Socialism Not Speculation to Blame for High Oil Prices

More than 75% of the world’s oil reserves are controlled by national oil companies. Of the world’s top 20 oil-producing firms, 14 are state-run. Those areas where private companies have been able to drill have recently been shrinking, and remaining private companies are facing hostile governments that may try to nationalize them.

Meanwhile, Congress, pandering to the least economically sound sentiments of the American public, recently tried to pass a bill to curb oil market speculation. This, lawmakers argued, was the way to get prices down. Speculation is just trading on the future price of a good. There have been many reasons to expect the price of oil to continue to rise. Along with rising demand, and subsidies to aid the rise in demand, there is a lot of risk. Risk causes volatility and drives prices up — at least in the short term.

There is risk because of the war in Iraq, because of the government in Iran, terrorism, and then there is additional risk because of the growing number of countries where the governments are trying to nationalize the oil supply.

This typically starts with the government harassing private oil companies. Clearly that makes owning stocks in those companies risky as owners will lose their investment. This can also fuel volatility in the futures markets as investors try to predict the likelihood of nationalization. If those companies get taken over or forced out, the total supply of oil may fall and so the future price will be higher.

This has been going on for a few years now. And the trend continues to worsen. Russia’s Vladimir Putin jailed the ex-chief of Yukos oil company so that it could be taken over by state-owned Rosneft in 2004. And today in Moscow, British Petrol is being hassled and taken to court.

In 2003 Hugo Chavez took the reigns of Petroleos de Venezuela in a “re-nationalization” move, and now Ecuador is taking Chevron to court. This little move by Ecuador could be the start of something bigger, as it looks like Ecuador might join forces with Chavez’s state-run venture, which might in turn join forces with Russia’s.

Bolivia also nationalized in 2006. Soon there will be nowhere left outside of Western Europe and the U.S. where private oil can safely drill.

Another reason that nationalization can drive prices up is that state-owned companies tend to under-produce private ones, creating additional risk that long-term output will be lower. Finally, consolidation of oil companies into just a few nationalized firms, especially when those countries form cartels rather than competing freely on the market, will also drive up prices. This trend in nationalization is simply an extension of the existing problems of OPEC. It should be obvious that this trend is contributing to the high oil prices.

But rather than see the reasons for the rise in prices — the real risks which face the oil market — Congress tries to strangle speculation, prevent new drilling, and it even flirts with idea of nationalizing our own supply. Reps. Maurice Hinchey (D-N.Y.) and Maxine Waters (D-Calif.) both recently suggested it, and a recent poll shows many Democrats(and even a few Republicans) think it’s a good idea. But nationalizing is the problem, not the answer.

cross-posted at Heritage.

Rent-Seeking and The Housing Crisis

Recently, a scandal has broken out that provides great insight into the housing crisis. Countrywide Mortgage brokers have been treating Congress to VIP lending rates. Accepting donations of $100 or more is illegal for these politicians, but scandals like this are not uncommon. The deeper question is why a profit-seeking business like Countrywide would want to offer discount rates to government officials in the first place. It is, of course, because they expect something in return.

If government could not offer these businesses any preferential legislation, exemptions from taxes or relief from anti-business regulations, there would be no incentive to buy them off.

Economists call this kind of activity rent-seeking. When firms spend money – or decrease their profit – in order to ensure favorable treatment by government it is not efficient. They produce no more output, and instead the resources are wasted. The favorable treatment gives them a monopoly position or an advantage over their competitors and the consumer suffers.

It also encourages government officials to pass more kinds of regulations that strangle business so that there are more chances to offer relief in exchange for pay-offs from the businesses. So, it creates a feedback loop leading to more regulations, more bribes and then even more regulation.

The only way to end the cycle is to limit the scope of government with a clear line preventing government from offering any kind of preferential treatment to firms.

