Another take on Chapter 18. part 1, 2.0

I’ve been extremely busy this year, and that has a lot to do with why I haven’t kept up the blog. But there’s something else. I’ve also been wrestling with how to deal with this chapter while also remaining “respectable” and coming across as sane, while also being true to the science of economics.

What I am referring to here is the need for a state. And already I can see the reader jumping ship or rolling their eyes. If that is the case then it is their loss. Consider that just over 500 years ago there was no free market in regards to religion. taxes were used to build and maintain churches and to pay the salary of the clergy. If in 1516 someone had suggested that taxes and the state were not necessary in the upkeep and maintenance of religious institutions he might well have been regarded as a lunatic. But today we all know that such a man, had he existed was no lunatic at all, but merely ahead of his time. So hear me out, and wait until the end to decide if I am crazy, or merely have adopted the ideas of men who were ahead of their time.

Sowell says that a modern economy can not exist within a vacuum. But in more explicit terms what he is saying is that the market economy can not succeed without non market forces. Which is quite the contradiction considering most everything else he has said. He makes the assertion but never gets into the details of why not.

Could the market provide security? They do in shopping malls and at theme parks, why not for a city? As it is the police do not operate under a system of profit and loss. If someone breaks into your home and steals all you have the police do not get paid more if they catch the burglar and they do not get paid less if he strikes again. Today in some big cities there are neighborhoods in which the police don’t even go into unless shots are fired. They have no incentive to and every incentive not to. And because the state has a monopoly on bringing criminals to justice, no one else dares interfere.

But the free market would provide this service. No one can say exactly how. but many leading economic theorists suggest that the insurance companies would play a big role one way or another. They are the ones who stand to loose if burglars are not caught, if murders escape justice, and so on.

The idea is that either insurance companies would have a division dedicated to security, to catching car thieves, burglars, arsonists and other criminals, Or that they would pool their resources together between the different firms and contract with a security agency to do the same, or that there may be different and competing security agencies on contract with the different insurance companies. State Farm might have Bob’s Security Company working for them, while in the same town Progressive might be using Bill’s Security Company. Naturally it is in the best interests of both firms, whether they use the same security company or different ones to catch all criminals they can even if a particular victim is not their client. Think of how cell towers work. Merely because your carrier is Sprint, it doesn’t mean that you only have service when you are within signal range of a Sprint cell tower. You get coverage when you’re using an AT&T tower or a T-Mobile tower, and the cell phone companies settle with each other without you ever being bothered with it. It wouldn’t matter where you were at or who your insurance provider is, if you were the victim of a crime someone would be there to help you, and to seek justice on your behalf.

What about the poor? Yes there would be some who wouldn’t afford coverage. But in the first place a criminal stands much more to gain from preying off the more well affluent than off of indigents. And in any case someone who would attack a poor person, shows a disregard for life and/or property that can not go unanswered. The security agencies would still be interested in seeking justice in such cases. Though in all honesty there would likely, just as there is today under a state system, be less interest in solving the murder of a prostitute and drug addict than of a well-to-do wife and mother of 2 in a middle class neighborhood.

And I might digress here to point out that the advocacy of a market based security system is not utopian. It isn’t to say that nothing bad will ever happen, that no injustice will ever happen, or that no crime will ever go unsolved. The only claim is that the market is more efficient, that is better, and cheaper.

Let me address one more angle. What about the rights of the accused? The insurance agency doesn’t stand much to gain merely by throwing a scapegoat in jail. They need justice, they want to get the bad guys. And part of your premiums would go towards providing defensive legal council if accused. Naturally this could present a potential for a conflict of interest if the victim and the accused both have the same insurance company. The solution would likely come in the form of a recusal on one side or the other. State Farm would hand over the task of either prosecuting or defending the accused to another agency. A representative from a third agency might stand in as the role of judge. A jury trial may still be possible, but there would be one big difference. Aside from some sort of contractual agreement in the terms of an insurance policy, no juror would be in the court room as a result of compulsion. Either the jurors would be paid, or they would get a discount on their premiums by serving as a juror. For someone whose time is vastly more valuable, such as the owner of a construction company, he would likely not end up on a jury.

There is one other important difference, between a state run system of justice and one that is driven by people making free choices. That is that crimes, would take on a new meaning, or revert back to their old meaning. That is that there would need to be a victim in order for a security agent to drag you into court. College kids wouldn’t get cited for smoking pot, unless they were in violation of their landlord/tenant agreement, but presumably the college kids would seek out a living arrangement that was suitable to their recreational choices. There would not be a broad based law against smoking pot the way there is against assault or theft. and even in this case it is much more likely that the tenants would not be hauled into court, but merely be evicted.
There would in some form or fashion be a victim. victimless “crimes” would be a thing of the past.

