January 22, 2008

Free Markets

Cameron recently sent me an article entitled The Free Market Fairy by Joe Gregorio at BitWorking. Gregorio casts the Free Market as a mythical beast summoned by conservatives and classical liberals to solve any problem.

About the only thing that seems reasonable in this article is Gregorio's statement that I, Pencil by Leonard Read is a great introduction to the concepts and power of free markets.

Gregorio goes on in the next paragraph to claim: "the Free Market Fairy was the justification for taking a chainsaw to lending regulations in 2003 which precipitated the housing bubble, subsequent collapse, resultant credit crunch, and impending recession." Unfortunately, the Paul Krugman article he links to, while it mentions a chainsaw wielding event, neither names specific regulations, nor outlines how their elimination precipited the subprime market bomb. What Krugman does reveal that the event took place "on June 3, 2003 — just about the time subprime lending was starting to go wild". In other words, according to Gregorio's own source which he claims demonstrates that deregulation caused the subprime fiasco, Krugman reveals that subprime lending was already out of control. In fact there is reason to believe that some legislation, such as the "Community Reinvestment Act" and a long history of bailouts exacerbated subprime lending by requiring that banks lend to riskier people and providing a sense that if things went really wrong, the banks would be bailed out from their bad investments. Thus, by encouraging bad loans and minimizing the consequences of bad loans, the incentive to give bad loans increased.

As an aside, Krugman berates Greenspan:

"Mr. Greenspan dismissed as a “collectivist” myth the idea that businessmen, left to their own devices, “would attempt to sell unsafe food and drugs, fraudulent securities, and shoddy buildings.” On the contrary, he declared, “it is in the self-interest of every businessman to have a reputation for honest dealings and a quality product.”"

But of course, what Greenspan is saying is true in the long term. Business do sometimes rip-off their customers, which is why buyers need to be alert and not just accept everything businesses tell them. However, if a business routinely deceives its customers into buying bad products, the word will get out and that company will die. Which is precisely why the government should not bail out banks that made bad loans. Bailing out bad businesses only encourages those bad practices and keeps bad businesses alive. In other words, while it is not true that all businesses operating in a free market are angelic, it is true that market forces push them to make make good products and deal honestly with consumers.

Gregorio then goes on to say that the free market has been claimed as a solution to 4 problems: healthcare, education, global warming, and the free market. Because healthcare is the only situtation Gregorio even attempts to comment on at greater depth, I'll discuss it later. As for the other 3:

Free Market for Education

I see no reason why the free market is not an appropriate solution to education problems. As even Gregorio admits, the forces of a free market maximize cost effectiveness, that is quality per dollar. Part of the problem with the current system it has only limited incentives to be cost effective and provide quality. Because public schools are so much cheaper than private schools and almost everyone has to pay for them anyway (via taxes), they will always have a majority of our children. As such, public schools are not very accountable for their quality, as most parents are unwilling or can't afford to spend hundreds or thousands of extra dollars just to find higher quality. A free market education system would provide a more even playing field for all schools and allow parents to vote with their dollars much more effectively. Furthermore, if one wishes to add some government guarantee that all children get an education, subsidy vouchers can easily be introduced to the system.

Free Market for Global Warming

Although global warming is a bogus problem, as I have argued in previous articles ([1] [2] [3] [4]), it is interesting to note that later in his article, Gregorio extolls the free market as a worthy toll in the governments toolbox that works well in conjunction with some regulations. As far as I am aware, all supposed "solutions" to global warming that appeal to the free market are of this mold. For example, the Kyoto Protocol and John McCains "carbon credit" systems are essentially the establishment of an artificial, government made, carbon emissions market where a limited right to pollute can be bought and sold. A more libertarian solution also requires government regulation to work in tandem with a market system. This other solution recognizes that pollution is the off-loading of pollutants into a carrier (stream or atmosphere) which then carries the pollution into or through property owned by other citizens, who then have a right to sue for compensation, thus attaching a real cost to such dumping, providing incentives to minimize it. However, neither is seen as simply solved without government by some mystical free market force.

Free Market for Slavery?

Here, Gregorio claims that Ron Paul suggested that Free Markets would have fixed slavery. As evidence that Paul made such a suggestions, Gregorio links to this article. This claim is not found in the article. What the article explains Ron Paul as claiming is that the solution to slavery would have been "simply shell out some cash, buy the slaves, and set them free." It isn't even clear from the article if Ron Paul was suggesting this as a government funded solution or a private funded solution.

