Saturday, May 28, 2011

Voluntary Taxation

While I normally do not post articles to this blog, I was struck by the delicious irony that this article detailed.  It's entitled, "Will They Tax Themselves More?" by Donna Martinez.

In North Carolina, we are facing a large budget deficit and since we have a balanced budget amendment, we must either raise taxes (fat chance!) or cut spending (finally?).  As a result, the special interest groups are howling about the cuts to their largess.  Anyway, all of this is now solved by House Bill 887.  If passed, it will allow tax payers to redirect some or all of their refunds to special government accounts earmarked for specific spending.  For example, if you think that the arts are being cut too much, then you can waive your refund and send it to the special account for the arts.  The same goes for education and several other "priority" programs.

Will the special interest groups donate their refunds to these funds?  Will they convince others to do the same?  Time will tell, but I wouldn't hold my breath waiting for it to happen. 

Special interests need and want your money.  They view the state as a parent making sure that the children share all that they have.  I view it the same way that Frederic Bastiat did over 160 years ago--it is legalized plunder.  (Or here for the pdf version.)

Wednesday, May 18, 2011

Economic Distress Index--Is the Economy Worsening?

On the right side of this page, you will see the Economic Distress Index that I have created.  It was suggested by my friends at FEE to create an updated version of the famous Misery Index of the late 1970s.  I update it as the data comes in. 

As I have been tracking it, I have noticed that the economy tends to be in distress whenever the index is above 46.  This has not been scientifically determined.  If anyone would like to work on this data set, I am willing to work with you.  Just e-mail me at:

The point of this post is that the index has been falling from its high of 62.8 in June 2009 to the recent low of 48.0 in December 2010.  Since the new year, the Distress Index has been climbing.  We are now at 49.6.  While this may be an aberration, it may also be the start of the next trend.

Is the economy headed toward another recession?  Is the economy worsening?

My training tells me that before an economy can make a solid recovery, we need to liquidate the malinvestments that have been built up in our economy.  So far I see little evidence that we have cleaned out much malinvestment.  In fact, I think that we have quite a bit more that needs to be liquidated.

While I tend to be optimistic, I don't see the evidence of anything more than a lumbering economy that is burdened down by these malinvestments.  The translation is that we cannot have healthy growth until we clear these out.  With stimulus bills and government programs designed to prop them up, I think that this anemic growth will be around for a few more years.

Monday, May 16, 2011

Austrian Economics Forum Spring 2011 #5--Intro. to Austrian Monopoly Theory

The final session of our Austrian Economics Forum took place at Dr. Cordato's house.  He and his wife, Dr. Karen Palasek, made a really nice dinner for us, but the ground rules were that we had to talk economics before anything else.  (Were they afraid we wouldn't talk economics while eating?  Clearly an unfounded fear!)

This session's reading was "A Critique of Neoclassical and Austrian Monopoly Theory" by Dominic Armentano, found here  This is a chapter in the book New Directions in Austrian Economics edited by Louis Spadaro (1978).

The Armentano reading was a straight forward, introductory article to monopoly theory from an Austrian perspective.  Cordato added several personal comments about Armentano.  The one anecdote that struck me was that Armentano had formulated much of his criticism of the Neo-Classical Monopoly Theory long before he became (or even really studied) Austrian(ism).

The major, traditional Austrian criticism of standard Monopoly Theory rests upon the definition of the market.  Monopolies are defined as a single seller without any close substitutes.  However according to Austrian theory, a substitute can only be defined in the mind of the user of the goods.  When Saran Wrap first came out there was nothing else like it.  So were there any substitutes?  Actually yes, there were many because the relevant market was "What can I put my sandwich in so I can take it to school/work?"  The substitutes were wax paper, tin foil, aluminum foil, paper bags or even Tupperware.  None of them look like Saran Wrap, but they are all substitutes.  Or an example I use in my class is that helicopters and closed-circuit cameras are substitutes.  Of course, physically they are nothing alike.  However, if we are trying to learn about traffic congestion during our morning commute, then they are substitutes.

Furthermore when it comes to defining the market, we can define it in such a way that we are all monopolists.  I am the only one who supplies my labor.  Or if we broaden the definition, then there is no such thing as a monopolist. 

At the end of our abbreviated discussion (we were hungry), we agreed that the Rothbardian definition of monopoly was the best.  Rothbard uses the old definition of a government created monopoly privilege.  If there is a law, legal restriction, etc. that forcibly prevents others from competing, then that is a monopoly.  Otherwise, there is no monopoly.  There are two objections to this.  The first is a natural resource monopoly.  I find this problematic.  If there was such a monopoly, as soon as it sells some to anyone else, there arises a potential competitor.  From this point we start to get into some rather strangely concocted hypothetical situations.  "Suppose under the following circumstances...blah, blah, blah."  If we need to resort to such narrow assumptions, then we are not really describing the world around us and have started to play mental games.  There's nothing wrong with mental games.  In fact most of the leading economic journals are full of such things.  Just please don't waste my time on them.

The second objection is that of a natural market monpoly where a firm is so good at what it does, no other firm can compete.  To which I ask, "What's the problem with that?"  From a consumer's point of view this is great!  They offer better prices, better quality, better locations, better service, etc.  On every single vector of competition, this firm is better.  If it lags in any one of these areas, then a niche market can arise. 

Neo-Classical economic theory relies far too much on counting the number of firms that are competing.  To them "competition" is a state of being.  It is a noun.  Austrian Theory rejects this view and says that competition is a rivalrous process.  The only way that relative scarcities (prices) can be discovered and determined is through competition--real competition.  It only takes one producer and an open market for there to be competition.  The supposed monopolist must compete against potential competitors, otherwise, they will soon appear.  Leonard Read once said that trying to stop competition in a free market is like standing in a river with a broom, trying to sweep the water away.  For an instant, the water is brushed aside, but then it comes rushing back in.

Austrians view competition differently.  We view it in the same way that sports teams do.  In order to know the outcome, we need to play the game.  This is why Austrian Economics has been gaining so much attention in other business fields like Strategic Management.

Cordato is hoping that the next semester (Fall) will follow the course of more Microeconomic stuff.  I'm thinking that we should look at Mises's Theory of Money and Credit so that we can finish it in 2012, the 100th anniversary of its publication.  I don't know the direction, but I am sure that it will be a fun ride.

Monday, May 2, 2011

Keynes vs. Hayek Round Two Video

The long awaited sequel to the Keynes vs. Hayek rap is out.

Here is the original first video: