people at the margin, those who are on the line between struggling to survive and outright disenfranchisement, will tend to be those least equipped to criticize the system in a productive fashion. However, a society which embraces asceticism as a form of virtue will have respected intellectuals on the economic margin, as well.

A society that serves and is served well by its intellectuals may tend to ignore potentially alarming trends at the margin. An increase in the number of potentially disaffected people may be ignored until it is too late, resulting in revolution. However, a society with a respected class of ascetic intellectuals will have a source of information about the condition of people on the margin, and, more importantly, potential ideas as to how the situation comes about, and thus be more likely to periodically reform in response to developing injustices, thus pushing the margin out, creating a more inclusive society.

Thus, a society which has asceticism as a core value will tend to have greater long term stability than one that does not, providing a potential socio-evolutionary explanation for why asceticism seems to crop up so often in successful systems of thought.

(The name of this post is a shout-out to fellow players of Sid Meyer's Alpha Centauri.)

Notes from the train

I finished reading Prophet of Innovation during my train ride, and thumb-typed the following on the way:

I am starting to understand the fourth division of the factors of production: entrepreneurship. While the other three are necessary for the continuation of existing productive structures, the creation of new ones requires the entrepreneur, and successful entrepreneurship is rewarded by profits. The rewards of capital are necessary for the maintenance of capital, the rewards of labor maintain labor. Potential profits are the spur of innovation, and actual profits are evidence of success.

The rewards of land, on the other hand, maintain nothing, and it is from there that the funds of mischief can be found, and it is there that public funds can be safely and justly appropriated.

When I was taking economics classes, I was surprised to learn that my teachers spoke not of three factors of production, but four, with the additional one being "entrepreneurship", "profit" being the name for that particular revenue stream. I wondered: what differentiates "entrepreneurship" from other forms of labor (which can take both physical and mental forms) that it gets its own category? Sure, the entrepreneur's "wage" is more dependent on the success or failure of a business than the hourly or salaried worker, but that's no different than the independent laborer who works directly with marginal land.

But according to Schumpter (or at least, according to his biographer) the entrepreneur isn't just any businessman, and economic profit isn't just any revenue stream. It's an exceptional revenue stream, the result of being among the first to engage in some vital new enterprise. It's a huge, but temporary revenue stream, a sudden reward for innovation that dwindles as competitors enter the market. The entrepreneur doesn't make changes that modestly improves efficiency; he introduces new products, services, and modes of business organization that alter the landscape, people's ways of life, in fundamental (and in the long term, highly beneficial) ways.

Land, Labor, and Capital were the only terms needed by the early economists, before the art of finance matured to the level where the entrepreneur and the financier could be separate entities: banks make loans to entrepreneurs so they can try their ideas. The banks then collect interest (which is most likely the sum of the rewards of both capital and land), or they lose the money if the entrepreneur defaults. But if the entrepreneur is correct, revenues can greatly exceed labor costs and bank obligations (including the opportunity cost of working for himself instead of someone else)... and the entrepreneur himself collects a tidy sum, which is rightly called "profit".

This was a new phenomenon when economics got its start, and I think Joseph Schumpter is recognized as the first economist to formally recognize the role of the entrepreneur in the capitalist economy. Wages, interest, rent: these provide for the maintenance of the status quo. But profit: that is what spurs men to wrack their brains and work ridiculously long hours in an effort to do what none have done before. The freedom to do this, and to reap the rewards, is the thing that makes a national economy great.

In Defense of Savings: Credit Card Cancer by Peter Schiff

Peter Schiff has written an article on the subject of savings and credit which expresses similar sentiments to what I have been posting over the past few months, so I thought I'd link it here. He simply makes the point that, contrary to what the economists our politicians are currently listening to seem to say, credit is not the bedrock of a healthy economy; savings is. Without savings, credit cannot be extended. What this means is that if one is relying upon an open line of credit (a credit card) as one's supply of emergency funds, those emergency funds will not be available when one needs it most: during a recession. Savings, however, would be, and can continue to serve as the base for the extension of credit.

I'll have been on a train for three days by the time I would normally post, so that's all I've got for this week.

