Destruction Is Not Profit

In the Washington Post, Neil Irwin explains how after hurricane Sandy economic activity will be sluggish for the weeks following because most of the businesses will be shut down after the devastating storm.  He goes on to ramble about how it will take months for businesses to re-open and return to their previous status.  I find it interesting though that he believes the result from this devastation will lead to economic growth or a positive net from opportunity to rebuild and clear damages.  “During the next couple quarters, there will be an almost perverse boost in overall economic activity, as efforts to clear damage and rebuild houses and businesses add to the gross domestic product.”  This whole tragedy reminds me of the fallacy of the broken window as Bastiat explains, and that the silver lining you (can't) find with hurricane Sandy is purely one seen side of the cost; it's important we find and question the unseen.  We see the cost and benefit of providing more jobs, but the problem is we don’t see that we are spending money to rebuild things we already had, and we are now taking money away from the country to rebuild the city when we could have spent it on something else more productive or at least something that we didn’t already have.  Bastiat explains, “But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows (in our case-destroy cities), that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen.”  Furthermore, Irwan from the Washington Post explains that “there are no reliable estimates of the financial damage wrought by the storm, but one pre-storm estimate of $88 billion would imply that rebuilding efforts would add about two-tenths of a percentage point to GDP growth.”  Again this is just fictitious, even though many economist and people in general use the GDP as a measure of our welfare they are simply wrong; the GDP fails miserably to accurately measure my overall happiness and has no way of quantifying my quality of life. 

Back to the opportunity Irwin tries to convince us of that hurricane Sandy will generate jobs, exchange and happiness; he supports this by unfolding, “The storm depleted some of the nation’s capital stock- houses, stores, and bridges and other infrastructure were destroyed… The country is, in effect, poorer by whatever amount the damage comes to but the urgent need to rebuild will create jobs and spur economic activity, with the bill paid by insurers and governments.”  The whole idea that depleted housing, stores and business will generate jobs is just crazy, on one hand yes it does but it also takes away from us spending money in a more productive way or towards something we didn’t already have.  As we said in class, instead of replacing that broken window we could have spent it on a new pair of shoes for the shop; same goes for New Jersey/New York, instead of paying people to replace their houses, stores and business they could have had the government spend money on things that would bring more enjoyment and prosperity to the states.  It’s amazing though that Irwin pursist that there is a silver lining within this mess, and that there are long term benefits to rebuilding infrastructures that we already had compared to investing in new projects and innovations. 

Furthermore, “In a 2002 paper published in the journal Economic Inquiry, Mark Skidmore and Hideki Toya analyzed areas that were affected by natural disasters around the world. They found that such events can provide the impetus needed to invest in new and more productive capital.”  Yet it again, I don’t completely disagree with what they are claiming but I do believe that they are not seeing the whole picture; they see the obvious but are failing to see the not so obvious that I pointed out earlier.  Bastiat helps to explain this through the broken window, “Let us take a view of industry in general, as affected by this circumstance. The window being broken, the glazier’s trade is encouraged to the amount of six francs: this is that which is seen.  If the window had not been broken, the shoemaker’s trade (or some other) would have been encouraged to the amount of six francs: this is that which is not seen.  And if that which is not seen is taken into consideration, because it is a negative fact, as well as that which is seen, because it is a positive fact, it will be understood that neither industry in general, nor the sum total of national labor, is affected, whether windows are broken or not.”  Ultimately, when people like Irwin claim that there is a benefit to rebuilding things we previous had they are only looking at what can be seen and not at what can’t be seen.  Irwin sees that this devastation allows someone to use their labor and make a wage, what he doesn’t see is that the person who is paying to repair the damages is being urged to use money in this way instead of something that may be more enjoyable or beneficial to them or their business.  Furthermore, when Irwin claims that the government pays for these rebuilds I think he is wrong;  they may be writing the check or finding the credit but the government isn’t taking it out of their pockets, they are taking it from our pockets through taxes, or they are borrowing money from other countries, printing money (causing inflation) or they are spending future income for present problems which all have rippled unintended consequences.  Bastiat sums it up well, “Whence we arrive at this unexpected conclusion: Society loses the value of things which are uselessly destroyed; and we must assent to a maxim which will make the hair of protectionists stand on end—To break, to spoil, to waste, is not to encourage national labor; or, more briefly, DESTRUCTION IS NOT PROFIT.”  Concluding, Irwin must see the unseen and reevaluate his beliefs on finding the silver lining within great devastation; and he must question where New Jersey/ New York would have been without the hurricane and what the government could have spent the money on if it didn’t have to rebuild previously owned damaged goods.

http://articles.washingtonpost.com/2012-10-30/business/35501939_1_economic-activity-jobs-numbers-major-damage

The tax of being alive

When the founders, who once participated in the creation of a constitutionalist society, feared tyranny from a centralized government while also fearing a tyranny of the majority, could they have ever feared a tyranny of the minority? When Congress passed the Affordable Care Act (ACA), almost two thirds of the citizens of the United States said they were opposed to universal health care.  It seems that everyday we learn something new about the law that makes our lives a bit more complex and beholden to the federal government.

