Planning and Power

This is an abridgment of chapter 2 of F. A. Hayek's famous work "The Road to Serfdom."

Planning and Power

IN ORDER to achieve their ends, the planners must create power—power over men wielded by other men—of a magnitude never before known. Their success will depend on the extent to which they achieve such power. Democracy is an obstacle to this suppression of freedom which the centralized direction of economic activity requires. Hence arises the clash between planning- and democracy.
Many socialists have the tragic illusion that by depriving private individuals of the power they possess in an individualist system, and transferring this power to society, they thereby extinguish power. What they overlook is that, by concentrating power so that it can be used in the service of a single plan, it is not merely transformed but infinitely heightened. By uniting in the hands of some single body power formerly exercised independently by many, an amount of power is created infinitely greater than any that existed before, so much more far-reaching as almost to be different in kind. It is entirely fallacious to argue that the great power exercised by a central planning board would be "no greater than the power collectively exercised by private boards of directors." There is, in a competitive society, nobody who can exercise even a fraction of the power which a socialist planning board would possess. To decentralize power is to reduce the absolute amount of power, and the competitive system is the only system designed to minimize the power exercised by man over man. Who can seriously doubt that the power which a millionaire, who may be my employer, has over me is very much less than that which the smallest bureaucrat possesses who wields the coercive power of the state and on whose discretion it depends how I am allowed to live and work?
In every real sense a badly paid unskilled workman in this country has more freedom to shape his life than many an employer in Germany or a much better paid engineer or manager in Russia*. If he wants to change his job or the place where he lives, if he wants to profess certain views or spend his leisure in a particular way, he faces no absolute impediments. There are no dangers to bodily security and freedom that confine him by brute force to the task and environment to which a superior has assigned him. Our generation has forgotten that the system of private property is the most important guaranty of freedom. It is only because the control of the means of production is divided among many people acting independently that we as individuals can decide what to do with ourselves. When all the means of production are vested in a single hand, whether it be nominally that of "society" as a whole or that of a dictator, whoever exercises this control has complete power over us. In the hands of private individuals, what is called economic power can be an instrument of coercion, but it is never control over the whole life of a person. But when economic power is centralized as an instrument of political power it creates a degree of dependence scarcely distinguishable from slavery. It has been well said that, in a country where the sole employer is the state, opposition means death by slow starvation.

*Remember this book was written in 1944, during Nazi Germany and Bolshevik Russia.

A Few Short Quotes

"We want a society in which we are free to make choices, to make mistakes, to be generous and compassionate. That is what we mean by a moral society - not a society in which the State is responsible for everything, and no one is responsible for the State."

"Socialism's results have ranged between the merely shabby and the truly catastrophic - poverty, strife, oppression and, on the killing fields of communism, the deaths this century of perhaps 100 million people. Against that doctrine was set a contrary, conservative belief in a law-governed liberty. It was this view which triumphed with the crumbling of the Berlin Wall. Since then, the Left has sought rehabilitation by distancing itself from its past."

"Socialists have always spent much of their time seeking new titles for their beliefs, because the old versions so quickly become outdated and discredited."

- Margaret Thatcher

Right to Work in Indianda

Indiana Leads the Right-to-Work Charge

The Hoosier State's historic vote may be a tipping point in the battle against Big Labor.

Shikha Dalmia | February 7, 2012

Last week, Indiana became the first state in a decade (and the first state in the Rust Belt) to adopt a right-to-work law. This means that Indiana’s working men and women, like their comrades in 22 other states, will no longer have to pay mandatory dues to union bosses as a condition of employment. Big Labor was apoplectic, even threatening demonstrations at Sunday’s Super Bowl in Indianapolis, although saner heads prevailed, averting a PR disaster for unions.

But regardless of how Big Labor feels, Indiana’s law will go down in history as the watershed moment that decisively stemmed the awesome power it has exerted on American politics for about a century.

