Smith, Marx, and Piketty: Reisman’s New York Times Comments on Steven Erlanger’s Article “Taking on Adam Smith (and Karl Marx)"

I made the following comments in response to a New York Times article by Steven Erlanger titled “Taking On Adam Smith (and Karl Marx),” which appeared yesterday. Erlanger’s article is essentially a review of the book Capital in the Twenty-First Century by Thomas Piketty, who appears to be the current rage among much of the economics profession. His book was dubbed by Krugman as “one of the watershed books in economic thinking.”

COMMENT 1 (at http://nyti.ms/1lv1FH5):

Mr. Erlanger’s article is titled “Taking on Adam Smith (and Karl Marx).” Allow me to suggest a different perspective than Mr. Piketty’s from which these two figures can be taken on. Namely, the fact that both of them make the same profound error.

This is the belief that the original and primary form of labor income is wages, with profits appearing only later, with the emergence of capitalists and their capitals, as an unearned, unjust deduction from wages.

The truth is that the income of workers producing and selling such things as pairs of shoes and loaves of bread in Smith’s “original state of things,” or in Marx’s equivalent “simple circulation,” is not wages. It is sales revenue. And precisely because there are no capitalists and thus no expenditure of money for the purpose of bringing in the sales revenues, there are no money costs to deduct from those sales revenues. Thus, the whole of the sales revenues is profit. Profit is the original and primary form of labor income.

What capitalists and their buying for the sake of selling are responsible for is not the existence of profit, but the existence of wages and the other costs of production, and thus a reduction in the proportion of sales revenues that is profit.

And just as Columbus, and not his crew, is given primary responsibility for the discovery of America, so it is businessmen and capitalists who are the primary producers in modern conditions. Profit is the income of their, mainly intellectual labor.

COMMENT 2 (at http://nyti.ms/1mqlXmh):

The wealth of the rich is not the cause of the poverty of the poor, but rather of making the poor less poor, indeed, rich. The wealth of the rich is invested in means of production, which are the foundation of the supply of products available to everyone through purchase. Their wealth—their capital—is also the source of the demand for labor and thus of wages. The greater is the capital of the rich, the larger is the supply of products and the demand for labor, i.e., the higher are real wages and the general standard of living. Where would you rather live and work? In a society whose means of production were a few goat farms, accompanied by a correspondingly small demand for labor, or in a society filled with multi-billion dollar corporations producing a corresponding supply of products and competing for your labor?

Over the last generation or more, economic progress has greatly slowed, and many people are economically worse off than they used to be. Why should that be a surprise? Producers are laboring under the ever-growing oppression of government regulation: now 700,000 accumulated pages just at the federal level.

Massive credit expansion entering the stock and real estate markets has created artificial inequality as it drives up the prices of stocks and real estate, which are owned predominantly by the rich. It has also caused massive losses of capital through such things as the construction of millions of homes whose buyers could not afford to pay for them.

COMMENT 3 (at http://nyti.ms/1lvZN0B):

Contrary to Mr. Piketty, the fact that the rate of return on capital is higher than the rate of economic progress does not at all imply that the fortunes of the rich will increase more rapidly than the overall size of the economic system.

The fortunes of the rich can grow only to the extent that they save and invest out of their relatively high rate of return. But to the extent that they do so, economic progress tends to increase and the rate of return tends to decrease.

Economic progress tends to increase insofar as the savings result in a larger supply of capital goods, which serves to increase production, including the further production of capital goods. The rate of return on capital tends to fall because the larger expenditure for capital goods (and labor) shows up both as larger accumulations of capital and as an increase in the aggregate amount of costs of production in the economic system, which serves to reduce the aggregate amount of profit.

Our problems today result largely from government policies that serve to hold down saving and the demand for capital goods. Among these policies are the corporate and progressive personal income taxes, the estate tax, chronic budget deficits, the social security system, and inflation of the money supply. To the extent that these policies can be reduced, the demand for and production and supply of capital goods will increase, thereby restoring economic progress, and the aggregate amount and average rate of profit will fall.      

 

The Road to a Geriatric Holocaust and How to Get Off It: Reisman's Comments on New York Times Article "Cost of Treatment May Influence Doctors"

On April 18, the National (print) edition of The New York Times published a front-page article titled "Cost of Treatment May Influence Doctors." The article reveals a growing acceptance in the medical profession of the belief that it is proper for doctors to practice medicine with only one eye on the patient because the other eye must be attentive to the impact of the patient’s treatment on the government’s budget.

