Punching Holes in the Public Goods Argument

Experts tell us that if we want things like bridges, parks, public streets and fire departments, then government must provide them. The private sector either can’t or won’t, or things would simply become awful if it did.

That conclusion is mostly justified by the theory of “public goods,” for which we can thank Paul Samuelson, the first American economist to win a Nobel Prize.

Paul Krugman — another economist and ceaseless supporter of government spending — makes the similar typical claim in this blog post, where he writes that to deny some things must be provided by the government is “stupid,” and to think so you must have slept through Econ 101. By “things the government must provide,” Krugman means everyone being forced to pay via taxation.

Disturbingly, the taxation solution requires many people to foot the bill for things they will never use, or to fund things they oppose. It also means people have less money to do with as they choose. Krugman maintains this is necessary because some things are “public goods whose benefits can’t be internalized by the market.”

A hole punched through a gigantic log at Kauffman Legacy Park; a private, yet free public park in Kansas City.

A hole punched through a gigantic log at Kauffman Legacy Park; a private, yet free park in Kansas City.

Fortunately, this is one case where “experts” like Krugman are embarrassingly wrong. Yes, we do need fire departments, free education and the like, but the government doesn’t have to pay for them. We will get them, sometimes via the market, and sometimes by different means such as charity and philanthropy. In fact, the aim of this article is to show you just how easy it is to punch holes in claims like Krugman’s — an example of what I will call the “public goods argument.”

Punching holes in the public goods argument is actually an old sport. In the 1960s, Paul Samuelson cited, in a footnote in his textbook Economics, John Stewart Mills’ example of the lighthouse as something that markets could not provide.

This prompted free market economist Ronald Coase to respond with historical documentation of private lighthouses built during the 17th Century in Britain. Since then, people have continued to provide empirical evidence to refute public goods arguments, and cheerleaders for government spending — the Krugmans of the world — have continued to ignore the evidence.

But we’ve got to keep showing them. So, I’ve located several things, right here in Kansas City, that stubbornly exist in contradiction to what experts claim and which serve to undermine the case for public expenditure by Krugman, et al. I’ll drive to each one, and document it with a digital camera. I’ll note how far the thing is from my home, and how long it took me to drive to it.

After seeing how easy it is to find things experts say you won’t, I hope you want to go out and try it yourself.

Exhibit 1: Private Public Street

Cedarbrooke Lane, Cedarbrooke subdivision
South Kansas City

80 ft (2 seconds)

I don’t have to go far before I reach my first destination. At the end of the cul-de-sac, about 80 feet from my garage door, runs Cedarbrooke Lane. This is a privately owned, public street, despite the fact that even most of its owners are probably unaware of the fact.  I roll off the gently sloping suburban curb onto a wide expanse of blacktop. Aside from one shallow pothole to the north of me, the street is in good condition and looks comparable to the city-owned Locust Street, which it adjoins. The street is freely accessible to the general public, as well as US Postal and other service vehicles, so it is truly public in the sense that it is available to all who wish to drive on it, yet it is paid for privately.

Such a thing shouldn’t be possible, but here it is.

Apart from their being constructed at all, a big concern about private streets is that they might fall into disrepair because the owners can opt to neglect them when money is short. In the face of such fears,  it is interesting that this street has existed for forty years and has always been kept in good condition.

But how? The answer is that it belongs to a homeowners association. When you buy a home in the Cedarbrooke subdivision, you agree to pay dues for the provision of things like trash, water and landscaping, as well as the upkeep of Cedarbrooke Lane. The HOA has a contractual obligation to maintain certain aspects of the member properties. If a particular homeowner fails to pay his or her dues, the HOA is empowered to put a lien on their property to ensure that it can fulfill its obligations.

As a result, not only do the homeowners who together own Cedarbrooke Lane benefit from the street, so does the entire South Kansas City community.

If only the public goods argument were in as good a shape as Cedarbrooke Lane.

Exhibit 2: Private Welfare

Great Temple Mausoleum at Mount Moriah Cemetery
South Kansas City

.25 miles (2 min)

Today it is taken for granted that government must take money from you to make sure someone else doesn’t “slip through the cracks.” Advocates of public social welfare claim that although everyone benefits by not having other people living in squalor, we can’t count on voluntary giving to provide for all who need help. Likewise, they say, private insurance surely won’t cut it because — being profit driven — insurance companies have an incentive not to pay.

