In my postings over the next several weeks (maybe months, I sometimes get lazy), I will try to weave in themes that I believe if properly expressed, will first determine who the Republican nominee will be and ultimately who will be the next President of the United States.

We will start with my opinion and perspective of the most important issue of the 2012 election and beyond, the economy, and why so many get it wrong. The people who support big government and government intervention in the economy would have you believe that the economy is simply too complex to understand, that is why we must seek to control it. We must have expert economists to “manage “ our economy but we all know from evidence that even the most accomplished of these experts are the about as accurate as your local weather girl.

I want to kick this off today with a discussion of the order of precedence – a discussion of the economic chicken vs. egg argument because this is the basis for the “too complex to understand” misconception. As we have said before, you can’t build a truth from a false premise and you can’t fix a problem by treating a symptom. The first issue with the “we need control” premise is that it is based on the chicken/egg dilemma – that is a false premise because we can determine an order of precedence, a hierarchy of process order in the economy in relation to individuals, firms and government.

So, here we go – your comments are welcome because, according to my IQ score, there is a great statistical probability that there are quite a few of you out there who are smarter than I am.

Why Capitalism?

Why capitalism? Because there is a strong correlation between economic freedom and political freedom. I’ll quote Milton Friedman from his book, Capitalism and Freedom (Chicago: University of Chicago Press, 1962):

It is widely believed that politics and economics are separate and largely unconnected; that individual freedom is a political problem and material welfare an economic problem; and that any kind of political arrangements can be combined with any kind of economic arrangements. The chief contemporary manifestation of this idea is the advocacy of “democratic socialism” by many who condemn out of hand the restrictions on individual freedom imposed by “totalitarian socialism” in Russia, and who are persuaded that it is possible for a country to adopt the essential features of Russian economic arrangements and yet to ensure individual freedom through political arrangements. The thesis of this chapter is that such a view is a delusion, that there is an intimate connection between economics and politics, that only certain arrangements are possible and that, in particular, a society which is socialist cannot also be democratic, in the sense of guaranteeing individual freedom.

Economic arrangements play a dual role in the promotion of a free society. On the one hand, freedom in economic arrangements is itself a component of freedom broadly understood, so economic freedom is an end in itself. In the second place, economic freedom is also an indispensable means toward the achievement of political freedom.

The first of these roles of economic freedom needs special emphasis because intellectuals in particular have a strong bias against regarding this aspect of freedom as important. They tend to express contempt for what they regard as material aspects of life, and to regard their own pursuit of allegedly higher values as on a different plane of significance and as deserving of special attention. For most citizens of the country, however, if not for the intellectual, the direct importance of economic freedom is at least comparable in significance to the indirect importance of economic freedom as a means to political freedom.

It is no coincidence that the countries that enjoy the most political freedom also enjoy the most economic freedom.

The Economy – Where it all starts, panties and all…

Let’s talk about where everything starts – begin at the beginning, as it were.

Commerce… Business… The exchange of goods and services for a return… Everything starts here. The very reason that we even have time to sit around and debate politics and the actions of our leadership is that we don’t have to hunt or forage for food every minute of every day and we don’t have to protect our families from predatory animals that want to eat us and predatory humans who want to take our stuff.

“Progressives”, like Elizabeth Warren (we have quoted her here), will tell you that government is the reason that you don’t have to chase and kill an ostrich to get a  few feathers for pair of crotchless feathery panties – that government is the reason that you can just hop on Al Gore’s greatest invention, the Internet, and order them from Frederick’s of Hollywood  or Victoria’s Secret to be delivered directly to your door – not that there is anything wrong with that, apparently many people like fancy knickers, I don’t personally wear them myself but I certainly can see the attraction.

Feathery panties aside (which is the likely the main reason that they are crotchless), the reason that you can do this is not government, it is commerce.

Point being…what was I saying? Oh, yeah…sorry, lost focus there for a minute…even if AlGore did invent the Internet, that isn’t the reason. The reason is that VS and Frederick’s has panties to sell and there is a market for them…actually, the market comes first and then the panties but panties are bought and sold making the customers, their significant others AND the firms happy…and they continue to produce those great catalogs…so we all win! In the words of King Leonidas – “THIS. IS. CAPITALISM!”

See government in there anywhere? A Department of  Sexiness, perhaps? Panty death panels?

No you don’t – because government doesn’t drive demand. Individuals do, they drive demand based on their wants, needs and income and firms respond to that demand.

