Austrian Economics: An Overview
The Austrian School of Economics is not some teaching institution in Vienna, nor is it even about the economy of Austria. Rather, the term refers to a particular approach to economics, and to the economists around the world who subscribe to it.
- The Austrian School is an approach to economics that originated in Vienna in the 1870s. It is highly critical of modern mainstream economics.
- Austrians (as they are called - though today they are found everywhere) hold that all economic events stem from the values and choices of the particular individuals involved and their circumstances at the time.
- Austrians argue that mainstream economists are therefore wrong to look for statistical linkages between economic phenomena. Austrians say that their individual - and values-based approach provides a better explanation of economic events such as boom and bust.
KEY PRINCIPLES OF AUSTRIAN ECONOMICS
- The economic decisions from which all economic phenomena derive are inherently personal and unpredictable.
- Value does not exist in things, but in the minds of the individuals who value them. Trade occurs and prices emerge precisely because people value things differently. Markets steer goods to their most valued uses. Private ownership is essential to achieving the best results.
- Government intervention, and policy mistakes such as inflation, disrupt this highly complex market process and invariably produce perverse results.
HOW AUSTRIAN ECONOMICS DIFFERS FROM THE MAINSTREAM
A number of key principles, or points of emphasis, distinguish the views of Austrians from those of mainstream economists. They cover all parts of the subject, from the very nature of what economists ought to be studying, through how individual prices come about (and their importance in directing production and consumption), through the workings of the overall economy, to policy prescriptions. Ten such points are listed below:
- Economics is all about individuals
- Economics is quite unlike natural science
- Everything in economics rests on human values
- Prices help us maximise value and minimise cost
- Competition is a discovery process
- Private ownership is essential
- Production is a difficult balancing act
- Inflation is deeply damaging
- Actions have unintended consequences - good and bad
- Government intervention is almost always malign
The information on this page is an extract taken from Dr Eamonn Butler's book 'Austrian Economics A Primer' ISBN 1-902737-69-5 published by the Adam Smith Institute www.adamsmith.org. We highly recommend this concise and easy to read book as a starting point for anyone wanting to gain a better understanding of Economics.
Henry Hazlitt: A Brief Biography
Henry Hazlitt – (1894 - 1993) journalist, libertarian, philosopher and economist is widely regarded as one of the most brilliant intellectuals of our century. Born in Philadelphia he secured his first proper job at the age of 20 working for the Wall Street Journal as a stenographer. It was whist at the Wall Street Journal he gained an interest for economics. He published his first book 'Thinking as a Science' aged 21. A few years later working as an editorial writer for the New York Evening Post and New York Evening Mail he published his second book 'The Way to Will Power' in 1922. By the late 1920s Hazlitt reputation as a writer and thinker had grown. It was in these years he met the famous British philosopher Bertrand Russell whom he spent two years interviewing in preparation of writing his biography, which Russell later decided he would rather like to do himself.
During the early thirties he worked at the left wing magazine Nation as a writer on economic subjects up to 1933 when he was eventually ousted from his post for criticising President Roosevelt's doctrine.
From 1934 to 1946 Hazlitt worked for the New York Times writing editorials. It was during this time he met Ludwig von Mises a Jewish emigrant who left Nazi dominated Europe in 1940. Von Mises was a prominent figure in the Austrian School of economic thought. Indeed it was Von Mises whom is credited for introducing Hazlitt to the Austrian School of economics. Hazlitt later went on to cite Von Mises as being his greatest influence on his writings in economics. Hazlitt helped secure work for Von Mises at New York University and arranged for Von Mises to contribute to editorials in the New York Times. Hazlitt's review of Ludwig von Mises first book to be translated into English made Socialism an instant classic in the US. Hazlitt was also responsible for introducing Frederick A. Hayek's book 'The Road to Serfdom' to a wider audience through his reviews in the New York Times. In particular his review of F.A. Hayek's 'Road to Serfdom' led Reader's Digest to publish the condensed version that catapulted Hayek to fame.
Hazlitt was a man of great principal committed to his views; he was consistently opposed to the increasing interventionist role played by the US government in the economy. His strongly held beliefs, out of favour at a time of creeping state involvement ultimately resulted in him once again being squeezed out of his post at the left leaning New York Times. After leaving the Times he joined Newsweek where he became one of the most influential financial writers in the country. It was in 1946 while working for Newsweek he wrote 'Economics in One Lesson' which would later go on to be considered his most significant contribution to the discipline of Economics.
Economics in One Lesson: An Overview
‘Economics in One Lesson’ is a brilliant but concise piece of work that covers a considerable amount of ground. It explains basic truths about economics and the economic fallacies responsible for unemployment, inflation, high taxes and recession. Hazlitt illustrates the destructive effects of taxes, rent & price controls, inflation, trade restrictions and minimum wage laws. He also writes about classical liberal thinkers like Adam Smith and Thomas Jefferson to name but two.
We have reproduced the lessons covered in Henry Hazlitt’s book using contemporary examples in what we like to call our numbered #HAZLITT series. Each of these lessons highlights two main themes.
• First, the tendency by socialists to overlook all the consequences of any given economic action. Socialists focus instead on the immediately “visible” and ignore the often far bigger impact on the “invisible”.
• Second, you will see how any interference in the free market, no matter how well intentioned is nearly always a bad idea.
Both are of course linked and they each demonstrate the “law of unintended consequences.”
#1 Hazlitt - The Broken Window Fallacy
• The car scrappage & boiler replacement scheme
• The Broken Window Fallacy
This is an analogy made famous by Frederic Bastiat in 1850.
A thug decides to have some fun and so he kicks in the window of his local pub. A crowd gathers and several get into a debate about the affect this will have on the local economy. They decide it will boost the local economy. The pub owner must now spend £250 on a new window; this means the local glazier has some work that he wouldn’t otherwise have. The glazier will then spend the £250 on something else and this will have an ever expanding impact on the economy. But they have omitted the pub owner, “the invisible”. He is now down £250 so actually there is no net gain. In fact, there is a net loss because beforehand he had a window and £250 which he was going to use to buy a new suit. So actually the local tailor (invisible) has in fact lost out in this example as the pub owner will have to do without a suit. Put it this way if the thug really does boost the economy then surely we should all go out and smash our town to bits. Nobody in their right mind would agree however that this is a good idea.
Today this fallacy is alive and kicking and being put to good use by governments in ways that are clearly non-violent but by no means less destructive. A few years ago the UK government like many others once again came to the aid of the failing car industry and introduced a scrappage scheme for vehicles over 10 years old. Swiftly on the back of this initiative a gas boiler trade in scheme was touted.
Let us expand upon this analogy further with a tangible example. In the case of the home owner persuaded to replace their gas boiler unnecessarily what we don’t see is what they would have used this money for instead. He or she may have used that money to go on holiday; this would have created an opportunity for a travel agent who could have used the money made in commission to decorate their kitchen which would have in turn created opportunities for a painter and decorator. Alternatively the home owner could have saved the money in a bank, and then the money itself could be lent to someone who wanted to start a new business. In essence the home owner could have done something else with their money that would have created opportunities for other people. The end result is skewed economic activity of the free market by the government with unforeseen 'invisible' consequences.
