Here is this week’s episode of Freedom Watch:
We love to blog about liberty and we hope you do too. That’s why we need your help! In order to have a great site that can be a resource to others we need to have a steady stream of good quality content.
We are looking for some liberty bloggers to join with Liberty Movement HQ. Are you interested?
If so, please contact AdamRBitely@gmail.com for more information.
From Pete:
Check out my latest op-ed, “In Praise of Pirates,” at NPR here.
Please leave a comment over at NPR and hit “recommend” if you like the piece.
If there’s enough interest on NPR’s website, I have a chance at being on their program, “All Things Considered” next week.
The Economic Liberty Lecture Series: Bruce Fein from The Future of Freedom Foundation on Vimeo.
By Justin Williams
Deferring risk is attempting to take a risky action that may bring a big benefit and putting the costs upon other. Those who may read this site are probably thinking about our current government bailouts, but I would like to look deeper into this problem. In particular, regulations that defers costs. One example of this is the Federal Deposit Insurance Corporation (FDIC), which insures a certain amount of a bank holder’s account. This is what I call the consumer bailout of 1933 as their website says that they were created because of thousands of bank failures during this time. Regardless of why you think the banks failed, this was a bailout for consumers in order to defer the costs upon the taxpayers.
This one regulation changed the way that people looked at banking forever. Like the way medicaid recipients think of health care, people now think of their checking and savings accounts as a right. They believe that the bank should always be a safe place for them to put their money because they are insured. When you go to a barber, you exchange money for a haircut. You are exchanging your property (money) for a service (haircut). This should be no different than a bank. There may be chance that when you get your haircut, that they could do it wrong or cut you. This will not happen 99% of the time, but there is still a chance just like there is a chance the bank will fail. One way you avoid this is by developing a relationship with your bank and your barber. The other way is people like lawyers offer their services to prosecute in case of problem and there are insurance companies that offer insurance to the barber at a fee. All voluntary but important functions. This goes to show you that even without the FDIC there will probably be an insurance system, but banks will not be forced to join and the risk will not be deferred to the taxpayer.
Taking names is the after effect. It is when you feel harmed and you try to find who was responsible. When the barber cuts your ear, you know who is responsible. When your bank fails, it seems to the public that it is more than just the bank responsibility. They blame Capitalism, not the bank but they should. Banks are businesses! They are not some sacred invincible being that you park your money at. Now with the FDIC’s “protection” nobody cares about the business practices of their bank. If you knew that your barber cut off every other persons ear, you would not go. If you knew that your bank was making bad loans and losing money, you would not go.
So now who is to blame? The people who gave the first government bailout, also known as the New Deal. They distorted the market and reduced the incentive for consumers to check what their bank is doing. They basically gave out $100,000 dollar blank checks for every account to every bank and expected prudence. This is like handing a teenager a new car and expecting him/her to not drive it.
People will never see this because they would rather blame the “unknown,” Capitalism.
The G20 is Hiding Protectionism
The Threat of Hyper-Depression
In a market economy, business deaths are like death itself - an unfortunate but inevitable fact of life. However, recent government bailouts have tried to stop the inevitable by intervening in the market, at least temporarily saving failed firms from the economic grim reaper. Before putting the next failed business on life support, it’s worth remembering why it makes sense to let struggling producers expire.
• When failing businesses are allowed to fail, resources are released from employments where they don’t add value and made available for employments where they do.
Resources used for one purpose can’t be used for another. Thus, it’s important that they find their way to the purposes we value most. Enter the profit-and-loss system. Under this system, when producers use resources in ways that are consistent with our wants, they earn profits. When they don’t, they earn losses. If losses are severe enough or accumulate over time, the producers who earn them go under.
Far from cause for concern, this failure is cause for celebration. When ineffective producers fail, resources committed to producing goods we value less are freed for producing goods we value more. Polaroid’s failure released resources for the production of digital cameras; Commodore Computers’ failure released resources for the production of IBM computers; and Chi Chi’s restaurant’s failure released resources for, well, the production of food that tastes good. Who better to sacrifice the resources required to expand production of the things we want than producers of the things we don’t?
If government prevents failing producers from going out of business, resources get “stuck” in employments where they’re less productive. We can’t have as many of the products we care more about because the means needed to make them remain locked in the manufacture of products we care less about. Society suffers as a result.
• When failing businesses are allowed to fail, producers learn how to combine resources in ways that create wealth.
We take it for granted that producers know what we want. But this information doesn’t appear magically. It has to be produced. The profit-and-loss system produces this information - but only when government lets failing businesses fail.
Profits and losses do for producers what traffic signals do for drivers. They tell them when to “go,” “slow down” and “stop” their productive activities. By communicating which resource combinations consumers value most and which they don’t, profits and losses direct “economic traffic,” informing producers how to produce.
If government prevents ineffective producers from failing, the red light on the “economic traffic signal” stops working. Production continues and resources flow when they should halt, destroying wealth instead of creating it.
• When failing businesses are allowed to fail, producers have incentives to combine resources in ways that create wealth.
The profit-and-loss system works because successful producers reap rewards when they combine resources effectively and unsuccessful producers incur costs when they don’t. The prospect of profits from making good decisions and losses from making bad ones encourages producers to make choices that improve our lives.
But if government shields ineffective producers from the consequences of their bad decisions, producers’ incentives become skewed. For instance, when policy permits producers to enjoy the benefits of successful risk-taking but subsidizes the losses of unsuccessful gambles, producers have an incentive to take on more risk than they should. Since they’re no longer responsible to consumers when they make poor choices, the link connecting producers’ and consumers’ interests is weakened and, with it, the economy’s ability to advance.
At a time when failure is the new dirty word and government seems willing to prop up floundering firms at any cost, we would do well to remember the benefits of letting failing businesses go belly up.
Peter T. Leeson is BB&T Professor for the Study of Capitalism at George Mason University and author of the new book, “The Invisible Hook: The Hidden Economics of Pirates.”.
By Justin Williams
When most people think of anarchy, they think about chaos but the classic definition simply means “without government.” For example, we do not have a world government. There is not an overarching powerful sovereign force that can do anything to us that they want in the world. Dr. Peter Leeson has an article publish in the journal of Public Choice (2006) 130:41-53 called “Efficient Anarchy” that evaluates this question.
The social contract theory which explains the “good” possible reason why we agree to have government in our lives is that fact that “government enables individuals to realize gains from exchange they could not capture if the state were absent.” Of course, we seem to forget that the institutions of government are very costly. So when is it optimal and not optimal to have a government?
Since many educated people live under government today, we often “forget that numerous societies were stateless for most of their histories and that many remained so well into the 20th century.” Some examples of this are the “African groups such as the Tiv, which included over one million individuals” and many others like international anarchy mentioned before.
Dr. Leeson explores a simple model with two people trading. H is the payoffs when government is present, L is relatively lower trade without government, and G be the cost of government. Government is an efficient solution when G < H - L. Where G > H - L anarchy is efficient. G could be greater than H-L either because government is expensive or there is a big gap from high level of trade to low level. The costs of government include simple organizing costs, cost of enforcement of rules, how many public goods they have (the cost of those) and I would even add the potential growth of government.
So the African tribes are considered “small H-L anarchy” meaning that government could not increase trade that much due to relatively small societies. There is also “big G anarchy” which like having a world government would be very costly. This is where low cost private institutions come into today to make international trade possible. In fact, these private institutions have been around for a long time including 12th century Medieval Europe with the law merchant.
In my opinion, the interesting part is when does it become inefficient and then is it truely inefficient. In the short-run, a limited government may seem very attractive but often the cost of it growing to the size it is today is not taken into account. Mostly because none of the founders are here today to be effected by the growth of government. So if government is efficient for a period of time and G grows causing it to be inefficient, can we get out of it and if so how? I personally believe we are well beyond the point of government being the more efficient solution, but if you do not believe that then you must ask yourself when? When does a government’s costs exceed it benefits?
Stimulating the Economy Into the Ground
There Will Be (Hyper)Inflation
Watch yesterday’s episode of “Freedom Watch”:
