Free market, profit incentive eliminate racism


I relay the following explanation, which I gave to an anonymous friend who believed that the free market fosters racism, and could not understand why he was wrong.

Okay, I will explain, with a preface.  Your hypothetical situation, in which many employers are racists, assumes that free people are, in large part, naturally racist and averse to being near people of other races.  It assumes that employers much prefer white employees to black ones.  If this is true (a big if), the market will tend to eliminate their racist natures.  Simply, here’s how (and remember that this situation is based on your racist assumptions, which may or may not be accurate):

All other factors being equal, demand for a white employee is much higher than demand for a black employee.   Therefore whites tend to be employed at a high wage, and blacks tend to be employed at a much lower wage, if at all.  In this context–which in its results resembles reality–imagine two manufacturers that produce the exact same product, one of which hires based on racial preference.

The racist employer hires an all-white workforce, and pays his employees the going wage for white labor.  The profit-seeking employer hires the cheapest labor, and therefore ends up with an all-black workforce.  Labor costs are much higher for the employer who employs only whites.  This means the price of his product must also be much higher than the price of the profit-seeking employer’s identical product.  Consumers will therefore buy from the profit-seeker, with whom the racist cannot compete.  The racist manufacturer will fail, leaving all of his white employees unemployed.  This unemployment, which must happen many times over if racist employment is prevalent in society, cheapens white labor, and in short order the price of labor is determined by the price or quality of labor–not by skin color.  In this way, the price mechanism, the market, and the profit incentive eliminate racist business practices.

AIG spells nationalization of entire insurance industry

A I Jeez

The Wall Street Journal reports that since receiving government aid, insurance giant AIG has begun greatly underbidding its competitors in the insurance industry.  Fed Chair Ben Bernanke acknowledges this practice, and believes it is necessary for AIG to do this, in order to gain enough marketshare to become profitable.

With billions of government handouts, AIG is able to offer peerless premiums.  In a free market, offering such low premiums would be corporate suicide.  But AIG is not a free market participant.  It has government backing.  Bernanke and Treasury Secretary Timothy Geithner have, on numerous occasions, voiced their intent to do whatever is necessary to keep AIG from folding. In this context, risks that would normally bankrupt the company do not restrict its behavior, because its liquidity flows from a seemingly bottomless barrel, the purse of the citizenry.  Losses from these risks will continue to be subsidized, and those subsidies will encourage more risks, and bring on more losses.

Other insurance companies cannot compete with a company that has unlimited liquidity.  This leaves their executives with a dilemma: they can keep their premiums high and non-competitive, and lose all of their customers; or they can lower their rates to meet AIG’s, keep their marketshare, and become illiquid when they are forced to pay out to misfortunate customers.  Both of these options will end in bankruptcy.

When AIG’s competitors are nearing bankruptcy, one of a few results may play out:  they may fail outright, leaving their marketshare available to AIG; they may be bailed out by the government, which starts them on AIG’s path of neverending losses; or, they may be purchased by AIG.  In each of these results, a government-funded monopoly over the insurance industry is established.  This monopoly, like all monopolies, will suffer unnecessary costs and miss opportunities to innovate.

The added costs of a non-competitive insurance industry will be great, even in the unlikely circumstance that it is fully funded by premiums.  It is likely, however, that the monopoly would evolve into a nationalized insurance company, or a government service, rather than revert back to a private insurance corporation.

If AIG’s insurance role becomes a government service, it appears that the costs of that service will be borne by everyone who uses dollars, as the Treasury has started printing large amounts of currency to pay its bills.  This inflation is perhaps the most regressive form of taxation, because it hurts those who are not wealthy enough to protect themselves properly from its effects.

A letter concerning economic reality

As a response to this article, which declares and celebrates the end of laissez-faire economic influence, I shared with my mother (who forwarded the article to me) thoughts so relevant to the economic discussion in America today, they are worth repeating here:

This article, besides unpardonably confounding economic liberty with imperial oppression and brutal dictatorhip, grossly neglects theoretical argument, so the ignorant reader is to accept its conclusion without understanding it.  This negligence of thought is a necessary means to an unreasoned end.  So far from being worthy of publication, this article would be expensive at any price, and is not worth the time spent reading it.  By equivocating much, it says nothing.

The idea that Barack Obama will “referee the laissez-faire versus free-market debate” is laughable; as referee in that non-existent contest (laissez-faire and free-market are inseparable allies), Obama would probably sabotage both competitors and declare an interventionist victory.

I will present a few points ignored by this article that, if attended to, would render a very different image.

First, it has been over a century since we have had a free market for goods and services and private control of production and consumption.  Therefore we have not had capitalism, and it is irrational to blame economic woes on a system that does not exist; it is as reasonable to blame Martians.

Secondly, and most importantly, government fostered the economic crisis.  Behold artificially low interest rates during the tech bust of 2001-02.  The only way to keep rates so low is by printing money out of thin air.  This government-created free money combined with implicit government guarantees of new loans via Fannie Mae and Freddie Mac generated a housing bubble and subsequent financial bubble large enough to threaten the existence of the global financial system.  Because that system is naturally undeserving of its legitimacy, its collapse may be a good thing, but only if governments practice humility in the aftermath.  Governments should understand that the maximization of individual freedom is their purpose, both politically and economically.  Governments should come to know that the evils of paper money cannot be overstated.  Governments should not allow interested monopolies to control monetary bases.  Governments should focus on destroying monopolies, not turning them into unavoidable institutions.  Inexplicably, we must now rest our hopes of economic salvation upon the imminent Representative Barney Frank and Senator Christopher Dodd, both of whom promoted bad loan practices and free money policies for years, and neither of whom saw the economic crisis coming.  This is a sure case of the inmates running the asylum.

