A Crash Course in (Bad) Economics

Earlier this week, a friend of mine sent me a video with the comment, “Thoughts? Because this sounds pretty legit.” Given Robert Reich’s credentials, for the first few seconds I was expecting it to be a mostly-true Chicago (or mainstream) analysis of the American economy. At about 7 seconds in, I thought it was going to satire, and at 30 seconds I realized I had to pause the video and pour myself a drink.

In Principle:

This man, Reich, demonstrates throughout the video that he is an adherent to the Keynesian method of econometrics, which is not actually economics. It is econometrics: a pseudo-scientific form of soothsaying which has dictated the economic policies of governments in North America and most of Europe since the turn of the twentieth century, causing every depression, recession, and economic crisis since then.

Everything Reich says flies in the face of both real economics (the Austrian school) and it’s new-age, left-leaning cousin, the Chicago school. Ostensibly, the source of my ire is a 2.5 minute video dispelling myths about the economy which are damaging society at large. In reality, I am disappointed that people fall for the rhetoric of Reich and his cohorts’ demagoguery when they so obviously beg important questions while simultaneously making claims with no substantive arguments to support them.

Even though frequent readers/listeners already know, it is important to remind people that I am not a Republican. This video is obviously designed as a political hit-piece against common republican rhetoric, a-la the arch-Keynesian, Paul Krugman. In the common political landscape, if I dislike or argue against this hit-piece (regardless of its facticity), I must be a Republican. This could not be further than the truth; every policy put in place by republicans, all the way back to Lincoln, has done incalculable economic and social harm. To endorse republicanism is to endorse genocide, theft, and theomisanthropic puritania.

Back to Reich. Being a Keynesian, he believes the economy is a machine with a handful of levers and knobs which remain constant unless the chairman of the Fed or the President adjusts them. This is a horribly flawed ontology. “The economy” is nothing more than the emergent properties of individuals’ actions on the aggregate; changing market signals by artificial means results in changes in the economy due to individuals adjusting their behavior around the impediments created by such meddling. These adjustments’ results have been consistently predicted by the Austrian school, but not the Keynesian method.

The three “myths” covered in the video are “’the rich’ are the job creators,” “The ‘free market’ and government are opposites,” and “We should be worried about the size and scope of government.” At this point, one should understand why I had to remind readers I am not a republican and why I’m so pissed that someone could fall for this video. In the course of “dispelling” these “myths”, Reich makes twelve claims… ten of which are simply untrue and the other two have nothing to do with the issue at hand. We’ll just run through them all, really quick, and we will all feel better and understand economics a little more.

Most people haven’t gotten a raise in years.”
This is a tired old piece of rhetoric that, while hinting at truth, is itself false. By every reasonable metric, the “working class” (which is directly alluded to in this video) has, collectively, seen raises over the last several decades. This is the result of two functions. The first can be explained with my own experiences as an example. I am “working class”, and I have walked a journey typical of hard-working individuals within the “working class”. I have slowly increased my income by way of improving my set of marketable talents and bolstering my resume, thereby “getting a raise” and improving my quality of life by way of having more to negotiate with when seeking employment.

Of course, being a Keynesian, Reich is a collectivist. On the aggregate, I have not received much more of a raise than has been the historical trend for “the working class” as a whole. Therefore, on the aggregate, “the working class” hasn’t received a raise. Unless you take into account the fact that my yearly salary (which is typical for “my class”) is comparable to that of an upper-middle class family in the 1960s. I am only “working class” because of two driving factors overlooked by Reich: inflationary fiscal policies (the dollar today is worth mere pennies as compared to the dollar of the 1960s) and a drastically improved quality of life. If I were to choose to live the life of an upper-middle-class man in the 1960s, I could almost do so. But why would I want to eschew air conditioning, microwaves, cell phones, computers, internet, quality television, power steering, coffee machines, Dungeons and Dragons, spandex… and this whole list is just off the top of my head. The reality, revealed by looking at the actual numbers, is that “the working class” makes more now than it ever has throughout history, we just have more awesome shit to spend it on, and that’s a good thing.

