So the other day I was wasting time looking at Facebook profiles (I’m giving that up, by the way) and I saw a discussion about whether workers were “free” in a free market.

The answer was no. Workers are not free because they cannot get paid as much as they want.

This is a delusional way to think about the question. We all wish we could get paid more than we are. That is human nature.

Look at it this way, What company would stay in business if it announced it was cutting wages in half tomorrow?

Both owners and workers have to face economic realities. The owners cannot pay anyone more than they can afford. Otherwise they go out of business. They cannot afford to pay workers less than those workers can get elsewhere, or else they go out of business.

Wages, like all prices, fluctuate. The idea that wages as measured in currency should always go up is a fantasy.

And even talking about wages that way distracts from an important way that workers, as consumers, are constantly giving themselves raises. In fact, it looks like a new clothing allowance is on the horizon:

Penney’s slashing prices on all merchandise – USATODAY.com.

Penney is permanently marking down all of its merchandise by at least 40% so shoppers will no longer have to wait for a sale to get the lowest prices in its stores.

So, what used to cost a hundred dollars to buy, normally, may soon only cost sixty dollars. I suspect other companies will be “forced” (!) to follow Penney’s lead. That is a raise. For everyone. And it is the result of the real and true “collective bargaining”–the market.

But then we get this wisdom from Robert Reich:

Modern technologies allow us to shop in real time, often worldwide, for the lowest prices, highest quality, and best returns. Through the internet we can now get relevant information instantaneously, compare deals and move our money at the speed of electronic impulses. Consumers and investors have never been so empowered.

Yet these great deals come at the expense of our jobs and wages, and widening inequality. The goods we want or the returns we seek can often be produced more efficiently elsewhere by companies offering lower pay and fewer benefits. They come at the expense of main streets, the hubs of our communities.

First, of all, there is a lot more in Reich’s column about pollution and the environment. He makes assertions without evidence so I don’t feel the need to respond. I just bring it up to point out that it is there too, and it is a different argument.

Above, his argument is that buying cheaper products is an economic problem. It is absolutely true that a “main street” that has been dependent on an inefficient factory that employed most of the people is going to have to close. It should. The people should find work elsewhere. Chaining consumers to such people is slavery.

In what world do factories never close? In what world does the way things are made never change, never get improved, never get supplied by a new producer?

A lifeless world. A dead planet.

In this living world we are all, everyone of us, are trying to produce and consume as best we can. In this living world there is constant change and we have to learn and help and adapt and enjoy.

The idea that this process–the mere living of a society–must result in widening inequality is theoretically illogical and historically false. We know why inequality is beginning to widen: because of the omnivorous, ever-hungry state. It has corrupted currencies all over the world in order to fund a ruling regime, a finance-political complex. In this environment, we have been slowly losing ground for decades as saving has been discouraged and debt has been encouraged. Reich pining for higher prices is just another attempt to keep the status quo going.

The efficiency of trade is impossible if the medium of exchange can be tampered with by politicians/state-bankers.

Look at what Reich is actually saying. Information should be hampered. Transportation should be slowed. Prices should rise. Ignorance, geographical barriers, and higher prices are what we should all want. We would all be better off.

In a way I think Reich is telling us the truth. He is telling us what the political establishment can and will “provide” for us–and is trying to make a case that it is a social good.

Bastiat had it right:

Which is preferable for man and for society, abundance or scarcity?

“What!” people may exclaim. “How can there be any question about it? Has anyone ever suggested, or is it possible to maintain, that scarcity is the basis of man’s well-being?”

Yes, this has been suggested; yes, this has been maintained and is maintained every day, and I do not hesitate to say that the theory of scarcity is by far the most popular of all theories. It is the burden of conversations, newspaper articles, books, and political speeches; and, strange as it may seem, it is certain that political economy will not have a completed its task and performed its practical function until it has popularized and established as indisputable this very simple proposition: “Wealth consists in an abundance of commodities.”

Do we not hear it said every day: “Foreigners are going to flood us with their products”? Thus, people fear abundance.

Has not M. de Saint-Cricq said: “There is overproduction”? Thus, he was afraid of abundance.

