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 George Reisman's Blog on Economics, Politics, Society, and Culture

March 2006  

This blog is a commentary on contemporary business, politics, economics, society, and culture, based on the values of Reason, Rational Self-Interest, and Laissez-Faire Capitalism. Its intellectual foundations are Ayn Rand's philosophy of Objectivism and the theory of the Austrian and British Classical schools of economics as expressed in the writings of Mises, Böhm-Bawerk, Menger, Ricardo, Smith, James and John Stuart Mill, Bastiat, and Hazlitt, and in my own writings.

The contents of the blog are copyright © 2006 by George Reisman. All rights reserved. Permission is hereby granted to reproduce and distribute individual articles below electronically and/or in print, other than as part of a book. (Email notification is requested). All other rights reserved. George Reisman, Ph.D., is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.


Friday, March 31, 2006

Different Flag, Different Lyrics, But the Same Old Tune

The flag is Green now, instead of Red. And the lyrics are different. But the tune is still the same old tune.

When the Reds sang it, the lyrics were that the individual could not be left free because the result would be such things as “exploitation,” “monopoly,” and depressions. When the Greens sing it, the lyrics are that the individual cannot be left free because the result will be such things as destruction of the ozone layer, acid rain, and global warming. (Add an extra chorus now for global warming.)

The tune is still that the individual cannot be left free, that he cannot be left free because his peaceful pursuit of his own happiness and prosperity somehow inflicts harm on others, and that only the government’s pointing a gun at his head will save the rest of mankind from some dreadful calamity.

The Red thugs wanted to control the economic system to set things right. The Green thugs want to control the environment, especially the climate, to set things right.

The Red thugs had no idea of what they were doing and neither do the Green thugs. Just consider this statement from a supporter of prohibitions on carbon dioxide emissions in order to stop global warming:

One of the ironies of the Arctic melting is that it runs the risk of flipping the switch on oceanic thermohaline circulation and shutting down the Atlantic current - this could lead to a sharp cooling in Europe (which lies further north than the US), and appears to have happened in the past. (Posted by “Tokyo Tom” on the Ludwig von Mises Institute’s Blog on March 30, 2006 08:24PM)

Here is someone who doesn’t even know if the global warming he wants to stop will turn out to be a continent-wide cooling instead. But that gives him no pause. He still thinks he knows enough to send the police out to stop people from acting on the knowledge they have about the good they can achieve for themselves by producing and buying goods that happen to emit some carbon dioxide into the air. Their knowledge is to count for nothing. The allegedly superior knowledge of “scientists” is to prevail—at the point of a gun.

That’s the bottom line. Pointing guns at people in the name of some higher collective good, and prohibiting them from achieving their own good. That’s socialism. That’s environmentalism.

Copyright © 2006 by George Reisman. All rights reserved. George Reisman, Ph.D., is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.


Tuesday, March 28, 2006

Collectivism, Climate Change, and Economic Freedom

An individual kills someone—for money, out of jealousy, as an act of revenge, or because he doesn’t like his victim’s looks. A chorus of left-“liberals” rushes in to excuse his act, especially if he is poor. He is not responsible, they say. The real criminal is “Society,” for having allowed him to live in the conditions that led him to kill.

Another individual owns a refrigerator, an air conditioner, and an automobile or SUV. This time, a chorus of left-“liberals” rushes in and pronounces him guilty. He is allegedly guilty of causing “global warming,” by virtue of the carbon dioxide emitted into the atmosphere by the burning of the fossil fuels required to produce and operate his goods.

The “innocent” killer is not to be punished but “rehabilitated.” The “guilty” owner of the appliances and automobile or SUV, however, is to be punished. He is to be prohibited from continuing with his evil ways. He is to be compelled by the force of law to do his part in reducing global carbon dioxide emissions, which means, he is ultimately to be deprived of his goods or, at best, to be made to accept radically smaller, less effective substitutes for them.

Clearly, there is something very wrong here. What is wrong is the influence of the philosophy of collectivism.

Collectivism considers the group—the collective—to be the primary unit of social reality. It views the collective as having real existence, separate from and superior to that of its members, and as thinking and acting, and as the source of value. At the same time, it regards the individual as an essentially inconsequential cell in the superior, living collective organism. It is on this basis that the loss of an individual’s life is considered to be of no great consequence, with the result that whatever the killer of an individual might be guilty of, it is viewed as not all that serious in the first place. And then, the killer’s actions, it is held, do not emanate from within himself but from the collectively determined circumstances in which he lives.

By the same token, if the collective, consisting of billions of individuals consuming fossil fuels over two centuries or more, is responsible for releasing enough carbon dioxide and other gases into the atmosphere to raise the average surface temperature of the Earth, then each and every individual now alive and who consumes fossil fuels is held to be responsible for the phenomenon, because no distinction is made between the individual and the collective. This is the basis on which the owner of the appliances and vehicle is held to be “guilty.” His individual emissions of carbon dioxide are seen as part and parcel of the emissions of carbon dioxide by all the members of the carbon-dioxide emitting collective taken together and as responsible for their effect.

There is a different, diametrically opposed philosophy, which has all but been forgotten. It is rarely, if ever, taught in our “culturally diverse” educational system, whose diversity consists in the teaching of numerous varieties of collectivism and the employment of many varieties of collectivists, all the while almost totally excluding this fundamentally different point of view. The name of this different philosophy is individualism. Its most important advocates are Ludwig von Mises and Ayn Rand.

According to individualism, only individuals exist; collectives consist of nothing but individuals. Only the individual thinks; only the individual acts; only the life of the individual has value and is important. All rights are rights of individuals.

On the basis of individualism, the life taken by a killer is the worst possible loss to the victim and an enormous loss to anyone who loved him. Moreover, that loss of life is the result of action that the killer chose to perform and did not have to perform. He is therefore responsible for a terrible loss and deserves to be severely punished, even to the point of losing his own life.

In contrast, no individual, and no voluntary association of individuals acting for a common purpose, such as a business corporation, is responsible for any perceptible rise in the surface temperature of the world or for any harm that could result to anyone from such a rise. When it comes to global warming, the human individual is innocent! Nor is the human “race” guilty. There is no human race apart from the individuals who comprise it. Any attempt to punish an allegedly guilty human race reduces to the attempt to punish innocent individuals.

