21st Century Schizoid Boy

Food for thought:

Suppose there were food insurance. Rather than everyone paying for food with their own money, people would pay a certain fee to their insurance company every month, and in return the insurance company would pay for all of its clients’ groceries.

The rest: http://mises.org/daily/4549

Closely related to the problems of economic calculation:

Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because (s)he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him/her or are made with his/her active co-operation. We need to remember only how much we have to learn in any occupation after we have completed our theoretical training, how big a part of our working life we spend learning particular jobs, and how valuable an asset in all walks of life is knowledge of people, of local conditions, and of special circumstances. To know of and put to use a machine not fully employed, or somebody’s skill which could be better utilized, or to be aware of a surplus stock which can be drawn upon during an interruption of supplies, is socially quite as useful as the knowledge of better alternative techniques. The shipper who earns his living from using otherwise empty or half-filled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities, or the arbitrageur who gains from local differences of commodity prices– are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others.

It is a curious fact that this sort of knowledge should today be generally regarded with a kind of contempt and that anyone who by such knowledge gains an advantage over somebody better equipped with theoretical or technical knowledge is thought to have acted almost disreputably. To gain an advantage from better knowledge of facilities of communication or transport is sometimes regarded as almost dishonest, although it is quite as important that society make use of the best opportunities in this respect as in using the latest scientific discoveries. This prejudice has in a considerable measure affected the attitude toward commerce in general compared with that toward production. The common idea now seems to be that all such knowledge should as a matter of course be readily at the command of everybody, and the reproach of irrationality leveled against the existing economic order is frequently based on the fact that it is not so available. This view disregards the fact that the method by which such knowledge can be made as widely available as possible is precisely the problem to which we have to find an answer.

If it is fashionable today to minimize the importance of the knowledge of the particular circumstances of time and place, this is closely connected with the smaller importance which is now attached to change as such. Indeed, there are few points on which the assumptions made (usually only implicitly) by the “planners” differ from those of their opponents as much as with regard to the significance and frequency of changes which will make substantial alterations of production plans necessary. Of course, if detailed economic plans could be laid down for fairly long periods in advance and then closely adhered to, so that no further economic decisions of importance would be required, the task of drawing up a comprehensive plan governing all economic activity would be much less formidable.

It is, perhaps, worth stressing that economic problems arise always and only in consequence of change. As long as things continue as before, or at least as they were expected to, there arise no new problems requiring a decision, no need to form a new plan. The belief that changes, or at least, day adjustments have become less important in modern times implies the contention that economic problems also have become less important. This belief in the decreasing importance of change is, for that reason, usually held by the same people who argue that the importance of economic considerations has been driven into the background by the growing importance of technological knowledge.

Is it true that, with the elaborate apparatus of modern production, economic decisions are required only at long intervals, as when a new factory is to be erected or a new process to be introduced? Is it true that, once a plant has been built, the rest is all more or less mechanical, determined by the character of the plant, and leaving little to be changed in adapting to the ever changing circumstances of the moment?

One reason why economists are increasingly apt to forget about the constant small changes which make up the whole economic picture is probably their growing preoccupation with statistical aggregates, which show a very much greater stability than the movements of the detail. The comparative stability of the aggregates cannot, however, be accounted for–as the statisticians occasionally seem to be inclined to do–by the “law of large numbers” or the mutual compensation of random changes. The number of elements with which we have to deal is not large enough for such accidental forces to produce stability. The continuous flow of goods and services is maintained by constant deliberate adjustments, by new dispositions made every day in the light of circumstances not known the day before, by B stepping in at once when A fails to deliver. Even the large and highly mechanized plant keeps going largely because of an environment upon which it can draw for all sorts of unexpected needs: tiles for its roof, stationery or its forms, and all the thousand and one kinds of equipment in which it cannot be self-contained and which the plans for the operation of the plant require to be readily available in the market.

This is, perhaps, also the point where I should briefly mention the fact that the sort of knowledge with which I have been concerned is knowledge of the kind which by its nature cannot enter into statistics and therefore cannot be conveyed to any central authority in statistical form. The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision. It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place and that the central planner will have to find some way or other in which the decisions depending on them can be left to the “man on the spot.”