Yet this Masonic hall (which spookily, doubles as a mausoleum) is a testament to how, for thousands of years, people have found inventive ways of taking care of one another voluntarily. The Freemasons probably originated as a guild of professional stonemasons in the middle ages. Among other things, guilds provided for the families of member craftsmen in the event of the member’s injury or death. Up until the first part of the 20th Century, such societies in America combined aspects of charity and private insurance: members pooled their resources and the organizations used those funds to help members address hardships.

As David T. Beito describes, these organizations flourished when times were toughest, like during the Great Depression:

The heyday… [of mutual aid societies in America] was during an era when millions of Americans lived on a scale of poverty which would be considered intolerable by today’s underclass. Despite this, millions invested their scarce resources in erecting a vast system of fraternal mutual aid. Although insurance gave some protection, those who subscribed to fraternal societies gained access to services not easily guaranteed in a commercial contract.

Today government programs have crowded out much of what these associations once provided. Yet a friend of mine, who belongs to a lodge, tells me that Freemasons still vow to help fellow lodge members should they lose employment or housing. Next time you are shopping for insurance try asking your new agent if he or she will swear to help you out of the next pickle in which you find yourself!

Just another chink in the armor of the public goods argument.

Exhibit 3: Private and Free Public Park and Botanical Garden

Kauffman Legacy Park & Kauffman Memorial Garden
Midtown Kansas City

11.5 miles (16 min)

Of all public goods, my favorite is the park. What would cities be like without them? But who would want a world where every park, if it existed at all, had a tall fence around it forcing you to pay to get in? What about people who could not afford to pay? These questions call to mind the dismal reality envisioned by the Krugman’s of the world if the government doesn’t provide us with parks.

So I have headed north and soon I’m in my old stomping grounds — Midtown Kansas City. I’m here to put paid to the supposed rule that parks can’t be private and free at the same time.

Amazingly, I find not only a free park, but also a free botanical garden thrown in for good measure. Together Kauffman Legacy Park and Kauffman Memorial Garden span six blocks just east of the wonderful Country Club Plaza shopping district. The park provides outdoor leisure while instilling conservation values by exposing you to the beauty of a native landscape in the heart of a city.  Kauffman Memorial Garden is a world-class botanical garden that looks like some medieval nobleman’s courtyard. It’s a favorite for wedding pictures.

Both were built in 2004 along with the Kauffman Foundation Conference Center. They are fast becoming two of the most cherished destinations in KC. Amazingly, all of this goodness costs the Kansas City taxpayer nothing, nor are people charged to use either of the two amenities. The Kauffman Foundation pays for these public amenities the same way it funds educational programs promoting entrepreneurship among disadvantaged youth — via voluntary contributions.

Krugman’s looking tired. Maybe he should take a walk in the park.

Exhibit 4: Private Public Radio

KCUR studios
Midtown Kansas City

7.1 miles (16 minutes)

As usual, as I drive today, I am listening to KCUR – 89.3 FM (Kansas City Public Media). The uniqueness of American public radio is underappreciated by libertarians: Whereas in most Western countries public radio is paid for via some sort of tax, in America, only 16% of its funding comes from government while a huge 39% comes from individual donations. The rest largely comes from charitable foundations and corporate benefactors. With such minuscule public funding, America’s public radio demonstrates that yet another public good arguably refutes what prevailing theory asserts about it.

Libertarians should make a point of contributing to public radio so as to raise the percentage of private funding even higher. We could easily see the day when all funding from taxation could be eliminated with no negative repercussions. By eliminating government involvement, NPR (National Public Radio) would only become more independent — and more secure: While the experts insist that the only way to guarantee the independent voice of public broadcasting to Americans is for government to provide it, according to NPR’s website, individual contributions are the most reliable source of funding in hard times!

Public radio gets my gift of support again this year. Paul Krugman gets a lump of coal.

Exhibit 5: Private Policing

Chesley Brown Security Vehicle
Midtown Kansas City

11.5 miles (16 minutes)

Photograph of a private security vehicle patrolling near The Plaza in Kansas City.

