Friday, 15 June 2012

Cunliffe fails history again

Labour’s aspiring would-be leader David Cunliffe continues to head around the country pretending he knows what he’s talking about,  disgracing himself in his first speech with his lack of learning and absence of economic nous, an experience he repeated in front of yesterday’s audience of receivership and liquidation lawyers—reciting history that wasn’t so and economics that never could be.

I still maintain his future lies in poetry.

Let’s see however if we can’t correct some of his latest error-ridden diatribe. He begins with cloth-cap boiler plate before settling into his main theme:

Anyone who seriously believes that the economy can somehow heal itself by being left alone, hasn’t read a newspaper for the last 12 months.

And anyone who thinks the economy has been left alone hasn’t read a newspaper—or a history book—for some time. But this is the level of his flawed analysis, in which virtually every sentence is either a lie, or spin, or just frankly mistaken. He either believes it, or he’s even stupider than the cat’s arse he looks like. [Cunliffe’s drivel appears below in italics, followed by my comments.]

No one these days [he says] seriously believes that a totally unregulated economy will work. Just as important, no one seriously believes that a totally regulated economy will work. It’s a question of getting the balance right.

This is three canards in one, isn’t it: Two straw-men coupling with an attempt to posture as a man of balance. (“Look at me, I’m a moderate!”)  But the fact is, while there are any number of ridiculous regulations that helped cause the crash and that still burden the recovery,* despite his posturing Cunliffe doesn’t suggest removing any burden—but only adding more. 

imageHe talks  of “Lessons Learned From the Great Depression”—and it’s clear on reading further he’s learned none. Perhaps because all of what he appears to know about the Great Depression is not true.**

The Great Depression [he says], for those who haven’t studied history, was caused by a lack of government regulation.

Well, it’s clear Cunliffe has never studied history. The Great Depression—America’s  Great Depression (which was where it began and where it took longest to recover) did not persist for lack of any regulation; it was spun out and spun out by an endless series of regulations pouring out of the White House—regulations to keep wages high, to keep prices high, to cartelise industries, to confiscate gold, to confiscate agricultural produce, to pick winners and subsidise losers, to create a business environment of such complete “regime uncertainty” that no-one (not even the President) knew from one day to the next what what would happen the day after tomorrow.

The 1929 stock market crash triggered an economic tsunami that all but flattened America. Just like now, it was the ordinary people that bore the brunt of the crash and the depression that followed it.
    And, as if the crash itself wasn’t bad enough, the government still refused to intervene, so the situation got worse.

The 1929 crash was not the biggest economic crash in history.  It was not even the biggest crash in that decade. In 192o the stock market fell further and faster than in 1929—and the collapse in the monetary base during 1920–1921 was the largest in U.S. history—yet within eighteen months recovery was complete.

Further, and for a variety of reasons (some of them involving a sick and lame-duck president and a Fed still reluctant to destroy their currency) in 1920-21 neither government nor Federal Reserve Bank “intervened”—in fact in every sense they did the very opposite of  what Cunliffe now recommends:  the government slashed its budget, the Fed hiked interest rates, and the Consumer Price Index dropped like a stone. And the situation rapidly got better, mostly because costs came down as prices came down and businesses had the certainty and lower costs within which to redirect production into new and more profitable ventures.

Things got better, and fast.

So that’s what happened when there was no “intervention.”  And like a laboratory experiment we can contrast it with the prescription tried a decade later, because what was tried there was virtually the diametric opposite with results as grim as described by Cunliffe:

Bank after bank collapsed, along with the millions of families who had entrusted those bankers with their life savings.
By 1933, 11,000 of the United States’ 25,000 banks had failed. That’s nearly half.
People had no money…And so it went on, and on, and on, until, by 1933, nearly 13 million Americans were unemployed. That was a quarter of the total workforce.
And what was the government’s response: nothing.

imageYes, bank after US bank collapsed. 9,646 in all (Cunliffe’s figure is just made up for effect.) They collapsed because the government was doing something: with regulations on branch banking and gold holding it was getting in the way. When nearly half of US banks were failing, how many banks do you think were failing over the border in Canada, where the same regulations weren’t imposed? Answer: not one. The government’s own banking regulations amplified the problem.

And do you know why 1933 was the nadir for banks? Because the incoming president, Franklin Roosevelt, had put it about for months since his election (it taking months for the new president to be inaugurated) that upon his inauguration he would devalue the dollar and confiscate gold, rumours he put about that caused the biggest run on the banks since the Civil War.

