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Source link: http://archive.mises.org/9164/professor-samuelson-on-income-and-tolerance/

Professor Samuelson on Income and Tolerance

December 30, 2008 by

Professor Samuelson has, in this case, misinterpreted an insufficiently small set of data to arrive at conclusions that square only with his own personal value judgments. He claims that his intellectual opponents (F.A. Hayek and Milton Friedman) give bad advice when they promote laissez-faire. FULL ARTICLE

{ 50 comments }

Michael A. Clem December 30, 2008 at 9:09 am

I admit to being baffled by how someone as intelligent as Samuelson can engage in the same silly errors and confusion as the economic layperson. Still, he’s unlikely to change his mind about it. Someone’s already suggested a book about Paul Krugman and his ideas-perhaps a better idea wouuld be a book that criticizes several modern mainstream economists and their ideas and theories, including Samuelson and not just Krugman in particular. It’s just possible that by engaging the mainstream in this way, and by pointing out the deficiencies in mainstream theory, people more open to different ideas on economics will discover and appreciate Austrian economics.

Matt R. December 30, 2008 at 9:10 am

And it was Sameulson’s textbook I used as an economics major! It’s time to learn from the Austrian School.

fundamentalist December 30, 2008 at 9:28 am

Samuelson: “If America turns protectionist, blame past Republican deregulating — a fine instance of the Law of the Unintended Consequences.”

Of course, he refuses to mention that a Democrat, Jimmy Carter, started the ball rolling on deregulation, and the another Democrat, Bill Clinton, furthered it, or that the very tiny sums of deregulation that has happened in the past 30 years followed a socialist takeover of the economy under Hoover and Roosevelt. Under “deregulation” the US went from a fully socialist economy (German style, not Soviet) to socialist light. Apparently, Samuelson has dementia which causes him to forget most of the past.

Of course, Samuelson was speaking to a European audience that craves regular fixes of anti-Americanism, especially if it comes from an American. All Samuelson said was that Americans should be more like Europeans. What Europeans refuse to see is how much we are like them and growing more so every day. The state does everything it can to destroy the manufacturing base of the country through high taxes, inflation and regulation. Europe hasn’t created a new job since 1950 and the US is desperately trying to imitate it.

What Samuelson knows, but conveniently forgets, is that economies can’t grow without capital accumulation by businesses and that state regulation, taxation and inflation destroy capital accumulation. And if economies don’t grow, then population growth causes unemployment. High levels of unemployment cause social unrest as people fight each other for the remaining jobs. That’s why Europe has slightly more social unrest than does the US. Unemployment is a for more serious evil than inequality.

J. Ortega December 30, 2008 at 9:42 am

I admit, that i used to think that the theory of the invisible hand was possible, but i don’t think it anymore.
If you let a bunch o people in an island, at the end of the day, there will be a leader that will make the rules.
For the Economy, it’s the same. You cannot hope there will be an invisible hand, that will keep everything properly working. You have to watch the market to avoid unfairness or you will soon have a Rockefeller (or a Wall Street) that will take advantage of the situation and build a monopoly.

Any market left out of control, leads to a monopolistic market. For example internet or software (the more similar markets we can call “liberal market”)

Inquisitor December 30, 2008 at 9:56 am

Any government left out of control, leads to a monopolistic market.* Yes. IP is a government privilege, FYI.

Samuelson is an idiot, and a shallow one at that, it seems.

Mike Sproul December 30, 2008 at 10:14 am

Check out the inside front cover of Samuelson’s Principles book from the early 1980′s. It shows soviet income on a clear path to overtaking US income–just before the Soviet Union collapsed.

Saku December 30, 2008 at 10:33 am

J. Ortega said: I admit, that i used to think that the theory of the invisible hand was possible, but i don’t think it anymore.

If you let a bunch o people in an island, at the end of the day, there will be a leader that will make the rules.

It’s a good thing then that we have a committee and congress to construct the english language we speak in, otherwise we’d all be without words.

Oh wait, there is no centralized authority at all.

And there doesn’t need to be one. It was the invisible hand, the thing that helped facilitate human exchange. People, left alone, will come to their own conclusions as to what is beneficial to them. They don’t need to be treated as children. This is the same in language as it is the same in commerce.

Also, if you put a bunch of people on the island, it is more likely they would work out law themselves, without a leader.

For the Economy, it’s the same. You cannot hope there will be an invisible hand, that will keep everything properly working. You have to watch the market to avoid unfairness or you will soon have a Rockefeller (or a Wall Street) that will take advantage of the situation and build a monopoly.

Any market left out of control, leads to a monopolistic market. For example internet or software (the more similar markets we can call “liberal market”)

People like Rockefeller can only take advantage of things if it is granted power from the government. In a market that is unrestricted and open to anybody freely entering in, there can be no monopoly.

The internet is a hugely decentralized system, where no one entity has complete control. That’s the point. Software is the same. Usually if there’s any problems in the process, it is, again, due to government controls. Patents are a good example of government controls that destroy market processes.

It’s important to keep in mind that the current market in the US is NOT FREE. It is a highly restricted mixed economy. There exists enough of a free market for some to rise up and prosper, but many magnitudes less than there would normally be. The market, and as a consequence the prosperity of the populous, is greatly hampered by government.

