Front Page

The Grammar of History

The Grammar of Economics

The Grammar of Theology

The Grammar of Latin

The Grammar of Math

The Grammar of Energy

The Grammar of English

STORE


Wednesday, December 31, 2008

The Economics of 2008Go Here: Dave Barry Year in Review: Bailing out of 2008

How weird a year was it?

Here's how weird:

O.J. actually got convicted of something.

Gasoline hit $4 a gallon -- and those were the good times.

On several occasions, Saturday Night Live was funny.

There were a few days there in October when you could not completely rule out the possibility that the next Treasury Secretary would be Joe the Plumber.

Finally, and most weirdly, for the first time in history, the voters elected a president who -- despite the skeptics who said such a thing would never happen in the United States -- was neither a Bush NOR a Clinton.

Of course not all the events of 2008 were weird. Some were depressing. The only U.S. industries that had a good year were campaign consultants and foreclosure lawyers. Everybody else got financially whacked. Millions of people started out the year with enough money in their 401(k)'s to think about retiring on, and ended up with maybe enough for a medium Slurpee.

So we can be grateful that 2008 is almost over. But before we leave it behind, let's take a few minutes to look back and see if we can find some small nuggets of amusement. Why not? We paid for it, starting with . . .


Go Here: Dave Barry Year in Review: Bailing out of 2008

Rumpelstiltzkin's Study on Economics


Written and Illustrated by Diane Stanley
(Published by Morrow Junior Books-1997)

Once there was a miller's daughter who got into a heap of trouble. It was all because her father liked to make up stories and pass them off as truth. Unfortunately, the story he told was that his daughter could spin straw into gold, which, of course, she could not. Even more unfortunately, he told this whopper in the hearing of a palace servant who rushed right off to tell the king. Since the king loved nothing in this world more than gold, he had the miller's daughter hauled up to the palace immediately and made her an offer she couldn't refuse. he put her in a room full of straw and ordered her to spin it into gold by morning, or die.

By one of those unlikely coincidences so common in fairy tales, no sooner had the king closed and bolted the door than a very small gentleman showed up and revealed that he really could spin straw into gold. Furthermore, he offered to do it in exchange for her necklace, which was made of gold-tone metal and wasn't worth ten cents. Naturally, she agreed.

The next morning, the king was so overjoyed with his room full of gold that he rewarded the miller's daughter by doubling the amount of straw and repeating his threat. Once again, Rumpelstiltskin(for that was his name) arrived to help her out. This time she gave him her cigar-band pinkie ring.

After this second success, the king was practically apoplectic with greed. He proceeded to empty every barn in the neighborhood of straw and to fill the room with it. This time, he added a little sugar to sweeten the pot: If she turned it all into gold, he would make her his queen. you can just imagine how the miller's daughter was feeling when Rumpelstiltskin popped in for the third time.

"That's quite a pile," he said. "I suppose you want me to spin it into gold."

"Well, the situation has changed just a bit," said the miller's daughter(who also had a name-it was Meredith). "If you don't, I will die. If you do, I marry the king."

Now that, thought Rumpelstiltskin, has possibilities. After all, getting to be the queen was a big step for a miller's daughter. She would surely pay him anything. And there was only one thing in the world he really wanted-a little child to love and care for.

"Okay, here's the deal," he said. "I will spin the straw into gold, just like before. In return, once you become queen, you must let me adopt your firstborn child. I promise I'll be an excellent father. I know all the lullabies. I'll read to the child every day. I'll even coach Little League."

"You've got to be kidding," Meredith said. "I'd rather marry you than that jerk!"

"Really?" said Rumpelstiltskin, and he blushed all the way from the top of his head to the tip of his toes(which admittedly wasn't very far, because he was so short).

"Sure," she said. "I like your ideas on parenting, you'd make a good provider, and I have a weakness for short men."

So Rumpelstiltskin spun a golden ladder, and they escaped out the window. They were married the very next day and lived happily together far, far away from the palace.

Meredith and Rumpelstiltskin lived a quiet country life, raising chickens and growing vegetables. Every now and then, when they needed something they couldn't make or grow, Rumpelstiltskin would spin up a little gold to buy it with.

Now, they had a daughter, and she was just as sunny and clever as you would expect her to be, having such devoted parents. When she was sixteen, they decided she ought to see more of the world, so every now and then they allowed her to take the gold into town to exchange it for coins and to do a little shopping.

The goldsmith grew curious about the pretty country girl who came in with those odd coils of gold. He mentioned it to his friend the baker, who mentioned it to the blacksmith, who mentioned it to the tax collector, who hurried to the palace and told the king.

It may not surprise you to learn that the king hadn't changed a bit. If anything, he was greedier than before. As he listened, his eyes glittered. "I once knew a miller's daughter who could make gold like that," he said. "Unfortunately, she got away. Let's make sure this one doesn't."

So the next time Rumpelstiltskin's daughter went to see the goldsmith, two of the king's guards were waiting for her. In a red-hot minute, she was in a carriage and speeding toward the palace. And what she saw on the way broke her heart. Everywhere the fields lay barren. Sickly children stood begging beside the road. Nobody in the kingdom had anything anymore, because the king had it all.

Finally they reached the palace. There were high walls around it and a moat full of crocodiles. Armed guards were everywhere, gnashing their teeth, clutching their swords, and peering about with shifty eyes. As the carriage went over the bridge and under the portcullis, the hungry people shook their fists at them. It was not a pretty sight.

Rumpelstiltskin's daughter was taken at once to the grand chamber where the king sat on his golden throne. He didn't waste time on idle pleasantries.

"Where did you get this?" he asked, showing her the gold.

"Uh. . . ," said Rumpelstiltskin's daughter.

"I thought so," said the king. "Guards, take her to the tower and see what she can do with all that straw."

Rumpelstiltskin's daughter looked around. She saw a pile of straw the size of a bus. She saw a locked door and high windows. She gave a big sigh and began to think. She knew her father could get her out of this pickle. but she had heard stories about the king all her life. One room full of gold would never satisfy him. Her father would be stuck here, spinning, until there was not an iota of straw left in the kingdom.

After a while she climbed the pile of straw and thought some more. She thought about the poor farmers and about the hungry children with their thin faces and sad eyes. She put the two thoughts together and cooked up a plan. The Rumpelstiltskin's daughter curled up and went to sleep.

The next day, the king was very disappointed. "Where's my gold?" he wanted to know.

"I'm sure you have rooms full of it upstairs," said Rumpelstiltskin's daughter. And she was right. He did.

"But I want more!" he said. "And I want you to make it for me."

"Alas," she said, "I never made gold in my life. But"-and here she paused for effect-"I say my grandfather make it." When the king's face brightened, she added, "He died years ago."

"Surely you remember how he did it," cried the king. "Think! Think!"

"Well," she said slowly," there is one thing I'm sure of. he didn't spin it, he grew it."

The next morning the king and Rumpelstiltskin's daughter got into his glittering coach, with two guards up front and two guards behind and a huge bag of gold inside. They drove under the portcullis, over the bridge, and out into he countryside. At the first farm they came to, they stopped and sent for the farmer. He was thin and ragged and barefoot. So were his wife and children.

"Now tell the farmer he must plant this gold coin his field, and you will come back in the fall to collect everything it has grown. Tell him you will give him another gold coin for his pains," she whispered.

"Do I have to?" the king whined.

"Well, I don't know," she said. "That's how my grandfather always did it."

"Okay," said the king. "But this better work." He gave the farmer two gold coins, and they hurried on to the next farm. By the end of the week they had covered the entire kingdom.

All through the summer the king was restless. "Is it time yet?" he would ask. "Is the gold ripe?"

"Wait," said Rumpelstiltskin's daughter.

Finally August came and went. "Now," she said.

"Now you can go and see what has grown in the fields."

So once again they piled into the glittering coach(with two guards behind) and brought along wagons to carry the gold and a lot more guards to protect it.

As they neared the first farm, the king gasped with joy. The field shone golden in the morning sun.

"Gold!" he cried.

"No," said Rumpelstiltskin's daughter, "something better than gold."

"How can anything be better than gold?" said the king.

"It's wheat," she said. "You can eat it. You can't eat gold."

Before the king could start turning purple, the farmer and his family came running toward the carriage. In their arms they carried baskets of wheat and barley and apples and green beans and pumpkins and corm and I don't know what all. They piled it into the wagon and kissed the king's hand, grinning ear to ear. I can promise you that nothing like that had every happened to the king before.

"Well," he said sheepishly, "maybe there will be gold at the next place."

But everywhere it was the same. The land prospered, the children looked healthy, and the king was a hero. At the end of the week they returned to the palace with all the food the wagons could carry.

