Tuesday, February 9, 2010

Block Party

By Michael Labeit

No one has ever mistaken Columbia University as an institution devoted to free market economics, and for good reason. So when I had the privilege to meet acclaimed economist and iconoclast Dr. Walter Block at the Mathematics Building on the Columbia campus, I knew the occasion would be a rare one. I happily managed to be one of the first students to approach him in what was an almost completely vacant lecture room. "This is no surprise" I thought." Columbia doesn't exactly attract the type of students that would be interested in this sort of lecture, nor does it tend to provoke that kind of interest while students attend." Fortunately, enough people came, students and non-students alike, to fill most of the seats. They would not be disappointed.

If you've ever seen one of Dr. Block's lectures on Youtube you would know that he is (admittedly) soft-spoken but not shy, jovial but nevertheless willing to "betray" your hospitality by telling you that you're wrong if he believes so. He does not let the sorry state of current affairs encourage him to address others cynically but he also does not speak with levity, as if we're not burdened by the growing coercive authority of government. The lecture was studded with two somber moments when Dr. Block asked for a moment of silence at the beginning and at the conclusion for the remembrance of John David Fernandez, a Columbia sophomore and the former vice president of the Columbia University Libertarians who passed away from pneumonia. It was he who invited Dr. Block to speak at Columbia to begin with, so it was a fitting tribute.

Personal Experiences

Dr. Block divided his lecture into two parts: his personal and academic experiences and economics and political philosophy. He began with his time as a student in 1972 pursing a Ph.D at Columbia. Block noted that his dissertation was on the effects of rent control and that the distinguished economist Gary Becker was his dissertation advisor at the time. Block had used statistical analysis to demonstrate that rent control laws had led to shortages of housing units, where the quantity of housing units demanded exceeded the quantity supplied. His work produced significant t-values in his favor but also yielded significant t-values that contradicted his thesis.

When Block informed Becker of this oddity, Becker, in a very non-positivist manner, admonished him to repeat the procedure until he "got it right." How unusual, Block claimed, that Becker would ask this of him, since the purpose of his empirical work, and of empirical work in general, was to test the soundness of theories, not be tested by them. Theories are supposed to conform to empirical data, not vice versa. If the two are discrepant, then it's the theory that should be abandoned, not the data. From this experience, Block concluded that "if you scratch a Chicagoan, chances are you'll find an Austrian." He explained this reasoning later within the lecture.

Block continued to reminisce about his economics professors. Predictably, most were either oblivious or insouciant to Austrian economics. His macroeconomics professor Arthur Burns chose to use his time during class to discuss his dinners with Nixon. Professor Albert Hart was dubbed "marblemouth" by Block and his fellow students because he was, as Block described, "incoherent." The now well-known pro-globalization economist, Jagdish Bhagwati, was a leftist and an advocate of increasing foreign aid outlays to India (surprise, surprise) when he was a professor to Dr. Block. Another of Block's instructors, professor William Vickrey, believed foreign aid should in part come in the form of bicycles and roller skates. No doubt, the cast and crew of Block's academic career were unusual.

Block particularly emphasized the obstructions he faced when pursing his doctorate, possibly his greatest intellectual crucible. "Pack your dissertation committee" was his advice to the Ph.D candidates in the lecture room, a humourous allusion to FDR's plot to fraudulently "pack" the Supreme Court in the 1930s. Block's committee was composed of five scrutinizers: three economists, one other professor from Columbia, and a yet-to-be-chosen fifth guest from elsewhere. Given his intellectual prowess, one would guess that Block's anti-rent control dissertation presentation would have perhaps impressed even the most intransigent detractor. This may have been true for your average academic, but, unfortunately for Block, a rent control commissioner was chosen as the fifth individual. According to Block, the commissioner was the most recalcitrant member of the committee and that after five hours of effort (two for the presentation and three for what can best be described as an interrogation) he was unwilling to grant Block the evaluation he required in order to receive his doctorate. Only after being beseeched by his committee associates did the commissioner relent. Of course, "packing one's committee" would be a corrupt endeavor but one can certainly appreciate Block's wit when one understands how disadvantaged he was ab initio.

Not all of Block's academic experiences were as despondent however. He recalled how he defended Professor Peter Bauer in school who he considered a true free market advocate. One of Block's most crucially developmental experiences was his encounter with Ayn Rand, Nathaniel Brandon, and Leonard Peikoff when Rand came to deliver a speech at Columbia. Block was a philosophy-majoring left-liberal at the time and took the opportunity to heckle Rand with his grievances. He situated himself right between Rand and Brandon to prepare for further harrassment but instead engaged in a conversation which ended with Brandon recommending two books to him, Rand's Atlas Shrugged and Henry Hazlitt's Economics in One Lesson, the former becoming his most favorite novel and the latter being a text he now regularly issues to his students. Block did voice a common complaint about Rand however, namely that she and her group of intellectuals nurtured a form of cultishness and dogmatism, behavior that made him a bit disillusioned with Rand and her litigious assembly of Objectivists.

Block went on to give credit to Robert Nozick, the famous Harvard libertarian philosopher. It was Dr. Nozick, Block argued, who introduced libertarianism to mainstream political philosophy in academia. Block did mention Ludwig von Mises when he discussed his personal academic experiences but only briefly since Mises did not produce a significant effect on Block personally. He attended Mises’s final NYU seminar when the venerable economist was well into his 80s. Mises’s tenacity is a well-known fact in free-market circles, but even with his vigor Block recalled how Percy Greaves had to shout questions in Mises’s ear so that they could be made audible. Mises of course was the author of Human Action, the most influential text in the entire corpus of the Austrian School.