In fact, here is a quick (incomplete) list of the offices, agencies, government bureaus, government corporations, boards, policies and laws that distort the market in huge proportions:

Office of Tax Policy, Office of the Comptroller of the Currency, Internal Revenue Service (IRS), Community Development Investment Fund, Office of Thrift Supervision, Neighborhood Reinvestment Corporation, Office of Financial Institutions, Office of International Trade, Office of Banking and Securities, Office of Trade Finance, Office of International Monetary Policy, Office of Financial Stability, Import-Export Bank, Exchange Stabilization Fund, Working Group on Financial Markets, Plunge Protection Team, Federal Trade Commission (FTC), National Credit Union Administration (NCUA), Securities Investor Protection Corporation (SIPC), Federal Deposit Insurance Corporation (FDIC), Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), Federal Financial Institutions Examination Council (FFIEC), Federal Housing Finance Board (FHFB), United States Department of Housing and Urban Development (HUD), Office of Federal Housing Enterprise Oversight (OFHEO)

Federal Reserve Act of 1913, Revenue Act of 1913, Securities Act of 1933, Securities Exchange Act of 1934, Banking Act of 1935, Trust Indenture Act of 1939, Investment Company Act of 1940, Investment Advisors Act of 1940, Employment Act of 1946, Federal Reserve-Treasury Department Accord of 1951, Bank Holding Company Act of 1956, 1970, Commodity Exchange Act of 1970, Securities Investor Protection Act of 1970, Housing and Community Development Act of 1974, Home Mortgage Disclosure Act of 1975, Federal Reserve Reform Act of 1977, Financial Institutions Regulatory and Interest Rate Control Act of 1978, International Banking Act of 1978, Full Employment and Balanced Growth Act of 1978, Monetary Control Act of 1980, Garn-St. Germain Depository Institutions Act of 1982, Plaza Accord of 1985, Lourve Accord of 1987, Fair Housing Amendments Act of 1988, Financial Institutions Reform, Recovery and Enforcement Act of 1989, Federal Deposit Insurance Corporation Improvement Act of 1991, Federal Housing Enterprises Financial Safety and Soundness Act of 1992, National Securities Markets Improvement Act of 1996, Gramm Leach Bliley Act of 1999, Regulation Fair Disclosure Rule of 2000, Uniform Securities Act of 1956, 1985, 1988 and 2002, Sarbanes Oxley Act of 2002, Regulation National Market System Rule of 2005, Community Re-Investment Act of 1994

And the main cultprit, responsible for every boom in and bust in the US since 1913: The Federal Reserve System

This is not counting federal labor and environmental legislation which also reduce competition and distort the market. Keep in mind, there are also state, county and local laws and agencies on top of this.

A large portion of this is in place to keep markets closed to competitors. Certain business interests don’t want to compete, want a restricted market and then successfully lobby the government to kill competition.

You don’t need any of these. The only laws that are necessary are ones that protect against fraud.

J. Ortega December 30, 2008 at 10:46 am

For Saku:
Interesting debate. What about google or microsoft?
Any big company is always trying to put barriers to avoid the others to enter its kingdom. I would do the same and there is no invisible hand that can avoid that.

About the idea of “liberalism”, even Adam Smith wanted to put rules to protect competition and avoid monopolies.

What is the difference between Anarchy and your Liberalism?

Kind regards

eric lansing December 30, 2008 at 10:49 am

I frigging love when Sproul’s here.

Michael A. Clem December 30, 2008 at 11:07 am

Any big company is always trying to put barriers to avoid the others to enter its kingdom. I would do the same and there is no invisible hand that can avoid that.
Ah, but there is a big difference between what someone wants to do and what they are actually able to do. Government regulation and enforcement is the easiest way for corporations to put up barriers to competition, because politicians and bureaucrats are influenced by comparatively small amounts of money and rhetoric that shows they are doing their jobs, even if it’s wrong. With a very restricted government, or better yet without government, the corporations would have to do the dirty work themselves, which would be expensive, difficult, time-consuming, and ultimately futile, eating at their bottom line because they couldn’t socialize the costs onto taxpayers.
For a historical example, look at Standard Oil and John D. Rockefeller from about 1858 till 1890. Yes, Standard had gained most of the business through improved productivity, but were unable to forcibly restrict their competition. They tried buying up their competitors, but as long as there were opportunities for high profits, more competitors would pop up out of the woodwork. Standard was unable to actually achieve a monopoly, in spite of their high market share, much less maintain it.

Michael A. Clem December 30, 2008 at 11:08 am

Any big company is always trying to put barriers to avoid the others to enter its kingdom. I would do the same and there is no invisible hand that can avoid that.
Ah, but there is a big difference between what someone wants to do and what they are actually able to do. Government regulation and enforcement is the easiest way for corporations to put up barriers to competition, because politicians and bureaucrats are influenced by comparatively small amounts of money and rhetoric that shows they are doing their jobs, even if it’s wrong. With a very restricted government, or better yet without government, the corporations would have to do the dirty work themselves, which would be expensive, difficult, time-consuming, and ultimately futile, eating at their bottom line because they couldn’t socialize the costs onto taxpayers.
For a historical example, look at Standard Oil and John D. Rockefeller from about 1858 till 1890. Yes, Standard had gained most of the business through improved productivity, but were unable to forcibly restrict their competition. They tried buying up their competitors, but as long as there were opportunities for high profits, more competitors would pop up out of the woodwork. Standard was unable to actually achieve a monopoly, in spite of their high market share, much less maintain it.

DD December 30, 2008 at 11:22 am

J. Ortega ,

“The invisible hand works” when violence is prohibited. In a system that protects private property and individual rights, it is only the “invisible hand” that will prevail. you are assuming a chaotic scenerio, where aggressors are free to use physical force. If Government was to do it’s proper and only legitimate task of protecting our rights, instead of violating them, then the “invisible hand” of a system based on voluntary exchange (free market) would always work.

