I recently had the opportunity of visiting the emergency room at a big university hospital close to where I live (as a “customer,” unfortunately). It is safe to say that I was positively surprised by this experience. Of course, being from Sweden I expected something similar to the emergency rooms back home; Sweden is a socialist country, but it is not a backward, third world kind of place – the quality of health care is generally the same as in the US.

Since I have experience from visiting a big university emergency room in Sweden as well, this is the perfect opportunity to tell the world of my experience in a comparative case study. Both visits are from college towns, which should mean that a lion’s share of the population is very young and, one would presume, healthy. (For the sake of clarity: neither of the case studies involve ambulance but only walk-in emergency care. And in neither of the cases was for very serious medical problems, so don’t worry – I’m fine.)

The university hospital I visited here in the US is part of a very big, public university, so the comparison is not one of purely private vs. public. But it is safe to say that the differences between the two cases is primarily due to institutional differences: health care in the US is to a large extent paid for via [private] health insurance whereas all emergency care in Sweden is legally a public monopoly. There may be differences due to regional factors, traditions, culture, etc too – but since I have experience of both systems and it is easily shown that the quality of care in Sweden and the US is basically the same, I would say one can be fairly certain that the general differences shown in this case study are typical.

Let me first briefly tell you about my experience here in the US. After entering there were two desks with friendly ladies immediately greeting the care-seeker and asking what’s wrong. To the right, there was a small waiting room with probably 15-20 nice chairs for relatives and others who wait for their loved ones. One man was there playing with his child, probably waiting for the child’s mother (or sibling), despite it being around lunch-time.

After asking a few short questions and getting insurance information, a nurse appeared from the door three feet away with a wheel chair and I was immediately taken into a room with three nurses hooking up whatever machines they believed they needed, taking tests, etc. I also had to put my signature on two papers, the purpose of which was explained clearly by one of the nurses.

A physician came in and asked several more questions and took some more tests while looking at one of the flat screen monitors showing heart rate, blood pressure and numerous other things. Ten minutes later a nurse came by to take an X-ray, and some more tests were taken. And then, as seems to always be the case no matter what country one is in, I was left on my bed waiting for test results. There were frequently nurses checking in on me to see that I was alright.

Two hours later I was released with a prescription and advice on how to get well and with printouts of instructions what to do if there are further symptoms, when and where to make appointments for follow-ups etc. What is striking about this visit is that they asked for my ID (and insurance card), but nobody asked for payment or even discussed coverage etc.

The Swedish case is quite different. Instead of entering into a foyer with nurses greeting you, you step right into a waiting room with numerous people in it (Swedish emergency rooms are for some reason always packed with people). The first thing you do is take a ticket from the machine with your number on it, and then you go to the desk in the far end to register with the receptionist. Note that the purpose of a receptionist in this “free” public health care system is to receive payment for the visit or get your personal information for billing (the out-of-pocket cost would be approximately $45, but depending on what regional political unit you are in) and make sure you await your turn.

Next to the receptionist’s desk there is a closed, wheel chair approved (extra-wide) door next to a window covered with drapes on the inside. Behind that door is the screening room with a nurse seeing one person at a time trying to make a preliminary diagnosis in order to establish priority. You may speak to the nurse when it is your turn (that’s the number on your ticket!), but until then you will have to sit down if there are available chairs or otherwise stand waiting.

My experience is that most people in the waiting room are not seriously ill. In fact, I’ve seen retired people munching on cookies and drinking coffee from thermoses while talking to their friends. (You would not often find vending machines in these kinds of places in Sweden – I don’t think I’ve ever seen one.) It has seemed to me that they are in the ER to socialize with their friends rather than seek care; my guess is that they are feeling lonely or that they may have a headache or something that a Tylenol would take care of (old people’s common headaches is a real problem for ambulance emergency care!).

If you are in serious pain you will need to call an ambulance, even if it is not life-threatening or even urgent. Why? Because the wait in the emergency room could take hours – several hours. Without revealing too much about my own or my loved ones’ medical conditions, let me assure you that I’ve been in the emergency room at this Swedish university hospital where the the person seeking care has been in tremendous pain – but we have still been directed to sit down and await our turn (the receptionist makes the call, it seems).

When it is finally your turn, you may enter the room with the screening nurse. If it is serious, as it was in the case I’m describing, he or she will pretty soon realize that urgent care is necessary and then immediately notify a physician and the patient to a room (the rooms, I’ve noticed, are the same in Sweden and the US: they are basically rooms with three walls with the fourth wall being a curtain or glass door). The care is basically the same, even though you would likely experience more wait time in Sweden and you would not see as many people checking in on you.

The physician and nurses will take tests, check your heart rate and blood pressure etc. It is unlikely that you will be hooked up to a digital screen showing all this, but if you are (perhaps if your condition requires continuous control of values) it will not likely be a flat screen but one of those old green-and-black computer screens mounted to the wall or the ceiling.

One obvious difference is that comfort is not a priority in Swedish care; whereas nurses will frequently ask you if you are okay and adjust your seat or bed or whatever in the US, you will most likely be left alone on a rather uncomfortable bunk in Sweden. Also, you will notice that physicians and nurses in Sweden wear their own clothes with a white robe on top (some nurses do wear the white pajamas-like health care suits seen in the US), while in the US everybody seems to wear the pajamas-looking suits in different colors (green, blue, etc).

As I said earlier, the quality of care is about the same. It is a myth that public systems necessarily have lower quality care; they don’t always, and the reason for this is probably that poor quality is easily seen and will be “fixed” by politicians seeking reelection (through legal guarantees or whatever). But anyone with a little economics understanding knows that if quality is the same while out-of-pocket costs basically approach zero, it will shift (increase) demand. Supply, on the other hand, will not increase and is even likely, due to the empirically established law of sky-rocketing costs in public bureaucracies, to decrease.

The result is, of course, excess demand or shortage; in other words, health care is of good quality but is generally less accessible. In this case study,the inaccessibility of health care through the ER is due to the long waits in the waiting room (and also why you won’t see that many people checking up on you while admitted) – and the reason for this is characterized by the elderly having an ER picnic (which is, I must emphasize, something I have experienced myself).

So what do we learn from this case study? Well, first we need to stress that neither system is private – they are both shades of public. Furthermore, health care culture is not very different in terms of how and and what quality of care is given. The major difference is that there is less public bureaucracy in the US case (and, consequently, more of private market) due to private insurance financing. Therefore, the differences between the cases are due to these institutional differences: the level of reliance on political vs market solutions.

The funny thing in this is that one cannot conclude that emergency care in the US is better because it costs more. This is not true; Swedish health care is among the most expensive in the world, as is US health care. Any differences are marginal and the differences are not seen across the board: Swedish health care is more expensive in certain kinds of care whereas American ditto is more expensive in other kinds. No conclusions can be drawn due to costs or availability of capital (even though, of course, insurance companies try to keep costs down in the US while this role is taken on by the political system in Sweden).

It is also interesting that the obvious differences so easily can be explained by economic reasoning. Taking a principles course in micro economics gives us all the tools necessary to explain and understand the differences between American and Swedish health care – and economics perfectly predicts the outcomes of the systematic difference.

What we should learn from this is not, however, to always ask economists for advice. It is true that economics provides the tools to identify and assess pros and cons, but there is a lot of bullshittery going on by economists. One has to be open-minded and realize that institutions and context matter – and need to be considered in an economic analysis. Krugman-type economists would consciously overlook certain obvious problems/costs of public bureaucratic organization while they would over-emphasize semi-relevant benefits. So when asking economists, one must know what to expect.

What we can learn is what is strikingly obvious: artificial incentives created by a public system with no access to [internal and/or external] prices and not subject to competition cause problems due to the inability (indeed, impossibility) to calculate the best use of resources. The effect is higher cost and lower output, hence the inaccessibility of Swedish health care.

The previous post discussed the problems of measurement and the very problematic assumption that “people are like rocks,” i.e. that individuals share a fixed and observable nature in the same way that rocks have common simple properties. I also stretched the discussion to cover the ever present tension between the Weberian concepts of erklären and verstehen.

The former kind of science strictly emphasizes explaining facts and establishing simple causal relationships that can be derived from the observable properties of the entity. The latter stresses the subjective understanding of what is going on, and finding a way of rationally establishing a way to “see” how things work and are related. Weber explicitly states that erklären is the purpose and method unique for the natural sciences whereas the social sciences need to have a verstehen-based perspective. Predictions, hence, are possible only in sciences based on the erklären methodology and this is the conflict in economics: a fundamentally social science attempting to make use of primarily (only?) the methods and methodology of the natural sciences.