The Car Scrappage Scheme
Not only was this scheme demonstrably wasteful, as thousands of vehicles with plenty of miles left on the clock were sent to the crusher prematurely, the consumer was also taken for a massive ride by the car industry. The car scrappage scheme or ‘scam’ as we like to call it encouraged people to buy vehicles they otherwise wouldn't have done. Vehicles that in reality were not sold to them at a discount; that would have lost 20% of their face value on leaving the forecourt and in most cases would have required a loan to buy making the cost of buying a new car just as expensive as ever.
#2 Hazlitt - Government Spending
• Keynesian economics
• Government spending to boost the economy is a disaster
• Politicians never deliver value for money
• HS2 is a bad idea
Ask anyone what they think of politicians and you are not likely to get many positive responses. Again, ask anyone what they think of public services, which of course are run by politicians, and you get the same response. It is odd then that most people seem to think that Government spending is a good thing although the recent ongoing economic crisis is forcing a healthy debate on that assumption.
Take Ed Balls. He thinks that if the economy is stalling the Government should take up the slack and start spending. That way it will boost demand and will kick start the economy. This is called Keynesian Economics. This is a fallacy.
It misses the point that there is no such thing as a free lunch; that all Government expenditures must be paid for by taxes. But firstly let’s be clear: we are not saying we do not need taxes. Of course, we need taxes to pay for defence, legislature, road infrastructure, police and the civil service. But we are not talking here about essential services. Instead we are talking about Government expenditure which is designed “to provide employment.”
Let’s take an example. We are now in recession so the Coalition decides to splurge our taxes building a new railway – the HS2 will do just fine as an example. This will cost an estimated £32bn of taxpayer’s money. Politicians never fail to tell us that they are creating huge employment for railway engineers and builders – and hundreds of jobs are created. Great! But hold on that £32bn is now money that the taxpayers no longer have. It has been taken from them. That means that £32bn will not be spent in the private economy which of course is the “invisible impact.” As you will know from the first #1 HAZLITT this means thousands of tailors and other skilled people will have to go without. Of course it is not easy to put a figure on how many jobs are lost as a result of this lost demand but it is a racing certainty it will far exceed the number of jobs created by the politicians.
So for every job created by the public work of building HS2 at least one, possibly more, private jobs are lost. But there is another point we need to consider. Who do you think will spend that £32bn most efficiently? Will it be a) 100 or so politicians/bureaucrats spending money that does not belong to them and was not earned by them or b) 20m taxpayers whose money it is in the first place and has been earned by the sweat of their collective brows?
If you are still not convinced just have a look at Japan. Japan went into recession in 1989 and is still in the same recession some 20 odd years later. Keynesian economists told the Japanese Government to spend, spend, spend just as Ed Balls is now shouting this advice into any nearby TV microphone at the British public. Not surprisingly politicians love spending our money and the Japanese politicians are no different and to give them their due they didn’t hold back. Japan now boasts bridges that are not used, motorways that simply stop in the middle of empty fields, entire shopping centres built in unpopulated villages – in short it’s a mess. Is that an efficient use of private capital?
If you remember the last election you will remember Gordon Brown started his campaign grinning like a cat inside a newly built hospital. The message was obvious. Here is “a shiny hospital greater than anything that private capital could have built”. But the hospital so great that “private capital could not have built it” was in fact been built by private capital – that capital that was expropriated in taxes. Canada also built lots of shiny new hospitals with taxpayer’s money. Unfortunately, the Canadian politicians did not bother themselves with basic questions of supply and demand and many of those hospitals had to be demolished a few years ago without ever having been used. The UK is no different. We have just built new super fire stations throughout the UK that will never be used. We have NHS IT projects that don’t work. We have fighter jets that will never fly, the list goes on. To make it easier think about this; can you think of one single Government project that was completed on time and to budget?
One more question. Why do you think it is that the BBC, paid for by tax payers money, never exposes these gargantuan white elephants?
#3 Hazlitt – High Taxes Kill The Economy
• High taxes cause unemployment
• Why UK no longer has a manufacturing industry
• Why Hong Kong is so successful
According to official figures the UK Government consumes some 55% of GDP. Actually, elsewhere on wesayUK we argue it is far higher than this but we will stick with the official figure for now. The UK experienced its greatest economic growth in the 1800s and 1900s when the tax take was about 9% give or take. Really this is not surprising.
Put it this way - for every pound we earn we give the Government over half, 55 pence. That is 55p taken out of the economy. Instead, it goes to the Government where most of it is wasted – for more discussion on why there is so much waste please refer to our [TBA Socialism # HAZLITT].
In addition, individuals and corporations are now not incentivised to be entrepreneurial. If you set up a business you bear the risk of all losses completely. So if a business loses 100% of all its losses and only gets to keep 45 pence for every pound gained, fairly obviously businesses will be reluctant to expand and take on new employees. And entrepreneurs out there will think twice about becoming an employer. Improved machinery and better-equipped factories come into existence much more slowly than they otherwise would. The result is that consumers are prevented from getting better and cheaper products to the extent they otherwise would. In addition, the capital available for entrepreneurs begins to shrink, which pushes up interest rates on borrowing capital and so makes any business venture even more risky.
But it doesn’t stop there. High taxes push up wages. No one is prepared to work for a small net salary. This has the effect of making goods produced in the UK uncompetitive. Why buy an expensive car from the UK when you can get a cheaper one from Japan. On a day to day basis it is impossible to see the impact of high prices. But judged over time it is as clear as night and day. The UK spawned the industrial revolution but today it is a pale imitation. How many goods are made in the UK today? Huge industries have been lost from the UK and have gone abroad. Dyson is a recent example. If he stayed in the UK he would likely go out of business. In some towns in the UK the majority of workers are now either on social or are employed by the Government. Ironically, it is also the case that the Government jobs and of course generous welfare payments are both pushing up wage levels for those brave entrepreneurs still struggling in the UK. That’s not a good use of tax payer’s money.
So put simply high taxes cost the economy far, far more than simply 55 pence in every pound. The affect is in fact exponential.
If you look at any very successful economy (UK and USA in the nineteenth centuries, Hong Kong and Singapore today) you will find that they all operate low tax regimes. And also they enjoy excellent public services. Hong Kong is an excellent case in point. In the 1950s it looked and resembled a third world shanty town. Sadly for Hong Kong it was just a lump of rock with no mineral deposits or any natural wealth and a small population. In 1961 however a Scottish civil servant Sir John James Cowperthwaite became the Financial Secretary of Hong Kong. Given politicians tendency to interfere at any given opportunity and impose swingeing taxes to help fund their extravagant election promises Sir John did something highly unusual. He did nothing. He had an acute understanding of libertarian economics and he resisted the urge to interfere. Today Hong Kong enjoys one of the highest GDPs per capita of any country in the world. Sir John by the way is utterly revered in China even to this day. It’s a pity hardly anyone in the UK knows him because his legacy is definitely one to copy.
