simply Capitalism

posted by Beth @ 12:32 PM

While checking out blogs on Tax Day Tea Parties, I discovered a wonderful post written back in January on Haight Speech.

Who could have Foreseen?

Oftentimes people respond to a crisis by claiming that it could not have been foreseen. (Government officials said this in the wake of 9/11, as one example.) With regard to the housing crisis, I have an answer: Henry Hazlitt. From his 1946 book Economics In One Lesson:

The case against government-guaranteed loans and mortgages to private businesses and persons is almost as strong as, though less obvious than, the case against direct government loans and mortgages [for homes]. … Government-guaranteed home mortgages, especially when a negligible down payment or no down payment whatever is required, inevitably mean more bad loans than otherwise. They force the general taxpayer to subsidize the bad risks and to defray the losses. They encourage people to ‘buy’ houses that they cannot really afford. They tend to eventually to bring about an oversupply of houses as compared with other things. They temporarily overstimulate building, raise the cost of building for everybody (including the buyers of the homes with the guaranteed mortgages), and may mislead the building industry into an eventually costly overexpansion. In brief, in the long run they do not increase overall national production but encourage malinvestment.

Over sixty years ago, and he nailed it. What a shame nobody was listening.

Hazlitt's book is a wonderful introduction economic analysis in which he takes a fundamental principle and applies it to a number of commonly held, but erroneous, economic assumptions. In the introduction, he summarizes the principle as follows:

The art of economics consists in looking not merely at the immediate but the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

Using this approach, Hazlitt examines the ignored effects of policies such as rent control, minimum wage, protectionist tariffs, make-work schemes, subsidies and bailouts, and several others. He clearly and simply demonstrates that by looking beyond the immediate effects, what at first glance appears to be beneficial is in fact harmful. Written for the intelligent layman, this book can also be read by an interested high-schooler.

Hazlitt's formulation is a recipe to correct the error in thinking of known as "context dropping." Ayn Rand explains this error in her essay "The 'Conflicts' of Men's Interests."

[T]here are two major ways of context-dropping: the issues of range and of means.

A rational man sees his interests in terms of a life time and selects goals accordingly. This does not mean that he has to be omniscient, infallible, or clairvoyant. It means that he does not live his life short-range...It means that he does not regard any moment as cut off from the context of the rest of his life, and that he allows no conflicts or contradictions between his short-range and long range interests. he does not become his own destroyer by pursuing a desire today which wipes out all his values tomorrow.

A rational man does not indulge in wistful longings for ends divorced from means, He does not hold a desire without knowing (or learning) and considering the means by which it is to be achieved.*

Leonard Peikoff elaborates further:

Whenever you tear an idea from its context and treat it as though is were a self-sufficient, independent item, you invalidate the thought process involved. If you omit the context, or even a crucial aspect of it,then no matter what you say will not be valid...

A context-dropper forgets or evades any wider context. He stares at only one element, and he thinks, "I can change just this one point, and everything else will remain the same." In fact, everything is interconnected. That one element involves a whole context, and to assess a change in one element, you must see what it means in the whole context.*

Looking at the whole context is key to evaluating the effects of any action or policy. Attempting to raise the number of home owners through government-guaranteed home mortgages drops the context both in terms of range and of means.

In terms of range, subsidizing loans for people who in fact can not afford the homes the loans are intended to purchase, has created not home-owners but mortgage defaulters. The effects of artificially lowered interest rates spread through the economy, distorting risk and profit calculations, leading to outrageous levels of leverage, culminating in the recent collapse which has destroyed the businesses and savings of millions of people and trillions of dollars. All of these events are intricately interconnected.

In term of means, all government subsidies necessarily involve violating property rights in the name of the "redistribution of wealth," which is nothing more than today's euphemism for the Marxist principle, "From each according to his ability, to each according to his need." No policy which violates a fundamental right can be considered valid.

When evaluated in the entire context of range and means, government subsidies are neither moral nor practical. With the application of properly constructed principles to the full context, the destructiveness of such policies can easily be foreseen.


*Quotes for Ayn Rand and Leonard Peikoff were taken from The Ayn Rand Lexicon, edited by Harry Binswanger, New American Library, 1986, pg 105