Year-End Update

Before sending 2014 on its way and welcoming with hopeful anticipation the new year, here is a round-up of some essays posted in recent months:

• Will America follow Canada’s economic fight against impertinent obstructions? — on the lessons Canada (and other Commonwealth countries) can teach the United States on the inverse relationship between economic growth and state interventions, whether in the form of taxation policy, regulations, or government debt;
• Market independence or business as usual? — following Republican gains in the November U.S. mid-term elections, will the GOP adhere to constitutionally limited government of enumerated powers or will Washington politics be ‘business as usual’, pursuing bureaucratic aggrandisement, crony capitalism, and fiat money policies? This essay was published courtesy of the Institute of Economic Affairs;
• Ethan Frome’s winter of discontent — on the role of winter in Edith Wharton’s novella, infusing the family of one Massachusetts community with physical and spiritual bleakness; and
• Scrooge: a Christmas capitalist-icon — why the skinflint is the hero of Charles Dickens’s A Christmas Carol, illustrating the sources of wealth for community well-being and the distinctions between public welfare and private charity.

If any of these essays catch your fancy, please share them with your friends and colleagues. DMI needs encouragement to flourish and seek out new research and publishing opportunities!

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#DMI_Reads Update — Reading has been sporadic since the last update; but apart from dipping into the works of William Graham Sumner (Yale sociologist from the early 1900s, who wrote on politics and economics), and the fictional works of Edith Wharton and Charles Dickens (mentioned above), I began the autumn with a Downeast classic and ushered in the winter months with three fine works in political economy:

• Sarah Orne Jewett’s The Country of the Pointed Firs (Boston and New York: Houghton Mifflin, 1896) — a lovely summer sojourn in a Maine coastal community. Curiously, Edith Wharton found Jewett’s perspective unrealistically pleasant and an incentive to write Ethan Frome;

• Roger Koppl’s From Crisis to Confidence: Macroeconomics after the Crash (London: Institute of Economic Affairs, 2014) — an analysis of why Western growth continues to lag, despite many countries’ recovery from recessionary woes;

• Dwight Lee and Richard McKenzie’s Failure and Progress: The Bright Side of the Dismal Science (Washington, DC: Cato Institute, 1993) — a contemporary classic in public choice economics and capitalist theory, important for its examination of the role of present failure for future success and of the dynamic nature of the marketplace, influenced by market competition and political competition; and
• Christopher Snowdon’s Selfishness, Greed and Capitalism: Debunking Myths about the Free Market (London: Institute of Economic Affairs, 2014) — a marvellous debunking of progressive liberal myths concerning self-interest, ‘perfect knowledge’, GDP, and levels of poverty.

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It only remains to remind you to follow DMI on Twitter and on Facebook, and to wish all my readers good health and good fortune in 2015!

Scrooge: a Christmas capitalist-icon

Ebenezer Scrooge has been appropriated by the political left as the poster-child of all that is wrong with capitalist society;¹ he is, in the words of an employee’s wife, ‘an odious, stingy, hard, unfeeling man (91)’.

Yet we should read him as the hero — for such he is — of Charles Dickens’s A Christmas Carol, a capitalist icon worthy of emulation. His one moral failing is no fault of capitalism and, true enough, the path toward his redemption lies through it.

As the vehicle of Scrooge’s transformation is fueled by ghosts of Christmases past, present, and future, so does the chronology of capitalism — where the satisfaction of present wants depends on past economic decisions — lead to future prosperity and well-being.

Self-interest

Scrooge’s behaviour in his personal affairs has become the literary personification of greed and selfishness; yet in his public affairs, where self-interest motivates his actions, Scrooge is a benefactor of the common good. Scrooge would not succeed unless he served a public need; his wealth is proof that others benefit from his attention to business. ‘His wealth is of no use to him,’ his nephew Fred mistakenly believes; ‘He don’t do any good with it (98).’ For, if he failed to take an interest in the needs of others — hardly a definition of selfishness — Scrooge would be among the poor who seek aid and comfort.

Nevertheless, the ghost of Jacob Marley, Scrooge’s sometime associate, damns their all-consuming entrepreneurial zeal: ‘Mankind was my business. The common welfare was my business (30)’. But their money-lending venture, far from being an impediment to societal improvement, was an aid to prosperity and well-being, enabling others their own ‘self-interested’ opportunity to offer their goods and services in the marketplace, and themselves prosper in the bargain.

The establishment of Scrooge & Marley, like every profitable enterprise patronised by consumers (whose wants and needs are satisfied), promoted the interests of mankind. Michael Levin, CUNY professor of philosophy, limns the any number of ways Scrooge’s self-interest is a boon to his community and its present and future desires. It (along with voluntary exchange and the division of labour) was among the hallmarks of capitalist culture wherein Western civilisation blossomed, according to Adam Smith’s creed. ‘But man has almost constant occasion for the help of his brethren,’ he wrote, ‘and it is in vain for him to expect it from their benevolence only.’

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chuses to depend chiefly upon the benevolence of his fellow-citizens. Even a beggar does not depend upon it entirely.²

No less than Scrooge’s final reformation is the outcome of self-interest. Before, its negative effects are directed solely against him, as his nephew witnesses:

‘I am sorry for him; I couldn’t be angry with him if I tried. Who suffers by his ill whims? Himself always. Here he takes it into his head to dislike us, and he won’t come and dine with us.’ (98)

Afterwards, shown by the Christmas ghosts how he disavowed the bonds of friendship he once cherished in his youth, and the bitter end to which his obsessions, unaltered, will lead him, Scrooge vows to alter his life and ‘honour Christmas in my heart, and try to keep it all the year (134).’ His alteration enriches his own life and the lives around him.