Thus everyone must stand back and keep his hands off our appliance and vehicle owner. He has done absolutely nothing wrong. In fact, the very existence of his possessions implies that he has done a considerable amount that is right and good. He has improved his own life and probably that of family members and friends by his acquisition and use of his goods. And he has had to do good to others, in order to be able to earn the money that enabled him to buy his goods. To earn that money, he had to produce goods and services that others judged to be of more value to them than the money they paid him.

The conclusion that follows from this is that we should wish this individual well and hope for his continued and even greater success and good fortune in the future, and wish the same for all other peaceful individuals. This is known as having good will toward one’s fellow man.

Having introduced the perspective of individualism, let us now concede for the sake of argument that there actually is global warming and that the currently prevailing estimates of its future extent and consequences for rising sea levels are all perfectly accurate. (In case anyone has forgotten, those estimates are a rise in average temperature of 4 degrees Fahrenheit by 2100, accompanied by a 1 to 3 feet rise in sea-levels by that time, culminating in a cumulative rise in sea-levels of 13 to 20 feet in following centuries.) Let us also concede that if the human race did not exist or existed in the much smaller numbers and abject poverty and misery characteristic of the pre-industrial era, there would be no global warming or at least significantly less of it.

We have shown that this global warming, and any damage it may do, is still not the product of any individual human being. Nor is it the product of any such actual entity as “the human race.” There is no such actual entity. At the very most, global warming is a cumulative, unintended byproduct of human behavior for which no one is responsible.

A phenomenon for which no human being is responsible is an act of nature. That is the category to which all global warming belongs. It is an act of nature. It is an act of nature whether it comes about, as it did more than once in geologic time, in the absence of human beings from the planet, or in the presence of human beings. To repeat, it is an act of nature even when it is the unintended cumulative byproduct of the actions of billions of human beings. None of those human beings is responsible as an individual and there is no human “race” that is responsible.

With the interfering cobwebs of collectivism out of the way, and seeing global warming now as a phenomenon of nature, we are in a position to consider the question of how human beings should deal with global warming and with the wider question of how they should deal with climate change in general. For someday, there certainly will be climate change. If not global warming in this century, then, certainly, in some other century. And if not global warming, then a new ice age, which, according to some accounts is already overdue, and which mankind’s carbon dioxide emissions may have served merely to postpone.

The question of how to deal with climate change, in turn, is subsumed by the broader question of how should human beings deal with physical reality in meeting their needs and wants. It is part of that question.

And that question has already been answered—by the science of economics—and answered beyond all honest dispute. The only way for human beings to meet their needs and wants in an efficient and progressively improving way is if they produce under a system of division of labor and monetary exchange, which in turn rests on a foundation of private ownership of the means of production and economic freedom. The name for this system, of course, is capitalism. (A much smaller number of human beings than are now alive could survive without this system, as our ancestors survived, namely, as essentially self-sufficient farmers. But they would live in the poverty and misery of our ancestors, and, as stated, their number would be relatively small—a billion or so versus our present six billion or more.) For the present number of human beings to survive and to be able to enjoy the comforts, conveniences, and luxuries now found throughout the modern, industrial economies of the world, capitalism and its economic freedom are essential.

Economic freedom is what is required to cope with global warming, global freezing, or any other form of large-scale environmental or social change. If global warming turns out to be a fact, the free citizens of an industrial civilization will have no great difficulty in coping with it—that is, of course, if their ability to use energy and to produce is not crippled by the environmental movement and by government controls otherwise inspired. (This applies even to responses to natural disasters, such as hurricanes and floods, that allegedly will occur in connection with global warming. The response of a free market would be typified by that of the Biloxi, Mississippi gambling casinos in the aftermath of hurricane Katrina. Within months of being freed of restriction to riverboats and being allowed for the first time to locate on land, they sprang into existence ready and eager for action, in the midst of otherwise unrelieved devastation and paralysis, as most property owners waited for government aid from FEMA. The casino owners were fortunate in being ineligible for such aid and so took immediate action on their own. On this subject, see my blog post of March 14, 2006.)

The seeming difficulties of coping with global warming, or any other large-scale change, arise only when the problem is viewed from the collectivist perspective of government central planners. It would be too great a problem for government bureaucrats to handle, as is the production even of an adequate supply of wheat or nails, as the experience of the whole socialist world has shown. But it would certainly not be too great a problem for tens and hundreds of millions of free, thinking individuals living under capitalism to solve. It would be solved by means of each individual being free to decide how best to cope with the particular aspects of global warming that affected him.

Individuals would decide, on the basis of profit-and-loss calculations, what changes they needed to make in their businesses and in their personal lives, in order best to adjust to the situation. They would decide where it was now relatively more desirable to own land, locate farms and businesses, and live and work, and where it was relatively less desirable, and what new comparative advantages each location had for the production of which goods. Factories, stores, and houses all need replacement sooner or later. In the face of a change in the relative desirability of different locations, the pattern of replacement would be different. Perhaps some replacements would have to be made sooner than otherwise. To be sure, some land values would fall and others would rise. Whatever happened, individuals would respond in a way that minimized their losses and maximized their possible gains. The essential thing they would require is the freedom to serve their self-interests by buying land and moving their businesses to the areas rendered relatively more attractive, and the freedom to seek employment and buy or rent housing in those areas.

Given this freedom, the totality of the problem would be overcome. This is because, under capitalism, the actions of the individuals, and the thinking and planning behind those actions, are coordinated and harmonized by the price system (as many former central planners of Eastern Europe and the former Soviet Union have come to learn). As a result, the problem would be solved in exactly the same way that tens and hundreds of millions of free individuals have solved much greater problems than global warming, such as redesigning the economic system to deal with the replacement of the horse by the automobile, the settlement of the American West, and the release of the far greater part of the labor of the economic system from agriculture to industry.

This is not to deny that important problems of adjustment would exist if global warming did in fact come to pass. But whatever they would be, they would all have perfectly workable solutions. The most extreme case would be that of the Maldive Islanders, in the Indian Ocean, all of whose land might disappear under water. The population of the Maldive Islands is less than two hundred thousand people. In 1940, in a period of a few days, Great Britain was able to evacuate its army of more than three hundred thousand soldiers from the port of Dunkirk, under the threat of enemy gunfire. Surely, over a period of decades, the opportunity for comfortable resettlement could be arranged for the people of the Maldives.

Even the prospective destruction of much of Holland, if it could not be averted by the construction of greater sea walls, could be dealt with by the very simple means of the United States and Canada joining with the European Union in extending the freedom of immigration to Dutch citizens. If this were done, then in a relatively short time, the economic losses suffered as the result of physical destruction in Holland would hardly be noticed, and least of all by most of the former Dutchmen.