Bet you never had an economics lesson based on panties, have you? That’s why you should visit here often and encourage your friends to come as well. We are all about economics and panties…and the economics of panties…or the panties of economics. Two great tastes that taste great together…

If for no other reason than VS or Frederick’s, capitalism should be declared a stunning success!

The Economy – Why they get it wrong – the order of precedence…

The main reason that they get it so wrong is that “progressives” try to change the oil by inflating the spare tire in the trunk. They get the order of events wrong and therefore the cause and effect completely ass-backwards.

The reason that “progressives” have been, and will always be doomed in dealing with the economy is that they continue to get the order of precedence wrong – commerce comes first, government second. Their assumption is that government is first and commerce is the result. A simple method in deducing an order of precedence like this is to ask this question: “If we remove one of the elements of a system, can the remaining elements in the system or the total system survive?” In this case, if we remove government from the system, commerce survives – some would say that it thrives – the converse is not true. If commerce is removed, government cannot survive, not even by force because it depends on money (or in the instance of governmental borrowing, the promise of future money) from taxpaying entities.

So, simplified for the anti-corporation/#OWS/big government set: no commercial activity = no tax revenue = no ability for government to borrow = no government spending = no government. If you “progressives” want funds to pay for your adventures in socialism, you better get on board with the engine that generates the cash for you.

What generates that flow of tax revenues? Economic activity generated by commercial transactions by profit seeking individuals and firms. At its most basic level, economic activity only requires two people engaged in a transaction – a good, service or idea that is priced at a point where the seller wants to sell and the buyer wants to buy. This is as simple two people meeting in the middle of a field with no one else around, both having something that the other wants/needs and these two making a decision to trade. Do these two need government to assure “fairness” – no, “fairness” is a concept that is judged by the individuals involved in the transaction, not a third party. Fairness is ensured by the decision to make the transaction; it is based on the perception of value assigned to the trade by both parties.

Another aspect of “fairness” is that in a free economy, the bad actors a punished by individuals refusing to do business with them –they fail and a new person rises to meet the need of the market. This is the “creative destruction” that culls the weak, the cheats and ineffective members of the economy. It self-regulates over time.

Think that you are powerless and you aren’t part of this free capitalist economy because you work for an “evil corporation”? Wrong. You are. The Marxists would have you believe that you are a wage slave but the act of commerce is as simple as your paycheck – you trade your labor at a value that the company wants to pay and you are willing to sell – it is a commercial transaction. In a capitalist economy, if you don’t approve of that trade or the value equation changes, you are free to add to your skills (making you worth more to the company) or to seek other employment – in a Marxist/communist economy, you are not.

The government then skims off a fee for this transaction called a tax.

Why do we get away with stupid macroeconomic decisions?

The only reason that they have been able to get away with this error over the years is that an economy based on the concepts of capitalism/free enterprise is strong enough to absorb a great deal of abuse without the gears grinding to a halt. When an economy has the freedom to change (the concept of “creative destruction” is one mechanism) it can avoid the abrupt corrections and crashes that a “managed” economy is subject to.

A capitalist economy not only is the most effective way to distribute wealth, it is also the best mechanism to manage risk. By taking risk down to the lowest level, to the individual transactions if possible, the risk is mitigated by spreading it over many smaller segments of the economy rather than a larger collective segment. The best example of the risk of collective economic can be seen as playing out in the EU today. Prior to the creation of a common currency and financial system when Greece or Italy had an issue, they could manipulate their own currencies and financial policies to adjust their own economies and if they went down, they didn’t take Germany with them. Germany could make a choice to loan them money (or not) based on an economic decision, not a political one. Today, with the “unified” economy, Brussels has control over Greek, Italian and German monetary policy and as we can see, if Greece, Italy and Portugal go down, they will likely take all of Europe down as well.

Centralization of economies also centralizes risks. A downturn doesn’t just affect a region, it hits the entire entity. America’s risks are still quite diversified as compared to those of the EU and in general , we are seeing individual states with sound fiscal policies recovering faster than those without. It is a Red State capitalism/Blue State collectivism battle… and just guess who is winning?

Can an economy be “managed”?

There will be arguments that we have to “manage” an economy to be “fair” – this is another leftist/central planning lie because the central planners define “fairness” as an equal distribution of income or “economic equality” – we dump the entire productivity of the nation in a bucket and everybody gets an equal share with no regard to the effort you put in. In true capitalism, fairness is described as getting a return on your investment in proportion to the value that the market places on what you bring to it.