But predictions are problematic in and of themselves even if we ignore the tension arising from using erklären methodology studying verstehen phenomena. The very nature of predictions imply the usage of historic data to say something about the future. As we know, and have known at least since the days of the Ancient Greeks, it does not follow from the fact that the sun has risen every morning for centuries that it will continue to do so. History and future are not the same and may even be very different. What makes the future so troublesome is that it is fundamentally uncertain and we cannot use the certain facts of history to create knowledge about it.

As was stressed in the previous post, extrapolating doesn’t necessarily make sense. Doing the same maneuver for predictions about the future from data about historical events makes even less sense. Tomorrow will not be exactly like yesterday, which is a fact everybody knows and should know. This fact is true for details as well. That a rock falls to the ground if dropped today does not mean it will do so tomorrow.

However, we can conclude that a rock will fall to the ground if dropped tomorrow if we can show what makes it drop and we can rely on the properties of these causes being the same tomorrow. A rock has a fixed nature with certain properties and these do not change. We have been able to establish that a rock is dead matter that responds to exogenous forces in a very reliable and predictable way – we know that a rock is a rock is a rock and that this means something in terms of its nature.

It may be the case that tomorrow does not have gravity or that all rocks have turned into lollipops, but that doesn’t change the fact that rocks, according to our defintion, are rocks and that they respond to different forces in certain ways. We cannot with complete certainty say that everything will be the same tomorrow, but we can make general statements that will hold true for the things, forces, and properties we have specified (if we have done a good job specifying them). 

Now try the same thing with a human being. An individual is an individual is an individual. If this is true in the same sense as a rock is a rock, then we should be able to establish if one and every individual likes ice cream, responds the same way to stimuli like heat and cold, reacts to a certain situation the same way with a high level of certainty. 

Try the latter and compare a rock with an individual. Expose the rock to exogenous forces and observe its “behavior” and what happens to it. Then expose an individual to some stimuli and observe the behavior. Repeat it and observe the behavior – is it exactly the same? You will find that different individuals react in different ways to stimuli – and that one individual’s reactions will change over time as he or she learns. The rock never learns.

So even if the way a rock is affected by certain experiments is not purely certain for the future, it is very much predictable. The way John Doe reacts to, e.g., a speeding car about to hit him is different every time – and may not [ever] be the same as how Jane Doe reacts. It is not predictable; we cannot know what will happen (i.e. how the individual will react). 

So how will people react to lower prices in a certain good? We can attempt to predict that tomorrow, if the price for widgets is 10% lower, people will purchase 500,000 more widgets. But that doesn’t make sense. If the price is indeed lower it does not follow that the people who bought a widget yesterday at the higher price are more likely to buy a widget again. It also doesn’t follow that people in general value the widget in the same way. 

The only thing we can say is that ceteris paribus people will tend to purchase more of the cheaper good, at least for as long as they subjectively expect to be better off through purchasing one [more]. People want to be better off (which follows from the definition of better) and therefore make choices to improve their situation – to the best of their ability. But their preferences change and their ranking of those preferences change – as do their needs, perspectives, experience, knowledge, etc. An individual is not an individual is not an individual, at least not the same way a rock is a rock is a rock.

The problem of induction is problematic in natural science where dead matter is studied, even though the deathness of matter makes its properties reliable and effects predictable. Add life to the equation and the problem of induction becomes insurmountable and obviously so. 

Some things do seem to be repeated over time and the saying that “history repeats itself” may be thought to disprove the point I am making. But it doesn’t. It may be true that history tends to repeat itself if we do not learn from it, but the problem is that there is no “we” in the sense that there is a “rocks.” Individuals are different from each other and they change over time; humankind may not learn from the lessons of history, but it is equally true that situations do not repeat themselves – only man-made abstractions of them do. It is rational to learn from the essence of a situation not to repeat it or its negative consequences, but it is equally rational to say that things have changed and therefore the outcomes may do so too.

The lesson to be learned is that collectivism doesn’t work when we speak of human behavior simply because human behavior is not as tightly bound to the properties of “human” as the effects on a rock are to its properties. The reason is that human consciousness is not necessarily the same as the human body – one could possibly predict the effects of stimuli in medicine, but not in economics. Medicine works with the properties of the human body, i.e. its constitution and chemical and biological relationships (however complex); economics studies human behavior, where one individual’s choice to act is not based on the same facts as another’s, and a specific individual tends to learn – and change – from experience.

In an opinion piece in the National Post the obvious question is asked: Why Do We Have Economists? The question had to be asked, especially since there has been no real “blame game,” no real and public debate on why all predictions turned out wrong, and no consequences for the economics profession. After all, economists often stress the fact that action is taken under rational assumptions of consequences and that all actions have consequences of some form. The army predicting economists is obviously an exception to that rule.

As some sociology professors frequently joking: say what you will about economists, but you will always get a straight and precise answer – and you always know that it is wrong. So the question asked by the editor of the National Post should be well taken; it is an important one. Why do we have economists?

But there is a question that is more important, especially for the professional economists who make all these “always wrong” predictions, and that is what makes the predictions always turn out wrong? The answer to this question lies in the error of Milton Friedman in his now famous (should-be infamous) article “The Methodology of Positive Economics” and the people who followed him (and still do).

Economics prides itself of being a deductive science, i.e. that new knowledge is deduced directly and logically from true premises or assumptions. Friedman argued that it doesn’t matter if the assumptions are wrong as long as one can extract general rules from which one can make predictions that are somewhat reliable and come close to the truth. What he spelled out was a theory of economics aiming to be a natural science, where exactness is both important and possible. In economics, however, we should learn that exactness is neither important nor possible.

In order to provide a positive, rigorous science that can produce exact predictions, one has to through out all understanding (in the Weberian verstehen-sense) and rely solely on cold data. One cannot make predictions unless that which is studied is perfectly observable and with clear boundaries. But what if we apply this line of thinking on human action, which is the core of what is studied in economics. Are the causes, nature, and consequences of human action perfectly observable and have clear boundaries? How do we measure the causes of an individual’s actions? His choice of action? The action itself? Its consequences?

The latter comes closer than the former, but it is still not even close to having the properties of the objects studied in the natural sciences. Mixing x grams of A with y grams of B may always create the substance C, and exposing D to E or F may always show exactly z – but doing m to one individual does not necessarily create the same effect as doing m to another. People are not simply responding perfectly and blindly to exogenous influences, there is a whole lot of other things going on that are at least as important as certain influences. Some call it “free will,” but you don’t have to go as far into metaphysical or religious pondering to realize that people are neither rocks nor [simpler] animals.

The problem of economic prediction is just that underlying assumption that we can “easily” predict the outcome of numerous people through meddling with some of the variables that affect people’s choices. It is simply not the case that different individuals choose to act the same way when exposed to (or influenced by) the same stimuli. Our bodies may – may – react in the same way, but our minds do not. 

To this some might retort: thanks to the law of large numbers we can generalize our conclusions despite individuals not being alike. When the law of large numbers is applicable, we can simply assume that if we just have a sample large enough all potentially skewed or unrepresentative data will even out and we will find The Truth about human beings. But this does not change the problem at hand – we are still generalizing in the same way, but only with more data and more individuals. 

Even if we accept the law of large numbers as a sufficient reason to use statistics to understand people, we will have to face the problem with their not being the same. That people, being boundedly rational, would always choose more over less (which necessarily follows from the definition of choice) does not mean they will choose a particular outcome over another in every situation. Each individual will make a subjective assessment of his preferences and rank them, then make a choice based on what he knows of his ranked preferences (this is the decision process, whether it is carried out consciously and reflectingly or not). But the ranking may change depending on circumstances as well as what the individual has learned.

Making perfect predictions the way Friedman proposed means we must take the quality of being human out of every individual, or at least “even it out” in order to calculate precise predictions. What do we learn by knowing that people without personalities and without “inner depth” (some call it soul) would necessarily act according to our the predictions? Probably not much.

Furthermore, the predictions are based on extrapolating well beyond what is reasonable. Establishing one person’ s assessment of everyday risk and the costs he accepts to take care to avoid this risk, and translating it into dollar amounts, does not necessarily give us monotonous knowledge of this individuals preferred choices. It does not follow that he would accept a high risk to lose his life if he was paid some muliple of the cost he was willing to take on for smaller risks.

Predictions simply do not cut it. So why do we have economists?

The answer to this question is that we do not need most economists, but we do, at the same time, need economists more than ever. The reason for this is that the economists working on predicting the exact outcome of hundreds or thousands (or millions or billions) of individuals’ simultaneous choices are worthless, their methodology is fundamentally flawed and they are nothing but frauds. And they should be treated accordingly.

