Friday, 23 March 2012

CUE CARD ECONOMICS: Economic Harmonies, and The Miracle of Breakfast

FRENCH EXISTENTIALIST PHILOSOPHER Jean Paul Sartre famously stated “Hell is other people,” and he wrote many books to prove it. 

Unfortunately, all he proved to most readers was that Hell is reading Jean Paul Sartre books.

A century earlier his countryman Frederic Bastiat discovered, argued and helped to prove something very different; that other people are the very opposite of hell. Said Bastiat in his own magnum opus Economic Harmonies:

“All men’s impulses, when motivated by legitimate self-interest, fall into a harmonious social pattern.”

This is the big lesson that economics can give to philosophers: that the world is not made up of the “fundamental antagonisms” between people that some philosophers find everywhere,

    Between the property owner and the worker.
    Between capital and labour.
    Between the common people and the bourgeoisie.
    Between agriculture and industry.
    Between the farmer and the city-dweller.
    Between the native-born and the foreigner.
    Between the producer and the consumer.
    Between civilization and the social order.

And, to sum it all up in a single phrase:

    Between personal liberty and a harmonious social order.

What economics can teach philosophers (and what Bastiat can still teach economists) is that other human beings need neither be a burden nor a threat, neither a hell nor a horror but a blessing.

This is the greatest lesson economics can teach: that in a society making peaceful cooperation possible we each gain from the existence of others.

What a great story to tell!

TO START TO TELL THIS long story, a story that all of economics really serves to show, let’s begin with a short story—an excerpt, from a short story by a great short story writer: O. Henry. As his characters sit down in their wilds to break their fast with something “composed of fried bacon and a yellowish edifice that proved up something between pound cake and flexible sandstone,” they begin to reflect on The Perfect Breakfast:


Such a breakfast, they sigh, might only be possible in New York. "It's a great town for epicures.” As is virtually every city.  We take for granted now that in virtually every cafe in every city in the country we can sit down to the perfect breakfast. We reach over to Brazil or Kenya for our coffee and down to Christchurch for our mushrooms and rolls; to Pokeno, or Vermont, for our bacon and head further down to the Waikato to dig a slice of butter out of a Te Rapa urn and then turn over a beehive near a manuka patch in Nelson for our honey.

This is the Miracle of Breakfast: that we can eat like the gods for the cost only of a few dollars thanks to the freedom to trade, the division of labour and the 'invisible hand' of the market. And we take this for granted.  We take it so much for granted rather than celebrate sharing the meal gods eat on Olympia, we complain if our eggs are too cold.

And we don’t need long arms to enjoy it: we need the arms and minds of other people who are free to produce, free to trade, free to enjoy the fruits of their own labour by trading those fruits with others.

This is the lesson integrated by all of economics:  when you remove force and fraud people are a blessing rather than a curse. Thanks be to the freedom to trade, the division of labour and the 'invisible hand' of the market that makes it possible.

This is the great lesson of Economic Harmonies hinted at by Adam Smith, made explicit by our friend Frederic Bastiat, and developed in specific areas by the likes of Friedrich Hayek and Ludwig Von Mises. Bastiat first noticed it in a visit to Paris. Paris gets fed, he observed, yet no-one celebrates the miracle:


A light we term self-interest. It is this, says Bastiat, that is at the root of all the Harmonies.

Think about it. On our own we can produce barely anything in a single day.  If we were to permanently endure self-sufficiency or life in the wilds not only would the meal of ambrosia perpetually elude us, our lives would be one long round of much labour for very little reward.  We need others to keep us supplied as we now take for granted—with food, with drink, with iPods, iPads and the very roofs over our head—but how to enlist those others in our aid? Simple: we rely on trade. On voluntary cooperation. In short, we offer them their own profit in return for ours. We appeal to their own self-interest, a point made by Adam Smith in the part of his famous book where he invokes his most famous metaphor:


And so we do. By pursuing our own self-interest, through our production, our trade, our enterprise, we ensure “Paris gets fed.”

But there is no central planner here. That is the second part of this miracle: the “resourceful and secret power that governs the amazing regularity of such complicated movements” is not the result of government planning but the opposite: it is a naturally developed “spontaneous order” regulated by this “inner light” of self-interest and the power of free exchange.  That power, that light,  “is so illuminating, so constant, and so penetrating, when it is left free of every hindrance” it produces the order we take so much for granted.


This, Bastiat’s great lesson of spontaneous order, was taken up by Friedrich Hayek, observing society relies on the spontaneous order arising out of our voluntary cooperation.


This great miracle can only happen when each of us is free to follow our own road, to make use of our unique knowledge and circumstances to pursue our self-interests,  so promoting that of the society more effectually than when we really intend to promote it.

imageSO WHAT EXPLAINS THIS Miracle of Breakfast then? Bastiat’s conclusion in three points:

  • Free exchange
  • Self-interest
  • Spontaneous order

Or in one idea:

“That the legitimate interests of mankind are essentially harmonious.”

This is the great lesson integrated by economics, if we are willing to hear it:

Mind you, it takes all of economics to prove the point. And most philosophers are unable to read, or integrate, that much. 

But so too are so many of today’s economists.

Wednesday, 21 March 2012

A shambles

Is there any truth to the rumour that jurors failed to convict Tame Iti and his co-defendants on the charge of involvement in an "organised" criminal group because what they saw of their group looked far from organised?

In any case, after the farcical arrests and trial it's now clear that the hastily drawn up Suppression of Terrorism Act under which the Urewera 20 16 15 14 4 were seized and charged is as great a shambles as Iti's rabble, and perhaps an even greater threat to our individual security.

It must go.

Just as he was about to do some good!


The first time in my life I find it in myself to offer good words about Nick Smith, and within 24 hours he's resigned.

I almost feel responsible.

That said however, on the issue on which he resigned he behaved badly: using political pull to help a friend (endorsing her ACC claim on ministerial letterhead) then lying about it afterward (saying he "couldn't recall" if he used the letterhead or not. Yeah right.)

So the minister with a tongue so forked he could hug a tree with it has gone, but ironically just before he was about to do some good.

I trust (but doubt) his successor will proceed to tie up councils, as Smith planned to do. And I hope (without any sense of optimism) that his succcessor will do what Smith never would and proceed further: to gut the RMA.

Both are urgent.

Given my new-found ability to place a curse on cabinet ministers though, perhaps if Smith's replacement proves too recalcitrant I should just offer some words of praise. As unlikely as that might sound.

ECONOMICS FOR REAL PEOPLE: "The very soul of economics..."

Here's the note from our friends at Auckland's Economics Group on tomorrow night's meeting.

Tomorrow, Thursday 22nd, 6pm, Room 223 of the Uni Business School, we begin our first session of four on Economic Harmonies. And in the first of these we discuss the idea at the heart and soul of economics that is so often misunderstood:

 Economic Harmonies 1: Division of Labour - The very soul of economics!

* Why was Henry Ford able to produce more cars in a day than any other manufacturer?


* Why is economics founded on 'division of labour'?


