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LJWorld.com weblogs The Free Market

When Governments Ignore Economics

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Men are not robots. If you change the environment in which they operate, they do not continue on down a pre-programmed path. They change what they do, they act towards specific ends, and their actions are based on what they believe will accomplish those ends. This is the essence of economics which is lost on politicians and liberals.

Whenever someone suggests a new government regulation or increased tax, they don’t take into account that people are not robots. They believe they can just increase taxes on the rich and sit back and collect the extra revenue. If people were robots this would work just fine, but they are not. By changing the economic environment, that changes people’s incentives. With the reward of entrepreneurial success diminished, fewer people will accept the risk that comes with starting or expanding their business. With the reward of high income reduced, fewer people will undergo the time, cost and work necessary to become a professional, such as a doctor. The results are higher unemployment, lower economic growth, fewer doctors and other professionals, and a lower standard of living for everyone.

These and other negative consequences never come into the calculations of the statists who recommend even more progressive taxation. This comes from a fundamental lack of economic knowledge. The laws of economics are as immutable as the laws of physics. Yet while no one considers building a spaceship without accounting for the law of gravity, people think they can ignore the laws of economics when making policy. Ignoring economics is the fatal conceit that dooms the policies of the left to fail.

Comments

true_patriot 3 years, 3 months ago

Speaking of a concrete need for regulation: http://www.guardian.co.uk/environment/2011/jan/06/bp-oil-spill-deepwater-horizon Latest analysis shows corporate negligence, poor leadership (despite sky-high salaries and bonuses) and a likelihood that this kind of preventable man-made disaster will indeed happen again unless these kinds of companies are better regulated.

I would also recommend "The Big Short" by insider Michael Lewis for a readable and highly educational inside look at how the increasingly unregulated economy got exploited until it broke. It explains some of the relevant exotic financial instruments extremely well yet reads like a human interest high-tension drama.

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jayhawklawrence 3 years, 3 months ago

A lot of issues are just not black and white issues. A lot of issues which need a lot of study and attention become politicized and debated to the point where no one can be objective or even rational anymore.

That is the problem with isms. They often times become a handy replacement for common sense.

That is why economists and politicians and lawyers love isms.

One of the most controversial decisions in recent years is the subcontracting of defense contracts to other countries and the bidding war on military transport planes.

And the costs keep rising....

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jayhawklawrence 3 years, 3 months ago

While I agree with a lot of things you say Liberty, I can see also that there are some controversial things you have said that are opinions and not facts.

What I do agree with is that everyone should study economics and anyone handling money should have studied economics. That is why every business degree and mba program that I have seen requires some economic coursework.

For example, I have worked in the manufacturing sector for decades and almost every manufacturer believes strongly in free trade. But the same number will tell you that the trade we are involved with is almost never fair trade which makes free trade impossible.

So why do we call it free trade if it isn't?

I think the question answers itself when we look at the problems in government.

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jayhawklawrence 3 years, 3 months ago

A lot of young people want to study economics and political science. I sincerely hope they do not.

Economics is a very fascinating field, but if you let an economist run the government or your company you will probably end up bankrupt. The same can be said of lawyers who become politicians.

Focus on math and science as best you can and become a well read person. Learn how to sell. Take a selling course and practice gaining confidence. Surround yourself with talent and smart people.

Find a good company to work for to gain experience and then start your own.

Somebody told me that nobody ever got rich working for a living. Something to really think about.

Then after you become successful and get to know the many incredible and successful people out there, you can sit back and listen to the latest fad economist or politician blab about how much they know about nothing at all.

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thuja 3 years, 3 months ago

Go see the Inside Job movie at Liberty Hall.

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kansanbygrace 3 years, 3 months ago

Heard a great one just this morning. Moderator asks, "How far in advance can today's economists predict economic changes?" the Economist responds, "Six months ago."

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true_patriot 3 years, 3 months ago

I see you are still trapped in the illusory meme that sees government and the private sector as two different entities.

