Copyright 2012 by John T. Reed

I just finished reading Grand Pursuit; The Story of Economic Genius by Sylvia Nasar. Excellent book. I recommend it.

Nasar is famous for writing A Beautiful Mind.

I was inspired to get it after I saw her interviewed about it on TV. She came across as a bit flaky or flighty on TV, but the book is rock solid.

When reviewing books, I often retitle them. A more accurate title of this book would be

History from Charles Dickens to Amartya Sen of the battle for the economic policy hearts and minds of the people of the world and their leaders

Wordandphrasemeisters rule

Economists try to understand allocation of resources, productivity, innovation, distribution of income and wealth, prosperity, and all that. They seek to find ways to optimize economic policy. Although there is fundamental research and analysis involved, it seems in this book to come down more to who comes up with the most beguiling phrases to persuade the public and leaders to adopt their policies.

I wrote a web article recently where I noted that American had been tricked into accepting Marxism by the use of the cloying phrases “progressive income tax” and “safety net.” These phrases are nothing but a rewording of the succinct description of Marxism: from each according to his ability, to each according to his need.

Nasar chronicles the bleeding heart limousine liberal woman who applied the phrase “safety net” to welfare and a bunch of others on both sides like Commie, pinko, liberal, hippie bed wetter Charles Dickens who misled through novels aimed at selling the welfare state (Christmas Carol, Oliver Twist, etc.) and Milton Friedman (Free to Choose—a beguiling phrase that has since been seized by abortionists).

Multiple biographies of economists

The time period of the book stretches from the 1840s to the present. It is a series of biographical chapters about the various most influential economists—including many who are obscure outside of the profession. (Mention is also made of Adam Smith whose extremely influential Wealth of Nations came out in 1776.) It told me far more than I thought I needed to know about which famed economist got which household help pregnant and such.

Beguiling phrase alone are not enough, but they are extremely important and probably sine qua non for successful influence. The economist in question must also come up with persuasive logic and relevant research.

For example, the Laffer Curve, which is not in the book, makes sense and is supported by empirical evidence, was a big part of Reaganomics. It says that revenue will rise as rates rise from zero—in taxation, mass transit fares, and the percentage of gambling revenues taken by the house—but only up to a point after which the take of the government/transit authority/house falls because people change their behavior to avoid the higher rates.

CBO required to ignore Laffer Curve

By the way, the Congressional Budget Office that “scores” bills related to the budget is required by law to assume that the Laffer curve does not exist, that taxpayers behavior does not change at all as a result of new tax or other laws. In other words, the CBO is required to assume that if Congress enacted a 100% tax on incomes over, say, $1 million a year, the people who earned those amounts last year would all do so this year as well. In fact, they would retire, buy municipal bonds, renounce their citizenship, etc. No one is going to go to work every day for nothing after tax.

I had a fairly well-developed idea of economic policy before I read this book. This book improved my understanding and sharpened it. In the last chapter, I found some more stuff like my “progressive income tax” and “safety net” comments above.

‘Greatest good’

You’ve heard the expression that the goal of economic policy is the “greatest good for the greatest number.. I gave it little thought but agreed with it.

It’s nonsense. It reflects the mind-set of a jailer or a farmer with regard to his crops or livestock. The problem is who defines the “greatest good.” Each of us decides that for ourselves. The greatest good for the greatest number suggests forcing the masses into conformity with some behavior that produces someone’s idea of the greatest good.

Economists and social scientists tend to define greatest good in terms of average life span, infant mortality, unemployment, and so on. What about freedom? What about happiness?

To maximize life span and infant mortality and unemployment, chicken farmers feed their imprisoned chickens pure water and vetrinarian-formulated health pellets, illuminate their cages with the right amount and color of light, flush the urine and feces out of their cages and kill the ones who do not lay enough eggs. No doubt today’s farm-raised egg-laying hens have the greatest average life spans, infant mortality, and productivity in the history of the world. But I do not want to be a human chicken living in a way that maximizes someone else’s definition of “greatest good.”

The Founding Fathers defined the greatest good correctly: life, liberty, and pursuit of happiness. The liberals can shove their “life, free medical care, green energy, and forced avoidance of transfats” definition of greatest good.

Leave us alone except when one person hurts another.

Requirements for prosperity

The proper economic policy is:

• free trade

• monetary stability

• rule of law including enforceability of contracts

• property rights

• no regulation of commerce beyond ancient regulation of humans with regard to murder, fraud, negligence, and so on

• moderate taxes (There is a Laffer Curvish, Goldilocks, just-right level of taxation and government defense and law enforcement service.)