It is in this connection that what I have called the “economic calculus” (or the Pure Logic of Choice) helps us, at least by analogy, to see how this problem can be solved, and in fact is being solved, by the price system. Even the single controlling mind, in possession of all the data for some small, self-contained economic system, would not– every time some small adjustment in the allocation of resources had to be made–go explicitly through all the relations between ends and means which might possibly be affected. It is indeed the great contribution of the Pure Logic of Choice that it has demonstrated conclusively that even such a single mind could solve this kind of problem only by constructing and constantly using rates of equivalence (or “values,” or “marginal rates of substitution”), that is, by attaching to each kind of scarce resource a numerical index which cannot be derived from any property possessed by that particular thing, but which reflects, or in which is condensed, its significance in view of the whole means-end structure. In any small change he will have to consider only these quantitative indices (or “values”) in which all the relevant information is concentrated; and, by adjusting the quantities one by one, he can appropriately rearrange his dispositions without having to solve the whole puzzle ab initio or without needing at any stage to survey it at once in all its ramifications.

Fundamentally, in a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to co-ordinate the separate actions of different people in the same way as subjective values help the individual to co-ordinate the parts of his plan.

The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all. The mere fact that there is one price for any commodity–or rather that local prices are connected in a manner determined by the cost of transport, etc.–brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.

The most significant fact about [the price] system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on and passed on only to those concerned. It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement.

Of course, these adjustments are probably never “perfect” in the sense in which the economist conceives of them in his equilibrium analysis. But I fear that our theoretical habits of approaching the problem with the assumption of more or less perfect knowledge on the part of almost everyone has made us somewhat blind to the true function of the price mechanism and led us to apply rather misleading standards in judging its efficiency. The marvel is that in a case like that of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly; that is, they move in the right direction. This is enough of a marvel even if, in a constantly changing world, not all will hit it off so perfectly that their profit rates will always be maintained at the same even or “normal” level.

I have deliberately used the word “marvel” to shock the reader out of the complacency with which we often take the working of this mechanism for granted. I am convinced that if it were the result of deliberate human design, and if the people guided by the price changes understood that their decisions have significance far beyond their immediate aim, this mechanism would have been acclaimed as one of the greatest triumphs of the human mind. Its misfortune is the double one that it is not the product of human design and that the people guided by it usually do not know why they are made to do what they do. But those who clamor for “conscious direction”–and who cannot believe that anything which has evolved without design (and even without our understanding it) should solve problems which we should not be able to solve consciously–should remember this: The problem is precisely how to extend the span of our utilization of resources beyond the span of the control of any one mind; and therefore, how to dispense with the need of conscious control, and how to provide inducements which will make the individuals do the desirable things without anyone having to tell them what to do.

The problem which we meet here is by no means peculiar to economics but arises in connection with nearly all truly social phenomena, with language and with most of our cultural inheritance, and constitutes really the central theoretical problem of all social science. As Alfred Whitehead has said in another connection, “It is a profoundly erroneous truism, repeated by all copy-books and by eminent people when they are making speeches, that we should cultivate the habit of thinking what we are doing. The precise opposite is the case.”

Civilization advances by extending the number of important operations which we can perform without thinking about them. This is of profound significance in the social field. We make constant use of formulas, symbols, and rules whose meaning we do not understand and through the use of which we avail ourselves of the assistance of knowledge which individually we do not possess. We have developed these practices and institutions by building upon habits and institutions which have proved successful in their own sphere and which have in turn become the foundation of the civilization we have built up.

The price system is just one of those formations which man has learned to use (though he is still very far from having learned to make the best use of it) after he had stumbled upon it without understanding it. Through it not only a division of labor but also a coordinated utilization of resources based on an equally divided knowledge has become possible.

It is in many ways fortunate that the dispute about the indispensability of the price system for any rational calculation in a complex society is now no longer conducted entirely between camps holding different political views. The thesis that without the price system we could not preserve a society based on such extensive division of labor as ours was greeted with a howl of derision when it was first advanced by Von Mises twenty-five years ago. Today the difficulties which some still find in accepting it are no longer mainly political, and this makes for an atmosphere much more conducive to reasonable discussion. When we find Leon Trotsky arguing that “economic accounting is unthinkable without market relations”; when Professor Oscar Lange promises Professor von Mises a statue in the marble halls of the future Central Planning Board; and when Professor Abba P. Lerner rediscovers Adam Smith and emphasizes that the essential utility of the price system consists in inducing the individual, while seeking his own interest, to do what is in the general interest, the differences can indeed no longer be ascribed to political prejudice. The remaining dissent seems clearly to be due to purely intellectual, and more particularly methodological, differences.

… There is something fundamentally wrong with an approach which habitually disregards an essential part of the phenomena with which we have to deal: the unavoidable imperfection of man’s knowledge and the consequent need for a process by which knowledge is constantly communicated and acquired. Any approach, such as that of much of mathematical economics with its simultaneous equations, which in effect starts from the assumption that people’s knowledge corresponds with the objective facts of the situation, systematically leaves out what is our main task to explain.