And what was the government’s response? Well, it was far from nothing. From 1929 to 1933 Hoover did the exact opposite of sitting on his hands. He was virtually Keynes-Lite, as he himself boasted in his 1932 presidential campaign:

We might have done nothing [said Hoover]. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put it into action.... No government in Washington has hitherto considered that it held so broad a responsibility for leadership in such times.... For the first time in the history of depression, dividends, profits, and the cost of living, have been reduced before wages have suffered.... They were maintained until the cost of living had decreased and the profits had practically vanished. They are now the highest real wages in the world.
Creating new jobs and giving to the whole system a new breath of life; nothing has ever been devised in our history which has done more for ... "the common run of men and women." Some of the reactionary economists urged that we should allow the liquidation to take its course until we had found bottom.... We determined that we would not follow the advice of the bitter-end liquidationists and see the whole body of debtors of the United States brought to bankruptcy and the savings of our people brought to destruction.

imageFeatured in Hoover's plan were increased taxes, lowered interest rates, huge deficits, public dams, public works, restrictions on immigration and trade, and government regulation of banking, finance, industry and labour markets—even his 1932 opponent Franklin Roosevelt accused him (accurately) of “reckless and extravagant” spending, of thinking “that
we ought to center control of everything in Washington as rapidly as possible,” and of
presiding over “the greatest spending administration in peacetime in all of history.”  It was all of it—all the spending, all the alleged “stimulus”—all an attempt to keep up wages and prices and keep the engine ticking over in the manner to which Cunliffe suggests we do today.

It failed.  It failed spectacularly.

By 1933, nearly 13 million Americans were unemployed. Yet when the Second World War began, after eight years of further intervention by Franklin Roosevelt (whose advisers conceded their New Deal was based on the “Hoover New Deal”) , nearly 12 million were still unemployed (unemployment had never dropped below 20% for the whole of the decade) and Roosevelt was to embrace a world war as a way to get the unemployed out of his hair.

Cunliffe '”quotes” Hoover’s Treasury Secretary Andrew Mellon (“by curious coincidence, one of the wealthiest men in America” sneers Cunliffe) who was supposed to have advised Hoover to “liquidate labour, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system.” Fact is, it would have. But the “quote” was actually Hoover’s, and it was him contrasting the “liquidationist” programme of the type followed in 1920 with the “interventionist programme” followed by Hoover and Roosevelt from 1929 to 1933, and 1933 to 1945 respectively.

Cunliffe neither knows nor cares about the truth. He says

the voters threw out Herbert Hoover and voted in Franklin D. Roosevelt. Roosevelt heavily intervened in the economy, regulated the banks and the stockbrokers, and set America on the path of its longest period of economic growth in history.

But as Roosevelt’s own Treasury Secretary Henry Morgenthau summarised for a 1939 Treasury meeting the results of this heavy intervention and regulation

“No, gentlemen, we have tried spending money. We are spending more than we have ever spent before and it does not work. ...I say after eight years of this Administration we have just as much unemployment as when we started…Mr. Doughton: And an enormous debt to boot!
HMJr.: And an enormous debt to boot! We are just sitting here and fiddling and I am just wearing myself out and getting sick. Because why? I can’t see any daylight. I want it for my people, for my children, and your children. I want to see some daylight and I don’t see it…

From Cunliffe neither do we see daylight, only dishonesty. For it is from shibboleths and myths like this he hopes to assemble around himself a braindead mob of zealots eager to accept him and his word as sufficient unto itself to lead him to Prime Ministerial glory—for make no mistake, that is his ambition.

There is more, much more in his speech that challenges both the historical record and the patience of his audience. But since he is going to continue going around the country stirring up ignorance, might I suggest just four questions you might ask from him if you have the misfortune to find yourself in a room with him and a microphone up front.  Ask him,

  • Why did the US economy recover so quickly in 1920-21 by following the opposite of his prescription?
  • How was it that England. Australia, Canada and New Zealand followed more conventional, less interventionist policies than the US and were out of Depression by 1934/45?
  • Why was it that no Canadian banks failed in 1929-33, while US banks were falling over like so many houses of cards?
  • Why was it that when US government sending plummeted in 146 and deficit spending ended, and 10 million US servicemen came home from the war, why was it that instead of the economic disaster predicted by Keynesians at the time this was instead the beginning of real prosperity?