Saku December 30, 2008 at 11:28 am

Interesting debate. What about google or microsoft?

See what I said about patents. What are patents but government granted monopolies?

For the case against intellectual property see Stephan Kinsella, on this site.

Or go here for Michele Boldrin’s and David Levine’s writings on the subject: http://www.dklevine.com/general/intellectual/againstfinal.htm

Any big company is always trying to put barriers to avoid the others to enter its kingdom. I would do the same and there is no invisible hand that can avoid that.

The way to avoid it is a less restrictive market without government intervention based on classical liberalism. Governments that have no control over market processes (including money) and are only there to act as enforcers of contracts to protect against fraud.

Or, if you read some of what is on this site, a anarcho-capitalistic society with no state or federal government at all. But to really understand the basics of that takes some reading. (A lot of reading actually.)

About the idea of “liberalism”, even Adam Smith wanted to put rules to protect competition and avoid monopolies.

He has some good things to say, but in this case, Adam Smith was wrong. Unfortunately, many people wrongly cite him to be the end all be all of economics.

Michael A. Clem December 30, 2008 at 11:31 am

Sorry for double post – I got a submission error the first time and thought it didn’t go through.

Eric December 30, 2008 at 12:08 pm

The high pay of CEO’s is because they produce results. The question is HOW do they do this today?

What has changed to cause the higher salaries for CEO’s? I maintain it’s the ability to get benefits for their companies from government. Since this often requires great skill, there are fewer CEO’s that can hit the home run ball and so command the greater salaries.

One can laboriously build up a company, the old fashioned way, by selling things people want, or one can use the force of government to protect your markets and harm your competition.

As in most cases, it’s simply supply and demand. Like a gifted baseball player, only a few can hit home runs consistently, and they get paid the most.

In our not-so-free market, only a few CEO’s are well enough connected to the politicians to get the regulations written to their benefit over their competition. The average CEO simply works hard to earn his company an honest buck. But like in baseball, if you can cheat, and not get caught, you can make the big bucks.

Using force is the quick way to make a buck. And as long as you don’t get caught, crime pays. Crime that’s made into law pays the best.

This likely explains the large increase in the ratio of salaries of CEO’s to the workforce. After all, if you can sell cars at a loss of $4,000 each, and still stay in business through a few connections, then you’re worth a big salary.

Brent Railey December 30, 2008 at 2:56 pm

One of the things that I love most about Austrian economics is its epistemology; that its epistemology is not empirical in nature and thus not self-refuting. It understands that all reasoning begins with a set of presuppositions and logically deduces conclusions from them, and as long as the assumptions are correct, the conclusions will also be correct—provided the laws of logic were properly used.

What is so interesting about “empirical science” is the lack of epistemological understanding of its adherents. Empiricism cannot prove a single thing to be absolutely true, and its method is a clear example of the fallacy of affirming the consequent. Even worse, empirical scientists don’t even realize that their methods have no power whatsoever in value judgments. That is what bothers me about modern “scientists”, they use the prestige of science to influence morality, when in science is amoral. The term “intolerable inequality” is a perfect example of such abuse. What is meant by the terms inequality and intolerable? What empirical evidence exists to say inequality is intolerable? Empirical science will never be able to answer that question; and the sad thing is these scientists abuse their position to influence value judgment all the time and the media parrots them.

Austroglide December 30, 2008 at 3:13 pm

Excellent article. Such a sad state of affairs that a theorist of the stature of Mr. Samuelson can posit such arguments and be held to no general account for the fallacies contained therein. There seems to be so much confusion and lack of understanding of cause and effect in economics.

Per Mr. Railey’s point, this stems in my opinion from a better understanding of epistemology and thus what does and does not constitute “scientific understanding”.

Austroglide December 30, 2008 at 3:27 pm

Correction: I meant to attribute the widespread confusion in economics as to causes and effects to LACK OF a better understanding of epistemology.

joebhed December 30, 2008 at 3:45 pm

ignorant central government planner here -

I know it’s just me, but I don’t really see any point to the criticism that is being offered, admittedly without having read Prof. Samuelson’s article, though I have read a couple of his books.

Mac: Samuelson cannot be correct because his analysis is not based on a condition of laissez-faire.

Given that no such thing as a perfect absence of economic regulation has ever existed, it appears unworkable to ascribe any value to any observations on the effects of deregulation on income distribution and society.

So, what’s the point?

Mac admits that there is no accepted proof that economic deregulation does or does not lead to income inequality. So, there is no proof in existence that Samuelson’s observations are just plain wrong.

Prof. Samuelson is weighing in on a recent decade of economic history with perhaps insufficient data to support his conclusion, which the writer claims support Samuelson’s own theory of economic justice.

ummmm, what do the Mises people do in this regard? Do they not regularly on this site use recent economic trends to justify their school of economic thought?

And then the little retort that Sarbanes is good for accountants, (or the tax acts are good for lawyers) seems just childish.

I don’t think the point is that the people CANNOT accept, or tolerate, greater income inequality under financial deregulation, so much as that people shouldn’t have to, and would not, if they had the choice.

We live in an imperfect world.
We debate the consequences of our actions, both before and after they are taken.

There is no doubt that the past years of financial deregulation have resulted in greater income disparity – the rich are getting richer and the poor are getting poorer.

Let those who think this is a good thing say why so.
I promise not to comment that there is insufficient data because we never had perfect regulation, or that the comments are only based on preconceived notions about regulation.

