Friday, March 12, 2010

FA Hayek's "The Road to Serfdom"

I just read a fantastic economic-political book by FA Hayek, written during WWII. Since you will probably never read the book for yourself, here are some notes about his thoughts.

Chapter 1.
The WWII world will not consider that problems are stemming from the West’s pursuit of cherished ideals and that they have different results than expected…We must measure capitalism’s success by previous generations’ hopes and wishes, not by our present desired standards; biggest success is creating more self-determinism…absolute insistence on hard rules, particularly laissez faire, does harm to the classical liberal cause…the liberal must be knowledgeable about market structure and its functionality in order to act prudently to produce growth; government can be helpful to control monopolies…ideas had been spreading from England to the East before 1870. By this time though, eastern ideals began spreading everywhere…1944 problems within socialist circles in England/America had already been hashed out by German socialists years earlier.
Chapter 2.
The founders of socialism were against freedom of thought…socialism’s promise of “freedom” is really that economic disparity will disappear…in recent years writers began to recognize that socialism and fascism were closer to cousins than opposites…most socialists truly believe in liberty and would recoil if they realized the true implications of their beliefs
Chapter 3.
Freedom and organization are mutually exclusive…planners believe that liberals’ plan of having individuals make independent plans is no plan at all…liberals believe that competition is best means to coordinate human efforts in a beneficial manner…liberalism requires a healthy legal system…the state should do only roles that private incentives do not allow private sector to take care of (i.e. tragedy of commons issues)…a mixture of competition and planning is worse than devoting to either extreme.
Chapter 4.
Large companies achieving economies of scale have not empirically been proven to reduce competitive forces…monopolies more likely come about from government intervening and regulating…competition requires that individual entrepreneurs adapt themselves to the relevant price levels…there are many good social desires, but few can be accomplished; for one ideal to be fully accomplished, others must be sacrificed…single-minded idealists are one step away from being fanatics.
Chapter 5.
All collectivism leads to some sort of unitary end…society does not have an agreed upon comprehensive moral code (but needs one for socialist leaders to come to proper decisions)…once the state runs a certain portion of the economy, it will indirectly control the whole due to the fact that its policy changes would implicitly influence all other sectors…Professor Laski asked: What happens to socialist systems when party control theoretically changes each election?...congress democratically writing the economy’s guidelines (i.e. the current Health Bill) is a ludicrous thought. There is simply too much to be formally written down (externalities abound!)…democracy is not the highest end -> LIBERTY IS THE HIGHEST END.
Chapter 6.
Government should be fixed by previously fixed rules…individuals need to know how the government will act in various situations…collectivism requires that the law favor whoever’s interest is the state’s current favored interest…more state planning = harder for individual to plan…distributive justice conflicts with Rule of Law…legislative limitations reflect that individuals have inalienable rights.
Chapter 7.
Economics can’t be separated from other aspects of life…controlling economy leads to totalitarianism…economic planning on “marginal needs” destroys our ability to choose what is marginal to us…economy is the means to all of our needs…authoritative government is worst monopolist of all…planning production affects our place of work and choice of work…people buy into socialism because they want to ignore the fact that life is a bunch of tradeoffs.
Chapter 8.
Competition is blind (isn’t justice supposed to be blind?), yet socialists complain of blindness as if it were a vice…private property is most important guarantee of freedom…being fired in capitalism is more dignified than having your job assigned by the state.
Chapter 9.
Workers with equal pay have no incentive to work hard…choice and risk go hand in hand…society is leaning toward preferring security over freedom (in 1944 and TODAY)…giving up liberty for temporary safety is a bad tradeoff.
Chapter 10.
Ordinary socialists generally don’t have the ruthlessness required to fully carry out socialist policy…totalitarian leaders get all the sheep of society who have no strong convictions of their own…it is easier for people to agree on hating something than on loving something…socialists believe in duty to national peers, why not to humanity in general?...internationalism is a product of individualist thoughts…socialists think that taking power from the individual is extinguishing power; actually consolidates and strengthens power…collectivism requires “ends justify means” philosophy.
Chapter 11.
Best way to achieve a goal is to have everyone believe in that goal…propagandists stole the word “liberty”, most promises of freedom ended in reductions in liberty…collectivism requires silencing the critical minority…whatever may cause doubt of the government’s ability must be suppressed…according to Nazi minister of justice: each new scientific theory must ask itself if it serves the state’s purpose…individualism is an attitude of humility before the social process.
Chapter 12.
The German left and right unified in their fight against liberalism.
Chapter 13.
Hayek writes about Englishmen that have sympathetic tendencies towards the roots of Nazism…English scientists were agitating for a “scientific organization of society”…rampant monopoly is best left to the market to work out because government control of monopolies is forever state-controlled monopoly…Englishmen have no excuse for believing planned = freer than capitalism due to their easy observations of Germany.
Chapter 14.
Young generation will be poor after war and look to government to keep employment up, this is just going to reduce wages and marginal productivity of labor…young Britons don’t care for economic arguments and would prefer to be led by the government.
Chapter 15.
International planning is worse than national planning…it would simply be rule by force…everyone will complain that they have a better plan…there should be an external power that says “no” to all sorts of restrictive economic measures between nations.

Tuesday, February 9, 2010

History of Economic Thought Beginnings

I'm taking an independent study course on the history of economic thought this semester. Basically I will be reading secondary sources on the important items that Smith, Marx, and Keynes wrote as well as some primary sources and thoughts on secondarily important economists.

