MCViewPoint

Opinion from a Libertarian ViewPoint

Posts Tagged ‘division of labor’

COVID Lockdowns Crippled the Division of Labor, Setting the Stage for Civil Unrest | Mises Wire

Posted by M. C. on June 20, 2020

We only have three options for getting what we want: we can produce it, we can take from somebody who has produced it, or we can exchange peacefully with somebody who has produced it. The third option is the division of labor, and it is the only one that involves peaceful cooperation with others. It is also the only option that sustains civilization. Looting, vandalism, assault, and arson are regressive—they are not a means to advance society. They are the unraveling of society and the social harmony brought about by the division of labor.

https://mises.org/wire/covid-lockdowns-crippled-division-labor-setting-stage-civil-unrest?utm_source=Mises+Institute+Subscriptions&utm_campaign=8dfb5f87ae-EMAIL_CAMPAIGN_9_21_2018_9_59_COPY_01&utm_medium=email&utm_term=0_8b52b2e1c0-8dfb5f87ae-228343965

In his podcast, Dave Smith has likened the lockdowns to gasoline and the murder of George Floyd to a spark.

But why were the lockdowns fuel for social unrest? One of the reasons the lockdowns paved the way for social unrest is that they led to a widespread breakdown in the division of labor. This could only result in more conflict and social unrest.

Economist Ludwig von Mises has explained why this is so. In Human Action, Mises presents the division of labor as more than a purely economic concept. Although he certainly expounds the increased productivity attributable to the division of labor, he also heralds it as civilization itself. It is social cooperation and mutuality. He presents it in opposition to conflict and violence. The division of labor is predicated on and also results in peaceful relations between individuals.

Here, I want to discuss the gasoline, and not the spark. Mises.org writers have discussed the spark and the related issues of institutional problems with police departments, police brutality, a breakdown in trust in the police, and police militarization.

What Is the Division of Labor?

The division of labor is just what it sounds like: one person does one job while another person does a different job. In a market economy, these jobs are not assigned randomly, but are purposefully chosen by each individual according to his or her own skills and values. Instead of trying to produce everything we want to consume on our own, we produce one good and offer it in exchange for a variety of goods we prefer.

The ability to consume a larger variety of goods is not the only benefit of the division of labor. Total production increases enormously, such that each individual who participates in the division of labor enjoys a massive increase in his standard of living. The division of labor allows us to emerge from bare subsistence and flourish as a civilization, producing art, writing philosophy, celebrating holidays, and exploring space. These things are impossible for man in economic isolation.

One of the greatest laws of economics is the law of association, which Mises proves mathematically (uncharacteristically) in Human Action. The law of association shows that everyone who participates in the division of labor gains as a result. No one is excluded from this opportunity. Thus,

The law of association makes us comprehend the tendencies which resulted in the progressive intensification of human cooperation. We conceive what incentive induced people not to consider themselves simply as rivals in a struggle for the appropriation of the limited supply of means of subsistence made available by nature. We realize what has impelled them and permanently impels them to consort with one another for the sake of cooperation. Every step forward on the way to a more developed mode of the division of labor serves the interests of all participants. (p. 159)

Unraveling the Division of Labor

The undoing of the division of labor and the social cooperation that it both requires and entails is social conflict.

The market economy involves peaceful cooperation. It bursts asunder when the citizens turn into warriors and, instead of exchanging commodities and services, fight one another. (p. 817)

During the months of government-imposed lockdowns, everybody was prevented from participating in the division of labor as they were accustomed to. Even those who kept their jobs could not exchange goods with those who did not keep their jobs. The entire social nexus was reduced to a small list of government-defined “essential” services. The increase in unemployment is really only a part of the picture of the economic harm caused by the lockdowns. Everybody who relied on the goods and services produced by the so-called nonessential businesses was harmed: consumers, employees, and proximate businesses in the structure of production alike.

Man shall not live by government-defined essential services alone, however. For a short time, and where possible, citizens resorted to black markets and self-sufficiency (which, as we have seen, is hardly sufficient). But a spark and the cover of protests in the streets gave some a chance to acquire goods by theft. These opportunists are aided by additional mayhem like vandalism, violent assault, and arson. Unfortunately, both insufficient and over-the-top responses by police also add to the mayhem, giving violent rioters more opportunity and also poorly reasoned, two-wrongs-make-a-right self-justification for their aggression.

