Monday, August 27, 2012

The Sex of Economics

Most life on earth gets generated by sexual reproduction. There is also reproduction in the economy, as well as the economic intercourse of trade, which constitute the sex of economics.

The concept of economic reproduction is emphasized in the Marxian school of economic thought. In Marxist theory, the conditions for production are continuously re-created as a circular flow. The concept of the circular flow of both goods and of factor-inputs was first developed by the French economists of the 1700s, who called their theory of natural economic laws “Physiocracy.” The factors or categories of inputs are land, labor, and capital goods.

In Physiocratic thought, production has a “net product,” a surplus that comes from the land. The surplus is a gain beyond the costs of production. Economists have identified several types of surplus, including the consumer and producer surplus, but the latter is misnamed, because in a competitive industry, the surplus that comes from production is mostly land rent, as known by the Physiocrats and the Classical economists, but forgotten by today’s neoclassical paradigm.

In human life, the enjoyment of sex is a natural consumer surplus, a gift from nature. Believe it or not, this consumer surplus can generate land rent, as does all consumer surplus, because people prefer to live in locations with a larger total consumer surplus than a place with a lower surplus, and this increase in locational demand generates land rent.

In Physiocratic thought, when some of the net product or rent surplus is invested in productive capital goods, that generates economic growth. Marx called this “expanded reproduction,” production beyond what is needed to replace depreciated labor and capital goods. The Physiocratic model was put to productive use in Japan during the latter 1800s and in Taiwan after 1950 to generate rapid development, but the chiefs of government in the U.S., Europe, and Japan have spurned this, the only way out of their economic malaise. The economies of the developed world have lost their sex drives - expanded economic reproduction there has ceased.

Although Karl Marx derived his theory from Physiocratic and Classical thought, he shifted the source of the production surplus, from land rent to the wages of labor. That is a fatal error in Marxian doctrine. Modern economics recognizes correctly that competitive labor has no long-run surplus; for if there were a surplus, that attracts labor into that industry, which drives the wage down until the surplus is eliminated. In contrast, the supply of spatial land cannot expand, so the surplus that is rent stays there.

Because ordinary labor has no surplus, the taxation of wages is deadly. When wages are taxed, the worker is no longer able to buy the product of his own labor. The public goods and subsidies provided by government cannot make up for the loss due to taxes, because the taxes include the excess burden of reduced surpluses, plus the spending waste from fraud and inefficiency. The taxation of labor and the capital goods produced by labor constitutes economic birth control. Taxes on production are an economic contraception that reduces economic reproduction.

In the Austrian school of economic thought, capital goods have a time structure based on the rate of interest. The goods of “lower order” have a high turnover, a short period of production. For example, a store selling perishable goods has a turnover of only a few days. If the firm borrows funds to pay for the inventory, the debt can be repaid very quickly from the sale of goods. Thus the rate of interest for a one-time loan matters very little.

In contrast, a tree that requires 40 years to mature has a long period of production, a very slow turnover. Investment in such “goods of higher order” is very sensitive to the interest rate, since the alternative is to buy bonds that pay the prevailing rate of interest. When interest rates rise, there is more investment in lower order capital goods, and when interest rates fall, there is more investment in higher order capital goods, principally in real estate development.

Therefore, the reproduction of capital goods is not just a matter of investing in more goods, but also of the right balance among the various turnover levels of capital goods. The right balance can only be determined by the natural free-market rate of interest. Since today the transaction rate of interest is manipulated by central banks such as the U.S. Federal Reserve, today’s economic reproduction is distorted. Taxation and subsidies also distort the sex of economics, reproduction and economic intercourse. The distortions have created inflation, recessions, and chronic high unemployment. Government intervention has stifled economic reproduction.

Note how the global economy now hangs on the meetings in the European Union on what to do about the excessive government deficits and debts, or the actions of the Federal Reserve, or on the fiscal policy debates in Congress. Everybody wants to know the tax policies of the candidates for President. These are symptoms of a very deep economic disease which are destroying the private enterprise that developed the developed world.