‘Why, bless my soul!’ cried Fred, ‘who’s that?’

‘It’s I. Your uncle Scrooge. I have come to dinner. Will you let me in, Fred?’

Let him in! It is a mercy he didn’t shake his arm off. He was at home in five minutes. Nothing could be heartier… Wonderful party, wonderful games, wonderful unanimity, won-der-ful happiness! (144-45)

‘Failure and Progress’

Indeed, it may be said that in employing the ghosts of Christmas past, present, and future, Dickens unknowingly evoked the importance of time to capitalism, of present investment for future gain, distinguishing long-term consequences from short-term expediency, good or ill.³

Scrooge earns his living as a money-lender; from the state of his enterprise we can surmise that many to whom he lends succeed and profit. Yet it must no doubt also be the case that others fail and thus face unpleasant financial repercussions. Dickens insinuates that such hard practice is among Scrooge’s sins, but this confuses the ethical underpinning of capitalism with private morals.

Resources are scarce, whether they be in the form of equipment, skilled labour, or capital investment. Businesses that succeed by satisfying society’s needs turn these scarce resources to good use; those that succumb, waste them and deprive society of material gain. Turning a blind eye to this inescapable reality results in society’s loss, even for those who fail in the marketplace. Success for one group enables succour and the promise of future success for the less fortunate. As Dwight Lee and Richard McKenzie write in Failure and Progress:

The pervasive failures of many people could be more than balanced by pervasive successes of other people who produce better products at lower costs and prices. Individuals who fail are at the same time gaining from the system that induces people to compete and therefore to fail as well as succeed. In practical terms, that means that the business people who fail may actually be experiencing a higher level of well-being because of the economic system that permits their failure.⁴

(In the 1951 film starring Alastair Sim, Scrooge conducts an hostile take-over of his employer’s firm; yet if old Mr Fezziwig cannot compete in a progressive world, Scrooge’s management will ensure that scarce resources are not wasted but put to more effective use as directed by consumers, promising employment and success instead of a shuttered shop. The film also illustrates the many debtors who rejoice at Scrooge’s passing, yet this only means that the limited funds available for enterprise are not put to the disposal of more promising business ventures.)

Charity

In his neglect of private charity, Scrooge may fairly be the object of opprobrium. Like many to-day, he relies on the government’s public welfare, ‘the workhouses’ and ‘the prisons’, ‘the Treadmill and the Poor Law’ (13), to alleviate the suffering of the poor. Government welfare is conflated with ‘charity’, a linguistic error that confuses private and public roles, subjecting one to undeserved commendation and the other to shameful neglect.

Scrooge mistakes the welfare provisions he supported through taxation as effective means of assisting the poor. Public Choice economics demonstrates that the political arm of redistribution often has ulterior and self-serving motives; while Lee and McKenzie argue convincingly that we should not expect the poor to exploit political competition any better than market competition. Moreover, the investment of time and care exemplifying the ‘personal touch’ translates into charity having a greater chance of changing lives for the better than impersonal, bureaucratic welfare schemes.

Proponents of welfare, meanwhile, compound the problem with their naïve faith in state-run philanthropy. ‘Socialism, like the ancient ideas from which it springs, confuses the distinction between government and society’, wrote Frédéric Bastiat in The Law. ‘As a result of this, every time we object to a thing being done by government, the socialists conclude that we object to its being done at all.’⁵

It is worth noting that the solicitors for the poor who approach Scrooge for assistance are in full knowledge of the limitations of state institutions, confessing that ‘they scarcely furnish Christian cheer of mind or body to the multitude,’ in avoidance of which ‘many would rather die (14).’ It is Scrooge’s capitalist acumen that will permit him to be, not a scourge to society and its destitute, but their patron.

But there is something more profound at work than Scrooge learning that public welfare is no match for private charity. The lesson that the Christmas ghosts impress upon him is that, while business has its proper sphere, man does not live by commerce alone — his acquaintances (such as they are) merely cultivated for their business connexions.

Scrooge’s cramped existence can only be alleviated by rediscovering his lost humanity — ‘he had been revolving in his mind a change of life … and hoped he saw his new-born resolutions carried out (116)’ — abandoned when he forgot that capitalism was the means for happiness, not its realisation. Scrooge’s dilemma of self-interest is well-summarised by Howard Baetjer:

…the opportunity cost of his ceaseless accumulation of assets is the far greater wealth in “psychic income”—pleasure—that he forgoes. No doubt Scrooge is doing what he perceives to be in his self-interest—each of us is homo economicus to that extent—but as the ghosts show Scrooge, he is making catastrophic mistakes.⁶

For although Scrooge will rise to be a great benefactor of his community, the greatest beneficiary will be Scrooge himself.

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So, it is well-nigh time for defenders of free markets and true economic progress to claim Ebenezer Scrooge as one of their own, rescuing him from progressive liberals who denigrate his services on behalf of the common good. They are the heirs of the children ‘Ignorance’ and ‘Want’ (see 107), whose sentimental obfuscation of capitalism’s mixture of failure and progress result in material deprivation when there could be plenty.

Both should remember Margaret Thatcher’s justly famous maxim, ‘No-one would remember the good Samaritan if he'd only had good intentions; he had money as well.’ And, along with nephew Fred, we should toast his accomplishments as an icon of capitalist bounty:

A merry Christmas and a happy New Year to the old man, whatever he is! Uncle Scrooge! (104)

ENDNOTES

^1. Charles Dickens, A Christmas Carol [1843], Arthur Rackham, illus. (Philadelphia: J.B. Lippincott, 1915). All quotations in the essay are taken from this edition.

