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Sept. 15, 2006 - Freedomain Radio - Stefan Molyneux
30:21
416 Gas Prices
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Hi everybody, it's Steph.
I hope you're doing well.
We are going to...
I'm just going to do one more emails of the week or posts of the week today so that I can test out my fancy schmancy new microphone, which I think is pretty cool, and we'll see how the sound quality goes and what effect it has on how I sound.
And what I'd like to talk about, I'm just going to switch here to a post that was posted by a user, and what I'd like to talk about is touching a little bit on economics.
Economics is quite a fascination of mine.
I consider it to be Absolutely thrilling and exciting science.
And as you may or may not know, depending on your own readings into or understanding of our education in economics, economics is a study of the allocation of resources because, of course, all resources are limited, lifespan, goods, services, and so on.
And all human desires are pretty much infinite, right?
Your computer can never be fast enough, your car can never get you there quickly enough, your blender never lasts quite as long as you want it to.
So all human desires are infinite, all resources are finite, and how you stretch resources to cover human desires is one of the things that the science of economics bases itself on, or the discipline of economics bases itself on.
Now, the other aspect to economics that is quite important is that economics is very much focused on finding the hidden costs to particular decisions.
And, for instance, if you want a shiny new Maserati and you go out and buy it, the economist will say, great.
Now, of course, one of the hidden costs that is included in the purchase process of a Maserati is the fact that you simply can't purchase anything else with the money that you've allocated towards the Maserati.
That's not a bad thing necessarily, but it's something that's important to understand.
One of the hidden costs in something like the minimum wage law, if you double the minimum wage to, I don't know, $11 or $12 an hour, One of the hidden costs that an economist wants to point out is the fact that people whose wage is worth less to people than $10 or $11 or $12 an hour simply won't get hired.
And you won't hear much about that.
You'll hear quite a lot of thanks and praise from people who have had their minimum wages raised.
So it's like, yay, I get double the money, that's good.
And you'll hear a lot... From those sorts of people, but what you won't hear from are the people who never got a job because they're simply not worth that much or who lost their job because if minimum wage doubles, then people just can afford fewer workers.
I mean, there's practical limits in the allocation of resources.
So one of the central things or one of the central tasks that an economist does is To discover the hidden losses in policies so that you can make a balanced decision.
I think it was Eisenhower who said, he said, for the love of God, give me one day a one-armed economist.
And someone said, why?
And he said, so at least I can once have a meeting with an economist where the economist doesn't say, well, on the other hand...
And for another example...
If a factory in a town risks being closed and the government then takes $50 million from the general population and then gives this money to the factory owners in forms of subsidies or something like that, Then the people, 200 people who've kept their jobs, are going to be very happy and consider this the best policy in the known universe.
However, The people who would have gotten jobs if the $50 million had not been taken from the taxpayers, but instead had been left in the hands of the taxpayers to buy whatever it is that they want to buy, that would have created probably quite a lot more than 200 jobs, because it takes quite a lot of labor to transfer this money, the police, the bureaucrats, and so on.
So this sort of an important thing is to look at the hidden costs or the hidden consequences of certain decisions.
The visible benefits are obvious and don't need any exploration.
The hidden costs are very important to examine and to understand.
So this is a very sort of key thing that economists need to do.
The reason that you have a science called economics, or a discipline you could say, called economics, such as you have medicine, nutrition, and philosophy, is because it's not obvious, right?
There's an ideal state. There is the actual state, closing the gap is not obvious in...
In nutrition, as you can see by all the fads sweeping, you know, bacon good, bacon bad, you know, sweeping the nutrition world.
And in the same way, as the answers are not always obvious and clear in the realm of philosophy, it certainly is the case, and perhaps the most the case in the discipline of economics, that the hidden costs represented by certain policies are very hard to root out.
It takes quite a lot of research to be able to root out the hidden costs of particular policy decisions For a number of reasons.
The first, of course, is that those who benefit from certain policy decisions are quite vocal in their approbation or approval of those policy decisions.
I was like, yay, we got $50 million in a grant to keep our factory open.
We're the happiest people in the known universe and we think that this is the best policy ever.
So that's one way of obscuring the cost.
The second is it's easy to find somebody to interview who had a job and lost it because a certain subsidy was not given from the government.
It's not quite such an easy task to find somebody who would have gotten a job if the subsidy was not taken from the taxpayer and given to the factory owners, because there's simply no way to find that person, and there's no way to prove objectively that they would have had a job if the subsidy had not been taken,
blah-de-blah-de-blah. So that is sort of some of the major reasons why things tend towards visible gains, the reallocation of resources, and so on.