The cook was so overjoyed, he put on a sumptuous feast to celebrate. Unfortunately, there was no one to invite except Rumpelstiltskin's daughter and the guards, who spent the whole meal gnashing their teeth, clutching their swords, and peering about with shifty eyes.

"I wish they'd quit that," said Rumpelstiltskin's daughter.

After dinner, the king spoke. "That was all very nice, my dear," he said, "but you must have been mistaken. That was how your grandfather grew food, not how he made gold."

"Right," she said as she pulled her shawl tightly around her shoulders and gazed longingly at the fire. Even in the palace she could feel the chill of autumn. Time for phase two, she thought.

"Of course you're right," she said. "I told you it was long ago. but I think I remember now. He didn't grow gold. He knitted it with golden knitting needles."

So the next day they loaded the coach with knitting needles, a bag of gold, and lots and lots of yellow wool. They headed off under the portcullis, over the bridge(with two guards up front and two guards behind), and out into the countryside.

At the first cottage they came to, they asked to see the granny. She hobbled to the door in her rags and curtsied to the king.

"Now," whispered Rumpelstiltskin's daughter, "give her a bag of wool and a pair of needles. Tell her to knit it all up and you will come back in a month to collect your riches. Give her a gold coin for her pains."

"Do I have to?" the king whined.

"My grandfather always did," she said. "I would, if I were you."

And so they went all over the kingdom, hiring every granny they could find.

At the end of the month, the king ordered his coach and wagons, rounded up his guards, and went to see the grannies. As he neared the first cottage, he heard the sound of singing. Looking out the window, the king saw crowds of happy villagers waiting there to greet him, cheering wildly as he passed. And every one of them was warm as toast in yellow woolly clothes.

"Gold!" cried the king.

"Something better than gold," said Rumpelstiltskin's daughter. "Your people will be warm all winter."

Everyone brought presents for the king. by the time he got back to his palace, he had seventeen sweaters, forty-two mufflers, eight vests, one pair of knickers, one hundred and thirty-five pairs of socks, twelve nightcaps, and a tam-o'-shanter. All the color of gold.

"Do they suit me?" asked the king as he tried them on.

"Absolutely," said Rumpelstiltskin's daughter.

The guards just stood there, gnashing their teeth, clutching their swords, and peering about with shifty eyes.

"Don't you think it's time you got rid of them?" she suggested. "And the walls and the moat and the crocodiles, too. You don't need them anymore-your people love you now."

She was right, as always, so the king set the guards to work tearing down the walls. And with the stones, they built a zoo for the crocodiles and houses for the poor.

"Are you sure you don't remember how your grandfather made gold?" asked the king one day.

"I'm afraid not," she said.

"It's a terrible pity," he sighed. "But you did try. And as a reward, I have decided to make you my queen."

"Why don't you make me prime minister instead," suggested Rumpelstiltskin's daughter.

And so the king did just that. He built her a nice house near the palace, and once a month she took time off to visit her parents. The people of the kingdom never went cold or hungry again. And whenever the king started worrying about gold, she sent him on a goodwill tour throughout the countryside, which cheered him right up.

Oh, and I forgot to tell you-Rumpelstiltskin's daughter had a name, too. It was Hope.

Continue reading "Rumpelstiltzkin's Daughter" and Analysis

Concepts: Role of government, scarcity, human resources, natural resources

Sometimes I run across a book that has such a well-crafted story and such exquisite illustrations that I just sit back and say, "Wow!" This book by Diane Stanley is one of those "wow" books. In this version of Rumpelstiltskin, the miller's daughter, Meredith, is not a brainless wench who jumps at the chance to marry the king. Rumpelstiltskin is not an evil child-snatching gnome. In fact, he's a sweet soul who only wants one thing in life -- a child to love and care for. No wonder Meredith decides to ditch the king and marry Rumpelstiltskin. Besides, she has a weakness for short men. Rumpelstiltskin and Meredith marry, work on their farm, and raise their daughter. Although the family could use Rumpelstiltskin's talents to become exceedingly rich, he only spins a small amount of gold to buy those things they can't make or grow themselves. The rest of the people in the kingdom are not so lucky. The greedy king has rooms full of gold while his subjects are penniless and starving. No wonder he needs a contingent of armed guards who have elevated teeth-gnashing and sword-clutching into an art form.

When Rumpelstiltskin's daughter is sixteen, her parents let her take the odd bit of gold into town to exchange it for coins to buy necessities. Eventually the old greedy king hears about this, kidnaps Rumpelstiltskin's daughter, and locks her in a tower filled with straw. "Rumpelstiltskin's daughter looked around. She saw a pile of straw the size of a bus. She saw a locked door and high windows. She gave a big sigh and began to think. She knew her father could get her out of this pickle. But she had heard stories about the king all her life. One room full of gold would never satisfy him. Her father would be stuck here, spinning, until there was not an iota of straw left in the kingdom. "After a while she climbed the pile of straw and thought some more. She thought about the poor farmers and about the hungry children with their thin faces and sad eyes. She put the two thoughts together and cooked up a plan. . ." Instead of spinning straw into gold, Rumpelstiltskin's daughter puts her plan (which Ms. Stanley develops so cleverly that you really should read it for yourself) into action and saves the kingdom by teaching the king some simple lessons in economics and public relations. By the end of the story, the king offers her his hand in marriage, which she wisely declines. "Why don't you make me prime minister, instead," she suggests.

The best word to describe the illustrations is sumptuous. Diane Stanley's greedy king with his elegantly styled coif bears a striking resemblance to Louis XIV, and the artwork mirrors the Sun King's opulence. The palace shines with gilded ceilings and elaborate tiled floors. On the palace walls hang masterpieces so famous that my six year old can recognize most of them --works by da Vinci, Van Gogh, Picasso.


Summary:
Rumpelstiltskin's daughter may not be able to spin straw into gold, but she is more than a match for a monarch whose greed has blighted an entire kingdom.

LESSON: RUMPELSTILTSKIN’S DAUGHTER

"Rumpelstiltzkin" from Andrew Lang's The Blue Fairy Book, reprinted online at Rick Walton, Children's Author: Classic Tales and Fables.

"Rumpelstilzchen" by the Grimm Brothers, reprinted online with 19th-century illustrations at Nineteenth-Century German Stories.

Part 1:

Part 2:

Part 3:

Part 4:

Sunday, December 28, 2008

Inflation...

Inflation in One Page by Henry Hazlitt

The future of the dollar

The future risk of Hyperinflation





End the Federal Reserve, End the Income tax, cut spending, save, US dollar, gold, silver, honest finance, inflation, economics, China

Thursday, December 4, 2008

Stocks to Rise in ’09, UBS Says; S&P 500 May Gain 53%

This:
Opinion.. Dec. 3 (Bloomberg) -- Global stocks will withstand a “full-blown” recession and surge in 2009 as cheap valuations and efforts by governments to restore confidence in the financial system lure investors back to equities, UBS AG said.

Facts...
UBS catalogues its $37.4 billion writedowns

UBS, the investment bank, spelt out in painful detail yesterday the failures that contributed to its $37.4 billion (£18.8 billion) of sub-prime writedowns. The failures included a rushed set-up of its hedge fund business, an over-aggressive growth plan and lack of risk management in investment banking.

Switzerland's largest bank issued a report for shareholders outlining the findings of an inquiry conducted at the request of the Swiss Federal Banking Commission, the regulator.

UBS is the European bank worst hit by the credit crunch, with $18.4 billion in writedowns for 2007 and $19 billion in this year's first quarter.

and... PARIS — Switzerland extended urgent help Thursday to its storied banking industry as the government acknowledged that even the world’s biggest wealth needed protection from the tumult gripping the global financial system.

Less than a week after Europe and the United States coordinated moves to ease the crisis, the Swiss government said it would take a 9 percent stake in UBS, the financial giant that has been among the hardest hit by losses from American subprime mortgage debt, and provide it with 6 billion Swiss francs ($5.36 billion) in capital.

Rebuking UBS for failing to maintain adequate risk controls, regulators also set up a $60 billion fund to absorb troubled assets lingering on its books, a move intended to strengthen its financial and competitive position.
Then this:


Who do you believe?

Wednesday, November 26, 2008

Christendom economics? Allocation list:

We asked several questions: What kind of work should we do? How should we mange our time? What "taxes" are we required to pay? How should we spend our wealth? How should we invest our wealth? How should we preserve and grow our wealth? This is what we believe our Bible study taught us about economics:

1. We should work to glorify God, grow His Kingdom on earth.

2. The work should produce fantastic safe infrastructure, be innovative, earth friendly, healthy, farmer friendly, family oriented, community oriented, helpful to widows and orphans, liberating, responsible, peaceful, with foundations, businesses and agencies producing,providing and serving every gift and talent that God graced man with.

