Rational Conduct

Well, no.  Not quite.  However, he did give a shout out to the Austrian Business Cycle Theory.

“I would say there were three types of broad errors of policy and policy both here and around the world. One was that monetary policy around the world was too loose too long. And that created this just huge boom in asset prices, money chasing risk.”

So, what’s Geithner or the Obama administration doing to pressure the Fed to fix this problem?  My guess is nothing.  We’ll continue to follow the same loose money policies.

Hat tip: Gene Callahan

In my university’s econ association meeting today we talked about prices, knowledge, and touched a bit on morality.  The two readings the president of the association had us read was Leonard Read’s I, Pencil and Hayek’s essay that won him the Nobel Prize The Use of Knowledge in Society along with Russel Robert’s podcast the Price of Everything to get us thinking and start the conversation that ensued.

The conversation began with how the market plans itself  on a decentralized level through the division of labor and the merits of it.  The main way it does this is through prices.  Prices are the main mechanism for which people show they have goods to offer and also tells how much people are willing to pay for it, and it doesn’t seem to do this in any particular centralized manner.  It’s all just individuals free to choose.  Prices will be high when products are more scarce while products that are less scarce will be low, all depending on where demand meets supply, or equilibrium.

In Russ Roberts podcast he used a personal experience to show this.  At the time of the story he lived in St. Louis which had been hit with several floods.  Sometime after the floods he had an architect draw up some plans for a deck addition to his house and said it would cost X amount, which at the time he thought he could afford.  However, once he got the carpenter to give a proper estimate it ended up being twice the amount he had expected based on his architect’s estimate.  Mr. Roberts was taken a bit back by the estimate and decided it was not something he wanted to go through with for that price.

The question posed then, is why did this happen?  If we think about it in economic terms it was the market sending a price signal telling Mr. Roberts that his deck is not as important at this time when these resources could be much better allocated elsewhere, like rebuilding houses that were damaged in the floods leaving people homeless.  It didn’t make economic sense for him to build a deck while his neighbors needed the carpenters more and were thus willing to pay more money for the services of the carpenter to build their house than Mr. Roberts was willing to pay for his deck.

It began getting interesting when we started talking about the ethical and moral implications of price gouging.  The example used was New Orleans immediately after Hurricane Katrina when resources and services were wiped out by the hurricane causing supply to rise while the demand remained fairly stable in terms of goods such as water, food, flashlights, power provided by generators (the demand of the last two possibly went up).  These conditions caused prices to rise exorbitantly to the point that it sent signals to others to enter the market because it was beneficial to them, while at the same time beneficial to the people who desperately need these goods.

One of my colleagues believed there was a moral quagmire here.  His reasoning behind this was he believed that we must look at the demographics of the location we are attempting to serve in the time of crisis and make price judgments based on that information.  New Orleans is typically considered to have a large makeup of its population in low income minorities who may not be able to pay $10-$15 for a gallon jug of water, whereas a wealthier person may be able to.  In the case of New Orleans he believed these prices were too high using the argument of morality.  In which case he believed the government had the obligation to intervene and essentially say, “No prices above X amount,” X being the variable for whatever is considered moral or what the statistics proved the people of the region could afford to survive on.  On a purely emotional level I can see where he is coming from, but there’s two arguments I would make in this case.

First of all, morality is highly subjective.  What he may find immoral, I or someone else may not.  If we are to allow the government to intervene on mere moral arguments then it becomes a question of, well, where do we find a common moral grounds in which everyone can come to an agreement upon?  In my opinion, government should not take part in moral issues for I think the only argument in support of government is to protect one’s property.

The second issue I take with this argument is, again, morality is subjective.  What is more moral?  Letting a central body such as government tell producers and suppliers what they can produce and at what price?  Well, if we set prices at a previous equilibrium price where it was cheaper in a time of crisis, we get the problem of necessary goods such as water running out (or becoming more scarce).  If the prices are kept low people will tend to buy water when they don’t necessarily need it or hoard it, because it benefits them and their family to do so.  If you are late to get water there may be no water to be had at any price because the retailer has already run out.  In economics this is what we call a shortage.  But, what comes of that person that came late?  Do they go without water and get sick or possibly die of dehydration?  So as we can see there really is a gray line with this moral argument where it seems no matter which way you flip the coin there is an undesirable situation no matter if it lies on heads or tails.

