Why is the Capitalist Workplace so Authoritarian?

You are told that capital tyrannizes over labor. I do not deny that each one endeavors to draw the greatest possible advantage from his situation; but, in this sense, he realizes only that which is possible. Now, it is never more possible for capitalists to tyrannize over labor, than when they are scarce; for then it is they who make the law -- it is they who regulate the rate of sale. Never is this tyranny more impossible to them, than when they are abundant; for, in that case, it is labor which has the command.

- Frederic Bastiat, from Capital and Interest

A persistent criticism of capitalism as an ideology is that it is authoritarian by nature, and can only lead to tyrannical bosses ruling over dependent staff who are forced - by fear of poverty and starvation - to remain under their command. Certainly, if we take our example from the workplaces of today, most of them are hierarchical, and many of them pretty authoritarian. In extreme cases staff even need to ask permission to go to the bathroom. So there appears to be some demonstration to the thesis.

In reality there is nothing inherent in the system of free enterprise that necessitates hierarchy, and many businesses have been successfully run with decentralised structures. Ricardo Semler is an example of an entrepreneur who had such massive success running his business on a non-hierarchical model that he turned to teaching other capitalists all over the world to do the same. Nonetheless, crappy bosses who like to throw their weight around the shop or office are ten a penny, and since no one likes working under a dictatorship we really have to question why more egalitarian models not more common.

A market will tend to use the skills and propensities of the labour force within that market, because it is costly and time consuming to inculcate staff with new habits. For example, if a workplace can afford to hire experienced staff rather than train newbies they will often do so (especially where there is a high minimum wage.) Companies will sooner offer a raise to hold on to an employee with a good work ethic than take a risk on someone new. The fact is, human qualities are less malleable than other factors of production, and so it's usually going to be preferable to try and court the kind of employees you want around rather than try to foster whoever walks in the door into a new sort of character you like; especially considering people have their own proclivities and desires for their own personal character development, unlike machines. This is why most of the companies that run in cooperative or non-hierarchical structures begin with this idea as a primary value, and will tend to attract a certain kind of person who shares in the company vision and is competent to contribute to making it a reality. (Tim Kelley, an expert who currently helps companies adapt to what he calls "The New Paradigm in Business" states that as they do usually some number of employees flee, unable to adapt to the rights they are afforded, and responsibilities they must shoulder, under the changed system.)

Now am I saying that people are naturally slavish and therefore will tend towards hierarchy on a free market?

Not at all!

The average person who enters the workplace has been through 11-13 years of a mandatory education system which is highly authoritarian and hierarchical, and at the time in their life where their character is most impressionable and inclined to adapt to their circumstances. Their personalities have already been adapted to what was necessary for them thrive (or at least survive) under that system. Interestingly, the empirical evidence on how people best learn seems to suggest that a cooperative learning environment is far more productive than the isolated one that is the dish of the day at school. A crappy boss is not that unfamiliar in aspect from a crappy teacher, and it's hard to imagine that a population exposed to a long period of cooperative and mutually edifying education along the lines of the empirical evidence would be so tolerant of poor treatment from authority. If schools were to teach reasoning, social skills, emotional handing, conflict resolution, and other soft skills, far more people would have the skills to run organisations. start business enterprises, or create egalitarian ones.

The Marxist ideal of workers owning the means of production is perfectly compatible with free market capitalism, and there is no reason why there should not be more worker run cooperatives, communally owned business, and organisations with polycentric structures - other than the fact that currently, workers have no idea how to own the means of production or run a business. Partly because this requires different skills from what is required to complete their jobs from day to day, and partly because they are pre-conditions by years of hierarchical and authoritarian state education. If Marx was right and bosses provide no value - only skimming profit off the top - then workplaces without bosses will surely be more efficient and out-compete workplaces that shell out unnecessarily on paying them... but we will never know until we reform our education system.

What we can Learn about Economics from Scandinavia

Lately there has been a lot of talk online about how successful the Scandinavian countries are, and their success has been put down to Democratic Socialist policies like a large welfare state, high taxes, and high public spending. We are encouraged to view the example set by Denmark and Sweden as a model for our nation, and indeed there is a lot to learn about economics from the examples they have set. The nature of those lessons, however, may come to many as a surprise.

