Intrusive Government: The Greatest Threat To Any Economy!

Money: A Medium Of Exchange, Not A Moral Sedative!

***Chapter Fourteen--Conservative Debate Handbook***


Some Useful Distinctions

Economic Aspects of Legal & Social Issues; Supply & Demand; Money Supply vs. Price; Distortion, Inertia, Habit, Perception, Monopoly & Price; Fallacy Of Central Planning in Dealing With Elasticity of Factors & Division of Labor; Whose Values, Whose Valuations.

An Imaginary Dichotomy

While we have dealt briefly with economic issues in the Introduction, in Chapters 7 and elsewhere, there may appear at first impression to be a greater emphasis on other aspects of the ideological conflict in the first 13 Chapters of this Handbook. Such appearance would be illusion; an illusion derived from a fallacy that we should put to rest.

Economics is a study--correctly a discipline--that focuses not only on the material, but on all things that add to or sustain the values of life. In a real sense, all human action is economic. This point is important in a Conservative Debate Handbook, because of efforts to confuse issues by implying a philosophic difference between so-called "Economic Conservatives" and so-called "Social Conservatives." Indeed, some believe this to be a serious division on the political and philosophic right. Such suggested phenomenon is neither real nor a Conservative dilemma. What is being perceived is neither a phenomenon of the Left nor of the Right, but the fact that there are many people who, for one reason or another, become preoccupied with a single issue or group of issues, and allow that limiting focus to dominate their perspective.

Yet, how can one who understands human motivation even attempt to divorce the social from the economic? Since man first formulated social institutions, social values, wants and ambitions have all been among the dominant motives for economic effort; so, too, have religious values. Indeed, every endeavor that goes beyond the mere needs for individual survival, reflects social or religious values. To illustrate, consider some examples:

The Puritan Fathers of New England clearly demonstrated the inseparability of social, economic and religious considerations. (Anyone who closely peruses this Handbook will know that we attribute the primary root of modern American Conservatism to the values of the Virginia gentry, those who provided so much of the original leadership, including four of the first five Presidents. So, in picking the roots of New England for an illustration, we are certainly not offering any form of circular--or "in house"--argument.)

By all accounts, the Puritans were the ultimate models of what has been described as the "American work ethic." They improved their lot by hard work, but they put a very high value--a value reflected in economic effort--on social and religious values. Their basic story was once well known to every American boy or girl:

Fearing persecution by an Established Church, the Puritans first fled England for the Netherlands, where they were treated with complete toleration, and allowed to prosper. But wanting to preserve an Anglo-Saxon heritage, rather than be absorbed into Dutch culture, they elected to return to Britain, from which they soon embarked to the New World, to establish their own very risky settlement on the New England coast; seeking to clear a wilderness and pursue a better life within the framework of their own heritage, while guided by devoutly held religious doctrines. A skilled people, who could have prospered either in the Netherlands or England, they elected to start again, virtually from scratch, because of the value they put on social (cultural and ethnic) and religious concepts. Clearing that wilderness and enduring a harsh winter, which killed off many of their number, were part of the price they were very willing to pay.

Nor were cultural and/or ethnic factors any less important to the American mainstream. When Jefferson had the chance to purchase the vast Louisiana Territory, he seized the opportunity in large part because: it not better that the opposite bank of the Mississippi should be settled by our own brethren and children, than by strangers of another family? With which shall we be most likely to live in harmony and friendly intercourse? [Second Inaugural Address, March 4, 1805.]

In an earlier letter to that generation's John C. Breckinridge, August 12, 1803, Jefferson had stated very clearly the ethnic values involved in having the existing Eastern (coastal) States fund a purchase that would secure a congenial neighborhood for those Americans already settling in the West, on the eastern waters of the Mississippi:

I do not view it as an Englishman would the procuring future blessings for the French nation, with whom he has no relations of blood or affection. The future inhabitants of the Atlantic and Missipi States will be our sons. We leave them in distinct but bordering establishments. We think we see their happiness in their union, & we wish it. Events may prove it otherwise; and if they see their interest in separation, why should we take side with our Atlantic rather than our Missipi descendants? It is the elder and the younger son differing. God Bless them both, & keep them in union, if it be for their good, but separate them, if it be better.

You will note that both the Puritans and the Jeffersonians made these economic decisions from a long term, generation spanning perspective. Similar long term, generation spanning perspectives, marry the economic and social aspects of questions affecting the structure and durability of American family life and values. It is in this long term, generation spanning perspective that the apparent dichotomy between the social and the economic melts away into a common intellectual stream.