The way to achieve these things is for government to have nothing to do with anything but preventing person A from hurting person B: defense, law enforcement, courts, and prisons and the taxes to provide those services. Trade and what money to use should be left for each individual or trading pair to decide for themselves.

Specialization and innovation

Rising living standards, an amazing facet of the last two centuries well documented in the book, come from specialization and innovation. In my research on protecting yourself from hyperinflation and depression, I keep finding that subsistence farmers are oases of heaven in the hell of a monetary instability crisis (Monetary instability means inflation or deflation. The Great Depression was generally deflation.) But subsistence farming, my father’s childhood in West Virginia, is throwing the rising living standard engine in reverse—switching from specialization to jack-of-all trades and from capital-intensive factory-produced goods to hand-made tools and other objects.

Hyperinflation and depression are horrific assaults on the non-subsistence farmer part of the population by ineptly or malevolently changing the value of the currency up or down. (Deflation/depression is generally government ineptitude: failure to expand the money supply as fast as the economy is growing. Hyperinflation is generally deliberate misbehavior by the government: counterfeiting money because it is unable or unwilling to raise the money it needs by taxing or borrowing.)

Modern high-standard-of-living societies depend on stable money and are constructed on the assumption of continued stable money. They are addicted to stable money. When stable money is taken away, modern society collapses—really—into malnutrition, preventable illness stemming from poor diet and lack of normal access to medical care, increased violent crime.

Freedom-loving people are not joiners but joiners win

By definition, freedom-loving libertarian types are not joiners. They do not organize.

Organized labor is, by definition, organized. They are the core of the left. Ambulance-chaser lawyers are organized. Statists, as Mark Levin calls them, are organized. Furthermore, the left is amoral, if not immoral. They want power. This is an asymmetric battle because the right does not want power. They want to be left alone. The right needs to get power in order to be left alone but they either do not recognize that or when they get power, they go native and start selling out to campaign contributors and lobbyists.

The Left wants crises

I read in the last year or two where a top labor leader said we need a financial crisis to get our agenda enacted. Rahm Emanuel said a crisis is a terrible thing to waste. On page 36 of Grand Pursuit, they quote Marx saying,

Only a world war can break old England…and bring the proletariat to power.

And when a guy like Marx says that, his next sentence is “So how can we start a world war?” Or in the labor leader’s case, “How can we foment a financial crisis?” To these people, the tens of millions who die or suffer in world wars or depressions or hyperinflations are nothing but the “eggs you have to break to make an omelet”—to recall a hated phrase from Sinclair Lewis’s It Can’t Happen Here. The socialist totalitarian utopia ends justify any means. (Marx was German, but generally lived in England, the most capitalistic country on earth at the time.)

‘Inevitable’

Marx and other socialists are big on depicting their chosen policies as inevitable. Al Gore does that with climate change propaganda. Alleged inevitability is merely another intellectually-dishonest debate tactic.

If there were no poor, the left would have to invent them. Arguably, there are no longer any poor in America but the left has invented them by redefining poor so it now includes people with flat screen TVs, indoor plumbing, cars, and so on. If a medical cure for poor could be invented, the left would go nuts and try to outlaw it. The poor are their excuse for everything they do. Erstwhile presidential candidate John Edwards spoke of two Americans, one living under overpasses in monstrously large numbers. No one could figure out what the hell he was talking about. They all live near overpasses and see few if any such people. Various investigations into the homeless generally find they are mentally ill, alcoholics, or drug addicts, with an occasional “Pursuit of happyness” normal family. Before the Clinton welfare reform, we were told the world would come to and end if it passed. It did. Even liberals had to admit that the world did not come to an end. Investigations found the prior welfare recipients got jobs, or already had jobs they were not disclosing or moved in with family, etc.

Anyway, when you read Nasar’s book, you can see the pattern of the left beating this helping-the-poor-justifies-totalitarian-socialism drum going back to Charles Dickens in the 1840s. The Christian church also advocates that so they aid and abet the godless Marxist cause ironically.

Obama recently quoted the Bible in support of his socialist redistribution schemes:

From everyone who has been given much, much will be demanded. Luke 12:48

I do not know who wrote the Bible. I believe they were humans. And I do not know what they meant by the sentence. It is too vague. But they and Obama can kiss my ass. I do not recall anyone giving me anything other than my mom’s tiny bequest and my father-in-law’s bigger one. We paid the substantial inheritance tax on the latter. So we’re done. And I do not even agree with the notion that says anyone can demand anything from those who were fortunate enough to have been given anything. You get life, liberty, and the pursuit of happiness, not a right to demanded anything from anyone. Furthermore, Obama intends that phrase to really mean

From those who HAVE much, much will be demanded—no matter whether they were given it or busted their asses earning it.

His welfare state needs money as does his re-election, and he is amoral, so cough it up if you know what’s good for you.

 

The correct formula is that if you believe there are lots of deserving poor, reach your hand into your pocket and help them with your money or your time. You may also PURSUADE others to join you in that effort. That is the way it was done before the 1930s all around the western world. But there must be no government involvement because government is nothing but an instrument of coercion with a monopoly on violence. If you give the government the job of helping the poor, it turns into a bottomless-pit, vote-buying, redistribution-of-wealth, Robin Hood politician scam that bankrupts the federal government. I have no problem with Christian charity as long as the government stays out of it. A president quoting the Bible as justification for policy is way out of line—violates the First Amendment.

The poor need charity, or a kick in the pants. Neither is the proper role of government. Private charity and persuasion are the only permissible means to help the poor. Of course, as Nasar points out on page 191,

entrepreneurs did more to eliminate poverty than any government or charity.

I would add that’s the understatement of the ages. Mind-boggling improvements in wealth and health have occurred around the world in the last two centuries, almost all caused by entrepreneurs, hardly any caused by charity and the government has made things worse, e.g., the minimum wage law which raises the unemployment rate among workers who are the youngest and have the least experience or skills or are minorities who are targets of subtle racism.

One theory that was widespread in the early chapters of the book is still around among the dumb and/or ignorant. That is that the amount of money or wealth in the world is fixed and it is just a matter of whose pocket it is in. Those who have more than average are simply selfish. Malthus is the most famous advocate of this. He said the people of the world would all starve if the population passed some number it passed over a century ago. You still have people preaching that nonsense in the China one-child policy and peak oil and all that crap. Another similar notion popular in the 1800s, but now apparently no longer believed by anyone—thank God—was that the only way to increase workmen’s wages to was to decrease the number of workmen.

One lesson in Nasar’s book was also in Schumpeter’s. That is, innovation—figuring out better ways to do things—is mandatory. Innovate or be innovated against. All businesses must constantly figure out better ways to do things. If they do that once then never again, they will be initially be successful ten driven out of business by competitors who provide better value to the customers.

Even leftists scrutinize the poor from time to time and learn that they are poor because of things like absenteeism, lack of education, poor human relations habits, and so on. Logically, they figure the solution is to train the poor to have good work habits, more knowledge, etc.

But they never seem to figure out what any teacher or coach knows: you cannot educate the uneducable or coach the uncoachable. It is the endless programs to help the poor, who generally lack the motivation, that have made the cumulative War on Poverty cost far exceed the amount needed to make every poor person a multi-millionaire. Evidently, the War on Poverty is a jobs program for liberal college grads, not for the poor. We also see this in liberal criminal justice. The Army staff sergeant who murdered and burned 16 women and children in Mach 2012 had graduated from a liberal anger-management program.

A substantial segment of the left is constantly scheming to gradually dupe the public into accepting another and another and another small change that move us toward totalitarian socialism. Creeping socialism it was called when I was younger. In the late 1800s in London, the Fabian Society was the main perpetrator of this. More recently, we have heard a lot about Saul Alinsky’s Rules for Radicals. Their goal is not to win the debate, but to slip a Mickey into the nation’s idea “water supply” and sneak what they want past the public until it is too late. Don’t use the S word. Call it Single Payer or helping the environment.

Scapegoats

The public does not understand economics. So when they suffer from it, they tend to blame human scapegoats like Easterners (in the U.S. among midwestern farmers), Jews, foreigners, speculators, Wall Street. This has been going on for centuries according to Nasar. Demagogue politicians encourage it.

Credit

One aspect of the book I did not find persuasive was Joseph Schumpeter’s claim that innovation requires cheap and available credit. The way I would put it is that capital-intensive industries require cheap and available credit to make expensive changes, and innovations are changes, but not all industries are capital intensive. Maybe most are, but I am in a non-capital intensive industry, publishing, and I am aware of many others. Schumpeter needed to get out more. The Internet, a rather important industry, may be capital intensive for its server farm owners/operators, but not for its users. Indeed, it is almost capital free. (Can’t be too hard on Schumpeter about the Internet. It came into prominence around 1997. Schumpeter died in 1950.)