The Scandinavian countries are successful, but not for the reasons most people think they are. Each of them were already wealthy, egalitarian, equitable and successful nations long before they adopted any socialist policies whatsoever. For most of the 20th century they had more free market economies than the other countries in Europe; and because they largely stayed out the two World Wars they didn't have to waste huge sums of money on weapons, paying forces, and then replacing destroyed infrastructure in the aftermath.

In many ways the Scandinavian nations are still far more free market than the USA, Britain or France are. Their economies are far less regulated, they do not demand occupational licenses to practice in hundreds of professions that require them in some states of The US (in Finland you don't even need a license to practice law, yet people manage to hire competent lawyers and the cost is far lower), it's easier to start a business, to hire people - and fire them, and there is a lot less red tape and forms to fill in. We have certainly not been asked to heed the example of the Nordic countries in these respects, in fact these policies have been fervently opposed by the champions of The Scandinavian Model in Europe and America.

What's more, the Scandinavian countries were all far more successful before they adopted any socialist policies at all. Sweden enjoyed the highest per-capita income growth in the entire world from 1870 to 1950. It was from the 1970s onward that the Scandinavian nations began their experiments in Democratic Socialism and they remained somewhat successful during this period but less so than previously. These nations built their welfare states on the wealth created by free markets; and in so doing began to reverse their success.

All the Scandinavian countries are market economies. Danish Prime Minister Lars Løkke Rasmussen finally got so tired of media claims to the contrary that he exclaimed: "I would like to make one thing clear. Denmark is far from a socialist planned economy. Denmark is a market economy." Sweden, however, did attempt the experiment of centrally planning their economy like The Soviet Union - and with disastrous consequences.

The Case of Sweden

Socialism nearly destroyed Sweden. Swedish government spending rose from a relatively modest 20% of GDP to 50% between 1950 and 1975. Taxes, public debt, and the number of government employees all expanded massively. By the 1980s the destructive effects of the Swedish experiment with socialism was completely apparent to everyone and the government had to attempt to jump-start the economy with a massive expansion of credit which resulted in economic chaos: stock market and real estate bubbles burst, and interest rates were pushed up to 500 percent by the Swedish central bank. By 1990 Sweden had fallen from the fourth place in international income comparisons to twentieth. The decline led to a revolt against the socialist regime. More economically liberal politicians sharply reduced income tax rates, abolished currency controls, deregulated bank lending, privatized several government enterprises, deregulated the retail, telecommunications and airline industries; and implemented deep government spending cuts. Sweden began to recover and is doing a lot better now (as I am sure you have all heard.) But Sweden's recovery was all thanks to free markets - and no thanks to socialism.

Despite Sweden's economic recovery after the mid-1990s it is still poorer than Mississippi, the lowest income state in the USA. A 2009 study by the Swedish Economic Association discovered that the Swedish economy had failed to create any new jobs in the private sector on net between 1950 and 2005. The actual unemployment rate in Sweden is still probably at least three times higher than the official government figures because many Swedes live off government sick benefit and early retirement and are not counted. Thousands of Swedes are paid by the government to participate in "labor market political activities" whose only purpose is to reduce the official unemployment rate. To speed along their recovery, Sweden has been privitising portions of it's healthcare, social security, and education sectors in an effort to heal them up from the incentives entailed in public ownership which always destroys the quality of services while ratcheting up the cost of provision. Private health insurance is booming in Sweden because of the inevitable rationing, shortages and long wait times which their highly socialised healthcare system has lead to. It may seem shocking but in Sweden the government instructed doctors to "prioritize" patients according to their status as future taxpayers. The elderly are at the bottom of that list since they are mostly retired and paying relatively little in taxes while receiving large shares of government services. It's a distressingly callous approach that can only make cool sense from the perspective of planners seeking to minimize expenses out of the public purse which different interests are all angling for. (So much for socialism doing away with competition.)