Finally, Block allotted much of his time to discussing perhaps his most instrumental acquaintance, Murray Rothbard. From reading Rothbard’s pioneering work, Block figured he was an intrepid, physically overawing, man’s man. Instead, when he first made contact, Block described Rothbard as a “short, fat, little Jew” with an almost unstoppable diligence. Rothbard could author eight relatively unblemished pages in one hour and his influence on the Austrian School, and on Block in particular, are unmistakable. His Man, Economy, and State is a treatise par excellence and a must-read for any serious economist.

However, Block did not want to give anyone in the audience the impression that he and Rothbard were automatons who worked and thought perfectly in sync, since it may have seemed, prima facie, that this was the case, giving the adulation Block thought Rothbard was worthy of and the fact that Block worked with Rothbard as an associate editor of the Review of Austrian Economics. Block revealed a number of instances in which their opinions were incongruent. The issue of immigration unearthed an intellectual divide between the two. Both Block and Rothbard were of one mind when it came to the idea that all property should be private. However, Rothbard believed that, given the existence of the welfare state, the government should restrict the flow of immigrants into the country (postponement libertarian position) in order to decrease the number of tax consumers and therefore reduce the redistributionist burden upon the taxpayers. By contrast, Block argued that the government should not restrict immigration (free-immigration libertarian position) and that the free flow of immigrants should be allowed to overwhelm the welfare state, hopefully leading to its demise. Block likened Rothbard’s position to a prohibition on “excessive” pro-creation (his “Storkovia” analogy). The two occurrences, immigration and pro-creation, amount to the same thing politico-economically: both processes increase the human population within a given territory. Babies and immigrants are both capable of becoming dependent upon the government. Why should the latter be obstructed and not the former? Logical consistency, Block argued, would commit a postponement libertarian to restrain both.

The two also clashed when it came to the far less urgent issue of voluntary slavery. Rothbard argued that contractual slavery was an aberration while Block argued it was justifiable. Block devoted only a few minutes to this debate since it is less penetrable than the immigration dispute.

Block’s did take the time to stress what he felt was Rothbard’s type of intellectual tolerance. When introduced to Hans Hermann-Hoppe’s defense of private property via argument from argumentation ethics Rothbard, instead of casting aspersions, welcomed Hoppe and his argument as what he thought was a superior justification of private property than his own. There are now Austrians who reject Hoppe’s argument and those who endorse it.

Philosophy and Economics

Block devoted the remainder of his lecture to a juxtaposition of Austrian School economics with libertarianism, Chicago School economics, and antitrust economics. He began with the common confusion between Austrianism and libertarianism. Austrian economics, he argued, is a theory of economics, of autistic and interpersonal human action, which does not include any normative claims, or “ought” propositions such as “One ought to oppose taxation.” Libertarianism is, by contrast, a theory of political philosophy, of the proper forms of social interaction, which includes a number of normative propositions such as “The initiation of physical force against person or property is wrong.” Libertarianism tells people which values to pursue while Austrian economics does not counsel anyone on what values to seek. Austrian economics is thus a value-free theory in Block’s eyes, while libertarianism is not. Furthermore, while most Austrians are libertarians, the two are not necessarily linked, according to Block. There are many libertarians such as Bryan Caplan, Robert Nozick, and others from the Cato Institute who are not Austrians. George Reisman from the Mises institute is a self-described Objectivist and Austrio-classical. The proposition “All Austrians are libertarians” and its converse are both false, as a matter of fact and logic.

Speaking of logic, perhaps the best part of Block’s lecture was his comparison between Austrian economics and Chicago economics. What makes Austrian economics unique is the fact that it is not treated as a “branch of science but as a branch of logic,” not the fact that its adherents are committed to the free-market. Austrian economics is a theory of human action that proceeds deductively and hypothetically, like mathematics, ultimately from a set of axioms or logically undeniable propositions. Austrian economics is deductive, meaning that it’s composed of such arguments where it is impossible that the conclusion is false if the premises are true. In a valid deductive argument, if the premises are true, then the conclusion will be true as a matter of logical necessity. Austrian economics is also hypothetical, meaning its deductive arguments are mediate arguments (syllogistic) where one premise is a hypothetical proposition (If A are B), the other premise is an affirmed, categorical form of the antecedent within the hypothetical proposition (A), and the conclusion is the categorical form of the consequent (B). The argument runs like this: (If A, then B), (A), (Therefore, B). Furthermore, (B) can become a premise for a subsequent syllogism, say (If B, then C), (B), Therefore (C), und so weiter. One can embellish this whole procedure by formalizing it using the propositional calculus, though this is not strictly necessary for proof purposes. See Carveth Read and P.D. Magnus for more on informal and formal logic, respectively.

Chicago economics, conversely, is not deductive but positivistic . Rothbard offered the following as a simple example of the positivist method:

Step 1. The scientist observes empirical regularities, or “laws,” between variables.

Step 2. Hypothetical explanatory generalizations are constructed, from which the

empirically observed laws can be deduced and thus “explained.”

Step 3. Since competing hypotheses can be framed, each explaining the body of empirical laws, such “coherence” or consistent explanation is not enough; to validate the hypotheses, other deductions must be made from them, which must be “testable” by empirical observation.

Step 4. From the construction and testing of hypotheses, a wider and wider body of
generalizations is developed; these can be discarded if empirical tests invalidate them, or be replaced by new explanations covering a still wider range of phenomena.