And to take sort of an example of that in the realm of caring for the poor, if you look at, you know, simply at the statistics in the United States in the post-war period, You could quite easily see that the poverty rate was falling about 1% per year from the early 1950s onward.
Absolutely, completely and totally unprecedented in human history for that to occur.
So, that is a pretty radical reduction in poverty.
It was based on the economic growth that came after the Second World War.
And... Then what happened was LBJ put in the welfare state.
I mean expanded the welfare state.
It was already there from the Great Depression.
But LBJ expanded the welfare state and what happened was that the progress towards the alleviation of poverty stopped.
And there's lots of reasons for this which we can go into another time.
But statistically the introduction of the welfare state arrested and stalled the problem that was being solved by the free market which is the solution to poverty.
If you want people to not be poor, you need to give them as much economic opportunity as possible.
And, of course, once you start taxing very heavily to pay for a welfare state and a war in Vietnam and so on, those increased taxes cause a reduction in productivity, which ends up in fewer opportunities, particularly for the poor.
So... The benefits of the welfare state are very easy to trace.
I mean, the vocal sort of visible benefits, right?
So all the people who are getting checks and the bureaucracies and so on, and all of the businesses that have grown up around welfare neighborhoods to supply them with whatever they want, all of those people, of course, and the politicians and the tax collectors and so on, they're all very positive.
In defense of the existence and the benefit and the virtue of the welfare state, which could be seen as a way of ensuring that the government continues because if the problem of poverty was actually solved, then your need for government redistribution programs would be that much less.
So, of course, the government has no real incentive to actually get rid of poverty in the way that the free market does.
And so if you look at the benefits, the bureaucrats, the welfare recipients, the certain of the welfare recipients themselves, and the IRS and the enforcement agents and the legislators and all of these,
you know, millions and millions of people involved in the welfare state in redistribution of one form or another, those people are going to feel that the welfare state is a good thing, whereas The poverty rate, which I believe, I'm not positive, is around 14 or 13% that it stalled at after the introduction of the welfare state, which, you know, as you would generally expect, when you subsidize something, you increase it, and when you tax something, you decrease it.
It's the basic principle of economics.
And, of course, when you subsidize poverty and you tax production, you will increase poverty and you will decrease production.
That's just an inevitable result of those kinds of policies.
but very specific groups within society gain an enormous amount in material terms and in career terms from the existence of the welfare state, and it's those people who are very vocal about its continuance, whereas the people, like if we say that poverty since the introduction of the welfare state, like if we say that poverty since the introduction of the welfare state, if it hadn't been introduced, there's no reason to believe that the reduction in poverty would not have continued, and maybe it would be down to 4% or
Now, you can see these kinds of differences in the differences in unemployment between, say, America, which has a more flexible labor market, and Germany or France.
I think it's two to three times the unemployment in those other countries.
So, there's no reason to believe that the reduction in the poverty rates that began after the Second World War would not have continued to end up down in the realm of 3%, 4%, 5%.
So you have roughly 10% more poverty in American society as a direct result of the welfare state.
The case could be made.
I'm not going to say that I've clinched it in one little chat, but you could make a very strong case, if not a clinching case, for the fact that you have 10% more poor people now because of the welfare state than you would have if the welfare state was not put into place.
Now, the problem with that, of course, is that you can't find these people who would now not be poor if the welfare state were not put into place.
That's very important to understand.
You can't find these people because that's a hypothetical universe, right?
That's looking for the alternate universe where Germany won the Second World War or whatever.
You can't find, you can't interview victorious Nazis and you can't interview people who would have made it out of poverty in the absence of the welfare state.
So in the same way that you can't interview children and compare them to how they would have been if they'd had a more rational and privately funded kind of educational system, You can't simply put two twins, one in public school, one in private school, or whatever, but...
You can't find these people.
It takes quite a lot of research and combing over information to try and find traces of this alternate universe that would have occurred had resource allocation decisions been made differently.
To take sort of one final example, and I'm sure you get the point, but just one more.
If you force a woman to marry a man, you can't interview her to find out how happy she would have been if you didn't force her to marry that man.
Who would she have married instead?
What would that marriage have been like?
We'll never know, because force was used in the interaction.
So we'll never know how that woman's life might have turned out in the absence of brute force.