Sweden's experiment with socialism also destroyed its history of innovation. The great companies that came out of Sweden such Lidl, H&M, Volvo, Saab,  AstraZeneca, Electrolux and Ericsson were all founded in Sweden's free market period. After 1970, the establishment of new firms dropped significantly and many enterprises now survive purely on government contracts out of the public pocket rather than by indication that they are producing what consumers actually want. It was during the free market period when Sweden produced Alfred Nobel, inventor of dynamite, Sven Wingquist inventor of the self-aligning ball bearing, Gustaf Dalen who founded the gas company AGA, and Baltazar von Platen, who invented the gas-absorption refrigerator.

The Case of Denmark

Denmark, like the other Scandinavian nations, may have a large welfare state and public sector, but it also has a far freer economy than the US and many other western nations as I have mentioned. Denmark is only one place below America on the Economic Freedom Index and was previously one rank above it. It is the most free market of all the Scandinavian countries.

This does not mean Denmark has found the right balance, having "the best of both worlds" though.

The large welfare state and heaving public sector has lead to poor social consequences in Denmark, not good ones. Only the nation's relatively free market economy has compensating for the fact, as evidenced by the fact that similar policies have worked nowhere outside of Scandinavian countries: neither in Greece, nor France, nor Spain nor anywhere else. This is partly down to the culture of a hard work ethic that the Scandinavian countries have inherited from their history which required their people to survive the harsh climate. Unfortunately, as generations wear on these welfarist policies are warping the very culture that allowed them to work in the short term.

In Denmark more than a quarter of the working-age population (aged 18-66) is on the government dole; for every one hundred persons employed full time, there are about sixty working age on welfare. In many regions less than half of people are employed.  More than 1.5 million people live full-time on taxpayer-funded handouts; the other 4 million people in the country have to pay a marginal income tax rate of 55.6% (on incomes of 55,000$ and above), a 25% national sales tax, and a wide variety of other taxes. Danish economist Per Henrik Hansen estimated taxes in Denmark approach 70% of income when all is considered. It has been claimed that Denmark has a more regressive tax system than the US where a far higher percentage of the taxes fall on the rich.

It might come to a surprise to many on the left who are championing the Danish model (such as Bernie Sanders and his supporters) to discover out that many Danish voters are turning out to vote for more free market politicians, and even the Democratic Socialist Party and those further to the left are in agreement that this is a problem. The classic liberal (free market) Venstre Party was in power in a coalition with the Conservative People's Party from 2001 to 2011 and was elected on its own in 2015. They have gained massive support in making free market reforms to the welfare state and are carrying them out right now! The platform has cross-party support.

Denmark is following the example that Sweden has been laying out since the 1990s. They are undergoing massive welfare reforms because they acknowledge their huge welfare state has created massive dependency and started to shift their culture away from personal responsibility and the ancient hard work ethic they had inherited. This calls the final death knell of empiricism for Socialism as an ideology - but how long before the left will heed the sound?

The Real Economic Lesson to be taken from Scandinavia

The real lesson to be taken from Scandinavia is that socialism wrecks economies and culture. It erodes the work ethic of a nation over generations and it takes a long time for free markets to restore them to prosperity afterwards. In Scandinavia, these policies have been a disaster only mitigated by having economies that are relatively unregulated compared to Europe and America.

New Zealand also flirted with all the policies that Bernie Sanders and supporters want to copy from Scandinavia up until the 1990s as well. It didn't do much for them at all. Since the 1990s New Zealand liberalised their economy and have been far more prosperous; Australia are following suit. Hong Kong was poorer than most countries in Africa and has become one of the richest countries in the world per head in a generation thanks to free market policies. Singapore has also proven itself to be a modern economic miracle. None of the countries which adopted socialism, nor any of the highly statist economies in the developing world, have had results that compare to those of Hong Kong or Singapore in the same period - and many of them remain devastated.

Free markets have helped the poor more than anyone else as they take people out of the most abject poverty and dependency at once, giving them control over their own destiny rather than having to rely on unreliable government to hand them alms. Markets also create the wealth necessary to look after those who remain poor, which is why most of the world's poor would rather be poor in a market economy than a highly socialised one with big government.

We can learn from Sweden and Denmark, yes. We can learn that we don't need miles of regulations or occupational licensing in up to 800 professions which drive up the price of services and stop young people from getting jobs. We can learn that when it's easier to start a business, hire and fire people, and to cut through red tape that brings prosperity. We can learn that high taxes and high spending stunt rather than grow an economy. We can learn that well-intentioned welfarist policies do more to foster dependency than to help the poor in the long term. That is the hardest pill to swallow.

