Sunday, 15 April 2018

Milton Friedman, the Liar

Milton Friedman, a great American economist. He received the 1976 Nobel Memorial Prize in Economic Sciences. The father of the Monetarist current. Avid supporter of the so-called Free Market. His work influenced policy makers far and wide. Milton Friedman, a gentleman, a liarContinue Reading

Friday, 13 April 2018

Justice for the WASPI and All Pensioners



[...] With the correct premise in mind, coherent pension age policy is to slowly bring it down from pre 1995/2011 levels, for both men and women. [...] Who will finance Social Security, Health Care, Education et all? The real economy, if the Government allows it to function for this purpose. All that’s required is the political will to approve proper budgets for these institutions to serve their mandate accordingly. There’s no need to target a specific deficit or debt to GDP ratio. Read more here

Neoliberalism 2: From Paris to Pèlerin



George Orwell: “But he does not see, or will not admit, that a return to ‘free’ competition means for the great mass of people a tyranny probably worse, because more irresponsible, than that of the State. The trouble with competitions is that somebody wins them. Professor Hayek denies that free capitalism necessarily leads to monopoly..." Continue Reading

Wednesday, 11 April 2018

Mosler bonds, Public Banks, Surplus Recycling Agreements, Taxing Economic Rent - for Local Governments


Personally, I am not an advocate for parallel currencies. There is an argument to be made in their favor, if the Local Authorities were allowed to give several different currencies the status of legal tender in their jurisdictions. The advantage is that the system is more resilient to negative demand shocks. But the downside is that the system is less efficient. The opposite is true for a single currency jurisdiction. The system is not resilient to negative demand shocks, but it is more efficient. Below are my preferred ways for Local Governments to secure funding.

(Continue reading here)

Friday, 23 March 2018

Hamstring Workout



Aren't the hamstrings' muscle fiber composition predominantly fast twitch?

Tuesday, 13 March 2018

The End of Turkish Growth?

(Article written originally on January 3rd)

Using data on Turkey from its Central Bank and the Undersecretariat of Treasury, I made a graph with the country’s sectoral balances as percentage of GDP between the years 2008 and 2016.


Ever since 2010, Turkish private sector debt has skyrocketed. It has been the main driver of GDP growth, although the Government did make important contributions. In the last decade it has poured over 90 billion dollars in the creation of bridges, highways, freeways, tunnels, railways, and airports. Capacity utilization jumped back since the GFC, and the labor force participation rate has been going up consistently – although participation among women is still low. Such a good economic climate, no doubt, made Erdogan’s pursuit of his authoritarian agenda much easier. This situation, however, is near its end. According to the OECD, Turkish private debt for 2016 was at over 170 percent of GDP.

Turkish firms are loaded with debt, especially with debt denominated in foreign currencies. Households too can’t keep borrowing forever. Soon enough, they will desire to spend less and save more. Private debt deflation is not that far off. The level of severity will depend on how fast private debt is retired compared to new private debt being created. Given Turkey’s track record of persistent Current Account deficits, salvation won’t come from exports. The Government needs to formulate a proper fiscal response – and if it will decide to embrace austerity, the same foolish path chosen by many Western countries, then Erdogan will have a full fledged depression on his hands.

Politically-speaking, this shall be his greatest challenge. It’s easier to ascend to power than it is to hold on to it. Historically-speaking, proper understanding of economics and pertinent fiscal policy is what separated the real dictators from the would-be despots. Erdogan’s critics often compare him to Hitler, given his belligerent rhetoric and harsh methods of handling dissent.

On one occasion, when he was asked if the state’s unity would be preserved under an executive presidential system, Erdogan replied, “There are already examples in the world. You can see it when you look at Hitler’s Germany.” And recently, he expressed a desire to review the border treaty with Greece. It’s easy for politicians to announce increased Government investment when GDP figures are good. But when GDP is shrinking, it takes foresight and guts to profess the same thing. Last year, the Transport, Maritime and Communications minister Ahmet Arslan announced joint efforts between Turkey and Japan for the creation of a Turkish Space Agency alongside continued investment in infrastructure of up to 64 billion dollars. It remains to be seen, though, if Erdogan is smart enough to actively engage in deficit spending once the downturn occurs.

