Steve Bannon disses libertarianism

Steve Bannon told a NY Times reporter:

I think the Democrats are fundamentally afflicted with the inability to discuss and have an adult conversation about economics and jobs, because they’re too consumed by identity politics. And then the Republicans, it’s all this theoretical Cato Institute, Austrian economics, limited government — which just doesn’t have any depth to it. They’re not living in the real world.

The importance of Heinlein

I know that some readers are thinking, “Why are you wasting your time with posts about a long-dead science fiction writer? That’s stuff for nerds. We want to hear more about Donald Trump.”

I think, maybe, that Heinlein is more important than anyone realizes. I sense that most of the libertarian arguments I see today don’t actually come from Ayn Rand, but they come from Heinlein. Heinlein’s endorsement of libertarianism is a lot more subtle and less in-your-face than Ayn Rand’s novels. However, Heinlein’s novels are a lot more readable. And Heinlein understood that novels can be a powerful form of influence. You are much more likely to accept a new idea if first you come to identify with a character, and then the character comes to believe in the idea based on events that happen to him, even though the whole situation is a fictional setup by the author.

Heinlein’s novels were probably read by most white American engineering types when they were teenagers (at least the older ones), and that’s why engineering types veer so strongly libertarian.

Utopia: Economy of 1515-1516 and the wool industry in England

Raphael has a lot to say here.

He complains about noblemen who don’t do anything useful to contribute to the economy. And then he complains about noblemen’s retainers who are more numerous and also don’t do anything useful to contribute to the economy. And then he complains about the amount of resources wasted on standing armies.

Sheep: Per Wikipedia, wool and cloth spun from wool were the chief exports of medieval England. Raphael doesn’t believe that this is a good thing for the average Englishman. He complains that the nobles enclose land for pasture for sheep grazing, kicking out the peasant farmers and leaving them with no way to feed themselves.

Because sheep herding is much less labor intensive than farming crops, converting farmland to sheep pastures results in mass unemployment. The peasants don’t even enjoy the benefits of cheap wool, because sheep farming is controlled by a few rich men who can raise prices because they have an “oligopoly” (that’s the word that Paul Turner uses in his translation).

Towards the end of Book 1, Raphael praises the “communist” economy of Utopia. I think the best thought in all of Book 1 is this critique of capitalism:

[W]hen everyone’s entitled to get as much for himself as he can, all available property, however much there is of it, is bound to fall into the hands of a small minority, which means that everyone else is poor. And wealth will tend to vary in inverse proportion to merit. The rich will be greedy, unscrupulous, and totally useless characters, while the poor will be simple, unassuming people whose daily work is far more profitable to the community than it is to them.

That’s right, you can’t cure poverty by growing GDP! Thomas More saw that 500 years ago. That’s why I’ve made the grim prediction that automation and robots will increase poverty even as they, paradoxically, create an abundance of material goods with minimal human labor.

RAPHAEL: … I’m quite convinced that you’ll never get a fair distribution of goods, or a satisfactory organization of human life, until you abolish private property altogether. So long as it exists, the vast majority of the human race, and the vastly superior part of it, will inevitably go on labouring under a burden of poverty, hardship, and worry. …

MORE: I disagree. I don’t believe you’d ever have a reasonable standard of living under a communist system. There’d always tend to be shortages, because nobody would work hard enough. In the absence of a profit motive, everyone would become lazy, and rely on everyone else to do the work for him. Then, when things really got short, the inevitable result would be a series of murders and riots, since nobody would have any legal method of protecting the products of his own labour – especially as there wouldn’t be any respect for authority, or I don’t see how there could be, in a classless society.

RAPHAEL: You’re bound to take that view, for you simply can’t imagine what it would be like – not accurately, at any rate. But if you’d been with me in Utopia, and seen it all for yourself, as I did – I lived there for more than five years, you know, and the only reason why I ever left was that I wanted to tell people about the New World – you’d be the first to admit that you’d never seen a country so well organized.

Well that’s an interesting exchange. More, pretending to be himself, makes an argument that Ayn Rand will make 441 years in the future, and Raphael responds that you should believe him because he’s seen it with his own eyes. Except that Utopia is a fake country that doesn’t exist.

Which character does the real More actually believe?

Value transference essay no. 1

Another re-post from the archives.

* * *

The reason we need to talk about value transference is because other people are talking about “value creation.” If you look at the Google ngram viewer, you will see that the phrase “value creation” was practically nonexistent before the 1970s, and that its use skyrocketed during the last two decades.

I don’t really know why the phrase was originally created, but people of a libertarian-conservative bent have glommed onto it as a way of explaining the results of what they call “free markets” and as a way of justifying a libertarian-conservative approach to taxation

The theory behind value creation is that people and businesses make money be creating value that other people are willing to pay for. People may pay in currency, but of course currency is just a store of value that allows people to more efficiently trade the value they created for the value that others created.