Because the answer to every single one of those simple questions undermines the whole premise on which Cunliffe’s Five Year Plan rests.

* * * * *

* Indeed, the three most regulated parts of the US economy were housing, mortgages and banking; no surprise then that the crash happened at the intersection of all three.
The question is not regulation or not. It’s about what governments can and must do to protect individual rights, property rights and contracts—to protect actions chosen voluntary and production about the separation of state and economics , and after a century of ever-increasing government regulations and spending, do Americans think the obvious solution is to increase government regulations and spending? Why, when companies in the least regulated industries prosper and those in the most heavily regulated industries struggle and fail, do people blame failures on capitalism and free markets?a large number of quite smart people understand it is not a matter of regulation per se

** The best, most concise debunking of what many people think they know about the Great Depression can be gleaned from Larry Reed’s short ‘Great Myths of the Great Depression,’ online in a 28-page PDF.

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Thursday, 14 June 2012

How This Bear Market Could Last Another 18 Years… Just Like Japan’s

_Kris_SayceGuest post by Kris Sayce from Money Morning Australia, who looks at the country that most famously began following the “stimulus” prescription more than twenty years ago.

Last week, Bloomberg News reported:

‘Japan’s Topix Index (TPX) entered a bear market, with stocks plunging to a level not seen since 1983 as Europe’s debt crisis spurs a global flight from risk assets, driving up the yen and threatening exports…
‘In 1983, the Topix was in the sixth year of a 12-year advance that ended when an asset bubble burst, ushering in an era of deflation and economic stagnation. The gauge has lost 76 percent since peaking on Dec. 18, 1989.’

It has been a rough time for Japanese stock investors.

An entire generation of Japanese have lived through a bear market. Japanese investors who were 18 when they bought their first shares in 1989 are now 41 years old.

And so, as the Aussie market nears the end of its fifth year as a bear market, the question on every investor’s lips should be: Will Aussie stocks fall for another 18 years?

We’ll give you our take on it now…

Until recently, most people thought asset prices always went up.

This was mostly the view among stock and housing investors.


Because it was what they had seen during their lifetime. Even when house and stock prices fell, it wasn’t long before they recovered and went higher again.

Take the 1987 and 2001 stock market crashes. Or the early 1990s housing bust. Soon prices stopped falling, levelled off, and then soared higher.

What the Japanese Bear Market Tells Us

But as the Japanese experience shows, stock and housing prices don’t always go up, and they don’t always recover after a crash.

Look at that quote from Bloomberg again. The Topix Index ‘has lost 76 percent since peaking on Dec. 18, 1989.′

And the important thing is, if Japanese stock market history tells you anything, over time the impact of the crash gets worse, not better. As this chart of another Japanese index, the Nikkei 225 shows:

chart of another Japanese indexSource: Wikipedia

Following the 1989 peak, the index halved over the next four years. Then it steadied into a range, before continuing to fall.

The Japanese stock market is an important lesson for any investor about the impact of credit-fuelled bubbles. We won’t go into the history of the Japanese bubble, except to remind you of how the 3.41 km2 of land containing Tokyo’s Imperial Palace was valued at ‘more than all the real estate in California’ during the 1980s boom (Edward Jay Epstein, 2009).

What it tells you is that rather than stock and housing prices always going up (in the long run), they behave more like a bouncing ball.

In Japan during the 1980s, the credit-fuelled boom threw the ball high into the air. It began to fall in 1989. The ball hit the floor in the early 1990s…bounced until the mid-1990s…fell and hit the floor again by the mid-2000s…and so on.

You get the point.

But why should this happen? And what can it tell us about the future direction of the Aussie market?

Following Japan’s Bear Market Lead

The Japan experts will tell us Japan is unique. The usual spiel is that Japan owns all its own debt and so it’s different to the debt picture in the US, Europe and elsewhere.

Maybe that’s true. And maybe it isn’t. Or maybe Japan’s economy is just a few years ahead of the game. Consider these two charts from the latest Banque de France Financial Stability Review:

Holders of government debtClick here to enlarge
Source: Banque de France

Right now, Japanese residents and the Bank of Japan hold 94% of all Japanese government debt.

Compare that to 52% of US government debt held by the Fed and private residents. In fact, US Fed and government (including government agencies) hold USD$6.328 trillion…about 40% of all US debt.

