Monday, June 28, 2010
As he wandered, Geothustra beheld yonder a large city he had never visited. Out of curiosity, he walked towards it, and then a beggar, a wrinkled old man with white hair, held his palm out, and asked, “Five shillings please, for cigarettes?”
“Come with me to the city,” Geothustra answered, “and we can get you a job washing dishes, so that you may indulge in your vice.”
“No!” the beggar cried out. “Do not go to the city! You will suffer loss! Turn around!”
“Why there and not here?” asked Geothustra.
“Everything in the city is corrupted and crumbling. Thieves abound. There is filth everywhere. Nobody is safe.”
“This is odd,” said Geothustra. Here in the woods, it is peaceful. Here, there is blissful silence. But where people are gathered, there is noise and sadness. Why would people create misery for themselves?”
“I don’t know,” said the beggar. “I just need a smoke.”
“Maybe I can introduce there some new values,” said Geothustra.
“Useless!” cried the old man. “You will be ignored. Nobody will understand. There are many voices there, saying different things, and nobody knows who is correct.
“Excessive noise murders thoughts,” said Geothustra. “But do not logic and evidence tell us what is right?”
Just then, a woman who looked deceptively youthful appeared.
“Please stay here a while,” Geothustra called out to her. “You are beautiful, and I wish to enjoy your company for a little while. I am named Geothustra, after my grand-uncle Zarathustra. If I may ask, what is your name?”
“My name is Eternity,” she answered.
“If you went away and came back, would this be an Eternal recurrence?” asked Geothustra.
She smiled. “Let us go down to the city. There must be some good people there.”
“Everywhere,” said Geothustra, “there are those who call themselves ‘good.’ But they are flies which buzz around bothering people. They are mosquitos who sting and say it is for your good.”
“The good say they help the poor. Do you not pity the poor?” said Eternity.
“Pity fouls the air,” said Geothustra. “If all we do is give alms to the poor, then our pity becomes a cruel prison. That is why I despise pity.”
“The government should do something,”said the beggar.
“Who is in government?” asked Geothustra. “Those who lust to rule. They become hard hearted. Their democracy exploits the vanity of the people. The people are camels.”
“One hump or two?” asked the beggar.
“Nothing but humps,” said Geothustra. “Like a camel, the proletarian man kneels down and lets himself be burdened. He then walks around carrying a useless sack of rocks.”
“And it goes on for eternity!” said Eternity.
“Oh, I am falling in love with you!” exclaimed Geothustra.
“I need a cigarette,” said the beggar.
“Going back to the good,” said Eternity. “Why is it bad to be good?”
“The ordinary man believes that his good is a universal good. The superior being, who reasons rather than reacts, understands the difference between his personal good and the universal good. He rejects the chief who seeks to impose his personal good on all. The greatest evil is the sin of Adam and Eve, whose conceit led them to believe they could replace the tree of knowledge of good and evil, with a new plant of their own sowing. We need to go beyond the stifling good and evil dictated by cultural and personal conceit. Go your way, and let other folks go their ways.”
Spoke Eternity, “If you say this to the city folk, you will disturb their sleep, and they will not like it, despite their sleep being plagued with nightmares.”
“Very well,” said Geothustra. “We will not venture into the city. Instead, let us instead go into the woods, where there is a meadow, where the gods are dancing naked.”
“Why naked?” said the beggar. Geothustra noticed that his shirt was stained, his trousers were
torn, and his shoes worn out. Is naked worse than rags?
“The dancing gods are ashamed of all clothing,” said Geothustra. “It is the opposite of the city.”
“Dancing gods? You speak in riddles and stories,” said the beggar.
“These are metaphors and similes,” explained Eternity.
“I must speak in parables,” said Geothustra, “so that people ponder what I say, rather than reject it in reflex.”
“Like a poet,” said Eternity.
“Oh! I love you, Eternity!” exclaimed Geothustra.
“Tell us another parable,” said the beggar.
Replied Geothustra, “The sun pours gold into the sea from its inexhaustible wealth, so that even the poorest may row with golden oars, but man has ruined the sea and prefers to till rocky soil.”
“Government should give me free smokes,” said the beggar, “because I badly need them!”
Said Geothustra, “The rabble wants to live free of charge, but I propose a new nobility. If we accepted the gold naturally offered to us, then we would be able to earn wealth and receive goods in exchange.”
“Well,” said the beggar. “If you can’t give me money for smokes, good bye,” and he departed.
“He will be back,” said Eternity. “Beggars are an eternal recurrence.”
“What about truth?” asked Geothustra,.
“Truths are eternal,” said Eternity. “People cast them aside, yet truth always comes back. Truth gets lost and then rediscovered over and over again. Truth too is an eternal recurrence.”
“Oh, my soul,” spoke Geothustra, “I have longed for you all my life. There is no soul that could be more encompassing! Into your eyes I looked, and I caught a glimpse of nirvana. Never before have I found a woman whom I could love, Eternally, Recurrently, until now!
I love you, O Eternity!”
Thus spake Geothustra.