As can be seen, the positivist method is a form of scientific induction. In scientific inductive arguments the conclusion may be false even if the premises are true, unlike deductive arguments. So while the Austrian school proceeds deductively from premises that are observable such as “Humans act” and “Leisure is a consumer good,” the Chicago school does not. Furthermore, whereas Austrians do not rely upon economic statistics to test their theories (since their conclusions indubitably follow), the Chicagoans use economic data to determine whether their theories are valid. Thus, while the Austrians argue that the law of demand - that as the price of a good falls, the quantity of that good demanded will either increase or remain the same – that this law follows logically from the axiom of human action and cannot be contradicted within a theoretical, unhampered free market, the Chicagoans would be hard-pressed to make such an assertion. By contrast, the Chicago-neoclassical method would involve testing the law of demand by determining if empirical data corresponded with its claims about the quantity demanded. It is a data-driven method that’s deeply concerned with experimental duplicatibility.
This brings us back to Becker’s insistence that Block get his figures “correct” on his rent control dissertation. Block insinuated that Becker knew well that as the rent of housing units fell, the quantity of housing units demanded would either remain the same or rise. He suggested that Becker’s persistence came from at least an intuitive understanding that the law of demand is always true in a free market. So if there is a discrepancy between a theory and empirical data, it’s not axiomatic that the theory should be discarded. If the theory in question proceeds deductively from true propositions, then it’s the contradictory empirical data that should be ditched, not the theory.

Other points of contention mentioned by Block between both schools include the use of mathematics, economic forecasting, and value. While the Austrians refrain from using much math, at most employing algebra when they feel it’s absolutely essential, the Chicago-neoclassical approach involves calculus, complex statistics, and econometrics, epistemic instruments that have made it necessary for majors in economics to become part-time mathematicians. According to Block, the Austrians focus on making qualitative propositions descriptive of human action whereas Chicagoans and neoclassicals use econometric tools to make quantitative claims about human action in addition to qualitative assertions. And whereas Austrians make qualitative predictions, particularly regarding the mal-effects of government intervention, Chicagoans and neoclassicals tend to make quantitative as well as qualitative predictions regarding future events. Finally, Austrians subscribe to the subjective theory of value and ordinal utility theory while Chicagoans and neoclassicals tend to subscribe to the objective theory of value (not to be confused with the Objectivist theory of value which is an ethical theory, not an economic one) and cardinal utility theory. For a much more comprehensive comparision between the methods of the Austrian school and of the Chicago-neoclassical school, see Jesus Huerta de Soto , Murray Rothbard , and Edward W. Younkins.

These differences are not merely academic however. According to Block, they can lead the Austrians and the Chicagoans in very different public policy directions. For instance, the Chicagoans have favored the existence of a welfare state, believing that it can, at an optimal size, “maximize social utility,” on the idea that the utility of goods can be measured. If the utility of a specific quantity of money possessed by Y is higher for X than it is for Y, than that money should be taken from Y and given to X. The problem with this reasoning, according to Block, was multifaceted. It first assumed that utility can be measured (cardinal utility theory). Rothbard has answered this charge by arguing that measurement requires a unit of measurement. Since there is no unit of measurement for utility, the utility of a given good cannot be mathematically assessed. Furthermore, if the utility of a good cannot be measured, period, it can’t be measured for anyone and therefore compared between people, especially between providers of and candidates for welfare. As Lew Rockwell has stated

Conventional welfare theory argues that if the law of diminishing marginal utility is true, then total utility can be easily increased. If you take a dollar from a rich man, his welfare is slightly diminished, but that dollar is worth less to him than to a poor man. Thus redistributing a dollar from a rich man to a poor man increases the total utility between the two. The implication is that welfare can be maximized through perfect income equality. The problem with this, say Austrians, is that utilities cannot be added and subtracted, since they are subjective.
Again, Rothbard has proven to be masterful when it comes to critiquing mainstream, Chicagoan/neoclassical methodology. Block further warned the audience of the Chicagoan/neoclassical propensity to embroider arguments with useless mathematics. Pseudo-units like “utils” can be constructed to measure utility, but as long as they do not represent anything in the realm of existence, they are uselessly arbitrary.

Lastly, Block addressed anti-trust economics. He conceded that if an ambitious economics or law major wanted to put his or her degree to work, he or she should choose anti-trust. Right or wrong, that’s where the money was, especially in consulting. However, anti-trust law was grounded in bad economics, he argued. Block paid particular attention to the unpredictability of anti-trust law, joking about how a producer could be submitted an anti-trust subpoena for charging prices higher than the competition (restraint of trade), for charging prices lower than the competition (intent to monopolize), and for charging prices equivalent to the competition (collusion or conspiracy). He also attracted attention to the fact that anti-trust authorities may define industries very broadly or very narrowly, whichever serves their purpose best. And again, he drew on the fact that anti-trust economics take for granted the idea that opportunity costs can be measured and graphed as a curve. If anti-trust laws were to be taken seriously, Block argued, it would commit trust-busters to take on “producers” like Roger Federer, who, in accordance with anti-trust doctrine, could be labeled as a supply-cutting monopolist. Anti-trust law, taken sincerely, would encourage the Justice Department to nationalize Roger Federer, or morph him into a utility via municipalization, to mitigate against his anti-competitiveness. The third option, disintegration, would be impossible for obvious reasons. But all humour aside, Block argued that anti-trust law, taken to its logical extent, would literally involve such nonsensical decision making.

Block was kind enough to take a number of questions after his lecture. Through these he revealed a number of interesting convictions, facts, etc. Block rejected left-right specific differentia to libertarianism, preferring what he calls “plumbline” libertarianism , a form of libertarianism grounded purely on an uncompromising opposition to physical aggression against person and property. Block commented for a moment on a recent series of Mises Institute critiques of mutualist Kevin Carson. When asked how Kevin Carson was mistaken, Block answered simply with “…he’s a Marxist.” Block also took Roderick Long to task for his claim that sexism played a part in manufacturing the income gap between men and women. As Block explained, the gap was explained in part by the marital asymmetry hypothesis, the premise that married women expend more labour at home than married men do. Well, as women expend more labour at home, they have less labour to expend in the workplace, and therefore what labour they do expend in the workplace will garner less income. The truth of this hypothesis is suggested by the fact that the income gap that provokes so much vitriol from the Left exists between married men and married women. The gap is non-existent between single men and single women.