The Use of Knowledge in Society, Friedrich Hayek, the American Economic Review, XXXV, No. 4; September, 1945, 519-30, http://www.virtualschool.edu/mon/Economics/HayekUseOfKnowledge.html.

In summary, “The theory of economic calculation shows that in the socialistic community, economic calculation would be impossible. The problem of economic calculation is the fundamental problem of socialism. The problem of economic calculation is a problem which arises in an economy which is perpetually subject to change, an economy which every day is confronted with new problems which have to be solved. Far more important than the transformation of existing raw materials into consumers’ goods, the renewal of capital and the investment of newly formed capital is the central problem of economic calculation.”

In general, humans act only because they are not completely satisfied. Were they always to enjoy complete happiness, they would be without will, without desire, without action. In the land of the lotus-eaters there is no action. Action arises only from need, from dissatisfaction. It is purposeful striving towards something.

Materials are limited so that they have to be used in such a way that the most urgent needs are satisfied first, with the least possible expenditure of materials for each satisfaction.

All rational action is economic. All economic activity is rational action. All rational action is in the first place individual action. Only the individual thinks. Only the individual reasons. Only the individual acts. Society arises from the actions of individuals.

All human action, so far as it is rational, appears as the exchange of one condition for another. Humans apply economic goods and personal time and labor in the direction which, under the given circumstances, promises the highest degree of satisfaction, and they forgo the satisfaction of lesser needs so as to satisfy the more urgent needs. This is the essence of economic activity– the carrying out of acts of exchange.

Every human who, in the course of economic activity, chooses between the satisfaction of two needs, only one of which can be satisfied, makes judgments of value.

Under very simple conditions, a human should have little difficulty in forming a judgment upon the relative significance of the factors of production. When, however, conditions are at all complicated, and the connection between things is harder to detect, we have to make more delicate computations if we are to evaluate such instruments. An isolated human can easily decide whether to extend hunting or cultivation. The processes of production one has to take into account are relatively short. The expenditure they demand and the product they afford can easily be perceived as a whole. But to choose whether we shall use a waterfall to produce electricity or extend coal mining is quite another matter. Here the processes of production are so many and so long, the conditions necessary to the success of the undertaking so multitudinous, that we can never be content with vague ideas. To decide whether an undertaking is sound we must calculate carefully.

But computation demands units. And there can be no unit of the subjective use-value of commodities. Marginal utility provides no unit of value. The worth of two units of a given commodity is not twice as great as one– although it is necessarily greater or smaller than one. Judgments of value do not measure: they arrange, they grade. If a human relies only on subjective valuation, even an isolated human cannot arrive at a decision based on more or less exact computations in cases where the solution is not immediately evident. As a rule the human will not be able to reduce all to a common unit. But he or she may succeed in reducing all elements in the computation to such commodities as can be evaluated immediately, that is to say, to goods ready for consumption and the disutility of labor and then he or she is able to base a decision upon this evidence. It is obvious that even this is possible only in very simple cases. For complicated and long processes of production it would be quite out of the question.

In an exchange economy, the objective exchange value of commodities becomes the unit of calculation. In the first place we are able to take as the basis of calculation the valuation of all individuals participating in trade. The subjective valuation of one individual is not directly comparable with the subjective valuation of others. It only becomes so as an exchange value arising from the interplay of the subjective valuations of all who take part in buying and selling. Secondly, they enable those who desire to calculate the cost of complicated processes of production to see at once whether they are working as economically as others. If they cannot carry through the process at a profit, it is a clear proof that others are better able to turn to good account the instrumental goods in question. Finally, calculations based upon exchange values enable us to reduce values to a common unit. Any commodity desired can be chosen for this purpose. In a money economy, money is the commodity chosen.

Money calculations have their limits. Money is neither a yardstick of value nor of prices. Money does not measure value. Nor are prices measured in money: they are amounts of money. The relation between money and goods perpetually fluctuates not only on the goods side but on the money side also.

The deficiencies of money calculations arise for the most part, not because they are made in terms of a general medium of exchange, money, but because they are based on exchange values rather than on subjective use-values. For this reason all elements of value which are not the subject of exchange elude such computations. The beauty of a place or of a building, even if it does not enter into exchange relations, is just as much a motive of rational action, provided people think it significant. If we know precisely how much we have to pay for beauty, health, honor, pride, and the like, nothing need hinder us from giving them due consideration. Sensitive people may be pained to have to choose between the ideal and the material. But that is not the fault of a money economy. It is in the nature of things. For even when we can make judgments of value without money computations we cannot avoid this choice. Called upon to choose between bread and honor, if honor cannot be eaten, eating can at least be forgone for honor.