Similarly, when we look at the welfare state, which is, of course, as we know from our examination of politics, is we say income redistribution, which indicates, of course, linguistically that it was somehow distributed in the first place, which is not the case.
But when we look at the welfare state, we can't Because it's a forced interaction, right?
I mean, the government comes with the threat of force, takes your money from you and redistributes it as the government sees fit.
Because it's a forced interaction, we can't look at the world as if the welfare state did not exist.
We can only look at the trends that existed before the introduction of the welfare state, and those trends were that poverty was being diminished considerably, and we know that as a direct...
Certainly as a coincidental time frame with the introduction of the welfare state, the reduction of poverty ceased and poverty became sort of stagnant and continued.
And of course, in particular, ethnic groups continued to increase, you know, pretty catastrophically.
So, that having been said, that we want to look for the hidden costs and not the visible benefits.
That the visible benefits are absolutely simple and very, very easy to understand.
We can guess that smoking is nice because people smoke, right?
What you want to do is point out the hidden costs of smoking.
And it's the same thing with economics.
So, that having been said, what have we got here?
You know, a 30-minute introduction to a post.
Boy! This gentleman wrote...
And he said, I'm in a college microeconomics class.
And it's a small class of about 20 people in which the professor encourages debate.
In fact, once during the semester, we led a discussion about something in our own lives that is impacted by the principles of economics.
We are still on easy crap like supply and demand, elasticity, making decisions at the margin.
So this can't be too, too technical.
What would be a good topic to do in the light of the fact that today's topic that someone led was about gas prices.
Not only did they not criticize rising gas prices caused by the government, they in fact commend it.
Rising prices. They said that rising prices would cause people to switch to alternative fuels faster.
And so this was good for everyone, sort of like a, quote, retirement plan for oil, as one person said.
The Speaker recommended tariffs on foreign oil and did so because they would achieve three desirable benefits.
One, more government revenue, and of course we know how desirable that is.
Two, more usage of alternative fuels.
Three, expedited development of American fuel services, thus causing less dependence on foreign oil.
Now, this person then goes on a little bit longer, but I think it's worth having a look at this.
This is a very common belief that people have about tariffs and about the importance of taxing imports on foreign oil for the reasons that were outlined.
Now, those benefits, of course, when we look at the first one, which is that a tariff or a tax on the imports of foreign oil will create more government revenue.
Of course, if it's a net addition, you really don't need any kind of discipline called economics, right?
If you have a pill that gives you more energy, that causes you to lose weight, and has no adverse effects whatsoever, Then you really don't need a whole lot of cost-benefits analysis to figure these things out.
And it's free, right?
So if you look at a desirable benefit in that a tax on the imports of oil will raise government revenue, and that's a good thing, even if we accept that it's a good thing, it's certainly an incomplete picture of what actually occurs in the real world.
If I steal money from you and the only thing that the economist notices is that I have more money, it doesn't seem like that bad a thing.
Hey, Steph's got more money.
He can go out and buy a high-quality microphone.
And so an economist, of course, would never look at it that way.
The economist would say, okay, well, Steph has more money.
I steal $100 from you, so I have more money.
But you, on the other hand, have less money.
And you have less money in two ways, right?
This is an important thing to understand.
The first reason that you have less money is the obvious one, that I've taken $100 from you.
Less money. The second reason that you have less money is because instead of me going out and getting a job and thus contributing my productivity to the labor market or the services market, I'm instead plotting and lurking in alleys and sharpening my switchblade so that I can mug people.
And what that means is that I am not contributing my labor in a productive sense to the free market, which means that the prices of goods are actually slightly higher because of my lack of participation in the labor market.
See, my demands, even as a mugger, I've got to have a place to live, I've got to eat, and so on.
So my demands are the same, but I'm not contributing anything in a productive sense to the economy.
So if, for instance, you had, I don't know, 20% of the people involved in crime, then not only would people have a whole bunch of stuff stolen from them, but very roughly the prices of things would be one-fifth higher because there was less labor competition, there was less productivity in the labor force, fewer companies were being started or staffed by blah, blah, blah, blah, blah.
So that's sort of another example of sort of hidden costs that you need to kind of keep your eye on if you sort of get into the idea of economics.
So when we say more government revenue would result from an imposition of tariffs or taxes on imported oil, well, that's fine.
But where the hell is the money coming from?
The money is coming from the consumer.
So if you slap a $10 tax per barrel on the price of imported oil, all that happens is that the costs get passed along to the consumer.
