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When even alleged titans of capitalism subscribe to nonsense about economics

And also as ever, if you want to reduce inequality and also, not quite the same thing but close to it, raise the incomes of the working poor then what you should be agitating for is not more price fixing, but a return to full employment. Which, in this particular place and time, means arguing for less regulation of who may employ whom to do what and also arguing that the Federal Reserve should delay raising interest rates. For there are indeed things we can do to make the economy better but we do also have to make sure that they’re the right things.

Tim Worstall, who is picking apart the thinking of the chief operating officer of Blackstone, the world’s largest listed asset management house. I have been to briefings where I have heard investment managers say that minimum wage laws are a good thing and have dismissed worries about unemployment, especially among minorities and the young, as unwarranted. What I fear is that there are now quite a lot of people working in the investment sector who have imbibed some “making water flow uphill” socialistic nonsense, and these folk now oversee our investment portfolios. It is definitely worthwhile spending time working out if the investment professionals in charge of your money subscribe to these ideas or not.

For a brilliant take-down of minimum wage laws, rent controls and other attempts to push up/reduce prices from where they might otherwise be, Henry Hazlitt’s Economics in One Lesson, over half a century old, is still a classic of devastating argumentation.

(Author’s note: corrected from the original where I wrote BlackRock rather than Blackstone. Mea culpa.)

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35 comments to When even alleged titans of capitalism subscribe to nonsense about economics

  • Mr Ed

    A lot of fund managers are inevitably riding on the back of the flow of fiat money into the stock market which inflates equity prices and yet I have often read of managers failing to beat index tracker stocks. I though that it was a classic sign of a boom when one investment fund starting putting its ‘star’ managers on adverts in London railway stations c. early 2008, when the ‘celebrity’ fund manager arrived, on the back of a wave of fiat money. Come the bust, the adverts disappeared, as did the gains. But the fund managers have no way of identifying what is a bubble gain and what is a ‘real’ capital gain. Judgment certainly helps, but knowing when to sell and buy is not a gift given to all.

    You do not need to know economics to make money out of shares in a fiat money boom economy. You don’t even need to know economics to make money in any economy, any more than you need good eyesight to be an optician, as von Mises pointed out.

  • Lee Moore

    There’s no doubt that raising the minimum wage raises productivity, as this simple arithmetical example shows. Assume ten workers earning the marginal productivity of their labour = 25 + 21 + 19 + 16 + 14 + 12 + 9 + 7 + 6 + 5 = 13.4 production per worker. Introduce a minimum wage of 8, losing the three least productive workers, and you’re left with 25 + 21 + 19 + 16 + 14 + 12 + 9 = 16.6 production per worker. A staggering 24% boost to productivity from a simple, caring, government intervention.

  • Brad

    We have a breed of “investment managers” who exist in a 401K world. Government threatens to tax your labor, but says they will defer if you put your money here (wall street), and the money rolls in (breaking any form of sensible market signalling). These people are cronies. It shows just how broken the system is. People may roll their eyes when I bust out the “corporo-fascism” moniker for the US’s economic system, but that is precisely what it is. There’s a few traditional firms out there, but the vast majority are semi-parasitic cronies jobbing the system. The USG has put their productive sector (the people that actually produce anything) between being a creditor on one hand (putting your money in wall street) and a debtor on the other (mortgage holders ultimately connected with Fannie Mae). Some folks are still in holding wealth in real estate, but that’s largely beyond the productive sector to have the time to deal with. There’s simply nothing Free Market about any of this. And it explains, ultimately, why so few people are actually saving anything. They can sense, whether they fully put their finger on it, that there’s something unwholesome about all this.

    In short, if there’s support for an increase in minimum wage, it’s not out of altruism, it’s because they’s expect even more resources chased by the USG into the “agency” of wall street. And they are more than likely aware that increases in minimum wage typically call for loose money and the process of debasement results in a boon for themselves. The new currency ends up in the hands of the New York/Washington D.C. axis.

  • Rob

    BlackRock and Blackstonecare different companies. Tim is talking about Blackstone

    (Editor: typo corrected)

  • JohnW

    It is rather shocking to hear of such basic economic ignorance among those who should know better – in a similar vein, here is George Reisman fisking Warren Buffet.