^2. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations [1776], R.H. Campbell and A.S. Skinner, eds., Glasgow Edition of the Works and Correspondence of Adam Smith, Vol. 2a (Indianapolis: LibertyClassics, 1981), I.ii.2.

^3. See Henry Hazlitt, Economics in One Lesson [1946] (Auburn, AL: Ludwig von Mises Institute, 2008), 5: ‘…the whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.’

^4. Dwight R. Lee and Richard B. McKenzie, Failure and Progress: The Bright Side of the Dismal Science (Washington, DC: Cato Institute, 1993), 27.

^5. Frédéric Bastiat, The Law [1850], Dean Russell, trans. (London: Institute of Economic Affairs, 2001), 46.

^6. Howard Baetjer Jr., ‘Ebenezer Scrooge and the Free Society’, The Freeman, 38:12 (December 1988): 470.

Ethan Frome’s winter of discontent

Fascinated as I am by the writing career of Edith Wharton, when The Austin Chronicle announced that her novel, Ethan Frome, was to be its book club’s December pick, it seemed an ideal opportunity to read it. This short essay records some of my first impressions.

Ethan Frome is a sad tale;¹ and yet, if we read ‘to know that we are not alone’, we finish the novel with a deeper awareness of life’s sublime vicissitudes and are grateful its troubles belong to another. From the beginning, the ‘starkness’ of Ethan’s existence is laid bare.

I had come in the degenerate day of trolley, bicycle and rural delivery, when communication was easy between the scattered mountain villages, and the bigger towns in the valleys, such as Bettsbridge and Shadd’s Falls, had libraries, theatres and Y.M.C.A. halls to which the youth of the hills could descend for recreation. But when winter shut down on Starkfield, and the village lay under a sheet of snow perpetually renewed from the pale skies, I began to see what life there—or rather its negation—must have been in Ethan Frome’s young manhood (7-8).

The frigid landscape of Ethan Frome is far more than a backdrop against which events unfold. It is a major player in its own right; harsh, daunting, unforgiving — and compelling. ‘Why now?’ asks The Austen Chronicle about taking up Ethan Frome. ‘Because the recent cold snap got us thinking about our favorite freezing-temp love stories.’

But unlike the world of Nancy Mitford, love does not thrive in the cold climate of Starkfield for the Frome clan.² Indeed, if their frustrated emotional lives were to be represented by any season of the year, it is winter at its worst, when it portrays life’s termination in death — especially when that death is the loss of hope. The desolateness of winter pervades Ethan Frome.

Day by day, after the December snows were over, a blazing blue sky poured down torrents of light and air on the white landscape, which gave them back in an intenser glitter. One would have supposed that such an atmosphere must quicken the emotions as well as the blood; but it seemed to produce no change except that of retarding still more the sluggish pulse of Starkfield. When I had been there a little longer, and had seen this phase of crystal clearness followed by long stretches of sunless cold; when the storms of February had pitched their white tents about the devoted village, and the wild cavalry of March winds had charged down to their support; I began to understand why Starkfield emerged from its six months’ siege like a starved garrison capitulating without quarter. Twenty years earlier the means of resistance must have been far fewer, and the enemy in command of almost all the lines of access between the beleaguered villages; and, considering these things, I felt the sinister force of [the] phrase: “Most of the smart ones get away.” But if that were the case, how could any combination of obstacles have hindered the flight of a man like Ethan Frome? (8-9)

For Ethan’s obstacles were many, a legion of soul-destroying disappointments: a promising engineering career cut short by a father’s sickness; unrelenting duties on an unprepossessing farm and mill; a mother’s lingering dementia and an unhappy marriage, thusly ill-contracted.

After the funeral, when he saw her preparing to go away, he was seized with an unreasoning dread of being left alone on the farm; and before he knew what he was doing he had asked her to stay there with him. He had often thought since that it would not have happened if his mother had died in spring instead of winter… (70)

Even the prospect of abandoning Starkfield for a modicum of contentment comes to naught by his wife Zeena’s social inadequacies, as ‘Ethan learned the impossibility of transplanting her. She chose to look down on Starkfield, but she could not have lived in a place which looked down on her.’ The outside world, too, conspires against him. ‘Even Bettsbridge or Shadd’s Falls would not have been sufficiently aware of her, and in the greater cities which attracted Ethan she would have suffered a complete loss of identity (71-72).’

Only the arrival of his wife’s destitute cousin, Mattie Silver, sent to Starkfield to aid Zeena in her perpetual discomfort — ‘[w]hen she came to take care of his mother she had seemed to Ethan like the very genius of health, but he soon saw that her skill as a nurse had been acquired by the absorbed observation of her own symptoms (72)’ — offers him moments of respite, ‘a “feel” of spring in the air (149)’, that fleetingly relieves his sadness, then heightens it, and with a stroke makes it permanent.

The climax of the story is swift; its repercussions, like most bad ends, plays out for decades. His usually self-absorbed wife, newly curious of an unsuspecting-Ethan’s attentions elsewhere, pronounces the cousin’s care inadequate; she hires a new girl to tend to the household and turns an ill-prepared Mattie out to fend for herself. In a fit of desperation Ethan and Mattie, both facing unpalatable futures, opt for a careening sled and a well-placed elm to bring them lasting rest, but fate has other plans: they survive the ‘smash-up’ — she an invalid, he badly crippled — with the cruel irony that Zeena must now serve as nurse-maid to both.

