no third solution

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Category Archives: Economic Fallacies

Manufacturing Broken Windows, One Tank at a Time

June 19th, 2008

A peculiar sort of tragedy of the commons is the not in my backyard argument, used to forestall or prevent certain “undesirable” developments (like airports, Wal-Marts, nuclear reactors, or oil derricks). On the one hand, the tragedy of commons asserts that when property rights are not clearly defined, the property in question will be over-utilized, depleted, destroyed, etc. The NIMBY argument is kind of the opposite: when property rights are not clearly defined, NIMBY properties won’t be utilized, used, or developed at all, instead they sit idle.

It’s queer that the NIMBY argument is used against noisy, pollutive or other undesirable plants, but not generally applied to military development. For example, a lot of people really hate war, but they don’t get up-in-arms about the Tank Plant down the street that’s churning out the latest in mass-murder technology (permalinked PDF):

General Dynamics, which has operations also in Sterling Heights and other parts of the country, is working on a $2-billion contract to help develop combat systems being built over the next five years.

The goal: Make everything more agile, more lethal and less reliant on manpower by 2015, when the Army’s 14-part Future Combat Systems is to be integrated.

“It’s a new way of fighting,” said Paul Mehney, associate director of communications for the program.

To review:

America’s chief export is war — and practically all of the countries that “hate us” are running a massive trade deficit in that department. — America’s Chief Export, 10-23-2007

The new weapon will allegedly be able to fire shells up to eight miles away. Boasts Mehney, “We’re going to be able to hit what we can’t see.”

Yeah, nothing like tossing volley after fucking volley of depleted uranium eight miles into the distance. If military accountability with regards to “collateral damage” and haphazard murders is at an all time low (and it probably is), prepare for it reach new depths of indecency.

But nobody cares. Nobody ever says “Not in my backyard!” to a military base or a tank plant. They generally don’t hate it when General Dynamics or Lockheed Martin begins development of new superweapons in their backyards. Probably because they thing that GD or LM are creating jobs. In actuality, these developments make us all worse off.

Behold the fallacy of the broken window.

A tank plant simply can’t be measured in terms of the employment it provides, because it is a net-negative value proposition.  A tank plant must be measured in the terms of death and destruction it produces, and is the sort of thing that nobody, anywhere, ever, should be happy about.

General Dynamics, of course, employs a certain number of people here in Sterling Heights, or at the Warren tank plant (is that still around?) But these companies are effectively paid for with money that everyone else has earned, but which has been stolen from them through taxes. In the absence of confiscatory taxation, people would be spending their money on something else, and those employed in the war-making industries would be doing something other than wasting scarce and valuable resources on the production of goods the only purpose of which is to cause death and destruction, brown people in far away lands wouldn’t have to worry about depleted uranium shells screaming through their front windows in the middle of the night, they wouldn’t hate us, and we’d have more stuff and leisure and time to enjoy. Money not directed towards the production of mass-murder would instead be directed to some productive endeavor, and we’d be better off, as a result.

Everything that’s used in the creation of weaponry has other uses, as well: the engineers could be designing cars or refrigerators, the laborers could be welding bicycles together instead of rivets on armor, the metal components and raw materials could be used to make a million-and-one other things. And the only way to divert these resources towards the production of tanks instead of cars or refrigerators is by paying more for them than they’re otherwise worth. Everything the government procures is necessarily, and by definition, overpaid for!

See, it’s just not as simple as “the people employed by GD would simply be employed somewhere else, with no net effect.” It can’t be this simple, because what General Dynamics creates has a cost in measured in terms of real resources, and eventually is designed to destroy real resources. The actual cost of an Abrams tank is the sum of the resources used in its creation and maintenace, plus the resources and lives it destroys during its useful life, plus the opportunity costs associated therewith. 

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Nobody sees the death and destruction. The simply see that the glazier is employed, and they smile. Forget about the fucking glazier. Imagine a world where windows don’t break, or better yet, a world where there are no windows.

Capital Markets are Profoundly Distorted

May 16th, 2008

One of my Finance professors used to always say that anyone who could figure out how to competitively loan money to the small business would be a billionaire overnight. He cited a number of hurdles that would need to first be overcome: the hands-on, labor-intensive inventory accounting that often takes place when evaluating a prospective borrower, and the all-too-often requirement that the borrower mortgage his house in order to secure the loan.

That adage crossed my mind the other night. I started thinking, “Why is it so hard to lend money to small businesses?”

It’s simply too easy for the big businesses to borrow money. Real savings decreases in the presence of artificial and ex-nihilo credit, so there is a smaller amount of savings (in this case, generally, “real” savings) available to lend, at rates comparatively higher than those at which the larger, more politically-connected businesses can borrow.   Real savings decreases because the prevailing interest rate is no longer market-generated, and is generally held artificially low.  Since non-institutional investors can’t earn an adequate return on their investments, the tendency is to forego investment in favor of consumption which is made artificially more attractive by low interest rates.  These low interest rates also send a signal to borrowers, encouraging them to take on more debt than they otherwise would.When big businesses borrow money from big banks, who borrow money from the Government, this is not actual, accumulated capital which they are borrowing.  It is pure debt-money.  The injection of this new money distorts the marketplace, as the recipients thereof use this money to bid resources away from those who don’t have access to the new credit.  They must pay a price higher than the prevailing market price, causing prices to rise.

