Capitalism and the Value of Human Life

Gary North posted a brief article based on the following graph which sparked an interesting discussion on his website: This is a graph of Total Capacity Utilization, obtained from the FED's website, which is a description of the percentage of total possible output at which the economy is operating. Basically, if a factory is operating on all cylinders, cranking out as much product as it possibly can over a given time interval, capacity utilization is at 100%. If the factory is shut down, it is 0%. If only two of the three shifts are currently in operation, meaning that the factory is operating at full output 16 hours per day, and is idle 8 hours, capacity utilization is at 66.6%. Said another way, if the factory is capable of producing 100 widgets/day, but is only operating at 75 widgets/day, then capacity utilization is at 75%. Simple enough? Basically, the graph is a description of the employment of physical capital, the tools of production. It complements a description of unemployment, the employment of human capital, which looks like this: Obviously, the data here are plotted inversely, in that the first is a graph of employment and the second is unemployment, so you see spikes instead of dips during recessions (the areas highlighted with grey bars) in the second graph. But you are intelligent. You get the idea. During recessions capital is idled, leading to excess capacity and unemployment. During booms, capital is re-employed. By the way, unemployment of capital (and people) is the best way to judge recession. Next time the egg-heads are debating whether or not the country is in recession, check this graph. It's a no-brainer. What Gary North found interesting about this graph (and which I probably wouldn't have noticed) is that peak capacity utilization (the highest capacity utilization observed between recessions) is in a systematic, 40-year downtrend. The peaks get systematically lower and lower. This is to say that "excess capacity," i.e., the productive capacity still not being used at peak employment, is systematically increasing. There is increasing physical overcapacity for production in the United States. Why? Very interesting. Intrepid economical sleuth that I am, naturally I joined in. And I think I have the answer. I opined that this was the result of an ever increasing ratio of capital to labor. The perpetual accumulation of capital is a natural effect of the wealth building propensity of a capitalist system. Ever more and better tools of production are being placed at the hands of labor, increasing productive capacity. This is how capitalist nations become wealthier. A wonderful side effect of this phenomenon, however, is that as ever more capital is used to multiply the output of human effort, and the ratio of capital to humans increases, humans become relatively more valuable, both as a result of higher individual productivity and as the limiting agent in the productive process. As humans become more scarce in relation to capital, they become relatively more valuable. So, as the value of humans increases over time, it becomes increasingly preferrable for capital to sit idle than for humans to sit idle, or to become injured. What we are seeing in the graph is, I think, a reflection of human considerations taking priority over maximizing the output of physical capital as a simple result of humans being rendered more valuable by a capitalist system. For people who think much about economics, this is probably not an entirely unfamiliar phenomenon. We've all heard about the dreadful working conditions during the Industrial Revolution. Why were they so dreadful? Because industrializing economies were in the early stages of capital accumulation. Capital was scarce, labor plentiful, which meant that capital got priority. Machines and factories were kept in operation despite human costs that we would find unacceptable today. Did fingers get chewed off in the power looms? So what? Fingers were cheap. It was easy enough to just grab some other kid off the street and set him to work. But the loom had to stay in operation. It was expensive, and it was spinning money. A lot as changed for the better since then, and a lot of people, especially the unions, would like you to believe that it was government action and collective bargaining that improved conditions. Not true. Over time, as capital accumulates and becomes more plentiful, labor becomes increasingly limiting. Wages must increase as employers bid for workers. Entrepreneurship increases output through technological advancement as labor becomes limiting. Higher productivity allows workers to earn their subsistence more readily, further increasing their bargaining power (and leisure time!). In short, as capitalism got rolling, it made humans more valuable. And since one of the other great strengths of free-markets is the enforcement of accurate pricing, they were treated like it. The union's would have gotten nowhere if business didn't already know that they could still make a profit with higher salaries and better working