What we can learn from Scandinavia is what Sweden and Denmark have already learned from their experiments with socialism. Hopefully we will learn from them without repeating their mistakes.

The main sources for this article are Debunking Utopia by Dr. Nima Sanandaji, and The Problem With Socialism by Tom DiLorenzo, you can get these two books if you want to learn more.

Free Market Environmentalism

The Excesses of Capitalism

The government - we are told - is necessary to protect us from the excesses of capitalism, and whatever gripes the average person might have about their elected officials, almost all of them can agree upon this.

But there's a problem with thinking the government can ever enter the economy as a fair referee rather than merely playing into the hands of whatever factions are most rich, powerful, and influential; because as soon as a corporations can make more money by angling for government favours than they can by serving customers that is exactly what they are going to do. Not necessarily because they are evil - but because it becomes the rational thing to do.

On an open market where only voluntary exchanges are permitted a business can only turn a profit by  providing something that the general buying public wants. No matter how greedy the corporate fat-cats may be, if they fail to 'cough up the goods' (and services) that people want they will go to the wall. [all puns intended] In this way the market forces otherwise self-interested people to apply their self-interest to social ends.

Critics may still complain about "tooth and nail" competition, but at least on a free market firms are competing to serve you better and win your disposable income. As soon as the government intervenes in the economy one thing is for sure: companies will compete for control over legislative bodies and the strings of the public purse. This is where the real "tooth and nail" begins.

According to The Sunlight Foundation for each of the 5.8 billion dollars spent by America's 200 most politically active corporations between 2007 and 2012 on federal lobbying and campaign contributions by they got $741 in return in kickbacks and benefits.

To pay for these kickbacks tax-payers were left $4.3 trillion dollars poorer - but that's not all.  $5.8 billion was spent in political gaming instead of invested in jobs and product development. These incentives drive companies to misallocate resources by making products that the general public doesn't want profitable, and products that they do unprofitable. In other words, the government has become the client of these corporations rather than their customers.

Firms might lobby or contribute to political campaigns to earn the exclusive right to provide government with their products. This will give them a huge advantage over competitors even if they are producing inferior or more expensive services. They can lobby for subsidies on their own goods or tariffs on cheaper or superior competitors.They can get the government to pass laws about who can and cannot operate in their sector.

Mandatory licenses, fees, reviews, huge stacks of forms, inspections, make it expensive for small start up businesses to enter the market and compete on an equal playing field. Companies spend millions of dollars on accountants, lawyers, actuaries and bureaucrats - not to mention tens of thousands of hours - to make sure they comply with the entangling webs of red tape, and make no mistake this harms the public. The costs are reflected in the price of products, and those are millions of dollars and tens of thousands of hours that are not being spent on more productive work that would benefit others. The rounds of "regulation" inflate corporate profits more and more, by cutting small firms out the market and directing sales to bigger firms who can afford specialists or whole departments to play the game.

By changing the incentive structure of the economy to favour profit through political influence over serving customers the government corrupts the market rather than moderating its excesses.

Why The State will Not solve Social Problems

The impulse of the state is not to solve social problems but to create as many dependents as possible, including a bloated public sector full of Marxists and as many people as possible on welfare who they can then turn on whenever they need someone to blame for their own excesses. That is why the size of government grew massively even under so-called free market Thatcher who made hand-outs to big business and sent military spending through the roof. Every dependent will make justifications for the existence of the state as a necessary evil and attack the free market which takes people out of poverty. The natural state of everyone who is born is poverty; all wealth was created by individuals for themselves or to trade with other people for something which they agree upon in a voluntary exchange. Voluntary exchange enriches both parties as each trader values what they get from the trade more than what they part with, and so trade takes people out of poverty not government. Government retards this organic process by putting restrictions on who can trade with whom under what circumstances and passing an ever increasing litany of laws that make it impossible for poor people to find employment so that many people will have to compete for few jobs and accept whatever conditions are given to them. This creates dependency upon which government survives. To complete the trick the government directs the attention of the oppressed to their crappy bosses rather than the conditions which created the crappy bosses, those state interventions which restricted the number of jobs.