Comment 1at http://nyti.ms/1ngD4JY:   

Prior to WW II, the principle operative in medical care in the United States was essentially that a patient was entitled to all the medical care he could afford to buy from willing providers. Lack of ability to pay could be made good only by private charity, often provided by doctors and hospitals.

Starting in WW II, with the government’s exemption of employer-provided medical insurance from wartime wage controls, the principle became ascendant that a patient was entitled simply to all the medical care he needed, without consideration of his ability to pay.

Now, it appears, we have come full circle, and the ability to pay is once again to be an essential element in the provision of medical care. Only now, it is not the individual’s ability to pay, but the State’s ability to pay.

This is a very dangerous situation, for it means that it is now up to the State to determine who lives and who dies. It is particularly dangerous for the elderly.

If one looks at medical care for the elderly from the perspective of the government’s finances, it is obvious that their care is a major expense to the government, while their limited ability to work prevents them from contributing very much in the way of tax revenue.

The horrifying truth is that we have created a situation in which the government’s finances would be improved to the extent that the elderly simply did not receive care, and further improved as they then died off, which would reduce the government’s Social Security payments.

Comment 2 at http://nyti.ms/1jjP1Ie:

The ever-rising cost of medical care certainly does need to be restrained. But asking doctors to treat patients with one eye on the government's budget is not the way to do it.

Medical care can be made more affordable to the extent that the supply of it can be increased, while the demand for it is decreased. We can increase the supply of medical care by abolishing or at least greatly liberalizing medical licensing requirements. We can reduce the demand for medical care by eliminating as far as possible the interference that makes it appear to be costless to the individual or far less costly than it actually is.

It is true that if medical licensing requirements were reduced, less capable people would be performing tasks that today only more capable people perform.  That would be the medical equivalent of an automobile market in which people are allowed to buy not only a Cadillac or a Lexus, but also a Chevrolet or Toyota. We need to open up the medical market to competition, particularly at the low end.

The cost of drugs could be reduced by opening up their production to competition—from imports and from new drugs. The latter could be accomplished by sharply reducing the FDA's power to restrain the introduction of new drugs.

Some Answers to Global Warming Propaganda: Reisman's Comments on NY Times Article "Political Rifts Slow U.S. Effort on Climate Laws"

 

On April 15, the National (print) edition of The New York Times published an article titled "Political Rifts Slow U.S. Effort on Climate Laws." The article was inspired by the latest report of the United Nations Intergovernmental Panel on Climate Change (IPCC) and naively and uncritically accepted the findings of that report as true.

Because The Times limits comments to 1500 characters, including spaces between words, I had to submit two, separate comments. And even then, I could not include some essential points, though I've included them here, following the end of my first comment.

The comments can be found on The Times' website, be clicking the respective links that follow the headings "Comment 1" and "Comment 2."

COMMENT 1 at http://nyti.ms/1eEJJuM:

It's remarkable that the author of this article, and the authors of the IPCC report that inspired it, can be concerned about the destructive effects on food production and other essentials of human well-being that will allegedly result from global warming, but do not give the slightest thought to the destructive effects on human well-being of forcibly imposing drastic reductions in CO2 emissions. These emissions are a by-product of such things as the use of tractors and harvesters in food production and of refrigerators and freezers in food preservation. They are the result of people driving automobiles, lighting, heating, and air conditioning their homes, and using electricity to power their machinery and appliances. In short, CO2 emissions are a by-product of producing and enjoying the material goods that distinguish a modern standard of living from that of the Third World.

Preventing government imposed reductions in the use of fossil fuels is not something that is merely in the narrow self-interest of the oil and coal industries. Rather it is in the self-interest of the hundreds of millions of average people who vitally depend on the products of these industries.

Perhaps there will someday be economical substitutes for fossil fuels. Until then, substantially reducing the use of fossil fuels means imposing the certainty of a drastic decline in the standard of living of the average person in order to avoid what is at most the possibility of some seriously bad weather.

[The following two paragraphs were not included in my Times comment because of lack of space, i.e., they would have exceeded the 1500 character limit.]

And if we need such things as massive sea walls to avoid such effects of that bad weather as the flooding of coastal areas, we had better be sure that we have the largest possible modern industrial base available to construct them.