In contrast to the earlier Americans' clear sense of family and heritage as material benefits, certain self-styled "Economic Conservatives," whose apparent concern is not the conservation of heritage, but next year's personal "bottom line"--hardly an authority enhancing attribute--have tried to justify an open border and indiscriminate immigration on the naive rationalization that allowing others to come here, to take the jobs that Americans do not want, is sound economics. We will not belabor the absurdity of such claims, here, since we intend to devote the next Chapter to that subject. But it may suffice, for the moment, to point out that none of the poseurs making that argument, seems willing to address the long term implications of those policies for a host of interlocking social and economic questions--other than by cant and slogan.

The sometimes perceived dichotomy between social and economic issues, then, is really only a facet of shallow or inadequate perception.

Supply And Demand

The foundation of traditional economic analysis is the "Law of Supply and Demand:" The relationships between desire and production, between quantity and price; the mechanism of the market as a final determinant as to how that which is available, or may by effort be made available, may best be allocated. The immediate corollary, based upon the tenet that a free market moves inevitably towards a self-correcting equilibrium, one that fairly balances the factors of production with the demands for production at an optimum level, is as valid today as in the time of Adam Smith.

The essential qualification, of course, is that an economy is a dynamic. While there is an inherent tendency towards equilibrium in a free economy, changing realities, habits, wants, and natural forces, will always prevent there ever being a point where perfect equilibrium is actually obtained. And if that is true of a free market, where the players can each make the best possible immediate adjustments for their own clearly perceived interests; it is far more evident where Government seeks to intrude decisions made by distant committees, with far less adequate perception of those interests, adding another layer of fluctuating variables to slow down a market's ability to respond to previously changing factors.

Besides the clear limitations on any human action, the most obvious phenomena that prevent instant adjustment of the factors of production and demand, lie in the degree of elasticity or inelasticity. Neither raw materials nor labor, neither consumer wants nor habits, neither transportation nor communication, are completely elastic. Nor is the ratio between present and deferred enjoyment of the fruits of human labor.

A simple illustration of this may be found in analyzing the frequently encountered fallacies--ones with considerable political implication--which surround Governmentally collected statistics on the level of employment. We touched above on the foolish idea that an indiscriminate immigration policy is sound economics. Quite apart from the myriad of social and political side effects of present immigration trends, an obvious immediate problem arises if people, brought in for one type of employment, see their jobs eliminated, either by a new technology or the end of a cycle. As explored in other Chapters, people are not interchangeable. We do not all have equivalent aptitudes or even nearly equivalent aptitudes. Those who come to pick fruit and vegetables may not be able to adapt to what may be available if more growers go to automated systems; nor may niche workers even in the most technological job categories.

But this is not just a problem which has to be taken into account in formulating an immigration policy. The same lack of interchangeability affects those who may be native born, who also find themselves suddenly unemployed. The theory then that a certain level of unemployment may be desirable as a means of spurring economic growth--one that tends to be anathema to organized Labor;--as the theory that beyond a certain point Governmental planners must do something to get people back to work--one that the same interest group would embrace;--are not much sounder than the pursuit of easy immigration by a shortsighted Business group. The macro aspects of all of these situations mask a myriad of micro problems; the individual characteristics of which being themselves dynamic, can seldom be understood by Government until they have ceased to be the present determinants of an ever changing situation. [A cruel political unwillingness to accept other aspects of the same reality is destroying public education in America.]

It takes only a modicum of common sense to realize that the most efficient way to deal with the problem of the unemployed individual, is the traditional American way of putting him on his own mettle to find that, which he can do, that other people most value. To the extent that some may still need outside help, the most effective help is apt to be a local agency--whether public or private--that can respond to individual needs, without having to satisfy the checklists or theories of a distant committee, in a distant Capital.

Money Supply And Prices

Adjustments in production and consumption, mandated by interactive supply and demand factors, will achieve different degrees of efficiency depending upon the complexity of factors on one side or the other--factors which always include time and context. Because the factors are always in motion, always shifting, it may be extremely difficult to predict trends very far beyond the immediate future. However, as a rule, one might expect the relationship between the supply of money and the general price level to be more easily predictable than the more idiosyncratic relationship between the production and demand of specific products.