In other words, this is a horrible example because almost no (or maybe even none at all) actually make this claim. Even arguing that Ron Paul claims free markets can solve slavery seems to be a bit of a stretch.

A Magic Fairy

Gregorio continues, arguing that free markets are magical because they fit the 3 hallmarks of magical devices. I'm pretty sure this criteria for a magic device is either obscure or entirely made up by Gregorio, as I have never heard of it before, he provides no citation, and a Google search comes up with his article first and then a bunch of irrelevant links.

Outside Physics

Gregorio tries to argue that the free market opporates outside of phsyics and is therefore magical. It seems to me that this is rather absurd because a free market is not physical phenomenon. Free Market theory is essentially the study of social interactions involving transfers of ownership and production of value.

Outside Science

What Gregorio really means here is that he believes free markets have repeatedly failed. However, this is not as clear as Gregorio would like to think. Even in the US, while most of our commodities are traded more freely than in most other nations, nearly all our markets are regulated to some extent. Therefore, the classic attempt by many modern liberals and socialists to observe that "market x in the US isn't doing so hot" ergo "free markets don't work" doesn't follow for 2 reasons. First, markets have boom/bust cycles. Second, most markets in the world aren't really free.

Additionally, Gregorio probably picked one of the least free markets in the US as an example: health care. Almost everyone agrees that market forces have been vastly distorted both by a disconnect between consumers and cost, and massive government regulation. Anyone ever heard of the FDA? Medicare? Medicaid? SCHIP?


Gregorio attempts to finish his proof that a free market as understood by many is a magical device by arguing that it is often believed to be morally right. This really is a bunch of nonsense. People described various policies and social systems as good and bad from all different kinds of political viewpoints every day. People do this because they see an idea as making the world better or worse and assign a value of good or bad accordingly. Gregorio's rhetoric simple tries to cast this in legitimate activity in a negative light for a subsection of people.

Stop the Magic

Of course, as Gregorio claims, the Free Market is an amoral force. However, two aspects of free market are things we would generally consider to be good. First, the prerequisite for a free market is that people are free to exchange their property as they wish. Second, the forces of a free market encourage better growth than any other economic system by maximizing the freedom to act as one wishes and the freedom to collect benefits for work that others value.

Gregorio than compares free markets as amoral forces to physical forces, such as gravity. I don't know about you, but I like gravity. I think I might even describe it as "a good force", because I like not flying or floating off into space. Oops, I guess I believe in the "magic" of gravity. :o

The Tool User

Here Gregorio argues that a free market is a government tool and that the government can and should add regulations to free markets to instill morality into them. Of course, he ignores such important questions as, whose morality we should instill in markets, and that the more a market is regulated, the less free it is.

Another thing Gregorio seems to assume is that the government is the moral and forming expression of a culture, and therefore if it is moral to say, care for sick people, that the government must do it. This is another key disagreement between conservatives and modern liberals. Modern liberals, who really are generally socialists, tend to believe that the government makes a society and that what a society should do should be done by government. Conservatives believe that government is an institution of society that provides a distinct set of services (essentially, the protection of individuals right from violations by other citizens (internal violations) and other nations (external violations)). Society to a conservative is a larger and much looser group of people living freely together, organizing for common causes, etc.

January 15, 2008

The Looming Tower

I recently finished reading The Looming Tower by Lawrence Wright. It is an excellent history of al Qaeda, focusing on the events leading up to 9/11. It also includes a parallel discussion of the FBI, CIA, and NSA investigation of al Qaeda before 9/11.

In particular, I found 4 things Wright reveals about al Qaeda particularly interesting. First, the book begins not with bin Laden, but with an Islamic author, Qtub, who became an ideological leader of Egyptian Islamists who wanted to reclaim and purify their country for their brand of Islam. Second, the Afghan war with the Soviets attracted both bin Laden and the Egyptian Islamists to fight a more global war to protect what they viewed as Islamic territory. Third, it was bin Laden's vision of an extra-national militia which could be easily mobilized to defend Islam globally that would later morph into al Qaeda, a loose coalition of terror groups and cells with the primary goal of expanding Islam globally against the encroaching West, of which the US was seen as the leader. Finally, I was intrigued to learn of repeated offers of help to al Qaeda by Iraq, which saw a common cause against the West.

The history of FBI, CIA, and NSA monitoring of al Qaeda was also interesting. Particularly, their lack of cooperation because of the "Wall" and different information priorities. For example, Wright explains that the CIA was often reticent to share intel with the FBI because the CIA views secrets as currency, whereas widely known info is relatively useless, and the FBI's purpose is primarily to prosecute criminals based on info, which makes it public.