“Managing” an economy will always fail due to two significant reasons (not the only ones but two of them): 1) the Law of Unintended Consequences and 2) the Heisenberg Uncertainly Principle.

The Concise Encyclopedia of Economics defines the Law of Unintended Consequences as:

The law of unintended consequences, often cited but rarely defined, is that actions of people—and especially of government—always have effects that are unanticipated or unintended. Economists and other social scientists have heeded its power for centuries; for just as long, politicians and popular opinion have largely ignored it.

The concept of unintended consequences is one of the building blocks of economics. Adam Smith’s “invisible hand,” the most famous metaphor in social science, is an example of a positive unintended consequence. Smith maintained that each individual, seeking only his own gain, “is led by an invisible hand to promote an end which was no part of his intention,” that end being the public interest. “It is not from the benevolence of the butcher, or the baker, that we expect our dinner,” Smith wrote, “but from regard to their own self interest.”

These “unintended” consequences can be good or bad, but the issue is that they are “unintended”, in a planned economy, the assumption is that there are none of these; however, in an economy the size of a nation, there will always be things that simply cannot be contemplated by every law, regulation or control. It is physically impossible – for an example, just look at Obamacare. Love it or despise it, there is no argument that there were items that were not known at the time of passage and will continue to develop as the regulations are defined (at least until it is found unconstitutional or repealed – which themselves are examples of unintended consequences) and it only presumes to address 1/7^th of the total economy, not even a majority.

Add to that, the Heisenberg Uncertainty Principle, and we complicate the activity greatly. This principle is a facet of physics, of a branch called quantum mechanics; Heisenberg’s observation is the basis for the initial realization of fundamental uncertainties in the ability of an experimenter to measure more than one quantum variable at a time. Attempting to measure an elementary particle’s position to the highest degree of accuracy, for example, leads to an increasing uncertainty in being able to measure the particle’s momentum to an equally high degree of accuracy.

The best illustration of this principle is a thought experiment called Schrödinger’s Cat.  Herr Schrödinger…

…came up with this idea of putting a cat in a box. Along with the cat is a device with an atom that could decay (radioactive decay) and cause a poison to be released and kill the cat. Or, the same atom could decay and not cause the release of a poison and the cat would live. It all depends on the nature of the atom’s decay. Since the probability of the atom decay one way or the other is 50-50 we have no way of knowing which way the atom decayed until we opened the box and looked at the cat. There is nothing unusual about this experiment until you ask about the cat before the box is opened. By the way, this experiment was never done! This is what is called a thought experiment.

Before the box is opened, is the cat dead or alive? In the answer to this question lies the whole key to quantum mechanics. The answer is …… are you ready? The answer is……. Both! Both! The cat is both dead and alive. It is only at the moment in time that we actually look at the cat that one or the other reality becomes the reality upon which the next question about the cat can be asked.

…And in conclusion.

(not really, there will eventually be more – this is just something that smart people say to let you know they are tired of talking to people like you and me and I just wanted feel smart.)

So basically, our intervention in a market or an economy sets off a chain reaction of consequences that we do not anticipate and just by observing those effects, we change them. The temptation of government is to add another layer of rules or regulations to affect some sort of control but the end result is another cascade of consequences, more unanticipated results and more rules. It is a never ending cycle of cause and effect where the “regulator” is always behind the curve in information and action and with every action, the regulator gets geometrically farther behind until the system either overcomes the regulator or collapses.

The mortgage bubble and the subsequent crash is a perfect example of these two aspects combining with the presumption of regulatory control to create disaster…and what happened after? Rather than look at the true causes (I’m talkin’ to you Chris “Friends of Angelo” Dodd and Barney “I swear that I didn’t know my boyfriend was a gay pimp”  Frank), in true form the proto-communists in our political class cried out for more regulation.

That is like saying that the fire won’t go out because we aren’t pouring enough gas on it to drown it out.

Let’s review:

• Capitalism is the best system to spread economic well being.
• Economic freedom goes hand in hand with political freedom.
• Don’t put the cart before the horse –get the order of events right.
• Capitalism is self regulating.
• Distributed capitalism mitigates risk and can absorb a lot of bad decisions.
• Economies can’t be “managed” on a large scale – at least not by humans.

Any candidate who articulates this to the American people is miles ahead of the Law Lecturer in Chief.

Smitty at The Other McCain has this nugget of wisdom.