It is in these vicissitudes where Ethan Frome is as immemorial as human nature and the four seasons; sadly, Ethan and his family know only one. Edith Wharton believed that at its heart was a bare, uncompromising moral as timeless as the bedrock upon which the village sat. In an introduction written for a 1922 edition, she explained:

the theme of my tale was not one on which many variations could be played. It must be treated as starkly and summarily as life had always presented itself to my protagonists; any attempt to elaborate and complicate their sentiments would necessarily have falsified the whole. They were, in truth, these figures, my granite outcroppings; but half-emerged from the soil, and scarcely more articulate (ii).

Unlike the momentarily victorious House of York, for Ethan Frome there is no hope that ‘now is the winter of our discontent made glorious summer’.³ His winter lasts year-round; his disappointments are continuous, cemented by the attempted ‘escape’ that fateful February night, which not only ensnared him in its perpetual gloom, but his wife and her cousin, too — misfortune and grief compounded. Only death, on its own terms and in its own time, will bring relief.

They turned in at the gate and passed under the shaded knoll where, enclosed in a low fence, the Frome grave-stones slanted at crazy angles through the snow. Ethan looked at them curiously. For years that quiet company had mocked his restlessness, his desire for change and freedom. “We never got away—how should you?” seemed to be written on every headstone; and whenever he went in or out of his gate he thought with a shiver: “I shall just go on living here till I join them (50-51).”

For me, Ethan Frome is a novel of winter to be read in winter, when the nearness of freezing cold and blanketing snow makes the reality of Starkfield more emphatic. Even the rare occasions when love does break the surface (to acknowledge The Austin Chronicle’s enthusiasm), it must flail against the chill of broken humanity which, in the end, masters it. For me, Ethan Frome will always remind of a place where ‘[a] mournful peace hung on the fields, as though they felt the relaxing grasp of the cold and stretched themselves in their long winter sleep (79).’

ENDNOTES

^1. Edith Wharton, Ethan Frome [1911] (New York: Charles Scribner’s Sons, 1922). All quotations in the essay are taken from this edition.

^2. An allusion to Love in a Cold Climate.

^3. See Shakespeare’s Richard III, I.i.1-2.

Will America follow Canada’s economic fight against impertinent obstructions?

Twenty-six years after the United States and Canada concluded their historic free trade agreement, it may startle some to see how their constituents size up the trading relationship.

In a report published last month, Nanos Research (in collaboration with the University of Buffalo) found that when Canadians were asked to ‘rank the top two countries that are closest with Canada in terms of business values’, the United States polled at 61 per cent, far beyond the next two challengers, with Britain at 20 per cent and Germany at 12 per cent.¹

Meanwhile, when Americans were asked the same question in relation to their own business values, Canada came in at a mere 24 per cent, followed close at the heels by Britain and Japan, both at 21 per cent.²

Were citizens asked to describe the socio-economic fabric of their countries, no doubt a plurality of Americans would respond through a mantra coloured by the heroics of their Founding, noting their adherence to limited government, free market values, and individual freedom, principles which FEE founding father Leonard Read described as ‘the essence of Americanism’.³

Canadians, still hewing to the country’s tory origins (which skew social democratic), would list their traditions of robust government, interventionist economic policies, and communal politics. Indeed, many Canadians reflexively identify themselves as the ‘un-Americans’ — our own Confederation moment, aspects of which continue to show up in the Nanos/UB survey on border security. And yet in many respects, Canadians — or at least their federal government — have come to exemplify those American values which its southern neighbours have allowed progressive ideals to supplant.

During the Great Recession of 2007-09, for instance, Canadian banking rules regulating adequate reserves and conservative lending practices meant that Bay Street experienced few of the credit disturbances or the financial meltdowns that became regular occurrences on Wall Street. And, under the Liberal governments of Jean Chrétien and Paul Martin and the Conservative government of Stephen Harper, Ottawa has pursued measures of deficit reduction and lower government expenditures as a percentage of GDP, policies virtually orphans on Capitol Hill with its $500 billion deficits and $18 trillion debt. Canada’s commitment to global competitiveness is clearly visible it its reduction of corporate taxes to 15 per cent, where in America corporate taxes are amongst the highest in the West at 35 per cent.

According to the 2014 Index of Economic Freedom, published annually by the Heritage Foundation, Canada ranks sixth in the world, making it the ‘freest economy in the North American region.’ Its debt to GDP stands at 86 per cent — its path toward fiscal prudence slowed by the Great Recession. The United States, meanwhile, does not even place in the top ten, ranking twelfth among leading nations. Its debt to GDP now exceeds 100 per cent.

Canada’s economic successes are replicated within the Anglosphere, with Australia and New Zealand surpassing it on the Heritage Index (third and fifth, respectively), with Ireland at ninth and the United Kingdom placing fourteenth. (Britain’s former colony of Hong Kong, reunited politically to mainland China since 1997 under a ‘one country, two systems’ agreement, ranked first.)

All is not lost for the United States, though. Already the country has made strides in the right direction, largely through forced sequestrations and its indomitable entrepreneurial spirit to succeed. As Adam Smith observed in The Wealth of Nations:

The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security, is so powerful a principle, that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often incumbers its operations; though the effect of these obstructions is always more or less either to encroach upon its freedom, or to diminish its security.⁴

America’s fundamentals remain strong; only its government agenda of Keynesian policies and interventionist programmes, including the Fed’s adherence to quantitative easing, need to be reformed. ‘Interventionist policies create uncertainty, raise the costs of financial intermediation and discourage investment. I might almost say that the problem is not that the government has done too little, but that it has done too much,’ writes Roger Koppl in From Crisis to Confidence: Macroeconomics after the Crash. ‘The problem is changing rules, uncertain regulations, shifting Fed policy. The problem is the variability and unpredictability of government economic policy.’⁵

These economic interventions are among the ‘impertinent obstructions’ with which the federal government burdens the states, business enterprises, and individual men and women. Canada’s own time of reckoning came in the mid-90s, when the choice was between reform or collapse. Forward-thinking leaders, putting national well-being before any ideological qualms, faced reality and restructured downward the Welfare State. Much the same scenario took place in Australia and New Zealand, with the United Kingdom making up for opportunities lost under its Labour governments.

