Libertarians in Action

Libertarianism covers many movements according to Wikipedia, but what I mean by this term is what Wikipedia defines as anarcho-capitalism: the political theory that all problems of human society are best resolved by market forces. So they want nothing more than to abolish the state and leave the market to take care of everything: from schools to health care and from defense and police to the justice system. These ideas originate from the group of economists known as Austrian School, like Mises and Hayek. The Austrian School had important contributions to the development of economics, refuting the marxist theory that was very popular in Europe at that time. For example they developed the subjective theory of value opposed to the labour theory of value proposed by Marx. They also predicted that implementing Marx's ideas will lead people to misery and dictatorship, but few people listened to them. We had to learn it the hard way, after 50 years of communism. However, libertarians took these ideas to the other extreme, idealizing the market forces in every aspect of our life. This is even more bizarre to me since even Hayek, the most recognized economist of this school, acknowledged in his works that there are situations of market failures, or other motives like moral grounds which legitimate the existence and intervention of the state.

I met once such a group, they were organizing a seminar discussing libertarian authors. They were very passionate about their ideas and would not consider any counter-argument. I remember somebody cheering the situation in Somalia on a forum, saying that the collapse of the state there 10 years ago will let people develop better since there will be only market forces at play. My reaction to this was to propose them to go on an inhabited island and build there the society they dreamed of. Recently I found that somebody did try to do exactly this. Not on an island (it's hard sometimes to eat your own dog food), but on the internet. This guy created an online marketplace, called Silk Road, using only encrypted connections so people cannot be traced. He wanted to seal this market from any possible government intervention, following the true spirit of libertarianism. And guess what trade flourished on this market: drugs, of course. It took FBI a couple of years to penetrate and dismantle this network. You can read the fascinating story on how Silk Road raised and fell in Wired in two parts here and here. A few days ago the creator of this market was sentenced to life in prison without parole. He is not at large anymore...

The Economist on carbon tax

I wrote a while ago here about a paper with various proposals to put a cost on CO2 emissions and how I like the idea of a carbon added tax. This evening I read the first complete endorsement of a carbon tax in The Economist. The blog post dismantles various arguments against such a tax and explains the incentives it will bring about. It's worth reading it on Free Exchange.
So if most economists agree on this issue, why is it not happening, what is politician's position on this issue? One the one hand the likes of the tea party don't wont any kind of tax whatsoever and another big group would prefer to spend money on their pet green projects, than to have a generic tax that would make the good and cheap technologies winners. Apart from being captive to special interests, their chronic lack of vision in handling various aspects of current economic challenges is disappointing.

Was Marx right in the end?

In a recent interview Nouriel Roubini (also known as the prophet of the crisis) said that capitalism could auto-destroy itself when too much capital accumulation takes place and the agregate demand becomes in turn very weak. The original declaration can be seen here:



First I'd like to note that in general any system involving human beings can self-destroy by simply commiting suicide. If somebody wants to give credit to Marx she should prove somehow that capitalism will always lead to a self-destruction stage. My second observation is the focus on consumption that appears in current macro-economics world. We need to keep increasing our consumption in order to match the ever increasing producing capacity and this is the only way we can advance the global GDP (here domestic is planet Earth :). I think the real trap in today's economics is this focus on consumption that creates the demand. We can live a happy life without this exacerbated consumption and in the end this is a matter of what we value, isn't it?

P.S. By comparing the subjective theory of value and labour theory of value one can understand the fallacy of Marxism, but more on this in another post.

A cartel of a different kind

According to Webster an economic cartel is "a combination of independent commercial or industrial enterprises designed to limit competition or fix prices". Usually a group of companies conspire to have higher prices on their products (like the recent case of detergent market in E.U., or the infamous notarial price lists from Romania) or to deter other parts to enter their market (what Vodafone and Orange were charged in Romania), but in this case a group of companies tried to fix the price of labour. Well, labour is a special market anyway, with a lot of social implications, but this market usually has an important asymmetry of information over salaries between the employer and the employee, as many private companies require their employees not to disclose their income (the study of asymmetry of information in markets and its implications was developed by Joseph Stiglitz and he was awarded the Nobel prize in economics for it) . Even in these conditions some companies (namely Apple, Google, Adobe, Intel, Intuit, Lucasfilm and Pixar) allegedly engaged in even more anti-competitive practices (like an agreement not to try to hire employees of one another)? I understand that the competition for talented engineers is tough in Silicon Valley, but these companies are among the most profitable on this planet. It's always nice to save some pennies though, isn't it?