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McCulloch vs. Maryland: The Anti Magna Carta

I just finished reading William Norman Grigg's latest article over at Lewrockwell.com, The Martial Law Mind-Set. It basically details a number of incidents of assault and murder by policemen in response not to any actual criminal activity, but rather to simple insistence on the part of citizens that they be treated as citizens and free men, rather than simply cringing in servile obedience. It includes a number of contemporary examples, and one ancient one: the murder of Archimedes by an occupying Roman soldier... making the point that many policemen today are behaving much more like an occupying army under a condition of martial law, than as peace officers.

The thing that got me thinking was the idea that policemen may never be prosecuted as individuals. They are generally subject only to departmental discipline, and otherwise above the law... not subject to it... at least when they are on duty and in uniform. The theory behind this, in its basest expression, is that a man acting in the name of the State is not subject to the law, but rather IS the law.

This is far from the ideal, derived from ancient English tradition, that all, even the King himself, are subject to the law. This ideal is best known, to me, through the myths of King Arthur. The best historical expression that I am aware of, perhaps the starting point, is the Magna Carta. Signed at swordpoint by a defeated king, it was the first document detailing certain rights which have survived to this day, including the right of Habeas Corpus. Also included was an explicit declaration that the King is subject to the law, and it even established a procedure for a particular group of barons to take matters into their own hands should the King violate the law. This portion was repudiated at the time, but it indicates the trend of the day, which continued for a very long period of the history of English speaking peoples.

Then came McCulloch vs. Maryland. The State of Maryland attempted to levy a tax on all banks not chartered by the Maryland legislature, including the then new Second Bank of the United States, which had opened a branch in Baltimore, Maryland. McCulloch was the head of the Baltimore branch, and refused to pay the tax on the grounds that institutions established by Congress are immune to State laws. All Maryland's state courts sided with Maryland, until the Supreme Court overturned it on appeal, establishing the principle that the United States Government was supreme. Nobody acting on behalf or the United States Government could be held subject to the law of the several states in any fashion that could be construed as interfering with the actions of the United States. The Court chose the position of the Bank, which the Constitution did not authorize, rather than the States, which the ninth and tenth amendments stated were to be deferred to in all matters not explicitly delegated to the Federal government.

True, this governed only the relationship between the two levels of government. However, it established a principle: our community is not a community of equals, but of higher and lower. The higher are those blessed by their association with the State, exclusively represented by the United States Government (and increasingly by the President alone). The lower is everyone else, and wherever their interests clash, higher must always defer to lower. State governments are subject to their federal superior; ordinary citizens must submit, without complaint or caveat, to those who serve the United States.

I'm not sure if I have a point in this. I simply found the comparison of the two events interesting, representative of two incompatible principles. It was Grigg's article that got me thinking about this.

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Interest Rate Manipulation: Insights From Joseph Schumpter

About a week ago, I finished reading Progress and Poverty, and started up a biography called Prohpet of Innovation: Joseph Schumpeter and Creative Destruction, by Thomas K. McGraw. It's a very enjoyable read. Schumpeter himself, as told by McGraw, is turning out to be a very interesting character. Even better, some of the description of his intellectual influence upon the field of economics is cluing me in to some of the logic behind interest rate manipulation in the interest of economic progress. I've barely begun to read (I'm only on the sixth chapter or so), but it has inspired me to tackle this issue from another angle. I don't know, yet, if it is Schumpeter's angle, but it may be a good one, nonetheless.

Schumpeter, apparently, was the first to effectively make the point that the proper pricing for a product is not necessarily based upon the average cost per unit, but rather upon the marginal cost. The idea is that if one charges the marginal cost, the low price will result in increased demand, meaning that, in the long run, one who charges the marginal cost will make a better profit.

Say you're a kid with a lemonade stand. You plan to make fifty glasses of lemonade. It will cost you $40 (totally arbitrary number out of a hat) to produce those fifty glasses. Average cost is $20/50 glasses, or $0.40. Fifty cents is a nice round number, and gives you a small profit over the average cost.

However, you could make one more glass of lemonade for, say, ten cents. This is because, once you've bought your equipment (your table, sign, lemon squeezer, pitchers, etc?), you don't have to buy it again (economy of scale). According to Schumpeter, you'd do better to base your price off that ten cent marginal cost, than the fourty cent average cost. You take a loss in the short run, but in the long run, people come running for the cheap lemonade, and you end up selling hundreds or thousands of glasses at a larger total profit than you would have sold the fifty around average cost.