To-day, with slight hiccups, the economic future of all these countries is promising. Now America is poised on a similar precipice. As Leonard Read observed, the key is leadership and a faith in ‘the spiritual antecedent of the American miracle’:

As this belief in the use of force as a means of creative accomplishment increases, the belief in free men—that is, men acting freely, competitively, cooperatively, voluntarily—correspondingly diminishes. Increase compulsion and freedom declines. Therefore, the solution to this problem, if there be one, must take a positive form, namely, the restoration of a faith in what free men can accomplish.⁶

Will the United States follow the Commonwealth example and, following the November mid-term repudiation of ‘Big Government’ and in preparation for the presidential contest in ’16, rally against coercive intervention and for economic prosperity?

ENDNOTES

^1. CAN-AM Relationship Drift Continues, The Nanos-UB North American Monitor — Year 10, 11.

^2. Nanos/UB Survey, 12.

^3. See Leonard E. Read, ‘The Essence of Americanism’, The Freeman, 48:9 (September 1998), 527-32.

^4. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Edwin Cannan, ed., Vol. 2 (London: Methuen & Co., 1904 [1776]), IV.v, 43.

^5. Roger Koppl, From Crisis to Confidence: Macroeconomics after the Crash (London: Institute of Economic Affairs, 2014), 14.

^6. Read, ‘The Essence of America’, 531.

Why Progressive Taxation Abuses Tory Policies for the Common Good

Arguable it is that the traditional Tory is more amenable to the exercise of government and the financial burdens therein assumed than is the Whig; modern conservatism, arising from Burke’s pen and Peel’s practice (under the previous tutelage of Pitt the Younger and the 2^nd Earl of Liverpool) were conscious steps away from the Toryism of paternalism and protection—Toryism which had its philosophical foundations in feudal society where the prince exercised charity through personal noblesse oblige but also through the State offices he assumed. Samuel Johnson, the idiosyncratic Tory par excellence, took the American colonists-in-rebellion to task for their Enlightenment views on taxation, arguing in ‘Taxation no Tyranny’ that

the supreme power of every community has the right of requiring from all its subjects, such contributions as are necessary to the publick safety or publick prosperity, which was considered by all mankind as comprising the primary and essential condition of all political society, till it became disputed by those zealots of anarchy, who have denied to the parliament of Britain the right of taxing the American Colonies.¹

Progressive taxation builds on this notion, on the basis that those who earn more can afford to pay more.² From Johnson a theoretical underpinning for graduated taxation can also be adduced, for he held that ‘A tax is a payment exacted by authority from part of the community for the benefit of the whole. From whom, and in what proportion such payment shall be required, and to what uses it shall be applied, those only are to judge to whom government is intrusted.’³ Johnson died in 1784, while the first income tax in the United Kingdom was introduced by Pitt thirteen years later, as a means of funding the nascent Napoleonic Wars.

Our understanding of political economy has evolved much since the time of Johnson; indeed, it was only in the year following Johnson’s essay that Adam Smith published his An Inquiry into the Nature and Causes of the Wealth of Nations,⁴ incidentally the same year that the Declaration of Independence was announced in Philadelphia. We now have a better understanding of capitalist enterprise, the importance of investment and entrepreneurship, and the limitations of the State in promoting, much less engaging in, productive activities. Far better for the marketplace to create wealth and employment opportunities than to have the State redistribute wealth ineffectually.

Yet beliefs that entrepreneurial activity behaves neutrally to disincentivising taxing policy still exist, nowhere more so than in the reborn idea of ‘progressive’ taxation, which takes the charitable precept that ‘from whom much is given, much is expected’ and enacts it into law. Taken to extreme lengths, it violates Laffer Curve analysis that shows that beyond a certain revenue maximising point—roughly 20-30 per cent—high marginal rates of taxation curb business incentives and, instead of raising more revenue for the State, actually raise less.⁵

To add insult to injury, though progressive taxation was introduced originally as a tax upon the rich, it now encompasses the middle class, both because ‘soak the rich’ policies can no longer fund the burgeoning Welfare State and due to pay rises (largely due to inflationary pressures) which float the earnings of the higher middle class into corresponding tax brackets.

As John Chamberlain wrote of the economic effects,

Psychologically speaking, there is obviously some point where the progressive tax must recoil upon itself, destroying the base from which it might hope to achieve a maximum of “take.” Just where the point is we cannot tell: there is no way of measuring businesses that are unborn, or energies and creative enthusiasm that simply fail to well up. But when a progressive tax dampens the impulse to generate income, then the tax base itself must narrow and diminishing returns set in.⁶

Whatever can be said in favour of progressive taxation as an historical artefact (rooted in feudal duties of noblesse oblige), in practice it has grown out of all proportion as a means of helping at the bottom by skimming more from the top. The appetite of the leviathan State knows no bounds.

Here endeth the first lesson; all which serves as preamble for my essay ‘Taxing the middle class to extinction’, published by courtesy of the Institute of Economic Affairs.

