Capitalism is not "A System of Competition"

Capitalism - A System of Competition?

Capitalism has often been described by as “a system of competition” by its adversaries, or a system “based on competition.” Naturally, this assertion is usually coupled with a spirited oration on how this “tooth n’ nail” competition psychologically corrupts us – pitting man against man in a “race to the bottom.”

Many of capitalism’s most vocal advocates have, themselves, imbibed this premise uncritically. They leap to a fervent defences of competition, extolling its virtues – real or perceived. In my view this is a mistake. To accept without evaluation the presupposition that capitalism is a system of competition – in contrast to other hypothetical systems of cooperation (namely socialism and communism) – is to frame the very debate itself in leftist terms and play the game on an unfairly tilted game-board.

Competition is Fierce for Government-Controlled Resources

This is not to say that those who defend competition do not raise some worthy points. For example: If not competition, then what is the alternative? Is there to be one central provider of each good and service available who gets to decide on our behalf how it is best to be produced and then allocated? Add to that, that if competition is wrong in the market, then why not in the political sphere? Surely democracy is out of the question if competition is a corrupting factor, because what do political candidates do if not compete for office? Think of the competition this generates between political parties, not to mention the ensuing competition between firms and individuals for preferential treatment from politicians and legislators, competition between lobbyists, think-tanks, and voters, to receive benefits out of the public purse. If the free and voluntary section of society is a system of competition, how much more so is government? Surely democracy is a “system of competition.” Politicians are competing for the very machinations of control in our society. For the right to pass and enforce laws which apply to everyone (whether they agree with them or not) and to force them to pay for their enforcement. They are not simply competing for market share where the winner of the competition is the one that satisfies the most demand. We can sidestep the more mundane economic arguments in favour of competition for the moment, such as the case that it increases efficiency and cheapens goods while driving innovation, as we are all familiar with them already.

Capitalism is a System of Voluntary Exchange

Nonetheless, parsing what is essentially a sociological debate – a meditation upon the effects of an economic environment upon the soul of man – in socialist terms; basing it upon left-wing premises without examining their foundation is to cede too much ground. A comical equivalent would be for a leftist responding to the clichéd assertion of the American right that “Hitler was a Socialist!” by arguing that many of his labour policies were successful in improving social conditions for the working class.

This is not to say that competition is necessarily an evil either. The problem lies in defining capitalism as “a system of competition” - in comparison to other systems which are somehow “cooperative”; that is a rhetorical ploy. Those who profess it may honestly believe it to be so, but it’s not true. Capitalism is not “a system of competition” any more than any other system. Capitalism (at least in its free-market, laissez faire ideal) is a system of the voluntary exchange of goods and services in the absence of physical coercion, theft, compulsion or fraud, predicated upon the fundamental right to own and accumulate property.

Or, for brevity: Capitalism is a system of voluntary exchange, predicated upon the right to own property.

One might even venture, therefore, that capitalism is a system of voluntary cooperation.

Granted, this definition still leaves room to debate the morality of accumulating property. Or perhaps whether the “negative” right to ownership when it comes to the rich should take precedence over the “positive” right to healthcare or education at their expense when it comes to the poor. We can even debate whether the relationship between capitalists and their employees are really free of coercion given the power disparity between the two groups. Indeed these are debates I delight in exploring further. However, there is no justification for defining capitalism as a system based upon competition.

Because Scarcity is a Fact of Life, Competition will Exist under Any System

The reason for this is that while the voluntary exchange of goods and services may give rise to a certain amount of competition, competition does not give rise to the voluntary exchange of goods and services. Scarcity does. In any situation of scarcity of resources, there is bound to be some form of competition over those resources (as well as over how those resources are allocated). To exemplify the mistake that is being made here, consider the uncontroversial statement: “The fact that things exist gives rise to motion.”; Now, if I were to conclude that because of this, “motion itself gives rise to the material world,” that would be a weird conclusion to reach. Motion is a feature of the material world, not what defines it or gives rise to it. Similarly, competition is a feature found within a capitalist economy, but it is not its defining feature, nor is it only a feature of capitalism…

If we have a system that allows voluntary exchange, some competition is bound to arise out of that, but that would happen under any system. Even if you had a completely communistic society, which was centrally planned and involved no exchange of money whatsoever, people’s time would still be limited. If you were a film maker in this society, you would probably want as many people to see your films as possible. As would every other film-maker. That would put you at least somewhat in competition with them. Does this mean that communism, too, is a system of competition? Certainly you would be competing for the only customer – the sponsorship of the state. Corruption and cronyism would surely be the result. Who gets their film made and who doesn’t? Who allocates the highly desirable job of being a film-maker over the undesirable job of being a street-sweeper or refuse collector, and how can their favour be courted? The competition will commence, but instead of being decided by the free and voluntary exchange of film-goers, investors and film-makers it will be decided by someone else, I would argue, in a rather more authoritarian fashion. (For a particularly vivid and chilling illustration of how communism substitutes market competition over customers [which is at least tied to the provision of desirable services] for the completely unmeritocratic competition over gaining favour from the corrupt power structure of the state, I refer the reader to Ayn Rand’s first novel, We The Living.)