However, the businessman who prices in this manner must be able, somehow, to cover the losses on those initial units. He has to start off in the hole... and this requires financing. The lower the interest rate he's offered, the more likely he is to to enact such a plan. A plan of this sort is very good: the entrepreneur makes a profit, and lots of people get a desired product much cheaper than they used to. Resources are being used more efficiently. Everybody wins.

If lower interest rates induce entrepreneurs to innovate, lower interest rates are automatically better, right? John McCain was correct to wish the interest rate would go to zero, right? Not really. Associating low interest rates with innovation, then deciding that it causes the innovation by itself, is, I think, an example of post hoc ergo proctor hoc. It's a bit like the modern economics equivalent of a cargo cult: planes with gifts land on airstrips, therefore we can cause such planes to land on our island by building an airstrip.

Returning to our hypothetical lemonade stand kid, imagine if he established his stand in the middle of winder. Imagine if he established it in the depths of an industrial recession, amid people poor enough they'd rather drink fetid water than pay ten cents a glass. Imagine if he established it in the middle of a sparsely populated desert (sure, folks are thirsty, but there aren't many customers out there). Imagine if he spent hundreds, thousands, millions of dollars on equipment that would bring his marginal costs down to one cent per glass at a certain level of production... and not enough people showed up even to cover his fixed costs. With a zero percent interest rate, he could try... but he could not succeed unless economic conditions were such that people were "ready" for this particular innovation.

This is particularly true for new products that customers don't know enough about to know whether they want one or not.

It isn't enough for the entrepreneur to establish a new productive process; his potential customers must be in a position to buy. A whole host of factors go into this: their current perceived financial security, their attitude regarding novel products, the marginal utility of the new product as compared to their existing stock of wealth, the number of competing new products, and so on. While lemonade stand kid could easily figure this out through simple observation, for larger scale production the information necessary to appraise the likelyhood of customer acceptance is much more difficult to come by.

However, there is one piece of information that reflects conditions better than any other, and it is very easy to find: the interest rate. The interest rate is the price of borrowing money: the intersection between the supply and demand curve for loanable funds. When these curves are not interfered with by government action, they accurately transmit the necessary information to the entrepreneur.

The supply curve indicates, most basically, the aggregate savings rate of all the individuals in a given society, and how available those funds are for loan. (If they're not available for loan, this savings rate expresses itself in lower factor prices, which can work nearly as well, I think.) It indicates a willingness on the part of people to contribute to production without immediately consuming the results, which is necessary for the establishment of new capital. It also indicates how financially secure people might feel, and how much people might be willing to spend on new products (the wealth effect).

The demand curve, on the other hand, telegraphs just how much competition there is for the available loanable funds, and therefore the available resources they represent. If there's a load of new construction, innovation, consumption, and such already happening, there isn't much left in the way of resources to divert to yet more new production. Divert more, and you end up diverting it from basic necessities. It's a bit like a new colony full of people who spend the summer digging for gold, and enter the winter with little to no food stores. What it is actually, is what we call the business cycle: a burst of activity and optimism, followed by sudden disaster.

These two numbers set a barrier of sorts to innovation, which is higher or lower depending upon the conditions. A higher rate might indicate either a society not receptive to trying out new things; or a society that is quite ready, but also with a great deal of competition as to who is going to do the innovation. Either way, the high barrier dissuedes new entrepreneurs from entering the fray, diverting their abilities to safer efforts. A low rate definitely indicates a consumer base that is ready for new products and factors of production available for use in the production of such, and possibly a dearth of entrepreneurs... assuming the supply curve isn't being manipulated by dishonest banking practices, nor the demand curve by excessive borrowing by the government.

In other words, low interest rates don't cause progress. They merely indicate that conditions are ripe for progress, and invite the would-be entrepreneur to try his hand. Artificially low interest rates, the result of an inflationary monetary policy, trick the would-be entrepreneur into innovating at a time when the economy is not yet ready for it. The naturally high rates that result from such conditions would encourage consumers to cut their consumption, thus preparing the ground for future innovation.