The government cannot solve social problems because the government lives on social problems. If tomorrow everyone woke up in a world without crime then what need for a large police force? In a world with little poverty and many routes out of poverty, then what need for huge welfare programs and government bureaucrats to administer them? If there wasn't a shortage of medical staff pushing the price of medical care through the roof then who would tolerate a million people on NHS waiting lists? If we didn't fear any enemies in the Middle East or Russia what need for a large military and curtailments on civil liberties? Who would need government without social problems? Who would want it? It is in the interests of government to perpetuate social problems internally and create enemies abroad, then blame all of this on capitalism and the free market so the average individual will call on government to save them.

If we want to solve social problems we need to dig in with our own hands and start helping. We can volunteer, create organisations, or support organisations that are already doing good work. 

Trump's Views Against Free Trade are Dumb

Now that the election is over Donald Trump is fair game for criticism even to those among my network who supported his election (or voted for him) because of their certainty that Hilary Clinton was a worse option on immigration, foreign policy, economics, or for any other reason. And I will be criticising. It's nothing personal, it's just business. Trump is clickbait, I have important things to teach about economics, and if I can get interest by breaking down his policies then I see no reason why I should not invoke his name.

Trump is not a libertarian candidate on any of our three platforms (foreign policy, civil liberties or economics); but as this is an economics blog its only his economic platform I will discuss. If Trump's supporters (and even his detractors) can see clearly on these issues than perhaps they can influence him by assimilation. The fact is, for the main part, your average person - whether they are a Trump supporter or hater - doesn't know why these policies don't work and so I figure it's well worth an explanation.


Trump's economic policies seem to comprise of a strange mix right-wing nationalism and left-wing opposition to free market capitalism on the dubious grounds that it is "bad for workers." (Slip in "American" before workers and you get the combination of the two.)

I think Trump largely made these appeals on the campaign trail because they are populist in nature and can win votes by an age old method. Identify an external enemy and decry them, then declare your ability to combat and defeat them. In Trump's case, this enemy has been China, and while I am glad that he chose a trade rival rather than a military one (so glad!) I really hope that he does not start a trade-war with China when he takes The Oval Office.

Despite Trump's protestations, it does not damage a nation when jobs are moved abroad because that nation can import those products from nations where they are produced cheaper. In economics this is called the principle of Comparative Advantage. Each nation is particularly proficient or well suited to producing certain types of goods and services - and each can benefit from trading with others for that reason. This applies even if one nation is better at producing more or even all goods than the other. (Rather than reinvent the wheel by explaining this allow me to signpost you to an article that does it sufficiently well.) (also see: http://www.investopedia.com/ask/answers/09/law-comparative-advantage.asp)

Each nation can benefit from specialisation and producing what they are best at, and the free market will naturally tend to flow towards them doing that through the incentives that it offers. (The more nations do this the richer they will become, the less they do this the poorer they will become.) The incontrovertible fact is that labour costs are particularly high in America as compared to poorer countries and therefore their comparative advantage is not largely in manufacturing at the moment. What this requires of America, as a nation, is that they move more towards a skills economy and away from a manufacturing one. America is frankly too rich for most manufacturing jobs, and it doesn't make any sense for most of them to be done in the USA. If those jobs are allowed to be moved abroad to poorer countries over a period of transition, in the long term everyone stands to gain. As those goods will become cheaper, Americans will be able to benefit from lower living costs and will have more left over to spend on other products (American or otherwise.)  Poorer nation will also benefit from the influx of American dollars which they can then spend on goods that will increase their own living standards. Trump has decried trade deficits, but the big secret is that dollars can only be spent on American products and so must find their way back to America eventually in the form of increased imports.

What is more, as those countries become richer and develop, more people in those countries - too - will move away from agricultural and manufacturing jobs into thinking professions. When they do this will be a boon for the entire world; those populations will themselves begin inventing all sorts of ideas and devices that will benefit Americans.