And according to a 28th March report by the Wall Street Journal, ‘The Federal Reserve is propping up the entire US economy by buying 61 percent of the government debt issued by the Treasury Department…’

The report concludes that this is ‘a trend that cannot last’.

But what if it can last?

What if the US Fed keeps buying US debt?

Who’s to say that in 10 or 15 years, US residents and the Fed won’t own 94% of all US debt?

It doesn’t seem likely now, but then, four years ago it didn’t seem likely that the US government would own 40% of its own debt today.

With so much money flowing into government coffers, investors need to face the facts: the era of financial asset growth is over.

No government will ever choose to cut spending. Remember that all the talk of austerity is false. Government spending in the US, UK and Australia will go up over the next few years…even though the politicians claim they’re making savage cuts.

(All they’re doing is cutting the spending growth rate, not the nominal rate. In other words, if the previous forecast was to grow government spending by 5% next year, but it only grows 4.5% they call it a spending cut…even though spending has risen.)

We’re afraid things are the same for Australia.

The Boom is Over, Get Used to a Long Bear Market

Australia has benefited from a decade of the China resources boom. But that boom is over. US and European private spending is falling. And as Europe and the US are China’s two biggest export markets, any problems in those economies will impact China…and therefore Australia.

That’s despite what the mainstream media told you when they claimed Europe is ‘so far away’. That growth was in Asia…where we are. That’s only true if Americans and Europeans kept spending.

The problem facing Australia over the next few years is the problem that the US and Europe face now. How to pay for an expensive welfare system when tax revenues fall?

The answer will be to look to Japan, Europe and the US… print more money and have the central bank buy the government’s debt.

Anyone who thinks Australia or New Zealand is different due to the lower levels of government debt is kidding themselves. It only takes a few years of budget deficits and suddenly the government and taxpayer are running just to stand still.

So, far from being an exception, Japan is more like the blue-print for governments and central bankers everywhere. Get ready for this bear market to last another 18 years…at least.

Posted by permission of Money Morning Australia, where
this post first appeared.


Wednesday, 13 June 2012

Bring back capital controls? It’s already happening!

You may have noticed in recent months a growing chorus of economic morons, from Jane Kelsey to Bernard Hickey to NZ Manufacturers and Exporters Association CEO John Walley, calling for the imposition of capital controls—or to put it in real English, for the government to put bans, restrictions and prohibitions on the use, storage and movement of your money and valuables.

What would that be like?  Don’t just wonder: look. Look at the places where capital controls have already been imposed—in Italy, in Greece, in Ireland, in Iceland, in Portugal, in Spain…

Simon Black from the Sovereign Man blog summarises today’s frightening re-impositions of what we thought we’d seen the last of in NZ in 1985 (and in rest of the developed world in the late 70s), before which we “enjoyed” fixed exchange rates, extensive controls on capital flows … and the “Polish shipyard” economy presided over by Robert David Muldoon.

It starts: the government’s plan to steal your money.
    THERE ARE CONSEQUENCES TO being flat broke.
    There are consequences to investing any level of confidence in a financial system underpinned by debt and the creation of paper currency.
    There are consequences for ignoring reality and pretending that everything is normal.
    This is one of them: European officials yesterday flat out admitted that they were discussing rolling out a series of harsh capital controls across the continent, including bank withdrawal limits and closing down Europe's borderless Schengen area.
    Some of these measures have already been implemented sporadically; customers of Italian bank BNI, for example, were all frozen out of their accounts starting May 31st upon the recommendation and approval of Italy's bank regulator. No ATM withdrawals, no bill payments, nothing. Just locked out overnight.
    In Greece, the government has taken to simply pulling funds directly out of its citizens' bank accounts; anyone suspected of being a tax cheat (with a very loose interpretation in the sole discretion of the government) is being relieved of their funds without so much as administrative notification.
    It's no wonder why, according to the Greek daily paper Kathimerini, over $125 million per day is fleeing the Greek banking system.
    European political leaders aim to put a tourniquet on this wound in the worst possible way.