Public Resources Corporation?

Heh, it was only a few days ago I was looking at my old posts on this subject and was like, "PRC? Where have I seen that before? Oh, right. Doh!" Totally not intended.

My previous, most radical suggestion is that there should be some entity that collects the rent, and only the rent, and then turns around and distributes it back to the People on a roughly one-to-one basis. This was designed to satisfy my desire for economic justice, my distrust of the state in whatever form, and, let's face it, my desire to justify personally living on the government dole, in some fashion. I've called the position "market geoanarchism".

It also included (tentatively) an elaborate scheme in which each individual at the time of institution was given a share (like corporate stock, only with some extra restrictions), which was then passed down and divided through the generations. This was initially included to satisfy what remained of my faith in Thomas Malthus' ideas regarding population growth, and then retained to render my ideas palatable both to others who still believe in these ideas (who would like the aspect of the plan that penalizes having large families), and to nationalists (who would like the consequence that only existing citizens and their children could take part in the system). It would also appeal to family-centered types, since, after that first generation, the shares would largely be concentrated in society's oldest members.

As I said before, I am re-reading Progress and Poverty; I'm nearly finished. On this re-read, I realize how much of this elaborate scheme of mine, while it rests upon Henry George's ideals, it is also shaped by the assumptions he spends a considerable amount of time debunking... effectively, I might add. However, what follows are not his musings, but my own.

My desire for economic justice has always been hampered by my mistrust for the packages in which it so often comes. I am not a Communist, a Socialist, or any other kind of "ist" which calls for the enslavement of all to all (or rather, the oligarchs that represent the "all"). I grew up thinking I would be a Republican. I had in me the notion that poverty was caused, not by any kind of injustice, but by indolence, sloth, stupidity—all manner of vice. The rich were rich because they deserved it; the same with the poor. The size of the gap between the richest and the poorest bothered me... but if that was the result of the operation of a free market, who am I to argue?

Of course, our market is not free, and even some of the institutions people assume are a necessary part of a free market are neither necessary nor just... which Henry George has helped me to see.

Then there is my mistrust of the State. It begins with the dawning recognition of stupidity on the part of representatives and bureaucrats that anyone who is paying attention must see, moves on through the recognition of the fact that our "democracy" is not. Then I hear the complaints about "too much money" in politics. The rich purchase the government, and then use it to trod upon the poor... mostly the poor of other countries, but here, as well. Then there are the government schools I attended as a child... only one out of the three was actually decent. The environment in which I grew up colors my view of the state as an only somewhat mitigated evil.

However, there is a second feature of the single tax system I had missed is that, not only does it free the laborer and the capitalist from the burden of all manner of taxes in addition to the rent they must in any case pay (income, payroll, capital gains, tariffs and excises, not to mention the bookkeeping necessary to keep all these straight); it also siphons off for public use that excess, unearned wealth which is currently used for the monopolization of mass communications (among other purposes). Those who justly earn their money would, of course, still be able to use their money to influence a democratic process... but the increasingly oligarchic character of this competition for airtime would be shattered. With wages and interest up and the revenues of land ownership in the hands of a democratically shaped government, the tendency of democratic forms to produce oligarchic results would be greatly lessened. Perhaps we could trust such a government.

As to my desire to live on the dole... well, I guess not. A good part of my goal was to see the money that presently makes oligarchs and dilettantes out of a small portion of the people spread among the whole population, with the belief that it would only produce a whole population of dilettantes when the day came that producing wealth was so easy that a very few could produce the material needs of an entire population, voluntarily. (Star Trekonomics, I called it.) A democratic government could still decide to distribute their funds that way... but it doesn't necessarily have to be that way.