While "inflation" to the public, at large, means rising prices, and "deflation," falling prices; the actual mechanism of inflation is an increase in the supply of money and money substitutes in relation to the total supply of goods and services for which money may be spent. A rise in prices results from a change in that ratio that cheapens the value of the medium of exchange in relation to what it will be exchanged for. If one envisions an informal, ongoing auction, where consumers are bidding for the supply of desired goods and products; in theory, a sudden increase in the supply of money--with no greater labor having been required to produce that money--should just as suddenly increase the level of prices that consumers are willing to pay. Yet such is not the case--at least not initially.

The initial effect on prices of increasing the money supply may be very slight. There is a built in inertia, arising from what has become customary. Consumers tend to resist paying more; tend to consider any additional money available, an increase in their personal prosperity. It is only gradually that the perception shifts, as prices finally start to rise for goods in short supply. As that gradual shift takes place, there will come a point where the perception of increasing wealth gives way to a fear of decreasing value--to a need to spend, while the medium of exchange still has most of its previously perceived buying power. Soon a chase may be on, which can lead to some terrible results indeed, as in Germany and Hungary, a few years after World War I.

Because the immediate euphoria--the sense of enhanced prosperity that follows an initial modest increase in the supply of money--has "feel good" aspects; it has great appeal to politicians seeking to induce a sense of well being among their followers and supporters. Since it also makes it easier to pay off debt, it appeals to several interest groups and makes debtors very happy. Since what makes debtors happy, induces more buying on future credit, it initially makes mercantile interests happy, as they sell more. Yet all of this artificial happiness only makes the eventual adjustment that much more difficult and painful.

It is only by keeping firmly in mind that money is only a medium of exchange, and that it is production and services--including the saved fruits of past production and services--that ultimately must pay for all goods and services, that one can really understand the counter-productive nature of artificial, short-term monetary stimulus. While it may actually induce greater immediate effort, such will be more than offset by the built-in ingredients for future disruption of markets, and by a distortion in the ability to make long term plans based upon the greatest achievable predictability as to factors of production and consumption.

Inertia, Habit, Perception, Monopoly & Price

A wide variety of factors can and will interfere with conceptually valid expectations for adjustment in economic misallocations and imbalances. Some need only to be mentioned to be easily recognized:

The price of the frequently bought, low cost product, can acquire a usage independent of fluctuations in supply and demand; even to substantial shifts in the supply of money, or the ratio of money and money substitutes to goods and services. Let us take a rather simplistic, but real, example from the recurring American experience: The Hershey chocolate bar. Throughout our childhood, the price of a chocolate bar was 5 cents. The price remained 5 cents for many years. But as inflationary pressures came more and more to play on the cost of ingredients, the company gradually reduced the size of the bars. Thus what had been 1 3/4 or 1 7/8 ounces came, by degrees, to be 1 5/8, then 1 1/2, then 1 3/8 ounces. We believe that they took it all the way down to 1 1/8 ounces, before they raised the price to a dime and went back to the larger bars--only to gradually repeat the whole process.

During the same period, the company introduced alternatives, bars partially adulterated with cheaper ingredients. Both exercises reflected an independent usage for the concept that a chocolate bar should cost 5 cents.

The price history of many a commonly used product, through the years, would reflect the same phenomenon; while the pricing and alteration of more complex products would reflect at least a similar tendency--or alternatively a pricing inertia--illustrating some of the difficulties in freely adjusting prices.

We focus on the effect of habit and price association as a factor in slowing the pursuit of equilibrium, but we could as easily toss a bone to "Liberal" academics, acknowledging that the coercive power of business monopolies and oligopolies can also interfere with the market's ability to achieve an optimum allocation of resources. Such combinations or forces can not only defend for a time higher prices than pure competition would allow, but they can often use their greater market leverage to force lower prices on their suppliers, than might otherwise be likely.

Ludwig von Mises, the great Austrian exponent of the ultimate efficiency of the Free Market, attributed the success of monopolistic price distortions primarily to Governmental interference in the economy:

The monopoly problem mankind has to face is not an outgrowth of ...the market economy. It is a product of purposive action on the part of governments. It is not one of the evils inherent in capitalism as the demagogues trumpet. It is, on the contrary, the fruit of policies hostile to capitalism and intent upon sabotaging and destroying its operation. [Human Action, (Third Revised Ed.) Chapter XVI, 6.]

However, not all of the Governmental action that von Mises cites as contributing to monopolistic pricing, is of the malevolent variety. For example, patent protection, recognized in most advanced societies, and one of the very few domestic powers that the Constitution (Article I, Sec. 8) actually grants to the American Federal Government, has surely provided enormous social and economic benefit by tending to focus creative energy into the most pragmatic forms of innovation. Still it must be recognized that part of the cost of such benefit is borne by its facilitation of monopolistic pricing.

