Free Is Not Always Good

On Sep 30th, the day before the National Day of China, millions of Chinese drivers on the expressways got stuck in the enormous traffic jams. It was not because of inclement weather or heavy traffic controls. Instead, it was because during the four national holidays, the expressways were free to use under a new policy. Everyone wanted to grab the deal and millions of cars squeezed into the roads. In my opinion, “free” is rather expensive and intervention of government will deeply harm the expressway firms. Government should cancel all price controls in expressway tolls and let the market decide the price. This would be the best and most efficient way.

Everyone knows that free is good. However, sometimes you have to pay much more than you get from the free goods. As we saw on the news, millions of cars rushed into the expressways and the roads were totally congested. Millions of drivers and their families got stuck in the huge traffic jams for more than ten hours. Many people were forced to change their travel plans. Thousands of freight trucks were also stuck in the traffic. Some people even paid more than time and money; a young man missed the last time to see his father in the long traffic jam, only because he wanted to save the $40 toll. [i] Apparently, since people tend to overuse free goods, the toll-free policy will result in huge losses in society. Since the social loss is much greater than the benefits drivers get, it would be more reasonable to charge people for using the expressways instead of opening the gates free for everyone.

In addition, if you think requiring expressways to give free access to cars during holidays is as normal as free admission in public museums and public parks, you are making a big mistake here. The expressways in China are not public infrastructures. They are mostly constructed and owned by private firms. They are self-financing and seek their revenue from toll. Would it be normal if the government requested all the grocery stores not to charge people for buying groceries during national holidays? Would it be normal if the government requested Apple store to distribute free iPhones to everyone during Christmas? Yes, offering the “free thing” may be a social welfare. Nevertheless, government does not have the right to deprive the rights of private firms in charging people from using their goods.

In addition, any government intervention in a fully functional market will lead to disruption and inefficiency. The expressway market is highly efficient and it has been proved by the fact that China’s expressways network became the longest highway system in a short 24 years, while it took the United States over 50 years since the Congress passed the Federal Aid Highway Act in 1956. Private firms are willing to invest, operate, and maintain their expressways since there is huge revenue from tolls. On the other hand, drivers pay to enjoy the convenience of a good expressway network. This win-win status quo will be disrupted if government tries to lower the tolls or even set it free. Private firms will hesitate to step into the expressway market, and the maintenance and continued operation of expressways will face difficulties due to financial issues. On the other hand, those who really need to use expressways will be squeezed out by free-riders.

Government should cancel all expressways price control, which will work best for the whole society. Any interruption of a perfectly functional market like the Chinese expressway firms will disturb the economic process that allows resources to go where they are most needed and will cause inefficiency and social loss. Government intervention in expressway toll pricing will not increase any social welfare but instead will lead to chaos in the market of expressway firms and obstruct the future construction of expressways.

The Comparisons and Analysis of Atlas Shrugged With Chinese Economy in Last Decades

Ayn Rand’s Atlas Shrugged is one of the greatest contemporary novels which describes and analyzes the function of entrepreneurs in our economics, and depicts the catastrophe which might happen when the entrepreneurship has been limited and destroyed by central government regulation. Rand use her stunning talented skill to create a real world, which is so sophisticated that perfectly reflecting the relationship between industries and government. Atlas Shrugged represents an essence of Rand’s philosophy- the prosperity of our world is the result of those who work hard to chasing their own profit independently. 

Starts from the economic reform in 1978, China’s political and economic begin to transform from central planning economy to free market economy. However, the Communist Party still want to maintain their socialism political framework. This cause the extremely complex economy situation in today’s China. Since China joined the World Trade Organization in 2000, numerous private enterprises began to establish their leading place in manufacture and international trading, and state-owned enterprise begins their reforming attempt to privatization. But on the other hand, there is still strong obstruction maintaining state ownership and workers’ welfare. Today’s China economy is a mixture of central planned economy and free market economy. The Chinese economy within last decades shows a major conflict between free economy and state-reglated economy. In other words, it is also a conflict between entrepreneurship based on self-interest and government regulation based on mass welfare. In this sense, the main theme of Atlas Shrugged reflects the conflict which China is facing now. The difference is that China is at the midpoint of the transition from government regulation to free economy, while in Atlas Shrugged the country is in the transition from free economy to government regulation. 