Chances are you feel safer at the grocery store or out on the town in recent years than you previously did. Well it’s not because we have more municipal police on the streets, but rather because we have more private security. Police are one of the standard examples cited as a public good not producible on the market.  Yet more and more, police forces are being supplemented by private security officers which can stand guard rather than simply respond after something bad happens — too late to help the victims.

In The Privatization of Police in America, James F. Pastor observes that private police now outnumber municipal police officers by as much as 4:1. Additionally, more support staff are employed, and the annual revenue of private security outstrips that of municipal police, as well:

Private policing has annual revenues over $52 billion with the industry employing 1.5 million people. In contrast, public police spend $30 billion with a workforce of approximately 600,000.

How is this possible? Stores and entertainment districts have an incentive to keep patrons safe as well as to protect their own property. Similarly, homeowners associations can better support property values by providing a safe environment while spreading the cost among the property owners. Just as with the public street I mentioned earlier, it won’t matter that non-residents benefit: if an HOA-contracted security service happens to deter rapists or muggers, thus protecting joggers in the surrounding neighborhood, it won’t cost the HOA any more.

So spill-over effects — what Krugman referred to in his blog post as “benefits not captured by the market” — are not the big problem experts claim they are. It’s a good thing that people who are not the intended objects of protection nevertheless benefit from the deterrence that protective services provide, and it won’t reduce the amount of services employed.

I chance on a good shot of a security vehicle. Judging by its proximity to both The Plaza and the Kauffman properties, I imagine its driver is probably patrolling for one of those organizations. Nevertheless, people who live close by benefit from the deterrence the roaming vehicle provides. Yet that fact has not stopped the client organization from contracting with the security company, despite what public goods theory predicts!

Go to jail, Paul Krugman. (Monopoly reference.)

Exhibit 6: Private Art Museums

Nelson-Atkins Museum of Art
Kemper Museum of Contemporary Art
Midtown Kansas City

11.8 miles (17 minutes)

As with parks, museums are things we’d like folks not to have to pay for since we want as many people as possible to consume the knowledge and culture that such institutions conserve and expound. We want that because it betters our society.

But art is expensive, and so are the museums that house much of it. Cities like St. Louis, Chicago, and New York subsidize the expense so as to allow everyone admission at no cost. Like free parks, free museums fit the description of a public good to a T, because, by their very nature, they are non-excludable making them difficult to pay for.

If the experts are correct, it must be necessary to publicly fund art museums, as the cities listed above do. Except that that’s not what happens in Kansas City, where not just one, but two exceptional museums, not far from each other in KC’s Midtown area, defiantly remain privately owned, but nevertheless, free to the public.

The world renowned Nelson-Atkins Museum of Art has been around for 80 years and never cost the Kansas City citizenry a dime, either in taxes or entry fees.

Likewise, the Kemper Museum of Contemporary Art has not charged for use since its opening in 1994.

These museums — massively expensive as they are — are entirely funded by voluntary contributions: Large sums pledged each year by the well-to-do and corporate sponsors, and small gifts of dollars and loose change contributed by the people who give at the door.

The public goods argument belongs in a museum — a history museum.

Why They Get it Wrong

In some of the cases presented above, the difficulties for the market with regard to public goods was easily overcome — in hindsight.

To paraphrase a response by Richard Dawkins to skeptics of Darwinism, an appeal to your personal incredulity is not a strong argument against the market. The fact that economists sitting behind a desk or scribbling on a whiteboard can’t imagine how the market will get something done has nothing to do with whether it will.

But in the examples I found, it wasn’t always the market that got the job done: sometimes it was just good old civil society — the private sector rather than private enterprise — and always the result of human values, choices, and actions. In either case, government and taxation were not necessary.

As for cases where charity and philanthropy are the vehicles for providing public goods, one reason public goods theorists get it wrong, and assume people won’t do enough, is that they over extend the classical economist’s model of the self-interested rational actor, homo economicus.

That model helped illuminate the actions of the “businessman” as Ludwig von Mises explained;  but taken more broadly, it’s a bad caricature of a real human being. Unlike homo economicus, who wouldn’t lift a finger if it wouldn’t increase the value of his bank account, real people donate to help others or to fund a community undertaking they want to see accomplished. When they do, it is because they value others being better off or the success of a project, more than they value the money they contribute to that end.