So you see politicians suffer from the “broken window fallacy”. They use our taxes to operate useless work schemes, or to pay people not to work, or they give them non jobs in the public sector. Of course they never fail to boast about their achievements but what they fail to see is the huge impact high taxes are having on our economy. They are only looking at one side of the coin.
#4 Hazlitt - Government Interference and Subsidies
• Government loans and subsidies are a bad idea
• Crowding out explained
In the last #3 HAZLITT you heard how politicians, in imposing high taxes, harmed the economy and caused high unemployment. But unfortunately politicians have more tricks up their sleeves. Keen to tackle high unemployment politicians decide to make business loans. On the face of it, it seems a good idea. People are better off in work than on the dole. It is cruel and wasteful to put them on relief. Why not set them up in business and make them self respecting citizens? The loan will be repaid one day so there is no loss to the taxpayer.
So the Government offers business loans in addition to business loans offered by the private sector. But there are key differences. The Government is not risking its own money. If banks make poor decisions they will pay for them by going insolvent (actually this is what should happen with banks – we’ll leave that for another article). So banks tend to be very careful before making a loan.
If the Government operated by the same strict standards, there would be no good arguments for the Government entering the field at all. Why do what private agencies already do? But the Government almost invariably operates by different standards. The fact is the Government will make loans to individuals who could not get loans from the private sector. In other words, Government loans suffer far higher defaults. Socialists argueem style=span style=font-size: 12pt; font-family: helvetica; color: #333399; that this is more than offset by those who do repay the loans and as a consequence are now productive. But the socialists are only looking at what is “visible”. They are ignoring the “invisible”. What about those people and projects that are now deprived of funds. In order to get this credit the Government must plunder the private sector of capital. This lack of capital causes lenders to be more careful in their lending practices. It also pushes up interest rates.
Imagine A would have got a loan for a farm had the Government not intervened. A is of good character, works hard, and has saved some capital and is known to his local bank manager. Instead, however, the Government has expropriated the available capital and has given it to B. The Government does not have the same experience as the bank manager, does not bear any commercial risk and does not know B. B may turn out to be a good bet but it is unlikely.
The point to bear in mind is that capital is limited. When the Government gets involved it takes up a scarce resource – in this case Capital – and it almost never does as good a job as the private sector. In this example, we have deliberately kept it simple – e.g. there is not enough capital for A. In practice, A is likely to be deprived of funds due to artificially high interest rates or high farm prices both of which have been forced higher by Government interference.
Quite apart from general incompetence politicians basically are in the business of “creating employment”. In other words, they are not analyzing business plans based on productivity, profit margins, chance of success etc. All they want to do is create employment. As such they tend to favour inefficient, unproductive schemes that require lots of labour. Put it another way. The Government is depriving the market of valuable labour and capital and making it work inefficiently. By doing this also the Government is pushing up the cost of labour and capital in the private sector – this is referred to as “crowding out” or “squeezing” the private sector which of course leads to more unemployment.
In the UK today we have town and cities where the majority of people are employed by the Government. This has the affect of pushing up the wage levels and so it “crowds out” the private sector. In other words, private employers (who we should be encouraging) are unable to compete due to the massive misallocation of tax funds. When you buy a Sky sports package you pay more than is the market rate because the BBC, again using taxpayer’s money, competes for the same sports rights, and so push up the ultimate cost of the sports package. Many private businesses are unable to get capital loans from banks because the Government is hovering up any such scarce capital resources – all of these examples are examples of “crowding out” and there are many, many more.
The Coalition is guilty of this same fallacy. A subsidy is the same as a loan. The Coalition has chosen to subsidize home mortgages. The Coalition is thereby depriving the market of private capital. One other affect of this is to cause house prices to rise which leads to homelessness. The subsidies to the banking sector both under Labour and the Coalition are catastrophically poor decisions. Politicians are compounding an already very dangerous position of their own making.
The answer is always the same. By interfering in the free market, no matter how well intentioned, the Government causes irreparable damage that may not be immediately obvious.
#5 Hazlitt – Machines Create Employment
• Socialists hate progress and change
If you have listened to the [TBA # HAZLITT on capitalism] you would have heard how new inventions are a force for good. They create employment and in time they force down the price of goods making them more affordable to a wider number of people. If you step back and take in a time span of 400 years it is easy to see this in action. Today we all enjoy luxuries like central heating, cheap travel that only Kings and the super rich could afford in the seventeenth century. But not everyone sees it this way.
Socialists argue that machines destroy jobs. They argue that the machine can do a job previously done by many hands and so it is only right to resist any such technological advance. A classic example is the cotton spinning wheel invented in 1760 which gave rise to the Industrial Revolution in Britain. The workers were concerned about their job prospects and would frequently riot and destroy as many spinning wheels as they could lay their hands on. Order frequently had to be restored by the military.
At the time in 1760 there was a total workforce of 7,900. Just 27 years after the invention of the spinning wheel there were 320,000 workers engaged in the industry. How was this possible when such machines are clearly labour saving devices? It happened because the machines significantly boosted production which in turn meant the price of cotton inevitably fell sharply. Once this happened far more people could afford cotton which in turn boosted demand and soon we were shipping cotton half way across the world. This massive demand in cotton meant the industry had to expand – more machines, machine mechanics, logistic workers etc etc.
Also, say a coat used to cost £200 but now thanks to new machinery it can be sold for £100. Even if this did not lead to an increase in the number of coasts purchased (though that’s highly unlikely) customers how have a saving of £100 which will be fed back into the economy and will result in increased demand elsewhere. So for every lost job it is inevitable that many more jobs will be created elsewhere.
With the passage of time it is easy to see their mistake but actually this fallacy still prevails today, albeit under different disguises. Take the London Underground. It is massively overstaffed. We have the technology today where we do not need train drivers. But unions will argue against any progress on the basis that it is bad for the economy. They are thinking only of the specific issue of those particular employees which to be fair they are paid to do. However, there is nothing clever in wasting human capital and financial capital in paying someone to do a non job. It would be far better if that driver is freed up to do something productive that the market actually wants.
Unions and also Government agencies also make the same fallacy when they insist only union labour can do a certain job or only people with a certain Government licence. They may pretend the licence is there to ensure a certain quality of work but actually this is more often an excuse. They think they are protecting jobs but actually they are simply causing market inefficiencies by interfering – yet again. The same fallacy lies behind EU law which prohibits the number of hours a worker can work in a week. The EU, in interfering in this way, believes that by doing this they are “creating work”. Actually, they achieve the exact opposite.
Put it this way. If machines, or any progress for that matter, are to be resisted because they kick people out of work then we should abandon all progress and go back to the caves. But how is it the world now supports 9 billion people despite all these horrible inventions? But despite the obvious absurdity of these arguments they are very convincing, even today, precisely because they focus people’s attention only on the immediate, the visible. They only focus on the employees who may lose their jobs and they omit to mention the many more people who will find new employment.
