March 31, 2013

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:

Works Cited

Russell S. Sobel, "Entrepreneurship." The Concise Encyclopedia of Economics.2008. Library of Economics and Liberty. 30 March 2013. <>.

Gwynn Thomas. "Marx's Basic Theory". The Socialist Standard. Vol 1122, Feb 1998. The Socialist Party of Great Britain. 30 March 2013. <>

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:

March 18, 2013

Cyprus Deposit "Tax" Experiment

In the latest round of European bailouts, Cyprus has agreed to accept a $22 Billion bailout with one incredible stipulation: a one time “wealth tax” on all bank deposits.   This is not so much a tax but a blatant confiscation of private property.   But putting the moral issue aside, let us analyze this government decision based on two economic “laws”: 1. When intervening in the economy, government policy always creates more problems (unintended consequences)  2.  Problems created by government intervention lead to further government intervention. 
So what is the government try to solve?  Bank Insolvency.   It is beyond me how policy makers can’t see the obvious ramifications of this “tax”.  Instead of solving bank insolvency, they are going to create bank insolvency!  Individuals will obviously want to pull money out of the banks that just stole their money, and park their money elsewhere.  A.K.A. Bank Run.   What do bank runs cause?   Bank Insolvency.   
This government policy will create the very problem they are trying to solve, only to a much worse degree.  What happens next?  More government intervention!  Next they will need to solve the bank run, so they will probably have to make it illegal to withdraw money.  Problem solved, right?  Wrong.  It’s hard to predict where things will go from there, but one thing we can be sure of: it won’t go the way the policy makers intend.  It will only create another significant problem that requires further government intervention, and on and on it will go. 
What we will see in the coming days and weeks will fit perfectly with the two “laws” of government interventionism: bank run problem followed by further government invention.  What exactly happens and how it happens is anybody’s guess.  But my question is: how can the policy makers not guess that confiscating bank deposits might cause people to remove their bank deposits?  Perhaps they do know and their intentions are not what they seem…..

March 1, 2013

The Illusion of Equilibrium

From the dawn of our economic education – sometimes beginning when we were in middle school – we were taught about the concepts of supply and demand. At the center of those supply and demand curves lies an equilibrium; an equilibrium which can be accurately calculated by QD = QS or  [m(x) + b]Demand = [m(x) + b]Supply. Most of us learned such simple algebraic equations in seventh grade. The context of a ”equilibrium” excels far beyond what the average person may think. This equilibrium continues as an overly complex and highly ambiguously understood concept.

The history of economics revolve around the idea of equilibrium and done so since the early theories of Leon Walras and Stanley Jevons. Leon Walras (in 1874) conceptually founded the ideas of marginal utility when he drafted a hypothetical economy using a series of equations that equaled the number of unknowns. Equilibrium prices and quantities solve this system of complexity and demonstrate prices and quantities drive the economy towards equilibrium. Stanley Jevons was the first to formulate economics as a mathematical science in the early 1860s by formulating the ideas of economic utility.

Economics has since then improved upon these concepts and added more equations to the pool of useful calculations.  Economics has since been referred to as a science, in relation to that of physics, more so today than ever before. Conventional economics, or orthodox economics, deals with the concept of equilibrium, and other mathematical concepts, as objective facts–absolute certainties. From this perspective we can better identify the mainstream economic profession as a static representation of a dynamic and changing field of study. In other words, the orthodox view of economics, or the dominant school of thought, may place itself in a limited bubble of knowledge and exploration.

To further explain the concept of equilibrium, we turn to what is referred to as the “evenly rotating economy.” The concept of an evenly rotating economy dates back to Ludwig Von Mises who used such a phrase to describe a static economy. The “evenly rotating economy” analogously creates a situation in which all persons stop deliberating the many factors within a situation and proceed to perform an action in a general way.  To simplify, all economic functions perform themselves in a robotic process with all other things equal.

As we know, however, the economy is not a machine and it certainly isn’t a chessboard with people being manipulated. Instead, one should view the economy as an ecosystem—a community of living and dynamic organisms. The people involved in an economy—which includes everyone—interact and interconnect with each other in more than one way every second of everyday.

We know that economics studies what it means to be human: to make choices based upon a set of preferences. These preferences are selected upon how they themselves interpret them because humans interact differently from day to day. Value is subjective and individual desire changes for every circumstance. Actions occur in individual’s minds and any attempt to subjectively measure such decisions is inaccurate.

Equilibrium can only exist when there remains perfect information. The decision maker must have perfect knowledge regarding the choice he or she made. The knowledge one has acquired must become more and more concrete as time passes. This equilibrium will only last as long as anticipations and expectations prove correct. Executions of plans are as a result of relevant knowledge and any change in that knowledge disrupts the equilibrium.

“All propositions of equilibrium analysis, such as the proposition that relative values will correspond to relative costs, or that a person will equalize the marginal returns of anyone factor in its different uses, are propositions about the relations between actions. Actions of a person can be said to be in equilibrium in so far as they can be understood as part of one plan” (F.A. Hayek 36, Individualism and Economic Order).
Equilibrium is impossible to achieve because individuals are constantly changing wants, desires and actions. Dissatisfaction in expectations always occurs for many every day. Macro fluctuations in micro foundations interrupt ecological processes that may lead to a complex equilibrium. Stability and complexity lay the foundation for a mixed economy; however, it may appear that such stability is difficult to achieve given the ecological differences in human desires.

In the end, economics is not physics. Economics, if anything, is an art; an art of future predictions based upon hypothetical models and calculations. To think otherwise is an insult to the physics profession and the knowledge we have gained through actual experimentation.

As Mises says, “What they are doing is vain playing with mathematical symbols, a pastime not suited to convey any knowledge.”