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#DMI_Reads Update — Here is a list of current reading for the month of July:

• William Graham Sumner, The Challenge of Facts and Other Essays, Albert Galloway Keller, ed. (New Haven: Yale University Press, 1914) [insightful essays on politics and economics from the father of American sociology; I quote extensively from ‘What Makes the Rich Richer and the Poor Poorer?’ in the IEA essay above]; and
• Albert Taylor Bledsoe, Was Davis a Traitor; or Was Secession a Constitutional Right Previous to the War of 1861? (Richmond, VA: Hermitage Press, 1907 [1866]) [an examination of the ‘compact’ theory of American Union (as opposed to the ‘nationalist’ theory) and the legitimacy of state secession, with a view to the Civil War actions of Confederate president, Jefferson Davis].

ENDNOTES

^1. Samuel Johnson, ‘Taxation no Tyranny; an Answer to the Resolutions and Address of the American Congress [1775]’, in The Works of Samuel Johnson, LL.D., vol. 8 (London: Nichols and Son, 1816), 155-204; see 156.

^2. For an excellent overview of progressive taxation, see John Chamberlain, ‘The Progressive Income Tax’, The Freeman: Ideas on Liberty, 11:11 (November 1961): 30-42.

^3. ‘Taxation no Tyranny’, 162. Emphasis added.

^4. Curiously, Smith too laid the theoretical groundwork for progressive taxation: ‘The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.’ See An Inquiry into the Nature and Causes of the Wealth of Nations, R.H. Campbell and A.S. Skinner, eds., Glasgow Edition of the Works and Correspondence of Adam Smith, vol. 2b (Indianapolis: LibertyClassics, 1981), V.ii.b.3.

^5. Daniel J. Mitchell, ‘Taxation and government spending’, in A Beginner’s Guide to Liberty, Richard Wellings, ed. (London: Adam Smith Institute, 2009), 36-46; see esp. 42-43.

^6. John Chamberlain, ‘The Progressive Income Tax’, 32.

Speculation in light of Catholic Social Teaching

To-day the Institute of Economic Affairs posted my essay ‘Pope Francis should praise speculators, not spurn them’. Addressing a conference in Rome meeting to discuss the topic of impact investing, the Pope praised its work on behalf of the poor and marginalised, with a not-too-subtle condemnation of investment for self-interest.

Yet from the economic perspective, any legal investment is an investment toward the common good (barring criminal activities), as any successful enterprise will benefit not only the entrepreneur but also provide employment opportunities and make available a new good or service that serves a public need. At the same time, the increase in wealth makes additional charitable-giving possible. Asking the State to intervene in the investment process will only set up new bureaucratic obstacles, leading to economic decisions that are not motivated by the efficiency of free consumer-choice but by the wastefulness of political agendas.

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#DMI_Reads Update — Here is a list of current reading for the month of June:

• Dwight R. Lee and Richard B. McKenzie, Failure and Progress: The Bright Side of the Dismal Science (Washington, DC: Cato Institute, 1993) [insightful analysis that economic growth also entails failure as innovation and competition jostle in the marketplace; fortunately, though, the failure of some usually means better opportunities for all]; and
• S.C. Littlechild, The Fallacy of the Mixed Economy: An ‘Austrian’ Critique of Recent Economic Thinking and Policy, 2^nd ed. (London: Institute of Economic Affairs, 2009 [1986]) [a lovely account of Austrian economic principles in relation to classical economic theory and planned economies, particularly in relation to the early years of the Thatcher ministry].

I have also been reading up on scholarly articles, listing them under the category of ‘Journal jottings’. Follow-up comments or suggestions for complementary reading are most welcome.

And to-morrow, enjoy a peaceful Dominion Day!

The perpetual protest against economic error

Just a single posting for review, ‘The Infernal Resilience of Economic Fallacies’, examining the British government’s 2014 Budget and various commentaries on it, good and less good. Frédéric Bastiat, the French classical economist, once wrote that confronting bad economics was a ‘perpetual protest’ — a point illustrated in the necessity to correct the recurrent errors inherent in Keynesian policies of state intervention and protectionist trade programmes.

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#DMI_Reads Update — Here is a list of current reading, since the last message in February; perhaps it will lead to some interesting discussion:

• Frédéric Bastiat, Economic Sophisms—Second Series, in The Bastiat Collection, 2^nd ed. (Auburn, AL: Ludwig von Mises Institute, 2011) [masterful short essays that demolish mercantilism and protectionism];
• Christopher Hibbert, The Destruction of Lord Raglan: A Tragedy of the Crimean War, 1854-55 (Boston and Toronto: Little, Brown, 1961) [I cannot read Hibbert’s account of Lord Raglan’s misadventures in the Crimea without picturing Sir John Guilgud’s marvellous portrayal in The Charge of the Light Brigade];
• Henry Hazlitt, The Inflation Crisis, and How to Resolve It (New York: Arlington House, 1978) [Hazlitt’s writings on the illusions of inflationary salvation are an education in themselves];
• C. Brad Fraught, The Oxford Movement: A Thematic History of the Tractarians and Their Times (University Park, PA: Pennsylvania State University Press, 2003) [a lovely overview of Newman, Keble, Froude, and Pusey and their impact upon the Victorian Church of England];
• Friedrich Gentz, The Origin and Principles of the American Revolution, Compared with the Origin and Principles of the French Revolution, John Quincy Adams, trans., Peter Koslowski, ed. (Indianapolis: Liberty Fund, 2010 [1800]) [Gentz’s summary of the causes of the American revolt is seminal in understanding the War of Independence]; and
• Stephen Macedo, The New Right v. The Constitution, 2^nd ed. (Washington, DC: Cato Institute, 1987) [a fascinating critique of conservative attempts to read the U.S. Constitution according to ‘democratic’ principles].

I have also been trying to catch up on scholarly articles, listing them under the category of ‘Journal jottings’. Follow-up comments or suggestions for complementary reading are most welcome.