    Simply, capital controls are policies which restrict the free flow of capital into, out of, through, and within a nation's borders. They can take a variety of forms, including:

  • Setting a fixed amount for bank withdrawals, or suspending them altogether
  • Forcing citizens or banks to hold government debt
  • Curtailing or suspending international bank transfers
  • Curtailing or suspending foreign exchange transactions
  • Criminalizing the purchase and ownership of precious metals
  • Fixing an official exchange rate and criminalizing market-based transactions

Establishing capital controls is one of the worst forms of theft that a government can impose. It traps people's hard earned savings and their future income within a nation's borders.
    This trapped pool of capital allows the government to transfer wealth from the people to their own coffers through excessive taxation or rampant inflation... both of which soon follow.
    The thing about capital controls is that they're like airline baggage fees; ultimately, all governments want to do it, they're just waiting on the first guy to impose them so that they can shrug their shoulders, stick it to the people, and blame 'industry standards.'
    Moreover, capital controls were a normal part of the global economic landscape for most of the 20th century, right up to the 1970s. It's been a long time coming for governments to return to that model.
    Since the inception of this letter, it has been a constant theme for us to talk about the increasing threat of capital controls. Your money, your savings, your livelihood are all under attack by insolvent governments, and it's critical to take steps to reduce your exposure.
    When European financial leaders all openly admit that they're making plans to establish continent-wide capital controls, it really begs the question-- what additional warning sign does one need?
    The dominos have already started falling. Iceland. Ireland. Greece. Spain. Portugal. Italy. Cyprus. Soon even France and the rest of Europe.

And it will come to New Zealand as well. There are well over 50 billion reasons why—and know-nothing cheerleaders like Hickey, Kelsey and the well-named Walley to talk it up.

If you don’t start fighting back now, it might be too late.

PS: In that same article linked to above, Simon Black concludes with things you can do when the government comes for your money.


No power? How about no Greens.

What’s the definition of humbug? I’m not sure exactly, but it’s something involving Russel Bloody Norman and his Green Party. Who are on Red Radio this morning arguing that the country needs security of electricity supply!

Excuse me, this is Russel Bloody Norman from the Green Party arguing for security of electricity supply!?

It just makes your jaw drop.

This is the Green Party who partied when the coal-fired Meremere Power Station was mothballed and protested when it wanted to re-open transforming waste to power. Who celebrated when Marsden A closed and Marsden B was disallowed from opening—and whose protesting helped to make the closing necessary and the opening impossible.  Who cheered when power stations closed in New Plymouth, Palmerston North and Te Awamutu.  Who help to throttle every proposed expansion of every existing power plant, and who helped to kill new generation from Project Hayes, Project Aqua, Mokihinui Hydro, Tongariro Hydro and hydro using the Whanganui River, Wairau River, Matiri River, Makititaki River or the Arnold River;  any further hydro on the Clutha River; any possible gas or tidal generation around the Kaipara; and who even as we speak are helping to delay new generation projects at Dobson, Castle Hill, Hurunui, Matiri, Mill Creek, Mokau, North Bank, Puketoi, Rotoma, Stockton, and Wairau.

They’ve protested every coal-fired power-station that has been opened—and every gas-fired and oil-fired power station proposed—and they’ve resisted every coal mine, gas field and oil field being explored, coming on stream or being exploited. They’ve argued against every wind project—and helped to spearhead resistance. They’ve helped to stop every new hydro scheme proposed –and every oil or gas-fired plant dreamed up. They helped to promote the Kyoto Protocol and the related Emissions Trading Scam, which serve to strangle coal, oil and gas-fired power stations, and the Resource Management Act, which helps to kill off hydro, wind and thermal power stations.

If we have no power, and we’re perilously close to that unhappy state, then it is they and their fellow travellers will have played the largest part in making that happen.

And now they have the cheek, they have the effrontery , to complain that selling state-owned power generators is going to threaten the security of electricity supply!

I’m staggered.

The only thing worse than the absolute bloody hypocrisy is the abject bloody acquiescence of the journalists who didn’t bother to ask Russel Norman how he looks in the bleeding mirror in the morning without vomiting.

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Tuesday, 12 June 2012

Let’s deal with the sackings first, and leave the repairs ‘til later

I see Judith Collins, under pressure about the shambolic setup that is ACC, has chosen a scapegoat. She’s sacked the Chairman.*

That this will do nothing to change the setup that is ACC is immaterial.** Action was called for, and action has been taken. And action is what Collins is all about—or at least the appearance of action.

After all, who cares about actually changing ACC when you can get the same headline for a quick sacking.

* * * * *

* Well, actually, he’s headed for a nice sinecure as chairman of the ANZ Bank. But I’m sure “sacking” will be the spin.

