He who has a Right to Work, has a Right to Profit - by Frederick Bastiat

XII. -He who has a Right to Work, has a Right to Profit

“Brethren, you must club together to find me work at your own price.” This is the right to work; i.e., elementary socialism of the first degree. “Brethren, you must club together to find me work at my own price.” This is the right to profit; i.e., refined socialism, or socialism of the second degree.
Both of these live upon such of their effects as are seen. They will die by means of those effects which are not seen.
That-which is seen, is the labour and the profit excited by social combination. That which is not seen, is the labour and the profit to which this same combination would give rise, if it were left to the tax-payers.
In 1848, the right to labour for a moment showed two faces. This was sufficient to ruin it in public opinion.
One of these faces was called national workshops. The other, forty-five centimes. Millions of francs went daily from the Rue Rivoli to the national workshops. This was the fair side of the medal.
And this is the reverse. If millions are taken out of a cash-box, they must first have been put into it. This is why the organizers of the right to public labour apply to the tax-payers.
Now, the peasants said, “I must pay forty-five centimes; then I must deprive myself of some clothing. I cannot manure my field; I cannot repair my house.”
And the country workmen said, “As our townsman deprives himself of same clothing, there will be less work for the tailor; as he does not improve his field, there will be less work for the drainer; as he does not repair his house, there will be less work for the carpenter and mason.”
It was then proved that two kinds of meal cannot come out of one sack, and that the work furnished by the Government was done at the expense of labour, paid for by the tax-payer. This was the death of the right to labour, which showed itself as much a chimera as an injustice. And yet, the right to profit, which is only an exaggeration of the right to labour, is still alive and flourishing.
Ought not the protectionist to blush at the part he would make society play?
He says to it, “You must give me work, and, more than that, lucrative work. I have foolishly fixed upon a trade by which I lose ten per cent. If you impose a tax of twenty francs upon my countrymen, and give it to me, I shall be a gainer instead of a loser. Now, profit is my right; you owe it me.” Now, any society which would listen to this sophist, burden itself with taxes to satisfy him, and not perceive that the loss to which any trade is exposed is no less a loss when others are forced to make up for it, such a society, I say, would deserve the burden inflicted upon it.
Thus we learn, by the numerous subjects which I have treated, that, to be ignorant of political economy is to allow ourselves to be dazzled by the immediate effect of a phenomenon; to be acquainted with it is to embrace in thought and in forethought the whole compass of effects.
I might subject a host of other questions to the same test; but I shrink from the monotony of a constantly uniform demonstration, and I conclude by applying to political economy what Chateaubriand says of history:-

“There are,” he says, “two consequences in history; an immediate one, which is instantly recognized, and one in the distance, which is not at first perceived. These consequences often contradict each other; the former are the results of our own limited wisdom, the latter, those of that wisdom which endures. The providential event appears after the human event. God rises up behind men. Deny, if you will, the supreme counsel; disown its action; dispute about words; designate, by the term, force of circumstances, or reason, what the vulgar call Providence; but look to the end of an accomplished fact, and you will see that it has always produced the contrary of what was expected from it, if it was not established at first upon morality and justice.”

Chateaubriand's Posthumous Memoirs.

Why Do Nations Fail? by Daron Acemoglu

http://www.hoover.org/publications/defining-ideas/article/103766

January 5, 2012

defining ideas

Why Do Nations Fail?

by Daron Acemoglu (member of the Property Rights, Freedom, and Prosperity Task Force)

As Arab dissidents know all too well, it has to do with how societies are politically organized.

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Editor’s note: The Region, a journal of the Federal Reserve Bank of Minneapolis, recently discussed job markets, property rights, global warming, and the Arab Spring with MIT economist Daron Acemoglu, who is a member of the Hoover Institution’s John and Jean De Nault task force on property rights. Below is an excerpt from that interview. The entire interview can be found here.
Region: [Let’s discuss] your work with James Robinson on transitions in political economy. I wonder if you could share any thoughts you’ve had about how that research applies to the Arab Spring.
Acemoglu: Yes, for the last 15 years, most of my research is exactly what you could call, broadly, political economy. Why don’t I talk about that a bit, and then we can kind of transition into transitions.
Region: Perfect.
Acemoglu: My professional research didn’t start with political economy, although when I originally began to study economics in high school and college, I was interested in what today you would call political economy—the interaction of politics and economics.

 
Photo credit: The Region

But later in college and graduate school, I started working on issues related to human capital, economic growth and so on. But then after a while, I sort of realized, well, you know, the real problems of economic growth aren’t just that some countries are technologically innovative and some aren’t, and some countries have high savings rates and some don’t. They are really related to the fact that societies have chosen radically different ways of organizing themselves.
So there is much meaningful heterogeneity related to economic outcomes in the political structures of societies. And these tend to have different institutions regulating economic life and creating different incentives. And I started believing—and that’s reflected in my work—that you wouldn’t make enough progress on the problems of economic growth unless you started tackling these institutional foundations of growth at the same time.
That got me onto a path of research that has been trying to understand, theoretically and empirically, how institutions shape economic incentives and why institutions vary across nations. How they evolve over time. And the politics of institutions, meaning, not just economically which institutions are better than others, but why is it that certain different types of institutions stick?
What I mean by that is, it wouldn’t make sense, in terms of economic growth, to have a set of institutions that ban private property or create private property that is highly insecure, where I can encroach on your rights. But politically, it might make a lot of sense.
If I have the political power, and I’m afraid of you becoming rich and challenging me politically, then it makes a lot of sense for me to create a set of institutions that don’t give you secure property rights. If I’m afraid of you starting new businesses and attracting my workers away from me, it makes a lot of sense for me to regulate you in such a way that it totally kills your ability to grow or undertake innovations.
So, if I am really afraid of losing political power to you, that really brings me to the politics of institutions, where the logic is not so much the economic consequences, but the political consequences. This means that, say, when considering some reform, what most politicians and powerful elites in society really care about is not whether this reform will make the population at large better off, but whether it will make it easier or harder for them to cling to power.

Politicians are more interested in clinging to power than in making society a better place.

Those are the sort of issues that become first-order if you want to understand how these things work. And this area is where the majority of my time was devoted over the last 10 years, though I’ve been working on it for 16 years or more, a lot of it with Jim Robinson. Jim and I have co-authored a couple of papers on the effect of institutions on economic growth. We’ve written a lot on political processes and transitions, dictatorship, democracy and a series of papers on issues of political power and elites and so on. Some of that underpinned our book Economic Origins of Dictatorship and Democracy, which I’ll come back to in the context of your question about the Arab Spring. And some of it led to this new book that we finished—in fact, it’s here [lifting a roughly bound manuscript from beneath several papers on his desk] which will come out next year, next calendar year.
Region: Why Nations Fail?
Acemoglu: Yes, Why Nations Fail. It’s sort of a broader take on what are the deep causes, according to us, of this great variety of economic outcomes and economic organizations that you observe around the world, and we try to sort of have a coherent theory of this that is very different from those that are very popular in the media and policy circles. It is also, to some degree, even different from the ones that economists articulate. We put much more emphasis on the politics of it, rather than geography and culture, which is what a lot of policy and media people emphasize, or things related to optimal policy and how we can improve policy at the margin, and how we can design policies better, which is what economists put a lot of emphasis on.
Our take is that the political constraints here are central. And development is all about breaking those political constraints, rather than just thinking within existing political constraints and looking at the optimal tax design or the optimal unemployment insurance design and so on, within those constraints.
Obviously, the two are complementary, but I think this perspective is quite different from what’s out there. So that’s the major thing that’s kept me busy over the last few years.
In this very long, roundabout way, let me come to the question that you asked, which was about the Arab Spring.
Region: Ah, yes. I see that your preface in Why Nations Fail is just that: You write, “Why Egyptians filled Tahrir Square [to bring down Hosni Mubarak, and what it means for our understanding of the causes of prosperity and poverty].”

Development occurs when political constraints are removed.