It’s equally remarkable that those who fear global warming have given virtually no consideration to non-destructive ways of dealing with it, assuming that the threat is real in the first place. Why aren’t major prizes being offered for the development of low-cost, effective methods of removing large quantities of CO2 from the atmosphere? For example, is it beyond us to develop plant species that will absorb vast multiples of the CO2 that plants normally absorb? Why is the only possible solution thought to be the destruction of modern economic life?

COMMENT 2 at http://nyti.ms/1eEJrEl:

If global warming is a real threat, why haven’t politicians the world over made the negotiation of treaties for free immigration a top priority? If it’s a serious threat, and people will not willingly deal with it by committing economic suicide in the form of depriving themselves of the massive amounts of energy that would be lost through such measures as imposing a 70 percent reduction in CO2 emissions, then preparations should be starting now to allow for the future migration of hundreds of millions of Indians and Chinese into what will then be an inhabitable Siberia. The United States, Mexico, and the countries of Central America, should likewise be negotiating for free immigration into what will then be an inhabitable central Canada. Greenland should be declared open to all comers. Whatever the problems it may cause, global warming, if it really comes, will also be accompanied by vast new economic opportunities if not blocked by government migration barriers.

Or are we to fear that the “sin” of enjoying a modern standard of living must end in nothing less than a version of hellfire and brimstone—in the form of the recreation on Earth of the climate conditions on the planet Venus?

If so, what is the proof? Is it the direct observation of another planet Earth that turned into a Venus? Or is it strings of assumptions and inferences? And how can the Earth have had ice ages accompanied by more than10 times the CO2 that it is supposedly on track to experience now?

 

 

THE PIONEER VS. THE WELFARE STATE: Essays on Liberty in Peril by GEN LAGRECA

Available at Amazon.com (http://amzn.to/O7WIbR) in Kindle format. 99¢.

A New Declaration of Independence

This is a wonderful book. It evoked despair when the author described the conditions of our welfare state. At the same time, and especially as the result of the next-to-last essay “Why I Love America,” it evoked great admiration for our Constitution and Bill of Rights, and resulted in my having hope for the America I also love. Hopefully, the author’s projected “New Declaration of Independence” will someday become a reality. This book should be required reading in all the high schools and colleges of this country.

EDITH PACKER


Strangling the Pioneering Spirit

The essays in this book are gems of excellent, powerful writing in a great cause. Again and again, when the book describes the original, pioneering spirit of America, it brings the reader to a mountaintop of admiration for freedom, for the unimpeded action freedom makes possible, and for the genius of our Founding Fathers in establishing a country dedicated to freedom. And again and again, when it describes the very different spirit that prevails today—the spirit of the welfare state—it plunges the reader into the depths of despair. Here, the reader is made to confront such things as the entitlement mentality run amok and the results of the 700,000 pages of stifling arbitrary rules and regulations that have been promulgated and accumulated in The Federal Register since 1936.

One cannot read this book without a sense of tragic loss over what has gone so terribly wrong in our country. The author concludes with a call for a “NEW Declaration of Independence.” One can only hope that someday it will happen. But for now and the foreseeable future, it would have the greatest difficulty in finding signers, let alone a sufficient number of soldiers willing to fight for a renewal of the ideals on which our country was founded. But enough people reading this book would certainly help to improve the odds.

GEORGE REISMAN

Second Comment on the Big Bang Theory Appering in the New York Times Online

The “Big Bang” theory and its associated estimate of the age of the universe are not empirical facts of any kind but strictly inferences from propositions that are themselves questionable. Namely, an estimate of the size of the universe and the claim that the universe is expanding and is so at some definite rate. Given a definite size and rate of expansion of the universe, it follows mathematically that at some point, allegedly 13.8 billion years ago, the universe was disappearingly small.

The analogy of a financial “Big Bang” may be useful. Thus, for example, a hypothetical present-day fortune of a trillion dollars might be traced back to the “Big Bang” of the investment of a single penny 339 years ago that has earned a 10 percent compound rate of interest ever since. For 0.01*1.1^339 equals a little more than a trillion dollars. The fortune could be declared to be 339 years old.

In fact, of course, no one has an actual fortune of a trillion dollars, and a uniform rate of compound interest or any rate of interest has never been earned on the same fortune probably even for as long as a single century. So the mathematics does not tell us anything about actual reality here.