But rather than moving toward a smaller scope of government, we are currently headed in the opposite direction. The new housing bill is set to bail out firms on a preferential basis – often by helping those, like Countrywide, who made the most risky sub-prime loans. In the future, these businesses will remember the compassion of Congress and will take these risks again.

Local governments will benefit too – with $3.9 billion in community development block grants. These grants are provided so that local governments can purchase, renovate and resell foreclosed homes. The proceeds can then be used to do this again next time that government subsidies followed by government bailouts lead to a new round of foreclosures. In this way, government can cause a crisis, solve it, and cause a new one, little by little expanding its scope in the process.

Have we not learned the lessons of the National Recovery Administration, when subsidies and bailouts, public works programs, and stringent regulations led us to a consolidation of government and big business that strangled private initiative and threatened the liberties we hold dear? Apparently we have not – a recent Time Magazine poll showed that 82% favor public works projects and 70% say more government programs are needed for those struggling.

The more that we allow government to solve our economic woes, the more that it expands its scope and creates new woes, just to have something more to solve. This is the rent-seeking power of government at its most frightening.

Cross-posted at the Heritage blog.

Note that the Center for American Progress was very enthusiastic about the community development block grants - HT Econlog for that.

Understanding Monopoly Socialism

Lenin (1917), in complete agreement with Marx, and with the true meaning of socialism, lays out the economic and organizational identity between state-capitalism and socialism. The only difference - which isn't one - is the "class" of the leaders of the system. But, of course, as leaders running the system, either one belongs to the "class" called bureaucrat. Hence, Lenin laid out the answer to Bukharin's Leviathan problem (see below).

Everybody talks about imperialism. But imperialism is merely monopoly capitalism.

...And what is the state? It is an organisation of the ruling class ...

For if a huge capitalist undertaking becomes a monopoly, it means that it serves the whole nation. If it has become a state monopoly, it means that the state (i.e., the armed organisation of the population, the workers and peasants above all, provided there is revolutionary democracy) directs the whole undertaking. In whose interest?

Either in the interest of the landowners and capitalists, in which case we have not a revolutionary-democratic, but a reactionary-bureaucratic state, an imperialist republic.

Or in the interest of revolutionary democracy—and then it is a step towards socialism.

For socialism is merely the next step forward from state-capitalist monopoly. Or, in other words, socialism is merely state-capitalist monopoly which is made to serve the interests of the whole people and has to that extent ceased to be capitalist monopoly.

Bukharin, of course, expressed disgust that state-capitalism was the most evil administrative totalitarianism to crawl the wretched Earth. In Imperialism and the World Economy (1915) he wrote:

Thus arises the final type of the contemporary imperialist robber state, an iron organization which envelops the living body of society in its tenacious, grasping paws. It is a New Leviathan, before which the fantasy of Thomas Hobbes seems child's play. And even more “non est potestas super terram quae compateur ei” (“there is no power on earth that can compare with it”).

Bukharin was, of course, right.

Bukharin did consider that a planned a totalitarian society could exist which was not socialism (as conceived by Marx), he pondered a possible "third system"; but he could not see that in fact it was socialism - that the only difference between central planning as socialism, and central planning as this "third system", was a change in human nature which would allow the people to enjoy this slavery.

He described this "third system" in the same 1915 book:

We would have an entirely new economic form. This would be capitalism no more, for the production of commodities would have disappeared; still less would it be socialism, for the power of one class over the other would have remained (and even grown stronger). Such an economic structure would, most of all, resemble a slaveowning economy where the slave market is absent. (italics in original)

However, the flaw in Bukharin's reasoning is that he is considering a non-economic effect (the domination of one class over another) as part of the definition of an economic system. Instead, an economic analysis must consider just the economic organization of the system - its institutions and their effects - and from there determine the expected outcome: whether it will resemble a slaveowning economy without a slave market.