* What barriers are there to division of labour? And what implications of these barriers?


These questions and more answered tomorrow night at the Auckland Uni Economics Group.

WHERE:Room 223, Auckland Business School, Auckland Uni
WHEN: 6pm, Thursday evening

All welcome!

Tuesday, 20 March 2012

We come to praise Nick Smith. For now. [updated]

imageI never thought I’d write to praise Nick Smith rather than bury him. Neither did Liberty Scott.

But here you go.

It’s a first.

Because Nick Smith intends to muzzle councils.

Not just chronically over-spending councils haemorrhaging debt; not just over-stretched councils over-excited about meddling in other peoples’ business; not just councils flush with over-aggrandisement on truckloads of other people’s money; but all councils in the country who, he says, he intends to confine to doing only what councils should be doing.

Now if you were to list the differences between what Nick and I think councils should be doing you would have a very long list indeed.

So I hang my enthusiasm for his pronouncement not on words like “castrate,” “emasculate” and “tie up”–i.e., the sort of words I would be using as minister to describe my intentions for councils’ powers—but on the more temperate words being used like “confine,” restrict” and “roll back” (still far more energetic than anything else said by this government in its four year reign) and his stated intention to end the failed decade-long experiment of granting councils the legal “power of general competence.”

The reforms, dubbed “Better Local Government” effectively remove what has been widely known as the “power of general competence” granted to local councils in [Sandra Lee’s] 2002 reform of the Local Government Act, which made them responsible for “social, economic, environmental and cultural well-being.”
    Instead, councils will be given legal responsibility to provide “good quality local infrastructure, public services and regulatory functions at the least possible cost to households and business.”

This ill-named “power of general competence” (clearly an oxymoron when it comes to councils in any case) was always going to end badly because, as many of us said at the time, it overturned the centuries-long principle of  that citizens may do anything they like except what is explicitly prohibited by law, whereas agents of government may do only what is explicitly allowed by law.  This is what it means to have the rule of laws, not men—a principle overturned by Sandra Lee’s 2002 reforms with the resulting encroachment by cockroaches on things they should never have contemplated.

So bravo then to Nick Smith (words I never thought I’d write) for doing what urgently needed to be done, and should have been done years ago. (One still wonders why, rather than reining in every bureaucracy in the country by doing what Nick promises to do, as local government minister Rodney Hide instead committed all his energy and every part of his party’s dwindling political capital into super-sizing Auckland’s bureaucracy.  There’s a story there still to be told.)

But it’s not all good news.  The minister still talks about “super” mayors and “super” bureaucracies, twin illusions you would think the reality of Len Brown and his dysfunctional merry-makers should surely have punctured by now.

And he maintains his enthusiasm for the disaster that is the Resource Management Act, which has single-handedly reduced property rights while raising housing prices.

So something to celebrate. But it’s still early days.

PS: Feel free to let us know what Nick Smith is trying to demonstrate in the picture above. Answers on a postcard please.

UPDATE:  Yes, this is still the same old Nick Smith, of course.  A person with a fully-equipped battery of political antennae who as minister of ACC was happy to write a “reference” for a friend who just happened to be involved in a messy ACC claim—fully aware of the effect of such a letter from such a minister on those considering the claim, even though he now suggests otherwise.

Monday, 19 March 2012

DOWN TO THE DOCTOR'S: Ron Paul just doesn't get it

_McGrath001Doc McGrath has been reconsidering Ron Paul…

For a long time past, opinion among supporters of free-market capitalism has been divided  over the suitability for office of Republican presidential candidate Ron Paul. I have been a long-time supporter of Dr Paul, if only because of the uncommon sense he speaks on matters related to economics and central banking.

The septuagenarian obstetrician-gynaecologist-cum-congressman has long been an advocate of the gold standard, and of disestablishing the Federal Reserve. He opposes government intrusion into the lives of private citizens by his opposition to the knee-jerk laws that make passing through an airport in the U.S. a harrowing and degrading experience for most travellers.

All good so far.

_RonPaulBut I am now convinced his foreign policy would be detrimental to the interests of the U.S. in the long term. For a long time, I used to believe a policy of strict “isolationism”—pulling U.S. troops out of the hundred-and-thirty-something countries where they are stationed in their tens of thousands at present—would be a good idea, especially seeing as how the U.S. is basically bankrupt (and will probably be owned by China a few years from now).

I thought pulling troops back to the continental U.S. would save billions if not trillions of dollars, and might pacify those who resent the presence of United States troops on their soil.  But, as many in the libertarian and Objectivist movements have long been suggesting, such a policy would not lead to peace and prosperity for U.S. citizens. Instead, it would be a gutless capitulation to the enemies of freedom and in invitation to them to treat the sleeping giant as a a docile dinosaur willing to accept any indignity. It would not douse the flames of resentment in many of those countries, it would fan them. Such a policy would show their enemies (and on numerous occasions since at least the Suez capitulation has shown them) that the U.S. is a soft touch who will tolerate substantial strikes against its own citizens without any adequate retaliation.

Notwithstanding the fact that the current U.S. government and its chief executive have been to a greater or lesser degree traitors to the U.S. Constitution, like virtually all their predecessors for the last hundred years, the United States still best represents the idea of a secular nation built on the principles of individual rights and liberty. 

Despite the betrayal by U.S. politicians of the principles for which many of the Founding Fathers risked their lives, Ron Paul, sadly, does not represent a coherent force for good. He is a deeply flawed politician, with a blind spot in foreign policy the size of Texas.

I read  the transcript of a recent interview with ARI executive director Yaron Brook and listened to a short audio clip from 2011, and then knew without a doubt that I had been wrong in my unquestioning support for a man whose foreign policy position amounts to this:

The underlying problem with Ron Paul is his basic motivation: rather than pro-freedom he is primarily anti-government.

Instead of advocating government that protects individual rights, he has given libertarianism a bad name by advocating anarchism, the view that all government is bad; instead of advocating small government and the rule of law, he and his supporters argue for no state and no rule of law. In reality, there can be no freedom when there is no government: look, for example, at the chaos in Somalia, where the rule of law has broken down completely. That is no libertarian society; it is anarchic dog-eat-dog civil war without any protection of individual rights at all.

Yaron Brook says in the audio clip above that he could consider voting for a presidential candidate that wasn't an Objectivist, just as long as they were advocates for individual rights. Whether or not you consider Objectivism to be the best grounding philosophy for theories of individual rights and capitalism—and I happen to think it is—here we have an Objectivist saying that he could support a non-Objectivist as a candidate. I'm not sure Ayn Rand would have been that generous.  [Yes, she was; see below. – Ed.]

Free-market capitalism needs a new political torch-bearer.  Whether Ron Paul's high-ish profile has set back the cause of free-market capitalism decades, as Brook asserts, is debatable. He is occasionally inarticulate and does, unfortunately, come across as a crazy uncle type. It is surely telling that much of his current support appears to come from pacifists on the left wing of American politics who can relate to Ron Paul's short-sighted and frankly dangerous foreign policy.