DW MacKenzie December 30, 2008 at 4:08 pm

“I admit, that i used to think that the theory of the invisible hand was possible, but i don’t think it anymore … You cannot hope there will be an invisible hand, that will keep everything properly working. You have to watch the market to avoid unfairness”

Who is to do this watching and who defines what and and is not “fair”? What forces regulate those who regulate? I find the idea that government either self regulates or can be regulated far less plausible than the idea that markets can self regulate. Am I wrong? Please explain why, if you can.

DWM PhD

newson December 30, 2008 at 6:31 pm

to eric/joebhed:
i do not believe that ceo productivity alone is responsible for the ballooning executive salaries. just look how the remuneration packages are structured: base salary is typically modest, the huge windfalls have been in option and other equity-payoffs. the massive equity boom driven by the fed’s inflation has privileged asset traders (ie ceo’s) over mere wage-earners.

so i wouldn’t praise ceo’s for their productivity, nor would i condemn them for arranging their affairs to maximize benefits (via share buy-backs etc). they take advantage of the monetary disorder, but they do not originate it.

Bill Anderson December 30, 2008 at 6:48 pm

I am curious as to Prof. Samuelson’s income, and if he considers his higher-than-average income to be “intolerable.”

Eric December 30, 2008 at 7:14 pm

Good point Bill.

Sorta like how Al gore uses more electricity than dozens of average families.

What the collectivists preach never applies to themselves.

joebhed December 30, 2008 at 7:26 pm

Doctor Mac,

Isn’t this just about our opinions of government?
The more or less plausibility of the statement is what is in question.
This is not something that can be proven nor disproven.
The answer is, obviously, it depends.
I suggest we stick with this point for discussion.

You cannot be wrong in believing that the free market can self-regulate.
You have the added advantage of there never having been a free market.
At least not in our lifetimes.
And, for most of us, that is all we know and care about.
That, and the future.

That raises the question of whether government can be regulated, by itself, or by its people.
Of course it can.
We are free, sovereign people with a democratic control of our government.
Under ideal circumstances, it is at least theoretically possible for the people to be in control of their government.
That’s all the regulation I need.
The rest is self-governance.

Neither can that opinion be proved wrong.
So, under ideal circumstances, which we have never seen, free markets can self-regulate.
At the same time, under ideal circumstances, those being that the people are actually in control of their government, which we have also never seen, government is capable of self regulation through the will of its free, sovereign people.

So, under all ideal circumstances, why would free markets self regulate, and why is free market self-regulation more plausible than democratic government self-regulation?

as usual, cgph.

Bennet Cecil December 30, 2008 at 7:36 pm

Does professor Samuelson think George Bush believes in libertarianism? Bush has increased the size and scope of government immeasurably. Obama will do the same. Both believe more government makes more prosperity. Bush used and Obama will use the power of the presidency to enrich their constituencies. The federal government will grow at the expense of the private citizen. Professor Samuelson has his head in the clouds when he speaks of a limited centrist state. Our constitution was supposed to give us a limited state. Democrats and Republicans have trashed the constitution and made the federal government omnipotent. Left and right are both the same. Neither want balanced budgets or limited government power.

There is no force that will stop the growth of government spending. It will continue until there is total economic collapse. When the government takes more than half of the wealth generated by productive private citizens, why will citizens increase productivity? I am not speaking about the few hundred billionaires heading large corporations. Many of them can be easily replaced without making much difference. I am referring to the innovators and entrepreneurs who are the foundation of American prosperity. The American people, left, right and center, are headed for a long period of self imposed economic decline.

DW MacKenzie December 31, 2008 at 6:39 am

“Isn’t this just about our opinions of government?
The more or less plausibility of the statement is what is in question. This is not something that can be proven nor disproven”

Economics tells us much about the relative merits of private and public sector institutions. On the theory side there is little reason to expect government to outperform the market in matters of commerce. It is easy to show that markets fall short of perfection (i.e. imperfect competition, imperfect information), but public institutions have far more serious problems (i.e. collective action failures, political ignorance, undifined collective preferences).

On the history/data side there are good examples of private and public sector institutions to compare and contrast. Contrary to what CGPH wrote there is enough variation between different nations and different time periods to look for clues from data. See economic freedom indexes

Michael A. Clem December 31, 2008 at 8:02 am

joebhed, everyone’s entitled to their opinions, including Dr. Samuelson, IF he states that he is making an opinion, and not a fact of economic science. Instead he’s claiming as an economist that something is wrong without sufficient proof. At best, he’s being misleading. He either needs to label his opinions as opinions, or he needs to make a better case for his argument.

joebhed December 31, 2008 at 9:26 am

Michael-
This was not an economics textbook nor a classroom lecture.
This was an opinion piece in Der Spiegel.
Several other financial/economics experts also expressed their opinions.
Economist may, and do, have opinions.
There is always room for making a better case for his argument.

DWM –
“contrary to what cgph wrote….”
Actually, what I wrote, is what you wrote.
There are endless volumes of time and locationally differentiated facts and data available, but, as you said, there is no proof of any general conclusion.
Thus, there is only opinion.

I repeat my question:
Why would free markets self-regulate (corollary – why haven’t they?), and why isn’t government capable of being well-governed?

In particular, as to your earlier comment, why is the latter “far less plausible” than the former?
I have never said, and I have never thought, there was any “reason to expect government to outperform the market in matters of commerce.”

But, in truth, the performance of the imperfectly free markets we have now leave me with little confidence that even greater market freedoms during the period of Prof. Samuelson’s observations would have resulted in a better outcome than we now observe.

Michael A. Clem December 31, 2008 at 9:34 am

This was an opinion piece in Der Spiegel.

You’re quite right. My apologies.

Saku December 31, 2008 at 10:47 am

Why would free markets self-regulate (corollary – why haven’t they?), and why isn’t government capable of being well-governed?”