After months of histrionics by unions and Democratic legislators—who twice skipped town to prevent a quorum—the Indiana House a few weeks ago passed the bill with a largely party-line 54-44 vote. It sailed through the GOP-dominated Senate last week and Gov. Mitch Daniels signed it immediately. Daniels pulled a switcheroo, becoming a big right-to-work champion after years of foot-dragging. In doing so, he might have unleashed forces that Big Labor can’t beat back.

The economic case for right-to-work laws has long been clear. Big Labor denies this, but manufacturers avoid union towns like the plague. Not a single foreign automaker has built a factory in Michigan, the auto capital of the world, whose highly trained auto work force—you’d think—would give it an unbeatable advantage. Daniels embraced the right-to-work cause when he couldn’t get Volkswagen even to return his calls, because the company won’t consider coming to a non-right-to-work state.

The upshot is that right-to-work states have done a far better job of growing their economies, providing jobs—especially in manufacturing—and attracting people. Between 2002 and 2009, every year except one, economic growth in these states was noticeably higher than in non-right-to-work states. Over the last decade, employment grew 2.3 percent in right-to-work states compared with a 4 percent decline in others. What’s more, income growth in the right-to-work states was 17.5 percentage points higher. And Ohio State University economist Richard Vedder found that “without exception, a statistically significant positive relationship” exists between the presence of right-to-work laws and in-migration.

So why aren’t states scrambling to embrace right-to-work laws? Four words: fear of Big Labor.

It took 10 years to win this battle in Indiana, even though unions are less potent there than in its neighboring states. Only 10.9 percent of Indiana’s private-sector employees are unionized, compared with 16.5 percent in Michigan.

More importantly, Indiana doesn’t allow recalls against lawmakers or referenda to repeal bills, making the fight for right-to-work much more winnable. That’s not the case in most other states. Big Labor, for example, launched a recall campaign against Wisconsin Gov. Scott Walker after he implemented a right-to-work law for public-sector employees. And Big Labor deployed its enormous war chest—amassed through mandatory dues, obviously—in November on a ballot initiative that killed a similar law in Ohio.

This means that right-to-work advocates have to prepare not for just one but multiple battles in order to prevail. The uncertainty makes it hard to convince state GOP lawmakers, even when they control all chambers, to take up their cause. Indeed, the last time a right-to-work bill came up for a vote in Indiana, in 2005, 22 Republican House lawmakers voted against it.

Right-to-work activists could overcome such resistance—and short-circuit the process—by themselves putting a referendum before voters. But the problem there, notes Paul Kersey of the Michigan-based Mackinac Center for Public Policy, is that unless there is about 60 to 70 percent public support and considerable financial backing to withstand the $100 million or so advertising onslaught and a union-orchestrated get-out-the-vote drive, things could backfire badly. Not only would the ballot lose, but the cadres of pro-union voters who show up at the polls would cause losses in other GOP races. That’s why the GOP establishment moves mountains to stop right-to-work initiatives.

So why will the Indiana victory break this logjam? Three reasons. First, unions are in a depleted state after fending off attacks in Indiana, Wisconsin, and Ohio. They may no longer be able to fight effectively on new fronts, especially if they lose the recall petition against Walker, which looks likely. His law is gaining popularity every day as public schools, for example, regain control over their budgets and teachers.  

Second, anemic growth and state budgets saddled with public employee legacy costs have shifted opinion in a pro-right-to-work direction. In Michigan, the union epicenter, the issue has been drawing over 50 percent support for a while.

But, above all, Indiana will both intensify the competitive pressure on its neighbors and offer lessons that they can’t ignore. So long as none of the Rust Belt states was right-to-work, they could all blame other factors for their manufacturing woes. With Indiana breaking ranks, this is a less viable political sell. A highly regarded 1998 study by Thomas Holmes of the Federal Reserve Bank of Minneapolis found that manufacturing employment as a percentage of county population increased by a third in right-to-work counties compared to bordering non-right-to-work ones. If Indiana becomes an attractive destination for manufacturers in the Midwest, its neighbors can hardly sit on their derrieres and watch.

None of this will happen overnight. Right-to-work states are not even in the majority today. But a decade hence, things might look dramatically different.

Shikha Dalmia is a Reason Foundation senior analyst and a columnist for The Daily, where this column originally appeared.

