The law of supply is a fundamental law in economics. It is used in the majority of economic theories either implicitly or explicitly. There are many factors that go into how supply is calculated but one of them is input prices. Basically, this says as input prices go up/down, suppliers will produce less/more and therefore the supply curve will shift.
Let's use this theory when considering laws. First, I will use a simple example like littering. Littering in my home state results in a $500 fine. The fine is set at this level not because littering actually merits a $500 fine but rather, it is unlikely to get caught littering so the price must be high enough to deter littering. There are some mathematics behind how they come up with $500 that I will not get into but that is the general theory. Clearly, if there was no such fine littering would increase due to the first paragraph. The price is less so therefore there will be more "supply".
Now, lets extrapolate this example to larger crimes. What is the price of murder? It could be a death sentence, or, if someone making $40,000 a year gets caught murdering someone 20 years before retirement that will cost him $800,000 (20*40K). This is not even including the chance of getting a pay raise, the cost of his leisure, his price on his right to vote etc etc.
I said all of that to reference a point of view I find to be absurd. Recently, I was in a discussion with someone that argued because murders take place even though laws prohibiting murders exist the laws prohibiting murder are unnecessary. The idea is the law does not deter the action so the law is useless.
This argument is simply ridiculous. Laws prohibiting murder exact a cost that is extremely high for those contemplating such action. However, without the law the cost drops to 0. To claim that murders won't increase, as my opponent claimed, is to defy economic law. Clearly, the marginal benefit of murdering someone will be greater than the marginal cost if the cost of murdering someone is nil. However, if the marginal cost is $1,000,000+ it is much more difficult for marginal benefit to be greater than marginal cost. Hence, increasing the price will deter people from committing murder.
Another economic reason why these kinds of laws are good for society is based on the division of labor. We allow other people to enforce justice on our behalf. When criminal activity ensues and harm is realized on ourselves or a loved one it is human nature to demand justice. If we were expected to enact justice every time a crime was committed against our person, property, or loved one we would have to stop our productive lives to pursue justice against the perpetrator. The lack of division of labor in this regard would lead to economic inefficiency.
This argument has nothing to do with governmental laws, governmentally provided police forces, or governmentally provided national defense vs. private laws, privately provided police force, or privately provided national defense. My argument is merely pointing out that any civil society requires these laws. Understood in this sense, I am appealing to how Bastiat understood the law; laws are instituted because the laws are meant to protect what preceded the legal institution in the first place, namely, person and property.
Wednesday, November 20, 2013
Saturday, November 16, 2013
Cubic Spline Interpolation and Econometrics
This paper was written for my Numerical Analysis class. It was a small project in which I had to write a code and also answer a real world problem. One of the problems I face as an aspiring economist is finding appropriate data to run regressions on. If the data does not have the same time frequency, the model is meaningless. Hence, I wrote a code for Cubic Spline Interpolation and showed it accurately interpolates data.
The paper requires a bit of mathematical maturity, but the idea can still be clearly understood.
Note: I did not include any of the appendices, and the format of the paper was altered when I turned it into a PDF for some reason.
The paper requires a bit of mathematical maturity, but the idea can still be clearly understood.
Note: I did not include any of the appendices, and the format of the paper was altered when I turned it into a PDF for some reason.
Monday, November 11, 2013
An Analytical View of The Chilean Miracle.
(Image Courtesy of Google Images)
The dynamics of the economic marketplace in many South American countries has been due mainly to political instability based on the effort of South American leaders to centralize government’s economic and political power at the expense of individual liberty. Economic mechanisms are sometimes used to subsume the individual into the state, and grow executive power. However, neo-liberal market reforms instituted in Chile after the coup that ousted Allende, slowly eroded executive power during a tacit shift towards individual freedom and increased economic production that eventually lead to the peaceful ousting of Pinochet’s authoritarian dictatorship, and a thriving economy. The failure of other Latin American democracies in South America has been due to the political insecurity of the executive to relinquish total economic control.
Freedom isn’t only the right to be politically free, via the rule of law and democratic elections, but also economically free, via voluntary transactions.
The free market principles of market reform in South America are based on the
idea of Adam Smith’s “invisible hand”, the notion that the allocation of scarce
resources with multiple uses is best organized by free people in voluntary,
mutually beneficial transactions, as opposed to government coordination of
economic arrangements. This spontaneous order, according to Dr. Milton
Friedman, can also remove some of the political constraints by government over
the individual, “By removing the organization of economic activity from the
control of political authority, the market eliminates this source of coercive
power. It enables economic strength to be a check to political power, rather
than reinforcement.” (Friedman 15) The more economic control the government has
over the individual, the more one will look to the government rather than
themselves or others, to solve their problems, directly correlating to
increased political power for the state.
Immediately following the global economic instability of the
Great Depression beginning in 1930, dictators and presidents have been using
economic control to gain and maintain political power. For instance, in the
1930s, Brazil’s Getulio Vargas backed by the military, instituted the “Estavo
Novo” or “new state” and declared himself dictator. His government
interventions into the economic realm were modeled after Italian fascism of the
same time period. He instituted import substitution and corporatist policies
that “…combined strong government involvement in economic activities with the
organization of workers into government controlled unions.” (Vanden and Provost
229). Peron, in Argentina followed a similar model to that of Vargas in Brazil,
“In power, Peron’s strategy was similar to that of Vargas… his rule took on
nationalistic tones and policies of economic protectionism were implemented.