America should kiss most manufacturing goodbye and focus on creating a dynamic, diverse, highly intellectual and skilled workforce. That will require reforming the schools, and abolishing all minimum wage laws restricting internships so that people can take low paying jobs to learn skills that lead to high paying jobs. This would also allow the movement of manufacturing to be phased out rather than removed all at once as lower wages will encourage businesses to stick around longer.  (Note Trump has said nothing about freezing or reversing minimum wage, in fact he said it should be raised to $10 an hour. If you think the minimum wage is a good thing let me signpost you to this article which explains in detail why it is not.)

Trump appears to think that other countries dumping cheap Steel in America is bad for Americans, because it undercuts American-produced steel, but that is not the case either. The very idea was satirised by Frederic Bastiat in his essay Candle Stick Makers Petition, where the candle-makers claim that it is unfair that they have to compete with the sun which is giving out free light and so the government should blot it out. When foreign steel is dumped in America. it is going to benefit every industry that uses steel. Even if the domestic steel industry suffers for a while, of what consequence is that to the wider economy? That's like saying it's unfair to the fridge-makers if your neighbour offers you his spare fridge for free. The value of steel is only going to increase in the long term as it becomes more scarce - and at the time when it becomes profitable for the domestic industries open up again later their product will sell for a higher price. Saying this is bad is like saying that someone paying half the price of your car for you is bad. It is only nominally bad to some small number of individuals, it is not bad over the economy as a whole.

Trump is not all bad on economics, he has spoken out against trade deals like "NAFTA." But is it for the right reasons? Free Trade agreements should be written on less than one page. They should simply say "Lets trade." It seems that Trump is angling at "a better deal for American workers" as if such a thing could exist. The best deal is the deal that says anyone can trade with anyone at any time. Any restrictions mean that a small group may be profiting at the expense of everyone else. The agreement to trade is a private agreement between two individuals that government should have no involvement in whatsoever.

Trump stresses that income tax was not an original mandate of government, and that is good. But he wants to replace it with tariffs on "foreign goods." Perhaps tariffs are better than income tax, but that is not the final judgement on the matter: being punched is also better than being stabbed.

Now I defer to the words of a facebook user, who gives a great explanation:
"In understanding the benefits of division of labor, we first understand that wealth is not measured in currency accumulation - wealth is measured in time. The natural state of man is scarcity and poverty, it has been a recent phenomenon that we have been able to improve the standard quality of life for human beings on this planet. We can relate this to the amount of time or labor now required for the average person to acquire basic necessities for existence - food, shelter, clothing. Without division of labor, I would be left to make my own clothes, to hunt for my own food and to build my own shelter with my labor alone. When we engage in trade, markets emerge which then allow specialization so that each individual can focus on providing his/her time towards the most efficient use of the world's scarce resources. Of course, we know this general process to be known as the free market, whereby all of human action works towards a spontaneous order in which profits reward those that satisfy consumers by their responsible and efficient use of our precious resources, and losses ensure that those who fail to deliver these means to the proper ends either learn from the errors of their ways or move on to find an alternate use of their time. The key to understand is that the spontaneous order of the market is constantly at work to ensure that scarce resources are allocated to their most efficient ends. Over time, savings and investment lead us to improved capital structures, which lengthen the structure of production, but increase efficiency and output. Increased output makes it so that purchasing power is increased by greater abundance of goods and thus general welfare is increased.

So if time has a direct relationship to wealth, the more goods available to the market place, the richer we are. Trump frames the argument that China is taking our jobs by producing lower priced products and therefore China is winning, and we as Americans are losing. The fatal error with this logic is the failure to understand that not only are we all producers, but we are also all consumers. If able to create a product for lower price then that means that less of our income is needed to be spent on that particular good, meaning that less of our TIME is needed to be exchanged for purchase of that good. To this principal, a nation's borders have zero relevancy. To illustrate, if I earn $10 per hour and the average TV is $500, then I must work 50 hours in order to exchange my earnings for that TV set. If the TV is produced at a lower cost so that it is then sold for $250 then I am now more rich because I only have to work 25 hours to exchange my earnings for that same TV. Following the logic of Trump's argument, if we are to focus only on protecting my earnings as a producer, and not my purchasing power as a consumer, then the market scenario would be less favorable. In this anecdote, our ability to produce this TV in the US at a higher cost is granted by the government, by way of tariffs. In a narrow sense, on the margin, the producer of the TV benefits, but society as a whole is poorer. The TV producer keeps his job, but we must all spend more of our time to acquire this good. In the long run, because this protectionist policy will not be limited to just TVs, the TV producer will also be worse off because other goods will cost more under the same economic laws."