Do not the workers wreck machines? Thus, they are afraid of overproduction, or—in other words—of abundance.

Has not M. Bugeaud uttered these words: “Let bread be dear, and the farmer will be rich”? Now, bread can be dear only because it is scarce. Thus, M. Bugeaud was extolling scarcity.

Has not M. d’Argout based his argument against the sugar industry on its very productivity? Has he not said again and again: “The sugar beet has no future, and its cultivation cannot be extended, because just a few hectares of sugar beets in each department would be enough to supply all the consumers in France”? Thus, as he sees things, good consists in barrenness and scarcity; and evil, in fertility and abundance.

Do not La Presse, Le Commerce, and the majority of the daily newspapers publish one or more articles every morning to prove to the Chambers and to the government that it is sound policy to legislate higher prices for everything through manipulation of the tariff? Do not the Chambers and the government every day comply with this injunction from the press? But tariffs raise the prices of things only because they reduce their supply in the market! Thus, the newspapers, the Chambers, and the government put the theory of scarcity into practice, and I was right to say that this theory is by far the most popular of all theories.

Contra Reich, I assert that the economy will, if allowed to do so by the politico-finance complex, provide more for all if prices are allowed to fall (and rise) under market forces. Since Reich provides no evidence or arguments that free exchange causes poverty and widening inequality, I won’t burden myself with doing more than stating the obvious.

The one who loves pleasure will be a poor person;
whoever loves wine and anointing oil will not be rich. — Proverbs 21.17

This is not just about private behavior. People do make themselves poor but, often enough, they learn in time from failures or from others that they need to save.

But what if we constructed a nation that diverted all proposed savings into consumption? What happens when the government claims that their bonds are a form of savings?

So we “save” by loaning the government money. We have security knowing that it will come back with interest.

But why is interest possible? Because people find productive uses with the money.They do profitable things with it so they can pay back the creditors/savers.

Does the government do that? Has the government been using all its debt for investment? Are we doing just fine with all the government’s infrastructure responsibilities?

Or has the government really borrowed money for the purpose of immediate consumption? Is there anything behind the promise of repayment with interest other than simply the ability to tax people at a later date?

Think of all the changes that happened in the nineteenth century: buildings, bridges, factories, roads…

Where did all that investment come from? Someone had to save money and then loan it for needed projects that were believed to be a way to satisfy future wants.

Now, in the twentieth century, the government developed 1.) new ways to directly confiscate people’s wealth and 2) new ways of diverting people’s savings into immediate consumption rather than investment.

All those trillions of dollars that could have been invested in the formation of capital for future use got sent to overthrow Noriega prop up corn prices and get people to walk on the moon.

And, just to add delusions to damage, we developed financial tricks to pretend we were not impoverishing ourselves.

Now the time is up and everyone wonders what is happening.

What happened is that the we’ve consumed for a century rather than produce.

The vague notion of security which the welfare doctrinaires have in mind when complaining about insecurity refers to something like a warrant by means of which society guarantees to everybody, irrespective of his achievements, a standard of living which he considers satisfactory.Security in this sense, contend the eulogists of times gone by, was provided under the social regime of the Middle Ages. There is, however, no need to enter into an examination of these claims. Real conditions even in the much-glorified thirteenth century were different from the ideal picture painted by scholastic philosophy; these schemes were meant as a description of conditions not as they were but as they ought to be. But even these Utopias of the philosophers and theologians allow for the existence of a numerous class of destitute beggars, entirely dependent on alms given by the wealthy. This is not precisely the idea of security which the modern usage of the term suggests.

The concept of security is the wage earners’ and small farmers’ pendant to the concept of stability held by the capitalists. In the same way in which capitalists want to enjoy permanently an income which is not subject to the vicissitudes of changing human conditions, wage earners and small farmers want to make their revenues independent of the market. Both groups are eager to withdraw from the flux of historical events. No further occurrence should impair their own position; on the other hand, of course, they do not expressly object to an improvement of their material well-being. That structure of the market to which they have in the past adjusted their activities should never be altered in such a way as to force them to a new adjustment. The farmer in a European mountain valley waxes indignant upon encountering the competition of Canadian farmers producing at lower costs. The house painter boils over with rage when the introduction of a new appliance affects conditions in his sector of the labor market. It is obvious that the wishes of these people could be fulfilled only in a perfectly stagnant world.

