Asymmetric knowledge

SMBC

Capital as sunk cost

Commenter Gregg wants me to explain why every advanced capital-intensive industrial economy (ACIIE) needs to socialize investment. The primary source of my belief on this issue is Michael Perelman's Railroading Economics. It's been a while since I've read the book, so I'm not sure what's his argument directly, and what's my interpretation.

First, let me define my terms. An advanced capital-intensive industrial economy (ACIIE)is an economy where capital investment in many sectors is large enough such that if the capital had to be paid for in full up front, the firm would be uneconomical in the short run. However, if we can amortize the capital costs over the long run, then the business becomes economical.


(click for larger image)
What the above graph shows is the supply and demand schedule for a firm. I'm assuming linear demand and marginal cost curves, and three average total cost curves: one with all the capital paid up front, one with no capital payments (just fixed and variable costs), and one with an amortized payment of capital. The return on investment (~3% p.a.), amortized yearly, is chosen intentionally to make the average total cost with capital payments equal to the marginal cost at the equilibrium.* The equilibrium price is 70 per unit at 41 units per year, the ATC without capital costs is 41 per unit, the operating profit is, on average, 29 per unit.

Long-run competition will ensure that the cost of capital for the sector will move the ATC to the marginal cost at the equilibrium quantity/price.

In a truly laissez faire economy, everything has to be cash on the barrel-head. There's no way to enforce a long-term contract. If I have to pay cash on the barrel-head for my capital, I don't turn a profit until the middle of the 8th year. And that's assuming a relatively steep supply curve. If the supply curve is flat (no diseconomies of scale), then my average total cost excluding capital costs is nearly equal to my marginal cost, and I never make a profit, because annual ATC then equals MC, and the average total cost over the lifetime of the capital is MC + CC/Q, which is greater than MC. (And even if I could make a profit over the ten year lifetime of the capital, long-term competition would ensure that someone would try to undercut me for a little less profit, and someone would try to undercut her, and so forth, until sector was making a penny total profit over ten years.)

It's important to note that minarchism is not a truly laissez faire economy: a truly laissez faire economy has no forcible government intervention at all, and forcible government intervention to enforce a long-term contract is, well, forcible government intervention.

Because capital is a sunk cost (indeed, all fixed costs are sunk costs), no one can make money by investing unless we have a political, i.e. non-economic, way of recovering capital costs. Capitalism is one such way of socializing capital costs; socialism and communism are also ways of socializing capital costs.

The Stupid! It Burns! (knee-jerk edition)

Apparently, Cassie Gray is burningly stupid. In a comment added today to a post I wrote more than four years ago, this complete idiot writes (and I reproduce her comment in full, unedited):

Americans have a knee jerk reaction to the word "Communism" because they know history. Over 150 MILLION people murdered at the hands of communist regimes in the 20th Century. Enslavement of 1/3 the population worldwide. Communism cannot work because it views humankind as parts in a machine and makes life decisions for its people based on budgetary costs. Ironic that a system that claims to care so much about people care less than than the people themselves. If its so brilliant, then explain why the last 100 years have shown people trying to escape it? It is stunning to me that any of you would even attempt to legitimize the brutality of such a system. What do you think that says about your character when you defend government sanctioned mass murder? You all are either masochists, sadists, or the epitome of ignorance! Just goes to show that most of the institutionalized so-called professors in America and Europe should be on trial for treason.

Typical comments with typical answers

To pre-answer a few comments I often get:

Stupid comments:

You're wrong about X.

No, I'm not.

You're wrong about X, asshole.

No, I'm not. Fuck off.

I think you're wrong about X.
No, I'm not wrong, and I don't really care what you think; I care only about why you think it.

How dare you assert X?

Because I think it's true.  

How dare you fail to mention X!?

I don't know about it, I don't think it's true, or I don't think it's relevant in this context.

You failed to justify X.

Yes, I know. Sometimes I speculate, sometimes I summarize. This is a blog, not an academic journal. If you want to know why I think something, you need but ask.

You didn't justify X, so I don't have to justify to you my vehement assertion that you're wrong.

No, you don't have to justify anything at all to me. Indeed, you don't have to post here at all to not justify your opinion to me, so don't.

Mediocre comments:
You're right about X.

yay. I know. Do you have something to add?

Good comments:

Why do you think X?
You're wrong about X because of A, B, and C.
You failed to mention X, and it's important because of A, B, and C.
You're right about X, and it implies the surprising results of Y and Z.

Some of what I know (or believe) about economics

After about two and a half years of studying economics and political science in college, as well as reading a fair amount on my own, here's what I know or believe about economics. I have arguments for everything; if the argument is strong, I know it; if the argument is weak or poorly fleshed out, I just believe it. I'm not going to present the arguments here, just the claims. If you want the argument, you need but ask.

Metaphysics

Economics is inherently normative. Anyone who tells you otherwise is trying to sell you something.

Everything in economics is part of one or more dialectical relationships. There are no philosophical "foundations" for anything interesting in economics.

Consequently, the idea of microeconomic foundations for macroeconomics is not coherent. Macroeconomics is its own thing, not just an emergent property of microeconomics. There are an enormous, perhaps infinite, number of ways to conceptualize dialectical relationships between macro and micro.

While dialectical relationships are fundamental, individual micro and macro characteristics and their relationships, can be described statically and linearly. These non-dialectical descriptions, however, are very context sensitive, and describe only where the dialectic happens to be in a specific context at a very specific point in space and time. Generalizing from static descriptions is almost always wrong.

(One useful, albeit deeply imperfect and highly oversimplified, analogy is to a star: the fusing core of the star is the "macro", the outer layers are the "micro". They are distinguishable; both affect each other; neither would exist without the other. Sometimes they're in a dynamic equilibrium; sometimes they're not; sometimes they move from one equilibrium to another; sometimes they explode and/or collapse.)

Macroeconomics (an economy more-or-less as a whole)

By definition, the set of institutions create and implement macroeconomic policy are the government.

