Tag Archives: economics

Bill Gates, the Government, and Neo-Luddism

Last Thursday, Business Insider published an article about Bill Gates’s statement of the coming revolutionary economic and social changes we will face in the next 20 years: ‘Bots are taking away jobs!’ Mechanic laborers, Gates posits, will be the cause of drastic adjustments in many different industry in regards to labor demand that will put many out of work. This philosophy is known as Neo-Luddism– the opposition to modern technology. Among the various reasons for this technophobic outlook are the industrial effects machines can have on employment. The influence of these workers and their unions’ fear of advancement in production can be seen in the many labor laws and make-work practices made into law.  I never would’ve thought, however, that I would hear such aversion to technological improvement from the former CEO of Microsoft. But I would like to argue that all these are positive developments. I concede there will be some pains involved for certain workers in certain industries, which I will address later, and that jobs will initially be lost by some, but it will be worth it in the end. After all, where else have we heard the ‘stealing our jobs’ argument before: illegal immigrants. As I pointed out in this post,  however, accepting more workers into our nation will help expand and improve our economy. In a very non-racist way, the robots are just like the Mexicans in this case because they free up workers who can then be allocated to industries in which they are more efficient, the machines are more productive, and it will ultimately benefit both the producer and consumer.

The belief that machinery causes net unemployment and economic problems has been proven wrong time and time again. It all started back in one of my favorite eras of history: the Industrial Revolution, when the newly created labor-saving machinery of the time threatened the jobs of the textile workers, or so it seemed at the time. Sir Richard Arkwright had just created the spinning frame, which dramatically reduced the work needed to produce threads for yarn. The conventional spinning wheel needed one skilled operator to spin one thread. Arkwright’s new spinning frame, known as the water frame because it was water-powered, was so ingeniously invented in such a way that it took one unskilled operator to produce 128 threads at a time. Being right at the beginning of the Industrial Revolution, this had never happened before on such a large scale, and was bound to have a great effect on the economy. This efficiency,  the workers believed, would cause massive unemployment. 128 people out of work for every one person kept– that’s more than 99% unemployment. To protest this horrifying turn of events, stocking frames and other new equipment were smashed (see the picture above), factories destroyed, and Arkwright received many a death threat. Fortunately for the working class, however, technology and its effect on unemployment did not and does not work the way they thought, for instead of the expected result, employment actually increased 4,400% from 7,900 to 320,000 people! And the standard of living increased, too. Why is this?

In his introduction to economics and most famous book Economics in One Lesson, Henry Hazlitt explains, in a chapter titled, “The Curse of Machinery”. Because of the scarcity of goods, people try to economize their resources to produce more efficiently and cost-effectively. They try to answer the question “How can I produce more for the same amount of labor?” To illustrate the effect of how a capitalist addresses this question, I shall artisan like the ones in the cotton-spinning industry mentioned above. A capitalist has, let’s say, 128 workers. Through his friend and business partner Sir Arkwright, he purchases a water frame, and drops all but one worker in his work force. Because of the new invention, both the 127 workers’ jobs and the capitalist’s investment in the old method of production and therefore the jobs of those workers are lost. This definitely look like unemployment in the short run, and it makes sense that the workers were scared of these new developments. Many of them had a hard time recovering financially. But to look at just the unemployment as permanent and a net loss is to be mistaken. Firstly, the very creation of the technology creates employment, or as George W. Bush so poetically put it, “When somebody makes a machine, it means there’s jobs at the machine-making place.”  And often, labor-saving machinery requires a person to operate it. Since exchanges are only made if one values what they’re purchasing more than what they’re giving up, it would mean that the water frame’s work was worth more than the work of the people laid off. Once the profit from the thread produced by the  water frame makes up its cost, that translates into profits. With the invention being more efficient than the workers’ labor, the capitalist gains more profits than he would before. Profits, with which he can do any or all of three things: use it to buy more machines to make more thread, invest, or consume, all of which increases employment in more industries. And the extra production and competition caused lead to lower prices, which passes the benefit unto the consumer. Because the consumers now have extra money they left over that they otherwise wouldn’t have had, they do the same three things the capitalist did, they invest in production, or they consume and invest in other aspects of the economy. This cycle continues, maximizing the production and profits of all involved and vitalizing the economy. Such innovation either increases production which increases wages, or lowers prices, increasing what one can buy with one’s wages. With all the government regulations and restrictions concerning labor and unions today, however, this becomes more difficult. Many relics of Franklin Roosevelt that damaged the economy and  infringed on the right of employers and employees to make voluntary contracts are still present today. Despite this, technological innovation will raise the standards of living for all of society.

So Mr. Gates, there’s no need to fear robotic labor. For when you follow that view to its conclusion, any piece of technology invented reduced employment, and caused economic stagnation. But this is not the case. When agriculture was pioneered and perfected, it freed up our ancestors from all needing to hunt and gather. It lead to and outburst in art, science, productivity, recreation, and higher quality of life. It lead to civilization. Imagine what the world will be like when labor is automated! Karl Marx’s vision where one can “do one thing today and another tomorrow, to hunt in the morning, fish in the afternoon, and rear cattle in the evening” can be realized, not through communism, but through the most capitalist process there is: production for a profit.