Acemoglu: Exactly. If you want to think about the Arab Spring, I think a couple of issues are central, and some of them are the focus of this book, and some of them are the focus of both the previous book, Economic Origins of Dictatorship and Democracy, and this new book.
The first issue, which we focus on much more in this book, is that these societies weren’t dictatorships only in the sense that they banned elections. They were dictatorships of a very particular kind, but a kind that has been quite common around the world, where a narrow segment of the society controls both political power and economic resources.
So if you look at all of these societies from Tunisia to Egypt to Syria to Bahrain or to Libya, a narrow elite controlled political power, limited the ability of almost anybody else in society to have any political voice and used their political power to distribute economic resources of the nation to themselves at the exclusion of anybody else.
In Libya, that’s sort of obvious. In Syria, it’s also sort of obvious now; the newspapers have explained in great detail how the Alawite minority, for example, commands not only all the economically lucrative positions, but also all the top positions of the bureaucracy and the army. In Bahrain, that’s quite clear with the Sunni minority. In Tunisia and Egypt, it was a little in the softer form, in that many business interests that were favored had very strong representation within the group of cronies that Mubarak or Ben Ali had around them. And in those countries, the army and the security forces were effectively keeping any kind of real democracy at bay.
The consequence, perhaps not surprisingly again, is that when you have a system like this where a very narrow group controls political power for its economic ends, it also is quite disappointing for economic growth. It doesn’t encourage new technologies to come in; it doesn’t allow people to use their talents; it doesn’t allow markets to function; it doesn’t give incentives to the vast majority of the population; moreover, it encourages the people who control political power to suppress many forms of innovation and economic change because they fear it will be a threat to their stability.
So the result was large fractions of the population were excluded from political voice, they were excluded from economic power and they also saw their living standards not increase because there wasn’t strong enough economic growth.
There are exceptions in the sense that Tunisia and Egypt did have some economic growth. They did have improved education of the population over the last 20 years. But by and large, the majority of the society felt that they weren’t getting enough out of this deal, and they also had very little faith that politics as usual was going to serve their interests.
So, what to do? Well, most of the time, nothing, because such a system is structured and survives precisely because it is successful in denying voice and power to the majority. If the majority had real power all the time, such a system wouldn’t survive—in the same way that a plantation society wouldn’t be able to survive if 90 percent of the slaves really had a political voice.
But the 90 percent have vast numerical advantage if they can get organized—for example, as in Syria, where the Alawites rule society but are a small minority. So it’s very difficult to keep the majority at bay all the time. Especially when there is some instability and some spark, as the one that came from Tunisia. In the rest of the Middle East, people began to organize and solve their collective action problem. They made real demands from those who were holding power.

Will the Arab Spring mirror England's Glorious Revolution or Russia's Bolshevik Revolution?

And what are those demands going to be? The people who went to Tahrir Square actually wanted deep, fundamental change. They wanted deep, fundamental change, partly for economic reasons. But also, I think, if you read the blogs and other things they write, it’s also clear that they thought fundamental change could only come from political change. In fact, from the get-go, a lot of the discussion, the debate over “reform or no reform,” focused on political change.
So, the first move of the Mubarak regime was to say, “OK, fine, you want reforms? We’ll give you reforms. Just go home.” And the reaction of the people in Tahrir Square was, “No, you’ve got to be crazy, because if we go home, you’ll just continue the same system as before.”
This is the driving framework, the key element of the framework that Jim and I developed in Economic Origins of Dictatorship and Democracy. This also features to some degree here [in Why Nations Fail]. If you are able to solve the collective action problem and make some demands, then promises of change or economic goodies or political reform in the future are not good enough. Because if I go away and stop the collective action that is taking place in Tahrir Square or any other place, tomorrow what are your incentives to actually carry out the economic reform or the political reform?
And that’s exactly what the people in Tahrir Square said: “No, we don’t believe you. The moment we go home, you’re going to re-create the same system.” The only way of making those reforms credible is to change the distribution of political power and make the reforms right away. That’s exactly what the people in Tahrir Square wanted.
So at some level, therefore, we understand through the lens of this framework, I think, how the dynamics played out, why the demands were made in the way they were made and why people in power tried to make concessions, but they weren’t successful when there were demands for deep political reform.
The big question is: Is this going to be a political revolution like the Glorious Revolution in England, which unleashed a fundamental process of transformation in the political system with associated economic changes? Ultimately, such political revolutions are fundamental to the growth of nations. That’s one of the arguments we make.
Or is it going to be the sort of revolution like the Bolshevik Revolution or the independence movements in much of sub-Saharan Africa in the 1960s, where there was a change in political power, but it went from one group to another, which then re-created the same system and started the same sort of exploitative process as the previous one?
The Bolsheviks were obviously very different from the Romanovs, but they created an even more exploitative system than the Czarist regime in Russia. Many of the independence leaders in sub-Saharan Africa, from Nkrumah to Mugabe to Kenyatta, were obviously very committed to throwing out the whites. And they had very legitimate demands, just like the Egyptians do today, but the system that they created either degenerated into something as bad or they personally created something even worse, like Mugabe did when he destroyed Ian Smith’s terrible racist regime, and he created something as terrible.
Earlier, in the 1960s, Nkrumah came to power in Ghana, and in Sierra Leone, Margai came to power. Margai re-created a very exploitative system. It was perhaps marginally better than the British system, but then Margai was replaced by his half-brother and then by Siaka Stevens in 1967. Stevens made things so much worse, but all of its roots were in what Margai had done. [He had] just taken over the British system and used it for his own political and economic purposes. Under Stevens, the whole system sort of collapsed.
So, there is no guarantee that such movements will translate into a broad-based political revolution, as opposed to a palace coup where one group takes control for another. And again, part of the point of Why Nations Fail is trying to understand the conditions under which one takes place and interpret the long swath of history and the institutional variations that we see around us in light of this.

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Daron Acemoglu is the Charles P. Kindleberger Professor of Applied Economics in the Department of Economics at the Massachusetts Institute of Technology. He is an elected fellow of the American Academy of Arts and Sciences, the Econometric Society, the European Economic Association, and the Society of Labor Economists. He has received numerous awards and fellowships, including the inaugural T. W. Shultz Prize from the University of Chicago, the Sherwin Rosen Award for outstanding contributions to labor economics in 2004, and the John Bates Clark Medal in 2005. His research interests include political economy, economic development and growth, human capital theory, growth theory, innovation, search theory, network economics, and learning.

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Letters to the editor

It's the System, Stupid

Excellent interview. My take on it was that to be successful, a revolution must replace both those in power and the system they use to maintain power. If only those in power are replaced, the system continues and nothing changes for the better. I wonder how our country could use that excellent insight today, for example, in regards to the Arab Spring?
---Willis Cook

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Letters to the editor may be sent to definingideas@stanford.edu. Editors reserve the right to reject or publish (and edit) letters.

      

   