Competition is a feature of living in a world of scarcity and would exist in any system. Socialism cannot do away with competition – nor can any other system. Therefore it is wrong, both logically and polemically, to define capitalism as “a system of competition” in contrast to socialism; let alone define communism – a system where individuals will have to compete for the favour of authorities who make decisions on their behalf – as a system of cooperation.

Scarcity Means Competition Extends Beyond the Economy

The implications of these facts reach into any circumstances of scarcity beyond the economy. For example, supposing two friends each invite me over to dinner of an evening, I might have to make a choice between their invitations which will result in one of them losing out on my company. Does this then mean that friendship is a system of competition?

We can’t see all of our friends all of the time, or even all of them at the same time. Even if we do, we are bound to have to split our attention between them. In addition to that we can only maintain so many close friendships at once, and we definitely can’t be friends with everyone. All of this means that inevitably we have to make choices. We each make decisions on who to make and maintain friendships with based upon our value judgements, conscious or unconscious. Perhaps based on how happy we feel around them, how long we have known one another, how much we have in common, how much we trust someone or how loyal they have shown themselves to be, how much they educate, enrich or enlighten us, or perhaps based upon what roles roles they allow us to fulfil in their lives. There can be countless other reasons. The fact is we decide. People who feel that they will benefit from our company, for whatever reason, will make attempts to spend time with us. We will invariably begin to make choices on who to spend time with based upon our values, schedule, and what other activities we are willing sacrifice to see them. These are basic facts of life, but they hardly make friendship a system of competition.

Similarly, on the market, our time and resources are limited. We make value-based judgements about choices of products and services to consume based upon what utility we think they will bring to us, sacrificing some options to others. Maybe we will choose a coffee shop based on which has the best tasting coffee, or maybe based on which provides the nicest atmosphere, or maybe based on which is closest, or where the customer service is best, or which is the cheapest, or which we have gone to the longest and therefore find familiar, or perhaps even based on which we think has the best ethos – for example, because they are a social enterprise that only sells fair trade produce and deliberately seeks to employ and train disadvantaged people. The fact is we decide. Each service provider believes they will benefit from our custom and will make attempts to attract us, placing an upward pressure on the quality of services and a downward pressure on price which we may correctly identify as a form of competition. Since human beings are not infallible, sometimes someone might buy a coffee that they don’t end up liking, but over the long term the competition is likely to be won by the satisfaction of customers.

Free to Choose

The miraculous wonder we miss when we focus our attention upon the competition which derives from choice is the ability to choose itself. For example, supposing two commercial events are being held on the same evening. Each perspective patron will want to choose whichever event appeals to them the most, and for whatever reasons they choose based upon what they value in an event. Now, to simply mention that these events are “in competition” would be to completely miss the crucial point that event-goers (who are in the majority compared to event-organizers) have a choice of two events which they may prefer to go to one of rather than one alone.

There is no necessity for competition implicit in the market either. If both events are in jeopardy due to a lack of patrons, then their organizers can always put their heads together and create one bigger, better event. Or they can choose distinct themes that are aimed at different audiences, or perhaps they will agree that it would be in their interests if one of them moved their event to a different night, and they could cross-promote one another. This is part of the free choice the market affords, unless the government has passed laws against it, calling it “collusion.”

The defining feature of the market, clearly, is not competition, but choice. The freedom to choose. It is only when event organizers can go to the government to force people to buy tickets, or shut down other events, or get preferential legislation passed to make it easier for them to advertise, or regulate the market so tightly that only established events-managers can survive, that we see competition become the dominant force. Coercion has entered the market which is no longer free. This is not free market capitalism but what we observe in many sectors of our society today – crony capitalism, or “neo-liberalism” as some may call it. (Unfortunately the failings of “neo-liberalism” are endlessly pinned on the market economy itself rather than the state’s nefarious influence in the market.)

It is worth mentioning that there is actually far more cooperation involved in providing people with goods and services than competition. You have to cooperate with buyers, sellers, managers, employees, suppliers, customers, advertisers, promoters, marketers, collective buyers, and so on. Leonard E. Read (1898-1983), founder of the Foundation for Economic Education, illustrated this in his most famous essay, I, Pencil, first published in 1958. In it he noted that not a single person on the face of this earth knows how to make a pencil. He goes onto explain that the cedarwood is sourced from Oregon and the logs milled in California. The graphite is mined in Ceylon, mixed with clay from Mississippi, then treated with a hot mixture which includes candelilla wax from Mexico to increase its strength and smoothness. The six coats of lacquer come separately from the growers of castor beans and the refiners of castor oil. In fact, when you include those who manufacture and transport the equipment involved in these processes you cannot help but marvel at the fact that millions of people have a hand in its creation. They are working in concert, in cooperation, and as a result you can get a pencil for pennies.