conditions. Without that simple fact, higher wages and higher costs would have put them out of business. (Those annoying physical laws of the universe, always intruding...) Likewise today, most of this kind of labor is done in Asia. Why? Because in a macabre sort of calculation, Asian fingers are cheaper than Western fingers, Asian time cheaper than Western time, Asian sweat cheaper than Western sweat. Yes, yes, there is currency and market manipulation. I won't deny that; but even accounting for this there is still a vast differential in the capital to labor ratios which is responsible for a lot of what has happened. We can also actually see this in more everyday occurences, an excellent example of which was pointed out by another reader. He reports how, back in 1968, he and many other highly educated men made a living producing the punch-card programs for a university computer with less computing power than a modern desktop computer! The men, as in multiple people, were perpetually busy feeding programs into the computer to ensure that it was never idle! It was an expensive machine, after all! What a waste to leave a computer sitting idle! Today, of course, most computers spend most of their time sitting idle, waiting for a human to give them a command. Why? Because computers are cheap! Now computers are used to maximize the output of people, not the other way around. Even common secretaries almost universally have a computer at their own personal disposal nowadays. At a cost of only maybe ~$500/yr, it is a miniscule fraction of a secretary's personal salary of maybe ~$20k/yr. Why wouldn't you buy such a cheap tool to vastly increase a worker's output? You'd be insane not to. And why would you worry that such a tool spent some of its time idle? You'd worry more about the idle secretary who was costing you 40 times more money! This little metric is what makes the graph that puzzled Gary North so inspiring. Today, most factories and chemical plants (like the one I work at) still operate 24 hours a day. They are far more expensive than a computer, and too expensive to remain idle. Yet there is the graph, showing decreasing capacity utilization, probably not unlike what a graph of computer usage might have looked like had such data been recorded. How is it that entire factories and chemical plants experience such a phenomenon? One word: safety. Factories and chemical plants are dangerous places, and humans really have become that much more valuable than 40 years ago. I can vouch for it: my own plant is obsessed with safety. It costs too much for someone to get injured. The company would rather see somewhat lower overall productivity than time lost to injury and money lost to medical bills. I haven't been there that long, but the old timers inform me that it wasn't always that way. At one time, things were done a lot less carefully. Back then, an injury would get you taped up and sent back to work. Nowadays, it will get you fired. It is also obssessed with chemical spills. It would rather see lower efficiency than chemicals released into the environment or disruptive accidents. Again, human priorities taking precedence over maximizing output. I suppose a cynic could argue that this is just a matter of higher medical and litigation costs, environmentalism, regulations and the like, and isn't really something to be proud of. There probably is some of that. No doubt a fair amount of lost productivity can be attributed to frivolous concerns. But at the same time, the number one priority of an economy is supposed to be about serving human interest, e.g. satisfying consumer demand, and it also says a lot that we can afford such "indulgences." Indeed, it says a lot that we can afford to worry about things like safe working conditions and polluting our environment. A lot of places can't. We have come a long way, though some of us don't appreciate it much and don't want to admit it. We should also keep this effect in mind as we watch our government squander away our accumulated capital on its cursed "plans" and "initiatives." Especially as it is doing now, maximizing present consumption at the expense of accumulated capital. This is utterly foolish and self-destructive. We are consuming our own futures, as those of you who planned on retiring on your 401(k)'s have likely experienced more literally than you would like. The excesses of the past were just that -- excesses. They should be left behind, not preserved at all costs as we are doing now. The folks that should be most mindful of this (and are least likely to be) are those who think things like working conditions and environmental problems are important. As the capital melts away, I would expect at some point the effect to run in reverse. And one can expect that even legitimate human social concerns like these will eventually take a backseat to keeping one's belly full if this behavior continues. It may have already gone too far. I'd hate to think what it would be like to see that graph turn back upward. But on the basis of what is going on today, I have a feeling it will...