You're not taxing foreign companies.
You're not taxing the oil producers.
You're taxing the consumer. You might as well just slap a tax on consumer products.
Every tax, every tariff at source, corporate welfare, you know, sorry, corporate taxation and so on.
All of this stuff is entirely, you might as well always slap a tax on the end consumer.
It might as well be a sales tax because that's where it all gets eventually paid for.
And so the fact that a tariff will provide more revenue for the government, that's fine, even if you accept that.
I don't think it's fine at all, but it's fine in terms of if you accept that, but you have to ask, of course, where's the money coming from?
The money is coming from the consumer who's going to pay for that tariff in the higher price of oil.
So you've got to look at the hidden cost.
We end up having to pay more money to the government, which takes more money out of the economy in terms of investment, in terms of hiring people, in terms of competition for products, which is going to let the price of products escalate to some degree.
So the bill gets paid.
It just gets paid by the end consumer in terms of lower productivity, less competition, and so There is no sort of free lunch, right?
A basic principle of economics.
Somebody's got to pay the piper.
So more government revenue just equals less revenue for everybody else.
So he says here, more usage of alternative fuels.
So the idea there is, of course, if you slap...
Let's make it even larger, right?
We double the price of imported oil, and this sort of money ends up in the hands of the government...
And that this is going to increase the usage of alternative fuels.
Well, that's really not the case, because if you look at how democracy actually works in the real world rather than in some fantasy cloud land of perfect virtue, what happens is...
If the government even starts talking about legislation in terms of doubling the price of imported oil, the first thing that's going to happen, of course, is that the oil companies are going to leap into action and are going to start buying politicians.
It's a lot cheaper to buy a bunch of politicians than it is to pay a 50% increase in the price of your product because of a tariff, right?
So the soul of a politician comes a lot cheaper than a billion barrels of oil.
So the first thing that you're going to do when you start meddling in the oil industry is you're going to start getting the oil industry interested in controlling the government.
If you're walking down the street and somebody pulls a gun on you, you're kind of going to focus your next couple of minutes at least on that person.
Even if you're on the cell phone, you're probably not going to say, yeah, I'll keep talking with you.
You're probably going to say, just a moment, there's a guy pointing a gun at me.
I'll get back to you. And, of course, when the government begins to single out an industry for corrective tariffs or taxation, all that happens is that the executives within that company switch their focus from pleasing the consumer to trying to control the guns of government, right? To point them somewhere else other than at themselves.
And so what happens is the oil companies, when threatened with a tariff increase, simply start going and buying politicians and then get heavily embedded into the political process.
And of course, once a company has invested in buying a bunch of politicians, they're not going to just, you know, a politician's not like a scud.
It's not like a fire-and-forget missile.
Once you've got a politician or a judge or whoever it is in your pocket, and I'm not talking, you know, under-the-table $100 bills, though that could be the case.
I'm talking about campaign contributions and so on.
Once you have that situation where you've become heavily invested in Washington, all that's going to happen is you're going to start, instead of the politicians aggressing against you, you're going to buy the politicians and use them to aggress against everybody else.
The principle of self-defense, right?
And... You know, if the gun's going to go off, you want it to go off somewhere other than you, right?
So if the government is going to regulate tax and control an industry and it's pointed at you, you're going to get in there and make sure that it gets pointed at someone else.
So, what happens is when the government threatens a tax increase or a tariff increase on a particular industry, all that happens is the industry then goes in and starts buying up politicians.
And, of course, what is the oil industry going to do once it becomes embedded in Washington politics?
Well, I think it's going to do what we all would expect for an oil company to do.
It is going to use the power of the state to prevent and control the exploration of alternative fuels.
So it's going to raise safety concerns, it's going to raise R&D taxes, it's going to It's going to lengthen approval times.
It's going to put regulatory stuff in place.
It's going to do as much as humanly possible to use the power of the government to prevent competitive entrance into the field.
So, for instance, after price controls were put in, To the United States economy in the 1970s under the great free market Republican Nixon, after price controls were put into the economy, all that happened was the oil companies moved into politics.
And since then, of course, you haven't had a domestic refinery built because, you know, one thing that happens is that the people who have risen to the top through the hurly-burly in competition of the free market, once they get control of the political process, the first thing they want to do is set up barriers to entry through the state.
So that other people can't come into the field and compete, right?
So after price controls went in in the 1970s during the stagflation gas crisis, then the regulations for starting up new refineries simply became too onerous.
