Saturday, November 24, 2012

Economics for Occupiers Pt. 5: Wage Controls.

In part 3 we discussed labor as a commodity to be auctioned on the market like any other commodity and how the individual can enhance the value of his or her labor by acquiring skill sets for which the market is paying a premium. In part 4 we discussed labor unions, and how they changed the perception of labor from a resource to a commodity and then proceeded to interfere with how that commodity is contracted in the market.

An axiom of free-market economics is that any attempt to dictate how commodities are priced or traded by a governing agency will have adverse and often unanticipated effects on the market in question, to the ultimate detriment of both parties in a trade contract. The market does not like to be tampered with and will ultimately punish the beneficiaries of any tampering.

Attempts at artificial price controls never accomplish the task they’re designed for and always generate unintended and often unforeseen consequences. This is true for labor as well as any other commodity.

Read more about this in chapter 6 of Economic for Occupiers, now available on

Thursday, November 22, 2012

Economics for Occupiers pt 4 - Unions

In part 3 we examined the concept of labor as a commodity and how the market prices labor, and strategies that the worker can use to improve marketability. Most people on the left, including the Occupy crowd, should be howling about this concept of labor, ready to demonstrate how the market doesn’t treat labor the way we’ve defined, and are therefore ready to dismiss the whole proposition. In this part, we’ll examine the role of labor unions and how they inhibit the labor market to the detriment of both the laborers and the employers who buy the labor.

It was once observed to me that companies that become unionized usually deserve it. This sage observation reflected the general sentiment that a company that cares for its workforce, pays them fairly and provides them with competitive benefits packages usually doesn't have to worry about collective bargaining.

Unions have their roots in the early days of industrialization, when the principles of socialism were generally accepted as a potential solution to some of the obvious problems that workers experienced in those days. Before industrialization, most productivity was either unskilled or closely controlled within guilds, which provided an entry barrier to the job market and basically set up each trade as a sort of cartel, thus protecting it from the pressures of competition. Acceptance into a guild was by invitation only, and recruits had to serve an apprenticeship to learn the trade before they could practice in the market, be it carpentry, weaving, tailor, mason, smith or any other skilled endeavor. 

Read more about this in chapter 5 of Economic for Occupiers, now available on

Friday, November 16, 2012

Economics for Occupiers - Pt 3: Labor

A common theme in the Occupy movement, and many other groups with a liberal agenda, is the rights of the workers.  Occupiers commonly moan that they deserve a job, that they blame society for the huge debt they incurred acquiring a college education and they cannot find work.

In Part 1 we discussed a simple barter economy of meat, vegetables and fertilizer, and discussed how the addition of other commodities and trade partners increases the potential complexity of the market exponentially.  Eventually the number of possible transactions and the possible motivations of each participant becomes mind-boggling and impossible to quantify. The system has become hopelessly complex.

Once a system has become sufficiently complex, however, the job of the analyst becomes easier, because behaviors may be modeled and quantified on a statistical basis.  Individual transactions and motivations are inherently unpredictable, but the general trends and behaviors of a large enough group of actors will become very predictable.

Now let’s discuss a unique and particular commodity in any economy.  This particular commodity is the underlying driving force behind all other commodities, yet it is the most misunderstood and least appreciated.  This is the one resource that we all have at our disposal to one degree or another, and that everyone can bring to the market and sell.  This is the commodity of labor.

Read more about this in chapter 4 of Economic for Occupiers, now available on

Sunday, November 11, 2012

Economics for Occupiers Pt. 2: Money

One of the basic problems with the Occupy movement - and anyone who's suspicious of Capitalism on general principle - is that they don't understand money.  In part 1 of this series, we looked at a simple barter economy and showed that as products and markets are added to an economy, the complexity of the economic system expands exponentially. In our example, the basic unit of trade was simply vegetables and meat, which everybody apparently had a demand for. As a way of measuring wealth in a complex economy, vegetables and meat make poor mediums of exchange, because they're hard to transport and are impermanent – they don’t last.

A medium of exchange must have several features. It must be relatively small. It must be something difficult to acquire by the average person. It must be universally recognized for its value. Since recorded history, precious metals – notably gold and silver – have filled these requirements. A weight of gold or silver had an agreed value, and all commodities in an economy could be valued by an amount of gold or silver. In our part 1 example, it was no longer necessary to keep tabs on how many vegetables could be traded for a quantity of meat, or how much dung could be traded for fertilizer.  Participants in an economy longer needed to acquire goods for which they had no use except to use as trading material to get what they did want.

