Prosperity, stability, security – these are things people generally desire. Obama did a great job alluding to these ends in his State of the Union speech a couple of days ago. Unfortunately, a disastrous problem arises when you choose the wrong means to achieve desired ends. The mistake of choosing the wrong means occurs when people have the wrong ideas about the cause and effect relationship between the means and ends. Obama’s economic agenda is a perfect example of this problem. His State of the Union address typifies this problem of using the wrong means to achieve the stated ends of prosperity and economic recovery. Most of what he talked about made apparent his ignorance of economic calculation. Obama is completely lost on the role of profits and losses in the economy.
On Economic Calculation:
Obama talked a lot about manufacturing jobs and high-tech jobs. He apparently wants to see more of these in the US. I question this goal of his. Who is Obama to decide that America is the best (most efficient) place to manufacture cars? Who is Obama to decide that America is the best place to assemble iPhones? What rational basis does this man have to decide that America should manufacture more goods within its borders instead of importing them?
The truth is that he has absolutely no rational basis for these assertions. Only entrepreneurs guided by profit and loss can make resource efficient decisions regarding the technicalities of production such as where a good should be produced. Entrepreneurs seeking the highest possible return on their investment guide resources into their most efficient uses. This is not to argue that cars or iPhones emphatically shouldn’t be produced in the US. What this means is that no one can know this information outside the profit and loss framework of the market economy.
Obama also stated that he wanted to get Detroit-made cars onto the streets of Seoul. But what about the car manufacturing jobs in Korea!!! If Obama thinks America should produce a bunch of cars, why not Korea too? The inability of Obama to rationally answer this question should illustrate the unreasoned nature of his entire proposal to get more manufacturing jobs into the US. His agenda is nothing more than an appeal to the unexamined, popular opinions of the masses.
Additionally, Obama referenced the large supply of natural gas in the US and stated that his “administration will take every possible action to safely develop this energy.” Really? His administration is going to lead the way in natural gas development? This was just after he got done talking up his support for the innovation created by entrepreneurs. Why not let entrepreneurs on the free market, the people with real incentives to produce in a way that satisfies consumers, develop natural gas technology?
He then praised the government-funded research that resulted in the technology to extract the natural gas. This praise of government-funded research is, however, entirely misplaced. The resources put to use in researching that technology could not have been efficiently allocated. We know this because economic calculation is not present outside the profit and loss framework of the free market. Once again, the only people who can efficiently allocate resources are entrepreneurs. This is because they use profit and loss as their guide. If a good is profitable to produce, this indicates that consumers value that use of the resources more so than alternative uses of the resources. In this way, entrepreneurs searching for profit improve the material well-being of humanity.
An entrepreneur considering whether or not to produce something must consider all the costs associated with that production process. These costs include research and development. If he doesn’t think he can make more money than he puts into research, he won’t do the research and society will be better for it. Societal wealth is squandered in government research labs because they aren’t geared toward satisfying the real, demonstrated preferences of consumers. As is the case with all things green, government funding for research is allocated based on political considerations rather than considerations of consumer satisfaction and the betterment of mankind. The private-public partnership Obama gives such high praise is a nightmare of waste and resource misallocation. This type of partnership between the state and private enterprise is more commonly known as fascism.
The building projects Obama wants to engage in suffer from the same problem of economic calculation. The government has no way of knowing whether or not their building projects add or subtract to societal wealth. The result is that they bid away scarce resources from entrepreneurs who actually satisfy the demonstrated preferences of consumers.
According to Obama, outsourcing jobs to foreign countries “weakens the economy.” This is a completely fallacious statement. What really weakens the economy is the regulations and taxes within the US that make foreign countries more profitable to operate a business in. Outsourcing is merely consequence of an overbearing, wealth-destroying government. Entrepreneurs only outsource because they are eager to earn the highest return on their investment and satisfy consumer preferences.
Modifying tax codes to make outsourcing less appealing to entrepreneurs will have one of two consequences. The first possibility is that Americans will have to pay more for products that could be more efficiently produced overseas. This is only a possibility if Americans can afford to pay the higher price. This brings us to option number two.
The second possibility is that the products simply won’t get produced. If consumers do not value a product more than the cost of the land, labor, and capital required to produce it, no entrepreneur will produce it. If the business can’t produce at price consumers are willing to pay, all the American jobs that were the initial goal of the tax reform would be lost or diverted into other, less wealth producing activities. As a result of the tax, society would lose out on the product, the foreign jobs, and the residual, managerial jobs left in America. This is yet another demonstration of how futile attempting to correct the ill effects of past interventions with new ones really is.
Both the increased price of the product and the total shut down of the company will result in a net loss of jobs, and more importantly wealth. Wealth creation is the real goal of the economy. Much of our socio-economic interactions with others exist because they make our lives easier and more enjoyable. If jobs were the goal, I could simply throw a brick through a window, bingo, job created. Now the victim of my hypothetical vandalism will employ a glazier to replace the window. Unfortunately, the full set of consequences arising from the destructive act mean that society will now only have a window instead of a window and whatever the victim would have bought with that same money.