The government took a strong hold of the economy…” (Vanden and Provost 229).
These two populist leaders in Latin America derived their power by controlling
individual’s economic situation by limiting competition for both input and
output, while dissipating the costs among the population as a whole.
This corporatist/fascist mentality is largely associated
with the political “right” and perceived to be on the opposite pole of the
political spectrum than communism. However, this conclusion disregards
altogether the relation of the individual to the state in both systems and his
subjugation thereof; both fascism and communism are different degrees of
statism, as both clearly institute various degrees of dirigisme. In professor
Peter Drucker’s study of totalitarianism, he saw fascism as the logical
ideological progression of socialism, “Fascism is the stage reached after
communism has proved an illusion, and it has proved as much an illusion in
Stalinist Russia as in pre-Hitler Germany.” (Hayek 80) Moreover, after his
research on the origins of fascism and it’s relation to communism, largely from
first-hand accounts, led prominent economist F.A. Hayek to conclude, “While to
many who have watched the transition from socialism to fascism at close
quarters the connection between the two systems has become increasingly
obvious…” (Hayek 81-82). Furthermore, prominent 21st century
economist Dr. Thomas Sowell adds, “…there is remarkably little difference
between Communists and Fascists, except for rhetoric, and there is far more in
common between fascists and the moderate left…” (Intellectuals 99).
The intervention into the economy by government is primarily
out of political expediency; ensuring political longevity and increasing the
concentration of power afforded to the state, specifically the executive
branch. Dirigiste economies are inherently flawed and tend to fail irrespective
of where state control is focused (socialism/fascism), and thus provides the
political capital needed to employ such a blatant political power grab. For
example, in Argentina during the military regime of the late 70s and early 80s
the military junta, despite economic counsel citing the economic
instability was due to an interventionist state and the ISI strategy, advised
the junta that, “loosening of free market forces would not only create the
conditions for renewed economic growth but also discipline the social actors…”
The junta’s inability or “persistent refusals” to relinquish “their
state-oriented expectations and behaviors… led to economic disaster.” (Vanden
and Provost 435). The state, rather than implementing economic freedom that
could threaten their political power, chose the status quo at the economic
peril of the people.
The junta’s inability to relinquish control over the economy
eventually did them in. This dissatisfaction with the economic instability
perpetuated by the state eventually paved the way for Carlos Menem’s democratic
election in 1989, and the political capital needed for market reform, albeit
partial. Despite growing inflation and economic instability that had been
growing for decades, Menem was able to quell the inflation by his
“convertibility law”, which pegged the Argentine peso to the U.S. dollar,
stabilizing the money supply and bringing down inflation by using their foreign
exchange reserves as a commodity (Schamis 71). In addition to a stable
currency, Menem promulgated market reforms, which “included
trade-liberalization, deregulation, and privatization.” (Schamis, Transition 72).
In Short, the parity of the Argentine peso and the U.S. dollar, proved to be a
Trojan horse and eventually became its demise. “Bank money” and ensuing credit
expansion due to lax reserve requirements eventually lead to an economic bust
in 2001-2002 (Schamis, Transition 73).
Menem’s partial market reforms were initially successful, and a statist political power grab ensued as he attempted to capitalize on his economic success with increased political power (Schamis 72). Thus, leading to centralized state power corrupting the entire economy, particularly in Menem’s case, running up massive federal deficits in order to sustain Menem’s “strategy for achieving constitutional reform and winning reelection.” And eventually lead to the economic collapse in 2001-2002 (Schamis, Transition 72). A few years later the Kirchner’s, beginning with Nestor and then later his wife Christina, implemented pragmatic policies to stabilize the economy. From there, following a well established pattern in South America, the political power grab ensued. Christina’s political and economic overreach—far more egregious and further “left” than her husbands before her—advocated for more state control of the economy and a nationalization that Professor Schamis describes as “more Chavez-like than anything else” (Schamis, Decay 72). Schamis describes further the goal of such economic and political power grabs by the state in broader terms:
"Social policy through government discretion in a system marked by concentrated executive authority is fundamentally a tool to give rulers more resources for their patronage—that is, to control social groups and diminish the autonomy of civil society. The idea that some rights have to be violated for others to be advanced is thus perverse; it is just about abusing power, which plants the seeds of an undemocratic political order." (Decay, 74)
No matter where on the political spectrum one may be,
violations of political and economic rights are inevitable in a system where
government is concentrated in an all-powerful executive; as individual rights
are manipulated by the state to erode the civil society as means to end. In the
case of Chile, the situation is somewhat symmetrical to Argentina, yet in many
ways asymmetrical. The key difference being more pragmatic and realistic
macroeconomic advice under the junta by the “Chicago boys”, a group of Chilean
economists that had studied under the tutelage of Milton Friedman at Chicago
University (Stephens). The market reforms success came in spite of a ruthless
dictator and an economy in shambles, as Bret Stephens explains, “Inflation
topped out at an annual rate of 1000%, foreign currency reserves depleted, and
per capita GDP was roughly that of Peru…”
The cause of the economic catastrophe was inherent in
Allende’s statist economic policy that was rife with expropriations; often by
force, nationalization, wage and price controls and rationing of consumer goods
by local boards called the “Unions of Supply and Price Controls” know as JAP
(Lira). The latter was instituted due to the inflation and lack of consumer
goods as an economic consequence of the former. Lira describes how rations were
distributed if an individual was openly opposed the state, “these people
perceived as “unfriendly” to Allende… received insufficient rations for their
families, or no rations at all.” (Lira). The socialist policies of Allende
worked to stifle political freedom just as much as economic freedom. The
complete decimation of the economy by the Marxist economic policies of Allende
lead ultimately to a military coup led by Augusto Pinochet and a period of 17
years of dictatorial rule.
