Atlas

Do you remember the Greek myth about the giant Atlas? He was tasked to hold up the entire world. Ayn Rand used this story as a metaphor in her book Atlas Shrugged (must read). She equated Atlas with the producers of the world, the men/women of the mind, those whose creative effort brings into existence all of our material abundance. She noted that they labored under the strain of holding up the rest of the world, the moochers and looters, who couldn't be bothered with producing their own sustanence, just as Atlas held up the world in the myth. In a famous conversation in her book between two heroes, Fransico D'Anconia asks Hank Rearden what he would do if he saw Atlas, bent and bleeding, struggling with all his might to hold up the world. Hank doesn't know what he could do, and so turns the question back to Fransisco. Fransisco replys, "Tell him to shrug." (Hence the title of the book)

I find Miss Rand's metaphor extremely accurate. If you look around the world today it is clear that there is a minority of people who, through their tremendous effort, are supporting the rest. This support is manifest in many ways: welfare, foreign aid, medicare/medicade, social security, public works, etc. In all cases though the pattern is the same -- the most productive people (i.e. rich people) have their hard earned production taken away from them (via taxes) to support various 'noble' causes (i.e. handouts to moochers/looters).

My question is this: can this continue? (Of course it should not continue.) The moochers and looters have always relied on one implicit assumption: that there will always be some producer around for them to loot from. I would like to explore this assumption and see wether it is true.

There are two important factors that will determine whether there remain any producers in the world (or at least enough producers to support the rest). First, there must be people willing to produce. Second, they must be able to do so. The moochers/looters take for granted that the first condition will always be satisfied. They understand that there is a basic (and noble) human drive to be productive, and they count on some people to follow it. The second condition is never considered by the moochers/looters. They, having renounced the mind, are unable/unwilling to consider how things are produced and under what conditions such production is possible. They have the mentality that goods simply exist, and will always continue to exist. How? Somehow is the ubiquitous answer.

So let us consider each condition. Will there always be people willing to produce? To answer this we must consider what gets them to do so in the first place? They must have some motivation. Naturally, men's selfish desire to live (which is a good thing) usually serves as their motivation. But what if they knew that any action that they could take in an attempt to advance their good would ultimately not serve that end? Would it still serve as a compelling motivation? No. So in the realm of production, what could frustrate a persons attempts to further his good? The confiscation of his wealth is one thing. For example, you go to work in order to earn an income. Would you continue to do so if you recieved no income? No. (You may like your job, and have other secondary reasons for doing it, but they are not the primary reason. Earning an income is primary.) Also, it should be noted that it need not be all of you income that is confiscated for your motivation to be squashed. There is a critical level of confiscation, above which all motivation to produce is lost. So we have found one condition that will quell peoples desire to produce: confiscation of their wealth. (there are others, but it this is the most prevelant one today)

Next let us consider whether there exist conditions that make production impossible, even if hypothetically there remained some people willing to try. First let us note that when men are compelled by force, they cannot produce. Oh they can go through motions, perform manual labor, etc., but that is not the root of production. Production is a product of the mind, and the mind is paralyzed by force. Just look at the former Soviet Union; they had millions of people forced to labor and what did it get them? Starvation, stagnation, and the slow distruction of a nation. Not only can you not compell production, but you cannot restrain those who do produce and expect them to continue. Freedom is a neccacerry condition for production. When men are not free to make the decisions that are best for their productive enterprise, they cannot produce long. Production is an active process, that cannot survive stagnation. For example, suppose you own a development company. You obtain a section of land and start to build a housing subdivision on it. Half way through excavation you are served with a court order to stop building. Apparantly there is an endangered field mouse who may live on your property, and as such you are now restricted from developing it. You however have sunk millions of dollars into this project already, anticiating a large return after completion. Now you are stuck with a worthless peice of land that cannot be developed, and you go bankrupt. As a bonus, the bank that financed your expedition cannot bare the blow of your bankruptcey, and thus goes under too. Of course that was a made up example, and it only illustrates how one restriction hurts one person, but the principle is true across the board. Whenever there is a regulation placed on a producer it can only hinder his production, but never increase it. When regulation becomes total and complete, however, all production fails. (it is like chaining a man frome nose to toes, and then expecting him to be able to work)

In addition to regulation, confiscation of wealth also hinders production. In an industrial society business concerns are made possible by financing through capital. (such as the bank lending money to the developer in the above example) Banks however get their money through the savings of other producers. (see post below) If everyone's wealth is confiscated though, then there can be no excess capital to be put to good use, and thus no advanced in production. Even when confiscation is not total, the incentive to investors is diminished, and thus capital is reduced, thereby, through a chain effect, stunting production. (would you buy a stock if 75% of its earnings were taxed away?)