How does a government full of red tape, costly bureaucrats, and inefficient management think that they can improve the best medical system that the world has ever seen? The United States did not achieve the best medical care system because the government nurtured it; it became the best health care system despite the government’s attempts to regulate it though free market competition. The argument politicians used to enact ACA was that the law would lower the cost of health care insurance by $2,400 a year, therefore lowering the cost of medical attention. Today, we not only see the cost going up, but according to the Denver Post, we see the average yearly premium amount going up by 40 percent. If politicians wanted to lower the cost of health insurance one step they could have taken would have been to allow insurance companies to trade between state lines and encourage more competition among the health market, reducing some of centuries of regulations that were put on the industries. Another way could have been tort reform, by simply making it harder to sue doctors, reducing the amount of frivolous lawsuits and reducing the amount paid in malpractice insurance.

In a country that was founded to be a protector of property rights and liberty, why would we allow the tyranny of an elect few tell us that we must be taxed for having the privilege of living within its borders? The only way to fight a “run-away” government is to educate the masses and let them know that the only way continue elevating our society is not to give our daily decision to an elect few but to limit the power of we have handed them by taking it back through the election process.

Health Care Cost Discrepancies

In his article, Why is American Health Care So Ridiculously Expensive?, journalist Derek Thompson attempts to present explanations for why, in a 2012 report by the International Federation of Health Plans comparing the average price of 21 different medical procedures in 25 countries, the United States  ranked most expensive in all 21 categories, often twice or even three times more expensive than the runner-up. Thompson claims that the two primary reasons for the drastic difference in cost between American healthcare and the rest of the world stems from two primary sources: the fact that the government does not manage the prices charged for medical procedures, and  the claim that "the complications created by our for-profit system adds tremendous costs." However, after thinking through his claims and applying basic economic principles, I have arrived at the conclusion that Thompson has little grasp on the true forces at work in the healthcare systems of both America and the rest of the world.

                Let us begin by looking at Thompson's first claim. In his article, Thompson writes, " the U.S. is unique in our reliance on for-profit insurance companies to pay for both essential and elective care. Twenty cents from every $1 goes, not to health care, but to 'marketing, underwriting, administration, and profit'," and goes on to conclude that "In a system where government doesn't negotiate prices down, prices will be higher." Both of these points show a complete lack of understanding of basic economic principles. The result of having multiple privately-owned insurance companies competing is that fees paid by American consumers for their insurance policies will be bid down in an attempt to undercut competition.

                Even more telling is the fact that the author has seemed to reverse the cause-and-effect of medical insurance cost of medical procedures: an increase in the cost of medical procedures would logically lead to an increase in the cost of insurance premiums, not the other way around. As to the question government management, while it is true that the governments of many other countries have succeeded in using force to keep the costs of medical procedures down, Thompson reluctantly admits the inevitable result of such intervention; namely that in those countries there are significant shortages in medical care and marked decrease in medical innovation compared to the United States.

   

                Thompson's second claim, that "the absurd complexity of U.S. health care creates its own costs," reasoning that "All these systems require another inefficiency -- the existence of compilers, middlemen who compile the bills doctors submit and shuttle them thru the payment system," once again make a faulty connection. The hiring of these "compilers" would result in increased insurance premiums, not in increased prices for the procedures themselves. As Thompson clearly states, the increase in cost comes purely from the increased difficulty in processing the procedure's bills, not from an increase in the cost of the procedure itself.

                So then, what could serve as an explanation for the still quite real price discrepancy between the price of American healthcare  services and those offered by other countries? I believe the key lies, as stated above, in the use of force. Out of all of the countries surveyed for the report, only the United States eschews  the use of government force to determine the price of medical procedures. Therefore, the prices offered in America are much more accurate representations of the true cost of the given procedures then any price quoted elsewhere. And as a result, "American health care is the world's envy in some categories, especially in cancer care, wait times, and access to new technologies" while patients in other countries have to wait months or even years to receive treatment. Who is truly better off: the cancer patient that has to pay more, but can get medical treatment immediately, or the cancer patient who pays less, but has to wait years to begin treatment?