We only have three options for getting what we want: we can produce it, we can take from somebody who has produced it, or we can exchange peacefully with somebody who has produced it. The third option is the division of labor, and it is the only one that involves peaceful cooperation with others. It is also the only option that sustains civilization. Looting, vandalism, assault, and arson are regressive—they are not a means to advance society. They are the unraveling of society and the social harmony brought about by the division of labor.

Restoring Social Harmony

But even the opportunistic looters should want the mayhem to end and the peaceful division of labor to resume, according to Mises:

Seen from the point of view of the individual, society is the great means for the attainment of all his ends. The preservation of society is an essential condition of any plans an individual may want to realize by any action whatever. Even the refractory delinquent who fails to adjust his conduct to the requirements of life within the societal system of cooperation does not want to miss any of the advantages derived from the division of labor. He does not consciously aim at the destruction of society. He wants to lay his hands on a greater portion of the jointly produced wealth than the social order assigns to him. He would feel miserable if antisocial behavior were to become universal and its inevitable outcome, the return to primitive indigence, resulted. (p. 164, emphasis added)

Peace can only resume when entrepreneurs find it profitable to reopen their businesses. Government lockdowns and violent mobs are data for the entrepreneur’s decision-making process. Mises warns that it can get so bad that civilization crumbles:

If apart from the market and outside of the market there is robbing and plundering, these facts are a datum for the market. The actors must take into account the fact that they are threatened by murderers and robbers. If killing and robbing become so prevalent that any production appears useless, it may finally happen that productive work ceases and mankind plunges into a state of war of every man against every other man. (p. 646)

This, then, is the difficulty. Peace and cooperation are both a prerequisite and an outcome of the division of labor. Entrepreneurs need to be assured that laws against looting, murder, and property destruction will be enforced to such an extent that they can reopen their businesses and rehire employees.

But this leads to yet another problem: when the police themselves are guilty of mishandling justice and sometimes even instigating violence, all trust breaks down and businesses may simply leave the area.

Mises had some comments about the issues police departments have in properly carrying out their jobs, and they have to do with the lack of economic calculation:

Success or failure of a police department’s activities cannot be ascertained according to the arithmetical procedures of profit-seeking business. No accountant can establish whether or not a police department or one of its subdivisions has succeeded. (p. 305)

When I posted this quote to social media recently, somebody asked what Mises proposed as a solution to this problem. The quote is taken from a discussion about the profit and loss mechanism of the market, which is contrasted with bureaucratic management. Mises’s guidance was that citizens and government officials should keep a close eye on budgets to make sure that government services are provided in the best possible proportions and in the best ways. Mises’s greatest student, Murray Rothbard, would later provide a solution that allows security production to be regulated by the same profit and loss system of the market economy.

 

Be seeing you

Posted in Uncategorized | Tagged: , , | Leave a Comment »

With Bailouts, Governments Are the Big Winners | Mises Wire

Posted by M. C. on March 26, 2020

…but above all with loan guarantees provided by the state-owned bank KfW. This means that the state makes the taxpayer responsible for squaring the bill for any loan default in an emergency; the taxpayer must once again serve as a credit default insurer.

Whether the unsecured paper money system survives the current crisis depends significantly on whether (i) the state’s credit guarantees succeed in warding off a wave of bankruptcies and (ii) investors regain confidence in the system and credit markets return to normal. There should be no doubt, however, that a life-threatening situation has arisen for the unbacked monetary system. The probability of things going wrong this time is not zero.

Every crisis caused by the unbacked paper money system expands the power of states over economic and social life, and unfortunately, once the state has expanded its power, its expansion will not be reversed.

https://mises.org/wire/bailouts-governments-are-big-winners?utm_source=Mises+Institute+Subscriptions&utm_campaign=991626415a-EMAIL_CAMPAIGN_9_21_2018_9_59_COPY_01&utm_medium=email&utm_term=0_8b52b2e1c0-991626415a-228343965

The growing concerns about the consequences of the COVID-19 coronavirus have led to a global demand and supply shock: the demand for goods and services has collapsed, and because international production and value chains are now also disrupted, output slows down, and its former level can no longer be maintained.