On the other hand,  if you borrow $20,000 from your grandfather in order to start a Landscaping business, that’s arguably $20,000 of actual, accumulated wealth. It’s money that gramps can’t use in the meantime, except incrementally per the payback schedule.

The substantive difference here is that in the case of the Landscaper, a tradeoff was made: Grandpa foregoes present consumption in favor of future consumption, whereas the big business does not need to make any such tradeoff.
One consequence of this scenario, is that smaller borrowers have a harder time securing loans. Too much credit is being made available to big business, without the backing of any actual collateral. Credit expansion crowds out the real savings, on which smaller businesses depend.  It is difficult for the small business to raise capital, because the market for capital is profoundly distorted.

Comments on Comments #11

March 28th, 2008

I hate posting these on Fridays, because Friday is typically a low-traffic day. But I also hate waiting until Monday at which time some of my comments are well-past overdue.

Kip Esquire responds in brief to my second post on jury nullification, which was a response to his podcast on the same subject:

1. That libertarians do not have a monopoly on nullification, and therefore the maneuver is not intrinsically libertarian. Just as a gun can be used either for libertarian or anti-libertarian purposes, so too can nullification. It is therefore invalid for libertarians to claim a unique moral proprietorship of the act, as they so often do.

2. The simple truth remains that lying your way onto a jury is not the moral high ground. “The ends justify the means” was, last time I checked, simply not a core libertarian premise — quite the opposite, in fact.

As to (1), I grant that jury nullification is not the only way, nor the best way, and probably not even a moderately successful way to advance the cause of liberty. It’s just one more tool to use as circumstances so dictate. If other libertarians claim stewardship over jury nullification, they are certainly as wrong as the people who claim that guns are intrinsically evil.

Regarding (2), the definition of “moral high ground” I suppose, is at least somehow related to whether there exists a law higher than that created by the State. And since many (most? all?) libertarians claim that the State is overstepping some sort of boundary beyond which its actions cease being justifiable, we can surmise that appealing to a higher law is certainly a libertarian principle, and a core principle, at that. Furthermore, we need to examine whether the act of lying, that is, misrepresenting the truth is universally immoral—a claim which I reject. We don’t need to worry about whether “the ends justify the means” if we’re confident that the means are justified of themselves. Of the moral high ground, we can be certain of at least one thing: there is nothing morally superior about acquiescing to the State, and convicting, or participating in the conviction/incarceration of people for acts which are not crimes.

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The Picket Line criticizes my argument against the futility of tax resistance, or symbolic withholding. All’s fair, I suppose. It depends on how you define victory. If you really think that by making yourself worse-off, you can ween the State from its violent cycle, by all means go for it. I just don’t think it works.

Mr. Z’s call for anarchists to “lead the way for ‘off the books’ transactions, making them more available” is followed not by some good examples of how he does this, but with what seems to be a demand that these anarchists be more-or-less completely victorious in this task before he joins them: “Find me a way to buy my house, agorist-style, and I’ll listen.”

At the present, agorism is a brand-new subject matter for me. I’ve only just begun studying the idea, let alone have I had the opportunity to put any of it in to practice. The “find me a way to buy a house, agorist style, and I’ll listen” comment was a tad toungue-in-cheek. I don’t want everyone else to be victorious, but it’s not something I can do on my own. For the record, I did note some quasi-agorist transactions of the sort that most people (present company, included) already practice on a more-or-less frequent basis.

This sort of “it’s only symbolic, it’s not really important” thinking is usually accompanied by gestures of capitulation. Mr. Z goes on to say that “all efforts to resist paying a portion of one’s income taxes are essentially futile, because one is still paying all other forms of taxes…” In other words, I may as well not fight the battle, because even if I win, I still won’t have won the war.

“Even if I win the battle” is a red herring, because as long as you’re using FRNs there are no battles! Almost every transaction in which you participate is taxable, so as long as you spend those notes you’re simply choosing a different form of taxation! If withholding $17.76 from your tax return this year makes it easier to sleep at night, by all means, do it. But don’t be fooled into thinking that you’re going to stop the State by so doing. If you’re withholding your taxes, you’re not going far enough.

I think victory is freedom from the State. Symbolically fighting the State with its own laws isn’t going to get anyone very far because it’s only possible to de-fund the government if it were using legitimate currency, which it is not. And even if it were, there simply aren’t enough tax protesters in existence to starve the State by withholding some nominal sum, and therefore their efforts are misguided.

The principal argument, though, is that you can’t de-fund Leviathan by withholding from the State the very fiat money the creation of which it controls! Because the government operates on monopoly money backed only by the people’s general faith in that fiction, I understand that the only way to bring down the system is to stop having faith in that fiction, to stop using that money, and to practice counter-economics. There probably are enough resisters to begin a counter-economy, which has greater chance at succeeding, if you define success as “freedom from the State.”

