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Connecting the Dots on Financial Reform

Posted in economics, liberty, politics, USSA by dingodonkey on January 22, 2010

Let’s take just one paragraph from a recent speech by Pres. Obama, beginning with the line:

Banks will no longer be allowed to own, invest, or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit, unrelated to serving their customers.

Forget for a second about whether this is a good regulation or not, because what’s way more interesting is the way our president described it.  Read that again, with some emphasis added:

Banks will no longer be allowed to own, invest, or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit, unrelated to serving their customers.

Hoo-boy.  So the problem, in Pres. Obama’s eyes, is not that there is some grave systemic risk posed by banks running “hedge funds, private equity funds, or proprietary trading operations” (many reasonable arguments that this is true have been advanced), but rather that it is wrong for them to do so unless they are acting on behalf of their customers (i.e. “the people”) instead of for their own profit (i.e. “themselves”).  I know a word to describe this way of thinking:

Collectivism: Personal or social orientation that emphasizes the good of the group, community, or society over and above individual gain.

Don’t buy that interpretation?  Well, here’s the president’s very next line, seeming to confirm it:

If financial firms want to trade for profit, that’s something they’re free to do.  Indeed, doing so — responsibly — is a good thing for the markets and the economy.

Who decides whether they’re responsible with their money?  Doesn’t this ring of “well if you want to do [insert discouraged action here], you’re free to do so, but….”?

This president could not wait to force public bailouts on even those banks that didn’t want them (he voted for it), and then refuse to allow them to repay as soon as they could (in his capacity as president).  Why would he do that?  So he can justify direct government control of the financial sector with statements like what he said next:

But these firms should not be allowed to run these hedge funds and private equities funds while running a bank backed by the American people.

This is effective nationalization, and nothing less.


Mandatory Minimum Wage

Posted in economics by dingodonkey on September 7, 2009

I’m trying to improve my understanding of economics.  This post is a part of that effort, so feel free to present new ideas or evidence in the comments.  I’ll appreciate it.

I want to look at the standard arguments for and against a minimum wage.  They all center around the efficacy of a minimum wage in bringing about a higher standard of living for the working poor.  Here’s the typical pro-position: low wage-earners cannot make enough money in a month to even pay their rent, let alone live a decent lifestyle or provide for a families.  The work they do for their employers makes business success possible, and so the businesses raking in loads of cash have an obligation to share more of that profit with their workers.  The government enforcing this obligation has an added bonus of narrowing the gap between rich and poor.  Market forces that pay workers what their labor is actually worth are inadequate to ensure a just income.

If you believe those things, I doubt anybody will be able to talk you out of them.  In order to accept that view, you have to believe that coercive fiat, not a free marketplace, is the more reliably just authority for determining price and value.  You even have to go so far as to reject private property rights and accept an imposed order designed to cut down the rich and lift up the poor, and you have to believe that those are worthy goals unto themselves.  What you may not realize, is that many people against the minimum wage have the same value system but do not believe a minimum wage is effective in bringing about those effects.  In other words, the objection is solely a pragmatic one.

The standard arguments against a minimum wage are somewhat confused. In the olden days, it was argued that the increased burden on businesses forced them to lay off more or hire fewer workers to make up for the artificially increased wages, leading to an increase in unemploment — but it turns out that while that certainly does happen, it’s not on a very large scale.   This is the crux of the position advanced in an interesting (employee-centric rather than employer-centric, focusing on young workers) way by Jeffrey A. Tucker in Generation Sloth, posted on Mises Daily:

On July 24 this year, the government raised the minimum wage to $7.25, which is another way of saying that unemployment is mandatory for anyone who is otherwise willing to work for less. You have no freedom to negotiate or lower the price for your service. You are either already valuable at this rate or you are out of the game.

Here is how it works. I’ve never been good at shaping pizza dough by hand, throwing it up in the air the way those guys do, so it would certainly cost more for any pizza joint to hire me at that high rate than I could bring them in revenue. I would be a sure money loser. As a result, the government has made it effectively illegal for me to attempt this kind of work.

While much of the “increases unemployment” position is largely discredited outside political circles, Tucker makes a very important point that still holds up — younger workers are essentially forced out of the workforce.  Look at recent employment numbers to see the proof.  Of course, minimum wage advocates cite this as an advantage, since they believe it is unfair that young workers who don’t need jobs have them while older workers who do can’t get them.  My own response is that it is unfair for them to be able to decide upon and enforce fairness.

More recently, a new view has emerged that runs like this, from contrarian economist Steven E. Landsburg’s The Sin of Wages:

Ordinarily, when we decide to transfer income to some group or another—whether it be the working poor, the unemployed, the victims of a flood, or the stockholders of American Airlines—we pay for the transfer out of general tax revenue. That has two advantages: It spreads the burden across all taxpayers, and it makes politicians accountable for their actions. It’s easy to look up exactly how much the government gave American, and it’s easy to look up exactly which senators voted for it.