Frugality and Luxury - by Frederick Bastiat

XI. -Frugality and Luxury

It is not only in the public expenditure that what is seen eclipses what is not seen. Setting aside what relates to political economy, this phenomenon leads to false reasoning. It causes nations to consider their moral and their material interests as contradictory to each other. What can be more discouraging, or more dismal? For instance, there is not a father of a family who does not think it his duty to teach his children order, system, the habits of carefulness, of economy, and of moderation in spending money.
There is no religion which does not thunder against pomp and luxury. This is as it should be; but, on the other hand, how frequently do we hear the following remarks:-
“To hoard, is to drain the veins of the people.”
“The luxury of the great is the comfort of the little.”
“Prodigals ruin themselves, but they enrich the State.”
“It is the superfluity of the rich which makes bread for the poor.”
Here, certainly, is a striking contradiction between the moral and the social idea.
How many eminent spirits, after having made the assertion, repose in peace. It is a thing I never could understand, for it seems to me that nothing can be more distressing than to discover two opposite tendencies in mankind. Why, it comes to degradation at each of the extremes: economy brings it to misery; prodigality plunges it into moral degradation. Happily, these vulgar maxims exhibit economy and luxury in a false light, taking account, as they do, of those immediate consequences which are seen, and not of the remote ones, which are not seen. Let us see if we can rectify this incomplete view of the case.
Mondor and his brother Aristus, after dividing the paternal inheritance, have each an income of 50,000 francs. Mondor practises the fashionable philanthropy. He is what is called a squanderer of money. He renews his furniture several times a year; changes his equipages every month. People talk of his ingenious contrivances to bring them sooner to an end: in short, he surpasses the fast livers of Balzac and Alexander Dumas.
Thus, everybody is singing his praises. It is, “Tell us about Mondor? Mondor for ever! He is the benefactor of the workman; a blessing to the people. It is true, he revels in dissipation; he splashes the passers-by; his own dignity and that of human nature are lowered a little; but what of that? He does good with his fortune, if not with himself. He causes money to circulate; he always sends the tradespeople away satisfied. Is not money made round that it may roll?”
Aristus has adopted a very different plan of life. If he is not an egotist, he is, at any rate, an individualist, for he considers expense, seeks only moderate and reasonable enjoyments, thinks of his children's prospects, and, in fact, he economises.
And what do people say of him? “What is the good of a rich fellow like him? He is a skinflint. There is something imposing, perhaps, in the simplicity of his life; and he is humane, too, and benevolent, and generous, but he calculates. He does not spend his income; his house is neither brilliant nor bustling. What good does he do to the paper hangers, the carriage makers, the horse dealers, and the confectioners?”
These opinions, which are fatal to morality, are founded upon what strikes the eye: -the expenditure of the prodigal; and another, which is out of sight, the equal and even superior expenditure of the economist.
But things have been so admirably arranged by the Divine inventor of social order, that in this, as in everything else, political economy and morality, far from clashing, agree; and the wisdom of Aristus is not only more dignified, but still more profitable, than the folly of Mondor. And when I say profitable, I do not mean only profitable to Aristus, or even to society in general, but more profitable to the workmen themselves -to the trade of the time.
To prove it, it is only necessary to turn the mind's eye to those hidden consequences of human actions, which the bodily eye does not see.
Yes, the prodigality of Mondor has visible effects in every point of view. Everybody can see his landaus, his phaetons, his berlins, the delicate paintings on his ceilings, his rich carpets, the brilliant effects of his house. Every one knows that his horses run upon the turf. The dinners which he gives at the Hotel de Paris attract the attention of the crowds on the Boulevards; and it is said, “That is a generous man; far from saving his income, he is very likely breaking into his capital.” This is what is seen.
It is not easy to see, with regard to the interest of workers, what becomes of the income of Aristus. If we were to trace it carefully, however, we should see that the whole of it, down to the last farthing, affords work to the labourers, as certainly as the fortune of Mondor. Only there is this difference: the wanton extravagance of Mondor is doomed to be constantly decreasing, and to come to an end without fail; whilst the wise expenditure of Aristus will go on increasing from year to year. And if this is the case, then, most assuredly, the public interest will be in unison with morality.
Aristus spends upon himself and his household 20,000 francs a year. If that is not sufficient to content him, he does not deserve to be called a wise man. He is touched by the miseries which oppress the poorer classes; he thinks he is bound in conscience to afford them some relief, and therefore he devotes 10, francs to acts of benevolence. Amongst the merchants, the manufacturers, and the agriculturists, he has friends who are suffering under temporary difficulties; he makes himself acquainted with their situation, that he may assist them with prudence and efficiency, and to this work he devotes 10,000 francs more. Then he does not forget that he has daughters to portion, and sons for whose prospects it is his duty to provide, and therefore he considers it a duty to lay by and put out to interest 10,000 francs every year.
The following is a list of his expenses: -
1st, Personal expenses......... 20,000 fr.
2nd, Benevolent objects........ 10,000
3rd, Offices of friendship..... 10,000
4th, Saving.................... 10,000
Let us examine each of these items, and we shall see that not a single farthing escapes the national labour.
1st. Personal expenses. -These, as far as work-people and tradesmen are concerned, have precisely the same effect as an equal sum spent by Mondor. This is self-evident, therefore we shall say no more about it.
2nd. Benevolent objects. -The 10,000 francs devoted to this purpose benefit trade in an equal degree; they reach the butcher, the baker, the tailor, and the carpenter. The only thing is, that the bread, the meat, and the clothing are not used by Aristus, but by those whom he has made his substitutes. Now, this simple substitution of one consumer for another, in no way effects trade in general. It is all one, whether Aristus spends a crown, or desires some unfortunate person to spend it instead.
3rd. Offices of friendship. -The friend to whom Aristus lends or gives 10,000 francs, does not receive them to bury them; that would be against the hypothesis. He uses them to pay for goods, or to discharge debts. In the first case, trade is encouraged. Will any one pretend to say that it gains more by Mondor's purchase of a thorough-bred horse for 10,000 francs, than by the purchase of 10,000 francs' worth of stuffs by Aristus or his friend? For, if this sum serves to pay a debt, a third person appears, viz. the creditor, who will certainly employ them upon something in his trade, his household, or his farm. He forms another medium between Aristus and the workmen. The names only are changed, the expense remains, and also the encouragement to trade.
4th. Saving. -There remains now the 10,000 francs saved; and it is here, as regards the encouragement to the arts, to trade, labour, and the workmen, that Mondor appears far superior to Aristus, although, in a moral point of view, Aristus shows himself, in some degree, superior to Mondor.
I can never look at these apparent contradictions between the great laws of nature, without a feeling of physical uneasiness which amounts to suffering. Were mankind reduced to the necessity of choosing between two parties, one of whom injures his interest, and the other his conscience, we should have nothing to hope from the future. Happily, this is not the case; and to see Aristus regain his economical superiority, as well as his moral superiority, it is sufficient to understand this consoling maxim, which is no less true from having a paradoxical appearance, “To save, is to spend.”
What is Aristus's object in saving 10,000 francs? Is it to bury them in his garden? No, certainly; he intends to increase his capital and his income; consequently, this money, instead of being employed upon his own personal gratification, is used for buying land, a house, &c., or it is placed in the hands of a merchant or a banker. Follow the progress of this money in any one of these cases, and. you will be convinced, that through the medium of vendors or lenders, it is encouraging labour quite as certainly as if Aristus, following the example of his brother, had exchanged it for furniture, jewels, and horses.
For when Aristus buys lands or rents for 10,000 francs, he is determined by the consideration that he does not want to spend this money. This is why you complain of him.
But, at the same time, the man who sells the land or the rent, is determined by the consideration that he does want to spend the 10,000 francs in some way; so that the money is spent in any case, either by Aristus, or by others in his stead.
With respect to the working class, to the encouragement of labour, there is only one difference between the conduct of Aristus and that of Mondor. Mondor spends the money himself and therefore the effect is seen. Aristus, spending it partly through intermediate parties, and at a distance, the effect is not seen. But, in fact, those who know how to attribute effects to their proper causes, will perceive, that what is not seen is as certain as what is seen. This is proved by the fact, that in both cases the money circulates, and does not lie in the iron chest of the wise man, any more than it does in that of the spendthrift. It is, therefore, false to say that economy does actual harm to trade; as described above, it is equally beneficial with luxury.
But how far superior is it, if, instead of confining-our thoughts to the present moment, we let them embrace a longer period!
Ten years pass away. What is become of Mondor and his fortune, and his great popularity? Mondor is ruined. Instead of spending 60,000 francs every year in the social body, he is, perhaps, a burden to it. In any case, he is no longer the delight of shopkeepers; he is no longer the patron of the arts and of trade; he is no longer of any use to the workmen, nor are his successors, whom he has brought to want.
At the end of the same ten years, Aristus not only continues to throw his income into circulation, but he -adds an increasing sum from year to year to his expenses. He enlarges the national capital, that is, the fund which supplies wages, and as it is upon the extent of this fund that the demand for hands depends, he assists in progressively increasing the remuneration of the working class; and if he dies, he leaves children whom he has taught to succeed him in this work of progress and civilization.
In a moral point of view, the superiority of frugality over luxury is indisputable. It is consoling to think that it is so in political economy, to every one who, not confining his views to the immediate effects of phenomena, knows how to extend his investigations to their final effects.