Yet the long term effect of monopolistic leverage can only be to delay adjustment. Ultimately the same forces that control other markets must prevail. A monopoly can exploit a perceived need among its consuming customers or suppliers only until the one or the other, or both, realize that there are more optimal uses for their respective funds and resources than those dictated by the monopoly.

The Fallacy Of Central Planning

We have already touched on the most obvious problem for Central Planning in a complex economy. Just by adding a new layer of variables, which must be considered, it can only slow down the ability of a market to adjust to changing conditions. The more elaborate the intrusion, the greater the detriment. But there is another aspect of political interference, which is virtually certain to accompany economic planning in a Society where the Government is popularly elected, that will cause far greater damage to the elasticity of factors and hence the capacity of a market for self-correction.

While there are areas where a Governmental pursuit of a social policy may actually confer long term benefit, such as the purchase of the Louisiana Territory to secure an ethnically congenial neighborhood for America's western settlers, such as the protection of patents; these situations tend to be the exceptions. Their benign characteristics derive from a number of factors, the principal of which is that they are directed to a general benefit. They are not slanted towards the peculiar interests or desires of a particular group or faction. But with the modern popularly elected Government, most social policies, enacted into law, are precisely so slanted.

Consider the absurd cost of faction induced Twentieth Century intrusions by the U.S. Federal Government into the personnel decisions of American business. From the Wagner Act, which made it an unfair Labor practice for American Management & Labor to be too friendly--an obvious effort to promote the concept of class conflict at the expense of economic efficiency--to the so called "Civil Rights" movement, to the Federal takeover of occupational safety and the Americans With Disabilities Act, an overreaching Federal Government has assumed one role after another, never granted in the Constitution. While the stated goals may have sounded laudatory to the modern "Liberal," the bureaucratic implementation of these goals can not reasonably be argued to be economically efficient.

Regardless of how one feels about the claimed right of politicians to pass judgment on whom is hired or fired in private business, Legislation prohibiting personal preferences--whether directed at racial preferences, religious preferences, sexual preferences, preferences of national origin or for physical fitness--can only interfere with the ease with which the not so free market adjusts to changing conditions. It is not only in the burden on management, which must consider how every choice may be viewed by bureaucratic enthusiasts, who feel ordained by legal authority to enforce "equal" treatment in fields where a certain amount of subjective judgment is inevitable. There is also the effect on the balance of the labor force, where many may suspect that someone else has had an unfair leg up for an unacceptable reason, leading to poorer performance among all harboring such suspicion.

The argument will doubtless be made that laws which forbid discrimination in employment actually remove obstacles to the optimum utility of labor; that they secure the employment of the best person for each job by removing artificial barriers. Such an argument is inherently misleading. Just the enormous cost of implementation--the wasted unproductive labor for enforcement on the public side, and for avoiding problems on the private side--would more than offset any imagined benefit. But there is actually no reason to believe that the market was not already utilizing available labor in an optimum manner--indeed, better utilizing labor, where the motive was to optimize profit, not humor a distant committee with little or no real perception of all factors in any situation at any moment in time.

While an otherwise qualified person might be refused employment in a given company because of a racial, religious, ethnic or other private preference of a particular owner, it does not follow that such denial by one possible employer would materially effect the potential utilization of that individual. All the usual motivations, which make a market economy the most efficient ever devised, would still operate.

If the refused individual had indeed the qualifications, the rational presumption is that there would always be other potential employers, only too glad to utilize the suggested aptitudes--and utilize those aptitudes without the mutual morale undermining sense of coercive authority and outside intrusion, present with the threat of Governmental action. This presumption, moreover, conforms to a considerable body of past experience. For a compelling example, take that of the Japanese-Americans after a World War II removal from their homes and camp internment, at a time of very hostile and negative attitudes towards their race, to their status two years after the War, when a study showed that virtually every individual in the sample had bettered his status, during the intervening period, from what it had been at the time of removal! When profit seeking employers discovered that they could provide excellent value for wage or salary dollar, the barriers fell away.

