Year in Review

The year now passing began with sickness for yours truly — which more-or-less set the tone for the ensuing twelve months. Good grief!

Research and writing therefore proceeded haltingly and with many interruptions but, with the onset of winter, there was some resolution in selecting ideas to explore in the weeks ahead:

1. Free markets, capital formation, entrepreneurship, and legal rules, as essential components of economic growth;
2. American politics and fidelity to the U.S. Constitution, culminating with the presidential election in November;
3. British conservatism, in theory and practice, especially from the historical perspective of Benjamin Disraeli and Margaret Thatcher; and
4. Mediæval culture, particularly in relation to the Enlightenment, and the rise of capitalist economics and the pursuit of liberty. (My conceit is that a conservative appeal to the Middle Ages, rightly applied, can provide all the better aspects of the eighteenth century, without those ‘atomising’ elements eschewed by Tories.)

So, before sending 2015 on its way and welcoming with hopeful anticipation the new year, here is a round-up of essays posted throughout the year:

• New year, old politics, for the Republican-led Congress — on the Washington establishment’s penchant for spending, regardless of political party in power. This essay was published courtesy of the Centre for Policy Studies;
• The genius of America’s founding culture sustains her still — on the lessons of America’s republican founding (by way of an excellent analysis by Myron Magnet), in which the path to prosperity was marked by individual effort and responsibility, with government limited to enforcing the rule of law and safeguarding the polity from threat: two modest objectives most states fail to realise, as illustrated by Public Choice Theory. This essay also published courtesy of CPS;
• Only the market can give life to the Living Wage — on the reason why government-imposed minimum wage regulations only shrink the labour force, and why only the market can provide real wage increases;
• What Role Does Charity Have in the Workplace? — on charity as best conceived as a voluntary act with negative consequences when applied to the marketplace, whether by government fiat or misplaced good intentions. This essay published courtesy of the Intercollegiate Studies Institute; and
• Unleash prosperity by giving full rein to capital accumulation — to mark the launch of the Committee to Unleash Prosperity, an essay on the true source of economic growth, capital accumulation, which increases production and employment, and benefits consumers with lowers costs and more purchasing power.

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!

As a special treat, the Institute was mentioned in a New York Sun column on America’s ‘Constitution Day’. Many thanks to the editor, Seth Lipsky.

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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 2016!

Unleash prosperity by giving full rein to capital accumulation

As the health of America’s economy remains mired in the doldrums, a new organisation débuts to refresh the winds of forward movement: the Committee to Unleash Prosperity.

An inaugural press release announces that the Committee ‘was founded to combat America’s “growth gap” by promoting an agenda that will revitalize America’s economy.

In the past decade and a half, under both Republican and Democratic presidents, U.S. economic growth has diminished to roughly 2% annually—a significant decrease from its Post-World War II average of 3.5%.

This subpar growth rate has come at tremendous cost to American families, household incomes, employment opportunities, investment, and poverty levels. Above all, the lack of growth has led some to doubt the attainability of the American Dream and to wonder if our current economic climate is the new norm.

The Committee has six main objectives: (1) a broad-based, low rate, flat tax; (2) limited government spending; (3) decreased regulation; (4) sound money; (5) free trade; and (6) rule of constitutional law. Given the aim of unleashing prosperity, the Committee has effectively laid out a programme for capital accumulation.

But, as a necessary first step toward economic growth, the state must be constrained to its constitutional duties — a programme which would have won the approval of Calvin Coolidge, the last American president whose adherence to limited government and low taxes encouraged the longest period of exceptional economic performance: average real growth of 4.82 per cent during his tenure. As he wrote in his second ‘State of the Union’ address delivered to Congress:

Nothing is more likely to produce that public confidence which is the forerunner and the mainstay of prosperity, encourage and enlarge business opportunity with ample opportunity for employment at good wages, provide a larger market for … products, and put our country in a stronger position to be able to meet the world competition in trade, than a continuing policy of economy.

The vision offered by capital accumulation

The source of prosperity in the West, noted Ludwig von Mises — the foremost economist of the twentieth century — was the initiation of capital accumulation. ‘The historical period in which the smooth working of the market economy was again and again interrupted through expansionist ventures was an epoch of continuous economic progress,’ he wrote in his magnum opus, Human Action. ‘The steady advance in the accumulation of new capital made technological improvement possible. Output per unit of input was increased and business filled the markets with increasing quantities of cheap goods.’¹

Savings and investment are the sources of new capital, which investors and entrepreneurs employ to satisfy consumer wants with better methods of industrial production or with the introduction of new goods and services. But additional capital equipment cannot come into existence if surplus earnings, either of individuals or corporations, are taxed away by government to fund present demands, usually in the form of redistributionist policies to combat the bugbear of ‘income inequality’.