But in order for people to voluntarily contribute to make society better, they have to have enough left over after other things are paid for. Since taxation reduces people’s expendable income, every government-provided public good reduces people’s ability to help voluntarily.

A Call to Action

Go out and find your own examples of privately provided goodness and punch some more holes in the the public goods argument. It’s fun and all too easy!

Thanks:
Ian Huyett, for introducing me to the concept of mutual aid societies.
Jeffrey Hull, for suggesting I change “Poking” to “Punching” in the title—just to add a little punch.
Erin Skornia, for letting me post photos of her irreverently running in a sprinkler at a cemetery.

Creative Commons License
“Punching Holes in the Public Goods Argument” by Tracey Zoeller , including all photography and illustrations, is licensed under a Creative Commons Attribution 3.0 Unported License.

“Krugman Able to See at Last” by Tracey Zoeller is based on a photograph by 00Joshi on Flickr at http://www.flickr.com/photos/00joshi/6331682723/.

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The Ayn Rand in Iron Man

With the comic book character Iron Man, Stan Lee challenged himself to create the most unlikely of comic book superheroes–one that most of his readers should have despised:

The ’60s kids hated the war; Tony Stark (aka Iron Man) would be an arms manufacturer. They opposed capitalist exploitation; Lee would make Stark a rich entrepreneur and industrialist. Feminism was in its second wave; Tony Stark would be a playboy. Communalism was an ideal, and transcendental spirituality was on the rise; Tony would be a megalomaniac. Lee said he set himself a goal to take everything his readers hated and make his new hero all of those things, “shove him down their throats and make them like him…”

What Lee accomplished was to introduce the world to its first capitalist superhero!

Flash forward: This spring US theaters featured the latest installment in a string of films based on the character Stan Lee foisted on the world, and which it did, in fact, come to love. Tony Stark (brilliantly brought to life by Robert Downey Jr.) has now been the lead role in three wildly successful feature films: Iron Man (2008), Iron Man 2 (2010) and Iron Man 3 (2013). He is also a major protagonist in the ensemble film The Avengers (2012).

Several commentators have noted that the capitalist spirit is alive and well in the Iron Man films–and a few have even noted that there are some motifs in Iron Man 2 which are reminiscent of themes in Ayn Rand’s works. Rand invented a sort of philosophy of capitalism, called Objectivism, which she expounded in her fictional novels and other writing. She was most active during the same period that Iron Man debuted as a comic, so it makes sense that there would be an influence. There certainly are Randian themes in Iron Man 2, but I think we can say likewise of all three Iron Man films. In fact, the character development of Stark and the psychology of his enemies, seem as if they could have been lifted from an Objectivist psychology textbook (if there were such a thing).

For instance, the enemies whom Stark encounters in the films reflect Randian character types:

Mystic
Islamic Jihadists (Iron Man) use the fruits of reason (stolen or purchased high tech weapons of the Western world) for the sake of achieving their irrational ends.

Moocher
Obadiah Stane (Jeff Bridges, Iron Man), executive of Stark Enterprises, represents the lie of altruism. He pretends to assert the needs of the board of directors over the “selfish” desires of the individual (Stark), but in reality, this is a cover for his own self-serving intentions.

Looter
Senator Stern (Garry Shandling, Iron Man 2) operates under the delusion that society is primary, and the individual secondary, and tries to appropriate the rewards of individual initiative for the sake of the collective. In doing so, he risks killing the goose that lays the golden eggs. Ivan Vanko (Mickey Rourke, Iron Man 2) is the son of an old business partner of Stark’s father. He has a victim mentality, believing that he has gotten a raw deal out of life. He thinks that Stark’s successes should have been his own, and he attempts to take them by force.

Second-Hander
Justin Hammer (Sam Rockwell, Iron Man 2) is a plugged-in, crony-capitalist arms dealer who tries to compete with Stark’s superior tech-savvy through schmoozing and deceit. He envies Stark’s success and wants to destroy Stark’s legacy to buttress his own crippled ego.

Nihilist
The Mandarin (Guy Pearce, Iron Man 3) got a raw deal and now he’s taking revenge. As brilliant as he is, he fails to see the fallacy in his own actions. He does not comprehend that he can know the difference between good and evil the same way he can understand the biotech behind his weapons–through reason.