Death by Wealth Tax

http://www.hoover.org/publications/defining-ideas/article/105021

Death by Wealth Tax

by Richard A. Epstein (Peter and Kirsten Bedford Senior Fellow and member of the Property Rights, Freedom, and Prosperity Task Force)

Egalitarian impulses will sink our struggling economy.

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The country’s preoccupation with income inequality has become the fount of many bad ideas. Among the very worst comes from Stanford University professor of economics Ronald McKinnon. Writing in the Wall Street Journal, he proposes the most radical of reforms under the most soothing of titles: The Conservative Case for a Wealth Tax.
His argument falters at every level. To be sure, McKinnon starts out with the unexceptionable observation that inequality and unemployment remain two hot issues in the upcoming election. But he advances the ball on neither front by his respectful bow to Occupy Wall Street. Far from proposing a solution, McKinnon has become part of the problem.
Attacks on the inequality of wealth always miscarry when they fail to show that the wealth in question has been acquired by tainted means. Otherwise, the hard work that improves the lot of one person, without reducing the wealth of anyone else, should count as a social improvement.

  
 Illustration by Barbara Kelley

The great danger of egalitarianism is that it is all too comfortable leveling down, such that the cardinal virtue of any reduction of inequality is that it hurts the rich more than it does the poor. In such a system, the government invests public resources to achieve an end that does nothing to benefit members of either group. Worse still, our prolonged economic downturn undermines our overblown tax and transfer economy. Less wealth in the hands of the rich reduces the revenues that federal and state governments have available to spend on their preferred clientele.
As to unemployment, the blunt truth is that all grand monetary and fiscal policies will fall short without extensive deregulation of labor markets. The Obama jobs bill, which still languishes in Congress, is so larded with mindless restrictions that even the most ardent Keynesian should blush to mention it in polite company.
Yet, if McKinnon’s ends are dubious, the means he chooses to achieve them are far worse. He begins his discussion by stressing two key points, both true, and both misapplied. The first is that high marginal tax rates on income deter productive economic activity. The second is that the application of an income tax regime to high-net-worth individuals creates a genuine conundrum for the tax system in how best to tax the endless array of “capital gains, stock options, interest and dividends,” not to mention the stock of imputed income that arises from the ownership of second homes, tony art collections, and fancy yachts.
McKinnon thinks that a wealth tax will produce more wealth without raising marginal tax rates, and further, that it will make these other assets a source of government revenues. The payoff is a proposal to impose annually a three percent wealth tax on each person’s assets, both domestic and foreign, which exceed $3,000,000. That proposal could lead, he claims, to the rationalization of the income tax, presumably by lowering marginal tax rates, although it is hard to say by how much, given the current political climate. It also has the added virtue of hitting hard at inherited wealth, which when cautiously invested, produces relatively little income. McKinnon does not mention anything about whether he would eliminate the estate tax, but he need not worry. With this proposal in place, there will be little left to tax at death anyhow.

The wealth tax is essentially a tax on income.

The major objection to this proposal is that it fails to meet its own policy criterion. It is, for example, false to say that the wealth tax does not operate as an additional tax on income, when of course it does for the simple reason that today’s income, when saved, becomes part of tomorrow’s wealth.
Start with a hypothetical person who has zero net worth but high human capital, so that in his first year of business he earns $13 million dollars. Let us assume that this is taxed at the outset at 40 percent, so that after paying $5.2 million in ordinary taxes, he has at the end of the taxation year a sizeable asset portfolio of $7.8 million, of which $4.8 million is subject to the three percent wealth tax, producing an additional tax of $160,000. For that first year, the de facto income tax rate moves up just a bit to around 40.8 percent, not too small to notice.
That, however, is the situation after one year. Those same dollars are also subject to another tax the following year, and yet another tax the year after that. In each case, the wealth base has shrunk by the additional taxes of the previous years. In each instance, the income generated by that wealth is first taxed at the 40 percent marginal bracket, with the residue added to the wealth base. And in each case, the combination of the wealth tax on accumulated wealth and the income tax on new earnings is over 100 percent of net income.
And just to top things off, if this entrepreneur manages to earn $10 million dollars in each of the following years, he has already exhausted his $3 million exemption, so for that person, the 3 percent wealth tax hits the entire $7.8 million that remains, for an effective income tax in the first year of 41.8 percent.
For each successive year, the effective combined tax rate on accumulated wealth shoots up, savings decline, and the system falls into paralysis.  The situation gets truly dangerous in those years in which the asset base shrinks in value, for the wealth tax still remains to drive net worth even lower. In this frosty economic environment, conspicuous consumption turns out to be the most sensible response to a wealth tax, with the consequent loss of investment.
The effects of the wealth tax are far worse than this scenario plays out, because of its incredible administrative burdens. Professor McKinnon’s major area of academic expertise lies in international economics. But the key question falls outside that area of expertise into the mundane question of how to administer either an income or a wealth tax. As he rightly notes, for persons whose incomes are in cash or marketable securities, the valuation questions are generally a cinch. But for the top one percent, who are the target of a wealth tax, the taxation of income presents a bewildering set of real challenges that are not so easy for even the best experts to resolve.
I began my erratic career as a tax lawyer as a student in the late Professor Boris Bittker’s 1966 tax course at Yale Law School. The opening case was United States v. Drescher, which asked the question of how to tax a single-payment annuity, with a cost of $5,000. The annuity was payable either to the plaintiff or his beneficiary. It was also retained by the employer and not assignable by the plaintiff. Our travail with this case was not inconsiderable, because none of us understood exactly what this transaction was about.

Conspicuous consumption is the most sensible response to a wealth tax.

So Bittker, in his relentless fashion, quizzed us about whether the cost to the employer should be regarded as the correct measure of value to the employee, whether the income should be taxed now, or whether taxation should be deferred until the money was paid out under the terms of the policy. We were a collection of clueless wonders.
One obvious source of concern in this simple example was whether it made sense to tax Drescher on the value of the policy when he did not have the cash to pay it. Of course, he could pay for the annuity out of other assets, but in some cases, he might have to borrow on these assets in order to get out of the liquidity trap. And if he had to pay the money without the cash, the waspish Bittker then asked, what about the young associate who has been told that he has been made a lifetime partner of the firm? That shift in status results in a huge increase in economic value, but should it be taxed at that time? If so, what should be done in later years, if the value of the partnership increases or decreases? What should the result be when cash is distributed by the firm? Is that distribution now a return of capital on an annuity already taxed, or does it count in part as taxable income, which might be offset in part by a decline in the value of the partnership interest now that the arrangement has on average one year less to run?
The average reader will glaze over at these complexities. The practical answer is that the government will try to tax the vested value of the annuity unless there is some explicit statutory provision that calls for a different tax treatment. The standard (Haig-Simons) definition of income includes all consumption during the tax period plus any increase in net worth. But no tax law anywhere uses Haig-Simons to define the tax base. The current income taxation system thinks that discretion is the better part of valor and taxes neither. The consumption income is outside the system altogether, but the economic income is usually picked up at some later time.
Given progressive taxation, postponement of income past peak years could easily lead to a reduction in government revenue. That deferment in turn is, ironically, encouraged by the conscious Congressional decision to allow people to defer taxation on their pension plans until some future date.
One basic motif of the income tax, therefore, is to figure out the major deviations from the Haig-Simons formula to allow the system to function. I know of no serious tax lawyer who thinks that an effort to tax all increments in net worth makes sense. The question of how to tax these various items of wealth, however, does come to the fore in connection with the estate tax, which now is defined in a fashion that includes, with various bells and whistles, all of the decedent’s assets in the tax base.
The administrative complications of figuring out the estate tax are far greater than those for the income tax for one simple reason. With the income tax, defer now and pay later is always a viable strategy. With the estate tax, either the government takes its cut now or it forever holds its peace. It therefore has to engage in the thankless task of assigning value to all the complex financial pieces that remain in the decedent’s estate. For large estates, this is no easy matter, for it could include the valuation of all sorts of partial interests in privately held corporations, where there is no active share market to aid valuation. These capital structures tend to be highly complex, and the simple fractional ownership of shares is only a first estimate of value that is influenced, for example, by the control rights within the firm and the discretionary salaries, dividend policies, and growth plans of the business. It typically takes years to resolve these disputes, longer if they go to litigation. Drescher was a 1950 case that resolved disputes over Drescher’s 1939 and 1940 tax years.