The proponents of Governmentally coerced and supervised "equal employment opportunities" made a point, in promoting their agenda, to play on the past hurt feelings of various ethnic groups. Thus, they reminded Americans of an Irish or Jewish background that some employers, in areas impacted by heavy immigration, had once posted signs stating that "no Irish" or "no Jews" need apply. American Negroes were recruited by these Socialists as the "last hired and first fired." But the fact is that every ethnic group referred to had already achieved better in America than their ancestral cousins had ever achieved in their ancestral homelands before any "Civil Rights" act was enacted. The market was working; the play on hurt feelings was pure and simple demagoguery.

All of the same considerations apply to those covered by the Americans With Disabilities Act.

The other argument that demagogues have used to support Governmental supervision of employment practices, is that employment statistics show certain groups much more heavily represented in some occupational categories than others. This type of statistical comparison, of course, demonstrates nothing that should alarm anyone. Indeed, anyone who understands the concept of the "Division of Labor"--the economic mechanism by which Mankind advance beyond the primitive--understands that such disparity is precisely what any reasonable person would expect.

The fact is that even the smallest, most closely related, samples of human types reflect a great variation in aptitudes. Compare two families from a common ethnic heritage living on the same comfortable suburban street, each with five children. Would anyone--anyone with an understanding of reality--expect the five children in the one family to have the same aptitudes as the five children in the other family? If not, why would anyone expect children from far more diverse backgrounds to have the same aptitudes as the children in either of our sample families? Demagogues stirring up group antagonism only succeed with their fatuous argument, because they appeal to those who lack the critical capacity, or the intellectual integrity, to actually analyze political and social issues. The silent response of others reflects the intimidation discussed in the previous Chapter.

But the disruptive effect of Governmental intrusion is not limited to employment. Consider the idiocy of the New Deal farm program in a hungry world. Consider the fallacy of "Price Controls." Consider the intrusion of the United States Government into the Constitutionally unsanctioned field of civilian health care:

Since the adoption of Medicare in 1965, the cost of medical care in America has not only exploded almost geometrically; there has been an enormous increase in personnel devoted to processing accounts and filling out forms, as opposed to those actually treating human illness. It would require the imaginative genius of a Dean Swift to capture the essence of what such "health reform" has actually achieved. Older readers may perhaps still remember a time when most of those one saw in a Doctor's office were actually engaged in treating patients, not shuffling papers or computerizing records. Some may even remember the days when no indigent person needed Governmental assistance to see a Doctor, because the Doctor's oath required he treat such person; while the Doctor, himself, made a very good living with far less fear of being sued.

Intrusive Government is not only expensive. Because there really is not the imagined dichotomy between Social and Economic valuations, the distortion of the economics of medicine--or anything else--easily leads to a distortion of the social values inherent in the human actions involved.

Whose Values--Whose Valuations

Virtually every action by Government intended to effect economic adjustment to real conditions, or intended to impose upon economic activity a set of social goals or objectives, involves a matter of setting values: Of substituting the values dominant in the Government, effectively the values of a remote committee, for the valuations put on goods, resources and human action by the dynamic, inter-active market. The inherent flaw in the concept is obvious.

The genius of a market economy is that it involves all those, who will play a part in economic activity, in a dynamic process where those closest to each of the factors of production, consumption and human action of every sort, play a direct and immediate role in setting the values, both monetary and social, of those same factors of production, consumption and human action. It is precisely because those most effected in any aspect are those able to react most immediately in that area--and with what is clearly the greatest motivation to react rationally--that the system works so much better than any other. Those who think that you can tamper with the dynamic to the benefit of the process, do not really understand that dynamic.

The Founding Fathers understood what Government could do to promote economic well-being. They conveyed no power to impose the values, social or economic, of one faction or interest group on another. Rather, they granted Government only the power necessary to remove impediments to a free market; the power to provide uniform measures and debt relief, a stable currency for predictable decision making, better communication among the participants, and a means to enforce the obligation of contracts entered into by those participants. The intention was to facilitate, not intrude. When one reads what the Constitution actually provides and contrasts those provisions with what the demagogues of the Twentieth Century managed to promote, you realize how sadly America has lost her way.

Prosperity can never be created by Government. Intrusive Government is ever the impediment to prosperity. In its very ability to complicate each decision, to make economic adjustment of every sort more difficult and uncertain, while taxing production to pay for that very wasting of human resources in an administrative bureaucracy enforcing an intrusive purpose, necessitating responsive layers of unproductive and misdirected supervisors engaged in damage control in the private sector; there is a mountain of evidence to suggest that intrusive Government is the single most baleful influence on any economy.

We have dealt in other Chapters with the moral absurdity of the Government, in a Republic, trying to change the values of its citizens.

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