#6 Hazlitt - The fallacy of full employment
• Technology boosts wealth
• Why the public sector is full of non jobs
The economic goal of any nation is to achieve the greatest results with the least effort. This is what drives invention and technological advances. This is why men began putting burdens on the backs of mules instead of on their own. In other words, our objective should be to maximise production. In doing this, it makes sense that we will have full employment. But production is very much the end, employment the means. We cannot have full production without full employment. But we can easily have full employment without full production. Keynesian economists obsess about full employment. They should instead focus on production.
Primitive tribes are naked, and poorly fed and housed, but they do not suffer from unemployment. Africa is poorer than the UK but the main problem from which they suffer is primitive production methods and not unemployment. Nothing is easier to achieve than full employment when it is divorced from production. Hitler provided full employment with a huge armament programme. World War 11 provided full employment for every nation involved. Slave labour in Germany had full employment. Prisons and chain gangs have full employment. The UK pursued full employment as an end in itself from 1940s right through the 1970s with disastrous consequences.
Politicians love to pursue “make work” policies. They think they are being clever by creating non jobs but all they are in fact doing is making us unproductive and poorer. Just look at the Guardian jobs pages to see endless non jobs if you need convincing. For years and years Gordon Brown squeezed the taxpayer for more taxes and used these monies to go on a hiring binge in the public sector. Sure some of these jobs were essential but many were non jobs and none of them contributed one single penny to the economy. You could argue it was shrewd politics because for years he was hailed as some kind of genius and helped keep Labour in power for 13 years. The UK economy is now starting to unravel and is paying for this largesse and totally avoidable mistakes.
The progress of civilization has meant the reduction of employment, not its increase. It is because we have become increasingly wealthy as a nation that we no longer need to employ child labour (still a feature in growing economies today) and the aged for example. In the UK today however we are actually reversing this natural process. Because we have embraced socialism and high taxes it is now necessary for two adults per household to work as the norm. Clearly this will have large long term social impacts which we are now beginning to see.
#7 Hazlitt - The Fallacy of Tariffs
• Why tariffs are bad news
• EU imposes the mother of tariffs and impoverishes Africa
There are not many areas where economists all agree on a single issue but protectionism is one, so why the need for this article? Because even today politicians continue to make the same mistake that Adam Smith highlighted in his seminal work The Wealth of Nations in 1776. In fact, Adam Smith almost appeared apologetic even to raise such an obvious point saying:
“The proposition is so very manifest that it seems ridiculous to take any pains to prove it; nor could it ever have been called in question, had not the interested sophistry of merchants and manufacturers confounded the common- sense of mankind.”
Let’s just see how obvious this point is. You do not need to know economic theory to make good economic decisions – you basically need “common- sense” as Adam Smith argued all those years ago.
Imagine you need a patio. In your present job you earn £300 a day. You work out that it will take you 15 days labour if you do it yourself. Total cost excluding materials comes to £4,500. On the other hand, you could employ a builder to do the same job. He too charges £300 a day but it takes him 3 days. What are you going to do?
Exactly, it’s not a head scratcher. This is called comparative advantage and you will recall we touched on this in the [TBA Capitalism video]. In other words, you quickly work out it is better to pay someone else to do the patio because they are more efficient than yourself and instead you concentrate your efforts on your own specialism, whatever that happens to be. The exact same calculation that applies to home economics applies too to international trade.
Enter politicians. They are in the job for votes and being crowd pleasers. As you will know by now they make the fallacy of focussing on the immediate effects of a tariff on special groups, and neglect to consider its long-run effects on the whole community. Let’s look at an example. A jumper maker in the UK is concerned that the Government is thinking about taking away tariffs on imported jumpers. The USA can make jumpers for £25 but with a £5 tariff they cost £30 in the UK. That is how much it costs the UK manufacturer to make a jumper. As such, he argues that if they remove the tariff he will have to shut down his factory in Leicester. 1000s of jobs will be lost plus of course all those other industries which rely on those employees’ purchasing power. The tariff stays, but of course it is not as simple as that. Customers in the UK are now paying £5 more than they ought to. In effect, they are subsiding 1000s of employees to do something they are not very productive at. As such, 1000s of employees will now be out of work elsewhere in the economy due to the lack of £5 purchasing power. However, it is very hard to quantify these 1000 workers and so of course politicians ignore their plight – put simply, they don’t vote, stupid.
But take it one step further. Let’s say they did remove the tariff. As such, customers buy their jumpers from the States and they have an extra fiver in their pocket. Now a manufacturer in the States has lots of pounds. In order to make any use of these pounds, this simply means the manufacturer now must buy goods and services from the UK. Ok he can exchange the pounds for dollars with a middle man but ultimately those pounds will end up back in the UK it really doesn’t matter how they get there. Of course, this boosts the UK even further and results in more UK jobs. What about the UK jumper makers. They will probably lose their jobs – but here’s the interesting bit – they will find employment doing something productive where they enjoy comparative advantage.
But the point is this is not a zero sum game. Tariffs actually reduce productivity and wage levels in the UK. That is self evident. Paying people to do something inefficiently is not a smart move, no matter how you look at it. Sure the special interest workers (jumper workers) do benefit but in the very long term even they lose out. To be fair to the UK when it comes to international trade it is one of the most liberal in the world certainly compared to America for example. But in large part we have surrendered sovereignty to the EU and that is an entirely different proposition. The Common Agricultural Policy (CAP) is a tariff that fundamentally short changes the European consumer and the African farmer. Essentially, African farmers have to pay a tax or tariff in order to be able to export goods to Europe. The affect of this is to make African products too high and so in short they are denied entry to this massive market. It has been estimated that just a single 1% increase in trade from Africa is the same as all the aid given to Africa each year. It is nauseating then to hear politicians crowing about how much taxpayers’ money they are donating to Africa each year in aid. The Coalition has just doubled international aid but still CAP, which causes the real damage, is left intact. The special interest group of course is the French farmer.
#8 Hazlitt - Price Fixing
• Fixing market prices by dictat is not a good idea
• Miliband thinks he knows better than consumers
Politicians love to sound off about high prices. Ed Miliband recently railed against high parking fees; train prices; air fares; energy and much else besides. What he conveniently ignored is the extent to which high taxes, over regulation and inflation, all caused by politicians, contribute to high prices. In the case of air fares it is often the case that over 50% of the air fare is down to taxes, especially with budget airlines. About 60% of the price of petrol is made up of tax; wine can be as high as 80% tax and on and on it goes. Not just that, but have you any idea how expensive the NHS is? Most of us don’t even use it. He didn’t mention any of these issues. Funny that so what is Miliband’s solution?
The threat is obvious. Unless private companies drop their prices he will step in and fix prices by law, assuming of course he is voted into power.
By now you will know this is a disastrous policy. But in practice you simply need common sense to know this is a bad idea. Miliband does not understand that prices ultimately are set by consumers and not by the private companies. The market sets the price, always. If you get your pricing wrong you will soon go out of business. That is how the market works.