While we think of what to do with the predicting economists we need to find the real economists, the people who understand the market and can tell us how it functions and what is required for it to function well. Very few economists understand what the market is about and how the emergent order arises, subsists, and what it effectuates. These economists were able to say a long time ago that we were heading towards a meltdown, and they did. They even published these warnings, but nobody listened or wanted to hear about it. “Nobody” here denotes the prediconomists and the political elite that [usually] hire them. 

Economists need to do what businesses did a long time ago: go back to basics. There is no need for armies of economists trying to predict the exact results of public policy, of interest rate changes, or monetary policy, etc. The use of prediconomists is not to learn about the future or politics, but as “useful idiots” disguising blind, naive, and ignorant attempts to regulate people’s choices through granting the commandeering of society an air of scientificity. And they serve well as scapegoats when their predictions turn out to be wrong and the people in charge can hide behind their “good intentions.”

What there is a need for is real economists who do not engage in futile attempts to “scientifically” make exact predictions of people’s future choices. We need people to tell us how the market works so that we can reap the full fruits of our hard work and profit from the risks we take.

The general leftist might not find this question troubling, since the “obvious” answer is that economists work with money and capital and therefore have a natural and benefiting relationship with capital owners in our capitalist economy. This may be an answer that explains some individuals’ actions and convictions, but it is hardly the reason economists in general – theoretically or in reality – tend to have free market ideals. But it may be an easy way of avoiding over-simplifying and over-politicizing the issue.

Some may argue the other side of the simplified leftist coin: that there is a “selection bias” and therefore that people who like money and capital(ism) are more likely to choose to work with and study money and capital. This too may explain why some of the individuals in economics feel they belong on the right. But it doesn’t explain why virtually a whole discipline identify with the “right” side of the political spectrum.

The real answer should be based in simple economic theory: the theory of incentives, or, rather, the assumption that people do what they have an incentive to do. This is a core understanding in economics of the true nature of human action. People do what they have an incentive to do, and understanding this may lead the individual economist researcher to the solution to many a problem. Understanding that people do what they have an incentive to do explains virtually any social standards or institutions.

What this means here is that economists think this way and therefore necessarily think this way also with respect to politics and the organization of government. Seeing that individuals in government are acting on their incentives means seeing all the possible problems with government. For instance, take any democratically elected parliament taking the proposed budget to a vote. If the members of parliament would pay whatever is spent themselves they would have a great incentive of minimize the budget, make sure that it is spent and distributed efficiently, that only projects with great chances of success and with real benefits would see the light of day. But this is not the case; politicians choose what to spend other people’s money on.

Imagine what this screwed up set of incentives would mean in another setting, e.g. a common grocery store. We know that the owner or manager of the store makes sure to hire those he can trust to sell (and not steal) the groceries and he will only buy those groceries he knows people will buy. Why? Because his ass is on the line – if he spends most of the budget on groceries nobody wants he will lose customers and therefore his own money…and perhaps the whole store. 

Now imagine the same situation but where the owner or manager can decide how much money he gets to spend through simply taking other people’s money. Whoever lives in the area has to pay whatever percentage of his income to the owner of the grocery store so that the grocerer can buy goods to offer his customers. Now what are the incentives for him to buy only good products, only products people will like, and hire people he can trust? It makes more sense to buy the cheapest groceries, no matter if people like them, and hire the people he likes or people he feels sorry for or people he wants to do a favor. 

It is not necessary to ask which grocery store will be of greater utility for the customer, even if some of the groceries in the “political” grocery store are for free. 

This is how any political parliament works: politicians claim they are limited by their budgets, but they get to decide the size of the budget (and take the money necessary) and even if they should stay within the budget. It is often the case that they spend way more than they take from people, thereby not only spending people’s earned incomes but also the money they will earn in the future. So any political organization is, in terms of incentives, totaly screwed up. Or, to translate it into economic lingo, the incentives between the principal (voter) and agents (politicians) are misaligned.

So it makes sense for economists to identify with whatever politician that seems to understand more (read: seems to be less ignorant) about these things. And these people, at least rhetorically, are often found in the political right. I say rhetorically, since it is pretty obvious to whoever understands politics that in the choice between Bush and Obama neither one understands the first thing about economics. But Bush was able to make it sound like he had a fraction of a clue. 

The interesting point is not really that economists identify with the political right, but rather why they do not follow their theoretical understanding all the way through and demolish the State – at least in their thinking. Some of them clearly do (I am one), but not very many. 

So what we have here is really a whole academic discipline that understands, or supposedly understands, economics and therefore can identify the lack of aligned incentives in political organization – but don’t do so all the way. Economists either do not fully believe economic theory or they do not believe government is what it is (and claims to be). Which is it?

Some clearly do not understand and do not wish to understand economic theory nor apply it on other things than their precious formulas and functions. Such economists will never find any truth and will not produce anything of value to anyone. But what about the rest? It is clear that many economists live in symbiosis with the State and therefore do not wish to think about it in less positive terms. After all, the government employs a lot of economists and economists find it very prestigeous to work for the people with political power. So they simply neglect to apply their economic understanding on the organization they wish to serve.

So how about the rest, i.e. economists who do understand economic theory and wo do not find it necessary to lie to themselves in what regards the State? The answer to this question is what is very sad. It should be the case that economists who end up identifying with the political “right” while supporting government simply do so because they are as brainwashed as most people. Despite being scholars in economics they have learned throughout their lifetimes that there is no way to survive without government.

Economists (many of them) may not like government, but they accept it and even support it. And they use their sound theories to make government more efficient and effective – simply because they have been taught that there is no other way. To a free-thinking individual with economic understanding this is of course the same as saying that a certain industry “must” function like the “statist” grocery store mentioned above – but that we need to make its wasteful operations as efficient and effective as possible not to get “too much waste.”

Anyone understanding the competitive market understands that waste is not acceptable, that waste is minimized automatically through the profit motive and the pressure from competition. The problem here is not only that government is a monopoly and that the profit motive is nonexistent. The problem is also that it is an organization that can “legitimately” force its customers (and non-customers) to pay for its costs while it can supply whatever it wishes at whatever cost it finds most appropriate. 

Government, in other words, is an organization that is much much worse than any monopoly mentioned in economic theory – it is a monopoly cubed, judging from the weird incentives it creates and the effect it has on the market. There is therefore no way of understanding economists’ support for government other than that they have given up in the sense not applying what they know to it. Brainwashing works, even on those who have dedicated your whole professional lives to learning the truth – and when the truth speaks out clearly against government.

But it is not these problems, however important, that I want to discuss in this post. Instead, I want to discuss the structure of the education I’m getting and what it seems to focus. Herein lies an important lesson to be learned about education in general and especially how students are treated. It is obvious that many professors seem to struggle with understanding how to treat graduate students, which means they sometimes fall into the “undergrad trap” and talk to us like were we at the very beginning of our studies on a higher level.

An even more obvious fact is that professors seem to lack an understanding for the greater issues. Someone has told me that students tend to focus on theory and theoretical reasoning because “it is easier” than “real” empirical research. I strongly disagree with this view; I find it ignorant and, frankly, stupid. It is not easier to develop a good theory than, as is supposedly “more difficult,” to grab a data set, run [standardized] regressions and then claim to have found The Truth. Such a statement makes me lose whatever respect I had for the person making it; they deserve no respect – rather, they deserve to be despised.

Even though most professors do not share (or at least not state) this view, misunderstanding or non-understanding is common. Often the problems I identify with premises for published papers that we’re reading are ignored, probably because they require a philosophical mindset. I’m not saying I’m a prodigy or hyper-intelligent and that “all professors” are stupid; on the contrary, my experience in both the Swedish master programs and the American PhD program is that the professors are usually highly intelligent people. However, they are not scholars and therefore cannot grasp the essence of discussions on a purely conceptual or theoretical level. There are, of course, exceptions to this rule, but they are not many.

Professors have chosen to (in some cases been forced to) focus on details for so long that they have more or less forgotten what they’re doing is all about. They no longer have an interest in finding Knoledge or Truth (if this ever was the case), but are more interested in specific “cool” details of theoretical-empirical papers that have, for some reason, become famous. It is no doubt the case that details can be interesting – and even very interesting – but a detail or sub-reasoning can only be interesting if the overall theoretical framework is a reasonable construct upon a basis of sound premises. This is, I’m afraid, not often the case. Papers are very often empirical or try to develop a theory from a semi-inductive approach to knowledging, and as such it seems the authors have not spent much time thinking through the foundation of the theory developed.

