The GDP Fixation

Every Friday I receive a free investment letter from John Mauldin, an investment advisor who has enough credibility to get on CNBC, hold conferences with top speakers and produce an investment letter read by millions. Recently, he has been harping on GDP (as in GDP = C + I + G + (X-M), where C is consumption, I is investment, G is government spending, X is exports and M is imports). Now, if we accept that increased GDP is good, then any decrease in G is bad. However, some economists disagree and suggest that G should, in fact, be subtracted from the equation, as government spending is spending that people would otherwise forgo or channel into activities other than invading Iraq, bailing out banks or purchasing car companies that have failed to be competitive. Such an economist is Murray N. Rothbard who, in America's Great Depression, describes a measure he calls the Gross Private Product, or GPP. To quote him (pg 224),

In the pleasant but illusory world of "national product statistics," government expenditures on goods and services constitute an addition to the nation's product. Actually, since government's revenue, in contrast to all other institutions, is coerced from the taxpayers rather than paid voluntarily, it is far more realistic to regard all government expenditures as a depredation upon, rather than an addition to the national product. (emphasis in original)

So, Rothbard's equation is

GPP = C + I - G + (X-M)

where G now represents the maximum of government revenues and government spending - the value it extracts from the economy. Rothbard elaborates more on GPP and the reader may want to follow up on his ideas. In fact, I think that Rothbard may be too harsh on government spending, as there is some value produced in some spending - it's just impossible to know what it is as it is not subject to consumer sovereignty or profit and loss.

Now, if Mauldin were like Paul Krugman - that is completely ignorant of the Austrian School of economics and a shill for Democrats - I wouldn't blame him. However, Mauldin does know about the Austrian School and was apparently present when Gary North and Mark Skousen interviewed F. A. Hayek. Mauldin does disagree with the Austrian Business Cycle Theory (ABCT) and has said in his newsletter that he is more inclined to Irving Fisher's views; but how can a thinking person suggest that G - government spending - must not be reduced too quickly as it will lead to a reduction in GDP and further economic pain? Yes, a reduction of government spending will injure some parts of the population, but that capital is then freed up for productive uses. The longer we delay that reduction the greater - and wider - will be the pain.

Article in Liberty Magazine

Liberty has published the issue online that contains an article I wrote called "Laissez Faire Justice" on the cover and "Marketing Morality" in the table of contents. It is an expanded and edited (by Liberty editors) version of my previous post "Competition as a Discovery Procedure for Ethics."

2021/10/15 Edit: Replace heading link and dead article link to reflect live URLs.

Banking, Theory, and the Crucible of Free Markets

Recently, a salvo was fired by Joseph T. Salerno in the battle between those who argue for 100% banking reserves (characterized by Salerno as the Neo-Currency School) and those who support a more lax approach, represented by Lawrence H. White. You can find White's response here. Aside from disputing what von Mises meant when he wrote about banking on a number of occasions, it seems that Salerno's argument is that the creation of fiduciary media is sufficient to create business cycles, while White's claim is that the creation of fiduciary media in the right amount prevents depressions. To both of them I say that their approaches are simply business models. If consumers value the 100% reserves model more, it may dominate. If the fractional reserve model serves their needs better, we may see the opposite. And the likely result is that some combination of the models will co-exist, even in the same institution. And, if business cycles persist, entrepreneurs will either learn to live with them, as humanity has learned to live with the unknown future, or banks will adjust their actions to mitigate the financial impacts, learning from their market failures and successes. Policy disputes are important in societies with large amounts of state intrusion, and if either Salerno or White had any chance of their arguments affecting the course of the Obama, or any other, Administration, I would be encouraging them to pull out the stops to make their points. However, their arguments are for a free society, and consumers expressing their preferences will be the final arbiters.

Conflict of Interest

During the recent grilling of Goldman Sachs's management I was struck by an oft-repeated question about whether they were concerned more about the welfare of their clients or of the firm. It seems the deeper question, assuming that the answer was one or the other, is how a firm that has a divergence between its interests and those of its clients can continue to exist? If a firm were to have a known divergence of interests with its clients and is still in business, a number of conclusions might be drawn.

It could be possible that for this type of business no one has come up with a way in which to align the interests of both parties. This problem is one of knowledge, and might especially plague industries in which results are difficult to evaluate or are not evident until a much later date - medicine comes to mind. Or it may be that there are known ways of aligning interests, but they are illegal. For example, it is my understanding that it is illegal for stock brokers to cover client losses on stock recommendations. Finally, in a corollary to the latter case, regulations and mandates may create such a barrier to entry that innovative business models that would potentially align the interests of clients and the firm more closely are unlikely to be tried. This condition effectively produces a cartel of the already-existing enterprises that then provide uniformly mediocre services. How many times has your bank angered you, and you decide against changing because "they are all the same?"

In a free market "consumer sovereignty" has a meaning, and firms that ignore it are destined for the trash heap.

Anarchism

In the book The Socialist Tradition, Alexander Gray states (pg 3):

An anarchist society is conceivable only if all concerned are the embodiment of reason and restraint. Not merely therefore should an anarchist be a man of reason; he should also combine with his own reason a wholly unreasonable belief that all others are equally reasonable.

I would agree with this quote in the context of an anarchism that expects certain values, like abstract concepts of justice or equality, to be universally held. However, as a free-market anarchist I suggest that a society in which people hold many different values is possible, just as we live in a society in which Fords, Chevrolets and Toyotas, among others, address the values of a wide spectrum of car buyers. See my blog entry, "Competition as a Discovery Procedure or Ethics" for thoughts on that subject.

Charity vs. Investment

The tragedy in Haiti the last week has led to an outpouring of requests for charity. Haiti has been the constant recipient of charity in the form of aid from the US and others, and what has been accomplished? This creation of dependent states, from Haiti to Africa has only perpetuated poverty and throttled development in emerging countries.

So, what is the answer? The left would call it "exploitation," while I would call it "investment." Haitians would clearly be willing to accept wage rates that are below those in much of the western hemisphere, and creating manufacturing capacity there could be very attractive to many companies. To do so the Haitians would have to convince those companies that their investments would be safe from confiscation and experience minimal taxation - not an easy task for a country with such a turbulent history. Also, nations that were truly interested in Haiti's recovery would need to offer true free trade with them. With unions and other populists likely to be in opposition, another big hurdle to overcome. In the end I think we can expect that Haitians will continue to starve and be dependent - a failure that we can attribute to ongoing charity.

Investment is superior to charity because the investor is concerned about the results and expects a return. That means that he tends his garden, rather than casting the seed to the winds and hoping for the best. I believe that even families, which are commonly thought to be socialist units, are based on investments in the members. Parents invest in the kids, hoping they will be close companions and helpers in the future. Even friendship is an investment with expectations of good times, a sympathetic ear and help when something can't be accomplished alone.

Investment, not charity, is a recipe for growth and prosperity.