On this point, note that at least one House Representative did accurately predict the events that led to the financial bust.  In a speech to the House in 2001, he said “despite the long-term damage to the economy inflicted by the government’s interference in the housing market, the government’s policies of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.” That Representative was ignored by almost everyone, and probably laughed at by the interventionist economists that this article aggrandizes.  That Congressman was Dr. Ron Paul, who continues to be widely ignored by popular economists, his colleagues, and our media.

Thirdly, most true free-market economists follow the “Austrian” theories of Murray Rothbard, Ludwig von Mises, and Friedrich A. von Hayek.  Free marketeers typically place more value on each of these three than Milton Friedman because their work was much more thorough, more laissez-faire, and more conclusive.  Few if any contemporary proponents of laissez-faire economics hail from the University of Chicago.

Economic science and history inform us that there will eventually be a final and all-destructive economic downturn: the fiat currency bust, which in the United States will be the destruction of the dollar.  The nature of this destruction will likely be hyperinflationary, like Germany’s post-WWI Mark or the ancient Roman denari (severe dilution of silver content in coins was the ancient “paper” money, and is still practiced).  I hope this will be followed by a return to sound asset-backed currencies and the elimination of fraudulent banking institutions, whose theft brings so much hardship to the unaware, unoffending, humble human.

Tough love for America (not hate)

The storm is brewing.

For those who understand the economic structure of the United States, and hold–like myself–a neoclassical economic philosophy, the short term and long term outlooks for the status quo are gloomy for the individual, and in turn, for the nation as a whole. An economic system whose stated goals are maximum employment and minimum wage will self-destruct, because it steadily reduces the productivity of labor. Inevitably labor will lose efficiency, wages will stagnate, banks will fail, and inflation will soar; and then there will be a period of pretended stability, during which the average American worker seems less “broke” than usual. This process will be repeated until the government’s burden is greater than the nation’s production, at which point something has to change (probably not peacefully).

There is no safe store of value in the United States today, which is why the nation has a negative savings rate. The system itself is orchestrating its own demise, and I am ready to see the depths of that failure. It is true that I would like to see the United States economy collapse, but only so that it may be rebuilt on a foundation of solid principles–principles of individual liberty and personal responsibility that have all but disappeared from our society.

For my “unpatriotic” short-term wishes and my lofty long-term dreams, my character is under assault by both wings of the ruling elite. When analyzing my character in respect to the U.S. economy, Rush Limbaugh and Sean Hannity quizzically find themselves on common ground with the Al’s of Sharpton, Gore, and Franken, in the collective conclusion that I hate America. But who are the true haters of America–those who wish to control markets and individuals, all of whom show a disappointing lack of faith in their fellow humans, or those who wish to set them free, and rest their faith in the individual? Individual liberty and personal responsibility are the pure sources of our streams, tributaries, and mighty rivers of wealth. When we treat the reservoir of wealth but neglect its sources, we err tremendously, because we unwittingly produce the pollutants we wish to remove.

It is not that I want America to fail–I want America to succeed, but I know it will not if it continues on its present path–a path lined by the barbs of corporate media and political apathy, and leading in the direction of insurmountable debt, insatiable public entitlement, and a tidy totalitarian hell. This America is the one I wish to see fail, and in truth, it is not America at all. The America I love no longer exists. Socialists of all parties disbanded it generations ago, but it will be restored. The inextinguishable embers of liberty will burn brightly once again, fueled by political revolution, only the timing of which is uncertain.

Wealth, Economics and Foreign Policy

Earthly residence of the devil

A real financial tip: Don’t buy anything you can’t afford, and hold onto whatever property you have through this depression. This is not a sale on financial stocks, nor is it a time to be jumping into shallow pools of capital. This is the beginning of something unprecedented and horrible for this country, and the media is making light of it. The Federal Reserve is knee-deep right now, and it’s only going to get worse over the next two years. If you look at the economic indicators, there is no avoiding rough times ahead, and the people may end up burning down the Fed’s doors by the time everything they have done comes to light. When bond and interest rates start skyrocketing, all hell will break loose, and there will be two choices: massive unemployment or hyperinflation (likely a combination of the two).

The worst thing that could happen: war with Iran. I believe China is trying to bait the U.S. into war with Iran, so that they may become allies with Iran and turn against Europe and the United States. Part of Iran’s political confidence has to stem from some assurance from the Chinese. After China backs Iran in the U.S. invasion, they will then call all of their U.S. Treasury securities, sell U.S. stocks, and leave our economy completely destroyed, which would allow them to realize their long-awaited goal of becoming the world’s top superpower. Our military and economic interests would find themselves penniless and cornered in the Middle East and Asia, and if cool heads do not prevail, we might quickly assume the identity of a nationalist and socialist country, eager to blame anyone but ourselves.

Going forward from the depths of what is sure to come within a score (hyperstagflation and confiscatory tax rates while paying the boomer generation’s debts and entitlements), the important thing to realize is that we already know how to build a solid foundation of self-security.  We did it over two hundred years ago, and we need to follow the Constitution back to prosperity. We must learn from history, practice sound economic and monetary policies, and stop repeating our mistakes.  For now, the writing is on the wall, and I am eager to wash it off as quickly as possible.  The Fed needs to let the market correct itself, and stop prolonging its own demise.