It is a sad truth that even academic researchers doing theoretical work have been so “empiricized” by the pressure of mainstream that have lost touch with the real world as well as interest in and understanding for the importance of premises and assumptions.

This brain washing (to use my adviser’s words) begins early in people’s academic careers. Graduate school is supposed to create a basis of knowledge while teaching the student how to think critically, but the real nature of the programs is that they aim for the streamlining of thought rather than encouragement for individual, unique, pioneering thought. It is true that all programs pay lip service to the dogma that students must learn critical thinking and that they must engage in research on their own even if they are taking a heavy course load. But the truth is that as little time as possible is left for the student to actually engage in such activities.

My own experience is that advanced studies are not very difficult; there are of course problems of notation, language and concepts one has never encountered before, but the level of difficulty is not unsurmountable. It appears to be difficult simply because there is so much work involved with learning what is taught in the course, but the work is not primarily time and effort spent tryting to wrestle complex concepts or advanced reasoning. Most courses cover fairly intuitive concepts.

I realize that I sound like someone who believes he is a Nietzschean übermensch, but that is not at all what I try to say. I have struggled quite a bit with the courses I’ve taken; it is only after finishing the course work that I have realized that the level of difficulty was not as high as I thought. And it has nothing to do with my “understanding what I [now] know.” The problem i have with the structure of the courses is that they seem to focus so much on details and technicalities that students cannot grasp what the professor is trying to say.

Take, for instance, a course I took in advanced micro economic theory. The theory itself, and especially the concepts behind it, is relatively simple – if you know anything about economics you should understand what make actors demand or supply goods and services on the market. But that is not what the course is about. Instead, the course barges into a jungle of calculus where the student struggles with finding first and second order conditions of abstract functions supposedly symbolizing a person’s “utility function” or a firm’s “production function.”

Of course, in the real world there is no such thing as a production function – a firm has assets and produces output using the resources and assets at hand in the best way possible. They are not making a generic function of their business processes and then taking derivatives to find the “optimal point.” And there is even less of a utility function (a somewhat humorous concept, I might add).

The details and technicalities are what is important and the understanding for what is really going on – or why the discipline ended up with these functions and conditions in the first place – is not only left out, it is ignored, dismissed, and considered “unimportant.”

As an analogy, imagine an automobile manufacturer where the engineers are hired to focus on making components as efficiently as possible without thinking of their use in the whole. If no one thinks of what the automobile is supposed to do – or how to put it together – there will be no automobile. Just like experts in economics (which is my field) can talk of “properties” of functions for ages without ever mentioning or even considering what the functions are for, where they come from, or what they try to explain.

What is the importance of the generic, differentiable, mathematical function to how people act in a market?

Academia is so consumed by discussing the details that nobody has time for or ever considers the so-called “whole picture.” Even in “softer” courses it is the case that students need to read as many articles as possible on certain details and technical matters that there simply is no time for reflection. After reading a couple of dozen articles – in a short time period – that all discuss the same technicality, how many students would you think are able to take a step back and reflect on the importance of the technicality qua technicality? Not very many.

It is therefore the case that academic education of today bears no resemblance whatsoever with the classical education of Ancient Athens (such as Plato’s Academy or Aristotle’s Lyceum) or even the education in the modern era. For instance, when German philosopher Immanuel Kant taught courses he discussed problems of morality and let the students consider his own theory and comment on it. I am not saying that the education of that time was unstructured or that it was some kind of dopey discourse post-modern style, but that there was a fundamental interest in ideas.

It may be unfair to compare the modern “hard” science of economics with the soft philosophies of Plato, Aristotle, and Kant. But the thing is that Aristotle, for example, spent a lot of time on explaining natural phenomena and did so systematically and in an as structured and scientific way possible in that time and age. Yet his aim was not to dissect a detail of a small part of that which he found – he strived to understand and explain the world around him.

A criticism to my comparison of modern economics and the natural science research of Aristotle is that today’s society – as well as our knowledge – is way too advanced to use Aristotles methods. This may be true to some degree, but do not kid yourself – we are not as advanced compared to previous times as you would like to think. In terms of knowledge, we’re to a large extent in the process of rediscovering what scientists hundreds of years before us discovered, described, explained, and understood.

As a matter of fact, we have forgotten the reason for doing scientific work and research. We have to rediscover the purpose of what we are doing, but so far we are so focused on the details and technicalities that we haven’t even started acknowledging that we’re missing the whole picture and even parts of it through staring at one stroke of the pen.

Science is literally worthless if we cannot allow us to reflect on it and make it useful on a higher level of  abstraction; we are so busy doing scientific research that we have forgotten what the research is for.

So it is not surprising that that the [few] questions I [find it worthwhile to] ask aren’t understood. I am no Cicero, so perhaps my questions could be much more clearly articulated. But I doubt that the problem is primarily my inability to phrase the questions clearly enough – the problem, I maintain, is that they are of another nature than what science is thought to be all about. I cannot help finding similarities between theories, conflicts in implicit underlying assumptions, and problems in the questions being asked (rather in how they are answered). I am not interested in the technicalities or detailed answers; I am interested in the questions.

Perhaps you say that it is sad that I was not born a few hundred years ago, in a time where people still thought the way I think and were interested in the kind of things I am interested in. That is, in a time before the sciences were divided into separate disciplines and before the quantification of knowledge-seeking. And you may be right – I was born too late.

But on the other hand, science has lost its way and is maundering without compass or aim. I am certain that we will soon discover that we are not asking the right questions – and that we aren’t really asking questions at all. The recent interest for so-called “interdisciplinary research” is definitely a step in the right direction, even though it is a very small step. Science, I believe, will once again find a way back to the path of knowledge discovery; it is a matter of when not if.

From this perspective, I’d like to think that I was not born a few hundred years too late. Rather, I was born too soon. Or perhaps I can help science find its way back to its roots and purpose; that is, find the way home.

The reason for this is that each herder will recognize that the cost of adding one more animal to the pasture is zero to the individual herder, whereas the benefit is great. He will also realize that if he does not take the opportunity to put the additional animal on the pasture someone else will. The benefit will thus be reaped by someone, the question is but by whom.

So in order not to be beaten to it by the others, each herder will rush to maximize their benefits through adding as many animals as possible to the pasture. This will soon degrade the land and make it unusable due to the excessive overuse caused by the rational benefit-seeking herders. The more obvious the profit, the faster and more devastating will be the overuse.

The same type of problem is haunting the Internet, since the Internet technology makes a number of activities almost or totally free. The very structure of Internet builds on the free transmission of data on any suppliers’ networks, which means it is an easy target for anyone who can make a profit out of its use.

Spamming is the most obvious “tragedy of the commons” problem. Since e-mailing is virtually free, anyone can contact anyone else with an e-mail account at no cost – and it does not cost more to send one million e-mails than it costs to send only one or two. Radically increasing the volume is therefore “free,” which means that anyone who can make money out of sending e-mails will tend to do so. This is why so many spend hours of their potentially productive time clearing their inboxes of numerous unsolicited and anonymous e-mails with misspelled offers of Viagra, penis enlargements, and women “for sale.”

The problem of spamming is further increased by the Internet making it possible – indeed, even easy – to send such e-mails anonymously. The structure of the Internet allows for far-reaching privacy through hiding one’s whereabouts, and it is also an open system, which makes it easy to pretend to be someone else. The result of a commons that allows its users anonymity is obvious: it will suffer from hyper overuse.

Another problem on the Internet, which is not as commonly identified, is so-called trolling. This phenomenon is often described as people using commons such as Internet discussion forums to post irrelevant, offensive, and possibly harmful messages in great quantities. The obvious reason for such anti-social behavior is to disrupt and destroy the discussions (or the web site), but it is also the case that these so-called “trolls” find pleasure in being seen (however anonymously so).

Trolls haunt practically any setting on the Internet that supplies a costless framework for discussion or sharing, and since the Internet is built on the principles of freedom, gratis, and anonymity it has proven very difficult to be successful in charging for such services. Thus: discussion forums and other such “collective” free services develop different methods to keep trolls in check and minimize their damage. Such methods include anything from moderating and surveillance to blocking of IP addresses and users. But since it is easy for a troll to, e.g., simply create a free e-mail account and re-register, most measures taken to get rid of trolls are rather ineffective.

The trolling problem is increasing all over the Internet and it has lately become a rather great problem with the world’s largest encyclopedia: Wikipedia. With its success it has become increasingly important for the organizations and people with “articles” on Wikipedia to make sure they look good and that the articles do not give them bad will. In other words, it has been noted that e.g. the CIA has routinely edited articles that are of interest for the United States government – the government wants to keep sensitive information (about its illegal and oppressive policies) out of the Wikipedia and far from common people’s knowledge. Also, it has been discovered that the Vatican is also editing Wikipedia entries in order to hide not-so-beneficial details of its past and present.