The IMF and the rating agencies will undoubtedly preach for fiscal tightening, for so-called “fiscal responsibility.” Why? Because the Government deficit is going to explode on its own, due to the automatic fiscal stabilizers. Aggregate Demand is spending plus the change in private debt. Private debt going up adds to Aggregate Demand. Private debt going down shrinks Aggregate Demand. Less private spending means fewer sales. Fewer sales translate into layoffs, unsold output, and idle capacity. Less economic activity translates into less tax revenue and higher spending on welfare and unemployment checks. The reverse happens during a boom. In short, the system is always trying to correct itself.

It would actually be enough if politicians simply allowed the automatic fiscal stabilizers to do their job. But more often than not, politicians unknowingly adopt the wrong fiscal measures, which sabotage the work of the stabilizers, in effect prolonging the downturn and causing needless socio-economic hardships. Turkey’s economic bust might not come this year, but it will come. The sectoral balances over time don’t lie. Private sector de-leveraging is inevitable. It will be an opportunity for Erdogan and his party to entrench their hold over the country’s affairs – depending on how they act – or they will stand to lose a good measure of that influence if they opt for the austerity path. In conditions of rising unemployment and poverty, a second coup attempt might very well succeed.

Though I loathe Erdogan’s ideology, his methods, and his deeds, I can’t see him losing power any time soon. Geopolitically-speaking, with him at the helm, Turkey is valuable for both Russia and the US. After all, actors in Europe and the Middle East need to be contained too, be they allies or not.

Sunday, 4 March 2018

We're all irrelevant

I said to myself, "Look, I have increased in wisdom more than anyone who has ruled over Jerusalem before me."
I applied my heart to know wisdom, and to know madness and folly. I perceived that this also was a chasing after wind.
For in much wisdom is much grief: and he that increaseth knowledge increaseth sorrow.
Ecclesiastes 1:16-1:18

Wednesday, 28 February 2018

South Africa, the next Zimbabwe?

Serban V.C. Enache
(Article originally written on February 22nd)

After years of scandals, South Africa’s president Jacob Zuma was finally forced to resign last week. After almost 10 years of government corruption allegations, the new president, Cyril Ramaphosa, has the opportunity to change things for better or worse. Ramaphosa addressed the nation’s parliament in Cape Town and outlined his political priorities. His speech can be watched here (talk of reforms begins at around 30:40). He seeks to fix the injustice in the country, an injustice stemming from the original European colonists in the 1600s stealing land from the indigenous tribes. Ramaphosa called it the “original sin”, and stated his desire for land reform – transferring ownership from white owners to black South Africans.

President Ramaphosa explained the means to accomplish his goal. Eviction. Confiscation without financial redress. “The expropriation of land without compensation is envisaged as one of the measures that we will use to accelerate redistribution of land to black South Africans.” The president stressed that the aim is to improve agricultural production and food security, advance rural development, reduce poverty, and strengthen the economy.

His ambition is reminiscent of Robert Mugabe’s attempt in 1999-2000 at correcting colonial and Apartheid-era injustices in Zimbabwe. Thousands of white-owned farms were confiscated by the government, and the farmers were forced out. Zimbabwe used to be known as the breadbasket of southern Africa. But within a few years of Mugabe’s land distribution, food production plummeted. African farmers who became landowners, in the wake of Mugabe’s reform, did not have access to funding, and or lacked the know-how to manage the farms. Unemployment jumped to 80 percent. In order to keep prices from rising, demand would have had to shrink in consequence – a political impossibility, given that 45 percent of Zimbabwe’s food output capacity was lost.