Found at http://reason.com/archives/2012/02/07/indiana-leads-the-right-to-work-charge

The Nature of Ownership

The Nature of Ownership

Regarded as a sociological category ownership appears as the power to use economic goods. An owner is he who disposes of an economic good.

Thus the sociological and juristic concepts of ownership are different. This, of course, is natural, and one can only be surprised that the fact is still sometimes overlooked. From the sociological and economic point of view, ownership is the having of the goods which the economic aims of men require. This having may be called the natural or original ownership, as it is purely a physical relationship of man to the goods, independent of social relations between men or of a legal order. The significance of the legal concept of property lies just in this—that it differentiates between the physical has and the legal should have. The Law recognizes owners and possessors who lack this natural having, owners who do not have, but ought to have. In the eyes of the Law 'he from whom has been stolen' remains owner, while the thief can never acquire ownership. Economically, however, the natural having alone is relevant, and the economic significance of the legal should have lies only in the support it lends to the acquisition, the maintenance, and the regaining of the natural having.

To the Law ownership is a uniform institution. It makes no difference whether goods of the first order or goods of higher order form its subject, or whether it deals with durable consumption goods or non-durable consumption goods. The formalism of the Law, divorced as it is from any economic basis, is clearly expressed in this fact. Of course, the Law cannot isolate itself completely from economic differences which may be relevant. The peculiarity of land as a means of production is, partly, what gives the ownership of real property its special position in the Law. Such economic differences are expressed, more clearly than in the law of property itself, in relationships which are sociologically equivalent to ownership but juristically allied to it only, e.g., in servitudes and, especially, in usufruct. But on the whole, in Law formal equality covers up material differences.

Considered economically, ownership is by no means uniform. Ownership in consumption goods and ownership in production goods differ in many ways, and in both cases, again, we must distinguish between durable goods and goods that are used up.

Goods of the first order, the consumption goods, serve the immediate satisfaction of wants. In so far as they are goods that are used up, goods, that is, which in their nature can be used but once, and which lose their quality as goods when they are used, the significance of ownership lies practically in the possibility of consuming them. The owner may also allow his goods to spoil unenjoyed or even permit them to be destroyed intentionally, or he may give them in exchange or give them away. In every case he disposes of their use, which cannot be divided.

The position is a little different with goods of lasting use, those consumption goods that can be used more than once. They may serve several people successively. Here, again, those are to be regarded as owners in the economic sense who are able to employ for their own purposes the uses afforded by the goods. In this sense, the owner of a room is he who inhabits it at the time in question; the owners of the Matterhorn, as far as it is part of a natural park, are those who set foot on it to enjoy the landscape; the owners of a picture are those who enjoy looking at it. Thehaving of the uses which these goods afford is divisible, so that the natural ownership of them is divisible also.

Production goods serve enjoyment only indirectly. They are employed in the production of consumption goods. Consumption goods emerge finally from the successful combination of production goods and labour. It is the ability to serve thus indirectly for the satisfaction of wants which qualifies a thing as a production good. To dispose of production goods is to have them naturally. The having of production goods is of economic significance only because and in so far as it leads finally to a having of consumption goods.

Goods to be used up, which are ripe for consumption, can be had but once—by the person who consumes them. Goods of lasting use, which are ripe for consumption, may be had, in temporal succession, by a number of people; but simultaneous use will disturb the enjoyment of others, even though this enjoyment is not quite excluded by the nature of the commodity. Several people may simultaneously look at a picture, even though the proximity of others, who perhaps keep him from the most favorable viewpoint, may disturb the enjoyment of any individual in the group; but a coat cannot be worn simultaneously by two people. In the case of consumption goods the having which leads to the satisfaction of wants by the goods cannot be further divided than can the uses which arise from the goods. This means that with goods to be used up, natural ownership by one individual completely excludes ownership by all others, while with durable goods ownership is exclusive at least at a given point of time and even in regard to the smallest use arising from it. For consumption goods, any economically significant relationship other than that of the natural havingby individuals is unthinkable. As goods to be used up absolutely and as durable goods, at least to the extent of the smallest use arising from them, they can be in the natural ownership of one person only. Ownership here is also private ownership, in the sense that it deprives others of the advantages which depend upon the right of disposing of the goods.