This is a deep subject of which I have still only scratched the surface. Questions in the comment section are greatly appreciated.

Who Pays the Sales Tax? Did Rothbard and Woods get it Wrong?

Until now I’ve critiqued very smart non-Austrians for whom I have a lot of respect. If anyone doubts that I hold these folks in high regard they can put those doubts to rest, because today I am critiquing Dr. Thomas Woods, whom I have the greatest respect for and believe has done more for the cause of liberty than anyone else of his generation. He’s written 13 books, hosted more than 900 podcasts, and has dozens of lectures archived over at the Mises Institute. In all of that content, this is the only point of real disagreement I have with him concerning libertarian theory or economics. So while this is no trifling matter, you can rest assured that he is an author and speaker who I consider to be well worth your time.

Where Woods veered off the path of sound Austrian Economics was on the Contra Krugman Show. His co-host, Dr. Robert P. Murphy, who is one of the leading thinkers of the Austrian School, didn’t do much to correct Tom’s error. He cited Murray N. Rothbard (1926-1995), who himself was known as Mr. Libertarian, as he made his point. So it may well be that I am in the wrong. In fact, if I were a betting man, I would bet that I am wrong and Rothbard, Woods, and Murphy are in the right. But we can’t rely solely on authority for truth; an argument must stand or fall on its own merits. If it were anyone else making the comment that Tom did, I would be all over it. It is only because I consider him to be such a respected libertarian thinker that I have given so much thought to the matter before writing.

In the episode of the podcast, Woods summarized an article by Rothbard that explains that it is the producer and/or seller who bears the burden of a sales tax rather than the consumer. The argument is that if consumers are willing to pay $107 for a product, then they are willing to pay $107 for that product whether it costs $100 plus $7 in sales tax, or $107 with no tax. Without the tax, the extra $7 would go to the producers and retailers rather than the government.  The point being, if customers are willing to pay $107 why wouldn’t the producer/retailer just charge 7% more in the absence of a 7% sales tax?

My answer is that this is a good analysis in the short run, or if there is a monopoly of some type. Consider if, in the days before internet, TV, and satellite, the tax on cable were removed. Then, quite naturally, one could expect that the cable company would increase their prices to the same pretax-cut level.

But in the rest of the world, in the world of gasoline, cigarettes, and pickup trucks, an elimination of the sales tax only benefits the consumer if we look at the long run. If tomorrow, taxes on gasoline were eliminated, the price wouldn’t immediately drop by 20 cents a gallon, but in time, one oil driller, refinery, or gas station is going to decide that selling to more customers with only a 15 cent per gallon surplus is preferable to their current market share at a 20 cent per gallon surplus. Then someone else will decide that they can gain market share by dropping their price another 5 cents, and so on, until the price drops down to the current price pre-tax price.

My question is, if companies are currently making a profit by charging their current, taxed prices, and the tax is removed, why wouldn’t competition push the prices back down to where they are in the absence of a tax?

And this brings us to the tricky question of Carrier. If it is the consumer who bears the burden of sales taxes (or corporate income taxes, as I would also maintain) then why is it that Trump’s special tax break deal with Carrier only benefits Carrier and not the consumer?

One of the hallmarks of a market economy is profit and loss, the two are tied together, and both demonstrate how efficient a company is at turning a less valuable good into a more valuable good. When they are efficient at this, the firm earns a profit; when they are inefficient, they suffer a loss. If the costs of their inputs exceeds the revenue from their sales, they suffer loss. Taxes are one of those costs. At first it would look like I am backpedaling on everything I’ve said up ’til now, but hang in there, Carrier doesn’t have a tax problem, they have an efficiency problem. A tax is no different than any other expense that a business has to pay: rent, utilities, salaries, etc. Does the consumer not pay for these, too, in an indirect way? And if a firm is able to get a competitive advantage in one of these cost areas, do they not leverage it to undercut their competitors? Carrier has been unable to trim their costs in any other area, and so they opted to move to Mexico and trim their tax and regulation costs.

Consider the case of a store owner in a city mall, let’s say AE outfitters. (That’s Austrian Economists’ Outfitters, not to be confused with American Eagle Outfitters.) One day, by a chance of fate, the store owner manages to save the life of the mall owner. As a result of this heroism, the owner of the mall decides to waive the rent for the owner of AE indefinitely. In such a case, would this benefit the consumers who shop there? No. Because only the one store would be operating rent free, while every other store in the mall is still paying through the nose for rent.

But, consider if after another brush with death, the owner of the mall decides that he doesn’t much care for money anymore, and he stops charging rent to all of the tenants in his mall. Now this is a different deal entirely. No longer a boon for a single firm, competition between Old Navy, A&F, American Eagle, and Austrian Economists’ would push down prices, and the savings in the cost of rent would in fact be passed on to consumers.