Firstly, I want to discuss about the state-owned or government-regulated industries. The core thread of the novel is following the regulation changes in the railway system. Both the Taggart and the Chinese Railway System are troubled by the idea of “serve for the society.” In the novel, several government restriction policies have been conducted in the railway system, including the Anti-Dog-Eat-Dog Rule and Railway Unification Plan. Since the competition environment worsen and the regulation and central planning from government, the business of Taggart Transcontinental becomes inevitable to decline and collapse. There are accidents occurs due to unsuccessful regulation from Unification Board. There are useless routes only construct according to the administration or James Taggart’s “international friendship” or “the awareness of overall”, such as the San Sebastián Line. And the company is struggle in the restriction of low transportation fee while they have to fulfill the “needs” of public.

Chinese railway system is managed by the Ministry of Railways, a member of government system. The purpose to having a state-owned rail way system is to control the “important industry.” The railway system is responsible for fulfill the “priority needs” of public and state-own industries. Similar to the idea of James Taggart, for the benefit of the “mass”, since last decade the Ministry of Railways began to use a great amount of funds to construct the High Speed Rail (civilian use and low passenger capacity) instead of to expand their ordinary railway network, which is more demand in the industrial transportation. Because of the huge blindness investment in constructing the High Speed Railway, as well as maintaining the high worker welfare, the China Railway System has huge deficit, and even no money for continue the ordinary route construction for the urgent need of industries such as coal mining. The record shows until 2011 first season, the Ministry of Railways has 3000 billion US dollars in debt. Not only the China Railway System, but also a huge number of state-owned industries have been in finance difficulties when the government stops to provide support funding. They get in trouble because they invest in “public need” and “mass benefit”, instead of the most profitable route. Irony, the price system based on supply and demand tells us that the most profitable route is exactly the most needed route. Rand will oppose the idea of sacrifice to meet the “mass welfare” because it violates the private incentive to innovate and allocate the resources in maximum the benefits. Those industrials which aim of “mass welfare” are destined to fail because there is no private incentive to meet the demand of market, but losing money in unnecessary projects. On the other hand, I would argue that the failure is also because both the Taggart and the China Railway have become “common goods” in some sense. They provide cheap and huge transportation services to public. As Garrett Hardin argues in his article “The Tragedy of the Commons”, the public tend to exploit these resources. “An unmanaged commons in a world of limited material wealth and unlimited desires inevitably ends in ruin.” Cheap price and huge route network will be extremely hard for the railway company to avoid losses. Moreover, both the Twentieth Century Motor Company and the Chinese state-owned companies tend to fail, because people the “lack of incentive” to work hard and bear the loss. As Misses argues, the socialism cannot succeed because of the lack of individual responsibility. The owner of the twentieth Century Motor didn’t give punishment on the workers who are lazy. Same in the Chinese state-owned industries, those who work in the China Railway System enjoy huge welfare and it is not easy to fire them, and they have huge incentive in being lazy and making money from cutting corner. Therefore the quality of the service or even the quality of the railway is low.

On the opposite side of state-owned industries which aim at “public welfare”, there are private enterprises which seek individual interest. In the novel, the saviors of the world are those entrepreneurs who have strong individual incentive to work hard and innovate, in order to gain private profits. In Rand’s philosophy, the individual incentive is the motor that driving the world. Hank Reardon, Dagny Targget, Ellis Wyatt, and others make profit by chasing their own benefit, instead of sacrifice to meet the “mass benefit.” Rand regarded them as the “motor” of the world

Wenzhou is one of the major areas where the manufacturing small and middle enterprises gather. In contrast to those falling state-owned industry, these small enterprises have a huge vitality and making great profit. The entrepreneurs in Wenzhou are willing to take risk and make profit. Wenzhou becomes one of the wealthiest cities in China and generates the most billionaire. However, there is a major problem that small enterprises cannot get sufficient funding, since state-owned banks regulated to lend most of their money to state-owned industries. In addition, the private loan is illegal in China. In order to maximize their production, entrepreneurs have to lend illegal usury. Similar to our heroes in the novel, these entrepreneurs are suffer from the accusation from ordinary people of “greedy” and “profiteering”