To the extent that it is free, the self-interest of the producer is subordinated to the hardly antisocial end of meeting the desires of others. A producer wins the competition only by organising a vast degree of cooperation in the service of satisfying the demand of consumers. This means producing things that regular people like you and I value enough to part with their scarce resources for. To the extent the government interferes in the market, firms are enticed to compete over government contracts, subsidies, preferential legislations, and so forth. This is a corrupting factor in the market as companies no longer have to focus on serving consumers but doing whatever it takes to beguile officials. Sometimes that may well be providing the best service, but this becomes far more likely as the end user is no longer the buyer. Instead they may lobby, bribe, or bait with promises of high paying positions for officials after they leave office. In my book Universal Basic Income – For and Against I note that according to The Sunlight Foundation, a non-partisan, non-profit organization that aims to make government more accountable and transparent, “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 they got $741 in return in kickbacks and benefits. This poses a tremendous problem because as soon as it becomes more profitable for a business to lobby the government than serve their customers then lobbying will become their top priority. This is why government is often a corrupting actor in the economy rather than a referee. The mutual benefit of politicians and big business getting in bed together often outweigh those of serving the public. 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.” The competition has turned sour.

Those free-market advocates who extol the virtues of competition may point out that every service provider is, in one sense, actually competing with every other product that someone can possibly conceive of buying with their money, and argue that is a good thing as encourages firms to really try their best to create things that will please people in order to earn their cash and do business with them. Still, it cannot be said that capitalism is a system of competition – because competition is not the basis of the system, but choice. The freedom of consumers to choose gives rise to trial and error between competing service-providers attempting to draw a profit by catering broadly to as many consumers as possible or narrowly to meet certain niches depending upon their expertise and predilections. As human desires are infinite, there will likely always be incrementally more beneficial ways of meeting those desires, and thus infinite scope for innovation. What the market allows is for different producers to fill different niches. Buyers are able to compare the relative merits and drawbacks of competing products and vote with their cash on which they feel will better meet their needs according to their own values. Producers themselves are able to observe innovations in the marketplace and attempt to improve upon whichever products or services are already available. Customers will ultimately be the arbitrators of which models are successful and which will be weeded out the market. While there is clearly some competition in this process, overall it is a system of cooperation between buyers and sellers to reach a mutually satisfying voluntary exchange. In comparison to a centrally planned economy (or sector of an economy) where the amount of trial and error is very limited, and the state must roll out a one-size-fits-all solution scarcely tested against other possible solutions – a little competition between service producers might be worthwhile in exchange for a greater degree of autonomy and cooperative communication between service users and service providers which takes the form of supply and demand.

The beauty of the free market, when it is allowed to function, it that it is a constantly self-correcting and self-optimising system. Producers can reflect upon what is available and look for gaps in the market, or improvements upon existing services, and the public will quickly be able to provide signals of what is serving them and what is not by which variations they choose to part with their money for. Over time this leads to a general improvement in the standard of service available to them and decrease in cost which is probably why most of the products we buy are pretty decent. If someone sells a faulty watch then we have somewhere else to go for watches. If we did away with choice in the name of eliminating competition, if there was a design flaw in one watch it would have already been rolled out to every store and it would be too late. What is more if someone could think of any small way to make the watch better, more accurate, more durable, more energy efficient, the new model would probably not hit the market for fear of someone making another improvement upon it making all of those obsolete as well.

The Primary Feature of Capitalism is Choice, Not Competition

So to review, because people make choices with scarce resources and limited time, competition will be an inherent part of any economic system so long as there is scarcity. The primary feature of free market capitalism is not competition, but choice. Rather than moderate the amount of competition in an economy, state intervention will replace competition to serve customers on a voluntary basis with competition over gaining the favour of whoever is responsible for allocating resources within government. Instead of competing to serve their customers as best as they possibly can to achieve the biggest market share – firms can, will, and do, compete for government favours, and to have their products “rolled out” by the state to as many people as they can using public funds or subsidies out of the public purse. This is where the real “tooth and nail” begins.

Why do Markets Work? Public vs. Private

Can Government Make a Business Run "For The Good of Society" ?

