November 7th, 2014

‘History has been rather kind to the American voter’

cccp“History has been rather kind to the American voter.”

When Ludwig von Mises wrote those words in 1953 he was referring to the fact that Americans had the opportunity to learn from the lackluster economies of Europe where states were busy nationalizing industries, imposing price controls, and generally imposing more socialism at every turn. The only thing keeping Europe afloat, Mises observed, was the Marshall Plan and the lavish foreign aid bestowed on the Europeans by the wealthier Americans who (back in 1953) had the good sense to be far less socialistic than the Europeans:

History has been rather kind to the American voter. It has provided him with object lessons in socialism. If he looks behind the Iron Curtain, he can learn useful things about the one-party system of the classless and profitless “peoples’ democracies.” If he studies European budgets, he will be informed about the “blessings” of nationalization. Even if he stays at home, he can extend his views by carefully reading what the newspapers report about the financial breakdown of New York City, the world’s largest and richest urban agglomeration, the intellectual capital of Western civilization, the home of the United Nations. There is plenty of experience that can induce a man to analyze scrupulously what the progressive propaganda has taught him, and to think twice before again casting his vote for the apostles of socialization and advocates of public spending.

History may have been kind to the American taxpayer, but the taxpayer, obviously, did not capitalize on such an opportunity granted by History.

Having let the lesson go over our heads, History tried to teach the lesson yet again, this time by illustrating the utter collapse of the Eastern Bloc and Soviet economies. When Mises wrote the following, he might as well have been writing in 1990 as the Soviet Bloc collapsed:

When economists clearly demonstrated the reasons why socialism cannot work, the statists and interventionists arrogantly proclaimed their contempt for mere theory. “Let the facts speak for themselves; not economics books, only experience counts.” Now the facts have spoken.

The facts have indeed spoken, and many were even listening. Unfortunately, the answer was sought not in private markets, but in “the third way” and mere partial socialism. The talk of total equality is now gone. Rather than redistribute wealth from the rich to the rest, the state now kindly redistributes the wealth from the middle class and others without political power.  Some goes to the poor, but even more goes to the already-rich and their friends in government,  whether through money creation (i.e., inflation) or outright old-fashioned subsidies.

Will anything be learned when this system fails? Maybe. On the other hand, History be be through being kind to Americans.

The Economics Behind the Fall of the Berlin Wall

6956Mises Daily Friday by Ryan McMaken:

Much of the media discussion around the twenty-fifth anniversary of the Berlin Wall’s fall will focus on American military politics and the politicians of the time. But to truly understand why the Soviet system in Eastern Europe collapsed, we must look to Mises’s pioneering work on economic planning.

Majorities in Several States Vote To Punish Low-Skill Workers

Fired businessman searching for a job isolated on white backgrouMy anti-democracy critics will shake their heads in dismay at me, but I’ve been forced to come to the conclusion that there’s no reason to believe that plebiscitary democracy is any worse than the usual kind. Indeed, in American states that must hold plebiscites to authorize tax increases, one hears regular howls from the pro-tax crowd about how “direct democracy” is awful and that “representative democracy” is so much better.  There’s even this federal lawsuit by pro-tax groups claiming that Colorado’s requirement that voters approve tax increases is unconstitutional. In other words, those who favor tax increases hate voter referendums and initiatives. Internationally, of course, there are the secession votes and the upcoming vote on gold in Switzerland. I have a hard time coming up with a reason why such things are comparatively bad (compared to an alternative in which everything is up to the elected elites).

That said, the news isn’t always good with such voter-approved measures. A majority of voters in four states voted to raise the minimum wage:

If there was upsets and contention in much of midterm voting, there was one topic on which the electorate was largely united: raising the minimum wage. Alaska, Arkansas, Nebraska, and South Dakota all had ballot measures on raising state minimum wages above both their current levels and the federal $7.25 an hour figure.

All four states passed the measures, most by significant margins. More than two-thirds of voters in Alaska agreed to raise minimum wage to $9.75 by 2016. Sixty-five percent of Arkansas voters set the state on course to adopt an $8.50 figure by 2017. In Nebraska, 59 percent said the number should be $9 an hour by 2016. Only South Dakota stood out with a slimmer margin; 53 percent voted to raise minimum wage to $8.50 an hour next year. In Alaska and South Dakota, minimum wage is now pegged to inflation, meaning that it will rise as the cost of living does.

What these voters said with their votes was “I’m in favor of making it illegal for people with low productivity to get a job. Teenagers, people who were poorly educated by failing public schools, people who have never had a job, and people who are not very intelligent, should all just stay home and do nothing because we want to make sure that no one can afford to hire those people.”

