In which I give my third take on Chris Espinal's article and Jahfre Fire Eater's response to that article. by Walt Thiessen
(libertarian)
Tuesday, February 3, 2009
Chris Espinal's article, The Economics of Random Stuff: Preferences, claims that it's important to note that when trying to estimate how bailout money will be used by individuals, their consumer preferences should be included in the equation. In his response to Chris's article, So Why DO Most Economists Ignore Preferences?, Jahfre Fire Eater claims that economists ignore preferences because they are caught in a Keynesian/Friedmanite dynamic struggle that ignores the insights of Austrian economics.
I tend to agree with Jahfre more than Chris, but I really think both articles miss the critical point, which is that the bailout is about plunder vs preferences, not about which preferences individuals will select.
We live in an entire society based on plunder, and the plunder begins and ends with the monetary system. This sounds harsh to some people, since we associate the word "plunder" with sacking and looting an entire town. It's the kind of activity that only barbarians participate in. Civilized people do not.
But when an entire society is based on the idea that the majority may rightfully take property from some people for the benefit of others, I say that qualifies as plunder. Our current fiat monetary system is the basis for the plunder because it itself is based on plunder. The reason derives from how the money is created. Whenever the Federal Reserve (or any other central bank in the world today) wants to create money, it does so by issuing a debt in the public's name. (Notice that the Fed never issues the debt in its own name, a wonderful way to earn money. They pay the interest out of our pockets, and they pass the obligation along to us, while the interest is collected for the benefit of the Fed's member banks and other institutions and individuals who lend the money in the first place. Is there another more accurate word for this than "plunder"? I don't think so.)
For instance, one very common way to do this is for the Fed to sell a Treasury note, thereby creating a debt for the entire public. Indeed, 90% of all profits earned by the Fed (if they can be truly described as "earned") are, by law, collected by the Federal Government. (The other 10% go to the Fed's hidden shareholders, but that's another topic for another day.) So, in essence, the Fed puts "we the people" in debt and turns the money over to Congress to spend as they see fit. In this way, a forced wealth transfer takes place. Note that the public have no choice about whether they are going into debt. The majority may favor it, but the minority are forced to accept the obligation even if it's against their wishes.
Additionally, since it is a debt, the public are required to pay interest on that debt, which is the primary reason why the Income Tax remains in effect and was passed into law the same year that the Federal Reserve Act was originally passed: 1913. (Ben Samuel, please take note, because you omitted this crucial point in your article on the income tax.)
The beneficiaries of the plunder are the politicians and the bankers. The victims are the taxpayers and the people who have to use this form of money whether they want to or not. The politicians and bankers and most economists love to claim that the taxpayers are beneficiaries too, but that's misleading. Not only does it overlook the fact that the taxpayers have no choice about "investing" in this activity, but the results of government funded programs are routinely negative on balance. The list of government programs that have been created to do good but which have ended up doing more net harm than good is longer than most people can itemize.
Worse yet, this primary form of plunder encourages secondary and tertiary plunder on a regular basis. When the economy is dependent upon a debt being issued in order to grow, a curious side-effect is created which is that the only way to grow the society is to send the society deeper into debt. Mere creation of wealth isn't enough, because the interest payments and hidden price inflation require that an overly large amount of wealth must be created just to break even. This is a horrible trap which produces devastating and hidden results. The results are hidden because it is very difficult for the average person to make the conceptual connection between the original plunder and the eventual outcome. The fact that the plunder leads inescapably to financial crises like the one we are currently experiencing is too difficult a concept for many people to handle, primarly because the idea has never been adequately explained to them by their leaders, educators, and the media. And why would either the leaders or the media want to explain it? They wouldn't. They believe it would not be in their best interests to explain it. Nor do the educators believe it is in their best interest to explain it, in large part because most educators themselves don't even understand it.
One of the unrecognized consequences in Espinal's context of preferences is that the preference of individuals to pay off debt and not spend money is considered by economists to be an undesirable preference. The reason this is true is, as I pointed out above, the entire system is dependent upon society as a whole to go into deeper debt in order to achieve the fiat money master's dream (nightmare really) of "prosperity." This tendency to go into debt as a society also encourages individuals to go into debt. By creating a hidden obligation for individuals as members of society, regardless of whether they would voluntarily choose to accept such a debt on their own, a morality of debt permeates that society and is encouraged to grow.
This morality of debt is also encouraged by the inflationary effect of fiat money. The more fiat money that is produced, the less the value of that money (at equilibrium) will tend to be. In this way, value is surreptitiously stolen from people, value which only shows up later as inflated prices.
When the system trips over itself, as any system based on debt is bound to do from time to time (and which so eloquently describes the current financial crisis), the money supply is reduced somewhat, and a deflation occurs. In a monetary system that depends upon a constant creation of inflation in order to survive, this is nothing less than catastrophe.
So really it is irresponsible to define the problem as merely one of preferences. Omitting the plunder aspect omits the most important aspect of the story.
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Fortunately for those of us who crave Liberty, The State, under this current system of plunder, can only reach a certain proportion before it consumes itself; the sad fact about that, as usual, it is the People who will suffer. The State, once it becomes the largest employer in a country, always saps the productivity from the economy. As we have been seeing, our government has become the largest employer, not only in this country, but in the world. The amount of productivity that is siphoned off of the economy of this country is enormous and cannot be completely comprehended or calculated due to the very nature of The State.