  • Regional

    When I was employed by a bank, most of the employees were Bolshi.

  • RRS

    0 to 76 years ago I was “worked” on farms (in addition to city jobs for youngsters).

    Back then manure from pens and lots was cured in piles.

    It was obvious that despite all you might learn about the pile and how to handle it, it would tell you nothing about the individual animals that produced it. That didn’t mean the pile did not have its values for what it was when cured and spread (often my job).

    Something like that seems applicable to “Macroeconomics.” The piles of data, usually historic, may have some “value;” but, they give us little useful information or insights into the nature of the individuals and their actions which produce the data.

    You can’t conduct animal husbandry on the basis of the manure pile.

    Next; to take down Tara’s harp again: We are observing interference with relationships (employer-employee); officious intermeddling (we know better -sometimes best); claiming information (data) for knowledge – in general, hubris.

    “. . . if you want to *reduce inequality* and also, not quite the same thing but close to it, raise the incomes of the working poor then what you should be agitating for is not more price fixing, but a return to full employment.”

    A valid view about the concept of pricing interference, which would include wages as prices. However:

    Though possibly not popular here, consider “capabilities” as suggested by Amatyra Sen (Equality of What 1979). Decide on any measures of quality of life (including degrees of freedom)as well as (relative) incomes or comparative consumption; then examine what can be done about a particular condition. Unless, we are just going to adjust how we are to look upon and regard one another (which is a hell of a lot harder)for the meaning of equality.

    In economics, “equality” is a “wrong” subject. It is fine for the manure piles (poultry are different!!), but not for individuals.

  • RRS

    That was 80 to 76 years ago.

  • Fred the Fourth

    In my posts, I’m gonna start writing “0 to 76 years ago” instead of my usual “many many moons ago”. Thanks.

  • Thailover

    Lee Moore, LOL, that’s funny. Let’s see how productive the company is when people making 14-25 bucks an hour have to time-share floor sweeping duty and constantly answering the phone. Just because a lawyer is a much better typist than his receptionist, doesn’t mean he should be doing the typing. I assume you were being facetious.

  • bgates

    My passage to Tim Worstall’s article was interrupted by the Forbes Quote of the Day:

    “Most of the luxuries, and many of the so-called comforts of life are not only indispensible [sic], but positive hindrances to the elevation of mankind.”
    Henry David Thoreau

    Apparently TW notwithstanding, Forbes is basically pro-poverty.

  • lucklucky

    “there are now quite a lot of people working in the investment sector who have imbibed some “making water flow uphill” socialistic nonsense”

    Many capitalists are socialists except for their things. Mercantilists in short.

    A capitalist also go with the flow, if the market of ideas strongly favours marxism he goes along. Well marxist media dominates so a capitalist to have be out of their sights have to say neo marxist values.

    Also for many capitalists the only ideology they have is their companies and their investments not forgetting subsidies and regulated market advantages. This is not to say they are necessarily evil or malevolent is that in their lives they don’t have energy to think in politics beside the upper crust and the upper crust is strongly marxist.

    I know people that are so busy from business project to business project, the wife and kids are in a 2nd class of time spent and in a lifetime they seldom think more than that. Where they get how to think? from the newspapers. And they repeat what they read.

  • John Galt III

    Rush Limbaugh today on Bill Gates:

    Gates claims that only Socialism can solve global warming because the private sector has invented virtually nothing since WWII.

    http://www.breitbart.com/big-government/2015/11/02/bill-gates-socialism-can-save-us-climate-change/

    Drop dead, asshole. You live in a 66,000 square foot house (vs. The White House @ 54,900 sq. ft.)that used half the lumber in North America to construct, while your private jets use more aviation fuel than the US Air Force.

  • Julie near Chicago

    Really, as fisking, Dellers does a proper fisking of Boy Wonder Gates. What Dr. Reisman does is to write a short textbook (“textpamphlet”?) on Capitalism and address it to Compleat Capitalist (he is?) Buffett.

    But Dellers is providing infotainment (not always a bad thing), whereas Dr. Reisman seems more interested in educating people in general about capitalism.

    Really, Reisman has the tougher job; but Dellers will probably get his main point across to more people.

    It’s hard to see how Gates can be as utterly stupid as he seems.