The New York Post recently reported that a judge in Indiana has temporarily barred Starbucks from closing 77 Teavana stores that were failing because "the very profitable Starbucks could absorb the financial hit". Industry experts said the ruling will send a chill down the spines of distressed retailers, and with good reason! The prospect of not being able to shut down an outlet that is bleeding the rest of the business may have countless unintended consequences that will affect not just owners but consumers in general. Firms are likely to take this as a signal to be more cautious about opening up new stores, and become reluctant to invest, take risks, and employ people in the first place. Customers stand to lose.

Amidst the debate upon the justice of the justice in question, I heard a voice clamour, "The question is not of profit, but whether a business should be run for society or society should be run for business!" and to be quite frank the claim struck me at first as vacuous; professing much while saying very little. Yet we must admit that throughout history many governments have believed they were "serving society" (rather than the business community) by forcing companies to fix prices, continue operations at a loss, or even subsidising or bailing them out with public funds. Many have believed this is in the interest of "the greater good."

Could it be that government forcing Starbucks to maintain unprofitable stores - in some circumstances - would be good for society?

First we should examine the use of the word "society" itself. Rather than bring clarity, it obscures the issue, making it more difficult to apprehend the facts of the matter. Who exactly is society and how do we measure what is and isn't good for it? Society is made of a whole bunch of different individuals and groups with different interests, and what is good for one might not necessarily be good for another.

It's not that keeping a Teavana open despite the owner's desire to close it won't be good for anyone; clearly the proprietor of the shopping centres is willing to fight hard for what they stand to gain, and certainly regular patrons will be happy to be able to get their regular cup of chai before leaving a hard-days-shop. However, the point is the move privilege a few individuals who want to continue going to those outlets at the expense of everyone else in the area who has demonstrated that they would rather something else opens up in that space instead. Starbucks then will need to recuperate the loss somehow or other, perhaps by increasing prices slightly at all other locations. If the locality can only sustain the demand for three tea houses and the unprofitable Teavana happens to be the forth then they are also bleeding demand away from the other three, and so on. We can continue counting negative consequences to other parties.

If Starbucks are deprived of however many millions it costs to operate 77 unprofitable stores that is less money they have to invest in stores that are wanted by enough people to keep them afloat. It's less cash for shareholders who will take it out to the shops to spend it or reinvest it in other businesses, it's less for Starbucks customers who have to pay slightly more for a cup of coffee and therefore don't have to spend on something else, it's less for Starbucks employees who might have to forego a raise because there is less to go around..

Clearly the effect of this policy is not something that can be broken down into whether it ‘benefits society’ or not. All we can say is that it benefits some groups and harms others.

It seems ironic to me that most of those who will cheer on the judges ruling, forcing Starbucks to run 77 tea outlets - against their own interests - for the interests of others are probably the most likely to complain when a Teavana opens up that it will "drive out" locally owned tea houses (which are probably actually collapsing under the strain of the regulations they have to comply with, not being able to afford Starbucks team of expensive lawyers and accountants.) If anything you'd think this crowd would be cheering on the closures! As they carry with them a certain prejudice that whatever vexes big business is necessarily good for the rest of us, we can only conclude that supporting the ruling is less about what is good for society and more about what is bad for Starbucks.

Surplus Value

It's still a very prevalent view that employers are somehow exploiting the people who work for them when they draw a profit from their business, despite the fact that a person's employer is clearly doing more for their finances than all of the people who are not employing them. I might add, perhaps somewhat facetiously, including those keyboard-warriors who claiming that entering someone into employment is exploiting them.

It is true that workers do get paid less than the total value of what they produce, but that is because what they produce is made with other resources which have to be bought, and in a factory or work place which has a price and requires overheads to operate. The capitalist is responsible for paying for marketing and advertising to link the product to potential buyers - and at the end of the day, if the product doesn't sell, everyone else has already been paid but the capitalist walks away with the loss.

The capitalist lays out a vision of what he thinks will meet people's needs better than they are being met at present. This requires a particular expertise which is in itself a labour contribution over and above that of the other employees which is unique to the entrepreneur. If his vision is clear, indeed he will make a profit. If it is faulty he will make a loss. This is not a necessary risk, absent the profit motive a rich person is more likely to buy a bigger house or go on a cruise. But the capitalist takes a risk now, and foregoes consumption, in hope that he will reap the benefit later. That is part of what he is being paid for.

Another part of what he is being paid for is the time between making the investment and getting paid for that investment. We would all rather have resources in the here-and-now than some time in the future, because the future is uncertain, that is why lenders can charge interest on money that they borrow. They are choosing to forgo a smaller amount of consumption now for a larger one in future. The workers get paid now, the capitalist gets paid later only after the product has sold, and only IF it is sold, after everyone else has been paid. Austrian Economist, Eugen von Böhm-Bawerk explained that far from exploiting labour, the capitalist removes the burden of waiting for income from the workers. If they wanted to produce the goods themselves they would also have to wait until they could find a buyer before gaining a stable wage, and first save or borrow in order to accumulate the resources to buy a factory or workshop without the help of the capitalist.