After all, this is a crisis and most crisis’ are temporary.  Once people begin to flood the market with water after the $15 price signal is sent the price of water eventually begins to go down as supply begins to go up.  So while many are temporarily inconvenienced, the market will begin to work itself out.  Whereas if there was no price signal sent because a price was capped, if college kids, businessmen, or other ordinary people didn’t see the profit that could be had, there would have been little to no supply inconveniencing everyone whether they could afford the water or not.

Often times Herbert Hoover gets the blame for causing The Great Depression during his term.  He deserves the criticism.  However, most of the criticism is aimed at him for all the wrong reasons.  “Hoover did nothing” and he had that “laissez-faire attitude which let the markets fail” seem to be the most often the common complaints from many liberals and even some of today’s conservatives.  In making an argument for passing the TARP bill President Bush and Vice President Cheney told members of Congress they risked being labeled the party of Hoover if they did not pass the bill.  Yet Hoover made attempts at stabilizing prices, fixing wages, instituting public works programs, etc.  One of the worst things he may have done was sign the Smoot-Hawley Tariff Act despite the opposition by 1,028 economists.

It wasn’t that this act created the depression.  The Great Depression would have existed regardless of Hoover’s particular decision on this bill.  But surely, it prolonged it and lowered the living standards of the people during a depression by stifling competition, reducing supply, and raising prices on regular products–especially agriculture–which was the whole point of the Act in the first place as demonstrated from this excerpt from one of Hoover’s speeches in 1932.

Bad as our prices are… you will find that, except for the guardianship of the tariff, butter could be imported for 25 percent below your prices, pork products for 30 percent below your prices, lamb and beef products from 30 to 50 percent below, flaxseed for 35 percent below, beans for 40 percent below, and wool 30 percent below your prices.  Both corn and wheat could be sold in New York from the Argentine at prices below yours at this moment were it not for the tariff. I suppose these are ghastly jests.

Now, the removal of or reduction of the tariff on farm products means a flood of them into the United States from every direction, and either you would be forced to further reduce your prices, or your products would rot in your barns.

There you have it.  The true workings of government genius–keep prices high and living standards low.

Today it is starting to become just as bad.  The CBC reports that a Canadian citizen that sells equestrian products attempted to cross the border to go to a trade show was barred from crossing the border because, according to a U.S. border patrol tax eater, he is, and I quote, “friggin’ stealing jobs away from American citizens.”  Mind you he seems to be actually creating American jobs.  This seems reminiscent of a particular South Park episode.

But that is just one example of fervent nationalism and protectionism shown by an individual border patrol agent, surely they wouldn’t be ignorant enough to further enact more protectionist measures policy-wise, right?

I wouldn’t be so sure.

Tariffs and overall protectionism is far from dead.  The “Buy American” sentiment is in full effect with a provision in the latest stimulus bill that requires all stimulus spending (which if you haven’t noticed I oppose) to come from American manufacturers.  On Bush’s way out he raised the tariff on Roquefort Cheese from France to 300% from 100% (originally put in place by Clinton) because of “persistent sales despite the 1999 levy” (President Obama has delayed this and will hopefully repeal it).  Tariff disputes between the U.S. with China and Mexico have caused the countries to retaliate or threaten retaliation.  Russia has raised tariffs on it’s used car sales, China has tightened the food trade, India is not taking toys from China, and many other countries are pursuing the similar strategies.

I do not doubt this is bad news as free trade has always made nations more prosperous and these tariffs do nothing more than to raise funds for governments while raising the prices on regular consumers within the countries that impose them.  If governments want to help the people within their respective nations during this economic hardship they would be wise to allow individuals from other countries to trade freely without barriers and, ideally, without treaties.  It’s unfortunate this mindset still exists in today’s global world, but as long as the people remain ignorant of the benefits of free trade, namely cheaper prices and job creation, and politicians are willing to give into the people’s populism and display their own nationalistic tendencies we will continue to see this mentality far into the future.

To send you off, I leave you a quote from Ben Stein’s character in the movie Ferris Bueller’s Day Off, “The Hawley Smoot Tariff Act … did it work? Anyone? Anyone know the effects? It did not work, and the United States sank deeper into the Great Depression.”  Gee, thinking about it I learned a lot from that movie while growing up.