It is physically impossible, at the macroeconomic level, to consume more than we produce. We do not have to use public or central economic planning to make sure we do not consume more than we produce.

It is possible and very undesirable to produce more than we consume. If we find that we are (or are about to) produce more than we consume, we should consume more or produce less.

The "exception" to these rules, i.e. international trade deficits or surpluses, are not really exceptions. We can either look at the global economy as the macroeconomy, or we can simply say that without legitimate enforcement mechanisms, and assuming that countries are rational*, a country running a trade surplus has an immediate reason to justify apparently giving away some of its goods and services.

*A dodgy assumption, I'll admit, but dealing with irrationality is not something I know much about.

In an advanced, capital-intensive industrial economy, the "natural" micro rate of investment, i.e. the rate of investment that would occur if there were no specifically macroeconomic institutions, i.e. the government, is negative. In other words, left to themselves, individuals would let existing capital rot until we were no longer an advanced industrial economy.

Except under very restricted conditions that no longer apply in almost every existing economy, the sunk cost of capital cannot be recovered in a perfectly competitive market.

There is a dialectical relationship between the macroeconomic (government) policy and microeconomic (individual) behavior. Neither one "controls" the other, neither can be separated from the other. It is possible to have no macroeconomic institutions, but a capital-intensive industrial economy would then be impossible.

I'm not sure if income and wealth inequality have instrumental effects on macroeconomic aggregates, but distribution is important enough for its own sake that its effects on aggregates is of secondary (but not negligible) importance.

It's useful and unproblematic at the microeconomic level to treat money as just as real as rocks and trees. Money isn't actually real, and it's undesirable at the macroeconomic level to treat it as real, but it must be taken seriously nonetheless. What it means to take money seriously without thinking it's real at a macroeconomic level is so profoundly counter-intuitive that I think one must study economics seriously to avoid grave conceptual errors.

Microeconomics

In a capital-intensive industrial economy, it is impossible to even conceptualize, much less measure, the real productivity of an individual or a household*; thus, the concept of an individual household's productivity is not a coherent concept. The income of a household from factors of production (wages, interest, dividends and rents) has nothing whatsoever to do with the incoherent notion of its actual productivity. Whatever does determine (in the loosest sense) a household's income, it is not actual productivity.

*With the possible exception of very few households that do not participate at all in production.

Individual and household productivity was a coherent concept in societies before capital-intensive industrial economics (albeit weakened substantially in intensive agriculture). Most of our intuitions about individual productivity derive from our long history before we were a capital-intensive industrial industrial economy. These intuitions are now not only mistaken, but gravely misleading.

Markets are, conceptually, a good way of distributing some kinds of decision-making. They are a terrible way of distributing other kinds of decision-making, especially certain kinds of Prisoner's Dilemma types of decisions. Markets are a horrible way to make moral decisions.

Castaways

Castaways by Flea Snobbery, Andrés Diplotti

Don't Download This Song

The inconsistentcy of Libertarian arguments

My objections to Libertarianism does not rest on the claim that Libertarian ideology is incoherent or internally inconsistent. Their ideology is as coherent and internally consistent as it needs to be. Unjustified coercion consists of the use of force without a specific, individual agreement permitting that use. Ownership of property is absolute, and its acquisition and transfer is (with a few easily patched exceptions) well defined. Fundamentally, Libertarians (as well as most left-anarchists) believe that social, collective decision-making must be restricted to privileging Libertarianism (or left-anarchism) as a system of individual rights, privileges, and obligations. No other collective decision-making is valid or legitimate. Libertarians want a specific socio-political system, and there's nothing wrong with wanting a socio-political system, and there's nothing wrong with advocating a system because that's the system the advocate wants.

I object to Libertarianism on two bases. First, it's not the sort of system I want, because I believe that because I don't own much property, I would a virtual slave. Libertarianism seems like a very thinly disguised oligarchical plutocracy. I don't think it's a system that most people want.

Some Libertarians are pretty much upfront that most people would not want Libertarianism (or anarcho-capitalism). For example, as Andrew Dittmer interprets Hans-Hermann Hoppe, Libertarianism considers the preferences of the "dull and indolent" masses to be irrelevant and their satisfaction would lead to degeneracy*. However, what torques me up about Libertarians is that there's a strain of pervasive intellectual dishonesty among Libertarians, at about the same level as the intellectual dishonesty of Christian apologists. To a certain extent, neither can avoid such dishonesty: it is difficult to convince people to legitimize social, political, cultural, and economic systems such as Christianity or Libertarianism that are not in their material interest, and all social systems require popular legitimacy.

Hoppe, Hans-Herman. Democracy: The God That Failed, 2001. p. 288. qtd. in Dittmer

The intellectual dishonesty is not in the underlying ideology; the dishonesty resides in the justification for the ideology. Every Libertarian I've ever met starts off trying to leverage our dislike of other people forcing us to do things. So the argument always begins with the use of force. Jeff Orok, State Chair of the Libertarian Party of Colorado used this sort of argument when he was speaking at the Humanists of Colorado meeting: paraphrasing from memory, he said that if it is wrong for someone to take your watch at gunpoint, then it is wrong for the State to take your money at gunpoint. Because this argument is not otherwise qualified, the implication is that the "taking stuff at gunpoint" is what is wrong. Similarly, when I debated Jon Adams at the University of Colorado, Denver, he said (again paraphrasing from memory) that taxation is wrong because taxation entails that men with guns will shoot you if you don't pay. Again, without additional qualification, the clear implication is that what is wrong is that men with guns must collect it. But of course any sort of absentee property ownership requires that the owner be able to take stuff at gunpoint. The argument then changes to whether or not the force is coercive, i.e. whether or not the person subject to force has agreed to be subject to force. This move is problematic in two ways.