Very few people understand the requirements of economic reproduction, even though these principles were discovered long ago by the Physiocrats. The French economists of the 1700s gave the world the term “laissez faire.” As the Chinese sage Lao Tzu wrote, the world can run on its own. Optimal economic reproduction requires what Henry George called “true free trade.” And as the Physiocrats recognized, true free trade requires the elimination of all tax barriers, with public revenue based only on the surplus from production, land rent.

Just as many cultures have negative attitudes on human sex, the cultures of the world are now biased against the healthy sex of economics. Many people want government to redistribute and intervene. Then they blame religious and ethnic minorities for their troubles. As the Beatles sang in their song Revolution, “You better free your mind instead.”

Sunday, August 19, 2012

The Sales Tax Petard

For years, the web-based book seller had not been charging sales tax in states in which it did not have a physical presence such as a store. States do not have legal jurisdiction over enterprises that are not located within their territory, although Amazon and other companies have had relationships with affiliate companies, which makes the concept of a physical presence unclear.

Customers who do not pay a sales tax to the seller are supposed to pay a Ause@ tax that is equivalent to a sales tax, but they rarely do this, due to the absence of enforcement. This proves that most people do not consider a tax on goods to be a moral obligation.

Now the sales-tax-free era is coming to an end. Book store owners had long complained that it was unjust for them to pay sales taxes while web-based sellers were not charging the tax. In California and some other states, the sales tax rate is about ten percent, a substantial difference when the price of a book is high, and the books can be mailed at the low-cost media rate.

The efficient and equitable solution is to abolish the sales tax. Sales taxes are a 19th century antiquated tax not suitable for the global economy of the 21st century. With the abolition of sales taxes, all sellers are on an equal tax playing field. Instead of taxing goods such as books, the states could more efficiently and equitably tap land values and land rent. But politics compels the state governments to subsidize land values, so the state officials did the opposite, applying their sales taxes to Amazon and other web-based sellers. Amazon has stopped fighting the sales tax, and has appeared to surrender to sales-tax pressure, but it is actually making lemonade.

The Amazon company is already taxing goods in several states, including New York and Texas, and will include more states from 2012 thru 2014, including California. Local book sellers are hoping that the taxing of web-based sellers will stop the drain of customers to those sellers. But they may have hoisted themselves with their own petards, as the old Hamlet saying goes. A petard is a small gunpowder bomb, and the saying comes from being blown upward from one=s own bomb that explodes prematurely.

If Amazon has to charge and pay sales taxes even without a store or warehouse in a state, the company has no more reason to avoid such physical presence. Indeed, Amazon is being pushed by the state governments to install distribution centers to generate jobs. These warehouses will provide same-day delivery to customers, at little or no cost to the buyers. If a buyer seeks a particular book, it would save time to order from Amazon rather than go to a book store, with all the bother of driving, parking, and waiting in line. The main reason to go to a book store would be to browse, but one can also browse on a book seller=s web site.

There are three reasons why governments levy sales taxes. The reason is not to collect revenue, since governments could raise revenues from other sources. The first reason for sales taxes is to force the poor to pay taxes. Conservatives want the poor to pay taxes so that they feel the burden of government. The second reason for sales taxes in addition to having other taxes is to split up taxation among many sources to make it difficult for individuals and firms to calculate the total taxes paid. Tax complexity is thus a deliberate government policy. The third reason to impose a sales tax instead of the more efficient land tax is to subsidize landownership, since public goods raise land values unless paid for by land owners.

By becoming landowners in a state, and other firms in effect get a tax rebate from the states. The firms pass the sales tax to customers and suffer some of the tax burden in fewer sales and less profit, but if they own real estate, they can get their money back in the implicit rental that reflects the public services paid for by the customers rather than the firms. Thus the web-based retailers are learning to game the system in their favor.

The losers are the people who buy goods, and have no clue that they are thereby paying a second tax in the form of an excess burden and deadweight loss, and redistributing wealth to the rich in the form of higher land values. Of course real estate owners suffered large losses during and after the Great Recession of 2008, but the upswing of the real estate cycle is now starting, just in time for web-based retailers to cash in under the disguise of providing jobs in warehouses.