My Fundamental Argument Against Socialism

Prices are pieces of information that facilitate coordination between actors.

They communicate changing supply and demand conditions, allowing actors to make real-time, rational judgments about how they ought to allocate resources if they are to be efficient and if their ventures are to be successful.

As Hayek writes, the price system is a “machinery for registering change.”

Prices arise from the decisions and valuations of individual actors who, by their observation and closeness to the sources and uses of commodities, understand how changing conditions—in the earth, the skies, the minds of men—affect the supply and demand associated with those commodities. Most intimately, they begin with the owners of such commodities, whose livelihoods depend on rational and sustainable allocation of such commodities as objects of sale to their fellow human beings.

This is key: That prices begin as subjective valuations in the minds of those with a personal stake in the priced commodities, and that these valuations are then informed incessantly by the valuations of others with different perspectives and understandings of dynamic supply and demand conditions. These prices are affected even further by the uses of these priced commodities down the structure of production—influences that extend back up (and down) the production structure to communicate changed conditions at any point.

It is simply fact, then, that a socialist society has no prices, and thereby no means to allocate resources such that changing supply and demand conditions at any point in any good’s production structure proportionally affect a good’s price.

A socialist society, understood as an arrangement where the means of production are owned by the state (representing, in theory, the common interest of all members of society) and not by individual actors, divests anyone in the society of the incentive and uniquely-associated knowledge to adequately adjust prices to reflect changing conditions. Whereas shifts in demand and supply are, in a free market economy, observed in the behaviors of actors exchanging their produce—in ever-changing volumes—for some goods more than others, such behaviors ostensibly do not occur in a socialist economy, where materials are not owned by individual actors, but are owned more-or-less by all, with no one person having a greater stake in some commodity than another.

Prices, therefore, carry no use as information regarding changing supply and demand conditions in a socialized society. They do not communicate from one actor to another the unique knowledge possessed about how events might and do affect the value of some good. Rather, they serve simply to direct actors toward or away from certain goods as deemed appropriate by those with the duty of setting prices (they direct actions toward here or there, but they do not guide actions toward true efficiency). Though perhaps not entirely arbitrary, assuming some methodical rationale on the part of such bureaucrats, prices in a socialized system do not serve to communicate changing real world conditions, but assume the role of communicating someone or another’s interpretation of how changing conditions ought to affect price.

Socialism divests prices of their use in reflecting real conditions and informing actors (that is, connecting them to the real world and to all their fellow actors), and instead imagines some imputation of value by prices onto goods, based on some schema rooted in something other than actual, true valuations on the part of actors with a personal stake in relevant goods.

This is true only so long as planners do not possess the means to predict the valuations of all a society’s actors. Such a means would be some feat, indeed—it entails comprehensive, real-time knowledge of not just all changing material conditions, but all shifts, at all times, in human needs and preferences, and the simultaneous rational synthesis of all such data. Absent this capacity (that is, in the conceivable real-world as we know it today), valuations in a socialist system occur in a parallel universe, where markets for commodities do exist and thereby influence the subjective interpretations of actors in a world unmarked by socialism whatsoever even after private ownership is verboten

Prices in a socialist context, therefore, are not prices at all, but fiats. Their use is merely to advance some end (be it even so noble as maximizing human welfare). They possess no characteristic of market prices—they do not communicate changes in supply and demand rooted in the minds of individual valuators with a personal stake in valued goods. They do not facilitate efficient adjustments to ensure a steady and rational flow of goods toward their most valued ends—Hayek’s “machinery for registering change.” And they do not economize on information and guide actors’ behaviors regarding their productive energies, as such entrepreneurship is of no use when all production is planned, and decreed valuations say nothing, with certainty, about how energies might be spent toward productive ventures.

Mises writes, “There is no such thing as prices outside the market.” This is a fact of nature. What alleged prices may exist in a completely planned and socialized society will direct activity toward some end or another, but will not accurately inform actors of changing real conditions nor guide them toward efficient goods allocation relative to what goes on the real world of subjective wants and valuation.