If the United States is to enjoy capital formation and the ensuing prosperity the Committee wants the country to unleash, then it needs limited government, restrained from tampering with the spontaneous order of the market, as a first step; low taxes and minimal regulation — and the end of cronyism which feeds on favouritism — are corollaries of the minarchist state. But will Americans support a suspension of their entitlement culture?

The seductive illusion of government intervention

Modern governments in the post-Keynesian era create only the illusion of general prosperity, by taxing those who have (wealth creators) and redistributing to those who have not (wealth eaters). The importance of saving surplus earnings for investment purposes was deemed ridiculous by the Depression chimera that too-much savings was a major cause of unemployment. Reflating the work rolls through government spending and make-work projects was championed as the easy route to riches for all.

But genuine prosperity can only be assured by actual employment and an increase in real wage rates — both of which are dependent upon capital accumulation above the level of employment. Job opportunities and greater productivity result, in addition to fueling entrepreneurial incentive. But the threat of intervention dissipates incentive: whether through punitive income taxes, capital gains taxes, or corporation and dividend taxes, or the equally damaging loss of confidence which constant interference engenders. The Manhattan Institute reports that GDP for 2015 is projected to be less than 2 per cent, with investment a negligible 0.6 per cent.

Moreover, if capital is consumed and not replenished, then previous accumulations — in the form of factories, equipment, and the other means of production — wear out, are depleted, or become obsolete through change in technology or consumer wants. Production stagnates, while entrepreneurs and innovation go without the necessary tools for growth. Employment stalls and prices rise.

In addition, capital accumulation can falter if governments promote, through loose monetary policy, goods and services which do not satisfy consumer needs: what von Mises termed ‘malinvestment’. Any capital thus dedicated to specious demand is wasted, as it is not fungible and cannot be rededicated to more useful purposes. The Committee to Unleash Prosperity is wise, then, to target low taxation and a stable currency as necessary conditions for capital accumulation.

‘The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology’, states Human Action.

The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period and that such an artificially induced boom is doomed. They are looking for the philosophers’ stone to make it last.²

The task before the Committee is to demonstrate to a sceptical populace, beguiled by government legerdemain, that capital accumulation is the true philosophers’ stone of prosperity. ‘What determines the course of a nation’s economic policies is always the economic ideas held by public opinion,’ cautioned von Mises. ‘No government, whether democratic or dictatorial, can free itself from the sway of the generally accepted ideology.’³

Enlightening people about the true source of wealth and prosperity

The trouble is that for many Americans the generally accepted ideology is the welfare state; those Americans who receive more from government than what they pay in taxes, nearly 50 per cent of whom pay no income taxes at all. For them, self-interest militates against reform away from redistribution toward individual effort. ‘‘In the days of laissez faire people looked upon government as an institution whose operation required an expenditure of money which must be defrayed by taxes paid by the citizens,’ wrote von Mises.

Today the majority of the citizens look upon government as an agency dispensing benefits ...expect[ing] to receive from the treasury more than they contribute to its revenues. The state is in their eyes a spender, not a taker. These popular tenets were rationalized and elevated to the rank of a quasi-economic doctrine by Lord Keynes and his disciples. Spending and unbalanced budgets are merely synonyms for capital consumption [emphasis added].⁴

This is the dilemma of democratic government: when states, formerly charged with maintaining the rights of private property, weaken to popular appeals to redistribute wealth through confiscatory taxation, dressed up in the language of ‘fairness’ or ‘equality’ or the more brutally honest ‘soak the rich’ mentality — social justice in the form of the ‘clientele’ state. It was a contest foreseen by the legendary French economist, Frédéric Bastiat:

‘…when plunder is organised by law for the profit of those who make the law, all the plundered classes try somehow to enter — by peaceful or revolutionary means — into the making of laws,’ he wrote in his classic pamphlet on spoliation.⁵ ‘According to their degree of enlightenment, these plundered classes may propose one of two entirely different purposes when they attempt to attain political power: either they may wish to stop lawful plunder, or they may wish to share in it.’

It is the pre-eminent political contest facing the United States. Do Americans want to continue spending to-day the profits of capitalism, or will they choose to save for to-morrow and reap the benefits of capital investment? Upon the answer rests the American Dream and the ultimate success of the Committee to Unleash Prosperity.

