God is a Capitalist

Saturday, January 7, 2017

Trump's strength is his weakness - businessman economics

President Trump is clearly a good businessman. His wealth proves it. And it was partly his success in business that encouraged many adults to vote for him. The logic seemed sound: if the problem with the US is the economy then surely a successful businessman can fix it. But the fact that he is a successful businessman is Mr. Trump’s weakness as well.

Mises used to say that businessmen are better at predicting the short run than are economists so economists should not try to compete with them in their area of comparative advantage. The job of the good economist is to force business people to look up once in a while and acknowledge the long run. They can spurn the long run and court the short run, but the long run always shows up and the longer she has been ignored the uglier she is. The field of economics was born out of that insight, Mises wrote:
In order to discover the immediate-the short-run-effects brought about by a change in a datum, there is as a rule no need to resort to a thorough investigation. The short-run effects are for the most part obvious and seldom escape the notice of a naive observer unfamiliar with searching investigations. What started economic studies was precisely the fact that some men of genius began to suspect that the remoter consequences of an event may differ from the immediate effects visible even to the most simple-minded layman. The main achievement of economics was the disclosure of such long-run effects hitherto unnoticed by the unaffected observer and neglected by the statesman. (Mises, Human Action, 649)

Still, economics had been plagued with the businessman’s point of view in the past. Mises was referring to the classical economists when he wrote,
They had to satisfy themselves with a theory explaining only the activities of the businessman without going back to the choices of everybody as the ultimate determinants. They dealt only with the actions of businessmen eager to buy in the cheapest market and to sell in the dearest. The consumer was left outside the field of their theorizing. HA 63
With the dawn of Austrian economics in the 1870s under Karl Menger, which coincided with the shift to marginal thinking and the embrace of the consumer, economic thought was finally on sound footing. Then along came Keynes.

Keynes resurrected the classical error that new investment is profitable only when there is an increase in consumers’ demand. Hayek called that ‘part of the same widespread fallacy to which the businessman is especially prone.’ The error lies in applying what holds for a single industry to industry as a whole:
... the relative magnitude of the demand for equipment of a particular industry will depend upon the demand for the product of that industry, it is certainly not true to say that the demand for capital goods in general is directly determined by the magnitude of the demand for consumers’ goods (Hayek, Prices and Production p.143).
Keynes was popular partly because he clothed businessman economics with the robes of academic respectability.

Trump has appointed several business leaders to top positions in his new cabinet - Andy Puzder, CEO of Carl’s Jr. and Hardee’s restaurants, as Secretary of Labor; Rex W. Tillerson, CEO of ExxonMobil, as Secretary of State; Scott Pruitt, a pro-business attorney general from Oklahoma, as head of the Environmental Protection Agency (EPA).

As businessmen, or business friendly-men, they will continue to commit the businessman fallacies. In addition to the fallacy that consumer spending drives investment, Trump and his allies are advancing the mercantilist error that says imports are destructive while exports alone enrich the nation. Adam Smith tried to slay that medieval idea 200 years ago with little success except among good economists, a small minority in the profession. But why has the businessman’s economics defeated sound economics for centuries? Mises answered:
The truth is that modern nationalism is a corollary of the domestic policy of government control of business. It has been demonstrated that government control of business would manifestly fail already in the short run if the country is not isolated from the rest of the world. A government aiming at full regimentation of business must aim at autarky too. Every kind of international economic relations impairs its power to interfere with domestic business and limits the exercise of its sovereignty. The state cannot pretend to be an omnipotent god if it has to bother about its citizens' ability to compete with foreign business. The outcome of government interference with business is totalitarianism, and totalitarianism requires economic self-sufficiency (Mises, Money, Method and the Market Process, 151).
When a nation has embraced socialism to the degree the US has over the past century, inequality soars, employment collapses, oligopolies congeal, corruption spreads and standards of living erode. The people demand the government do something and for the government to have the control the people demand it has to shut out foreigners.

In the same way that Democrat National Committee dirty tricks during the latest election cycle were a far greater danger to democracy than any Russian hacking of emails, socialist economic policies in the US destroy more jobs than all foreign threats combined and turn the people and politicians to nationalism. 

What does the myopia of businessman economics mean for investors? It means most of the president's policies won't have the impact investors are hoping for. Fiscal stimulus won't stimulate. Tax breaks and slowing down regulations will be too little too late to save the stock market in 2017.