First, the notion of legitimizing force by agreement confuses the subjective with the objective. Because Libertarianism is not popularly appealing, one Libertarian claim is that Libertarianism is objectively true: regardless of what anyone or everyone believes or prefers, the set of rights, privileges, and obligations that Libertarianism describes are true, in the same sense that regardless of what anyone or everyone believes or prefers, when you slap a few kilograms of plutonium together, you get a very large explosion. But agreements are inherently subjective; we cannot even talk about agreements except by discovering what people actually believe and prefer. Agreements cannot be "objective," and it is difficult to see how an inherently subjective phenomenon can be regulated objectively. Once we talk about agreements legitimizing force, we have decisively moved to the realm of the subjective.

The second problem emerges from the first: what constitutes a legitimate agreement? Why should we consider one system of legitimizing agreements, Libertarianism, superior to other systems, such as liberal democratic republican capitalism, democratic socialism, democratic communism, state communism, or fascism? Why should we demand individuated agreements exclusively and consider collective agreements, such as taxation, to be categorically illegitimate? The appeal to natural law has to fail. In the first sense of natural law as objective, how can there be a mind-independent law that regulates mind-dependent things? In the second sense of natural law as what the vast majority of people want, independently of their power or positions, the vast majority of people do in fact legitimize collective agreements, so Libertarianism manifestly contradicts natural law in this sense. Indeed, collective agreements are manifestly more efficient where externalities, information asymmetry, finite buyers and sellers, barriers to entry, always-declining marginal costs, sunk costs*, and other factors render markets inefficient.

*Sunk cost is especially important, because capital is always a sunk cost. In an industrial economy, the cost of capital is a substantial fraction of the total cost of most goods and services. Pure free markets push the price of a good to the marginal cost of the last item produced; the cost of capital is entirely contained in the marginal cost of the first item produced. Without some collective agreement protecting capital costs, an industrial economy will collapse.

If the natural law argument fails, then Libertarians have to make a pragmatic argument. When they do so, they fall to the level of pure lies and bullshit shown by Christian apologists. Market-based healthcare is more efficient than socialized healthcare! Well, no. purely privatized healthcare very obviously less efficient that socialized healthcare for most ordinary, commonsense definitions of efficiency. Voucherized education is more efficient than socialized education! The facts are now coming in, and no, it's again obviously not efficient. Latvia's incredible growth shows the economic efficacy of Libertarian policies adopted after the 2008 global financial collapse! But Latvia hasn't grown incredibly; it's still worse off both in GDP and employment than it was before the collapse. (And even if it had, Latvia? Good grief.) The bullshit is just as thick: every partial success that happens is attributed to Libertarianism; every partial failure is the result of the Libertarianism not being sufficiently complete. (Every "miraculous" survival is the hand of God; every tragic death happens despite God's concern.) When they're not just lying about the facts, they're creating patently unfalsifiable standards.

As I said in the beginning, Libertarian ideology is consistent, at least as consistent as it needs to be. Internal consistency is not a high bar: if the Christians can manage it, and they can, the Libertarians should not have much a challenge. The problem is the justification: the justification is equivocal, inconsistent, disingenuous, unfounded, lying, and riddled with bullshit. I can see no other explanation but that Libertarians want an oligarchic plutocracy, and for obvious reasons, they cannot be forthright, so they must cloak their ideology of slavery in the language of liberty. It is unfortunate that so many who would be slaves in a Libertarian society advocate Libertarianism so fanatically, but anyone who has studied Christian apologetics will understand that the tendency of slaves to fanatically advocate the part of their masters is not a Libertarian but a thoroughly human characteristic.

Cheating

(via Daniel Florien)

Quantity and quality of money

In his comment, Ralph Benko, editor of the website The Gold Standard Now, defends the gold standard, or at least alludes to defenses. One argument is that, historically, use of the gold standard correlates to economic growth. Benko and his unnamed advocates "suspect, with good reason, that there is more than a coincidental correlation." Benko also asserts that my criticism of the gold standard as limiting economic growth "conflates quantity and quality theory of money." Benko compares the gold standard to abstract units of measure, and implies that holding money to a gold standard does not affect economic growth any more than holding the definition of a yard constant affects the production of yardsticks. These defenses, however, are facially thin.

A suspicion of causation is not very impressive. Correlation is evidence of causation, but it is at best only preliminary evidence, and tells us nothing about the direction of causation. For example, if changing economic conditions caused the gold standard to begin to limit economic growth, or if some underlying change in economic conditions caused both slower economic growth and the inefficiency of the gold standard, then we would expect to see the same correlation: declining economic growth at the same time the gold standard was being eroded. Benko suggests that the correlation might have something to do with Total Factor Productivity, but I can't seen any plausible connection. Benko admits this defense is just a suspicion, so I think it's justified to not take it too seriously.

The more substantive objection is that I'm conflating quality with quality. But this objection at least needs more elaboration. Money is not an abstract unit of measure, it's a reified social construction that we pretend has actual existence; we actually pretend to store and move money in time and space like we move physical objects in space. There's nothing wrong with that pretense; pretending to store and move money around is just a way of modeling and representing the storage and movement of real goods and services.

In one sense, the quantity of money doesn't matter to money as a representation of transactions of real goods and services, only its quality. If we could move money arbitrarily quickly, then one unit of money would suffice, so long as that unit had a consistent representation. "Wealthy" or "poor" people would just be those through whose hands the unit of money passed relatively more or less often. But money cannot move arbitrarily quickly, for two reasons. First is just physics: it takes time, energy, and effort to move money, even by computer; doubling the actual units of money in use halves that effort, because moving two units in one transaction has about the same cost as moving one unit.

The second reason is because of money's other use: as a liquid store of value. We don't just move money around to represent the movement of goods and services, we store money to virtually transfer consumption in time (by actually transferring it in space between different people: my saving must be your excess spending, and vice versa).

Because money must be stored, the quantity of money is directly related to its quality. Indeed, as we know, Y * P = M * V: real GDP (Y) times the price level (P) is, by definition, equal to the quantity of money (M) times the average velocity of money (V). Everything else being equal*, increasing the quantity of money increases the price level in the short term, as more M is chasing the same amount of Y. But the price level is the "quality" of money. Thus (under ordinary circumstances) there is a direct relationship between the quantity and quality of money.

*Which is sometimes not the case: when interest rates are near the zero lower bound, for example, the velocity of money just decreases when the money supply increases, without changing GDP or the price level.

There is, however, a third issue: socially constructed agreements directly denominated in money, i.e. purely financial agreements. When I borrow money, I both borrow and agree to repay only money, not any actual goods and services that money represents. Financial agreements must involve positive nominal interest rates: no one would ever loan money at a zero or negative rate; they would just hold the cash. This means that if the price level decreases, people who owe money would owe more goods and services than they originally borrowed. Since interest rates cannot be negative, there is no easy way to reflect expectations of future deflation in interest rates. This is why real economists fear deflation more than (modest) inflation: deflation — or even just the expectation of deflation — causes money to stop moving, and the way our system is presently set up, money in motion is economic activity. Deflation causes a decline in real GDP. Because inflation can be easily reflected in interest rates, modest inflation does not affect real GDP in as dramatic a way as does even the smallest deflation.

What does all this have to do with the gold standard? Under the gold standard, M is the physical quantity of processed gold in the hands of the government and private individuals, and its increase (or decrease) cannot be socially constructed. (If Benko means something else by a gold standard, he will have to explicitly describe it.) Assuming the velocity (V) doesn't change (under ordinary circumstances it doesn't), the quantity of gold (M) must represent all the real goods and services we're capable of producing (divided by a constant V) plus all the real goods and services people want to store. Given that there's no particular reason to believe that real GDP will increase at the same rate that the quantity of gold increases, then either P or Y must change. But P, the price level, is the "quality" of money. It is how much goods and services a unit of currency will produce. So, if we let price levels float, the quality of gold will vary just as does the quality of a fiat currency; it's not fixed objectively. Alternatively, if we demand price stability, then we must match real GDP to increases in the money supply, which is just having the tail wag the dog. Either gold doesn't actually do anything macroeconomically significant, or it does exactly the wrong thing.

Not only does a gold standard have zero or negative macroeconomic effects, it also cannot limit government spending. The government can effectively create a monopoly on gold, simply by demanding whatever taxes it wants in gold, and paying for goods and services in gold. By changing the ratio of the two, the government can set the price level to whatever it wants: an ounce of gold is "worth" whatever the government will pay an ounce of gold for, which people will provide because they need the gold to pay their taxes.

So, demanding a gold standard seems as weird and arbitrary as demanding that all legal documents should change to using the Courier font for all legal documents or declaring that a court does not have jurisdiction because the flag in the room has a fringe. It really doesn't matter if our price levels are arbitrarily denominated in ounces of gold or simply fiat dollars. The demand for a gold standard, therefore, is disingenuous. It has nothing to do with "sound" money, since gold is just a slightly less efficient way of doing what fiat currency already does. It is, instead, aimed at delegitimizing the democratic republic, in favor of placing political power in the hands of the people who happen to own a lot of gold right now.

The Stupid! It Burns! (feminist edition)

The 9 Ugliest Feminists In America That's it. Just the title. The actual article is just as stupid as you think.

(via Chris Clarke at Pharyngula)

The Stupid! It Burns! (liberallogic edition)

I've never given this "award" to an entire website before. Many sites deserve it, and there are a number of websites that I no longer feature here because they are an endless stream of stupidity, and I try to be ecumenical. However, today's site is an endless stream of burningly stupid soundbites using the demotivational poster template. Have a look, but be prepared for the stupid!

Liberal Logic 101



And apropos of nothing, let's hear it for Ahren Paulson, who graciously allowed me to use the graphic I use for this series. He's an incredible artist and all-around great guy.

Absentee ownership

I don't particularly like reddit, and I have my statistics counter set to not report (but still record) inbound links from there. However, every once in a while I'll get a spike in traffic, look around, and see my work discussed on some reddit thread. (The actual spike is from a different reddit thread.)

Thus, I stumbled upon MaunaLoona's commentary on my post, "The Libertarian argument." As is usually the case with Libertarians, the commenter pretty much completely misses the point, but inadvertently brings up some topics that deserve more analysis.

I define absentee ownership here as the situation where the objectively determinable direct use of physical coercion against the person of the owner is not required to deprive him or her of its objectively determinable use.

By his definition leaving a car parked on the road is absentee ownership.

There are a number of issues here. First, yes, leaving your car locked on the side of the road is one form of absentee ownership. And, we do in fact have to make social constructions, such as laws, courts, and police, to define and protect individuals' interest in retaining possession of objects, such as cars, they are not presently using, or even that they loan to others. A misconception here seems to be that I am absolutely against absentee ownership. I'm not. I just argue that all absentee ownership is socially constructed; there are no objective physical facts that define absentee ownership. The argument is against the justification, which MaunaLoona will talk about below.

For example, the occupant of a rented house is already in physical possession of the house; if the renter arbitrarily decides not to pay the rent, no objectively determinable coercion against the person of the owner is necessary. Indeed, it is the owner who must, in a objectively determinable sense, initiate coercion against the possessor to exert meaningful ownership.

The owner of the house is using force to remove an invader. You can call it "initiating coercion" all you want, just as long as we're clear what you mean by that phrase. Words have meaning. They don't mean what you want them to mean.

But this is precisely my point: what does "coercion" actually mean? Does it mean what it does when Libertarians are arguing against coercion: taxation is obviously coercive because if you don't pay your taxes, men and women with guns will come to kill you. Or does it mean what it does when Libertarians are arguing for rent: if you don't pay your rent, although men and women with guns will come to kill you, that's not coercion because it's justified by an agreement. Again, MaunaLoona will develop this point below.