Two things are necessary if computations of value in terms of money are to take place. First, not only goods ready for consumption but also goods of higher order must be exchangeable. If this were not so, a system of exchange relationships could not emerge. No single human, be he or she the greatest genius ever born, has an intellect capable of deciding the relative importance of each one of an infinite number of goods of higher orders. No individual could so discriminate between the infinite number of alternative methods of production that he or she could make direct judgments of their relative value without auxiliary calculations. In societies based on the division of labor, the distribution of property rights effects a kind of mental division of labor, without which neither economy nor systematic production would be possible. In the second place, there must be a general medium of exchange, a money, in use.

In the simple conditions of a closed household, it is possible to survey the whole process of production from beginning to end. It is possible to judge whether one particular process gives more consumption goods than another. But, in the incomparably more complicated conditions of our own day, this is no longer possible. True, a socialist society could say that 1000 litres of wine were better than 900 litres. It could decide whether or not 1000 litres of wine were to be preferred to 500 litres of oil. Such a decision would involve no calculation. The will of some human would decide. But the real business of economic administration, the adaptation of means to ends only begins when such a decision is taken. And only economic calculation makes this adaptation possible. Without such assistance, in the bewildering chaos of alternative materials and processes the human mind would be at a complete loss.

To suppose that a socialist community could substitute calculations in kind for calculations in terms of money is an illusion. In a community that does not practice exchange, calculations in kind can never cover more than consumption goods. They break down completely where goods of higher order are concerned. Once society abandons free pricing of production goods rational production becomes impossible. Every step that leads away from private ownership of the means of production and the use of money is a step away from rational economic activity.

The existence of a surrounding system of free pricing supports State and municipal undertakings to carry out technical improvements, because it is possible to observe the effects of similar improvements in similar private undertakings at home and abroad.

Without calculation, economic activity is impossible. Since under Socialism economic calculation is impossible, under Socialism there can be no economic activity in our sense of the word. In the absence of criteria of rationality, production could not be consciously economical. For some time possibly the accumulated tradition of thousands of years would preserve the art of economic administration from complete disintegration, however, changing conditions would make them irrational. They would become uneconomical as the result of changes brought about by the general decline of economic thought. The command of a supreme authority would govern the business of supply. The wheels would go round, but to no effect.

Under a system based upon private ownership in the means of production, the scale of values is the outcome of the actions of every independent member of society. Everyone plays a two-fold part in its establishment, first as a consumer, secondly as a producer. As consumer, he or she establishes the valuation of goods ready for consumption. As producer, he or she guides production-goods into those uses in which they yield the highest product.

Under Socialism, the economic administration may indeed know exactly what commodities are needed most urgently. But this is only half the problem. The other half, the valuation of the means of production, it cannot solve. It is possible to conceive arrangements permitting the use of money for the exchange of consumer goods. But since the prices of the various factors of production (including labor) could not be expressed in money, money could play no part in economic calculations.

Suppose, for instance, that the socialist commonwealth was contemplating a new railway line. Would a new railway line be a good thing? If so, which of many possible routes should it cover? Under a system of private ownership we could use money calculations to decide these questions. The new line would cheapen the transportation of certain articles, and, on this basis, we could estimate whether the reduction in transport charges would be great enough to counterweigh the expenditure which the building and running of the line would involve. True, money calculations are incomplete. True, they have profound deficiencies. But we have nothing better to put in their place. Under sound monetary conditions they suffice for practical purposes. If we abandon them, economic calculation becomes absolutely impossible.

This is not to say that the socialist community would be entirely at a loss. It would decide for or against the proposed undertaking and issue an edict. But, at best, such a decision would be based on vague valuations. It could not be based on exact calculations of value.

A stationary society could, indeed, dispense with these calculations. If we assume that the socialist system of production were based upon the last state of the system of economic freedom which it superseded, and that no changes were to take place in the future, we could indeed conceive a rational and economic Socialism. But only in theory. A stationary economic system can never exist. Capital goods employed in production are sooner or later used up. This is true, not only of those goods which constitute circulating capital, but also of those which constitute fixed capital. Those, too, sooner or later are consumed in production. In order that capital may be maintained in the same proportions, or that it may be increased, constant effort is necessary. Care must be taken that the capital goods used up in the process of production are replaced; and, beyond that, that new capital is created. Capital does not reproduce itself (177).

Under Socialism all the means of production are the property of the community. The community alone disposes of them and decides how to use them in production. The community produces, the products accrue to the community, and the community decides how those products are to be used.