For this reason, also, it would be quite absurd to think of removing or even of reforming ownership in consumption goods. It is impossible in any way to alter the fact that an apple which is enjoyed is used up and that a coat is worn out in the wearing. In the natural sense consumption goods cannot be the joint property of several or the common property of all. In the case of consumption goods, that which one usually calls joint property has to be shared before consumption. The joint ownership ceases at the moment a commodity is used up or employed. The having of the consumer must be exclusive. Joint property can never be more than a basis for the appropriation of goods out of a common stock. Each individual partner is owner of that part of the total stock which he can use for himself. Whether he is already owner legally, or owner only through the division of the stock, or whether he becomes legal owner at all, and whether or not a formal division of the stock precedes consumption—none of these questions is economically material. The fact is that even without division he is owner of his lot.

Joint property cannot abolish ownership in consumption goods. It can only distribute ownership in a way which would not otherwise have existed. Joint property restricts itself, like all other reforms which stop short at consumption goods, to effecting a different distribution of the existing stock of consumption goods. When this stock is exhausted its work is done. It cannot refill the empty storehouses. Only those who direct the disposal of production goods and labour can do this. If they are not satisfied with what they are offered, the flow of goods which is to replenish stocks ceases. Therefore, any attempt to alter the distribution of consumption goods must in the last resort depend on the power to dispose of the means of production.

The having of production goods, contrary to that of consumption goods, can be divided in the natural sense. Under conditions of isolated production the conditions of sharing the having of production goods are the same as the conditions of sharing consumption goods. Where there is no division of labour the having of goods can only be shared if it is possible to share the services rendered by them. The having of non-durable production goods cannot be shared. The having of durable production goods can be shared according to the divisibility of the services they provide. Only one person can have a given quantity of grain, but several may have a hammer successively; a river may drive more than one water wheel. So far, there is no peculiarity about the having of production goods. But in the case of production with division of labour there is a two-fold having of such goods. Here in fact the having is always two-fold: there is a physical having (direct), and a social having (indirect). The physical having is his who holds the commodity physically and uses it productively; the social having belongs to him who, unable to dispose physically or legally of the commodity, may yet dispose indirectly of the effects of its use, i.e. he who can barter or buy its products or the services which it provides. In this sense natural ownership in a society which divides labour is shared between the producer and those for whose wants he produces. The farmer who lives self-sufficiently outside exchange society can call his fields, his plough, his draught animals his own, in the sense that they serve only him. But the farmer whose enterprise is concerned with trade, who produces for and buys in the market, is owner of the means of production in quite a different sense. He does not control production as the self-supporting peasant does. He does not decide the purpose of his production; those for whom he works decide it—the consumers. They, not the producer, determine the goal of economic activity. The producer only directs production towards the goal set by the consumers.

But further owners of the means of production are unable in these conditions to place their physicalhaving directly into the service of production. Since all production consists in combining the various means of production, some of the owners of such means must convey their natural ownership to others, so that the latter may put into operation the combinations of which production consists. Owners of capital, land, and labour place these factors at the disposal of the entrepreneur, who takes over the immediate direction of production. The entrepreneurs, again, conduct production according to the direction set by the consumers, who are no other than the owners of the means of production: owners of capital, land, and labour. Of the product, however, each factor receives the share to which he is economically entitled, according to the value of his productive contribution in the yield.