The agrarian equivalent, an even distribution of agricultural lands with free public access to woodlands and pasture, still requires the people to work to get what they want from that land. To simply distribute land rent among the population would likely have every bit as much of a checking effect upon progress and productivity as the current waste of resources engaged in continual efforts to overthrow the oligarchy, and the counter to those efforts... whether it be the enormous resources poured into mass media to decide elections in this country, or the extraordinary wastes of life and wealth in other countries. It wouldn't be as bad as conventional socialism, which either pays people to be poor (my system would have continued paying regardless of how much money you actually earned) or takes not only the rent, but the whole reward of labor; but there would still be plenty of people who would take the opportunity to be lazy... like me. ^.^'

Finally, there is Malthusianism. I no longer believe that there can be such a thing as "too many people". Malthusianism rests upon the idea that the cause of poverty is simply too many people to too few resources. However, George's investigation of three cases generally thought to be poverty resulting from population pressure (China, India, Ireland) were, in fact, cases of poverty caused by rapaciously unjust regimes, with lower population densities than those seen in England and Western Europe. The problem was not that the land was incapable of supporting the population, but that no accumulation of capital was allowed... since any savings would quickly be taken away by the authorities. Without savings, any bad harvest becomes a humanitarian disaster, and no production enhancement can occur.

I'm pretty sure this principle is universal: poverty, even mass starvation, is the result not of "population pressure" but the mass theft that is the complex of taxes and rents (if not outright rampant banditry) that afflicts any advanced society. As it is so often said, the problem with world hunger isn't production, but distribution. There's plenty of food, even more could be produced, and with more people comes an ever greater variety of products and services. Production is not insufficient, but is rather diverted to both the service of and the opposition to an oligarchy.

Thus, there is no need to regulate population by any means. Opportunity costs relative to the bearing and raising of children increase as wealth increases. This keeps population in check quite well (evidenced by the fact that the richer the family or society, the lower the birthrate, generally speaking)... and there is no justice in penalizing the descendants of those increasingly few that do keep the population up. In addition, treating it as stock with all kinds of special restrictions on who can buy and sell and when to prevent the accumulation of the stock in an aristocracy simply complicates the plan unnecessarily. Thus, the hereditary stock portion of the plan is both unnecessary and undesirable.

Additionally, I see no reason to disenfranchise the young in an effort to artificially buttress the authority of elders. In an earlier stage of society, the eldest may lead, but the land belongs to the whole family or clan... not to the individual. I would still include a mechanism by which a group as small as a family could (temporarily?) secede from the centralized system, to allow for other public services to other subgroups... but i no longer feel the need to have membership determined by heredity.

This leads me to the nationalist aspect. The nature of the single tax ensures that everybody living in the country is contributing to the system (since no production can occur in a mature economy without a portion of that production being distributed out via rent), which means that the specter of the "illegal immigrant" who mooches off public services while paying no tax is eliminated. To work requires access to land, and to access land is to be taxed... period (whether or not the government is collecting this tax). The only question that remains is who is allowed to vote... and that, I think, can be safely delegated to the legislature, provided the initial enfranchisement is broadly constructed on the ideal of universal suffrage. With both oligarch and pauper reduced if not eliminated, legislative power becomes considerably safer.

In other words, I'm pretty much scrapping most of the ideas for the Public Resources Corporation.

Weekly Ramble Greatest Hits

Right now, I'm going through my old posts looking for something specific to refer to in a new post... and as I do, I'm discovering ones I'm enjoying reading. I figure now is as good a time as any to link what I consider to be my own "hall of fame;" or rather, posts I do not feel embarrassed about when I re-read them. So I guess I'll link them here:

• RE: Salon's Psychoanalysis of Libertarians
• Hillary Clinton Comes to Fresno
• Eternal Sonata - Free Liberal RPG
• I Know an Old Lady
• The Fall of Santiago - I love when I find an excuse to refer to video games ;)
• Loyalty Day - Primarily because the phenomenon it exposes is so darned bizarre
• Liberalism
• On Readiness for War - I was trying not to include any long ones in this list, but this one is too good not to.
• Santa Claus, Atheist Myth - I really wish I knew where to put this. I'd love to start a flamewar over this.
• Legality and Morality - Primarily because it's the post that helped me find Cranky Weasel.
• The Garden of Eden - An example of Daniel Quinn influenced thinking
• The Urban Archipelago - Probably the most in conformity with the new theme for this blog; an appeal from a libertarian to liberals stinging from the wounds inflicted by neoconservativism

I can't help but notice that I get the most comments from people I don't know in resp0nses to posts in which I advocate the public collection and distribution of rents. That's a good sign, I think.

