Economist Alfred Marshall

In 1879 as Karl Marx was becoming popular in Europe Alfred Marshall wrote The Economics of Industry.   Marx was a reaction to the principles of Adam Smith.  Karl Marx focused on the distribution of an existing pie where Adam Smith sought the benefits for all of an expanding pie.  Marx saw the profit motive as leading to increasing alienation of workers and the inevitable collapse of capitalism.

Marshall’s obsessive effort to understand how business worked led to his most important discovery.  The economic function of the business firm in a competitive market was not only or even primarily to produce profits for owners. It was to produce higher living standards for consumers and workers.  How did it do this? By producing and distributing more goods and services of better quality and at lower cost with fewer resources. Why?  Competition forced owners and managers to constantly make small changes to improve their products, manufacturing techniques, distribution, and marketing.  The constant search to find efficiency gains, economize on resources, and do more with less resulted over time in doing more with the same or fewer resources. Multiplied over hundreds or thousands of enterprises throughout the economy , the accumulation of incremental improvements over time raised average productivity and wages. In other words, competition forced businesses to raise productivity in order to stay profitable.  Competition forced owners to shares the fruits of these efforts with managers and employees, in the form of higher pay, and with customers, in the form of higher quality or lower prices.

The implication that business was the engine that drove wages and living standards higher ran counter to the general condemnation of business by intellectuals.   Even Adam Smith, who famously described  the benefits of competition in terms of an invisible hand that led producers to serve consumers without their intending to do so, had not suggested that the role of butchers, bakers, and giant joint stock companies was to raise living standards.  Although Karl Marx had recognized that business enterprises were engines of technological change and productivity gains, he could not imagine that they may also provide the means by which humanity could escape poverty and take control of its material condition.

From Grand Pursuit – The Story of Economic Genius by Sylvia Nasar

Sylvia Nasar’s book traces the development of economics from Adam Smith through Milton Friedman.  The book gives a background of the key developers of economic theory by relating their thinking to their personal development and the history of their time.

Unlike the hard sciences where laboratory conditions can prove or disprove a theory in a short period of time, the impacts of economic theory only play out at the speed of history.  All too often in the development of economics, rational and mathematical models are humbled by the development of history and the unexpected genius of people who respond much different in the real world than the mechanical objects they are treated as by the brilliant but flawed theories of those intellectuals who confuse thought with understanding, and knowledge with wisdom.

Larry Anderson writes for American Thinker, Venture Capitalism Not Crony Capitalism, 1/20/12:

Excerpt:

The moral difference between a Governor Keith and a Thomas Denham (venture capitalist)  is staggering. Keith made lavish promises (not just to Benjamin Franklin) based on the use of money that Keith did not have or that did not belong to him. People were seduced into Keith’s “investments” because of his position in the British government. Spending someone else’s money is easy, painless, and risk free — for both the “lender” and the recipient. (Benjamin) Franklin described Governor Keith thus, “He wished to please everybody, and, having little to give, he gave expectations.”

Denham, on the other hand, could not afford to tarnish his reputation by making promises he could not keep. Like many entrepreneurs, Denham was a venture capitalist and a retail businessman. He loaned and borrowed real money to and from real people. Franklin admired Denham..

HKO comments:

Venture capitalists take risks with their investors’ money, voluntarily placed at risk; crony capitalists use taxpayers’ money.  Venture capitalists do not make money buying companies and then shutting them down. Politicians use taxpayer money to buy votes and enjoy the fruits of their political power long after their Solyndras have paid their executive bonuses and shut down.

Crony capitalism is to capitalism what National Socialism (Nazism)  is to socialism.

With Pelosi explaining that unemployment benefits are the best form of stimulus spending and the President suggesting that further regulation actually creates jobs, it is hard to  conceive of more misguided economic thinking.

On a tour in China economist Milton Friedman asked why workers were using shovels instead of earth moving equipment to dig large holes at a construction site. The guide said that they used shovels to create more jobs.  ”You should then be using spoons,” Friedman suggested.

In Pajama’s Media Zombie writes The Leaf-Blower Paradox and the Fundamental Fallacy of Obamanomics (1/13/12).

Excerpts:

Historians still argue whether FDR’s policies shortened or lengthened the Depression, but Obamanomics makes FDR’s busywork schemes look brilliant by comparison.

In descending order:

• FDR redistributed money to the poor by using the government as an inefficient middleman. But under his system at least something positive got achieved — roads were built, parks improved — however non-essential they may have been.