  • RRS

    @ Julie in the Cornfields:

    Buffet may not be as “Compleat” as Charlie Munger, but BRK is certainly an example of the “complete capitalist condition.”

    Shareholders (Disclosure: I am one)do not get dividends or prizes. The surpluses attained from operations and ephemeral investing are redeployed into production or reinvestment; increasing “intrinsic value.”

    In the general forms of current managerial capitalism there is much sequestration of surpluses. They are neither redeployed nor distributed; but held, probably as a management “enhancement.”

  • Laird

    Worstall makes lots of good points in this article, but then he falls into economic error of his own with the silly throwaway line at the end “and also [we should be] arguing that the Federal Reserve should delay raising interest rates.” Interest rates are simply the price of money, and the Fed shouldn’t be setting them at all; that should always have been left entirely to the market. The artificially low interest rates forced on us by the Fed for the last seven (!) years has resulted in serious misallocation of capital as well as denying savers a reasonable return, forcing them farther out on the risk spectrum. It has operated as a subsidy to the stock market (and the big banks) as well as permitting the government to spend wantonly funded by massive, unsustainable debt. The Fed’s zero interest rate policy has been economic idiocy of the worst sort. It is wreaking serious harm on the economy and will eventually cost us dearly. Not only should the Fed raise interest rates now, it should be moving aggressively toward eliminating its meddling in them entirely.

  • Mose

    Thank you for pointing that out, Laird, it was bugging me, too. I even read the original article to see if it was misquoted, and read the comments here to crowd-check my criticism. I am surprised to find Worstall in support of a government directed inflationary program which rewards indebtedness at a direct cost to savers, creates bubbles wherever the cheap credit is invested, and drives up import costs, which are disproportionately felt by the poor. It seems the hand of Keynes touches many even of our own.

  • Julie near Chicago

    RRS, not to put too fine a point on it: There is a strong buzz amongst the pro-free-enterprise folks that Mr. Buffett is a Crony par excellence. To me, “capitalism” is an honorable concept that basically refers to free enterprise, full stop: That is, freedom of enterprise, or activity, in both the business and the personal spheres.

    Viewed in this way, cronyism is incompatible with both personal freedom (liberty) and free enterprise. So, one might be a “cronyist” or a capitalist, but not both.

    But it is true that here I am “among the alien corn,” as your reference to my hayseed origins or present whereabouts might suggest (nowadays the Rockford/Malta/DeKalb area is not quite so given to farming as one might wish, so the “in the Cornfields” is less apt than I’d prefer–not that I want to give up resarch libraries and international supermarkets).

    So if I am misinformed, and Mr. Buffett is innocent of shenanigans such as pressing the PTB to derail the Keystone XL Pipeline in order to re-rail Burlington Northern, then I’m sure we would all be glad to hear it.

    And if I have misinterpreted your comment, I do apologize, and would be glad to be disabused of my error. :>)

  • Paul Marks

    Being a good businessman (a “capitalist”)and understanding economics are very different things.

    The former is about managing your business so that it is profitable in the long term.

    The latter is about understanding the economy generally.

    Understanding, for example, that a subsidy for your business may be good for you personally – but it is not good for the economy generally.

    That the benefit for you will be less than the loss for others.

    The economics of government interventionism is not a “zero sum game” it is a NEGATIVE sum game.

    Government interventionism (government spending and regulations) makes the “pie”, the economy, smaller than it otherwise would be.

    Do some capitalists really understand this?

    I can think of a couple who do understand it.

    Charles Koch and David Koch.

    The left are correct to hate these capitalists – as they are a true threat to the collectivists.

    And those “libertarians” who attack “the Koch brothers” (for their own how-many-angels-can-dance-on-the-head-of-a-pin reasons) are fools.

  • Paul Marks

    As for the Federal Reserve – it should not exist, neither should the Bank of England and so on.

    Interest rates should be determined by the price relationships between borrowers and REAL SAVERS.

    REAL SAVERS – people who actually sacrifice consumption.

    Not the printing press or bank book keeping tricks.

    If a banker things that his book keeping tricks are “deposits” and he can lend out this “money” by “crediting to the account” and so on.

    Fine – let him (or her) play that game.