Modern socialists lay great emphases on designating the socialist community as Society, and therefore on describing the transfer of the means of production to the control of the community as the “Socialization of the means of production.” The word “society,” with its corresponding adjective “social,” has three separate meanings. It implies, first, the abstract idea of social interrelationships, and secondly, the concrete conception of a union of the individuals themselves. Between these two sharply different meanings, a third has been interposed in ordinary speech: the abstract society is conceived as personified in such expressions as “human society, ” “civil society.”

The reason for all this is in order to avoid using the term State or its equivalent, since this word has an unpleasant sound to all those lovers of freedom and democracy. The Marxian social democracy could at one and the same time contemplate the destruction of the existing State machine, fiercely combat all anarchistic movements, and pursue a policy which led directly to an all powerful state.

Now it does not matter in the least what particular name is given to the coercive apparatus of the socialistic community. What is important is the problem of the organization of this socialistic State or community. For the Marxists talk glibly about expressing the will of society, without giving the slightest hint how “society” can proceed to will and act. Yet of course the community can only act through organs which it has created.

Now it follows from the very conception of the socialistic community that the organ of control must be unitary. Of course this organ can be subdivided and there can be subordinate offices to which definite instructions are transmitted. But the unitary expression of the common will, which is the essential object of the socialization of the means of production and of production, necessarily implies that all offices entrusted with the supervision of different affairs shall subordinate to one office. This office must have supreme authority to resolve all variations from the common purpose and unify the executive aim. It does not matter whether this organ is an absolute prince or an assembly of all citizens organized as a direct or indirect democracy. It does not matter how this organ conceives its will and expresses it. That under the unitary direction of the central authority the administration of individual branches of production is entrusted to seemingly independent departments does not alter the fact that only the central authority directs. The relations between the individual departments are settled, not on the market by the competition of buyers and sellers, but the command of authority. The problem is this: that there is no standard by which one may account and calculate the effects of these authoritarian interventions, because the central authority cannot be guided by exchange-relationships formed on a market. The authority may indeed base its calculations on substitution-relationships, which it determines itself. But this decision is arbitrary; it is not based, as are market prices, on the subjective valuations of individuals and imputed to the producers’ goods by the economic operation of all those active in production and trade. Rational economic calculation cannot therefore be based upon it (476).

Some socialists believe that the socialist community could solve the problem of economic calculation by the creation of an artificial market for the means of production. They admit that it was an error on the part of the older socialists to have sought to realize Socialism through the suspension of the market and the abolition of pricing for goods of higher orders. And they contend that Socialism must create a market in which all goods and services may be priced. Unfortunately, the motive force of the whole process which gives rise to market prices for the factors of production is the ceaseless search on the part of the capitalists and the entrepreneurs to maximize their profits by serving the consumers’ wishes. Without the striving of the entrepreneurs for profit, of the landlords for rent, of the capitalists for interest and the laborers for wages, the successful functioning of the whole mechanism is not to be thought of. The prospect of profit is the market’s mainspring by setting it in motion and maintaining it.

The advocates of the artificial market, however, are of the opinion that an artificial market can be created by instructing the controllers of the different industrial units to act as if they were entrepreneurs in a capitalistic state. They argue that even under Capitalism the managers of joint stock companies work not for themselves but for the companies, that is to say, for the shareholders. The only difference would be that under socialism the product of the manager’s labors would go to the community rather than to the shareholders.

However, these controllers of individual industrial units would have to be appointed. Under Capitalism the managers of the joint stock companies are appointed either directly or indirectly by the shareholders. In so far as the shareholders give to the managers power to produce by the means of production of the company’s stock they are risking their own property or a part of their own property. The speculation may succeed and bring profit; it may, however, misfire and bring about the loss of the whole or part of the capital concerned. This committing of one’s own capital to a business whose outcome is uncertain and to men or women whose future ability is still a matter of conjecture whatever one may know of their past, is the essence of joint stock company enterprise.

Capitalist production is that which adopts wise roundabout methods in contrast with a non-capitalistic production which goes directly to its end in a hand to mouth manner. The characteristic feature of the capitalistic method of production is that the producer works to obtain a profit. Capitalistic production is production for profit, socialist production will be, as the socialists say, production for the satisfaction of needs. But to achieve a profit, that is a result greater in value than the costs, must also be the aim of the socialistic community. If economic activity is rationally directed, that is if it satisfies more urgent before less urgent needs, it has already achieved profits, since the cost, i.e. the value of the most important of the unsatisfied needs, is less than the result attained.

