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.

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.

DMI 2013 Round-Up

While there have been no official DMI updates in a very long time, research has continued apace — although very slowly due to various computer malfunctions and interruptions. Nevertheless, here is a round-up of essays published this year:

• ‘If elections have consequences, then so does economics’ — A look at the Laffer Curve, when high marginal tax rates result in lower revenues, not more.


• ‘Depardieu bids French statists “Adieu!”’ — More on the Laffer Curve, when high marginal tax rates entice wealth creators to flee to more amenable tax jurisdictions.


• ‘March out the vote!’ — Does the State have the right to force individuals to vote, or does such action confuse which demands deference and precedence, citizens or their government?


• ‘The inexorable lessons of currency debasement’ — On the evils of inflating the money supply.


• ‘Median voter theorem: why mainstream parties adopt similar policies’ — Why do opposing political parties so often cling to the centre and present similar policies to the electorate? What does this mean for principled ‘ginger’ groups embedded within such larger organisations?

Several projects-in-hand will continue in the new year: One example is the paradox interwoven in F.A. Hayek’s economics and politics; another involves the phenomenon of ‘liberal Toryism’ — the dynamism between classical liberal laisser-faire economics and the traditional Tory belief in ‘limited paternalism through the State’, ideas which have overtones in the work of Adam Smith and Edmund Burke, and find continuing expression in the 21-st century through various British and American theorists — more to come!

Another experiment in the coming months will be #DMI_Reads, where I will ‘tweet’ my current reading lists and ask for feedback and complementary book recommendations.

As always, remember to follow DMI on Twitter, on Facebook, and (here) on its dedicated page.

All best wishes for 2014!

DMI Omnibus Update on Disraeli’s Birthday

Earl of Beaconsfield

While research and writing at DMI continue unabated, I have been remiss at sending out update notices for several published columns over the last several months. And so without further delay — and in honour of Benjamin Disraeli’s 208th birthday! — here are links to recent postings at the Institute of Economic Affairs and the Adam Smith Institute to get you caught up:

• ‘The organic roots of oaks and free markets’ takes a tongue-in-cheek Telegraph column and illustrates why the Conservative party’s modern icon of an oak tree is an excellent exemplar of the organic dynamism of free markets, and why a return to the ‘Thatcher torch’ — representing the light of liberty — is a bad omen if taken to mean more robust government intervention in the economy.


• ‘Tax Freedom for the Poor!’ is an appeal to raise the threshold at which the low-paid begin to pay income tax — allowing them to keep more of what they earn will build their self-respect and act as a work incentive, while at the same time curbing the extent of government redistribution. (A second theme of this posting is that while the poor who earn less than the threshold will necessarily be removed from the income tax register, they nevertheless still do pay any number of ancillary taxes, which may itself be considered a good thing: An esprit de corps is fostered with their fellow citizens while making them conscious of the true costs of government.)


• ‘Without capitalism, can there be culture?’ argues that we owe much of our cultural attainment because of the free market and the division of labour which it encourages — not despite of them. (I will admit that other factors contribute to culture, too.) This avenue of defence will be familiar to students of Adam Smith and to admirers of Josef Pieper’s small classic Leisure: The Basis of Culture.


• ‘America’s Chief Magistrate and the Spirit of ’76’ looks at American politics from the perspective of the Founders’ vision of individual liberty and limited government. Intended to be a rather minor position, the Presidency has assumed powers never intended either for the Chief Executive or the Washington establishment. Intrusions into the actions of individuals and the marketplace are hallmarks of ‘government failure’ that only a spirited return to constitutionalism can avert.


• ‘Can Americans afford compromise on the fiscal cliff?’ demonstrates that, à la Laffer Curve analysis, if higher tax revenues are the object, then raising the marginal tax rate on the wealthy is not the answer; though Aristotle taught that compromise as a mean between deficiency and excess is oftentimes the route to realising the common good, when the options are between right and wrong there is only one option. (Cross-posted at Public Finance International.)

Well, that’s a wrap. A reminder, too, to join the discussion on DMI’s Facebook page (please sign-up if you are not already a member) and tell your friends and neighbours about us.

Wishing you a very Merry Christmas, Season’s Greetings, and all best wishes for 2013!

The Global Economics of Corporate Tax Cuts

With the burgeoning of the modern welfare state, taxes on corporations are widely accepted as one of the least offensive ways to raise funds to pay for them. But is this true?