One response is that coercion to enforce absentee ownership is socially constructed to be legitimate, even though the absentee owner does not possess the property. However, if social construction can legitimatize coercion to maintain absentee ownership, then social construction can legitimatize coercion to collect taxes. Remember, the argument against taxation above must be in some sense that because it is coercive, taxation is unjust regardless of any social constructions that legitimatize it.

Taxation is not voluntary. Entering into a rental agreement is. If there is any doubt about who the owner of the rented property is, the contract will say "the owner retains ownership of the property and will kick you out if you fail to pay rent".

Here, MaunaLoona just changes the justification from the use of coercion to socially constructed idea of "voluntary." OK, a socially constructed "voluntary agreement" can potentially justify objective, physical coercion, but this is a different argument than that objective, physical coercion is itself unjustified. The argument then becomes how to construct "voluntary agreement" to exclude taxation but include rent. It is perhaps possible to construct "voluntary agreement" to exclude taxation but include rent, but the construction becomes so convoluted that it loses its obvious linguistic meaning. And even if we could create a coherent, consistent construction, why should we accept that particular construction as authoritative?

Seems like equivocation and strawman are typical leftist tactics. The above argument is similar to:

a. Libertarians claims taxation is immoral because of coercion
b. Defending your property is coercion
c. Property ownership is immoral. Checkmate, libertarians!

I don't think I'm exaggerating when I say I've heard this argument a hundred times before. I wish they would come up with something new.

Well, we don't come up with something new precisely because Libertarians keep using the same contradictory, equivocal justification, which I discuss in this post. Again, I am not claiming that Libertarian ideology is inconsistent or incoherent; if Christian theologians can consistently reconcile the character of Yahweh with an omnibenevolent deity, we can reconcile anything, including Libertarian ideology. Instead, I am arguing that their justification for their ideology is incoherent, inconsistent, and equivocal.

Commenter saint1947 adds:

Taxation is not voluntary. Entering into a rental agreement is.

Exactly! It is not a social construct that allows a property-owner to "initiate force" to remove a renter who refuses to pay. It is the terms of the contract that that specific individual renter signed.

The obvious stupidity of this comment probably deserves a The Stupid! It Burns! tag. A contract (including all the social institutions necessary to interpret and enforce it) is a social construct, in just the same sense that a statute mandating payment of taxes is a social construct.

To reiterate: I am not absolutely against absentee ownership, contracts, the use of physical force, nor am I absolutely against making social constructs to manage and enforce these social relationships. But social constructs are, well, social; what I object to is Libertarians claiming some sort of privilege for their own preferred forms of social constructs, and using poor arguments to justify them.

The power of selling out

(via Lambert Strether at naked capitalism)

Time Preference

A staple of both micro- and macroeconomics is the individual time preference. According to this theory, first, goods and services are worth more now than they are later, and second, individuals have different time preferences: some prefer fewer goods and services now rather than more later; others prefer more goods and services later than fewer now. In other words, if I'm entitled to one latte each day, I would never go without a latte today just so I could consume two tomorrow; there's no benefit to foregoing today's latte just so I can drink it tomorrow. But I I can go without a latte today and consume three lattes tomorrow: today's latte, tomorrow's latte, and the "extra" latte I gain by going without today. Some people would rather have their one latte each day; others would rather forego some individual day's lattes so they can get extra in the future.

That there is a time preference is obviously true: some people do not save at interest, and consume everything they're entitled to today; others, in exactly the same situation, consume less than they're entitled to today to consume more tomorrow. However, the question is whether time preference is an intrinsic or a derived element of an individual's utility function.

Let's consider an obviously unrealistic economy. First, we assume the economy is completely stable: there's no per capita economic growth*. We will produce exactly the same amount tomorrow as we do today, and everyone knows and expects economic stability. Second, everyone has exactly the same income, and we assume no individual's income will ever change. Third, we assume that everyone's utility function is constant across some period of time, say a four-week month: every individual will always want to consume exactly the same bundle of goods in any given month.

It seems clear that at least some elements of individuals utility functions still make sense: some people will prefer to consume only lattes and go without yoga lessons; some will consume only yoga lessons and go without lattes, and some will prefer various combinations of lattes yoga lessons. The aggregate of all the utility functions will create a family of indifference curves between lattes and yoga lessons, and the marginal costs of lattes and yoga lessons will create a production possibility frontier, and we know there's one optimal point where the indifference curves and the production possibility frontier intersect, specifying the relative quantities and prices of lattes and yoga lessons. Let's assume that the optimum is that one latte per day for a week is, in aggregate, equivalent to one yoga lesson per week, and people can choose between two lattes per day for a week, two yoga lessons per week, or any combination in between**.

*We can either assume no population growth and no economic growth, or we can assume that per capita production is always constant.

**It doesn't matter here whether or not we can produce and consume fractional lattes and yoga lessons.

We can say, then, that any element of a utility function that makes sense under these restricted conditions is an intrinsic element. Any element that makes sense only when we relax these assumptions is a derived element, derived, that is, from the relaxation of the assumption. For example, if an individual's utility function changes because we allow per capita economic growth, that change is an element derived from the fact of extrinsic economic growth.

Under these assumptions, then, time preference would say different individuals who valued lattes and yoga lessons equally but had different time preferences would choose between the following options:

1. Neutral: one latte every day (28 per month) and one yoga lesson per week (4 per month) on the one hand, and on the other hand, they might choose
2. High: two lattes every day for one week (14 per month), two yoga lessons the first week (2 per month), and none at all for the rest of the month.
3. Low: no lattes or yoga lessons at all for one week, and two lattes and two yoga lessons for the next three weeks (42 lattes and 6 yoga lessons).

The first individual has a neutral time preference, the second has a high time preference, and the third has a low time preference. It's clear that if time preferences are symmetrically distributed, then those with low time preference can trade with those with high time preference, and production and consumption remains constant on a daily basis, with every pair of individuals consuming a total of one latte per day and one yoga lesson per week.