3. After Caesar's taxes (likened to locusts) our Net pay should be allocated: a) 1% to pay for the priest of our own choice for worship
b) 9% donated to an agency, foundation, or business of our choice "Holy unto the LORD"
c) 5% donated to help the poor of our choice (could be widow/orphan)
d) 5% to spend with our family to rejoice in the Lord (holiday funds)
e) 50% towards family business (about 17 grams of silver/year towards justice - haven't figured the application for this one out yet)
f) 20% towards investing in commodities
g) 10% long term savings to be preserved in cases of dire emergency but hopefully and inheritance for our children. (gold)
h) NO long term DEBT (in case of emergencies God allows a 6 year debt - MAX), (In countries where there is property tax - 30 year fixed rate mortgages are considered paying rent - This would also protect your family against the statist inflation tax.

Monday, November 24, 2008

The Secret to Wealth

10 immutable laws of money

Money, Debt and Banking


Economics in One Lesson - Video Series

A useful companion to Hazlitt's Economics in One Lesson is this series of videos, recorded in July-August 2008, in which various professors comment on each of the book's chapters — explaining the argument, elaborating on it, and applying it to present conditions.

Video 1: The Lesson
Video 2: The Broken Window
Video 3: Public Works Mean Taxes
Video 4: Credit Diverts Production
Video 5: The Curse of Machinery
Video 6: Disbanding Troops and Bureaucrats
Video 7: Who's Protected by Tariffs?
Video 8: "Parity" Prices
Video 9: How the Price System Works
Video 10: Minimum Wage Laws
Video 11: The Function of Profits
Video 12: The Assault on Saving

Essentials of Economics I

Essentials of Economics by Faustino Ballve; online here (.pdf)
A brief Survey of Principles and Policies

Faustino Ballvé was a remarkable thinker and economist, educated in Spain and England and teaching and practicing law in Mexico City. He was here when Ludwig von Mises came to speak on a lecture tour. The talks that Ballvé heard sparked a new intellectual energy in him. He carried on a long correspondence with Mises himself, checking his education from graduate school against Mises's views. They became good friends.

The result of his studies and correspondence was this splendid book, which really ought to be considered a classic. It was published first in 1956, and had a massive impact in Latin America. It was translated and published in English in 1965, and went into many other foreign translations. The language is elegant and principles enduring. Its popularity was due in part to its brevity combined with its scope: at only 129 pages, it covers nearly the field of economics.

It covers ten essential lessons:

* What is Economics About?
* The Market
* The role of the Entrepreneur
* Capital, Labor, and Wages
* Money and Credit
* Monopoly, Crises, and Unemployment
* International Trade
* Nationalism and Socialism
* The Controlled Economy
* What Economics Is Not About
He combines history, theory, and clear exposition to present what might be called an orthodox Austrian view of the way the world works. It has no footnotes, a deliberate choice of the author to stay within the objective of the book, namely to educate the intelligent laymen in economic theory. It is also free of data that might have quickly become dated. The result is a dream in so many ways: a stable, balanced, and nicely proportioned introduction to economic theory for everyone.

Truly, even after a half century, the achievement of this book becomes clearer. It reads as fresh as the day it came off the press. Felix Morley adds this in his introduction: "Something of the warmth and cheerfulness of the author's personality comes through, to make the reader feel that his is listening to the conversation of an old and cherish friend."

Friday, October 10, 2008

6th grade #12 Economics in One Lesson - The Assault on Saving

Economics in One Lesson
by Henry Hazlitt
The Lesson Applied
The Assault on Saving

From time immemorial proverbial wisdom has taught the virtues of saving, and warned against the consequences of prodigality and waste. This proverbial wisdom has reflected the common ethical as well as the merely prudential judgments of mankind. But there have always been squanderers, and there have apparently always been theorists to rationalize their squandering.

The classical economists, refuting the fallacies of their own day, showed that the saving policy that was in the best interests of the individual was also in the best interests of the nation. They showed that the rational saver, in ma king provision for his future, was not hurting, but helping, the whole community. But today the ancient virtue of thrift, as well as its defense by the classical economists, is once more under attack, for allegedly new reasons, while the opposite doctrine of spending is in fashion.

In order to make the fundamental issue as clear as possible, we cannot do better, I think, than to start with the classic example used by Bastiat. Let us imagine two brothers, then, one a spendthrift and the other a prudent man, each of whom has inherited a sum to yield him an income of $50,000 a year. We shall disregard the income tax, and the question whether both brothers really ought to work for a living or give most of their income to charity, because such questions are irrelevant to our present purpose.

Alvin, then, the first brother, is a lavish spender. He spends not only by temperament, but on principle. He is a disciple (to go no further back) of Rodbertus, who declared in the middle of the nineteenth century that capitalists “must expend their income to the last penny in comforts and luxuries,” for if they “determine to save... goods accumulate, and part of the workmen will have no work.”[*] Alvin is always seen at the night clubs; he tips handsomely; he maintains a pretentious establishment, with plenty of servants; he has a couple of chauffeurs, and doesn’t stint himself in the number of cars he owns; he keeps a racing stable; he runs a yacht; he travels; he loads his wife down with diamond bracelets and fur coats; he gives expensive and useless presents to his friends.

To do all this he has to dig into his capital. But what of it? If saving is a sin, dissaving must be a virtue; and in any case he is simply making up for the harm being done by the saving of his pinchpenny brother Benjamin.

It need hardly be said that Alvin is a great favorite with the hat check girls, the waiters, the restaurateurs, the furriers, the jewelers, the luxury establishments of all kinds. They regard him as a public benefactor. Certainly it is obvious to everyone that he is giving employment and spreading his money around.

Compared with him brother Benjamin is much less popular. He is seldom seen at the jewelers, the furriers or the night clubs, and he does not call the head waiters by their first names. Whereas Alvin spends not only the full $50,000 income each year but is digging into capital besides, Benjamin lives much more modestly and spends only about $25,000 Obviously, think the people who see only what hits them in the eye, he is providing less than half as much employment as Alvin, and the other $25,000 is as useless as if it did not exist.

But let us see what Benjamin actually does with this other $25,000 He does not let it pile up in his pocketbook, his bureau drawers, or in his safe. He either deposits it in a bank or he invests it. If he puts it either into a commercial or a savings bank, the bank either lends it to going businesses on short term for working capital, or uses it to buy securities. In other words, Benjamin invests his money either directly or indirectly. But when money is invested it is used to buy or build capital goods—houses or office buildings or factories or ships or trucks or machines. Any one of these projects puts as much money into circulation and gives as much employment as the same amount of money spent directly on consumption.

“Saving,” in short, in the modem world, is only another form of spending. The usual difference is that the money is turned over to someone else to spend on means to increase production. So far as giving employment is concerned, Benjamin’s “saving” and spending combined give as much as Alvin’s spending alone, and put as much money in circulation. The chief difference is that the employment provided by Alvin’s spending can be seen by anyone with one eye; but it is necessary to look a little more carefully, and to think a moment, to recognize that every dollar of Benjamin’s saving gives as much employment as every dollar that Alvin throws around.

A dozen years roll by. Alvin is broke. He is no longer seen in the night clubs and at the fashionable shops; and those whom he formerly patronized, when they speak of him, refer to him as something of a fool. He writes begging letters to Benjamin. And Benjamin, who continues about the same ratio of spending to saving, not only provides more jobs than ever, because his income, through investment, has grown, but through his investment he has helped to provide better-paying and more productive jobs. His capital wealth and income are greater. He has, in brief, added to the nation’s productive capacity; Alvin has not.

So many fallacies have grown up about saving in recent years that they cannot all be answered by our example of the two brothers. It is necessary to devote some further space to them. Many stem from confusions so elementary as to seem incredible, particularly when found in the works of economic writers of wide repute. The word saving, for example, is used sometimes to mean mere hoarding of money, and sometimes to mean investment, with no clear distinction, consistently maintained, between the two uses.

Mere hoarding of hand-to-hand money, if it takes place irrationally, causelessly, and on a large scale, is in most economic situations harmful. But this sort of hoarding is extremely rare. Something that looks like this, but should be carefully distinguished from it, often occurs after a downturn in business has got under way. Consumptive spending and investment are then both contracted. Consumers reduce their buying. They do this partly, indeed, because they fear they may lose their jobs, and they wish to conserve their resources: they have contracted their buying not because they wish to consume less but because they wish to make sure that their power to consume will be extended over a longer period if they do lose their jobs.

But consumers reduce their buying for another reason. Prices of goods have probably fallen, and they fear a further fall. If they defer spending, they believe they will get more for their money. They do not wish to have their resources in goods that are falling in value, but in money which they expect (relatively) to rise in value.

The same expectation prevents them from investing. They have lost their confidence in the profitability of business; or at least they believe that if they wait a few months they can buy stocks or bonds cheaper. We may think of them either as refusing to hold goods that may fall in value on their hands, or as holding money itself for a rise.