Finally, it's worth mentioning that the capitalist is increasing the value of the workers labour! If a man decides to try out the same manoeuvres which might get them somewhere in a factory out in a field it will not produce much of value to anyone else. Clearly workers can earn more working for their employer than for themselves otherwise they would simply declare themselves self-employed and get on with making a higher income. Perhaps some of them can earn more working for themselves but do not want to take on the responsibilities entailed which are currently met by the firm which employs them. This too is evidence that capitalists are providing value.

Marxists hold that capitalists simply skim their profits off the top while providing no value of their own. That they are "extracting surplus value" from their workers. But if that was true, non-profit organisations would just swoop in and undercut profit-making firms by eliminating the "dead weight" costs of paying a capitalist. They do not because they cannot. Capitalists are clearly providing some competence or vision which benefits their workers. Each benefits from the mutual exchange, as evidence by the fact that if the worker could get a better deal s/he would take it, and if the employer could find a better worker s/he would hire them instead.

Ultimately, wages are not an arbitrary figure but a reflection of how much value an employee is able to provide to a customer. If a person wants to do away with an employer they can do so by learning skills, either on the job or on the side, which will allow them to work for themselves. Likewise, profits are not arbitrary but a reflection of how much value a company is providing on the marketplace. Provided - of course - that they are drawing their profits from serving the market place rather than lobbying or appealing to the state, but that is another article.

"In order to show that it is a half-truth, we must have recourse to long and dry dissertations."

- Frederic Bastiat

Slavery did not advance Western Civilisation.

Every now and then someone will say something like "Despite the fact that slavery was immoral the modern world was build upon slavery and we owe the lifestyle we enjoy to the sacrifice of slaves..." Sounds compelling - except its not true. Slavery held back the advance of civilization because its pointless to innovate, invent or automate when you have (free) slave labour. Absent slavery the agricultural revolution may have begun decades earlier. Slavery was an abomination, and positive ends can never become of corrupt means.

Occupational Licensing

In 2015 Obama sent his council of economic advisers out on a fact finding missions to discover why job creation was so hard for the administration and this council - made up of a bunch of Democrats, right - not ideological free marketeers - concluded that demands for mandatory occupational licensing were creating terrible cartels, excluding workers and getting in the way of regular people wanting to start up businesses.

There are over 800 occupations that might require a licence in some states in America including a tour guide, manicurist, dog walker, librarian, locksmith, dry cleaner, auctioneer, fruit ripener, plumber, private investigator, Christmas tree vendor, florist, interior designer, funeral director, cab driver, shampoo specialist, glass installer, cat groomer, tree groomer, hunting guide, kick boxer, real estate agent, tattoo artist, nutritionist, acupuncturist, music therapist, yoga instructor and mortician.

On the back of people's justified fears of disastrous bridges being built by unqualified tradesmen and hapless patients being sliced open by quacks, government - with the help of protected industries - have managed to sell the myth that mandatory occupational licensing increases the safety and quality of services. People assume that if the government says its fixed its fixed. The reality is that mandatory occupational licensing far reduces the number of practitioners operating in any sector, and when consumers have less choice they have to take whatever they can get at whatever price they have to pay. As a result the quality of services can actually go down and prices up.

This is borne out by the empirical data:

After compiling a meta-analysis entitled, "Rule of Experts," S. David Young concluded “…most of the evidence suggests that licensing has, at best, a neutral effect on quality and may even cause harm to the consumers... The higher entry standards imposed by licensing laws reduce the supply of professional services…. The poor are net losers because the availability of low-cost service has been reduced.”

Stanley Gross of Indiana State University, had to concur, “…mainly the research refutes the claim that licensing protects the public.”

More recently economics PhD. Morris Kleiner released two publications (2006, 2013) for the Upjohn Institute for Employment Research demonstrating that licensing occupations does more to restrict competition that to ensure quality.

On a free market, the poor may have to sometimes settle for inferior services - but often that is better than no service at all which might be what they otherwise receive. Even so, the price of most services will come down over time if a multiplicity of firms are offering similar services: if not in price then in real terms as wages rise. There are more risks though. When people can’t buy services they might try to do their own work, their own electrical work, plumbing or dental work, this has often happened in the past, and sometimes the consequences can even be fatal.

Still, most people find it difficult to imagine how society might be protected from quacks without government-mandated occupational licences, so lets have a quick review of some of the market can account for this:

Market Competition. Consumers provide a large degree of regulation over markets by not repeatedly buying poor services and advising other customers of what to buy and what not to buy.
Consumer Watchdogs. Customers want to know which services offer the best value for money and are quick to consult experts in magazines or online for good information before they choose a provider.
Employer Discretion. Employers do not want to take on a poorly qualified civil engineer or plastic surgeon.
Registration. Third parties or groups of experienced practitioners can create registries of bonafide service providers. If a complaint is lodged against someone on the registry the administrators can investigate the case and strike them off if they are guilty or give them a warning.
Private Certification. In the absence of mandatory government licensing consumers will often want assurance from credible sources that the services they are going to pay for are of high quality - and more importantly - safe. Third parties can offer to certify practitioners that meet their standards.
Litigation. Customers already have protection under the law against faulty products or false advertising even in the absence of mandatory occupational licensing. The threat of being sued for causing damages is enough to deter most companies from releasing harmful products, if the threat of killing off their customers is not enough already.
Contracts. Customers can make explicit contacts with service providers to ensure they have recourse if they don't get what they think they are getting. If a company says the customer is getting x but gives them y the contract clearly delineates who is in the right and who is in the wrong.
Bonding. Individuals can engage in agreements in advance that involve third parties to ensure that payment is transferred when it is supposed to be.
Insurance. Customers can insure themselves against receiving faulty goods or receiving harm from services. In some cases the insurer will be able to bring litigation against the service providers for damages incurred offering a deterrent against providing poor services.
Jail. If the fact that it is not profitable in the long-term to kill of your customers is not enough to deter greedy capitalists from selling products that are physically harmful, the prospect of a jail term just might be.

Occupational Licensing simply come down to the government abolishing someone's right to provide services to someone else who is willing to buy those services, and then selling it back to that person at a fee. This is usually at the cost of several years in some educational institution where education in the necessary skills is dragged out over several years and supplemented with a whole bunch of written work that is superfluous to the exercising of those skills. The sum result of these policies are to drive otherwise capable people out of their passion because they are not academic, can't afford the education or the time off work, or can't look at another educational institution after the horrors of school. Willing students are saddled with debts and loss of work experience while they study and expect to recoup expenses from customers. All of this drives up the cost of products, reducing living standards for average people.

We see a real problem with this with the FDA when they allow highly dangerous foods - and people presume "the government has taken care of it, if it was dangerous it would be off the market" - when the opposite is the case. They have also held (and continue in some cases to hold) life-saving drugs off the market for decades at the expense of countless lives. They also have the monopoly on this service so it's impossible to compare their performance with any other agencies that might have had a much better record of making good judgements of food and drugs. With a multiplicity of firms acting in the sector you could compare their history for a sense of which might be the most reliable when it comes to what.

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.

Regime Uncertainty

A seductive (if poorly considered) critique of markets is the notion that they are so wildly unpredictable and inherently unstable that we need government to watch over them and intervene to mitigate their excesses. There is a great irony in this position which I will reveal.

Economist John Maynard Keynes (1883 – 1946) made perhaps the most famous case for this view, coining the term "animal spirits" to describe the irrational, impulse-driven whims of market-actors based on arbitrary expectations that could only cause instability. The idea itself seems to make sense because it's hard for intellectuals, who love chewing over ideas and coming up with bright plans, to see how a society could run coherently without a single plan. The truth is, market economies are actually planned - there is just no central plan. What happens on a market is that lots of individuals make little plans to roll out their bright ideas into the through businesses, charities, and other organisations, hoping to influence as many people as possible. The plans which prove successful on the small scale attract resources and grow steadily in their impact. Other planners emulate them and adapt their own plans in light of their success. Meanwhile those plans which prove to be failures never get far off the ground.

This means that, left to their own devices, markets have their own self-correcting mechanisms which Keynes appeared to have overlooked. While in any situation there may be entrepreneurs, investors, and consumers who do indeed make poor or irrational decisions and make mistakes (driven by their animal spirits) there will always be others who succeed as well. The mechanism of profit and loss allocates the pool of available capital to those producers who make good predictions as to what consumers (you and I) want over the long term and reallocate them away from those who use the badly. This limit the scope of damage caused by bad or incompetent decision-makers. Where people fail, the results of those failures will be limited to some small number of people. This can not be said of failures of government which might extend to affecting the entire society.

Now, here's the irony. Even allowing for Keynes his hypothesis that markets are inherently unstable, how can the prospect of intervention by government, at any time, into the economy do anything but make the market more unpredictable and make it more difficult for the "little planners" to make long-term decisions? Over the course of 20 years a government could change 5 or more times. With each change in administration the form of state interventions in the economy can change dramatically, as can the political philosophy driving it. Plans can be added or scrapped at any time. Government can increase or reduce taxes at whim, or increase or decrease spending. They can pass new tariffs, grant subsidies, institute licensing laws and regulations or scrap them. Government-mandated Central Banks (like The Bank of England or The Federal Reserve) can increase or decrease interest rates; expand the money supply or contract it. Plus what makes those calm and virtuous actors themselves immune to the influences of the animal spirits? Do they not too have emotional whims, not to mention voters and campaign contributors to please?