The answer is, they have self-regulated. Look at economic history. In the past, there have been single industries that have been without government regulation and their markets worked very well. Any time problems have arisen, it is, an overwhelming majority of the time, due to government intervention.

So why have they? Because it is in their best interest to do so. The competition and profit motive are very powerful and keep individuals and firms in check. Also, if you are a firm routinely engaged in fraud or theft, in addition to the legal troubles, soon no one will work with you and you will be without income.

The less restricted the market, the more participants and therefore more competition. The more competition, the better the service/product between single providers, as it is in each firm/individual’s best interest to provide value or otherwise lose income to other competitors. This is what keeps markets in check.

Why isn’t government capable of being well-governed?

Because the very nature of it is based on coercion. Most in politicians know this. That’s why they became politicians in the first place. Sure, there might be a few genuine believers here and there, but for the most part, the majority are there to enrich themselves at the expense of others.

Calling the current situation the fault of capitalism and unregulated markets is akin to George Bush getting on an aircraft carrier and proclaiming “Mission Accomplished.” It is a statement that is either a total lie or delusionally misinformed.

Even if you agreed with everyone here that the markets were, in fact, severely restricted, that does not mean that unrestricted markets would perform the same at all.

Let’s do a thought experiment.

Consider the english language. It has been hammered out over centuries. There are many accents, dialects, local vocabularies and strains, but generally, they are understood by all who speak it. This is an example of free exchange. People, of their own free will, engaging in converse. Over the many years of that process, what we call english has been created.

Say there was a government agency that regulated how people spoke english. There was a mandate that only 10 words could be spoken per sentence, that there was to be a standard vocal pitch to be used by all, that certain word combinations were illegal and the rate of speed people spoke was slower by half. Say this agency, also decided that 30% of the existing vocabulary was inefficient and decreed those words were now against the law.

Would the subsequent english, which would be horrible, stunted and hard to use, be an example of why english is terrible and needs more regulation?

I realize my thought experiment is a bit dramatic but I think it illustrates my point.

How do we know what would happen in an unregulated market? We know based on logical common sense and the historical precedents I mentioned previously.

fundamentalist December 31, 2008 at 11:21 am

Joebhed: “Why would free markets self-regulate (corollary – why haven’t they?)…”

As Adam Smith wrote, the baker and cobbler don’t produce bread and shoes out of the goodness of their hearts and love for mankind. They do it because it’s in their best interest to do so if they want to make a living for their families. The free market punishes greed, laziness, fraud and many other societal evils. Sustainable develop takes place when all lending comes from savings. Savings acts as the regulator of how quickly the economy grows. It quits working that way when the state steps in to enforce its own sense of morality. Booms and busts happen when the state tries to speed up economic growth by artificially increasing the money supply above the amount supplied by savings.

Joebhed: “…and why isn’t government capable of being well-governed?”

You would have to read public choice literature to get the full answer, but in brief the state in not capable of being well-governed because of the mismatch between goals and incentives. The incentives in politics are the opposite of those in the market. The market pays people to supply good service and quality goods at a reasonable price and it pays well. Politics doesn’t pay politicians for doing well; they get their regular salary and that’s it. But being a corrupt politician pays extremely well. That’s why the major campaign contributors determine policy.

DW MacKenzie December 31, 2008 at 12:09 pm

“Actually, what I wrote, is what you wrote”

Actually, I quoted you, and then disagreed. Available theory and evidence indicate that marekts outperform government. This is not mere opinion, but the product of carefully reasoned theoretical and empirical study.

“the performance of the imperfectly free markets we have now leave me with little confidence…”

We do not have free markets, and the Federal Government has its fingerprints all over this crisis. The case for government failure is therefore stronger than ever. The massive failures of the Federal Reserve and other authorities leading into and during this crisis go further to prove the incapability of government regulation in improving economic conditions.

Walt D. December 31, 2008 at 12:10 pm

I agree with Eric. Take the cases of Bear Stearns and Lehman, both bankrupt. In the first case CEO James Cayne decided that the best course of action was to kiss Hank Paulsen’s ass. Bear was sold to JP and he walked away with $50 million, and the shareholders got about $4 a share. John Fuld was not prepared to Kow Tow and as a result Lehman was allowed to fail, and the shareholders got nothing.
I think Newson has it spot on. Also, do not forget that it was Bill Clinton who decided that it was a good idea to link CEO pay to performance. This led to formulaic compensation packages linked to stock prices. Also, the multi-million dollar bonuses paid to traders are also a “percentage of the action”. The big criticism of these pay outs is that they are “free options”. They give a huge payout when things go well and nothing when things go bad. However, they are usually structured so that the payouts on a five year deal are paid out year by year, so that there is always a huge up-front payout in the early years. This payout does not get returned when the deals go sour in later years.

joebhed December 31, 2008 at 5:09 pm

DWM.
Last post.
Ok. Ok. Ok.
Markets outperform government in commerce.
I still don’t see the significance of this statement.
In order to “outperform”, there must be competition in performance.
So, I just don’t get the significance of this point.
I thought we were discussing the preponderance of the evidence that it was far less plausible that governments can be regulated(managed) as opposed to free markets self-regulating.
And, I repeat, I never said government outperforms markets – in commerce.
So, we’re going somewhat in circles.
And I’ll get off here.

