Mental Mistakes

Chapter 15

In a survey of global finance in The Economist (1/30/99) is described the "impossible trinity" that underlies the instability of global markets. "A policymaker trying to design the ideal financial system has three objectives. He wants continuing national sovereignty, financial markets that are regulated, supervised and cushioned, and the benefits of global capital markets."

If we took these elements and applied them to an individual man, we would say he wants independence, he wants to have things his way, and he wants the benefits of trade.

The survey points out the impossibly of having all three elements at once. "Those who wish to maintain sovereignty and yet allow capital markets to integrate must accept an entirely free market at the global level."

Applied to an individual, that becomes: if you want to be free and have the benefits of trade, you must accept an entirely free market.

Does the survey conclude that accepting a free market is the right solution? No, it recommends various combinations of the elements. "Different countries will have taken different routes to achieving the 'impossible trinity' of integration, regulation, and sovereignty." Why is that? "A completely unfettered international capital market is politically unacceptable."

That is Subjectiman's solution. He tries to balance the elements in different ways at different times. He tries to stay reasonably free, and get some of the benefits of trade, while still enforcing some demands. A market without should committees is politically unacceptable.

That is also Mixtureman's formula for life. His sovereignty includes an active element aiming for real freedom, a passive element adding, "if it's not too much trouble," and a subjective element adding, "as long as I can do what I feel like sometimes." His regulation is partly self-regulation, partly random action, and partly whim. His integration with the market is partly that of the trader, partly that of the beggar, and partly that of the thief.

Since market action consists of voluntary trading, it is no surprise that it mirrors thought. It is no surprise that the elements of international finance are the elements of international markets, and the elements of local markets, and the elements of family interaction. Notice that each family member wants some independence, some integration into the family, and some control of family regulations. Since the elements are balanced out, it seems natural that the same elements should be balanced out in society.

It is a flawed analogy. It confuses children with adults. Children, by definition, are not capable of self-regulation. Adults are. Children are integrated into the family as a means of teaching and nurturing. Adults are integrated into the market as a means of prospering. As can be seen by looking at global markets, local markets, or flea markets, sovereignty ultimately means the sovereignty of the individual; regulation ultimately means self-regulation; and integration ultimately means voluntary participation.

Seen at the fundamental level, the elements of the "impossible trinity" are no longer in conflict. They are individual rights, self-regulation, and voluntary trading. Stated in yet another way, they are rights, reason, and the division of labor. Nobody argues that these elements are not desirable, or cannot produce prosperity. They only argue that the elements are politically unacceptable. Rights cannot be absolute, reason cannot be the final word, and a division of labor must be "fair" by some arbitrary standard. We must pretend that some adults are children to be cared for, others are parents to run things, and others are slaves to be taxed. Then we must balance the elements accordingly.

Nevertheless, you personally can take the elements straight, if you choose. You can exercise your rights, use your reason, and trade in free markets. Mixtureman can energize his passive elements, and use his active elements to show his subjective elements how to grow up.

Activeman analyzes international markets the same way he analyzes all markets: by comparing the elements to the principle of voluntary trade. He learns that when our constitution was being forged, individual states did not allow free trade with other states. Now we take that for granted, but we don't allow free trade with other countries. A trade is a voluntary exchange between people, not between countries. Borders mean everything to politicians, but nothing to traders. Free trade could extend the division of labor to the entire world, and, by the evidence of history, multiply our prosperity beyond dreaming.

Tariffs and trade restrictions are the government's way of appeasing subjectivists who demand that their products not compete with foreign products, that their workers not compete with foreign workers, that their prices not be compared to foreign prices. It is not all right for California and Nevada to fight over such things, but it is all right to fight with Japan. Of course, every time we free up trade with Japan a little more, we get richer instead of poorer. But getting richer involves adjustments, and neither Passiveman nor Subjectiman wants to make adjustments.

Passiveman does not want to make adjustments because he considers any change a threat. Subjectiman refuses to make adjustments toward reality, because he thinks reality should adjust toward him. When should committees talk about "cushioning" the market or providing a "safety net", they are trying to make individual adjustments unnecessary. Activeman knows that adjusting to the market is profitable, so he looks for market solutions to the cushioning problem. He buys insurance. He puts money aside to be used if he finds himself between jobs. For his effort he accepts the market price, whether going up or down. That is, he accepts reality.

International traders point with pride when some country "accepts the discipline of the market", or "abandons its trade straightjacket". It is a source of amazement and delight when a country accepts reality to some noticeable degree. Investors are soon interested in such a country. That countries don't accept reality is not due to historical forces, but to philosophical forces: the fact that people living in the country and running things do not accept reality. International chaos is not mysterious; it comes from the mental mistakes of thinkers worldwide.