In closing, I highly recommend this book for those who want to know more about al Qaeda and why they seek to destroy us.

January 12, 2008

Response to Senator Schumer's Radio Address

I try to listen to the President's and the Democrat's weekly radio address and I was particularly disappointed with Senator Schumer's address this week. In the address, he describes the currentstate of the economy "the worst shape...since the days immediately following 9/11". He also repeats much of the tired, middle class rhetoric coming from people such as Obama, Edwards, and Huckabee.

He warns of a recession and labels Bush's policies "Do-nothing". In particular, he is concerned about 4 things:

1 - "From 2000 to 2006, most Americans saw their real income actually go down."

I don't know what he bases this on, but I suspect this is in large part caused by the recession in the early part of those years. The picture he seems to be trying to paint, one of continually increasing hardship for the middle class, isn't necessarily supported by such a statistic.

2 - "The average tax relief for a millionaire under this Administration is 100 times larger than the elief for a typical middle class household."

Oh really? I'm guessing this is because the poor Senator doesn't understand math and the difference between a typical middle class household income and a millionaire income. Take for example, someone, A, who makes $100,000 a year (quite a bit more than most middle class families) at a 30% tax rate. That person would pay about $30,000 in taxes a year, and a 1% tax break would constitute $1000 in relief. Consider another person, B, who makes about $10 million a year. At $10 million a year (100 times A's income) at the same tax rate, B pays $3 million dollars (100 times A's taxes) and the SAME tax break for B would save him $100,000 a year (again 100 times A's income).

The point is, the reason the millionaire receives more relief from tax cuts is because he pays more, not because Bush likes him more. I am repeatedly annoyed that people in charge of running this country either don't understand these simple facts, or hope we are so stupid we won't see through the rhetoric.

3 - "The price of college tuition, health care and energy...have skyrocketed."


As a current college student, tuition and tuition increases are certainly a concern, but they are not over-burdening and it seems to be fairly easy to get bank loans to cover expenses if one needs to and it shouldn't be too hard to pay off after graduating, as long as one lives frugally, didn't stay in school absurdly long, and actually got a degree that is worth something (unlike an English degree, which I hear is generally good for a job under $30k). Speaking of such degree's, it seems to me that part of the cause of high tuition costs is probably high demanded driven primarily by artificially low prices (via government aid) and the conventional wisdom that a college degree is necessary to get a good job without much emphasis on the kind of degree. This leads to more people going to college (free money increases demand) and a lack of focus on degrees that are valuable in the work force (because they are "hard").

Health Care

As for health care, I agree that this is a problem. However, I think most people are ignoring two primary factors effecting the quality and cost of health care.

First, insurance, especially insurance paid for by a third-party such as an employer or government, hides the real cost of using health care from consumers. Consumers therefore feel that it is cheaper than it is, because they don't foot the bill, and decreased prices, perceived or real, increase demand, driving prices up for access to medical resources (which I understand is not a booming business in terms of growth and expansion). In other words, the lack of cost transparency leads not just more consumers to demand health care, but for individual consumers to demand more of it, which they may not really need. Because the health care industry is not growing parallel to the increase in demand, cost increases as health care becomes a more relatively scarce resource.

Second, particularly regarding pharmaceudicals, it is my understanding that the US is one of the few countries that respects drug patents. Most other countries, such as Canada with their famously cheap medicine, achieve this cheapness either via price controls or lack of patent protection, which allows a company to pay $0 on R&D to develop a drug, meaning it only has to make back the cost of production rather than the additional cost of years of R&D and additional costs of FDA approval. One might think that lives and health are worth saving at such an expense to pharmaceudicals, but if all countries did this, the investment required to find cures would become unprofitable, causing relative stagnation is pharmaceudical research. We could achieve much lower costs for a health care status quo, but health care progress would become absurdly unprofitable and therefore under-funded.

Increased nationalization of health care would solve neither of these problems. On the contrary, it would only serve to exacerbate them.