For densely populated, impoverished countries with low-lying coastal areas, like Bangladesh and Egypt, the obvious solution is for those countries to sweep away all of the government corruption and underlying irrational laws and customs that stand in the way of large-scale foreign investment and thus of industrialization. This is precisely what needs to be done in these countries in any case, with or without global warming, if their terrible poverty and enormous mortality rates are to be overcome. If they do this, then the physical loss of a portion of their territory need not entail the death of anyone, and, indeed, their standard of living will rapidly improve. If they refuse to do this, then nothing but their own irrationality should be blamed for their suffering. The threat of global warming, if there is really anything to it, should propel them into taking now the actions they should have taken long ago.

Indeed, it would probably turn out that if the necessary adjustments were allowed to be made, global warming, if it actually came, would prove highly beneficial to mankind on net balance. For example, there is evidence suggesting that it would postpone the onset of the next ice age by a thousand years or more and that the higher level of carbon dioxide in the atmosphere, which is supposed to cause the warming process, would be highly beneficial to agriculture by stimulating the growth of vegetation. Growing seasons too might be extended. Furthermore, any loss of agricultural land, such as that which is supposed to take place in low-lying areas as the result of higher sea levels, would be far more than compensated for by vast quantities of newly useable land in central Canada, Alaska, Siberia, and Greenland.

Whether global warming comes or not, it is certain that nature will sooner or later produce major changes in the climate. To deal with those changes and virtually all other changes arising from whatever cause, man absolutely requires individual freedom, science, and technology. In a word, he requires the industrial civilization constituted by capitalism. What he does not require is the throttling of his ability to act, by the environmental movement. If it really is the case that the average mean temperature of the world will rise a few degrees in the next century as the result of the burning of fossil fuels and of other modern industrial processes, the only appropriate response is along the lines of being sure that more and better air conditioners are available.

In absolutely no case would the appropriate response be that of the environmentalists, who seek to throttle and destroy industrial civilization by means of massive restrictions on the use of energy. The environmentalist solution to global warming is the diametric opposite of economic freedom and the pursuit of material self-interest that it allows and the economic success that that pursuit brings. The environmentalist solution is the massive violation of economic freedom and the imposition of massive economic sacrifice, in the insane belief that the way to cope with the destructive forces of nature is to deprive man of his means of coping with them, as though he, and not nature were the cause of those destructive forces, as though nature, left to itself, were benign.

Yes, man’s economic activity can sometimes have negative by-products, on the scale of droplets of harm compared with tank-car loads of good. There have been two centuries of the most rapid economic progress and improvement in the history of the world, elevating the lives of hundreds of millions of people above that of the kings and emperors of history, and holding out the potential for the whole population of the world to be similarly elevated. If the price of this scale of good is to be the existence of higher sea-levels and some very bad weather, that is a tiny price indeed. And the answer to the bizarre fears of such things is that under capitalism, man will deal with any such negative forces of nature resulting as by-products of his activity in precisely the same successful way that he regularly deals with the primary forces of nature.

Primitive man, the ideal of the environmentalists, was incapable of successfully coping with climate changes. Modern man, thanks to industrial civilization and capitalism, is capable of successfully coping with climate changes. To do so, it is essential that he ignore the environmentalists and not abandon the intellectual and material heritage that elevates him above primitive man. The grandchildren of those who endured World War II and its massive air raids and battles on land and sea, to preserve the freedom and way of life of the Western World from tyranny, should not now run away in terror from the threat of hurricanes and floods. Moreover, adopting the program of the environmentalists and throttling the production of energy, will not save the condos in South Florida or the Malibu beachfront, or any thing else of value. They will be useless without the energy production required for people to access them and enjoy them. And when hurricanes and floods come, as they inevitably do, those who have adopted the environmentalists’ program will simply be unable to cope with them.

Marxian “scientific socialism” was collectivism in its boisterous, arrogant youth. Environmentalism is collectivism in its demented old age. It will be much easier to overcome than was Marxism. Marxism, however falsely and dishonestly, at least promised major positives: the unlocking of human potential and the achievement of future material prosperity. Environmentalism is reduced to trying to find terrified people with less than the mentality of children, to whom it can offer the prospect of avoiding wind and rain. It is the intellectual death rattle of collectivism. When it has been overcome, a world-embracing capitalist economy will be able to come into existence and be capable in fact of achieving unprecedented economic progress and prosperity across the entire globe.

Copyright © 2006 by George Reisman. All rights reserved. George Reisman, Ph.D., is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics. Most of the material in this article has been taken from Chapter 3 of Capitalism.


Saturday, March 25, 2006

The Environmentalists Are Trying to Frighten the Natives

In a manner reminiscent of witch doctors urging primitive people to sacrifice their sheep and goats in order to mollify the wrath of the gods, today’s environmentalists and their shills in the media and academe repeatedly urge the people of the United States and the rest of the modern world to sacrifice their use of energy and their standard of living in order to avoid the wrath of the Earth and its atmosphere. That wrath will allegedly take one form or another: a new ice age (recall the predictions of Paul Ehrlich) or, if not a new ice age, then global warming and a resulting rise in sea levels. And if global warming and a rise in sea levels of 1 to 3 feet over the next 100 to 150 years is not sufficiently frightening, then a rise in sea levels of 13 to 20 feet over centuries lying still further in the future is projected. Both of these sea-level results are supposed to proceed from a projected rise in average global temperature of 4 degrees, and of average temperature in the Arctic specifically of 5 to 8 degrees. (See “Melting Ice Threatens Sea-Level Rise” and “Climate Data Hint at Irreversible Rise in Seas” in today’s [March 25, 2006] New York Times.)

None of these predictions is based on any kind of scientific experiment. Nor could they be. A scientific experiment would require a laboratory somewhere that contained two identical planets, Earth 1 and Earth 2. There would be just one difference between them. The human population of Earth 1 achieves an Industrial Revolution and rises to the level of energy use and standard of living of our own present-day Earth and its likely level of energy use within the next century. In contrast, the human population of Earth 2 fails to advance beyond the energy use of the Dark Ages or pre-industrial modern times. And then the scientists in the laboratory observe that the average temperature of Earth 1 comes to exceed the average temperature of Earth 2 by 4 degrees, and that of its Arctic region by 5 to 8 degrees, and that its sea level proceeds to rise by the number of feet described, while the sea level of Earth 2 remains unchanged.