Saving Part 4: The Federal Reserve System

The stated purpose of the Federal Reserve is to prevent industrial depression. It does so not by sober management of the supply of money and credit, but rather by allowing the inflationary boom to occur, and then attempting to prevent the resulting deflation by shoveling new money into the economy faster than it can disappear. In doing so, it transfers wealth from those who have earned it to a few favored parties who are "at the spigot" so to speak.

There are three basic ways the Fed increases the money supply.

It is most commonly done through the purchase of government securities: Treasury notes, that is. Banks may find themselves unable to lend due to the fact that previous lenders are defaulting on their loans... and the assets forfeited are not worth as much as it was appraised to be when the loan was first made. This is the problem the banking industry found itself in when house prices began to collapse: the economy began to slow, debtors walked away from their houses, which were worth significantly less than the loan at this point, and the banks no longer have sufficient reserves to open up new loans.

The Fed comes to the rescue by buying government securities (bonds) from the banks, thus giving the banks the liquidity needed to return to making loans. (Thus, banks are relieved of the duty of making sure their borrowers are people who can actually repay.) The money the Fed pays for the bonds does not come from any reserve they've been holding for such a purpose; rather, they simply declare it into existence. This is an increase in the money supply, which increases the wealth of the people who receive it before prices rise, at the expense of those who must pay the higher prices before they receive the new money.

The second way is to change the size of the reserves banks are required to keep on hand, enabling to make more loans against fewer deposits. The third is to lower the rate at which the Fed loans money directly to member banks. These two options were not used as often as the first under Alan Greenspan, though Bernake has made extensive use of both.

The first is of greatest interest to me because, in addition to increasing the money supply to the benefit of well connected speculators at the expense of the common man; it also enables the government to appropriate revenues indirectly through inflation. This is how it works:

The Treasury issues bonds to cover expenses in excess of tax receipts. Various private parties (as well as the central banks of other governments) purchase these. If the buyers hold these bonds, they receive payments of "interest" over time. This, in itself, represents a government transfer of wealth from the working class to the creditor class. It doesn't stop there, I think I'll stop here a moment to illustrate one of the consequences of a system like this.

The United States Treasury issues Treasury notes, and sells them to the general public. At the same time, trade is going on between the United States of America and the People's Republic of China. If they chose to do so, the Chinese could use those dollars to purchase goods exported from the United States. However, their government keeps the money for the most part, and their people are not in any position to demand a greater share of export revenues. At any rate, they have another option: They can use it to purchase Treasury Notes, and as a result, receive "interest" on those notes.

So you have the Chinese government, which returns US Dollars to the United States by way of the government, rather than in standard trade, creating what to the rest of us feels like a trade imbalance. On the one hand, poorly compensated Chinese workers send goods to the United States, but don't get as much in return as they could. On the other hand, American workers find industrial jobs migrating to China at a faster rate than would otherwise occur. So at the top of this scheme, you have the United States Government giving future American tax revenues to the Chinese Government in exchange for past Chinese tax revenues. (This is not to mention the rest of the world's creditor class, which subsists to a significant degree off tax revenues.) At the bottom, you have both American and Chinese laborers, both suffering a grave injustice.

But as I said before, it does not stop there. If this were the end of it, and they were borrowing the money that arises naturally from society, there would be a limit to how much can be borrowed. For the more the government borrowed against future tax revenues, the less that would be available for private businesses, with the interest rate rising in response to the government's contribution to the overall demand for loanable funds. This would slow economic growth, "crowding out" business finance in favor of government finance.

Thus, the Federal Reserve steps in to save the day, by inflating the supply of money and credit, artificially lowering the interest rate.

As I said before, they do this by purchasing government securities. So the circle is complete. The Treasury sells them to the general public. The Fed then buys them from the general public. The middleman, generally the Wall Street investment bank, obviously won't sell unless they're going to make out better than they otherwise would; thus, they make a "profit" off the exchange. And the the Federal Reserve Banks are required by law to return 3/4 of the interest they receive on government securities to the US Treasury... relieving the government of much of the interest they would otherwise have to pay.

Thus, new money is issued, with the Government getting to spend some of it, and the "investors" (or should I say "fences?") who act as middlemen between the Treasury and the Fed getting a cut, as well. Wealth is transferred to both parties, at the expense of everybody else. The second spenders, of course, are the government's workers and suppliers, who maintain corps of lobbyists to ensure they retain this privilege. Their workers and suppliers are the third spenders, benefiting less, until the money finally crosses the line into the hands of those who saw prices rise before they saw the new money come into their hands.

Hence, inflation IS a tax, which employs bankers and speculators as well paid tax collectors. It is also a highly regressive, as the poorest of workers also tend to be furthest from the government money spigot, while those who are closest, if they aren't already wealthy, will be pushed in that direction. And it occurred to me as I was writing this that, given the state of the US Dollar as the "World's Reserve Currency", nobody is further from the spigot than the poorest of the poor in a third world country. This dynamic may go far to explain third world poverty. I shall have to explore the issue further in the future.

New Name!

Rummaging around in my old posts, I ran across a name: Eugene Plawiuk. I decided to check out what he's been up to in the world of blogging, and (re?)discovered Carnival of Anarchy, a left anarchist site. It seems there's something going in in Greece, that has a lot of energy and little direction. But I was more interested in this post, in which Marja E briefly touched upon her journey from state socialism to more of a true anarchism, or "anhierarchical libertarianism." Stories like this make me happy. It tells me that we are, truly, aiming at similar ends; that it is merely the means and flavoring where we truly differ.

I've had an image in my mind for some time, a roughly two-dimensional political spectrum model with the usual "left" and "right", but circular, and inverted, like a Moebius Strip. Those who go far enough Right (like a Rothbardian conservative), or far enough Left (like an anarcho-syndicalist), find themselves, if they bother to look, occupying very similar territory. My image has us, who have journeyed to this point from Left and Right, unaware of our proximity since each of us stands on the opposite side of the strip (I may have to make an icon to show this). But if we would but look over the edge, we might see the other staring back, close enough to touch.

I am one who started out by journeying Right, along the path laid down by my fathers before me, both my physical father, and my political fathers... those we call the Founding Fathers. But the further right I went, the more I found myself in the company of others who journeyd from positions I once considered implacable enmities. Now I look over the edge to the side, and I call out to my fellow travlers... from the Dark Side of the Mobeius Strip.

Excerpt: Progress and Poverty

I am reading through Henry George's Progress and Poverty a second time, and am currently in the chapter in which he examines various proposed remedies to the problem of the expanding wealth gap and the extreme poverty of the lowest classes, pointing out their deficiencies. On passage in particular jumped out at me, since it tears down a current practice that many accept as an article of faith. In Book VI, Chapter 1, page 277:

As to the truths that are involved in socialistic ideas I shall have something to say hereafter; but it is evident that whatever savours of regulation and restriction is in itself bad, and should not be resorted to if any other mode of accomplishing the same end presents itself. For instance, to take one of the simplest and mildest of the class of measures I refer to—a graduated tax on incomes. The object at which it aims, the reduction or prevention of immense concentrations of wealth, is good; but this means involves the employment of a large number of officials clothed with inquisitorial powers; temptations to bribery, and perjury, and all other means of evasion, which beget a demoralisation of opinion, and put a premium upon unscrupulousness and a tax upon conscience; and, finally, just in proportion as the tax accomplishes its effect, a lessening in the incentive to the accumulation of wealth, which is one of the strong forces of industrial progress.

I just wanted to share that. Note that the work, itself, is not simply a bashing of socialism, but rather a book that examines the problem of the link between progress and increasing poverty, and ends by proposing a solution simpler, more economically sound, but also more radical than socialism.

Saving Part 3: The Banks

Last week, I asked, where does the new money come from? Where does the wealth it procures go? I'll start with something I think all agree is not a beneficial practice: outright counterfeiting.

It's simple: just print something which can pass for the things printed up at the US Bureau of Printing and Engraving, and then use it to buy stuff. Who loses? If it's a particularly bad forgery and they spend it in through particularly foolish marks, probably that first victim: this person then takes it to the grocery store or something, which uses their methods for detecting counterfeit bills, and they refuse to take it. The counterfeiter has conned only one person, and stolen from only that one person.

