starbucks4ever (99.53)

RH

January 14, 2009 – Comments (5)

An interesting summary of the Libertarian cause here. 

What's curious this ode to Libertarianism is that most of its points are valid. However, there are couple of other valid points that Libertarians conveniently forget...

The Government indeed has been playing Robin Hood since the 1930s. That is to say, it was TRYING to do that for a while. The past 30 years have been somewhat different. To carry the analogy further, we can say that RH started with good intentions, but, like many an idealist before him, gradually became more conformist. As years passed by, one could see RH in the company of the Sheriff of Nottingham, and recently our Robin was videotaped accepting a bank check from the Sheriff. But I am digressing. 

The point the Libertarians are trying to make is that if we could only hang RH and make the Sherwood forest safe for the Sheriff again, an era of prosperity will commence. The Sheriff will hold on to his money, invest it in various kinds of businesses, the peasants will get high-paid jobs working for the Sheriff, and will no longer need to hunt deer on the King's property. A good argument in its own right.

If only the Libertarians took care to address this question. How much money exactly does the Sheriff need to retain in order to start his businesses that would grow Nottingham's GDP? What percentage of Nottingham's total capital should it be? Obviously, there isn't much that the Sheriff could accomplish with 0%, 1%, or even 5%. On the other hand, if it gets too close to 100%, the investment by the Sheriff will also reduce to zero. The reason is that if the Sheriff is allowed to hold on to 100%, 95%, or 90% of the net worth, then the people of Nottingham cannot purchase even those shoes, baked goods, and beef that are already being produced. Why would the Sheriff invest even one penny in a new bakery when the existing baker cannot sell his excess bread? (Side note: even though the Sheriff likes to eat well, he cannot consume the whole daily output of the bakery).

There is a wide agreement among the economists that the amount of capital investment that an economy needs can vary somewhere from 15% to 25% of the GDP. If you try to invest more than that, the economy is likely to develop diobesity, in other words, the extra investment will not make it more healthy. For example, Japan invested heavily in real estate prices. Initially these investments were very efficient, but then as these investments made prices too high, more an more investment was required for further inflation of the bubble, and the efficiency of these investments dropped until it became negative and the surplus capital invested in RE simply destroyed itself. By the same token, when Soviet planners decided to outinvest America, they found themselves producing more and more steel to produce more and more machines producing steel, so all the sacrifices the Soviet consumers made to free up more investment capital were wasted. The optimal amount of investment can vary of course, but it appears that it could be closer to 25% of GDP for emerging economies like Zimbabwe and closer to 15% of the GDP for developed economies like the US. Once that point is reached, the RH analogy stops working. When the Sheriff could not amass in his hands more than 5% of the city's GDP because RH used to ambush him in the Sherwood forest every other month, the well-being of the city of Nottingham required that RH should be sent to gallows (or, to stay closer to the facts, bribed by the Sheriff and hired as a forest inspector to track down poachers). However, when the trick worked and the Sheriff accumulated more capital than he could possibly invest, one can no longer repeat the same old argument. Because in fact, it is time for RH to go back to good old days and to cure the lopsided structure of the economy that suffers from waste, overinvestment, and underconsumption.

As we see, the actual case for or against RH is not that simple. RH can be a bad guy when our problem is too little investment capital, or a good guy when we have the opposite problem. And to determine if RH could be of any use in the modern America, we have to look at what happens to investment capital. If, for example, the baker, the butcher, and the shoemaker are looking to borrow money at 10% interest to expand their flourishing businesses, chances are that we should NOT be employing RH to address the inequality issue. Perhaps we could even run RH in the reverse mode to microwave the process of accumulation of investment capital (Reaganomics, anyone?). Another matter is when nobody can find a real business to invest in, and TRILLIONS OF DOLLARS PRINTED BY BERNANKE EVERY YEAR GO TO DIE IN ONE GIGANTIC BUBBLE AFTER ANOTHER. So to sum up the RH analogy, we can say that after the forest was cleared of robbers, our Sheriff has developed an acute case of investment diabesity by trying to eat more green sugar candies from the bakery "Bernanke and Friends" than he could safely digest. Since the patient lacked the willpower to cut down on sugar, the doctor asked RH to withdaw the extra sweets from the patient and distribute them among the hungry Nottingham residents.

Let's see if we can expose the other fallacies in the RH analogy brought up by our Libertarian-leaning friends when we have more time...