It is interesting that the very two things that are most popular today in our government, taxation and regulation, are the very things that cause production to cease.

Now any of you who know me know that I am a math/science geek, and the rest of the post will reflect this. I wanted to come up with a mathmatical and visual way a representing what I have argued above. So here goes:

• let p be a variable representing the fraction of producers in our society. (thus p = 0.30 means 30% of the people in our soceity are producers)
  let m be a variable representing the fraction of moochers/looters in our society. (thus m = 0.70 means 70% of the people in our soceity are producers)
• note that p + m = 1 because the total percent of producers added to the total percent of moochers/looters must be 100%. (so if the number of producers goes down, then the number of moochers/looters must go up)
• let a be a variable representing how much the producers can produce.
• let b be a variable representing how much the moochers/looters steal from the producers.
• define P(p,m,a,b) to be a function that represents the total excess production, meaning that which the producers produce less that which the moochers/looters steal.
• Then P = ap - bm , but because p + m = 1 , ==> P = ap - b(1 - p) = p(a + b) - b .

Now the looters assumptions can be quantified as follows: their assumption that there will always be those willing to produce is the same as assuming that p does not decrease, and their assumtion that production will always be possible is the same as assuming that a will not decrease. If that where true then the excess production could simply be determined by setting b at the appropriate level. The following graphs illustrate how setting b at different levels changes production, P.














The goal of the moochers/looters is illustrated in the third graph. They want to take as much as possible from the producers, while still having P > 0. (if P is less than 0, then people are starving).

However, a and p are not constants. As I argued above, they are diminished by the presence of confiscation and controls (represented by b). Thus, as long as b does not equal 0, a and p will be decreasing functions of b. The actual functional relationship may be very complex, but a good approximation is given here.

• let a(b,t) = a - ct^(db) . I realize that the math looks weird, but all that is going on is a is decreasing in time, t, and the speed at which it is decreasing depends on the size of b. (a, c, and d are just constants that can be figured out for particular cases) What this function represents is the diminishing of productive capacity by the presence of confiscation and controls.


• let p(b,t) = p -et^(fb) . This is the same idea as the function for a, p is diminishing as time goes on with speed set by b. This represents how the number of people willing to produce decreases in the presence of confiscation.

With thess additions our graphs change:

Of course the actual numbers in the graphs are made up, but what I am going for is a visual understanding of the problem, not a rigorous proof. As you can see, the very presence of controls and confiscation diminishes productivity, and the more the controls/confiscation, the faster it does so. Eventually the moochers/looters end up taking more from the producers than is produced (when the red line crosses zero). At this point the society is in trouble.





Ok, no more math stuff. Let me recap my point (cause I kinda got lost). Producers cannot be exploited indefinitely. If the confiscations and controls they are currently enduring are not lifted then they eventually will "shrug" and drop the world. The assumption of the moochers/looters that someone will always be there to produce, ...somehow..., is wrong. With their motivation squashed and their hands tied, even the best eventually will fall. What is the solution? Freedom of course.

Has the Free Market Failed?

I was listening to a talk show the other day, and they were debating the consequences of the AIG crash. (spurred on by the news of the multi-million dollar bonuses some executives were getting after ruining the company and receiving billions of bailout-dollars) The show host argued that the failure of AIG proved that more government regulation is needed, while the guest was supporting the free market. The host raised the following questions: "didn't the free market already have it's chance? The credit-default-swap market (the genesis of AIG's failure) was completely unregulated, and look what happened as a result. Shouldn't the government have stopped AIG from investing so irresponsibly?"



I am not interested right now in arguing who was right between the host and the guest (you probably know what I would say anyway), but I did want to explore what I consider to be the underlying issue. The host is saying that the free market did not work. I would like to ask what he means by "the free market did not work"? The obvious answer is: look at AIG! The biggest insurance company in the world went bankrupt, the government had to bail them out, the credit market went into a tail-spin as a result, and the entire economy is tanking. (I am, of course, putting words into someones mouth, but I think it is a fair representation.) For decades now, ever since the New Deal really, this same formula has been used -- when something bad happens in the economy say that the free market has failed, and that we need more regulation to save us.



But has the free market really failed? I argue that the facts listed above about AIG and the economy are true, but that they do not show that the free market does not work. They are in fact instances of the free market working! It is quite simple really: what is the free market's mechanism for discouraging bad investment? Risk, i.e. the possibility of failure. AIG made horrible investments (bad risk), and as a result they should fail! AIG's failure is the result of their actions, and represents the way the market automatically adjusts to discourage such actions.