This weekend Newsweek put up an article on their website by Daniel Gross titled “Stop Saving Now” which echoes the calls of the likes of Paul Krugman, Ben Brenanke, and the Economist that I mentioned in my earlier post on Mr. Bernankes comments to the Council on Foreign Relations.  In the article Mr. Gross makes the argument that people need to take on more risk and start spending, “otherwise we fall into what economist John Maynard Keynes called the ‘paradox of thrift.’”   The only way to get out of this economic mess, according to Gross, is for the American people to spend once again.

To understand where Mr. Gross is wrong we must recognize two things: what caused this economic mess and what savings is.  To do this let us look at this bubble torn economy.  It has been riddled with debt for the last decade or so with the idea that mere consumption would create prosperity.  The American people took on huge loans to buy houses with the assumption that real estate created wealth and treated it as such by taking out mortgages as if their homes were ATM’s and that this money was indeed wealth created by their home as if it was magic.  What most people don’t understand is how the Federal Reserve and the government facilitated this.  Through legislation such as the Community Reinvestment Act banks were forced to give loans to people not credit worthy or they would not be allowed to expand and their business practices greatly stifled, so they complied.  Along with this the Federal Reserve had held interest rates to extremely low rates which gave even more incentive for people to take loans at these abnormally low rates before the interest rose.

These actions by the Fed and Congress forced banks to take on more risk while the low interest rates and easy money incentivized risk for home buyers.  As more people found their way into houses housing prices began skyrocketing well beyond sustainable levels, again sending abnormal signals to banks, home buyers, and homebuilders that there was real wealth in real estate.  What happens next is these low rates begin to reset, the teaser rates end, and people realize they no longer can pay for their homes.  Pop goes the bubble.

However, this does not stop just at homes.  This same situation goes for credit cards, student loans, car loans, loans to franchise owners of bubble businesses like Cold Stone Creamery and Starbucks, and the like.  The Federal Reserve’s easy money policy has extended to all debt by way of fiat and low interest.  Something that would have never happened if on a currency such as gold.

So now some people are slowly getting their sanity back and realizing the bubble mistakes were doozies.  Unsustainable lending and borrowing leads to an unsustainable consumption, seems like such a simple concept.  Regardless of all the intervention and credit the government is trying to offer markets people are finally getting their senses back and their time preference is now heading toward, while probably not quite there yet, a sustainable level.  People are now realizing that instead of putting that “next new thing” on the credit card, or taking out an eighth mortgage to pay for it, maybe they should save up instead.  People are finally saving up for future endeavors whether it be a business of their own, or education, or a home, or a car, or whatever their next big purchase may be.  This is a good thing, this is the idea of time preference after all, and is the realistic, ideal, and sustainable way of purchasing items.

What’s so bad about savings?  After all isn’t that what capitalize banks?  Why does no one realize it’s people’s savings that banks loan out to entrepreneurs and businessmen to create new businesses and expand existing businesses. It is the savings that builds up the very foundation of a stable economy, not the overwrought and irresponsble spending of consumers.  Why is Daniel Gross not praising the new found thrift of Americans?

In The Michigan Daily Vincent Patsy makes a good argument for liberals to love the free market rather than despise it as they so often seem to do.  Liberals try to use the market to make the argument that government must step in and distribute wealth rather than having the free market distribute it.  But Patsy finds that this comes in conflict with the idea that we have rights over our property, namely our body, while the ownership of our other property, whether it be money, capital, or land, is subject to the whims of government.

They seem to separate the idea of individual freedom with economic freedom as if they are two separate entities entirely.  But they are not.

If we are to believe that we can separate economic freedom from individual freedom we are no longer expected to be free individuals at all.  No longer do we have the ability to pursue our own needs, wants, and desires through the free market system.  Rather we must entrust this task with governments who have no interest in our individual goals but have an interest, at best, in the whole, and at worst, interest in interest groups which may only prove to harm individual goals and wealth.  If we are to pursue the goals of the whole we no longer respect the rights of the smallest minority, the individual.

I do not think their collectivist ideas, goals, and the means which they attempt to achieve them are all that convincing.  We’ve had liberal government since the end of World War I, and we’ve had government ever so encroaching into our business and our property, yet we have yet to eliminate poverty.  Instead we’ve created a larger gap between the rich and the poor.  Some liberals will argue that this is because we haven’t stuck to liberal policies.  But I challenge them to show me any time period since World War I we’ve ever had a free market economy or anything close to such.  It simply has never happened.

