whereaminow (77.19)

Models Continued

April 19, 2009 – Comments (9)

This post is a response to devoish's excellent post on Models for limited government.  devoish is a thoughtful and courteous debater as well as a skilled investor and I have nothing bad to say about him.  I hope I can keep the discussion as elevated as he has.  I post articles because I enjoy the debates and not for any other reason.

Since the subject of creating, mimicking, or striving for economic models are central to classical economic analysis, I would like to continue the discussion.  This is a lengthy response, unsuitable for a comment, and hopefully worthy to stand as its own post.

Qatar / UAE

First, however, I would like to correct some of the information provided on Qatar.  According to the 2009 Index for Economic Freedom government spending as portion of GDP was 32.1%, not 57% as indicated in devoish's post.  I do not know from where devoish pulled that statistic but it is likely outdated, as government spending as a percentage of GDP has been shrinking on a year to year basis for over three decades.  It was over 90% in the early 1970's.  In the UAE, government spending as a portion of GDP was 21.4% in 2008. 

There are different ways to measure freedom, one being social freedom and the other being economic freedom.  On both accounts, Qatar has made progress over the last three decades that are spectacular when compared to any other nation's history.  The trend in Qatar is toward freedom, albeit in a two steps forward one step back manner.  The trend in America is away from freedom.  

Qatar is an example of a country where the government becomes a smaller part of the lives of its citizens each year.  America is an example of a country where the government becomes a larger part of the lives of its citizens each year.  Qatar may not be a great example of limited government, but I went with my observations on that one, and I stand by it.  It is not a free market utopia and I never claimed that it was.  It is, however, moving towards greater economic and social freedom rather than away.

Qatar's political system is not a democracy, nor did I claim otherwise.  It would be nice to have representation, but since I don't have taxation (the individual income tax for all residents, foreign and Qatari is 0%) and I am free to leave whenever I please, it's not the end of the world.  Democracy is a spectacular advancement in the history of government.  Democracy, either limited or socialistic however, is not a panacea for social and economic problems.  In fact, it has created many new problems that are rarely considered or addressed by democratic scholars.  Economic and social freedoms are much more important to me than rocking the vote, since my vote would be cast for someone who could continue those freedoms.  However, neither democracy nor monarchy can guarantee long term protection of current freedoms.

On the subject of medical care, Qatar has almost the exact same mixed medical system as the United States, having copied the USA as its model.  As I have noted before, the American medical system is a mixture of fascism (Congressional mandated HMO's, PPO's [via law in 1973]) and socialism (VA, Medicare, Medicaid). However, hospitals such as Al-Emadi Hospital in Doha offer private care that is unmatched in the Western world.

On the subject of education, American universities both public and private receive significant assistance from the government.  It would surprise many Ivy League students to know that these so-called private universities receive up to 50% of their funds from the federal government.  I see little difference between the two countries. The oil industry in America was cartelized under FDR seventy years ago, so no difference there either.

Zimbabwe, Somalia, and other Failed States

There is a reason these countries are referred to as failed "States" and not failed "markets."  Zimbabwe has a ruler, a tyrant that manipulates democratic elections, destroyed the market economy, employs an army of thugs that killed and expropriated the farming community, terrorizes its own citizens, drove away foreign investment, destroyed its trade relationships, and otherwise erased any existence of a market economy.  To call this a failure of limited government would be comical except that so many believe it.  Somalia has suffered from competing warlords ruthlessly outshining each other in the art of brutality for decades.  Calling this a failure of limited government would be like calling 1790's France a failure of limited government.  

If anything can be determined from the models of Zimbabwe and Somalia, it is that war, dictatorship, and brutality are devastating to freedom and economic growth.  These are failures of all-powerful governments and rulers, not failures of freedom.   

When we talk about limited government, we don't mean limited in terms of numbers of bureaucrats or the amount of laws; we mean limited in power or limited in the way that government manifests itself in the lives of its subjects.  I would enjoy seeing any argument which proposes that Zimbabwean President Mugabe's power is too limited in scope or that if only his government was bigger and more powerful and had health care, the Zimbabwean people would be better off.