Yes, when the specter of government hangs looming over the economy conditions can rapidly and unpredictably change at any time, in countless ways and this can only exacerbate the problem that the Keynesians plan to solve. Economist Robert Higgs called this the phenomenon of "Regime Uncertainty", where investors fear it may be hard or even impossible to foresee the extent to which future government actions will alter the “rules to the game.” As a result, investors become averse to taking risk (much in the way that Keynes feared they might) not due to a lack of government intervention – but in anticipation of it!

Private investors have "skin in the game." Their own self-interest should motivate them to only take certain risks of personal loss, and investigate all the available information to make robust decisions. But public servants are forever fated to spending other peoples money on other people. The best people at making decisions with money are most likely not in government. They're probably out there in the free market making "Little Plans" to launch a new businesses or product that might one day spread out to the furthest reaches of the earth the way mobile phones are now reaching the world's poorest populations in Africa.

I'm in the process of writing a book called "The Errors of Keynes" if you would like to receive updates about it please grab my free eBook and you will get an update when it's good to go.

That Which is Seen and That Which is Not Seen

In economics we talk about the fallacy of the seen and the unseen. For example when you tax the population for a government make-work project you create jobs but as many or more jobs are being lost because the population doesn't have that money to spend in the shops. Well talk about a laboured analogy, but everyone posts about the stars who are dying, yet no one sees the stars that are being born!

RIP. George Michael and Carrie Fischer, et al.

Workplace Safety

It's widely believed that it was the intervention of government and labour unions which is responsible for improving safety conditions in factories and other industries, but that is not accurate. This graph demonstrates that workplace fatalities were already very much on the decline before OSHA (the Occupational Safety and Health Administration) was even founded in America:



Tom DiLorenzo wrote in Capitalism "Enriches the Working Class":
"Capitalism has also made the workplace safer. In relatively “dangerous,” strenuous, or dirty jobs, employers must pay a wage premium because relatively few people want such jobs. Economists call this a “compensating difference.” The man who rides on the outside of the garbage truck at daybreak, in the winter, in the northern states, does so because he makes a very good salary – better than any of his alternatives. Profit-seeking capitalists have always understood that they need to pay more to get people to perform risky or dangerous work. Therefore, they have also always understood that there is profit in making the work place safer. A safer workplace requires a lesser compensating difference. Lower wages paid to the workers can mean higher profits for the capitalist. Thus, the American workplace had become safer and safer for generations before the Occupational Safety and Health Administration (OSHA) was established in the 1970s. Indeed, OSHA has often reduced workplace safety with its clumsy and stupid workplace rules enforced by government bureaucrats with no knowledge of the specific work that they are regulating. "

The government can intervene to bring about workplace safety faster, but this will not be without any negative consequences to their employees. The dictates of government will displace private efforts. Once the state declares that they are in charge of safety businesspersons are going to leave it up to the experts. Rather than investigating what investments will improve safety most effectively, they will spend lots of money on whatever the central planners at OSHA dictate; and if these are harebrained ideas these resources will be misallocated and go completely to waste.

Do you really think those workplace safety advancements were paid for out of the factory owners pockets? Well they weren't. They were paid for out of the workers pockets. Employers have a certain amount to budget for labour and it makes zero difference to them whatsoever if that gets spent on wages, health and safety, health insurance, company cars or anything else the employees might want to receive as payment in kind. On a free market employees will tend to get roughly the package of spending on them that they want because if a workplace is too dangerous they can go somewhere across the road that pays them less and spends more on safety. As recent empirical evidence of this the economist Benjamin Powell actually went to factories in the poorest countries in the world and asked them if they would like better health and safety, shorter hours, and a long list other benefits; overwhelmingly they said yes to everything - who wouldn't? - Unless those benefits meant less pay. In which case they declined them all. This is why workplace safety was shoddy when people were poor, but improved as people got richer. When you're broke you'd rather your employer spent the money on your wage than health and safety. However, as your standard of living increases safety at work becomes more of a priority so your expectations on your employer go up. This would all arranged voluntarily even without legislation from government. In fact it was! If employers were responsible for injuries or deaths they may have been sued for damage in common law courts for having caused harm or loss.