We need to simplify the tax code. That means a flat tax.

Drescher is child’s play compared to the current environment.  For anyone who wants a foretaste of what the estate tax looks like, try a brief visit to the IRS website or take a gander at Form IRS 706, which must be filed for all taxable estates. It is no accident that the usual timeframe for filing an estate tax form is nine months, with frequent extensions for large estates. The liquidity issues remain difficult for family businesses and farms, so that the Internal Revenue Code contains special provisions for deferred payments. The tax collector becomes in effect a lender of last resort.
The implications for McKinnon’s proposals are enormous. The wealth tax is nothing more than an annual estate tax, at a far lower rate. There is no way that the system can work on that time cycle. Most estate taxes are for older persons who have consciously simplified their holdings prior to death. The wealth tax hits productive people at a time when their activities are highly jumbled. Liquidity is often at a low ebb. The well-to-do have stakes in venture capital firms; they have long term royalty arrangements, where the value of the contract rights depends in large measure on work that owners have yet to do. They often own foreign assets, whose valuation is heavily influenced by a wide range of local regulations. These people often have complex liabilities—guarantees on loans to closed corporations, for example—that have to be deducted from assets to give an accurate position of net worth.
All the estimates are likely to be wrong. The cost of figuring them out, moreover, is deductible from both the income and the wealth tax. The first tax year will not be closed before the second year form has to be filed. Yet its wealth base will depend on the findings of an earlier year.
The nightmare gets still worse. Once these valuations are made, almost always late, the liquidity crunch is sure to hit. The assets in question are often not of the sort on which banks are prepared to make loans. They are not of the sort that can be sold, if they can be sold at all, without destroying the internal control structure of the business. The amount of liquid assets will decline as there is an annual rush to sell them in order to cover the liabilities on the illiquid ones. Art dealers and collectors will have to unload parts of their collections in a down market. Yet once they are sold, that will trigger a downward revaluation of the retained assets. Forget about private school tuition. The new planning challenge for the wealthy is getting dinner on the table.
In the end, therefore, McKinnon has it exactly backwards. The income tax prudently backs off from all of these fearsome complications by reducing the tax base to cover only receipts in cash or cash equivalents. The lesson here is that valuation is not just the tail on the dog. It is often the dog itself. Anyone who has worked in the trenches knows that forced evaluation causes nightmares whenever it is required, whether it be for the estate tax, divorce, eminent domain, or bankruptcy. What is needed is a sense of modesty, not of adventurism.
Anyone who looks over the estate tax forms might gain some sense of why I began my academic career as a tax specialist, but have developed a fierce and abiding distaste for the entire estate tax venture. In the end, simplification should be a driving force that pushes us into a flat tax on consumption. It is a pity that this lesson has escaped Professor McKinnon.

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Richard A. Epstein, the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, is the Laurence A. Tisch Professor of Law, New York University Law School, and a senior lecturer at the University of Chicago. His areas of expertise include constitutional law, intellectual property, and property rights. His most recent books are Design for Liberty: Private Property, Public Administration, and the Rule of Law (2011), The Case against the Employee Free Choice Act (Hoover Press, 2009) and Supreme Neglect: How to Revive the Constitutional Protection for Private Property (Oxford Press, 2008).

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Letters to the editor

Tax the Free Riders

At a broad conceptual level, the taxation of wealth, especially wealth that is sub-optimally managed, provides an incentive to prudent money management. Consider someone who has great wealth and little income such as Teresa Heinz Kerry. Much of the government apparatus is devoted to the protection of her life and property, yet she is in many respects a free rider.
---Vincent Cox

The Volatility of Wealth Valuation

Prof. Epstein is certainly correct that a wealth tax is a very bad idea, but while listing many reasons it is a bad idea, he only skirts around the main one, which is that wealth, specifically its valuation, is highly subject and volatile. As an example, let us consider Bill Gates. Well over 90% of his wealth is embedded in the value of his Microsoft stock. For argument's sake, let us assume it is 100% and that he owns exactly one billion shares. The first question is what price should be used to value Microsoft: year end, one year average, average of monthly closes? Assume year end. Then if Gates pays 3% tax on year end valuation and on Jan 2 the price of MSFT drops 20%, does Mr. Gates get a refund? Since his only wealth is MSFT stock, selling 3% may well be a trigger for the decline in value.
One just needs to look at the Byzantine complexities of local real estate valuations to see what problems this leads to. As real estate prices rose through the early 2000s, the local assessors were quick to raise the valuation of my property, but when they collapsed, it required multiple years of fights to get them to reduce it and it is still higher than any realistic valuation of our property in the current market.

---John Hudock

Don't Forget the Takings Clause

In his article Death by Wealth Tax, Richard Epstein states that ''Attacks on the inequality of wealth always miscarry when they fail to show that the wealth in question has been acquired by tainted means.'' This is true, and it touches on the real core issue: The strongest proponents of the wealth tax believe all rents and most profits are tainted, and only wages can be assumed to be pure. This incidentally explains why millionaire celebrities are acceptable to OWS but not Wall Street financiers. The wealth of the celebrities is assumed to come from astronomical wages paid for whatever it is the celebrity does.
It goes without saying that an economy which forbids rents and profits will be so impoverished that, even if it achieves its goal of greater equality, it will be an equality of misery.
There is also the Constitutional objection to a wealth tax. Once the idea that the government can seize a certain percentage of assets every year is accepted, then the Takings Clause becomes a dead letter, and there is no remaining limit to the means by which government can encroach on private property.
---Kent G. Budge

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Letters to the editor may be sent to definingideas@stanford.edu. Editors reserve the right to reject or publish (and edit) letters.