Money is not evil, nor is it the root of all evil.  The love of money is not the root of all evil, as will be demonstrated in future articles.  Money is a contract of trust between honest men. Only when dishonest people attempt to pervert money to enrich themselves without exchanging value does money take the appearance of evil.  But money is only as evil as those who trade it, and the market will eventually punish those who abuse the honesty represented by money.

Read more about this in chapter 3 of Economic for Occupiers, now available on

Friday, November 9, 2012

Repeal the 17th Amendment!

The most egregious and devastating blow the American experiment has suffered occurred almost 100 years ago with the passage of the 17thamendment.  This was the amendment that changed the way US Senators were selected, and it fundamentally changed the character of the government and balance of power between the states and the federal government.

The founding fathers designed a government that was similar in some ways to the British parliament.  There was an upper house and a lower house.  In England this is the house of Lords and the house of commons – a compromise that addresses the feudal roots of British society by allowing the appointed or inherited position in the House of Lords to counterbalance the populist House of Commons.  The American innovation to this system was to divorce the Executive from the legislative body and make it a completely separate institution, more power than a Prime minister, less power than a King.

The founders saw wisdom in a system where two houses of legislative power had disparate motivations.  They recognized that people – even (or especially) elected people – would usually act in their own self-interest before the bests interests of the common good. Providing separate houses with disparate motivations for maintaining their place in the government would be a filter to prevent the “good idea fairy” from enacting poor legislation.

Under their vision, the country was not a monolithic nation, but an affiliation of like-minded but autonomous state governments.  The role of the Senate was to serve as the voice of the individual states at the federal level.  The House represented the people, the Senate represented the State governments.  The method of selection to these bodies was very different, resulting in different behaviors and motivations from the members.  As directly elected representatives with a very short service term, the House members had to be constantly conscious of the wishes of their constituency, and to reflect those wishes in their legislative activities.  An individual representative had a relatively small amount of power, and a relatively small constituency to which to answer.  Representatives had a huge appetite for funds, because running a political campaign can be an expensive operation.

The Senate, on the other hand, was normally appointed by the state legislatures, and therefore was answerable to those bodies regarding their fitness to be retained in office.  The individual Senators had much more power than a representative did, because there are fewer Senators and they serve three times as long before being re-elected. This creates a different set of priorities for a Senator compared to Representative. The Senator cares nothing for the popular opinion, his allegiance is to the state legislature that put him in office.  His patronage flows through his local government, not from the political party. His allegiance to the party line is diminished.

The 17th amendment fundamentally changed the character of the Senate.  By allowing the direct election of the Senators by the citizens of the state, it severed the Senate’s need to be answerable to the legislatures of the state.  Senators no longer had to justify their vote to the State government, as long as they maintained their popularity with the electorate.  The problem with this is that the electorate cannot possibly be conversant on all the issues facing the Senate or the ramifications of those issues to the state governments.  Instead of representing the State governments and preventing federal incursions into state jurisdictions in violation of the tenth amendment, the prime purpose of the Senator was to try to bring as much federal money as possible into his state to placate the electorate.  Senators suddenly required large amounts of cash to fund their reelection campaigns, and cash from the party became extremely important, which resulted in voting the party line without regard to the advisability of the legislation, or the impact on the Senator’s state.  Basically it became more important to be popular and wealthy than to do a good, responsible job.  Because of the immense financial advantage that a sitting Senator had in a popular election, Senators could expect a career in their position, elected for life as long as they didn’t do anything to anger their constituents.  Because of the financial requirements to maintain his seat, a Senator’s patronage flows from whoever can best fund his campaigns.  This is not and cannot be a function of the state legislatures, but becomes that of big donors, and party and political bosses. Franklin Roosevelt used this financial patronage to great effect to ram through his destructive agenda and consolidate power in the federal government.
Some say that the original method of selecting Senators was entrenched racism.  The claim is that the appointment of Senators was one way the slave-holding and then later segregationist South maintained political power. Proponents of this claim maintain that such a structure was necessary or the southern slave states would not have ratified the Constitution.  This position is pure fallacy, since the selection of Senators is done by the legislatures which are elected by the same people who directly elect representatives.  The racist southern states were far outnumbered by 1913, so this was a relatively moot point and not worthy of requiring a change in how the Senate was chosen to cure a non-existent problem.  Further the claim that this was a power-sharing compromise ignores some of the very important roles of the Senate that were reserved under the Constitution, specifically because the Senate was meant to represent the state governments, not the state electorate.