Obviously, this is not how such temperature and sea-level projections are arrived at. They are reached on the basis of combining various bits and pieces of actual scientific knowledge with various arbitrary assumptions, which combinations are then fed into computers and come out as the results of “computer models.” Different assumptions produce different results. The choice of which bits and pieces of scientific knowledge to include also produces different results. The process is very similar to an individual with a spreadsheet combining various financial formulas with various assumptions about rates of return, periods of time, tax rates, and so forth, and then coming out with projections of his retirement income.

Imaging being a member of a jury, charged with deciding the guilt or innocence of a defendant on the basis of such computer models. Would it then be even remotely possible to render a verdict that met the standard of “guilty beyond a reasonable doubt.”

Yet this is the caliber of the evidence on the basis of which the environmentalist prosecutors/persecutors of Industrial Civilization want us to convict it and condemn it to death. Yes, the death of the Industrial Revolution and Industrial Civilization. That is what is meant by such statements as, “`we will have to commit soon to a major effort to stop most emissions of carbon to the atmosphere,’” i.e., to stop the consumption of most or all oil, coal, and natural gas, and thus throw the world back to the pre-Industrial ages. (This particular statement was made by Dr. Jonathan T. Overpeck of the University of Arizona, one of the “scientists” referred to in The Times’ articles. Its meaning is supported by major segments of the environmental movement with little or no opposition from the rest of the movement.)

Industrial Civilization is not a disembodied concept. It is the foundation of the material well-being and of the very lives of the great majority of the 6 billion or more people now living. It’s destruction would mean the collapse of the production of food and medicine and literally result in worldwide famines and plagues. This is a result that would be of great satisfaction to those environmentalists who believe that the pre-Industrial World’s population limit of about a billion people was somehow more desirable than the subsequent growth in population to its present size. But it would not be of any comfort or joy to those who had to suffer and die in the process and who saw their loved ones suffer and die. Nor would it be of any comfort or joy to the survivors, who would have to live lives of abject poverty and misery.

There are juries that bring in verdicts in defiance of all reason. The question is, is the jury of contemporary public opinion in the developed world in general and in the United States in particular so simple minded and irrational as to bring in a totally unjustified death-penalty verdict not only against modern Industrial Civilization, but against most of the human race at the very same time?

Copyright © 2006 by George Reisman. All rights reserved. George Reisman, Ph.D., is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.

Thursday, March 23, 2006

My Pepperdine Syllabi, One "Micro" and One "Macro"

Now that my relationship with Pepperdine University has been finalized (I was given the title of “Professor Emeritus”), I want to make my syllabi available to anyone who may be interested. I’ve got basically two of them (one “micro” and the other “macro”). Each of them has eight supplements. The arrangement is somewhat complex and the way I handled it was with a course web site. I’ve now recreated and somewhat updated that web site. The link is The site also contains many hundreds of essay and short-answer questions on my book Capitalism. In my judgment, which others will doubtless dispute, these syllabi are useable in Economics 101 to 801 and 102 to 802.

Much of this material has been incorporated into the manual for my Program of Self-Education in the Economic Theory and Political Philosophy of Capitalism. But I think it’s much more effective in this format. I’ve added to the above syllabi my syllabus for the Program, which incorporates numerous supplementary readings that I recommend.

Judging from the hit counter on its home page, the response to my Pepperdine website with its syllabi and syllabus supplements has already been much greater than I expected. This has motivated me to start making the supplements as fully functional as they were when I used them in my classes.

I’ve begun with material directly related to my most recent post "Production Versus Consumption.” So, if anyone is interested in a look at the Productionist and Consumptionist aggregate demand curves, please go to the site, come down in the left hand frame until you get to the link “477_Supplement_2.” When you click on it, the pdf file that comes up will have hyperlinks of its own, indicated either by a thin blue box or a blue underline, depending on the version of the Adobe Reader that you have. Clicking on the first link will take you to the Productionist aggregate demand curve and the surrounding discussion in Capitalism, clicking on the second one will take you to the Consumptionist aggregate demand curve and surrounding discussion.

There are five additional links in the supplement, which go to figures and tables in Capitalism illustrating Say’s Law.

The operation of the links is quirky and it’s possible they may not even work for everyone. I’m trying to get the kinks out and I welcome reports of any problems (and also successes). Whether the links work well or poorly, I’d appreciate knowing your operating system, version of Acrobat or Acrobat Reader, and the browser you’re using, including its version number.

Thank you for your help.
George Reisman

P. S. Please send the results to me at

P.P.S. The pagination in the online version of Capitalism has now been greatly improved, because the Acrobat Reader now distinguishes between Roman and Arabic numerals.

Thursday, March 16, 2006

Debunking a Reported Defiance of Economic Law in South Korea

Today’s [March 16, 2006] New York Times reports as news a story which, if true, would be an event in defiance of economic law and thus a literal miracle, comparable to the raising of the dead or a virgin birth. This alleged miracle is contained in the headline “In Korea, Bureaucrats Lead the Technology Charge.”

The opening paragraph of the article gushes, “With Korea's aggressive electronics conglomerates leading the world's markets into the next frontiers of high technology, an unlikely commander is heading the charge: the government.” This supposedly is the same government and the same bureaucrats who, in the article’s words, led “a push into biotechnology that produced a national scandal over faked stem cell research.” (The scandal first became public last December.)

Reading further into the article, however, one learns some very significant information. Namely, the head of the country’s Ministry of Information and Communication—the ministry described as the leading governmental actor in information technology in South Korea, “with a budget of nearly $1 billion to promote new technologies”—is one Chin Dae Je. Apparently with no awareness of its significance, the article mentions that before becoming minister of information three years ago, Mr. Chin was an executive of Samsung Electronics. The same paragraph in the article also reveals that he “consulted with his former Samsung colleagues, along with other big Korean companies, to pick technologies that would help the nation `leap into the leadership position in the I.T. field.’”

Based on this information, here’s my hypothesis, which I think is far more plausible than financially disinterested Korean bureaucrats glued to following government regulations, somehow suddenly, causelessly, becoming responsible for the country’s economic success: The parties leading the technology charge, and at the same time using the Korean government as a vehicle serving their financial self-interests, are Samsung Electronics and other Korean firms. Their executives tell the bureaucrats what to do. All that’s happened is that they’ve managed to obtain government financing for some of their research. (Of course, sometimes, acting through the government, they may also tell some competitors what to do, which makes it looks like initiative is coming from the government.)