(Reference: Thus Spoke Zarathustra by Friedrich Nietzche, Cambridge University Press, 2006; Third Part.)
Sunday, June 20, 2010
Gold as Implicit Money
Economics encompasses two realities, the explicit and the implicit. The explicit is visible, obvious, recorded, and quoted. Explicit expenses are paid to others and recorded by accountants. The explicit is also called “nominal,” since that is what is named. For example, nominal interest is what a bank says it is paying, and the money it pays to depositors.
But there is also an implicit realm that is also real. Indeed, the implicit is more real than the explicit. What is explicit is often merely the superficial appearance. But things are often not what they appear to be. The reality beneath is implicit, not visible, not quoted, and not recorded, yet it is the true reality. Economists often use the adjective “economic” to designate the real thing in contrast to the explicit number or the accounting data.
An enterprise has explicit and implicit expenses. The explicit expenses are recorded by bookkeepers and accountants. The implicit expenses are non-recorded opportunity costs, such as what the owner of a business would have earned elsewhere, or what the assets of the firm would yield if sold and converted to bonds. The real cost of oil is not what the buyer pays but also includes the implicit costs of pollution damage not paid for by the customer.
Real interest is the nominal interest minus the inflation rate. Economic profit is accounting profit minus implicit expenses. Real GDP is nominal GDP (in current dollars) adjusted for inflation. Economists deflate prices and include implicit costs to get at the implicit reality.
Land rent is another implicit reality. The economic rent of land is the difference in the value of the output of a plot relative to the output at the least productive land in use. This rent is also the payment for the use of land at which the quantity of land available equals the quantity demanded by users. This implicit rent can be different from the explicit rental payment a tenant pays to a landlord. If the explicit rent payment is less than the economic rent, then the tenant is receiving the rest as implicit rent.
We can apply the explicit and the implicit to money also. Explicit money is the currency and bank deposits we use for transactions. Prior to World War I, in much of the world, explicit money was gold. Paper currency was a money substitute convertible into the real money, gold. Money substitutes such as traveler’s checks are explicit.
Today, governments and their central banks issue paper currency not convertible into gold, thus fiat money, based only on law and custom. Yet many governments also keep substantial amounts of gold. Why?
Because the cost of production of fiat money is basically zero, and so the value of fiat currency can ultimately fall to zero. Witness the currency of Zimbabwe, which has experienced hyperinflation. Governments and their central banks hold gold because it is implicit money.
Even though gold now is not used explicitly to exchange for goods, gold could be so used. Gold is a quite liquid asset, readily converted into currencies or readily exchanged for goods. Gold is a better store of value than fiat currencies such as the US. dollar, which have been subject to continuous inflation. Gold does not default, and gold does not go broke. Gold does not rust or deteriorate with age. Gold holds much value in a small volume.
In a financial crises or economic collapse, gold will still have value. If you want an asset that will have value one thousand years from now, you could not do better than gold. A plot of land may have value today, but not tomorrow if that location has gone bad.
A good currency is one that you can carry in your pocket. Some reformers have proposed commodities such as bricks or electricity or land as money. Good luck carrying bricks to the store! A good currency is one that one cannot cheaply make more of, as is the case with bricks or electricity. Land is fixed in supply, but you can’t put it in your pocket to carry to the store. You could say to the store owner, “I have a quarter acre of land in Vermont that I want to pay with.” Good luck with that.
You could try to base money on an hour of electricity, but if the government issues huge amounts of currency convertible into electricity, there would be so many notes that it could never all really be converted, so both the notes and electricity would trade at a discount relative to other goods. If you can’t carry it in your pocket, it is not good money, and the market will come up with an implicit currency that can be carried, such as gold.
Gold has natural properties that make it suitable to use as money, which is why the world moved to a gold standard prior to World War I. Governments prefer fiat money, because they can expand it at will, yet they hold gold because it retains value, and they can exchange it for goods when squeezed by circumstances. Its potential and eternal exchange value makes gold eternally and universally the premier form of implicit money.
Sunday, June 13, 2010
Attempts to Squash Challenger Political Parties
When Americans vote for candidates, most of them think they are choosing between Republicans and Democrats. The more fundamental choice is between the challenger parties and the establishment parties. When one votes for a Republican or a Democrat, in effect on is accepting the status quo, and is choosing among currents in the political mainstream instead of a different river.
In California, for example, besides the Republican and Democratic parties, there are several challenger parties: the American Independent Party for right-wing conservatives, the Green Party for radical environmentalists, the Libertarian Party for tolerant free-marketeers, and the Peace and Freedom Party for state-socialists.
Even though the small challenger parties seldom win elections, they offer a meaningful choice for voters who fundamentally reject the status quo. The policies of the establishment mainstream have resulted in the outcomes that are ruining the planet and the economy: massive pollution, a depressed economy, Grand Canyon sized budget deficits, high unemployment, and endless war.
Despite the small party membership and votes of the minor parties, the establishment feels threatened by the ideas generated by the challengers. They seek to stifle the voices of protest and radical change. An example was Proposition 14 on the California ballot on 8 June 2010. Proposition 14 replaced the party primary elections with an election in which voters will select from all the candidates from all the parties. The top two vote getters will then be on the ballot for the general election, even if both are in the same political party.
