Free trade; not trade wars or negotiated trade

With a lot of Americans fearful for their jobs and their president saying he can protect jobs with tariffs, international trade has become a big emotional issue.

Trade is such an emotional issue because our economy is organized such that our physical and psychological well-being requires us to have steady employment. At the same time economic changes require employment flexibility. One way to deal with this conflict would be to have a guaranteed income scheme so that individuals can cope with changes. My committment to such a scheme stands behind the rest of this post and indeed all the posts on this weblog. If people can survive comfortably without employment then this fear should no longer be a factor.

We should also analyse economic issues in physical or real terms rather than financial terms. Trade is the exchange of goods and services, not money which is a tool to facilitate the exchanges. It is very easy to get a distorted picture of the economy when people analyse economic problems in financial terms.

For all merchant-pull-1398066_1920we talk about the market economy and our devotion to competition, we have a long tradition of restricting competition. One of the ways we do that is by imposing tariffs on imports from other countries. Other ways we restrict competition with subsidies and legislation.

The economics law of comparative advantage says countries are better off to specialize and trade, even if one country is more efficient in the production of all items. This is attractive to people who want economic growth. This blogger also likes the idea of efficiency so that we can have more time for leisure activities.

I also believe the best way to do free trade is unilaterally. To do free trade and get the full benefits Canada should abolish all tariffs and restrictions on foreign goods and services coming into the country regardless of what other countries do. If other countries want to subsidize our lifestyle, then that is up to them. If they do not want to buy from us, then that is saving our resource base for the benefit of our children.

The free trade agreements of which governments are so fond are in reality negotiated trade agreements. They are negotiated for the sake of special interests of producers. These are the same interests as those who want legislation to restrict competition – patents, copyright, licensing – and who want subsidies for their firms. To get a feel for the complexity of these negotiations look at this article in The Economist. Trying to negotiate to satisfy the special interests of multiple countries must be an impossible challenge.

International trade is not such an important issue for Americans because the United States is one large free trade zone and they are or have benefited from the law of comparative advantage.

Economics is a social activity and like all relationships, to be satisfying for all parties there needs to be a more or less equal exchange. Those Americans who promote trade wars are being anti social. To me that sounds un-American.

Lots of politicians and commentators worry about the dire consequences of American tariffs and the resulting trade wars. Yes. we are headed into some even more serious economic problems but they will not be caused by tariffs and trade wars. The basic problem is that we have used up the most easily accessible energy and mineral resources. Increased efficiency from free trade will help us cope with this issue but will not solve it.

The British Labour Party and economic decision making

It appears the British are getting ready to elect a Labour Party government which is hoping to introduce some “structural” changes to economic decision-making.

This blogger believes economic changes are urgently needed but also figures the changes proposed by the Labour Party will only change the faces making decisions and will do nothing to change the well-being of English people.

0*V_sRwC4Rvi4GfN3ZWhen socialists realize that central planning does not accomplish what they want they try to reform by decentralizing the central planning. To see how the British are likely to try this, see this article in The Economist.

The main issue in capitalism versus socialism is who gets to make decisions about what economic projects are undertaken and who gets to do them.

There are three main ways in which this decision-making can be done.

The first is that major decisions are made by bankers who get to do this via their control over money creation. Fractional reserve banking means bankers create money when they make loans and this gives them a great deal of power to decide what projects go ahead and by whom. The capital in capitalism comes from the money created when loans are made. Even small decisions like who gets to build housing and who gets to buy the houses are made by bankers when they approve the loans and mortgages. Any meaningful reform will require changes in the way in which money is created. There are ways to do this. Not only will bankers object to the loss of power but a lot of people have an emotional committment to money and will fiercely oppose changes. Another strong feature of this system is that governments pass legislation that restricts competition and allows some people to make profits. This system we call capitalism.

The second approach to decision-making is called socialism or central planning. Decisions are made by political leaders or their bureaucrats. Socialists like to use words such as “democratic” and “public interest” but in reality make decisions according to their own values and interests. Because of this socialist economies tend to be an inefficient use of resources. Decision making is still made by a few people even if they claim it is on behalf of others.

The third way of making decisions is a true market or perfect competition. We like to think our economy is based on markets but a lot of it is based on legislation that restricts competition such as patents, copyright,licensing and tariffs. In North America one area of life in which competition is allowed is religious services. As we are committed to freedom of religion the government does not interfere. One often hears of people who go church shopping.