I think part of the reason why liberals shy away from the free markets is because they have this notion that capitalists, or the rich, are always trying to take from the poor or the working class through the vice of greed.  It’s the essence of class warfare that keeps them going on with their philosophy, but I think the heart of the problem is that they misunderstand the economic argument. It is the rich who employ the poor, who create the economic calculation which allows economies and peoples to prosper, and create our social structure which allows us to pursue our individual goals.  There seems to be no attempt to rationalize this on the sides of liberals.

Indeed Patsy makes a good argument for liberals to at least think about their individual ownership ideas and how it may come in conflict with their economic philosophy.  I’m hopeful he, and even myself, can get across to some liberals. He left them with this quote by Isabel Paterson: “Most of the harm in the world is done by good people, and not by accident, lapse, or omission. It is the result of their deliberate actions, long preserved in, which they hold to be motivated by high ideals toward virtuous ends.”  Like Patsy, I do not doubt liberals devotion to a higher ends, but we must remind them that their ideas come into conflict with individual liberty and the idea of self ownership if we wish to get the message across.

Rational conduct is what all humans partake in when faced with any particular decision they have to make.  They are working towards the means that will satisfy their wants, needs, and desires, thus their conduct will be rational in order to obtain these goals.  In his book Human Action, Ludwig von Mises astutely pointed out:

Rational conduct means that man, in face of the fact that he cannot satisfy all his impulses, desires, and appetites, forgoes the satisfaction of those which he considers less urgent.

However, it is often said that humans, more often than not, are irrational beings that work toward an ends which only satisfy themselves without thinking of the “big picture,” or as some socialists will say “the good of the whole”.  They act on the human emotions that are greed and malice in order to take from others.  This argument is a fallacy.  While it may be true that humans will work towards their own ends.  It is also true that even if the big picture is not thought about while considering any action a human partakes in the big picture is realized.

Human action is what drives our personal lives, out social structure, and our  economy and as long as man is a rational being then we are said to be better off for it.  After all it is our desire for our needs to be met, both internal and external, that drive us to interact for not only our own good, but for the good of others as well.  Our desire for personal interaction drives us to create relationships with other people.  It is our desire for material objects which drive us to employ our own resources, human and non-human, to obtain these material desires.  There is reason behind our decisions to make friendships, seek employment, and buy products from those selling them.  These same people who have employed their own knowledge and resources to offer you the objects which you sought out, which in turn allow them seek out items in much the same way as you did.

Murray Rothbard best pointed this out in his book The Ethics of Liberty when he references to “A Crusoe Social Philosophy”.  Dr. Rothbard made the connection that social and economic exchange is best for humanity as a whole because we all have something to offer.  In his example Crusoe may produce fish and Friday may produce wheat, while Crusoe may exchange his fish for Friday’s wheat and vice versa.  In this exchange both parties benefit and neither one is negatively effected (ie. there is no zero-sum game).  They can certainly do both if capable, but when they specialize in a particular expertise they are then able to produce more of each item as they become more productive through this specialization.  Thus, even if Crusoe is better at growing wheat and catching fish Crusoe is still better off at what he is best at in terms of himself, in other words, what gives him the best exchange.  In the end they both still benefit and it is created through the transfer of private property ownership rights as each person transfers each others ownership of the item in the exchange.

This is why when property rights and division of labor is allowed to take place people prosper.  It is not due to government intervention, government stimulus, regulations, or forced equality which all too often the pro-statist mentality attempts to argue.  In reality government intervention only hinders rational conduct by putting into place uninterested individuals (i.e.-politicians) that often do not care who profits, as long as they get their share, along with installing barriers of entry that limit the competition that drives us to choose most rationally. Therefore it’s imperative for an economy to be free of the constraints of government, lest we lose our freedom, and ultimately our prosperity while government’s and interconnected entities of government become fat and happy while the people they are put in charge of are forced into impoverishment.

The purpose for which I created this website is to provide an argument that indeed rationality is common within humans when they’re not corrupted by the ideas of statism and interferences of governments.  I plan to touch on many topics from philosophy, to political economy, to history, to monetary and fiscal policy, and maybe even some general politics will end up in the mix.  My hope for this site is to create a hub for my thoughts and writings to not only develop my own thoughts and writing skills, but to allow them to be in a public setting where they can be discussed and debated with other rational human beings.