On other occasions, they’ve no doubt managed to obtain other forms of government subsidization, such as, perhaps, some road construction or river and harbor improvements. Looked at in this light, there’s actually nothing more surprising going on in Korea today than went on in our own country in much of the 19th Century, when businessmen used the government under Republican administrations to enact protective tariffs on their behalf. (This, of course, still goes on today in our country, in far more varied forms than tariffs and on a much larger scale than in the 19th Century.)

The same principle of businessmen using the government for their own ends undoubtedly applies to Japan and the alleged role of its Ministry of International Trade and Industry in the success of the Japanese economy. And it applies to every other case of alleged government responsibility for the economic success of a country.

Such behavior on the part of businessmen is morally wrong and economically debilitating. It is morally wrong because it entails initiating physical force against others, for example, in the collection of taxes to pay for the subsidies. It is economically debilitating in all of its forms: Government sponsorship of research easily becomes government control of research and the destruction of research. Protective tariffs distort production and hold down real incomes, living standards, and the ability to save and invest. Roads and river and harbor improvements would be more efficiently built and operated by private firms than by the government.

But such behavior on the part of businessmen is at least intelligible and proceeds from the operation of financial self-interest, albeit misguided financial self-interest. With a proper limitation on the powers of government, it is capable of being rechanneled into morally proper and economically sound forms. It stands on a much higher rung in hell than the dull, dead hatred of self-interest, success, and wealth that so often proceeds from within government itself and always proceeds from ideologues seeking to use government to impose their wealth and life-hating philosophies.

Corrupt businessmen are infinitely cleaner and better than corrupt ideologues. They’re still willing to take money to do what a customer wants. The corrupt ideologue in contrast is unwilling to take money to stop doing what his victim does not want. If I had to choose, I’d take the corrupt businessman any day.

It’s sign of the corruption of our culture that today, businessmen feel the need to hide behind the mantle of corrupt ideology and pretend that what springs from their fundamentally life-giving self-interest comes instead from the government, the agency that can give only destruction and death.

Copyright © 2006 by George Reisman. All rights reserved. George Reisman, Ph.D., is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.

Wednesday, March 15, 2006

In the U.S. Senate the Guilty Interrogate the Innocent

In an article titled “A Senate Panel Interrogates Wary Oil Executives” today’s New York Times reports that “The nation's top oil executives were called before Congress again yesterday to defend their industry's recent mergers and record profits, in the face of public outrage over high oil and gasoline prices.”

Judging from The Times’ article, the hearings touched on everything but the simple, obvious cause of high oil and gasoline prices. They dealt with mergers in the oil industry, which, it was recognized by Senator Feinstein (Democrat from California), have served to lower costs of production in the industry. Somehow neither she nor, apparently, any of the other senators present, could see that the resulting lower costs would naturally result in lower prices if that were the only factor operative. (Lower prices would be necessary in order to derive competitive advantage from the lower costs and the mergers that produced them. Absent lower prices, smaller-scale, higher-cost firms would be just as profitable as before. But with lower prices, they would not be and would thus have to yield market share to the merged and now lower-cost producers.)

A witness (a professor in the business school at UC Berkeley) seemed to want to say that gasoline prices had risen because the world price of oil had risen, which, in The Times’ reporter’s words at least, made the oil companies “not solely responsible for high gasoline prices.”

Two Republican senators, Specter from Pennsylvania and DeWine from Ohio, placed the blame on OPEC. And Senator Specter has apparently proposed legislation to allow the U.S. government to take legal action against OPEC for its fixing of oil prices.

I titled this article “In the U.S. Senate the Guilty Interrogate the Innocent.” A more complete title would be, “In the U.S. Senate, Senators Serving the OPEC Cartel Interrogate American Energy Producers Whom They Prevent from Breaking that Cartel.”

How do U.S. Senators, and the whole US government, do this? They do it by preventing the expansion in domestic oil production that could take place in Alaska, offshore on the continental shelf, and in the vast territories that have arbitrarily been set aside as wildlife preserves and wilderness areas and closed to oil drilling. They also do it by preventing the construction of new atomic power plants and by impeding the mining of coal and the development of additional supplies of natural gas.

Larger supplies of domestically produced oil would increase the world supply of oil and drive down its price. And they could do so very dramatically, because just as a few percent decrease in the supply of oil is capable of increasing its price by a multiple of several times that few percent, so a few percent increase in the supply of oil would work just as powerfully in the opposite direction.

At the same time, the availability of larger supplies of atomic power, coal, and natural gas, would reduce the demand for oil, since the additional supplies of these fuels would replace oil to an important extent. The oil no longer needed by an electric utility, for example, because that utility would now use atomic power or burn coal, that oil would have to find some alternative use, and to open up that use its price would have to be substantially lower.

Our government’s policy of preventing the increase in the supply of oil, atomic power, coal, and natural gas, is what is responsible for the high prices of oil and gasoline that we must now pay. Let it just get out of the way, and the supply of all these forms of energy will dramatically increase and the price of oil and gasoline will fall, even more dramatically.

Every senator who votes to place obstacles in the way of U.S. energy production, who helps to harass U.S. energy producers, is voting to hamper OPEC’s most important competitors and to allow OPEC to go on obtaining high prices. Such senators are the ones who bear responsibility for the high price of oil and gasoline. They are senators serving OPEC not the American people.

They are the ones who deserve to be interrogated, in order to learn how they could be so blind, so stupid, and so destructive.

Copyright © 2006 by George Reisman. All rights reserved. George Reisman, Ph.D., is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.

Tuesday, March 14, 2006

Devastation and Recovery: Reconciling Contrary Observations in Biloxi, Mississippi

A front-page story in today’s [March 14, 2006] New York Times, datelined Biloxi, Miss., reports,

The devastation of the coast here remains shocking to the uninitiated eye; towns where people have clearly worked night and day just to remove debris look as though they were hit by a hurricane six days ago, rather than six months.

 However, just two paragraphs later we are told,

Biloxi is still a tangle of crumbling buildings, bent signs and silent streets. But all that changes in the parking lots of the three casinos that have opened on land, where drivers are lucky to find a space. Crowds appear within the casinos from seemingly nowhere, as if planted in place, with people holding cocktails and clutching room keys that double as casino entry cards in the cavernous, smoke-fogged halls.