Once in office, Pinochet’s ultimate goal was to stamp out
socialism, not just programmatically, but by force. The statist, authoritarian
junta persecuted anyone associated with the socialist or communist parties;
many were killed, tortured, imprisoned or exiled at the hands of junta (Vanden,
Provost 466). Like Allende and others before him, as well as other leaders In
South American politics during his time, Pinochet, “commander-in-chief of the
army, centralized power in his person…” (Vanden, Provost 466). The transition
from Marxism to Pinochet and the Chicago boys didn’t occur simultaneously,
rather the “continuing economic decline forced him to look for some new policy
alternatives.” (Stephens). It wasn’t until March 1975 that the Chicago boy’s
policies had been implemented.
The market reforms instituted under Chile were congruent to
that of Argentinean President Carlos Menem, and were not at all entirely
“laissez-faire” or free market. Moreover, the reforms pursued were not to the
extent espoused by Milton Friedman, as Jonathan Marshall explains in an 1983
article, “Freidman’s own protégés abandoned laissez-faire economics at certain
critical junctures, and these departures, not any maniacal monetarism, produced
Chile’s suffering.” (Doherty) This article written in the in early 80’s when
Chile was in the midst of a slow economy, most likely due to a restriction and
correction of the monetary policy (Doherty). One deviation was pegging the
Chilean peso to U.S. dollars in the early 80’s, subsequently overvaluing the
peso and hurting exports (like Menem's convertibility law). Another deviation
was Pinochet, like Peron and Vargas before him, oversaw a system of corporatism
that protected state favored business’ from the competition of the free market
in the form of government credit and bailouts (Doherty).
However, these limited market reforms, in spite of
corporatism and devaluation of the peso were reasonable steps in the right
direction. Two of which made this possible, monetary stabilization (Martinez)
and the other, was giving the means of production (private property) back to
the people (Vanden, Provost 466). Private property rights are essential to any
world economy and a backbone of neo-liberal market reforms. Economist Dr.
Thomas Sowell explains, “For economic activities that take some time, property
rights are a prerequisite, so that those who farm or invest in business can
feel assured that the fruits of their activities will be theirs.” (Facts and
Fallacies 218). Many believe wrongly that property rights only benefit the
wealthy, but Sowell delves further and explains that even those without
property have a huge stake in private property rights, “if they are to be
employed in an economy made prosperous by the presence of property rights.”
(Facts and Fallacies 218). Moreover, in the absence of such rights, as seen
under the Allende regime, production drastically decreases or ceases
altogether.
Like Milton Friedman, who once proclaimed back in 1962,
while discussing individual freedom in economic arraignments, he explicitly
states that it is a vehicle to political freedom, ...economic freedom is also
and indispensable means toward the achievement of political freedom.”
(Friedman 8). Not only did the reforms help Chile, Friedman’s assertion proved
to be substantive. The eventual macroeconomic stability in the late 80’s, among
other factors, was a large part of the eventual democratic transition in 1990
(Martinez). When Pinochet finally stepped down in 1990, GDP had risen by 40%
(in 2005 dollars); by comparison, Peru and Argentina during the same time
period, stagnated (Stephens). As of 2010, and a result of their market reforms
Chile has become South Americans richest people, with the lowest levels of
corruption, lowest infant mortality rate and lowest number of people living
below the poverty line (Stephens).
In conclusion, not only are economic freedoms separate from
political freedom, they are both components of a greater whole: individual
liberty. The only mechanism that protects both the worker and the consumer is
competition in a free market. As we have seen in South America, leaders use
economic arraignments and coercion to increase their power at the expense of
political and economic liberty; both fascism and socialism employ this tactic
in similar fashion to achieve the same result. Chile is a unique case in which
a military junta, a top down organization, promoted an economic policy that was
bottom up. The success of their economic structure in comparison to the Marxist
policies before is undeniable. The political atrocities committed by Pinochet
are deplorable, yet the neo-liberal market reforms remain today, despite two
moderate socialist presidents from 2000-2010, a clear vindication of the
Chilean market reform's success (Vanden, Prevost 467-468).
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