Eventually, there forms a high degree of absurdity produced by The State especially when it comes to regulatory edicts and the execution of those edits. The shear volume of legislation emanating from The State eventually becomes unmanageable and, as I said, absurd since there reaches a point when it is not mentally or physically possible to know what all the laws are, how they are applied and when they are violated.
The confiscatory nature of The State always distorts the economic health of a country; wealth is transferred from the productive sector of the economy to the un-productive public sector of The State and the machinery necessary to keep it running. At some point The State reaches that critical point where it consumes the vast wealth being produced in the country, dislocations are created not only by government policy, but also by the requirements of the government itself. The larger The State becomes the more it consumes and the more distortions are exposed within the economy. The exploitative nature of The State combined with the non-productive structure of its operations will always prove to be the bane of economic health. The State becomes the ideal employer, providing the best services, benefits and at times the best pay for the least productive form of employment: Bureaucracy.
As The State becomes larger and larger, it ultimately destroys the very system of productivity that it depends upon for its power. Since it must, over the long term consume more and more of the productive economy to sustain its own growth it naturally lowers the productive incentives in the country to the point that it can no longer fuel itself. The “Monster” eventually eats itself.
Additionally, the fiat monetary system itself not only promotes the ideology of plunder, it depends upon the ideology of coercion in the form of taxation. In fact, as you may know, a former head of the New York Federal Reserve once stated that under a fiat monetary system there is no need for taxation to generate revenue for the government and that the only reasons for taxation in the form of income tax, estate tax and gift tax was to enforce the use of the fiat currency, to maintain social control and to redistribute wealth. The Federal Reserve Act would not have the power it does if it were not for the 16th and 17th Amendments to the Constitution, all of which were passed in the same year 1913.
It is indeed officially sanctioned plunder, The State is the barbarian which is sacking this country and the People have yet to awaken to that fact, but they soon will awaken and hopefully they will have enough sense to do something about this mess.
Posted By: Jahfre Fire Eater
Date: 2009-02-03 13:08:03
Hi Walt,
I certainly agree with your assessment of the plunderish nature of our monetary system. :-)
I believe you and I are talking about the same "system". Your article deals more with the nature of the system while I was addressing why people who should know better, still support it fervently.
My point, made in way too many words, as usual, was that "most" economists support that system of plunder because their way of life depends on doing so. They act, due to indoctrination by the guild, to benefit themselves and their descendents.
Their entire life-purpose is to prevent the bread, which plundering empire builders shower upon their guild, from landing butter-side-down. Preferences and future generations (not in their lineage...supposedly) be damned.
I avoid buying into grand and glorious conspiracies of evil when the real-world provides obvious incentives for such individual behavior to be common, accepted and rational even when taken as a whole, it is manifestly absurd. It's a matter of examining the incentives for behavior with the understanding that they are most often local and immediate for each individual in spite of that individual's relationship to the overall nature of the empire.
In Christopher's original article he suggested that economists should change their behavior. I offered my perspective on why their current behavior remains in force. despite its apparently irrationality. It isn't based on knowledge, understanding or "rightness". It is based on selfish, personal incentives to preserve their way of life.
Saying economists should start to consider the relevance of preference is akin to suggesting that poison ivy should be morning glories instead. Supporting the plundering empire isn't a preference, it is the nature of products of the guild.
One could describe the benefits of morning glory-ism from now til the end of time and not a single poison ivy plant would make the change. Assuming that most economists are free to, or capable of, changing their fundamental nature is a fallacy. It falls into the bucket of bad thinking that I call, "if everyone would just see the world the same way I do everything would be better." Well, they won't. Now what. Time for plan B.
Posted By: Walt Thiessen
Date: 2009-02-04 07:11:49
Jahfre: But isn't it fair to say that the main reason that economists don't want to change their understanding is that they are dependent upon the current system as it is currently configured regardless of warts? Without limiting the discussion to that system solely, there would be no difficulty in changing their views. As you said, they struggle to prevent anyone, particularly themselves, from thinking from a "butter side down" viewpoint. That's why I believe that you really can't separate the plunder vs preferences debate from the preferences vs non-preferential debate, except by insisting that "butter side down" doesn't exist. To my mind, that view constitutes "missing the critical point."
Posted By: Jahfre Fire Eater
Date: 2009-02-04 07:27:34
I do agree Walt. I didn't intent to imply that ANY part of this horrible system should be considered in isolation from any of the other parts. Plunder is ALWAYS what keeps an empire growing. I don't think I said anything to soften or obscure that fact. You made that point very well. I was making another one; not comparing them on their merits.
From the elected officials to the economists who chirp encourgement in their ears, to the religious fear-mongers to the people in the streets who voted 98% to support this current system. None of them, none of their motivations or incentives, in cluding plunder, are an more or less important than any other component of the system in my view.
Plunder is always a necessary result for an Empire to sustain itself as you described so well. And, there will always be people who believe that system of plunder is right good and proper because they do not see it as plunder but as progress...thus the term "Progressives". It is this deeply ingrained cultural acceptance and defense of an obviously horrible and oppressive system, and the necessary, resulting plunder, that I endeavor to undermine in my writing and daily interactions with the public.
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