The demand and supply shock brings the division of labor in the individual countries and thus internationally to a standstill. The damage is colossal and threatening. The fine division of labor is the engine that drives the economic prosperity of the world’s population. It cannot be switched off with impunity. If the shutdown continues, supply shortages of vital goods will be inevitable for people around the world.

Above all, however, the unbacked paper money system, which has been established worldwide, has been severely shaken by the slump in production and incomes, and this could ultimately have fatal consequences for the global economy; price action in financial markets has already given us a taste of this (as the figure below shows). Whether in the USA, Europe, Asia, or Latin America, unbacked paper money systems are found everywhere.

poll1

Unbacked Paper Money Systems

In an unbacked paper money system, the central bank, in close cooperation with the commercial banks, expands the money supply by extending loans. It amounts to an increase in the money supply out of thin air (ex nihilo): new money is put into circulation that is not covered by “real savings.” Economists are only too well aware that such an unfunded monetary system inevitably causes crises.

The unbacked paper money system cannot stand one thing: a drop in income, a drop in the price of goods. This is because then the overindebtedness of companies, households, and, above all, states comes to light—the whole paper money swindle is exposed. And that is the reason why the states are now intervening more heavily than ever (“all in”) with their central banks in the economic and societal system.

Interest rates have been cut as far as possible to provide relief to borrowers and keep the debt pyramid from collapsing. Financially ailing states and banks have access to unlimited cash injections from the central bank if necessary. However, unlike in the financial and economic crisis of 2008/2009, the private sector is now also on fire: companies and private households are threatened by bankruptcy.

Most companies are indebted; they have to pay interest and principal on an ongoing basis. If sales collapse, firms no longer earn anything and run into financial difficulties. If companies become insolvent, jobs will be lost, and the storm will ultimately reach private households, the consumers, who will then also have no money to service their debts.

This is when banks step on the “credit brake”: they are no longer willing or able to prop up shaky borrowers, let alone lend them new money. However, if the inflow of new loans to the national economy dries up, basically all debtors will end up in a tight spot. They cannot repay their loans, and they can also no longer get new loans that could replace their liabilities coming due.

Loan defaults are increasing. The credit supply is shrinking—and exacerbating the bankruptcy problem. Banks are experiencing credit defaults that deplete their equity, and they, too, are experiencing difficulties. In other words: The “credit boom” that drove economies and fueled the debt incentive is bursting. The boom is turning into a bust.

Banking “Bailout”

In Germany, for instance, there has already been a reaction to “master” the crisis, with an expansion of short-time work benefits and tax deferrals, but above all with loan guarantees provided by the state-owned bank KfW. This means that the state makes the taxpayer responsible for squaring the bill for any loan default in an emergency; the taxpayer must once again serve as a credit default insurer.

If the placebo pill works, trust returns, stumbling debtors get new bank loans, and loan defaults remain low, the taxpayer gets off lightly. But if the maneuver fails and loan defaults occur, a lot of money will be needed. The state will have to incur new debt, which will then presumably be bought up by the European Central Bank (ECB). This creates new central bank money.

And the new money is paid out to the banks directly: on their balance sheets, credit claims are exchanged for balances with the central bank. It’s pretty clear: it will be those banks in particular that will be protected by the state guarantees. The banks get this insurance virtually free of charge, on top of the collateral that borrowers have already given them, and which banks can use. So it will be the taxpayer who will have to shoulder the bill.

Guaranteeing Credit

Things will be less pleasant for borrowers. Struggling companies can be saved from insolvency if and when they get new loans thanks to state guarantees. But their debt is increasing: either the interest and principal payments are temporarily suspended and capitalized—that is, they are added to the outstanding loan amount to be serviced subsequently—or the new loans are used to pay the debt service of the old loans.

At this point, it should be borne in mind that many companies will most likely suffer a permanent loss of sales due to the crisis: even if the demand for goods should normalize again at some point, the lost sales will not be recuperated. As a result, firms’ debt-to-earning power ratio will deteriorate and their cost of capital will increase (other things being equal).