Article: http://www.theatlantic.com/business/archive/2013/03/why-is-american-health-care-so-ridiculously-expensive/274425/#comments

College Tuition (Inflation)

As a college student I believe that college tuition and costs are too high. On Forbes website I found an article that talk about college costs being out of control. A few things mentioned in the article were the comparison between College Tuition & Fees Vs. Overall Inflation is 498.98 % to 114.85. Also, that state colleges and universities in the past have controlled prices somewhat by throwing more tax dollars at institutions and through private funding. But lately the trend has reversed, the costs are continuing to rise and with less effort to control these costs. There needs to be fiscal accountability for these institutions of higher learning.

The fact is Inflation is why too high for college tuition and isn’t even close to what the overall inflation rate is. Inflation is taxation without representation. So as college students and citizens in the United States we should not allow this extra tax to be associated with our college degrees. Obviously, we need to hold our government more accountable for keeping the purchasing power of the monetary unit as high as possible.  We need a government that isn’t worried about the way they necessarily spend the money they have, but how the money they have is obtained. With inflation and the loss of monetary purchasing power, prices do not change to the same extent. This is what examples the different relationship between college tuition inflation and the overall inflation. Because there will always be prices rising more rapidly than others or falling more rapidly. Why is inflation so high though? One of the main reasons could be because the government is giving out loans, grants, and money to students and colleges that was printed or aka inflation money. Another reason could be that there are subsidies involved, and so many regulations within the government related to these colleges.

The answer to this problem to getting rid of this hidden tax is to have a government that is doing everything it can to keep the purchasing monetary power as high as possible. The way to do this is eliminate as many manipulated unions, and government policies to leave the market unhampered. Make relative price more important and not the price level and you will see inflation not continue to grow as it is.

On the Entrepreneur

On the Entrepreneur

Karl Marx' labor theory of value assumes that all value attributed to any particular good or service is derived directly from the factors of production, what he called the "productive forces", consisting of the "means of production and labor power" (Thomas, pp. 3). Basically, the "means of production" are what are often known as natural resources: land, minerals, water, etc., and "labor power" is the work exerted by a laborer or group of laborers. So according to Marx' theory, the value of a good is based solely on 1) the natural resources, and 2) the labor that went into producing a good.

What Marx neglected in his theory is the role of the entrepreneur, but this is not accidental: Marx believed that the business owners (Bourgeoisie) only exploited the laborers (Proletarians), and did not provide anything of value. He sought to correct this 'market failure' by removing the exploitative role from the production function. But one might wonder, if the role of the entrepreneur is valueless, why did Marx think that the government should assume this role?

In a true capitalist society, entrepreneurs will necessarily be the leaders, for it is their ideas that will be the source of all change and innovation within the economy (aka the world). All others not exercising the entrepreneurial role, are merely just following protocol, doing the same thing over and over again. If it were not for the entrepreneur, an economy would be a never-ending repetition of people doing the same thing over and over every day; this is the essence of the concept of an "evenly-rotating economy".

When thinking about an "evenly-rotating economy", I am reminded of John Stuart Mill's On Liberty. In his essay, Mill explains that the diminishing of individual thought and action would lead to a "stagnant pool" society. This means that if everyone were to do the same things over and over again and there was never any change; just like a pool of water that sits unmoved, the society would become stagnant. Mill referred to the "geniuses" of society as being those who prevented the stagnant pool from forming by coming up with new ideas and ways of doing things, and thus "stirring the pot", if you will. I would contend that the role of Mill's genius is parallel in many ways with the Austrian understanding of the entrepreneur, as presented by Schumpeter, Mises, Kirzner, Rothbard, et al. In fact, through his many writings, Mill contributed significantly to the popularization of the term "entrepreneurship" (Sobel, para 5).


So, what does all of this mean?

First of all, it is important to recognize that Marx neglected the value of the entrepreneur. In seeing the class struggle between the Bourgeoisie and Proletarians, he perceived that the workers were being exploited. He saw workers receiving low wages and business owners making much more money - and perceived this to be an issue that needed corrected, and one that he thought would be as the result of a series of social revolutions. Marx thought that the government, free from the profit motive, and instead, committed to meeting social needs, would be a beneficent replacement for the so-called "exploiters", who were fueling the class struggle he perceived.

Secondly, widespread disdain for "profit" has made the role of the entrepreneur even more neglected. The idea that a non-profit organization will serve society and a for-profit business only wants money has also reinforced the neglect of the entrepreneur. It is interesting to note that profit literally means progress, and is the opposite of loss. This makes me wonder why so many progressives are anti-capitalist; apparently they are more supportive of companies that suffer losses (greater losses = greater service to society?!?).