Algeria - by Frederick Bastiat

X. -Algeria

Here are four orators disputing for the platform. First, all the four speak at once; then they speak one after the other. What have they said? Some very fine things, certainly, about the power and the grandeur of France; about the necessity of sowing, if we would reap; about the brilliant future of our gigantic colony; about the advantage of diverting to a distance the surplus of our population, &e. &e. Magnificent pieces of eloquence, and always adorned with this conclusion: -“Vote fifty millions, more or less, for making ports and roads in Algeria; for sending emigrants thither; for building houses and breaking up land. By so doing, you will relieve the French workman, encourage African labour, and give a stimulus to the commerce of Marseilles. It would be profitable every way.”
Yes, it is all very true, if you take no account of the fifty millions until the moment when the State begins to spend them; if you only see where they go, and not whence they come; if you look only at the good they are to do when they come out of the tax-gatherer's bag, and not at the harm which has been done, and the good which has been prevented, by putting them into it. Yes, at this limited point of view, all is profit. The house which is built in Barbary is that which is seen; the harbour made in Barbary is that which is seen; the work caused in Barbary is what is seen; a few less hands in France is what is seen; a great stir with goods at Marseilles is still that which is seen.
But, besides all this, there is something which is not seen. The fifty millions expended by the State cannot be spent, as they otherwise would have been, by the tax-payers. It is necessary to deduct, from all the good attributed to the public expenditure which has been effected, all the harm caused by the prevention of private expense, unless we say that James B. would have done nothing with the crown that he had gained, and of which the tax had deprived him; an absurd assertion, for if he took the trouble to earn it, it was because he expected the satisfaction of using it, He would have repaired the palings in his garden, which he cannot now do, and this is that which is not seen. He would have manured his field, which now he cannot do, and this is what is not seen. He would have added another story to his cottage, which he cannot do now, and this is what is not seen. He might have increased the number of his tools, which he cannot do now, and this is what is not seen. He would have been better fed, better clothed, have given a better education to his children, and increased his daughter's marriage portion; this is that is not seen. He would have become a member of the Mutual Assistance Society, but now he cannot; this is what is not seen. On one hand, are the enjoyments of which he has been deprived, and the means of action which have been destroyed in his hands; on the other, are the labour of the drainer, the carpenter, the smith, the tailor, the village-schoolmaster, which he would have encouraged, and which are now prevented - all this is what is not seen.
Much is hoped from the future prosperity of Algeria; be it so. But the drain to which France is being subjected ought not to be kept entirely out of sight. The commerce of Marseilles is pointed out to me; but if this is to be brought about by means of taxation, I shall always show that an equal commerce is destroyed thereby in other parts of the country. It is said, “There is an emigrant transported into Barbary; this is a relief to the population which remains in the country.” I answer, “How can that be, if, in transporting this emigrant to Algiers, you also transport two or three times the capital which would have served to maintain him in France?”
The Minister of War has lately asserted, that every individual transported to Algeria has cost the State 8,000 francs. Now it is certain that these poor creatures could have lived very well in France on a capital of 4,000 francs. I ask, how the French population is relieved, when it is deprived of a man, and of the means of subsistence of two men?
The only object I have in view is to make it evident to the reader, that in every public expense, behind the apparent benefit, there is an evil which it is not so easy to discern. As far as in me 'lies, I would make him form a habit of seeing both, and taking account of both.
When a public expense is proposed, it ought to be examined in itself, separately from the pretended encouragement of labour which results from it, for this encouragement is a delusion. Whatever is done in this way at the public expense, private expense would have done all the same; therefore, the interest of labour is always out of the question.
It is not the object of this treatise to criticize the intrinsic merit of the public expenditure as applied to Algeria, but I cannot withhold a general observation. It is, that the presumption is always unfavourable to collective expenses by way of tax. Why? For this reason: -First, justice always suffers from it in some degree. Since James B. had laboured to gain his crown, in the hope -of receiving a gratification from it, it is to be regretted that the exchequer should interpose, and take from James B. this gratification, to bestow it upon another. Certainly, it behooves the exchequer, or those who regulate it, to give good reasons for this. It has been shown that the State gives a very provoking one, when it says, “With this crown I shall employ workmen”; for James B. (as soon as he sees it) will be sure to answer, “It is all very fine, but with this crown I might employ them myself.”
Apart from this reason, others present themselves without disguise, by which the debate between the exchequer and poor James becomes much simplified. If the State says to him, “I take your crown to pay the gendarme, who saves you the trouble of providing for your own personal safety; for paving the street which you are passing through every day; for paying the magistrate who causes your property and your liberty to be respected; to maintain the soldier who maintains our frontiers,” -James B., unless I am much mistaken, will pay for all this without hesitation. But if the State were to say to him, I take this crown that I may give you a little prize in case you cultivate your field well; or that I may teach your son something that you have no wish that he should learn; or that the Minister may add another to his score of dishes at dinner; I take it to build a cottage in Algeria, in which case I must take another crown every year to keep an emigrant in it, and another hundred to maintain a soldier to guard this emigrant, and another crown to maintain a general to guard this soldier,“ &c., &c., -I think I hear poor James exclaim, ”This system of law is very much like a system of cheat!“ The State foresees the objection, and what does it do? It jumbles all things together, and brings forward just that provoking reason which ought to have nothing whatever to do with the question. It talks of the effect of this crown upon labour; it points to the cook and purveyor of the Minister; it shows an emigrant, a soldier, and a general, living upon the crown; it shows, in fact, what is seen, and if James B. has not learned to take into the account what is not seen, James B. will be duped. And this is why I want to do all I can to impress it upon his mind, by repeating it over and over again.
As the public expenses displace labour without increasing it, a second serious presumption presents itself against them. To displace labour is to displace labourers, and to disturb the natural laws which regulate the distribution of the population over the country. If 50,000,000 fr. are allowed to remain in the possession of the taxpayers, since the tax-payers are everywhere, they encourage labour in the 40,000 parishes in France. They act like a natural tie, which keeps every one upon his native soil; they distribute themselves amongst all imaginable labourers and trades. If the State, by drawing off these 50,000,000 fr. from the citizens, accumulates them, and expends them on some given point, it attracts to this point a proportional quantity of displaced labour, a corresponding number of labourers, belonging to other parts; a fluctuating population, which is out of its place, and, I venture to say, dangerous when the fund is exhausted. Now here is the consequence (and this confirms all I have said): this feverish activity is, as it were, forced into a narrow space; it attracts the attention of all; it is what is seen. The people applaud; they are astonished at the beauty and facility of the plan, and expect to have it continued and extended. That which they do not see is, that an equal quantity of labour, which would probably be more valuable, has been paralyzed over the rest of France.

We Are All Austrians Now?

Arnold Kling

There is a YouTube going around in which Ron Paul's applause line at a rally is "We're all Austrians now!" Conveniently enough, in this interview, Pete Boettkeexplains Austrian economics superbly.

Austrians want to talk about the institutional environment within which economic activity takes place. They want to talk about cultural frames of reference that form the priors that rational actors have. They want to talk about the fact that we each have different priors, because we're diverse individuals who have different perspectives on the world. Somehow, we have to reconcile these differences through the exchange processes in the market. ...It's a very broad notion of social science, of which economics is a part, rather than the idea that economics is somehow separated from all the social sciences.

Read the whole thing. I could have quoted many paragraphs. More below the fold.

On the topic of Austrian economics and Ron Paul, Matt Yglesias writes,

Unfortunately, however, it's the Austrian school, which preaches despair and demands no action at all, that has the most effective political champion and the most dedicated followers. If I'm wrong, and the economy doesn't recover in 2012, then these faddish views may gain more steam and perhaps we really all will be Austrians someday soon. But let's hope not. The developed countries that have done best in the recession--places like Israel and Sweden--are the ones that have pursued the least "Austrian" courses of action, while the European Central Bank's insistence on pursuing a somewhat Austrian-style course in Spain and Italy is creating a deepening crisis.

Separately, Yglesias writes,

I have a pet theory that one of the main reasons the policy response to the current economic crisis has been so bad is that we had the wrong crisis. 

What he is saying is that the crisis we got is not the crisis that economists were predicting. This is a very important point. A lot of economists predicted crisis X. Instead we got crisis Y. And now the economists who predicted crisis X jump to claim credit for predicting the crisis. What Yglesias adds to this narrative is the claim that policy is responding to the crisis that was predicted rather than to the actual crisis.

I think that the best illustration of Yglesias' point is the policy response to Freddie Mac and Fannie Mae. The crisis people expected was that a sudden move in interest rates would expose risks in their portfolio management. No one expected them to suffer from too many mortgage defaults. And even after the fact, many "reform"proposals call for a new entity that no longer takes interest-rate risk (the risk that didn't hurt Frannie) but takes credit risk (the risk that killed them). In short, the reformers act as if we had the crisis they predicted, not the one that we had.

Anyway, in macroeconomics, the crisis that was predicted was a huge capital outflow, leading to higher interest rates and a depreciation of the dollar. This would have forced a reorientation of the economy away from consumer spending and housing and into producing internationally competitive goods and services. If you are a policy wonk, this requires all sorts of government management to help with this complex transition to a weak dollar with high interest rates. Yglesias writes,

But this is not the crisis we're having. Interest rates are low. Headlines tell us that "U.S. Factories Could Suffer From Dollar's Appeal". I'm inclined to think that we will, at some future point, face the crisis we should have had and it will need to be addressed in complicated ways. But the crisis we're having is, for all its horror and scale, a pretty banal monetary crunch

Circling back to Austrian economics, the crisis we are having does resemble the crisis that Austrians were predicting. That is, they thought that money was too easy and that this would result in malinvestment. In his essay on Austrian economics, Yglesias dismisses this because the decline in the economy proved to be so widespread. However, I would argue that the patterns of specialization and trade are so complex and interdependent that the crash in housing could in fact lead to widespread disruptions. It affects real estate agents, attorneys, firms involved in the manufacture and distribution of household durables, and so on. It has huge relative regional effects. It reverberates through the financial industry. It affects people overseas who had counted on an ongoing mortgage securities market.

I do not want to assert that the crisis we are having is precisely what Austrian business cycle theory predicts. I am not such a firm believer in any macro model. Let me finish with another quote from Boettke on Austrian thinking:

What the position makes you have is not libertarianism, or anything like that, but humility. The economist is nothing more than a student of society, and any economist that tries to represent themselves as a saviour of society should be subject to ridicule.