An economic action is said to be profitable if in the capitalist system it yields an excess of receipts over costs. An economic action is said to be productive when, seen from the point of view of a hypothetical socialist community, the yield exceeds the cost involved. Some economic acts which are profitable are not productive and, vice versa, some are productive but not profitable. This fact is sufficient to condemn the capitalistic order of society. Whatever a socialist community would do seems to socialists indisputably good and reasonable; that anything different can happen in a capitalistic society is, in their opinion, an abuse which cannot be tolerated. But an examination of the cases in which profitability and productivity are alleged not to coincide will show that this judgment is purely subjective.

For example, speculation in the capitalist system performs a function which must be performed in any economic system however organized: it provides for the adjustment of supply and demand over time and space. If it is eliminated, then some other organization must take over its function: the community itself must become a speculator. Without speculation there can be no economic activity reaching beyond the immediate present.

Far more important than the transformation of existing raw materials into consumers’ goods, the renewal of capital and the investment of newly formed capital is the central problem of economic calculation, not the problem of disposing of the circulating capital already in existence. One cannot base decisions of this sort, which are binding for years and decades ahead, on the momentary demand for consumers’ goods. One must look to the future, that is, one must be “speculative” (477).

Socialism, An Economic and Sociological Analysis, Ludwig von Mises, 1947, Pages 96-130 (473), http://files.libertyfund.org/files/1060/Mises_0069_EBk_v5.pdf.

In an article on “Economic Calculation in a Socialist Community,” which appeared in the spring of 1920, he demonstrated that the possibility of rational calculation in our present economic system was based on the fact that prices expressed in money provided the essential condition that made such reckoning possible. The essential point on which Professor Mises went far beyond anything done by his predecessors was the detailed demonstration that an economic use of the available resources was only possible if this pricing was applied not only to the final product but also to all the intermediate products and factors of production, and that no other process was conceivable that would in the same way take account of all the relevant facts as did the pricing process of the competitive market.

http://mises.org/daily/4590

Write your own!

Human society rests on a strong individual and flows outward from individual to love, family, friends, neighbors, and finally voluntary cooperation with other humans, in that order. Tribes, nations, governments, and races are unimportant. Unlike other animals, modern humans are rational and understand that voluntary cooperation is more productive than violence. Ideas form the structure of society and greatly impact its quality (e.g. government and its extent or anarchy, moral principles, purpose, etc.). Humans are philanthropists and help each other (the greatest explosion of charity in history occurred voluntarily in the 19th century United States). A human may only use violence in self-defense of body or property, defending that of others, and surviving (e.g. eating). This violence must be proportional and only used as a last resort. Otherwise, the actions of another human are unimportant. Humans must strive to be productive, helpful members of society, and not to take the physical world for granted. Life and humanity are fundamentally good.

The U.S. became the largest economy in the world (total GDP) in the late 1870s and caught up to the U.K. in GDP-per-capita in the 1880s, before the Federal Reserve and the growth of government:

Angus Maddison, Professor of Economics, The University of Groningen, Netherlands, 2006, http://www.ggdc.net/maddison/Historical_Statistics/horizontal-file_02-2010.xls (methodology).

We present a new class of statistical deanonymization attacks against high-dimensional micro-data, such as individual preferences, recommendations, transaction records and so on. Our techniques are robust to perturbation in the data and tolerate some mistakes in the adversary’s background knowledge.

We apply our de-anonymization methodology to the Netflix Prize dataset, which contains anonymous movie ratings of 500,000 subscribers of Netflix, the world’s largest online movie rental service. We demonstrate that an adversary who knows only a little bit about an individual subscriber can easily identify this subscriber’s record in the dataset. Using the Internet Movie Database as the source of background knowledge, we successfully identified the Netflix records of known users, uncovering their apparent political preferences and other potentially sensitive information.

Robust De-anonymization of Large Sparse Datasets, Arvind Narayanan and Vitaly Shmatikov, The University of Texas at Austin, March 8, 2008, http://userweb.cs.utexas.edu/~shmat/shmat_oak08netflix.pdf.

As noted by Paul Krugman, most of the mortgage securitization (subprime, adjustable rate, jumbo, and option ARM) that spawned the collapse of 2008 was led by non-Government entities. However, all of these instruments were a function of low interest rates– i.e. they couldn’t have existed or have been profitable without them. That doesn’t excuse the fraud and banksterism that occurred, but crazy things happen when you flood a market with fake money. Subprime is now back to 20%, this time fully backed by the government and the government now owns or securitizes more than 95% of the whole mortgage market.