In essence, therefore, natural ownership of production goods is quite different from natural ownership of consumption goods. To have production goods in the economic sense, i.e. to make them serve one's own economic purposes, it is not necessary to have them physically in the way that one must have consumption goods if one is to use them up or to use them lastingly. To drink coffee I do not need to own a coffee plantation in Brazil, an ocean steamer, and a coffee roasting plant, though all these means of production must be used to bring a cup of coffee to my table. Sufficient that others own these means of production and employ them for me. In the society which divides labour no one is exclusive owner of the means of production, either of the material things or of the personal element, capacity to work. All means of production render services to everyone who buys or sells on the market. Hence if we are disinclined here to speak of ownership as shared between consumers and owners of the means of production, we should have to regard consumers as the true owners in the natural sense and describe those who are considered as the owners in the legal sense as administrators of other people's property. This, however, would take us too far from the accepted meaning of the words. To avoid misinterpretation it is desirable to manage as far as possible without new words and never to employ, in an entirely different sense, words habitually accepted as conveying a particular idea. Therefore, renouncing any particular terminology, let us only stress once more that the essence of the ownership of the means of production in a society which divides labour differs from that found where the division of labour does not take place; and that it differs essentially from the ownership of consumption goods in any economic order. To avoid any misunderstanding we will henceforth use the words, 'ownership of the means of production' in the generally accepted sense, i.e. to signify the immediate power of disposal.

-Ludwig von Mises, Socialism, pp. 37-42

The Equal Distribution of Wealth

Equal Distribution of Wealth

A few days ago I heard a man, an economics professor, say that the United States would be better off and more successful if every person was paid equally, if the GDP were really per capita. This man proclaims to be an Adam Smith, laissez-faire follower. I thought that this kind of a system, where everyone receives equal pay, would not work and would collapse the United States’ economy in a matter of days if not hours.

The GDP in the United States in 2011 was $12,982 trillion. With a population of 310,000,000 people in the U.S. that means the GDP per capita is $41,877. Now if everyone would be paid the same every year and if the combined amount of those payments could not exceed the GDP our economy, as we now know it, would not be able to survive very long at all. What would it do to the incentive to work? What would it do to investments? What would it do to start-up companies? What would it do to the real estate market? These are vital questions that are very complex in their answers. But, here in this short article, hopefully we can get somewhat of an understanding.

What about having an incentive to work? This is a term regularly used in economic debates. The socialist economy provides little to no incentive for people to go to work and excel at their job. Why is this the case? Pride and selfishness play a huge role in this. In order for someone to excel and prosper at their job they have to know that they will receive some kind of remuneration for that work. If they do not receive some kind of incentive they will not work hard and will lose the inventive process that made this country what it is today. A man who is asked to work extra hours and receive no extra pay or compensation for his work may work those extra hours, but he will not be as productive as he could have been had there been an incentive for him to work that much harder. This is easy to understand so we will leave it at that.

Now, another aspect of this question is what would happen to big business if the CEO and all the top executives only received $41,877 per year for their work? There is a reason for huge companies to hand out huge salaries to high ranking members of the organization. If there was no high salary, perks and benefits there would be no incentive for people to seek or have those jobs. Why would you go through all the stress and pain that is necessary to manage General Motors or Chase Bank if you knew that you would only receive as much as the rest of the employees, who do far less work than you do. The CEO of General Electric would quit and get a job doing the least amount of work he could, why work if you’re not going to get paid what it’s worth? So here is the big issue, these top positions would be vacant and nobody would ever want to do these jobs. But, if nobody is there to do these jobs that means all the huge businesses here in the U.S. are going to go out of business. Wal-Mart, for example, has roughly 2.1 million employees worldwide. If the people running Wal-Mart found out that tomorrow their salaries would be cut to $41,877 per year do you think they would stay with their job and work it out? Would you? Would you put up with the stress and burden of managing 2.1 million employees for a lousy $3,489 bucks a month? The answer is a resounding NO! Nobody would. There is no incentive to work. So now, not only do all the “big wigs” at all of these thousands of major businesses quit, but it also leads to the company going under and all the millions of employees being out of a job as well. There are an estimated 18,469 large businesses (businesses employing over 500 people) in the United States as of 2008 (that is the latest census data). There are hundreds, if not thousands, of these companies that employee well above the 500 employee mark. The large businesses employed around 61.2 million people in 2008 (http://www.sba.gov/sites/default/files/sbfaq.pdf). So if half of these lost their jobs that means 30.6 million people would be out of a job overnight, and that is a generous number. This of course is all just speculative, because the numbers are from 2008, before the economic downturn. Nonetheless, it shows how catastrophic it would be if everyone received the same paycheck. This needs no more argument here, if more is desired to reach a full agreement with these statements all one needs to do is study the history of the USSR and why it failed. The bottom line is that if you cut salaries you cut the incentive to work, and all those making more than this will be discouraged in their jobs.