"When I think about my business," goes a common complaint, "things are clear as a bell. But when I try to think about economics and the market, it's just completely confusing." It is Mixtureman's complaint. He uses one method to think about his business, and another to think about markets. If his mind goes passive when it considers markets, then he assumes that "somebody" manages markets like he manages his business. Who would that be but government committees? If his mind goes subjective when it considers markets, he demands that they be "fair". He wants a playing field that is "level", meaning tilted a bit in his favor.

If Mixtureman tries to think about markets objectively, then he is hit with the implications of the basic fact that trade is voluntary. Can it be that proper market regulation is the self-regulation of traders? Can it be true that prices are only meaningful when there is no coercion involved in them? Can it be true that international trade needs no more regulation that trade between States of the Union? No! These things are politically unacceptable. They are too confusing to consider.

In order to pretend that interference in the market is good for it, one must evade the fundamental fact that trade only takes place when traders agree to trade. To see how much coercion traders will accept is to see how much you can damage the market without destroying it.

A glance around the world shows that markets are destroyed daily, created daily, and driven underground daily. If subjective thinkers learned from experience, they would give up on demands and try objectivity. After all, subjectivity is essentially a child's way of handling things. It is not experienced as a superior method, but as a default. It is the absence of method.

To see why Subjectiman insists on his "methods" even though they don't work, study his demands on the market. Particularly revealing are his demands on the international market. He points with alarm to the "negative trade balance", as a threat to our prosperity.

If people in Michigan make cars, and people in Florida grow oranges, then they can drive around Florida in cars, and eat oranges in Michigan, by making a trade. Floridians do not stop trading for cars between orange crops. They have a negative trade balance with Michigan. Cars are coming in, but oranges are not yet going out. This does not alarm Subjectiman, because he thinks that Florida simply owes Michigan some oranges, and the settlement will be made in dollars anyway.

When he sees electronics coming in from Japan, however, Subjectiman looks for what's going out in trade, and sees nothing. Apparently we owe Japan a lot of goods, which we don't have. So the negative trade balance is putting our country in hock to Japan, and threatening our very sovereignty.

That is what happens when you get essentials wrong. Is it true that Florida can owe Michigan oranges? Of course not. The essential of government is not ownership, but rights protection. Orange growers in Florida owe car makers in Michigan some oranges, or the equivalent in money. In other words, car makers here find customers there, and arrange to get paid.

When electronics manufacturers in Japan find customers in America, and arrange to get paid, there is no economic difference, and no reason for Subjectiman to worry, or the government to get involved. Trading is voluntary. If customers were not paying, merchants would not be selling. When a firm in Japan bought Rockefeller Center, that showed how the payments were arranged, and confirmed Subjectiman's horror of foreign ownership. Though the Center changed hands again, Subjectiman feels that his worst fears were confirmed. He avoids analyzing the real source of his fear.

Then there is "exporting jobs". This worry also depends on getting essentials wrong. It assumes that there are only so many things to be done, and if they are done in Mexico, we will run out of jobs. What really happens is that efficiency increases. If a job gets done cheaper in Mexico, then workers are freed up here to do previously undone things, or new things. Since things to be done are already limitless, and inventors keep thinking up more things to do, workers are always in short supply.

Subjectiman could see the foolishness of his fear by comparing America to Europe. Many countries in Europe have laws to prevent the "export" of jobs. They also have high unemployment. America is less stringent about "exporting jobs". It has low unemployment. Either there is no causal link, or it goes in the other direction. After all, when car makers move to Tennessee, we do not think that Michigan should stop exporting jobs and Tennessee should stop importing jobs. But Subjectiman avoids analyzing the real source of his fear.

Is it that other countries will grow rich? Japan was called the world's richest country, for a while. Subjectiman called that a threat. But if the government of Japan does not claim to be the owner of all the wealth in Japan, the idea is meaningless. America is now called the richest country, which means only that more rich people live here than elsewhere. If Subjective government has its way, they will have to move, or lose their wealth. Subjectiman's notion that governments own everything, and individuals nothing, is not really believed even by him. It is not the real source of his fear.

Is Subjectiman more fearful of local markets, or distant markets? If we judge by volume of complaints, flea markets scare him not at all, but international markets scare him a lot. His attitude seems to be that there are never enough controls on international markets. This is logical if the real source of his fear is lack of control. Distant markets in other lands are harder to control than familiar markets at home.

Looking at the real source of Subjectiman's fear might reveal why he fails to correct mental mistakes even when they become obvious.

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