ENDNOTES

^1. Ludwig von Mises, Human Action: A Treatise on Economics [1949], 4^th rev. ed., Bettina Bien Greaves, ed. (San Francisco: Fox & Wilkes, 1996), 561.

^2. Human Action, 575.

^3. Human Action, 850.

^4. Human Action, 849-50.

^5. Frédéric Bastiat, The Law [1850], Dean Russell, trans. (London: Institute of Economic Affairs, 2001), 26-27.

On the Web: Thoughts on charity in the workplace

Please see my first post for the Intercollegiate Review website, ‘What Role Does Charity Have in the Workplace?’

Charity may begin at home but it ends at the workplace, suggests a report from the New York Times. The world cheered when Dan Price, cofounder of Gravity Payments, decided to initiate a minimum salary of $70,000 per year across the board for his workforce, this after hearing a friend complain about making ends meet on $40,000 a year and realizing that many of his 120 employees earned less.

Those who were already receiving this minimum salary, however, didn’t like it. They had had to work long hours to attain that pay level. Experience and the hard work that gave rise to it merited their compensation, but now new hires and others with lower seniority were reaping the benefits without the effort. Minimum-wage mandates have always raised the hackles of classical economists, but rarely have they drawn the publicly vented ire of employees themselves. Until now.

Read more…

Only the market can give life to the Living Wage

Boris Johnson, Mayor of London and now Member of Parliament for Uxbridge and South Ruislip, created a stir at his May social media Q&A when, responding to a query about the living wage, replied:

The Living Wage should be massively expanded & be 1 of the great national ambitions with increasing productivity...

Desiring a living wage for all is not shocking. But how to arrive at such economic well-being does set the stage for a row — and this is why the progressive left has taken such interest in Johnson’s remark.

The rationale for the Living Wage

The idea of a ‘living wage’ is not in itself controversial; with roots in Catholic Social Thinking, Leo XIII wrote in his 1891 encyclical Rerum Novarum that ‘a workman’s wages [should] be sufficient to enable him comfortably to support himself, his wife, and his children’,¹ a position endorsed in 1931 in Pius XI’s Quadragesimo Anno: ‘the worker must be paid a wage sufficient to support him and his family’² — and subsequently in succeeding papal social encyclicals.³

In contemporary political discourse, a living wage is deemed a supplement to the state-mandated minimum wage for recipients residing in areas where the cost of living is particularly high. Controversy wages about how to achieve a living wage: whether by voluntary market co-operation or by coercive state redistribution.

Market forces favour sustainable wages…

For a living wage to be enjoyed by the greatest number of people, the free market is by far the better route. Goods and services are freely exchanged, with avenues open for entrepreneurship, competition, and new business ventures. Employers advertise job openings and prospective applicants offer their talents for whatever the market deems they are worth. When prices are high, new suppliers are attracted to the market (as well as new jobs) and prices drop, becoming more affordable. (And, where employment is at a premium, this shortage puts natural upward pressure on salaries.)

Employment is subject to the same market dynamic of supply and demand, with value-added skills commanding higher wages. Those with very little skills may not earn much, but they do acquire the talents and work habits to progress to better paying jobs in the future. In this scenario, unemployment will be naturally low.

…Whereas state intervention stifles sustainability.

Using the state to attain the living wage, however, is far less satisfactory and ultimately counter-productive. The basic mechanism of the minimum wage has negative consequences that far outweigh the illusion of immediate benefits. Employers will not hire staff whose low skill-sets are deemed not cost-effective — usually the young and school-leavers who would gain most for the work routines employment promises.

Henry Hazlitt summarised the position of the most vulnerable in his brilliant primer, Economics in One Lesson:

You cannot make a man worth a given amount by making it illegal for anyone to offer him anything less. You merely deprive him of the right to earn the amount that his abilities and situation would permit him to earn, while you deprive the community even of the moderate services that he is capable of rendering. In brief, for a low wage you substitute unemployment. You do harm all around, with no comparable compensation. […] We have deprived society of the value of his services. We have deprived the man of the independence and self-respect that come from self-support, even at a low level, and from performing wanted work, at the same time as we have lowered what the man could have received by his own efforts.⁴

Moreover, the minimum wage hinders employment overall and acts as an artificial brake on economic growth. (According to ONS figures for May 2015, of the 1.83 million unemployed actively seeking work, an additional 42,000 were ‘discouraged’ workers who had given up looking altogether. Minimum wage requirements are among the many factors holding down employment numbers.)