While I agree with most if not all of what Ron Paul has to say on Austrian economics, I think American capitalism needs a new political voice and a fresh presidential candidate for 2016. Peter Schiff springs to mind. Andrew Breitbart would have been great. Penn Jillette would be a scream.

Dr Paul's star reached its zenith some time back and is now falling. He should step down once the primary/caucus season finishes, enjoy what years he has left with his family, and allow a more consistently individualistic figurehead to take up the cudgels against both the overt socialists in the Democratic Party, and the utterly revolting conservatives such as Romney and Santorum who give the party of Lincoln a bad name.

imageA wiser head than mine labelled as "Saddamites" those reluctant to endorse military action against Iran, Saudi Arabia and other nations whose governments nurture anti-American terrorists. How right he was. Ron Paul is a "Saddamite", and I guess I was too. But not any more.

The U.S. government should unleash the dogs of war onto the murderous regimes of Iran, Syria, the treacherous Saudis, and any other failing states giving succour to promoters of Islamic jihad. Turn the political rulers of those hostile states into pariahs, or even radioactive glass, if need be. But let's not wait for another Islam-inspired atrocity to occur before striking at the sponsors of that hideous death cult.

Now that plans to shut Iranian banks out of the world financial markets appear to be proceeding, it could be an opportune time to begin.

Ron Paul was right on one thing: the U.S. Government is not the world's policeman. But what Dr Paul failed to tell us is that it nevertheless has a duty to defend American citizens everywhere from people wanting to murder and maim them. To defend them with deadly and overwhelming force, with energy sufficient to transform wanna-be Islamist martyrs into gas molecules.

Just as it is time for Ron Paul to move on, it is time for the United States government to move on from a policy of appeasement toward vicious crazed murderers, to a policy of dishing out swift and palpable justice to those who threaten American interests with violence. While I have serious reservations over the funding of such a war, I don't think Obama really has a choice now.

Only this time, count me as a supporter of such a just war not as a Ronulan appeaser of Islam. I'm only sorry it took so long for the scales to drop from my eyes.

See you until next week,
Doc McGrath

* * * *

NB: In her 1964 article “How to Judge a Political Candidate” Rand said:

One cannot expect, nor is it necessary, to agree with a candidate's total philosophy -- only with his political philosophy (and only in terms of essentials). It is not a Philosopher-King that we are electing, but an executive for a specific, delimited job.... we have to judge him as we judge any work, theory or product of mixed premises: by his dominant trend....
If a candidate evades, equivocates and hides his stand under a junk-heap of random concretes, we must add up those concretes and judge him accordingly. If his stand is mixed, we must evaluate it by asking: Will he protect freedom or destroy the last of it? Will he accelerate, delay or stop the march toward statism?

It was on this basis that she first supported and then became disappointed in the candidacy of (who would have guessed it!) Barry Goldwater.

Friday, 16 March 2012

GUEST POST: Reverse Engineering the Gecko and Other Advancements from the World of R&D

Guest post by Doug Hornig of Casey Research 

Technology advances so fast that it's impossible - even for people who dedicate their lives to it - to keep up with everything that's going on, let alone the average investor with a whole other life to live doing so. With this information gap in mind, we'd like to bring you some of the more interesting research and development stories we've come across recently.

Diff'rent Strokes

There are any number of ways that scientists come up with their ideas for new products. But one of the most time-honored is to go back to nature. If something has worked out there in the natural world, maybe it can be replicated in the lab.

Beyond copying the shape of wings or legs, few phenomena in nature happen above the microscopic scale. Until recently, that made it quite difficult for us to reproduce many of the miniature miracles that nature uses every day. But with advances in nano-scale manufacturing, researchers are once again turning to nature, and to their imaginations, to inspire a new generation of materials.

That's what some German researchers were thinking as they set out to, in essence, reverse engineer the gecko.

Fifteen Minutes Can Save You...

Didn't you ever wonder how it is that this lowly creature can scamper up walls and across ceilings without falling? Turns out, it's both simple and complex.

The simple part is that the gecko has thousands of tiny hairs, called "setae," covering its feet and legs. The hairs are not only numerous, they're coupled with flattened tips that can splay out to maximize contact on even rough surface areas. It's these that enable the animal to maintain adhesion to whatever it's traversing.

The more complicated part is why this works, especially when the gecko is upside down. In a pull/push contest between gravity and some miniscule setae, no matter how many of them there are, intuition suggests that the former should prevail; yet direct observation proves that it does not. Furthermore, if the gecko's feet are sticky enough to overcome gravity, how does it ever get unstuck?

It has to do with the van der Waals force, named for the Dutch theoretical physicist of the late 19th-early 20th century, Johannes Diderik van der Waals. The force - actually a collection of several forces - is defined in the International Union of Pure and Applied Chemistry Gold Book as:

The attractive or repulsive forces between molecular entities (or between groups within the same molecular entity) other than those due to bond formation or to the electrostatic interaction of ions or of ionic groups with one another or with neutral molecules. The term includes: dipole-dipole, dipole-induced dipole and London (instantaneous dipole-induced dipole) forces. The term is sometimes used loosely for the totality of nonspecific attractive or repulsive intermolecular forces.

In other words, they kinda don't know exactly what's going on there, but we can see the effects. The attractive power of the van der Waals force that exists between gecko feet and the ceiling exceeds that of any repulsive force. It also exceeds the gravitational attraction of the Earth below.

(Gravity, though we tend to think of it as strong, is really quite weak. Consider that a body as massive as the Earth is incapable of keeping anything with legs or wings constantly plastered to it. We can't pole vault into space, of course, but animals can jump pretty high and soar even higher, and we can launch small projectiles free of the planet.)

Gravity is not powerful enough to pin the gecko to just one spot. Thus, the creature can walk just fine above our heads, up and down walls... pretty much wherever it wants.

So, now that we get the overall picture, why can't we do it, too? A lot of people want to. The quest for the so-called "Spiderman" suit has consumed a ton of research dollars - especially within the military, where its obvious potential usefulness has made it one of modern warfare's holy grails.

We don't have one yet. Physicists at the Polytechnic University of Turin came up with a design using carbon nanotubes back in 2007, but a working model has proven impractical. However, we're inching closer. Check out this fellow:

Image: Wahj via Flickr

He's Achim Oesert of the University of Kiel in Germany, and he's hanging from a 20 x 20 cm square of silicone tape created by his research team.

The bio-inspired tape's construction features hairs similar to setae, and it sticks to a surface via the van der Waals force. It is not only strong enough to support a human, as you can see, but it can work underwater and leaves no sticky residue. Best of all, it can also be attached and detached thousands of times without losing its adhesive properties.

It's the triumph of the gecko.

Not only are we looking at a whole new generation of adhesive products, but we're closing in on the day when we'll be able to slither up walls without the CGI assist that Spiderman needs.

It Hit Me Like an Ounce of Bricks

At the opposite end of the spectrum are researchers who don't take their inspiration from nature but are creating things entirely new to the universe from scratch, using building blocks from nanotechnology. In this arena, a lot of extraordinary and exciting things are happening.

