Tuesday, January 05, 2010

Somewhere Hidden Something Goes

As you read this, fifty trillion neutrinos are passing through your body each second. Neutrinos are tiny neutral particles. The sun emits illions of them, and they pass through the earth without affecting it. We cannot see or feel them; it requires a particle detection laboratory to measure them. Neutrinos are hidden from sight, sound, and touch, but they are real.

Science has provided us with much knowledge about the human body, but much of what goes on inside is hidden. There can be disease building up in our bodies that is not easily detected. Somewhere hidden in our bodies, something can be going on, and we will not know it until it becomes too big and bad to stay hidden.

There could malicious programs that snuck into your computer undetected by protective software. Webs site are collecting data on you, hidden from your view. Programs are running in a PC that you can see if you type control-alt-delete, but they do not tell you what goes on, and there could be programs that do not show up there. Someone somewhere could be collecting data and recording what you do. Even the originator of a program will not know who gets infected, as the program itself generates offspring robots. Somewhere hidden, something goes, and perhaps nobody knows.

Don’t ask from whom the economy hides; it hides from you! Economic data can be different from what they appear to be. The main benefit from learning economics is to be able to understand the reality that lies hidden beneath superficial appearances.

For example, you might think that when a bank says it is paying you four percent interest, you are getting $4 annually for each $100 in your account. That is the superficial appearance. But some of that gain is not real, since it just makes up for inflation. To get the real interest rate, subtract inflation from the quoted or nominal rate. So if inflation is three percent, the real interest would be four minus three, thus one percent real interest, or $1.

But the U.S. Treasury does not keep it real. It taxes the nominal, not the real, interest. So if the tax rate is 50 percent, the state takes $2 from the interest. You real after-tax interest then becomes a minus one percent. Hidden from sight, inflation and taxes take away much of what you earn.

The real profit from enterprise is also hidden. A business man may think that if his revenue for the year is $1,000,000 and he pays $800,000 for labor, rent, and equipment, his profit is $200,000. But economic reality says otherwise. Somewhere hidden are costs not recorded by the accountant. If the entrepreneur had worked as an employee for somebody else, and he would earn $150,000, that is a cost of being in business as wages foregone. If he owns assets in his business and they could fetch $50,000 in annual interest, that too is an implicit cost. Subtract these from the accounting profit, and we get an economic profit of zero. In reality, he is not making any profit, as there are costs going on that are hidden but real.

Phenomena such as land rent are to a great extent hidden. The economic rent of land is what the highest (or second-highest, technically) bidder would pay to use that land. An owner who also uses and occupies the land is also paying and receiving rent; implicitly paying as tenant and receiving as owner. So land generates rent just as magnets generate a field, even without our seeing it.

What is hidden can be more real than what we think we observe. What we think we see is in large part an interpretation of what we observe. We can experience an emotional reaction to a picture or scene that is based on our beliefs and values rather than the physicality of the object.

One reason why government planing and control so often fail is that much of the economy is hidden from view. As the economist Friedrich Hayek pointed out, the knowledge relevant to production, exchange, and consumption is decentralized, changing, and tacit. Much of the knowledge is not written down, but in our minds, and we might not even be able to fully explain it.

Comes the government, and it thinks it can plan and provide for our welfare, including our old-age income, our medical services, our education, and our safety. It can do these things, but government agents cannot peer into our minds to discover what we really want, and they cannot see into the uncertain future to realize what is best of any person or society, When government uses force, it is altering reality into outcomes with unintended and unknowable consequences.

Faced with uncertainty and lack of knowledge, with hidden forces going on, it is best for each adult to set his own course. If we can keep our full wage and share the rent, we would all be able to choose our own bliss. Nobody can know what makes me happy but me, and even I don’t always know, so it’s best not to meddle.


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