We Are All Austrians Now? Arnold Kling

Credit - by Frederick Bastiat

IX. -Credit

In all times, but more especially of late years, attempts have been made to extend wealth by the extension of credit. I believe it is no exaggeration to say, that since the revolution of February, the Parisian presses have issued more than 10,000 pamphlets, crying up this solution of the social problem. The only basis, alas! of this solution, is an optical delusion -if, indeed, an optical delusion can be called a basis at all.
The first thing done is to confuse cash with produce, then paper money with cash; and from these two confusions it is pretended that a reality can be drawn.
It is absolutely necessary in this question to forget money, coin, bills, and the other instruments by means of which productions pass from hand to hand; our business is with the productions themselves, which are the real objects of the loan; for when a farmer borrows fifty francs to buy a plough, it is not, in reality, the fifty francs which are lent to him, but the plough: and when a merchant borrows 20,000 francs to purchase a house, it is not the 20,000 francs which he owes, but the house. Money only appears for the sake of facilitating the arrangements between the parties.
Peter may not be disposed to lend his plough, but James may be willing to lend his money. What does William do in this case? He borrows money of James, and with this money he buys the plough of Peter.
But, in point of fact, no one borrows money for the sake of the money itself; money is only the medium by which to obtain possession of productions. Now, it is impossible in any country to transmit from one person to another more productions than that country contains.
Whatever may be the amount of cash and of paper which is in circulation, the whole of the borrowers cannot receive more ploughs, houses, tools, and supplies of raw material, than the lenders altogether can furnish; for we must take care not to forget, that every borrower supposes a lender, and that what is once borrowed implies a loan.
This granted, what advantage is there in institutions of credit? It is, that they facilitate, between borrowers and lenders, the means of finding and treating with each other; but it is not in their power to cause an instantaneous increase of the things to be borrowed and lent. And yet they ought to be able to do so, if the aim of the reformers is to be attained, since they aspire to nothing less than to place ploughs, houses, tools, and provisions in the hands of all those who desire them.
And how do they intend to effect this?
By making the State security for the loan.
Let us try and fathom the subject, for it contains something which is seen, and also something which is not seen. We must endeavour to look at both.
We will suppose that there is but one plough in the world, and that two farmers apply for it.
Peter is the possessor of the only plough which is to be had in France; John and James wish to borrow it. John, by his honesty, his property, and good reputation, offers security. He inspires confidence; he has credit. James inspires little or no confidence. It naturally happens that Peter lends his plough to John.
But now, according to the Socialist plan, the State interferes, and says to Peter, “Lend your plough to James, I will be security for its return, and this security will be better than that of John, for he has no one to be responsible for him -but himself; and I, although it is true that I have nothing, dispose of the fortune of the taxpayers, and it is with their money that, in case of need, I shall pay you the principal and interest.” Consequently, Peter lends his plough to James: this is what is seen.
And the Socialists rub their hands, and say, “See how well our plan has answered. Thanks to the intervention of the State, poor James has a plough. He will no longer be obliged to dig the ground; he is on the road to make a fortune. It is a good thing for him, and an advantage to the nation as a whole.”
Indeed, gentlemen, it is no such thing; it is no advantage to the nation, for there is something behind which is not seen.
It is not seen, that the plough is in the hands of James, only because it is not in those of John.
It is not seen, that if James farms instead of digging, John will be reduced to the necessity of digging instead of farming.
That, consequently, what was considered an increase of loan, is nothing but a displacement of loan. Besides, it is not seen that this displacement implies two acts of deep injustice.
It is an injustice to John, who, after having deserved and obtained credit by his honesty and activity, sees himself robbed of it.
It is an injustice to the tax-payers, who are made to pay a debt which is no concern of theirs.
Will any one say, that Government offers the same facilities to John as it does to James? But as there is only one plough to be had, two cannot be lent. The argument always maintains that, thanks to the intervention of the State, more will be borrowed than there are things to be lent; for the plough represents here the bulk of available capitals.
It is true, I have reduced the operation to the most simple expression of it, but if you submit the most complicated Government institutions of credit to the same test, you will be convinced that they can have but on result; viz., to displace credit, not to augment it. In one country, and in a given time, there is only a certain amount of capital available, and all are employed. In guaranteeing the non-payers, the State may, indeed, increase the number of borrowers, and thus raise the rate of interest (always to the prejudice of the tax-payer), but it has no power to increase the number of lenders, and the importance of the total of the loans.
There is one conclusion, however, which I would not for the world be suspected of drawing. I say, that the law ought not to favour, artificially, the power of borrowing, but I do not say that it ought not to restrain them artificially. If, in our system of mortgage, or in any other, there be obstacles to the diffusion of the application of credit, let them be got rid of; nothing can be better or more just than this. But this is all which is consistent with liberty, and it is all that any who are worthy s will ask.

When al Qaeda Is Defeated, Can We Have Our Liberties Back?

by Gene Healy

Last week brought the unsurprising news that the Transportation Security Administration had terrorized yet another 6-year-old with a humiliating pat-down. Dog bites man, federal agent gropes child — we're getting all too accustomed to this sort of thing in post-9/11 America.

Meanwhile, even the administration's top terror warriors are starting to admit that al Qaeda is a spent force. Two weeks ago, in his first public comments after moving from Langley to the Pentagon, Defense Secretary Leon Panetta noted that al Qaeda's defeat was "within reach."
When we kill or round up some 10 to 20 remaining senior operatives, Panetta said, we'll "really cripple al Qaeda as a threat to this country." In fact, the al Qaeda threat has looked anything but robust for some time now.
Last summer, al Qaeda's online journal Inspire, a sort of Soldier of Fortune magazine for wannabe jihadis, suggested using "a tractor or farm vehicle in an attack outfitted with blades or swords as a fearsome killing machine" — perfect for "mowing down the enemies of Allah."
Among the treasure trove of materials seized from the Abbottabad compound was a missive from Osama bin Laden himself, condemning that scheme as "indiscriminate slaughter" — an odd objection, coming from a mass murderer.
Yet somehow, the terrorist mastermind missed the more obvious objection: The plan is utterly screwball — an embarrassment — the dumbest scheme since ... well, since al Qaeda operative Iyman Faris' 2002 plan to cut down the Brooklyn Bridge with a blowtorch. As I've said before, sometimes you get the sense that these guys aren't the sharpest scimitars in the shed.
The global intelligence firm Stratfor put it more politely in a recent analysis: "The jihadists seem to be having a problem ... finding people who can master the terrorist tradecraft" and travel freely to the West.
They've been reduced to urging potential sympathizers who already live here to stock up at gun shows and shoot some infidels at the mall. But, as Stratfor observes, "the very call to leaderless resistance is an admission of defeat."
We may be winning, but don't dare imagine that "victory" will take the form of a restoration of lost liberties. That's "defeatist" thinking. I suppose that's why, shortly after SEAL Team 6 killed bin Laden, Congress and the president's autopen got together to reauthorize the Patriot Act. The threat recedes, but the surveillance state must live on.
And there can be no talk of beating porno-scanners into plowshares. The Department of Homeland Security recently warned that terrorists might "surgically implant explosive devices" in their bodies.
Slate.com reports that several firms are already hard at work on scanners that can look inside our bodies instead of just inside our clothes. Like all other bureaucracies, the bureaucracy of fear has a merciless logic of its own. It exists to exist, generating new invasions of privacy — and new federal contracts — however speculative the threats.Ten days after the Sept. 11 attacks, in a speech to a joint session of Congress, President George W. Bush laid out his vision of al Qaeda's demise: heirs to the "murderous ideologies of the 20th century," they'd end up "in history's unmarked grave of discarded lies."
Nearly a decade later, U.S. Navy SEALs pitched the head murderer's body off the side of the USS Carl Vinson into the North Arabian Sea — a watery grave that's a pretty close approximation of Bush's imagery.
Wired magazine defense analyst Spencer Ackerman asks the right question: "Why does the U.S. still need to devote such overwhelming resources worldwide against a force that's seeing history pass it by?"
As the 10th anniversary of the Sept. 11 attacks approaches, isn't it time we started thinking about a "peace dividend"?