A characteristic feature of the unhampered market society is that it is no respecter of vested interests. Past achievements do not count if they are obstacles to further improvement. The advocates of security are therefore quite correct in blaming capitalism for insecurity. But they distort the facts in implying that the selfish interests of capitalists and entrepreneurs are responsible. What harms the vested interests is the urge of the consumers for the best possible satisfaction of their needs. Not the greed of the wealthy few, but the propensity of everyone to take advantage of any opportunity offered for an improvement of his own well-being makes for producer insecurity. What makes the house painter indignant is the fact that his fellow citizens prefer cheaper houses to more expensive ones. And the house painter himself, in preferring cheaper commodities to dearer ones, contributes his share to the emergence of insecurity in other sectors of the labor market.

COMMENT:

Mises makes no claim here about the origin of social unrest and the anti-capitalist mentality that he critiques here. But it is hard for me, once I recognize the association he points to, not to think that we have here the true source of market interventionism.

Rich people hate capitalism. If they got rich through capitalism, that is beside the point. Capitalism makes no promises that they will stay rich. It becomes a threat. They pursue security by means of politics. Since political change requires “the consent of the governed,” they manufacture false promises for members of other social classes. If there are revolutionaries who sometimes (rarely) arise from those classes, they find and support them.

Socialism and/or the “mixed” economy, as ideas, “trickle down” from above.

No sooner had I written my post below, Steve Jobs the World-Famous Slave, than I saw the American Spectator take Robert Reich to the woodshed for his economic heresy (or rather, false orthodoxy).

But in truth, it seems that Reich actually agrees with my defense of Steve Jobs! Reich acknowledges that the consumers are the sovereign decision makers and the CEOs are just servants to them. Sadly, the Reich piece requires registration, and I couldn’t get the free version to work right. But here’s the Spectator’s testimony:

America’s “insatiable consumers” have destroyed the economy and the “hubs of our communities” with their relentless pursuit of “great deals.”The”lure of the bargain,” suggests Reich, is a destructive force.

So it was not Jobs’ fault but those demanding consumers who wouldn’t put up with a scratched screen. Reich at least gets us past the blaming of “corporate greed.” It is consumer greed that forces prices down.

Reich blames Americans’ desire for lower prices, prosperity, and happiness for sending jobs “elsewhere.” But he ignores the fact that those lower prices mean we have more money available to buy other, costlier goods and services here in America. So rather than make snow globes and t-shirts, Americans develop advanced technology, manufacture airplanes and cars, and provide the world’s best financial, health, and education services. They use iPads that put enormous competitive pressures on laptop manufacturers and publishers to provide more creative services to people who want them.

It is enough to make on wonder whether Reich has ever read Schumpeter, who in 1942 pointed out:”The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort.” (Capitalism, Socialism, and Democracy, p. 67)

Trade freed Americans from the sweatshop and now it is freeing them from the factory floor. It will do the same for Asians and Africans. Yet Reich would end trade with poor countries, since their environmental and working conditions”offend common decency.” Does Reich truly believe these workers’ usual alternative, subsistence farming, can gain them a “decent” standard of living? Does he really believe he knows better than the poor in developing countries what is best for them? Not allowing those workers to decide for themselves would keep them in poverty. Meanwhile, middle-class Americans are made worse off by higher prices.

The article goes on to show how high prices are touted as the key to wealth by many in the establishment. Sadly, this is hardly a partisan problem. The Bush Administration used many of the same people and the same outlook for the economy.

The best place to go for a better understanding of how the economy works, coordinates needs, provides for the populace, and balances out, can be found at the website of the Ludwig von Mises Institute. In a later post I’ll make more specific recommendations for the two or three of my readers who aren’t already fans of that site.

Not long ago, Apple boasted that its products were made in America. Today, few are. Almost all of the 70 million iPhones, 30 million iPads and 59 million other products Apple sold last year were manufactured overseas.

via Apple, America and a Squeezed Middle Class – NYTimes.com.