One of the latest developments is the micro-lattice.

Image: Dan Little, HRL Laboratories, LLC

What you see above is a structure that looks substantial but really isn't. It's a mesh so ethereal that it doesn't disturb the dandelion fluff. It's being billed as the world's lightest construction material, and it almost certainly is. At just 0.9 milligrams per cubic centimeter, it's 99.99% air, 100 times lighter than Styrofoam, and less than one-thousandth the density of water. When dropped from shoulder height, the micro-lattice floats like a feather, taking about 10 seconds to reach the ground.

Yet it is metal, fashioned from interconnected, hollow nickel-phosphorous tubes with a wall thickness of 100 nanometers - 1,000 times thinner than a human hair. The tubes are angled and connect at nodes to form repeating, three-dimensional, asterisk-like cells. Think the Eiffel Tower - which is also very light and weight-efficient thanks to its hierarchical lattice design - but at microscopic scale.

The super-lightweight lattice is the result of research carried out by a team from UC Irvine, HRL Laboratories, and the California Institute of Technology; their report was published in the November 18 issue of Science.

In addition to being ultralight, it's also strong and better yet, energy absorbent. Spongy. It can suffer compression up to 50% of its height and spring back into shape, as you can see in this video.

For now, the applications being considered include things like soundproofing and impact protection. But imagine a car with a body made of material inspired by this stuff - so light it'd probably get a hundred miles to the gallon. Plus, a fender-bender would be self-repairing; no trip to the body shop needed.

We can hardly wait.

3D Printing Meets Robotics

Going back to an inspiration from nature and two of our favorite areas of technology - robotics and 3D printing - we'd like to share with you the jumping spiderbot:

This little guy is the brainchild of researchers at Germany's Fraunhofer Institute for Manufacturing Engineering and Automation.

Borrowing from nature, the Fraunhofer team wanted to create a robot with the agility and stability of real spiders when getting around, along with special joints that allow it to jump. Four of its eight-inch legs are on the ground at any one time, while the remaining four can turn and ready themselves for the next step. Diagonally opposed members can also move simultaneously. Bending the front pairs of legs pulls the spiderbot's body along, while stretching the rear legs pushes it. Finally, the spiderbot's legs and body are fitted with pneumatically operated, elastic drive bellows that bend and extend its legs with the force required for jumping.

The control unit, valves, and compressor that drive the beast are built into the robot's body, which could also be fitted with various measuring devices and sensors should the spider ever be dispatched to a job out in the real world.

For construction of the spiderbot's parts, the Fraunhofer team eschewed more conventional engineering technologies and turned instead to selective laser sintering (SLS), which fuses a powdered polyamide material by scanning cross-sections of the desired object on the surface of the powder bed. This production method offered the advantage of allowing complex geometries and inner structures to be constructed, while ensuring that the result will be lightweight and extremely cheap to produce. Individual parts can be quickly remade and swapped out if they fail, without having to keep a stamping machine on standby.

The spiderbot is merely a prototype at the moment, but subsequent versions could have a bright future exploring environments that are too hazardous or difficult for human access, such as cave-ins or nuclear accident sites.

[The plethora of exciting developments in technology are changing the world as we know it, and nowhere is this more true than in biotechnology and health care.]

Doug Hornig is senior editor of the Casey Daily Dispatch .

Thursday, 15 March 2012

Speech wars: Let’s play spot the platitudes

imageIf you’re wondering why folk are losing interest in politics even while govt continues to eat out our substance, then the platitudes espoused today in the Battle of the Speeches offer a clue—”visionary” speeches by our two main party leaders that would have (and surely did) turn the speech writers themselves to thoughts of sleep.

So let’s liven things up and play spot the platitude. I’ll give you a line from either Key’s* or Shearer’s** speech, and you tell me which one said it:

New Zealand will be clean, it will be green, it will be clever & and it will be a place that's good for lambs.

    Which one: Key or Shearer?

Let me tell you a story about a circus.

    Which one: Key or Shearer?

We're working hard to take the country forward.

    Which one: Key or Shearer?

We can’t catch Australia, so let’s aim for Finland.

    Which one: Key or Shearer?

New Zealanders want their leaders to focus on the future.

    Which one: Key or Shearer?

A vision is a marvellous thing.

    Which one: Key or Shearer?

We've got an economic action plan with 120 key things to build a more competitive economy.  We are currently developing that plan further.

    Which one: Key or Shearer?

We will be presenting detailed and far-reaching policies. We will spend the next two years listening, drawing up our plans. We will accept the best ideas wherever they come from… So let's be clear: I'm not going to offer up some magic bullet.

    Which one: Key or Shearer?

People say governments can’t pick winners, but we can.

    Which one: Key or Shearer?

New Zealanders care deeply about the quality of public services.

    Which one: Key or Shearer?

New Zealanders care how society looks after the most vulnerable.

    Which one: Key or Shearer?

We must move forward together, looking after one another along the way.

    Which one: Key or Shearer?

The public sector is important.

    Which one: Key or Shearer?

If I had to sum up what we need to do in one sentence I'd say this: we need to make a new New Zealand.

    Which one: Key or Shearer?

I came into politics to make a difference. And it is time for a clear focus on what will make New Zealand a better place.

    Which one: Key or Shearer?

We need to value teachers.

    Which one: Key or Shearer?

We need to value public servants.

    Which one: Key or Shearer?

If you're prepared to invest in the future, your fate can change.

    Which one: Key or Shearer?

Let’s not just sell the world what we’re good at.  Let’s copy what others do instead.

    Which one: Key or Shearer?

We live in a world of social media, online sales, internet banking and apps for almost everything.

    Which one: Key or Shearer?

Our community must take care of the needy. They deserve a share of the pie. Everyone who can help to make that pie needs to be involved, and fairly rewarded for doing it.

    Which one: Key or Shearer?

Everyone in the country deserves and will get a pony.

    Which one: Key or Shearer?

Actually, one or two of  these could well have been trick questions on my part. But only one or two.  Could you spot them?

The fact is, however, it doesn’t matter which one said what. It’s the same brand of paternalist bullshit on both sides.

But check the answers for yourself here and here if you must.

And let’s keep moving forward together, into a new dawn, rubbing shoulders with the future…

[Image from the NZ Herald]

* * * *  *

* Key, John, i.e., that nice man on the telly
** Shearer, David, i.e., leader of the Labour Party***
*** Remember the Labour Party?

Northern Gateway toll road – a story of politics over reason

Surprised at hearing news that the managers of New Zealand’s only toll road, the Silverdale to Puhoi Highway, are only now beginning to chase up non-paying drivers?

No wonder, says Liberty Scott, because the toll road was a political creation—and only “a state body can so egregiously ignore collecting money for the use of a service, when the incentives are so badly wrong.”

He tells a fascinating story of a road that cost nearly five times more than it was supposed to, in addition to a tolls collection department set up expressly to cost more to run than it was ever going to collect.