Because the United States has a so-called free market, it is argued that the only way to make money in the United States is by creating value. Therefore, the richest people (at least the richest self-made people) are those who created the most value, because there’s a direct and nearly-perfect correlation between value created and how much money an individual or business has accrued.

The correlation between value creation and wealth bolsters the libertarian-conservative viewpoint that taxes should be kept low. Suppose Doctor Uno is lazy and only saves one life per week. Doctor Dos works hard and saves ten lives per week. Is it fair to punish Doctor Dos for his hard work and his life-saving contributions to society by hitting him with a higher tax rate?

What about rich people who clearly didn’t do anything useful in order to become rich, such as people who were born rich or who married rich spouses? The libertarian-conservatives would argue that, if property rights are to mean anything, they should mean that rich people are entitled to do whatever they want with their money, and that includes giving it to spouses and children. So taxing these people would be punishing the original act of value creation.

Even if one accepts the argument that all wealth accretion is the result of value creation, it doesn’t necessary follow that progressive tax rates are wrong or immoral. The purpose of taxation is not to punish anyone but to fund necessary government functions. The rich are taxed at a higher rate because they can afford to pay more and because they have a lower marginal utility for additional money.

As you know, it’s my hypothesis that great fortunes are the result not of value creation but the result of transferring the value created by the hard work of other people. This is what I call value transference, and it’s a necessary counterbalance to the now popular term of “value creation.”

Why do people deny the truth of value transference? No doubt for the same reason they deny the truth of evolution, or HBD. Libertarian-conservative types are so psychologically invested in the idea of wealth equals value creation that any hint of a greater truth causes severe cognitive dissonance. And they get angry at me. If the rich are rich not because they created value but because they transferred the value created by the hard work of others to themselves (some might replace “transferred” with the less polite word of “stole”), what justification is there for allowing them to keep their wealth?

Actually, history is full of justifications for why the people with wealth and power are entitled to their wealth and power. There has never been a society in recorded history where there weren’t a few who were rich and powerful and many who were poor, and the rich and powerful always had explanations for why they were entitled to their positions long before modern theories of economics were invented. Divine right was one such explanation. The Pharoah of ancient Egypt went one better and said the he himself was a god. Today we look back at these explanations and laugh, but who’s to say that in the distant future, humans wiser than ourselves won’t look down similiarly at the justifications used by the billionaires of the present?

This introductory essay leaves many unanswered questions, such as:

1. Is our economy really a free market?
2. What the heck do people mean by a free market anyway? (Answering this question is necessary to answer the previous question as well as the following question.)
3. Is it true that the only way to make money in a free market is by creating value?
4. Why would anyone voluntarily give money to someone else unless they were getting value in return?

How the rich make life unaffordable for regular people

There’s a Wall Street Journal article about how very rich people are buying multi-unit apartment buildings and turning them into single-family urban mansions.

In September, Ms. Painvin bought a three-unit townhouse in Brooklyn with plans to convert it into a 3,000-square-foot home. “We were kind of floored at the amount of space you could get,” she says.

Libertarian types often ask “how does it hurt me if someone else makes a lot of money?” Well here is an example of how it hurts you, by making it unaffordable to live in the good neighborhoods of Brooklyn.

Saint of libertarian economics: Arthur Laffer

There are many saints of economic libertarianism. For this post I profile one of them: Arther Laffer.

Laffer (still alive today) was a relatively unimportant economists, though prominent enough to be at a meeting in 1974 with Donald Rumsfeld and Dick Cheney, at which a divine miracle happened in the form of him drawing a squiggly line on a napkin which became known as the Laffer Curve which proved, once and for all, that high taxes are really really bad.

Now, to give a certain amount of fairness to Laffer’s point of view, the top marginal income tax rate in 1974 was 73%, but at the same time there was only a 35% capital gains rate, plus there were a lot of loopholes which allowed taxpayers to present their income as capital gains, and even bigger loopholes which allowed taxpayers not to show any income at all (pass-through of partnership losses because of accelerated depreciation played a big part in those loopholes). The corporate income tax rate was also lower than the personal income tax rate, which encouraged wealth to be kept in corporations rather than paid out as dividends. They say that there’s no avoiding death or taxes, but in fact the 73% tax rate in 1974 was avoidable, which meant that tax collections were a lot lower than 73% of true income, and also that a lot of business activity went into tax avoidance rather than productive growth of companies.

I could state a general rule of tax avoidance behavior, which is that if different types of income have different rates, then over time an increasing percentage of declared income will be of the types that have the lower rates. I applaud the efforts during the Regan administration to reform the tax code by closing loopholes, which did in fact result in higher tax collections despite lowering the top rates.