Before hurricane Katrina, there were no casinos on land in Mississippi. They had all been on riverboats. The legislation authorizing them on land was enacted only after Katrina.

So how does it happen that brand new casinos spring up in months, while during the same period the rest of the region devastated by the hurricane simply continues to be devastated, showing hardly any signs of recovery?

Here’s a hypothesis to explain the disparity: The casinos are privately owned, profit-seeking business firms of a kind ineligible to receive government financial assistance. Thus, as soon it became legal to pursue an opportunity to make a good profit by opening casinos, their owners proceed to do just that, as quickly and as efficiently as possible.

In contrast, the rest of Biloxi and the Mississippi coast, and apparently most of New Orleans as well, are on hold, waiting for government money and busy doing whatever it may be that the government requires as a condition for receiving its money. Possibly, they are busy simply trying to learn what the government requires them to do as a condition for receiving its money. Possibly, the government itself is busy trying to figure out what it wants them to do as a condition for receiving its money.

If this line of explanation is correct, and I am confident that it is, then it follows that if one wants rapid recovery from large-scale disasters, the government should offer no financial assistance and offer absolutely no prospect of financial assistance.

Is there anything else the government might do, or not do, to speed recovery in such cases? Yes. It should suspend all requirements for obtaining permits of any kind relating to building and construction and the opening of new businesses, including, above all, requirements for environmental impact statements and their approval.

Further, the government should not wait for new disasters to strike. Legislation suspending permitting requirements during the aftermath of disasters should be enacted well before the next one occurs. That would permit banks and insurance companies to develop their own criteria for making loans and writing insurance policies in the absence of governmental requirements.

Given these changes, natural disasters would be followed by the most rapid possible recoveries. The freedom to respond to them would go a very long way in diminishing their character as disasters.

Copyright © 2006 by George Reisman. All rights reserved. George Reisman, Ph.D., is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.

Wednesday, March 08, 2006

The Global Warming Bugaboo

The environmental movement maintains that science and technology cannot be relied upon to build a safe atomic power plant, to produce a pesticide that is safe, or even to bake a loaf of bread that is safe, if that loaf of bread contains chemical preservatives. When it comes to global warming, however, it turns out that there is one area in which the environmental movement displays the most breathtaking confidence in the reliability of science and technology, an area in which, until recently, no one—not even the staunchest supporters of science and technology—had ever thought to assert very much confidence at all. The one thing, the environmental movement holds, that science and technology can do so well that we are entitled to have unlimited confidence in them is forecast the weather—for the next one hundred years!

It is, after all, supposedly on the basis of a weather forecast that we are being asked to abandon the Industrial Revolution or, as it is euphemistically put, “to radically and profoundly change the way in which we live”—to our enormous material detriment. We are being asked to freeze and then progressively reduce global carbon dioxide emissions and, of course, to correspondingly reduce our consumption of the oil, coal, and natural gas that causes these emissions. Indeed, according to The Earth Policy Institute, “Scientists believe that an immediate 70–80 percent reduction in current carbon emissions is necessary to mitigate further climate change.” And we had all better be ready to throw away our refrigerators, wear plenty of sweaters in the winter, fan ourselves in the summer, and ride bicycles or walk to wherever we need to go.

Of course, any global limitation on carbon dioxide emissions whatever, let alone a 70-80 percent reduction, implies that the economic development and hence increased energy consumption and carbon dioxide emissions of the vast presently backward regions of the world would have to be accomplished at the expense of the equivalently reduced energy consumption and carbon dioxide emissions of the more advanced countries. Thus, as much as the two and a half billion or so people of China and India consumed more energy, the billion or so people of the United States, Western Europe, and Japan would have to consume equivalently less energy.

Very closely connected with the demand for reduced carbon-dioxide emissions and energy consumption is something else that might appear amazing. This concerns prudence and caution. No matter what the assurances of scientists and engineers, based in every detail on the best established laws of physics—about backup systems, fail-safe systems, containment buildings as strong as U-boat pens, defenses in depth, and so on—when it comes to atomic power, the environmental movement is unwilling to gamble on the unborn children of fifty generations hence being exposed to harmful radiation. But on the strength of a weather forecast, it is willing to wreck the economic system of the modern world—to literally throw away industrial civilization!

The meaning of this insanity is that industrial civilization is to be wrecked because this is what must be done to avoid bad weather. All right, very bad weather. The very bad weather of hurricanes like Katrina.

In a manner reminiscent of an old Hollywood movie in which some great white hunter might attempt to frighten a tribe of jungle savages in darkest Africa, the environmentalists tell a badly dumbed-down American public that Katrina and worse hurricanes to come are the result of global warming resulting from fossil fuel consumption. They tell us in effect, that if we destroy the energy base needed to produce and operate the construction equipment required to build strong, well-made, comfortable houses for hundreds of millions of people, we shall be safer from such hurricanes than if we retain and enlarge that energy base. They tell us that if we destroy our capacity to produce and operate refrigerators and air conditioners, we shall be better protected from hot weather than if we retain and enlarge that capacity. They tell us that if we destroy our capacity to produce and operate tractors and harvesters, to can and freeze food, to build and operate hospitals and produce medicines, we shall secure our food supply and our health better than if we retain and enlarge that capacity.

There is actually a remarkable new principle implied here, concerning how man can cope with his environment. Instead of our taking action upon nature, as we have always believed we must do, we shall henceforth control the forces of nature more to our advantage by means of our inaction. Indeed, if we do not act, no significant threatening forces of nature will arise! The threatening forces of nature are not the product of nature, but of us! Thus speaks the environmental movement.

More on this madness will follow.

Copyright © 2006 by George Reisman. All rights reserved. George Reisman, Ph.D., is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.

Saturday, March 04, 2006

Ayn Rand Answers, The Best of Her Q&A, Edited by Robert Mayhew, New American Library, 2005. x + 241 pp.

Ayn Rand’s question-and-answer sessions following her lectures, and following the lectures of Nathaniel Branden, were always a fascinating display of her brilliance. They showed an incredibly powerful mind at work on the spot, instantaneously able to unravel virtual pretzels of mistaken premises, errors of logic, and, not infrequently, one or more forms of dishonesty, and bring everything into the clearest, sharpest light. Watching her do this incredible work, I came to think of her as a kind of avenging angel, routinely righting the intellectual wrongs that were destroying our culture and that almost always went unanswered. She answered them—in spades! I thought of her as taking the questions of intellectual shysters and hanging them with them.