Machinery - by Frederick Bastiat

VIII. -Machinery

“A curse on machines! Every year, their increasing power devotes millions of workmen to pauperism, by depriving them of work, and therefore of wages and bread. A curse on machines!” This is the cry which is raised by vulgar prejudice, and echoed in the journals.
But to curse machines, is to curse the spirit of humanity!
It puzzles me to conceive how any man can feel any satisfaction in such a doctrine.
For, if true, what is its inevitable consequence? That there is no activity, prosperity, wealth, or happiness possible for any people, except for those who are stupid and inert, and to whom God has not granted the fatal gift of knowing how to think, to observe, to combine, to invent, and to obtain the greatest results with the smallest means. On the contrary, rags, mean huts, poverty, and inanition, are the inevitable lot of every nation which seeks and finds in iron, fire, wind, electricity, magnetism, the laws of chemistry and mechanics, in a word, in the powers of nature, an assistance to its natural powers. We might as well say with Rousseau -“Every man that thinks is a depraved animal.”
This is not all; if this doctrine is true, since all men think and invent, since all, from first to last, and at every moment of their existence, seek the cooperation of the powers of nature, and try to make the most of a little, by reducing either the work of their hands, or their expenses, so as to obtain the greatest possible amount of gratification with the smallest possible amount of labour, it must follow, as a matter of course, that the whole of mankind is rushing towards its decline, by the same mental aspiration towards progress, which torments each of its members.
Hence, it ought to be made known, by statistics, that the inhabitants of Lancashire, abandoning that land of machines, seek for work in Ireland, where they are unknown; and, by history, that barbarism darkens the epochs of civilization, and that civilization shaies in times of ignorance and barbarism.
There is evidently in this mass of contradictions something which revolts us, and which leads us to suspect that the problem contains within it an element of solution which has not been sufficiently disengaged.
Here is the whole mystery: behind that which is seen, lies something which is not seen. I will endeavour to bring it to light. The demonstration I shall give will only be a repetition of the preceding one, for the problems are one and the same.
Men have a natural propensity to make the best bargain they can, when not prevented by an opposing force; that is, they like to obtain as much as they possibly can for their labour, whether the advantage is obtained from a foreign producer, or a skillful mechanical producer.
The theoretical objection which is made to this propensity is the same in both cases. In each case it is reproached with the apparent inactivity which it causes to labour. Now, labour rendered available, not inactive, is the very thing which determines it. And, therefore, in both cases, the same practical obstacle -force, is opposed to it also. The legislator prohibits foreign competition, and forbids mechanical competition. For what other means can exist for arresting a propensity which is natural to all men, but that of depriving them of their liberty?
In many countries, it is true, the legislator strikes at only one of these competitions, and confines himself to grumbling at the other. This only proves one thing, that is, that the legislator is inconsistent.
Harm Of False Premise
We need not be surprised at this. On a wrong road, inconsistency is inevitable; if it were not so, mankind would be sacrificed. A false principle never has been, and never will be, carried out to the end.
Now for our demonstration, which shall not be a long one.
James B. had two francs which he had gained by two workmen; but it occurs to him, that an arrangement of ropes and weights might be made which would diminish the labour by half. Thus he obtains the same advantage, saves a franc, and discharges a workman.
He discharges a workman: this is that which is seen.
And seeing this only, it is said, “See how misery attends civilization; this is the way that liberty is fatal to equality. The human mind has made a conquest, and immediately a workman is cast into the gulf of pauperism. James B. may possibly employ the two workmen, but then he will give them only half their wages for they will compete with each other, and offer themselves at the lowest price. Thus the rich are always growing richer, and the poor, poorer. Society wants remodelling.” A very fine conclusion, and worthy of the preamble.
Happily, preamble and conclusion are both false, because, behind the half of the phenomenon which is seen, lies the other half which is not seen.
The franc saved by James B. is not seen, no more are the necessary effects of this saving.
Since, in consequence of his invention, James B. spends only one franc on hand labour in the pursuit of a determined advantage, another franc remains to him.
If, then, there is in the world a workman with unemployed arms, there is also in the world a capitalist with an unemployed franc. These two elements meet and combine, and it is as clear as daylight, that between the supply and demand of labour, and between the supply and demand of wages, the relation is in no way changed.
The invention and the workman paid with the first franc, now perform the work which was formerly accomplished by two workmen. The second workman, paid with the second franc, realizes a new kind of work.
What is the change, then, which has taken place? An additional national advantage has been gained; in other words, the invention is a gratuitous triumph -a gratuitous profit for mankind.
From the form which I have given to my demonstration, the following inference might be drawn: -“It is the capitalist who reaps all the advantage from machinery. The working class, if it suffers only temporarily, never profits by it, since, by your own showing, they displace a portion of the national labour, without diminishing it, it is true, but also without increasing it.”
I do not pretend, in this slight treatise, to answer every objection; the only end I have in view, is to combat a vulgar, widely spread, and dangerous prejudice. I want to prove, that a new machine only causes the discharge of a certain number of hands, when the remuneration which pays them as abstracted by force. These hands, and this remuneration, would combine to produce what it was impossible to produce before the invention; whence it follows that the final result is an increase of advantages for equal labour.
Who is the gainer by these additional advantages?
First, it is true, the capitalist, the inventor; the first who succeeds in using the machine; and this is the reward of his genius and his courage. In this case, as we have just seen, he effects a saving upon the expense of production, which, in whatever way it may be spent (and it always is spent), employs exactly as many hands as the machine caused to be dismissed.
But soon competition obliges him to lower his prices in proportion to the saving itself; and then it is no longer the inventor who reaps the benefit of the invention -it is the purchaser of what is produced, the consumer, the public, including the workmen; in a word, mankind.
And that which is not seen is, that the saving thus procured for all consumers creates a fund whence wages may be supplied, and which replaces that which the machine has exhausted.
Thus, to recur to the forementioned example, James B. obtains a profit by spending two francs in wages. Thanks to his invention, the hand labour costs him only one franc. So long as he sells the thing produced at the same price, he employs one workman less in producing this particular thing, and that is what is seen; but there is an additional workman employed by the franc which James B. has saved. This is that which is not seen.
When, by the natural progress of things, James B. is obliged to lower the price of the thing produced by one franc, then he no longer realizes a saving; then he has no longer a franc to dispose of, to procure for the national labour a new production; but then another gainer takes his place, and this gainer is mankind. Whoever buys the thing he has produced, pays a franc less, and necessarily adds this saving to the fund of wages; and this, again, is what is not seen.
Another solution, founded upon facts, has been given of this problem of machinery.
It was said, machinery reduces the expense of production, and lowers the price of the thing produced. The reduction of the profit causes an increase of consumption, which necessitates an increase of production, and, finally, the introduction of as many workmen, or more, after the invention as were necessary before it. As a proof of this, printing, weaving, &c., are instanced.
This demonstration is not a scientific one. It would lead us to conclude, that if the consumption of the particular production of which we are speaking remains stationary, or nearly so, machinery must injure labour. This is not the case.
Suppose that in a certain country all the people wore hats; if, by machinery, the price could be reduced half, it would not necessarily follow that the consumption would be doubled.
Would you say, that in this case a portion of the national labour had been paralyzed? Yes, according to the vulgar demonstration; but, according to mine, No; for even if not a single hat more should be bought in the country, the entire fund of wages would not be the less secure. That which failed to go to the hat-making trade would be found to have gone to the economy realized by all the consumers, and would thence serve to pay for all the labour which the machine had rendered useless, and to excite a new development of all the trades. And thus it is that things go on. I have known newspapers to cost eighty francs, now we pay forty-eight: here is a saving of thirty-two francs to the subscribers. It is not certain, or, at least, necessary, that the thirtytwo francs should take the direction of the journalist trade; but it is certain, and necessary too, that if they do not take this direction they will take another. One makes use of them for taking in more newspapers; another, to get better living; another, better clothes; another, better furniture. It is thus that the trades are bound together. They form a vast whole, whose different parts communicate by secret canals; what is saved by one, profits all. It is very important for us to understand, that savings never take place at the expense of labour and wares.