Of course, big business has also recognized that they can lose a lot of the goodwill they might have in the market place through letting people write “anything” in “their” Wikipedia entries.

Part of the negative information added to the Wikipedia articles might not be true and some might even be slanderous. Since the Wikipedia allows anyone to update and edit articles, one would think that the positive and negative extremes would even out so that most information in the articles are true or mostly true. This is however not the case, partly because of the commons problem, which is why the Wikipedia has appointed volunteer editors and even hired people to check the quality of entries.

But the problem with Wikipedia is greater than a lack of quality. It is easily targeted for campaigns due to its nature of being a “commons.” There are a great many trolls out there, and they seem to have a lot of time on their hands.

For instance, it has been noted that pro-global warming trolls are very active in changing Wikipedia entries on scientists who are skeptical towards the “imminent man-made catastrophe” scenarios. They therefore edit entries as part of their campaigns or even delete entries they are not very fond of. The National Post wrote about the scientist Fred Singer who, the Wikipedia entry said, believed in Martians.

The NP writes, for example, on U.K. scientist Benny Peiser:

Wikipedia refused to accept Peiser’s critique, or his interpretation ofhis own views, or an account of his views that he had provided to me, or an account of his views published in a peer-reviewed journal, or an account of his views published in The Wall Street Journal, or an account of his views published by the U.S. Senate committee on environment and public works.

Instead, the Wikipedia trollers insisted that all of the above sources were disqualified or irrelevant under Wikipedia rules, and that the trollers’ own understanding of Peiser’s views trumped all others.

The trolls are numerous and they are always there, which makes it very difficult to make sure the truth is kept for long in the articles. This is a problem for a great many people who are slandered on Wikipedia and cannot seem to have the slanderous remarks removed. Others have entries added only to see them be deleted over and over again even though they seem to comply with Wikipedia policies.

In this case, scientifically proven truths are tested by popular vote. If a sufficient number of people editing Wikipedia consider it important to have only one view on global warming on Wikipedia, then it seems this will be the case. But scientific truths aren’t subject to popular vote; on the contrary, it is science that is supposed to challenge our faulty world views through offering new theories and empirical proof that we are, indeed, wrong.

After all, if science was subject to popular vote, then we still wouldn’t have begun using the wheel and we certainly wouldn’t have adopted the view that the Earth is round – not flat. Popular belief 500 years ago was that the world was the center of the universe and that it was flat – that one could fall off if traveling too far in one direction. Was the discovery that the earth is indeed round a step forward, or would we be better off with the popular view?

I am myself a victim for such a trolls’ campaign on Wikipedia as described above. The last few years there has been an article on me emphasizing my anarchist views and political writings. But beginning the summer of 2007 there were constant “flags” on the article stating that it was up for deletion. The reason? I’m not “notable” enough. This may be true, I don’t know, but it seems strange to me that I was notable for three years or so before anyone questioned my notability – and that notability became an issue only after I had become somewhat known for my writings. Or was it an issue because I had become “notable”?

I tend to think the latter, since my views are hardly respected by most – and I have even received quite a few death threats, which would prove that some people aren’t too accepting of my views.

I’m personally not very interested in whether I’m on Wikipedia, but it was fun to see how the article evolved. It is not allowed for the person to edit articles on him-/herself, so I stayed away – but I checked it a little now and then and was amazed about how people could keep track of my views, my background, my whereabouts, and my ideological evolution. Most of it, I must say, was absolutely correct – even dates and places were correctly noted in the article.

An article was also added on the web site I started back in 1999 (or was it 1998?), Anarchism.net. But as soon as the article on Per Bylund was flagged or deletion, so was the article on Anarchism.net. A debate followed on the Wikitalk pages, and it was repeatedly decided that the article on me should not be deleted. But just like it isn’t possible to keep politicians at bay through clearly advising them against their wishes in a referendum (have you noticed how they always seem to hold another referendum soon after the first one if they aren’t pleased with the outcome?), one cannot beat trolls in a democratic vote.

The article on Per Bylund was kept the first, the second, and – I think – the third times it was up for deletion. Between each “flagging” it was updated by people who had more references and information, so the article quickly grew. This was not enough, however. The trolls finally won the battle through being more persistent than the anti-trollers, and both the articles on Per Bylund and Anarchism.net are now deleted from Wikipedia.

The interesting thing in this “war” on Wikipedia was that as soon as a deletion “flag” had been removed, another one was added. And there were only two or three people adding the deletion flags every time, at least one of them being a Wikipedia editor (with rights to make the final call to delete or keep). They obviously had a strong interest in not having these articles on Wikipedia. One would think nobody should think it important whether there would be an article on Per Bylund on Wikipedia, but obviously a couple of people thought it extremely important not to have it there.

I was continuously updated on what was going on by people with an interest in editing articles on Wikipedia. It was an interesting experience, to see how some people so eagerly invest such enormous amounts of time into having an article on someone so insignificant as myself removed from a free, online encyclopedia. I hope their gain, which I suspect is at best “feel-good,” was worth the trouble.

These are just a couple of examples, on that I experienced first-hand, of the tragedy of the commons problems on Wikipedia. The solution for Wikipedia is of course the same as for any such problem: adding cost to the use (and especially abuse) of the resource. Paying as little as 1/10 cent for editing a page would keep all or almost all trolls away. They are, after all, only doing it because it is at the expense solely of others.

In a sense, these trolls are unsuccessful politicians. Whereas politicians manage to get their hands on power and enrich themselves through making use of the that great [force-based] commons called the State, the trolls on Wikipedia and elsewhere don’t get further than their personal computer. But they have a lot in common – both thrive off the use of commons and eagerly invest in other people’s misery.

The latter is interesting, since it seems to apply to almost anybody – and it absolutely applies to most politicians. Having spent ten years as an activist, political leader, and elected to local parliament, I know for sure that politicians are no doubt some of the dumbest people on the planet. They are the true victims of the Savior Complex: they do not only believe they have the ability to save people from themselves and the world, but also that they have the right to use whatever means necessary to accomplish these ends – and they expect gratitude, money, and more power in return.

Ignorance should therefore be a large part of what these people are about.

But politicians aren’t the only people who suffer from the Savior Complex, even though they are the ones most heavily addicted to the feel-good of being do-gooders (at other people’s expense). Most people, I would say, are to some degree victims of or ready to become victims of this complex. The reason I say this is that anyone who is “awarded” a little power, especially in the power rule system we call democracy, pretty much immediately leap into being totally consumed by it.

Let’s have a look at health care policy as an example of this complex, and how it makes people totally ignorant of economics (assuming they knew anything about it to start with). Who is against “free” health care? Most people are not, even though some conservatives talk about it probably being a bit better if private corporations supplied the services rather than an outright government monopoly (they still support “free” health care policies if asked, though).  Why is that?

The reason for nationalizing health care is often a function of both health care services being a “very important” service and the costs being too high for “common people” to afford. Since it is important to everybody – nobody wants to be sick, and we all want as close to eternal life as possible – many conclude it is a “right” to have it: if it isn’t a right, they rightly conclude, everybody wouldn’t get it. So in order to save people from how the world works (meaning, if you can’t somehow pay for it yourself or provide your own health care – somebody else must be forced to pay for it) the obvious conclusion is to make it mandatory for all suppliers to make it available to anyone who “needs” it. (Notice how easily the Marxist term sneaked in to the mainstream vocabulary?)

So there is an obvious political demand for “free” health care services just like there is for promising any other kind of “free stuff” – only health care is by most people considered a lot more important than chocolate bars, cars, or even houses, which means politicians gain a whole lot more offering “free” health care than “free” chocolate bars.

One might wonder what made politicians get all the health care they so eagerly promise people. After all, most people in Congress and the White House don’t own hospitals or are even MDs – so where does the health care come from? As everybody knows, you cannot give people what you don’t have. If you do, then you would commit an act of either fraud (if you deceive the recipient) or theft (if you steal it from someone else to give it to a third person). Politicians have no problem with either of these “qualities” of course and often do both, but they tend to do a lot more of the latter than the former.

So we can safely conclude that politicians, when promising “free” health care, steal it directly from the suppliers or steal money from people to pay for it. In any case they do steal to provide people with what they don’t have. As anyone with just a fraction of economic understanding knows, there ain’t no such thing as a free lunch so someone has to cover the costs somewhere, somehow. In the case of “free” health care, which, by the way, seems to be called “universal” health care nowadays after people got a bit troubled by it suddenly being “free” through some act of political magic, the cost of it ends up with you and me and every other taxpayer. In other words: taxes increase.