Ron Paul also wrote that Donald Trump promises to bring back jobs to America without understanding the major policies that led to their departure in the first place. The financing of America's warfare/welfare state through the printing of phony money by the Federal Reserve and distorted interest rates that encourage consumption and discourage saving and investment.

Trump is right that there aren't enough jobs in America, but the solution is deregulation rather than regulation of international trade. He claims that American car manufacturers are suffering, but the solution for that is not to tax the import of goods from abroad, but to make better stuff. No one wants an American car, because - frankly - American cars suck. Once upon a time, under Hoover, America manufactured watches that counted a 58 minute hour. Rather than allow people to continue to buying superior watches from Switzerland, the government decided to put a tariff on Swiss watches and provoked the Swiss into boycotting American products like cars, typewriters, air conditioning, and so forth. The policy is as stupid now as it was back then.

Hopefully Trump will deliver better economic policies than his rhetoric suggests, he has for example spoken about the importance of deregulation and making it easy for people to start businesses and employ people. Perhaps his patriotic protectionist parlance was just pitching to the crowd.

Economics is Elegant! (not boring)

The Market for Elegance

There is a tendency for intellectuals to believe in big government because it gives their intellect a role in planning society. It’s hard for them to conceive that million of decisions taken by individual actors may outperform their own intelligence or the intelligence of mandated “experts” but in reality it has and always will, and for logical reasons.

Nobel Prize winning economist F. A. Hayek explained that no one has the information to centrally plan an economy – and even if they did, this information is constantly changing in real time. People’s behaviours, values, preferences, ideas, expectations and knowledge change constantly and in unpredictable ways (thankfully so lest we be reduced to a bunch of deterministic automatons!) The information required to plan an economy is distributed amongst us all – and it is expressed in every transaction we make or choose not to make. Every time we decide something is too expensive, every time we buy something that is on sale because we only find it worth the cost at the reduced price. What we choose to buy is about as accurate a representation of what we value as we are likely to devise (apart from perhaps the way we choose to spend our time and attention) because each buy is at the expense of everything and anything else we could choose to buy with the same limited resource. It’s a measure of what we value in our particular circumstances.

It’s the interplay of countless actors trying products and services, rating them, deciding whether or not they want to buy them again, recommending them, cautioning others against them, which enables producers to know – without even talking to the vast majority of their customers – what exactly is desired and what is not. We are constantly giving out signals to producers of what to produce, in what quantity, limiting waste through overproduction and preventing shortages. This leads to approximately the right goods being produced in approximately the right quantities approximately all of the time. It also limits waste as goods that no one wants will not be in production for long, those that have been produced already will fall in price ending up in the bargain bin until someone finds them a home. This accounts for why in planned economies there are always mass shortages of some goods and wasteful overproduction of others.

Of course there will always be some Maverick or hard-headed producers that completely ignore all these signals and just do what they want, (Henry Ford, “If I had asked people what they wanted, they would have said faster horses.”) but they will not be in production for long to waste resources unless they really do know better than their customers. 

This is just evidence that human knowledge is not perfect. Consumers don’t always make the best choices first time – how could they? But they are unlikely to make the same bad purchase a second time. When they do err, the consequences of bad decisions are usually limited to some small number of people. On the other hand, when government policy-makers or central planners step in to make decisions over the entire economy, a poor choice can affect millions.

It’s this idea of one-size-fits-all – the customary approach of government – which is exactly what we need to combat, because it relies on the assumption of perfect knowledge (a priori) on the part of a small qualified number, which can only be gained by the individual experience huge amounts of individuals (a posteriori). Occasionally an inferior product, a VHS, will outperform a superior one, a Betamax, but ultimately DVD will come along and outperform both. The market acts like a sieve for good ideas, leaving bad ones behind.

It’s a wonder that so many fail to grasp the beauty and elegance of this self-correcting system of interdependence.


A. S. 11/2016

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