The Opportunity Costs of Socialism

The American Government (ahem, The Council of Economic Advisers) has just released a new paper – 72 pages in length – titled: The Opportunity Costs of Socialism. Here are the first paras from the Executive Summary to give you a sense of where it is going, but just download a copy yourself. Haven’t read it all but looks both comprehensive but also easy to understand, if you are of a mind to understand.

Coincident with the 200th anniversary of Karl Marx’s birth, socialism is making a comeback in American political discourse. Detailed policy proposals from self-declared socialists are gaining support in Congress and among much of the electorate.

It is unclear, of course, exactly what a typical voter has in mind when he or she thinks of “socialism.” But economists generally agree about how to define socialism, and they have devoted enormous time and resources to studying its costs and benefits. With an eye on this broad body of literature, this report discusses socialism’s historic visions and intents, its economic features, its impact on economic performance, and its relationship with recent policy proposals in the United States.

We find that historical proponents of socialist policies and those in the contemporary United States share some of their visions and intents. They both characterize the distribution of income in market economies as the unjust result of “exploitation,” which should be rectified by extensive state control. The proposed solutions include single-payer systems, high tax rates (“from each according to his ability”), and public policies that hand out much of the Nation’s goods and services “free” of charge (“to each according to his needs”). Where they differ is that contemporary democratic socialists denounce state brutality and would allow individuals to privately own the means of production in many industries.

In assessing the effects of socialist policies, it is important to recognize that they provide little material incentive for production and innovation and, by distributing goods and services for “free,” prevent prices from revealing economically important information about costs and consumer needs and wants. To this end, as the then–prime minister of the United Kingdom, Margaret Thatcher (1976), once argued, “Socialist governments . . . always run out of other people’s money,” and thus the way to prosperity is for the state to give “the people more choice to spend their own money in their own way.”

What went wrong in Venezuela is still my acid test. It’s a technical issue as much as moral, but this seems to cover both.

AND A BIT MORE ON THE SAME REPORT: Someone has looked further into the document and this is the analysis: White House Report Says Socialist Policies Could Cut GDP Nearly in Half.

“The definition of democratic socialism to me,” Ocasio-Cortez said, “is the fact that in a modern, moral and wealthy society, no American should be too poor to live.”

To capture this variation, the CEA economists looked at how socialist policies from different countries and times would affect America’s productive output. The results were uniformly less than stellar.

“An extensive economic growth literature … documents a relationship between real GDP and the degree of socialism, measured in a large sample of countries as the opposite of economic freedom,” the report notes. “The studies suggest that moving U.S. policies to highly socialist policies would reduce real GDP at least 40 percent in the long run.”

That highly socialist benchmark is based on analyzing what the United States would look like if it implemented policies similar to Venezuela, a highly industrialized country whose major industries—most notably petroleum production—are state-owned. Such policies have led to food rationinghyperinflation, and a mass exodus of the population. Similar policies implemented in the United States would cut GDP per capita by some $24,000 per person, the CEA estimated.

And do note the words, “at least”. They don’t want to exaggerate so provide a best case scenario, as in GDP per head might fall by only $24,000, but could be more.

A dark age coming

The headline story in The AFR today begins:

The federal government has slammed plans by business to go it alone on climate and energy policy but industry leaders are holding their ground and have the backing of Labor and the Greens.

It’s a new world out there.

Meanwhile, in the US: Is The Fed Trying To Tank The Trump Economy Before The Midterms? Want to breed uncertainty? Try this on for size:

Dallas Fed President Robert Kaplan said he still favors the central bank raising short-term interest rates three more times before deciding whether more increases will be necessary to keep the economy on an even keel.

This suggests the Federal Reserve should lift rates at its December, March and June policy meetings “unless something changes,” Mr. Kaplan said Tuesday in a Wall Street Journal interview.

Fed Chairman Jerome Powell said then that rates remain low enough to continue stimulating economic growth. But according to the Wall Street Journal other officials have expressed a range of views, and some uncertainty, about how high rates would have to go to reach a so-called neutral level that neither spurs nor slows growth.