More thoughts on fractional reserve banking

I haven’t written about this, or economics generally, in a while. Left my graduate program 18 months ago, and have been too busy with a new house, new kids, and my business to do much reading on economics.

But a post in this Facebook group got me going. So here’s a string of thoughts I’ve had on fractional reserve banking over the past year.

The only difference between a deposits box, or a “full-reserve” account, and a bank account in a FRB is in degree of risk they assume.

If I give my cash to a fractional reserve bank, they assume some risk by guaranteeing me withdrawal-on-demand because, of course, they are lending out my cash to others and don’t actually have everyone’s cash on hand at all times.

If I give my cash to a full reserve bank, they assume some risks by guaranteeing withdrawal-on-demand because, of course, they can’t actually guarantee that — they have no idea what the future holds.

(Neither, of course, does the fractional reserve bank know what the future holds.)

Fractional reserve banks are just businesses, managing risk. Depositors are customers who take a gamble with the banks’ guarantee. Of course, a fractional reserve bank may (though not necessarily) be more likely to “default” on withdrawal demands, but a full-reserve bank can’t 100% guarantee full redemption, either.

What if, for example, they are robbed? Were they wrong to ever guarantee full redemption, knowing theft was a possibility? What if they even made decisions that increased the known likelihood of their vault’s being robbed, even if only slightly? Does this make their guarantee fraudulent (or more fraudulent)?

Critics call fractional reserve banking fraudulent because it’s “a claim by multiple parties to each use a present resource differently.” That description of fractional reserve banking is accurate, but there’s no fraud. For how is that different than any health insurance plan, whereby members claim the benefits of their plan and solicit/secure services on account of the plan’s guarantee to pay a provider after services rendered, while members (and providers) know full-well that the insurer cannot technically cover everyone’s possible claims at any possible time?

Another perspective (of the same argument): How is the risk assumed by a fractional reserve bank different, except only in degree, than that assumed by a full-reserve bank who moves their vault to a less-secure location (to, say, cut down on costs)? Or than that assumed by a full-reserve bank who moves their vault to a known fault line, where an earthquake is far more likely to cause damage to physical deposits (cash, buillon)?

Neither form of bank can absolutely guarantee withdrawal-on-demand any more than any business can guarantee that, if you pay, they’ll send your product.

It’s just a matter of degrees of risk. That’s how I think about full vs. fractional banking after many years of considering the issue. Please correct me if any of my analogies are not appropriate.

I grant that in a full-reserve system does not entail, like in a fractional reserve system, “a claim by multiple parties to each use a present resource differently.” But a full-reserve system is, in the context of making payments against full-reserve deposit accounts, no more a “guarantee” than drawing on funds at a bank that willingly and knowingly does not have sufficient funds on hand to honor every withdrawal request. Vendors are still taking the risk that your bank, against which your checking card is pulling, will actually transfer funds. And you are still assuming, when writing a check and expecting that to be sufficient enough for a vendor to let you walk out the door with product, that a full-reserve bank will honor their guarantees. There’s still a third-party involved here, such that the “claims” being laid are not on the funds (critics’ “present resource”) whatsoever, but against the guarantees made by a given bank (of any type).

A personal anecdote that also helps illustrate my point: One of my clients has more open POs (in terms of dollar amount) than my company could possibly honor, should they demand all their services be rendered at the same time (this is very unlikely, knowing their model and their history with us). Yet we’ve guaranteed, technically, that we will honor any requests for services at any time. They, in turn, guarantee their vendors certain timelines, and accept payment from those vendors in advance of us actually performing the contracted service. This has a similar “inflationary” effect on the economy as that inherent in a fractional reserve system.

Should I not be making this guarantee to my client? Is it fraudulent for me to do so? I think not. And I think fractional reserve banks are making the exact same “guarantee.”

A deeply, deeply stupid debate

From a great piece by Kevin D. Williamson at National Review.