Since 2011, numerous owner of this small enterprise has run away, leaving the factory stop and workers become unemployed. The reason is because they cannot repay their debt in usury and therefore, their financial chain has been cut off. Ordinary people begin to condemn this entrepreneur as “selfish”, they hope the government can “regulate” the small enterprise lending market for the benefit of workers and ordinary people. They did not realize that the activity that those entrepreneur who take risk to lend money to seek profits generate the wealth of the society. They did not realize that the problem is not on those entrepreneurs but on the regulation of private lending. The Chinese economist Mao Yushi, who recent got the Milton Friedman Liberty Prize, said that to deal with this crisis, the government has to legalize the usury market. However, his comment has been criticized as “speaking for the riches.” Like the ordinary people and looters in Atlas Shrugged, they did not realize that money is not evil itself, but only a medium of exchange, and make through production. The money helps the thousands of process to link together and complete the production. The small enterprise lending usury is only to make greater production. To deal with this problem, the central government is planning to establish a “Small Enterprise Administration Bureau” to regulate the small enterprise. If the activities of small enterprises are regulated by government, they will lose possibility to take risk for their individual incentives, which is the most important part in entrepreneurship.

From reading the catastrophe brought by government regulation on free market, we know that Rand is opposed to the state-ownership. In her view, the ideas of “sacrifices for the mass benefit” are evil and “individual incentives” are noble. The force pushing the society to go forward is not sacrifice, but individual pursuit benefits. In order to assure the release “individual incentives”, there should not be any government regulations in the economy. The Rand’s philosophy may give a lesson to the conflicts in China between free economy and government regulation.

ECB’s activities during Jan 1st to April 15th

European Central bank is the central bank of euro area. It is responsible for conducting monetary policy to stabilize the economy in euro area. The economic crisis and European sovereign-debt crisis began from 2009 continue to worried euro zone countries. The major policy aim of ECB in the first season in 2012 is continue to stimulate the European economy and give assistance to European banks and government. According to ECB, their major task is using short-term interest rate to “maintain the euro purchase powered,” which means their first aim is the price stability.

In 2012, the European Central Bank has temporally been stopped the Securities Markets Program they conducted last year. ECB has been buying the government bonds directly by open market operation, by injecting euro into debt crisis in order to bailout. ECB brought government bonds from secondary markets, in order to lower down the borrowing cost (interest rate) and give relief to government in debts. SMP has been criticized for reckless. Although it did work out: according to the New York Times, “Spain’s 10-year bonds carry interest rates that hover around 5.5percent, compared with 7 percent and higher in November, and Italy’s five-year bonds are approaching 5 percent, down from nearly 8 percent at their peak.”

On January 12th, ECB President Mario Draghi announced that the European Central Bank continue to held the interest rate at 1%. The marginal lending facility and the deposit facility remain unchanged at 1.75% and 0.25% respectively.  Facing the “very grave” economic situation, the ECB drop its forecast of 2012 for euro region from 1.3% to 0.3%. The low interest rate is expected to continue to stimulate the lending activity and investment

On February 9th, the European Central Bank announced they will continue to hold euro interest rate at 1%. The lending rate and deposit rate remain unchanged at 1.75% and 0.25% respectively. This is the second month ECB continued to hold the interest rate at a low percentage. Mr. Draghi said there is small signed that Eurozone economy begin to stabilize. And he expect the euro area economy to “recover very gradually” in 2012. ECB continue to have stable and transparent policy in holding low interest rate, in order to give stimulation for banks to recover.

On February 20th, the European Central Bank said that they had stopped purchasing the government bonds last week. ECB bond purchases have been reduce to €59 million, or $78 million the week before. The major bailout policy changed from SMP to focus on refinancing operation.