This story is interesting. It relates facts that we ought to consider. It also reinforces amazing economic superstitions.

Here is the story’s main anecdote:

In 2007, a little over a month before the iPhone was scheduled to appear in stores, Mr. Jobs beckoned a handful of lieutenants into an office. For weeks, he had been carrying a prototype of the device in his pocket.

Mr. Jobs angrily held up his iPhone, angling it so everyone could see the dozens of tiny scratches marring its plastic screen, according to someone who attended the meeting. He then pulled his keys from his jeans.

People will carry this phone in their pocket, he said. People also carry their keys in their pocket. “I won’t sell a product that gets scratched,” he said tensely. The only solution was using unscratchable glass instead. “I want a glass screen, and I want it perfect in six weeks.”

After one executive left that meeting, he booked a flight to Shenzhen, China. If Mr. Jobs wanted perfect, there was nowhere else to go…

…the focus on Asia “came down to two things,” said one former high-ranking Apple executive. Factories in Asia “can scale up and down faster” and “Asian supply chains have surpassed what’s in the U.S.” The result is that “we can’t compete at this point,” the executive said.

The impact of such advantages became obvious as soon as Mr. Jobs demanded glass screens in 2007.

For years, cellphone makers had avoided using glass because it required precision in cutting and grinding that was extremely difficult to achieve. Apple had already selected an American company, Corning Inc., to manufacture large panes of strengthened glass. But figuring out how to cut those panes into millions of iPhone screens required finding an empty cutting plant, hundreds of pieces of glass to use in experiments and an army of midlevel engineers. It would cost a fortune simply to prepare.

Then a bid for the work arrived from a Chinese factory.

When an Apple team visited, the Chinese plant’s owners were already constructing a new wing. “This is in case you give us the contract,” the manager said, according to a former Apple executive. The Chinese government had agreed to underwrite costs for numerous industries, and those subsidies had trickled down to the glass-cutting factory. It had a warehouse filled with glass samples available to Apple, free of charge. The owners made engineers available at almost no cost. They had built on-site dormitories so employees would be available 24 hours a day.

Now here is the first question: Would consumers have bought in iPhone that scratched up?

I ask this because the article, without argument or rationale, chooses to blame one and only one partner in the worldwide economy (not “American” economy). The blame is placed on abstract “companies” seeking “profits.”

But how is the American consumer who is too demanding to buy an iPhone that will scratch up not also “guilty” of seeking “profit”–of demanding that a good be provided for him of a certain quality. Who are the real people driving the decision here?

Yes, Steve Jobs made a choice. But it was a choice that was entirely about his sense of whether or not he could sell iPhones. Maybe Jobs was wrong, but I don’t think so. The moment our toys start to appear cheap, the game is up.

The Global Slave

Steve Jobs was, at one time, a notoriously incompetent slave. He made products his masters did not want. At least, not enough of them wanted them in sufficient numbers to make him worth keeping around. And thus we read without a trace of irony:

In its early days, Apple usually didn’t look beyond its own backyard for manufacturing solutions. A few years after Apple began building the Macintosh in 1983, for instance, Mr. Jobs bragged that it was “a machine that is made in America.” In 1990, while Mr. Jobs was running NeXT, which was eventually bought by Apple, the executive told a reporter that “I’m as proud of the factory as I am of the computer.” As late as 2002, top Apple executives occasionally drove two hours northeast of their headquarters to visit the company’s iMac plant in Elk Grove, Calif.

But as of late 2002, Jobs did not crash and burn the way he did at Apple in the eighties. He adapted himself, with the help of others, to serve consumers–the consumers whom he had to please to remain in his line of work.

It is true that Apple put out products at a price point that served a certain kind of consumer, but others had their desires served by other slaves, (Dell, Microsoft, etc). And that is exactly why Jobs was probably right about the glass screen.

What would have happened if Apple had spent billions creating specific factories in the United States? They would go bankrupt. That is all. They would not be able to sell a product within the reach of the middle class (yes, even with the credit cards helping out), and even at a luxury price there would probably not be enough customers to make the economy of scale work out.