You say the government has its fingers all over this crisis.
Ummm, yeah, in so far as it failed to prevent the crisis by first placing the free-market capitalists in charge of the nation’s money supply(FED), and then by failing to regulate the operation of the money system to meet the needs of the country and its people.
So, I am a big believer in the failures of government, and would maybe put it differently in that the government failure was to not have its fingerprints all over this crisis.
I noticed, but haven’t fully read, a recent Misesblog posting clarifying Greenspan’s idiotic deregulated free-market philosophy being responsible for the crisis.
For some reason, Austros conflagrate the private banking cartel known as the FED as being the federal government, but it is not.
That is not just my opinion.
That is the finding of every court case in which the FED’s independence has been an issue.
And it is today, (Bloomberg v. FED) in that the FED says it does not need to provide information on its brokeback loans to everybody in the world because it is not subject to the USFOIA as it is not part of the government.
So, the notion that the FED’s failures reflect on the GOVUS is not something that gets any traction, to my way of thinking.

Ever upward.

Stephen Grossman December 31, 2008 at 5:24 pm

Samuelson doesn’t like inequality. This makes him a Marxist ideologist, not a scientist. Science begins in observation of the concrete,material universe and logically induces from there to a rationally systematic understanding. Science does not begin in arbitrary ideals. See Aristotle and Rand, not Plato, Kant and Popper.

mitcjm December 31, 2008 at 7:45 pm

joebhed,

Could the FED do what it did without government backing? It’s only a cartel because the government gave it such powers. Therefore, it is essentially a government entity.

DW MacKenzie January 1, 2009 at 6:07 am

JOEHEB

The Federal Reserve Bank was created by an act of congress in 1913. It has legal-Federal granted monopoly on creating new bank reserves of dollars. You will not find shares of FRB stock on any exchange, so its stock price is undefined. Actual control of monetary policy lies with the Federal Reserve Chairman and the Federal Reserve Board, and these persons are presidential appointees. Member banks cannot select or remove these persosns, so control over total bank reserves is a matter of government policy set by government appointees.

The Fed is organized to look like a corporation, but it is not a private agency, especially where monetary policy is concerned. As for Greenspan being a free marketeer, he set price controls in credit markets (i.e. interest rates) as Fed Chairman. This is what financed the subprime boom. This talk of free markets and deregulation in recent years simply is not true. Only the Congress and President can repeal federal regulations, and Bush signed a grand total of zero acts of deregulation in to law.

Greenspan lacked authority to pass deregulation. Grenspan did control certain short run interest rates. He also influenced long term rates. This is not what I call a free market. This is government regulation, and it has failed.

DWM PhD

joebhed January 1, 2009 at 9:53 pm

It was going to be my last post, but now we are on the FED. Sorry.

“You will not find shares of FRB stock on any exchange, so its stock price is undefined.”

Please. More private corporations exist that are not traded on any exchange than are traded on ALL exchanges. Its stock price is irrelevant, even to its membership.
For some reason, you didn’t say that the FED was not a private corporation of private corporations.
It is a self-serving, private, money-creating cartel answerable to no one but itself.
As I said, and which you ignored, in every legal case it has been established that the Federal Reserve Banking System is a private system and is not part of the government.
Those “quasi” government qualities are the things that make people think that it is part of the government, but it is not.
Yes, it was created by the government, an act that proves that the powers that were conveyed to the private banking cartel resided with the government and the sovereign people of this country.
The FED is not part of the government. When it comes to the money power, the FED has usurped the government.
“control over total bank reserves is a matter of government policy set by government appointees.”
In fact, control of total bank reserves is a matter of a select group of private bankers who, under the Act, are given the broadest task of managing price stability and full employment in the American economy.
Of course this same group of private bankers are the folks that nominate people to be appointed to the positions on their Board. The terms of appointed Board Members exceed any Congressional, Senatorial or Presidential terms.
Your choice, Senator: Larry, Curly or Mo.
All Federal Reserve Bank employees are not federal employees.
The private Federal Reserve Banking corporations are NOT part of the federal government.
I know it’s convenient, though incorrect, to equate the FED with the government simply because the FED bankers issue what are referred to as US dollars. But which, upon closer inspection, are Federal Reserve Notes.
“Greenspan lacked authority to pass deregulation.”
Please, have a little respect. We understand the role of the FED Chair well enough. As I said, being in charge of the overall economy means it is your job to recommend the proper policy to accomplish the very broad objectives under the Act.
To not have the correct policies is the definition of Greenspan’s failure.
Greenspan advocated greater freedom and innovation, which came about through the actions of Clinton and Gramm to “deregulate” the separations of businesses by banks and the maintenance of a sustainable capital structure within the financial services industry.
That was only one aspect of the deregulation of financial services, i.e. a freeing of the capital markets. Am I correct that you expect people to believe that GREATER deregulation of all financial services is what is going to restore confidence in the economy and our political processes.
I’m sorry, but to me, this is where the faith in the invisible hand goes blind.
“This talk of free markets and deregulation in recent years is not true”.
Dear Dr. D.: Trading in energy futures, at the CFTC, or the trading in financial exotica mostly under the SIV rubric, in the financial/credit markets, and many other future-derived examples, represent not only the deregulation of the financial services industry, but also a move to self-regulation of that industry.
If it gets any freer than self-regulation with other people’s money, give me a call.
The Federal Reserve Banking System is a private banking cartel, established through immense political pressure brought about by the banking interests in this country. I thought this was something that libertarians agreed with.

DW MacKenzie January 2, 2009 at 7:49 am

1. The Federal reserve Board effectively controls open market operations, and this board consists of presidential appointees. Ben Bernanke is the key figure in determining changes in bank reserves through open market operations. This is a well established fact that proves my point that Federal reserve policy is removed from the market test. The powers that be (mainly Bernanke) at the Fed cannot be installed or removed by the alleged private owners of the Fed. So bank reserves are determined by political appointees- 7 out of 12 members of the Federal Open Market Committee, including the chair and vice chair. If you do not understand these simple facts, then you should give up trying to understand these issues.