An Environmental Protection Agency was founded.
It became absolutely impossible, pretty much.
I mean, you look at the fight going on over the Alaskan oil drilling.
It's pretty much impossible to get...
A new kind of refinery going in the US, and I don't think a new one's been built for about 25 years.
And of course, what does this do?
This allows people to raise profits because they're preventing new and more supple entrants into the field.
So the idea that somehow if you give the government the power to aggress against an industry, that that industry is not going to react in a defensive manner by attempting to buy and control politicians and then use the power of the government to entrench their own position and prevent new entrants, particularly the exploration of alternative fuels, is a fantasy land, right?
It's like setting up a communist government and hoping that everything's going to just work out.
Oh wait, that was done. That was most of the 20th century.
Now, the other thing that's going to occur when you start to raise the profits of oil prices, right?
So these people say, well, rising oil prices is a good thing.
Well, as we know, when prices go up, profits tend to increase.
And so the fact that oil companies are making more money also has a very strong and direct impact on where investment money flows in an economy.
If you can get a healthy 12% to 15% annual return on investment by investing in oil companies, and you can do that because a lot of them have gained control of the apparatus of government and used it to prevent other people from coming into the field.
If you can get control of the state, your profits go up.
This is one of the reasons why companies are so interested in a sort of proto-fascistic manner in combining with the state in order to raise the barriers to entry and put in regulations that ensure their own profits and reduce competition.
It's the fault of the system.
I mean, you can't blame people for trying to make money.
And the fact that they can offload the costs of enforcement to the taxpayers for whatever rules that they've managed to get the government to pass, It's not really the fault of the free market that such a corrupt system exists. .
Now, what happens though is if the prices of oil continue to rise, then the profits of oil companies, and we can of course have staggering profits over the last couple of years, the profits in oil companies rise.
What does that mean? Well, what that means, of course, is that Investors are going to want to invest in oil companies rather than investing in alternative fuel sources.
This is pretty clear.
If you can get 10-15% investing in British Petroleum, you're not going to put in a hugely speculative investment into an alternative fuels area, particularly because you're very aware, if you do research in this area or know the industry at all, That you're perfectly aware that the oil companies will use the state to crush whatever innovations you come along with, right? So that's certainly not going to happen.
So the idea that rising oil prices will speed up the development of American fuel reserves, thus causing less dependence on foreign oil, it's like naive economics.
It's like kindergarten economics.
You have to look at how the world actually works.
The moment you start pointing guns at people, like raising tariffs on their products and so on, They're going to react in a defensive manner.
And the idea that politicians can't be bought is a laughable one.
They're part of the economy, right?
They're bought and sold like Barbies on eBay.
And so the idea that industries are not going to react in very defensive and proactive measures to hang on to their profits, that the only variable in the equation in human life is that the government can just unilaterally impose tariffs on companies That's a complete fantasy.
It's a complete fantasy. People fight back.
People who are part of large industries are pretty well versed in how to get lobbyists going and how to get government to do what you need it to do.
Many of the people who are involved as lobbyists have far more experience in manipulating government than a newly elected senator or congressman has.
So, the idea that companies will not take this power and use it for their own benefit and gain is a complete fantasy.
So, this is what this guy means when he says that these people are economically challenged.
Yeah, the government's going to get more revenue, and what's it going to use that for?
Well, the last thing I'll say is that even if this tariff did everything and no company ever reacted, they just sat back and said, oh, double my tariffs, no problem, I'll give up my Entire billions of profits just because I like to obey the law and don't want to interfere in any kind of political process, even though I'm quite sure that my competitor will.
Even if none of that occurred, and the only thing that happened was that the government got more income, well, what does the government do with income?
It uses that income as collateral to borrow more money.
So the price of oil may then go up, but all that's going to happen is that the government's going to get a billion dollars.
It's going to use that as leverage to buy or print 10 billion or 20 billion dollars.
All that's going to get added to the national debt.
So the average consumer not only loses the billion dollars out of the economy to begin with, but ends up with a liability 10 or 20 times higher.
So that obviously is not a very productive solution for the average citizen.
So I hope that that's of interest.
I do find this kind of stuff very fascinating to look into.
And I certainly would recommend a fantastic book.
It's Economics in One Lesson by Henry Haslett.
There's tons of other great books on economics.
Try and stay away from the college textbooks, though they tend to be a little bit on the socialist side.
So anyway, I hope this is of interest to you.
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