Archive | June, 2012

Day 1 of Robert Wenzel’s 30-day reading list

27 Jun

Henry Stuart Hazlitt (November 28, 1894 – July 9, 1993) was an American economist, philosopher, literary critic and journalist for such publications as The Wall Street Journal, The Nation, The American Mercury, Newsweek, and The New York Times, and he has been recognized as a leading interpreter of economic issues from the perspective of American conservatism and libertarianism – Wikipedia

As per my previous post, I have set out on a task to go through Robert Wenzel’s 30 readings prescribed for an introduction to the Austrian school. The below are my thoughts on the first reading, ‘The Task Confronting Libertarians’ by Henry Hazlitt.

Hazlitt mentions early in the article that libertarians are a minority, and the task laid before them of defending free markets and civil rights is tremendous. It is important to think over this again. We do not realize how pervasive government intervention has become. We regard many activities as unquestionable prerogative of the government- like issuing currency. A lot of conventional brain washing has to be reversed before it may strike someone – why should the government really control the money supply? It is in this sense that libertarians are a minority- what they question has already been settled by the society in favour of the government.

Hazlitt outlines some basic principles which a libertarian can use to defend the free market ideology. They are a nice summary of some standard criticisms against government intervention.

One simple truth that could be endlessly reiterated, and effectively applied to nine-tenths of the statist proposals now being put forward or enacted in such profusion, is that the government has nothing to give to anybody that it doesn’t first take from somebody else.

Any government expenditure has to be met by taxes. A government may borrow, but borrowings too have to be eventually redeemed by the tax payers. In a paper currency system, the government may print money, but printing money is also financed by a covert ‘inflation tax.’ The bottom line- there is no free lunch. We may clamour for government subsidy on petrol, but its our own money that will be used to finance such a subsidy program.

Hazlitt writes,

Thus, it can be pointed out that the modern welfare state is merely a complicated arrangement by which nobody pays for the education of his own children, but everybody pays for the education of everybody else’s children; by which nobody pays his own medical bills, but everybody pays everybody else’s medical bills; by which nobody provides for his own old-age security, but everybody pays for everybody else’s old-age security; and so on.

As noted before, Bastiat exposed the illusive character of all these welfare schemes more than a century ago in his aphorism: “The State is the great fiction by which everybody tries to live at the expense of everybody else.”

Another line of argument against government intervention would be to question “Instead of what?” This would be the opportunity cost argument against government expenditure. For e.g., a tax financed aid program launched by the government would preempt resources from some other use.

The third basic principle of ‘knowing the consequences’ is what I find the most appealing.

Another very important principle to which the libertarian can constantly appeal is to ask the statists to consider the secondary and long-run consequences of their proposals as well as merely their intended direct and immediate consequences.

Lets take an example. The Indian government recently introduced legislation to reserve 25% seats in private schools for students from disadvantaged sections of the society. The ‘direct and immediate’ consequences of this are so attractive that it looks like a great piece of legislation. After all, what could be wrong in giving disadvantaged students access to top class education facilities? Its only when the ‘secondary and long-run consequences’ of this policy are considered that a different picture emerges. What impact will this move have on the supply of quality schooling in India? Does this legislation redeem the government of improving the state of public schools in villages? How will the quality of education be impacted? What does the historical precedent of reservations suggest – like reservations in India’s higher educational institutes? Has the policy worked there against the stated objectives? One also needs to consider the negative effects of the increase in government confidence to introduce such legislation elsewhere. Tomorrow, will the government legislate that out of 4 seats in a car, one seat has to be reserved for a disadvantaged pedestrian?

There are many such questions. One could go on and on. The bottom line being that government intervention, albeit for a noble cause, can bring the baggage of unintended consequences with it. And whats worse is that such unintended consequences only becomes obvious after close examination.

One could mention here an oft repeated point by Milton Friedman – government policy should be evaluated based on its actual impact, not on the basis of its stated objectives.

My own addition to the Hazlitt’s basic principles on how to defend libertarian views-

Its very simple. Replace the word ‘government’ in an argument with the name of a politician – for starters, you can use Lalu Prasad Yadav.

The poor in a society will be looked after by the government.

The poor in a society will be looked after by Lalu Prasad Yadav.

You will immediately see the difference. The first sentence sounds very credible because it evokes images of a paternal body called ‘government’ which looks after its citizens, much like a shepherd looks after his sheep. However, the government is nothing more than the politicians who constitute the government. In this sense, the word ‘government’ is actually an euphemism – an euphemism for corrupt politicians. A point made evident by the second sentence.

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The Libertarian Reading List – The 30 day challenge

26 Jun

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F.A. Hayek

I recently came across a collection of 30 articles, meant to be read over 30 days, to understand the Austrian school of economics. Why I think this is important –

1) With the global economy in turmoil, we keep hearing about different policy prescriptions to deal with the crisis. It is a good time now to get acquainted with the different school of economic thoughts. This will help in making sense of the wonderful debate that brews everyday in the blogosphere.

2) I feel the Austrian perspective on Economics is ignored in educational institutes. The set of 30 articles may be a good starting point to coherently understand the Austrian school. So while we know quite a bit on Keynesian economics, the above looks like a good place to read about a starkly different point of view.

Disclaimer – I have not yet read any of the articles. 30 articles in 30 days seems difficult for me. So I have customized the challenge as the 120 day challenge. Will try to cover one article in 4 days. In case I stick to this and have something interesting to share, will update on a follow up blog post.