See the full story here with a nice diagram showing the suspected bilateral agreements between various companies.

What to tax and how to spend the public funds

Since the crisis is still here (now with the sovereign debt flavor) and nobody declared it unconstitutional yet, Romanians discovered a new domain where everybody has an opinion after football and politics: the tax system and budget deficit. So here are my two cents on this issue.

The budget deficit can be reduced in two ways: by increasing the income, or by decreasing the spending. In order to have more income the state can either improve the collection rate of the existing taxes by simplifying the forms and cracking down on tax evasion (that could be hard given the corruption levels of the tax authorities)
or by increasing some taxes. Regarding taxes my preference is for a system that tax rather consumption then work. Since the whole human race's consumption levels is unsustainable on the long term, any measure that discourages this consumption is welcomed from my point of view. From taxation point of view this would be higher VAT, excises on energy products and other goods, property taxes (which are very low in Romania), road taxes, CO2 tax. It's true that I don't feel very affected by these types of taxes since I always enjoy starring at the ceiling and thinking of a math problem :) On the other hand, the taxes on work should be lowered so that people are encouraged to work (legally). Note that in Romania currently there are 4-4.5 millions of employees out of a working age (18-62) population of 10 millions people. Even if you take out maybe 2 millions migrant workers there are still 3.5 millions who are not formally working in this country!

Now, there are some opinions that whatever mix of taxes the government will choose the state will not be able to get more than 32% of GDP as budget income. In this case the only real option for getting a balanced budget is to cut the spending to 32% of GDP (currently they are at around 40%). That should lead to lay-offs in the public sector. Another source of economy would a more efficient public spending and procurement, but this is hard to do quickly given the level of corruption in this area.

As you can see the fight against corruption should always be a high priority because it affects both tax collection and public money spending. That is what is corruption all about in the end.

P.S. Enough economics, I'll end this post with a good Spanish restaurant where I ate a couple of nights ago: Alioli: paella, creme catalane and sangria were all good.

Future cars

Today we have diesel and petrol cars and a few hybrids, the most successful being Toyota Prius. As this industry is build on inoculation of the idea of having a personal vehicle, unless some catastrophic event (natural or economical) happens I don't see that many people giving up their beloved cars no matter how good the public transport will be.
So what will be the future of cars? Among the alternatives to oil based propelled cars the hype is nowadays on electric cars. Some estimates are saying that by 2020 10% of new sales will be electric cars, others estimate the adoption rate will be much slower to only 1-2% of new sales. At least one big company (Renault) is betting on the first estimate and plans to launch a full range of electric cars in a few years. The main drawbacks for electric cars at this moment are the cost of batteries (most of them use lithium which is not that abundant) and the infrastructure for recharging them. See the full story here.
As for myself, I hope the next car I buy will be at least a hybrid one.

Economists and economics

I read two articles recently that lead me to writing this post. One by Paul Krugman who analyzes how most of the economists didn't anticipate the crisis that hit the world last year and another one (in Romanian) who criticize exactly Paul Krugman and Joseph Stiglitz for their omnipresence in mass-media where they impose their "leftist" ideas.

First I should mention that I read both books of the Vienna school economists (like Mises and Hayek) and Stiglitz. The science of economics mainly tries to create models that explain the interactions of people in the context of goods and their value. Apart for the various competing models one big disputed point among economists is how much the state should be involved in economy. The adepts of a liberal ideology claim that we should always let the market free to reach its equilibrium, as the free market is the most efficient way of allocating resources. But the ideal market model has one important assumption: that the agents act rational. And this assumption is not true many times, for example in the recent asset bubble people were driven by an "irrational exuberance" and they kept buying properties at ridiculous prices. One may say that a model is limited by its nature and cannot account for all the complexities of reality, but if a model cannot predict bubbles in various markets that keep appearing and have devastating effects on the economy when they burst then that model is not very useful. On the other hand, if we understand that such bubbles can occur than maybe public policies that act to prevent such evolutions are desirable: for example, counter cyclical monetary policies like raising interest rates when the economy grows strongly.