The situation worsened due to the breakdown in the infrastructure and constraints affecting the supply-chain. For example, the National Railways of Zimbabwe (NRZ), a corporate entity wholly owned by the government, had suffered enough decay to dramatically lower its ability of transporting the output from mines, leading to fewer exports and fewer earnings in foreign currency. In 2007, there was a 57 percent decline in export mineral shipments.

The country’s manufacturing sector was not spared. Statistical reports on production capacity and performance were published by the Confederation of Zimbabwe Industries. Manufacturing output fell by 29 percent in 2005, by 18 percent in 2006, and by 28 percent in 2007. Shockingly, just 18.9 percent of Zimbabwe’s industrial capacity was being used in 2017. Shortages in raw materials was a major problem, but overall, firms blamed the Central Bank for stalling their access to foreign currencies (money required to buy essential imports).

In the Central Bank’s defence, it was using its foreign reserves to import food. When viewed in proper context, the chain of events is as follows: cripple your domestic food supply, use foreign reserves to import food, which in turn, squeezes exporters of foreign currency, which they need to purchase the necessary materials required for production. Agricultural output was wrecked and what manufacturing capacity the economy had left was barely being used. The importation of goods was also stymied because many importers chose to abandon goods at the border to avoid exorbitant import duties. In response to all this, and as investment dried up, the country’s GDP fell every year at a rate of 7-8 percent.

Though hyperinflation was inevitable (originally triggered from the collapse in output), it is not an argument against government deficit spending per se. I cannot stress this enough, the over-production of money was a consequence of the hyperinflation crisis, not the cause of it. Responsible use of fiscal policy doesn’t mean adherence to arbitrary debt to GDP or deficit to GDP ratios. It means, or it ought to mean, getting the economy to work at full employment while retaining price stability.

When a nation’s production capacity is severely mismanaged, the only way to avoid inflation is to dramatically contract real spending to match the new lower output capacity. Casualties from starvation would have been higher if the government of Zimbabwe had cut spending to such a severe degree. Mugabe’s motivation might have been correct (morally-speaking), but his reform was badly implemented, and I fear Ramaphosa’s reform will have the same fate, despite his claim that the government won’t use “smash and grab” methods of seizing land.

A better course of action, in my view, is the Georgist approach to political economy. Land is not a man-made good. It is freely provided by nature, it is a natural monopoly, and thus should serve public purpose. If the new president is serious in his pledge to strive for a fairer and prosperous South Africa, then his government needs to completely rework the tax-code. The government should focus on capturing the value of land through a land-value tax, while eliminating the fiscal burden on labor, consumption, and on property (property, understood as man-made things and improvements to the land). With a starting rate of 25 percent, Cyril Ramaphosa could transition the country toward a 100 percent land-value tax in four years time.

The Georgist approach is simple, non-bureaucratic, easy to control, and the most progressive way to manage the country’s affairs. No more idle land, low and stable prices for housing, more disposable income for households, lower production costs, near zero overhead – and by capturing economic rent, the government makes the economy less prone to boom-bust cycles. It is not a panacea by any stretch of the imagination, but it’s a lot better than conventional forms of taxation. The South African state allows its currency (the Rand) to float, giving it maximum space to pursue whatever fiscal and monetary policy it desires.

In summary, through a 100 percent land-value tax, the elimination of taxes on productive activities, coupled with comprehensive investments in public infrastructure, and giving farmers access to cheap credit (via public banks), the country would prosper like never before – and would always be able to make any payment in its own sovereign currency.

Vice's Tom Streithorst slanders MMT

Serban V.C. Enache

Vice published an article by Tom Streithorst on the 28 of February, called “The Radical Left-Wing Theory That the Government Has Unlimited Money.” The subject matter is about MMT (Modern Monetary Theory). Streithorst committed an ignorant and unfair attack by labelling an accurate description of the monetary system as a “radical left-wing theory.” MMT is apolitical. It’s not centrist, left wing, or right wing. It’s a descriptive theory. By associating it with the so-called Radical Left, the author did a favor to those making straw man attacks on MMT.