Investing would be hit very hard. The venture capitalist and the angel investor would have no money to invest in new businesses. This means that entrepreneurship would all but cease to exist. Where would people get the money to start a business if there were not banks or people to loan this money out? There would again be no incentive to start a new business. Maybe someone will say that if I work hard enough and I earn enough that I can raise the GDP high enough to make it worth it to work that hard. But the combined income of two the wealthiest people in the country Steve Jobs and Bill Gates would only add $2.49 per year to each paycheck, and imagine the long hours and years they had to put in to get their businesses to where they are today. It’s absurd to think that investing and entrepreneurship would still exist under a fixed income system. Who would work hard for years only to see his salary go up maybe a few cents over that time? Because people no longer have millions to lend out to others there would be no new investments and business creation would come to a standstill, causing another axe to be thrown at the economic tree.

The question of equal pay and startup companies has been lightly touched in the last paragraph, but a little more would be useful. Small firms accounted for 65 percent (or 9.8 million) of the 15 million net new jobs created between 1993 and 2009 (http://www.sba.gov/sites/default/files/sbfaq.pdf). That means that because there are no new firms, because there is no incentive and there is no money to finance them, millions of new jobs will never be created. This would not be a problem if everyone was going to live forever young and have no children; in that circumstance there would be no need to create new jobs, but that is not the world as it is. Some people may argue that to create your own business is to be independent and free. Free from what? You’re still only making as much as the next person and probably working just as hard. Free from stress? Of course you would be, you would be guaranteed a check every month, so why start a business in the first place?

What about the real estate market? The debt to income ratio helps us to understand the problem here. When making payments on a house it is recommended that you stay below 45% of your income for monthly payments. 45% of $41,877 is $18,844, or $1,570 per month to spend on a house. What about those who are paying mortgages on homes worth more than that? In the U.S. there are thousands. If anyone who is paying $1,570 or more per month on a house has a pay cut to $41,877 per year they can kiss their houses goodbye. They will not be able to afford it. This would devastate the banking industry just as it has done recently and it would also destroy the real estate market. What happens when the real estate market and banks fail has been shown to us in the last few years so I will not go on further here about that. However, think of this and the mass unemployment explained above. I wonder what we would do with all of those vacant houses…

A fundamental argument of socialism is that people are entitled to things such as the minimum standard of living and health care and a number of other items that are to be free to all those who want or need it. This is a fundamental flaw that this way of thinking has inherent in it. How can everyone be entitled to these things? For if everyone was entitled and everyone quit working there would be nobody to provide it for us. There is no such thing as a free lunch. In order to give this liberty to the people you must also enslave others to give it to them, because it doesn’t just appear out of thin air, someone must provide it, and who will that be? Nothing can be called a right if it has to be earned. That is one of the philosophical problems of socialist thinking, “here you deserve this, now go earn it!” How can we say that we should give everyone equal pay when many have not earned it. Being born does not mean you deserve anything but the right to breathe, the right of freedom of speech, freedom of thought and the right to pursue your own happiness.

So we can see in just these few paragraphs the disastrous effects of equal re-distribution of wealth and the havoc it would have on the American economy. We did not even mention that most of our economy is made up of service jobs and what it would do there. We did not discuss that we are a consumer based economy, what if nobody could afford to buy anything anymore? What would be the point of schools and education? What would be the point of anything if we were all meted the same reward for different exertions at work? What about free riders, those who sit back and let everyone else do the work? There are many questions and debates that go into this argument. This is the fundamental debate between capitalism and communism, or socialism. There have been volumes and libraries written to defend either side of the arguments we have covered in three pages. But these are the general ideas that follow these style of arguments. However, common sense and a little thinking can get you a long way in turning to the side of inequality and unequal pay and rewards.