2. To say simply that judges have ruled that the Fed is private is argument by authority, which is a classic fallacy. I am not going to accept this proposition uncritically. Judges are fallable and seldom understand economics. How do they justify this claim that the Fed is private? Where is their proof? The fact remains that Bernanke and his Board cannot be removed by member banks, and there is no possibility of a takeover through the market.

3. There is no clear reason to expect the Gramm-Clinton deregulation to create a housing bubble. Some on the left have actually pointed to the Carter-Reagan deregulation as the source of these problems! You are mired in the Post Hoc Fallacy, plain and simple. Explain a causal connection or give up.

4. There are very clear reasons to expect the agrressive enforcement of the Commnity Reinvestment Act by Andrew Cuomo and his successors to create bias towards an unsustainable housing boom. You would be correct that I see greater deregulation, specifically an end to the CRA, as key to restoring financial stability. Both Clinton and Bush promoted an ‘ownership society’ whereby banks were pressured to extend mortages to persons who were bad risks. I suppose you could argue that banks would have given out risky mortages anyway, because they love risk and abhor profits. You could also blame this on trilaterlalists in black helicopters or on space aliens.

Michael A. Clem January 2, 2009 at 8:41 am

We’ve been over this before, but you just don’t want to admit it. The Fed is “private” organization, all right, but one that has been granted a government-enforced monopoly that would not and could not exist in a free market. My local electric and gas companies have similar monopolies, but on a smaller scale. I agree that my electric company is not a government entity, but due to the monopoly privilege, it is still a government-protected entity, just as the Fed is.
Yes, they could pass another law and end the monopoly, or more likely, simply give that monopoly back to the U.S. Treasury, but the problem, as we’ve pointed out before, is not that the power is in private hands, but that the power is a monopoly power. If the Treasury were exercising that power, there’s no reason to believe they would do better than the Fed, and if anything, the Treasury would be more susceptible to the desires of the political administration, not less so. Then the business cycle would most likely be timed to the election cycle, as presidents jockey to “fix the economy” in time for re-election and pass off the bust to the next president.
As for the “deregulation”, any such deregulation was a series of government actions, with government backing and support if things go wrong, not the result of a free market. In a free market, freedom and responsibility go hand-in-hand. A business that makes bad business decisions suffers losses and has to decide to revise their business policies or risk going out of business. A business that can socialize their losses onto taxpayers or other entities obviously has to worry less about profitability and more about currying political favor.

newson January 2, 2009 at 8:57 am

a very funny “private” company indeed, one that devolves all net earnings to treasury; where all board members are appointed by the president and confirmed by the senate.

if something quacks like a duck, walks like a duck, and swims like a duck, chances are it is a duck.

J Cortez January 2, 2009 at 9:40 am

Michael A. Clem: The Fed is not private. It is public.

DW MacKenzie and newson gave examples as to why this is true.

Just consider it another government bureau that is secretive and rarely answers for its mistakes (think SEC, IRS, DOD, DEA, ATF, CIA, etc.)

DW MacKenzie January 2, 2009 at 10:16 am

“Then the business cycle would most likely be timed to the election cycle, as presidents jockey to “fix the economy” in time for re-election and pass off the bust to the next president”

Alberto Alesina (Harvard U) published a book demostrating that the business cycle does follow the election cycle. Why? Because monetary policy is determined by presidential appointees.

This is why I often find it hard to take the left seriously. You guys keep insisting that the Fed is private despite evidence to the contrary, and desptite your own inability to provide valid evidence of your own.

Bernake and his board are Presidential appointees. They control the monetary base and strongly influence total bank reserves. These are objective facts, and should not be debated. You are in denial of reality.

joebhed January 2, 2009 at 2:04 pm

To Dr. D.
Let’s be realistic.
Neither of us can prove the negative. Let’s keep that in mind.

No.1
The appointments again.
To paraphrase baron Rothchild: ‘Allow me to create and control the nation’s money, and I care not who makes the laws governing appointments.’
All of the members of the Board and FOMC are private bankers, plain and simple, who have moved up through the ranks.
We agree on who sets bank reserves policies, those noble appointees.
But I thought we also agreed that the whole fractional RESERVE system was fallacious, inherently inflationary and should be outlawed.

No. 2
Ummm – the classic fallacy of argument by authority? it is because it is.
PULEEZ.
We are talking about whether the FED is part of the government, which is a legal authority question. In several final legal decisions, the findings of the courts, interestingly enough, is that the government does not exercise legal control of the federal reserve banks. For instance:
“Other factors courts have considered include whether the entity is an independent corporation…, whether the government is involved in the entity’s finances…. and whether the mission of the entity furthers the policy of the United States… Examining the organization and function of the Federal Reserve Banks, and applying the relevant factors, we conclude that the Reserve Banks are not federal instrumentalities for purposes of the FTCA, but are independent, privately owned and locally controlled corporations.” (Lewis v. US)

Also:
“It is evident from the legislative history of the Federal Reserve Act that Congress did not intend to give the federal government direction over the daily operation of the Reserve Banks..”
“.. the Federal Reserve Banks, though heavily regulated, are locally controlled by their member banks. Unlike typical federal agencies, each bank is empowered to hire and fire employees at will. Bank employees do not participate in the Civil Service Retirement System. They are covered by worker’s compensation insurance, purchased by the Bank, rather than the Federal Employees Compensation Act. Employees traveling on Bank business are not subject to federal travel regulations and do not receive government employee discounts on lodging and services.”
“The Banks are listed neither as “wholly owned” government corporations under 31 U.S.C. § 846 nor as “mixed ownership” corporations under 31 U.S.C. § 856, … For these reasons we hold that the Reserve Banks are not federal agencies for purposes of the Federal Tort Claims Act and we affirm the judgment of the district court.”
Please excuse me for relying on legal authority to determine a legal question.