Block gave a lengthy response to one question about the incredulity people exhibit against the demonstrated fact that economic freedom is a necessary condition for economic prosperity. His explanation behind such disbelief was twofold. First, he argued it was in the interests of the ruling class (governments and their cooperatives) that people fail to understand the causal link between freedom and wealth, after all, freedom and government authority share an inverse relationship. Therefore, it’s no surprise that the ruling class may take steps to discredit the link between liberty and affluence. Secondly, Block took a refreshing diversion into sociobiology, which, according to Block, held that “we are the way we are because of what it took to survive years ago.” Physiological inclinations encourage people to act in ways that are detrimental to their self-interest. We are hardwired to engage in explicit cooperation, the personal, sometimes familial form of social collaboration but not hardwired whatsoever to engage in implicit cooperation, e.g., market activity. Block alluded to an incident in New Orleans after the Hurricane Katrina catastrophe where a water supplier charged $20/gallon for his freshwater. Natural disasters tend to reduce supply and therefore tend to increase prices, so $20/gallon was almost certainly a logical consequence of the lack of scarce freshwater. However, someone waiting on the water queue summoned the authorities on the “price gouger” and while he was being arrested and read his rights the people on line applauded! Block held that trust in the free market, while rational, was very much counterintuitive.

I took the opportunity to ask Block to express his opinion on intellectual property, as I was aware of the positions of many Austrians on this issue but not his. He responded with “Intellectual property is illegitimate” and went on to argue that he thought intellectual property committed believers to performative contradictions. Finally, Block responded to a question on banking, announcing that he was opposed to fractional reserve banking. Fractional reserve banking, he argued, created conflicting claims to private property, was fraudulent, and that central banks and government deposit insurance were created to manage the intrinsic dilemmas posed by fractional reserves.

I don’t agree with all of Block’s convictions, but then again he doesn’t necessarily look for or revel in consensus, as is evident in his work. Regardless of one’s disagreements, libertarians, Objectivists, economists, and political philosophers alike have much to learn from Dr. Block. I certainly hope more people take the time to meet him and/or his fellow Austrians when the opportunity presents itself, as I have.

Michael Labeit is an economics major, a disgruntled army reservist, an aspiring freelance writer, and an amateur logician. He currently resides in the People's Republic of New York City and can be reached at logician179@yahoo.com.

-Rockwell, Jr., Llewellyn H. "Why Austrian Economics Matters." Mises Institute. Web. 10 Feb. 2010.

-Rothbard, Murray N. "Praxeology as the Method of the Social Sciences." Mises Institute. Web. 10 Feb. 2010.

Labels: ,

Tuesday, November 3, 2009

Explaining the Difference Between Capitalism and Corporatism to Michael Moore

By Michael Labeit

The primary trailer to Michael Moore's latest hideously unwatchable “documentary” Capitalism: A Love Story features a narration of a series of events surrounding the financial crisis beginning in late 2008 and the federal government's particular method for addressing it with Moore ultimately proclaiming that “By spending just a few million dollars to buy Congress Wall Street was given billions.” No arguing with that proposition.

After just 22 seconds time Moore takes us to Rep. Marcy Kaptur (D) of Ohio who laments the fact that
“Everything was being handled by the Treasury Secretary from Goldman Sachs...they [influential Wall Street firms] had Congress right where they wanted them...this was almost like an intelligence operation.”
Again, touché madam. Immediately after Kaptur's last words evacuate her, the screen swings to an unidentified man in front of a Condo Vultures logo who asserts categorically that “this is straight up capitalism,” an assertion that ends up sounding - perhaps inadvertently - like a conclusion, one inferred, consciously or not, from the previous claims within the trailer. It is here where our brief search for the nonsense ends.

I cannot possibly recount how many times I have encountered this ubiquitous fusion, one that is pervasive but usually implicit, embedded within both the makeshift and prepared arguments of academics, pundits and politicians. Moore invites us to commit it ourselves.

It's the error of mistaking corporatism for capitalism.

I find myself having to identify and explain the fundamental differences between capitalism and corporatism incessantly to everyone from shout-and-holler Bill Moyer lovers to scandalously sloppy PhD professors. Unfortunately, I tend to come across people, thanks to both misinformation and disinformation from school and the media, who are staggeringly impenetrable to valid, logical demonstrations. Arguing with some very easily becomes futile, hellishly so. Nevertheless, the distinction between capitalism and corporatism exists and it must be made public.

What is Capitalism?

Defining our terms is the first step we must take in order to prove capitalism/corporatism unionists wrong. Capitalism is a social system based upon the recognition of individual rights, including private property rights where all goods, both intermediate goods and final goods, are owned privately. The “rights” referred to above are ethical-legal principles that identify and sanction man's freedom of action strictly within a social context.

Under capitalism, each individual possesses the legally unalterable authority to support and sustain himself, to conduct himself in accordance with his own independent judgment, to control the material product of his mental and/or physical labour, and, in connection with these rights, each and every individual has the legal authority to be free from the initiation of physical force. The initiation of physical force, also known as aggression, refers to any act that disturbs or upsets the soundness or cohesion of a non-aggressor's body, his property, or ownership of his property. A man must think and act in order to survive; his survival requires both mental and physical activity. Rights recognize and sanction man's freedom to proceed with thinking and acting in his self-interest. Only the initiation of physical force can frustrate another’s attempt to take those actions condoned by his rights. A man is prevented from exercising his rights only from the coercion of another. Murder, assault, vandalism, and theft are apt examples. Such actions and all other examples of aggression are illegal under capitalism, period. Accordingly, all relationships under capitalism must be formed voluntarily between consenting adults.Furthermore, this absence of aggression that exists under capitalism allows for the formation of the free market, the vast network of voluntary exchanges of property titles to intermediate and final goods.