Along comes Miliband with zero business experience let alone any experience at all of these particular industries. In an act of Herculean arrogance he believes he knows best: the market is wrong. Socialists believe we need “saving” from the free market – to help convince us they describe the market in derogatory terms calling it anarchic; cutthroat; dog-eat-dog; law-of –the- jungle, can’t be allowed to run riot; red in the tooth and on it goes. Socialists believe that if we leave prices to the mercy of the free market that prices will be pushed up by competition such that only the rich will be able to afford those prices. As you will know from the [TBA Capitalism # HAZLITT] the free market and competition actually drives prices down.
Sure this policy may make Miliband popular with those members of the public who use these services but in effect he is impoverishing all of us. So this is what will happen?
Let’s say Miliband is successful and he reduces air fares by dictat. Immediately, demand will rise because the prices are now cheaper. Supply will also reduce. Because people buy more, the accumulated supply is more quickly taken up. Because profit margins have now been reduced many marginal companies will go out of business and successful businesses will be forced to cut back. In other words, Miliband will bring about the exact opposite of what he intended. There will now be less supply of any given commodity where prices have been fixed above the market level. What he was aiming for was an abundance of supply at affordable prices. Price fixing has been tried on many occasions in the past, always with the same result; a shortage of those products and higher unemployment. To deal with this situation politicians have responded with various devices which amount to yet more interference. Among these devices are rationing, cost control, subsidies, and universal price fixing. What will happen in due course is that to “control” the situation you need to extend price fixing to more and more areas of the economy until eventually you end up with a full on socialist economy with a very powerful state calling the shots. As Albert Einstein famously said, doing the same thing over and over again and expecting different results is the definition of insanity. Put it another way, when you are in a hole sensible people stop digging. Socialists have a tendency to hire a JCB digger.
# 9 Hazlitt - Rent Control
• Rent control like price controls is a bad idea
• Harms the poor in the long run
• Drives up the price of housing
The house building industry in the UK is one of the most heavily regulated and interfered with markets resulting in a housing shortage and high property prices especially in our main cities. Developers are compelled by law to build houses below the market rate – called affordable housing – intended for key workers. Another favourite trick is to fix rent levels below the market level to help tenants out. As always with socialist policy it is immediately seductive until you look into the detail. We will now consider the impact of rent controls.
Rent controls were very popular immediately after the war. There was a shortage of housing and the Government at the time felt that tenants were being exploited by greedy landlords. They sprung into action and imposed rent controls.
So the landlords are being asked to subsidize the rent of their tenants. After time these protected rents can be as little as 10% of the true market rents. Protected tenants therefore are onto a good thing and they refuse to move on even if they no longer need all the space. As such, the rent controls encourage wasteful use of a scarce resource. Landlords are now making little profit and so they tend to neglect basic repairs which creates bad will with the tenants. Obviously property prices crash because who wants to buy a property with a protected tenant. In due time, it becomes very difficult for landlords to make ends meet so they cut off electricity and gas and in effect they abandon the properties. This is basically what happened in New York and you ended up with countless derelict neighbourhoods left vacant and subject to vandalism, arson and so forth.
What impact does it have on homes that are not rent protected. Of course their rent levels increase in time. This is due to several factors. One, because of the rent controls you have in effect taken out of circulation say 30% of the housing stock – this pushes down supply overall and so prices have to rise in those houses that do not have a rent control. In effect then those tenants are subsidizing the rent of the protected tenants. Also, the supply issue is made even worse because developers are reluctant to build new housing fearing more government interference; also the market is skewed because many protected tenants are not moving on.
So let’s see how the market would have dealt with this situation had no rent controls been imposed. Remember the reason for the rent controls was because there was a shortage of housing and so rents were high. What would happen is that tenants would economize on space and so cut down their rental costs. Families would share bedrooms etc. So you get efficiency savings not waste. Seeing the increased profit margins developers would respond by building new houses which of course increases the supply. What you saw earlier was a decrease in supply. Over time therefore rents would come down to an affordable level for everyone. What is more it would be fair. No one section of society would be compelled by law to subsidise another sector of society.
In the UK today we do continue to have subsidized housing which has the affect of limiting supply and driving up the price of housing. Politicians love high property prices because voters, those on the housing ladder at least, feel wealthy because of the high prices and are inclined to vote for the incumbent government. Today there is talk in the Labour party of bringing back rent controls (Ken Livingstone and David Lammy).
#10 Hazlitt - Minimum Wage is a Bad Idea
• Minimum wage punishes the low skilled
• It results in unemployment
• Causes misallocations in the economy
It is astonishing that the Gordon Brown brought in the minimum wage not only without any open derision but with the full support of the other main political parties.
Raising the price of labour is a truly bad idea for the exact same reasons that forcing down the price of certain commodities is highly destructive as discussed in an earlier # HAZLITT. You cannot make society richer by forcing up wages. If it was that simple we would all be multi millionaires and global poverty would be a thing of the past.
How on earth can any one politician dictate to millions of employees throughout the UK, all very different in many key aspects, what their wage level should be? You do not have to be an economist to know that it is monumental folly to think that ONE wage level will be sufficient. If you just think about prices in general you will notice how they are constantly changing day in day out, as changes in supply and demand work their magic through the price system. Wage levels are no different.
Gordon Brown does not seem to realize that labour is voluntary. Employers are constantly comp/span/p#8 Hazlitt - Price Fixingtext-align: justify;span style=eting to attract the best employees and so they must offer attractive wages. We are not being exploited by the market; instead we are being exploited due to the fact that we must surrender over half our wealth to the Government in taxes or face a jail term. Funny that Gordon Brown did not confront that. Let’s now look at the all too predictable results of this policy.
Because of the minimum wage level the minimum weekly wage is now set at say £300. If someone is only worth £290 he will not be employed. You cannot make a man worth a certain amount by making it illegal for anyone to offer him anything less. You merely deprive him of the right to earn the amount that his abilities and situation would permit him to earn, while you deprive the community of his services.
The higher wages mean businesses make less profits and marginal businesses go bust hence more unemployment. Even if businesses can offset the wage increase by jacking up prices consumers will buy less of that product; furthermore consumers have less money for other goods and so the economy is harmed elsewhere – again more unemployment.
So unemployment is an inevitable result. Some people argue that if industry X cannot survive without paying starvation wages then it is better if industry X is put out of business. This overlooks several factors. One, consumers now have to do without that product. Two, no matter how low those wages were they had to have been the best in that area otherwise those employees would have sold their labour services to another higher paying employer. What now happens is that those ex employees compete in the market place for the remaining jobs in that area which has the affect of driving down wage levels in those other industries.
When you consider minimum wage levels you have to also look at social pay as well. Let’s say dole money and housing grants equal £250 per week. The minimum weekly wage is £300. This now means that in effect if your services are worth only £290 a week you cannot find employment. That means therefore the Government will have to pay you £250 a week to do nothing. This means you have been deprived of your independence and self-respect from performing wanted work. But what if your services are worth £300? Whilst you will find work you are now in effect only working for £50 per week because you can get £250 doing nothing. This explains why some 99% of all jobs generated in the private sector in the last 10 years have been taken up by immigrant labour. The indigenous population in the UK is being paid not to work. Of course this has huge social consequences which are beyond the scope of this paper.