So it is with the Big Bang theory. It is an exercise in mathematics. But more than that, it claims the equivalent of $1 trillion being physically stuffed into the space of a single penny. No. It claims the whole physical universe being stuffed into the space of single penny.
 
This comment appears in TheTimes at

http://nyti.ms/1d1D64X

 

Reisman's New York Times Comment on the "Big Bang" Theory

The other day I posted a series of tweets on the "Big Bang" Theory. They were inspired as a response to a New York Times article on the subject by Dennis Overbye, titled "Space Ripples Reveal Big Bang’s Smoking Gun."
Today, I consolidated the tweets and posted them on the Times' website as a reader's comment. My statement follows and the hyperlink to it appears at the end.

The universe is the totality of all of existence.
If the universe is expanding, into what is it expanding? Mustn’t that into which it is expanding exist and thus be part of the universe?
If the universe is the totality of all of existence, how can there be anything beyond the universe?
As the totality of all of existence, the concept of boundaries cannot apply to the universe.
As the totality of all of existence, nothing could have existed before the universe except non-existence, which cannot exist.
The concepts before and after cannot apply to the universe without implying the contradiction of the existence of non-existence.
The universe did not have a beginning. Nor will it have an end.
Not having had a beginning, the universe did not originate in a “Big Bang” or any other event.

http://nyti.ms/1mhKpIS. Click “All” if necessary.

Letter to Secretary of Labor Perez Against Raising the Minimum Wage

Secretary Tom Perez
Department of Labor

Dear Secretary Perez:

Raising the minimum wage is a formula for causing unemployment among the least-skilled members of society. The higher wages are, the higher costs of production are. The higher costs of production are, the higher prices are. The higher prices are, the smaller are the quantities of goods and services demanded and thus the number of workers employed in producing them. These are all propositions of elementary economics that you and the President should well know.

It is true that the wages of the workers who keep their jobs will be higher. They will enjoy the benefit of a government-created monopoly that excludes from the market the competition of those unemployed workers who are willing and able to work for less than what the monopolists receive.

The payment of the monopolists’ higher wages will come at the expense of reduced expenditures for labor and capital goods elsewhere in the economic system, which must result in more unemployment.

Those who are unemployed elsewhere and who are relatively more skilled will displace workers of lesser skill, with the ultimate result of still more unemployment among the least skilled members of society.

The unemployment directly and indirectly caused by raising the minimum wage will require additional government welfare spending and thus higher taxes and/or greater budget deficits to finance it.

Your and the President’s policy is fundamentally anti-labor and anti-poor people. While it enriches those poor people who are given the status of government-protected monopolists, it impoverishes the rest of the economic system to a greater degree. It does this through the combination both of taking away an amount of wealth equal to the monopolists’ gains and of causing overall production to be less by an amount corresponding to the additional unemployment it creates. The rise in prices and taxes that results from raising the minimum wage both diminishes the gains of the monopolists and serves to create new and additional poor people, while worsening the poverty of those who become unemployed.

Furthermore, the higher the minimum wage is raised, the worse are the effects on poor people. This is because, on the one hand, the resulting overall unemployment is greater, while, on the other hand, the protection a lower wage provides against competition from higher-paid workers is more and more eroded. At today’s minimum wage of $7.25 per hour, workers earning that wage are secure against the competition of workers able to earn $8, $9, or $10 per hour. If the minimum wage is increased, as you and the President wish, to $10.10 per hour, and the jobs that presently pay $7.25 had to pay $10.10, then workers who previously would not have considered those jobs because of their ability to earn $8, $9, or $10 per hour will now consider them; many of them will have to consider them, because they will be unemployed. The effect is to expose the workers whose skills do not exceed a level corresponding to $7.25 per hour to the competition of better educated, more-skilled workers presently able to earn wage rates ranging from just above $7.25 to just below $10.10 per hour. The further effect could be that there will simply no longer be room in the economic system for the employment of minimally educated, low-skilled people.

Of course, the minimum-wage has been increased repeatedly over the years since it was first introduced, and there has continued to be at least some significant room for the employment of such workers. What has made this possible is the long periods in which the minimum wage was not increased. Continuous inflation of the money supply and the rise in the volume of spending and thus in wage rates and prices throughout the economic system progressively reduce the extent to which the minimum wage exceeds the wage that would prevail in its absence. The minimum wages of the 1930s and 1940s—25¢ an hour and 75¢ an hour—long ago became nullities. To reduce and ultimately eliminate the harm done by today’s minimum wage, it needs to be left unchanged.