Conspiracy: A Biblical View

I recently finished reading Gary North's Conspiracy: A Biblical View. I had known about this book for some time, but for whatever reason hadn't found it sufficiently interesting a topic to read. After all, there are an awful lot of things out there demanding attention right now, and I just haven't had the time for reading much recently. I have a whole pile of books that I have intended to read sitting around gathering dust, or whatever it is that e-books gather when they are not in use, and this topic was certainly not one that was screaming for attention considering the present economic situation. But enough of that. So what did I think? First of all, let me say that I am not predisposed or even mildly sympathetic to the view that there are about three guys or some secret society that runs the world from the shadows. This point of view really grates on me. I get very tired of the infantile thesis that Hitler or Stalin or Mao or whoever ruined Germany, Russia, China, mankind, the 20th century, or fill-in-the-blank all by his lonesome self. No single human being can accomplish a feat this large without a considerable amount of help! These kinds of statements deny the culpability of the innumerable guilty parties that helped these leaders in their gruesome tasks, or otherwise stood by and allowed it to happen. They also ignore the fact that for anyone to attain the kind of political power that these men undeniably had, there must be a very sizable population that was sympathetic to their professed ideals, at least for a time. Likewise, if there really are a handful of sinister people operating from the shadows to accomplish all the evils of this world, this is only made possible by a compliant population. Not a knowing population necessarily, but at least one that "goes along with the plan." But surely people have minds of their own, or at least ought to be held accountable for their own actions? If the "conspiracy" is guilty of evil, this would imply that we ourselves are guilty of evil, for it is we who carry out their will. Are we questioning the actions we are asked to undertake? Do we bother to ask whether what we are doing is evil? If we are not, or worse, we ask, answer, and do anyway, then who is really to blame? In short, such a view of history is simply ludicrous, and is in my opinion an attempt by certain parties to avoid blame, or to avoid having to consider the possibility that humanity as a whole is capable of such evil. It is easier to shift all of the blame onto a single person, preferably a dead person for whom it is widely acceptable to publicly condemn and is incapable of defending himself. But it is not rational. This is why I have taken the cultural view of history. It is not possible for a single man, or even a few, to control a vast population which is diametrically opposed to such rule. Government necessarily is a product of culture. On the other hand, our very own conspiracy theorist Ben can point to many events which clearly show acts of duplicity on the part of the ruling class towards the ruled. There is undeniably a great deal of shuck-and-jive that goes on in the world of politics, and an awful lot of instances of voters manifestly not getting what they asked for. So who's really in charge here? Somebody's got to be making these decisions, and it sure as heck isn't "We the People." If you've been paying attention to this blog for some time, you've seen an ongoing debate between the two of us over precisely this point. After reading this little book, I'd have to say that the debate is officially over. It seems that we both had a little bit right (OK, so maybe Ben had a bit more than I did), but neither of us knew the half of it. At any rate, I'm surrendering my position. I agree with Gary and Ben: it really is a conspiracy. But there's a lot more to conspiracies than you might think. I was pretty amazed how similar a lot of what we had been thinking was to some of the central ideas of this book. It is true that I read a lot of Gary North's stuff, but I tend to avoid things like this. I usually stick to his economic and religious writings. Maybe its just that his thinking has influenced me to such a degree that I have basically shuffled down paths of thought that would lead more or less to a lot of the ideas in this book. I also encountered one of the key ideas in a quote from R. J. Rushdoony that Gary uses frequently, which I used awhile back. But Ben? Actually, the Rushdoony quote is a good place to start:

The important question to ask is this: What makes a conspiracy work? Let us suppose that a number of us conspired together to turn the United States into a monarchy, and ourselves into its nobility; let us further suppose that we could command millions from our own to achieve this goal. Or, let us suppose that, with equal numbers and money we conspired to enforce Hindu vegetarianism on the country. In either case, we would have then, not a conspiracy, but a joke. A successful conspiracy is one which is so in tune with the faith and aspirations of its day that it offers to men the fulfilment of the ideals of the age. It is an illusion to believe that dangerous or successful conspiracies represent no more than a small, hidden circle of diabolical men who are manipulating the world into ruin. Such groups often exist, but they only exist and succeed because their plan and hope is closely tied to the public dream and the faith of the age. If the threat were only from small circles of hidden men, then our problem would be easy. Then, as Burton Blumert has observed, "if we only unmasked the conspiracy, all our problems would be solved, but if the trouble is in all of us, then we really are in trouble."