This doesn’t seem to be a big deal for some people, since they might argue that they would gladly pay a couple of extra dollars to provide for the poor. That may be the case, but somehow these “friendly” people never got to giving the poor even one cent’s worth of health care prior to it being mandatory. One might wonder if these people are so good if they simply refuse to do it unless forced to.

That obvious contradiction of the do-gooders’ mentality set aside, how many dollars would they, now as tax payers, have to pay to provide health care for the poor? Probably not very much if they would support only vital health care, which is sometimes the case when buying health insurance – the insurance company dedicates part of the premium to supplying health care for those in need. But the problem is that a government program does not easily target certain illnesses – and it certainly doesn’t have a restricted budget (after all, if the money available isn’t enough they just go get more). Also, government is not an actor with a clear and controlled purpose (which is usually the case for a company) – so government is victim of both fuzzy, incomprehensible goals and a huge principal-agent problem (people acting on behalf of government aren’t controlled or controllable, and they have no incentives at all to act morally as agents of government – they act in their interest instead).

How often haven’t I heard physicians in Sweden claim “we might as well do this too, since you are here” while adding “there’s no cost to you, of course, since we have free health care”? All too often, and hardly anyone would say no to further tests or treatments even though they aren’t necessary or even recommended. Had it been at your own expense you would probably first have asked about the cost, and then considered if it is “worth it.” If it is free, then go for it!

This is the rational way to think about it, so I blame no one for accepting “extra” treatment. The people paying for it are unknown to you and you will never meet them or be held responsible – and since you dutifully pay your taxes you have the “right” to get “your share.” So people tend to consume more. Sounds familiar? If you pass someone handing out free stuff, would you then get more than if you would have to pay for it?

I’ve conducted a couple of experiments of this myself, while I was in politics. In a local high school we tried to “sell” our ideas through handing out stuff with our party’s logo etc. When we offered free stuff, even if they were only bumper stickers, everything would be gone within seconds – people eagerly grabbed tens if not hundreds of stickers even if they didn’t at all sympathize with the party.

Stickers are expensive, so we tried to limit it to “one free sticker per person.” This worked in the sense that all the stickers weren’t gone in seconds – it took minutes. At one time we tried limiting this very costly campaigning strategy through offering all stuff – stickers, socks, coffee mugs, and even t-shirts – at a very limited cost. We set the price at around $0.10 per item. After a whole day’s campaigning we would go home still having almost all the stuff we brought! Nobody wanted these things (and I don’t blame them) since they had to pay – even though it was only $0.10!

I admit that this political merchandise is totally worthless to people – who wants a pair of socks with a political logo? A t-shirt with an enormous party logo? Unless you are an active member it has literally no value (maybe negative).

Now apply the logic of the worthless political stuff to the “very important” health care. Of course, the demand for health care would sky-rocket to levels never anticipated by even the most pessimistic politician. And the costs would follow. The normal government reaction to this is to make sure to limit the cost for the program (they never ever consider abolishing a program that voters may “like”), often through setting a ceiling to how much certain treatments may cost. So they hire an army of bureaucrats to calculate the “true” market price (this isn’t doable, but government does it all the time) and how much it “may” cost – and then they limit the amount government pays for the certain treatment.

This is what the Medicaid is all about. Government says a kidney transplant is worth $X and therefore pays that much. In theory (if we for the moment pretend to be very ignorant) this should limit the costs. The problem is that bureaucrats have no idea – and some of them probably cannot even spell to “transplant.” So they have to ask the suppliers how much it would be. The first estimate may be fairly accurate, but as time goes by people learn that the government bureaucrats – in order to avoid being scammed by suppliers of health care services – set the ceilings at only part of what they claim the real costs is. So they have an incentive to push prices upward in order to cover costs and – possibly – make a profit. If bureaucrats calculate ceiling prices to 90 % of reported costs, the reported costs will be at least 110 % of the real costs. Also, they will charge private customers less than they charge the government, since private customers (and insurance companies) cannot afford to pay much whereas government has no clue – and will only reach deeper into people’s pocket books if they run out of money (or print more of it).

When the bureaucrats understand this (which could, admittedly, take some time) they retaliate: they say they will only pay the real price, not the charged price. So they will require health care providers to either report all their transactions to the newly established authority for health care services market price estimations or offer only fixed prices. The latter might not sound like a bad idea, but the fact is that health care providers often would charge poor customers less than rich customers for the same purposes that insurance companies give free health care to poor – charity because it increases the firm’s market value and creates a competitive advantage.

Also, health insurance companies would have discounts for promising certain volumes to the health care providers. The “fixed price” demanded by government bureaucrats now pushes average prices up, since any offered discounts mean less money from the authorities for delivered services. This hurts, of course, people who are poor or have health insurances.

The effect of this is that poor people who somehow aren’t covered by the rigid government program no longer stand a chance – they cannot get health care at all unless they find someone who can pay the overprice on their behalf. Also, insurance premiums go up, since there are no longer any discounts available and prices tend to move quickly upward to cover possible cost increases. A fixed price needs to cover the risk of increased costs in a way variable prices do not – in the latter case, if costs go up prices will too (and the same if costs go down) while in the former case government will only allow for price increases under certain circumstances and at certain times. So prices are continually adjusted upwards.

So the effect of this “excellent” government program is sky-rocketing demand and prices rapidly increasing.

Politicians are of course totally surprised by this result – they thought they would do good and provide “free” health care for everybody at the costs when the program was established and with the demand at that same time. Now they learn that demand and prices are increasing so rapidly that the program always runs out of money – and this makes people real angry when government isn’t able to give them what they promised. So they add more money to the program budget and perhaps more restrictions, again causing higher prices.

Another common measure is to include more people in the program, since a lot of people suddenly cannot afford the health care they once were able to get for their hard-earned money. So the program is enlarged to cover everybody in “need,” which of course creates the same kind of problems again – only to a much greater degree. (But it is too optimistic to conclude politicians understand this; they won’t.)

It is at this time the people suffering from the Savior Complex once again step forward and sees opportunity. They offer new and far more extensive programs to make sure people get health care even though they can’t afford it – they high prices are publicly condemned as results of “corporate greed” or perhaps described as a “market failure.” The new program, perhaps a “nobody left behind” or “universal” program to finally solve the problem, is a great way to get elected. After all, most people don’t have the economic understanding nor the insight in the horrendous government systems to figure out what is going on.

This is one of those excellent games that would go on even if politicians were wise enough to understand what is going on (and they’re not). After all, everybody loses while the politicians win – they get more power, bigger government, and more friends get to be hired in another fancy government authority. This would give them enough incentive to act against the public interest, which is of course what they always do.

But what if they would for some reason understand the effects of their program? They would still go through with it, even if they would find the effects somewhat unfair. The reason? Simply to satisfy their egos. They are, after all, victims of the Savior Complex. They are addicts to being seen as do-gooders; they want appreciation – they want to look like they do something. That makes them dream sweet dreams every night. While you and I pay the terrible and enormous costs of these self-absorved petty good-for-nothings.

For more on the Swedish welfare state, please see How the Welfare State Corrupted Sweden. For articles where I briefly discuss the Savior Complex (or Messiah Complex, which I used to call it), please see Saving the World Through Saving Yourself and A Strategy for Forcing the State Back.

The proponents of a central bank claim there is a general need for a centralized power to create stability in the market and counteract the boom and bust cycles that we’re experiencing. The proponents of a market freed from a central bank claim the exact opposite: that the Fed through its meddling with the currency and interest rates create the boom and bust cycles. So how are we to find out which of these parties has got this right and which is utterly confused?

One way is to think about it for a minute or two. It isn’t too hard to realize what underlying philosophies make people take these two positions. In the former case, the market itself is unstable and needs to be corrected. So it is saying that there is some kind of friction or instability in the market that it cannot sort out itself, and therefore we need political instruments to take care of it. Sounds like a reasonable conclusion given that the premises are correct.

So let’s have a look at the premises. Why does the market fluctuate in big wave-like motions up and down, in which everybody frantically collectively buy everything or sell everything? Marx claimed it was the underlying contradiction in capitalism that caused these booms and busts. Because of oppression and the ongoing class conflict between the propertied and unpropertied (proletarian) classes there is tension, and the exploitation of labor workers makes capitalists literally go “wild,” which in turn makes the market unstable. (This is a very simplified version of Marxian business cycle theory, of course.)