In December 2019, German banks had credit claims of more than €4,000 billion in their balance sheets. If the banks receive a loan guarantee from the state, which, let’s say, secures 80 percent of the loan claims, the guarantees of €553 billion announced by the KFW would result in bank loans of a good €690 billion, i.e., collateral for almost 17 percent of the outstanding bank loans.

In the euro area as a whole, outstanding bank loans amounted to a massive €18,591 billion at the end of last year. If euro governments were to follow the German credit guarantee example, they would have to accept considerable contingent liabilities for their households. This, in turn, will presumably drastically lower their credit rating on the financial markets—especially since all countries are already overstretched financially.

Helicopter Money

It would not be surprising if sooner or later people called for the issuance of helicopter money. The US administration seems to be moving in this direction already: on March 17, US Treasury secretary Steve Mnuchin announced that the US wants to send checks to its citizens by mail, something to the amount of $1,000 per person. You may argue that formally this is a tax refund. But as all the US dollars will be created out of thin air, the procedure comes relatively close to a form of helicopter US dollar issuance.

From a technical point of view, it is indeed quite easy to issue helicopter money: every account holder receives a “monetary gift” from the central bank and can use it to go shopping or service his/her outstanding debts. However, the issuance of helicopter money is difficult to control politically: it wouldn’t take long, and the central bank would be drowning in requests for monetary gifts.

Be that as it may, the issuance of helicopter money is very alluring, especially in a situation in which the debt pyramid threatens to collapse as recession-depression looms on the horizon and people strongly believe that inflation of goods prices is a blessing and the “least evil” policy. Under these conditions, helicopter money will likely be distributed at some point to stimulate consumption and ease debtors’ financial strain.

Almighty State

Whether the unsecured paper money system survives the current crisis depends significantly on whether (i) the state’s credit guarantees succeed in warding off a wave of bankruptcies and (ii) investors regain confidence in the system and credit markets return to normal. There should be no doubt, however, that a life-threatening situation has arisen for the unbacked monetary system. The probability of things going wrong this time is not zero.

But a breakdown is not yet inevitable. The states and their central banks can still pull “new rabbits out of the hat.” For example, faltering banks could be recapitalized by countries injecting new money that they receive from the ECB as equity capital; or states could finance themselves and consumers as well as firms with the issuance of helicopter money. One thing is pretty certain: without government intervention, without their market manipulations, the unbacked money system could no longer be maintained.

And that should make citizens extremely concerned indeed. Crises regularly lead to an increase in government power. The causes of crises are habitually mis- and reinterpreted: the free market has failed, it will be said, and now only the state can help—even though the state and its central bank are the main culprits causing financial and economic crises.

They are the ones who started and encouraged the debt economy with their unbacked paper money system, a system that sooner or later must collapse. This time, the trigger of the crisis is the concern about the consequences of the coronavirus. How aggressively the states intervene in the global market and societal system also plays an important role; that is, the extent to which states seize the opportunity to expand their power.

Serfdom

The more apparent it becomes that the unbacked monetary system does not work—that it causes crises—the higher is the tendency for people to turn a blind eye to this very truth. The more uninhibitedly collectivist-socialist measures are reinterpreted as “rescue policies” on the part of politicians and mainstream economists, the more such interventions are welcomed by the general public and approved.

Every crisis caused by the unbacked paper money system expands the power of states over economic and social life, and unfortunately, once the state has expanded its power, its expansion will not be reversed. As a result, the economy will become increasingly entangled with state socialist policies over time as the state and its central bank fight the crisis whose seeds they planted.

If people do not want to turn away from the unbacked paper money system, it is predictable that sooner or later everything will be subordinated to one goal: to strengthen the state—to provide it with ever more powers and with unlimited financial resources. And this means that the free markets (or what little is left of them), and thus also civil and entrepreneurial freedoms, will be stifled more and more.

Given current events, it is therefore far from exaggerated to say that without a “bailout” of the system, a global depression is inevitable. But with a bailout comes serfdom.

Be seeing you

 

 

Posted in Uncategorized | Tagged: , , , | Leave a Comment »