Thirdly, as demonstrated by many Austrian economists and also J.S. Mill , a society needs entrepreneurs to innovate and to avoid stagnation. If there were no entrepreneurs, and everyone performed the same job every day, eventually a system of this fashion will go bankrupt. The entrepreneur makes sure that the economy is always growing and reshaping to better suit the needs of its participants.


In a capitalist system, entrepreneurial action serves the purpose of allocating resources to their most desired uses. It is very important to recognize that these entrepreneurial choices will only have a widespread effect if they are 'adopted' by the non-entrepreneurs within the economy. If the choice of the entrepreneur is not supported by others (made evident by the purchasing of his product or service), then the entrepreneur will not be able to sustain his endeavor. For this reason, under unhampered market conditions, if a business is not providing a good that people perceive to be valuable/profitable to them, the business will  not be profitable, and thus, entrepreneurial profit indicates whether a business is serving people or not.

On the other hand, if a government decides to produce a 'good', each individual within that nation will have to buy the good whether or not they perceive the good to  be profitable. So, a government can continue to produce any 'good' whether or not the people believe it to actually be (a) "good", but in the unhampered market only producers of goods and services that consumers believe to be valuable will return a profit. Businesses in the 'free market' cannot produce goods people do not want to pay for (at least for very long). Governments can and do produce goods people do not want to pay for (as long as people pay their taxes).

The role of the entrepreneur is vital to the well-being of individuals. Successful entrepreneurs are those who are best at anticipating consumer needs and finding how to produce and provide these goods at the lowest cost. Thus the free market system, expanded by the vision and work of the entrepreneur, will provide the conditions in which individuals needs are met to the greatest degree. It is therefore in the best interests of every individual to recognize the significance of competition in fulfilling individual wants, and the vital role that the entrepreneur plays in ensuring competition, profit, and progress for all.


"I don't want to do nothing, there's plenty to do,
The question I ponder is who plans for whom?

Do I plan for myself, or leave it to you?

I want plans by the many, And not by the few.”

-from  "Hayek",  in Fight of the Century: Keynes vs. Hayek Round Two, found here:

http://www.youtube.com/watch?v=GTQnarzmTOc

Works Cited

Russell S. Sobel, "Entrepreneurship." The Concise Encyclopedia of Economics.2008. Library of Economics and Liberty. 30 March 2013. <http://www.econlib.org/library/Enc/Entrepreneurship.html>.

Gwynn Thomas. "Marx's Basic Theory". The Socialist Standard. Vol 1122, Feb 1998. The Socialist Party of Great Britain. 30 March 2013. <http://www.worldsocialism.org/spgb/socialist-standard/1990s/1998/no-1122-february-1998/marxs-basic-theory>

The Fair Tax Act

The fair tax act was proposed in first proposed in 2003 by Representative John Linder of Georgia.  It has recently been reintroduced to congress as the Fair Tax Act of 2013.  The simplest way to describe the Fair Tax Act is that it would get rid of all national income tax, and instead a higher sales tax would be used.  Those who favor this proposal have many reasons for doing so.  Some of the benefits include no longer having individuals send in income tax, but have businesses collect taxes and send them to the government.  This would eliminate the need for the IRS, while some tax collection agency would be needed, the amount of enforcement required would be much less than what is currently needed to regulate tax collection from every citizen.  Congressional committees have also found that since enforcing tax law I so complicated that there are many citizens who do not follow it, this puts an extra burden on those citizen who do comply with federal tax law. 

I think that one of most important implications of a sales tax are none of these reasons mentioned above, but rather how the incentives people see will change.  A tax on income changes the way people view making money.  An income tax of say ten percent would mean that a person motivation to make a dollar is really only ninety cents.  If the income tax is progressive such as ours is, then a persons incentive to make each additional dollar is diminished. 

On the other hand if a sales tax is in place, and no income tax, then people will have more incentives to earn more money.  Simultaneously they will also have more incentive to save.  If the income tax of ten percent were changed to a sales tax of ten percent then people would only get ninety cents worth of a good for every dollar they spent.  This would motivate people to save more. 

If people would save more it would have positive long term economic affects for our country.  One big problem in the United States today is that people are over spending and therefore not saving.  One of the requirements for economic growth is capital accumulation, and if Americans aren’t saving then we cannot be accumulating capital.  So if a sales tax increased savings it would also increase capital accumulation, which could significantly contribute to our long-term economic success.

Links to resources:

http://economics.about.com/cs/taxpolicy/a/fairtax.htm

http://www.fairtax.org/site/PageServer?pagename=HowFairTaxWorks

http://www.govtrack.us/congress/bills/113/hr25/text