However, it's hard to look at this as specifically a time preference. If we assume that everyone is rational, then every person knows they will have to go without sooner or later. Instead we can look at these kinds of preferences as saying that an individual prefers two lattes a day for a week more than they dislike going without a latte for a week. But in this case, they can trade one-for-one with others with the same preference. They can trade their lattes this week for others' lattes next week, and then switch back and forth. Then, instead of getting two lattes per day (and two yoga lessons) for only one week per month, they get two lattes per day and two yoga lessons per week for two weeks. Thus, a time preference, where more goods later can be substituted for fewer now, seems entirely irrational under conditions of absolute stability.

If we relax the assumptions, then time preference starts to seem more reasonable. If we assume economic growth, or if we assume that income levels change over time (note that the former implies the latter, but not vice versa), or if we assume that fundamental preferences change over time, then a time preference obviously makes sense. Some people will be happy with their one latte a day; those who forego their latte today invest the unused labor to make latte production more efficient tomorrow, and they reap the "extra" lattes not taken from the high time preference consumers but from increased productivity. Indeed, investment and increasing productivity are not the result of time preferences; time preferences are an artifact of economic growth.

What is a voluntary agreement?

Today, a rather stupid anonymous commenter left this message in response to my post, The Libertarian Argument:

How can you not see the difference between a lease, which was signed by the tenant, and a decree that was forced upon a citizen by the majority? One is a voluntary agreement, the other is force.

The commenter makes a number of rather obvious errors, most notably that that Libertarian argument does not usually consist of how to justify the initiation of coercion, but rather that the initiation of coercion is intrinsically unjustifiable. Of course, as I discuss in the post, the Libertarian argument is fundamentally in bad faith: agreements they don't like are unjustifiable because they entail the initiation of coercion; agreements they like aren't the initiation of coercion because they are justified. I find this "argument" as tedious and stupid as Divine Command Theory.

But this comment, while completely stupid, does suggest a more interesting question: what is an agreement? What do agreements mean? When is an agreement voluntary? The Libertarian position is straightforward: Agreements are what Libertarians want them to be, they mean what Libertarians want them to mean, and they're voluntary when Libertarians like them (and involuntary when they don't like them). Libertarians interpret "voluntary agreement" like Christians interpret the Bible.

But there are more subtle issues (more subtle than a Libertarian is like shorter than Manute Bol) about agreements.

What is a voluntary agreement and what does it mean? Well, first of all, an agreement has to provide mutual benefit: all parties to an agreement have to be better off overall than if the agreement did not happen. Second, all parties to a voluntary agreement must be able to forego the agreement without harm. Finally, an agreement cannot be fully explicit: there must be a social process to interpret the meanings of agreements. But even with this definition, there are still notable controversies.

First, although an agreement has to provide mutual benefit, there's no determinist how that mutual benefit is allocated among the parties. The allocation of the "surplus benefit" is a matter of bargaining power, not logic, which then raises the question: what are legitimate and illegitimate ways of obtaining and exercising bargaining power? Is possession of money legitimate bargaining power? How about votes? How about violence, threatened or actual? People have any number of positions on these issues, but there's no single rationally correct answer; they're political questions.

Second, what constitutes "harm"? It's relatively uncontroversial that getting killed or beaten constitutes harm, so that giving my wallet to a mugger who points a gun at me is not a voluntary agreement. But what about natural harms? Does freezing or starving to death constitute a harm that renders an agreement involuntary? How about becoming stateless, ejected from the protection of a society? Is it harm to lose some portion of the mutual benefit of an agreement because of a change in bargaining power. No one is self-sufficient; we all need to rely on others for our physical survival. Does our mutual dependence entail at least some obligation on the part of others to assist the survival of others? Again, these are not rational but political questions.

Third, how do we resolve disagreements between parties to an agreement about what a particular agreement actually means? What, precisely, have the parties agreed to? What do we do about these disputes? Again, how to interpret an agreement is as much a matter of not rationality but politics.

It's not enough to lay out just a consistent set of answers to these questions, because there are a very large number (perhaps infinite) number of consistent answer sets. Why should I prefer your set of answers to another?

One problem (out of many) with not only Libertarianism (right-anarchists) but also left-anarchism is that anarchists simply push all the interesting political questions to "voluntary agreements" and assume all these problematic questions are thereby solved at a stroke. I think this position is at best naive, and at worst dishonest.

The Stupid! It Burns! (incompatibility edition)

The author of the blog, Shadow to Light, does not appear to like Susan Jacoby’s Atheistic Beliefs:

So the community that insists science and religion are incompatible is now going to embrace the notion that emotion and reason are complementary? Well, intellectual consistency has never been a strong point of atheism.

Again, I've only given you a taste of the stupid.

ETA: The stupid refers to the Shadow to Light author's critique. Susan Jacoby rocks!

The Stupid! It Burns! (which god? edition)

Christians say Atheists are right Atheists don't believe in

god as Kim Jung Il. . . A god of power and supervision and invigilation and suspicion. . . . And [a Christian] almost always has to say: I don't believe in that god either.

Uh... I know a lot of Christians who actually do believe in such a god, but all right, let's run with that. What kind of a god do you believe in, Dave?

When a Christian says GOD they mean who you know when you know Jesus. Jesus whose purpose is to introduce his Father. (Luke 10) God who is firstly Father, who sent his Son into the world in the power of the Holy Spirit. Not power, but a person - a person who is universally acknowledged to have been good and kind and innocent, and who was nonetheless executed and then it was claimed resurrected. There is a story to consider, to read.

Wait, what?

Lots more stupid in the article.

The Stupid! It Burns! (humility edition)

Why Are Atheists Always Attacking Christians?:

It's common to read attacks by Atheists on practicing Christians on Daily Kos -- and, indeed, on the Internet at large. These attacks often infantalize Christians, assault their sense of reason, slander them or level broad accusations that have little support in fact. The context of these attacks is usually the All-Seeing Eye of the Atheist, which is capable to seeing into the minds of Christians and instantly understanding their motiviations, even when such motivations are cloudy or obscure to the Christian himself. . . .