Greens often say they want an economy based on small business but they also automatically reject everything said by economists. This is unfortunate because economics has worked out the theory of small business and can say exactly what to do.

In order to have perfect competition all participants in a market, sellers and purchasers, must be so small that no one can influence the price by increasing or decreasing the amount they buy or sell. There must also be perfect knowledge. All participants need to know all prices. Entry to and exit from an industry needs to be easy which means there can be no patents or copyright.

For the purposes of this post decision-making is made by customers who vote with their buying decisions. Price changes are signals to producers to increase or decrease production.

One of the reasons this blogger likes the true market economy is that it allows a lot of decisions to be made by individuals. One of the problems is that individuals to not have a lot of power. People with common vested can form powerful lobbying groups and can get governments to pass legislation which restricts competition and provides them with excess profits.

Socialists talk of giving workers influence over economic decisions, but their proposals give decision-making to boards or councils. Workers are also consumers and with a market system they will have the same influence as all consumers. A market system also allows for a great variety of products. For example, if schools were based on a market there could easily be schools based on different educational philosophies and parents could choose which they wanted for their children. A voucher system could ensure that all children got an education.

Socialists also argue that capitalism encourages greed. This may be true when decisions are made by bankers, but in a true market there are no profits, just wages and a return on investment. If there are profits being made in an industry, more people will go into it until there are no profits.

If the British Labour Party gets elected and is successful in changing the “structure” of their economy, they may change the size of a few of the units for which decision are being made. However, they will still be steering the same ship in the same ocean. Jeremy Corbyn is not radical or brave enough to change the way in which money is created or to drop a committment to economic growth, both of which are urgently needed to protect people from an economic collapse.

 

 

 

 

 

 

 

 

 

 

 

Equality: by command, by market or by sharing?

Are command economies the only way to achieve economic equity?  This question was asked recently on Reddit.  It illustrates a common misconception about market economies.  Also, this blogger thinks a discussion on types of economy should include sharing as practiced by some smaller tribal societies. Continue reading

Uber, the sharing economy and competition

This guy probably should not write about Uber and the taxi business.  I don’t own a smart phone;  I live 15 miles into the country from a one-taxi town and I can recall using a taxi twice in the last 15 years.  However, taking the risk, here are some observations. The first is that the “sharing means economy”  competition.  We sometimes distort the meanings of words to hide realities and the reality here is that we are introducing more competition into our economy.  This guy lived for four years on a British Columbia coastal Indian reserve where the sharing economy meant that fishermen shared their catches or when  somebody faced a medical emergency they would get a fundraising dinner.  (This was very important where most emergencies meant an expensive plane trip to the big city.)   The sharing features of their economy were probably inherited from pre-white contact times. Our society gives lip service to the market economy and competition but when we get to the details our commitment varies according to the color of the hat we are wearing.  It is not surprising consumers of taxi services are quite fond of Uber but the owners of taxis and their drivers are feeling threatened by the increased competition. Traditionally the taxi industry has dealt with competition by convincing local governments to license their cars.  By limiting the number of cars they can limit competition and keep prices up.  If customers have to wait that is irrelevant. A second observation is that providing transportation to others is low paid work and probably always will be regardless of Uber promises to prospective drivers.  A Google of “taxi driver earnings” shows that a few drivers earn less than minimum wage and most are only a little better.  One has to anticipate that once Uber has changed the industry this will continue to apply.   As with many low-paid occupations there are opportunities to exploit workers.  It may be that Uber with its computerized collection of data will be more transparent and less exploitative. One of those who appear to have been deceived by the term “sharing economy” is Janice Stein, director of the Munk School of Global Affairs in Toronto.  In this essay she writes as if the sharing economy is a new reality based on “disruptive technologies.”  (The internal combustion engine was once a disruptive technology.) One of her criticisms of the sharing economy  is that  “The best available evidence shows that many people who seem to be stringing together part-time work in “sharing” enterprises are at or below the poverty line, with no employment benefits and a social safety net that only the state provides.”  Neither increased competition or disruptive technologies should be blamed for current economic problems. Another criticism is that people providing services are not regulated, avoid safety inspections and don’t pay taxes.  We must be careful here because regulations including safety inspections can be an excuse to limit competition.  As I understand it the new technology makes it easy for customers to provide evaluations and regulation.  A driver with and unsafe car would be quickly be called on it. Uber has been criticized for its “surge” pricing.  This is the same as time of day pricing which some power utilities are or will be introducing.  Prices should be determined by supply and demand.  One of the problems with the regular taxi business is that does not meet changes in demand throughout the day. One last concern must be privacy.  We should assume anything that happens with a computer is probably being stored and is probably available to advertisers and government agents.  Most people appear to be not worried about the amount of advertising to which they are exposed.  The risk from government is that people don’t like to be criticized.   Computerized data make it easy for government agents to decide who are the enemies of the state, anyone who disagrees with their personal beliefs, and to track them. I find that frightening. The sharing economy is making some industries more competitive which is good for consumers and maybe not so good for producers.  Its downside is the potential for social control which goes with the extensive use of computers. 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