From this standpoint, there is no basis on which to distinguish the "third system" from socialism. Indeed, it has no commodities - no trade, no market, no prices - so it isn't capitalism. Instead, it has central planning. This is the same as socialism. The only differences from socialism which Bukharin observes are that (1) one class may still dominate another and (2) that this class may not serve the needs of the people. But these two are potential results of the economic structure, not part of the structure itself.

The steps that socialists believed would prevent the outcome described above include a change in human nature on the part of the people, and the motives of the working class, who were to take the reigns of their new society. But their new society, they knew, would need to help change the nature of the people, and the structure must also allow the working class to achieve their good intentions. As any good economist knows, intention is not result.

If the economic structure is identical, why would this "third system" not also produce the desired change in human nature? The distinction is only in the "class" which has the reigns. But, this implies that the intention of the class will be accomplished through this structure. It must then be proven that this economic structure will indeed allow the working class to accomplish its goals and that these goals not only exist at the start but also remain, even as they take on the "class" of bureaucrat.

Socialists asserted that the economic structure - planning - would create a society of abundance. But this assertion was tied in to the "socialist" nature of their system - that the working class ruled it. Hence, Bukharin could not show that planning itself would produce enough plenty to allow the working class to accomplish their goals. In fact, Marxists relied primarily on their argument of inevitability to show this result. But the economic organization itself can only promise the need to direct the actions of the people, the result of abundance does not directly follow from the collective ownership of the means of production, and the "rationality" of the planned system.

If it could be shown that (a) the planned system will lead to higher output and that (b) the requirements for planning efficiently still allow for the egalitarian distribution required for the fulfillment of the socialist ideal, then it would only remain to show that the desire of the planners would remain benevolent, and the nature of the citizens would be such that the planned system would not feel oppressive (or that the system would allow for democracy, a much harder case). But Marxists proved none of these.

Bukharin also broached the subject as late as 1928 - just before Stalin helped to bring a fully socialist planned economy to the Soviet Union (and Bukharin at this point was losing his hold on the reigns of the system). He explained how it might look:

Here a planned economy exists, organized distribution not only in relation to the links and interrelationship between the various branches of production, but also in relation to consumption. The slave in this society receives his share of provisions, of goods constituting the product of the general labor. He may receive very little, but all the same there will be no crises.

The crises referred to are, of course, the crises Bukharin believed to be inevitable under capitalism. Again, he sees that economically the organization is identical. He is one step away from seeing that this is in fact the system he has been advocating and putting into place in Russia. What is he missing?

He is missing the fact that this economic system does not allow for any other outcome. The "very little" product that the "slave" receives is, of course, all there will be. The bureaucrats in power not only will not, but cannot, give the people any more. Despite the best of intentions which they may or may not have, they can do no more than act as slave masters. They are forced to direct the actions of individuals. They cannot change human nature. They cannot wave a magic wand and effect the higher output, the perfect order, or the master plan which they may desire.

The planned economy - the institutional organization of the economy - determines the outcome. The best intentions of the best people in the highest leadership positions cannot turn a slave economy into a socialist paradise, just because they wish it so.

The Electoral Map

This is pretty amazing - as of right now (and the last vote was cast almost 24 hours ago, so not sure if its still running) the outcome at this Ask 500 People's question of mine tracks perfectly with the voters' spectrum of about 40% Republican, 40% Democrat and the remainder as Independent/Swing/Don't Care/other :

The question is:

Government has a duty to help the poor and to regulate business.

A) No, government should stay out of the people's business.
B) Yes, this is the function of government.
C) Only if we vote for those things.

The results:

	No	Yes	Only if...
United States	40%	40%	20%

Planning Every Home

Here is a perfect example of the planning mentality driven by the need for order.

Arstechnica rails "We're in dire need of a national broadband strategy" because we have less broadband than other countries. Seeing something perceived to be a problem, the immediate conclusion is that government must fix it. Clearly, if the US is falling behind other countries in some area which the author deems important, then the US government must intervene on its behalf and both determine what is "wrong" and also "fix it."