And I've read Hayek before but have moved beyond that. Perhaps you would benefit from reading "The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too" by James Kenneth Galbraith for some modern economic analysis that more closely matches the economic universe we find ourselves in today. http://amzn.to/hEkbQk

Interestingly, the economic model you seem to support is technically considered a form of liberalism. Strange irony.

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true_patriot 3 years, 3 months ago

I used to be a Libertarian but then I realized it's an impossible philosophy. The reality is that we are all inescapably bound together, particularly at the kind of populations we are at today, and need to band together with some degree of organization.

To further complicate things, the corporate world and government have become so intertwined at so many levels that anyone stuck in the quaint meme of "big gub-mint is bad, business is good" is well and truly trapped in an illusion from the past, if it ever really existed. If the two are different aspects of the same process, it's a mistake to treat one as a bogeyman and the other as a savior. It's not even about ratio, it's about how intertwined they are at many levels.

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seriouscat 3 years, 3 months ago

Economics is a fascinating topic and I never tire of it. I do think there is a lot of merit to the libertarian way of thinking and am glad that people like LO, as annoying and obnoxious as they are, challenge people to actually examine their assumptions a little more than they probably would otherwise. Libertarianism is a lot more closely related to communism/socialism than most people realize. They are two sides of the same anti-establishment coin and I have a lot more respect for anyone who can argue effectively for either theory than those who refuse to exercise their brains and simply accept face value status quo.

BUT, I just can't abide certain libertarian tenets, the main and most obvious one being that if industry is unrestrained by labor and safety regulations, equilibrium is achieved, rights are protected, everyone fairs better and labor conditions will always improve. As long as the human capital pool from which industry acquires labor is significantly bigger than what they require, workers are viewed as more or less expendable and will be abused.

Mining practices are an especially poignant example of what industry does to workers and the environment when left to its own devices. Even 150 years after the 'Molly Maquires' rose in protest against conditions where kids as young as seven-years old kids were working fourteen-hour days, six days a week in unsafe mines, among many other well documented and horrific labor practices, mining companies STILL abuse workers, flout safe practices, and throw up dangerous dams made of silt that expose entire regions of people to total disaster. If one examines the behavior of multi-nationals once they open shop in regions of the world with little to no regulation for protecting people and the natural resources upon which they depend, it's painfully clear that industry is not and has never been in the business of 'collaborative effort' at all.

Plus libertarians have a marketing problem. If one looks at libertarianism it is way more two-dimensional than one would guess just by talking to the typical lib. For example, business would be unfettered by regulation, but workers and individuals would also be unfettered in exposing them to punitive measures for bad practices. Most people are thinking of gigantic, immortal, all powerful corporations and according to LO, corporations are a product of the state and under true libertarianism would not exist. I think part of the problem most people have with industry is how much it 'gets away with' . Maybe if libs talked more about the abolition of corporations, limited liability, reasonable tort enforcement and a strong blindly just court system to handle the ridiculously litigious society that arises under such a system, they wouldn't seem like such shills for industry. I'm all for natural consequences.

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true_patriot 3 years, 3 months ago

This brand of trickle-down radical economics has been tried in many parts of the world since it came in from the crackpot fringe in the 1970's and it has only ever had destructive effects. It destroys middle classes, it creates vast poverty, and dramatically polarizes wealth into a few at the top holding most of it and the rest of the masses at the bottom holding a sliver of it.

It is ridden with contradictions and misappropriations of once-sound economic principles that simply do not hold in a global economy or when turned upside down by those fighting for the wealthiest in the world even at the theoretical level, but now that we've seen it in practice, it is proven to be a failure.

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camper 3 years, 3 months ago

True thuja. The people who are getting paid off are the pseudo economists like Rush Limbaugh. He has a choir to preach to, millions of listeners, and a contract worth many millions. Politicians are no better. What is happening here is that they basically find an economist that will support there view. This can be done easily.

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thuja 3 years, 3 months ago

Economics ? a pseudo-science that tries to make sense of ephemera. When you learn that top economists in academia are being paid off to write papers that falsely promote the risky lending practices that nearly toppled the world economy a few years ago, you would learn that it may be as effective for these guys to write a paper about cooking, and then use the findings to advise us.

For even a clock that is stopped is right twice a day.

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camper 3 years, 3 months ago

LO. Arguing with you is like a dog chasing it's tail. So I'm not going to do it. I am going to thank you for writing the blog however. It has initiated good debate. I meant no disrespect. But I kindly disagree with some of your points. Not all of them though. Over and out.

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camper 3 years, 3 months ago

Continued.

And because of this, I believe the government has the following responsibilities, which ironically help to preserve freedom and free enterprise:

1) Establish rule of law and protection of property - If you don't have this, not many will be willing to participate. 2) Regulate and mitigate externalities - These are consequences of economic activity that are felt by parties not participating in the transaction. It is the stuff that flows downstream. Pollution is a prime example. The government has a responsibility to minimize these externalities. 3) Long term investment in research that do not necessarily fit an economic model because profitability is long term. Medical research, NASA, and investment in other scientific research are examples. Long term benefits are stategic and well worth the investment. 4) Provide rules where ownership is collective as opposed to private. A prime example is the necessity of regulating the fishing industry. If a governing body does not do so, resources will not be conserved. Nobody owns a school of bluefin tuna. 5) Provide goods that provide public good or utility. This can be argued as I sure have see on these pages. But they are things like fire, police, education. social security, health care, mass transportation etc. 6) Regulation and oversight of money supply, banking and financial markets, and securities. 7) Last but not least......and sure to make some cringe. To provide a public safety net to help minimize severe dowturns in the economic cycle. These are things like unemployment benefits and yes, economic stimulus.

I don't particulary see the above (7) things as being socialism as some of the fear mongers will have you believe. They help to even out inefficiencies of market forces. I do not think the market is the sole solution to all of society's needs and problems. It provides for a great deal of them, and is preferable. It is Utopianisim to believe fully in one model and not recognize inherent inefficiencies.

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camper 3 years, 3 months ago

When Governments ignore economics, you might get one of these extreme results:

1) The government decides the allocation of resources and essentially you have something like communism. In this system the government has little ability to determine market forces and what the people desire. Here is where you might be making fighter planes when the people really want a pair of jeans and good bread.

2) Powerful corporate monopolies control resource allocation and due to sheer size, competition is inhibited, there are barriers to enter the market, and prices, quality of product are easily controlled by the largest. Free enterprise is severely limited as a result. Ruling power may somewhat be described as an Oligarchy.

The United States economy is somewhere between these two. Thank god.

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jafs 3 years, 3 months ago

It's fascinating how when you scratch the surface of a logical, freedom loving person, you find much that is opposed to that - charged emotion, and the desire to control others.

Macrobiotic theory has a saying - the bigger the front, the bigger the back - which seems apt here.

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bstew34864 3 years, 3 months ago

By the way,

Economics is not physics. But, I will say that in terms of identifying organizing principles human behavior has some of the predictability associated with the "hard" sciences. An excellent book regarding social physics is called the "Social Atom" by Mark Buchannon.

For my money field of economics is ready for a complete overhaul. The primary problem with traditional economics is that calculations are based on th "rational decision making" model of human behavior. Many economist now know that this view of man is mostly wrong. Instead the fields of complexity science, evolutionary psychology, and network theory have led to a complete new view of human decision-making.

So, while we might not be robots in the traditional sense we are certainly predictable in our behaviors at the unconscious level. Just ask the folks at Dillons, Walmart, and Target. Think the products and the layout of their stores is by chance? Think again. It is all based on the neuroscience of consumer behavior. Ever wonder why Best Buy is expanding and Office Depot is going out of business? Walk in their stores and take a moment to become aware of your subtle emotions. Best Buy energizes you while Office Max seems unorganized and depressive. This is not by accident.

In essence, we are predictable robots motivated by the interplay of our genes, unconscious biases, and the relevant social situation.

Finally, the strongest emotions humans have is fear (it is what allowed us to survive in those hunterer-gather groups some 60 to 100 thousand years ago on the African Savannah. Yep, that's right we are all Africans. I'll leave that for another discussion).

However, our most powerful virture is fairness (once again without fairness our ancestors would have never made it out of Africa).