 

UPDATE: I’d like to refer you to this article about protectionist policies at work. It concerns the legislation passed to limit the sales of Tesla Cars. It really makes it evident that it’s special interests, not just economic ignorance, that is the cause. Hopefully, it will end on a happier note, however. Over 70 economists and law professors have signed a letter opposing the anti-Tesla direct automobile distribution ban.

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The Fall of Mt. Gox and Why to Buy Bitcoin

 It may seem odd, but at a time when every major news source was reporting the end of Bitcoin, I bought my first Bitcoin today using the Coinbase exchange. While I am new to Bitcoin itself, I have been following its community, primarily via /r/Bitcoin, and from the looks of it, this “crash” pales in comparison to previous ones. How I see it is that Mt. Gox needed to die, and now that’s it’s behind us the Bitcoin community can grow even bigger and better. I’ve never trusted that exchange very much, what with all the trading incidents and stories of being unable to withdraw one’s own money. Despite the recent events that stirred commotion in the world of cryptocurrency, I think that this is one of the best times to get started.

First off, assuming the BTC economy will strengthen, one can buy low right now. At the time this post was written, 1 BTC goes for $540.55 to $560 depending one which exchange. As we’ve witnessed in the past, Bitcoin is fully capable of surpassing $1,000. Secondly, and I’m I disappointed with the media for causing confusion about this, the problem lay in the Mt. Gox exchange specifically, and not the currency itself. Just as one may get scammed when using U.S. Dollars or the Euro or any currency, but you cannot get scammed by the currency itself, this was the case with Bitcoin. And with the paranoia of a “Bitcoin Scam,” came attention from the government, one of the very institutions whose lack of presence in this currency as made it so popular.

Senator Joe Manchin (D-W.V.) has actually called for a complete ban on Bitcoin, just like China and Thailand (because of course that’s where we should get our policy from), writing that it is “disruptive to our economy. If one wants to read his complete letter, Business Insider did an article on it. I’d like to use this post to respond.

Here starts out with:

I write today to express my concerns about Bitcoin. This virtual currency is currently unregulated and has allowed users to participate in illicit activity, while also being highly unstable and disruptive to our economy.

Allowed user’s to participate in illicit activity? What does he think people usually buy illegal drugs with and is still used in such transactions today? The dollar! Why don’t we ban that too‽ Any currency can be used to buy anything so long as that vendor is willing to accept it in payment. A currency is a commodity just like any other. And as far as it being “disruptive”, it’s pretty clear just by looking at the Coin’s value that there’s pretty high demand for it, and that any government intervention would be many times more disruptive.

Bitcoin is a crypto-currency that has gained notoriety in recent months due to its rising exchange value and relation to illegal transactions . . . [which has made] Bitcoin attractive to some also attract criminals who are able to disguise their actions from law enforcement. Due to Bitcoin’s anonymity, the virtual market has been extremely susceptible to hackers and scam artists stealing millions from Bitcoins users.”

Once again, this brings us back to the argument for banning the dollar. And it’s plain to see that if people continue to trade BTC despite the “dangers” that it does not pose a sufficient threat enough to discourage its use.

It has been banned in two different countries—Thailand and China [and the European Union has] issued warnings to Bitcoin users as their respective governments consider options for regulating or banning its use entirely. I am most concerned that as Bitcoin is inevitably banned in other countries, Americans will be left holding the bag on a valueless currency.

Why can’t Manchin understand that that is the market’s issue to deal with? And Bitcoin’s ban is nowhere near inevitable. The Swiss Government has proposed treating it like any other foreign currency.

As of December 2013, the Consumer Price Index (CPI) shows 1.3% inflation, while a recent media report indicated Bitcoin CPI has 98% deflation. In other words, spending Bitcoin now will cost you many orders of wealth in the future. This flaw makes Bitcoin’s value to the U.S. economy suspect, if not outright detrimental.

Senator Manchin is correct in asserting that deflation discourages consuming in the present. But what it does do is encourage investment. The alternative to using Bitcoin is using the inflationary dollar. Just as deflation discourages present, consumer spending, inflation encourages it. But when that inflation is caused by a government or bank creating money or credit out of thin air and loaning it, it causes investment in places where there naturally would be no demand, and when the investment percolates down to the consumer, in the form of higher wages and incomes, the malinvestment is exposed and must be liquidated, these liquidations being known as depressions, which need only be fleeting as long as government does not try to keep wages, incomes, prices, and spending at pre-depression levels which, unfortunately, is usually the government’s way of “tackling” depressions. Inflations and deflations in the value of money are sustainable given the right demand, if it is in a free market setting, but this is not the case with the dollar