Beginning in the middle of 2007… Figure 3 shows dramatic declines during this time in both non-agency securitization and originations of loans retained in the lending institution’s portfolio. In the present day, when Ginnie Mae’s activities are included, the three GSEs are providing unprecedented support to the housing market—owning or guaranteeing almost 95% of the new residential mortgage lending.

This shift in mortgage finance has had a profound impact on the types of borrowers receiving loans. In the fourth quarter of 2006, approximately 10% of originations in our sample were labeled by originators as “subprime.” For the entire universe of mortgages, subprime loans are estimated to have made up about 20% of originations in 2006. By the first quarter of 2008, the subprime share was effectively zero. Since then, increased FHA lending—identified here by Ginnie Mae’s share—has revived this segment of the market. After plummeting in early 2008, the share of borrowers with FICO credit scores lower than 660 has returned to just higher than 20%, the same share as when subprime securitization peaked in 2006.

With the vast majority of current mortgage lending now intermediated in some form by the GSEs, it will be difficult for the housing market to return to normal.

Recent Developments in Mortgage Finance, The Federal Reserve Bank of San Francisco, John Krainer, Senior Economist, October 26, 2009, http://www.frbsf.org/publications/economics/letter/2009/el2009-33.pdf.

Quotes from David Stevens, the head of the U.S. Government’s Federal Housing Administration (FHA/HUD):

This is a market purely on life support, sustained by the federal government…

Having FHA do this much volume is a sign of a very sick system.

FHA Home-Financing Volume Sign of ‘Very Sick System’, Bloomberg, May 24, 2010, http://www.businessweek.com/news/2010-05-24/fha-home-financing-volume-sign-of-very-sick-system-update2-.html.

John Taylor [stanford.edu] giving the main talk at the 2010 NBER Conference:

One does not need to rely on the Taylor rule to conclude that from the perspective of many of the standard objective functions that monetary policy might seek to optimize, rates were held too low for too long. The real interest rate was negative for a very long period, similar to what happened in the 1970s. The intervention was an intentional departure from a policy approach that was followed in the decades before. The Fed’s statements that interest rates would be low for a “prolonged period” and that interest rates would rise at a “measured pace” is evidence of these intentions.

The low interest rates added fuel to the housing boom, which in turn led to risk taking in housing finance and eventually a sharp increase in delinquencies, foreclosures, and the deterioration of the balance sheets of many financial institutions as toxic assets grew rapidly. To test the connection between the low interest rates and the housing boom I built a simple model relating the federal funds rate to housing construction. My research showed that a higher federal funds rate would have avoided much of the boom and bust.

Macroeconomic Lessons from the Great Deviation, Remarks at the 25th NBER Macro Annual Meeting, John Taylor, Professor of Economics, Stanford University, May, 2010, http://www.stanford.edu/~johntayl/NBERMacroAnnualTalkFinal.pdf.

See also:

• http://www.fdic.gov/news/news/speeches/chairman/spjun1810.html

George Washington, the first president of the United States, gave a farewell address to the people of the nation that shows an amazing amount of forethought and humility. It’s amazing that a military general could have said such things. Generals, and seemingly the whole culture back then, seemed truly different (in general), philosophically.

Hence likewise [all the parts combined] will avoid the necessity of those overgrown military establishments, which under any form of government are inauspicious to liberty, and which are to be regarded as particularly hostile to republican liberty.

The basis of our political systems is the right of the people to make and to alter their constitutions of government. But the Constitution which at any time exists, until changed by an explicit and authentic act of the whole people, is sacredly obligatory upon all.

Liberty itself will find in such a government, with powers properly distributed and adjusted, its surest guardian.

Let me now take a more comprehensive view and warn you in the most solemn manner against the baneful effects of the spirit of party, generally… The alternate domination of one faction over another, sharpened by the spirit of revenge natural to party dissension, which in different ages and countries has perpetrated the most horrid enormities, is itself a frightful despotism. But this leads at length to a more formal and permanent despotism. The disorders and miseries which result gradually incline the minds of men to seek security and repose in the absolute power of an individual; and sooner or later the chief of some prevailing faction, more able or more fortunate than his competitors, turns this disposition to the purposes of his own elevation on the ruins of public liberty… It opens the door to foreign influence and corruption, which find a facilitated access to the government itself through the channels of party passions.

Avoiding likewise the accumulation of debt, not only by shunning occasions of expense, but by vigorous exertions in time of peace to discharge the debts which unavoidable wars may have occasioned, not ungenerously throwing upon posterity the burden which we ourselves ought to bear.

Observe good faith and justice towards all nations; cultivate peace and harmony with all.