A COMMENT ON RISING RATES: I have been asked about rising rates in the comments. And as I have said in the past, rates have been too low for too long which has lowered the productivity of our array of investments. The issue is not whether rates should rise – they should – but whether they should rise now immediately before an election. The effect on share markets was obvious enough. Front-page treatment of a falling market can move voter sentiment, specially the way it can be played on by the media. The Fed kept rates down throughout the Obama presidency and there was never any doubt it would push them up once PDT was elected. Optics is all, and even if the adjustments brought on by higher rates are positive for the economy, it may not look that way to anyone who is paying out more on their mortgages or small-business loans.

It’s more difficult to understand than you think

The reasons are explicable but they are very difficult to understand without a thorough knowledge of how economies work.

From Instapundit

GLORIA ALVAREZ ON REASON TV: Socialism Fails Every Time (Video):

It certainly has a lot of bad luck associated with it, for some inexplicable reason.

For an explanation, you need to go to what is known as the Socialist Calculation Debate, and then be prepared to spend a long time thinking it through. You can easily see that all such experiments have failed in the past, but that is empirical, and never convinces since it is always different next time, at least when it all begins. The end point is always The Soviet Union, Cuba, North Korea and Venezuela, but why?

The bang-your-head-against-a-wall theory of economic policy

I’m in the middle of writing a paper on Classical Economic Theory which has as its central theme how near impossible for someone educated within one school of economic thought to understand another. My own belief is that one can only understand an economic theory if one actually has at some stage thought it was valid.

But on the larger question whether economic theory can help us understand what to do, it is an unambiguous yes, if it’s classical economic theory, and for the most part if it’s Austrian. Otherwise, forget it. Modern economics is basically a bang-your-head-against-a-wall-theory because it feels so good when you stop.

This book has just come to my attention. I have highlighted two bits from the ad which make me very suspicious that she might really be able to help out any of us with much of anything at all.

Questions:

(1) What do the ideas of Karl Marx tell us about the likely future for the Chinese economy?

(2) With globalization in trouble, what can we learn about handling Brexit and Trumpism?

Answers:

(1) The more they pay attention to Marx, the worse their economic outcomes will be.

(2) If you are wondering how to “handle” Brexit and the economics of Donald Trump, you are already demonstrably incapable of understanding their natures or how and why they will improve things.

Anyway, here is the ad for the book. History of Economics is always worth a look, and you have to start somewhere, although if you want my advice, where to start is with this one. Meanwhile, there is this:

Front Cover

Since the days of Adam Smith, economists have grappled with a series of familiar problems – but often their ideas are hard to digest, even before we try to apply them to today’s issues. Linda Yueh is renowned for her combination of erudition, as an accomplished economist herself, and accessibility, as a leading writer and broadcaster in this field. In The Great Economists she explains the key thoughts of history’s greatest economists, how our lives have been influenced by their ideas and how they could help us with the policy challenges that we face today.

In the light of current economic problems, and in particular growth, Yueh explores the thoughts of economists from Adam Smith and David Ricardo to recent academics Douglass North and Robert Solow. She asks, for example, what do the ideas of Karl Marx tell us about the likely future for the Chinese economy? How do the ideas of John Maynard Keynes, who argued for government spending to create full employment, help us think about state intervention? And with globalization in trouble, what can we learn about handling Brexit and Trumpism?

Getting Say’s Law right is hard

This is an article on the great economist, Leland Yeager, who has just passed away. And in this article in memoriam, Market Grandmaster by James A. Dorn, there is a discussion on Say’s Law which is dangerously off centre as has been virtually every discussion since the publication of The General Theory in 1936. Here is what is right taken directly from the article: “there can be no problem of deficiency of aggregate demand”. That is precisely what Say’s Law means. To this principle there are no exceptions. But what is said is that “fundamentally” there can be no deficiency of demand, but that it does occur on some occasions. To accept an exception, especially this, you might as well be a Keynesian.

Say’s Law did not rule out recessions. The idea that classical economists had some principle that made recessions impossible is so loony it’s hard to understand how such an idea could ever have established itself, yet that is what Keynes did. Therefore, to refute Keynes, one must begin by showing how untrue this was. Say’s Law rules out only one thing. It rules out, and rules out absolutely, demand deficiency as a cause of recession but nothing else, and most especially recessions due to monetary disturbances which were recognised by classical economists as frequent and often devastating. The classical theory of the cycle, stretching back to the start of the nineteenth century, discussed monetary breakdown and their effects. Monetary disturbances are not a deficiency of demand but a structural deformation. The GFC was not caused by a deficiency of demand but a monetary disturbance. Nor did a public sector stimulus in any economy lead to recovery, which might have occurred had demand deficiency been the problem. The contour and causes of the GFC were not just consistent with the classical theory of recession, but so too was the failure of any recovery to gather momentum anywhere in the world. This description mis-states the conclusions reached by classical economists, which we now bundle together under the heading of Say’s Law.