It is a misnomer to call this temporary refusal to buy “saving.” It does not spring from the same motives as normal saving. And it is a still more serious error to say that this sort of “saving” is the cause of depressions. It is, on the contrary, the consequence of depressions.

It is true that this refusal to buy may intensify and prolong a depression. At times when there is capricious government intervention in business, and when business does not know what the government is going to do next, uncertainty is created. Profits are not reinvested. Firms and individuals allow cash balances to accumulate in their banks. They keep larger reserves against contingencies. This hoarding of cash may seem like a cause of a subsequent slowdown in business activity. The real cause, however, is the uncertainty brought about by the government policies. The larger cash balances of firms and individuals are merely one link in the chain of consequences from that uncertainty. To blame “excessive saving” for the business decline would be like blaming a fall in the price of apples not on a bumper crop but on the people who refuse to pay more for apples.

But when once people have decided to deride a practice or an institution, any argument against it, no matter how illogical, is considered good enough. It is said that the various consumers goods industries are built on the expectation of a certain demand, and that if people take to saving they will disappoint this expectation and start a depression. This assertion rests primarily on the error we have already examined—that of forgetting that what is saved on consumers’ goods is spent on capital goods, and that “saving” does not necessarily mean even a dollar’s contraction in total spending. The only element of truth in the contention is that any change that is sudden may be unsettling. It would be just as unsettling if consumers suddenly switched their demand from one consumers’ good to another. It would be even more unsettling if former savers suddenly switched their demand from capital goods to consumers’ goods

Still another objection is made against saving. It is said to be just downright silly. The nineteenth century is derided for its supposed inculcation of the doctrine that mankind through saving should go on baking itself a larger and larger cake without ever eating the cake. This picture of the process is itself naive and childish. It can best be disposed of, perhaps, by putting before ourselves a somewhat more realistic picture of what actually takes place.

Let us picture to ourselves, then, a nation that collectively saves every year about 20 percent of all it produces in that year. This figure greatly overstates the amount of net saving that has occurred historically in the United States,[*] but it is a round figure that is easily handled, and it gives the benefit of every doubt to those who believe that we have been “oversaving.”

Now as a result of this annual saving and investment, the total annual production of the country will increase each year. (To isolate the problem we are ignoring for the moment booms, slumps, or other fluctuations.) Let us say that this annual increase in production is 2.5 percentage points. (Percentage points are taken instead of a compounded percentage merely to simplify the arithmetic.) The picture that we get for an eleven-year period, say, would then run something like this in terms of index numbers:
YearTotal ProductionConsumers' Goods ProductionCapital Goods Production
First1008020[†]
Second102.58220.5
Third1058421
Fourth107.58621.5
Fifth1108822
Sixth112.59022.5
Seventh1159223
Eighth117.5 949423.5
Ninth1209624
Tenth122.59824.5
Eleventh12510025


The first thing to be noticed about this table is that total production increases each year because of the saving, and would not have increased without it. (It is possible no doubt to imagine that improvements and new inventions merely in replaced machinery and other capital goods of a value no greater than the old would increase the national productivity; but this increase would amount to very little and the argument in any case assumes enough prior investment to have made the existing machinery possible.) The saving has been used year after year to increase the quantity or improve the quality of existing machinery, and so to increase the nation’s output of goods. There is, it is true (if that for some strange reason is considered an objection), a larger and larger “cake” each year. Each year, it is true, not all of the currently produced cake is consumed. But there is no irrational or cumulative restraint. For each year a larger and larger cake is in fact consumed; until, at the end of eleven years (in our illustration), the annual consumers’ cake alone is equal to the combined consumers’ and producers’ cakes of the first year. Moreover, the capital equipment, the ability to produce goods, is itself 25 percent greater than in the first year.

Let us observe a few other points. The fact that 20 percent of the national income goes each year for saving does not upset the consumers’ goods industries in the least. If they sold only the 80 units they produced in the first year (and there were no rise in prices caused by unsatisfied demand) they would certainly not be foolish enough to build their production plans on the assumption that they were going to sell 100 units in the second year. The consumers’ goods industries, in other words, are already geared to the assumption that the past situation in regard to the rate of savings will continue. Only an unexpected sudden and substantial increase in savings would unsettle them and leave them with unsold goods.

But the same unsettlement, as we have already observed, would be caused in the capital goods industries by a sudden and substantial decrease in savings. If money that would previously have been used for savings were thrown into the purchase of consumers goods, it would not increase employment but merely lead to an increase in the price of consumption goods and to a decrease in the price of capital goods. Its first effect on net balance would be to force shifts in employment and temporarily to decrease employment by its effect on the capital goods industries. And its long-run effect would be to reduce production below the level that would otherwise have been achieved.

The enemies of saving are not through. They begin by drawing a distinction, which is proper enough, between “savings” and “investment.” But then they start to talk as if the two were independent variables and as if it were merely an accident that they should ever equal each other. These writers paint a portentous picture. On the one side are savers automatically, pointlessly, stupidly continuing to save; on the other side are limited “investment opportunities” that cannot absorb this saving. The result, alas, is stagnation. The only solution, they declare, is for the government to expropriate these stupid and harmful savings and to invent its own projects, even if these are only useless ditches or pyramids, to use up the money and provide employment.

There is so much that is false in this picture and “solution” that we can here point only to some of the main fallacies. Savings can exceed investment only by the amounts that are actually hoarded in cash.’[*] Few people nowadays, in a modern industrial community, hoard coins and bills in stockings or under mattresses. To the small extent that this may occur, it has already been reflected in the production plans of business and in the price level. It is not ordinarily even cumulative: dishoarding, as eccentric recluses die and their hoards are discovered and dissipated, probably offsets new hoarding. In fact, the whole amount involved is probably insignificant in its effect on business activity.

If money is kept either in savings banks or commercial banks, as we have already seen, the banks are eager to lend and invest it. They cannot afford to have idle funds. The only thing that will cause people generally to try to increase their holdings of cash, or that will cause banks to hold funds idle and lose the interest on them, is, as we have seen, either fear that prices of goods are going to fall or the fear of banks that they will be taking too great a risk with their principal. But this means that signs of a depression have already appeared, and have caused the hoarding, rather than that the hoarding has started the depression.

Apart from this negligible hoarding of cash, then (and even this exception might be thought of as a direct “investment” in money itself) savings and investment are brought into equilibrium with each other in the same way that the supply of and demand for any commodity are brought into equilibrium. For we may define savings and investment as constituting respectively the supply of and demand for new capital. And just as the supply of and demand for any other commodity are equalized by price, so the supply of and demand for capital are equalized by interest rates. The interest rate is merely the special name for the price of loaned capital. It is a price like any other.

This whole subject has been so appallingly confused in recent years by complicated sophistries and disastrous governmental policies based upon them that one almost despairs of getting back to common sense and sanity about it. There is a psychopathic fear of “excessive” interest rates. It is argued that if interest rates are too high it will not be profitable for industry to borrow and invest in new plants and machines. This argument has been so effective that governments everywhere in recent decades have pursued artificial “cheap-money” policies. But the argument, in its concern with increasing the demand for capital, overlooks the effect of these policies on the supply of capital. It is one more example of the fallacy of looking at the effects of a policy only on one group and forgetting the effects on another.

If interest rates are artificially kept too low in relation to risks, there will be a reduction in both saving and lending. The cheap-money proponents believe that saving goes on automatically, regardless of the interest rate, because the sated rich have nothing else that they can do with their money. They do not stop to tell us at precisely what personal income level a man saves a fixed minimum amount regardless of the rate of interest or the risk at which he can lend it.

The fact is that, though the volume of saving of the very rich is doubtless affected much less proportionately than that of the moderately well-off by changes in the interest rate, practically everyone’s saving is affected in some degree. To argue, on the basis of an extreme example, that the volume of real savings would not be reduced by a substantial reduction in the interest rate, is like arguing that the total production of sugar would not be reduced by a substantial fall of its price because the efficient, low-cost producers would still raise as much as before. The argument overlooks the marginal saver, and even, indeed, the great majority of savers.

The effect of keeping interest rates artificially low, in fact, is eventually the same as that of keeping any other price below the natural market. It increases demand and reduces supply. It increases the demand for capital and reduces the supply of real capital. It creates economic distortions. It is true, no doubt, that an artificial reduction in the interest rate encourages increased borrowing. It tends, in fact, to encourage highly speculative ventures that cannot continue except under the artificial conditions that gave them birth. On the supply side, the artificial reduction of interest rates discourages normal thrift, saving, and investment. It reduces the accumulation of capital. It slows down that increase in productivity, that “economic growth,” that “progressives” profess to be so eager to promote.