** No more will it change the setup that is ACC than the sacking of IRD Commissioner Graham Holland after the inquiry into the corrupt culture of the IRD changed that organisation. But it looks mighty impressive, doesn’t it.

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The dingo wasn’t innocent

Dingo killed Azaria, coroner finds
A dingo was responsible for the death of Azaria Chamberlain in 1980, a Northern Territory coroner has found.

It’s taken virtually thirty years to confirm that Michael and Lindy Chamberlain, as was, didn’t kill their baby. A dingo did.

The last time the issue was canvassed was in 1995 when a coronial inquest returned an open verdict—about which feelings were running hot. How hot? Well, let me tell you. A couple of years after that verdict I was in Darwin playing footy with a New Zealand team.

We headed into town one day, all wearing our team shirts to encounter a rally demanding Justice For Lindy Chamberlain. Thinking it would be funny, one of our number yelled out “The Dingo Was Innocent!”  As you do. (Did I tell you we were all wearing the same shirt as this idiot?) Well, it was funny back home, and might have been funny at any other time and place.  But I can tell you, you’ve never seen 22 blokes move so quickly. This crowd were pretty much the opposite of amused, and only our own agility avoided a few of them not being guilty of something more serious than purveying a bad dingo joke.

This case has been a running sore for Australian justice for thirty years. Thank goodness it can finally and conclusively be put to bed.

Tank man [updated]

enhanced-buzz-wide-4701-1338497429-4Source: AP/Je1ff Widener

The image of a defiant man stopping a column of Chinese Red Army tanks heading towards the 1989 Tiananmen Square massacre has become iconic.  Two recently unearthed photos give greater context—the uncropped photo is frankly terrifying.

enhanced-buzz-wide-6951-1338324627-11Source: AP/Terrill Jones


See also "40 of The Most Powerful Photographs Ever Taken"—and scroll down to comments for other contributions and suggestions.

[Hat tip Geek Press and Jason Erik Lundberg]

UPDATE:  Video here of the massacre and the confrontation, when for one moment the honour of one billion people rested on the shoulders of one man. [Hat tip Riko S.]

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Scarcity and Intellectual Property, 2: Empirical Evidence for Inventions

Guest post by Dale Halling

A NUMBER OF ALLEGED scholars[1] suggest the logical basis for property rights is scarcity—that property rights efficiently allocate scarce resources and so avoid conflicts.  These alleged scholars argue that ideas and inventions are not subject to scarcity and, therefore, intellectual property rights should not exist.  These arguments seem to be particularly prevalent among libertarians, particularly those at the Cato and Mises Institutes and among the open source community.  In this article we will examine whether there is a lack of scarcity in the creation of ideas.

According to this theory, tangible property rights include only real property rights in land and buildings and personal property rights in things like cars and furniture.  Tangible or physical property is scarce since it takes resources to create and can only be owned by one person at a time.  According to this theory however, intangible or intellectual property such as patents and copyrights (and software according to the arguments of the open source community) is not scarce, which means multiple people may own intellectual property without excluding others from the property.  According to Tom G. Palmer a proponent of the “scarcity theory” of property:

It is this scarcity that gives rise to property rights. Intellectual property rights, however, do not rest on a natural scarcity of goods, but on an “artificial, self created scarcity.”[2]

Scarcity however is neither the historical nor the logical basis of private property rights.

PATENTS, ONE OF THE TYPES of intellectual property rights, are based on creating new ideas or inventions.  The number of potential inventions appears to be almost limitless.  For instance, Paul Romer, a professor of economics at Stanford states:

On any conceivable horizon — I’ll say until about 5 billion years from now, when the sun explodes — we’re not going to run out of discoveries. Just ask how many things we could make by taking the elements from the periodic table and mixing them together. There’s a simple mathematical calculation: It’s 10 followed by 30 zeros. In contrast, 10 followed by 19 zeros is about how much time has elapsed since the universe was created.[3]

Someone might object that Paul Romer has overstated the number of possible chemical inventions, since not all elements are able to chemically bind to each other.  On the other hand, this calculation only includes one of each element.  Some of our most important chemical compounds contain long chains of carbon and silicon atoms.  In addition, the elements can bond to each other in multiple ways, ionic bonds, covalent bonds, polar covalent bonds and hydrogen bonds.  Elements may also have double, triple and quadruple bonds.  When you add in all these variations, Dr. Romer probably underestimated the number of possible chemical inventions.  And this calculation is only for chemistry.  When you consider computer networks or electronic circuits with millions of transistors or nodes the number of different possible connection is n(n-1)/2 or easily equal to the number of combinations described for chemistry.  This does not begin to name all the possible number of inventions.  This would seem to argue for a lack of scarcity on the conception of ideas or inventions.