ECB also make an agreement on the Greek bonds exchange program. ECB holds a huge amount of Greece bond

On February 29th, the European Central Bank announced a new long-term refinancing operation (LTRO). The LTRO is monetary policies similar to Federal Reserve’s Quantitative Easing (QE) which aim at stimulate economy. The difference is that LTRO is mainly focus on bank sector, instead of a general stimulation. This is the second LTRO since the one ECB settled in December last year. According to the news article from Business Week, in the second LTRO, the ECB will “lend banks 529.5 billion euros ($712.2 billion) for 1,092 days, topping the 489 billion euros handed out to 523 institutions in the first three- year operation in December.” This means the first and second LTRO will totally lend Europe banks about 1 trillion euros in the three-year length. 800 European banks can borrow this amount of money from ECB at the rate of 1%.  It is the biggest stimulation policy offer by ECB since Mario Draghi became ECB president. By giving a low interest rate fund to banks, they increase the liquidity in financial sector. Banks can recover from debts and stimulate them to lend money and to invest. The LTRO reduce the fear of bank failure and offering oppurtunities for banks to buy government bonds. In this sense, instead of buying the government loans directly by open market operation, LTRO let ECB turn to support banks to buy government bonds in order to solve the sovereign crisis.

After the announcement of second LTRO, the overnight deposit of Eurozone banks has hit the record high as €776.9 billion.

On March 8th, the Europe Central Bank continues to maintain the interest rate on the main refinancing operations at 1%. The lending rate and deposit rate remain unchanged at 1.75% and 0.25% respectively. This is the third month ECB continues to hold their interest rate at 1%. Mr. Draghi confirm there is sign of stability in economy and said the “risk environment has been improve enormously. The ECB continued to express confidence to markets through the regular press meeting.

On April 4th, the Europe Central Bank announced to hold the interest rate at 1%. This is the fourth month ECB maintained their interest rate unchanged. The lending rate stayed at 1.75% and the deposit rate stayed at0.25%

According to these activities rang from January to April, we can see clearly that all the monetary police of ECB is still aiming at stimulating European economy. From January to April, the major monetary policy conducted by ECB is maintaining the low interest rate and the  second Long Term Refinancing Operation. ECB holds the interest rate as low as 1% for four months. The low interest rate is aimed at stimulate the Eurozone economy. ECB is following “forward guidance” in conducting their monetary policy.  The continuity of the euro interest rate reflects that ECB is holding the same policy for a long time, in order to create transparency and confidence to the market. The second LTRO will  Eecb does not have the ability to use open market operation.

Planned Chaos by Ludwig von Mises

In his short book Planned Chaos, economist Ludwig von Mises discusses the defective economic and social consequences of establishing central planning governments including interventionism, socialism, communism, Fascism and Nazism (last four are essentially to be socialism according to Mises). He criticizes the attempt to build a state which controls everything and benefits all people will lead to dictatorship and the ruin of Western civilization.

In the first two chapters, Mises argues that the “failure of interventionism” is destined. He distinguishes interventionism from socialism, since interventionism is still a market economy. Interventionism, as defined by interventionists, is a social structure that has both advantages in socialism and capitalism. Mises criticizes that interventionism will fail because they build a system which is worse than the previous one they want to alter. The Great Depression in the 90s, as Mises argues, is not because of capitalism but interventionism. He argues that the anti-capitalism damages the operation of Western civilization. Furthermore, Mises argues that this kind of “midway between socialism and capitalism” (2) is not stable. The attempt to control even a part of a free economy will produce chaos. If the interventionism government does not realize their failure but add more regulations, the system will gradually turns into socialism. He also argues that political democracy can only work with a free economy. Men have to choose either socialism (planned economy) or capitalism (free economy). Mises emphasized that “there is no such thing as a scientific ought” (16). He claims that the conflicts of choosing socialism or capitalism come from the consideration of human welfare instead of the distribution of income. 