The money rate can, indeed, be kept artificially low only by continuous new injections of currency or bank credit in place of real savings. This can create the illusion of more capital just as the addition of water can create the illusion of more milk. But it is a policy of continuous inflation. It is obviously a process involving cumulative danger. The money rate will rise and a crisis will develop if the inflation is reversed, or merely brought to a halt, or even continued at a diminished rate.

It remains to be pointed out that while new injections of currency or bank credit can at first, and temporarily, bring about lower interest rates, persistence in this device must eventually raise interest rates. It does so because new injections of money tend to lower the purchasing power of money. Lenders then come to realize that the money they lend today will buy less a year from now, say, when they get it back. Therefore to the normal interest rate they add a premium to compensate them for this expected loss in their money s purchasing power. This premium can be high, depending on the extent of the expected inflation. Thus the annual interest rate on British treasury bills rose to 14 percent in 1976; Italian government bonds yielded 16 percent in ‘977; and the discount rate of the central bank of Chile soared to 75 percent in 1974. Cheap-money policies, in short, eventually bring about far more violent oscillations in business than those they are designed to remedy or prevent.

If no effort is made to tamper with money rates through inflationary governmental policies, increased savings create their own demand by lowering interest rates in a natural manner. The greater supply of savings seeking investment forces savers to accept lower rates. But lower rates also mean that more enterprises can afford to borrow because their prospective profit on the new machines or plants they buy with the proceeds seems likely to exceed what they have to pay for the borrowed funds.

We come now to the last fallacy about saving with which I intend to deal. This is the frequent assumption that there is a fixed limit to the amount of new capital that can be absorbed, or even that the limit of capital expansion has already been reached. It is incredible that such a view could prevail even among the ignorant, let alone that it could be held by any trained economist. Almost the whole wealth of the modern world, nearly everything that distinguishes it from the preindustrial world of the seventeenth century, consists of its accumulated capital.

This capital is made up in part of many things that might better be called consumers’ durable goods—automobiles, refrigerators, furniture, schools, colleges, churches, libraries, hospitals and above all private homes. Never in the history of the world has there been enough of these. Even if there were enough homes from a purely numerical point of view, qualitative improvements are possible and desirable without definite limit in all but the very best houses.

The second part of capital is what we may call capital proper. It consists of the tools of production, including everything from the crudest axe, knife or plow to the finest machine tool, the greatest electric generator or cyclotron, or the most wonderfully equipped factory. Here, too, quantitatively and especially qualitatively, there is no limit to the expansion that is possible and desirable. There will not be a “surplus” of capital until the most backward country is as well equipped technologically as the most advanced, until the most inefficient factory in America is brought abreast of the factory with the latest and finest equipment, and until the most modern tools of production have reached a point where human ingenuity is at a dead end, and can improve them no further. As long as any of these conditions remains unfulfilled, there will be indefinite room for more capital.

But how can the additional capital be “absorbed”? How can it be “paid for”? If it is set aside and saved, it will absorb itself and pay for itself. For producers invest in new capital goods—that is, they buy new and better and more ingenious tools — because these tools reduce costs of production. They either bring into existence goods that completely unaided hand labor could not bring into existence at all (and this now includes most of the goods around us—books, typewriters, automobiles, locomotives, suspension bridges); or they increase enormously the quantities in which these can be produced; or (and this is merely saying these things in a different way) they reduce unit costs of production. And as there is no assignable limit to the extent to which unit costs of production can be reduced—until everything can be produced at no cost at all—there is no assignable limit to the amount of new capital that can be absorbed.

The steady reduction of unit costs of production by the addition of new capital does either one of two things, or both. It reduces the costs of goods to consumers, and it increases the wages of the labor that uses the new equipment because it increases the productive power of that labor. Thus a new machine benefits both the people who work on it directly and the great body of consumers. In the case of consumers we may say either that it supplies them with more and better goods for the same money, or, what is the same thing, that it increases their real incomes. In the case of the workers who use the new machines it increases their real wages in a double way by increasing their money wages as well. A typical illustration is the automobile business. The American automobile industry pays the highest wages in the world, and among the very highest even in America. Yet (until about 1960) American motorcar makers could undersell the rest of the world, because their unit cost was lower. And the secret was that the capital used in making American automobiles was greater per worker and per car than anywhere else in the world.

And yet there are people who think we have reached the end of this process,[*] and still others who think that even if we haven’t, the world is foolish to go on saving and adding to its stock of capital.

It should not be difficult to decide, after our analysis, with whom the real folly lies.

(It is true that the U. S. has been losing its world economic leadership in recent years, but because of our own anticapitalist governmental policies, not because of “economic maturity.”)




BONUS:

Thursday, October 2, 2008

Look up the laws of economic liberty (there are different schools of thought)

Liberty's Dictator, our triune God, tells us His law word needs to be established in every area of life. Economics is one of those areas. The world economy today is doomed because it's two classes, the hosts and the parasites, are morally and religiously corrupt. Instead of being a participant of that fiat law order of economic private property destruction (sooner or later); recognize, learn, and establish the law that is regenerating (to name a few):
  1. Not to steal money stealthily Lev. 19:11
  2. The court must implement punitive measures against the thief Ex. 21:37
  3. Each individual must ensure that his scales and weights are accurate Lev. 19:36
  4. Not to commit injustice with scales and weights Lev. 19:35
  5. Not to possess inaccurate scales and weights even if they are not for use Deut. 25:13
  6. Not to move a boundary marker to steal someone's property Deut. 19:14
  7. Not to kidnap Ex. 20:13
  8. Not to rob openly Lev. 19:13
  9. Not to withhold wages or fail to repay a debt Lev. 19:13
  10. Not to covet and scheme to acquire another's possession Ex. 20:14
  11. Not to desire another's possession Deut. 5:18
  12. Return the robbed object or its value Lev. 5:23
  13. The court must implement laws against the one who assaults another or damages another's property Ex. 21:18
  14. Not to murder Ex. 20:12
  15. Not to accept monetary restitution to atone for the murderer Num. 35:31
  16. The court must send the accidental murderer to a city of refuge Num. 35:25
  17. Not to accept monetary restitution instead of being sent to a city of refuge Num. 35:32
  18. Not to leave others distraught with their burdens (but to help either load or unload) Deut. 22:4
  19. Conduct sales according to biblical law Lev. 25:14
  20. Not to overcharge or underpay for an article Lev. 25:14
  21. Not to insult or harm anybody with words Lev. 25:17
  22. Not to cheat a convert monetarily Ex. 22:20

Monday, September 15, 2008

Simple Economics - 2. Barter


Direct exchange (barter) doesn't produce much. It is hard to trade your diamond ring for flowers from the florist, eggs from the farmer, and some shoes from the local market. You can't always divide the item you have in order to barter.

There is another problem. It would be hard to pay workers with items they might not need or want.

Direct exchange is only the beginning of the economic system.

Friday, September 12, 2008

6th grade #7 Economics in One Lesson - Spread-the-Work Schemes

by Henry Hazlitt

I HAVE REFERRED to various union make-work and featherbed practices. These practices, and the public toleration of them, spring from the same fundamental fallacy as the fear of machines. This is the belief that a more efficient way of doing a thing destroys jobs, and its necessary corollary that a less efficient way of doing it creates them.

Allied to this fallacy is the belief that there is just a fixed amount of work to be done in the world, and that, if we cannot add to this work by thinking up more cumbersome ways of doing it, at least we can think of devices for spreading it around among as large a number of people as possible.

This error lies behind the minute subdivision of labor upon which unions insist. In the building trades in large cities the subdivision is notorious. Bricklayers are not allowed to use stones for a chimney: that is the special work of stonemasons. An electrician cannot rip out a board to fix a connection and put it back again: that is the special job, no matter how simple it may be, of the carpenters. A plumber will not remove or put back a tile incident to fixing a leak in the shower: that is the job of a tile-setter.

Furious “jurisdictional” strikes are fought among unions for the exclusive right to do certain types of borderline jobs. In a statement prepared by the American railroads for the Attorney-General’s Committee on Administrative Procedure, the roads gave innumerable examples in which the National Railroad Adjustment Board had decided that

each separate operation on the railroad, no matter how minute, such as talking over a telephone or spiking or unspiking a switch, is so far an exclusive property of a particular class of employee that if an employee of another class, in the course of his regular duties, performs such operations he must not only be paid an extra day’s wages for doing so, but at the same time the furloughed or unemployed members of the class held to be entitled to perform the operation must be paid a day’s wages for not having been called upon to perform it.