A progressive tax policy as its main goal tries to reduce inequality or status differences which when taken to an extreme cause all sorts of problems for the respective society. Read a book called the "Spirit Level" to read the fascinating research on this topic. So, with a progressive tax policy liberals try to address inequality by increasing fairness which inturn starts to minimze the fear felt by those on the bottom.

Again, coutries that practice egalitariansm seem to be doing pretty well. It make you go hmmm,,,

b

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bstew34864 3 years, 3 months ago

Liberal One,

Like I stated earlier, I really don't understand the libertarian philosophy. Well, I understand it, but I don't understand why we should take it seriously if it has no chance to succeed in the "real world".

I do appreciate the libertarian concern for individual rights, but those of us on this blog believe there has to be some balance with the common good.

When you constantly stress "voluntary participation" that sounds great, but in essence it creates a free-rider problem similar to the Tragedy at the Commons.

Since we can go back and forth with "research" and "data" let me once again try another analogy.

Most of us like to watch sports. And we like to watch different sports. What makes each sport different? The rules. The rules of a respective sport determine the desireable qualties of the players, coaches, and drives their behavior. Without rules there would only be chaos. Once the rules are determied successful sports have refs who enforce these rules. This ensures a fair playing field for all of those involved. These refs should be objective and there primary incentive is to ensure everyopne plays by the agreed upon rules (not incentivized by dreams of wealth). Take the rules away and you would have refs making up rules as they went along with little consistency. Take the refs away then the game would be dominated by the most powerful. Only by having the rules to set the parameters and the refs to enforce them can you truly have a great sport where everyone has a fair chance at success.

The rules if you haven't guessed is the constitution and the refs are the government. You can't have one without the other.

From my vantage point, it seems as though libertarians just want to have the rules but no refs. From a purely logical point of view this desire is unattainable. Not the least of which is that it runs in direct opposition to human nature and sounds more like a sequel to "Lord of the Flies" rather than a viable form of government.

Remember, if men were angels...

p.s. thanks for the lively topic

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jafs 3 years, 3 months ago

When somebody can't engage in conversation and debate for long without resorting to insults, this shows the weakness of their argument and/or perhaps reveals a character flaw of some sort.

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Liberty_One 3 years, 3 months ago

"It's laissez-faire zealots who believe people are robots...believing that human beings are exclusively motivated in everything they do by money"

Wow, completely wrong, but what do you expect from Jimo? This is clearly disproven in the first few pages of Human Action. See the link above. You don't have to read far, just the first 20 pages or so.

"Increasing tax rates increases tax revenues as predictably as 1+1=2 "

No one ever said they wouldn't. The problem is all the negative consequences.

"Increased government taxation causes real world human beings to work harder and generate more economic activity"

Actually the opposite. As the value of work is lessened, the relative value of leisure increases. This is common sense.

"Most of the entrepreneurs in the world live in very poor countries."

And? Most of the poor people live in poor countries. Most of the sick people live in poor countries. Most of the people live in poor countries too. Correlation doesn't equal causation, young student.

"Big government increases the ability (and real world occurrence) of people to take economic risks by creating bridges to allow time for risks to pay off,"

Absolutely true--for the people that are on the receiving end of government graft. For the rest of society it harms economic opportunity. Jimo doesn't understand one of the most basic of economic concepts: opportunity costs.

"Economic motivations are social and are unaltered by universal taxation schemes. "

Socialism was disproven a long time ago. Please keep up.

"The results of laissez-faire ideology are clear: higher unemployment, lower economic growth and a lower standard of living for the middle class. America in the 1920-30s and again in the 1990s-2000s provide irrefutable evidence of this."

Another one of Jimo's lies. The US hasn't been anywhere close to laissez-faire since before the progressive era. The 1920s was an era of increasing government intervention in the economy, where a Federal Reserve-created bubble eventually burst causing the 1929 depression.

"There never has been at any time in any place anywhere on earth a "free market""

But somehow Jimo knows exactly what will happen if we ever dare to have voluntary exchanges.