That’s not the whole story, however.

Although there are an unlimited number of potential inventions, this does not mean that creating them is free.  The U.S. spends over $300 billion a year on research and development to discover inventions.[4] Either these people are wasting a tremendous amount of money on a fraud, or producing inventions really is subject to scarcity. 

The fact is that conceiving inventions takes scarce resources.  Researchers are scarce. The availability of research facilities and research equipment are all subject to scarcity.  Each researcher’s ability and their time to pursue various inventions and discoveries is limited. 

Clearly, the proponents of the scarcity theory of property are incorrect on this and much else: the development of inventions and innovations really is subject to scarcity.

Dale Halling is an American patent attorney and entrepreneur, and the author of the book The Decline and Fall of the American Entrepreneur: How Little Known Laws are Killing Innovation.
Read his regular thoughts at his
State of Innovation blog.

[1] Kinsella, Stephen, Against Intellectual Property and Palmer, Tom G., “Are Patents and Copyright Morally Justified? The Philosophy of Property Rights and Ideal Objects”, Harvard Journal of Law & Public Policy, Vol. 13, No. 3, Summer 1990, pp. 817- 865.

[2] Palmer, Tom G., “Are Patents and Copyright Morally Justified? The Philosophy of Property Rights and Ideal Objects”, Harvard Journal of Law & Public Policy, Vol. 13, No. 3, Summer 1990, p. 865.

[3] Bailey, Ronald, “Post-Scarcity Prophet: Economist Paul Romer on growth, technological change, and an unlimited human future”, Reason, December 2001.

[4] Kao, John, Innovation Nation: How America is losing its Innovation Edge, Why it Matter, and What We Can Do to Get it Back, Free Press, 2007, p. 39

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Monday, 11 June 2012

ECONOMICS FOR REAL PEOPLE: “Meltdown,” or, the complete story of the GFC in sixty minutes

Our friends at the Auckland Uni Economics Group report they’re regurgitating nonsense enduring exams this week, but the hardy souls are meeting this evening nonetheless.  Here’s their announcement:

imageTonight, we will be watching a video presentation by economic historian Thomas Woods, based on his 2009 book Meltdown (subtitle: “A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse”). Including:

  • How the government and the media created the myth that this crisis is so complicated that people should not question the government's response but leave it up to the "experts."
  • That no amount of government regulation or "brilliant" politician can fix a broken system—a new system is the best solution.
  • How politicians and the media refuse to talk about the role of the Federal Reserve in this crisis, but it is at the heart of the problem.
  • The media has created the myth that we need a "new New Deal" to get out of this crisis.
  • The cold truth that capitalism isn't the culprit—the government is.

Join us, and join in the discussion afterwards:

WHAT: “Meltdown,” vidoe presentation by Thomas E Woods, followed by Q&A
WHEN: Tonight, Mondy, at 6pm
WHERE: Case Room 3, Level Zero, University of Auckland Business School

All welcome.
See you there!


SCHIFF: “Damn The Torpedoes” [updated]

_PeterSchiffGuest post by Peter Schiff

Last week in an interview on CBS Network News, Economist Mark Zandi, the chief economist for ratings agency Moody’s, unwittingly revealed a central error of the global economic establishment. Zandi has made a career out of finding the middle ground between republican and democrat economic talking points. As a result of this skill, he has been rewarded with large quantities of airtime from media outlets that want to appear non-partisan, despite the fact that his supposedly neutral analysis often leaves listeners frustrated.

When asked about the recent deterioration in the global economy, Zandi said that “the worst possible scenario” at present would occur if Greece were to leave the Eurozone. He claimed that the economic gyrations and liquidations of bad debt that would result from such an exit would be sufficient to create a vicious cycle that could drag the global economy back into recession. As a result, he urged policy makers to take whatever steps necessary to maintain the current integrity of the 17 nation Eurozone.

Given what most economists now know, few would actively argue that Greece’s entrance into the Eurozone back in 2001 was a good idea. In fact most concede it was a terrible idea based on bad forecasting and outright fraud. There is little disagreement over the fact that Greece grossly misrepresented its financial position in order to gain initial entry into the monetary union. It is also widely agreed upon that in the ensuing decade Greece exploited its monetary advantages to borrow irresponsibly.