The best defense of workers rights is having the largest choice of employers available as possible. All of the things which the left think will help workers reduces their number of options by making employing people profitable to less employers and therefore reducing the options of workers rather than increasing them. The consequence of having less jobs to go around is that low skilled workers have to accept whatever is going on whatever terms are offered to them, and often tolerate crappy bosses. On a free market, some people might have to tolerate a less well paid job in the short term, but if they have a bad boss or do not like the safety conditions at work they can easily walk into a job elsewhere because anyone can employ them. This is a system of spiritual advancement. A wise individual can choose the job that will teach them the most skills, then move to the next one, and onto the next, and keep on moving from job to job gathering skills until they can get a management position, start their own business, or become a staff trainer or consultant themselves. It affords the maximum opportunity for class mobility. Each well-intentioned socialist policy: the minimum wage, maximum regulations, workplace safety, - takes a big slice out of the pie of possible jobs available and reduces the prospects of the poor to become wealthy in the long term.

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.

Fallacies of the Redistributionists

One of the favourite arguments of the redistributionists is that if you tax the rich and give it to the poor then the poor will spend it in their local economy which will get the economy going, rather than what the rich will do, which is "just" invest it or buy luxury goods.

I call these economic half-truths because, as Frederic Bastiat explained in his introduction to Economic Sophisms, "We must confess that our adversaries have a marked advantage over us in the discussion. In very few words they can announce a half-truth; and in order to demonstrate that it is incomplete, we are obliged to have recourse to long and dry dissertations."

It is true that if you take money from the rich and give it to the poor the poor will go into the shops and spend it.  However, people who say that redistributing wealth stimulates the economy have not yet realised that saved money is also money that is being used and is being productive. It could be as an asset in a bank to base loans off of. Once those loans are made the money is no longer in the hands of rich people in the practical sense anyway. It's now in the hands of the business owner, the staff, the suppliers, and then it circulates because those people spend it in their local economy. Therefore all that is happening is a different group of people are now spending the money in their local economy.

The thing is that money is not being raised or created out of thin air. It is already circulating in the economy. It is in capital investments which do improve the regular man's living standard in a more nuanced way. When rich people invest in businesses it allows those businesses to create products and services which contribute to peoples well-being. If those businesses are successful that is a sign they have created something that people want, if they are not the money gets taken away from the investor, which creates a natural tendency for the money to collect with people who are good at investing in companies that create things that people actually want. If the resources are being used to create goods that people buy, how can those same resources be used to make machines and tools?

As a friend explained, many people get befuddled when money is introduced. We can use grain seeds as an analogy for money. You can either eat grain or save it for planting for next years harvest. The more seeds you save the larger your harvest will be the next year. The harvest is symbolic of the abundance of products that capital investments make. If there was very little grain after the harvest the price of that grain would be very high, however if there was much of it it would be sold very cheaply. In accordance with the laws of supply and demand, the more things are produced the cheaper those goods and services become and this, broadly speaking, is what raises living standards. Not so much rising wages, although they contribute, but the fall in the price of goods compared to wages.

Redistribution will not even solve the problem of inequality, despite the claims of the redistributionists to the contrary, because it doesn't address the cause of low incomes, which is that people have a lack of economically valuable skills. People who are highly skilled are often headhunted for jobs and can choose between positions as well as attracting higher salaries. Because their skills are sought after they never have to put up with poor treatment in the workplace if it bothers them. They are more likely to have friendly, supportive bosses, or even become their own boss.

When you redistribute wealth you the people you redistribute it to have not become any more economically productive. They do not have any new skills. Broadly speaking, they are just going to go out and spend the cash in the shops which means it will end up right back in the pockets of the people who have been taxed to redistribute! And not without any harmful effects! It'd be like if a store owner gives a kid $20 and the kid buys $20 worth of product from the store, how has the economy grown?

This is an exercise in taking money from the deep end of the pool and throwing it into the shallow end, while spilling it along the way on government, administrators, bureaucrats and tax collectors - not to mention the lawyers, accountants and lobbyists who have now made lucrative careers in trying to help the rich avoid paying the redistributive taxes. Those people could otherwise be doing more productive work serving the public. The cash is still going to go back where it came from.

The real solution to the problem of income inequality is not bribing those at the top down but bringing those at the bottom up. The best way to do this, sorry to redistributionists, is to make it easy as possible for people to start businesses and hire and fire people. When there are many jobs in the economy workers can easily move from one job into another, which means they are in charge. They can take a job, take advantage of on-the-job training and learn skills, then move on to another job and do the same thing again, until they are so highly skilled that they can get a supervisory position or a management position, or create their own job. That is real class mobility. Well-intention ed interventions in the free market such as minimum wages, occupational licensing, red tape and regulations, patents, labour laws, and countless others, actually make the condition of workers worse over the long term because they have less jobs to choose from - this means they may have to admit poor working conditions and bad management because they can't just walk into another job at any time. Everything the left thinks is good for workers is bad for workers. Even if many of the jobs are bad and poorly paid they still make it difficult for management to treat staff poorly and get away with it, and no one needs stay in those jobs for very long anyway, just to tide them over until they can get something better or until they have mastered the skills and someone else will take them on for more.