Read it and weep: Northern Gateway toll road – a story of politics over reason.

Wednesday, 14 March 2012



Auckland’s Economics Group has kicked off for the year, ,meeting every Thursday at Auckland Uni Business School.  Here’s a note from about tomorrow night’s discussion:

“Why study economics?”     "Why does it matter?"

If you want to win a race, you have to get to the start line. Likewise, if you want to know why economics matters—and why good economics matters most—you have to start at the very beginning.

This week we discuss the very foundations of economics: and you’re guaranteed to come away with some surprising conclusions!

    When: Thursday, 15 March 
    Where: Case Room 223, Level 2, Business School Building (please note the room change!)
    Time: 6pm

All welcome. Look forward to seeing you there.

Three years on, how does the government’s economic rescue look?

SHOULD A GOVERNMENT SPEND more or less in a downturn? Should it inflict “austerity,” or should it spend and borrow and hope?

The issue has once again become a live one as this economy, and all the others, still struggle to resurrect themselves—while all around us commentators and alleged economists lie about the austerity, and deceive about the results of “borrow and hope.”

How refreshing then to see one local commentator who seems to understand money printing is not the answer.

[Bryan Gould & Bernard Hickey have] been complaining that austerity does not work and is no solution to our current woes, he points to Greece, Spain et al, to illustrate his point.
    Greece, however, is a mess precisely because they have never practiced austerity. Greek governments used to print drachmas, and lately borrowed Euros. If borrowing money was a path to riches then Greece would be a wealthy country. It isn’t.

And nor are we.

imageI said four years ago when this calamity first hit that we had no choice about the pain of recovery, only about the length of time it would take. Either a short, sharp shock, or (like Japan) years of grinding lethargy while the supposed plan of “hope and borrow” becomes inexorably the millstone of “hope and pray.”

It’s a shame we weren’t having this discussion back in 2008 when the excrement first hit the ventilation device.

Except we were

Unfortunately, the “great and the good” weren’t listening. Three years ago in February, the “great and the good” instead gathered together in Manukau with John Key and Bill English for the new government’s “Jobs Summit.”  (Remember the “Jobs Summit”?)

imageThe job of the Jobs Summit was to get buy-in from commentators and industry groups for the government’s plan to “rescue” the economy. The “plan” turned out to be borrow to pay for current spending, and borrow even more to pay for new spending. Naturally the plan received buy-in from all those present, since the vast majority confidently expected that new spending to head their way.

It brought to mind Adam Smith’s famous observation:

"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." 

This approach however wasn’t just designed to buy votes and keep Fletcher Building et al afloat. It was supposed to keep economy-wide spending up during the downturn, which would (supposedly) help keep up wages and prices, and pay for jobs for everyone who wanted one. 

But it didn’t work.

And we continue to borrow hundreds of millions of dollars a week with no sign at all (except in Treasury’s fantasies) of this borrowing abating.

Fact is, the approach was utterly wrong-headed. If a household borrowed to pay its bills when a home-maker lost her job, we’d call her irresponsible. It she kept borrowing for four years while her situation deteriorated, we’d call her insane.

So why is it that when finance ministers do this they’re considered to be saviours?

imageWORLDWIDE, THE CRASH DESTROYED trillions and trillions and trillions of dollars of wealth. And because of the way money is created in our fiat money system (being essentially debt organised into currency), this meant that trillions and trillions of dollars was destroyed. Money had just disappeared.

By thinking only about aggregate spending however, rather than on where the spending was going, the delusion  is created that this new spending can replace the old spending. But the old spending stopped because businesses had gone to the wall. Because malinvestments had spread throughout the system. Because business after business was struggling to pay its bills, desperate to pay back its own debt, and was beginning (properly) to deleverage itself.

Governments could either help or hinder that process.  They could help by allowing the correction to occur, as happened in the 1920/21 Depression, from which recovery was achieved in about eight months. Or they could try to keep prices up, wages up and spending up (as Herbert Hoover and Franklin Roosevelt did in the thirties, and Japan did again in the nineties) and ensure the pain hung around for years.

Tragically, they chose the latter. They tried to reflate the economy by borrowing; but reflating after a crash and expecting recovery to occur is like reversing over a traffic casualty and expecting him to rise from the dead.

And I said so at the time.  In fact why don’t I just reprint what I said then, and you can see who’s right and who’s wrong (and compare my solutions below to the seven time-honoured methods by which to extend a recession: head to this post and then check out the seven points just above the cartoon):

Friday, February 27, 2009
Jobs Summit, 2: The solutions

Keynesians embraced the notion that the economy could settle into an equilibrium characterized by persisting unemployment. Critics such as Haberler, Pigou, and eventually Patinkin argued [however]that falling wages and prices would increase the real value of money holdings and that the spending out of those real cash balances would restore the economy to full employment…
Roger Garrison, Time and Money (p. 20)

Gathered there now in Manukau is a collection of folks who have all fallen prey to the ‘Grocer Fallacy.’ They all figure that if the government can only keep their own wages and prices up, and spend enough to keep customers coming through their own particular door, then all will be well with their little part of the world.

Poor fools. As anyone familiar with the Fallacy of Composition would understand, what is true for a part is not necessarily true for the whole. This is certainly true about the myopia of the merchants who are currently huddled desperately around the government’s feet.

As I said in Part One of my piece on this Jobs Summit, which addressed some of the problems in most of the mainstream solutions, the primary problem is not to encourage spending but to afford it. We are not in this position because we didn’t spend enough – Gawd help us – but because the world’s orgy consumption over the past few years consumed our pool of real savings – about US$39 trillion of real savings according to Mr Bollard. The primary problem we must now confront is not a drop in spending, but a drop in the resources we now have command over.

imageIn that analysis is contained the necessary solutions to recovery: to refill the pool of real savings, and to correct prices and production as soon as possible to the new realities we now face.

We can rebuild the pool of real savings just as long as we ignore the hysterical exhortations to keep spending.

We can still produce all we need just as long as we allow costs to reflect the new realities.

We can still employ as many people as are willing to work, as long as they are willing to work for what their job is now worth.

Economy-wide, and across the board, we need to stop spending so extravagantly. Urgently. And we need – all of us – to recognise the new worldwide realities we all now face.