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Jimo 3 years, 3 months ago

Unfortunate Truths:

  1. Increasing tax rates increases tax revenues as predictably as 1+1=2 (as long as politicians aren't bribed to write in 'loopholes'.) Periods of American history with the highest tax rates overlap periods of maximum economic growth and opportunity.

  2. It's laissez-faire zealots who believe people are robots (although the common term is 'zombies') - believing that human beings are exclusively motivated in everything they do by money (except when they don't fit the laissez-faire straightjack and are derided as 'irrational'). If your mother fed you at her breast, it was only because she could see the moneymaking angle of such action.

  3. Increased government taxation causes real world human beings to work harder and generate more economic activity (at least up to a point - the point they achieve their actual economic needs, not their 'rich and famous' delusions).

  4. Most of the entrepreneurs in the world live in very poor countries. Their ubiquity does not lead to national prosperity as real world observation makes undeniable.

  5. Big government increases the ability (and real world occurrence) of people to take economic risks by creating bridges to allow time for risks to pay off, greater certainty for economic conditions, and safety nets to lessen the shock of failure. (How're those debtors' prisons working out for yuh?)

  6. Economic motivations are social and are unaltered by universal taxation schemes. That is, they're relative, not absolute. Having a trillion dollar bank account is meaningless when the minimum wage is $1T/hr.! E.g., a 75% marginal tax rate (common for virtually the entire post-war era in America) won't change the social pecking order one iota -- the #1 richest man will still be #1, the same with #2, and on and on. Result: zero change in the incentives "to become" anything. Query: how do socialist countries lacking "incentives" manage without doctors? Answer: they don't! What a stupid question. They have plenty of doctors.

  7. The results of laissez-faire ideology are clear: higher unemployment, lower economic growth and a lower standard of living for the middle class. America in the 1920-30s and again in the 1990s-2000s provide irrefutable evidence of this. In contrast, the golden era of 'Let it to Beaver' America was marked by the precise opposite approach: highly progressive taxation of wealth, an activist government openly working to help the middle class. The wealthiest nations on earth -- not the U.S., which is well on the path to third-world status -- wouldn't give these laissez-fiaire, hair-brained schemes of the time of day. Indeed, there isn't a story in history of a poor nation becoming wealthy eschewing governmental policy and regulation - not the U.S., Britain, Germany, Sweden, Japan, Korea, or China.

There never has been at any time in any place anywhere on earth a "free market" - only in the 'thought experiments' of a laissez-faire charlatan.

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staff04 3 years, 3 months ago

What is your position on the US raising the debt limit?

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MyName 3 years, 3 months ago

There are major issues with this post that seem to stem from a lack of understanding of both Economics and (especially) Physics. Particularly the claim that: "The laws of economics are as immutable as the laws of physics" is ridiculous on its face. Economics is a model of human behavior that tries to reduce market activities to a set of numbers and then use higher Mathematics and Statistics to make assumptions about those activities. Physics is similar in some respects as it does include a way of modeling real world activities using Mathematics.

However, the key thing is that all of the laws that make up the theory behind Physics can be (and are) proven by experiments. Economics (especially that dealing with large market behaviors) can't say the same for the vast majority of its subjects. When it comes to the gold standard of Truths that you can use to build bridges and airplanes, Economics is about as useful as Baseball statistics. Economics didn't predict the '08 market failures, for example, and all the laws of supply and demand had to say about it was that at some point the supply of reputable mortgages was tainted to the point that no one could put a price on them with any certainty. This is the kind of thing that government has to step in and try and stabilize. Someone has to be the buyer of last resort or there ends up being a hole in the market.

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gudpoynt 3 years, 3 months ago

When the product of a private company is found to cause long term negative effects on health or environment, subsequently taking significant cost to mitigate those negative effects (oftentimes orders of magnitude greater than the cost to produce the original product), the private company rarely considers post-production "cleanup" costs when setting the price of their product.

So who, in your mind LO, should pay for the cleanup?

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overplayedhistory 3 years, 3 months ago

What about when governments ignore price fixing and don't enforce anti-trust laws? I don't suppose you remember a time when there were only economists, rather than liberal economists or conservative economists? Do you have as much money as the Koch brothers or do you just hate college educated people who have critical thinking skills?

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jafs 3 years, 3 months ago

"The laws of economics are as immutable as the laws of physics"

Highly debatable, at best, and most likely simply incorrect - in fact, the blog itself contains one of the main reasons why - people are not robots. Hence economics, which is a study of human behavior, cannot be as certain as hard sciences which deal with entities without will and choice.

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Lindsey Buscher 3 years, 3 months ago

"The laws of economics are as immutable as the laws of physics."

Care to name even one "law" of economics?

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bstew34864 3 years, 3 months ago

Number three: If libertariansm is so great why is it that not one country practices this form of government? I know, it's those bad government bureaucrats that keep the pople ignorant of the great benefits of the free market. Uhh, wrong answer. No country uses libertariansm because it is not practical and it does not work in the real world. So you, Ted Kaczisnsky, and the National Review should get real and understand that the free market is not the answer to the challenges of the future. Granted, a well regulated market is beneficial but it has to be kept in check to limit the inevitable inequality that surely will arise. (look up Power Law and the Pareto Effect).

Thought Experiment: Most of us loves the KU Basketball team. But when you really think about it what exactly is it that we like about them. Now, most people would say we love their effort, hard work, but most importantly we love how they play as a team. Bill Self recruits great players from all over the country. Players who in High School were the "go to" guys on their teams. Most of these players had one thing in common...they were selfish. They took most of the shots and rarely played the kind of team defense the coach Self requires.

Are you starting to get my drift? Libertariansm is a selfish philosophy that places the focus on the individual. His needs and his wants. It is completely out of balance. On the otherhand a free market system that is well regulated by the government places an emphasis on the collective good, the community, or in the case of ku basketball te team.

So, everything we admire in collective effort whether it is the concept of heaven or great sports teams it always starts out with conern for others and working together.

Just ask Bill Self.

b

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bstew34864 3 years, 3 months ago

You know Liberal One it never ceases to amaze me how many times I have to hear people praise the greatness of the "Market". Especially self appointed free market oracles such as yourself. There are so many errors of logic in the liberatarian mindset and philosophy that I do not have the energy nor the time to engage you in all of them. But, for arguements sake let me just touch on three.

Number One: If libertariansm is so great why are the happiest people in socialist countries. You know countries like Sweeden, Denmark, Switzerland, and Norway? These countries all practice to varying degrees Socailism, but they seem t be doing just fine. In every survey on wellbeing I have read these countries are always at the top. Why? Heck, even our northern neighbors Canada lean toward socialism and they seem to be doing just fine..

Number Two: People are a lot more like robots than you think. As Dan Areilly would say, they are "Predictably Irrational". Because of our programmed errors in logic, not to mention the power of our unconscious mind to predictably generate biases we as a species tend to make foolish assumptions and illogical judgements largely based on the sturcture of our brain. It is instinctive not to want to pay taxes if your brain has been constantly exposed to the notion that taxes are bad and that your individual success has soley been based on your individual prowess and hard work. From social science research we know this to be categorically false. No man is an island and without collaborative effort, luck, and societal institutions most people would not acheive their current level of success. i.e student loans, housing help etc,etc,. While government is not always perfect it does try to level the playing field to ensure those born into poor cicumstances have a decent opportunity to live a good life.

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Liberty_One 3 years, 3 months ago

I heard an interesting lecture from an economics professor who held a theory that some people are just naturally socialists/progressives/liberals. He pointed out that the socialist economists of the 20s, 30s and 40s, when socialism had proved beyond a doubt to be a complete failure, simply could not renounce their support of government intervention of some sort. They gave up on socialism, but still supported heavy-handed central control of the economy. Perhaps it's just genetics.

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booyalab 3 years, 3 months ago

I think people tend to hold progressive views for reasons other than a misapprehension of cause and effect. Politicians hold them to get votes. College students hold them to be popular. And so on.

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Liberty_One 3 years, 3 months ago

Read more about the laws of economics and Human Action here in Mises's master work for free online: http://mises.org/Books/HumanActionScholars.pdf

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