Few things could be more valuable for advancing Ayn Rand’s philosophy of Objectivism, rescuing contemporary culture from the philosophical poison that is destroying it, and, at the same time, giving a sense to those who never met her of what Ayn Rand was like in person, than making her Q&A sessions available to the public, in the original, spoken form in which they took place and were recorded.

Unfortunately, this was not the approach taken by Prof. Mayhew and Leonard Peikoff, whom Prof. Mayhew credits with having encouraged him to undertake the project. Instead of remaining faithful to the oral nature of the material being presented, they decided to make a book out of it, which it never was and now cannot properly be.

Speaking is not writing. Converting lectures, and still more, spontaneous answers in question periods, into the form of an essay or book requires editing and a process of considerable intellectual refinement. As a result, in order to put her oral material into the form of a book, Prof. Mayhew was placed in the impossible position of trying to improve upon Ayn Rand. This is an assignment that no one in the world would be capable of carrying out but Ayn Rand herself.

It was totally unnecessary to attempt it. Making the attempt must rank as a classic example of context dropping. Of dropping the context that while carefully considered, edited writing is superior to spontaneous speech, it by no means follows that the most carefully considered, edited writing produced by Robert Mayhew is superior to the spontaneous speech of Ayn Rand. Nothing can be gained from attempting such a conversion when there is no one alive capable of reliably carrying out the conversion.

The result of Prof. Mayhew’s misguided attempt is a product that, in his own words, “should not be considered part of Objectivism.”

In his view, the reason is simply that “no one can guarantee that Ayn Rand would have approved of editing she herself did not see.” But these words subsume something much more substantial. This is revealed when Prof. Mayhew says, “I should mention, however, that some (but not much) of my editing aimed to clarify wording that, if left unaltered, might be taken to imply a viewpoint that she explicitly rejected in her written works.”

Here we have a confession that the content of some of Ayn Rand’s answers has been materially altered, indeed, apparently transformed, at least in part, into the very opposite of what she actually said. We have no way of knowing if what was involved was a mere act of misspeaking, or something of real significance, possibly representing a change in her position on a subject. We cannot know if Ayn Rand was addressing a complexity in her position that was too subtle for Prof. Mayhew to follow and that he mistakenly inferred a contradiction of her published position when in fact there was none. Whatever the explanation may be, the reader will never know. Nor will anyone know what significant new knowledge the world may have been deprived of because Prof. Mayhew assumed that he was entitled to correct Ayn Rand.

Even the most minimal respect for honesty would have required explicitly naming all such Q&As and providing the exact text of Ayn Rand’s answers in all such cases. If transcripts were not to be provided for all the Q&As, they should most certainly and absolutely have been provided in cases of this kind. That way, the reader would know what Ayn Rand actually said, not what Prof. Mayhew had decided she should be allowed to say. In his capacity as editor, Prof. Mayhew could have argued for his particular interpretation in a footnote if he wished, but not present his interpretation as though it were the view of Ayn Rand.

But with the most cavalier disrespect for his readers’ independence and powers of judgment, Prof. Mayhew not only does not provide the transcripts necessary to know what Ayn Rand actually said, but he does not even tell us which particular answers of Ayn Rand he has altered in this way nor how many answers he has altered in this way. The result is that a reader who has had no first-hand experience with Ayn Rand’s answers can never be sure if what he is reading on any given page is the views actually expressed by Ayn Rand in a Q&A or some distortion of Ayn Rand’s views invented by Prof. Mayhew. In effect, his policy of disrespect and secretiveness has substantially destroyed the value of the whole book.

Many years ago, there was a young actress to whom Ayn Rand gave the responsibility of directing a production of her play “The Night of January 16th.” Toward the close of the play’s run, an actor prevailed upon this young woman to allow him to alter one of Ayn Rand’s lines in one of the play’s last performances. When Ayn Rand learned of this, she was furious and completely ended her relationship with this young woman, who had been in her inner circle for several years. Ayn Rand attached the highest value to her every word and would never agree to her words being altered by anyone, let alone made to represent the opposite of what she said.

I cannot say if Ayn Rand were alive and knew what Prof. Mayhew had done with her words, and what Leonard Peikoff had allowed and encouraged him to do, that neither of these gentlemen would now still be alive. Ayn Rand would not literally have killed them, though she might have thought about it. What I can say is that neither of them would ever again be welcome to touch a single word or thought of hers.

Copyright © 2006 by George Reisman. All rights reserved. George Reisman, Ph.D., is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.

Wednesday, March 01, 2006

Answer to Krugman on Economic Inequality

Paul Krugman is very upset. In his Monday New York Times Op-Ed column this week, he complains that while the real incomes of the great majority of Americans have essentially stagnated or declined over the last thirty-five years, “income at the 99th percentile rose 87 percent; income at the 99.9th percentile rose 181 percent; and income at the 99.99th percentile rose 497 percent.”

He describes the situation as one of “a rising oligarchy” and says, “[i]t suggests that the growth of inequality may have as much to do with power relations as it does with market forces.” Krugman does not explain what he means by “power relations” beyond implying that economic inequality in and of itself is their cause. “There's an arrow of causation,” he says, “that runs from diverging income trends to Jack Abramoff and the K Street project [a project designed to enmesh Republican politicians and lobbyists].”

The essential thing to understand here about Krugman is that he is a Keynesian. And as Mises observed, “The essence of Keynesianism is its complete failure to conceive the role that saving and capital accumulation play in the improvement of economic conditions.” This failure is present in Krugman’s hostility to economic inequality.

Krugman and all other enemies of economic inequality conceive of wealth and income strictly in terms of consumers’ goods. As they see matters, a wealthier, higher-income individual simply has more goods and services that he personally can enjoy than does the average person. This view is reflected in the typical depiction of capitalists as fat men, whose plates are overflowing with superfluous food, while struggling wage earners starve. The alleged solution is to take from the surplus of the capitalists and make good the deficiency of the wage earners.

The truth, which real economists, from Adam Smith to Mises, have elaborated, is that in a market economy, the wealth of the rich—of the capitalists—is overwhelmingly invested in means of production, that is, in factories, machinery and equipment, farms, mines, stores, and the like. This wealth, this capital, produces the goods which the average person buys, and as more of it is accumulated and raises the productivity of labor higher and higher, brings about a progressively larger and ever more improved supply of goods for the average person to buy.