The higher prices Americans will pay for non-outsourced goods mean that they will have less money to spend on other things. The result is a decrease in the overall amount of goods they can consume. This will also result in fewer overall jobs in the economy. If, due to restrictions on outsourcing, I have to spend $50 for a pair of American made jeans instead of $20 for the Chinese made jeans, I will no longer be able to spend $30 on other goods. Whoever would have produced that $30 worth of goods I would have bought is now out of a job.
Obama’s State of the Union address was a catastrophe of economic fallacies. Not only were his ends and means completely misaligned, he (predictably) demonstrated no knowledge of how resources are efficiently allocated in the economy (economic calculation, profit and loss). The result is a country straying further and further from free market principles. The effect of eschewing those good ideas (free market ones) will be a continued recession and stifled economic growth.
One must be very careful saying knows nothing about economics and that their arguments are extremely fallacious. For one leaves oneself wide open for similar attacks.
You said that Obama does not understand economic calculation. This may be true, his speech certainly doesn’t show the opposite. But your own understanding of economic calculation is also severely lacking. Entrepreneurs do not make decisions according to economic calculation. Rather they do exactly what bureaucrats do and make educated guesses in the face of uncertainty. Sometimes those educated guesses turn out right, sometimes they do not. What economic calculation does is provide a means of telling of whether or not past actions were the correct actions to take. It does not in anyway tell people what actions they should take in the present. This is clearly evidenced by the rampant losses that occur in a free market. If entrepreneurs were able to guide their actions by economic calculation, they would always gain profits. Now it’s true that one cannot use economic calculation to measure past government actions, However, it is perfectly reasonable for a politician to praise a government agency for helping to achieve a political objective. It is entirely possible that the cost of the government research in this specific instance is substantially below the benefits created by it.
Entrepreneurs engage in production and innovation they believe will earn them profit. I think we might be splitting hairs here, but I wanted to clarify by saying “entrepreneurs are guided by economic calculation” in no way implies that they will never earn losses. Of course they will earn losses. The *uncertainty* with which we all must face the future renders losses an unavoidable feature of our existence. Entrepreneurs do in fact make decisions based on economic calculation. To put it simply, they make present production decisions they believe will earn them future profit. Bureaucrats do not. When an entrepreneur makes a mistake he must pay out of his own livelihood for that mistake. He must suffer a lower income because of it. When a bureaucrat makes a mistake their income does not change. This is because their revenue stream is not dependent on correctly predicting and satisfying consumer preferences. Their revenue stream is extracted coercively and does not vary with respect to their decision making. Since their revenue is earned without satisfying demonstrated consumer preferences, they are outside the realm of economic calculation.
While I’ll concede to the possibility that government funded research might, by some stroke of luck, involve the efficient allocation of resources, the chances of this happening are very low. This is because they have no incentive not to waste money on whatever makes their job more convenient for themselves. However, research performed in the realm of economic calculation (private enterprise) always aims towards efficiently satisfying consumers. There is really no reason to expect government funded research to be efficient and increase societal wealth.
How can it be reasonable to praise a government agency if you can’t use economic calculation to measure past government actions? All we know is something else would have happened if the risk of being injured by government agents didn’t need to be taken into account by taxpayers. Is providing that risk a praiseworthy action?
You’re right in saying that entrepreneurs are motivated by profit in a way that bureaucrats cannot be. However, profit is not the only legitimate motivation, even on a purely free market economy. For example, most colleges are motivated by the pursuit prestige, at least in some loose sense, not profit. This is not a result of government regulation or intervention, but a result of the nature of the education market. The advantage of using monetary profit and loss to judge the rightness of some production decision is that it is quantifiable in a way that, as far as I know, none of the other measures are. Now, I’m not going to get into an argument about public choice, and whether or not Congressional decisions are a reasonable proxy for profit and loss in some instances. That is an entirely different argument. And to be perfectly honest, I don’t really care for most, if any, government research, and would not have supported funding that anyway.
As for the argument, that an entrepreneurs are more adequately incentivized to pursue efficient research? I an’t really argue with that. Although, I probably would argue that there is a place for non-profit funded research especially in the basic sciences. Furthermore, the question here is not whether one could expect government-funded research to be efficient, but rather it is possible that a specific instance’s benefits exceeded its costs – a much less controversial position. Furthermore, it’s entirely possible that research like this was conducted in labs that receive only a relatively small percentage of their funding from the government, and one would therefore expect them to be at least somewhat efficient.
Basically, what I’m saying is that all that economic calculation does is enable one to quantifiably judge past actions. The profit does also incentivize the entrepreneur to be efficient, which is related I guess. However, there are other legitimate ways of judging actions, otherwise, the pareto optimal non-profit sector would be intrinsically inefficient, which is an outright contradiction. The problem with government production is a combination of a moral hazard problem (the bureaucrats incentives do not line up with the consumers), and a lack of information. Both of these problems also occur in the private sector, even the for-profit private sector, although to a lesser extent, and in neither sector do they rule out the possibility of investment’s benefits exceeding it’s costs.
Great information :)