More so, his article betrays political bias. “[Republicans] have pushed radical legislation that would slash spending. But Democrats sometimes make anti-deficit arguments too.” Excuse me? Sometimes? Democrats and Republicans always use the deficit and national debt boogiemen to try and persuade voters that their counterparts are worse. Our rivals will increase the deficit and the debt, or have done so already, with their failed programs. Our desire is to reduce the national debt over the course of years if you give us a mandate. And the solution deficit doves and hawks put on the table involve a reduction in net government spending, but corporate welfare and so-called defense spending is never touched. The Democratic Party’s economic platform, today, is not a progressive platform – so Streithorst ought not to cuddle them.

“Under a fiat currency system, a government can print as much money as it likes. As long as [the] country can mobilize the necessary real resources of labor, machinery, and raw materials, it can provide public services.” The author fails to mention a critical observation. MMT describes the monetary system, but not all systems are like. MMT differentiates between currency issuers and currency users.

A currency user government, for example, is Greece, or Ireland. A currency user spends and taxes in a foreign currency. A currency issuer government, like the US, Japan, Israel, and others – they spend and tax in their own currencies. They may wish to peg their currency to external ones, or make their currency redeemable in commodities; but this restricts the freedom they have to conduct whatever fiscal and monetary policy they like. MMT points out that a free floating fiat currency does away with restrictions and allows the government, so long as there is political will, to operate with negative capital indefinitely, without any risk of bankruptcy.

“a government can print as much money as it likes.” This statement is correct, but without the next explanatory remarks I’m about to make, it leaves readers thinking it actually happens. The US, and indeed most governments today don’t print money when they deficit spend. More so, governments don’t decide the amount of cash in the system. The private sector does that, and then the Central Bank accommodates. Banks use reserves to purchase cash from the Central Bank, and the Central Bank obtains the cash notes from the Bureau of Engraving. The public’s desire for cash determines the amount, not the government. In fact, you will see most MMTers on social media insisting that “money printing” is a myth as it is traditionally understood or assumed. Spending is done electronically via keystrokes.

“Every five-year-old understands money. It’s what you give the nice lady before she hands you the ice cream cone—an object with intrinsic value that can be redeemed for goods or services.” In this part, the author drops the ball. He refers to money as “an object with intrinsic value that can be redeemed for goods and services.” He is confused and he is incorrect. Goods and services have intrinsic value, money has extrinsic value. In the case of government money, the root demand for it is government money taxation. Notice the difference between taxing in money and taxing in commodities or hours worked. Most people tend to bash fiat money because there’s nothing “of value” inside it. But the currency in and of itself is not worthless. You could use a paper note to start a fire or wipe your arse with it, but it’s smarter to use it to purchase output, extinguish government obligations, or just keep it in your pocket for future use.

Money has extrinsic value, the institutional apparatus behind it gives it value – whether we’re talking about private or public institutions. Government notes, subway tokens, McDonald’s coupons, your neighbor’s promise written on a piece of paper, all these things are money – and in every society, there is a hierarchy of money. Usually, the government’s money sits at the top.

Next, we have the author trivializing the difference between commodities and IOUs, a crucial explanation that MMT offers – again – with no recourse to any type of political ideology. Tom Streithorst says, “This mildly metaphysical distinction [between commodities and IOUs] ends up having huge practical consequences.” It’s not mildly metaphysical, it’s not metaphysical at all. A promise made and unfulfilled we call a debt. That’s an IOU. It’s a contract. A commodity is not a debt, it’s not a contract. Things like grain, metal, wood, coal, plastic, paper, bicycles, and condoms – these things are commodities.

IOUs can be stored in the memory of the contract parties, but since it’s impractical for humans to remember everything, we make use of pen and paper. We (individuals and institutions) record our IOUs in various mediums. We record them in commodities. For instance, we write information on a piece of paper, or we stamp information on a coin, on a piece of wood, on a piece of bone, on clay tablets, or we record it on an electronic medium (computers and so on).