    But when (and it is “when” not “if”) the “bank run” comes…….

    No government backed “suspension of cash payments” or anything like that.

    If the banker can not pay cash-on-the-nail (as the Italians used to say) then the bank closes.

    And it should not reopen.

    Ditto all these people who are selling gold and silver that does-not-really-exist.

    You are “selling gold” or “selling silver”.

    Fine – but you better actually have the physical material you say you are selling.

    If you do not have the physical stuff you have contracted to sell – then you are bankrupt.

    No state intervention to “save the financial system”.

    As such a “system” is just a pile of book keeping tricks.

    As is a “financial system” where lending (borrowing) is many times larger than the total amount of cash REAL SAVINGS.

  • Johnathan Pearce (London)

    Just wanted to second every word of what Laird said.

  • RRS

    @ Julie, Girl of The Golden [Mid]West,

    You touch on how semantics, possibly approaching semiotics, affect thinking (not to exclude my own).

    We start with an “idea” or concept of capital, what comprises it, then what is done with it, then who does things with it. The “it” most often remains within the concept of the philosopher Marx.

    That is quite different from the “condition” that is seen as “Capitalism,” which results from the nature of the relationships and circumstances of a social order – usually identified as its “economy.”

    So, I will submit to all and sundry that a “Capitalist” is one who participates in particular functions of those relationships and circumstances that result in capitalism. Those particular functions may include ownership and control of assets; or simply control by managerial authority (w/o ownership). Among the objectives of those functions is the utility of those assets (in the relationships and circumstances)to gain values or generate surpluses from production of goods and services.

    As the populace of this nation has actively consented (sometimes demanded) or passively accepted the embodiment of authority of the Federal Administrative State, our social order has additional relationships and circumstances that derive from that State, many, if not most, of which affect “the economy.”

    Those falling in the semiotic category of “Capitalists” encounter the effects of those additional relationships and circumstances and deal with them by evasions, contention, compliance, subversion and seductions, among other techniques. Somewhere in those dealings with what is created politically we observe the vulnerabilities of the “political” to the “Capitalist.” This seems due to the competing “merits” of the differing objectives.

    What is deemed “Crony” in these aspects is not that of long-standing affiliations, nor of political appointments, but rather the responses to protect assets, their productive possibilities and taking advantages of, or reactions to, the relationships and circumstance introduced by the Federal Administrative State.

    That discourse is separate from one on the “political” or social dispositions of those who have a function as capitalists.

    The “faults” lie not with our maligned “Crony Capitalists,” but with our accession to our Federal Administrative State.

  • Regional

    Paul Marks when I was employed by a bank, deposits were considered liabilities and loans assets.

  • Fraser Orr

    Just for the record, I do not believe the underlying concept of fractional reserve banking is a bad thing. When conducted privately, possibly with private depositor insurance, it has the potential to be a good thing: financial leverage often is a good thing assuming the risk is properly managed — which is to say has an appropriate probability of causing proportionate harm to the risk taker.

    The problem is the such banking is regulated and insured by the government and that screws everything up.

    Perhaps the worst words ever spoken by a government official were “Too big to fail.”

  • Alisa

    An excellent series of comments by RRS – many thanks.

  • Laird

    @ Mose: “It seems the hand of Keynes touches many even of our own.”

    Too true, and well said.

  • Julie near Chicago

    RRS, thanks for your thoughtful reply. You write,

    “What is deemed “Crony” in these aspects is not that of long-standing affiliations, nor of political appointments, but rather the responses to protect assets, their productive possibilities and taking advantages of, or reactions to, the relationships and circumstance introduced by the Federal Administrative State,”

    and of course there is considerable truth to that. It is for instance the substance of Bradley and Donway’s defense of businessmen against Kolko’s version (which has become I guess the Standard Version) of the history of American capitalism (forget the name of socialist Kolko’s book, sorry). It does, by the way, raise the moral issue of the rectitude of yanking an innocent bystander in front of one for use as a shield against a shooter’s bullet, but leave that aside. (I note that this issue is implicit Atlas Shrugged — not as a main theme, but as a necessary and observable symptom of the Cronyism system it dismembers. “How do I condemn thee? Let me count the ways….”)