By contrast, the minimum wage places the entire burden on one small group: the employers of low-wage workers and, to some extent, their customers. Suppose you’re a small entrepreneur with, say, 10 full-time minimum-wage workers. Then a 50 cent increase in the minimum wage is going to cost you about $10,000 a year. That’s no different from a $10,000 tax increase. But the politicians who imposed the burden get to claim they never raised anybody’s taxes.

In other words, this view is arguing that raising the minimum wage is really equivalent to taxing a small group to redistribute that wealth to the wage “earners”.  The objection is that this tax burden should be spread across all of society, not concentrated on those who have chosen to employ (in fairness, they may not always be subsequently free to choose to lay off) the minimum wage earners.  If the goal is to redistribute wealth to unskilled laborers, then there are more efficient mechanisms for doing that.

Left out of all of this is whether or not that is a good and just goal.  It all comes down to this idea of equality, of economic justice.  When I oppose a minimum wage, it is for none of the reasons outlined above.  It is for a reason much more basic:

The fact that opportunities open to the poor in a competitive society are much more restricted than those open to the rich does not make it less true that in such a society the poor are much more free than a person commanding much greater material comfort in a different type of society. — F.A. Hayek

Political equality is conceded to all, and hence arises the erroneous notion of absolute equality. Because men are equally free, they claim to be absolutely equal. When this false and absurd doctrine becomes prevalent, there is sure to be trouble…When the finances become embarrassed, the idea of equality readily lends itself to a confiscation of private property as a method of relieving the mass of poverty. Confidence is destroyed; things grow worse, until perhaps some demagogue, popular either as a military hero or as a mob orator, gets himself proclaimed tyrant. — Francis W. Hirst

Mathematics in Economics

Posted in economics by dingodonkey on September 1, 2009

I’m a “pure” mathematician by training, meaning that the math I studied was incredibly abstract and totally divorced from application outside the realm of ideas.  My job is the other side of that coin, essentially applied mathematician in engineering and science applications.  So when it comes to thinking mathematically about various fields, I have pretty good perspective.

Murray Rothbard rejected, as Austrian economists tend to do, what he called Mathematical Economics:

The mathematical method, like so many other fallacies, has entered and dominated present-day economic thought because of the pervading epistemology of positivism. Positivism is essentially an interpretation of the methodology of physics ballooned into a general theory of knowledge for all fields.

The reasoning runs like this: Physics is the only really successful science. The “social sciences” are backward because they cannot measure, predict exactly, etc. Therefore, they must adopt the method of physics in order to become successful. And one of the keystones of physics, of course, is the use of mathematics.

The positivists tend to separate the world into the truths of physics on the one hand and “poetry” on the other; hence their use of mathematics and their scorn for verbal economics as being “literary.”

If we grant Rothbard his terminology, it’s pretty easy to see what he’s driving at.  Mathematics (and what he really means is the “applied mathematics” style of math) is misapplied in conventional economics, in an effort to bolster it up with greater scientific rigor.  He goes on to explain that the very feature of physics that makes mathematical descriptions so fitting breaks down in the comparison to economics — economics is governed axiomatically by human behavior, by motivation, whereas physics is not.

But I don’t grant Rothbard his terminology.  Like most physicists, he has mathematics all wrong.  So-called “verbal economics”, and Austrian economics in particular, seems to me far more mathematical than the “mathematical economics” of the physicists.  Beginning with a set of axioms, and rules for interpreting logically and for defining concepts, conclusions in Austrian economics are in fact logically proven, mathematical proofs in verbal form.  Just like most “pure” math is.

In economics, … we know the cause, for human action, unlike the movement of stones, is motivated. Therefore, we may build economics on the basis of axioms — such as the existence of human action and the logical implications of action — which are originally known as true.

From these axioms we can deduce step by step, therefore, laws which are also known as true. And this knowledge is absolute rather than relative precisely because the original axioms are already known.

This is the nature of mathematical proof, not of demonstrated correlation between mathematics and physical reality (as in physics).  Even his discussion of the use of calculus, with its reliance on the infinitesimal, demonstrates the point — the infinitesimal in physics is just a convenient tool for simplifying the consideration of massive discrete systems.  In reality, as in math, the infinitesimal only applies to ideas.

It’s no wonder that as a mathematician I am so strongly attracted to the Austrian school.  I find their axioms intuitive.  I find their arguments compelling.  I find their conclusions reasonable.  I find their distrust of shoddy math reassuring.  I find their impact on my wallet convincing.