And that first question is what this book is about: what makes a conspiracy work. Of course, it is a pretty short book, and provides mostly just an outline. If you are looking for a lot of specifics, this isn't the book for you. But it might be a good place to start, as it has an excellent bibliography. This book is more for a person who might be straddling the fence, who's a bit skeptical of both sides, the mainstream and the kooks, thinks there might be a bit more going on than makes the evening news, there might be a bit of manipulation going on, but has little patience for theories about space aliens killing JFK (sound familiar?) A lot of space is devoted to the broader, shared ideology of the "conspiracies," the main one of which he terms the "Establishment," (yes, that Establishment, the one that controls the USA) and just how they manipulate public opinion, a necessary requisite for controlling the public, rather than the public controlling the conspirators. A lot of it will sound familiar: control of the mainstream media outlets, control of academia, etc. But a good bit is commonsensical stuff that I never would have thought of: passive suppression of truthful conspiracy theories themselves as "kooky," even as the ideas promoted by the conspirators are far and away more bizarre. The conspirators use a lot of human-self censorship and irrationality to accomplish their goals (controlling public education helps in this regard...), and silence debate using such means far more than they actually bother to combat their rivals head on. But be forewarned: if you're not on board with the whole Christianity thing, first of all, you really ought to reconsider, but secondly, as the title suggests, the book takes a distinctly Christian view of things. If you are easily off-put by the suggestion that God has much to do with things that happen in real life, this book is going to get under your skin. Gary takes the view that all conspiracies are evil and necessarily against God's chosen order. He explicitly says that:

Western Civilization's moral foundations and especially legal foundations were constructed in terms of biblical morality and biblical law. Thus, the conspirators are at war against Western Civilization.

So, if you're an atheist, better keep an open mind (or find another book. But I'm telling you, you're missing out...) The last part is devoted to combating the conspiracy. Believe it or not, Gary has a lot of confidence that the conspiracy will eventually be broken. Maybe that's because he's taken the view that they are going up against God. I suppose smart money would naturally be on The Almighty. But he has a lot of regular old boring arguments to make his case, too, though this was written sometime before the present financial crisis. Interestingly, he even predicts in this book, which is fairly old, that there will inevitably be a severe financial crisis which will force the population to "choose sides," and though he isn't certain the good guys win this time around, he seems to heavily favor them. This is on the basis of the "conservative uprising" that has been occurring over the last few decades, throwing a lot of unwanted light on the institutions controlled by the Establishment, even if they don't necessarily have their own act all that together. Of course, he's got an unfair advantage making such a prediction, being a fantastic economist in his own right, but I still find it impressive that he was predicting these kinds of things in the '90's. He terms the solution "education," but to me, it sounds more like simple rejection of the conspirators. As he even explains, understanding isn't really necessary; just a simple distaste for what the conspirators have to say and want to do, and a willingness to give them the boot. And since he is of the opinion that the conspiracy is inherently anti-God, the solution is simply understanding and acceptance of God's order in their lives. Knowledge or even awareness of the machinations of the conspirators is really beside the point. As the Rushdoony quote implies, the conspiracy needs public approval of its plans. The conspiracy is only in charge of what the public wants to do. If the public isn't game, and can't be manipulated into playing the way the conspirators would like, well, it's all over. I would highly recommend this little book to anybody with any interest whatsoever in the topics discussed on this blog. No, there are no monetary statistics, and not much Austrian theory either, but I have a feeling most folks would rather tune in for politics anyway. And if you really want to "do something" about the present situation, I can't think of a better source. So, what are you waiting for? Check it out!