The nation, prompted by ill will and resentment, sometimes impels to war the government, contrary to the best calculations of policy. The peace often, sometimes perhaps the liberty, of nations has been the victim.

So likewise, a passionate attachment of one nation for another produces a variety of evils. Sympathy for the favorite nation, facilitating the illusion of an imaginary common interest in cases where no real common interest exists and infusing into one the enmities of the other, betrays the former into a participation in the quarrels and wars of the latter, without adequate inducement or justification.

Against the insidious wiles of foreign influence (I conjure you to believe me, fellow citizens) the jealousy of a free people ought to be constantly awake, since history and experience prove that foreign influence is one of the most baneful foes of republican government. But that jealousy to be useful must be impartial; else it becomes the instrument of the very influence to be avoided, instead of a defense against it. Excessive partiality for one foreign nation and excessive dislike of another cause those whom they actuate to see danger only on one side, and serve to veil and even second the arts of influence on the other. Real patriots, who may resist the intrigues of the favorite, are liable to become suspected and odious, while its tools and dupes usurp the applause and confidence of the people to surrender their interests.

The great rule of conduct for us in regard to foreign nations is, in extending our commercial relations, to have with them as little political connection as possible. So far as we have already formed engagements, let them be fulfilled with perfect good faith. Here let us stop.

Europe has a set of primary interests, which to us have none or a very remote relation. Hence she must be engaged in frequent controversies, the causes of which are essentially foreign to our concerns. Hence therefore it must be unwise in us to implicate ourselves, by artificial ties, in the ordinary vicissitudes of her politics or the ordinary combinations and collisions of her friendships or enmities. Our detached and distant situation invites and enables us to pursue a different course.

Why forgo the advantages of so peculiar a situation? Why quit our own to stand upon foreign ground? Why, by interweaving our destiny with that of any part of Europe, entangle our peace and prosperity in the toils of European ambition, rivalship, interest, humor, or caprice?

It is our true policy to steer clear of permanent alliances with any portion of the foreign world—so far, I mean, as we are now at liberty to do it, for let me not be understood as capable of patronizing infidelity to existing engagements (I hold the maxim no less applicable to public than to private affairs, that honesty is always the best policy)—I repeat it therefore, let those engagements be observed in their genuine sense. But in my opinion it is unnecessary and would be unwise to extend them. Taking care always to keep ourselves, by suitable establishments, on a respectably defensive posture, we may safely trust to temporary alliances for extraordinary emergencies.

Harmony, liberal intercourse with all nations, are recommended by policy, humanity, and interest. But even our commercial policy should hold an equal and impartial hand: neither seeking nor granting exclusive favors or preferences; consulting the natural course of things; diffusing and diversifying by gentle means the streams of commerce but forcing nothing; establishing with powers so disposed—in order to give to trade a stable course, to define the rights of our merchants, and to enable the government to support them—conventional rules of intercourse, the best that present circumstances and mutual opinion will permit, but temporary, and liable to be from time to time abandoned or varied, as experience and circumstances shall dictate; constantly keeping in view, that it is folly in one nation to look for disinterested favors from another— that it must pay with a portion of its independence for whatever it may accept under that character—that by such acceptance it may place itself in the condition of having given equivalents for nominal favors and yet of being reproached with ingratitude for not giving more. There can be no greater error than to expect or calculate upon real favors from nation to nation. It is an illusion which experience must cure, which a just pride ought to discard.

In offering to you, my countrymen, these counsels of an old and affectionate friend, I dare not hope they will make the strong and lasting impression I could wish—that they will control the usual current of the passions or prevent our nation from running the course which has hitherto marked the destiny of nations. But if I may even flatter myself that they may be productive of some partial benefit, some occasional good, that they may now and then recur to moderate the fury of party spirit, to warn against the mischiefs of foreign intrigue, to guard against the impostures of pretended patriotism— this hope will be a full recompense for the solicitude for your welfare by which they have been dictated.

Though in reviewing the incidents of my administration I am unconscious of intentional error, I am nevertheless too sensible of my defects not to think it probable that I may have committed many errors. Whatever they may be, I fervently beseech the Almighty to avert or mitigate the evils to which they may tend. I shall also carry with me the hope that my country will never cease to view them with indulgence and that, after forty-five years of my life dedicated to its service with an upright zeal, the faults of incompetent abilities will be consigned to oblivion, as myself must soon be to the mansions of rest.

Washington’s Farewell Address to the People of the United States, September 19, 1796, The Philadelphia Daily American Advertiser, http://www.access.gpo.gov/congress/senate/farewell/sd106-21.pdf