He  goes on to say that is dangerous and we should stop it before it “hurts hard-working Americans.” I don’t know about that; it didn’t seem to hurt people such as Jered Kenna, Charlie Shrem, or Roger Ver. The letter was addressed to various government officials and financial regulators, one of them being the Federal Reserve Chairwoman, Mrs. Janet Yellen. I have to admit that so far I have not been a very big fan of Yellen so far, due to her view on inflation. Nonetheless, I was glad to here yesterday that she responded to Senator Manchin that the Federal Reserve does not have the authority to regulate Bitcoin: “Bitcoin is a payment innovation that’s taking place outside the banking industry. To the best of my knowledge there’s no intersection at all, in any way, between Bitcoin and banks that the Federal Reserve has the ability to supervise and regulate. So the fed doesn’t have authority to supervise or regulate Bitcoin in anyway. One concern with Bitcoin is the potential for money laundering. [FinCen] has indicated their money laundering statutes are adequate to meet enforcement needs. The Fed doesn’t have authority with respect to Bitcoin, but certainly it would be appropriate for Congress to ask questions about what the right legal structure would be for digital currencies. My understanding is Bitcoin doesn’t touch [American] banks.” She finishes that even if they were to try, it would be difficult to regulate, saying, “It’s not so easy to regulate Bitcoin because there’s no central issuer or network operator. This is a decentralized, global [entity].”

So despite what they tell you, this is the best time to start using bitcoins. You can buy low, transaction fees are extremely low, it’s anonymous, allowing you to buy black market goods (and I’d like to point out here that the black market is not inherently evil. There’s the white market, which is the mainstream economy, the black market, which is the underground economy, and the red market, which is the violence-and-theft economy. There are overlaps between them in some cases, but anything black or white, and not red, is completely morally justified in my opinion. Sorry, this was a long parenthetical phrase; and I don’t think your supposed to have multiple sentences inside these), it’s peer-to-peer, so there’s no middleman, and it’s completely decentralized, so there is no central banks controlling it, so no government can control the currency. No more artificial booms followed by very real busts; booms and busts will still exist, only the market will solve its own problems. Let’s get Bitcoin back on track so it can go to the moon!

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Minimum Wage Increases: Too Good To Be True?

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Image Credits to Henry Payne

Recently, there has been much debate on whether or not to raise the federal minimum wage from $7.25 to a new, higher $10 or $11 minimum wage, some workers even calling for $15. These meager salaries, they say, are just not enough to get along. Liberals and many conservatives alike have called for a “living wage”. President Obama and Senate Democrats began pushing for such hikes in workers’ salaries since February this year when they proposed $9, but revised their plan, boosting the wage up to $10.10. This they say, would bring “58 percent of the nation’s 10 million-plus working poor out of poverty.” This assumption, however, is flawed. It assumes that companies would employ at the same rate as they do now and not lay anyone off. Basically, it rest on the assumption that a government decree can suspend supply-and-demand and other basic economic phenomenon. The minimum wage does not work as intended because artificially overvaluing a commodity, whether it be milk or bread, or a worker’s labor, causes people to buy less of it.

Let’s say, for a moment, that I am not talking about a salary, but the price of a commodity. Let us say that I am a baker. I may sell my bread at $3 a loaf, because that’s how much it is worth. Now, let us say, a politician comes along, with completely good intentions, believing that bakers deserve more money for every loaf they sell. He raises the minimum price of a loaf of bread to $4 per loaf. While this may appear to both politician and public as a blessing from the government, what it does in reality is hurt both the consumer (in this case, the customers of the bakery) and the producer (me, the baker). Tim used to come around every Thursday to the bakery with $15 with which to buy bread. Before the new law, he could purchase 5 loaves, and I would be paid $15 dollars. Now he can only purchase 3 loaves, and only pay me $12.

You may be wondering, what the hell does this baker analogy have anything to do with the minimum wage? My answer to that is that it has everything to do with minimum wage, for wage is, in fact, a price. An employee’s wage is that price that he charges the employer for his work. Since wages are prices, the same principles affect both. Let us say now, that my bakery has been very successful and I’m going to hire $100 an hour’s worth of new employees. If I pay each $7.25 an hour, hire 13 new employees. Now the minimum wage is raised to $10, and I’ll only hire 10 new workers, or $15, and I’ll only hire 6.

What a minimum wage does is replace low wages with unemployment. Just like my loaves of bread, the job market cannot evade the law of supply-and-demand. The great thing about the free market is that even if someone is unskilled and is only able to produce a small amount of money, the market lets him do that. But you cannot make the worth of a man’s work greater by making it illegal for anyone to pay him less. What you are doing is making it illegal for that man to work. There are other ways to go about raising wages. One’s salaries are determined by how much wealth they create. Therefore, in order to raise the value of one’s work, they should increase how much wealth the create– increasing productivity. By innovating, inventing, and working more efficiently, one can increase how much they generate.

If someone is actually being paid less than how much their work is worth, they can simply not work for that employer. If the employer is paying to little, people will decide not to work for him, they will move into other industries or unionize against said employer. Having a central leader decree how much whoever anyone gets paid is the worst way of raising wages.

Photo Credits: Frontiers of Freedom

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