This is, as I’ve previously noted, easier said than done. Eventually we’re all asked the question, “How do we get from here, to there?” There, being the libertarian ideal. I admit that I’m long on rhetoric and short on practicality, but one thing is certain: the system is beyond broken, and can’t be reformed from within.

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The Peak Oil Myth has been popular!

NC Erickson wants to know, “What alternative sources are you imagining?? There is nothing known that comes close to the energy profit ratio of light, sweet crude oil.”

NCE, I’m not imagining anything. I’m just hypothesizing based on the laws of economics. What is true is that at some price point, at some time in the future, there will be an alternative. It may or may not be less expensive than oil, (my conjecture is that it will be less-so) but since we’ll effectively run out of oil anyways, that doesn’t really matter.

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Dave McCartney also sounds off on the subject:

The hope and/or assertion that the free market will allow another energy source to usurp oil is inherently flawed.

…Any alternative energy source is wholly dependent upon fossil fuels for it’s extraction, transport, and distribution, and ongoing maintenance.>

Dave, where is your sandwichboard? “The End is Nigh!”

This is a dangerously stupid position to argue, unless you suggest that in-fact there can never be a way to efficiently tap other sources of energy! i.e., to produce more energy than is expended on production. If this is true, there is not a single argument you can advance in favor of continued use of fossil fuels over other alternatives that doesn’t ultimately result in the destruction of mankind.

Of course, on balance, some alternative fuels so-called are net-negative. I’m calling you out, ethanol! But at some level of scarcity, light sweet crude also becomes a net-negative: it will cost more than a gallon of gas to produce a gallon of gas. Although alternative energy’s dependence on fossil fuels may be true now (to my knowledge it is), it certainly won’t be true in the future. As oil becomes increasingly more expensive, other sources of energy become increasingly more viable. This is elementary economics.

The laws of thermodynamics ultimately constrain and limit us, and no combination of human inventiveness or money can make energy, only manage it.

When left to their own devices, entrepreneurs will see to it that the market embraces opportunities to engage in what Schumpeter called “creative destruction.” New industries rise on the backs of the old. Previously unimaginable concepts become commonplace.

The market should be able to manage the (nearly) infininite amount of solar power beamed down to us from the heavens, every day. Nuclear power is an alternative energy source, provided the market develops the appropriate means of disposing waste and quarantining contaminants. Of course solar power can’t make tires and clothing, but for the most part, plastics are pretty recyclable. Clothes can be made from renewable resources like, oh, I dunno: cotton or wool. People can live in earthships, for instance, which consist of a fair amount of recycled materials, they require no fossil fuels to operate, and are self-sustainable/energy independent.

There is a finite supply of fossil fuel-oil in the world, and in light of this fact, the only conclusion I can draw from Dave’s pessismistic argument is: “The only source of energy that mankind will ever be able to use is oil.”

If this is true, then we’re all pretty much fucked anyways.

Franc chimes in:

Bla bla bla, who gives a fuck? Oil might be more efficient, but that doesn’t mean people will keep using it even if the price skyrockets.

Y’all are fucked.

I think the point that Dave was trying to make is that not only is oil more efficient, but also that it’s the only efficient source of energey, being defined as a source of energy that has a positive net balance. This may be true, for now, but I don’t believe it is a universally true statement. If it is, as I’ve outlined above and as Franc notes: we are all fucked.

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I haven’t heard from Olly in a while, but glad he’s back. He adds to the discussion in What is your Obligation to your Lender:

I guess I just don’t understand the confusion here. If you signed a contract that said “if I can’t afford to pay X then I’ll give you this collateral” then what’s wrong with saying “well, can’t afford it, here you go.”

…Everyone is to blame for this crisis

Everyone, including the lenders and the investors who bought these toxic asset-backed securities (RMBS, anyone?) If you don’t understand how commodities are traded, you probably shouldn’t be investing in commodities. If you don’t understand the intricacies of forex, you shouldn’t be writing options on Yen. There is probably a rule in investing: If you don’t know what the fuck you’re buying, you can’t value the asset in question, or you don’t understand the fundamentals of its valuation, then you probably shouldn’t be buying it.

If this isn’t a rule in investing, I propose that it should be one.

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On the topic of the Detroit mayor and his recent perjury/hooker/adultery/whistleblowing scandal, (Detroit Mayor Guilty of Perjury?Jorge comments:

I think Congress should pass a law prohibiting any kind of inquiries on marital/sexual behavior of people (while on office or not). Exceptions would be, of course, if the inquiry is proven to be absolutely necessary to clarify other sorts of misconduct. Still, even in such cases, the details of the investigated’s sexual lives should be fiercely protected by Justice.

I don’t think Congress should pass any laws. I also don’t think that public officials should be using “public” funds to protect the secrecy of their extramarital affairs especially as they are materially related to the whistleblower suit in question.

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That’s all for now, I’m working on a handful of drafts which may or may not bear fruit.

no third solution

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