Moreover, economic theory doesn't question the morality or rationality of our goals. For example, in U.S. under free market conditions it is clear that not all people will have health insurance. The fact that a society may choose to offer health insurance to all its citizens it's not an economic issue, but a moral one. Thus, the fact that the state collects taxes and redistributes money to achieve such a goal should not be seen as an interference with the free market, but as an voluntary action of that society. This particular example of health care was acknowledged even by Hayek in his Constitution of Liberty as a legitimate case where the state might play a role in the economy.

The free market theory says that given certain assumptions an equilibrium state is reached, having the expression of the equilibrium price of a good. However, it is important to notice there can be many possible equilibrium states. Some of them might be more desirable than others (for example having fewer unemployed people, or having universal health insurance, avoiding financial meltdown), so in this case the intervention of the state in the economy is acceptable. The same argument applies when talk about ecology and global warming. Although some say that no intervention is necessary cause the free market will lead us to an equilibrium state, what if this state is one where life is no longer sustainable on Earth? We'd better make sure that the equilibrium state where our environment is heading is one where we can also live around.

GDP to be replaced as a measure of well being

For a long time most of the people looked at GDP as the measure of well being of a country. This is misleading from at least 2 reasons in my opinion.
First, as the GDP measures what is produced inside a country it measures as positive output the work done by the firefighters after a fire, or the medication bought to cure an illness also contributes to the GDP. But the negative consequences of these events are not taken into account.
Secondly, we arrive at a state where the consumption is encouraged in order to increase the GDP. As we consume more, the GDP increases, people have jobs and everybody is happy. But the environment degradation (pollution and resource depletion) is not taken into account anywhere in this equation.

A number of organizations proposed alternative ways to measure "user satisfaction" and also the state of the environment so we can have a better picture of the real state of a particular region. See an example of such measures here.
The European Commission is heading in this direction too and it will investigate alternative ways to GDP of measuring the development of a country. I hope this trend will catch with other countries too, so the governments get rid of this obsession of increasing the GDP at any cost.

Carbon added tax

This year the countries around the world are supposed to reach an agreement for the next treaty on preventing global warming. This new treaty will replace the current Kyoto treaty and it is hoped it will have bigger targets and involve most of the big polluters countries (one of the shortcomings of Kyoto treaty was that big countries like U.S., China and India didn't sign it). So there is much discussion about what this treaty should stipulate and how it will be enforced. I don't follow all the news on this subject, but in general (main stream media) I didn't see articles written by economists about how to handle global warming. And this is an economic matter after all, since we will have to pay somehow to protect the environment. I thought of the economists I read and I imagined Stiglitz should have written something about how to tackle global warming. And indeed, I found this interesting paper on his site. It discusses various proposals on how to tax CO2 emissions and how the implementation might work or not. The most fair solution in my opinion is the "carbon added tax" which is similar in concept with the VAT: each part of the production chain is taxed according to the emissions it produces for the goods and service he delivers. The total tax in fact is paid by the consumer, which thus has two incentives: to consume less and to consume "greener" products (that carry a smaller tax). For sure it's not trivial to enforce such a tax world wide, but this is a sound solution from the economic point of view.

The cost of wind energy

I read a very interesting analysis regarding the total cost of using wind power to generate electricity on The Register. Basically, the idea is that since wind is not guaranteed to blow all the time, you need to have back-up energy generating capacity to keep the energetic system in balance. There are various theories and proposals to fix this problem like: wind doesn't blow in one region/country but might blow in another one so the spread of wind mills will create a balance, or when you have excess wind you can use a part of the energy to pump some water uphill and use hydro-energy as back-up when the wind doesn't blow. This study demonstrates that in the case of UK these solutions are not feasible (using statistics regarding the wind intensity patterns), so in the end you need to have gas/coal back-up power plants. This leads to a total different cost of wind energy. It's interesting to see who will pay this cost. Normally the ones who install wind mills should be asked to pay for the back-up capacity too.

Biofuels and food price

The food prices started to climb since last year. And some people are blaming the increased bio-fuels production for this. This is indeed one of the reasons in my opinion, especially since the production of bio-fuels is subsidized in some countries, which I think it's a mistake. The other reason is an increase in income in China and India, where people can afford to eat more. See an in depth analysis of the food crisis here. The good part of this is that some land that was not used in Romania because it was simple not profitable for farmers to cultivate them are now used. On my last trip to Constanta I saw lots of rapeseed (one of the plants the bio-diesel is made of) fields in bloom.