More distortions are felt elsewhere. Because the minimum wage keeps low skilled workers from entering the workforce this means those higher up the pay scale receive higher wage levels because they face less competition.
Once politicians introduce some degree of market interference – in this case the minimum wage – it is not only very difficult politically to remove the minimum wage but actually political parties compete with each other to raise the minimum wage to even higher levels. This is exactly what has happened since the minimum wage was introduced into the UK. The only way to raise wage levels is to increase productivity levels. If we lowered taxes businesses could then invest more in plant and machinery which would help increase our productivity. Petty regulation from the EU and low education levels in the UK are also areas that need to be addressed.
#11 Hazlitt - Are Union Wage Demands Beneficial for Workers?
• Union pay demands are a short term fix
• They damage the economy and bring about unemployment
• Union leaders benefit disproportionately
Firstly unions do serve a purpose. An employee on his own may not have sufficient information to gauge what his services are worth in the market. As such, he may accept a job that pays him below his market worth. This is compounded by the fact that his job is worth more to him than it is worth to an employer. If the employee gets these negotiations on pay wrong it has a material impact on his life. If the employer gets it wrong it will result in lost profits but the impact is not as big or as personal. The union then is able to redress this imbalance and ensure that its members do get paid the fair market wage. Unions also ensure decent working conditions etc.
But here we are talking about fair market wages. The problems arise where the union demands wages in excess of the market value. Union leaders adhere to the belief that all workers are naturally exploited and are being under paid. They ignore the reality that all employers are constrained in the amount of wages they can pay out by the degree of productivity of those employees. Ultimately, the wages are set by the customers who choose to buy those goods and services e.g. by the market.
Ramping up wages beyond the market rate results in reduced profits which forces marginal businesses out of business. Even if the business stays solvent and is able to raise its prices this will cause a slack in demand and so result in workers being laid off. Whichever way you look at it you will see a rise in unemployment. In effect then the increase in wages is being paid by those who have lost their jobs. You cannot buck the market. Someone always pays. You cannot magic extra wage levels without an increase in productivity – it is a total impossibility.
What about those employees still in work? Well in the short term they will benefit. However, where you get large scale wage increases across a range of industries you will see a rise in prices e.g. inflation which will offset over time any such increases. In addition, due to the increased number of laid off workers the Welfare Bill will have to be paid for from those still in work – again this will offset any such wage increase.
The losers are obviously a) laid off workers and b) non unionised workers who now find they are paying higher prices than would have been the case. Those unionised workers in the long run are also likely to see no net gain for the reasons mentioned. In the long we all suffer. In the UK the Welfare Bill has become prohibitively expensive and that bill has to be borne by someone. That “someone” are the workers in the UK. As a consequence it becomes very expensive to hire a UK worker compared to a worker in other countries. Over the last 50 years we have essentially exported our industries abroad to more business friendly environments. People don’t ask “where is this hoover made?” If there are two hoovers of the same quality they will always choose the cheaper hoover. You must remember it is the consumer, not employers, who set price levels and therefore the level of wages. This is why Dyson had to undergo the major hassle of moving his business abroad; if he didn’t his business ultimately would fail in the UK. Towns and cities in the North of England once led the industrial revolution. Now in these same towns and cities the majority of inhabitants are either on the dole or work for the State. The rest of the UK workers are actually paying them not to work. We have created a vicious cycle where wage fixing and generous welfare payments will lead inevitably to more unemployment and higher Welfare Bills and so on and so on.
It needs to be pointed out as well that high taxes, to pay for the Welfare Bill, means less capital to invest in plant and machinery which you need to increase productivity. At the moment we have only considered job losses from existing job levels. A proper analysis should also factor in the jobs we would have gained had we been able to invest extra capital in plant and machinery which really would boost productivity levels and so create both extra job opportunities and increased wage levels.
It has to be said in passing however that union leaders do benefit. Take Harriet Harman’s husband, Jack Dromey. He has been given a multi million pound house to live in for a peppercorn rent. Not bad. Most union leaders earn six figure salaries which puts them in “top 1%” money earners in the UK. So to be fair not everyone loses out.
#12 Hazlitt - Inflation is a Hidden Tax
• Inflation explained
• UK and USA heading towards hyper inflation
To understand inflation you need to understand the role of money in our economy. Our economy is an exchange economy, a barter economy. If I want something I must exchange something or some service in return. Money simply facilitates this exchange economy.
So for example, let’s say X is a builder. When X buys a beer he is in effect swapping some building services for that glass of beer. All “money” does is allow the exchange to take place hence the term money is “a medium of exchange”. Fairly obviously if money did not exist and the builder had to say do half an hour’s work in order to get the beer we would still be scratching around in caves.
The wealth in any economy is the amount of things we make or services we provide in that economy; it has nothing to do with how much money we have. Take an extreme example. Let’s say that in the UK nobody worked at all, no services were provided and no goods were made. Even if the Bank of England printed billions of pounds (actually it is in fact doing this – more on that later) this would make no difference; our economic activity would still be zero. If money was wealth then of course we would have no global poverty.
So you can see clearly that money does not equal wealth. If you doubled the amount of money in circulation that would not increase our productivity at all. A factory making shoes would not suddenly make twice the number of shoes for example. Demand would not go up. Just because a customer this week has £200 not £100 in his wallet does not mean the factory will all of a sudden crank out more shoes. Money is a commodity just like any other product. If you increase the supply of any product (coffee, orange juice, bread) but demand stays the same then prices will fall. Money is no different. You now have twice the amount of pounds chasing the same number of goods and services. What happens is the purchasing power of money falls. This means you need 200 pounds to buy a pair of shoes that used to cost 100 pounds.
So inflation is a reduction in the purchasing power of our money. If X has £10k savings in his bank account and we have inflation of 10% his savings have effectively been reduced to £9k. Basically, because his money has lost value he is unable to buy as much with his money. We can see inflation today in the UK. A pint of beer now costs £3.50; food across the board has gone up in price; petrol costs far more; energy bills are off the charts etc. It’s difficult to work out the amount of inflation we have because the Government is very coy about revealing exactly how much money is being printed. Also, the inflation figures that the Government brings out are so heavily manipulated as to be almost meaningless. Listen to any media commentator and without fail they misrepresent inflation. They believe inflation is being driven higher by rising prices of commodities. They will typically say something like “The high price of oil is causing inflation in our economy.” The Bank of England makes the exact same mistake; they have a number of instructional videos in which they explain inflation on their website and they get it wrong.
But you see the Government is never keen to blame itself; politicians always blame someone else so this is no surprise. It’s always easier to blame horrible oil suppliers rather than their own policy. They will never blame inflation on money printing because then they will lose a huge number of votes.