The standard of living is not raised by arbitrary laws and decrees imposing higher wage rates, but by the rise in the productivity of labor, which increases the supply of goods relative to the supply of labor and thus reduces prices relative to wage rates, and thereby allows prices to rise by less than wages when the quantity of money and volume of spending in the economic system increase.

If raising the standard of living of the average worker is your and the President’s goal, you should abandon your efforts to raise the minimum wage. Instead, you should strive to eliminate all government policies that restrain the rise in the productivity of labor and thus in the buying power of wages.

If your goal is to raise the wages specifically of the lowest-paid workers, you should strive to eliminate everything that limits employment in the better-paid occupations, most notably the forcible imposition of union pay scales, which operate as minimum wages for skilled and semi-skilled workers. In causing unemployment higher up the economic ladder, union scales serve to artificially increase the number of workers who must compete lower down on the economic ladder, including at the very bottom, where wages are lowest. To the extent that occupations higher up could absorb more labor, competitive pressure at the bottom would be reduced and wages there could rise as a result.

Abolishing or at least greatly liberalizing licensing legislation would work in the same way. To the extent that larger numbers of low-skilled workers could work in such lines as driving cabs, giving haircuts, or selling hot dogs from push carts, the effect would also be a reduction in competitive pressure at the bottom of the economic ladder and thus higher wages there.

The principle here is that we need to look to greater economic freedom, not greater government intervention, as the path to economic improvement for everyone, especially the poor.

Sincerely yours,

George Reisman, Ph.D.

The Capitalist Economist

Pepperdine University Professor Emeritus of Economics

Author: Capitalism: A Treatise on Economics and other titles

Website: www.capitalism.net

Blog: http://georgereismansblog.blogspot.com

On Twitter @GGReisman

 

Reisman's Comments Against Proposed IRS "Guidance for Tax-Exempt Social Welfare Organizations on Candidate-Related Political Activities"

On February 26 and 27, I posted the following comments on the website www.regulations.gov. They concerned the proposed regulation IR-2013-92, which is described as "Guidance for Tax-Exempt Social Welfare Organizations on Candidate-Related Political Activities."

Any and all government "guidance" with respect to political activities are ipso facto violations of the freedoms of speech and press, which freedoms are explicitly protected by the US Constitution. It is immoral, unconstitutional, and outrageous for the government to attempt to "guide" [i.e., control] any of its citizens' political activities. Therefore, the IRS's proposed rule for "Tax Exempt Social Welfare Organizations on Candidate-Related Political Activities" known as "Regulation IR-2013-92" should be withdrawn at once.

While it is not accurate to call the IRS a terrorist organization, the IRS is definitely a TERRIFYING organization. Millions of Americans live in dread of its "audits," which trample all rights of privacy and private property. Such dread also inhibits the rights of free speech and free press.

The very existence of the IRS is incompatible with the foundations of the United States as originally conceived, which is why its existence was unconstitutional prior to the enactment of the 16th Amendment. That amendment and the consequent creation of the IRS has changed the character of our country from one inhabited by free and self-confident citizens who could look to their government for protection against thieves and bandits into one made up of frightened cowards, who must live in fear of their government that more and more resembles a gang of bandits.

The IRS must not add to its already rampant trampling of individual rights any new abridgement. It must not seek to further silence its helpless victims by this new proposed rule for "guiding" their political activities.
 

***

This proposed rule seeks to reduce the influence of money on the outcome of elections for public office, even though the money is used merely for the purpose of spreading ideas and arguments concerning political candidates and their qualifications for office based on the soundness, or lack of soundness, of their ideas and programs. The only possible way for the IRS, or any government agency or organ, to accomplish the objective of this rule is by means of threatening the imposition of fines for its violation, the payment of which fines is compelled by the threat of imprisonment.

Thus to reduce the influence of money on the outcome of elections, the IRS is proposing to replace it with the influence of THE THREAT OF GOVERNMENT FORCE. Threatening such force is a blatant violation of the freedoms of speech and press, and of free elections as well. Such a rule belongs in China, Russia, or Venezuela, whose citizens are accustomed to tyranny.  It certainly does not belong in the United States of America. It should be withdrawn at once and those responsible for its suggestion should be fired.