At least the author mentions Kelton, Wray, Mosler, and Mitchell, and we also learned about Occupy Wall Street veteran Jesse Myerson. He is campaigning for the progressive grassroots group Hoosier Action, and is using MMT (deficit owl) arguments to sway the average voter. That is indeed good news.

Saturday, 10 February 2018

Job Guarantee, Universal Basic Income, Taxation of Economic Rents

UBI would get rid of the means-tested bureaucracy & the time spent in the bureaucratic gauntlet, the stigma that comes with it, would increase social mobility (ppl are not discouraged to seek other income generating activities) & it would directly improve labor's bargaining power.
The JG fulfills what UBI can't (in and of itself), integrating the long term unemployed into the job market (you can't integrate ex-cons without a JG program), provides employment when the market can't or won't, it indirectly improves labor's bargaining power.
These 2 policies (JG and UBI) need to come alongside legislation to capture economic rent (in all its forms). Without the latter, all the gains will slowly get eroded by the rent seekers via (land rents, finance & insurance rents, technological rents, political rents (cronyism)).
#JIG #UBI #JG #MMT #LVT

Wednesday, 7 February 2018

The Rate of Return on Everything

The Rate of Return on Everything

Serban V.C. Enache



A new working paper – conducted by Óscar Jordá, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor – reveals the aggregate real rate of return in the economy between 1870 and 2015. Data was used from sixteen advanced economies over a span of 150 years. The countries are Belgium, Australia, the US, the UK, Japan, Italy, Germany, France, Denmark, Finland, Switzerland, Sweden, the Netherlands, Spain, Portugal, and Norway. The study analyzes three types of returns: investment income (yields), capital gains (price changes), and total returns (the sum of the two). The calculations were done for four major asset classes, equities and housing (classified as risky), and government bonds and short-term bills (classified as safe).

Unfortunately, the authors make no mention of “rent seeking” or “economic rent,” nor do they attempt to make any distinction between capital and land (man-made things and natural monopolies), or between rent and non-rent earnings. Such distinctions are necessary to gage the amount of economic rent, which acts as a surcharge on the real economy, making production and consumption unnecessarily more expensive. Economic rent, understood as income obtained without any enterprise, without any cost of production, stems from four sources: land values, the mark-ups of the financial and insurance sector, patents, and political lobbying.

On risky returns, the paper could only focus on available data from equity markets. Total returns on residential real estate and equities on average was at about 7 percent per year. Housing outperformed equity before WW2. Since then, equities outperformed housing on average, but only at the cost of much higher volatility and synchronicity with the business cycle. Housing returns are similar to equity returns, yet considerably less volatile. Diversification with real estate is admittedly harder than with equities. Before WW2, the real returns on housing and equities (and safe assets) followed remarkably similar trajectories. After WW2 this was no longer the case, and across countries equities then experienced more frequent and correlated booms and busts. Someone holding the two asset classes would see significant aggregate diversification gains. Ideally, the investor would like to hold an internationally diversified portfolio of real estate holdings, even more so than equities.

On safe assets, the paper finds the real return has been very volatile over the long-run, more so than initial expectations, and often even more volatile than the real returns on risky assets. Each of the world wars was a moment of very low safe rates, well below zero. So was the 1970s inflation and growth crisis. The peaks in the real safe rate took place at the start of the interwar period, and during the mid-1980s. Viewed from a long-run perspective, the authors judge the real safe rate as normally fluctuating around the levels that we see today, making it not unusual. Instead of asking why the safe rate declined since the mid-80s, the authors ask why was the safe rate so high during those years. I would venture an answer: new government policy to issue gilts to back private pensions. Indexed-linked gilts were issued by the Thatcher administration in ’81 with the express purpose of managing the risk profile of private pension funds – and indeed they served that purpose. While some might label this policy a triumph of monetarism, it’s also clear evidence the private sector cannot manage the risk profile of pensions without government assistance.

Safe returns have been low on average, falling in the 1–3 percent range for most countries and peacetime periods. While this combination of low returns and high volatility has offered a relatively poor risk-return trade-off to investors, the low returns have also eased the pressure on government finances, in particular allowing for a rapid debt reduction in the aftermath of WW2.

