Today is my last day covering this Daily Dispatch. Well, technically tomorrow is, but the weekend edition is just a compilation of our favorite stories from the week. Anyway, I want to take this opportunity to thank you for allowing me to bring you some stories I thought were important and to beg forgiveness if I bored you. I’ll see you again periodically in this missive and along with Doug Casey, David Galland, Terry Coxon, and Bud Conrad in The Casey Report, which you can learn more about by clicking here.
And with that, on to today’s stories.
These days, you can’t pick up a paper, turn on the TV, or surf the Internet without being bombarded by economic fallacies -- gaping holes in logic that not only go uncontested by the masses but are absorbed and regurgitated by them.
Take this gem of a headline and lead-in written by a “senior writer” for CNNMoney.com yesterday:
Cash for Clunkers: Real stimulus
The boost to auto sales caused by the government trade-in program should lead to increased production from Detroit. That would have a big ripple effect.
Here we see by far the most common of all economic fallacies – the fallacy from which many others stem. It is the fallacy of overlooking secondary consequences, also known as “The Broken Window Fallacy.”
To quote Henry Hazlitt’s Economics in One Lesson:
Let us begin with the simplest illustration possible: let us, emulating Bastiat, choose a broken pane of glass.
A young hoodlum, say, heaves a brick through the window of a baker's shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Fifty dollars? That will be quite a sum. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $50 more to spend with other merchants, and these in turn will have $50 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.
Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $50 that he was planning to spend for a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $50 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as a part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.
The glazier's gain of business, in short, is merely the tailor's loss of business. No new "employment" has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.
So it is with the aforementioned “Cash for Clunkers” program. What is seen is people trading in old cars and buying new ones. What is unseen is the lost business that will never take place because wealth has been transferred from taxpayers to car buyers. The money taken from taxpayers can’t be used for other things.
As an aside, I want to point out how appropriate the title to this piece is. You see, the “Cash for Clunkers” program requires that trade-ins be scrapped – literally breaking windows everywhere.
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Health care reform has been in the news a lot recently, and I feel compelled to mention that nobody has touched on what I think is the fundamental issue at hand – the issue of rights.
Although health care and health insurance are often used interchangeably, there is an important difference between the two. Whereas “health care” consists of the actual goods and services necessary for medical care (i.e., consumer goods), “health insurance” is one means of affording such care. The two are closely related but distinct. If health care is a consumer good, like shoes, does it make sense for the president to base his reform plan on a belief, “that every American has the right to affordable, comprehensive, and portable health coverage”? In a word – no. Proponents of the Austrian School of Economics would recognize this statement as a logical and economic fallacy.
Throughout time, human rights included the right not to be murdered, not to be raped, not to be robbed, not to be kidnapped, etc. These are the classical "negative" rights. A negative right is a right not to be subjected to an action of another human being or group of people – including the state – in the form of violence or coercion.
Firmly rooted in socialist-progressivism, many politicians today invoke so-called “positive rights” – the right to such things as food, clothing, shelter, and medical care. And whether the advocates actually believe it or not is a non-issue – in this universe, it is empirically impossible to simultaneously apply a positive right to all people.
The only way to apply a positive right to a consumer good (like a right to medical care) is by violating the negative rights of certain persons. In this instance, taxation is the only way that government can apply a positive right to an economic good. In other words – to steal resources from productive persons to pay for benefits to others. Taxes, by definition, involve people being subjected to a coercive action of the state – explicitly protected by negative rights. This coercive action violates innocent individuals’ rights to life, liberty, etc., by not allowing them to use their earnings to support their own lives.
Since we’re kind of on the subject of health care reform, I have a few thoughts on the whole socialism in medicine issue also.
One of the most important insights of the Austrian School of Economics is the extraordinary complexity of the free market. It is so complex that no single individual, no committee, and no computer program can account for more than a tiny fraction of the factors that drive a modern economy.
Friedrich Hayek, a Nobel Prize-winning economist, made this the central point of his writings for the last 35 years of his life. He proved that only through the private property social order and the free interplay of pricing can society become the beneficiary of the market’s (masses of individuals) enormous quantities of relevant knowledge. There is no possible way that a committee of salaried bureaucrats can plan an entire economy or even one industry. Ergo, socialized medicine will not work anywhere ever. These schemes will inevitably lead to rationing of care, a lack of adequate medical equipment and supplies, skyrocketing costs, and a general increase in patients’ dissatisfaction.
The fact that socialized medicine cannot work has not stopped the socialist-progressives from giving it the old college try – over and over, and over again. During the past fifty years, most of the industrialized world (including the U.S., but to a lesser degree) has socialized its medical industries.
Under a policy of socialized medicine, capital investment in new technologies like an MRI machine is considered a cost rather than an income-producing asset that reduces real costs. William L. Anderson’s “Socialism and Medicine, Part 2,” published in the June 2008 Freedom Daily, provides a detailed analysis of this issue. In the article, Anderson cites a column by Paul Krugman, the well-known economist for the New York Times and Princeton University, who recently declared that medical care in the United States is costly because of high-quality medical capital such as MRI and CAT scan devices. His reasoning (or rather, the lack thereof) follows:
No “economist” can be forgiven for constructing such a faulty chain of economic logic.
Most importantly, Krugman neglects to consider what high-quality medical capital devices like the MRI replace. In a matter of minutes and without the use of a scalpel, they allow doctors to perform exploratory surgery and diagnose countless disorders for a large number of people. Before the creation of such devices, doctors had to perform invasive procedures that took infinitely longer to perform and for which there was a recovery period for the patient. Diagnosing such problems today is done at a fraction of the total costs that used to be involved.
Krugman erroneously appeals to the discredited cost-of-production theory of value. Carl Menger conclusively demonstrated that demand for the final product is what gives value to production and capital goods, not the other way around. Technical jargon aside, this concept is essential in explaining why Krugman and others like him advocate the policies they do and why they are so wrong when they do so. An economist’s theory of value is what guides all aspects of his or her work. If his underlying theory is fallacious, all his conclusions will be too.
What happens when people like Krugman are taken seriously? An excerpt from Anderson’s aforementioned article helps clarify.
Thus, demand for high-tech medical care equipment plummets under such a system, R&D to create new such machines stops, manufacturers go out of business, and people die.
With all that said, I apologize if I came across as too preachy in today’s missive. That was not my intention. Certain issues just really fire me up more than others.
And that, dear readers, is that for today.
See you tomorrow in the weekend edition. In the meantime, thank you for reading and for being a subscriber to a Casey Research service.
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