Human nature is such that, on closer examination, the Atheist movement is full of the same weak, irrational, conflicted, myopic human beings that fill the ranks of the religious. We're all small -- tiny, really -- when compared to the grandeur of the Divine or the Universe. (Your choice.)

So, please. A little humility?

Economic growth and the gold standard

Assuming a gold standard were possible (i.e. that people wouldn't just create fiat money around it), it doesn't seem possible that we could get optimal economic growth under a gold standard.

In market/capitalist economics, Y * P = M * V: Real gross domestic product (Y, the total production of final goods and services) times the price level (P) equals the quantity of money (M) times the velocity of money (V, the number of times, on average, a unit of money is used in a transaction for final goods and services). We can also say Y = (M * V) / P. We can choose our units so that P = 1; therefore Y = M * V.

Remember that V in this case is not just the number of transactions using a particular unit of money, it is the number of times the unit of money crosses the production/consumption boundary. Alice's employer pays her; that's one transaction. Alice buys food at the store; that's two transactions. The store uses the money to buy food from a wholesaler. That's not a transaction that counts towards V, because the store and the wholesaler are both on the production side. Similarly, when the wholesaler pays the processor, or the processor pays the farmer, or when the farmer pays his mortgage, those are not transactions that count in the velocity of money. It's only when the store, wholesaler, processor, farmer, or banker, pays an employee, investor, or landlord does the money cross the producer/consumer boundary and V increases. It seems clear, therefore, that V is physically limited. No matter how an ounce of gold is represented, whether it's a physical coin, an ingot, or an entry in a database that corresponds to some physical gold, money can move only so quickly.

The point of a gold standard is to physically limit M, to create a quantity of money whose increase is physically limited. Since V is already physically limited, that means the quantity of money in motion, M * V, is physically limited. If we have price stability, then P is constant. Therefore, an increase in real gross domestic product is limited to the limit of the increase in the physical quantity of gold. But there is no particular reason to believe that the limit on the increase on the physical quantity of gold is the optimal increase in real gross domestic product. And that's absolute GDP; there's no reason to believe that the increased quantity of gold even match even population growth.

Furthermore, what is the value of a specific quantity of gold? Gold has very little intrinsic value, outside of electronics and jewelry: you can't eat or drink it, nor does it keep you warm or dry. Gold does, however, have a physical cost: the marginal socially necessary abstract labor time to produce the "last" unit quantity of gold. Expressed in money, the marginal cost of one unit quantity of gold is one unit quantity of gold. In other words, all the economic growth would go to the gold producers. There really isn't a world with an industrial economy in which a gold standard is a good idea.

There are, of course, any number of people that support a gold standard who have just not thought through the economics. But there must be gold standard advocates who have thought through the economics. Some of them, I suppose, really would limit real economic growth, but I've never seen a gold standard advocate say explicitly endorse limiting economic growth to the increase in the supply of gold. The others, however, realize that some sort of fiat currency is necessary for economic growth in an industrial economy. The question, then, is who gets to control economic growth, and, more importantly, who gets to distribute the benefits of economic growth. It is fairly obvious, then, that such control would go to the people that own most of the gold.

Economic power, control over the means of production, is political power. One does not imply the other; they are the same thing. In an advanced industrial economy, the means of production is not ownership of factories or land, but ownership of money itself. By definition, the government is the set of institutions and their members that own the money. Thus there can be no such thing as "private" ownership of money: the fundamental owners of money are, by definition, the government. So the question is not whether we should have government ownership of money, but rather what kinds of institutions, with what kinds of members, should constitute the governmental ownership of money.

I'm not a big fan of republican democracy, but a republic is, at least to some extent, accountable to all the people. Putting the government in the hands of people who say proudly and explicitly that they recognize no accountability except to their own well-being seems like a Very Bad Idea.

Promises that can be kept

In "Promises That Can't Be Kept", John Long argues that the government benefits are like free ice cream, eroding the profitability of the economy until it becomes bankrupt. Yes, people like free stuff, but Long argues that if a business starts giving out too much free stuff, someone has to pay for it, and the people who can afford to pay extra will go elsewhere. There Ain't No Such Thing, dontcha know, As A Free Lunch. Long explicitly describes his on-the-course-to-bankruptcy ice cream shop as an analogy to the federal debt. Mentioning (but not citing), I presume, "Why $16 Trillion Only Hints at the True U.S. Debt," by former Republican congressmen Chris Cox and Bill Archer. In this article, Cox and Archer claim that the federal government owes $86.8 trillion:

The actual liabilities of the federal government—including Social Security, Medicare, and federal employees' future retirement benefits—already exceed $86.8 trillion, or 550% of GDP. For the year ending Dec. 31, 2011, the annual accrued expense of Medicare and Social Security was $7 trillion.

According to Cox and Archer, we will soon have to collect $8 trillion per year to fund these entitlement programs, a task that would be difficult even in an economy with an annual gross domestic product of $13-14 trillion. Sooner or later, something has to give. But Cox and Archer's numbers are suspect; more importantly, Long's ice cream shop analogy is misleading and fails to accurately describe the macroeconomic role of a government with a sovereign currency.

Cox and Archer are trying to scare us with big numbers, and they don't describe these numbers and their sources accurately enough for us to really understand the numbers. On what time-frame does the government "owe" $86.8 trillion? Are these actual debts, or just promised payments? There is a difference: I could say that you personally owe more $1 million, because that's how much money you'll have to spend to stay alive over the next 30 years. But you don't have to reduce your spending to pay back that "debt": that "debt" just is what you'll have to spend. I'm not an expert in social security accounting, but I do more-or-less vaguely know that both Social Security and Medicare project income and expenses over about 75 years. So if that's $86.8 trillion over 75 years, then that's about $1.16 trillion per year, which is not particularly scary. Similarly, as an accountant, I look carefully at qualified numbers. When Cox and Archer talk about an "annual accrued expense of $7 trillion," the first thing I want to look at is how they calculate an "annual accrued expense." Even the most honest accountant uses bullshit numbers, and this $7 trillion smells like a bullshit number. Without telling us how they got it, I just don't know what it means. Finally, these are Republicans talking about government money, and Republicans have less credibility talking about money than Kent Hovind has talking about population genetics. I don't even bother to check Republican math anymore; I simply presume it's an outright lie.