It is true that a few persons can profit at the expense of the rest of us from this minute arbitrary subdivision of labor— provided it happens in their case alone. But those who support it as a general practice fail to see that it always raises production costs; that it results on net balance in less work done and in fewer goods produced. The householder who is forced to employ two men to do the work of one has, it is true, given employment to one extra man. But he has just that much less money left over to spend on something that would employ somebody else. Because his bathroom leak has been repaired at double what it should have cost, he decides not to buy the new sweater he wanted. “Labor” is no better off, because a day’s employment of an unneeded tile-setter has meant a day’s disemployment of a sweater knitter or machine handler. The householder, however, is worse off. Instead of having a repaired shower and a sweater, he has the shower and no sweater. And if we count the sweater as part of the national wealth, the country is short one sweater. This symbolizes the net result of the effort to make extra work by arbitrary subdivision of labor.

But there are other schemes for “spreading the work,” often put forward by union spokesmen and legislators. The most frequent of these is the proposal to shorten the working week, usually by law. The belief that it would “spread the work” and “give more jobs” was one of the main reasons behind the inclusion of the penaltyovertime provision in the existing Federal Wage-Hour Law. The previous legislation in the states, forbidding the employment of women or minors for more, say, than forty-eight hours a week, was based on the conviction that longer hours were injurious to health and morale. Some of it was based on the belief that longer hours were harmful to efficiency. But the provision in the federal law, that an employer must pay a worker a 50 percent premium above his regular hourly rate of wages for all hours worked in any week above forty, was not based primarily on the belief that forty-five hours a week, say, was injurious either to health or efficiency. It was inserted partly in the hope of boosting the worker’s weekly income, and partly in the hope that, by discouraging the employer from taking on anyone regularly for more than forty hours a week, it would force him to employ additional workers instead. At the time of writing this, there are many schemes for “averting unemployment” by enacting a thirty-hour week or a four-day week.

What is the actual effect of such plans, whether enforced by individual unions or by legislation? It will clarify the problem if we consider two cases. The first is a reduction in the standard working week from forty hours to thirty without any change in the hourly rate of pay. The second is a reduction in the working week from forty hours to thirty, but with a sufficient increase in hourly wage rates to maintain the same weekly pay for the individual workers already employed.

Let us take the first case. We assume that the working week is cut from forty hours to thirty, with no change in hourly pay. If there is substantial unemployment when this plan is put into effect, the plan will no doubt provide additional jobs. We cannot assume that it will provide sufficient additional jobs, however, to maintain the same payrolls and the same number of man-hours as before, unless we make the unlikely assumptions that in each industry there has been exactly the same percentage of unemployment and that the new men and women employed are no less efficient at their special tasks on the average than those who had already been employed. But suppose we do make these assumptions. Suppose we do assume that the right number of additional workers of each skill is available, and that the new workers do not raise production costs. What will be the result of reducing the working week from forty hours to thirty (without any increase in hourly pay)?

Though more workers will be employed, each will be working fewer hours, and there will, therefore, be no net increase in man-hours. It is unlikely that there will be any significant increase in production. Total payrolls and “purchasing power” will be no larger. All that will have happened, even under the most favorable assumptions (which would seldom be realized) is that the workers previously employed will subsidize, in effect, the workers previously unemployed. For in order that the new workers will individually receive three-fourths as many dollars a week as the old workers used to receive, the old workers will themselves now individually receive only three-fourths as many dollars a week as previously. It is true that the old workers will now work fewer hours; but this purchase of more leisure at a high price is presumably not a decision they have made for its own sake: it is a sacrifice made to provide others with jobs.

The labor union leaders who demand shorter weeks to “spread the work” usually recognize this, and therefore they put the proposal forward in a form in which everyone is supposed to eat his cake and have it too. Reduce the working week from forty hours to thirty, they tell us, to provide more jobs; but compensate for the shorter week by increasing the hourly rate of pay by 33.33 percent. The workers employed, say, were previously getting an average of $226 a week for forty hours work; in order that they may still get $226 for only thirty hours work, the hourly rate of pay must be advanced to an average of more than $7.53.

What would be the consequences of such a plan? The first and most obvious consequence would be to raise costs of production. If we assume that the workers, when previously employed for forty hours, were getting less than the level of production costs, prices and profits made possible, then they could have got the hourly increase without reducing the length of the working week. They could, in other words, have worked the same number of hours and got their total weekly incomes increased by one-third, instead of merely getting, as they are under the new thirty-hour week, the same weekly income as before. But if under the forty-hour week, the workers were already getting as high a wage as the level of production costs and prices made possible (and the very unemployment they are trying to cure may be a sign that they were already getting even more than this), then the increase in production costs as a result of the 33.33 percent increase in hourly wage rates will be much greater than the existing state of prices, production and costs can stand.

The result of the higher wage rate, therefore, will be a much greater unemployment than before. The least efficient firms will be thrown out of business, and the least efficient workers will be thrown out of jobs. Production will be reduced all around the circle. Higher production costs and scarcer supplies will tend to raise prices, so that workers can buy less with the same dollar wages; on the other hand, the increased unemployment will shrink demand and hence tend to lower prices. What ultimately happens to the prices of goods will depend upon what monetary policies are then allowed. But if a policy of monetary inflation is pursued, to enable prices to rise so that the increased hourly wages can be paid, this will merely be a disguised way of reducing real wage rates, so that these will return, in terms of the amount of goods they can purchase, to the same real rate as before. The result would then be the same as if the working week had been reduced without an increase in hourly wage rates. And the results of that have already been discussed.

The spread-the-work schemes, in brief, rest on the same sort of illusion that we have been considering. The people who support such schemes think only of the employment they might provide for particular persons or groups; they do not stop to consider what their whole effect would be on everybody.

The spread-the-work schemes rest also, as we began by pointing out, on the false assumption that there is just a fixed amount of work to be done. There could be no greater fallacy. There is no limit to the amount of work to be done as long as any human need or wish that work could fill remains unsatisfied. In a modern exchange economy, the most work will be done when prices, costs and wages are in the best relations with each other. What these relations are we shall later consider.

Thursday, September 11, 2008

Simple Economics - 1. The Value of Exchange



Did Robinson Crusoe have money?

How did money begin? Can you eat gold coins?

Crusoe and Friday could just TRADE with each other for the things that they wanted or needed.

To “trade” is to swap, exchange, and barter.

When Crusoe, say, exchanges some fish for lumber, he values the lumber he "buys" more than the fish he "sells," while Friday, on the contrary, values the fish more than the lumber.

The fish may be more valuable than the lumber. The exchange does not have to be equal.

When more and more people come together and more families want to exchange with one another “markets” and “money” start to show up.

Men exchange because they need or want goods, services, or both.

Different people in different places provide different goods and services to exchange.

Exchange is also called commerce.

A system that allows trade is called a market.

The original form of trade is barter, the direct buying and selling of goods and services.

Most of the time modern traders “exchange”, buy and sell, with money.

As a result, buying can be separated from selling, or earning.

Exchange is the lifeblood,

not only of our economy, but of civilization itself.

copy, print and color. Where is the market?

source: Murray Rothbard

Thursday, September 4, 2008

6th grade #7 Economics in One Lesson - The Curse of Machinery

by Henry Hazlitt

The Lesson Applied

The Curse of Machinery

AMONG THE MOST viable of all economic delusions is the belief that machines on net balance create unemployment. Destroyed a thousand times, it has risen a thousand times out of its own ashes as hardy and vigorous as ever. Whenever there is long-continued mass unemployment, machines get the blame anew. This fallacy is still the basis of many labor union practices. The public tolerates these practices because it either believes at bottom that the unions are right, or is too confused to see just why they are wrong.

The belief that machines cause unemployment, when held with any logical consistency, leads to preposterous conclusions. Not only must we be causing unemployment with every technological improvement we make today, but primitive man must have started causing it with the first efforts he made to save himself from needless toil and sweat.

To go no further back, let us turn to Adam Smith’s Wealth of Nations, published in 1776. The first chapter of this remarkable book is called “Of the Division of Labor,” and on the second page of this first chapter the author tells us that a workman unacquainted with the use of machinery employed in pin-making “could scarce make one pin a day, and certainly could not make twenty,” but with the use of this machinery he can make 4,800 pins a day. So already, alas, in Adam Smith’s time, machinery had thrown from 240 to 4,800 pin-makers out of work for every one it kept. In the pin-making industry there was already, if machines merely throw men out of jobs, 99.98 percent unemployment. Could things be blacker?

Things could be blacker, for the Industrial Revolution was just in its infancy. Let us look at some of the incidents and aspects of that revolution. Let us see, for example, what happened in the stocking industry. New stocking frames as they were introduced were destroyed by the handicraft workmen (over 1000 in a single riot), houses were burned, the inventors were threatened and obliged to flee for their lives, and order was not finally restored until the military had been called out and the leading rioters had been either transported or hanged.