    Let me re-focus, then, on Cronyism as a symptom of corruption in the relationship between both common citizens on the one hand and businessmen on the other, and government; because both halves of this exist, not just the one. And it is one thing to go along as little as one can manage (as with Allison and BB&T, or Joe the Plumber), and another thing entirely to take advantage of the existing corruption to Make Deals and even to Make Money.

    (I ask: Would you, a retailer, buy what you know perfectly well are stolen goods from a known fence in order to sell yourself, legitimately, in order to improve your bottom line–having gotten them at less than wholesale? By the way, antiques dealers everywhere might ask themselves this question. The issue is the same.)

    “Cronyism” as used in the context of corruption between government (including its agencies and agents) and businessmen (as well as private citizens in their capacity as voters) specifically refers to situations where either:

    1. Non-governmental actors bribe (or otherwise induce: blackmail, extort) governmental actors to provide services or to pass laws that will help them and hinder whomever they wish hindered, at the point of the governmental gun. (It is the function of the old-fashioned, stereotypical Ward Boss, who I think is still well and truly in business, to play politics in order to get favored treatment for his constituents — famously, their potholes are fixed first, as an example.) The bribery may take the form of votes, financial contributions to campaigns of politicians or even to Party coffers, or of “gifts” to politicians or their preferred charities, or of sweetheart deals with politicians’ businesses.

    –OR–

    2. Persons or groups wielding the power of their governmental positions use this to extort votes, contributions, gifts, or sweetheart deals from the businessmen, relying on the power of the gun to get their way from the businessmen (and if the governmental actor or his group is thuggish enough, he may add out-and-out personal extortion, as well as blackmail, to his governmental power).

    There may of course be middlemen of various sorts between the businessmen and the government. Sometimes they are called “influence-peddlers.” To my mind one such is the REV Jesse Jackson. He has gotten for himself enormous political power, including the power to extort without having to answer for it (e.g., the NASCAR scandal). AlBore is another who might be put in this category, since he is no longer formally a politician, but still figures in the calculations of the Mighty, is certainly of use to them, and has been the recipient of governmental help in the way of getting the sales of “carbon offsets” permitted. His weight is also behind “Cap and Trade,” of course — a boon to govt. coffers, which money can be spent on various subsidies and other vote-inducing measures such as the parcelling out of Obamaphones.

    Another is, so I understand, Warren Buffett, who puts his enormous reputation as a “Capitalist” to good use touting all sorts of governmentally-desired rubbish such as the Evil of the Keystone Pipeline on “environmental” grounds, and his avowed wish to tax “the rich” right out of their positions as enablers of capitalism (“capitalism,” in the sense of the accumulation and use of capital in order to create wealth). The fact, of course, is that if the money of people who have it, which could be invested in production — or used to buy consumer (luxury) goods, with the purchase price being used in part to finance further production via workers’ wages and businessmen’s profits — is taken instead by government and parcelled out to others in a most financially inefficient manner, there will be little or none left to finance new production. This renders Capitalism a nullity, so it is hard for me to consider Mr. Buffett a Capitalist, although he sometimes acts as if he were one.

    Always subject, of course, to revision of my opinion of Buffett should allegations of corruption be shown to be untrue.

    For the common voter, there is no prima facie difference between the outcomes of these two scenarios for corruption: The main difference is only in who initiates the corruption.

    . . .

    If government, its agencies, or its actors, or its middlemen, or its policies, use its or their power to defeat personal liberty in either economic markets or other areas of human life (getting the potholes fixed; seeing that Jr. goes to Harvard; dictating whether one may legally smoke on the public street, or on one’s property, or inside one’s own four walls!; whether one must send one’s kids to some Officially Approved School or other; and on and on and on) then that government is engaged in misuse of power to defeat the citizens’ liberty in general.

    That is the basis of the reason why Miss Rand, for one, claimed the name of “Capitalism” for the entire system of what might be called “Freedom from illegitimate governmental acts,” thus emphasizing–not creating–the way in which “personal” and “economic” freedom are bound up together.

    Not to mention the more direct and obvious fact that if there is not economic freedom–if one cannot legally sell a large soda-pop, or a Glock 9-mm and ammo–then the purchaser also cannot exercise his private right to buy one. So unless he’s inherited a firearm (plenty of ongoing attempts to defeat RKBA, indeed to outlaw private firearms altogether), he’s SOL in the RKBA area, not to mention No drinking of large sodas for you, me lad!