Asking the Wrong Questions

Once again, Gary North provides an insightful item, which I located on the web by googling it. It's a good read:

How did we go so far off the tracks? He offered a few nuggets that seemed to explain the credit bubble. To reiterate, there really was no adult supervision. The guys putting these packages together certainly had some sense that they were crazy but nobody said stop. Government regulators being paid $100k couldn't tell guys making $20 million to take a hike. The senior managers loved the money flows. Cubicles--millions of cubicles--were staffed with engineers, chemists, physicists, and mathematicians from the best colleges in the country with no knowledge of the history of markets, fat tails, and past human follies, only how to financially engineer.

This kind of commentary has the insight of somebody fairly intimate with the situation, but it also annoys the heck out of me, because it completely misses the point. Yes, a lot of "illegal" stuff went on, and "rules" were broken. Common sense got checked at the door and a lot of stupid things were done. Really?! You don't say... Newsflash everyone: politicians are crooks, regulators frequently fall down on the job, and Wall Streeters are out to make lots and lots of money any way they can. Who would have ever guessed? Not to mention the fact that the guys who write the rules, a.k.a. our illustrious politicians, were doing a full court press to get more money into subprime by strongarming lenders into lending to preferred demographics and passing out government guarantees on Fannie and Freddie debt. And the answer is supposed to be more regulation? So there will be more rules to ignore next time? Adult supervision? Where are the adults? I don't see any. All this garbage completely misses the point. We should not be asking how this crisis was allowed to occur. I should think that would be obvious at this point, and that there is really nothing that anybody can do about natural human tendencies, except beat on some humans, which isn't allowed and probably wouldn't work anyway, though it might releive some tension for a little while. We should be asking how it was able to occur. Such horrible investments as is guy is describing should have come unglued long, long, ago, yet the housing bubble has been 20 years in the making. Ask any newbie forex trader how long a 10,000x position is likely to look like a smart bet, even if it was one at the time it was made. How about the odds of several million such positions lasting for years? The entire mess was dependent on a continuous inflow of money, provided courtesy of the Federal Reserve. It could not have occurred otherwise. Rules, regulations, and depending on man's supposed innate goodness to keep markets working does not work. Actually losing money when you screw up, at about the time that you screw up or soon after, and not being able to foist your losses on others works only slightly better, but at least it is something. So far it is the best we've got. Providing a continual stream of new money into markets and blanket government guarantees isn't helpful. To be fair, later on in the letter the issue of excess money is addressed tangentially:

The money overwhelmed the system. It was like when the computers gained consciousness in Terminator. The money pushed all regulations aside. It bought deregulation, politicians, and anything else necessary to keep the money machine growing. Nobody dared yell stop because so damned much money was being made.

But this still misses the point. Which is: NO FED, NO EXPANDING MONEY SUPPLY, NO PROBLEM. Do we really want the government deciding what kinds of investments we are allowed to make, and enforcing rules willy-nilly? Do we really want politicians in charge of the money supply? It hasn't worked yet. I do not see why it ever should. Maybe its time to try something new. Or something old, rather... Gold, anyone?