In this regard, the campaign for a living wage is another example of the Keynesian fallacy of trying to raise aggregate demand: the true response lies on the supply side where, in J.B. Say’s classical liberal formulation, demand is constituted by supply. Increased production will lower prices and raise employment prospects, both in the form of jobs and increased real wages; the living wage is a tax on job creation and an impediment to growth.

The Prime Minister acknowledged that ‘the best way out of poverty is work — and the dignity that brings’, in his 2013 Conference speech:

We know that profit, wealth creation, tax cuts, enterprise — these are not dirty, elitist words — they’re not the problem, they really are the solution because it’s not government that creates jobs, it’s businesses. It’s businesses that get wages in people’s pockets, food on their tables, hope for their families and success for our country.

It has already been reported that Oliver Letwin, minister with responsibility for government policy, ‘spent the campaign in Whitehall drawing up proposals to merge quangos and slash Government regulation’.

And speaking in Bristol, Business Secretary Sajid Javid announced an upcoming Enterprise Bill with further reductions in red tape. ‘For the first time, the actions of regulators will be counted towards achieving the overall £10 billion in cuts … the first time in modern history that government has successively reduced red tape and continued with reductions in the next parliament.’ The harmful effects of government interference will be fact-based, as ‘business will be our partner, giving us the evidence we need to roll back the state.’

Opportunities for success trump rhetorical good intentions.

Yet the idea that a benevolent state can impose high wage rates persists by the progressive élite, who care more for the rhetorical generosity of their intentions than with the outcome of their policies; who argue theirs is the charitable choice, when in reality charity is a matter of individual choice, not government fiat.

Frédéric Bastiat noted the hypocrisy, and wrote that proponents of state activism confuse ‘the distinction between government and society. As a result of this, every time we object to a think being done by government, the socialists conclude that we object to its being done at all.’⁵

State action to raise up the poor when others (so it is believed) refuse to help is not benign, but a zero-sum game. Left to their own devices, businesses would offer employment opportunities for all seeking work, and prices for life’s necessaries would settle at attainable levels. Regulation and government diktat impede this natural market phenomenon and, most damning, hurt the intended beneficiaries.

One of the reasons areas are designated for living wage programmes — think of London and New York — is that state intervention impedes market forces from addressing the underlying problems, stymied by rent controls, subsidised housing, zoning restrictions, and other barriers. Dwight Lee and Richard McKenzie, authors of Failure and Progress, examined the many ways in which government missteps persist when market challenges find their own way toward resolution, and came to this conclusion:

The single most effective government poverty program consists of government doing nothing more than establishing an environment that facilitates market exchanges. Nothing else that can be done by government comes even remotely close to reducing poverty as much, especially over the long run.⁶

It is one thing for the free market to aim for the living wage, quite another to provide for it through the state. If Boris Johnson understands this distinction, then may his advocacy for sustainable incomes have every success in Parliament.

For, in the end, it is all the difference between market success and government failure. The latter makes the progressive élites feel good about themselves; only market freedom will bring the living wage to those who want to move from poverty to economic prosperity.

ENDNOTES

^1. Pope Leo XIII, Rerum Novarum, 15 May (Vatican City: Libreria Editrice Vaticana, 1891), §46.

^2. Pope Pius XI, Quadragesimo Anno, 15 May (Vatican City, Libreria Editrice Vaticana, 1931), §71.

^3. Why any given wage is not a ‘living’ wage was raised by Pope Leo in Rerum Novarum: ‘Let the working man and the employer make free agreements, and in particular let them agree freely as to the wages; nevertheless, there underlies a dictate of natural justice more imperious and ancient than any bargain between man and man, namely, that wages ought not to be insufficient to support a frugal and well-behaved wage-earner. If through necessity or fear of a worse evil the workman accept harder conditions because an employer or contractor will afford him no better, he is made the victim of force and injustice (§45).’ Of course, just why an employee’s wage insufficiency becomes the sole responsibility of the employer is raised by Thomas E. Woods, Jr in his essay ‘The Unanswered Question of the Just Wage’, in Catholic Social Teaching and the Market Economy, Rev. 2^nd ed., Philip Booth, ed. (London: Institute of Economic Affairs and St Paul’s Publishing, 2014), 162.

^4. Henry Hazlitt, Economics in One Lesson (New York and London: Harper & Brothers, 1946), 138; 140.

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

^6. Dwight R. Lee and Richard B. McKenzie, Failure and Progress: The Bright Side of the Dismal Science (Washington, DC: Cato Institute, 1993), 106.