Posted tagged ‘economics’

On the Utility of Economic Liberty

October 23, 2009

Economic liberty means the ability of the individual to choose the use of his property, whether this means production, consumption, modification, or exchange. The motivation for this use is to improve one’s welfare, physical, mental, or emotional, either in the present or in the future. The result of this liberty is a society in which property is manipulated in a way that most benefits each user.

Movivation is not necessarily outcome, but this motivation can be demonstrated significant in this manner. In the process of making decisions, the individual can, and often does, obtain information necessary to reach a desired result. This itself reduces the tendency for random error in the market; however, even more truths confirm the market’s efficiency in maintaining utility, as will be shown below.

An exchange occurs because multiple individuals find it in their best interest to trade property. Again, the motivation for making an exchange does not necessarily mean that both parties will benefit; however, in the interest of benefitting, both parties of the exchange will release information significant ot guarantee confidence to ensure that the other party will agree to the exchange.

Production occurs in a market because individuals wish to implement their person and property in a manner that will allow a return (through exchange of the produced goods and services). This return is necessarily greater when the goods exchanged meet the most urgent and significant wants of the consumer; therefore, the individual will seek to produce goods and services that the potential purchasers will desire most.

As with exchange, the intents of satisfying the population with production are not necessarily the results; however, the burden of absense of individual demand is significant enough to reallocate goods and services other percieved demands of the consumer. Production is always tending towards meeting the demands of the consumer.

The result of this individualist liberty is naturally a greater utility for society, a general welfare out of chaos. Violence, or coercion, on the other hand, necessarily forces a change in the above criteria and necessarily lower the utility and welfare of society. This economic violence must cease to the highest degree possible if true prosperity is to be witnessed.


Suppose Social Security contributions were invested

June 1, 2009

Social Security was conceived as a pure Ponzi scheme. Contributions collected were immediately paid out to beneficiaries. That worked adequately back in the 1930s when payouts started at age 65 and life expectancy was 67. Over the years life expectancy has risen to 78 and substantial payouts have been added for surviving dependent children and other welfare functions. One substantial reform was initiated under Reagan, in which a trust fund was added to help cover the withdrawals of retiring baby boomers.

The trust fund is invested entirely in government bonds, which means that Social Security contributions have been funding the debt load. We know that most Social Security contributions are paid out without being invested, but it’s still interesting to see what would happen if the contributions were all invested in either government bonds or the stock market.

With the market having crashed last year, some say that should put an end to the notion that the risky stock market might be a viable alternative to safe bonds.

I have been contributing to Social Security since 1964. Like everyone, I received a year-by-year accounting of the my contributions from the Social Security Administration, so I put the data into a spreadsheet to see theoretically how alternatives might have fared. I found on the internet the ten-year Treasury Bill rates and the gains and losses of the S&P 500. The S&P 500 is a broader-based index than the Dow Jones Industrial Average, so I took it as a more stable investment.

My method in building the spread sheet was to begin each year with the balance from the previous year, adjust the balance with investment gains or losses, and finally add the contributions for the year. I included both my contributions and my employer’s contributions, but only the Social Security part, not the Medicare contribution.

The stock market provided more excitement than Treasury Bills. The $216K in contributions grew steadily to be worth $613K at the start of 2009. The stock investments lost a heart-stopping plunge from $1,740K last year, but nonetheless still had $1,093 at year end. So despite the worst market year in the 45 year period, the stock investment was still 78% ahead of Treasuries.

Theoretical Social Security investments

In the past the market declined in eight of the 45 years, but never more than two years in a row. As investment firms are fond of saying, that is no guarantee of future performance. Nonetheless, from the viewpoint of pure statistics it’s likely to recover considerably more than T-bills over the next few years.

One implication is that if a portion of my Social Security contributions were invested in the stock market, say 25%, all of the welfare payments could have been made and my retirement benefits might have nearly doubled. And that’s true despite the biggest market sell-off in 45 years.