John Long's analogy, though, is not merely unhelpful, it is actively misleading. First, the government is not handing out free ice cream, and it is not handing things out to poor people. They are providing a service that everyone must have: retirement income and old-age health care to people who have, for the most part, worked and paid taxes their whole lives. No rational person would forego these benefits, and the only reason anyone might do so would be to survive in the short term. By making it a universal tax-supported government benefit, employers cannot force workers to compete on who is willing to starve later to work now. Second, the government is not a business that must make a profit (or at least not make a loss) to survive. The government must have debt, because net government financial debt is net private-sector financial assets. If we want to have net private financial assets, then we must have net public debt. That's how the financial system works. Furthermore, the government does not, like an ice cream shop, have to compete with other businesses, and does not have to match its revenues to its expenditures, even in the long run. The government not only must run a deficit, it can print money at will. There are pros and cons to printing money, of course, but they are completely different than the pros and cons of a private business borrowing from individuals. Any time someone compares the government to a business, they simply do not understand fundamental macroeconomics. John Long does not understand fundamental macroeconomics.

Social Security and Medicare are obligations that Americans, as civilized human beings, must meet. We simply cannot choose to let any of our old people starve or go without adequate medical care. We simply must do it. And we can. Even if it did take 50% of our GDP to take care of our old people, then that's what we would have to do. Letting old people starve and die is simply not an option. But the idea that we will have to spend 50% of our GDP to take care of our old people doesn't make any sense. In "A Summary of the 2012 Annual Reports," the Social Security and Medicare Boards of Trustees report that total Social Security spending, 4.2% of GDP in 2007, will rise to about 6.4% of GDP in 2035 and then fall to about 6.1% of GDP in 2050. Similarly, Medicare, at 2.0% of GDP in 2011, will rise to 4.0% of GDP by 2086. Cox and Archer are pulling annual expenditures of 50% of GDP out of their asses; The true amount of 10-11% of GDP isn't couch-cushion money by any means, but it's hardly impossible. For Long to repeat these numbers is simply irresponsible journalism. Our promises to, well, ourselves, that our society will ensure that we won't starve or die of treatable medical conditions in our old age, must be kept, and they can be kept.

The Stupid! It Burns! (leap of faith edition)

The Atheistic Leap of Faith

I want to point out some of the contradictions that I see in [an atheist's] worldview. My point in the following is to be loving by clearly presenting the truth as I see it. I recognize this style is a bit abrupt and can come across as harsh, but I assure you, that’s not my intention.

Here are the clashing statements, right next to each other:
1: There are no objective moral truths.
2: I’ve decided to accept some moral axioms as true, because I think it is important to have a moral system to live by.

1: There is no ultimate moral accountability for my actions.
2: Even when I know no one can catch me doing things that we would both consider to be “bad”, but are still incredibly fun things to do, I try to do what I think is right.

1: In the long run, all life will be extinguished.
2: I’m pretty hopeful about the future.

1: Anyone you help will die shortly afterwards.
2: I’m willing to make sacrifices so that others can have a better life.

1: Looking at it scientifically, we are specks of cosmic dust.
2: I think my life has a lot of meaning.

1: Everything happens in accordance with the laws of physics and biochemistry.
2: I have free will.

1: Everything happens in accordance with the laws of physics and biochemistry.
2: My mind rationally assess propositions in order to make logical conclusions.

1: We are biochemical reproducing machines.
2: I truly love my family and friends.

1: Our particular existence is the result of a colossal series of random events and the process of natural selection.
2: I’m trying to figure out the purpose of my life.

1: Everything about us can be explained by evolutionary pressures.
2: My own beliefs about reality are explainable in terms of what is most reasonable.

[inline links omitted]

Day 9: Godwin's law

Hitler's Economics, by Llewellyn H. Rockwell, Jr.

Day 9 of Robert Wenzel's 30 Day Reading List on Libertarianism

Day 0: The Libertarian catechism

Previous: An unproductive critique
Next: We're done.

I'll skip Day 8, Murray Rothbard's opaque and seemingly pointless Taxation Methods Evaluated, where he seems to say that taxes are bad because they cannot be made more palatable, and when they can be made more palatable, they are thereby worse; they are bad because they cannot adjust incentives, and when they can adjust incentives, they are thereby worse. Yeah, we get it, you don't like taxes.

In day 9, however, Llewellyn H. Rockwell, Jr. explicitly invokes Godwin's Law. Yes, the title of the piece really is Hitler's Economics. Yes, according to Rockwell, Keynesians are Nazis.

I think we're done here. According to this Libertarian canon, which prominently features Llewellyn H. Rockwell, Jr., Ron Paul's campaign manager, Libertarians really are batshit crazy.

Day 7: An unproductive critique

Is Greater Productivity a Danger?, David Gordon

Day 7 of Robert Wenzel's 30 Day Reading List on Libertarianism

Day 0: The Libertarian catechism

Previous: The cause of, and solution to, all the world's problems (summary) (response)
Next: (soon)

There's really no point in reading David Gordon's more-or-less accurate summary of Tim Jackson's article, "Let’s Be Less Productive or Gordon's trivial response. Jackson's article isn't that informative: I really don't know whether or not we might no longer be able to increase labor productivity. Furthemore, while Jackson offers an ontological definition of productivity, he doesn't talk about how to measure it.

The only point I can see in in Gordon's summary and response (and Wenzel's inclusion) seems to be to accuse those crazy liberals of arguing against productivity, which Jackson manifestly doesn't do.