This whole discussion, of course, ignores the reality that “the working class” is defined by a particular degree of income, and so it would be impossible for “the working class” to get a raise, as the moment one moves up or down, they are part of a different class.

“CEOs get paid a lot.”
Yes, they do. I’m not sure why this is an issue, though. CEOs are hired employees, just like every burger-flipper, paper-pusher, or department manager; they must demonstrate to their employer that their service is worth more than they are getting paid. If a CEO gets paid $300,000 a year, it is because they, through their management of executive resources, have earned the company a significant percentage more, probably in the ballpark of 200% or more. I get paid a certain amount to do my job because the market value for my services are about 110% of what I charge. If we were to apply the same criteria to both myself and a CEO, either I should get paid half as much or a CEO should get paid twice as much as they currently are… Aren’t we lucky that CEO’s don’t get paid as much as they could/should?

Still, I fail to see why we should care how much someone voluntarily pays someone else for voluntarily providing a service.

“The middle class and poor create jobs by spending.”
What is a job and how is it created? A job is created when someone has a desire or need he is either unable or unwilling to meet on his own and so he pays someone else to do it for him. This is what’s called “the division of labor”. In the case of craftsmen in the past, I would provide a blacksmith with a job by hiring him to make me horseshoes or swords or something. It is true that peasants such as myself would require the blacksmith’s services and would, therefore, directly lead to the creation of jobs by way of increasing demand, but even in this framework, the noblemen and kings would be the primary source of demand: shoeing cavalry, arming armies, furnishing castles… much more demand than the occasional plow or horseshoe.

In this modern, service-based economy, the situation is

different. There are a good number of middle-class and poor individuals that open “mom and pops” shops and other businesses that operate similarly to the craftsmen of old but, by far and away, the largest source of jobs is large corporations. Wal-Mart alone employs 1% of the available workforce in America, and the other companies everyone loves to hate, like Mc Donalds and fast food conglomerates employ most of the other 99% of available workers.

These employers are the product of “the rich” identifying a demand and meeting it. In other words, a substantial majority of jobs are created by “the rich”. “But,” you might say (if you’re a Keynesian), “that demand you say the rich identify and meet is clearly the aggregate demand created by the poor and middle class… so the poor and middle class is still the foundation of this causal chain. Ha!” They certainly are the cause for the demand, but even if the poor and middle class suddenly decided, as a whole, that they no longer desired cheap, low-quality, and convenient food and appliances, that would be offset by their demand shifting to a new good or service. Who will meet that new demand? “The rich”. Demand, when viewed at a high enough altitude, is merely a function of population size.

“We need minimum wage, overtime protection, and tax breaks to give the poor more money.”
Laws such as minimum wage, mandatory maternity leave, or benefits/obamacare regulations only serve to hurt the poor. As I alluded to in the CEO claim, the amount an individual gets paid must at least be marginally less than the amount one generates for one’s employer. If, by making a shit-ton of lattes for Starbucks generates approximately $10/hr (after they pay for the materials, machinery, facility…), I would have to offer my services for less than $10/hr in order to entice Starbucks to hire me. If the minimum wage were to suddenly jump to or above $10/hr, Starbucks would have to find ways to improve efficiency or otherwise cut costs. Most likely baristas/cashiers would get replaced with robots that cost more than a barista does now, but less than $10/hr.

Ready for some real economics? What I just described is called a “price floor”, and economics has a great deal of a-priori and evidential data on the effects of price floors. Here’s what the economists have found:

Price floors create surpluses.
Minimum wage is a price floor for labor.
Minimum wage creates a surplus of labor.
A surplus of labor is unemployment.
Minimum wage causes unemployment.

Other mandatory expenses such as overtime protections, mandatory leave, benefits, etc. effectively increase the cost of employees as well. Instead of being allowed to compete on one’s own merits and negotiation, one must also compete with regulations which make one’s labor more expensive by artificial means. An easy real-world example exists in my department at work. My department has five part-time employees getting paid to do the work of two full-time employees. In order to entice the part-timers to work, my employer must assign more hours than needed to each of them, leading to waste. That waste, however, is still smaller than the amount of additional mandatory cost of simply hiring two of them full-time and no longer remain underemployed and impoverished. In a free market, these same opportunities would be afforded to the other three part-timers at other employers (if they wanted to take them).