The overarching theme of the three Iron Man films is Individualism vs. Collectivism: Stark has to learn not to substitute the values of society for his own before he can save the day. But there are other themes that resonate throughout all three movies–like knowing that you are capable of achieving your goals and that you deserve the rewards of that achievement. Although each Iron Man movie contains a mix of Randesque ideas, I have picked out the concept I think most represents the essence of each film. (I did not include The Avengers since it was not, strictly speaking, an Iron Man movie.)

Iron Man : Learn to be more selfish
Tony Stark is introduced to us as CEO of Stark Enterprises; an innovative arms manufacturer and inventor. Incredibly talented and absurdly rich, Stark seems to be living a self-centered and hedonistic life. But in reality–as a Randian psychotherapist might observe–he has been sacrificing himself to the needs of society and his father’s legacy. He has not come into his own and begun living for himself.

Then, an event happens that makes him question the arms manufacturing industry that he helped create in the footsteps of his father: He falls prey to Islamic extremists using the weapons his company made for the US military. This leads to the creation of his famous mechanized suit of armor that comes to be known as Iron Man. It is powered by the miniaturized version of Stark’s father’s energy generating device prototype: the arc reactor. Responding to Stark’s unwelcome move to shut down the weapons division of Stark Enterprises, Obadiah Stane, Stark’s father’s old business partner, shuts Stark out of his own company and begins building his own suit from an early version of Tony’s creation. There’s only one thing he still lacks: the miniaturized arc reactor to energize the suit. He hires an engineer to create it for him, but the guy cannot do it. “Tony Stark was able to build this in a cave with a bunch of scraps!” he bellows at the cowering technician, who replies plaintively, “Well I’m sorry. I’m not Tony Stark.”

In our world, the same problems are playing out in real life: Tim Cook is not Steve Jobs–and no collective of Apple employees, however schooled in Jobsian thinking, can take the place of the deceased entrepreneur extraordinaire. Apple’s stock has been on shaky ground since Jobs passed away in 2011. In Ayn Rand’s philosophy, the individual pursuing his or her own dreams and visions is all-important.

Failing at making his own arc reactor, Stane resorts to stealing Stark’s. He justifies his actions with an appeal to altruism and its inverted morality: “Do you really think that just because you have an idea, it belongs to you? Your father helped give us the atomic bomb. Now, what kind of world would it be if he was as selfish as you?” In contrast to the collectivist impulse represented by Obadiah, we see that Stark eschews the expected superhero dual identity. That, should he embrace it, would force him to distance himself from the fame of the hero persona and impose on him the humility that society demands of the great. Instead, he proclaims, staring into the cameras on international television: “I am Iron Man.”

Iron Man 2 : Believe in yourself
Tony Stark struggles to maintain his property from the grasping hands of the government, an arms dealer who wants Stark’s fame and prestige without earning it, and a sociopath who blames Stark’s father for robbing his own father, and himself, of a better life. Stark must do this while trying to overcome a problem with his arc reactor that threatens to kill him.

Early on, we see Stark defend private property before a senate hearing called by Senator Stern, who wants to nationalize Stark’s invention. Stark is hilariously irreverent before the Senate Armed Services Committee. “You want my property? You can’t have it. But I did you a big favor: I successfully privatized world peace.” However, Stark is out of sorts because it appears he will die from the toxins created by the arc reactor in his chest. He doubts his own abilities can break this impasse, and so he makes a series of mistakes–including relinquishing his CEO status to Pepper Pots (Gwyneth Paltrow), and letting a prototype version of his suit get stolen by his friend who works for the military.

In Randian philosophy, there is the idea that life is not stacked against us like a bad hand of cards. We are equipped to understand reality, and thereby to act to achieve our values. Knowing this is what Rand understands as self-esteem. This is the lesson Stark must learn in Iron Man 2.

Eventually, Stark resolves all these problems, regaining confidence in his abilities and reestablishing his ownership of the Iron Man suit. But ultimately he decides to grant the use of the suit to his friend, James Rhodes (Don Cheadle). Tony will not let society claim what is his alone, but he will lend his invention to a friend whom he knows will reciprocate and help him out from time to time. This interplay reflects Rand’s trader principle: the precept that no one may be sacrificed to another individual or group, but rather, each must offer something of value to the other.