Which is to say,

  • Recovery requires lower wages and salaries across the board. Government (both central and local) can certainly start this process, not by congratulating themselves when they refuse to take a pay rise, or when they "cap" their own wages and salaries to the rate of inflation, but by actively cutting the wages and salaries of all those employed by government, right across the board.
    Since the cost of government is such a large part of costs to business, in spending terms alone this will have a huge impact -- not to mention the tremendous example it gives to others.
    Ten percent is a nice round number, and as it happens that was the figure adopted in the thirties when the Forbes/Coates Government cut government salaries, helping to kick off the revival that began less than two years later (and back then government was only a fraction of the size and influence it is today).
    • Policy Solution: Cut government wages and salaries by ten percent.
  • Recovery requires the freedom of wage rates to fall so that (as George Reisman points out) the presently reduced supply of capital and the credit becomes capable of supporting a larger volume of employment and production. The introduction of the minimum wage increased unemployment in the thirties beyond measure; it visibly discriminates against Maori and youth employment. Let us keep people employed in the work they want at a price that is affordable.
  • Recovery requires that producers and investors -– those who control the pool of real savings – have certainty. Sure, governments always like to look as if they’re doing something, but the more they do – and the more they look like they might do – the less certainty producers and investors have, and the more likely they are to keep their money in their pockets. It was this very "regime uncertainty" that was one of the key reasons the Great Depression continued so damned long in the US. Let’s learn from that mistake. Don’t confuse government action, which consumes real capital, with private action – which builds it up.
    • Policy Solution: Reduce regime uncertainty by government doing as little as possible, by getting the hell out of the way, and by stating clearly in advance what little is going to be done so that everyone knows what’s happening – that is, a policy of No Surprises which is far better than a “rolling maul” of meddling before which no one is able to plan ahead.
  • Recovery requires the rapid liquidation of unsound investments. Capital has already been consumed and is now in short supply. Creditors themselves can be endangered because they’re unable to collect what they are owed. The quicker liquidations are allowed to happen, the more rapidly the resources tied up in those investments can be released, and made available for recovery. Which means not listening to most of the whiners at the Jobs Summit who want their own bad positions propped up, but allowing all the malinvestments to be liquidated – to stop consuming capital – to allow mortgagee sales to happen – to insist that debts are paid. (Except of course the “debts” that are owed to the IRD. Those bastards can wait.)
    • Policy Solution: Allow the remaining capital of lenders to be freed up as soon as physically possible by allowing the rapid liquidation of unsound investments.
  • Recovery requires that government stops spending so goddamn much. The single biggest cost to producers is the dead weight of government. Government spending is not investment – it is consumption. We’ve consumed enough – what producers have needs to be made available for recovery. Cutting their wages and salaries would be a good start (see above). Cutting useless and intrusive government departments would be even better; it’s not like there’s a shortage of the bastards to choose from.
  • Recovery requires that the pool of real savings are built up again. According to Mr Bollard, up to $39 trillion has been consumed so far in the current economic collapse. Those savings need to be built back up again – and with real savings, not with the counterfeit capital that caused so much of that capital destruction. (And we must realise that it is not consumption spending that drives an economy, it is spending on production – and we must understand that it is the pool of real savings that drives production spending). In order to achieve this goal, as Mark Skousen explains, the government needs to find ways to stimulate savings and genuine capital reformation – and the best method is simply to remove barriers to capital accumulation, and to encourage everyone, including wage and salary earners, to save. Which means reducing their costs.
    • Policy Solution: Reduce or eliminate taxes on interest and dividends, and resist calls for a capital gains tax.
    • Policy solutions: Resist the temptation to lower interest rates to negative real rates, and let the market leave them where they need to be to encourage the rebuilding of real capital.
  • Recovery requires that the costs of regulation and compliance are urgently reduced. We’ve been hearing the rhetoric for years, that governments are going to reduce compliance costs, and still there’s no serious intent on the horizon – nothing soon enough, anyway. So let’s offer two simple methods by which that can happen NOW.
    The first is to declare several free enterprise zones around the country, at least one in every major population area, in which all taxes and regulations for new development and new businesses are severely, if not savagely, reduced. Which is to say, instead of throwing money we haven’t got at projects that don’t make sense, allow small, new enterprises to attract real investment and create real jobs without the heavy hand of government slowing that process down.
    The second is to introduce a network of Small Consents Tribunals for Resource Consent Applications for projects under, say, $300,000. This, at a stroke, will get builders back to work, and the cost of home-owning come down. You can read the details of how these would work here. Do it now.
    • Policy Solution: Declare several free enterprise zones around the country, at least one in every major population area.
    • Policy Solution: Introduce a network of Small Consents Tribunals for Resource Consent Applications for projects under, say, $300,000.
  • Recovery requires tax cuts. During America’s Great Depression, Franklin Roosevelt raised taxes to usurious heights – as Stephen Moore from the WSJ points out, “the top tax rate under Roosevelt soared to almost 80 percent and then 90 percent, thus smothering any possibility of a [US-led] recovery.” Let us not make that same mistake here. Let us also realise that the single biggest cost to producers is their tax bill. At a time of economic distress, that is a bill few businesses can afford. Taxes must be reduced.
    They must be reduced for producers. And they must be reduced for the person working two jobs to keep their family afloat, and who’s being punished for it.
    A responsible government however would know that they can’t cut taxes without cutting spending. Reality cannot be faked in that way. Roosevelt, for one, tried deficit spending on top of his enormous taxes, with the result that at the end of a decade of deficits fully 17.2 percent of Americans were still unemployed (which was up from 16.3 percent or 8,020,000 in 1931) and those who were still working were trying to pay off a debt that amounted to US$280 billion in 1930s dollars!
    Deficits don’t work. They still have to be paid for. Leaving the bill for future generations is a form of ‘fiscal child abuse.’
    • Policy Solution: Cut taxes. But make commensurate spending cuts first.
    • Policy Solution: Remove the imposition of added taxes on secondary jobs.
  • Recovery requires that the purchasing power of money be at least maintained, and at best enhanced. What this means is that the dollar in our pocket needs to be able to purchase more real goods and services, not less, with every month and year that passes.
    And what this means is that producers must be able to produce more with less, so that real prices can come down – and we can buy more with less. It means that the Reserve Bank must resist the temptation to flood the country with counterfeit capital as they have been, every new dollar of which reduces the purchasing power of every dollar in your pocket. It means they must lower the fractional reserve rate that has allow private banks to so profligately inflate the currency with a reserve backing only a fraction of what a responsible lender would contemplate.
    In short it means they must pull their heads in, insist on deleveraging, and get the hell out of the way so that real saving and genuine capital accumulation can happen.
    • Policy Solution: Restrict the Reserve Bank’s ability to inflate the currency, and remove the ability of private banks to inflate their own credit lines.

In short, to borrow once again the words of CNBC’s courageous Rick Santelli, we need to reward people that could carry the water instead of drink the water.

If that doesn’t happen, then we’ll be needing our own tea party right here in NZ

* * * *

imageI need to make something explicit in my solutions above that at present is only implicit. I say that w e can still employ as many people as are willing to work, just as long as they are willing to work for what their job is now worth. And I say that one solution to looming unemployment is to devise various means by which costs, including wages and salaries, can fall in order to reflect the new economic realities of lower costs.

But while this means lower wages and salaries in monetary terms, in fact in real terms this need not mean a fall at all – and could in act mean a rise in real wages.

This seemingly paradoxical conclusion is reached by means of two related arguments. The first is that if all costs fall across the board, then it follows that the same amount of money will now command a greater number of goods and services – in other words, since the purchasing power of every dollar has been increased, we can now buy more real goods and service with our reduced monetary incomes. In other words, even with reduced monetary incomes, our real incomes may have risen.