I would agree that modern economies need efficient capital markets (banks, stock markets, commodity markets) because there are a lot of capital-intensive industries and some capital-intensive individual human activities like buying a home or motor vehicles.

Wars

Wars do not come off well in the book, nor should they. World War I changed England from the most powerful country in the world to an also ran. It did not do any of the other warring powers much good either.

Wars are extremely expensive both directly in paying for soldiers and their equipment as well as indirectly in obliteration of international trade and neglect of other needs like education, maintenance, research and development, replacement of plant and equipment and infrastructure. The U.S. has been economically devastated by the combination of Vietnam, Iraq, and Afghanistan. Indeed, al Qaeda said hurting America economically was one of its goals. Mission accomplished.

Arguably, countries who fight wars need to declare bankruptcy after they are over—including those who “won.” That would make it harder to fight future wars because it would be harder to sell war bonds. That would be a good thing. Germany and Japan sort of declared bankruptcy after world War II, and they came out quite well economically.

Wars are the ultimate “It seemed like a good idea at the time.” They are also the ultimate proof of Murphy’s Three laws:

• Everything is harder than you think.

• Everything takes longer than you think.

• If anything can go wrong, it will, and at the worst possible time.

Now reflect on the Vietnam, Iraq, and Afghan wars with those statements in mind. Hard to argue.

Perhaps worse, wars are also used to grab unconstitutional “war-time powers.” The only “wartime” power in the Constitution is the ability of the president to suspend habeas corpus in the event of rebellion or invasion. Neither was present during World War I or II or Korea, Vietnam, Iraq, or Afghanistan. At least two unconstitutional powers grabbed during World War II are still hurting the country today. The war was used as an excuse to put the federal government in charge of all wages and prices. Rent control, ended at war’s end, but New York City adopted a municipal replacement law. At its peak in the 1970s and 1980s, that law was responsible for the abandonment of about 30,000 apartment units per year by owners who could not collect enough rents to pay the operating expenses.

World War II controls on wages caused companies to use the providing of health and other benefits to give raises not permitted by wage controls. Businesses have no business being in the health control business. But now it is expected and companies that do not provide “normal” levels of benefits are pilloried, all because of a bad habit started in war.

In the early 1970s, partly because of the expense of the Vietnam war, we had price controls again. When they ended, a number of municipalities around the U.S. decided like New York City did after World War II to adopt municipal rent controls after they got a taste of that blood in the 1970s price controls. Those controls generally are still hurting the cities that adopted them.

The entitlements that are now bankrupting the federal government stem from Johnson’s “War on Poverty” “Great Society” and from FDR’s “New Deal”, a series of government initiatives wielded as if “war-time powers” had been given to the President. These violated the basic principles of individual liberty, the Xth Amendment’s limits on federal government powers, and they were disastrous economic policy that is still holding back the U.S. economy with milk price controls, crop support rules, Social Security, minimum wage, etc.

Vienna after World War I

I have recently become fascinated by post-World War I Vienna because it was a stark example of what hyperinflation does to a modern country. I read Anna Eisenmenger’s diary—one of the most powerful books I have ever read. I bought and watched Greta Garbo’s second starring role German 1925 film The Joyless Street, a silent movie about Vienna in the 1920s—sort of a video version of Eisenmenger’s similar ordeal, and Chapter VI of Nasar’s book is titled “The Last Days of Mankind: Schumpeter in Vienna.” Her chapter VIII is “The Joyless Street.”

Schumpeter was a great economist famous for his analysis of the role of innovation in economics. In 1919, he was the Minister of Finance of Austria.

The Last Days of Mankind is the name of a play written around 1919 by German author Karl Kraus. It warned that embittered half-starved hordes of returning soldiers would turn Austria into a battlefield. Not quite, but that was close to what happened. One of the returning soldiers—the entire Austrian Army deserted at the same time—was Friederich Hayek, another famed economist who is written about in Grand Pursuit. Ludwig von Mises, another prominent Austrian economist, was the head of the Vienna Chamber of Commerce at that same time! And Sigmund Freud was practicing psychiatry there then. Initially he preferred western patients because they paid in non-Austrian currency. But before long, even they did not want to travel to Vienna because it had become so dreadful because of hyperinflation.

Brief piece of advice after reading a number of books about hyperinflation in Austria, Germany, and Hungary after World War I, and watching that silent film, you do not ever want to live in a country that has hyperinflation. Note to Americans: you appear likely to me to do just that in the foreseeable future. Expert estimates vary from several years to sooner than 2020.