I have stated before my belief in the importance of closing tax loopholes and eliminating tax deductions. If there’s a need increase tax revenue, we should always attack loopholes and deductions before raising rates. However, for each loophole or deduction there’s a strong lobby behind it. This is because, unlike libertarianists, real-world rich people see wealth as a zero-sum game: so as long as everyone’s tax rates increase, their status in the economic pecking order remains unchanged, so they aren’t actually harmed by higher tax rates, they are only harmed if a deduction or loophole which benefits them in particular is eliminated.

Libertarianists, have come to worship the Laffer Curve as proof that all taxes are evil and their worldview is correct, much like Christians see the Shroud of Turin as proof that Jesus really existed. From the libertarianist comments on my blog, I see that they think that current tax rates like the 39% top income tax rate or any amount of estate taxes are causing rich people to retire and stop working entirely, much like the rich people of Atlas Shrugged.

Why is it even a problem if rich people want to retire? It’s only a problem if you take the Atlas Shrugged point of view that rich people are needed to make the economy function and if they stop doing work, there aren’t any people with modest incomes who could step in and take their place.

However, the libertarianist point of view doesn’t make any sense if you assume that rich people behave rationally and want to be richer than their peers. Who would pass up the opportunity to make a billion dollars on account of the fact that 50% of it, or even 70%, of it was taxed? Isn’t it better to have $300 million than to have nothing? I would say it’s a hell of a lot better. I hear about all of the amazing businesses that have not been formed because the tax rates are too high, and it’s all nonsense. No one who starts a business is thinking about what happens to their estate after they die. Libertarianists, despite thinking of themselves as rational economists, are clueless about why people start businesses. And even if they did think about estate taxes, if they were even the slightest bit rational they would realize that it’s much better for their children if they die rich than if they die middle-class or die poor, and that would still be true if estate taxes were increased significantly over their current levels.

The prophets: Ayn Rand and Adam Smith (libertarian economics part 2)

Libertarian economics, like other religions, has its prophets.

AYN RAND

The most important prophet, the equivalent of Jesus, is Ayn Rand.

Now I can hear some people saying that Ayn Rand is a novelist and not an economist, and that no one really takes her seriously. And she didn’t even consider herself to be a libertarian, she said she was an “objectivist” (whatever that means).

Nevertheless, her books have been more widely read than anything else related to libertarian economics. If a libertarianist politician is likely to cite anyone for inspiration, it is more likely to be Ayn Rand than anyone else.

As far as people taking her seriously, people take the Bible seriously even though it’s just as much a work of fiction as The Fountainhead or Atlas Shrugged.

Of her two biggest novels, Atlas Shrugged is the most dear to libertarianists because the message is easier to understand. Atlas Shrugged takes place in a dystopian retro-future where communists have taken over the government of the United States and all other countries; consequently the country and the world are going to hell (somewhat literally since the dystopian retro-future of Atlas Shrugged is the equivalent to Christianity’s Hell, a divine punishment for violating the laws of libertarian economics). Because of the evil policies of the communist government, what is potentially the greatest invention ever, John Galt’s free-energy perpetual-motion engine, cannot be developed and manufactured. (Except in Galt’s Gulch, a hidden valley in the Rockies where the heroes of the book go to form a perfect libertarian society free from government interference.)

The other lesson from Atlas Shrugged is that the value that people create is directly related to how much money they make. Thus when Hank Rearden, the billionaire industrialist leaves society to move to Galt’s Gulch, everything that his company was doing disintegrates, because all of his factories, and the engineers who worked from him, are useless without Hank Rearden to tell them what to do. (In the real world, big companies do just fine after their billionaire founders leave.)

ADAM SMITH

Adam Smith is the world’s first economist. He is to be given much credit for trying to scientifically understand and explain the economy of the 18th century.

Libertarianists believe that Adam Smith was a proponent of laissez-faireism because he explained that the “invisible hand” guides the economy in the absence of government regulation. To quote Wikipedia:

The invisible hand is a metaphor used by Adam Smith to describe unintended social benefits resulting from individual actions. The phrase is employed by Smith with respect to income distribution (1759) and production (1776). The exact phrase is used just three times in Smith’s writings, but has come to capture his notion that individuals’ efforts to pursue their own interest may frequently benefit society more than if their actions were directly intending to benefit society

It needs to be pointed out how vastly different the economy of the 18th century was compared to the economy of today. There was no electricity, no internal combustion engine, no land transportation faster than a horse, no long distance communications except for letters carried by horse-drawn carriages. The large corporations of today were impossible without those enabling technologies. The largest business enterprises of the time were what we would consider small businesses today. The kind of monopoly power that big corporations have today simply didn’t exist in the 18th century. As I’ve pointed out before, Michael Porter’s classic book “Competitive Strategy” is a better guide to understanding the modern economy than anything written by Greg Mankiw.