The consumers were and are the masters. We buy things if we want them. A few have value systems and worldviews to which an appeal can be made for “altruistic” reasons. But outside of overpriced coffee, advertising that you must pay higher than market prices hasn’t caught on. And it wouldn’t work. Every time you pay more than you should for a product, you forgo the opportunity to buy another product. All those unsold products represent unemployment and poverty somewhere in the world. They are conveniently invisible but real lost opportunities to meet the needs of the masters–the consumers.

When Steve Jobs was driven out of Apple the first time, there were no editorials claiming that Jobs was a saint because he kept Apple’s profits low. He was regarded as a failure–a visionary with some strong points, but an overall failure as a CEO. That is true to this day, outside of electric cars and corruptocratic solar panel projects. When someone fails to keep his company profitable (with allowance for startup time), he is understood to have failed in his basic job to the company. It is only the successful who get this sort of moral criticism, even though they would receive no moral support for failing.

And in the meantime, company profits are what many in the middle class are hoping to use to retire. Again, Steve had to be a good slave for consumers and for shareholders.

The Imbalance

What would America have had to be like in order to have a factory readily available for the needs of the iPhone buyers? Do we have glass and factories and laborers and engineers all ready to go at a moments notice? No. We don’t. Why does China? Perhaps this is a story of redeeming some malinvestment (does the Chinese government build factories in an unfinished state, hoping some foreign entrepreneur will have needs that mesh? I hope not). But probably the factory was used for a project that ended. The only reason they were available with the right resources at the right time is that China is a relatively poor country with a much smaller middle class.

Do you want that to be true of the United States?

If so, then the squeezed middle class is not the concern, it is the problem. The article portrays the Chinese workers as exploited, but it doesn’t tell us why they are signing up for those exploitative jobs.

Modernization has always caused some kinds of jobs to change or disappear. As the American economy transitioned from agriculture to manufacturing and then to other industries, farmers became steelworkers, and then salesmen and middle managers. These shifts have carried many economic benefits, and in general, with each progression, even unskilled workers received better wages and greater chances at upward mobility.

But in the last two decades, something more fundamental has changed, economists say. Midwage jobs started disappearing. Particularly among Americans without college degrees, today’s new jobs are disproportionately in service occupations — at restaurants or call centers, or as hospital attendants or temporary workers — that offer fewer opportunities for reaching the middle class.

Even Mr. Saragoza, with his college degree, was vulnerable to these trends. First, some of Elk Grove’s routine tasks were sent overseas. Mr. Saragoza didn’t mind. Then the robotics that made Apple a futuristic playground allowed executives to replace workers with machines. Some diagnostic engineering went to Singapore. Middle managers who oversaw the plant’s inventory were laid off because, suddenly, a few people with Internet connections were all that were needed.

But there are major players missing from this story of “modernization.” With the economic gains of the twentieth-century came a combination of systems produced by the erection of a superstate in North America. Modernization is a dynamic process that keeps changing, but that is not what politics allows for. Labor unions, a state-education system, and a central bank masking economic realities by debt and bubbles stopped the innovation. From now on the only thing that matters is somehow preserving the status quo. So we have a President who thinks it is within his paygrade to question a civilian about his choices in commerce, and no one thinks this is inappropriate. This is insane. And it is impossible. By definition, life involves change. There is no steady state. The economy always shifts. Trying to keep one element stationary is a recipe for disaster and poverty, even when you call it “the American Dream.”

I feel sorry for Mr. Saragoza, but he should have been told that he, like every other consumer, is also an entrepreneur. Getting an “education” was never an automatic path to anything. It was a risky investment. We have only one youth, and we make the best choice that we can in how we invest it, in what sort of training we will receive.

But none of us are told this. None of us are told we need to save massive amounts of money for ourselves whenever we do have a good job. We are encouraged to spend and to spend money we don’t have. We have an entire political system dedicated to making people like Mr. Saragoza engage in risky behavior without ever realizing that he is taking risks.