This proposition was bad on many dimensions. First of all, it violates freedom of association. Voters should be able to associate in a party of common interests, and then choose the candidate from their party. Why, for example, should those not in the Green Party be able to vote for a Green candidate, drowning out the voices of the party members? This constitutes party crashing.
Secondly, the voices of the challenger party will be extinguished in the general election. Even write-in candidates would not be allowed for state and national candidates. Not only that, challenger voices would be stifled even in the primary election.
In California, minor political parties retain their ballot status by polling at least two percent of the vote in a midterm (not presidential year) general election. Under Proposition 14, since only the major party candidates would be on the ballot, the challenger parties will lose their ballot status, unless the party membership is relatively large. Candidates of some of the smaller challenger parties will not be able to include their party affiliation in the primary election. Those not familiar with the party candidates would not know which candidate is in the Peace and Freedom or Libertarian parties.
The establishment parties get their funding from special interests and in return, provide them with subsidies. Our social problems can only be remedied with radical changes that would eliminate these privileges. Proposals to eliminate party voting would stifle these choices and voices.
We have today the forms of democracy, but not the substance. The establishment party bosses set the agenda by backing the establishment candidates. Occasionally a challenger within a party will win, such as the political upsets that occurred in the spring of 2010. But these candidates usually move towards the center in the general election.
Only the challenger parties can provide an alternative to the status quo in the general election. But the voters may not fully understand the effects of voiding party elections. They may not understand that the elimination of party primary elections would further demolish the substance of democracy, leaving a shell, an illusion of choice, that would be even more deeply exploited by the special interests.
Sunday, June 06, 2010
Governmental financing externalities
There have been proposals to tax soda drinks because they make people fat and unhealthy, and thus increase medical costs that are paid for by the government. The advocates of soda taxes claim that the sugary drinks create a negative externality, which the soda drinkers should prevent by paying for their future medical costs via the soda tax. However, these advocates evidently do not understand the economics of externalities.
An external effect, or externality, is an uncompensated impact on others. A negative externality imposes a cost on others. Pollution, for example, that trespasses into others’ property, without compensation to those affected, is a negative externality.
In contrast to a real externality, a physical invasion into others’ domains, a pecuniary externality is an effect on others caused by economic activities that do not physically invade others but affect them by a change in prices or profits. For example, if one company increases market share, the others which lose market share suffer a pecuniary externality. Economic analysis concludes that real externalities should require compensation, while pecuniary externalities should not.
A third type of externality is a governmental financing externality, in which the activity of some people impose a cost on others because they are forced to pay taxes to pay for that activity. That applies to the consumption of unhealthy food when taxpayers pay for the medical costs.
If people fully paid for their medical costs, then drinking unhealthy sodas would not impose an externality. The sugar would make the drinker fat and sick, and he would pay for the medical expenses. It is only because government subsidizes medical expenses with Medicare, Medicaid, and other governmental financing that a cost is imposed on others. So this is an externality caused by government policy.
Thieves impose a real externality when they invade property to steal wealth. Government likewise imposes a real externality when it forcibly extracts wealth from taxpayers. If externalities are bad and should be prevented, then the first policy response should be to abolish taxation except from sources, such as land, that do not suffer negative externalities.
The taxation of land rent obtains wealth which is a surplus, funds left over after paying for the costs of labor and capital goods. After the land-rent tax is in place, even the landowner suffers no externality, since the tax just replaces the mortgage interest he would otherwise have paid.
The argument for the forced extraction of wealth from soda drinkers collapses when one realizes that the tax itself is an externality, and that the governmental financing externality would not exist if we untax labor so that workers can then afford to pay for their own medical costs.
The concept of using taxes to reduce the consumption of unhealthy food, if applied generally, would get bogged down in controversy. For example, there are claims that some sugar substitutes are unhealthy. Some nutritionists claim that eating meat is unhealthy, and most experts agree that eating processed foods such as cookies is unhealthy. Others say these are acceptable in moderation. So a proposal to tax foods made from wheat flour, or with sugar, or too much salt, or sugar substitutes such as aspartame, or meat, or milk products, or too many chemical additives, would be disputed. There are difference in views about supplements such as vitamins, minerals, and enzymes. Controversies among experts in nutrition make economics look good by comparison.
The better proposal is disclosure. Require a logo such as a skull and crossbones for foods for which there is a wide agreement that they are unhealthy. A poison logo would be put on foods such as sugary candy, salty crackers, and fatty bacon. Such disclosure is now being made for fish that may contain mercury and on tobacco products, and there are warnings on some foods that pregnant women should not consume these.
A tax on an externality created by government policy is a perversion of the economic policy of charging for real externalities. As law professor Eugene Volokh has written, the “solution to this problem is to eliminate the government financing that created the ‘externality’ in the first place.” Just as pecuniary externalities have a different moral and economic effect from real ones, so should the policy for governmental financing externalities be to abolish them, not use them as an excuse to impose yet another tax externality.