No.3
Gramm-Clinton deregulation and the financial services bust.
I never mentioned the housing bubble – it’s just another sympton.
The failure was the establishment of the ‘B’ in MBS.
That ‘backing” was exactly the financial innovation that Greenspan blessed as the basis for our newfound prosperity. The mixture of real mortgages with junk bonds. The creativity of deregulated financial services. Again, I thought we agreed on that crap.

No.4
I am ultimately disappointed that your discussion resorts to hang the financial crisis on the CRA, that ludicrous charge being refuted by another Mises blogger as we speak. I think you know perfectly well that the reason bankers lent funds for these risky mortgages was because everyone else in the deregulated financial services industry was doing it, and no CEO was going to miss out on getting the ‘points’ and the fees for rolling this fiasco a little further down the road. Jeezum crow.

joebhed January 2, 2009 at 2:31 pm

Michael –
Para 1
Let’s see. You agree, at least, that the FED is a private banking cartel – not part of the government, but operating as a financial monopoly with the power to indebt the American people by creating all money as a debt, repayable with interest, which it does not create.
To me, THAT is the problem.
If you do not refer to your monopolistic investor-owned electric utility as the government, why do so with the FED?
I think we agree that we want to end that monopolistic power – abolish the FED.

Para 2
After agreeing we could turn over monetary policy to the Treasury, for some reason there is no consideration given to the fact that, and I thought we agreed on this, the Treasury would be operating strictly as a money-issue agency, and not under a fractional-reserve bank lending system. As Friedman opined, properly operating under a strict quantity-theory based issue system, we could remove the ability of the government to have either congressional or presidential influenced money expansion policies, and their boom-bust cycles.

Para 3
I don’t disagree. I never said the banking or financial services industry was a free-market. It is all regulated to provide protections for consumers of those services. As it is in the rest of the world. As long as it is legal for people to collectively organize their political power, I am convinced that if there were zero regulation in financial services, there would soon be a call for, and there would soon be, a resort to financial regulation.
We both have the advantage that there has never been a free market here, but that’s my opinion.

Respectfully.

Michael A. Clem January 2, 2009 at 2:51 pm

…the Treasury would be operating strictly as a money-issue agency, and not under a fractional-reserve bank lending system. As Friedman opined, properly operating under a strict quantity-theory based issue system, we could remove the ability of the government to have either congressional or presidential influenced money expansion policies, and their boom-bust cycles.
I fail to see why the Treasury would operate on such a strict system, or how they could be held accountable to it. Nor do I see how giving this power to the Treasury would end fractional reserve banking. It seems to me that that’s an issue separate from the actual issuing of money.
Furthermore, the Treasury would still need a mechanism for introducing new money into the economy, and it would most likely be something similar to what the Fed does. So how does that solve anything?
The government couldn’t be stopped from creating the Fed, so why should we expect that a purely government bureaucracy is going to be more controllable, more restricted?

DW MacKenzie January 2, 2009 at 3:57 pm

1. This is really absurd. Ben Bernanke was an economics professor at Princeton prior to his appointment as Fed chair (and the FOMC). He was not a private banker. Rice was at Berkely and Cornell, Krozner was a the U of C, and the NBER… So your contention that they are from the banking community is not generally true. Volcker was once employed by Citibank, but only a conspiracy theorist would attribute significance to this fact.

2. Your evidence- “It is evident from the legislative history of the Federal Reserve Act that Congress did not intend to give the federal government direction over the daily operation of the Reserve Banks”.

All this means is that the president appoints a board to manage daily changes in reserves. Benanke does not answer to private bankers. Obama will decide if he gets another term. You do not understand your own evidence.

3. Any competent bank CEO would steer clear of highly leveraged loans from risky borrowers. Arnold Kling was at Freddie Mac and he traces the practice of accepting highly leveraged loans there. Your use of the term ludicrous with respect to the CRA is an empty and unsupported assertion.

DW MacKenzie January 2, 2009 at 3:58 pm

1. This is really absurd. Ben Bernanke was an economics professor at Princeton prior to his appointment as Fed chair (and the FOMC). He was not a private banker. Rice was at Berkely and Cornell, Krozner was a the U of C, and the NBER… So your contention that they are from the banking community is not generally true. Volcker was once employed by Citibank, but only a conspiracy theorist would attribute significance to this fact.

2. Your evidence- “It is evident from the legislative history of the Federal Reserve Act that Congress did not intend to give the federal government direction over the daily operation of the Reserve Banks”.

All this means is that the president appoints a board to manage daily changes in reserves. Benanke does not answer to private bankers. Obama will decide if he gets another term. You do not understand your own evidence.

3. Any competent bank CEO would steer clear of highly leveraged loans from risky borrowers. Arnold Kling was at Freddie Mac and he traces the practice of accepting highly leveraged loans there. Your use of the term ludicrous with respect to the CRA is an empty and unsupported assertion.

newson January 4, 2009 at 8:00 am

http://www.federalreserve.gov

end of discussion.

DW MacKenzie January 4, 2009 at 11:27 am

The thrift council does not determine open market operations. It merely advises The Board of Governors on the needs of the thrift industry. You are making a fool of yourself.

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