Monthly Archives: December 2008

Well-Needed Lambast Of Democracy-Worship

I’ve come out with criticisms of democracy at many times in the past. I believe simple “majority rule”, which is what democracy is, is not a very good form of government. When most westerners think of “democracy”, they actually think of a western liberal form of government similar to that we have in the USA, where the government is hamstrung from becoming too heavy-handed by the natural history of the culture (in our case, English common law and natural rights doctrine), and Constitutional limits on the scope of power. Thus, many applaud the spread of “democracy” around the world, but do not understand that democracy without the above restraints ceases to be a good form of government.

I’ve pointed out that those restraints are beginning to crumble here in the USA, and we’ll all be worse for it. TJIC, along the same lines, gives his take on democracy:

I continue to assert that the leftist love affair with “democracy” is a horrid mistake. Or, rather, democracy is something horrible, and leftists love it for that very reason. Justice and freedom are the two important things in society, and democracy is neither – it is a tool whereby the political leaders are selected. Certainly, there is some reason to believe that a polity with a feedback loop whereby the worst leaders can – maybe – be ejected from power via the ballot box is preferable to the identical system where no leader can ever be ejected from power … but that’s hardly a ringing endorsement of democracy as the be-all, end-all of governance.

I am convinced that leftists love democracy, though, particularly because it does not promise freedom. Individual freedom (a negative right; an ability to say that government may not do something) is often distasteful to leftists, and “democracy” is an ideology that makes it easy to subvert the desire to stop government. “Stop government?” they say “why, the government is not something ‘other’ – the government is just you and me! All of us, working together, to accomplish a common goal! Now, it’s only fair that we the people …”, and thus begins the justification for all manner of theft, destruction and regulation.

I spoke about Libertarianism and Democracy two years ago, where the salient point is this:

Libertarianism isn’t anti-Democracy. In fact, the statement itself is nonsensical. Libertarianism is a moral system, valuing individual liberty as it’s highest ideal. Democracy is a form of government, consisting of majority rule. Or, to make it more plain, liberty is an end, democracy is a means to an end.

Unrestrained democracy does not always (some would say not even usually) lead to liberty. In fact, democracy is a subterfuge by which liberty can be restrained. The majority is often wrong, and many infringements of liberty (slavery, Jim Crow and segregation) were upheld by the majority. It’s not that I’m opposed to majority rule; I’m opposed to unjust rule. Unjust rule is far more difficult to defeat when it is justified by “the will of the people”.

Quote Of The Day

I was at lunch with colleagues today, and the question was raised as to why regulators couldn’t see the financial crisis coming due to all the “creative” financial instruments. To me it was clear, and I threw out a slight paraphrase of an old saying:

Those who can; produce. Those who can’t; regulate.

Now, it’s undoubtedly more complex than that. Just as they say generals spend time preparing for “the last” war, I would say that regulators try to address “the last crisis”. While they were trying to solve the incentives that created Enron with SarbOx, people with money on the line were looking for ways to exploit the rules of SarbOx. The system is structured to reward those who find the loopholes in the system.

But I think it’s also clear that the leading lights of the world aren’t drawn to the comparative low pay of government employment. Those who are willing to risk more get the bigger rewards.

The problem is the system. If there were LESS constraints, there would be less of a presumption of safety in the market. That presumption of safety and stability is one of those things that allowed people to become so highly leveraged. If we didn’t live in a world where we assumed that the SEC makes us safe, might we take a little more care in how we invest?

A Primer on Money

Money is critical to civilization. Without it, the capital improvements and complex economic processes are impossible, and there will be a very weak form division of labor. Money allows humanity to rise above the savagery of stone age existence. Yet most people don’t understand what money is, how it is created and how it can be abused by elites in a society to plunder the common men.

What is money?

Imagine you are a farmer. You want to purchase some shoes. You grow grain. To purchase shoes in a barter economy, you must find a shoemaker who wants some grain. If you want to purchase some eggs, you must find an egg farmer who wants grain. If you want to make a tractor, you have to find a tractor maker who wants to be paid in grain, or failing that, you have to find the tools and materials you need to build the tractor from scratch, finding suppliers who are willing to be paid in grain.
Of course, grain is perishable, so you can’t amass too much grain with which to pay for really expensive stuff. And of course, you are not likely to find a supplier who is willing to be paid in large amounts of grain since they fact the same problem. As a result, you will be limited to purchasing small items that are worth small amounts of grain.

All of these problems can be solved by trading your grain not directly for the stuff you want to consume, but for something that is
a) more long lasting than your grain
b) in wider demand than your grain

Whereas you might only find one shoemaker who is willing to trade shoes for your grain, you might find three shoemakers who are willing to trade shoes for this mystery substance. This allows you to chose the lowest cost supplier of shoes, who is willing to trade the most shoes for the least amount of your grain.