The second is that if we resort to cutting hours – or to the nonsensical idea of a nine-day fortnight – and if we maintain full employment, then by that means we are actually producing less, we are reducing our productivity, and so rather than putting us back on the path to prosperity we are instead only marking time at best, or even going backwards. By contrast, if we can maintain full employment, even with reduced wages and salaries, then the economy will not need to fund the extra expenditure required to pay the doles, but it also means that productivity itself can be maintained. Which means we will be producing more with less cost – which is the necessary path to recovery.

This is not sleight of hand. This is just simple economic reality.

After four years of trying, I continue to commend it to your attention.

Tuesday, 13 March 2012

DOWN TO THE DOCTOR’S: Helmet Hitlers hammered [updated]

_McGrath001This week, Dr Richard McGrath feels the wind in his hair.

An article in the 10 Feb, 2012, edition of the NZ Medical Journal is devastatingly bad news for cycle helmet zealots. Written by Colin Clarke, who has coached competitive cyclists, worked as a road safety instructor, and cycled more than 8000 km on New Zealand roads alone.  A mechanical engineer from York, in England, his thorough study suggests cyclists were safer without helmets. Which should surely expose 'helmet Hitlers' to the possibility of legal action for the deaths their law changes have caused.

So what does Colin say? It's quite shocking, really. First, cycling use has decreased by 51% since lid-wearing was made compulsory.

So half the number that were previously travelling by pushbike are now either walking, using hydrocarbon-guzzling enviro-raping earth-incinerating methods of travel such as trains, buses, motorcycles or cars, or they’re not not travelling at all but sitting at home on the couch.

Second, the injury rate for cyclists per hour travelled has risen by over 20%. Which means those remaining cyclists (the half of them who haven't chucked their bike in the shed and let the spiders spin cobwebs over them) are now statistically at higher risk of injury per unit time than they were before the lid laws were forced through.

Third and most damningly, the reluctance of people to cycle, and the associated morbidity associated with this decrease, has resulted in the premature deaths of 53 New Zealanders per year for the past 18 years (not to mention the morbidity and mortality caused by the emission-spewing motor vehicles that it could be assumed some of the ex-cyclists are now using). 

imageThe case against compulsory helmeting, on all counts from health to aesthetics, is now stronger than the case for criminalising non-wearers.

As an aside, the helmets that people are now forced to don use plastics and sometimes polystyrene, which I always thought were like poison to environmentalists. And, heaven forbid, some filthy capitalists will be making a profit producing said helmets in a Chinese perspiration factory and selling them at a vastly inflated price. Why the 'green' lobby isn't up in arms about it all, I can't understand. Perhaps it's the increase in premature deaths of humans that keeps the more extreme among them happy?

I can't do better than mention some quotes contained in Colin's article:

  • "The evidence from Australia and New Zealand suggests that the wearing of helmets might even make cycling more dangerous" (European Cycling Federation)
  • "The case for helmets is far from sound" (UK National Children's Bureau)
  • "Compulsion to wear a bike helmet is detrimental to public health" (W.J. Curnow)

imageNot to mention that cycling is now much less fun!

Colin Clarke makes a very good point, which the Molesworth St micro-managers would do well to keep in mind:

Where a reasonable doubt exists about any product providing a net benefit then the consumer should have the right not to use it. It is simply, but importantly, respecting human rights by allowing the individual to decide. Insufficient respect for human rights is shown across the world and unless the individual is allowed to exercise their rights then this opens the way for devaluing human rights in general.

Let’s face it, the law was never brought in on the evidence. But the evidence is now overwhelming for repeal.

I wonder if the governments who brought in the ill-conceived helmet laws—and those who failed to abolish—might now find themselves under scrutiny and being asked to justify the 53 extra New Zealanders who have died every year since 1994, and will continue to die until this absurd law is overturned?

See you next week!
Doc McGrath

PS: image

imagePPS: Pictures from the Australian website/blog Helmet Freedom. Plenty more good material there.  Follow them on Facebook.

UPDATE:  And plenty of good material too at the local “freedom to choose” website: “Cycling Health is not opposed to the use of helmets,” they declare, “but merely to the element of compulsion. Our position is that individuals should have the right to choose whether or not to use a helmet, without interference by Governments.”


Some nice pics too:












Monday, 12 March 2012

Could the U.S. Federal Reserve collapse? Well, fingers crossed.

Yaron Brook discusses Ron Paul’s prediction (hope?) that the Federal Reserve might collapse.

No foreigners please, we’re Labour

David Shearer, the Leader of the Labour Party, has finally made a headline.  (I give his official title here just so you know who he is. That you wouldn’t know if I didn’t tell you he is a measure of how desperately he needs the headline.)

Unfortunately, in announcing he would like to make NZ land virtually off limits to anyone without a New Zealand passport (for fear, perhaps, that NZ land will be put on ships and transported overseas where foreigners will do strange foreign things will be done with it) it is only to declare he is just as economically ignorant as his predecessors, and perhaps even more xenophobic.

Basically, he wants to make NZers poorer. He wants to buy votes with our prosperity.

Leave aside the xenophobia. If you can. But the economic ignorance on this one is, unfortunately, widespread, and should have everyone interested in their own future prosperity up in arms.

We have people willing to put good money into this place, matched with a blanket refusal to understand the benefits of foreign capital in a small place like ours with a paucity of our own pool of real savings. (A place that since its early days was built with foreign capital, for goodness’ sake.)

We have the prospect of new money being given voluntarily to existing owners, which they can re-invest, matched not with a welcome mat but a jackboot and a stop sign.

We have the prospect of new investment into existing land by those able to make it and us more prosperous, matched with no understanding whatsoever of the benefits to all of us of this increased prosperity.

Here are two more simple rules:

  1. In a division-of-labour society like ours, it doesn’t matter to us where capital comes from just as long as it comes here.
  2. In a division-of-labour society like ours, it doesn’t matter who owns the means of production just as long as the owners are free to invest, to produce and to innovate.

Why doesn’t it matter? Because there is a general benefit to all of us from there being more capital working here; a general benefit to all of us from more private ownership, whatever the race, creed, passport, skin colour or ancestry of the owners.

That is: there is a general benefit to buyers of products, to sellers of labour, to owners of other land. Which is to say, to all of us except a politician in search of a headline. 

Sellers of labour receive the benefit of the new capital applied to wages. The reason New Zealand wages are 30% lower than Australia is not because Australia has stronger unions or any other stupid reason, but because Australia has more capital, and is more productive with it—and we have politicians who want to keep it that way.

As even Shearer’s own economic advisers should be able to tell him (and as I suspect he even knows himself) the single-best means by which to increase wages is to increase our pool of real savings, which is to say to increase capital investment.  Sellers of labour benefit from the increased productivity of the greater capital coming into the country—both the new capital invested in the existing land, and the capital used to purchase the land that will be reinvested by vendors (or their investment vehicles) in new and further production. This is a double benefit for every wage-earner because, as George Reisman points out, 

Capital is the foundation both of the demand for labor and the supply of consumers’ goods. Its continuous accumulation is the foundation of high and rising real wages and a high and rising standard of living for everyone...

if you want higher wages you should be doing all you can not to an foreign investment but to encourage it.  Not to lower our pool of real savings but to discourage xenophobic restrictions on NZ's capital markets, and to discourage restrictions on local productivity.