The mall analogy may seem theoretical, but Carrier is in the position described in the first scenario. They have achieved a competitive advantage that only benefits them. If all their competitors were given the same tax breaks, they would no longer be in such a good position and would be forced to look at other cost-cutting measures such as moving to Mexico, or possibly even be filing for Chapter 7 bankruptcy.

There is one very important contribution Murphy made to the discussion, about which both Tom and I agree, and that is that a tax is going to have the same effect regardless of where exactly it is imposed. In other words, it doesn’t matter if a tax is put on a tobacco company for every ton of tobacco it produces, or if a tax is placed on a consumer for every ounce of tobacco he buys; the result is the same. They also agree that a tax is going to hurt everyone involved. Tom would say that consumers are hurt indirectly because there will be less competition or less R&D, and I say that the company is hurt in an indirect way by the fact that their sales will be reduced.

While Rothbard’s point about the Austrian subjective value theory is important, he has completely missed the effects of competition on price.

Basic Economics, Chapter 18, Part One

“A modern market economy cannot exist in a vacuum. Market transactions take place within a framework of rules, and require someone with the authority to enforce those rules. Government not only enforces its own rules, but also enforces contracts and other agreements and understandings among numerous parties transacting with one another in the economy.”

This would seem to be a sound statement at the opening of the chapter. But let’s think more about what is being said. “A modern market economy can not exist in a vacuum.” Who ever proposed that it does or should? And is there any fundamental difference between a modern market economy and any other economy at any other time?

Markets exist among people. They can’t exist as an entity in and of themselves, but exist only when people have the opportunity to trade with each other. They do not exist or become black markets when that freedom is interfered with. The mere fact that there are black markets that operate with an extraordinary degree of efficiency–without the government enforcing contracts or settling disputes, and while actively working to hinder their operation–should be a clear sign to all that markets can operate quite nicely without aid or intervention from the government. The only thing that distinguishes the “modern market economy” from the “black market” is the lack of total government opposition to the “modern market economy.”

To get into this a little more, consider Sowell’s comment that a modern market economy, “…require[s] someone with the authority to enforce those rules.” This isn’t altogether true, even on the face of it. There are, for instance, many rules in the market that are not enforced by government at all, or, if they are, were only legally codified after the custom was widespread, such as presenting a receipt to the customer after a purchase. An example of still uncodified rules are pricing rules that dictate that if you sell a product that is inferior to your competitor’s, you must charge a lower price, offer greater convenience, or in some other way compensate your customer to justify the inferior quality. The same rule is applied in reverse for selling at a higher price a product of the same quality as a competitor. These pricing rules are not enforced by the state, but if a firm fails to keep these rules, they will see a decline in their profits and ultimately run the risk of going out of business.

Of course, I wouldn’t say that false advertising or not fulfilling a contract is the same as breaking the rules of English grammar by using a misplaced modifier; but, then again, the vast majority of rules in the market are similar to the rules of English grammar in that they are enforced through a peer system appropriate to the environment. When grammar rules are broken, it hinders the speaker’s ability to communicate effectively and be understood. Insofar as these aims are important to the speaker, he strives to follow the rules of the language; and, insofar as he does not, others think poorly of him. If his violations are bad enough, people even refuse to listen to him.

Similarly, there are rules that apply to the market. Do not steal, for instance. Consider an agreement in which Adam agrees to pay Bob $30 for Bob to cut Adam’s grass. Bob then cuts the grass, but then Adam doesn’t pay Bob. This is essentially no different than if Adam had stolen $30 from Bob. Word would get around about Adam’s failure to pay, and he’d be unable to find someone to work for him in the future.

These types of rules, and the fact that they are broken, do not, in and of themselves, provide justification for a state (though at this point in our study of Sowell, that necessity has not been ruled out), but only demonstrates the necessity for a security and justice industry. Whether that industry should be just another of the 1,000 industries in the marketplace, open to competition and subject to contractual agreements between customers and providers, or whether that industry should be run only as a state monopoly funded through compulsory confiscation of the money of all members of society is a question that will be dealt with later.