    It all goes together.

  • RRS

    @ Julie

    Reflections on Corruption

    From your observations shall we conclude that only those who participate in accordance with specified modes of conduct and constraints in particular functions of those relationships and circumstances that result in capitalism are indeed true capitalists; or is that inferring too much?

    In the case of the Federal Administrative State (as distinct from the Constitutionally delineated Government) which has been established and functions as a game for power, played by administrators for power, to equate gaming that system, its administrators and the politicians who succor it, with “corruption,” may require some clarification.

    Of course the people who engage in activities that cause capitalism are not oblates of some holy economic order pledged to some form of economic celibacy and purity. Somebody gets screwed every day; but not everybody gets screwed every day (unless that’s what they sign up for).

    Rent-seeking (in the Gordon Tullock format) is only corrupt because it is satisfied for corrupt objectives of administrators. It is satisfied by the actions of the players in the game for administrative power. “Agencies” and the Government are impersonal entities. It is the people within and their motives that seem better identifiers of the sources of administrative corruption.

  • Julie near Chicago

    RRS, I think we must be talking past each other somehow. Maybe our real differences (if any!) aren’t coming to light because neither of us is able to change his (your) or her (my) understanding of what “capitalism” (even in the purely economic/financial sense) means.

    But in any case, the point is that freedom in the libertarian sense (political “liberty”) does require government to keep its nose where it belongs, which is NOT in dictating financial policies, stealing from or defrauding the citizenry in order to do favors for “friends,” nor threatening businessmen with governmental reprisal should they fail to come across per the current demand. This is the very definition of corrupt government.

    Yes, I agree, we have now got this Administrative State, which is a godawful mess, a nightmare, and rife with opportunities for corruption whether initiated by or at the behest of its agents or agencies, or initiated by what some call rent-seekers, some call Cronies, and some call moochers: People looking not to trade value for value with other traders (and for sure not with the Gov, which has nothing to trade except the continuance of your life, which it will let you keep if you turn over the contents of your wallet, or of your conscience), but rather to get the State to give them some special favors by means of the its lawmaking powers (however illegitimately gotten) and its guns ‘n’ goons.

    Some of them (on both sides) no doubt even believe they are doing The Right Thing.

    But to lump Tammany Hall’s politico-fatcats, AlBore, and John Allison together as “capitalists” because they all operate in the economic sphere (market), is downright perverse, so I cannot believe that that is what you are trying to do. Therefore you must be trying to get at something else, and I am too much in the Alien Corn to get it.

    Suggest suspending proceedings for the nonce. :>)

  • Alisa

    If I may, the difference is that Julie’s point is concerned with capitalism as an ideology, and RRS’ with it as a practice. In the latter sense (i.e. in practice), everyone is a capitalist, but the former makes little sense to me – precisely because of that practice thing: everyone breaths, so what point is there in advocating breathism as an ideology?

  • RRS

    Thank you Alisa. I wanted to honor Julie’s request. But, to yours, I will say we each have been describing two different aspects of human actions.

  • Alisa

    I’m sorry – I should not have been trying to speak for either of you.

  • Julie near Chicago

    RRS, your summary sounds reasonable to me. The fact is, I think maybe I myself have been not entirely clear about what I meant about what in this discussion.

    In any case, if it is considered as a discussion–an joint exploration of ideas–rather than an “argument” in the sense of “dispute,” it’s interesting and I’d love to start over from scratch sometime.

    I will say that it seemed to me that you disapproved of my disapproval of Mr. Buffett as a Capitalist, and things got complicated from there. This may well have been a mistake of mine that set off the whole thing.

    By the way, I did appreciate the humor of your two forms of address *g*. That’s what prompted me to adapt “Ruth among the Alien Corn” to my own position as a neophyte in the area of economics. :>)))

    . . .

    Dear Alisa, I very much appreciate your comment. It has helped me to see the subject exchange in a somewhat different light.

    From my POV at least, you have nothing to be sorry about. And anyway, always glad to get your input.

  • Alisa

    You two are too kind 🙂