When the supply of and demand for money do not mesh, monetary disequilibrium can upset the smooth operation of the market mechanism and Say’s Law must be qualified. This is especially true when price and resource adjustments are sluggish.

To describe this as a qualification to Say’s Law is simply wrong, but worse, concedes almost all the ground that Keynesians need to drive public spending upwards, and not just during recessions but in every phase of the cycle.

Here is Dorn’s text on Say’s Law.

Say’s Law Is Fundamentally Right

According to Yeager (1979), “There has been too much aggregation in macroeconomics, theoretical and applied—too much of the notion of aggregate demand confronting aggregate supply. Fundamentally, Say’s Law is right: supply of some goods and services constitutes demand for other goods and services; fundamentally there can be no problem of deficiency of aggregate demand.” However, “the exchange of goods and services against goods and services takes place through money.” When the supply of and demand for money do not mesh, monetary disequilibrium can upset
the smooth operation of the market mechanism and Say’s Law must be qualified. This is especially true when price and resource adjustments are sluggish.

Consequently, Yeager emphasized that students need “to understand the tremendous importance of money in facilitating exchange and thus in facilitating the division of labor in producing
the goods to be exchanged.” In particular, they need to recognize that “money facilitates economic calculation and the comparison of costs and benefits and the signaling function of price and
profit” (ibid.).

Yeager: Market Grandmaster

Yeager goes on to argue that it is “precisely because money is so important to the working of the economic system [that] monetary disorders can have fateful consequences.” Thus, there is a “hitch in Say’s Law: Although ‘fundamentally’ goods and services exchange against goods and services, money is the intermediary in this process; and if the demand for and supply of money get out of balance, these fundamental exchanges are impeded” (ibid.).

Yeager elaborated on this idea elsewhere, explaining that an

imbalance between the actual quantity of money and the total of desired cash balances cannot readily be forestalled or corrected through adjustment of the price of money on the market for money because money, in contrast with all other things, does not have a single price and single market of its own. Monetary imbalance has to be corrected through the roundabout and sluggish process of adjusting the prices of a great many individual goods and services (and securities). Because prices do not immediately absorb the full impact of the supply and demand imbalances for individual goods and services that are the counterpart of an overall monetary imbalance, quantities traded and produced are affected also. Thus, the deflationary process associated with an excess demand for money, in particular, can be painful [Yeager 1983: 307].

You can hardly believe how ignorant some people are

 
And dangerous too. Endless ignorance from The Washington Post: Five myths about capitalism.

  1. Greed, a natural human instinct, makes markets work.
  2. Corporations must be run to maximize value for shareholders.
  3. Workers’ pay is an objective measure of economic contribution.
  4. Equality of opportunity is all people need to climb the economic ladder.
  5. Making the economy fairer will make it smaller and less prosperous.

And what makes the list particularly absurd is the implicit assumption that anyone anywhere believes these are true, that anyone believes any of these are true.

The author is, Steven Pearlstein, ‘a Washington Post economics columnist and the Robinson professor of public affairs at George Mason University, is the author of “Can American Capitalism Survive?”’ And to answer his question, if that is the kind of advice we are getting, the answer is NO, not a chance. Venezuela here we come.

How about these five rules instead.

  1. Personal freedom and self interest, natural human instincts, make markets work.
  2. Every business if it is to survive must have enough revenue to cover all of its costs.
  3. Workers’ pay is related to the productivity of the economy.
  4. Equality is not an economic principle but you will get more of it in an open competitive economy than anywhere else.
  5. Expanding the economy and making it more productive will also make it fairer.

The first fair and deliberate exchange in world history

From The Wealth of Nations:

“Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog. Nobody ever saw one animal by its gestures and natural cries signify to another, this is mine, that yours; I am willing to give this for that….But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of.”

On the other hand, it could be the resurrection of an economy recovering from the grip of a socialist experiment, Venezuela say, in about a year or two from now.

Cartoon via Powerline – The Week in Pictures