Wages are a reflection of the worker’s productivity. When wages increase (assuming a relatively-free market) it is because the worker’s productivity has increased, either because of improved capital (such as better equipment) or because the worker himself has improved (e.g., through more experience).

An employer simply cannot afford to pay an employee something above and beyond what the worker produces for the company. If he does, then the wage is generally being subsidized by the other workers who must now earn less than their level of productivity indicates, because some of that must go to pay the employees who are money-losers.

In practice, the overwhelming effect is this: employers don’t hire low-productivity workers whose productivity is below the minimum wage, and in many cases will simply replace workers with capital (i.e., automated cashiers, etc.) which have been made relatively economical by the increase in the price floor. The federal government itself admits this employment effect, since it has included a loophole in the minimum wage in its own regulations for disabled workers. Early progressives also assumed it would cause unemployment, which they thought was a good thing.

Increasing a minimum wage is a death sentence for the careers of the most “at-risk” members of the population (to use a phrase favored by the left). They will have to earn money under the table (i.e., illegally), work in an unpaid-internship, or simply go on welfare.

Meanwhile, detractors of free markets will say “gee, look, the employment rate looks just fine in NE, SD, etc.” Ken Zahringer explains.

Numerous Mises Daily writers have covered this topic, of course. For more, see:

How Minimum Wage Laws Increase Poverty – George Reisman 

The Crippling Nature of Minimum-Wage Laws – Murray N. Rothbard 

Welfare, Minimum Wages, and Unemployment – Greg Morin 

Even the Feds Admit Minimum Wages Cause Unemployment by Nioholas Freiling

How Special-Interest Groups Benefit from Minimum Wage Laws by Gary Galles

Mythology of the Minimum Wage - D.W. MacKenzie 

The Unseen Costs of the Minimum Wage - Josh Grossman 

The Minimum Wage Forces Low-Skill Workers to Compete with Higher-Skill Workers – George Reisman


Solution to Unemployment Found: Kill the Unemployed

3910409246_4e37658972_bThat was the solution proffered by eugenicist progressives during the 1920s and 1930s. At least, that was their preferred option. Frank Taussig admitted that we “have not reached the stage where we can proceed to chloroform [the unemployed] once and for all, but at least they can be segregated, shut up in refuges and asylums, and prevented from propagating their kind.”

Many leftists today deny that minimum wage laws increase unemployment among the least skilled and most disadvantaged workers. Among many early progressives, however, it was fully admitted that minimum wages cause unemployment, and this fact was to be used to effect good eugenicist social policy.  In “Eugenics and Economics in the Progressive Era” in The Journal of Economic Perspectives by Thomas C. Leonard, Leonard examines how the minimum wage was used to separate the “worthy” workers (i.e., those who could earn a “living wage”) from those unproductive workers who should be sterilized.

From Leonard’s analysis, we learn several things:

1. It was assumed and fully admitted by progressives that a  minimum wage would cause unemployment among the least-skilled workers in society.

2. For the eugenicists, the resulting unemployment was a good thing because it allowed the “experts” to more easily cull those who were worthy of being allowed to continue to exist and reproduce, from those who were not.

3. Such arguments for the minimum wage were also closely related to the racism inherent in early minimum wage arguments, which is covered in more detail here.

Leonard explores the assumed benefits of unemployment caused by minimum wages here:

Columbia’s Henry Rogers Seager, a leading progressive economist who served as president of the AEA in 1922, provides an example. Worthy wage-earners, Seager (1913a, p. 12) argued, need protection from the “wearing competition of the casual worker and the drifter” and from the other “unemployable” who unfairly drag down the wages of more deserving workers (1913b, pp. 82–83). The minimum wage protects deserving workers from the competition of the unfit by making it illegal to work for less. Seager (1913a, p. 9) wrote: “The operation of the minimum wage requirement would merely extend the definition of defectives to embrace all individuals, who even after having received special training, remain incapable of adequate self-support.” Seager (p. 10) made clear what should happen to those who, even after remedial training, could not earn the legal minimum: “If we are to maintain a race that is to be made of up of capable, efficient and independent individuals and family groups we must courageously cut off lines of heredity that have been proved to be undesirable by isolation or sterilization . . . .”