Right now, we are embroiled in a deeply, deeply stupid debate over whether to raise the statutory minimum wage to $15 an hour. (I write “statutory minimum wage” because the real minimum wage is always and everywhere $0.00 an hour, as any unemployed person can confirm for you.) Because everything in the economy is in reality priced relative to everything else, using the machinery of government to monkey around with the number of little green pieces of paper that attaches to an hour’s labor manning the register at 7-Eleven or taking orders at Burger King is, necessarily, an exercise in futility. The underlying hierarchy of values — the relative weighting between six months’ work washing dishes and six months’ tuition at the University of Texas — is not going to change. Prices in markets are not arbitrary — they are reflections of how real people actually value certain goods and services in the real world. Arbitrarily changing the dollar numbers attached to those preferences does not change the underlying reality any more than trimming Cleveland off a map of the United States actually makes Cleveland disappear.

The Young and the Economically Illiterate

Occupy_London_banner[1]This article was originally published at on January 23, 2013.

Earlier this month, the Higher Education Research Institute reported that today’s young people are more narcissistic than ever. Our drive to succeed surpasses that of our parents. We expect a great future for our generation. Our intellectual, leadership and social self-confidence are at all-time highs.

Exciting, right? Doesn’t personal ambition drive innovation and progress? Isn’t self-interest the fount of the invisible hand’s innumerable blessings?

Under the right circumstances, yes—unwillingness to settle for one’s current state of affairs is a healthy incentive for entrepreneurial innovation. “The mark of the creative mind,” economist Ludwig von Mises wrote, “is that it defies a part of what it has learned or, at least, adds something new to it.”

But considering the economic beliefs of the average American young person, this news couldn’t be worse.

The fact is, most of today’s young people are economically illiterate. Most don’t understand how the economy works, or what drives economic progress. Most have no commitment to the notion of earned success. This was demonstrated by a recent paper by University of Pennsylvania economists Bhattacharjee, Dana and Baron in a 2010 paper. Citing multiple surveys of consumers’ opinions regarding profit and social value, they write:

We find a strong negative correlation between perceived profit and social value across both industries and specific firms. People report little faith in the power of markets to create and reward value, neglecting the incentive properties of profit and focusing instead on the perceived intentions of firms.

Holding profit and social value to be at odds defies even the most cursory understanding of economics. Profits, of course, do not detract from a firm’s social value, but are simply the reward for efficiently satisfying consumer demand. High profits are earned by those who most deftly meet the needs of their fellow human beings. A rejection of the notion that profit correlates with social value, then, reveals a deep ignorance of any and all economic theories.

But scientific surveys are hardly needed to uncover the economic illiteracy of the Millennial generation. It was my generation, indeed, who assured the eight-year presidency of progressive Barack Obama. It was this generation who hailed Obamacare’s victory over the largely unwilling elderly population. And it is the Millennial generation who overwhelmingly support mandated forgiveness for their unforgivably high levels of college loan debt.

Ironically, this same generation is the most educated in all of human history. Never before has public education been so readily available to every single child, and a university education as easy as a single FAFSA application. Even further, the Internet has made information freely available to anyone with access to a public library.

In that light, the economic ignorance of today’s young people is truly sobering.

But the dangers of ignorance itself stand pale in comparison to the hazards created by ignorance accompanied by a drive to succeed—the very combination possessed by young people today. In fact, the more “educated” an economically illiterate individual, the more likely he or she will advance ideas wholly antithetical to economic progress and human flourishing.

This happens all the time. Well-meaning individuals seeking to benefit their fellow men unknowingly plot the world’s economic demise with various welfare, entitlement and regulatory schemes they wrongly think to be steps toward equality and social harmony. The more educated these individuals are, the less likely they will be persuaded of their mistake. As Isabel Paterson wrote:

Most of the harm in the world is done by good people, and not by accident, lapse, or omission. It is the result of their deliberate actions, long persevered in, which they hold to be motivated by high ideals toward virtuous ends … when millions are slaughtered, when torture is practiced, starvation enforced, oppression made a policy, as at present over a large part of the world, and as it has often been in the past, it must be at the behest of very many good people, and even by their direct action, for what they consider a worthy object.

Unless young people recognize the unwavering power of economic law and accept the insights of praxeological science, my generation’s entrepreneurial energies will be spent in vain. Their arrogant attempts to conjure wealth, avoid fiscal austerity and thwart unstoppable market forces will crash and burn.

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