Of course, Steve Jobs, for all his fame, never had the power to fix any of this. He had to make calculations within the economic system that was presented to him. He had to appeal to the abilities of consumers even if most of those consumers were on a long-term track to an unsustainable credit debacle, buying iPhones with plastic and measuring their wealth on the basis of a fictional housing value.

The article is right that there is a disaster ahead, and that the economy is failing. But it is completely clueless about where the problems have come from and where the solutions lie.

In a sound economy, people trade goods and services. Because not all people can find the best goods at the best time, to trade for what they want, people find intermediate goods–money. But our money is paper based on debt. It contaminates and destabilizes trade, making it impossible to really be sure how to best serve consumers.

That’s a post for another time. The point I want to make here is that Apple is serving the Middle Class. It is not the one responsible for squeezing them.

Steve Jobs was an effective servant.

The point to remember is that economists win nobel prizes for the same reason Obama won the peace prize. It is a propaganda tool for the maintenance of power.

The Robinson Crusoe Credit Card Company

Let’s imagine an individual who starts a credit card company–a small one, with a single customer: himself. Would the fact that he “owed the money to himself” mean that he could afford to run up a credit card debt on consumption? No. If the credit card company was run by a 100% full reserves, then the best that could happen is that eventually he would have to acknowledge that the money “loaned” on the expectation of repayment was actually simply spent on consumption. There would be no way to actually “profit” in this scenario. “Owing money to oneself” does not make the person any less poor. It gives him no real advantage. He would simply have spent his reserves irrationally.

“We” are never the same people

Pretend for the moment that the US debt was funded 100% by American citizens who purchased bonds expecting them to mature and be repaid with interest. The fact that “we owe ourselves the money” would mean exactly nothing. The fact would remain that we are hoping to retire on money that has to be given to us at the right time. Where is that money going to come from if it was spent rather than really invested? There are only three things that can happen:

1. Tax revenues can be raised at the future point when the loans must be paid. This could produce the best-case of the three bad scenarios. One way taxes could be raised would be the arrival of many times more taxpaying producers. But the exact opposite is happening. We have fewer people who can pay on the debt (or really, on the interest on the debt; the borrowing continues all the while). This is not only a problem in Europe, but throughout the world. So tax revenues only increase by tax rates being jacked way up. Note that taxes are not just used to pay for desired (by someone) consumables. They are used to pay for those things plus a great deal of interest in a world where people have come to expect to get things that they can’t afford. Austerity comes with the tax increases; the new taxes are not enough to prevent the austerity.
2. The debter can default and never pay the people making the loans. In other words, “we owe it to ourselves” means something that might be your parents eating dog food or “death panels.” We owe it to ourselves is a future of poverty and bankruptcy. Austerity again.
3. The debter can print more money. This, of course, is really exactly the same result as (2) above. The difference will be starving old people buying their dog food with wheel barrows of paper. Again, austerity.

So “owing ourselves” the debt means nothing good. It doesn’t make the debt any less a problem. It doesn’t give us a financial perpetual motion machine. The machine is going to grind to a halt, with our bones caught in the gears.

But this all hides another factor. The people who tend to rely on government debt are not always the same people who profit from that debt. This is especially true of a small class of people who sell bonds and collect a commission on the sales. “We owe it to ourselves” hides perverse lines of exploitation. What is worse: we really have voted for the benefits of immediate consumption to be passed on to our children. Democracy with public debt is the economic system that makes it rational for adults to eat their children.

China is “us” too

Finally, in the case of foreigners who were silly enough to loan the US money, they really don’t represent much of a separate problem. I guess the idea is that, if the US fails to pay back Chinese bondholders; their might be a war. But what would a war accomplish? If we are that broke the expense of war will outweigh anything that could possibly be gained by such action. Conceivably, the US could be brought into a supra national entity that then starts dictating “austerity” measures to us–as in the case of Greece in the EU.  But even that wouldn’t last. Bankruptcy would overwhelm all the players. Foreigners are going to be hurt just like US citizens. Debt is the problem, not foreign lenders.

Conclusion

Public debt is inherently immoral because it involves the plunder of other people for our own consumption. The fact that this is defended because we are “merely” consuming our own children (the real meaning of “we owe it to ourselves”) only adds to the perversity.