Thursday, February 20, 2014

Those bungling capitalists!

By Carl Stoll

A review of “Chávez Decaffeinates Venezuela. Coffee shortages predictably follow his price controls", by Mary Anastasia O'Grady, Wall Street Journal, May 3, 2010

Author’s note: It is not my intention in this review to defend President Hugo Chávez’ nationalization of the coffee plantations. On the contrary, I agree with Ms. O'Grady that price controls are useful measures only in emergency situations, not as instruments of steady economic policy.

Firstly, Ms O’Grady inexplicably confuses central planning with price controls. These two sorts of state intervention in the economy are both deplorable, but should be kept analytically separate because their economic effects are different, as pointed out by Ludwig von Mises in his works A Critique of Interventionism and Middle of the Road Policy Leads to Socialism.

Ms O’Grady cites a prominent economist, the late Milton Friedman, to the effect that governments are always incompetent bunglers. Milton Friedman was undoubtedly a very talented economist and much of what he wrote is very sensible indeed. His arguments against a gold standard, his critique of federal regulatory bodies as artificially imposed cartels, and numerous other positions he espoused are well worth reading and have held up well against the ravages of time and fashion. .

Nonetheless Mr. Friedman had an unfortunate proclivity for dogmatism when it came to the issue of government participation in the economy. This proclivity drove him to propagate what can only be called blatant and horrendous lies. Mr. Friedman’s sleazy record on this score is exposed in excruciating detail by Elton Rayack in his book Not So Free to Choose: The Political Economy of Milton Friedman and Ronald Reagan, published by Praeger in 1987. Rayack cites claims from Friedman’s works that are patently ridiculous and are obviously purely ideological secretions lacking any empirical basis whatever. For example Friedman claimed that Japan’s 19th-century industrialization was driven by private entrepreneurs, whereas the most cursory glance at Japanese economic history reveals that the state played the decisive role in every single stage of Japanese economic history since at least 1850! And that is but one example of many.

Consequently I am not terribly impressed by one more Friedman quote badmouthing government.

I admit that governments often make blunders. However the government is not the only party guilty of mismanagement. In the article "America the Resilient. Defying Terrorism and Mitigating Natural Disasters” by Stephen E. Flynn, that appeared in the March/April 2008 edition of Foreign Affairs, I read the following:

“In 2005, after a review of hundreds of studies and reports, the American Society of Civil Engineers issued a scathing report card on 15 categories of infrastructure: the national power grid … received [a] D … the best grade, C+, went to bridges …”

The US power grid is owned and operated by power companies, the great majority of which are privately owned. According to National Public Radio, "The U.S. electric grid is a complex network of independently owned and operated power plants and transmission lines. Aging infrastructure … has forced experts to critically examine the status and health of the nation's electrical systems.”

On the other hand US bridges are almost without exception government property.

How do you explain that, according to the American Society of Civil Engineers, in 2005 the infrastructure belonging to and maintained by the government was in better shape (score: C+) than the infrastructure belonging to and maintained by private enterprise (score: D)?

Don't bother to reply. I know the answer already. My many years of researching the issue of private vs. public ownership of the means of production have persuaded me that the slogan “the government can't do anything right” has a certain basis in reality, but it is by no means a universal rule.

Furthermore I have concluded that private enterprise is guilty of just as much incompetence, waste and sundry other misdeeds as the government.

Blaming the government for everything is merely a right-wing hobby, very much cultivated in the US, where it has become a kind of folk religion.

The US is perhaps the only industrial country that lacks an integrated national power grid. Those bungling capitalists have been extremely negligent about connecting the East with the West, and Texas has its own separate grid! (At least when I researched the matter in 2003, links among those three segments were both scarce and feeble.)

If the power grid were run by the government, as I think it should be, the US would undoubtedly have been provided with an integrated power grid many, many years ago. Like Mexico, for example, where electric power was a state monopoly for many years.

I believe that judgments on economic phenomena should be based on meticulous study of the facts and not on right-wing propaganda à la Milton Friedman.

Libertarians’ flawed economic concepts

Concept of property
Your libertarian argument based on property rights is utterly conclusive, because it is purely logical, being based on the definition of the term “property”.
However I reject your definition of the term “property”. Property is a social institution. Its definition must be adapted so as to maximise the welfare of society as a whole – without however despoiling the proprietor, which would discourage productive efforts. 
Private property exists only thanks to the vigilance of the state. Private property can be enjoyed only thanks to the provision of infrastructure, which in practically all historical instances has been provided by the state. The very concept of private property is defined by the state in its laws.
You attempt to define property ahistorically on the basis of an abstract morality that fraudulently claims to have no social or historical roots. Such a claim cannot be taken seriously.   