Iron Man 3 : Stay focused
An important idea in Rand’s philosophy is that morality is rational: what makes sense for us and what is right are the same. But we must constantly choose to think. We cannot rely on handed-down wisdom, the current views held by society, or our own whims. That things can go wrong when we go on autopilot is the main idea in Iron Man 3.

Subsequent to the inter-dimensional battle in The Avengers, Stark has developed his technology 100 fold over what he had achieved in prior films. Now his armor can fly to him, and even assemble itself as a fully autonomous AI-driven robot. Stark has a fleet of these intelligent suits which can aid him in battle, each with special characteristics and battle strengths. The reason for the constant tinkering is that he has unresolved fears, which he needs to address yet is putting off. His obsession with his gadgets begins to get in the way of his relationship with Pepper Potts, and his fears begin to manifest in the form of anxiety attacks.

Then a terrorist begins bombing, and the strikes come more and more often. Stark discovers that the origins of the mysterious villain, The Mandarin, lay in his own past: Stark had mindlessly blown off a think-tank founder–who wanted to partner with Stark–and an idealistic geneticist with a breakthrough biotechnology. Stark quickly forgot about the geneticist and her work, but the think-tank founder became a terrorist who went on to exploit the discovery. Now he wants to sell the government technology to help it defend against terrorist threats that he was manufacturing in the first place.

For much of the film, Stark must go without his suit as he attempts to discover the identity of the Mandarin. In the process, he regains confidence in his intellect, not only in terms of past successes, but also in his innate ability to create now and in the future. He comes to acknowledge his lack of focus, both in the past, when he inadvertently sowed the seeds of the terrorist trouble, but also, in his current relationship with Pepper. In the end, he makes a bold move to cement these realizations into place–he destroys all his Iron Man suits.

The notion of the purposeful destruction of something you hold dear, for the sake of something worth even more, is a recurring theme in Rand’s work. In The Fountain Head, for instance, architect Howard Roark burns his greatest architectural feat to the ground rather than let it be ruined by a committee. In Atlas Shrugged, the world’s innovators destroy their own work to keep it from being appropriated by the government. This destruction is justified by the absolute right of the individual to the fruits of his/her own work and ideas, as expressed in the right to property.

Stark destroys Iron Man because he now has absolute confidence in himself and his ability to obtain his own values. He does not need suits to protect him because he created them in the first place and he is the true source of their power. He can create a new Iron Man suit or any other thing that he may need. And because of this, we know that we will see Iron Man saving the day, again.

Getting Something for Nothing

“Make your money work for you: invest it!” That’s what we’re all told. Too bad we need so much of our money in the here and now, rather than a distant future that may never come, since much of that invested money might just vaporize as it did for millions of us in 2008. What if money became more valuable over time, without having to be invested? Or, rather than getting an extra job, what if you could get richer just laying on the couch? It would be as if you could put a hundred dollars under the cushion and two seasons of Arrested Development later, pull out $110; every time you went shopping you could afford a little more.

The idea seems to defy a law of nature. We’re even told to fear increasingly valuable money! If prices generally fall, experts tell us, it will lead to an economic catastrophe: the dreaded spiral of deflation where the economy goes into a prolonged shrinking phase. But is that really so? Except for during The Great Depression, no one living during the current or previous centuries has ever experienced generally falling prices. But if you asked 19th century Americans, they would have told a different story. For decades they benefited from generally falling prices and during that time the economy grew.

What we do experience is called inflation. I remember my introduction to the concept of inflation well. Back in my home town, there was an old fashioned burger and milk shake shop called Kreem Kup, where you could still get a real hamburger pressed with a wide spatula on a flat top grill. Once a year, on its anniversary, Kreem Kup sold everything for 1950s prices, which meant that I could buy a hamburger for 25¢ and a Coke to wash it down for only 5¢.

Folks like my dad, who lived through WWII and the post-war years, all understood inflation well and they had a pretty convincing explanation for it: We are all just a bit greedy and naturally always try to hike up prices when we sell things, which in turn results in other prices rising to compensate; wages rise in order that people can afford to keep spending more. An alternative view had it the other way around: High wages start the process and the prices of other things rise to make up for the increased labor costs. It really sounded plausible that our natural tendency to want more would inextricably lead us to getting less. That’s just the sort of depressing fact you must come to accept as you grow up and learn to shed your naïve optimism. Thankfully, it isn’t the slightest bit true. Really, it’s just an example of blaming the victim. And it’s circular reasoning, since it tries to explain rising prices by means of other rising prices. So what is the real explanation? That will become clear when you understand what counterfeiting is and what’s wrong with it.