Economic Models

Creating economic models has long been the staple of classical economics, furthered by the two most significant economic treatises of the 20th century, Human Action by Mises and Man, Economy, and State with Power and Market by Rothbard.  If creating and analyzing economic models is your taste, I can't implore you enough to give these two a whirl, particularly Rothbard's, which expands upon Mises' foundation, fills in the holes in his work, and presents the most complete analysis of economic study in human history.  I have linked the free pdf's of both works above.  These are not political works.  Rothbard was a member of the New Left, the Conservative Goldwater movement, and the Libertarian Party during various times of his life, failing to embrace any of them. In the end, he stands as an economist solely, with a model of how a free market could work in Power and Market and For A New Liberty (free pdf.)

The economic modeling by free market academics has not stopped there.  Most recently, Professor Walter Block has released a model for privatizing roads and highways (free pdf).  There are scores of similar works for every facet of the economy currently under government control or strict supervision, whether your interests are banking, emergency services, utilities, etc.

Economic modeling has long been criticized by Keynesians and pro-big government economists as out of touch and simplistic.  Empiricism is the preferred form of economic study.  There is nothing wrong with empiricism as a science; however we disagree that it should be the basis of economic science.  For example, Math is not an empirical science rather it is based upon logic and deductions.  We did not determine that a straight line is the shortest distance between two points by employing an empirical study of every straight line in history. 

The Model of Paper Money

"So far as I can discover, paper money systems have always wound up with collapse and economic chaos." - Congressman Howard Buffett, father of Warren Buffett

The quote above matches my own study. I have posted my findings which cover two thousand years from the simpler market economies of Christ's time until today.  Classical economists attempted several models of paper money, eventually rejecting all of them as inherently flawed.  It may only be coincidental that modern economists embraced empiricism at roughly the same time they embraced paper money, but it is suspicious nonetheless.  China, Rome, Germany, Austria, and many other countries have experimented with paper currencies with tragic endings. (Note: I make a clear distinction between paper money and redeemable paper certificates, i.e. money tied to a commodity.) I have attempted to explain the reasons that governments continue to walk down this seemingly destructive path.  Even though it is possible that every reason I have listed is false, there is still no economic model we can point to which shows that paper money works. 

In a democracy, the most crucial aspect of the legitimacy of government is the vote. If the vote is fraudulent, corrupted, miscounted, manipulated, or earned through empty promises, the system suffers.  The same can be said for the most important element of a market economy: its money.  This is the most important issue for me, as evidenced by the seven part blog series I presented in defense of sound money.  Money is the graduation of a primitive barter economy to a market economy.  Its proper use is one of the hallmarks of civilization. Its manipulation always leads to economic chaos. I find little inspiration in the academics who assign vague concepts like greed and self interest to our economic ills without addressing the crucial element that unbacked paper money plays in an economy.  That is why I am here.

The argument against Limited Government

Devoish's argument is that there are no longer any truly limited governments. In fact, due to population expansion, they may not even be possible anymore.  It is certainly true that State power has risen dramatically since World War I.  This is a sad development.  As Randolph Bourne noted at the dawn of the war to end all wars:

"War has an immemorial tradition and heredity only because the State has a long tradition and heredity. But they are inseparably and functionally joined. We cannot crusade against war without crusading implicitly against the State. And we cannot expect, or take measures to ensure, that this war is a war to end war, unless at the same time we take measures to end the State in its traditional form. The State is not the nation, and the State can be modified and even abolished in its present form, without harming the nation."

If it is true that we are headed for an age of unprecedented State power, then we may also be headed for an age of unprecedented war. This concerns me as it should anyone who cares for the survival of humanity.  I have no desire to increase the capacity of the State to wage war, thus I must resolve myself to continue to fight for an end to the State.  I do not support limited government (or the Qatari government), but rather no government at all.  Choosing between the lesser of two evils is still choosing evil.

Is an increase in global population a problem for limited government supporters? I don't see why. Limited government allowed the market economy to prosper, fostering in an age of population growth unmatched in history. No time in history has seen advancement in survival like the 18th and 19th centuries. I have never heard of any study that makes the case that a market economy can not handle a growing population.    

In conclusion, each of us wants the same thing.  We want a better world for all humanity, not just a select few. Any Libertarian who only supports the rich should be exposed as a fool, as should anyone who supports an economic policy that only benefits a small group at the expense of humanity.  That is the basis of Hazlitt's timeless line:

"The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups."

David in Qatar