Defining property
You call the state a parasite because the state doesn't respect private property. However private property was created and defined by the state and is protected and maintained by the state. Without the state, private property does not exist. How can you oppose private property on the one hand to the state on the other as if private property were an independent entity unrelated to and prior to the state?
Moreover, you call the state a parasite because it encroaches on the private property that it created. However parasitism clearly implies harmful activity, activity that is pernicious to others, in this case to property owners.
To make this epithet stick, you must prove that the net effect of taxes and other state encroachments on private property is to reduce property owners’ wealth (or society’s wealth, or both).
But taxes are used among other things to pay policemen’s wages. If there were no police, property owners would be wiped out in 24 hours by bands of roving looters. So you cannot be demanding the abolition of the police. Therefore you must be implying that the state continue to maintain and defend private property for free, without charging any of its expenses to property owners. In that case, who shall pay the expense of defending property owners’ wealth?
Your theory seems to demand the existence of a class of persons who own no property, from whom the state should extract the revenue required to pay the costs of defending property.
Thus your theory of property seems to require a slave class without property rights.
The next logical step is to say, with Proudhon “Property is theft.”

Different kinds of property
Stating the issue of property as a moral question, i.e. right or wrong, is unacceptable.
There are many different sorts of property with different economic characteristics. Some assets are fixed in amount, like land, while others are easily multiplied, like human capital.
To apply a one-size-fits-all standard to these different forms of wealth would mean to restrict the state’s ability to tax them differently depending on the different effects that taxation has on them.
Many sorts of wealth are unearned. Their possessor has done nothing to earn his assets except being at the right place at the right time to collect a windfall, or has obtained his wealth through monopoly practices or by inheritance. Taxing these assets at high rates does not discourage productive efforts. Consequently they should be taxed at high rates.
The value of land is composed of the improvements that the landowner has made plus the innate value of the land that depends on extraneous factors that the owner cannot influence. This latter part should be taxed at a 100% rate.

Free-market ideology
Free-market ideology carefully avoids discussing the conditions necessary for markets to be efficient transmitters of information in the Hayekian sense.
Moreover it ignores the socio-political framework necessary for markets to exist and operate properly. Consequently free-market ideology simply fails to address fundamental issues and its conclusions are therefore irrelevant.
All the works you cite suffer from a fundamental flaw, namely that they fail to take into account numerous defects of the market, some of which are preventable and other are not.
1. Preventable market defects are monopoly, fraud, coercion and perhaps others. Any of these phenomena makes the price diverge from the competitive market price and renders the benefits of markets illusory to a greater or lesser extent.
I admit, however, that monopolies can have advantages.
The only way to prevent these defects is through government action. Government is conceived of, in this context, as a referee that sets and enforces rules and is itself not motivated by the desire for commercial gain.
2. Market defects that are not preventable are public goods and externalities. Here again the government must step in to assure the common good.
The concept of public goods is based on the concept of exclusive enjoyment, i.e. the owner’s ability to prevent others from enjoying use of his property. Goods that enable exclusive enjoyment are called private goods. Those that do not are called public goods.
Markets work well only for private goods. Public goods must be provided through non-commercial mechanisms, i.e. non-profit associations, charities or government. Free-market ideology does not address the issue of public goods. Consequently its conclusions are irrelevant.
Theoretical discussion has limitations. A more conclusive method of ascertaining the issue of whether and to what extent government intervention in the economic sphere is beneficial or otherwise is empirical research of historical cases of government action. The fact that no free-market enthusiast has ever bothered to research empirically the many cases of government action is itself an indictment of free-market ideology. I, by contrast, have researched the development of the welfare state in a number of European countries and concluded that the welfare state – if well run -- is a thoroughly beneficial institution in advanced industrial societies, which greatly increases the standard of living and assures social and political stability.
An example: the health care system in the US and in other industrial countries
In the US the health care system is highly regulated. However, this regulation cannot be considered a restriction on the freedom of action of the profit-making firms involved in the health-care industry, for the simple reason that all regulation in the industry is drafted by those profit-making firms by means of their puppets in the legislatures. Consequently the inefficiency of the US health care system cannot be attributed to government regulation as such. On the contrary, the US health care system is designed to facilitate profit-making by the firms involved.

The US health care system is a scandal, a hazard to public health. Although the US spends a huge share of its national income on health care, Americans’ health is far worse than that of comparable industrial countries. The reason is obvious: those countries have a national health care system run by public bodies and the US does not. The public bodies are not motivated by profit, but by the goal of improving public health.
The data are available in many places.