The Infernal Resilience of Economic Fallacies

If only economic fallacies were characteristic of economic goods — and scarce! Unfortunately, this is not so, and fallacies in favour of protection and stimulus flourish and spread their noxious untruths. For Frédéric Bastiat, it was the task of political economists to do battle against them in a ‘perpetual protest’¹.

Sometimes, though, the source of the economic fallacy surprises, as it did when reading a brief John Redwood commentary on Britain’s latest Budget from its Chancellor of the Exchequer, George Osborne.

Redwood, once a protégé to Thatcher and a respected scholar and politician, understands the dynamism which underpins the Laffer curve², writing that ‘tax revenues are rising ... by allowing more tax revenue to arise naturally through the growth of the economy’, underlining the fact that higher taxes do not necessarily result in higher revenues:

Where the government has tried higher tax rates on income and capital gains it has actually damaged the revenues, not increased them. If any government tried to reduce the deficit quickly through a series of tax rate rises, considerable damage would be done to the economy and tax revenues might fall.

Plus, he advocates a route to balanced budgets through such growth, which ‘...has always been the main requirement to help correct the large imbalances in the economy without pushing it into deep recession.’ Yet in the same paragraph, Redwood lauds government fiscal interventions that are just as likely — depending upon the steps taken — to be impediments to the economic growth he favours. ‘We need more exports, more homes, more domestically produced goods to replace imports, ‘he asserts. ‘The budget seeks to help bring that about.’

Export expansion, for instance, can benefit from reductions in regulations that artificially raise the price of British goods. As for housing, such regulatory reform would doubtless be of more benefit than the Chancellor’s ‘help-to-buy’ initiative: ‘The chancellor’s sub-prime subsidies risk further inflating the housing market,’ warns Richard Wellings. ‘More households will take on debts that could become unaffordable should interest rates return to normal levels. Thus significant default risk has been loaded onto taxpayers. There are also potentially very serious implications for the banking sector should government policies ignite another boom-bust cycle.’

All things being equal, Redwood goes off the beam, though, in his condemnation of foreign trade which he views as a threat to domestic industry or, nearer the mark, British employment. The organic ramifications of trade are by no means static, as Geoffrey Wood outlines in Fifty Economic Fallacies Exposed:

Producers are guided by the prices they see confronting them to produce what is most profitable for them and to do so as cheaply as they can. Prices thus direct resources to where they are most useful, as those producers to whom they are most valuable will pay most for them. If an economy is trading freely, without tariffs, its resources are making the most of the opportunities prescribed to them by the patterns of prices in the rest of the world.

The economy’s resources will thus be used where it is most productive, relative to the rest of the world, for them to be. The economy will be making the most of the opportunities available to it.³

In an harmonious trading environment, then, countries produce according to their strengths, and buy from countries with respective productive advantages. Far from a zero sum transaction as Redwood suggests, this is an economic policy with positive sum benefits — and a respectable pedigree: David Ricardo called it ‘the law of comparative advantage’, whereas for Ludwig von Mises it was ‘the law of association’.

But for sheer entertainment in slaying this protectionist bugbear, one must return to Bastiat, who doubtless would have relished a go at Redwood’s economic faux pas. From his essay ‘Domination through Industrial Superiority’, we can imagine how he would set upon Redwood’s admonition against imports:

We produce at home neither tea, coffee, gold, nor silver. Does this mean that our industry as a whole thereby suffers some diminution? No; it means only that, in order to create the equivalent value needed to acquire these commodities by way of exchange, we employ less labor than would be required to produce them ourselves. We thus have more labor left over to devote to satisfying other wants. We are that much richer and stronger. All that foreign competition has been able to do, even in cases in which it has absolutely eliminated us from a particular branch of industry, is to save labor and increase our productive capacity.⁴

Bastiat acknowledged that even the best are tripped up by economic fallacies, due to their sheer tenacity (and controversy over balance-of-trade issues is among the most intractable). Fortunately for Redwood (and us), there remain those political economists who can diagnose these errors and prescribe the needful antidotes. The Chancellor of the Exchequer himself would do well to schedule an appointment.

ENDNOTES

^1. Frédéric Bastiat, ‘Property and Law’, in Selected Essays on Political Economy, George B. de Huszar, trans., Seymour Cain, ed. (Irvington-on-Hudson, NY: Foundation for Economic Education, 1995), 115.

^2. See Arthur Laffer, The Laffer Curve and the Failure of Stimulus Spending, Lecture delivered to the Institute of Economic Affairs, London, 27 June 2012.

^3. Geoffrey E. Wood, Fifty Economic Fallacies Exposed (London: Institute of Economic Affairs, 2002), 34.

^4. Frédéric Bastiat, ‘Domination through Industrial Superiority’, in Economic Sophisms, Arthur Goddard, trans. & ed. (Irvington-on-Hudson, NY: Foundation for Economic Education, 1996), 268.

Economic Laws Trump Political Prestidigitation

‘It is the highest impertinence and presumption ... in kings and ministers, to pretend to watch over the œconomy of private people,’ observed Adam Smith. ‘If their own extravagance does not ruin the state, that of their subjects never will (Wealth of Nations, II.iii.36).’

This theme is explored in two essays posted this month. The first, ‘No Crystal Ball Needed to Forecast Fundamentals of Sound Economics’, takes a look at what constitutes ‘wealth producers’ and ‘wealth destroyers’, and why government — when it goes beyond providing the basic framework of law and order, and acting as a service provider of last resort — is so often a member of the latter group and not the former.

