Wall Street On Trial

How minimum wage does more harm than good

A real market economy ensures that greed is good

By John Key

Sixty years of division of the Korean peninsula has created two states with very different standards of living in one country. The Korean example is pathological. The division of Germany resulted in two states, both functional in economic terms, but one far richer. The less noticed comparison between the modern economic histories of Finland and Estonia had the same outcome.

There are few controlled experiments in economics, but these are as close as we get, and the results were clear. They were also unexpected. Hard though it is to believe today, in the 1960s many serious commentators on left and right believed that Russian economic progress threatened western hegemony. Those on the left were naively credulous and those on the right victims of paranoid fantasies.


A perhaps apocryphal story tells of a Russian visitor, impressed by the laden shelves in US supermarkets. He asked: “So who is in charge of the supply of bread to New York?” The market economy’s answer – that not only is no one in charge, but it is a criminal offence for anyone to seek that position – is surprising. In the words of the economists Kenneth Arrow and Frank Hahn, “the immediate common sense answer to the question ‘what will an economy motivated by individual greed and controlled by a very large number of different agents look like?’ is probably ‘there will be chaos’.” Our intuition is that a centrally planned allocation of resources will be more efficient than an uncoordinated one. In a market economy, that error constantly leads us to overestimate the economic advantages, and longevity, of large companies.

Our intuitions about the merits of scale and centralisation are generally wrong, partly because a price system can co-ordinate the decentralised decisions of many small companies and households well. Adam Smith’s insight about the invisible hand is often interpreted in this way and modern mathematical economists have established that proposition more precisely. But if co-ordination were the only strength of the market economy, a computer could do that job equally well. Computers are very good at processing information.

But the prices and entrepreneurs of the market economy are much better at eliciting the information, on preferences and products, needed to make the calculations. Prices, and entrepreneurs, manage the market’s process of discovery. A functioning market economy allows endless small-scale experimentation. When such experiments succeed, they are quickly imitated: when they fail, as experiments usually do, they are abandoned. Centralised economies, lacking this disciplined pluralism, experimented too rarely: when they did, they typically implemented on too large a scale. They often lacked honest feedback on performance. Subordinates had good reason to tell the great leader what he wanted to hear. We see the same mechanisms at work in our large corporations.

But what of profit? North Korea is hardly free of the profit motive. The Kim dynasty and the cliques around it may profess disdain for capitalism, but they understand the goal of personal enrichment as well as any Wall Street Master of the Universe. The difference between North Korea and the US is not that one society offers more scope for greed than the other. In both countries, as in many others, there are greedy people and many who are not, and those who are greedy are disproportionately represented in the controlling elite. The difference lies in the channels of greed – the degree to which the quest for profit is directed towards the creation of new wealth rather than the appropriation of wealth already created by other people.

A successful market economy emphasises the former and restricts the latter through rules and institutions, in a structure that has evolved slowly and requires constant defence against those who would use economic and political power to subvert it. Success or failure in that endeavour is the central explanation for why some societies are rich and others poor. Crony capitalism is very different from the market economy.

The Story of Broke and The Story of Broke Response

The response to the story of broke touches on one of the fundamental problems of the education system in the west today its one-size fit all top down bureaucratic approach.

The Cost of War on Drugs

Lets hope some time this century governments will no longer fear to treat their citizens as adults and legalise drugs, with immense benefits for everyone. Fact of the matter is that those who want drugs can get them anyway, whereas those who are responsible enough not to take drugs will not use them even if they were legal. Therefore the war on drugs does not prevent drug taking. It simply uses up huge amounts of resources and leads to conflict and suffering among criminal groups involved in the drugs trade.

Bastitat extracts

“The state is the great fictitious entity by which everyone seeks to live at the expense of everyone else…Nothing enters the public treasury for the benefit of a citizen or a class unless other citizens and other classes have been forced to put it there…heavy government expenditures and liberty are incompatible…To be free, on one’s own responsibility, to think and to act, to speak and to write, to labor and to exchange, to teach and to learn—this alone is to be free.”

*******

“On coming to Paris for a visit, I said to myself: Here are a million human beings who would all die in a few days if supplies of all sorts did not flow into this great metropolis. It staggers the imagination to try to comprehend the vast multiplicity of objects that must pass through its gates tomorrow, if its inhabitants are to be preserved from the horrors of famine, insurrection, and pillage. And yet all are sleeping peacefully at this moment, without being disturbed for a single instant by the idea of so frightful a prospect. On the other hand, eighty departments have worked today, without co-operative planning or mutual arrangements, to keep Paris supplied.

“How does each succeeding day manage to bring to this gigantic market just what is necessary—neither too much nor too little? What, then, is the resourceful and secret power that governs the amazing regularity of such complicated movements, a regularity in which everyone has such implicit faith, although his prosperity and his very life depend upon it? That power is an absolute principle, the principle of free exchange. We put our faith in that inner light which Providence has placed in the hearts of all men, and to which has been entrusted the preservation and the unlimited improvement of our species, a light we term self-interest, which is so illuminating, so constant, and so penetrating, when it is left free of every hindrance.

“Where would you be, inhabitants of Paris, if some cabinet minister decided to substitute for that power contrivances of his own invention, however superior we might suppose them to be; if he proposed to subject this prodigious mechanism to his supreme direction, to take control of all of it into his own hands, to determine by whom, where, how, and under what conditions everything should be produced, transported, exchanged, and consumed? Although there may be much suffering within your walls, although misery, despair, and perhaps starvation, cause more tears to flow than your warm-hearted charity can wipe away, it is probable, I dare say it is certain, that the arbitrary intervention of the government would infinitely multiply this suffering and spread among all of you the ills that now affect only a small number of your fellow-citizens.”

US-German unemployment rate 2000-2011

German unemployment rate fell steadily post 2005 as labour market reforms that reduced labour costs (and therefore increased competitiveness) began to take effect. After 2005 Germans essentially decided to work as hard or harder for less reward, in other words they decided to sacrifice. The results of such a compromise is booming exports, as of January 2012 record low unemployment and high growth. At a time when most developed economies are going through considerable contraction.

Why The Global Warming Agenda Is Wrong

The Tea Party vs. Occupy Wall Street

Incompatability of Equality and Liberty

Are we prepared to give up liberty for equality? Soviets and Eastern Europe tried it. It did not exactly turn out to be a great success.