Gary's Column Has Wings

I posted a brief comment (and a recommendation that you READ!) a column by Gary North which first appeared as a regular post on his website for subscribers only (where I got to read it first! hahaha!), and then later appeared on LRC, at which time I commented on it since it would be available for your viewing pleasure. It was then commented on by Vox Day, and now it has moved to one of the daily columns on Mises.org. The reason this particular essay has legs is BECAUSE IT IS IMPORTANT! What we are seeing probably is just as big as he says that it is. When historians are writing their history books two centuries from now, they will say that American power began its final collapse in October, 2008, just as Soviet communism began its collapse with the fall of the Berlin wall. It was the event that revealed the Empire had no clothes. The ability and willingness to project overwhelming force held the Soviet bloc together. The American financial system is what is holding the "American empire" together, such as it is. This is the means by which America funds its military operations, projects power across the globe, and maintains domestic tranquility between some very unhappily wed countrymen. Without it, the American government is impotent, both at home and abroad. Similarly, the USSR had been in dire financial straits prior to the civil unrest which brought it down. I have a Russian friend whose mother's factory had been paying her in alarm clocks in the months prior to collapse, because the domestic economy had become something of a joke. Nobody took the financial system seriously anymore. It is difficult for a government to project power when money and finance has become a laughingstock. How does one pay its soldiers and police? How does one ensure that they don't pick up "side work" to help pay the bills? I think this is one of the major problems Mexico has, and it seems to be getting worse lately. The money and lifestyle available from illicit activities simply overwhelms what legally legitimate activities can provide. The mismanagement and dysfunction with which their domestic affairs are handled has ensured that their economy cannot offer up substantial legitimate opportunity, while at the same time ensuring that the domestic government hasn't the resources to effectively dissuade illegal activity. Coupled with a northern neighbor whose citizens can afford to pay a fortune for certain substances that for some reason it is also intent on banning, and you have a recipe for, well, Mexico. This is an important lesson: the ability of a government to project power/maintain order is at its most fundamental level based upon its willingness to refrain from using that power, which entails tolerating a bit of liberty and that other players acquire a bit of power in their own right. Without a bit of liberty, economies simply don't function. When a government tries to control everything, in effect it is able to control nothing. In other words, for a society to function, it has to embrace a certain level of Austrian theory. This is because, simply, Austrian theory is true. Acting on what is true results in positive outcomes in a world governed by universal laws, both physical and ethical. "The truth shall set you free," as a very wise Man once said, at least to what is possible within the confines of this physical existence. An economist, politician, or civilization can no more do just as one pleases than an engineer can design an aircraft in the shape of a cube simply because he desires it. An engineer that ignores the truth of physical law will forever remain on the ground. An engineer that submits to them and takes them into account may one day fly among the clouds. So it is with civilizations. China appears to have learned this lesson to some degree, probably from the example of the USSR. America knew this lesson once, and seems to have forgotten. Of course, said future historians probably still won't understand economics, certainly not as well as Gary North does, and the collapse will just go down as the end of an excessively free financial system that was allowed to rum amok. At least that is how history has treated other such occurrences, as we perpetually hear the Great Depression being explained and we are currently being force-fed about the present crisis. Some truth we simply never accept.

Gary North Blasts American Banking Fascism

Gary North gives fantastic perspective to the failure of fascist banking in America:

The American conspirators have lost the one thing that they thought they had: control over the nation and the nation's finances by means of the fractional reserve banking system. That system is coming unglued, just as Ludwig von Mises said it would, just as Murray Rothbard said it would, and just as those other Austrian economists who understand the enormous weakness of the fractional reserve system had said would eventually take place.

I wonder sometimes if there is anything coherent remaining in what is generally called the conservative movement. Do any of these people have a clue as to what has been taking place? We are seeing the disintegration of the fractional reserve banking system all over the world. It is being held together by bailouts, which are the government equivalent of bailing wire and chewing gum.

Basically, the economic laws of the universe are having their way with the backside of central banking. This is not the failure of the free market, it is the triumph of the free market over the fascist, government-directed system that has been suffocating it for nearly a century. The scrambling of central bankers and politicians all over the world is an attempt to sustain the conspiracy and the power it gives them just a little while longer. It won't work. Great, great read. Gary North is one of the select few who saw the whole crisis coming and predicted it almost to the day. Read everything you can find by him. It seems like very day I'm posting another "Must Read." This is another. I highly recommend you go read it.