Last Updated: Mar 25th, 2013 - 16:46:15 Newsletters : 2008 Newsletters : 15 August 2008 Long Thought for the Day Most of the world today has a very high standard of living which is a result of economic growth. When it comes to understanding what causes economic growth we are in the advantageous position of being able to observe many nations around the world as they struggle to get economic growth. Some succeed and some fail. New Zealand has recently failed and instead of moving up to the top half of the OECD rich list we have moved down two more places to the edge of the bottom quarter; A dismal failure of political strategy. China is a country that lost 30 million people to starvation only 50 years ago. Now look at her! This transformation occurred because Deng Xiaoping believed that “to be rich is glorious”, and he set about getting a country full of rich people. He achieved this by unleashing the potential of the people themselves. China had suffered from socialism for 50 years and it was very obvious that having a big central bureaucracy instructing everyone on how to live their lives was not working. So Deng Xiaoping reduced the bureaucracy and encouraged the people to run their own lives. He did this by allowing them to keep more of what they each earned. And he allowed the peasants to own their land. He did not have a grand plan for everything. He understood that people, given the choice, will look for ways to improve their lot and in so doing they will provide goods and services that others will buy. And that is the essence of an economy. So let the people do more for themselves and stand back. Look at China today. Freeing the people has created somewhere between 300,000 and 500,000 millionaires in China today; from none 30 years ago. One generation of hard work did this. Hard work and the understanding that people could get to keep the fruits of their own labour. Unfortunately New Zealand is going the wrong way. We don’t like millionaires. We chase them away with higher taxes, more regulation and government control, and the belief by politicians that they can control the economy so that people get richer. The big lesson to learn by observing all the other countries is that more government control means less private enterprise and that means less wealth. That means EVERYONE is poorer. Wealth is generated by private enterprise. The person who starts a small business and makes a living and perhaps a small profit is creating wealth. With that wealth they can build a house to live in and buy cars and TV sets to enjoy. A whole lot of people running small businesses creates lots of wealth – and lots of jobs which means that everybody who is prepared to work and save can be wealthy. How this happens is so simple that people don’t stop to think about it. An economy is the sum total of people exchanging goods and services for money, and money for goods and services; all on a voluntary basis. Each voluntary exchange happens because one party prefers the money and the other party prefers the service or the goods – so the exchange is made. This is a voluntary exchange and benefits both parties. The reason I can say this so categorically is that if one of the parties felt that they were not benefiting from the exchange they would not agree to the transaction. So an economy consists of people making voluntary exchanges of goods, services and money to everyone’s benefit. COMPLETELY WITHOUT GOVERNMENT INTERFERENCE! Now consider the government. How does it get the money it wants? Through compulsion on pain of fine or imprisonment. Kings of old did it this way. Emperors did it this way. Dictators and despots do it this way. Democratic politicians do it this way. There is no voluntary exchange. The money taken by government can be divided into two bags. One bag is spent back into the country to create infrastructure which enables the private sector to more easily conduct their transactions. The other bag is spent on being the government; running parliament and a myriad of government departments. This second bag is a cost to the economy to be borne by everyone and subtracts from our wealth. The vanity of politicians is to think that by their efforts they cause the wealth of the nation to rise. The evidence is that more effort by politicians causes private enterprise to shrink and wealth to be less than it otherwise would be. If we could only persuade governments to reduce in size and leave us alone we would all be better off. Remember the referendum where 84% of the population wanted to have 99 politicians instead of 120 politicians? 84% of us know that we are top heavy with a “head office” trying to control everything and that just like a company, we would be better off with the smallest possible “head office” overhead. Did the politicians accept this advice? Does the turkey vote for Xmas? Now must be the time for binding referendums. We do need infrastructure, policing and justice and we do need to defend the shores. Nobody will deny that. There is a question of whether it is best done by government or by private enterprise. Roads could be built by private enterprise and tolls charged for their use. This would have the benefit of getting roads where they were really needed. After all, private enterprise is not going to build a road just to please some voters who might vote a politician back into power. Money and effort goes voluntarily into supplying just what is needed. I have seen a good argument put forward for justice by private enterprise. Judges got paid for judging by the parties involved. If they showed bias then future parties would not use their services. So we get unbiased judgments. It would work just like independent arbitrators work now. But we don’t need to spend much time in looking at justice, defence and infrastructure. We could do ourselves a great benefit by removing all other parts of government. This would free up a large number