International evidence on the decline of the natural rate of interest since the mid-1980s is consistent with the paper’s rich cross-country sample. According to the authors, this observation is compatible with the secular stagnation hypothesis, whereby the economy can fall into low investment traps. The possibility that advanced economies are entering an era of low real rates calls into question standard monetary policy frameworks based on inflation targeting. Orthodox monetary policy has been credited for the Great Moderation, until the Global Financial Crisis arrived. Since that turbulent period, the prospect of long stretches constrained by the effective lower bound left commentators wondering whether inflation targeting schemes are the still the right approach for central banks.

In my opinion, secular stagnation is a farce. It’s not some inexorable phenomenon, driven by demographic shifts or changes in business-consumer behaviour. By employing a stock-flow consistent approach, we find it is the result of high inequality, high private debt, and pro-cyclical, regressive fiscal policy. The concept of secular stagnation first entered the economics debate in the late 1930s, when economies were still caught in the Great Depression. The problem in the ’30s was dramatically overcome by the onset of WW2 as governments increased their net spending (fiscal deficits) substantially. Commitment to full employment after the war’s end maintained growth and prosperity for decades until monetarist ideas came to prominence. As for inequality, let’s look at the USA. In 1929, the richest 5 percent received 34 percent of total national income. In 1951, they received only 18 percent of the total. Currently, inequality is vastly greater than it was in 1929. The cure to the slow growth and the real unemployment we see today is government deficit spending, with the precise target of employing people to produce output and paying them good wages, not deficit spending to increase the idle savings of the opulent minority.

Over the very long run, the paper finds the risk premium has been volatile. A vast literature in finance has typically focused on business-cycle co-movements in short span data. In contrast, the paper’s richer data sample uncovered four dramatic swings in the risk premium at lower frequencies (that sometimes endured for decades, and which far exceed the amplitudes of business-cycle swings). In most peacetime periods this premium has been stable at about 4–5 percent. But risk premiums stayed curiously and persistently high from the 1950s to the 1970s. However, there is no visible long-run trend. Curiously, the bursts of the risk premium in the wartime and interwar years were mostly a phenomenon of collapsing safe rates rather than dramatic spikes in risky rates. In fact, the risky rate has often been smoother and more stable than safe rates, averaging about 6–8 percent across all eras. Recently, with safe rates low and falling, the risk premium has widened due to a parallel but smaller decline in risky rates. These shifts keep the two rates of return close to their normal historical range. Whether due to shifts in risk aversion or other phenomena, safe rates seem to absorb almost all of these adjustments. The authors conclude it is a puzzle in need of further exploration and explanation.

Thomas Piketty argued that, if the return to capital exceeded the rate of economic growth, rentiers would accumulate wealth at a faster rate and thus worsen wealth inequality. Comparing returns to growth, the paper finds that Picketty’s claim holds true for more countries and more years. In fact, the only exceptions appear in very special periods – the years in or right around wartime. The fact that returns to wealth have remained fairly high and stable while aggregate wealth increased rapidly since the 1970s, is clear evidence capital accumulation contributed to the decline in the labor share of income over recent decades. Instead of being unequivocal about it, the authors only suggest that capital accumulation may have contributed to labor’s fall.

The paper concludes that returns to risky assets, and risk premiums, have been high and stable over the past 150 years, and substantial diversification opportunities exist between risky asset classes, and across countries. Arguably the most surprising thing is that long run returns on housing and equity look remarkably similar. Yet while returns are comparable, residential real estate is less volatile on a national level, opening up new questions about risk premiums. The research speaks directly to the relationship between the rate of return on wealth and the growth rate of the economy, a seminal figure in the current debate on inequality. Across most countries, the weighted rate of return on capital was twice as high as the growth rate in the past 150 years.