Arstechnica links to further explanation of the right "strategy" and how our current one is wrong. They complain that the government "strategy" relies too much on the free market. The government says that intervention will distort the market and Arstechnica replies :

Is it too much to ask for some sort of vision? Some sort of leadership? Something along the lines of "a chicken in every pot and fiber to every home by 2012"?

Yes, its too much to ask. The assumption is that government must determine what the "right amount" of broadband is. Further, the assumption is that government should set the goal, determine whether it is being met and why, and finally take action to reach that goal. But, my dears, that is planning. It is a planning mindset, and leads to planning of the economy.

Just as you don't want government to ensure that chickens are raised and killed and delivered to your door, based on some fallacious notion that it is government's job to put "a chicken in every pot," neither should we expect government to ensure that we have broadband in every town or fiber in every home.

It is actually conceivable that we have the right amount of broadband right now. This may not be a "market failure." In fact, we could probably never determine whether there is some kind of failure here - be it caused within the market or by government. We can't know the "right amount" of broadband. But, also, here is the kicker:

I have lived in rural New Mexico. I know the facts. You can get satellite internet in the furthest reaches of the most absurd nooks and crannies of the four corners states and across the most ridiculous expanses of desert - for cheap. For much less than the median rural New Mexico household spends on other luxury items. If they want it, they can get it. This is true across the country - either satellite or cable or DSL is offered everywhere (the map shown by Arstechnica confirms this; nearly every spot on it has some kind of broadband, just apparently not as much as they have in Australia).

If demand is low, then fewer services are offered. In other words, if they don't want it, they don't get it. So it isn't there. If they do want it, guess what, someone offers it. If they want it, they can get it.

If they want it, they can get it.

One more time: we don't need government to spoon feed us.

A Race to the Bottom

Could it be that governments around the world are competing so hard for investment that they are actually going to bottom out on business taxation one day soon? This is the best sign I have seen in some time - since the big trend toward flat taxes by former communist countries - that indeed a small-government world is possible.

Note that I am not saying that tax trends overall have been good, but consider the evidence regarding business tax competition.

(1) Corporate income taxes are lower in all except four OECD countries than they were in 1986 -- unfortunately, overall taxes as a percent of GDP have gone up in every one. Seven OECD countries cut corporate rates between 2006 and 2007.

(2) The reduction in rates since 1986 and the low rates in OECD countries today are the result of conscious competition among countries for investment income. Because of this competition Germany, which has lagged other European Union countries in lowering corporate tax rates, wanted to force tax harmonization among member countries to prevent investment from fleeing. When this strategy failed, Germany was forced to start lowering its own corporate rate.

(3) The intent to compete ferociously, and without respite, is spelled out. In a testimony to the Canadian Senate Committee on Banking, Trade and Commerce, it was recommended that “the Canadian capital gains tax rate should be quickly be lowered to match the rate in the United States.”

The report then added that “the Committee also recommends that international competitiveness be the criterion guiding the choice of a capital gains tax regime, and that federal government be prepared to lower the tax until that criterion is met.” Canadians listened, and the current capital taxation in Canada is falling fast. By 2012 the federal corporate income tax rate will be 15% and the overall effective corporate rate will be the lowest in the G7 and, as the budget report gloats, it will be over 9 percentage points lower than in the US.

How low can they go? Maybe a little vicious competition can help bring a more reasonable tax system and lead to smaller government. Sadly, it may only be on the business side that government will care to compete. Yet "brain drain" does occur when individual income taxes are too high. As any anarcho-capitalist will tell you, competition is the best way to keep government in line. Let's hope we're beginning to see a trend toward tax competition.

The New Farm Bill: Agricultural Planning

In explaining consumer sovereignty, Mises said:

Neither the entrepreneurs nor the farmers nor the capitalists determine what has to be produced. The consumers do that.

