Wednesday, June 10, 2009

Let them fail … God damn it! (amv)

This post is about some of the most elementary principles of economic theory, nothing really new and well known to economists since … mmmh …. say 1776, the year Adam Smith’s Wealth of Nations was published and the Declaration of Independence signed in the New World. You do not need to have a Ph.D. in economics or be a rocket scientist in any respect to understand the following outline. What motivates this post, however, is the lack of sound economic reasoning in most newspaper articles and in television news.

This morning (I am writing this around midnight, so it was rather yesterday morning), watching the Morgenmagazin, I was shocked by a lady (still) working for Karstadt and terribly afraid to lose her job. She even mentioned that her little daughter - who heard some rumors about mummy’s endangered job – confronted her with the situation … and mom openly concedes that this made her brake down in tears. She seemed absolutely devastated: ‘For such an such years I made a great job here and nevertheless my standard of living is threatened. How can this be? I did what I was supposed to do. Bla bla bla. I am not guilty - it’s someone elses fault, not mine. bla bla, thus: Mr./Mrs. Taxpayer, come and bail me out! Save my job!' Politics, especially the German social democrats under the lead of Mr. ‘I-have-no-clue-but-I-want-to-win–elections Steinmeier, attempts to ‘save every job, if possible’ and considers to help all those many poor fellows out there, who produce a marginal value product below their incomes (which is exactly the rule for outright populists and demagogues such as Steinmeier).

To a cold-hearted economist, however, the answer is straightforward: let all those companies go bankrupt that cannot generate revenues to balance their costs. Making losses is a clear signal: the resources employed in the provision of all the goods and services in question, from Opel cars to Karstadt stores, are more precious in other lines of production. Let the market take care of it: just imagine we would have frozen the structure of production 50 years ago, with the same line of reasoning put forward today: ‘but all those innocent people!’ The problem is: this is no question of guilt! And if someone is guilty than the consumers are, who arrogate themselves to buy something else. Honestly, do you have an Opel? Do you purchase your stuff at Karstadt? And why not! We work for our income, that is, also we have to supply our labor force and hope that someone can profit by maximizing someone else’s utility. Max U by making profit! It is the simultaneous occurrence of a variety of different people with different preference scales, a multitude of alternative productive opportunities and technological knowledge, and a complex system of highly differentiated resource endowments that generate profit and loss signals which guide resources to their most productive uses (thus defined).

Indeed, our mommy and the management of Karstadt are the true villains of this plot: they want the monopoly of power the give them our incomes which we obviously prefer to spend on someone else, on other mum’s and their kids! What rights do they have? What about all those mom’s and dad’s that would earn these incomes instead? Long, long time ago, Frederik Bastiat, a French journalist of the highest rank, distinguished between ‘what is seen and what is unseen’. What is seen are the jobs lost today. These jobs get public attention. What remains unseen are the jobs that could be created, if policy would not have intervened. These remain in the dark and nobody cares. The tyranny of the status quo!

The good news: a market economy is not a zero-sum game, so that every winner is evidence of someone losing. Just look at the long-run time series of per capita incomes … but compare those of market systems with those in which the tribe mentality of the masses is allowed to meddle with institutions and to destroy the market mechanism. So don’t get fooled by some pseudo-romantic ideas about social justice. In economic history many loosing industries claimed that they are too important and to profitable to leave the stage. If they were, why did they need the monopoly of power, coercing the general public to finance their employees way of life? In all these cases they sold their special interests as a matter of general welfare. This is no question of social justice – whatever this may be. So let them fail … God damn it!