The second essay, ‘Raising the minimum wage while debasing the currency: an illogical economic policy?’ (published courtesy of the Institute of Economic Affairs), argues that instituting minimum wage laws while engaging in quantitative easing of the money supply is a hopeless venture; each activity considered alone is less than innocuous, but pursing both at the same time is an exercise in futility as any doubtful benefits are cancelled out and nullified.

Smith recognised that ‘All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord (IV.ix.51).’ To-day, encouraged by social democrats and their Progressive ideology, governments are addicted to these systems, whether through the aforementioned minimum wage laws and currency debasement or other forms of welfare economics. But, in the end, economic laws trump political prestidigitation.
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#DMI_Reads Update — Two volumes are in the reading queue this month: The Case for Capitalism (E.P. Dutton, 1920) by Hartley Withers and Lectures on the French Revolution (Liberty Fund, 2000) by Lord Acton.

Do you know of a little-known and under-appreciated volume on the French Revolution that you’d like to recommend? Write and tell me about it. And do people still read Thomas Carlyle on the subject? I’ve looked at the first few pages of his massive tome and been daunted, but am game to have another look if anyone is willing to make an argument in its favour.

No Crystal Ball Needed to Forecast Fundamentals of Sound Economics

Who wouldn’t want a crystal ball to forecast the route to economic prosperity? For while the fundamentals are available to all who care to study the basics of catallaxy, only charlatans will claim to have foreknowledge of consumer choice.

In reflexions about the likely course of global economies in the new year, Cato Institute senior fellow Richard Rahn agrees, acknowledging that ‘the reason so many forecasters miss the mark is because there are too many unknowns to be captured by mathematical models, particularly those unknowns dealing with human responses to changing events.’

But there are some things which can be known, based on the praxeological logic of human nature and social behaviour. Wealth is created by individual endeavour and shared through voluntary exchange. Another certainty is that when governments intervene in this process and aim at redistribution, both initiative and wealth are adversely affected, to society’s peril.

Rahn presents this as a case of wealth producers versus wealth destroyers — ‘the productive are those who add more value and wealth than they consume, and the destructive are those who destroy more value and wealth than they create’ — and their effects upon the dynamic market: Effects whose full consequences cannot be known in advance, cannot be ‘foretold’, given the individual choices of millions of participants in free markets and their subsequent reactions to government interventions, whether in the form of taxation, regulation, or too-generous welfare provisions.

In coming weeks, for instance, just wait for the debate in the U.S. Congress over increasing the minimum wage and extending unemployment payments: Each a government intervention into socio-economics, each counterproductive as a measure to promote wealth generation, and instead examples of wealth diversion and destruction. Better efforts would be focussed on the causes of employment impediments, whether through lowering punitive tax rates that hamper growth or removing regulations which touch on everything from competition to healthcare and serve as brakes on business development. By removing the barriers imposed by government, entrepreneurial activity will enjoy renewed impetus that will respond through increased employment opportunities, that will in turn redound to the State by way of reduced support burdens and heightened revenues.

But no statist applauds when the economy is allowed to heal itself from the cack-handed cures of physicians past; so social democrats will pride themselves on their enlightened, progressive policies, irrespective of the long-term economic or social ramifications. But these politicians are immune from the extravagance (and consequences) of ‘pretended’ charity, even if they are not entirely ignorant — thankfully! — of the folly of their prescriptions: For if the minimum wage were truly an antidote to income inequality, why limit its increase to $10.10 an hour, and why extend long-term unemployment benefits a mere three months? The reason is that economic laws of wages and incentives rout fiat government, and no amount of sleight-of-hand will mask the market meltdown if these progressive measures are given full rein.

Given the predominance of this State interference, then, Rahn confidently hazards one prediction for 2014: another financial downturn to come.

I am reasonably confident in saying the world is headed for a major financial crisis, because the numbers show that most large economies are projected to further increase their debt-to-gross domestic product ratios this year, which are already at record-high global levels. However, I cannot forecast with a high probability (nor do I know others who can) when this financial crisis will occur.

Regardless of ‘when’, the ‘why’ of crisis are the old, tried-and-failed distractions from the welfare economists’ bag of tricks: top-down central government planning; stimulus spending; regulatory excess; quantitative easing and interference with the natural rate of interest (with ensuing boom and bust cycles); and, of course, minimum wage laws and extended unemployment benefits, among other social security largess. What surprises is that there is still an audience for these maladroit manipulations.

It seems that only amongst the progressive élite, whose blind faith in their own prescience obscures the underlying dynamism of markets, is the crystal ball of economic reality either wanted or necessary. They may try to pull the wool over our eyes, but in the end, economic laws trump political prestidigitation.

Public Choice and the Free Press

Although freedom of the press does not usually occupy a central theme in introductory Public Choice Theory texts, it is an essential part of keeping government, politicians, and the bureaucracy honest. Without constant scrutiny and accountability, the political class is apt to become careless and equate their private interests with the public good — one of the key warnings elaborated in the Public Choice philosophy.

This independent oversight is threatened, therefore, when the State believes it has the right to oversee the modus operandi of the press (beyond the general legal norms which are prescribed for all citizens). Will the Fourth Estate be punished with legal coercion for publishing information that uncovers official malfeasance? Or will it tailor its reporting to satisfy its political masters, enabling future acts of impropriety?

Students of Public Choice, then, believe a free press is a necessary safeguard to individual liberty.

My full argument for the Institute of Economic Affairs is here.

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#DMI_Reads Update — Two volumes are in the reading queue this month:  A Humane Economy (Regnery, 1960) by Wilhelm Röpke and Economic Sophisms—First Series (Ludwig von Mises Institute, 2011) by Frédéric Bastiat.