Government intervention is yet another exemplar of initiated force since it is the use of aggression to fulfill certain socio-economic objectives. As such, it contradicts the essential nature of a capitalist economy as a non-aggressive economy. An economy remains capitalist so long as the government, or any other agency for that matter, refrains from intervening coercively in the peaceful private lives of citizens. The implications of this fact are substantial: under pure capitalism there are no taxes, no price ceilings, no price floors, no product controls, no subsidies to either the rich or the poor, no public streets, no public schools, no public parks, no central banks, no wars of aggression, no immigration restrictions, etc. Government neither resorts to aggression under capitalism nor does it sanction its use by others, end of story.

What is Corporatism?

Corporatism shares no such description. It is a social system where the government intervenes aggressively into the economy, typically with political instruments that benefit large corporations and enterprises to the detriment of smaller businesses and private citizens. Such instruments include subsidies, tariffs, import quotas, exclusive production privileges such as licenses, anti-trust laws, and compulsory cartelization designs. All involve the initiation of physical force: subsidies come from taxes, tariffs are taxes, import quotas restrict trade, license schemes prohibit non-licensed producers from producing certain goods, anti-trust laws allow competitors to gain or retain market share through legal competition in court, and compulsory cartelization speaks for itself. Economists David Gordon and Thomas DiLorenzo elaborate well on the less-than-pleasant nature and history of corporatism and economic fascism here and here . Read Murray Rothbard’s analysis of government intervention for further reference here.

Similar to socialist governments, corporatist authorities seize control of land and capital goods when they feel it is necessary to do so without regard for private property rights. However, unlike socialist governments, corporatist states usually do not formally nationalize private sector firms, choosing instead to assume de facto control over them rather than de jure control. This difference however is procedural, one of style, not of essence, making it superficial - ancillary at best - and therefore fundamentally useless as an argumentative tool of fascists and socialists to distance themselves from each other. Corporatism is a system of institutionalized aggression. Between the complementary terms “capitalist” and “non-capitalist,” corporatism finds itself comfortably within the latter.

This means that the latest attempt by the federal government to save the financial industry by subsidizing failed or failing institutional investors and banks is an illustration of a corporatist, not a capitalist effort. Market forces have nothing to do with the Troubled Asset Relief Program or the misleading “American Recovery and Reinvestment Act of 2009.” These Congressional gems do not present themselves as intellectual dilemmas for capitalists, for advocates of the free market – not whatsoever. Under capitalism, firms that do not satisfactorily satisfy consumer demand are made promptly to surrender their assets and their business influence. Financial capital is siphoned away from these unproductive enterprises and allocated toward those who have proven themselves capable of taking up the mantle of “producer.” I want at this moment to intrude the name Ludwig von Mises, the man who bluntly argues in his text Human Action that
Ownership of capital is a mandate entrusted to the owners, under the condition that it should be employed for the best possible satisfaction of the consumers. He who does not comply with this imposition forfeits his wealth and is relegated to a place in which his ineptitude no longer hurts people's well-being.

Conversely, the kinds of legislative bills, laden with underhanded plots to subsidize various politically-connected businesses and undertakings, which see the desk of our current president, and have appeared before to his immediate predecessor, are political tools meant deliberately to obstruct the operation of this most capitalistic profit and loss mechanism. Call it what you’d like but you may not call it “capitalism.” If you find yourself cursing the wretched collaboration of businessmen and statesmen, by all means proceed. I welcome it. However, if that’s the case it is not the free market system that you find so reprehensible.

A Plea for Scrupulousness

So as we see, the implicit argument made within Mr. Moore’s trailor, if it may be designated as such, is a non-sequitor. “Bailouts, influence by Wall Street firms, ergo capitalism” is not even worthy of scrutiny. The intended fulcrum of the argument has nothing whatsoever to do with the inference. Its poor quality is as flagrant as its careless ambitiousness; it reeks, with few reservations, of a willingness to jump to conclusions. Such casual “reasoning” is enough to put me on my guard and tells me what to expect from the rest of the film.

It all boils down to diligence versus sloppiness. To put it vulgarly, capitalism is not whatever America has, or whatever Washington does, or whatever the rich do. It has a very specific identity, as does corporatism. Failing to discriminate between the two makes it that much easier for the government to further extend its authority beyond already breached Constitutional bounds. Crises make for serendipitous occasions for propagandists and pseudo-intellectuals. An economically inclined public can hedge against this menace.

"Capitalism!?! Say that again, would you."

-Von Mises, Ludwig. Human Action. 4th ed. Irvington: Foundation for Economic Education, 1996. Print.

Michael Labeit is an economics major, a disgruntled army reservist, an aspiring freelance writer, and an amateur logician. He currently resides in the People's Republic of New York City and can be reached at logician179@yahoo.com.

Copyright 2009 EPJ Group LLC


Thursday, September 17, 2009

Why There is No Right to Healthcare

By Michael Labeit

Proposals for greater government intervention in the healthcare industry, including “Obamacare,” are all contingent upon the ethical proposition that people have a right to healthcare. But is this widely held assertion true? Hardly.

In order to debunk the claim that healthcare is a right, one must first identify what a right is. A right, according to the great thinker Ayn Rand, is “a moral principle defining and sanctioning a man’s freedom of action in a social context.” There are three primary rights: the right to life, to liberty, and to property.

Philosopher Craig Biddle succinctly explains these three rights as follows:

"The right to life is the right to act as one’s life requires—which means, on the judgment of one’s mind. The right to liberty is the right to be free from coercive interference—so that one can act on the judgment of one’s mind. The right to property is the right to keep, use, and dispose of the product of one’s effort—which one does by acting on one’s judgment."

As indicated by Biddle, rights can only be violated by “coercive interference,” otherwise known as the initiation of physical force, or simply aggression. Assault, murder, theft, etc - these are acts of aggression since they obstruct man's freedom of action. They prevent him from exercising his rights and taking those actions sanctioned by his rights. The significance of rights is easy to discern, for envision a society where rights are not recognized by the political authorities, where the freedom to guide one’s own life or enjoy the product of one’s own labour does not exist. We have seen (and continue to see) many examples of this in action, at home and abroad.