So now you start to get to what inflation really is. It is a tax but as you will hear in the next lesson it is a very nasty and destructive tax. You must understand the extent to which the Government has control over you. People think that once they have paid their taxes (up to 70%) that they should be allowed to sit back and enjoy the fruits of their own labour. But it is fundamental to understand that the Government can effectively grab those savings off you. They don’t need to hack into your back account or ram raid the bank. They simply print more money and so rob you completely of your wealth.
Let’s look at an extreme example. What if the Government printed so much money that a pound had the same purchasing power of one penny. So a pound can only buy ONE penny sweet whereas before it could buy 100. In this situation you have just lost 99% of your savings. You have just been completely and utterly robbed and there is nothing you can do to stop it.
If you think this is farfetched think again. Hyper inflation has hit many, many countries in the recent past from Germany to Hungary to Argentina to Zimbabwe. We believe that the UK and USA are heading towards hyper inflation unless we are very careful. If you want a good understanding on hyperinflation we suggest you read When Money Dies by Adam Ferguson. This explains the affects of hyper inflation in Germany in the early 1920’s. The Government at the time printed money like no tomorrow to pay for WW1.
When inflation set in Germans were hauling around bags of money to pay for a loaf of bread. Soon nobody bothered with money and they reverted to bartering. You had debilitating chaos and poverty. In Berlin police showed up on horseback to control the crowds and they turned on the horses ripping them to bits and eating them there and then. It was truly horrific. This is why Angela Merkel is refusing American and French demands to print money. The Germans after all these years have never forgotten the horrors of hyper inflation. If you are wondering why America cares about Europe it is because Obama is painfully aware how bad the situation in America really is. If the EU tips over the edge that nightmare scenario will come knocking on America’s door in no time. America has vast amounts of debt, just like Europe but even worse, and the time for hiding is fast running out.
#13 Hazlitt - Inflation is a Silent Killer
• Inflation hits the poor hardest
• It is not a fair tax
• It destroys our economy
We said earlier that inflation is a tax but actually it is far worse. When a Government imposes taxes it affects everyone, everywhere at the same time and there is transparency. You know the Government wants more of your money and you know how much. The Government has to persuade you this is a good move so it is democratic at least.
Inflation as you have seen is the ultimate stealth tax. We will now explain why it hits the poor the hardest.
When the Government prints money the new money has to enter the economy somehow. Today, it is investment banks that are getting this money first. So bankers now have this new money. Their yearly pay has gone up 50% let’s say. When bankers buy goods and services these companies detect that the bankers will pay more and so they increase their prices. So you see how price rises will ripple across the whole economy and this process can take 2 years on average. During this period you see how Bankers enjoy this extra money when inflation is 0% - good for them. Let’s now look at the other end of the scale. Lower income earners may not see a rise in their salaries to offset inflation for about two years. During this time they are getting clobbered. Even at the end of 2 years it is often the case that their salary rises will not equal the true inflation rate. Say inflation is 30% - if they get an increase of 10% they are still down 20%.
In practice it is the private sector lower income earners that bears the brunt. Public sector workers benefit from union bargaining strength which does fight their corner well. But the true answer is that ultimately we are all worse off.
Moreover, it is a tax not only on individual’s expenditures, but on his savings account and life insurance. It is, in fact, a flat capital levy, without exemptions, in which the poor man pays as high a percentage as the rich man.
Inflation also plays havoc with the price system. From earlier lessons you know that in a capitalist society price determines what gets made, in what quantities and for how long. It sets fair wage levels and allows scarce goods to be utilized as efficiently as possible. It is a finely tuned calibrating machine. Now think about the havoc caused when you debase money?
Entrepreneurs see the low interest rate level and they borrow money to invest in some business venture. They do not know the low interest levels have been brought about by inflating the money supply. They are being given wrong signals; everyone is. What happens over time is you have a huge number of business failures and chaos ensues. What is even worse is that inflation is done on the sly and no one has a clue where it will stop. If you shout “fire” in a crowded theatre you get panic and inflation is no different. Once people sense that prices are rising inexorably they panic. To go back to Germany it was often the case that the price of a cup of coffee would jump in price from the time you entered the shop to the time you finished the cup of coffee. Remember prices are determined by supply and demand. So when money is debased by 50% it is not the case you can say prices will rise by 50%. It is not that simple. If people are fearful and they believe that inflation is worse than it really is price levels will reflect that fear. People will spend all their savings on anything they can get their hands on because they know tomorrow their savings will be worthless. Now inflation becomes hyper. It is at this point that the whole economic show has been destroyed – once control is lost you cannot just put the genie back in the bottle. Our puny pound will not be able to buy any foreign goods. Why would Russia exchange gas for pounds that have no worth? This is starting to happen to the dollar. Russia, China, Iran, India no longer conduct trade in dollars. They use gold. China is desperate to offload its dollar holdings without rocking the boat. They do not want to spook the markets – if they do the dollar will tank in price and this means the Chinese, who are sitting on 3 trillion dollars right now, will lose all this wealth over night.
#14 Hazlitt - Why Politicians Love Inflation
• UK has similar debt levels to Greece
• The gold standard
Politicians love to bribe us with “freebies.” Gordon Brown showered tax credits on the middle classes. But the Government does not produce any money so they must get this money via taxes. But there’s the problem – taxes are not popular. Politicians know that we will tolerate far higher taxes as long as they are imposed little bit by little bit over the years. Gordon Brown was a political maestro when it came to imposing stealth taxes but even that has its limits.
Enter inflation. Politicians simply cannot resist the addiction of inflation. They get to print money, build say a few shiny hospitals whilst all the time keeping taxes at the same level. People do not recognize that inflation is a tax and politicians know that. Furthermore, even when inflation does rear its ugly head in a few years’ time politicians simply blame someone else and our media goes along with the charade.
There is another reason to inflate. You will remember from earlier lessons that often politicians will increase the wage levels of a certain given industry. As we have explained this will result in increased unemployment. If the situation is allowed to get out of hand politicians will deliberately introduce inflation in order to bring about an indirect reduction in those wage levels. Talk about digging a deeper hole. The Bank of England says that it is targeting an inflation rate of 2% - this is profound ignorance. No amount of inflation is a good thing, ever.
The UK is in a major hole today. The Government is spending more and more of our money but it has got to the upper limits of taxes. About 70% of our wealth is eaten up by taxes. But still the Government has bills to pay so what does it do?
Well it has been borrowing money. Taking on loan money is simply deferred tax. We have to pay interest on that loan money and we have to repay the capital and this can only be done by increasing taxes at some point in the future. The UK has borrowed so much that we are now at the point where foreigners e.g. China will no longer lend to us. So what now? Basically, the Bank of England has been printing money (it’s all done electronically these days) and giving it to the Government. Does that strike you as healthy? Normal? What will happen is that we debase our money supply and we repay our creditors with useless bits of paper- so the UK Government robs both the UK public and generations to come and its creditors. This is the single reason why the UK has not suffered the same fate as Greece or France. The Germans refuse to print money so interest rates are rising across Europe which is clobbering indebted nations like Greece, Portugal, Ireland, France, Austria, Italy.