of intelligent people who could participate in the real world and just by working to provide a real service that is in demand (indicated by people being willing to pay for it) they would boost the wealth of the nation. And if we had very low taxes and could hire people more easily and with less risk, this would encourage all these new entrepreneurs to plough back the profits and build up their businesses with the thought perhaps of growing the enterprise to the stage of selling on the world market. Just like Hell Pizza! And if our taxes were really low then there would be a good case for the enterprise to stay with their Head Office in New Zealand. This is how to build wealth for all New Zealanders. Less government, low taxes, maximum freedom for the individual and the economy will just naturally flourish. Aug 13, 2008, 11:55 Newsletters : 2008 Newsletters : 15 August 2008 Are Central Banks Getting It All Wrong? "I am very struck by the value placed on little models that are never actually confronted with data from the real world," said one G7 central banker. "This is not science in my view." I have very real reasons for believing that the "science" of economics is not science and that the mathematics as used in economic models is not suitable for that purpose. I am speaking as a mathematician who has taught statistics, studied Operations Research and computer modeling and one who understand the basics of science. It is interesting to read of a banker with similar opinions. My proof is still in the incubator - but read on: Aug 14, 2008, 18:24 Newsletters : 2008 Newsletters : 15 August 2008 Economic Freedom Writing in Economic Freedom of the World, 1975–1995, James Gwartney and his co-authors defined economic freedom in the following way: "Individuals have economic freedom when, (a) property they acquire without the use of force, fraud, or theft is protected from physical invasions by others, and, (b) they are free to use, exchange, or give their property as long as their actions do not violate the identical rights of others. Thus, an index of economic freedom should measure the extent to which rightly acquired property is protected and individuals are engaged in voluntary transactions." (Gwartney, Lawson, and Block, 1996: 12) "This is the fifth edition of the annual report, Economic Freedom of North America, and this year marks the first time we are producing a US edition of the report. The statistical results of this year’s study persuasively confirm those published in the previous four editions: economic freedom is a powerful driver of growth and prosperity. Those provinces and states that have low levels of economic freedom continue to leave their citizens poorer than they need or should be." New Zealand has had very high levels of economic freedom in recent years but we have been slipping down the scale recently. Will we tip over into the abyss or can we solve our political problems and maximise our economic freedom? The thin edge of the reduction in freedom is illustrated with the recent news that a Napier resident had a tree declared to be of historic value and then was fined $300 for trimming it without permission. The resident is said to own the tree but the bureaucrats actually control what happens. This is definitely not freedom over one's own private property. There is a carefully crafted political manoeuvre now being pushed to have a category of person known as a "Stakeholder". That is a person who does not have ownership but who declares an interest and then insists on having a say in the enterprise - whatever it may be. This takes away private property ownership rights to the detriment of all. This report is far too long for a complete study but a quick glance at it will show you the pertinent points. Maybe we should concentrate on measuring economic freedom, sure in the knowledge that it will lead to economic growth, and thus save ourselves from endless convoluted arguments with economists of various schools of thought who provide more confusion than clarity. This article was recommended to me by a new reader from the "Deep South". Nice to meet a fellow Southlander! [ Visit Website ] Aug 14, 2008, 10:54 Newsletters : 2008 Newsletters : 15 August 2008 The Great Variety of Poor Rich People From time to time I have expressed doubts about the value of statistics provided by institutions - particularly government institutions. Richard Daughty in the USA just says it so well. Aug 13, 2008, 10:20 Newsletters : 2008 Newsletters : 15 August 2008 Freddie, Fannie, and Curses on FDR "As for the future, Mises's theory that the government will always favor more government seems wholly sound." Our experience in New Zealand certainly bears that out. Government grew and grew until Muldoon failed to cope with the economy and then David Lange and his crew reduced government to a more manageable size. Now Clark and Cullen have grown our government back up to super size again. No wonder we are in trouble! Here is another aspect of the American housing mortgage boondoggle: [ Visit Website ] Aug 12, 2008, 10:11 Newsletters : 2008 Newsletters : 15 August 2008 Homage To Jacques Rueff In a free market, wages eventually ease their way down to levels that allow capitalists to exploit workers again. Always have. But for some reason, in Britain in the 1920s, this didn’t happen. Bill Bonner explains... Aug 11, 2008, 12:38 Newsletters : 2008 Newsletters : 15 August 2008 Governments Caused Credit Crisis, Capitalism Gets Blamed Ambrose reports on the worlds paper money scheme. Unfortunately he doesn't realise that is the problem. He still thinks that government regulation will solve the problem. No such luck. Aug 8, 2008, 12:30 Newsletters : 2008 Newsletters : 15 August 2008 Quote for the Week “So long as the state exists, there is no freedom. When there is freedom, there will be no state.” Vladimir Ilyich Lenin, The State and Revolution, 1918. Aug 6, 2008, 11:21