And this is accurate - in a free market. However, the Farm Bill has effectively put an end to that truth, in the United States. Passing with a veto-proof majority, the new farm bill expands subsidies further, and gives yet more power of direction to farmers and corporations; and their legislative managers.

Originally enacted (under other names, such as the AAA) the farm bill was a central planning program to control agricultural prices and support employment and wages. Over the past 75 years it has changed its mission, but it is still used for planning purposes.

Today, senators reel off speeches about the importance of directing funds toward "sustainable" energy, ensuring low food prices, and feeding the poor. Meanwhile, they don't mind that their interest groups and constituents reward them with votes for the generous subsidies. While congress no longer attempts to restrict production by commanding the farmers to kill their pigs, they still set quotas and control prices.

Is it possible to get congress to abandon this massive central planning program? There is such a loud and broad constituency for it (farmers including big business, low income and welfare advocates, environmentalists, and those who just like government regulation) that it seems unlikely. However, congress does respond to the voter. Let him not be irrational.

Update - Washington Watch says:

H.R. 2419
The Farm Bill Extension Act of 2007
Costs $5,727.56 per family

Universal versus Quantitative

Economic Laws are universal. As Mises explained, contra Caplan, because supply and demand laws - marginal utility, preferring more at a lower price - are universal, it isn't a quantitative matter but a qualitative matter that maximizing output is better achieved with a free market solution. For the given ends (maximizing output), the best means are to allow the free market to work rather than intervene.

However, while this means that markets are better than socialism, does this mean all interventions are bad? Clearly the qualitative result - the end is better achieved with markets than socialism - is true. But how much better? That is the quantitative question. The answer is clear at the system level: a lot better. But, at the intervention level, one must weigh the objectives.

If the objective of a given intervention is only to maximize output, one need not ask the quantitative question: the market will better serve. But, if one has multiple ends: (1) raise the wages of the poorest worker (2) without reducing total output by very much, then the quantitative question surfaces. For, even if the only end is to increase the wages of the poorest worker, there is a time component, and total output will ultimately lead to lower wages in the long run for the poorest worker (if higher output over time leads to higher real wages of the poorest worker, over time).

This is where the Krugmans and Card & Kreugers (and Galbraiths, who dispute the condition) like to fight. Maybe the quantitative aspect isn't large enough to offset the first round effect of the command benefit. When they argue this line, some turn to "natural rights" arguments: it isn't right to command benefits. But an economist must look at the quantitative aspect of the universal truth, and weigh the losses against the benefits. How does total output respond? How does the universal rule of competitive wage setting and profit maximization induce the employer to respond to command wage hikes? How will the benefit accrue - will it at all? To whom will it go?

And hence economics becomes difficult, and dynamic, quantitative and empirical analysis is required. Hat tips to Mises, Caplan and the struggling economists on both sides.

Competition and Anarchy

Over at Distributed Republic, Micha Ghertner argues the competitive government position for libertarianism/anarchy:

I personally would much rather take the risk of letting isolated communities victimize their own members than the opposite risk of adopting a social rule whereby those with sufficient political power are free to "reproduce their ideologies and prejudices" upon all members of society, and not just a few sub-communities within it.

Many people tend to take a moral stance on anarchism: a democratic state should set the social rules, otherwise the strongest will brutalize - mobsters will take over and nobody will be safe. But, what if government currently is the mob boss? On the one hand, democracy is supposed to prevent that, but we all know that tyranny of the majority can oppress the minority (Hitler was democratically elected) so this argument is weak at best.

On the other hand, you have the idolization of the state as moral authority, which makes it dangerous. While the miniature states (or private security firms) can also take on this superior moral role, at least there would be more competition and free entry and exit from the states, so that minorities can easily escape persecution. Potentially they would also be less idolized if they were voluntary and competing.

Could this be a consequentialist morality argument for anarchy - that our values are more likely to be protected in a system with competition over moral authority?

Update: coincidentally, Arnold Kling just posted something on the same subject.