Morality play

An interesting point made by John Maynard Keynes and discussed in the book were his efforts to dispel the notion that booms and busts were some sort of morality play where the gods were punishing the people for enjoying the boom too much. I agree. It’s like some aboriginal tribe believing volcano eruptions or earthquakes were manifestations of the gods being unhappy and requiring sacrifice of the best looking boy in the tribe to assuage them.

Trivial cause and solution to big problems

Another Keynes point that is counterintuitive to the ignorant is that catastrophes are often caused by trivial causes and have trivial solutions. Zimbabwe hyperinflation in the 2000s and the gas station lines in the U.S. in the late 1970s are examples. In both cases, a decree by the government ending government involvement with money in Zimbabwe and gasoline prices and allocations of supply in the case of gas solved the problems overnight.

But the vast army of ignoramuses believes big problems must have big cause and complex solutions. Sometimes they do and sometimes they do not.

Protectionism

Free trade is the only way to go. So-called fair trade is just a euphemism for protectionism based on the notion that two wrongs make a right and you started it so our putting tariffs on your products is the punishment you deserve.

The above-mentioned ignoramuses cannot understand that tariffs hurt both sides of the transaction that would have happened without them. A sentence on page 392 captures much of the issue:

[Keynes and his American disciples] believed with equal conviction that the breakup of the pre-World War I global economy—produced by the frantic beggar-thy-neighbor attempts of each nation to insulate itself from the worldwide economic crisis—and the accompanying decline in world trade were partly responsible for world war.

Milton Friedman said tariffs are the government that imposes them kicking their citizens in the shin. Retaliatory tariffs are the other government saying if you don’t stop kicking your citizens in the shin, we will start kicking our citizens in the shins.

Protectionism is cutting off your imports to spite your export customers.

If I were king, I would end all tariffs regardless of how the various countries treat exports from America. Our businesses that were the subject of of tariffs by foreign governments would suffer or continue to suffer trying to compete with domestic businesses in the countries to which we could not export because of tariffs. Too bad, so those countries have to do without our products and must buy their own overpriced ones. Too bad for their citizens. Our citizens need to do other things.

Meanwhile, if we eliminated all tariffs on all other countries, we would enjoy the lowest costs of any country on earth because our citizens would be free to buy whatever they wanted from whomever they wanted and they would typically buy the best value. That would necessarily also have the effect of making us the most competitive country in the world because we would have the most competitive market in the world. Our business would have to be the best in the world to beat the foreign companies that would be allowed to compete here without artificial handicaps. The other countries that used tariffs to protect their home industries would suffer the self-inflicted punishment of paying higher prices for the goods in question and the punishment of having industries in their country that were not able to compete in the world.

Unfortunately, the vast majority of the citizens of the world are too stupid to understand this. They make steel pipe or whatever and they want not to have to compete with China or other steel pipe manufacturers. Tough. People in hell want ice water too. Is it fair to let other countries impose tariffs on our products but us not do the same to them? Fairness is beside the point as well as being in the eye of the beholder.

If we eliminate all tariffs, we get tons of stuff as cheaply as possible and our industries have to compete with the best in every category. Whether other countries are smart enough to do the same is none of our business.

Some things never change

[Communist Party of the USA] membership peaked in 1944 at eighty thousand or so, the overwhelming majority of members drifted away in less than a year, and it exerted scant influence beyond a few neighborhoods in the [San Francisco] Bay Area, Boston, and New York and a handful of trade unions. (page 396)

Since the vast majority of people would far rather State regimentation than slumps and unemployment, the drift towards collectivism is bound to continue if popular opinion has any say in the matter. George Orwell in his review of The Road to Serfdom in 1944

Where you go to change things

A young undergrad friend of mine just told me he plans to study economics and political science to stop the loss of liberty and the free market by going to Washington. Better he should heed the following from page 425:

Neither Friedman nor Samuelson ever returned to government, both confident that they could have a bigger impact by teaching and writing than the staff of a president or the Fed.

What you do with what you have

Robert Solow proved

That it was not what a nation had but what a nation did with what it had the determined long-run economic success or failure.

Amen. That very similar to the main message of my book Succeeding.

Here are some examples. Hong Kong and Singapore have nothing in terms of resources, but they are world class stars economically because of what they do with what they have. On the other hand, Africa, Russia, and others have fabulous resources but their economies are disasters or weak sisters. See also my web article that You can find ways to win or make excuses for losing.

The battle is occasionally fought in venues like swing state polling places, but mainly the battle for America is being fought in the land of ideas and this book is a great overview of the battlefield.

Carpe diem. And this book will help you do it.

John T. Reed