Tuesday, 6 February 2018

Defending The Free Market

Defending The Free Market
Serban V.C. Enache



I have spent a lot of my youth criticizing Free Market ideology and its proponents. This time, however, I will attempt to write (to the best of my ability) a defence of it. Supply and Demand are easy concepts. The way they interact and consequences born of those interactions are also simple to understand. The problem is to confuse theory with reality – to ignore empirical data when it is at odds with our assumptions and aspirations. Most proponents of the Free Market are willing to disregard all criticism regarding their assumptions and assign any other element of blame for the undesired outcome produced. The laziest defense is to employ the No True Scotsman argument. What? It failed? Well, that’s not a real free market set of policies. Worry not, adepts of socialism and communism employ the No True Scotsman as well. But for the purposes of this article, I will give Ayn Rand as an example.

According to her objectivist philosophy, a true concept must be observed before it is thought. If there is no example in the real world, the mental concept is false and invalid. She maintains that concepts represent classifications of observed referents, that there are invalid concepts (those without referents), and that truth means identifying the facts of reality – the logical recognition of the facts of experience. Ayn Rand maintains that capitalism is an “unknown ideal.” A capitalist economic system has “never yet existed, not even in America.”

So let’s see the logical implications of this. If concepts must be observed and capitalism has never been observed, then capitalism is not a concept. If truth is real and capitalism has never existed, then capitalism is not true. If truth must be experienced and capitalism is unknown, then capitalism is not true. If concepts without referents are invalid and capitalism does not have a referent, then capitalism is an invalid concept.

Before I can actually attempt a defense of the Free Market, I need to define it – and I define it in a manner that most of its adepts wouldn’t agree with. The market is a creation of the state. In order for it to work, it requires an independent party capable of settling disputes, enforcing and protecting contract laws, and property rights. In the real world, supply and demand are not the only forces at work. The state element lies between them, and it’s not an intermediary agent. In fact, it is the prime creator of demand in money terms. By imposing an obligation on the public, extinguishable only in state currency, the state creates unemployment of money paying jobs. Then, the state spends in order to provision itself with the necessary labor and materials for its purposes (the military, the court system, the police, roads, bridges, etc).

It gets more complicated in practice, but in theory, if too few people show up to take government jobs, the state increases the tax – if too many people show up, the state reduces the tax. Why do people accept to do work in exchange for government currency, which they need to pay taxes, fees, and fines owed to the state? Because there are legal repercussions if they don’t – (temporary loss of freedom, confiscation of property, community work, etc). The state is a vehicle of coercion. Coercion works. Coercion is efficient. Persuasion is not efficient. Show me a surplus-producing society based solely on voluntarism that has survived the ages up to the present. There is none. Efficient societies rely on a certain measure of coercion; and the most efficient employ taxation in money, not in commodities. One example will suffice. This year is the 150th anniversary of Japan's Meiji Restoration, one of the most important modern revolutions of the non-European world. Key elements of the Meiji Restoration reforms was to end taxation in grain. The government placed a money tax on land, calculated on the land's potential, instead of the actual crop yield – and landowners were made responsible for the tax, not the farmers.

So that’s the market, but what about the free market? Freedom is an ideal, but in the real world, we have to work with laws and with deeds. The vast majority of Free Market advocates will claim that the state needs to keep out of the market, in order for the market to deliver positive results. Laissez-faire doctrine means ‘leave it (the market, the economy) alone.’ This belief is pure superstition. More often than not, the market fails to deliver results mid to long term precisely because the state is being masterfully inactive. Capitalism runs on sales. Sales are a function of spending, both public and private spending. The nongovernment sector has periods of leveraging and de-leveraging – and this doesn’t happen in a void. The government impacts the cycle greatly. The state should be active in capturing economic rent, active in combating the formation of cartels, active in fostering public investment (projects which benefit the country as a whole and that are too large for private agents to engage in on their own), and the state should pursue a counter-cyclical fiscal policy agenda to achieve and maintain price stability and full employment.

Without a doubt, Free Market advocates will shout at at me, “This is socialism! This is statism!” If they choose to apply those adjectives to the above, they should label Carl Menger, founder of the Austrian School of Economics a socialist too. Let’s see what he had to say about government’s role in his lectures to Crown Prince Rudolf of Austria.