Examine your Constitution and you will see the Senate has some unique functions that were put in place to give the state governments a very prominent role in the federal government.  The Senate has the sole power to try all impeachments.  Under the original system, Senator’s affiliation to party politics was loose, as party money was not necessary to maintain a seat.  This aloofness gave the Senators the objectivity necessary to impeach a president who had committed crimes, and the Senator need only explain his reasons to the state legislature. Today, it has become virtually impossible to successfully impeach a sitting president, because the act of conviction is too high a political risk for the Senators.  Conversely, in the event of a Senate that is heavily weighted in one direction, a president of the opposite party may risk impeachment on a specious charge.  The role of the Senate in impeachments has become that of political ax-man rather than objective jurist.

Another unique function of the Senate is the ratification of treaties.  A treaty is a binding commitment on the part of the US with a foreign nation.  Given the founding father’s understanding that we are not a monolithic sovereign, but a collection of sovereigns, the individual states were supposed to have a significant say in what treaty obligations that the collective was placing on them.  Thus the role of the Senate in this very important function.  With the direct election of the Senate, the wishes of the individual state legislatures is moot – a Senator will more likely vote according to his patron desires than his legislature.  A Senator need not pay any attention to his state legislature, as long as his war chest is big enough to ensure re-election.

The Senate shall advise and consent on cabinet and judicial appointments.  A Senate which derives its patronage from the party will rubber-stamp that party’s activities regardless of the effect on the states.  Recently the US attorney general sued the state of Arizona to halt the implementation of a state immigration law.  Regardless of the where you stand on the issue, this is a clear tenth amendment issue.  If the Senate were selected by the state legislatures, they would be justifiably concerned about federal interference in states rights.  But because the majority of the Senate derives their patronage from the party in power, this is overlooked, and the nomination of this attorney general was never in jeopardy. 

Likewise, the appointment of Supreme Court justices can have a terrific impact on the interpretation of state’s rights and interstate issues, and should be of prime concern to state legislatures.  The system envisioned by the founders was that a nominee could conceivably be vetted by all of the state congressional assemblies, and the Senators instructed on how to vote during confirmation.  This would result in a much more thorough review of the qualifications of a nominee, and prevent radicals from either end of the spectrum from being seated. Today, the Senate derives its patronage from the party, and if the president and the Senate majority are of the same party, there is no barrier to the most radical justices being seated on the bench, prepared to take a red pen to the Constitution.

We’ve discussed the unique powers of the Senate, and their implications under both forms of selecting Senators. The day-to-day business of legislation is also heavily affected by the 17th amendment.  Before this amendment, a Senator was a relatively free agent. He was beholden to uphold the interests of his patrons, which were necessarily in the state legislatures.  It was a good way to cross review legislation, get a fresh perspective on it, and to ensure that careful thought was given.  The problem with unfunded mandates was unheard of – such legislation would never pass the Senate.  While an ideologically polarized electorate might forgive their House leaders for stupidity and re-elect them, State legislatures are unlikely to tolerate such nonsense as, “We have to pass this 2000 page bill to find out what’s in it!”

Yes, there was corruption involved in the selection of Senators by the state legislatures. But the 17th amendment didn’t cure this, it just traded one form of corruption for another.  Today we have multiple proposals to limit campaign finances, to make the system fair.  These are futile, particularly when the proposed legislation is being written by the very people who benefit from campaign finance.  At least before the 17th amendment, the corruption was at a local level, less damaging overall and easier to prosecute at a local level.  Today, a lobbyist need not court individual state legislators to secure the patronage of a single Senator, he can straight to the party leaders and provide them with financing, with the assurance that they will use their powers of patronage to make lower ranking Senators toe the party line. 

Repealing the 17th amendment will be nearly impossible.  There are only two routes to amending the Constitution.  Two thirds of both houses have to approve an amendment, or two thirds of the states can petition for a Constitutional congress.  The first way is a non-starter: the Senate will not approve an amendment that will likely result in them losing their jobs.  The idea of calling a Constitutional congress should chill anyone who reads this, because it would open the door to special interests wreaking all sorts of mischief with our Constitution.  The only possible way that I can envision is for one or both parties to require as a litmus test for all Senate nominees to vow to introduce and support an amendment to repeal the 17th and restore the balance of power in our government and our country.