And every consumer should be up in arms too about Shearer’s wish to prohibit to them the benefits of new foreign capital coming here. Buyers of products receive all the benefits of the new capital applied to production. (And remember, this is both the new capital invested in the existing land and the capital used to purchase the land that will be reinvested by vendors in new and further production.)  As George Reisman explains, “It cannot be stressed too strongly: the simple fact is that in a division-of-labor society, one does not have to own the means of production in order to get their benefit. One has only to be able to buy the products.” 

Remember, it doesn’t matter where capital comes from, just so long as it comes here; or who owns the means of production, just as long as owners are allowed to produce unencumbered.

This is a general rule which George Reisman calls:

imageThe General Benefit from Private Ownership of the Means of Production

The influence of the division of labor on the institution of private ownership of the means of production is almost universally ignored. Typically, people think of privately-owned means of production in terms that would be appropriate only in a non-division-of-labor society. That is, they think of them in the same way that they think of privately owned consumers' goods—namely, as being of benefit only to their owners. They believe that before the non-owners can benefit from the means of production, they must first become owners.

This belief underlies the popularity of all forms of "redistributionism" and socialism. People believe that so long as wealth remains concentrated in the hands of a relatively small number of capitalists [or foreigners], the capitalists [or foreigners] alone benefit from it. For the great mass of non-capitalists [or NZers] to benefit, it is believed, the wealth of the capitalists must first be taken away and given to the non-capitalists, or be held by the government and used for the collective good of all, [or, even more nonsensically, to be prohibited altogether from coming here].

Closely related to these ideas, of course, is the belief—held virtually as a self-evident axiom—that capitalism is a system which operates only in the interests of the capitalists, and that the defenders of capitalism must therefore either be capitalists themselves or be in the pay of the capitalists, or else simply be perverse enemies of the great majority of mankind. So deeply rooted are such convictions that it is often thought to be a sufficient refutation of the arguments of an advocate of capitalism to intimate the size of his bank balance or stockholdings.

Similarly, in reporting election results, the news media routinely explain voting patterns on the basis of the voters' wealth and income status. They take it for granted that only wealthy, upper-income voters will favor "conservative," i.e., pro-capitalist policies, and that poorer, lower-income voters will automatically favor "liberal," i.e., anti-capitalist policies.

Even the alleged friends of capitalism often share the conviction that private ownership of the means of production and capitalism serve only the capitalists: very often their notion of how to fight the spread of communism is first to create more capitalists. Only then, they believe, will there be a sufficient number of people with an interest in opposing communism.

The Benefit of Capital to the Buyers of Products

The first thing that must be realized is that in a division-of-labor society, all private property that is in the form of means of production—i.e.,  of capital—serves everyone, non-owners as well as owners. In a division-of-labor society, the means of production are not used in producing for their owners' personal consumption, but for the market. They are used in producing goods that are sold. The physical beneficiaries of this private property—and it is the far greater part of the capitalists' wealth—are all those who buy the products it helps to produce. In other words, it is the general buying public who are the physical beneficiaries of the capitalists' capital.

Consider, for example, the question of who are the physical beneficiaries of Toyota’s auto plants. That is, who physically receives the products of these plants? Is it the stockholders and bondholders of Toyota? Of course not. The number of Toyota's cars that is produced for the capitalists who own Toyota is relatively insignificant. Almost 100 percent of Toyoto’s auto output goes to people who do not own a single share of its stock or a single one of its bonds. The same is true of every other business enterprise.

Indeed, the proportion of Toyota’s auto output that is purchased by stockholders or bondholders of any enterprise—by  capitalists of any description—out of the proceeds of profit or interest income, is relatively small when compared with the proportion that is purchased by wage and salary earners. The far greater part of the automobiles purchased from Toyota and almost all other auto manufacturers is purchased by wage and salary earners. Wages and salaries, not profits and interest, are the source of the overwhelming bulk of consumption expenditure throughout a capitalist economy. It is wage and salary earners who consume the overwhelming majority of the automobiles, television sets, housing, furniture, food, and clothing, and almost every other consumers' good that is produced.

Thus, the overwhelmingly greater part of the physical benefit derived from the privately owned means of production in a capitalist economic system goes to non-owners of the means of production—to wage and salary earners.

imageIt cannot be stressed too strongly: the simple fact is that in a division-of-labor society, one does not have to own the means of production in order to get their benefit. One has only to be able to buy the products. In a division-of-labor society, one gets the benefit of means of production owned by others--every time one appears in the market as a customer. Indeed, it is of the very essence of a division-of-labor society that one obtains the benefit of others' means of production, just as one obtains the benefit of others' labor and knowledge, and that this occurs by means of the purchase of products in the market. It is only in a non-division-of-labor society, in which there is little or no production for the market, in which the producer and the consumer are almost always one and the same person, that privately owned means of production benefit only their owners, or virtually only their owners.

Implicitly, it is such a society that the enemies of capitalism have in mind. They have not yet woken up to the fact that capitalism is a division-of-labor society. They are unaware that in a division-of-labor society, the means of production serve everyone who buys products, and that thus, under capitalism, there is a general benefit from the capital owned by the capitalists—a benefit which everyone shares in his capacity as a buyer of products, even if he himself does not own any means of production or capital [and, it should hardly need saying, even if those capitalists were not born here].

This general benefit, it should be realized, applies to all of the means of production, not merely to those which are employed in the direct production of consumers' goods. The benefit of the steel mills that produce the steel that enters into Toyota’s cars goes to the buyers of the cars, along with the benefit of the auto plants, as does the benefit of the iron mines that contribute to the production of that steel, and the benefit of the factories that produce iron-mining equipment. The benefit of the land that grows wheat goes to the buyers of bread, as does the benefit of the tractors used in the growing of wheat, and the benefit of the factories which produce those tractors, along with the benefit of the flour mills that make the wheat into flour, and of the bakeries that finally turn out the bread....

It could be objected that if capital comes from overseas then all the production will go overseas as well. But the economic argument for selling overseas is the same wherever the capital comes from that is used to produce the products: it is to sell wherever the producer can receive the highest price.

The likes of Fonterra et all already sell most of their produce overseas because that’s where they get the highest prices: they sell milk overseas so we can import Toyotas. Any local production by foreign owners will bring similar benefits.

And if we do want to pay enough to bid our own produce away from foreign markets, then we can only do that by making ourselves rich enough to do that.

And we won’t do that by sticking a stop sign in the face of foreign capital.

* * * * *

The excerpt used above is taken from George Reisman’s book, Capitalism: A Treatise on Economics, pp 296-297. Copyright © 1996 by George Reisman. All rights reserved. Read more of Professor Reisman’s work at his blog and at The Jefferson School of Philosophy, Economics, and Psychology.