Counterfeiting, legal and illegal

If you’ve paid attention you know that, in recent years, the so-called greenback has been gradually changing color. As of this writing, The Federal Reserve is hard at work on a dramatically overhauled 100 dollar bill. It utilizes color and sophisticated design elements in order to thwart counterfeiters. Why? Because with the advent of desktop scanners and printers, the potential for unlimited spending power came into the reach of all of us. It used to require a master craftsman and a printing press, but now it is child’s play to print knockoffs of old-style bills which can easily pass as beer money in a dimly lit bar. But why does the Federal Reserve care so much about keeping people from printing their own tender? Is it merely due to a cultural disdain for unearned gain?

To see, let’s imagine a counterfeiter has printed himself ten dollars in new money and spent it. He actually gets something for nothing (minus the cost of printing and the time and effort taken to create the bills). The shop owner, who exchanges goods for the new money, then deposits the new money in the bank. He is now $10 richer (minus the cost of the goods he traded) and he has not been harmed in any way, so long as the fake bills are not detected. But with each new transaction, the prices of products and services is bid up a little more, until the purchasing power of the newly introduced money is completely counterbalanced by the rising prices.

Eventually, the new dollars make their way to your grandmother in the rest home who spends it again. She has a fixed income, and by now her cost of living has risen at least ten dollars but her income has not increased at all. So what made the counterfeiter and the first ones who got his fake ten bucks a little richer, has made grandma poorer. In effect, the ten dollars was stolen from grandma to pay the counterfeiter! As for those who get wages, their salaries will eventually rise along with other prices, but wages always lag so we all feel the pinch of the counterfeiter’s actions. Grandma feels it much more though.

Counterfeiting is a very bad thing indeed, and it’s good for the government to go out of its way to discourage it, except for one thing: the biggest counterfeiter of all, is actually the Federal Reserve itself! As Ron Paul likes to point out, the actions of the Federal Reserve, create inflation and the effect of these actions is indistinguishable from those of counterfeiting, except far worse!

The Federal Reserve is able to control the supply of money; it can use this power to hold the supply where it is, or even withdraw money from circulation to slow the economy. It can also fan the fires of the economy by pumping money into the system to encourage spending and rev the economy up. And this has been shown by Austrian economists to be the source of the boom and busts that have been so disastrous for many people throughout the last two centuries. It seems there is rarely ever any need to tighten the money supply, and endless reasons to keep it growing. Among the many rationales for continual inflation, is the bugaboo of its opposite: deflation.

Your friend, deflation

The idea of deflation, with its effect of shrinking prices, sounds like something we should wish for. In bad times like The Great Depression, it was a blessing to folks who were out of work. Today, it would be a boon to the “underemployed” and to all of us. Nevertheless, some economists claim that it is a bad thing.

Inventor and futurist Ray Kurzweil, now the Director of Engineering for Google, complains that some economists have repeatedly dismissed his predictions of continued technological progress siting deflation as the reason. Since technological progress results in falling prices and falling prices ultimately result in a shrinking economy, innovation would no doubt fizzle. Computer chips may keep getting better and cheaper, but eventually people just won’t need yet faster machines and will quit buying them so often.

However, Kurzweil rightly retorts that the economists are not considering that faster computers can do different things than slower ones can. So people will buy tomorrow’s computers to help them do different things than they bought yesterday’s to do. Far from slowing, technological progress is actually increasing exponentially. Peoples’ needs and desires are infinite; as soon as a solution becomes feasible and economical, what were once mere wishes become demands. Shrinking prices will result in more economic demand, not less.

Demand deflation now!

Inflation is not our fault. We don’t create rising prices by spending too much or wanting higher wages. The continual pumping of money into the system is to blame, not us. This has an even darker effect than a devalued dollar and rising prices. The booms and busts which have repeatedly punctuated my lifetime, are caused by the increase of money which has the effect of diverting funds toward the production of capital goods at a time when consumer goods should be made in greater abundance. In this way, a bust, as in 2008, must eventually happen. Despite such dangers, we must invest our hard earned savings in a risky stock market just to earn a return grater than the rate of inflation.