Corporate profits, taxation and the market economy

Firms avoiding the payment of income taxes are good for headlines, but if we had a truly competitive market economy, the taxation of corporate profits would not be an issue because there would be no profits to tax.

Some people think profits are a divine right for entrepreneurs and shareholders and others see them as evil.  I see them as an  indication of the extent to which our so-called market economy is not performing the way we like to believe it does.

In a market economy a firm making profits is a signal for others to get into that field.  Competition will then force prices down till an equilibrium is reached at which there are wages and a return on investment but no profits.

Generally, the owners of businesses want to limit competition to  make as much profit as they can.  The most effective way is to get governments to pass legislation which restricts competition.   Governments are usually willing.  It is an easy way to repay obligations to supporters.  Licensing, trade restrictions, subsidies, copyright and patents all restrict competition.  The result is that consumers pay more than they should and firms make profits.   During the recent golden age of prosperity most people didn’t notice but now that things are much tighter we are noticing growing inequality and the disappearance of the middle class.

I think there is a pattern here.  Firms get legislation to limit competition and when the profits become too much for people to accept the calls for reform result in regulations.  As corporations have more lobbying power than consumers the regulations, if anything, restrict competition even more.

As profits result from a lack of competition the extent to which firms make profits are an indication of the extent to which we do not have a market economy.

If we really believed in economic equality and if we really want to limit profits we would repeal legislation that restricts competition.

 

If you like this post you are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

The U.S. election – meanness or dominance

As a Canadian I have been trying to ignore the U.S. election.   However when I saw where some libertarian market economics people were excited about the appointment of Paul Ryan as the vice-presidential candidate I decided to have a little look.

What I found is that while Ryan supports a market economy and smaller government he has proposed a 16 per cent reduction in U.S. spending on social programs.  This goes against my belief that we should have a collective responsibility to ensure everyone has the opportunity for the same standard of living as everyone else.

Another concern is that this reinforces the view that market economics is heartless and mean-spirited.   An income support scheme of some sort has to be an essential part of market economics.

On the other side of the political divide there are a lot of people who appear to believe they have a right to tell others how to live their lives.  One would expect these people to support a political party that promised to interfere in the economy and people’s lives.

So there you have it – a choice between dominance and meanness.  If I were American I would probably deliberately spoil my ballot.

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

Adam Smith and election funding

For some time I have been saying capitalism as we practice it should be defined as a system in which governments pass legislation which allows some people to make profits by restricting competition.

I hate to admit it but I have never read Adam Smith’s Wealth of Nations although some years ago I purchased a second-hand copy.

Therefore I perked up when I read a column in The Guardian that Adam Smith said something similar.

 

However, what is less well known is that Smith shared some of the key concerns of today’s critics of neoliberalism. His most famous work, The Wealth of Nations, offered a powerful political critique of the “one per cent” of his day, to borrow the terminology of the Occupy movement. In what he himself described as a “very violent attack” on an unjust status quo, Smith repeatedly emphasised the role of power, influence and class in distorting economic policy to serve the interests of a narrow elite.

 

Smith noted that the “English legislature has been peculiarly attentive to the interests of commerce” because policymakers were continually “imposed upon by the sophistry of merchants”. The vested interests “like an overgrown standing army … have become formidable to the government, and upon many occasions intimidate the legislature”. They argue their case “with all the passionate confidence of interested falsehood”, predicting national ruin if their demands are not met.

 

Now take a look at this item from The Huffington Post which reports on some aspects of financing for the current U.S. election.  It appears a lot of people with an interest in restricting competition are putting a lot of money into the election campaign.

I figure one of the most neglected features of the perfect competition model is that there should be perfect knowledge.

Therefore rather than restricting election financing I would suggest all parts of the campaign should include the source of funding and what legislation the source is interested in influencing or retaining.

I have now downloaded Adam Smith’s book onto my ereader.  That was a lot quicker than trying to find the hard copy.

 

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