Imagine for a moment that the government had let AIG go under instead of bailing them out. Would any reasonable company make similarly silly investments in the C.D.S. market? Of course not! They would say to themselves, "Holy Crap! We need to dump that risky C.D.S. stuff, or we are going to go the way of AIG." The market would correct itself without the need of some Regulator to go around deciding who could invest in what and how much, based solely on his discretion. Is it moral for a Regulator to tell people or companies how they can invest? No. But beyond that I am saying that, moral or not, it is not even needed! Of course the government did not let AIG die, so the message sent instead was this: do what ever you want, because if your risky investments turn south, you will be bailed out. The government essentially has removed the cautionary incentive of Risk, thereby undercutting the free market, all the while blaming the free market that it has hog tied!



Let me return to my main point though. What would a failure of the free market consist of? Failure is a completely conditional concept, i.e. it depends on what the goal is. For example, if I asked you "is earning $10.00 a failure?", how would you respond? You would likely be confused. Why? Because I did not specify a context. If the goal was earning $1000.00 to buy a new computer, then yes, $10.00 is a failure. If, however the goal was getting a hamburger, then $10.00 would be a success. This may seem like a trivial example, but the people who are claiming that the free market doesn't work are doing the exact same thing. They (referred to as Statists from here on) say the market failed, but specify no yard stick by which to measure failure.



The Statists do, of course, have a yard stick, but the do not express it explicitly. Their measure is this: if something bad happens in the economy, such as large companies going bankrupt, high unemployment, inflation, stock market drops, etc., then that is a failure of the free market. (it is important to note that they do not consider the bad event a failure of those involved, but of the market itself) In other words, the goal is uninterrupted economic growth with no setbacks, losses, or bad deals. That sounds on the surface like a good goal, and I believe most people would accept it initially. That is one reason why the Statists feel no need to explicitly state it. However, the goal does not stand up long to any rational scrutiny, which is the second reason the Statists don't want to openly state it. They are afraid to let their goal be rationally discussed, and instead deflect discussion to more catchy emotional subjects, like the bonuses to the executives, or sob stories of needy workers, etc. They are dependent on the fact that most people take things for granted and accept their initial feelings about a subject as sufficient, never examining closely the ideas they accept. (I say most people. There are those who do think deeply about things. I wish there were more.)



So then, let us scrutinize the goal of perfect prosperity. First, is it achievable in real life? No. In real life there is always the possibility that someone will fail. This is true of free and controlled markets (more on that later). Second, why should we want to achieve it? It is true that in general terms prosperity is good, but we cannot consider it in a vacuum, out of context. Whether the goal is good or not depends entirely on what price would have to be paid to achieve it. I say that the goal of perfect prosperity is evil, because of the price that must be paid for it. The only way to ensure no bad economic outcomes is to remove the possibility of any variation in outcomes at all. That means the elimination of good outcomes. For, after all, if one can succeed then one must also be able to fail. (for those of you who are LDS: it is the same thing we believe Satan wanted to do. He wanted to eliminate all choices in order to remove the possibility of making a bad choice)



Consider an analogy -- We would all probably agree that health is a good thing. However, there is always the possibility of disease in real life. If I proposed, in the name of uninterrupted health, placing everyone in a protective quarantine plastic bubble (such as the one in the Jon Travolta movie), would you say my goal is noble? No. Health is only a valid goal because it promotes our living a vibrant life. But as we all know, living vibrantly is more than bodily function, and living in a bubble is no life at all. Thus we cannot say that my goal is noble, but just not realistic. The very price of the goal negates its goodness: health ceases to be good if it is destroying ones capacity to live (in the broader sense of live). It is the same with the Statists alleged goal.



So why do the Statists hold such an unachievable, irrational goal as a standard of measure? Precisely because they know it is unachievable. When bad things inevitably happen, they can step in, as they are now, and say the free market has failed. This opens the door for them to do as they please. They naturally promise that they will be able to do better, and we naively believe them. Of course they cannot achieve their goal either, but that is not the point. When more failures occur they will have an ace up their sleeve. Simply blame the free market again! Then even more controls will be clamored for. It is a self reinforcing cycle that repeats with the ultimate end being total state economic control. Of course then when the failures continue to happen there will be no free market left to blame, but by then it wont matter.



What is the solution? We must insist on a proper measuring stick of success. That measure should be freedom. The success of the economy must be measured by how free it is. Not because we believe that freedom will somehow mystically ensure uninterrupted prosperity (as some conservatives argue), because that is falling into the trap of accepting the Statists premises. There will be unfortunate events from time to time in a free economy, but freedom should be our goal because it is right.

What is Wealth?