What these booms and busts really mean is that people tend to act “like one” and therefore when someone starts buying everybody starts buying – and when someone starts selling everybody starts selling. This might seem intuitive, but since we know everybody in the market is trying to make a profit this simply cannot be the case. There are panics, of course, when the market is already going up or down very rapidly. When you realize something strange is going on and that you are about to lose all your money, you might panic. But that still doesn’t explain why the market goes down before people panic.

Let’s think about it, when the market is going up at a modest rate, why in the world would a lot of people suddenly sell all they have and leave the market? If the market is going up we would of course have some people selling to realize their profits, but there is no reason to not invest more or stay in the market with some investments when it is going up. It simply doesn’t make sense for everybody to collectively sell everything they have and put the money in a bank account instead of taking advantage of the economic growth.

The same thing is true for the opposite situation. In a market with falling indexes there is no reason for everybody to collectively and suddenly start buying and thereby change the direction of how the market develops. If people really did collectively make a decision – wouldn’t we know of it? Wouldn’t we have a huge information problem to solve first? And if everybody follows a leader, wouldn’t we know who that leader is? Wouldn’t we be able to identify him or her? (After all, we are parts of the market.)

No one working in the financial markets will tell you they are but sheep following a leader or that they are acting collectively on some kind of invisible command. They might tell you that they could panic in certain situations and at that time act like sheep or follow someone’s lead. But then we’re back at the same problem again: the panic doesn’t arise out of thin air, it is caused by something – and it is usually caused by drastic change in the markets. Now, if everybody is acting on drastic change – where the hell does the change come from? “The market,” after all, is but an abstraction of all the people and transactions out there – drastic change cannot happen in the market before people act [on it], because such a change is the result of their actions.

This cause of the problem is what Marx tried to explain with the “inherent contradiction” in capitalism, even though I don’t think he did a very good job (at least not if this theory is applied to the concept of the market in general). However, most people working in the financial markets have adopted this Marxian view of what they are doing. This is evident from how they view the Federal Reserve: most financial analysts claim, and they do so sincerely, that the Fed is necessary to counteract the booms and busts. So they seem to believe that they aren’t able to trade with each other using reason and acting upon it – they can only act collectively and irrationally, and therefore they are doomed to create these booms and busts.

I doubt anyone working in and with the markets would choose to tell you they are all brainless drones acting collectively without ever thinking of what they are doing. On the contrary, many of them spend most of their time analyzing facts trying to make as fact-based and rational decisions as possible.

Now, even if Marx was wrong – this is surely a contradiction. These people claim there is a need for a centralized power counteracting the effects of their collective and irrational actions in the market place whereas they also claim to invest based on as thorough rational analysis as is possible given the ever existing constraints in supply of time and money. We can only conclude these people are wrong in one of these claims: either they are just trying to cover up their “sheepness” through faking analysis, or they are not normally acting like sheep.

The proponents of a market free from the Fed and its meddling with the currency and interest rates claim there are no natural boom and bust cycles in the market. People do panic when the market suddenly and drastically changes, but these sudden and drastic changes are in turn caused by over- and underinvestment triggered by attempts to artificially make capital cheaper and more expensive through meddling with currency and interest rates. What they are saying (and my use of the word “meddling” should give me a way as one of them) is that the boom and bust cycles were originally caused by the central bank trying to politically increase (politicians hardly ever want to decrease) growth through artificial measures.

They lowered interest rates (the price of capital) to spur investment or printed more money in order to “invest” in wars or welfare systems and other benefits to get re-elected. What would such a shock to the market system result in? The obvious answer is that when the price of capital suddenly and somewhat drastically goes down a lot of business people act on this incentive – they get their hands to this money and make investments they otherwise wouldn’t make. Why wouldn’t they make these investments otherwise? Because they make the investments they can afford, and they choose the ones they believe are most profitable – when the price of capital is artificially lowered they can suddenly afford the more risky and less “safe” investments and do so in order to maximize profits.

You can’t really blame people acting in their own interest and acting as they have always act. The reason they make these extra risky investments is because someone lowered interest rates to a level the market itself doesn’t consider reasonable.

The extra investments cause a boom, of course, since investments increase dramatically. And the extra investments, since they are riskier, tend to be bad investments much more often than the investments that were made with capital at market price. It is also important to realize that this “stimulation” of the market usually is a one-time thing – the state does not have any reason to always keep interest rates low (which is very costly – for everybody), they only do this as a way to win the election.

So what happens when the investments start failing (and a lot of them will)? The market is pushed downward at a rate not possible were it not for the artificially cheap investment capital that a lot of people took advantage of. After having spent all money available on investments people tend to underinvest – they have already invested as much as they dare (even considering the cheaper capital). So they start to cut back, especially when they realize some of the extra investments were in fact not very good. So we have a recoil to the artificial boom – a bust.

How does the state, through the Fed, react to these cycles? Just like they react right now: “oh my god, there is a lot of bad investments out there, a recession is coming – we need to lower interest rates to get the market going again.” Well, this might work a couple of times – but it creates but another boom before another bust, and each time the Fed needs to use more drastic measures (i.e., lower the interest rate more or print even more money) to really change things.

Anybody see an evil circle? Anybody see who’s the culprit? Yep, the Fed.

So we have these two positions, and they both are available in a number of different versions, that either the Fed helps a market that cannot take care of itself or it causes the problems it claims to fix.

One can only ask: how come anyone survived before the Fed was founded in 1913? The history books should be brimful with depressions much worse than the one starting in 1929. After all, in 1929 we had the Fed to save us.

We’re told recession is something that “just happens” in the market; something that we cannot get around and that we cannot really understand. They don’t say the wave-like ups and downs in the market are results of what Marx called inherent conflicts in capitalism, but they sure seem to mean exactly that. The experts don’t know why, but the market seems to go up and down in periods – in general boom and bust cycles.

As gold hits and passes $1,000 per ounce, and oil reaches beyond $110 per barrel, we are destined to see a weakening dollar as a result of the overall recession. The fact that the Fed is frequently pushing out more dollars in the international market system, sometimes as loans and sometimes as alms, to cover the massive costs for the ongoing war in Iraq and Afghanistan, is something that isn’t mentioned at all.

Where does all this money come from? If the Fed decides to offer another loan to the market or hand out treasury bonds, where is the reserve of value from which this money is taken? The sad truth is that there is none, which means any such action by the Fed is adding more of the fiat currency to the market without any kind of value backing.

But judging from the “experts” on TV, I guess the number of dollars “out there” has no effect on the value of the currency. Prices of any goods that have heavily increased supply go down – that is something any economist knows for sure. But this reasoning seems to not affect money. After all, money is money and has nothing to do with other things people trade with?

The falling dollar has in only seven months cost me more than 10% of the value of my annual salary as a Graduate Research Assistant at the University of Missouri measured in my “home currency” Swedish Kronas (see August 15 vs. March 14). This is not because the Krona is unbelievably strong; on the contrary, the Krona is – like any other fiat currency – inflated, but it is so at a much lower rate than the American dollar.

How much has the dollar fallen? (Or, in more correct language: how much poorer have Americans become “thanks” to their politicians?) Let’s have a look at the exchange rate five years ago, on March 14, 2003, about the time when the war began. The dollar has fallen almost 29 % since then as compared to that small, insignificant country’s fiat currency.

Theoretically, this should mean American products are a helluvalot cheaper now than five years ago, which should be good for exports and for countries importing American goods. So the problem of the dollar shouldn’t be anybody else’s problem.

Even considering that the dollar is a “world currency” (whatever that means), and that a lot of companies and corporations have signed contracts in dollars, shouldn’t affect e.g. European countries too much. At least not in the long term – such losses are nothing but temporary and should therefore be covered by temporary measures or productivity increases.

The reason the world is so closely following what is happening with the dollar exchange rate (but no one is of course asking why this is happening) is that the international system of trade is 100 % political. It is managed by political organizations that enforce political rule; it is traded through political channels with political favors and with politically controlled currencies; and the corporations acting in the system are almost without exception heavily subsidized by “its” country’s political government.

This is the reason politicians around the world are now aiming to collectively save the dollar (link in Swedish). The natural thing to do in a time of crises would of course be to take whatever measures to strengthen one’s own nest, to make sure the “home market” is strong enough to survive a dollar crisis. Which can only be done through massive deregulation and depoliticization of the market (broadly defined). This is, of course, not in the interest of politicians and political power – even though it is definitely in the interest of people and firms everywhere.

Instead of taking advantage of the situation, politicians around the world get together to do what they do best: make things even worse. The dollar is to be saved only so that status quo is unaffected by the problems caused by political meddling with the economy – and this can only be achieved through intervention in support of the dollar.