• The Leaf-Blower Paradox also redistributes money to the poor, but is one step down; instead of inefficiently achieving non-essential goals, the leaf-blowers collectively produce nothing whatsoever.

• And then we have Obama, who takes us down to the absolute lowest level of counter-productiveness: He proposes that we “create jobs” by employing people to prevent the creation of jobs. Hiring people to implement economy-destroying EPA regulations — and then touting this dubious strategy as a way to “create jobs” — is the equivalent of hiring thousands of men to drive steamrollers over America’s farmlands. Not only have we lowered unemployment by creating thousands of new Steamroller Driver positions, but we’ve created more jobs in the agricultural sector as well, since the farmers now have to hire workers to re-plant all their crops!

In my admittedly primitive way of visualizing economics, there are two basic kinds of jobs: The first kind, which I call “productive jobs,” involve the creation of new things: manufacturing, inventing, designing, building, extracting raw materials, and so on. The second kind, which I call “maintenance jobs,” involve preserving a pleasant and safe civilizational environment: policing, service jobs, cleaning, health care, and so forth. These “maintenance jobs” are less glamorous but they are just as essential to the economy, because they create and maintain a status quo in which productiveness can be achieved.

Yet Obama and his crack team of economists have now dreamt up a third kind of job: The destructive job. Except Obama is more subtle than hiring Steamroller Drivers. No, instead, his destructive employment program involves the hiring of bureaucrats to stifle and crush entrepreneurialism and the free market; technicians to install machinery which makes doing business more difficult and expensive; IRS agents to squeeze more and more money from the dwindling number of productive Americans; and public servants whose job is to remove as many people as they can from the employment market by enslaving them to addictive lifelong entitlements like Food Stamps and unending unemployment benefits.

HKO comments:

The Leaf Blower is a great analogy to government make work schemes.  The idea that government actions that destroy jobs can be described as creating them is the shallowest of Orwellian economic thinking.

John Taylor and John Cogan write in the Wall Street Journal   Stimulus has Been a Washington Job Killer 10/3/11

Excerpts:

Temporary, targeted tax reductions and increases in government spending are not good economics. They have repeatedly failed to increase economic growth on a sustainable basis. What may come as a surprise is that such policies are not good politics either. Their inability to deliver promised economic benefits has invariably led disappointed voters to turn against those politicians, Democratic and Republican, who have supported them.

Mr. Obama’s $800 billion temporary, targeted stimulus plan took the same approach as Mr. Carter’s more than three decades earlier. The February 2009 bill included temporary tax rebates, additional spending on federal programs, and one-time grants to state and local governments.

It had the same negligible economic impact as Mr. Carter’s and, thus far, eerily similar political consequences. The plan’s failure preceded a historic Republican electoral sweep in the 2010 House elections and significant Republican gains in the Senate. The continuing economic discontent has placed Mr. Obama’s re-election in serious jeopardy.

That temporary tax reductions and increases in government spending can jump-start the economy and sustainably boost employment and personal income may seem like a politician’s dream policy. But the repeated failure of these short-term interventionist policies to deliver the promised economic benefits should make politicians think twice. Reliance on them has already cost dozens of members of Congress their jobs and two postwar presidents a second term.

HKO Comments:

Businesses (at least successful and survivable businesses) do not make long term plans based on short term stimulus.  Even more important than lower taxes, we need stable taxes that do not threaten to change every time the president is at the podium and the Congress is in session.  It is atrocious how much time and money we waste  trying to estimate the tax implication of our decisions.  There are significant changes almost every year, most of which rarely enter the public discourse.

Daniel Hannan writes in the UK The Telegraph with Memo to the Occupy Protesters: here are ten things we evil capitalists really think.

Point 1:

Free-marketers resent the bank bailouts. This might seem obvious: we are, after all, opposed to state subsidies and nationalizations. Yet it often surprises commentators, who mistake our support for open competition and free trade for a belief in plutocracy. There is a world of difference between being pro-market and being pro-business. Sometimes, the two positions happen to coincide; often they don’t.

Point 2:

What has happened since 2008 is not capitalism. In a capitalist system, bad banks would have been allowed to fail, their profitable operations bought by more efficient competitors. Shareholders, bondholders and some depositors would have lost money, but taxpayers would not have contributed a penny (see here).

HKO comment:

The government is able to transfer the pain of market corrections, but not eliminate it.  The well connected get saved at tax payer expense.  Even if the intervention was necessitated by the credit collapse, what is being done to avert a repeat?  Dodd Frank intervened in the setting of debit card fees which had nothing to do with this disaster,  but left the chief causes such as Fannie Mae untouched.