Corporations — and, more accurately, their fiduciary officers — are self-interested organisations, which pass along tax burdens in the form of increased prices to consumers; where competition limits such price flexibility, costs are borne by employees or by reductions in capital accumulation.

As students of the Laffer curve theory know, too, raising taxes does not necessarily mean increased tax revenues; as the wit says, oftentimes less is more.

Moreover, in to-day’s globalised economy, nations seeking to attract businesses must compete with other countries by offering levels of taxation that are conducive for enterprises to set up shop within their borders — and to remain as satisfied tax-payers, untempted by the allure of foreign tax incentives.

Recent Canadian economic news — both in relation to arguments for higher corporation taxes and the revenue generated through lower taxes — is instructive.

Click here for my full argument at the Adam Smith Institute.

Can the GOP Defend Capitalism?

No doubt like many non-Americans, I too have been caught up in the drama — farce? — of the Republican party’s race to select a presidential candidate to face Barack Obama in November.

Many political issues are of especial concern for conservatives: limited government and fealty to the, respect for States’ and individual rights, and defence of the Republic. One of America’s more immediate (and seemingly more intractable) problems concerns its growing debt burden, a situation made worse by continuing billion-dollar deficits, high unemployment numbers, and unfunded liabilities (principally Medicare, Medicaid, and Social Security).

On all of these issues, though, the Republican presidential contenders — save for one individual (with some candidates better or worse, depending on the issue) — are showing themselves woefully inadequate. Recent debate on reviving America’s economy highlights the GOP’s weakness in understanding the philosophy of capitalism, let alone crafting a pro-marketplace campaign that will resonate with voters.

Click here for my full argument at the Adam Smith Institute. (My appreciation to Sam Bowman, Director of Research.)

Mapping the Dangers of Competitive Harm

Last week a Cato Institute report caught my eye, about a French commercial court awarding damages to a map-maker for losses incurred through potential customers’ use of Google Maps.

Serendipitously, at the time I was reading Richard Epstein’s Free Markets Under Siege, where he examines ‘competitive markets and compensation for competitive harms’. In the free market system, sellers compete for buyers, who base their purchases on such qualities as price and quality. If the seller can meet consumer demands, free exchange will occur; if not, consumers will go elsewhere and the seller must either improve his business model or close up shop.

Yet the practice of competitive harm means that successful businesses must compensate businesses that are unable to attract trade — a practice that, if followed to its logical conclusion, means that the dynamic free market must ultimately succumb to the deadened economics of socialism.

Click here for my full argument at the Institute of Economic Affairs.

America’s Sublime Debt Ceiling Crisis

For many watching the ongoing debate in American politics about raising the level of the debt ceiling, the experience has been sublime — to use Edmund Burke’s definition to describe ‘whatever is in any sort terrible, or is conversant about terrible objects, or operates in a manner analogous to terror’.

At the heart of the debate are fundamental questions of politics: How much government do Americans want? Are they willing to pay for it? What are the socio-economic repercussions of the Welfare State?

Democrats see more government as an aid to individual freedom and self-realisation, whereas Republicans argue that more government is a detriment to those ends and will benefit primarily the political class alone. It becomes an existential contest between equality and liberty, respectively.

In the short term, the issue of increasing the federal government’s borrowing limits has been an opportunity for partisans to mount their favourite hobby horses, whether it’s spending cuts to grow the economy or in taxing the rich to make them pay their fair share — rationalising expenditure priorities and the possibility of the U.S. defaulting on its debt obligations have been relegated to the periphery.

One side only, I offer, has economic fundamentals in its favour, and they manifest themselves in the long-term consequences for capitalism and the free economy.

Click here for my full argument at the Institute of Economic Affairs.

ADDENDUM: The negative impact of tax rises beyond the ‘governing optimum’ of the Rahn curve — and more specifically, the ‘tax burden’ of the Laffer curve — has been brilliantly summarised by Harvard economist Jeffrey A. Miron: ‘By reducing the income of households and the profits of businesses, higher tax rates discourage consumption and investment, slowing the economy in the short run. By reducing hiring, savings, and investment, they reduce economic growth in the long run. And higher tax rates are undermined by tax evasion and avoidance, making them an inefficient way to raise revenues.’