The unemployable were thus those workers who earned less than some measure of an adequate standard of living, a standard the British called a “decent maintenance” and Americans referred to as a “living wage.” For labor reformers, firms that paid workers less than the living wage to which they were entitled were deemed parasitic, as were the workers who accepted such wages—on grounds that someone (charity, state, other members of the household) would need to make up the difference. For progressives, a legal minimum wage had the useful property of sorting the unfit, who would lose their jobs, from the deserving workers, who would retain their jobs. Royal Meeker, a Princeton economist who served as Woodrow Wilson’s U.S. Commissioner of Labor, opposed a proposal to subsidize the wages of poor workers for this reason. Meeker preferred a wage floor because it would disemploy unfit workers and thereby enable their culling from the work force. “It is much better to enact a minimum-wage law even if it deprives these unfortunates of work,” argued  Meeker (1910, p. 554). “Better that the state should support the inefficient wholly and prevent the multiplication of the breed than subsidize incompetence and unthrift, enabling them to bring forth more of their kind.” A. B. Wolfe (1917, p. 278) an American progressive economist who would later become president of the AEA in 1943, also argued for the eugenic virtues of removing from employment those who “are a burden on society.”

In his Principles of Economics, Frank Taussig (1921, pp. 332–333) asked rhetorically, “how to deal with the unemployable?” Taussig identified two classes of unemployable worker, distinguishing the aged, infirm and disabled from the “feebleminded . . . those saturated with alcohol or tainted with hereditary disease . . . [and] the irretrievable criminals and tramps. . . .” The latter class, Taussig proposed, “should simply be stamped out.” “We have not reached the stage,” Taussig allowed, “where we can proceed to chloroform them once and for all; but at least they can be segregated, shut up in refuges and asylums, and prevented from
propagating their kind.”

The progressive idea that the unemployable could not earn a living wage was bound up with the progressive view of wage determination. Unlike the economists who pioneered the still-novel marginal productivity theory [i.e., Austrian economists -ed.], most progressives agreed that wages should be determined by the amount that was necessary to provide a reasonable standard of living, not by productivity, and that the cost of this entitlement should fall on firms.

But how should a living wage be determined? Were workers with more dependents, and thus higher living expenses, thereby entitled to higher wages? Arguing that wages should be  matter of an appropriate standard of living opened the door, in this era of eugenics, to theories of wage determination that were grounded in biology, in particular to the idea that “low-wage races” were biologically predisposed to low wages, or “under-living.” Edward A. Ross (1936, p. 70), the proponent of race-suicide theory, argued that “the Coolie cannot outdo the American, but he can underlive him.” “Native” workers have higher productivity, claimed Ross, but because Chinese immigrants are racially disposed to work for lower wages, they displace the native workers.

 HT to John Cochran.

Bob Murphy: The Fed’s Stock Market Casino

NYSEJeff Deist and Robert P. Murphy address the vital topic of Fed interference in financial markets. Are the global equity and bond markets a charade, engineered by monetary expansion and destined to collapse like a house of cards? Is the investing game basically rigged? How can Janet Yellen and financial elites keep markets from crashing without endless new rounds of quantitative easing? Why is understanding Austrian economics necessary, but not sufficient, to be a successful investor? And how would stock markets have a social function in a free society? Anyone interested in investing, personal finance, Austrian economics, and the wit and wisdom of Bob Murphy will enjoy this show.

Referenced articles:

The Social Function of Futures Markets – Robert P. Murphy

The Social Function of Call and Put Options – Robert P. Murphy

The Social Function of Stock Speculators – Robert P. Murphy

Robert Murphy is an associated scholar of the Mises Institute, where he teaches at the Mises Academy.He runs the blog Free Advice and is the author of The Politically Incorrect Guide to Capitalism, theStudy Guide to “Man, Economy, and State with Power and Market,” the “Human Action” Study Guide,The Politically Incorrect Guide to the Great Depression and the New Deal, and his newest book,Lessons for the Young Economist. Send him mail.

Saturday: Live Streaming the Costa Mesa Mises Circle

The West Coast Regional Mises Circle in Costa Mesa is sold out, but be sure and mark your calendars so you can join us live via On November 8 —this Saturday— we’ll be broadcasting all the lectures and speeches from Costa Mesa. Check here at the blog for live streams and links.

Click here for live streaming.


Here’s the schedule:

Tentative Schedule (all times Pacific)
Grand Ballroom

10:20 a.m. Welcome
10:30 a.m. Jeff Deist “The Case for Optimism”
10:50 a.m. David Gordon “Thinkers Who Challenged the State”
11:10 a.m. Lew Rockwell “Against the State”
11:30 a.m. Presentation of the 2014 Mises Entrepreneurship Award to Louis E. Carabini
11:40 a.m. – 1:00 p.m. Lunch and discussion, bookstore open
1:00 p.m. Judge Andrew P. Napolitano “The Natural Law as a Restraint Against Tyranny”
1:30 p.m. Ron Paul “Freedom Doesn’t Come from Government”
2:00 p.m. break, bookstore open (final opportunity to purchase books for speakers to autograph)
2:20 p.m. Speaker Panel Q&A
3:00 p.m. Closing remarks
3:10 p.m. Adjourn