But there are very likely better counterfeiters whose creations might circulate through considerably more hands before they are discovered... if ever. No one person is defrauded in this case, though obviously, someone has been. In truth, everybody has been; the ill-gotten wealth is taken not from any individual particularly, but from the common stock of wealth generally. Every false bill that enters circulation withdraws something from this stock, without first adding anything to it. Every false bill that enters circulation makes everyone else just that much poorer.

Fact: the number of "dollars" circulating through the economy in one form or another (mostly electronic) increases over the long term, and it very rarely decreases in the short term. Where do the new dollars come from? In the following paragraphs, I will describe the mechanics of monetary expansion, and leave the judgment as to whether or not this is justified to the reader.

One agency that introduces new money is the banks. Banks are permitted by law to loan out more money than they have on deposit. The amount the bank must have either in their vault on on deposit with a Federal Reserve Bank is determined by the Federal Open Markets Committee, but for the purpose of this illustration I will assume a 10% reserve requirement. What this means is that if you deposit $100 at the bank, they are now allowed to loan out an additional $900. They do this by simply creating an account that says "I have $900 in me." There is, of course, only safe if the depositors do not attempt to withdraw more than 10% of the amount the bank owes them... which is what happened to IndyMac last July. There was a time when such a failure would destroy not only the bank, but the money the depositors thought they had. These days the FDIC, backed by tax dollars should they run out of money, ensures that the depositors do not lose their money.

Now, the banks' contribution to monetary expansion is not uniformly upward, but rather somewhat cyclical. Were it not for the business cycle (economic growth and recession), the money supply would grow, plateau, and then not grow any more. Who would benefit from this growth? The answer is that those who borrowed and spent money earlier in this growth would benefit more than those who borrowed and spent it later, with those not borrowing getting the shaft. Much like the counterfeiter, the early borrower gets to spend the money before knowledge of the existence of this new money is dispersed through the market... that is to say, before prices rise (or slow their decrease) in response to this new money being spent in. Unlike the counterfeiter, the borrower has to pay interest on this new money, and must pay it back, but he gets to spend it when it is worth more, and pay it back when it is worth less... meaning he gets more out of it than he puts back in. He gets it from later borrowers to a later extent, and non-borrowers to a greater extent. Additionally, the banks themselves get to collect another portion of the increased productivity that can result from additional investment in the form of interest, some of which goes to depositors, some of which goes to the bank's investors.

Note that this serves, during the increase, as an incentive to borrow and a disincentive to save.

The reality of the business cycle, however, ensures that the banks' contribution doesn't plateau, but rather cycles. During the boom, they lend out more money. During the recession, they concern themselves primarily with getting loans paid back, and are less inclined to loan (because people seem less likely to pay them back). And just as lending against a fractional reserve adds more money to the economy, that same loan being paid back removes it. So long as loans are being made and paid back at the same rate, the overall quantity of money does not increase. But the reality is that there are times when there is more lending than repayment (the boom), and times when there is more repayment than lending (the bust, or "recession"). (I won't be talking about the cause of the business cycle here, but for my preferred explanations google "Austrian Business Cycle Theory" and "Land Market Cycle".)

So our economy goes (or rather would go, if the Federal Reserve allowed it) through periods where the banks expand the money supply, and periods where they contract it. Those who exploit this system wisely can profit from increased money, and avoid the dropping prices that result from reduced money (as those who got out at the top of the recent housing boom did) at the expense of those to whom they sold it. It's rather like an exceptionally successful counterfeiting ring who manage to unload large quantities of exquisitely crafted fake money onto suckers, enjoy what they've already bought as everyone else's prices rise in response... then sell their stuff for real money right as the forgeries begin to to be discovered and removed, but before the prices begin to return to their original levels in response... and THEN buy yet again, at the lower prices.

These days, however, the money supply is rarely allowed to truly decrease (though money is continually injected into and removed from this speculative market or that as the fads change, causing volatile price changes over the short term... as was the case when the banks significantly loosened criteria for lending against real estate... and then suddenly tightened them again). The Federal Reserve System also has ways of manipulating the money supply, by manipulating the base against which the banks lend. And while, given a fixed base, the banks could theoretically plateau at a new level and never increase again; the Federal Reserve has ways to constantly increase the base... and does, to the benefit of a different set of parties.

The Federal Reserve's role will be next week's topic.