Increased energy costs are also a real problem with a more complex cause. Although much of the rising energy costs are probably due in part to increasing demand in developing countries, the control of large oil supplies by socialist (for example, Hugo Chavez) and unstable countries have also worked to cut off oil supplies. However, it is important to note that Congress, in which Schumer, and other government bodies in the US have repeatedly blocked development of our own oil reserves (ANWAR, Gulf rigs, new refineries), which could simultaneously decrease our dependence on foreign oil and increase the availability of oil in the US. What is generally being done by Congress is funding research on numerous "Green" technologies for alternative energy sources which are more expensive than oil. Additionally, at least one of these more expensive fuels (ethanol) is often required as an additive to gasoline in the name of making it more environmentally friendly, also increasing the cost. Therefore, Congress and policies Schumer probably supports have been contributors to the cost of energy in this country.

One thing a lot of people don't know is that we already have a new energy source with almost zero emmissions that could simultaneously replace most of the dirty coal and gas power plants that form the majority of our power infrastructure and dramatically reduce car emissions. This energy source is nuclear power. Unfortuantely, a lot of fear mongering and misinformation has turned many Americans against this source of energy, but rather than trying to overcome that problem, as France apparently has, the US has taken it pretty much off the table. The advocation of nuclear power by most of the Republican candidates in the New Hampshire debates was probably the high point of debate for me and I hope they continue to do so.

4 - Housing crisis

One thing Schumer forgets to mention is that part of the cause of the housing bubble and subsequent fallout was caused by the government encouraging banks to give out loans to risky people and people failure to prepare for what most people said was coming. Bailing out banks and people who took loans they couldn't afford will only reinforce the message of irresponsibility in planning for the future. Furthermore, it will hurt those who DID plan ahead and set aside money to invest in property during the perceived market downturn. Doing nothing IS the right thing to do in this case, but I seem to recollect from past weekly radio addresses that President Bush actually is planning to do something about this. What Schumer is probably complaining about here is that Bush isn't doing enough to bail people out.

Schumer's solution

The only real solution Schumer presents is increased government spending, apparently on anything:

"prominent economists believe that the best way to jumpstart is not only with tax cuts, but with stimulus spending. The President seems to focus only on tax cuts, which are important, but we need spending as well, whether it be for short-term items such as extending unemployment insurance or longer-term investments such as in clean energy and infrastructure." - Schumer

But we should not let these economists (probably Keynesian economists, who have been deluded into thinking that the government can and should flatten the market boom/bust cycle) fool us. All government funds come from one of two places, taxes (from the people) or borrowing. The thing Schumer either doesn't realize or hopes we don't realize is that private citizens and organizations can spend based on thses sources just as well as the government. Particularly in terms of the funds raised by taxation, that is money people would probably prefer to have spent themselves anyway.

Consider the economy as a set of industries. For each industry, profit (the result of spending public or private funds on that industries output [products]) signals that industry to grow (the profits are largely investing in increasing the industry to meet increased demand, increasing profit). Losses, signal an industry to shrink because it's output is higher than societies demand. Next, consider a person (A) who makes $100,000 a year. Instead of conventionally thinking about this $100,000 as what we generally consider it to be, a resource which A can use to buy things for himself, think it as 100,000 votes for product production. When A buys say, a new computer, he spends $1000 to buy himself a new computer. But he also signals 1000 votes worth of demand for the computer. The computer industry (0) receives these votes their goods, reacting to this signal that their product is in demand, expands. A continues the year like this, expending his money (votes), on other industries (0-100) according to the things he wants to consume. Other industries do not receive any funding from A and sadly decrease their output proportionally. As a model citizen, he also pays $30,000 in taxes, as he did the year before when he was helping us see through Schumer's faulty logic on tax relief. This $30,000 in taxes represents a 30% decrease in A's votes which represet his control over the economy. It also represents an increase of 30,000 votes in the governments control of the industry.

This illustration clarifies that government is not a magic entity and the fact that money controls the economy. When the government takes our money, it doesn't magically become more valuable or powerful than when we had it. All that happens is that our influence in the economy is decreased and the influence of governments (that is, beaurocrats and government officials, such as Senator Schumer) increases.

It is also important to note that saving money does not mean that it sits around and does nothing. Unless one's method of saving is hiding legal tender in the basement, saving is investing, in banks, businesses, bonds, etc. That money is then spent by someone else.

Therefore, A's $100,000 will be invested in the economy at some point during the year, and government intervention does not change this. All government intervention can do is change where that money is invested.

Notice also that Schumer juxtaposes tax cuts and government spending as two promoters of economic growth. The truth is that spending promotes economic growth in an industrial region. The difference between tax cuts and stimulus spending is who spends the money, us, or them. It is also important to note that economic growth is also dependent on industries producing what people really want. It seems to me that the best way to signal to the economy to produce according to the people's demands is to allow them the maximum control over their own money as possible.