* * *

It should be noted that Adam Smith himself wrote in The Wealth of Nations:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

Thus Adam Smith realized that without government interference, market participants will attempt to circumvent competition, and often succeed at it.

Guide to libertarian economics part 1: the Free Market

There is no single authoritative document, like the Bible or the Constitution, which explains libertarian economics. Rather it’s a synthesis of what conservative libertarian types (libertarianists) are currently saying about economics. Libertarian economics is an evolving concept, and what someone said about it fifty or a hundred years ago is not necessarily relevant to the current understanding of it. Because it’s a concept and a religion rather than a real science, detailed technical knowledge of economics isn’t necessary for one to be a True Believer.

THE FREE MARKET

The thing most venerated in libertarian economics is the “free market,” much like the cow is venerated by Hindus. Hindus believe that the cow is representative of divine and natural beneficence, and that is how libertarianists view the “free market.”

But despite the libertarianist worship of the “free market,” it’s not actually defined very clearly. When libertarianists talk about the “free market,” they simultaneously mean a market that is not regulated by the government, and the belief that in the absence of government regulation, prices will be set by supply and demand and by competition, and “economic growth” will be much greater than in a regulated economy. Just as Satan is the embodiment of evil to Christians, government regulation (including taxes which are an especially hated subset of government regulation) are the embodiment of evil to libertarianists. And just as Heaven is the reward for being a good Christian, “economic growth” is the reward for being a good libertarian.

There is no scientific proof that all government regulations are bad, or that we would all be better off without government regulation. It’s accepted by libertarianists as a matter of faith, just as Christians accept the divinity of Jesus as a matter of faith. In fact, I strongly disagree that competition is the natural result of the absence of government regulation, especially in the modern economy which is based on mass marketing and intellectual property. It should be noted that the entire field of economics is heavily based around the study of the economy of the 18th century, an economy which no longer exists.

Vox article about Donald Trump and populism

The reader “dsgntd_plyr” mentioned this Vox article about Donald Trump and populism in a comment.

The takeaways from the article are:

1. Social Security is extremely popular. 93.7% of the people think that Social Security benefits should be kept the same or increased. Even with voters who are registered Republicans, Social Security is extremely popular. Support a decrease in Social Security benefits is a loser position (with respect to winning elections).

Let me digress and say something about “socialism.” The word “socialism” is often used to scare Republican voters, but the reality is that the majority of Republican voters like socialism once they are used to it, and it’s a socialism that benefits working middle-class people (i.e. people who do the right things) with no strings attached. I am sure that Republican voters would also come to like government-paid healthcare, especially if it were less complicated and confusing than Obamacare. (Although from the perspective of Republican elites, complicated and confusing is a feature that they can use to attack the whole concept of government-paid healthcare.)

2. Immigration is not as popular with regular people as it is with elites. 43.4% of people want to decrease immigration and only 14.3% want to increase it. As the article shows, among Republican voters who the author of the article does not classify as “business Republicans,” there is strong opposition to immigration.

3. Thus Donald Trump, who says that he wants to reduce immigration but maintain social security, is in line with a strong plurality (if not a majority, that’s not clear) of Republican primary voters. Jeb Bush, who scares voters with proposals like making the retirement age higher (which is really a reduction of benefits) is not saying what the majority of voters want to hear. And of course, we know that Jeb Bush’s pro-amnesty position for illegal immigrants is definitely not what Republican voters want to hear. No wonder why Bush has only single digit support in the polls.

When will party elites realize that Bush is a doomed favorite son and pick someone else? And who will they pick? Only Ben Carson and Donald Trump have strong polling strength right now.

New Jersey and self-service gas stations

Since it was brought up in the comments…

New Jersey is the only state where self-service gas stations are illegal. (New Jersey used to be joined by Oregon, but Oregon has finally abolished that archaic featherbedding law.)

My experience buying gas in New Jersey is waiting an interminably long time in the car before the attendant finally comes over to you, and then waiting another interminably long time after the gas finishes pumping for the attendant to come back and finish the job.

It is believed that voters actually support this moronic law, and I chalk that up to fear of change, even if it’s change for the better. Furthermore, if there’s truly a market demand for full-service gasoline stations, then the service will continue to be offered. (However, based on how things are in every other state, no one wants to pay extra money per gallon for something they can easily do themselves.)

Why does New Jersey want to make people work a crappy job for low pay where the worker has to breathe in carcinogenic gasoline fumes all day when self-service works well everywhere else in the country? If there aren’t enough useful jobs to go around and we need to give people make-work because we believe that the bounty of our post-scarcity society shouldn’t be distributed to anyone unless they do something that looks like work, then we should give them more healthy and self-actualizing work to do.