Thus, for example, because the automobile companies have numerous modern and efficient automobile factories, there is a production of automobiles sufficient for almost every family in the United States to own one. Because Exxon-Mobil and other oil companies own oil wells, pipelines, and refineries, there is gasoline and heating oil for the average American to buy. (And if the wealth of these companies were greater, and if its use in developing sources of supply were not blocked again and again by those who value the wildness of nature above the welfare of people, there would be a larger and more affordable supply of gasoline and heating oil to buy.)

The capital of business firms is also the foundation of the demand for labor. The wealthier and more numerous are business firms, the greater is the demand for labor and the higher are wage rates. As illustration, just consider where it is more desirable to work: in an economy with few or no business firms or only small, impoverished business firms, or in an economy with large numbers of wealthy business firms. It is obvious whose competition for one’s services will be more beneficial.

Thus, in a market economy, people have a two-sided benefit from the capital owned by others. The capital of others is the source of the supply of the goods they buy and the source of the demand for the labor they sell. And the greater is that capital, the greater is this two-sided benefit to everyone. To the extent that the supply of goods produced is greater, prices are lower. And to the extent that the demand for labor is greater, wages are higher. Lower prices and higher wages: that is the effect capital accumulation.

An essential prerequisite of capital accumulation is saving. What is saved out of income is added to capital.

For a variety of reasons, the incomes that are most heavily saved and invested are higher incomes rather than lower incomes. A major reason is that high incomes are often earned as high rates of return on capital, and, by being heavily saved and invested, are the means of building a personal fortune. Such high incomes, moreover, are earned as the result of introducing new and better products and more efficient methods of production. Their being heavily saved and invested and thus enlarging the capitals employed makes possible an increased production of the new and better products and a wider application of the more efficient methods of production.

To the extent that our economy is still free, all this is undoubtedly true of the high incomes Krugman complains about. They are the incomes of the great innovators of our time, such as Bill Gates, Michael Dell, Steve Jobs, and Sam Walton—the men whose efforts have transformed important parts of our economic system and who could not have done it had they not been free to earn and then save and invest extraordinarily high incomes.

Of course, not all the high incomes earned in our economy are of this character. There are also high incomes earned as the result of government subsidies and government harassment of competitors. And there are high incomes earned by trial lawyers who bring bogus class-action law suits. These incomes are earned largely at the direct expense of the innovators. And precisely because of this, it should be clear, they are earned indirectly at the expense of everyone else in the economic system.

The essential point here is that the economic inequality that results from economic freedom is to the material self-interest of everyone. It is the foundation of rising real wages and a rising standard of living.

Given the actual nature of economic inequality under economic freedom, how can we reconcile the apparent side-by-side existence of greater economic inequality with economic stagnation or outright decline?

Some part of the answer may be that the increase in the degree of economic inequality is only a matter of appearance, not reality. The lower income tax rates of the last generation may well have resulted in the reporting of substantial high incomes that were previously concealed by means of various methods of tax avoidance.

But let’s put that aside and proceed to a more substantial answer. This is an answer suggested, surprisingly enough, by Krugman himself, when he referred to “power relations” in contrast to “market forces.”

“Power relations”—i.e., the use of physical force by one person or group against another—are present in all forms of government intervention in the economic system. There is no law, regulation, ruling, edict, or decree whose enforcement does not rest on the threat of sending armed officers to arrest and imprison violators, and, if they resist, to kill them if necessary.

This force is appropriate when used against common criminals, whose defining characteristic is that they themselves have previously used force against innocent victims, in committing such acts as robbery, rape, and murder. In cases of this kind, the government’s use of force serves to protect the innocent and to enable them to go about the peaceful pursuit of their happiness.

Government intervention in the economic system, in contrast, is the use of force not against common criminals, who have previously initiated its use, but against peaceful citizens engaged in production and voluntary exchange and whose only “crime” is that they have done something the government has decided it does not like. This force serves to prevent people from doing what they judge to be in their interest to do and to compel them to do what they judge to be against their interest to do.

In all cases of this kind, the government’s force operates to make people worse off than they could have been. And the more extensive the government’s intervention becomes, the greater becomes the gap between the life that people must live and the better life they could have lived had the government not stood in their way. At some point government intervention becomes sufficient to cause people to live not only worse than they might have lived, but worse than they actually did live in the past.

This last is what has been happening to the American people since the era of the “New Frontier” and the “Great Society.” Since that time, the weight of government intervention has become sufficient to stop or nearly stop economic progress for large numbers of Americans and to cause actual economic decline for many.

Inflation, Social Security, and Medicare undermine the incentive to save and accumulate capital. Vast government budget deficits absorb large amounts of the savings and capital that do exist and divert them from business investment to financing the government’s consumption. More recently, the government-engineered housing boom, built on the foundation of artificially low interest rates imposed by the Federal Reserve, has operated in a similar way and diverted further vast sums from business investment to housing purchases. And before the housing boom, the dot-com bubble, also created by the Federal Reserve, created the illusion of vast wealth and capital that served to squander substantial portions of the capital that did exist.

Inflation has also played a major role in enlarging the highest incomes in the economic system. This has been the case insofar as inflation (understood in terms of an increase in the quantity of money) entered the economic system in the form of new loans that served to drive up securities prices and thus the value of stock options. Take this away, and the rise in the highest incomes over the period that Krugman complains about would be much less, if it existed at all.

But there is more. The last forty years or so have seen the imposition of environmental legislation and consumer product safety legislation, and numerous other government programs that serve to increase the costs of production. The great majority of people assume that the higher costs simply come out of profits and need not concern them. But the fact is that the general rate of profit in the economic system remains more or less the same, with the result that increases in costs show up as increases in prices, or as decreases in other costs, notably, wages.

The real wages of the average American are stagnating in large part because the higher real wages he could have had—precisely on the foundation of the work of today’s great businessmen and capitalists—have instead been used to pay for the cost of environmental and safety regulations. Money that might have been paid as higher wages has instead been used to buy equipment, materials, and components required to be in compliance with these regulations. Larger supplies of goods that might have come into existence and driven down prices or at least prevented inflation from raising them as much as it has, have been prevented from coming into existence, especially by environment regulations.

This is the answer economic theory gives to Krugman and to the hordes of other intellectual dilettantes whose writings and lectures on the subject of economic inequality proceed in ignorance and thus end up amounting to just so much clutter—clutter irrespective of the prestige attached to the venues in which it accumulates.

Copyright © 2006 by George Reisman. All rights reserved. George Reisman, Ph.D., is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.

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