Property Rights and Coercion: Institutional Philosophy

A Marxian philosopher who is dating my sister was nice enough to have her forward a Marx reader and a link to an interesting critique of "libertarian parables" (from Arnold Kling at Econlog) which "conflate" coercion by government with coercion by other individuals.

Based on a utilitarian framework, the blogger argues that these kinds of coercion are not the same:

A well-ordered society is governed by the rule of law. This means that there are institutional processes to govern certain classes of action. The outcome of a just institutional process -- whether it be a guilty verdict, or minimum wage legislation -- has a different normative status than the corresponding action of a neighbour who takes it upon himself to unilaterally impose his will on others.

This is a good argument. However, it doesn't resolve the problem, it just kicks it down the road. What is this "normative status?"

True, institutional coercion is different from unilateral coercion; but it may be better or it may be worse: this depends both on what the government coercion achieves and also on how you define "better" and "worse". The institutional takings by the Soviet government were not - I'd argue - better than unilateral theft: they were worse. I haven't proven this in any framework; I could show it with efficiency as the endpoint; I could also try to show it with morality as the endpoint or with the magnitude or quantity of coercion as the endpoint.

What is the difference between coercion by individuals and coercion by government? Is it the organized nature of the latter? Or the equality before the law? Is it a matter of "fairness"? Or is it an efficiency thing? If the framework is utilitarianism, it would be efficiency - however, then only efficient coercion should count for that, and for example, a minimum wage certainly isn't that.

But libertarians who cry "coercion" are usually not taking a utilitarian framework; they are usually arguing "natural rights." So, we need to determine the "ends" and then judge the "means" on that basis.

Organized coercion by government could be said to violate more rights, not fewer. If government consistently violates rights, then one could argue this is "better" in some sense; if fairness not coercion per se, is the measure. Then, of course, "fairness" must be defined.

On the other hand, if government only punishes theft by an individual, then coercion is minimized; while if government punishes individual coercion but then violates rights on its own, then quantity of coercion is increased. So, if quantity of coercion is the measure, government violation is also worse.

The blogger also argues that the freedom from coercion is not enough, because common property implies a freedom to use of said property, and property rights invade this freedom. Hence protection of property and freedom from the takings neglects the freedom of others - and hence in its own way is coercive:

Freedom to use common land and resources is restricted by private property rights, which replaces it with a (particular individual's) freedom to dispose of property, and exclude others from use of it.

This reminds me of that quote I blogged about last week:

If someone is starving in the minimal state, yet in a ‘no-ownership’ world they would have been in a more advantageous position, then they do, in fact, have rights to compensation against all property holders (although not against the state) under the principle of justice in rectification. The Lockean proviso, or rather its historical shadow, would have been violated.

It appears to me as a natural rights argument, not a utilitarian one.

In reality, whomever has made a claim to the property is the rightful owner, whose rights must be protected. If someone buys it (under private property institutions) then he owns it-- there is no "right" to "common property" if someone has purchased it. The only way to claim that "freedom to use" common property has been violated is to invoke natural rights. Otherwise it is just the institutional framework, which either protects private property or it doesn't.

The blogger also slips in a positive freedom based on outcome, which far exceeds the institutional framework setup:

(2) It neglects other kinds of constraints that can impede us, leading to an impoverished conception of "freedom" that fails to track what really matters to us (namely, capability). Negative liberty is fine as far as it goes, but it makes for a rather one-eyed approach to evaluating policy. A better maxim would be to seek to enable people to achieve their goals. Economists (like everyone else) should be concerned with opportunities, not merely interference.

Now he wants to give people a right to certain outcomes. This goes beyond any protection of rights or freedoms (natural or otherwise) and seeks to determine outcomes. However, the assumption, of course, is that government could even get the outcomes desired-- something which is clearly a huge jump. It also has nothing to do with freedom. It may have to do with "welfare" but is has nothing to do with "freedom." And welfare - well that comes with its own bag of worms.