Without the Fed and its monetary policies, prices could generally fall, as they did during the Industrial Revolution—and as they are doing in certain segments of the economy, like computers. Our standard of living could improve while we exert no more effort than before. Wouldn’t that be great?

The money printers are using the phony specter of deflation as an excuse for a policy of continual inflation, which is nothing really but counterfeiting by another name. They are stealing form the poor to give to the rich and robbing us all of some much needed relaxation!

Additional reading: What You Should Know About Inflation by Henry Hazlitt

Moore’s Law

According to The New Yorker, Michael Moore once misrepresented two writers as associate producers in order to skirt labor union compensation rules. Moore has a knack for drawing fire from both friends and enemies alike, so—not too surprisingly—his alleged behavior has provoked accusations of hypocrisy from the Right and greed from the Left. However, I will argue that what Michael did was actually a good thing.

Here is the anecdote as it was reported in an article published by The New Yorker in 2004:

One day during production on the first season of the show, Moore called two of his writers into his office. It was, for both of them, their first job in television, and they had been hired with the title of associate producer. They were not members of the Writers’ Guild, the powerful union for writers in movies and TV, and thus were not receiving health benefits, and would not qualify later for a percentage of video and rerun sales. “Michael said, ‘I’m getting a lot of heat from the union to call you guys writers and pay you under the union rules,’ ” Eric Zicklin, one of the associate producers, says. “ ‘I don’t have the budget for that. But if they keep coming down on me that’ll mean I’ll only be able to afford one of you and the other one’s gotta go.’

Michael Moore is a strong advocate of labor unions and denounces the ruthlessness of profit-hungry business. Given his views, his alleged actions may seem disappointing or even angering. But with the benefit of economic understanding, Moore’s actions look differently: Moore, like every other human, obeys the law of marginal utility.

A supply and demand graph shows that Michael Moore will keep two writers if they don't join the Writer's Guild, but only one if they do.

The law of marginal utility reveals how we all employ scarce resources for the attainment of ends, and have to make choices between those means that we value more over those that we value less. If Michael Moore wants to make a TV show, he must have not only writers but also makeup artists and a camera crew. He only has a finite amount of funds with which to procure all of these things. If his costs rise, he will have to sacrifice some things in order to keep others. In the demand curve illustration we see that, at the original wage price, there is a demand for two writers. But at a higher price, the quantity demanded is reduced by one. Why?  If writers cost too much, some other urgently needed thing will have to be sacrificed and the show may be put in jeopardy.

If the writers join the union and Moore lets one go, which one will it be?  If we think of writing as a homogenous good, like eggs of the same grade, then each page of writing goes first toward the most urgent need—this week’s episode. Once there are enough pages of writing to cover the first episode, any more pages of writing will go to the next one and so on. Each week Moore must have at least enough writing to cover one episode. If writer A can output enough pages to cover a single episode, but writer B can only generate enough to cover part of an episode, Michael will fire B.

Now we can ad more detail to our graph. Before we could say that given increased labor costs, Michael would keep one writer and let the other go, but didn’t know which writer was kept on and which one was fired. Now, we can identify each writer with reasonable certainty. At the lower initial labor cost, Michael’s stock of writers is A, B. After the cost increase, his stock is A.

A supply and demand graph shows that Michael Moore will keep both writers A and B if they don't join the Writer's Guild, but only A if they do.

Even if one writer joined the union and thus cost Michael substantially more to retain, the other could keep his job provided he was willing to lower his own salary sufficiently to make up the difference. But if both writers belong to the union and must be compensated the same, one writer will have to go.

This is why free market advocates point out that minimum wage laws, or equal pay for equal work legislation, are counterproductive: They raise the wage cost of laborers least able to demand a high wage—precisely those that will be the first to be let go, or last to be hired, if costs increase. Minimum wages all but guarantee that the lowest-wage laborers lose their jobs or fail to get them in the first place. They steal from the vulnerable the ability to compete on the basis of price when their skills are not enough, or when they would not be hired because of prejudice.

Instead of pointing out his hypocrisy, or accusing him of greed, we should call attention to the good that Michael Moore was doing by giving his writers fake titles in order to save money: giving them both a chance to work.