Now, what is meant when left-liberals argue that "healthcare is a right?" The implication is that a man is entitled to healthcare goods simply if he lacks them and requires them. The problem that arises here is that healthcare goods - hospital treatment, medicinal products, health insurance - must be produced with, among other things, human labour. Doctors must work to treat patients; drug companies must work to develop medicine; insurers must work to cover financial risk. Since healthcare goods require human labour for their existence, a "right" to healthcare goods implies a "right" to the mental and physical labour of others, a "right" to be provided with healthcare goods against the will of the providers of healthcare goods.

Such an alleged "right" violates genuine rights because it sanctions aggression, for a "right" to healthcare only has meaning when healthcare providers and taxpayers can be effectively and reliably coerced into offering/paying for healthcare goods for those who don't have them or can’t afford them. Exercising one's "right" to healthcare would necessarily involve levying unchosen duties and obligations upon others. In practice, this entails, among other things: the imposition of compulsory labour upon doctors, price controls on drugs from pharmaceutical firms, the imposition of obligatory coverage mandates upon health insurance enterprises, and, above all, increased taxation. These are all acts of “coercive interference” as they represent government threats backed by the promise of government-administered physical force.

Such authority amounts to the "right" to enslave, for a "right" to healthcare means a "right" to command involuntary servitude from others. This is the case with all so-called "positive rights." There is no right to an education, or to an income, or to housing, or to credit, anymore than there is a right to a luxury yacht. Who will be forced to fulfill the debts and obligations both financial and physical imposed by the government acting on behalf of those exercising such "rights?" What about the rights of these individuals? No - we have a right to pursue material values but not to material values. Rights promise freedom, not commodities.

Until Barack Obama and his supporters in Congress understand this, they will continue to prosecute an agenda that will surely aggravate the already chronic problems of our healthcare industry.

Michael Labeit is an economics major, a disgruntled army reservist, an aspiring freelance writer, and an amateur logician. He currently resides in the People's Republic of New York City and can be reached at logician179@yahoo.com.

-Biddle, Craig. “Immigration and Individual Rights.” The Objective Standard. Spring 2008. Accessed August 20th, 2009. http://theobjectivestandard.com/issues/2008-spring/immigration-individual-rights.asp

http://theobjectivestandard.com/issues/2008-spring/immigration-individual-rights.asp -Rand, Ayn. The Virtue of Selfishness. Accessed August 20th, 2009. Signet, November 1, 1964


Saturday, September 12, 2009

In Defense of Oil Futures Markets

By Michael Labeit

A gutsy individual named Ron has objected to my critique of Rep. Peter DeFazio's claim that speculative activity causes "oil bubbles," instances of rapidly rising oil prices. He clearly states that he endorses "Any successful effort to curtail speculation in oil futures, by whatever source" since, as he argues, "The price of gas, diesel and other petroleum derived products has wide impact on the economy of the the world." "Let the monied interests go to Las Vegas if the need to gamble gets too overwhelming...," he proclaims. Let us educate Mr. Ron.

Ron subscribes to a sentiment that many, many people share. One of the most commonly held assertions among both economic laymen and academics alike is that speculators make money through "pump and dump" schemes, manifesting their high demand for commodities or financial instruments by making large purchases, causing prices to increase significantly (the pump phase). Once prices have reached an ostensibly arbitrary point, these speculators send the market into a chaotic tailspin by abruptly selling the commodities or financial instruments they've previously acquired (the dump phase).

The net effect is a momentary but nevertheless socially-detrimental rise in prices to which everyone in the economy is subservient to, cheating all of its "honest" non-speculating participants, especially those innocent citizens and small businesses remorselessly dependent upon gasoline and other petroleum-derived goods. And since there are no real substitutes to gasoline and diesel fuel (unless you're one of those individuals that has the fortitude and patience to convert your engine to run on fast food by-product) the little guys and gals of the economy remain unable to shake this dependency that many in the media and academia have had the nerve to call an "addiction." Thus, they are being exploited.

Depressing, surely, but spectacularly incorrect.

First of all, speculators en masse cannot make money by manipulating the prices of commodities by aggressive buying and selling; they can only profit by exploiting spatial and temporal discrepancies in prices caused by exogenous phenomena - events external to the actions of the speculators - that affect the demand for and supply of goods. Speculators who attempt "pump and dump" gimmicks run the risk of being undercut by speculators who have made previous purchases and seek to exploit price differentials themselves by pre-selling other speculators.

Institutional speculators are extremely vigilant economic agents; they are supremely sensitive to changes within the market and since they're well-equipped with high-frequency trading technology they're very responsive to market movements and stand ready to react to price signals. This speculative competition makes "pump and dump" contrivances far too risky to prosecute. Thus, (temporal) speculators must yield profits by going through the trouble of forecasting future prices, juxtaposing those expected prices with current prices, and acting accordingly in order to ensure that profits are created and/or losses are avoided.

This is how oil speculators make money - by forecasting the future price of oil, comparing that future price with the current price or spot price, and acting in accordance with that comparison in order to reap a profit and/or evade a loss. True, by increasing demand for oil in the present, speculators raise the spot price of oil. But this completely ignores the crucial function of oil speculators within the marketplace.

Let's say that oil speculators, ever so eager to gain new market information, identify a series of potentially unsettling new facts. Rebels in Nigeria are stirring up hostile popular sentiment against the local corporate oil drillers, expressing their disgust by sabotaging vital transport pipelines with home-made satchel charges. Russian politicians are harassing yet another hydrocarbon enterprise that operates north of the Caucasus Mountains through frivolous and unnecessary lawsuits and audits. The Iranian military expresses an interest in purchasing additional Kilo-class diesel-electric attack submarines from the Kremlin, seeking to add additional units to their Persian Gulf fleet that may be used to patrol and eventually halt commerce in and out of the Strait of Hormuz. Venezuelan dictator Hugo Chavez mobilizes his groveling conscripts in preparation for a long-planned seizure of foreign-operated oil rigs as part of his grander agenda to achieve a "socialism for the 21st century." OPEC decides to cut output in a political maneuver to pressure the West into politico-economic acquiescence.

All these events seriously threaten to produce a lower future aggregate supply of crude oil. Meanwhile, artificially cheap bank credit, electronically manufactured by central banks around the world, is still flooding global capital markets, giving young, ambitious entrepreneurs financial hard-ons. In addition to this, reliable economists forecast a future end to a lingering, Fed-produced recession (somehow, among this international fiasco) and, concomitantly, an eventual rise in aggregate demand.

These seemingly fateful occurrences ultimately point to one effect: significantly higher oil prices. These economic phenomena, while dreadfully inopportune for gasoline-for-use buyers qua gasoline-for-use buyers, by contrast make for a rather fortuitous opportunity for oil speculators. In order to explain how speculators may profitably exploit this opportunity – and benefit society in the process - we must make a brief excursion into the wonderful world of futures contracts, for the futures market is a fundamental haven for speculators and speculative profit-making.

A futures contract is a standardized, voluntary agreement between two parties where one party, the contract-seller, agrees to deliver a specific quantity of commodities or financial instruments (assets) to the other party, the contract-buyer, on an agreed-upon date in the future at a presently agreed-upon price. The price of the assets purchased by the contract-buyer, the futures price, is set by the futures market and reflects the expectations market participants have of the future spot price of the assets in question, the future spot price being the price of the underlying asset on the exact date of delivery as stipulated within the contract. The futures price is derived from expectations of the future spot price; hence oil futures are derivative instruments.

Institutional speculators who believe that the price of oil will increase notably in the future assume the contract-buyer position before the advent of the price increase. They believe that the futures price does not accurately convey supply and demand factors, specifically that the underlying assets of the futures contract are underpriced. With all of the tumultuous events above occurring within the same general timeframe, the speculators will most likely be successful in both their assumptions and their decisions, given that they tend to be the first ones in possession of such knowledge and, therefore, they tend to be aware before the rest of their comrades within the larger market (don’t be mistaken - an amalgam of these incidents would send oil prices into the stratosphere).

When a contract-buyer and a contract-seller successfully participate in a futures contract, they are required to submit a preliminary deposit equivalent to a specific margin requirement into a margin account to be upheld by a broker who works through a clearinghouse (clearinghouses set margin requirements and broker exchanges ultimately between contract-buyers and contract-sellers in futures markets). The net daily adjustment in the value of a given futures position is added or subtracted from a participant’s margin account (credited or subtracted respectively) at the termination of every trading day in a procedure called “marking to market.”

Once the speculators purchase their respective rights and obligations as part and parcel of assuming a contract-buyer position, they wait for the international supply and demand forces to exert their influence upon the spot price. As time passes, the futures price and the spot price both rise but the futures price approaches ever closer to the spot price. The futures price and spot price equalize upon the delivery date because, as economist Dr. R. Glenn Hubbard notes, “At the date of delivery, no investor or trader is willing to pay more or less for the underlying asset than its current market value, which is the spot price.” As the futures price rises to rendezvous with the spot price, the margin accounts of the speculators increase as they are supplemented by daily monetary additions derived from positive changes in the value of their futures positions. They are making money!

As more speculators purchase more oil futures and as the oil spot price increases, the oil futures price increases as a result. However the discrepancy between the oil futures price and the oil spot price decreases as the former pursues the latter to equivalence, quickly reducing opportunities for speculative profit-making. Since oil speculators want the profit, not the oil, they sell their contract-buyer positions to other economic agents before the delivery date when they feel that any further assumption of the contract-buyer position is no longer in their best interest. Voila! Upon the sale, they finally reap their rewards, for their selling price is much higher than their buying price.

How have our oil speculators benefitted society? Well, their initial acquisition of oil futures prompts oil producers and stockpilers to stockpile and restrict the production of oil since the producers and stockpilers know that the speculators qua speculators buy oil futures only when they think that the oil spot price is headed for a real rally. If a major incline is in the destiny of the oil spot price, than the oil producers and stockpilers can make serious temporally-based profits of their own by postponing both oil production and the release of oil stockpiles until the oil spot price truly ascends. This way, oil futures markets permit speculators to disseminate vital price information to producers and stockpilers which in turn allows producers and stockpilers to adjust production and oil deliverance in accordance with supply and demand signals, decreasing production and deliverance when supply is high and/or demand is low and increasing production and deliverance when supply is low and/or demand is high. This way, futures markets help market participants conserve scarce resources. How environmental, yes?

Futures markets grant speculators the ability to rapidly adjust prices in accordance with human needs and desires. Accurate prices - those that reflect real-life supply and demand factors – must be established because only an accurate price for a good or asset can equalize the quantity of that good or asset demanded with the quantity of that good or asset supplied. If prices are too high, the quantity supplied exceeds the quantity demanded, creating surpluses that represent wasted resources. If prices are too low, the quantity demanded exceeds the quantity supplied, creating shortages that represent failures to satisfy the needs and wants of consumers. By adjusting prices in harmony with real world events, oil-derivative speculators set in motion a chain reaction that encourages economic agents to set prices and allocate resources in a way that proves to be socially beneficial.

Futures contracts do not create the price fluctuations that people commonly protest. Ironically, it’s the existence of price fluctuations that help create a demand for futures contracts, for the existence of substantial price fluctuations in goods creates a demand for speculation and hedging, two market maneuvers made possible by derivatives like futures.