Much has been written about how the fundamental misfit between Greece’s economy and currency gave birth to a deeply flawed system that was destined to run off the rails. Most also agree that the countries like Greece and Germany are too economically and culturally disparate to exist under the same monetary umbrella. But despite all this, Zandi wants to maintain the status quo. In his opinion, it is so imperative to prevent the deflationary consequences of an economic restructuring that it is preferable to prop up a failed system, perhaps indefinitely, rather than allow a newer, healthier system to replace it. In the process, the moral hazard created not only assures that Greece will become an even greater burden on Europe, but so too will other nations whose leaders will be emboldened in their profligacy by the anticipation of similar help.

imageFrom Zandi’s perspective (and he is certainly in the majority on this point) the goal of economic policy is to keep GDP growing. It follows then that he will oppose large-scale debt liquidations which drag down GDP in the short term. But sometimes debt needs to be liquidated. Bad ideas need to be abandoned. Once economies stop throwing good money after bad, capital is freed up to flow into more economically viable purposes. But economists and politicians never look at the long term. Their job seems to be to manage the economy for the next election.

The same “damn the torpedoes” mentality dominates economic thinking with respect to the U.S. economy as well. Years of artificially low interest rates, and government subsidies that direct capital towards certain sectors and away from others, has created an economy with too little savings and production, and too much borrowing and consumption. The ultra-low interest rates currently supplied by the US Federal Reserve serve to perpetuate this unsustainable artificial economy. Higher rates would work quickly to redirect capital to the more productive sectors. But high rates could bring deflation and liquidation, which few economists are prepared to risk.

The US has too many shopping malls selling stuff, but not enough factories making stuff. It has too many kids in college studying liberal arts, and not enough in the workforce acquiring skills that will actually increase their productivity. Banks are loaning too much money to individuals to buy houses, and not enough money to entrepreneurs to buy equipment. There are too many tax-takers riding in the wagon, and not enough taxpayers pulling it. The list is long, but the solutions are short.

The US needs interest rates to rise to market levels, and the economy to restructure without government interference—to stop beating a dead horse and hitch its wagon to an animal that can really pull. The process will be painful for many, but like ripping off a band-aid, the pain will be over relatively quickly. However, since a painful restructuring means recession, politicians resist the cure with every fiber of their beings. So instead of a genuine recovery, one that will provide productive jobs and rising living standards, we see only a phony recovery that produces neither.

Preserving a broken system merely to avoid the pain necessary to fix it only makes the situation worse.  Propping up sectors that should be contracting prevents resources from flowing to other sectors that should be expanding. Keeping workers employed in non-productive jobs prevents them from gaining productive employment elsewhere. Encouraging activity or behaviour the market would otherwise punish discourages alternatives that it would otherwise reward.

Unfortunately, leaders on both sides of the Atlantic put politics above economics, and economists like Mark Zandi provide the cover they need to get away with it.

Peter Schiff is CEO and Chief Global Strategist of Euro Pacific Capital and host of the internationally syndicated Peter Schiff First posted Friday, June 8, 2012 at Europacific Capital

UPDATE: Meanwhile…

imageImage from Zero Hedge

And in Ireland they’re not just mourning their team’s embarrassing non-performance on Saturday night. Like iwi off to the trough for a new payout on the same claims,  the Irish government demands renegotiation of its bailout terms to match Spain:

            Congrats Germany: you have now opened the Pandora's box of infinite moral hazard, bailout renegotiations
         and unconditional rescues. Anything less than a pari passu bailout to Spain's, which the economy minister 
         touted as having no political strings attached, will incite a revolution.
         Oh, [but in the good news], the IMF has just been made obsolete.

And the three-quarters of Ireland not off work mourning Saturday night’s loss are over at Euro 2012 celebrating further losses by the German taxpayer:

Image from The Daily Capitalist

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Sunday, 10 June 2012

SUNDAY HUMOUR: The anatomy of economic rescue

It’s a hard to know if the regular cycle of “rescue plans” for US and Europe involving oodles of newly-minted money is cause for mirth or misery—is it comedy or tragedy? Still, this simple diagram at least makes the cycle clearer:


Expect the process to continue until either the money or voter’s patience and credulity run out.

[Hat tip Zero Hedge: “Friday Humor: Eurogroup Meeting Preview Redux”]

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