Now it is important to bear in mind that insofar as the rioters were thinking of their own immediate or even longer futures their opposition to the machine was rational. For William Felkin, in his History of the Machine-Wrought Hosiery Manufactures (1867), tells us (though the statement seems implausible) that the larger part of the 50,000 English stocking knitters and their families did not fully emerge from the hunger and misery entailed by the introduction of the machine for the next forty years. But insofar as the rioters believed, as most of them undoubtedly did, that the machine was permanently displacing men, they were mistaken, for before the end of the nineteenth century the stocking industry was employing at least a hundred men for every man it employed at the beginning of the century.

Arkwright invented his cotton-spinning machinery in 1760. At that time it was estimated that there were in England 5,200 spinners using spinning wheels, and 2,700 weavers—in all, 7,900 persons engaged in the production of cotton textiles. The introduction of Arkwright’s invention was opposed on the ground that it threatened the livelihood of the workers, and the opposition had to be put down by force. Yet in 1787—twenty-seven years after the invention appeared—a parliamentary inquiry showed that the number of persons actually engaged in the spinning and weaving of cotton had risen from 7,900 to 320,000, an increase of 4,400 percent.

If the reader will consult such a book as Recent Economic Changes, by David A. Wells, published in 1889, he will find passages that, except for the dates and absolute amounts involved, might have been written by our technophobes of today. Let me quote a few:

During the ten years from 1870 to 1880, inclusive, the British mercantile marine increased its movement, in the matter of foreign entries and clearances alone, to the extent of 22,000,000 tons... yet the number of men who were employed in effecting this great movement had decreased in 1880, as compared with 1870, to the extent of about three thousand (2,990 exactly). What did it? The introduction of steam-hoisting machines and grain elevators upon the wharves and docks, the employment of steam power, etc....

In 1873 Bessemer steel in England, where its price had not been enhanced by protective duties, commanded $80 per ton; in 1886 it was profitably manufactured and sold in the same country for less than $20 per ton. Within the same time the annual production capacity of a Bessemer converter has been increased fourfold, with no increase but rather a diminution of the involved labor.

The power capacity already being exerted by the steam engines of the world in existence and working in the year 1887 has been estimated by the Bureau of Statistics at Berlin as equivalent to that of 200,000,000 horses, representing approximately 1,000,000,000 men; or at least three times the working population of the earth....

One would think that this last figure would have caused Mr. Wells to pause, and wonder why there was any employment left in the world of 1889 at all; but he merely concluded, with restrained pessimism, that “under such circumstances industrial overproduction . . . may become chronic.”

In the depression of 1932, the game of blaming unemployment on the machines started all over again. Within a few months the doctrines of a group calling themselves the Technocrats had spread through the country like a forest fire. I shall not weary the reader with a recital of the fantastic figures put forward by this group or with corrections to show what the real facts were. It is enough to say that the Technocrats returned to the error in all its native purity that machines permanently displace men—except that, in their ignorance, they presented this error as a new and revolutionary discovery of their own. It was simply one more illustration of Santayana’s aphorism that those who cannot remember the past are condemned to repeat it.

The Technocrats were finally laughed out of existence; but their doctrine, which preceded them, lingers on. It is reflected in hundreds of make-work rules and featherbed practices by labor unions; and these rules and practices are tolerated and even approved because of the confusion on this point in the public mind.

Testifying on behalf of the United States Department of Justice before the Temporary National Economic Committee (better known as the TNEC) in March 1941, Corwin Edwards cited innumerable examples of such practices. The electrical union in New York City was charged with refusal to install electrical equipment made outside of New York State unless the equipment was disassembled and reassembled at the job site. In Houston, Texas, master plumbers and the plumbing union agreed that piping prefabricated for installation would be installed by the union only if the thread were cut off one end of the pipe and new thread were cut at the job site. Various locals of the painters’ union imposed restrictions on the use of sprayguns, restrictions in many cases designed merely to make work by requiring the slower process of applying paint with a brush. A local of the teamsters’ union required that every truck entering the New York metropolitan area have a local driver in addition to the driver already employed. In various cities the electrical union required that if any temporary light or power was to be used on a construction job there must be a full-time maintenance electrician, who should not be permitted to do any electrical construction work. This rule, according to Mr. Edwards, “often involves the hiring of a man who spends his day reading or playing solitaire and does nothing except throw a switch at the beginning and end of the day.”

One could go on to cite such make-work practices in many other fields. In the railroad industry, the unions insist that firemen be employed on types of locomotives that do not need them. In the theaters unions insist on the use of scene shifters even in plays in which no scenery is used. The musicians’ union required so-called stand-in musicians or even whole orchestras to be employed in many cases where only phonograph records were needed.

By 1961 there was no sign that the fallacy had died. Not only union leaders but government officials talked solemnly of “automation” as a major cause of unemployment. Automation was discussed as if it were something entirely new in the world. It was in fact merely a new name for continued technological advance and further progress in labor-saving equipment.


The Curse of Machinery

Section 2

But the opposition to labor-saving machinery, even today, is not confined to economic illiterates. As late as 1970, a book appeared by a writer so highly regarded that he has since received the Nobel Prize in economics. His book opposed the introduction of laborsaving machines in the underdeveloped countries on the ground that they “decrease the demand for labor”!* The logical conclusion from this would be that the way to maximize jobs is to make all labor as inefficient and unproductive as possible. It implies that the English Luddite rioters, who in the early nineteenth century destroyed stocking frames, steam-power looms, and shearing machines, were after all doing the right thing.

One might pile up mountains of figures to show how wrong were the technophobes of the past. But it would do no good unless we understood clearly why they were wrong. For statistics and history are useless in economics unless accompanied by a basic deductive understanding of the facts—which means in this case an understanding of why the past consequences of the introduction of machinery and other labor-saving devices had to occur. Otherwise the technophobes will assert (as they do in fact assert when you point out to them that the prophecies of their predecessorsturned out to be absurd): “That may have been all very well in the past but today conditions are fundamentally different; and now we simply cannot afford to develop any more labor-saving machines.” Mrs. Eleanor Roosevelt, indeed, in a syndicated newspaper column of September19, 1945, wrote: “We have reached a point today where labor-saving devices are good only when they do not throw the worker out of his job.”

If it were indeed true that the introduction of labor-saving machinery is a cause of constantly mounting unemployment and misery, the logical conclusions to be drawn would be revolutionary, not only in the technical field but for our whole concept of civilization. Not only should we have to regard all further technical progress as a calamity; we should have to regard all past technical progress with equal horror. Every day each of us in his own activity is engaged in trying to reduce the effort it requires to accomplish a given result. Each of us is trying to save his own labor, to economize the means required to achieve his ends. Every employer, small as well as large, seeks constantly to gain his results more economically and efficiently— that is, by saving labor. Every intelligent workman tries to cut down the effort necessary to accomplish his assigned job. The most ambitious of us try tirelessly to increase the results we can achieve in a given number of hours. The technophobes, if they were logical and consistent, would have to dismiss all this progress and ingenuity as not only useless but vicious. Why should freight be carried from Chicago to New York by railroad when we could employ enormously more men, for example, to carry it all on their backs?

Theories as false as this are never held with logical consistency, but they do great harm because they are held at all. Let us, therefore, try to see exactly what happens when technical improvements and labor-saving machinery are introduced. The details will vary in each instance, depending upon the particular conditions that prevail in a given industry or period. But we shall assume an example that involves the main possibilities.

Suppose a clothing manufacturer learns of a machine that will make men’s and women s overcoats for half as much labor as previously. He installs the machines and drops half his labor force.

This looks at first glance like a clear loss of employment. But the machine itself required labor to make it; so here, as one offset, are jobs that would not otherwise have existed. The manufacturer, however, would have adopted the machine only if it had either made better suits for half as much labor, or had made the same kind of suits at a smaller cost. If we assume the latter, we cannot assume that the amount of labor to make the machines was as great in terms of payrolls as the amount of labor that the clothing manufacturer hopes to save in the long run by adopting the machine; otherwise there would have been no economy, and he would not have adopted it.

So there is still a net loss of employment to be accounted for. But we should at least keep in mind the real possibility that even the first effect of the introduction of labor-saving machinery may be to increase employment on net balance; because it is usually only in the long run that the clothing manufacturer expects to save money by adopting the machine: it may take several years for the machine to “pay for itself.”

After the machine has produced economies sufficient to offset its cost, the clothing manufacturer has more profits than before. (We shall assume that he merely sells his coats for the same price as his competitors and makes no effort to undersell them.) At this point, it may seem, labor has suffered a net loss of employment, while it is only the manufacturer, the capitalist, who has gained. But it is precisely out of these extra profits that the subsequent social gains must come. The manufacturer must use these extra profits in at least one of three ways, and possibly he will use part of them in all three: (1) he will use the extra profits to expand his operations by buying more machines to make more coats; or (2) he will invest the extra profits in some other industry; or (3) he will spend the extra profits on increasing his own consumption. Whichever of these three courses he takes, he will increase employment.