We are all too accustomed to the half-witted ridicule that derivatives instruments, in particular oil-derivatives, receive from blitheringly ignorant pundits, academics, and politicians who have not as of yet pulled their heads out of their asses. Let us understand the nature of the battle our comrades in the speculative-derivative trenches wage against mal-adjustments and simultaneously develop the intestinal fortitude to publically praise their efforts in the face of a most unsophisticated intimidation from Washington.

Michael Labeit is an economics major, a disgruntled army reservist, an aspiring freelance writer, and an amateur logician. He currently resides in the People's Republic of New York City and can be reached at logician179@yahoo.com.

-Hubbard, R. Glenn. Money, the Financial System, and the Economy . Addison Wesley; 6 edition (July 23, 2007).

-"The Market Works Just in Time." Ludwig von Mises Institute. 7/7/2008. http://mises.org/story/3027

-"Stockpiles and Speculators." Ludwig von Mises Institute. 1/7/2008. http://mises.org/story/2819

-"The Social Function of Futures Markets." Ludwig von Mises Institute. 11/29/2006. http://mises.org/story/2399

-"The Social Function of Stock Speculators." Ludwig von Mises Institute. 11/22/2006. http://mises.org/story/2381

Copyright 2009 EPJ Group LLC


Saturday, September 5, 2009

Contra DeFazio on Oil

By Michael Labeit

Rep. Peter DeFazio has proposed a new tax scheme to be levied upon institutional speculators claiming, among other falsities, that it will substantially hedge against high oil prices. DeFazio has indicted speculation in the past for allegedly helping to cause the 2008 oil bubble and he believes that it again is behind the current oil price rise.

The Hill newspaper has quoted DeFazio stating that “The tax is simple; it imposes a small burden that penalizes short-term traders for speculating on the price of oil” and that “This legislation exempts legitimate hedgers from the transaction tax. Since the tax is on speculation only, it deters speculation and undermines much of the crude oil price bubble.” According to The Hill newspaper DeFazio’s plan involves “a 0.2 percent transaction tax on crude oil futures contracts” and would “tax the options for oil futures (in other words, the premium paid to have the option to buy a futures contract) at 0.5 percent.”

As always, beware of politicians bearing gifts.

DeFazio exhibits a basic misunderstanding of economics and of economic history typical of most politicians. The rapid rise of oil prices that plagued the global economy in 2008 to which DeFazio has referred to before had two chief causes: the Fed's inflationary monetary policy and the federal government's various supply constraints, the former being the primary cause between the two.. Supply restrictions courtesy of Uncle Sam have been well-documented. Congressional regulations have obstructed U.S. oil exploration and drilling in numerous places, most notably ANWR, the Outer Continental Shelf including areas off the coast of Florida where Sino-Cuban oil ventures currently operate, the Mid-west oil shale region, and others.

But it is the Fed that must be given the distinction of being the principal inflator of oil prices, since it is the principal inflator of prices per se. Under the tutelage of Alan Greenspan the Fed executed a policy of synthetically low interest rates, rapidly expanding the money supply partly in response to the 00'-01' recession. By engaging in monetary inflation and artificially lowering interest rates, i.e., decreasing rates further than what a free market would have inevitably established, the Fed sent false signals to entrepreneurs, giving them the impression that the market had decreased interest rates or the price of loanable funds, that market time-preferences fell or, in other words, that the future-orientedness of consumers had increased when in fact it had not.

With the Fed's monetary inflation underway, business undertakings that once seemed unprofitable now seemed profitable after all given that now loanable funds were less expensive to acquire. With this decrease in the price of bank credit came an increase in the quantity of bank credit demanded – entrepreneurs used this new opportunity to purchase loanable funds and use those funds to bid for and purchase productive factors (real estate, labour, and capital goods) with which to embark on those now "profitable" undertakings. The productive structure of the economy lengthened and widened as more inexpensive bank credit fueled a greater entrepreneurial demand for capital goods. This greater entrepreneurial demand for capital goods raised capital good prices and financed the growth of the capital goods industry. "Higher-order" entrepreneurs entered the market to satisfy the growing entrepreneurial demand for capital goods.

Oil was and is a very "non-specific" or versatile capital good as it is used to produce an array of other capital goods and consumer goods. Its versatility naturally makes it more marketable and this characteristic of oil promptly expressed itself as oil prices flew from around $16.21/barrel in December 2001 to a record $147..17/barrel on July 17th 2008. Thus, as interest rates on bank credit fell due to Fed monetary inflation, entrepreneurs acquired more bank credit and increased their demand for, among other things, oil, driving the price to new levels far beyond current production capacity which was and still is reeling from its own problems caused by government coercive intervention.

Let's contrast this brief but essential history of the movement of oil with the movement of the fed funds rate which is a primary monetary instrument of the Federal Reserve. The fed funds rate peaked at 6.50% on May 16, 2000. The Fed initiated its descent on January 3rd, 2001 by reducing it to 6.00% and steadily decreased the fed funds rate ultimately to a low of 1.00% on June 25th, 2003 In response to price inflation fears the Fed began increasing the rate after June but the expansion of the money supply had already occurrred thus ensuring rising capital goods prices. The Fed's monetary inflation coincides well with the oil price rise
-Bolton, Alexander. "AFL-CIO, Dems push new Wall Street tax." The Hill. August 30th, 2009. http://www.thehill.com/homenews/house/56789-afl-cio-dems-push-new-wall-street-tax -"History Of Illinois Basin Posted Crude Oil Prices." Illinois Oil & Gas Association.

http://www.ioga.com/Special/crudeoil_Hist.htm -"History of the Target Fed Funds Rate from 1990 to The Present." The Federal Funds Rate (Fed Funds Rate).


Michael Labeit is an economics major, a disgruntled army reservist, an aspiring freelance writer, and an amateur logician. He currently resides in the People's Republic of New York City and can be reached at logician179@yahoo.com.

Copyright 2009 EPJ Group LLC