“Government thus has to intervene in economic life for the benefit of all not only to redress grievances, but also to establish enterprises that promote economic efforts but, because of their size, are beyond the means of individuals and even private corporations. These are not paternalistic measures to restrain the citizens’ activities; on the contrary, they furnish the means for promoting such activities; furthermore, they are of some importance for those great ends of the whole state that make it appear civilized and cultured.

“Important roads, railways and canals that improve the general well-being by improving traffic and communication are special examples of this kind of enterprise and lasting evidence of the concern of the state for the well-being of its parts and thereby its own power; at the same time, they constitute major prerequisites for the prosperity of a modern state.

The building of schools too is a suitable field for government to prove its concern with the success of its citizens’ economic efforts.”

Why am I attempting to defend the Free Market? Because markets cannot be free so long as rent seeking is allowed to go unchecked. One of the principles of classical liberalism was that property should belong to he who best makes use of it. The rentier class doesn’t make use of it in an efficient manner. By not capturing the entire value of land, the state leaves the biggest free lunch in the hands of a few at the expense of the real economy. Everybody works, but the rent seeker. His profit is unearned increment made possible by the presence of communities and the enterprise of their people. Profits made without labor, without risk, without investment, without a cost of production by simply owning that which was provided by nature and slapping a private surcharge on it.

Indeed, complex and unfair government regulations hinder the market’s activities, but the solution to bad and thick regulations is not an end to all regulations, but simple and sound rules. If you ever played a game with someone, you will be frustrated if you end up losing because you followed the rules, and they didn’t. You will also be frustrated to see people (who did not labor or invest) reap major profits, which were obtained from the efforts of those like you. Whatever rent-of-location the state relinquishes is available freely not to be pledged as government taxes, but to property owners as rent, or to money lenders as interest. This shrinks your disposable income and makes the price of consumption higher. The rentier excess charge is slapped on top of the capitalist’s mark-up, which is on top of the actual cost of production.

Looking back at history, Thomas Malthus, for all his imperfections, his mathematical model not only incorporates land as a component, but it couldn’t describe production without it. Y=F(N,L) where Y is output and N is labour and L is land. In contrast, what does Robert Solow’s model give us? Land is replaced with capital. Y=F(N,K) Tragically, modern macro-economics is based on the latter.

The marxist stance is that capitalists can’t turn a profit without exploiting labor. What about net profit? The net profit in the nongovernment sector ((I-S)+(X-M))? Where does it come from? It comes from the government sector (G-T), from its fiscal deficit. Profit is a flow. Flows can be negative or positive (deficits or surpluses / debits or credits), just like stocks (negative financial capital, positive financial capital). We know that people like to save for rainy days. And in the aggregate, net saving can only happen if the government allows it. Firms and households who are in net profit (who are net saving), are they exploiting the government?

It frustrates me when I see marxists today focusing on what I believe to be trivialities, ignoring to make a distinction between land and capital, and forgetting about rent. Marx’s theory of rent has witnessed fewer comments and developments, by followers and critics alike. He talked about differential rent and absolute rent. Marx’s theory of land and mineral rent should be brought up today, for it’s applicable to all segments of production where great difficulties of entry limit mobility of capital for long periods of time. Marxists today shouldn’t lump all profits together. They should focus on attacking land rents, cartel rents, and technological rent.

To sum up, we can’t talk about the ‘free market’ when the market is not free of rent seeking – just as we can’t talk about ‘democratic control’ over the means of production, when all decision making happens at the top. Humans think in language. If we don’t define the meaning of the words we employ, we will never get our points across. We will always misunderstand other points of view, and we will always be misunderstood. That’s why I felt the need to defend the notion or ideal of the Free Market while properly defining it, because as commonly understood it’s slavery being sold as freedom. It’s feudalism being sold as meritocracy. A market free of economic rent and government corruption is a worthy thing to champion.