In other words, the manufacturer, as a result of his economies, has profits that he did not have before. Every dollar of the amount he has saved in direct wages to former coat makers, he now has to pay out in indirect wages to the makers of the new machine, or to the workers in another capital-using industry, or to the makers of a new house or car for himself or for jewelry and furs for his wife. In any case (unless he is a pointless hoarder) he gives indirectly as many jobs as he ceased to give directly.

But the matter does not and cannot rest at this stage. If this enterprising manufacturer effects great economies as compared with his competitors, either he will begin to expand his operations at their expense, or they will start buying the machines too. Again more work will be given to the makers of the machines. But competition and production will then also begin to force down the price of overcoats. There will no longer be as great profits for those who adopt the new machines. The rate of profit of the manufacturers using the new machine will begin to drop, while the manufacturers who have still not adopted the machine may now make no profit at all. The savings, in other words, will begin to be passed along to the buyers of overcoats—to the consumers.

But as overcoats are now cheaper, more people will buy them. This means that, though it takes fewer people to make the same number of overcoats as before, more overcoats are now being made than before. If the demand for overcoats is what economists call “elastic”—that is, if a fall in the price of overcoats causes a larger total amount of money to be spent on overcoats than previously— then more people may be employed even in making overcoats than before the new labor-saving machine was introduced. We have already seen how this actually happened historically with stockings and other textiles.

But the new employment does not depend on the elasticity of demand for the particular product involved. Suppose that, though the price of overcoats was almost cut in half—from a former price, say, of $150 to a new price of $100—not a single additional coat was sold. The result would be that while consumers were as well provided with new overcoats as before, each buyer would now have $50 left over that he would not have had left over before. He will therefore spend this $50 for something else, and so provide increased employment in other lines.

In brief, on net balance machines, technological improvements, automation, economies and efficiency do not throw men out of work.

The Curse of Machinery

Section 3

Not all inventions and discoveries, of course, are “labor-saving” machines. Some of them, like precision instruments, like nylon, lucite, plywood and plastics of all kinds, simply improve the quality of products. Others, like the telephone or the airplane, perform operations that direct human labor could not perform at all. Still others bring into existence objects and services, such as X-ray machines, radios, TV sets, air-conditioners and computers, that would otherwise not even exist. But in the foregoing illustration we have taken precisely the kind of machine that has been the special object of modern technophobia.

It is possible, of course, to push too far the argument that machines do not on net balance throw men out of work. It is sometimes argued, for example, that machines create more jobs than would otherwise have existed. Under certain conditions this may be true. They can certainly create enormously more jobs in particular trades. The eighteenth century figures for the textile industries are a case in point. Their modern counterparts are certainly no less striking. In 1910, 140,000 persons were employed in the United States in the newly created automobile industry. In 1920, as the product was improved and its cost reduced, the industry employed 250,000 In 1930, as this product improvement and cost reduction continued, employment in the industry was 380,000. In 1973 it had risen to 941,000. By 1973, 514,000 people were employed in making aircraft and aircraft parts, and 393,000 were engaged in making electronic components. So it has been in one newly created trade after another, as the invention was improved and the cost reduced.2

There is also an absolute sense in which machines may be said to have enormously increased the number of jobs. The population of the world today is four times as great as in the middle of the eighteenth century, before the Industrial Revolution had got well under way. Machines may be said to have given birth to this increased population; for without the machines, the world would not have been able to support it. Three out of every four of us, therefore, may be said to owe not only our jobs but our very lives to machines.

Yet it is a misconception to think of the function or result of machines as primarily one of creating jobs. The real result of the machine is to increase production, to raise the standard of living, to increase economic welfare. It is no trick to employ everybody, even (or especially) in the most primitive economy. Full employment—very full employment; long, weary, backbreaking employment—is characteristic of precisely the nations that are most retarded industrially. Where full employment already exists, new machines, inventions and discoveries cannot—until there has been time for an increase in population — bring more employment. They are likely to bring more unemployment (but this time I am speaking of voluntaiy and not involuntary unemployment) because people can now afford to work fewer hours, while children and the overaged no longer need to work.

What machines do, to repeat, is to bring an increase in production and an increase in the standard of living. They may do this in either of two ways. They do it by making goods cheaper for consumers (as in our illustration of the overcoats), or they do it by increasing wages because they increase the productivity of the workers. In other words, they either increase money wages or, by reducing prices, they increase the goods and services that the same money wages will buy. Sometimes they do both. What actually happens will depend in large part upon the monetary policy pursued in a country. But in any case, machines, inventions and discoveries increase real wages.


The Curse of Machinery

Section 4

A warning is necessary before we leave this subject. It was precisely the great merit of the classical economists that they looked for secondary consequences, that they were concerned with the effects of a given economic policy or development in the long run and on the whole community. But it was also their defect that, in taking the long view and the broad view, they sometimes neglected to take also the short view and the narrow view. They were too often inclined to minimize or to forget altogether the immediate effects of developments on special groups. We have seen, for example, that many of the English stocking knitters suffered real tragedies as a result of the introduction of the new stocking frames, one of the earliest inventions of the Industrial Revolution.

But such facts and their modern counterparts have led some writers to the opposite extreme of looking only at the immediate effects on certain groups. Joe Smith is thrown out of a job by the introduction of some new machine. “Keep your eye on Joe Smith,” these writers insist. “Never lose track of Joe Smith.” But what they then proceed to do is to keep their eyes only on Joe Smith, and to forget Tom Jones, who has just got a new job in making the new machine, and Ted Brown, who has just got a job operating one, and Daisy Miller, who can now buy a coat for half what it used to cost her. And because they think only of Joe Smith, they end by advocating reactionary and nonsensical policies.

Yes, we should keep at least one eye on Joe Smith. He has been thrown out of a job by the new machine. Perhaps he can soon get another job, even a better one. But perhaps, also, he has devoted many years of his life to acquiring and improving a special skill for which the market no longer has any use. He has lost this investment in himself, in his old skill, just as his former employer, perhaps, has lost his investment in old machines or processes suddenly rendered obsolete. He was a skilled workman, and paid as a skilled workman. Now he has become overnight an unskilled workman again, and can hope, for the present, only for the wages of an unskilled workman, because the one skill he had is no longer needed. We cannot and must not forget Joe Smith. His is one of the personal tragedies that, as we shall see, are incident to nearly all industrial and economic progress.

To ask precisely what course we should follow with Joe Smith —whether we should let him make his own adjustment, give him separation pay or unemployment compensation, put him on relief, or train him at government expense for a new job—would carry us beyond the point that we are here trying to illustrate. The central lesson is that we should try to see all the main consequences of any economic policy or development—the immediate effects on special groups, and the long-run effects on all groups.

If we have devoted considerable space to this issue, it is because our conclusions regarding the effects of new machinery, inventions and discoveries on employment, production and welfare are crucial. If we are wrong about these, there are few things in economics about which we are likely to be right.

Click to enlarge

...

Compare your current purchasing power with yesterdays:
Inflation Calculator

Economics for your Children:

Teach your children not to be debtors.

Look up the laws of economic liberty

Liberty's Dictator, our triune God, tells us His law word needs to be established in every area of life. Economics is one of those areas. The world economy today is doomed because it's two classes, the hosts and the parasites, are morally and religiously corrupt. Instead of being a participant of that fiat law order of economic private property destruction (sooner or later); recognize, learn, and establish the law that is regenerating (to name a few):
  1. Not to steal money stealthily Lev. 19:11
  2. The court must implement punitive measures against the thief Ex. 21:37
  3. Each individual must ensure that his scales and weights are accurate Lev. 19:36
  4. Not to commit injustice with scales and weights Lev. 19:35
  5. Not to possess inaccurate scales and weights even if they are not for use Deut. 25:13
  6. Not to move a boundary marker to steal someone's property Deut. 19:14
  7. Not to kidnap Ex. 20:13
  8. Not to rob openly Lev. 19:13
  9. Not to withhold wages or fail to repay a debt Lev. 19:13
  10. Not to covet and scheme to acquire another's possession Ex. 20:14
  11. Not to desire another's possession Deut. 5:18
  12. Return the robbed object or its value Lev. 5:23
  13. The court must implement laws against the one who assaults another or damages another's property Ex. 21:18
  14. Not to murder Ex. 20:12
  15. Not to accept monetary restitution to atone for the murderer Num. 35:31
  16. The court must send the accidental murderer to a city of refuge Num. 35:25
  17. Not to accept monetary restitution instead of being sent to a city of refuge Num. 35:32
  18. Not to leave others distraught with their burdens (but to help either load or unload) Deut. 22:4
  19. Conduct sales according to biblical law Lev. 25:14
  20. Not to overcharge or underpay for an article Lev. 25:14
  21. Not to insult or harm anybody with words Lev. 25:17
  22. Not to cheat a convert monetarily Ex. 22:20