Well, here we are in a full blown recession. It seems like all we hear about on the news anymore are debates about what President Obama should do to "fix" the economic woes of the country. There are Multi-Billion Dollar bailouts plans, and Multi-Trillion Dollar stimulus plans, being tossed around. (for those of us who find it hard to imagine what a trillion dollars is, it is: $1.0 x 10^12; or $1,000,000,000,000; or One Thousand-Billion dollars, or One Million-Million dollars, or One Thousand-Thousand-Thousand-Thousand Dollars... i.e. a lot! Consider this if you earned a hefty $100-Million per year you would have to work Ten-Thousand years to earn a Trillion dollars.)

Naturally, the political lines have been drawn: Democrats are salivating at the opportunity to hugely expand the governments role and spend oodles-&-gobs of money, while the Republicans, in classic "I'm still rel event" fashion, are opposing anything and everything the D's want to do. They do agree on one thing though: that the government needs to do something to fix the economy. The R's just don't want the D's to get the credit for doing it!

I challenge both the R's and the D's basic premise: that the government has the responsibility, or even the right, to try fixing the economy. But that is for another post -- so for the sake of argument I will assume that the health of the economy is a valid concern for the government. What then characterizes a healthy economy? One in which wealth is maximized. But this begs the question that is the title of this post, what is wealth?

For nations wealth is measured in GDP, for a financial planner it is Assets less Debts, but in the end it all boils down to plain old dollars. This seems like a simple answer, wealth is dollars, ...duhh. But have you ever asked yourself what money is? I don't mean paper or metal, or even the means of exchange for goods. I mean what is it? Only by understanding this can we know how to maximize it.

Money is products that have been produced but not consumed. In our modern economy it is often hard to see this link between production and money, so it is helpful to think in more basic terms first, and then project upward. Suppose everyone were farmers. You could only eat that which you had produced. If you produce more than you need, then that surplus represents your wealth. This wealth could be saved in case the next year was less productive, or traded via barter to other farmers for rudimentary goods. However you would not be able to save much, because the food would naturally spoil after time. And trading with other farmers would not alleviate this problem because all they have to trade to you is also their surplus food (aside from a negligible amount of home-made products) which will also spoil. So there is a natural ceiling to the total production possible to a community.

For example, suppose you become so productive as a farmer that you can reap 3 years worth of food in one year. What are you going to do with the other 2 years worth of food? Suppose you can save one years worth without it spoiling, then what about the other extra year? Maybe you can trade a quarter of it to other people for durable goods, but the last 3/4 goes to waste. This is where money steps in. If you could exchange your extra 2 years of food for money, then that money would not spoil, and in the future you could trade the money back for food or other goods if needed. Thus money is a means of saving. Of course it is also a means of exchange, but that is not it's primary purpose. Money is not important because it makes trading easier, it is important because it makes savings possible. It is savings that allows man to progress beyond a Dark Age style hand-to-mouth existence.

Without savings our modern economy would never be possible. Consider any non-farming profession: lets take an Auto maker for example. An Auto maker does not produce anything that can be readily consumed. So how does an Auto maker live (he/she has to eat something)? They must somehow obtain food from those who do produce it (farmers). If the farmers are only producing enough for themselves though, this is impossible. So the very existence of non-farming professions depends on the farmers being able to save. And, as outlined above, the degree to which farmers can save is severely limited without money, and therefor so also is the possibility of professions limited without money.

Of course we do have money, so we know how an Auto maker could survive: he sells his cars for money, and then trades that money to farmers for their food. (they then can buy things, such as cars) Here is the crucial point though: the Auto maker only got the money because he had produced something (the car). Likewise the farmer only received the money from the Auto maker because he had produced something (the food). This is true for every link in the chain of selling all the way back to the miner who brought the money (gold) out of the ground with his blood, sweat, and tears.

Now back to our society and the question at hand. Knowing that wealth is goods produced but not consumed (i.e. money, i.e. savings), how can it be maximized? Only by producing more goods than are consumed! This is the secret that the D's and the R's refuse to see. Production is wealth. The governmental approach to the economy however seeks simply to give money to certain groups, thereby "stimulating" the economy. How does this moving around of money increase wealth? Where, after all, does the government get its trillions to stimulate the economy? By taking it from people who already have it. How did the people get it? By producing. Does taking the money from them and giving it to someone else somehow increase that which had been produced? No. The total amount of production remains unchanged, and, tragically, a horrible injustice is also perpetrated. However, even if one disagrees with me that it is unjust to do this, surely one can see that it does not work!

In the primitive society imagined above, if some people refused to produce they would starve (or be left to the charity of those who did produce). However in our modern society there is the possibility of delaying this process through the use of credit. Many people consume more than they produce through this means, but we all know that eventually it catches up to them. Our government is now doing the same thing. By refusing to see that the only way to increase wealth is by increasing production the government is living on borrowed money. But government or individual, the time of reckoning always comes.