Additionally, you can stockpile this substance, storing it for later consumption, allowing you to save years of productions in order to purchase some very expensive item like a tractor.

Finally, if this substance is popular enough, you will be able to find many people willing to buy your grain by trading you this substance. This allows you to maximize the payment you get for your product.

Of course, given a choice between two substances that have these qualities, you will naturally choose the substance that has the best qualities you are looking for, choosing the more popular substance over the less popular one if you are looking for something to trade in the near term, and choosing the more durable item over the less durable one if you are looking to stockpile it.

If you are not a farmer, but a tractor maker, selling one tractor every few months, but needing to buy food daily you will of course have an additional quality you demand: you want something that is divisible.

Any human society where people engage in trade, some substance or small group of substances that are
a) homogeneous or fungible
b) durable
c) in wide demand

will come to dominate the trade. These substances are what we call money.

Inflation in a free market

Since money is merely a commodity that is widely demanded for trading purposes, it is produced like any other commodity. Farmers grow tobacco. Distillers distill whiskey. Chemists produce cocaine paste. Miners produce gold. The production is dictated by the demand for the commodity.

Of course, the larger the supply of money that is available for trade, the lower the price of the money in terms of other commodities. In other words, if the supply of gold expands, everything else being equal, the number of bushels of grain an ounce will purchase will go down. Of course, to a persons seeking to purchase things with the money, they see this as each bushel of grain having a higher price.

Rising prices erode savings. The faster the supply of a money commodity is increasing, the less useful it is as a way of saving. This reduction in the usefulness of the commodity translates into a reduced demand for it. The reduction in demand means that people will be less interested in trading other goods for it, which again results in a rise in prices, since a a grain seller will want even more of the stuff before he is willing to risk a trade.

There are two outcomes of rising prices due to inflation in a free market. The first is that production is reduced. As the money commodity becomes worth less, its production becomes less profitable. The production eventually slows until the effort involved in producing money is once again justified by the profit earned by selling it for other goods and services.

The second is that people look for more stable substitutes, and start switching to using alternate money-commodities for their transactions.

Deviation From Free Markets

Money standards
Of course, the producer of the money commodity would prefer that this not happen. Many would see an opportunity for great profit if they could produce the commodity as rapidly as possible without having to worry about people abandoning the money.
So they call for laws to force people to do business in that commodity. These laws are known as legal tender laws. These laws force people to settle debts in the commodities whether they want to accept them or not. The force is to the detriment of consumers and money users, who are forced to forego a better money in favor of the standard.
Taxation can confine people to using a particular commodity just as legal tender laws do. If the government routinely levies taxes that are to be paid in fish-heads, for example, people will have to procure a certain number of fish-heads annually to pay the tax. The fish-heads being in wide demand, naturally they are used in indirect exchange. Other commodities are at a substantial disadvantage as far as their usefulness as a money.
Discriminatory Taxation
A government can also make alternate commodities even less popular by taxing transactions or saving in other commodities more heavily than the government approved money commodity. Her in the United States, for example, if you keep your savings in gold rather than in U.S. dollars, when you trade the gold for something else, you are levied a capital gains tax on the difference between the prices in dollars of gold on the day it was traded away and the day you acquired it.

The dangers of government control of the money supply

There are two properties that make governments especially destructive:

1)Governments are able to seize resources by force and to compel people to do buainess with them allowing them to continue economically unprofitable activities for far longer than free market enterprises.

2)Governments, being controlled by people who have little incentive to take a long term view, and a great deal of incentive to use their offices for short-term personal gain

When governments seize control of the money supply, the result is usually disaster. They overproduce money, usually by debasing coinage. They force people to use the state approved currency to the exclusion of all else. In extreme cases they wreck the economy so badly that saving because impossible, and the economy reverts to a barter economy.

Today, the United States government has engaged in massive amounts of spending. They are not getting this money through taxation. Rather they are borrowing it, and a good porioin of what is being borrowed is money created by the Federal Reserve. The production costs of U.S. dollars being almost nonexistent, the Federal Reserve can continue to create money profitably through a Zimbabwe like hyperinflation. The Soviet Union and Nazi Germany were founded upon the ruins of nations whose economies had been strangled by government mismanagement of money. Will the United States similarly succumb to tyranny? Time will tell.

Recommended Reading

What has government done to our money? by Dr Murray Rothbard

Milton Friedman and the Case against Currency Monopoly by G Selgin

I am an anarcho-capitalist living just west of Boston Massachussetts. I am married, have two children, and am trying to start my own computer consulting company.