Something that we take for granted in Econ 101 taught in a capitalist society is that demand drives the price level for a given product. For example, if I design a blue football but nobody thinks it is cool, I'll probably have to sell it for $5 or less because the demand is so low. But say that my blue football gets immensely popular in the eyes of 15 year old dudes, then I can sell the ball for $25. The point is that if no one wants to buy my product, the value I provided is obviously low. But if people want my product, then the value I provided is obviously high. Unfortunately Adam Smith, the father of modern economics and the leader of the "classical liberals" group couldn't quite figure out how to explain this concept, although practically he understood the truth of the matter. But because he failed to describe this rule of value being based upon utility as opposed to inputs, two future economists took much of his proper teaching and messed it up with a ridiculous theory called the Labor Theory of Value.

Thomas Malthus and David Ricardo both had the idea that value of a product is determined by the amount of labor input. In a very simplified example, they considered that a product that took ten hours to produce was more valuable than a product that took two hours to produce. How absurd!

This may not seem like a serious problem, but these authors influenced a certain Karl Marx and Frederich Engels, co-authors of The Communist Manifesto. To be continued...

Tuesday, December 8, 2009

Thomas Sowell and Black Stigmas

I read this little bit on a recent Thomas Sowell column. This is in essence why I adamantly disagree with affirmative action. Each person should be judged upon character and productivity, not skin color. We shouldn't lavish awards on certain races of people that would not be given to other races for similar accomplishments.

"In response to the news of President Obama receiving the Nobel Prize for peace, an e-mail from a reader recalled a black classmate's comments upon graduating high school many years ago. When asked to list the advantages and disadvantages of being black, the black student facetiously listed as an advantage 'being praised for infinitesimal accomplishments.'"

Joseph Stiglitz's How Globalization Works - Chapter 4

Stiglitz laments, “even if trade does follow, not everyone is a winner.” It is difficult to take the author seriously when this is a concern of his. Of course not everyone is a winner! Some companies produce terrible products; we don’t want them to win. We want companies to produce high quality products that we desire. As globalization continues, domestic markets are going to be shaken up due to the new recognition of more efficient industries abroad. If foreign unskilled lose their jobs, why should the domestic government care? It should only care about its own citizens.
He goes on to argue that rich nations should unilaterally open their economies developing nations, essentially providing unbalanced trade rules. I believe that this could actually be beneficial to a domestic economy. After all, if the developing nation is able to provide a better product than a previously protected domestic industry, then the domestic consumers are better off. If the developing nation is unable to provide a better product, then the domestic industry will have proven its worth to the domestic economy. Either way, the developing country is given a chance to grow and the domestic economy wins.

Joseph Stiglitz's How Globalization Works - Chapter 3

Stiglitz writes that the Washington Consensus was idealistic economics that didn’t produce real-life success. He believes that most economists have gotten past the question of whether markets are inherently efficient and have moved on to “whether government can improve matters.”
He cites the growth of Asian countries as being the product of governments “choosing which sectors their countries would develop rather than leaving it up to only the market to decide.” The spillover effect supposedly increased returns from this policy since technologies developed in “chosen” industries could be applied to the castaway industries.
Stiglitz goes on to make the audacious claim that “it is important for countries to focus on equity, on ensuring that the fruits of growth are widely shared. There is a compelling moral case for equity…” He then concludes his chapter by saying; “it would be even better if we titled [the playing field] to favor the developing countries.”
This author would surely feel right at home in the former Soviet economy. His mind must be in a fantasy world to consider that equality is something to be obtained through markets or that governments choosing economic winners and redistributing wealth is morally desired.
The only way humans will ever all end up equal from an economic perspective is if no one has any economic assets at all. People are by nature selfish and equality should hardly be pursued. Rather, freedom of the individual to pursue economic wellbeing should be promoted.
Stiglitz clearly believes that national governments are in place to pursue equality of their own citizens as well as the good health of all foreign citizens. I fundamentally disagree with him on the grounds that national governments should simply promote freedom for its own people. They should be founded on the belief that all humans are selfish, not benevolent, as Stiglitz mistakenly believes.

Razeen Sally's New Frontiers in Free Trade - Chapter 5

Sally writes that Preferential Trade Agreements are generally hedges on the part of nations that see the WTO multilateral negotiations as weak and slow. These PTAs “secure preferential access to major markets and are a means of managing and defusing trade tensions with powerful players.” He states that these should ideally go above and beyond the liberalization that is agreed upon during multilateral negotiations.
These agreements are frequent in East and Southeast Asia between the booming markets. However, these agreements are proving to be generally ineffective because disciplinary action for lack of compliance is a weak force. Thus countries do not have strong incentives to abide by more than the original WTO agreements.
Of course it would be lovely if nations would act in less political of a manner during PTA negotiations and if they would abide by their self-imposed restrictions. But again, trade agreements between sovereign nations are secondary in the eyes of executives who want to be reelected and guard their respective nations. It seems that Sally is pushing political science to the wayside and writing idealistic views on these agreements.

Razeen Sally's New Frontiers in Free Trade - Chapter 4

Sally writes that the WTO provides a few advantages within trade but is currently neither being used efficiently nor effectively. He mentions that it helps governments fight foreign protectionist policies, hinders predation practices, and encourages good domestic policies. Yet two major problems are that the WTO is rather political and it is leading to too much standards harmonization.
He notes three ways to fix the WTO’s problems: “restore focus on a core market-access and rules agenda…. revive effective decisionmaking; and, not least, scale back ambitions and expectations.”
I believe that the WTO could theoretically be a helpful tool that fosters international trade. It should be used to fight members’ protectionism, as that is antithetical to globalization. However, it seems to be quite a lofty dream to believe that numerous countries could possibly sit down to negotiations and produce rules that are “fair” to each member. What is fairness anyway?
The most important prescription that Sally makes is that the WTO should have more modest expectations for future agreements. It should humbly recognize that sweeping multilateral agreements are not effective in a world full of selfish, sovereign nations. Instead it should seek to mediate between nations as they individually trade with others.