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.

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.

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