When you look back at the 2007 crash people blame the subprime crisis in America. But this is not the real problem. Ask yourself this question: “why were banks making money out of domestic housing? Shouldn’t they be lending money to business start ups?” But there is no real economic activity in the States or Europe so the banks, in desperation to boost their huge bonuses, turned to the domestic housing sector. This was not a good sign whichever way you look at it. It signals loudly and clearly that our economies are bust. So how do we avoid inflation?
The only way is to go back to honest money, money you cannot print. Paper money has never lasted very long for obvious reasons. Actually, one of the main reasons for the collapse of the Roman Empire was an addiction to debasing the money supply by clipping coins. Now we are nearing the end of the American Empire. We must ultimately go back to the gold standard which served as money very well for 2,000 years.
### Hazlitt - Roundup
Over sixty years has past since Henry Hazlitt’s lessons were first published in 1946 and yet they are still as relevant today as ever; the popular fallacies they expose continue to persist in present day government policy. It is incredible to think we are making the same mistakes today. If you take any discipline you will see steady improvement in that discipline over the years. Better health care, faster cars, warmer clothes and so on and so on. Economics however is going backwards.
The mistakes these lessons highlight are principles put forth by Keynesian economics which is an apologist for socialism. Which central banker, mainstream politician, Government or academic economist called the 2007 crash? Answer: not one. The same characters are still meeting at Davos and imposing the exact same policies that brought us to this sorry state: 'Socialist Economics'. Imagine seeing a doctor every month for five years and he kept giving you a clean bill of health. If one day it’s discovered you are ravaged with cancer would you go back to the same doctor?
In the UK we are not helped by the fact that the BBC, a State owned media monopoly, is 100% behind socialist policy. The BBC is tremendously influential and it sets the mood music of the nation. The Coalition cuts are virtually nonexistent but to listen to the BBC you would think they were brutal. The BBC frames the discussion right from the start. It labels cuts as “austerity cuts.” The implication is that high taxes are good and cuts are bad, austere. If that was the case let’s ramp taxes up to 100% and be done with it.
Once you understand that wealth is the amount of goods and services produced as a whole you will have a far clearer understanding of the affect of any given policy. If you raise the wage levels of a certain industry you do not boost productivity. In fact, that industry will produce less goods. If you subsidise a given industry you are using the wealth of other taxpayers to support workers in another industry to continue to be unproductive.
Right now we pay about 70% in taxes. This is a massive disincentive for any entrepreneur thinking of starting up a business. If he fails he loses all his savings. If he is successful he only keeps 30p in the pound. Even if he does get the business off the ground he will almost certainly come unstuck because he will not be able to produce goods at competitive prices. Because wage levels are so high in the UK we can no longer compete as a country. As such, all our industrial and manufacturing businesses have gone abroad. The only businesses to remain in the UK (e.g. software, pharmaceutical, defence, legal, financial) are high value businesses which are not as price sensitive. But India and China are churning out a highly educated workforce each year so we cannot be complacent and suppose these industries are safe forever.
Politicians are masters at blaming everyone else. They blame 'Jonny Foreigner' for taking our jobs; the greedy 1% for taking more than their fair share; they talk of inflation or recessions as some kind of contagion that drifts in on the wind; they blame individuals for not saving and not spending and on and on it goes the limit only being their imaginations. The simple fact is we are over taxed and over regulated. We have taxedspan style=p style=, borrowed and printed money and now we are bankrupt. Once busy industrial towns are now derelict. The 20 stone Gorilla in the middle of the room is the bloated Government and it is incredible how little attention is being focussed on this fact.
If the UK wishes to be successful we need to become more productive. Entrepreneurs and workers should be encouraged to work by being allowed to keep more of their hard earned cash. At the moment you can earn more money on Welfare than in certain jobs. Public sector workers earn more than private sector workers. This is madness. Government also has to stop micro managing every single industry with petty regulations passed by faceless bureaucrats who have never worked in industry before.
Libertarianism is not just about economics and wealth. Really it is about liberty and honesty. A socialist society is not fair. It punishes hard work and favours the lazy and feckless and special interest groups. Because Government is so big and interfering corruption becomes a natural corollary. Businesses spend vast amount of time and money buying political favours. The lobbying in Washington and Brussels is completely off the charts. This is why whenever you look at corruption tables you will see the top slots are taken up by ex communist countries – this is no coincidence. It is not that those people are genetically more corrupt. It is that the economic system – socialism –brings about corruption. Socialism also saps the individual of any self identity, community spirit and initiative. We have engendered a class in the UK that only knows its rights and not its responsibilities. People no longer instinctively reach out to help their neighbour because quite rightly they have been brought up to think this is the Government’s job.
Right now politicians are groping for the answer. They have hit upon the phrase “crony capitalism” which just goes to show how truly they are missing the point. When you pay taxes you are subliminally being told that this is a virtuous act. Not to pay taxes, or to moan about high taxes and you are told you are selfish, don’t care for your common man. But the time surely has come to ask, why? Why does the Government think it is better placed to spend our money than we are? What is the justification for saying the Government should tax us to death and supply shoddy public services in return? Part of the problem comes from thinking as the Government as somehow democratic. But actually, the vast majority of your taxes ends up with a few thousand civil servants, quangos, public sector workers, special interest groups, people in short who are not democratically elected, people who have jobs for life and who get to spend the majority of your money as they see fit. If you don’t like your local school, tough. If you are not happy with your local hospital, tough. If you want a weekly bin collection, tough. If you are unhappy with the high levels of immigration or generous welfare handouts, tough. If you are concerned about lax sentencing, tough. You must see that many, many people benefit from this misery industry and so it stays.
Both the Tories and Labour have been following socialist policy for the last sixty years. The changes between them, despite all the hot air and cross words might be 1% or 2% in income tax. Repeatedly we are being told about “new launches” or “new approaches” but all we get is more of the same: give us your money and we will spend it for you. China and India today are embracing capitalism after disastrous spells of socialism. Each day thousands upon thousands are being lifted out of poverty in those countries. This is because they are allowing the conditions for people to help themselves out of poverty. If China can do it then the UK, which invented the industrial revolution and modern capitalism, has no excuse whatsoever.
What drives so much socialism is self interest. Politicians need to create work for themselves. They interfere, they tax more and by so doing they create more jobs for themselves. By creating a huge dependency sub class in society that does not and never will work, they create work for social workers, child minders, social academics all feeding off this misery industry. But it’s not just politicians who benefit. Banks love easy credit economics because it allows them to borrow at near 0% and lend out at 5% plus. Easy money. If things go wrong they get bailed out. This is why bank economists and Government economists are invariably Keynesian. They deliver a message their paymasters want to hear; a message which hugely profits them. Take also large corporations. They love socialism as well because by lobbying for ever more draconian regulation they are basically shutting out the smaller competition and so creating a monopoly position for themselves which means greater profits. There is also a proliferation of vested interest groups all vying for Government interference which benefits them and to hell with everyone else. In short, it is self interest which is helping to create and keep the monster we have today.
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