In chapter three Mises talked about the history of Socialism and Communism. As Mises writes in his book, Marx and Engels use the term “communism” and “socialism” in the same manner. According to Marx, socialism is inevitable to present and “emerge in the same time” (24) across the world. He argues that Lenin, as a dictator, hated the way that socialists gain power by parliamentary procedure. In Marx’s doctrine, the “transition” from capitalism and socialism should be accomplished by “revolution and civil war” (22). In order to explain the low living standard in Russia after the Communist Revolution, Stalin inserts Socialism as the phase before entering Communism. Stalin defined Russia as still in the “early phase” of communism, so it needs to use socialist methods to raise the living standard of Russia. In Mises opinion, the aggressiveness of Russia is different from the “Lebensraum doctrine” (33) of Nazis and Fascist. It is the dictators, Lenin and Stalin, who are aggressive in expanding the communism influence. Russia annexed several countries and built several puppet governments. Mises says that the “real crisis of Russian Marxism” (41) is that most of the advanced industrial countries didn’t embrace communism, which is a criticism to Marx’s prediction that communism will appear in the most advanced capitalist countries. Misses claimed that in order to solve this ideological crisis, Russia “must conquer the world” (41) and this leads to its aggressiveness.

Mises argues that Bolshevists, Fascists and Nazis all have the doctrine of dictatorship. Even as the opponent of Stalin, Trotsky is essentially a dictator the same as Stalin. Mises says that Trotsky advocated every policy made by Stalin and the only problem is that he himself is not the dictator. In Mises’s opinion, the story of Trotsky reveals that most of the socialist activists are fanatical and they never rationally consider the consequence of centrally planning an economic system. What they do is dreaming of a utopia society and advocating dictatorship.

In the middle chapters of the book, Mises put forward an important discussion of what distinguishes central planned government and democracy government. He argues that the restriction of government power is the distinction. By this he means it is a choice between law and human welfare. In order to maximize mass welfare, socialists do not want laws to restrain their power in building institutions. They become dictators. Mises argues that “state and government are the social apparatus of violent coercion and repression.”(50) Freedom and liberty will exist only with the appearance of “societal bonds”.

In chapter seven, Mises talks about the history of Fascism. Fascism is a separation of orthodox Marxian socialism, and borrows other socialism doctrines. Benito Mussolini was at first an orthodox Italian socialist and changes his path to stand with nationalist socialists. Fascist economy, Mises argues, is still interventionism at first but changes into “Nazi pattern of socialism” later (61). Then Mussolini adapted guild socialism and labeled it as corporativism. Mises claimed that the aggressiveness of Fascism is caused by “overpopulation” in Italy(63).

In chapter eight, Mises talks about the history of Nazism. He argues that Nazism is essentially a kind of socialism. Mises writes that “the philosophy of the Nazis…is the purest and most consistent manifestation of the anticapitalistic and socialistic spirit of our age” (65). In previous chapter Mises argues that the aggressiveness of Nazism comes from the idea of “Lebensraum” (33). They want to gain more economic resources and material by conquering other nations. Mises claimed that, as he has says about Stalin and Trotsky, Hitler is a “product” of Nazism instead of the “founder” (67). Mises also criticizes the eugenics idea of Nazis that there is no way to identify an inferior man according to laws or political ideologies. Men cannot be valued by “scientific” verification. The “scientific ought” (68) doctrine explains the cold-blood crimes committed by Nazis, Mises says.

Mises raises an objection to the claiming that the success of Soviet Union at that time is an experimental proof of the feasibility of socialism. He argues that there is no experiment of social science can be made and it is meaningless to discuss the significance of historic experience. He says that the only thing history shows us is necessity of private ownership. Mises’s fundamental objection to socialism is the “impossibility of economic calculation” (74). According to Mises, the lack of price system will lead to chaos in the operation economy. Mises’s second objection is the “less efficient mode of production” (76) of socialism. The low living standard in Russia is covered up by the state press.

In the final chapter Mises argues that believing socialism is inevitable actually pushes the public towards socialism. Not only socialist propaganda, but also intellectual leaders are fanatic to socialism. They appear in the public view much more often than entrepreneurs and technologists. Mises believes people should consider the consequence of choosing central planning economic system and prevent the destruction of freedom and wealth.