Basic Economics, Chapter 18, Prologue Part 2

There was one other point I forgot to make in my last post, that of the importance of maintaining an objective, scientific, and value-free analysis. There is temptation to bring ethics and morality into the discussion, because it can make it easier to argue for the free market filling all the roles government now fills. By way of example, it is easy and persuasive to many, to argue that theft is wrong, and that taxation is theft; therefore, the state should be abolished. But, there are far too many people who don’t take issue with a little injustice as long as it doesn’t get out of control. Therefore, I cannot rely on a common understanding of what is ethical or moral to make a case for the free market as it doesn’t exist. Additionally, the argument for a free market in the fields of justice and defense hasn’t yet been settled scientifically. For instance, Jason Stapleton has made some good arguments against free markets in justice and defense. He points out that the free market may not always produce the desired results of a community that respects life and property rights so the day-to-day business of production and trade can carry on unmolested under stable conditions. Stapleton gives good examples of what could go wrong and paints the picture of a world I definitely don’t want to live in.

I don’t hesitate to concede that a completely free market society under the worst possible conditions is less desirable than a generally well-functioning society that has a night watchman state. On the other hand, having a state poses its own risks and its own problems. One cannot assume that just having a state will lead to the best possible outcomes for its citizens. Case in point, in the 1850s, Germany wasn’t even a nation state in the way we understand it today. The government was limited, and people were mostly free. It was not perfect, but there were no injustices so great as to cause a mild-mannered economist to advocate for the abolition of the state. Then, over the course of the next 100 years, the German state grew both geographically and in influence and power, a world war was fought, hyperinflation followed, fascism took over, and millions of people were rounded up and systematically murdered during a second world war that saw the utter destruction of major population centers throughout Europe. When all of that was over, the iron fist of socialism laid hold of the German people for another 40 years.

A fair question to ask is how many thousands of years would pass in a free market society, even under the worst conditions, before the death toll, cost of property lost, pain, suffering, and injustices all equaled what came to pass in those 100 years under the German state?

Certainly, given the example of Germany, any advocate of the state should admit it is preferable to live in the worst conditions of a stateless society than in the worst conditions of a state. I say this to try to spark an interest in the question and to encourage people to postpone judgement and consider the question without bias, as economists, as scientists.

Sowell writes that virtually everyone can agree on a few limited functions of government; Stapleton says it’s useless to debate the matter. Sowell is clearly right, because the majority of people in the world cannot imagine life without the state. Because of this, Stapleton may have a point that it is futile to try and convince people otherwise. However, economics, like any other science, is not dependent upon the consensus of the masses, nor is its study a waste of time.

As far as what’s possible and what seems possible, if you were to go back 500 years to any place in the Christian world and propose the notion of separation of church and state, you would be looked at like a madman. From Santo Domingo to the Scottish Highlands to the Balkans to London, it was taken as fact that religion was a department of the State. Not precisely the same way that the USDA is a department of our government today, true, but a portion of the taxes collected by kings went to fund the church. And there was, as far as I am aware, not a single man who thought that it should or could be otherwise. Had you been foolish enough to raise questions regarding the possibility that religion should be privatized and left to the free market, the response would have been that priests would starve and church buildings would fall into disrepair. Given the obvious facts regarding organized religion today, and the attitudes of people 500 years ago, it seems a reasonable analogy to the issue of whether we need a state operated monopoly in the areas of justice and security, which we will be grappling with here as we study Chapter 18 of Sowell’s Basic Economics. Perhaps in another 500 years there will be no state, and the people living in the Free Market Society of North America will look back with bewilderment at the injustices, wars, and destruction that plagued us in our time the same way we look back at the crusades and the backwardness of state run churches.

Chapter 18, Government Functions, Prologue

It has been a long time. And it’s been an even longer time since my last post on Basic Economics. This is no coincidence. We are at Chapter 18, which deals with the functions of government. Until the last month or so, I have personally wavered on questions of whether or not the state is necessary, whether the free market or the government could efficiently provide security and justice for all, and whether it could be just. Additionally, given that we already have a state, whether it is worth the trouble to transition from state run monopolies on infrastructure, defense, and other areas to a completely open and competitive free market. And if so, how exactly that would be done.

Meanwhile I’m faced with the reality that if the state were truly minimal, if it left us to our own devices, free from direct taxation and onerous regulations, who would care? Perhaps I would be content to swallow the pitch Sowell makes about the necessity of the state and not worry myself too much about it. On top of this, there is the delicate task of advocating for a free market in the  security and justice industry without sounding like a loon.

Should I acquiesce and just concede the necessity of the state for the sake of argument? That is the view 99% of people hold. And what is the point of arguing to abolish the state here? Why not focus on areas where I have a better chance of winning people over?

To be direct: because truth matters. Truth matters when it’s inconvenient, and when it is unpopular and tedious and draining.

With this in mind, I will examine both the case for the government as Sowell makes the case for it in Chapter 18 and an alternative case for free market competition in areas currently controlled by government entities. Hopefully, if you haven’t thought me to be a lunatic up until now, you will stick with me through my study on this chapter.

I’ll post this introduction and hopefully be back to start the study on Chapter 18 soon.