Bush ignores Congress…

…again. When Congress couldn’t come to terms on a bailout for the big three stooges, President Bush had to make sure it got done:

President George W. Bush’s decision to provide up to $17.4 billion in short-term loans should help General Motors Corp. and Chrysler LLC avoid a short-term cash crisis, but it will force them to dramatically change how they operate – or face bankruptcy.

No one should be surprised by this. The question is whether or not Obama will be inspired by this to continue the imperial presidency “for the good of the economy”. Your thoughts?

Condemning Those Who Forget History

Financial analysts are starting to notice a disturbing correlation between the present economic crisis and the roots of the stagnation that gripped Japan for the better part of a decade starting in the 1990s.

In today’s New York Times, for example, Martin Flacker notes a surprising similarity between what the Federal Reserve has been doing and the actions that the Bank of Japan took in response to it’s crisis:

The Bank of Japan first lowered interest rates to zero in 1999 for a year and then again in 2001 for five years. The Japanese central bank was trying to contain a domestic financial crisis not unlike the one now crippling global markets, in which collapsing real estate and share prices caused the bankruptcy of large financial companies, like Yamaichi Securities in 1997.

The central bank’s hope was that by lowering borrowing costs to virtually nil, it could encourage commercial banks to lend more money to businesses and consumers, rekindling demand.

Sound familiar ? It should, because it’s essentially the same thing that the Federal Reserve Board has been doing since September.

And the similarities don’t end there, Anthony Randazzo at Reason notes the five mistakes that Japan made when faced with a bursting asset bubble:

First mistake. The Bank of Japan tried to ease economic pains during their downturn through the 1990s by loaning large amounts of money to businesses. However, such attempts to recapitalize the market were counteracted by underlying management problems endemic to the dying firms.

According to Shigenori Shiratsuka, Deputy Director and Senior Economist at the Bank of Japan, even though firms became unprofitable, the government still encouraged lending to them to prevent losses from materializing. There were heavy concerns about a failing firm increasing unemployment.


Fifth mistake. With the Japanese government enabling lending to zombie businesses, taking cash away from productive ventures, and passing tax laws and other regulations that did not promote growth, the private sector was actively discouraged from investing.

Again, sound familiar ? The United States started doing that in September with the financial services bailout — which quickly expanded beyond the financial services industry as more and more companies sought to redefine themselves as banks in order to be eligible for government largesse — and continues today in the just-announced auto industry bailout.

Rather than letting the market liquidate these zombie companies in an orderly fashion, the Japanese government instead sought to prop them up, which only served to delay the inevitable day of reckoning, and divert money from more productive uses.

But if you thought the similarities between late 80’s Japan and America 2008 ended there, you’d be wrong; the Japanese also tried a healthy dose of Keyensian pump-priming:

As January 20 nears, Barack Obama’s ambitions for spending on the likes of roads, bridges and jobless benefits keep growing. The latest leak puts the “stimulus” at $1 trillion over a couple of years, and the political class is embracing it as a miracle cure.

Not to spoil the party, but this is not a new idea. Keynesian “pump-priming” in a recession has often been tried, and as an economic stimulus it is overrated. The money that the government spends has to come from somewhere, which means from the private economy in higher taxes or borrowing. The public works are usually less productive than the foregone private investment.

In the Age of Obama, we seem fated to re-explain these eternal lessons. So for today we thought we’d recount the history of the last major country that tried to spend its way to “stimulus” — Japan during its “lost decade” of the 1990s. In 1992, Japanese Prime Minister Kiichi Miyazawa faced falling property prices and a stock market that had sunk 60% in three years. Mr. Miyazawa’s Liberal Democratic Party won re-election promising that Japan would spend its way to becoming a “lifestyle superpower.” The country embarked on a great Keynesian experiment:

Over a period from 1992 through 1999, the Japanese injected 118.2 trillion Yen (the equivalent of about 203.4 billion US Dollars at current exchange rates) into the economy, and it didn’t help move the economy one bit. Japan’s economy was stagnant for a decade and didn’t start moving again until 2003:

Japan’s economy grow anemically over that decade, but as the nearby chart shows, its national debt exploded. Only in this decade, with a monetary reflation and Prime Minister Junichiro Koizumi’s decision to privatize state assets and force banks to acknowledge their bad debts, did the economy recover.

Do Barack Obama, George W. Bush, Hank Paulson, and Ben Bernanke really think that the United States can succeed where the Japanese so obviously failed ?

More importantly, can American’s learn from the mistakes committed by what was once the most dynamic economy in the world ?

We’d better hope so, otherwise we could be looking at a pretty long and bleak decade.

Cross-posted from Below The Beltway

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