What we are about to see is therefore a collective effort by politicians worldwide to make their central banks spend enormous amounts of tax payers’ money to buy paper dollars so that the supply in the market is limited (or decreased), which will make the dollar regain some of the illusion of value. This may seem like another one of politicians’ stupid ideas to try to do something about something they are utterly ignorant about.

But let me assure you it is worse than that.

The reason the dollar is crashing is because there is a war going on in Iraq and Afghanistan (and there might soon be another one in Iran). Wars are costly and they certainly cannot be financed through regular taxation – the Iraq war will cost as much as the U.S. federal income tax for two full years according to Nobel prize-winning economist Joseph Stiglitz. It is obvious that such costs cannot fit in the budget; it is also impossible to “temporarily” raise taxes to cover for such costs.

In other words, costs have to be covered in other ways than direct taxation. When a thief cannot steal enough to cover his costs, what does he do? He starts another lucrative business: counterfeiting. The Fed is literally pumping billions of dollars into the market to cover the costs of the war, which causes the dollar to fall. And then politicians all over the world take tax payers’ hard earned money to “rescue” the dollar from collapse.

So when people work hard in Europe and Japan to make a living, their politicians are taking their money and literally sending them to Washington D.C. to be spent on killing more people in Iraq.

What a wonderful world.

Update: The Financial Times is now writing on how non-American central banks will bail out the United States financial problems. They don’t mention what it means, of course, but they report on what is about to happen.

But why is inflation a problem? According to the common definition used in the media, in politics, as well as in economics, inflation is an “increase in the price level of goods and services.” It is therefore pretty obvious why inflation is bad for most of us: with higher prices we get less for our hard earned dollars. Indeed, the latter is sometimes made part of the definition: “prices for consumer goods rise, eroding purchasing power” (emph. added).

So we, i.e., all of us, would definitely have an interest in keeping inflation “as low as possible,” or – even better – at zero (if possible). In other words, we should be grateful that we have government and the Federal Reserve to protect us and the economy from inflation, which would make us a lot poorer were it allowed to increase.

It is a well known fact that prices tend to increase. Ask anyone and they know for sure that prices will go up, which makes it better to buy whatever you need now, if you have the funds necessary, rather than wait for later. Especially if you are not sure how much your salary will increase (if at all). In other words, those of us who do have funds could very well become richer through spending than holding on to their money.

So there seems to be a bias in the economy to increase differences in wealth. Those who already have enough funds don’t have to wait for higher prices, and thus get more for their dollars than those of us who don’t have that much money. In other words: if you are rich, you will get richer; if you are poor, you will stay poor.

This is the problem with the capitalist economic system, if you ask any Marxist economist or theorist. The economic system does not only distribute wealth unevenly, it also augments the differences; this is the very basis for exploitation – the rich industrialists are given the opportunity by both the state and the economy to make more money, to get even wealthier, while the poor labor workers’ salaries are literally swallowed by inflation.

And it is conventional wisdom that prices do indeed always go up. Prices of groceries and clothing go up; prices for energy go up; prices for houses as well as rented apartments go up; prices of cars, transportation, and travel go up; prices for health care and education go up. Up, up, up. They don’t ever go down, at least not in the long run. Or do they?

Let’s have a look at an example of a free market, without regulation, and what would happen to prices. Imagine there is a market for goods and that it is at equilibrium (or close to it), so that demand is approximately the same as supply. In other words, prices are set at such a level that there isn’t a great shortage (demand higher than supply) or surplus (supply higher than demand). In other words, the market “works.”

In this market, if relative demand suddenly goes up the prices will follow (upwards). This would also be true if relative supply goes up, which would lead to prices going down to adjust for the increased number of goods in the market that would not be sold if the price was not lowered. Prices may be different in different areas, but the market as a whole (at any level) is somewhat stable in that it “tries” to approach equilibrium. There will thus not be a long time period of constant surplus or shortage; such inefficiencies will be corrected through price changes.

But let us make something clear: such price changes are not the same as constanly increasing (or decreasing) prices. We haven’t gotten that far in the example yet. So far, all we know is that prices fluctuate naturally in a market.

What happens over time? One thing that is for sure is that producers have a great incentive to be efficient, or more importantly: to increase efficiency. Increased efficiency means the products can be offered in the market to a lower price than competitors are able to match, which means increased market share and thus (hopefully) increased profits. Such increased efficiency, which is caused by constant market competition (from existent competitors or probable future such), is largely the same as economic growth.

There should thus be a tendency in the market for these products towards lower prices. Of course, if prices for energy, capital goods, and labor go up, prices might not go down as much. But as long as there are markets for energy and capital goods the prices in these markets would tend to go down as well.

If we assume salaries are kept at a constant level, the purchasing power of each dollar earned would increase. This should mean any consumer with income or funds at hand would be better off waiting for lower prices rather than to purchase the goods immediately. In other words, there is a fundamental market incentive for saving rather than spending, which in turn should put extra pressure on producers and sellers of goods and services to “make” consumers purchase as soon as possible (and therefore also increased competition).

At this point (or sooner), the Marxist would definitely ask about the market for labor – wouldn’t it too tend towards lower prices and thus lower salaries? Well, so far we have only discussed the supply side, companies supply the market with goods and services. These companies are however not suppliers of labor – they are consumers of labor, and therefore companies employing labor workers would bid prices up rather than down. The supply side competes and thereby push salaries down; in this case, labor workers themselves would, through competing for the best employment available, push salaries down. Would labor workers compete to such degree that they would not only accept, but compete for, exploitation level salaries?

In a free market, which is the fundamental assumption in this example, there are no regulations restricting the market in such a way that labor workers are forced to accept employment. Companies compete for labor workers not only with other companies, but also with the possibility of labor workers starting their own businesses (individually or together), making use of their competencies and reaping the full profits. It is very unlikely that a freed market would tend towards a situation where a whole class (if such a thing at all exists in a market) would choose slave labor or exploitative employment.

If this is indeed true, you might ask why not the market for capital goods work the same way – companies are consumers of capital goods. This is true, and I have so far only discussed the supply side of this; there is also a demand side for capital goods competing for consumption in such a way that prices are bid up.

But it is important to understand that a new type of capital good (like a machine), used by an entrepreneur seeking new and more efficient ways of producing some good, is expensive at first – but as soon as the market realizes that there are profits to be earned from adopting the same type of capital goods in production, the market grows and the market therefore generates incentives for increasing efficiency in producing the capital good itself.

(The same is true in the labor market, where unique knowledge in a new market is highly rewarded, whereas relative salaries may go down as this knowledge becomes a common characteristic sought for in the market.)

What we have in such a market is therefore deflation rather than inflation, at least if we assume there is no secret meddling with the currency itself. If the currency used in the market place is stable, actors in the market will see the value of each dollar measured in goods and services go up. In other words: prices go down.

If the market works in such a way that a stable currency is effectively deflated, then the cause of inflation in our contemporary markets must be something other than the market itself. As we have already established, prices do tend to go up and the value of one’s salary, measured in the amount of goods and services it can purchase, is constantly abated.

To understand the inflation from which we suffer, we need first ask: 1. why do prices go up rather than down? and 2. is the currency stable?

The first question can be answered rather easily without having to study the market or the details of it. In our example we assumed a free market without regulation, whereas the real market today is extensively regulated by [at least] three levels of government. The market mechanisms are restricted (if at all allowed) and therefore the market does not function as a market. In other words, the regulated market may not deliver the positive effects expected.

The second question can as easily be answered. No contemporary currencies are stable, partly because they are not fixed in value (through for instance an exchange value set in commodities) and partly because the money supply is constantly increased. In other words: the value of money is based thoroughly on expectations that it will be accepted by sellers of goods and services in the future and that it will retain some or all of its value; and the volume of currency notes (bills and coins) is increased relative to the market estimate of number of products and services already available, which causes a pressure on prices upward. The supply of money without backing in “real” value is in other words increased, while the market has not created a corresponding increase in available goods and services.

Inflation according to the mainstream definition is therefore a product of government-imposed restrictions on how the market functions, while government at the same time is supplying a currency without a real value base that is constantly suffering from an [artificial] increase in supply. The reason inflation is such a problem is thus that the market is not allowed to generate wealth through economic growth to the degree (or even fraction of) it would if left unregulated, and that government is constantly devaluing the currency the market uses. No wonder inflation is a problem – we are getting poorer from not reaping the full profits of our investments (in terms of money, labor, effort, and ideas) while being stripped of the value we have at hand (as currency).

And then government comes to the rescue claiming to fight inflation?