He was right about taxes, in this instance, though. If the government would stop stealing property from the poor, the quality of life and upward mobility of the poor would increase dramatically…

“We can only afford this by taxing the rich.”
…Oh. Being a Keynesian, what Reich means is “The federal government can only continue to spend more each year than the year prior if it continues to steal more money each year. If it steals less from the poor, it must steal more from the rich.” This is one of the many points of contention between the Keynesian method and economics which will never be resolved; both the evidence and the a-priori data indicates that taxation is bad for the economy, while the Keynesian method demands ever-increasing taxation to fuel ever-increasing government spending.

The simple reality is that taxation is theft and one ought to execute the taxman. Voting to raise taxes (on anyone) is tantamount to the higest orders of extortion.

“The free market doesn’t exist in nature.”
The free market IS nature. More on this in a moment.

“…it is created by government.”
Despite what republican and other socialist rhetoricians believe, the term “free market” actually means something. The free market is so called because it is a space in which goods and services can be exchanged freely (a.k.a. voluntarily) without the initiation of coercive force. A Keynesian will claim that no such space could exist (due to an irrationally broad definition of “coercive” and “force”). As such, Reich, claims that the only thing that can resemble a free market is one in which a strongman will impose coercive force across the board in the form of regulations, restrictions, prohibitions, licensure, taxation, price controls, and mandatory predatory loans (legal tender laws and federal reserve notes), all enforced by the threat of greater theft, imprisonment, and murder. In other words, we are already living in Keynes utopia.

The closest examples we have of the free market in contemporary culture is my under-the-table handyman work, the Silk Road (and its offspring), and my friend growing and selling pot out of a port-a-potty warehouse. The thing they all have in common? They are largely beyond the reach of government violence.

“Monopolies will happen without government, so we need government (which is a monopoly on force)
I believe the absurdity of this claim is self-evident. So, instead, I want to go back to the “state of nature” discussion. Economics, in its general conception, is the study of the application of scarce resources. In the case if environments with scarce resources, those that are better suited to investing said resources win and those unable or unwilling to invest well will fail. In biological terms, those best adapted to a particular environment will thrive and reproduce while the ill-adapted perish. In the case of a tool-making species with a fluid division of labor, those that produce the most utility for others in the environment will get rich while those who waste resources remain impoverished. The free market is the natural extension of horizontal evolution when applied to a tool-making and service-trading species. The free market IS nature.

“We need only worry about who the government works for, not the size or scope of it.”
One must remember that “the government” is nothing more than a group of individuals acting with common purpose: governance. Therefore “the government” is either a corporation in the employ of its own segment of “the rich” which owns the corporation (this is where you insert your pet conspiracy theory) or “the government” works for itself by default and necessity. In any case, “the government” is never going to work for you or me. Less cynically, though, we could pretend that “the 99%” could buy out the government from “the 1%”. So far, every attempt that even remotely succeeded has demonstrated that such projects produce undesirable outcomes: the French revolution(s), the Bolshevik revolution, the rise of the Third Reich…

“Big money in politics makes for bad politics and a rigged game.”
This is almost true and has nothing to do with the three “myths”, but I will address it anyway. There is an unimpeachably strong correlation between big money in politics and politics being bad and the game being rigged. However, correlation is not causation. Turns out, politics is always bad and the game is rigged by design. That’s what differentiates the government from the free market. Adding big money merely increases the funds with which government can pursue bad outcomes.

“Yay 99%, boo 1%.”
This sentiment no longer warrants an intellectual response. If you want to hear something a little less intellectual and a little more violent, listen to the audio version of this post.

TL;DR: Each of the three “myths” presented by Robert Reich in this video are, in fact, true, as is demonstrated by this brief and incredibly superficial refutations of his nonsense presented as refutations of the “myths”. Read some Mises before listening to scam artists on Youtube. Yes, “Human Action” is far more dense and difficult to understand, but who said that the truth would be easier to understand than lies? Oh, that’s right, demagogues like Robert Reich.

Instead of listening to this clown, go to www.mises.org

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